UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1998
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. 0-22436
<TABLE>
<S> <C> <C>
Delaware Lady Luck Gaming Corporation 88-0295602
(State or other jurisdiction of (Exact name of Registrant as specified in its charter) (I.R.S. employer
incorporation or organization) identification number)
206 North Third Street, Las Vegas, Nevada 89101
(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: (702) 477-3000
</TABLE>
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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. As of August 7,
1998, there were 4,880,613 shares of common stock, $.006 par value per share,
outstanding.
<PAGE>
AN INCORRECT CASH BALANCE AS OF JUNE 30, 1998 APPEARED ON THE ORIGINAL CONDENSED
CONSOLIDATED BALANCE SHEET. THE CORRECTED FIGURE IS $33,410.
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
LADY LUCK GAMING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
ASSETS
June 30, December 31,
1998 1997
Current assets:
Cash and cash equivalents.............. $ 33,410 $ 19,552
Restricted cash........................ 15,127 15,388
Accounts receivable, net............... 1,029 786
Inventories............................ 996 957
Assets held for sale................... 673 2,791
Prepaid expenses....................... 1,473 2,456
-------------- ---------------
Total current assets................ 52,708 41,930
-------------- ---------------
Property and equipment, net of
accumulated depreciation and
amortization of $27,934 and $26,525
as of June 30, 1998 and December 31,
1997, respectively..................... 116,591 128,375
Other assets:
Deferred financing fees and costs, net
of accumulated amortization of
$3,780 and $3,347 as of June 30,
1998 and December 31, 1997,
respectively........................ 2,307 2,740
Investment in unconsolidated
affiliates, net 12,410 9,313
Other.................................. 2,711 2,948
-------------- ---------------
17,428 15,001
-------------- ---------------
TOTAL ASSETS.............................. $ 186,727 $ 185,306
============== ===============
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
2
<PAGE>
LADY LUCK GAMING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(in thousands)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
June 30, December 31,
1998 1997
Current liabilities:
Current portion of long-term debt...... $ 520 $ 4,481
Accrued interest....................... 1,823 1,846
Accounts payable....................... 3,963 5,178
Construction and retention payables.... 1,952 1,957
Accrued property taxes................. 776 1,476
Other accrued liabilities.............. 9,429 7,320
-------------- ---------------
Total current liabilities........... 18,463 22,258
-------------- ---------------
Long-term debt:
Mortgage notes payable................. 173,500 173,500
Other long-term debt................... 2,905 3,314
-------------- ---------------
Total long-term debt................ 176,405 176,814
-------------- ---------------
Total liabilities................ 194,868 199,072
-------------- ---------------
Commitments and contingencies
(Notes 5 through 11)
Series A mandatory cumulative redeemable
preferred stock, $44.91 and $42.44, as
of June 30, 1998 and December 31, 1997,
respectively per share liquidation
value, 1,800,000 shares authorized,
433,638 shares issued and outstanding.. 19,475 18,402
-------------- ---------------
Stockholders' deficit:
Common stock, $.006 par value,
75,000,000 shares authorized,
4,880,613 shares issued and
outstanding ........................ 29 29
Additional paid-in capital............. 31,382 31,382
Accumulated deficit.................... (59,027) (63,579)
-------------- ---------------
Total stockholders' deficit......... (27,616) (32,168)
-------------- ---------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT.................. $ 186,727 $ 185,306
============== ===============
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
3
<PAGE>
<TABLE>
<CAPTION>
LADY LUCK GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues:
Casino........................... $ 32,124 $ 35,043 $ 68,602 $ 71,842
Food and beverage................ 4,242 4,151 8,930 8,590
Hotel............................ 1,100 1,115 2,095 2,106
Equity in net income of
unconsolidated affiliates..... 1,629 1,434 3,097 2,376
Other............................ 903 1,432 1,905 2,862
---------- ---------- ---------- ----------
Gross revenues................ 39,998 43,175 84,629 87,776
Less: Promotional allowances (3,548) (3,097) (7,506) (6,490)
---------- ---------- ---------- ----------
Net revenues.................. 36,450 40,078 77,123 81,286
---------- ---------- ---------- ----------
Costs and expenses:
Casino........................... 13,812 14,300 29,244 29,199
Food and beverage................ 1,382 1,796 2,859 3,484
Hotel............................ 698 603 965 1,166
Other............................ 39 68 100 142
Selling, general and
administrative................ 12,649 13,105 25,345 26,489
Related party management/
license fees.................. 68 422 525 936
Depreciation and amortization.... 2,214 2,976 4,604 5,929
Gain on sale of assets........... (2,848) - (2,848) -
---------- ---------- ---------- ----------
Total costs and expenses...... 28,014 33,270 60,794 67,345
---------- ---------- ---------- ----------
Operating income ................... 8,436 6,808 16,329 13,941
Other income (expense):
Interest income.................. 494 211 757 370
Interest expense................. (5,505) (5,723) (11,089) (11,395)
Other............................ (342) 36 (342) 88
---------- ---------- ---------- ----------
Total other expense........... (5,353) (5,476) (10,674) (10,937)
---------- ---------- ---------- ----------
Income before income tax provision.. 3,083 1,332 5,655 3,004
Income tax provision................ 15 105 30 105
---------- ---------- ---------- ----------
NET INCOME.......................... 3,068 1,227 5,625 2,899
Preferred stock dividends........... 544 486 1,073 958
---------- ---------- ---------- ----------
Income applicable to
common stockholders.............. $ 2,524 $ 741 $ 4,552 $ 1,941
========== ========== ========== ==========
NET INCOME PER SHARE
Applicable to common stockholders $ 0.52 $ 0.15 $ 0.93 $ 0.40
========== ========== ========== ==========
Weighted average number of common
shares outstanding............... 4,880,613 4,880,613 4,880,613 4,880,613
========== ========== ========== ==========
<FN>
The accompanying notes are an integral part of these condensed consolidated
statements.
