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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
- - -------------------------------------------------------------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 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
- - -------------------------------------------------------------------------------
(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
- - -------------------------------------------------------------------------------
(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 November 5, 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
September 30, December 31,
1999 1998
------------- -------------
Current assets:
Cash and cash equivalents...................... $ 22,201 $ 28,834
Marketable securities.......................... 18,092 19,219
Accounts receivable, net....................... 736 862
Inventories.................................... 499 946
Prepaid expenses............................... 1,744 1,333
------------- -------------
Total current assets.......................... 43,272 51,194
------------- -------------
Property and equipment, net of accumulated
depreciation and amortization of $36,514 and
$31,352 as of September 30, 1999 and December
31, 1998, respectively........................ 131,874 120,904
Other assets:
Deferred financing fees and costs, net of
accumulated amortization of $4,861 and
$4,212 as of September 30, 1999 and December 1,226 1,875
31, 1998, respectively.......................
Investment in unconsolidated affiliate, net.... 17,204 14,412
Other.......................................... 4,601 3,300
------------- -------------
23,031 19,587
------------- -------------
TOTAL ASSETS..................................... $ 198,177 $ 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
September 30, December 31,
1999 1998
------------- -------------
Current liabilities:
Current portion of long-term debt............. $ 1,052 $ 595
Accrued interest.............................. 1,859 1,834
Accounts payable.............................. 2,697 1,915
Construction payables......................... 1,952 3,951
Accrued property taxes........................ 985 1,300
Other accrued liabilities..................... 8,514 9,106
------------- -------------
Total current liabilities................... 17,059 18,701
------------- -------------
Long-term debt:
Mortgage notes payable........................ 173,500 173,500
Other long-term debt.......................... 3,114 3,084
------------- -------------
Total long-term debt........................ 176,614 176,584
------------- -------------
Total liabilities......................... 193,673 195,285
------------- -------------
Commitments and contingencies (Notes 5 through 11)
Series A mandatory cumulative redeemable
preferred stock, $51.75 and $47.53, as
of September 30, 1999 and December 31, 1998,
respectively per share liquidation value,
1,800,000 shares authorized, 433,638 shares
issued and outstanding........................ 22,442 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........................... (49,349) (55,622)
------------- -------------
Total stockholders' deficit................. (17,938) (24,211)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT..... $ 198,177 $ 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 Nine Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Casino............................... $ 33,286 $ 28,907 $ 97,818 $ 97,509
Food and beverage.................... 4,133 3,368 11,553 12,298
Hotel................................ 1,693 1,109 4,281 3,204
Equity in net income of
unconsolidated affiliate........... 1,952 787 5,242 3,884
Management fees from
unconsolidated affiliate........... 737 584 2,054 1,673
Other................................ 1,037 960 2,949 2,865
--------- --------- --------- ---------
Gross revenues.................... 42,838 35,715 123,897 121,433
Less: Promotional allowances.... (3,936) (2,812) (10,660) (10,318)
--------- --------- --------- ---------
Net revenues...................... 38,902 32,903 113,237 111,115
--------- --------- --------- ---------
Costs and expenses:
Casino............................... 14,257 11,613 40,873 40,857
Food and beverage.................... 1,260 1,115 3,467 3,974
Hotel................................ 502 245 1,333 1,210
Other................................ 23 20 51 120
Selling, general and administrative.. 12,687 9,915 34,371 35,260
Related party license fees........... 921 839 2,944 2,453
Gain on sale of assets............... - - - (2,848)
Depreciation and amortization....... 2,487 2,156 6,760 6,760
Pre-opening expenses................. - - 437 -
--------- --------- --------- ---------
Total costs and expenses.......... 32,137 25,903 90,236 87,786
--------- --------- --------- ---------
Operating income........................ 6,765 7,000 23,001 23,329
Other income (expense):
Interest income...................... 360 584 1,295 1,341
Interest expense..................... (5,504) (5,481) (15,935) (16,570)
Other................................ 1 - (167) (342)
--------- --------- --------- ---------
Total other income (expense)...... (5,143) (4,897) (14,807) (15,571)
--------- --------- --------- ---------
Income before income tax provision...... 1,622 2,103 8,194 7,758
Income tax provision.................... 30 15 90 45
--------- --------- --------- ---------
NET INCOME.............................. 1,592 2,088 8,104 7,713
Preferred stock dividends............... 627 561 1,831 1,634
--------- --------- --------- ---------
Income applicable to common
stockholders......................... $ 965 $ 1,527 $ 6,273 $ 6,079
========= ========= ========= =========
BASIC AND DILUTED NET INCOME PER SHARE
Applicable to common stockholders.... $ 0.20 $ 0.31 $ 1.29 $ 1.25
========= ========= ========= =========
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)
Nine months Ended
September 30,
-------------------------
1999 1998
----------- -----------
Cash flows from operating activities:
Net income..................................... $ 8,104 $ 7,713
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization............... 6,760 6,760
Amortization of bond offering fees and costs 649 649
Gain on sale of assets...................... - (2,848)
Earnings in excess of distributions -
unconsolidated affiliate.................. (2,792) (3,884)
(Increase) decrease in assets:
Accounts receivable......................... 126 (285)
Inventories................................. 447 (57)
Prepaid expenses............................ (411) 1,112
Increase (decrease) in liabilities:
Accounts payable............................ 782 (2,169)
Other accrued liabilities................... (882) (1,272)
----------- -----------
Net cash provided by (used in) operating
activities..................................... 12,783 5,719
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment............. (16,611) (4,583)
Proceeds of sale of operating assets........... - 15,127
Construction payables.......................... (1,999) (5)
Restricted cash................................ - 158
Sale or (purchases) of marketable securities... 1,127 (15,455)
Other.......................................... (1,301) (658)
----------- -----------
Net cash provided by (used in) investing
activities..................................... (18,784) (5,416)
----------- -----------
Cash flows from financing activities:
Payments on debt and slot contracts............ (632) (1,664)
----------- -----------
Net cash provided by (used in) financing
activities..................................... (632) (1,664)
----------- -----------
Net increase (decrease) in cash and cash
equivalents.................................... (6,633) (1,361)
Cash and cash equivalents, beginning of period.... 28,834 19,552
----------- -----------
Cash and cash equivalents, end of period.......... $ 22,201 $ 18,191
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during period for interest
(net of amount capitalized of $490 in
the nine months ended September 30, 1999)....... $ 15,261 $ 15,939
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated statements.
