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 September 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 October 21, 1998, there were outstanding 22,758,408 shares of the Company's
common stock.
Page 1 of 32
Exhibit Index Page 23
1
<PAGE>
Sodak Gaming, Inc.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Earnings for the three months ended
September 30, 1998 and 1997 3
Consolidated Statements of Earnings for the nine months ended
September 30, 1998 and 1997 4
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997 5
Consolidated Statements of Cash Flows for the nine months ended
September 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 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
EXHIBIT INDEX 23
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Sodak Gaming, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30,
-------------------------------------------
1997 1997 as
as adjusted previously
In thousands, except share and per share amounts 1998 (Note 2) reported
- ------------------------------------------------ ------------ ------------- ------------
<S> <C> <C> <C>
Revenue:
Product sales $ 12,995 15,157 15,157
Gaming operations 13,921 14,606 14,606
Wide area progressive systems 4,040 3,956 3,956
Financing income 1,914 1,917 1,917
------------ ------------ ------------
Total revenue 32,870 35,636 35,636
------------ ------------ ------------
Costs and expenses:
Cost of product sales 10,043 11,676 11,676
Gaming operations 11,867 13,007 13,083
Selling, general and administrative 4,065 4,870 4,236
Restructuring charges (note 4) 1,814 0 0
Interest and financing costs 513 1,001 1,001
------------ ------------ ------------
Total costs and expenses 28,302 30,554 29,996
------------ ------------ ------------
Income from operations 4,568 5,082 5,640
Loss on sale of subsidiary (note 4) (1,706) 0 0
Other income, net 21 35 35
------------ ------------ ------------
Earnings before income taxes 2,883 5,117 5,675
Provision for income taxes 1,279 1,901 2,116
------------ ------------ ------------
Net earnings $ 1,604 3,216 3,559
============ ============ ============
Earnings per common share, basic and diluted $ 0.07 0.14 0.16
============ ============ ============
Weighted average number of common and
common equivalent shares outstanding 22,805,920 22,882,130 22,882,130
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
Sodak Gaming, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------------------
1997 1997 as
as adjusted previously
In thousands, except share and per share amounts 1998 (Note 2) reported
- ------------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Product sales $ 38,728 40,824 40,824
Gaming operations 41,864 41,380 41,380
Wide area progressive systems 11,624 9,870 9,870
Financing income 6,553 6,000 6,000
------------ ------------ ------------
Total revenue 98,769 98,074 98,074
------------ ------------ ------------
Costs and expenses:
Cost of product sales 29,604 31,650 31,650
Gaming operations 38,163 39,866 39,530
Selling, general and administrative 13,527 15,519 13,310
Restructuring charges (note 4) 2,964 0 0
Interest and financing costs 2,271 2,624 2,624
------------ ------------ ------------
Total costs and expenses 86,529 89,659 87,114
------------ ------------ ------------
Income from operations 12,240 8,415 10,960
Loss on sale of subsidiary (note 4) (1,706) 0 0
Other income, net 94 599 599
------------ ------------ ------------
Earnings before income taxes and cumulative
effect of accounting change 10,628 9,014 11,559
Provision for income taxes 4,209 3,542 4,293
------------ ------------ ------------
Earnings before cumulative effect of
accounting change 6,419 5,472 7,266
Cumulative effect of accounting change,
net of income tax effect 0 (3,131) 0
------------ ------------ ------------
Net earnings $ 6,419 2,341 7,266
============ ============ ============
Earnings per common share, basic and diluted:
Earnings before cumulative effect of
accounting change $ 0.28 0.24 0.32
Cumulative effect of accounting change 0.00 (0.14) 0.00
------------ ------------ ------------
Net earnings $ 0.28 0.10 0.32
============ ============ ============
Weighted average number of common and
common equivalent shares outstanding 22,786,303 22,911,488 22,911,488
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
Sodak Gaming, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
In thousands, except share and per share amounts 1998 1997
- ------------------------------------------------ ------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,206 3,942
Current trade, notes and interest receivables 29,790 36,137
Inventories 18,705 22,294
Prepaid expenses 730 756
Refundable income taxes 289 663
Deferred income taxes 1,953 1,319
----------- -----------
Total current assets 54,673 65,111
Property and equipment, net 57,929 59,739
Notes receivable, net of current maturities 32,738 38,723
Deferred income taxes 123 789
Investment in joint venture (note 5) 2,400 0
Other assets, net 289 794
----------- -----------
$ 148,152 165,156
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,364 32,379
Note payable 1,500 0
Current maturities of long-term debt 3,568 3,634
Income taxes payable 642 75
Deferred financing fee revenue 1,414 1,846
Accrued payroll and payroll related costs 2,827 1,986
Other accrued liabilities 4,369 3,620
----------- -----------
Total current liabilities 34,684 43,540
----------- -----------
Long-term debt, net of current maturities 6,376 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 46,480 40,061
Cumulative translation adjustment (3,499) (2,374)
----------- -----------
Total shareholders' equity 107,092 101,798
----------- -----------
$ 148,152 165,156
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
Sodak Gaming, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
----------------------------------------
1997 1997 as
as adjusted previously
In thousands 1998 (Note 2) reported
- ------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 6,419 2,341 7,266
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Pre-tax cumulative effect of accounting change 0 4,409 0
Depreciation and amortization 4,304 4,762 4,762
Provision for doubtful accounts 368 575 575
Deferred income taxes 32 214 1,214
Loss on sale of subsidiary 1,706 0 0
Gain on sale of receivables 0 (537) (537)
Net gain on sale of property, equipment and real estate (8) 0 0
Changes in operating assets and liabilities:
Trade and accrued interest receivables (1,226) 3,500 3,500
Notes receivable relating to financed sales 20,077 1,243 1,243
Inventories 3,589 (9,836) (9,836)
Prepaid expenses (380) 76 76
Accounts payable (11,885) 3,989 3,989
Accrued liabilities 1,721 1,276 1,276
Income taxes payable, net of refundable income taxes 942 1,071 2,101
---------- ---------- ----------
Net cash provided by operating activities 25,659 13,083 15,629
---------- ---------- ----------
Cash flows from investing activities:
Cash advanced on notes receivable (10,403) (3,877) (3,877)
Payments received on notes receivable 3,502 4,049 4,049
Proceeds from sale of property, equipment and real estate 628 0 0
Purchases of property and equipment (5,770) (7,723) (7,723)
Investment in joint venture (2,400) 0 0
(Increase) decrease in other assets 155 (241) (2,787)
---------- ---------- ----------
Net cash used in investing activities (14,288) (7,792) (10,338)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from short-term borrowing 1,500 0 0
Proceeds from long-term borrowings 30,000 23,750 23,750
Principal repayments of long-term debt (43,507) (37,049) (37,049)
Proceeds from sale leaseback transaction 0 7,540 7,540
Net proceeds from exercise of stock options 0 6 6
---------- ---------- ----------
Net cash used in financing activities (12,007) (5,753) (5,753)
---------- ---------- ----------
Effect of exchange rate changes on cash and cash equivalents (100) (39) (39)
---------- ---------- ----------
Net decrease in cash and cash equivalents (736) (501) (501)
Cash and cash equivalents, beginning of period 3,942 4,077 4,077
---------- ---------- ----------
Cash and cash equivalents, end of period $ 3,206 3,576 3,576
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,324 2,497 2,497
Cash paid during the period for income taxes 3,235 978 978
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
Sodak Gaming, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 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 (see note 3 - Recent Accounting Pronouncements, "REPORTING ON COSTS OF
START-UP ACTIVITIES"). 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 sheet at 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 nine months ended September 30, 1997 as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
In thousands September 30, 1997 September 30, 1997
------------------------------------------------------------------ ------------------ ------------------
<S> <C> <C>
Increase (decrease) in gaming operations expenses $ (76) 336
Increase in selling, general and administrative expenses 634 2,209
----------- -----------
Decrease in income from operations 558 2,545
Less income tax benefit 215 751
----------- -----------
Decrease in earnings before cumulative effect of accounting change $ 343 1,794
=========== ===========
</TABLE>
The cumulative effect of this accounting change, reflected as a charge to
earnings 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.