</FN>
</TABLE>
4
<PAGE>
LADY LUCK GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended
June 30,
1998 1997
Cash flows from operating activities:
Net income............................ $ 5,625 $ 2,899
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization......... 4,604 5,929
Amortization of bond offering
fees and costs...................... 433 433
Gain on sale of assets................ (2,848) -
Equity in net income of
unconsolidated affiliates........... (3,097) (2,376)
(Increase) decrease in assets:
Accounts receivable................. (245) 160
Inventories......................... (39) 86
Prepaid expenses.................... 1,173 100
Increase (decrease) in liabilities:
Accounts payable.................... (1,215) 605
Other accrued liabilities........... (705) (596)
-------------- ---------------
Net cash provided by (used in)
operating activities.................. 3,686 7,240
-------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment.... (3,594) (1,557)
Proceeds from sale of
operating assets.................... 15,127 -
Restricted cash....................... 261 -
Other................................. (79) (174)
-------------- ---------------
Net cash provided by (used in)
investing activities.................. 11,715 (1,731)
-------------- ---------------
The accompanying notes are an integral part of these condensed consolidated
statements.
5
<PAGE>
LADY LUCK GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands, except supplemental schedule)
(Unaudited)
Six Months Ended
June 30,
1998 1997
Cash flows from financing activities:
Payments on debt and slot contracts... (1,543) (1,999)
-------------- ---------------
Net cash provided by (used in) financing
activities............................ (1,543) (1,999)
-------------- ---------------
Net increase (decrease) in cash and cash
equivalents................... 13,858 3,510
Cash and cash equivalents,
beginning of period................... 19,552 15,490
-------------- ---------------
Cash and cash equivalents, end of period $ 33,410 $ 19,000
============== ===============
Supplemental disclosures of cash flow
information:
Cash paid during the period for
interest.......................... $ 10,679 $ 10,980
============== ===============
Cash paid during the period for
taxes............................. $ - $ 80
============== ===============
Supplemental Schedule of Non-Cash Investing and Financing Activities:
The liquidation value of the Series A mandatory cumulative redeemable preferred
stock increased by approximately $1,073,000 and $958,000 in unpaid accrued
dividends for the six month periods ended June 30, 1998 and 1997, respectively.
The Company entered into several contracts with manufacturers for the purchase
of slot machines and other assets which totaled approximately $637,000 and
$618,000 for the six month periods ended June 30, 1998 and 1997, respectively.
Effective February 19, 1998, a subsidiary of the Company sold substantially all
of its real property and operating assets to the holder of its mortgage note in
exchange for forgiveness of the $2,750,000 mortgage note and the assumption of
certain liabilities.
The accompanying notes an integral part of these condensed consolidated
statements.
6
<PAGE>
LADY LUCK GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The Company and Basis of Presentation
Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
Company's 1997 Annual Report on Form 10-K. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. The results for the three and six
month periods ended June 30, 1998 and 1997 are not necessarily indicative of
future financial results. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Among the
estimates made by management is the evaluation of the recoverability of the
carrying values of the land held for development and the reserve for disposition
costs related to the sale of Lady Luck Biloxi's operating assets as more fully
described below. The Company has made certain financial statement
reclassifications for the three and six month periods ended June 30, 1997 in
order to classify amounts in a manner consistent with the three and six month
periods ended June 30, 1998.
The consolidated financial statements of Lady Luck Gaming Corporation
("LLGC"), a Delaware corporation, include the accounts of LLGC and its
subsidiaries (collectively the "Company"). For the periods presented in the
financial statements, the Company's operations primarily include those of LLGC,
Lady Luck Gaming Finance Corporation ("LLGFC"), a Delaware corporation; Lady
Luck Mississippi, Inc. ("LLM"), Lady Luck Biloxi, Inc. ("LLB") (see Note 9),
Magnolia Lady, Inc. ("MLI"), Lady Luck Tunica ("LLT"), each a Mississippi
corporation (collectively the "Mississippi Companies") and Gold Coin, Inc.
("GCI") (see Note 10). The Company also owns an interest in a joint venture with
Bettendorf Riverfront Development Company ("BRDC") and previously owned an
investment in a joint venture (the "Bally's Joint Venture") with Bally's
Entertainment Corp. ("Bally's") (see Note 4) which are and have been accounted
for under the equity method. LLGC and its subsidiaries were organized to develop
and operate gaming and hotel properties in emerging jurisdictions.
