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, 1998
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 July 20, 1998, there were outstanding 22,758,408 shares of the Company's
common stock.
Page 1 of 28
Exhibit Index Page 22
<PAGE>
Sodak Gaming, Inc.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations for the three months ended
June 30, 1998 and 1997 3
Consolidated Statements of Operations for the six months ended
June 30, 1998 and 1997 4
Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997 5
Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
EXHIBIT INDEX 22
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Sodak Gaming, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended June 30,
----------------------------------------
1997 1997 as
In thousands, except share and per share as adjusted previously
amounts 1998 (Note 2) reported
-------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Product sales $ 14,969 14,230 14,230
Gaming operations 14,577 13,855 13,855
Wide area progressive systems 3,915 3,480 3,480
Financing income 2,551 1,773 1,773
----------- ----------- -----------
Total revenue 36,012 33,338 33,338
----------- ----------- -----------
Costs and expenses:
Cost of product sales 11,366 10,547 10,547
Gaming operations 13,375 13,814 13,522
Selling, general and administrative 4,879 5,302 4,597
Restructuring charges 1,149 0 0
Interest and financing costs 751 834 834
----------- ----------- -----------
Total costs and expenses 31,520 30,497 29,500
----------- ----------- -----------
Income from operations 4,492 2,841 3,838
Other income, net 52 15 15
----------- ----------- -----------
Earnings before income taxes 4,544 2,856 3,853
Provision for income taxes 1,681 1,186 1,426
----------- ----------- -----------
Net earnings $ 2,863 1,670 2,427
=========== =========== ===========
Earnings per common share, basic and diluted $ 0.13 0.07 0.11
=========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding 22,769,961 22,900,152 22,900,152
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Sodak Gaming, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------------------------
1997 1997 as
In thousands, except share and per share 1998 as adjusted previously
amounts (Note 2) reported
- ---------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Product sales $ 25,732 25,667 25,667
Gaming operations 27,943 26,774 26,774
Wide area progressive systems 7,584 5,913 5,913
Financing income 4,639 4,084 4,084
------------ ------------ ------------
Total revenue 65,898 62,438 62,438
------------ ------------ ------------
Costs and expenses:
Cost of product sales 19,561 19,975 19,975
Gaming operations 26,296 26,859 26,447
Selling, general and administrative 9,462 10,649 9,074
Restructuring charges 1,149 0 0
Interest and financing costs 1,758 1,623 1,623
------------ ------------ ------------
Total costs and expenses 58,226 59,106 57,119
------------ ------------ ------------
Income from operations 7,672 3,332 5,319
------------ ------------ ------------
Other income:
Gain on sale of receivables 0 537 537
Other, net 73 28 28
------------ ------------ ------------
Total other income 73 565 565
------------ ------------ ------------
Earnings before income taxes and
cumulative effect of accounting change 7,745 3,897 5,884
Provision for income taxes 2,930 1,642 2,177
------------ ------------ ------------
Earnings before cumulative effect of
accounting change 4,815 2,255 3,707
Cumulative effect of change in accounting
principle, net of income tax effect 0 (3,131) 0
------------ ------------ ------------
Net earnings (loss) $ 4,815 (876) 3,707
============ ============ ============
Earnings (loss) per common share,
basic and diluted:
Earnings before cumulative effect of
accounting change $ 0.21 0.10 0.16
Cumulative effect of accounting change 0.00 (0.14) 0.00
------------ ------------ ------------
Net earnings (loss) $ 0.21 (0.04) 0.16
============ ============ ============
Weighted average number of common and
common equivalent shares outstanding 22,776,495 22,926,165 22,926,165
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Sodak Gaming, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
In thousands, except shares June 30, 1998 December 31, 1997
- ------------------------------------------------ ------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,923 3,942
Current trade, notes and interest receivables 30,411 36,137
Inventories 18,640 22,294
Prepaid expenses 875 756
Refundable income taxes 857 663
Deferred income taxes 1,344 1,319
--------- ---------
Total current assets 59,050 65,111
Property and equipment, net 60,225 59,739
Notes receivable, net of current maturies 32,138 38,723
Deferred income taxes 443 789
Other assets, net 287 794
--------- ---------
$ 152,143 165,156
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 19,624 32,379
Current maturities of long-term debt 3,741 3,634
Income taxes payable 0 75
Deferred financing fee revenue 1,557 1,846
Accrued payroll and payroll related costs 3,331 1,986
Other accrued liabilities 4,580 3,620
--------- ---------
Total current liabilities 32,833 43,540
--------- ---------
Long-term debt, net of current maturities 13,749 19,818
--------- ---------
Shareholders' equity:
Preferred stock, $0.001 par value, 25,000,000
shares authorized, none issued and outstanding 0 0
Common stock, $0.001 par value, 75,000,000
shares authorized, 22,758,408 issued and
outstanding 23 23
Additional paid-in capital 64,088 64,088
Retained earnings 44,877 40,061
Cumulative translation adjustment (3,427) (2,374)
--------- ---------
Total shareholders' equity 105,561 101,798
--------- ---------
$ 152,143 165,156
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Sodak Gaming, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------------------
1997 1997 as
as adjusted previously
In thousands 1998 (Note 2) reported
- ------------------------------------------------------ ---------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 4,815 (876) 3,707
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Pre-tax cumulative effect of change in
accounting principle 0 4,409 0
Depreciation and amortization 2,937 3,271 3,271
Provision for doubtful accounts 244 357 357
Deferred income taxes 321 137 137
Gain on sale of receivables 0 (537) (537)
Gain on sale of property, equipment and real
estate (47) 0 0
Changes in operating assets and liabilities:
Trade and accrued interest receivables (15) 5,902 5,902
Notes receivable relating to financed sales 16,160 1,417 1,417
Inventories 3,654 (1,131) (1,131)
Prepaid expenses (118) 158 158
Accounts payable (12,756) (12,093) (12,093)
Accrued liabilities 2,017 647 647
Income taxes payable, net of refundable income
taxes (268) (169) 1,644
-------- -------- --------
Net cash provided by operating activities 16,944 1,492 3,479
-------- -------- --------
Cash flows from investing activities:
Cash advanced on notes receivable (6,576) (3,875) (3,875)
Payments received on notes receivable 2,497 1,735 1,735
Proceeds from sale of property, equipment and real
estate 524 0 0
Purchases of property and equipment (4,553) (4,998) (4,998)
(Increase) decrease in other assets 157 (255) (2,242)
-------- -------- --------
Net cash used in investing activities (7,951) (7,393) (9,380)
-------- -------- --------
Cash flows from financing activities:
Proceeds from long-term borrowings 28,000 22,750 22,750
Principal repayments of long-term debt (33,962) (14,934) (14,934)
Net proceeds from exercise of stock options 0 4 4
-------- -------- --------
Net cash provided by (used in) financing
activities (5,962) 7,820 7,820
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents (50) (147) (147)
-------- -------- --------
Net increase in cash and cash equivalents 2,981 1,772 1,772
Cash and cash equivalents, beginning of period 3,942 4,077 4,077
-------- -------- --------
Cash and cash equivalents, end of period $ 6,923 5,849 5,849
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for interest $ 1,665 1,600 1,600
Cash paid during period for income taxes 2,877 396 396
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Sodak Gaming, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(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 1997 consolidated financial statements and notes thereto as
published in the annual report on Form 10-K.
