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, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________ Commission File No. 0-21754 SODAK GAMING, INC. (Exact name of registrant as specified in its charter) SOUTH DAKOTA 46-0407053 (State of Incorporation) (I.R.S. Employer Identification No.) 5301 S. Highway 16 Rapid City, South Dakota 57701 (Address of principal executive offices) (605) 341-5400 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----------- ---------- At June 30, 1996, there were outstanding 11,366,650 shares of the Company's common stock. Page 1 of 21 Exhibit Index Page 20 1 SODAK GAMING, INC. INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets as of June 30, 1996 and December 31, 1995 3 Consolidated Statements of Earnings for the three months ended June 30, 1996 and 1995 5 Consolidated Statements of Earnings for the six months ended June 30, 1996 and 1995 6 Consolidated Statements of Cash Flows for the six months ended June 30, 1996 and 1995 7 Notes to Consolidated Financial Statements 8 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 1. Legal proceedings 16 Item 2. Changes in Securities 17 Item 3. Defaults Upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 19 EXHIBIT INDEX 20 2 PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements - ----------------------------------------- SODAK GAMING, INC. Consolidated Balance Sheets Assets June 30, December 31, 1996 1995* ----------------- ----------------- Current assets: Cash and cash equivalents $ 3,837,366 $ 974,221 Receivables: Trade accounts, net of allowance for doubtful accounts 23,437,468 15,971,347 Short-term notes receivable 628,000 1,846,213 Notes receivable, current maturities 25,877,680 25,610,033 Accrued interest 447,528 322,012 Inventories: Gaming machines 11,598,177 12,798,282 Repair parts and other gaming accessories 5,108,536 2,530,500 Prepaid expenses and other current assets 1,020,681 1,080,934 Deferred income taxes 669,000 528,000 ----------------- ----------------- Total current assets 72,624,436 61,661,542 ----------------- ----------------- Property and equipment: Land and improvements 638,361 628,143 Building 5,684,121 5,640,453 Gaming operations equipment 12,587,916 4,674,004 Office furniture and equipment 2,198,340 1,791,327 Transportation equipment 1,897,045 1,837,565 Shop equipment 481,196 346,789 ----------------- ----------------- 23,486,979 14,918,281 Less accumulated depreciation 2,007,205 1,245,004 ----------------- ----------------- Total property and equipment, net 21,479,774 13,673,277 ----------------- ----------------- Other assets: Notes receivable, net of current maturities 25,768,784 26,164,915 Net investment in direct financing-type lease 13,644,083 13,982,140 Amounts due from riverboat lessee 22,581,768 19,950,823 Real estate held for sale 1,140,435 1,140,435 Other assets 3,371,763 1,481,885 ----------------- ----------------- Total other assets 66,506,833 62,720,198 ----------------- ----------------- Total assets $ 160,611,043 $ 138,055,017 ================= ================= * From audited financial statements The accompanying notes are an integral part of the consolidated financial statements. 3 SODAK GAMING, INC. Consolidated Balance Sheets Liabilities and Shareholders' Equity June 30, December 31, 1996 1995* ---------------- ---------------- Current liabilities: Accounts payable $ 29,925,640 $ 22,234,670 Current maturities of long-term debt 59,013 56,891 Income taxes payable 1,396,851 993,718 Accrued liabilities 1,451,250 1,502,170 ---------------- ---------------- Total current liabilities 32,832,754 24,787,449 ---------------- ---------------- Long-term debt, net of current maturities 25,514,329 18,043,977 ---------------- ---------------- Deferred income taxes 1,151,000 963,000 ---------------- ---------------- Shareholders' equity: Preferred stock at $0.001 par value, 25,000,000 shares authorized, none outstanding 0 0 Common stock at $0.001 par value, 75,000,000 shares authorized, 11,366,650 and 11,361,138 shares issued and outstanding at June 30, 1996 and December 31, 1995, respectively 11,367 11,361 Additional paid-in capital 63,787,291 63,713,980 Retained earnings 37,314,302 30,535,250 ---------------- ---------------- Total shareholders' equity 101,112,960 94,260,591 ---------------- ---------------- Commitments and contingencies Total liabilities and shareholders' equity $ 160,611,043 $ 138,055,017 ================ ================ * From audited financical statements. The accompanying notes are an integral part of the consolidated financial statements. 