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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACTOF 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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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock of Lady Luck Gaming Corporation ($.006 par value)
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(Title of class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of each registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock, $.006 par value, held by
non-affiliates of the registrant, Lady Luck Gaming Corporation, on March 12,
1999, based on the closing sale price as reported by the Nasdaq National Market,
was approximately $13,999,930. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 12, 1999, 4,881,003 shares of the registrant, Lady Luck Gaming
Corporation's, Common Stock, $.006 par value, were outstanding.
The registrant, Lady Luck Gaming Corporation's, proxy statement for its
1999 Annual Meeting of Stockholders is incorporated by reference herein into
Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS.
All statements contained herein that are not historical facts, including
but not limited to, statements regarding Lady Luck Gaming Corporation ("LLGC")
and its subsidiaries' (collectively, the "Company"), 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 Rhythm and Blues/Country Casino
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
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 Part II, Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations--Certain Risks and Uncertainties, for a
discussion of some of these factors.
General
The Company operates distinctly themed dockside and riverboat casinos and
related entertainment and lodging facilities in several gaming markets. To
attract repeat customers, the Company's strategy focuses on offering spacious
facilities, ample parking, proximity to major highways, accessible hotel
accommodations and providing a value-oriented gaming experience. The Company
currently owns and operates: (1) two music-themed dockside casinos, a hotel and
an entertainment center in Coahoma County, Mississippi, and a hotel less than
one mile from this complex; (2) a showboat-themed dockside casino and a hotel in
Natchez, Mississippi; and (3) through a 50% owned joint venture, a riverboat
casino and a hotel in Bettendorf, Iowa (the Company also owns and leases the
cruising vessel to this joint venture). The Company may develop other dockside
or riverboat casino projects, including projects at the following locations: (1)
Kimmswick, Missouri, and (2) Vicksburg, Mississippi. In addition, the Company
operates a central reservations center in Phoenix, Arizona which books
reservations for the Company's four hotels.
Recently, as part of the Company's strategy to dispose of under-performing
assets and focus on the markets where it has strong competitive positions, the
Company disposed of: (1) Lady Luck Biloxi in Biloxi, Mississippi (June 1998);
(2) Lady Luck Central City in Central City, Colorado (February 1998); and (3)
the Company's 35% interest in Bally's Saloon, Gambling Hall and Hotel in Tunica,
Mississippi (September 1997). These asset sales and the improved performance at
its core properties have significantly enhanced the Company's profitability.
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Operating Casinos
Lady Luck Rhythm & Blues/Country Casino Complex (Coahoma County). Lady Luck
Rhythm & Blues opened for dockside gaming in June 1994 and the attached 173-room
hotel opened in August 1994. Coahoma County, Mississippi is located
approximately 120 miles southeast of Little Rock, Arkansas and 60 miles
southwest of Memphis, Tennessee. Approximately two million people live within
the complex's primary target markets.
To better accommodate its customers, the Company opened the Country Casino
and an entertainment center, the Pavilion, in May 1996 and acquired the 120-room
Riverbluff Hotel across the Mississippi River in Helena, Arkansas in July 1996.
Lady Luck Rhythm & Blues has a Las Vegas-style Rhythm & Blues theme, and the
Country Casino has a Las Vegas-style country theme. The Company believes that
the Coahoma County casinos benefit from being in an attractive location with
easy access. The Company is the only operator serving the Coahoma County area
and its casinos are located next to the Helena Bridge, the closest bridge
crossing the Mississippi River that connects Arkansas with Mississippi. The
nearest other bridges that cross the Mississippi River are approximately 50
miles to the north (near Memphis, Tennessee) and approximately 90 miles to the
south (near Greenville, Mississippi). The Company enjoys a strong market
position with visitors from Arkansas, as its casinos are the closest to and most
easily accessed from the Little Rock area.
The casinos occupy two barges with approximately 60,000 square feet of
combined gaming space. As of December 31, 1998, the casinos featured 1,560 slot
machines, 49 table games and six poker tables. Other related amenities include
the 173-room Lady Luck Rhythm & Blues Hotel, the 120-room Riverbluff Hotel, the
Pavilion entertainment center, three restaurants and a buffet. The Pavilion
consists of approximately 25,000 square feet of entertainment and event space,
two movie theaters, an arcade and a logo shop.
Management believes that the further development of the Country Casino as a
destination property will enhance the combined operations of the Lady Luck
Rhythm & Blues/Country Casino complex. During 1998, the Company opened a
full-service restaurant to replace the food court in the Country Casino. To meet
peak demand and enhance access to the Country Casino, the Company also modified
traffic patterns and added additional paved parking areas for 360 automobiles
and 15 tractor-trailers in 1998. In addition, the Company made various other
improvements, such as remodeling portions of the casino and installing a new
property-wide PBX system for more efficient communications and lower operating
costs. In August 1998, the Company began construction of a 314-room hotel which
is expected to open during the second quarter of 1999. The new hotel will more
than double the number of rooms at the Company's property and allow it to
attract and serve existing and future customers living in distant markets.
Approximately $6.1 million of the $17.0 million hotel construction project was
completed during 1998. The balance of this project will be completed during the
first half of 1999.
In addition, the Company is remodeling the rooms at the existing hotel
adjacent to Lady Luck Rhythm & Blues. The remodeling costs are not expected to
exceed $500,000 and the remodeling is anticipated to be completed during the
second quarter of 1999.
Lady Luck Bettendorf. The Lady Luck Bettendorf opened in April 1995. The
Bettendorf casino and related facilities are owned by a 50/50 joint venture
between the Company and Bettendorf Riverfront Development Company. Lady Luck
Bettendorf serves the Quad Cities metropolitan area and is one of three gaming
facilities serving that market. Since its recent expansion in August 1998, Lady
Luck Bettendorf's market share has risen above 50%, and was 48% for 1998, a
significant increase from its market share of 35% during its first full quarter
of operations. Lady Luck Bettendorf benefits from being in an attractive
location with easy access. The casino is located just off Interstate 74 on the
Mississippi River and offers easy access from the two interstate highways
serving the Quad Cities metropolitan area, Interstate 74 and Interstate 80.
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The casino consists of approximately 30,000 square feet of gaming space on
a riverboat gaming vessel that emphasizes spaciousness and excitement with its
ample aisle space, high ceilings and a connecting pavilion and hotel. The
overall effect avoids the cramped atmosphere found in the nearby competing
riverboat casinos. As of December 31, 1998, the casino featured 1,157 slot
machines, 43 table games and seven poker tables. Customers also enjoy related
facilities that include a restaurant, gift shop and a showroom/entertainment
area for parties and special events. In August 1998, the Company completed
construction of a 256-room hotel with a fully enclosed walkway to the riverboat
casino, a 500-car parking garage, approximately 16,000 square feet of convention
space and a bypass over the nearby railroad to improve access.
During April 1998, the Iowa Racing and Gaming Commission approved the
addition of up to 230 new slot machines and six table games at Lady Luck
Bettendorf, many of which were installed before the opening of the hotel. The
Company anticipates further development of a restaurant and offices at Lady Luck
Bettendorf's conference center. Notwithstanding these planned expenditures, the
Company anticipates that Lady Luck Bettendorf will begin distributing up to 45%
of its net income beginning in 1999 to its owners in relation to their relative
ownership percentages.
Bettendorf Riverfront Development Company is leasing certain real property
to the Bettendorf Joint Venture. The Company owns and leases a cruising vessel
to Lady Luck Bettendorf. These leases are paid monthly and were determined based
on arms-length negotiations between the Company and BRDC.
All net profits and losses from all operations of Lady Luck Bettendorf are
allocated equally between the Company and its joint venture partner. The Company
manages Lady Luck Bettendorf pursuant to a management agreement for a fee equal
to 2% of gross revenues (as defined in the agreement) plus 7% of EBITDA (as
defined in the agreement) not to exceed 4% of annual casino gross revenue
generated by Lady Luck Bettendorf, less $37,500 per month. The Company's joint
venture partner provides consulting services to it concerning licensing,
staffing and management of the marine aspects of the gaming vessel and any
land-based development. The Company's partner's consulting fees, which are based
on Lady Luck Bettendorf's gross revenues, and are not to exceed $325,000
annually, are to be paid by the Company out of its management fee. A group of
four managers operate the Bettendorf joint venture. Both the Company and its
joint venture partner have each appointed two managers. Most management
decisions, including capital calls and distributions, are determined by a
majority of the managers.
Lady Luck Natchez. Lady Luck Natchez opened in February 1993. Natchez is
one of the first settlements along the Mississippi with a rich history that
attracts tourists from around the nation. To attract tourists who are drawn to
Natchez, the Company's showboat-themed casino was built to resemble the historic
J. M. White Mississippi riverboat, which docked at Natchez in the late 1800s.
Lady Luck Natchez is the only gaming facility serving the Natchez area, with the
nearest casino approximately 50 miles away in Marksville, Mississippi. Lady Luck
Natchez also benefits from being in an attractive location with easy access. The
Company's property is located at the intersection of a north-south highway
connecting Natchez, Mississippi and Memphis, Tennessee and a major east-west
thoroughfare.
The three-story, dockside casino has approximately 14,300 square feet of
gaming space. As of December 31, 1998, the casino space featured 634 slot
machines, 16 table games and four poker tables. Customers may also enjoy Lady
Luck Natchez's nearby recently remodeled 147-room River Park Hotel which
includes convention and banquet facilities and is located less than one mile
from our casino, the Bayou Lane Buffet restaurant and a its nearby gourmet
restaurant featuring chef John Martin.
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Development Stage Projects
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In addition to its operating casinos, the Company has two dockside or
riverboat casino projects that are in various stages of development. The current
status of each of these development stage projects is described below.
Kimmswick, Missouri
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The first two phases of the project, as planned, include a land-based hotel
and casinos onboard two separate vessels. The proposed site is located on an
approximately 45-acre parcel of land approximately 25 miles south of St. Louis,
Missouri. The Company has entered into an option to lease the proposed site at
terms management believes are very favorable to the Company. The Company
believes the development project possesses many of the favorable characteristics
that it seeks in developing new projects in that the location enjoys good
accessibility to major transportation corridors, close proximity to major
metropolitan areas, and is an attractive market with its closest competition
more than 20 miles away.
As of December 31, 1998, the Company had invested approximately $8.7
million ($140,000 of which was invested during 1998) in the Kimmswick project,
including vessel construction. Development costs have been fully reserved and
the vessel construction costs were reduced by a $3.0 million write-down
recognized during 1997. The Company estimates that the Kimmswick project will
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 Kimmswick project and has 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 is no guarantee that the Company will be selected or obtain the necessary
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 Kimmswick project may also be subject to: (1) the
selection of three new Missouri Gaming Commission members, which the Company
believes may not be familiar with the Company's application; (2) gaming revenues
in the major metropolitan areas of Missouri having not increased commensurate
with recent increases in capacity, causing concerns of potential competitive
saturation; and (3) regulatory factors, including loss limits, having generally
caused gaming operations to underperform relative to facilities in neighboring
jurisdictions without those restrictions.
The Vicksburg Project
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This development is expected to include a riverboat casino, an
approximately 200-room hotel, an 800-car parking garage, and additional
amenities in Vicksburg, Mississippi. The Vicksburg project is expected to be
located on approximately 23.9 acres of land owned by the Company immediately
south of the Interstate 20 bridge along the Mississippi River, with access to
Washington Street, in Vicksburg. The Company believes the Vicksburg project
possesses many of the favorable characteristics that it seeks in developing new
properties in that the location enjoys access to major transportation corridors
and is within close proximity to major metropolitan areas.
During 1997, the Company entered into a joint venture agreement with
Horseshoe Gaming, LLC to form a joint venture to complete and operate the
Vicksburg project. However, during October 1998, the Company terminated this
joint venture agreement under its terms.
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A gaming license was granted on August 18, 1994 and has subsequently been
renewed through July 2000. As of December 31, 1998, the Company has invested
approximately $14.5 million ($100,000 of which was invested during 1998) 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 replacement 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. The Company is currently revising the development plan.
Casino developments on the Big Black River could significantly adversely
affect operating casinos in Vicksburg and thus the viability of the Vicksburg
project. The Big Black River is located about 13 miles from Vicksburg, between
Vicksburg and Jackson, Mississippi, 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 the site was rejected, and in the fourth
quarter of 1997, a circuit court found the site suitable. The Mississippi Gaming
Commission and the City of Vicksburg have appealed the circuit court decision to
the state Supreme Court. Once the appeal has been perfected, the state 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 is no guarantee that the circuit court ruling will be overturned. The
Company believes that the state Supreme Court should rule on the appeal by the
first quarter of the year 2000.
Marketing
The Company employs systematic, database-driven marketing programs to
attract and retain gaming customers. The Company uses general marketing
approaches to attract first time customers to its casinos by advertising its
slot player club program, popular entertainment and other promotions. Once
customers enter the Company's casinos, the Company attempts to ascertain their
name and playing level regardless of their level of play. As a result, the
Company has accumulated a database of more than five million names that is used
to send targeted and personalized follow-up promotions. Management believes the
Company benefits from utilizing the names on this database to target potential
customers. The Company uses this data, as well as the data collected from other
sources, to implement direct-mail marketing programs designed to increase the
frequency of casino patron visits. The Company expects to continue building a
detailed database by using customer tracking systems. The Company believes that
its marketing strategy, which focuses on promoting all levels of player, along
with its attractive facilities, creates strong brand image synonymous with
quality gaming facilities, service and dining.
Initially, the Company focuses on targeting the local and drive-in markets
surrounding each of its properties. To create a positive image and maintain
awareness of its properties, the Company uses direct mail, television, radio,
billboard and newspaper advertising. To target local residents, promotions
emphasize the appetizing food, friendly service, a high paying slot player club
program, and the latest in gaming technology. The goal of the Company's
marketing program is to capture the name, level of play and preferred games of
every customer that either: (1) plays slot machines or table games; (2) responds
to an advertisement or redeems a coupon book; or (3) is recommended by another
customer. The Company uses this data in its direct-mail marketing programs.
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As the markets surrounding the Company's casinos continue to mature, the
Company has expanded its focus to encompass the surrounding tourist markets of
each casino. The Company effectively competes for outside tourists, as a result
of the attractive lodging facilities at each of its properties. The Company uses
and continuously monitors the effectiveness of direct mail, television
advertising, newspapers, billboards and tourist magazines placed in the
surrounding areas to increase the its casinos' visibility.
License and Other Agreements
Effective January 1, 1996, the Company entered into several agreements with
entities controlled by Mr. Tompkins, Chairman of the Board and Chief Executive
Officer of the Company, replacing other agreements that were less favorable to
the Company. Under a license agreement with International Marco Polo Services,
Inc., (formerly known as Lady Luck Casino, Inc. and Marco Polo's International
Marketing, Inc. which merged in 1996) ("Marco Polo Services"), a corporation
owned and controlled by Mr. Tompkins, the Company pays Marco Polo Services an
annual licensing fee with respect to the Lady Luck name and the mailing list
developed by Gemini, Inc. ("Gemini"), an S corporation wholly owned by Mr.
Tompkins that does business as Lady Luck Casino/Hotel in Las Vegas, Nevada. The
licensing fee is equal to the greater of (a) 9% of the Company's EBITDA as
defined (calculated as EBITDA of the Company and all its subsidiaries and joint
ventures (multiplied, in the case of Lady Luck Bettendorf and the Kimmswick
project by the Company's ownership interest), excluding, among other things, all
revenues and expenses arising from any casino or casino/hotel for which the
Company is not the operator and which does not utilize the mailing list or Lady
Luck name and excluding revenues from the lease of equipment owned by the
Company to third parties or unconsolidated entities), and (b) $1,700,000 per
year (as adjusted based on the Consumer Price Index). The Company has agreed to
use the Lady Luck name on all existing and future casinos that it operates. The
license agreement provides that during any period of default in the payment of
principal or interest on 2001 Notes, the Company will not pay (but will accrue
on its books) any licensing fee due to Marco Polo Services. For 1998, the
licensing fees paid to Marco Polo Services by the Company were approximately
$3.4 million.
Under an office lease with Gemini, the Company pays Gemini the sum of
$300,000 per year, as adjusted based on the Consumer Price Index, for corporate
office facilities and services. In addition, the Company reimburses Gemini for
the approximate retail value of rooms, food and beverage, and other items
provided to the Company by Gemini. For 1998, net rent expense and reimbursable
items paid to Gemini were $315,000 and $104,000, respectively. In addition, the
Company incurred $304,000 of marketing and other expenses reimbursed by Gemini
for 1998.
Marco Polo Services provides marketing services to the Company under a
reimbursement agreement with the Company. Mr. Uboldi, the Company's President
and Chief Operating Officer and director of the Company, is the Vice President
of Marco Polo Services. For 1998, the Company paid Marco Polo Services $870,000
for the cost of marketing services based on allocated payroll, overhead, direct
advertising and other marketing costs. In addition, Marco Polo Services
reimbursed the Company for $405,000 of expenses paid by the Company on behalf of
Marco Polo Services related to 1998 marketing costs.
With respect to the Bettendorf joint venture, pursuant to an assignment and
assumption agreement between Marco Polo Services and the Company, Marco Polo
Services assigned to the Company its rights to receive a management fee for
services performed for the Bettendorf joint venture and to assign its obligation
to pay part of that fee to its joint venture partner.
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Employees
As of December 31, 1998, the Company had approximately 2,500 employees, as
follows: approximately 1,050 employees at the Lady Luck Rhythm & Blues/Country
Casino complex; approximately 425 employees at Lady Luck Natchez; approximately
1,000 employees at Lady Luck Bettendorf; 14 employees at the Company's
reservation facilities in Phoenix; and 17 employees at the Company's corporate
headquarters in Las Vegas. The Company's employees are currently non-union. The
Company has not experienced any work stoppages and believes its relations with
its employees are good.
Competition
The Company believes the gaming markets in which it currently operates or
intends to develop projects are extremely competitive and expects them to become
even more competitive. The Company competes in these gaming markets by
attempting to develop locations within these markets which are more accessible
to potential customers and through its sales and marketing efforts described
above.
There is a substantial risk that the supply of gaming facilities in
Mississippi will exceed the demand for gaming, which could have a material
adverse effect on the Company's operating results. As of December 31, 1998,
there were a total of 28 licensed and operating dockside gaming facilities in
Mississippi, consisting of nine in Tunica, eight in Biloxi, two in Gulfport,
four in Vicksburg, one in Hancock County, one in Coahoma County, one in Natchez
and two in Greenville (one additional dockside casino is licensed and under
construction in Biloxi). DeSoto County, the northwestern-most Mississippi County
and nearest to Memphis, could, under existing state law, vote to authorize
gaming activities, which would in turn increase competition in this market. The
voters of DeSoto County have voted against legalized gaming on three occasions,
most recently in November 1996. However, local referenda may be held during
presidential election years, and there is no guarantee that gaming will not be
approved in DeSoto County in future elections. Additionally, in Arkansas, a
gaming referendum, which, if passed, would have legalized particular forms of
gaming at particular locations, was defeated in November 1996. If gaming were
legalized in particular areas of Arkansas or, to a lesser extent, in DeSoto
County, it could have a material adverse effect on the Company's Coahoma County
facilities. Furthermore, the Mississippi Band of Choctaws negotiated a compact
with the State of Mississippi and has opened a land-based casino located
approximately 100 miles to the east of Jackson, Mississippi, which has affected
Lady Luck Natchez and, if further developed, could affect the Vicksburg project.
Lady Luck Bettendorf faces competition from two other riverboats in the
Quad Cities area, including riverboats in Davenport, Iowa and Rock Island,
Illinois. However, Lady Luck Bettendorf has increased its share of the Quad
Cities, Iowa market from approximately 46% during 1997 to 48% during 1998.
The Company also competes with gaming facilities nationwide and in Canada,
including land-based casinos in Nevada, New Jersey, South Dakota, Colorado and
Ontario, riverboat or dockside gaming in Missouri and Louisiana as well as
various gaming operations on Native American land in such states as New York,
California, Connecticut, Iowa, Michigan, Minnesota, Arizona, Washington,
Wisconsin, Louisiana and Mississippi. Other jurisdictions may legalize various
forms of gaming that may compete with the Company in the future. Although the
Company expects that the presence of gaming in a city will result in an increase
in the number of people visiting that city, there is no guarantee that an
increase will actually occur. The failure of those cities to realize an
increase, or a subsequent decrease in the number of visitors to an area where
the Company is engaged in gaming, could have a material adverse effect on the
Company's operations.
In any jurisdiction where the Company may begin operations, it will face
competition for the more desirable sites and for qualified personnel. The
Company will also compete with other forms of wagering, including bingo and pull
tab games, card clubs, pari-mutuel betting on horse racing and dog racing,
state-sponsored lotteries, video lottery terminals and video poker terminals, as
well as other forms of entertainment.
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Some of the Company's competitors have more gaming industry experience,
larger operations or significantly greater financial and other resources than
the Company does. Given these factors, it is possible that substantial
competition could have a material adverse effect on the Company's future results
of operations.
Seasonality and Weather
Even if the Company is able to expand into other jurisdictions, it may
remain dependent on a relatively small number of dockside facilities. 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 occur at the casinos in Mississippi and Iowa
with winter months typically yielding lower revenues due to adverse weather
conditions.
Regulatory Matters
The Company, through its subsidiaries and affiliates, owns and operates
gaming casinos in Mississippi and Iowa and may develop projects in Missouri and
Mississippi. The entities owning these casinos and any of the Company's entities
owning casinos in the future are or will be required to obtain and maintain
gaming licenses from the applicable state regulatory authorities and comply with
the related regulations. Although the Company believes it is in material
compliance with all applicable gaming regulations, non-compliance by the Company
could have a material adverse effect on the Company's operations. Generally,
regulatory authorities have broad discretion in granting, renewing and revoking
gaming licenses. Lady Luck Gaming Corporation itself is required to be found
suitable to own the entities that directly or indirectly own casinos. In
addition, the Company's directors and many of the casinos' employees are
required to obtain gaming licenses. Where it has not already done so, the
Company intends to apply for licenses and to have its employees, to the extent
required, apply for licenses. All directors and executive officers of the
Company have received all necessary approvals with respect to the operating
casinos and have received, applied for or will apply for all necessary approvals
with respect to the development stage projects. While the Company has received
gaming licenses in the states of Mississippi, Colorado and Iowa, the Company has
not received licenses in any other jurisdiction. There is no guarantee that each
casino, officer, director, or the appropriate gaming employees will receive
(where not yet received) or maintain the necessary gaming licenses, or that the
Company or its casinos will be able to operate successfully or profitably under
the terms of any licenses. The failure of the Company or any of its key
personnel to obtain or retain a license in a particular jurisdiction could have
a material adverse effect on the Company's ability to obtain or retain licenses
in other jurisdictions.
Any jurisdiction in which the Company may seek to conduct gaming operations
in the future would likely require the Company to apply for and obtain
regulatory approvals with respect to the construction, design and operational
features of whatever gaming facilities it intends to use. There is no guarantee
that the Company will obtain the necessary approvals on a timely basis or with
acceptable conditions to allow the Company to open any of the development stage
projects. In addition, the State of Mississippi currently requires, and other
jurisdictions may require, prior approval for all entities that are conducting
gaming within their respective jurisdictions before conducting gaming in other
jurisdictions. The obtaining of licenses and approvals may be time consuming and
expensive and cannot be guaranteed. Any regulations adopted by the gaming
commissions, the legislatures or any governmental authority having jurisdiction
in Mississippi, Missouri, Iowa, or other jurisdictions in which the Company has
or intends to have gaming operations may have a material adverse effect on the
Company's results of operations or financial condition, including its ability to
raise financing.
<PAGE>
10
Mississippi Gaming Regulations
The ownership and operation of a gaming business in Mississippi is subject
to extensive laws and regulations, including the Mississippi Gaming Control Act
passed in June 1990 (the "Mississippi Act") and the related regulations (the
"Mississippi Regulations") issued by the Mississippi Gaming Commission and
Mississippi Tax Commission which are empowered to oversee and enforce the
Mississippi Act. Gaming in Mississippi can be legally conducted only on vessels
of a particular minimum size in navigable waters in counties bordering the
Mississippi River or in waters of the State of Mississippi (so-called dockside
gaming) which lie adjacent and to the south (principally in the Gulf of Mexico)
of the Counties of Hancock, Harrison, and Jackson, and only in counties in
Mississippi in which the registered voters have not voted to prohibit gaming
activities. The voters in Jackson County, the southeastern-most county of
Mississippi, and DeSoto County, south of Memphis, Tennessee, have voted to
prohibit gaming. Gaming may also be legally conducted on Native-American lands
in Mississippi as regulated in part by the Federal Indian Gaming Regulatory Act
of 1988, which activity is not subject to the Mississippi Act. Presently, the
Mississippi Band of Choctaws operates a land-based casino at a location in
East-Central Mississippi.
