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 September 30, 2001March 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.
------------------------------------------------------------------------
(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 NovemberMay 9, 2001,2002, 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 September 30, 2001March 31, 2002 3
and December 31, 200030, 2001
Consolidated Statements of Earnings for the three 4
months ended September 30,March 31, 2002 and April 1, 2001 and October 1, 2000
Consolidated Statements of Comprehensive Earnings 5
for the three months ended September 30,March 31, 2002 and
April 1, 2001 and
October 1, 2000
Consolidated Statements of Earnings for the nine months 6
ended September 30, 2001 and October 1, 2000
Consolidated Statements of Comprehensive 7
Earnings for the nine months ended September 30, 2001
and October 1, 2000
Consolidated Statements of Cash Flows for the nine 8three 6
months ended September 30,March 31, 2002 and April 1, 2001 and October 1, 2000
Notes to Consolidated Financial Statements 97
ITEM 2. MANAGEMENT'S DISCUSSION AND 1513
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE 2419
DISCLOSURES ABOUT MARKET RISK
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 2521
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 3023
2
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
*
SEPTEMBERMARCH 31, 2002 DECEMBER 30, 2001
DECEMBER 31, 2000
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 22,647 $ 10,469$34,962 $42,638
Short-term investments 3,060 32,4772,016 2,027
Current maturitiesinstallments of notes receivable 11,736 16,67927,265 28,273
Accounts receivable, 4,107 2,373net 72 3,601
Deferred tax asset 6,111 13,6744,553 4,549
Other current assets 1,052 2,3831,601 1,079
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 48,713 78,05570,469 82,167
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Property and Equipment-Net 2,171 1,4148,257 7,524
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Other Assets:
Land held for development 71,649 58,67116,051 16,038
Notes receivable-less current maturities 54,236 35,337installments 72,250 67,525
Cash and cash equivalents-restricted 15,296 30,2709,202 9,175
Investments in and notes from unconsolidated affiliates 2,540 3,209951 839
Interest receivable 5,195 2,0277,311 6,147
Other long-term assets 8,021 3,8267,736 7,527
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Other Assets 156,937 133,340113,501 107,251
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $207,821 $212,809
===================================================================================================================================$192,227 $196,942
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 176 $ 79$152 $105
Current maturities of long-term debt 525 5251,325 1,325
Current installments of capital lease obligations - 123
Income taxes payable 4,546 5,4794,244 3,906
Litigation and claims accrual 6,672 25,0786,309 6,572
Other accrued expenses 5,470 4,5213,671 3,341
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 17,389 35,68215,701 15,372
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Long-term Liabilities:
Long-term debt-lessCapital lease obligations-less current maturities 1,325 1,325installments - -----------------------------------------------------------------------------------------------------------------------------------5,591
Other long-term liabilities 224 225
- -------------------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 1,325 1,325224 5,816
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 18,714 37,00715,925 21,188
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
Shareholders' Equity:
Capital stock, $.01 par value; authorized 100,000 shares; 10,638 common
shares issued and outstanding
at SeptemberMarch 31, 2002, and December 30, 2001 and December 31, 2000 106 106
Additional paid-in-capital 131,525 131,525
Retained earnings 57,544 44,504Earnings 44,739 44,183
Accumulated other comprehensive loss (68) (333)(60)
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 189,107 175,802176,302 175,754
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $207,821 $212,809
===================================================================================================================================$192,227 $196,942
===================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
* - FROM AUDITED CONSOLIDATED FINANCIAL STATEMENTS
3
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
(UNAUDITED)
THREE MONTHS ENDED
-------------------------------------------
SEPTEMBER 30,---------------------------------------------
MARCH 31, 2002 APRIL 1, 2001 OCTOBER 1, 2000
------------------ ---------------
Revenues:REVENUES:
Management fee income $ 8,664 $10,6841,502 $ 9,223
COSTS AND EXPENSES:
Selling, general and administrative 2,541 2,6472,099 2,580
Depreciation and amortization 323 32999 331
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Costscosts and Expenses 2,864 2,976expenses 2,198 2,911
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) FROM OPERATIONS 5,800 7,708(696) 6,312
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 1,350 2,0401,785 1,816
Interest expense (24)(23) (24)
Equity in loss of unconsolidated affiliates (103) (797)
Other(123) (109)
- 61
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total other income, net 1,223 1,2801,639 1,683
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 7,023 8,988943 7,995
Provision for income taxes 2,880 4,012387 3,278
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 4,143556 $ 4,976
===============================================================================================================4,717
========================================================================================================
BASIC EARNINGS PER SHARE $ 0.390.05 $ 0.47
===============================================================================================================0.44
========================================================================================================
DILUTED EARNINGS PER SHARE $ 0.390.05 $ 0.46
===============================================================================================================0.44
========================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 10,638 10,638
DILUTIVE EFFECT OF STOCK COMPENSATION PROGRAMS 2 144
- 74
- ---------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON AND DILUTED--------------------------------------------------------------------------------------------------------
Weighted Average Common and Diluted
SHARES OUTSTANDING 10,638 10,712
===============================================================================================================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
