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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-24993
LAKES GAMING, 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)
(612) 449-9092
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE.
Securities registered pursuant to Section 12(g) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $0.01 par value NASDAQ National Market
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 24, 1999, 10,584,282 shares of the Registrant's Common Stock
were outstanding. The aggregate market value of the Common Stock held by
nonaffiliates of the Registrant on such date, based upon the last sale price of
the Common Stock as reported on the NASDAQ National Market on March 24, 1999,
was $73,077,568. For purposes of this computation, affiliates of the Registrant
are deemed only to be the Registrant's executive officers and directors.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
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PART I
RECENT DEVELOPMENTS
On March 10, 1999 Lakes Gaming, Inc. announced that the Company has entered
into a Memorandum of Understanding with Casino Resource Corporation ("CSNR") to
form a joint venture for the purpose of submitting, to the Pokagon Band of
Potawatomi Indians, (the "Band") a proposal to oversee the development,
construction and management of a casino gaming resort facility for the Band in
the State of Michigan. Lakes Gaming, Inc. will own 80% of the joint venture and
will be the managing partner with full authority to act in the best interests of
the venture.
ITEM 1. BUSINESS
The following discussion contains trend information and other
forward-looking statements that involve a number of risks and uncertainties. The
actual results of Lakes Gaming, Inc., a Minnesota corporation (the "Company"),
could differ materially from the Company's historical results of operations and
those discussed in the forward-looking statements. Factors that could cause
actual results to differ materially include, but are not limited to, those
identified in "Risk Factors."
Lakes Gaming, 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 Casinos"). Pursuant
to the terms of a Distribution Agreement entered into between Grand Casinos and
Lakes and dated as of December 31, 1998 (the "Distribution Agreement"), Grand
Casinos shareholders received .25 shares of Lakes Common Stock for each share
held in Grand Casinos.
Immediately following the Distribution, Grand Casinos merged with a
subsidiary of Park Place Entertainment Corporation, a Delaware corporation
("Park Place"), pursuant to which Grand Casinos became a wholly owned subsidiary
of Park Place (the "Merger"). Grand Casinos shareholders received one share of
Park Place common stock in the Merger for each share they held in Grand Casinos.
Lakes operates the Indian casino management business and holds various
other assets previously owned by Grand. The Company's revenues are derived
almost exclusively from management fees. Lakes manages two land-based,
Indian-owned casinos in Louisiana: Grand Casino Avoyelles, in Marksville,
Louisiana ("Grand Casino Avoyelles"), owned by the Tunica-Biloxi Tribe of
Louisiana (the "Tunica-Biloxi Tribe") and Grand Casino Coushatta, in Kinder,
Louisiana ("Grand Casino Coushatta"), owned by the Coushatta Tribe of Louisiana
(the "Coushatta Tribe").
For a portion of fiscal 1998, and prior to the Distribution, Grand Casinos
also had management contracts for Indian-owned casinos located at Grand Casino
Hinckley and Grand Casino Mille Lacs, both located in Minnesota. The management
contract at Grand Casino Mille Lacs expired at the end of the first quarter of
1998, and the management contract at Grand Casino Hinckley ended in December
1998.
BUSINESS STRATEGY
Lakes develops and manages Indian-owned casino properties that offer the
opportunity for long-term development of related entertainment amenities,
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 from its competitors. Lakes'
strategy is to distinguish itself within its markets by providing exceptional
guest service and developing superior facilities. Lakes provides experienced
corporate and casino management and develops and implements a wide scale of
marketing programs.
Lakes is dedicated to providing high quality, comprehensive entertainment,
with focused attention to guest service. Facilities managed by Lakes, staffed
with well trained local casino employees, offer a casual environment designed to
appeal to the family-oriented, middle income customer. Lakes strives to offer
its casino customers creative gaming selections in a pleasant, festive, smoke-
and climate-controlled setting. Lakes' managed casinos also offer reasonably
priced, high-quality food, first class hotel rooms, video arcades and Grand
Casino Kids Quest(SM), a professionally supervised entertainment and child care
center.
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GROWTH STRATEGY
The primary focus in Lakes' growth strategy is to continue managing casino
resorts under existing Indian management contracts and to attempt to obtain the
renewal of those same contracts. Lakes also intends to pursue new casino resort
management and development opportunities with other Indian tribes. Lakes hopes
to capitalize upon Grand Casinos' reputation as an experienced and successful
casino management company, along with Lakes' available capital and experienced
management, development skills and expertise to secure new development and
management opportunities in Indian gaming. A central element of Lakes' growth
strategy is to manage casinos located within driving distance of major
population centers and, by itself or with Indian tribal partners, to develop
destination, entertainment resorts consisting of hotels and recreation
facilities as amenities to the casinos. Lakes seeks to operate quality
facilities staffed with well-trained, local employees that offer the
entertainment and recreational opportunities that customers have come to expect
in destination resorts. Lakes will also search for attractive opportunities to
expand and grow the Company in business ventures not related to Indian
management contracts and will evaluate any such opportunity when and if
available on a case by case basis.
MARKETING
Lakes targets its marketing strategy at its managed operations to attract
and retain the repeat customer. Management believes that Lakes' emphasis on
enhancing the entertainment value coupled with marketing programs, contributes
to attracting the repeat customer.
Lakes' operations strategy seeks to combine retail, gaming and
entertainment marketing techniques. Lakes profiles its casino customers
utilizing available demographic data, regularly conducted customer surveys and
other sources. Based upon this data, Lakes uses a variety of initial special
promotions to attract the first-time customer and, thereafter, seeks to leverage
initial customer satisfaction through a mix of marketing programs dedicated to
developing a repeat customer. A variety of other events, facilities and
entertainment media provide the patron with a total entertainment experience.
Lakes markets these programs through a variety of direct and media marketing
techniques utilizing a significant customer data base at each location.
GRAND CASINO AVOYELLES
Grand Casino Avoyelles opened in June 1994 and consists of a 218 room hotel
and approximately 50,000 square feet of casino gaming space containing
approximately 1,700 slot machines and 55 table games. The resort's other
features include a 1,700 seat entertainment complex, three restaurants plus a
night club featuring live entertainment, a full-service RV resort, a Kids
Quest(SM) child care activity center, a video arcade, a gift shop and parking
for approximately 2,250 vehicles.
Grand Casino Avoyelles is located approximately 50 miles west of Natchez,
Mississippi, and within approximately 200 miles of the Louisiana cities of Baton
Rouge, Lafayette, New Orleans, and Shreveport. Lakes purchased approximately 64
acres of land adjacent to the Tunica-Biloxi reservation and donated
approximately 21 acres of this land to the Tunica-Biloxi Tribe. This land has
been placed in trust, has been approved for gaming, and is the site upon which
Grand Casino Avoyelles was constructed.
Lakes also leases land to the Tunica-Biloxi Tribe for a 220 room hotel
which opened during 1996 and is located in close proximity to Grand Casino
Avoyelles. The Tunica-Biloxi Tribe operates the hotel as a part of the Grand
Casino Avoyelles enterprise. Lakes guarantees $16.5 million of Tunica-Biloxi
Tribal debt incurred in connection with the purchase of the hotel, and has
subordinated payment of Lakes' management fee and any loan amounts owed by the
Tunica-Biloxi Tribe to Lakes to the repayment of such debt. As of January 3,
1999, the amount outstanding was $7.3 million. The debt is scheduled to be fully
repaid by April 2000.
The term of Lakes' development and management agreement with the
Tunica-Biloxi Tribe (the "Tunica-Biloxi Agreement") expires on June 3, 2001. The
net distributable profits, if any, as determined on a modified cash basis, are
distributed each month 60% to the Tunica-Biloxi Tribe and 40% to Lakes.
Lakes loaned the Tunica-Biloxi Tribe an aggregate of approximately $23.5
million to construct and open Grand Casino Avoyelles, of which amount
approximately $3.5 million was not, but may need to be, approved
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by the Bureau of Indian Affairs (the "BIA") and/or the National Indian Gaming
Commission (the "NIGC"). Approximately $8.0 million of such loans remained
outstanding at January 3, 1999. The loans bear interest at 1% over the prime
rate and are payable over the remaining term of the Tunica-Biloxi Agreement.
The Tunica-Biloxi Agreement was approved by the BIA on February 27, 1992.
The Tunica-Biloxi Tribe and the State of Louisiana entered into a tribal-state
compact on September 29, 1992, which was approved by the Secretary of the
Interior on November 18, 1992. The compact expires on November 18, 1999 but will
automatically renew for an additional seven year period unless either the
Tunica-Biloxi Tribe or the State of Louisiana delivers to the other prior
written notice of non-renewal not less than 180 days prior to November 18, 1999.
In the event the compact is not renewed, legal gaming will not be permitted at
Grand Casino Avoyelles. There can be no assurance that the compact will be
renewed.
In connection with the Distribution, Lakes and the appropriate subsidiaries
made application to the Tribal gaming regulatory authority for a license and,
obtained certification and licensure by the Louisiana State Police.
GRAND CASINO COUSHATTA
Grand Casino Coushatta opened in January 1995 and currently consists of a
223 room hotel and approximately 98,000 square feet of casino gaming space
containing approximately 3,100 slot machines and 90 table games. Three
restaurants plus a food court, a full-service RV resort, a Kids Quest(SM) child
care center, a video arcade, a gift shop and parking for approximately 1,600
vehicles are among the property's non-gaming amenities.
On February 25, 1992, Grand Casinos, as predecessor to Lakes, entered into
a construction agreement and management contract (the "Coushatta Agreement")
with the Coushatta Tribe for the development, construction, and management of a
casino facility in Elton, Louisiana, on Highway 165. Grand Casino Coushatta is
located approximately 60 miles south of Alexandria, Louisiana, and within 200
miles of Houston, Texas. Grand Casinos purchased approximately 688 acres of land
adjacent to the Coushatta reservation. Grand has donated approximately 530 acres
to the Coushatta Tribe. This land has been placed in trust for the Coushatta
Tribe. The remaining land was sold to the Coushatta Tribe, and Lakes holds a
promissory note to secure payment of the purchase price with an outstanding
balance of $2.3 million at January 3, 1999.
Grand Casinos loaned the Coushatta Tribe an aggregate of approximately
$38.3 million to construct and open Grand Casino Coushatta, of which amount up
to approximately $20.3 million was not, but may need to be, approved by the BIA
and/or NIGC. The loans bear interest at 1% over the prime rate and are payable
over the remaining term of the Coushatta Agreement. Approximately $14.4 million
of such loans remained outstanding as of January 3, 1999.
The Coushatta Tribe constructed a hotel on trust land located adjacent to
the casino. Pursuant to the Distribution, Lakes guaranteed $25.0 million of
indebtedness incurred by the Tribe in connection therewith. Such indebtedness
has a repayment term of approximately four years. Lakes subordinated payment of
its management fee and repayment of any loans outstanding from the Coushatta
Tribe to the repayment of such indebtedness. Loan advances of $19.6 million have
been made to the Tribe as of January 3, 1999, for the hotel project.
The Coushatta Agreement was approved by the BIA on February 27, 1992. The
Coushatta Tribe and the State of Louisiana entered into a tribal-state compact
on September 15, 1992, which was approved by the Secretary of the Interior on
November 4, 1992. The compact expires on November 4, 1999, and will
automatically renew for an additional seven year period unless either the
Coushatta Tribe or the State of Louisiana delivers to the other prior written
notice of non-renewal not less than 180 days prior to November 4, 1999. In the
event the compact is not renewed, legal gaming will not be permitted at Grand
Casino Coushatta. There can be no assurance that the compact will be renewed. In
connection with the Distribution, Lakes was certified by the Louisiana State
Police to manage the casino.
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The Coushatta Agreement expires on January 16, 2002. The net distributable
profits, if any, as determined on a modified cash basis, are distributed each
month 60% to the Coushatta Tribe and 40% to Lakes.
FUNDING AGREEMENTS
Pursuant to the terms of the Distribution Agreement, Lakes assumed Grand's
obligations under various agreements (the "Funding Agreements") with each of the
Tunica-Biloxi and Coushatta Tribes to provide temporary funding, if necessary,
for the construction of certain additional amenities on Grand Casino Avoyelles
and Grand Casino Coushatta. The terms of the Funding Agreements require each
party to advance money for the payment of construction costs if and when the
casino operating funds designated for such purpose are insufficient. Any funds
advanced are to be repaid, together with interest at the prime rate plus 1
percent, over the remaining term of the respective management agreement.
Advances of $1.2 million and $7.7 million have been made to Tunica-Biloxi
and Coushatta Tribes, respectively, as of January 3, 1999.
POLO PLAZA
Lakes owns, through a subsidiary, certain interests in four contiguous
parcels of land in Las Vegas, Nevada, including the Polo Plaza Shopping Center.
All or any combination of these interests may be sold, held for sale or held for
future development. Lakes is currently evaluating the potential sale of these
interests and in connection therewith has entered into a listing agreement with
a real estate broker for the active marketing of these parcels. See "Item 2
Properties" on page 20.
COMPETITION
The gaming industry is highly competitive. Gaming activities include
traditional land-based casinos; river boat and dockside gaming; casino gaming on
Indian land; state-sponsored video lottery and video poker in restaurants, bars
and hotels; pari-mutuel betting on horse racing, dog racing, and jai-alai;
sports bookmaking; and card rooms. The casinos managed by Lakes compete with all
these forms of gaming, and will compete with any new forms of gaming that may be
legalized in additional jurisdictions, as well as with other types of
entertainment. Lakes also competes with other gaming companies for opportunities
to acquire legal gaming sites in emerging gaming jurisdictions and for the
opportunity to manage casinos on Indian land. Some of the competitors of Lakes
have more personnel and greater financial and other resources than Lakes.
Further expansion of gaming could also significantly affect Lakes' business.
The Louisiana markets are highly competitive and numerous Louisiana
casinos, along with others in Mississippi, compete with Grand Casino Coushatta
and Grand Casino Avoyelles. A single large land-based casino is currently
planned for downtown New Orleans. This project, which filed for protection under
the bankruptcy laws in November of 1995, has recently emerged from bankruptcy
reorganization pursuant to the confirmation of its Third Amended Joint Plan of
Reorganization by the United States Bankruptcy Court for the Eastern District of
Louisiana on October 13, 1998. This project is scheduled to open by October 30,
1999. If the land-based project opens, it will compete with the casinos managed
by Lakes. Louisiana has also legalized river boat gaming. There are presently 14
licensed river boats in operation in Louisiana, four of which are presently
operating in the vicinity of Lake Charles, Louisiana, within approximately 50
miles of Grand Casino Coushatta, drawing players from the Houston market. The
Louisiana Gaming Control Board has indicated it will not award the remaining
authorized license until after the 1999 legislative session. The river boats
compete with Louisiana casinos managed by Lakes. Moreover, the legalization of
casino gaming in Texas could have a material adverse effect on the casinos
managed by Lakes. Louisiana has also enacted legislation which would allow
racetracks in certain parishes to install slot machines, subject to approval in
local referenda. If such local approvals are obtained, the slot machine
operations could also have a material effect on the casinos managed by Lakes.
Video poker machines may be located in facilities that serve liquor, at truck
stops, and at pari-mutuel racetracks and off-track betting facilities.
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REGULATION
The ownership, management, and operation of gaming facilities are subject
to extensive federal, state, provincial, tribal and/or local laws, regulations
and ordinances, which are administered by the relevant regulatory agency or
agencies in each jurisdiction (the "Regulatory Authorities"). 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. Certain common basic provisions that are
currently applicable to Lakes are described below.
Neither Lakes nor any subsidiary may own, manage or operate a gaming
facility unless proper licenses, permits and approvals are obtained. An
application for a license, permit or approval may be denied for any cause that
the Regulatory Authorities deem reasonable. Most Regulatory Authorities also
have the right to license, investigate, and determine the suitability of any
person who has a material relationship with Lakes or any of its subsidiaries,
including officers, directors, employees, and security holders of Lakes or its
subsidiaries. In the event a Regulatory Authority were to find a security holder
to be unsuitable, Lakes may be sanctioned, and may lose its licenses and
approvals if Lakes recognizes any rights in such unsuitable person in connection
with such securities. Lakes may be required to repurchase its securities at fair
market value from security holders that the Regulatory Authorities deem
unsuitable. Lakes' Articles of Incorporation authorize Lakes to redeem
securities held by persons whose status as a security holder, in the opinion of
the Lakes' Board, jeopardizes gaming licenses or approvals of Lakes or its
subsidiaries.
Once obtained, licenses, permits, and approvals must be periodically
renewed and generally are not transferable. The Regulatory Authorities may at
any time revoke, suspend, condition, limit, or restrict a license for any cause
they deem reasonable. Fines for violations may be levied against the holder of a
license, and in certain jurisdictions, gaming operation revenues can be
forfeited to the State under certain circumstances. No assurance can be given
that any licenses, permits, or approvals will be obtained by Lakes or its
subsidiaries, or if obtained, will be renewed or not revoked in the future. In
addition, the rejection or termination of a license, permit, or approval of
Lakes or any of its employees or security holders in any jurisdiction may have
adverse consequences in other jurisdictions. Certain jurisdictions require
gaming operators licensed therein to seek approval from the state before
conducting gaming in other jurisdictions. Lakes and its subsidiaries may be
required to submit detailed financial and operating reports to Regulatory
Authorities.
The political and regulatory environment for gaming is dynamic and rapidly
changing. The laws, regulations, and procedures pertaining to gaming are subject
to the interpretation of the Regulatory Authorities and may be amended. Any
changes in such laws, regulations, or their interpretations could have a
material adverse effect on Lakes.
Certain specific provisions to which Lakes is currently subject are
described below.
Indian Gaming
The terms and conditions of management contracts for the operation of
Indian-owned casinos, and of all gaming on Indian land in the United States, are
subject to the Indian Gaming Regulatory Act ("IGRA"), which is administered by
the NIGC, and also are subject to the provisions of statutes relating to
contracts with Indian tribes, which are administered by the Secretary of the
Interior (the "Secretary") and the BIA. The regulations and guidelines under
which NIGC will administer IGRA are evolving. The IGRA and those regulations and
guidelines are subject to interpretation by the Secretary and NIGC and may be
subject to judicial and legislative clarification or amendment.
Lakes may need to provide the BIA or NIGC with background information on
each of its directors and each shareholder who holds five percent or more of
Lakes' stock ("5% Shareholders"), including a complete financial statement, a
description of such person's gaming experience, and a list of jurisdictions in
which such person holds gaming licenses. Background investigations of key
employees also may be required. Lakes' Articles of Incorporation contain
provisions requiring directors and 5% Shareholders to provide such information.
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IGRA currently requires NIGC to approve management contracts and certain
collateral agreements for Indian-owned casinos. Prior to NIGC assuming its
management contract approval responsibility, management contracts and other
agreements were approved by the BIA. All of Lakes' current management contracts
and collateral agreements were approved by the BIA; however, the NIGC may review
such management contracts and collateral agreements for compliance with IGRA at
any time in the future. The NIGC will not approve a management contract if a
director or a 5% Shareholder of the management company (i) is an elected member
of the Indian tribal government that owns the facility purchasing or leasing the
games; (ii) has been or is convicted of a felony gaming offense; (iii) has
knowingly and willfully provided materially false information to the NIGC or the
tribe; (iv) has refused to respond to questions from the NIGC; or (v) is a
person whose prior history, reputation and associations pose a threat to the
public interest or to effective gaming regulation and control, or create or
enhance the chance of unsuitable activities in gaming or the business and
financial arrangements incidental thereto. In addition, the NIGC will not
approve a management contract if the management company or any of its agents
have attempted to unduly influence any decision or process of tribal government
relating to gaming, or if the management company has materially breached the
terms of the management contract or the tribe's gaming ordinance, or a trustee,
exercising due diligence, would not approve such management contract.
A management contract can be approved only after NIGC determines that the
contract provides, among other things, for (i) adequate accounting procedures
and verifiable financial reports, which must be furnished to the tribe; (ii)
tribal access to the daily operations of the gaming enterprise, including the
right to verify daily gross revenues and income; (iii) minimum guaranteed
payments to the tribe, which must have priority over the retirement of
development and construction costs; (iv) a ceiling on the repayment of such
development and construction costs; and (v) a contract term not exceeding five
years and a management fee not exceeding 30% of profits; provided that the NIGC
may approve up to a seven year term and a management fee not to exceed 40% of
profits if NIGC is satisfied that the capital investment required, and the
income projections for the particular gaming activity justify the larger profit
allocation and longer term. While Lakes believes that its management contracts
meet all requirements of IGRA, there is a risk that the NIGC may reduce the term
or the management fee provided for in any such contracts. Currently, the
management contracts (i) have not been reviewed or approved by NIGC, and (ii)
NIGC could call them for review at any time and may not approve the contracts at
all or may require modification prior to granting approval.
Grand and Lakes have requested that the NIGC either approve the Grand
Distribution, the Merger and the assignment of Grand's management contracts to
Lakes or acknowledge that their approval is not required. While Lakes believes
that the assignment is valid and has received the consent and support of both
the Tunica-Biloxi Tribe and the Coushatta Tribe, there can be no assurance that
the NIGC will respond favorably or will respond in a timely manner.
