10-Q 1 c87666e10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 4, 2004 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 ENTERTAINMENT, 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) (Zip Code) (952) 449-9092 (Registrant's telephone number, including area code) 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of August 11, 2004, there were 22,225,884 shares of Common Stock, $0.01 par value per share, outstanding. All share and per share data for periods prior to May 3, 2004 has been retroactively restated to give effect to a two-for-one stock split (the "Stock Split") in the form of a 100% stock dividend paid on May 3, 2004 to shareholders of record on April 26, 2004. LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES INDEX
PAGE OF FORM 10-Q --------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of 3 July 4, 2004 and December 28, 2003 Condensed Consolidated Statements of Earnings for the 4 three months ended July 4, 2004 and June 29, 2003 Condensed Consolidated Statements of Comprehensive 5 Earnings for the three months ended July 4, 2004 and June 29, 2003 Condensed Consolidated Statements of Loss for the six 6 months ended July 4, 2004 and June 29, 2003 Condensed Consolidated Statements of Comprehensive Loss 7 for the six months ended July 4, 2004 and June 29, 2003 Condensed Consolidated Statements of Cash Flows for 8 the six months ended July 4, 2004 and June 29, 2003 Notes to Condensed Consolidated Financial Statements 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 21 CONDITION AND RESULTS OF OPERATIONS ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 29 ITEM 4. CONTROLS AND PROCEDURES 29 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 30 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 32 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 33
2 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)
JULY 4, 2004 DECEMBER 28, 2003 ------------ ----------------- ASSETS Current Assets: Cash and cash equivalents $ 19,405 $ 25,340 Accounts receivable, net 323 1,038 Deferred tax asset 5,385 5,385 Prepaids 2,878 2,119 Other current assets 914 1,645 -------- -------- Total Current Assets 28,905 35,527 -------- -------- Property and Equipment-Net 6,485 6,492 -------- -------- Other Assets: Land held under contract for sale 4,863 4,612 Land held for development 14,159 14,536 Notes receivable 88,135 84,682 Investments 7,893 8,717 Deferred tax asset 7,472 6,634 Other long-term assets 9,036 8,860 -------- -------- Total Other Assets 131,558 128,041 -------- -------- TOTAL ASSETS $166,948 $170,060 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 1,360 $ 1,906 Income taxes payable 7,042 7,215 Accrued payroll and related costs 589 497 Other accrued expenses 4,445 3,018 -------- -------- Total Current Liabilities 13,436 12,636 -------- -------- TOTAL LIABILITIES 13,436 12,636 -------- -------- COMMITMENTS AND CONTINGENCIES Shareholders' Equity: Capital stock, $.01 par value; authorized 100,000 shares; 22,226 and 21,474 common shares issued and outstanding at July 4, 2004, and December 28, 2003, respectively 222 215 Additional paid-in-capital 136,290 132,291 Retained Earnings 17,000 24,918 -------- -------- Total Shareholders' Equity 153,512 157,424 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $166,948 $170,060 ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 3 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
(UNAUDITED) THREE MONTHS ENDED ------------------ JULY 4, 2004 JUNE 29, 2003 ------------ ------------- REVENUES: License fee income $ 4,718 $ 2,954 -------- -------- Total Revenues 4,718 2,954 -------- -------- COSTS AND EXPENSES: Selling, general and administrative 3,155 3,788 Production costs 2,645 1,162 Impairment losses 6,407 - Reversal of litigation and claims accrual - (3,212) Depreciation and amortization 150 131 -------- -------- Total Costs and Expenses 12,357 1,869 -------- -------- LOSS FROM OPERATIONS (7,639) 1,085 -------- -------- OTHER INCOME (EXPENSE): Interest income 43 314 Equity in earnings (loss) of unconsolidated affiliates (23) (60) Other - (1) -------- -------- Total other income, net 20 253 -------- -------- Earnings (loss) before income taxes (7,619) 1,338 Provision (benefit) for income taxes (461) 549 -------- -------- NET EARNINGS (LOSS) ($ 7,158) $ 789 ======== ======== BASIC EARNINGS (LOSS) PER SHARE ($ 0.32) $ 0.04 ======== ======== DILUTED EARNINGS (LOSS) PER SHARE ($ 0.32) $ 0.04 ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 22,212 21,276 DILUTIVE EFFECT OF STOCK COMPENSATION PROGRAMS - 1 -------- -------- WEIGHTED AVERAGE COMMON AND DILUTED SHARES OUTSTANDING 22,212 21,277 ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 4 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (IN THOUSANDS)
(UNAUDITED) THREE MONTHS ENDED ------------------ JULY 4, 2004 JUNE 29, 2003 ------------ ------------- NET EARNINGS (LOSS) ($7,158) $789 OTHER COMPREHENSIVE EARNINGS (LOSS), NET OF TAX: Unrealized gains (losses) on securities - - ------ ---- COMPREHENSIVE EARNINGS (LOSS) ($7,158) $789 ====== ====
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 5 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF LOSS (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
(UNAUDITED) SIX MONTHS ENDED ---------------- JULY 4, 2004 JUNE 29, 2003 ------------ ------------- REVENUES: License fee income $ 8,858 $ 3,504 ------- ------- Total Revenues 8,858 3,504 ------- ------- COSTS AND EXPENSES: Selling, general and administrative 6,415 5,866 Production costs 5,117 2,063 Impairment losses 6,407 - Reversal of litigation and claims accrual - (3,212) Depreciation and amortization 293 259 ------- ------- Total Costs and Expenses 18,232 4,976 ------- ------- LOSS FROM OPERATIONS (9,374) (1,472) ------- ------- OTHER INCOME (EXPENSE): Interest income 91 551 Equity in loss of unconsolidated affiliates 396 (147) Other 42 158 ------- ------- Total other income, net 529 562 ------- ------- Loss before income taxes (8,845) (910) Benefit for income taxes (927) (372) ------- ------- NET LOSS ($ 7,918) ($ 538) ======= ======= BASIC LOSS PER SHARE ($ 0.36) ($ 0.03) ======= ======= DILUTED LOSS PER SHARE ($ 0.36) ($ 0.03) ======= ======= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 21,982 21,276 DILUTIVE EFFECT OF STOCK COMPENSATION PROGRAMS - - ------- ------- WEIGHTED AVERAGE COMMON AND DILUTED SHARES OUTSTANDING 21,982 21,276 ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 6 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (IN THOUSANDS)
(UNAUDITED) SIX MONTHS ENDED ------------------------------ JULY 4, 2004 JUNE 29, 2003 ------------ ------------- NET LOSS ($ 7,918) ($ 538) OTHER COMPREHENSIVE EARNINGS (LOSS), NET OF TAX: Unrealized gains (losses) on securities - - ------- ------ COMPREHENSIVE LOSS ($ 7,918) ($ 538) ======= ======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 7 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
(UNAUDITED) SIX MONTHS ENDED ---------------- JULY 4, 2004 JUNE 29, 2003 ------------ ------------- OPERATING ACTIVITIES: Net loss ($ 7,918) ($ 538) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 293 259 Unit-based compensation expense 270 27 Equity in (earnings) loss of unconsolidated affiliates (396) 147 Deferred income taxes (838) 1,418 Impairments and write-downs 6,407 - Changes in operating assets and liabilities: Accounts receivable 715 (832) Income taxes (173) (1,252) Accounts payable (546) (130) Accrued expenses 1,519 (2,922) Other (28) (220) -------- -------- Net Cash Used in Operating Activities (695) (4,043) -------- -------- INVESTING ACTIVITIES: Payments for land held under contract for sale (251) (433) Payments received on land held under contract for sale - 16,765 Payments made for land held for development (122) (1,591) Advances on notes receivable (9,383) (6,642) Investment in and notes receivable from unconsolidated affiliates 1,242 (495) Increase in restricted cash, net - 5,906 Increase in other long-term assets (176) (225) Reduction of (payments for) property and equipment, net (286) 6 -------- -------- Net Cash Provided by (Used in) Investing Activities (8,976) 13,291 -------- -------- FINANCING ACTIVITIES: Proceeds from issuance of common stock 3,736 - -------- -------- Net Cash Provided by Financing Activities 3,736 - -------- -------- Net decrease in cash and cash equivalents (5,935) 9,248 Cash and cash equivalents - beginning of period 25,340 14,106 -------- -------- CASH AND CASH EQUIVALENTS - END OF PERIOD $ 19,405 $ 23,354 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Income taxes $ 13 $ 4 Noncash operating activities: Capitalized television costs related to unit options issued to consultants 139 -