----------------------------------------
SEPTEMBER 30,-----------------------------------------
MARCH 31, 2002 APRIL 1, 2001
OCTOBER 1, 2000
---------------------------------------------------------------------------------
NET EARNINGS $4,143 $4,976$556 $4,717
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) during the period 194 64(8) 53
Reclassification adjustment for losses (gains)
included
in net earnings 176 (36)
----------------------------------------- 67
-----------------------------------------
COMPREHENSIVE EARNINGS $4,513 $5,004
========================================$548 $4,837
=========================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
5
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
(UNAUDITED)
NINE MONTHS ENDED
-----------------
SEPTEMBER 30, 2001 OCTOBER 1, 2000
------------------ ---------------
Revenues:
Management fee income $27,486 $ 52,392
COSTS AND EXPENSES:
Selling, general and administrative 8,061 7,447
Depreciation and amortization 983 2,578
- --------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 9,044 10,025
- --------------------------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 18,442 42,367
- --------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 4,763 5,786
Interest expense (73) (73)
Equity in loss of unconsolidated affiliates (364) (2,003)
Provision for litigation loss - (18,000)
Write-down of unconsolidated affiliates (666) -
Other - 63
- --------------------------------------------------------------------------------------------------------------
Total other income (expense), net 3,660 (14,227)
- --------------------------------------------------------------------------------------------------------------
Earnings before income taxes 22,102 28,140
Provision for income taxes 9,062 12,359
- --------------------------------------------------------------------------------------------------------------
NET EARNINGS $13,040 $ 15,781
==============================================================================================================
BASIC EARNINGS PER SHARE $ 1.23 $ 1.48
==============================================================================================================
DILUTED EARNINGS PER SHARE $ 1.22 $ 1.48
==============================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 10,638 10,633
DILUTIVE EFFECT OF STOCK COMPENSATION PROGRAMS 40 25
- --------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON AND DILUTED
SHARES OUTSTANDING 10,678 10,658
==============================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
6
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
------------------------------------
SEPTEMBER 30, 2001 OCTOBER 1, 2000
------------------------------------
NET EARNINGS $13,040 $15,781
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized gains on securities:
Unrealized holding gains during the period 10 48
Reclassification adjustment for losses (gains)
included in net earnings 255 (36)
------------------------------------
COMPREHENSIVE EARNINGS $13,305 $15,793
====================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
7
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINETHREE MONTHS ENDED
-----------------
SEPTEMBER 30,----------------------------------
MARCH 31, 2002 APRIL 1, 2001 OCTOBER 1, 2000
------------------ ---------------
OPERATING ACTIVITIES:
Net earnings $13,040 $15,781$ 556 $ 4,717
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 983 2,578
Gain on sale of investment - (61)99 331
Equity in loss of unconsolidated affiliates 364 2,003
Write down of unconsolidated subsidiaries 666 -
Provision for litigation loss - 18,000123 109
Changes in operating assets and liabilities:
Accounts receivable (3,924) 1,0653,529 (4,708)
Income taxes 6,447 (4,555)338 2,902
Accounts payable 97 (321)47 63
Accrued expenses (457) (59)67 (974)
Other 698 (511)(127) (1,441)
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 17,914 33,9204,632 999
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Short-term investments, purchases (12,708) (52,795)- (5,208)
Short-term investments, sales/maturities 42,572 47,850- 24,882
Payments for land held for development (12,978) (2,977)(13) (11,729)
Payments for notes receivable (24,024) (24,511)(5,100) (11,229)
Proceeds from repayment of notes receivable 9,037 15,1881,008 2,926
Investment in and notes receivable from unconsolidated affiliates (508) (1,787)(160) (303)
Increase in restricted cash, net (3,026) (18,004)(27) (2,803)
Increase in other long-term assets (3,213) (18)(1,470) (113)
Payments for property and equipment, net (888) (42)(832) (19)
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (5,736) (37,096)(6,594) (3,596)
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stockPayments on capital lease obligations (5,714) -
79
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided byUsed in Financing Activities (5,714) -
79
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)decrease in cash and cash equivalents 12,178 (3,097)(7,676) (2,597)
Cash and cash equivalents - beginning of period 42,638 10,469
24,392
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $22,647 $21,295
==================================================================================================================================$ 34,962 $ 7,872
======================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $73 $73$ 25 $ 24
Income taxes 4,002 16,7175 1,292
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
86
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 manages the largest casino resort in Louisiana under a
management contract that expires in January 2002. The Company has entered into 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, and has entered intoventure. 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 agreementwith 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 developmentjoint 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 landthree 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 Las Vegas strip.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. In addition,Additionally, as a
result of its spin-off from Grand, Lakes hasreceived 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.
On December 31,
2000, the carrying value of former investments in Fanball.com, Inc., Trak 21
Development, LLC and Interactive Learning Group, Inc., were written down to
zero.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 ninethree months ended September 30, 2001,March 31, 2002, are not
necessarily indicative of the results that may be expected for the year ending
December 30, 2001.29, 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
31, 2000.
9
LAKES GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)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.
