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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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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: June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-22436
Lady Luck Gaming Corporation
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(Exact name of registrant as specified in its charter)
Delaware 88-0295602
(State or other jurisdiction of (I. R. S. employer
incorporation or organization) identification number)
206 North Third Street, Las Vegas, Nevada 89101
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (702) 477-3000
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Indicate by check mark whether 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
PROCEEDING 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
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 13, 1999 there
were 4,881,003 shares of common stock, $.006 par value per share, outstanding.
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
LADY LUCK GAMING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(Unaudited)
ASSETS
June 30, December 31,
1999 1998
------------ ------------
Current assets:
Cash and cash equivalents...................... $ 24,969 $ 28,834
Marketable securities.......................... 13,047 19,219
Accounts receivable, net....................... 995 862
Inventories.................................... 832 946
Prepaid expenses............................... 1,923 1,333
------------ ------------
Total current assets.......................... 41,766 51,194
------------ ------------
Property and equipment, net of accumulated
depreciation and amortization of $34,031 and
$31,352 as of June 30, 1999 and December 31,
1998, respectively............................ 131,666 120,904
Other assets:
Deferred financing fees and costs, net of
accumulated amortization of $4,645 and
$4,212 as of June 30, 1999 and December 31, 1,442 1,875
1998, respectively...........................
Investment in unconsolidated affiliate, net.... 16,218 14,412
Other.......................................... 3,760 3,300
------------ ------------
21,420 19,587
------------ ------------
TOTAL ASSETS..................................... $ 194,852 $ 191,685
============ ============
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
2
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LADY LUCK GAMING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except share and per share amounts)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
June 30, December 31,
1999 1998
------------ ------------
Current liabilities:
Current portion of long-term debt............. $ 501 $ 595
Accrued interest.............................. 1,850 1,834
Accounts payable.............................. 1,543 1,915
Construction payables......................... 1,952 3,951
Accrued property taxes........................ 690 1,300
Other accrued liabilities..................... 8,703 9,106
------------ ------------
Total current liabilities................... 15,239 18,701
------------ ------------
Long-term debt:
Mortgage notes payable........................ 173,500 173,500
Other long-term debt.......................... 3,201 3,084
------------ ------------
Total long-term debt........................ 176,701 176,584
------------ ------------
Total liabilities......................... 191,940 195,285
------------ ------------
Commitments and contingencies(Notes 5 through 9)
Series A mandatory cumulative redeemable
preferred stock, $50.31 and $47.53, as of
June 30, 1999 and December 31, 1998,
respectively per share liquidation value,
1,800,000 shares authorized, 433,638 shares
issued and outstanding........................ 21,815 20,611
------------ ------------
Stockholders' deficit:
Common stock, $.006 par value, 75,000,000
shares authorized, 4,881,003 shares issued
and outstanding.............................. 29 29
Additional paid-in capital ................... 31,382 31,382
Accumulated deficit........................... (50,314) (55,622)
------------ ------------
Total stockholders' deficit................. (18,903) (24,211)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT..... $ 194,852 $ 191,685
============ ============
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
3
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LADY LUCK GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Casino................................ $ 32,255 $ 32,124 $ 64,532 $ 68,602
Food and beverage..................... 3,870 4,242 7,420 8,930
Hotel................................. 1,498 1,100 2,588 2,095
Equity in net income of
unconsolidated affiliate............. 1,878 1,629 3,290 3,097
Management fees from
unconsolidated affiliate............. 719 581 1,317 1,089
Other................................. 1,005 903 1,912 1,905
--------- --------- --------- ---------
Gross revenues..................... 41,225 40,579 81,059 85,718
Less: Promotional allowances....... (3,623) (3,548) (6,724) (7,506)
--------- --------- --------- ---------
Net revenues....................... 37,602 37,031 74,335 78,212
--------- --------- --------- ---------
Costs and expenses:
Casino................................ 13,510 13,812 26,616 29,244
Food and beverage..................... 1,161 1,382 2,207 2,859
Hotel................................. 449 698 831 965
Other................................. 17 39 28 100
Selling, general and administrative... 11,380 12,649 21,684 25,345
Related party license fees............ 965 649 2,023 1,614
Depreciation and amortization......... 2,183 2,214 4,273 4,604
Gain on sale of assets................ - (2,848) - (2,848)
Pre-opening........................... 437 - 437 -
--------- --------- --------- ---------
Total costs and expenses........... 30,102 28,595 58,099 61,883
--------- --------- --------- ---------
Operating income........................ 7,500 8,436 16,236 16,329
Other income (expense):
Interest income....................... 606 494 935 757
Interest expense...................... (5,235) (5,505) (10,431) (11,089)
Other................................. (2) (342) (168) (342)
--------- --------- --------- ---------
Total other expense................ (4,631) (5,353) (9,664) (10,674)
--------- --------- --------- ---------
Income before income tax provision...... 2,869 3,083 6,572 5,655
Income tax provision.................... 30 15 60 30
--------- --------- --------- ---------
NET INCOME.............................. 2,839 3,068 6,512 5,625
Preferred stock dividends............... 612 544 1,204 1,073
--------- --------- --------- ---------
Income applicable to common
stockholders.......................... $ 2,227 $ 2,524 $ 5,308 $ 4,552
========= ========= ========= =========
BASIC AND DILUTED NET INCOME PER SHARE
Applicable to common stockholders..... $ 0.46 $ 0.52 $ 1.09 $ 0.93
========= ========= ========= =========
Weighted average number of common
shares outstanding.................... 4,881,003 4,881,003 4,881,003 4,881,003
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated statements.
4
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LADY LUCK GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except Supplemental Schedule)
(Unaudited)
Six Months Ended
June 30,
------------------------
1999 1998
---------- -----------
Cash flows from operating activities:
Net income...................................... $ 6,512 $ 5,625
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................. 4,273 4,604
Amortization of bond offering fees and costs 433 433
Equity in net income of unconsolidated (3,290) (3,097)
affiliate...................................
Gain on sale of assets........................ - (2,848)
(Increase) decrease in assets:
Accounts receivable........................... (133) (245)
Inventories................................... 114 (39)
Prepaid expenses.............................. (590) 1,173
Increase (decrease) in liabilities:
Accounts payable.............................. (372) (1,804)
Other accrued liabilities..................... (997) (116)
---------- -----------
Net cash provided by (used in) operating 5,950 3,686
activities....................................... ---------- -----------
Cash flows from investing activities:
Purchase of property and equipment............... (14,591) (3,594)
Sales of marketable securities................... 6,172 -
Construction payables............................ (1,999) -
Distributions of earnings from unconsolidated
affiliate...................................... 1,484 -
Proceeds from sale of operating assets........... - 15,127
Restricted cash.................................. - 261
Other............................................ (460) (79)
---------- -----------
Net cash provided by (used in) investing (9,394) 11,715
activities....................................... ---------- -----------
Cash flows from financing activities:
Payments on debt and slot contracts.............. (421) (1,543)
---------- -----------
Net cash provided by (used in) financing (421) (1,543)
activities....................................... ---------- -----------
Net increase (decrease) in cash and cash
equivalents...................................... (3,865) 13,858
Cash and cash equivalents, beginning of period..... 28,834 19,552
---------- -----------
Cash and cash equivalents, end of period........... $ 24,969 $ 33,410
========== ===========
Supplemental disclosures of cash flow information:
Cash paid during period for interest (net of
amount capitalized of $490 in the six months
ended June 30, 1999)........................... $ 9,982 $ 10,679
========== ===========
The accompanying notes are an integral part of these
condensed consolidated statments.
5
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LADY LUCK GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands, except Supplemental Schedule)
(Unaudited)
Supplemental Schedule of Non-Cash Investing and Financing Activities:
The liquidation value of the Series A mandatory cumulative redeemable
preferred stock increased by approximately $1,204,000 and $1,073,000 in unpaid
accrued dividends for the six month periods ended June 30, 1999 and 1998,
respectively.
The Company entered into several contracts with manufacturers for the
purchase of slot machines and other assets which totaled approximately $444,000
and $637,000 for the six month periods ended June 30, 1999 and 1998,
respectively.