The Mississippi Act requires that a person (including any corporation or
other entity) must be licensed to conduct gaming activities in Mississippi. A
license will be issued only for a specified location that has been approved as a
gaming site by the Mississippi Gaming Commission prior to issuing a license. The
Mississippi Act also requires that each officer or director of a gaming
licensee, or other person who is actively and directly engaged in the
administration or supervision of gaming, or who has any other significant
involvement with the activities of any gaming subsidiary, or who exercises a
material degree of control over the licensee, either directly or indirectly,
must be found suitable by the Mississippi Gaming Commission. In addition, any
employee of the licensee who is directly involved in gaming must obtain a work
permit from the Mississippi Gaming Commission. The Mississippi Gaming Commission
will not issue a license or make a finding of suitability unless they are
satisfied, after an extensive investigation paid for by the applicant, that the
persons associated with the gaming licensee or applicant for a license have
proven that they are of good character, honesty and integrity, with no relevant
or material criminal record. In addition, the Mississippi Gaming Commission will
not issue a license unless they are satisfied that the licensee is adequately
financed or has a reasonable plan to finance its proposed operations from
acceptable sources, and that persons associated with the applicant have
sufficient business probity, competence and experience to engage in the proposed
gaming enterprise. The Mississippi Gaming Commission may refuse to issue a work
permit to a gaming employee (1) if the employee has committed larceny,
embezzlement or any crime of moral turpitude, or knowingly violated the
Mississippi Act or Mississippi Regulations, or (2) for any other reasonable
cause.
The Mississippi Gaming Commission has the power to deny, limit, condition,
revoke and suspend any license, finding of suitability or registration, or fine
any person, as they deem reasonable and in the public interest, subject to an
opportunity for a hearing. The Mississippi Gaming Commission may fine any
licensee or person who was found suitable up to $100,000 for each violation of
the Mississippi Act or the Mississippi Regulations, which is the subject of an
initial complaint, and up to $250,000 for each violation which is the subject of
any subsequent complaint. The Mississippi Act provides for judicial review of
decisions of the Mississippi Gaming Commission by petition to a Mississippi
Circuit Court, but the filing of a petition does not necessarily stay any action
taken by the Mississippi Gaming Commission pending a decision by the Circuit
Court.
License fees and taxes, computed in various ways depending on the type of
gaming involved, are payable to the State of Mississippi and to the counties and
cities in which the Company's gaming subsidiaries' respective operations are
conducted. Depending on the particular fee or tax involved, these fees and taxes
are payable either monthly, quarterly or annually and are based on a percentage
of the gross gaming revenues received by a casino operation, the number of slot
machines operated by the casino, or the number of table games operated by the
casino. Each gaming licensee must pay a license fee to the State of Mississippi
based on "gaming receipts" (generally defined as gross receipts less payouts to
customers as winnings). In Coahoma and Harrison Counties, for instance, the
local governments have imposed gross revenue fees of 3.2% as well as annual fees
on slot machines. As of June 1, 1995, the City of Natchez was authorized to
impose an equivalent tax on casino gross revenue. The license fee equals 4% of
gaming receipts of $50,000 or less per month, 6% of gaming receipts over $50,000
and up to $134,000 per month,
<PAGE>
11
and 8% of gaming receipts over $134,000 per month. These license fees are
allowed as a credit against the Company's Mississippi State income tax liability
for the year paid. The Company may also be subject to a local municipal or
county tax equal to one-tenth of the license fee due to the State of Mississippi
as set forth above. An additional license fee, based on the number of table
games conducted or planned to be conducted on the gaming premises, is payable to
the State of Mississippi annually in advance. Based on the Company's planned
activities, this additional licensee fee will equal approximately $399,200
(aggregate for all the Company's dockside casinos), plus $100 for each game in
excess of 35 games at any one location. Municipal and county fees have been and
may in the future also be assessed, and may vary from jurisdiction to
jurisdiction. All taxes must be timely paid in order to retain the gaming
license.
The Company is also subject to certain audit and record keeping laws and
regulations, primarily intended to ensure compliance with the Mississippi Act,
including compliance with the provisions relating to the payment of license
fees. The Mississippi Gaming Commission, through the power to regulate licenses,
has the power to impose additional restrictions on the holders of the securities
of the Company at any time. The Company is required to provide the Mississippi
Gaming Commission with notice of any changes in directors or officers. The
Mississippi Gaming Commission requires that any chief executive officer,
president, chief financial officer or secretary of the Company or its
subsidiaries be found suitable. In addition, the Mississippi Gaming Commission
requires that any other director or officer of the Company who has a substantial
involvement with gaming or a significant administrative supervisory role of the
gaming operations be found suitable. These suitability findings may be made
after these individuals take office as directors or officers. However, the
Mississippi Gaming Commission may require that the Company sever relations with
individuals if they are not found suitable. In addition, during the pendency of
any suitability finding, the Mississippi Gaming Commission may require that
these individuals not act as directors or officers. The Mississippi Gaming
Commission has found Messrs. Tompkins, Uboldi, Reid and Tombari suitable.
Because the Company is licensed to conduct gaming in Mississippi, neither
the Company nor any affiliates may engage in gaming activities outside of
Mississippi without the prior approval of the Mississippi Gaming Commission. The
Mississippi Gaming Commission has adopted regulations related to foreign gaming
approval and the impact of any of these regulations on the future operations of
the Company cannot be determined at this time. The Mississippi Gaming Commission
has confirmed that this requirement will not apply retroactively. However, the
Mississippi Gaming Commission will need to approve the Company's future gaming
operations outside of Mississippi. The Mississippi Gaming Commission has
approved the Company's operations in Iowa.
The Mississippi Regulations also require prior approval for a "plan of
recapitalization" as defined by the regulations. In addition, the Company must
submit detailed financial, operating and other reports to the Mississippi Gaming
Commission. Substantially all loans, leases, securities and similar financing
transactions entered into by the Company must be reported to or approved by the
Mississippi Gaming Commission. The Company is required periodically to submit
detailed financial and operating reports to the Mississippi Gaming Commission
and to furnish any other information that the Mississippi Gaming Commission may
require. The Mississippi Act requires annual audits by independent certified
public accountants of the financial statements of casino licensees with gross
revenue of $3 million or more.
Any permanently moored vessel used for casino operations must meet the fire
safety standard of the Mississippi Fire Prevention Code and the Life Safety Code
and the Standards for the Construction and Fire Protection of Marine Terminals,
Piers and Wharf's of the National Fire Protection Association. Additionally, any
establishment to be constructed for dockside gaming must meet the Southern
Standard Building Code or the local building code, if a local building code has
been implemented at the casino's site. All permanently moored vessels must
comply with specified standards for stability, flooding and stability after
damage. The Mississippi Regulations require approvals by the American Bureau of
Shipping, which is under contract with the Mississippi Gaming Commission to
perform these stability tests.
<PAGE>
12
Iowa Gaming Regulations
In 1989, the State of Iowa legalized riverboat gaming on the Mississippi
River and other waterways located in Iowa. The legislation authorized the
granting of licenses to not-for-profit corporations which, in turn, are
permitted to enter into operating agreements with qualified persons who also
actually conduct riverboat gaming operations. Such operators must likewise be
approved and licensed by the Iowa Racing and Gaming Commission (the "Iowa Gaming
Commission").
On August 11, 1994, the Riverbend Regional Authority, a not-for-profit
corporation organized for the purpose of facilitating riverboat gaming in
Bettendorf, Iowa, entered into an operator's contract with the Bettendorf joint
venture authorizing the Bettendorf joint venture to operate riverboat gaming
operations in Bettendorf. The initial term of the operator's contract is for
three years. The Bettendorf joint venture has the right to renew the contract
for succeeding three-year periods as long as Scott County voters approve gaming
in the jurisdiction. The Company renewed the operator's contract effective
September 1, 1998. Under the operator's contract, the Bettendorf joint venture
pays the Riverbend Regional Authority a fee equal to 4.1% of the adjusted gross
receipts. Further, pursuant to statute, the Bettendorf joint venture generally
must pay a fee to the City of Bettendorf equal to 1.65% of adjusted gross
receipts.
In 1994, Iowa amended the enabling legislation removing several previous
restrictions including loss and wager limits and restrictions on the amount of
space on a vessel that may be utilized for gaming. Current law permits gaming
licensees to offer unlimited stakes gaming on games approved by the Iowa Gaming
Commission on a 24-hour basis. Dockside casino gaming is authorized by the Iowa
Gaming Commission although the licensed vessel is required to conduct at least
one two-hour excursion cruise each day for at least 100 days during the
excursion season. The legal age for gaming is 21.
The enabling legislation gives each county the opportunity to hold a
referendum on whether to allow casino gaming within its boundaries. A referendum
was passed on April 7, 1994, with 80% voting in favor of passage and authorizing
casino gaming in Bettendorf for a period of nine years from the issuance date of
the license. Another referendum cannot be held until 2002 and if approved,
subsequent referenda will occur at eight-year intervals.
On March 5, 1998, the Iowa Gaming Commission authorized the renewal of the
Bettendorf joint venture's gaming license. The license is for an additional term
of one-year beginning April 1, 1998, is not transferable and will need to be
renewed in March 1999 and at the end of each annual renewal period.
The ownership and operation of gaming facilities in Iowa are subject to
extensive state laws, regulations of the Iowa Gaming Commission and various
county and municipal ordinances (collectively, the "Iowa Gaming Laws"),
concerning the responsibility, financial stability and character of gaming
operators and persons financially interested or involved in gaming operations.
Iowa Gaming Laws seek to: (1) prevent unsavory or unsuitable persons from having
direct or indirect involvement with gaming at any time or in any capacity; (2)
establish and maintain responsible accounting practices and procedures; (3)
maintain effective control over the financial practices of licensees (including
the establishment of minimum procedures for internal fiscal affairs, the
safeguarding of assets and revenues, the provision of reliable record keeping
and the filing of periodic reports with the Iowa Gaming Commission); (4) prevent
cheating and fraudulent practices; and (5) provide a source of state and local
revenues through taxation and licensing fees. Changes in Iowa Gaming Laws could
have a material adverse effect on the Bettendorf joint venture's gaming
operations.
Gaming licenses granted to individuals must be renewed every year, and
licensing authorities have broad discretion with regard to such renewals.
Licenses are not transferable. The Bettendorf joint venture must submit detailed
financial and operating reports to the Iowa Gaming Commission. Any contract in
excess of $50,000 must be submitted to and approved by the Iowa Gaming
Commission.
<PAGE>
13
Officers, directors, managers and key employees of the Bettendorf joint
venture are required to be licensed by the Iowa Gaming Commission. Employees
associated with gaming must obtain work permits that are subject to immediate
suspension under specific circumstances. In addition, anyone having a material
relationship or involvement with the Bettendorf joint venture may be required to
be found suitable or to be licensed, in which case those persons would be
required to pay the costs and fees of the Iowa Gaming Commission in connection
with the investigation. The Iowa Gaming Commission may deny an application for a
license for any cause deemed reasonable. In addition to its authority to deny an
application for license, the Iowa Gaming Commission has jurisdiction to
disapprove a change in position by officers or key employees and the power to
require the Bettendorf joint venture to suspend or dismiss officers, directors
or other key employees or sever relationships with other persons who refuse to
file appropriate applications or whom the Iowa Gaming Commission finds
unsuitable to act in such capacities.
The Iowa Gaming Commission may revoke a gaming license if the licensee: (1)
has been suspended from operating a gaming operation in another jurisdiction by
a board or commission of that jurisdiction; (2) has failed to demonstrate
financial responsibility sufficient to meet adequately the requirements of the
gaming enterprise; (3) is not the true owner of the enterprise; (4) has failed
to disclose ownership of other persons in the enterprise; (5) is a corporation
10% of the stock of which is subject to a contract or option to purchase at any
time during the period for which the license was issued, unless the contract or
option was disclosed to the Iowa Gaming Commission and the Iowa Gaming
Commission approved the sale or transfer during the period of the license; (6)
knowingly makes a false statement of a material fact to the Iowa Gaming
Commission; (7) fails to meet a monetary obligation in connection with an
excursion gaming boat; (8) pleads guilty to, or is convicted of a felony; (9)
loans to any person, money or other thing of value for the purpose of permitting
that person to wager on any game of chance; (10) is delinquent in the payment of
property taxes or other taxes or fees or a payment of any other contractual
obligation or debt due or owed to a city or county; or (11) assigns, grants or
turns over to another person the operation of a licensed excursion boat (this
provision does not prohibit assignment of a management contract approved by the
Iowa Gaming Commission) or permits another person to have a share of the money
received for admission to the excursion boat.
If it were determined that the Iowa Gaming Laws were violated by a
licensee, the gaming licenses held by a licensee could be limited, made
conditional, suspended or revoked. In addition, the Bettendorf joint venture and
the persons involved could be subject to substantial fines for each separate
violation of the Iowa Gaming Laws at the discretion of the Iowa Gaming
Commission. Limitations, conditioning or suspension of any gaming license could
(and revocation of any gaming license would) have a material adverse effect on
the operations of the Bettendorf joint venture.
The Iowa Gaming Commission may also require any individual who has a
material relationship with the Bettendorf joint venture to be investigated and
licensed or found suitable. The Iowa Gaming Commission, prior to the
acquisition, must approve any person who acquires 5% or more of the Bettendorf
joint venture's equity securities. The applicant stockholder is required to pay
all costs of this investigation.
Gaming taxes approximating 20% of the adjusted gross receipts will be
payable by the Bettendorf joint venture on its operations to the State of Iowa.
In addition, there are costs that include a $50,000 initial application fee,
yearly operations fees and all costs associated with monitoring and enforcement
by the Iowa Gaming Commission and the Iowa Department of Criminal Investigation.
If required by any gaming authority or if the Company reasonably determines
that ownership of any of the Company's securities, including the 2001 Notes, by
any person or entity will either materially preclude, interfere with, threaten
or delay the issuance of, or jeopardize the maintenance and existence of any
gaming or liquor license, or result in the imposition of significantly
burdensome terms or conditions on any license, the Indenture covering the 2001
Notes provides that the Company has the right to redeem them or require their
sale.
<PAGE>
14
Non-Gaming Regulations
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 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 the 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.
The Company's riverboat at Lady Luck Bettendorf must comply with U. S.
Coast Guard requirements as to boat design, on-board facilities, equipment,
personnel and safety. This riverboat must hold Certificates of Documentation and
Inspection issued by the U. S. Coast Guard and may also be subject to local
zoning and building codes. Each of the Company's permanently moored barges in
Mississippi must be certified and approved by the American Bureau of Shipping
with respect to stability and single compartment flooding in accordance with
Mississippi regulations. These permanently moored barges must meet the fire
safety standards of the Mississippi Fire Prevention Code and Life Safety Code
and the Standards for the Construction and Fire Protection of Marine Terminals,
Piers and Wharves of the National Fire Protection Association and may also be
subject to local zoning and building codes.
<PAGE>
15
ITEM 2. PROPERTIES
The Company has various property leases and options to lease property and
owns barges on which dockside casinos have been or are anticipated to be
constructed. The Company (1) owns two parcels of property at the site where Lady
Luck Biloxi is located and leases several other properties at that site, (2)
owns property at the Vicksburg site, (3) leases various land in Natchez and owns
the property where the River Park Hotel is located, (4) has entered into the
Coahoma County lease and purchased the leasehold associated with the property
where the Riverbluff Hotel is located, (5) has entered into various leases in
Gulfport, Mississippi, and (6) has entered into an option to lease the Kimmswick
Site. All rental payments under these leases, other than rental payments under
the Coahoma County leases, are calculated on a fixed base rent adjusted in
accordance with increases in the Consumer Price Index up to a maximum of 3% in
any given year. Rental payments under the Coahoma County leases are 5.5% of the
annual gross revenues (calculated in accordance with those leases). The Company
owns eight barges, one of which is in Natchez, three of which are intended for
use in the construction of the Vicksburg project and four of which are in
Coahoma County. The Company also owns a cruising gaming vessel which is being
leased to the Bettendorf joint venture and has approximately $6.0 million ($3.0
million net of reserves and accruals) invested in a partially finished cruising
vessel. The Company leases and has an obligation to acquire property in Central
City, Colorado (during 1998 the Company acquired a portion of this leased
property). Mortgages and other security agreements for the benefit of holders of
the 2001 Notes encumber some of the Company's properties. Additionally, the
Company has granted liens on particular owned and leased properties to the
sellers or lessors of those properties, including a plot of land adjacent to
Lady Luck Biloxi and the property where the River Park Hotel is located and has
purchased the leasehold interest where the Riverbluff Hotel is located. The
Company leases its corporate offices in Las Vegas, Nevada.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to the legal proceedings discussed below, which have
arisen in the normal course of business. In view of the inherent difficulty of
predicting the outcome of litigation and other legal proceedings, the Company
cannot state with certainty what the eventual outcome of any of these pending
proceedings will be.
Shareholder Class Action Lawsuits
---------------------------------
The Company has been named as a defendant in a purported shareholder class
action lawsuit filed 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 Lady Luck Gaming Corporation ("Lady Luck Gaming"),
Alain Uboldi, Director and Chief Operating Officer of Lady Luck Gaming, Michael
Hlavsa, the former Chief Financial Officer of Lady Luck Gaming, 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.
<PAGE>
16
Greek Lawsuits
--------------
The Company and particular joint venture partners 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 $7.1 million as of March 5, 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 cases are still in their preliminary stages and their outcome cannot be
predicted with any degree of certainty; however, the Company believes, based in
part on advice of counsel, that it has meritorious defenses.
A Greek architect filed an action against the Company alleging that he was
retained by the Company to provide professional services with respect to a
casino in Loutraki, Greece. On July 29, 1996, the Athens Court of First Instance
in this matter served the Company's Greek counsel with its decision and entered
judgment against the Company in the amount of approximately 87.1 million drachma
plus accrued interest (which was approximately $294,000, plus accrued interest,
as of March 5, 1999 based on published exchange rates). The Company appealed the
Court's decision. Subsequent to December 31, 1998, the Company settled this
action for $335,000 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 Lady Luck Mississippi, Inc. on or about
September 23, 1993. Superior had previously done construction work for Lady Luck
Natchez on its barge, 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 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. Subsequent to
December 31, 1998, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
No matters were submitted to a vote of security-holders of Lady Luck Gaming
during the fourth quarter of 1998.
<PAGE>
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Lady Luck Gaming's Common Stock (symbol "LUCK") trades on the Nasdaq
National Market tier of The Nasdaq Stock Market and is quoted in The Wall Street
Journal and other newspapers. The following table sets forth the high and low
sale prices of the Common Stock for each quarter during the preceding two years,
as reported by the Nasdaq National Market. The Company effected a one-for-six
reverse stock split on June 4, 1998, and the sales prices set forth below have
been restated for periods before June 4, 1998 to reflect the decreased number of
shares of Common Stock outstanding.
Nasdaq National Market Daily Sales Price
High Low
---------------- ----------------
1998
1st Quarter.................... $ 10.500 $ 5.436
2nd Quarter.................... 11.628 6.750
3rd Quarter.................... 9.250 4.375
4th Quarter.................... 5.500 2.813
1997
1st Quarter.................... $ 12.750 $ 10.125
2nd Quarter.................... 11.250 9.000
3rd Quarter.................... 12.750 7.125
4th Quarter.................... 9.750 4.500
As of March 5, 1999, Lady Luck Gaming had approximately 457 holders of
record of its Common Stock.
Lady Luck Gaming did not pay any cash dividends on its Common Stock in 1998
or 1997 and has no intention of paying cash dividends on its Common Stock in the
foreseeable future. In addition, the Indenture covering the 2001 Notes restricts
the Company's ability to pay dividends on its Common Stock (See Note 5 to the
Company's Consolidated Financial Statements).
<PAGE>
18
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
(thousands of dollars)
Gross revenues............. $157,184 $172,043 $175,351 $158,411 $125,134
Promotional allowances..... (13,105) (13,183) (12,527) (8,821) (7,979)
Net revenues............... 144,079 158,860 162,824 149,590 117,155
Casino expenses............ 52,497 57,301 56,806 49,703 41,859
Food and beverage expenses. 4,941 6,644 6,928 8,582 7,215
Hotel expenses............. 1,640 2,236 1,925 1,667 652
Other operating expenses... 143 258 282 310 574
Selling, general and
administrative........... 45,252 52,939 53,786 49,539 51,926
Related party managemnt/
/license fees............ 3,370 2,953 3,434 5,520 2,471
Depreciation and
amortization............. 8,506 12,886 11,289 9,694 7,067
Pre-opening expense........ - - 247 - 2,970
Litigation claims.......... - 700 1,100 - -
Gain on sale of assets..... (2,848) - - - -
Reserve for loss on
sale of assets........... - 7,621 - - -
Project development
costs write-downs
and reserves............. - 7,784 404 509 15,635
Asset impairment
write-down............... - 20,698 - - -
Loss on sale of investment
in unconsolidated
affiliate................ - 1,912 - - -
Abandonment loss........... - - - - 9,344
Operating income
(loss)................... 30,578 (15,072) 26,623 24,066 (22,558)
Other (expense)............ (20,337) (21,390) (20,415) (19,024) (15,393)
Income (loss) before income
tax and extraordinary
items.................... 10,241 (36,462) 6,208 4,862 (37,951)
Net income (loss).......... 10,166 (36,511) 6,139 6,718 (35,665)
Net cash provided by
(used in) operating
activities.............. 9,080 10,114 13,492 17,083 8,590
- --------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
(thousands of dollars)
Cash and cash equivalents... $28,834 $19,552 $15,490 $22,148 $28,914
Restricted cash............. - 15,388 - 8,858 7,847
Marketable securities....... 19,219 - - - -
Current assets.............. 51,194 41,930 19,523 35,219 44,679
Property and equipment,
net....................... 120,904 128,375 173,119 155,664 170,345
Total assets................ 191,685 185,306 223,718 217,281 226,963
Current liabilities......... 18,701 22,258 19,892 23,702 216,954
Total liabilities........... 195,285 199,072 200,973 200,675 221,137
Series A mandatory
cumulative redeemable
preferred................. 20,611 18,402 16,430 14,669 13,097
Stockholders' equity
(deficit)................. (24,211) (32,168) 6,315 1,937 (7,271)
Working capital (deficit)... 32,493 19,672 (369) 11,517 (172,275)
- --------------------------------------------------------------------------------
<PAGE>
19
Years Ended December 31, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
(thousands of dollars, except per share
amounts and employees)
SELECTED DATA
Basic and diluted net
income (loss) per
share
Before extraordinary
items and preferred
stock dividend.............. $ 2.08 $ (7.48) $ 1.26 $ 0.92 $ (8.72)
Extraordinary items......... - - - 0.47 0.26
Applicable to common
stockholders................ 1.63 (7.88) 0.90 1.07 (8.79)
Shares used in computing
net income per share........ 4,881 4,881 4,881 4,825 4,217
Shares outstanding at
year end.................... 4,881 4,881 4,881 4,881 4,548
Cash dividends declared
per common share............ - - - - -
Common stock - High(1)........ $ 11.63 $ 12.75 $ 27.75 $ 16.88 $ 82.50
Common stock - Low(1)......... $ 2.81 $ 4.50 $ 9.75 $ 9.00 $ 13.50
Common stock - Year end(1).... $ 2.63 $ 6.00 $ 11.25 $ 9.75 $ 15.56
Number of employees........... 2,500 3,100 2,950 2,850 2,100
- --------------------------------------------------------------------------------
(1) The Company effected a one-for-six reverse stock split on June 4, 1998,
and the sales prices set forth above have been restated for periods before
June 4, 1998 to reflect the decreased number of shares of Common Stock
outstanding.
Reference is made to Part I, Item 3 - Legal Proceedings, which contains
information regarding uncertainties that may have a material adverse effect on
the Company's future financial condition and results of operations.