4 SODAK GAMING, INC. Consolidated Statements of Earnings (Unaudited) Three Months Ended June 30, --------------------------------- 1996 1995 ------------- ------------- Revenues: Product sales $ 26,095,641 $ 20,202,625 Gaming operations 5,396,376 2,214,364 Wide area progressive systems 1,858,252 802,278 Financing income on notes receivables and other financing arrangements 1,440,738 1,242,936 Other 8,265 25,828 ------------- ------------- Total revenues 34,799,272 24,488,031 ------------- ------------- Costs and expenses: Cost of product sales 20,393,810 15,519,125 Gaming operations 2,962,672 82,805 Selling, general and administrative 4,522,758 3,838,300 Interest and financing costs 518,853 209,227 ------------- ------------- Total costs and expenses 28,398,093 19,649,457 ------------- ------------- Income from operations 6,401,179 4,838,574 Other income (expense) 8,974 (9,241) ------------- ------------- Earnings before income taxes 6,410,153 4,829,333 Provision for income taxes 2,328,828 1,772,870 ------------- ------------- Net earnings $ 4,081,325 $ 3,056,463 ============= ============= Earnings per common and common equivalent share $ 0.36 $ 0.27 ============= ============== Weighted average number of common and common equivalent shares outstanding 11,447,075 11,373,786 ============== ============== The accompanying notes are an integral part of the consolidated financial statements. 5 SODAK GAMING, INC. Consolidated Statements of Earnings (Unaudited) Six Months Ended June 30, ------------------------------------ 1996 1995 -------------- --------------- Revenues: Product sales $40,578,248 $29,863,310 Gaming operations 9,239,039 4,321,987 Wide area progressive systems 3,613,110 1,233,609 Financing income on notes receivable and other financing arrangements 2,902,865 2,209,619 Other 15,047 51,768 -------------- --------------- Total revenues 56,348,309 37,680,293 -------------- --------------- Costs and expenses: Cost of product sales 31,293,408 23,045,556 Gaming operations 4,481,555 82,805 Selling, general and administrative 8,931,024 7,364,745 Interest and financing costs 967,227 255,965 -------------- --------------- Total costs and expenses 45,673,214 30,749,071 -------------- --------------- Income from operations 10,675,095 6,931,222 Other income 15,761 71,254 -------------- --------------- Earnings before income taxes 10,690,856 7,002,476 Provision for income taxes 3,911,804 2,563,171 -------------- --------------- Net earnings $ 6,779,052 $ 4,439,305 ============== =============== Earnings per common and common equivalent share $ 0.59 $ 0.39 ============== =============== Weighted average number of common and common equivalent shares outstanding 11,438,981 11,367,462 ============== =============== The accompanying notes are an integral part of the consolidated financial statements. 6 SODAK GAMING, INC. Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, -------------------------------- 1996 1995 ------------- ------------- Cash flows from operating activities: Net earnings $ 6,779,052 $ 4,439,305 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 832,955 222,884 Provision for doubtful accounts 303,000 150,000 Net deferred income taxes 47,000 165,000 Gross profit on sales financed through notes receivable (4,015,594) (4,762,903) Changes in operating assets and liabilities: Receivables (7,894,637) 7,983,751 Purchase of inventories sold under financed sales (10,730,385) (13,557,006) Payments received on notes receivable relating to financed sales 13,862,941 11,844,295 Inventories (3,855,064) 2,818,762 Prepaid expenses and other current assets 60,253 (210,075) Accounts payable 7,690,970 (17,878,745) Accrued liabilities (50,920) 286,963 Income taxes payable 403,133 (1,479,797) --------------- -------------- Net cash provided by (used in) operating activities 3,432,704 (9,977,566) --------------- -------------- Cash flows from investing activities: Cash advanced on notes receivable (29,739) (4,143,692) Payments received on notes receivable 2,259,475 1,213,453 Purchases of property and equipment (6,140,300) (4,469,654) Increase in due from riverboat lessee (2,630,945) (1,991,191) Principal payments received on direct financing-type lease 338,057 0 Increase in other assets (1,911,898) (89,824) --------------- -------------- Net cash used in investing activities (8,115,350) (9,480,908) --------------- -------------- Cash flows from financing activities: Proceeds from long-term borrowings 16,250,000 11,000,000 Principal repayments of long-term debt (8,777,526) (3,025,660) Net proceeds from exercise of stock options 73,317 0 --------------- -------------- Net cash provided by financing activities 7,545,791 7,974,340 --------------- -------------- Net increase (decrease) in cash and cash equivalents 2,863,145 (11,484,134) Cash and cash equivalents, beginning of period 974,221 12,466,828 --------------- -------------- Cash and cash equivalents, end of period $ 3,837,366 $ 982,694 =============== ============== Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 786,300 $ 228,460 Cash paid during the period for income taxes $ 3,461,671 $ 3,877,968 Supplemental disclosure of non-cash investing activity: Gaming machines inventory transferred to gaming operations equipment $ 2,477,133 $ 1,037,969 The accompanying notes are an integral part of the consolidated financial statements. 