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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 2, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-24993
LAKES GAMING, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1913991
(State or other jurisdiction (I.R.S., Employer
of incorporation or organization) Identification No.)
130 CHESHIRE LANE, MINNETONKA, MINNESOTA 55305
(Address of principal executive offices)
(952) 449-9092
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE.
Securities registered pursuant to Section 12(g) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $0.01 par value NASDAQ National Market
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
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 the 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. [ ]
As of March 20, 2000 shares of the Registrant's Common Stock were outstanding.
The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant on such date, based upon the last sale price of the Common Stock as
reported on the NASDAQ National Market March 20, 2000 was $75,203,971. For
purposes of this computation, affiliates of the Registrant are deemed only to be
the Registrant's executive officers and directors.
DOCUMENTS INCORPORATED BY REFERENCE
Part III. Portions of the Registrant's definitive Proxy Statement in connection
with the Annual Meeting of Shareholders to be held on May 3, 2000 are
incorporated by reference into Items 10 through 13, inclusive.
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PART I
ITEM 1. BUSINESS
The following discussion contains trend information and other
forward-looking statements that involve a number of risks and uncertainties. The
actual results of Lakes Gaming, Inc., a Minnesota corporation (the "Company"),
could differ materially from the Company's historical results of operations and
those discussed in the forward-looking statements. Factors that could cause
actual results to differ materially include, but are not limited to, those
identified in "Risk Factors."
Lakes Gaming, Inc., a Minnesota corporation ("Lakes" or the "Company") was
established as a public corporation on December 31, 1998, via a distribution
(the "Distribution") of its common stock, par value $.01 per share (the "Common
Stock") to the shareholders of Grand Casinos, Inc. ("Grand"). Pursuant to the
terms of a Distribution Agreement entered into between Grand and Lakes and dated
as of December 31, 1998 (the "Distribution Agreement"), Grand shareholders
received .25 shares of Lakes Common Stock for each share held in Grand.
Immediately following the Distribution, Grand merged with a subsidiary of
Park Place Entertainment Corporation, a Delaware corporation ("Park Place"),
pursuant to which Grand became a wholly owned subsidiary of Park Place (the
"Merger"). Grand shareholders received one share of Park Place common stock in
the Merger for each share they held in Grand.
Lakes operates an Indian casino management business and holds various other
assets previously owned by Grand. The Company's revenues are derived almost
exclusively from management fees. Lakes currently manages two land-based,
Indian-owned casinos in Louisiana: Grand Casino Avoyelles, in Marksville,
Louisiana ("Grand Casino Avoyelles"), owned by the Tunica-Biloxi Tribe of
Louisiana (the "Tunica-Biloxi Tribe") and Grand Casino Coushatta, in Kinder,
Louisiana ("Grand Casino Coushatta"), owned by the Coushatta Tribe of Louisiana
(the "Coushatta Tribe").
Other assets previously owned by Grand that Lakes now owns through a
subsidiary, include certain interests in four contiguous parcels of land in Las
Vegas, Nevada, including the Polo Plaza Shopping Center. All or any combination
of these interests may be sold, held for sale or held for future development.
Lakes is currently evaluating the potential sale of these interests and in
connection therewith has entered into a listing agreement with a real estate
broker for the active marketing of these parcels.
For a portion of fiscal 1998, and prior to the Distribution, Grand also had
management contracts for Indian-owned casinos located at Grand Casino Hinckley
and Grand Casino Mille Lacs, both located in Minnesota. The management contract
at Grand Casino Mille Lacs expired at the end of the first quarter of 1998, and
the management contract at Grand Casino Hinckley ended November 30, 1998.
BUSINESS STRATEGY
Lakes' vision is to create a company with predictable long-term profitable
growth that will be highly valued by its investors. The Company will implement
three business strategies to accomplish its vision. The first of the three
strategies is to grow the Company's assets. The more assets the Company has, the
greater its potential for diversification and growth. The Company plans to
increase its asset base by continuing to provide high quality comprehensive
management services to Grand Casino Avoyelles and Grand Casino Coushatta. Lakes
is dedicated to developing superior facilities and providing guest service that
exceeds expectations. The facilities managed by Lakes are staffed with
well-trained local casino employees and offer a casual environment designed to
appeal to the family-oriented, middle income customer. Lakes strives to offer
its casino customers creative gaming selections in a pleasant, festive, smoke
and climate-controlled setting. Lakes' managed casinos also offer reasonably
priced, high-quality food, first class hotel rooms, video arcades and Grand
Casinos Kids Quest (SM), a professionally supervised entertainment and child
care center.
Lakes is prohibited by the Indian Gaming Regulatory Act ("IGRA") from
having an ownership interest in any casino it manages for Indian tribes. The
management contracts for Grand Casino Avoyelles and Grand Casino Coushatta
expire June 3, 2001 and January 16, 2002, respectively. The Coushatta Tribe and
Lakes have agreed on a five-year contract renewal beginning January 17, 2002,
subject to National Indian Gaming Commission ("NIGC") approval. Net
distributable profits, if any, under the new agreement will be determined in
accordance with IGRA and distributed each month 90% to the Coushatta Tribe and
10% to Lakes. There can be no assurance that the Grand Casino Avoyelles
management contract will be renewed upon expiration or the Grand Casino
Coushatta extension will be approved by NIGC. The failure to renew
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Lakes' management contracts would result in the loss of revenues to Lakes
derived from such contracts, which would have a material, adverse effect on
Lakes' results of operations. The Coushatta Tribe and the Tunica-Biloxi Tribe
each entered into tribal-state compacts with the State of Louisiana on September
29, 1992. These compacts were approved in November 1992 by the Secretary of the
Interior. The compact for the Coushatta Tribe expired November 4, 1999, and the
compact for the Tunica-Biloxi Tribe expired November 18, 1999, and the State of
Louisiana has delivered a written notice of non-renewal. The Governor and each
Tribe have agreed on a six-month extension which has been submitted to the
Department of the Interior for approval. The Coushatta Tribe and the
Tunica-Biloxi Tribe are actively negotiating with the State of Louisiana terms
for a new compact. Lakes' management agreements with the Tunica-Biloxi Tribe and
the Coushatta Tribe expire after November 1999. In the event the compacts are
not renewed, gaming may not be permitted at Grand Casino Avoyelles or Grand
Casino Coushatta. There can be no assurance that these compacts will be renewed
on terms and conditions acceptable to either of the Tribes.
Another way the Company plans to grow its assets is to grow the Indian
casino management business. Lakes enjoys a reputation as an experienced and
successful casino management company for Native American owned casinos with
available capital and experienced management. Lakes develops, constructs and
manages Indian-owned casino properties that offer the opportunity for long-term
development of related entertainment facilities, including hotels, theaters,
recreational vehicle parks and other complimentary amenities designed to enhance
the customers' total entertainment experience and to differentiate facilities
managed by Lakes from its competitors. Lakes provides experienced corporate and
casino management and develops and implements a wide scale of marketing
programs. In conjunction with this part of Lakes' business strategy, Lakes
entered into three new agreements in 1999, for the development, construction and
management of three new Indian-owned casinos.
On May 12, 1999, the Company announced that it would form a partnership for
the purpose of developing a gaming facility on Indian-owned land near San Diego,
California. Under the agreement, Lakes has formed a limited liability company
with Kean Argovitz Resorts, LLC ("KAR"), a limited liability company based in
Houston, Texas. The partnership between Lakes and KAR holds a contract to
develop and manage a casino resort facility with the Jamul Indian Village in
California. The contract is subject to approval by NIGC. California voters
recently approved an amendment to the State Constitution which allows for
Nevada-style gaming on Indian land and ratifies the Tribal Compact. Development
of the casino resort will begin once various regulatory approvals are received.
On June 22, 1999, the Company announced that it has been selected by the
Pokagon Band of Potawatomi Indians (the "Band") to serve as the exclusive
developer and manager of a proposed casino gaming resort facility to be owned by
the Band in the state of Michigan. In connection with its selection, Lakes and
the Band have executed a development and management agreement governing their
relationship during the development, construction and management of the casino.
Various regulatory approvals are needed prior to commencement of development
activities. Casino construction is not planned to start until land is accepted
into trust status by the Secretary of the Interior and the agreements are
approved by the Chairman of NIGC.
On July 15, 1999, the Company announced that it would form a partnership
for the purpose of developing a gaming facility on Indian-owned land near
Sacramento, California. Pursuant to the agreement, Lakes has formed a limited
liability company with KAR, a limited liability company based in Houston, Texas.
The partnership between Lakes and KAR has been awarded a contract to develop and
manage a casino resort facility with the Shingle Springs Band of Miwok Indians
in California. The contract is subject to approval by NIGC and placement of the
land where the gaming facility is to be located into trust with the Bureau of
Indian Affairs ("BIA"). California voters recently approved an amendment to the
State Constitution which allows for Nevada-style gaming on Indian land and
ratifies the Tribal Compact. Development of the casino resort will begin once
various regulatory approvals are received.
Each of the three new agreements require Lakes to loan each tribe various
amounts to be used for preliminary development and start-up costs at each casino
location. Total loan commitments, by Lakes, for the three projects are
approximately $100 million.
The second business strategy is to remove a number of uncertainties
surrounding the Company. To help accomplish this part of the Lakes strategy, the
Company continues to evaluate the potential sale or development of its land in
Las Vegas. The Company has the land listed for sale with a real estate broker
and is currently reviewing alternative offers for the development or potential
sale of the property. The Company also must win or settle the various lawsuits
regarding Stratosphere. The Company is actively defending the suits and expects
trial hearings to start in 2001 unless they are settled prior to that time. The
other uncertainty
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facing Lakes relates to the three proposed casino developments. In each such
location, the Tribes need to have land accepted into trust on their behalf by
the Bureau of Indian Affairs, and the National Indian Gaming Commission needs to
approve the applicable Lakes management contracts. In addition, the Pokagon Band
of Potawatomi Indians in Michigan needs to secure a valid contract with that
state or a casino may not be built. Lakes is actively working with the Tribes to
bring these issues to a successful conclusion.
Diversification is the key to Lakes' long-term success and it is the third
of the business strategies. Lakes currently plans to buy or create new long-term
business opportunities through the use of cash, stock or debt to complement its
Indian casino management business. Substantial long-term growth and low multiple
values to generate high returns are just a few of the attributes in companies or
start-ups that Lakes is looking for in new opportunities to help enhance
shareholder value. In addition to this approach, Lakes currently has investments
in unconsolidated affiliates which include a 27 percent ownership interest in
Fanball.com, Inc., a start-up internet provider of fantasy sports services, and
a 23 percent ownership interest in Interactive Learning Group, Inc., a consumer
product company. Lakes invested $3.4 million and $3 million in Fanball.com and
Interactive Learning Group, respectively, at the end of the second quarter of
1999. Additionally, as a result of its spin-off from Grand, Lakes received a 49
percent ownership interest in Trak 21 Development, LLC, a developer of player
tracking systems for the casino industry, and a 27 percent ownership interest in
New Horizon Kids Quest, Inc., a publicly held provider of child care facilities.
MARKETING
Lakes targets its marketing strategy at its managed operations to attract
and retain the repeat customer. Management believes that Lakes' emphasis on
enhancing the entertainment value, coupled with marketing programs, contributes
to attracting the repeat customer.
Lakes' operations strategy seeks to combine retail, gaming and
entertainment marketing techniques. Lakes profiles its casino customers
utilizing available demographic data, regularly conducted customer surveys and
other sources. Based upon this data, Lakes uses a variety of initial special
promotions to attract the first-time customer and, thereafter, seeks to leverage
initial customer satisfaction through a mix of marketing programs dedicated to
developing a repeat customer. A variety of other events, facilities and
entertainment media provide the patron with a total entertainment experience.
Lakes markets these programs through a variety of direct and media marketing
techniques utilizing a significant customer database at each location.
GRAND CASINO AVOYELLES
Grand Casino Avoyelles opened in June 1994 and consists of a 218 room hotel
and approximately 50,000 square feet of casino gaming space containing
approximately 1,700 slot machines and 55 table games. The resort's other
features include a 1,700 seat entertainment complex, three restaurants plus a
night club featuring live entertainment, a full-service RV resort, a Kids
Quest(SM) child care activity center, a video arcade, a gift shop and parking
for approximately 2,250 vehicles.
Grand Casino Avoyelles is located approximately 50 miles west of Natchez,
Mississippi, and within approximately 200 miles of the Louisiana cities of Baton
Rouge, Lafayette, New Orleans, and Shreveport. Lakes purchased approximately 64
acres of land adjacent to the Tunica-Biloxi reservation and donated
approximately 21 acres of this land to the Tunica-Biloxi Tribe. This land has
been placed in trust, has been approved for gaming, and is the site upon which
Grand Casino Avoyelles was constructed.
Lakes also leases land to the Tunica-Biloxi Tribe for a 220 room hotel
which opened during 1996 and is located in close proximity to Grand Casino
Avoyelles. The Tunica-Biloxi Tribe operates the hotel as a part of the Grand
Casino Avoyelles enterprise. Lakes guaranteed $16.5 million of Tunica-Biloxi
Tribal debt incurred in connection with the purchase of the hotel, and has
subordinated payment of Lakes' management fee and any loan amounts owed by the
Tunica-Biloxi Tribe to Lakes to the repayment of such debt. As of January 2,
2000, the amount outstanding was $2.0 million. The debt is scheduled to be fully
repaid by April 2000.
The term of Lakes' development and management agreement with the
Tunica-Biloxi Tribe (the "Tunica-Biloxi Agreement") expires on June 3, 2001. The
net distributable profits, if any, as determined on a modified cash basis, are
distributed each month 60% to the Tunica-Biloxi Tribe and 40% to Lakes.
Lakes loaned the Tunica-Biloxi Tribe an aggregate of approximately $23.5
million to construct and open Grand Casino Avoyelles, of which amount
approximately $3.5 million was not, but may need to be, approved by the BIA
and/or NIGC. Approximately $5.4 million of such loans remained outstanding at
January 2, 2000.
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The loans bear interest at 1% over the prime rate and are payable over the
remaining term of the Tunica-Biloxi Agreement.
The Tunica-Biloxi Agreement was approved by the BIA on February 27, 1992.
The Tunica-Biloxi Tribe and the State of Louisiana entered into a tribal-state
compact on September 29, 1992, which was approved by the Secretary of the
Interior on November 18, 1992. The compact expired on November 18, 1999 and the
State of Louisiana has delivered a written notice of non-renewal. The Governor
and the Tribe have agreed on a six-month extension which has been approved by
the Department of the Interior.
In connection with the Distribution, Lakes and the appropriate subsidiaries
made application to the Tribal gaming regulatory authority for a license and
obtained certification and licensure by the Louisiana State Police.
GRAND CASINO COUSHATTA
Grand Casino Coushatta opened in January 1995 and currently consists of a
223 room hotel and approximately 98,000 square feet of casino gaming space
containing approximately 3,100 slot machines and 90 table games. Three
restaurants plus a food court, a full-service RV resort, a Kids Quest(SM) child
care center, a video arcade, a gift shop and parking for approximately 1,600
vehicles are among the property's non-gaming amenities.
On February 25, 1992, Grand, as predecessor to Lakes, entered into a
construction agreement and management contract (the "Coushatta Agreement") with
the Coushatta Tribe for the development, construction, and management of a
casino facility in Elton, Louisiana, on Highway 165. Grand Casino Coushatta is
located approximately 60 miles south of Alexandria, Louisiana, and within 200
miles of Houston, Texas. Grand purchased approximately 688 acres of land
adjacent to the Coushatta reservation. Grand has donated approximately 530 acres
to the Coushatta Tribe. This land has been placed in trust for the Coushatta
Tribe. The remaining land was sold to the Coushatta Tribe, and Lakes holds a
promissory note to secure payment of the purchase price with an outstanding
balance of $1.5 million at January 2, 2000.
Grand loaned the Coushatta Tribe an aggregate of approximately $38.3
million to construct and open Grand Casino Coushatta, of which amount up to
approximately $20.3 million was not, but may need to be, approved by the BIA
and/or NIGC. The loans bear interest at 1% over the prime rate and are payable
over the remaining term of the Coushatta Agreement. Approximately $10.0 million
of such loans remained outstanding as of January 2, 2000.
The Coushatta Tribe constructed a hotel on trust land located adjacent to
the casino. Pursuant to the Distribution, Lakes guaranteed $25.0 million of
indebtedness incurred by the Tribe in connection therewith. Such indebtedness
has a repayment term of approximately five years. Lakes subordinated payment of
its management fee and repayment of any loans outstanding from the Coushatta
Tribe to the repayment of such indebtedness. As of January 2, 2000, the amount
outstanding was $19.3 million.
The Coushatta Agreement was approved by the BIA on February 27, 1992. The
Coushatta Tribe and the State of Louisiana entered into a tribal-state compact
on September 15, 1992, which was approved by the Secretary of the Interior on
November 4, 1992.
The compact expired on November 4, 1999 and the State of Louisiana has
delivered a written notice of non-renewal. The Governor and the Tribe have
agreed on a six-month extension which has been approved by the Department of the
Interior. In connection with the Distribution, Lakes was certified by the
Louisiana State Police to manage the casino.
The current Coushatta Agreement expires on January 16, 2002. The net
distributable profits, if any, as determined on a modified cash basis, are
distributed each month 60% to the Coushatta Tribe and 40% to Lakes. The
Coushatta Tribe and Lakes have agreed on a five year contract renewal beginning
January 17, 2002, subject to NIGC approval. Net distributable profits, if any,
under the new contract will be determined in accordance with IGRA and
distributed each month 90% to the Coushatta Tribe and 10% to Lakes.
FUNDING AGREEMENTS
Pursuant to the terms of the Distribution Agreement, Lakes assumed Grand's
obligations under various agreements (the "Funding Agreements") with each of the
Tunica-Biloxi and Coushatta Tribes to provide temporary funding, if necessary,
for the construction of certain additional amenities on Grand Casino Avoyelles
and Grand Casino Coushatta. The terms of the Funding Agreements require each
party to advance
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money for the payment of construction costs if and when the casino operating
funds designated for such purpose are insufficient. Any funds advanced are to be
repaid, together with interest at the prime rate plus 1 percent, over the
remaining term of the respective management agreement.
Advances of $1.2 million and $13.9 million had been made to the
Tunica-Biloxi and Coushatta Tribes, respectively, as of January 2, 2000. Amounts
outstanding were $0.8 million and $11.0 million to the Tunica-Biloxi and
Coushatta Tribes, respectively.
POLO PLAZA
On October 1, 1999, the Company purchased the shopping center and land
owned by the Nevada Resort Properties Polo Plaza Limited Partnership (the
"Partnership") in lieu of exercising its right to purchase the remaining 51%
interest in the Partnership. Prior to the purchase, the Company held a 49%
ownership interest in the Partnership. In consideration for the purchase, the
Company paid approximately $3.3 million and paid off the outstanding partnership
mortgage of approximately $6.3 million. A $6.2 million loan to the Partnership
made by the Company during January 1999 was repaid and satisfied at the closing
by offsetting an appropriate amount against the purchase price as agreed by the
Company and the Partnership. Pursuant to the purchase agreement relating to this
transaction, the Partnership is currently being dissolved. Lakes continues to
operate the site as a commercial shopping center.
COMPETITION
The gaming industry is highly competitive. Gaming activities include
traditional land-based casinos; river boat and dockside gaming; casino gaming on
Indian land; state-sponsored video lottery and video poker in restaurants, bars
and hotels; pari-mutuel betting on horse racing, dog racing, and jai-alai;
sports bookmaking; and card rooms. The casinos managed by Lakes compete with all
these forms of gaming, and will compete with any new forms of gaming that may be
legalized in additional jurisdictions, as well as with other types of
entertainment. Lakes also competes with other gaming companies for opportunities
to acquire legal gaming sites in emerging gaming jurisdictions and for the
opportunity to manage casinos on Indian land. Some of the competitors of Lakes
have more personnel and greater financial and other resources than Lakes.
Further expansion of gaming could also significantly affect Lakes' business.
The Louisiana markets are highly competitive and numerous Louisiana
casinos, along with others in Mississippi, compete with Grand Casino Coushatta
and Grand Casino Avoyelles. A single large land-based casino recently opened in
downtown New Orleans and competes for customers with the casinos managed by
Lakes. Louisiana has also legalized river boat gaming. There are presently 14
licensed river boats in operation in Louisiana, four of which are presently
operating in the vicinity of Lake Charles, Louisiana, within approximately 50
miles of Grand Casino Coushatta, drawing players from the Houston market.