<PAGE>
20
ITEM 7. 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 Rhythm
and Blues/Country Casino 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 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
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
For the years ended December 31, 1997 and 1998, consolidated gross revenues
decreased from $172.0 million to $157.2 million, respectively, a decrease of
$14.8 million or 9%.
Comparisons of the Company's consolidated gross revenues between periods
may not be meaningful to the extent they reflect several changes related to the
Company's strategy to rationalize its asset base and dispose of its
underperforming investments. In this pursuit, since September 30, 1997, 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; (2) substantially all of the
operating assets of Lady Luck Central City effective February 19, 1998; (3) its
35% partnership interest in the Bally's joint venture, related to the former
Tunica County, Mississippi operations, effective September 30, 1997. In
addition, effective January 1, 1998, the Company has sold certain gaming
equipment which the Company had been leasing to the Bettendorf joint venture
prior to that date. The Company's gross revenues from operations decreased
during the year ended December 31, 1998 compared to the year ended December 31,
1997 as follows (in millions):
Lady Luck Biloxi ........................................... $ 20.9
Lady Luck Central City ..................................... 4.6
Equipment lease income from equipment sold ................. 1.5
Equity in net income of the Bally's joint venture .......... 1.3
<PAGE>
21
Gross revenues at the Lady Luck Rhythm & Blues/Country Casino complex
increased from $94.3 million to $101.1 million, an increase of $6.8 million or
7%, during the years ended December 31, 1997 and 1998, respectively. The Lady
Luck Rhythm & Blues/Country Casino complex's gross revenues increased primarily
due to the time period between July 16, 1997 and August 3, 1997 when access to
the complex was restricted by a temporary closure of the Helena Bridge by the
Arkansas Department of Transportation due to structural damage caused when a
barge with a large boom attachment hit the bridge. The bridge was repaired and
no further restrictions on access have been suffered since the repair.
The Company's 50% equity in the net income of the Bettendorf joint venture
increased from $3.4 million to $5.1 million, an increase of $1.7 million or 50%,
during the years ended December 31, 1997 and 1998, respectively. This increase
was despite a non-recurring expense of $1.2 million (the Company's 50% share of
which is $600,000) of pre-opening expenses related to the opening of the Lady
Luck Bettendorf Hotel on August 29, 1998. During the years ended December 31,
1997 and 1998, the Bettendorf joint venture's total gross revenues increased
from $75.7 million to $89.4 million, an increase of $13.7 million or 18%,
despite some disruption of business due to construction and expansion at the
facility. This increase in gross revenues was due primarily to an $11.6 million
increase in casino revenues driven by a $9.8 million increase in slot machine
revenues. Average daily net win per slot machine increased 2% despite an
approximately constant win percentage and a 15% increase in the average number
of slot machines in operation. In addition to its new hotel and the increase in
the average number of slot machines in operation during the year ended December
31, 1998 compared to the year ended December 31, 1997, the Bettendorf joint
venture: (1) furnished additional food complimentaries to its patrons to
stimulate casino revenues; (2) provided improved parking to patrons with the
completion in November 1997 of a 500-space parking garage; (3) provided improved
access to patrons with the opening of a bypass over the nearby railroad during
the third quarter of 1998; and (4) reduced rent expense by purchasing gaming
equipment from the Company effective January 1, 1998 which it had been leasing.
Gross revenues at Lady Luck Natchez increased from $30.6 million to $34.7
million, an increase of $4.1 million or 13%, during the years ended December 31,
1997 and 1998, respectively. Lady Luck Natchez's gross revenues increased
primarily due to a $2.7 million increase in slot machine revenues and a $1.1
million increase in food and beverage revenues. These increases were due to the
following: (1) 18 days of business interruption and continuing disruption due to
adverse weather and river conditions experienced during the year ended December
31, 1997; (2) changes in marketing strategies including a shift from advertising
to more promotions and increased offerings of hotel rooms, food and beverage to
patrons on a complimentary basis; (3) modest improvement in the local economy
between periods; and (4) the addition of a nearby off-site full-service
restaurant that attracted an increased number of new visitors.
Casino operating expenses as a percentage of casino revenues increased from
41% in the year ended December 31, 1997 to 42% in the year ended December 31,
1998, primarily due to the following: (1) decreases in casino revenues at Lady
Luck Biloxi in 1998 prior to its closure on June 7, 1998 which caused fixed
costs such as gaming device license fees and some labor charges to be spread
over a lower revenue base; (2) an increase in the cost of complimentary rooms,
food and beverage furnished to casino customers in relation to casino revenues;
and (3) an increase in cash incentives for slot machine players in relation to
slot revenues. These decreases in operating margins were offset partially by 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)
the negative effects on the prior year's operating results at the Lady Luck
Rhythm & Blues/Country Casino complex resulting from the restricted access
experienced from July 16, 1997 through August 3, 1997, as described above.
<PAGE>
22
Food and beverage costs and expenses, prior to reclassifying the cost of
complimentaries, as a percentage f related revenues decreased from 93% for the
year ended December 31, 1997 to 87% for the year ended December 31, 1998. This
decrease was primarily due to reductions in labor and food and beverage costs
relative to food and beverage revenues at Lady Luck Natchez and the Lady Luck
Rhythm & Blues/Country Casino complex offset partially by decreased profit
margins at Lady Luck Biloxi before closing the facilities. Relative costs also
decreased due to the closing in February 1998 of Lady Luck Central City, which
historically operated at less favorable margins than the Company's other
properties.
Gross room revenues for the River Park Hotel increased approximately 6%
during the year ended December 31, 1998 compared with the prior year.
Approximately 40% of the hotel's rooms were undergoing remodeling during a
portion of the current year, which caused some inconvenience to guests and were
partially responsible for a decrease in average daily room rates from $42 to
$36, a decrease of $6 or 14%. The lower number of available rooms, lower room
rates and increased offerings of hotel rooms to patrons on a complimentary basis
caused the River Park Hotel's occupancy rate to increase from 65% to 84%.
Combined gross room revenues at the Riverbluff Hotel and the 173-room hotel at
Lady Luck Rhythm & Blues/Country Casino complex were affected by the access
restriction from July 16, 1997 through August 3, 1997 as described above;
however, during the year ended December 31, 1998 compared with the prior year,
combined gross room revenues decreased by approximately 3%. Between comparative
periods, the Riverbluff Hotel's occupancy rate decreased from 83% to 70% while
average daily room rates increased from $24 to $27. The Lady Luck Rhythm & Blues
Hotel's occupancy rate increased from 77% to 89% between comparative periods and
average daily room rates decreased from $39 to $33. Increased offerings of hotel
rooms at these facilities to patrons on a complimentary basis positively
affected occupancy rates. The Lady Luck Rhythm & Blues Hotel's decrease in
average daily room rate was primarily due to competitive pressures from
properties which have added a significant number of rooms in nearby Tunica
County, Mississippi. The Lady Luck Bettendorf Hotel experienced an occupancy
rate of 72% from its opening on August 29, 1998 through December 31, 1998 and
achieved an average daily room rate of $52.
Selling, general and administrative expenses as a percentage of total gross
revenues decreased from 31% to 29% during the years ended December 31, 1997 and
1998, respectively. The decrease was primarily due to the following: (1) the
absence from operations of the relatively underperforming properties of Lady
Luck Biloxi and Lady Luck Central City, both of which historically operated at
less favorable margins than the Company's average margin; (2) a decrease in
casino marketing expenses as a percentage of total gross revenues at the Lady
Luck Rhythm & Blues/Country Casino complex over the prior year period, during
which time it had suffered the effects of access restrictions as described above
and which had required abnormally high marketing expenditures after access was
restored to regenerate customer patronage to previous levels; (3) reductions in
casino marketing and entertainment costs and an increase in gross revenues at
Lady Luck Natchez compared to the prior year period when additional advertising
and marketing had been necessary to recapture customers subsequent to the casino
reopening as described above; (4) a $600,000 downward adjustment to certain of
Lady Luck Biloxi's accruals, including cash incentives to slot players, chip
liabilities, and other accruals which had arisen in the normal course of
business based on estimates for which actual liabilities were calculated on
expiration of required redemption periods; and (5) reserving 1998 rent expense
related to Lady Luck Gulfport in previous years. These decreases were partially
offset by the following: (1) increased insurance costs associated with employee
medical claims; and (2) an increase in development costs related primarily to
the Company's pursuit of a license in Vancouver, Canada and negotiating the
ancillary development agreement.
Operating income was $30.6 million for the year ended December 31, 1998, a
$45.7 million improvement over the $15.1 million operating loss for the year
ended December 31, 1997. The net income applicable to common stockholders was
$8.0 million or $1.63 per share for the year ended December 31, 1998 compared
with the net loss applicable to common stockholders of $38.5 million or $7.88
per share for the year ended December 31, 1997. In addition to the changes
described above, the increases in operating income and income applicable to
common stockholders were due to the following: (1) a $2.8 million gain, net of
reserves for disposition costs, recognized on the sale of substantially all of
the assets associated with the Lady Luck Biloxi casino in June 1998; (2) a $1.9
million loss on the sale of the Bally's joint venture to Hilton Hotels
Corporation during the year ended December 31, 1997; (3) a decrease in
depreciation expense at Lady Luck Biloxi during 1998, both before and after its
sale (the reduction before
<PAGE>
23
the sale was the result of a $20.7 million asset impairment write-down
recognized in 1997); (4) an absence of depreciation expense at Lady Luck Central
City, both before and after its sale (the absence prior to the sale was due to
recording 1998's depreciation expense as part of the $7.6 million reserve for
loss on sale recorded during 1997); (5) the $7.8 million development project
cost write-downs and reserves recognized during 1997 related to current and
former development stage projects; (6) a $1.3 million increase in interest
income due to increases in cash and marketable securities received as a result
of assets sales; and (7) increased management fees from an unconsolidated
subsidiary due to improved operations at the Bettendorf joint venture as
described above.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
For the years ended December 31, 1997 and 1996, gross revenues decreased to
$172.0 million from $175.4 million, a decrease of $3.4 million or 2%. The
decrease was primarily due to the Lady Luck Rhythm & Blues/Country Casino
complex's revenues and operating results being materially adversely affected,
during the third quarter of 1997 by a temporary closure by the Arkansas
Department of Transportation of the Helena Bridge, which provides the principle
access from the complex's primary customer market. Other causes of the decrease
include: (1) two closures of Lady Luck Natchez, for a total of approximately 18
days due to flooding on the Mississippi River and adverse weather conditions,
which caused lingering disruptive effects for a period after each reopening; (2)
declines in table games revenues at each wholly owned subsidiary due to
decreases in the amounts wagered at each of these properties and decreases in
the percentage of wagers won by Lady Luck Natchez and Lady Luck Biloxi; (3) the
addition of two competitive casinos and a significant number of hotel rooms by
competitors of the Lady Luck Rhythm & Blues/Country Casino complex; (4) a
deteriorating local economy in Natchez, Mississippi and decreasing customer
headcount at Lady Luck Natchez; (5) a growing disparity in relation to its
competitors in the amenities which Lady Luck Biloxi is able to offer its
customers, such as on-site hotel rooms for table games players; (6) operational
changes and an absence of capital improvements at Lady Luck Central City; and
(7) increased competition at Lady Luck Central City from nearby casinos. The
adverse effects of these items were partially offset by: (1) an increase in the
Company's equity in net income of unconsolidated affiliates; (2) a full year of
operation of the Country Casino adjacent to Lady Luck Rhythm & Blues in 1997
which had opened on May 21, 1996; (3) an increase in Lady Luck Biloxi's slot
machine revenues due to an increase in the amounts wagered; (4) Lady Luck
Natchez's purchase of the River Park Hotel on April 15, 1996; and (5) the
acquisition of the 120-room Riverbluff Hotel in Helena, Arkansas on July 3,
1996.
As noted, access to the Lady Luck Rhythm & Blues/Country Casino complex's
two casinos, hotel and the Pavilion was severely restricted from July 16, 1997
through August 3, 1997. On July 16, 1997, a barge with a large boom attachment
hit the Helena Bridge which crosses the Mississippi River and connects Arkansas
and Mississippi. The bridge provides access to the complex's Arkansas customers
on which it is highly dependent. The resulting structural damage to the bridge
caused the Arkansas Department of Transportation to close the bridge until
August 4, 1997. A 6% increase in gross revenues of the Lady Luck Rhythm &
Blues/Country Casino complex experienced in the fourth quarter of 1997, compared
to the fourth quarter of 1996, indicates a successful recovery since the
bridge's reopening. In addition, the adverse effects experienced during the
bridge's closure were partially offset by a full year of operation of the
Country Casino in 1997 which had opened in May 1996. The net effect of these
changes and the addition of competitive facilities resulted in a $900,000 or 1%
decrease in gross revenues at the Lady Luck Rhythm & Blues/Country Casino
complex to $94.3 million during the year ended December 31, 1997 from $95.2
million during the year ended December 31, 1996. The largest decrease during
these comparative years for the complex primarily resulted from decreases in the
amounts wagered on table games, which caused gross table games revenues to
decrease $1.7 million for the year ended December 31, 1997 from the prior year.
This decrease was offset partially by an increase in food and beverage revenues
of $900,000 primarily due to increased food and beverage furnished to customers
as complimentaries. The increase in complimentaries was a necessary response to
additional competitor facilities added in 1996.
Slot machine, table games and food and beverage revenues decreased $1.0
million, $1.2 million and $500,000, or 4%, 26% and 16%, respectively, at Lady
Luck Natchez during the year ended December 31, 1997 compared to the prior year.
In addition to the adverse effects resulting from the flooding on the
Mississippi River and other adverse weather conditions, which twice closed Lady
Luck Natchez's operations for a total of approximately 18 days during
<PAGE>
24
the year ended December 31, 1997 and caused lingering disruptive effects for a
period after each reopening, these decreases were due to a deteriorating local
economy in Natchez, Mississippi. The decreases in gross casino revenues, while
primarily due to decreases in the amounts wagered, were also due to declines in
the win percentages from 1996 to 1997. The amounts wagered may have also
decreased in part due to fewer rooms and to less food and beverage being
furnished to customers on a complimentary basis during the comparative periods.
This decrease in complimentary food and beverage was a significant factor in the
decline in gross food and beverage revenues.
Lady Luck Biloxi's gross revenues increased $400,000 during the year ended
December 31, 1997 as compared to 1996. This increase occurred primarily between
the three-month periods ended March 31, 1997 and March 31, 1996, during which
time an 8% increase in the average number of slot machines and a 20% increase in
the average daily net win per slot machine increased Lady Luck Biloxi's slot
machine revenues by $1.2 million. This increase in slot machine revenues was
primarily a result of increased marketing expenditures and increased food and
beverage furnished as complimentaries to customers during that time. The
increase in slot machine revenues was offset partially by decreases in table
game revenues each quarter during the year ended December 31, 1997 as compared
to the respective prior year's quarters. These declines in table games revenues
were primarily due to decreases in total amounts wagered, which was caused in
part by a growing disparity in the amenities which Lady Luck Biloxi was able to
offer its customers in relation to its competitors, some of which were able to
offer on-site hotel rooms and entertainment. Lady Luck Biloxi experienced a
significant decrease in gross revenues since the opening of additional
competitive facilities in its market, principally the opening of the Imperial
Palace in December 1997. This competitive trend continued until its sale in June
1998.
Lady Luck Central City's slot machine revenues declined $1.1 million
between the years ended December 31, 1997 and 1996. This decrease was due to
both a decrease in the total amount wagered on slot machines and a decrease in
the related win percentage. During these comparative periods, Lady Luck Central
City's total amount wagered on slot machines decreased 17%. Lady Luck Central
City's decreases were due in part to operational changes, an absence of capital
improvements at the facility and increased competition from nearby casinos.
Subsequent to December 31, 1997 and effective February 19, 1998, Lady Luck
Central City sold its real property and substantially all operating assets to
the holder of its mortgage note in exchange for forgiveness of the note which,
as of December 31, 1997, had a $2,750,000 balance. The sale resulted in a loss
of $7,287,000, which was recognized during 1997, including reserves for the
remaining real property leases.
The Company's equity in net income of the Bettendorf joint venture
increased $300,000, or 11%, during the year ended December 31, 1997 as compared
to the prior year. This increase primarily was due to a 13% increase in slot
machine revenues. The Bettendorf joint venture's increase in slot machine
revenues was due to an increase in both the average daily net win per slot
machine and the average number of slot machines in operation, as is further
detailed in the tables that follow.
The Company's equity in net income of the Bally's joint venture increased
$600,000 during the nine-month period ended September 30, 1997 (the effective
date of the Company's sale of its 35% partnership interest to Hilton Hotels
Corporation) compared to the year ended December 31, 1996. As the Company's
interest was sold during 1997, a comparison of results between years is not
meaningful. Furthermore, the Company's equity in net income for the year ended
December 31, 1996 reflected a $1.2 million deduction for the Company's share of
pre-opening expenses, while no such expenses were recognized during the
nine-month period ended September 30, 1997.
<PAGE>
25
Casino operating expenses Company-wide as a percentage of casino revenues
increased from 39% in the year ended December 31, 1996 to 41% in the year ended
December 31, 1997, primarily due to the following: (1) severe access
restrictions at the Lady Luck Rhythm & Blues/Country Casino complex, the
temporary closings of Lady Luck Natchez and the decreases in casino revenues
from most of the Company's other gaming operations which caused fixed costs and
certain variable costs, that could not immediately be eliminated, to be spread
over a lower revenue base; (2) a 1% increase in the cost of complimentary rooms,
food and beverage furnished to casino customers in relation to casino revenues;
(3) an increase in table games payroll expense at each property in relation to
table games revenue; and (4) increases in slot machine rentals, slot department
special events and cash incentives for slot machine players in relation to slot
revenues.
Food and beverage costs and expenses, prior to reclassifying the cost of
complimentaries, as a percentage of related revenues increased from 90% for the
year ended December 31, 1996 to 93% for the year ended December 31, 1997, due to
an increase in labor costs at Lady Luck Natchez and increases in the cost of
sales in relation to revenues at each property. These increases were offset
partially by a decrease in labor costs in relation to revenues at the Rhythm &
Blues/Country Casino complex.
Gross room revenues for the River Park Hotel and the Riverbluff Hotel
increased 10% and 167%, respectively, and decreased 16% for the 173-room hotel
at the Lady Luck Rhythm & Blues/Country Casino complex during the year ended
December 31, 1997 compared with the prior year. However, these comparisons are
not for equivalent periods because Lady Luck Natchez purchased the River Park
Hotel on April 15, 1996, the Lady Luck Rhythm & Blues/Country Casino complex
acquired the 120-room Riverbluff Hotel in Helena, Arkansas on July 3, 1996, and
access to the 173-room hotel at the Lady Luck Rhythm & Blues/Country Casino
complex was temporarily restricted during the current year period as described
above.
Selling, general and administrative expenses as a percentage of total gross
revenues remained a constant 31% during the years ended December 31, 1996 and
1997. A significant reduction in rent paid by the Rhythm & Blues/Country Casino
complex was offset by increases in its casino marketing expenditures there and
at Lady Luck Natchez and Lady Luck Biloxi primarily related to direct mail,
other advertising or promotions and group sales, and increases in facility
expenses at the Lady Luck Rhythm & Blues/Country Casino complex for utilities,
security, insurance and property taxes, primarily due to the addition of the
Country Casino. Rent paid by the Lady Luck Rhythm & Blues/Country Casino complex
decreased because percentage rents under the lease during 1997 were reduced due
to the temporary access restriction described above. In addition, rent was
greater during the five-month period ended May 31, 1996 as compared to the
corresponding period in 1997 due to an additional fixed monthly rental expense
of $150,000 which was required to be paid prior to the opening of the Country
Casino on May 26, 1996. Subsequent to May 31, 1996, the fixed rent was replaced
with a percentage rent that has been less than the fixed rent.
Operating (loss) income was ($15.1) million and $26.6 million for the years
ended December 31, 1997 and 1996, respectively. In addition to the changes
described above, this $41.7 million decrease in operating income was due to the
following occurrences, which are further described below: (1) $7.6 million
reserve in 1997 for the loss on the sale of assets; (2) project development cost
write-downs and reserves in 1997 of $7.8 million; (3) a $20.7 million asset
impairment write-down in 1997; (4) a $1.9 million loss on the sale of investment
in an unconsolidated affiliate in 1997; (5) a $1.6 million increase in
depreciation expense during 1997 primarily related to the acquisition of the
River Park Hotel and the Riverbluff Hotel and the opening of the Country Casino
and the Pavilion, each during 1996; and (6) decreased hotel operating margins.
The effects of these items were partially offset by the following: (1) a
$400,000 reduction in litigation claims; (2) a $500,000 decrease in
related-party license fee expenses from lower operating results during 1997; (3)
a $500,000 increase in management fee revenues related to the Bettendorf joint
venture; and (4) the absence of $200,000 of pre-opening expense which was
recognized during 1996 in conjunction with the opening of the Country Casino and
the Pavilion.
<PAGE>
26
Effective February 19, 1998, Lady Luck Central City sold substantially all
of its real property and operating assets to the holder of its mortgage note in
exchange for forgiveness of the $2.8 million note and the assumption of some of
its liabilities. In connection with this sale, during 1997 the Company recorded
a reserve of $7.3 million to write-down the assets held for sale to fair market
value less closing costs, to reserve for operating losses in 1998 prior to the
effective sale date and to reserve for estimated future lease payments and
write-downs on its parking lot leases which were not assumed by the purchaser of
the assets sold.
In addition, the Company sold to the Bettendorf joint venture all of the
gaming equipment that the venture had been leasing from the Company since April
1995 under a gaming equipment lease. The gaming equipment was sold for its
negotiated value of $712,000 as of December 31, 1997. The $358,000 reserve for
loss on the sale of assets represents the net book value in excess of negotiated
value as of December 31, 1997. The sale was effective January 1, 1998.
During 1997, the Company wrote-down various project development costs
totaling approximately $7.8 million due to changes in regulatory, political and
competitive environments and other factors.
The first write-down was related to the Kimmswick project. The State of
Missouri investigates applicants at its discretion and there is no guarantee
that the Company's application will be actively reviewed in future periods. In
November 1997, the Missouri Supreme Court ruled that several existing Missouri
gaming projects were illegal due to their locations not being on the Mississippi
or Missouri rivers. In addition, some current operators in Missouri have been
experiencing poor operating results. These uncertainties have resulted in the
Company recording a $2.3 million project development write-down in 1997 of the
remaining balance of its pre-opening and other development costs and a $3.0
million write-down of construction in progress for a portion of the partially
completed cruising vessel which, if not used for the Kimmswick project, could be
sold or possibly used in a future development project. Nevertheless, management
estimates that the fair value of this partially completed cruising vessel was
approximately 50% of its net book value. These valuations are based on
assumptions regarding expected future economic, market and gaming regulatory
conditions. Changes in these assumptions could result in further changes in the
estimated net realizable value of the partially completed cruising vessel.
The second write-down was related to the Vicksburg project. The
consummation of the transactions contemplated by the joint venture agreement
with Horseshoe Gaming, LLC was subject to the fulfillment of several conditions.
Either party, on or after April 1, 1998, could terminate the joint venture
agreement if particular conditions were not met. In October 1998, the Company
terminated the joint venture agreement as the conditions were not satisfied. A
determination that particular assets may not be usable in the Vicksburg project
as currently contemplated resulted in a $2.3 million write-off of construction
in progress during 1997. 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. Changes in these assumptions could result in changes in the
estimated net realizable value of the property.
Additionally, the Company had previously planned to construct and operate a
casino in Gulfport, Mississippi. However, in 1997 the Company suspended further
development of the Gulfport project and is not currently engaged in negotiating
either an agreement to sell or develop these leaseholds. The Company intends to
cancel these leases at the earliest date allowable under the lease agreements.
During 1997, the Company provided a project development reserve of approximately
$162,000 to fully reserve remaining future minimum lease payments net of
estimated sublease rentals for the remaining leases. Reserves of approximately
$350,000 and $600,000 had previously been provided during 1996 and 1995,
respectively.
Lastly, during 1997, the Company provided reserves of approximately $50,000
related to its investment in Lady Luck New Mexico for a total reserve, including
1996 and 1995 reserves, of approximately $250,000. The Company received $200,000
cash during 1997 for its remaining investment balance.