7 SODAK GAMING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1996 (UNAUDITED) Note 1 - Unaudited Consolidated Financial Statements - ---------------------------------------------------- The accompanying unaudited consolidated financial statements of Sodak Gaming, Inc. and its consolidated subsidiaries, Sodak Gaming International, Inc., Sodak Gaming Peru, S.A., Ecuasodak S.A., and Sodak Gaming do Brasil Ltda have been prepared by the Company in accordance with generally accepted accounting principles for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission. Pursuant to such rules and regulations, certain financial information and footnote disclosures normally included in the consolidated financial statements have been condensed or omitted. The results for the periods indicated are unaudited, but reflect all adjustments (consisting only of normal recurring adjustments) which management considers necessary for a fair presentation of operating results. Results of operations for interim periods are not necessarily indicative of a full year of operations. These condensed consolidated financial statements should be read in conjunction with the 1995 financial statements and notes thereto. Certain 1995 amounts have been reclassified to conform to the 1996 presentation. Note 2 - Acquisition of Gamblers Supply Management Company - ----------------------------------------------------------- On July 1, 1996, the Company acquired all of the outstanding shares of Gamblers Supply Management Company (GSMC) for $1 million in cash. The acquisition will be accounted for using the purchase method of accounting. The assets of GSMC consist of gaming machines, gaming equipment and the dockside facilities, which include a 24-room hotel, parking lots, marina, restaurant, lounge and other support facilities and related furniture, fixtures and equipment. In addition to the purchase price, the Company has agreed to guarantee a GSMC note payable to its former shareholders in the amount of $4.4 million. Sodak continues to hold notes receivable (relating to prior loans to GSMC to finance the dockside facility and gaming equipment), lease payments receivable and accrued interest receivable from GSMC aggregating to $22.6 million as of June 30, 1996. 8 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS -- THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1995 Net earnings for the three months ended June 30, 1996 increased 33.5% to $4.1 million, or $0.36 per share, compared to net earnings of $3.1 million, or $0.27 per share, for the three months ended June 30, 1995. The Company's principal revenue sources -- product sales, gaming operations, wide area progressive systems, and financing -- all recorded increases in revenues and net earnings for the three months ended June 30, 1996, compared to the same quarter in 1995. Product sales and wide area progressive systems were the primary contributors to the increase in net earnings. The greatest rate of revenue growth occurred in gaming operations -- a 143.7% increase propelled by the continued expansion of Latin American gaming operations. REVENUES Total revenues increased 42.1% to $34.8 million for the three months ended June 30, 1996, compared to $24.5 million for the three months ended June 30, 1995. PRODUCT SALES. Product sales increased 29.2% to $26.1 million for the three months ended June 30, 1996, from $20.2 million in 1995. Total sales of gaming machines, including specialty gaming machines and used machines, were approximately 3,100 machines in 1996 as compared to approximately 2,250 machines in 1995. The gaming machine placements in 1996 were primarily in the states of Michigan and Wisconsin and in the province of Ontario, Canada. GAMING OPERATIONS. Gaming operations revenue increased 143.7% to $5.4 million for the three months ended June 30, 1996, from $2.2 million in 1995. This increase is primarily attributable to the growth of gaming operations in Peru and the introduction of gaming operations in Ecuador and Brazil. Gaming operations revenue consisted of $1.6 million in lease revenue from the Miss Marquette riverboat for the three months ended June 30, 1996, compared to $1.7 million in 1995 (the operating company of the Miss Marquette casino complex, Gamblers Supply Management Company (GSMC), was purchased by the Company on July 1, 1996 -- see page 15 for discussion); $0.4 million in revenue earned from the Company's share of Harrah's Entertainment, Inc.'s (Harrah's) management fee in connection with Harrah's Phoenix Ak-Chin casino and entertainment complex in each of the three months ended June 30, 1996 and 1995 (Harrah's owns approximately 14.1% of the Company's outstanding shares at June 30, 1996); and $3.4 million in revenue from international gaming operations in 1996 compared to $0.1 million in 1995. The Company believes that gaming operations revenue will