Effective February 19, 1998, a subsidiary of the Company sold
substantially all of its real property and operating assets to the holder of a
$2,750,000 mortgage note in exchange for forgiveness of the mortgage note and
the assumption of specific liabilities.
The accompanying notes are an integral part of these
condensed consolidated statments.
6
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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 1998 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 period ended June 30, 1999 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, a partially completed gaming vessel 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 six month period ended June 30, 1998 in order to
classify amounts in a manner consistent with the six month period ended June 30,
1999.
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;
Magnolia Lady, Inc. ("MLI"), Lady Luck Mississippi, Inc. ("LLM"), Lady Luck
Biloxi, Inc. ("LLB") and Lady Luck Tunica, Inc. ("LLT"), each a Mississippi
corporation (collectively the "Mississippi Companies"); and L. L. Gaming
Reservations, Inc. ("LLGR"), a Nevada corporation. The Company also owns a
50% interest in a joint venture with Bettendorf Riverfront Development
Company ("BRDC") which is and has been accounted for under the equity
method. The Company's financial statements also include the development
efforts of Lady Luck Kimmswick, Inc. ("LLK"), a 93% owned Missouri
corporation; and Lady Luck Vicksburg, Inc. ("LLV") a Mississippi
corporation. 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; 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; MLI, which does business as Lady Luck Casinos
& Entertainment Resort 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, acquired and took over operation of the 120-room Riverbluff Hotel in
Helena, Arkansas on July 3, 1996 and commenced operation of an additional
314-room hotel on April 30, 1999; LLT which currently leases a gaming vessel to
Lady Luck Bettendorf, LC, an Iowa limited liability company (see below); LLGR
began operating a central reservations center for the Company's hotels on
September 3, 1996; Lady Luck Quad Cities, Inc. ("LLQC"), a Delaware corporation
and subsidiary of the Company, LLQC formed a joint venture with BRDC, Lady Luck
Bettendorf, LC, (the "Bettendorf Joint Venture") to operate a casino in
Bettendorf, Iowa which commenced operations on April 21, 1995 and commenced
operation of a 256-room hotel on August 29, 1998. LLK and LLV are in various
stages of development and have no operating history.
7
<PAGE>
LADY LUCK GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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, additional competition,
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, Nasdaq National Market Listing 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 4,881,003 and to increase the par
value of these shares from $0.001 to $0.006 per share. Instead of fractional
shares resulting from the Reverse Split, stockholders received 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.
On June 21, 1999, the Company was informed by the Nasdaq National Market
that it had determined the Company was no longer eligible for listing because
the Company's Common Stock failed to maintain market value of public float and
bid price, composed of total shares outstanding reduced by those held by
directors and officers, as defined, greater than or equal to $15.0 million, and
a bid price of at least $5.00, respectively, in accordance with Nasdaq
Marketplace Rules 4450(b)(3) and 4450(b)(4). The Company since has been accepted
for listing on the Nasdaq Smallcap Market.
4. Investment in Unconsolidated Affiliate
The Company's investment in its joint venture with BRDC is accounted for
under the equity method and the Company's portion of income or loss from the
joint venture is included in Equity in Net Income of Unconsolidated Affiliate in
the accompanying Condensed Consolidated Statements of Operations for the three
and six months ended June 30, 1999 and 1998.
Bettendorf Joint Venture
------------------------
In December 1994, the Company entered into 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 has been leasing certain real
property to the Bettendorf Joint Venture at a lease rate equal to $150,000 per
month. Effective September 1998, this real estate lease was amended to include a
temporary parking easement, necessary due to the addition of the hotel, for an
additional lease rate of $20,000 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, 1999 of $19,081,000 to the Bettendorf Joint Venture
for approximately $189,000 per month, which amount was determined based on
arms-length
8
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LADY LUCK GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
negotiations between the Company and BRDC. This lease is for an initial term of
5 years, expiring in May 2000, with a 10-year renewal option. During March 1999,
the Bettendorf Joint Venture submitted in writing to the Company its commitment
to renew this lease. The Company and BRDC are exploring the possible sale of the
gaming vessel to the Bettendorf Joint Venture; however, there can be no
assurance such sale will be successfully negotiated or if such sale is
negotiated, that the Bettendorf Joint Venture will be able to obtain requisite
financing on acceptable terms. The Company's rental income relating to the
gaming vessel lease was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
$ 567 $ 567 $ 1,133 $ 1,133
======== ======== ======== ========
Pursuant to a former equipment lease, effective January 1, 1998, the
Company sold specific gaming equipment to the Bettendorf Joint Venture for a
negotiated amount of $712,000 cash.
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. The Company has also been 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.
Summarized balance sheet information for the Bettendorf Joint Venture as
of June 30, 1999 and December 31, 1998 is as follows (in thousands):
June 30, December 31,
1999 1998
------------ ------------
Current assets............................ $ 9,896 $ 6,870
Property and equipment, net............... 52,629 52,727
Other..................................... 508 750
------------ ------------
Total assets............................ $ 63,033 $ 60,347
============ ============
Current liabilities....................... $ 6,031 $ 8,154
Long-term liabilities..................... 24,566 23,370
Members' equity........................... 32,436 28,823
------------ ------------
Total liabilities and members' equity... $ 63,033 $ 60,347
============ ============
Summarized results of operations for the Bettendorf Joint Venture for the
three and six month periods ended June 30, 1999 and 1998 are as follows (in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Net revenues................ $ 24,640 $ 21,597 $ 46,839 $ 40,722
Costs and expenses.......... 20,885 18,338 40,258 34,527
--------- --------- --------- ---------
Net income............... $ 3,755 $ 3,259 $ 6,581 $ 6,195
========= ========= ========= =========
9
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LADY LUCK GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of changes in the Company's investment in the Bettendorf Joint
Venture for each of the six month periods ended June 30, 1999 and 1998 are as
follows (in thousands):
1999 1998
--------- ------------
Investment, beginning of period....... $ 14,412 $ 9,313
Equity in net income of 3,290 3,097
unconsolidated affiliate............
Distributions to the Company.......... 1,484 -
--------- --------
Investment, end of period............. $ 16,218 $ 12,410
========= ========
Included in the Company's Accumulated Deficit at June 30, 1999 is
$13,218,000 undistributed earnings of the Bettendorf Joint Venture.
5. Long-term Debt
At June 30, 1999 and December 31, 1998, long-term debt consisted of the
following (in thousands):
June 30,1999 December 31, 1998
----------------- -----------------
$185,000, 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 an individual;
monthly payments of principal
and interest at 8.5%; due
March 2018; collateralized by
a deed of trust................... 341 344
Notes payable to a bank;
monthly payments of principal
and interest at 8%; due
November 2008; collateralized
by deeds of trust................. 451 198
Notes payable to corporations;
monthly payments of principal
and interest at rates up to
12.5%; due November 1999
through December 2002;
secured by the equipment.......... 358 494
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............................. 2,546 2,623
Other............................... 6 20
----------- -----------
177,202 177,179
Less: current portion............... (501) (595)
----------- -----------
Total long-term debt.............. $ 176,701 $ 176,584
=========== ===========
10
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LADY LUCK GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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) requires the Company 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, 1999.
Andrew H. Tompkins, Chairman and Chief Executive Officer of the Company,
beneficially owns approximately 46% of the Company's outstanding Common Stock.
Mr. Tompkins also owns a casino-hotel in Las Vegas, Nevada and the Lady Luck
trademark and a customer list, which the Company licenses from him. The Las
Vegas casino-hotel has incurred substantial indebtedness and is in default on
that debt as of June 30, 1999. Mr. Tompkins is personally liable for the debt
and has pledged certain of his assets, including the Lady Luck trademark and
customer list, as collateral for the benefit of the holders of that
indebtedness. As a result of the current default, these lenders are entitled to
the benefit of this collateral and could foreclose on the pledge and seize the
Lady Luck trademark and customer list and sell them to a third party. In
addition, Mr. Tompkins may be required to sell his Common Stock in the Company,
the trademark and the customer list to satisfy the debt.