Certain 1997 amounts have been reclassified to conform to the 1998
presentation.
NOTE 2 - CHANGE IN ACCOUNTING METHOD
During the fourth quarter of 1997, the Company changed its accounting
method for costs of pre-opening and start-up activities to capitalizing such
costs subsequent to obtaining all regulatory approvals and authorizations for
the underlying project and expensing such costs immediately upon opening the new
operation. The Company's previous accounting method had been to capitalize such
costs from inception until the project became operational, at which time the
capitalized costs were amortized over a period not to exceed five years. As a
result of this accounting change, there were no such capitalized costs on the
balance sheets at June 30, 1998 or December 31, 1997.
The effect of adopting this new accounting method reduced previously
reported earnings before cumulative effect of the accounting change during the
three months and six months ended June 30, 1997 as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Three months Six months
In thousands ended June 30, 1997 ended June 30, 1997
--------------------------------------------------------------------- -------------------- -------------------
<S> <C> <C>
Increase in gaming operations expenses $ 292 412
Increase in selling, general and administrative expenses 705 1,575
-------------------- -------------------
Decrease in income from operations 997 1,987
Income tax effect 240 535
-------------------- -------------------
Decrease in earnings before cumulative effect of accounting change $ 757 1,452
==================== ===================
</TABLE>
The cumulative effect of this accounting change, reflected as a charge to
earnings (loss) on January 1, 1997 in the amount of approximately $3.1 million,
is comprised of approximately $4.4 million of such costs capitalized at January
1, 1997, net of tax benefits of approximately $1.3 million.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, REPORTING ON COSTS OF START-UP ACTIVITIES, requiring
pre-opening and start-up costs to be expensed as incurred. The Company has
adopted the requirements of this new Statement of Position effective in the
first quarter of 1998. The adoption of the requirements of this new Statement of
Position did not impact the Company's financial statements.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, REPORTING COMPREHENSIVE INCOME. This statement requires companies to
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet, and is effective for the Company's year ending
December 31, 1998. The Company's only item of other comprehensive income relates
to foreign currency translation adjustments, and is presented separately on the
balance sheet as required. If presented for the three months and six months
ended June 30, 1998 and 1997, comprehensive income (loss) would be as follows:
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Three Six months
Three months ended
Three months ended Six months June 30, 1997
months ended June 30, 1997 Six months ended as
In thousands ended June 30, 1997 as previously ended June 30, 1997 previously
June 30, 1998 as adjusted reported June 30, 1998 as adjusted reported
------------- ------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ 2,863 1,670 2,427 4,815 (876) 3,707
Foreign currency translation
adjustments (524) (139) (139) (1,053) (255) (255)
Tax effect of foreign
currency translation 8 24 24 62 45 45
adjustments
------------- ------------- ------------ ------------- ------------- -------------
Comprehensive income $ 2,347 1,555 2,312 3,824 (1,086) 3,497
============= ============= ============ ============= ============= =============
</TABLE>
NOTE 4 - CORPORATE RESTRUCTURING
On June 18, 1998, the Company announced a corporate restructuring designed
to refocus the Company on its core businesses - product sales and wide area
progressive systems to Native American casinos. The Company indicated its
current plan to limit future pursuit of gaming operations to North America. The
Company also announced that it would be divesting its Latin American operations
in Peru, Ecuador and Brazil.
In conjunction with certain changes and restructuring, known costs and
expenses relating to severance amounting to approximately $1.1 million were
charged to operations during the three months ended June 30, 1998. The Company
is currently in the preliminary stages of restructuring and the early planning
stage for the divestiture of Latin American assets. When the Company determines
a specific divestiture plan, additional restructuring charges may be incurred.
NOTE 5 - COMMON SHARES OUTSTANDING
The following is a reconciliation of basic weighted average shares
outstanding to diluted weighted average shares outstanding for the three-month
and six-month periods ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Six months
Three months ended
Three months ended Six months June 30, 1997
months ended June 30, 1997 Six months ended as
ended June 30, 1997 as previously ended June 30, 1997 previously
June 30, 1998 as adjusted reported June 30, 1998 as adjusted reported
------------- ------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shares Outstanding
Weighted average
common shares
outstanding 22,758,408 22,758,231 22, 758,231 22,758,408 22,757,961 22,757,961
Adjustments for common
stock equivalents 1 11,553 141,921 141,921 18,087 168,204 168,204
------------- ------------- -------------- ------------- ------------- --------------
Weighted average number
of common and
common equivalent
shares outstanding 22,769,961 22,900,152 22,900,152 22,776,495 22,926,165 22,926,165
============= ============= ============== ============= ============= ==============
Net Earnings (loss) $ 2,863,031 $ 1,670,439 $ 2,427,181 $ 4,815,551 $ (875,664) $ 3,706,692
============= ============= ============== ============= ============= ==============
Earnings (loss) per share,
basic $ 0.13 $ 0.07 $ 0.11 $ 0.21 $ (0.04) $ 0.16
============= ============= ============== ============= ============= ==============
Earnings (loss) per share,
diluted $ 0.13 $ 0.07 $ 0.11 $ 0.21 $ (0.04) $ 0.16
============= ============= ============== ============= ============= ==============
- --------------------------------------------------------------------------------------------------------------------
(1) Represents adjustment computed under the treasury stock method for stock
options granted at fair market value at date of grant.
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
The discussion that follows compares results for the three months and six
months ended June 30, 1998 to results for the three months and six months ended
June 30, 1997. Results for 1997 have been adjusted for an accounting change as
described in Note 2 to the consolidated financial statements.
On June 18, 1998, the Company announced a corporate restructuring designed
to refocus the Company on its core businesses - product sales and wide area
progressive systems to Native American casinos. The Company indicated its
current plan to limit future pursuit of gaming operations to North America. The
Company also announced that it would be divesting its Latin American operations
in Peru, Ecuador and Brazil.
In addition, the announcement included: 1) Company plans to appoint two
additional independent directors to the board; 2) the June 30, 1998 retirement
of Michael G. Wordeman as chief executive officer, who will remain as chairman
of board through May 1999 and intends to remain on the board thereafter; 3) the
appointment of Roland W. Gentner as interim chief executive while an executive
search for a new chief executive is undertaken (Mr. Gentner has been president,
chief operating officer and director since 1993); and 4) the assumption of the
duties of David R. Johnson, who resigned as chief financial officer on June 12,
1998, by Clayton R. Trulson, vice president of finance and treasurer.