IGRA established three separate classes of tribal gaming -- Class I, Class
II, and Class III. Class I includes all traditional or social games played by a
tribe in connection with celebrations or ceremonies. Class II gaming includes
games such as bingo, pulltabs, punch boards, instant bingo and card games that
are not played against the house. Class III gaming includes casino-style gaming
and includes table games such as blackjack, craps and roulette, as well as
gaming machines such as slots, video poker, lotteries, and pari-mutuel wagering.
IGRA prohibits substantially all forms of Class III gaming unless the tribe
has entered into a written agreement with the state in which the casino is
located that specifically authorizes the types of commercial gaming the tribe
may offer (a "tribal-state compact"). IGRA requires states to negotiate in good
faith with tribes that seek tribal-state compacts, and grants Indian tribes the
right to seek a federal court order to compel such negotiations. Many states
have refused to enter into such negotiations. Tribes in several states have
sought federal court orders to compel such negotiations under IGRA; however, the
Supreme Court of the United States held in 1996 that the Eleventh Amendment to
the United States Constitution immunizes states from suit by Indian tribes in
federal court without the states' consent. Because Indian tribes are currently
unable to compel states to negotiate tribal-state compacts, Lakes may not be
able to develop and manage casinos in states that refuse to enter into, or
renew, tribal-state compacts.
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The State of Louisiana has entered into tribal-state compacts with the
Coushatta Tribe and the Tunica-Biloxi Tribe. Each of the Louisiana compacts
expires in November 1999 but will automatically renew for additional terms
unless either party delivers to the other prior written notice of non-renewal at
least 180 days prior to the applicable expiration date. In the event either of
the Louisiana compacts is not renewed, legal gaming will not be permitted at the
applicable casino location. There can be no assurance that either of the
Louisiana compacts will be renewed.
In addition to IGRA, tribal-owned gaming facilities on Indian land are
subject to a number of other federal statutes. The operation of gaming on Indian
land is dependent upon whether the law of the state in which the casino is
located permits gaming by non-Indian entities, which may change over time. Any
such changes in state law may have a material adverse effect on the casinos
managed by Lakes.
Title 25, Section 81 of the United States Code states that "no agreement
shall be made by any person with any tribe of Indians, or individual Indians not
citizens of the United States, for the payment or delivery of any money or other
thing of value . . . in consideration of services for said Indians relative to
their lands . . . unless such contract or agreement be executed and approved" by
the Secretary or his or her designee. An agreement or contract for services
relative to Indian lands that fails to conform with the requirements of Section
81 will be void and unenforceable. Any money or other thing of value paid to any
person by any Indian or tribe for or on his or their behalf, on account of such
services, in excess of any amount approved by the Secretary or his or her
authorized representative will be subject to forfeiture. Lakes believes that it
has complied with the requirements of Section 81 with respect to its management
contracts for Grand Casino Avoyelles and Grand Casino Coushatta.
The Indian Trader Licensing Act, Title 25, Section 261-64 of the United
States Code ("ITLA") states that "any person other than an Indian of the full
blood who shall attempt to reside in the Indian country, or on any Indian
reservation, as a trader, or to introduce goods, or to trade therein, without
such license, shall forfeit all merchandise offered for sale to the Indians or
found in his possession, and shall moreover be liable to a penalty of $500..."
No such licenses have been issued to Lakes to date. The applicability of ITLA to
Indian gaming management contracts is unclear. Lakes believes that ITLA is not
applicable to its management contracts, under which Lakes provides services
rather than goods to Indian tribes. Lakes further believes that ITLA has been
superseded by IGRA.
Indian tribes are sovereign nations with their own governmental systems,
which have primary regulatory authority over gaming on land within the tribe's
jurisdiction. Because of their sovereign status, Indian tribes possess immunity
from lawsuits to which the tribes have not otherwise consented or otherwise
waived their sovereign immunity defense. Therefore, no contractual obligations
undertaken by tribes to Lakes would be enforceable by Lakes unless the tribe has
expressly waived its sovereign immunity as to such obligations. Courts strictly
construe such waivers. Lakes has obtained immunity waivers from each of the
tribes to enforce the terms of its management agreements, however, the scope of
those waivers has never been tested in court, and may be subject to dispute.
Additionally, persons engaged in gaming activities, including Lakes, are subject
to the provisions of tribal ordinances and regulations on gaming. These
ordinances are subject to review by NIGC under certain standards established by
IGRA. The possession of valid licenses from the Coushatta Tribe and
Tunica-Biloxi Tribe are conditions of the Coushatta Agreement and the
Tunica-Biloxi Agreement, respectively.
Nevada Regulatory Matters
The ownership and operation of casino gaming facilities, the operation of
inter-casino linked systems and the manufacture and distribution of gaming
devices are subject to (i) the Nevada Gaming Control Act and the regulations
promulgated thereunder (collectively, the "Nevada Act"); and (ii) various local
ordinances and regulations. Gaming operations in Nevada are subject to the
licensing and regulatory control of the Nevada Gaming Commission ("Nevada
Commission"), the Nevada State Gaming Control Board ("Nevada Board") and various
other county and city regulatory agencies (collectively referred to as the
"Nevada Gaming Authorities"). The manufacture and distribution of gaming devices
are subject to the licensing and regulatory control of the Nevada Board and the
Nevada Commission.
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The laws, regulations, and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy that are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) maintenance of effective
control over the manufacture, distribution and selling of gaming devices and
equipment; (v) the prevention of cheating and fraudulent practices; and (vi)
providing a source of state and local revenues through taxation and licensing
fees. Change in such laws, regulations and procedures could have an adverse
effect on the Company.
All gaming devices and cashless wagering systems that are manufactured,
sold, or distributed for use or play in Nevada, or for distribution outside of
Nevada, must be manufactured by licensed manufacturers, distributed or sold by
licensed distributors, and approved by the Nevada Commission. The approval
process includes rigorous testing by the Nevada Board, a field trial, and a
determination as to whether the gaming device meets strict technical standards
that are set forth in the regulations of the Nevada Gaming Authorities.
Associated equipment must be administratively approved by the Chairman of the
Nevada Board before it is distributed for use in Nevada.
The Company has submitted its application to be registered with the Nevada
Commission as a publicly traded corporation (a "Registered Corporation") and to
be found suitable by the Nevada Commission. The Company is in the process of
obtaining, from the Nevada Gaming Authorities, the various registrations,
approvals, permits, findings of suitability, and licenses required by the State
of Nevada.
As a Registered Corporation, the Company will be required periodically to
submit detailed financial and operating reports to the Nevada Commission and
furnish any other information that the Nevada Commission may require.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or a
corporate licensee in order to determine whether such individual is suitable or
should be licensed as a business associate of a corporate licensee. The Nevada
Gaming Authorities may deny an application for licensing or a finding of
suitability for any cause that they deem reasonable. A finding of suitability is
comparable to licensing, and both require submission of detailed personal and
financial information followed by a thorough investigation. The applicant for
licensing or a finding of suitability must pay all the costs of the
investigation. Changes in licensed positions must be reported to the Nevada
Gaming Authorities and in addition to their authority to deny an application for
a finding of suitability or licensure, the Nevada Gaming Authorities have
jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director, or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company, the Company would have to sever all relationships
with such person. In addition, the Nevada Commission may require the Company to
terminate the employment of any person who refuses to file appropriate
applications. Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada. The Company is required
to submit detailed financial and operating reports to the Nevada Commission.
If it were determined that the Nevada Act was violated by the Company, the
Company and the persons involved could be subject to substantial fines for each
separate violation of the Nevada Act at the discretion of the Nevada Commission.
Limitation, conditioning, or suspension of the Company's registration and
finding of suitability could (and revocation would) materially adversely affect
the Company.
Any beneficial holder of a Registered Corporation's voting securities,
regardless of the number of shares owned, may be required to file an
application, be investigated, and have his or her suitability as a beneficial
holder of the Registered Corporation's voting securities determined if the
Nevada Commission has reason to believe that such ownership would otherwise be
inconsistent with the declared policies of the State of Nevada.
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The applicant must pay all costs of investigation incurred by the Nevada Gaming
Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than 5% of a
Registered Corporation's voting securities to report the acquisition to the
Nevada Commission. The Nevada Act requires that beneficial owners of more than
10% of a Registered Corporation's voting securities apply to the Nevada
Commission for a finding of suitability within thirty days after the Chairman of
the Nevada Board mails the written notice requiring such filing. Under certain
circumstances, an "institutional investor," as defined in the Nevada Act, that
acquires more than 10%, but not more than 15%, of a Registered Corporation's
voting securities may apply to the Nevada Commission for a waiver of such
finding of suitability if such institutional investor holds the voting
securities for investment purposes only. An institutional investor shall not be
deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Registered Corporation, any change in the Registered Corporation's
corporate charter, bylaws, management, policies, or operations of the Registered
Corporation, or any of its gaming affiliates, or any other action that the
Nevada Commission finds to be inconsistent with holding the Registered
Corporation's voting securities for investment purposes only. Activities that
are not deemed to be inconsistent with holding voting securities for investment
purposes only include (i) voting on all matters voted on by stockholders; (ii)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other activities as the
Nevada Commission may determine to be consistent with such investment intent. If
the beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the voting securities
of the Company beyond such period of time as may be prescribed by the Nevada
Commission may be guilty of a criminal offense. The Company will be subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with them, it (i) pays that
person any dividend or interest upon voting securities of the Company, (ii)
allows that person to exercise, directly or indirectly, any voting right
conferred through securities held by that person, (iii) pays remuneration in any
form to that person for services rendered or otherwise, or (iv) fails to pursue
all lawful efforts to require such unsuitable person to relinquish his voting
securities including, if necessary, the immediate purchase of said voting
securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any
debt security of a Registered Corporation to file applications, be investigated,
and be found suitable to own the debt security of a Registered Corporation if
the Nevada Commission has reason to believe that such ownership would not
otherwise be consistent with the declared policies of the State of Nevada. If
the Nevada Commission determines that a person is unsuitable to own such
security, then pursuant to the Nevada Act, the Registered Corporation can be
sanctioned, including the loss of its approvals, if without the prior approval
of the Nevada Commission, it (i) pays to the unsuitable person any dividend,
interest, or any distribution whatsoever; (ii) recognizes any voting right by
such unsuitable person in connection with such securities; (iii) pays the
unsuitable person renumeration in any form; or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.
Once the Company has completed the registration process and has been found
suitable by the Nevada Gaming Authorities, the Company will be required to
maintain a current stock ledger in Nevada, which may be examined by the Nevada
Gaming Authorities at any time. If any securities are held in trust by an agent
or by a nominee, the record holder may be required to disclose the identity of
the beneficial owner to the Nevada Gaming Authorities. A failure to make such
disclosure may be grounds for finding the record holder unsuitable. The Company
is also required to render maximum assistance in determining the identity of the
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beneficial owner. The Company may also be required to disclose to the Nevada
Commission, upon its request, the identities of any of its security holders.
Although the Nevada Commission has the power to require that the stock
certificates of the Company bear a legend indicating that the securities are
subject to the Nevada Act, it has not yet done so.
Once the Company has completed the registration process and has been found
suitable by the Nevada Gaming Authorities, the Company may not make a public
offering of its securities without the prior approval of the Nevada Commission
if the securities or proceeds therefrom are intended to be used to construct,
acquire or finance gaming facilities in Nevada, or to retire or extend
obligations incurred for such purposes. Approval of a public offering does not
constitute a finding, recommendation, or approval by the Nevada Commission or
the Nevada Board as to the accuracy or adequacy of the prospectus or the
investment merits of the securities offered. Any representation to the contrary
is unlawful.
Changes in control of a Registered Corporation through merger,
consolidation, stock or asset acquisitions, management or consulting agreements,
or any act or conduct by a person whereby he or she obtains control, may not
occur without the prior approval of the Nevada Commission. Entities seeking to
acquire control of a Registered Corporation must meet a variety of stringent
standards prescribed by the Nevada Board and Nevada Commission prior to assuming
control of such Registered Corporation. The Nevada Commission may also require
controlling stockholders, officers, directors, and other persons having a
material relationship or involvement with the entity proposing to acquire
control, to be investigated and licensed as part of the approval process
relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada corporate gaming licensees, and Registered Corporations
that are affiliated with those operations, may be injurious to stable and
productive corporate gaming. The Nevada Commission has established a regulatory
scheme to ameliorate the potentially adverse effects of these business practices
upon Nevada's gaming industry and to further Nevada's policy to (i) ensure the
financial stability of corporate gaming licensees and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Registered Corporation can make exceptional repurchases of
voting securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Registered
Corporation's Board of Directors in response to a tender offer made directly to
the Registered Corporation's stockholders for the purposes of acquiring control
of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the state of Nevada and to the
counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly or annually and are based upon
either (i) a percentage of the gross revenues received; (ii) the number of
gaming devices operated; or (iii) the number of table games operated.
Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease by the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if they knowingly violate any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fail to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engage in activities that
are harmful to the state of Nevada or its ability to collect gaming taxes and
fees, or employ a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the ground of personal unsuitability.
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Non-gaming Regulations
The Company and its subsidiaries are subject to certain federal, state and
local, safety and health laws, regulations pertaining to operation of barges and
other marine laws, and regulations and ordinances that apply to non-gaming
businesses generally, such as the Clean Air Act, Clean Water Act, Occupational
Safety and Health Act, Resource Conservation Recovery Act and the Comprehensive
Environmental Response, Compensation and Liability Act. The Company believes
that it is currently in material compliance with such regulations. The coverage
and attendant compliance costs associated with such laws, regulations and
ordinances may result in future additional cost to the Company's operations.
EMPLOYEES
At March 25, 1999, Lakes had approximately 30 employees, two of whom are
"shared employees" between Grand and Lakes. Lakes believes its relations with
employees are positive.
RISK FACTORS
In addition to factors discussed elsewhere in this Annual Report on Form
10-K, the following are important factors that could cause actual results or
events to differ materially from those contained in any forward-looking
statement made by or on behalf of the Company.
INDEMNIFICATION OBLIGATIONS. Under the Distribution Agreement, Lakes and
Grand agreed to indemnify each other for liabilities retained by them in the
Distribution. Additionally, under the Agreement and Plan of Merger, dated as of
June 30, 1998 (the "Merger Agreement") by and among Hilton Hotels Corporation,
Park Place, Gaming Acquisition Corporation, Lakes and Grand, Lakes agreed to
indemnify Grand for (i) Grand's ongoing indemnification obligations to current
and former directors and officers of Grand and (ii) contingent liabilities
related to Stratosphere Corporation ("Stratosphere"). The availability of such
indemnities will be dependent upon the financial strength and creditworthiness
of Grand and Lakes, respectively. No assurance can be given that such entities
will be in a position to fund such indemnities should they be obligated to do so
in the future.
LAKES FUNDING OBLIGATION. As security to support Lakes' indemnification
obligations to Grand under each of the Distribution Agreement and the Merger
Agreement, Lakes agreed to deposit, in trust for the benefit of Grand, as a
wholly owned subsidiary of Park Place, an aggregate of $30 million to cover
various commitments and contingencies 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)
consisting of four annual installments of $7.5 million, payable at the end of
each year for a four year period subsequent to the effective date of the Merger
if the indemnification obligation still exists. Lakes' ability to satisfy this
funding obligation is materially dependent upon the continued success of its
operations and the general risks inherent in its business. In the event Lakes is
unable to satisfy its funding obligation, it would be in breach of its agreement
with Grand, possibly subjecting itself to additional liability for contract
damages, which could have a material adverse effect on Lakes' business and
results of operations.
HIGHLY REGULATED INDUSTRY. The ownership, management and operation of
gaming facilities are subject to extensive federal, state, provincial, tribal
and/or local laws, regulations, 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. Grand and Lakes have requested that the National
Indian Gaming Commission (the "NIGC") either approve the Distribution or
acknowledge that their approval is not required. There can be no assurance the
NIGC approval or any other required approvals will be secured on a timely basis,
if at all. See "Regulation."
STRATOSPHERE CORPORATION; PENDING LITIGATION. Grand and certain of its
current and former directors and officers are defendants in several lawsuits
related to Grand's former investment in Stratosphere. Stratosphere
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owns and operates the Stratosphere Tower, Casino & Hotel, a casino/hotel and
entertainment complex in Las Vegas which filed for reorganization under Chapter
11 of the Bankruptcy Code on January 27, 1997. On November 7, 1997, Stratosphere
filed a second amended proposed plan of reorganization with the Bankruptcy Court
which became effective on October 14, 1998 (the "Second Amended Plan"). Under
the Second Amended Plan, the secured portion of Stratosphere's outstanding first
mortgage notes were converted into 100% of the equity of the reorganized
Stratosphere and all of the common stock of Stratosphere outstanding prior to
the effective date of the Second Amended Plan was canceled. Grand beneficially
owned approximately 37% of the issued and outstanding common stock of
Stratosphere prior to its cancellation as a result of the Second Amended Plan
becoming effective.
Pursuant to the terms of the Distribution Agreement, any future liabilities
arising out of the various Stratosphere-related lawsuits were assumed by Lakes.
In addition other contingent liabilities related to or arising out of Grand's
non-Mississippi business (such as tribal loan guarantees, real property lease
guarantees for Lakes subsidiaries, and director and officer indemnity
obligations (see below)) were also assumed by Lakes. Although potential costs
associated with these various commitments and contingencies did not increase
solely as a result of the Distribution, given the numerous uncertainties
associated with litigation and the contingent nature of Lakes' various financial
commitments, Lakes is unable to quantify, within any reasonable range, its total
exposure if all or any of the pending litigation were to be resolved adversely
to Lakes' interests. Nor is Lakes able to assess the likelihood that it will be
required to perform on some or all of its contingent financial obligations.
Under Minnesota corporate law, Lakes is required, subject to certain
limitations and exclusions, to indemnify its current and former officers and
directors. Although Lakes has agreed to assume the liabilities related to
Stratosphere and the Stratosphere lawsuits, Lakes agreed under the Merger
Agreement to indemnify Grand for such liabilities and certain other pending
litigation. Accordingly, Lakes will bear the cost of defending itself, its
current and former directors and officers, and Grand and its current and former
officers and directors for any settlement or judgment of such matters. Although
these lawsuits are in their early stages and Lakes plans to defend itself
vigorously, there can be no assurance that the costs of defense and any
settlement or judgment will not have a material adverse effect on Lakes or, if
Lakes does not satisfy its indemnification obligations to Grand, on Grand.
OPERATING COVENANTS; DIVIDEND RESTRICTIONS. So long as Lakes is required to
indemnify Grand for certain specified liabilities, including (i) contingent
liabilities assumed by Lakes under the Distribution Agreement, (ii) ongoing
director and officer indemnification obligations and (iii) contingent
liabilities related to Stratosphere, 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
interest in Lakes, without the written consent of Park Place, which consent can
be given or withheld in Park Place's sole and absolute discretion.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. Lakes anticipates
that the cash it received in the Distribution, interest expected to be earned
thereon and its anticipated revenues will be sufficient to finance its
operations. There can be no assurance, however, that Lakes will not seek or
require additional capital at some point in the future through either public or
private financings. Such financings may not be available when needed on terms
acceptable to Lakes or at all. Moreover, any additional equity financings may be
dilutive to Lakes shareholders, and any debt financing may involve additional
restrictive covenants. An inability to raise such funds when needed might
require Lakes to delay, scale back or eliminate some of its expansion and
development goals, and might require Lakes to cease its operations entirely. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Lakes -- Capital Resources, Capital Spending and Liquidity."
COMPETITION. The gaming industry is highly competitive. Gaming activities
include traditional land-based casinos; river boat and dockside gaming; casino
gaming on Indian land; state-sponsored lotteries and video poker in restaurants,
bars and hotels; pari-mutuel betting on horse racing, dog racing and jai alai;
sports bookmaking; and card rooms. The Indian-owned casinos managed by Lakes
compete, and will in the future
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compete, with all these forms of gaming, and will compete with any new forms of
gaming that may be legalized in additional jurisdictions, as well as with other
types of entertainment.
In Louisiana, there are presently 14 licensed river boats in operation that
compete with Grand Casino Coushatta and Grand Casino Avoyelles, including
"Casino America" and "Players Lake Charles" and, to a lesser extent, "Binion's
Horseshoe Casino," "Casino Magic" and "Harrah's Shreveport."
Lakes also competes with other gaming companies for opportunities to
acquire legal gaming sites in emerging and established gaming jurisdictions and
for the opportunity to manage casinos on Indian land. Because the Distribution
resulted in the unavailability of historical cash flows and assets represented
by Grand's Mississippi business, Lakes' ability to compete for and develop
future gaming or other business opportunities will be restricted, both in the
size and number of development projects it can pursue. Many of Lakes'
competitors have more personnel and most have greater financial and other
resources than Lakes. Such competition in the gaming industry could adversely
affect Lakes' ability to attract customers and thus, adversely affect its
operating results. In addition, further expansion of gaming into new
jurisdictions could also adversely affect Lakes' business by diverting customers
from its managed casinos to competitors in such jurisdictions.
