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 October 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. 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
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(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 November 15, 1999, there were 10,628,398 shares of Common Stock, $0.01 par
value per share, outstanding.
Page 1 of 29
2
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
October 3, 1999 and January 3, 1999
Consolidated Statements of Earnings 4
for the three months ended October 3, 1999
and September 27, 1998
Consolidated Statements of Earnings for 5
the nine months ended October 3, 1999 and
September 27, 1998
Consolidated Statements of Cash Flows 6
for the nine months ended October 3, 1999
and September 27, 1998
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND 11
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 20
ITEM 5. Other Information 25
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)
OCTOBER 3, 1999 JANUARY 3, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $53,749 $56,774
Current installments of notes receivable 14,810 8,561
Accounts receivable 6,580 15,217
Other current assets 8,148 8,126
- --------------------------------------------------------------------------------------------------------------
Total Current Assets 83,287 88,678
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Property and Equipment-Net 1,391 1,265
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Other Assets:
Land held for development 53,730 26,647
Notes receivable-less current installments 18,404 25,118
Cash and cash equivalents-restricted 4,649 4,992
Investments in and notes from unconsolidated affiliates 9,173 8,590
Other long-term assets 10,602 6,079
- --------------------------------------------------------------------------------------------------------------
Total Other Assets 96,558 71,426
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $181,236 $161,369
==============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $215 $ -
Income taxes payable 7,955 10,811
Litigation and claims accrual 8,691 10,554
Other accrued expenses 4,377 4,625
- --------------------------------------------------------------------------------------------------------------
Total Current Liabilities 21,238 25,990
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Long-term Liabilities:
Long-term debt-less current installments 975 975
Deferred income taxes 2,593 2,733
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Total Long-Term Liabilities 3,568 3,708
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 24,806 29,698
- --------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
Shareholders' Equity:
Capital stock, $.01 par value; authorized 100,000 shares;
10,620 and 10,576 common shares issued and outstanding
at October 3, 1999, and January 3, 1999, respectively 106 106
Additional paid-in-capital 131,283 130,929
Accumulated other comprehensive earnings 417 636
Retained earnings 24,624 -
- --------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 156,430 131,671
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $181,236 $161,369
==============================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 3 -
4
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
THREE MONTHS ENDED
-------------------------------------
OCTOBER 3, 1999 SEPTEMBER 27, 1998
(UNAUDITED)
REVENUES:
Management fee income $14,440 $21,582
COSTS AND EXPENSES:
Selling, general and administrative 849 1,696
Depreciation and amortization 480 283
- --------------------------------------------------------------------------------------------------------
Total Costs and Expenses 1,329 1,979
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EARNINGS FROM OPERATIONS 13,111 19,603
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OTHER INCOME (EXPENSE):
Interest income 1,781 1,400
Interest expense (24) (24)
Equity in loss of unconsolidated affiliates (1,408) (41)
Other 129 29
- --------------------------------------------------------------------------------------------------------
Total other income, net 478 1,364
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Earnings before income taxes 13,589 20,967
Provision for income taxes 6,149 (4,316)
- --------------------------------------------------------------------------------------------------------
NET EARNINGS $7,440 $25,283
========================================================================================================
BASIC EARNINGS PER SHARE $0.70 $2.39
========================================================================================================
DILUTED EARNINGS PER SHARE $0.68 $2.37
========================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 10,606 10,573
DILUTIVE EFFECT OF STOCK COMPENSATION PROGRAMS 330 88
- --------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON AND DILUTED
SHARES OUTSTANDING 10,936 10,661
========================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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5
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
NINE MONTHS ENDED
------------------------------------
OCTOBER 3, 1999 SEPTEMBER 27, 1998
(UNAUDITED)
REVENUES:
Management fee income $44,441 $64,330
COSTS AND EXPENSES:
Selling, general and administrative 5,451 7,684
Depreciation and amortization 1,435 932
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Total Costs and Expenses 6,886 8,616
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EARNINGS FROM OPERATIONS 37,555 55,714
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OTHER INCOME (EXPENSE):
Interest income 5,839 4,000
Interest expense (73) (73)
Equity in loss of unconsolidated affiliates (1,771) (266)
Other 1,417 257
