UNITED STATES
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 29, 2003July 4, 2004
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. 0-24993
LAKES ENTERTAINMENT, INC.
-------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1913991
--------- ---------- ------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
130 Cheshire Lane
Minnetonka, Minnesota 55305
--------------------- --------------------------- ----------
(Address of principal executive offices) (Zip Code)
(952) 449-9092
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of August 7, 2003,11, 2004, there were 10,638,32022,225,884 shares of Common Stock, $0.01 par
value per share, outstanding. All share and per share data for periods prior to
May 3, 2004 has been retroactively restated to give effect to a two-for-one
stock split (the "Stock Split") in the form of a 100% stock dividend paid on May
3, 2004 to shareholders of record on April 26, 2004.
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
INDEX
PAGE OF
FORM 10-Q
---------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 29, 20033
July 4, 2004 and December 29, 2002 328, 2003
Condensed Consolidated Statements of Earnings (Loss)for the 4
three months ended July 4, 2004 and June 29, 2003
Condensed Consolidated Statements of Comprehensive 5
Earnings for the three months ended July 4, 2004
and June 29, 2003
and June 30, 2002 4
Condensed Consolidated Statements of Comprehensive
Earnings (Loss) for the three months ended June 29, 2003
and June 30, 2002 5
Condensed Consolidated Statement of Loss for the six 6
months ended July 4, 2004 and June 29, 2003 and June 30, 2002 6
Condensed Consolidated Statements of Comprehensive Loss 7
for the six months ended July 4, 2004 and June 29, 2003 and June 30, 2002 7
Condensed Consolidated Statements of Cash Flows for 8
the six months ended July 4, 2004 and June 29, 2003 and June 30, 2002 8
Notes to Condensed Consolidated Financial Statements 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 21
CONDITION AND RESULTS OF OPERATIONS 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 3129
ITEM 4. CONTROLS AND PROCEDURES 3129
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 3230
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 33
ITEM 5. OTHER INFORMATION 3432
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 3433
2
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
JUNE 29,JULY 4, 2004 DECEMBER 28, 2003
DECEMBER 29, 2002
- ----------------------------------------------------------------------------------------------------------------------------- -----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 23,35419,405 $ 14,10625,340
Accounts receivable, net 948 116323 1,038
Deferred tax asset 4,481 6,7715,385 5,385
Prepaids 2,878 2,119
Other current assets 741 547
- -----------------------------------------------------------------------------------------------------------------914 1,645
-------- --------
Total Current Assets 29,524 21,540
- -----------------------------------------------------------------------------------------------------------------28,905 35,527
-------- --------
Property and Equipment-Net 6,697 6,962
- -----------------------------------------------------------------------------------------------------------------6,485 6,492
-------- --------
Other Assets:
Land held under contract for sale 4,772 28,8324,863 4,612
Land held for development 29,382 27,79114,159 14,536
Notes receivable-less current installments 75,595 70,955
Cash and cash equivalents-restricted - 8,300receivable 88,135 84,682
Investments in and notes from unconsolidated affiliates 8,423 1,0137,893 8,717
Deferred tax asset 4,707 3,8357,472 6,634
Other long-term assets 8,823 6,657
- -----------------------------------------------------------------------------------------------------------------9,036 8,860
-------- --------
Total Other Assets 131,702 147,383
- -----------------------------------------------------------------------------------------------------------------131,558 128,041
-------- --------
TOTAL ASSETS $167,923 $175,885
=================================================================================================================$166,948 $170,060
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 961,360 $ 2261,906
Income taxes payable 4,312 5,564
Litigation and claims accrual 180 5,8477,042 7,215
Accrued payroll and related 418 252costs 589 497
Other accrued expenses 2,944 3,486
- -----------------------------------------------------------------------------------------------------------------4,445 3,018
-------- --------
Total Current Liabilities 7,950 15,375
- -----------------------------------------------------------------------------------------------------------------13,436 12,636
-------- --------
TOTAL LIABILITIES 7,950 15,375
- -----------------------------------------------------------------------------------------------------------------13,436 12,636
-------- --------
COMMITMENTS AND CONTINGENCIES
Shareholders' Equity:
Capital stock, $.01 par value; authorized 100,000 shares;
10,63822,226 and 21,474 common shares issued and outstanding
at June 29, 2003,July 4, 2004, and December 29, 2002 106 10628, 2003, respectively 222 215
Additional paid-in-capital 131,526 131,525136,290 132,291
Retained Earnings 28,341 28,879
- -----------------------------------------------------------------------------------------------------------------17,000 24,918
-------- --------
Total Shareholders' Equity 159,973 160,510
- -----------------------------------------------------------------------------------------------------------------153,512 157,424
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $167,923 $175,885
=================================================================================================================$166,948 $170,060
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(LOSS)
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
(UNAUDITED)
THREE MONTHS ENDED
------------------
JULY 4, 2004 JUNE 29, 2003
JUNE 30, 2002
------------------------- -------------
REVENUES:
License fee income $ 4,718 $ 2,954
$ -
- ------------------------------------------------------------------------------------------------------- --------
Total Revenues 4,718 2,954
-
- ------------------------------------------------------------------------------------------------------- --------
COSTS AND EXPENSES:
Selling, general and administrative 4,950 9,5723,155 3,788
Production costs 2,645 1,162
Impairment losses 6,407 -
Reversal of litigation and claims accrual - (3,212) -
Depreciation and amortization 150 131
120
- ------------------------------------------------------------------------------------------------------- --------
Total Costs and Expenses 12,357 1,869
9,692
- -----------------------------------------------------------------------------------------------
EARNINGS (LOSS)-------- --------
LOSS FROM OPERATIONS (7,639) 1,085
(9,692)
- ------------------------------------------------------------------------------------------------------- --------
OTHER INCOME (EXPENSE):
Interest income 43 314 436
Interest expense - (24)
Equity in lossearnings (loss) of unconsolidated affiliates (23) (60)
(108)
Other - (1)
-
- ------------------------------------------------------------------------------------------------------- --------
Total other income, net 20 253
304
- ------------------------------------------------------------------------------------------------------- --------
Earnings (Loss)(loss) before income taxes (7,619) 1,338
(9,388)
Provision (Benefit)(benefit) for income taxes (461) 549
(2,208)
- ------------------------------------------------------------------------------------------------------- --------
NET EARNINGS (LOSS) ($ 7,158) $ 789
($ 7,180)
======================================================================================================= ========
BASIC EARNINGS (LOSS) PER SHARE ($ 0.32) $ 0.07 ($ 0.67)
===============================================================================================0.04
======== ========
DILUTED EARNINGS (LOSS) PER SHARE ($ 0.32) $ 0.07 ($ 0.67)
===============================================================================================0.04
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 10,638 10,63822,212 21,276
DILUTIVE EFFECT OF STOCK COMPENSATION PROGRAMS - -
- -----------------------------------------------------------------------------------------------1
-------- --------
WEIGHTED AVERAGE COMMON AND DILUTED
SHARES OUTSTANDING 10,638 10,638
===============================================================================================22,212 21,277
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(LOSS)
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
-----------------------------------------------------
JULY 4, 2004 JUNE 29, 2003
JUNE 30, 2002
----------------------------------------------- -------------
NET EARNINGS (LOSS) $ 789 ($7,180)
OTHERCOMPREHENSIVE7,158) $789
OTHER COMPREHENSIVE EARNINGS (LOSS), NET OF TAX:
Unrealized lossesgains (losses) on securities:
Unrealized holding losses during the periodsecurities - (2)
Reclassification adjustment for losses included
in net earnings (loss) -
47
----------------------------------------- ----
COMPREHENSIVE EARNINGS (LOSS) $ 789 ($7,135)
===================================7,158) $789
====== ====
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
5
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
(UNAUDITED)
SIX MONTHS ENDED
----------------
JULY 4, 2004 JUNE 29, 2003
JUNE 30, 2002
------------------------- -------------
REVENUES:
ManagementLicense fee income $ -8,858 $ 1,502
License fee income 3,504
-
- ------------------------------------------------------------------------------------------------------ -------
Total Revenues 8,858 3,504
1,502
- ------------------------------------------------------------------------------------------------------ -------
COSTS AND EXPENSES:
Selling, general and administrative 7,929 11,6716,415 5,866
Production costs 5,117 2,063
Impairment losses 6,407 -
Reversal of litigation and claims accrual - (3,212) -
Depreciation and amortization 293 259
219
- ------------------------------------------------------------------------------------------------------ -------
Total Costs and Expenses 18,232 4,976
11,890
- ------------------------------------------------------------------------------------------------------ -------
LOSS FROM OPERATIONS (9,374) (1,472)
(10,388)
- ------------------------------------------------------------------------------------------------------ -------
OTHER INCOME (EXPENSE):
Interest income 91 551 1,172
Interest expense - (47)
Equity in loss of unconsolidated affiliates 396 (147)
(231)
Other 42 158
-
- ------------------------------------------------------------------------------------------------------ -------
Total other income, net 529 562
894
- ------------------------------------------------------------------------------------------------------ -------
Loss before income taxes (8,845) (910) (9,494)
Benefit for income taxes (927) (372)
(2,251)
- ------------------------------------------------------------------------------------------------------ -------
NET LOSS ($ 7,918) ($ 538)
($ 7,243)
====================================================================================================== =======
BASIC LOSS PER SHARE ($ 0.05)0.36) ($ 0.68)
===============================================================================================0.03)
======= =======
DILUTED LOSS PER SHARE ($ 0.05)0.36) ($ 0.68)
===============================================================================================0.03)
======= =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 10,638 10,63821,982 21,276
DILUTIVE EFFECT OF STOCK COMPENSATION PROGRAMS - -
- ------------------------------------------------------------------------------------------------------ -------
WEIGHTED AVERAGE COMMON AND DILUTED
SHARES OUTSTANDING 10,638 10,638
===============================================================================================21,982 21,276
======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
6
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
------------------------------------------------------------------
JULY 4, 2004 JUNE 29, 2003
JUNE 30, 2002
------------------------------------------------ -------------
NET LOSS ($ 7,918) ($ 538) ($7,243)
OTHER COMPREHENSIVE LOSS,EARNINGS (LOSS), NET OF TAX:
Unrealized lossesgains (losses) on securities:
Unrealized holding losses during the periodsecurities - (10)
Reclassification adjustment for losses included
in net loss -
47
------------------------------------------- ------
COMPREHENSIVE LOSS ($ 7,918) ($ 538)
($7,206)
=========================================== ======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
7
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
----------------
JULY 4, 2004 JUNE 29, 2003
JUNE 30, 2002
------------------------- -------------
OPERATING ACTIVITIES:
Net loss ($ 538)7,918) ($ 7,243)538)
Adjustments to reconcile net loss to net cash
used inprovided by (used in) operating activities:
Depreciation and amortization 293 259
218Unit-based compensation expense 270 27
Equity in (earnings) loss of unconsolidated affiliates (396) 147
231
Impairment of land held under contract for saleDeferred income taxes (838) 1,418
Impairments and write-downs 6,407 - 3,000
Write down of related party receivables - 4,000
Changes in operating assets and liabilities:
Accounts receivable 715 (832) 3,601
Income taxes 167 (3,547)(173) (1,252)
Accounts payable (546) (130) (105)
Accrued expenses 1,519 (2,922)
915
Other (194) (1,565)
- -----------------------------------------------------------------------------------------------------------(28) (220)
-------- --------
Net Cash Used in Operating Activities (695) (4,043)
(495)
- ------------------------------------------------------------------------------------------------------------------- --------
INVESTING ACTIVITIES:
Short-term investments, sales/maturities - 1,101
Payments for land held under contract for sale (251) (433) (666)
Payments received on land held under contract for sale - 16,765
-
Payments made for land held for development (122) (1,591) (4,910)
Advances on notes receivable (9,383) (6,642) (9,947)
Proceeds from repayment of notes receivable - 67
Investment in and notes receivable from unconsolidated affiliates 1,242 (495)
(139)
Decrease (increase)Increase in restricted cash, net - 5,906 (55)
Increase in other long-term assets (176) (225) (333)
Reduction of (payments for) property and equipment, net (286) 6
(716)
- ------------------------------------------------------------------------------------------------------------------- --------
Net Cash Provided by (Used in) Investing Activities (8,976) 13,291
(15,598)
- ------------------------------------------------------------------------------------------------------------------- --------
FINANCING ACTIVITIES:
Payments on capital lease obligationsProceeds from issuance of common stock 3,736 -
(5,714)
Payments on long-term debt - (350)
- ------------------------------------------------------------------------------------------------------------------- --------
Net Cash Used inProvided by Financing Activities 3,736 -
(6,064)
- ------------------------------------------------------------------------------------------------------------------- --------
Net increase (decrease)decrease in cash and cash equivalents (5,935) 9,248 (22,157)
Cash and cash equivalents - beginning of period 25,340 14,106
42,638
- ------------------------------------------------------------------------------------------------------------------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 19,405 $ 23,354
$ 20,481
=================================================================================================================== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ - $ 49
Income taxes $ 13 $ 4
5Noncash operating activities:
Capitalized television costs related to unit options issued to
consultants 139 -
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
8
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS
Lakes Entertainment, Inc., a Minnesota corporation ("Lakes" or the "Company")
was established as a public corporation on December 31, 1998, via a distribution
(the "Distribution") of its common stock, par value $.01 per share (the "Common
Stock") to the shareholders of Grand Casinos, Inc. ("Grand").