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 $1,831,000 and $1,634,000 in unpaid
accrued dividends for the nine month periods ended September 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
$1,119,000 and $689,000 for the nine month periods ended September 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 statements.
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 nine
month periods ended September 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 three and nine month periods ended September 30, 1998
in order to classify amounts in a manner consistent with the three and nine
month periods ended September 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"), Lady Luck Gulfport, Inc. ("LLG") and Lady Luck Tunica,
Inc. ("LLT"), each a Mississippi corporation (collectively the "Mississippi
Companies"); Lady Luck Central City, Inc. ("LLCC"), a Delaware corporation,
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, LC ("BRDC") which is and has been accounted
for under the equity method (the "Bettendorf Joint Venture"). 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, formed a joint venture with BRDC, Lady Luck
Bettendorf, LC, 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.
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2. Certain Risks and Uncertainties
The Company's operations in Mississippi and Iowa are dependent upon its
continued ability to be licensed by the respective gaming authorities. Such
licenses 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 MLI's casino operations. These casino operations 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 stockholders 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 and per share amounts 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 that 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 per share, 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 the Bettendorf Joint Venture with BRDC is
accounted for under the equity method and the Company's portion of income or
loss from the Bettendorf Joint Venture is included in Equity in Net Income of
Unconsolidated Affiliate in the accompanying Condensed Consolidated Statements
of Operations for the three and nine month periods ended September 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 September 30, 1999 of $18,927,000 to the Bettendorf Joint
Venture for approximately $189,000 per month, which amount was determined based
on arms-length
8
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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's rental income relating
to the gaming vessel lease was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
$ 567 $ 567 $ 1,700 $ 1,700
========= ========= ========= =========
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 in 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 for its work
as consultants.
Summarized balance sheet information for the Bettendorf Joint Venture as
of September 30, 1999 and December 31, 1998 is as follows (in thousands):
September 30, December 31,
1999 1998
------------- ------------
Current assets........................... $ 10,042 $ 6,870
Property and equipment, net.............. 52,946 52,727
Other.................................... 738 750
------------- ------------
Total assets........................... $ 63,726 $ 60,347
============= ============
Current liabilities...................... $ 5,983 $ 8,154
Long-term liabilities.................... 23,335 23,370
Members' equity.......................... 34,408 28,823
------------- ------------
Total liabilities and members' equity.. $ 63,726 $ 60,347
============= ============
Summarized results of operations for the Bettendorf Joint Venture for the
three and nine month periods ended September 30, 1999 and 1998 are as follows
(in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Net revenues..................... $ 25,203 $ 21,446 $ 72,042 $ 62,168
Costs and expenses............... 21,299 19,873 61,557 54,401
--------- --------- --------- ---------
Net income.................... $ 3,904 $ 1,573 $ 10,485 $ 7,767
========= ========= ========= =========
9
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A summary of changes in the Company's investment in the Bettendorf Joint
Venture for each of the nine month periods ended September 30, 1999 and 1998 are
as follows (in thousands):
1999 1998
----------- -----------
Investment, beginning of period............. $ 14,412 $ 9,313
Equity in net income of unconsolidated
affiliate................................. 5,242 3,884
Distributions to the Company................ 2,450 -
----------- -----------
Investment, end of period................... $ 17,204 $ 13,197
=========== ===========
Included in the Company's Accumulated Deficit at September 30, 1999 is
$14,204,000 of undistributed earnings related to the Bettendorf Joint Venture.
5. Long-term Debt
At September 30, 1999 and December 31, 1998, long-term debt consisted of
the following (in thousands):
September 30, December 31,
1999 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 the Company......... $ 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................... 339 344
Notes payable to a bank;
monthly payments of principal
and interest at 8%; due
November 2008; collateralized
by deeds of trust................. 433 198
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.......... 880 494
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............................. 2,510 2,623
Other............................... 4 20
----------- -----------
177,666 177,179
Less: current portion............... (1,052) (595)
----------- -----------
Total long-term debt.............. $ 176,614 $ 176,584
=========== ===========
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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,
and (d) to engage in other lines of business, and 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 September 30, 1999.