- --------------------------------------------------------------------------------------------------------
Total other income, net 5,412 3,918
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Earnings before income taxes 42,967 59,632
Provision for income taxes 18,343 10,327
- --------------------------------------------------------------------------------------------------------
NET EARNINGS $24,624 $49,305
========================================================================================================
BASIC EARNINGS PER SHARE $2.33 $4.68
========================================================================================================
DILUTED EARNINGS PER SHARE $2.28 $4.58
========================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 10,590 10,541
DILUTIVE EFFECT OF STOCK COMPENSATION PROGRAMS 215 226
- --------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON AND DILUTED
SHARES OUTSTANDING 10,805 10,767
========================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 5 -
6
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
-------------------------------------
OCTOBER 3, 1999 SEPTEMBER 27, 1998
(UNAUDITED)
OPERATING ACTIVITIES:
Net earnings 24,624 49,305
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,435 932
Gain on sale of investment (875) -
Equity in loss of unconsolidated affiliates 1,771 265
Changes in operating assets and liabilities:
Current assets 8,597 (2,342)
Income taxes (2,856) 17,637
Accounts payable 215 (77)
Accrued expenses (2,111) 483
Other (399) -
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 30,401 66,203
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INVESTING ACTIVITIES:
Payments for property and equipment (230) (36)
Payments for notes receivable (6,763) (3,362)
Proceeds from repayment of notes receivable 8,521 4,745
Decrease (increase) in restricted cash 343 (3,767)
Investment in and notes receivable from unconsolidated affiliates (7,592) -
Payments for land held for development (21,868) (10,312)
Decrease (increase) in other long-term assets (6,191) 223
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (33,780) (12,509)
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FINANCING ACTIVITIES:
Distribution to Grand - (53,695)
Proceeds from issuance of common stock 354 -
Payments on long-term debt - (9)
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Net Cash Provided by (Used in) Financing Activities 354 (53,704)
- ----------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (3,025) (10)
Cash and cash equivalents - beginning of period 56,774 33,208
- ----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD 53,749 33,198
======================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $73 $73
Income taxes 18,202 -
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 6 -
7
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.
2. PRINCIPLES OF CONSOLIDATION
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.
Lakes' investments in unconsolidated affiliates include a 27 percent ownership
interest in Fanball.com, Inc., a start-up internet provider of fantasy sports
services, and a 33 percent ownership interest in Interactive Learning Group,
Inc., a consumer product company. Lakes' investments in Fanball.com and
Interactive Learning Group in the amounts of $3.4 million and $3 million,
respectively, were made at the end of the second quarter of 1999. Additionally,
as a result of its spin-off from Grand Casinos, Lakes received a 49 percent
ownership interest in Trak 21 Development, LLC, a developer of player tracking
systems for the casino industry, and a 27 percent ownership interest in New
Horizon Kids Quest, Inc., a publicly held provider of child care facilities.
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LAKES GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 nine months ended October 3, 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.
3. 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.
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. The compact for the Coushatta
Tribe expired November 4, 1999, and the compact for the Tunica-Biloxi Tribe
expires November 18, 1999, and the State of Louisiana has delivered a written
notice of non-renewal. The Governor and each Tribe have agreed on a six-month
extension which has been submitted to the Department of the Interior for
approval. The Coushatta Tribe and the Tunica-Biloxi Tribe are actively
negotiating with the State of Louisiana terms for a new compact. 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, gaming
may 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. See Part II, Item 5. Other Information.
- 8 -
9
LAKES GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. 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 October 3, 1999 are as follows (in
thousands):
Operating Leases
----------------
1999 $ 921
2000 3,225
2001 2,981
2002 3,109
2003 3,176
Thereafter 47,550
-------
$60,962
=======
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 October 3, 1999, the amount outstanding was $3.5 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 October 3, 1999, the amount
outstanding was $20.3 million.
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10
LAKES GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 (see Item 1. Legal Proceedings).
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, on each
annual anniversary of the Distribution and 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.
5. SUBSEQUENT EVENTS
On November 12, 1999, the Company announced the resignation of Thomas J. Brosig
as President, and as a member of the Board of Directors of the Company. Lyle
Berman, Chairman of the Board and Chief Executive Officer of the Company, will
assume the role of President.