Lakes' primary business is to develop and manage Indian-owned casino properties
that offer the opportunity for long-term development of related entertainment
facilities, including hotels, theaters, recreational vehicle parks and other
complementary amenities designed to enhance the customers' total entertainment
experience and to differentiate facilities managed by Lakes currentlyfrom its
competitors. Lakes provides experienced corporate and casino management and
develops and implements a wide scale of marketing programs. In conjunction with
this part of Lakes' business strategy, Lakes has entered into development and
management agreements with four separate
tribes for four newrelating to one casino operations, oneproject in Michigan and two casino
projects in California, and
one with the Nipmuc Nation on the east coast. The Company also has agreements
for the development of one additional casino on Indian owned landeach subject to regulatory
approvals. Lakes has also explored, and will continue to explore, numerous other
possible development projects.
Formed in California
throughMarch 2002 as a joint venture, which is currently being disputed byWorld Poker Tour, LLC ("WPT"), a 78%
owned subsidiary of Lakes, has created a circuit of previously-established poker
tournaments affiliated under the tribe. Each of
these projects is currently in the development phase.
The Company"World Poker Tour" name, and has also formed a joint venture with a producer to launchproduced the
World Poker Tour ("WPT") and establish poker as the next significant televised
mainstream sport. During March of 2003, thetelevision series. WPT signed an agreement for a second season
with the Travel Channel, LLC (TRV)("TRV"), granting TRV the right tofor broadcast the first season of the WPTWorld Poker Tour
series which has now been completed. During July of 2003, WPT reached
an agreement withon cable television. TRV for a second season withwas also granted options for five additional
seasons. WPT receives a series of fixed license payments from TRV, subject in
each caseTRV.
Lakes has recently created a new division to satisfactionbuy, license and/or market new
table game concepts for licensing to casinos. The Company is currently testing a
number of production milestonesnew games and other conditions. Revenue
is recognized ratably as production milestones and other conditions are met.there may be revenue from this effort beginning during
2004. See also Note 8.
LAND HELD UNDER CONTRACT FOR SALE
On December 28, 2001, the Company transferred title and ownership obligations of
the Polo Plaza shopping center property to Metroflag Polo, LLC. In conjunction
with this transaction, Lakes transferred to Metroflag BP, LLC, rights to and
obligations of the adjacent Travelodge property consisting of a long-term land
lease and a motel operation. This transaction was accounted for under the
deposit method of accounting under the requirements of Statement of Financial
Accounting Standards No. 66, Accounting for Sales of Real Estate, rather than as
a sale. Therefore, the property was included as land held under contract for
sale on the accompanying condensed consolidated balance sheet as of December 29,
2002. The total price for this combined transaction was approximately $30.9
million. Terms of the transaction included a $1.0 million down payment, which
was received in January 2002, a contractual commitment to pay Lakes $23.3
million by December 29, 2002, and a second contractual agreement to pay Lakes
$7.5 million on June 30, 2004. A $0.5 million payment on the notes receivable
was received during 2002.
During 2002, Lakes and Metroflag restructured the
terms of the Polo Plaza and Travelodge property transactions due to
deteriorating economic conditions. The parties reduced the purchase price for
the Polo Plaza property from $23.8 million to $21.8 million.
On the revised payment date, which was scheduled to be
no later than January 31, 2003, $16.8 million of the purchase price was to be
payable to Lakes in cash and $4.0 million was to be payable through the issuance
to Lakes of a preferred membership interest in Metroflag. Effective June 30,
2002, Lakes recorded a $3.0 million impairment charge for these properties
relating to the adjustment in the purchase price and the potential discount on
the return of Lakes' preferred interest.
9
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
This real estate was reported at its adjusted carrying value in Land Held Under
Contract for Sale as of December 29, 2002. Lakes' collateral is the property and
lease rights described above which would revert back to Lakes in the event of
default by Metroflag.
During March of 2003, Lakes and Metroflag agreed to additional revisions to the
terms of the Polo Plaza and Travelodge property transactions. The parties have
increased the price of the Polo Plaza property from $21.8 million to $25.8
million and extended the payment date to May 15, 2003. On the payment date,
$16.8 million of the purchase price was paid to Lakes in cash, $4.0 million was
paid through the issuance to Lakes of a preferred membership interest in
Metroflag and $4.0 million was paid through the issuance to Lakes of a
subordinated membership interest in Metroflag.
On or before April 30, 2004,9
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Previously, Metroflag Polo may elect to distribute to Lakes $3.0paid $1.0 million plus interest in cash as full return of Lakes'a down payment. Lakes can
require Metroflag to repurchase the $4.0 million preferred interest. If paidinterest any time on
or after April 30, 2004,
and in no event later than December 24, 2006, the entire $4.0 million plus
interest will be payable.2006. The subordinated interest must be repurchased for
$4.0 million at the time of repayment by Metroflag of an outstanding $3.5
million contractual commitment in connection with the Travelodge property, which
is scheduled on or before December 28, 2004.
In March of 2003, the parties decreased the sale price of the Travelodge
property from $7.5 million to $3.5 million. At that time, the contractual
commitment to pay Lakes was also decreased from $7.5 million to $3.5 million.million, as
a result of the increase in the purchase price of the Polo Plaza property
discussed above. During 2003, Lakes took a $1.0 million impairment charge on the
Travelodge property. If the Travelodge commitment is not repaid by December 28,
2004, ownership of the Travelodge lease rights would revert back to Lakes. If
this were to occur, the property would be recorded on Lakes' balance sheet at
the lower of its fair value or the adjusted basis of the investment related to
the Travelodge property. Lakes has also agreed to loan to Metroflag BP up to
$3.0 million related to Travelodge operating shortfalls through December 28,
2004. As of July 4, 2004 and December 28, 2003, the outstanding loan balance was
$2.4 million and $2.1 million, respectively. This loan is scheduled to be repaid
on December 28, 2004. If at any time the Polo Plaza property is sold and the
Travelodge commitment has not been repaid, Metroflag is required to repurchase
the subordinated interest for the lesser of $4.0 million or any portion of the
net cash proceeds from such sale or refinancing that exceeds $60.0 million.
LAND HELD FOR DEVELOPMENT
On April 7, 2003, Lakes announced that it has signed a Letter of Intent to sell
the approximate 3.5 acre undeveloped site, known as the Shark Club Parcel, for a
purchase price of $15.0 million in cash. The transaction closed on July 1, 2003.
In addition to the $15.0 million payment, Lakes received $1.0 million as
repayment of a loan previously made by Lakes to Chateaux, LLC, a joint venture
entity originally formed by Lakes and a time-share developer for the purpose of
developing the Shark Club Parcel as an upscale time-share project.
Also includedIncluded in land held for development is land held for possible transfer to
Indian tribes for use in future casino resort projectsprojects. During the second
quarter of 2004, an impairment related to the Nipmuc Nation land held for
development in the amount of $14.4$0.5 million and $12.8 million as of June 29, 2003 and December 29, 2002,
respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" in November 2002.was recorded related to the Nipmuc
Nation casino development project. This interpretation elaborates on the disclosures to
be made by a guarantor in its financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee.
10
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The initial recognition and initial measurement provisions of this
interpretation are applicable to all guarantees and modification to guarantees
made after December 31, 2002. The Company's disclosure of the indemnification
and guarantee agreements of the Company is in compliance with the
interpretation. The disclosure requirements in this interpretation are effective
for financial statements of interim or annual periods ended after December 15,
2002. The adoption of the interpretation did not have a material impact on the
Company's results of operations, financial position and cash flows. The Company
does have an indemnification agreement with Grand Casinos which is fully
described in Note 8 Commitments and Contingencies.
In January 2003, the FASB issued Interpretation No. 46 (FIN46), "Consolidation
of Variable Interest Entities", which addresses the consolidation of variable
interest entities. The interpretation applicable immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which a Company obtains an interest after that date. For variable
interests in variable interest entities acquired before February 1, 2003, the
interpretation applicable appliesamount was included in the first interim period beginning after
June 15, 2003. The Company has determined that it has no investments or other
interests in entities that may be deemed variable interest entities under the
provisionstotal
impairment charge of FIN 46, as the development projects subject$6.4 million related to the management
agreements withNipmuc Nation project. This
impairment occurred after the Nipmuc Nation was denied federal recognition as an
Indian Tribes are not separate entities or legal structures.
In December 2002,Tribe and sovereign government within the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendmentmeaning of FASB Statement No.
123". SFAS No. 148 provides alternative transition methods for companies that
make a voluntary change tofederal law by the
fair-value-based methodBureau of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company has adopted the disclosure provisions of SFAS No. 148 and
its adoption had no impact on the Company's consolidated financial position or
results of operations.Indian Affairs (BIA).
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Lakes and its wholly-owned and majority-owned subsidiaries.
Investments in unconsolidated affiliates representing 50% or less of voting
interests are accounted for on the equity method. All significant intercompany
balances and transactions have been eliminated in consolidation.
Lakes' investments in unconsolidated affiliates include a 50 percent ownership
interest in PCG Santa Rosa, LLC, a joint venture formed to develop a casino on
Indian-owned land in California and a 49 percent voting50% ownership interest in the
Chateaux,2022 Ranch, LLC,
a joint venture formed to develop and/or sell approximately 2000 acres owned by
the Shark Club Parceljoint venture in Las
Vegas, Nevada, into an upscale timeshare project. See Note 8 for current statusEastern San Diego County. This land was sold during the
first quarter of 2004. The sale of the Shark Club Parcel.
11land reduced Lakes' investment in 2022
Ranch to less than $0.1 million.
10
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The condensed consolidated financial statements have been prepared by the
Company in accordance with accounting principles generally accepted in the
United States of America for interim financial information, in accordance with
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 condensed consolidated financial statements
have been condensed or omitted.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for fair
presentation have been included. Operating results for the sixthree months ended
June 29, 2003July 4, 2004 are not necessarily indicative of the results that may be expected
for the year ending December 28,
2003.January 2, 2005. The condensed consolidated financial
statements should be read in conjunction with the condensed consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended December 29, 2002.28, 2003.
3. STOCK-BASED COMPENSATION
At June 29, 2003,July 4, 2004, the Company has two stock-based employee compensation plans.
The Company accounts for those plans under the recognition and measurement
principles of APB OptionOpinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
WPT also has a unit-based compensation plan for both employees and consultants.
WPT has a 2002 Unit Option Plan (the "2002 Plan") which is approved to issue up
to an aggregate of 7,000 Class B non-voting units of WPT in connection with unit
option grants to employees and consultants. The options become exercisable in
quarterly installments on each of the first four anniversaries of the date of
the grant and each installment expires six years after being exercisable. The
employee must be employed by the Company on the anniversary date in order to
vest in any units that year. If the employee is terminated (voluntarily or
involuntarily) prior to the vesting of any portion of a unit option, the
unvested portion will be forfeited.
For WPT unit options issued to employees, deferred stock compensation for the
unit options is measured at the units' fair value in excess of the exercise
price on the date of grant and is being amortized over the vesting period of
four years. For WPT unit options issued to consultants, compensation expense is
measured at the option's fair value. Fair value is measured when the unit
options vest in annual installments on each of the first four anniversaries of
the date of the grant. Compensation expense is estimated in periods prior to
vesting based on the then current fair value. Changes in the estimated fair
value of unvested options are recorded in the periods the change occurs.
Additionally, on March 4, 2002, WPT granted 15,000 Class A voting units to its
President under a management agreement. The restricted units vest in four equal
installments annually beginning February 25, 2003. If there is a change of
control, all non-vested restricted units vest immediately.
11
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The Company accounts for the WPT unit-based employee compensation under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. Compensation expense for
unit option grants issued to employees is recorded to the extent the fair market
value of the units on the date of grant exceeds the option price. Compensation
expense for restricted unit grants is measured based on the fair market value of
the units on the date of grant. The compensation expense is amortized ratably
over the vesting period of the awards.
The Company accounts for WPT unit-based consultant compensation according to the
recognition and measurement principles of EITF 96-18, Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. Compensation expense for unit
option grants issued to consultants is recorded at the fair market value of the
options at the measurement date, defined as the date the options vest and
services have been provided.
The following table illustratesillustrated the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.compensation under the Lakes' plans and unit-based employee and
consultant compensation under the WPT Plans (in thousands except per share
data).
THREE MONTHS ENDED SIX MONTHS ENDED
THREE MONTHS ENDED
---------------- ------------------JULY 4, 2004 JUNE 29, 2003 JUNE 30, 2002JULY 4, 2004 JUNE 29, 2003
JUNE 30, 2002------------ ------------- ------------- ------------------------- -------------
Net earnings (loss):
$ (538) $ (7,243)As reported $(7,158) $ 789 $ (7,180)
As(7,918) $ (538)
Add: Unit-based compensation expense 176 10 270 30
included in reported net earnings
(loss)
Less: Total stock-based compensation (537) (423) (987) (817)
expense determined under the fair
value method, net of related tax effects
(767) (849) (383) (426)
Pro forma (1,305) (8,092) 406 (7,606)(7,519) 376 (8,635) (1,325)
Net earnings (loss) per share:
As reported -- Basic $ (0.05)(0.32) $ (0.68)0.04 $ 0.07(0.36) $ (0.67)(0.03)
Pro forma -- Basic (0.12) (0.76) 0.04 (0.71)(0.34) 0.02 (0.41) (0.06)
As reported -- Diluted (0.05) (0.68) 0.07 (0.67)(0.32) 0.04 (0.36) (0.03)
Pro forma -- Diluted (0.12) (0.76) 0.04 (0.71)(0.34) 0.02 (0.41) (0.06)
12
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. MANAGEMENT CONTRACTS FOR INDIAN-OWNED CASINOS
The ownership, management and operation of gaming facilities are subject to
extensive federal, state, provincial, tribal and/or local laws, regulation, and
ordinances, which are administered by the relevant regulatory agency or agencies
in each jurisdiction. These laws, regulations and ordinances vary from
jurisdiction to jurisdiction, but generally concern the responsibility,
financial stability and character of the owners and managers of gaming
operations as well as persons financially interested or involved in gaming
operations. The Company is prohibited by the Indian Gaming Regulatory Act ("IGRA") from
having an ownership interest in any casino it manages for Indian tribes.
