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 June 30, 1999
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 August 11, 1999, there were outstanding 22,814,140 shares of the Company's
common stock.
Page 1 of 58
Exhibit Index Page 24
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Sodak Gaming, Inc.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Earnings for the three months ended
June 30, 1999 and 1998 3
Consolidated Statements of Earnings for the six months ended
June 30, 1999 and 1998 4
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 5
Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
EXHIBIT INDEX 24
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Sodak Gaming, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three months ended June 30,
-----------------------------------------
Dollars in thousands, except per share amounts 1999 1998
------------------------------------------------------------ ------------------- --------------------
Revenue:
Product sales $ 16,695 14,969
Wide area progressive systems 4,069 3,915
Financing income 1,768 2,551
------------------- --------------------
Total revenue 22,532 21,435
------------------- --------------------
Costs and expenses:
Cost of product sales 12,189 11,366
Selling, general and administrative 3,783 4,688
Depreciation and amortization 627 306
Interest and financing costs 45 363
------------------- --------------------
Total costs and expenses 16,644 16,723
------------------- --------------------
Income from operations 5,888 4,712
Other income, net 181 45
------------------- --------------------
Earnings before income taxes 6,069 4,757
Provision for income taxes 2,245 1,715
------------------- --------------------
Earnings from continuing operations 3,824 3,042
Income (loss) from discontinued operations
less applicable income taxes 1,411 (179)
------------------- --------------------
Net earnings $ 5,235 2,863
=================== ====================
Earnings per share basic and diluted:
Earnings from continuing operations $ 0.17 0.13
Income (loss) from discontinued operations 0.06 0.00
------------------- --------------------
Net earnings $ 0.23 0.13
=================== ====================
Weighted average number of common and assumed conversion
shares outstanding 23,009,713 22,769,961
=================== ====================
The accompanying notes are an integral part of the consolidated financial
statements.
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Sodak Gaming, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Six months ended June 30,
-----------------------------------------
Dollars in thousands, except per share amounts 1999 1998
------------------------------------------------------------ ------------------- --------------------
Revenue:
Product sales $ 34,628 25,732
Wide area progressive systems 7,670 7,584
Financing income 3,548 4,639
------------------- --------------------
Total revenue 45,846 37,955
------------------- --------------------
Costs and expenses:
Cost of product sales 26,177 19,561
Selling, general and administrative 7,642 7,844
Depreciation and amortization 1,242 605
Interest and financing costs 169 943
------------------- --------------------
Total costs and expenses 35,230 28,953
------------------- --------------------
Income from operations 10,616 9,002
Other income, net 245 66
------------------- --------------------
Earnings before income taxes 10,861 9,068
Provision for income taxes 3,996 3,274
------------------- --------------------
Earnings from continuing operations 6,865 5,794
------------------- --------------------
Discontinued operations:
Income (loss) from discontinued operations
less applicable income taxes 1,768 (979)
Loss on disposal of joint venture interest,
less applicable income taxes (285) -
------------------- --------------------
Total discontinued operations 1,483 (979)
------------------- --------------------
Net earnings $ 8,348 4,815
=================== ====================
Earnings per share basic and diluted:
Earnings from continuing operations $ 0.30 0.25
Income (loss) from discontinued operations .07 (0.04)
Loss on disposal of joint venture interest (0.01) -
------------------- --------------------
Net earnings per share $ 0.36 0.21
=================== ====================
Weighted average number of common and assumed conversion
shares outstanding 22,992,766 22,776,495
=================== ====================
The accompanying notes are an integral part of the consolidated financial
statements.
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Sodak Gaming, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
In thousands, except share and per share amounts June 30, 1999 December 31, 1998
-------------------------------------------------------------------------------- ------------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 23,199 6,100
Current trade, notes and interest receivables 37,596 38,210
Net investment in sales-type leases, current maturities 2,384 1,640
Inventories 21,194 14,565
Prepaid expenses 324 408
Refundable income taxes - 1,165
Net assets held for sale 21,736 -
Deferred income taxes 2,571 1,870
------------------- ---------------
Total current assets 109,004 63,958
Property and equipment, net 17,030 47,117
Notes receivable, net of current maturities 17,613 24,708
Net investment in sales-type leases, net of current maturities 1,559 1,917
Investment in joint venture - 2,400
Deferred income taxes - 202
Other assets 58 206
------------------- ---------------
$ 145,264 140,508
=================== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 24,949 16,313
Note payable - 1,500
Current maturities of long-term debt - 2,836
Income taxes payable 1,217 -
Deferred financing fee revenue 899 1,278
Accrued payroll and payroll-related costs 1,403 3,891
Other accrued liabilities 523 3,328
------------------- ---------------
Total current liabilities 28,991 29,146
Long-term debt, net of current maturities - 4,366
Deferred Taxes 777 -
------------------- ---------------
Total liabilities 29,768 33,512
------------------- ---------------
Shareholders' equity:
Preferred stock, $0.001 par value, 25,000,000 shares authorized, none
issued and outstanding - -
Common stock, $0.001 par value, 75,000,000 shares authorized, 22,814,140
and 22,789,908 shares
issued and outstanding at June 30, 1999 and
December 31, 1998, respectively 23 23
Additional paid-in capital 64,377 64,226
Retained earnings 51,096 42,747
------------------- ---------------
Total shareholders' equity 115,496 106,996
------------------- ---------------
$ 145,264 140,508
=================== ===============
The accompanying notes are an integral part of the consolidated financial
statements.