LLGC and LLGFC were formed in February 1993. LLM began dockside casino
operations on February 26, 1993 in Natchez, Mississippi and acquired and took
over operation of the 147-room River Park Hotel in Natchez, Mississippi on April
15, 1996; Lady Luck Central City, Inc., formerly Gold Coin Incorporated
("LLCC"), a Delaware corporation and subsidiary of the Company, opened on May
28, 1993 and sold its real property and operating assets and ceased operations
effective February 19, 1998 (see Note 10); LLB began dockside casino operations
on December 13, 1993 in Biloxi, Mississippi and sold its real property and
operating assets and ceased operations effective June 7, 1998 (see Note 9); MLI,
which does business as Lady Luck Rhythm & Blues, commenced dockside gaming
operations on June 27, 1994 in Coahoma County, Mississippi, commenced operation
of a 173-room hotel on August 16, 1994, commenced gaming operations of Country
Casino and the Pavilion on May 21, 1996 and acquired and took over operation of
the 120-room Riverbluff Hotel in Helena, Arkansas on July 3, 1996; Lady Luck
Quad Cities, Inc. ("LLQC"), a Delaware corporation and subsidiary of the
Company, formed a joint venture with BRDC (the "Bettendorf Joint Venture") to
operate a casino in Bettendorf, Iowa which commenced operation on April 21, 1995
(see Note 4); Old River Development, Inc., a subsidiary of the Company,
commenced operation of a 240-room hotel on August 24, 1994, contributed it to
the Bally's Joint Venture in March 1995 and sold its equity investment to
Bally's effective September 30, 1997 (see Note 4); and, L.L. Gaming
Reservations, Inc., a Nevada corporation and subsidiary of the Company, began
operating a central reservations center for the Company's hotels on September 3,
1996. Lady Luck Vicksburg, Inc. ("LLV"), a subsidiary of the Company and Lady
Luck Kimmswick, Inc. ("LLK"), a 93% owned subsidiary of the Company and a
Missouri corporation, are in various stages of development and have no operating
history.
2. Certain Risks and Uncertainties
The Company's operations in Mississippi and Iowa are dependent on the
continued licensability or qualifications of the Company and its subsidiaries
that hold the gaming licenses in these jurisdictions. Such licensing and
qualifications are reviewed periodically by the gaming authorities in these
states.
7
<PAGE>
LADY LUCK GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A significant portion of the Company's consolidated revenues and operating
income are generated by the Company's Coahoma County, Mississippi casino
operations. These casinos are highly dependent on patronage by residents in
Arkansas. A change in general economic conditions, closure of the Helena Bridge
or a change in the extent and nature of regulations enabling casino gaming in
Arkansas could adversely affect these casinos' future operating results.
3. Reverse Stock Split and Net Income Per Share
Effective June 4, 1998, the Company's shareholders approved a one-for-six
reverse stock split with regard to its Common Stock (the "Reverse Split"). The
effects of the Reverse Split were to reduce the number of issued and outstanding
shares of Common Stock from 29,285,698 to 4,880,613 and to increase the par
value of these shares from $0.001 to $0.006 per share. In lieu of fractional
shares resulting from the Reverse Split, stockholders shall receive a cash
payment from the sale of the aggregate fractional shares on the open market. The
Reverse Split did not change the number of authorized shares of the Company's
Common Stock and had no effect on the Company's Preferred Stock. All references
in the financial statements to number of shares, per share amounts and market
prices of the Company's Common Stock have been retroactively restated to reflect
the decreased number of shares of Common Stock outstanding.
As of December 31, 1997, the Company adopted Statement of Financial
Accounting Standard No. 128 "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128
establishes new accounting standards for the computation and financial statement
presentation of earnings per share data. The adoption of SFAS No. 128 did not
affect the Company's earnings per share calculations. As of June 30, 1998,
options to purchase 68,000 shares of common stock at exercise prices ranging
from $15.00 to $18.72 per share were outstanding and exercisable, respectively,
and could potentially dilute earnings per share in future periods. The related
weighted average number of shares of common stock were not included in the
computations of earnings per share because the options' exercise prices were
greater than the average market prices of common stock during the three and six
month periods ended June 30, 1998 and 1997 and any effective would be
antidilutive.
4 Investment in Unconsolidated Affiliates
The Company's investment in the joint ventures with BRDC and its former
investment in the joint venture with Bally's are accounted for under the equity
method and the Company's portion of income or loss from the joint ventures is
included in Equity in Net Income of Unconsolidated Affiliates in the
accompanying Condensed Consolidated Statements of Operations for the three and
six month periods ended June 30, 1998 and 1997.
Bettendorf Joint Venture
In December 1994, the Company entered the Bettendorf Joint Venture with
BRDC to develop and operate a casino in Bettendorf, Iowa ("Lady Luck
Bettendorf"). The joint venture agreement required that the Company and BRDC
each contribute cash to the Bettendorf Joint Venture of $3.0 million in return
for a 50% ownership interest. In addition, BRDC is leasing certain real property
to the Bettendorf Joint Venture at a lease rate equal to $150,000 per month. The
Company is leasing a gaming vessel with a cost of $21,635,000 and a carrying
value net of accumulated depreciation as of June 30, 1998 of $19,694,000 to the
Bettendorf Joint Venture for approximately $189,000 per month, which amount was
determined based upon arms-length negotiations between the Company and BRDC. In
addition, from inception of the Bettendorf Joint Venture through December 31,
1997, the Company had been leasing certain gaming equipment to the Bettendorf
Joint Venture with a cost of $3,705,000 for approximately $122,000 per month,
its fair market rental value. Pursuant to such equipment lease, effective
January 1, 1998, the Company sold the equipment to the Bettendorf Joint Venture
for a negotiated amount of $712,000 cash.
8
<PAGE>
LADY LUCK GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company's rental income relating to these leases for the three and six
month periods ended June 30, 1998 and 1997 are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Gaming vessel lease $ 567 $ 566 $1,133 $1,133
Gaming equipment lease - 366 - 732
------ ------ ------ ------
Total Bettendorf lease
rental income $ 567 $ 932 $1,133 $1,865
====== ====== ====== ======
Lady Luck Bettendorf commenced operations on April 21, 1995. All net
profits and losses from all operations of Lady Luck Bettendorf are allocated
equally between the Company and BRDC. Effective January 1, 1996, the Company was
granted the right to manage Lady Luck Bettendorf with substantially the same
terms and fees as the Company's wholly-owned casinos, less $37,500 abated per
month, with up to $325,000 annually of the fees received by the Company paid to
BRDC as consultants.