The management contracts govern the relationship between the Company and the
tribes with respect to the construction and management of the casinos. The
construction or remodelingdevelopment portion of the agreements commencedcommences with the signing of the
respective contracts and continuedcontinues until the casinos openedopen for business;
thereafter, the management portion of the respective management contracts
continues for a period up to seven years. Under the terms of the contracts, the
Company, as manager of the casino, receives a percentage of the distributable
profits (as defined in the contract) of the operations as a management fee after
payment of certain priority distributions, a cash contingency reserve, and
guaranteed minimum payments to the tribes.
Lakes has a contract to be the exclusive developer and manager of an
Indian-owned gaming resort near New Buffalo, Michigan with the Pokagon Band of
Potawatomi Indians. The Company has formed partnerships that hold contracts to
develop and manage two casinos to be owned by Indian tribes in California, one
near San Diego with the Jamul Indian Village, and the other near Sacramento with
the Shingle Springs Band of Miwok Indians.
Lakes and another company have formed
a partnership with a contract to finance the construction of an Indian-owned
casino 60 miles north of San Francisco, California for the Cloverdale Rancheria
of Pomo Indians. The Rancheria is currently disputing the agreement with the
partnership and has notified the partnership that it wishes to terminate the
contract. The Company also has also signed contracts with the Nipmuc Nation of Massachusetts
for development and management of a potential future gaming resort in the
eastern United States; however, in June 2004, this tribe has received a negative
finding regardingwas denied federal
recognition fromas an Indian Tribe and sovereign government within the meaning of
federal law by the Bureau of Indian Affairs (BIA). The tribe has submitted additional information for reconsideration.As a result of this denial,
Lakes incurred an impairment charge of approximately $6.4 million during the
second quarter of 2004 related to the impairment of Lakes' investment in the
Nipmuc Nation casino development project.
5. NOTES RECEIVABLE
The notes receivable from Indian Tribes are generallyresult from costs incurred by the
Company for the development of gaming properties to be managed byunder which the Company.Company has
signed management contracts. The repayment terms are specific to each tribe and
are largely dependent upon the operating performance of each gaming property.
Repayments of the aforementioned notes receivable are required to be made only
if distributable profits are available from the operation of the related
casinos. Repayments are also the subject of certain distribution priorities
specified in the management contracts. In addition, repayment of the notes
receivable and the manager's fees under the management contracts are
subordinated to certain other financial obligations of the respective tribes.
Through June 29, 2003, no amounts have been withheld under these provisions.
13
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Notes receivable consist of the following (in thousands):
June 29,July 4, 2004 December 28, 2003
December 29, 2002
------------------------- -----------------
Properties under development:
Notes from the Pokagon Band of Potawatomi Indians with variable interest rates
(not to exceed 10%) (5.00%(5.25% at June 29, 2003)July 4, 2004), receivable in 60 monthly
installments subsequent to commencement date $ 40,624 $ 39,470$43,601 $41,729
Notes from the Shingle Springs Band of Miwok Indians with variable interest
rates (6.00%(6.25% at June 29, 2003)July 4, 2004), receivable in varying monthly installments based
on contract terms subsequent to commencement date 17,539 14,03529,896 24,428
Notes from Jamul Indian Village with variable interest rates (6.00%(6.25% at June 29,
2003)July 4,
2004), receivable in 1260 monthly installments subsequent to commencement date 10,795 9,49213,496 12,336
Notes from the Nipmuc Nation with variable interest rates (6.00% at June 29,
2003) receivable in varying installments based on contract terms subsequent to
commencement date 4,150 3,814- 4,634
Other 2,487 4,144
--------- --------1,142 1,555
------- -------
Total notes receivable 75,595 70,955
======== ========$88,135 $84,682
======= =======
Interest income on notes receivable from Indian Tribes related to casinoproperties
under development projects is deferred because realizability of the interest is
contingent upon the completion and positive cash flow from operation of the
casino. Interest deferred during the development period is recognized over the
remaining life of the note using the effective interest method. As of June 29,
2003July 4,
2004 and December 29, 2002, $12.228, 2003, $17.4 million and $10.1$15.2 million of interest on notes
related to properties under development has been deferred.
Management periodically evaluates the recoverability of such notes receivable
based on the current and projected operating results of the underlying facility
and historical collection experience. No impairment losses on such notes
receivable have been recognized through June 29, 2003.
The terms of these notes require the casinos to be constructed and to generate
positive cash flows prior to the Company receiving repayment. As such, an
estimate of the fair value of these notes requires an assessment of the timing
of the construction of the related casinos and the profitability of the related
casinos. Due to the significant uncertainty involved in such an assessment, the
Company does not believe that it is practicable to accurately estimate the fair
value of these notes with the degree of precision necessary to make such
information meaningful.
During the second quarter of 2004, an impairment related to the Nipmuc Nation
notes receivable in the amount of $5.9 million was recorded related to the
Nipmuc Nation casino development project. This amount was included in the total
impairment charge of $6.4 million related to the Nipmuc Nation project. This
impairment occurred after the Nipmuc Nation was denied federal recognition as an
Indian Tribe and sovereign government within the meaning of federal law by the
BIA.
14
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. INCOME TAXES
The Company is currently under examination in various states for income and
franchise tax matters. The Internal Revenue Service has completed a field exam
of the Company's tax returns for the years ended December 30, 2001 and December
31, 2000. The Company has recorded a reserve assessment related to these
examinations and other tax matters. The reserve is reflected as part of income
taxes payable on the accompanying consolidated balance sheets.
7. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain property and equipment, including an airplane, under
a non-cancelable operating lease. The airplane lease expired May 1, 2003 and was
renewed for a one-year period. The lease provides for one additional one-year
renewal term.term, which began May 1, 2004. Approximate future minimum lease
payments, due under this lease as of June 29, 2003, assuming the second one-year renewal is exercised,July 4, 2004, are as follows (in
thousands):
Operating Leases
----------------
2003 $ 300
2004 600$300
2005 200
--------
$ 1,100
========----
$500
====
PURCHASE OPTIONS
The Company has the right to purchase the airplane it leases during the base
lease term and any renewal
termterms for approximately $8 million.
INDEMNIFICATION AGREEMENT
As a part of the transaction establishing Lakes as a separate public company on
December 31, 1998, the Company has agreed to indemnify Grand through December 28,
2004 against all costs, expenses and liabilities incurred in connection with or
arising out of certain pending and threatened claims and legal proceedings
to whichagainst Grand and certain
of its subsidiaries are likely to be parties.pay all related settlements and judgments. The Company's
indemnification obligations include the obligation to provide the defense of all
claims made in proceedings against Grand and to pay all related settlements and
judgments. As security to support Lakes' indemnification obligations to Grand, Lakes agreed
to deposit an aggregate of $30 million, in trust for the benefit of Grand, as a
wholly owned subsidiary of Park Place, to cover various commitments and
contingenciesThere is currently no known liability related to or arising out of Grand's non-Mississippi business and
assets (including by way of example, but not limitation, tribal loan guarantees,
real property lease guarantees for Lakes' subsidiaries and director and
executive officer indemnity obligations). The deposits were to be made in four
annual installments of $7.5 million, over the four-year period subsequent to
December 31, 1998. Any proceeds remaining in this
trust after all the secured
obligations were indefeasibly paid in full and discharged were to be returned to
Lakes.
15
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Lakes made the first deposit of $7.5 million on December 31, 1999 and deposited
an additional $18 million in an escrow account in July 2000. The $18 million
deposit represented partial satisfaction of Lakes indemnification obligation
pursuant toindemnification.
As a settlement agreement related to certain litigation claims brought
against Grand by its shareholders. Upon receipt of a court order on August 14,
2001 giving final approval to the settlement, the $18 million in restricted cash
was removed from the Company's condensed consolidated balance sheet. In January
2001, Lakes purchased the Shark Club property in Las Vegas for $10.1 million in
settlement of another Grand obligation that was subject to the indemnification
by Lakes. As of December 29, 2002, $7.5 million related to security to support
Lakes' indemnification obligations to Grand was included as restricted cash in
the accompanying condensed consolidated balance sheets. In May 2003, $2.3
million was paid out of the trust to Stratosphere Corporation to satisfy Lakes'
indemnification obligations to Grand resulting from Grand's settlement of a
litigation claim seeking recovery of certain amounts paid by Stratosphere to
Grand and a subsidiary of Grand that were alleged to be preferential payments
under the bankruptcy laws. As this litigation claim was the last remaining known
material Grand obligation that was subject to indemnification by Lakes, the
trust account was terminated on May 8, 2003 and the remaining restricted funds
of approximately $5.9 million, including interest, were released to Lakes and
reclassified as unrestricted cash on Lakes' condensed consolidated balance sheet
as of June 29, 2003. Notwithstanding termination of the trust account, Lakes'
indemnification obligations to Grand remain in effect. Subsequent
indemnification obligations to Grand Casinos, if any, would be paid directly by
Lakes.
As part of the indemnification agreement, Lakes has agreed that it will not
declare or pay any dividends, make any distribution on account of Lakes' equity
interests, or otherwise purchase, redeem, defease or retire for value any equity
interests in Lakes without the written consent of Park Place.Caesars Entertainment, Inc,
the parent Company of Grand.
15
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
LEGAL PROCEEDINGS
SLOT MACHINE LITIGATION
In 1994, William H. Poulos filed a class-action lawsuit in the United States
District Court for the Middle District of Florida against various parties,
including Grand and numerous other parties alleged to be casino operators or
slot machine manufacturers. This lawsuit was followed by several additional
lawsuits of the same nature against the same, as well as additional defendants,
all of which were subsequently consolidated into a single class-action pending
in the United States District Court for the District of Nevada.
Following a court order dismissing all pending pleadings and allowing the
plaintiffs to re-file a single complaint, a complaint has been filed containing
substantially identical claims, alleging that the defendants fraudulently
marketed and operated casino video poker machines and electronic slot machines,
and asserting common law fraud and deceit, unjust enrichment and negligent
misrepresentation and claims under the federal Racketeering-Influenced and
Corrupt Organizations Act. Various motions were filed by the defendants seeking
to have this new complaint dismissed or otherwise limited. In December 1997, the
Court, in general, ruled on all motions in favor of the plaintiffs. The
following summaries describeplaintiffs then filed a motion seeking class certification and the defendants
opposed it. In June 2002, the Court entered an order denying class
certification, and the plaintiffs have appealed this order to the 9th Circuit
Court of Appeals. Briefing is complete, an oral hearing took place in January
2004, and no ruling has yet been issued.
WILLARD EUGENE SMITH LITIGATION
On October 24, 2003, Lakes announced that it had been named as one of a number
of defendants in a counterclaim filed in state court in Harris County, Texas by
Willard Eugene Smith involving Kean Argovitz Resorts, LLC (KAR), related persons
and entities. In the counterclaim, Smith asserts that, under an alleged oral
agreement with Kevin Kean, he is entitled to a percentage of fees to be received
by the KAR entities or their principals relating to the Shingle Springs and
Jamul casinos that Lakes' subsidiaries are developing in California. Smith also
seeks recovery of damages and other relief from the KAR entities, Lakes and
certain known legal proceedings to which Grand
is a party which Lakes has assumed, oraffiliates based on their conduct with respect to the alleged agreement.
Lakes believes the counterclaim against it is without merit. Lakes understands
that the alleged oral agreement upon which Smith bases his claim was rendered
null and void in a prior judgment issued against Smith by the Harris County,
Texas state court in October 2000. However, in September 2003, the court vacated
the prior judgment against Smith. Lakes may haveacquired KAR's interests in the Shingle
Springs and Jamul projects on January 30, 2003. In the buyout agreements between
Lakes and certain KAR entities and related principals, the KAR entities
represented to Lakes that the KAR entities and their affiliates had no
continuing agreements with any third party relating to the Shingle Springs and
Jamul projects and agreed to indemnify Grand, in connection withLakes and its affiliates from damages
resulting from prior dealings of the Distribution.
STRATOSPHERE PREFERENCE ACTION
In April 1998, Stratosphere served on GrandKAR entities and Grand Media & Electronics
Distributing, Inc., a wholly owned subsidiary of Grand ("Grand Media"), a
complaint inrelated principals
concerning the Stratosphere bankruptcy case seeking recovery of certain
amounts paid by Stratosphere to (i) Grand Media for electronic equipment
purchased by Stratosphere from Grand Media,projects. Lakes will vigorously defend against the allegations
made against it and (ii) Grand as management feeswill pursue its indemnification rights against the KAR
entities and for costs and expensestheir principals under a management agreement between Stratosphere and
Grand.the buyout agreements if necessary.
16
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Stratosphere claimedEL DORADO COUNTY, CALIFORNIA LITIGATION
On January 3, 2003, El Dorado County filed an action in its complaintthe Superior Court of
the State of California, seeking to prevent the construction of a highway
interchange that was approved by a California state agency. The action does not
seek relief directly against Lakes. However, the interchange is necessary to
permit the construction of a casino to be developed and managed by Lakes through
a joint venture.