7
<PAGE>
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 sheets as required. If presented for the three months and nine months
ended September 30, 1998 and 1997, comprehensive income would be as follows:
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
----------------------------------------- -----------------------------------------
1997 1997
1997 as previously 1997 as previously
In thousands 1998 as adjusted reported 1998 as adjusted reported
- ------------------------------ ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net earnings $ 1,604 3,216 3,559 6,419 2,341 7,266
Foreign currency translation
adjustments, net of income
tax effects (72) (62) (62) (1,125) (317) (317)
----------- ----------- ----------- ----------- ----------- -----------
Comprehensive income $ 1,532 3,154 3,497 5,294 2,024 6,949
=========== =========== =========== =========== =========== ===========
</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. On
July 31, 1998, the Company divested its Brazilian subsidiary. The Company also
plans to divest from its Latin American operations in Peru and Ecuador.
In conjunction with the restructuring, known costs and expenses (primarily
relating to employees' severance) amounting to approximately $1.8 and $3.0
million pre-tax, substantially all of which have been paid at September 30,
1998, were charged to operations during the three months and nine months ended
September 30, 1998, respectively.
A pre-tax loss on the sale of the Brazilian subsidiary amounting to $1.7
million was recognized during the three months and nine months ended September
30, 1998. The Company is proceeding with its divestiture plans regarding its
gaming operations in Peru and Ecuador. Additional losses on divestiture are
anticipated as these divestitures are completed.
NOTE 5 - INVESTMENT IN JOINT VENTURE
The Company has 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, received regulatory approval by the Louisiana Gaming
Control Board on September 15, 1998. The project is anticipated to be financed
by an equity investment from the Company and Hollywood equal to approximately
25% of the total estimated $185 million project cost; the remaining 75% is
anticipated to be financed through a debt offering or other credit facility.
During the third quarter of 1998, the Company invested $2.4 million in the joint
venture, but has no commitment to invest additional funds until financing for
the project is arranged. The debt financing for the project is anticipated to
occur in the second quarter of 1999, at which time it is anticipated that the
Company and Hollywood would each invest approximately $21 million additional
equity in the joint venture. Construction is planned to commence upon
finalization of financing arrangements and is expected to take approximately 15
months. However, there can be no assurance that financing arrangements will be
obtained.
The Company effectively will own 50% of the joint venture and will account
for the project on the equity method of accounting. To date, the joint venture
has not incurred any material operating expenses.
8
<PAGE>
NOTE 6 - 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 nine-month periods ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
----------------------------------------- -----------------------------------------
1997 as 1997 as
1997 previously 1997 previously
1998 as adjusted reported 1998 as adjusted reported
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares outstanding:
Weighted average common
shares outstanding 22,758,408 22,758,408 22,758,408 22,758,408 22,758,112 22,758,112
Adjustments for common
stock equivalents(1) 47,512 123,722 123,722 27,895 153,376 153,376
----------- ----------- ----------- ----------- ----------- -----------
Weighted average number
of common and
common equivalent
shares outstanding 22,805,920 22,882,130 22,882,130 22,786,303 22,911,488 22,911,488
=========== =========== =========== =========== =========== ===========
Net earnings $ 1,603,715 $ 3,216,072 $ 3,559,410 $ 6,419,266 $ 2,340,408 $ 7,266,102
=========== =========== =========== =========== =========== ===========
Earnings per share, basic $ 0.07 $ 0.14 $ 0.16 $ 0.28 $ 0.10 $ 0.32
=========== =========== =========== =========== =========== ===========
Earnings per share, diluted $ 0.07 $ 0.14 $ 0.16 $ 0.28 $ 0.10 $ 0.32
=========== =========== =========== =========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(1) Represents adjustment computed under the treasury stock method for stock
options granted at fair market value at date of grant.
9
<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 nine
months ended September 30, 1998 to results for the three months and nine months
ended September 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. On
July 31, 1998, the Company divested its Brazilian subsidiary. The Company also
plans to divest from its Latin American operations in Peru and Ecuador.
As a result of the restructuring process, the Company's selling, general
and administrative costs during the three months ended September 30, 1998 have
been reduced compared to other recent periods, and ongoing selling, general and
administrative costs are expected to stabilize at such lower levels to reflect
reorganization and changes in strategy. However, there can be no assurance that
selling, general and administrative costs will remain at such lower levels.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997
Excluding the restructuring charges and the loss on sale of the Brazilian
subsidiary (described in note 4 to the financial statements on page 8), net
earnings for the three months ended September 30, 1998 would have increased 32%
to $4.2 million, or $0.19 per share, compared to $3.2 million, or $0.14 per
share for the three months ended September 30, 1997. The increase in earnings
before the restructuring charges and the loss on sale of the Brazilian
subsidiary was primarily due to improved operating results at the MISS
MARQUETTE, decreased selling, general and administrative expenses as a result of
the restructuring and decreased interest expense. These improvements were
partially offset by reduced revenues from product sales and increased operating
costs related to the Peruvian gaming operations. Total revenue decreased 8% to
$32.9 million in 1998, compared to $35.6 million in 1997. Total costs and
expenses prior to restructuring charges decreased 13% to $26.5 million in 1998,
compared to $30.6 million in 1997.
Including the restructuring charges and the loss on sale of the Brazilian
subsidiary, net earnings for the three months ended September 30, 1998 decreased
50% to $1.6 million, or $0.07 per share, compared to net earnings of $3.2
million, or $0.14 per share, for the three months ended September 30, 1997.
PRODUCT SALES
Revenue from product sales decreased 14% to $13.0 million in 1998 compared
to $15.2 million in 1997. The decrease in 1998 was the result of a 13% decrease
in machine sales revenue to $10.8 million in 1998 compared to $12.4 million in
1997 and a 22% decrease in ancillary gaming and non-gaming related product sales
revenue to $2.2 million in 1998 compared to $2.8 million in 1997.
New gaming machine shipments decreased 15% to 1,510 machines in 1998
compared to 1,780 machines in 1997. In 1998, 79% of the new machine shipments
were to casinos in Arizona, Connecticut,
10
<PAGE>
Iowa, Mississippi and Wisconsin. In 1997, 80% of the new machine shipments were
to casinos in Arizona, Louisiana and North Carolina. 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 $10.0 million in 1998, from
$11.7 million in 1997 as a result of decreased product sales revenue. The gross
margin on product sales remained relatively stable at 22.7% in 1998 as compared
to 23.0% in 1997.