Lady Luck Bettendorf incurred management fees for the three and six month
periods ended June 30, 1998 and 1997 as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Lady Luck Bettendorf
management fees $ 581 $ 437 $1,089 $ 796
====== ====== ====== ======
The Bettendorf Joint Venture is currently constructing a $39.5 million
expansion project pursuant to its master-plan (See Note 8).
Summarized balance sheet information for the Bettendorf Joint Venture as of
June 30, 1998 and December 31, 1997 is as follows (in thousands):
June 30, December 31,
1998 1997
Current assets $ 7,912 $ 4,758
Other 839 732
Property and equipment, net 43,441 25,459
------------ ------------
Total assets $ 52,192 $ 30,949
============ ============
Current liabilities $ 18,586 $ 12,276
Long-term liabilities 8,786 48
Members' equity 24,820 18,625
------------ ------------
Total liabilities and
members' equity $ 52,192 $ 30,949
============ ============
9
<PAGE>
LADY LUCK GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Summarized results of operations for the Bettendorf Joint Venture for the
three and six month periods ended June 30, 1998 and 1997 are as follows (in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Net revenues $ 21,597 $ 19,055 $ 40,722 $ 36,473
Costs and expenses 18,338 16,967 34,527 32,943
---------- ---------- ---------- ----------
Net income $ 3,259 $ 2,088 $ 6,195 $ 3,530
========== ========== ========== ==========
A summary of changes in the Company's investment in the Bettendorf Joint
Venture for each of the six month periods ended June 30, 1998 and 1997 are as
follows (in thousands):
1998 1997
Investment, beginning of period $ 9,313 $ 5,886
Equity in net income
of unconsolidated affiliate 3,097 1,764
------------ ------------
Investment, end of period $ 12,410 $ 7,650
============ ============
Included in the Company's Retained Earnings at June 30, 1998 is $9,410,000 of
undistributed earnings of the Bettendorf Joint Venture.
Bally's Joint Venture
The Company entered an agreement effective September 30, 1997 to sell its
35% minority interest in Bally's Saloon, Gambling Hall and Hotel in Tunica,
Mississippi to Hilton Hotels Corporation, the majority owner and manager of the
property (the "Partnership Interest Redemption Agreement") (See Note 5).
5. Long-Term Debt
At June 30, 1998 and December 31, 1997, long-term debt consisted of the
following (in thousands):
June 30, December 31,
1998 1997
11 7/8% First Mortgage Notes;
quarterly payments of interest
only; due March 2001;
collateralized by substantially
all assets of the Company and
guaranteed by LLGC.................. $ 173,500 $ 173,500
Note payable to a corporation;
monthly payments of interest
only at 10%; principal due
July 2001, collateralized by
a deed of trust (See Note 10)....... - 2,750
Note payable to a corporation;
annual payments of principal of
$119 plus accrued interest at 8%;
due June 2003; collateralized by
a land deed of trust (See Note 9)... - 714
10
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LADY LUCK GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Notes payable to corporations;
monthly payments of principal
and interest at rates up to 12 1/2%
due through February 1999 secured
by the equipment.................... 242 1,122
Mortgage note payable to a
corporation; quarterly payments
of principal and interest at
prime plus 1 1/2% based on a
20 year amortization; due April
2006; collateralized by a
deed of trust....................... 2,698 2,773
Mortgage note payable to an
individual; monthly payments of
principal and interest at 8 1/2%
based on a 20 year amortization;
due March 2018; collateralized
by a deed of trust.................. 348 -
Note payable to a corporation;
quarterly payments of principal
and accrued interest at 9%; due
October 1998, collateralized by
a deed of trust..................... - 110
Other.................................. 137 326
----------- ----------
176,925 181,295
Less: current portion.................. (520) (4,481)
----------- ----------
Total long-term debt................ $ 176,405 $ 176,814
=========== ==========
The Indenture, as amended and supplemented (the "Indenture"), covering the
Company's 11 7/8% First Mortgage Notes due 2001 (the " 2001 Notes") provides
for, among other things, restrictions on the Company's and certain of its
subsidiaries' abilities (a) to pay dividends or other distributions on its
capital stock, (b) to incur additional indebtedness, (c) to make asset sales,
(d) to engage in other lines of business, and (e) to maintain a minimum
consolidated net worth, as defined in the Indenture. The Company believes it is
in compliance with the Indenture, as amended and supplemented, as of June 30,
1998.
The 2001 Notes bear interest at the rate of 11-7/8% per annum effective
October 15, 1995 (prior to that time they bore interest at the rate of 10-1/2%
per annum). Interest on the 2001 Notes held by each holder who consented to
certain amendments to and waivers of continuing defaults under the Indenture in
1996 (the "Amendments and Waivers") will be payable quarterly on each March 1,
June 1, September 1 and December 1, so long as the 2001 Notes are outstanding
(interest on the notes held by each holder who did not consent to the Amendments
and Waivers will continue to be payable semi-annually on March 1 and September
1). In addition, the Company is obligated within 180 days after the end of each
year, commencing with the year ending December 31, 1996, to purchase on the open
market, or to make an offer to purchase from the holders at par, 2001 Notes with
a principal amount equal to Excess Cash Flow (as defined in the Indenture) for
such year, provided that the Company will be able to credit towards the amount
of 2001 Notes required to be purchased in any year any amount of 2001 Notes it
has purchased since January 1, 1996 which it has not previously used as a credit
in any prior year. There was no Excess Cash Flow for the years ended December
31, 1997 and 1996. The Company may also repurchase a portion of the 2001 Notes
from time to time in early satisfaction of any required repurchase expected
pursuant to the Indenture or otherwise, the amount of which and the timing of
repurchase cannot currently be estimated and is dependent on adequate cash
availability and market conditions.