The casino will be owned by the Shingle Springs Band of Miwok Indians. The
matter was tried to the court on August 22, 2003. On January 2, 2004, Judge
Lloyd G. Connelly, Judge of the Superior Court for the State of California,
issued his ruling on the matter. The Court denied the petition in all respects
except one. As to the one exception, the Court sought clarification as to
whether the transportation conformity determination used to determine the
significance of the air quality impact of the interchange operations considered
the impact on attainment of the state ambient air quality standard for ozone.
The California Department of Transportation (Caltrans) prepared and filed the
clarification sought by the Court. Prior to the Court's determination of the
adequacy of the clarification, El Dorado County appealed Judge Connelly's ruling
to the California Court of Appeals.
A ruling with respect to the casino development planned by the Shingle Springs
Rancheria was issued June 21, 2004 by the Superior Court of California, County
of Sacramento. The ruling indicates that the addendum previously provided to the
court by Caltrans did not provide a quantitative showing to satisfy the court's
earlier request for a clarification on meeting the state ambient ozone standard.
The court recognized that the information provided by Caltrans does
qualitatively show that the project may comply with the state standard, but
concluded that is insufficient. Rather the court is requiring a quantitative
analysis and the court recognizes that the methodology for that analysis "is not
readily apparent". In addition, the ruling specifically states, "Moreover such
amounts are recoverable by
Stratosphere as preferential payments under bankruptcy law. In May 1998, Grandmethodology appears necessary for the CEQA analysis of transportation projects
throughout the state, including transportation projects for which respondents
(i.e. Caltrans) have approval authority." Caltrans, the Shingle Springs Tribe
and Lakes responded to Stratosphere's complaint denyingthe court with a revised submission in August 2004.
Representatives of the California Air Resources Board and the Sacramento Area
Council of Governments filed declarations supporting our revised submission to
the court. Opposition to that Stratosphererevised submission has been filed, and a hearing
on the revised submission is entitled to
recoverscheduled on August 20, 2004.
GRAND CASINOS, INC. LITIGATION
In connection with the amounts described in the complaint. Discovery was completedestablishment of Lakes as a public corporation on
December 31, 20011998, via a distribution of its common stock to the shareholders of
Grand, the Company and Grand entered into an agreement governing the case proceeded to trial before the United States
Bankruptcy Court for the Districtsharing or
allocation of Nevada on June 20, 2002.
On December 31, 2002, the Bankruptcy Court issued its final judgment holding
that: (i) paymentstax benefits accruing to Grand Media for electronic equipment totaling
approximately $3.3 million areand certain affiliated companies.
On August 13, 2004, an arbitrator awarded to the Company partial summary
judgment on certain of the Company's claims against Grand under the tax sharing
agreement. The dollar amount that will be awarded to the Company on these claims
has not recoverablebeen determined, certain other claims by Stratosphere as avoidable
preferences,the Company under the agreement
have not been decided, and (ii) paymentno hearing date has been set to Grand for management services in the
approximatedetermine such dollar
amount of $2.3 million is recoverable by Stratosphere and an
avoidable preference. On May 8, 2003, this judgment was satisfied out of amounts
held in trust as security to support Lakes' indemnification obligations to
Grand. The Company had recorded a reserve assessment related to this litigation
which exceeded the final judgment amount by $3.2 million. This amount was
reversed during the second quarter of 2003 resulting in a $3.2 million pre-tax
decrease in costs and expenses in the accompanying consolidated statement of
loss for the six months ended June 29, 2003 and the accompanying consolidated
statement of earnings for the three months ended June 29, 2003.or decide such claims.
OTHER LITIGATION
Lakes is involved in various other inquiries, administrative proceedings, and
litigation relating to contracts and other matters arising in the normal course
of business. While any proceeding or litigation has an element of uncertainty,
management currently believes that the final outcome of these matters, including
the matters discussed above, is not likely to have a material adverse effect
upon the Company's consolidated financial position or results of operations.
7. RELATED PARTY TRANSACTIONS
During 2001 and 2000, Lakes made a total of $4.0 million in unsecured loans,
which were receivable in full on December 31, 2002, to ViatiCare Financial
Services, LLC, which has since been acquired by Living Benefits Financial
Services ("Living Benefits"). In March 2001, the Board of Directors of Lakes
decided not to make further loans to ViatiCare. A $4.0 million impairment charge
for this note was recorded during the quarter ended June 30, 2002, due to
increased competition in the viatical insurance business and restrictions on
ability to make further policy acquisitions.
Subsequent to the decision by the Lakes Board to make no further loans to
ViatiCare, L. B. Acquisitions, LLC, which is owned by Lyle Berman, the Chief
Executive Officer and a Director of Lakes, made loans to Living Benefits. As an
incentive to make the loans, L. B. Acquisitions was granted an initial 9% voting
interest in Living Benefits and was given the option to convert the loan balance
into 45% of the voting interest in Living Benefits. Therefore, Lyle Berman,
through L. B. Acquisitions, beneficially owns a total of approximately 55% of
the voting interest of Living Benefits.
17
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Previously,8. RELATED PARTY TRANSACTIONS
Lakes formed two joint venture partnershipshas entered into a license agreement with Kean Argovitz
Resorts,Sklansky Games, LLC ("KAR"),Sklansky)
pursuant to which Lakes is developing a limited liability company basedWorld Poker Tour No Limit Texas Hold `Em
casino table game that uses certain of Sklansky's intellectual property rights.
Lakes had also entered into a license agreement with WPT pursuant to which Lakes
has obtained a license to utilize the World Poker Tour name and logo in
Houston, Texas for
the purpose of developing and managing casino resort projectsconnection with the Shingle
Springs Banddevelopment of Miwok Indians andthis casino table game. Under the Jamul Indian Village, both in California.
On January 30, 2003,terms of
this agreement, if Lakes restructured a series of arrangementselects to proceed with KAR and
its individual members such that Lakes has effectively acquired 100% ownershipdevelopment of the joint ventures in exchange for restructuring indebtedness of $1.8 million
from the joint venture partnerships tocasino
table game, Lakes and an agreement to make certain
conditional payments to the individual KAR members from profits received under
the respective management contracts. While these conditional payments could
total up to $2 million per year for each project, Lakes believes these payments will be substantially less than KAR would have received under their original
interest. The individual KAR members have optionsrequired to repurchase their interestpay WPT a specified minimum annual royalty
payment of 10% of the gross revenue Lakes receives from its sale or obtainlease of the
game, whichever is greater. In addition to our indirect majority ownership in
World Poker Tour, LLC through one of our wholly owned subsidiaries, Lyle Berman
and his son, Brad Berman, own 28% and 44% equity interests in Sklansky,
respectively. Lyle Berman also serves as Chairman and Chief Executive Officer of
WPT, and Brad Berman is a comparable financial interest, in the event they are found suitable
by relevant gaming regulatory authorities.
A subsidiarymember of Lakes and Land Baron West, LLC are partners in a joint venture
formed to develop or sell land purchased by the joint venture near San Diego,
California. Land Baron West, LLC owed the joint venture $0.5 million, and $0.2
million,WPT's Board of Directors.
Effective as of June 29, 2003 and December 29, 2002, respectively. These amounts
are included in accounts receivable on the accompanying condensed consolidated
balance sheets.
During 2002,February 24, 2004, WPT entered into a non-exclusive license
agreement with G-III Apparel Group, Ltd. ("G-III"). Morris Goldfarb, a Lakes
rented the use of Company equipment to another company that
haddirector, is a mutual Board member during a portion of 2001. The transaction was for full
valuedirector, Co-Chairman of the associated useBoard and all payments totaling $0.02 millionChief Executive Officer of
G-III. Under the agreement, G-III licenses the World Poker Tour name, logo and
trademark from WPT in connection with G-III's production of certain types of
apparel for such use
have been received.
8. SUBSEQUENT EVENT
SHARK CLUB
On July 1, 2003, Lakes completeddistribution in authorized channels within the sale ofUnited States, its
Shark Club propertyterritories and possessions and in Las
Vegas, Nevada to an entity to be managed and operated by Marriott Ownership
Resorts, Inc.certain circumstances, Canada. As
consideration for this sale,non-exclusive license, G-III pays royalties and certain
other fees to WPT.
Lakes received $15.0provides general and administrative services to WPT that include
accounting, finance and treasury, tax, human resources/personnel, employee
benefits, retail, systems support and marketing support. As reimbursement of
compensation for these services, Lakes bills WPT an amount equal to the gross
wages of the Lakes employees that provide services to WPT based upon the actual
time incurred on WPT matters.
Effective as of March 4, 2002, Lakes Poker Tour, LLC, a wholly-owned subsidiary
of Lakes, entered into a loan agreement with WPT pursuant to which WPT is
allowed to borrow up to $4.0 million. The related promissory note of WPT accrues
interest at an annual rate of 6.2% and matures in full on March 4, 2005. Lakes
may terminate the loan agreement at any time and upon such termination, all
amounts advanced and accrued are due one year after the termination. WPT has
granted Lakes a security interest in all of WPT's assets to secure the loan. As
of July 4, 2004, there was a remaining balance of $0.2 million in cash, plus $1.0 millionprincipal and
interest under the promissory note.
9. SEGMENT INFORMATION
Lakes' principal business is the development and management of gaming related
properties. Additionally, the Company is the majority owner of the World Poker
Tour, LLC. (See Note 1). Substantially, all of our operations are conducted in
the United States. Lakes' reportable segments are as repaymentfollows (in millions):
18
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Industry Segments
-----------------
Real Estate World Poker Corporate & Total
Development Tour Eliminations Consolidated
----------- ---- ------------ ------------
Total Assets as of
July 4, 2004 $ 138.0 $ 2.5 $ 26.4 $ 166.9
Total Assets as of
December 28, 2003 126.1 2.5 41.5 170.1
For the Three Months
Ended/as of July 4, 2004
Revenue $ - $ 4.7 $ - $ 4.7
Net earnings (loss) (6.4) 0.9 (1.7) (7.2)
Depreciation expense - - 0.2 0.2
For the Three Months
Ended/as of June 29, 2003
Revenue $ - $ 3.0 $ - $ 3.0
Net earnings (loss) (0.7) 1.3 0.2 0.8
Depreciation expense - - 0.1 0.1
10. STOCK SPLIT
During April of 2004, the Company's Board of Directors declared a two-for-one
stock split, payable in the form of a loan previously made100% stock dividend on Lakes' outstanding
common stock. The stock dividend was paid on May 3, 2004 to Chateauxshareholders of
record as of April 26, 2004.
As a result of the stock split, shareholders received one additional share of
common stock for every share they held on the record date. Upon completion of
the split, the number of common shares outstanding was approximately 22.2
million. In connection with the stock split, the Company introduced a direct
registration program to provide for uncertified shares through Wells Fargo
Shareowner Services, the Company's transfer agent and registrar. As a result,
the additional shares were issued in "book-entry" form without stock
certificates and are registered on the books of the Company maintained by Lakes.
18Wells
Fargo Shareowner Services.
11. SUBSEQUENT EVENTS
In connection with the initial public offering of WPT Enterprises, Inc. (WPTE),
World Poker Tour, LLC converted from a Delaware limited liability company into a
Delaware corporation named "WPT Enterprises, Inc." on July 28, 2004. As a part
of the conversion, each of World Poker Tour, LLC's limited liability company
units was converted into 160 shares of common stock. Restricted units and unit
options were converted using the same ratio.
19
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
WPTE adopted a 2004 Stock Incentive Plan that is authorized to grant stock-based
awards to purchase up to 3,120,000 shares of WPTE common stock, including
options to purchase up to 1,120,000 shares of WPTE common stock issued to WPTE
employees and consultants that were outstanding under World Poker Tour, LLC's
2002 Plan at the time of the conversion.
On August 9, 2004, the Securities and Exchange Commission declared effective a
registration statement of WPTE that registered the offer and sale of up to
4,000,000 shares of WPTE common stock, at $8.00 per share, in WPTE's initial
public offering and an additional 600,000 shares of WPTE common stock that may
be sold if the underwriters involved in the offering exercise their
over-allotment option. WPTE's common stock was approved for trading on The
Nasdaq Stock Market and began trading on August 10, 2004. The initial closing of
the offering, at which WPTE sold 4,000,000 shares of common stock, occurred on
August 13, 2004, with WPTE receiving proceeds of approximately $28.5 million,
net of estimated offering expenses and underwriting discounts. The underwriters
in the offering have an over-allotment option to purchase an additional 600,000
shares of WPTE common stock that expires on September 23, 2004. It is expected
that proceeds from the offering will be used to expand WPTE's entertainment
production business and for its working capital. There were no selling
shareholders participating in the offering. Lakes did not recognize a gain on
this transaction.
Following is summarized pro forma balance sheet data as of July 4, 2004. This
data has been adjusted to reflect the offering at the initial public offering
price of $8.00 per share of common stock.
July 4, 2004
December 28, 2003 Actual Pro Forma
----------------- ------ ---------
Current Assets $ 35,527 $ 28,905 $ 57,405
Total Assets 170,060 166,948 195,448
Current Liabilities 12,636 13,436 13,436
Minority Interest -- -- 9,662
Capital Stock 215 222 222
Additional Paid-in Capital 132,291 136,290 155,128
Retained Earnings 24,918 17,000 17,000
20
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Lakes Entertainment, Inc., a Minnesota corporation ("Lakes" or the "Company")
was established as a public corporation on December 31, 1998, via a distribution
(the "Distribution") of its Common Stock, to the shareholders of Grand Casinos,
Inc. ("Grand").
