10-K405 1 c61198e10-k405.txt FORM 10-K 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ 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 DECEMBER 31, 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 ------------------- --------------------- 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. [X] As of March 21, 2001, 10,637,953 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 on March 21, 2001 was $85,761,535. 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 23, 2001 are incorporated by reference into Items 10 through 13, inclusive. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 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") develops, constructs and manages casinos and related hotel and entertainment facilities in emerging and established gaming jurisdictions. The Company's revenues are derived almost exclusively from management fees. Lakes currently manages the largest casino resort in Louisiana, Grand Casino Coushatta, in Kinder, Louisiana ("Grand Casino Coushatta"), owned by the Coushatta Tribe of Louisiana (the "Coushatta Tribe"). The Company has entered into development and management agreements with three separate tribes for three new casino operations, one in Michigan and two in California. The Company also has agreements for the development of at least one casino facility on Indian land in California through a joint venture, and has entered into a joint venture agreement for the development of land on the Las Vegas Strip. For a portion of fiscal 2000 and prior, Lakes had a management contract with the Tunica-Biloxi Tribe of Louisiana for Grand Casino Avoyelles. The Tunica-Biloxi Tribe elected to exercise its option for an early buyout of the contract effective March 31, 2000, which was scheduled to expire on June 3, 2001. Lakes 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"). As a result of the Distribution, Lakes operates the Indian casino management business and holds various other assets previously owned by 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 of one share 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. Prior to the Distribution, Grand 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 is implementing 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 through the growth of its Indian casino management business. As the successor to Grand's Indian gaming 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, in August, 2000, the Company formed a joint venture for the purpose of developing at least one gaming facility on Indian-owned land in California. Additionally, Lakes entered into three new agreements in 1999, for the development, construction and management of three 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 2 3 manage a casino resort facility with the Jamul Indian Village in California. The contract is subject to approval by NIGC. In 2000, California voters 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. The United States Department of the Interior issued a Finding of No Significant Impact (FONSI) in January 2001 and filed a legal notice of its intent to place into trust 675 acres on behalf of the Pokagon Band. Under Federal law, a 30-day waiting period was required for public comments to be made before the land in trust process could be finalized. During the 30-day period, a lawsuit was filed against the federal government by a Michigan-based group in an attempt to block the casino development. The Department of Justice is defending the suit on behalf of the Secretary of Interior. While the outcome of the suit cannot be predicted at this time, we remain confident that this last hurdle will be successfully overcome and the casino development will be approved. 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"). In 2000, California voters 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 August 10, 2000, the Company announced that it had agreed to form a joint venture for the purpose of developing gaming facilities on Indian owned land in California. Under the agreement, Lakes formed a joint venture limited liability company with MRD Gaming, a limited liability company. The partnership between Lakes and MRD holds the contract to finance casino facilities with the Cloverdale Rancheria of Pomo Indians. The planned site for the potential new casino development is located on Highway 101 in Cloverdale, California, approximately 60 miles north of San Francisco. Development will start as soon as various regulatory approvals are obtained. Development is also subject to completion of definitive financing arrangements. The joint venture also entered into a contract relating to the Paskenta Band of Nomlaki Indians. Lakes has made loans to the joint venture for this project. However, in February 2001, Lakes announced its intention to discontinue its involvement with the Paskenta project. Lakes is dedicated to developing superior facilities and providing guest service that exceeds expectations. 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 a professionally supervised entertainment and child care center. The second business strategy is to remove a number of uncertainties surrounding the Company. Consistent with this part of the Lakes strategy, the Company announced on June 19, 2000, that a settlement agreement had been reached regarding both the Stratosphere shareholders' litigation and the Grand Casinos, Inc. shareholders' litigation. The agreement required Lakes to pay $9 million to the Grand Casinos, Inc. shareholders and $9 million to the Stratosphere shareholders for a total of $18 million, which was reflected as a non-operating expense in 2000. This amount was paid into escrow and related accounts in July 2000 for full and final settlement for all federal and state related actions. Such amount is included as restricted cash on the accompanying consolidated balance sheet as of December 31, 2000. The settlement is subject to final approval by the respective courts. 3 4 Another uncertainty addressed during fiscal 2000 was the potential sale or development of the land owned or controlled by the Company in Las Vegas. On July 31, 2000, Lakes announced that it had formed a joint venture, Metroplex-Lakes, LLC, to develop an upscale, retail, commercial, hotel and entertainment complex on the approximate 16 acres surrounding the corner of Harmon Avenue and Las Vegas Boulevard (the "Strip") in Las Vegas. The joint venture has a two-year option to buy the majority of the site from Lakes at a price that will approximately equal Lakes' investment in the property. Lakes will have voting control of the joint venture, however, development decisions affecting the real estate purchased by the joint venture must be mutually agreed upon. Lakes and Metroplex will share results from the joint venture equally. The other uncertainty facing Lakes relates to the proposed casino developments. At each California location, the Tribes need to have land accepted into trust on their behalf by the Bureau of Indian Affairs. At the Michigan location, the Secretary of the Interior has accepted the land into trust, however, during the 30-day public comment period a group called "Taxpayers of Michigan Against Casinos" filed a complaint to stop the U.S. Department of Interior from placing it into trust. The Department of Justice will defend this lawsuit on behalf of the Secretary of the Interior. Additionally, the National Indian Gaming Commission needs to approve the applicable Lakes' management contracts. Lakes is actively working with the Tribes to bring these issues to a successful conclusion. Diversification is important 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. 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 of these facilities, 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 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 with the Coushatta Tribe for the development, construction, and management of a casino facility in Kinder, Louisiana. Grand purchased approximately 688 acres of land adjacent to the Coushatta reservation. Grand donated approximately 530 acres of land to the Coushatta Tribe which has been placed in trust. 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 $.8 million at December 31, 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 $5.2 million of such loans remained outstanding as of December 31, 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 4 5 management fee and repayment of any loans outstanding from the Coushatta Tribe to the repayment of such indebtedness. As of December 31, 2000, the amount outstanding was $13.0 million. The Coushatta management 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 delivered a written notice of non-renewal. The Governor and the Tribe have agreed on three extensions totaling thirteen months, which were approved by the Department of the Interior. On December 11, 2000, the Tribe and the State of Louisiana agreed to terms of a new compact. The compact is subject to approval by the Department of the Interior. The current Coushatta Management 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 the Coushatta Tribe to provide temporary funding, if necessary, for the construction of certain additional amenities on Grand Casino Coushatta. The terms of the Funding Agreements require each party to advance 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 one percent, over the remaining term of the respective management agreement. Advances of $14.9 million have been made to the Coushatta Tribe through December 31, 2000. As of December 31, 2000, $6.2 million remains outstanding. 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 and to be managed by Lakes compete with all of 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. A single large land-based casino in downtown New Orleans competes for customers with the casino 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 operating in the vicinity of Lake Charles, Louisiana, within approximately 50 miles of Grand Casino Coushatta. The riverboats compete with the Louisiana casino managed by Lakes. Moreover, if the legalization of casino gaming in Texas occurs, it could have a material adverse effect on the casino 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 casino 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 5 6 in gaming operations. Certain basic provisions that are currently applicable to Lakes in its management, development and financing activities 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, 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 6 7 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 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 the Coushatta Management Agreement, as extended, meets all requirements of IGRA, there is a risk that the NIGC may reduce the term or the management fee provided for in any such contract. Currently, the management contract (i) has not been reviewed or approved by NIGC, and (ii) NIGC could call them for review at any time and may not approve the contract at all or may require modification prior to granting approval. 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. 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 contract for 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 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 7 8 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 are conditions of the Coushatta Agreement. 