On March 31, 2000 the Company announced that it had reached an agreement with
the Tunica-Biloxi Tribe of Louisiana, effective March 31, 2000, for the early
buyout of the management contract for Grand Casino Avoyelles. The Tunica-Biloxi
Tribe of Louisiana elected to exercise its option for the early buyout of the
contract, which was scheduled to expire on June 3, 2001. The early buyout of the
contract was provided for in the original seven-year management agreement and,
under the agreement, Lakes was compensated for the management fees the Company
would have received had it managed Grand Casino Avoyelles through the original
contract expiration date of June 3, 2001, discounted to their present value.
Included in management fee income for the nine months ended October 1, 2000 is
approximately $16 million relating to the early buyout. Lakes was also repaid
all amounts owing to it under its loan agreements with the Tribe. The management contract for Grand Casino Coushatta expiresexpired January 16, 2002,
and will not be
renewed. Althoughwhich is seven years from the Coushatta Tribe had previously agreed to a contract
renewal in principle, the Coushatta Tribe decided to placedate the casino operations
under their direct control.opened, and was not renewed. This
non-renewal will resulthas resulted in the loss of revenues to the Company derived from
such contract, which will havehas had a material adverse effect on the Company's results
of operations. The Coushatta Tribe entered into a tribal-state compact withAs of March 31, 2002, the State of
Louisiana on September 29, 1992. This compact was approvedCompany has no other management
contracts from which it will derive revenues in November 1992 by
the Secretary of the Interior. The compact expired November 4, 1999 and the
State of Louisiana delivered a written notice of non-renewal. The Governor and
the Tribe agreed on three extensions totaling thirteen months that were approved
by the Department of the Interior. On July 20, 2001, the Tribe and the State of
Louisiana agreed to terms of a new compact. The compact is subject to approval
by the Department of the Interior. There can be no assurances that the compact
will be approved by the Department of the Interior.
102002.
8
LAKES GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. NOTES RECEIVABLE
Notes receivable consist of the following (in thousands):
SeptemberMarch 31, 2002 December 30, 2001
December 31, 2000
-------------------------------- -----------------
Notes from the Pokagon Band of Potawatomi Indians with
variable interest rates not(not to exceed 10% (7.00%)
(5.75% at September 30, 2001)March 31, 2002), receivable in 60 monthly
installments subsequent to commencement date $33,451 $21,918$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 (8.00%(6.75% at September 30, 2001)March 31, 2002),
receivable in 1248 monthly installments subsequent to
commencement date 10,279 5,55413,428 12,373
Notes from the Jamul Indian Village with variable interest
rates (8.00%(6.75% at September 30, 2001)March 31, 2002), receivable in 1248 monthly
installments subsequent to commencement date 6,014 3,3728,694 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 PCG Corning, LLC, with variable interest rates (7.50% at
September 30, 2001) 4,500 2,679
Note from ViatiCare Financial Services, LLC, with
a fixed interest rate of 8.25% at March 31, 2002 due
on demand 4,000 3,740
Notes from the Coushatta Tribe with variable interest rates (7.00% at September
30, 2001), receivable in 84 monthly installments through January 2002 3,210 12,227
Notes from the Nipmuc Nation with variable interest rates (8.00% at 1,761 558
September 30, 2001) receivable in 60 monthly installments subsequent to
commencement date4,000
Other 2,757 1,9686,473 5,809
------- -------
Total notes receivable 65,972 52,01699,515 95,798
Less - current maturitiesinstallments of notes receivable (11,736) (16,679)(27,265) (28,273)
------- -------
Notes receivable, less current maturities $54,236 $35,337installments $72,250 $67,525
======= =======
119
LAKES GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The notes receivable from Indian Tribes are generally advances made to Indian Tribes 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 September 30, 2001,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. Losses of approximately $1.0 million for
the nine months ended September 30, 2001No impairment losses on such notes
receivable have been recognized on such notes
receivable. No losses were recognized for the nine months ended October 1, 2000.
The current year losses relate to notes receivable from PCG Corning, LLC (a
partnership formed by Lakes and MRD Gaming, a limited liability company). This
company held a contract with the Paskenta Band of Nomlaki Indians to develop a
potential gaming facility. In February 2001, Lakes announced its intention to
discontinue its involvement with the Paskenta project.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. LITIGATION SETTLEMENT
A settlement agreement was reached in June 2000 regarding both the Stratosphere
shareholders' litigation and the Grand Casinos, Inc. shareholders' litigation.
The agreement required Lakes to pay $9 millionCAPITAL LEASE OBLIGATIONS
Pursuant to the terms of the Distribution Agreement, Grand Casinos, Inc.
shareholdersassigned to Lakes,
and $9 millionLakes 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 Stratosphere shareholdersterms 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 total of $18
million, which was reflected as a non-operating expensecapital leased
asset and liability in the second quarteramount of 2000. The after-tax impactapproximately $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 litigation loss was $10.6 million or $1.00 per
diluted share. The $18 million was placed by Lakes into escrow accounts on
behalf of the recipients. On August 14, 2001, the Court issued an order giving
final approvalCompany's capital lease
obligation related to the settlement. As such, both the $18 million in restricted
cash and related litigation and claims accrual were removed from the Company's
consolidated balance sheet. The complaints by the shareholder groups were
originally filed in 1996 against various defendants including Grand Casinos,
Inc. The complaints included allegations of misrepresentations, federal and
state securities law violations and various other claims in connection with the
Stratosphere project. As part of the transaction establishing Lakes as a
separate public company on December 31, 1998, Lakes agreed to indemnify Grand
for all obligations arising out of these lawsuits.
