-----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, B6PqHuDzCQDVlYBY6exbu3HdSEAFVYzanBy6m2tb7o26N4W35q399TWDuFsiP+no i+W68qrW5Ro3kwCDwESXlg== 0000950131-96-005821.txt : 19961118 0000950131-96-005821.hdr.sgml : 19961118 ACCESSION NUMBER: 0000950131-96-005821 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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: 1934 Act SEC FILE NUMBER: 000-21754 FILM NUMBER: 96663522 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 FORM 10-Q 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, 1996 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 September 30, 1996, there were outstanding 22,757,688 shares of the Company's common stock. Page 1 of 23 Exhibit Index Page 22 1 SODAK GAMING, INC. INDEX
Page ---- PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995 3 Consolidated Statements of Earnings for the three months ended September 30, 1996 and 1995 5 Consolidated Statements of Earnings for the nine months ended September 30, 1996 and 1995 6 Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and 1995 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 1. Legal proceedings 19 Item 2. Changes in Securities 20 Item 3. Defaults Upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURES 21 EXHIBIT INDEX 22
2 PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Sodak Gaming, Inc. Consolidated Balance Sheets Assets
September 30, December 31, 1996 1995 * ------------- ------------ Current assets: Cash and cash equivalents $ 3,518,280 $ 974,221 Receivables: Trade accounts, net of allowance for doubtful accounts 42,912,355 15,971,347 Short-term notes receivable 80,860 1,846,213 Notes receivable, current maturities 23,872,030 25,610,033 Net investment in direct financing-type lease, current maturity -- 626,693 Accrued interest 710,952 322,012 Inventories: Gaming machines 18,269,965 12,798,282 Repair parts and other gaming accessories 4,074,397 2,530,500 Prepaid expenses and other current assets 1,849,502 1,080,934 Deferred income taxes 455,000 528,000 ------------ ------------ Total current assets 95,743,341 62,288,235 ------------ ------------ Property and equipment: Land and improvements 1,357,616 628,143 Buildings and improvements 17,390,547 5,640,453 Excursion gaming vessel 13,850,176 -- Gaming operations equipment 24,341,954 4,674,004 Office furniture and equipment 2,423,760 1,791,327 Transportation equipment 2,114,902 1,837,565 Shop equipment 508,246 346,789 ------------ ------------ 61,987,201 14,918,281 Less accumulated depreciation (3,195,793) (1,245,004) ------------ ------------ Total property and equipment, net 58,791,408 13,673,277 ------------ ------------ Other assets: Notes receivable, net of current maturities 29,824,008 26,164,915 Net investment in direct financing-type lease, net of current maturity -- 13,355,447 Amounts due from riverboat lessee -- 19,950,823 Real estate held for sale 596,658 1,140,435 Excess of purchase price over fair market value of assets acquired 8,147,089 -- Other assets 4,288,008 1,481,885 ------------ ------------ Total other assets 42,855,763 62,093,505 ------------ ------------ Total assets $197,390,512 $138,055,017 ============ ============
* From audited financial statements. The accompanying notes are an integral part of the consolidated financial statements. 3 Sodak Gaming, Inc. CONSOLIDATED BALANCE SHEETS Liabilities and Shareholders' Equity
September 30, December 31, 1996 1995 * --------------- ------------- Current liabilities: Accounts payable $ 51,770,712 $ 22,234,670 Current maturities of long-term debt 1,722,773 56,891 Income taxes payable 815,505 993,718 Accrued liabilities 4,473,700 1,502,170 ------------- ------------- Total current liabilities 58,782,690 24,787,449 ------------- ------------- Long-term debt, net of current maturities 30,850,044 18,043,977 ------------- ------------- Deferred income taxes 1,238,000 963,000 ------------- ------------- Shareholders' equity: Preferred stock at $0.001 par value, 25,000,000 shares authorized, none outstanding -- -- Common stock at $0.001 par value, 75,000,000 shares authorized, 22,757,688 and 22,722,276 shares issued and outstanding at September 30, 1996 and December 31, 1995, respectively 22,758 22,722 Additional paid-in capital 63,963,095 63,702,619 Retained earnings 42,533,925 30,535,250 ------------- ------------- Total shareholders' equity 106,519,778 94,260,591 ------------- ------------- Commitments and contingencies Total liabilities and shareholders' equity $ 197,390,512 $ 138,055,017 ============= =============
* From audited financial statements. The accompanying notes are an integral part of the consolidated financial statements. 4 Sodak Gaming, Inc. CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
