<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
-------- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 2, 2000
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 August 9, 2000, there were 10,637,953 shares of Common Stock, $0.01 par
value per share, outstanding.
<PAGE> 2
LAKES GAMING, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE OF
FORM 10-Q
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<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of 3
July 2, 2000 and January 2, 2000
Consolidated Statements of Earnings for 4
the three months ended July 2, 2000 and
July 4, 1999
Consolidated Statements of Earnings for the 5
six months ended July 2, 2000 and July 4, 1999
Consolidated Statements of Cash Flows for the 6
six months ended July 2, 2000 and July 4, 1999
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND 13
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 27
SECURITY HOLDERS
ITEM 5. OTHER INFORMATION 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 29
</TABLE>
2
<PAGE> 3
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 2, 2000 JANUARY 2, 2000
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<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $23,740 $24,392
Short-term investments 49,321 27,433
Current installments of notes receivable 12,674 15,406
Accounts receivable 4,979 5,613
Other current assets 7,426 7,380
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Total Current Assets 98,140 80,224
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Property and Equipment-Net 1,127 1,888
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Other Assets:
Land held for development 56,696 54,812
Notes receivable-less current installments 26,103 20,022
Cash and cash equivalents-restricted 12,038 12,149
Investments in and notes from unconsolidated affiliates 8,530 8,446
Other long-term assets 5,006 5,997
----------------------------------------------------------------------------------------------------------------------
Total Other Assets 108,373 101,426
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TOTAL ASSETS $207,640 $183,538
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $214 $488
Income taxes payable 2,920 6,385
Litigation and claims accrual 25,715 8,419
Other accrued expenses 5,799 6,099
----------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 34,648 21,391
----------------------------------------------------------------------------------------------------------------------
Long-term Liabilities:
Long-term debt-less current installments 1,500 1,500
Deferred income taxes 764 786
----------------------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 2,264 2,286
----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 36,912 23,677
----------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
Shareholders' Equity:
Capital stock, $.01 par value; authorized 100,000 shares;
10,638 and 10,629 common shares issued and outstanding
at July 2, 2000, and January 2, 2000, respectively 106 106
Additional paid-in-capital 131,485 131,406
Accumulated other comprehensive loss (494) (478)
Retained Earnings 39,631 28,827
----------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 170,728 159,861
----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $207,640 $183,538
======================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
<PAGE> 4
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------
JULY 2, 2000 JULY 4, 1999
------------ ------------
<S> <C> <C>
REVENUES:
Management fee income $10,655 $14,892
COSTS AND EXPENSES:
Selling, general and administrative 2,747 2,892
Depreciation and amortization 328 479
----------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 3,075 3,371
----------------------------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 7,580 11,521
----------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 2,116 2,423
Interest expense (24) (24)
Equity in loss of unconsolidated affiliates (397) (109)
Provision for litigation loss (18,000) -
Other - 877
----------------------------------------------------------------------------------------------------------------
Total other income (expense), net (16,305) 3,167
----------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (8,725) 14,688
Provision (benefit) for income taxes (3,414) 6,066
----------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) ($5,311) $8,622
================================================================================================================
BASIC EARNINGS (LOSS) PER SHARE ($0.50) $0.81
================================================================================================================
DILUTED EARNINGS (LOSS) PER SHARE ($0.50) $0.80
================================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 10,632 10,587
DILUTIVE EFFECT OF STOCK COMPENSATION PROGRAMS 10 192
----------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON AND DILUTED
SHARES OUTSTANDING 10,642 10,779
================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE> 5
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------------
JULY 2, 2000 JULY 4, 1999
------------ ------------
<S> <C> <C>
REVENUES:
Management fee income $41,708 $30,001
COSTS AND EXPENSES:
Selling, general and administrative 4,800 4,602
Depreciation and amortization 2,249 955
----------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 7,049 5,557
----------------------------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 34,659 24,444
----------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 3,746 4,059
Interest expense (49) (49)
Equity in loss of unconsolidated affiliates (1,205) (364)
Provision for litigation loss (18,000) -
Other - 1,288
----------------------------------------------------------------------------------------------------------------
Total other income (expense), net (15,508) 4,934
----------------------------------------------------------------------------------------------------------------
Earnings before income taxes 19,151 29,378
Provision for income taxes 8,347 12,194
----------------------------------------------------------------------------------------------------------------
NET EARNINGS $10,804 $17,184
================================================================================================================
BASIC EARNINGS PER SHARE $1.02 $1.62
================================================================================================================
DILUTED EARNINGS PER SHARE $1.02 $1.60
================================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 10,631 10,582
DILUTIVE EFFECT OF STOCK COMPENSATION PROGRAMS 4 153
----------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON AND DILUTED
SHARES OUTSTANDING 10,635 10,735
================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
5
<PAGE> 6
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------------
JULY 2, 2000 JULY 4, 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $10,804 $17,184
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 2,249 955
Gain on sale of investment - (875)
Equity in loss of unconsolidated affiliates 1,205 364
Provision for litigation loss 18,000 -
Changes in operating assets and liabilities:
Accounts receivable 648 (34)
Income taxes (3,465) (3,459)
Accounts payable (274) 191
Accrued expenses (557) (1,701)
Other (64) (1,238)
--------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 28,546 11,387
--------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Short-term investments, purchases (27,524) -
Short-term investments, sales/maturities 5,653 -
Payments for land held for development (1,884) (10,032)
Payments for notes receivable (16,771) (6,764)
Proceeds from repayment of notes receivable 12,503 5,093
Investment in and notes receivable from unconsolidated affiliates (1,283) (6,639)
Decrease in restricted cash, net 111 343
Increase in other long-term assets (56) (798)
Payments for property and equipment, net (26) (209)
--------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (29,277) (19,006)
--------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 79 111
--------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 79 111
--------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (652) (7,508)
Cash and cash equivalents - beginning of period 24,392 56,774
--------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $23,740 $49,266
==========================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $49 $49
Income taxes 11,638 12,665
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
6
<PAGE> 7
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"). Pursuant to the
terms of a Distribution Agreement entered into between Grand and Lakes and dated
as of December 31, 1998 (the "Distribution Agreement"), Grand shareholders
received .25 of one share of Lakes common stock for each share held in Grand.