The Company continues to explore various options to refinance the 2001
Notes. However, there can be no assurance as to the timing of any such
refinancing or that the Company will continue these pursuits and, if pursued,
that terms acceptable to the Company can be negotiated.
11
<PAGE>
LADY LUCK GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Sale of Biloxi Operating Assets
Pursuant to an Asset Purchase Agreement, on June 11, 1998, the Company
received approximately $15.1 million cash from Grand Casinos of Mississippi,
Inc. and Grand Casinos, Inc. (collectively "Grand Casinos") for the sale of
substantially all of the assets, excluding gaming equipment and certain
non-contiguous real property, associated with its Lady Luck Biloxi casino which
ceased operations June 7, 1998. In accordance with the Indenture, the Company
has 180 days after receiving the $15.1 million to invest the money and any
earnings thereon in a Related Business (as defined in the Indenture). If the
Company does not invest the funds in a Related Business before such time, under
certain circumstances, the Company must make an offer to repurchase a portion of
the 2001 Notes at a price of 101% of par for the amount of the funds that was
not invested in a Related Business. Accordingly, the proceeds from the sale and
earnings thereon have been classified as Restricted Cash (as defined in the
Indenture) as of June 30, 1998. Any remaining funds not used to repurchase the
2001 Notes tendered, if any, will become unrestricted and available for general
purposes.
Sale of Interest in Bally's Joint Venture
Pursuant to a Partnership Interest Redemption Agreement, on November 3,
1997, the Company received approximately $15.3 million cash for its investment
in the Bally's Joint Venture. The Company will invest $5.7 million of the
proceeds from the sale of its interest in the Bally's Joint Venture in a Related
Business (as defined in the Indenture). Also in accordance with the Indenture,
the Company, on April 16, 1998, offered to repurchase up to $9.6 million
principal amount of the 2001 Notes (the "Tender Offer") at a price of 101% of
par plus accrued and unpaid interest thereon. The Tender Offer expired on May
14, 1998 and none of the 2001 Notes were tendered. The remaining proceeds from
the sale and interest earned thereon became unrestricted and available for
general purposes at that time.
6. Employment Agreements
On October 24, 1994, LLGC entered Letter Agreements with Alain J. Uboldi,
LLGC's President, Chief Operating Officer and Director, and Rory J. Reid, LLGC's
Senior Vice-President, General Counsel, Secretary and Director (the
"Agreements"). The Agreements provide that in the event of a Change of Control,
as defined in the Agreements, and the subsequent termination of the employment
of either Mr. Uboldi or Mr. Reid, under certain circumstances, LLGC would be
required to pay to Mr. Uboldi and Mr. Reid a lump sum severance payment equal to
2.99 times the sum of their respective annual base salary plus the amount of any
bonus paid in the year preceding such termination. In the event of such
termination, Mr. Uboldi and Mr. Reid would also receive in cash an amount equal
to the product of the difference between subtracting the exercise price of each
option held by Mr. Uboldi or Mr. Reid (whether or not fully exercisable) from
the current price of LLGC's common stock, as defined. Further, in connection
with the Agreements, Mr. Uboldi and Mr. Reid would receive life, disability,
accident and health insurance benefits substantially similar to those they are
receiving immediately prior to their termination for a 36-month period after
such termination.
7. Litigation
Shareholder Class Action Lawsuits
The Company has been named as a defendant in a purported shareholder class
action lawsuit alleging violations by the Company of the Securities Exchange Act
of 1933 and the Securities Exchange Act of 1934 for alleged material
misrepresentations and omissions in connection with the Company's 1993
prospectus and initial public offering of Common Stock. The complaint seeks,
inter alia, injunctive relief, rescission and unspecified compensatory damages.
In addition to the Company, the complaint also names as defendants Andrew H.
Tompkins, Chairman and Chief Executive Officer of LLGC, Alain Uboldi, President,
Director and Chief Operating Officer of LLGC, Michael Hlavsa, the former Chief
Financial Officer of LLGC, Bear Stearns & Co., Inc. and Oppenheimer & Co., Inc.,
who acted as lead underwriters for the initial public offering. The Company has
retained outside counsel to respond to the complaint. On October 8, 1997, the
Company was served with an order of the court dismissing all of the Plaintiff's
Section 10(b) and eleven of the Plaintiff's sixteen Section 11, 12 and 15
12
<PAGE>
LADY LUCK GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
allegations with prejudice for failing to adequately state a claim. The court
also ordered the Plaintiffs to and the Plaintiffs have filed an amended
complaint regarding the five Section 11, 12 and 15 claims which were not
dismissed with prejudice. While the outcome of this matter cannot presently be
determined, the Company believes based in part on advice of counsel, that it has
meritorious defenses.
Greek Lawsuits
The Company and certain of its joint venture partners (the "Defendants")
are defendants in a lawsuit brought by the country of Greece and its Minister of
Tourism before the Greek Multi-Member Court of First Instance. The action
alleges that the Defendants failed to make certain payments in connection with
the gaming license bid process for Patras, Greece. The payments the Company is
alleged to have been required to make aggregate approximately 2.1 billion
drachma (which was approximately $7.1 million as of July 29, 1998 based upon
published exchange rates). Although it is difficult to determine the damages
being sought from the lawsuit, the action may seek damages up to such aggregate
amount. The cases are still in their preliminary stages and their outcome cannot
be predicted with any degree of certainty; however, the Company believes, based
in part on advice of counsel, that it has meritorious defenses.
