1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 4, 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. 1-12962
LAKES GAMING, INC.
------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1913991
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
130 Cheshire Lane
Minnetonka, Minnesota 55305
--------------------- -----
(Address of principal executive offices) (Zip Code)
(612) 449-9092
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of May 11, 1999, there were 10,584,282 shares of Common Stock, $0.01 par
value per share, outstanding.
Page 1 of 33
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LAKES GAMING, INC. AND SUBSIDIARIES
INDEX
PAGE OF
FORM 10-Q
---------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of 3
April 4, 1999 and January 3, 1999
Consolidated Statements of Earnings 4
for the three months ended April 4, 1999
and March 29, 1998
Consolidated Statements of Cash Flows 5
for the three months ended April 4, 1999
and March 29, 1998
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND 11
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 18
ITEM 6. Exhibits and Reports On Form 8-K 27
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3
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
APRIL 4, 1999 JANUARY 3, 1999
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $63,567 $56,774
Current installments of notes receivable 8,917 8,561
Accounts receivable 15,397 15,217
Deferred income taxes 7,370 7,370
Other current assets 1,429 756
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Total Current Assets 96,680 88,678
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Property and Equipment-Net 1,433 1,265
- -------------------------------------------------------------------------------------------------------------
Other Assets:
Land held for development 35,030 26,647
Notes receivable-less current installments 22,909 25,118
Cash and cash equivalents-restricted 4,992 4,992
Investments in and notes from unconsolidated affiliates 8,501 8,590
Casino development costs 4,412 4,846
Securities available for sale 1,033 1,033
Other long-term assets 313 200
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Total Other Assets 77,190 71,426
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TOTAL ASSETS $175,303 $161,369
=============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $409 $ -
Income taxes payable 16,864 10,811
Litigation and claims accrual 9,633 10,554
Other accrued expenses 4,390 4,625
- -------------------------------------------------------------------------------------------------------------
Total Current Liabilities 31,296 25,990
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Long-term Liabilities:
Long-term debt-less current installments 975 975
Deferred income taxes 2,733 2,733
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Total Long-Term Liabilities 3,708 3,708
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TOTAL LIABILITIES 35,004 29,698
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COMMITMENTS AND CONTINGENCIES
Shareholders' Equity:
Capital stock, $.01 par value; authorized 100,000 shares;
10,576 and 10,584 common shares issued and outstanding
at April 4, 1999, and January 3, 1999, respectively 106 106
Additional paid-in-capital 130,995 130,929
Accumulated other comprehensive earnings 636 636
Retained Earnings 8,562 -
- -------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 140,299 131,671
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $175,303 $161,369
=============================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
THREE MONTHS ENDED
-----------------------------------
APRIL 4, 1999 MARCH 29, 1998
------------- --------------
(UNAUDITED)
REVENUES:
Management fee income $15,109 $23,030
COSTS AND EXPENSES:
Selling, general and administrative 1,709 4,876
Depreciation and amortization 476 371
- --------------------------------------------------------------------------------------------
Total Costs and Expenses 2,186 5,247
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EARNINGS FROM OPERATIONS 12,923 17,783
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OTHER INCOME (EXPENSE):
Interest income 1,635 1,338
Interest expense (24) (24)
Equity in loss of unconsolidated affiliates (255) (48)
Other 411 199
- --------------------------------------------------------------------------------------------
Total other income, net 1,767 1,465
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Earnings before income taxes 14,691 19,248
Provision for income taxes 6,128 7,545
- --------------------------------------------------------------------------------------------
NET EARNINGS $8,562 $11,703
============================================================================================
BASIC EARNINGS PER SHARE $0.81 $1.11
============================================================================================
DILUTED EARNINGS PER SHARE $0.80 $1.08
============================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 10,578 10,496
DILUTIVE EFFECT OF STOCK COMPENSATION PROGRAMS 104 378
============================================================================================
WEIGHTED AVERAGE COMMON AND DILUTED
SHARES OUTSTANDING 10,682 10,874
============================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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5
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
--------------------------------
APRIL 4, 1999 MARCH 29, 1998
------------- --------------
(UNAUDITED)
OPERATING ACTIVITIES:
Net earnings $8,562 $11,703
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 476 371
Changes in operating assets and liabilities:
Current Assets (852) (6,297)
Income taxes 6,053 7,545
Accounts payable 408 -
Accrued expenses (1,156) 1,829
Other 255 48
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Net Cash Provided by Operating Activities 13,746 15,199
- ----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Payments for property and equipment (200) -
Proceeds from sale of property and equipment - 682
Advances under notes receivable - (2,023)
Proceeds from repayment of notes receivable 1,852 1,216
Increase in restricted cash - (4,017)
Payments for land held for development (8,383) (4,099)
Increase in other long-term assets (288) (476)
- ----------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (7,019) (8,717)
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FINANCING ACTIVITIES:
Distribution to Grand - (6,414)
Proceeds from issuance of common stock 67 -
Payments on long-term debt - (13)
- ----------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 67 (6,427)
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Net increase in cash and cash equivalents 6,794 55
Cash and cash equivalents - beginning of period 56,774 33,208
- ----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $63,567 $33,263
====================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $24 $ -
Income taxes 245 -
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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6
LAKES GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. UNAUDITED FINANCIAL STATEMENTS:
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 had 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. The Merger and Distribution received all
necessary shareholder and regulatory approvals and was completed on December 31,
1998. Grand obtained a ruling from the Internal Revenue Service (IRS) that the
Distribution qualified as a tax-free transaction, solely with respect to Grand
shareholders except to the extent that Grand shareholders received cash in lieu
of fractional shares.