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 8 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BUSINESS Lakes Entertainment, 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"). Lakes' primary business is to develop and manage Indian-owned casino properties that offer the opportunity for long-term development of related entertainment facilities, including hotels, theaters, recreational vehicle parks and other complementary amenities designed to enhance the customers' total entertainment experience and to differentiate facilities managed by Lakes from its competitors. Lakes provides experienced corporate and casino management and develops and implements a wide scale of marketing programs. In conjunction with this part of Lakes' business strategy, Lakes has entered into development and management agreements relating to one casino project in Michigan and two casino projects in California, with development of each subject to regulatory approvals. Lakes has also explored, and will continue to explore, numerous other possible development projects. Formed in March 2002 as a joint venture, World Poker Tour, LLC ("WPT"), a 78% owned subsidiary of Lakes, has created a circuit of previously-established poker tournaments affiliated under the "World Poker Tour" name, and has produced the World Poker Tour television series. WPT signed an agreement for a second season with the Travel Channel, LLC ("TRV"), for broadcast of the World Poker Tour series on cable television. TRV was also granted options for five additional seasons. WPT receives a series of fixed license payments from TRV. Lakes has recently created a new division to buy, license and/or market new table game concepts for licensing to casinos. The Company is currently testing a number of new games and there may be revenue from this effort beginning during 2004. See also Note 8. LAND HELD UNDER CONTRACT FOR SALE On December 28, 2001, the Company transferred title and ownership obligations of the Polo Plaza shopping center property to Metroflag Polo, LLC. In conjunction with this transaction, Lakes transferred to Metroflag BP, LLC, rights to and obligations of the adjacent Travelodge property consisting of a long-term land lease and a motel operation. During 2002, Lakes and Metroflag restructured the terms of the Polo Plaza and Travelodge property transactions due to deteriorating economic conditions. The parties reduced the purchase price for the Polo Plaza property from $23.8 million to $21.8 million. During March of 2003, Lakes and Metroflag agreed to additional revisions to the terms of the Polo Plaza and Travelodge property transactions. The parties increased the price of the Polo Plaza property from $21.8 million to $25.8 million and extended the payment date to May 15, 2003. On the payment date, $16.8 million of the purchase price was paid to Lakes in cash, $4.0 million was paid through the issuance to Lakes of a preferred membership interest in Metroflag and $4.0 million was paid through the issuance to Lakes of a subordinated membership interest in Metroflag. 9 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Previously, Metroflag paid $1.0 million in cash as a down payment. Lakes can require Metroflag to repurchase the $4.0 million preferred interest any time on or after December 24, 2006. The subordinated interest must be repurchased for $4.0 million at the time of repayment by Metroflag of an outstanding $3.5 million contractual commitment in connection with the Travelodge property, which is scheduled on or before December 28, 2004. In March of 2003, the parties decreased the sale price of the Travelodge property from $7.5 million to $3.5 million. At that time, the contractual commitment to pay Lakes was also decreased from $7.5 million to $3.5 million, as a result of the increase in the purchase price of the Polo Plaza property discussed above. During 2003, Lakes took a $1.0 million impairment charge on the Travelodge property. If the Travelodge commitment is not repaid by December 28, 2004, ownership of the Travelodge lease rights would revert back to Lakes. If this were to occur, the property would be recorded on Lakes' balance sheet at the lower of its fair value or the adjusted basis of the investment related to the Travelodge property. Lakes has also agreed to loan to Metroflag BP up to $3.0 million related to Travelodge operating shortfalls through December 28, 2004. As of July 4, 2004 and December 28, 2003, the outstanding loan balance was $2.4 million and $2.1 million, respectively. This loan is scheduled to be repaid on December 28, 2004. If at any time the Polo Plaza property is sold and the Travelodge commitment has not been repaid, Metroflag is required to repurchase the subordinated interest for the lesser of $4.0 million or any portion of the net cash proceeds from such sale or refinancing that exceeds $60.0 million. LAND HELD FOR DEVELOPMENT Included in land held for development is land held for possible transfer to Indian tribes for use in future casino resort projects. During the second quarter of 2004, an impairment related to the Nipmuc Nation land held for development in the amount of $0.5 million was recorded related to the Nipmuc Nation casino development project. This amount was included in the total impairment charge of $6.4 million related to the Nipmuc Nation project. This impairment occurred after the Nipmuc Nation was denied federal recognition as an Indian Tribe and sovereign government within the meaning of federal law by the Bureau of Indian Affairs (BIA). 2. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements include the accounts of Lakes and its wholly-owned and majority-owned subsidiaries. Investments in unconsolidated affiliates representing 50% or less of voting interests are accounted for on the equity method. All significant intercompany balances and transactions have been eliminated in consolidation. Lakes' investments in unconsolidated affiliates include a 50 percent ownership interest in PCG Santa Rosa, LLC, a joint venture formed to develop a casino on Indian-owned land in California and a 50% ownership interest in 2022 Ranch, LLC, a joint venture formed to develop and/or sell approximately 2000 acres owned by the joint venture in Eastern San Diego County. This land was sold during the first quarter of 2004. The sale of the land reduced Lakes' investment in 2022 Ranch to less than $0.1 million. 10 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) The condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information, in accordance with the rules and regulations of the Securities and Exchange Commission. Pursuant to such rules and regulations, certain financial information and footnote disclosures normally included in the condensed consolidated financial statements have been condensed or omitted. In the opinion of management, all adjustments considered necessary for fair presentation have been included. Operating results for the three months ended July 4, 2004 are not necessarily indicative of the results that may be expected for the year ending January 2, 2005. The condensed consolidated financial statements should be read in conjunction with the condensed consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 28, 2003. 