Andrew H. Tompkins, Chairman and Chief Executive Officer of the Company,
("Tompkins") 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 September 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 the trademark and the customer
list to satisfy the debt. Pursuant to a Forbearance Agreement dated April 29,
1999 and supplemented on September 24, 1999, the Banks that are parties to this
Forbearance Agreement have agreed to modify the requirement for scheduled
principal installments and to require limited principal reductions between now
and until June 30, 2000 due to the Banks during the period commencing on January
26, 1999 and ending on June 30, 2000 subject to satisfaction of certain
conditions. In addition, upon the consummation of the purchase of the Lady Luck
trademark and customer list as well as the purchase of the Lady Luck
casino-hotel by the Company as provided for in the Purchase Agreement effective
as of August 19, 1999 by and among Gemini, Inc., International Marco Polo
Services, Inc., Andrew H. Tompkins and the Company, the Banks have agreed, on
the condition that such consummation has occurred prior to June 30, 2000, to
discount the unpaid principal balance due to the Banks by $1,000,000 pursuant to
the terms and conditions of the Purchase Agreement.
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 a
requirement of Isle of Capri Casinos, Inc., ("Isle of Capri") a Delaware
corporation, entering into a Merger Agreement with the Company, Mr. Tompkins
provided Isle of Capri with a purchase option with respect to his shares and
agreed to deposit such shares in escrow for the benefit of Isle of Capri (see
Note 9 - Subsequent Event:
Merger Agreement with Isle of Capri Casinos, Inc.).
6. Employment Agreements
On October 24, 1994, LLGC entered Letter Agreements with Alain J. Uboldi,
LLGC's President, Chief Operating Officer and Director, and Rory J. Reid, LLGC's
Senior Vice-President, General Counsel, Secretary and Director (the "Letter
Agreements"). The Letter Agreements were for an initial term of three years, and
on each October 24, beginning October 24, 1997, the Letter Agreements are
automatically extended for an additional year, unless terminated by the Company
on or before July 24 of that year. The Letter Agreements provide that in the
event of a change of control, as defined in the Letter 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
11
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exercisable) and the current price of LLGC's common stock. Further, in
connection with the Letter 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 Letter
Agreements (see Note 9 - Subsequent Event: Merger with Isle of Capri Casinos,
Inc.).
7. Litigation
Shareholder Class Action Lawsuits
---------------------------------
The Company has been named as a defendant in a purported stockholder 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 Tompkins, Alain Uboldi and
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 $6.7 million as of November 7, 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.
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
12
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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.
Refer to Form 10-Q's filed for the quarterly periods ended March 31, 1999
and June 30, 1999 and to Form 10-K filed for the year ended December 31, 1998
for previously reported legal matters.
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, the continued development of the marina is beyond the control of
the Bettendorf Joint Venture, thus no liquidated damages are being assessed. As
of September 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 approximately $1,600,000.
In addition, the Bettendorf Joint Venture completed demolition of the
Plaza building at 1823 State Street and prepared the site for donation back to
the City. This cost of this process was $225,000 during the nine month period
ended September 30, 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 September 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 during the nine month period ended September 30, 1999.
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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 construction of
five new generators for the Lady Luck Casinos and Entertainment Resort. The cost
of construction and installation of the generators was approximately $4.2
million which has been paid. 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 September 30, 1999, the Company has invested approximately $8.9
million ($273,000 of which was invested during the nine months ended September
30, 1999) in the Missouri Project, including the Service Marine 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 to be considered for
approval 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 gaming
facilities, causing concerns of potential competitive saturation; and (ii)
regulatory factors, including loss limits, which have generally caused gaming
operations to underperform relative to facilities in neighboring jurisdictions
without such restrictions.
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The Vicksburg Project
---------------------
The development as planned will include a riverboat casino, an approximate
200-room hotel, an 800-car parking garage, and additional amenities (the
"Vicksburg Projet"). 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 September 30, 1999 the
Company has invested approximately $14.8 million ($118,000 of which was invested
during the nine month periods ended September 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 casino
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 expected to be ruled upon by mid-year 2000, 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>
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. Such action 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 September 30, 1999, the Company's
total long-term indebtedness was approximately $176.6 million and its
stockholders' deficit was approximately $17.9 million. This level of
indebtedness could have material adverse 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: Merger Agreement with Isle of Capri Casinos, Inc.