As a result of the Distribution, Lakes operates the Indian casino management
business and holds various other assets previously owned by Grand. Lakes' main
business is the development, construction and management of casinos and related
hotel and entertainment facilities in emerging and established gaming
jurisdictions. Lakes has entered into the following contracts for the development, management
and/or financing of new casino operations, all of which are subject to various
regulatory approvals before construction can begin: (1)begin. Lakes has a contract to be the exclusive developer and manager of an
Indian-owned gaming resort near New Buffalo, Michigan for the Pokagon Band of
Potawatomi Indians. (2) Lakes has entered into contracts to
develop and manage two casinos to be owned by Indian tribes in California, one near San Diego withIndian-owned gaming resorts for the Jamul Indian Village and the other near Sacramento with thefollowing:
- Shingle Springs Band of Miwok Indians. (3) Lakes and another company have formed a partnership
with a contract to finance the constructionIndians near Sacramento, California
- Pokagon Band of an Indian-owned casino 60 miles
north ofPotawatomi Indians near New Buffalo, Michigan
- Jamul Indian Village near San Francisco, California. The Cloverdale Rancheria has notified the
partnership that the Rancheria wishes to terminate the relationship between the
two parties. The partnership has advised the Rancheria that the partnership
believes the contract is enforceable. The Rancheria acknowledges that the
partnership has loaned the Rancheria money and that the Rancheria will endeavor
to repay the money in a timely manner. (4) Lakes has also signed contracts with
the Nipmuc Nation, a Massachusetts Indian tribe, for development and management
of a potential future gaming resort in the eastern United States; however, this
tribe has received a negative finding regarding federal recognition from the
Bureau of Indian Affairs (BIA). The tribe has submitted additional information
to the BIA for reconsideration.Diego, California
In addition, Lakes owns options to purchase the patent rights for various new
casino games and is actively marketing these new games to the casino industry in
an attempt to have
a casino acceptlicense the games for use in their operations.
WPT Enterprises, Inc., (formerly known as World Poker Tour, LLC) a
majority-owned subsidiary of Lakes ("WPT"), has also formedcreated a joint venture with another company to develop approximately 2,000 acres owned bycircuit of
previously-established poker tournaments affiliated under the joint venture in eastern San Diego County in California. It is possible the
land will be sold in lieu of a development by the joint venture. Lakes"World Poker Tour"
name, and has also
formed a joint venture with a producer to launchproduced the World Poker Tour ("WPT")
and establish poker as the next significant televised mainstream sport. The
joint venturetelevision series. WPT signed an
agreement with the Travel Channel ("TRV") in March 2003,
for broadcast of the first season of the WPT series which has now been
completed. During July of 2003, WPT reached an agreement with TRV for a second season with the Travel Channel, LLC ("TRV") for broadcast
of the World Poker Tour series on cable television which is currently airing in
reruns. TRV was also granted options for five additional seasons. Revenue is recognized ratably
as production milestonesseasons and other conditions are met. DuringTRV has
exercised its option for the first two
quarters of 2003, Lakes recognizedthese five seasons, which is currently in
production. WPT receives a series of fixed license payments from TRV.
On August 9, 2004, the Securities and Exchange Commission declared effective a
registration statement of WPT that registered the offer and sale of up to
4,000,000 shares of WPT common stock, at $8.00 per share, in WPT's initial
public offering and an additional 600,000 shares of WPT common stock that may be
sold if the underwriters involved in the offering exercise their over-allotment
option. WPT's common stock was approved for trading on The Nasdaq Stock Market
and began trading on August 10, 2004. The initial closing of the offering, at
which WPT sold 4,000,000 shares of common stock, occurred on August 13, 2004,
with WPT receiving proceeds of approximately $3.5$28.5 million, in revenue related
tonet of estimated
offering expenses and underwriting discounts. The underwriters' over-allotment
option expires on September 23, 2004. It is expected that proceeds from the
World Poker Tour. Revenues related to the second seasonoffering will be recognized during 2004.
19used to expand WPT's entertainment production business and for
its working capital. There were no selling shareholders participating in the
offering. Lakes did not recognize a gain on this transaction and the proceeds
will be reflected as a minority interest.
21
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Lakes' growth strategy contemplates the development of existing projects, the
pursuit ofAdditionally, Lakes continually evaluates other opportunities to developdiversify the
Company's activities and manage additional gaming facilities and
the pursuit ofbring in new business opportunities. The successful implementation of this
growth strategy is contingent upon the satisfaction of various conditions,
including obtaining governmental approvals, the impact of increased competition,
and the occurrence of certain events, many of which are beyond the control of
Lakes.revenue streams.
SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies, which Lakes believes are the most critical
to aid in fully understanding and evaluating its reported financial results,
include the following: revenue recognition and realizability of notes
receivable.
REVENUE RECOGNITION: Revenue from the management of Indian-owned casino gaming
facilities is recognized when earned according to the terms of the management
contracts. Currently all of the Indian-owned casino projects that Lakes is
involved with are in development stages and are not yet open. Therefore, until a
project is open and operating, Lakes will not recognize revenue related to
Indian casino management. Interest income on notes receivable for Indian tribes
related to casino development projects is deferred because realizability of the
interest is contingent upon the completion and generation of cash flow from the
operation of the casino. Interest deferred during the development period is
recognized over the remaining life of the note using the effective interest
method. RevenueLicense revenue from the World Poker Tour series airing on TRV is
recognized ratably as
production milestonesupon delivery of completed episodes. WPT sponsorship and other conditionshost casino
revenue is recognized upon airing of episodes. Any payments received in excess
of WPT revenue earned are met.deferred and recognized upon delivery or airing of
episodes.
IMPAIRMENT OF LONG-TERM ASSETS: TheCurrently, the Company's notes receivable from
Indian Tribes are generally for the pre-construction development of gaming
properties to be managed by the Company. The repayment terms are specific to
each tribe and are largely dependent upon the operating performance of each
gaming property. Repayments of the notes receivable are required to be made only
if distributable profits are available from the operation of the related
casinos. Repayments are also the
subject ofto certain distribution priorities
specified in the management contracts. In addition, repayment of the notes
receivable and the manager's fees under the management contracts may beare
subordinated to certain other financial obligations of the respective tribes. Through June 29, 2003, no impairments have
been recorded under these provisions.
Management periodically evaluates the recoverability of such notes receivable
based on the current and projected operating results of the underlying facility
and historical collection
experience.an assessment of the underlying facility and an assessment as to the
likelihood of project completion. If the Company determines an impairment has
occurred, the notes receivable would be written down to their estimated fair
value. During the second quarter of 2004, an impairment related to the Nipmuc
Nation notes receivable in the amount of $5.9 million was recorded under these
provisions. This impairment occurred after the Nipmuc Nation was denied federal
recognition as an Indian Tribe and sovereign government within the meaning of
federal law by the Bureau of Indian Affairs (BIA).
The Company currently holds land held for development and land held under
contract for sale. The Company periodically evaluates whether events and
circumstances have occurred that may affect the recoverability of the net book
value of these assets. If such events or circumstances indicate that the
carrying amount of an asset may not be recoverable, the Company estimates the
future cash flows expected to result from the use of the asset. If the sum of
the expected future undiscounted cash flows does not exceed the carrying value
of the asset, the Company will recognize an impairment loss.
2022
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
During June 2004, the Company recognized an impairment loss of approximately
$0.5 million on land held for development related to the Nipmuc Nation project.
This amount was included in the total impairment charge of $6.4 million related
to the Nipmuc Nation project.
The following discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and notes thereto and management's
discussion and analysis included in the Company's Annual Report on Form 10-K for
the year ended December 29, 2002.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" in November 2002. This interpretation elaborates on the disclosures to
be made by a guarantor in its financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee.
The initial recognition and initial measurement provisions of this
interpretation are applicable to all guarantees and modification to guarantees
made after December 31, 2002. The Company's disclosure of the indemnification
and guarantee agreements of the Company is in compliance with the
interpretation. The disclosure requirements in this interpretation are effective
for financial statements of interim or annual periods ended after December 15,
2002. The adoption of the interpretation did not have a material impact on the
Company's results of operations, financial position and cash flows. The Company
does have an indemnification agreement with Grand Casinos which is fully
described in the Financial Condition section of this Management's Discussion and
Analysis.
In January 2003, the FASB issued Interpretation No. 46 (FIN46), "Consolidation
of Variable Interest Entities", which addresses the consolidation of variable
interest entities. The interpretation applicable immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which a Company obtains an interest after that date. For variable
interests in variable interest entities acquired before February 1, 2003, the
interpretation applicable applies in the first interim period beginning after
June 15,28, 2003. The Company has determined that it has no investments or other
interests in entities that may be deemed variable interest entities under the
provisions of FIN 46, as the development projects subject to the management
agreements with the Indian Tribes are not separate entities or legal structures.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123". SFAS No. 148 provides alternative transition methods for companies that
make a voluntary change to the fair-value-based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company has adopted the disclosure provisions of SFAS No. 148 and
its adoption had no impact on the Company's consolidated financial position or
results of operations.
21
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
Revenues are calculated in accordance with accounting principles generally
accepted in the United States of America and are presented in a manner
consistent with industry practice.
Historically, net distributable profits by
the Indian casinos were computed using a modified cash basis of accounting in
accordance with the management contracts to calculate management fees. Under
this modified cash basis of accounting prescribed by the management contracts,
the write-off of capital equipment and leased assets for the casino operations
was accelerated, which thereby impacted the timing of net distributable profits.
SIX MONTHS ENDED JUNE 29, 2003JULY 4, 2004 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 200229, 2003
Revenues
Total revenues were $3.5$8.9 million for the six months ended June 29, 2003July 4, 2004 compared
to $1.5$3.5 million for the same period in the prior year. Revenues for the current
and prior year periodperiods were derived entirelyprimarily from license fees related to the
WPT series,
which has now completedseries. The increase in revenue is primarily due to an increase in license
fees related to season two episodes delivered to TRV during 2004, compared to
license fees related to season one episodes delivered to TRV during 2003. Also
contributing to the increase was revenue of approximately $0.9 million related
to WPT-related licensing, sponsorship and merchandise included in total revenue
for the six months ended July 4, 2004. In April 2004, TRV exercised its option
to broadcast the first full season. An agreement forof a possible five additional seasons. WPT second
season was reached during July of 2003. Under the new agreement, WPT will
receive a series ofreceives fixed
license payments for the second season. These payments
will commence in 2004 and arefrom TRV subject to satisfaction of production milestones and
other conditions.
WPT is also entitled to a portion of the revenues from
other sources including international distribution, merchandising and certain
sponsorships, and WPT is currently exploring these opportunities. Revenues for
the prior year period were derived entirely from management fees from the
management of Grand Casino Coushatta. The management contract with the Coushatta
Tribe of Louisiana for Grand Casino Coushatta expired on January 16, 2002. The
Company currently has no other management contracts from which it will derive
revenues in 2003.
Costs and Expenses
Total costs and expenses were $18.2 million and $5.0 million for the six months
ended July 4, 2004 and June 29, 2003, respectively. Included in 2004 costs and
expenses is an impairment charge of approximately $6.4 million related to the
write-off of Lakes' investment in the Nipmuc Nation casino development project.
This impairment charge was the result of the Nipmuc Nation being denied
recognition as an Indian Tribe and sovereign government within the meaning of
federal law by the Bureau of Indian Affairs. During the six months ended June
29, 2003, costs and expenses were reduced by a reversal of unused litigation
accrual of $3.2 million under the Company's prior agreement to indemnify Grand
Casinos, Inc. in connection with the Stratosphere litigation matters.
Selling, general and administrative expenses increased from $5.9 million for the
six months ended June 29, 2003 compared to $11.9 million for the same period in the prior year. Selling,
general and administrative expenses decreased from $11.7$6.4 million for the six months ended June 30, 2002July 4,
2004. This increase is primarily due to $7.9 million foran increase in overhead costs associated
with the six months ended June 29,
2003. This decrease is the result of impairment charges taken in the prior year
period of $4.0 million relating to a note receivable from Living Benefits, LLC,
and $3.0 million relating to the Polo Plaza and Travelodge properties,WPT which was partially offset by an increasea decrease in professional fees
of approximately $1.4
million related to the property sales in Las Vegas, Nevada, as well as an
increase in costs incurred associated with WPT in the amount of $2.2 million during the current year2004 period. Also during the current year period, the Company
reversed a reserve assessment related to Stratosphere litigation which exceeded
the final judgment amount resulting in a reversal of litigation and claims
accrual in the amount of $3.2 million.
22
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Other
Interest income was $0.6WPT production costs increased from $2.1
million for the six months ended June 29, 2003 compared
to $1.2 million for the same period in the prior year. This decrease is
primarily due to lower cash balances during the period.
Losses Per Common Share and Net Losses
For the six months ended June 29, 2003, basic and diluted losses per common
share were $0.05, compared to basic and diluted losses of $0.68, for the same
period in the prior year. Losses for the period ended June 29, 2003 were $0.5
million compared to $7.2$5.1 million for the six
months ended June 30, 2002. This
decrease in losses is primarily due to the impairment charges of $7.0 million
taken in the prior year period discussed above. Also contributing to the
decrease was the WPT revenue of $3.5 million recognized in 2003, compared to
management fee income of $1.5 million related to the management of Grand Casino
Coushatta, recognized in the prior year period.