Historical references to the Company which predate the Distribution give pro
forma effect to the Distribution as if it had already occurred.
Immediately following the Distribution, Grand merged with a subsidiary of Park
Place Entertainment Corporation, a Delaware corporation ("Park Place"), pursuant
to which Grand became a wholly owned subsidiary of Park Place (the "Merger").
Grand shareholders received one share of Park Place common stock in the Merger
for each share they held in Grand. The Merger and Distribution received all
necessary shareholder and regulatory approvals and was completed on December 31,
1998. Grand obtained a ruling from the Internal Revenue Service (IRS) that the
Distribution qualified as a tax-free transaction, solely with respect to Grand
shareholders except to the extent that Grand shareholders received cash in lieu
of fractional shares.
Lakes manages Indian-owned casinos and owns certain other assets related to
potential gaming or commercial development. The Company manages an Indian-owned
casino in Kinder, Louisiana and previously managed an Indian-owned casino in
Marksville, Louisiana through March 31, 2000.
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 24 percent ownership
interest in Fanball.com, Inc., a start-up internet provider of fantasy sports
services, and a 23 percent ownership interest in Interactive Learning Group,
Inc., a consumer product company. Lakes invested $3.4 million and $3 million in
Fanball.com and Interactive Learning Group respectively, at the end of the
second quarter of 1999. Additionally, as a result of its spin-off from Grand,
Lakes received a 49 percent ownership interest in Trak 21 Development, LLC, a
developer of player tracking systems for the casino industry, and a 27 percent
ownership interest in New Horizon Kids Quest, Inc., a publicly held provider of
child care facilities.
7
<PAGE> 8
LAKES GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The consolidated financial statements have been prepared by the Company in
accordance with generally accepted accounting principles for interim financial
information, in accordance with the rules and regulations of the Securities and
Exchange Commission. Pursuant to such rules and regulations, certain financial
information and footnote disclosures normally included in the consolidated
financial statements have been condensed or omitted. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for fair presentation have been included. Operating results
for the six months ended July 2, 2000, are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000. The
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended January 2, 2000.
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 six months ended July 2, 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 expires January 16, 2002. The Coushatta
Tribe and Lakes have agreed on a five-year contract renewal beginning January
17, 2002, subject to National Indian Gaming Commission ("NIGC") approval. Net
distributable profits, if any, under the new agreement will be determined in
accordance with IGRA and distributed each month 90% to the Coushatta Tribe and
10% to Lakes. There can be no assurance that the Louisiana management contract
will be renewed upon expiration or approved by the NIGC upon any such renewal.
The failure to obtain approval of the renewed management contract would result
in the loss of revenues to the Company derived from such contract, which would
have a material adverse effect on the Company's results of operations.
8
<PAGE> 9
LAKES GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 has delivered a written notice of
non-renewal. The Governor and the Tribe have agreed on a second six-month
extension. The Coushatta Tribe is actively negotiating with the State of
Louisiana terms for a new compact. In the event the compact is not renewed,
gaming may not be permitted at Grand Casino Coushatta. There can be no assurance
that this compact will be renewed on acceptable terms and conditions. See Part
II, Item 5. Other Information.
4. 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 a total of $18 million, which has been
reflected as a non-operating expense in the second quarter of 2000. The
settlement agreement is subject to final approval by the respective courts,
which is expected to occur later this year. The net income impact of the
litigation loss was $10.6 million or $1.00 per diluted share. Adjusted net
income, for the six months ended July 2, 2000, excluding the provision for
litigation loss was $21.4 million or $2.02 per diluted share. 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.
5. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain property and equipment under non-cancelable operating
leases. Future minimum lease payments, excluding contingent rentals, due under
non-cancelable operating leases as of July 2, 2000 are as follows (in
thousands):
<TABLE>
<CAPTION>
Operating Leases
----------------
<S> <C> <C>
2000 1,450
2001 2,978
2002 3,109
2003 3,176
2004 3,246
Thereafter 44,179
-------
$58,138
=======
</TABLE>
9
<PAGE> 10
LAKES GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
PURCHASE OPTION AGREEMENTS
As a condition to the Merger, the Company has agreed to exercise its call option
to purchase the Shark Club property in Las Vegas, Nevada, not later than January
10, 2001. The option purchase price will be approximately $10 million.