On Oct. 5, 1999, the Company and Isle of Capri signed a definitive
agreement whereby Isle of Capri will acquire 100 percent of the Company in a
merger transaction (the "Merger"). Under the terms of the agreement, the
Company's common stockholders will receive cash in the amount of $12 per share
for an aggregate share consideration of approximately $59 million and Isle of
Capri will assume all of Lady Luck's outstanding long-term debt in the amount of
approximately $176.6 million. The agreement also provides for the redemption of
the Company's outstanding preferred stock in the amount of approximately $22
million. Closing is expected in the first half of 2000 pending the approval of
at least 75% of the Company's stockholders and gaming regulators in all
applicable jurisdictions and other contingencies. Pursuant to a Stockholder
Support Agreement entered into by Tompkins, the owner of approximately 46% of
the Company's Common Stock, and Isle of Capri, Tompkins will sell to Isle of
Capri shares of the Company's Common Stock equal to 34.99% of the issued and
outstanding shares of the Company's Common Stock and, under certain
circumstances, Tompkins will sell the balance of the shares of the Company's
Common Stock owned by him to Isle of Capri. In addition, Tompkins has agreed to
vote his shares in favor of approval of the Merger and has placed his shares in
an escrow for the benefit of Isle of Capri.
16
<PAGE>
10. Subsequent Event: Acquisition of Gamblers Supply Management Company
On October 29, 1999, the Company completed the purchase of all of the
outstanding capital stock of Gamblers Supply Management Company ("GSMC"), a
South Dakota corporation and a wholly-owned subsidiary of Sodak Gaming, Inc.
("Sodak"), a South Dakota corporation, from Sodak pursuant to a Stock Purchase
Agreement dated as of July 30, 1999 (the "GSMC Agreement"). GSMC owns the Miss
Marquette riverboat casino located in Marquette, Iowa and the associated real
property and assets. The purchase price was approximately $41.7 million and the
assumption of certain liabilities. Pursuant to the GSMC Agreement, Working
Capital should have been negative $2,689,119. Following the closing, the final
purchase price will be adjusted for any difference between that amount and the
actual amount of Working Capital at the time of the closing. In connection with
the Miss Marquette Purchase, Isle of Capri Casinos, Inc. provided a purchase
money loan of $16.3 million to GSMC which was used to pay a portion of the
purchase price to Sodak. Isle of Capri has taken a lien on substantially all of
the assets of the Miss Marquette riverboat gaming facility, excluding the gaming
licenses.
The riverboat gaming and entertainment complex includes a 914-position
riverboat casino, including 698 slot machines, with approximately 18,747 square
feet of gaming space; 590-space parking lot; land-based restaurant/buffet; live
entertainment showroom; 24-room hotel; full service marina with 32 slip spaces;
and off-site facilities including administrative office space and laundry
facilities.
11. Subsequent Event: Acquisition Agreement with Gemini, Inc. and IMPS
The Company has entered into an agreement, effective as of August 19, 1999,
to purchase 100 percent of the stock of Gemini, Inc., a Nevada corporation, and
100 percent of the stock of International Marco Polo Services, Inc., ("IMPS") a
Nevada corporation (the "Gemini Agreement"). The Gemini Agreement also provides
for the purchase of the Lady Luck Hotel & Casino in Las Vegas and associated
real property and assets from Tompkins and his affiliated companies, as well as
the purchase of the rights to use the Lady Luck trademark currently owned by one
of Tompkins' affiliated companies, and will permit the Company, upon closing of
the transactions, to cease paying the trademark licensing fees it currently pays
to Gemini. The Board of Directors of the Company (the "Board") appointed a
Special Committee of three independent, outside directors to negotiate the
transaction on behalf of the Company. The Special Committee, which hired its own
independent financial and legal advisors to assist it during the negotiations,
unanimously recommended that the Company's Board approve the agreement. The
total purchase price is $45.5 million. In the opinion of the Special Committee's
independent financial advisor, the agreement is fair, from a financial point of
view, to the stockholders of the Company other than Tompkins. In connection with
entering into the Merger Agreement with Isle of Capri (see Note 9 - Subsequent
Event: Merger Agreement with Isle of Capri Casinos, Inc.) the Gemini Agreement
was amended to provide, subject to the consummation of the Merger, that the sale
of the trademark assets may be consummated at the same time as the Merger
without consummating the acquisition of the Las Vegas Hotel, if the approval of
the Nevada Gaming Commission to the acquisition of the Las Vegas Hotel has not
been received at the time of the consummation of the Merger. However, if the
approval of the Nevada Gaming Commission is received prior to the consummation
of the Merger, both the acquisition of the trademark assets and the acquisition
of the Las Vegas Hotel & Casino may be consummated at the same time as the
Merger.
The Las Vegas Hotel & Casino includes more than 30,000 square feet of
gaming space, more than 800 slot and video poker machines and 30 table games,
792 hotel guestrooms, four restaurants, a cocktail lounge and a showroom, and a
multi-level parking garage.
17
<PAGE>
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"); the
ability of the Company to refinance the 2001 Notes on a reasonable basis; future
acquisitions, mergers 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 (Certain of these factors are discussed
throughout Part I - Financial Information).
Results of Operations
=====================
Three Months Ended September 30, 1999 Compared to the Three Months Ended
September 30, 1998
For the three months ended September 30, 1999 as compared to 1998,
consolidated gross revenues increased to $42.8 million from $35.7 million,
respectively, an increase of $7.1 million or 20%.
