-----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, IohTfB45u/lIpF5SyhWsX595jxHxOLog2qje9m3Zi6UQbrWTR1t505nFlaoJYU3q imfKIUsZTgFX9HhML++ODQ== 0000897101-98-001029.txt : 19981026 0000897101-98-001029.hdr.sgml : 19981026 ACCESSION NUMBER: 0000897101-98-001029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981023 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: 98730151 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 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 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 PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Sodak Gaming, Inc. CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
Three months ended September 30, ------------------------------------------- 1997 1997 as as adjusted previously In thousands, except share and per share amounts 1998 (Note 2) reported - ------------------------------------------------ ------------ ------------- ------------ 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 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 3 Sodak Gaming, Inc. CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
Nine months ended September 30, -------------------------------------------- 1997 1997 as as adjusted previously In thousands, except share and per share amounts 1998 (Note 2) reported - ------------------------------------------------ ------------ ------------ ------------ 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 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 4 Sodak Gaming, Inc. CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, In thousands, except share and per share amounts 1998 1997 - ------------------------------------------------ ------------- ------------ 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 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 5 Sodak Gaming, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended September 30, ---------------------------------------- 1997 1997 as as adjusted previously In thousands 1998 (Note 2) reported - ------------------------------------------------------------- ---------- ---------- ---------- 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
The accompanying notes are an integral part of the consolidated financial statements. 6 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:
------------------------------------------------------------------------------------------------------------ Three months ended Nine months ended In thousands September 30, 1997 September 30, 1997 ------------------------------------------------------------------ ------------------ ------------------ 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 =========== ===========
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 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:
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 - ------------------------------ ----------- ----------- ----------- ----------- ----------- ----------- 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 =========== =========== =========== =========== =========== ===========
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 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:
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 ----------- ----------- ----------- ----------- ----------- ----------- 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 =========== =========== =========== =========== =========== ===========
- -------------------------------------------------------------------------------- (1) Represents adjustment computed under the treasury stock method for stock options granted at fair market value at date of grant. 9 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 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 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 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 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 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 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. 16 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 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. 18 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 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 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 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 22 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 EX-10.15 2 PURCHASE AND SALE AGREEMENT 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. 24 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 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 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 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 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 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 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 EX-27 3 FINANCIAL DATA SCHEDULE
5 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. 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 3,206 0 31,730 1,940 18,705 54,673 68,618 10,689 148,152 34,684 6,376 0 0 23 107,069 148,152 38,728 98,769 29,604 86,529 0 368 2,271 10,628 4,209 6,419 0 0 0 6,419 0.28 0.28
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