increase as a result of the acquisition of GSMC (see page 15 for discussion) and as current operations mature and additional operations and strategic 9 markets are developed. However, there can be no assurance that such revenues will be realized due primarily to gaming's dependence on its legal status and public acceptance in certain jurisdictions. WIDE AREA PROGRESSIVE SYSTEMS. Wide area progressive revenues increased 131.6% to $1.9 million for the three months ended June 30, 1996, from $0.8 million in 1995. Wide area progressive systems revenues are derived from the operation of multi-link systems available to Native American casinos nationwide in jurisdictions permitting such systems. The increase in revenues is a result of the expansion of systems. At August 1, 1996, the Company was providing a total of seven wide area progressive systems which were operating in 10 states: Arizona (which permits the operation of intrastate wide area progressive systems in lieu of interstate systems), Connecticut, Iowa, Louisiana, Michigan, New Mexico, North Dakota, Oregon, South Dakota, and Wisconsin. The Quartermania and Megabucks interstate systems were first introduced to Native American casinos in August 1994; the Nickelmania interstate system was introduced in November 1995; the Arizona intrastate Quartermania and Megabucks systems were introduced in December 1995; and the Dollars Deluxe interstate system was introduced in June 1996. The Company also operates a system available to non-Native American casinos located in Deadwood, South Dakota. Based on current market trends, the Company believes that the wide area progressive revenues could increase through the placement of additional machines on existing systems as well as the introduction of new systems. FINANCING INCOME. Financing income on notes receivable and other financing arrangements increased 15.9% to $1.4 million for the three months ended June 30, 1996, compared to $1.2 million in 1995. This increase was primarily due to an increase in financing arrangements entered into. COSTS AND EXPENSES Total costs and expenses increased 44.5% to $28.4 million for the three months ended June 30, 1996, compared to $19.6 million for the same three month period in 1995. PRODUCT SALES. The cost of product sales increased 31.4% to $20.4 million for the three months ended June 30, 1996, from $15.5 million in 1995. This increase was attributable to the increased sales volume of gaming machines. As a percentage of product sales revenue, the cost of products increased to 78.2% in 1996, from 76.8% in 1995. The lower gross margin is due primarily to an increase in the percentage of sales qualifying for discounts. GAMING OPERATIONS. Gaming operations direct costs increased $2.9 million to $3.0 million for the three months ended June 30, 1996, compared to $0.1 million in 1995. This increase is attributed to the expansion of gaming operations in Peru and the introduction of gaming operations in Ecuador and Brazil. 10 SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased 17.8% to $4.5 million for the three months ended June 30, 1996, from $3.8 million in 1995. This increase resulted primarily from increases in compensation and related employee costs and benefits, depreciation, travel and other expenses associated with the development of new markets, including gaming operations in the United States, Peru, Ecuador, Brazil, and other countries, primarily in Latin America. These expenses are consistent with the Company's growth philosophy and ongoing strategy to establish gaming operations and other recurring revenue sources and to successfully pursue opportunities in potential new gaming jurisdictions. As a percentage of total revenues, selling, general and administrative expenses decreased to 13.0% in 1996 compared to 15.7% in 1995. INTEREST AND FINANCING. Interest and financing costs increased 148% to $0.5 million for the three months ended June 30, 1996, from $0.2 million in 1995. The increase in financing costs is attributed to increased borrowings for 1) the expansion of gaming operations in Latin America, 2) the increases in receivables and contracts from the financing of product sales, and 3) the construction of a new warehouse, assembly, systems operations and corporate headquarters facility. The Company believes that interest and financing costs will increase during 1996 and future years as the Company continues its growth strategy. INCOME FROM OPERATIONS The cumulative effect of the above described changes resulted in a 32.3% increase in income from operations to $6.4 million for the three months ended June 30, 1996, from $4.8 million for the three months ended June 30, 1995. As a percentage of revenues, income from operations decreased to 18.4% in 1996, from 19.8% in 1995. This decrease in the operating margin of the Company was primarily the result of 1) the lower gross margin on product sales due to the increase in sales qualifying for discounts, and 2) the expansion of international gaming operations, which are in a phase of growth and infrastructure development. EARNINGS BEFORE INCOME TAXES Earnings before income taxes increased 32.7% to $6.4 million for the three months ended June 30, 1996, compared to $4.8 million for the three months ended June 30, 1995. Provision for income taxes were $2.3 million in 1996, compared to $1.8 million in 1995, representing 36.3% and 36.7% of earnings before income taxes for the three months ended June 30, 1996 and 1995, respectively. 