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 21, 2001, Lakes had approximately 30 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 and under the Agreement and Plan of Merger, relating to the Merger (the "Merger Agreement") Lakes agreed to indemnify Grand and affiliates of Grand for (i) liabilities of Grand retained by Lakes in the Distribution, (ii) Grand's ongoing indemnification obligations to current and former directors and officers of Grand and (iii) contingent liabilities related to Stratosphere Corporation ("Stratosphere"). As described under Item 3, a settlement agreement has been reached regarding both the Stratosphere shareholders' litigation and the Grand Casinos, Inc. shareholders' litigation. The agreement required Lakes to pay $9 million to the Grand Casinos, Inc. shareholders and $9 million to the Stratosphere shareholders for a total of $18 million. This amount has been paid into escrow and related accounts in July 2000 for full and final settlement for all federal and state related actions. The settlement is subject to final approval by certain courts. If the settlement is not approved, Lakes' obligations could be greater than the amount it has already paid, which may have a material adverse effect on Lakes. As described under Item 3, there are currently a number of other litigation matters for which Lakes has indemnification obligations under the Distribution Agreement and the Merger Agreement. Until Lakes has reached a final resolution with respect to these matters, there can be no assurance that Lakes' indemnification obligations will not have a material adverse effect on Lakes. LAKES' FUNDING OBLIGATION. As security to support Lakes' indemnification obligations to Grand, 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 8 9 obligation still exists. Lakes made the first deposit of $7.5 million on December 31, 1999. In partial satisfaction of the indemnification obligation, Lakes deposited $18 million in an escrow account for settlement of both the Stratosphere shareholders' litigation and the Grand Casinos, Inc. shareholders' litigation. Such amounts are included as restricted cash on the accompanying balance sheet as of December 31, 2000. In 2001, Lakes has also purchased the Shark Club property in Las Vegas for $10.1 million in settlement of another claim that was subject to the indemnification obligation. Lakes' ability to satisfy further the 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 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. See "Regulation." 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 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, one land based casino and two other Native American casino operations. 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 contract for Grand Casino Coushatta expires January 16, 2002. The Coushatta Tribe and Lakes have agreed on a five-year 9 10 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. Lakes' 10% share under the new agreement will be lower than under the current agreement. Under the current agreement, Lakes is entitled to 40% of adjusted cash flows of the casino. Although the reduction in percentage will be offset somewhat by the fact that net distributable profits are expected to be higher than the current adjusted cash flow measure, Lakes' revenues from the Coushatta casino are expected to be lower under the new agreement than under the current agreement. Further, there can be no assurance that the management contract will be approved by the NIGC. The failure to renew Lakes' management contract would result in the loss of revenues to Lakes derived from such contract, which would have a material adverse effect on Lakes' results of operations. The Coushatta Tribe entered into tribal-state compacts with the State of Louisiana on September 29, 1992. The compact was approved in November, 1992 by the Secretary of the Interior. The compact expired in November, 1999 and the State of Louisiana delivered a written notice of non-renewal. The Governor and the Tribe have agreed on three extensions, which were approved by the Department of the Interior. On December 11, 2000, the Coushatta Tribe and the State of Louisiana agreed to terms for a new compact. The compact is subject to approval by the Department of Interior. In the event that the compact is not approved but the management contract is renewed, Lakes will continue to operate the casino at this location. Currently, the management contract for Grand Casino Coushatta generates substantially all of Lakes' operating revenues. Without the renewal of the existing management contract or the realization of new business opportunities or new management contracts, the non-renewal of the Louisiana management contract or failure of the Department of Interior to approve the new compact could have a material adverse impact on Lakes' results of operations and financial condition. 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, 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 an Indian tribe in excess of the loan ceiling set forth in the Indian management contracts. Under certain circumstances, these loans may not be enforceable by Lakes. As of December 31, 2000, loan balances outstanding to the tribe were approximately $12.2 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 one Indian-owned casino. The management contract for Grand Casino Coushatta expires January 16, 2002. The Coushatta Tribe and Lakes have agreed on a five-year contract renewal beginning January 17, 2002, subject to NIGC approval. Lakes' revenues from Coushatta are expected to decrease significantly under the new contract, and Lakes must seek increased revenues from other sources or its results will be adversely affected. The combination of only one managed casino 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. Accordingly, poor operating results at Grand Casino Coushatta or a delay in the 10 11 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 locations where Lakes plans to develop and operate casinos has a limited operating history 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 in the State of California 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. The start of development and construction of the casino projects is subject to various regulatory approvals. No assurances can be given that once a schedule for such construction and development activities is 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. Although Lakes generally provides only preliminary construction financing for its managed casinos, with each project Lakes is subject to the risk that its investment may be lost if the project cannot obtain adequate financing to complete development and open the casino successfully. In some cases, Lakes may be forced to provide more financing than it originally planned in order to complete development, increasing the risk to Lakes in the event of a default by the casino. RISKS ASSOCIATED WITH DIVERSIFICATION. Lakes has announced that part of its strategy involves diversifying into other gaming-related businesses, such as Internet gaming. These projects involve business risks separate from the risks involved in casino development and these investments may result in future losses to Lakes. Lakes also is investing significant resources into a joint venture to develop commercial property in Las Vegas. As with casino development projects, major real estate projects entail significant risks, including delays and unanticipated cost increases. There is no assurance that diversification activities will successfully add to Lakes' future revenues and income. 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 The Company owns, or holds purchase options for, approximately sixteen acres of land surrounding the corner of Harmon Avenue and Las Vegas Boulevard in Las Vegas, Nevada. On July 31, 2000, Lakes announced that it had formed a joint venture, Metroplex-Lakes LLC to develop the properties. The joint venture has a two-year option to buy the majority of the site from Lakes at a price that will approximately equal Lakes' investment in the property plus the assumption of Lakes' future obligations under a long-term 11 12 ground lease. The joint venture will also assume Lakes' option to purchase the remainder of the site from a third party. 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. SHARK CLUB PARCEL The Shark Club Parcel is an approximate 3.4 acre undeveloped site adjacent to the Polo Plaza Shopping Parcel and the Travelodge. A subsidiary of Lakes was the tenant on this site under a ground lease (the "Shark Club Lease"). In connection with the Merger, Lakes agreed with Park Place that Lakes would either exercise, or cause one of its subsidiaries to exercise, the Shark Club Lease purchase option prior to the earliest time when the landlord could require Lakes (or Grand as the guarantor) to purchase the subject real estate. On January 10, 2001, Lakes exercised its option to purchase the Shark Club Parcel for $10.1 million. CABLE PARCEL Pursuant to a November 1, 1997 Option Agreement, and a June 1, 2000 amended Option Agreement, Lakes acquired an option to purchase approximately 4.5 acres of land located near the Polo Plaza Shopping Center anytime prior to January 2, 2003. As consideration for the option, Lakes paid the landowner a non- refundable monthly option payment of $80,000 through May 31, 2000 and began paying $100,000 per month commencing June 1, 2000. The option agreement states that the purchase price for the rear parcel, consisting of approximately 3 acres, is $18 million and the purchase price for the entire Cable property, 4.5 acres, is $39.1 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 12 13 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. 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 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 added the Company as an additional defendant because of its indemnity obligation and stipulation. The parties have reached a settlement covering the Stratosphere shareholders litigation. A stipulation of settlement was approved by the court on December 4, 2000. The Stratosphere state and federal settlement was for $9 million, inclusive of all plaintiffs fees and costs. A conditional judgement was entered and no distribution of the settlement will occur until the Minnesota federal litigation is also dismissed. 13 14 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. As described under "Stratosphere Shareholders Litigation -- Federal Court" above, the parties have reached a $9 million settlement covering the Stratosphere shareholders litigation in federal and state courts. A Stipulation and Order for Dismissal with Prejudice was entered on January 11, 2001, providing that the state court litigation be dismissed with prejudice inasmuch as the parallel federal court action has been resolved. 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. The consolidated complaint sought class action treatment for a class comprising all persons (other than the defendants) who purchased Grand common stock during the period from December 19, 1995 through July 19, 1996. 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 judgement motion. The court heard the motion on September 2, 1999. On March 28, 2000, the court granted the motion in part and denied the motion in part. The court dismissed with prejudice, all claims against the defendants as to the members of the putative class who did not purchase Grand common stock during the period from December 19, 1995 through June 6, 1996 inclusive. 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. On June 19, 2000, the Company announced that a settlement agreement had been reached regarding the litigation. The agreement called for the Company to pay $9 million to the Grand shareholders for full and final settlement of all claims covering the original class period. The settlement agreement is subject to final approval by the US District Court for the District of Minnesota. The $9 million was placed into an escrow account by Lakes on behalf of the recipients in July 2000. 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. 14 15 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. 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, portions of the Motions for Summary Judgment by both parties were denied in part. The Court subsequently denied Grand's request for expedited appellate court review as to the portions of Motions that were denied. Thereafter, the parties jointly sought the Court's consideration of a subsequent summary judgment motion. During the August 30, 2000 scheduled pretrial conference call, the Court and the parties agreed to try the action upon an amended joint pretrial order and a series of post-trial briefs. Post-trial briefing concluded on December 12, 2000 and oral argument was held January 22, 2001. During oral argument, the Court asked both parties to submit findings of fact and conclusions of law within three weeks. The Court did not indicate its decision. 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 15 16 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 16 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Lakes became a publicly held company as a result of the Grand Distribution effective December 31, 1998. The Common Stock began trading on the Nasdaq National Market under the symbol LACO on January 4, 1999. For the period from January 4, 1999 through December 31, 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 Year Ended December 31, 2000: High................................................ $ 9.50 $10.13 $10.63 $ 9.38 Low................................................. 7.50 6.63 8.50 7.13