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Sodak Gaming, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
-----------------------------------------
In thousands 1999 1998
-------------------------------------------------------------------------- ------------------- -------------------
Cash flows from operating activities:
Net earnings $ 8,348 4,815
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,854 2,937
Loss on sale of joint venture interest 439 -
Provision for doubtful accounts - 244
Gain on sale of property, equipment and real estate - (47)
Deferred income taxes 278 321
Changes in operating assets and liabilities:
Trade and accrued interest receivables 1,729 (15)
Notes receivable relating to financed sales 4,784 16,160
Net investment in sales-type leases (386) -
Inventories (6,807) 3,654
Prepaid expenses (102) (118)
Accounts payable 8,885 (12,756)
Accrued liabilities and deferred financing fees (3,399) 2,017
Income taxes payable, net of refundable income taxes 2,382 (268)
------------------- -------------------
Net cash provided by operating activities 18,005 16,944
------------------- -------------------
Cash flows from investing activities:
Cash advanced on notes receivable - (6,576)
Payments received on notes receivable 3,061 2,497
Proceeds from sale of property, equipment and real estate - 524
Purchases of property and equipment (926) (4,553)
Decrease in other assets 148 157
------------------- -------------------
Net cash provided by (used in) investing activities 2,283 (7,951)
------------------- -------------------
Cash flows from financing activities:
Proceeds from long-term borrowings - 28,000
Principal repayments of long-term debt (3,340) (33,962)
Net proceeds from exercise of stock options 151 -
------------------- -------------------
Net cash used in financing activities (3,189) (5,962)
------------------- -------------------
Effect of exchange rate changes on cash and cash equivalents - (50)
------------------- -------------------
Net increase in cash and cash equivalents 17,099 2,981
Cash and cash equivalents, beginning of period 6,100 3,942
------------------- -------------------
Cash and cash equivalents, end of period $ 23,199 6,923
=================== ===================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 588 1,665
Cash paid during the period for income taxes 2,134 2,877
Supplemental schedule of noncash investing activity:
Note receivable obtained from sale of joint venture interest $ 1,961 -
The accompanying notes are an integral part of the consolidated financial
statements.
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Sodak Gaming, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(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 1998 consolidated financial statements and notes thereto as published in the
annual report on Form 10-K.
Certain 1998 amounts have been reclassified to conform to the 1999
presentation.
NOTE 2 - MERGER WITH IGT
On March 11, 1999, the Company announced that a definitive agreement was
signed whereby the Company would be acquired by a wholly-owned subsidiary of
International Game Technology (NYSE: IGT), a world leader in the design,
development and manufacture of microprocessor-based gaming products and software
systems in all jurisdictions where gaming is legal. Under this merger agreement,
each outstanding share of Sodak common stock will be converted into the right to
receive $10 in cash. The Company would become a wholly-owned subsidiary under
the terms of the agreement. The shareholders of Sodak, at a special shareholder
meeting on July 7, 1999, voted to approve the merger agreement. The transaction
is expected to close in the second half of 1999. As conditions to closing, the
Company agreed to divest its wholly-owned riverboat casino entertainment
complex, the MISS MARQUETTE, and its 50% joint venture interest to develop a
gaming riverboat complex in Louisiana.
The Company is proceeding with its divestiture of gaming operations. On
March 31, 1999, the Company sold its interest in the Louisiana joint venture to
a subsidiary of Hollywood Casino Corporation for $2.5 million, payable six
months after the opening of the Louisiana complex. The amount was discounted to
reflect the present value of the transaction, resulting in a loss of $0.4
million. On July 30, 1999, the Company entered into a definitive agreement to
sell the Miss Marquette riverboat casino and associated real property and assets
to Lady Luck Gaming Corporation. The agreement provides for a sale price of
$41.67 million and the assumption of certain liabilities. Closing of the sale is
anticipated to be prior to October 31, 1999. The assets of the Miss Marquette
Riverboat expected to be divested are classified as net assets held for sale.
Completion of the sale is conditioned upon regulatory approvals, financing and
satisfaction of other customary conditions.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENT
During 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes new
standards for recognizing all derivatives as either assets or liabilities, and
measuring those instruments at fair value. The Company plans to adopt the new
standard during the first quarter of the year 2001, as required. The Company is
in the process of evaluating SFAS 133 and the impact on the Company, but does
not believe the impact will be material.
