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 March 31, 2002
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.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1913991
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
130 Cheshire Lane
Minnetonka, Minnesota 55305
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(952) 449-9092
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
As of May 9, 2002, there were 10,637,953 shares of Common Stock, $0.01 par value
per share, outstanding.
LAKES GAMING, INC. AND SUBSIDIARIES
INDEX
PAGE OF
FORM 10-Q
---------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2002 3
and December 30, 2001
Consolidated Statements of Earnings for the three 4
months ended March 31, 2002 and April 1, 2001
Consolidated Statements of Comprehensive Earnings 5
for the three months ended March 31, 2002 and
April 1, 2001
Consolidated Statements of Cash Flows for the three 6
months ended March 31, 2002 and April 1, 2001
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND 13
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE 19
DISCLOSURES ABOUT MARKET RISK
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 23
2
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, 2002 DECEMBER 30, 2001
- -------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $34,962 $42,638
Short-term investments 2,016 2,027
Current installments of notes receivable 27,265 28,273
Accounts receivable, net 72 3,601
Deferred tax asset 4,553 4,549
Other current assets 1,601 1,079
- -------------------------------------------------------------------------------------------------------------------
Total Current Assets 70,469 82,167
- -------------------------------------------------------------------------------------------------------------------
Property and Equipment-Net 8,257 7,524
- -------------------------------------------------------------------------------------------------------------------
Other Assets:
Land held for development 16,051 16,038
Notes receivable-less current installments 72,250 67,525
Cash and cash equivalents-restricted 9,202 9,175
Investments in and notes from unconsolidated affiliates 951 839
Interest receivable 7,311 6,147
Other long-term assets 7,736 7,527
- -------------------------------------------------------------------------------------------------------------------
Total Other Assets 113,501 107,251
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $192,227 $196,942
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $152 $105
Current maturities of long-term debt 1,325 1,325
Current installments of capital lease obligations - 123
Income taxes payable 4,244 3,906
Litigation and claims accrual 6,309 6,572
Other accrued expenses 3,671 3,341
- -------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 15,701 15,372
- -------------------------------------------------------------------------------------------------------------------
Long-term Liabilities:
Capital lease obligations-less current installments - 5,591
Other long-term liabilities 224 225
- -------------------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 224 5,816
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 15,925 21,188
- -------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
Shareholders' Equity:
Capital stock, $.01 par value; authorized 100,000 shares; 10,638 common
shares issued and outstanding
at March 31, 2002, and December 30, 2001 106 106
Additional paid-in-capital 131,525 131,525
Retained Earnings 44,739 44,183
Accumulated other comprehensive loss (68) (60)
- -------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 176,302 175,754
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $192,227 $196,942
===================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
(UNAUDITED)
THREE MONTHS ENDED
---------------------------------------------
MARCH 31, 2002 APRIL 1, 2001
REVENUES:
Management fee income $ 1,502 $ 9,223
COSTS AND EXPENSES:
Selling, general and administrative 2,099 2,580
Depreciation and amortization 99 331
- --------------------------------------------------------------------------------------------------------
Total costs and expenses 2,198 2,911
- --------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) FROM OPERATIONS (696) 6,312
- --------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 1,785 1,816
Interest expense (23) (24)
Equity in loss of unconsolidated affiliates (123) (109)
- --------------------------------------------------------------------------------------------------------
Total other income, net 1,639 1,683
- --------------------------------------------------------------------------------------------------------
Earnings before income taxes 943 7,995
Provision for income taxes 387 3,278
- --------------------------------------------------------------------------------------------------------
NET EARNINGS $ 556 $ 4,717
========================================================================================================
BASIC EARNINGS PER SHARE $ 0.05 $ 0.44
========================================================================================================
DILUTED EARNINGS PER SHARE $ 0.05 $ 0.44
========================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 10,638 10,638
DILUTIVE EFFECT OF STOCK COMPENSATION PROGRAMS 2 144
- --------------------------------------------------------------------------------------------------------
Weighted Average Common and Diluted
SHARES OUTSTANDING 10,640 10,782
========================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