THREE MONTHS ENDED JUNE 29, 2003 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2002
Revenues
Total revenues were $3.0 million for the three months ended June 29, 2003. There
were no revenues in the same period in the prior year. Revenues forJuly 4, 2004. In the current year period, were derived entirely from license feesWPT production costs and
related to the WPT series,
which has now completed its first full season. An agreement for a WPT second
season was reached during July 2003. Revenue from the second season will beepisode revenues were recognized in 2004 as production milestones and other conditions are met.
Costs and Expenses
Total costs and expenses were $1.9 million for the three months ended June 29,
2003, compared to $9.7 million for the same period in the prior year. Selling,
general and administrative expenses decreased from $9.6 million for the three
months ended June 30, 2002 to $5.0 million for the three months ended June 29,
2003. This decrease is primarily due to a second quarter 2002 impairment of $4.0
million relating to a note receivable from Living Benefits Financial Services,
LLC, as well as a $3.0 million impairment charge taken on the Polo Plaza and
Travelodge properties, which was partially offset by an increase in professional
fees of approximately $1.4 million related to the property sales in Las Vegas,
Nevada, as well as an increase in costs incurred associated with WPT in the
amount of $1.2 million during the current year period. Also during the current
year period the Company reversed a reserve assessment relatedrelative episode was
delivered to Stratosphere
litigation which exceeded the final judgment amount resulting in a reversal of
litigation and claims accrual in the amount of $3.2 million.TRV.
23
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Other
Interest income was $0.3 million forHowever, because WPT did not have an executed agreement in 2002, when a portion
of production costs related to the threeWPT episodes delivered during the six months
ended June 29, 2003 were incurred, such costs were expensed in 2002 rather than
being capitalized. The increase was also due to a greater number of episodes
being delivered to TRV during the 2004 period compared to $0.4the 2003 period.
Other
Interest income was $0.1 million for the six months ended July 4, 2004 compared
to $0.6 million for the same period in the prior year. This decrease is
primarily due to lower cash balances duringa decrease in interest earned on amounts owed to Lakes by
Metroflag related to the period.
Earningsproperties sold to Metroflag by Lakes in Las Vegas,
Nevada.
Losses Per Common Share and Net EarningsLosses
For the threesix months ended June 29, 2003,July 4, 2004, basic and diluted earningslosses per common share
were $0.07,$0.36, compared to basic and diluted losses of $0.67,$0.03 per common share, for
the same period in the prior year. EarningsLosses for the period ended July 4, 2004 were
$7.9 million compared to $0.5 million for the six months ended June 29, 2003.
This increase in losses is primarily due to the impairment charge of $6.4
million taken in the current year period discussed above.
THREE MONTHS ENDED JULY 4, 2004 COMPARED TO THE THREE MONTHS ENDED JUNE 29, 2003
Revenues
Total revenues were $4.7 million for the three months ended July 4, 2004,
compared to $3.0 million in the prior year period. Revenues for the current and
prior year periods were primarily derived from license fees related to the WPT
series. The increase in revenue is primarily due to an increase in license fees
related to season two episodes delivered to TRV during the second quarter of
2004, compared to license fees related to season one episodes delivered to TRV
during the second quarter of 2003. Also contributing to the increase was revenue
of approximately $0.5 million related to WPT-related licensing, sponsorship and
merchandise included in total revenue for the three months ended July 4, 2004.
Costs and Expenses
Total costs and expenses were $12.4 million and $1.9 million for the three
months ended July 4, 2004 and June 29, 2003, respectively. Included in second
quarter 2004 costs and expenses is an impairment charge of approximately $6.4
million related to the write-off of Lakes' investment in the Nipmuc Nation
casino development project. This impairment charge was the result of the Nipmuc
Nation being denied recognition as an Indian Tribe and sovereign government
within the meaning of federal law by the Bureau of Indian Affairs. During the
three months ended June 29, 2003, costs and expenses were $0.8reduced by a reversal
of unused litigation accrual of $3.2 million comparedunder the Company's prior agreement
to losses of $7.2 million forindemnify Grand Casinos, Inc. in connection with the three months ended June
30, 2002. This increase in earnings relates primarily to the impairment charges
of $7.0 million taken in the prior year period discussed above. Also
contributing to the increase was the WPT revenue recognized in the current year
quarter.
Outlook
It is currently contemplated that there will be no operating revenues for the
remainder of 2003 from existing casino development projects or from the World
Poker Tour. Although none of the existing casino development projects are
expected to produce revenue in 2003, Lakes continues to evaluate potential new
revenue-generating business opportunities. The Company recently signed an
agreement with TRV for a second season of the WPT series. Costs associated with
WPT are expected to remain primarily consistent during the third and fourth
quarters of 2003. However, revenues related to the second season will not be
recognized until 2004, as production milestones and other conditions are met.
Lakes anticipates that second season revenues from all sources will allow WPT to
be profitable in 2004 and future years, thereby being incremental to Lakes'
earnings and reducing financial risks associated with this venture. Lakes
continues to closely monitor its operating expenses.
FINANCIAL CONDITION
At June 29, 2003, Lakes had $23.4 million in unrestricted cash and cash
equivalents. Subsequent to June 29, 2003, Lakes has received $15.0 million in
cash related to the sale of the Shark Club property and $1.0 million as
repayment of a loan previously made to Chateaux by Lakes. Lakes considers its
cash position, which includes the payments received upon the sale of the Shark
Club property, adequate to cover expected remaining 2003 operating expenses. For
the six months ended June 29, 2003, net cash used in operating activities
totaled $4.0 million. For the six months ended June 30, 2002, net cash used in
operating activities totaled $0.5 million. For the current year period, net cash
provided by investing activities totaled $13.3 million. For the six months ended
June 30, 2002, net cash used in investing activities totaled $15.6 million.
Included in these investing activities for the periods ended June 29, 2003 and
June 30, 2002 are advances on notes receivable of $6.6 million and $9.9 million,
respectively. Net receipts from land held under contract for sale were $16.3
million during the six months ended June 29, 2003. Payments for land held under
contract for sale were $0.7 million for the six months ended June 30, 2002.Stratosphere litigation
matters.
24
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Unrestricted cash increased by $5.9Selling, general and administrative expenses decreased from $3.8 million for the
three months ended June 29, 2003 to $3.2 million for the three months ended July
4, 2004. This decrease is primarily due to a decrease in professional fees
incurred during the 2003 period as a resultassociated with the sale of property in Las
Vegas, Nevada. WPT production costs increased from $1.2 million for the reclassification of restricted cash as unrestricted. During the periodsthree
months ended June 29, 2003 to $2.6 million for the three months ended July 4,
2004. In the current year period, WPT production costs and related episode
revenues were recognized in the period the relative episode was delivered to
TRV. However, because the TRV agreement was not executed until March 2003, and a
portion of production costs related to the WPT episodes delivered during the
three months ended June 30, 2002, payments29, 2003 were incurred before the execution of the
agreement, such costs were expensed prior to that three-month period rather than
being capitalized. This factor reduced production costs recognized during the
three months ended June 29, 2003.
Earnings Per Common Share and Net Earnings
For the three months ended July 4, 2004, basic and diluted losses per common
share were $0.32, compared to basic and diluted earnings of $0.04 per share, for
the same period in the prior year. Losses for the three months ended July 4,
2004 were $7.2 million compared to earnings of $0.8 million for the three months
ended June 29, 2003. This increase in losses relates primarily to the impairment
charge of $6.4 million related to the Nipmuc Nation taken during the three
months ended July 4, 2004.
Outlook
It is currently contemplated that there will be no operating revenues for 2004
from existing casino development projects. WPT expects to recognize the
remaining $2.0 million in revenue from the second season of the World Poker Tour
series, along with associated production costs during the third and fourth
quarters of 2004. WPT currently anticipates generating revenues of approximately
$10.8 million from Season Three license fees under the Travel Channel agreement,
depending on the number of episodes that ultimately comprise that season. WPT is
expected to recognize approximately $3.1 million of this revenue during the
third and fourth quarters of fiscal 2004, with the rest being recognized in
fiscal 2005.
Subsequent to the initial public offering of WPT, Lakes continues to own a
majority of WPT's equity. Therefore, WPT's operating results will continue to be
consolidated with our results.
In addition to the WPT business, Lakes continues to evaluate potential new
revenue-generating business opportunities. Lakes continues to closely monitor
its operating expenses.
FINANCIAL CONDITION
At July 4, 2004, Lakes had $19.4 million in unrestricted cash and cash
equivalents. Lakes' operating revenues from casino operations have been minimal
since the expiration of the management contract with the Coushatta Tribe in
January 2002. In 2003, the operating revenues derived from WPT were offset
almost entirely by production costs. In the first six months of 2004, operating
revenues from WPT operations were $8.9 million, and WPT's net income was
approximately $1.7 million.
25
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
In August 2004, WPT raised approximately $28.5 million in cash proceeds from its
initial public offering, net of underwriting discounts and estimated offering
expenses. WPT's cash resources are expected to be used for WPT's business and
will not be available for the Company's casino operations or other non-WPT
businesses. The Company's primary source of cash for its casino operations
during the past two years has been from the planned sale of assets. We expect
that proceeds from the sale of assets will decrease in 2004. During the first
quarter of 2004, the 2022 Ranch land, which was owned by Lakes and its joint
venture partner Land Baron West, LLC, was sold. Lakes received cash in the
amount of approximately $1.7 million.
Our management contracts with our tribal partners require that we provide
financial support in the form of notes receivable prior to the beginning of
construction (the `Pre-construction Financing'). We also have commitments to
provide additional financing to our tribal partners to fund the construction of
the casinos (`the Construction Financing') if it is not available from other
sources. These notes are interest bearing; however, the interest is deferred
until the casino is built and has established profitable operations. In the
event that the casinos are not built, our only recourse is to attempt to
liquidate assets of the development, if any, excluding any land in trust. We
currently believe that our existing casino development projects included in the
table below will be constructed and achieve profitable operation; however, no
assurance can be made that this will occur. If this does not occur, it is likely
that Lakes would incur substantial or complete losses on its pre-construction
advances and any land held for development
amounteddevelopment.
Casino Development Advances/Commitments
---------------------------------------
(in millions)
Pre-construction Land Held for Remaining
Advances Development Commitment
as of 7/4/04 as of 7/4/04 as of 7/4/04
----------------- ------------- ------------
Jamul Indian Village $13.5 $ 6.6 $ 9.9
Shingle Springs Band of Miwok Indians 29.9 7.4 2.7
Pokagon Band of Potawatomi Indians 43.6 - 24.9
For the Pokagon project, the Company has agreed to $1.6 million and $4.9 million, respectively.
Lakes plans to use its cash for continuing operations, loans to current joint
ventures and tribal partners to develop existing and anticipated Indian casino
operations, the pursuit of additional business opportunities, and settlement of
pending litigation matters. The amount and timing of Lakes' cash outlays for
casino development loans will depend on the timing of the regulatory approval
process and the availability of external financing. When approvals are received,provide additional financing
willfrom its own funds if financing at an interest rate not to exceed 13% is not
available from third parties. If this occurs and Lakes is required to provide
all financing, this would be neededan additional commitment of up to complete the projects. It is currently
plannedapproximately $54
million. Currently, it appears that this third-party financing will be obtained by each individual
tribe.available for
this project. However, there can be no assurance that if third-party financing is notwill
be available and that Lakes will not be required to finance these projects directly. If
Lakes must provide this financing, Lakes expects to obtain debt or equity
financing which it would loan to the respective tribes as necessary. In the
alternative,additional
financing.
Lakes may be required to provide a guarantee the tribes'of tribal debt financing or
otherwise provide support for the tribes' obligations.tribal obligations related to any of the
projects. Any guarantees by Lakes or similar off-balance sheet liabilities will
increase Lakes' potential exposure in the event of a default by any of these
tribes.
At June 29, 2003, Lakes had approximately $75.6 million in notes receivable from
Indian tribes and other parties. Most of these amounts are advances made to the
tribes for the development of gaming properties managed by Lakes. See Note 5 to
the Consolidated Financial Statements included in Item 1.
The joint venture entities that hold the management contracts for the San Diego
and Sacramento area casino resorts were previously jointly owned with two LLC's
owned by Kevin M. Kean and Jerry A. Argovitz, (the "KAR Entities"). On January
30, 2003, subsidiaries of Lakes purchased the respective joint venture interests
of the KAR Entities for nominal consideration, at which time the joint venture
entities became indirect wholly owned subsidiaries of Lakes. At the time of the
purchase, Lakes or its subsidiaries had notes receivable from the KAR Entities
and a long-term receivable from Kevin M. Kean that, as of December 29, 2002,
were in the amounts of $1.8 million and $1.9 million, respectively. In
connection with the purchase transactions, Lakes and certain of its subsidiaries
entered into separate agreements with Kevin M. Kean and Jerry A. Argovitz, the
two individual owners of the KAR Entities. Under these agreements, Lakes and its
subsidiaries have forgiven the notes receivable from the KAR Entities, subject
to the agreements of Messrs. Kean and/or Argovitz to assume the obligations
under the notes in certain circumstances.
Under the agreements with Kevin M. Kean, Mr. Kean may elect to serve as a
consultant to Lakes' subsidiaries during the term of each subsidiary's casino
management contract if he is found suitable by relevant gaming regulatory
authorities. In such event, Mr. Kean will be entitled to receive annual
consulting fees equal to 20% of the management fees from the San Diego area
casino operations and 15% of the management fees from the Sacramento area casino
operations, less certain costs of these operations.