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NOTE 4 - 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 six month periods ended June 30, 1999 and 1998:
Three months ended June 30, Six months ended June 30,
------------------------------------ ----------------------------------
1999 1998 1999 1998
---------------- ------------------ ---------------- ----------------
Weighted average common shares outstanding
for basic EPS calculation 22,814,140 22,758,408 22,802,225 22,758,408
Adjustments for assumed conversion shares
(stock options) 195,573 11,553 190,541 18,087
---------------- ------------------ ---------------- ----------------
Weighted average common shares
outstanding for diluted EPS calculation 23,009,713 22,769,961 22,992,766 22,776,495
================ ================== ================ ================
-8-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
The Company's core business is distributing gaming equipment and ancillary
products and providing wide area progressive systems primarily to Native
American casinos. The Company also operates the MISS MARQUETTE riverboat casino
and entertainment facility located on the Mississippi River at Marquette, Iowa.
Other business activities include a participation in Harrah's Entertainment,
Inc.'s (Harrah's) management fee from Harrah's Phoenix Ak-Chin casino in Arizona
and income from financing product sales and casino ventures. Further, the
Company had entered a joint venture with subsidiaries of Hollywood Casino
Corporation (Hollywood) and New Orleans Paddlewheels (NOP) to develop a hotel,
dining, retail and riverboat casino entertainment complex on the Red River in
downtown Shreveport, Louisiana.
On March 11, 1999, the Company announced that a definitive agreement was
signed whereby the Company would be acquired by a wholly-owned subsidiary of
International Game Technology (NYSE: IGT), a world leader in the design,
development and manufacture of microprocessor-based gaming products and software
systems in all jurisdictions where gaming is legal. Under this merger agreement,
each outstanding share of Sodak common stock will be converted into the right to
receive $10 in cash. The Company would become a wholly-owned subsidiary under
the terms of the agreement. The shareholders of Sodak, at a special shareholder
meeting on July 7, 1999, voted to approve the merger agreement. The transaction
is expected to close in the second half of 1999. As conditions to closing, the
Company agreed to divest its wholly-owned riverboat casino entertainment
complex, the MISS MARQUETTE, and its 50% joint venture interest to develop a
gaming riverboat complex in Louisiana.
The Company is proceeding with its divestiture of gaming operations. On
March 31, 1999, the Company sold its interest in the Louisiana joint venture to
a subsidiary of Hollywood Casino Corporation for $2.5 million, payable six
months after the opening of the Louisiana complex. The amount was discounted to
reflect the present value of the transaction, resulting in a loss of $0.4
million. On July 30, 1999, the Company entered into a definitive agreement to
sell the Miss Marquette riverboat casino and associated real property and assets
to Lady Luck Gaming Corporation. The agreement provides for a sale price of
$41.67 million and the assumption of certain liabilities. Closing of the sale is
anticipated to be prior to October 31, 1999. Completion of the sale is
conditioned upon regulatory approvals, financing and satisfaction of other
customary conditions.
The Company operated a casino and various gaming hall and route operations
in certain Latin American countries from May 1995 through December 1998. In June
1998, the Company announced a corporate restructuring designed to refocus the
Company on its North American businesses as described above. As part of the
restructuring, the Company divested its Latin American gaming operations in
Peru, Ecuador and Brazil. As of December 31, 1998, the restructuring was
complete, and all Latin American operations were divested.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1999
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1998
Net earnings from continuing operations increased 26% to $3.8 million, or
$0.17 per share for the three months ended June 30, 1999, compared to $3.0
million, or $0.13 per share for the same period in 1998. The increase in
earnings was primarily due to increased product sales, decreased selling,
general
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and administrative expense, and decreased interest and financing costs. Total
revenue increased 5% to $22.5 million in 1999, compared to $21.4 million in
1998. Total costs and expenses decreased slightly to $16.6 million in 1999,
compared to $16.7 million in 1998.
PRODUCT SALES
Revenue from product sales increased 12% to $16.7 million in 1999 compared
to $15.0 million in 1998. The increase was the result of a 4% increase in
machine sales to $12.6 million in 1999, compared to $12.1 million in 1998 and a
44% increase in ancillary product sales to $4.1 million in 1999 compared to $2.9
million in 1998.
New gaming machine shipments decreased 6% to approximately 1,515 machines
in 1999 compared to 1,620 machines in 1998. Average revenue per new machine sold
during the second quarter of 1999 increased to approximately $8,300, compared to
$7,200 in 1998, due in part to an increased percentage of enhanced,
higher-priced machines in the mix of machines sold. In 1998, the Company sold
230 used machines compared to none in 1999.
In 1999, 77% of the new machine shipments were to casinos in Arizona,
North Carolina and Wisconsin. In 1998, 88% of the new machine shipments were to
casinos in Kansas, Michigan, North Carolina, New Mexico, Oregon and Wisconsin.
Growth of gaming in Native American jurisdictions is outside the control of the
Company and is influenced by the legal, electoral and regulatory processes of
those jurisdictions.
The cost of product sales increased 7% to $12.2 million in 1999, from
$11.4 million in 1998 as a result of increased product sales volume. The gross
margin on product sales was 27.0% in 1999 compared to 24.1% in 1998. The
increase in gross margin is primarily due to the 44% increase in ancillary
product sales which carry higher margins than machines and the decrease in used
machine sales which carry a lower margin than new machines.