Pursuant to the Indenture, a sale of Mr. Tompkins' Common Stock resulting
in another person beneficially owning more than 35% of the Company's outstanding
common stock would trigger a Change in Control event, which would in turn permit
any holder of the Company's outstanding 2001 Notes to require the Company to
repurchase all or any part of such holder's 2001 Notes at a cash price equal to
101% of the principal amount thereof, plus accrued and unpaid interest. As of
July 29, 1999, the closing market price of the 2001 Notes, as reported by
Donaldson, Lufkin and Jenrette, was 101.75%.
6. Employment Agreements
On October 24, 1994, LLGC entered into 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 were for an initial term of three years, and on
each October 24, beginning October 24, 1997, the Agreements are automatically
extended for an additional year, unless terminated by the Company on or before
July 24 of that year. 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 difference between the exercise price of each option held by Mr.
Uboldi or Mr. Reid (whether or not fully exercisable) and the current price of
LLGC's common stock. 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. A sale of Mr.
Tompkins' Common Stock resulting in another person beneficially owning more than
30% of the Company's outstanding Common Stock or a change in the persons
constituting a majority of the board of directors over a two-year period (unless
new directors are elected or nominated by two-thirds of the directors who were
directors at the beginning of the period) would trigger the change of control
provisions in the Agreements.
11
<PAGE>
LADY LUCK GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 Act of 1933,
as amended (the "Securities Act"), and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), for alleged material misrepresentations and
omissions in connection with the Company's 1993 prospectus and initial public
offering of Common Stock. The complaint seeks, among other things, 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, 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 Plaintiffs' claims under
Section 10(b) of the Exchange Act and 11 of the Plaintiffs' 16 claims under
Sections 11, 12 and 15 of the Securities Act with prejudice for failing to
adequately state a claim. The court also ordered the Plaintiffs to file, and the
Plaintiffs have filed, an amended complaint regarding the five claims under
Sections 11, 12 and 15 of the Securities Act 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 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 specified 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 $6.9 million as of July 30, 1999 based on
published exchange rates). Although it is difficult to determine the damages
being sought from the lawsuit, the action may seek damages up to that aggregate
amount plus interest. The case is still in its preliminary stage and its 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. During February 1999, the Company settled this
action for $335,000, including any accrued interest, the amount of which had
been reserved fully in 1997.
Other Matters
-------------
On November 5, 1996, the United States Bankruptcy Court for the Northern
District of Mississippi dismissed a lawsuit that 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. This 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.
12
<PAGE>
LADY LUCK GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During November 1996, Lady Luck Central City, Inc. entered into a
Memorandum of Understanding (the "Memorandum") with BWCC, Inc., which does
business as Bullwhackers-Central City ("Bullwhackers"). The Memorandum provided
for a combination of the respective companies' gaming establishments that
currently operate on adjacent real property in Central City. As a result of the
Memorandum, the parties negotiated and purportedly executed a definitive
Operating Agreement and Lease Agreement in September 1997. During the fourth
quarter of 1997, Bullwhackers refused to honor these definitive agreements, and
accordingly, the Company commenced suit against Bullwhackers. The Company and
Bullwhackers have reached an agreement whereby the Company received $300,000 as
a settlement from Bullwhackers during April 1999.
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 minimum period of notice of 60 days, with the exception of
certain leases entered into by LLB and Lady Luck Gulfport, Inc. that are
cancelable on six-months notice on the fifth anniversary of the commencement
date of such leases and on 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 on regulatory approval of the
lease and all leases contain certain periodic rent adjustments.
Construction Commitments
------------------------
Bettendorf Joint Venture
------------------------
Pursuant to a development agreement with the City of Bettendorf, the
Bettendorf Joint Venture is developing a marina with seasonal transient docking
facilities. The development agreement requires that in the event that the
construction of the marina is not completed before April 1, 1999, unless
completion is restricted beyond the control of the Bettendorf Joint Venture, the
Bettendorf Joint Venture must pay the City $100,000 per month until the project
has been completed. The Bettendorf Joint Venture is currently pursuing the
necessary licenses for development of the marina. As approvals for the licenses
are pending environmental evaluations and flood plain analyses, the continued
development of the marina is beyond the control of the Bettendorf Joint Venture,
thus no liquidated damages are being assessed. As of June 30,1999, the
Bettendorf Joint Venture had incurred approximately $72,000 of costs related to
the marina and anticipates that, if constructed, the marina will cost an
additional amount not in excess of $2,000,000, of which the Bettendorf Joint
Venture is responsible for approximately $1,000,000.
In addition, the Bettendorf Joint Venture is demolishing the Plaza
building at 1823 State Street and preparing the site for donation back to the
City. This cost of this process is $225,000 and will be completed during 1999.
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, 1999,
approximately $6.0 million ($3.0 million net of reserves and accruals) 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. During
1998, the contractor filed for bankruptcy. The filing listed $1.5 million as an
accrued construction receivable and did not list the partially completed vessel
as an asset. The Company has relocated the vessel from the shipyard at a cost of
approximately $200,000.
13
<PAGE>
LADY LUCK GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Country Hotel
-------------
During August 1998, MLI entered into an agreement for and began the
construction of a new 314-room hotel adjacent to its Country Casino. The hotel
opened April 30, 1999. The Company has funded the construction primarily with
the proceeds from the sale of substantially all of LLB's operating assets. The
completed project had total costs of approximately $16.7 million.
Generators
----------
During March 1999, MLI entered into an agreement for the production of
five new generators for the Lady Luck Casinos and Entertainment Resort. The cost
of production and installation of the generators is approximately $4.2 million
of which $2.9 million has been paid through June 30, 1999. The generators
commenced power production during July 1999.
Development Stage Projects
--------------------------
In addition to its operating casinos, the Company has riverboat or
dockside casino projects in various stages of development in Kimmswick, Missouri
and Vicksburg, Mississippi; (the "Development Stage Projects"). 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"). 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"). LLK has entered into options to lease the Kimmswick Site.
As of June 30, 1999, the Company has invested approximately $8.7 million
($12,000 of which was invested during the six months ended June 30, 1999) in the
Missouri Project, including the vessel construction noted above. Development
costs have been fully reserved and the vessel construction costs have been
reduced by a $3.0 million write-down recognized during 1997, leaving
approximately $3.0 million of property and equipment, net of these reserves and
an approximately $1.9 million construction payable. The Missouri Project is
estimated to cost an additional $105.0 million to complete. 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 gaming 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)
competition, as 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 (ii) regulatory factors, including loss
limits, have generally caused gaming operations to underperform relative to
facilities in neighboring jurisdictions without such restrictions.
14
<PAGE>
LADY LUCK GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Vicksburg Project
---------------------
The development as planned will include a riverboat casino, an
approximately 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.
A gaming license was granted to LLV on August 18, 1994 and has
subsequently been renewed through July 2000. As of June 30, 1999 the Company has
invested approximately $14.8 million ($227,000 of which was invested during the
six months ended June 30, 1999) in the Vicksburg Project, with net property and
equipment and deposits 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 on assumptions regarding future economic, market and gaming
regulatory conditions including the viability of the Vicksburg Site for the
development of a casino project and the ability of the Company to obtain a joint
venture partner and capital to develop the 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, although the Company is currently revising the development plan.
Casino developments on the Big Black River could significantly adversely
affect operating casinos in Vicksburg, as well as the viability of the Vicksburg
Project. 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. During the fourth quarter of 1996, the Mississippi Gaming
Commission found a proposed casino site on the Big Black River unsuitable.
However, 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. Once the appeal has been perfected, the Supreme Court must rule on it
within 270 days. In addition, on July 16, 1998, the Mississippi Gaming
Commission adopted a regulation that prohibits developments such as projects on
the Big Black River. While the Company believes that adoption of this regulation
will increase the prospects of a favorable ruling for the Mississippi Gaming
Commission and the City of Vicksburg with respect to the appeal, which is
currently being held in abeyance pending related rulings, there can be no
assurances that the circuit court ruling will be overturned.
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, including the Clean Air Act, the Clean Water Act, the
Resource Conservation and Recovery Act, the Comprehensive Environmental
Response, Compensation and Liability Act, the Oil Pollution Act, the
Occupational Safety and Health Act, and similar state statutes.