On March 21, 2001, the last reported sale price for the Common Stock was $9.50 per share. As of March 21, 2001, the Company had approximately 1,064 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." 17 18 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: -------------------------------------------------------------------- DECEMBER 31, JANUARY 2, JANUARY 3, DECEMBER 28, DECEMBER 29, 2000 2000 1999 1997 1996 ------------ ---------- ---------- ------------ ------------ (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) LAKES HISTORICAL RESULTS OF OPERATIONS: Total revenue................. $ 59 $ 55 $ 92 $ 79 $ 77 Total operating income........ 47 45 76 70 60 Net Earnings (loss)........... 16(2) 29 61 45 (109)(3) Net Earnings (loss) per share -- basic............. 1.47(2) 2.72 5.80 4.32 (10.46)(3) Net Earnings (loss) per share -- diluted........... 1.47(2) 2.67 5.71 4.20 (10.46)(3) OTHER OPERATING DATA: EBITDA(1)..................... 50 47 78 71 61 BALANCE SHEET: Unrestricted Cash and cash equivalents................ $ 10 $ 24 $ 57 $ 33 $ 34 Total assets.................. 213 184 161 132 114 Total debt.................... 2 2 1 1 1 Shareholders' equity.......... 176 160 132 119 104
--------------- (1) 2000 includes $19.8 million in revenues from the management contract for Grand Casino Avoyelles that concluded during 2000, including $16.0 million relating to the early buyout of the agreement. 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 excludes the $18 million provision for the Stratosphere litigation settlement and the $5.5 million write-off of unconsolidated affiliates in 2000 and the $161 million write off of Grand's investment in Stratosphere Corporation in 1996. 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 accounting principles generally accepted in the United States (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 December 31, 2000, January 2, 2000, January 3, 1999, December 28, 1997, and December 29, 1996 totaled $3 million, $2 million, $2 million, $1 million, and $1 million, respectively. (2) Includes a non-recurring, non-cash $18 million provision for the Stratosphere litigation settlement and a $5.5 million charge for the write-off of unconsolidated affiliates. (3) Includes a non-recurring, non-cash $161 million charge related to the write-off of Lakes' investment in Stratosphere Corporation. 18 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW 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, to the shareholders of Grand Casinos, Inc. ("Grand"). Pursuant to the terms of the Distribution Agreement entered into between Grand and Lakes dated as of December 31, 1998, Grand shareholders received .25 of one share of Lakes Common Stock for each share held in Grand. Historical references to the Company which precede 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 (the "Merger"). 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 a land-based, Indian-owned casino, Grand Casino Coushatta, in Kinder, Louisiana ("Grand Casino Coushatta"), owned by the Coushatta Tribe of Louisiana (the "Coushatta Tribe"). Pursuant to the Coushatta management contract, Lakes receives a fee based on the net distributable profits (as defined in the contracts) generated by Grand Casino Coushatta. The management contract expires 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 Company also managed a second land-based, Indian-owned casino in Marksville, Louisiana ("Grand Casino Avoyelles"), owned by the Tunica-Biloxi Tribe of Louisiana (the "Tunica-Biloxi Tribe"). On March 31, 2000, the Company reached an agreement with the Tribe for the early buyout of the management contract for Grand Casino Avoyelles, which was scheduled to expire on June 3, 2001. The early buyout of the contract was provided for in the original seven-year management agreement and, under the agreement, Lakes was compensated for the management fees the company would have received had it managed Grand Casino Avoyelles through the original contract expiration date of June 3, 2001, discounted to their present value. Lakes was also repaid all amounts owing to it under its loan agreements with the Tribe. 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 Indian-owned casino properties that offer the opportunity for long-term development and related hotel and entertainment facilities in emerging and established gaming jurisdictions. 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 Jamul Indian Village in California. The contract is subject to approval by NIGC. In 2000, California voters 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. 19 20 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. 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 had development and management contracts. In January 2001, the land comprising the casino site was accepted into trust by the Secretary of Interior subject to a 30-day public comment period. During the 30-day period a complaint was filed against the Secretary of the U.S. Department of the Interior in the District Court of Columbus by a group called "Taxpayers of Michigan Against Casinos", to stop the U.S. Department of Interior from placing into trust the land for the casino site. The Department of Justice will defend this lawsuit on behalf of the Secretary of the Interior. 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. In 2000, California voters 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 June 19, 2000, the Company announced that a settlement agreement had been reached regarding both the Stratosphere shareholders' litigation and the Grand Casinos, Inc. shareholders' litigation. The agreement required Lakes to pay $9 million to the Grand Casinos, Inc. shareholders and $9 million to the Stratosphere shareholders for a total of $18 million, which has been reflected as a non-operating expense in the second quarter of 2000. This amount was paid into escrow and related accounts in July 2000 for full and final settlement for all federal and state related actions. The settlement is subject to final approval by the respective courts, which is expected to occur later this year. On July 31, 2000, the Company announced that it had formed a joint venture, Metroplex-Lakes, LLC, with Metroplex, LLC to develop Las Vegas real estate now controlled by Lakes. Metroplex-Lakes, LLC plans to develop an upscale retail, commercial, hotel and entertainment complex on approximately 16 acres surrounding the corner of Harmon Avenue and Las Vegas Boulevard (the "Strip") in Las Vegas. The joint venture has a two-year option to buy the majority of the site from Lakes at a price that will approximately equal Lakes' investment in the property plus the assumption of Lakes' future obligations under a long-term ground lease. The joint venture will also assume Lakes' option to purchase the remainder of the site from a third party. Lakes will have voting control of the joint venture, however, development decisions affecting the real estate purchased by the joint venture must be mutually agreed upon. Lakes and Metroplex will share results from the joint venture equally. 20 21 On August 10, 2000, the Company announced that it had agreed to form a joint venture for the purpose of developing new gaming facilities on Indian owned land in California. Under the agreement, Lakes formed a limited liability company with MRD Gaming, a limited liability company. The partnership between Lakes and MRD holds the contract to develop casino facilities with the Cloverdale Rancheria of Pomo Indians. The planned site for the potential new casino development is located on Highway 101 in Cloverdale, California, approximately 60 miles north of San Francisco. Development at the casino will start as soon as various regulatory approvals are obtained by the tribe. Development is also subject to completion of definitive financing arrangements. The joint venture also entered into a contract relating to the Paskenta Band of Nomlaki Indians. Lakes has made loans to the joint venture for this project. However, in February 2001, Lakes announced its intention to discontinue its involvement with the Paskenta project. Lakes' investments in unconsolidated affiliates include a 50 percent ownership interest in each of Lakes Cloverdale, LLC, and Lakes Corning, LLC, joint ventures formed to develop gaming facilities on Indian-owned land in California. Additionally, as a result of its spin-off from Grand, Lakes received a 27 percent ownership interest in New Horizon Kids Quest, Inc., a publicly held provider of child care facilities. On December 31, 2000, Lakes wrote off the carrying value in the amount of $5.5 million of certain investments in unconsolidated affiliates. The investments include Fanball.com, Inc., a start-up internet provider of fantasy sports services, Interactive Learning Group, a consumer products company, and Trak 21 Development, LLC, a developer of player tracking systems for the casino industry. A potential new business venture that Lakes is actively considering is establishing one or more web sites to conduct online gaming in a regulated country, taking wagers placed from only outside the United States. Lakes is currently evaluating the technology of various web site providers. The chosen provider would create and maintain a gaming web site subject to the negotiation and execution of definitive documents, due diligence, regulatory approvals and other conditions. Lakes' limited operating history may not be indicative of Lakes' future performance. In addition, a comparison of results from year to year may not be meaningful due to the opening of new facilities during each year and the buy-out and/or cessation of other casino management contracts. Lakes' growth strategy contemplates the expansion of existing operations, the pursuit of opportunities to develop and manage additional gaming facilities and the pursuit of new business opportunities. The successful implementation of this growth strategy is contingent upon the satisfaction of various conditions, including obtaining governmental approvals, the impact of increased competition, and the occurrence of certain events, many of which are beyond the control of Lakes. The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto for the years ended December 31, 2000, January 2, 2000 and January 3, 1999. RESULTS OF OPERATIONS Revenues are calculated in accordance with accounting principles generally accepted in the United States and are presented in a manner consistent with industry practice. Net distributable profits 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 contract with Grand Casino Coushatta expires January 16, 2002. The Coushatta Tribe and Lakes have agreed on a five-year contract renewal beginning January 17, 2002, subject to NIGC approval. There can be no assurance that the management contract will be renewed upon expiration or approved by NIGC upon any such renewal. The failure to renew the Lakes' management contract would result in the loss of revenues to Lakes derived from such contract, which would have a material adverse effect on Lakes' results of operations. The Coushatta Tribe entered into a tribal-state compact with the State of Louisiana on September 29, 1992. This compact was approved in November 1992 by