The Company believes that its ability to provide products would be
unaffected by the pending acquisition of the Company by IGT.
WIDE AREA PROGRESSIVE SYSTEMS
Wide area progressive systems revenue increased 4% to $4.1 million in
1999, compared to $3.9 million in 1998. The increase was the result of an
increase in both the number of systems offered and the number of machines on
such systems. At June 30, 1999, 25 systems were in operation compared to 16
systems at June 30, 1998. During the second quarter of 1999, two new systems
were introduced: ELVIS in a $1.00 denomination (one interstate and one
intrastate). The number of machines on the systems at June 30, 1999 increased to
approximately 2,250 from approximately 1,800 at June 30, 1998. While the number
of machines grew, revenue increased modestly due to the fact that 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. 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
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systems and the entry of competing systems of other gaming companies could
affect the Company's future revenue from wide area progressive systems.
At June 30, 1999, 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. The systems in operation were:
HIGH ROLLERS, MEGABUCKS (one interstate and one intrastate), DOLLARS DELUXE,
SLOTOPOLY (one interstate and one intrastate), FABULOUS 50's, QUARTERMANIA (one
interstate and two intrastate), WHEEL OF GOLD, TOTEM POLE, PINBALLMANIA,
JEOPARDY! (one interstate and one intrastate), Nickelmania, SUPER NICKELMANIA,
WHEEL OF FORTUNE in both $1.00 (one interstate and one intrastate) and 25(cent)
denominations (one interstate and two intrastate), and ELVIS in both $1.00 (one
interstate and one intrastate) and 25(cent) denominations.
The Company believes that its ability to provide wide area progressive
systems would be unaffected by the pending acquisition of the Company by IGT.
FINANCING INCOME
Financing income results from interest income on notes receivable, fees
charged in association with financing arrangements and the Company's portion of
the management fee from Harrah's Entertainment, Inc.'s (Harrah's) Phoenix
Ak-Chin casino and entertainment facility. Financing income decreased 31% to
$1.8 million in 1999, compared to $2.5 million in 1998. The decrease was
primarily due to a lower outstanding balance of interest-bearing receivables
related to financed sales in 1999 compared to 1998, as well as, $0.7 million in
financing fees recognized in 1998 for arranging financing for casino projects.
The Company recognized revenue of $0.4 million in both 1999 and 1998 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 a financing guaranty provided to Harrah's
by the Company during the initial development and early operations phases of the
facility. The guaranty expired in 1996 when the loan was paid in full. As
consideration for the guaranty, the Company receives, from Harrah's, 4% of the
distributable net income of the gaming operation over the term of the management
contract, which expires December 1999. The Company is entitled to participate in
any extensions to the management agreement between Harrah's and the Native
American tribe associated with the Harrah's Phoenix Ak-Chin. There can be no
assurance that Harrah's management contract will be extended or that the terms
of any extension will not change materially from the current management
contract.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 19% to $3.8 million
in 1999, from $4.7 million in 1998 primarily due to lower severance expenses in
1999. As a percent of total revenue, selling, general and administrative
expenses decreased to 16.8% in 1999 compared to 21.9% in 1998.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 105% to $.6 million in 1999,
compared to $.3 million in 1998. This increase was primarily attributable to a
Company-wide information system placed in service in the fourth quarter of 1998.
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INTEREST AND FINANCING COSTS
Interest and financing costs decreased to $0.04 million in 1999, from $.4
million in 1998. The decrease in interest and financing costs was primarily the
result of increased cash flows from operations during the latter part of 1998
and into 1999, which in turn decreased second quarter 1999 borrowings to fund
working capital needs as compared to 1998.
INCOME FROM OPERATIONS
The cumulative effect of the above described changes resulted in a 25%
increase in income from operations to $5.9 million in 1999, compared to $4.7
million in 1998. As a percent of total revenue, income from operations increased
to 26% in 1999, from 22% in 1998.
OTHER INCOME
Other income, which consists primarily of interest income, increased to
$0.2 million in 1999 from $0.05 million in 1998. The increases is primarily due
to the increase in cash and cash equivalents, which have been invested in short
term interest bearing securities.
PROVISION FOR INCOME TAXES
Provision for income taxes was $2.2 million in 1999 as compared to $1.7
million in 1998, representing 37% and 36% of earnings before income taxes in
1999 and 1998, respectively.
DISCONTINUED OPERATIONS
GAMING OPERATIONS
As discussed on page 9, the Company plans to divest its gaming operations.
Income from discontinued operations increased to $1.4 million or $0.06 per share
for the three months ended June 30, 1999, compared to a loss of ($0.2) million
for the same period in 1998.
Gaming operations revenue decreased 35% to $9.5 million in 1999, from
$14.6 million in 1998. The decrease in gaming operations revenue is due to the
divestiture of international gaming operations in the last two quarters of 1998.