In conjunction with certain changes and restructuring, known costs and
expenses relating to severance amounting to approximately $1.1 million were
charged to operations during the three months ended June 30, 1998. The Company
is currently in the preliminary stages of restructuring and the early planning
stage for the divestiture of Latin American assets. When the Company determines
a specific divestiture plan, additional restructuring charges may be incurred.
After completion of the restructuring process, the Company's ongoing
administrative costs are expected to be reduced to reflect reorganization and
changes in strategy.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1998
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1997
Net earnings for the three months ended June 30, 1998 increased 71% to $2.9
million, or $0.13 per share, compared to net earnings of $1.7 million, or $0.07
per share, for the three months ended June 30, 1997. Excluding the
above-mentioned restructuring charge pertaining to severance costs, net earnings
would have been $3.6 million, or $0.16 per share.
The primary factors causing the increase in earnings were increased
revenues from wide area progressive systems, improved operating results at the
MISS MARQUETTE and increased financing income. Total revenue increased 8% to
$36.0 million in 1998, compared to $33.3 million in 1997. Total costs and
expenses increased 3% to $31.5 million in 1998, compared to $30.5 million in
1997. Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased 25% to $6.7 million in 1998 compared to $5.4 million in 1997. EBITDA
is a commonly used calculation to measure operating performance. The Company
includes EBITDA in its results of operations to assist interpretation of
financial performance; however, the Company's principal financial measures are
net earnings and earnings per share.
<PAGE>
PRODUCT SALES
Revenue from product sales increased 5% to $15.0 million in 1998 compared
to $14.2 million in 1997. The increase in 1998 was the result of an 8% increase
in machine sales revenue to $12.1 million in 1998 compared to $11.2 million in
1997 (which included $0.4 and $1.9 million of used machine sales in 1998 and
1997, respectively). This increase was partially offset by a 5% decrease in
ancillary gaming and non-gaming related product sales revenue to $2.9 million in
1998 compared to $3.0 million in 1997. In 1998, the Company is continuing its
strategy of being a full-service provider to its customers by offering an
extensive product line which includes gaming-related and non-gaming related
products and supplies.
New gaming machine shipments increased 11% to 1,620 machines in 1998
compared to 1,470 machines in 1997. In 1998, 88% of the new machine shipments
were to casinos in Kansas, Michigan, North Carolina, New Mexico, Oregon and
Wisconsin. In 1997, 65% of the new machine shipments were to casinos in
Connecticut, Iowa and Michigan. 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. In 1998, the
Company sold 230 used machines, compared to 450 in 1997.
The cost of product sales increased 8% to $11.4 million in 1998, from $10.5
million in 1997. The gross margin on product sales decreased to 24.1% in 1998 as
compared to 25.9% in 1997. The decrease in gross margin is due primarily to the
sale of $1.9 million of used machines in 1997, which had a higher gross margin
than new machine sales.
GAMING OPERATIONS
Gaming operations revenue increased 5% to $14.6 million in 1998, from $13.9
million in 1997. This increase was attributable to an increase in revenue from
the MISS MARQUETTE, which was partially offset by reduced revenue in Peru.
Direct costs of gaming operations decreased 3% to $13.4 million in 1998,
compared to $13.8 million in 1997. The decrease was primarily attributed to
decreased costs in Peru.
DOMESTIC GAMING OPERATIONS
MISS MARQUETTE. The MISS MARQUETTE riverboat casino and entertainment
facility has 698 machines and 36 table games and is located on the Mississippi
River at Marquette, Iowa. Revenue increased 18% to $9.5 million in 1998 compared
to $8.1 million in 1997. Direct operating costs remained steady at $7.6 million
in 1998 and 1997. The improvement in operating performance is primarily the
result of three factors: an improvement in weather conditions in 1998 relative
to 1997, the implementation of new marketing strategies and a continuation of
cost-containment measures initiated by management. However, there can be no
assurance that continued improvement will be realized.
INTERNATIONAL GAMING OPERATIONS
As discussed on page 9, the Company plans to divest from its Latin American
gaming operations. The Company is currently in the early stages of planning for
the divestiture of Latin American assets. Because such efforts are preliminary
to date, the following discussion excludes specific divestiture plans.
When the Company determines a specific divestiture plan, additional
restructuring charges may be incurred.
PERU. The Company operates gaming halls and route operations in Peru. In
the fall of 1996, the Peruvian government announced that it would implement
regulatory changes in conjunction with the transfer of gaming regulatory
authority to the federal government and imposed a 200% increase in the
per-machine tax which became effective in October 1996. Among other regulatory
changes announced in
<PAGE>
January 1997 were (i) minimum machine requirements at gaming halls (in Lima,
gaming halls must have at least 120 machines per location and gaming halls in
other cities must have at least 80 machines per location); and (ii) a
requirement that machine refurbishments must be certified by manufacturers and
that all machines show pay tables in Spanish. The Company continues its efforts
to comply with these requirements and expects to be in full compliance within
the time frame allowed by the regulators.
Revenue decreased 16% to $3.2 million in 1998 compared to $3.8 million in
1997. The revenue decrease is primarily attributed to increased competitive
factors and to economic effects associated with severe weather conditions
related to "El Nino". Direct operating costs decreased 6% to $4.1 million in
1998 compared to $4.4 million in 1997. The number of machines in operation at
June 30, 1998 was approximately 1,380 at 15 locations compared to approximately
940 machines at 15 locations at June 30, 1997.
BRAZIL. The Company established a gaming hall with 200 machines in the
Arpoador district of Rio de Janeiro in June 1996. In December 1997, the
agreement between the Company and the owners of the gaming hall was revised such
that the operation is now a route operation with 172 machines. Revenue decreased
7% to $1.3 million in 1998 compared to $1.4 million in 1997. Direct costs
decreased 9% to $1.3 million in 1998 compared to $1.4 million in 1997.
ECUADOR. The Company operates a casino in Quito, Ecuador which has 150
machines and 12 table games. Revenue remained steady at $0.5 million in both
1998 and 1997. Direct costs associated with the operation were $0.4 million in
both 1998 and 1997. In the second quarter of 1998, new regulations, pertaining
to minimum capital investment, citizenship of top management and hours of
operation among other matters, were issued for the operation of casinos and
bingo parlors. Their applicability to the Company's operation are under review
by legal advisors in Ecuador. Compliance with these new regulations is required
in the fourth quarter of 1998.
WIDE AREA PROGRESSIVE SYSTEMS
Wide area progressive systems revenue increased 13% to $3.9 million in 1998
compared to $3.5 million in 1997. The increase was the result of an increase in
both the number of systems offered and the number of machines on such systems.