3. STOCK-BASED COMPENSATION At July 4, 2004, the Company has two stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. WPT also has a unit-based compensation plan for both employees and consultants. WPT has a 2002 Unit Option Plan (the "2002 Plan") which is approved to issue up to an aggregate of 7,000 Class B non-voting units of WPT in connection with unit option grants to employees and consultants. The options become exercisable in quarterly installments on each of the first four anniversaries of the date of the grant and each installment expires six years after being exercisable. The employee must be employed by the Company on the anniversary date in order to vest in any units that year. If the employee is terminated (voluntarily or involuntarily) prior to the vesting of any portion of a unit option, the unvested portion will be forfeited. For WPT unit options issued to employees, deferred stock compensation for the unit options is measured at the units' fair value in excess of the exercise price on the date of grant and is being amortized over the vesting period of four years. For WPT unit options issued to consultants, compensation expense is measured at the option's fair value. Fair value is measured when the unit options vest in annual installments on each of the first four anniversaries of the date of the grant. Compensation expense is estimated in periods prior to vesting based on the then current fair value. Changes in the estimated fair value of unvested options are recorded in the periods the change occurs. Additionally, on March 4, 2002, WPT granted 15,000 Class A voting units to its President under a management agreement. The restricted units vest in four equal installments annually beginning February 25, 2003. If there is a change of control, all non-vested restricted units vest immediately. 11 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) The Company accounts for the WPT unit-based employee compensation under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Compensation expense for unit option grants issued to employees is recorded to the extent the fair market value of the units on the date of grant exceeds the option price. Compensation expense for restricted unit grants is measured based on the fair market value of the units on the date of grant. The compensation expense is amortized ratably over the vesting period of the awards. The Company accounts for WPT unit-based consultant compensation according to the recognition and measurement principles of EITF 96-18, Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Compensation expense for unit option grants issued to consultants is recorded at the fair market value of the options at the measurement date, defined as the date the options vest and services have been provided. The following table illustrated the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation under the Lakes' plans and unit-based employee and consultant compensation under the WPT Plans (in thousands except per share data).
THREE MONTHS ENDED SIX MONTHS ENDED JULY 4, 2004 JUNE 29, 2003 JULY 4, 2004 JUNE 29, 2003 ------------ ------------- ------------ ------------- Net earnings (loss): As reported $(7,158) $ 789 $ (7,918) $ (538) Add: Unit-based compensation expense 176 10 270 30 included in reported net earnings (loss) Less: Total stock-based compensation (537) (423) (987) (817) expense determined under the fair value method, net of related tax effects Pro forma (7,519) 376 (8,635) (1,325) Net earnings (loss) per share: As reported -- Basic $ (0.32) $ 0.04 $ (0.36) $ (0.03) Pro forma -- Basic (0.34) 0.02 (0.41) (0.06) As reported -- Diluted (0.32) 0.04 (0.36) (0.03) Pro forma -- Diluted (0.34) 0.02 (0.41) (0.06)
12 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 4. MANAGEMENT CONTRACTS FOR INDIAN-OWNED CASINOS 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 management contracts govern the relationship between the Company and the tribes with respect to the construction and management of the casinos. The development portion of the agreements commences with the signing of the respective contracts and continues until the casinos open for business; thereafter, the management portion of the respective management contracts continues for a period up to 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. Lakes has a contract to be the exclusive developer and manager of an Indian-owned gaming resort near New Buffalo, Michigan with the Pokagon Band of Potawatomi Indians. The Company has formed partnerships that hold contracts to develop and manage two casinos to be owned by Indian tribes in California, one near San Diego with the Jamul Indian Village, and the other near Sacramento with the Shingle Springs Band of Miwok Indians. The Company also has signed contracts with the Nipmuc Nation of Massachusetts for development and management of a potential future gaming resort in the eastern United States; however, in June 2004, this tribe was denied federal recognition as an Indian Tribe and sovereign government within the meaning of federal law by the Bureau of Indian Affairs (BIA). As a result of this denial, Lakes incurred an impairment charge of approximately $6.4 million during the second quarter of 2004 related to the impairment of Lakes' investment in the Nipmuc Nation casino development project. 5. NOTES RECEIVABLE The notes receivable from Indian Tribes result from costs incurred by the Company for the development of gaming properties under which the Company has signed management contracts. 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. 13 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Notes receivable consist of the following (in thousands):
July 4, 2004 December 28, 2003 ------------ ----------------- Properties under development: Notes from the Pokagon Band of Potawatomi Indians with variable interest rates (not to exceed 10%) (5.25% at July 4, 2004), receivable in 60 monthly installments subsequent to commencement date $43,601 $41,729 Notes from the Shingle Springs Band of Miwok Indians with variable interest rates (6.25% at July 4, 2004), receivable in varying monthly installments based on contract terms subsequent to commencement date 29,896 24,428 Notes from Jamul Indian Village with variable interest rates (6.25% at July 4, 2004), receivable in 60 monthly installments subsequent to commencement date 13,496 12,336 Notes from the Nipmuc Nation with variable interest rates - 4,634 Other 1,142 1,555 ------- ------- Total notes receivable $88,135 $84,682 ======= =======
Interest income on notes receivable from Indian Tribes related to properties under development is deferred because realizability of the interest is contingent upon the completion and positive cash flow from operation of the casino. Interest deferred during the development period is recognized over the remaining life of the note using the effective interest method. As of July 4, 2004 and December 28, 2003, $17.4 million and $15.2 million of interest on notes related to properties under development has been deferred. The terms of these notes require the casinos to be constructed and to generate positive cash flows prior to the Company receiving repayment. As such, an estimate of the fair value of these notes requires an assessment of the timing of the construction of the related casinos and the profitability of the related casinos. Due to the significant uncertainty involved in such an assessment, the Company does not believe that it is practicable to accurately estimate the fair value of these notes with the degree of precision necessary to make such information meaningful. During the second quarter of 2004, an impairment related to the Nipmuc Nation notes receivable in the amount of $5.9 million was recorded related to the Nipmuc Nation casino development project. This amount was included in the total impairment charge of $6.4 million related to the Nipmuc Nation project. This impairment occurred after the Nipmuc Nation was denied federal recognition as an Indian Tribe and sovereign government within the meaning of federal law by the BIA. 14 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 6. INCOME TAXES The Company is currently under examination in various states for income and franchise tax matters. The Internal Revenue Service has completed a field exam of the Company's tax returns for the years ended December 30, 2001 and December 31, 2000. The Company has recorded a reserve assessment related to these examinations and other tax matters. The reserve is reflected as part of income taxes payable on the accompanying consolidated balance sheets. 7. COMMITMENTS AND CONTINGENCIES: LEASES The Company leases certain property and equipment, including an airplane, under a non-cancelable operating lease. The airplane lease expired May 1, 2003 and was renewed for a one-year period. The lease provides for one additional one-year renewal term, which began May 1, 2004. Approximate future minimum lease payments, due under this lease as of July 4, 2004, are as follows (in thousands):
