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