Three Months Ended September 30, -------------------------------- 1996 1995 -------------- ------------ Revenues Product sales $ 45,492,183 $ 18,647,024 Gaming operations 13,873,296 2,749,354 Wide area progressive systems 2,287,516 1,504,024 Financing income on notes receivables and other financing arrangements 1,448,928 1,575,563 Other 7,801 12,377 ------------ ------------ Total revenues 63,109,724 24,488,342 ------------ ------------ Costs and expenses Cost of product sales 36,028,977 13,894,583 Gaming operations 11,281,012 756,714 Selling, general and administrative 6,838,635 3,697,718 Interest and financing 699,942 285,279 ------------ ------------ Total costs and expenses 54,848,566 18,634,294 ------------ ------------ Income from operations 8,261,158 5,854,048 Other income (expense) (37,007) 17,765 ------------ ------------ Earnings before income taxes 8,224,151 5,871,813 Provision for income taxes 3,004,528 2,154,700 ------------ ------------ Net earnings $ 5,219,623 $ 3,717,113 ============ ============ Earnings per common and common equivalent share $ 0.23 $ 0.16 ============ ============ Weighted average number of common and common equivalent shares outstanding 23,083,239 22,800,390 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 5 Sodak Gaming, Inc. CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
Nine Months Ended September 30, ------------------------------------ 1996 1995 ------------- ------------- Revenues Product sales $ 86,070,431 $ 48,510,334 Gaming operations 23,112,335 7,071,341 Wide area progressive systems 5,900,626 2,737,633 Financing income on notes receivable and other financing arrangements 4,351,793 3,785,182 Other 22,848 64,146 ------------- ------------- Total revenues 119,458,033 62,168,636 ------------- ------------- Costs and expenses: Cost of product sales 67,322,385 36,940,139 Gaming operations 15,762,567 839,519 Selling, general and administrative 15,769,659 11,062,463 Interest and financing costs 1,667,169 541,245 ------------- ------------- Total costs and expenses 100,521,780 49,383,366 ------------- ------------- Income from operations 18,936,253 12,785,270 Other income (expense) (21,246) 89,019 ------------- ------------- Earnings before income taxes 18,915,007 12,874,289 Provision for income taxes 6,916,332 4,717,871 ------------- ------------- Net earnings $ 11,998,675 $ 8,156,418 ============= ============= Earnings per common and common equivalent share $ 0.52 $ 0.36 ============= ============= Weighted average number of common and common equivalent shares outstanding 22,946,429 22,756,746 ============= =============
The accompanying notes are an integral part of the consolidated financial statements. 6 Sodak Gaming, Inc. Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, ------------------------------ 1996 1995 ------------ ------------ Cash flows from operating activities: Net earnings $ 11,998,675 $ 8,156,418 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 2,197,199 416,042 Provision for doubtful accounts 2,318,668 225,000 Net deferred income taxes 348,000 276,000 Loss on sale of property and equipment 51,347 17,677 Gross profit on sales financed through notes receivable (5,216,067) (6,991,861) Changes in operating assets and liabilities: Receivables (29,586,628) 9,347,271 Purchase of inventories sold under financed sales (14,341,089) (19,732,243) Payments received on notes receivable relating to financed sales 20,679,098 15,996,068 Inventories (9,932,175) (2,729,061) Prepaid expenses and other current assets (485,852) (538,517) Accounts payable 29,167,605 (15,232,359) Accrued liabilities 1,053,705 745,163 Income taxes payable (178,213) (1,506,868) ------------ ------------ Net cash provided by (used in) operating activities 8,074,273 (11,551,270) ------------ ------------ Cash flows from investing activities: Cash advanced on notes receivable (5,195,703) (4,708,496) Payments received on notes receivable 3,918,024 1,803,549 Purchases of property and equipment (8,910,662) (6,099,728) Proceeds from sale of property and equipment 501,801 38,011 Increase in due from Gamblers Supply Management Company, prior to acquisition (2,630,945) (3,198,169) Principal payments received on direct financing-type lease 338,057 - Purchase of Gamblers Supply Management Company, net of cash acquired 237,571 - Increase in other assets (2,632,223) (218,182) ------------ ------------ Net cash used in investing activities (14,374,080) (12,383,015) ------------ ------------ Cash flows from financing activities: Proceeds from long-term borrowings 27,250,000 18,000,000 Principal repayments of long-term debt (18,666,646) (5,538,736) Net proceeds from issuance of common stock - - Net proceeds from exercise of stock options 260,512 - ------------ ------------ Net cash provided by financing activities 8,843,866 12,461,264 ------------ ------------ Net increase (decrease) in cash and cash equivalents 2,544,059 (11,473,021) Cash and cash equivalents, beginning of period 974,221 12,466,828 ------------ ------------ Cash and cash equivalents, end of period $ 3,518,280 $ 993,807 ============ ============ Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 1,350,578 $ 513,478 Cash paid during the period for income taxes $ 6,771,941 $ 5,969,221 Supplemental schedule of noncash investing activity: Gaming machines inventory transferred to gaming operations equipment $ 3,135,349 $ 1,412,606 The accompanying notes are an integral part of the consolidated financial statements.