12building.
10
LAKES GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain property and equipmentan airplane under a non-cancelable operating leases. Futurelease. The
airplane lease expires May 1, 2003 and provides for two one-year renewal terms.
Approximate future minimum lease payments, excluding contingent rentals, due under non-cancelable operating leasesthis lease as of September 30, 2001March 31,
2002, considering both one-year renewals are exercised, are as follows (in
thousands):
Operating Leases
----------------
2001 $ 744
2002 2,333
2003 2,330
2004 2,400
2005 2,472
Thereafter 35,534
--------
$ 45,813
========
Lakes is obligated
Operating Leases
----------------
2002 $ 450
2003 600
2004 600
2005 200
--------
$ 1,850
PURCHASE OPTIONS
The Company has the right to purchase the office buildingairplane it occupies in Minnetonka,
Minnesota in January 2002leases during the base
lease term and any renewal term for $8.7approximately $8 million.
Lakes currently has $3.0 million
included as restricted cash onDuring 2001, the accompanying consolidated balance sheet as of
September 30, 2001 for this purpose.
PURCHASE OPTION AGREEMENTS
The Company has an optionsold its rights to purchase the Travelodge property in Las
Vegas, Nevada, forincluding its option to purchase the purchase price of $30 million on October 31, 2017.Travelodge property. During the
third quarter of
2001, the option to purchase the Cable property in Las Vegas, Nevada for the
purchase price of $39.1 million was allowed to lapse.
LOAN GUARANTY AGREEMENTS
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 September 30, 2001 and December 31,
2000, the amounts outstanding were $8.3 million and $13.0 million, respectively.
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.
13
LAKES GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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. These amounts are
included as restricted cash on the December 31, 2000 balance sheet. 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, amounts$7.5 million related to
security to support Lakes' indemnification obligations to Grand is included as
restricted cash on the accompanying consolidated balance sheets decreased from $25.5 million as of DecemberMarch 31,
2000
to $7.5 million as of September2002 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.
7. SUBSEQUENT EVENTS
In October 2001, Lakes was repaid $4.5 million in loans outstanding from PCG
Corning, LLC related to the Paskenta project. Lakes had made loans totaling $5.5
million to PCG Corning and had written off approximately $1.0 million as
uncollectible during 2001. In February 2001, Lakes announced its intention to
discontinue its involvement with the Paskenta project.
1412
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, par value $.01 per share,Common Stock, to the shareholders of Grand Casinos,
Inc. ("Grand").
As a result of the Distribution, Lakes develops, constructs and manages Indian-ownedoperates the Indian casino properties that offer
the opportunity for long-term development in emerging and established gaming
jurisdictionsmanagement
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 Company'stribe has indicated that it will submit additional information for
reconsideration.
Lakes' historical revenues arehave been derived almost exclusively from management
fees. During 2001, Lakes managesmanaged a land-based, Indian-owned casino, in Louisiana: Grand Casino
Coushatta, in Kinder, Louisiana ("Grand Casino Coushatta"), owned by. Pursuant to the
Coushatta Tribe of
Louisiana (the "Coushatta Tribe").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 expiresexpired January 16, 2002, which is seven years from the date the casino opened, and willwas not be
renewed. This non-renewal will resulthas resulted in the loss of revenues to the Company
derived from such contract, which will havehas had a material adverse effect on the
Company's results of operations.
The Company also managed a second land-based, Indian-owned casino in Marksville,
Louisiana ("Grand Casino Avoyelles"), owned by the Tunica-Biloxi Tribe of
Louisiana (the "Tunica-Biloxi Tribe") through March 31, 2000. On March 31, 2000
the Company announced that it had reached an agreement with the Tunica-Biloxi
Tribe of Louisiana, effective March 31, 2000 for the early buyout of the
management contract for Grand Casino Avoyelles. The Tunica-Biloxi Tribe of
Louisiana elected to exercise its option for the early buyout of the contract,
which was scheduled to expire on June 3, 2001. The early buyout of the contract
was provided for in the original seven-year management agreement and, under the
agreement, Lakes was compensated for the management fees the company would have
received had it managed Grand Casino Avoyelles through the original contract
expiration date of June 3, 2001, discounted to their present value. Lakes was
also repaid all amounts owing to it under its loan agreements with the Tribe.
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 the Jamul Indian Village in California. The contract is subject to
approval by NIGC. In March of 2000, California voters approved an amendment to
the State Constitution which allows for Nevada-style gaming on Indian land and
ratifies the Tribal Compact. Development of the casino resort will begin once
various regulatory approvals are received.