Operating Leases ---------------- 2004 $300 2005 200 ---- $500 ====
PURCHASE OPTIONS The Company has the right to purchase the airplane it leases during the renewal terms for approximately $8 million. INDEMNIFICATION AGREEMENT As a part of the transaction establishing Lakes as a separate public company on December 31, 1998, the Company agreed to indemnify Grand through December 28, 2004 against all costs, expenses and liabilities incurred in connection with or arising out of certain pending and threatened claims and legal proceedings against Grand and to pay all related settlements and judgments. 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. There is currently no known liability related to this indemnification. As a part of the indemnification agreement, Lakes 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 interests in Lakes without the written consent of Caesars Entertainment, Inc, the parent Company of Grand. 15 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) LEGAL PROCEEDINGS SLOT MACHINE LITIGATION In 1994, William H. Poulos filed a class-action lawsuit in the United States District Court for the Middle District of Florida against various parties, including Grand and numerous other parties alleged to be casino operators or slot machine manufacturers. This lawsuit was followed by several additional lawsuits of the same nature against the same, as well as additional defendants, all of which were subsequently consolidated into a single class-action pending in the United States District Court for the District of Nevada. Following a court order dismissing all pending pleadings and allowing the plaintiffs to re-file a single complaint, a complaint has been filed containing substantially identical claims, alleging that the defendants fraudulently marketed and operated casino video poker machines and electronic slot machines, and asserting common law fraud and deceit, unjust enrichment and negligent misrepresentation and claims under the federal Racketeering-Influenced and Corrupt Organizations Act. Various motions were filed by the defendants seeking to have this new complaint dismissed or otherwise limited. In December 1997, the Court, in general, ruled on all motions in favor of the plaintiffs. The plaintiffs then filed a motion seeking class certification and the defendants opposed it. In June 2002, the Court entered an order denying class certification, and the plaintiffs have appealed this order to the 9th Circuit Court of Appeals. Briefing is complete, an oral hearing took place in January 2004, and no ruling has yet been issued. WILLARD EUGENE SMITH LITIGATION On October 24, 2003, Lakes announced that it had been named as one of a number of defendants in a counterclaim filed in state court in Harris County, Texas by Willard Eugene Smith involving Kean Argovitz Resorts, LLC (KAR), related persons and entities. In the counterclaim, Smith asserts that, under an alleged oral agreement with Kevin Kean, he is entitled to a percentage of fees to be received by the KAR entities or their principals relating to the Shingle Springs and Jamul casinos that Lakes' subsidiaries are developing in California. Smith also seeks recovery of damages and other relief from the KAR entities, Lakes and certain affiliates based on their conduct with respect to the alleged agreement. Lakes believes the counterclaim against it is without merit. Lakes understands that the alleged oral agreement upon which Smith bases his claim was rendered null and void in a prior judgment issued against Smith by the Harris County, Texas state court in October 2000. However, in September 2003, the court vacated the prior judgment against Smith. Lakes acquired KAR's interests in the Shingle Springs and Jamul projects on January 30, 2003. In the buyout agreements between Lakes and certain KAR entities and related principals, the KAR entities represented to Lakes that the KAR entities and their affiliates had no continuing agreements with any third party relating to the Shingle Springs and Jamul projects and agreed to indemnify Lakes and its affiliates from damages resulting from prior dealings of the KAR entities and related principals concerning the projects. Lakes will vigorously defend against the allegations made against it and will pursue its indemnification rights against the KAR entities and their principals under the buyout agreements if necessary. 16 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) EL DORADO COUNTY, CALIFORNIA LITIGATION On January 3, 2003, El Dorado County filed an action in the Superior Court of the State of California, seeking to prevent the construction of a highway interchange that was approved by a California state agency. The action does not seek relief directly against Lakes. However, the interchange is necessary to permit the construction of a casino to be developed and managed by Lakes through a joint venture. The casino will be owned by the Shingle Springs Band of Miwok Indians. The matter was tried to the court on August 22, 2003. On January 2, 2004, Judge Lloyd G. Connelly, Judge of the Superior Court for the State of California, issued his ruling on the matter. The Court denied the petition in all respects except one. As to the one exception, the Court sought clarification as to whether the transportation conformity determination used to determine the significance of the air quality impact of the interchange operations considered the impact on attainment of the state ambient air quality standard for ozone. The California Department of Transportation (Caltrans) prepared and filed the clarification sought by the Court. Prior to the Court's determination of the adequacy of the clarification, El Dorado County appealed Judge Connelly's ruling to the California Court of Appeals. A ruling with respect to the casino development planned by the Shingle Springs Rancheria was issued June 21, 2004 by the Superior Court of California, County of Sacramento. The ruling indicates that the addendum previously provided to the court by Caltrans did not provide a quantitative showing to satisfy the court's earlier request for a clarification on meeting the state ambient ozone standard. The court recognized that the information provided by Caltrans does qualitatively show that the project may comply with the state standard, but concluded that is insufficient. Rather the court is requiring a quantitative analysis and the court recognizes that the methodology for that analysis "is not readily apparent". In addition, the ruling specifically states, "Moreover such methodology appears necessary for the CEQA analysis of transportation projects throughout the state, including transportation projects for which respondents (i.e. Caltrans) have approval authority." Caltrans, the Shingle Springs Tribe and Lakes responded to the court with a revised submission in August 2004. Representatives of the California Air Resources Board and the Sacramento Area Council of Governments filed declarations supporting our revised submission to the court. Opposition to that revised submission has been filed, and a hearing on the revised submission is scheduled on August 20, 2004. GRAND CASINOS, INC. LITIGATION In connection with the establishment of Lakes as a public corporation on December 31, 1998, via a distribution of its common stock to the shareholders of Grand, the Company and Grand entered into an agreement governing the sharing or allocation of tax benefits accruing to Grand and certain affiliated companies. On August 13, 2004, an arbitrator awarded to the Company partial summary judgment on certain of the Company's claims against Grand under the tax sharing agreement. The dollar amount that will be awarded to the Company on these claims has not been determined, certain other claims by the Company under the agreement have not been decided, and no hearing date has been set to determine such dollar amount or decide such claims. OTHER LITIGATION Lakes is 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, including the matters discussed above, is not likely to have a material adverse effect upon the Company's consolidated financial position or results of operations. 