7 SODAK GAMING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 (UNAUDITED) Note 1--Unaudited Consolidated Financial Statements - --------------------------------------------------- The accompanying unaudited consolidated financial statements of Sodak Gaming, Inc. and its consolidated subsidiaries (Sodak Gaming International, Inc.; S.G.International, Inc.; Sodak Gaming Peru, S.A.; Beuasodak S.A.; Gamblers Supply Management Company (Note 2); and Sodak Gaming do Brasil Ltda) 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 1995 financial statements and notes thereto. Certain 1995 amounts have been reclassified to conform to the 1996 presentation. Note 2--Acquisition of Gamblers Supply Management Company - --------------------------------------------------------- In 1994, the Company invested $21.8 million (excluding approximately $5.7 million of equipment financing provided by the Company) in the Miss Marquette, which the Company leased to Gamblers Supply Management Company (GSMC) beginning October 1, 1994 for a period of eight years with automatic extensions of an additional 17 years. This investment consisted of (a) $14.3 million expended by the Company to acquire and refurbish a riverboat, and (b) an additional $7.5 million that the Company loaned to GSMC to fund costs incurred by GSMC to develop and construct dockside facilities and related amenities. The lease required scheduled lease payments of the greater of an aggregate of $25 million, or 50% of defined net income from casino operations, determined annually, during the first 43 months of the lease; and 50% of defined net income from casino operations thereafter, beginning in April 1998. GSMC was unable to meet regularly scheduled payments under the lease and financing notes due to dockside facility construction and preopening cost overruns. The Company allowed GSMC to defer its scheduled payments to the Company, which enabled GSMC to use its operating cash flow to pay for the aforementioned cost overruns. On July 1, 1996, the Company acquired all of the outstanding shares of common stock of GSMC for $1 million in cash. The acquisition was accounted for using the purchase method of accounting. The fair value of the assets acquired totaled $31.8 million consisting of gaming machines, gaming equipment, and the dockside facilities, which include a 24-room hotel, parking lots, marina, restaurant, lounge and other support facilities and related furniture, fixtures and equipment. The liabilities assumed were valued at $8.2 million and consisted of trade accounts payable, accruals and notes payable to the former shareholders guaranteed by the Company. The Company continues to hold notes receivable (relating to prior loans to GSMC to finance the dockside facilities and certain gaming equipment), lease payments receivable and accrued interest receivable from GSMC aggregating approximately $22 million as of September 30, 1996. Such receivables from GSMC are eliminated in the Company's consolidated financial statements. The excess purchase price over the fair value of the net assets acquired is approximately $8.1 million, which is recorded as goodwill in the accompanying balance sheet and amortized over 15 years on a straight-line basis. The Company's policy for assessing recoverability is to periodically review the recorded amounts. The review considers factors such as whether the amortization of the goodwill over its remaining life can be recovered through forecasted results of the Miss Marquette riverboat. 8 The following unaudited pro forma information presents a summary of consolidated results of operations of the Company and GSMC as if the acquisition had occurred January 1, 1995 (for purposes of calculating December 31, 1995 pro forma information) and January 1, 1996 (for purposes of calculating September 30, 1996 pro forma information), with pro forma adjustments to give effect for amortization of goodwill and the net decrease in interest income and rental income from the riverboat lessee:
Year ended Nine months ended Dec. 31, 1995 September 30, 1996 ------------- ------------------ Revenues $121,803,061 $131,100,925 Net income 11,046,701 10,771,680 Net income per common share $ 0.49 $ 0.47
Note 3 - Shareholders' Equity - ----------------------------- On August 30, 1996, the Company's Board of Directors approved a two-for-one stock split in the form of a stock dividend, effected by a distribution on September 27, 1996, of one additional share for each share owned by shareholders of record on September 13, 1996. The $0.001 par value per share of Sodak's common stock was unchanged by the stock split. The par value of the additional shares issued as a result of the stock split was capitalized into common stock on the balance sheet by means of a transfer from additional paid-in capital. All references in these financial statements to numbers of common shares and earnings per share have been restated to give retroactive effect to the stock split. In addition to the common stock, the Company has preferred stock, $0.001 par value, 25,000,000 shares authorized, none outstanding. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Notice This report contains forward-looking statements reflecting management's knowledge and judgment about factors which could materially affect Company performance in the future. Terms indicating future expectation and optimism about future potential and anticipated growth in revenue and earnings of the Company's business lines -- product sales, gaming operations (particularly in Latin America), wide area progressive systems and financing -- and like expressions typically identify such statements. Actual results and events may differ significantly from those discussed in forward-looking settlements. 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 projected. In particular, the Company is committing substantial capital to its proposed CBF video gaming operations in Brazil. There can be no assurance that the Company's proposed Brazilian operations will be successful due to the uncertainty of the Brazilian gaming market, the need for government approval by various state regulatory authorities in Brazil, possible changes in Brazilian gaming laws, the possible legalization of casinos that would compete with the Company's video gaming operations, potential competitors and risks relating generally to the implementation of a new business enterprise. 