Comparing June 30, 1998 to June 30, 1997, the Company implemented systems in one
additional state, Minnesota; six new systems became operational, WHEEL OF GOLD,
HIGH ROLLERS, TOTEM POLE, JEOPARDY, and two twenty-five cent WHEEL OF FORTUNE
systems; and the number of machines on the systems increased to approximately
1,800 from approximately 1,480. At June 30, 1998, 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, Minnesota, New Mexico, North Dakota, Oregon, South Dakota and
Wisconsin. At June 30, 1998, 16 systems were in operation: MEGABUCKS (one
interstate and one intrastate), DOLLARS DELUXE, FABULOUS 50'S, QUARTERMANIA (one
interstate and two intrastate), NICKELMANIA, WHEEL OF FORTUNE in both dollar
(one interstate and one intrastate) and twenty-five cent denominations (one
interstate and one intrastate, which both began operating in June 1998), WHEEL
OF GOLD (which began operating in July 1997), HIGH ROLLERS (which began
operating in August 1997), TOTEM POLE (which began operating in December 1997)
and JEOPARDY (which began operating in January 1998).
Based on current market trends, the Company anticipates increased revenue
from its wide area progressive systems as it proceeds with its strategy to place
additional systems and machines in jurisdictions permitting the operation of
wide area progressive systems. However, there can be no assurance that casinos
will continue
<PAGE>
adding systems and machines or that necessary regulatory approvals
will be obtained in 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 from wide area progressive systems.
FINANCING INCOME
Financing income results from interest income on notes receivable, fees
charged in association with financing arrangements and the Company's portion of
the management fee from Harrah's Entertainment, Inc.'s (Harrah's) Phoenix
Ak-Chin casino and entertainment facility. Financing income increased 44% to
$2.6 million in 1998 compared to $1.8 million in 1997. This increase is
primarily due to $0.7 million in financing fees recognized in 1998 for arranging
financing for casino projects. There were no fees recognized in the second
quarter of 1997 for such services.
The Company recognized revenue of $0.4 million in 1998 compared to $0.5
million in 1997 as its share of 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). This fee is earned in conjunction with financing
guaranties provided to Harrah's by the Company during the initial development
and early phases of the facility. The guaranty expired in 1996 when the loan was
paid in full. As 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 and any extensions thereto. The current
management agreement expires December 1999. There can be no assurance that
Harrah's management contract will be extended or that the terms of any extension
will not be materially changed.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 8% to $4.9 million
in 1998, from $5.3 million in 1997. As a percent of total revenue, selling,
general and administrative expenses decreased to 13.5% in 1998 compared to 15.9%
in 1997.
RESTRUCTURING CHARGES
Severance costs of $1.1 million were incurred in the second quarter of 1998
in conjunction with the Company's announced restructuring (see page 9 for
discussion).
INTEREST AND FINANCING COSTS
Interest and financing costs were $0.8 million in both 1998 and 1997. The
Company believes that interest and financing costs may increase in future
periods as the Company pursues its growth strategy.
INCOME FROM OPERATIONS
The cumulative effect of the above described changes resulted in a 58%
increase in income from operations of $4.5 million in 1998, compared to $2.8
million in 1997. As a percent of total revenue, income from operations increased
to 12.5% in 1998, from 8.5% in 1997. The increase in the operating margin was
primarily the result of increased revenues from wide area progressive systems,
improved operating results at the MISS MARQUETTE and increased financing income,
offset partially by lower operating margins in Peru and the restructuring
charges.
<PAGE>
OTHER
Earnings before income taxes increased 59% to $4.5 million in 1998,
compared to $2.9 million in 1997. Provision for income taxes was $1.7 million in
1998, compared to $1.2 million in 1997, representing 37% and 42% of earnings
before income taxes for 1998 and 1997, respectively.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998
COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997
Earnings before cumulative effect of accounting change for the six months
ended June 30, 1998 increased 114% to $4.8 million, or $0.21 per share, compared
to $2.3 million, or $0.10 per share, for the six months ended June 30, 1997.
Excluding the aforementioned restructuring charge pertaining to severance costs,
net earnings would have been $5.5 million, or $0.24 per share (see page 9 for
discussion).
The primary factors causing the increase in earnings were increased
revenues from wide area progressive systems, improved operating results at the
MISS MARQUETTE and increased financing income. Total revenue increased 6% to
$65.9 million in 1998, compared to $62.4 million in 1997. Total costs and
expenses decreased 1% to $58.2 million in 1998, compared to $59.1 million in
1997. Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased 42% to $12.4 million in 1998 compared to $8.8 million in 1997. EBITDA
is a commonly used calculation to measure operating performance. The Company
includes EBITDA in its results of operations to assist interpretation of
financial performance; however, the Company's principal financial measures are
net earnings and earnings per share.
On January 1, 1997, the Company recognized a $3.1 million charge (net of
$1.3 million income tax effect) related to a cumulative effect of an accounting
change as described in Note 2 to the consolidated financial statements.
PRODUCT SALES
Revenue from product sales was $25.7 million in both 1998 and 1997. Machine
sales revenue increased 7% to $19.8 million in 1998 compared to $18.6 million in
1997 (which included $0.4 and $5.3 million of used machine sales in 1998 and
1997, respectively). This increase was offset by a 16% decrease in ancillary
gaming and non-gaming related product sales revenue to $5.9 million in 1998
compared to $7.1 million in 1997. In 1998, the Company is continuing its
strategy of being a full-service provider to its customers by offering an
extensive product line which includes gaming-related and non-gaming related
products and supplies.
New gaming machine shipments increased 23% to 2,580 machines in 1998
compared to 2,100 machines in 1997. In 1998, 77% of the new machine shipments
were to casinos in Kansas, Michigan, Minnesota, New Mexico, and Wisconsin. In
1997, 75% of the new machine shipments were to casinos in Connecticut, Iowa,
Kansas, Michigan and Wisconsin. 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. In 1998, the
Company sold 230 used machines, compared to 1,810 in 1997.
The cost of product sales decreased 2% to $19.6 million in 1998, from $20.0
million in 1997. The gross margin on product sales increased to 24.0% in 1998 as
compared to 22.2% in 1997. The increase in gross margin is due primarily to the
sale of $3.4 million of used machines at approximate cost in the first quarter
of 1997.
<PAGE>
GAMING OPERATIONS
Gaming operations revenue increased 4% to $27.9 million in 1998, from $26.8
million in 1997. This increase was attributable to an increase in revenue from
the MISS MARQUETTE, which was partially offset by reduced revenue in Peru.
Direct costs of gaming operations decreased 2% to $26.3 million in 1998,
compared to $26.9 million in 1997. The decrease was attributed to decreased
costs at the MISS MARQUETTE and in Peru.
DOMESTIC GAMING OPERATIONS
MISS MARQUETTE. Revenue increased 13% to $17.6 million in 1998 compared to
$15.5 million in 1997. Direct operating costs decreased 2% to $14.6 million in
1998, from $14.9 million in 1997. The improvement in operating performance is
primarily the result of three factors: an improvement in weather conditions in
1998 relative to 1997, the implementation of new marketing strategies and a
continuation of cost-containment measures initiated by management. However,
there can be no assurance that continued improvement will be realized.
INTERNATIONAL GAMING OPERATIONS
As discussed on page 9, the Company plans to divest from its Latin American
gaming operations. The Company is currently in the early stages of planning for
the divestiture of Latin American assets. Because such efforts are preliminary
to date, the following discussion excludes specific divestiture plans.