LAKES GAMING, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Earnings
(In thousands)
(UNAUDITED)
THREE MONTHS ENDED
-----------------------------------------
MARCH 31, 2002 APRIL 1, 2001
-----------------------------------------
NET EARNINGS $556 $4,717
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) during the period (8) 53
Reclassification adjustment for losses included
in net earnings - 67
-----------------------------------------
COMPREHENSIVE EARNINGS $548 $4,837
=========================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
5
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
----------------------------------
MARCH 31, 2002 APRIL 1, 2001
OPERATING ACTIVITIES:
Net earnings $ 556 $ 4,717
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 99 331
Equity in loss of unconsolidated affiliates 123 109
Changes in operating assets and liabilities:
Accounts receivable 3,529 (4,708)
Income taxes 338 2,902
Accounts payable 47 63
Accrued expenses 67 (974)
Other (127) (1,441)
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 4,632 999
- ----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Short-term investments, purchases - (5,208)
Short-term investments, sales/maturities - 24,882
Payments for land held for development (13) (11,729)
Payments for notes receivable (5,100) (11,229)
Proceeds from repayment of notes receivable 1,008 2,926
Investment in and notes receivable from unconsolidated affiliates (160) (303)
Increase in restricted cash, net (27) (2,803)
Increase in other long-term assets (1,470) (113)
Payments for property and equipment, net (832) (19)
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (6,594) (3,596)
- ----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Payments on capital lease obligations (5,714) -
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (5,714) -
- ----------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (7,676) (2,597)
Cash and cash equivalents - beginning of period 42,638 10,469
- ----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 34,962 $ 7,872
======================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 25 $ 24
Income taxes 5 1,292
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
6
LAKES GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS
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").
Lakes currently has development and management agreements with four separate
tribes for four new casino operations, one in Michigan, two in California and
one with the Nipmuc Nation on the east coast. The Company also has agreements
for the development of one additional casino on Indian owned land in California
through a joint venture. Each of these projects is currently in the development
phase.
On March 1, 2002, the Company announced it had signed a letter of intent with
respect to an investment in a joint venture with Steven Lipscomb, an experienced
producer of televised poker tournaments. The purpose of this joint venture would
be to launch the World Poker Tour and establish poker as the next significant
televised mainstream sport. The terms of this investment would require Lakes to
make an investment of $0.1 million for an approximate 78% ownership position in
the joint venture. Lakes would also be required to lend up to $3.2 million to
the joint venture as needed. The joint venture would issue a note to Lakes at
6.2% interest per annum with principal payable at the end of three years. The
Lakes' note would be secured by a blanket security interest in all assets of the
joint venture. If certain predetermined goals are not achieved by the joint
venture, Lakes would have the right to stop advances on the note. If Lakes were
to elect to stop funding the joint venture, all outstanding principal amounts
would be due one year from the date Lakes stopped funding.
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 50 percent ownership
interest in PCG Santa Rosa, LLC, a joint venture formed to develop a casino on
Indian-owned land in California. During the first quarter of 2001, Lakes wrote
off its 50 percent investment in PCG Corning, LLC, also a joint venture formed
to develop a casino on Indian-owned land in California. Additionally, as a
result of its spin-off from Grand, Lakes received a 27 percent ownership
interest in New Horizon Kids Quest, Inc. (NHKQ), a publicly held provider of
child care facilities. In June 2001, Lakes entered into an agreement with NHKQ
pursuant to which NHKQ will acquire Lakes' interest in NHKQ. As a result of this
transaction, Lakes incurred a one time write-down charge of $0.7 million before
tax, during the second quarter of 2001.
7
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 accounting principles generally accepted in the United States
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 March 31, 2002, are not
necessarily indicative of the results that may be expected for the year ending
December 29, 2002. 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 December
30, 2001.
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.
The management contract for Grand Casino Coushatta expired January 16, 2002,
which is seven years from the date the casino opened, and was not renewed. This
non-renewal has resulted in the loss of revenues to the Company derived from
such contract, which has had a material adverse effect on the Company's results
of operations. As of March 31, 2002, the Company has no other management
contracts from which it will derive revenues in 2002.