The Company also has an option to purchase the Travelodge property in Las Vegas,
Nevada for the purchase price of $30 million on October 31, 2017, and options to
purchase the Cable property in Las Vegas, Nevada for the purchase price of up to
approximately $39 million any time prior to January 2, 2003.
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 July 2, 2000, the amount
outstanding was $16.1 million.
INDEMNIFICATION AGREEMENT
As a part of the Distribution Agreement and the Agreement and Plan of Merger,
dated as of June 30, 1998, by and among Hilton Hotels Corporation, Park Place,
Gaming Acquisition Corporation, Lakes and Grand (the "Merger Agreement"), the
Company has agreed to indemnify Grand against all costs, expenses and
liabilities incurred in connection with or arising out of certain pending and
threatened claims and legal proceedings to which Grand and certain of its
subsidiaries are likely to be parties. The Company's indemnification obligations
include the obligation to provide the defense of all claims made in proceedings
against Grand and to pay all related settlements and judgments. See Part II,
Item 1. Legal Proceedings.
As security to support Lakes' indemnification obligations to Grand under each of
the Distribution Agreement and the Merger Agreement, and as a condition to the
consummation of the Merger, Lakes has agreed to deposit, in trust for the
benefit of Grand, as a wholly owned subsidiary of Park Place, an aggregate of
$30 million, to cover various commitments and contingencies related to or
arising out of, Grand's non-Mississippi business and assets (including by way of
example, but not limitation, tribal loan guarantees, real property lease
guarantees for Lakes' subsidiaries and director and executive officer indemnity
obligations) consisting of four annual installments of $7.5 million during the
four-year period subsequent to the effective date of the Merger. Any surplus
proceeds remaining after all the secured obligations are indefeasibly paid in
full and discharged shall be paid over to Lakes. Lakes made the first deposit of
$7.5 million on December 31, 1999 and such amount is included as restricted cash
on the accompanying balance sheets as of July 2, 2000 and January 2, 2000.
10
<PAGE> 11
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED)
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.
6. SUBSEQUENT EVENTS
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, LLC is owned by Las Vegas based real estate
developer Brett Torino who will manage the joint venture.
Metroplex-Lakes, LLC plans to develop an upscale retail, commercial, hotel and
entertainment complex on approximately 16 acres surrounding the corner of Harmon
Avenue and Las Vegas Boulevard (the "Strip") in Las Vegas. 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. The joint venture
will also assume Lakes' option to purchase the remainder of the site from a
third party.
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 two new gaming facilities on Indian owned
land in California. Under the agreement, Lakes will form two separate limited
liability companies with MRD Gaming, a limited liability company based in Las
Vegas, NV. MRD and its affiliates have successfully developed two other Indian
casinos, one in Arizona and one in Kansas. The partnership between Lakes and MRD
will hold contracts to develop and open two casino resort facilities with two
separate American Indian Tribes in California. Development at each casino resort
location will start as soon as various regulatory approvals are obtained by each
applicable Tribe.
On August 10, 2000, the Company announced that it is actively negotiating
agreements with prospective partners that would result in two new business
ventures.
One potential area of new business that Lakes is actively exploring involves the
life settlement industry. Lakes has currently agreed to provide up to $3 million
in bridge loans to a participant in the industry. Lakes has also agreed in
principle to form a wholly-owned subsidiary for the purpose of making a $22.5
million subordinated term loan to the same company. A portion of the term loan
is convertible at Lakes' option into a majority ownership interest in the
borrower.
11
<PAGE> 12
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED)
Lakes' commitment to proceed with the term loan is subject to the borrower's
securing a $150 million revolving warehouse credit facility to enable the
borrower to purchase and then securitize pools of life settlements. The borrower
will use the Lakes' loan proceeds as equity support for the warehouse facility.
The proceeds of the warehouse facility will be used to purchase existing life
insurance policies from persons 65 years or older. The life settlement business
through such a purchase provides liquidity to the holder of the policy during
his or her lifetime. The company that Lakes is planning to do business with
expects to receive a funding commitment from a warehouse lender in the near
future. This transaction is subject to negotiation and execution of definitive
documents, due diligence, regulatory approvals and other conditions.
Another business opportunity involves international internet gaming. Lakes is
considering establishing one or more web sites to conduct online gaming in a
regulated country, taking wagers placed from only outside the United States.
Lakes has identified an experienced provider of online gaming technology and is
negotiating a contract under which Lakes would license the provider's technology
for the new gaming web sites. The provider would create and maintain the gaming
web sites under a proposed two year service agreement. Any transaction is
subject to negotiation and execution of definitive documents, due diligence,
regulatory approvals and other conditions.
12
<PAGE> 13
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Lakes was established as a public corporation on December 31, 1998, via a
distribution of its common stock, par value $.01 per share, to the shareholders
of Grand. Pursuant to the terms of the Distribution Agreement entered into
between Grand and Lakes dated as of December 31, 1998, Grand shareholders
received .25 of one share of Lakes Common Stock for each share held in Grand.
Historical references to the Company which preclude the distribution give pro
forma effect to the Distribution as if it had already occurred.
Immediately following the Distribution, Grand merged with a subsidiary of Park
Place pursuant to which Grand became a wholly owned subsidiary of Park Place
(the "Merger"). Grand shareholders received one share of Park Place common stock
in the Merger for each share they held in Grand.