When the Company determines a specific divestiture plan, additional
restructuring charges may be incurred.
PERU. Revenue decreased 15% to $6.5 million in 1998 compared to $7.6
million in 1997. The revenue decrease is primarily attributed to increased
competitive factors and to economic effects associated with severe weather
conditions related to "El Nino". Direct operating costs decreased 4% to $8.1
million in 1998 compared to $8.4 million in 1997.
BRAZIL. Revenue increased 3% to $2.8 million in 1998 compared to $2.7
million in 1997. Direct costs were $2.7 million in both 1998 and 1997.
In 1996, the Company entered into an agreement with the Confederacao
Brasileira de Futebol (CBF, or the Brazilian Soccer Federation) to own and
operate linked progressive video gaming systems in Brazil. Subsequent to that
agreement the Company entered into a joint venture agreement with IGT and the
Dreamport division of GTECH Holdings Corporation to proceed with the development
and operations of this system. In the first quarter of 1998, the Company, IGT
and Dreamport mutually agreed to terminate the joint venture on terms provided
in the agreement, due to ongoing uncertainties pertaining to the regulatory
status of the proposed gaming operations.
In late March 1998, the President of Brazil signed legislation known as
"Lei Pele," which among other provisions, may change the regulatory status that
allowed qualified sports organizations to sponsor video gaming operations. The
enactment of this law could make the Company's involvement with both the
proposed CBF video gaming project and the Arpoador video bingo hall uncertain.
However, there are efforts under way proposing regulations under the new law
which may authorize continued operations at the Arpoador gaming hall.
ECUADOR. Revenue increased 17% to $1.1 million in 1998 compared to $1.0
million in 1997. Direct costs associated with the operation were $0.9 million in
both 1998 and 1997.
<PAGE>
WIDE AREA PROGRESSIVE SYSTEMS
Wide area progressive systems revenue increased 28% to $7.6 million in 1998
compared to $5.9 million in 1997. The increase was the result of an increase in
both the number of systems offered and the number of machines on such systems.
Comparing June 30, 1998 to June 30, 1997, the Company implemented systems in one
additional state, Minnesota; six new systems became operational, WHEEL OF GOLD,
HIGH ROLLERS, TOTEM POLE, JEOPARDY, and two twenty-five cent WHEEL OF FORTUNE
systems; and the number of machines on the systems increased to approximately
1,800 from approximately 1,480. See page 10 for additional discussion.
FINANCING INCOME
Financing income increased 14% to $4.6 million in 1998 compared to $4.1
million in 1997. This increase is primarily due to $0.8 million in financing
fees recognized in 1998 for arranging financing for casino projects. Fees
recognized in the first six months of 1997 for such services amounted to $0.5
million. The Company recognized revenue of $0.9 million in 1998 compared to $1.0
million in 1997 as its share of Harrah's management fee from the Harrah's
Phoenix Ak-Chin casino.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 11% to $9.5 million
in 1998, from to $10.6 million in 1997. As a percent of total revenue, selling,
general and administrative expenses decreased to 14.4% in 1998 compared to 17.1%
in 1997.
RESTRUCTURING CHARGES
Severance costs of $1.1 million were incurred in the second quarter of 1998
in conjunction with the Company's announced restructuring (see page 9 for
discussion).
INTEREST AND FINANCING COSTS
Interest and financing costs increased 8% to $1.8 million in 1998, compared
to $1.6 million in 1997. The increase in interest and financing costs was
primarily the result of increased first quarter borrowings during 1998 to fund
working capital needs. The Company believes that interest and financing costs
may increase in future periods as the Company pursues its growth strategy.
INCOME FROM OPERATIONS
The cumulative effect of the above described changes resulted in a 130%
increase in income from operations of $7.7 million in 1998, compared to $3.3
million in 1997. As a percent of total revenue, income from operations increased
to 11.6% in 1998, from 5.3% in 1997. The increase in the operating margin was
primarily the result of increased revenues from wide area progressive systems,
improved operating results at the MISS MARQUETTE and increased financing income,
partially offset by lower operating margins in Peru and the restructuring
charges.
OTHER
Other income decreased $0.5 million in 1998 due to a gain on sale of
receivables of $0.5 million earned in 1997. Earnings before income taxes and
cumulative effect of accounting change increased 99% to $7.7 million in 1998,
compared to $3.9 million in 1997. Provision for income taxes was $2.9 million in
1998, compared to $1.6 million in 1997, representing 38% and 42% of earnings
before income taxes for 1998 and 1997, respectively.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital increased $4.6 million to $26.2 million during the six
months ended June 30, 1998. This increase was due to a $10.7 million decrease in
current liabilities which was partially offset by a $6.1 million decrease in
current assets.
CASH FLOWS
During the six months ended June 30, 1998, the Company's cash and cash
equivalents increased $3.0 million to $6.9 million. Cash provided by operating
activities was $16.9 million in 1998 compared to $1.5 million provided in 1997.
The cash flows from operations for 1998 were primarily affected by net earnings,
depreciation, and changes in receivables, inventories, accounts payable and
accrued liabilities.
Cash used in investing activities amounted to $8.0 million in 1998 and $7.4
million in 1997. Cash used in investing activities consisted primarily of $6.6
million and $3.9 million advanced on notes receivable for customer financing in
1998 and 1997, respectively; and $4.6 million and $5.0 million used to purchase
property and equipment in 1998 and 1997, respectively. The 1998 property and
equipment purchases were primarily attributable to costs associated with 1) the
development of a new Company-wide information system, and 2) expenditures for
gaming operations equipment at the MISS MARQUETTE and in Peru. Cash used in
investing activities was partially offset by $2.5 million and $1.7 million in
payments received on notes receivable from customer financing in 1998 and 1997,
respectively.
Financing activities used $6.0 million cash in 1998 compared to providing
$7.8 million in 1997. Cash flows from financing activities in both 1998 and 1997
consisted of proceeds from borrowings on the Company's revolving credit
facility, net of principal repayments on the revolving credit facility and other
long-term debt.
INDEBTEDNESS/LINES OF CREDIT
The Company had $17.5 million of debt outstanding at June 30, 1998. Of that
amount, $8.3 million was borrowed under a 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 letters of
credit, and a $30 million tranche (Tranche B) for acquisitions and major capital
equipment expenditures. Since June 1997, the amount available under Tranche B is
being reduced by $1.875 million quarterly. As a result, the maximum credit
amount under the revolving credit facility was $40.6 million at June 30, 1998.
Tranche A matures in February 1999, plus two one-year renewal options subject to
bank approval, and Tranche B matures in February 2001. 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 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. In
addition to the loans outstanding, the Company had $8.6 million in letters of
credit outstanding at June 30, 1998.
In July 1997, the Company entered into a sale-leaseback arrangement
involving the sale of certain MISS MARQUETTE furniture and equipment for $7.5
million, which approximated book value at the time of sale.