11 RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1995 Net earnings for the six months ended June 30, 1996 increased 52.7% to $6.8 million, or $0.59 per share, compared to net earnings of $4.4 million, or $0.39 per share, for the six months ended June 30, 1995. The Company's principal revenue sources -- product sales, gaming operations, wide area progressive systems, and financing -- all recorded increases in revenues and net earnings for the six months ended June 30, 1996, compared to the same period in 1995. Product sales and wide area progressive systems were the primary contributors to the increase in net earnings. The greatest rate of revenue growth occurred in wide area progressive systems -- a 192.9% increase as a result of continued expansion of machines to the systems. REVENUES Total revenues increased 49.5% to $56.3 million for the six months ended June 30, 1996, compared to $37.7 million for the first six months in 1995. PRODUCT SALES. Product sales increased 35.9% to $40.6 million for the six months ended June 30, 1996, from $29.9 million in 1995. Total sales of gaming machines, including specialty gaming machines and used machines, were approximately 5,050 machines in 1996, as compared to approximately 3,300 machines in 1995. The gaming machine placements in 1996 were primarily in the states of Arizona, Connecticut, Kansas, Michigan, Mississippi and Wisconsin and in the province of Ontario, Canada. GAMING OPERATIONS. Gaming operations revenue increased 113.8% to $9.2 million for the six months ended June 30, 1996, from $4.3 million in 1995. This increase is primarily attributable to the growth of gaming operations in Peru and the introduction of gaming operations in Ecuador and Brazil. Gaming operations revenue consisted of $3.3 million in lease revenue from the Miss Marquette riverboat for the six months ended June 30, 1996, compared to $3.4 million in 1995 (the operating company of the Miss Marquette casino complex, GSMC, was purchased by the Company on July 1, 1996 -- see page 15 for discussion); $0.9 million in revenue earned from the Company's share of Harrah's management fee in connection with Harrah's Phoenix Ak-Chin casino and entertainment complex for each of the six months ended June 30, 1996 and 1995 (Harrah's owns approximately 14.1% of the Company's outstanding shares at June 30, 1996); and $5.1 million in revenue from international gaming operations in 1996 compared to $0.1 million in 1995. The Company believes that gaming operations revenue will increase as a result of the acquisition of GSMC (see page 15 for discussion) and as current operations mature and additional operations and strategic markets are developed. However, there can be no assurance that such revenues will be realized due primarily to gaming's dependence on its legal status and public acceptance in certain jurisdictions. 12 WIDE AREA PROGRESSIVE SYSTEMS. Wide area progressive revenues increased 192.9% to $3.6 million for the six months ended June 30, 1996, from $1.2 million in 1995. Wide area progressive systems revenues are derived from the operation of multi-link systems available to Native American casinos nationwide in jurisdictions permitting such systems. The increase in revenues is a result of the expansion of systems. At August 1, 1996, the Company was providing a total of seven wide area progressive systems which were operating in 10 states: Arizona (which permits the operation of intrastate wide area progressive systems in lieu of interstate systems), Connecticut, Iowa, Louisiana, Michigan, New Mexico, North Dakota, Oregon, South Dakota, and Wisconsin. The Quartermania and Megabucks interstate systems were first introduced to Native American casinos in August 1994; the Nickelmania interstate system was introduced in November 1995; the Arizona intrastate Quartermania and Megabucks systems were introduced in December 1995; and the Dollars Deluxe interstate system was introduced in June 1996. The Company also operates a system available to non-Native American casinos located in Deadwood, South Dakota. Based on current market trends, the Company believes that the wide area progressive revenues could increase through the placement of additional machines on existing systems as well as the introduction of new systems. FINANCING INCOME. Financing income on notes receivable and other financing arrangements increased 31.4% to $2.9 million for the six months ended June 30, 1996, compared to $2.2 million in 1995. This increase was primarily due to an increase in financing arrangements entered into. COSTS AND EXPENSES Total costs and expenses increased 48.5% to $45.7 million for the six months ended June 30, 1996, compared to $30.7 million in 1995. PRODUCT SALES. The cost of product sales increased 35.8% to $31.3 million for the six months ended June 30, 1996, from $23.0 million in 1995. This increase was attributable to the increased sales volume of gaming machines. As a percentage of product sales revenue, the cost of products was 77.1% in 1996 and 77.2% in 1995. GAMING OPERATIONS. Gaming operations direct costs increased $4.4 million to $4.5 million for the six months ended June 30, 1996, compared to $0.1 million in 1995. This increase is attributed to the expansion of gaming operations in Peru and the introduction of gaming operations in Ecuador and Brazil. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased 21.3% to $8.9 million for the six months ended June 30, 1996, from $7.4 million in 1995. This increase resulted primarily from increases in compensation and related employee costs and benefits, advertising and promotion, depreciation, provision for doubtful accounts, travel and other expenses associated with 13 the development of new markets, including gaming operations in the United States, Peru, Ecuador, Brazil, and other countries, primarily in Latin America. These expenses are consistent with the Company's growth philosophy and ongoing strategy to establish gaming operations and other recurring revenue sources and to successfully pursue opportunities in potential new gaming jurisdictions. As a percentage of total revenues, selling, general and administrative expenses decreased to 15.8% in 1996 compared to 19.5% in 1995. INTEREST AND FINANCING. Interest and financing costs increased 278% to $1.0 million for the six months ended June 30, 1996, from $0.3 million in 1995. The increase in financing costs is attributed to increased borrowings for 1) the expansion of gaming operations in Latin America, 2) the increases in receivables and contracts from the financing of product sales and 3) the construction of a new warehouse, assembly, systems operations and corporate headquarters facility. The Company believes that interest and financing costs will increase during 1996 and future years as the Company continues its growth strategy. INCOME FROM OPERATIONS The cumulative effect of the above described changes resulted in a 54.0% increase in income from operations to $10.7 million for the six months ended June 30, 1996, from $6.9 million for the six months ended June 30, 1995. As a percentage of revenues, income from operations increased to 18.9% in 1996, from 18.4% in 1995. This improvement in the operating margin of the Company was primarily attributable to the growth in revenues from wide area progressive systems, which have lower costs than product sales due to the absence of a `cost of goods sold' component. EARNINGS BEFORE INCOME TAXES Earnings before income taxes increased 52.7% to $10.7 million for the six months ended June 30, 1996, compared to $7.0 million for the six months ended June 30, 1995. Provision for income taxes were $3.9 million in 1996, compared to $2.6 million in 1995, representing 36.6% of earnings before income taxes for both six month periods ended June 30, 1996 and 1995. LIQUIDITY AND CAPITAL RESOURCES WORKING CAPITAL Working capital increased $2.9 million to $39.8 million during the six months ended June 30, 1996. This increase was primarily a result of a $2.9 million increase in cash and cash equivalents, a $6.6 million increase in receivables, and a $1.4 million increase in inventories. The increases were partially offset by a $7.7 million increase in accounts payable and a $0.4 million increase in income taxes payable. 14 CASH FLOWS During the six months ended June 30, 1996 the Company's cash and cash equivalents increased $2.9 million to $3.8 million. Cash provided by operating activities was $3.4 million for the six months ended June 30, 1996. Cash provided by operating activities was primarily the result of $6.8 million in net earnings, $0.8 million in depreciation and amortization, $13.9 million in payments received on notes receivable relating to financed sales, a $7.7 million increase in accounts payable, and a $0.4 million increase in income taxes payable. These proceeds were partially offset by $14.7 million in gross profit and inventories sold under financing arrangements, a $7.9 million increase in receivables, and a $3.9 million increase in inventories. Cash used in investing activities for the six months ended June 30, 1996 was $8.1 million, which consisted of $6.1 million used to purchase property and equipment primarily for gaming operations in Latin America, a $2.6 million increase in amounts due from riverboat lessee and a $1.9 million