As a result of the Distribution, Lakes operates the Indian casino management
business and holds various other assets previously owned by Grand. The Company's
revenues are derived almost exclusively from management fees. Lakes manages a
land-based, Indian-owned casino in Louisiana: Grand Casino Coushatta, in Kinder,
Louisiana ("Grand Casino Coushatta"), owned by the Coushatta Tribe of Louisiana
(the "Coushatta Tribe"). The management contract expires seven years from the
date the casino opened. The Coushatta Tribe and Lakes have agreed on a five-year
contract renewal beginning January 17, 2002, subject to NIGC approval. Net
distributable profits, if any, under the new agreement will be determined in
accordance with IGRA and distributed each month 90% to the Coushatta Tribe and
10% to Lakes.
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.
13
<PAGE> 14
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED)
Lakes develops, constructs and manages casinos and related hotel and
entertainment facilities in emerging and established gaming jurisdictions.
Lakes' revenues are derived from management fee income from Grand Casino
Coushatta. For a portion of fiscal 1998, and prior to the Distribution, Grand
also had management contracts for Indian-owned casinos located at Grand Casino
Hinckley and Grand Casino Mille Lacs in Minnesota. The management contract at
Grand Casino Mille Lacs expired at the end of the first quarter of 1998, and the
management of Grand Casino Hinckley ended November 30, 1998, with the buyout of
the remaining contract term. Grand commenced operations in September 1990, and
opened its first casino, Grand Casino Mille Lacs, in April 1991. Grand Casino
Hinckley commenced operations in May 1992, Grand Casino Avoyelles commenced
operations in June 1994 and Grand Casino Coushatta commenced operations in
January 1995.
Pursuant to the Coushatta management contract, Lakes receives a fee based on the
net distributable profits (as defined in the contracts) generated by Grand
Casino Coushatta.
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. California voters recently 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 June 22, 1999, the Company announced that it has been selected by the Pokagon
Band of Potawatomi Indians (the "Band") to serve as the exclusive developer and
manager of a proposed casino gaming resort facility to be owned by the Band in
the state of Michigan. In connection with its selection, Lakes and the Band have
executed a development and management agreement governing their relationship
during the development, construction and management of the casino. Various
regulatory approvals are needed prior to commencement of development activities.
Casino construction is not planned to start until land is accepted into trust
status by the Secretary of the Interior and the agreements are approved by the
Chairman of NIGC.
On 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
indicated that he will appeal 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. Lakes is continuing to work
with the Band to have land accepted into Trust by the Secretary of Interior and
to have the management agreement approved by the NIGC.
14
<PAGE> 15
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
On July 15, 1999, the Company announced that it would form a partnership for the
purpose of developing a gaming facility on Indian-owned land near Sacramento,
California. Pursuant to the agreement, Lakes has formed a limited liability
company with KAR, a limited liability company based in Houston, Texas. The
partnership between Lakes and KAR has been awarded a contract to develop and
manage a casino resort facility with 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"). California voters recently 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.
Lakes' investments in unconsolidated affiliates include a 24 percent ownership
interest in Fanball.com, Inc., a start-up internet provider of fantasy sports
services, and a 23 percent ownership interest in Interactive Learning Group,
Inc., a consumer product company. Lakes invested $3.4 million and $3 million in
Fanball.com and Interactive Learning Group respectively, at the end of the
second quarter of 1999. Additionally, as a result of its spin-off from Grand,
Lakes received a 49 percent ownership interest in Trak 21 Development, LLC, a
developer of player tracking systems for the casino industry, and a 27 percent
ownership interest in New Horizon Kids Quest, Inc., a publicly held provider of
child care facilities.
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 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. The settlement is subject to final approval by the respective courts,
which is expected to occur later this year.
Lakes' limited operating history may not be indicative of Lakes' future
performance. In addition, a comparison of results from year to year may not be
meaningful due to the opening of new facilities during each year. Lakes' growth
strategy contemplates the expansion of existing operations and the pursuit of
opportunities to develop and manage additional gaming facilities and the pursuit
of new business opportunities. The successful implementation of this growth
strategy is contingent upon the satisfaction of various conditions, including
obtaining governmental approvals, the impact of increased competition, and the
occurrence of certain events, many of which are beyond the control of Lakes.
15
<PAGE> 16
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended January 2, 2000.
RESULTS OF OPERATIONS
Revenues are calculated in accordance with generally accepted accounting
principles and are presented in a manner consistent with industry practice. Net
distributable profits from Grand Casino Coushatta are computed using a modified
cash basis of accounting in accordance with the management contracts. The effect
of the use of the modified cash basis of accounting is to accelerate the
write-off of capital equipment and leased assets, which thereby impacts the
timing of net distributable profits.
Lakes is prohibited by the IGRA from having an ownership interest in any casino
it manages for Indian tribes. The management contract for Grand Casino Coushatta
expires January 16, 2002. The Coushatta Tribe and Lakes have agreed on a
five-year contract renewal beginning January 17, 2002, subject to NIGC approval.