<PAGE>
The transaction was accounted for as a financing, whereby the property remains
on the books and continues to be depreciated. A financing obligation
representing the proceeds was recorded and is reduced based on payments made
under the arrangement. As of June 30, 1998, approximately $6.3 million related
to this financing obligation is included in debt outstanding. The financing
arrangement requires the Company to make monthly payments of approximately
$233,000 through July 2001. Upon expiration of the arrangement, the Company will
own the furniture and equipment.
Of the remaining $2.9 million of debt, $1.7 million relates to debt payable
to the former shareholders of Gamblers Supply Management Company (the
Company-owned subsidiary which operates the MISS MARQUETTE), $0.8 million
relates to various other debt secured by certain property of the MISS MARQUETTE
and $0.4 million is secured by certain transportation equipment.
CAPITAL COMMITMENTS
In September 1994, Sodak assisted a casino management company, Royal
Associates Management, Inc. (Royal), in acquiring $8 million in financing from a
financial institution. The Company also guaranteed the debt. The loan was used
to construct Phase II of the Cypress Bayou Casino owned by the Chitimacha Tribe
of Louisiana. The loan guaranty agreement was revised in December 1997, allowing
Royal to re-borrow prepaid amounts with a maximum allowable loan balance of $4.3
million. In return for the guaranty, the Company receives a loan guaranty fee
based on a percentage of the outstanding loan balance, and additionally, a
lesser percentage of the unused maximum allowable loan balance. As of June 30,
1998, the outstanding loan balance was $2.2 million.
In October 1997, the Company entered into an agreement with Hollywood
Casino Corporation (Hollywood) and New Orleans Paddlewheels to develop a
riverboat casino, hotel and retail complex in Shreveport, Louisiana. The
proposed project, to be managed by Hollywood, is pending regulatory approval by
the Louisiana Gaming Control Board (LGCB). The project is to be financed by an
equity investment from the joint venture partners equal to approximately 25% of
the total estimated project cost; the remaining 75% is anticipated to be
financed through a debt offering or other credit facility. The project is
estimated to cost approximately $170 million. The Company's participation in the
project is contingent upon 1) obtaining regulatory approval of the project by
the LGCB; 2) the Company's obtaining a gaming license in Louisiana; and 3) the
joint venture's obtaining necessary debt financing. Construction is expected to
commence upon finalization of regulatory approvals and financing arrangements
and is expected to take approximately 15 months. However, there can be no
assurance that regulatory approvals and financing arrangements will be obtained.
INTERNATIONAL OPERATIONS
Approximately 16% of total revenue for the six months ended June 30, 1998
was derived outside of the United States, compared to 18% for the six months
ended June 30, 1997. 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 divests from its international operations, exposure to gains and
losses on foreign currency transactions may decrease.
<PAGE>
IMPACT OF INFLATION
Inflation did not have a significant effect on the Company's operations
during the six months ended June 30, 1998.
YEAR 2000 COMPLIANCE
In conjunction with the development of a Company-wide information system,
the Company anticipates to be in compliance with Year 2000 requirements. Costs
related to compliance are not expected to be significant.
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 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, William Poulos filed a class action lawsuit in the
United States District Court for the Middle District of Florida, Case No.
94-478-CIV-ORL-22 (the Poulos case). The Complaint in the Poulos case alleges
violations of 18 U.S.C. ss. 1962(a), (c), and (d), the Racketeering Influenced
and Corrupt Organizations Act, and pendent state law claims. The approximately
41 named defendants in the Poulos case consist of the manufacturers and
distributors of electronic gaming devices, and companies who are parents and/or
affiliates of the entities which operate and/or provide the electronic gaming
devices for play by the public.
On May 10, 1994, William Ahearn filed a class action lawsuit in the United
States District Court for the Middle District of Florida, Case No.
94-532-CIV-ORL-22 (the Ahearn case). The named defendants and claims made in the
Poulos and Ahearn cases are virtually identical.
<PAGE>
On June 30, 1994, the Poulus and Ahearn cases were consolidated. On
December 9, 1994, the Poulos and Ahearn cases were transferred to the United
States District Court for the District of Nevada pursuant to 28 U.S.C. ss.
1404(a). On November 29, 1994, William Poulos filed a second class action
lawsuit in the United States District Court for the Middle District of Florida,
Case No. 94-1259-CIV-ORL-22 (the Cruise Ship case). The allegations made in the
Cruise Ship case are virtually identical to the allegations in the Poulos and
Ahearn cases. The defendants in the Cruise Ship case consist of manufacturers
and distributors of electronic gaming devices, and the operators of cruise ships
and cruise ship casinos where the devices are expose for play by passengers. On
September 14, 1995, the Cruise Ship case was transferred to the United States
District Court for the District of Nevada pursuant to 28 U.S.C. ss. 1404(a). On
September 26, 1995, Larry Schreier filed a class action lawsuit in the United
States District Court for the District of Nevada. Except for alleging a smaller
and more precisely defined class of plaintiffs, the Schreier case is virtually
identical to the Poulos and Ahearn cases. The Poulos, Ahearn, Schreier, and
Cruise Ship cases have been consolidated and assigned to visiting United States
District Court Judge David A. Ezra. Sodak is a named defendant in the Poulos,
Ahearn, and Schreier cases. 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.
The Defendants argued a variety of motions to dismiss and also procedural
motions before the Court on November 3, 1997. The Court ruled on the same
issuing various Orders which were entered and served on December 19, 1997. The
most significant rulings were that the Court ordered Plaintiffs to file an
Amended Complaint by January 9, 1998, and the Plaintiffs wire fraud count
against Defendants was dismissed with prejudice (cannot be relitigated). On
March 19, 1998 the Court granted Defendant's Motion to Bifurcate Discovery and
to Stay Merits Discovery until the Court decides the Plaintiff's Motion for
Class Certification.
The Defendant's Class Discovery responses are substantially complete.
However, it is anticipated that Plaintiffs will move to compel certain answers
that were objected to and not produced. On the other hand, Defendants moved to
compel discovery against the Plaintiffs. On June 4, 1998, the magistrate judge
granted 29 of 33 discovery requests against Plaintiffs. This ruling will
necessarily delay the completion of class discovery. At mid-July depositions of
the class representatives were beginning to take place. The Defendant's
Opposition to Motion of Class Certification is due approximately at the end of
July and Plaintiff's Reply due approximately the middle of August.
The Company believes the Consolidated action is without merit. The Company
is vigorously pursuing all legal defenses available to it and is participating
in the defense through counsel and the defendants steering committee created
pursuant Court Order.
<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
The Company held its annual meeting of shareholders on May 7, 1998 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, 1998.