8
LAKES GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. NOTES RECEIVABLE
Notes receivable consist of the following (in thousands):
March 31, 2002 December 30, 2001
-------------- -----------------
Notes from the Pokagon Band of Potawatomi Indians with
variable interest rates (not to exceed 10%)
(5.75% at March 31, 2002), receivable in 60 monthly
installments subsequent to commencement date $37,035 $35,236
Notes from Metroflag Polo, LLC, with variable interest
rates (5.00% at March 31, 2002), receivable in monthly
installments of interest only through September 30,
2002, at which time principal is due 23,265 23,706
Notes from the Shingle Springs Band of Miwok Indians
with variable interest rates (6.75% at March 31, 2002),
receivable in 48 monthly installments subsequent to
commencement date 13,428 12,373
Notes from Jamul Indian Village with variable interest
rates (6.75% at March 31, 2002), receivable in 48 monthly
installments subsequent to commencement date 8,694 7,554
Note from Metroflag BP, LLC, non-interest bearing with
an implicit interest rate of 5.0%, receivable in full on
June 28, 2004 6,620 7,120
Notes from ViatiCare Financial Services, LLC, with
a fixed interest rate of 8.25% at March 31, 2002 due
on demand 4,000 4,000
Other 6,473 5,809
------- -------
Total notes receivable 99,515 95,798
Less - current installments of notes receivable (27,265) (28,273)
------- -------
Notes receivable, less current installments $72,250 $67,525
======= =======
9
LAKES GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The notes receivable from Indian Tribes are generally for the development of
gaming properties to be managed by the Company. The repayment terms are specific
to each tribe and are largely dependent upon the operating performance of each
gaming property. Repayments of the aforementioned notes receivable are required
to be made only if distributable profits are available from the operation of the
related casinos. Repayments are also the subject of certain distribution
priorities specified in the management contracts. In addition, repayment of the
notes receivable and the manager's fees under the management contracts are
subordinated to certain other financial obligations of the respective tribes.
Through March 31, 2002, no amounts have been withheld under these provisions.
The notes receivable from Metroflag Polo, LLC and Metroflag BP, LLC relate to
the sale of the Polo Plaza property in Las Vegas, Nevada and to the sale of
rights to the adjacent Travelodge property consisting of a long-term land lease
and motel operation. Lakes' collateral for the two notes is the property and
lease rights described above which would revert back to Lakes in the event of
default by Metroflag.
Management periodically evaluates the recoverability of such notes receivable
based on the current and projected operating results of the underlying facility
and historical collection experience. No impairment losses on such notes
receivable have been recognized through March 31, 2002.
The Company believes the costs and complexities of assembling the relevant facts
and comparables needed to appraise the fair market values of these notes based
on estimates of net present value of discounted cash flows or using other
valuation techniques are excessive and the process exceedingly time consuming.
It further believes that the determined results would not reasonably differ from
the carrying values, which are believed to be reasonable estimates of fair
market value based on past experience with similar receivables.
5. CAPITAL LEASE OBLIGATIONS
Pursuant to the terms of the Distribution Agreement, Grand assigned to Lakes,
and Lakes assumed, a lease agreement dated February 1, 1996 covering Lakes'
current corporate office space of approximately 65,000 square feet with a lease
term of fifteen years. The lease commenced on October 14, 1996. During 2001,
also pursuant to the terms of the Distribution Agreement, Lakes entered into a
capital lease arrangement for the corporate office space at which time the
operating lease was cancelled. Accordingly, Lakes recorded a capital leased
asset and liability in the amount of approximately $5.8 million. These amounts
are included on the accompanying consolidated balance sheet as of December 30,
2001. On January 2, 2002, the Company completed the purchase of its corporate
office building for $6.4 million, including transaction expenses. This
transaction resulted in the extinguishment of the Company's capital lease
obligation related to the building.
10
LAKES GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases an airplane under a non-cancelable operating lease. The
airplane lease expires May 1, 2003 and provides for two one-year renewal terms.
Approximate future minimum lease payments, due under this lease as of March 31,
2002, considering both one-year renewals are exercised, are as follows (in
thousands):
Operating Leases
----------------
2002 $ 450
2003 600
2004 600
2005 200
--------
$ 1,850
PURCHASE OPTIONS
The Company has the right to purchase the airplane it leases during the base
lease term and any renewal term for approximately $8 million.