Some of the Company's owned and leased properties were used in the past
for industrial purposes, which have or may have resulted in soil or groundwater
contamination. For example, the Vicksburg site had been used as a bulk petroleum
storage facility since the early 1950's, and contained above-ground storage
tanks and barge and truck loading docks associated with that operation. Known
releases of petroleum products from three of the seven tanks have occurred since
1986, along with other small releases at various locations on site. The
subsurface assessment of the environmental condition of the site by an outside
environmental consultant indicated that some of the soils at the site were
contaminated with petroleum hydrocarbons and associated volatile organic
compounds, and that this contamination was present in significant concentrations
in some locations on site. Remediation efforts at the Vicksburg site are
complete. On February 21, 1996, the Mississippi Department of Environmental
Quality determined that the environmental remediation
15
<PAGE>
LADY LUCK GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
conducted by the seller meets all federal and state standards, and has certified
that no further action is required. However, there is no guarantee that the
Mississippi Department of Environmental Quality or the Federal Environmental
Protection Agency will not alter target cleanup levels in the future, resulting
in additional cleanup requirements. This would expose the Company to additional
liability as the owner of the property, and could result in a material delay of
the construction of new facilities on-site.
A sublessee at its Helena, Arkansas property has informed the Company that
there may be contamination on this property from underground storage tanks used
by the sublessee for gas station operations. The Company is awaiting further
information on this matter (including the extent of the contamination), but
believes that the sublessee will be responsible for any costs to investigate and
remediate the property. However, there is no guarantee that the sublessee will
in fact pay any of the costs.
Other than those described, the Company has not made, and does not
anticipate making, material expenditures or incurring delays with respect to
environmental protection, and health and safety laws and regulations. However,
there is no guarantee that additional pre-existing conditions will not be
discovered and that the Company will not encounter material liabilities or
delays.
Leverage
--------
The Company is highly leveraged. As of June 30, 1999, the Company's total
long-term indebtedness was approximately $176.7 million and its stockholders'
deficit was approximately $18.9 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 entrance 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. Subsequent Event
On August 2, 1999, the Company and Sodak Gaming, Inc. ("Sodak") announced
they have signed a definitive agreement for the Company to purchase a subsidiary
of Sodak which owns or will own the Miss Marquette riverboat casino and
associated real property and assets from Sodak. The agreement includes a
purchase price of approximately $41.7 million. Completion of the sale is
conditioned upon regulatory approvals, financing, satisfaction of other
conditions to the pending merger between Sodak and International Game
Technology, and other conditions.
The Miss Marquette riverboat gaming and entertainment complex includes a
914-position riverboat casino, including 698 slot machines, with approximately
18,747 square feet of gaming space; a 590-space parking lot; a land-based
restaurant/buffet; a live entertainment showroom; a 24-room hotel; a full
service marina with 32-slip spaces, and off-site facilities including
administrative space and laundry facilities.
16
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
All statements contained herein that are not historical facts, including
but not limited to, statements regarding the Company's current business
strategy, the Company's prospective joint ventures, asset sales and expansions
of existing projects, and the Company's plans for future development and
operations, are based on current expectations. These statements are
forward-looking in nature and involve a number of risks and uncertainties.
Generally, the words "anticipates," "believes," "estimates," "expects" and
similar expressions as they relate to the Company and its management are
intended to identify forward-looking statements. Actual results may differ
materially. Among the factors that could cause actual results to differ
materially are the following: the availability of sufficient capital to finance
the Company's business plan on terms satisfactory to the Company; competitive
factors, such as legalization of gaming in jurisdictions from which the Company
draws significant numbers of patrons and an increase in the number of casinos
serving the markets in which the Company's casinos are located; changes in
labor, equipment and capital costs; the ability of the Company to consummate its
contemplated joint ventures on terms satisfactory to the Company and to obtain
necessary regulatory approvals for them; changes in regulations affecting the
gaming industry; the continued operation of the Helena Bridge connecting
Arkansas to Coahoma County, Mississippi, the location of the Lady Luck Casinos
and Entertainment Resort complex; the ability of the Company to comply with its
Indenture covering the First Mortgage Notes Due 2001 (the "2001 Notes"); future
acquisitions or strategic partnerships; general business and economic
conditions; the Company's ability to become Year 2000 compliant in a timely
manner and within its cost estimates including the risk that one or more of the
representations provided to the Company by its suppliers may ultimately be
proven false; and other factors described at various times in the Company's
reports filed with the Securities and Exchange Commission. The Company wishes to
caution readers not to place undue reliance on any forward-looking statements,
which statements are made pursuant to the Private Litigation Reform Act of 1995.
These forward-looking statements speak only as of the date they are made. The
Company expressly disclaims any obligation or undertaking to disseminate any
updates or revisions to any forward-looking statement contained in this report
to reflect any change in its expectations with regard to that forward-looking
statement or any change in events, conditions or circumstances on which that
forward-looking statement is based. See "--Certain Risks and Uncertainties"
below for discussion of some of these factors.
Results of Operations
=====================
Three Months Ended June 30,1999 Compared to the Three Months Ended June 30, 1998
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999 as compared to 1998, consolidated
gross revenues increased to $41.2 million from $40.6 million, respectively, an
increase of $0.6 million or 1%.
Comparisons of the Company's consolidated gross revenues between periods
may not be meaningful as a result of the Company's sale of certain
underperforming assets. The Company has sold substantially all of the assets,
excluding gaming equipment and certain non-contiguous real property, associated
with its Lady Luck Biloxi casino effective June 11, 1998. The Company's gross
revenues from operations during the three months ended June 30, 1998 generated
by Lady Luck Biloxi was $4.0 million.
Gross revenues at the Lady Luck Casinos & Entertainment Resort increased
from $25.0 million to $28.5 million, an increase of $3.5 million or 14%, during
the three months ended June 30, 1998 and 1999, respectively. Despite the
disruption caused by hotel construction, the Lady Luck Casinos & Entertainment
Resort's gross revenues increased primarily due to a $2.6 million increase in
slot machine revenues and a $0.4 million increase in hotel revenues. These
increases in revenues were due to additional customers attracted by the opening
of the new 314-room hotel adjacent to the Country Casino on April 30, 1999 which
increased the daily supply of available rooms from 293 to 607. The Lady Luck
Casinos & Entertainment Resort increased the average number of slot machines in
operation from 1,321 to 1,475, an increase of 154 or 12% between comparative
periods to accommodate the additional customers.
17
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
Gross revenues at Lady Luck Natchez increased from $8.7 million to $9.5
million, an increase of $0.8 million or 9%, during the three months ended June
30, 1998 and 1999, respectively. Lady Luck Natchez's gross revenues increased
due to a $0.6 million increase in slot machine revenues and a $0.1 million
increase in food and beverage revenues. These increases were due to the
following: (1) the addition of more bus line runs including group sales; (2)
additional advertising; (3) a full quarter of operations and the addition of a
lunch menu during the current year period at a nearby off-site full-service
restaurant which opened during May 1998 that has attracted an increased number
of new visitors to the casino; (4) the remodeling of two additional floors of
the River Park Hotel between comparative periods which are believed to have
attracted more affluent customers; and, (5) the use of a check guarantee service
during the current year period which has enabled Lady Luck Natchez to cash a
larger volume of customer checks at the casino.
The Company's investment in the Bettendorf joint venture is accounted for
under the equity method and the Company's portion of income or loss from the
joint venture is included in gross revenues. In addition, the Company's gross
revenues include income from leasing a gaming vessel to the Bettendorf joint
venture and management fee income for managing the Bettendorf joint venture's
operations. The combined gross revenues recognized by the Company related to
these items increased from $2.8 million to $3.2 million during the three months
ended June 30, 1998 and 1999, respectively. The Bettendorf joint venture's gross
revenues increased from $22.8 million to $26.1 million, an increase of $3.3
million or 14%, during the three months ended June 30, 1998 and 1999,
respectively. These increases were primarily due to a $1.7 million increase in
slot machine revenues and the addition of $1.1 million in hotel revenues. These
increases in revenues were due to additional customers attracted by the opening
of the new 256-room hotel which opened in September 1998. The Bettendorf joint
venture increased the average number of slot machines in operation from 991 to
1,163, an increase of 172 or 17% between comparative periods to accommodate the
additional customers. These increases in revenues resulted in additional
management fees and net income for the Company despite increases in the
Bettendorf joint venture's operating expenses and interest expense related to
the expansion and increased customer levels.