A Greek architect filed an action against the Company alleging that he was
retained by the Company to provide professional services with respect to a
casino in Loutraki, Greece. The plaintiff in such action sought damages of
approximately $800,000. On July 29, 1996, the Company's Greek counsel was served
with a decision by the Athens Court of First Instance in such matter. The Greek
Court entered judgment against the Company in the amount of approximately 87.1
million drachma (which was approximately $293,000 as of July 29, 1998 based upon
published exchange rates) plus interest. The Company has appealed the Court's
decision. During the fourth quarter of 1997, the Company's Greek counsel
informed the Company that it is more likely than not that the appellate court
will not overturn the Athens Court of First Instance's decision. A reserve has
been provided during the fourth quarter of 1997 and interest is accrued monthly;
however, the Company intends to continue to defend itself in this matter.
Other Matters
On November 5, 1996, the United States Bankruptcy Court for the Northern
District of Mississippi dismissed a lawsuit which had been brought by Superior
Boat Works, Inc. ("Superior") against LLM on or about September 23, 1993.
Superior had previously done construction work for LLM on its Natchez barge
("Lady Luck Natchez"), as well as some minor preparatory work on one other barge
of the Company. Such proceeding alleged damages of approximately $47.0 million,
of which approximately $3.4 million was alleged for additional construction work
on Lady Luck Natchez and the remaining amount was alleged for unjust enrichment,
for causing the bankruptcy of Superior and for future work Superior expected to
perform for the Company. Superior has appealed the decision to dismiss the
action. The Company, based in part on the advice of its counsel, believes that
it has meritorious defenses and does not believe that the appeal of the decision
will have a material adverse effect on the Company's financial condition or
results of operations.
8. Commitments and Contingencies
Lease Commitments
LLGC on its own or through its operating subsidiaries, has entered into a
series of leases and options to lease in various locations where it is operating
or intends to develop and operate dockside casinos. The leases are primarily for
a term of 40 years from the date of execution and are cancelable at the option
of LLGC with a maximum period of notice of 60 days with the exception of certain
leases entered into by LLB and Lady Luck Gulfport, Inc., also a subsidiary of
the Company, which are cancelable upon six months notice on the fifth
anniversary of the commencement date of such leases and upon six months notice
on any fifth anniversary date thereafter. In addition, LLGC, on its own or
through its operating subsidiaries, has entered into certain options to either
lease or purchase additional property in other states. Most of the leases are
contingent upon regulatory approval of the lease and all leases contain certain
periodic rent adjustments.
13
<PAGE>
LADY LUCK GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Construction Commitments
Bettendorf Joint Venture
The Bettendorf Joint Venture is currently constructing an expansion
project pursuant to its master-plan at a cost of approximately $39.5 million.
The project, which began construction June 23, 1997, is planned to include an
approximately 260 room hotel with a fully enclosed walkway to the riverboat
casino, 30-50 slip marina, a 500-car parking garage and a bypass over the nearby
railroad to improve access. In addition, during April 1998, the Iowa Racing and
Gaming Commission approved the addition of up to 230 new slot machines and six
table games at the Bettendorf Joint Venture. The expansion project financing is
non-recourse to the Company and includes a $17.5 million bank first mortgage
note, a $5.0 million second mortgage from an affiliated company of BRDC, and
$7.5 million in tax increment financing from the City of Bettendorf to be repaid
from property taxes and in exchange for deeding the overpass to the City of
Bettendorf. The cost of the overpass is not expected to exceed such financing
from the City of Bettendorf. The balance of the expansion project's cost is to
be paid from the Bettendorf Joint Venture's cash on hand. The project is
scheduled to be completed in the Fall of 1998.
Service Marine Vessel
The Company has entered into an agreement for the construction of a
cruising gaming vessel in the amount of $16.0 million and as of June 30, 1998,
approximately $6.0 million has been expended under this contract and
approximately $1.9 million is included in construction payables. Construction
has been discontinued and is not anticipated to resume until such time as a
suitable development project proceeds.
Natchez Site
Lady Luck Natchez was required under its current lease to move its casino
barge several hundred feet to another docking facility on land subject to its
existing lease by February 1998. Management has not relocated the casino barge
and the lessor has allowed the casino to remain in its current location.
Management and the lessor have reached an agreement in principle to amend the
existing lease to allow the barge to remain in its current location. Pursuant to
such agreement the lessor agrees to allow the barge to remain at its current
location in consideration of the Company's agreement to pay liquidated damages
of $1.2 million in the event it terminates the lease at any time during the 10
year period following the execution of the lease amendment. Should an amendment
to the lease reflecting the preliminary agreement discussed above not be
executed, the cost of relocating the barge is currently estimated not to exceed
$1.2 million. Pursuant to the existing lease, the lessor has asserted that the
Company did not make certain improvements to the site required by the agreement.
As part of the preliminary agreement discussed above, the Company has agreed to
pay the lessor $500,000 in liquidated damages and to pay up to $250,000 to
construct additional parking spaces on the leased property.
Development Stage Projects
In addition to its Operating Casinos, the Company has riverboat, dockside
or land-based casino projects in various stages of development in Kimmswick,
Missouri; Vicksburg, Mississippi; and Vancouver, British Columbia. The current
status of each of these Development Stage Projects is described below.
Kimmswick, Missouri
The first two phases of the project, as planned, include a land-based
hotel and casinos onboard two separate vessels (the "Missouri Project"). LLK has
entered into an option to lease the Kimmswick Site. The proposed site is located
on an approximately 45-acre parcel of land in Jefferson County, Missouri,
approximately 25 miles south of St. Louis (the "Kimmswick Site").
