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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-22436
Lady Luck Gaming Corporation
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(Exact name of registrant as specified in its charter)
Delaware 88-0295602
(State or other jurisdiction of (I. R. S. employer
incorporation or organization) identification number)
206 North Third Street, Las Vegas, Nevada 89101
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (702) 477-3000
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Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. As of May 3, 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
March 31, December 31,
1999 1998
------------ ------------
Current assets:
Cash and cash equivalents...................... $ 28,440 $ 28,834
Marketable securities.......................... 16,613 19,219
Accounts receivable, net....................... 1,002 862
Inventories.................................... 965 946
Prepaid expenses............................... 1,180 1,333
------------ ------------
Total current assets.......................... 48,200 51,194
------------ ------------
Property and equipment, net of accumulated
depreciation and amortization of $32,953 and
$31,352 as of March 31, 1999 and December 31, 127,791 120,904
1998, respectively............................
Other assets:
Deferred financing fees and costs, net of
accumulated amortization of $4,429 and
$4,212 as of March 31, 1999 and December 31,
1998, respectively........................... 1,658 1,875
Investment in unconsolidated affiliate, net.... 15,548 14,412
Other.......................................... 3,468 3,300
------------ ------------
20,674 19,587
TOTAL ASSETS..................................... $ 196,665 $ 191,685
============ ============
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
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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
March 31, December 31,
1999 1998
------------ ------------
Current liabilities:
Current portion of long-term debt............. $ 539 $ 595
Accrued interest.............................. 1,842 1,834
Accounts payable.............................. 2,263 1,915
Construction payables......................... 5,988 3,951
Accrued property taxes........................ 392 1,300
Other accrued liabilities..................... 9,056 9,106
------------ ------------
Total current liabilities................... 20,080 18,701
------------ ------------
Long-term debt:
Mortgage notes payable........................ 173,500 173,500
Other long-term debt.......................... 3,012 3,084
------------ ------------
Total long-term debt........................ 176,512 176,584
------------ ------------
Total liabilities......................... 196,592 195,285
------------ ------------
Commitments and contingencies (Notes 5 through 8)
Series A mandatory cumulative redeemable
preferred stock, $48.90 and $47.53, as
of March 31, 1999 and December 31, 1998,
respectively per share liquidation value,
1,800,000 shares authorized, 433,638 shares
issued and outstanding........................ 21,203 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........................... (52,541) (55,622)
------------ ------------
Total stockholders' deficit................. (21,130) (24,211)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT..... $ 196,665 $ 191,685
============ ============
The accompanying notes are an integral part of these
condensed consolidated statements.
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LADY LUCK GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(Unaudited)
Three Months Ended
March 31,
----------------------
1999 1998
---------- ----------
Revenue:
Casino......................................... $ 32,277 $ 36,478
Food and beverage.............................. 3,550 4,688
Hotel.......................................... 1,090 995
Equity in net income of unconsolidated
affiliate.................................... 1,412 1,468
Management fees from unconsolidated affiliate.. 598 508
Other.......................................... 907 1,002
---------- ----------
Gross revenues................................ 39,834 45,139
Less: Promotional allowances................. (3,101) (3,958)
---------- ----------
Net revenues.................................. 36,733 41,181
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Costs and expenses:
Casino......................................... 13,106 15,432
Food and beverage.............................. 1,046 1,477
Hotel.......................................... 382 267
Other.......................................... 11 61
Selling, general and administrative............ 10,304 12,696
Related party license fees..................... 1,058 965
Depreciation and amortization.................. 2,090 2,390
---------- ----------
Total costs and expenses.................... 27,997 33,288
---------- ----------
Operating income.................................. 8,736 7,893
Other income (expense):
Interest income................................ 329 263
Interest expense............................... (5,196) (5,584)
Other.......................................... (166) -
---------- ----------
Total other income (expense)................ (5,033) (5,321)
---------- ----------
Income before income tax provision................ 3,703 2,572
Income tax provision.............................. 30 15
---------- ----------
NET INCOME........................................ 3,673 2,557
Preferred stock dividends......................... 592 529
---------- ----------
Income applicable to common stockholders.......... $ 3,081 $ 2,028
========== ==========
BASIC AND DILUTED NET INCOME PER SHARE
Applicable to common stockholders............ $ 0.63 $ 0.42
========== ==========
Weighted average number of common shares
outstanding.................................. 4,881,003 4,881,003
========== =========
The accompanying notes are an integral part of these
condensed consolidated statements.
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LADY LUCK GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except Supplemental Schedule)
(Unaudited)
Three Months Ended
March 31,
----------------------
1999 1998
---------- ----------
Cash flows from operating activities:
Net income....................................... $ 3,673 $ 2,557
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization................. 2,090 2,390
Amortization of bond offering fees and costs.. 217 217
Equity in net income of unconsolidated
affiliate................................... (1,412) (1,468)
(Increase) decrease in assets:
Accounts receivable........................... (140) (183)
Inventories................................... (19) (25)
Prepaid expenses.............................. 153 232
Increase (decrease) in liabilities:
Accounts payable.............................. 348 (817)
Other accrued liabilities..................... (950) 37
---------- ----------
Net cash provided by (used in) operating
activities....................................... 3,960 2,940
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment............... (8,891) (1,571)
Sales of marketable securities................... 2,606 -
Construction payables............................ 2,037 -
Distributions of earnings from unconsolidated
affiliate........................................ 276 -
Restricted cash.................................. - 5,578
Other............................................ (168) 205
---------- ----------
Net cash provided by (used in) investing
activities...................................... (4,140) 4,212
---------- ----------
Cash flows from financing activities:
Payments on debt and slot contracts.............. (214) (1,034)
---------- ----------
Net cash provided by (used in) financing
activities...................................... (214) (1,034)
---------- ----------
Net increase (decrease) in cash and cash
equivalents...................................... (394) 6,118
Cash and cash equivalents, beginning of period...... 28,834 19,552
---------- ----------
Cash and cash equivalents, end of period............ $ 28,440 $ 25,670
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during period for interest (net of
amount capitalized of $272 in the three months
ended March 31, 1999).......................... $ 4,972 $ 5,353
========== ==========
Supplemental Schedule of Non-Cash Investing and Financing Activities:
The liquidation value of the Series A mandatory cumulative redeemable
preferred stock increased by approximately $592,000 and $529,000 in unpaid
accrued dividends for the three month periods ended March 31, 1999 and 1998,
respectively.
The Company entered into several contracts with manufacturers for the
purchase of slot machines and other assets which totaled approximately $86,000
and $287,000 for the three month periods ended March 31, 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 statement.
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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 month
period ended March 31, 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 month period ended March 31, 1998 in order to
classify amounts in a manner consistent with the three month period ended March
31, 1999.