During 2001, the Company sold its rights to the Travelodge property in Las
Vegas, Nevada, including its option to purchase the Travelodge property. During
2001, the option to purchase the Cable property in Las Vegas, Nevada for the
purchase price of $39.1 million was allowed to lapse.
INDEMNIFICATION AGREEMENT
As a part of the transaction establishing Lakes as a separate public company on
December 31, 1998, the Company has agreed to indemnify Grand 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, 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 December 31, 1998. Any surplus proceeds remaining after all
the secured obligations are indefeasibly paid in full and discharged shall be
paid over to Lakes.
11
LAKES GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Lakes made the first deposit of $7.5 million on December 31, 1999 and in July,
2000, Lakes deposited $18 million in an escrow account in partial satisfaction
of the indemnification obligation. The $18 million deposit represented a
settlement agreement which was reached in June, 2000 regarding both the
Stratosphere Shareholders' litigation and the Grand Casinos, Inc. Shareholders'
litigation. On August 14, 2001, the Court issued an order giving final approval
to the settlement. As such, the $18 million in restricted cash was removed from
the Company's consolidated balance sheet. As a result, $7.5 million related to
security to support Lakes' indemnification obligations to Grand is included as
restricted cash on the accompanying consolidated balance sheets as of March 31,
2002 and December 30, 2001.
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.
12
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 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, to the shareholders of Grand Casinos,
Inc. ("Grand").
As a result of the Distribution, Lakes operates the Indian casino management
business and holds various other assets previously owned by Grand. Lakes' main
business is the development, construction and management of casinos and related
hotel and entertainment facilities in emerging and established gaming
jurisdictions. Lakes has entered into the following contracts for the
development, management and/or financing of new casino operations, all of which
are subject to various regulatory approvals before construction can begin: (1)
Lakes has a contract to be the exclusive developer and manager of an
Indian-owned gaming resort near New Buffalo, Michigan. (2) Lakes and another
company have formed partnerships with contracts to develop and manage two
casinos to be owned by Indian tribes in California, one near San Diego and the
other near Sacramento. (3) Lakes and another company have formed a partnership
with a contract to finance the construction of an Indian-owned casino 60 miles
north of San Francisco, California. (4) Lakes has also signed contracts with a
Massachusetts Indian tribe for development and management of a potential future
gaming resort in the eastern United States; however, this tribe has received a
negative finding regarding federal recognition from the Bureau of Indian Affairs
(BIA). The tribe has indicated that it will submit additional information for
reconsideration.
Lakes' historical revenues have been derived almost exclusively from management
fees. During 2001, Lakes managed a land-based, Indian-owned casino, Grand Casino
Coushatta, in Kinder, Louisiana ("Grand Casino Coushatta"). Pursuant to the
Coushatta management contract, Lakes received a fee based on the net
distributable profits (as defined in the contracts) generated by Grand Casino
Coushatta. The management contract expired January 16, 2002, and was not
renewed. This non-renewal has resulted in the loss of revenues to the Company
derived from such contract, which has had a material adverse effect on the
Company's results of operations.
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 and the buy-out
and/or cessation of other casino management contracts. Lakes' growth strategy
contemplates the expansion of existing operations, 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 significant accounting policies, which Lakes believes are the most critical
to aid in fully understanding and evaluating its reported financial results,
include the following: revenue recognition and realizability of notes
receivable.
13
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
REVENUE RECOGNITION: Revenue from the management of Indian-owned casino gaming
facilities is recognized when earned according to the terms of the management
contracts. Currently all of the Indian-owned casino projects that Lakes is
involved with are in development stages and are not yet open. Therefore, Lakes
is not currently recognizing revenue related to Indian casino management.