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, respectively.
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 ("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 terms of seven years. Management
contracts for the two previously managed Minnesota casinos, Grand Casino Mille
Lacs and Grand Casino Hinckley concluded during 1998.
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LAKES GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 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.
The accompanying unaudited 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.
The consolidated financial statements have been prepared by the Company in
accordance with generally accepted accounting principles for interim financial
information, in accordance with the rules and regulations of the Securities and
Exchange Commission. Pursuant to such rules and regulations, certain financial
information and footnote disclosures normally included in the consolidated
financial statements have been condensed or omitted. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for fair presentation have been included.
Operating results for the three months ended April 4, 1999, are not necessarily
indicative of the results that may be expected for the fiscal year ending
January 2, 2000.
The consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended January 3, 1999.
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8
LAKES GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. COMMITMENTS AND CONTINGENCIES:
LEASES
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 April 4, 1999 are as follows (in
thousands):
Operating Leases
----------------
1999 $ 2,762
2000 3,225
2001 2,981
2002 3,109
2003 3,176
Thereafter 47,550
--------
$ 62,803
========
As a condition to the Merger, the Company has agreed to exercise its call option
to purchase the Shark Club property in Las Vegas, Nevada, not prior to April 9,
2000 and not later than January 10, 2001. The option purchase price would be
approximately $10.1 million.
The Company also has an option to purchase the Travelodge property in Las Vegas,
Nevada for the purchase price of $30 million on October 31, 2017, and an option
to purchase the Cable property in Las Vegas, Nevada for the purchase price of
$18 million any time prior to October 31, 2000.
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 April 4, 1999, the amount outstanding was $5.9 million.
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 April 4, 1999, $22.8 million has
been advanced, and is outstanding.
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LAKES GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The Company has entered into a guaranty agreement related to a construction loan
agreement entered into by Nevada Resort Properties Polo Plaza Limited
Partnership. The guaranty will remain in effect until the loan is paid. The
maturity date is October 31, 2000, and as of April 4, 1999, the outstanding
principal balance was $6.2 million.
The Company provided a limited guaranty for the purpose of financing
Stratosphere Corporation ("Stratosphere") 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 Distribution Agreement and the Agreement and Plan of Merger dated as of June
30, 1998, by and among Hilton Hotels Corporation, Park Place, Gaming Acquisition
Corporation, Lakes and Grand (the "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 Merger. 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.
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10
LAKES GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 proposed plan of reorganization, the
("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 terms of the Merger
Agreement, to indemnify Grand and Grand's current and former officers and
directors against such liabilities.
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11
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Lakes was established as a public corporation on December 31, 1998, via a
distribution of its common stock, par value $.01 per share to the shareholders
of Grand.
Pursuant to the terms of the Distribution Agreement entered into between Grand
and Lakes and dated as of December 31, 1998, 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 had already occurred.
Immediately following the Distribution, Grand merged with a subsidiary of 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.
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 first 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.
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12
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
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.
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended January 3, 1999.
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. 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 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 or Grand Casino Coushatta. There can be no assurance that these
compacts will be renewed on terms and conditions acceptable to either of the
tribes.
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LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
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.
