-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IBVDyPshNOcAZ1G6drBWA4+3GD7gMa0iHl7ulLqCxET/pt9a83xERvvAbgvvS/E4 b1Q9vQaUNktV+FJS0mBf8A== 0000897101-98-000491.txt : 19980504 0000897101-98-000491.hdr.sgml : 19980504 ACCESSION NUMBER: 0000897101-98-000491 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980501 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SODAK GAMING INC CENTRAL INDEX KEY: 0000903856 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PROFESSIONAL & COMMERCIAL EQUIPMENT & SUPPLIES [5040] IRS NUMBER: 460407053 STATE OF INCORPORATION: SD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21754 FILM NUMBER: 98607923 BUSINESS ADDRESS: STREET 1: 5301 S HWY 16 CITY: RAPID CITY STATE: SD ZIP: 57701 BUSINESS PHONE: 6053415400 MAIL ADDRESS: STREET 1: SODAK GAMING INC STREET 2: 5301 S HIGHWAY 16 CITY: RAPID CITY STATE: SD ZIP: 57701 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 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 April 28, 1998, there were outstanding 22,758,408 shares of the Company's common stock. Page 1 of 17 Exhibit Index Page 16 Sodak Gaming, Inc. INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Statements of Operations for the three months ended March 31, 1998 and 1997 3 Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997 4 Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II. OTHER INFORMATION Item 1. Legal proceedings 13 Item 2. Changes in Securities 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15 EXHIBIT INDEX 16 PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Sodak Gaming, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three months ended March 31, ---------------------------------------- 1997 1997 as In thousands, except share and per share as adjusted previously amounts 1998 (Note 2) reported - -------------------------------------------- ------------ ------------ ------------ Revenue: Product sales $ 10,764 11,437 11,437 Gaming operations 13,365 12,919 12,919 Wide area progressive systems 3,669 2,434 2,434 Financing income 2,088 2,310 2,310 ----------- ----------- ----------- Total revenue 29,886 29,100 29,100 ----------- ----------- ----------- Costs and expenses: Cost of product sales 8,195 9,427 9,427 Gaming operations 12,920 13,045 12,925 Selling, general and administrative 4,583 5,347 4,477 Interest and financing costs 1,008 789 789 ----------- ----------- ----------- Total costs and expenses 26,706 28,608 27,618 ----------- ----------- ----------- Income from operations 3,180 492 1,482 ----------- ----------- ----------- Other income: Gain on sale of receivables -- 537 537 Other, net 21 12 12 ----------- ----------- ----------- Total other income 21 549 549 ----------- ----------- ----------- Earnings before income taxes and cumulative effect of accounting change 3,201 1,041 2,031 Provision for income taxes 1,248 456 751 ----------- ----------- ----------- Earnings before cumulative effect of accounting change 1,953 585 1,280 Cumulative effect of change in accounting principle, net of income tax effect -- (3,131) -- ----------- ----------- ----------- Net earnings (loss) $ 1,953 (2,546) 1,280 =========== =========== =========== Earnings (loss) per common share, basic and diluted: Earnings before cumulative effect of accounting change $ 0.09 0.03 0.06 Cumulative effect of accounting change -- (0.14) -- ----------- ----------- ----------- Net earnings (loss) $ 0.09 (0.11) 0.06 =========== =========== =========== Weighted average number of common and common equivalent shares outstanding 22,783,029 22,952,174 22,952,174 =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. Sodak Gaming, Inc. CONSOLIDATED BALANCE SHEETS March 31, 1998 December 31, In thousands, except shares (unaudited) 1997 - ------------------------------------------------- -------------- ------------ ASSETS Current assets: Cash and cash equivalents $ 3,550 3,942 Current trade, notes and interest receivables 37,727 36,137 Inventories 19,238 22,294 Prepaid expenses 1,181 756 Refundable income taxes 319 663 Deferred income taxes 1,399 1,319 --------- --------- Total current assets 63,414 65,111 Property and equipment, net 59,205 59,739 Notes receivable, net of current maturies 38,880 38,723 Deferred income taxes 706 789 Other assets, net 769 794 --------- --------- $ 162,974 165,156 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 17,924 32,379 Current maturities of long-term debt 11,720 3,634 Income taxes payable 853 75 Deferred financing fee revenue 1,984 1,846 Accrued payroll and payroll related costs 1,758 1,986 Other accrued liabilities 3,987 3,620 --------- --------- Total current liabilities 38,226 43,540 --------- --------- Long-term debt, net of current maturities 21,526 19,818 --------- --------- Shareholders' equity: Preferred stock, $0.001 par value, 25,000,000 shares authorized, none issued and outstanding -- -- Common stock, $0.001 par value, 75,000,000 shares authorized, 22,758,408 issued and outstanding at March 31, 1998 and December 31, 1997 23 23 Additional paid-in capital 64,088 64,088 Retained earnings 42,014 40,061 Cumulative translation adjustment (2,903) (2,374) --------- --------- Total shareholders' equity 103,222 101,798 --------- --------- $ 162,974 165,156 ========= ========= The accompanying notes are an integral part of the consolidated financial statements. Sodak Gaming, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended March 31, ------------------------------------- 1997 1997 as as adjusted previously In thousands 1998 (Note 2) reported - ----------------------------------------------------------------- --------- ------------ ------------ Cash flows from operating activities: Net earnings (loss) $ 1,953 (2,546) 1,280 Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Pre-tax cumulative effect of change in accounting principle -- 4,409 -- Depreciation and amortization 1,510 1,566 1,566 Provision for doubtful accounts 104 112 112 Deferred income taxes 3 (6) (6) Gain on sale of receivables -- (537) (537) Changes in operating assets and liabilities: Trade and accrued interest receivables (1,010) 9,036 9,036 Notes receivable relating to financed sales 5,301 (177) (177) Inventories 3,055 466 466 Prepaid expenses (424) 94 94 Accounts payable (14,455) (18,699) (18,699) Accrued liabilities 277 (43) (43) Income taxes payable, net of refundable income taxes 1,122 (1,008) 566 -------- -------- -------- Net cash used in operating activities (2,564) (7,333) (6,342) -------- -------- -------- Cash flows from investing activities: Cash advanced on notes receivable (6,576) (3,875) (3,875) Payments received on notes receivable 435 849 849 Purchases of property and equipment (1,283) (1,363) (1,363) (Increase) decrease in other assets 24 (21) (1,012) -------- -------- -------- Net cash used in investing activities (7,400) (4,410) (5,401) -------- -------- -------- Cash flows from financing activities: Proceeds from long-term borrowings 18,500 20,500 20,500 Principal repayments of long-term debt (8,706) (8,454) (8,454) -------- -------- -------- Net cash provided by financing activities 9,794 12,046 12,046 -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents (222) (163) (163) -------- -------- -------- Net increase (decrease) in cash and cash equivalents (392) 140 140 Cash and cash equivalents, beginning of period 3,942 4,077 4,077 -------- -------- -------- Cash and cash equivalents, end of period $ 3,550 4,217 4,217 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during period for interest $ 971 465 465
The accompanying notes are an integral part of the consolidated financial statements. Sodak Gaming, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 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. 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 March 31, 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 ended March 31, 1997 by approximately $0.7 million, comprised of an increase in gaming operations and selling, general and administrative expenses of approximately $1.0 million, net of tax benefits of approximately $0.3 million. 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 during the three months ended March 31, 1998. 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 on the statement of operations for the three months ended March 31, 1998, comprehensive income would be approximately $0.5 million less than reported net income, due to foreign currency translation adjustments. 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 ended March 31, 1998 to results for the three months ended March 31, 1997 adjusted for an accounting change as described in Note 2 to the consolidated financial statements. RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1997 Earnings before cumulative effect of accounting change for the three months ended March 31, 1998 increased 234% to $2.0 million, or $0.09 per share, compared to net earnings of $0.6 million, or $0.03 per share, for the three months ended March 31, 1997. The primary factors causing the increase in earnings were increased revenues from wide area progressive systems, increased gross margins from product sales, improved operating results in certain gaming operations and reduced selling, general and administrative expenses. Total revenue increased 3% to $29.9 million in 1998, compared to $29.1 million in 1997. Total costs and expenses decreased 7% to $26.7 million in 1998, compared to $28.6 million in 1997. Earnings before interest, taxes, depreciation and amortization (EBITDA) increased 68% to $5.7 million in 1998 compared to $3.4 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. 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 6% to $10.8 million in 1998 compared to $11.4 million in 1997. The decrease in 1998 was the result of a 23% decrease in ancillary gaming and non-gaming related product sales revenue to $3.0 million in 1998 compared to $4.0 million in 1997, which was partially offset by a 3% increase in machine sales revenue to $7.7 million in 1998 compared to $7.5 million in 1997 (which included $3.4 million of used machine sales 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 52% to 960 machines in 1998 compared to 630 machines in 1997. In 1998, 86% of the new machine shipments were to casinos in Arizona, Louisiana, Minnesota, New Mexico and Wisconsin. In 1997, 79% of the new machine shipments were to casinos in Kansas 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 no used machines, compared to 1,360 in 1997. The cost of product sales decreased 13% to $8.2 million in 1998, from $9.4 million in 1997. Due to the absence of sales of used machines in 1998 (which are typically sold at or near cost), the gross margin on product sales increased to 23.9% in 1998 as compared to 17.6% in 1997. Excluding the 1997 used machine revenue and costs, the gross margin on product sales in 1997 would have been 25.5%. GAMING OPERATIONS Gaming operations revenue increased 3% to $13.4 million in 1998, from $12.9 million in 1997. This increase was attributable to an increase in revenue from the MISS MARQUETTE and in Ecuador and Brazil, which was partially offset by reduced revenue in Peru. Direct costs of gaming operations decreased 1% to $12.9 million in 1998, compared to $13.0 million in 1997. The decrease was primarily attributed to decreased costs at the MISS MARQUETTE. 