There were 22,758,408 shares of Common Stock entitled to vote at the
meeting and a total of 21,768,719 shares (95.65%) were represented at the
meeting. The shareholder voting was as follows:
1. Election of Directors:
WITHHOLD
FOR AUTHORITY
---------- ---------
Michael G. Wordeman 21,664,720 103,999
Roland W. Gentner 21,664,520 104,199
Thomas Celani 21,668,120 100,599
Colin V. Reed 21,668,970 99,749
Manuel Lujan, Jr. 21,667,922 100,797
Ronnie Lopez 21,666,770 101,949
2. To ratify the selection of KPMG Peat Marwick LLP as independent auditors of
the Company for the fiscal year ending December 31, 1998:
For - 21,738,743 Against -18,886 Abstain - 11,090 Broker Non-Vote - 0
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.14 Agreement between Sodak Gaming, Inc. and Michael G. Wordeman
dated June 17, 1998.
b. Reports on Form 8-K
None.
<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: July 21, 1998
SODAK GAMING, INC.
By: \s\ Clayton R. Trulson
---------------------------------------
Clayton R. Trulson
Vice President of Finance
and Treasurer
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Page
- ------ ----
10.14 Agreement between Sodak Gaming, Inc.
and Michael G. Wordeman dated June 17, 1998 22
27 Financial Data Schedule (submitted with the EDGAR filing only)
Exhibit 10.14
AGREEMENT
The purpose of this Agreement and General Release ("Agreement") is to
confirm the agreed upon terms, conditions, and arrangements regarding the
separation of Michael G. Wordeman ("Executive") on behalf of himself, his
spouse, his heirs, executors, administrators, successors, assigns, and/or
derivatively on behalf of the Company, from his employment with Sodak Gaming,
Inc. and all its subsidiaries and affiliates ("Company").
WHEREAS:
A. Executive has been advised by the Company, orally and by this written
statement, to CONSULT WITH AN ATTORNEY before he signs this Agreement.
B. Executive entered into and executed a written Employment Agreement on J
une 30, 1993 with the Company. A true and correct copy of which is attached
hereto as Exhibit A .
C. Executive has submitted a letter of resignation from employment with the
Company and the Company has agreed to accept his resignation, a true and correct
copy of his letter of resignation is attached hereto marked Exhibit B .
D. Executive agrees to remain on the Company's Board of Directors and,
acknowledges and understands conduct as a Board member is governed by the
fiduciary obligations thereby incurred including but not limited to the Doctrine
of Corporate Opportunity, Duty of Care, Duty of Loyalty, Confidentiality and the
Business Judgment Rule.
In consideration of the mutual promises and agreements herein contained,
Executive and the Company agree as follows:
1. Termination. Executive's Employment Agreement dated June 30, 1993 which
expires June 30, 1999 is hereby terminated.
2. Separation Date. Executive's LAST DAY OF WORK, which shall also be
referred to as the Separation Date, will be June 30, 1998, and he has no present
or future right to further employment with the Company.
3. Severance Pay. Executive upon his separation date, shall receive the
following:
a. As consideration for termination of Executive'sEmployment
Agreement and the Noncompetition Covenant contained herein, a
lump sum payment in an amount equal to Two (2) Years of his
present base salary after applicable federal tax withholdings
and deductions have been deducted from said amount.
b. Health insurance until May 31, 2000 in accordance with
Company policy for senior management as such policies as may
be amended from time to time. The Company shall convert
Executive's membership to Arrowhead Country Club to
Executive's personal ownership on or before June 30, 1998.
Executive shall purchase the Company vehicle assigned to him
on or before June 30, 1998 for an amount equal to the lower
of the Company's book value or the wholesale Blue Book value
of such vehicle. Upon receipt of payment for such vehicle,
the Company shall pay Executive a lump sum car allowance in
the amount of Thirteen Thousand Two Hundred Twenty Five
<PAGE>
($13,225.00) Dollars.
c. A grant of 10,000 stock options pursuant to the Company's
1993 Director's Stock Option Plan with an exercise price of
the market price established by the last sale price on NASDQ
on June 30, 1998.
d. Two annual travel budgets of $25,000 per consecutive year.
Executive shall have access to the Corporate aircraft for
personal use until (a) May 31, 2000 or (b) Executive ceases to
be a member of the Company's Board of Directors, whichever
event first occurs. Personal use access is subject to
availability. Executive's personal use of the Company aircraft
shall be charged against the travel budget on an hourly fixed
cost basis as such cost shall be determined by the company and
may be adjusted from time to time. Company business use of the
aircraft shall be as authorized by the CEO. All business
expenses incurred by Executive require approval of the
Chairman of the Board Audit Committee prior to reimbursement
or charge against Executive's Travel Budget. If Executive
ceases to be a member of the Company's Board of Directors
prior to May 31, 2000, any unused portion of the annual budget
shall be paid to Executive, if Executive is a member of the
Company's Board of Directors on May 31, 2000, any unused
travel budget shall revert to the Company.
e. A lump sum payment of One Hundred Twenty Five Thousand
Dollars ($125,000) for office facility expenses.
4. Confidential and Proprietary Information. Executive shall not at any
time before two (2) years from the Separation Date, make available either
directly or indirectly, to any competitor or potential competitor of the
Company, or divulge, disclose, or communicate to any person, firm, corporation,
or other business entity in any manner whatsoever, any confidential or
proprietary information of the Company unless expressly authorized to do so by
the Company in writing. The Company shall provide Executive all documents and
information necessary to perform the function of Chairman of the Board of
Directors.
5. Cooperation. Executive agrees not to cause, encourage or participate in
any LEGAL PROCEEDINGS against the Company, its parent, subsidiaries, affiliates,
officers, directors, agents, benefit plan trustees, and employees ("Released
Parties") with respect to Executive's employment by the Company, except to
enforce this Agreement. Executive shall cooperate and give information necessary
to any internal investigation or inquiry made by the Company and/or relating to
any lawsuit against and/or by the Company of which Executive may have material
knowledge, or be a potential witness.
6. Understanding.
Executive acknowledges that the nature and extent of the benefits made
available to him have been EXPLAINED and that he UNDERSTANDS them. It is agreed
that these benefits are being received IN EXCHANGE FOR A FULL AND COMPLETE
RELEASE of all federal and state claims of any country and of any kind which he
may have against the Company based upon his employment with the Company; that he
intends to be bound by this release; that he has entered into this release
knowingly and voluntarily and after having the opportunity to review its terms
with a lawyer; and that the terms and conditions of this release were the result
of full discussions and negotiations between the parties.
7. No Admission of Liability. Executive also hereby agrees that nothing
contained in this Agreement is, or is to be treated as, an admission of
liability or wrongdoing by the Company or by the Executive and that no
ultimatums were given by either party.
<PAGE>
8. Governing Law. All disputes under this Agreement will be settled by
mediation and if necessary arbitration both in the County of Pennington, State
of South Dakota, in accordance with the rules of the American Arbitration
Association, or its successor, and judgment upon the award rendered may be
entered in any court with jurisdiction.