Consolidated casino operating expenses as a percentage of consolidated
casino revenues decreased from 43% in the three months ended June 30, 1998 to
42% in the three months ended June 30, 1999, primarily due to the following: (1)
the ceasing of operations in June 1998 of Lady Luck Biloxi, which property
historically had operated at less favorable margins than the Company's average
margin; (2) reductions in the relative cost of complimentary food and beverage
furnished to casino customers; and, (3) relative reductions in payroll and
related costs at Lady Luck Natchez. These decreases were offset partially by
increased cash incentives to slot machine customers in relation to slot revenues
due to relatively more customers using slot club cards while playing slot
machines.
Food and beverage costs and expenses, prior to reclassifying the cost of
complimentaries, as a percentage of related revenues decreased from 90% for the
three months ended June 30, 1998 to 87% for the three months ended June 30,
1999. This decrease was primarily due to the closing in June 1998 of Lady Luck
Biloxi, which property historically operated at less favorable margins than the
Company's other properties. The effects of this reduction were partially offset
by increases in relative food and beverage costs.
Gross room revenues for the River Park Hotel increased approximately 7%
during the three months ended June 30, 1999 compared with the prior year three
months as a result of increasing its average daily room rate from $36 to $45, an
increase of $9 or 25%. The additional gross room revenues from the increase in
the average daily room rate was offset partially by a decrease in occupancy from
92% to 81% between comparative three month periods. The Lady Luck Casinos &
Entertainment Resort completed construction of its 314-room Country hotel which
opened April 30, 1999 and experienced an occupancy rate of 47% and an average
daily room rate of $42. During the three months ended June 30, 1999 as compared
with the prior year, gross room
18
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
revenues of the Rhythm & Blues hotel decreased by approximately 8%. Between
comparative periods, the Rhythm & Blues hotel's occupancy rate decreased from
91% to 71%, while average daily room rates increased from $32 to $39 which
increase was possible in part due to remodeling during the three months ended
March 31, 1999. During the three months ended June 30, 1999 as compared with the
prior year, gross room revenues of the Riverbluff hotel increased by
approximately 4%. The Riverbluff hotel's occupancy rate increased from 72% to
75% between comparative periods and average daily room rates increased from $25
to $26. Increased offerings of hotel rooms at these facilities to patrons on a
complimentary basis positively affected occupancy rates. The Lady Luck
Bettendorf hotel, which opened during September 1998, experienced an occupancy
rate of 78% during the three months ended June 30, 1999 and achieved an average
daily room rate of $56.
Selling, general and administrative expenses as a percentage of total
gross revenues decreased from 31% to 28% during the three months ended June 30,
1998 and 1999, respectively. The decrease was primarily due to the following:
(1) the absence of operations of the relatively underperforming Lady Luck
Biloxi, which historically operated at less favorable margins than the Company's
average; (2) an absence in the current year period of accruals made in the prior
year period related to unfavorable employee medical claims experience; and, (3)
recovery of legal costs and reversal of accruals related to settlements of
specific litigation. These decreases were partially offset by the following: (1)
accruals for possible assessments related to non-compliance with currency
transaction reporting requirements; and, (2) increased record retention costs
related to optically scanning a significant amount of back office documents and
storing the images on compact discs for later retrieval.
Operating income was $7.5 million for the three months ended June 30, 1999.
Operating income was $8.4 million for the three months ended June 30, 1998. In
addition to the changes described above, the decrease in operating income was
primarily due to operating income for the prior year period including a $2.8
million gain, net of reserves for disposition costs, recognized on the sale of
substantially all of the assets associated with Lady Luck Biloxi. The decrease
was also due to $0.4 million of preopening expense related to the opening of the
Country hotel and $0.3 million of additional related party license fees in the
current year period resulting from improved earnings.
Income applicable to common stockholders was $2.2 million or $0.46 per
share for the three months ended June 30, 1999 compared $2.5 million or $0.52
per share for the three months ended June 30, 1998. The decrease in income
applicable to common stockholders due to the items described above was partially
offset due a reduction in net interest expense due to capitalizing interest on
funds used during construction of the 314-room Country hotel at the Lady Luck
Casinos and Entertainment Resort.
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
- -----------------------------------------------------------------------------
For the six months ended June 30, 1999 as compared to 1998, consolidated
gross revenues decreased to $81.1 million from $85.7 million, respectively, a
decrease of $4.6 million or 5%.
Comparisons of the Company's consolidated gross revenues between periods
may not be meaningful as a result of the Company's sale of certain
underperforming assets. The Company has sold substantially all of the assets,
excluding gaming equipment and certain non-contiguous real property, associated
with its Lady Luck Biloxi casino effective June 11, 1998. The Company's gross
revenues from operations during the six months ended June 30, 1998 generated by
Lady Luck Biloxi was $11.0 million.
Gross revenues at the Lady Luck Casinos & Entertainment Resort increased
from $51.3 million to $55.9 million, an increase of $4.6 million or 9%, during
the six months ended June 30, 1998 and 1999, respectively. Despite the
disruption caused by hotel construction, the Lady Luck Casinos & Entertainment
Resort's gross revenues increased primarily due to a $4.2 million increase in
slot machine revenues and a $0.4 million increase in hotel revenues. These
increases in revenues were due to additional customers attracted by the opening
of the new 314-room hotel adjacent to the Country Casino on April 30, 1999 which
increased the daily supply of available rooms from 293 to 607. The Lady Luck
Casinos & Entertainment Resort increased the average number of slot machines in
operation from 1,328 to 1,514, an increase of 186 or 14% between comparative
periods to accommodate the additional customers.
19
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
Gross revenues at Lady Luck Natchez increased from $17.5 million to $19.3
million, an increase of $1.8 million or 10%, during the six months ended June
30, 1998 and 1999, respectively. Lady Luck Natchez's gross revenues increased
due to a $1.5 million increase in slot machine revenues and a $0.2 million
increase in food and beverage revenues. These increases were due to the
following:: (1) the addition of more bus line runs including group sales; (2)
additional advertising; (3) six months of operations and the addition of a lunch
menu during the current year period at a nearby off-site full-service restaurant
which opened during May 1998 that has attracted an increased number of new
visitors to the casino; (4) the remodeling of two additional floors of the River
Park Hotel between comparative periods which are believed to have attracted more
affluent customers; and, (5) the use of a check guarantee service during a
portion of the current year period which has enabled Lady Luck Natchez to cash a
larger volume of customer checks at the casino.
The Company's investment in the Bettendorf joint venture is accounted for
under the equity method and the Company's portion of income or loss from the
joint venture is included in gross revenues. In addition, the Company's gross
revenues include income from leasing a gaming vessel to the Bettendorf joint
venture and management fee income for managing the Bettendorf joint venture's
operations. The combined gross revenues recognized by the Company related to
these items increased from $5.3 million to $5.7 million during the six months
ended June 30, 1998 and 1999, respectively. The Bettendorf joint venture's gross
revenues increased from $43.1 million to $49.7 million, an increase of $6.6
million or 15%, during the six months ended June 30, 1998 and 1999,
respectively. These increases were primarily due to a $3.6 million increase in
slot machine revenues and the addition of $2.0 million in hotel revenues. These
increases in revenues were due to additional customers attracted by the opening
of the new 256-room hotel which opened in September 1998. The Bettendorf joint
venture increased the average number of slot machines in operation from 971 to
1,160, an increase of 189 or 19% between comparative periods to accommodate the
additional customers. These increases in revenues resulted in additional
management fees and net income for the Company despite increases in the
Bettendorf joint venture's operating expenses and interest expense related to
the expansion and increased customer levels.