Gaming operations expenses decreased 49% to $6.8 million in 1999, compared
to $13.4 million in 1998. The decrease in gaming operations expenses is due to
the divestiture of international gaming operations in the last two quarters of
1998.
Selling, general and administrative expenses from the discontinued
operations decreased 80% to $0.2 million in 1999, compared to $1.0 million in
1998. Interest expense from the discontinued operations decreased to $.3 million
in 1999 compared to $.4 million in 1998. Income tax expense from the
discontinued operations increased to $0.8 million in 1999 compared to ($0.03)
million in 1998.
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 remained constant at $9.5 million in 1999, and direct
operating costs decreased 11% to $6.8 million in 1999 compared to $7.6 million
in 1998. As a result, operating profit increased 44% to $2.7 million in 1999
compared to $1.9
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million in 1998. As a condition of the pending acquisition of the Company by
IGT, the Company agreed to divest this operation.
RESULTS OF CONTINUING OPERATIONS - SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO
THE SIX MONTHS ENDED JUNE 30, 1998
Net earnings from continuing operations increased 18% to $6.9 million, or
$0.30 per share for the six months ended June 30, 1999, compared to $5.8
million, or $0.25 per share for the same period in 1998. The increase in
earnings was primarily due to increased product sales and decreased interest and
financing costs. Total revenue increased 21% to $45.8 million in 1999, compared
to $37.9 million in 1998. Total costs and expenses increased 22% to $35.2
million in 1999, compared to $28.9 million in 1998.
PRODUCT SALES
Revenue from product sales increased 35% to $34.6 million in 1999 compared
to $25.7 million in 1998. The increase was the result of a 29% increase in
machine sales to $25.6 million in 1999, compared to $19.8 million in 1998 and a
53% increase in ancillary product sales to $9.0 million in 1999 compared to $5.9
million in 1998.
New gaming machine shipments increased 30% to approximately 3,340 machines
in 1999 compared to 2,580 machines in 1998. Average revenue per new machine sold
during the six months ended June 30, 1999 increased to approximately $7,700,
compared to $7,500 in 1998, due in part to a increased percentage of enhanced,
higher-priced machines in the mix of machines sold.
In 1999, 75% of the new machine shipments were to casinos in Arizona, New
Mexico, North Carolina and Wisconsin. In 1998, 77% of the new machine shipments
were to casinos in Kansas, Michigan, Minnesota, New Mexico and Wisconsin. Growth
of gaming in Native American jurisdictions is outside the control of the Company
and is influenced by the legal, electoral and regulatory processes of those
jurisdictions.
The cost of product sales increased 34% to $26.2 million in 1999, from
$19.6 million in 1998 as a result of increased product sales volume. The gross
margin on product sales was 24.4% in 1999 compared to 24.0 % in 1998. The slight
increase in gross margin is primarily due to higher margins on ancillary product
sales.
The Company believes that its ability to provide products would be
unaffected by the pending acquisition of the Company by IGT.
WIDE AREA PROGRESSIVE SYSTEMS
Wide area progressive systems revenue increased 1% to $7.7 million in
1999, compared to $7.6 million in 1998. The increase was the result of an
increase in both the number of systems offered and the number of machines on
such systems. At June 30, 1999, 25 systems were in operation compared to 16
systems at June 30, 1998. During the six months ending June 30, 1999, four new
systems were introduced: ELVIS in a $1.00 denomination (one interstate and one
intrastate) and in a 25(cent) denomination AND SLOTopoly in a 25(cent)
denomination.
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The number of machines on the systems at June 30, 1999 increased to
approximately 2,250 from approximately 1,800 at June 30, 1998.
FINANCING INCOME
Financing income decreased 24% to $3.5 million in 1999, compared to $4.6
million in 1998. The decrease was primarily due to a lower outstanding balance
of interest-bearing receivables related to financed sales in 1999 compared to
1998, as well as, $0.8 million in financing fees recognized in 1998 for
arranging financing for casino projects. The Company recognized revenue of $0.8
million in both 1999 and 1998 as its share of Harrah's management fee from the
Harrah's Phoenix Ak-Chin casino.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 3% to $7.6 million
in 1999, from $7.8 million in 1998. As a percent of total revenue, selling,
general and administrative expenses decreased to 17% in 1999 compared to 21% in
1998.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 105% to $1.2 million in 1999,
compared to $.6 million in 1998. This increase was primarily attributable to a
Company-wide information system placed in service in the fourth quarter of 1998.
INTEREST AND FINANCING COSTS
Interest and financing costs decreased 82% to $0.2 million in 1999, from
$.9 million in 1998. The decrease in interest and financing costs was primarily
the result of increased cash flows from operations during the latter part of
1998 and into 1999, which in turn decreased 1999 borrowings to fund working
capital needs as compared to 1998.
INCOME FROM OPERATIONS
The cumulative effect of the above described changes resulted in an 18%
increase in income from operations to $10.6 million in 1999, compared to $9.0
million in 1998. As a percent of total revenue, income from operations decreased
to 23% in 1999 from 24% in 1998.