17 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 8. RELATED PARTY TRANSACTIONS Lakes has entered into a license agreement with Sklansky Games, LLC ("Sklansky) pursuant to which Lakes is developing a World Poker Tour No Limit Texas Hold `Em casino table game that uses certain of Sklansky's intellectual property rights. Lakes had also entered into a license agreement with WPT pursuant to which Lakes has obtained a license to utilize the World Poker Tour name and logo in connection with the development of this casino table game. Under the terms of this agreement, if Lakes elects to proceed with its development of the casino table game, Lakes will be required to pay WPT a specified minimum annual royalty payment of 10% of the gross revenue Lakes receives from its sale or lease of the game, whichever is greater. In addition to our indirect majority ownership in World Poker Tour, LLC through one of our wholly owned subsidiaries, Lyle Berman and his son, Brad Berman, own 28% and 44% equity interests in Sklansky, respectively. Lyle Berman also serves as Chairman and Chief Executive Officer of WPT, and Brad Berman is a member of WPT's Board of Directors. Effective as of February 24, 2004, WPT entered into a non-exclusive license agreement with G-III Apparel Group, Ltd. ("G-III"). Morris Goldfarb, a Lakes director, is a director, Co-Chairman of the Board and Chief Executive Officer of G-III. Under the agreement, G-III licenses the World Poker Tour name, logo and trademark from WPT in connection with G-III's production of certain types of apparel for distribution in authorized channels within the United States, its territories and possessions and in certain circumstances, Canada. As consideration for this non-exclusive license, G-III pays royalties and certain other fees to WPT. Lakes provides general and administrative services to WPT that include accounting, finance and treasury, tax, human resources/personnel, employee benefits, retail, systems support and marketing support. As reimbursement of compensation for these services, Lakes bills WPT an amount equal to the gross wages of the Lakes employees that provide services to WPT based upon the actual time incurred on WPT matters. Effective as of March 4, 2002, Lakes Poker Tour, LLC, a wholly-owned subsidiary of Lakes, entered into a loan agreement with WPT pursuant to which WPT is allowed to borrow up to $4.0 million. The related promissory note of WPT accrues interest at an annual rate of 6.2% and matures in full on March 4, 2005. Lakes may terminate the loan agreement at any time and upon such termination, all amounts advanced and accrued are due one year after the termination. WPT has granted Lakes a security interest in all of WPT's assets to secure the loan. As of July 4, 2004, there was a remaining balance of $0.2 million in principal and interest under the promissory note. 9. SEGMENT INFORMATION Lakes' principal business is the development and management of gaming related properties. Additionally, the Company is the majority owner of the World Poker Tour, LLC. (See Note 1). Substantially, all of our operations are conducted in the United States. Lakes' reportable segments are as follows (in millions): 18 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
Industry Segments ----------------- Real Estate World Poker Corporate & Total Development Tour Eliminations Consolidated ----------- ---- ------------ ------------ Total Assets as of July 4, 2004 $ 138.0 $ 2.5 $ 26.4 $ 166.9 Total Assets as of December 28, 2003 126.1 2.5 41.5 170.1 For the Three Months Ended/as of July 4, 2004 Revenue $ - $ 4.7 $ - $ 4.7 Net earnings (loss) (6.4) 0.9 (1.7) (7.2) Depreciation expense - - 0.2 0.2 For the Three Months Ended/as of June 29, 2003 Revenue $ - $ 3.0 $ - $ 3.0 Net earnings (loss) (0.7) 1.3 0.2 0.8 Depreciation expense - - 0.1 0.1
10. STOCK SPLIT During April of 2004, the Company's Board of Directors declared a two-for-one stock split, payable in the form of a 100% stock dividend on Lakes' outstanding common stock. The stock dividend was paid on May 3, 2004 to shareholders of record as of April 26, 2004. As a result of the stock split, shareholders received one additional share of common stock for every share they held on the record date. Upon completion of the split, the number of common shares outstanding was approximately 22.2 million. In connection with the stock split, the Company introduced a direct registration program to provide for uncertified shares through Wells Fargo Shareowner Services, the Company's transfer agent and registrar. As a result, the additional shares were issued in "book-entry" form without stock certificates and are registered on the books of the Company maintained by Wells Fargo Shareowner Services. 11. SUBSEQUENT EVENTS In connection with the initial public offering of WPT Enterprises, Inc. (WPTE), World Poker Tour, LLC converted from a Delaware limited liability company into a Delaware corporation named "WPT Enterprises, Inc." on July 28, 2004. As a part of the conversion, each of World Poker Tour, LLC's limited liability company units was converted into 160 shares of common stock. Restricted units and unit options were converted using the same ratio. 19 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) WPTE adopted a 2004 Stock Incentive Plan that is authorized to grant stock-based awards to purchase up to 3,120,000 shares of WPTE common stock, including options to purchase up to 1,120,000 shares of WPTE common stock issued to WPTE employees and consultants that were outstanding under World Poker Tour, LLC's 2002 Plan at the time of the conversion. On August 9, 2004, the Securities and Exchange Commission declared effective a registration statement of WPTE that registered the offer and sale of up to 4,000,000 shares of WPTE common stock, at $8.00 per share, in WPTE's initial public offering and an additional 600,000 shares of WPTE common stock that may be sold if the underwriters involved in the offering exercise their over-allotment option. WPTE's common stock was approved for trading on The Nasdaq Stock Market and began trading on August 10, 2004. The initial closing of the offering, at which WPTE sold 4,000,000 shares of common stock, occurred on August 13, 2004, with WPTE receiving proceeds of approximately $28.5 million, net of estimated offering expenses and underwriting discounts. The underwriters in the offering have an over-allotment option to purchase an additional 600,000 shares of WPTE common stock that expires on September 23, 2004. It is expected that proceeds from the offering will be used to expand WPTE's entertainment production business and for its working capital. There were no selling shareholders participating in the offering. Lakes did not recognize a gain on this transaction. Following is summarized pro forma balance sheet data as of July 4, 2004. This data has been adjusted to reflect the offering at the initial public offering price of $8.00 per share of common stock. July 4, 2004 December 28, 2003 Actual Pro Forma ----------------- ------ --------- Current Assets $ 35,527 $ 28,905 $ 57,405 Total Assets 170,060 166,948 195,448 Current Liabilities 12,636 13,436 13,436 Minority Interest -- -- 9,662 Capital Stock 215 222 222 Additional Paid-in Capital 132,291 136,290 155,128 Retained Earnings 24,918 17,000 17,000