Consolidated casino operating expenses as a percentage of consolidated
casino revenues decreased from 43% in the six months ended June 30, 1998 to 41%
in the six months ended June 30, 1999, primarily due to the following: (1) the
ceasing of operations in February 1998 of Lady Luck Central City and in June
1998 of Lady Luck Biloxi, which properties historically has operated at less
favorable margins than the Company's average margin; (2) reductions in the
relative cost of complimentary food and beverage furnished to casino customers;
and, (3) relative reductions in payroll and related costs at Lady Luck Natchez.
These decreases were offset partially by the following: (1) increases in payroll
and related costs at the Lady Luck Casino & Entertainment Resort in an effort to
improve the quality of service to customers; and (2) increased cash incentives
to slot machine customers in relation to slot revenues due to relatively more
customers using slot club cards while playing slot machines.
Food and beverage costs and expenses, prior to reclassifying the cost of
complimentaries, as a percentage of related revenues decreased from 90% for the
six months ended June 30, 1998 to 86% for the six months ended June 30, 1999.
This decrease was primarily due to the closing in February 1998 of Lady Luck
Central City and June 1998 of Lady Luck Biloxi, which properties historically
have operated at less favorable margins than the Company's other properties. The
effects of these reductions were partially offset by relative increases in labor
and food and beverage costs at Lady Luck Natchez and the Lady Luck Casinos &
Entertainment Resort.
Gross room revenues for the River Park Hotel increased approximately 9%
during the six months ended June 30, 1999 compared with the prior year six
months as a result of increasing its average daily room rate from $36 to $45, an
increase of $9 or 25%. The additional gross room revenues from the increase in
the average daily room rate was offset partially by a decrease in occupancy from
84% to 76% between comparative six month periods. The Lady Luck Casinos &
Entertainment Resort completed construction of its 314-room Country hotel which
opened April 30, 1999 and experienced an occupancy rate of 47% and an average
daily room rate of $42. During the six months ended June 30, 1999
20
<PAGE>
as compared with the prior year, gross room revenues of the Rhythm & Blues hotel
decreased by approximately 2%. Between comparative periods, the Rhythm & Blues
hotel's occupancy rate decreased from 89% to 80%, while average daily room rates
increased from $32 to $37 which increase was possible in part due to remodeling
during the three months ended March 31, 1999. During the six months ended June
30, 1999 as compared with the prior year, gross room revenues of the Riverbluff
hotel increased by approximately 9%. The Riverbluff hotel's occupancy rate
increased from 71% to 74% between comparative periods and average daily room
rates increased from $25 to $27. Increased offerings of hotel rooms at these
facilities to patrons on a complimentary basis positively affected occupancy
rates. The Lady Luck Bettendorf hotel, which opened during September 1998,
experienced an occupancy rate of 75% during the six months ended June 30, 1999
and achieved an average daily room rate of $55.
Selling, general and administrative expenses as a percentage of total gross
revenues decreased from 30% to 27% during the six months ended June 30, 1998 and
1999, respectively. The decrease was primarily due to the following: (1) the
absence of operations of the relatively underperforming Lady Luck Biloxi, which
historically operated at less favorable margins than the Company's average; (2)
an absence in the current year period of accruals made in the prior year period
related to an unfavorable employee medical claims experience; (3) recovery of
legal costs and reversal of accruals related to settlements of specific
litigation; and, (4) an absence in the current year period of repair costs
related to storm damage incurred in the prior year period. These decreases were
partially offset by the following: (1) increased administrative payroll and
related costs; (2) accruals for possible assessments related to non-compliance
with currency transaction reporting requirements; and, (3) increased record
retention costs related to optically scanning a significant amount of back
office documents and storing the images on compact discs for later retrieval.
Operating income was $16.2 million for the six months ended June 30, 1999.
Operating income was $16.3 million for the six months ended June 30, 1998.
Despite the positive changes described above, operating income decreased
primarily due to operating income for the prior year period including a $2.8
million gain, net of reserves for disposition costs, recognized on the sale of
substantially all of the assets associated with Lady Luck Biloxi. The decrease
was also due to $0.4 million of preopening expense related to the opening of the
Country hotel and $0.4 million of additional related party license fees in the
current year period resulting from improved earnings. These decreases were
partially offset by a $0.3 million net reduction in depreciation expense due to
the sales of Lady Luck Central City in February 1998 and Lady Luck Biloxi in
June 1998 offset partially by depreciation related to the Country hotel which
opened April 30, 1999.
Income applicable to common stockholders was $5.3 million or $1.09 per
share for the six months ended June 30, 1999 compared $4.6 million or $0.93 per
share for the six months ended June 30, 1998. In addition to the changes
described above, the increase in income applicable to common stockholders was
primarily due to the following: (1) a reduction in net interest expense
primarily resulting from the capitalization of $0.5 million interest on funds
used during construction of the 314-room Country hotel at the Lady Luck Casinos
and Entertainment Resort; and, (2) a $0.2 million increase in interest income
due to increases in cash and marketable securities received as a result of asset
sales and from operations. These positive factors were offset partially by a
$0.1 million increase from compounding on unpaid prior dividends on the
Company's Mandatory Cumulative Redeemable Preferred Stock.
21
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
Operating Casinos
- -----------------
Dollar amounts shown in the following tables for gross revenues, net
revenues, management fee and operating income are in millions. Operating margin
is calculated as operating income divided by net revenues.
Lady Luck Casinos and Entertainment Resort
------------------------------------------
% %
Three Months Increase Six Months Increase
Ended (Decrease) Ended (Decrease)
June 30, 1999 vs. June 30, 1999
----------------- ---------- ------------------ ----------
1999 1998 1998 1999 1998 1998
-------- -------- ---------- -------- -------- ----------
Gross revenues..... $ 28.5 $ 25.0 14 $ 55.9 $ 51.3 9
Net revenues....... 25.7 22.7 13 50.7 46.6 9
Management fee..... 1.0 0.7 43 1.9 1.6 19
Operating income... 4.0 4.9 (18) 9.8 11.1 (12)
Operating margin... 16% 22% (6) pts 19% 24% (5)pts.
Average daily net
win per table
game............. $ 643 $ 597 8 $ 624 $ 647 (4)
Average number of
tables in
operations........ 49 50 (2) 49 50 (2)
Average daily net
win per slot
machine.......... $ 160 $ 157 2 $ 155 $ 160 (3)
Average number of
of slot machines
in operation..... 1,475 1,321 12 1,514 1,328 14
Lady Luck Natchez
-----------------
% %
Three Months Increase Six Months Increase
Ended (Decrease) Ended (Decrease)
June 30, 1999 vs. June 30, 1999
----------------- ---------- ------------------ ----------
1999 1998 1998 1999 1998 1998
-------- -------- ---------- -------- -------- ----------
Gross revenues..... $ 9.5 $ 8.7 9 $ 19.3 $ 17.5 10
Net revenues....... 8.7 7.9 10 17.8 15.9 12
Management fee..... 0.3 0.2 50 0.7 0.5 40
Operating income... 1.2 1.0 20 2.6 2.2 18
Operating margin... 14% 13% 1 pt. 15% 14% 1 pt.
Average daily net
win per table
game............. $ 699 $ 662 6 $ 756 $ 734 3
Average number of
tables in
operations........ 16 16 - 16 16 -
Average daily net
win per slot
machine.......... $ 114 $ 111 3 $ 118 $ 111 6
Average number of
of slot machines
in operation..... 653 613 7 648 615 5
22
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
Lady Luck Bettendorf (a) (b)
--------------------
% %
Three Months Increase Six Months Increase
Ended (Decrease) Ended (Decrease)
June 30, 1999 vs. June 30, 1999
----------------- ---------- ------------------ ----------
1999 1998 1998 1999 1998 1998
-------- -------- ---------- -------- -------- ----------
Gross revenues..... $ 26.1 $ 22.8 14 $ 49.7 $ 43.1 15
Net revenues....... 24.6 21.6 14 46.8 40.7 15
Management fee..... 0.7 0.6 17 1.3 1.1 18
Operating income... 4.2 3.2 31 7.3 6.1 20
Operating margin... 17% 15% 2 pts. 16% 15% 1 pt.