15
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED)
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.
On January 18, 2000, a Michigan Ingham County Circuit Judge ruled that the
Michigan State Legislature acted improperly in 1998 when it approved casino
compacts by joint resolution. The Governor of the State of Michigan has appealed
the ruling. The ruling directly affects four tribes in Michigan, one of which is
the Pokagon Band of Potawatomi Indians with whom Lakes has development and
management contracts.
In January 2001, the land comprising the casino site was accepted into trust by
the Secretary of Interior, subject to a 30-day public comment period. During the
30-day period, a complaint was filed against the Secretary of the U.S.
Department of the Interior in the District Court of Columbus by a group called
"Taxpayers of Michigan Against Casinos", to stop the U.S. Department of Interior
from placing into trust the land for the casino site. The Department of Justice
will defend this lawsuit on behalf of the Secretary of the Interior.
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 second limited
liability company with KAR. The partnership between Lakes and KAR has been
awarded a contract to develop and manage a casino resort facility with the
Shingle Springs Band of Miwok Indians 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"). In March of 2000,
California voters approved an amendment to the State Constitution which allows
for Nevada-style gaming on Indian land and ratifies the Tribal Compact.
Development of the casino resort will begin once various regulatory approvals
are received.
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 in the process of being dissolved.
16
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
On June 19, 2000, the Company announced that a settlement agreement had been
reached regarding both the Stratosphere shareholders' litigation and the Grand
Casinos, Inc. shareholders' litigation. The agreement required Lakes to pay $9
million to the Grand Casinos, Inc. shareholders and $9 million to the
Stratosphere shareholders for a total of $18 million, which was reflected as a
non-operating expense in the second quarter of 2000. This amount was paid into
escrow and related accounts in July 2000 for full and final settlement for all
federal and state related actions. On August 14, 2001, the Court issued an order
giving final approval to the settlement. As such, both the $18 million in
restricted cash and related litigation and claims accrual were removed from the
Lakes balance sheet.
On July 31, 2000, the Company announced that it had formed a joint venture,
Metroplex-Lakes, LLC, with Metroplex, LLC to develop Las Vegas real estate now
controlled by Lakes. Metroplex-Lakes, LLC plans to develop an upscale retail,
commercial, hotel and entertainment complex on approximately 11.5 acres
surrounding the corner of Harmon Avenue and Las Vegas Boulevard (the "Strip") in
Las Vegas. Lakes previously controlled approximately 16.0 acres at this site;
however, during the quarter ended September 30, 2001, the option to purchase the
Cable property, consisting of approximately 4.5 acres, was allowed to lapse. The
joint venture has a two-year option to buy the majority of the site from Lakes
at a price that will approximately equal Lakes' investment in the property plus
the assumption of Lakes' future obligations under a long-term ground lease.
Lakes will have voting control of the joint venture, however, development
decisions affecting the real estate purchased by the joint venture must be
mutually agreed upon. Lakes and Metroplex will share results from the joint
venture equally.
On August 10, 2000, the Company announced that it had agreed to form a joint
venture for the purpose of developing new gaming facilities on Indian owned land
in California. Under the agreement, Lakes formed a limited liability company
with MRD Gaming, a limited liability company. The partnership between Lakes and
MRD holds the contract to develop casino facilities with the Cloverdale
Rancheria of Pomo Indians. The planned site for the potential new casino
development is located on Highway 101 in Cloverdale, California, approximately
60 miles north of San Francisco. Development at the casino will start as soon as
various regulatory approvals are obtained by the tribe. Development is also
subject to completion of definitive financing arrangements. The joint venture
also entered into a contract relating to the Paskenta Band of Nomlaki Indians.
However, in February 2001, Lakes announced its intention to discontinue its
involvement with the Paskenta project. Lakes has made loans totaling $5.5
million to the joint venture (PCG Corning, LLC) for this project. During 2001,
Lakes wrote off approximately $1.0 million as uncollectible relating to these
loans. As of September 30, 2001, $4.5 million in loans remained outstanding (see
Note 4). In October 2001, Lakes was repaid the $4.5 million relating to these
loans.
On July 9, 2001, the Company announced that it had signed development and
management agreements with the Nipmuc Nation of Massachusetts for a potential
future casino resort in the eastern United States. The Nipmuc Nation's petition
for federal recognition received a proposed positive finding from the Bureau of
Indian Affairs (BIA) in January 2001.
17
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED)
In September 2001, that proposed positive finding was reversed by the BIA when
it issued a negative finding relating to the Nipmuc Nation's request for federal
recognition. The Nipmuc Nation has 180 days to submit additional information for
reconsideration. In addition, community groups will have an opportunity to
submit comments and documentation. If approval is received, the Nipmuc Nation
would need to put land in trust and come to a gaming agreement with the state
where the land is located before proceeding with any such enterprise.
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 for the Cloverdale Rancheria of Pomo Indians.
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, for the Paskenta Band of Nomlaki Indians.
In addition, Lakes has 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. On December 31, 2000, the carrying value of former investments
in Fanball.com, Inc., Trak 21 Development, LLC and Interactive Learning Group,
Inc. were written down to zero.