REALIZABILITY OF NOTES RECEIVABLE: The Company's notes receivable from Indian
Tribes are generally for the development of gaming properties to be managed by
the Company. The repayment terms are specific to each tribe and are largely
dependent upon the operating performance of each gaming property. Repayments of
the notes receivable are required to be made only if distributable profits are
available from the operation of the related casinos. Repayments are also the
subject of certain distribution priorities specified in the management
contracts. In addition, repayment of the notes receivable and the manager's fees
under the management contracts are subordinated to certain other financial
obligations of the respective tribes. Through December 30, 2001, no amounts have
been withheld under these provisions. Management periodically evaluates the
recoverability of such notes receivable based on the current and projected
operating results of the underlying facility and historical collection
experience.
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto and management's discussion
and analysis included in the Company's Annual Report on Form 10-K for the year
ended December 30, 2001.
RESULTS OF OPERATIONS
Revenues are calculated in accordance with accounting principles generally
accepted in the United States and are presented in a manner consistent with
industry practice. Net distributable profits 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 MARCH 31, 2002 COMPARED TO THE THREE MONTHS ENDED APRIL 1,
2001
Revenues
Total revenues were $1.5 million for the three months ended March 31, 2002
compared to $9.2 million for the same period in the prior year. Revenues for the
quarter in both years were derived from fees related to the management of Grand
Casino Coushatta. Revenue and earnings for the quarter were less than the same
period last year primarily due to the expiration of the management contract with
the Coushatta Tribe of Louisiana for Grand Casino Coushatta on January 16, 2002.
The Company's revenues and earnings will not include contributions from the
Coushatta operation going forward. As of March 31, 2002, the Company has no
other management contracts from which it will derive revenues in 2002.
14
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 $2.2 million for the three months ended March 31,
2002, compared to $2.9 million for the same period in the prior year. Selling,
general and administrative expenses decreased from $2.6 million for the three
months ended April 1, 2001 to $2.1 million for the three months ended March 31,
2002. This decrease is partially due to a decline in rent expense resulting from
the purchase of the corporate office building in January 2002. Fewer costs
relating to travel and payroll also contributed to the decline in selling,
general and administrative expenses during the current year period.
Other
Interest income was $1.8 million for the three months ended March 31, 2002 and
for the three months ended April 1, 2001. Equity in loss of unconsolidated
affiliates remained constant at $0.1 million.
Earnings per Common Share and Net Earnings
For the three months ended March 31, 2002, basic and diluted earnings per common
share were $0.05. This compares to basic and diluted earnings of $0.44 per
common share, for the three months ended April 1, 2001. Earnings totaled $0.6
million for the three months ended March 31, 2002 compared to $4.7 million for
the three months ended April 1, 2001. The decrease in earnings relates primarily
to the expiration of the management contract for Grand Casino Coushatta on
January 16, 2002 described above.
Outlook
Except for fees earned from the management of Grand Casino Coushatta through
January 16, 2002, it is currently contemplated that there will be no additional
operating revenues for the remainder of 2002. Although none of the existing
casino development projects are expected to produce revenue in 2002, Lakes
continues to evaluate potential new revenue-generating business opportunities.
Lakes continues to closely monitor its operating expenses. Currently, operating
expenses are expected to remain consistent for the remainder of 2002. The
Company's strong cash position is considered adequate to cover expected 2002
operating expenses.
CAPITAL RESOURCES, CAPITAL SPENDING, AND LIQUIDITY
At March 31, 2002, Lakes had $44.2 million in restricted and unrestricted cash
and cash equivalents. The Company also had $2.0 million in short-term,
available-for-sale investments, consisting primarily of a fixed income portfolio
made up of various types of bonds which are rated A1 or better. The cash and
short-term investment balances are planned to be used to fund operating expenses
and for loans to current joint venture and tribal partners to develop existing
and anticipated Indian casino operations, the pursuit of additional business
opportunities, and settlement of pending litigation matters.
15
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
The amount and timing of Lakes' cash outlays for casino development loans will
depend on the timing of the regulatory approval process and the availability of
external financing. When approvals are received, additional financing will be
needed to complete the projects.