20 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Lakes Entertainment, 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, 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. Lakes' main business is the development, construction and management of casinos and related hotel and entertainment facilities in emerging and established gaming jurisdictions. Lakes has entered into contracts for the development, management and/or financing of new casino operations, all of which are subject to various regulatory approvals before construction can begin. Lakes has contracts to develop and manage Indian-owned gaming resorts for the following: - Shingle Springs Band of Miwok Indians near Sacramento, California - Pokagon Band of Potawatomi Indians near New Buffalo, Michigan - Jamul Indian Village near San Diego, California In addition, Lakes owns options to purchase the patent rights for various new casino games and is actively marketing these new games to the casino industry in an attempt to license the games for use in their operations. WPT Enterprises, Inc., (formerly known as World Poker Tour, LLC) a majority-owned subsidiary of Lakes ("WPT"), has created a circuit of previously-established poker tournaments affiliated under the "World Poker Tour" name, and has produced the World Poker Tour television series. WPT signed an agreement for a second season with the Travel Channel, LLC ("TRV") for broadcast of the World Poker Tour series on cable television which is currently airing in reruns. TRV was also granted options for five additional seasons and TRV has exercised its option for the first of these five seasons, which is currently in production. WPT receives a series of fixed license payments from TRV. On August 9, 2004, the Securities and Exchange Commission declared effective a registration statement of WPT that registered the offer and sale of up to 4,000,000 shares of WPT common stock, at $8.00 per share, in WPT's initial public offering and an additional 600,000 shares of WPT common stock that may be sold if the underwriters involved in the offering exercise their over-allotment option. WPT's common stock was approved for trading on The Nasdaq Stock Market and began trading on August 10, 2004. The initial closing of the offering, at which WPT sold 4,000,000 shares of common stock, occurred on August 13, 2004, with WPT receiving proceeds of approximately $28.5 million, net of estimated offering expenses and underwriting discounts. The underwriters' over-allotment option expires on September 23, 2004. It is expected that proceeds from the offering will be used to expand WPT's entertainment production business and for its working capital. There were no selling shareholders participating in the offering. Lakes did not recognize a gain on this transaction and the proceeds will be reflected as a minority interest. 21 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Additionally, Lakes continually evaluates other opportunities to diversify the Company's activities and bring in new revenue streams. SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies, which Lakes believes are the most critical to aid in fully understanding and evaluating its reported financial results, include the following: revenue recognition and realizability of notes receivable. REVENUE RECOGNITION: Revenue from the management of Indian-owned casino gaming facilities is recognized when earned according to the terms of the management contracts. Currently all of the Indian-owned casino projects that Lakes is involved with are in development stages and are not yet open. Therefore, until a project is open and operating, Lakes will not recognize revenue related to Indian casino management. Interest income on notes receivable for Indian tribes related to casino development projects is deferred because realizability of the interest is contingent upon the completion and generation of cash flow from the operation of the casino. Interest deferred during the development period is recognized over the remaining life of the note using the effective interest method. License revenue from the World Poker Tour series airing on TRV is recognized upon delivery of completed episodes. WPT sponsorship and host casino revenue is recognized upon airing of episodes. Any payments received in excess of WPT revenue earned are deferred and recognized upon delivery or airing of episodes. IMPAIRMENT OF LONG-TERM ASSETS: Currently, the Company's notes receivable from Indian Tribes are generally for the pre-construction development of gaming properties to be 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 notes receivable are required to be made only if distributable profits are available from the operation of the related casinos. Repayments are also subject to 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. Management periodically evaluates the recoverability of such notes receivable based on the current and projected operating results of the underlying facility and an assessment of the underlying facility and an assessment as to the likelihood of project completion. If the Company determines an impairment has occurred, the notes receivable would be written down to their estimated fair value. During the second quarter of 2004, an impairment related to the Nipmuc Nation notes receivable in the amount of $5.9 million was recorded under these provisions. This impairment occurred after the Nipmuc Nation was denied federal recognition as an Indian Tribe and sovereign government within the meaning of federal law by the Bureau of Indian Affairs (BIA). The Company currently holds land held for development and land held under contract for sale. The Company periodically evaluates whether events and circumstances have occurred that may affect the recoverability of the net book value of these 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. 22 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) During June 2004, the Company recognized an impairment loss of approximately $0.5 million on land held for development related to the Nipmuc Nation project. This amount was included in the total impairment charge of $6.4 million related to the Nipmuc Nation project. The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto and management's discussion and analysis included in the Company's Annual Report on Form 10-K for the year ended December 28, 2003. RESULTS OF OPERATIONS Revenues are calculated in accordance with accounting principles generally accepted in the United States of America and are presented in a manner consistent with industry practice. SIX MONTHS ENDED JULY 4, 2004 COMPARED TO THE SIX MONTHS ENDED JUNE 29, 2003 Revenues Total revenues were $8.9 million for the six months ended July 4, 2004 compared to $3.5 million for the same period in the prior year. Revenues for the current and prior year periods were derived primarily from license fees related to the WPT series. The increase in revenue is primarily due to an increase in license fees related to season two episodes delivered to TRV during 2004, compared to license fees related to season one episodes delivered to TRV during 2003. Also contributing to the increase was revenue of approximately $0.9 million related to WPT-related licensing, sponsorship and merchandise included in total revenue for the six months ended July 4, 2004. In April 2004, TRV exercised its option to broadcast the first of a possible five additional seasons. WPT receives fixed license payments from TRV subject to satisfaction of production milestones and other conditions. Costs and Expenses Total costs and expenses were $18.2 million and $5.0 million for the six months ended July 4, 2004 and June 29, 2003, respectively. Included in 2004 costs and expenses is an impairment charge of approximately $6.4 million related to the write-off of Lakes' investment in the Nipmuc Nation casino development project. This impairment charge was the result of the Nipmuc Nation being denied recognition as an Indian Tribe and sovereign government within the meaning of federal law by the Bureau of Indian Affairs. During the six months ended June 29, 2003, costs and expenses were reduced by a reversal of unused litigation accrual of $3.2 million under the Company's prior agreement to indemnify Grand Casinos, Inc. in connection with the Stratosphere litigation matters. Selling, general and administrative expenses increased from $5.9 million for the six months ended June 29, 2003 to $6.4 million for the six months ended July 4, 2004. This increase is primarily due to an increase in overhead costs associated with the WPT which was partially offset by a decrease in professional fees incurred during the 2004 