THREE MONTHS ENDED APRIL 4, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 29,
1998
Revenues
Grand Casino Avoyelles and Grand Casino Coushatta generated $15.1 million in
management fee income during the three months ended April 4, 1999. Grand Casino
Mille Lacs, Grand Casino Hinckley, Grand Casino Avoyelles and Grand Casino
Coushatta generated $23 million in management fee income during the three months
ended March 29, 1998. Gross revenue increases at Grand Casino Avoyelles and
Grand Casino Coushatta partially offset the fact that the management contracts
for Grand Casino Mille Lacs and Grand Casino Hinckley ended during 1998.
Contributing to the increases were a 223-room hotel at Grand Casino Coushatta,
which opened in November of 1998 along with a 28,000 square foot casino
expansion at Coushatta which opened in December of 1999, and a special events
center and RV resort at Grand Casino Avoyelles, which opened during the first
quarter of 1998.
Costs and Expenses
Total costs and expenses were $2.2 million for the three months ended April 4,
1999, compared to $5.2 million for the same period in the prior year. Selling,
general, and administrative expenses decreased in the amount of $3.2 million
from $4.9 million for the three months ended March 29, 1998 to $1.7 million for
the three months ended April 4, 1999 due primarily to fewer legal costs and
project write-offs.
Other
Interest income was $1.6 million and $1.3 million for the three months ended
April 4, 1999 and March 29, 1998, respectively.
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14
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Earnings per Common Share and Net Earnings
For the three months ended April 4, 1999 basic and diluted earnings per common
share were $.80 and $.81, respectively. This compares to basic and diluted
earnings of $1.11 and $1.08 per share for the three months ended March 29, 1998.
Earnings decreased $3.1 million to $8.6 million for the three months ended April
4, 1999 compared to the same period in the prior year. This decrease is
primarily due to the expiration of the management contracts for Grand Casino
Mille Lacs and Grand Casino Hinckley during 1998. Total revenues during the
period ended March 29, 1998, under these expired contracts was $8.9 million. The
Company's current year period revenues and earnings do not include contributions
from these operations.
CAPITAL RESOURCES, CAPITAL SPENDING, AND LIQUIDITY
At April 4, 1999 Lakes had $68.6 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
business opportunities, and potential settlement of pending litigation matters.
For the three months ended April 4, 1999 and March 29, 1998 net cash provided by
operating activities totaled $13.7 and $15.2 million, respectively. For the same
periods, net cash used in investing activities totaled $7 million and $8.7
million, respectively. For the three months ended April 4, 1999 and March 29,
1998, proceeds from repayment of notes receivable amounted to $1.9 and $1.2
million, respectively. Advances under notes receivable amounted to $0 and $2
million for the three months ended April 4, 1999 and March 29, 1998. Also during
these periods, payments for land held for development amounted to $8.4 and $4.1
million, respectively, and restricted cash, increased $0 and $4 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,
to cover various commitments and contingencies related to or arising out of,
Grand's non-Mississippi business and assets (including by way of illustration
and 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, 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.
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15
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
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.
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 third quarter 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.
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LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
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
Quarterly Report on Form 10-Q and other materials filed or to be filed by the
Company with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company) contain statements that are forward-looking, such as plans for
future expansion and other business development activities as well as other
statements regarding capital spending, financing sources and the effects of
regulation (including gaming and tax regulation) and competition.
Such forward-looking information involves important risks and uncertainties that
could significantly affect the anticipated results in the future and,
accordingly, actual results may differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company.
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17
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
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 the Company's Annual Report on
Form 10-K for the year ended January 3, 1999.
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18
LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
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LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
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. In December 1998, the plaintiffs completed fact discovery related to the
issues raised by the summary judgment motion. Expert discovery was completed in
March of 1999. Defendants' reply papers will be filed on June 1, 1999 and
thereafter the Court will set a hearing and rule on the motion.
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.
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LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
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. In December
1998, the plaintiffs completed fact discovery related to the issues raised by
the summary judgement motion. Expert discovery was completed in March of 1999.
The parties are currently engaged in some follow-up discovery pertaining to the
summary judgment motion. Defendants reply papers will be filed on June 1, 1999,
and thereafter the Court will set a hearing and rule on 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 motion for leave to amend the complaint has been granted and
Lakes has filed its answer. Lakes will defend this action vigorously.
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LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
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
sought further review of the ruling by the Minnesota Supreme Court. The Court
has not yet indicated whether it will grant review.
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.
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LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
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.
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LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
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.