The river boats compete with Louisiana casinos managed by Lakes. Moreover,
the legalization of casino gaming in Texas could have a material adverse effect
on the casinos managed by Lakes. Louisiana has also enacted legislation allowing
racetracks in certain parishes to install slot machines, which has been approved
in local referenda. The slot machine operations could also have a material
effect on the casinos managed by Lakes. Video poker machines may be located in
facilities that serve liquor, at truck stops, and at pari-mutuel racetracks and
off-track betting facilities.
REGULATION
The ownership, management, and operation of gaming facilities are subject
to extensive federal, state, provincial, tribal and/or local laws, regulations
and ordinances, which are administered by the relevant regulatory agency or
agencies in each jurisdiction (the "Regulatory Authorities"). These laws,
regulations and ordinances vary from jurisdiction to jurisdiction, but generally
concern the responsibility, financial stability and character of the owners and
managers of gaming operations as well as persons financially interested or
involved in gaming operations. Certain basic provisions that are currently
applicable to Lakes are described below.
Neither Lakes nor any subsidiary may own, manage or operate a gaming
facility unless proper licenses, permits and approvals are obtained. An
application for a license, permit or approval may be denied for any cause that
the Regulatory Authorities deem reasonable. Most Regulatory Authorities also
have the right to license, investigate, and determine the suitability of any
person who has a material relationship with Lakes or any of its subsidiaries,
including officers, directors, employees, and security holders of Lakes or its
subsidiaries. In the event a Regulatory Authority were to find a security holder
to be unsuitable, Lakes may be sanctioned,
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and may lose its licenses and approvals if Lakes recognizes any rights in such
unsuitable person in connection with such securities. Lakes may be required to
repurchase its securities at fair market value from security holders that the
Regulatory Authorities deem unsuitable. Lakes' Articles of Incorporation
authorize Lakes to redeem securities held by persons whose status as a security
holder, in the opinion of the Lakes' Board, jeopardizes gaming licenses or
approvals of Lakes or its subsidiaries.
Once obtained, licenses, permits, and approvals must be periodically
renewed and generally are not transferable. The Regulatory Authorities may at
any time revoke, suspend, condition, limit, or restrict a license for any cause
they deem reasonable. Fines for violations may be levied against the holder of a
license, and in certain jurisdictions, gaming operation revenues can be
forfeited to the State under certain circumstances. No assurance can be given
that any licenses, permits, or approvals will be obtained by Lakes or its
subsidiaries, or if obtained, will be renewed or not revoked in the future. In
addition, the rejection or termination of a license, permit, or approval of
Lakes or any of its employees or security holders in any jurisdiction may have
adverse consequences in other jurisdictions. Certain jurisdictions require
gaming operators licensed therein to seek approval from the state before
conducting gaming in other jurisdictions. Lakes and its subsidiaries may be
required to submit detailed financial and operating reports to Regulatory
Authorities.
The political and regulatory environment for gaming is dynamic and rapidly
changing. The laws, regulations, and procedures pertaining to gaming are subject
to the interpretation of the Regulatory Authorities and may be amended. Any
changes in such laws, regulations, or their interpretations could have a
material adverse effect on Lakes.
Certain specific provisions to which Lakes is currently subject are
described below.
INDIAN GAMING
The terms and conditions of management contracts for the operation of
Indian-owned casinos, and of all gaming on Indian land in the United States, are
subject to the IGRA, which is administered by NIGC, and also are subject to the
provisions of statutes relating to contracts with Indian tribes, which are
administered by the Secretary of the Interior (the "Secretary") and the BIA. The
regulations and guidelines under which NIGC will administer IGRA are evolving.
The IGRA and those regulations and guidelines are subject to interpretation by
the Secretary and NIGC and may be subject to judicial and legislative
clarification or amendment.
Lakes may need to provide the BIA or NIGC with background information on
each of its directors and each shareholder who holds five percent or more of
Lakes' stock ("5% Shareholders"), including a complete financial statement, a
description of such person's gaming experience, and a list of jurisdictions in
which such person holds gaming licenses. Background investigations of key
employees also may be required. Lakes' Articles of Incorporation contain
provisions requiring directors and 5% Shareholders to provide such information.
IGRA currently requires NIGC to approve management contracts and certain
collateral agreements for Indian-owned casinos. Prior to NIGC assuming its
management contract approval responsibility, management contracts and other
agreements were approved by the BIA. All of Lakes' current management contracts
and collateral agreements were approved by the BIA; however, the NIGC may review
such management contracts and collateral agreements for compliance with IGRA at
any time in the future. The NIGC will not approve a management contract if a
director or a 5% Shareholder of the management company (i) is an elected member
of the Indian tribal government that owns the facility purchasing or leasing the
games; (ii) has been or is convicted of a felony gaming offense; (iii) has
knowingly and willfully provided materially false information to the NIGC or the
tribe; (iv) has refused to respond to questions from the NIGC; or (v) is a
person whose prior history, reputation and associations pose a threat to the
public interest or to effective gaming regulation and control, or create or
enhance the chance of unsuitable activities in gaming or the business and
financial arrangements incidental thereto. In addition, the NIGC will not
approve a management contract if the management company or any of its agents
have attempted to unduly influence any decision or process of tribal government
relating to gaming, or if the management company has materially breached the
terms of the management contract or the tribe's gaming ordinance, or a trustee,
exercising due diligence, would not approve such management contract.
A management contract can be approved only after NIGC determines that the
contract provides, among other things, for (i) adequate accounting procedures
and verifiable financial reports, which must be furnished to the tribe; (ii)
tribal access to the daily operations of the gaming enterprise, including the
right to verify daily
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gross revenues and income; (iii) minimum guaranteed payments to the tribe, which
must have priority over the retirement of development and construction costs;
(iv) a ceiling on the repayment of such development and construction costs; and
(v) a contract term not exceeding five years and a management fee not exceeding
30% of profits; provided that the NIGC may approve up to a seven year term and a
management fee not to exceed 40% of profits if NIGC is satisfied that the
capital investment required, and the income projections for the particular
gaming activity justify the larger profit allocation and longer term. While
Lakes believes that its management contracts meet all requirements of IGRA,
there is a risk that the NIGC may reduce the term or the management fee provided
for in any such contracts. Currently, the management contracts (i) have not been
reviewed or approved by NIGC, and (ii) NIGC could call them for review at any
time and may not approve the contracts at all or may require modification prior
to granting approval.
Grand and Lakes have requested that the NIGC either approve the Grand
Distribution, the Merger and the assignment of Grand's management contracts to
Lakes or acknowledge that their approval is not required. While Lakes believes
that the assignment is valid and has received the consent and support of both
the Tunica-Biloxi Tribe and the Coushatta Tribe, there can be no assurance that
the NIGC will respond favorably or will respond in a timely manner.
IGRA established three separate classes of tribal gaming -- Class I, Class
II, and Class III. Class I includes all traditional or social games played by a
tribe in connection with celebrations or ceremonies. Class II gaming includes
games such as bingo, pulltabs, punch boards, instant bingo and card games that
are not played against the house. Class III gaming includes casino-style gaming
and includes table games such as blackjack, craps and roulette, as well as
gaming machines such as slots, video poker, lotteries, and pari-mutuel wagering.
IGRA prohibits substantially all forms of Class III gaming unless the tribe
has entered into a written agreement with the state in which the casino is
located that specifically authorizes the types of commercial gaming the tribe
may offer (a "tribal-state compact"). IGRA requires states to negotiate in good
faith with tribes that seek tribal-state compacts, and grants Indian tribes the
right to seek a federal court order to compel such negotiations. Many states
have refused to enter into such negotiations. Tribes in several states have
sought federal court orders to compel such negotiations under IGRA; however, the
Supreme Court of the United States held in 1996 that the Eleventh Amendment to
the United States Constitution immunizes states from suit by Indian tribes in
federal court without the states' consent.
Because Indian tribes are currently unable to compel states to negotiate
tribal-state compacts, Lakes may not be able to develop and manage casinos in
states that refuse to enter into, or renew, tribal-state compacts.
The State of Louisiana has entered into tribal-state compacts with the
Coushatta Tribe and the Tunica-Biloxi Tribe. Each of the Louisiana compacts
expired in November 1999. The State of Louisiana has delivered a written notice
of non-renewal. The Governor and each Tribe have agreed on a six-month extension
which has been approved by the Department of the Interior. In the event either
of the Louisiana compacts is not renewed, legal gaming possibly may not be
permitted at the applicable casino location. There can be no assurance that
either of the Louisiana compacts will be renewed.
In addition to IGRA, tribal-owned gaming facilities on Indian land are
subject to a number of other federal statutes. The operation of gaming on Indian
land is dependent upon whether the law of the state in which the casino is
located permits gaming by non-Indian entities, which may change over time. Any
such changes in state law may have a material adverse effect on the casinos
managed by Lakes.
Title 25, Section 81 of the United States Code states that "no agreement
shall be made by any person with any tribe of Indians, or individual Indians not
citizens of the United States, for the payment or delivery of any money or other
thing of value...in consideration of services for said Indians relative to their
lands...unless such contract or agreement be executed and approved" by the
Secretary or his or her designee. An agreement or contract for services relative
to Indian lands that fails to conform with the requirements of Section 81 will
be void and unenforceable. Any money or other thing of value paid to any person
by any Indian or tribe for or on his or their behalf, on account of such
services, in excess of any amount approved by the Secretary or his or her
authorized representative will be subject to forfeiture. Lakes believes that it
has complied with the requirements of Section 81 with respect to its management
contracts for Grand Casino Avoyelles and Grand Casino Coushatta.
The Indian Trader Licensing Act, Title 25, Section 261-64 of the United
States Code ("ITLA") states that "any person other than an Indian of the full
blood who shall attempt to reside in the Indian country, or on any Indian
reservation, as a trader, or to introduce goods, or to trade therein, without
such license, shall forfeit
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all merchandise offered for sale to the Indians or found in his possession, and
shall moreover be liable to a penalty of $500..." No such licenses have been
issued to Lakes to date. The applicability of ITLA to Indian gaming management
contracts is unclear. Lakes believes that ITLA is not applicable to its
management contracts, under which Lakes provides services rather than goods to
Indian tribes. Lakes further believes that ITLA has been superseded by IGRA.
Indian tribes are sovereign nations with their own governmental systems,
which have primary regulatory authority over gaming on land within the tribe's
jurisdiction. Because of their sovereign status, Indian tribes possess immunity
from lawsuits to which the tribes have not otherwise consented or otherwise
waived their sovereign immunity defense. Therefore, no contractual obligations
undertaken by tribes to Lakes would be enforceable by Lakes unless the tribe has
expressly waived its sovereign immunity as to such obligations. Courts strictly
construe such waivers. Lakes has obtained immunity waivers from each of the
tribes to enforce the terms of its management agreements, however, the scope of
those waivers has never been tested in court, and may be subject to dispute.
Additionally, persons engaged in gaming activities, including Lakes, are subject
to the provisions of tribal ordinances and regulations on gaming. These
ordinances are subject to review by NIGC under certain standards established by
IGRA. The possession of valid licenses from the Coushatta Tribe and
Tunica-Biloxi Tribe are conditions of the Coushatta Agreement and the
Tunica-Biloxi Agreement, respectively.
NON-GAMING REGULATIONS
The Company and its subsidiaries are subject to certain federal, state and
local, safety and health laws, regulations pertaining to operation of barges and
other marine laws, and regulations and ordinances that apply to non-gaming
businesses generally, such as the Clean Air Act, Clean Water Act, Occupational
Safety and Health Act, Resource Conservation Recovery Act and the Comprehensive
Environmental Response, Compensation and Liability Act. The Company believes
that it is currently in material compliance with such regulations. The coverage
and attendant compliance costs associated with such laws, regulations and
ordinances may result in future additional cost to the Company's operations.
EMPLOYEES
At March 20, 2000, Lakes had approximately 25 employees. Lakes believes its
relations with employees are positive.
RISK FACTORS
In addition to factors discussed elsewhere in this Annual Report on Form
10-K, the following are important factors that could cause actual results or
events to differ materially from those contained in any forward-looking
statement made by or on behalf of the Company.
INDEMNIFICATION OBLIGATIONS. Under the Distribution Agreement, Lakes and
Grand agreed to indemnify each other for liabilities retained by them in the
Distribution. Additionally, under the Agreement and Plan of Merger, dated as of
June 30, 1998 (the "Merger Agreement") by and among Hilton Hotels Corporation,
Park Place, Gaming Acquisition Corporation, Lakes and Grand, Lakes agreed to
indemnify Grand for (i) Grand's ongoing indemnification obligations to current
and former directors and officers of Grand and (ii) contingent liabilities
related to Stratosphere Corporation ("Stratosphere"). The availability of such
indemnities will be dependent upon the financial strength and creditworthiness
of Grand and Lakes, respectively. No assurance can be given that such entities
will be in a position to fund such indemnities should they be obligated to do so
in the future.
LAKES' FUNDING OBLIGATION. As security to support Lakes' indemnification
obligations to Grand under each of the Distribution Agreement and the Merger
Agreement, Lakes agreed to deposit, in trust for the benefit of Grand, as a
wholly owned subsidiary of Park Place, an aggregate of $30 million to cover
various commitments and contingencies related to, or arising out of, Grand's
Non-Mississippi business and assets (as defined in the Merger Agreement)
(including by way of example, but not limitation, tribal loan guarantees, real
property lease guarantees for Lakes' subsidiaries and director and executive
officer indemnity obligations) consisting of four annual installments of $7.5
million, payable at the end of each year for a four year period subsequent to
the effective date of the Merger if the indemnification obligation still exists.
Lakes made the first deposit of $7.5 million on December 31, 1999 and such
amount is included as restricted cash on the accompanying balance sheet as of
January 2, 2000. Lakes' ability to satisfy this funding obligation is materially
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dependent upon the continued success of its operations and the general risks
inherent in its business. In the event Lakes is unable to satisfy its funding
obligation, it would be in breach of its agreement with Grand, possibly
subjecting itself to additional liability for contract damages, which could have
a material adverse effect on Lakes' business and results of operations.
HIGHLY REGULATED INDUSTRY. The ownership, management and operation of
gaming facilities are subject to extensive federal, state, provincial, tribal
and/or local laws, regulations, and ordinances, which are administered by the
relevant regulatory agency or agencies in each jurisdiction. These laws,
regulations and ordinances vary from jurisdiction to jurisdiction, but generally
concern the responsibility, financial stability and character of the owners and
managers of gaming operations as well as persons financially interested or
involved in gaming operations. Grand and Lakes have requested that the NIGC
either approve the Distribution or acknowledge that their approval is not
required. There can be no assurance the NIGC approval or any other required
approvals will be secured on a timely basis, if at all. See "Regulation."
STRATOSPHERE CORPORATION; PENDING LITIGATION. Grand and certain of its
current and former directors and officers are defendants in several lawsuits
related to Grand's former investment in Stratosphere. Stratosphere owns and
operates the Stratosphere Tower, Casino & Hotel, a casino/hotel and
entertainment complex in Las Vegas which filed for reorganization under Chapter
11 of the Bankruptcy Code on January 27, 1997. On November 7, 1997, Stratosphere
filed a second amended proposed plan of reorganization with the Bankruptcy Court
which became effective on October 14, 1998 (the "Second Amended Plan"). Under
the Second Amended Plan, the secured portion of Stratosphere's outstanding first
mortgage notes were converted into 100% of the equity of the reorganized
Stratosphere and all of the common stock of Stratosphere outstanding prior to
the effective date of the Second Amended Plan was canceled. Grand beneficially
owned approximately 37% of the issued and outstanding common stock of
Stratosphere prior to its cancellation as a result of the Second Amended Plan
becoming effective.
Pursuant to the terms of the Distribution Agreement, any future liabilities
arising out of the various Stratosphere-related lawsuits were assumed by Lakes.
In addition other contingent liabilities related to or arising out of Grand's
Non-Mississippi business (such as tribal loan guarantees, real property lease
guarantees for Lakes' subsidiaries, and director and officer indemnity
obligations (see below)) were also assumed by Lakes. Although potential costs
associated with these various commitments and contingencies did not increase
solely as a result of the Distribution, given the numerous uncertainties
associated with litigation and the contingent nature of Lakes' various financial
commitments, Lakes is unable to quantify, within any reasonable range, its total
exposure if all or any of the pending litigation were to be resolved adversely
to Lakes' interests. Nor is Lakes able to assess the likelihood that it will be
required to perform on some or all of its contingent financial obligations.
Under Minnesota corporate law, Lakes is required, subject to certain
limitations and exclusions, to indemnify its current and former officers and
directors. Although Lakes has agreed to assume the liabilities related to
Stratosphere and the Stratosphere lawsuits, Lakes agreed under the Merger
Agreement to indemnify Grand for such liabilities and certain other pending
litigation. Accordingly, Lakes will bear the cost of defending itself, its
current and former directors and officers, and Grand and its current and former
officers and directors for any settlement or judgment of such matters. Although
these lawsuits are in their early stages and Lakes plans to defend itself
vigorously, there can be no assurance that the costs of defense and any
settlement or judgment will not have a material adverse effect on Lakes or, if
Lakes does not satisfy its indemnification obligations to Grand, on Grand.
OPERATING COVENANTS; DIVIDEND RESTRICTIONS. So long as Lakes is required
to indemnify Grand for certain specified liabilities, including (i) contingent
liabilities assumed by Lakes under the Distribution Agreement, (ii) ongoing
director and officer indemnification obligations and (iii) contingent
liabilities related to Stratosphere, Lakes has agreed that it will not declare
or pay any dividends, make any distribution on account of Lakes' equity
interests, or otherwise purchase, redeem, defease or retire for value any equity
interest in Lakes, without the written consent of Park Place, which consent can
be given or withheld in Park Place's sole and absolute discretion.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. Lakes anticipates
that the cash it received in the Distribution, interest expected to be earned
thereon and its anticipated revenues will be sufficient to finance its
operations. There can be no assurance, however, that Lakes will not seek or
require additional capital at some point in the future through either public or
private financings. Such financings may not be available when needed on terms
acceptable to Lakes or at all. Moreover, any additional equity financings may be
dilutive to Lakes shareholders, and any debt financing may involve additional
restrictive covenants. An
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inability to raise such funds when needed might require Lakes to delay, scale
back or eliminate some of its expansion and development goals, and might require
Lakes to cease its operations entirely. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Lakes -- Capital
Resources, Capital Spending and Liquidity."
COMPETITION. The gaming industry is highly competitive. Gaming activities
include traditional land-based casinos; river boat and dockside gaming; casino
gaming on Indian land; state-sponsored lotteries and video poker in restaurants,
bars and hotels; pari-mutuel betting on horse racing, dog racing and jai alai;
sports bookmaking; and card rooms. The Indian-owned casinos managed by Lakes
compete, and will in the future compete, with all these forms of gaming, and
will compete with any new forms of gaming that may be legalized in additional
jurisdictions, as well as with other types of entertainment.
In Louisiana, there are presently 14 licensed river boats in operation that
compete with Grand Casino Coushatta and Grand Casino Avoyelles, including
"Casino America" and "Players Lake Charles" and, to a lesser extent, "Binion's
Horseshoe Casino," "Casino Magic" and "Harrah's Shreveport."
Lakes also competes with other gaming companies for opportunities to
acquire legal gaming sites in emerging and established gaming jurisdictions and
for the opportunity to manage casinos on Indian land. Because the Distribution
resulted in the unavailability of historical cash flows and assets represented
by Grand's Mississippi business, Lakes' ability to compete for and develop
future gaming or other business opportunities will be restricted, both in the
size and number of development projects it can pursue. Many of Lakes'
competitors have more personnel and most have greater financial and other
resources than Lakes. Such competition in the gaming industry could adversely
affect Lakes' ability to attract customers and thus, adversely affect its
operating results. In addition, further expansion of gaming into new
jurisdictions could also adversely affect Lakes' business by diverting customers
from its managed casinos to competitors in such jurisdictions.
MANAGEMENT CONTRACTS OF LIMITED DURATION. Lakes is prohibited under the
IGRA from having an ownership interest in any casino it manages for Indian
tribes. The current management contracts for Grand Casino Avoyelles and Grand
Casino Coushatta expire June 3, 2001 and January 16, 2002, respectively. The
Coushatta Tribe and Lakes have agreed on a five year contract renewal beginning
January 17, 2002, subject to NIGC approval. Net distributable profits, if any,
under the new agreement will be determined in accordance with IGRA and
distributed each month 90% to the Coushatta Tribe and 10% to Lakes. There can be
no assurance that any of these management contracts will be renewed upon
expiration or approved by the NIGC upon any such renewal. Lakes anticipates that
any renewal of the Grand Casino Coushatta and Grand Casino Avoyelles management
contracts will be upon terms less favorable to Lakes. The failure to renew
Lakes' management contracts would result in the loss of revenues to Lakes
derived from such contracts, which would have a material adverse effect on
Lakes' results of operations.