MANAGEMENT CONTRACTS OF LIMITED DURATION. Lakes is prohibited under the
Indian Gaming Regulatory Act of 1988 (the "IGRA") from having an ownership
interest in any casino it manages for Indian tribes. The management contracts
for the various Indian-owned casinos that Lakes manages for Indian tribes
generally have a term of seven years. The management contracts for Grand Casino
Avoyelles and Grand Casino Coushatta expire June 3, 2001 and January 16, 2002,
respectively. There can be no assurance that any of these management contracts
will be renewed upon expiration or approved by the NIGC upon any such renewal.
Lakes anticipates that any renewal of the Grand Casino Coushatta and Grand
Casino Avoyelles management contracts will be upon terms less favorable to
Lakes. The failure to renew Lakes' management contracts would result in the loss
of revenues to Lakes derived from such contracts, which would have a material
adverse effect on Lakes' results of operations.
The Coushatta Tribe and the Tunica-Biloxi Tribe each entered into
tribal-state compacts with the State of Louisiana on September 29, 1992. These
compacts were approved in November, 1992 by the Secretary of the Interior. Each
compact expires in November, 1999, but will automatically renew for an
additional seven year terms unless either the tribe or the State of Louisiana
delivers to the other written notice of non-renewal at least 180 days prior to
the applicable expiration date. Lakes' management agreements with the Tunica-
Biloxi Tribe and the Coushatta Tribe expire after November 1999. In the event
the compacts are not renewed, legal gaming will not be permitted at Grand Casino
Avoyelles or Grand Casino Coushatta. In the event that the compacts are renewed,
but Lakes' management contracts are not, Lakes will not operate the casinos at
those locations. The non-renewal of either the compacts or the management
contracts would result in the loss of revenues to Lakes derived from such
contracts, which would have a material adverse effect on Lakes' results of
operations. Currently, the management contracts for Grand Casino Coushatta and
Grand Casino Avoyelles generate all of Lakes' operating revenues. Without the
renewal of either or both of the existing management contracts or the
realization of new business opportunities or new management contracts, the non-
renewal of the Louisiana management contracts would have a material adverse
impact on Lakes' results of operations and financial condition. There can be no
assurance that these compacts will be renewed on terms and conditions acceptable
to either of the tribes.
MANAGEMENT CONTRACTS SUBJECT TO GOVERNMENTAL MODIFICATION. The NIGC has the
power to require modifications to Indian management contracts under certain
circumstances or to void such contracts or ancillary agreements including loan
agreements if the management company fails to obtain requisite approvals or to
comply with applicable laws and regulations. While Lakes believes that its
management contracts meet the requirements of the IGRA, NIGC has the right to
review each contract and has the authority to reduce the term of a management
contract or the management fee or otherwise require modification of the
contract, which could have an adverse effect on Lakes. Currently, the management
contracts (i) have not been reviewed or approved by NIGC and (ii) NIGC could
call them for review at any time, in which case NIGC may not approve the
contracts at all or may require modification prior to granting approval. In
addition, Lakes
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has made loans to Indian tribes in excess of the loan ceilings set forth in each
of the Indian management contracts. Under certain circumstances, these loans may
not be enforceable by Lakes. As of January 3, 1999, loan balances outstanding to
such tribes were approximately $33.7 million.
LIMITED RECOURSE AGAINST TRIBAL ASSETS. Lakes has made, and will make
substantial loans to tribes for the construction, development, equipment and
operations of casinos managed by Lakes. Lakes' only recourse for collection of
indebtedness from a tribe or money damages for breach or wrongful termination of
a management contract is from revenues, if any, from casino operations. Lakes
has subordinated, and may in the future subordinate, the repayment of these
loans to a tribe and other distributions due from a tribe (including management
fees) in favor of other obligations of the tribe to other parties related to the
casino operations. Accordingly, in the event of a default by a tribe under such
obligations, Lakes' loans and other claims against the tribe will not be repaid
until such default has been cured or the tribe's senior casino-related creditors
have been repaid in full.
DEPENDENCE ON KEY PERSONNEL. Lakes' success will depend largely on the
efforts and abilities of its senior corporate management, particularly Lyle
Berman, its Chairman and Chief Executive Officer and Thomas J. Brosig, its
President. Mr. Brosig is President -- Mid-South Region of Park Place. Under the
terms of his employment agreement with Park Place, Mr. Brosig is prohibited from
devoting more than 15% of his time to Lakes. The loss of the services of either
Mr. Berman or Mr. Brosig, or other members of senior corporate management could
have a material adverse effect on Lakes. Lakes does not have an employment
agreement with either Mr. Berman or Mr. Brosig, and has not obtained life
insurance policies on any of its officers.
LIMITED BASE OF OPERATIONS. Lakes' principal operations consist of the
management of two Indian-owned casinos. The combination of the relatively small
number of managed casinos and the potentially significant investment associated
with any new managed casino may cause the operating results of Lakes to
fluctuate significantly and adversely affect the profitability of Lakes. Due to
this relatively small number of current locations, poor operating results at any
one casino or a delay in the opening or non-opening of any future casinos could
materially affect the profitability of Lakes. Future growth in revenues and
profits will depend to a large extent on Lakes' ability to continue to increase
the number of its managed casinos.
ITEM 2. PROPERTIES
Corporate Office Facility
Pursuant to the terms of the Distribution Agreement, Grand has assigned to
Lakes, and Lakes has 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 and the
annual base rent is $768,300 plus building operating costs.
POLO PLAZA
Shark Club Parcel
A subsidiary of Lakes is the tenant under a ground lease (the "Shark Club
Lease") which has a term through July 31, 2046 unless sooner terminated in
accordance with the provisions thereof. The Shark Club Lease provides for base
rent in the initial amount of $65,000 per month, subject to adjustment each
lease year based on a cost of living formula and additional rent in the amount
of $6,500 per month if the parcel is used for a casino/hotel. In addition to the
base rent, Lakes must pay all taxes on and bear all costs of maintaining the
property. Grand Casinos also executed a guarantee in connection with the
execution of the Shark Club Lease by its former subsidiary.
The Shark Club Lease also includes a purchase option pursuant to which
Lakes can acquire the parcel at any time after August 1, 1999 at a formula
purchase price set forth in the Shark Club Lease, roughly equal to 120 times the
adjusted base monthly rent in effect at the time of the purchase. The Shark Club
lease also includes a landlord "put" option pursuant to which the landlord could
require the tenant to purchase the parcel at any time from and after August 1,
2000.
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In connection with the Merger, Lakes agreed with Park Place that Lakes will
either exercise, or cause one of its subsidiaries to exercise, the Shark Club
Lease purchase option prior to the earliest time when the landlord could require
Lakes (or Grand as the guarantor) to purchase the subject real estate.
Under the Shark Club Lease, Lakes is required to maintain the leased
property, including the building located thereon. Lakes has received a notice of
violation from the Clark County Department of Administrative Services for
alleged failure to remove debris from certain real property included within the
Polo Plaza development project. The same parcel of leased real property has been
damaged as a result of a fire on the premises. Pursuant to the Shark Club Lease,
Lakes is required to restore, replace or possibly demolish the leased facilities
as a result of the damage. The Shark Club Lease allows Lakes to demolish the
building, but would require that Lakes increase the security deposit from
$500,000 to $2.5 million in such event. Effective February 3, 1999, Lakes
executed an amendment to the Shark Club Lease that permits it to raze the
property without increasing its security deposit. In exchange. Lakes agreed to
waive the payment and accrual of interest on such security deposit.
Travelodge Parcel
A Lakes subsidiary is tenant under a ground lease (the "Travelodge Lease")
which commenced on June 17, 1996, and will (unless sooner terminated in
accordance with the provisions thereof) remain in effect until June 16, 2095.
The Travelodge Lease provides for a base rent (in the initial amount of $166,667
per month) that is adjusted each lease year based on a cost of living formula.
In addition to the base rent, the tenant must pay all taxes on and costs of
maintaining the leased property. Lakes has the option to purchase the leased
property during the 20th lease year for the purchase price of $30,000,000. Lakes
manages the hotel building located on the leased property. A third party had a
sublease interest in the leased property. That claimed interest was terminated
pursuant to an agreement between the third party and Lakes that provides for
payments by Lakes in the amount of $150,000 per quarter for a period of ten
years after such party surrendered possession of the property to Lakes. A
portion of the building located on the leased property is subleased, which Lakes
has the right to terminate after January 1, 1999 by making certain prescribed
payments, and complying with certain other conditions stated, in the sublease.
Polo Plaza Shopping Center Parcel
Nevada Resort Properties Polo Plaza Limited Partnership (the "Partnership")
owns and operates the Polo Plaza Shopping Center. Lakes has a 49% limited
partnership interest in the Partnership. Lakes has the right to purchase the
remaining 51% interest in the Partnership at any time prior to October 3, 1999
for approximately $3.3 million. In June 1997, Grand, as predecessor to Lakes,
entered into an agreement with the Partnership that granted it the right to
negotiate, on behalf of the Partnership, agreements for the termination of then
existing leases for the shopping center property. The Partnership also agreed
that each new lease for the shopping center property would include a provision
allowing the landlord to terminate such lease on not less than 90 days notice,
with no termination fee. Lakes assumed responsibility for termination and
relocation costs to be paid by the Partnership under tenant termination
agreements, and agreed to reimburse the Partnership for certain rents and
certain other amounts lost as a result of such termination agreements.
The holder of the first deed of trust that currently encumbers the shopping
center property has asserted that the loan secured by that deed of trust is in
default because the Partnership has permitted the termination of tenant leases
pursuant to tenant termination agreements negotiated by the Lakes subsidiary.
The Partnership has in turn asserted that Lakes is responsible for curing the
alleged default. Lakes is discussing the assertions with the holder of the first
deed of trust and the Partnership. Lakes is currently negotiating with the
Partnership to purchase the shopping center land and building in lieu of
exercising Lakes' right to purchase the remaining 51% interest in the
Partnership. In addition, Lakes has loaned the partnership approximately $6.2
million to bring the mortgage loan current.
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Cable Parcel
Pursuant to a November 1, 1997 Option Agreement, Grand acquired an option
to purchase approximately 4.5 acres of land located near the Polo Plaza Shopping
Center anytime prior to October 31, 2000. As consideration for the option, Lakes
pays the landowner a non-refundable monthly option payment of $80,000. The
option agreement states that the purchase price for the land is $18,000,000.
ITEM 3. LEGAL PROCEEDINGS
In January 1997, Stratosphere and its wholly owned operating subsidiary
filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. On
November 7, 1997, Stratosphere filed its Second Amended Plan which was declared
effective on October 14, 1998. Prior to the effectiveness of the Second Amended
Plan, Grand owned approximately 37% of the issued and outstanding common stock
of Stratosphere. Under the Second Amended Plan, all shares of Stratosphere
common stock that were outstanding prior to the effective date of the Second
Amended Plan have been canceled. In addition, the secured portion of
Stratosphere's first mortgage notes that were outstanding prior to the effective
date have been exchanged for a total of 2,030,000 shares of new common stock.
Pursuant to the terms of the Distribution Agreement, Lakes assumed, among other
liabilities, certain known and contingent liabilities associated with all
pending, threatened or future litigation related to the Stratosphere litigation
described below. Although Lakes assumed such liabilities, because Grand remains
liable for claims by plaintiffs in such litigation and for indemnifying Grand's
former officers and directors with respect to such litigation, Lakes agreed,
under the term of the Merger Agreement, to indemnify Grand and Grand's current
and former officers and directors against such liabilities. See "Certain Factors
Indemnification Obligations" -- "Stratosphere Corporation; Pending Litigation."
The following summaries describe certain known legal proceedings to which
Grand is a party and which Lakes has assumed, and/or must indemnify Grand, in
connection with the Distribution.
STRATOSPHERE SHAREHOLDERS LITIGATION -- FEDERAL COURT
In August 1996, a complaint was filed in the U.S. District Court for the
District of Nevada -- Michael Ceasar, et al v. Stratosphere Corporation, et al
- -- against Stratosphere and others, including Grand. The complaint was filed as
a class action, and sought relief on behalf of Stratosphere shareholders who
purchased their stock between December 19, 1995 and July 22, 1996. The complaint
included allegations of misrepresentations, federal securities law violations
and various state law claims.
In August through October 1996, several other nearly identical complaints
were filed by various plaintiffs in the U.S. District Court for the District of
Nevada.
The defendants in the actions submitted motions requesting that all of the
actions be consolidated. Those motions were granted in January 1997, and the
consolidated action is entitled In re: Stratosphere Corporation Securities
Litigation -- Master File No. CV-S-96-00708 PMP (RLH).
In February 1997, the plaintiffs filed a consolidated and amended complaint
naming various defendants, including Grand and certain current and former
officers and directors of Grand. The amended complaint includes claims under
federal securities laws and Nevada laws based on acts alleged to have occurred
between December 19, 1995 and July 22, 1996.
In February 1997, various defendants, including Grand and Grand's officers
and directors named as defendants, submitted motions to dismiss the amended
complaint. Those motions were made on various grounds, including Grand's claim
that the amended complaint failed to state a valid cause of action against Grand
and Grand's officers and directors.
In May 1997, the court dismissed the amended complaint. The dismissal order
did not allow the plaintiffs to further amend their complaint in an attempt to
state a valid cause of action.
In June 1997, the plaintiffs asked the court to reconsider its dismissal
order, and to allow the plaintiffs to submit a second amended complaint in an
attempt to state a valid cause of action. In July 1997, the court allowed the
plaintiffs to submit a second amended complaint.
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In August 1997, the plaintiffs filed a second amended complaint. In
September 1997, certain of the defendants, including Grand and Grand's officers
and directors named as defendants, submitted a motion to dismiss the second
amended complaint. The motion was based on various grounds, including Grand's
claim that the second amended complaint failed to state a valid cause of action
against Grand and those officers and directors.
In April 1998, the Court granted Grand's motion to dismiss, in part, and
denied the motion in part. Thus, the plaintiffs are pursuing the claims in the
second amended complaint that survived the motion to dismiss.
In June 1998, certain of the defendants, including Grand and Grand's
officers and directors named as defendants, submitted a motion for summary
judgment seeking an order that such defendants are entitled to judgment as a
matter of law. As of December 1998, the plaintiffs completed fact discovery
related to the issues raised by the summary judgment motion. Expert discovery is
expected to be completed in March of 1999. The Court will not decide the motion
until after such discovery is completed and the parties have submitted their
respective arguments regarding the motion, which Lakes' attorneys anticipate
will be in June of 1999.
STRATOSPHERE SHAREHOLDERS LITIGATION -- NEVADA STATE COURT
In August 1996, a complaint was filed in the District Court for Clark
County, Nevada -- Victor M. Opitz, et al v. Robert E. Stupak, et al -- Case No.
A363019 -- against various defendants, including Grand. The complaint seeks
relief on behalf of Stratosphere Corporation shareholders who purchased stock
between December 19, 1995 and July 22, 1996. The complaint alleges
misrepresentations, state securities law violations and other state claims.
Grand and certain defendants submitted motions to dismiss or stay the state
court action pending resolution of the federal court action described above. The
court has stayed further proceedings pending the resolution of In re:
Stratosphere Securities Litigation.
GRAND CASINOS, INC. SHAREHOLDERS LITIGATION
In September and October 1996, two actions were filed by Grand shareholders
in the U.S. District Court for the District of Minnesota against Grand and
certain of Grand's current and former directors and officers.
The complaints allege misrepresentations, federal securities law violations
and other claims in connection with the Stratosphere project.
The actions have been consolidated as In re: Grand Casinos, Inc. Securities
Litigation -- Master File No. 4-96-890 -- and the plaintiffs filed a
consolidated complaint. The defendants submitted a motion to dismiss the
consolidated complaint, based in part on Grand's claim that the consolidated
complaint failed to properly state a cause of action.
In December 1997, the court granted Grand's motion to dismiss in part, and
denied the motion in part. Thus, the plaintiffs are pursuing the claims in the
consolidated complaint that survived Grand's motion to dismiss. Discovery in the
action has begun.
The defendants have submitted a motion for summary judgment seeking an
order that the defendants are entitled to judgment as a matter of law. The
plaintiffs are currently engaged in discovery related to the issues raised by
the summary judgment motion. The court will not decide the motion until after
such discovery is complete and the parties have submitted their respective
arguments regarding the motion.
In early February 1999, the plaintiffs filed a motion for leave to amend
the complaint in this action to include, as defendants in the case, both the
Company and Park Place. The defendants seek to include the Company under the
theory that the Company is a proper party to the lawsuit as a result of the
assumption by the Company of all of Grand's liabilities with respect to the
Stratosphere project and the indemnification agreement obligations of the
Company with respect to Park Place. The Company agreed to assume certain of
Grand's liabilities and entered into an indemnification agreement with Park
Place in connection with the Merger.
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DERIVATIVE LITIGATION
In February 1997, certain shareholders of Grand brought an action in the
Hennepin County, Minnesota District Court -- Lloyd Drilling, et al v. Lyle
Berman, et al -- Court File No. MC97-002807 -- against certain current and
former officers and directors of Grand. The plaintiffs allege that those
officers and directors breached certain fiduciary duties to the shareholders of
Grand as a result of certain transactions involving the Stratosphere project.
Pursuant to Minnesota law, Grand's Board of Directors appointed an independent
special litigation committee to evaluate whether Grand should pursue the claims
made in the action against the officers and directors. The special litigation
committee completed its evaluation in December 1997, and filed a report with the
court recommending that such claims not be pursued.
Grand provided the defense for Grand's current and former officers and
directors who are defendants in the action pursuant to Grand's indemnification
obligations to such defendants.
In January 1998, Grand submitted a motion for summary judgment based on the
special litigation committee's report. In May 1998, the court granted the
motion, thereby dismissing the plaintiffs' claims. In August 1998, the
plaintiffs appealed the Court's ruling. On March 9, 1999, the Minnesota Court of
Appeals affirmed the dismissal of the plaintiffs' claims. The plaintiffs have
until April 8, 1999, to seek further review of the ruling by the Minnesota
Supreme Court.
SLOT MACHINE LITIGATION
In April 1994, William H. Poulos brought an action in the U.S. District
Court for the Middle District of Florida, Orlando Division -- William H. Poulos,
et al v. Caesars World, Inc. et al -- Case No. 39-478-CIV-ORL-22 -- in which
various parties (including Grand) alleged to operate casinos or be slot machine
manufacturers were named as defendants. The plaintiff sought to have the action
certified as a class action.
A subsequently filed Action -- William Ahearn, et al v. Caesars World, Inc.
et al--Case No. 94-532-CIV-ORL-22 -- made similar allegations and was
consolidated with the Poulos action.
Both actions included claims under the federal Racketeering-Influenced and
Corrupt Organizations Act and under state law, and sought compensatory and
punitive damages. The plaintiffs claimed that the defendants are involved in a
scheme to induce people to play electronic video poker and slot machines based
on false beliefs regarding how such machines operate and the extent to which a
player is likely to win on any given play.
In December 1994, the consolidated actions were transferred to the U.S.
District Court for the District of Nevada.
In September 1995, Larry Schreier brought an action in the U.S. District
Court for the District of Nevada -- Larry Schreier, et al v. Caesars World, Inc.
et al -- Case No. CV-95-00923-DWH (RJJ).
The plaintiffs' allegations in the Schreier action were similar to those
made by the plaintiffs in the Poulos and Ahearn actions, except that Schreier
claimed to represent a more precisely defined class of plaintiffs than Poulos or
Ahearn.
In December 1996, the court ordered the Poulos, Ahearn and Schreier actions
consolidated under the title William H. Poulos, et al v. Caesars World, Inc., et
al -- Case No. CV-S-94-11236-DAE (RJJ) -- (Base File), and required the
plaintiffs to file a consolidated and amended complaint. In February 1997, the
plaintiffs filed a consolidated and amended complaint.
In March 1997, various defendants (including Grand) filed motions to
dismiss or stay the consolidated action until the plaintiffs submitted their
claims to gaming authorities and those authorities considered the claims
submitted by the plaintiffs.
In December 1997, the court denied all of the motions submitted by the
defendants, and ordered the plaintiffs to file a new consolidated and amended
complaint. That complaint has been filed. Grand has filed its answer to the new
complaint.
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The plaintiffs have filed a motion seeking an order certifying the action
as a class action. Grand and certain of the defendants have opposed the motion.
The Court has not ruled on the motion.
STRATOSPHERE NOTEHOLDER COMMITTEE BANKRUPTCY COURT ACTION
In June 1997, the Official Committee of Noteholders (the "Committee") in
the Chapter 11 bankruptcy proceeding for Stratosphere filed a motion with the
U.S. Bankruptcy Court for the District of Nevada (the "Bankruptcy Court") by
which the Committee sought Bankruptcy Court approval for assumption (on behalf
of Stratosphere's bankruptcy estate) of the March 1995 Standby Equity Commitment
(the "Standby Equity Commitment") between Stratosphere and Grand.