<PAGE>
27
The Company evaluated the recoverability of Lady Luck Biloxi's long-lived
assets in 1996 and 1997 due to recurring operating losses based on the criteria
established under Financial Accounting Standards Board Statement No. 121 ("SFAS
121"). During the fourth quarter of 1997, pursuant to SFAS 121, the Company
recorded an impairment write-down to Lady Luck Biloxi's long-lived assets of
$20.7 million. The Company considered the historical operating results and the
significant downturn in the operating results of Lady Luck Biloxi since the
opening of additional competitive facilities in its market, principally the
opening of the Imperial Palace in December 1997. In performing its review for
recoverability, the Company compared the projected undiscounted future cash
flows to the carrying value of Lady Luck Biloxi's long-lived assets of $31.5
million as of December 31, 1997. As the net carrying value of long-lived assets
exceeded the estimated undiscounted future cash flows, the Company was required
to recognize an impairment loss and write-down long-lived assets to their fair
market value of $10.8 million. Fair value became the new cost basis for the
impaired assets and previously accumulated depreciation was eliminated. As
active market quotations were not available, the Company measured fair value by
discounting estimated future cash flows. Considerable management judgment was
necessary to estimate discounted future cash flows. Substantially all of the
assets of Lady Luck Biloxi were subsequently sold June 11, 1998 (see Note 5 to
the Consolidated Financial Statements).
Pursuant to an agreement effective September 30, 1997, the Company sold its
35% minority interest in Bally's Saloon, Gambling Hall and Hotel in Tunica,
Mississippi to Hilton Hotels Corporation, the majority owner and manager of the
property. The sale resulted in a loss of $1,912,000, which represented the
difference between the sales price and the net investment in the Bally's joint
venture and related assets.
The net (loss) applicable to common stockholders was ($38.5) million or
($7.88) per share for the year ended December 31, 1997 compared with net income
applicable to common stockholders of $4.4 million or $0.90 per share for the
year ended December 31, 1996. This $42.9 million or $8.78 per share decrease in
net income applicable to common stockholders was primarily due to the following:
(1) the $41.7 million decrease in operating income as described above; (2) a
$500,000 decrease in other income; (3) a $200,000 increase in preferred stock
dividends caused by the compounding return on dividends not paid in cash; (4) a
$200,000 increase in net interest expense due primarily to a decrease in
interest capitalized in the current year; and (5) a $200,000 decrease in
interest income resulting from greater cash invested in 1996 prior to the
opening of the Country Casino.
Certain Risks and Uncertainties
The Company, through its subsidiaries and affiliates, owns and operates
gaming casinos in Mississippi and Iowa and may develop projects in Missouri and
Mississippi. The entities owning these casinos and any of the Company's entities
owning casinos in the future are or will be required to obtain and maintain
gaming licenses from the applicable state regulatory authorities and comply with
the related regulations. Although the Company believes it is in material
compliance with all applicable gaming regulations, non-compliance by the Company
could have a material adverse effect on the Company's operations. Generally,
regulatory authorities have broad discretion in granting, renewing and revoking
gaming licenses. Lady Luck Gaming itself must be found suitable to own the
entities that directly or indirectly own the Company's casinos. In addition, the
Company's directors and many of its employees are required to obtain gaming
licenses. Where it has not already done so, the Company intends to apply for its
licenses and to have its employees, to the extent required, apply for their
licenses. All directors and executive officers of the Company have received all
necessary approvals with respect to the operating casinos and have received,
applied for or will apply for all necessary approvals with respect to the
development stage projects. While the Company has received gaming licenses in
the states of Mississippi, Colorado and Iowa, it has not received licenses in
any other jurisdiction. There is no guarantee that each casino, officer,
director, or the appropriate gaming employees will receive (where not yet
received) or maintain the necessary gaming licenses, or that the Company or its
casinos will be able to operate successfully or profitably under the terms of
any licenses. The failure of the Company or any of its key personnel to obtain
or retain a license in a particular jurisdiction could have a material adverse
effect on the Company's ability to obtain or retain licenses in other
jurisdictions.
<PAGE>
28
There is a substantial risk that the supply of gaming facilities in
Mississippi will exceed the demand for gaming, which could have a material
adverse effect on the Company's operating results. DeSoto County, the
northwestern-most Mississippi County and nearest to Memphis, could, under
existing state law, vote to authorize gaming activities, which would in turn
increase competition in this market. The voters of DeSoto County have voted
against legalized gaming on three occasions, most recently in November 1996.
However, local referenda may be held during any presidential election year, and
there is no guarantee that gaming will not be approved in DeSoto County in
future elections. Additionally, in Arkansas, a gaming referendum, which, if
passed, would have legalized particular forms of gaming at particular locations,
was defeated in November 1996. If gaming were legalized in particular areas of
Arkansas or, to a lesser extent, in DeSoto County, it could have a material
adverse effect on the Company's Coahoma County facilities, which generate a
significant portion of the Company's consolidated revenues and operating income.
Furthermore, the Mississippi Band of Choctaws negotiated a compact with the
State of Mississippi and has opened a land-based casino located approximately
100 miles to the east of Jackson, Mississippi, which has affected Lady Luck
Natchez and, if further developed, could affect the Vicksburg project. The
Company also competes with gaming facilities nationwide and in Canada. It is
also possible that substantial local and nationwide competition could cause the
supply of gaming facilities to exceed the demand for gaming. Additionally, some
of the Company's competitors have more gaming industry experience, larger
operations, or significantly greater financial and other resources than has the
Company. Given these factors, it is possible that substantial competition could
have a material adverse effect on the Company's future results of operations.
The Lady Luck Rhythm & Blues/Country Casino complex's revenues and
operating results in 1997 were materially adversely affected by a temporary
closure by the Arkansas Department of Transportation of the Helena Bridge. These
casinos are highly dependent on patronage by residents of Arkansas. A change in
general economic conditions, a future closure of the Helena Bridge, or the
extent and nature of regulations enabling casino gaming in Arkansas could
adversely effect these casinos' future operating results.
The Company is highly leveraged (see Liquidity and Capital Resources below
for additional information).
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 February 28, 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 December 31, 1998, 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,
<PAGE>
29
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. TheCompany has so far evaluated approximately 63% 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.
Operating Casinos
Dollar amounts shown in the following tables for gross revenues, net
revenues, management/license fee and operating income are in millions. Operating
margin is calculated as operating income divided by net revenues.
Lady Luck Rhythm & Blues/Country Casino Complex (a)
<TABLE>
<CAPTION>
%Increase %Increase
(Decrease) (Decrease)
Year Ended December 31, 1998 vs. 1997 vs.
---------- ---------- ---------- ----------- ----------
(in millions)
<S> <C> <C> <C> <C> <C>
Gross revenue............. $ 101.1 $ 94.3 $ 95.2 7 (1)
Net revenues.............. 92.3 86.8 88.9 6 (2)
Management/license fee.... 3.5 3.0 3.1 17 (3)
Operating income.......... 20.6 19.5 22.9 6 (15)
Operating margin.......... 22% 22% 26% - pts (4) pts
Average daily net win per
table game.............. $ 629 $ 602 $ 820 4 (27)
Average number of tables
in operation............ 49 50 43 (2) 16
Average daily net win per
slot machine............ $ 147 $ 143 $ 169 3 (15)
Average number of slot
machines in operation... 1,420 1,343 1,141 6 18
</TABLE>
(a) County Casino and the Pavilion opened May 21, 1996; therefore, comparisons
may not be meaningful.
<PAGE>
30
Lady Luck Natchez
<TABLE>
<CAPTION>
%Increase %Increase
(Decrease) (Decrease)
Year Ended December 31, 1998 vs. 1997 vs.
1998 1997 1996 1997 1996
---------- ---------- ---------- ----------- ----------
(in millions)
<S> <C> <C> <C> <C> <C>
Gross revenue............. $ 34.7 $ 30.6 $ 33.3 13 (8)
Net revenues.............. 31.7 28.4 30.4 12 (7)
Management/license fee.... 1.2 1.0 1.1 20 (9)
Operating income.......... 4.0 2.6 4.4 54 (41)
Operating margin.......... 13% 9% 14% 4 pts (5) pts
Average daily net win per
table game.............. $ 651 $ 612 $ 765 6 (20)
Average number of tables
in operation............ 16 16 17 - (6)
Average daily net win per
slot machine............ $ 110 $ 103 $ 109 7 (6)
Average number of slot
machines in operation... 618 616 584 - 5
</TABLE>
Lady Luck Bettendorf (a)
<TABLE>
<CAPTION>
%Increase %Increase
(Decrease) (Decrease)
Year Ended December 31, 1998 vs. 1997 vs.
1998 1997 1996 1997 1996
---------- ---------- ---------- ----------- ----------
(in millions)
<S> <C> <C> <C> <C> <C>
Gross revenue............. $ 89.4 $ 75.7 $ 68.5 18 11
Net revenues.............. 84.5 71.6 65.2 18 10
Management/license fee.... 2.3 1.6 1.1 44 45
Operating income.......... 11.4 6.8 6.4 68 6
Operating margin.......... 13% 9% 10% 4 pts (1) pt
Average daily net win per
table game.............. $ 792 $ 701 $ 717 13 (2)
Average number of tables
in operation............ 39 38 36 3 6
Average daily net win per
slot machine............ $ 183 $ 180 $ 173 2 4
Average number of slot
machines in operation... 1,036 903 824 15 10
</TABLE>
(a) Lady Luck Bettendorf is 50% owned by Lady Luck Quad Cities, Inc. ("LLQC").
The Company includes 50% of its net income as equity in net income of
affiliates using the equity method of accounting.
<PAGE>
31
Liquidity and Capital Resources
During the year ended December 31, 1998, the Company generated $9.1 million
in cash from operations. The primary sources during the year ended December 31,
1998 of cash and non-cash resources were: (1) cash flow from operations; (2)
cash on hand at the beginning of the year; (3) $15.1 million of the proceeds
from the sale in 1998 of substantially all of the assets of Lady Luck Biloxi,
excluding gaming equipment and noncontiguous real property; (4) $15.4 million of
restricted cash at December 31, 1997 from the sale of the Company's interest in
the Bally's joint venture, which became available for investment in related
business and general corporate purposes during 1998; and (5) the purchase of
slot machines and other assets on contracts with their manufacturers to be
repaid over time. The primary uses of cash and non-cash resources during the
year ended December 31, 1998, other than operating expenditures, include:
A. $10.4 million for property and equipment as follows:
Related to Magnolia Lady, Inc.:
- Commencement of construction of a 314-room hotel
- Commencement of remodeling of the Rhythm & Blues Hotel
- Modifying parking lot traffic patterns and adding 360 paved
parking spaces for automobiles and 15 for tractor-trailers
- Installation of a property wide telephone system for more
efficient communications and lower operating costs
Related to Lady Luck Mississippi, Inc.:
- Remodeling a portion of the River Park Hotel
- Remodeling of the casino and buffet
- Addition of a gourmet restaurant in close proximity to the
casino
- A deposit with its lessor for the construction of 260
additional parking spaces
B. $19.2 million for the purchase of marketable securities.
C. $2.1 million for the payment of debt and slot contracts.
D. $1.4 million for the acquisition of slot machines and other assets by
certain subsidiaries for the incurrence of indebtedness.
E. $2.8 million and $700,000 for forgiveness of debt of Lady Luck Central
City and Lady Luck Biloxi, respectively, related to the asset sales
described elsewhere herein.
F. $2.2 million for accrual of preferred stock dividends.
Lady Luck Central City did not generate positive operating cash flow during
the year ended December 31, 1998 due primarily to lease and debt service
requirements. Lady Luck Central City is expected to require additional cash
infusions of $200,000, the expense portion of which was fully accrued as of
December 31, 1998, in 1999 for payments on the remaining parking lot leases
including the purchase of these lots as required by the contracts. The sellers
will finance a portion of the purchases. During 1998, Lady Luck Gaming acquired
one of the leased properties with the other two to be acquired in 1999. Lady
Luck Central City will require additional cash infusions related to these leases
in periods beyond 1999 for debt service.
The Bettendorf joint venture recently constructed an expansion project as
part of its master-plan at a cost of approximately $37.0 million. The project
includes a 256-room hotel with a fully enclosed walkway to the riverboat casino,
a 500-car parking garage and a bypass over the nearby railroad to improve
access. The hotel opened August 29, 1998 with the other amenities opening prior
to that date. In addition, the project includes a marina, construction of which
has been delayed due to pending environmental evaluations and flood plain
analyses beyond the Company's control. During April 1998, the Iowa Gaming
Commission approved the addition of up to 230 new slot machines and six table
games at Lady Luck Bettendorf, many of which were installed prior to the opening
of the hotel.
<PAGE>
32
The expansion project financing is non-recourse to the Company and includes a
$17.5 million bank first mortgage note, allowing for up to a $5.0 million second
mortgage from an affiliated company of the Company's joint venture partner
($1.25 million was actually used), and including $7.5 million in tax increment
financing from the City of Bettendorf to be repaid from property taxes in
exchange for deeding the overpass to the City of Bettendorf. During 1998, the
Company repaid the balance of the second mortgage to the affiliated company of
the Company's joint venture partner. As of December 31, 1998, the Bettendorf
joint venture had outstanding the full amount of the bank first mortgage note
and the tax increment financing. The balance of the expansion project's costs
was paid from the Bettendorf joint venture's cash on hand and from operations.
Under a partnership interest redemption agreement, the Company received
approximately $15.3 million in cash on November 3, 1997 for its investment in
the Bally's joint venture. The Company invested $5.7 million of the proceeds
from the sale of its interest in the Bally's joint venture in a related
business. Also, in accordance with the Indenture governing the 2001 Notes, the
Company offered to repurchase up to $9.6 million principal amount of the 2001
Notes at a price of 101% of par plus accrued and unpaid interest on April 16,
1998. None of the 2001 Notes were tendered and the offer expired on May 14,
1998. The remaining proceeds from the sale and the interest earned on them
became unrestricted and available to the Company for general corporate purposes
at that time.
During August 1998, the Company entered into an agreement to construct a
new 314-room hotel adjacent to the Country Casino. Commencing in August 1998,
the project is expected to be completed during the second quarter of 1999 at a
cost estimated not to exceed $17.0 million. The Company intends to fund the
construction primarily with the proceeds from the sale of substantially all of
Lady Luck Biloxi's operating assets. Subsequent to December 31, 1998, the
Company entered into an agreement for the purchase of generators that will
replace the Lady Luck Rhythm & Blues/Country Casino complex'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.
Lady Luck Mississippi, Inc. paid the lessor of the Natchez site $500,000 in
liquidated damages, as the Company did not make specified improvements to the
site required by the related lease. In addition, Lady Luck Natchez was required
under its lease to move its casino barge several hundred feet to another docking
facility on land subject to the lease by February 1998. On August 21, 1998,
management and the lessor amended the lease to allow the barge to remain in its
current location. Under this amendment, the lessor agreed to allow the barge to
remain at its current location in consideration of the Company's agreement to
pay liquidated damages of $1.2 million if it terminates the lease at any time
during the 10-year period following the execution of the lease amendment and to
pay $250,000 to construct additional parking spaces on the leased property.
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 anticipates that it will not repurchase any
portion of the 2001 Notes in 1999 other than in connection with a refinancing.
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.
<PAGE>
33
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 exploring options to
either relocate the vessel from the shipyard or sell it to a third party.
No further significant expenditures for projects under development are
anticipated to be made by the Company from existing cash or cash flow from
operations. If the Company determines it needs additional funds, there is no
guarantee that funds, whether from equity or debt financing or other sources,
will be available, or if available, will be on terms satisfactory to the
Company.
The Company has been named as a defendant in a purported shareholder class
action lawsuit filed alleging violations by the Company of the Securities Act of
1933 and 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 Lady Luck Gaming, Alain Uboldi, Director and Chief
Operating Officer of Lady Luck Gaming, Michael Hlavsa, the former Chief
Financial Officer of Lady Luck Gaming, 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.
The Company and particular joint venture partners 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 $7.1 million as of March 5, 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 cases are still in their preliminary stages and their outcome cannot be
predicted with any degree of certainty; however, the Company believes, based in
part on advice of counsel, that it has meritorious defenses.
A Greek architect filed an action against the Company alleging that he was
retained by the Company to provide professional services with respect to a
casino in Loutraki, Greece. On July 29, 1996, the Athens Court of First Instance
in this matter served the Company's Greek counsel with its decision and entered
judgment against the Company in the amount of approximately 87.1 million drachma
plus accrued interest (which was approximately $294,000, plus accrued interest,
as of March 5, 1999 based on published exchange rates). The Company appealed the
Court's decision. Subsequent to December 31, 1998, the Company settled this
action for $335,000 which had been reserved fully in 1997.
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 against Lady Luck Mississippi, Inc. on or about September 23, 1993.
Superior had previously done construction work for Lady Luck Natchez on its
barge, 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
<PAGE>
34
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 with Bullwhackers-Central City. 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 that definitive agreements, and
accordingly, the Company commenced suit against Bullwhackers. Subsequent to
December 31, 1998, 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.
The Company is highly leveraged. As of December 31, 1998, the Company's
total long-term indebtedness was approximately $176.6 million and its
stockholders' deficit was approximately $24.2 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.
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 Small-Cap Market tier, but no
guarantee can be provided that the Company would be in fact eligible for
Small-Cap listing.
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.
<PAGE>
35
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. Mr. Tompkins is personally liable for the debt and has pledged his
assets, including the 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 or decide
to sell his stock, 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
March 24, 1999, the closing market price of the 2001 Notes, as reported by
Bloomberg Financial Services was 102.19%.
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 (for
example, fuel and transportation prices) relative to the general rate of
inflation may have a material effect on 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. Flooding on
the Mississippi River and other adverse weather conditions caused Lady Luck
Natchez to close its operations twice for a total of approximately 18 days in
1997. The inability to use a dockside facility during any period could have a
material adverse effect on the Company's financial results. Seasonal revenue
fluctuations may occur at the Company's existing casinos in Mississippi and Iowa
with winter months typically yielding lower revenue due to adverse weather
conditions.
<PAGE>
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants....................................37
Consolidated Balance Sheets as of December 31, 1998 and 1997................38
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996......................................40
Consolidated Statements of Mandatory Cumulative Redeemable
Preferred Stock and Stockholders' Deficit for the years
ended December 31, 1998, 1997 and 1996................................42
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996......................................43
Notes to Consolidated Financial Statements..................................45
<PAGE>
37
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Lady Luck Gaming Corporation:
We have audited the accompanying consolidated balance sheets of Lady Luck Gaming
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of operations, mandatory
cumulative redeemable preferred stock and stockholders' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lady Luck Gaming Corporation
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
February 22, 1999(except with respect to the
matter discussed in Note 5, as to
which the date is March 14, 1999)
<PAGE>
38
LADY LUCK GAMING CORPORATION
CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and 1997
(in thousands, except share and per share amounts)
ASSETS
1998 1997
----------- ------------
Current assets:
Cash and cash equivalents.......................... $ 28,834 $ 19,552
Restricted cash.................................... - 15,388
Marketable securities.............................. 19,219 -
Accounts receivable................................ 862 786
Inventories........................................ 946 957
Assets held for sale............................... - 2,791
Prepaid expenses................................... 1,333 2,456
--------- ---------
Total current assets............................. 51,194 41,930
--------- ---------
Property and equipment:
Land and land improvements......................... 16,235 17,974
Building and improvements.......................... 89,912 95,472
Furniture, fixtures and equipment.................. 34,680 36,279
--------- ---------
140,827 149,725
Less accumulated depreciation...................... (31,352) (26,525)
--------- ---------
109,475 123,200
Construction in progress........................... 11,429 5,175
--------- ---------
Total property and equipment, net................ 120,904 128,375
--------- ---------
Other assets:
Deferred financing fees and costs, net of
accumulated amortization of $4,212 and $3,347 as
of December 31, 1998 and 1997, respectively...... 1,875 2,740
Investment in unconsolidated affiliates, net...... 14,412 9,313
Other............................................. 3,300 2,948
--------- ---------
19,587 15,001
TOTAL ASSETS........................................ $ 191,685 $ 185,306
========= =========
The accompanying notes are an integral part of these consolidated statements
<PAGE>
39
LADY LUCK GAMING CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
As of December 31, 1998 and 1997
(in thousands, except share and per share amounts)
LIABILITIES AND STOCKHOLDERS' DEFICIT
1998 1997
----------- ------------
Current liabilities:
Current portion of long-term debt............... $ 595 $ 4,481
Accrued interest................................ 1,834 1,846
Accounts payable................................ 1,915 4,776
Construction payables........................... 3,951 1,957
Accrued property taxes.......................... 1,300 1,375
Other accrued liabilities....................... 9,106 7,823
--------- ---------
Total current liabilities..................... 18,701 22,258
--------- ---------
Long-term debt:
Mortgage notes payable.......................... 173,500 173,500
Other long-term debt............................ 3,084 3,314
--------- ---------
Total long-term debt.......................... 176,584 176,814
--------- ---------
Total liabilities........................... 195,285 199,072
--------- ---------
Commitments and contingencies (Notes 14, 15, 16
and 17)
Series A mandatory cumulative redeemable preferred
stock, $47.53 and $42.44, respectively per share
liquidation value, 1,800,000 shares authorized,
433,638 shares issued and outstanding........... 20,611 18,402
--------- ---------
Stockholders' deficit:
Common stock, $.006 par value, 75,000,000 shares
authorized, 4,881,003 shares issued and
outstanding as of December 31, 1998 and 1997.. 29 29
Additional paid-in capital ..................... 31,382 31,382
Accumulated deficit............................. (55,622) (63,579)
--------- ---------
Total stockholders' deficit................... (24,211) (32,168)
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT....... $ 191,685 $ 185,306
========= =========
The accompanying notes are an integral part of these consolidated statements
<PAGE>
40
LADY LUCK GAMING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS For the Years
Ended December 31, 1998, 1997 and 1996
(in thousands, except share and per share amounts)
1998 1997 1996
------------ ------------ ------------
Revenues:
Casino...............................$ 126,314 $ 138,860 $ 143,886
Food and beverage.................... 15,535 17,152 16,928
Hotel................................ 4,229 4,216 3,948
Equity in net income of 5,099 4,724 3,815
unconsolidated affiliates........
Management fees from unconsolidated 2,292 1,569 1,117
affiliate........................
Other................................ 3,715 5,522 5,657
--------- --------- ---------
Gross revenues..................... 157,184 172,043 175,351
Less: Promotional allowances....... (13,105) (13,183) (12,527)
--------- --------- ---------
Net revenues....................... 144,079 158,860 162,824
--------- --------- ---------
Costs and expenses:
Casino............................... 52,497 57,301 56,806
Food and beverage.................... 4,941 6,644 6,928
Hotel................................ 1,640 2,236 1,925
Other................................ 143 258 282
Selling, general and administrative.. 45,252 52,939 53,786
Related party license fees........... 3,370 2,953 3,434
Depreciation and amortization........ 8,506 12,886 11,289
Pre-opening expenses................. - - 247
Litigation claims.................... - 700 1,100
Gain on sale of assets............... (2,848) - -
Reserve for loss on sales of assets.. - 7,621 -
Project development cost write-downs
and reserves....................... - 7,784 404
Asset impairment write-down.......... - 20,698 -
Loss on sale of investment in
unconsolidated affiliate........... - 1,912 -
--------- --------- ---------
Total costs and expenses........... 113,501 173,932 136,201
--------- --------- ---------
Operating income (loss)................ 30,578 (15,072) 26,623
--------- --------- ---------
Other income (expense):
Interest income...................... 2,160 878 1,073
Interest expense, net................ (21,960) (22,407) (22,170)
Other................................ (537) 139 682
--------- --------- ---------
(20,337) (21,390) (20,415)
--------- --------- ---------
Income (loss) before income tax
(provision) .........................$ 10,241 (36,462) 6,208
The accompanying notes are an integral part of these consolidated statements
<PAGE>
41
LADY LUCK GAMING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (continued) For
the Years Ended December 31, 1998, 1997 and 1996
(in thousands, except share and per share amounts)
1998 1997 1996
------------ ------------ ------------
Income (loss) before income tax $ 10,241 (36,462) 6,208
(provision)..........................