It is currently planned that this third-party financing will be obtained by each
individual tribe. However, there can be no assurance that if third-party
financing is not available, Lakes will not be required to finance these projects
directly. If Lakes must provide this financing, Lakes expects to obtain debt or
equity financing which it would loan to the respective tribes as necessary. As
part of a recently announced letter of intent to invest in a joint venture which
would televise poker tournaments, the Company would be required to invest $0.1
million for an approximately 78% ownership position in the joint venture. The
Company would also be required to loan up to $3.2 million to the joint venture
as needed.
For the three months ended March 31, 2002 and April 1, 2001, net cash provided
by operating activities totaled $4.6 million and $1.0 million, respectively. A
$4.2 million reduction in net earnings was more than offset by changes in
accounts receivable, which increased by $4.7 million during the 2001 period and
decreased by $3.5 million during the 2002 period. For the three months ended
March 31, 2002 and April 1, 2001, net cash used in investing activities totaled
$6.6 million and $3.6 million, respectively. Included in these investing
activities for the three months ended March 31, 2002 and April 1, 2001, are
proceeds primarily from repayment of notes receivable from Indian-owned casinos,
which amounted to $1.0 million and $2.9 million, respectively. Advances under
notes receivable were $5.1 million and $11.2 million for the three months ended
March 31, 2002 and April 1, 2001, respectively. There was a net decrease in
short-term investments of $0 and $19.7 million for the three months ended March
31, 2002 and April 1, 2001, respectively.
Also during these periods, payments for land in Las Vegas, Nevada, held for
development amounted to $.01 million and $11.7 million, respectively. Included
in the payments for land held for development of $11.7 million during the three
months ended April 1, 2001 was the purchase of the Shark Club property in Las
Vegas, Nevada for approximately $10.1 million. The remaining decrease in
payments made for land held for development from the prior year quarter to the
current year quarter is the result of the sale of the Polo Plaza Shopping Center
and Travelodge sites on December 28, 2001.
As a part of the agreements dated as of June 30, 1998, by and among Hilton
Hotels Corporation, Park Place, Gaming Acquisition Corporation, Lakes and Grand,
the Company has agreed to indemnify Grand Casinos, Inc. 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 Part II, Item 1. Legal Proceedings.
16
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
As security to support Lakes' indemnification obligations to Grand, Lakes agreed
to deposit, in trust for the benefit of Grand, as a wholly owned subsidiary of
Park Place, an aggregate of $30 million, consisting of four annual installments
of $7.5 million during the four-year period subsequent to December 31, 1998.
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. The Company made the first
deposit of $7.5 million on December 31, 1999. In 2000, Lakes deposited $18.0
million into an escrow account on behalf of the recipients in the Stratosphere
shareholders' litigation and the Grand Casinos, Inc. shareholders' litigation.
As the $18.0 million was paid out during 2001, the remaining deposit of $7.5
million is included as restricted cash on the accompanying consolidated balance
sheets as of March 31, 2002 and December 30, 2001. In January 2001, Lakes also
purchased the Shark Club property in Las Vegas for $10.1 million in settlement
of another claim that was subject to the indemnification obligations.
On December 28, 2001, the Company sold the Polo Plaza shopping center property
to Metroflag Polo, LLC. In conjunction with this sale, Lakes sold to Metroflag
BP, LLC, rights to the adjacent Travelodge property consisting of a long-term
land lease and a motel operation. The sale price for this combined transaction
was approximately $30.9 million. Terms of the transaction include a $1.0 million
down payment, a note to Lakes in the amount of $23.3 million payable on
September 30, 2002, and a second note payable to Lakes that is non-interest
bearing in the amount of $7.5 million due on June 30, 2004. Lakes' collateral
for the two notes is the property and lease rights described above which would
revert back to Lakes in the event of default by Metroflag. The transaction was
closed subject to certain administrative post-closing conditions that must be
satisfied within six months after the closing. Certain of these conditions have
not yet been satisfied as of May 14, 2002. If the conditions are not satisfied
or waived by Metroflag within the prescribed period, Metroflag has the right to
require Lakes to repurchase the properties.
In addition to the notes receivable from Metroflag, Lakes also has approximately
$69.6 million in notes receivable from Indian tribes and other parties. Most of
these amounts are advances made to the tribes for the development of gaming
properties managed by Lakes. See Note 3 to the Consolidated Financial
Statements.