Gross revenues at the Lady Luck Casinos & Entertainment Resort increased
from $25.2 million to $30.1 million, an increase of $4.9 million or 19%, during
the three months ended September 30, 1998 and 1999, respectively. The Lady Luck
Casinos & Entertainment Resort's gross revenues increased primarily due to a
$3.4 million increase in slot machine revenues, a $0.6 million increase in hotel
revenues and a $0.6 million increase in food and beverage revenues. These
increases in slot machine revenues and hotel revenues were primarily 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 amount wagered on slot machines at the Lady
Luck Casinos & Entertainment Resort increased 24% between comparative periods
attributable to the additional customers. The increase in food and beverage
revenues was also due to an increase in the amount of food and beverage
furnished to customers on a complimentary basis for which an increase in the
promotional allowance was reported.
Gross revenues at Lady Luck Natchez increased from $8.5 million to $9.4
million, an increase of $0.9 million or 11%, during the three months ended
September 30, 1998 and 1999, respectively. Lady Luck Natchez's gross revenues
increased primarily due to a $0.4 million increase in slot machine revenues and
a $0.4 million increase in table games
18
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
revenues. These increases were due to the following: (1) the addition of more
bus line runs including group sales; (2) additional advertising and
entertainment; (3) the remodeling of two additional floors of the River Park
Hotel between comparative periods which are believed to have attracted more
affluent customers; (4) 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; (5) marketing to table games players outside of
its local markets; and, (6) an increase in the average number of slot machines
in operation from 611 to 663, an increase of 52 or 9%, between comparative
periods to lessen the effects of capacity constraints at peak demand times and
changing the types of machines in operation to more popular products.
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
Bettendorf 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 $1.9 million to $3.3 million
during the three months ended September 30, 1998 and 1999, respectively. The
Bettendorf Joint Venture's gross revenues increased from $22.6 million to $26.7
million, an increase of $4.1 million or 18%, during the three months ended
September 30, 1998 and 1999, respectively. These increases were primarily due to
a $2.8 million increase in slot machine revenues and the addition of $1.0
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 and resulted in $1.2 million of preopening expense during 1998.
The Bettendorf Joint Venture increased the average number of slot machines in
operation from 1,040 to 1,166, an increase of 126 or 12% 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 increased from 40% to 43% in the three month periods ended
September 30, 1998 and 1999. The increases were primarily due to the following:
(1) increases in VIP marketing efforts in an effort to attract new customers
from outside the local area; (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; and, (3) increased hotel rooms,
food and beverage furnished to customers on a complimentary basis at the Lady
Luck Casinos & Entertainment Resort. These increases were only partially offset
by the relative reductions in payroll and related costs at Lady Luck Natchez.
Food and beverage costs and expenses, prior to reclassifying the cost of
complimentaries, as a percentage of related revenues decreased from 86% for the
three months ended September 30, 1998 to 85% for the three months ended
September 30, 1999. This decrease was primarily due to decreases in food and
beverage costs and payroll and related expenses at Lady Luck Natchez offset
partially by increases in food and beverage costs and payroll and related
expenses at the Lady Luck Casinos & Entertainment Resort due in part to the
upgrading of its food product and service levels.
Gross room revenues for the River Park Hotel increased approximately 8%
during the three months ended September 30, 1999 compared with the prior year
three months as a result of increasing its average daily room rate from $39 to
$49, an increase of $10 or 26%. The additional gross room revenues from the
increase in the average daily room rate was offset partially by a decrease in
occupancy from 85% to 77% 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 63% and
an average daily room rate of $38. During the three months ended September 30,
1999 as compared with the prior year, gross room revenues of the Rhythm & Blues
hotel decreased by approximately 25%. Between comparative periods, the Rhythm &
Blues hotel's occupancy rate decreased from 93% to 66%, while average daily room
rates increased from $33 to $36 which increase was possible in part due to
remodeling during the three months ended March 31, 1999. During the three months
ended September 30, 1999 as
19
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
compared with the prior year period, gross room revenues of the Riverbluff hotel
decreased by approximately 9%. The Riverbluff hotel's occupancy rate increased
from 76% to 79% between comparative periods and average daily room rates
decreased from $27 to $24. Increased offerings of hotel rooms at Riverbluff 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 87% during the three months ended September 30, 1999 and
achieved an average daily room rate of $60.
Selling, general and administrative expenses as a percentage of total
gross revenues increased from 28% to 30% during the three months ended September
30, 1998 and 1999, respectively. The increase was primarily due to the
following: (1) increased administrative payroll and related costs; and, (2) $0.5
million of expenses related to a planned refinancing of the Company's first
mortgage notes which was subsequently postponed pending the acquisition of the
Company by Isle of Capri Casinos, Inc.
Operating income was $6.8 million for the three months ended September 30,
1999. Operating income was $7.0 million for the three months ended September 30,
1998. In addition to the changes described above, operating income decreased
$0.2 million primarily due to the following: (1) a $0.3 million increase in
depreciation expense related to the Country hotel which opened April 30, 1999;
and, (2) a $0.1 million of additional related party license fees in the current
year period resulting from improved operating results, as defined, of the
Company.
Income applicable to common stockholders was $1.0 million or $0.20 per
share for the three months ended September 30, 1999 compared to $1.5 million or
$0.31 per share for the three months ended September 30, 1998. In addition to
the changes described above, the decrease in income applicable to common
stockholders was primarily due to the following: (1) a $0.2 million reduction in
interest income primarily resulting from a decrease in interest bearing cash
equivalents and marketable securities due to amounts expended on the
construction of the 314-room Country hotel and generators at the Lady Luck
Casinos and Entertainment Resort; and, (2) a $0.1 million increase from
compounding on unpaid prior dividends on the Company's Mandatory Cumulative
Redeemable Preferred Stock.