Average daily net
win per table
game............. $ 745 $ 770 (3) $ 715 $ 772 (7)
Average number of
tables in
operations........ 42 37 14 43 37 16
Average daily net
win per slot
machine.......... $ 186 $ 200 (7) $ 178 $ 192 (7)
Average number of
of slot machines
in operation..... 1,163 991 17 1,160 971 19
- ---------------------------
(a) Lady Luck Bettendorf is 50% owned by LLQC. The Company includes 50%
of its net income as equity in net income of affiliates using the
equity method of accounting.
(b) The Illinois governor approved dockside gaming in that state
effective June 1999 lifting the cruising requirement. The long-term
effects of this change, if any, on competition from an Illinois
riverboat in close proximity to Lady Luck Bettendorf is not presently
known.
23
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
During the six months ended June 30, 1999, the Company generated $6.0
million in cash from operations. The primary sources during the six months ended
June 30, 1999 of cash and non-cash resources were: (1) cash flow from
operations; (2) cash on hand at the beginning of the year; (3) $6.2 million from
the sale of marketable securities; (4) $1.5 million distribution of earnings
from the Bettendorf Joint Venture; and (5) the purchase of slot machines on
contracts with their manufacturers to be repaid over time. The primary uses of
cash and non-cash resources during the six months ended June 30, 1999, other
than operating expenditures, include:
A. $14.6 million for net property and equipment primarily related to the
Lady Luck Casinos and Entertainment Resort as follows:
- $10.8 million for continuation of construction of a 314-room hotel
- $2.9 million for continuing production and installation of new
generator systems
- $0.4 million for continuation of remodeling of the Rhythm & Blues
Hotel
B. $0.4 million for the re-payment of debt and slot contracts.
C. $0.4 million for the acquisition of slot machines and other assets by
certain subsidiaries for the incurrence of indebtedness.
D. $1.2 million for accrual of preferred stock dividends.
Lady Luck Central City is expected to require cash infusions of $0.1
million during the remainder of 1999, the expense portion of which was fully
accrued as of December 31, 1997 for payments on the remaining parking lot
leases, including the purchase of the two remaining lots as required by the
contracts. The sellers will finance a portion of the purchases. Lady Luck
Central City will require additional cash infusions related to these parking
lots in periods beyond 1999.
During the remainder of 1999, Lady Luck Biloxi is expected to require cash
infusions of up to $0.2 million, the expense portion of which was fully accrued
as of December 31, 1998, for payments on a lease and other specific liabilities.
The lease cost is $0.2 million annually through May 2008, unless an earlier
assignment to Grand Casinos of Mississippi, Inc., pursuant to an asset sale
agreement, can be executed or an early buy-out can be negotiated with the
lessor. A reserve was established as of December 31, 1998 for the discounted
future expected expense related to this lease. Lady Luck Biloxi may require
additional cash infusions related to this lease in periods beyond 1999 for lease
payments if the lease is not assigned or bought out and for the settlement of
specific other remaining obligations of Lady Luck Biloxi.
Pursuant to a development agreement with the City of Bettendorf, the
Bettendorf Joint Venture is developing a marina with seasonal transient docking
facilities. The development agreement requires that in the event that the
construction of the marina is not completed before April 1, 1999, unless
completion is restricted beyond the control of the Bettendorf Joint Venture, the
Bettendorf Joint Venture must pay the City $100,000 per month until the project
has been completed. The Bettendorf Joint Venture is currently pursuing the
necessary licenses for development of the marina. As approvals for the licenses
are pending environmental evaluations and flood plain analyses, the continued
development of the marina is beyond the control of the Bettendorf Joint Venture,
thus no liquidated damages are being assessed. As of June 30,1999, the
Bettendorf Joint Venture had incurred approximately $72,000 of costs related to
the marina and anticipates that, if constructed, the marina will cost an
additional amount not in excess of $2,000,000, of which the Bettendorf Joint
Venture is responsible for approximately $1,000,000.
24
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
In addition, the Bettendorf Joint Venture is demolishing the Plaza
building at 1823 State Street and preparing the site for donation back to the
City. This cost of this process is $225,000 and will be completed during 1999.
The Bettendorf Joint Venture is developing plans to build-out and operate
an upscale restaurant in the Lady Luck Center adjacent to its hotel.
Construction is currently anticipated to begin during 1999 with costs estimated
not to exceed $1.1 million. The Bettendorf Joint Venture plans to fund the cost
of this project from its cash on hand and from its operations.
During August 1998, MLI entered into an agreement for and began the
construction of a new 314-room hotel adjacent to its Country Casino. The hotel
opened April 30, 1999. The Company has funded the construction primarily with
the proceeds from the sale of substantially all of LLB's operating assets. The
completed project had total costs of approximately $16.7 million.
During March 1999, MLI entered into an agreement for the production of
five new generators for the Lady Luck Casinos and Entertainment Resort. The cost
of production and installation of the generators is approximately $4.2 million,
$2.9 million of which had been paid as of June 30, 1999. The generators
commenced power production during July 1999 and the balance of the project will
be paid from cash on hand and from operations during the three months ending
September 30, 1999.
The Company and Sodak Gaming, Inc. ("Sodak") have signed a definitive
agreement for the Company to purchase a subsidiary of Sodak which owns or will
own the Miss Marquette riverboat casino and associated real property and assets
from Sodak. The agreement includes a purchase price of $41.7 million. Completion
of the sale is conditioned upon regulatory approvals, financing (see below),
satisfaction of other conditions to the pending merger between Sodak and
International Game Technology, and other conditions. The Miss Marquette
riverboat gaming and entertainment complex includes a 914-position riverboat
casino, including 698 slot machines, with approximately 18,747 square feet of
gaming space; a 590-space parking lot; a land-based restaurant/buffet; a live
entertainment showroom; a 24-room hotel; a full service marina with 32-slip
spaces, and off-site facilities including administrative space and laundry
facilities.
No further significant expenditures for projects under development are
committed to be made by the Company from existing cash or cash flow from
operations. Various amounts of cash and non-cash resources may be used during
1999 for other capital improvements, expansions or acquisitions that cannot
currently be estimated and may be contingent on market conditions and other
factors. If significant cash or other resources become available, the Company
may make additional capital expenditures. In any case, the amount of capital
expenditures will be based on cash available and market conditions at the time
any commitment is made.
The Company may also repurchase all or a portion of the 2001 Notes in
early satisfaction of any required repurchase expected under the Indenture
governing the 2001 Notes or otherwise, the amount of which and the timing of
repurchase cannot currently be estimated and are dependent on adequate cash
availability and market conditions. The Company continues to explore various
options to refinance the 2001 Notes and intends to seek financing to fund its
purchase of the Miss Marquette riverboat casino and associated assets as
described above. However, there is no guarantee that terms acceptable to the
Company can be negotiated. The Company anticipates that it will not repurchase
any portion of the 2001 Notes in 1999 other than in connection with a
refinancing.
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, 1999,
approximately $6.0 million ($3.0 million net of reserves and accruals) 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. During
1998, the contractor filed for bankruptcy. The filing listed $1.5 million as an
accrued construction receivable and did not list the partially completed vessel
as an asset. The Company has relocated the vessel from the shipyard at a cost of
approximately $200,000.
25
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
The Company is involved in specific lawsuits which if adversely decided
could have a material adverse effect upon the Company's financial position and
results of operations (see Note 7 to the condensed consolidated financial
statements included as Item 1, Part I).
The Company is subject to certain federal, state and local environmental
protection, health and safety laws, regulations and ordinances that apply to
businesses generally, including the Clean Air Act, the Clean Water Act, the
Resource Conservation and Recovery Act, the Comprehensive Environmental
Response, Compensation and Liability Act, the Oil Pollution Act, the
Occupational Safety and Health Act, and similar state statutes (see Note 8 to
the condensed consolidated financial statements included as Item 1, Part I).
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 4,881,003 and to increase the par
value of these shares from $0.001 to $0.006 per share. Instead of fractional
shares resulting from the Reverse Split, stockholders received 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.