25
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
If Mr. Kean is found suitable by relevant gaming regulatory authorities and
elects to serve as a consultant, he will be obligated to repay 50% of the notes
receivable from the KAR Entities. If Mr. Kean is not found suitable by relevant
gaming regulatory authorities or otherwise elects not to serve as a consultant,
he will be entitled to receive annual payments of $1 million from each of the
San Diego and Sacramento area casino projects during the term of the respective
casino management contracts (but not during any renewal term of such management
contracts). Regardless of whether Mr. Kean serves as a consultant, a Lakes
subsidiary has agreed to loan up to $1.25 million to Mr. Kean, $1 million of
which must be used to fund certain obligations of Mr. Kean related to a separate
joint venture formed to acquire land in the San Diego area. Mr. Kean's personal
indebtedness to Lakes remained outstanding. Mr. Kean has agreed that 50% of the
consulting fees or other payments payable to him under the agreements with Lakes
and its subsidiaries shall be applied toward repayment of his indebtedness to
Lakes. In the event of a default under the agreements, 100% of the fees and
payments will be applied toward repayment of his indebtedness to Lakes.
Under the agreements with Jerry A. Argovitz, if Mr. Argovitz is found suitable
by relevant gaming regulatory authorities, he will be entitled to purchase for
nominal consideration a 20% equity interest in the Lakes subsidiary holding a
management contract with the San Diego area casino and a 15% equity interest in
the Lakes subsidiary holding a management contract with the Sacramento area
casino. Upon such purchase, Mr. Argovitz will become obligated to repay 50% of
the notes receivable from the KAR Entities. If he is not found suitable or does
not elect to purchase equity interests in the Lakes subsidiaries, Mr. Argovitz
may elect to receive annual payments of $1 million from each of the San Diego
and Sacramento area casino projects from the date of election through the term
of the respective casino management contracts (but not during any renewal term
of such management contracts).
As part of a joint venture which will televise poker tournaments, the Company
invested $0.1 million for an approximately 78% ownership position in the joint
venture during 2002. The Company is also required to loan up to $3.2 million to
the joint venture as needed. As of June 29, 2003, the Company had made net loans
totaling $1.8 million to the joint venture.
On December 28, 2001, the Company transferred title and ownership obligations of
the Polo Plaza shopping center property to Metroflag Polo, LLC. In conjunction
with this transaction, Lakes transferred to Metroflag BP, LLC, rights to and
obligations of the adjacent Travelodge property consisting of a long-term land
lease and a motel operation. This transaction was accounted for under the
deposit method of accounting under the requirements of Statement of Financial
Accounting Standards No. 66, Accounting for Sales of Real Estate rather than as
a sale. Therefore, the fair value of the property was included as land held
under contract for sale on the accompanying balance sheet as of December 29,
2002. The total price for this combined transaction was approximately $30.9
million. Terms of the transaction include a $1.0 million down payment, which was
received in January 2002, a contractual commitment to pay to Lakes $23.3 million
and a second contractual commitment to pay Lakes $7.5 million.
26
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
During 2002,Our major use of cash over the past three years has been Pre-construction
Financing provided to our tribal partners. At July 4, 2004, Lakes and Metroflag restructuredhad
approximately $88.1 million in notes receivable from Indian tribes. See Note 5
to the terms of the Polo Plaza and
Travelodge property transactions due to deteriorating economic conditions. The
parties reduced the purchase price for the Polo Plaza property from $23.8
million to $21.8 million. On the payment date, which was scheduled to be no
later than January 31, 2003, $16.8 million of the purchase price was to be
payable to Lakes inConsolidated Financial Statements.
We believe that our cash and $4.0 million was to be payable through the issuance
to Lakes of a preferred membership interest in Metroflag. During 2002, Lakes
recorded a $3.0 million impairment charge for these properties relating to the
adjustment in the purchase price and a negotiated potential discount on the
return of Lakes' preferred interest. Lakes' collateral for the two contractual
commitments is the property and lease rights described above which would revert
back to Lakes in the event of default by Metroflag.
During March of 2003, Lakes and Metroflag agreed to additional revisions to the
terms of the Polo Plaza and Travelodge property transactions. The parties have
increased the price of the Polo Plaza property from $21.8 million to $25.8
million. On the payment date, which was extended to May 15, 2003, $16.8 million
of the purchase price was paid to Lakes in cash $4.0 million was paid through
the issuance to Lakes of a preferred membership interest in Metroflag and $4.0
million was paid through the issuance to Lakes of a subordinated membership
interest in Metroflag. On or before April 30, 2004, Metroflag Polo may elect to
distribute to Lakes $3.0 million plus interest inequivalents, along with expected cash
as full return of Lakes'
preferred interest. If paid after April 30, 2004 and in no event later than
December 24, 2006, the entire $4.0 million plus interestreceipts, will be payable. The
subordinated interest must be repurchased for $4.0 million at the time of
repayment of an outstanding $3.5 million contractual commitmentadequate to fund operating expenses and Pre-construction
Financing in connection
with the Travelodge property, which is scheduled on or before December 28, 2004. If the Travelodge commitmentPokagon casino project begins construction, it is
not repaid by December 28, 2004, ownership of
the Travelodge lease rights would revert back to Lakes. If at any time the Polo
Plaza property is sold and the Travelodge commitment has not been repaid,
Metroflag is required to repurchase the subordinated interest for the lesser of
$4.0 millionanticipated that we will require additional capital through either public or
any portion of the net cash proceeds from such sale or
refinancing that exceeds $60.0 million.
In March of 2003, the parties decreased the sale price of the Travelodge
property from $7.5private financings.
Lakes loaned $0.3 million to $3.5 million. The contractual commitment to pay
Lakes was also decreased from $7.5 million to $3.5 million and is now payable no
later than December 28, 2004.
On July 1, 2003, Lakes completed the salea former non-tribal partner in one of its Shark Club property in Las
Vegas, Nevada to an entityIndian
casino development projects. Repayment is expected to be managed and operated by Marriott Ownership
Resorts, Inc. As consideration forreceived from this
sale, Lakes received $15.0 million in
cash, plus $1.0 million as repayment of a loan previously made to Chateaux by
Lakes.
27
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Pursuant to the terms of the Distribution Agreement, Grand Casinos assigned to
Lakes, and Lakes assumed, a lease agreement dated February 1, 1996 covering
Lakes' current corporate office space of approximately 65,000 square feet with a
lease term of fifteen years. The lease commenced on October 14, 1996. During
2001, also pursuant to the terms of the Distribution Agreement, Lakes entered
into a capital lease arrangement for the corporate office space at which time
the operating lease was cancelled. Accordingly, Lakes recorded a capital leased
asset and liability in the amount of approximately $5.8 million. On January 2,
2002, as per the agreement with Grand Casinos, Lakes purchased the building for
$6.4 million, including transaction expenses. This transaction resulted in the
extinguishment of the Company's capital lease obligationformer partner's future consulting fees related to the
building.
The Company had two notes payable with third parties, which were repaid during
2002. The first was collateralized by certificates of deposit, in the amount of
$1.0 million. The second was collateralized by property in the amount of $0.4
million.certain Indian casino
development projects. At July 4, 2004, $0.3 million is outstanding under this
agreement.
As a part of the agreements resulting from Lakes' spin-off from Grand Casinos
and related transactions,transaction establishing Lakes hasas a separate public company on
December 31, 1998, the Company agreed to indemnify Grand Casinosthrough December 28,
2004 against all costs, expenses and liabilities incurred in connection with or
arising out of certain pending and threatened claims and legal proceedings
against Grand and to which Grand
Casinospay all related settlements and certain of its subsidiaries are likely to be parties.judgments. The Company's
indemnification obligations include the obligation to provide the defense of all
claims made in proceedings against Grand Casinos and to pay all related settlements and
judgments. See Part II Item 1. Legal Proceedings.There is currently no known liability related to this obligation.
As of December
29, 2002, Lakes had $7.5 million deposited in trust as security to support
Lakes' indemnification obligations to Grand Casinos. In May 2003, $2.3 million
was paid outa part of the trust to Stratosphere. Following such payment,indemnification agreement, Lakes agreed that it will not
declare or pay any dividends, make any distribution on account of Lakes' equity
interests, or otherwise purchase, redeem, defease or retire for value any equity
interests in Lakes without the trust
account was terminated and the remaining restricted fundswritten consent of approximately $5.9
million, including interest, were released to Lakes and reclassified as
unrestricted cash on Lakes' condensed consolidated balance sheet as of June 29,
2003. Notwithstanding termination of the trust account, Lakes' indemnification
obligations to Grand remain in effect. Subsequent indemnification obligations to
Grand Casinos, if any, would be paid directly by Lakes.Grand.
SEASONALITY
The Company believes that the operations of all casinos to be managed by the
Company will be affected by seasonal factors, including holidays, weather and
travel conditions.
REGULATION AND TAXES
The Company is subject to extensive regulation by state gaming authorities. The
Company will also be subject to regulation, which may or may not be similar to
current state regulations, by the appropriate authorities in any jurisdiction
where it may conduct gaming activities in the future. Changes in applicable laws
or regulations could have an adverse effect on the Company.
28
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The gaming industry represents a significant source of tax revenues. From time
to time, various federal legislators and officials have proposed changes in tax
law, or in the administration of such law, affecting the gaming industry. It is
not possible to determine the likelihood of possible changes in tax law or in
the administration of such law. Such changes, if adopted, could have a material
adverse effect on the Company's results of operations and financial results.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" in November 2002. This interpretation elaborates on the disclosures to
be made by a guarantor in its financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee.
The initial recognition and initial measurement provisions of this
interpretation are applicable to all guarantees and modification to guarantees
made after December 31, 2002. The Company's disclosure of the indemnification
and guarantee agreements of the Company is in compliance with the
interpretation. The disclosure requirements in this interpretation are effective
for financial statements of interim or annual periods ended after December 15,
2002. The adoption of the interpretation did not have a material impact on the
Company's results of operations, financial position and cash flows. The Company
does have an indemnification agreement with Grand Casinos which is fully
described in the Financial Condition section of this Management's Discussion and
Analysis.
In January 2003, the FASB issued Interpretation No. 46 (FIN46), "Consolidation
of Variable Interest Entities", which addresses the consolidation of variable
interest entities. The interpretation applicable immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which a Company obtains an interest after that date. For variable
interests in variable interest entities acquired before February 1, 2003, the
interpretation applicable applies in the first interim period beginning after
June 15, 2003. The Company has determined that it has no investments or other
interests in entities that may be deemed variable interest entities under the
provisions of FIN 46, as the development projects subject to the management
agreements with the Indian Tribes are not separate entities or legal structures.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123". SFAS No. 148 provides alternative transition methods for companies that
make a voluntary change to the fair-value-based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company has adopted the disclosure provisions of SFAS No. 148 and
its adoption had no impact on the Company's consolidated financial position or
results of operations.
2927
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on its financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors, except
for the financing commitments previously discussed, and except for Lakes'
investments in unconsolidated affiliates (see Note 2).
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Form 10-K
and other materials filed or to be filed by the Company with the Securities and
Exchange Commission (as well as information included in oral statements or other
written statements made or to be made by the Company) contain statements that
are forward-looking, such as plans for future expansion and other business
development activities as well as other statements regarding capital spending,
financing sources and the effects of regulation (including gaming and tax
regulation) and competition.
Such forward looking information involves important risks and uncertainties that
could significantly affect the anticipated results in the future and,
accordingly, actual results may differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company.
These risks and uncertainties include, but are not limited to, those relating to
possible delays in completion of Lakes' casino projects, including various
regulatory approvals and numerous other conditions which must be satisfied
before completion of these projects; possible termination or adverse
modification of management contracts; continued indemnification obligations to
Grand Casinos; highly competitive industry;industries; possible changes in regulations;
reliance on continued positive relationships with Indian tribes and repayment of
amounts owed to Lakes by Indian tribes; possible need for future financing to
meet Lakes' expansion goals; risks of entry into new businesses; inability to
achieve financial results from the contemplated business expansion of WPT; WPT's
relatively short operating history; reliance on the agreement with TRV for most
of our consolidated revenues; possible inability of WPT's programming to
maintain a sufficient audience and exposure to adverse trends in the television
production business generally; possible increases in production expenses,
compared to fixed license revenues for related episodes; risk of inability to
protect WPT's proprietary rights or preserve the value of WPT's brands;
dependence on WPT's relationships with member casinos and strategic partners;
and reliance on Lakes' and WPT's management. For further information regarding
the risks and uncertainties, see the "Business -- Risk Factors" section of the
Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2002.
3028,
2003.
28
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK;
CONTROLS AND PROCEDURES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments include cash and cash equivalents,
marketable securities and long-term debt. The Company's main investment
objectives are the preservation of investment capital and the maximization of
after-tax returns on its investment portfolio. Consequently, the Company invests
with only high-credit-quality issuers and limits the amount of credit exposure
to any one issuer. The Company does not use derivative instruments for
speculative or investment purposes.
The Company's cash and cash equivalents are not subject to significant interest
rate risk due to the short maturities of these instruments. As of June 29, 2003,July 4, 2004,
the carrying value of the Company's cash and cash equivalents approximates fair
value. The Company has in the past and may in the future obtain marketable debt
securities (principally consisting of commercial paper, corporate bonds, and
government securities) having a weighted average duration of one year or less.
Consequently, such securities would not be subject to significant interest rate
risk.