Nine months Ended September 30, 1999 Compared to the Nine months Ended
September 30, 1998
For the nine months ended September 30, 1999 as compared to 1998,
consolidated gross revenues increased to $123.9 million from $121.4 million,
respectively, an increase of $2.5 million or 2%.
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 nine months ended September 30, 1998
generated by Lady Luck Biloxi was $11.0 million.
Gross revenues at the Lady Luck Casinos & Entertainment Resort increased
from $76.5 million to $86.0 million, an increase of $9.5 million or 12%, during
the nine months ended September 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 $7.6 million increase in
slot machine revenues, a $1.0 million increase in hotel revenues and a $0.9
million increase in food and beverage revenues. These increases in revenues were
primarily 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 1,375 to 1,503, an increase of 128 or 9% between comparative periods to
accommodate the additional customers.
20
<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 $26.0 million to $28.7
million, an increase of $2.7 million or 10%, during the nine months ended
September 30, 1998 and 1999, respectively. Lady Luck Natchez's gross revenues
increased due to a $1.9 million increase in slot machine revenues, a $0.4
million increase in table games revenues and a $0.3 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 and
entertainment; (3) nine months of operations during the current year period of 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; (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; (6) marketing to table games players outside of its local markets; and,
(7) an increase in the average number of slot machines in operation from 613 to
653 between comparative periods to lessen the effects of capacity constraints at
peak demand times and changing the types of machines in operation to more
popular products.
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
Bettendorf 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 $7.3 million to $9.0 million
during the nine months ended September 30, 1998 and 1999, respectively. The
Bettendorf Joint Venture's gross revenues increased from $65.7 million to $76.4
million, an increase of $10.7 million or 16%, during the nine months ended
September 30, 1998 and 1999, respectively. These increases were primarily due to
a $6.4 million increase in slot machine revenues and the addition of $2.9
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 and resulted in $1.2 million of preopening expense during 1998.
The Bettendorf Joint Venture increased the average number of slot machines in
operation from 995 to 1,162, an increase of 167 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 Ventur'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 remained constant at 42% in the nine months ended September 30,
1999 and 1998. The decreases from 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 have operated at less favorable margins than the
Company's average margin; and, (2) relative reductions in payroll and related
costs at Lady Luck Natchez were offset by the following: (1) increases in VIP
marketing efforts in an effort to attract new customers from outside the local
area; 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 89% for the
nine months ended September 30, 1998 to 86% for the nine months ended September
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 food and beverage costs at Lady Luck Natchez and the Lady Luck
Casinos & Entertainment Resort and an increase in labor costs at the Lady Luck
Casinos & Entertainment Resort.
21
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
Gross room revenues for the River Park Hotel increased approximately 8%
during the nine months ended September 30, 1999 compared with the prior year
nine months as a result of increasing its average daily room rate from $37 to
$46, an increase of $9 or 24%. 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 77% between comparative nine 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 57% and
an average daily room rate of $39. During the nine months ended September 30,
1999 as compared with the prior year, gross room revenues of the Rhythm & Blues
hotel decreased by approximately 10%. Between comparative periods, the Rhythm &
Blues hotel's occupancy rate decreased from 90% to 75%, while average daily room
rates increased from $33 to $37 which increase was possible in part due to
remodeling during the first three months of 1999. During the nine months ended
September 30, 1999 as compared with the prior year, gross room revenues of the
Riverbluff hotel increased by approximately 3%. The Riverbluff hotel's occupancy
rate increased from 73% to 76% between comparative periods and average daily
room rates remained constant at $26. Increased offerings of hotel rooms at
Riverbluff 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 79% during the nine months ended September 30,
1999 and achieved an average daily room rate of $57.
Selling, general and administrative expenses as a percentage of total
gross revenues decreased from 29% to 28% during the nine months ended September
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; (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; and, (4) $0.5 million of expenses related to a planned
refinancing of the Company's first mortgage notes which was subsequently
postponed pending the acquisition of the Company by Isle of Capri.
Operating income was $23.0 million for the nine months ended September 30,
1999 and was $23.3 million for the nine months ended September 30, 1998. Despite
the positive changes described above, operating income decreased $0.3 million
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 $0.5 million of additional related party license fees in the
current year period resulting from improved operating results, as defined, of
the Company. Depreciation expense remained constant despite the sales of Lady
Luck Central City in February 1998 and Lady Luck Biloxi in June 1998 as these
reductions were offset by depreciation related to the Country hotel which opened
April 30, 1999.
Income applicable to common stockholders was $6.3 million or $1.29 per
share for the nine month period ended September 30, 1999 compared to $6.1
million or $1.25 per share for the nine months ended September 30, 1998. In
addition to the changes described above, the increase in income applicable to
common stockholders was primarily due to a reduction in net interest expense
primarily resulting from the capitalization of $0.5 million of interest on funds
used during construction of the 314-room Country hotel at the Lady Luck Casinos
and Entertainment Resort. A $0.2 million increase from compounding on unpaid
prior dividends on the Company's Mandatory Cumulative Redeemable Preferred Stock
was offset by a $0.2 million decrease in other expense.