The Coushatta Tribe and the Tunica-Biloxi Tribe each entered into
tribal-state compacts with the State of Louisiana on September 29, 1992. These
compacts were approved in November, 1992 by the Secretary of the Interior. Each
compact expired in November, 1999 and the State of Louisiana has delivered a
written notice of non-renewal. The Governor and each Tribe have agreed on a
six-month extension which has been approved by the Department of the Interior.
In the event the compacts are not renewed, legal gaming may possibly not be
permitted at Grand Casino Avoyelles or Grand Casino Coushatta. In the event that
the compacts are renewed, but Lakes' management contracts are not, Lakes will
not operate the casinos at those locations. The non-renewal of the management
contracts would result in the loss of revenues to Lakes derived from such
contracts, which would have a material adverse effect on Lakes' results of
operations. Currently, the management contracts for Grand Casino Coushatta and
Grand Casino Avoyelles generate all of Lakes' operating revenues. Without the
renewal of either or both of the existing management contracts or the
realization of new business opportunities or new management contracts, the
non-renewal of the Louisiana management contracts would have a material adverse
impact on Lakes' results of operations and financial condition. There can be no
assurance that these compacts will be renewed on terms and conditions acceptable
to either of the tribes.
MANAGEMENT CONTRACTS SUBJECT TO GOVERNMENTAL MODIFICATION. The NIGC has
the power to require modifications to Indian management contracts under certain
circumstances or to void such contracts or ancillary agreements including loan
agreements if the management company fails to obtain requisite approvals or to
comply with applicable laws and regulations. While Lakes believes that its
management contracts meet the requirements of the IGRA, NIGC has the right to
review each contract and has the authority to reduce the term of a management
contract or the management fee or otherwise require modification of the
contract,
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which could have an adverse effect on Lakes. Currently, the management contracts
(i) have not been reviewed or approved by NIGC and (ii) NIGC could call them for
review at any time, in which case NIGC may not approve the contracts at all or
may require modification prior to granting approval. In addition, Lakes has made
loans to Indian tribes in excess of the loan ceilings set forth in each of the
Indian management contracts. Under certain circumstances, these loans may not be
enforceable by Lakes. As of January 2, 2000, loan balances outstanding to such
tribes were approximately $33.1 million.
LIMITED RECOURSE AGAINST TRIBAL ASSETS. Lakes has made, and will make
substantial loans to tribes for the construction, development, equipment and
operations of casinos managed by Lakes. Lakes' only recourse for collection of
indebtedness from a tribe or money damages for breach or wrongful termination of
a management contract is from revenues, if any, from casino operations. Lakes
has subordinated, and may in the future subordinate, the repayment of these
loans to a tribe and other distributions due from a tribe (including management
fees) in favor of other obligations of the tribe to other parties related to the
casino operations. Accordingly, in the event of a default by a tribe under such
obligations, Lakes' loans and other claims against the tribe will not be repaid
until such default has been cured or the tribe's senior casino-related creditors
have been repaid in full.
DEPENDENCE ON KEY PERSONNEL. Lakes' success will depend largely on the
efforts and abilities of its senior corporate management, particularly Lyle
Berman, its Chairman and Chief Executive Officer. The loss of the services of
Mr. Berman or other members of senior corporate management could have a material
adverse effect on Lakes. Lakes does not have an employment agreement with Mr.
Berman.
LIMITED BASE OF OPERATIONS. Lakes' principal operations currently consist
of the management of two Indian-owned casinos. The management contracts for
Grand Casino Avoyelles and Grand Casino Coushatta expire June 3, 2001 and
January 16, 2002, respectively. The Coushatta Tribe and Lakes have agreed on a
five-year contract renewal beginning January 17, 2002, subject to NIGC approval.
The combination of the relatively small number of managed casinos and the
potentially significant investment associated with any new managed casino may
cause the operating results of Lakes to fluctuate significantly and adversely
affect the profitability of Lakes. Due to this relatively small number of
current locations, poor operating results at any one casino or a delay in the
opening or non-opening of any future casinos could materially affect the
profitability of Lakes. Future growth in revenues and profits will depend to a
large extent on Lakes' ability to continue to increase the number of its managed
casinos or develop new business opportunities.
RISKS ASSOCIATED WITH NEW DEVELOPMENT ACTIVITIES. Although Lakes and
certain members of its management team have experience developing, operating and
managing casinos owned by Indian tribes and located on Indian land, neither the
Company nor any of these individuals has developed or operated a casino in
either the State of California or the State of Michigan. In addition, the gaming
industry in each of the three locations where Lakes plans to develop and operate
casinos has no operating history as yet and faces several legal and procedural
challenges which will need to be resolved prior to the commencement of Lakes'
development activities and the opening and operation of the respective casinos.
The opening of each of the proposed Lakes' facilities, near San Diego, CA,
Sacramento, CA, and in the State of Michigan, respectively, will be contingent
upon, among other things, the completion of construction, hiring and training of
sufficient personnel and receipt of all regulatory licenses, permits,
allocations and authorizations. The scope of the approvals required to construct
and open these facilities will be extensive, and the failure to obtain such
approvals could prevent or delay the completion of construction or opening of
all or part of such facilities or otherwise affect the design and features of
the proposed casinos.
At this time, Lakes does not have a target date for the start of
development and construction of these three projects, and no assurances can be
given that even once a schedule for such construction and development activities
has been established, such development activities will begin or will be
completed on time, or any other time, or that the budget for these projects will
not be exceeded. Major construction projects entail significant risks, including
shortages of materials or skilled labor, unforeseen engineering, environmental
and/or geological problems, work stoppages, weather interference, unanticipated
cost increases and non-availability of construction equipment. Construction,
equipment or stalling problems or difficulties in obtaining any of the requisite
licenses, permits, allocations and authorizations from regulatory authorities
could increase the total cost, delay or prevent the construction or opening or
any of these planned casino developments or otherwise affect their design. In
addition, once developed, no assurances can be given that the Company will be
able to manage these casinos on a profitable basis or to attract a sufficient
number of guests, gaming customers and other visitors to make the various
operations profitable independently.
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ITEM 2. PROPERTIES
CORPORATE OFFICE FACILITY
Pursuant to the terms of the Distribution Agreement, Grand has assigned to
Lakes, and Lakes has assumed a lease agreement dated February 1, 1996 covering
Lakes' current corporate office space of approximately 65,000 square feet with a
lease term of fifteen years. The lease commenced on October 14, 1996 and the
annual base rent is $768,300 plus building operating costs.
LAS VEGAS LAND
SHARK CLUB PARCEL
A subsidiary of Lakes is the tenant under a ground lease (the "Shark Club
Lease") which has a term through July 31, 2046 unless sooner terminated in
accordance with the provisions thereof. The Shark Club Lease provides for base
rent in the initial amount of $65,000 per month, subject to adjustment each
lease year based on a cost of living formula and additional rent in the amount
of $6,500 per month if the parcel is used for a casino/hotel.
In addition to the base rent, Lakes must pay all taxes on and bear all
costs of maintaining the property. Grand Casinos also executed a guarantee in
connection with the execution of the Shark Club Lease by its former subsidiary.
In connection with the Merger, Lakes agreed with Park Place that Lakes will
either exercise, or cause one of its subsidiaries to exercise, the Shark Club
Lease purchase option of approximately $10.1 million prior to the earliest time
when the landlord could require Lakes (or Grand as the guarantor) to purchase
the subject real estate. Lakes is anticipating that date to be April 2000.
Under the Shark Club Lease, Lakes is required to maintain the leased
property. Lakes executed an amendment to the Shark Club Lease that permitted it
to raze the property without increasing its security deposit. In exchange. Lakes
agreed to waive the payment and accrual of interest on such security deposit.
TRAVELODGE PARCEL
A Lakes subsidiary is tenant under a ground lease (the "Travelodge Lease")
which commenced on June 17, 1996, and will (unless sooner terminated in
accordance with the provisions thereof) remain in effect until June 16, 2095.
The Travelodge Lease provides for a base rent (in the initial amount of $166,667
per month) that is adjusted each lease year based on a cost of living formula.
In addition to the base rent, the tenant must pay all taxes on and costs of
maintaining the leased property. Lakes has the option to purchase the leased
property during the 20th lease year for the purchase price of $30 million. Lakes
manages the hotel building located on the leased property. A third party had a
sublease interest in the leased property. That claimed interest was terminated
pursuant to an agreement between the third party and Lakes that provides for
payments by Lakes in the amount of $150,000 per quarter for a period of ten
years after such party surrendered possession of the property to Lakes. A
portion of the building located on the leased property is subleased, which Lakes
currently has the right to terminate by making certain prescribed payments, and
complying with certain other conditions stated, in the sublease.
POLO PLAZA SHOPPING CENTER PARCEL
On October 1, 1999, the Company purchased the shopping center and land
owned by the Nevada Resort Properties Polo Plaza Limited Partnership (the
"Partnership") in lieu of exercising its right to purchase the remaining 51%
interest in the Partnership. Prior to the purchase, the Company held a 49%
ownership interest in the Partnership. In consideration for the purchase, the
Company paid approximately $3.3 million and paid off the outstanding partnership
mortgage of approximately $6.3 million. A $6.2 million loan to the Partnership
made by the Company during January 1999 was repaid and satisfied at the closing
by offsetting an appropriate amount against the purchase price as agreed by the
Company and the Partnership. Pursuant to the purchase agreement relating to this
transaction, the Partnership is currently being dissolved. Lakes continues to
operate the site as a commercial shopping center.
CABLE PARCEL
Pursuant to a November 1, 1997 Option Agreement, Grand acquired an option
to purchase approximately 4.5 acres of land located near the Polo Plaza Shopping
Center anytime prior to October 31, 2000. As
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consideration for the option, Lakes pays the landowner a non-refundable monthly
option payment of $80,000. The option agreement states that the purchase price
for the land is $18 million.
ITEM 3. LEGAL PROCEEDINGS
The following summaries describe certain known legal proceedings to which
Grand is a party which Lakes has assumed, or with respect to which Lakes has
agreed to indemnify Grand, in connection with the Distribution.
STRATOSPHERE SHAREHOLDERS LITIGATION -- FEDERAL COURT
In August 1996, a complaint was filed in the U.S. District Court for the
District of Nevada -- Michael Ceasar, et al v. Stratosphere Corporation, et
al -- against Stratosphere and others, including Grand. The complaint was filed
as a class action, and sought relief on behalf of Stratosphere shareholders who
purchased their stock between December 19, 1995 and July 22, 1996. The complaint
included allegations of misrepresentations, federal securities law violations
and various state law claims.
In August through October 1996, several other nearly identical complaints
were filed by various plaintiffs in the U.S. District Court for the District of
Nevada.
The defendants in the actions submitted motions requesting that all of the
actions be consolidated. Those motions were granted in January 1997, and the
consolidated action is entitled In re: Stratosphere Corporation Securities
Litigation -- Master File No. CV-S-96-00708 PMP (RLH).
In February 1997, the plaintiffs filed a consolidated and amended complaint
naming various defendants, including Grand and certain current and former
officers and directors of Grand. The amended complaint includes claims under
federal securities laws and Nevada laws based on acts alleged to have occurred
between December 19, 1995 and July 22, 1996.
The Court has recently signed a scheduling order, which cuts off fact
discovery as of April 30, 2000 and expert discovery as of September 30, 2000.
The parties have submitted preliminary pretrial statements, which may be amended
after the completion of discovery.
In February 1997, various defendants, including Grand and Grand's officers
and directors named as defendants, submitted motions to dismiss the amended
complaint. Those motions were made on various grounds, including Grand's claim
that the amended complaint failed to state a valid cause of action against Grand
and Grand's officers and directors.
In May 1997, the court dismissed the amended complaint. The dismissal order
did not allow the plaintiffs to further amend their complaint in an attempt to
state a valid cause of action.
In June 1997, the plaintiffs asked the court to reconsider its dismissal
order, and to allow the plaintiffs to submit a second amended complaint in an
attempt to state a valid cause of action. In July 1997, the court allowed the
plaintiffs to submit a second amended complaint.
In August 1997, the plaintiffs filed a second amended complaint. In
September 1997, certain of the defendants, including Grand and Grand's officers
and directors named as defendants, submitted a motion to dismiss the second
amended complaint. The motion was based on various grounds, including Grand's
claim that the second amended complaint failed to state a valid cause of action
against Grand and Grand's officers and directors.
In April 1998, the Court granted Grand's motion to dismiss, in part, and
denied the motion in part. Thus, the plaintiffs are pursuing the claims in the
second amended complaint that survived the motion to dismiss.
In June 1998, certain of the defendants, including Grand and Grand's
officers and directors named as defendants, submitted a motion for summary
judgment seeking an order that such defendants are entitled to judgment as a
matter of law. In December 1998, the plaintiffs completed fact discovery related
to the issues raised by the summary judgment motion. Expert discovery was
completed in March of 1999. All papers relating to this matter were filed on
June 1, 1999.
On October 6, 1999, the District Court entered its Order, granting in part
and denying in part, defendants' Motion for Summary Judgment and Summary
Adjudication. The Court dismissed all allegations in reference to (1) Phase II
funding levels; (2) "over-allotments uses", as stated in the December 19, 1995
Prospectus; (3) the purpose and use of the Grand Casino Completion Guaranty, as
stated in the June 6, 1996 Press
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Statement; (4) the vague expressions of general optimism (issued within the
December 19, 1995 Prospectus, the 10-Q and 10-K Filings, press releases and
other public statements) referred to in this Order; (5) the adoption of
statements in securities analysts reports; (6) the alleged utterance of
misleading statements before the Nevada Gaming Commission; and (7) the temporary
diversion of Phase II proceeds to fund Phase I. The remaining claims relate to
the accuracy of defendants' budgetary estimates issued in Stratosphere's
December 1995 Prospectus and SEC 10-Q and 10-K Reports. The Court concluded that
there were triable issues as to whether defendants misstated anticipated
construction costs or omitted to disclose material cost overruns.
The court recently added the Company as an additional defendant because of
its indemnity obligation and stipulation. Park Place has opposed being added to
the litigation and plaintiffs' motion to add Park Place as a defendant is
pending.
STRATOSPHERE SHAREHOLDERS LITIGATION -- NEVADA STATE COURT
In August 1996, a complaint was filed in the District Court for Clark
County, Nevada -- Victor M. Opitz, et al v. Robert E. Stupak, et al -- Case No.
A363019 -- against various defendants, including Grand. The complaint seeks
relief on behalf of Stratosphere Corporation shareholders who purchased stock
between December 19, 1995 and July 22, 1996. The complaint alleges
misrepresentations, state securities law violations and other state claims.
Grand and certain defendants submitted motions to dismiss or stay the state
court action pending resolution of the federal court action described above. The
court has stayed further proceedings pending the resolution of In re:
Stratosphere Securities Litigation.
GRAND CASINOS, INC. SHAREHOLDERS LITIGATION
In September and October 1996, two actions were filed by Grand shareholders
in the U.S. District Court for the District of Minnesota against Grand and
certain of Grand's current and former directors and officers.
The complaints allege misrepresentations, federal securities law violations
and other claims in connection with the Stratosphere project.
The actions have been consolidated as In re: Grand Casinos, Inc. Securities
Litigation -- Master File No. 4-96-890 -- and the plaintiffs filed a
consolidated complaint. The defendants submitted a motion to dismiss the
consolidated complaint, based in part on Grand's claim that the consolidated
complaint failed to properly state a cause of action.
In December 1997, the court granted Grand's motion to dismiss in part, and
denied the motion in part. Thus, the plaintiffs are pursuing the claims in the
consolidated complaint that survived Grand's motion to dismiss. Discovery in the
action has begun.
The defendants have submitted a motion for summary judgment seeking an
order that the defendants are entitled to judgment as a matter of law. In
December 1998, the plaintiffs completed fact discovery related to the issues
raised by the summary judgement motion. Expert discovery was completed in March
of 1999. The parties have completed follow-up discovery pertaining to the
summary judgment motion. The court heard the motion on September 2, 1999. The
court has not yet ruled on the motion.
In early February 1999, the plaintiffs filed a motion for leave to amend
the complaint in this action to include, as defendants in the case, both the
Company and Park Place. The motion for leave to amend the complaint has been
granted and Lakes has filed its answer. Lakes will defend this action
vigorously.
SLOT MACHINE LITIGATION
In April 1994, William H. Poulos brought an action in the U.S. District
Court for the Middle District of Florida, Orlando Division -- William H. Poulos,
et al v. Caesars World, Inc. et al -- Case No. 39-478-CIV-ORL-22 -- in which
various parties (including Grand) alleged to operate casinos or be slot machine
manufacturers were named as defendants. The plaintiff sought to have the action
certified as a class action.
A subsequently filed Action -- William Ahearn, et al v. Caesars World, Inc.
et al -- Case No. 94-532-CIV-ORL-22 -- made similar allegations and was
consolidated with the Poulos action.
Both actions included claims under the federal Racketeering-Influenced and
Corrupt Organizations Act and under state law, and sought compensatory and
punitive damages. The plaintiffs claimed that the
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defendants are involved in a scheme to induce people to play electronic video
poker and slot machines based on false beliefs regarding how such machines
operate and the extent to which a player is likely to win on any given play.
In December 1994, the consolidated actions were transferred to the U.S.
District Court for the District of Nevada.
In September 1995, Larry Schreier brought an action in the U.S. District
Court for the District of Nevada -- Larry Schreier, et al v. Caesars World, Inc.
et al -- Case No. CV-95-00923-DWH(RJJ).
The plaintiffs' allegations in the Schreier action were similar to those
made by the plaintiffs in the Poulos and Ahearn actions, except that Schreier
claimed to represent a more precisely defined class of plaintiffs than Poulos or
Ahearn.
In December 1996, the court ordered the Poulos, Ahearn and Schreier actions
consolidated under the title William H. Poulos, et al v. Caesars World, Inc., et
al -- Case No. CV-S-94-11236-DAE(RJJ) -- (Base File), and required the
plaintiffs to file a consolidated and amended complaint. In February 1997, the
plaintiffs filed a consolidated and amended complaint.
In March 1997, various defendants (including Grand) filed motions to
dismiss or stay the consolidated action until the plaintiffs submitted their
claims to gaming authorities and those authorities considered the claims
submitted by the plaintiffs.
In December 1997, the court denied all of the motions submitted by the
defendants, and ordered the plaintiffs to file a new consolidated and amended
complaint. That complaint has been filed. Grand has filed its answer to the new
complaint.
The plaintiffs have filed a motion seeking an order certifying the action
as a class action. Grand and certain of the defendants have opposed the motion.
The Court has not ruled on the motion.
STANDBY EQUITY COMMITMENT LITIGATION
In September 1997, the Stratosphere Trustee under the indenture pursuant to
which Stratosphere issued its first mortgage notes filed a complaint in the U.S.
District Court for the District of Nevada -- IBJ Schroeder Bank & Trust Company,
Inc. v. Grand Casinos, Inc. -- File No. CV-S-97-01252-DWH (RJJ) -- naming Grand
as defendant.
The complaint alleges that Grand failed to perform under the Standby Equity
Commitment entered into between Stratosphere and Grand in connection with
Stratosphere's issuance of such first mortgage notes in March 1995. The
complaint seeks an order compelling specific performance of what the Trustee
claims are Grand's obligations under the Standby Equity Commitment.
The Stratosphere Trustee filed the complaint in its alleged capacity as a
third party beneficiary under the Standby Equity Commitment. Pursuant to the
Second Amended Plan, a new limited liability company (the "Stratosphere LLC")
was formed to pursue certain alleged claims and causes of action that
Stratosphere and other parties may have against numerous third parties,
including Grand and/or officers and/or directors of Grand. The Stratosphere LLC
has been substituted for IBJ Schroeder Bank & Trust Company, Inc. in this
proceeding.
In October of 1999, Motions for Summary Judgment by both parties were
denied. Grand's request for appellate court review of the denial as to its
motion for summary judgment was denied. The trial court is expected to hold a
pretrial conference to address discovery and scheduling issues. Lakes will
continue to defend the lawsuit diligently.