Lakes continues to own the Shark Club property which is an approximate 3.4 acre
undeveloped site adjacent to the Polo Plaza shopping center and Travelodge
sites. Lakes is currently in negotiations with a joint venture partner to
develop this site for an upscale time-share project. It is contemplated that
Lakes will contribute the property, valued at $16.0 million, and be required to
make no other material contributions of cash or property to the project
17
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Notes receivable from the Coushatta Tribe of Louisiana were $0.1 million at
December 30, 2001. The outstanding balance was repaid at the conclusion of the
management agreement on January 16, 2002. In addition, Lakes was previously the
guarantor of a loan agreement entered into by the Coushatta Tribe in the amount
of $25.0 million, with a balance of $6.8 million outstanding at December 30,
2001. Lakes was released from the guaranty agreement on January 16, 2002.
On January 2, 2002, the Company completed the purchase of its corporate office
building in Minnetonka, Minnesota for $6.4 million, including transaction
expenses. This transaction resulted in the extinguishment of the Company's
capital lease obligation related to the building.
Obligations
The Company has two notes payable with third parties. The first is
collateralized by certificates of deposit, with $1.0 million outstanding at
March 31, 2002 and December 30, 2001. Interest is compounded and paid on a
quarterly basis at 10%. The principal and any unpaid interest are due December
22, 2002. The second is collateralized by property with $0.4 million outstanding
at March 31, 2002 and December 30, 2001. Interest is compounded and paid on a
quarterly basis at 8.5%. The principal and any unpaid interest are due October
9, 2002.
Pursuant to the terms of the Distribution Agreement, Grand assigned to Lakes,
and Lakes assumed, a lease agreement dated February 1, 1996 covering Lakes'
current corporate office space of approximately 65,000 square feet with a lease
term of fifteen years. The lease commenced on October 14, 1996. During 2001,
also pursuant to the terms of the Distribution Agreement, Lakes entered into a
capital lease arrangement for the corporate office space at which time the
operating lease was cancelled. Accordingly, Lakes recorded a capital leased
asset and liability in the amount of approximately $5.8 million. These amounts
are included on the accompanying consolidated balance sheet as of December 30,
2001. On January 2, 2002, as per the agreement with Grand Casinos, Lakes
purchased the building as discussed above.
SEASONALITY
The Company believes that the operations of all casinos to be managed by the
Company will be affected by seasonal factors, including holidays, weather and
travel conditions.
REGULATION AND TAXES
The Company is subject to extensive regulation by state gaming authorities. The
Company will also be subject to regulation, which may or may not be similar to
current state regulations, by the appropriate authorities in any 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.
18
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
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
possible delays in completion of Lakes' casino projects, including various
regulatory approvals and numerous other conditions which must be satisfied
before completion of these projects; possible termination or adverse
modification of management contracts; continued indemnification obligations to
Grand; highly competitive industry; possible changes in regulations; reliance on
continued positive relationships with Indian tribes; possible impairment of
notes receivable of Indian tribes held by Lakes, which represent a large portion
of Lakes' assets; possible need for future financing to meet Lakes' expansion
goals; risks of entry into new businesses; and reliance on Lakes' management.
For further information regarding the risks and uncertainties, see the "Business
- -- Risk Factors" section of the Company's Annual Report on Form 10-K for the
fiscal year ended December 30, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments include cash and cash equivalents,
marketable securities and long-term debt. The Company's main investment
objectives are the preservation of investment capital and the maximization of
after-tax returns on its investment portfolio. Consequently, the Company invests
with only high-credit-quality issuers and limits the amount of credit exposure
to any one issuer. The Company does not use derivative instruments for
speculative or investment purposes.
19
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
The Company's cash and cash equivalents are not subject to significant interest
rate risk due to the short maturities of these instruments. As of March 31,
2002, the carrying value of the Company's cash and cash equivalents approximates
fair value. The Company's marketable debt securities (principally consisting of
commercial paper, corporate bonds, and government securities) have a weighted
average duration of one year or less. Consequently such securities are not
subject to significant interest rate risk.