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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 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 dates the casinos 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 November 30, 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. Grand 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.
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12
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
On May 12, 1999, the Company announced that it would form a partnership for the
purpose of developing a gaming facility on Indian-owned land near San Diego,
California. Under the agreement, Lakes has formed a limited liability company
with KAR, a limited liability company based in Houston, Texas.
The partnership between Lakes and KAR holds a contract to develop and manage a
casino resort facility with a Tribe in California. The contract is subject to
approval by NIGC. Development of the casino resort will not begin until the
compact the Tribe has entered into with the state of California receives
California voter approval.
On June 22, 1999, the Company announced that it has been selected by the Pokagon
Band of Potawatomi Indians (the "Band") to serve as the exclusive developer and
manager of a proposed casino gaming resort facility to be owned by the Band in
the state of Michigan. In connection with its selection, Lakes and the Band have
executed a development and management agreement governing their relationship
during the development, construction and management of the casino. Various
regulatory approvals are needed prior to commencement of development activities.
Casino construction is not planned to start until land is accepted into trust
status by the Secretary of the Interior and the agreements are approved by the
Chairman of NIGC.
On July 15, 1999, the Company announced that it would form a partnership for the
purpose of developing a gaming facility on Indian-owned land near Sacramento,
California. Pursuant to the agreement, Lakes has formed a limited liability
company with KAR, a limited liability company based in Houston, Texas.
The partnership between Lakes and KAR has been awarded a contract to develop and
manage a casino resort facility with a Tribe in California. The contract is
subject to approval by NIGC and placement of the land where the gaming facility
is to be located into trust with the Bureau of Indian Affairs ("BIA").
Development of the casino resort will not begin until the compact the Tribe has
entered into with the state of California receives California voter approval.
On October 1, 1999, the Company purchased the shopping center and land owned by
the Nevada Resort Properties Polo Plaza Limited Partnership (the "Partnership")
in lieu of exercising its right to purchase the remaining 51% interest in the
Partnership. Prior to the purchase, the Company held a 49% ownership interest in
the Partnership. In consideration for the purchase, the Company paid
approximately $3.3 million and paid off the outstanding partnership mortgage of
approximately $6.3 million. A $6.2 million loan to the Partnership made by the
Company during January 1999 was repaid and satisfied at the closing by
offsetting an appropriate amount against the purchase price as agreed by the
Company and the Partnership. Pursuant to the purchase agreement relating to this
transaction, the Partnership is currently being dissolved.
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13
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Lakes' investments in unconsolidated affiliates include a 27 percent ownership
interest in Fanball.com, Inc., a start-up internet provider of fantasy sports
services, and a 33 percent ownership interest in Interactive Learning Group,
Inc., a consumer product company. Lakes' investments in Fanball.com and
Interactive Learning Group in the amounts of $3.4 million and $3 million,
respectively, were made at the end of the second quarter of 1999. Additionally,
as a result of its spin-off from Grand Casinos, Lakes received a 49 percent
ownership interest in Trak 21 Development, LLC, a developer of player tracking
systems for the casino industry, and a 27 percent ownership interest in New
Horizon Kids Quest, Inc., a publicly held provider of child care facilities.
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 and the pursuit
of new business opportunities. The successful implementation of this growth
strategy is contingent upon the satisfaction of various conditions, including
obtaining governmental approvals, the impact of increased competition, and the
occurrence of certain events, many of which are beyond the control of Lakes.
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
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.
Lakes is prohibited by the IGRA from having an ownership interest in any casino
it manages for Indian tribes. 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 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. The compact for the Coushatta Tribe expired
November 4, 1999, and the compact for the Tunica-Biloxi Tribe expires November
18, 1999, and the State of Louisiana has delivered a written notice of
non-renewal. The Governor and each Tribe have agreed on a six-month extension
which has been submitted to the Department of the Interior for approval.
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14
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
The Coushatta Tribe and the Tunica-Biloxi Tribe are actively negotiating with
the State of Louisiana terms for a new compact. 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 may 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. See Part II, Item 5. Other Information.
NINE MONTHS ENDED OCTOBER 3, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
27, 1998
Revenues
Grand Casino Avoyelles and Grand Casino Coushatta generated approximately $44.4
million in management fee income during the nine months ended October 3, 1999.