Income tax (provision)................. (75) (49) (69)
--------- --------- ---------
NET INCOME (LOSS)...................... 10,166 (36,511) 6,139
Preferred stock dividends.............. (2,209) (1,972) (1,761)
--------- --------- ---------
Income (loss) applicable to common
stockholders......................... $ 7,957 $ (38,483) $ 4,378
========= ========= =========
BASIC AND DILUTED NET INCOME (LOSS) PER
SHARE
Applicable to common stockholders...... $ 1.63 $ (7.88) $ 0.90
========== ========== ==========
Weighted-average number of common
shares outstanding................... 4,881,003 4,881,003 4,881,003
========== ========== ==========
The accompanying notes are an integral part of these consolidated statements
<PAGE>
42
LADY LUCK GAMING CORPORATION
CONSOLIDATED STATEMENTS OF MANDATORY CUMULATIVE
REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' (DEFICIT)
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Mandatory
Cumulative Common Stock Total
Redeemable -------------------- Additional Stockholders'
Preferred Number of Paid-in (Accumulated Equity
Stock Shares Amount Capital Deficit) (Deficit)
---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1995............ $ 14,669 4,881 $ 29 $ 31,382 $ (29,474) $ 1,937
Accrued preferred
stock dividends.... 1,761 - - - (1,761) (1,761)
Net income........... - - - - 6,139 6,139
--------- --------- --------- --------- --------- ---------
Balance at December 16,430 4,881 29 31,382 (25,096) 6,315
31, 1996...........
--------- --------- --------- --------- --------- ---------
Accrued preferred
stock dividends.... 1,972 - - - (1,972) (1,972)
Net loss............. - - - - (36,511) (36,511)
--------- --------- --------- --------- --------- ---------
Balance at December
31, 1997........... 18,402 4,881 29 31,382 (63,579) (32,168)
--------- --------- --------- --------- --------- ---------
Accrued preferred
stock dividends.... 2,209 - - - (2,209) (2,209)
Net income........... - - - - 10,166 10,166
-------- --------- --------- --------- --------- ---------
Balance at December
31, 1998........... $ 20,611 4,881 $ 29 $ 31,382 $ (55,622) $ (24,211)
======== ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements
<PAGE>
43
LADY LUCK GAMING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
--------- ----------- ----------
Cash flows from operating activities:
Net income (loss).................... $ 10,166 $ (36,511) $ 6,139
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization....... 8,506 12,886 11,289
Amortization of bond offering fees
and costs......................... 865 865 865
Equity in net (income) of
unconsolidated affiliates......... (5,099) (4,724) (3,815)
(Gain) on sale of assets............ (2,848) - (404)
Reserve for loss on sale of assets.. - 7,621 -
Project development cost
write-downs and reserves.......... - 7,784 404
Asset impairment write-down......... - 20,698 -
Loss on sale of investment in
unconsolidated affiliate.......... - 1,912 -
Pre-opening expenses................ - - 247
(Increase) decrease in assets:
Accounts receivable................. (78) 490 (275)
Inventories......................... 11 202 (313)
Prepaid expenses.................... 1,313 (992) 111
Increase (decrease) in liabilities:
Accrued interest.................... 40 21 (501)
Accounts payable.................... (3,263) 1,300 808
Other accrued liabilities........... (533) (1,438) (1,063)
-------- --------- ---------
Net cash (used in) provided by
operating activities.............. 9,080 10,114 13,492
-------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment.... (10,366) (3,622) (21,524)
Proceeds from sale of operating assets. 15,127 - -
Construction payables................. 1,994 - (1,169)
Restricted cash....................... 15,388 (15,388) 8,858
Purchases of marketable securities.... (19,219) - -
Investment in unconsolidated - 15,250 (15)
affiliates........................
Pre-opening costs..................... - - (500)
Other assets.......................... (663) 1,621 (449)
-------- --------- ---------
Net cash (used in) provided by
investment activities............. 2,261 (2,139) (14,799)
-------- --------- ---------
The accompanying notes are an integral part of these consolidated statements
<PAGE>
44
LADY LUCK GAMING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
------------ ------------ -----------
Cash flows from financing activities:
Net proceeds from borrowings......... - - 40
Payments on debt and slot contracts.. (2,059) (3,913) (5,391)
--------- --------- ---------
Net cash (used in) provided by
financing activities................ (2,059) (3,913) (5,351)
--------- --------- ---------
Net (decrease) increase in cash and
cash equivalents...................... 9,282 4,062 (6,658)
Cash and cash equivalents, beginning 19,552 15,490 22,148
--------- --------- ---------
of year..............................
Cash and cash equivalents, end of year.. $ 28,834 $ 19,552 $ 15,490
========= ========= =========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest (net of amount
capitalized of $102, $289, and
$514 in 1998, 1997 and 1996,
respectively).................... $ 21,107 $ 21,521 $ 21,806
========= ========= =========
Income taxes paid ................. $ - $ 80 $ 225
========= ========= =========
Supplemental Schedule of Non-Cash Investing and Financing Activities:
The liquidation value of the Series A mandatory cumulative redeemable
preferred stock increased by approximately $2,209,000, $1,972,000 and $1,761,000
in unpaid accrued dividends for the years ended December 31, 1998, 1997 and
1996, respectively.
The Company entered into several contracts with manufacturers for the
purchase of slot machines and other assets which totaled approximately
$1,407,000, $743,000 and $3,780,000 for the years ended December 31, 1998, 1997
and 1996, respectively.
Effective June 11, 1998, in conjunction with the sale of substantially all
of Lady Luck Biloxi, Inc.'s operating assets to the holder of a $714,000
mortgage note, the holder forgave the outstanding principal and accrued interest
in addition to making a $15.1 million cash payment.
Effective February 19, 1998, Lady Luck Central City, Inc. 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 certain liabilities.
On July 3, 1996, Magnolia Lady, Inc. acquired the Riverbluff Hotel for
approximately $1,000,000, including approximately $600,000 cash and a
non-recourse mortgage note for the balance.
On April 15, 1996, Lady Luck Mississippi acquired the River Park Hotel for
approximately $4,000,000, including approximately $1,000,000 cash and a
non-recourse mortgage note for the balance.
The accompanying notes are an integral part of these consolidated statements
<PAGE>
45
LADY LUCK GAMING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. The Company and Basis of Presentation
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"); Lady Luck Central City, Inc.
formerly Gold Coin, 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
("BRDC") which is and has been accounted for under the equity method. The
Company formerly owned an interest in a joint venture with Bally's Entertainment
Corp. ("Bally's") which was 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") and Lady Luck Gulfport, Inc. ("LLG") both Mississippi
corporations. 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; LLCC opened on May 28, 1993 and sold its real property and operating
assets and ceased operations effective February 19, 1998 (see Note 9); LLB began
dockside casino operations on December 13, 1993 in Biloxi, Mississippi and sold
its real property and operating assets and ceased operations effective June 7,
1998 (see Note 11); MLI, which does business as Lady Luck Rhythm & Blues,
commenced dockside gaming operations on June 27, 1994 in Coahoma County,
Mississippi, commenced operation of a 173-room hotel on August 16, 1994,
commenced gaming operations of Country Casino and the Pavilion on May 21, 1996
and acquired and took over operation of the 120-room Riverbluff Hotel in Helena,
Arkansas on July 3, 1996; 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 (see Note 4); and, Old River
Development, Inc., a subsidiary of the Company, commenced operation of a
240-room hotel on August 24, 1994, contributed it to the Bally's Joint Venture
in March 1995 and sold its equity investment to Bally's effective September 30,
1997 (see Note 4). LLV and LLK 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.
<PAGE>
46
LADY LUCK GAMING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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. Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Significant intercompany accounts and transactions have
been eliminated.
(b) Use of Estimates
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.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less as cash equivalents.
(d) Restricted Cash
Restricted cash consists of amounts held in escrow and cash specifically
restricted to be used in accordance with the terms of the Indenture related to
the 2001 Notes (See Note 5).
(e) Marketable Securities
The Company's marketable securities, which are recorded at fair market
value, are comprised of federal agency and corporate obligations, all classified
as trading securities as of December 31, 1998, under Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Accordingly, net unrealized holding gains and losses for
trading securities were included in net income for the year ended December 31,
1998. Unrealized holding gains and losses are determined as the difference
between cost and fair value based on quoted market prices or valuation methods
from services believed to be reliable. The fair market value of the marketable
securities approximated their original cost at December 31, 1998, as the
unrealized holding gains were immaterial.
(f) Inventories
Inventories are stated at the lower of cost, as determined by the first-in,
first-out method, or market value.
<PAGE>
47
LADY LUCK GAMING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(g) Assets Held for Sale
Assets held for sale include the current book value of assets to be
disposed of, net of the estimated loss on sale of these assets. These assets
relate to LLCC (See Note 9).
(h) Property and Equipment
Property and equipment are stated at cost. The Company capitalizes interest
on funds dispersed during the active construction and development phases of its
projects. Depreciation and amortization are computed using predominantly the
straight-line method for financial reporting purposes and accelerated methods
for income tax purposes. Estimated useful lives for financial reporting purposes
are as follows:
Land improvements..................................15-25 years
Buildings and improvements.........................15-30 years
Furniture, fixtures and equipment....................5-7 years
When equipment has been fully depreciated, its cost and the related
accumulated depreciation are eliminated from the respective accounts. Gains or
losses arising from dispositions are reported as other income or expense. Costs
of major improvements are capitalized, while costs of normal repairs and
maintenance are charged to expense as incurred.
Substantially all property and equipment is pledged as collateral for
long-term debt. (See Note 5).
(i) Investment in Unconsolidated Affiliates
The Company accounts for its investment in 50% or less owned joint ventures
using the equity method of accounting. Under the equity method, original
investments are recorded at cost and adjusted by the Company's share of
earnings, losses and distributions of these joint ventures. No cash
distributions have been made since inception.
(j) Pre-Opening Costs
During April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 "Reporting of the Costs of Start-up
Activities" effective for fiscal years beginning after December 15, 1998. The
new standard requires that all companies expense costs of "start-up" activities
as the costs are incurred. The term "start-up" includes pre-opening,
pre-operating and organization activities. Previously, the Company had
capitalized these items until the property opened at which time these cumulative
costs were expensed. Although the Company has no capitalized "start-up" costs as
of December 31, 1998, any "start-up" costs related to projects in the
development stage will be required to be expensed as incurred beginning January
1, 1999.
(k) Development Costs
Development costs represent those costs such as legal and consulting fees,
gaming license applications and options for land acquisitions or leases incurred
for prospective gaming projects. The Company defers such costs for those
projects in jurisdictions in which gaming is legalized and in which the Company
believes that it has a probable chance of obtaining a license and completing the
project; otherwise, the costs are expensed as incurred and are included in
selling, general and administrative expense.
<PAGE>
48
LADY LUCK GAMING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(l) Deferred Financing Fees and Costs
Deferred financing fees and costs incurred relating to the issuance of the
2001 Notes were capitalized and are being amortized to interest expense using
the effective interest method over the term of the 2001 Notes.
(m) Revenue Recognition
Casino revenues represent the net win from gaming activities, which is the
difference between gaming wins and losses.
(n) Advertising
Advertising costs are expensed the first time such advertisement appears.
Total advertising costs (including direct mail marketing) were approximately
$3,917,000, $5,794,000 and $4,153,000 for 1998, 1997, and 1996, respectively.
(o) Income Taxes
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109 "Accounting for Income Taxes." SFAS No. 109 requires
the recognition of deferred tax assets and liabilities for the consequences of
temporary differences between amounts reported for financial reporting and
income tax purposes. SFAS No. 109 requires recognition of a future tax benefit
of net operating loss carryforwards and certain other temporary differences to
the extent that realization of such benefit is more likely than not; otherwise,
a valuation allowance is applied. Included in the calculation of the Company's
deferred tax assets and liabilities and the provision for income taxes is the
equity in net income of the Bettendorf Joint Venture and the Bally's Joint
Venture at their respective ownership interests.
(p) Net Income (Loss) Per Share
The Company follows the provisions of SFAS No. 128 "Earnings Per Share."
SFAS No. 128 requires basic income per share of common stock be computed based
on the number of weighted-average shares of common stock outstanding during the
period. Diluted income per share of common stock would be anti-dilutive; thus,
there is no difference between the basic and diluted earnings per share
disclosure. Pursuant to SFAS No. 128, all prior period presentations have been
restated. There was no material effect on the earnings per share calculations as
a result of these restatements.
(q) Fair Value of Financial Instruments
The fair value of the Company's financial instruments approximates their
recorded values at December 31, 1998 and 1997, except for the Company's mortgage
notes payable, the fair market values of which, based on quoted market prices,
were approximately $176.1 million and $177.0 million, respectively. The fair
values are not necessarily indicative of the amounts the Company could realize
in a current market exchange.
<PAGE>
49
LADY LUCK GAMING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(r) Long-lived Assets
Long-lived assets, which are not to be disposed of, including property and
equipment, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. Assets are grouped and evaluated for impairment at the lowest level
for which there are identifiable cash flows that are largely independent of the
cash flows of other groups of assets. The Company deems an asset to be impaired
if a projection of undiscounted future operating cash flows directly related to
the asset, including disposal value if any, is less than its carrying amount. If
an asset is determined to be impaired, the loss is measured as the amount by
which the carrying amount of the asset exceeds fair value. Fair value is
measured based on quoted market prices in active markets, if available. If
quoted market prices are not available, the Company measures fair value by
discounting estimated cash flows. Considerable management judgment is necessary
to estimate discounted future cash flows. Accordingly, actual results could vary
significantly from such estimates. During the fourth quarter of 1997, management
determined that the carrying value of LLB's long-lived assets had been impaired
(See Note 11).
(s) Reclassifications
The Company made certain financial statement reclassifications, which have
no impact on net income, for the years ended December 31, 1997 and 1996, in
order to classify amounts in a manner consistent with the year ended December
31, 1998.
4. Investment in Unconsolidated Affiliates
The Company's investments in joint ventures with BRDC and Bally's are
accounted for under the equity method and the Company's portion of income or
loss from the joint ventures is included in Equity in Net Income of
Unconsolidated Affiliates in the accompanying Consolidated Statements of
Operations for the years ended December 31, 1998, 1997 and 1996.
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 is leasing certain real property
to the Bettendorf Joint Venture at a lease rate equal to $150,000 per month. The
Company is leasing a gaming vessel with a cost of $21,635,000 and a carrying
value net of accumulated depreciation as of December 31, 1998 of $19,387,000 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. In addition, from inception of the Bettendorf Joint
Venture through December 31, 1997, the Company had been leasing certain gaming
equipment to the Bettendorf Joint Venture with a cost of $3,705,000 for
approximately $122,000 per month, its fair market rental value. Pursuant to such
equipment lease, effective January 1, 1998, the Company sold the equipment to
the Bettendorf Joint Venture for a negotiated amount of $712,000 cash. The
Company's rental income relating to the gaming vessel lease was $2,266,000,
$2,266,000 and $2,187,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. The Company's rental income relating to the gaming equipment lease
was $1,465,000 and $1,649,000 for the years ended December 31, 1997 and 1996,
respectively.
<PAGE>
50
LADY LUCK GAMING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Lady Luck Bettendorf commenced operations on April 21, 1995. All net
profits and losses from all operations of Lady Luck Bettendorf are allocated
equally between the Company and BRDC. Effective January 1, 1996 with the
replacement of the Old Management Agreements by the Marketing Agreements (see
Note 15), 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.
Lady Luck Bettendorf incurred management fees, net of $37,500 monthly
abatement, for the years ended December 31, 1998, 1997 and 1996 as follows (in
thousands):
December 31,
-----------------------------------------
1998 1997 1996
------------ ------------ ------------
Lady Luck Bettendorf
management fees........... $ 2,292 $ 1,569 $ 1,117
========= ========= =========
Summarized balance sheet information for the Bettendorf Joint Venture as
of December 31, 1998 and 1997 is as follows (in thousands):
December 31,
--------------------------
1998 1997
------------ ------------
Current assets........................ $ 6,870 $ 4,758
Other................................. 750 732
Property and equipment, net........... 52,727 25,459
--------- ---------
Total assets........................ $ 60,347 $ 30,949
========= =========
Current liabilities................... $ 8,154 $ 12,276
Long-term liabilities................. 23,370 48
Members' equity....................... 28,823 18,625
--------- ---------
Total liabilities and members' $ 60,347 $ 30,949
equity............................. ========= =========
Summarized results of operations for the Bettendorf Joint Venture for the
years ended December 31, 1998, 1997 and 1996 are as follows (in thousands):
1998 1997 1996
------------ ------------ ------------
Net revenues................ $ 84,508 $ 71,612 $ 65,202
Costs and expenses.......... 74,310 64,758 59,020
--------- --------- ---------
Net income ............... $ 10,198 $ 6,854 $ 6,182
========= ========= =========
<PAGE>
51
LADY LUCK GAMING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
A summary of changes in the Company's investment in the Bettendorf Joint
Venture for the years ended December 31, 1998, 1997 and 1996 and are as follows
(in thousands):
1998 1997 1996
------------ ------------ ------------
Investment, beginning of $ 9,313 $ 5,886 $ 2,795
period....................
Equity in net income of
unconsolidated affiliate.. 5,099 3,427 3,091
--------- --------- ---------
Investment, end of period... $ 14,412 $ 9,313 $ 5,886
========= ========= =========
Included in the Company's accumulated deficit is $11,412,000 of
undistributed retained earnings of the Bettendorf Joint Venture as of December
31, 1998.
Bally's joint venture
---------------------
Pursuant to an agreement effective September 30, 1997, the Company sold
its 35% minority interest in Bally's Saloon, Gambling Hall and Hotel in Tunica,
Mississippi to Hilton Hotels Corporation, the majority owner and manager of the
property (the "Partnership Interest Redemption Agreement"). The sale resulted in
a loss of $1,912,000, which represented the difference between the sales price
and the net investment in the Bally's Joint Venture and related assets.
Summarized results of operations for the Bally's Joint Venture for the
nine months ended September 30, 1997 (the effective date of the sale of the
Company's 35% interest in the Bally's Joint Venture) and the year ended December
31, 1996 are as follows (in thousands):
1997 1996
---------------- ----------------
Net revenues................ $ 48,836 $ 70,093
Costs and expenses.......... 45,129 67,976
-------------- --------------
Net income............... $ 3,707 $ 2,117
============== ==============
Net income of the Bally's Joint Venture for the year ended December 31,
1996 includes pre-opening expenses of $3.3 million.
A summary of changes in the Company's investment in the Bally's Joint
Venture for the nine months ended September 30, 1997 (the effective date of the
sale of the Company's 35% interest in the Bally's Joint Venture) and the year
ended December 31, 1996 are as follows (in thousands):
1997 1996
------------ ------------
Beginning investment.................. $ 15,563 $ 14,824
Equity in net income of
unconsolidated affiliate............ 1,297 724
Loss on sale of equity
investment.......................... (1,912) -
Other................................. 302 15
Proceeds from sale of
investment.......................... (15,250) -
--------- ---------
Ending investment................... $ - $ 15,563
========= =========
<PAGE>
52
LADY LUCK GAMING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
5. Long-term Debt
At December 31, 1998 and 1997, long-term debt consisted of the following
(in thousands):
1998 1997
------------ ------------
$185,000 11 7/8% First Mortgage
Notes; quarterly Payments of
interest only; due March 2001;
collateralized by substantially all
assets of the Company and
guaranteed by LLGC (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......... 344 -
Note payable to a bank; monthly
payments of principal and interest
of 8%; due November 2008;
collateralized by deed of trust........... 198 -
Note payable to a corporation;
monthly payments of interest only
at 10%; principal due July 2001,
collateralized by a deed of trust
(See Note 9).............................. - 2,750
Note payable to a corporation; annual
payments of principal of $119 plus
accrued interest at 8%; due June
2003; collateralized by a land deed
of trust.................................. - 714
Notes payable to corporations;
monthly payments of principal and
interest at rates up to 12.5% due
through December 2002 secured by
the equipment............................. 494 1,122
Mortgage note payable to a
corporation; quarterly payments of
principal and interest at prime
plus 11/2% based on a 20 year
amortization; due April 2006;
collateralized by a deed of trust......... 2,623 2,773
Note payable to a corporation;
quarterly payments of principal and
accrued interest at 9%; due July
1998, collateralized by a deed of
trust..................................... - 110
Other....................................... 20 326
--------- ---------
177,179 181,295
Less: current portion....................... (595) (4,481)
--------- ---------
Total long-term debt...................... $ 176,584 $ 176,814
========= =========
<PAGE>
53
LADY LUCK GAMING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
The Indenture, as amended and supplemented (the "Indenture"), covering the
Company's 11 7/8% First Mortgage Notes due 2001 (the "2001 Notes") provides for,
among other things, restrictions on the Company's and certain of its
subsidiaries' abilities (a) to pay dividends or other distributions on its
capital stock, (b) to incur additional indebtedness, (c) to make asset sales,
(d) to engage in other lines of business, and (e) to maintain a minimum
consolidated net worth, as defined in the Indenture. The Company believes it is
in compliance with the Indenture, as amended and supplemented, as of December
31, 1998.
The 2001 Notes bear interest at the rate of 11 7/8% per annum effective
October 15, 1995 (prior to that time they bore interest at the rate of 10 1/2%
per annum). Interest on the 2001 Notes held by each holder who consented to
certain amendments to and waivers of continuing defaults under the Indenture in
1996 (the "Amendments and Waivers") will be payable quarterly on each March 1,
June 1, September 1 and December 1, so long as the 2001 Notes are outstanding
(interest on the notes held by each holder who did not consent to the Amendments
and Waivers will continue to be payable semiannually on March 1 and September
1). In addition, the Company is obligated within 180 days after the end of each
year, commencing with the year ended December 31, 1996, to purchase on the open
market, or to make an offer to purchase from the holders at par, 2001 Notes with
a principal amount equal to Excess Cash Flow (as defined in the Indenture) for
such year. However, the Company will be able to credit toward the amount of 2001
Notes required to be purchased in any year any amount of 2001 Notes it has
purchased since January 1, 1996 which it has not previously used as a credit in
any prior year. There was no Excess Cash Flow for the years ended December 31,
1998 and 1997. The Company may also repurchase a portion of the 2001 Notes from
time to time in early satisfaction of any required repurchase expected pursuant
to the Indenture or otherwise, the amount of which and the timing of repurchase
cannot currently be estimated and is dependent on adequate cash availability and
market conditions.
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. Mr. Tompkins is personally liable for the debt and has pledged his
assets, including the 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 or decide
to sell his stock, 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
March 24, 1999, the closing market price of the 2001 Notes, as reported by
Bloomberg Financial Services was 102.19%.
Sale of Biloxi Operating Assets
-------------------------------
Pursuant to an Asset Purchase Agreement dated June 2, 1998, on June 11,
1998, the Company received approximately $15.1 million from Grand Casinos of
Mississippi, Inc. and Grand Casinos, Inc. (collectively "Grand Casinos") for the
sale of substantially all of the assets, excluding gaming equipment and certain
noncontiguous real property, associated with its Lady Luck Biloxi casino which
ceased operations June 7, 1998. The sale resulted in a $2.8 million gain
recognized during the year ended December 31, 1998. In accordance with the
Indenture, the
<PAGE>
54
LADY LUCK GAMING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Company had 180 days after receiving the $15.1 million (until December 8, 1998)
to invest the money and any earnings thereon in a Related Business (as defined
in the Indenture). The Company invested the funds in a Related Business before
such time.
Sale of Interest in Bally's Joint Venture
-----------------------------------------
Pursuant to a Partnership Interest Redemption Agreement, on November 3,
1997, the Company received approximately $15.3 million cash for its investment
in the Bally's Joint Venture. The Company invested $5.7 million of the proceeds
from the sale of its interest in the Bally's Joint Venture in a Related Business
(as defined in the Indenture). Also in accordance with the Indenture, the
Company, on April 16, 1998, offered to repurchase up to $9.6 million principal
amount of the 2001 Notes (the "Tender Offer") at a price of 101% of par plus
accrued and unpaid interest thereon. The Tender Offer expired on May 14, 1998
and none of the 2001 Notes were tendered. The remaining proceeds from the sale
and interest earned thereon became unrestricted and available to the Company for
general purposes at that time.
Scheduled maturities of long-term debt for each of the years ending as of
December 31, are as follows (in thousands):
1999.......................... $ 595
2000.......................... 259
2001.......................... 173,684
2002.......................... 216
2003.......................... 180
Thereafter.................... 2,245
--------------
Total...................... $ 177,179
==============
6. Mandatory Cumulative Redeemable Preferred Stock
LLGC has authorized 1,800,000 shares of Series A Mandatory Cumulative
Redeemable Preferred Stock. Holders of Series A are entitled to a compounded
cumulative preference dividend each quarter. The current dividend is 11.5% of
the liquidation preference per share per annum, payable or accrued in quarterly
installments. Dividends of approximately $2,209,000, $1,972,000 and $1,761,000
were accrued on the Series A preferred stock during the years ended December 31,
1998, 1997 and 1996, respectively. The Series A also requires mandatory
redemption on or before December 31, 2013. Cumulative dividends on these
preferred shares as of December 31, 1998 are $9,770,000.