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LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
The Stratosphere Trustee filed the complaint in its alleged capacity as a third
party beneficiary under the Standby Equity Commitment. Pursuant to the Second
Amended Plan, a new limited liability company (the "Stratosphere LLC") was
formed to pursue certain alleged claims and causes of action that Stratosphere
and other parties may have against numerous third parties, including Grand
and/or officers and/or directors of Grand. The Stratosphere LLC has been
substituted for IBJ Schroeder Bank & Trust Company, Inc. in this proceeding.
Discovery and motion practice is pending and Lakes will continue to defend this
lawsuit diligently.
STRATOSPHERE PLAN OF REORGANIZATION
The Second Amended Plan includes the formation of the Stratosphere LLC which was
formed to 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 the Stratosphere LLC with an investment of $5 million.
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.
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.
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LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
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.
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LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
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 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.
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LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
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 answered Seven Arrows' complaint, denying the
allegations in their entirety and asserting counter claims against Seven Arrows.
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 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 April 4, 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Description
10.1 Release and Assumption Agreement dated as of December 31,
1998, among Hibernia National Bank, the Coushatta Tribe of
Louisiana, the Coushatta Tribe of Louisiana Building
Authority, Grand Casinos of Louisiana, Inc. - Coushatta,
Grand Casinos, Inc., Lakes Gaming, Inc., a Minnesota
corporation and a subsidiary of Grand and Grand Casinos of
Louisiana, LLC - Coushatta, a Minnesota limited liability
company and a subsidiary of Lakes.
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LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
Exhibits Description
-------- -----------
10.2 Commercial Guaranty Agreement made and entered into
effective as of February 15, 1999, by Lakes Gaming, Inc., a
Minnesota corporation and Grand Casinos of Louisiana, LLC -
Coushatta, a Minnesota limited liability company in favor of
Hibernia National Bank, guaranteeing the Indebtedness (as
defined) of the Coushatta Tribe of Louisiana and the
Coushatta Tribe of Louisiana Building Authority.
10.3 Subordination Agreement Granted by Lakes Gaming, Inc., a
Minnesota corporation, in favor of Hibernia National Bank
entered into as of February 15, 1999.
10.4 Subordination Agreement Granted by Grand Casinos of
Louisiana, LLC, a Minnesota limited liability company in
favor of Hibernia National Bank entered into as of February
15, 1999.
10.5 Dominion Account Agreement dated as of May 1, 1997, between
the Coushatta Tribe of Louisiana, a federally recognized
Indian tribe, the Coushatta Tribe of Louisiana Building
Authority, an instrumentality of the Coushatta Tribe, Grand
Casinos of Louisiana, Inc. - Coushatta, a Minnesota
corporation, Grand Casinos, Inc., a Minnesota corporation,
the Cottonport Bank, a bank chartered under the laws of the
State of Louisiana, and Hibernia National Bank, a national
banking association.
10.6 Subordination Agreement Granted by Lakes Gaming, Inc., a
Minnesota corporation, in favor of Hibernia National Bank
entered into as of February 15, 1999.
10.7 Subordination Agreement granted by Grand Casinos of
Louisiana, LLC - Coushatta, a Minnesota limited liability
company, in favor of Hibernia National Bank entered into as
of February 15, 1999.
10.8 Dominion Account Agreement, dated effective as of December
17, 1997, between the Coushatta Tribe of Louisiana, a
federally recognized Indian tribe, Grand Casinos of
Louisiana, Inc. - Coushatta, a Minnesota corporation, Grand
Casinos, Inc. a Minnesota corporation, the Cottonport Bank,
a bank chartered under the laws of the State of Louisiana,
and Hibernia National Bank, a national banking association.
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LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
Exhibits Description
-------- -----------
10.9 Intercreditor Agreement dated as of February 4, 1998,
between Hibernia National Bank and Grand Casinos of
Louisiana, Inc. - Coushatta and Grand Casinos, Inc.
10.10 Counterpart Signature Page, dated as of February 15, 1999,
to that certain Intercreditor Agreement dated as of February
4, 1998 (the First Intercreditor Agreement), by and among
Hibernia National Bank, Grand Casinos, Inc. and Grand
Casinos of Louisiana, Inc. - Coushatta; entered into
pursuant to Section 2 of that certain Release and Assumption
Agreement dated as of December 31, 1998, by and among the
Hibernia National Bank, Grand Casinos, Inc., Grand Casinos
of Louisiana, Inc. - Coushatta, the Coushatta Tribe of
Louisiana, the Coushatta Tribe of Louisiana Building
Authority, Lakes Gaming, Inc. and Grand Casinos of
Louisiana, LLC - Coushatta.