GAMING OPERATIONS
Gaming operations revenue decreased 5% to $13.9 million in 1998, from
$14.6 million in 1997. This decrease was attributable to the divestiture of the
Brazilian gaming operation, partially offset by an increase in revenue from the
MISS MARQUETTE. Direct costs of gaming operations decreased 9% to $11.9 million
in 1998, compared to $13.0 million in 1997. This decrease was attributed to the
divestiture of the Brazilian gaming operation combined with decreased costs at
the MISS MARQUETTE, partially offset by increased 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 5% to $9.5 million in 1998 compared
to $9.1 million in 1997. Direct operating costs decreased 5% to $7.4 million in
1998 compared to $7.8 million in 1997. The improvement in operating performance
is primarily the result of the implementation of new marketing strategies and a
continuation of cost-containment measures initiated by management in late 1997.
INTERNATIONAL GAMING OPERATIONS
As discussed on page 10, the Company has divested of its operations in
Brazil. The Company is proceeding with its divestiture plans regarding its
gaming operations in Peru and Ecuador. Additional losses on divestiture are
anticipated as these divestitures are completed.
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. The Company has not paid
any per-machine Federal gaming tax in 1998 due to lower court decisions in Peru
holding such a tax to be unconstitutional. The Company has continued to accrue
for this tax and had an approximately $1.3 million accrued liability related to
this tax on the balance sheet at September 30, 1998. This accrual may be
reversed pending a Supreme Court decision in Peru affirming the
unconstitutionality of the Federal per-machine gaming tax. However, there can be
no assurance that such affirmance will be issued by the Supreme Court.
Among other regulatory changes announced in 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.
11
<PAGE>
The number of machines in operation at September 30, 1998 was
approximately 1,330 at 14 locations compared to approximately 830 machines at 12
locations at September 30, 1997. Revenue was $3.5 million in both 1998 and 1997.
Revenue did not increase proportionately with machines primarily due to
increased competitive factors and due to continued economic effects associated
with severe weather conditions related to "El Nino." Direct operating costs
increased 14% to $3.6 million in 1998 compared to $3.2 million in 1997. This
increase is primarily attributed to the increased number of locations and
machines in operation in 1998 as compared to 1997.
BRAZIL. From June 1996 through July 1998, the Company operated a gaming
hall in the Arpoador district of Rio de Janeiro with approximately 200 machines
(the agreement between the Company and the owners of the gaming hall was revised
such that the operation was a route operation of the Company from December 1997
through July 1998). On July 31, 1998, the Company divested its Brazilian gaming
operation. As a result of the divestiture, revenue decreased 71% to $0.4 million
in 1998 compared to $1.5 million in 1997. Direct costs decreased 71% to $0.4
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 decreased 22% to $0.4
million in 1998 compared to $0.6 million in 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.
WIDE AREA PROGRESSIVE SYSTEMS
Wide area progressive systems revenue grew 2%, rounding to $4.0 million in
both 1998 and 1997. Comparing the three months ended September 30, 1998 to the
three months ended September 30, 1997, five new systems were in operation; TOTEM
POLE, JEOPARDY, and three twenty-five cent WHEEL OF FORTUNE systems; and the
number of machines on the systems at September 30, 1998 increased to
approximately 1,810 from approximately 1,560 at September 30, 1997. Machine
growth outpaced revenue growth due to the fact that during 1998 the Company
continued to replace machines on older systems which provide higher margins to
the Company with machines on newer systems which provide lower margins to the
Company. These newer systems have greater player appeal and acceptance, as well
as greater casino acceptance. The Company believes this replacement activity has
peaked; therefore, continued machine additions to existing systems along with
the introduction of new, innovative systems and the placement of machines and
systems in new jurisdictions is anticipated to provide increased future revenue
growth. However, there can be no assurance that casinos will continue adding
systems and machines and 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.
At September 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, and 17 systems
were in operation: MEGABUCKS (one interstate and one intrastate), DOLLARS
DELUXE, FABULOUS 50'S, QUARTERMANIA (one interstate and two intrastate),
NICKELMANIA, HIGH ROLLERS, WHEEL OF GOLD, TOTEM POLE (which began operating in
December 1997), JEOPARDY (which began operating in January 1998), and WHEEL OF
FORTUNE in both dollar (one interstate and one intrastate) and twenty-five cent
denominations (one interstate and two intrastate, two of which began operating
in June 1998 and one of which began operating in July 1998).
12
<PAGE>
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 was $1.9 million in
both 1998 and 1997.
The Company recognized revenue of $0.4 million in both 1998 and 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 17% to $4.1 million
in 1998, from $4.9 million in 1997. The decrease is primarily attributed to the
restructuring as described on page 10. As a percent of total revenue, selling,
general and administrative expenses decreased to 12.4% in 1998 compared to 13.7%
in 1997.
RESTRUCTURING CHARGES
Restructuring charges, primarily related to severance costs, of $1.8
million were incurred in the third quarter of 1998 in conjunction with the
Company's restructuring (see page 10 for discussion).
INTEREST AND FINANCING COSTS
Interest and financing costs decreased 49% to $0.5 million in 1998, from
$1.0 million in 1997. The decrease in interest and financing costs was primarily
the result of increased cash flows from operations in 1998, which in turn
decreased third quarter average borrowings to fund working capital needs as
compared to 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 10%
decrease in income from operations to $4.6 million in 1998, compared to $5.1
million in 1997. As a percent of total revenue, income from operations decreased
to 13.9% in 1998, from 14.3% in 1997. The decrease in the operating margin was
primarily the result of the restructuring charges, decreased product sales
revenue and increased operating costs related to the Peruvian gaming operations,
partially offset by improved operating results at the MISS MARQUETTE, decreased
selling, general and administrative expenses and decreased interest expense.
Excluding the restructuring charges, income from operations would have
increased 26% to $6.4 million in 1998, and income from operations would have
been 19.4% of total revenue in 1998.
13
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OTHER
On July 31, 1998, the Company recognized a $1.7 million loss on the sale
of the Brazilian subsidiary (see note 4 to the financial statements on page 8).
Including the restructuring charges and the loss on the sale of the Brazilian
subsidiary, earnings before income taxes decreased 44% to $2.9 million in 1998,
compared to $5.1 million in 1997. Provision for income taxes was $1.3 million in
1998 as compared to $1.9 million in 1997, representing 44% and 37% of earnings
before income taxes for 1998 and 1997, respectively. The increased effective
rate in 1998 results primarily from the non-deductibility of a portion of the
loss on the sale of the Brazilian subsidiary.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997
Excluding the restructuring charges and the loss on the sale of the
Brazilian subsidiary (described in note 4 to the financial statements on page
8), earnings before cumulative effect of accounting change for the nine months
ended September 30, 1998 would have increased 79% to $9.8 million, or $0.43 per
share, compared to $5.5 million, or $0.24 per share, for the nine months ended
September 30, 1997. The primary factors causing the increase in earnings prior
to the restructuring charges and the loss on sale of the Brazilian subsidiary
were improved operating results at the MISS MARQUETTE, increased wide area
progressive systems revenues, increased financing income, decreased selling,
general and administrative expenses as a result of the restructuring and
decreased interest expense. These improvements were partially offset by
decreased operating results in Peru. Total revenue increased 1% to $98.8 million
in 1998, compared to $98.1 million in 1997. Total costs and expenses prior to
restructuring charges decreased 7% to $83.6 million in 1998, compared to $89.7
million in 1997.
Including the restructuring charges and the loss on the sale of the
Brazilian subsidiary, earnings before cumulative effect of accounting change for
the nine months ended September 30, 1998 increased 17% to $6.4 million, or $0.28
per share, compared to $5.5 million, or $0.24 per share, for the nine months
ended September 30, 1997.