The consolidated financial statements of Lady Luck Gaming Corporation
("LLGC"), a Delaware corporation, include the accounts of LLGC and its
subsidiaries (collectively the "Company"). For the periods presented in the
financial statements, the Company's operations primarily include those of LLGC,
Lady Luck Gaming Finance Corporation ("LLGFC"), a Delaware corporation; Magnolia
Lady, Inc. ("MLI"), Lady Luck Mississippi, Inc. ("LLM"), Lady Luck Biloxi, Inc.
("LLB") and Lady Luck Tunica, Inc. ("LLT"), each a Mississippi corporation
(collectively the "Mississippi Companies"); and L. L. Gaming Reservations, Inc.
("LLGR"), a Nevada corporation. The Company also owns a 50% interest in a joint
venture with Bettendorf Riverfront Development Company ("BRDC") which is and has
been accounted for under the equity method. The Company's financial statements
also include the development efforts of Lady Luck Kimmswick, Inc. ("LLK"), a 93%
owned Missouri corporation; and Lady Luck Vicksburg, Inc. ("LLV") a Mississippi
corporation. LLGC and its subsidiaries were organized to develop and operate
gaming and hotel properties in emerging jurisdictions.
LLGC and LLGFC were formed in February 1993. LLM began dockside casino
operations on February 26, 1993 in Natchez, Mississippi and acquired and took
over operation of the 147-room River Park Hotel in Natchez, Mississippi on April
15, 1996; LLB began dockside casino operations on December 13, 1993 in Biloxi,
Mississippi and sold its real property and operating assets and ceased
operations effective June 7, 1998; MLI, which does business as Lady Luck Casinos
& Entertainment Resort commenced dockside gaming operations on June 27, 1994 in
Coahoma County, Mississippi, commenced operation of a 173-room hotel on August
16, 1994, commenced gaming operations of Country Casino and the Pavilion on May
21, 1996 and acquired and took over operation of the 120-room Riverbluff Hotel
in Helena, Arkansas on July 3, 1996; LLT which currently leases a gaming vessel
to Lady Luck Bettendorf, LC, an Iowa limited liability company (see below); LLGR
began operating a central reservations center for the Company's hotels on
September 3, 1996; Lady Luck Quad Cities, Inc. ("LLQC"), a Delaware corporation
and subsidiary of the Company, LLQC formed a joint venture with BRDC, Lady Luck
Bettendorf, LC, (the "Bettendorf Joint Venture") to operate a casino in
Bettendorf, Iowa which commenced operations on April 21, 1995 and commenced
operation of a 256-room hotel on August 29, 1998. LLK and LLV are in various
stages of development and have no operating history.
2. Certain Risks and Uncertainties
The Company's operations in Mississippi and Iowa are dependent on the
continued licensability or qualifications of the Company and its subsidiaries
that hold the gaming licenses in these jurisdictions. Such licensing and
qualifications are reviewed periodically by the gaming authorities in these
states.
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A significant portion of the Company's consolidated revenues and operating
income are generated by the Company's Coahoma County, Mississippi casino
operations. These casinos are highly dependent on patronage by residents in
Arkansas. A change in general economic conditions, closure of the Helena Bridge
or a change in the extent and nature of regulations enabling casino gaming in
Arkansas could adversely affect these casinos' future operating results.
3. Reverse Stock Split, Nasdaq National Market Listing and Net Income Per
Share
Effective June 4, 1998, the Company's shareholders approved a one-for-six
reverse stock split with regard to its Common Stock (the "Reverse Split"). The
effects of the Reverse Split were to reduce the number of issued and outstanding
shares of Common Stock from 29,285,698 to 4,881,003 and to increase the par
value of these shares from $0.001 to $0.006 per share. Instead of fractional
shares resulting from the Reverse Split, stockholders received a cash payment
from the sale of the aggregate fractional shares on the open market. The Reverse
Split did not change the number of authorized shares of the Company's Common
Stock and had no effect on the Company's Preferred Stock. All references in the
financial statements to number of shares, per share amounts and market prices of
the Company's Common Stock have been retroactively restated to reflect the
decreased number of shares of Common Stock outstanding.
On October 19, 1998, the Company was informed by the Nasdaq National Market
that, based on its staff's review, the Company's Common Stock failed to maintain
market value of public float, composed of total shares outstanding reduced by
those held by directors and officers, as defined, greater than or equal to $15.0
million, in accordance with Marketplace Rule 4450(b)3 under Maintenance Standard
2. The Nasdaq National Market indicated that it will provide the Company a
period of time to demonstrate compliance. If the Company is unable to
demonstrate compliance during the period, the Company's Common Stock may be
delisted. If the Company is unable to achieve compliance, it may seek further
procedural remedies, but the Company cannot guarantee that it will be successful
in the employment of any of these remedies. However, the Company believes that
it would be eligible for listing on the Nasdaq Smallcap Market, but no guarantee
can be provided that the Company would be in fact eligible for Nasdaq Smallcap
Market listing.
4. Investment in Unconsolidated Affiliate
The Company's investment in its joint venture with BRDC is accounted for
under the equity method and the Company's portion of income or loss from the
joint venture is included in Equity in Net Income of Unconsolidated Affiliate in
the accompanying Condensed Consolidated Statements of Operations for the three
months ended March 31, 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 March 31, 1999 of $19,234,000 to the Bettendorf Joint Venture
for approximately $189,000 per month, which amount was determined based on
arms-length 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.
Pursuant to a former equipment lease, effective January 1, 1998, the Company
sold specific gaming equipment to the Bettendorf Joint Venture for a negotiated
amount of $712,000 cash. The Company's rental income relating to the gaming
vessel lease was $567,000 for each of the three months ended March 31, 1999 and
1998.
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Lady Luck Bettendorf commenced operations on April 21, 1995. All net
profits and losses from all operations of Lady Luck Bettendorf are allocated
equally between the Company and BRDC. The Company has also been granted the
right to manage Lady Luck Bettendorf with substantially the same terms and fees
as the Company's wholly-owned casinos, less $37,500 abated per month, with up to
$325,000 annually of the fees received by the Company paid to BRDC as
consultants.
Summarized balance sheet information for the Bettendorf Joint Venture as
of March 31, 1999 and December 31, 1998 is as follows (in thousands):
March 31, December 31,
1999 1998
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Current assets........................ $ 9,366 $ 6,870
Property and equipment, net........... 52,498 52,727
Other................................. 524 750
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Total assets........................ $ 62,388 $ 60,347
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Current liabilities................... $ 6,114 $ 8,154
Long-term liabilities................. 25,178 23,370
Members' equity....................... 31,096 28,823
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Total liabilities and members'
equity ........................... $ 62,388 $ 60,347
============ ============
Summarized results of operations for the Bettendorf Joint Venture for the
three months ended March 31, 1999 and 1998 are as follows (in thousands):
1999 1998
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Net revenues.......................... $ 22,199 $ 19,125
Costs and expenses.................... 19,374 16,189
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Net income........................ $ 2,825 $ 2,936
============ ============
A summary of changes in the Company's investment in the Bettendorf Joint
Venture for the three month periods ended March 31, 1999 and 1998 are as follows
(in thousands):
1999 1998
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Investment, beginning of period............. $ 14,412 $ 9,313
Equity in net income of unconsolidated
affiliate................................. 1,412 1,468
Distribution to members..................... (276) -
------------ ------------
Investment, end of period................. $ 15,548 $ 10,781
============ ============
Included in the Company's Retained Earnings at March 31, 1999 is
$12,548,000 of undistributed earnings of the Bettendorf Joint Venture.