Net distributable profits, if any, under the new agreement will be determined in
accordance with IGRA and distributed each month 90% to the Coushatta Tribe and
10% to Lakes. There can be no assurance that the Grand Casino Coushatta
extension will be approved by NIGC. The failure to obtain approval of the
renewed management contract would result in the loss of revenues to Lakes
derived from such contract, which would 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 has
delivered a written notice of non-renewal. The Governor and the Coushatta Tribe
have agreed on a second six-month extension. The Coushatta Tribe is actively
negotiating with the State of Louisiana terms for a new compact. In the event
the compact is not renewed, gaming may not be permitted at Grand Casino
Coushatta. There can be no assurance that this compact will be renewed on terms
and conditions acceptable to the Coushatta Tribe. See Part II, Item 5. Other
Information.
SIX MONTHS ENDED JULY 2, 2000 COMPARED TO THE SIX MONTHS ENDED JULY 4, 1999
Revenues
Grand Casino Avoyelles and Grand Casino Coushatta generated approximately $41.7
million and $30 million in management fee income during the six months ended
July 2, 2000 and July 4, 1999, respectively. The increase is due primarily to
the inclusion of approximately $16.0 million in management fee income relating
to the early buyout of the management contract for Grand Casino Avoyelles in the
first quarter of 2000, which is partially offset by the inclusion of no
management fees from Grand Casino Avoyelles during the second quarter of 2000.
16
<PAGE> 17
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Costs and Expenses
Total costs and expenses were $7.0 million for the six months ended July 2,
2000, compared to $5.6 million for the same period in the prior year.
Depreciation and amortization expense increased from $1.0 million for the six
months ended July 4, 1999 to $2.2 million for the six months ended July 2, 2000,
due to increased amortization in the current year period related to the early
buyout of the management contract for Grand Casino Avoyelles, at the end of the
first quarter of 2000.
Other
Provision for litigation loss was $18 million for the six months ended July 2,
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.
The settlement agreement is subject to final approval by the respective courts,
which is expected to occur later this year.
Equity in loss of unconsolidated affiliates increased from $.4 million for the
six months ended July 4, 1999 to $1.2 million for the six months ended July 2,
2000, due primarily to investments in Interactive Learning Group, Fanball.com
and Trak 21. Other income was $0 and $1.3 million for the six months ended July
2, 2000 and July 4, 1999, respectively.
Earnings per Common Share and Net Earnings
For the six months ended July 2, 2000, basic and diluted earnings per common
share were $1.02. This compares to basic and diluted earnings of $1.62 and $1.60
per common share, respectively, for the six months ended July 4, 1999. Earnings
decreased $6.4 million to $10.8 million for the six months ended July 2, 2000
compared to the same period in the prior year. This decrease is primarily due to
the provision for litigation loss of $18 million, which is partially offset by
the early buyout of the Company's management contract of Grand Casino Avoyelles
by the Tunica-Biloxi Tribe of Louisiana at the end of the first quarter of 2000.
Total management fees under this expired contract were $19.8 million and $7.4
million, during the periods ended July 2, 2000 and July 4, 1999, respectively.
THREE MONTHS ENDED JULY 2, 2000 COMPARED TO THE THREE MONTHS ENDED JULY 4, 1999
Revenues
Grand Casino Coushatta generated approximately $10.7 million in management fee
income during the three months ended July 2, 2000. Grand Casino Avoyelles and
Grand Casino Coushatta generated approximately $14.9 million in management fee
income during the three months ended July 4, 1999. This decrease is due to the
early buyout of the Company's management contract of Grand Casino Avoyelles by
the Tunica-Biloxi Tribe of Louisiana at the end of the first quarter of 2000.
The Company's current year period revenues do not include contributions from
this operation.
17
<PAGE> 18
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Costs and Expenses
Total costs and expenses were $3.1 million for the three months ended July 2,
2000, compared to $3.4 million for the same period in the prior year. Selling,
general, and administrative expenses and depreciation and amortization expense
decreased slightly in comparison with the prior year period.
Other
Provision for litigation loss was $18 million for the three months ended July 2,
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.
The settlement agreement is subject to final approval by the respective courts,
which is expected to occur later this year.
Other income was $0 and $.9 million for the three months ended July 2, 2000 and
July 4, 1999, respectively.
Earnings per Common Share and Net Earnings
For the three months ended July 2, 2000 basic and diluted losses per common
share were $.50. This compares to basic and diluted earnings of $.81 and $.80
per common share, respectively, for the three months ended July 4, 1999. Losses
totaled $5.3 million for the three months ended July 2, 2000 compared to
earnings of $8.6 million for the same prior year period. Included in the second
quarter 2000 results is a provision for litigation loss of $18 million as
described above. Also contributing to the decrease in earnings was the early
buyout of the management contract for Grand Casino Avoyelles by the
Tunica-Biloxi Tribe of Louisiana, which occurred at the end of the first quarter
of 2000. The Company's current year period earnings do not include contributions
from this operation. Second quarter net earnings for 1999 when excluding results
related to Grand Casino Avoyelles were $.61 per share compared to $.50 per share
before provision for litigation loss, for the second quarter of 2000. The
decrease in earnings relates primarily to decreases in interest income and other
income of $.3 million and $.9 million, respectively, and an increase in equity
in unconsolidated affiliates of $.3 million during the second quarter of 2000
compared to the second quarter of 1999.