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 decreased 5% to $38.7 million in 1998 compared
to $40.8 million in 1997. The decrease was primarily the result of a decrease in
ancillary gaming and non-gaming related product sales revenue.
New gaming machine shipments increased 6% to approximately 4,090 machines
in 1998 compared to approximately 3,870 machines in 1997. In 1998, 83% of the
new machine shipments were to casinos in Arizona, Iowa, Kansas, Michigan,
Minnesota, New Mexico, North Carolina and Wisconsin. In 1997, 66% of the new
machine shipments were to casinos in Arizona, Kansas, Louisiana, Michigan and
North Carolina. 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 approximately 230
used machines, compared to approximately 1,820 in 1997.
14
<PAGE>
The cost of product sales decreased 6% to $29.6 million in 1998, from
$31.7 million in 1997 as a result of decreased product sales revenue. The gross
margin on product sales increased to 23.6% in 1998 as compared to 22.5% 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.
GAMING OPERATIONS
Gaming operations revenue increased 1% to $41.9 million in 1998, from
$41.4 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
and Brazil. Direct costs of gaming operations decreased 4% to $38.2 million in
1998, compared to $39.9 million in 1997. The decrease was attributed to
decreased costs at the MISS MARQUETTE and in Brazil. See pages 11 and 12 for
more detailed information regarding specific gaming operations described below.
DOMESTIC GAMING OPERATIONS
MISS MARQUETTE. Revenue increased 10% to $27.1 million in 1998 compared to
$24.6 million in 1997. Direct operating costs decreased 3% to $22.0 million in
1998, from $22.8 million in 1997. The improvement in operating performance is
primarily the result of three factors: the implementation of new marketing
strategies, a continuation of cost-containment measures initiated by management
in late 1997 and an improvement in weather conditions in the first two quarters
of 1998 relative to 1997.
INTERNATIONAL GAMING OPERATIONS
As discussed on page 10, the Company has divested of its operations in
Brazil. The Company is proceeding with its divestiture plans regarding its
gaming operations in Peru and Ecuador. Additional losses on divestiture are
anticipated as these divestitures are completed.
PERU. Revenue decreased 11% to $9.9 million in 1998 compared to $11.1
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 increased 1% to $11.7
million in 1998 compared to $11.6 million in 1997.
BRAZIL. The Company divested of its Brazilian gaming operation on July 31,
1998. As a result of the divestiture, revenue decreased 24% to $3.2 million in
1998 compared to $4.2 million in 1997. Direct costs decreased 24% to $3.1
million in 1998 compared to $4.1 million in 1997.
ECUADOR. Revenue increased 12% to $1.6 million in 1998 compared to $1.5
million in 1997. Direct costs associated with the operation were $1.4 million in
both 1998 and 1997.
WIDE AREA PROGRESSIVE SYSTEMS
Wide area progressive systems revenue increased 18% to $11.6 million in
1998 compared to $9.9 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 (see page 12 for additional discussion).
15
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FINANCING INCOME
Financing income increased 9% to $6.6 million in 1998 compared to $6.0
million in 1997. This increase is primarily due to an increase in financing fees
and interest income recognized in 1998 for arranging financing for casino
projects. The Company recognized revenue of $1.3 million in 1998 compared to
$1.5 million in 1997 as its share of Harrah's management fee from the Harrah's
Phoenix Ak-Chin casino (see page 13 for additional discussion).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 13% to $13.5
million in 1998, from $15.5 million in 1997. The decrease is primarily
attributed to the restructuring as described on page 10. As a percent of total
revenue, selling, general and administrative expenses decreased to 13.7% in 1998
compared to 15.8% in 1997.
RESTRUCTURING CHARGES
Restructuring charges, primarily related to severance costs, totaling $3.0
million were incurred in the first nine months of 1998 in conjunction with the
Company's restructuring (see page 10 for discussion).
INTEREST AND FINANCING COSTS
Interest and financing costs decreased 13% to $2.3 million in 1998,
compared to $2.6 million in 1997. The decrease in interest and financing costs
was primarily the result of increased cash flows from operations in 1998, which
in turn decreased average borrowings to fund working capital needs as compared
to 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 45%
increase in income from operations to $12.2 million in 1998, compared to $8.4
million in 1997. As a percent of total revenue, income from operations increased
to 12.4% in 1998, from 8.6% in 1997. The increase in the operating margin was
primarily the result of improved operating results at the MISS MARQUETTE,
increased wide area progressive systems revenues, increased financing income,
decreased selling, general and administrative expenses as a result of the
restructuring and decreased interest expense. These improvements were partially
offset by the restructuring charges recognized and decreased revenues from
gaming operations in Peru.
Excluding the restructuring charges, income from operations would have
increased 81% to $15.2 million in 1998, and income from operations would have
been 15.4% of total revenue in 1998.
OTHER
On July 31, 1998, the Company recognized a $1.7 million loss on the sale
of the Brazilian subsidiary (see note 4 to the financial statements on page 8).
Other income was $0.1 million in 1998 as compared to $0.6 million in 1997. The
decrease in other income resulted from $0.5 million of income recognized in 1997
related to the sale of certain receivables at a premium. Including the
restructuring charges and the loss on the sale of the Brazilian subsidiary,
earnings before income taxes increased 18% to $10.6 million in 1998, compared to
$9.0 million in 1997. Provision for income taxes was $4.2 million in 1998 as
compared to $3.5 million in 1997, representing 40% and 39% of earnings before
income taxes for 1998 and 1997, respectively.
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LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital decreased $1.6 million to $20.0 million during the nine
months ended September 30, 1998. This decrease was due to a $10.4 million
decrease in current assets which was partially offset by a $8.8 million decrease
in current liabilities.
CASH FLOWS
During the nine months ended September 30, 1998, the Company's cash and
cash equivalents decreased $0.7 million to $3.2 million. Cash provided by
operating activities was $25.7 million in 1998 compared to $13.1 million in
1997. The cash flows from operations for 1998 were primarily affected by net
earnings, depreciation, the non-cash loss on the sale of the Brazilian
subsidiary, and changes in receivables, inventories, accounts payable, accrued
liabilities and income taxes payable.
Cash used in investing activities amounted to $14.3 million in 1998 and
$7.8 million in 1997. Cash used in investing activities consisted of $10.4
million and $3.9 million advanced on notes receivable primarily for customer
financing in 1998 and 1997, respectively; $5.8 million and $7.7 million used to
purchase property and equipment in 1998 and 1997, respectively; and $2.4 million
invested in a joint venture in 1998 (see capital commitments on next page). 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 $3.5 million and
$4.0 million in payments received on notes receivable from customer financing in
1998 and 1997, respectively; and $0.6 received on the sale of certain property
and equipment in 1998.
Financing activities used $12.0 million cash in 1998 and $5.8 million in
1997. Cash flows from financing activities in both 1998 and 1997 consisted
primarily 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. In addition, during 1998, the Company borrowed $1.5 million on a
short-term note related to an employee incentive loan plan and in 1997, the
Company entered into a sale leaseback transaction involving certain gaming
equipment which provided $7.5 million in cash.