the Secretary of the Interior. The compact for the 21 22 Coushatta Tribe expired November 4, 1999 and the State of Louisiana delivered a written notice of non-renewal. The Governor and the Tribe agreed on two six-month extensions, and one thirty-day extension, which were approved by the Department of the Interior. On December 11, 2000, the State of Louisiana and the Coushatta Tribe reached agreement on the terms of a new compact. The compact is subject to approval by the Department of the Interior. In the event the compact is not approved, gaming may not be permitted at Grand Casino Coushatta. FISCAL YEAR ENDED DECEMBER 31, 2000 COMPARED TO FISCAL YEAR ENDED JANUARY 2, 2000 Revenues. Total revenues were $59.0 million for the fiscal year ended December 31, 2000, compared to $54.7 million for the prior year. Aggregate management fee income from the Avoyelles and Coushatta casinos increased to approximately $58.6 million during the twelve months ended December 31, 2000 from $54.7 million in the previous year. Contributing to the increase of $3.9 million was the early buyout of the management agreement for Grand Casino Avoyelles by the Tunica-Biloxi Tribe of Louisiana in the first quarter of 2000. Under the early buyout agreement, the Company was compensated for the management fees it would have received had it managed Grand Casino Avoyelles through the original contract expiration date which was June 3, 2001. As a result, management fee income from Grand Casino Avoyelles increased approximately $5.6 million for the twelve months ended December 31, 2000 compared to the prior year. Also, despite a 5% increase in total revenue at Grand Casino Coushatta, management fee income decreased approximately $1.7 million for the twelve months ended December 31, 2000 compared to the twelve months ended January 2, 2000. This decrease is primarily due to increased marketing and employee benefit costs at Grand Casino Coushatta. As a result of the early buyout of the management agreement for Grand Casino Avoyelles, the Company's revenues and earnings will not include contributions from this operation going forward. Under the proposed amendment to the Coushatta management agreement, starting on January 17, 2002, the Company's share of the casino's income is expected to change. Under the existing contract, the Company receives 40% of modified cash flow. Under the proposed new agreement, the Company will receive 10% of the casino's "net distributable profits", calculated under applicable gaming regulations. The reduction in percentage will be offset somewhat by the fact that "net distributable profits" will be higher than the modified cash flow calculated under the existing agreement, which is reduced by the casino's debt service costs. However, management fee income from the Coushatta casino is expected to decline significantly under the new agreement. Costs and Expenses. Total costs and expenses increased $2.3 million, to $11.9 million for the year ended December 31, 2000, from $9.6 million for the prior year. Selling, general and administrative expenses increased $1.3 million, to $9.0 million for the year ended December 31, 2000 from $7.7 million for the prior year. The increase primarily reflects development costs relating to new casino projects. Depreciation and amortization expenses increased $1.0 million, to $2.9 million for the year ending December 31, 2000 from $1.9 million for the prior year, due to increased amortization in the current year related to the early buyout of the Avoyelles management contract. Taxes. Provision for income taxes was $12.9 million for the year ended December 31, 2000, compared to $22.1 million for the prior year. The effective tax rates for 2000 and 1999 were 45.0% and 43.4%, respectively. The reconciliation of the statutory federal tax rate of 35%, to the Company's actual rate for each of the years is state income taxes, net of the federal income tax benefit of 6%, and permanent differences in book to tax income of 4.0% and 2.4% for 2000 and 1999, respectively. Other. Provision for litigation loss was $18.0 million for the year ended December 31, 2000. This amount relates to a settlement agreement reached in June 2000 regarding both the Stratosphere shareholders' litigation and the Grand Casinos, Inc. shareholders' litigation. The agreement required Lakes to pay a total of $18.0 million, which has been reflected as a non-operating expense. This amount was paid into escrow and related accounts in July 2000 for full and final settlement for all federal and state related actions. Such amount is included as restricted cash on the accompanying consolidated balance sheet as of December 31, 2000. The settlement agreement is subject to final approval by the respective courts. 22 23 The $5.5 million charge for the write down of unconsolidated affiliates reflects the carrying value at December 31, 2000 for certain assets held as investments including securities in Fanball.com, Inc., Interactive Learning Group, Inc. and Trak 21 Development, LLC. Interest income increased $.3 million to $7.9 million for the fiscal year ended December 31, 2000 from $7.6 million for the prior year, primarily due to interest earned on additional notes receivable, partially offset by the early extinguishment of notes from the Avoyelles casino and decreased cash balances. Equity in loss of unconsolidated affiliates was $2.9 million for each of the years ending December 31, 2000 and January 2, 2000, due primarily to losses of Fanball.com, Interactive Learning Group and Trak 21 before these investments were written down in 2000. Earnings per Common Share and Net Earnings. For the fiscal year ended December 31, 2000 basic and diluted earnings per common share were $1.47 and $1.47, respectively. This compares to basic and diluted earnings per common share of $2.72 and $2.67, respectively, for the fiscal year ended January 2, 2000. Earnings decreased from $28.8 million for the fiscal year ended January 2, 2000 to $15.7 million for the fiscal year ended December 31, 2000. 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. 23 24 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. CAPITAL RESOURCES, CAPITAL SPENDING, AND LIQUIDITY At December 31, 2000 Lakes had $40.7 million in restricted and unrestricted cash and cash equivalents. The Company also had $32.5 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 joint venture and tribal partners to develop existing and anticipated Indian casino operations and the Las Vegas real estate, the pursuit of additional business opportunities, and settlement of pending litigation matters. The amount and timing of Lakes' cash outlays for casino development loans will depend on the timing of the regulatory approval process and the availability of external financing. For the years ended December 31, 2000, January 2, 2000 and January 3, 1999, net cash provided by operating activities totaled $35.1 million, $36.5 million and $85.8 million, respectively. For the same periods, net cash utilized in investing activities totaled $49.5 million, $69.3 million and $10.3 million. Included in these investing activities for the years ended December 31, 2000, January 2, 2000 and January 3, 1999 are proceeds primarily from repayment of notes receivable from Indian-owned casinos of $18.0 million, $12.0 million and $6.6 million, respectively. Also, during these periods, payments for land held for development amounted to $3.9 million, $22.9 million and $11.2 million, respectively. As a part of the Distribution Agreement and the Agreement and Plan of Merger, dated as of June 30, 1998, by and among Hilton Hotels Corporation, Park Place, Gaming Acquisition Corporation, Lakes and Grand (the "Merger Agreement"), 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. See Item 3. Legal Proceedings. 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 results of operations. The Company made the first deposit of $7.5 million on December 31, 1999. In 2000, Lakes deposited $18.0 million into an escrow account on behalf of the recipients in the Stratosphere shareholders' litigation and the Grand Casinos, Inc. shareholders' litigation. Such amounts are included as restricted cash on the accompanying consolidated balance sheets as of January 2, 2000 and December 31, 2000. In January 2001, Lakes also purchased the Shark Club property in Las Vegas for $10.1 million in settlement of another claim that was subject to the indemnification obligations. 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. 24 25 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 December 31, 2000. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's financial instruments include cash and cash equivalents, marketable securities and long-term debt. The Company's main investment objectives are the preservation of investment capital and the maximization of after-tax returns on its investment portfolio. Consequently, the Company invests with only high-credit-quality issuers and limits the amount of credit exposure to any one issuer. The Company does not use derivative instruments for speculative or investment purposes. The Company's cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of December 31, 2000, the carrying value of the Company's cash and cash equivalents approximates fair value. The Company's marketable debt securities (principally consisting of commercial paper, corporate bonds, and government securities) have a weighted average duration of one year or less. Consequently, such securities are not subject to significant interest rate risk. The Company's primary exposure to market risk associated with changes in interest rates involves the Company's notes receivable related to loans for the development and construction of Native American owned casinos. The loans and related note balances earn various interest rates based upon a defined reference rate. If interest rates rise or fall, the floating rate receivables may generate more or less interest income than what is currently recorded. As of December 31, 2000, Lakes had $49.3 million of floating rate notes receivables. Based on the applicable current reference rates and assuming all other factors remain constant, interest income for a twelve-month period would be $5.42 million. A reference rate increase of 100 basis points would result in an increase in interest income of $.3 million. A 100 basis point decrease in the reference rate would result in a decrease of $.5 million in interest income over the same twelve-month period. 25 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA LAKES GAMING, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants.................... 27 Consolidated Balance Sheets as of December 31, 2000 and January 2, 2000........................................... 28 Consolidated Statements of Earnings for the fiscal years ended December 31, 2000, January 2, 2000, and January 3, 1999...................................................... 29 Consolidated Statements of Comprehensive Earnings for the fiscal years ended December 31, 2000, January 2, 2000, and January 3, 1999........................................... 30 Consolidated Statements of Shareholders' Equity for the fiscal years ended December 31, 2000, January 2, 2000, and January 3, 1999........................................... 31 Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2000, January 2, 2000, and January 3, 1999...................................................... 32 Notes to Consolidated Financial Statements.................. 33
26 27 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 December 31, 2000 and January 2, 2000 and the related consolidated statements of earnings, comprehensive earnings, shareholders' equity and cash flows for each of the three years in the period ended December 31, 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 December 31, 2000 and January 2, 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Minneapolis, Minnesota January 26, 2001 27 28 LAKES GAMING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