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 9% to $8.1 million in 1998 compared to $7.4 million in 1997. Direct operating costs decreased 4% to $7.0 million in 1998 compared to $7.3 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 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 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 15% to $3.3 million in 1998 compared to $3.8 million in 1997. The revenue decrease is primarily attributed to severe weather conditions related to "El Nino," which resulted in the temporary closure of one location and a decrease in attendance and machine play at several other locations. Also affecting the revenue decrease was a small decrease in the average number of machines in operation. Direct operating costs were $4.0 million in both 1998 and 1997. The number of machines in operation at March 31, 1998 was approximately 1,170 at 15 locations, and approximately 1,210 machines at 20 locations were in operation at March 31, 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 increased 15% to $1.4 million in 1998 compared to $1.2 million in 1997. Direct costs increased 13% to $1.4 million in 1998 compared to $1.3 million in 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. Furthermore, the Brazilian federal legislature is considering legislation that would expand the scope of legal gaming in that country. However, there is no assurance that the Company will be successful in continuing or expanding its operations in Brazil. ECUADOR. The Company operates a casino in Quito, Ecuador which has 150 machines and 12 table games. Revenue in 1998 increased 37% to $0.6 million compared to $0.4 in 1997. Direct costs associated with the operation were $0.5 million in both 1998 and 1997. WIDE AREA PROGRESSIVE SYSTEMS Wide area progressive systems revenue increased 51% to $3.7 million in 1998 compared to $2.4 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 March 31, 1998 to March 31, 1997, the Company implemented systems in one additional state, Minnesota; four new systems became operational, WHEEL OF GOLD, HIGH ROLLERS, TOTEM POLE and JEOPARDY; and the number of machines on the systems increased to approximately 1,700 at the end of the first quarter of 1998 from approximately 1,300 at the end of the first quarter of 1997. At March 31, 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 March 31, 1998, 14 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 (which began interstate operations in March 1997 and intrastate operations in September 1997), 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 currently permitting the operation of wide area progressive systems. However, there can be no assurance that necessary regulatory approvals will be obtained in those prospective jurisdictions. Furthermore, public acceptance of these systems and the entry of competing systems of other gaming companies could affect the Company's future revenue 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 decreased 10% to $2.1 million in 1998 compared to $2.3 million in 1997. This decrease is primarily due to $0.5 million in financing fees received in 1997 for arranging interim financing for a casino project. There were no fees received in 1998 for such services. The decrease in financing fees was partially offset by an increase in interest earned on notes receivable due to a higher level of average outstanding principal amounts combined with a higher effective interest rate earned in 1998. The Company recognized revenue of $0.5 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 off 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 14% to $4.6 million in 1998, from $5.3 million in 1997, primarily as a result of cost reduction efforts that were implemented beginning in the fourth quarter of 1997 and continuing into 1998. As a percent of total revenue, selling, general and administrative expenses decreased to 15% in 1998 compared to 18% in 1997. INTEREST AND FINANCING COSTS Interest and financing costs increased 28% to $1.0 million in 1998, from $0.8 million in 1997. The increase in interest and financing costs was primarily the result of increased borrowings during 1998 to fund working capital needs. The Company believes that interest and financing costs may continue to increase in future years as the Company pursues its growth strategy. INCOME FROM OPERATIONS The cumulative effect of the above described changes resulted in income from operations of $3.2 million in 1998, compared to $0.5 million in 1997. As a percent of total revenue, income from operations increased to 10.6% in 1998, from 1.7% in 1997. The increase in the operating margin was primarily the result of the increased margins related to product sales, improved overall gaming operations results, increased revenue from wide area progressive systems (which has a higher margin than other revenue sources) and decreased selling, general and administrative expenses. OTHER Other income decreased $0.5 million to less than $0.1 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 an accounting change increased 208% to $3.2 million in 1998, compared to $1.0 million in 1997. Provision for income taxes was $1.2 million in 1998, compared to $0.5 million in 1997, representing 39% and 44% of earnings before income taxes for 1998 and 1997, respectively. LIQUIDITY AND