14
<PAGE>
LADY LUCK GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of June 30, 1998, the Company has invested approximately $8.6 million
in the Missouri Project which investment has been fully reserved. The Missouri
Project is estimated to cost an additional $105.0 million to complete
development of the first two phases. The proposed project has received the
appropriate zoning approval from the Jefferson County Planning Commission and
has received a U.S. Army Corps of Engineers 404 permit. However, a new permit
might be necessary due to changes in the proposed project design subsequent to
receiving the permit.
The Company has continued its efforts towards obtaining a license for the
Missouri Project and provided updated information to the Missouri Gaming
Commission. The Missouri Gaming Commission investigates applicants at its
discretion and has not yet selected the Company to be investigated. Furthermore,
there can be no assurance that the Company will be selected or obtain such
approvals from the Missouri Gaming Commission. While the Company intends to
continue seeking license approval by the Missouri Gaming Commission, the
eventual development of the Missouri Project may also be subject to: (i)
satisfactory resolution of a November 1997 Missouri Supreme Court ruling that
several existing Missouri gaming facilities are illegal due to not being located
upon the Mississippi or Missouri rivers (the Kimmswick Site is located upon the
Mississippi River, but resolution of the decision could delay selection of
additional applicants for licensing investigation); (ii) the selection of three
new Missouri Gaming Commission members, which the Company believes may not be
familiar with the Company's application; (iii) gaming revenues in the major
metropolitan areas of Missouri have not increased commensurate with recent
increases in capacity, causing concerns of potential competitive saturation;
and, (iv) regulatory factors, including loss limits, have generally caused
gaming operations to underperform relative to facilities in neighboring
jurisdictions without such restrictions.
The Vicksburg Project
The development as planned will include a riverboat casino, an approximate
200-room hotel, an 800-car parking garage, and additional amenities (the
"Vicksburg Project"). The Vicksburg Project is expected to be located on
approximately 23.9 acres of land owned by the Company immediately south of the
I-20 bridge along the Mississippi River, with access to Washington Street, in
Vicksburg, Mississippi.
During 1997, the Company entered into an agreement (the "Horseshoe Joint
Venture Agreement") with Horseshoe Gaming, LLC ("Horseshoe") to form a joint
venture to complete and operate the Vicksburg Project. Under the terms of the
joint venture agreement: (i) the Vicksburg Project will be operated by a wholly
owned subsidiary of Horseshoe Gaming, LLC; (ii) Horseshoe will own an equity
interest of 75%, with LLV, holding the remaining 25%; and, (iii) the partners
will contribute real property and other previously acquired assets with a
combined agreed-upon value of approximately $42.0 million. The Company
anticipates certain modifications to the joint venture agreement will be
necessary before the joint venture may be formed to reflect certain changes in
project scope.
A gaming license was granted to LLV on August 18, 1994 and has subsequently
been renewed through July 2000. As of June 30, 1998, the Company has invested
approximately $14.7 million in the Vicksburg Project with a net investment
remaining of approximately $8.4 million after project development cost
write-downs and reserves for assets which may not be usable in the project as
currently contemplated. Management's estimate of net realizable value is based
upon assumptions regarding future economic, market and gaming regulatory
conditions including the viability of the Vicksburg Site for the development of
a casino project. Changes in these assumptions could result in changes in the
estimated net realizable value of the property. The total cost of the project is
initially estimated to be approximately $100.0 million including the agreed-upon
value of contributed assets.
The consummation of the transactions contemplated by the Horseshoe Joint
Venture Agreement are subject to the fulfillment of several conditions (the
"Conditions"), including but not limited to, the partners' future agreement as
to the scope and cost of the project, required regulatory approval, and
completion of project financing. The Horseshoe Joint Venture Agreement provides
that it may be terminated by LLV or Horseshoe as of April 1, 1998 (the
"Termination Date") if the Conditions are not satisfied or waived as of the
Termination Date or without cause. All of the Conditions were not satisfied
15
<PAGE>
LADY LUCK GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
prior to the Termination Date. While the partners have not elected to terminate
the Horseshoe Joint Venture Agreement as of the termination date, there can be
no assurance that LLV or Horseshoe will not terminate the Horseshoe Joint
Venture Agreement. Furthermore, there can be no assurance that if consummated,
that the joint venture will be successful.
In addition, during the fourth quarter of 1996, the Mississippi Gaming
Commission found a proposed casino site on the Big Black River unsuitable. The
Big Black River is located about 13 miles from Vicksburg, between Vicksburg and
Jackson, the major population base from which Vicksburg casinos draw their
customers. An affected landowner on the Big Black River sued the Mississippi
Gaming Commission after it rejected the site, and in the fourth quarter of 1997,
a circuit court found the site suitable. The Mississippi Gaming Commission and
City of Vicksburg have appealed the circuit court decision to the State Supreme
Court. In addition, on July 16, 1998, the Mississippi Gaming Commission adopted
a regulation, which is expected to take effect within 30 days of adoption, that
would no longer allow developments such as projects on the Big Black River.
Casino developments on the Big Black River could significantly adversely
affect operating casinos in Vicksburg, as well as the viability of the Vicksburg
Project. While the Company believes that, based on previous rulings in favor of
the Mississippi Gaming Commission, the Big Black River will not be found
suitable for casino development, it will be some time before a ruling comes
forth, and there can be no assurances that the circuit court ruling will be
overturned.