2000 1999 -------- -------- ASSETS Current Assets: Cash and cash equivalents................................. $ 10,469 $ 24,392 Short-term investments.................................... 32,477 27,433 Current installments of notes receivable.................. 16,679 15,406 Accounts receivable....................................... 2,373 5,613 Deferred tax asset........................................ 13,674 6,301 Other current assets...................................... 2,383 1,079 -------- -------- Total Current Assets........................................ 78,055 80,224 -------- -------- Property and Equipment-Net.................................. 1,414 1,888 -------- -------- Other Assets: Land held for development................................. 58,671 54,812 Notes receivable-less current installments................ 35,337 20,022 Cash and cash equivalents-restricted...................... 30,270 12,149 Investments in and notes from unconsolidated affiliates... 3,209 8,446 Other long-term assets.................................... 5,853 5,997 -------- -------- Total Other Assets.......................................... 133,340 101,426 -------- -------- TOTAL ASSETS................................................ $212,809 $183,538 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable.......................................... $ 79 $ 488 Current maturities of long-term debt...................... 525 -- Income taxes payable...................................... 5,479 6,385 Litigation and claims accrual............................. 25,078 8,419 Other accrued expenses.................................... 4,521 6,099 -------- -------- Total Current Liabilities................................... 35,682 21,391 -------- -------- Long-term Liabilities: Long-term debt-less current maturities.................... 1,325 1,500 Deferred income taxes..................................... -- 786 -------- -------- Total Long-Term Liabilities................................. 1,325 2,286 -------- -------- TOTAL LIABILITIES........................................... 37,007 23,677 -------- -------- COMMITMENTS AND CONTINGENCIES (NOTE 7 AND 8) Shareholders' Equity: Capital stock, $.01 par value; authorized 100,000 shares; 10,638 and 10,629 common shares issued and outstanding at December 31, 2000, and January 2, 2000, respectively........................................... 106 106 Additional paid-in-capital................................ 131,525 131,406 Retained earnings......................................... 44,504 28,827 Accumulated other comprehensive loss...................... (333) (478) -------- -------- Total Shareholders' Equity.................................. 175,802 159,861 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $212,809 $183,538 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. 28 29 LAKES GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 2000, JANUARY 2, 2000 AND JANUARY 3, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999 1998 -------- ------- ------- REVENUES: Management fee income.................................... $ 59,044 $54,716 $92,347 COSTS AND EXPENSES: Selling, general and administrative...................... 9,025 7,750 14,557 Depreciation and amortization............................ 2,910 1,916 1,838 -------- ------- ------- Total Costs and Expenses................................... 11,935 9,666 16,395 -------- ------- ------- EARNINGS FROM OPERATIONS................................... 47,109 45,050 75,952 -------- ------- ------- OTHER INCOME (EXPENSE): Interest income.......................................... 7,943 7,580 5,601 Interest expense......................................... (97) (98) (98) Equity in loss of unconsolidated affiliates.............. (2,904) (2,925) (359) Gain (loss) on sale of securities........................ 61 1,264 (4,473) Provision for litigation loss............................ (18,000) -- -- Write-down of unconsolidated affiliates.................. (5,522) -- -- Other.................................................... 2 21 368 -------- ------- ------- Total other income (expense), net..................... (18,517) 5,842 1,039 -------- ------- ------- Earnings before income taxes............................... 28,592 50,892 76,991 Provision for income taxes................................. 12,915 22,065 15,811 -------- ------- ------- NET EARNINGS............................................... $ 15,677 $28,827 $61,180 ======== ======= ======= BASIC EARNINGS PER SHARE................................... $ 1.47 $ 2.72 $ 5.80 ======== ======= ======= DILUTED EARNINGS PER SHARE................................. $ 1.47 $ 2.67 $ 5.71 ======== ======= ======= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING................. 10,635 10,600 10,550 DILUTIVE EFFECT OF STOCK COMPENSATION PROGRAMS............. 7 186 162 -------- ------- ------- WEIGHTED AVERAGE COMMON AND DILUTED SHARES OUTSTANDING..... 10,642 10,786 10,712 ======== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 29 30 LAKES GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS YEARS ENDED DECEMBER 31, 2000, JANUARY 2, 2000 AND JANUARY 3, 1999 (IN THOUSANDS)
2000 1999 1998 ------- ------- ------- NET EARNINGS................................................ $15,677 $28,827 $61,180 OTHER COMPREHENSIVE INCOME, NET OF TAX: Unrealized gains (losses) on securities: Unrealized holding gains (losses) during the period.... 145 (1,114) 3,583 Less: reclassification adjustment for gains (losses) included in net earnings............................. 36 796 (2,818) ------- ------- ------- COMPREHENSIVE EARNINGS...................................... $15,786 $26,917 $67,581 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 30 31 LAKES GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2000, JANUARY 2, 2000 AND JANUARY 3, 1999 (IN THOUSANDS)
ACCUMULATED COMMON STOCK OTHER TOTAL --------------- ADDITIONAL DIVISION RETAINED COMPREHENSIVE SHAREHOLDERS' SHARES AMOUNT PAID-IN-CAPITAL EQUITY EARNINGS EARNINGS (LOSS) EQUITY ------ ------ --------------- --------- -------- --------------- ------------- 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 loss....... -- -- -- -- -- (1,114) (1,114) Net earnings................... -- -- -- -- 28,827 -- 28,827 ------ ---- -------- --------- ------- ------- -------- Balance, January 2, 2000......... 10,629 106 131,406 -- 28,827 (478) 159,861 Issuance of stock on options exercised -- net............. 9 -- 79 -- -- -- 79 Tax benefits from exercise of common stock options......... -- -- 40 -- -- -- 40 Other comprehensive earnings... -- -- -- -- -- 145 145 Net earnings................... -- -- -- -- 15,677 -- 15,677 ------ ---- -------- --------- ------- ------- -------- Balance, December 31, 2000....... 10,638 $106 $131,525 $ -- $44,504 $ (333) $175,802 ====== ==== ======== ========= ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. 31 32 LAKES GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, JANUARY 2, 2000 AND JANUARY 3, 1999 (IN THOUSANDS)
2000 1999 1998 ------- ------- ------- OPERATING ACTIVITIES: Net earnings.............................................. $15,677 $28,827 $61,180 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization............................. 2,910 1,916 1,838 (Gain) loss on sale of securities......................... (61) (1,264) 4,473 Equity in loss of unconsolidated affiliates............... 2,904 2,925 359 Write down of assets held as investments.................. 5,522 -- -- Deferred income taxes..................................... (9,480) (276) (1,040) Provision for litigation loss............................. 18,000 -- -- Changes in operating assets and liabilities: Accounts receivable.................................... 3,240 9,604 (8,792) Income taxes........................................... (906) (4,638) 23,596 Accounts payable....................................... (409) 488 -- Accrued expenses....................................... (1,001) (661) 6,193 Other.................................................. (1,284) (465) (2,040) ------- ------- ------- Net Cash Provided by Operating Activities................... 35,112 36,456 85,767 ------- ------- ------- INVESTING ACTIVITIES: Short-term investments, purchases......................... (52,795) (28,829) -- Short-term investments, sales/maturities.................. 48,080 500 -- Payments for land held for development.................... (3,858) (22,949) (11,229) Payments for notes receivable............................. (37,402) (12,406) (7,115) Proceeds from repayment of notes receivable............... 18,038 11,950 6,567 Investment in and notes receivable from unconsolidated affiliates............................................. (2,917) (8,035) (807) Increase in restricted cash, net.......................... (18,121) (7,157) (3,767) Decrease (increase) in other long-term assets............. (92) (2,539) 1,216 Proceeds from sale of securities.......................... -- 389 4,824 Payments for property and equipment, net.................. (397) (239) -- ------- ------- ------- Net Cash Used in Investing Activities....................... (49,464) (69,315) (10,311) ------- ------- ------- FINANCING ACTIVITIES: Distribution to Grand..................................... -- -- (51,890) Proceeds from issuance of common stock.................... 79 477 -- Proceeds on long-term debt................................ 350 -- -- ------- ------- ------- Net Cash Provided by (Used in) Financing Activities......... 429 477 (51,890) ------- ------- ------- Net increase (decrease) in cash and cash equivalents........ (13,923) (32,382) 23,566 Cash and cash equivalents -- beginning of period............ 24,392 56,774 33,208 ------- ------- ------- Cash and cash equivalents -- end of period.................. $10,469 $24,392 $56,774 ======= ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest.................................................. $ 97 $ 98 $ 98 Income taxes.............................................. 23,090 23,676 5,420
The accompanying notes are an integral part of these consolidated financial statements. 32 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, JANUARY 2, 2000, AND JANUARY 3, 1999 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 of one share 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. The merger and distribution received all necessary 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 currently manages the largest casino resort in Louisiana and has entered into development and management agreements with three separate tribes for three new casino operations, one in Michigan and two in California. The Company also has agreements for the development of a casino on Indian owned land in California through a joint venture, and has entered into a joint venture agreement for the development of land on the Las Vegas strip. 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. The Company reached an agreement with the Tunica-Biloxi Tribe of Louisiana, effective March 31, 2000, for the early buyout of the management contract for Grand Casino Avoyelles. The Tunica-Biloxi Tribe of Louisiana elected to exercise its option for the early buyout of the contract, which was scheduled to expire on June 3, 2001. The early buyout of the contract was provided for in the original seven-year management agreement and, under the agreement, Lakes was compensated for the management fees the Company would have received had it managed Grand Casino Avoyelles through the original contract expiration date of June 3, 2001, discounted to their present value. Included in management fee income for the year ended December 31, 2000 is approximately $16 million relating to the early buyout. Lakes was also repaid all amounts owing to it under its loan agreements with the Tribe. The management contract for Grand Casino Coushatta expires January 16, 2002. 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 Louisiana management contract will be renewed upon expiration or approved by the NIGC upon any such renewal. The failure to obtain approval of the renewed management contract would result in the loss of revenues to the Company derived from such contract, which would have a material adverse effect on the Company's results of operations. 