On June 21, 1999, the Company was informed by the Nasdaq National Market
that it had determined the Company was no longer eligible for listing because
the Company's Common Stock failed to maintain market value of public float and
bid price, composed of total shares outstanding reduced by those held by
directors and officers, as defined, greater than or equal to $15.0 million, and
a bid price of at least $5.00, respectively, in accordance with Nasdaq
Marketplace Rules 4450(b)(3) and 4450(b)(4). The Company since has been accepted
for listing on the Nasdaq Smallcap Market.
The Company is highly leveraged. As of June 30, 1999, the Company's total
long-term indebtedness was approximately $176.7 million and its stockholders'
deficit was approximately $18.9 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 entrance 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.
Andrew H. Tompkins, Chairman and Chief Executive Officer of the Company,
beneficially owns approximately 46% of the Company's outstanding Common Stock.
As a result of his ownership and control, Mr. Tompkins has the ability to
significantly influence the Company's affairs, including electing all of its
directors and (except as otherwise provided by law) approving or disapproving
other matters submitted to a vote of the Company's stockholders, including a
merger, consolidation or sale of assets.
Mr. Tompkins also owns a casino-hotel in Las Vegas, Nevada and the Lady
Luck trademark and a customer list, which the Company licenses from him. The Las
Vegas casino-hotel has incurred substantial indebtedness and is in default on
that debt as of June 30, 1999. Mr. Tompkins is personally liable for the debt
and has pledged certain of his assets, including the Lady Luck trademark and
customer list, as collateral for the benefit of the holders of that
indebtedness. As a result of the current default, these lenders are entitled to
the benefit of this collateral and could
26
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
foreclose on the pledge and seize the Lady Luck trademark and customer list and
sell them to a third party. In addition, Mr. Tompkins may be required to sell
his Common Stock in the Company, the trademark and the customer list to satisfy
the debt.
Pursuant to the Indenture, a sale of Mr. Tompkins' Common Stock resulting
in another person beneficially owning more than 35% of the Company's outstanding
common stock would trigger a Change in Control event, which would in turn permit
any holder of the Company's outstanding 2001 Notes to require the Company to
repurchase all or any part of such holder's 2001 Notes at a cash price equal to
101% of the principal amount thereof, plus accrued and unpaid interest. As of
July 29, 1999, the closing market price of the 2001 Notes, as reported by
Donaldson, Lufkin and Jenrette, was 101.75%. In addition, a sale of Mr.
Tompkins' Common Stock resulting in another person beneficially owning more than
30% of the Company's outstanding Common Stock or a change in the persons
constituting a majority of the board of directors over a two-year period (unless
new directors are elected or nominated by two-thirds of the directors who were
directors at the beginning of the period) would trigger the change in control
provisions in the LLGC agreements with Alain Uboldi, LLGC's President, Chief
Operating Officer and Director, and Rory J. Reid, LLGC's Senior Vice President,
General Counsel, Secretary and Director (see Note 6 to the Condensed
Consolidated Financial Statements included in Part I., Item 1.)
Year 2000
- ---------
The Company's computer systems may not be Year 2000 compliant. The Year
2000 issue is the result of computer programs being written using two digits
rather than four to define the applicable year, which may result in systems
failures and disruptions to operations on or after January 1, 2000. In order to
address this issue, the Company has retained an outside consultant to help it to
assess the computer systems used in the Company's business that are not Year
2000 compliant, and prepare and implement its Year 2000 computer compliance
program.
The Company has divided the systems located at each of its properties and
corporate offices into two categories: (1) systems that would have a significant
effect on operations or financial statements (the "mission critical systems"),
such as slot systems and lodging and gaming systems, and (2) low priority
systems (for example, individual personal computers or workstations). Each
category included both IT Systems (for example, network software and hardware
systems) and Non-IT Systems (for example, devices that are potentially date
sensitive due to their dependency on a built in computer chip or proprietary
software developed by a third party). The Company has to-date relied exclusively
on representations of the suppliers of its systems to determine whether a system
is Year 2000 compliant. As of June 30, 1999, the Company has determined that the
total costs related to the repair and replacement of the mission critical
systems that it has evaluated that are not yet Year 2000 compliant would not
have a material adverse effect on the Company. In making this determination, the
Company has relied on written representations from the Company's computer system
suppliers that those suppliers will provide the Company with applicable software
upgrades in a timely manner. As of June 30, 1999, the Company has not expended
significant funds on Year 2000 compliance and expects expenditures not in excess
of $500,000 will be necessary to complete remediation. The Company expects to
fund these costs through cash on hand and operating cash flows. If those
suppliers fail to provide upgrades in a timely manner or the upgrades are not
functional, this failure or non-functionality may have a material adverse effect
on the Company, including the loss of the authority to operate electronic gaming
devices in one or more jurisdictions if the electronic monitoring systems were
to become non-functional and waivers were not granted by the licensing
authorities. The Company has so far evaluated approximately 80% of the Company's
unique systems and if any remaining systems that have not been evaluated are not
Year 2000 compliant and cannot be Year 2000 compliant in a cost efficient or
timely manner, these costs or non-compliance may have a material adverse effect
on the Company. The Company intends to conduct testing of the date dependent
functions of specific systems beginning in August 1999. The Company also intends
to develop an internal contingency plan for disaster recovery and processing by
November 1999.
27
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
In addition, the Company estimates that the costs related to the repair
and replacement of the low priority systems that are not yet Year 2000 complaint
and any costs related to not using those systems until they are Year 2000
compliant will not have a material adverse effect on the Company.
Impact of Inflation
- -------------------
Absent changes in competitive and economic conditions or in specific
prices affecting the industry, management does not expect that inflation will
have a significant impact on the Company's operations. Changes in specific
prices (such as fuel and transportation prices) relative to the general rate of
inflation may materially affect the hotel-casino industry. There has been no
material impact from inflation during the periods covered by the accompanying
financial statements.
Seasonality and Weather
- -----------------------
A flood or other severe weather condition could cause the Company to lose
the use of one or more dockside facilities for an extended period. The inability
to use a dockside facility during any period could have a material adverse
effect on the Company's financial results. Seasonal revenue fluctuations may
occur at the Company's existing casinos in Mississippi and Iowa with winter
months typically yielding lower revenue due to adverse weather conditions.
<PAGE>
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not Applicable.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
(a) None.
(b) None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Stockholders was held on
April 27, 1999.
(b) Not applicable.
(c) Election of Directors
At the Annual Meeting of Stockholders held on April 27,
1999, Andrew H. Tompkins and Norman Little were nominated
as Class III directors to serve immediately (subject to
approval of all governing gaming authorities with respect
to Norman Little as a new director nominee) with a term
expiring at the 2002 annual meeting or until their
successors are duly elected and qualified. The voting on
such matters was as follows:
For Withhold Abstain
--------- -------- ---------
Andrew H. Tompkins 2,671,827 518 None
Norman Little 2,663,490 8,855 None
(d) Not applicable.
Item 5. OTHER INFORMATION
None
29
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description of Exhibits
------ ------------------------
27 Financial Data Schedule
(b) Reports on Form 8-K.
Form 8-K dated August 9, 1999 relating to Item 2.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATE: August 13, 1999 Lady Luck Gaming Corporation
----------------------------
Registrant
/s/ James D. Bowen
Its: Vice President Finance and
Principal Accounting Officer
and duly authorized officer
30
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(This schedule contians summary financial information extracted from the
Consolidated Statements of Operations for the year ended December 31, 1998 and
is qualified in its entirety by reference to such financial statements)
</LEGEND>
<CIK> 0000906527
<NAME> Lady Luck Gaming Corporation
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 24,969
<SECURITIES> 13,047
<RECEIVABLES> 1,428
<ALLOWANCES> 433
<INVENTORY> 832
<CURRENT-ASSETS> 41,766
<PP&E> 165,697
<DEPRECIATION> 34,031
<TOTAL-ASSETS> 194,852
<CURRENT-LIABILITIES> 15,239
<BONDS> 176,701
21,815
0
<COMMON> 29
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<TOTAL-LIABILITY-AND-EQUITY> 194,852
<SALES> 74,335
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<INCOME-PRETAX> 6,572
<INCOME-TAX> 60
<INCOME-CONTINUING> 6,512
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,512
<EPS-BASIC> 1.09
<EPS-DILUTED> 1.09
</TABLE>