Lady Luck Vancouver
The Province of British Columbia (the "Province"), through its Lotteries
Advisory Committee (the "LAC") invited interested parties to respond to a
Request for Proposal ("RFP") relating to a planned expansion of gaming in the
Province. The gaming expansion is intended to include destination-style casinos,
limited to 30 table games and 300 slots, with the slot machines being provided
and owned by the Province. Pursuant to the RFP, the Provincial government will
participate in the revenue and net income generated by gaming operations, with
an initial licensing period of ten years. In addition, local host governments
will participate in the net income generated by projects in their respective
jurisdictions for providing requisite services.
The Company responded to the RFP during the fourth quarter of 1997, with a
proposed project to be developed on Tsawwassen First Nation Band Reserve lands
(the "Vancouver Project"), located about 20 miles south of downtown Vancouver.
The Vancouver Project, which is expected to cost approximately $25.0 to $30.0
million, includes a 55,000 square foot gaming and entertainment facility and an
11,000 square foot Aboriginal cultural center, all to be located on
approximately 20 acres. The proposed gaming facility will also include an
800-seat bingo hall.
The LAC has been reviewing the various responses to the RFP, and has
informed the Company that its response has successfully been short-listed.
During the second quarter of 1998, the Company entered a development agreement
with the Tsawwassen First Nation as host community and has an option to lease
property on which the Vancouver Project is to be constructed. The Company
believes that the LAC will make selections of successful proponents during the
third quarter of 1998. After a proponent is selected, it then must negotiate the
various operating agreements with the Provincial government and obtain financing
for the project. While the Company believes that it may be selected for a gaming
license, there can be no assurances that it will be selected, nor that an
agreement with the Province of British Columbia can be successfully negotiated
or that financing can be obtained. As of June 30, 1998, the Company has invested
approximately $700,000 of capital in this project (which was expensed when
incurred) and does not anticipate investing additional material amounts of
capital prior to licensing.
Environmental Matters
The Company is subject to certain federal, state and local environmental
protection, health and safety laws, regulations and ordinances that apply to
businesses generally, such as the Clean Air Act, the Clean Water Act, the
Resource Conservation and Recovery Act, CERCLA, the Occupational Safety and
Health Act, and similar state statutes.
16
<PAGE>
LADY LUCK GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Although the Company knows of no pre-existing conditions at the intended
sites for the Development Stage Projects that will result in any material
environmental liability or delay, there can be no assurance that pre-existing
conditions will not be discovered and result in material liability or delay to
the Company.
Other than those described, the Company has not made, and does not
anticipate making, material expenditures with respect to such environmental
protection, and health and safety laws and regulations. However, the compliance
or cleanup costs associated with such laws, regulations and ordinances may
result in future additional costs to the Company's operations.
Leverage
The Company is highly leveraged. As of June 30, 1998, the Company's total
indebtedness was approximately $176.9 million and its stockholders' deficit was
approximately $27.6 million. This level of indebtedness could have important
consequences to stockholders. While management believes the Company will have
sufficient cash flow to meet its debt service and other cash outflow
requirements and maintain compliance with the covenants of the Indenture as
supplemented, to the extent that a substantial portion of the Company's cash
flow from operations remains dedicated to the payment of principal and interest
on its indebtedness, such cash flow is not available for other purposes such as
general operations, maintenance and improvement of casino and hotel facilities
or expansion of existing sites or into other gaming markets. Furthermore, the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures or acquisitions may be limited and the Company's
level of indebtedness could limit its flexibility in planning for, or reacting
to, changes in its industry.
9. Sale of Biloxi Operating Assets
Pursuant to an Asset Purchase Agreement, on June 11, 1998, the Company sold
to Grand Casinos substantially all of the assets, excluding gaming equipment and
certain non-contiguous real property, associated with its Lady Luck Biloxi
casino which ceased operations June 7, 1998. The sale resulted in an
approximately $2.8 million gain, net of reserves for disposition costs.
Consideration received from Grand Casinos included the following: (i) base sales
price of $15.0 million; (ii) forgiveness by Grand Casinos of the $714,000
balance of a mortgage note plus accrued interest which had been owed to it by
the Company; and, (iii) certain other prorations and assumptions of liabilities
and leasehold obligations by Grand Casinos.
10. Sale of Lady Luck Central City
Effective February 19, 1998, LLCC sold substantially all of its real
property and operating assets, associated with its Lady Luck Central City casino
to the holder of its mortgage note in exchange for forgiveness of the $2.8
million note and the assumption of certain liabilities. During 1997, the Company
recorded a reserve of $7.3 million to write-down LLCC's assets held for sale to
fair market value less closing costs, to reserve for operating losses in 1998
prior to the effective sale date and to reserve for estimated future lease
payments and write-downs on its parking lot leases which were not assumed by the
purchaser of the assets sold. During March 1998, LLGC acquired a portion of
LLCC's leased property with the remainder to be acquired in 1999.
11. Statement of Position 98-5
During April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 "Reporting on the Costs of Start-up
Activities". The new standard requires that all companies expense costs of
"start-up" activities as those costs are incurred. The term "start-up" includes
pre-opening, pre-operating and organization activities. Previously, the Company
had capitalized these items until the property opened at which time these
cumulative costs were expensed. Although the Company has no capitalized
"start-up" costs as of June 30, 1998, any "start-up" costs related to projects
in the development stage will be required to be expensed as incurred.
17
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<LEGEND>
AN INCORRECT PERIOD END DATE APPEARED ON THE ORIGINAL FINANCIAL DATA SCHEDULE.
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition at June 30, 1998
(Unaudited) and the Condensed Consolidated Statement of Income for the Six
Months Ended June 30, 1998 (Unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
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<NAME> Lady Luck Gaming Corporation
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