increase in other assets, primarily for capitalized development costs in Latin America. Cash used in investing activities was partially offset by $2.3 million of payments received on notes receivable. Financing activities provided $7.5 million during the six months ended June 30, 1996 as a result of net proceeds from long-term borrowings under a revolving credit facility. The increase in debt is primarily due to the purchase of gaming equipment and related costs associated with the expansion of international markets. In 1994, the Company invested $21.8 million (excluding approximately $5.7 million of equipment financing provided by the Company) in the Miss Marquette riverboat casino, which the Company leased to GSMC beginning October 1, 1994 for a period of eight years with automatic extensions of an additional 17 years. This investment consisted of (a) $14.3 million expended by Sodak to acquire and refurbish a riverboat, and (b) an additional $7.5 million that the Company loaned to GSMC to fund costs incurred by GSMC to develop and construct dockside facilities and related amenities. The lease required scheduled lease payments of the greater of an aggregate of $25 million, or 50% of defined net income from the related casino operations, determined annually, during the first 43 months of the lease; and 50% of defined net income from related casino operations thereafter, beginning in April 1998. GSMC was unable to meet regularly scheduled payments under the lease and financing notes due to dockside facility construction and preopening cost overruns. The Company allowed GSMC to fund the cost overruns with operating cash flow. On July 1, 1996, the Company acquired all of the outstanding shares of GSMC for $1 million in cash. The acquisition will be accounted for using the purchase method of accounting. The assets of GSMC consist of gaming machines, gaming equipment and the dockside facilities, which include a 24-room hotel, parking lots, marina, restaurant, lounge and other support facilities and related furniture, fixtures and equipment. In addition to the purchase price, the Company has agreed to guarantee a GSMC note payable to its former shareholders in the amount of $4.4 million. Sodak continues to hold notes receivable (relating to prior loans to GSMC to finance the dockside facility and gaming equipment), lease payments receivable and accrued interest receivable from GSMC aggregating to $22.6 million as of June 30, 1996. 15 INDEBTEDNESS / LINES OF CREDIT The Company had $25.6 million of long term debt outstanding at June 30, 1996. Of that amount, $25 million is borrowed under proceeds from a $50 million long-term revolving credit facility from a syndicate of banks. The revolving line has two components, a $20 million tranche (Tranche A) to be used for general corporate purposes and a $30 million tranche (Tranche B) for acquisitions and major capital equipment expenditures. Tranche A matures in February 1999, plus two one-year renewal options subject to bank approval, and Tranche B matures in February 2001. The amount available under Tranche B is reduced by $1.875 million quarterly beginning in 1997. The unused portion of the revolving credit facility is subject to a commitment fee, based on a calculation as defined in the agreement. Interest is payable based on variable rates which, at the Company's option, are based on the prime rate, federal funds rate plus 1%, or a Eurodollar rate plus an applicable margin. Amounts borrowed are secured by substantially all Company assets, excluding real estate, but including a first preferred ship mortgage on the Miss Marquette riverboat. The remaining $0.6 million is secured by certain transportation equipment and carries an interest rate of 7.45%; the majority of this loan is due in December 1998. CAPITAL COMMITMENTS As part of an agreement with Harrah's, the Company guaranteed financing relating to 50% of the construction cost of a Native American casino facility, managed by Harrah's, that opened in December 1994. As of August 1, 1996, the Company's outstanding guaranty was approximately $1.1 million. As a 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. During 1994, the Company assisted a casino management company in acquiring $8 million in financing from a financial institution. The Company guaranteed the management company's debt and receives a loan guarantee fee based on a percentage of the outstanding loan balance. As of August 1, 1996, the Company's guaranty was approximately $4.9 million. PART II. OTHER INFORMATION Item 1. Legal proceedings - ------------------------- RICO Litigation. On April 26, 1994, the Company was named as a defendant in a class action lawsuit filed in the United States District Court, Middle District of Florida, by William A. Poulos and William Ahearn, respectively, each of whom sought to assert claims on behalf of themselves and "all other similarly situated ("the plaintiffs"). Each of the