9 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. The Company regularly publishes disclosures in this and other reports that discuss the Company's business. See particularly the Company's reports on Forms 10-K, 10-Q, and 8-K filed with the Securities and Exchange Commission. General For several years after its inception in 1989, the Company's sole line of business was the marketing and distribution of gaming equipment to Native American casinos. Since 1993, the Company has diversified its revenue base and has focused on the development of gaming opportunities that generate recurring revenue sources. The Company's strategy is to expand gaming operations into new markets and to increase recurring revenue. As part of this strategy, the Company has entered emerging gaming markets in Latin America, where it develops, equips, finances and operates gaming halls and video gaming routes. The Company recently entered into an agreement (the "CBF Agreement") with the Brazilian Soccer Federation to own and operate linked progressive video gaming systems in Brazil. RESULTS OF OPERATIONS--THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1995 Net earnings for the three months ended September 30, 1996 increased 40% to $5.2 million, or $0.23 per share, compared to net earnings of $3.7 million, or $0.16 per share, for the three months ended September 30, 1995. The quarterly performance set a new record level of earnings, which support the continuation of the Company's long term growth strategy. The Company's principal revenue sources--product sales, gaming operations, and wide area progressive systems-- all produced record levels of revenue and net earnings for the three months ended September 30, 1996, compared to the same quarter in 1995. Product sales and wide area progressive systems were the primary contributors to the increase in net earnings. The greatest rate of revenue growth occurred in gaming operations, which had a 405% increase due to the continued rapid expansion of Latin American gaming operations and the July 1, 1996 acquisition of Gamblers Supply Management Company (GSMC), which operates the Miss Marquette riverboat casino complex (Miss Marquette) located at Marquette Iowa (see "Cash Flows," page 16 for discussion). Revenues Total revenues increased 158% to $63.1 million for the three months ended September 30, 1996, compared to $24.5 million for the three months ended September 30, 1995. Product Sales. Product sales increased 144% to $45.5 million for the three months ended September 30, 1996, from $18.6 million in 1995. Total sales of gaming machines, including specialty gaming machines and used machines, were approximately 5,240 machines in 1996 compared to approximately 2,020 machines in 1995. This increase was primarily attributable to a significant sale to the 10 Mohegan tribe in Connecticut in 1996. In addition to Connecticut, product sales in the three months ended September 30, 1996 were primarily in the states of Michigan and North Dakota. Gaming Operations. Gaming operations revenue increased 405% to $13.9 million for the three months ended September 30, 1996, from $2.7 million in 1995. This increase was primarily attributable to the July 1, 1996 acquisition of GSMC, the growth of gaming operations in Peru, and the introduction of gaming operations in Ecuador in March 1996 and in Brazil in June 1996. Latin American gaming revenues increased five-fold in 1996 compared to the same period in 1995. Gaming operations revenue for the three months ended September 30, 1996 consisted of $8.3 million in operating revenue generated from the Miss Marquette after the acquisition of GSMC on July 1, 1996, compared to $1.7 million in lease revenue from GSMC in 1995; $0.4 million in revenue earned from the Company's share of Harrah's Entertainment, Inc.'s (Harrah's) management fee in connection with Harrah's Phoenix Ak-Chin casino compared to $0.3 million in 1995 (Harrah's owns approximately 14% of the Company's outstanding shares at September 30, 1996); and $5.2 million in revenue from Latin American gaming operations compared to $0.8 million in 1995. This increase was primarily due to growth in Peru operations, which began in May 1995, and also due to the introduction of gaming operations in Ecuador in March 1996 and in Brazil in June 1996. Wide Area Progressive Systems. Wide area progressive systems revenue increased 52% to $2.3 million for the three months ended September 30, 1996, from $1.5 million in 1995. Wide area progressive systems revenues are derived from the operation of multi-link systems available to Native American casinos nationwide in jurisdictions permitting such systems. The increase in revenues was a result of the introduction of new systems and expansion of existing systems. At October 15, 1996, the Company was providing a total of eight wide area progressive systems which connected more than 1,100 machines in 10 states: Arizona (which permits the operation of intrastate wide area progressive systems in lieu of interstate systems). Connecticut, Iowa, Louisiana, Michigan, New Mexico, North Dakota, Oregon, South Dakota and Wisconsin. The Quartermania and Megabucks interstate systems were first introduced to Native American casinos in August 1994; the Nickelmania interstate system was introduced in November 1995; the Arizona intrastate Quartermania and Megabucks systems were introduced in December 1995; the Dollars Deluxe interstate system was introduced in June 1996; and the Fabulous 50's interstate system was introduced in September 1996. This Company also operates a Quartermania system available to non-Native American casinos located in Deadwood, South Dakota. Based on current market trends, the Company believes that the wide area progressive revenues could increase through the placement of additional machines on existing systems as well as the introduction of new systems. Based on early results from new two-coin games such as Dollars Deluxe and Fabulous 50's, the Company believes that future average daily revenues per machine may increase. Financing Income. Financing income on notes receivable and other financing arrangements decreased 8% to $1.4 million for the three months ended September 30, 1996, compared to $1.6 million in 1995. This decrease was primarily due to the elimination of interest income from GSMC on the Company's consolidated financial statements due to the July 1, 1996 acquisition of GSMC. 11 Costs and Expenses Total costs and expenses increased 194% to $54.8 million for the three months ended September 30, 1996, compared to $18.6 million for the same three months in 1995. Product Sales. The cost of product sales increased 159% to $36.0 million for the three months ended September 30, 1996, from $13.9 million in 1995. This increase was primarily attributable to the 159% increase in the number of gaming machines sold during the period. As a percentage of product sales revenue, the cost of products was 79% in 1996, compared to 75% in 1995. The lower gross margin was due primarily to an increase in the percentage of sales qualifying for cash discounts. Gaming Operations. Gaming operations direct costs increased $10.5 million to $11.3 million for the three months ended September 30, 1996, compared to $0.8 million in 1995. This increase was primarily attributable to the costs of operating the Miss Marquette subsequent to the Company's July 1, 1996 acquisition of GSMC. A portion of the increase was attributable to the expansion of gaming operations in Peru, and to the introduction of gaming operations in Ecuador and in Brazil. Expansion in Peru is expected to slow in the near term as the regulatory authority for gaming halls passes