STRATOSPHERE PREFERENCE ACTION
In April 1998, Stratosphere served on Grand and Grand Media & Electronics
Distributing, Inc., a wholly owned subsidiary of Grand ("Grand Media"), a
complaint in the Stratosphere bankruptcy case seeking recovery of certain
amounts paid by Stratosphere to (i) Grand as management fees and for costs and
expenses under a management agreement between Stratosphere and Grand, and (ii)
Grand Media for electronic equipment purchased by Stratosphere from Grand Media.
Stratosphere claims in its complaint that such amounts are recoverable by
Stratosphere as preferential payments under bankruptcy law.
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In May 1998, Grand responded to Stratosphere's complaint. That response
denies that Stratosphere is entitled to recover the amounts described in the
complaint. The matter is pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Lakes became a stand-alone, publicly held and publicly traded company as a
result of the Grand Distribution which was effected on December 31, 1998. The
fourth quarter of Lakes' fiscal year ended on Sunday, January 3, 1999 and the
Common Stock did not begin trading on the Nasdaq National Market under the
symbol LACO until Monday, January 4, 1999.
For the period from January 4, 1999 through January 2, 2000, the high and
low sales prices per share of the Company's Common Stock are indicated below, as
reported on the Nasdaq National Market:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Year Ended January, 2, 2000:
High................................................ $12.38 $11.88 $13.25 $10.31
Low................................................. 7.88 8.00 9.31 6.84
On March 20, 2000, the last reported sale price for the Common Stock was
$7.9375 per share. As of March 20, 2000, the Company had approximately
10,630,453 shareholders of record.
The Company has never paid any cash dividends with respect to its Common
Stock and the current policy of the Board of Directors is to retain any earnings
to provide for the growth of the Company. So long as Lakes is required to
indemnify Grand, as a subsidiary of Park Place, for certain specified
liabilities, Lakes has agreed that it will not declare or pay any dividends,
make any distribution on account of Lakes' equity interests or otherwise
purchase, redeem, defease or retire for value any equity interest in Lakes
without the written consent of Park Place which consent can be given or withheld
in Park Place's sole and absolute discretion. Subject to the foregoing dividend
restrictions, the payment of cash dividends in the future, if any, will be at
the discretion of the Board of Directors and will depend upon such factors as
earnings levels, capital requirements, the Company's overall financial condition
and any other factors deemed relevant by the Board of Directors. See "Risk
Factors -- Operating Covenants -- Dividend Restrictions."
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data presented below should be read in conjunction
with the Financial Statements and notes thereto included elsewhere in this Form
10-K, and in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Form 10-K.
FISCAL YEARS ENDED OR AS OF:
--------------------------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28, DECEMBER 29, DECEMBER 31,
2000 1999 1997 1996 1995
---------- ---------- ------------ ------------ ------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
LAKES HISTORICAL
RESULTS OF OPERATIONS:
Total revenue................... $ 55 $ 92 $ 79 $ 77 $ 69
Total operating income.......... 45 76 70 60 58
Net Earnings (loss)............. 29 61 45 (109)(2) 41
Net Earnings (loss) per share --
basic........................ 2.72 5.80 4.32 (10.46)(2) 4.81
Net Earnings (loss) per share --
diluted...................... 2.67 5.71 4.20 (10.46)(2) 4.65
OTHER OPERATING DATA:
EBITDA(1)....................... 47 78 71 61 60
BALANCE SHEET:
Unrestricted Cash and cash
equivalents.................. $ 24 $ 57 $ 33 $ 34 $ 33
Total assets.................... 185 161 132 114 233
Total debt...................... 2 1 1 1 1
Shareholders' equity............ 160 132 119 104 229
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- ---------------
(1) 1998 results include $36.8 million in revenues from the management contracts
for Grand Casino Mille Lacs and Grand Casino Hinckley that concluded during
1998. The Company's revenues and earnings will not include contributions
from these operations going forward. EBITDA is earnings before interest,
taxes, depreciation and amortization, which can be computed by adding
depreciation and amortization to operating income. EBITDA also excludes the
$161 million write off of Grand's investment in Stratosphere Corporation.
EBITDA is presented supplementally because management believes it allows for
a more complete analysis of results of operations. This information should
not be considered as an alternative to any measure of performance as
promulgated under generally accepted accounting principles (such as
operating income or income from continuing operations) nor should it be
considered as an indicator of the overall financial performance of Lakes.
The calculations of EBITDA may be different from the calculations used by
other companies and therefore comparability may be limited. Historical
depreciation and amortization for Lakes for the fiscal years ended January
2, 2000, January 3, 1999, December 28, 1997, December 29, 1996 and December
31, 1995 totaled $2 million, $2 million, $1 million, $1 million and $2
million, respectively.
(2) Includes a non-recurring, non-cash $161 million charge related to the
write-off of Lakes' investment in Stratosphere Corporation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Lakes was established as a public corporation on December 31, 1998, via a
distribution of its Common Stock, to the shareholders of Grand. Pursuant to the
terms of the Distribution Agreement entered into between Grand and Lakes and
dated as of December 31, 1998, Grand shareholders received .25 shares of Lakes
Common Stock for each share held in Grand. Historical references to the Company,
which preclude the distribution give pro forma effect to the distribution as if
it had already occurred.
Immediately following the Distribution, Grand merged with a subsidiary of
Park Place, pursuant to which Grand became a wholly owned subsidiary of Park
Place. Grand shareholders received one share of Park Place common stock in the
Merger for each share they held in Grand.
As a result of the Distribution, Lakes operates the Indian casino
management business and holds various other assets previously owned by Grand.
The Company's revenues are derived almost exclusively from management fees.
Lakes manages two land-based, Indian-owned casinos in Louisiana: Grand Casino
Avoyelles, in Marksville, Louisiana, owned by the Tunica-Biloxi Tribe and Grand
Casino Coushatta, in Kinder, Louisiana, owned by the Coushatta Tribe. Both
management contracts expire seven years from the dates the casinos opened.
For a portion of fiscal 1998, and prior to the Distribution, Grand also had
management contracts for Indian-owned casinos located at Grand Casino Hinckley
and Grand Casino Mille Lacs in Minnesota. The management contract at Grand
Casino Mille Lacs expired at the end of the first quarter of 1998, and the
management of Grand Casino Hinckley ended November 30, 1998, with the buyout of
the remaining contract term.
Lakes develops, constructs and manages casinos and related hotel and
entertainment facilities in emerging and established gaming jurisdictions.
Lakes' revenues are derived from management fee income from Grand Casino
Avoyelles and Grand Casino Coushatta. Grand commenced operations in September
1990, and opened its first casino, Grand Casino Mille Lacs, in April 1991. Grand
Casino Hinckley commenced operations in May 1992, Grand Casino Avoyelles
commenced operations in June 1994 and Grand Casino Coushatta commenced
operations in January 1995.
Pursuant to the Avoyelles and Coushatta management contracts, Lakes
receives a fee based on the net distributable profits (as defined in the
contracts) generated by Grand Casino Avoyelles and Grand Casino Coushatta.
On May 12, 1999, the Company announced that it would form a partnership for
the purpose of developing a gaming facility on Indian-owned land near San Diego,
California. Under the agreement, Lakes has formed a limited liability company
with KAR, a limited liability company based in Houston, Texas. The partnership
between Lakes and KAR holds a contract to develop and manage a casino resort
facility with the
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Jamul Indian Village in California. The contract is subject to approval by NIGC.
California voters recently approved an amendment to the State Constitution which
allows for Nevada-style gaming on Indian land and ratifies the Tribal Compact.
Development of the casino resort will begin once various regulatory approvals
are received.
On June 22, 1999, the Company announced that it has been selected by the
Pokagon Band to serve as the exclusive developer and manager of a proposed
casino gaming resort facility to be owned by the Pokagon Band in the State of
Michigan. In connection with its selection, Lakes and the Band have executed a
development and management agreement governing their relationship during the
development, construction and management of the casino. Various regulatory
approvals are needed prior to commencement of development activities. Casino
construction is not planned to start until land is accepted into trust status by
the Secretary of the Interior and the agreements are approved by the Chairman of
NIGC.
On July 15, 1999, the Company announced that it would form a partnership
for the purpose of developing a gaming facility on Indian-owned land near
Sacramento, California. Pursuant to the agreement, Lakes has formed a limited
liability company with KAR, a limited liability company based in Houston, Texas.
The partnership between Lakes and KAR has been awarded a contract to develop and
manage a casino resort facility with the Shingle Springs Band of Miwok Indians
in California. The contract is subject to approval by NIGC and placement of the
land where the gaming facility is to be located into trust with the BIA.
California voters recently approved an amendment to the State Constitution which
allows for Nevada-style gaming on Indian land and ratifies the Tribal Compact.
Development of the casino resort will begin once various regulatory approvals
are received.
On October 1, 1999, the Company purchased the shopping center and land
owned by the Nevada Resort Properties Polo Plaza Limited Partnership in lieu of
exercising its right to purchase the remaining 51% interest in the Partnership.
Prior to the purchase, the Company held a 49% ownership interest in the
Partnership. In consideration for the purchase, the Company paid approximately
$3.3 million and paid off the outstanding partnership mortgage of approximately
$6.3 million. A $6.2 million loan to the Partnership made by the Company during
January 1999 was repaid and satisfied at the closing by offsetting an
appropriate amount against the purchase price as agreed by the Company and the
Partnership. Pursuant to the purchase agreement relating to this transaction,
the Partnership is currently being dissolved.
On December 22, 1999, the Company and Rainforest Cafe, Inc. announced plans
to merge. Under the terms of the agreement, Rainforest Cafe shareholders would
have received .55 of one share of Lakes Common Stock for every share owned in
Rainforest Cafe. The transaction was terminated by mutual agreement on January
24, 2000 after Rainforest Cafe, Inc. received an unsolicited offer to purchase
Rainforest Cafe, Inc. Lakes will be entitled to a $2 million termination fee in
the event Rainforest Cafe, Inc. consummates a competing proposal prior to July
24, 2000.
Lakes' investments in unconsolidated affiliates include a 27 percent
ownership interest in Fanball.com, Inc., a start-up internet provider of fantasy
sports services, and a 23 percent ownership interest in Interactive Learning
Group, Inc., a consumer product company. Lakes invested $3.4 million and $3
million in Fanball.com and Interactive Learning Group, respectively, at the end
of the second quarter of 1999. Additionally, as a result of its spin-off from
Grand, Lakes received a 49 percent ownership interest in Trak 21 Development,
LLC, a developer of player tracking systems for the casino industry, and a 27
percent ownership interest in New Horizon Kids Quest, Inc., a publicly held
provider of child care facilities.
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto for the years ended
January 2, 2000, January 3, 1999, and December 28, 1997.
RESULTS OF OPERATIONS
Revenues are calculated in accordance with generally accepted accounting
principles and are presented in a manner consistent with industry practice. Net
distributable profits from Grand Casino Avoyelles and Grand Casino Coushatta are
computed using a modified cash basis of accounting in accordance with the
management contracts. The effect of the use of the modified cash basis of
accounting is to accelerate the write-off of capital equipment and leased
assets, which thereby impacts the timing of net distributable profits.
Lakes is prohibited by IGRA from having an ownership interest in any casino
it manages for Indian tribes. The management contracts for Grand Casino
Avoyelles and Grand Casino Coushatta expire June 3, 2001 and January 16, 2002,
respectively. The Coushatta Tribe and Lakes have agreed on a five-year contract
renewal beginning January 17, 2002, subject to NIGC approval. Net distributable
profits, if any, under the
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new agreement will be determined in accordance with IGRA and distributed each
month 90% to the Coushatta Tribe and 10% to Lakes. There can be no assurance
that any of these management contracts will be renewed upon expiration or
approved by NIGC upon any such renewal. The failure to renew the Lakes'
management contracts would result in the loss of revenues to Lakes derived from
such contracts, which would have a material adverse effect on Lakes' results of
operations. The Coushatta Tribe and the Tunica-Biloxi Tribe each entered into
tribal-state compacts with the State of Louisiana on September 29, 1992.
These compacts were approved in November 1992 by the Secretary of the
Interior. The compact for the Coushatta Tribe expired November 4, 1999, and the
compact for the Tunica-Biloxi Tribe expired November 18, 1999, and the State of
Louisiana has delivered a written notice of non-renewal. The Governor and each
Tribe have agreed on a six-month extension which has been approved by the
Department of the Interior. The Coushatta Tribe and the Tunica-Biloxi Tribe are
actively negotiating with the State of Louisiana terms for a new compact. In the
event the compacts are not renewed, gaming may not be permitted at Grand Casino
Avoyelles or Grand Casino Coushatta. There can be no assurance that these
compacts will be renewed on terms and conditions acceptable to either of the
Tribes.
FISCAL YEAR ENDED JANUARY 2, 2000 COMPARED TO FISCAL YEAR ENDED JANUARY 3, 1999
Revenues. Grand Casino Avoyelles and Grand Casino Coushatta generated
$54.7 million in management fee income during the fiscal year ended January 2,
2000. Grand Casino Mille Lacs, Grand Casino Hinckley, Grand Casino Avoyelles and
Grand Casino Coushatta generated $92.3 million in management fee income during
the fiscal year ended January 3, 1999. Gross revenue increases at Grand Casino
Avoyelles and Grand Casino Coushatta partially offset the fact that the
management contracts for Grand Casino Mille Lacs and Grand Casino Hinckley ended
during 1998. Contributing to the increases were a 223-room hotel at Grand Casino
Coushatta, which opened in November of 1998 along with a 28,000 square foot
casino expansion at Coushatta which opened in December of 1998. Also
contributing to the increases were a special events center and RV resort at
Grand Casino Avoyelles, which opened during the first quarter of 1998, and the
addition of approximately 180 slot machines at Avoyelles from January 3, 1999 to
January 2, 2000.
Costs and Expenses. Total costs and expenses decreased $6.7 million from
$16.4 million for the fiscal year ended January 3, 1999 to $9.7 million for the
fiscal year ended January 2, 2000. Selling, general, and administrative expenses
decreased $6.8 million from $14.6 million for the fiscal year ended January 3,
1999 to $7.8 million for the fiscal year ended January 2, 2000 due primarily to
legal, professional and other costs associated with separating Lakes from Grand
incurred during 1998.
Other. Interest income increased $2 million to $7.6 million for the fiscal
year ended January 2, 2000 from $5.6 million for the fiscal year ended January
3, 1999 due primarily to interest earned on increased cash balances and
additional notes receivable. Interest expense was $0.1 million for both periods.
Equity in loss of unconsolidated affiliates increased from $.4 million for the
fiscal year ended January 3, 1999 to $2.9 million for the fiscal year ended
January 2, 2000 due primarily to investments in Interactive Learning Group, Inc.
and Fanball.com.
Taxes. A deferred tax asset was recorded in 1996 when the Company set up a
reserve allowance due to uncertainty related to the collectibility of the note
receivable from Stratosphere. However, a full valuation allowance was created
for the deferred tax asset and no income tax benefit was recognized at that
time. Upon writing off the receivable and realizing the tax deduction in 1998,
the Company reversed the deferred tax asset valuation allowance, resulting in
the recognition of a $17.3 million income tax benefit. Under the terms of its
tax sharing agreement with Grand, any further tax benefits relating to capital
losses resulting from the Company's write-off of its investment in Stratosphere
will be shared equally by Lakes and Park Place, up to a benefit of approximately
$12 million to Lakes.
Earnings per Common Share and Net Earnings. For the fiscal year ended
January 2, 2000 basic and diluted earnings per common share were $2.72 and
$2.67, respectively. This compares to basic and diluted earnings per common
share of $5.80 and $5.71, respectively, for the fiscal year ended January 3,
1999. Earnings decreased $32.3 million to $28.8 million for the fiscal year
ended January 2, 2000 compared to the same period in the prior year.
FISCAL YEAR ENDED JANUARY 3, 1999 COMPARED TO FISCAL YEAR ENDED DECEMBER 28,
1997
Revenues. Grand Casino Mille Lacs, Grand Casino Hinckley, Grand Casino
Avoyelles and Grand Casino Coushatta generated $92.3 million in management fee
income during the fiscal year ended January 3,
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1999 as compared to $78.5 million for the prior year's comparable period. Gross
revenue increases at Grand Casino Hinckley, Grand Casino Avoyelles and Grand
Casino Coushatta offset the fact that the management contract for Grand Casino
Mille Lacs expired at the end of the first quarter. Contributing to the
increases was the early buyout of the Management Agreement for Grand Casino
Hinckley by the Mille Lacs Band of Ojibwe in December, 1998. Under the early
buyout agreement, the Company was compensated for the management fees it would
have received had it managed Grand Casino Hinckley through the original contract
expiration date which was May, 1999. Also contributing to the increases were a
378-room hotel at Grand Casino Hinckley, which opened in November of 1997, and a
special events center and RV resort at Grand Casino Avoyelles, which opened
during the first quarter of 1998.
1998 results include $36.8 million in revenues from the management
contracts for Grand Casino Mille Lacs and Grand Casino Hinckley that concluded
during 1998. The Company's revenues and earnings will not include contributions
from these operations going forward.
Costs and Expenses. Total costs and expenses were $16.4 million for the
fiscal year ended January 3, 1999 compared to $8.8 million for the same period
in the prior year. Selling, general, and administrative expenses increased in
the amount of $6.7 million from $7.9 million for the fiscal year ended December
28, 1997 to $14.6 million for the fiscal year ended January 3, 1999 due to
legal, professional and other costs associated with separating Lakes from Grand.
Other. Interest income was $5.6 million and $5.9 million for the fiscal
years ended January 3, 1999 and December 28, 1997, respectively. Interest
expense was $0.1 million for both periods.
Taxes. A deferred tax asset was recorded in 1996, when the Company set up
a reserve allowance due to uncertainty related to the collectibility of the note
receivable from Stratosphere. However, a full valuation allowance was created
for the deferred tax asset and no income tax benefit was recognized at that
time. Upon writing off the receivable and realizing the tax deduction in 1998,
the Company reversed the deferred tax asset valuation allowance, resulting in
the recognition of a $17.3 million income tax benefit. Under the terms of its
tax sharing agreement with Grand, any further tax benefits relating to capital
losses resulting from the Company's write-off of its investment in Stratosphere
will be shared equally by Lakes and Park Place, up to a benefit of approximately
$12 million to Lakes.
Earnings per Common Share and Net Earnings. For the fiscal year ended
January 3, 1999 basic and diluted earnings per common share were $5.80 and
$5.71, respectively. This compares to basic and diluted earnings of $4.32 and
$4.20 per share for the fiscal year ended December 28, 1997. Earnings increased
$16 million to $61.2 million for the fiscal year ended January 3, 1999 compared
to the same period in the prior year, primarily due to increased management fee
income from each of the casino operations.
CAPITAL RESOURCES, CAPITAL SPENDING, AND LIQUIDITY
At January 2, 2000 Lakes had $36.5 million in restricted and unrestricted
cash and cash equivalents. At January 2, 2000, the Company also had $27.4
million in short-term, available-for-sale investments, consisting primarily of a
fixed income portfolio made up of various types of bonds which are rated A1 or
better. The cash and short-term investment balances are planned to be used for
loans to current tribal partners to help develop existing operations, the
pursuit of additional gaming and non-gaming opportunities, and settlement of
pending litigation matters.
For the years ended January 2, 2000, January 3, 1999, and December 28,
1997, net cash provided by operating activities totaled $8.1 million, $85.8
million, and $35.8 million, respectively. During 1999, $27.4 million of cash and
cash equivalents were reclassified as short-term investments. For the years
ended January 2, 2000, January 3, 1999, and December 28, 1997, proceeds from
repayment of notes receivable amounted to $12.0 million, $6.6 million, and $6.1
million, respectively. Also during these periods, payments for land held for
development amounted to $22.9 million, $11.2 million, and $13.2 million,
respectively.
As security to support Lakes' indemnification obligations to Grand under
each of the Distribution Agreement and the Merger Agreement, and as a condition
to the consummation of the Merger, Lakes agreed to deposit, in trust for the
benefit of Grand, as a wholly owned subsidiary of Park Place, an aggregate of
$30 million, consisting of four annual installments of $7.5 million, on each
annual anniversary of the Distribution and Merger. Lakes' ability to satisfy
this funding obligation is materially dependent upon the continued success of
its operations and the general risks inherent in its business. In the event
Lakes is unable to satisfy its funding obligation, it would be in breach of its
agreement with Grand, possibly subjecting itself to additional liability for
contract damages, which could have a material adverse effect on Lakes' business
and
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results of operations. The Company made the first deposit of $7.5 million on
December 31, 1999, and such amount is included as restricted cash on the
accompanying consolidated balance sheet as of January 2, 2000.