CAPITAL RESOURCES, CAPITAL SPENDING, AND LIQUIDITY
At July 2, 2000, Lakes had $35.8 million in restricted and unrestricted cash and
cash equivalents. At July 2, 2000, the Company also had $49.3 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 balances are planned to be used for loans to current tribal partners to
help develop operations, the pursuit of additional gaming and non-gaming
opportunities, and potential settlement of pending litigation matters.
18
<PAGE> 19
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
For the six months ended July 2, 2000 and July 4, 1999, net cash provided by
operating activities totaled $28.5 million and $11.4 million, respectively. For
the same periods, net cash used in investing activities totaled $29.3 million
$19.0 million, respectively. Included in these investing activities for the six
months ended July 2, 2000 and July 4, 1999, are proceeds, primarily from
repayment of notes receivable from Indian-owned casinos, which amounted to $12.5
million and $5.1 million, respectively. Advances under notes receivable amounted
to $16.8 million and $6.8 million for the six months ended July 2, 2000 and July
4, 1999, respectively. Also during these periods, payments for land in Las
Vegas, Nevada, held for development amounted to $1.9 million and $10.0 million,
respectively, and short-term investments increased $21.9 million and $0,
respectively.
As security to support Lakes' indemnification obligations to Grand under each of
the Distribution Agreement and the Merger Agreement, and as a condition to the
consummation of the Merger, Lakes agreed to deposit, in trust for the benefit of
Grand, as a wholly owned subsidiary of Park Place, an aggregate of $30 million,
consisting of four annual installments of $7.5 million, on each annual
anniversary of the Distribution and Merger. Lakes' ability to satisfy this
funding obligation is materially dependent upon the continued success of its
operations and the general risks inherent in its business. In the event Lakes is
unable to satisfy its funding obligation, it would be in breach of its agreement
with Grand, possibly subjecting itself to additional liability for contract
damages, which could have a material adverse effect on Lakes' business and
results of operations. The Company made the first deposit of $7.5 million on
December 31, 1999 and such amount is included as restricted cash on the
accompanying consolidated balance sheets as of July 2, 2000 and January 2, 2000.
SEASONALITY
The Company believes that the operation of casinos managed by the Company are
affected by seasonal factors, including holidays, weather and travel conditions.
REGULATION AND TAXES
The Company is subject to extensive regulation by state gaming authorities. The
Company will also be subject to regulation, which may or may not be similar to
current state regulations, by the appropriate authorities in any other
jurisdiction where it may conduct gaming activities in the future. Changes in
applicable laws or regulations could have an adverse effect on the Company.
The gaming industry represents a significant source of tax revenues. From time
to time, various federal legislators and officials have proposed changes in tax
law, or in the administration of such law, affecting the gaming industry. It is
not possible to determine the likelihood of possible changes in tax law or in
the administration of such law. Such changes, if adopted, could have a material
adverse effect on the Company's results of operations and financial results.
19
<PAGE> 20
LAKES GAMING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this integrated
Quarterly Report on Form 10-Q and other materials filed or to be filed by the
Company with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company) contain statements that are forward-looking, such as plans for
future expansion and other business development activities as well as other
statements regarding capital spending, financing sources and the effects of
regulation (including gaming and tax regulation) and competition.
Such forward-looking information involves important risks and uncertainties that
could significantly affect the anticipated results in the future and,
accordingly, actual results may differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company.
These risks and uncertainties include, but are not limited to, those relating to
development and construction activities, dependence upon existing management,
pending litigation, domestic or global economic conditions and changes in
federal or state tax laws or the administration of such laws and changes in
gaming laws or regulations (including the legalization of gaming in certain
jurisdictions). For further information regarding these risks and uncertainties,
see the "Business -- Risk Factors" section of the Company's Annual Report on
Form 10-K for the year ended January 2, 2000.
20
<PAGE> 21
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.
The Court has recently signed a scheduled order, which cuts off fact discovery
as of April 30, 2000 and expert discovery as of September 30, 2000. The parties
have submitted preliminary pretrial statements, which may be amended after the
completion of discovery.
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.
21
<PAGE> 22
LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
In May 1997, the court dismissed the amended complaint. The dismissal order did
not allow the plaintiffs to further amend their complaint in an attempt to state
a valid cause of action.
In June 1997, the plaintiffs asked the court to reconsider its dismissal order,
and to allow the plaintiffs to submit a second amended complaint in an attempt
to state a valid cause of action. In July 1997, the court allowed the plaintiffs
to submit a second amended complaint.
In August 1997, the plaintiffs filed a second amended complaint. In September
1997, certain of the defendants, including Grand and Grand's officers and
directors named as defendants, submitted a motion to dismiss the second amended
complaint. The motion was based on various grounds, including Grand's claim that
the second amended complaint failed to state a valid cause of action against
Grand and 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 recently added the Company as an additional defendant because of its
indemnity obligation and stipulation.
22
<PAGE> 23
LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
The parties have reached a tentative settlement covering the Stratosphere
shareholders litigation. A draft stipulation of settlement is currently under
review. The Stratosphere state and federal settlement will be $9 million, if
approved, inclusive of all plaintiffs fees and costs. The $9 million was placed
into an account by Lakes on behalf of the recipients in July 2000.