In the motion, the Committee sought Bankruptcy Court authorization to
compel Grand to fund up to $60 million in "capital contributions" to
Stratosphere over three years, based on the Committee's claim that such
"contributions" are required by the Standby Equity Commitment.
Grand opposed the Committee's motion. Grand asserted, in its opposition to
the Committee's motion, that the Standby Equity Commitment is not enforceable in
the Stratosphere bankruptcy proceeding as a matter of law.
The Bankruptcy Court held a preliminary hearing on the Committee's motion
in June 1997, and an evidentiary hearing in February 1998 on the issues raised
by the Committee's motion and Grand's opposition to that motion. In February
1998, the Bankruptcy Court denied the Committee's motion, and determined that
the Standby Equity Commitment cannot be assumed (or enforced) by Stratosphere
under applicable bankruptcy law.
STANDBY EQUITY COMMITMENT LITIGATION
In September 1997, the Stratosphere Trustee under the indenture pursuant to
which Stratosphere issued its first mortgage notes filed a complaint in the U.S.
District Court for the District of Nevada -- IBJ Schroeder Bank & Trust Company,
Inc. v. Grand Casinos, Inc. -- File No. CV-S-97-01252-DWH (RJJ) -- naming Grand
as defendant.
The complaint alleges that Grand failed to perform under the Standby Equity
Commitment entered into between Stratosphere and Grand in connection with
Stratosphere's issuance of such first mortgage notes in March 1995. The
complaint seeks an order compelling specific performance of what the Committee
claims are Grand's obligations under the Standby Equity Commitment. The
Stratosphere Trustee filed the complaint in its alleged capacity as a third
party beneficiary under the Standby Equity Commitment.
Discovery and motion practice is pending and Lakes will continue to defend
this lawsuit diligently.
STRATOSPHERE PLAN OF REORGANIZATION
The Second Amended Plan contemplates the formation of a new limited
liability company which will own and pursue certain alleged claims and causes of
action that Stratosphere and other persons may have against numerous
third-parties, including Grand and/or officers and/or directors of Grand. The
Second Amended Plan contemplates capitalizing this new limited liability company
with an investment of $5 million. As of March 25, 1999, Grand has not been
served with any such litigation.
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 as management fees and for costs and
expenses under a management agreement between Stratosphere and Grand, and (ii)
Grand Media for electronic equipment purchased by Stratosphere from Grand Media.
Stratosphere claims in its complaint that such amounts are recoverable by
Stratosphere as preferential payments under bankruptcy law.
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In May 1998, Grand responded to Stratosphere's complaint. That response
denies that Stratosphere is entitled to recover the amounts described in the
complaint. Discovery is proceeding.
TULALIP TRIBES LITIGATION
In 1995, Grand entered into discussions with Seven Arrows, L.L.C. ("Seven
Arrows"), a Delaware limited liability company, regarding possible participation
by Grand in a proposed casino resort development on land in the State of
Washington held in trust by the United States for the Tulalip Tribes. Grand and
Seven Arrows entered into a letter of intent providing for the negotiation of a
revision to the Seven Arrows limited liability company agreement by which Grand
(or a subsidiary of Grand) would become a member of Seven Arrows. Those
negotiations were not completed, and no revision to the limited liability
company agreement was signed.
During the negotiations, Grand entered into an agreement (the "Advance
Agreement") with Seven Arrows and the Tulalip Tribes. The Advance Agreement
provided for the loan by Grand and Seven Arrows of certain amounts to the
Tulalip Tribes upon the satisfaction of certain conditions. Grand contends that
those conditions were never satisfied. Neither Grand nor Seven Arrows advanced
any amount under the Advance Agreement.
In April 1996, the Tulalip Tribes brought a legal action in Tulalip Tribal
Court -- Tulalip Tribes of Washington v. Seven Arrows LLC, et al. -- Case No.
TUL-Ci4/96-499 -- against Seven Arrows and Grand. The action sought various
remedies, including (i) a declaration that a lease and sublease between the
Tulalip Tribes and Seven Arrows for the land on which the casino resort was
proposed were rightfully terminated; (ii) damages for breach of the lease, the
sublease, and the Advance Agreement; and (iii) a declaration that the lease,
sublease, and Advance Agreement are void.
Because Grand was not a party to the lease or the sublease, Grand contended
in the tribal court action that the only claim against Grand was for breach of
the Advance Agreement; that Grand did not breach the Advance Agreement; and that
any damages sustained by the Tulalip Tribes as a result of any such breach are
not material.
In May 1996, Seven Arrows and Grand brought a legal action in the U.S.
District Court for the Western District of Washington -- Seven Arrows LLC, et
al. V. Tulalip Tribes of Washington -- Case No. C96-0709Z -- against the Tulalip
Tribes. Seven Arrows sought in that action certain remedies against the Tulalip
Tribes, including damages, and Grand sought rescission of the Advance Agreement.
Since June 1996, Seven Arrows, Grand and the Tulalip Tribes have been
engaged in disputes in both the tribal court and the federal court regarding
which court has jurisdiction over the various claims made in the two legal
actions. In July 1998, Seven Arrows, Grand, and the Tulalip Tribes entered into
a partial settlement agreement that resolved the jurisdictional dispute. In
accordance with the partial settlement agreement, all claims between the parties
must now be submitted to and decided by the federal court.
Pursuant to the partial settlement agreement, Seven Arrows filed a second
amended complaint in the federal action. Among other things, Seven Arrows seeks
damages from the Tulalip Tribes for lost profits of up to $15 million and for
recovery of sums paid to the Tribes between $2 million and $3 million. Grand is
not a party to the second amended complaint.
On September 30, 1998, the Tulalip Tribes answered, counterclaimed against
Seven Arrows, and filed and served a complaint in the pending federal action
against Grand. The complaint against Grand contains several counts, including
(i) a request for judgment declaring that the tribe's termination of the
agreements was effective and quieting title in the land; (ii) a claim for breach
of contract and breach of the implied covenant of good faith that alleges that
Grand is liable on the lease, sublease, and Advance Agreement based upon (a)
Grand's alleged status as a partner of Seven Arrows; (b) Grand's alleged status
as managing and operating agent of Seven Arrows; and (c) Grand's execution of
the Advance Agreement; (iii) a claim for negligent misrepresentation claiming,
in essence, that representations of Grand personnel induced the Tribes to
continue to honor the lease, sublease, and Advance Agreement and thereby to
incur expenses they would not have incurred otherwise; (iv) a claim that Grand,
by purporting to act for and with the authority of Seven
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Arrows, stands as warrantor and surety of Seven Arrows's obligations; and (v) a
claim for estoppel. Each claim for damages seeks the sum of $856,000 for
out-of-pocket expenses and for "lost profits damages" in an amount to be proved
at trial.
Grand answered this complaint January 15, 1999. Grand does not oppose the
Tribe's effort to quiet title to its land (the first claim). Grand denies that
it is factually or legally liable for the obligations or liabilities of Seven
Arrows under the lease and sublease. Grand continues to contend that, as to the
Tribe, its obligations, if any, are limited to those stated in the Advance
Agreement; that it did not breach the Advance Agreement; and that the Tribe's
damages for such breach, if any, are minimal (the second, fourth, and fifth
claims). Grand denies that it is liable for negligent misrepresentation (the
third claim). Grand also filed a counterclaim against the Tribe on January 15,
1999, seeking rescission of the Advance Agreement and damages from the Tribe
based upon the Tribe's breach of contract and breach of the covenant of good
faith and fair dealing. The Tribe denies the counterclaim.
On December 22, 1998, Seven Arrows answered the counterclaim of the Tribe
and asserted a complaint against Grand. Seven Arrows' complaint against Grand
alleges (a) that Grand agreed in writing not to take or omit any action that
would excuse the Tribe from its obligations to Seven Arrows or that would cause
Seven Arrows to be liable to the Tribe; (b) that if the Tribe's allegations are
correct, Grand acted as an agent of Seven Arrows and, as such, owed Seven Arrows
a fiduciary duty; and (c) that if the Tribe's allegations are correct, Grand was
a "partner" of Seven Arrows and, as such, owed Seven Arrows a fiduciary duty. If
the Tribe's allegations regarding certain acts, omissions, or representations of
the Company are correct and, as a result, Seven Arrows does not recover against
the Tribe, then Seven Arrows alleges that Grand is liable either for breach of
contract or breach of fiduciary duty in an amount equal to the amount Seven
Arrows would have recovered from the Tribe absent such acts, omissions, or
representations. Grand has not yet answered Seven Arrows's complaint but intends
to deny the allegations in their entirety and to defend the claim vigorously.
Discovery has begun and a three-week bench trial has been set to commence
November 1, 1999. Grand's liability for damages to all parties in the aggregate
cannot exceed $15 million pursuant to the partial settlement agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Lakes became a stand-alone, publicly held and publicly traded company as a
result of the Grand Distribution which was effected on December 31, 1998. The
fourth quarter of Lakes' fiscal year ended on Sunday, January 3, 1999 and the
Common Stock did not begin trading on the Nasdaq National Market under the
symbol LACO until Monday, January 4, 1999.
For the period from January 4, 1999 through March 24, 1999 the high and low
sales prices per share of the Company's Common Stock are indicated below, as
reported on the Nasdaq National Market:
HIGH DATE LOW DATE
---- ---- --- ----
$12.375 1/6/99 $7.875 3/24/99
On March 24, 1999, the last reported sale price for the Common Stock was
$8.25 per share. As of March 24, 1999, the Company had approximately 1,268
shareholders of record.
The Company has never paid any cash dividends with respect to its Common
Stock and the current policy of the Board of Directors is to retain any earnings
to provide for the growth of the Company so long as Lakes is required to
indemnify Grand, as a subsidiary of Park Place, for certain specified
liabilities, 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 interest in Lakes
without the written consent of Park Place which consent can be given or withheld
in Park Place's sole and absolute discretion. Subject to the foregoing dividend
restrictions, the payment of cash dividends in the future, if any, will be at
the discretion of the Board of Directors and will depend upon such factors as
earnings levels, capital requirements, the Company's overall financial condition
and any other factors deemed relevant by the Board of Directors. See "Risk
Factors -- Operating Covenants -- Dividend Restrictions."
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ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data presented below should be read in conjunction
with the Financial Statements and notes thereto included elsewhere in this Form
10-K, and in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Form 10-K.
FISCAL YEARS ENDED OR AS OF:
------------------------------------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29, DECEMBER 31, JANUARY 1,
1999 1997 1996 1995 1995
---------- ------------ ------------ ------------ ----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
LAKES HISTORICAL
RESULTS OF OPERATIONS:
Total revenue $ 92 $ 79 $ 77 $ 69 $ 23
Total operating income 76 70 60 58 16
Earnings (loss) from operations 61 45 (109)(2) 41 13
Net Earnings (loss) per share --
basic 5.80 4.32 (10.46)(2) 4.81 1.60
Net Earnings (loss) per share --
diluted 5.71 4.20 (10.46)(2) 4.65 1.60
OTHER OPERATING DATA:
EBITDA(1) 78 71 61 60 16
BALANCE SHEET:
Unrestricted Cash and cash
equivalents $ 57 $ 33 $ 34 $ 33 $ 4
Total assets 161 132 114 233 171
Total debt 1 1 1 1 4
Shareholders' equity 132 119 104 229 142
- ---------------
(1) 1998 results include $36.8 million in revenues from the management contracts
for Grand Casino Mille Lacs and Grand Casino Hinckley that concluded during
1998. The Company's revenues and earnings will not include contributions
from these operations going forward. EBITDA is earnings before interest,
taxes, depreciation and amortization, which can be computed by adding
depreciation and amortization to operating income. EBITDA also excludes the
$161 million write off of Grand's investment in Stratosphere Corporation.
EBITDA is presented supplementally because management believes it allows for
a more complete analysis of results of operations. This information should
not be considered as an alternative to any measure of performance as
promulgated under generally accepted accounting principles (such as
operating income or income from continuing operations) nor should it be
considered as an indicator of the overall financial performance of Lakes.
The calculations of EBITDA may be different from the calculations used by
other companies and therefore comparability may be limited. Historical
depreciation and amortization for Lakes for the fiscal years ended January
3, 1999, December 28, 1997, December 29, 1996, December 31, 1995 and January
1, 1995 totaled $2 million, $1 million, $1 million, $2 million, and $0.2
million, respectively.
(2) Includes a non-recurring non-cash $161 million charge related to the
write-off of Lakes' investment in Stratosphere Corporation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Lakes Gaming, 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 Casinos").
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Pursuant to the terms of a Distribution Agreement entered into between Grand and
Lakes and dated as of December 31, 1998 (the "Distribution Agreement"), Grand
Casinos shareholders received .25 shares of Lakes Common Stock for each share
held in Grand Casinos.
Immediately following the Distribution, Grand Casinos merged with a
subsidiary of Park Place Entertainment Corporation, a Delaware corporation
("Park Place"), pursuant to which Grand Casinos became a wholly owned subsidiary
of Park Place (the "Merger"). Grand Casinos shareholders received one share of
Park Place common stock in the Merger for each share they held in Grand Casinos.
As a result of the Distribution, Lakes operates the Indian casino
management business and holds various other assets previously owned by Grand.
The Company's revenues are derived almost exclusively from management fees.
Lakes manages two land-based, Indian-owned casinos in Louisiana: Grand Casino
Avoyelles, in Marksville, Louisiana ("Grand Casino Avoyelles"), owned by the
Tunica-Biloxi Tribe of Louisiana (the "Tunica-Biloxi Tribe") and Grand Casino
Coushatta, in Kinder, Louisiana ("Grand Casino Coushatta"), owned by the
Coushatta Tribe of Louisiana (the "Coushatta Tribe"). Both management contracts
expire seven years from the date the casino opened.
For a portion of fiscal 1998, and prior to the Distribution, Grand also had
management contracts for Indian-owned casinos located at Grand Casino Hinckley
and Grand Casino Mille Lacs in Minnesota. The management contract at Grand
Casino Mille Lacs expired at the end of the 1st quarter of 1998, and the
management of Grand Casino Hinckley ended in December 1998, with the buyout of
the remaining contract term.
Lakes develops, constructs and manages casinos and related hotel and
entertainment facilities in emerging and established gaming jurisdictions.
Lakes' revenues are derived from management fee income from Grand Casino
Avoyelles and Grand Casino Coushatta. Lakes commenced operations in September
1990, and opened its first casino, Grand Casino Mille Lacs, in April 1991. Grand
Casino Hinckley commenced operations in May 1992, Grand Casino Avoyelles
commenced operations in June 1994 and Grand Casino Coushatta commenced
operations in January 1995.
Pursuant to the Avoyelles and Coushatta management contracts, Lakes
receives a fee based on the net distributable profits (as defined in the
contracts) generated by Grand Casino Avoyelles and Grand Casino Coushatta.
Lakes' limited operating history may not be indicative of Lakes' future
performance. In addition, a comparison of results from year to year may not be
meaningful due to the opening of new facilities during each year. Lakes' growth
strategy contemplates the expansion of existing operations and the pursuit of
opportunities to develop and manage additional gaming facilities. 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.
Earlier this year, the Louisiana legislature considered various proposals
for state constitutional amendments and/or legislation that would impose certain
taxes, including excise taxes, on certain activities conducted on Indian
reservations. Some of the proposals were to become effective after the
expiration dates of the existing compacts between the State of Louisiana and the
Indian tribes that own and operate casinos in the State of Louisiana. None of
the proposals was adopted.
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto for the years ended
January 3, 1999, December 28, 1997, and December 29, 1996.
RESULTS OF OPERATIONS
Lakes is prohibited by the IGRA from having an ownership interest in any
casino it manages for Indian tribes. The management contracts for the various
Indian-owned casinos that the Company manages for Indian tribes generally have a
term of seven years. As noted above, the management contacts for Grand Casino
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Avoyelles and Grand Casino Coushatta expire June 3, 2001 and January 16, 2002,
respectively. There can be no assurance that any of these management contracts
will be renewed upon expiration or approved by NIGC upon any such renewal. The
failure to renew the Lakes management contracts would result in the loss of
revenues to Lakes derived from such contracts, which would have an adverse
effect on Lakes' results of operations. The Coushatta Tribe and the
Tunica-Biloxi Tribe each entered into tribal-state compacts with the State of
Louisiana on September 29, 1992. These compacts were approved in November 1992
by the Secretary of the Interior. Each compact expires in November 1999, but
will automatically renew for additional seven year terms unless either the tribe
or the State of Louisiana delivers to the other written notice of non-renewal at
least 180 days prior to the applicable expiration date. Lakes' management
agreements with the Tunica-Biloxi Tribe and the Coushatta Tribe expire after
November 1999. In the event the compacts are not renewed, gaming will not be
permitted at Grand Casino Avoyelles of Grand Casino Coushatta. There can be no
assurance that these compacts will be renewed on terms and conditions acceptable
to either of the tribes.
Revenues are calculated in accordance with generally accepted accounting
principles and are presented in a manner consistent with industry practice. Net
distributable profits from Grand Casino Avoyelles and Grand Casino Coushatta,
are computed using a modified cash basis of accounting in accordance with the
management contracts. The effect of the use of the modified cash basis of
accounting is to accelerate the write-off of capital equipment and leased
assets, which thereby impacts the timing of net distributable profits.
FISCAL YEAR ENDED JANUARY 3, 1999 COMPARED TO FISCAL YEAR ENDED DECEMBER 28,
1997
Earnings per Common Share and Net Earnings. For the fiscal year ended
January 3, 1999 basic and diluted earnings per common share were $5.80 and $5.71
respectively. This compares to basic and diluted earnings of $4.32 and $4.20 per
share for the fiscal year ended December 28, 1997. Earnings increased $16
million to $61.2 million for the fiscal year ended January 3, 1999 compared to
the same period in the prior year, primarily due to increased management fee
income from each of the casino operations.
Revenues. Grand Casino Mille Lacs, Grand Casino Hinckley, Grand Casino
Avoyelles and Grand Casino Coushatta generated $92.3 million in management fee
income during the fiscal year ended January 3, 1999 as compared to $78.5 million
for the prior year's comparable period. Gross revenue increases at Grand Casino
Hinckley, Grand Casino Avoyelles and Grand Casino Coushatta offset the fact that
the management contract for Grand Casino Mille Lacs expired at the end of the
first quarter. Contributing to the increases was the early buyout of the
Management Agreement for Grand Casino Hinckley by the Mille Lacs Band of Ojibwe
in December, 1998. Under the early buyout agreement, the Company was compensated
for the management fees it would have received had it managed Grand Casino
Hinckley through the original contract expiration date which was May, 1999. Also
contributing to the increases were a 378-room hotel at Grand Casino Hinckley,
which opened in November of 1997, and a special events center and RV resort at
Grand Casino Avoyelles, which opened during the first quarter of 1998.
1998 results include $36.8 million in revenues from the management
contracts for Grand Casino Mille Lacs and Grand Casino Hinckley that concluded
during 1998. The Company's revenues and earnings will not include contributions
from these operations going forward.
Costs and Expenses. Total costs and expenses were $16.4 million for the
fiscal year ended January 3, 1999 compared to $8.8 million for the same period
in the prior year. Selling, general, and administrative expenses increased in
the amount of $7.1 million from $7.9 million for the fiscal year ended December
28, 1997 to $15 million for the fiscal year ended January 3, 1999 due to legal,
professional and other costs associated with separating Lakes from Grand.
Other. Interest income was $5.6 million and $5.9 million for the fiscal
years ended January 3, 1999 and December 28, 1997, respectively. Interest
expense was $0.1 million for both periods.
A deferred tax asset was recorded in 1996 when the Company set up a reserve
allowance due to uncertainty related to the collectibility of the note
receivable from Stratosphere. However, a full valuation allowance was created
for the deferred tax asset and no income tax benefit was recognized at that
time. Upon writing off the receivable and realizing the tax deduction in 1998,
the Company reversed the deferred tax asset
26
27
valuation allowance, resulting in the recognition of a $17.3 million income tax
benefit. Under the terms of its tax sharing agreement with Grand, any further
tax benefits relating to capital losses resulting from the Company's write-off
of its investment in Stratosphere will be shared equally by Lakes and Park Place
up to a benefit of approximately $12 million to Lakes.
FISCAL YEAR ENDED DECEMBER 28, 1997 COMPARED TO DECEMBER 29, 1996
Earnings per Common Share and Net Earnings. For the year ended December 28,
1997, basic and diluted earnings per common share were $4.32 and $4.20,
respectively. For the year ended December 29, 1996 basic and diluted loss per
common share was $(10.46) per share. This includes a charge of $15.48 per
weighted average common share outstanding related to the write-down of Grand's
former investment in Stratosphere. Earnings for the year ended December 28, 1997
were $45.2 million compared to a loss of $(108.7) million (which includes a $161
million write-down of Grand's former investment in Stratosphere) for the prior
year's comparable period.