THE YEAR 2000 ISSUE
The Year 2000 issue was the result of computer programs being written using
two digits rather than four digits to define the applicable year. Any programs
that have time-sensitive software may have recognized a date using "00" as the
year 1900 rather than the year 2000. If not remedied, this could have resulted
in system failure or miscalculations.
The Company assessed the impact of the Year 2000 on its computer systems,
both hardware and software, and developed a plan to timely address the Year 2000
issue. The Company and its currently managed properties spent approximately $1.1
million in the execution of the Year 2000 plan. These expenditures were charged
to expense or capitalized in accordance with appropriate accounting policies. To
date there have been no material adverse consequences, nor does the Company
believe that there will be any future material adverse consequences to the
Company's business, operations, or financial condition from the Year 2000 issue.
However, there can be no assurances that failure to address the Year 2000 issue
by a third party on whom the Company's systems rely, will not have a material
adverse effect on the Company.
SEASONALITY
The Company believes that the operations of all casinos managed by the
Company are affected by seasonal factors, including holidays, weather and travel
conditions.
REGULATION AND TAXES
The Company is subject to extensive regulation by state gaming authorities.
The Company will also be subject to regulation, which may or may not be similar
to current state regulations, by the appropriate authorities in any other
jurisdiction where it may conduct gaming activities in the future. Changes in
applicable laws or regulations could have an adverse effect on the Company.
The gaming industry represents a significant source of tax revenues. From
time to time, various federal legislators and officials have proposed changes in
tax law, or in the administration of such law, affecting the gaming industry. It
is not possible to determine the likelihood of possible changes in tax law or in
the administration of such law. Such changes, if adopted, could have a material
adverse effect on the Company's results of operations and financial results.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
integrated Form 10-K/Annual Report and other materials filed or to be filed by
the Company with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company) contain statements that are forward-looking, such as plans for
future expansion and other business development activities as well as other
statements regarding capital spending, financing sources and the effects of
regulation (including gaming and tax regulation) and competition.
Such forward looking information involves important risks and uncertainties
that could significantly affect the anticipated results in the future and,
accordingly, actual results may differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company.
These risks and uncertainties include, but are not limited to, those
relating to development and construction activities, dependence upon existing
management, pending litigation, domestic or global economic conditions and
changes in federal or state tax laws or the administration of such laws and
changes in gaming laws or regulations (including the legalization of gaming in
certain jurisdictions). For further information regarding the risks and
uncertainties, see the "Business -- Risk Factors" section of this Annual Report
on Form 10-K for the fiscal year ended January 2, 2000.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
LAKES GAMING, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
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LAKES GAMING, INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................... 25
Consolidated Balance Sheets as of January 2, 2000 and
January 3, 1999........................................... 26
Consolidated Statements of Earnings for the fiscal years
ended January 2, 2000, January 3, 1999, and December 28,
1997...................................................... 27
Consolidated Comprehensive Statements of Earnings for the
fiscal years ended January 2, 2000, January 3, 1999, and
December 28, 1997......................................... 28
Consolidated Statements of Shareholders' Equity for the
fiscal years ended January 2, 2000, January 3, 1999, and
December 28, 1997......................................... 29
Consolidated Statements of Cash Flows for the fiscal years
ended January 2, 2000, January 3, 1999, and December 28,
1997...................................................... 30
Notes to Consolidated Financial Statements.................. 31
24
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Lakes Gaming, Inc.
We have audited the accompanying consolidated balance sheets of Lakes
Gaming, Inc. (a Minnesota corporation) and Subsidiaries as of January 2, 2000
and January 3, 1999 and the related consolidated statements of earnings,
comprehensive earnings, shareholders' equity and cash flows for each of the
three years in the period ended January 2, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lakes
Gaming, Inc. and Subsidiaries as of January 2, 2000 and January 3, 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended January 2, 2000, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
January 28, 2000
25
26
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
1999 1998
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 24,392 $ 56,774
Short-term investments.................................... 27,433 --
Current installments of notes receivable.................. 15,406 8,561
Accounts receivable....................................... 5,613 15,217
Other current assets...................................... 7,380 8,126
-------- --------
Total Current Assets........................................ 80,224 88,678
-------- --------
Property and Equipment-Net.................................. 1,888 1,265
-------- --------
Other Assets:
Land held for development................................. 54,812 26,647
Notes receivable-less current installments................ 20,022 25,118
Cash and cash equivalents-restricted...................... 12,149 4,992
Investments in and notes from unconsolidated affiliates... 8,446 8,590
Other long-term assets.................................... 5,997 6,079
-------- --------
Total Other Assets.......................................... 101,426 71,426
-------- --------
TOTAL ASSETS................................................ $183,538 $161,369
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 488 $ --
Income taxes payable...................................... 6,385 10,811
Litigation and claims accrual............................. 8,419 10,554
Other accrued expenses.................................... 6,099 4,625
-------- --------
Total Current Liabilities................................... 21,391 25,990
-------- --------
Long-term Liabilities:
Long-term debt-less current installments.................. 1,500 975
Deferred income taxes..................................... 786 2,733
-------- --------
Total Long-Term Liabilities................................. 2,286 3,708
-------- --------
TOTAL LIABILITIES........................................... 23,677 29,698
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
Shareholders' Equity:
Capital stock, $.01 par value; authorized 100,000 shares;
10,629 and 10,576 common shares issued and outstanding
at January 2, 2000, and January 3, 1999,
respectively........................................... 106 106
Additional paid-in-capital................................ 131,406 130,929
Accumulated other comprehensive earnings (loss)........... (478) 636
Retained earnings......................................... 28,827 --
-------- --------
Total Shareholders' Equity.................................. 159,861 131,671
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $183,538 $161,369
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
26
27
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED JANUARY 2, 2000, JANUARY 3, 1999 AND DECEMBER 28, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998 1997
------- ------- -------
REVENUES:
Management fee income..................................... $54,716 $92,347 $78,515
COSTS AND EXPENSES:
Selling, general and administrative....................... 7,750 14,557 7,916
Depreciation and amortization............................. 1,916 1,838 890
------- ------- -------
Total Costs and Expenses.................................... 9,666 16,395 8,806
------- ------- -------
EARNINGS FROM OPERATIONS.................................... 45,050 75,952 69,709
------- ------- -------
OTHER INCOME (EXPENSE):
Interest income........................................... 7,580 5,601 5,940
Interest expense.......................................... (98) (98) (98)
Equity in loss of unconsolidated affiliates............... (2,925) (359) (942)
Gain (loss) on sale of securities......................... 1,264 (4,473) --
Other..................................................... 21 368 117
------- ------- -------
Total other income, net................................ 5,842 1,039 5,017
------- ------- -------
Earnings before income taxes................................ 50,892 76,991 74,726
Provision for income taxes.................................. 22,065 15,811 29,523
------- ------- -------
NET EARNINGS................................................ $28,827 $61,180 $45,203
======= ======= =======
BASIC EARNINGS PER SHARE.................................... $ 2.72 $ 5.80 $ 4.32
======= ======= =======
DILUTED EARNINGS PER SHARE.................................. $ 2.67 $ 5.71 $ 4.20
======= ======= =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.................. 10,600 10,550 10,475
DILUTIVE EFFECT OF STOCK COMPENSATION PROGRAMS.............. 186 162 284
======= ======= =======
WEIGHTED AVERAGE COMMON AND DILUTED SHARES OUTSTANDING...... 10,786 10,712 10,759
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
27
28
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
YEARS ENDED JANUARY 2, 2000, JANUARY 3, 1999, AND DECEMBER 28, 1997
(IN THOUSANDS)
1999 1998 1997
------- ------- -------
NET EARNINGS................................................ $28,827 $61,180 $45,203
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) during the period.... (1,114) 3,583 (4,307)
Less: reclassification adjustment for gains (losses)
included in net earnings............................. 796 (2,818) --
------- ------- -------
COMPREHENSIVE EARNINGS...................................... $28,509 $61,945 $40,896
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
28
29
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JANUARY 2, 2000, JANUARY 3, 1999, AND DECEMBER 28, 1997
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK OTHER TOTAL
--------------- ADDITIONAL DIVISION RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT PAID-IN-CAPITAL EQUITY EARNINGS EARNINGS(LOSS) EQUITY
------ ------ --------------- -------- -------- --------------- -------------
Balance, December 29, 1996........ -- -- -- $102,224 -- $1,360 $103,584
Distribution to Grand Casinos,
Inc........................... -- -- -- (25,682) -- -- (25,682)
Other comprehensive earnings.... -- -- -- -- -- (4,307) (4,307)
Net earnings.................... -- -- -- 45,203 -- -- 45,203
------ ---- -------- -------- ------- ------ --------
Balance, December 28, 1997........ -- -- -- 121,745 -- (2,947) 118,798
Distribution to Grand Casinos,
Inc........................... -- -- -- (51,890) -- -- (51,890)
Other comprehensive earnings.... -- -- -- -- -- 3,583 3,583
Net earnings.................... -- -- -- 61,180 -- -- 61,180
Distribution from Grand Casinos,
Inc........................... 10,576 106 130,929 (131,035) -- -- --
------ ---- -------- -------- ------- ------ --------
Balance, January 3, 1999.......... 10,576 106 130,929 -- -- 636 131,671
Issuance of stock on options
exercised -- net.............. 53 -- 477 -- -- -- 477
Other comprehensive earnings.... -- -- -- -- -- (1,114) (1,114)
Net earnings.................... -- -- -- -- 28,827 -- 28,827
------ ---- -------- -------- ------- ------ --------
Balance, January 2, 2000.......... 10,629 $106 $131,406 $ -- $28,827 ($ 478) $159,861
====== ==== ======== ======== ======= ====== ========
The accompanying notes are an integral part of these consolidated financial
statements.
29
30
LAKES GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 2, 2000, JANUARY 3, 1999 AND DECEMBER 28, 1997
(IN THOUSANDS)
1999 1998 1997
------- ------- -------
OPERATING ACTIVITIES:
Net earnings.............................................. $28,827 $61,180 $45,203
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization............................. 1,916 1,838 890
(Gain) loss on sale of securities......................... (1,264) 4,473 --
Equity in loss of unconsolidated affiliates............... 2,925 359 942
Deferred income taxes..................................... (276) (1,040) (2,930)
Changes in operating assets and liabilities:
Accounts receivable.................................... 9,604 (8,792) 1,571
Income taxes........................................... (4,638) 23,596 (9,357)
Accounts payable....................................... 488 -- 45
Accrued expenses....................................... (661) 6,193 1,037
Other.................................................. (465) (2,040) (1,650)
------- ------- -------
Net Cash Provided by Operating Activities................... 36,456 85,767 35,751
------- ------- -------
INVESTING ACTIVITIES:
Short-term investments, purchases......................... (28,829) -- --
Short-term investments, sales/maturities.................. 500 -- --
Payments for land held for development.................... (22,949) (11,229) (13,153)
Payments for notes receivable............................. (12,406) (7,115) (1,825)
Proceeds from repayment of notes receivable............... 11,950 6,567 6,144
Investment in and notes receivable from unconsolidated
affiliates............................................. (8,035) (807) (336)
Increase in restricted cash, net.......................... (7,157) (3,767) --
Decrease (increase) in other long-term assets............. (2,539) 1,216 (1,435)
Proceeds from sale of securities.......................... 389 4,824 --
Payments for property and equipment, net.................. (239) -- (99)
------- ------- -------
Net Cash Used in Investing Activities....................... (69,315) (10,311) (10,704)
------- ------- -------
FINANCING ACTIVITIES:
Distribution to Grand..................................... -- (51,890) (25,682)
Proceeds from issuance of common stock.................... 477 -- --
Payments on long-term debt................................ -- -- (9)
------- ------- -------
Net Cash Provided by (Used in) Financing Activities......... 477 (51,890) (25,691)
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (32,382) 23,566 (644)
Cash and cash equivalents -- beginning of period............ 56,774 33,208 33,852
------- ------- -------
Cash and cash equivalents -- end of period.................. $24,392 $56,774 $33,208
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.................................................. $ 98 $ 98 $ 98
Income taxes.............................................. 23,676 5,420 41,504
The accompanying notes are an integral part of these consolidated financial
statements.
30
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 2000, JANUARY 3, 1999, AND DECEMBER 28, 1997
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Lakes Gaming, Inc., a Minnesota corporation ("Lakes" or the "Company") was
established as a public corporation on December 31, 1998, via a distribution
(the "Distribution") of its common stock, par value $.01 per share (the "Common
Stock") to the shareholders of Grand Casinos, Inc. ("Grand"). Pursuant to the
terms of a Distribution Agreement entered into between Grand and Lakes and dated
as of December 31, 1998 (the "Distribution Agreement"), Grand shareholders
received .25 shares of Lakes Common Stock for each share held in Grand.
Historical references to the Company which predate the Distribution give pro
forma effect to the Distribution as if it had already occurred.
Immediately following the Distribution, Grand merged with a subsidiary of
Park Place Entertainment Corporation, a Delaware corporation ("Park Place"),
pursuant to which Grand became a wholly owned subsidiary of Park Place (the
"Merger"), Grand shareholders received one share of Park Place common stock in
the Merger for each share they held in Grand. Both transactions are hereinafter
referred to as the Transaction. The Transaction received shareholder and
regulatory approvals and was completed on December 31, 1998. Grand obtained a
ruling from the Internal Revenue Service (IRS) that the Distribution qualified
as a tax-free transaction, solely with respect to Grand shareholders except to
the extent that Grand shareholders received cash in lieu of fractional shares.
Lakes manages Indian-owned casinos and owns certain other assets related to
potential gaming-related development. The Company manages two Indian-owned
casinos in Louisiana and previously managed two Minnesota casinos through April
4, 1998 and November 30, 1998. The Company had written off or reserved for its
investments and other related costs in Stratosphere Corporation (Stratosphere),
which owns the Stratosphere Tower, Casino and Hotel in Las Vegas, Nevada, as of
December 29, 1996 in the amount of $161 million. The Company has not recorded
any results of Stratosphere's operations in 1997, 1998 or 1999. Stratosphere is
the subject of Chapter 11 bankruptcy proceedings. See Note 8 for further
discussion. The Second Amended Plan has been approved by the Bankruptcy Court
and was declared effective on October 14, 1998. As such, all Stratosphere stock
owned by Lakes has been canceled.
MANAGEMENT CONTRACTS OF LIMITED DURATION
The ownership, management and operation of gaming facilities are subject to
extensive federal, state, provincial, tribal and/or local laws, regulation, and
ordinances, which are administered by the relevant regulatory agency or agencies
in each jurisdiction. These laws, regulations and ordinances vary from
jurisdiction to jurisdiction, but generally concern the responsibility,
financial stability and character of the owners and managers of gaming
operations as well as persons financially interested or involved in gaming
operations. The Company is prohibited by the Indian Gaming Regulatory Act from
having an ownership interest in any casino it manages for Indian tribes.
Management contracts for the two previously managed Minnesota casinos,
Grand Casino Mille Lacs and Grand Casino Hinckley concluded during 1998. The
current management contracts for Grand Casino Avoyelles and Grand Casino
Coushatta expire June 3, 2001 and January 16, 2002, respectively. The Coushatta
Tribe and Lakes have agreed on a five-year contract renewal beginning January
17, 2002, subject to NIGC approval. Net distributable profits, if any, under the
new agreement will be determined in accordance with IGRA and distributed each
month 90% to the Coushatta Tribe and 10% to Lakes. There can be no assurance
that the Louisiana management contracts will be renewed upon expiration or
approved by NIGC upon any such renewal. The failure to renew the Company's
management contracts would result in the loss of revenues to the Company derived
from such contracts, which would have a material adverse effect on the Company's
results of operations. The Coushatta Tribe and the Tunica-Biloxi Tribe each
entered into tribal-state compacts with the State of Louisiana on September 29,
1992. These compacts were approved in November 1992 by the Secretary of the
Interior. The compact for the Coushatta Tribe expired November 4, 1999, and the
compact for the Tunica-Biloxi Tribe expired November 18, 1999, and the State of
Louisiana has delivered a written notice of non-renewal. The Governor and each
Tribe have agreed on a six-month extension which has been approved by the
Department of the Interior.
The Coushatta Tribe and the Tunica-Biloxi Tribe are actively negotiating
with the State of Louisiana terms for a new compact. In the event the compacts
are not renewed, gaming may not be permitted at Grand
31
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 2000, JANUARY 3, 1999, AND DECEMBER 28, 1997 -- (CONTINUED)
Casino Avoyelles or Grand Casino Coushatta. There can be no assurance that these
compacts will be renewed on acceptable terms and conditions.
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 reported amounts of revenues and expenses during the
reporting period. Ultimate results could differ from those estimates.
YEAR END
The Company has a 52- or 53-week accounting period ending on the Sunday
closest to December 31 of each year. The Company's fiscal years for the periods
shown on the accompanying consolidated statements of earnings ended on January
2, 2000 (1999), January 3, 1999 (1998), and December 28, 1997 (1997). The
activity from the date of the Transaction to January 3, 1999 was not segregated
from the full year's results as it was not material.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Lakes and its
wholly-owned and majority-owned subsidiaries. Investments in unconsolidated
affiliates representing between 20% and 50% of voting interests are accounted
for on the equity method. All material intercompany balances and transactions
have been eliminated in consolidation.
Lakes' investments in unconsolidated affiliates include a 27 percent
ownership interest in Fanball.com, Inc., a start-up internet provider of fantasy
sports services, and a 23 percent ownership interest in Interactive Learning
Group, Inc., a consumer product company. Lakes invested $3.4 million and $3
million in Fanball.com and Interactive Learning Group, respectively, at the end
of the second quarter of 1999. Additionally, as a result of its spin-off from
Grand, Lakes received a 49 percent ownership interest in Trak 21 Development,
LLC, a developer of player tracking systems for the casino industry, and a 27
percent ownership interest in New Horizon Kids Quest, Inc., a publicly held
provider of child care facilities.
REVENUE AND EXPENSES
Revenue from the management of Indian-owned casino gaming facilities is
recognized when earned according to the terms of the management contracts.
The operating expenses of the Company include the costs associated with the
management of all gaming operations for which the Company has a management
contract. Such amounts represent the direct cost of providing assistance in the
areas of casino operations, marketing and promotion, customer service,
accounting, legal and other functions.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and in banks,
interest-bearing deposits, money market funds and other instruments with
original maturities of three months or less. Restricted cash and cash
equivalents consist primarily of funds deposited as security to support Lakes'
indemnification obligations to Grand under each of the Distribution Agreement
and the Merger Agreement, and funds designated as collateral relating to land
held for development. Cash and cash equivalents are stated at cost which
approximates fair value.
SHORT-TERM INVESTMENTS
Investment securities are classified as available-for-sale and stated at
market value. Unrealized gains and losses, net of income tax effects, are
excluded from income and reported as a component of accumulated other
comprehensive income. Market value is determined by the most recently traded
price of the security at the balance sheet date. Net realized gains or losses
are determined on the specific identification cost method.
32
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 2000, JANUARY 3, 1999, AND DECEMBER 28, 1997 -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Expenditures for additions, renewals, and improvements are capitalized. Costs of
repairs and maintenance are expensed when incurred. Depreciation and
amortization of property and equipment is computed using the straight-line
method over the following estimated useful lives:
Leasehold improvements...................................... 15 years
Furniture and equipment..................................... 3-10 years
Property and Equipment consist of the following (in thousands):
1999 1998
------ ------
Land.................................................. 1,234 709
Leasehold improvements................................ 376 376
Furniture and equipment............................... 1,466 1,227
------ ------
3,076 2,312
Less: Accumulated depreciation........................ (1,188) (1,047)
------ ------
Property and equipment, net........................... 1,888 1,265
====== ======
The Company periodically evaluates whether events and circumstances have
occurred that may affect the recoverability of the net book value of its
long-lived assets. If such events or circumstances indicate that the carrying
amount of an asset may not be recoverable, the Company estimates the future cash
flows expected to result from the use of the asset. If the sum of the expected
future undiscounted cash flows does not exceed the carrying value of the asset,
the Company will recognize an impairment loss.
LAND HELD FOR DEVELOPMENT
Land held for development consists of amounts related to an approximately
15-acre site in Las Vegas, Nevada, which the Company controls. All or any
portion of this site may be sold, held for sale or held for future development.
The Company is currently evaluating the potential sale of all or any portion of
this site and in connection therewith has entered into a listing agreement with
a real estate broker for the active marketing of this site.