period. WPT production costs increased from $2.1 million for the six months ended June 29, 2003 to $5.1 million for the six months ended July 4, 2004. In the current year period, WPT production costs and related episode revenues were recognized in the period the relative episode was delivered to TRV. 23 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) However, because WPT did not have an executed agreement in 2002, when a portion of production costs related to the WPT episodes delivered during the six months ended June 29, 2003 were incurred, such costs were expensed in 2002 rather than being capitalized. The increase was also due to a greater number of episodes being delivered to TRV during the 2004 period compared to the 2003 period. Other Interest income was $0.1 million for the six months ended July 4, 2004 compared to $0.6 million for the same period in the prior year. This decrease is primarily due to a decrease in interest earned on amounts owed to Lakes by Metroflag related to the properties sold to Metroflag by Lakes in Las Vegas, Nevada. Losses Per Common Share and Net Losses For the six months ended July 4, 2004, basic and diluted losses per common share were $0.36, compared to basic and diluted losses of $0.03 per common share, for the same period in the prior year. Losses for the period ended July 4, 2004 were $7.9 million compared to $0.5 million for the six months ended June 29, 2003. This increase in losses is primarily due to the impairment charge of $6.4 million taken in the current year period discussed above. THREE MONTHS ENDED JULY 4, 2004 COMPARED TO THE THREE MONTHS ENDED JUNE 29, 2003 Revenues Total revenues were $4.7 million for the three months ended July 4, 2004, compared to $3.0 million in the prior year period. Revenues for the current and prior year periods were primarily derived from license fees related to the WPT series. The increase in revenue is primarily due to an increase in license fees related to season two episodes delivered to TRV during the second quarter of 2004, compared to license fees related to season one episodes delivered to TRV during the second quarter of 2003. Also contributing to the increase was revenue of approximately $0.5 million related to WPT-related licensing, sponsorship and merchandise included in total revenue for the three months ended July 4, 2004. Costs and Expenses Total costs and expenses were $12.4 million and $1.9 million for the three months ended July 4, 2004 and June 29, 2003, respectively. Included in second quarter 2004 costs and expenses is an impairment charge of approximately $6.4 million related to the write-off of Lakes' investment in the Nipmuc Nation casino development project. This impairment charge was the result of the Nipmuc Nation being denied recognition as an Indian Tribe and sovereign government within the meaning of federal law by the Bureau of Indian Affairs. During the three months ended June 29, 2003, costs and expenses were reduced by a reversal of unused litigation accrual of $3.2 million under the Company's prior agreement to indemnify Grand Casinos, Inc. in connection with the Stratosphere litigation matters. 24 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Selling, general and administrative expenses decreased from $3.8 million for the three months ended June 29, 2003 to $3.2 million for the three months ended July 4, 2004. This decrease is primarily due to a decrease in professional fees incurred during the 2003 period associated with the sale of property in Las Vegas, Nevada. WPT production costs increased from $1.2 million for the three months ended June 29, 2003 to $2.6 million for the three months ended July 4, 2004. In the current year period, WPT production costs and related episode revenues were recognized in the period the relative episode was delivered to TRV. However, because the TRV agreement was not executed until March 2003, and a portion of production costs related to the WPT episodes delivered during the three months ended June 29, 2003 were incurred before the execution of the agreement, such costs were expensed prior to that three-month period rather than being capitalized. This factor reduced production costs recognized during the three months ended June 29, 2003. Earnings Per Common Share and Net Earnings For the three months ended July 4, 2004, basic and diluted losses per common share were $0.32, compared to basic and diluted earnings of $0.04 per share, for the same period in the prior year. Losses for the three months ended July 4, 2004 were $7.2 million compared to earnings of $0.8 million for the three months ended June 29, 2003. This increase in losses relates primarily to the impairment charge of $6.4 million related to the Nipmuc Nation taken during the three months ended July 4, 2004. Outlook It is currently contemplated that there will be no operating revenues for 2004 from existing casino development projects. WPT expects to recognize the remaining $2.0 million in revenue from the second season of the World Poker Tour series, along with associated production costs during the third and fourth quarters of 2004. WPT currently anticipates generating revenues of approximately $10.8 million from Season Three license fees under the Travel Channel agreement, depending on the number of episodes that ultimately comprise that season. WPT is expected to recognize approximately $3.1 million of this revenue during the third and fourth quarters of fiscal 2004, with the rest being recognized in fiscal 2005. Subsequent to the initial public offering of WPT, Lakes continues to own a majority of WPT's equity. Therefore, WPT's operating results will continue to be consolidated with our results. In addition to the WPT business, Lakes continues to evaluate potential new revenue-generating business opportunities. Lakes continues to closely monitor its operating expenses. FINANCIAL CONDITION At July 4, 2004, Lakes had $19.4 million in unrestricted cash and cash equivalents. Lakes' operating revenues from casino operations have been minimal since the expiration of the management contract with the Coushatta Tribe in January 2002. In 2003, the operating revenues derived from WPT were offset almost entirely by production costs. In the first six months of 2004, operating revenues from WPT operations were $8.9 million, and WPT's net income was approximately $1.7 million. 25 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In August 2004, WPT raised approximately $28.5 million in cash proceeds from its initial public offering, net of underwriting discounts and estimated offering expenses. WPT's cash resources are expected to be used for WPT's business and will not be available for the Company's casino operations or other non-WPT businesses. The Company's primary source of cash for its casino operations during the past two years has been from the planned sale of assets. We expect that proceeds from the sale of assets will decrease in 2004. During the first quarter of 2004, the 2022 Ranch land, which was owned by Lakes and its joint venture partner Land Baron West, LLC, was sold. Lakes received cash in the amount of approximately $1.7 million. Our management contracts with our tribal partners require that we provide financial support in the form of notes receivable prior to the beginning of construction (the `Pre-construction Financing'). We also have commitments to provide additional financing to our tribal partners to fund the construction of the casinos (`the Construction Financing') if it is not available from other sources. These notes are interest bearing; however, the interest is deferred until the casino is built and has established profitable operations. In the event that the casinos are not built, our only recourse is to attempt to liquidate assets of the development, if any, excluding any land in trust. We currently believe that our existing casino development projects included in the table below will be constructed and achieve profitable operation; however, no assurance can be made that this will occur. If this does not occur, it is likely that Lakes would incur substantial or complete losses on its pre-construction advances and any land held for development.