Revenues. For the year ended December 28, 1997 management fee income
totaled $78.5 million. This represents an increase of $1.2 million from
management fee income of $77.3 million for the year ended December 29, 1996.
Costs and Expenses. For the year ended December 28, 1997 selling, general,
and administrative expenses decreased $8.3 million from $16.3 million to $7.9
million. The $7.9 million includes approximately $3.2 million in Stratosphere
litigation reserves. Of the $16.3 million incurred for the year ended December
29, 1996, approximately $11.4 million is related to litigation accruals and
project write-downs.
Other. Interest income for the year ended December 28, 1997 remained
approximately the same at $5.9 million compared to the same period in the prior
year.
CAPITAL RESOURCES, CAPITAL SPENDING, AND LIQUIDITY
At January 3, 1999 Lakes had $61.8 million in restricted and unrestricted
cash and cash equivalents. The cash balances are planned to be used for loans to
current tribal partners to help develop existing operations, the pursuit of
additional gaming opportunities, and settlement of pending litigation matters.
For the years ended January 3, 1999, December 28, 1997 and December 29,
1996 net cash provided by operating activities totaled $85.8, $35.8 and $62.5
million, respectively. For the years ended January 3, 1999, December 28, 1997
and December 29, 1996, proceeds from repayment of notes receivable amounted to
$6.6, $6.1 and $10.6 million, respectively. Also during these periods, payments
for land held for development amounted to $11.2, $13.2 and $2.3 million,
respectively.
As security to support Lakes' indemnification obligations to Grand under
each of the Distribution Agreement and the Merger Agreement, and as a condition
to the consummation of the Merger, Lakes agreed to deposit, in trust for the
benefit of Grand, as a wholly owned subsidiary of Park Place, an aggregate of
$30 million, consisting of four annual installments of $7.5 million, on each
annual anniversary of the Distribution and Merger. Lakes' ability to satisfy
this funding obligation is materially dependent upon the continued success of
its operations and the general risks inherent in its business. In the event
Lakes is unable to satisfy its funding obligation, it would be in breach of its
agreement with Grand, possibly subjecting itself to additional liability for
contract damages, which could have a material adverse effect on Lakes' business
and results of operations.
YEAR 2000
Lakes is currently working to fully determine and resolve the potential
impact of the Year 2000 on the processing of date-sensitive information by its
computerized information systems. The Year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of Lakes' programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the Year 2000,
which could result in miscalculations or system failures.
27
28
Lakes and its managed properties have a Year 2000 program, the objective of
which is to determine and assess the risks of the Year 2000 issue, and plan and
institute mitigating actions to minimize those risks. Pursuant to the Lakes Year
2000 program, the Company has established an internal review team to monitor and
facilitate efficient Year 2000 compliance. Lakes is currently in the process of
upgrading its financial reporting systems, IT based and otherwise, to ensure
that they are Year 2000 compliant. Lakes' vendors and consultants have
represented to management that the new systems meet Year 2000 requirements.
Lakes' standard for compliance requires that for a computer system or business
process to be Year 2000 compliant, it must be designed to operate without error
in dates and date-related data prior to, on and after January 1, 2000. Between
now and the Year 2000, Lakes will proceed through its various phases of
assessment, detailed planning, implementation, testing and management. Lakes
expects to be fully Year 2000 compliant by mid-1999.
Generally, Lakes is confident that the implementation of its Year 2000
program in conjunction with the replacement of all of Lakes' financial reporting
systems will resolve any IT system compliance issues. Lakes has not currently
identified any material non-IT system Year 2000 issues. Throughout the remainder
of 1999, Lakes will continually review its progress against its Year 2000 plans
and determine what contingency plans are feasible and appropriate to reduce its
exposure to Year 2000 related issues.
Based on Lakes' current assessment, the costs of addressing potential
problems at Lakes and its managed properties are estimated at $1.3 million.
However, the historical and estimated costs relating to the resolution of Lakes'
Year 2000 compliance issues cannot be fully and finally determined at this time.
If significant customers or vendors identify Year 2000 issues in the future and
are unable to resolve such issues in a timely manner, it could result in a
material financial risk. Lakes has initiated formal communications with all of
its material suppliers to determine the extent to which Lakes' interface systems
are vulnerable to those third parties' failures to resolve their own Year 2000
issues. Lakes plans to devote the necessary resources to resolve all significant
Year 2000 issues in a timely manner.
While Lakes fully anticipates achieving Year 2000 compliance well in
advance of January 1, 2000 there are certain risks which exist with respect to
Lakes' business and the Year 2000. Those risks range from slight delays and
inefficiencies in processing data and carrying out accounting and financial
functions to, in a most reasonably likely worst case scenario, extensive and
costly inability to process data, provide vital accounting functions and
communicate with customers and suppliers. As of the date of this filing, Lakes
has not finalized a contingency plan to address the failure to be Year 2000
compliant.
SEASONALITY
The Company believes that the operation of all casinos managed by the
Company are 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 other
jurisdiction where it may conduct gaming activities in the future. Changes in
applicable laws or regulations could have an adverse effect on the Company.
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.
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
integrated Form 10-K/Annual Report and other materials
28
29
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 development and construction activities, dependence upon existing
management, pending litigation, domestic or global economic conditions and
changes in federal or state tax laws or the administration of such laws and
changes in gaming laws or regulations (including the legalization of gaming in
certain jurisdictions). For further information regarding the risks and
uncertainties, see the "Business -- Risk Factors" section of this Annual Report
on Form 10-K for the fiscal year ended January 3, 1999.
29
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
LAKES GAMING, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
LAKES GAMING, INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................... 31
Consolidated Balance Sheets as of January 3, 1999 and
December 28, 1997........................................... 32
Consolidated Statements of Earnings for the fiscal years
ended January 3, 1999, December 28, 1997 and December 29,
1996........................................................ 33
Consolidated Comprehensive Statements of Earnings for the
fiscal years ended January 3, 1999, December 28, 1997 and
December 29, 1996........................................... 34
Consolidated Statements of Shareholders' Equity for the
fiscal years ended January 3, 1999, December 28, 1997 and
December 29, 1996........................................... 35
Consolidated Statements of Cash Flows for the fiscal years
ended January 3, 1999, December 28, 1997 and December 29,
1996........................................................ 36
Notes to Consolidated Financial Statements.................. 37-52
30
31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Lakes Gaming, Inc.
We have audited the accompanying consolidated balance sheets of Lakes
Gaming, Inc. (a Minnesota corporation) and Subsidiaries as of January 3, 1999
and December 28, 1997 and the related consolidated statements of earnings,
comprehensive earnings, shareholders' equity and cash flows for each of the
three years in the period ended January 3, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lakes
Gaming, Inc. and Subsidiaries as of January 3, 1999 and December 28, 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended January 3, 1999, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
February 5, 1999
31
32
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 3, 1999 AND DECEMBER 28, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
1998 1997
---- ----
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 56,774 $ 33,208
Current installments of notes receivable.................. 8,561 6,654
Accounts receivable....................................... 15,217 6,425
Income taxes receivable................................... -- 14,785
Deferred income taxes..................................... 7,370 4,988
Other current assets...................................... 756 551
-------- --------
Total Current Assets........................................ 88,678 66,611
-------- --------
Property and Equipment -- Net............................... 1,265 3,071
-------- --------
Other Assets:
Land held for development................................. 26,647 15,418
Notes receivable -- less current installments............. 25,118 26,477
Cash and cash equivalents -- restricted................... 4,992 1,225
Investments in and notes from unconsolidated affiliates... 8,590 8,180
Casino development costs.................................. 4,846 4,144
Securities available for sale............................. 1,033 4,842
Other long-term assets.................................... 200 2,125
-------- --------
Total Other Assets.......................................... 71,426 62,411
-------- --------
TOTAL ASSETS................................................ $161,369 $132,093
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Income taxes payable...................................... 10,811 2,000
Litigation and claims accrual............................. 10,554 8,736
Other accrued expenses.................................... 4,625 193
-------- --------
Total Current Liabilities................................... 25,990 10,929
-------- --------
Long-term Liabilities:
Long-term debt............................................ 975 975
Deferred income taxes..................................... 2,733 1,391
-------- --------
Total Long-Term Liabilities................................. 3,708 2,366
-------- --------
TOTAL LIABILITIES........................................... 29,698 13,295
-------- --------
Commitments and Contingencies (Notes 2, 6, 7 and 8)
Shareholders' Equity:
Common stock, $.01 par value; 100,000 shares authorized;
10,576 common shares issued and outstanding at January
3, 1999................................................ 106 --
Additional paid-in-capital................................ 130,929 --
Division equity........................................... -- 121,745
Accumulated other comprehensive earnings (loss)........... 636 (2,947)
-------- --------
Total Shareholders' Equity.................................. 131,671 118,798
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $161,369 $132,093
======== ========
See accompanying notes to consolidated financial statements.
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33
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED JANUARY 3, 1999, DECEMBER 28, 1997 AND DECEMBER 29, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996
---- ---- ----
REVENUES:
Management fee income.................................. $92,347 $78,515 $ 77,273
OPERATING EXPENSES:
Selling, general and administrative.................... 14,557 7,916 16,258
Depreciation and amortization.......................... 1,838 890 1,343
------- ------- ---------
Operating Expenses................................... 16,395 8,806 17,601
------- ------- ---------
EARNINGS FROM OPERATIONS.................................... 75,952 69,709 59,672
------- ------- ---------
OTHER INCOME (EXPENSE):
Interest income........................................ 5,601 5,940 5,862
Stratosphere write-down................................ -- -- (160,923)
Loss on sale of securities............................. (4,473) -- --
Other.................................................. (89) (923) 214
------- ------- ---------
Total other income (expense), net.................... 1,039 5,017 (154,847)
------- ------- ---------
Earnings (loss) before income taxes......................... 76,991 74,726 (95,175)
Provision for income taxes.................................. 15,811 29,523 13,562
------- ------- ---------
NET EARNINGS (LOSS)......................................... $61,180 $45,203 $(108,737)
======= ======= =========
BASIC EARNINGS (LOSS) PER SHARE............................. $ 5.80 $ 4.32 $ (10.46)
======= ======= =========
DILUTED EARNINGS (LOSS) PER SHARE........................... $ 5.71 $ 4.20 $ (10.46)
======= ======= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.................. 10,550 10,475 10,395
======= ======= =========
WEIGHTED AVERAGE COMMON AND DILUTED SHARES OUTSTANDING...... 10,712 10,759 10,395
======= ======= =========
See accompanying notes to consolidated financial statements.
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34
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
YEARS ENDED JANUARY 3, 1999, DECEMBER 28, 1997 AND DECEMBER 29, 1996
1998 1997 1996
---- ---- ----
NET EARNINGS (LOSS)......................................... $61,180 $45,203 $(108,737)
UNREALIZED GAINS (LOSSES) ON SECURITIES
Unrealized holding gains (losses) during the period....... 3,583 (4,307) (1,806)
Less: reclassification adjustment for losses included in
net earnings........................................... (4,473) -- --
------- ------- ---------
COMPREHENSIVE EARNINGS (LOSS)............................... $60,290 $40,896 $(110,543)
======= ======= =========
See accompanying notes to consolidated financial statements.
34
35
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JANUARY 3, 1999, DECEMBER 28, 1997, AND DECEMBER 29, 1996
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK OTHER TOTAL
--------------- ADDITIONAL DIVISION COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT PAID-IN-CAPITAL EQUITY EARNINGS (LOSS) EQUITY
------ ------ --------------- -------- --------------- -------------
Balance, December 31, 1995..... -- -- -- 225,677 3,166 228,843
Distribution to Grand
Casinos, Inc.............. -- -- -- (14,716) -- (14,716)
Other comprehensive
earnings.................. -- -- -- -- (1,806) (1,806)
Net loss..................... -- -- -- (108,737) -- (108,737)
------ --- ------- -------- ------ --------
Balance, December 29, 1996..... -- -- -- 102,224 1,360 103,584
Distribution to Grand
Casinos, Inc.............. -- -- -- (25,682) -- (25,682)
Other comprehensive
earnings.................. -- -- -- -- (4,307) (4,307)
Net earnings................. -- -- -- 45,203 -- 45,203
------ --- ------- -------- ------ --------
Balance, December 28, 1997..... -- -- -- 121,745 (2,947) 118,798
Distribution to Grand
Casinos, Inc.............. -- -- -- (51,890) -- (51,890)
Other comprehensive
earnings.................. -- -- -- -- 3,583 3,583
Net earnings................. -- -- -- 61,180 -- 61,180
Distribution from Grand
Casinos, Inc.............. 10,576 106 130,929 (131,035) -- --
------ --- ------- -------- ------ --------
Balance, January 3, 1999....... 10,576 106 130,929 -- 636 131,671
====== === ======= ======== ====== ========
See accompanying notes to consolidated financial statements.
35
36
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 3, 1999, DECEMBER 28, 1997 AND DECEMBER 29, 1996
(IN THOUSANDS)
1998 1997 1996
---- ---- ----
OPERATING ACTIVITIES:
Net earnings (loss)....................................... $ 61,180 $ 45,203 $(108,737)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 1,838 890 1,343
Stratosphere write-down................................ -- -- 160,923
Loss on sale of securities............................. 4,473 -- --
Deferred income taxes.................................. (1,040) (2,930) (11,375)
Changes in operating assets and liabilities:
Accounts receivable.................................. (8,792) 1,571 (744)
Income taxes......................................... 23,596 (9,357) 3,417
Other current assets................................. (205) (1,650) (239)
Accounts payable..................................... -- 45 (30)
Accrued expenses..................................... 6,193 1,037 17,813
Other................................................ (1,476) 942 124
-------- -------- ---------
Net Cash Provided by Operating Activities................... 85,767 35,751 62,495
-------- -------- ---------
INVESTING ACTIVITIES:
Payments for property and equipment....................... -- (99) (795)
Proceeds from sale of property and equipment.............. 500 398 2,814
Advances under notes receivable........................... (7,115) (1,825) (50,000)
Proceeds from repayment of notes receivable............... 6,567 6,144 10,579
Increase in restricted cash............................... (3,767) -- (250)
Proceeds from sale of securities.......................... 4,824 -- --
Investment in and notes receivable from unconsolidated
affiliates............................................. (807) (336) (7,170)
Payments for land held for development.................... (11,229) (13,153) (2,264)
Decrease (increase) in other long-term assets............. 716 (1,833) 369
-------- -------- ---------
Net Cash Used in Investing Activities....................... (10,311) (10,704) (46,717)
-------- -------- ---------
FINANCING ACTIVITIES:
Distribution to Grand..................................... (51,890) (25,682) (14,716)
Proceeds from issuance of long-term debt.................. -- -- 24
Payments on long-term debt................................ -- (9) (375)
-------- -------- ---------
Net Cash Used in Financing Activities....................... (51,890) (25,691) (15,067)
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents........ 23,566 (644) 711
Cash and cash equivalents -- beginning of year.............. 33,208 33,852 33,141
-------- -------- ---------
CASH AND CASH EQUIVALENTS -- END OF YEAR.................... $ 56,774 $ 33,208 $ 33,852
======== ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................... $ 98 $ 98 $ 98
Income taxes........................................... 5,420 41,504 11,189
See accompanying notes to consolidated financial statements.
36
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1999, DECEMBER 28, 1997, AND DECEMBER 29, 1996
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Lakes Gaming, 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"). Pursuant to the
terms of a Distribution Agreement entered into between Grand and Lakes and dated
as of December 31, 1998 (the "Distribution Agreement"), Grand shareholders
received .25 shares of Lakes Common Stock for each share held in Grand.
Historical references to the Company which predate the Distribution give pro
forma effect to the Distribution as if it already occurred.
Immediately following the Distribution, Grand merged with a subsidiary of
Park Place Entertainment Corporation, a Delaware corporation ("Park Place"),
pursuant to which Grand became a wholly owned subsidiary of Park Place (the
"Merger"), Grand shareholders received one share of Park Place common stock in
the Merger for each share they held in Grand. Both transactions are hereinafter
referred to as the Transaction. The Transaction received shareholder and
regulatory approvals and was completed on December 31, 1998. Grand obtained a
ruling from the Internal Revenue Service (IRS) that the transaction is tax-free
to Grand shareholders.
Lakes manages Indian-owned casinos and owns certain other assets related to
potential gaming-related development. The Company manages two Indian-owned
casinos in Louisiana and previously managed two Minnesota casinos through April
4, 1998 and November 30, 1998. The Company had written off or reserved for its
investments and other related costs in Stratosphere Corporation (Stratosphere),
which owns the Stratosphere Tower, Casino and Hotel in Las Vegas, Nevada, as of
December 29, 1996 in the amount of $161 million. The Company has not recorded
any results of Stratosphere's operations in 1997 or 1998. Stratosphere is the
subject of Chapter 11 bankruptcy proceedings. See Note 8 for further discussion.
The Second Amended Plan has been approved by the Bankruptcy Court and was
declared effective on October 14, 1998. As such, all Stratosphere stock owned by
Lakes has been cancelled.
MANAGEMENT CONTRACTS OF LIMITED DURATION
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 from having
an ownership interest in any casino it manages for Indian tribes. The management
contracts for the various Indian-owned casinos that the Company manages for
Indian tribes generally have terms of seven years. Management contracts for the
two previously managed Minnesota casinos, Grand Casino Mille Lacs and Grand
Casino Hinckley concluded during 1998. Management contracts for Grand Casino
Avoyelles and Grand Casino Coushatta expire June 3, 2001 and January 16, 2002,
respectively. There can be no assurance that the Louisiana management contracts
will be renewed upon expiration or approved by the National Indian Gaming
Commission ("NIGC") upon any such renewal. The failure to renew the Company's
management contracts would result in the loss of revenues to the Company derived
from such contracts, which would have a material adverse effect on the Company's
results of operations. The Coushatta Tribe and the Tunica-Biloxi Tribe each
entered into tribal-state compacts with the State of Louisiana on September 29,
1992. These compacts were approved in November 1992 by the Secretary of the
Interior. Each compact expires in November 1999, but will automatically renew
for an additional seven-year term unless either the tribe or the State of
Louisiana delivers to the other written notice of non-renewal at least 180 days
prior to the applicable expiration date. The Company's management agreements
with the Tunica-Biloxi Tribe and the Coushatta Tribe expire after
37
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 3, 1999, DECEMBER 28, 1997, AND DECEMBER 29, 1996
November 1999. In the event the compacts are not renewed, legal gaming will not
be permitted at Grand Casino Avoyelles or Grand Casino Coushatta. There can be
no assurance that these compacts will be renewed on acceptable terms and
conditions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Ultimate results could differ from those estimates.
YEAR END
The Company has a 52- or 53-week accounting period ending on the Sunday
closest to December 31 of each year. The Company's fiscal years for the periods
shown on the accompanying combined statements of earnings ended on January 3,
1999 (1998), December 28, 1997 (1997), and December 29, 1996 (1996). The
activity from the date of the Transaction to January 3, 1999 was not segregated
from the full year's results as it was not material.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Lakes and its
wholly-owned and majority-owned subsidiaries. Investments in unconsolidated
affiliates representing between 20% and 50% of voting interests are accounted
for on the equity method. All material intercompany balances and transactions
have been eliminated in consolidation.
REVENUE AND EXPENSES
Revenue from the management of Indian-owned casino gaming facilities is
recognized when earned according to the terms of the management contracts.
The operating expenses of the Company include the costs associated with the
management of all gaming operations for which the Company has a management
contract. Such amounts represent the direct cost of providing assistance in the
areas of casino operations, marketing and promotion, customer service,
accounting, legal and other functions.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and in banks,
interest-bearing deposits, money market funds and other instruments with
original maturities of three months or less. Restricted cash and cash
equivalents consist primarily of funds designated as collateral relating to land
held for development.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for additions,
renewals, and improvements are capitalized. Costs of repairs and maintenance are
expensed when incurred.
Depreciation and amortization of property and equipment is computed using
the straight-line method over the following estimated useful lives:
Leasehold improvements...................................... 15 years
Furniture and equipment..................................... 3-10 years
38
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 3, 1999, DECEMBER 28, 1997, AND DECEMBER 29, 1996
The Company periodically evaluates whether events and circumstances have
occurred that may affect the recoverability of the net book value of its
long-lived 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.
LAND HELD FOR DEVELOPMENT
Land held for development consists of amounts related to an approximately
15-acre site in Las Vegas, Nevada, which the Company controls. All or any
portion of this site may be sold, held for sale or held for future development.
The Company is currently evaluating the potential sale of all or any portion of
this site and in connection therewith has entered into a listing agreement with
a real estate broker for the active marketing of this site.
CASINO DEVELOPMENT COSTS
Casino development costs consist of amounts incurred to expand managed
casino facilities and certain direct costs to obtain management contracts.
Casino development costs are amortized over the lives of the related management
contracts.
SECURITIES AVAILABLE FOR SALE
The Company records all securities available for sale at fair market value
at each period-end. The ending balance of shareholders' equity as of January 3,
1999 includes $.6 million of net unrealized gain (net of income taxes) on
securities classified as available-for-sale and the ending balance of division
equity as of December 28, 1997 includes $2.9 million of net unrealized loss (net
of income taxes) on securities classified as available-for-sale.