9. Noncompetition Covenant. Executive agrees that for a term of two (2)
years after his separation date he nor any of his affiliates (defined as any
Company or business entity of which Executive directly or indirectly owns 10% or
more equity interest or financing debt), shall not, without the written consent
of the Company's Board of Directors (determined by majority vote excluding
Executive should he be serving on said Board), directly or indirectly, engage in
competition with the Company in any manner or capacity (e.g., as an advisor,
principal, agent, partner, officer, director, stockholder, employee, member of
any association, or otherwise) in any phase of the past, current or next two
years business which the Company is conducting in South Dakota, North Dakota,
Wyoming, Native American jurisdictions (except and excluding Nevada, New Jersey,
and Hawaii), including the distribution, marketing, leasing, or selling of
accessories, devices, or systems related to the products or services being sold
by the Company. Executive further agrees (under the same terms and conditions
previously stated in this Paragraph 9) to not engage in any gaming operation
that competes with the Company within one hundred (100) miles of the Miss
Marquette Riverboat in Iowa, the Ak Chin Indian Gaming Casino in Arizona, the
Penticton Casino Project in B.C. Canada, and the Shreveport Riverboat Project in
Louisiana.
10. Miscellaneous.
10.01 Prior Agreements. This Agreement contains the entire agreement of
the parties relating to the employment of Executive as CEO and the subject
matter hereof and supersedes all prior agreements and understandings with
respect to such employment of Executive as CEO and the subject matter, and the
parties hereto have made no agreements, representations, or warranties relating
to the employment of Executive as CEO and the subject matter of this Agreement
which are not set forth herein.
10.02 Withholding Taxes. The Company may withhold from any benefits
payable under this Agreement all federal, state, city, or other taxes as shall
be required pursuant to any law or governmental regulation or ruling.
10.03 No Waiver. No term or condition of this Agreement shall be deemed
to have been waived, nor shall there be any estoppel to enforce any provisions
of this Agreement, except by a statement in writing signed by the party against
whom enforcement of the waiver or estoppel is sought. Any written waiver shall
not be deemed a continuing waiver unless specifically stated, shall operate only
as to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
10.04 Severability. To the extent any provision of this Agreement shall
be invalid or unenforceable, it shall be considered deleted herefrom and the
remainder of such provision and of this Agreement shall be unaffected and shall
continue in full force and effect. In furtherance and not in limitation of the
foregoing, should the duration or geographical extent of, or business activities
covered by, any provision of this Agreement be in excess of that which is valid
and enforceable under applicable law, then such provision shall be construed to
cover only that duration, extent, or activities which may validly and
enforceably be covered. Executive acknowledges the uncertainty of the law in
this respect and expressly stipulates that this Agreement be given the
construction which renders its provisions valid and enforceable to the maximum
extent (not exceeding its express terms) possible under applicable law.
10.05 Assignment. This Agreement shall be assignable, in whole or in
part, by the Company without
<PAGE>
the consent of Executive. After any such assignment by the Company, the Company
shall be discharged from all further liability hereunder and such assignee shall
thereafter be deemed to be the Company for the purposes of all provisions of
this Agreement including this Section 12.05.
10.06 Injunctive Relief. The Parties agree that it would be difficult
to compensate the other party fully for damages for any violation of the
provisions of this Agreement, including without limitation the provisions of
Sections 3, 9, 10, and 11. Accordingly, each party specifically agrees that the
other party shall be entitled to temporary and permanent injunctive relief to
enforce the provisions of this Agreement and that such relief may be granted
without the necessity of proving actual damages. This provision with respect to
injunctive relief shall not, however, diminish the right of either party to
claim and recover damages in addition to injunctive relief.
11. Execution of Documents. Executive agrees to cooperate and execute any
and all documents at any time requested by the Company that may be necessary to
or for, resign any position held by him on behalf of the Company, and any of its
subsidiaries including but not exclusively Sodak Gaming International, Inc., S.
G. International, Inc., Sodak Gaming do Brasil, Ltda, Sodak Gaming Peru, S. A.,
Eucasodak, S. A., Sodak Gaming Colorado, Gamblers Supply Management Company,
Sodak Gaming Mississippi, Sodak Gaming Texas, Sodak Louisiana, L. L. C., the
Company's SEC filings, investigative, regulatory and/or legal investigations and
disclosures.
In consideration of the receipt of the benefits described above, and except
for claims related to the obligations of the parties under this Agreement,
Executive RELEASES the Company and its subsidiaries and affiliates, and their
officers, directors, agents, benefit plan trustees, and employees from, any and
all claims whether known or unknown, related to Executive's Employment
Agreement, salary, bonus, stock, vacation, the Age Discrimination of Employment
Act of 1967, as amended, the Americans With Disabilities Act, the Civil Rights
Act of 1866, the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and any other state or federal laws of any country and regulations
relating to employment or employment discrimination. The Company releases
Executive from any and all claims, whether known or unknown, related to the
Executive's Employment Agreement as CEO.
Date delivered to Executive: 6/16/98
--------------------------
MICHAEL G. WORDEMAN SODAK GAMING, INC.
/s/ Mike Wordeman By: /s/ Michael G. Diedrich
------------------------------- --------------------------
Its: VP General Counsel
--------------------------
Date: 6/17/98 Date: 6/17/98
------------------------------- --------------------------
<PAGE>
State of South Dakota )
)ss.
County of )
On this the 17th day of June , 1998, before me, the undersigned Notary
Public, personally appeared Michael G. Wordeman, known to me or satisfactorily
proven to be the person whose name is subscribed to the within instrument and
acknowledged that he executed the same for the purposes therein contained.
In Witness Whereof, I hereunto set my hand and official seal.
/s/ George Grassby
-----------------------------------
Notary Public-South Dakota
My Commission Expires 6/2/05
-----------------------------------
(SEAL)
State of South Dakota )
)ss.
County of Pennington )
On this the 17th of June, 1998, before me, the undersigned officer,
personally appeared Michael G. Diedrich, who acknowledged himself to be the Vice
President and General Counsel of Sodak Gaming, Inc., a corporation, and that he,
as such Vice President and General Counsel, being authorized so to do, executed
the foregoing instrument for the purposes therein contained, by signing the name
of the corporation by himself as Vice President and General Counsel.
In Witness Whereof, I hereunto set my hand and official seal.
/s/ Susan M. Thayer
-----------------------------------
Notary Public-South Dakota
My Commission Expires 12/28/00
-----------------------------------
(SEAL)
<TABLE> <S> <C>
<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-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,923
<SECURITIES> 0
<RECEIVABLES> 32,213
<ALLOWANCES> 1,802
<INVENTORY> 18,640
<CURRENT-ASSETS> 59,050
<PP&E> 70,900
<DEPRECIATION> 10,675
<TOTAL-ASSETS> 152,143
<CURRENT-LIABILITIES> 32,833
<BONDS> 13,749
0
0
<COMMON> 23
<OTHER-SE> 105,538
<TOTAL-LIABILITY-AND-EQUITY> 152,143
<SALES> 25,732
<TOTAL-REVENUES> 65,898
<CGS> 19,561
<TOTAL-COSTS> 58,226
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 244
<INTEREST-EXPENSE> 1,758
<INCOME-PRETAX> 7,745
<INCOME-TAX> 2,930
<INCOME-CONTINUING> 4,815
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,815
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