plaintiffs filed suit against Sodak and approximately 41 other defendants (each a "defendant" and collectively "the defendants"). These two lawsuits were ordered consolidated by the Court, and the action has been transferred to the United States District Court, District of Nevada, for further proceedings. Each defendant is involved in the gaming business as either a gaming machine manufacturer, distributor, or casino operator. The class action lawsuit arises out of alleged fraudulent marketing and 16 operation of casino video poker machines and electronic slot machines. The plaintiffs allege that the defendants have engaged in a course of fraudulent and misleading conduct intended to induce people in playing their gaming machines based on a false belief concerning how those machines actually operate as well as the extent to which there is actually an opportunity to win on any given play. The plaintiffs allege that the defendants' actions constitute violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO") and give rise to claims of common law fraud and unjust enrichment. The plaintiffs are seeking monetary damages in excess of $1 billion and are asking that any damage awards be trebled under applicable federal law. On April 15, 1996, the Nevada Federal District Court issued Orders granting Sodak's and other's motions to dismiss and allowed plaintiffs to file amended Complaints to properly state a claim on or before May 31, 1996. The amended complaint was filed at the close of work of May 31, 1996. Accompanying the amended complaint was a motion seeking leave to substitute plaintiff Brenda McElmore in the place and stead of plaintiff Mr. Ahearn. The Company believes the plaintiffs' lawsuit to be without merit and the Company intends to vigorously pursue all legal defenses available to it. On September 26, 1995, another RICO-based class action was filed in the United States District Court, District of Nevada, by Larry Schreier, which named the Company as a defendant, along with the same 41 other defendants (each a "defendant" and collectively "the defendants"). The plaintiff in this action is a resident of Tulsa, Oklahoma, and purports to bring this action on behalf of himself and "all other similarly situated" (the "plaintiffs"), namely, all members of "casino card clubs" and players in "video poker tournaments", which would appear to be a sub-class of plaintiffs within the two prior class actions identified above and which are presently pending against the Company in the District of Nevada. Except for the identification of the class which the plaintiff seeks to represent, all substantive allegations of this action are virtually identical to the consolidated Poulos/Ahearn actions, and, the Company believes, is also without merit. This latest action is presently in its initial pleading phase, with answers or dispositive motions yet to be filed on behalf of the Company. The Company intends to vigorously pursue this action with all legal defenses available to it, and to shortly file various dispositive motions on its behalf. Item 2. Changes in Securities - ------------------------------ None. Item 3. Defaults Upon Senior Securities - ---------------------------------------- None. 17 Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ The Company held its annual meeting of shareholders on April 30, 1996 for the purposes of electing members of the Board of Directors of the Company and to ratify the selection of KPMG Peat Marwick LLP as independent auditors of the Company for the fiscal year ending December 31, 1996. There were 11,361,138 shares of Common Stock entitled to vote at the meeting and a total of 9,660,194 shares (85%) were represented at the meeting. The shareholder voting was as follows: 1. Election of Directors: WITHHOLD FOR AUTHORITY --------- ---------- Michael G. Wordeman 9,564,642 95,552 Roland W. Gentner 9,564,742 95,452 Thomas Celani 9,564,842 95,352 Colin V. Reed 9,432,962 227,232 Manuel Lujan, Jr. 9,564,842 95,352 Ronnie Lopez 9,564,742 95,452 2. To ratify the selection of KPMG Peat Marwick LLP as independent auditors of the Company for the fiscal year ending December 31, 1996: For - 9,654,889 Against-1,450 Abstain-3,885 Broker Non-Vote-0 Item 5. Other Information - -------------------------- None. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- a. Exhibits 11.1 Calculation of Earnings Per Common and Common Equivalent Share. b. Reports on Form 8-K Form 8-K dated July 15, 1996, reporting the Company's acquisition of all of the outstanding shares of Gamblers Supply Management Company. 18 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 7, 1996 SODAK GAMING, INC. By: \s\ David R. Johnson ----------------------------- David R. Johnson Chief Financial Officer 19 EXHIBIT INDEX Sequentially Exhibit No. Numbered Page - ----------- ------------- 11.1 Calculation of Earnings Per Common and Common Equivalent Share 21 27 Financial Data Schedule 20