STRATOSPHERE SHAREHOLDERS LITIGATION - NEVADA STATE COURT
In August 1996, a complaint was filed in the District Court for Clark County,
Nevada -- Victor M. Opitz, et al v. Robert E. Stupak, et al -- Case No. A363019
-- against various defendants, including Grand. The complaint seeks relief on
behalf of Stratosphere Corporation shareholders who purchased stock between
December 19, 1995 and July 22, 1996. The complaint alleges misrepresentations,
state securities law violations and other state claims.
Grand and certain defendants submitted motions to dismiss or stay the state
court action pending resolution of the federal court action described above. The
court has stayed further proceedings pending the resolution of In re:
Stratosphere Securities Litigation.
As described under "Stratosphere Shareholders Litigation - Federal Court" above,
the parties have reached a tentative $9 million settlement covering the
Stratosphere shareholders litigation in federal and state courts.
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. Thus, the plaintiffs are pursuing the claims in the
consolidated complaint that survived Grand's motion to dismiss. Discovery in the
action has begun.
23
<PAGE> 24
LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
The defendants have submitted a motion for summary judgment seeking an order
that the defendants are entitled to judgment as a matter of law. In December
1998, the plaintiffs completed fact discovery related to the issues raised by
the summary judgement motion. Expert discovery was completed in March of 1999.
The parties have completed follow-up discovery pertaining to the summary
judgment motion. The court heard the motion on September 2, 1999. 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 has been granted and
Lakes has filed its answer.
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 settlement agreement is subject to final
approval by the U.S. District Court for the District of Minnesota. The $9
million was placed into an escrow account by Lakes on behalf of the recipients
in July 2000.
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.
24
<PAGE> 25
LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
In December 1994, the consolidated actions were transferred to the U.S. District
Court for the District of Nevada.
In September 1995, Larry Schreier brought an action in the U.S. District Court
for the District of Nevada -- Larry Schreier, et al v. Caesars World, Inc. et al
-- Case No. CV-95-00923-DWH(RJJ). The plaintiffs' allegations in the Schreier
action were similar to those made by the plaintiffs in the Poulos and Ahearn
actions, except that Schreier claimed to represent a more precisely defined
class of plaintiffs than Poulos or Ahearn.
In December 1996, the court ordered the Poulos, Ahearn and Schreier actions
consolidated under the title William H. Poulos, et al v. Caesars World, Inc., et
al -- Case No. CV-S-94-11236-DAE(RJJ) -- (Base File), and required the
plaintiffs to file a consolidated and amended complaint. In February 1997, the
plaintiffs filed a consolidated and amended complaint.
In March 1997, various defendants (including Grand) filed motions to dismiss or
stay the consolidated action until the plaintiffs submitted their claims to
gaming authorities and those authorities considered the claims submitted by the
plaintiffs.
In December 1997, the court denied all of the motions submitted by the
defendants, and ordered the plaintiffs to file a new consolidated and amended
complaint. That complaint has been filed. Grand has filed its answer to the new
complaint.
The plaintiffs have filed a motion seeking an order certifying the action as a
class action. Grand and certain of the defendants have opposed the motion. The
Court has not ruled on the motion.
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.
25
<PAGE> 26
LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
The Stratosphere Trustee filed the complaint in its alleged capacity as a third
party beneficiary under the Standby Equity Commitment. Pursuant to the Second
Amended Plan, a new limited liability company (the "Stratosphere LLC") was
formed to pursue certain alleged claims and causes of action that Stratosphere
and other parties may have against numerous third parties, including Grand
and/or officers and/or directors of Grand. The Stratosphere LLC has been
substituted for IBJ Schroeder Bank & Trust Company, Inc. in this proceeding.
In October of 1999, portions of the Motions for Summary Judgment by both parties
were denied in part. The Court has subsequently denied Grand's request for
expedited appellate court review as to the portions of Motions that were denied.
Thereafter, the parties jointly sought the Court's consideration of a subsequent
summary judgment motion. The Court declined the parties' request and instead
required the filing of an extensive joint pretrial order. The Court has recently
scheduled the matter for trial on September 12, 2000. The Court further advised
that a telephonic calendar call is scheduled for August 30, 2000. Lakes will
continue to defend the lawsuit diligently.
STRATOSPHERE PREFERENCE ACTION
In April 1998, Stratosphere served on Grand and Grand Media & Electronics
Distributing, Inc., a wholly owned subsidiary of Grand ("Grand Media"), a
complaint in the Stratosphere bankruptcy case seeking recovery of certain
amounts paid by Stratosphere to (i) Grand as management fees and for costs and
expenses under a management agreement between Stratosphere and Grand, and (ii)
Grand Media for electronic equipment purchased by Stratosphere from Grand Media.
Stratosphere claims in its complaint that such amounts are recoverable by
Stratosphere as preferential payments under bankruptcy law.
In May 1998, Grand responded to Stratosphere's complaint. That response denies
that Stratosphere is entitled to recover the amounts described in the complaint.
The matter is pending.
OTHER LITIGATION
The Company has recorded a reserve assessment related to various of the above
items. The reserve is reflected as a litigation and claims accrual on the
accompanying consolidated balance sheet as of July 2, 2000.
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.
26
<PAGE> 27
LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders was held on May 3, 2000.