On October 15, 1998, Hollywood Park and Casino Magic completed a merger
agreement under which Hollywood Park purchased each outstanding share of Casino
Magic common stock for $2.27 of cash per share. As a result of this transaction,
the Company realized a loss of approximately $2.9 million, net of tax, on the
2,126,000 shares of Casino Magic common stock it owned at the time of the
Merger.
INCOME TAXES
The Company has historically filed a consolidated federal tax return with
Grand. Under a tax-sharing agreement with Grand, the Company reports income
taxes substantially on a separate-company basis.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The Company classifies
deferred tax liabilities and assets into current and non-current amounts based
on the classification of the related assets and liabilities.
INTEREST INCOME
Interest income represents interest on the notes receivable from Indian
tribes and interest on cash, cash equivalents and short-term investments.
Interest on the notes receivable is recorded as earned based on contractual
rates of interest. Interest on cash, cash equivalents and short-term investments
reflects the Company's portion of interest income realized from Grand's
investments in savings and money market accounts and other short-term liquid
investments.
39
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 3, 1999, DECEMBER 28, 1997, AND DECEMBER 29, 1996
EARNINGS PER SHARE
Earnings per share (EPS) is calculated for all periods based on the
exchange of one Lakes share for every four owned Grand shares. Basic EPS is
calculated by dividing earnings by the weighted average common shares
outstanding. Diluted EPS reflects the potential dilutive effect of all common
stock equivalents outstanding by dividing net income (loss) by the weighted
average of all common and dilutive shares outstanding.
CONCENTRATIONS OF CREDIT RISK
The financial instruments that subject the Company to concentrations of
credit risk consist principally of accounts and notes receivable. Notes
receivable are concentrated in specific Indian and other legalized gaming
regions.
ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income", effective December 29, 1997. SFAS 130
requires minimum pension liability adjustments, unrealized gains or losses on
the Company's available for sale securities and foreign currency translation
adjustments, which prior to adoption were reported separately in division
equity, to be included in other comprehensive earnings (loss).
2. MANAGEMENT CONTRACTS FOR INDIAN-OWNED CASINOS:
The Company had contracts with the Mille Lacs Band for the management of
two gaming facilities in Onamia and Hinckley, Minnesota. The management contract
for the gaming facility in Onamia expired on April 2, 1998.
The Company reached an agreement with the Mille Lacs Band of Ojibwe,
effective December 1, 1998, for the early buyout of the management contract for
the facility in Hinckley. The Mille Lacs Band elected to exercise its option for
the early buyout of the contract that was scheduled to expire on May 15, 1999.
The early buyout of the contract was provided in the original seven-year
management agreement and the Company received full value for all contracted
obligations by the Mille Lacs Band. Under the early buyout agreement, the
Company was compensated for the management fees the company would have received
had it managed Grand Casino Hinckley through the original contract expiration
date.
1998 results include $36.8 million in revenues from the management
contracts for Grand Casino Mille Lacs and Grand Casino Hinckley that concluded
during 1998. The Company's revenues and earnings will not include contributions
from these operations going forward.
In addition, the Company holds a management contract with the Tunica-Biloxi
Tribe of Louisiana for a gaming facility in Marksville, Louisiana, that expires
on June 3, 2001 and a management contract with the Coushatta Tribe of Louisiana
for a gaming facility in Kinder, Louisiana, that expires on January 16, 2002.
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 remodeling portion of the agreements commenced with the signing
of the respective contracts and continued until the casinos opened for business;
thereafter, the management portion of the respective management contracts
continues for a period of 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.
40
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 3, 1999, DECEMBER 28, 1997, AND DECEMBER 29, 1996
In the event the management contracts are not renewed upon expiration of
their initial term, the Company will be entitled to payments equal to a
percentage of the fair value of certain leased gaming equipment.
The management contracts for the Tunica-Biloxi Tribe of Louisiana and the
Coushatta Tribe of Louisiana have been approved by the Bureau of Indian Affairs
(BIA). While the Company believes that all of its management contracts meet all
requirements of the Indian Gaming Regulatory Act of 1988, the BIA or the NIGC
may attempt to reduce the terms or the management fees payable under the
management contracts or require other changes to the contracts.
3. NOTES RECEIVABLE:
Notes receivable consist of the following (in thousands):
JANUARY 3, 1999 DECEMBER 28, 1997
--------------- -----------------
Notes from the Coushatta Tribe with interest at a defined
reference rate plus 1% (not to exceed 16%) (8.75% at
January 3, 1999), receivable in 84 monthly installments
through January 2002...................................... $24,392 $22,722
Notes from the Tunica-Biloxi Tribe with interest at a
defined reference rate plus 1% (not to exceed 16%) (8.75%
at January 3, 1999), receivable in 84 monthly installments
through June 2001......................................... 9,287 10,409
------- -------
Total notes receivable...................................... 33,679 33,131
Less -- current installments of notes receivable............ (8,561) (6,654)
------- -------
Notes receivable, less current installments................. $25,118 $26,477
======= =======
The notes receivable are generally advances made to Indian Tribes for the
development of gaming properties 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 aforementioned notes receivable from
the Coushatta Tribe and the Tunica-Biloxi Tribe is 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 January 3, 1999, no
amounts have been withheld 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. No impairment losses
on such notes receivable have been recognized through January 3, 1999.
The Company believes the costs and complexities of assembling the relevant
facts and comparables needed to appraise the fair market values of these notes
based on estimates of net present value of discounted cash flows or using other
valuation techniques are excessive and the process exceedingly time consuming.
It further believes that the determined results would not reasonably differ from
the carrying values, which are believed to be reasonable estimates of fair
market value based on past experience with similar receivables.
41
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 3, 1999, DECEMBER 28, 1997, AND DECEMBER 29, 1996
4. INCOME TAXES:
The provisions for income taxes attributable to earnings (loss) for 1998,
1997, and 1996 consisted of the following (in thousands):
YEARS ENDED
------------------------------
1998 1997 1996
---- ---- ----
Current:
Federal......................................... $14,482 $30,307 $ 21,601
State........................................... 2,369 2,146 3,336
------- ------- --------
16,851 32,453 24,937
Deferred.......................................... (1,040) (2,930) (11,375)
------- ------- --------
$15,811 $29,523 $ 13,562
======= ======= ========
Reconciliations of the statutory federal income tax rate to the Company's
actual rate based on earnings (loss) before income taxes for 1998, 1997, and
1996 are summarized as follows:
YEARS ENDED
----------------------
1998 1997 1996
---- ---- ----
Statutory federal tax rate................................ 35.0% 35.0% (35.0)%
State income taxes, net of federal income tax benefit..... 2.0 1.9 2.3
Valuation allowance increases (decreases) on Stratosphere
losses and write-down................................... (22.5) -- 42.9
Other, net................................................ 6.0 2.6 4.0
----- ---- -----
20.5% 39.5% 14.2%
===== ==== =====
The Company's deferred income tax liabilities and assets are as follows (in
thousands):
1998 1997
---- ----
Non-current deferred taxes:
Losses related to Stratosphere.......................... $ -- $ 17,339
Other temporary differences............................. (2,733) (1,391)
------- --------
Net non-current deferred taxes............................ (2,733) 15,948
Less -- Valuation allowance............................... -- (17,339)
------- --------
Net non-current deferred liability........................ $(2,733) $ (1,391)
======= ========
Current deferred taxes:
Accruals, reserves and other............................ $ 7,370 $ 4,988
======= ========
A deferred tax asset was recorded in 1996 when the Company set up a reserve
allowance due to uncertainty related to the collectibility of a note receivable
from Stratosphere. However, a full valuation allowance was created for the
deferred tax asset and no income tax benefit was recognized at that time. Upon
writing off the receivable and realizing the tax deduction in 1998, the Company
reversed the deferred tax asset valuation allowance resulting in the recognition
of a $17.3 million income tax benefit. Under the terms of its tax sharing
agreement with Grand, any further tax benefits relating to capital losses
resulting from the Company's write-off of its investment in Stratosphere will be
shared equally by Lakes and Park Place up to a benefit of approximately $12
million to Lakes.
42
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 3, 1999, DECEMBER 28, 1997, AND DECEMBER 29, 1996
5. LONG-TERM DEBT:
The Company has a note payable with a third party, collateralized by
certificates of deposit, with $1.0 million outstanding at January 3, 1999 and
December 28, 1997. Interest is compounded on a quarterly basis at 10%. The
principal and interest are due March 22, 2003.
6. STOCK OPTIONS:
Grand had a Stock Option and Compensation Plan and a Director Stock Option
Plan whereby incentive and nonqualified stock options and other awards to
acquire shares of Grand's common stock were granted to officers, directors, and
employees.
Upon the consummation of the Transaction, the holders of outstanding Grand
stock options received one new option to purchase one share of Lakes common
stock for each four options previously held, and one new option to purchase one
share of Park Place common stock for each option previously held. The exercise
price of the new options was apportioned between Lakes and Park Place to
preserve option value as it existed on December 31, 1998 as measured by the
difference between the option exercise price and the fair market value of Grand
on that date. This value was calculated by reference to the closing price of
Lakes on January 4, 1999 and the closing price of Grand on December 31, 1998.
NUMBER OF COMMON SHARES
------------------------------
LAKES
OPTIONS OPTION PRICE
OUTSTANDING RANGE PER SHARE
----------- ---------------
Balance at January 3, 1999.......................... 1,054,846 (3.13 - 17.72)
========= =============
Additionally, Lakes has a 1998 Stock Option and Compensation Plan and a
1998 Director Stock Option Plan which are approved to grant up to an aggregate
of 1.5 million shares and .2 million shares respectively of incentive and
non-qualified stock options to officers, directors, and employees. No options
were outstanding under either plan at January 3, 1999 (see Note 9).
The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS No. 123, the Company's net earnings (loss)
would have been as follows (in thousands):
1998 1997 1996
---- ---- ----
Net earnings (loss):
As reported............................................... $61,180 $45,203 $(108,737)
Pro forma................................................. 59,694 44,570 (109,255)
Net earnings (loss) per share:
As reported -- Basic...................................... $ 5.80 $ 4.32 $ (10.46)
Pro forma -- Basic........................................ 5.66 4.25 (10.51)
As reported -- Diluted.................................... 5.71 4.20 (10.46)
Pro forma -- Diluted...................................... 5.57 4.14 (10.51)
The SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, thus the resulting pro forma compensation cost
may not be representative of that to be expected in future years. The fair value
of each award under the option plans is estimated on the date of grant using the
43
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 3, 1999, DECEMBER 28, 1997, AND DECEMBER 29, 1996
Black-Scholes option-pricing model. The fair value of the options issued in 1998
range from $5.98 per share to $12.26 per share. The following assumptions were
used to estimate the fair value of options:
1998 1997 1996
---- ---- ----
Risk-free interest rate............... 4.83%-5.85% 6.04%-6.98% 5.68%-6.95%
Expected life......................... 10 years 10 years 10 years
Expected volatility................... 0.487-0.509 0.563-0.629 0.528-0.613
Expected dividend yield............... -- -- --
7. EMPLOYEE RETIREMENT PLAN:
Grand had a section 401(k) employee savings plan for all full-time
employees which upon consummation of the Transaction became Lakes' Plan. The
savings plan allows participants to defer, on a pretax basis, a portion of their
salary and accumulate tax-deferred earnings as a retirement fund. Eligibility is
based on years of service and minimum age requirements. Contributions are
invested, at the direction of the employee, in one or more available funds.
Lakes matches employee contributions up to a maximum of 1% of participating
employees' gross wages. The Company contributed $.03 million, $.02 million, and
$.01 million during 1998, 1997, and 1996, respectively. Company contributions
are vested over a period of five years.
8. COMMITMENTS AND CONTINGENCIES:
LEASES
Rent expense, under non-cancelable operating leases, exclusive of real
estate taxes, insurance, and maintenance expense for 1998, 1997, and 1996 was
approximately $0.2 million each year.
The Company leases certain property and equipment under non-cancelable
operating leases. Future minimum lease payments, excluding contingent rentals,
due under non-cancelable operating leases as of January 3, 1999 are as follows
(in thousands):
OPERATING LEASES
----------------
1999........................................................ $ 3,683
2000........................................................ 3,404
2001........................................................ 2,981
2002........................................................ 3,109
2003........................................................ 3,176
Thereafter.................................................. 47,550
-------
$63,903
=======
As a part of the Transaction, the Company has agreed to exercise its call
option to purchase the Shark Club property in Las Vegas, Nevada, prior to July
31, 2000, the earliest date the landlord could require the Company to purchase
the property. The option purchase price would be approximately $9.3 million.
The Company also plans to exercise its option to purchase the Travelodge
property in Las Vegas, Nevada for the purchase price of $30 million on October
31, 2017.
Loan Guaranty Agreements
The Company has guaranteed a loan and security agreement entered into by
the Tunica-Biloxi Tribe of Louisiana for $16.5 million for the purpose of
purchasing a hotel and additional casino equipment. The agreement extends
through 2000, and as of January 3, 1999, the amount outstanding was $7.3
million.
44
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 3, 1999, DECEMBER 28, 1997, AND DECEMBER 29, 1996
On May 1, 1997, the Company entered into a guaranty agreement related to a
loan agreement entered into by the Coushatta Tribe of Louisiana in the amount of
$25.0 million, for the purpose of constructing a hotel and acquiring additional
casino equipment. The guaranty will remain in effect until the loan is paid. The
loan term is approximately five years. As of January 3, 1999, $19.6 million has
been advanced, and is outstanding.
The Company provided a limited guaranty for the purpose of financing
Stratosphere Corporation Hotel and Casino equipment subject to a maximum
limitation amount of $8.7 million.
Indemnification Agreement
As a part of the Transaction, the Company has agreed to indemnify Grand
against all costs, expenses and liabilities incurred in connection with or
arising out of certain pending and threatened claims and legal proceedings to
which Grand and certain of its subsidiaries are likely to be parties. 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 under
each of the Grand Distribution Agreement and the Park Place Merger Agreement,
and as a condition to the consummation of the Merger, Lakes has agreed to
deposit, in trust for the benefit of Grand, as a wholly owned subsidiary of Park
Place, an aggregate of $30 million, to cover various commitments and
contingencies 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) consisting of four annual installments
of $7.5 million, during the four-year period subsequent to the Effective Date of
the Transaction. Any surplus proceeds remaining after all the secured
obligations are indefeasibly paid in full and discharged shall be paid over to
Lakes.
As part of the indemnification agreement, Lakes has agreed that it will not
declare or pay any dividends, make any distribution 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.
STRATOSPHERE CORPORATION
In January 1997, Stratosphere and its wholly owned operating subsidiary
filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. On
November 7, 1997, Stratosphere filed its Second Amended Plan which was declared
effective on October 14, 1998. Prior to the effectiveness of the Second Amended
Plan, Grand owned approximately 37% of the issued and outstanding common stock
of Stratosphere. Under the Second Amended Plan, all shares of Stratosphere
common stock that were outstanding prior to the effective date of the Second
Amended Plan have been canceled. In addition, the secured portion of
Stratosphere's first mortgage notes that were outstanding prior to the effective
date have been exchanged for a total of 2,030,000 shares of new common stock.
Pursuant to the terms of the Distribution Agreement, Lakes assumed, among other
liabilities, certain known and contingent liabilities associated with all
pending, threatened or future litigation related to the Stratosphere litigation
described below. Although Lakes assumed such liabilities, because Grand remains
liable for claims by plaintiffs in such litigation and for indemnifying Grand's
former officers and directors with respect to such litigation, Lakes agreed,
under the term of the Merger Agreement, to indemnify Grand and Grand's current
and former officers and directors against such liabilities. See "Certain
Factors -- Indemnification Obligations" -- "Stratosphere Corporation; Pending
Litigation".
The following summaries describe certain known legal proceedings to which
Grand is a party and which Lakes has assumed, and/or must indemnify Grand, in
connection with the Distribution.
45
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 3, 1999, DECEMBER 28, 1997, AND DECEMBER 29, 1996
STRATOSPHERE SHAREHOLDERS LITIGATION -- FEDERAL COURT
In August 1996, a complaint was filed in the U.S. District Court for the
District of Nevada -- Michael Ceasar, et al v. Stratosphere Corporation, et
al -- against Stratosphere and others, including Grand. The complaint was filed
as a class action, and sought relief on behalf of Stratosphere shareholders who
purchased their stock between December 19, 1995 and July 22, 1996. The complaint
included allegations of misrepresentations, federal securities law violations
and various state law claims.
In August through October 1996, several other nearly identical complaints
were filed by various plaintiffs in the U.S. District Court for the District of
Nevada.
The defendants in the actions submitted motions requesting that all of the
actions be consolidated. Those motions were granted in January 1997, and the
consolidated action is entitled In re: Stratosphere Corporation Securities
Litigation -- Master File No. CV-S-96-00708 PMP (RLH).
In February 1997, the plaintiffs filed a consolidated and amended complaint
naming various defendants, including Grand and certain current and former
officers and directors of Grand. The amended complaint includes claims under
federal securities laws and Nevada laws based on acts alleged to have occurred
between December 19, 1995 and July 22, 1996.
In February 1997, various defendants, including Grand and Grand's officers
and directors named as defendants, submitted motions to dismiss the amended
complaint. Those motions were made on various grounds, including Grand's claim
that the amended complaint failed to state a valid cause of action against Grand
and Grand's officers and directors.
In May 1997, the court dismissed the amended complaint. The dismissal order
did not allow the plaintiffs to further amend their complaint in an attempt to
state a valid cause of action.
In June 1997, the plaintiffs asked the court to reconsider its dismissal
order, and to allow the plaintiffs to submit a second amended complaint in an
attempt to state a valid cause of action. In July 1997, the court allowed the
plaintiffs to submit a second amended complaint.
In August 1997, the plaintiffs filed a second amended complaint. In
September 1997, certain of the defendants, including Grand and Grand's officers
and directors named as defendants, submitted a motion to dismiss the second
amended complaint. The motion was based on various grounds, including Grand's
claim that the second amended complaint failed to state a valid cause of action
against Grand and those officers and directors.
In April 1998, the Court granted Grand's motion to dismiss, in part, and
denied the motion in part. Thus, the plaintiffs are pursuing the claims in the
second amended complaint that survived the motion to dismiss.
In June 1998, certain of the defendants, including Grand and Grand's
officers and directors named as defendants, submitted a motion for summary
judgment seeking an order that such defendants are entitled to judgment as a
matter of law. As of December 1998, the plaintiffs completed fact discovery
related to the issues raised by the summary judgment motion. Expert discovery is
expected to be completed in March of 1999. The Court will not decide the motion
until after such discovery is completed and the parties have submitted their
respective arguments regarding the motion, which Lakes' attorneys anticipate
will be in June of 1999.
STRATOSPHERE SHAREHOLDERS LITIGATION -- NEVADA STATE COURT
In August 1996, a complaint was filed in the District Court for Clark
County, Nevada -- Victor M. Opitz, et al v. Robert E. Stupak, et al -- Case No.
A363019 -- Against various defendants, including Grand. The complaint seeks
relief on behalf of Stratosphere Corporation shareholders who purchased stock
between December 19, 1995 and July 22, 1996. The complaint alleges
misrepresentations, state securities law violations and other state claims.
46
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 3, 1999, DECEMBER 28, 1997, AND DECEMBER 29, 1996
Grand and certain defendants submitted motions to dismiss or stay the state
court action pending resolution of the federal court action described above. The
court has stayed further proceedings pending the resolution of In re:
Stratosphere Securities Litigation.
GRAND CASINOS, INC. SHAREHOLDERS LITIGATION
In September and October 1996, two actions were filed by Grand shareholders
in the U.S. District Court for the District of Minnesota against Grand and
certain of Grand's current and former directors and officers.
The complaints allege misrepresentations, federal securities law violations
and other claims in connection with the Stratosphere project.
The actions have been consolidated as In re: Grand Casinos, Inc. Securities
Litigation -- Master File No. 4-96-890 -- and the plaintiffs filed a
consolidated complaint. The defendants submitted a motion to dismiss the
consolidated complaint, based in part on Grand's claim that the consolidated
complaint failed to properly state a cause of action.
In December 1997, the court granted Grand's motion to dismiss in part, and
denied the motion in part. Thus, the plaintiffs are pursuing the claims in the
consolidated complaint that survived Grand's motion to dismiss. Discovery in the
action has begun.
The defendants have submitted a motion for summary judgment seeking an
order that the defendants are entitled to judgment as a matter of law. The
plaintiffs are currently engaged in discovery related to the issues raised by
the summary judgment motion. The court will not decide the motion until after
such discovery is complete and the parties have submitted their respective
arguments regarding the motion.