Grand Casino Mille Lacs, Grand Casino Hinckley, Grand Casino Avoyelles and Grand
Casino Coushatta generated $64.3 million in management fee income during the
nine months ended September 27, 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 1998. Also
contributing to the increases were a special events center and RV resort at
Grand Casino Avoyelles, which opened during the first quarter of 1998, and the
addition of approximately 160 slot machines at Avoyelles from September 27, 1998
to October 3, 1999.
Costs and Expenses
Total costs and expenses were $6.9 million for the nine months ended October 3,
1999, compared to $8.6 million for the same period in the prior year. Selling,
general, and administrative expenses decreased in the amount of $2.2 million
from $7.7 million for the nine months ended September 27, 1998 to $5.5 million
for the nine months ended October 3, 1999 due primarily to fewer legal costs.
Other
Interest income increased from $4 million for the nine months ended September
27, 1998 to $5.8 million for the nine months ended October 3, 1999 due primarily
to interest earned on increased cash balances and additional notes receivable
during the nine months ended October 3, 1999, compared to the same period in the
prior year.
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15
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 nine months ended October 3, 1999 basic and diluted earnings per common
share were $2.33 and $2.28, respectively. This compares to basic and diluted
earnings of $4.68 and $4.58 per common share for the nine months ended September
27, 1998. Earnings decreased $24.7 million to $24.6 million for the nine months
ended October 3, 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 September 27, 1998 under these expired contracts was
$21.9 million. The Company's current year period revenues and earnings do not
include contributions from these operations. Also contributing to the decrease
in earnings was the reversal of a deferred tax asset valuation allowance,
resulting in the recognition of a $17.3 million income tax benefit, $13.1
million during third quarter 1998. 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
valuation allowance. 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.
THREE MONTHS ENDED OCTOBER 3, 1999 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER
27, 1998
Revenues
Grand Casino Avoyelles and Grand Casino Coushatta generated $14.4 million in
management fee income during the three months ended October 3, 1999. Grand
Casino Hinckley, Grand Casino Avoyelles and Grand Casino Coushatta generated
$21.6 million in management fee income during the three months ended September
27, 1998. This decrease is due primarily to the fact that the management
contract for Grand Casino Hinckley concluded during the fourth quarter of 1998.
Gross revenues increased at Grand Casino Avoyelles and Grand Casino Coushatta,
due to a 223-room hotel at Grand Casino Coushatta, which opened in November of
1998 along with a 28,000 square foot casino expansion at Grand Casino Coushatta
which opened in December of 1998, and the addition of approximately 160 slot
machines at Grand Casino Avoyelles from September 27, 1998 to October 3, 1999.
Gross revenue increases at Grand Casino Coushatta were offset by additional debt
service payments relating to the 223-room hotel.
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16
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Costs and Expenses
Total costs and expenses were $1.3 million for the three months ended October 3,
1999, compared to $2 million for the same period in the prior year. Selling,
general, and administrative expenses decreased in the amount of $.9 million from
$1.7 million for the three months ended September 27, 1998 to $.8 million for
the three months ended October 3, 1999 due primarily to fewer project
write-offs.
Other
Interest income was $1.8 million and $1.4 million for the three months ended
October 3, 1999 and September 27, 1998, respectively. The increase is due
primarily to additional interest earned on increased cash balances and
additional notes receivable during the three months ended October 3, 1999,
compared to the same period in the prior year.
Earnings Per Common Share and Net Earnings
For the three months ended October 3, 1999, basic and diluted earnings per
common share were $.70 and $.68, respectively. This compares to basic and
diluted earnings of $2.39 and $2.37 per common share for the three months ended
September 27, 1998. Earnings decreased $17.8 million to $7.4 million for the
three months ended October 3, 1999 compared to the same period in the prior
year. This decrease is partially due to the expiration of the management
contracts for Grand Casino Mille Lacs and Grand Casino Hinckley during 1998.
Total revenues during the three-month period ended September 27, 1998, under
these expired contracts was $6.7 million. The company's current year period
revenues and earnings do not include contributions from these operations. Also
contributing to the decrease in earnings was the reversal of a deferred tax
asset valuation allowance, resulting in the recognition of a $17.3 million
income tax benefit during 1998, $13.1 million of which was recognized during the
third quarter. 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 valuation allowance. 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.