7. Reverse Stock Split, NASDAQ 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.
<PAGE>
55
LADY LUCK GAMING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 Small-Cap Market tier, but no
guarantee can be provided that the Company would be in fact eligible for
Small-Cap listing.
As of December 31, 1998, options to purchase 68,000 and 43,000 shares of
Common Stock at exercise prices ranging from $15.00 to $18.72 per share were
outstanding and exercisable, respectively, and could potentially dilute earnings
per share in future periods. The related weighted average number of shares of
Common Stock were not included in the computations of earnings per share because
the options' exercise prices were greater than the average market prices of
Common Stock during the years ended December 31, 1998, 1997 and 1996 and any
effect would be antidilutive.
8. Promotional Allowances
The retail value of food, beverage and rooms provided on a complimentary
basis to customers without charge are included in gross revenues and then
deducted as promotional allowances. The estimated costs of providing these
promotional allowances are included in casino departmental expenses for the
years ended December 31, 1998, 1997, and 1996, as follows (in thousands):
1998 1997 1996
------------ ------------ ------------
Food and beverage............... $ 8,640 $ 9,347 $ 8,370
Hotel and other................. 1,072 906 800
------------ ------------ -----------
Total........................ $ 9,712 $ 10,253 $ 9,170
============ ============ ===========
9. Reserve for Loss on Sale of Lady Luck Central City Assets
Effective February 19, 1998, LLCC sold substantially all of its real
property and operating assets to the holder of its mortgage note in exchange for
forgiveness of the $2.8 million note and the assumption of certain liabilities.
During 1997, the Company recorded a reserve of $7.3 million to write-down the
assets held for sale to fair market value less closing costs, reserve for
operating losses in 1998 prior to the effective sale date and to reserve for
estimated future lease payments and write-downs on its parking lot leases which
were not assumed by the purchaser of the assets sold. Accordingly, the net
assets of LLCC were classified as Assets Held for Sale as of December 31, 1997.
<PAGE>
56
LADY LUCK GAMING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
10. Project Development Cost Write-Downs
During 1997, the Company wrote down various project development costs
totaling approximately $7.8 million due to changes in regulatory, political and
competitive environments and other factors.
The first write-down related to the Missouri Project. The State of Missouri
investigates applicants at its discretion and there can be no assurance that the
Company's application will be actively reviewed in future periods. In November
1997, the Missouri Supreme Court ruled that several existing Missouri gaming
projects are illegal due to their locations not being on the Mississippi or
Missouri rivers. In addition, certain current operators in Missouri have been
experiencing poor operating results. These uncertainties resulted in the Company
recording a $2.3 million project development write-down in 1997 of the remaining
balance of its pre-opening and other development costs and a $3.0 million
write-down of construction in progress for a portion of the partially completed
cruising vessel which, if not used for the Missouri Project, could be sold or
possibly used in a future development project. Nevertheless, management
estimates that the fair value of this partially completed cruising vessel was
approximately 50% of its net book value.
These valuations are based on assumptions regarding expected future
economic, market and gaming regulatory conditions. Changes in these assumptions
could result in further changes in the estimated net realizable value of the
partially completed cruising vessel.
The second write-down was related to the Vicksburg Project. The
consummation of the transactions contemplated by the Horseshoe Joint Venture
Agreement was subject to the fulfillment of several conditions (the
"Conditions"). Either LLV or Horseshoe could terminate the Horseshoe Joint
Venture Agreement on or after April 1, 1998, if certain conditions were not met.
In October 1998, the Horseshoe Joint Venture Agreement was terminated by LLV as
the Conditions were not satisfied. A determination that certain assets may not
be usable in the Vicksburg Project as currently contemplated resulted in a $2.3
million write-off of construction in progress during 1997. 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. Changes in these assumptions could
result in changes in the estimated net realizable value of the property.
Additionally, the Company had previously planned to construct and operate a
casino in Gulfport, Mississippi (the "Gulfport Project"). However, in 1997 the
Company suspended further development of the Gulfport Project and is not
currently engaged in negotiating either an agreement to sell or develop these
leaseholds. The Company intends to cancel these leases at the earliest date
allowable pursuant to the lease agreements. During 1997, the Company provided a
project development reserve of approximately $162,000 to fully reserve remaining
future minimum lease payments net of estimated sublease rentals for the
remaining LLG leases. Reserves of approximately $350,000 and $600,000 had
previously been provided during 1996 and 1995, respectively.
Lastly, during 1997, the Company provided reserves of approximately $50,000
related to its investment in Lady Luck New Mexico ("LLNM") for a total reserve
related to LLNM, including 1996 and 1995 reserves, of approximately $250,000.
The Company received $200,000 cash during 1997 for its remaining investment
balance.
11. Asset Impairment Write-Down
The Company evaluated the recoverability of LLB's long-lived assets in 1996
and 1997 due to recurring operating losses based on the criteria established
under Financial Accounting Standards Board Statement No. 121 ("SFAS 121").
During the fourth quarter of 1997, pursuant to SFAS 121, the Company recorded an
impairment write-down to LLB's long-lived assets of $20.7 million. The Company
considered the historical operating results and the
<PAGE>
57
LADY LUCK GAMING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
significant downturn in the operating results of LLB since the opening of
additional competitive facilities in its market, principally the opening of
Imperial Palace in December 1997. In performing its review for recoverability,
the Company compared the projected undiscounted future cash flows to the
carrying value of LLB's long-lived assets of $31.5 million as of December 31,
1997. As the net carrying value of long-lived assets exceeded the estimated
undiscounted future cash flows, the Company was required to recognize an
impairment loss and write-down long-lived assets to their fair market value of
$10.8 million. Fair value became the new cost basis for the impaired assets and
previously accumulated depreciation was eliminated. As active market quotations
were not available, the Company measured fair value by discounting estimated
future cash flows. Considerable management judgment was necessary to estimate
discounted future cash flows. Substantially all of the assets of LLB were
subsequently sold on June 11, 1998 (see Note 5).
12. Income Taxes
The net deferred tax asset (liability) as of December 31, 1998 and 1997,
are as follows (in thousands):
1998 1997
---------- ---------
Deferred tax asset
Net operating loss carry-forward............ $ 27,017 $ 20,798
Excess of tax over book basis of
assets due to write down of assets...... 7,283 14,778
Deposits.................................... 525 525
Other....................................... 2,369 1,691
---------- ---------
37,194 37,792
Less: valuation allowance................... (15,674) (19,167)
---------- ---------
Net deferred tax asset...................... 21,520 18,625
---------- ---------
Deferred tax liability
Excess of tax depreciation over book........ (18,283) (15,896)
Unconsolidated affiliates................... (680) (417)
Other....................................... (2,557) (2,312)
---------- --------
Net deferred tax liability.................. (21,520) (18,625)
---------- ---------
Net........................................ $ - $ -
========== =========
SFAS No. 109 requires recognition of the future tax benefit of these assets
to the extent realization of such benefits is more likely than not, otherwise, a
valuation allowance is applied. At December 31, 1998 and 1997, the Company
determined that $15,674,000 and $19,167,000, respectively, of tax benefits did
not meet the realization criteria because of the Company's history of operating
results. Accordingly, a valuation allowance was applied to reserve the
applicable deferred tax assets.
<PAGE>
58
LADY LUCK GAMING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
The following summarizes the components of the income tax (provision) for
the years ended December 31, 1998, 1997 and 1996 (in thousands):
1998 1997 1996
------------ ----------- ----------
Current....................... $ (75) $ (49) $ (69)
Deferred...................... - - -
----------- ---------- ----------
Income tax (provision)..... $ (75) $ (49) $ (69)
=========== ========== ==========
Mississippi State income taxes were offset by a tax credit for state gaming
taxes that are based on gross gaming revenues. The credit is the lesser of the
annual total gaming taxes paid or the Mississippi State income tax. Credit
carry-forwards are not permitted and may not be used on a combined company
basis.
A reconciliation of the "expected" income tax (provision) benefit assuming
a 35% federal statutory rate to the income tax provision for the years ended
December 31, 1998, 1997 and 1996 is as follows (in thousands):
1998 1997 1996
---------- ---------- ----------
"Expected" income tax (provision)
benefit............................ $ (3,583) $ 12,761 $ (2,173)
Nondeductible items.................... (254) (329) (59)
Net operating loss carryforward........ 3,762 - 2,163
Net operating loss--no benefit
recorded........................... - (12,481) -
---------- ---------- ----------
Income tax (provision).............. $ (75) $ (49) $ (69)
========== ========== ==========
At December 31, 1998 and 1997, the Company had net operating loss
carryforwards available for income tax purposes of approximately $77,000,000 and
$59,000,000, respectively, which expire from 2009 to 2018.
13. Stock Option Plan
Under the 1993 stock option plan (the "Stock Option Plan"), options may be
granted to purchase up to an aggregate of 166,667 shares of LLGC's common stock.
All full-time officers and other key executives, as well as outside directors of
LLGC, are eligible to receive options. Options may be granted that either are
intended to be incentive stock options or non-qualified stock options for income
tax purposes. Each option granted will be exercisable in full at any time or
from time to time as determined by the Compensation Committee, provided that no
option may have a term exceeding ten years.
During 1998 and 1997, no stock options were granted. During the year ended
December 31, 1996, 29,499 stock options were granted at exercise prices ranging
from $15.00 to $18.00 per share. During 1998, 1997 and 1996, no options expired
or were exercised; 667, 13,334, and 1,667 options were canceled, respectively.
The effect of these options on diluted EPS has been omitted as their inclusion
would be antidilutive.
<PAGE>
59
LADY LUCK GAMING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
The Company accounts for the Stock Option Plan under APB No. 25, under
which no compensation cost has been recognized. Had compensation cost for this
plan been determined consistent with Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123) the Company's
net income and earnings per share would have been reduced to the following pro
forma amounts:
Years Ended December 31,
----------------------------
1998 1997 1996
------- -------- -------
(thousands of dollars)
Net income (loss) applicable to
common stockholders as reported....... $ 7,957 $(38,483) $ 4,378
Pro forma................................ $ 7,790 $(38,544) $ 4,054
Basic and diluted net income (loss) per
share as reported..................... $ 1.63 $ (7.88) $ 0.90
Pro forma................................ $ 1.60 $ (7.90) $ 0.83
Because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The options granted to date to various employees and outside directors vest
ratably over 5 years, with an expiration 10 years from the date of issuance.
Option prices were equal to or greater than market value on the date of
issuance, and at December 31, 1998, the weighted-average issue price of the
options was $15.86. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions; risk-free interest rates of 5.4%, 5.4%, and 6.5%
for 1998, 1997 and 1996, respectively; expected lives of 5 years for 1998, 1997
and 1996 and expected volatility of 240, 213, and 185 percent for 1998, 1997 and
1996, respectively. There are no expected dividend yields in 1998, 1997 and
1996.
<PAGE>
60
LADY LUCK GAMING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
A summary of the status of the stock option plan and weighted average
exercise prices ("WAEP") at December 31, 1998, 1997 and 1996 and changes during
the years then ended is presented in the table below:
Years Ended December 31,
-------------------------------------------------------
1998 1997 1996
----------------- ----------------- ------------------
Number Number Number
OF Shares WAEP of Shares WAEP of Shares WAEP
--------- ------- --------- ------- --------- --------
Outstanding at
beginning of year... 69 $ 17.28 82 $ 17.44 54 $ 18.72
Granted............... - - - - 30 15.18
Forfeited/canceled.... (1) 17.79 (13) 18.26 (2) 18.72
-------- ------- ------
Outstanding at end
of year............. 68 17.28 69 17.28 82 17.44
======== ======== =======
Exercisable at
year end........... 43 17.80 29 18.60 20 18.72
Weighted average
fair value of
options............. $ - $ - $ 12.12
Weighted average
remaining
contractual life
of options.......... 6.02 years 7.03 years 7.19 years
14. 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.
15. Related Party Transactions
Effective January 1, 1996, the Company entered into several agreements with
entities controlled by Mr. Tompkins, Chairman of the Board and Chief Executive
Officer of the Company, replacing other agreements that were less favorable to
the Company. Under a license agreement (the "License Agreement") with
International Marco Polo
<PAGE>
61
LADY LUCK GAMING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Services, Inc., (formerly known as Lady Luck Casino, Inc. and Marco Polo's
International Marketing, Inc. which merged in 1996) ("Marco Polo Services"), a
corporation owned and controlled by Mr. Tompkins, the Company pays Marco Polo
Services an annual licensing fee with respect to the Lady Luck name and the
mailing list developed by Gemini, Inc. ("Gemini"), an S corporation wholly owned
by Mr. Tompkins that does business as Lady Luck Casino/Hotel in Las Vegas,
Nevada. The licensing fee is equal to the greater of (a) 9% of the Company's
EBITDA as defined (calculated as EBITDA of the Company and all its subsidiaries
and joint ventures (multiplied, in the case Bettendorf Joint Venture and the
Missouri Project by the Company's ownership interest), excluding, among other
things, all revenues and expenses arising from any casino or casino/hotel for
which the Company is not the operator and which does not utilize the mailing
list or Lady Luck name and excluding revenues from the lease of equipment owned
by the Company to third parties or unconsolidated entities), and (b) $1,700,000
per year (as adjusted based on the U.S. Consumer Price Index Urban Annual
Percent Change as published by the U.S. Department of Labor Bureau of Labor and
Statistics from year to year (the "Consumer Price Index")). The Company has
agreed to use the Lady Luck name on all existing and future casinos that it
operates. The License Agreement provides that during any period of default in
the payment of principal or interest on the 2001 Notes, the Company will not pay
(but will accrue on its books) any licensing fee due to Marco Polo Services. For
1998, 1997 and 1996, the licensing fees payable to Marco Polo Services by the
Company were approximately $3,370,000, $2,953,000 and $3,434,000, respectively.
Under an office lease with Gemini, the Company pays Gemini the sum of
$300,000 per year, as adjusted based on the Consumer Price Index, for corporate
office facilities and services. In addition, the Company reimburses Gemini for
the approximate retail value of rooms, food and beverage, and other items
provided to the Company by Gemini. During 1998, 1997 and 1996, net rent expense
of $315,000, $310,000 and $300,000, respectively, and reimbursable items of
$104,000, $147,000, and $129,000, respectively, were paid to Gemini. In
addition, the Company incurred $304,000, $49,000, and $7,000 of expenses for
1998, 1997 and 1996, respectively, that were related to marketing and other
expenses, and were reimbursed by Gemini
Marco Polo Services provides marketing services to the Company under an
agreement with the Company. Mr. Uboldi, the Company's President and Chief
Operating Officer and director of the Company, is the Vice President of Marco
Polo Services. Net marketing services received by the Company from Marco Polo
Services during 1998, 1997 and 1996, for allocated payroll, overhead, direct
advertising and marketing costs were $870,000, $788,000 and $659,000,
respectively. The Company incurred $405,000, $40,000 and $14,000 of expenses
related to marketing and other costs that were reimbursed by Marco Polo for
1998, 1997 and 1996, respectively.
16. 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
<PAGE>
62
LADY LUCK GAMING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 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 $7.1 million as of March 5, 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 cases are still in their preliminary stages and their
outcome cannot be predicted with any degree of certainty; however, the Company
believes, based in part on advice of counsel, that it has meritorious defenses.
A Greek architect filed an action against the Company alleging that he was
retained by the Company to provide professional services with respect to a
casino in Loutraki, Greece. On July 29, 1996, the Athens Court of First Instance
in this matter served the Company's Greek counsel with its decision and entered
judgment against the Company in the amount of approximately 87.1 million drachma
plus accrued interest (which was approximately $294,000, plus accrued interest,
as of March 5, 1999 based on published exchange rates). The Company appealed the
Court's decision. Subsequent to December 31, 1998, the Company settled this
action for $335,000 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, LLCC 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. Subsequent to December 31, 1998, 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.
<PAGE>
63
LADY LUCK GAMING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
17. 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 LLG 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. Rent expense incurred under operating
leases was approximately $6,890,000, $7,885,000, and $8,934,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
Future minimum lease commitments under non-cancelable long-term operating
leases for the years ending December 31, are as follows (in thousands):
1999................................... $ 1,735
2000................................... 1,669
2001................................... 1,389
2002................................... 1,389
2003................................... 1,389
Thereafter............................. 35,888
--------------
Total............................... $ 43,459
==============
Construction Commitments
- ------------------------
Bettendorf Joint Venture
------------------------
The Bettendorf Joint Venture recently constructed an expansion project
pursuant to its master-plan at a cost of approximately $37.0 million. The
project includes a 256-room hotel with a fully enclosed walkway to the riverboat
casino, a 500-car parking garage and a bypass over the nearby railroad to
improve access. The hotel opened August 29, 1998 with the other amenities
opening prior to that date. In addition, the project includes a marina,
construction of which has been delayed beyond the Company's control due to
pending environmental evaluations. During April 1998, the Iowa Racing and Gaming
Commission approved the addition of up to 230 new slot machines and six table
games at Lady Luck Bettendorf, many of which were installed prior to the opening
of the hotel. The expansion project financing is non-recourse to the Company and
includes a $17.5 million bank first mortgage note, a second mortgage from an
affiliated company of BRDC for up to $5.0 million ($1.25 million was actually
drawn), and includes $7.5 million in tax increment financing from the City of
Bettendorf to be repaid from property taxes in exchange for deeding the overpass
to the City of Bettendorf. During October 1998, the Company repaid the balance
of the second mortgage to the affiliated company of BRDC. As of December 31,
1998, the Bettendorf Joint Venture had outstanding the full amount of the bank
first mortgage note and the tax increment financing. The balance of the
expansion project's costs was paid from the Bettendorf Joint Venture's cash on
hand and from operations.
<PAGE>
64
LADY LUCK GAMING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Service Marine Vessel
---------------------
The Company has entered into an agreement for the construction of a
cruising gaming vessel in the amount of $16.0 million and as of December 31,
1998, 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 payable and did not list the partially completed vessel as
an asset. The Company is exploring options to either relocate the vessel from
the shipyard or sell it to a third party.
Natchez Site
------------
Pursuant to its lease, LLM paid the lessor of the Natchez site $500,000 in
liquidated damages as the Company did not make certain improvements to the site
required by the lease. In addition, Lady Luck Natchez was required under its
lease to move its casino barge several hundred feet to another docking facility
on land subject to the lease by February 1998. On August 21, 1998, management
and the lessor amended the lease to allow the barge to remain in its current
location. Pursuant to such agreement, the lessor agreed to allow the barge to
remain at its current location in consideration of the Company's agreement to
pay liquidated damages of $1.2 million if it terminates the lease at any time
during the 10 year period following the execution of the lease amendment and the
Company's payment of $250,000 to construct additional parking spaces on the
leased property.
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 project
is expected to be complete during the second quarter of 1999 at a cost estimated
not to exceed $17.0 million. The Company intends to fund the construction
primarily with the proceeds from the sale of substantially all of LLB's
operating assets. The remaining obligation under the general construction
contract at December 31, 1998 was $8.2 million.
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 December 31, 1998, the Company has invested approximately $8.7
million ($140,000 of which was invested during 1998) 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. The Missouri Project is estimated to cost an
additional $105.0 million to complete. The proposed project has
<PAGE>
65
LADY LUCK GAMING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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.
During 1997, the Company entered into an agreement (the "Horseshoe Joint
Venture Agreement") with Horseshoe Gaming, LLC ("Horseshoe") to form a joint
venture to complete and operate the Vicksburg Project. During October 1998, the
Company terminated the Horseshoe Joint Venture Agreement pursuant to a provision
therein.
A gaming license was granted to LLV on August 18, 1994 and has subsequently
been renewed through July 2000. As of December 31, 1998, the Company has
invested approximately $14.5 million ($100,000 of which was invested during
1998) 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 replacement 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. 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
<PAGE>
66
LADY LUCK GAMING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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. The Company believes that the Supreme Court should rule on the
appeal by the first quarter of the year 2000.
Lady Luck Vancouver
-------------------
The Province of British Columbia (the "Province"), through its Lotteries
Advisory Committee invited interested parties to respond to a Request for
Proposal ("RFP") relating to a planned expansion of gaming in the Province.
The Company responded to the RFP during the fourth quarter of 1997, with a
proposed project to be developed on Tsawwassen First Nation Band Reserve lands
(the "Vancouver Project"), located about 20 miles south of downtown Vancouver.
During the fourth quarter of 1998, the Company was informed that it did not
receive approval to proceed on the Project.
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 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.
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.
<PAGE>
67
Leverage
--------
The Company is highly leveraged. As of December 31, 1998, the Company's
total long-term indebtedness was approximately $176.6 million and its
stockholders' deficit was approximately $24.2 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.
<PAGE>
68
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable
PART III
The Board of Directors of LLGC has established April 27, 1999 as the annual
meeting date of stockholders.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be set forth in LLGC's Proxy
Statement for the 1999 Annual Meeting of Stockholders of LLGC, which information
is incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be set forth in LLGC's Proxy
Statement for the 1999 Annual Meeting of Stockholders of LLGC, which information
is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be set forth in LLGC's Proxy
Statement for the 1999 Annual Meeting of Stockholders of LLGC, which information
is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be set forth in LLGC's Proxy
Statement for the 1999 Annual Meeting of Stockholders of LLGC, which information
is incorporated by reference herein.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
Included in Part II of this Report:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations -- for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Mandatory Cumulative Redeemable Preferred
Stock and Stockholders' Deficit - for the years ended December
31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - for the years ended December
31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
<PAGE>
69
(a)(2) Financial Statement Schedules.
Included in Part III of this Report -- Unconsolidated financial
statements Lady Luck Bettendorf, L.C., an unconsolidated 50% or less
owned investee accounted for under the equity method included in
Item 14(d):
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations -- for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Members' Equity -- for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows -- for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(a)(3) Exhibits.
Exhibit
Number Description of Exhibits
- ------- -----------------------
3.1 Certificate of Incorporation of Lady Luck Gaming Corporation, as
amended. Incorporated by reference to Exhibit 3.1 to the Form S-1
Registration Statement filed by Lady Luck Gaming Corporation under the
Securities Act (No. 33-63930) (the "Form S-1").
3.2 By-laws of Lady Luck Gaming Corporation, as amended. Incorporated by
reference to Exhibit 3.2 to the Form S- 1.
4.1 Indenture dated as of February 17, 1994 by and among Lady Luck Gaming
Finance Corporation, the Guarantors named therein and First Trust
National Association (the "Indenture"). Incorporated by reference to
Exhibit 4.1 to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1993 by Lady Luck Gaming Corporation (the "Form 10-K").
4.2 Registration Rights Agreement dated as of February 17, 1994 by and
among Lady Luck Gaming Finance Corporation, the Guarantors named
therein and the Purchasers who were signatories thereto. Incorporated
by reference to Exhibit 4.2 to the Form 10-K.
4.3 Pledge Agreement dated as of February 17, 1994 from Lady Luck Gaming
Finance Corporation, as Pledgor to First Trust National Association, as
Trustee. Incorporated by reference to Exhibit 4.4 to the Form 10-K.
4.4 Pledge Agreement dated as of February 17, 1994 from Lady Luck Gaming
Finance Corporation, as Pledgor to First Trust National Association, as
Trustee. Incorporated by reference to Exhibit 4.4 to the Form 10-K.
4.5 Leasehold Deed of Trust, Assignment of Rents and Security Agreement
dated as of February 17, 1994 by and among Lady Luck Gulfport, Inc., as
Trustor, Jim B. Tohill as Trustee, and First Trust National
Association, as Beneficiary. Incorporated by reference to National
Exhibit 4.5 to the Form 10-K.
4.6 Leasehold Deed of Trust, Assignment of Rents and Security Agreement
dated as of February 17, 1994 by and among Lady Luck Mississippi, Inc.
as Trustor, Jim B. Tohill, as Trustee, and First Trust National
Association, as Beneficiary. Incorporated by reference to Exhibit 4.6
to the Form 10-K.