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' businessgrowth strategy
contemplates the expansion of existing operations, the pursuit of opportunities
to develop and manage additional gaming facilities maximizing the benefit of the land investment in Las Vegas, 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 31, 2000.30, 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.
18
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Lakes is prohibited by IGRA from having an ownership interest in any casino it
manages for Indian tribes. The management contract with Grand Casino Coushatta
expires January 16, 2002, and will not be renewed. The non-renewal of the
management contract will result in the loss of revenues to Lakes derived from
such contract, which will have a material adverse effect on Lakes' results of
operations.
The Coushatta Tribe entered into a tribal-state compact with the State of
Louisiana on September 29, 1992. This compact was approved in November 1992 by
the Secretary of the Interior. The compact for the Coushatta Tribe expired
November 4, 1999 and the State of Louisiana delivered a written notice of
non-renewal. The Governor and the Tribe agreed on two six-month extensions and
one thirty-day extension, which were approved by the Department of the Interior.
On July 20, 2001, the State of Louisiana and the Coushatta Tribe reached
agreement on the terms of a new compact. The compact is subject to approval by
the Department of the Interior. In the event the compact is not approved, gaming
may not be permitted at Grand Casino Coushatta.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED
OCTOBER 1, 2000
Revenues
Total revenues were $27.5 million for the nine months ended September 30, 2001
compared to $52.4 million for the same period in the prior year. Revenues for
the current year were derived from fees related to the management of Grand
Casino Coushatta. Revenues for the current year were less than the same period
last year primarily due to the early buyout of the Company's management contract
for Grand Casino Avoyelles by the Tunica-Biloxi Tribe of Louisiana at the end of
the first quarter 2000, pursuant to the terms of the contract. Revenues from
Grand Casino Avoyelles contributed $19.8 million for the nine months ended
October 1, 2000, including approximately $16.0 million in management fee income
recognized due to the buyout of the management contract. The decrease in
revenues relates also to a decline in management fees of $5.1 million from Grand
Casino Coushatta due to construction interruption on the main roads leading to
the casino, along with intensive marketing campaigns implemented by casinos in
the competitive Lake Charles market and adverse weather conditions in the area.
In addition, the tragic events of September 11, 2001 resulted in a decrease in
visitation and, accordingly, revenue during that period.
Costs and Expenses
Total costs and expenses were $9.0 million for the nine months ended September
30, 2001, compared to $10.0 million for the same period in the prior year.
Selling, general, and administrative expenses increased in comparison with the
prior year period, from $7.4 million for the nine months ended October 1, 2000
to $8.1 million for the nine months ended September 30, 2001, primarily due to
increased costs related to development costs of new casino projects.
Depreciation and amortization expense decreased from $2.6 million for the nine
months ended October 1, 2000 to $1.0 million for the nine months ended September
30, 2001, due to increased amortization in the prior year period related to the
early buyout of the management contract for Grand Casino Avoyelles at the end of
the first quarter of 2000.
19
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Other
Provision for litigation loss was $18 million for the nine months ended October
1, 2000. This amount relates to a settlement agreement reached in June 2000
regarding both the Stratosphere shareholders' litigation and the Grand Casinos,
Inc. shareholders' litigation. The agreement required Lakes to pay a total of
$18 million, which has been reflected as a non-operating expense in the second
quarter of 2000. This amount was paid into escrow and related accounts in July
2000 for full and final settlement for all federal and state related actions. On
August 14, 2001, the Court issued an order giving final approval to the
settlement. As such, both the $18 million in restricted cash and related
litigation and claims accrual were removed from the Lakes balance sheet.
In June 2001, Lakes entered into an agreement with New Horizon Kids Quest
(NHKQ), pursuant to which NHKQ will acquire Lakes' interest in NHKQ. As a
result, Lakes incurred a one time write-down charge of $0.7 million before tax,
during the second quarter of 2001.
Interest income was $4.8 million for the nine months ended September 30, 2001,
compared to $5.8 million for the same period in the prior year. This decrease is
due primarily to the decline in market interest rates and lower cash balances
compared to the prior year. Equity in loss of unconsolidated affiliates
decreased to $0.4 million for the nine months ended September 30, 2001 from $2.0
million for the nine months ended October 1, 2000, due primarily to the write
down of investments in Fanball.com, Interactive Learning Group, Inc. and Trak 21
during the quarter ended December 31, 2000. Current year period results do not
include losses from these operations.
Earnings per Common Share and Net Earnings
For the nine months ended September 30, 2001 basic and diluted earnings per
common share were $1.23 and $1.22, respectively. This compares to basic and
diluted earnings of $1.48 per common share, for the nine months ended October 1,
2000. Net earnings totaled $13.0 million for the nine months ended September 30,
2001 compared to $15.8 million for the same prior year period. Excluding results
from Grand Casino Avoyelles and the $18 million provision for litigation loss,
Lakes' earnings before taxes for the nine months ended September 30, 2001,
decreased approximately $5.9 million compared to the same period in the prior
year. The decrease in earnings relates primarily to the decline in management
fees from Grand Casino Coushatta described above.