from municipalities to the federal government. The federal government has temporarily halted issuing new site licenses and has increased gaming taxes by 200% effective October 1, 1996. The Company believes these changes will improve the market in the long term by reducing the number of competitors. The Company currently operates 20 gaming halls with approximately 1,150 gaming machines. The revenues from these operations continue to increase but the near-term effect of the gaming tax increase on profitability is uncertain. Anticipated revenue gains and profit margins may or may not outpace the increase in taxes. Immediately following the acquisition of GSMC, the Company implemented changes in the management of the Miss Marquette. The Company began new marketing programs, advertising campaigns and busing programs. The Company hired outside consultants to review operations, design new gaming floor configurations and provide direct-mail coupon programs. The Company's strategy is to market the Miss Marquette through targeted programs to specific market segments. Selling, General and Administrative. Selling, general and administrative expenses increased 85% to $6.8 million for the three months ended September 30, 1996, from $3.7 million in 1995. Included in this $3.1 million increase was a $2.0 million charge as a result of the determination in the third quarter of 1996 to completely write off $2.7 million of receivables relating to the development of a television video bingo lottery system in the Czech Republic. This increase also includes increases in compensation (including increased sales commissions related to the level of product sales) and related employee costs and benefits, depreciation, and expenses associated with the development of new markets, including gaming operations in Latin America. As a percentage of total revenue, selling, general and administrative expenses decreased to 11% in 1996 compared to 15% in 1995. Interest and Financing. Interest and financing costs increased 145% to $0.7 million for the three months ended September 30, 1996, from $0.3 million in 1995. The increase in financing costs was primarily attributable to increased borrowings for the expansion of gaming operations in Latin America and for the assumption of debt in connection with the July 1, 1996 acquisition of GSMC. The Company believes that interest and financing costs could continue to increase in future years as the Company pursues its growth strategy. 12 Income from Operations The cumulative effect of the above described changes resulted in a 41% increase in income from operations to $8.3 million for the three months ended September 30, 1996, from $5.9 million for the three months ended September 30, 1995. As a percentage of revenues, income from operations decreased to 13% in 1996, from 24% in 1995. The decrease in the operating margin was primarily the result of three factors: (i) The Company's fastest growing revenue source was gaming operations, which had a lower margin than either wide area progressive systems, which have minimal costs associated with them, or product sales. The lower margin was attributable to start-up costs in Latin America and the lower margins related to the Miss Marquette which the Company began operating upon acquisition of GSMC on July 1, 1996; (ii) The gross margin on product sales decreased to 21% in 1996, compared to 25% in 1995 due primarily to an increase in the percentage of sales qualifying for cash discounts; and (iii) The higher selling, general and administrative expenses experienced primarily due to the $2.0 million charge resulting from the determination in the third quarter of 1996 to completely write off $2.7 million of receivables relating to the development of a television video bingo lottery system in the Czech Republic. Earnings before Income Taxes Earnings before income taxes increased 40% to $8.2 million for the three months ended September 30, 1996, compared to $5.9 million for the three months ended September 30, 1995. Provision for income taxes was $3.0 million in 1996, compared to $2.2 million in 1995, representing 37% of earnings before income taxes for each of the three months ended September 30, 1996 and 1995. RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995 Net earnings for the nine months ended September 30, 1996 increased 47% to $12.0 million, or $0.52 per share, compared to net earnings of $8.2 million, or $0.36 per share, for the nine months ended September 30, 1995. The performance for the nine months ended September 30, 1996 set a new record level of earnings, which support the continuation of the Company's long term growth strategy. The Company's principal revenue sources -- product sales, gaming operations, wide area progressive systems, and financing -- all produced record levels of revenue and net earnings for the nine months ended September 30, 1996, compared to the same period in 1995. Product sales and wide area progressive systems were the primary contributors to the increase in net earnings. The greatest rate of revenue growth occurred in gaming operations, which had a 227% increase due to the continued rapid expansion of Latin American gaming operations and the July 1, 1996 acquisition of GSMC, which operates the Miss Marquette (see "Cash Flows," page 16 for discussion). 13 Revenues Total revenues increased 92% to $119.5 million for the nine months ended September 30, 1996, compared to $62.2 million for the first nine months in 1995. Product Sales. Product sales increased 77% to $86.1 million for the nine months ended September 30, 1996, from $48.5 million in 1995. Total sales of gaming machines, including specialty gaming machines and used machines, were approximately 10,300 machines in 1996, compared to approximately 5,300 machines in 1995. This increase was primarily attributable to significant sales to the Mohegan tribe in Connecticut and the Casino Rama in the Canadian province of Ontario in 1996. In addition to Connecticut and Ontario, product sales in 1996 were primarily in the states of Arizona, Kansas, Michigan, Mississippi, North Dakota and Wisconsin. Gaming Operations. Gaming operations revenue increased 227% to 23.1 million for the nine months ended September 30, 1996, from $7.1 million in 1995. This increase was primarily attributable to the July 1, 1996 acquisition of GSMC, the growth of gaming operations in Peru and the introduction of gaming operations in Ecuador in March 1996 and in Brazil in June 1996. Gaming operations revenue consisted of $8.3 million in operating revenue generated after the acquisition of GSMC on July 1, and $3.3 million in lease revenue (relating to the six months prior to the acquisition of GSMC) from the Miss Marquette, compared to $5.0 million in lease revenue in 1995; $1.2 million in revenue earned from the Company's share of Harrah's management fee in connection with Harrah's Phoenix Ak-Chin casino for each of the nine months ended September 30, 1996 and 1995 (Harrah's owns approximately 14% of the Company's outstanding shares at