INDEBTEDNESS/LINES OF CREDIT
The Company had $9.9 million of long-term debt outstanding at September
30, 1998. Of that amount, $1.5 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
$38.75 million at September 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,
17
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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 $8.0 million in
letters of credit outstanding at September 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. 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
September 30, 1998, approximately $5.9 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 $2.5 million of long-term debt, $1.3 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
related to various other debt secured by certain property of the MISS MARQUETTE
and $0.4 million is secured by certain transportation equipment.
During 1998, the Company borrowed $1.5 million on a short-term note
related to an employee incentive loan plan. This note is due in July 1999.
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 September
30, 1998, the outstanding loan balance was $1.4 million.
The Company has 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, received regulatory approval by the Louisiana Gaming
Control Board on September 15, 1998. The project is anticipated to be financed
by an equity investment from the Company and Hollywood equal to approximately
25% of the total estimated $185 million project cost; the remaining 75% is
anticipated to be financed through a debt offering or other credit facility.
During the third quarter of 1998, the Company invested $2.4 million in the joint
venture, but has no commitment to invest additional funds until financing for
the project is arranged. The debt financing for the project is anticipated to
occur in the second quarter of 1999, at which time it is anticipated that the
Company and Hollywood would each invest approximately $21 million additional
equity in the joint venture. Construction is planned to commence upon
finalization of financing arrangements and is expected to take approximately 15
months. However, there can be no assurance that financing arrangements will be
obtained.
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<PAGE>
INTERNATIONAL OPERATIONS
Approximately 15% of total revenue for the nine months ended September 30,
1998 was derived outside of the United States, compared to 17% for the nine
months ended September 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 completes its Latin American
divestitures, exposure to gains and losses on foreign currency transactions will
no longer exist.
IMPACT OF INFLATION
Inflation did not have a significant effect on the Company's operations
during the nine months ended September 30, 1998.
YEAR 2000 COMPLIANCE
The Company has commenced a project to identify, evaluate and implement
changes to computer systems and applications necessary to achieve a year 2000
date conversion with no effect on customers or disruption to business
operations. The Company will also be communicating with suppliers, financial
institutions and others with which it conducts business to coordinate year 2000
conversions. The total cost of compliance and its effect on the Company's future
results of operations will be determined as a part of this project. Based on
initial review, the total cost is not expected to exceed $200,000. However,
there can be no assurance that the systems of other companies on which the
Company may rely will be converted timely or that such failure to convert by
another company would not have an adverse effect on the Company's systems.
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.
19
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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.
On September 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
20
<PAGE>
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.
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
10.15 Agreement between the Company et al. and Pro-Gaming
Consultants Ltd et al.
b. Reports on Form 8-K
None.
21
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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: October 21, 1998
SODAK GAMING, INC.
By: /s/ Clayton R. Trulson
-------------------------------
Clayton R. Trulson
Vice President of Finance
and Treasurer
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EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Page
- ------ ----
10.15 Agreement between the Company et al. and
Pro-Gaming Consultants Ltd et al. 24
27 Financial Data Schedule 32
23
Exhibit 10.15
PURCHASE AND SALE AGREEMENT
THIS AGREEMENT is entered by and among the following parties:
1. SODAK GAMING INTERNATIONAL, INC., a South Dakota Corporation, with its
principal office at 5301 South Highway 16, Rapid City, South Dakota, United
States of America, hereinafter referred to as "Sodak International";
2. SODAK GAMING, INC., a South Dakota Corporation, with its principal office at
5301 South Highway 16, Rapid City, South Dakota, United States of America,
hereinafter referred to as "Sodak Gaming";
hereinafter each referred to as "Seller" and jointly referred to as "Sellers"
3. PRO-GAMING CONSULTANTS LTD., a company organized and existing under the laws
of British Virgin Islands, with its principal office at P.O Box 3175, Road Town,
Tortola, British Virgin Islands, hereinafter referred to as "Buyer" and,
4. MARCELO COSTA, Brazilian citizen, married, businessman, bearer o identity
card IFP/RJ no. 05538136-2 and taxpayer registration no. 721.747.817-00,
resident and domiciled at Rua Figueiredo Magalhaes, no. 581, CO 01, Rio de
Janeiro, RJ, Brazil, hereinafter referred to as MARCELO;
5. RICARDO NAMEN, Brazilian citizen, single, businessman, bearer o identity card
SSP/SP no. 6921978 and taxpayer registration no. 905350498-20 resident and
domiciled at Rua Joana Angelica 35/202 Rio de Janeiro, RJ, Brazil, hereinafter
referred to as RICARDO;
6. ANDRE TORRES, Brazilian citizen, married, businessman, bearer o identity card
OAB/RJ no. 49332 and taxpayer registration no. 702330127-53 resident and
domiciled at Rua Mexico no. 31 / 1602 Centro - Rio de Janeiro, RJ, Brazil,
hereinafter referred to as ANDRE and;
7. MARCUS FORTUNATO, Brazilian citizen, widowed, businessman, bearer o identity
card IRP/RJ no. 05610024-1 and taxpayer registration no. 705368807-00 resident
and domiciled at Rua Joana Angelica 35/202 Rio de Janeiro, RJ, Brazil,
hereinafter referred to as MARCUS.
hereinafter jointly and severally referred to as "Guarantors"
Whereas pursuant to the terms and conditions of this Agreement, Sellers desire
to sell to Buyer and Buyer to purchase from Sellers, 6,000,000 quotas, with a
par value of R$ 1,00 each, representing all the issued and outstanding quotas of
SODAK GAMING DO BRASIL LTDA., a Brazilian Limited Liability Company, with its
head offices at Rua Buenos Aires, no. 68, room 2901, Rio de Janeiro, RJ, Brazil,
taxpayer registration no. 00.810.201/0001-54, hereinafter called "Sodak Brasil"
or the "Company";
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants, agreements and conditions set forth
herein and therein and intending to be legally bound hereby and thereby, the
parties hereto agree as follows:
1. PURCHASE AND SALE OF THE QUOTAS
1.1. Subject to the provisions of this Agreement, at the closing provided for in
Section 1.4. hereof (the "Closing"), Sellers will sell and assign to Buyer
6,000,000 quotas, representing all of the issued and outstanding quotas of Sodak
Brasil (the "Quotas"), and Buyer will purchase, acquire and accept from Sellers
the Quotas.
1.1.1. Subject to the provisions of this Agreement, at the Closing, Sodak
International will sell and assign to Buyer 5,975,000 quotas, representing
approximately 99.59% of Sodak Brasil legal capital, and Sodak Gaming will sell
and assign to Buyer 25,000 quotas of Common Stock representing .41% of SODAK
BRASIL legal capital.
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<PAGE>
1.2. CONSIDERATION - Subject to the terms and conditions of this Agreement, in
consideration of the aforesaid sale, assignment of the Quotas, Buyer shall pay
or cause to be paid to Sellers at the Closing in cash the total Purchase Price
of US$ 1,000, by wire transfer of immediately available funds, in accordance
with Section 1.2.1., to such bank accounts as shall be designated by each of the
Sellers to Buyer (the "Purchase Price").
1.2.1. The Purchase Price will be divided among the Sellers as follows: (a)
Sodak International shall receive US$ 996.00 (b) Sodak Gaming shall receive US$
4.00
1.2.2. The Payment of the Purchase Price
The Purchase Price shall be paid to Sellers at Closing, as defined in Clause
1.4. below, in the amount and proportion established in Clauses 1.2. and 1.2.1.
1.3. Sellers upon full receipt of the Purchase Price at Closing will deliver to
Buyer full and complete receipts of the Purchase Price.