OTHER INCOME
Other income, which consists primarily of interest income, increased to
$0.2 million in 1999 from $0.06 million in 1998. The increases is primarily due
to the increase in cash and cash equivalents, which have been invested in short
term interest bearing securities.
PROVISION FOR INCOME TAXES
Provision for income taxes was $4.0 million in 1999 as compared to $3.3
million in 1998, representing 37% and 36% of earnings before income taxes in
1999 and 1998, respectively.
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DISCONTINUED OPERATIONS
GAMING OPERATIONS
As discussed on page 9, the Company plans to divest its gaming operations.
Income from discontinued operations increased to $1.8 million or $0.07 per share
for the six months ended June 30, 1999, compared to a loss of ($1.0) million or
($0.04) per share for the same period in 1998. See discussion on page 9 relating
to divestiture of gaming operations.
Gaming operations revenue decreased 38% to $17.4 million in 1999, from
$27.9 million in 1998. The decrease in gaming operations revenue is due to the
divestiture of international gaming operations in the last two quarters of 1998.
Gaming operations expenses decreased 50% to $13.7 million in 1999,
compared to $26.3 million in 1998. The decrease in gaming operations expenses is
due to the divestiture of international gaming operations in the last two
quarters of 1998.
Selling, general and administrative expenses from the discontinued
operations decreased 80% to $0.4 million in 1999, compared to $2.1 million in
1998. Interest expense from the discontinued operations decreased to $.5 million
in 1999 compared to $.8 million in 1998. Income tax expense from the
discontinued operations increased to $1.0 million in 1999 compared to ($0.3)
million in 1998.
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. Although revenue decreased 1% to $17.4 million in 1999 compared
to $17.6 million in 1998, direct operating costs also decreased 10% to $13.1
million in 1999 compared to $14.6 million in 1998. As a result, operating profit
increased in 1999 compared to 1998. As a condition of the pending acquisition of
the Company by IGT, the Company agreed to divest this operation.
LOSS ON DISPOSAL OF JOINT VENTURE INTEREST
The loss on disposal of joint venture interest for the six months ended
June 30th, 1999, is comprised of ($0.4) million loss less $0.1 million income
tax benefit due to the sale of the Company's interest in a joint venture to
develop a Louisiana gaming riverboat complex.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital increased $45.2 million to $80.0 million during the six
months ended June 30, 1999. The increase is attributable to an increase in
current assets of $45.0 million which is primarily related to the
reclassification of the Miss Marquette Riverboat assets to current assets, and a
decrease in current liabilities of $0.2 million.
CASH FLOWS
During the six months ended June 30, 1999, the Company's cash and cash
equivalents increased $17.1 million to $23.2 million. Cash provided by operating
activities was $18.0 million in 1999 compared to $16.9 million used in operating
activities in 1998. Significant items affecting 1999
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operating cash flows were net earnings, depreciation and amortization, loss on
sale of joint venture interest and changes in operating assets and liabilities.
Cash provided from investing activities amounted to $2.3 million in 1999
compared to ($8.0) million used in investing activities in 1998. Cash provided
by investing activities in 1999 consisted primarily of $3.1 million in payments
received on notes receivable from customer financing, partially offset by ($0.9)
million used to purchase property and equipment. Cash used in investing
activities in 1998 consisted primarily of $6.6 million advanced on notes
receivable for customer financing and ($4.6) million used to purchase property
and equipment. These 1998 uses were partially offset by $2.5 million in payments
received on notes receivable for customer financing and $0.5 million proceeds
from sale of property equipment and real estate. The property and equipment
purchases in 1999 were primarily for: 1) wide area progressive equipment placed
at customer casinos, 2) service vehicles and 3) gaming equipment at the MISS
MARQUETTE. The property and equipment purchases in 1998 were primarily
attributable to costs associated with the development of a new Company-wide
information system, and expenditures for gaming operations equipment at Miss
Marquette and in Peru.
Financing activities used $3.2 million in 1999 compared to $6.0 million
used in 1998. The 1999 uses resulted primarily from repayments of long-term debt
related to the MISS MARQUETTE. The cash used in financing activities in 1998
consisted of principal repayments on the revolving credit facility and other
long-term debt net of proceeds from borrowings on the Company's revolving credit
facility,
INDEBTEDNESS/LINES OF CREDIT
The Company's continuing operations had no long-term debt outstanding at
June 30, 1999. Net assets held for resale are net of long term debt of $ 5.4
million relating to the Miss Marquette riverboat gaming operation ( see
discussion at page 9).
The Company has a long-term revolving credit facility from a syndicate of
banks. The revolving line had a $20 million tranche (Tranche A) which matured on
March 31, 1999 and was not renewed at the election of the Company and a $30
million tranche (Tranche B) for acquisitions and major capital equipment
expenditures. The amount available under Tranche B is being reduced by $1.875
million quarterly since June 1997, and matures in February 2001. As a result,
the maximum credit amount under the revolving credit facility was $13.125
million at June 30, 1999. There were no borrowings or letters of credit
outstanding under the credit facility as of June 30, 1999. The unused portion of
the credit facility is subject to a commitment fee, based upon a calculation as
defined in the revolving credit agreement. Interest is payable at variable rates
which, at the Company's option, are based on the prime rate or a Eurodollar rate
plus an applicable margin. The revolving credit facility is secured by
substantially all Company assets, excluding real estate, but including a first
preferred ship mortgage on the MISS MARQUETTE riverboat.