THREE MONTHS ENDED SEPTEMBER 30, 2001MARCH 31, 2002 COMPARED TO THE THREE MONTHS ENDED OCTOBERAPRIL 1,
20002001
Revenues
Total revenues were $8.7$1.5 million for the three months ended September 30, 2001March 31, 2002
compared to $10.7$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. The $2.0 million decrease in revenues resulted from a
reduction in operating income atRevenue 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.
20Coushatta 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)
The decline in income at Coushatta is due to construction interruption on the
main roads leading to the casino, adverse weather conditions in the surrounding
area during the quarter and intensive marketing campaigns implemented by casinos
in the competitive Lake Charles market. In addition, the tragic events of
September 11, 2001 resulted in a decrease in visitation and, accordingly,
revenue during that period.
Costs and Expenses
Total costs and expenses were $2.9$2.2 million for the three months ended September
30, 2001,March 31,
2002, compared to $3.0$2.9 million for the same period in the prior year. Selling,
general and administrative expenses for the three months ended
September 30, 2001 were relatively consistent in comparison to the same prior
year period.
Other
Provision for litigation loss was $18decreased from $2.6 million for the three
months ended July 2,
2000. This amount relatesApril 1, 2001 to a settlement agreement reached in June 2000
regarding both the Stratosphere shareholders' litigation and the Grand Casinos,
Inc. shareholders' litigation. The agreement required Lakes to pay a total of
$18 million, which has been reflected as a non-operating expense in the second
quarter of 2000. This amount was paid into escrow and related accounts in July
2000 for full and final settlement for all federal and state related actions. On
August 14, 2001, the Court issued an order giving final approval to the
settlement. As such, both the $18.0 million in restricted cash and related
litigation and claims accrual were removed from the Lakes balance sheet.
Interest income was $1.4$2.1 million for the three months ended September 30, 2001,
compared to $2.0 million for the same period in the prior year.March 31,
2002. This decrease is partially due primarilyto 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 market rates from the prior year periodselling,
general and due
to lower cash balancesadministrative 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 decreased toremained constant at $0.1 million for the three months ended
September 30, 2001 from $0.8 million for the three months ended October 1, 2000,
due primarily to the write down of investments in Fanball.com, Interactive
Learning Group, Inc. and Trak 21 during the quarter ended December 31, 2000.
Current year period results do not include losses from these operations.million.
Earnings per Common Share and Net Earnings
For the three months ended September 30, 2001,March 31, 2002, basic and diluted earnings per common
share were $.39.$0.05. This compares to basic and diluted earnings of $.47 and
$.46,$0.44 per
common share, respectively, for the three months ended OctoberApril 1, 2000.2001. Earnings totaled $4.1$0.6
million for the three months ended September 30,
2001March 31, 2002 compared to $5.0$4.7 million for
the three months ended OctoberApril 1, 2000.2001. The decrease in earnings relates primarily
to the $2.0 million decline inexpiration of the management fees fromcontract for Grand Casino Coushatta on
January 16, 2002 described above.
21
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)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 September 30, 2001,March 31, 2002, Lakes had $37.9$44.2 million in restricted and unrestricted cash
and cash equivalents. The Company also had $3.1$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
cash equivalents 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, costs associated with the Las Vegas real
estate, 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 ninethree months ended September 30,March 31, 2002 and April 1, 2001, and October 1, 2000, net cash provided
by operating activities totaled $17.9$4.6 million and $33.9$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 same periods,three months ended
March 31, 2002 and April 1, 2001, net cash used in investing activities totaled
$5.7$6.6 million and $37.1$3.6 million, respectively. Included in these investing
activities for the ninethree months ended September 30,March 31, 2002 and April 1, 2001, and October 1,
2000, are
proceeds primarily from repayment of notes receivable from Indian-owned casinos,
which amounted to $9.0$1.0 million and $15.2$2.9 million, respectively. Advances under
notes receivable were $24.0$5.1 million and $24.5$11.2 million for the ninethree months ended
September 30,March 31, 2002 and April 1, 2001, respectively. There was a net decrease in
short-term investments of $0 and October$19.7 million for the three months ended March
31, 2002 and April 1, 2000.2001, respectively.
Also during these periods, payments for land in Las Vegas, Nevada, held for
development amounted to $13.0$.01 million and $3.0$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.
These amounts are included as restricted cash onAs the December 31, 2000 balance
sheet.
22
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
On August 14,$18.0 million was paid out during 2001, the Court issued an order giving final approval to the
Stratosphere shareholders' litigation and Grand Casinos, Inc. shareholders'
litigation settlement. As such, the $18remaining deposit of $7.5
million in restricted cash was removed
from the Lakes' balance sheet. As a result, amounts related to security to
support indemnification obligations to Grandis included as restricted cash on the accompanying consolidated balance
sheets decreased from $25.5 million as of DecemberMarch 31, 2000
to $7.5 million as of September2002 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 operationoperations of all casinos to be managed by the
Company arewill 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.