September 30, 1996); and $10.3 million in revenue from Latin American gaming operations in 1996 compared to $0.8 million in 1995. This increase was primarily due to growth in Peru operations, which began in May 1995, and also due to the introduction of gaming operations in Ecuador in March 1996 and in Brazil in June 1996. Wide Area Progressive Systems. Wide area progressive systems revenue increased 116% to $5.9 million for the nine months ended September 30, 1996, from $2.7 million in 1995. Wide area progressive systems revenues are derived from the operation of multi-line systems available to native American casinos nationwide in jurisdictions permitting such systems. The increase in revenues was a result of the introduction of new systems and the expansion of existing systems. At October 15, 1996, the Company was providing a total of eight wide area progressive systems which connected more than 1,100 machines in 10 states: Arizona (which permits the operation of intrastate wide area progressive systems in lieu of interstate systems), Connecticut, Iowa, Louisiana, Michigan, New Mexico, North Dakota, Oregon, South Dakota and Wisconsin. The Quartermania and Megabucks interstate systems were first introduced to Native American casinos in August 1994; the Nickelmania interstate system was introduced in November 1995; the Arizona intrastate Quartermania and Megabucks systems were introduced in December 1995; The Dollars Deluxe interstate system was introduced in June 1996; and the Fabulous 50's interstate system was introduced in September 1996. The Company also operates a Quartermania system available to non-Native American casinos located in Deadwood, South Dakota. Based on current market trends, the Company believes that the wide area progressive revenues could increase through the placement of additional machines on 14 existing systems as well as the introduction of new systems. Based on early results from new two-coin games such as Dollars Deluxe and Fabulous 50's, the Company believes that future average daily revenues per machine may increase. Financing Income. Financing income on notes receivable and other financing arrangements increased 15% to $4.4 million for the nine months ended September 30, 1996, compared to $3.8 million in 1995. This increase was primarily due to an increase in financing arrangements, which was partially offset by the elimination of interest income from GSMC on the Company's consolidated financial statements due to the July 1, 1996 acquisition of GSMC. Costs and Expenses Total costs and expenses increased 104% to $100.5 million for the nine months ended September 30, 1996, compared to $49.4 million in 1995. Product Sales. The cost of product sales increased 82% to $67.3 million for the nine months ended September 30, 1996, from $36.9 million in 1995. This increase was primarily attributable to the 94% increase in the number of gaming machines sold. As a percentage of product sales revenues, the cost of products was 78% in 1996, compared to 76% in 1995. The lower gross margin was due primarily to an increase in the percentage of sales qualifying for cash discounts. Gaming Operations. Gaming operations direct costs increased $14.9 million to $15.8 million for the nine months ended September 30, 1996, compared to $0.8 million in 1995. This increase was primarily attributable to the costs of operating the Miss Marquette subsequent to the Company's acquisition of GSMC. A portion of the increase was attributable to the expansion of gaming operations in Peru, and the introduction of gaming operations in Ecuador and Brazil. Selling, General and Administrative. Selling, general and administrative expenses increased 43% to $15.8 million for the nine months ended September 30, 1996, from $11.1 million in 1995. Included in this $4.7 million increase was a $2.0 million charge as a result of the determination in the third quarter of 1996 to completely write off $2.7 million of receivables relating to the development of a television video bingo lottery system in the Czech Republic. This increase also includes increases in compensation (including increased sales commissions related to the level of product sales) and related employee costs and benefits, advertising and promotion, depreciation, and expenses associated with the development of new markets, including gaming operations in Latin America. As a percentage of total revenue, selling, general and administrative expenses decreased to 13% in 1996 compared to 18% in 1995. Interest and Financing. Interest and financing costs increased 208% to $1.7 million for the nine months ended September 30, 1996, from $0.5 million in 1995. The increase in financing costs was primarily attributable to increased borrowings for the expansion of gaming operations in Latin America and for the assumption of debt in connection with the acquisition of GSMC. The Company believes that interest and financing costs could continue to increase in future years as the Company pursues its growth strategy 15 INCOME FROM OPERATIONS The cumulative effect of the above described changes resulted in a 48% increase in income from operations to $18.9 million for the nine months ended September 30, 1996, from $12.8 million for the nine months ended September 30, 1995. As a percentage of revenues, income from operations decreased to 16% in 1996, from 21% in 1995. The decrease in the operating margin was primarily the result of three factors: (i) The Company's fastest growing revenue source was gaming operations, which had a lower margin than either wide area progressive systems, which have minimal costs associated with them, or product sales. The lower margin is attributable to start-up costs in Latin America and the lower margins related to the Miss Marquette which the Company began operating upon acquisition of GSMC on July 1, 1996; (ii) The gross margin on product sales decreased to 22% in 1996, compared to 24% in 1995 due primarily to an increase in the percentage of sales qualifying for cash discounts; and (iii) The higher selling, general and administrative expenses experienced due primarily to the $2.0 million charge resulting from the determination in the third quarter of 1996 to completely write off $2.7 million of receivables relating to the development of a television video bingo lottery system in the Czech Republic. EARNINGS BEFORE INCOME TAXES Earnings before income taxes increased 47% to $18.9 million for the nine months ended September 30, 1996, compared to $12.9 million for the nine months ended September 30, 1995. Provision for income taxes was $6.9 million in 1996, compared to $4.7 million in 1995, representing 37% of earnings before income taxes for each of the nine months ended September 30, 1996 and 1995. LIQUIDITY AND CAPITAL RESOURCES WORKING CAPITAL Working capital decreased $0.5 million to $37.0 million during the nine months ended September 30, 1996. This decrease was primarily a result of a $29.5 million increase in accounts payable, a $3.0 million increase in accrued liabilities, and a $1.7 million