SECURITIES AVAILABLE FOR SALE
The Company follows the provisions of Statement on Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" and has classified all of its investments (except restricted cash
reserves) as available for sale, whereby investments are reported at fair value,
with unrealized gains and losses reported as accumulated other comprehensive
earnings (loss), net of income taxes, in the accompanying consolidated
statements of shareholders' equity.
On October 15, 1998, Hollywood Park and Casino Magic completed a merger
agreement under which Hollywood Park purchased each outstanding share of Casino
Magic common stock for $2.27 of cash per share. As a result of this transaction,
the Company realized a loss of approximately $2.9 million, net of tax, on the
2,126,000 shares of Casino Magic common stock it owned at the time of the
Merger.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The Company classifies
deferred tax liabilities and assets into current and non-current amounts based
on the classification of the related assets and liabilities.
33
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 2000, JANUARY 3, 1999, AND DECEMBER 28, 1997 -- (CONTINUED)
INTEREST INCOME
Interest income represents interest on the notes receivable from Indian
tribes and interest on cash, cash equivalents and short-term investments.
Interest on the notes receivable is recorded as earned based on contractual
rates of interest. Interest on cash, cash equivalents and short-term investments
reflects interest income realized from investments in savings and money market
accounts and other short-term liquid investments.
EARNINGS PER SHARE
Earnings per share (EPS) is calculated for the periods ended January 3,
1999 and December 28, 1997 based on the exchange of one Lakes share for every
four owned Grand shares. For all periods, basic EPS is calculated by dividing
earnings by the weighted average common shares outstanding. Diluted EPS reflects
the potential dilutive effect of all common stock equivalents outstanding by
dividing net income by the weighted average of all common and dilutive shares
outstanding.
CONCENTRATIONS OF CREDIT RISK
The financial instruments that subject the Company to concentrations of
credit risk consist principally of accounts and notes receivable. Notes
receivable are due primarily from the Tunica-Biloxi Tribe of Louisiana and the
Coushatta Tribe of Louisiana.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 137 deferred the effective date of
SFAS No. 133 to fiscal quarters of all fiscal years beginning after June 15,
2000. The Company believes that the adoption of SFAS No. 133 will not have a
material impact on the Company financial statements.
2. MANAGEMENT CONTRACTS FOR INDIAN-OWNED CASINOS:
The Company had contracts with the Mille Lacs Band for the management of
two gaming facilities in Onamia and Hinckley, Minnesota. The management contract
for the gaming facility in Onamia expired on April 2, 1998. The Company reached
an agreement with the Mille Lacs Band of Ojibwe, effective December 1, 1998, for
the early buyout of the management contract for the facility in Hinckley. The
Mille Lacs Band elected to exercise its option for the early buyout of the
contract that was scheduled to expire on May 15, 1999.
The early buyout of the contract was provided in the original seven-year
management agreement and the Company received full value for all contracted
obligations by the Mille Lacs Band. Under the early buyout agreement, the
Company was compensated for the management fees the company would have received
had it managed Grand Casino Hinckley through the original contract expiration
date.
1998 results include $36.8 million in revenues from the management
contracts for Grand Casino Mille Lacs and Grand Casino Hinckley that concluded
during 1998. The Company's revenues and earnings will not include contributions
from these operations going forward.
In addition, the Company holds a management contract with the Tunica-Biloxi
Tribe of Louisiana for a gaming facility in Marksville, Louisiana, that expires
on June 3, 2001 and a management contract with the Coushatta Tribe of Louisiana
for a gaming facility in Kinder, Louisiana, that expires on January 16, 2002.
The Coushatta Tribe and Lakes have agreed on a five-year contract renewal
beginning January 17, 2002, subject to NIGC approval. Net distributable profits,
if any, under the new agreement will be determined in accordance with IGRA and
distributed each month 90% to the Coushatta Tribe and 10% to Lakes.
The management contracts govern the relationship between the Company and
the tribes with respect to the construction and management of the casinos. The
construction or remodeling portion of the agreements commenced with the signing
of the respective contracts and continued until the casinos opened for business;
thereafter, the management portion of the respective management contracts
continues for a period of seven years.
34
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 2000, JANUARY 3, 1999, AND DECEMBER 28, 1997 -- (CONTINUED)
Under the terms of the contracts, the Company, as manager of the casino,
receives a percentage of the distributable profits (as defined in the contract)
of the operations as a management fee after payment of certain priority
distributions, a cash contingency reserve, and guaranteed minimum payments to
the Tribes.
In the event the management contracts are not renewed upon expiration of
their initial term, the Company will be entitled to payments equal to a
percentage of the fair value of certain leased gaming equipment.
The management contracts for the Tunica-Biloxi Tribe of Louisiana and the
Coushatta Tribe of Louisiana have been approved by the Bureau of Indian Affairs
(BIA). While the Company believes that all of its management contracts meet all
requirements of the Indian Gaming Regulatory Act of 1988, the BIA or the NIGC
may attempt to reduce the terms or the management fees payable under the
management contracts or require other changes to the contracts.
3. NOTES RECEIVABLE:
Notes receivable consist of the following (in thousands):
JANUARY 2, 2000 JANUARY 3, 1999
--------------- ---------------
Notes from the Coushatta Tribe with interest at a defined
reference rate plus 1% (not to exceed 16%) (9.5% at
January 2, 2000), receivable in 84 monthly installments
through January 2002...................................... $ 22,484 $24,392
Notes from the Tunica-Biloxi Tribe with interest at a
defined reference rate plus 1% (not to exceed 16%) (9.5%
at January 2, 2000), receivable in 84 monthly installments
through June 2001......................................... 6,196 9,287
Other....................................................... 6,748 --
-------- -------
Total notes receivable.................................... 35,428 33,679
Less -- current installments of notes receivable............ (15,406) (8,561)
-------- -------
Notes receivable, less current installments............... $ 20,022 $25,118
======== =======
The notes receivable are generally advances made to Indian Tribes for the
development of gaming properties managed by the Company. The repayment terms are
specific to each tribe and are largely dependent upon the operating performance
of each gaming property. Repayments of the aforementioned notes receivable from
the Coushatta Tribe and the Tunica-Biloxi Tribe is required to be made only if
distributable profits are available from the operation of the related casinos.
Repayments are also the subject of certain distribution priorities specified in
the management contracts. In addition, repayment of the notes receivable and the
manager's fees under the management contracts are subordinated to certain other
financial obligations of the respective tribes. Through January 2, 2000, no
amounts have been withheld under these provisions.
Management periodically evaluates the recoverability of such notes
receivable based on the current and projected operating results of the
underlying facility and historical collection experience. No impairment losses
on such notes receivable have been recognized through January 2, 2000.
The Company believes the costs and complexities of assembling the relevant
facts and comparables needed to appraise the fair market values of these notes
based on estimates of net present value of discounted cash flows or using other
valuation techniques are excessive and the process exceedingly time consuming.
It further believes that the determined results would not reasonably differ from
the carrying values, which are believed to be reasonable estimates of fair
market value based on past experience with similar receivables.
35
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 2000, JANUARY 3, 1999, AND DECEMBER 28, 1997 -- (CONTINUED)
4. INCOME TAXES:
The provisions for income taxes attributable to earnings for 1999, 1998,
and 1997 consisted of the following (in thousands):
YEARS ENDED
-----------------------------
1999 1998 1997
------- ------- -------
Current:
Federal................................................... $17,649 $14,482 $30,307
State..................................................... 4,692 2,369 2,146
------- ------- -------
22,341 16,851 32,453
Deferred.................................................... (276) (1,040) (2,930)
------- ------- -------
$22,065 $15,811 $29,523
======= ======= =======
Reconciliations of the statutory federal income tax rate to the Company's
actual rate based on earnings before income taxes for 1999, 1998, and 1997 are
summarized as follows:
YEARS ENDED
---------------------
1999 1998 1997
---- ----- ----
Statutory federal tax rate.................................. 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit....... 6.0 2.0 1.9
Valuation allowance increases (decreases) on Stratosphere
losses and write-down..................................... -- (22.5) --
Other, net.................................................. 2.4 6.0 2.6
---- ----- ----
43.4% 20.5% 39.5%
==== ===== ====
The Company's deferred income tax liabilities and assets are as follows (in
thousands):
1999 1998
------- -------
Current deferred tax asset:
Accruals, reserves and other.............................. $ 6,301 $ 7,370
======= =======
Non-current deferred taxes:
Unrealized investment losses (gains)...................... 1,815 (114)
Capitalized interest...................................... (1,737) (1,483)
Development cost amortization............................. (784) (960)
Other..................................................... (80) (176)
------- -------
Net non-current deferred tax liability...................... $ (786) $(2,733)
======= =======
A deferred tax asset was recorded in 1996 when the Company set up a reserve
allowance due to uncertainty related to the collectability of a note receivable
from Stratosphere. However, a full valuation allowance was created for the
deferred tax asset and no income tax benefit was recognized at that time.
Upon writing off the receivable and realizing the tax deduction in 1998,
the Company reversed the deferred tax asset valuation allowance resulting in the
recognition of a $17.3 million income tax benefit. Under the terms of its tax
sharing agreement with Grand, any further tax benefits relating to capital
losses resulting from the Company's write-off of its investment in Stratosphere
will be shared equally by Lakes and Park Place up to a benefit of approximately
$12.0 million to Lakes.
5. LONG-TERM DEBT:
The Company has two notes payable with third parties. The first is
collateralized by certificates of deposit, with $1.0 million outstanding at
January 2, 2000 and January 3, 1999. Interest is compounded and paid on a
quarterly basis at 10%. The principal and any unpaid interest are due December
22, 2002. The
36
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 2000, JANUARY 3, 1999, AND DECEMBER 28, 1997 -- (CONTINUED)
second is collateralized by property with $0.5 million outstanding at January 2,
2000. Interest is compounded and paid on a quarterly basis at 8.5%. The
principal and any unpaid interest are due November 5, 2001.
6. STOCK OPTIONS:
Grand had a Stock Option and Compensation Plan and a Director Stock Option
Plan whereby incentive and nonqualified stock options and other awards to
acquire shares of Grand's common stock were granted to officers, directors, and
employees.
Upon the consummation of the Transaction, the holders of outstanding Grand
stock options received one new option to purchase one share of Lakes common
stock for each four options previously held, and one new option to purchase one
share of Park Place common stock for each option previously held. The exercise
price of the new options was apportioned between Lakes and Park Place to
preserve option value as it existed on December 31, 1998 as measured by the
difference between the option exercise price and the fair market value of Grand
on that date. This value was calculated by reference to the closing price of
Lakes on January 4, 1999 and the closing price of Grand on December 31, 1998.
Additionally, Lakes has a 1998 Stock Option and Compensation Plan and a 1998
Director Stock Option Plan which are approved to grant up to an aggregate of 2.5
million shares and .2 million shares, respectively, of incentive and
non-qualified stock options to officers, directors, and employees.
Information with respect to the stock option plans is summarized as
follows:
NUMBER OF COMMON SHARES
------------------------------------------
LAKES
OPTIONS AVAILABLE OPTION PRICE
OUTSTANDING FOR GRANT RANGE PER SHARE
----------- ---------- ---------------
Balance at January 3, 1999............................ 1,054,846 -- $(3.13 - 33.11)
Additional Shares Authorized.......................... -- 2,700,000 --
Granted............................................... 1,845,000 (1,845,000) (8.38 - 10.81)
Canceled.............................................. (527,526) 527,526 (7.42 - 33.11)
Exercised............................................. (52,467) -- (3.13 - 11.34)
--------- ---------- --------------
Balance at January 2, 2000............................ 2,319,853 1,382,526 $(7.42 - 17.72)
========= ========== ==============
Exercisable at January 2, 2000........................ 789,353
=========
The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS No. 123, the Company's net earnings (loss)
would have been as follows (in thousands):
1999 1998 1997
------- ------- -------
Net earnings (loss):
As reported............................................... $28,827 $61,180 $45,203
Pro forma................................................. 28,431 59,694 44,570
Net earnings (loss) per share:
As reported -- Basic...................................... $ 2.72 $ 5.80 $ 4.32
Pro forma -- Basic........................................ 2.68 5.66 4.25
As reported -- Diluted.................................... 2.67 5.71 4.20
Pro forma -- Diluted...................................... 2.64 5.57 4.14
37
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 2000, JANUARY 3, 1999, AND DECEMBER 28, 1997 -- (CONTINUED)
The SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, thus the resulting pro forma compensation cost
may not be representative of that to be expected in future years. The fair value
of each award under the option plans is estimated on the date of grant using the
Black-Scholes option-pricing model. The fair value of the options issued in 1999
range from $8.38 per share to $10.81 per share. The following assumptions were
used to estimate the fair value of options:
1999 1998 1997
---------- ---------- -----------
Risk-free interest rate........................... 5.20-6.50% 4.83-5.85% 6.04%-6.98%
Expected life..................................... 10 years 10 years 10 years
Expected volatility............................... .452-.485 .487-.509 .563-.629
Expected dividend yield........................... -- -- --
7. EMPLOYEE RETIREMENT PLAN:
Grand had a section 401(k) employee savings plan for all full-time
employees which upon consummation of the Transaction became Lakes' Plan. The
savings plan allows participants to defer, on a pretax basis, a portion of their
salary and accumulate tax-deferred earnings as a retirement fund. Eligibility is
based on years of service and minimum age requirements. Contributions are
invested, at the direction of the employee, in one or more available funds.
Lakes matches employee contributions up to a maximum of 4% of participating
employees' gross wages. The Company contributed $.03 million, $.03 million, and
$.02 million during 1999, 1998, and 1997, respectively. Company contributions
are vested over a period of five years.
8. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain property and equipment under non-cancelable
operating leases. Rent expense, under non-cancelable operating leases, exclusive
of real estate taxes, insurance, and maintenance expense was $1.3 million, $0.2
million, and $0.2 million for 1999, 1998, and 1997, respectively. Future minimum
lease payments, excluding contingent rentals, due under non-cancelable operating
leases as of January 2, 2000 are as follows (in thousands):
OPERATING LEASES
2000....................................................... 3,178
2001....................................................... 2,981
2002....................................................... 3,109
2003....................................................... 3,176
2004....................................................... 3,246
Thereafter................................................. 44,303
-------
$59,993
=======
PURCHASE OPTIONS
As a condition to the Merger, the Company has agreed to exercise its call
option to purchase the Shark Club property in Las Vegas, Nevada, not prior to
April 9, 2000 and not later than January 10, 2001. The option purchase price
would be approximately $10.1 million.
The Company also has an option to purchase the Travelodge property in Las
Vegas, Nevada for the purchase price of $30 million on October 31, 2017 and an
option to purchase the Cable property in Las Vegas, Nevada for the purchase
price of $18 million anytime prior to October 31, 2000.
LOAN GUARANTY AGREEMENTS
The Company has guaranteed a loan and security agreement entered into by
the Tunica-Biloxi Tribe of Louisiana for $16.5 million for the purpose of
purchasing a hotel and additional casino equipment. The agreement extends
through 2000, and as of January 2, 2000 and January 3, 1999, the amounts
outstanding were $2.0 million and $7.3 million, respectively.
38
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 2000, JANUARY 3, 1999, AND DECEMBER 28, 1997 -- (CONTINUED)
On May 1, 1997, the Company entered into a guaranty agreement related to a
loan agreement entered into by the Coushatta Tribe of Louisiana in the amount of
$25.0 million, for the purpose of constructing a hotel and acquiring additional
casino equipment. The guaranty will remain in effect until the loan is paid. The
loan term is approximately five years. As of January 2, 2000 and January 3,
1999, the amounts outstanding were $19.3 million and $19.6 million,
respectively.
INDEMNIFICATION AGREEMENT
As a part of the Transaction, the Company has agreed to indemnify Grand
against all costs, expenses and liabilities incurred in connection with or
arising out of certain pending and threatened claims and legal proceedings to
which Grand and certain of its subsidiaries are likely to be parties. The
Company's indemnification obligations include the obligation to provide the
defense of all claims made in proceedings against Grand and to pay all related
settlements and judgments.
As security to support Lakes' indemnification obligations to Grand under
each of the Grand Distribution Agreement and the Park Place Merger Agreement,
and as a condition to the consummation of the Merger, Lakes has agreed to
deposit, in trust for the benefit of Grand, as a wholly owned subsidiary of Park
Place, an aggregate of $30 million, to cover various commitments and
contingencies related to or arising out of, Grand's non-Mississippi business and
assets (including by way of example, but not limitation, tribal loan guarantees,
real property lease guarantees for Lakes' subsidiaries and director and
executive officer indemnity obligations) consisting of four annual installments
of $7.5 million, during the four-year period subsequent to the Effective Date of
the Transaction. Any surplus proceeds remaining after all the secured
obligations are indefeasibly paid in full and discharged shall be paid over to
Lakes. Lakes made the first deposit of $7.5 million on December 31, 1999 and
such amount is included as restricted cash on the accompanying balance sheet as
of January 2, 2000.
As part of the indemnification agreement, Lakes has agreed that it will not
declare or pay any dividends, make any distribution of Lakes' equity interests,
or otherwise purchase, redeem, defease or retire for value any equity interests
in Lakes without the written consent of Park Place.
The following summaries describe certain known legal proceedings to which
Grand is a party which Lakes has assumed, or with respect to which Lakes has
agreed to indemnify Grand, in connection with the Distribution.
STRATOSPHERE SHAREHOLDERS LITIGATION -- FEDERAL COURT
In August 1996, a complaint was filed in the U.S. District Court for the
District of Nevada -- Michael Ceasar, et al v. Stratosphere Corporation, et
al -- against Stratosphere and others, including Grand. The complaint was filed
as a class action, and sought relief on behalf of Stratosphere shareholders who
purchased their stock between December 19, 1995 and July 22, 1996. The complaint
included allegations of misrepresentations, federal securities law violations
and various state law claims.
In August through October 1996, several other nearly identical complaints
were filed by various plaintiffs in the U.S. District Court for the District of
Nevada.
The defendants in the actions submitted motions requesting that all of the
actions be consolidated. Those motions were granted in January 1997, and the
consolidated action is entitled In re: Stratosphere Corporation Securities
Litigation -- Master File No. CV-S-96-00708 PMP (RLH).
In February 1997, the plaintiffs filed a consolidated and amended complaint
naming various defendants, including Grand and certain current and former
officers and directors of Grand. The amended complaint includes claims under
federal securities laws and Nevada laws based on acts alleged to have occurred
between December 19, 1995 and July 22, 1996.
The Court has recently signed a scheduling order, which cuts off fact
discovery as of April 30, 2000 and expert discovery as of September 30, 2000.
The parties have submitted preliminary pretrial statements, which may be amended
after the completion of discovery.
In February 1997, various defendants, including Grand and Grand's officers
and directors named as defendants, submitted motions to dismiss the amended
complaint. Those motions were made on various
39
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 2000, JANUARY 3, 1999, AND DECEMBER 28, 1997 -- (CONTINUED)
grounds, including Grand's claim that the amended complaint failed to state a
valid cause of action against Grand and Grand's officers and directors.
In May 1997, the court dismissed the amended complaint. The dismissal order
did not allow the plaintiffs to further amend their complaint in an attempt to
state a valid cause of action.
In June 1997, the plaintiffs asked the court to reconsider its dismissal
order, and to allow the plaintiffs to submit a second amended complaint in an
attempt to state a valid cause of action. In July 1997, the court allowed the
plaintiffs to submit a second amended complaint.
In August 1997, the plaintiffs filed a second amended complaint. In
September 1997, certain of the defendants, including Grand and Grand's officers
and directors named as defendants, submitted a motion to dismiss the second
amended complaint. The motion was based on various grounds, including Grand's
claim that the second amended complaint failed to state a valid cause of action
against Grand and Grand's officers and directors.
In April 1998, the Court granted Grand's motion to dismiss, in part, and
denied the motion in part. Thus, the plaintiffs are pursuing the claims in the
second amended complaint that survived the motion to dismiss.
In June 1998, certain of the defendants, including Grand and Grand's
officers and directors named as defendants, submitted a motion for summary
judgment seeking an order that such defendants are entitled to judgment as a
matter of law. In December 1998, the plaintiffs completed fact discovery related
to the issues raised by the summary judgment motion. Expert discovery was
completed in March of 1999. All papers relating to this matter were filed on
June 1, 1999.