4.7 Leasehold Deed of Trust, Assignment of Rents and Security Agreement
dated as of February 17, 1994 by and among Lady Luck Tunica, Inc., as
Trustor, Jim B. Tohill, as Trustee, and First Trust National
Association, as Beneficiary. Incorporated by reference to Exhibit 4.7
to the Form 10-K.
<PAGE>
70
4.8 Leasehold Deed of Trust, Assignment of Rents and Security Agreement
dated as of February 17, 1994 by and among Lady Luck Biloxi, Inc., as
Trustor, Jim B. Tohill, as Trustee, and First Trust National
Association, as Beneficiary. Incorporated by reference to Exhibit 4.8
to the Form 10-K.
4.9 Leasehold Deed of Trust, Assignment of Rents and Security Agreement
dated as of February 17, 1994 by and among Magnolia Lady, Inc., as
Trustor, Jim B. Tohill, as Trustee, and First Trust National
Association, as Beneficiary. Incorporated by reference to Exhibit 4.9
to the Form 10-K.
4.10 Leasehold Deed of Trust, Assignment of Rents and Security Agreement
dated as of February 17, 1994 by and among Gold Coin Incorporated, as
Trustor, Jim B. Tohill, as Trustee, and First Trust National
Association, as Beneficiary. Incorporated by reference to Exhibit 4.10
to the Form 10-K.
4.11 First Preferred Vessel Mortgage on the Whole of the Lady Luck I dated
as of February 17, 1994 from Lady Luck Mississippi, Inc. in favor of
First Trust National Association. Incorporated by reference to Exhibit
4.11 to the Form 10-K.
4.12 First Preferred Fleet Mortgage on the Whole of the Lady Luck Tunica I
and Lady Luck Tunica II dated as of February 17, 1994 from Lady Luck
Tunica, Inc. in favor of First Trust National Association. Incorporated
by reference to Exhibit 4.12 to the Form 10-K.
4.13 First Preferred Vessel Mortgage on the Whole of the Lady Luck Biloxi,
Inc. dated as of February 17, 1994 from Lady Luck Biloxi, Inc. in
favor of First Trust National Association. Incorporated by reference
to Exhibit 4.13 to the Form 10-K.
4.14 Security Agreement dated as of February 17, 1994 by and between Lady
Luck Kimmswick, Inc. and First Trust National Association.
Incorporated by reference to Exhibit 4.14 to the Form 10-K.
4.15 Security Agreement dated as of February 17, 1994 by and between Lady
Luck Vicksburg, Inc. and First Trust National Association.
Incorporated by reference to Exhibit 4.15 to the Form 10-K.
4.16 Deed of Trust, Assignment of Rents and Security Agreement dated as of
February 17, 1994 by and among Gold Coin Incorporated, the Public
Trustee of the County of Gilpin, State of Colorado and First Trust
National Association. Incorporated by reference to Exhibit 4.16 to the
Form 10-K.
4.17 Deed of Trust, Assignment of Rents and Security Agreement dated as of
February 17, 1994 by and among Lady Luck Biloxi, Inc., Jim B. Tohill
and First Trust National Association. Incorporated by reference to
Exhibit 4.17 to the Form 10-K.
4.18 Deed of Trust, Assignment of Rents and Security agreement dated as of
February 17, 1994 by and among Lady Luck Mississippi, Inc., Jim B.
Tohill and First Trust National Association. Incorporated by reference
to Exhibit 4.18 to the Form 10-K.
4.19 Assignment of Option dated as of February 17, 1994 by Lady Luck
Gulfport, Inc. in favor of First Trust National Association.
Incorporated by reference to Exhibit 4.19 to the Form 10-K.
4.20 Assignment of Option dated as of February 17, 1994 by Lady Luck
Kimmswick, Inc. in favor of First Trust National Association.
Incorporated by reference to Exhibit 4.20 to the Form 10-K.
4.21 Assignment of Option dated as of February 17, 1994 by Lady Luck
Vicksburg, Inc. in favor of First Trust National Association.
Incorporated by reference to Exhibit 4.21 to the Form 10-K.
4.22 Stockholders Agreement dated as of April 1, 1993 by and among the Lady
Luck Gaming Corporation, Andrew H. Tompkins and all current
stockholders and warrant holders of Lady Luck Gaming Corporation.
Incorporated by reference to Exhibit 4.14 to the Form S-1.
4.23 Cash Collateral and Disbursement Agreement dated February 17, 1994
among First Trust National Association. the Company and the Guarantors
named therein. Incorporated by reference to Exhibit 4.18 to the Form
10-K.
<PAGE>
71
4.24 First Amendment to Stockholders Agreement dated as of June 9, 1993, by
and among Andrew H. Tompkins and the Stockholders named therein.
Incorporated by reference to Exhibit 4.24 to the Registration Statement
on Form S-4 Registration Statement filed by Lady Luck Gaming
Corporation under the Securities Act (No. 33- 91616)(the "Form S-4, No.
91616").
4.25 Second Supplemental Indenture dated as of March 17, 1995 by and among
Lady Luck Gaming Finance Corporation, the Guarantors named therein and
First Trust National Association. Incorporated by reference to Exhibit
4.25 to the Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1995 by Lady Luck Gaming Corporation.
4.26 Third Supplemental Indenture by and among Lady Luck Gaming Finance
Corporation, Lady Luck Quad Cities, Inc. and First Trust National
Association. Incorporated by reference to Exhibit 4.26 to the Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 by Lady
Luck Gaming Corporation the ("1995 Form 10-K.")
4.27 Fourth Supplemental Indenture by and among Lady Luck Gaming Finance
Corporation, the Guarantors named therein and First Trust National
Association. Incorporated by reference to Exhibit 4.27 to the 1995
Form 10-K.
4.28 Specimen Common Stock Certificate. Incorporated by reference to
Exhibit 4.15 to the Form S-1.
4.29 Security Agreement (Lady Luck Gaming Finance Corporation) by and
between Lady Luck Gaming Finance Corporation and First Trust National
Association. Incorporated by reference to Exhibit 4.29 to the 1995 Form
10-K
4.30 Security Agreement (Lady Luck Gaming Corporation) by and between Lady
Luck Gaming Corporation and First Trust National Association.
Incorporated by reference to Exhibit 4.30 to the 1995 Form 10-K
4.31 Pledge Agreement between Lady Luck Quad Cities, Inc. and First Trust
National Association. Incorporated by reference to Exhibit 4.31 to the
1995 Form 10-K
10.1. Lease for parking lot in Biloxi, Mississippi dated May 28, 1993 by and
between John M. Mladnick and Lady Luck Biloxi, Inc. Incorporated by
reference to Exhibit 10.18 to the Form S-1.
10.2 Lease Agreement dated January 12, 1994 by and among Tyrone J. Gollott,
Gary F. Gollott, Thomas H. Gollott and Lady Luck Biloxi, Inc.
Incorporated by reference to Exhibit 10.10 to the Form 10-K.
10.5 Lease for casino site in Tunica, Mississippi, dated March 18, 1993
between Lady Luck Tunica, Inc. and D.C. Parker and Richard B. Flowers.
Incorporated by reference to Exhibit 10.5 to the Form S-1.
10.6 Lease for casino site in Gulfport, Mississippi dated October 5, 1992
between Lady Luck Gulfport, Inc. and Mississippi Coast Marine Inc.
Incorporated by reference to Exhibit 10.6 to the Form S-1.
10.7 Lease in Gulfport, Mississippi dated October 1, 1993 by and between
Coast Materials Company and Lady Luck Gulfport, Inc. Incorporated by
reference to Exhibit 10.15 to the Form 10-K.
10.8 Agreement to Lease in Gulfport, Mississippi dated September 23, 1993
by and among Robert C. Fielding, Lady Luck Gulfport, Inc. and Lady
Luck Gaming Corporation. Incorporated by reference to Exhibit 10.16 to
the Form 10-K.
10.9 Leases of part of casino site in Natchez, Mississippi dated October 29,
1991 between Lady Luck Mississippi, Inc. and Silver Land, Inc.
Incorporated by reference to Exhibit 10.7 to the Form S-1.
10.10 Silver Land, Inc. Amended and Restated Lease Agreement dated
December 31, 1992 Incorporated by reference to Exhibit 10.8 to the
Form S-1.
<PAGE>
72
10.11 Lease for part of casino site in Natchez, Mississippi dated June 30,
1992 by and between Lady Luck Mississippi, Inc. and the City of Natchez
and amendment thereto dated October 27, 1992. Incorporated by reference
to Exhibit 10.9 to the Form S-1.
10.12 Lease for part of casino site in Natchez, Mississippi dated June 30,
1992 by and between Lady Luck Mississippi, Inc. and the City of Natchez
and amendment thereto dated October 27, 1992. Incorporated by reference
to Exhibit 10.10 to the Form S-1.
10.13 Sublease Contract dated August 13, 1993 by and between Callon Petroleum
Company and Lady Luck Mississippi, Inc. Incorporated by reference to
Exhibit 10.22 to the Form 10-K.
10.14 Lease for parking lot in Central City, Colorado dated June 1, 1993 by
and among Gold Coin Incorporated and J. Scott Bradley and Phyllis M.
Brown (Lots 1-12). Incorporated by reference to Exhibit 10.21 to the
Form S-4 Registration Statement filed by Lady Luck Gaming Corporation
under the Securities Act (No. 33-65232) (the "Form S-4, No. 65232").
10.15 Lease for parking lot in Central City, Colorado dated June 1, 1993 by
and among J. Scott Bradley and Phyllis M. Brown and Gold Coin
Incorporated (Lots 13-21). Incorporated by reference to Exhibit 10.22
to the Form S-4, No. 65232.
10.17 Option to purchase site in Jefferson County, Missouri dated July 8,
1993 by and between Lady Luck Kimmswick, Inc. and Donald J. Branch.
Incorporated by reference to Exhibit 10.17 to the Form S-1.
10.18 Lease in Coahoma, Mississippi dated November 30, 1993 (sic) by and
among Roger Allen Johnson, Jr., Charles Bryant Johnson and Magnolia
Lady, Inc. Incorporated by reference to Exhibit 10.28 to the Form
10-K.
10.20 Lady Luck Gaming Corporation Employee Stock Option Plan. Incorporated
by reference to Exhibit 10.31 to the Form 10-K.
10.31 Agreement dated July 18, 1994 by and among Green Bridge Company, an
Iowa corporation, Bettendorf Riverfront Development Company, L.C., an
Iowa limited liability company, Lady Luck Casino, Inc., a Nevada
corporation, and Lady Luck Gaming Corporation. Incorporated by
reference to Exhibit 10.40 to the June 30, 1994 Form 10-Q.
10.33 Letter Agreement dated October 24, 1994 by and between Alain Uboldi and
Lady Luck Gaming Corporation. Incorporated by reference to Exhibit
10.41 to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 by Lady Luck Gaming Corporation (the "1994 Form
10-K").
10.34 Letter Agreement dated October 24, 1994 by and between Rory J. Reid and
Lady Luck Gaming Corporation. Incorporated by reference to Exhibit
10.42 to the 1994 Form 10-K.
10.38 Real Estate Lease dated January 12, 1995 by and among Greenbridge
Company, an Iowa corporation, Bettendorf Riverfront Development
Company, L.C., an Iowa limited liability company, Lady Luck Bettendorf,
L.C., an Iowa limited liability company and Lady Luck Quad Cities,
Inc., a Delaware corporation. Incorporated by reference to Exhibit
10.46 to the 1994 Form 10-K.
10.39 Operating Agreement dated December 2, 1994 by and between Lady Luck
Quad Cities, Inc., a Delaware corporation and Bettendorf Riverfront
Development Company, L.C., an Iowa limited liability company.
Incorporated by reference to Exhibit 10.47 to the 1994 Form 10-K.
10.40 Charter Agreement dated December 9, 1994 by and among Lady Luck Gaming
Corporation, Lady Luck Kimmswick, Inc. and Lady Luck Bettendorf, L.C.,
an Iowa limited liability company. Incorporated by reference to Exhibit
10.48 to the 1994 Form 10-K.
10.45 License Agreement dated as of January 1, 1996 among Lady Luck Casino,
Inc., Lady Luck Gaming Corporation and the other parties listed on the
signature pages thereto. Incorporated by reference to Exhibit 10.45 to
the 1995 Form 10-K.
<PAGE>
73
10.46 Services Agreement dated as of January 1, 1996 among Lady Luck Gaming
Corporation and Marco Polo International Marketing, Inc. Incorporated
by reference to Exhibit 10.46 to the 1995 Form 10-K.
10.47 Office Lease dated as of January 1, 1996 among Lady Luck Gaming
Corporation and Gemini, Inc. Incorporated by reference to Exhibit 10.47
to the 1995 Form 10-K.
10.48 Assignment and Assumption Agreement dated as of January 1, 1996 among
Lady Luck Gaming Corporation and Lady Luck Casinos, Inc. Incorporated
by reference to Exhibit 10.48 to the 1995 Form 10-K.
10.49 Contract for the Purchase and Sale of Real Estate and Personal Property
dated as of April 12, 1996 by and between River Park Hotel Group, Inc.
and Lady Luck Mississippi, Inc. Incorporated by reference to Exhibit
10.49 to the Quarterly Report on Form 10-Q for the quarter ended March
31, 1996 of Lady Luck Gaming Corporation.
10.51 Partnership Interest Redemption Agreement dated September 30, 1997
between Bally's Olympia Limited Partnership, a Delaware limited
partnership, and Old River Development, Inc., a Mississippi
corporation.
10.52 Commercial Contract to Buy and Sell Real Estate dated February 6,
1998 between Gold Coin, Inc., a Delaware corporation and J. D.
Carelli.
10.53 Agreement for Purchase and Sale of Business Assets dated February 6,
1998 between Gold Coin, Inc., a Delaware corporation and Stage Stop
Gaming Hall, Inc.
21 Subsidiaries of Lady Luck Gaming Corporation.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
(c) Financial Statement Schedules
Lady Luck Bettendorf, L.C.
<PAGE>
74
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the
30th day of March 1999.
LADY LUCK GAMING CORPORATION
By: /s/ Andrew H. Tompkins
Andrew H. Tompkins
(Chairman of the Board and Chief
Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/s/ Andrew H. Tompkins March 30, 1999
Andrew H. Tompkins
(Chairman of the Board, Principal Executive Officer
and Director)
/s/ Alain Uboldi March 30, 1999
Alain Uboldi
(President, Chief Operating Officer and Director)
/s/Lawrence P. Tombari March 30, 1999
Lawrence P. Tombari
(Senior Vice President, Chief Financial Officer and
Principal Financial Officer)
/s/James D. Bowen March 30, 1999
James D. Bowen
(Vice President Finance and Principal Accounting Officer)
/s/Rory J. Reid March 30, 1999
Rory J. Reid
(Senior Vice President, General Counsel,
Secretary and Director)
/s/Minxin Pei March 30, 1999
Minxin Pei, Director
/s/Anthony J. Drexel Biddle III March 30, 1999
Anthony J. Drexel Biddle III, Director
/s/James A. Bilbray March 30, 1999
James A. Bilbray, Director
/s/Charles Brewer March 30, 1999
Charles Brewer, Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(This schedule contians summary financial information extracted from the
Consolidated Statements of Operations for the year ended December 31, 1998 and
is qualified in its entirety by reference to such financial statements)
</LEGEND>
<CIK> 0000906527
<NAME> Lady Luck Gaming Corporation
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 28,834
<SECURITIES> 19,219
<RECEIVABLES> 1,231
<ALLOWANCES> 369
<INVENTORY> 946
<CURRENT-ASSETS> 51,194
<PP&E> 152,256
<DEPRECIATION> 31,352
<TOTAL-ASSETS> 191,685
<CURRENT-LIABILITIES> 18,701
<BONDS> 176,584
20,611
0
<COMMON> 29
<OTHER-SE> (24,240)
<TOTAL-LIABILITY-AND-EQUITY> 191,685
<SALES> 144,079
<TOTAL-REVENUES> 157,184
<CGS> 59,221
<TOTAL-COSTS> 59,221
<OTHER-EXPENSES> 54,280
<LOSS-PROVISION> 236
<INTEREST-EXPENSE> 21,960
<INCOME-PRETAX> 10,241
<INCOME-TAX> 75
<INCOME-CONTINUING> 10,166
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,166
<EPS-PRIMARY> 1.63
<EPS-DILUTED> 1.63
</TABLE>
LADY LUCK BETTENDORF, L.C.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of Lady Luck Bettendorf, L.C.:
We have audited the accompanying consolidated balance sheets of LADY LUCK
BETTENDORF, L. C. and subsidiary (the "Company") (an Iowa limited liability
company) as of December 31, 1998 and 1997, and the related consolidated
statements of operations, changes in members' equity and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of LADY LUCK BETTENDORF, L.C. and
subsidiary as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
January 29, 1999
<PAGE>
LADY LUCK BETTENDORF, L.C.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
ASSETS
1998 1997
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents..................... $ 5,620,000 $ 3,839,000
Accounts receivable, net of allowance for
doubtful accounts of $103,000 and 246,000 27,000
$141,000, respectively..................
Inventories............................... 432,000 105,000
Prepaid expenses and other current assets. 572,000 665,000
----------- -----------
Total current assets.................... 6,870,000 4,636,000
----------- -----------
PROPERTY AND EQUIPMENT:
Buildings................................. 38,818,000 6,335,000
Leasehold improvements.................... 5,358,000 4,755,000
Furniture, fixtures and equipment......... 13,960,000 8,178,000
----------- -----------
58,136,000 19,268,000
Less: accumulated depreciation............ (5,474,000) (3,311,000)
----------- -----------
52,662,000 15,957,000
Construction in progress.................. 65,000 9,502,000
----------- -----------
Total property and equipment, net....... 52,727,000 25,459,000
----------- -----------
Other assets.............................. 750,000 854,000
----------- -----------
TOTAL ASSETS................................ $60,347,000 $30,949,000
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
LADY LUCK BETTENDORF, L.C.
CONSOLIDATED BALANCE SHEETS (continued)
AS OF DECEMBER 31, 1998 AND 1997
LIABILITIES AND MEMBERS' EQUITY
1998 1997
----------- -----------
CURRENT LIABILITIES:
Current portion of capital leases ............ $ 124,000 $ 91,000
Current portion of long-term debt ............ 2,390,000 1,262,000
Accounts payable ............................. 1,058,000 481,000
Accounts payable-affiliates .................. 187,000 707,000
Construction and retention payables .......... -- 3,102,000
Accrued gaming taxes ......................... 318,000 723,000
Accrued progressive and slot club
activities.................................. 861,000 694,000
Other accrued liabilities .................... 3,216,000 1,887,000
----------- -----------
Total current liabilities .................. 8,154,000 8,947,000
COMMITMENTS AND CONTINGENCIES
Long-term capital leases, less current
portion..................................... 290,000 48,000
Long-term debt, less current portion ......... 23,080,000 3,329,000
----------- -----------
Total liabilities .......................... 31,524,000 12,324,000
----------- -----------
Members' equity ................................ 28,823,000 18,625,000
----------- -----------
TOTAL LIABILITIES AND MEMBERS' EQUITY .......... $60,347,000 $30,949,000
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
LADY LUCK BETTENDORF, L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------------ ------------ ------------
REVENUES:
Casino ......................... $ 80,916,000 $ 69,338,000 $ 62,202,000
Hotel .......................... 1,210,000 -- --
Food and beverage .............. 6,221,000 5,470,000 5,680,000
Other .......................... 1,095,000 883,000 664,000
------------ ------------ ------------
Gross revenues ............... 89,442,000 75,691,000 68,546,000
Less: promotional allowances ... (4,934,000) (4,079,000) (3,344,000)
------------ ------------ ------------
Net revenues ................. 84,508,000 71,612,000 65,202,000
------------ ------------ ------------
COSTS AND EXPENSES:
Casino ......................... 21,525,000 18,343,000 16,080,000
Hotel .......................... 762,000 -- --
Food and beverage .............. 1,932,000 1,537,000 2,413,000
Gaming and admission taxes ..... 20,081,000 18,023,000 15,731,000
Management fees - affiliates ... 2,292,000 1,569,000 1,117,000
Marine operations .............. 2,498,000 2,372,000 2,340,000
Selling, general and
administrative............... 15,543,000 15,145,000 12,766,000
Rental expenses - affiliates ... 4,202,000 5,819,000 6,222,000
Other expenses ................. 724,000 519,000 945,000
Depreciation and amortization .. 2,369,000 1,489,000 1,156,000
Pre-opening expenses ........... 1,157,000 -- --
------------ ------------ ------------
Total costs and expenses ..... 73,085,000 64,816,000 58,770,000
------------ ------------ ------------
Operating income ............. 11,423,000 6,796,000 6,432,000
------------ ------------ ------------
Other income (expense):
Interest income ................ 142,000 139,000 51,000
Interest expense, net .......... (1,052,000) (81,000) (301,000)
Loss on sale of assets ......... (315,000) -- --
------------ ------------ ------------
NET INCOME ....................... $ 10,198,000 $ 6,854,000 $ 6,182,000
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
LADY LUCK BETTENDORF, L.C.
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Bettendorf
Riverfront
Lady Luck Development
Quad Cities, Company,
Inc. L. C. Total
------------ ------------ ------------
Balance at December 31, 1995.......... $ 2,795,000 $ 2,794,000 $ 5,589,000
Net Income............................ 3,091,000 3,091,000 6,182,000
----------- ----------- -----------
Balance at December 31, 1996.......... 5,886,000 5,885,000 11,771,000
Net income............................ 3,427,000 3,427,000 6,854,000
----------- ----------- -----------
Balance at December 31, 1997.......... 9,313,000 9,312,000 18,625,000
Net income............................ 5,099,000 5,099,000 10,198,000
----------- ----------- -----------
Balance at December 31, 1998.......... $14,412,000 $14,411,000 $28,823,000
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
LADY LUCK BETTENDORF, L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
----------- ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................... $10,198,000 $ 6,854,000 $ 6,182,000
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization...... 2,369,000 1,489,000 1,156,000
Loss on sale of assets............. 315,000 - -
Pre-opening expenses............... 1,157,000 - -
(Increase) decrease in operating
assets:
Accounts receivable, net......... (219,000) (17,000) 96,000
Inventories...................... (327,000) 20,000 (50,000)
Prepaid expenses and other
current assets................. 93,000 16,000 (289,000)
Increase (decrease) in operating
liabilities:
Accounts payable (including
affiliates)..................... 57,000 (699,000) 694,000
Accrued gaming taxes............. (405,000) 113,000 76,000
Accrued progressive and slot
club activities................. 167,000 104,000 14,000
Other accrued liabilities........ 1,329,000 727,000 (313,000)
----------- ------------ -----------
Net cash provided by operating
activities........................... 14,734,000 8,607,000 7,566,000
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions..... (28,354,000) (14,335,000) (2,089,000)
(Decrease) increase in construction
and retention payables............. (3,102,000) 3,102,000 -
Pre-opening costs.................... (1,157,000) - -
Other assets, net.................... 58,000 (854,000) -
----------- ------------ -----------
Net cash used in investing
activities.......................... (32,555,000) (12,087,000) (2,089,000)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings............. 23,049,000 3,893,000 645,000
Payments on debt and capital
leases............................. (3,447,000) (1,693,000) (3,572,000)
----------- ------------ -----------
Net cash provided by (used in)
financing activities.............. 19,602,000 2,200,000 (2,927,000)
----------- ------------ -----------
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
LADY LUCK BETTENDORF, L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
----------- ------------ -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 1,781,000 (1,280,000) 2,550,000
CASH AND CASH EQUIVALENTS:
Beginning of period.................. 3,839,000 5,119,000 2,569,000
---------- ------------ -----------
End of period........................ $5,620,000 $ 3,839,000 $ 5,119,000
=========== ============ ===========
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest net of
amounts capitalized of $505,000,
$114,000, and $100,000 for 1998,
1997 and 1996, respectively........ $ 608,000 $ 81,000 $ 301,000
=========== ========== ==========
Supplemental Schedule of Non-Cash Investing and Financing Activities:
The Company entered into several contracts with manufacturers for the purchase
of slot machines and other equipment which totaled approximately $1,552,000,
$177,000 and $67,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
During 1996, approximately $2,556,000 of long-term debt was refinanced at more
favorable terms to the Company.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
LADY LUCK BETTENDORF, L.C.