(b) Matters voted upon:
(1) Directors elected at meeting:
<TABLE>
<CAPTION>
Affirmative Authority
Votes Withheld
----------- ----------
<S> <C> <C>
Lyle Berman 9,755,678 149,677
Morris Goldfarb 9,756,345 149,010
Ronald Kramer 9,756,320 149,035
Neil I. Sell 9,756,345 149,010
Timothy J. Cope 9,756,308 149,047
Joel N. Waller 9,756,345 149,010
</TABLE>
(2) The appointment of Arthur Andersen, LLP, Certified
Public Accountants, as independent auditors of the
Company for the 2000 fiscal year was ratified:
<TABLE>
<CAPTION>
Affirmative Negative
Votes Votes Abstentions
------------ ---------- -----------
<S> <C> <C> <C>
9,875,517 12,288 17,550
</TABLE>
ITEM 5. OTHER INFORMATION
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. The compact would have automatically renewed for an additional
seven year term if neither the Tribe nor the State of Louisiana had delivered to
the other written notice of non-renewal at least 180 days prior to the
applicable expiration date.
On April 7, 1999, the State of Louisiana provided written notice to the
Coushatta Tribe of Louisiana of the State's intent not to renew the Tribal-State
compact. The State further extended an invitation to the Tribe to continue to
discuss mutually advantageous terms and conditions under which the State and the
Tribe can enter into a new gaming compact. The Governor and the Tribe have
agreed on a second six-month extension which has been submitted to the
Department of the Interior for approval.
27
<PAGE> 28
LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
IGRA requires that for Class III gaming to occur on Indian land, it must be
conducted in accord with an effective state compact. IGRA further imposes an
obligation on state governments, upon the request of a Tribe, to negotiate with
Indian Tribes regarding the operation of gaming activities which are otherwise
allowable within the state "by any person, organization or entity". Louisiana
currently permits various forms of legalized, non-Indian gaming.
The Tribe is actively negotiating with the State to establish a suitable
alternative compact. It is unclear what consequences, if any, might result, in
the event the Tribe and the State are unable to either negotiate a suitable
alternative compact or agree to an extension of the existing compact. To the
knowledge of the Company, there has been no prior instance where an existing
compact has expired without either a replacement compact in place or an
extension (temporary or permanent) of the present compact.
Nonetheless, the Company's Management Agreement with the Tribe provides that,
absent a determination by (i) NIGC, (ii) the Congress of the United States,
(iii) the Department of the Interior or (iv) a final judgment from a court of
competent jurisdiction, that the operation of Grand Casino Coushatta would be
unlawful under either federal or state law, Lakes and the Tribe are obligated in
their duties to each other, as set forth in the Management Agreement.
As outlined above, in the absence of a determination by (i) NIGC, (ii) the
Congress of the United States, (iii) the Department of the Interior or (iv) a
final judgment from a court of competent jurisdiction, that the operation of
Grand Casino Coushatta would be unlawful under either federal or state law, so
long as the Tribe continues to conduct gaming activities at Grand Casino
Coushatta, Lakes intends to continue to operate and manage the casino and to
abide by the terms and obligations of the Management Agreement.
If the terms of the current Tribal-State compact expire, without the execution
of a new compact or the extension of the current compact, there is a risk that
(i) NIGC, (ii) the Congress of the United States, (iii) the Department of the
Interior, (iv) the United States Department of Justice or (v) a court of
competent jurisdiction could take action against the Tribe and Grand Casino
Coushatta resulting in the cessation of gaming operations at the casino and the
inability of Lakes to manage the casino.
The cessation of gaming operations at Grand Casino Coushatta or the inability of
Lakes to manage the gaming operations at the casino would result in the loss of
revenues to Lakes derived from the contract, which would have a material adverse
effect on Lakes' results of operations. Currently, the management contract for
Grand Casino Coushatta generates all of Lakes' operating revenues. Without the
realization of new business opportunities or new management contracts, the
cessation of gaming operations at the casino or the inability of Lakes to manage
the operations, would have a material adverse impact on Lakes' results of
operations and financial condition.
28
<PAGE> 29
LAKES GAMING, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Joint Contribution Agreement by and between Grand Casinos Nevada
I, Inc., Metroplex, LLC, Lakes Gaming, Inc., and Metroplex-Lakes,
LLC dated as of April 25, 2000.
10.2 Member Control Agreement of Metroplex-Lakes, LLC by and between
Grand Casinos Nevada I, Inc., Metroplex, LLC, and Metroplex-Lakes,
LLC dated as of April 25, 2000.
10.3 Real Estate Option Agreement by and between Grand Casinos Nevada
I, Inc., Metroplex-Lakes, LLC, and Metroplex, LLC dated as of
April 25, 2000.
10.4 Amended and Restated Option Agreement by and between Martin J.
Cable and Olga B. Cable, as Trustees of the Cable Family Trust and
Grand Casinos Nevada I, Inc. dated as of June 1, 2000.
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
(i) A Form 8-K, Item 5. Other Events, was filed on August 4, 2000.
29
<PAGE> 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: August 16, 2000 LAKES GAMING, INC.
------------------
Registrant
/S/ LYLE BERMAN
---------------------------------------
Lyle Berman
Chairman of the Board,
Chief Executive Officer and
President
/S/ TIMOTHY J. COPE
---------------------------------------
Timothy J. Cope
Executive Vice President and
Chief Financial Officer
30