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5. Long-term Debt
At March 31, 1999 and December 31, 1998, long-term debt consisted of the
following (in thousands):
March 31, December 31,
1999 1998
------------ ------------
$185,000, 11 7/8% First Mortgage Note;
quarterly payments of interest only;
due March 2001; collateralized by
substantially all assets of the Company
and guaranteed by LLGC (the "2001 Notes").... $ 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.............................. 342 344
Note payable to a bank; monthly payments of
principal and interest at 8%; due November
2008; collateralized by deed of trust........ 194 198
Notes payable to corporations; monthly payments
of principal and interest at rates up to
12.5%; due December 2002; secured by
the equipment................................ 415 494
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..................................... 2,585 2,623
Other.......................................... 15 20
------------ ------------
177,051 177,179
Less: current portion.......................... (539) (595)
------------ ------------
Total long-term debt......................... $ 176,512 $ 176,584
============ ============
The Indenture, as amended and supplemented (the "Indenture"), covering the
Company's 11 7/8% First Mortgage Notes due 2001 (the "2001 Notes") provides for,
among other things, restrictions on the Company's and certain of its
subsidiaries' abilities (a) to pay dividends or other distributions on its
capital stock, (b) to incur additional indebtedness, (c) to make asset sales,
(d) to engage in other lines of business, and (e) requires the Company to
maintain a minimum consolidated net worth, as defined in the Indenture. The
Company believes it is in compliance with the Indenture, as amended and
supplemented, as of March 31, 1999.
Andrew H. Tompkins, Chairman and Chief Executive Officer of the Company,
beneficially owns approximately 46% of the Company's outstanding Common Stock.
Mr. Tompkins also owns a casino-hotel in Las Vegas, Nevada and the Lady Luck
trademark and a customer list, which the Company licenses from him. The Las
Vegas casino-hotel has incurred substantial indebtedness and is in default on
that debt as of March 14, 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
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the benefit of the holders of that indebtedness. As a result of the current
default, these lenders are entitled to the benefit of this collateral and could
foreclose on the pledge and seize the Lady Luck trademark and customer list and
sell them to a third party. In addition, Mr. Tompkins may be required to sell
his Common Stock in the Company, the trademark and the customer list to satisfy
the debt.
Pursuant to the Indenture, a sale of Mr. Tompkins' Common Stock resulting
in another person beneficially owning more than 35% of the Company's outstanding
common stock would trigger a Change in Control event, which would in turn permit
any holder of the Company's outstanding 2001 Notes to require the Company to
repurchase all or any part of such holder's 2001 Notes at a cash price equal to
101% of the principal amount thereof, plus accrued and unpaid interest. As of
April 16, 1999, the closing market price of the 2001 Notes, as reported by
Donaldson, Lufkin and Jenrette, was 101.75%.
6. Employment Agreements
On October 24, 1994, LLGC entered Letter Agreements with Alain J. Uboldi,
LLGC's President, Chief Operating Officer and Director, and Rory J. Reid, LLGC's
Senior Vice-President, General Counsel, Secretary and Director (the
"Agreements"). The Agreements were for an initial term of three years, and on
each October 24, beginning October 24, 1997, the Agreements are automatically
extended for an additional year, unless terminated by the Company on or before
July 24 of that year. The Agreements provide that in the event of a change of
control, as defined in the Agreements, and the subsequent termination of the
employment of either Mr. Uboldi or Mr. Reid, under certain circumstances, LLGC
would be required to pay to Mr. Uboldi and Mr. Reid a lump sum severance payment
equal to 2.99 times the sum of their respective annual base salary plus the
amount of any bonus paid in the year preceding such termination. In the event of
such termination, Mr. Uboldi and Mr. Reid would also receive in cash an amount
equal to the difference between the exercise price of each option held by Mr.
Uboldi or Mr. Reid (whether or not fully exercisable) and the current price of
LLGC's common stock. Further, in connection with the Agreements, Mr. Uboldi and
Mr. Reid would receive life, disability, accident and health insurance benefits
substantially similar to those they are receiving immediately prior to their
termination for a 36-month period after such termination. A sale of Mr.
Tompkins' Common Stock resulting in another person beneficially owning more than
30% of the Company's outstanding Common Stock or a change in the persons
constituting a majority of the board of directors over a two-year period (unless
new directors are elected or nominated by two-thirds of the directors who were
directors at the beginning of the period) would trigger the change of control
provisions in the Agreements.
7. Litigation
Shareholder Class Action Lawsuits
---------------------------------
The Company has been named as a defendant in a purported shareholder class
action lawsuit alleging violations by the Company of the Securities Act of 1933,
as amended (the "Securities Act"), and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), for alleged material misrepresentations and
omissions in connection with the Company's 1993 prospectus and initial public
offering of Common Stock. The complaint seeks, among other things, injunctive
relief, rescission and unspecified compensatory damages. In addition to the
Company, the complaint also names as defendants Andrew H. Tompkins, Chairman and
Chief Executive Officer of LLGC, Alain Uboldi, Director and Chief Operating
Officer of LLGC, Michael Hlavsa, the former Chief Financial Officer of LLGC,
Bear, Stearns & Co., Inc. and Oppenheimer & Co., Inc., who acted as lead
underwriters for the initial public offering. The Company has retained outside
counsel to respond to the complaint. On October 8, 1997, the Company was served
with an order of the court dismissing all of the Plaintiffs' claims under
Section 10(b) of the Exchange Act and 11 of the Plaintiffs' 16 claims under
Sections 11, 12 and 15 of the Securities Act with prejudice for failing to
adequately state a claim. The court also ordered the Plaintiffs to file, and the
Plaintiffs have filed, an amended complaint regarding the five claims under
Sections
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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 particular 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 $7.0 million as of April 15, 1999 based on
published exchange rates). Although it is difficult to determine the damages
being sought from the lawsuit, the action may seek damages up to that aggregate
amount plus interest. The case is still in its preliminary stage and its outcome
cannot be predicted with any degree of certainty; however, the Company believes,
based in part on advice of counsel, that it has meritorious defenses.