increase in current maturities of long-term debt. The decreases were partially offset by a $23.2 million increase in receivables, a $7.0 million increase in inventories, a $2.5 million increase in cash and cash equivalents, and a $0.8 million increase in prepaid expenses and other current assets. CASH FLOWS During the nine months ended September 30, 1996, the Company's cash and cash equivalents increased $2.5 million to $3.5 million. Cash provided by operating activities was $8.1 million for the nine months ended September 30, 1996. Cash provided by operating activities was primarily the result of $12.0 million in net earnings, $2.2 million in depreciation and amortization, $2.3 million in provision for doubtful accounts (Czech TV Bingo), $20.7 million in payments received on notes receivable relating to 16 financed sales, a $29.2 million increase in accounts payable, and a $1.1 million increase in accrued liabilities. These proceeds were partially offset by $19.6 million in gross profit and inventories sold under financing arrangements, a $29.6 million increase in receivables, and a $9.9 million increase in inventories. Cash used in investing activities for the nine months ended September 30, 1996 was $14.4 million, which consisted of $8.9 million used to purchase property and equipment primarily for gaming operations in Latin America, $5.2 million advanced on notes receivable, a $2.6 million increase in amounts due from GSMC prior to its July 1, 1996 acquisition by the Company, and a $2.6 million increase in other assets, primarily for capitalized development costs in Latin America. Cash used in investing activities was partially offset by $3.9 million of payments received on notes receivable and $0.5 million of proceeds from the sale of property and equipment. Financing activities provided $8.8 million during the nine months ended September 30, 1996 as a result of the net proceeds from long-term borrowings under a revolving credit facility. The increase in debt was primarily due to the purchase of gaming equipment and related costs associated with the expansion of Latin American markets. In 1994, the Company invested $21.8 million (excluding approximately $5.7 million of equipment financing provided by the Company) in the Miss Marquette, which the Company leased to GSMC beginning October 1, 1994 for a period of eight years with automatic extensions of an additional 17 years. This investment consisted of (a) $14.3 million expended by the Company to acquire and refurbish a riverboat, and (b) an additional $7.5 million that the Company loaned to GSMC to fund costs incurred by GSMC to develop and construct dockside facilities and related amenities. The lease required scheduled lease payments of the greater of an aggregate of $25 million, or 50% of defined net income from the casino operations, determined annually, during the first 43 months of the lease; and 50% of defined net income from casino operations thereafter, beginning in April 1998. GSMC was unable to meet regularly scheduled payments under the lease and financing notes due in dockside facility construction and preopening cost overruns. The Company allowed GSMC to defer its scheduled payments to the Company, which enabled GSMC to use its operating cash flow to pay for the aforementioned cost overruns. On July 1, 1996, the Company acquired all of the outstanding shares of common stock of GSMC for $1 million in cash. The acquisition was accounted for using the purchase method of accounting. The fair value of the assets acquired totaled $31.8 million consisting of gaming machines, gaming equipment, and the dockside facilities, which include a 24-room hotel, parking lots, marina, restaurant, lounge and other support facilities and related furniture, fixtures and equipment. The liabilities assumed were valued at $8.2 million and consisted of trade accounts payable, accruals and notes payable to the former shareholders guaranteed by the Company. The Company continues to hold notes receivable (relating to prior loans to GSMC to finance the dockside facilities and certain gaming equipment), lease payments receivable and accrued interest receivable from GSMC aggregating approximately $22 million as of September 30, 1996. Such receivables from GSMC are eliminated in the Company's consolidated financial statements. The excess purchase price over the fair value of the net assets acquired is approximately $8.1 million which is recorded as goodwill in the accompanying balance sheet and 17 amortized over 15 years on a straight-line basis. The Company's policy for assessing recoverability is to periodically review the recorded amounts. The review considers factors such as whether the amortization of the goodwill over its remaining life can be recovered through forecasted results of the Miss Marquette riverboat. Indebtedness / Lines Of Credit The Company had $32.6 million of long-term debt outstanding at September 30, 1996. Of that amount, $26.5 million was borrowed under a $50 million long- term revolving credit facility from a syndicate of banks. The revolving line has two components, a $20 million tranche (Tranche A) to be used for general corporate purposes and a $30 million tranche (Tranche B) for acquisitions and major capital equipment expenditures. Tranche A matures in February 1999, plus two one-year renewal options subject to bank approval, and Tranche B matures in February 2001. The amount available under Tranche B is reduced by $1.875 million quarterly beginning in 1997. The unused portion of the revolving credit facility is subject to a commitment fee, based on 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, the federal funds rate plus 1%, or a Eurodollar rate plus an applicable margin. Amounts borrowed are secured by substantially all Company assets, excluding real estate, but including a first preferred ship mortgage on the Miss Marquette riverboat casino. Of the remaining $6.1 million of long-term debt, $4.2 million relates to debt payable to the former shareholders of GSMC, and the balance of long-term debt primarily relates to other debt assumed by the Company as a result of the purchase of GSMC. Capital Commitments During 1994, the Company assisted a casino management company in acquiring $8 million in financing from a financial institution. The Company guaranteed the management company's debt and receives a loan guarantee fee based on a percentage of the outstanding loan balance. As of October 15, 1996, the Company's guaranty was approximately $4.7 million. In August 1996, the Company announced it had entered into an agreement (the "CBF Agreement") with the Confederacao Brasileira de Futebol (Brazilian Soccer Federation or "CBF") to own and operate on behalf of CBF linked progressive video gaming systems in Brazil. Under a Brazilian federal law known as the "Zico law," an organization such as CBF that is a chartered sports entity participating in the management of at least three Olympic teams may operate bingo and games similar to bingo such as video bingo or keno ("bingo-similar games") in order to fund its activities, provided that applicable authorizations from Brazilian state regulatory authorities are obtained. The Company has developed bingo-similar video games which it believes comply with the Zico law. Under the CBF Agreement, the Company has the right and the obligation to provide bingo-similar video gaming equipment and systems to, and to operate gaming machines on behalf of, CBF. The CBF Agreement has an initial term of eight years and may be terminated by CBF if a bingo-similar gaming system is not operational and gaming play has not begun on or before March 30, 1997. 