33 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, JANUARY 2, 2000, AND JANUARY 3, 1999 -- (CONTINUED) Management contracts for the two previously managed Minnesota casinos, Grand Casino Mille Lacs and Grand Casino Hinckley concluded during 1998. The Coushatta Tribe entered into a tribal-state compact with the State of Louisiana on September 29, 1992. The compact was approved in November 1992 by the Secretary of the Interior. The compact expired November 4, 1999 and the State of Louisiana delivered a written notice of non-renewal. The Governor and the Tribe agreed on three extensions totaling thirteen months that were approved by the Department of the Interior. On December 11, 2000, the Tribe and the State of Louisiana agreed to terms of a new compact. The compact is subject to approval by the Department of the Interior. There can be no assurances that the compact will be approved by the Department of the Interior. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 December 31, 2000 (2000), January 2, 2000 (1999), and January 3, 1999 (1998). The activity from the date of the Transaction, December 31, 1998, to January 3, 1999 was not segregated from the full year's results as it was not material. PRINCIPLES OF CONSOLIDATION The accompanying audited and 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 50 percent ownership interest in each of Lakes Cloverdale, LLC, and Lakes Corning, LLC, joint ventures formed to develop casinos on Indian-owned land in California, 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. 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. On December 31, 2000, the carrying value of the investments in the unconsolidated affiliates of Fanball.com, Inc., Trak 21 Development, LLC, and Interactive Learning Group, Inc. were written down to zero. 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. 34 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, JANUARY 2, 2000, AND JANUARY 3, 1999 -- (CONTINUED) 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. 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):
2000 1999 ------ ------ Land.................................................. 875 1,234 Leasehold improvements................................ 376 376 Furniture and equipment............................... 1,513 1,466 ------ ------ 2,764 3,076 Less: Accumulated depreciation........................ (1,350) (1,188) ------ ------ Property and equipment, net........................... 1,414 1,888 ====== ======
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 16-acre site in Las Vegas, Nevada, which the Company controls. Lakes formed a joint venture, Metroplex-Lakes, LLC, to develop the real estate. The joint venture has a two-year option to buy the majority of the site from Lakes at a price that approximates Lakes' investment in the property. 35 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, JANUARY 2, 2000, AND JANUARY 3, 1999 -- (CONTINUED) 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. 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. 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 period ended January 3, 1999 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. Stock options that could potentially dilute earnings per share in the future of 867,268 and 620,969 in 2000 and 1999, respectively, were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented. 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 Coushatta Tribe of Louisiana and the Pokagon Band of Potawatomi Indians. ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments and for hedging activities. Implementation of SFAS 133 is required as of the beginning of fiscal year 2001 and will not have a material effect on the Company's financial position or results of operations. 36 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, JANUARY 2, 2000, AND JANUARY 3, 1999 -- (CONTINUED) RECLASSIFICATIONS Certain amounts in the 1999 and 1998 consolidated financial statements have been reclassified to conform to the 2000 presentation. These reclassifications had no effect on previously reported net earnings or shareholders' equity. 2. MANAGEMENT CONTRACTS FOR INDIAN-OWNED CASINOS: The Company reached an agreement with the Tunica-Biloxi Tribe of Louisiana, effective March 31, 2000, for the early buyout of the management contract for Grand Casino Avoyelles. The Tunica-Biloxi Tribe of Louisiana elected to exercise its option for the early buyout of the contract, which was scheduled to expire June 3, 2001. 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 Tunica-Biloxi Tribe of Louisiana. Under the early buyout agreement, the Company was compensated for the management fees, discounted to present value, the Company would have received had it managed Grand Casino Avoyelles through the original contract expiration date. 2000 results include $19.8 million in revenues from the management contract for Grand Casino Avoyelles that concluded during 2000. The Company's revenues and earnings will not include contribution from this operation going forward. 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. 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 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. 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 contract for the Coushatta Tribe of Louisiana has 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. 37 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, JANUARY 2, 2000, AND JANUARY 3, 1999 -- (CONTINUED) 3. NOTES RECEIVABLE: Notes receivable consist of the following (in thousands):
DECEMBER 31, 2000 JANUARY 2, 2000 ----------------- --------------- Notes from the Pokagon Band of Potawatomi Indians with variable interest rates, (not to exceed 10%), (10% at December 31, 2000), receivable in 60 monthly installments subsequent to commencement date........................... $ 21,918 $ 2,035 Notes from the Coushatta Tribe with variable interest rates (10.5% at December 31, 2000), receivable in 84 monthly installments through January 2002......................... 12,227 22,484 Notes from the Tunica-Biloxi Tribe repaid in 2000........... -- 6,196 Notes from the Shingle Springs Band of Miwok Indians with variable interest rates (11.5% at December 31, 2000), receivable in 12 monthly installments subsequent to commencement date......................................... 5,554 1,559 Notes from the Jamul Indian Village with variable interest rates (11.5% at December 31, 2000), receivable in 12 monthly installments subsequent to commencement date...... 3,372 859 Notes from ViatiCare Financial Services, LLC, with variable interest rates (13.5% at December 31, 2000)............... 3,740 -- Other....................................................... 5,205 2,295 -------- -------- Total notes receivable.................................... 52,016 35,428 Less -- current installments of notes receivable............ (16,679) (15,406) -------- -------- Notes receivable, less current installments............... $ 35,337 $ 20,022 ======== ========
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 are 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 December 31, 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 December 31, 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. 38 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, JANUARY 2, 2000, AND JANUARY 3, 1999 -- (CONTINUED) 4. INCOME TAXES: The provisions for income taxes attributable to earnings for 2000, 1999, and 1998 consisted of the following (in thousands):
YEARS ENDED --------------------------------- 2000 1999 1998 ------- ----------- ------- Current: Federal................................................. $17,602 $17,649 $14,482 State................................................... 4,793 4,692 2,369 ------- ------- ------- 22,395 22,341 16,851 Deferred.................................................. (9,480) (276) (1,040) ------- ------- ------- $12,915 $22,065 $15,811 ======= ======= =======
Reconciliations of the statutory federal income tax rate to the Company's actual rate based on earnings before income taxes for 2000, 1999, and 1998 are summarized as follows:
YEARS ENDED --------------------- 2000 1999 1998 ---- ---- ----- Statutory federal tax rate.................................. 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit....... 6.0 6.0 2.0 Valuation allowance increases (decreases) on Stratosphere losses and write-down..................................... -- -- (22.5) Other, net.................................................. 4.0 2.4 6.0 ---- ---- ----- 45.0% 43.4% 20.5% ==== ==== =====
The Company's deferred income tax liabilities and assets are as follows (in thousands):
2000 1999 1998 ------- ------- ------- Current deferred tax asset: Accruals, reserves and other.............................. $13,674 $ 6,301 $ 7,370 ======= ======= ======= Non-current deferred taxes: Unrealized investment losses (gains)...................... 2,670 1,815 (114) Capitalized interest...................................... (1,737) (1,737) (1,483) Development cost amortization............................. (35) (784) (960) Other..................................................... 423 (80) (176) ------- ------- ------- Net non-current deferred tax asset (liability).............. $ 1,321 $ (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 collectibility of a note receivable from Stratosphere. 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. 39 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, JANUARY 2, 2000, AND JANUARY 3, 1999 -- (CONTINUED) 5. LONG-TERM DEBT: The Company has three notes payable with third parties. The first is collateralized by certificates of deposit, with $1.0 million outstanding at December 31, 2000 and January 2, 2000. Interest is compounded and paid on a quarterly basis at 10%. The principal and any unpaid interest are due December 22, 2002. The second is collateralized by property with $0.5 million outstanding at December 31, 2000 and 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. The third is collateralized by property with $0.4 million outstanding at December 31, 2000. Interest is compounded and paid on a quarterly basis at 8.5%. The principal and any unpaid interest are due October 9, 2002. 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 Distribution, 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) Granted............................................... 105,500 (105,500) (7.88 - 8.88) Canceled.............................................. (85,080) 85,080 (8.33 - 16.10) Exercised............................................. (9,555) -- (8.33 - 8.33) --------- ---------- -------------- Balance at December 31, 2000.......................... 2,330,718 1,362,106 $(7.42 - 17.72) ========= ========== ============== Exercisable at December 31, 2000...................... 1,118,818 $(7.42 - 17.72) ========= ==============
40 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, JANUARY 2, 2000, AND JANUARY 3, 1999 -- (CONTINUED) 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):
2000 1999 1998 ------- ------- ------- Net earnings (loss): As reported............................................... $15,677 $28,827 $61,180 Pro forma................................................. 15,644 28,431 59,694 Net earnings (loss) per share: As reported -- Basic...................................... $ 1.47 $ 2.72 $ 5.80 Pro forma -- Basic........................................ 1.47 2.68 5.66 As reported -- Diluted.................................... 1.47 2.67 5.71 Pro forma -- Diluted...................................... 1.47 2.64 5.57
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 exercise value of the options issued in 2000 range from $7.88 per share to $8.88 per share and the exercise 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:
2000 1999 1998 ---------- ---------- ---------- Risk-free interest rate............................. 6.45-6.92% 5.20-6.50% 4.83-5.85% Expected life....................................... 10 years 10 years 10 years Expected volatility................................. .453-.538 .452-.485 .487-.509 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 Distribution 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 $.09 million, $.03 million, and $.03 million during 2000, 1999, and 1998, 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 $.8 million, $1.3 million, and $0.2 million for 2000, 1999 and 1998, respectively. Future minimum 41 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, JANUARY 2, 2000, AND JANUARY 3, 1999 -- (CONTINUED) lease payments, excluding contingent rentals, due under non-cancelable operating leases as of December 31, 2000 are as follows (in thousands):
OPERATING LEASES 2001....................................................... 2,978 2002....................................................... 3,108 2003....................................................... 3,176 2004....................................................... 3,246 2005....................................................... 3,318 Thereafter................................................. 40,862 ------- $56,688 =======
PURCHASE OPTIONS The Company 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 $39.1 million anytime prior to January 2, 2003. LOAN GUARANTY AGREEMENTS 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 December 31, 2000 and January 2, 2000, the amounts outstanding were $13.0 million and $19.3 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 in July, 2000, Lakes deposited $18 million in an escrow account in partial satisfaction of the indemnification obligation. Such amounts are included as restricted cash on the accompanying balance sheets as of December 31, 2000 and 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. 42 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, JANUARY 2, 2000, AND JANUARY 3, 1999 -- (CONTINUED) 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. 43 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, JANUARY 2, 2000, AND JANUARY 3, 1999 -- (CONTINUED) 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 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. The parties have reached a settlement covering the Stratosphere shareholders litigation. A stipulation of settlement was approved by the Court on December 4, 2000. The Stratosphere state and federal settlement was for $9 million, inclusive of all plaintiffs fees and costs. A conditional judgment was entered and no distribution of the settlement will occur until the Minnesota federal litigation is also dismissed. 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. As described under "Stratosphere Shareholder Litigation -- Federal Court" above, the parties have reached a $9 million settlement covering the Stratosphere shareholders litigation in federal and state courts. The state court litigation will be dismissed with prejudice. 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. The consolidated complaint sought class action treatment for a class comprising all persons (other than the defendants) who purchased Grand common stock during the period from December 19, 1995 through July 19, 1996. 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. 44 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, JANUARY 2, 2000, AND JANUARY 3, 1999 -- (CONTINUED) 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. On March 28, 2000, the Court granted the motion in part and denied the motion in part. The Court dismissed with prejudice, all claims against the defendants as to the members of the putative class who did not purchase Grand common stock during the period from December 19, 1995 through June 6, 1996 inclusive. 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. On June 19, 2000, the Company announced that a settlement agreement had been reached regarding the litigation. The agreement called for the Company to pay $9 million to the Grand shareholders for full and final settlement of all claims covering the original class period. The settlement agreement is subject to final approval by the US District Court for the District of Minnesota. The $9 million was placed into an escrow account by Lakes on behalf of the recipients in July 2000. 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. 45 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, JANUARY 2, 2000, AND JANUARY 3, 1999 -- (CONTINUED) 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, portions of the Motions for Summary Judgment by both parties were denied in part. The Court subsequently denied Grand's request for expedited appellate court review as to the portions of the Motions that were denied. Thereafter, the parties jointly sought the Court's consideration of a subsequent summary judgment motion. During the August 30, 2000 scheduled pretrial conference call, the Court and the parties agreed to try the action upon an amended joint pretrial order and a series of post-trial briefs. Post-trial briefing concluded on December 12, 2000 and oral argument was held January 22, 2001. During oral argument, the Court asked both parties to submit findings of fact and conclusions of law within three weeks. The Court did not indicate its decision. 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 December 31, 2000. 46 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, JANUARY 2, 2000, AND JANUARY 3, 1999 -- (CONTINUED) 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. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED): Year ended December 31, 2000 (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Net revenues...................................... $31,053 $10,655 $10,684 $ 6,652 Earnings from operations.......................... 27,078 7,580 7,708 4,743 Net earnings (loss)............................... 16,115 (5,311) 4,976 (103) Earnings (loss) per share: Basic........................................... $ 1.52 $ (.50) $ .47 $ (.02) Diluted......................................... 1.52 (.50) .46 (.01)
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
10. SUBSEQUENT EVENTS (UNAUDITED): On January 10, 2001, the Company exercised its call option to purchase the Shark Club property in Las Vegas, Nevada for $10.1 million. Lakes, through its' joint venture Metroplex-Lakes, LLC, plans to develop an upscale retail, commercial, hotel and entertainment complex on this site, and adjoining Lakes property, surrounding the corner of Harmon Avenue and Las Vegas Boulevard (the "Strip") in Las Vegas, Nevada. On February 8, 2001, the Company announced its intention to discontinue involvement in the casino development planned by the Paskenta Band of Nomlaki Indians in California. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 47 48 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information in response to this item is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this 10-K. ITEM 11. EXECUTIVE COMPENSATION Information in response to this item is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information in response to this item is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information in response to this item is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this 10-K. 48 49 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Consolidated Financial Statements:
PAGE ---- Report of Independent Public Accountants.................... 27 Consolidated Balance Sheets as of December 31, 2000 and January 2, 2000........................................... 28 Consolidated Statements of Earnings for the fiscal years ended December 31, 2000, January 2, 2000 and January 3, 1999...................................................... 29 Consolidated Statements of Comprehensive Earnings for the fiscal years ended December 31, 2000, January 2, 2000 and January 3, 1999........................................... 30 Consolidated Statements of Shareholders' Equity for the fiscal years ended December 31, 2000, January 2, 2000 and January 3, 1999........................................... 31 Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2000, January 2, 2000 and January 3, 1999...................................................... 32 Notes to Consolidated Financial Statements.................. 33
(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.)
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EXHIBITS DESCRIPTION -------- ----------- 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.) 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 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.) 10.12 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.) 10.13 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.) 10.14 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.) 10.15 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.) 10.16 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.)
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EXHIBITS DESCRIPTION -------- ----------- 10.17 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.) 10.18 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.) 10.19 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.) 10.20 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.) 10.21 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.) 10.22 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.) 10.23 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.) 10.24 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.) 10.25 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.) 10.26 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.)
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EXHIBITS DESCRIPTION -------- ----------- 10.27 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.) 10.28 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.) 10.29 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.) 10.30 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.) 10.31 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.) 10.32 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.) 10.33 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.) 10.34 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.) 10.35 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.)
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EXHIBITS DESCRIPTION -------- ----------- 10.36 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.) 10.37 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.) 10.38 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. (Incorporated herein by reference to Exhibit 10.61 to Lakes' Report on Form 10-K for the fiscal year ended January 2, 2000.) 10.39 Management Agreement dated as of July 8, 1999, by and between the Pokagon Band of Potawatomi Indians and Lakes Gaming, Inc., a Minnesota corporation. (Incorporated herein by reference to Exhibit 10.62 to Lakes' Report on Form 10-K for the fiscal year ended January 2, 2000.) 10.40 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. (Incorporated herein by reference to Exhibit 10.63 to Lakes' Report on Form 10-K for the fiscal year ended January 2, 2000.) 10.41 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. (Incorporated herein by reference to Exhibit 10.64 to Lakes' Report on Form 10-K for the fiscal year ended January 2, 2000.) 10.42 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. (Incorporated herein by reference to Exhibit 10.65 to Lakes' Report on Form 10-K for the fiscal year ended January 2, 2000.) 10.43 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. (Incorporated herein by reference to Exhibit 10.66 to Lakes' Report on Form 10-K for the fiscal year ended January 2, 2000.) 10.44 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. (Incorporated herein by reference to Exhibit 10.67 to Lakes' Report on Form 10-K for the fiscal year ended January 2, 2000.) 10.45 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. (Incorporated herein by reference to Exhibit 10.68 to Lakes' Report on Form 10-K for the fiscal year ended January 2, 2000.) 10.46 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. (Incorporated herein by reference to Exhibit 10.69 to Lakes' Report on Form 10-K for the fiscal year ended January 2, 2000.)