A Greek architect filed an action against the Company alleging that he was
retained by the Company to provide professional services with respect to a
casino in Loutraki, Greece. During February 1999, the Company settled this
action for $335,000, including any accrued interest, the amount of which had
been reserved fully in 1997.
Other Matters
-------------
On November 5, 1996, the United States Bankruptcy Court for the Northern
District of Mississippi dismissed a lawsuit that had been brought by Superior
Boat Works, Inc. ("Superior") against LLM on or about September 23, 1993.
Superior had previously done construction work for LLM on its Natchez barge
("Lady Luck Natchez"), as well as some minor preparatory work on one other barge
of the Company. This proceeding alleged damages of approximately $47,000,000, of
which approximately $3,400,000 was alleged for additional construction work on
Lady Luck Natchez and the remaining amount was alleged for unjust enrichment,
for causing the bankruptcy of Superior and for future work Superior expected to
perform for the Company. Superior has appealed the decision to dismiss the
action. The Company, based in part on the advice of its counsel, believes that
it has meritorious defenses and does not believe that the appeal of the decision
will have a material adverse effect on the Company's financial condition or
results of operations.
During November 1996, Lady Luck Central City, Inc. entered into a
Memorandum of Understanding (the "Memorandum") with BWCC, Inc., which does
business as Bullwhackers-Central City ("Bullwhackers"). The Memorandum provided
for a combination of the respective companies' gaming establishments that
currently operate on adjacent real property in Central City. As a result of the
Memorandum, the parties negotiated and purportedly executed a definitive
Operating Agreement and Lease Agreement in September 1997. During the fourth
quarter of 1997, Bullwhackers refused to honor these definitive agreements, and
accordingly, the Company commenced suit against Bullwhackers. During the three
months ended March 31, 1999, the Company and Bullwhackers reached an agreement
in principle whereby the Company expects to receive $300,000 as a settlement
from Bullwhackers. The settlement will not be recognized until the payment is
received.
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-
11
<PAGE>
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. As of April 1,1999, the Bettendorf Joint Venture had
incurred approximately $68,000 of costs related to the marina and anticipates
that, if constructed, the marina will cost an additional amount not in excess of
$1,000,000. 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.
In addition, the Bettendorf Joint Venture is responsible in 1999 for
demolishing the Plaza building at 1823 State Street and preparing the site for
donation back to the City. The Bettendorf Joint Venture estimates this process
will cost $200,000.
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 March 31, 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 is relocating the vessel from the shipyard at a cost
not expected to exceed $300,000 including interim storage.
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. As of
March 31, 1999, approximately $13.8 million of the project had been completed
and total costs are not expected to exceed $17.0 million.
Generators
----------
During March 1999, MLI entered into an agreement for the production of five
new generators for the Lady Luck Casinos and Entertainment Resort. The cost of
production and installation of the generators is expected not be exceed $4.1
million and is scheduled to be completed during the second quarter of 1999.
12
<PAGE>
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; and has discontinued a planned development in Vancouver,
British Columbia during 1998 (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 an option to lease the Kimmswick Site.
As of March 31, 1999, the Company has invested approximately $8.7 million
($5,000 of which was invested during the three months ended March 31, 1999) in
the Missouri Project, including the vessel construction noted above. Development
costs have been fully reserved and the vessel construction costs have been
reduced by a $3.0 million write-down recognized during 1997, leaving
approximately $3.0 million of property and equipment, net of these reserves and
an approximately $1.9 million construction payable. The Missouri Project is
estimated to cost an additional $105.0 million to complete. The proposed project
has received the appropriate zoning approval from the Jefferson County Planning
Commission and has received a U.S. Army Corps of Engineers 404 permit. However,
a new permit might be necessary due to changes in the proposed project design
subsequent to receiving the permit.
The Company has continued its efforts towards obtaining a gaming license
for the Missouri Project and provided updated information to the Missouri Gaming
Commission. The Missouri Gaming Commission investigates applicants at its
discretion and has not yet selected the Company to be investigated. Furthermore,
there can be no assurance that the Company will be selected or obtain such
approvals from the Missouri Gaming Commission. While the Company intends to
continue seeking license approval by the Missouri Gaming Commission, the
eventual development of the Missouri Project may also be subject to: (i) the
selection of three new Missouri Gaming Commission members, which the Company
believes may not be familiar with the Company's application; (ii) gaming
revenues in the major metropolitan areas of Missouri have not increased
commensurate with recent increases in capacity, causing concerns of potential
competitive saturation; and (iii) regulatory factors, including loss limits,
have generally caused gaming operations to underperform relative to facilities
in neighboring jurisdictions without such restrictions.
The Vicksburg Project
---------------------
The development as planned will include a riverboat casino, an
approximately 200-room hotel, an 800-car parking garage, and additional
amenities (the "Vicksburg Project"). The Vicksburg Project is expected to be
located on approximately 23.9 acres of land owned by the Company immediately
south of the I-20 bridge along the Mississippi River, with access to Washington
Street, in Vicksburg, Mississippi.
A gaming license was granted to LLV on August 18, 1994 and has subsequently
been renewed through July 2000. As of March 31, 1999 the Company has invested
approximately $14.6 million ($69,000 of which was invested during the three
months ended March 31, 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
13
<PAGE>
project. Changes in these assumptions could result in changes in the estimated
net realizable value of the property. The total cost of the project is initially
estimated to be approximately $100.0 million, although the Company is currently
revising the development plan.
Casino developments on the Big Black River could significantly adversely
affect operating casinos in Vicksburg, as well as the viability of the Vicksburg
Project. The Big Black River is located about 13 miles from Vicksburg, between
Vicksburg and Jackson, the major population base from which Vicksburg casinos
draw their customers. During the fourth quarter of 1996, the Mississippi Gaming
Commission found a proposed casino site on the Big Black River unsuitable.
However, an affected landowner on the Big Black River sued the Mississippi
Gaming Commission after it rejected the site, and in the fourth quarter of 1997,
a circuit court found the site suitable. The Mississippi Gaming Commission and
City of Vicksburg have appealed the circuit court decision to the State Supreme
Court. Once the appeal has been perfected, the Supreme Court must rule on it
within 270 days. In addition, on July 16, 1998, the Mississippi Gaming
Commission adopted a regulation that prohibits developments such as projects on
the Big Black River. While the Company believes that adoption of this regulation
will increase the prospects of a favorable ruling for the Mississippi Gaming
Commission and the City of Vicksburg with respect to the appeal, which is
currently being held in abeyance pending related rulings, there can be no
assurances that the circuit court ruling will be overturned.
Environmental Matters
---------------------
The Company is subject to certain federal, state and local environmental
protection, health and safety laws, regulations and ordinances that apply to
businesses generally, including the Clean Air Act, the Clean Water Act, the
Resource Conservation and Recovery Act, the Comprehensive Environmental
Response, Compensation and Liability Act, the Oil Pollution Act, the
Occupational Safety and Health Act, and similar state statutes.