10.11 Subordination Agreement granted by Lakes Gaming, Inc., a
Minnesota Corporation, in favor of Hibernia National Bank
entered into as of February 15, 1999.
10.12 Subordination Agreement granted by Grand Casinos of
Louisiana, LLC - Coushatta, a Minnesota Limited Liability
Company, in favor of Hibernia National Bank entered into as
of February 15, 1999.
10.13 Dominion Account Agreement, dated effective as of December
18, 1998, between the Coushatta Tribe of Louisiana, a
federally recognized Indian tribe, Grand Casinos of
Louisiana, LLC - Coushatta, a Minnesota limited liability
company, Lakes Gaming, Inc., a Minnesota corporation, the
Cottonport Bank, a bank chartered under the laws of the
State of Louisiana, and Hibernia National Bank, a national
banking association.
10.14 Second Intercreditor Agreement dated as of December 18,
1998, between Hibernia National Bank, Grand Casinos of
Louisiana, Inc. - Coushatta and Grand Casinos, Inc.
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LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
Exhibits Description
-------- -----------
10.15 Counterpart Signature Page, dated as of February 15, 1999,
to that certain Second Intercreditor Agreement dated as of
December 18, 1998 (the Second Intercreditor Agreement), by
and among Hibernia National Bank, Grand Casinos, Inc. and
Grand Casinos of Louisiana, Inc. - Coushatta; entered into
pursuant to Section 2 of that certain Release and Assumption
Agreement dated as of December 31, 1998, by and among the
Hibernia National Bank, Grand Casinos, Inc., Grand Casinos
of Louisiana, Inc. - Coushatta, the Coushatta Tribe of
Louisiana, the Coushatta Tribe of Louisiana Building
Authority, Lakes Gaming, Inc. and Grand Casinos of
Louisiana, LLC - Coushatta.
10.16 Release and Assumption Agreement dated as of December
31,1998, among Cottonport Bank, the Tunica-Biloxi Tribe of
Louisiana, Grand Casinos of Louisiana, Inc. - Tunica-Biloxi
, Grand Casinos, Inc., Lakes Gaming, Inc., a Minnesota
corporation and a subsidiary of Grand and Grand Casinos of
Louisiana, LLC - Tunica-Biloxi, a Minnesota limited
liability company and a subsidiary of Lakes Gaming, Inc.
10.17 Commercial Guaranty Agreement made and entered into
effective as of February 15, 1999, by Lakes Gaming, Inc., a
Minnesota corporation and Grand Casinos of Louisiana, LLC -
Tunica-Biloxi, a Minnesota limited liability company in
favor of the Cottonport Bank, guaranteeing the Indebtedness
(as defined) of the Tunica-Biloxi Tribe of Louisiana.
10.18 Subordination Agreement granted by Lakes Gaming, Inc., a
Minnesota corporation, in favor of the Cottonport Bank
entered into as of February 15, 1999.
10.19 Subordination Agreement granted by Grand Casinos of
Louisiana, LLC - Tunica-Biloxi, a Minnesota limited
liability company, in favor of the Cottonport Bank entered
into as of February 15, 1999.
10.20 Non-competition Agreement made and entered into as of
December 31, 1998, by and between Thomas J. Brosig and Park
Place Entertainment Corporation (f/k/a Gaming Co., Inc.), a
Delaware corporation.
10.21 Non-competition Agreement made and entered into as of
December 31, 1998, by and between Lyle Berman and Park Place
Entertainment Corporation (f/k/a Gaming Co., Inc.) a
Delaware corporation.
27 Financial Data Schedule (for SEC use only)
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31
LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
(b) Reports on Form 8-K
(i) A Form 8-K, Item 5. Other Events; and Item 7. Financial
Statements, Pro Forma Financial Information and Exhibits, was
filed on January 8, 1999.
(ii) A Form 8-K, Item 5. Other Events; and Item 7. Financial
Statements, Pro Forma Financial Information and Exhibits, was
filed on March 16, 1999.
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32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 13, 1999 LAKES GAMING, INC.
------------------
Registrant
/S/ THOMAS J. BROSIG
--------------------
Thomas J. Brosig
President
/S/ TIMOTHY J. COPE
-------------------
Timothy J. Cope
Executive Vice President and
Chief Financial Officer
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