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EXHIBITS DESCRIPTION -------- ----------- 10.47 Promissory Note dated as of the 15th day of February, 2000 by and among the Jamul Indian Village and Lakes KAR -- California, LLC, a Delaware limited liability company. (Incorporated herein by reference to Exhibit 10.70 to Lakes' Report on Form 10-K for the fiscal year ended January 2, 2000.) 10.48 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. (Incorporated herein by reference to Exhibit 10.71 to Lakes' Report on Form 10-K for the fiscal year ended January 2, 2000.) 10.49 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. (Incorporated herein by reference to Exhibit 10.72 to Lakes' Report on Form 10-K for the fiscal year ended January 2, 2000.) 10.50 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. (Incorporated herein by reference to Exhibit 10.73 to Lakes' Report on Form 10-K for the fiscal year ended January 2, 2000.) 10.51 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. (Incorporated herein by reference to Exhibit 10.74 to Lakes' Report on Form 10-K for the fiscal year ended January 2, 2000.) 10.52 Operating Agreement of Lakes KAR -- Shingle Springs, LLC dated as of the 29th day of July, 1999 by Lakes Shingle Springs, Inc. and Kean Argovitz Resorts -- Shingle Springs, LLC. (Incorporated herein by reference to Exhibit 10.75 to Lakes' Report on Form 10-K for the fiscal year ended January 2, 2000.) 10.53 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. (Incorporated herein by reference to Exhibit 10.76 to Lakes' Report on Form 10-K for the fiscal year ended January 2, 2000.) 10.54 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. (Incorporated herein by reference to Exhibit 10.77 to Lakes' Report on Form 10-K for the fiscal year ended January 2, 2000.) 10.55 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. (Incorporated herein by reference to Exhibit 10.78 to Lakes' Report on Form 10-K for the fiscal year ended January 2, 2000.) 10.56 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. (Incorporated herein by reference to Exhibit 10.79 to Lakes' Report on Form 10-K for the fiscal year ended January 2, 2000.) 10.57 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. (Incorporated herein by reference to Exhibit 10.80 to Lakes' Report on Form 10-K for the fiscal year ended January 2, 2000.)
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EXHIBITS DESCRIPTION -------- ----------- 10.58 Joint Contribution Agreement by and between Grand Casinos Nevada I, Inc., Metroplex, LLC, Lakes Gaming, Inc., and Metroplex-Lakes, LLC dated as of April 25, 2000. (Incorporated herein by reference to Exhibit 10.1 to Lakes' Report on Form 10-Q for the quarter ended July 2, 2000.) 10.59 Member Control Agreement of Metroplex-Lakes, LLC, by and between Grand Casinos Nevada I, Inc., Metroplex, LLC, and Metroplex-Lakes, LLC dated as of April 25, 2000. (Incorporated herein by reference to Exhibit 10.2 to Lakes' Report on Form 10-Q for the quarter ended July 2, 2000.) 10.60 Real Estate Option Agreement by and between Grand Casinos Nevada I, Inc., Metroplex-Lakes, LLC, and Metroplex, LLC dated as of April 25, 2000. (Incorporated herein by reference to Exhibit 10.3 to Lakes' Report on Form 10-Q for the quarter ended July 2, 2000.) 10.61 Amended and Restated Option Agreement by and between Martin J. Cable and Olga B. Cable, as Trustees of the Cable Family Trust and Grand Casinos Nevada I, Inc. dated as of June 1, 2000. (Incorporated herein by reference to Exhibit 10.4 to Lakes' Report on Form 10-Q for the quarter ended July 2, 2000.) 10.62 Acquisition and Participation Agreement, dated as of August 7, 2000, by and between MRD Gaming, LLC, a Nevada limited liability company, and Lakes Gaming and Resorts, LLC, a Minnesota limited liability company. (Incorporated herein by reference to Exhibit 10.1 to Lakes' Report on Form 10-Q for the quarter ended October 1, 2000.) 10.63 First Amendment to Acquisition and Participation Agreement, dated as of October 12, 2000, by and between MRD Gaming, LLC, a Nevada limited liability company, and Lakes Gaming and Resorts, LLC, a Minnesota limited liability company. (Incorporated herein by reference to Exhibit 10.2 to Lakes' Report on Form 10-Q for the quarter ended October 1, 2000.) 10.64 Member Control Agreement of Pacific Coast Gaming -- Corning, LLC. (Incorporated herein by reference to Exhibit 10.3 to Lakes' Report on Form 10-Q for the quarter ended October 1, 2000.) 10.65 Member Control Agreement of Pacific Coast Gaming -- Santa Rosa, LLC. (Incorporated herein by reference to Exhibit 10.4 to Lakes' Report on Form 10-Q for the quarter ended October 1, 2000.) 10.66 Promissory Note, dated as of October 12, 2000, by and between Pacific Coast Gaming -- Corning, LLC, a Minnesota limited liability company, and Lakes Corning, LLC, a Minnesota limited liability company. (Incorporated herein by reference to Exhibit 10.5 to Lakes' Report on Form 10-Q for the quarter ended October 1, 2000.) 10.67 Promissory Note, dated as of October 12, 2000, by and between Pacific Coast Gaming -- Santa Rosa, LLC, a Minnesota limited liability company, and Lakes Cloverdale, LLC, a Minnesota limited liability company. (Incorporated herein by reference to Exhibit 10.6 to Lakes' Report on Form 10-Q for the quarter ended October 1, 2000.) 10.68 Assignment and Assumption Agreement, dated as of October 16, 2000, by and among Great Lakes of Michigan, LLC, a Minnesota limited liability company, Lakes Gaming, Inc., a Minnesota corporation, and Pokagon Band of Potawatomi Indians. (Incorporated herein by reference to Exhibit 10.7 to Lakes' Report on Form 10-Q for the quarter ended October 1, 2000.) 10.69 First Amended and Restated Development Agreement, dated as of October 16, 2000, by and between the Pokagon Band of Potawatomi Indians and Great Lakes Gaming of Michigan, LLC, a Minnesota limited liability company (f/k/a Great Lakes of Michigan, LLC). (Incorporated herein by reference to Exhibit 10.8 to Lakes' Report on Form 10-Q for the quarter ended October 1, 2000.)
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EXHIBITS DESCRIPTION -------- ----------- 10.70 First Amended and Restated Management Agreement, dated as of October 16, 2000, by and between the Pokagon Band of Potawatomi Indians and Great Lakes Gaming of Michigan, LLC, a Minnesota limited liability company (f/k/a Great Lakes of Michigan, LLC). (Incorporated herein by reference to Exhibit 10.9 to Lakes' Report on Form 10-Q for the quarter ended October 1, 2000.) 10.71 First Amended and Restated Lakes Note, dated as of October 16, 2000, by and between the Pokagon Band of Potawatomi Indians and Great Lakes of Michigan, LLC, a Minnesota limited liability company. (Incorporated herein by reference to Exhibit 10.10 to Lakes' Report on Form 10-Q for the quarter ended October 1, 2000.) 10.72 First Amended and Restated Non-Gaming Land Acquisition Line of Credit, dated as of October 16, 2000, by and between the Pokagon Band of Potawatomi Indians and Great Lakes of Michigan, LLC, a Minnesota limited liability company. (Incorporated herein by reference to Exhibit 10.11 to Lakes' Report on Form 10-Q for the quarter ended October 1, 2000.) 10.73 Amended and Restated Transition Loan Note, dated as of October 16, 2000, by and between the Pokagon Band of Potawatomi Indians and Great Lakes of Michigan, LLC, a Minnesota limited liability company. (Incorporated herein by reference to Exhibit 10.12 to Lakes' Report on Form 10-Q for the quarter ended October 1, 2000.) 10.74 Amendment to Account Control Agreement, dated as of October 16, 2000, by and among Great Lakes of Michigan, LLC, a Minnesota limited liability company, Lakes Gaming, Inc., a Minnesota corporation, the Pokagon Band of Potawatomi Indians, and Firstar Bank, N.A. f/k/a Firstar Bank of Minnesota, N.A. (Incorporated herein by reference to Exhibit 10.13 to Lakes' Report on Form 10-Q for the quarter ended October 1, 2000.) 10.75 Unlimited Guaranty, dated as of October 16, 2000, from Lakes Gaming, Inc., a Minnesota corporation, and Great Lakes of Michigan, LLC, a Minnesota limited liability company, to the Pokagon Band of Potawatomi Indians. (Incorporated herein by reference to Exhibit 10.14 to Lakes' Report on Form 10-Q for the quarter ended October 1, 2000.) 10.76 Amendment to Pledge and Security Agreement, dated as of October 16, 2000, by and among the Great Lakes of Michigan, LLC, a Minnesota limited liability company, Lakes Gaming, Inc., a Minnesota corporation, and the Pokagon Band of Potawatomi Indians. (Incorporated herein by reference to Exhibit 10.15 to Lakes' Report on Form 10-Q for the quarter ended October 1, 2000.) 21 Subsidiaries of the Company. 23 Consent of Independent Public Accountants Dated January 26, 2001.
--------------- * Management Compensatory Plan or Arrangement (b) Reports on Form 8-K. (i) A Form 8-K, Item 5. Other Events, was filed on October 24, 2000 56 57 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, 2001 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, 2001.
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/ NEIL I. SELL Director --------------------------------------------- Neil I. Sell /s/ JOEL N. WALLER Director --------------------------------------------- Joel N. Waller
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