Some of the Company's owned and leased properties were used in the past for
industrial purposes, which have or may have resulted in soil or groundwater
contamination. For example, the Vicksburg site had been used as a bulk petroleum
storage facility since the early 1950's, and contained above-ground storage
tanks and barge and truck loading docks associated with that operation. Known
releases of petroleum products from three of the seven tanks have occurred since
1986, along with other small releases at various locations on site. The
subsurface assessment of the environmental condition of the site by an outside
environmental consultant indicated that some of the soils at the site were
contaminated with petroleum hydrocarbons and associated volatile organic
compounds, and that this contamination was present in significant concentrations
in some locations on site. Remediation efforts at the Vicksburg site are
complete. On February 21, 1996, the Mississippi Department of Environmental
Quality determined that the environmental remediation conducted by the seller
meets all federal and state standards, and has certified that no further action
is required. However, there is no guarantee that the Mississippi Department of
Environmental Quality or the Federal Environmental Protection Agency will not
alter target cleanup levels in the future, resulting in additional cleanup
requirements. This would expose the Company to additional liability as the owner
of the property, and could result in a material delay of the construction of new
facilities on-site.
A sublessee at its Helena, Arkansas property has informed the Company that
there may be contamination on this property from underground storage tanks used
by the sublessee for gas station operations. The Company is awaiting further
information on this matter (including the extent of the contamination), but
believes that the sublessee will be responsible for any costs to investigate and
remediate the property. However, there is no guarantee that the sublessee will
in fact pay any of the costs.
14
<PAGE>
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 March 31, 1999, the Company's total
long-term indebtedness was approximately $176.5 million and its stockholders'
deficit was approximately $21.1 million. This level of indebtedness could have
important consequences to stockholders. While management believes the Company
will have sufficient cash flow to meet its debt service and other cash outflow
requirements and maintain compliance with the covenants of the Indenture as
supplemented, to the extent that a substantial portion of the Company's cash
flow from operations remains dedicated to the payment of principal and interest
on its indebtedness, such cash flow is not available for other purposes such as
general operations, maintenance and improvement of casino and hotel facilities
or expansion of existing sites or into other gaming markets. Furthermore, the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures or acquisitions may be limited and the Company's
level of indebtedness could limit its flexibility in planning for, or reacting
to, changes in its industry.
15
<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; 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 retain or obtain Nasdaq listings; future acquisitions
or strategic partnerships; general business and economic conditions; the
Company's ability to become Year 2000 compliant in a timely manner and within
its cost estimates including the risk that one or more of the representations
provided to the Company by its suppliers may ultimately be proven false; and
other factors described at various times in the Company's reports filed with the
Securities and Exchange Commission. The Company wishes to caution readers not to
place undue reliance on any forward-looking statements, which statements are
made pursuant to the Private Litigation Reform Act of 1995. These
forward-looking statements speak only as of the date they are made. The Company
expressly disclaims any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement contained in this report to reflect
any change in its expectations with regard to that forward-looking statement or
any change in events, conditions or circumstances on which that forward-looking
statement is based. See "--Certain Risks and Uncertainties" below for discussion
of some of these factors.
Results of Operations
Three Months Ended March 31, 1999 Compared to the Three Months Ended
March 31, 1998
For the three months ended March 31, 1999 as compared to 1998,
consolidated gross revenues decreased to $39.8 million from $45.1 million,
respectively, a decrease of $5.3 million or 12%.
Comparisons of the Company's consolidated gross revenues between periods
may not be meaningful to the extent they reflect two significant changes related
to the Company's strategy to sell its underperforming assets. Since January 1,
1998, the Company has sold: (1) 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; and (2) substantially all of
the operating assets of Lady Luck Central City effective February 19, 1998. The
Company's gross revenues from operations during the three months ended March 31,
1998 due to these asset sales are as follows (in millions):
Lady Luck Biloxi $7.0
Lady Luck Central City 0.5
Gross revenues at the Lady Luck Casinos & Entertainment Resort increased
from $26.3 million to $27.4 million, an increase of $1.1 million or 4%, during
the three months ended March 31, 1998 and 1999, respectively. The Lady Luck
Casinos & Entertainment Resort's gross revenues increased despite: (1) severe
storms in Arkansas during the first two weeks of January 1999 which adversely
affected access by those customers; and (2) disruption caused by the
construction of the 314-room hotel adjacent to the Country Casino. The increase
was due to an 11% increase in the amount wagered on slot machines offset
partially by a decrease in table games revenues.
16
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
Gross revenues at Lady Luck Natchez increased from $8.8 million to $9.8
million, an increase of $1.0 million or 11%, during the three months ended March
31, 1998 and 1999, respectively. Lady Luck Natchez's gross revenues increased
due to a $900,000 increase in slot machine revenues and a $100,000 increase in
food and beverage revenues. These increases were due to the following: (1) the
addition of more bus line runs; (2) a shift from direct mail and promotions to
more special events and advertising; (3) the addition of a nearby off-site
full-service restaurant that attracted an increased number of new visitors; and
(4) the remodeling of two additional floors of the River Park Hotel between
comparative periods which are believed to have attracted more affluent
customers.
The Company's investment in the Bettendorf joint venture is accounted for
under the equity method and the Company's portion of income or loss from the
joint venture is included in gross revenues. In addition, the Company's gross
revenues include income from leasing a gaming vessel to the Bettendorf joint
venture and management fee income for managing the Bettendorf joint venture's
operations. The combined gross revenues recognized by the Company related to
these items remained relatively constant at $2.6 million and $2.5 million during
the three months ended March 31, 1999 and 1998, respectively. This is despite an
increase in the Bettendorf joint venture's gross revenues from $20.3 million to
$23.6 million, an increase of $3.3 million or 16%, which did not result in a
corresponding increase in its net income. This increase in gross revenues was
due primarily to a $2.0 million increase in slot machine revenues between
periods and recognition of $900,000 of hotel revenues during the three months
ended March 31, 1999 related to its 256-room hotel which opened in September
1998. The increase in slot machine revenues was primarily due to a 22% increase
between periods in the average number of slot machines in operation as part of
the facilities' expansion completed during September 1998. These revenues did
not result in a corresponding increase in the joint venture's net income due
primarily to the following: (1) $1.4 million increase in casino operating
expenses primarily related to relatively larger increases in slot department
expenses for such items as complimentaries, payroll, equipment and rentals; (2)
$700,000 of operating expense for the 256-room hotel; and (3) $300,000 of
additional interest and $400,000 of additional depreciation and amortization
related to the expansion.