1.4. CLOSING - Closing of the transactions contemplated by this Agreement shall
take place as promptly as practicable, and in any event no later than August 10,
1998, upon the satisfaction or waiver of all of the conditions to Closing set
forth in Section 4 hereof, at 10:00 hs. local time at the offices of Escritorio
de Advocacia Gouvea Vieira, Av. Rio Branco, No. 85, Rio de Janeiro, RJ, or on
such other date or at such other place as the parties may agree. The date of
Closing is referred to as the "Closing Date."
1.5. TRANSFER OF QUOTAS - At Closing and upon full receipt of the Purchase
Price, Sellers will execute and deliver to Buyer an amendment to the Social
Contract of Sodak Brasil transferring and assigning the Quotas to Buyer.
1.5.1. The amendment to the Company's Social Contract, which shall be filed
before the Rio de Janeiro Board of Trade, shall be substantially in the form of
the draft attached hereto as Exhibit No. 1.
1.6. TERMINATION OF THE EMPLOYMENT AGREEMENTS - The termination of the
Employment Agreements shall become effective on the Closing Date once all
closing documents have been executed and the transfer of shares has been made
between Sodak International and Sodak Gaming, Inc. to the Buyer. And the
termination compensation has been received by the Guarantors.
1.6.1. The Termination Agreements shall contain the usual clauses and shall
contemplate that neither Sodak International nor Sodak Gaming will have further
obligation whatsoever under the Employment Agreements signed with the Guarantors
and that the Guarantors, jointly and severally, shall save and hold Sellers
harmless from any liability concerning said Employment Agreements, including any
claims for Brazilian/ United States taxes and labor benefits.
2. REPRESENTATIONS AND WARRANTIES BY SELLERS - Each Seller represents and
warrants to Buyer as follows:
2.1. Ownership of Quotas - Sellers shall be on Closing Date the lawful owners of
the Quotas indicated in Section 1.1 hereof, all of which on the Closing Date
shall be registered in the Sellers' name.
2.1.1. Sellers shall have on the Closing Date good title to the Quotas free and
clear of all liens, encumbrances, restrictions and claims of every kind and
there are and on Closing Date there shall be no judicial or administrative
proceedings of any kind, either filed or, to the best of Sellers' knowledge,
threatened to be filed, which would prevent the transfer of Quotas herein
contemplated, except for as mentioned.
2.1.2. Sellers have full legal right, power and authority to enter into this
Agreement and, after satisfaction of the conditions set forth in Section 4.
shall have full legal right, power and authority to sell and transfer the Quotas
so owned by them pursuant to this Agreement.
2.1.3. The assignment to Buyer of the Quotas pursuant to the provisions of this
Agreement will transfer to Buyer valid title thereto, free and clear of all
liens, encumbrances, restrictions and claims of every kind, except any liens,
encumbrances, restrictions or claims which arise because of actions taken by, or
the status of, Buyer.
25
<PAGE>
2.1.4. Existence and Good Standing of Sodak Brasil - Sodak Brasil is a limited
liability company ["Sociedade por Quotas de Responsabilidade Limitada"] duly
organized, validly existing and in good standing under the laws of Brazil and is
duly licensed to conduct its business in Brazil.
2.2. Agreement - This Agreement constitutes a valid and legally binding
obligation of the Sellers, enforceable against Sellers, in accordance with its
terms, except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws, now or hereafter in effect affecting
generally the enforceability of creditors' rights and equitable remedies.
2.3. Effect of Agreement - Except for the applicable requirements listed in
Section 4, neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated herein will (i) violate the
By-Laws of Sodak Brasil, (ii) violate any statute, ordinance, regulation, order,
judgment, or decree of any court or governmental agency of Brazil, applicable to
Sellers or the Company, (iii) conflict with, result in a breach of any of the
terms of, constitute a default under, result in the termination of, or result in
the creation of any lien pursuant to the terms of, any material contract or
agreement to which Sellers or the Company are parties, except in the case of
clauses (ii) and (iii) hereunder where such violation, conflict, breach,
default, termination or lien would not have a material adverse effect on the
business, financial condition or results of operations of the Company.
2.4. Legal Capital of Sodak Brasil - The Company's subscribed capital is
$6,000,000 (Six Million Reias) divided into 6,000,000 Quotas, with par value of
R$1,00 each, and the amount paid in is R$ 5,669,516.87 (Five Million Six Hundred
Sixty-Nine Thousand, Five Hundred Sixteen Reias and eighty seven cents).
2.4.1. All the quotas of Sodak Brasil have been fully subscribed to and the
amount paid in is mentioned in 2.4. There are no outstanding options, warrants,
rights, calls, commitments, conversion rights, rights of exchange, plans or
other agreements of any character providing for the purchase, issuance or sale
of the capital stock of Sodak Brasil other than contemplated by this Agreement.
2.5. Contracts - To the best of Sellers' knowledge, all material contracts to
which Sodak Brasil currently is a party are listed on Exhibit No. 2 hereto.
2.6. Assets - Exhibit No. 3 contains a list of machines and equipment and other
assets of Sodak Brasil.
2.7. Sodak Brasil ordinary course of Business - Until Closing, Sellers will
cause the management of Sodak Brasil to conduct its respective business in the
ordinary and customary course of business and will cause Sodak Brasil to refrain
from any conduct departing from such ordinary and customary course of business,
unless Buyer shall have given its prior written consent.
2.8. No Implied Representation or Warranties - The Quotas, machines, equipment
and any other assets of Sodak Brasil are being transferred and conveyed to the
Buyer on an "as is", "where is" basis without representation or warranty express
or implied as to any matter not expressly set forth as a representation or
warranty of a Seller in this Agreement. Except as set forth as a representation
or warranty of a Seller in this Agreement, the Sellers do not represent or
warrant the completeness or accuracy of any Sodak Brasil's financial statements,
inventories, books or records, property and equipment accounts, customer lists,
the existence or absence of contingent or other claims which have been or may be
asserted against Sodak Brasil, the accuracy or completeness of tax records or
tax returns filed or to be filed by Sodak Brasil, the adequacy of Brazilian and
other taxes paid or to be paid by or for it, or any other matter not expressly
represented and warranted in this Agreement, being understood that Buyer has
conducted its own independent review and analysis to satisfy itself about such
matters, pursuant to Section 3.5.
3. REPRESENTATIONS AND WARRANTIES OF BUYER - Buyer and the Guarantors, jointly
and severally, represent and warrant to Sellers as follows:
3.1. Organization and Authority - Buyer is duly organized and validly existing
and in good standing under the laws of British Virgin Islands, and is duly
licensed to conduct its business. The execution and delivery of this Agreement
by Buyer, the performance by Buyer of its representations, warranties, covenants
and agreements hereunder, and the consummation by Buyer of the transactions
contemplated hereby have been duly authorized by all necessary corporate action.
26
<PAGE>
3.2. Agreement - This Agreement constitutes a valid and legally binding
obligation of Buyer enforceable against Buyer in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws, now or hereafter in effect affecting
generally the enforceability of creditor's right and equitable remedies.