23
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
These risks and uncertainties include, but are not limited to, those relating to
developmentpossible delays in completion of Lakes' casino projects, including various
regulatory approvals and construction activities, dependence upon existingnumerous other conditions which must be satisfied
before completion of these projects; possible termination or adverse
modification of management pending litigation, domestic or global economic conditions andcontracts; continued indemnification obligations to
Grand; highly competitive industry; possible changes in federal or state tax laws or the administrationregulations; reliance on
continued positive relationships with Indian tribes; possible impairment of
such lawsnotes 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 changes in
gaming laws or regulations (including the legalization of gaming in certain
jurisdictions).reliance on Lakes' management.
For further information regarding thesethe 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 31, 2000.30, 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 September 30,
2001,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 September
30, 2001,March 31,
2002, Lakes had $62.4$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 $4.2$4.1 million. A
reference rate increase of 100 basis points would result in an increase in
interest income of $0.6$0.7 million. A 100 basis point decrease in the reference
rate would result in a decrease of $0.6$0.7 million in interest income over the same
twelve-month period.
2420
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.
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.
25
LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
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.
The Court added the Company as an additional defendant because of its indemnity
obligation and stipulation.
The parties have reached a settlement covering the Stratosphere shareholders
litigation. A stipulation of settlement was approved by the Court on December 4,
2000. The Stratosphere state and federal settlement was for $9 million,
inclusive of all plaintiffs fees and costs. Pursuant to the settlement
agreement, no distributions could occur until the Minnesota federal litigation
was dismissed. On August 14, 2001, the Court issued an order granting final
approval to the settlement agreement. Distributions have been made in accordance
with the settlement agreement.
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.
26
LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
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.
As described under "Stratosphere Shareholders Litigation - Federal Court" above,
the parties have reached a $9 million settlement covering the Stratosphere
shareholders litigation in federal and state courts. A Stipulation and Order for
Dismissal with Prejudice was entered on January 11, 2001, providing that the
state court litigation be dismissed with prejudice inasmuch as the parallel
federal court action has been resolved.
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. The consolidated complaint
sought class action treatment for a class comprising all persons (other than the
defendants) who purchased Grand common stock during the period from December 19,
1995 through July 19, 1996.
In December 1997, the court granted Grand's motion to dismiss in part, and
denied the motion in part. The plaintiffs pursued the claims in the consolidated
complaint that survived Grand's motion to dismiss and discovery in the action
commenced.
The defendants 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
judgment motion. Expert discovery was completed in March of 1999.
The parties completed follow-up discovery pertaining to the summary judgment
motion. The court heard the motion on September 2, 1999. On March 28, 2000, the
court granted the motion in part, and denied the motion in part. The court
dismissed, with prejudice, all claims against the defendants as to the members
of the putative class who did not purchase Grand common stock during the period
from December 19, 1995 through June 6, 1996, inclusive.
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 was granted and
Lakes filed its answer.
27
LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
On June 19, 2000, the Company announced that a settlement agreement had been
reached regarding the litigation. The agreement called for the Company to pay $9
million to the Grand shareholders for full and final settlement of all claims
covering the original class period. The $9 million was placed into an escrow
account by Lakes on behalf of the recipients in July 2000. On May 2, 2001, the
settlement agreement received preliminary approval from the U.S. District Court
for the District of Minnesota. The Court issued an order granting final approval
to the settlement agreement on August 14, 2001. Distributions should now proceed
in accordance with the settlement agreement.
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.
2821
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 October of 1999, portions of the Motions for Summary Judgment by both parties
were denied in part. The Court subsequently denied Grand's request for expedited
appellate court review as to the portions of Motions that were denied. During
the August 30, 2000, scheduled pretrial conference call, 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. Upon the Court's request, both
parties submitted findings of fact and conclusions of law. 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 a notice of appeal.an
appeal with the Ninth Circuit and filed its opening brief on November 23, 2001.
Grand filed a notice of cross appeal to
seek review ofits answering brief on January 11, 2002 and the portion of the trial court's summary judgment order which
denied relief to Grand. The propriety of Grand's cross appeal, givenplaintiff filed its
status
as the prevailing party, was the subject of an Order to Show Cause.reply brief on February 8, 2002. The Ninth Circuit dismissed the cross appeal noting that Grand could present the same
arguments as an alternative reason to affirm the trial judgment in its favor. A
briefing schedule has been set which requires briefing to be complete by Januaryscheduled oral argument
for May 14, 2002.
29
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.
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.
The matterDiscovery is pending.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 September 30, 2001. This reserve
was decreased by $18 million from DecemberMarch 31, 2000 to September 30, 2001 as a
result of the final settlement of the Stratosphere and Grand Casinos litigation.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
None
(b) Reports on Form 8-K
(i) A Form 8-K, Item 5. Other Events, was filed on
(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 2001.
30
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: NovemberMay 14, 20012002 LAKES GAMING, INC.
------------------
Registrant
/s/ LYLE BERMAN
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Lyle Berman
Chairman of the Board,
Chief Executive Officer and President
/s/ TIMOTHY J. COPE
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Timothy J. Cope
Executive Vice President and
Chief Financial Officer
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