Consolidated casino operating expenses as a percentage of consolidated
casino revenues decreased from 42% in the three months ended March 31, 1998 to
41% in the three months ended March 31, 1999, primarily due to the following:
(1) the ceasing of operations in February 1998 of Lady Luck Central City and in
June 1998 of Lady Luck Biloxi, which properties historically operated at less
favorable margins than the Company's average margin; and (2) reductions in the
relative cost of complimentary rooms, food and beverage furnished to casino
customers. These decreases were offset partially by the following: (1) increases
in payroll and related costs at the Lady Luck Casino & Entertainment Resort in
an effort to improve the quality of service to customers; and (2) increased cash
incentives to slot machine customers at the Lady Luck Casino & Entertainment
Resort in relation to slot revenues due to relatively more of its customers
using slot club cards while playing slot machines.
Food and beverage costs and expenses, prior to reclassifying the cost of
complimentaries, as a percentage of related revenues decreased from 90% for the
three months ended March 31, 1998 to 85% for the three months ended March 31,
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 increases
in labor and food and beverage costs relative to food and beverage revenues at
Lady Luck Natchez and the Lady Luck Casinos & Entertainment Resort.
Gross room revenues for the River Park Hotel increased approximately 10%
during the three months ended March 31, 1999 compared with the prior year three
months. Approximately 40% of the hotel's rooms underwent remodeling since the
three months ended March 31, 1998, which enabled Lady Luck Natchez to increase
its average daily room rate from $37 to $44, an increase of $7 or 19%. The
additional gross room revenues from the increase in the
17
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
average daily room rate was offset partially by a 3% decrease in occupancy from
75% to 72% between comparative three month periods. Combined gross room revenues
at the Riverbluff hotel and the Rhythm & Blues hotel at Lady Luck Casinos &
Entertainment Resort were somewhat disrupted by construction of its 314-room
Country hotel which opened April 30, 1999; however, during the three months
ended March 31, 1999 as compared with the prior year, combined gross room
revenues of the Riverbluff and Rhythm & Blues hotels increased by approximately
6%. Between comparative periods, the Riverbluff hotel's occupancy rate increased
from 70% to 73%, while average daily room rates increased from $25 to $28. The
Rhythm & Blues hotel's occupancy rate increased from 87% to 90% between
comparative periods and average daily room rates increased from $44 to $47.
Increased offerings of hotel rooms at these facilities to patrons on a
complimentary basis positively affected occupancy rates. The Lady Luck
Bettendorf hotel, which opened during September 1998, experienced an occupancy
rate of 71% during the three months ended March 31, 1999 and achieved an average
daily room rate of $53.
Selling, general and administrative expenses as a percentage of total gross
revenues decreased from 28% to 26% during the three months ended March 31, 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)
a decrease in casino marketing expenses as a percentage of total gross revenues
at the Lady Luck Casinos & Entertainment Resort over the prior year three month
period due to a shift from advertising to bus programs; and (3) reductions in
facilities expenses such as repairs, maintenance, utilities and insurance at
Lady Luck Natchez due to the absence in the current period of storm damage to
the power system which had occurred in the prior period. These decreases were
partially offset by the following: (1) increased administrative payroll and
related costs; and (2) increased record retention costs related to optically
scanning a significant amount of back office documents and storing the images on
compact discs for later retrieval.
Operating income was $8.7 million for the three months ended March 31,
1999, an $800,000 improvement over the $7.9 million for the three months ended
March 31, 1998. In addition to the changes described above, the increase in
operating income was due to a $300,000 decrease in depreciation expense due to
the sales of Lady Luck Central City in February 1998 and Lady Luck Biloxi in
June 1998 offset partially by a $100,000 increase in related party license fees
due to improved earnings.
Income applicable to common stockholders was $3.1 million or $0.63 per
share for the three months ended March 31, 1999 compared $2.0 million or $0.42
per share for the three months ended March 31, 1998. In addition to the changes
described above, the increase in income applicable to common stockholders was
primarily due to the following: (1) a reduction in net interest expense
resulting from the capitalization of interest on funds used during construction
of the 314-room Country hotel at the Lady Luck Casinos and Entertainment Resort;
(2) a $100,000 increase in management fees from an unconsolidated subsidiary due
to improved earnings at the Bettendorf joint venture; and (3) a $100,000
increase in interest income due to increases in cash and marketable securities
received as a result of asset sales and from operations. These positive factors
were offset partially by the following: (1) $200,000 of losses on the sale of
slot machines; and (2) a $100,000 increase from compounding on unpaid prior
dividends on the Company's Mandatory Cumulative Redeemable Preferred Stock.
18
<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 Ended %Increase
March 31, (Decrease)
------------------ 1999 vs.
1999 1998 1998
-------- -------- ----------
Gross revenues........................... $ 27.4 $ 26.3 4
Net revenues............................. 25.0 23.9 5
Management fee........................... 0.9 0.9 -
Operating income......................... 5.8 6.2 (6)
Operating margin......................... 23% 26% (3) pts
Average daily net win per table game..... $ 606 $ 698 (13)
Average number of tables in operations... 49 50 (2)
Average daily net win per slot machine... $ 151 $ 163 (7)
Average number of slot machines in
operation.............................. 1,554 1,334 16
Lady Luck Natchez
-----------------
Three Months Ended %Increase
March 31, (Decrease)
------------------ 1999 vs.
1999 1998 1998
-------- -------- ----------
Gross revenues........................... $ 9.8 $ 8.8 11
Net revenues............................. 9.1 8.0 14
Management fee........................... 0.3 0.3 -
Operating income......................... 1.4 1.2 17
Operating margin......................... 15% 15% -
Average daily net win per table game..... $ 813 $ 808 1
Average number of tables in operations... 16 16 -
Average daily net win per slot machine... $ 123 $ 112 10
Average number of slot machines in
operation................................ 643 617 4
19
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
Lady Luck Bettendorf (a)
--------------------
Three Months Ended %Increase
March 31, (Decrease)
------------------ 1999 vs.
1999 1998 1998
-------- -------- ----------
Gross revenues.......................... $ 23.6 $ 20.3 16
Net revenues............................ 22.2 19.1 16
Management fee.......................... 0.6 0.5 20
Operating income........................ 3.1 2.9 7
Operating margin........................ 14% 15% (1) pt
Average daily net win per table game.... $ 684 $ 773 (12)
Average number of tables in operations.. 43 37 16
Average daily net win per slot machine.. $ 170 $ 184 (8)
Average number of slot machines in
operation............................... 1,156 951 22
- -----------------------
(a) Lady Luck Bettendorf is 50% owned by LLQC. The Company includes 50%
of its net income as equity in net income of affiliates using the
equity method of accounting.