In early February 1999, the plaintiffs filed a motion for leave to amend
the complaint in this action to include, as defendants in the case, both the
Company and Park Place. The defendants seek to include the Company under the
theory that the Company is a proper party to the lawsuit as a result of the
assumption by the Company of all of Grand's liabilities with respect to the
Stratosphere project and the indemnification agreement obligations of the
Company with respect to Park Place. The Company agreed to assume certain of
Grand's liabilities and entered into an indemnification agreement with Park
Place in connection with the Merger.
DERIVATIVE LITIGATION
In February 1997, certain shareholders of Grand brought an action in the
Hennepin County, Minnesota District Court -- Lloyd Drilling, et al v. Lyle
Berman, et al -- Court File No. MC97-002807 -- against certain current and
former officers and director of Grand. The plaintiffs allege that those officers
and directors breached certain fiduciary duties to the shareholders of Grand as
a result of certain transactions involving the Stratosphere project. Pursuant to
Minnesota law, Grand's Board of Directors appointed an independent special
litigation committee to evaluate whether Grand should pursue the claims made in
the action against the officers and directors. The special litigation committee
completed its evaluation in December 1997, and filed a report with the court
recommending that such claims not be pursued.
Grand provided the defense for Grand's current and former officers and
directors who are defendants in the action pursuant to Grand's indemnification
obligations to such defendants.
In January 1998, Grand submitted a motion for summary judgment based on the
special litigation committee's report. In May 1998, the court granted the
motion, thereby dismissing the plaintiffs' claims. In August 1998, the
plaintiffs appealed the Court's ruling. On March 9, 1999, the Minnesota Court of
Appeals affirmed the dismissal of the plaintiffs' claims. The plaintiffs have
until April 8, 1999, to seek further review of the ruling by the Minnesota
Supreme Court.
47
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 3, 1999, DECEMBER 28, 1997, AND DECEMBER 29, 1996
SLOT MACHINE LITIGATION
In April 1994, William H. Poulos brought an action in the U.S. District
Court for the Middle District of Florida, Orlando Division -- William H. Poulos,
et al v. Caesars World, Inc. et al -- Case No. 39-478-CIV-ORL-22 -- in which
various parties (including Grand) alleged to operate casinos or be slot machine
manufacturers were named as defendants. The plaintiff sought to have the action
certified as a class action.
A subsequently filed Action -- William Ahearn, et al v. Caesars World, Inc.
et al -- Case No. 94-532-CIV-ORL-22 -- made similar allegations and was
consolidated with the Poulos action.
Both actions included claims under the federal Racketeering-Influenced and
Corrupt Organizations Act and under state law, and sought compensatory and
punitive damages. The plaintiffs claimed that the defendants are involved in a
scheme to induce people to play electronic video poker and slot machines based
on false beliefs regarding how such machines operate and the extent to which a
player is likely to win on any given play.
In December 1994, the consolidated actions were transferred to the U.S.
District Court for the District of Nevada.
In September 1995, Larry Schreier brought an action in the U.S. District
Court for the District of Nevada -- Larry Schreier, et al v. Caesars World, Inc.
et al -- Case No. CV-95-00923-DWH(RJJ).
The plaintiffs' allegations in the Schreier action were similar to those
made by the plaintiffs in the Poulos and Ahearn actions, except that Schreier
claimed to represent a more precisely defined class of plaintiffs than Poulos or
Ahearn.
In December 1996, the court ordered the Poulos, Ahearn and Schreier actions
consolidated under the title William H. Poulos, et al v. Caesars World, Inc., et
al -- Case No. CV-S-94-11236-DAE(RJJ) -- (Base File), and required the
plaintiffs to file a consolidated and amended complaint. In February 1997, the
plaintiffs filed a consolidated and amended complaint.
In March 1997, various defendants (including Grand) filed motions to
dismiss or stay the consolidated action until the plaintiffs submitted their
claims to gaming authorities and those authorities considered the claims
submitted by the plaintiffs.
In December 1997, the court denied all of the motions submitted by the
defendants, and ordered the plaintiffs to file a new consolidated and amended
complaint. That complaint has been filed. Grand has filed its answer to the new
complaint.
The plaintiffs have filed a motion seeking an order certifying the action
as a class action. Grand and certain of the defendants have opposed the motion.
The Court has not ruled on the motion.
STRATOSPHERE NOTEHOLDER COMMITTEE BANKRUPTCY COURT ACTION
In June 1997, the Official Committee of Noteholders (the "Committee") in
the Chapter 11 bankruptcy proceeding for Stratosphere filed a motion with the
U.S. Bankruptcy Court for the District of Nevada (the "Bankruptcy Court") by
which the Committee sought Bankruptcy Court approval for assumption (on behalf
of Stratosphere's bankruptcy estate) of the March 1995 Standby Equity Commitment
(the "Standby Equity Commitment") between Stratosphere and Grand.
In the motion, the Committee sought Bankruptcy Court authorization to
compel Grand to fund up to $60 million in "capital contributions" to
Stratosphere over three years, based on the Committee's claim that such
"contributions" are required by the Standby Equity Commitment.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 3, 1999, DECEMBER 28, 1997, AND DECEMBER 29, 1996
Grand opposed the Committee's motion. Grand asserted, in its opposition to
the Committee's motion, that the Standby Equity Commitment is not enforceable in
the Stratosphere bankruptcy proceeding as a matter of law.
The Bankruptcy Court held a preliminary hearing on the Committee's motion
in June 1997, and an evidentiary hearing in February 1998 on the issues raised
by the Committee's motion and Grand's opposition to that motion. In February
1998, the Bankruptcy Court denied the Committee's motion, and determined that
the Standby Equity Commitment cannot be assumed (or enforced) by Stratosphere
under applicable bankruptcy law.
STANDBY EQUITY COMMITMENT LITIGATION
In September 1997, the Stratosphere Trustee under the indenture pursuant to
which Stratosphere issued its first mortgage notes filed a complaint in the U.S.
District Court for the District of Nevada -- IBJ Schroeder Bank & Trust Company,
Inc. v. Grand Casinos, Inc. -- File No. CV-S-97-01252-DWH (RJJ) -- naming Grand
as defendant.
The complaint alleges that Grand failed to perform under the Standby Equity
Commitment entered into between Stratosphere and Grand in connection with
Stratosphere's issuance of such first mortgage notes in March 1995. The
complaint seeks an order compelling specific performance of what the Committee
claims are Grand's obligations under the Standby Equity Commitment. The
Stratosphere Trustee filed the complaint in its alleged capacity as a third
party beneficiary under the Standby Equity Commitment.
Discovery and motion practice is pending and Lakes will continue to defend
this lawsuit diligently.
STRATOSPHERE PLAN OF REORGANIZATION
The Second Amended Plan contemplates the formation of a new limited
liability company which will own and pursue certain alleged claims and causes of
action that Stratosphere and other persons may have against numerous
third-parties, including Grand and/or officers and/or directors of Grand.
The Second Amended Plan contemplates capitalizing this new limited
liability company with an investment of $5 million. As of March 25, 1999, Grand
has not been served with any such litigation.
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 Stratosphere to (i) Grand as management fees and for costs and
expenses under a management agreement between Stratosphere and Grand, and (ii)
Grand Media for electronic equipment purchased by Stratosphere from Grand Media.
Stratosphere claims 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. That response
denies that Stratosphere is entitled to recover the amounts described in the
complaint. Discovery is proceeding.
TULALIP TRIBES LITIGATION
In 1995, Grand entered into discussions with Seven Arrows, L.L.C. ("Seven
Arrows"), a Delaware limited liability company, regarding possible participation
by Grand in a proposed casino resort development on land in the State of
Washington held in trust by the United States for the Tulalip Tribes. Grand and
Seven Arrows entered into a letter of intent providing for the negotiation of a
revision to the Seven Arrows limited liability company agreement by which Grand
(or a subsidiary of Grand) would become a member of Seven
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 3, 1999, DECEMBER 28, 1997, AND DECEMBER 29, 1996
Arrows. Those negotiations were not completed, and no revision to the limited
liability company agreement was signed.
During the negotiations, Grand entered into an agreement (the "Advance
Agreement") with Seven Arrows and the Tulalip Tribes. The Advance Agreement
provided for the loan by Grand and Seven Arrows of certain amounts to the
Tulalip Tribes upon the satisfaction of certain conditions. Grand contends that
those conditions were never satisfied. Neither Grand nor Seven Arrows advanced
any amount under the Advance Agreement.
In April 1996, the Tulalip Tribes brought a legal action in Tulalip Tribal
Court -- Tulalip Tribes of Washington v. Seven Arrows LLC, et al. -- Case No.
TUL-Ci4/96-499 -- against Seven Arrows and Grand. The action sought various
remedies, including (i) a declaration that a lease and sublease between the
Tulalip Tribes and Seven Arrows for the land on which the casino resort was
proposed were rightfully terminated; (ii) damages for breach of the lease, the
sublease, and the Advance Agreement; and (iii) a declaration that the lease,
sublease, and Advance Agreement are void.
Because Grand was not a party to the lease or the sublease, Grand contended
in the tribal court action that the only claim against Grand was for breach of
the Advance Agreement; that Grand did not breach the Advance Agreement; and that
any damages sustained by the Tulalip Tribes as a result of any such breach are
not material.
In May 1996, Seven Arrows and Grand brought a legal action in the U.S.
District Court for the Western District of Washington -- Seven Arrows LLC, et
al. v. Tulalip Tribes of Washington -- Case No. C96-0709Z -- against the Tulalip
Tribes, Seven Arrows sought in that action certain remedies against the Tulalip
Tribes, including damages, and Grand sought rescission of the Advance Agreement.
Since June 1996, Seven Arrows, Grand and the Tulalip Tribes have been
engaged in disputes in both the tribal court and the federal court regarding
which court has jurisdiction over the various claims made in the two legal
actions. In July 1998, Seven Arrows, Grand, and the Tulalip Tribes entered into
a partial settlement agreement that resolved the jurisdictional dispute. In
accordance with the partial settlement agreement, all claims between the parties
must now be submitted to and decided by the federal court.
Pursuant to the partial settlement agreement, Seven Arrows filed a second
amended complaint in the federal action. Among other things, Seven Arrows seeks
damages from the Tulalip Tribes for lost profits of up to $15 million and for
recovery of sums paid to the Tribes between $2 and $3 million. Grand is not a
party to the second amended complaint.
On September 30, 1998, the Tulalip Tribes answered, counterclaimed against
Seven Arrows, and filed and served a complaint in the pending federal action
against Grand. The complaint against Grand contains several counts, including
(i) a request for judgment declaring that the Tribe's termination of the
agreements was effective and quieting title in the land; (ii) a claim for breach
of contract and breach of the implied covenant of good faith that alleges that
Grand is liable on the lease, sublease, and Advance Agreement based upon (a)
Grand's alleged status as a partner of Seven Arrows; (b) Grand's alleged status
as managing and operating agent of Seven Arrows; and (c) Grand's execution of
the Advance Agreement (iii) a claim for negligent misrepresentation claiming, in
essence, that representations of Grand personnel induced the Tribes to continue
to honor the lease, sublease, and Advance Agreement and thereby to incur
expenses they would not have incurred otherwise; (iv) a claim that Grand, by
purporting to act for and with the authority of Seven Arrows, stands as
warrantor and surety of Seven Arrows' obligations; and (v) a claim for estoppel.
Each claim for damages seeks the sum of $856,000 for out-of-pocket expenses and
for "lost profits damages" in an amount to be proved at trial.
Grand answered this complaint on January 15, 1999. Grand does not oppose
the Tribe's effort to quiet title to its land (the first claim). Grand denies
that it is factually or legally liable for the obligations or liabilities of
Seven Arrows under the lease and sublease. Grand continues to contend that, as
to the Tribe, its
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 3, 1999, DECEMBER 28, 1997, AND DECEMBER 29, 1996
obligations, if any, are limited to those stated in the Advance Agreement; that
it did not breach the Advance Agreement; and that the Tribe's damages for such
breach, if any, are minimal (the second, fourth, and fifth claims). Grand denies
that it is liable for negligent misrepresentation (the third claim). Grand also
filed a counterclaim against the Tribe on January 15, 1999, seeking rescission
of the Advance Agreement and damages from the Tribe based upon the Tribe's
breach of contract and breach of the covenant of good faith and fair dealing.
The Tribe denies the counterclaim.
On December 22, 1998, Seven Arrows answered the counterclaim of the Tribe
and asserted a complaint against the Company. Seven Arrows' complaint against
Grand alleges (a) that Grand agreed in writing not to take or omit any action
that would excuse the Tribe from its obligations to Seven Arrows or that would
cause Seven Arrows to be liable to the Tribe; (b) that if the Tribe's
allegations are correct, Grand acted as an agent of Seven Arrows and, as such,
owed Seven Arrows a fiduciary duty; and (c) that if the Tribe's allegations are
correct, Grand was a "partner" of Seven Arrows and, as such, owed Seven Arrows a
fiduciary duty. If the Tribe's allegations regarding certain acts, omissions, or
representations of the Company are correct and, as a result, Seven Arrows does
not recover against the Tribe, then Seven Arrows alleges that Grand is liable
either for breach of contract or breach of fiduciary duty in an amount equal to
the amount Seven Arrows would have recovered from the Tribe absent such acts,
omissions, or representations. Grand has not yet answered Seven Arrows'
complaint but intends to deny the allegations in their entirety and to defend
the claim vigorously.
Discovery has begun and a three-week bench trial has been set to commence
November 1, 1999. Grand's liability for damages to all parties in the aggregate
cannot exceed $15 million pursuant to the partial settlement agreement.
OTHER LITIGATION
The Company has recorded a $10.6 million reserve assessment related to
various of the above items. The reserve is reflected as a litigation and claims
accrual on the accompanying consolidated balance sheet as of January 3, 1999.
Grand and Lakes are 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 is not likely to have a material adverse effect upon Grand's or the
Company's consolidated financial position or results of operations.
9. SUBSEQUENT EVENTS:
During January 1999, stock options to acquire up to 1.5 million shares of
Lakes' common stock were granted under the Company's 1998 Stock Option and
Compensation Plan, and .1 million shares of Lakes' common stock were granted
under the Company's 1998 Director Stock Option Plan.
The Company owns 49% of the Nevada Resort Properties, Polo Plaza Limited
Partnership (the Partnership) and is currently in negotiation to purchase the
land owned by the Partnership in lieu of exercising its right to purchase the
remaining 51% interest. In January 1999, the Company loaned $6.2 million to the
Partnership which shall be paid in monthly installments of interest only, at a
rate of 10 1/2% per annum, until the Company closes on the land or the remaining
51% of the Partnership. The loan shall then be repaid and satisfied by
offsetting an appropriate amount against the purchase price as agreed by the
Company and the Partnership.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 3, 1999, DECEMBER 28, 1997, AND DECEMBER 29, 1996
10. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Year ended January 3, 1999 (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Net revenues............................................ $23,030 $19,718 $21,582 $28,017
Earnings from operations................................ 17,783 18,328 19,603 20,238
Net Earnings............................................ 11,703 12,319 25,283 11,875
Earnings per share:
Basic................................................. $1.11 $1.17 $2.39 $1.13
Diluted............................................... 1.08 1.14 2.37 1.12
Year ended December 28, 1997 (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Net revenues............................................ $19,054 $19,814 $23,133 $16,514
Earnings from operations................................ 17,659 18,483 22,142 11,425
Net earnings............................................ 11,393 11,707 13,690 8,413
Earnings per share:
Basic................................................. $1.09 $1.12 $1.30 $.81
Diluted............................................... 1.07 1.10 1.26 .77
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
LAKES BOARD OF DIRECTORS
The business of Lakes is managed under the direction of its Board of
Directors (the "Lakes Board"). The current directors and executive officers of
Lakes are listed below.
LYLE BERMAN, age 57, Chairman of the Board and Chief Executive Officer of
Lakes since June 1998 and Chairman of the Board of Directors of Grand since
October 1991. Mr. Berman is a director of Park Place, Mr. Berman is also a
director of G-III Apparel Group Ltd ("G-III"), Innovative Gaming Corporation of
America ("IGCA"), New Horizon Kids Quest, Inc. ("Kids Quest") and Wilsons The
Leather Experts Inc. ("Wilsons"). Mr. Berman is Chairman of the Board and Chief
Executive Officer of Rainforest Cafe, Inc. ("Rainforest"). Mr. Berman was a
member of the Board of Directors of Stratosphere from July 1994 to July 1997,
and served as the Chairman of the Board of Directors of Stratosphere from July,
1996 to July, 1997. From July, 1994 through October 1996, Mr. Berman was
Stratosphere's Chief Executive Officer. Stratosphere filed for reorganization
under Chapter 11 of the Bankruptcy Code on January 27, 1997.
THOMAS J. BROSIG, age 49, President of Lakes and a director since June 1998
and President and Chief Executive Officer and a director of Grand since
September 1996. Mr. Brosig was Executive Vice President of Grand from August
1994 through September 1996 and President of Grand from May 1993 through August
1994. Mr. Brosig also served as Grand's Chief Operating Officer from October
1991 to May 1993 and as Grand's Chief Financial Officer from October 1991 to
January 1992. Mr. Brosig is a director of Famous Daves of America, Inc., G-III
and Wilsons. Mr. Brosig is currently the President Mid-South Region of Park
Place.
TIMOTHY J. COPE, age 47, Chief Financial Officer of Lakes and Chief
Financial Officer of Grand since January 20, 1994 and an Executive Vice
President since April of 1997 and a director of Grand since February 1998. Mr.
Cope was Grand's Vice President of Finance from August 1993 through January
1994. From May 1986 through August 1992, Mr. Cope was the Vice President-Finance
and Administration of Bally's Grand, Reno and after the sale of Bally's Grand,
Reno to Hilton in August 1992 served as the Vice President-Finance of The Reno
Hilton until August 1993. From January 1984 through May 1986, Mr. Cope was the
Vice President of Finance of MGM Grand Reno.
MORRIS GOLDFARB, age 48, Director of Lakes since June 1998 and a director
of Grand since December 1992. Mr. Goldfarb is a director and the President and
Chief Executive Officer of G-III. Mr. Goldfarb has served as either the
President or Vice President of G-III and its predecessors since their formation
in 1974. Mr. Goldfarb is a director of Wilsons.
RONALD J. KRAMER, age 40, Director of Lakes since June 1998 and a director
of Grand since March 1995. Mr. Kramer is the Chairman of the Board and Chief
Executive Officer of Ladenburg Thalmann Group Inc., an investment banking firm
where he has been employed for over five years. Mr. Kramer is also a Director of
Griffon Corporation and New Valley Corporation. Ladenburg has periodically
provided investment banking services to Grand.
DAVID L. ROGERS, age 56, Director of Lakes since June 1998 and a director
of Grand since October 1991. Mr. Rogers has been President of Wilsons since
March 1992. From November 1988 through March 1992, Mr. Rogers was Executive Vice
President and chief operating officer of Wilsons. Mr. Rogers is a director of
Wilsons and Rainforest.
NEIL I. SELL, age 57, Director of Lakes since June 1998 and a director of
Grand since October 1991. Until July 31, 1997, Mr. Sell was a director of
Stratosphere. Since 1968, Mr. Sell has been engaged in the practice of law in
Minneapolis, Minnesota with the firm of Maslon Edelman Borman & Brand, LLP,
which has rendered legal services to Grand.
JOEL N. WALLER, age 59, Director of Lakes since June 1998 and a director of
Grand since October 1991. Mr. Waller has been Chairman and Chief Executive
Officer of Wilsons since March 1992. Mr. Waller was
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President of Wilsons from 1983 through March 1992. Mr. Waller is also a director
of Damark International, Inc. and Rainforest.
JOSEPH GALVIN, age 59, is the Chief Operating Officer of Lakes and was the
Chief Administrative Officer of Grand from 1996 until 1998. From 1990 to
November 1996, Mr. Galvin served as Vice President of Security at Grand. From
1978 to 1990, Mr. Galvin was employed as a Vice President of Charmal Home
Center/W.R. Grace.
COMMITTEES OF THE LAKES BOARD
The Lakes Board has two standing committees: (i) Audit Committee; and (ii)
the Compensation Option Committee.
Lakes' Audit Committee consists of Messrs. David L. Rogers, Neil I. Sell
and Joel N. Waller. The audit committee recommends to the full Board the
engagement of the independent accountants, reviews the audit plan and results of
the audit engagement, reviews the independence of the auditors, and reviews the
adequacy of Lakes' system of internal accounting controls.
Lakes' Compensation Committee consists of Messrs. David L. Rogers and Joel
N. Waller. The Compensation Committee review Lakes' remuneration policies and
practices, and make recommendations to the Lakes Board in connection with all
compensation matters affecting Lakes.
COMPENSATION OF LAKES DIRECTORS
Each director of Lakes who is not otherwise employed by Lakes receives an
annual fee of $7,500. Lakes also pays each director not otherwise employed by it
a fee of $1,000 for each meeting of the Board of Directors and $1,000 for each
committee meeting of the Board of Directors attended.