On October 6, 1999, the District Court entered its Order, granting in part
and denying in part, defendants' Motion for Summary Judgment and Summary
Adjudication. The Court dismissed all allegations in reference to (1) Phase II
funding levels; (2) "over-allotments uses", as stated in the December 19, 1995
Prospectus; (3) the purpose and use of the Grand Casino Completion Guaranty, as
stated in the June 6, 1996 Press Statement; (4) the vague expressions of general
optimism (issued within the December 19, 1995 Prospectus, the 10-Q and 10-K
Filings, press releases and other public statements) referred to in this Order;
(5) the adoption of statements in securities analysts reports; (6) the alleged
utterance of misleading statements before the Nevada Gaming Commission; and (7)
the temporary diversion of Phase II proceeds to fund Phase I. The remaining
claims relate to the accuracy of defendants' budgetary estimates issued in
Stratosphere's December 1995 Prospectus and SEC 10-Q and 10-K Reports. The Court
concluded that there were triable issues as to whether defendants misstated
anticipated construction costs or omitted to disclose material cost overruns.
The Court recently added the Company as an additional defendant because of
its indemnity obligation and stipulation. Park Place has opposed being added to
the litigation and plaintiffs' motion to add Park Place as a defendant is
pending.
STRATOSPHERE SHAREHOLDERS LITIGATION -- NEVADA STATE COURT
In August 1996, a complaint was filed in the District Court for Clark
County, Nevada -- Victor M. Opitz, et al v. Robert E. Stupak, et al -- Case No.
A363019 -- against various defendants, including Grand. The complaint seeks
relief on behalf of Stratosphere Corporation shareholders who purchased stock
between December 19, 1995 and July 22, 1996. The complaint alleges
misrepresentations, state securities law violations and other state claims.
Grand and certain defendants submitted motions to dismiss or stay the state
court action pending resolution of the federal court action described above. The
court has stayed further proceedings pending the resolution of In re:
Stratosphere Securities Litigation.
GRAND CASINOS, INC. SHAREHOLDERS LITIGATION
In September and October 1996, two actions were filed by Grand shareholders
in the U.S. District Court for the District of Minnesota against Grand and
certain of Grand's current and former directors and officers. The complaints
allege misrepresentations, federal securities law violations and other claims in
connection with the Stratosphere project.
40
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 2000, JANUARY 3, 1999, AND DECEMBER 28, 1997 -- (CONTINUED)
The actions have been consolidated as In re: Grand Casinos, Inc. Securities
Litigation -- Master File No. 4-96-890 -- and the plaintiffs filed a
consolidated complaint. The defendants submitted a motion to dismiss the
consolidated complaint, based in part on Grand's claim that the consolidated
complaint failed to properly state a cause of action.
In December 1997, the court granted Grand's motion to dismiss in part, and
denied the motion in part. Thus, the plaintiffs are pursuing the claims in the
consolidated complaint that survived Grand's motion to dismiss. Discovery in the
action has begun.
The defendants have submitted a motion for summary judgment seeking an
order that the defendants are entitled to judgment as a matter of law. In
December 1998, the plaintiffs completed fact discovery related to the issues
raised by the summary judgement motion. Expert discovery was completed in March
of 1999. The parties have completed follow-up discovery pertaining to the
summary judgment motion. The court heard the motion on September 2, 1999. The
court has not yet ruled on the motion.
In early February 1999, the plaintiffs filed a motion for leave to amend
the complaint in this action to include, as defendants in the case, both the
Company and Park Place. The motion for leave to amend the complaint has been
granted and Lakes has filed its answer. Lakes will defend this action
vigorously.
SLOT MACHINE LITIGATION
In April 1994, William H. Poulos brought an action in the U.S. District
Court for the Middle District of Florida, Orlando Division -- William H. Poulos,
et al v. Caesars World, Inc. et al -- Case No. 39-478-CIV-ORL-22 -- in which
various parties (including Grand) alleged to operate casinos or be slot machine
manufacturers were named as defendants. The plaintiff sought to have the action
certified as a class action.
A subsequently filed Action - William Ahearn, et al v. Caesars World, Inc.
et al -- Case No. 94-532-CIV-ORL-22 -- made similar allegations and was
consolidated with the Poulos action.
Both actions included claims under the federal Racketeering-Influenced and
Corrupt Organizations Act and under state law, and sought compensatory and
punitive damages. The plaintiffs claimed that the defendants are involved in a
scheme to induce people to play electronic video poker and slot machines based
on false beliefs regarding how such machines operate and the extent to which a
player is likely to win on any given play.
In December 1994, the consolidated actions were transferred to the U.S.
District Court for the District of Nevada.
In September 1995, Larry Schreier brought an action in the U.S. District
Court for the District of Nevada -- Larry Schreier, et al v. Caesars World, Inc.
et al -- Case No. CV-95-00923-DWH(RJJ). The plaintiffs' allegations in the
Schreier action were similar to those made by the plaintiffs in the Poulos and
Ahearn actions, except that Schreier claimed to represent a more precisely
defined class of plaintiffs than Poulos or Ahearn.
In December 1996, the court ordered the Poulos, Ahearn and Schreier actions
consolidated under the title William H. Poulos, et al v. Caesars World, Inc., et
al -- Case No. CV-S-94-11236-DAE(RJJ) -- (Base File), and required the
plaintiffs to file a consolidated and amended complaint. In February 1997, the
plaintiffs filed a consolidated and amended complaint.
In March 1997, various defendants (including Grand) filed motions to
dismiss or stay the consolidated action until the plaintiffs submitted their
claims to gaming authorities and those authorities considered the claims
submitted by the plaintiffs.
In December 1997, the court denied all of the motions submitted by the
defendants, and ordered the plaintiffs to file a new consolidated and amended
complaint. That complaint has been filed. Grand has filed its answer to the new
complaint.
The plaintiffs have filed a motion seeking an order certifying the action
as a class action. Grand and certain of the defendants have opposed the motion.
The Court has not ruled on the motion.
41
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 2000, JANUARY 3, 1999, AND DECEMBER 28, 1997 -- (CONTINUED)
STANDBY EQUITY COMMITMENT LITIGATION
In September 1997, the Stratosphere Trustee under the indenture pursuant to
which Stratosphere issued its first mortgage notes filed a complaint in the U.S.
District Court for the District of Nevada -- IBJ Schroeder Bank & Trust Company,
Inc. v. Grand Casinos, Inc. -- File No. CV-S-97-01252-DWH (RJJ) -- naming Grand
as defendant.
The complaint alleges that Grand failed to perform under the Standby Equity
Commitment entered into between Stratosphere and Grand in connection with
Stratosphere's issuance of such first mortgage notes in March 1995. The
complaint seeks an order compelling specific performance of what the Trustee
claims are Grand's obligations under the Standby Equity Commitment.
The Stratosphere Trustee filed the complaint in its alleged capacity as a
third party beneficiary under the Standby Equity Commitment. Pursuant to the
Second Amended Plan, a new limited liability company (the "Stratosphere LLC")
was formed to pursue certain alleged claims and causes of action that
Stratosphere and other parties may have against numerous third parties,
including Grand and/or officers and/or directors of Grand. The Stratosphere LLC
has been substituted for IBJ Schroeder Bank & Trust Company, Inc. in this
proceeding.
In October of 1999, Motions for Summary Judgment by both parties were
denied. Grand's request for expedited appellate court review of the denial as to
its motion for summary judgment was denied. The trial court is expected to hold
a pretrial conference to address discovery and scheduling issues. Lakes will
continue to defend the lawsuit diligently.
STRATOSPHERE PREFERENCE ACTION
In April 1998, Stratosphere served on Grand and Grand Media & Electronics
Distributing, Inc., a wholly owned subsidiary of Grand ("Grand Media"), a
complaint in the Stratosphere bankruptcy case seeking recovery of certain
amounts paid by Stratosphere to (i) Grand as management fees and for costs and
expenses under a management agreement between Stratosphere and Grand, and (ii)
Grand Media for electronic equipment purchased by Stratosphere from Grand Media.
Stratosphere claims in its complaint that such amounts are recoverable by
Stratosphere as preferential payments under bankruptcy law.
In May 1998, Grand responded to Stratosphere's complaint. That response
denies that Stratosphere is entitled to recover the amounts described in the
complaint. The matter is pending.
OTHER LITIGATION
The Company has recorded a reserve assessment related to various of the
above items. The reserve is reflected as a litigation and claims accrual on the
accompanying consolidated balance sheet as of January 2, 2000.
Grand and Lakes are involved in various other inquiries, administrative
proceedings, and litigation relating to contracts and other matters arising in
the normal course of business. While any proceeding or litigation has an element
of uncertainty, management currently believes that the final outcome of these
matters is not likely to have a material adverse effect upon Grand's or the
Company's consolidated financial position or results of operations.
9. SUBSEQUENT EVENTS:
On January 18, 2000, a Michigan Ingham County Circuit Judge ruled that the
Michigan State Legislature acted improperly in 1998 when it approved casino
compacts by joint resolution. The Governor of the State of Michigan has
indicated that he will appeal the ruling. The ruling directly affects four
tribes in Michigan, one of which is the Pokagon Band of Potawatomi Indians with
whom Lakes has development and management contracts. Lakes is continuing to work
with the Band to have land accepted into Trust by the Secretary of Interior and
to have the management agreement approved by the NIGC.
42
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 2000, JANUARY 3, 1999, AND DECEMBER 28, 1997 -- (CONTINUED)
On February 7, 2000, Lakes announced that it reached an agreement with the
Coushatta Tribe of Louisiana for a five year renewal of its management
agreement. The new contract is subject to NIGC approval. Net distributable
profits, if any, under the new agreement will be determined in accordance with
IGRA and distributed each month 90% to the Coushatta Tribe and 10% to Lakes.
10. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Year ended January 2, 2000 (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Net revenues...................................... $15,109 $14,892 $14,440 $10,275
Earnings from operations.......................... 12,923 11,521 13,111 7,495
Net earnings...................................... 8,562 8,622 7,440 4,203
Earnings per share:
Basic........................................... $ .81 $ .81 $ .70 $ .40
Diluted......................................... .80 .80 .68 .39
Year ended January 3, 1999 (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Net revenues...................................... $23,030 $19,718 $21,582 $28,017
Earnings from operations.......................... 17,783 18,328 19,603 20,238
Net Earnings...................................... 11,703 12,319 25,283 11,875
Earnings per share:
Basic........................................... $ 1.11 $ 1.17 $ 2.39 $ 1.13
Diluted......................................... 1.08 1.14 2.37 1.12
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
43
44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information beginning immediately following the caption "Election of
Directors" to, but not including, the caption "Compensation Committee Interlocks
and Insider Participation" in the Company's 1999 Proxy Statement, to be filed
with the Securities and Exchange Commission within 120 days after the close of
the Company's year ended January 2, 2000 and forwarded to shareholders prior to
the Company's 1999 Annual Meeting of Shareholders (the "1999 Proxy Statement"),
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information in the 1999 Proxy Statement beginning immediately following
the caption "Executive Compensation" to, but not including, the caption
"Director Compensation", is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the 1999 Proxy Statement beginning immediately following
the caption "Voting Securities and Principal Holders Thereof" to, but not
including, the caption "Election of Directors", is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the 1999 Proxy Statement under the caption "Certain
Transactions" is incorporated herein by reference.
44
45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements:
PAGE
----
LAKES GAMING, INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................... 25
Consolidated Balance Sheets as of January 2, 2000 and
January 3, 1999........................................... 26
Consolidated Statements of Earnings for the fiscal years
ended January 2, 2000, January 3, 1999 and December 28,
1997...................................................... 27
Consolidated Comprehensive Statements of Earnings for the
fiscal years ended January 2, 2000, January 3, 1999 and
December 28, 1997......................................... 28
Consolidated Statements of Shareholders' Equity for the
fiscal years ended January 2, 2000, January 3, 1999 and
December 28, 1997......................................... 29
Consolidated Statements of Cash Flows for the fiscal years
ended January 2, 2000, January 3, 1999 and December 28,
1997...................................................... 30
Notes to Consolidated Financial Statements.................. 31
(a)(2) None.
(a)(3)
EXHIBITS DESCRIPTION
- -------- -----------
2.1 Agreement and Plan of Merger by and among Hilton, Park Place
Entertainment Corporation, Gaming Acquisition Corporation,
Lakes Gaming, Inc. and Grand dated as of June 30, 1998.
(Incorporated herein by reference to Exhibit 2.2 to Lakes'
Form 10 Registration Statement as filed with the Securities
and Exchange Commission (the "Commission") on October 23,
1998.) (the "Lakes Form 10")
3.1 Articles of Incorporation of Lakes Gaming, Inc.
(Incorporated herein by reference to Exhibit 3.1 to the
Lakes Form 10.)
3.2 By-laws of Lakes Gaming, Inc. (Incorporated herein by
reference to Exhibit 3.2 to the Lakes Form 10.)
10.1 Distribution Agreement by and between Grand Casinos, Inc.
and Lakes Gaming, Inc., dated as of December 31, 1998.
(Incorporated herein by reference to Exhibit 10.1 to Lakes'
Form 8-K dated January 8, 1999.)
10.2 Employee Benefits and Other Employment Matters Allocation
Agreement by and between Grand Casinos, Inc. and Lakes
Gaming, Inc., dated as of December 31, 1998. (Incorporated
herein by reference to Exhibit 10.2 to Lakes' Form 8-K dated
January 8, 1999.)
10.3 Intellectual Property License Agreement by and between Grand
Casinos, Inc. and Lakes Gaming, Inc., dated as of December
31, 1998. (Incorporated herein by reference to Exhibit 10.5
to Lakes' Form 8-K dated January 8, 1999.)
10.4 Tax Allocation and Indemnity Agreement by and between Grand
Casinos, Inc. and Lakes Gaming, Inc., dated as of December
31, 1998. (Incorporated herein by reference to Exhibit 10.3
to Lakes' Form 8-K dated January 8, 1999.)
10.5 Tax Escrow Agreement by and among Grand Casinos, Inc., Lakes
Gaming, Inc., and First Union National Bank as Escrow Agent,
dated as of December 31, 1998. (Incorporated herein by
reference to Exhibit 10.4 to Lakes' Form 8-K dated January
8, 1999.)
45
46
EXHIBITS DESCRIPTION
- -------- -----------
10.6 Insurance Receivable Agreement by and between Grand Casinos,
Inc. and Lakes Gaming, Inc., dated as of December 31, 1998.
(Incorporated herein by reference to Exhibit 10.6 to Lakes'
Form 8-K dated January 8, 1999.)
10.7 Trust Agreement dated as of December 31, 1998 entered into
by and among Lakes Gaming, Inc., Grand Casinos, Inc. and
First Union National Bank, as Trustee. (Incorporated herein
by reference to Exhibit 10.7 to Lakes' Form 10-K dated March
26, 1999.)
10.8 Pledge and Security Agreement dated as of December 31, 1998
entered into by and among Lakes Gaming, Inc., as Debtor and
First Union National Bank (the "Trustee") pursuant to the
Trust Agreement executed in favor of Grand Casinos, Inc.
(the "Secured Party"). (Incorporated herein by reference to
Exhibit 10.8 to Lakes' Form 10-K dated March 26, 1999.)
10.9 Lakes Gaming, Inc. 1998 Stock Option and Compensation Plan.
(Incorporated herein by reference to Annex G to the Joint
Proxy Statement/Prospectus of Hilton Hotels Corporation and
Grand dated and filed with the Commission on October 14,
1998 (the "Joint Proxy Statement") which is attached to the
Lakes Form 10 as Annex A.)*
10.10 Lakes Gaming, Inc. 1998 Director Stock Option Plan.
(Incorporated herein by reference to Annex H to the Joint
Proxy Statement/Prospectus of Hilton Hotels Corporation and
Grand dated and filed with the Commission on October 14,
1998 (the "Joint Proxy Statement") which is attached to the
Lakes Form 10 as Annex A.)*
10.11 Amended and Restated Management & Construction Agreement,
Loan Agreement, Promissory Note, and Security Agreement
between the Tunica-Biloxi Tribe of Louisiana and Grand
Casinos of Louisiana, Inc. -- Tunica-Biloxi, dated November
1, 1991. (Incorporated herein by reference to Exhibit 10BB
to Grand's Registration Statement on Form S-1, as amended,
File No. 33-46798.)
10.12 Amended and Restated Management & Construction Agreement,
Loan Agreement, Promissory Note, and Security Agreement
between the Coushatta Tribe of Louisiana and Grand Casinos
of Louisiana, Inc. -- Coushatta, dated February 25, 1992.
(Incorporated herein by reference to Exhibit 10CC to Grand's
Registration Statement on Form S-1, as amended, File No.
33-42281.)
10.13 Agreement among Grand, Bob Stupak, Bob Stupak Enterprises,
Inc. and Grand Casinos Resorts, Inc. dated November 15, 1993
and First and Second Amendments thereto dated December 22,
1993 and January 25, 1994. (Incorporated herein by reference
to Exhibit 10.46 to Grand's Report on Form 10-K for the
fiscal year ended January 1, 1995 (File No. 0-195650).)
10.14 Letter Agreement dated as of June 1, 1994 between
Stratosphere Corporation, Grand Casinos, Inc., Grand Casinos
Resorts, Inc., Bob Stupak Enterprises, Inc. and Bob Stupak.
(Incorporated herein by reference to Exhibit 10.80 to
Grand's Report on Form 10-Q for the quarter ended July 3,
1994 (File No. 0-19565).)
10.15 Amendment to June 1, 1994 Letter Agreement dated November
16, 1994 between Stratosphere Corporation, Grand Casinos
Resorts, Inc., Grand Casinos, Inc. Bob Stupak Enterprises,
Inc. and Bob Stupak. (Incorporated herein by reference to
Exhibit 10.48 to Grand's Report on Form 10-K for the fiscal
year ended January 1, 1995 (File No. 0-19565).)
10.16 Management and Development Agreement dated July 1, 1994, by
and between Stratosphere Corporation and Grand Casinos, Inc.
(Incorporated herein by reference to Exhibit 10.49 to
Grand's Report on Form 10-K for the fiscal year ended
January 1, 1995 (File No. 0-19565).)
10.17 Memorandum of Agreement dated as of February 16, 1995 by and
among Stratosphere Corporation and Grand Casinos, Inc.
(Incorporated herein by reference to Exhibit 10.50 to
Grand's Report on Form 10-K for the fiscal year ended
January 1, 1995 (File No. 0-19565).)
10.18 Standby Equity Commitment dated March 9, 1995 by and between
Grand Casinos, Inc. and Stratosphere Corporation.
(Incorporated herein by reference to Exhibit 10.51 to
Grand's Report on Form 10-K for the fiscal year ended
January 1, 1995 (File No. 0-19565).)
46
47
EXHIBITS DESCRIPTION
- -------- -----------
10.19 Notes Completion Guarantee dated March 9, 1995 by and
between Grand Casinos, Inc. and American Bank National
Association. (Incorporated herein by reference to Exhibit
10.52 to Grand's Report on Form 10-K for the fiscal year
ended January 1, 1995 (File No. 0-19565).)
10.20 Completion Guarantor Subordination Agreement dated March 9,
1995 between Grand Casinos, Inc. and American Bank National
Association. (Incorporated herein by reference to Exhibit
10.53 to Grand's Report on Form 10-K for the fiscal year
ended January 1, 1995 (File No. 0-19565).)
10.21 Funding Agreement dated as of September 27, 1996 by and
among Grand Casinos, Inc., and Stratosphere Corporation.
(Incorporated herein by reference to Exhibit 10.1 to Grand's
Report on Form 10-Q for the quarter ended September 30,
1996.)
10.22 Letter Agreement dated as of September 27, 1996 by and among
Grand Casinos, Inc., Stratosphere Corporation and
Stratosphere Gaming Corp. (Incorporated herein by reference
to Exhibit 10.2 to Grand's Report on Form 10-Q for the
quarter ended September 30, 1996.)
10.23 Restructuring Agreement Regarding Pre-Negotiated Plan of
Reorganization by and among Stratosphere Corporation,
Stratosphere Gaming Corp. and Grand Casinos, Inc. and Member
of AD Hoc Committee of holders of $203,000,000 of 14 1/4%
First Mortgage Notes Due 2002. (Incorporated herein by
reference to Exhibit 99.2 to Stratosphere Corporation's Form
8-K dated January 6, 1997.)
10.24 Lease Agreement, dated as of June 17, 1996, by and between
Brooks Family Trust and Nevada Brooks Cook as Landlord and
Cloobeck Enterprises and Grand Casinos Nevada I, Inc. as
Tenants. (Incorporated herein by reference to Exhibit 10.76
to Grand's Report on Form 10-K for the fiscal year ended
December 28, 1997.)
10.25 First Amendment to Ground Lease, dated November 25, 1997, by
and between MacGregor Income Properties West I, Inc. and
Grand Casinos Nevada I, Inc. (Incorporated herein by
reference to Exhibit 10.77 to Grand's Report on Form 10-K
for the fiscal year ended December 28, 1997.)