20
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
Liquidity and Capital Resources
During the three months ended March 31, 1999, the Company generated $4.0
million in cash from operations. The primary sources during the three months
ended March 31, 1999 of cash and non-cash resources were: (1) cash flow from
operations; (2) cash on hand at the beginning of the year; (3) $2.6 million from
the sale of marketable securities; (4) $300,000 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 three months ended March 31, 1999, other than
operating expenditures, include:
A. $8.9 million for net property and equipment primarily related to the
Lady Luck Casinos and Entertainment Resort as follows:
- $7.8 million for continuation of construction of a 314-room
hotel
- $400,000 for continuation of remodeling of the Rhythm & Blues
Hotel
- $900,000 for commencement of production and installation of
new generator systems
B. $200,000 for the re-payment of debt and slot contracts.
C. $100,000 for the acquisition of slot machines and other assets by
certain subsidiaries for the incurrence of indebtedness.
D. $600,000 for accrual of preferred stock dividends.
Lady Luck Central City is expected to require cash infusions of $200,000
during 1999, the expense portion of which was fully accrued as of December 31,
1997 for payments on the remaining parking lot leases, including the purchase of
the two remaining lots as required by the contracts. The sellers will finance a
portion of the purchases. Lady Luck Central City will require additional cash
infusions related to these leases in periods beyond 1999 for debt service.
During the remainder of 1999, Lady Luck Biloxi is expected to require cash
infusions of up to $100,000, the expense portion of which was fully accrued as
of December 31, 1998, for payments on a lease. The lease cost is $200,000
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.
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 in liquidated
damages until the project has been completed. As of April 1,1999, the Bettendorf
Joint Venture has incurred approximately $68,000 of costs related to the marina
and anticipates that, if constructed, the marina will cost an additional amount
not in excess of $1,000,000. 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 and thus no liquidated damages are being assessed. In addition,
the Bettendorf Joint Venture is responsible in 1999 for demolishing the Plaza
building at 1823 State Street and preparing the site for donation back to the
City. The Bettendorf Joint Venture estimates this process will cost $200,000.
21
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
During August 1998, the Company entered into an agreement to construct a
new 314-room hotel adjacent to the Country Casino. The hotel opened April 30,
1999. The Company funded the construction primarily with the proceeds from the
sale of substantially all of Lady Luck Biloxi's operating assets. As of March
31, 1999, approximately $13.8 million of the project had been completed and
total costs are not expected to exceed $17.0 million. During March 1999, the
Company entered into an agreement for the purchase of generators that will
replace the Lady Luck Casinos and Entertainment Resort's existing power
generation system. The project is scheduled for completion during the second
quarter of 1999 at a cost not to exceed $4.1 million. The Company intends to
fund the purchase and installation with a combination of bank financing and cash
on hand; however, if bank financing is unavailable on terms acceptable to the
Company, cash on hand and from operations will be used.
No further significant expenditures for projects under development are
anticipated to be made by the Company from existing cash or cash flow from
operations. Various amounts of cash and non-cash resources may be used during
1999 for other capital improvements, expansions or acquisitions that cannot
currently be estimated and may be contingent on market conditions and other
factors. If significant cash or other resources become available, the Company
may make additional capital expenditures. In any case, the amount of capital
expenditures will be based on cash available and market conditions at the time
any commitment is made.
The Company may also repurchase all or a portion of the 2001 Notes in early
satisfaction of any required repurchase expected under the Indenture governing
the 2001 Notes or otherwise, the amount of which and the timing of repurchase
cannot currently be estimated and are dependent on adequate cash availability
and market conditions. The Company has begun to explore various options to
refinance the 2001 Notes. However, there is no guarantee that the Company will
continue these pursuits and, if pursued, that terms acceptable to the Company
can be negotiated. The Company anticipates that it will not repurchase any
portion of the 2001 Notes in 1999 other than in connection with a refinancing.
The Company has an agreement for the construction of a $16.0 million
cruising gaming vessel and, as of December 31, 1998, approximately $6.0 million
had been paid under this agreement and approximately $1.9 million is included in
construction payables. It is anticipated that this vessel will be used for the
Kimmswick project. However, construction has been discontinued and is not
anticipated to resume until such time as the State of Missouri, with regard to
its gaming license application, selects the Kimmswick project for investigation.
During 1998, the contractor filed for bankruptcy. The filing listed $1.5 million
as an accrued construction receivable from the Company and did not list the
partially completed vessel as an asset. The Company is relocating the vessel
from the shipyard at a cost not expected to exceed $300,000 including interim
storage.
The Company is involved in specific lawsuits which if adversely decided
could have a material adverse effect upon the Company's financial position and
results of operations (see Note 7 to the condensed consolidated financial
statements included as Item 1, Part I).
The Company is subject to certain federal, state and local environmental
protection, health and safety laws, regulations and ordinances that apply to
businesses generally, including the Clean Air Act, the Clean Water Act, the
Resource Conservation and Recovery Act, the Comprehensive Environmental
Response, Compensation and Liability Act, the Oil Pollution Act, the
Occupational Safety and Health Act, and similar state statutes (see Note 8 to
the condensed consolidated financial statements included as Item 1, Part I).
Effective June 4, 1998, the Company's shareholders approved a one-for-six
reverse stock split with regard to its Common Stock (the "Reverse Split"). The
effects of the Reverse Split were to reduce the number of issued and outstanding
shares of Common Stock from 29,285,698 to 4,881,003 and to increase the par
value of these shares from
22
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
$0.001 to $0.006 per share. Instead of fractional shares resulting from the
Reverse Split, stockholders received a cash payment from the sale of the
aggregate fractional shares on the open market. The Reverse Split did not change
the number of authorized shares of the Company's Common Stock and had no effect
on the Company's Preferred Stock. All references in the financial statements to
number of shares, per share amounts and market prices of the Company's Common
Stock have been retroactively restated to reflect the decreased number of shares
of Common Stock outstanding.
On October 19, 1998, the Company was informed by the Nasdaq National Market
that, based on its staff's review, the Company's Common Stock failed to maintain
market value of public float, composed of total shares outstanding reduced by
those held by directors and officers, as defined, greater than or equal to $15.0
million, in accordance with Marketplace Rule 4450(b)3 under Maintenance Standard
2. The Nasdaq National Market indicated that it will provide the Company a
period of time to demonstrate compliance. If the Company is unable to
demonstrate compliance during the period, the Company's Common Stock may be
delisted. If the Company is unable to achieve compliance, it may seek further
procedural remedies, but the Company cannot guarantee that it will be successful
in the employment of any of these remedies. However, the Company believes that
it would be eligible for listing on the Nasdaq Smallcap Market, but no guarantee
can be provided that the Company would be in fact eligible for Nasdaq Smallcap
Market listing.