CAPITAL COMMITMENTS
During 1994 the Company assisted a casino management company in acquiring
$8 million in financing from a financial institution. The Company also
guaranteed the debt. The loan guaranty agreement, as subsequently revised,
allows the casino management company to reborrow prepaid amounts, and at June
30, 1999 the maximum allowable loan balance was $3.0 million. In return for the
guaranty, the Company receives a loan guaranty fee based upon a percentage of
the outstanding loan
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balance, and additionally, a lesser percentage of the unused maximum allowable
loan balance. As of June 30, 1999 the outstanding loan balance was $1.0 million.
As a condition of the agreement to be acquired by IGT, the Company agreed
to divest its interest in this project. On March 31, 1999, the Company sold its
interest in the Louisiana joint venture to a subsidiary of Hollywood for $2.5
million, payable six months after the opening of the Louisiana complex. The
amount was discounted to reflect the present value of the transaction, resulting
in a pre-tax loss of $0.4 million.
IMPACT OF INFLATION
Inflation has not had a significant effect on the Company's operations
during the six months ended June 30, 1999.
YEAR 2000 COMPLIANCE
The Company has undertaken various initiatives to ensure that its computer
equipment and software will function properly with respect to dates prior to,
during, and after the Year 2000. Information technology (IT) systems impacted by
the Year 2000 issue include systems commonly thought of as IT systems, such as
accounting, data processing and telephone systems, as well as systems that are
not commonly thought of as IT systems, such as alarm systems, security systems,
fax machines, and other miscellaneous systems. Both IT and non-IT systems may
contain imbedded technology which compounds the inventory, risk assessment,
remediation, and testing efforts.
STATE OF READINESS
The Year 2000 readiness issue, which is common to most businesses, arises
from the inability of computer information systems with date sensitive processes
to properly recognize and accurately process date-sensitive information. If the
Company or its customers, suppliers, or other third parties fail to make
corrections for programs that have defined dates using a two-digit year, this
could result in system failure or malfunction of certain computer equipment,
software, and other devices dependent upon computerized mechanisms that are date
sensitive. This problem may cause disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. Assessments of the potential cost
and effects of Year 2000 issues vary significantly among businesses, and it is
difficult to predict the actual impact. Recognizing this uncertainty, management
has commenced the following steps: a) established a Year 2000 project team; b)
implemented a plan that includes awareness, inventory, risk assessment,
remediation, contingency planning, and compliance maintenance phases; and c)
communicating with customers, vendors, and third party providers to ensure they
are addressing the Year 2000 issue.
The risk assessment, remediation, and contingency planning phases are
currently underway.
The Company is utilizing both internal and external resources to
accomplish its Year 2000 compliance plan, which began in November 1998 and is
expected to be substantially complete by the third quarter of 1999. Risk
management consultants have been engaged to review and assist Sodak in our Year
2000 compliance plans and efforts. The Company is also actively pursuing efforts
to ensure the readiness of our products and services.
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COSTS
The Company estimates that its direct costs for Year 2000 compliance will
consist primarily of costs related to the staff time devoted to Year 2000
compliance. The Company expects expenditures related to Year 2000 compliance to
approximate $0.2 million.
RISKS
The Year 2000 issue presents a number of other risks and uncertainties
that could impact Sodak operations. These include but are not limited to third
parties whose services the Company relies upon in order to produce and sell our
products, such as key suppliers, public utilities, telecommunication providers,
financial institutions, or certain regulators of the various jurisdictions where
Sodak does business, which could result in lost production, sales, or
administrative difficulties on the part of Sodak. The Company is corresponding
with these parties to determine their Year 2000 compliant status. Based on these
communications, contingency plans will be developed to allow Sodak to continue
business as normal.
The Company has identified the integrated Oracle Applications system and
the Native American Progressive Systems (NAPS) as critical business pieces that
would be substantially impacted by an inability to handle Year 2000 issues. The
Company believes that Year 2000 deficiencies will be remedied through computer
equipment and software replacement or modification in a timely fashion.
Oracle Applications was implemented on the Digital Alphaserver platform
with Compaq Tru64 (formerly known as Digital UNIX) in fiscal 1998 to replace
core-business information systems with an Enterprise Resource Planning (ERP)
software package. The Company has applied the operating system and database
upgrades to the Digital Alphaserver platform. The Oracle Applications Year 2000
compliance testing is complete and the appropriate patches have been applied to
the production instances.
The Company's NAPS are the proprietary systems of IGT. IGT is in the
process of upgrading all wide area progressive system software. The NAPS
software upgrade obtained regulatory approval in Native American jurisdictions
in March 1999. IGT implemented this upgrade to all NAPS jurisdictions in late
March 1999.