CAPITAL RESOURCES WORKING CAPITAL Working capital increased $3.6 million to $25.2 million during the three months ended March 31, 1998. This increase is due to a $5.3 million decrease in current liabilities which was partially offset by a $1.7 million decrease in current assets. CASH FLOWS During the three months ended March 31, 1998, the Company's cash and cash equivalents decreased $0.4 million to $3.5 million. Cash used in operating activities was $2.6 million in 1998 compared to $7.3 million used in 1997. The cash flows from operations for 1998 were primarily affected by net income, depreciation and amortization, and changes in receivables, inventories, accounts payable and income taxes. Cash used in investing activities amounted to $7.4 million in 1998 and $4.4 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 $1.3 million and $1.4 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 the development of a new Company-wide information system, and expenditures in Peru for leasehold improvements and gaming operations equipment. Cash used in investing activities was partially offset by $0.4 million and $0.8 million in payments received on notes receivable from customer financing in 1998 and 1997, respectively. Financing activities provided $9.8 million cash in 1998 compared to $12.0 million provided in 1997. Cash used in 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 $33.2 million of debt outstanding at March 31, 1998. Of that amount, $23.0 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 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 $42.5 million at March 31, 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 $23.0 million loan outstanding, the Company has $9.5 million in letters of credit outstanding at March 31, 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 March 31, 1998, approximately $6.7 million related to this financing obligation is included in debt outstanding. The financing arrangement requires 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 $3.5 million of debt, $2.1 million relates to debt payable to the former shareholders of GSMC, $0.9 million relates to various other debt secured by certain property of the MISS MARQUETTE riverboat casino and $0.5 million is secured by certain transportation equipment. CAPITAL COMMITMENTS In September 1994, Sodak assisted a casino management company, Royal Associates Management, Inc., 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 management to borrow back 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 March 31, 1998, the outstanding loan balance was $2.5 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. In the first quarter of 1998, the project was estimated to cost approximately $165 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. INTERNATIONAL OPERATIONS Approximately 18% of total revenue for the three months ended March 31, 1998 was derived outside of the United States, compared to 19% for the three months ended March 31, 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 continues to expand its international operations, exposure to gains and losses on foreign currency transactions may increase. The Company has not yet engaged, but may in the future engage, in currency hedging transactions intended to reduce the effect of fluctuations in foreign currency exchange rates. IMPACT OF INFLATION Inflation did not have a significant effect on the Company's operations during the three months ended March 31, 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. 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 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 11.1 Calculation of Earnings Per Common and Common Equivalent Share. b. Reports on Form 8-K None. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: May 1, 1998 SODAK GAMING, INC. By: \s\ David R. Johnson --------------------- David R. Johnson Chief Financial Officer EXHIBIT INDEX Exhibit Sequentially Number Numbered Page - ------ ------------- 11.1 Calculation of Earnings Per Common and Common Equivalent Share 17 27 Financial Data Schedule (submitted with the EDGAR filing only) EX-11.1 2 CALCULATION OF EARNINGS Exhibit 11.1 Sodak Gaming, Inc. CALCULATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE (Unaudited)
THREE MONTHS THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 1997 ENDED MARCH 31, 1997, AS PREVIOUSLY MARCH 31, 1998 AS ADJUSTED REPORTED ------------ ------------ ------------ SHARES OUTSTANDING Weighted average common shares outstanding 22,758,408 22,757,688 22,757,688 Adjustments for common stock equivalents (1) 24,621 194,486 194,486 ------------ ------------ ------------ WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 22,783,029 22,952,174 22,952,174 ============ ============ ============ NET EARNINGS (LOSS) $ 1,952,520 $ (2,546,104) $ 1,279,511 ============ ============ ============ EARNINGS (LOSS) PER SHARE, BASIC $ 0.09 $ (0.11) $ 0.06 ============ ============ ============ EARNINGS (LOSS) PER SHARE, DILUTED $ 0.09 $ (0.11) $ 0.06 ============ ============ ============
- -------------------------------------------------------------------------------- (1) Represents adjustment computed under the treasury stock method for stock options granted at fair market value at date of grant. EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 JAN-01-1998 MAR-31-1998 3,550 0 39,389 1,662 19,238 63,414 68,601 9,396 162,974 38,226 21,526 0 0 23 103,199 162,974 10,764 29,886 8,195 26,706 0 104 1,008 3,201 1,248 1,953 0 0 0 1,953 0.09 0.09
-----END PRIVACY-ENHANCED MESSAGE-----