3.3. Effect of Agreement - Neither the execution and delivery of this Agreement,
nor the consummation of the transactions contemplated hereby, will (i) violate
any provision of the organizational documents of Buyer, or (ii) violate any
statute, ordinance, regulation, order, judgment, or decree of any court or
governmental agency with jurisdiction over Buyer, or (iii) conflict with, result
in a breach of any of the terms of, constitute a default under, result in the
termination of, or result in the creation of any lien pursuant to the terms of,
any material contract or agreement to which Buyer are parties, except in the
case of clauses (ii) and (iii) hereunder where such violation, conflict, breach,
default, termination or lien would not have a material adverse effect on the
business, results of operations or financial condition of the Company.
3.4. Litigation and Related Matters - As of the date hereof, there is no
litigation, proceeding, or investigation pending, or to the best of Buyer'
knowledge, threatened, in court or before any court, governmental, regulatory or
administrative authority relating to Buyer or relating to this Agreement or to
the transactions contemplated hereby.
3.5. Investigation by Buyer - Buyer has conducted its own independent review and
analysis of the business, operations, assets, liabilities, results of
operations, financial condition and prospects of Sodak Brasil, including,
without limitation, the agreements with Arpoador Rio Empreendimentos e
Participacoes Ltda, dated December 8, 1997, Jockey Club of Rio Grande do Sul,
dated January 12, 1998, Jockey Club Brasileiro in Rio de Janeiro dated March 31,
1998, the three agreements based upon Law no. 8.672 of July 06, 1993, Lei Zico
with CBF dated June 30, 1996, MCA dated May 17, 1996, and ANC dated July 10,
1996, which have been considered as good, accurate and reliable, hereby
irrevocably and irretrievably releasing Sellers of any liability or asset
insufficiency whatsoever of Sodak Brasil, including, but not limited, to
commercial, administrative, fiscal, labor or social security obligations or
claims, including those relating to fiscal and social contributions, such as
ISS, INSS, FGTS, potential PIS/COFINS of the Company and the Federacao de
Atletismo do Estado do Rio de Janeiro.
3.5.1. In entering into this Agreement, except with respect to the
representations and warranties set forth in Article 2 hereof, Buyer has relied
solely upon its own investigation and analysis and Buyer (a) acknowledge that
neither Sellers nor the Company nor any of their directors, officers, employees,
affiliates, controlling persons, agents or representatives (such directors and
other persons and entity are collectively referred to as "Representatives")
makes or has made any representation or warranty, either express or implied, as
to the accuracy or completeness of any of the information provided or made
available to Buyer or their Representatives and (b) agree, to the fullest extent
permitted by law, that Sellers and the Company and their Representatives shall
not have any liability or responsibility whatsoever to Buyer or their
Representatives on any basis (including, without limitation, in contract or
tort, under federal or state securities laws or otherwise) based upon any
information provided or made available, or statements made, to Buyer or their
Representatives (or any omissions therefrom), including, without limitation, in
respect of the specific representations and warranties of Sellers set forth in
Article 2 of this Agreement, except as and only to the extent expressly set
forth herein with respect to such representations and warranties and subject to
the limitations and restrictions contained herein have relied solely upon its
own investigation and analysis.
3.5 2. Operating Expense - Seller is responsible for the cost and payment of all
normal business operating expenses of the Company up and through July 31, 1998.
Thereafter, all operating expenses of the Company are the sole and exclusive
responsibility of the Buyers and/or Guarantors. However, it is clearly
understood that any and all obligations and/or expenses of the Company required
pursuant to an agreement between the Company and the Jockey Club Brasileiro in
Rio de Janeiro dated March 31, 1998 are the sole and exclusive payment
responsibility of Buyer and Guarantors, even though said obligations and/or
expenses become due and owing prior to or upon July 31, 1998.
4. CONDITIONS OF CLOSING
4.1. The obligation of Sellers to consummate the transactions contemplated
hereby is subject to the satisfaction or waiver at or prior to the Closing of
the following conditions:
a) Evidence satisfactory to Sellers that the trade mark "Sodak" has been
properly assigned from the Company to Sodak Gaming free of charge
b) approval by the Board of Directors and/or the Capital Committee of Sodak
Gaming of the transaction contemplated herein.
27
<PAGE>
4.2 Sodak International shall assign, immediately after closing, to Buyer the
agreement dated January 05, 1998, being agreed upon that Buyer shall assume the
obligation to pay Unitec Consultores Tecnicos Associados Ltda. 14% of all
revenues earned by Sodak Brasil from operations at Jockey Club Brasileiro. The
Assignment Agreement shall be substantially in the form of the draft attached
hereto as Exhibit No. 4.
5. COVENANTS
5.1. Buyer and/or the Guarantors undertake that they shall be jointly and
severally responsible for defending any known or unknown, past, present or
future claims and lawsuits, if any, when the claim is made against one or both
of the Sellers and shall be responsible for paying the legal costs of defending
each of the Sellers and shall deposit securities, pay and satisfy any judgments
entered against each of the Sellers.
5.2. Buyers and the Guarantors agree to assume on Closing Date all pre-existing
obligations of each of the Sellers related to activities from their ownership of
Sodak Brasil.
5.3. Buyers and the Guarantors undertake not to perform any act that will give
cause to a third party to file a claim against each of the Sellers.
5.4. Buyers and the Guarantors shall not use, in any event, the funds deposited
in the escrow account no. 36240-7 at Banco Itau S/A, Brancy 0540, at Av. Rio
Branco 86 A, other than to pay the ISS liability to the City of Rio de Janeiro,
as described in Exhibit No. 5.
5.4.1. Exhibit No. 6 contains the list of the persons which will replace Messrs.
Vitor Rogerio da Costa and Carlos Alberto Correa Mariz, as the authorized
persons to sign on the account of the escrow account.
5.5. Buyer, immediately after being aware of the start of any actual or
threatened audit or review by any governmental authorities in Sodak Brasil,
shall give proper notice, in writing, to Sellers. It is agreed that Buyer and
the Guarantors shall fully cooperate and give any information necessary to any
internal investigation concerning activities of Sodak Brasil prior to and up to
Closing Date and shall cooperate and give any information or inquiry made by
Sellers and/ or relating to any regulatory or other government inquiry.
5.6. Sellers, at specific request from Buyer, undertake to cause Sodak Brasil to
dismiss the employees listed in Exhibit No. 7, attached hereto. It is agreed by
the parties that as to the employees listed in Exhibit No. 7, Seller shall be
responsible for the payments of any and all obligations related to dismissal of
such employees. Sellers financial obligation for termination of the employees
listed in Exhibit No. 7, with the exception of Patricia Pradal, will be US
$51,291.00. Any and all other employees of Sodak Brasil are the sole and
exclusive responsibility of Buyer and Guarantors, who shall be solely
responsible for the payment of any and all obligations related to the dismissal
of such employees.
5.7. The Buyer has not made and shall not make any claim against Sellers or any
of their directors, officers, employees, agents or representatives with respect
to any liability of any member of Sellers to Guarantors whether such liability
is disclosed or undisclosed, contingent or otherwise, or known or unknown to
Sellers.
5.8. Buyer and the Guarantors agree that they will be jointly and severally
responsible with Sodak Brasil on the obligations assumed by Sodak Brasil under
the three written agreements between Sodak Brasil with CBF - Brazilian Soccer
Federation dated on or about the 30th day of June, 1996, MCA Publicidade Inc.,
dated on or about the 17th day of May, 1996, and ANC - Communication and
Marketing, Inc. dated on or about the 10th day of July, 1996, if and when a
claim is made by CBF, MCA and ANC against one or both of the Sellers.