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17
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
CAPITAL RESOURCES, CAPITAL SPENDING, AND LIQUIDITY
At October 3, 1999 Lakes had $58.4 million in restricted and unrestricted cash
and cash equivalents. The cash balances are planned to be used for loans to
tribal partners to help develop operations, the pursuit of additional business
opportunities, and potential settlement of pending litigation matters.
For the nine months ended October 3, 1999 and September 27, 1998 net cash
provided by operating activities totaled $30.4 million and $66.2 million,
respectively. Payments for income taxes were $18.2 million and $0 for the nine
months ended October 3, 1999 and September 27, 1998, respectively. For the same
periods, net cash used in investing activities totaled $33.8 million and $12.5
million, respectively. Included in these investing activities for the nine
months ended October 3, 1999 and September 27, 1998, are proceeds, primarily
from repayment of notes receivable from Indian-owned casinos, which amounted to
$8.5 million and $4.7 million, respectively. Advances under notes receivable
amounted to $6.8 million and $3.4 million for the nine months ended October 3,
1999 and September 27, 1998. Also during these periods, payments for land in Las
Vegas, Nevada, held for development amounted to $21.9 million and $10.3 million,
respectively, and restricted cash decreased $.3 million and increased $4
million, respectively. For the nine months ended October 3, 1999 and September
27, 1998, payments for investments in, and notes receivable from, unconsolidated
affiliates totaled $7.6 million and $0, respectively, and other long-term assets
increased $6.1 million and decreased $.2 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.
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 many
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.
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18
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
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. During 1999, Lakes upgraded its
financial reporting systems to ensure that they would be 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.
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 currently managed properties are estimated at $1.1 million, of
which $.1 million is left to be spent. 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 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. Lakes has established 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.
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19
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
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.
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 these 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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20
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 which Lakes has assumed, or with respect to which Lakes has agreed to
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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21
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 Grand's 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. All papers relating to this matter were filed on June 1, 1999.
On October 6, 1999, the District Court entered its Order, granting in part and
denying in part, defendants' Motion for Summary Judgment and Summary
Adjudication. The Court dismissed all allegations in reference to (1) Phase II
funding levels; (2) "over-allotments uses", as stated in the December 19, 1995
Prospectus; (3) the purpose and use of the Grand Casino Completion Guaranty, as
stated in the June 6, 1996 Press Statement; (4) the vague expressions of general
optimism (issued within the December 19, 1995 Prospectus, the 10-Q and 10-K
Filings, press releases and other public statements) referred to in this Order;
(5) the adoption of statements in securities analysts reports; (6) the alleged
utterance of misleading statements before the Nevada Gaming Commission; and (7)
the temporary diversion of Phase II proceeds to fund Phase I. The remaining
claims relate to the accuracy of defendants' budgetary estimates issued in
Stratosphere's December 1995 Prospectus and SEC 10-Q and 10-K Reports. The Court
concluded that there were triable issues as to whether defendants misstated
anticipated construction costs or omitted to disclose material cost overruns.
Plaintiffs' counsel have requested that defendants stipulate to the inclusion of
the Company and Park Place as additional party defendants. We anticipate that
the Company will be so included and will defend the action vigorously.
The Court has ordered the parties to submit a joint pre-trial statement on or
before November 15, 1999.
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22
LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
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. 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 have completed follow-up discovery pertaining to the summary
judgment motion. The court heard the motion on September 2, 1999. The court has
not yet ruled on the motion.
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23
LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
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.
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.
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24
LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
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.
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 Trustee
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. 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.
In October of this year, Motions for Summary Judgment by both parties were
denied. Grand has requested that the appellate court review the denial as to its
motion for summary judgment. In the meantime, the trial court is expected to
hold a pretrial to address discovery and scheduling issues. Lakes will continue
to defend the lawsuit diligently.
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25
LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
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 pending.
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 October 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.
ITEM 5. OTHER INFORMATION
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. The compact for the
Coushatta Tribe expired November 4, 1999 and the compact for the Tunica-Biloxi
Tribe expires November 18, 1999. The compacts would have automatically renewed
for an additional seven year term if neither Tribe nor the State of Louisiana
had delivered to the other written notice of non-renewal at least 180 days prior
to the applicable expiration date.