22
<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 Nine Months Increase
Ended (Decrease) Ended (Decrease)
September 30, 1999 vs. September 30, 1999
----------------- ---------- ------------------ ----------
1999 1998 1998 1999 1998 1998
-------- -------- ---------- -------- -------- ----------
Gross revenues..... $ 30.1 $ 25.2 19 $ 86.0 $ 76.5 12
Net revenues....... 27.1 23.7 17 77.8 69.7 12
Management fee..... 1.0 0.9 11 2.9 2.5 16
Operating income... 4.1 5.0 (18) 13.9 16.0 (13)
Operating margin... 15% 22% (7) pts 18% 23% (5)pts.
Average daily net
win per table
game............. $ 704 $ 603 17 $ 650 $ 633 3
Average number of
tables in
operation......... 46 49 (6) 48 50 (4)
Average daily net
win per slot
machine.......... $ 165 $ 141 17 $ 158 $ 153 3
Average number of
of slot machines
in operation..... 1,481 1,468 1 1,503 1,375 9
Lady Luck Natchez
- - -----------------
% %
Three Months Increase Nine Months Increase
Ended (Decrease) Ended (Decrease)
September 30, 1999 vs. September 30, 1999
----------------- ---------- ------------------ ----------
1999 1998 1998 1999 1998 1998
-------- -------- ---------- -------- -------- ----------
Gross revenues..... $ 9.4 $ 8.5 11 $ 28.7 $ 26.0 10
Net revenues....... 8.5 7.8 9 26.3 23.8 11
Management fee..... 0.3 0.3 - 1.0 0.8 25
Operating income... 1.4 0.8 75 4.0 3.0 33
Operating margin... 16% 10% 6 pts. 15% 13% 2 pts.
Average daily net
win per table
game............. $ 768 $ 515 49 $ 760 $ 661 15
Average number of
tables in
operations........ 16 16 - 16 16 -
Average daily net
win per slot
machine.......... $ 108 $ 111 (3) $ 115 $ 111 4
Average number of
of slot machines
in operation..... 663 611 9 653 613 7
23
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
Lady Luck Bettendorf (a)
- - --------------------
% %
Three Months Increase Nine Months Increase
Ended (Decrease) Ended (Decrease)
September 30, 1999 vs. September 30, 1999
----------------- ---------- ------------------ ----------
1999 1998 1998 1999 1998 1998
-------- -------- ---------- -------- -------- ----------
Gross revenues..... $ 26.7 $ 22.6 18 $ 76.4 $ 65.7 16
Net revenues....... 25.2 21.4 18 72.0 62.2 16
Management fee..... 0.7 0.6 17 2.1 1.7 24
Operating income... 4.3 2.0 115 11.6 8.1 43
Operating margin... 17% 9% 8 pts. 16% 13% 3 pts.
Average daily net
win per table
game............. $ 652 $ 747 (13) $ 693 $ 763 (9)
Average number of
tables in
operations........ 44 39 13 43 38 13
Average daily net
win per slot
machine.......... $ 189 $ 183 3 $ 182 $ 189 (4)
Average number of
of slot machines
in operation..... 1,166 1,040 12 1,162 995 17
- - ---------------------------
(a) Lady Luck Bettendorf is 50% owned by LLQC. The Company includes 50%
of the net income of Lady Luck Bettendorf as equity in net income of
affiliates using the equity method of accounting.
Liquidity and Capital Resources
- - -------------------------------
During the nine months ended September 30, 1999, the Company generated
$12.8 million in cash from operations. The primary sources during the nine
months ended September 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) $1.1
million net from the sale of marketable securities; (4) $2.5 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 nine months ended
September 30, 1999, other than operating expenditures, include:
A. $16.6 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
- $4.2 million for continuing construction and installation of new
generator systems
- $0.4 million for continuation of remodeling of the Rhythm & Blues
Hotel
B. $0.6 million for the re-payment of debt and slot contracts.
C. $1.1 million for the acquisition of slot machines and other assets by
certain subsidiaries for the incurrence of indebtedness.
D. $1.8 million for accrual of preferred stock dividends.
24
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
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 debt service on
these parking lots in periods beyond 1999.
During the remainder of 1999, Lady Luck Biloxi is expected to require cash
infusions of up to $0.1 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 September 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 of approximately $1,600,000.
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 has been suspended pending redesign being considered pursuant to
the Merger with Isle of Capri. 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 construction and installation of the generators is approximately $4.2 million
which has been paid. The generators commenced power production during July 1999.
On October 29, 1999, the Company completed the purchase of all of the
outstanding capital stock of Gamblers Supply Management Company ("GSMC"), a
South Dakota corporation and a wholly-owned subsidiary of Sodak Gaming, Inc.