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. THE COMPANY AND BASIS OF PRESENTATION
Bettendorf Riverfront Development Company, L.C. ("BRDC") and Lady Luck
Quad Cities, Inc. ("LLQC") formed an Iowa limited liability company, Lady Luck
Bettendorf, L.C. (the "Company") for the purpose of operating a riverboat casino
on the Mississippi River based in Bettendorf, Iowa. Under the terms of the
Articles of Organization, the Company's term will expire in 2065. BRDC and LLQC
each contributed $3,000,000 for a 50% ownership interest in the Company. All net
profits and losses from all operations of the Company are allocated equally
between LLQC and BRDC. BRDC and LLQC are each represented by two managers with
most management decisions of the Company requiring the approval of both members.
On October 21, 1997, Lady Luck Bettendorf Marina Corporation ("LLBMC"), a
wholly-owned subsidiary of the Company, was created for the purpose of owning
the marina and parking garage. The Board of Directors of LLBMC is comprised of
the managers of the Company.
The Company commenced operations on April 21, 1995. The Company is located
on a leased parcel of land which is adjacent to Interstate 74 on the Mississippi
River. The Company's operations consist of a 30,000 square foot casino with
approximately 50 table and card games and 1,157 slot machines within three
floors of a gaming vessel, which is approximately 300 feet by 100 feet, a 256
room hotel, buffet style restaurant, gift shop, commercial center, sports bar,
500 space parking garage and a land based entertainment area for parties, shows,
and special events. The first floor has a Las Vegas casino theme, the second
floor has a sports theme and the poker room is on the third floor. The vessel is
certified for 2,500 passengers including crew. The Company's market is
concentrated in a radius of 50 miles of the Quad City Area and the Chicago area
serviced by ongoing bus programs.
The Company has substantially completed a $39,500,000 expansion project
pursuant to its master plan. During 1998, the Company completed a 256 room hotel
and an overpass that allows vehicles to cross over active railroad tracks. The
Company completed a 500 car parking garage in 1997. Financing for this project
was obtained through a $17,500,000 mortgage with the Rock Island Bank, N. A.
signed on June 23, 1997, a second mortgage with Cement Transportation
Corporation, a related party, for $5,000,000 signed on June 23, 1997, of which
$1,250,000 was drawn and fully repaid during 1998, and a development agreement
signed on June 17, 1997 with the City of Bettendorf which secured $7,500,000 of
tax incremental financing. The balance of the expansion project has been paid
from the Company's cash on hand. The planned marina remains under development
and is not expected to require additional financing to pay for its completion.
During the year ended December 31, 1998, approximately $17,500,000 was
drawn from the Rock Island Bank, N. A. mortgage and the Company repaid $200,000
of principal. Additionally, $7,500,000 of tax incremental financing has been
funded by the City of Bettendorf through a development agreement dated June 17,
1997.
<PAGE>
AGREEMENTS
City of Bettendorf "Development Agreement dated August 16, 1994"
The Company entered into an agreement, which was amended in August 1998,
with the City of Bettendorf (the "City"), a municipal corporation of the State
of Iowa, for the purpose of developing a gaming operation in the City. In return
for certain conditions, the City endorsed and supported the Company in obtaining
an Iowa gaming license. The Company is in compliance with the conditions of the
agreement and related amendment as follows:
a. The Company obtained an Iowa gaming license effective April 1, 1995 and
began operations on April 21, 1995.
b. The Company was to use commercially reasonable efforts to facilitate
completion of the existing commercial center improvements so that the
commercial center would be opened for business on or before September 1,
1996 (See Note 8). A portion of the commercial center was opened in October
1995 for the holiday season. As part of the hotel project discussed above,
the Company has opened approximately 25,000 square feet of banquet, kitchen
and convention space and anticipates utilizing the remaining 66,000 square
feet for a restaurant, office space and other facilities.
c. Under the original agreement, which was in effect until August 31, 1998,
the Company paid a development fee to the City of 2% on adjusted gross
receipts exceeding $35,000,000 but not to exceed $44,000,000 during each
twelve month period starting on the day gaming operations began, April 21,
1995. The maximum revenues subject to the 2% fee were $9,000,000 resulting
in maximum percentage based fees of $180,000. Additionally, the Company
paid a fee equal to $.50 per passenger under the original agreement.
d. Under the amended agreement, effective as of September 1, 1998, the Company
is to pay weekly, a development fee, in lieu of the previous 2% of adjusted
gross receipts and $.50 fee per passenger, to the City of Bettendorf. The
new development fee equals 1.65% of adjusted gross receipts with the
minimum annual fee of $1,020,000. The minimum annual fee shall terminate at
the Company's option for any year during which any of certain defined
conditions subsequently occur which result in a decrease of adjusted
receipts to less than $64,000,000. The minimum annual fee was not
terminated as of December 31, 1998.
e. If the Company so elects to terminate the minimum annual fee, the City
shall have the corresponding option to elect to receive for such year a
Development Fee as computed under the original agreement as noted above.
The Company has accrued City gaming fees of $26,000 and $165,000 as of December
31, 1998 and 1997, respectively.
<PAGE>
City of Bettendorf "Development Agreement dated June 17, 1997"
The Company entered into an agreement with the City for the purpose of
redeveloping a portion (24.6 acres) of the former J.I. Case property and
immediate berth area around the Lady Luck boat as a joint project to be known as
"The Bettendorf Downtown Riverfront Project."
This project includes the construction of a 256 room waterfront hotel, a
railroad overpass for vehicular access, a downtown riverfront parking center for
500 cars, improved area for public parking and a marina with seasonal transient
docking facilities. As part of this agreement, the City issued $9,500,000 in tax
incremental financing bonds (the "TIF Bonds"), $7,500,000 of which was used by
the Company to construct the overpass, parking garage, related site improvements
and pay for disruption damages caused by construction of the overpass. To enable
financing of the City's obligations, the Company will pay incremental property
taxes on the developed property assessed at a valuation of not less than
$32,000,000 until the TIF Bonds mature. In the event that the taxes generated by
the project and other qualifying developments in the redevelopment district do
not fund the repayment of the total TIF Bonds prior to their scheduled maturity,
the Company will pay the City $0.25 per person for each person entering the boat
until the remaining balance has been repaid. The City agreed to accept
conveyance of the overpass from Lady Luck upon its completion. The cost of the
overpass, parking garage, site improvements and disruption damages did not
exceed the financing from the City of Bettendorf. Costs incurred through
December 31, 1998 related to this project are $7,400,000.
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
Company, the Company will pay the City $100,000 per month until the project has
been completed. As of December 31,1998, the Company has incurred approximately
$65,000 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 Company
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
Company.
Pursuant to the agreement, the Company has paid an agreed upon amount of
$200,000 for damages which have been awarded to certain businesses disrupted by
the overpass construction.
In addition, the Company is responsible in 1999 for demolishing the Plaza
building at 1823 State Street and preparing the site for donation back to the
City. The Company estimates this process will cost $200,000.
Riverbend Regional Authority "Operator's Contract dated August 11, 1994"
The Company entered into an agreement, which was amended in August 1998,
with the Riverbend Regional Authority, an Iowa not-for-profit corporation (the
"RRA") and the holder of the Iowa gaming license, to operate a gaming boat. The
Company is in compliance with the conditions of the agreement as follows:
a. The Company has obtained and is operating a riverboat gaming facility with
a minimum capacity of 900 gaming positions.
<PAGE>
b. Under the original agreement, which was in effect until August 31, 1998,
the Company paid RRA $1.00 for each of the first 500,000 admissions and
$1.50 for each admission in excess thereof computed on an annual basis
commencing on the date gaming operations began, April 21, 1995. These
admission fees were paid weekly.
If the adjusted gross gaming receipts exceeded $44,000,000 during any
twelve month period starting on the day gaming operations began, the
Company was required to pay RRA 2% of any such excess. The Company exceeded
this level in 1997 and 1996, and began to make these additional
contributions weekly until April 21, 1998 and 1997, respectively.
c. Under the amended agreement, commencing on September 1, 1998 and continuing
for the term of the contract, the Company shall pay a fee to RRA equal to
4.1% of the adjusted gross receipts. In order to assist RRA in its
budgeting and grant process, subject to the following conditions, the
Company is to pay the RRA a minimum annual fee of $3,000,000 (the "Floor
Amount"). The Floor Amount will be reconciled on an annual basis from
September 1 through August 31 of each year with any deficiency due and
payable on September 10, with the deficiency calculated as the difference
between the Floor Amount and the accumulated weekly percentage fee. The
Floor Amount shall be automatically terminated for any year during which
any of certain defined conditions subsequently occur which result in a
decrease of adjusted gross receipts to less than $64,000,000.
d. The Company has executed a "Development Agreement" with the City of
Bettendorf as required by this agreement.
The Company has accrued RRA gaming fees of $50,000 and $398,000 as of December
31, 1998 and 1997, respectively.
Lady Luck Casino, Inc. "Casino Management Agreement dated September 30, 1994"
The Company entered into an agreement with Andrew H. Tompkins and Lady
Luck Casino, Inc. ("LLCI"), a Nevada corporation, to manage the operations of
the Company. In May 1996 the agreement was amended and Lady Luck Gaming
Corporation ("LLGC") (the "Management Company"), a Delaware corporation,
replaced LLCI as the manager of the casino, effective January 1, 1996. Andrew H.
Tompkins, International Marco Polo Services, Inc. ("IMPSI"), formerly known as
LLCI, and LLGC are all affiliates of the Company. The Management Company is to
supervise and control the Company's operations, provide marketing and accounting
services, allow the use of the Lady Luck name in connection with the operations
and access to the customer list. Cash payments made by the Company to IMPSI,
LLGC and their affiliates for services provided to the Company or payments made
on behalf of the Company for insurance, marketing and advertising production,
medical and other insurance, 401(k) plan contributions and other items totaled
approximately $6,379,000, $2,328,000 and $1,885,000 for the years ended December
31, 1998, 1997 and 1996, respectively, excluding management fees and rental
expenses paid to these related parties. The Management Company believes that all
expenses and costs applicable to the Company are reflected in the accompanying
consolidated financial statements on a basis which is representative of what
they would have been if the Company operated on a stand-alone basis. Highlights
of the agreement are as follows:
a. Term - The term of the "Casino Management Agreement" is from September 30,
1994 to September 30, 2033.
<PAGE>
b. Management Fee - A management fee of 2% of casino gross revenues (as
defined) plus 7% of earnings before income tax, depreciation and
amortization (as defined), together not to exceed 4% of the annual casino
gross revenues (as defined), will be paid to the Management Company.
Effective June 1996, the management fee was reduced by $37,500 per month.
The management fees incurred during the periods ended December 31, 1998,
1997 and 1996 were approximately $2,292,000, $1,569,000 and $1,117,000,
respectively. The outstanding and unpaid management fees at December 31,
1998 and 1997, were approximately $196,000 and $81,000, respectively. BRDC
will provide consulting services concerning licensing, staffing, and
management of the marine aspects of the gaming vessel and any land based
development. The Management Company is to pay part of its fee, up to
$325,000 annually, to BRDC for these consulting
services.
c. Working Capital Reserve - The agreement requires that $500,000 be
maintained in a casino bank account (as defined) as working capital for all
financial needs of the casino. At December 31, 1998 and 1997, the casino
bank account had a book balance of approximately $76,000 and $656,000,
respectively. At December 31, 1998, approximately $706,000 of cash was
transferred to the casino in anticipation of heightened casino activity at
year-end. This cash was transferred back to the bank immediately after the
year-end holiday. LLGC has indicated that this transaction does not violate
the provisions of the Management Agreement. Accordingly, the Company has
constructively maintained $500,000 of cash for working capital purposes at
December 31, 1998.
d. Maintenance Capital Improvements and Furniture, Fixtures and Equipment
"Replacement Reserve Account" - The Management Company is required to
reserve a percentage of casino gross revenues (as defined) each year (the
"Replacement Reserve Account") to pay the cost of additions to and
replacements of furniture, fixtures and equipment, and to provide for
capital improvements as follows:
o 1st operating year 1.5%
o 2nd operating year 2.5%
o 3rd operating year 3.0%
o 4th operating year 4.0%
o 5th operating year and each year thereafter 5.0%
This requirement has been constructively met as the Company has made and
paid for replacements and capital improvements from the casino bank
account, in excess of the approximately $3,070,000 and $2,080,000 that
were required to be funded as of December 31, 1998 and 1997, respectively.
<PAGE>
2. CERTAIN RISKS AND UNCERTAINTIES
The Company's operations are dependent on the continued licensing or
qualification of the Company. Such licensing and qualification are
reviewed periodically by the gaming authorities in the State of Iowa.
The Company receives a significant amount of their revenues from
patrons within 50 miles of the property. If economic conditions in these
areas were to decline materially or additional casino licenses were
awarded in these locations, the Company's results of operations could be
materially affected.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary.
Significant intercompany accounts and transactions have been
eliminated.
b. Estimates - 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 reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
c. Cash and Cash Equivalents - The Company considers all highly liquid
investments purchased with an original maturity of three months or
less as cash equivalents. The carrying amount of cash and cash
equivalents approximates its fair value.
d. Inventories - Inventories are stated at the lower of cost, as
determined by the first-in, first-out method, or market value.
e. Property and Equipment - Property and equipment are stated at cost.
Depreciation is computed using the straight-line method. Estimated
useful lives for financial reporting purposes are as follows:
Buildings 40 years
Leasehold improvements 15-20 years
Furniture, fixtures and equipment 5-7 years
Costs of major improvements are capitalized, while costs of normal
repairs and maintenance are charged to expense as incurred. Portions
of property, furniture, fixtures and equipment are pledged as
collateral for long-term debt (See Note 4).
f. Revenue Recognition - In accordance with gaming industry practice, the
Company recognizes casino revenues as the net win from gaming
activities, which is the difference between gaming wins and losses.
Casino revenues are net of accruals for anticipated payouts of
progressive slot jackpots and certain table games. Such anticipated
jackpot payments are reflected as current liabilities in the
accompanying balance sheets. Revenues from the hotel, convention and
banquet facilities, food, beverage, entertainment and the gift shop
are recognized at the time the related service or sale is
performed/made.
<PAGE>
g. Promotional Allowances - The retail value of food, beverage and other
items provided on a complimentary basis to customers without charge is
included in gross revenues and then deducted as promotional
allowances. The estimated cost of providing these promotional
allowances is included in casino departmental expenses for the years
ended December 31, 1998, 1997 and 1996 as follows:
1998 1997 1996
---------- ---------- ----------
Hotel................... $ 276,000 $ - $ -
Food and beverage....... 4,279,000 3,392,000 2,981,000
Other................... 563,000 593,000 465,000
---------- ---------- ---------
Total.............. $5,118,000 $3,985,000 $3,446,000
========== ========== ==========
h. Slot Patron Incentive Estimates - The Company provides slot patrons'
incentives based on the dollar amount of play on slot machines. An
accrual has been established based on an estimate of the outstanding
value of these incentives, utilizing the age and prior history of
redemptions. This amount is reflected as a current liability in the
accompanying balance sheets.
i. Advertising - Advertising costs are expensed the first time such
advertisement appears. Total advertising costs (including direct mail
marketing) were approximately $1,380,000, $1,497,000, and $1,399,000
in 1998, 1997 and 1996, respectively.
j. Pre-Opening Costs - Pre-opening costs include direct incremental
project salaries and other pre-opening costs incurred during the
pre-opening phase of projects. Pre-opening costs directly related to
construction of projects were capitalized as incurred and charged to
expense in the period each project commenced operations. Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities," is
effective for fiscal years beginning after December 15, 1998 and
requires that all pre-opening/start-up activities be expensed as
incurred. The Company has adopted this Statement of Position effective
January 1, 1999 and will expense future pre-opening costs as incurred.
k. Income Taxes - No provision for U.S. Federal income taxes or state
income taxes is recorded in the financial statements as such liability
is the responsibility of the Members.
l. Reclassifications - Certain prior year balances have been reclassified
to conform to current year presentation and have no impact on net
income.
<PAGE>
4. DEBT
At December 31, 1998 and 1997, long-term debt consisted of the following:
1998 1997
----------- -----------
a. Atronic Casino Technology LTD, LLC - $521,000
non interest bearing note; principal payments
of $43,721 per month; due in September 1999;
collateralized by gaming equipment............. $ 363,000 $ -
b. Aristocrat, Inc. - $224,000 non interest
bearing note; principal payments of $14,529 per
month; for twelve months; due in July 1999;
collateralized by gaming equipment............ 94,000 -
c. WMS Gaming, Inc. - $429,000 non interest
bearing note; principal payments of $37,508 per
month; due in June 1999; collateralized by
gaming equipment................................ 205,000 -
d. Rock Island Bank, N. A. - $17,500,000 loan;
interest at 7.93% per annum which re-sets
after 5 years; principal and interest payments
of $211,729 per month; due October 2008;
collateralized by certain land improvements
including the hotel............................. 17,308,000 -
e. Northwest Bank and Trust Co. - $3,200,000 loan;
interest of 9.25%; principal payment of $100,000
per month plus interest; due on demand not
earlier than February 1998 and no later than
October 1998; collateralized by gaming equipment
and guaranteed up to $1,100,000 by affiliates
of BRDC......................................... - 1,100,000
f. Sigma Note - $87,000 note; imputed interest of
8%; payment of $3,716 per month for eighteen
months; due in March 1998; collateralized by
gaming equipment................................ - 11,000
g. Rock Island Bank Loan - $312,000 loan; imputed
interest of 9.25%, payment of $17,806 per month
for 19 months; due in October 1998;
collateralized by certain business improvements. - 151,000
h. Tax Incremental Financing Payable - Interest
of approximately 6.7%; payments made through
incremental property taxes to the City of
Bettendorf until paid in full, maturity
no later than 2011.............................. 7,500,000 3,329,000
25,470,000 4,591,000
Less: current portion (2,390,000) (1,262,000)
----------- -----------
Total long-term debt $23,080,000 $ 3,329,000
=========== ===========
<PAGE>
The Company also entered into a second mortgage agreement on May 27, 1997
with Cement Transportation Corporation ("CTC"), a related party, in the amount
of $5,000,000. Security was provided through the second mortgage on the hotel,
future dockside retail facilities and commercial space. The loan was for a
period of five years. The loan was interest bearing at a rate of 12% over the
life of the loan. The agreement required the Company to pay a minimum of 45% of
its net earnings (as defined) annually until the loan is repaid. In addition,
pursuant to the agreement, no distributions could be made to the members, other
than those payments to CTC to pay off this loan until such time as the CTC loan
is paid in full. The first mortgage agreement with Rock Island Bank also
prevents greater than 45% of net earnings to be made in any one year in respect
to the second mortgage. The Company drew down and fully repaid approximately
$1,250,000 in 1998.
The mortgage agreement with Rock Island Bank, N. A. for $17,500,000
provides for, among other things, restrictions on the Company's ability to make
payments on the CTC debt in excess of 45% of the Company's operating income
after interest expense (as determined in accordance with generally accepted
accounting principles). Additionally, upon payment in full of the CTC debt
(which occurred in 1998), the Company may not declare, make or become obligated
to make any distribution (except for payments for services or goods actually
provided) to any of its Members in excess of 45% of the Company's operating
income after interest expense (as determined in accordance with generally
accepted accounting principles).
Scheduled maturities of long-term debt for each of the years ended
December 31, are as follows:
1999............................. $ 2,390,000
2000............................. 1,858,000
2001............................. 2,006,000
2002............................. 2,162,000
2003............................. 2,324,000
Thereafter....................... 14,730,000
-----------
Total...................... $25,470,000
===========
<PAGE>
5. CAPITAL LEASES
In July 1997, the Company entered into a two-year capital lease agreement
to purchase certain gaming equipment with a fair market value of $130,000 at an
interest rate of 8%. In October 1997, the Company entered into a two-year lease
agreement to purchase certain operating equipment with a fair market value of
$48,000 at an interest rate of 8%. In September 1998, the Company entered into
two five-year capital lease agreements for certain operating equipment with fair
market values of $284,000 and $90,000 at interest rates of 8% and 10%,
respectively. The future lease payments under the leases, together with the
present value of the lease payments, consisted of the following at December 31,
1998:
1999................................. $ 138,000
2000................................. 86,000
2001................................. 87,000
2002................................. 86,000
2003................................. 65,000
----------
Minimum lease payments................ 462,000
Less amounts representing interest.... (48,000)
----------
$ 414,000
==========
6. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following as of December 31:
1998 1997
---------- ----------
Accrued salaries, vacation and bonuses.... $ 800,000 $ 717,000
Accrued management fees - affiliates...... 196,000 81,000
Accrued advertising - affiliates.......... 111,000 109,000
Accrued property taxes.................... 260,000 269,000
Other..................................... 1,849,000 711,000
---------- ----------
Total other accrued liabilities........ $3,216,000 $1,887,000
========== ==========
7. RELATED PARTY TRANSACTIONS
The Company purchased property from a related party as follows:
In order to complete the obligations of the Development Agreement dated June 17,
1997 with the City of Bettendorf, the Company purchased the Plaza Building
located at 1823 State Street from Green Bridge Company, a related party, for
$372,000. These premises are required to be demolished before December 31, 1999,
at an estimated cost of $200,000, including environmental remediation. The
Company entered into an agreement with a related party to purchase slot machines
totaling approximately $51,000 in 1998.
<PAGE>
The Company entered into a second mortgage agreement on May 27, 1997 with
"Cement Transportation Corporation," a related party, for a loan of $5,000,000.
Security was provided through the hotel, future dockside retail facilities and
commercial facility. The loan was for a period of five years. The loan was
interest bearing at 12% over the life of the loan (see Note 4). The Company drew
down and fully repaid approximately $1,250,000 in 1998.
The Company has entered into long-term operating leases with related
parties. They are as follows:
a. Land - The Company has entered into a long-term operating lease agreement
with BRDC. The lease is for an initial term of 10 years, expiring May
2005, with nine 10 year options. The parties have set the lease payment at
$150,000 per month, based on a negotiated value. The Company has an option
to purchase the land during the initial term of the lease for its
appraised fair market value. The Company has not executed this option as
of December 31, 1998.
b. Boat - The Company has entered into a long-term operating lease, a charter
hire lease, with LLGC and Lady Luck Kimmswick, Inc., a Missouri
corporation. This lease is for an initial term of 5 years, expiring in May
2000, with a 10 year renewal option. The lease payment is $189,000 per
month, before use tax. The Company has an option to purchase the Boat
during the initial lease term for its appraised fair market value. The
Company has not executed this option as of December 31, 1998.
c. Equipment - The Company had entered into a long-term operating lease with
Lady Luck Gaming Finance Corporation to lease equipment. The lease was for
an initial term of 36 months, expiring April 1998, with two 1 year renewal
options. Effective January 1, 1998, the Company exercised its option to
purchase this equipment prior to the expiration of the lease for a
negotiated amount of $712,000.
d. Parking - The Company is in negotiation with Green Bridge Company, a
related party, to secure additional leased land for the purpose of
providing parking for customers and employees. It is anticipated that the
value of this additional parking will not exceed $20,000 per month
retroactive to September 1, 1998. The term of this lease is anticipated to
be month-to-month.
8. COMMERCIAL CENTER DEVELOPMENT
In October 1995, the Company completed construction of a 91,000 square
foot commercial center. Effective August 1998, the Company completed a 25,000
square foot banquet, kitchen and convention facility within the commercial
center. The Company anticipates utilizing the remaining square footage for a
restaurant, office space and other facilities. It is anticipated that the office
space will be completed in April 1999 and the restaurant by Fall 1999. The
Company anticipates hiring a consultant to locate other tenants; utilization of
the remaining space is contingent upon the determination of the specific
tenants. As the Company executes these plans, additional tenant and other
construction costs will be incurred, the amount of which depends on the specific
plan. Management intends to fund these costs from operations.
<PAGE>
9. LITIGATION
The Company is party to various litigation arising in the normal course of
business. Management is of the opinion that ultimate resolution of these matters
will not have a material adverse effect on the financial position or the results
of operations of the Company.
10. COMMITMENTS AND CONTINGENCIES
Lease Commitments - Future minimum lease payments for the land, boat and
gaming equipment required under operating leases that have non-cancelable lease
terms in excess of one year as of December 31, 1998, are as follows:
1999............................. $ 4,347,000
2000............................. 4,246,000
2001............................. 4,215,000
2002............................. 4,204,000
2003............................. 4,203,000
Thereafter....................... 71,163,000
-----------
Total...................... $92,378,000
===========
Management intends to renew the boat lease for an additional 10 years and
the land lease for an additional 30 years, these renewal options have been
assumed in the above disclosure.