10.26 Ground Lease, dated July 31, 1996, by and between MacGregor
Income Properties West I, Inc. and Cloobeck Enterprises.
(Incorporated herein by reference to Exhibit 10.78 to
Grand's Report on form 10-K or the fiscal year ended
December 28, 1997.)
10.27 Indemnification Agreement, dated as of December 31, 1997, by
and between Grand Casinos, Inc. and Lyle Berman.
(Incorporated herein by reference to Exhibit 10.79 to
Grand's Report on Form 10-K for the fiscal year ended
December 28, 1997.)
10.28 Carlson Center Office Lease by and between Carlson Real
Estate Company, a Minnesota Limited Partnership, as Landlord
and Grand Casinos, Inc. as Tenant, dated February 1, 1996,
as Amended by that First Amendment to Lease dated August 23,
1996. (Incorporated herein by reference to Exhibit 10.32 to
the Lakes Form 10.)
10.29 Sublease entered into effective as of the 30th day of
December 1998, between Grand Casinos, Inc., a Minnesota
Corporation ("Sublessor"), and Lakes Gaming, Inc., a
Minnesota Corporation ("Sublessee"). (Incorporated herein by
reference to Exhibit 10.29 to Lakes' Form 10-K dated March
26, 1999.)
10.30 Release and Assumption Agreement dated as of December 31,
1998, among Hibernia National Bank, the Coushatta Tribe of
Louisiana, the Coushatta Tribe of Louisiana Building
Authority, Grand Casinos of Louisiana, Inc. -- Coushatta,
Grand Casinos, Inc., Lakes Gaming, Inc., a Minnesota
corporation and a subsidiary of Grand and Grand Casinos of
Louisiana, LLC -- Coushatta, a Minnesota limited liability
company and a subsidiary of Lakes. (Incorporated herein by
reference to Exhibit 10.1 to Lakes' Report on Form 10-Q for
the quarter ended April 4, 1999.)
47
48
EXHIBITS DESCRIPTION
- -------- -----------
10.31 Commercial Guaranty Agreement made and entered into
effective as of February 15, 1999, by Lakes Gaming, Inc., a
Minnesota corporation and Grand Casinos of Louisiana,
LLC -- Coushatta, a Minnesota limited liability company in
favor of Hibernia National Bank, guaranteeing the
Indebtedness (as defined) of the Coushatta Tribe of
Louisiana and the Coushatta Tribe of Louisiana Building
Authority. (Incorporated herein by reference to Exhibit 10.2
to Lakes' Report on Form 10-Q for the quarter ended April 4,
1999.)
10.32 Subordination Agreement Granted by Lakes Gaming, Inc., a
Minnesota corporation, in favor of Hibernia National Bank
entered into as of February 15, 1999. (Incorporated herein
by reference to Exhibit 10.3 to Lakes' Report on Form 10-Q
for the quarter ended April 4, 1999.)
10.33 Subordination Agreement Granted by Grand Casinos of
Louisiana, LLC, a Minnesota limited liability company in
favor of Hibernia National Bank entered into as of February
15, 1999. (Incorporated herein by reference to Exhibit 10.4
to Lakes' Report on Form 10-Q for the quarter ended April 4,
1999.)
10.34 Dominion Account Agreement dated as of May 1, 1997 between
the Coushatta Tribe of Louisiana, a federally recognized
Indian tribe, the Coushatta Tribe of Louisiana Building
Authority, an instrumentality of the Coushatta Tribe, Grand
Casinos of Louisiana, Inc. -- Coushatta, a Minnesota
corporation, Grand Casinos, Inc., a Minnesota corporation,
the Cottonport Bank, a bank chartered under the laws of the
State of Louisiana, and Hibernia National Bank, a national
banking association. (Incorporated herein by reference to
Exhibit 10.5 to Lakes' Report on Form 10-Q for the quarter
ended April 4, 1999.)
10.35 Subordination Agreement Granted by Lakes Gaming, Inc., a
Minnesota corporation, in favor of Hibernia National Bank
entered into as of February 15, 1999. (Incorporated herein
by reference to Exhibit 10.6 to Lakes' Report on Form 10-Q
for the quarter ended April 4, 1999.)
10.36 Subordination Agreement granted by Grand Casinos of
Louisiana, LLC - Coushatta, a Minnesota limited liability
company, in favor of Hibernia National Bank entered into as
of February 15, 1999. (Incorporated herein by reference to
Exhibit 10.7 to Lakes' Report on Form 10-Q for the quarter
ended April 4, 1999.)
10.37 Dominion Account Agreement, dated effective as of December
17, 1997, between the Coushatta Tribe of Louisiana, a
federally recognized Indian Tribe, Grand Casinos of
Louisiana, Inc. -- Coushatta, a Minnesota corporation, Grand
Casinos, Inc. a Minnesota corporation, the Cottonport Bank,
a bank chartered under the laws of the State of Louisiana,
and Hibernia National Bank, a national banking association.
(Incorporated herein by reference to Exhibit 10.8 to Lakes'
Report on Form 10-Q for the quarter ended April 4, 1999.)
10.38 Intercreditor Agreement dated as of February 4, 1998,
between Hibernia National Bank and Grand Casinos of
Louisiana, Inc. -- Coushatta and Grand Casinos, Inc.
(Incorporated herein by reference to Exhibit 10.9 to Lakes'
Report on Form 10-Q for the quarter ended April 4, 1999.)
10.39 Counterpart Signature Page, dated as of February 15, 1999,
to that certain Intercreditor Agreement dated as of February
4, 1998 (the First Intercreditor Agreement), by and among
Hibernia National Bank, Grand Casinos, Inc. and Grand
Casinos of Louisiana, Inc. -- Coushatta; entered into
pursuant to Section 2 of that certain Release and Assumption
Agreement dated as of December 31, 1998, by and among the
Hibernia National Bank, Grand Casinos, Inc., Grand Casinos
of Louisiana, Inc. -Coushatta, the Coushatta Tribe of
Louisiana, the Coushatta Tribe of Louisiana Building
Authority, Lakes Gaming, Inc. and Grand Casinos of
Louisiana, LLC -- Coushatta. (Incorporated herein by
reference to Exhibit 10.10 to Lakes' Report on Form 10-Q for
the quarter ended April 4, 1999.)
10.40 Subordination Agreement granted by Lakes Gaming, Inc., a
Minnesota Corporation, in favor of Hibernia National Bank
entered into as of February 15, 1999. (Incorporated herein
by reference to Exhibit 10.11 to Lakes' Report on Form 10-Q
for the quarter ended April 4, 1999.)
48
49
EXHIBITS DESCRIPTION
- -------- -----------
10.41 Subordination Agreement granted by Grand Casinos of
Louisiana, LLC -Coushatta, a Minnesota Limited Liability
Company, in favor of Hibernia National Bank entered into as
of February 15, 1999. (Incorporated herein by reference to
Exhibit 10.12 to Lakes' Report on Form 10-Q for the quarter
ended April 4, 1999.)
10.42 Dominion Account Agreement, dated effective as of December
18, 1998, between the Coushatta Tribe of Louisiana, a
federally recognized Indian tribe, Grand Casinos of
Louisiana, LLC -- Coushatta, a Minnesota limited liability
company, Lakes Gaming, Inc., a Minnesota corporation, the
Cottonport Bank, a bank chartered under the laws of the
State of Louisiana, and Hibernia National Bank, a national
banking association. (Incorporated herein by reference to
Exhibit 10.13 to Lakes' Report on Form 10-Q for the quarter
ended April 4, 1999.)
10.43 Second Intercreditor Agreement dated as of December 18,
1998, between Hibernia National Bank, Grand Casinos of
Louisiana, Inc. -- Coushatta and Grand Casinos, Inc.
(Incorporated herein by reference to Exhibit 10.14 to Lakes'
Report on Form 10-Q for the quarter ended April 4, 1999.)
10.44 Counterpart Signature Page, dated as of February 15, 1999,
to that certain Second Intercreditor Agreement dated as of
December 18, 1998 (the Second Intercreditor Agreement), by
and among Hibernia National Bank, Grand Casinos, Inc. and
Grand Casinos of Louisiana, Inc. -- Coushatta; entered into
pursuant to Section 2 of that certain Release and Assumption
Agreement dated as of December 31, 1998, by and among the
Hibernia National Bank, Grand Casinos, Inc., Grand Casinos
of Louisiana, Inc. -- Coushatta, the Coushatta Tribe of
Louisiana, the Coushatta Tribe of Louisiana Building
Authority, Lakes Gaming, Inc. and Grand Casinos of
Louisiana, LLC -- Coushatta. (Incorporated herein by
reference to Exhibit 10.15 to Lakes' Report on Form 10-Q for
the quarter ended April 4, 1999.)
10.45 Release and Assumption Agreement dated as of December 31,
1998, among Cottonport Bank, the Tunica-Biloxi Tribe of
Louisiana, Grand Casinos of Louisiana,
Inc. -- Tunica-Biloxi, Grand Casinos, Inc., Lakes Gaming,
Inc., a Minnesota corporation and a subsidiary of Grand and
Grand Casinos of Louisiana, LLC -- Tunica-Biloxi, a
Minnesota limited company and a subsidiary of Lakes Gaming,
Inc. (Incorporated herein by reference to Exhibit 10.16 to
Lakes' Report on Form 10-Q for the quarter ended April 4,
1999.)
10.46 Commercial Guaranty Agreement made and entered into
effective as of February 15, 1999, by Lakes Gaming, Inc., a
Minnesota corporation and Grand Casinos of Louisiana,
LLC -- Tunica-Biloxi, a Minnesota limited liability company
in favor of the Cottonport Bank, guaranteeing the
Indebtedness (as defined) of the Tunica-Biloxi Tribe of
Louisiana. (Incorporated herein by reference to Exhibit
10.17 to Lakes' Report on Form 10-Q for the quarter ended
April 4, 1999.)
10.47 Subordination Agreement granted by Lakes Gaming, Inc., a
Minnesota corporation, in favor of the Cottonport Bank
entered into as of February 15, 1999. (Incorporated herein
by reference to Exhibit 10.18 to Lakes' Report on Form 10-Q
for the quarter ended April 4, 1999.)
10.48 Subordination Agreement granted by Grand Casinos of
Louisiana, LLC -- Tunica-Biloxi, a Minnesota limited
liability company, in favor of the Cottonport Bank entered
as of February 15, 1999. (Incorporated herein by reference
to Exhibit 10.19 to Lakes' Report on Form 10-Q for the
quarter ended April 4, 1999.)
10.49 Non-competition Agreement made and entered into as of
December 31, 1998, by and between Lyle Berman and Park Place
Entertainment Corporation (f/k/a Gaming Co., Inc.) a
Delaware corporation. (Incorporated herein by reference to
Exhibit 10.21 to Lakes' Report on Form 10-Q for the quarter
ended April 4, 1999.)
10.50 Equipment Loan Promissory Note in the principal amount of
$6,000,000 by and among the Tunica-Biloxi Tribe of
Louisiana, as Borrower and Hibernia National Bank, as Lender
executed as of May 28, 1999. (Incorporated herein by
reference to Exhibit 10.1 to Lakes' Report on Form 10-Q for
the quarter ended July 4, 1999.)
49
50
EXHIBITS DESCRIPTION
- -------- -----------
10.51 Dominion Account Agreement, dated effective as of May 28,
1999, between the Tunica-Biloxi Tribe of Louisiana, a
federally recognized Indian tribe, Grand Casinos of
Louisiana, LLC -- Tunica-Biloxi, a Minnesota limited
liability company, Lakes Gaming, Inc., a Minnesota corpora-
tion, the Cottonport Bank, a bank chartered under the laws
of the State of Louisiana, and Hibernia National Bank, a
national banking association. (Incorporated herein by
reference to Exhibit 10.2 to Lakes' Report on Form 10-Q for
the quarter ended July 4, 1999.)
10.52 Subordination Agreement Granted by Lakes Gaming, Inc., in
Favor of Hibernia National Bank entered into as of May 28,
1999. (Incorporated herein by reference to Exhibit 10.3 to
Lakes' Report on Form 10-Q for the quarter ended July 4,
1999.)
10.53 Intercreditor Agreement dated as of May 28, 1999, between
The Cottonport Bank, Hibernia National Bank and Grand
Casinos of Louisiana, LLC -- Tunica-Biloxi and Lakes Gaming,
Inc. (Incorporated herein by reference to Exhibit 10.4 to
Lakes' Report on Form 10-Q for the quarter ended July 4,
1999.)
10.54 Commercial Security Agreement entered into between the
Tunica-Biloxi Tribe of Louisiana (as Grantor) and Hibernia
National Bank (as Lender). (Incorporated herein by reference
to Exhibit 10.5 to Lakes' Report on Form 10-Q for the
quarter ended July 4, 1999.)
10.55 Subordination Agreement Granted by Grand Casinos of
Louisiana, LLC -- Tunica-Biloxi in Favor of Hibernia
National Bank entered into as of May 28, 1999. (Incorporated
herein by reference to Exhibit 10.6 to Lakes' Report on Form
10-Q for the quarter ended July 4, 1999.)
10.56 Equipment Loan Agreement dated effective as of May 28, 1999
made by and between the Tunica-Biloxi Tribe of Louisiana and
Hibernia National Bank, a national banking association.
(Incorporated herein by reference to Exhibit 10.7 to Lakes'
Report on Form 10-Q for the quarter ended July 4, 1999.)
10.57 Subscription Agreement and Investment Letter by and among
Lakes Gaming, Inc., a Minnesota corporation (the
"Subscriber") and Fanball.com, Inc., a Minnesota corporation
(the "Company") dated as of June 15, 1999. (Incorporated
herein by reference to Exhibit 10.1 to Lakes' Report on Form
10-Q for the quarter ended October 3, 1999.)
10.58 Stock Purchase Agreement dated as of June 15, 1999 between
Lakes Gaming, Inc. (the "Buyer") and Richard Kallio (the
"Seller"). (Incorporated herein by reference to Exhibit 10.2
to Lakes' Report on Form 10-Q for the quarter ended October
3, 1999.)
10.59 Subscription Agreement and Investment Letter by and among
Lakes Gaming, Inc. a Minnesota corporation (the
"Subscriber") and Interactive Learning Group, Inc., a
Minnesota corporation (the "Company") dated as of June 25,
1999. (Incorporated herein by reference to Exhibit 10.3 to
Lakes' Report on Form 10-Q for the quarter ended October 3,
1999.)
10.60 Mutual Termination Agreement by and Among the Registrant,
Rainforest Cafe, Inc. and RFC Acquisition Co. dated as of
January 24, 2000. (Incorporated herein by reference to
Exhibit 10.1 to Lakes' Report on Form 8-K dated as of
January 25, 2000.)
10.61 Development Agreement dated as of the 8th day of July, 1999
by and between the Pokagon Band of Potawatomi Indians and
Lakes Gaming, Inc., a Minnesota corporation.
10.62 Management Agreement dated as of July 8, 1999, by and
between the Pokagon Band of Potawatomi Indians and Lakes
Gaming, Inc., a Minnesota corporation.
10.63 Promissory Note (the "Lakes Note") dated as of July 8, 1999
by and among the Pokagon Band of Potawatomi Indians and
Lakes Gaming, Inc., a Minnesota corporation.
10.64 Non-Gaming Land Acquisition Line of Credit Agreement dated
as of the 8th day of July, 1999, by and between the Pokagon
Band of Potawatomi Indians and Lakes Gaming, Inc., a
Minnesota corporation.
10.65 Promissory Note (the "Transition Loan Note") dated as of
July 8, 1999 by and among the Pokagon Band of Potawatomi
Indians and Lakes Gaming, Inc., a Minnesota corporation.
50
51
EXHIBITS DESCRIPTION
- -------- -----------
10.66 Account Control Agreement dated as of July 8, 1999 by and
among the Pokagon Band of Potawatomi Indians and Lakes
Gaming, Inc., a Minnesota corporation.
10.67 Pledge and Security Agreement dated as of July 8, 1999 by
and among the Pokagon Band of Potawatomi Indians and Lakes
Gaming, Inc., a Minnesota corporation.
10.68 Memorandum of Agreement Regarding Gaming Development and
Management Agreements dated as of the 15th day of February,
2000 by and between the Jamul Indian Village and Lakes
KAR -- California, LLC, a Delaware limited liability
company.
10.69 Operating Agreement of Lakes Kean Argovitz
Resorts -- California, LLC dated as of the 25th day of May,
1999 by and between Lakes Jamul, Inc. and Kean Argovitz
Resorts -- Jamul, LLC.
10.70 Promissory Note dated as of 15th day of February, 2000 by
and among the Jamul Indian Village and Lakes
KAR -- California, LLC, a Delaware limited liability
company.
10.71 Security Agreement dated as of the 25th day of May, 1999 by
and between Lakes Jamul, Inc., a Minnesota corporation and
Lakes Kean Argovitz Resorts -- California, LLC, a Delaware
limited liability company.
10.72 Management Agreement between the Shingle Springs Band of
Miwok Indians and Kean Argovitz Resorts -- Shingle Springs,
LLC, dated as of the 11th day of June, 1999.
10.73 Development Agreement between the Shingle Springs Band of
Miwok Indians and Kean Argovitz Resorts -- Shingle Springs,
LLC, dated as of the 11th day of June, 1999.
10.74 Management Agreement dated as of the 29th day of July, 1999
by and among Lakes Shingle Springs, Inc., a Minnesota
Corporation and Lakes KAR -- Shingle Springs, LLC, a
Delaware limited liability company.
10.75 Operating Agreement of Lakes KARSS -- Shingle Springs, LLC,
dated as of the 29th day of July, 1999 by Lakes Shingle
Springs, Inc. and Kean Argovitz Resorts -- Shingle Springs,
LLC.
10.76 Assignment and Assumption Agreement between Kean Argovitz
Resorts -- Shingle Springs, LLC, a Nevada limited liability
company, and Lakes KAR -- Shingle Springs, LLC, a Delaware
limited liability company, dated as of the 11th day of June,
1999.
10.77 Assignment and Assumption Agreement and Consent to
Assignment and Assumption, by and between Lakes Gaming,
Inc., a Minnesota corporation, and Kean Argovitz
Resorts -- Shingle Springs, LLC, a Nevada limited liability
company, dated as of the 11th day of June, 1999.
10.78 Security Agreement dated as of the 29th day of July, 1999,
by and between Lakes Shingle Springs, Inc., a Minnesota
corporation, and Lakes KAR -- Shingle Springs, LLC, a
Delaware limited liability company.
10.79 Promissory Note dated as of the 29th day of July, 1999, by
and among Kean Argovitz Resorts -- Shingle Springs, LLC, a
Nevada limited liability company, and Lakes Shingle Springs,
Inc., a Minnesota corporation.
10.80 Pledge Agreement dated as of the 29th day of July, 1999, by
and between Kean Argovitz Resorts -- Shingle Springs, LLC, a
Nevada limited liability company, and Lakes Shingle Springs,
Inc., a Minnesota corporation.
21 Subsidiaries of the Company.
23 Consent of Independent Public Accountants Dated March 24,
2000.
27 Financial Data Schedule.
- ---------------
* Management Compensatory Plan or Arrangement.
(b) Reports on Form 8-K.
(i) A Form 8-K, Item 5. Other Events; and Item 7. Financial Statements,
Pro Forma Financial Information and Exhibits, was filed on December
23, 1999.
(c) See Part IV, Item 14 (a)(3) and the exhibit list immediately above.
(d) None.
51
52
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LAKES GAMING, INC.
Registrant
By: /s/ LYLE BERMAN
------------------------------------
Name: Lyle Berman
Title: Chairman of the Board and
Chief Executive Officer
Dated as of March 28, 2000
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
indicated as of March 28, 2000.
NAME TITLE
---- -----
/s/ LYLE BERMAN Chairman of the Board and Chief Executive Officer
- --------------------------------------------- (Principal Executive Officer)
Lyle Berman
/s/ TIMOTHY J. COPE Chief Financial Officer and Director
- --------------------------------------------- (Principal Financial and Accounting Officer)
Timothy J. Cope
/s/ MORRIS GOLDFARB Director
- ---------------------------------------------
Morris Goldfarb
/s/ RONALD KRAMER Director
- ---------------------------------------------
Ronald Kramer
/s/ DAVID L. ROGERS Director
- ---------------------------------------------
David L. Rogers
/s/ NEIL I. SELL Director
- ---------------------------------------------
Neil I. Sell
/s/ JOEL N. WALLER Director
- ---------------------------------------------
Joel N. Waller
52