The Company's primary exposure to market risk associated with changes in
interest rates involves the Company's notes receivable related to loans for the
development and construction of Native American owned casinos. The loans and
related note balances earn various interest rates based upon a defined reference
rate. If interest rates rise or fall, the floating rate receivables may generate
more or less interest income than what is currently recorded. As of March 31,
2002, Lakes had $66.2 million of floating rate notes receivable. Based on the
applicable current reference rates and assuming all other factors remain
constant, interest income for a twelve-month period would be $4.1 million. A
reference rate increase of 100 basis points would result in an increase in
interest income of $0.7 million. A 100 basis point decrease in the reference
rate would result in a decrease of $0.7 million in interest income over the same
twelve-month period.
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.
SLOT MACHINE LITIGATION
In April 1994, William H. Poulos brought an action in the U.S. District Court
for the Middle District of Florida, Orlando Division -- William H. Poulos, et al
v. Caesars World, Inc. et al -- Case No. 39-478-CIV-ORL-22 -- in which various
parties (including Grand) alleged to operate casinos or be slot machine
manufacturers were named as defendants. The plaintiff sought to have the action
certified as a class action.
A subsequently filed Action -- William Ahearn, et al v. Caesars World, Inc. et
al -- Case No. 94-532-CIV-ORL-22 -- made similar allegations and was
consolidated with the Poulos action.
Both actions included claims under the federal Racketeering-Influenced and
Corrupt Organizations Act and under state law, and sought compensatory and
punitive damages. The plaintiffs claimed that the defendants are involved in a
scheme to induce people to play electronic video poker and slot machines based
on false beliefs regarding how such machines operate and the extent to which a
player is likely to win on any given play.
In December 1994, the consolidated actions were transferred to the U.S. District
Court for the District of Nevada.
In September 1995, Larry Schreier brought an action in the U.S. District Court
for the District of Nevada -- Larry Schreier, et al v. Caesars World, Inc. et al
- -- Case No. CV-95-00923-DWH(RJJ). The plaintiffs' allegations in the Schreier
action were similar to those made by the plaintiffs in the Poulos and Ahearn
actions, except that Schreier claimed to represent a more precisely defined
class of plaintiffs than Poulos or Ahearn.
In December 1996, the court ordered the Poulos, Ahearn and Schreier actions
consolidated under the title William H. Poulos, et al v. Caesars World, Inc., et
al -- Case No. CV-S-94-11236-DAE(RJJ) -- (Base File), and required the
plaintiffs to file a consolidated and amended complaint. In February 1997, the
plaintiffs filed a consolidated and amended complaint.
In March 1997, various defendants (including Grand) filed motions to dismiss or
stay the consolidated action until the plaintiffs submitted their claims to
gaming authorities and those authorities considered the claims submitted by the
plaintiffs.
21
LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
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 August 2000, the Court and the parties agreed to try the action upon an
amended joint pre-trial order and a series of post-trial briefs. Post-trial
briefing concluded on December 12, 2000 and oral argument was held on January
22, 2001. On April 4, 2001, the Court entered judgment in favor of Grand and
issued its findings of fact and conclusions of law. The plaintiff filed an
appeal with the Ninth Circuit and filed its opening brief on November 23, 2001.
Grand filed its answering brief on January 11, 2002 and the plaintiff filed its
reply brief on February 8, 2002. The Ninth Circuit has scheduled oral argument
for May 14, 2002.
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.
22
LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
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 now complete and both parties have filed motions for summary
judgment. A hearing on both summary judgment motions is scheduled for May 22,
2002, and trial is scheduled for June 20, 2002.
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 March 31, 2002.
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
--------
10.1 Purchase Agreement dated October 31, 2001 by and between Park Place
Entertainment Corp. and Lakes Gaming, Inc.
(b) Reports on Form 8-K
-------------------
(i) A Form 8-K, Item 5. Other Events, was filed on January 2, 2002.
(ii) A Form 8-K, Item 5. Other Events, was filed on February 4, 2002.
(iii) A Form 8-K, Item 5. Other Events, was filed on March 1, 2002.
(iv) A Form 8-K, Item 5. Other Events, was filed on April 19, 2002.
23
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 14, 2002 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
24