The Company is also surveying its key vendors and service providers to
determine the extent to which interfaces with such entities are vulnerable to
Year 2000 issues. Although the Company has developed a system of communicating
with vendors to understand their ability to continue providing services and
products through the Year 2000 without interruption, there can be no assurance
that the systems of other companies on which the Company may rely will be timely
converted or that such failure to convert by another company would not have an
adverse effect on the Company's systems.
The Company believes the implementation of the integrated Oracle
Applications system and completion of the Year 2000 project as scheduled will
significantly reduce the risk of significant operating problems. The majority of
our application systems have been tested and remediated. The Company will retest
key areas in Fall 1999 to ensure Year 2000 compliance is maintained. The Company
believes this timetable should allow enough time to fix or replace any business
critical problems discovered during the testing phase.
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CONTINGENCY PLANS
In those instances where completion by the end of 1999 is not assured,
appropriate contingency plans will be developed. The Year 2000 issue presents a
number of other risks and uncertainties that could impact the Company, including
but not limited to third parties whose services relied upon in order to produce
and sell our products, such as key suppliers and customers, public utilities,
telecommunication providers, financial institutions, or certain regulators of
the various jurisdictions where the Company does business, which could result in
lost production, sales, or administrative difficulties on the part of the
Company. While the Company continues to believe the Year 2000 issues will not
materially affect its consolidated financial position or results of operations,
it remains uncertain as to what extent, if any, the Company may be impacted.
MARKET RISK
The company has market risk relating to long-term debt and notes payable
to third parties and banks which bear interest at fixed and variable rates. The
following is a summary of the debt instruments:
Maturing in one to three Maturing in four to six
years years
- --------------------------------------------------------------------------------
Fixed rate debt (21%) $ 4,696 0
Fixed rate debt (8% to 9%) $ 283 382
- --------------------------------------------------------------------------------
The Company has market risk relating to short term and long term notes
receivable with customers which bear interest at fixed and variable rates. The
following is a summary of the notes receivable:
Maturing in one to three Maturing in four to six
years years
- --------------------------------------------------------------------------------
Fixed rate notes (8% to 14%) $ 24,653 4,378
Variable rate notes (prime +1% to prime +4%) $ 6,638 0
- --------------------------------------------------------------------------------
MARKET RISK MANAGEMENT
The company is exposed to market risk from changes in interest rates.
Changes in interest rates could cause fluctuations in the Company's earnings and
cash flows. The Company's risk to interest rate fluctuations has not materially
changed since December 31, 1998.
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,
and changes in customer acceptance of gaming could cause results to differ
materially from any that may be expected.
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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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On April 26, 1994, William Poulos filed a class action lawsuit in the
United States District Court for the Middle District of Florida, Case No.
94-478-CIV-ORL-22 (the Poulos case). The Complaint in the Poulos case alleges
violations of 18 U.S.C. ss. 1962(a), (c), and (d), the Racketeering Influenced
and Corrupt Organizations Act, and pendent state law claims. The approximately
41 named defendants in the Poulos case consist of the manufacturers and
distributors of electronic gaming devices, and companies who are parents and/or
affiliates of the entities which operate and/or provide the electronic gaming
devices for play by the public.
On May 10, 1994, William Ahearn filed a class action lawsuit in the United
States District Court for the Middle District of Florida, Case No.
94-532-CIV-ORL-22 (the Ahearn case). The named defendants and claims made in the
Poulos and Ahearn cases are virtually identical.
On September 30, 1994, the Poulus and Ahearn cases were consolidated. On
December 9, 1994, the Poulos and Ahearn cases were transferred to the United
States District Court for the District of Nevada pursuant to 28 U.S.C. ss.
1404(a). On November 29, 1994, William Poulos filed a second class action
lawsuit in the United States District Court for the Middle District of Florida,
Case No. 94-1259-CIV-ORL-22 (the Cruise Ship case). The allegations made in the
Cruise Ship case are virtually identical to the allegations in the Poulos and
Ahearn cases. The defendants in the Cruise Ship case consist of manufacturers
and distributors of electronic gaming devices, and the operators of cruise ships
and cruise ship casinos where the devices are exposed 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. Class certification proceedings continue.
Procedural and discovery issues are ongoing. 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.
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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
10.21 Stock Purchase Agreement among Sodak Gaming, Inc., Gamblers
Supply Management Company and Lady Luck Gaming Corporation
dated as of July 30, 1999.
b. Reports on Form 8-K
None.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 11, 1999
SODAK GAMING, INC.
By: \s\ Clayton R. Trulson
------------------------------------
Clayton R. Trulson
Vice President of Finance
and Treasurer
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EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Page
- ------ ----
10.21 Stock Purchase Agreement among Sodak Gaming, Inc., Gamblers Supply Management 25
Company and Lady Luck Gaming Corporation dated as of July 30, 1999.
27 Financial Data Schedule (submitted with EDGAR filing only)
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