The Company is highly leveraged. As of March 31, 1999, the Company's total
long-term indebtedness was approximately $176.5 million and its stockholders'
deficit was approximately $21.1 million. This level of indebtedness could have
important consequences to stockholders. While management believes the Company
will have sufficient cash flow to meet its debt service and other cash outflow
requirements and maintain compliance with the covenants of the Indenture
governing the 2001 Notes, if a substantial portion of the Company's cash flow
from operations remains dedicated to the payment of principal and interest on
its indebtedness, that cash flow is not available for other purposes such as
general operations, maintenance and improvement of casino and hotel facilities
or expansion of existing sites or into other gaming markets. Furthermore, the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures or acquisitions may be limited, and the Company's
level of indebtedness could limit its flexibility in planning for, or reacting
to, changes in its industry.
Andrew H. Tompkins, Chairman and Chief Executive Officer of the Company,
beneficially owns approximately 46% of the Company's outstanding Common Stock.
As a result of his ownership and control, Mr. Tompkins has the ability to
significantly influence the Company's affairs, including electing all of its
directors and (except as otherwise provided by law) approving or disapproving
other matters submitted to a vote of the Company's stockholders, including a
merger, consolidation or sale of assets.
Mr. Tompkins also owns a casino-hotel in Las Vegas, Nevada and the Lady
Luck trademark and a customer list, which the Company licenses from him. The Las
Vegas casino-hotel has incurred substantial indebtedness and is in default on
that debt as of March 14, 1999. Mr. Tompkins is personally liable for the debt
and has pledged certain of his assets, including the Lady Luck trademark and
customer list, as collateral for the benefit of the holders of that
indebtedness. As a result of the current default, these lenders are entitled to
the benefit of this collateral and could foreclose on the pledge and seize the
Lady Luck trademark and customer list and sell them to a third party. In
addition, Mr. Tompkins may be required to sell his Common Stock in the Company,
the trademark and the customer list to satisfy the debt.
Pursuant to the Indenture, a sale of Mr. Tompkins' Common Stock resulting
in another person beneficially owning more than 35% of the Company's outstanding
common stock would trigger a Change in Control event, which would in turn permit
any holder of the Company's outstanding 2001 Notes to require the Company to
repurchase all or any part of such holder's 2001 Notes at a cash price equal to
101% of the principal amount thereof, plus accrued and unpaid interest. As of
April 16, 1999, the closing market price of the 2001 Notes, as reported by
Donaldson, Lufkin and
24
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
Jenrette, was 101.75%. In addition, a sale of Mr. Tompkins' Common Stock
resulting in another person beneficially owning more than 30% of the Company's
outstanding Common Stock or a change in the persons constituting a majority of
the board of directors over a two-year period (unless new directors are elected
or nominated by two-thirds of the directors who were directors at the beginning
of the period) would trigger the change in control provisions in the LLGC
agreements with Alain Uboldi, LLGC's President, Chief Operating Officer and
Director, and Rory J. Reid, LLGC's Senior Vice President, General Counsel,
Secretary and Director. See Note 6 to the Condensed Consolidated Financial
Statements included in Part I., Item 1.
Year 2000
- ---------
The Company's computer systems may not be Year 2000 compliant. The Year
2000 issue is the result of computer programs being written using two digits
rather than four to define the applicable year, which may result in systems
failures and disruptions to operations on or after January 1, 2000. In order to
address this issue, the Company has retained an outside consultant to help it to
assess the computer systems used in the Company's business that are not Year
2000 compliant, and prepare and implement its Year 2000 computer compliance
program.
The Company has divided the systems located at each of its properties and
corporate offices into two categories: (1) systems that would have a significant
effect on operations or financial statements (the "mission critical systems"),
such as slot systems and lodging and gaming systems, and (2) low priority
systems (for example, individual personal computers or workstations). Each
category included both IT Systems (for example, network software and hardware
systems) and Non-IT Systems (for example, devices that are potentially date
sensitive due to their dependency on a built in computer chip or proprietary
software developed by a third party). The Company has relied exclusively on
representations of the suppliers of its systems to determine whether a system is
Year 2000 compliant. As of March 31, 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 March 31, 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 operating cash flows. If those suppliers fail to
provide upgrades in a timely manner or the upgrades are not functional, this
failure or non-functionality may have a material adverse effect on the Company,
including the loss of the authority to operate electronic gaming devices in one
or more jurisdictions if the electronic monitoring systems were to become
non-functional and waivers were not granted by the licensing authorities. The
Company has so far evaluated approximately 87% of the Company's mission critical
systems and if any remaining systems that have not been evaluated are not Year
2000 compliant and cannot be Year 2000 compliant in a cost efficient or timely
manner, these costs or non-compliance may have a material adverse effect on the
Company. The Company has not adopted a written contingency plan in the event of
a worst-case scenario; however, based on the timing of completing evaluations of
critical systems and the successful implementation of repairs and replacements,
management will continue to evaluate the need for a formal contingency plan.
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.
24
<PAGE>
LADY LUCK GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
Impact of Inflation
Absent changes in competitive and economic conditions or in specific prices
affecting the industry, management does not expect that inflation will have a
significant impact on the Company's operations. Changes in specific prices (such
as fuel and transportation prices) relative to the general rate of inflation may
materially affect the hotel-casino industry. There has been no material impact
from inflation during the periods covered by the accompanying financial
statements.
Seasonality and Weather
A flood or other severe weather condition could cause the Company to lose
the use of one or more dockside facilities for an extended period. The inability
to use a dockside facility during any period could have a material adverse
effect on the Company's financial results. Seasonal revenue fluctuations may
occur at the Company's existing casinos in Mississippi and Iowa with winter
months typically yielding lower revenue due to adverse weather conditions.
25
<PAGE>
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not Applicable.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
(a) None.
(b) None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) 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.
None
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATE: May 13, 1999 Lady Luck Gaming Corporation
----------------------------
Registrant
/s/ James D. Bowen
Its: Vice President Finance and
Principal Accounting Officer and
duly authorized officer
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(This schedule contians summary financial information extracted from the
Consolidated Statements of Operations for the year ended December 31, 1998 and
is qualified in its entirety by reference to such financial statements)
</LEGEND>
<CIK> 0000906527
<NAME> Lady Luck Gaming Corporation
<MULTIPLIER> 1,000
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<PERIOD-TYPE> year
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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<CASH> 28,440
<SECURITIES> 16,613
<RECEIVABLES> 1,410
<ALLOWANCES> 408
<INVENTORY> 965
<CURRENT-ASSETS> 48,200
<PP&E> 160,744
<DEPRECIATION> 32,953
<TOTAL-ASSETS> 196,665
<CURRENT-LIABILITIES> 20,080
<BONDS> 176,512
21,203
0
<COMMON> 29
<OTHER-SE> (21,159)
<TOTAL-LIABILITY-AND-EQUITY> 196,665
<SALES> 36,733
<TOTAL-REVENUES> 39,834
<CGS> 14,545
<TOTAL-COSTS> 14,545
<OTHER-EXPENSES> 13,452
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<INCOME-PRETAX> 3,703
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