On April 7, 1999, the State of Louisiana provided written notice to each of the
Coushatta Tribe of Louisiana and the Tunica-Biloxi Tribe of Louisiana of the
State's intent not to renew the Tribal-State compacts. The State further
extended an invitation to each such Tribe to continue to discuss mutually
advantageous terms and conditions under which the State and the Tribes can enter
into new gaming compacts. The Governor and each Tribe have agreed on a six-month
extension which has been submitted to the Department of the Interior for
approval.
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26
LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
IGRA requires that for Class III gaming to occur on Indian land, it must be
conducted in accord with an effective state compact. IGRA further imposes an
obligation on state governments, upon the request of a Tribe, to negotiate with
Indian Tribes regarding the operation of gaming activities which are otherwise
allowable within the state "by any person, organization or entity". Louisiana
currently permits various forms of legalized, non-Indian gaming.
Each Tribe is actively negotiating with the State to establish suitable
alternative compacts. It is unclear what consequences, if any, might result, in
the event the Tribes and the State are unable to either negotiate suitable
alternative compacts or agree to an extension of the existing compacts. To the
knowledge of the Company, there has been no prior instance where an existing
compact has expired without either a replacement compact in place or an
extension (temporary or permanent) of the present compact.
Nonetheless, the Company's Management Agreements with each of the Tribes
provides that, absent a determination by (i) NIGC, (ii) the Congress of the
United States, (iii) the Department of the Interior or (iv) a final judgment
from a court of competent jurisdiction, that the operation of either Grand
Casino Coushatta or Grand Casino Avoyelles would be unlawful under either
federal or state law, Lakes and the Tribes are obligated in their duties to each
other, as set forth in the applicable Management Agreements.
As outlined above, in the absence of a determination by (i) NIGC, (ii) the
Congress of the United States, (iii) the Department of the Interior or (iv) a
final judgment from a court of competent jurisdiction, that the operation of
either Grand Casino Coushatta or Grand Casino Avoyelles would be unlawful under
either federal or state law, so long as the Tribes continue to conduct gaming
activities at Grand Casino Coushatta and Grand Casino Avoyelles, Lakes intends
to continue to operate and manage these casinos and to abide by the terms and
obligations of the applicable Management Agreements.
If the terms of the current Tribal-State compacts expire, without the execution
of new compacts or the extension of the current compacts, there is a risk that
(i) NIGC, (ii) the Congress of the United States, (iii) the Department of the
Interior, (iv) the United States Department of Justice or (v) a court of
competent jurisdiction could take action against either or both of the Tribes
and/or Grand Casino Coushatta and Grand Casino Avoyelles resulting in the
cessation of gaming operations at these casinos and/or the inability of Lakes to
manage either or both of these casinos.
The cessation of gaming operations at either or both of Grand Casino Coushatta
and Grand Casino Avoyelles or the inability of Lakes to manage the gaming
operations at these casinos 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 realization of new business opportunities or new
management contracts, the cessation of gaming operations at these casinos or the
inability of Lakes to manage those operations, would have a material adverse
impact on Lakes' results of operations and financial condition.
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27
LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Description
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10.1 Subscription Agreement and Investment Letter by and among
Lakes Gaming, Inc., a Minnesota corporation (the
"Subscriber") and Fanball.com, Inc., a Minnesota corporation
(the "Company") dated as of June 15, 1999.
10.2 Stock Purchase Agreement dated as of June 15, 1999 between
Lakes Gaming, Inc. (the "Buyer") and Richard Kallio (the
"Seller").
10.3 Subscription Agreement and Investment Letter by and among
Lakes Gaming, Inc. a Minnesota corporation (the
"Subscriber") and Interactive Learning Group, Inc., a
Minnesota corporation (the "Company") dated as of June 25,
1999.
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
None
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28
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: November 16, 1999 LAKES GAMING, INC.
-----------------------
Registrant
/S/ LYLE BERMAN
-----------------------
Lyle Berman
Chairman of the Board,
Chief Executive Officer and
President
/S/ TIMOTHY J. COPE
-----------------------
Timothy J. Cope
Executive Vice President and
Chief Financial Officer
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