("Sodak"), a South Dakota corporation, from Sodak pursuant to a Stock Purchase
Agreement dated as of July 30, 1999 (the "GSMC Agreement"). GSMC owns the Miss
Marquette riverboat casino located in Marquette, Iowa and the associated real
property and assets. The purchase price was approximately $41.7 million and the
assumption of certain liabilities. Pursuant to the GSMC Agreement, Working
Capital should have been negative $2,689,119 following the closing. The final
purchase price will be adjusted for any difference between that amount and the
actual amount of Working Capital at the time of the closing. In connection with
the Miss Marquette Purchase, Isle of Capri Casinos, Inc. provided a purchase
money loan of $16.3 million to GSMC which was used to pay a portion of the
purchase price to Sodak. Isle of Capri Casinos, Inc. has taken a lien on
substantially all of the assets of the Miss Marquette riverboat gaming facility,
excluding the gaming licenses.
25
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
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 foregoing is subject to the restrictions on capital
expenditures under the terms of the Merger Agreement which the Company entered
into the Isle of Capri.
Although permissible under the Indenture, the Company does not anticipate
a repurchase of all or a portion of the 2001 Notes in early satisfaction of any
required repurchase pursuant to the Indenture governing the 2001 Notes. The
amount and timing of any required repurchase cannot currently be estimated as it
is dependent on future results of operations. The Company has suspended its
pursuit of refinancing the 2001 Notes due to the pending merger with Isle of
Capri.
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 September 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.
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 stockholders 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 and per share amounts 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 per share, 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.
26
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
The Company is highly leveraged. As of September 30, 1999, the Company's
total long-term indebtedness was approximately $176.6 million and its
stockholders' deficit was approximately $17.9 million. This level of
indebtedness could have material adverse 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. As a requirement of Isle of Capri
entering into a Merger Agreement with the Company, Mr. Tompkins agreed to vote
his shares in favor of the approval of the merger with Isle of Capri, provided
Isle of Capri with a purchase option with respect to his shares and agreed to
deposit such shares in escrow for the benefit of Isle of Capri (see Note 9 to
the condensed consolidated financial statements included as Item 1, Part I).
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 September 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 the trademark and the customer
list to satisfy the debt.
Pursuant to a Forbearance Agreement dated April 29, 1999 and supplemented
on September 24, 1999, all scheduled principal installments due to the Banks
will be deferred until June 30, 2000, subject to satisfaction of certain
conditions. In addition, upon the consummation of, among other things, the
purchase of the Lady Luck trademark and customer list, as well as the purchase
of the Lady Luck casino-hotel by the Company as provided for in the Purchase
Agreement, by and among Gemini, Inc., International Marco Polo Services, Inc.,
Andrew H. Tompkins and the Company, the unpaid principal balance due to the
Banks will be discounted by $1,000,000 pursuant to the terms and conditions of
the First Supplement to the Forbearance Agreement.
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. 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.)
27
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
Year 2000
- - ---------
The Company's computer systems may or 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). Both
groups are being pursued for adherence to compliant standards. Also, each
category includes 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 primarily relied on
representations of the suppliers of its systems to determine whether a system is
Year 2000 compliant. However, the Company began conducting testing of the date
dependent functions of specific systems in September 1999. As of September 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
September 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 obtained representations from its vendors, as follows, that compliant
versions are available: (1) 100% of specialized software vendors; (2) 98% of
"shrink-wrap" software vendors; (3) 95% of IT hardware vendors; and, (4) 97% of
non-IT hardware vendors. The balance of the Company's unique systems have been
evaluated and determined not to be mission critical. Those that are not Year
2000 compliant and cannot be made Year 2000 compliant in a cost efficient or
timely manner may have a material adverse effect on the Company. The Company
also intends to develop an internal contingency plan for disaster recovery and
processing by December 1999.
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.
28
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
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.
29
<PAGE>
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not Applicable.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
(a) None.
(b) None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
Item 5. OTHER INFORMATION
None
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.
July 30, 1999 regarding Item 5.
August 19, 1999 regarding Item 5.
October 5, 1999 regarding Item 5.
October 29, 1999 regarding Item 2.
30
<PAGE>
SIGNATURES
- - ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATE: November 15, 1999 Lady Luck Gaming Corporation
Registrant
/s/ James D. Bowen
Its: Vice President Finance and
Principal Accounting Officer and
duly authorized officer
31
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(This schedule contains 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 22,201
<SECURITIES> 18,092
<RECEIVABLES> 1,224
<ALLOWANCES> 488
<INVENTORY> 499
<CURRENT-ASSETS> 43,272
<PP&E> 168,388
<DEPRECIATION> 36,514
<TOTAL-ASSETS> 198,177
<CURRENT-LIABILITIES> 17,059
<BONDS> 176,614
22,442
0
<COMMON> 29
<OTHER-SE> (17,967)
<TOTAL-LIABILITY-AND-EQUITY> 198,177
<SALES> 113,237
<TOTAL-REVENUES> 123,897
<CGS> 45,724
<TOTAL-COSTS> 45,724
<OTHER-EXPENSES> 44,512
<LOSS-PROVISION> 312
<INTEREST-EXPENSE> 15,935
<INCOME-PRETAX> 8,194
<INCOME-TAX> 90
<INCOME-CONTINUING> 8,104
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,104
<EPS-BASIC> 1.29
<EPS-DILUTED> 1.29
</TABLE>