The Company's primary exposure to market risk associated with changes in
interest rates involves the Company's notes receivable related to loans for the
development and construction of Native American owned casinos. The loans and
related note balances earn various interest rates based upon a defined reference
rate. The floating rate receivables will generate more or less interest income
if interest rates rise or fall. Interest income is deferred during development
of the casinos because realizability of the interest is contingent upon the
completion and positive cash flow from operation of the casino. As of June 29
2003,July 4,
2004, Lakes had $75.5$88.1 million of floating rate notes receivables. Based on the
applicable current reference rates and assuming all other factors remain
constant, deferred interest income for a twelve month period would be $4.1$5.1
million. A reference rate increase of 100 basis points would result in an
increase in deferred interest income of $0.8$0.9 million. A 100 basis point decrease
in the reference rate would result in a decrease of $0.8$0.9 million in deferred
interest income over the same twelve month period.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our chief executive officer and chief financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) or Rule 15d - 15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the
period covered by this quarterly report. Based on their evaluation, our chief
executive officer and chief financial officer concluded that Lakes
Entertainment, Inc.'s disclosure controls and procedures are effective.
There have been no significant changes (including corrective actions with regard
to significant deficiencies or material weaknesses) in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date of the evaluation referenced above.
3129
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following summaries describe certain known legal proceedings to which Grand
isSLOT MACHINE LITIGATION
In 1994, William H. Poulos filed a party which Lakes has assumed, or with respect to which Lakes may have
agreed to indemnify Grand,class-action lawsuit in connection with the Distribution.
STRATOSPHERE PREFERENCE ACTION
In April 1998, Stratosphere served on Grand and Grand Media & Electronics
Distributing, Inc., a wholly owned subsidiary of Grand ("Grand Media"), a
complaint in the Stratosphere bankruptcy case seeking recovery of certain
amounts paid by Stratosphere to (i) Grand Media for electronic equipment
purchased by Stratosphere from Grand Media, and (ii) Grand as management fees
and for costs and expenses under a management agreement between Stratosphere and
Grand.
Stratosphere claimed in its complaint that such amounts are recoverable by
Stratosphere as preferential payments under bankruptcy law. In May 1998, Grand
responded to Stratosphere's complaint denying that Stratosphere is entitled to
recover the amounts described in the complaint. Discovery was completed on
December 31, 2001 and the case proceeded to trial before the United States
BankruptcyDistrict Court for the Middle District of Florida against various parties,
including Grand and numerous other parties alleged to be casino operators or
slot machine manufacturers. This lawsuit was followed by several additional
lawsuits of the same nature against the same, as well as additional defendants,
all of which were subsequently consolidated into a single class-action pending
in the United States District Court for the District of NevadaNevada. Following a
court order dismissing all pending pleadings and allowing the plaintiffs to
re-file a single complaint, a complaint has been filed containing substantially
identical claims, alleging that the defendants fraudulently marketed and
operated casino video poker machines and electronic slot machines, and asserting
common law fraud and deceit, unjust enrichment and negligent misrepresentation
and claims under the federal Racketeering-Influenced and Corrupt Organizations
Act. Various motions were filed by the defendants seeking to have this new
complaint dismissed or otherwise limited. In December 1997, the Court, in
general, ruled on all motions in favor of the plaintiffs. The plaintiffs then
filed a motion seeking class certification and the defendants opposed it. In
June 2002, the Court entered an order denying class certification, and the
plaintiffs have appealed this order to the 9th Circuit Court of Appeals.
Briefing is complete, an oral hearing took place in January 2004, and no ruling
has yet been issued.
WILLARD EUGENE SMITH LITIGATION
On October 24, 2003, Lakes announced that it had been named as one of a number
of defendants in a counterclaim filed in state court in Harris County, Texas by
Willard Eugene Smith involving Kean Argovitz Resorts, LLC (KAR), related persons
and entities. In the counterclaim, Smith asserts that, under an alleged oral
agreement with Kevin Kean, he is entitled to a percentage of fees to be received
by the KAR entities or their principals relating to the Shingle Springs and
Jamul casinos that Lakes' subsidiaries are developing in California. Smith also
seeks recovery of damages and other relief from the KAR entities, Lakes and
certain affiliates based on their conduct with respect to the alleged agreement.
Lakes believes the counterclaim against it is without merit. Lakes understands
that the alleged oral agreement upon which Smith bases his claim was rendered
null and void in a prior judgment issued against Smith by the Harris County,
Texas state court in October 2000. However, in September 2003, the court vacated
the prior judgment against Smith. Lakes acquired KAR's interests in the Shingle
Springs and Jamul projects on January 30, 2003. In the buyout agreements between
Lakes and certain KAR entities and related principals, the KAR entities
represented to Lakes that the KAR entities and their affiliates had no
continuing agreements with any third party relating to the Shingle Springs and
Jamul projects and agreed to indemnify Lakes and its affiliates from damages of
the KAR entities and related principals concerning the projects. Lakes will
vigorously defend against the allegations made against it and will pursue its
indemnification rights against the KAR entities and their principals under the
buyout agreements if necessary.
30
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
EL DORADO COUNTY, CALIFORNIA LITIGATION
On January 3, 2003, El Dorado County filed an action in the Superior Court of
the State of California, seeking to prevent the construction of a highway
interchange that was approved by a California state agency. The action does not
seek relief directly against Lakes. However, the interchange is necessary to
permit the construction of a casino to be developed and managed by Lakes through
a joint venture. The casino will be owned by the Shingle Springs Band of Miwok
Indians. The matter was tried to the court on August 22, 2003. On January 2,
2004, Judge Lloyd G. Connelly, Judge of the Superior Court for the State of
California, issued his ruling on the matter. The Court denied the petition in
all respects except one. As to the one exception, the Court sought clarification
as to whether the transportation conformity determination used to determine the
significance of the air quality impact of the interchange operations considered
the impact on attainment of the state ambient air quality standard for ozone.
The California Department of Transportation (Caltrans) prepared and filed the
clarification sought by the Court. Prior to the Court's determination of the
adequacy of the clarification, El Dorado County appealed Judge Connelly's ruling
to the California Court of Appeals.
A ruling with respect to the casino development planned by the Shingle Springs
Rancheria was issued June 21, 2004 by the Superior Court of California, County
of Sacramento. The ruling indicates that the addendum previously provided to the
court by Caltrans did not provide a quantitative showing to satisfy the court's
earlier request for a clarification on meeting the state ambient ozone standard.
The court recognized that the information provided by Caltrans does
qualitatively show that the project may comply with the state standard, but
concluded that is insufficient. Rather the court is requiring a quantitative
analysis and the court recognizes that the methodology for that analysis "is not
readily apparent". In addition, the ruling specifically states, "Moreover such
methodology appears necessary for the CEQA analysis of transportation projects
throughout the state, including transportation projects for which respondents
(i.e. Caltrans) have approval authority." Caltrans, the Shingle Springs Tribe
and Lakes responded to the court with a revised submission in August 2004.
Representatives of the California Air Resources Board and the Sacramento Area
Council of Governments filed declarations supporting our revised submission to
the court. Opposition to that revised submission has been filed, and a hearing
on the revised submission is scheduled on August 20, 2002.
On2004.
GRAND CASINOS, INC. LITIGATION
In connection with the establishment of Lakes as a public corporation on
December 31, 2002,1998, via a distribution of its common stock to the Bankruptcy Court issued its final judgment holding
that: (i) paymentsshareholders of
Grand, the Company and Grand entered into an agreement governing the sharing or
allocation of tax benefits accruing to Grand Media for electronic equipment totaling
approximately $3.3 million areand certain affiliated companies.
On August 13, 2004, an arbitrator awarded to the Company partial summary
judgment on certain of the Company's claims against Grand under the tax sharing
agreement. The dollar amount that will be awarded to the Company on these claims
has not recoverablebeen determined, certain other claims by Stratosphere as avoidable
preferences,the Company under the agreement
have not been decided, and (ii) paymentno hearing date has been set to Grand for management services in the
approximatedetermine such dollar
amount of $2.3 million is recoverable by Stratosphere and an
avoidable preference. On May 8, 2003, this judgment was satisfied out of amounts
held in trust as security to support Lakes' indemnification obligations to
Grand.or decide such claims.
OTHER LITIGATION
Lakes is involved in various other inquiries, administrative proceedings, and
litigation relating to contracts and other matters arising in the normal course
of business. While any proceeding or litigation has an element of uncertainty,
management currently believes that the final outcome of these matters, including
the matters discussed above, is not likely to have a material adverse effect
upon the Company's consolidated financial position or results of operations.
3231
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders was held on June 2, 2003.11, 2004.
(b) At the Annual Meeting:
(1) Management'sAll nominees for directors as listed in the proxy statement were
elected with the following vote:
Affirmative Votes Authority Withheld
----------------- ------------------
Lyle Berman 10,235,925 166,6709,421,862 1,371,751
Timothy J. Cope 10,239,260 163,3359,421,373 1,372,240
Morris Goldfarb 10,070,022 332,57310,642,051 151,562
Ronald Kramer 10,348,604 53,99110,641,452 152,161
Ray Moberg 10,641,473 152,140
Neil I. Sell 10,103,334 299,2619,282,334 1,511,279
(2) The proposal to approve the proposed amendments to the Lakes
Entertainment, Inc. 1998 Stock Option and Compensation Plan was
approved, with the following vote:
Affirmative Votes Negative Votes Abstentions Broker Non-Votes
- ----------------- -------------- ----------- ----------------
7,118,235 206,114 10,797 3,458,467
(3) The proposal to approve the proposed amendments to the Lakes
Entertainment, Inc. 1998 Director Stock Option Plan was approved,
with the following vote:
Affirmative Votes Negative Votes Abstentions Broker Non-Votes
- ----------------- -------------- ----------- ----------------
5,915,338 1,408,921 10,887 3,458,467
(4) The appointment of Deloitte & Touche, LLP as independent auditors of
the Company was ratified with the following vote:
Affirmative Votes Negative Votes Abstentions
- ----------------- -------------- -----------
10,378,640 20,847 3,10810,619,462 164,128 10,023
(3) The proposal to grant full voting rights to shares of the Company's
common stock held by Mr. Lyle Berman, pursuant to the Minnesota Control
Share Acquisition Act, was not approved, with the following vote:
Affirmative Votes Negative Votes Abstentions Broker Non-Votes
- ----------------- -------------- ----------- ----------------
4,766,478 1,282,130 9,618 4,344,369
3332
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION
The Lakes Board of Directors previously has determined that each of the three
Audit Committee members is an "independent director" under Nasdaq listing
standards. The Board has been advised of an informal interpretation of the
Nasdaq rules that might cause Neil I. Sell, a member of the Audit Committee, not
to be considered independent. Mr. Sell is a partner in the law firm of Maslon
Edelman Borman & Brand, LLP, which performs legal services for Lakes, and the
fees paid by Lakes to the Maslon law firm have exceeded $60,000 per year. Under
the informal interpretation, all of these fees are imputed to Mr. Sell
personally, and he is not considered independent. However, under Nasdaq
guidelines, he can still serve as a member of the Audit Committee if the Board
of Directors determines that membership on the Audit Committee by Mr. Sell is
required by the best interests of Lakes and its shareholders. The Board has made
this determination considering all relevant factors, principally Mr. Sell's
membership on the Audit Committee since Lakes commenced its business, resulting
in his understanding of Lakes' financial statements and accounting issues; his
dedication and thoroughness as a member of the Audit Committee; his previous
background as a member of the Board of Directors and Audit Committee of Grand
Casinos, Inc.; and his background as a certified public accountant.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Purchase Agreement dated as of June 26, 2003, by and between
Grand Casinos Nevada I, Inc. and Diamond Resorts, LLC
31.1 Certification of CEO pursuant to Securities Exchange Act Rules
13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of CFO pursuant to Securities Exchange Act Rules
13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
34
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
(b) Reports on Form 8-K
(i) A Form 8-K, Item 5. Other Events,7. Financial Statements, Pro Forma Financial
Information and Exhibits, and Item 9. Regulation FD Disclosure,
was filed on April 7, 2004
(ii) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits, and Item 9. Regulation FD Disclosure,
was filed on April 7, 2003
(ii)16, 2004
(iii) A Form 8-K, Item 5. Other Events, and Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits, and Item 9. Regulation FD Disclosure,
was filed on April 14, 2003
(iii)19, 2004
(iv) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits, and Item 9. Regulation FD Disclosure,
was filed on April 26, 2004
(v) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits, and Item 9. Regulation FD Disclosure,
was filed on April 28, 2004
(vi) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits, and Item 9. Regulation FD Disclosure,
was filed on May 4, 2004
(vii) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits, and Item 12. Results of Operations and
Financial Condition, was filed on April 28, 2003
(iv)May 5, 2004
33
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
(b) Reports on Form 8-K (continued)
(viii) A Form 8-K, Item 5. Other Events, and Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits, and Item 9. Regulation FD Disclosure,
was filed on May 16, 2003
3517, 2004
(ix) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits, and Item 9. Regulation FD Disclosure,
was filed on May 18, 2004
(x) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits, and Item 12. Results of Operations and
Financial Condition, was filed on May 19, 2004
(xi) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits, and Item 9. Regulation FD Disclosure,
was filed on June 14, 2004
(xii) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits, and Item 9. Regulation FD Disclosure,
was filed on June 15, 2004
(xiii) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits, and Item 9. Regulation FD Disclosure,
was filed on June 22, 2004
(xiv) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits, and Item 9. Regulation FD Disclosure,
was filed on June 24, 2004
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: August 13, 200318, 2004 LAKES ENTERTAINMENT, INC.
-------------------------
Registrant
/s// s/ Lyle Berman
-----------------------------------------------------------
Lyle Berman
Chairman of the Board and
Chief Executive Officer
/s/ Timothy J. Cope
-----------------------------------------------------------
Timothy J. Cope
President and
Chief Financial Officer
3635