In addition, the Lakes 1998 Director Stock Option Plan (the "Lakes Director
Plan") provides that each director who was not an employee of Lakes or one of
its subsidiaries (a "Non-Employee Director") and who was in office at the time
of the Distribution, and each subsequent Non-Employee Director at the time of
his or her initial election to the Lakes Board receives a non-qualified stock
option to purchase up to 12,500 shares of Lakes Common Stock at an option
exercise price equal to 100% of the fair market value of the shares on such
grant date. Each option under the 1998 Lakes Director Plan will have a ten-year
term and will generally become exercisable in five equal installments commencing
on the first anniversary of the grant date.
ITEM 11. EXECUTIVE COMPENSATION
Lakes is a newly formed, public corporation that did not pay any
compensation to its executive officers in fiscal 1998. Compensation for the
Lakes executive officers will be determined by the Compensation and Stock Option
Committee of the Lakes Board. None of Lakes' executive officers currently have
an employment agreement with Lakes.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Lakes Compensation Committee is comprised of Messrs. David L. Rogers
and Joel N. Waller. Messrs. Rogers and Waller are directors and executive
officers of Wilsons. Lyle Berman and Tom Brosig, directors and executive
officers of the Company, and Morris Goldfarb, a director of the Company, are
directors of Wilsons. During fiscal 1998, Messrs. Brosig and Berman served on
the Compensation Committee of the Board of Directors of Wilsons.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information as to the shares of Lakes Common
Stock beneficially owned (or deemed to be owned pursuant to the rules of the
SEC) as of March 24, 1999 by each director of Lakes, each of the executive
officers of Lakes named elsewhere herein (the "Lakes Named Executive Officers"),
all directors and executive officers of Lakes as a group and each person known
to Lakes to be the beneficial owner of more than 5% of the outstanding shares of
Lakes Common Stock, in each case based upon beneficial ownership reporting of
Lakes Common Stock as of such date. Except as other-wise noted, each shareholder
has sole voting and investment power with respect to the shares beneficially
owned. As of March 24, 1999, there were 10,584,282 shares of Lakes Common Stock
issued and outstanding.
SHARES OF LAKES
COMMON STOCK PERCENT COMMON
NAME BENEFICIALLY OWNED STOCK OUTSTANDING
---- ------------------ -----------------
Lyle Berman(2)
130 Chesire Lane
Minnetonka, MN 55305...................................... 1,320,711(1) 12.2
Neil I. Sell, as sole trustee of four irrevocable trusts for
the benefit of Lyle Berman's children..................... 310,500(2) 2.9
Neil I. Sell................................................ 19,949(3) *
Thomas J. Brosig............................................ 237,060(4) 2.2
Timothy J. Cope............................................. 34,500(5) *
Ronald J. Kramer............................................ 8,000(6) *
Morris Goldfarb............................................. 27,830(7) *
David L. Rogers............................................. 24,514(8) *
Joel N. Waller.............................................. 18,806(9) *
Joseph Galvin............................................... 35,025(10) *
All Lakes Directors and Executive Officers as a Group (9
people including the foregoing)........................... 1,726,395(11) 15.6
Heartland Advisors, Inc.
790 North Milwaukee Street
Milwaukee, WI 53202....................................... 594,800(12) 5.6
Highfields Associates, LLC
Highfields Capital Management, LP
Richard L. Grubman
Jonathon S. Jacobson
200 Clarendon Street -- 51st Floor
Boston, MA 02117
Milwaukee, WI 53202....................................... 577,349(13) 5.46
- ---------------
* Less than one percent.
(1) Includes 20,625 shares beneficially owned by Mr. Berman's spouse. Also
includes 11,403 shares held by Berman Consulting Corporation, a corporation
wholly owned by Mr. Berman. Also includes options to purchase 250,000
shares.
(2) Mr. Sell has disclaimed beneficial ownership of such shares.
(3) Includes options to purchase 15,750 shares.
(4) Includes 22,450 shares beneficially owned by Mr. Brosig's spouse. Also
includes options to purchase 112,500 shares.
(5) Includes options to purchase 34,500 shares.
(6) Includes 500 shares beneficially owned by a partnership in which the
general partner is a corporation wholly owned by Mr. Kramer. Also includes
options to purchase 7,500 shares.
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(7) Includes 500 shares held by Mr. Goldfarb's adult children who reside in his
household. Also includes options to purchase 20,625 shares.
(8) Includes 8,250 shares beneficially owned by Mr. Rogers' spouse. Also
includes options to purchase 15,750 shares.
(9) Includes 513 shares beneficially owned by Mr. Waller's spouse. Also
includes options to purchase 15,750 shares.
(10) Includes options to purchase 35,025 shares.
(11) Includes shares held by corporations controlled by such officers and
directors. Also includes options to purchase 507,400 shares.
(12) Based solely upon the most recent Schedule 13G on file with the Securities
and Exchange Commission. The reporting person has sole voting power with
respect to 86,450 shares and sole dispositive power with respect to 594,800
shares.
(13) Based solely upon the most recent Schedule 13G on file with the Securities
and Exchange Commission. Messrs. Richard L. Grubman and Jonathon S.
Jacobson share both voting and dispositive power with respect to 577,349
shares directly owned by each of Highfields Capital I LP, Highfields
Capital II LP and Highfields Capital, Ltd. Messrs. Grubman and Jacobson are
each Managing Members of Highfields GP LLC, a Delaware limited liability
company, which is the general partner of Highfields Capital Management LP,
and in that capacity, directs its operations.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Lakes'
officers and directors, and persons who own more than ten percent of a
registered class of Lakes' equity securities, to file reports of ownership and
changes in ownership with the SEC and the Nasdaq National Market. Officers,
directors and greater than ten percent shareholders are required by SEC
regulation to furnish Lakes with copies of all Section 16(a) forms they file.
Based solely upon a review of the copies of such forms furnished to the Company
or written representations that no Forms 5 were required, the Company believes
that during the fiscal year ended January 3, 1999, all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten percent
shareholders were complied with.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
New Horizon Kids Quest, Inc.
New Horizon Kids Quest, Inc. ("Kids Quest") owns and operates Kids
Quest(SM) child care entertainment centers in casinos managed by Lakes. Lakes
beneficially owns approximately 28% of Kids Quest common stock. Lyle Berman,
Chairman of the Board and a principal shareholder of Lakes, is a director of
Kids Quest. The agreements under which Kids Quest operates child care centers
typically provide for a minimum guaranteed management fee to be paid to Kids
Quest by each managed property, which varies by location, as well as a child
care rate subsidy from each managed property against Kids Quest's operating
losses at those respective managed property locations.
Pursuant to an indemnification agreement entered into as of December 1998
by and between Lakes and Mr. Berman, Lakes has agreed to indemnify Mr. Berman
for any damages incurred by Mr. Berman arising out of his acts and omissions as
a director of Kids Quest.
Park Place Entertainment Corporation
Lyle Berman is a member of the Board of Directors of Park Place and he has
entered into an employment agreement with Park Place as of January 1, 1999 (the
"Park Place Employment Agreement") pursuant to which he will serve as a
part-time employee of Park Place for an initial term of 4 years, unless earlier
terminated by Park Place. As a part-time employee of Park Place, Mr. Berman will
receive compensation in the first year of Two Hundred Thousand Dollars
($200,000.00) and compensation in each of years two, three and four respectively
of an amount not less than Ten Thousand Dollars ($10,000.00). In connection with
his
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execution of the Park Place Employment Agreement, Mr. Berman received stock
options to purchase and aggregate of four hundred thousand (400,000) shares of
Park Place common stock at a per share exercise price of Six Dollars and
Sixty-Seven cents ($6.67), said options to vest at the rate of One Hundred
Thousand (100,000) shares per year on the anniversary date of the Park Place
Employment Agreement. The Park Place Employment Agreement also contains a
noncompetition covenant under which Mr. Berman is prohibited, subject to certain
exceptions, from participating in the ownership, management or control of any
business which is engaged in a gaming enterprise which competes or would compete
with Park Place. Additionally, Mr. Berman must present any gaming opportunities
and projects to Park Place in the first instance. If Park Place determines not
to pursue any venture or opportunity presented by Mr. Berman, only then may that
opportunity be presented to and pursued by Lakes. The following exceptions are
not subject to Mr. Berman's noncompetition agreement: (i) the management of
Indian owned casinos and related amenities; (ii) the development of the Polo
Plaza project in Las Vegas, NV; and (iii) Internet, cable television or other
electronic media-based gaming enterprises. The terms of Mr. Berman's employment
with Park Place may substantially limit the number and scope of opportunities
which Lakes will be able consider and pursue.
Thomas Brosig, the President and a Director of Lakes is also employed by
Park Place as its President Mid-South Region.
Other Matters
Neil I. Sell is a partner in the law firm of Maslon Edelman Borman & Brand,
LLP, which rendered legal services to Lakes during the last fiscal year.
Ronald J. Kramer is Chairman of the Board and Chief Executive Officer of
Ladenburg Thalmann & Co. Inc., an Investment Banking institution that has, from
time to time, provided investment advisory services to the Company and served as
the Investment Advisor to Grand in connection with the Merger.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements:
PAGE
----
LAKES GAMING, INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................... 31
Consolidated Balance Sheets as of January 3, 1999 and
December 28, 1997........................................... 32
Consolidated Statements of Earnings for the fiscal years
ended January 3, 1999, December 28, 1997 and December 29,
1996........................................................ 33
Consolidated Comprehensive Statements of Earnings for the
fiscal years ended January 3, 1999, December 28, 1997 and
December 29, 1996........................................... 34
Consolidated Statements of Shareholders' Equity for the
fiscal years ended January 3, 1999, December 28, 1997 and
December 29, 1996........................................... 35
Consolidated Statements of Cash Flows for the fiscal years
ended January 3, 1999, December 28, 1997 and December 29,
1996........................................................ 36
Notes to Consolidated Financial Statements.................. 37-52
- ---------------
(a)(2) None.
(a)(3)
EXHIBITS DESCRIPTION
-------- -----------
2.1 Agreement and Plan of Merger by and among Hilton, Park Place
Entertainment Corporation, Gaming Acquisition Corporation,
Lakes Gaming, Inc. and Grand dated as of June 30, 1998.
(Incorporated herein by reference to Exhibit 2.2 to Lakes'
Form 10 Registration Statement as filed with the Securities
and Exchange Commission (the "Commission") on October 23,
1998.) (the "Lakes Form 10")
3.1 Articles of Incorporation of Lakes Gaming, Inc.
(Incorporated herein by reference to Exhibit 3.1 to the
Lakes Form 10.)
3.2 By-laws of Lakes Gaming, Inc. (Incorporated herein by
reference to Exhibit 3.2 to the Lakes Form 10.)
10.1 Distribution Agreement by and between Grand Casinos, Inc.
and Lakes Gaming, Inc., dated as of December 31, 1998.
(Incorporated herein by reference to Exhibit 10.1 to Lakes'
Form 8-K dated January 8, 1999.)
10.2 Employee Benefits and Other Employment Matters Allocation
Agreement by and between Grand Casinos, Inc. and Lakes
Gaming, Inc., dated as of December 31, 1998. (Incorporated
herein by reference to Exhibit 10.2 to Lakes' Form 8-K dated
January 8, 1999.)
10.3 Intellectual Property License Agreement by and between Grand
Casinos, Inc. and Lakes Gaming, Inc., dated as of December
31, 1998. (Incorporated herein by reference to Exhibit 10.5
to Lakes' Form 8-K dated January 8, 1999.)
10.4 Tax Allocation And Indemnity Agreement by and between Grand
Casinos, Inc. and Lakes Gaming, Inc., dated as of December
31, 1998. (Incorporated herein by reference to Exhibit 10.3
to Lakes' Form 8-K dated January 8, 1999.)
10.5 Tax Escrow Agreement by and among Grand Casinos, Inc., Lakes
Gaming, Inc., and First Union National bank as Escrow Agent,
dated as of December 31, 1998. (Incorporated herein by
reference to Exhibit 10.4 to Lakes' Form 8-K dated January
8, 1999.)
58
59
EXHIBITS DESCRIPTION
-------- -----------
10.6 Insurance Receivable Agreement by and between Grand Casinos,
Inc. and Lakes Gaming, Inc., dated as of December 31, 1998.
(Incorporated herein by reference to Exhibit 10.6 to Lakes'
Form 8-K dated January 8, 1999.)
10.7 Trust Agreement dated as of December 31, 1998 entered into
by and among Lakes Gaming, Inc., Grand Casinos, Inc. and
First Union National Bank, as Trustee.
10.8 Pledge and Security Agreement dated as of December 31, 1998
entered in to by and among Lake Gaming, Inc., as Debtor and
First Union National Bank ( the "Trustee") pursuant to the
Trust Agreement executed in favor of Grand Casinos, Inc.
(the "Secured Party").
10.9 Lakes Gaming, Inc. 1998 Stock Option and Compensation Plan.
(Incorporated herein by reference to Annex G to the Joint
Proxy Statement/Prospectus of Hilton Hotels Corporation and
Grand dated and filed with the Commission on October 14,
1998 (the "Joint Proxy Statement") which is attached to the
Lakes Form 10 as Annex A.)*
10.10 Lakes Gaming, Inc. 1998 Director Stock Option Plan.
(Incorporated herein by reference to Annex H to the Joint
Proxy Statement/Prospectus of Hilton Hotels Corporation and
Grand dated and filed with the Commission on October 14,
1998 (the "Joint Proxy Statement") which is attached to the
Lakes Form 10 as Annex A.)*
10.11 Amended and Restated Management & Construction Agreement,
Loan Agreement, Promissory Note, and Security Agreement
between the Tunica-Biloxi Tribe of Louisiana and Grand
Casinos of Louisiana, Inc. -- Tunica-Biloxi, dated November
1, 1991. (Incorporated herein by reference to Exhibit 10BB
to Grand's Registration Statement on Form S-1, as amended,
File No. 33-46798.)
10.12 Amended and Restated Management & Construction Agreement,
Loan Agreement, Promissory Note, and Security Agreement
between the Coushatta Tribe of Louisiana and Grand Casinos
of Louisiana, Inc. -- Coushatta, dated February 25, 1992.
(Incorporated herein by reference to Exhibit 10CC to Grand's
Registration Statement on Form S-1, as amended, File No.
33-42281.)
10.13 Agreement among Grand, Bob Stupak, Bob Stupak Enterprises,
Inc. and Grand Casinos Resorts, Inc. dated November 15, 1993
and First and Second Amendments thereto dated December 22,
1993 and January 25, 1994. (Incorporated herein by reference
to Exhibit 10.46 to Grand's Report on Form 10-K for the
fiscal year ended January 1, 1995 (File No. 0-19565).)
10.14 Letter Agreement dated as of June 1, 1994 between
Stratosphere Corporation, Grand Casinos, Inc., Grand Casinos
Resorts, Inc., Bob Stupak Enterprises, Inc. and Bob Stupak.
(Incorporated herein by reference to Exhibit 10.80 to
Grand's Report on Form 10-Q for the quarter ended July 3,
1994 (File No. 0-19565).)
10.15 Amendment to June 1, 1994 Letter Agreement dated November
16, 1994 between Stratosphere Corporation, Grand Casinos
Resorts, Inc., Grand Casinos, Inc., Bob Stupak Enterprises,
Inc. and Bob Stupak. (Incorporated herein by reference to
Exhibit 10.48 to Grand's Report on Form 10-K for the fiscal
year ended January 1, 1995 (File No. 0-19565).)
10.16 Management and Development Agreement dated July 1, 1994, by
and between Stratosphere Corporation and Grand Casinos, Inc.
(Incorporated herein by reference to Exhibit 10.49 to
Grand's Report on Form 10-K for the fiscal year ended
January 1, 1995 (File No. 0-19565).)
10.17 Memorandum of Agreement dated as of February 16, 1995 by and
among Stratosphere Corporation and Grand Casinos, Inc.
(Incorporated herein by reference to Exhibit 10.50 to
Grand's Report on Form 10-K for the fiscal year ended
January 1, 1995 (File No. 0-19565).)
10.18 Standby Equity Commitment dated March 9, 1995 by and between
Grand Casinos, Inc. and Stratosphere Corporation.
(Incorporated herein by reference to Exhibit 10.51 to
Grand's Report on Form 10-K for the fiscal year ended
January 1, 1995 (File No. 0-19565).)
59
60
EXHIBITS DESCRIPTION
-------- -----------
10.19 Notes Completion Guarantee dated March 9, 1995 by and
between Grand Casinos, Inc. and American Bank National
Association. (Incorporated herein by reference to Exhibit
10.52 to Grand's Report on Form 10-K for the fiscal year
ended January 1, 1995 (File No. 0-19565).)
10.20 Completion Guarantor Subordination Agreement dated March 9,
1995 between Grand Casinos, Inc. and American Bank National
Association. (Incorporated herein by reference to Exhibit
10.53 to Grand's Report on Form 10-K for the fiscal year
ended January 1, 1995 (File No. 0-19565).)
10.21 Funding Agreement dated as of September 27, 1996 by and
among Grand Casinos, Inc. and Stratosphere Corporation
(Incorporated herein by reference to Exhibit 10.1 to Grand's
Report on Form 10-Q for the quarter ended September 30,
1996)
10.22 Letter Agreement dated as of September 27, 1996 by and among
Grand Casinos, Inc., Stratosphere Corporation and
Stratosphere Gaming Corp. (Incorporated herein by reference
to Exhibit 10.2 to Grand's Report on Form 10-Q for the
quarter ended September 30, 1996)
10.23 Restructuring Agreement Regarding Pre-Negotiated Plan of
Reorganization by and among Stratosphere Corporation,
Stratosphere Gaming Corp. and Grand Casinos, Inc. and Member
of AD Hoc Committee of holders of $203,000,000 of 14 1/4%
First Mortgage Notes Due 2002. (Incorporated herein by
reference to Exhibit 99.2 to Stratosphere Corporation's Form
8-K dated January 6, 1997)
10.24 Lease Agreement, dated as of June 17, 1996, by and between
Brooks Family Trust and Nevada Brooks Cook as Landlord and
Cloobeck Enterprises and Grand Casinos Nevada I, Inc. as
Tenants. (Incorporated herein by reference to Exhibit 10.76
to Grand's Report on Form 10-K for the fiscal year ended
December 28, 1997.)
10.25 First Amendment to Ground Lease, dated November 25, 1997, by
and between MacGregor Income Properties West I, Inc. and
Grand Casinos Nevada I, Inc. (Incorporated herein by
reference to Exhibit 10.77 to Grand's Report on Form 10-K
for the fiscal year ended December 28, 1997.)
10.26 Ground Lease, dated July 31, 1996, by and between MacGregor
Income Properties West I, Inc. and Cloobeck Enterprises.
(Incorporated herein by reference to Exhibit 10.78 to
Grand's Report on Form 10-K or the fiscal year ended
December 28, 1997.)
10.27 Indemnification Agreement, dated as of December 31, 1997, by
and between Grand Casinos, Inc. and Lyle Berman.
(Incorporated herein by reference to Exhibit 10.79 to
Grand's Report on Form 10-K for the fiscal year ended
December 28, 1997.)
10.28 Carlson Center Office Lease by and between Carlson Real
Estate Company, a Minnesota Limited Partnership, as Landlord
and Grand Casinos, Inc. as Tenant, dated February 1, 1996,
as Amended by that First Amendment to Lease dated August 23,
1996. (Incorporated herein by reference to Exhibit 10.32 to
the Lakes Form 10.)
10.29 Sublease entered into effective as of the 30th day of
December 1998, between Grand Casinos, Inc., a Minnesota
Corporation ("Sublessor"), and Lakes Gaming, Inc., a
Minnesota Corporation ("Sublessee").
21 Subsidiaries of the Company
27 Financial Data Schedule.
- ---------------
* Management Compensatory Plan or Arrangement.
(b) Reports on Form 8-K. The Company did not file any Current Reports on
Form 8-K during the fourth quarter ended January 3, 1999.
(c) See Part IV, Item 14 (a)(3) and the exhibit list immediately above.
(d) None.
60
61
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LAKES GAMING, INC.
Registrant
By: /s/ LYLE BERMAN
------------------------------------
Name: Lyle Berman
Title: Chairman of the Board and
Chief Executive Officer
Dated as of March 26, 1999
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
indicated as of March 26, 1999.
NAME TITLE
---- -----
/s/ LYLE BERMAN Chairman of the Board and Chief Executive Officer
- ------------------------------------ (Principal Executive Officer)
Lyle Berman
/s/ THOMAS J. BROSIG President and Director
- ------------------------------------
Thomas J. Brosig
/s/ TIMOTHY J. COPE Chief Financial Officer and Director
- ------------------------------------ (Principal Financial and Accounting Officer)
Timothy J. Cope
/s/ MORRIS GOLDFARB Director
- ------------------------------------
Morris Goldfarb
/s/ RONALD KRAMER Director
- ------------------------------------
Ronald Kramer
/s/ DAVID L. ROGERS Director
- ------------------------------------
David L. Rogers
/s/ NEIL I. SELL Director
- ------------------------------------
Neil I. Sell
/s/ JOEL N. WALLER Director
- ------------------------------------
Joel N. Waller
61