5.9. If and whenever Sellers are notified of a liability claim for any debt or
obligation, which payment or fulfillment is an obligation of Buyer and of the
Guarantors under this Agreement, Sellers shall, within a period not to exceed 10
(ten ) business days, give immediate and proper notice to Buyer and to the
Guarantors, in order to enable them to exercise their right of defense, and the
subject notice must contain the details of the liability claimed against the
Sellers with supporting documentation, if any (hereinafter Notice of Claim).
Untimely notice by Seller shall not affect the ongoing obligation of Buyer and
Guarantors under this Agreement. Sellers understand that if notification by
Sellers to Buyer and/or Guarantors is untimely it may cause waiver of certain
procedural and/or substantive rights in terms of any defenses that may be raised
by Sellers and if untimely notice is the fault of Sellers, Buyer and Guarantors
are absolved of liability for said waivers.
28
<PAGE>
5.9.1. Whenever as a result of the Notice of Claim given under Section 5.4., any
sum must be paid by Buyer in accordance with the terms of Section 5.1., Buyer
must advise Sellers by written notice, within 10 (ten) days after the receipt of
the notice given by Buyer, that (i) it shall proceed with the payment of the
full amount of the claim; or (ii) it shall defend such claim administratively
and/or judicially, making such deposit or other payment as may be required to
prevent a forfeiture or default, if and when required by the law and/or court
order.
5.9.2. If Buyer elects to defends the claim, Sellers shall designate the
lawyer(s) to properly act envisaging the legal measures referred to hereunder
and Buyer shall bear all costs involved in such defense including the posting of
bonds or the deposits of monies necessary to secure the payment of such third
party claims, if and when required by the law and/or court order.
5.10. At closing, all the trademarks and trade names of the Company shall be
held in the name of Sodak Gaming, which shall license the use of the trademark
and the trade name "Sodak" to Sodak Brasil for a period of 6 (six) months, as of
the Closing Date. For that purpose, the parties shall execute on Closing a
trademark License Agreement.
5.10.1. Buyer agrees to cause the Company to delete from its trade name
(denominacao social) upon expiration of the 6 (six) month period referred to
above, the trademark/name "Sodak."
5.11. Buyer agrees that it is its sole responsibility to pay in the remaining
subscribed capital of the Company.
6. MISCELLANEOUS
6.1. Notices - All notices, requests, or instructions hereunder shall be in
writing and delivered personally or sent by facsimile, registered or certified
mail, as follows:
If to Buyer:
Sodak Gaming do Brasil, Ltda.
Fax: 011 55 21 224 3688
Attention: Andre Torres
If to Sellers:
Sodak Gaming, Inc.
Fax: 605 355-4976
Attention: Michael G. Diedrich
and copy to:
Legal Department
Fax: 605 355-4976
Attention: Michael G. Diedrich
If to the Guarantors:
Sodak Gaming do Brasil
Fax: 011 55 21 224 3688
Attention: Andre Torres
Any of the above addresses and Company name may be changed at any time by notice
given as provided above, provided, however, that any such notice or change of
address shall be effective only upon receipt.
6.3. Entire Agreement and Amendment - This Agreement and the documents referred
to herein contain the entire agreement, and shall supersede all oral
understandings, among the parties thereto with respect to the transactions
contemplated hereby, and no amendment or modification hereof shall be effective
unless in writing and signed by all the parties hereto.
29
<PAGE>
6.4. Expenses - Each of the parties hereto shall bear such party's own expenses,
including travel and legal expenses, in connection with this Agreement and the
transactions contemplated hereby.
6.5. Governing Law; Submission to Jurisdiction - This Agreement shall be
governed by and construed in accordance with the laws of the Federative Republic
of Brazil (regardless of the laws that might otherwise govern under the
applicable principles of conflicts of laws thereof).
6.5.1. The Parties agree that in regard of any dispute arising in connection
with the present contract, the parties undertake to make their best effort to
negotiate in good faith in order to reach an amiable solution to such dispute.
6.5.2. In the event that such amiable solution can not be reached the dispute
will finally settled under the Rules of Conciliation and Arbitration of the
International Chamber of Commerce by one or more arbitrators appointed in
accordance with the said Rules.
6.5.3. The arbitration will be in Rio de Janeiro, RJ, Brazil, and arbitration
procedure will be conducted in the English language.
6.6. Beneficiary and Assignment - This Agreement shall be binding upon, and
inure to the benefit of, the parties hereto and their respective successors and
permitted assigns, but neither this Agreement nor any of the rights or
obligations hereunder shall be assigned by any of the parties hereto without the
prior written consent of the other.
6.7. Waiver and Modification - No waiver of any term, provision or condition of
this Agreement, whether by conduct or otherwise, in any one or more instances
shall be deemed to be or construed as a further or continuing waiver of any such
term, provision or conditions of this Agreement. This Agreement is irrevocable
and cannot be terminated, unless (a) by mutual and written agreement of the
Parties.
6.8. Exhibits - Each Exhibit hereto and all the provisions thereof are hereby
incorporated into this Agreement by reference and form a part hereof as if fully
set forth herein.
6.9. Headings - The headings of the various Sections hereof are for convenience
of reference only and shall not affect the meaning or the construction of any
provision hereof.
6.10. Survival of Representations - The representations and warranties of
Sellers and Buyer contained in this Agreement shall survive the closing date and
the consummation of the transactions contemplated by this Agreement, for a
period of Ten (10) Years from the Closing.
6.11. Severability - The unenforceability or invalidity of any Section or
provision of this Agreement shall not affect the enforceability or validity of
this Agreement.
6. 12. Counterparts - This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.
6.13. Language - This Agreement is being executed in English.
6.14. Neither party to this agreement may, without the prior written consent of
the other party, issue or allow any public release of information regarding the
agreement.
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto
in the presence of two witnesses.
Rapid City, South Dakota, U.S.A. July , 1998.
30
<PAGE>
PRO-GAMING CONSULTANTS, LTD.
By:
Name: Andre Torres
Title: Attorney in Fact
By:
Name: Ricardo Namen
Title: Attorney in Fact
By:
Name: Marcus Fortunato T
Title: Attorney in Fact
SODAK GAMING INTERNATIONAL INC.
By:
Name: Roland W Gentner
Title: Chief Operating Officer
SODAK GAMING, INC.
By:
Name: Roland W. Gentner
Title: President and Chief Operating Officer
GUARANTORS:
MARCELO COSTA
Guarantor
RICARDO NAMEN
Guarantor
ANDRE TORRES
Guarantor
MARCUS FORTUNATO
Guarantor
Witnesses:
1.
2.
31
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,206
<SECURITIES> 0
<RECEIVABLES> 31,730
<ALLOWANCES> 1,940
<INVENTORY> 18,705
<CURRENT-ASSETS> 54,673
<PP&E> 68,618
<DEPRECIATION> 10,689
<TOTAL-ASSETS> 148,152
<CURRENT-LIABILITIES> 34,684
<BONDS> 6,376
0
0
<COMMON> 23
<OTHER-SE> 107,069
<TOTAL-LIABILITY-AND-EQUITY> 148,152
<SALES> 38,728
<TOTAL-REVENUES> 98,769
<CGS> 29,604
<TOTAL-COSTS> 86,529
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 368
<INTEREST-EXPENSE> 2,271
<INCOME-PRETAX> 10,628
<INCOME-TAX> 4,209
<INCOME-CONTINUING> 6,419
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,419
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