18 In connection with the CBF Agreement, the Company has committed to purchase 1,000 gaming machines from International Game Technology by March 1997. The total cost to acquire and install these machines and related systems and equipment is expected to be approximately $10 million. If proposed plans to establish video bingo systems in Brazil are successfully implemented, the Company would make significant additional investments in equipment and working capital. The Company anticipates that if additional funds are required, such funds would be sought through public or private equity or debt financing. PART II. OTHER INFORMATION Item 1. Legal proceedings - ------------------------- RICO Litigation. On April 26, 1994, the Company was named as a defendant in a class action lawsuit filed in the United States District Court, Middle District of Florida, by William A. Poulos and William Ahearn, respectively, each of whom sought to assert claims on behalf of themselves and "all other similarly situated ("the plaintiffs"). Each of the plaintiffs filed suit against Sodak and approximately 41 other defendants (each a "defendant" and collectively "the defendants"). These two lawsuits were ordered consolidated by the Court, and the action has been transferred to the United States District Court, District of Nevada, for further proceedings. Each defendant is involved in the gaming business as either a gaming machine manufacturer, distributor, or casino operator. The class action lawsuit arises out of alleged fraudulent marketing and operation of casino video poker machines and electronic slot machines. The plaintiff's allege that the defendants have engaged in a course of fraudulent and misleading conduct intended to induce people in playing their gaming machines based on a false belief concerning how those machines actually operate as well as the extent to which there is actually an opportunity to win on any given play. The plaintiffs allege that the defendants' actions constitute violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO") and give rise to claims of common law fraud and unjust enrichment. The plaintiffs are seeking monetary damages in excess of $1 billion and are asking that any damage awards be trebled under applicable federal law. On April 15, 1996, the Nevada Federal District Court issued Orders granting Sodak's and others' motions to dismiss and allowed plaintiffs to file amended Complaints to properly state a claim on or before May 31, 1996. The amended complaint was filed at the close of work of May 31, 1996. Accompanying the amended complaint was a motion seeking leave to substitute plaintiff Brenda McElmore in the place and stead of plaintiff Mr. Ahearn. The Company believes the plaintiffs' lawsuit to be without merit and the Company intends to vigorously pursue all legal defenses available to it. Accordingly, motions to dismiss the amended complaint have been filed by the Company and all defendants. These motions await the Court's ruling. On September 26, 1995, another RICO-based class action was filed in the United States District Court, District of Nevada, by Larry Schreier, which named the Company as a defendant, along with the same 41 other defendants (each a "defendant" and collectively "the defendants"). The plaintiff in this 19 action is a resident of Tulsa, Oklahoma, and purports to bring this action on behalf of himself and "all other similarly situated" (the "plaintiffs"), namely, all members of "casino card clubs" and players in "video poker tournaments," which would appear to be a sub-class of plaintiffs within the two prior class actions identified above and which are presently pending against the Company in the District of Nevada. Except for the identification of the class which the plaintiff seeks to represent, all substantive allegations of this action are virtually identical to the consolidated Poulos/Ahearn actions, and, the Company believes, is also without merit. On August 15, 1996, the Nevada Federal District Court issued an order granting Sodak's and others' motions to dismiss and gave plaintiff leave to file an amended complaint on or before September 30, 1996. The amended complaint was filed at the close of work on September 30, 1996. The Company believes the plaintiff's lawsuit to be without merit. The Company intends to vigorously pursue all legal defenses available to it, and to shortly file renewed motions to dismiss the amended complaint on its behalf. 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 Form 8-K dated July 15, 1996, and Form 8-K/A dated September 13, 1996, reporting the Company's acquisition of all of the outstanding shares of Gamblers Supply Management Company. 20 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: November 13, 1996 SODAK GAMING, INC. By: /s/ David R. Johnson ____________________________ David R. Johnson Chief Financial Officer 21 EXHIBIT INDEX
Sequentially Exhibit No. Numbered Page - ----------- ------------- 11.1 Calculation of Earnings Per Common and Common Equivalent Share 23
22 EX-11.1 2 CALC. OF EARNINGS PER COMMON AND EQUIVALENT SHARE Exhibit 11.1 SODAK GAMING, INC. CALCULATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
THREE THREE NINE NINE MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 ------------------ ------------------ ------------------ ------------------ SHARES OUTSTANDING Weighted Average common shares outstanding 22,742,114 22,722,276 22,730,828 22,722,276 Adjustments for common stock equivalents (1) 341,125 78,114 215,601 34,470 ----------- ----------- ------------ ----------- Weighted average number of common and common equivalent shares outstanding 23,083,239 22,800,390 22,946,429 22,756,746 Net earnings $ 5,219,623 $ 3,717,113 $ 11,998,675 $ 8,156,418 Earnings per common and common equivalent share $ 0.23 $ 0.16 $ 0.52 $ 0.36 - --------------------------------
(1) Represents adjustment computed under the treasury stock method for restricted stock and stock options granted at fair market value at date of grant. 23 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. 1 9-MOS DEC-30-1996 JAN-01-1996 SEP-30-1996 3,518,280 0 43,358,351 445,996 22,344,362 95,743,341 61,987,201 3,195,793 197,390,512 58,782,690 32,572,817 22,758 0 0 106,497,020 197,390,512 86,070,431 119,458,033 67,322,385 100,521,780 21,246 2,318,668 1,667,169 18,915,007 6,916,332 11,998,675 0 0 0 11,998,675 0.52 0.52
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