Casino Development Advances/Commitments --------------------------------------- (in millions) Pre-construction Land Held for Remaining Advances Development Commitment as of 7/4/04 as of 7/4/04 as of 7/4/04 ----------------- ------------- ------------ Jamul Indian Village $13.5 $ 6.6 $ 9.9 Shingle Springs Band of Miwok Indians 29.9 7.4 2.7 Pokagon Band of Potawatomi Indians 43.6 - 24.9
For the Pokagon project, the Company has agreed to provide additional financing from its own funds if financing at an interest rate not to exceed 13% is not available from third parties. If this occurs and Lakes is required to provide all financing, this would be an additional commitment of up to approximately $54 million. Currently, it appears that third-party financing will be available for this project. However, there can be no assurance that third-party financing will be available and that Lakes will not be required to provide this additional financing. Lakes may be required to provide a guarantee of tribal debt financing or otherwise provide support for the tribal obligations related to any of the projects. Any guarantees by Lakes or similar off-balance sheet liabilities will increase Lakes' potential exposure in the event of a default by any of these tribes. 26 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Our major use of cash over the past three years has been Pre-construction Financing provided to our tribal partners. At July 4, 2004, Lakes had approximately $88.1 million in notes receivable from Indian tribes. See Note 5 to the Consolidated Financial Statements. We believe that our cash and cash equivalents, along with expected cash receipts, will be adequate to fund operating expenses and Pre-construction Financing in 2004. If the Pokagon casino project begins construction, it is anticipated that we will require additional capital through either public or private financings. Lakes loaned $0.3 million to a former non-tribal partner in one of its Indian casino development projects. Repayment is expected to be received from this former partner's future consulting fees related to certain Indian casino development projects. At July 4, 2004, $0.3 million is outstanding under this agreement. As a part of the transaction establishing Lakes as a separate public company on December 31, 1998, the Company agreed to indemnify Grand through December 28, 2004 against all costs, expenses and liabilities incurred in connection with or arising out of certain pending and threatened claims and legal proceedings against Grand and to pay all related settlements and judgments. 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. There is currently no known liability related to this obligation. As a part of the indemnification agreement, Lakes 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 interests in Lakes without the written consent of Grand. SEASONALITY The Company believes that the operations of all casinos to be managed by the Company will be 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 jurisdiction where it may conduct gaming activities in the future. Changes in applicable laws or regulations could have an adverse effect on the Company. The gaming industry represents a significant source of tax revenues. From time to time, various federal legislators and officials have proposed changes in tax law, or in the administration of such law, affecting the gaming industry. It is not possible to determine the likelihood of possible changes in tax law or in the administration of such law. Such changes, if adopted, could have a material adverse effect on the Company's results of operations and financial results. 27 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OFF-BALANCE SHEET ARRANGEMENTS The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors, except for the financing commitments previously discussed, and except for Lakes' investments in unconsolidated affiliates (see Note 2). 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 Form 10-K 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 possible delays in completion of Lakes' casino projects, including various regulatory approvals and numerous other conditions which must be satisfied before completion of these projects; possible termination or adverse modification of management contracts; continued indemnification obligations to Grand Casinos; highly competitive industries; possible changes in regulations; reliance on continued positive relationships with Indian tribes and repayment of amounts owed to Lakes by Indian tribes; possible need for future financing to meet Lakes' expansion goals; risks of entry into new businesses; inability to achieve financial results from the contemplated business expansion of WPT; WPT's relatively short operating history; reliance on the agreement with TRV for most of our consolidated revenues; possible inability of WPT's programming to maintain a sufficient audience and exposure to adverse trends in the television production business generally; possible increases in production expenses, compared to fixed license revenues for related episodes; risk of inability to protect WPT's proprietary rights or preserve the value of WPT's brands; dependence on WPT's relationships with member casinos and strategic partners; and reliance on Lakes' and WPT's management. For further information regarding the risks and uncertainties, see the "Business -- Risk Factors" section of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2003. 28 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK; CONTROLS AND PROCEDURES ITEM 3. 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 July 4, 2004, the carrying value of the Company's cash and cash equivalents approximates fair value. The Company has in the past and may in the future obtain marketable debt securities (principally consisting of commercial paper, corporate bonds, and government securities) having a weighted average duration of one year or less. Consequently, such securities would not be 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. The floating rate receivables will generate more or less interest income if interest rates rise or fall. Interest income is deferred during development of the casinos because realizability of the interest is contingent upon the completion and positive cash flow from operation of the casino. As of July 4, 2004, Lakes had $88.1 million of floating rate notes receivables. Based on the applicable current reference rates and assuming all other factors remain constant, deferred interest income for a twelve month period would be $5.1 million. A reference rate increase of 100 basis points would result in an increase in deferred interest income of $0.9 million. A 100 basis point decrease in the reference rate would result in a decrease of $0.9 million in deferred interest income over the same twelve month period. ITEM 4. CONTROLS AND PROCEDURES Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) or Rule 15d - 15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this quarterly report. Based on their evaluation, our chief executive officer and chief financial officer concluded that Lakes Entertainment, Inc.'s disclosure controls and procedures are effective. There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced above. 29 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS SLOT MACHINE LITIGATION In 1994, William H. Poulos filed a class-action lawsuit in the United States District Court for the Middle District of Florida against various parties, including Grand and numerous other parties alleged to be casino operators or slot machine manufacturers. This lawsuit was followed by several additional lawsuits of the same nature against the same, as well as additional defendants, all of which were subsequently consolidated into a single class-action pending in the United States District Court for the District of Nevada. Following a court order dismissing all pending pleadings and allowing the plaintiffs to re-file a single complaint, a complaint has been filed containing substantially identical claims, alleging that the defendants fraudulently marketed and operated casino video poker machines and electronic slot machines, and asserting common law fraud and deceit, unjust enrichment and negligent misrepresentation and claims under the federal Racketeering-Influenced and Corrupt Organizations Act. Various motions were filed by the defendants seeking to have this new complaint dismissed or otherwise limited. In December 1997, the Court, in general, ruled on all motions in favor of the plaintiffs. The plaintiffs then filed a motion seeking class certification and the defendants opposed it. In June 2002, the Court entered an order denying class certification, and the plaintiffs have appealed this order to the 9th Circuit Court of Appeals. Briefing is complete, an oral hearing took place in January 2004, and no ruling has yet been issued. WILLARD EUGENE SMITH LITIGATION On October 24, 2003, Lakes announced that it had been named as one of a number of defendants in a counterclaim filed in state court in Harris County, Texas by Willard Eugene Smith involving Kean Argovitz Resorts, LLC (KAR), related persons and entities. In the counterclaim, Smith asserts that, under an alleged oral agreement with Kevin Kean, he is entitled to a percentage of fees to be received by the KAR entities or their principals relating to the Shingle Springs and Jamul casinos that Lakes' subsidiaries are developing in California. Smith also seeks recovery of damages and other relief from the KAR entities, Lakes and certain affiliates based on their conduct with respect to the alleged agreement. Lakes believes the counterclaim against it is without merit. Lakes understands that the alleged oral agreement upon which Smith bases his claim was rendered null and void in a prior judgment issued against Smith by the Harris County, Texas state court in October 2000. However, in September 2003, the court vacated the prior judgment against Smith. Lakes acquired KAR's interests in the Shingle Springs and Jamul projects on January 30, 2003. In the buyout agreements between Lakes and certain KAR entities and related principals, the KAR entities represented to Lakes that the KAR entities and their affiliates had no continuing agreements with any third party relating to the Shingle Springs and Jamul projects and agreed to indemnify Lakes and its affiliates from damages of the KAR entities and related principals concerning the projects. Lakes will vigorously defend against the allegations made against it and will pursue its indemnification rights against the KAR entities and their principals under the buyout agreements if necessary. 30 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES PART II OTHER INFORMATION (CONTINUED) EL DORADO COUNTY, CALIFORNIA LITIGATION On January 3, 2003, El Dorado County filed an action in the Superior Court of the State of California, seeking to prevent the construction of a highway interchange that was approved by a California state agency. The action does not seek relief directly against Lakes. However, the interchange is necessary to permit the construction of a casino to be developed and managed by Lakes through a joint venture. The casino will be owned by the Shingle Springs Band of Miwok Indians. The matter was tried to the court on August 22, 2003. On January 2, 2004, Judge Lloyd G. Connelly, Judge of the Superior Court for the State of California, issued his ruling on the matter. The Court denied the petition in all respects except one. As to the one exception, the Court sought clarification as to whether the transportation conformity determination used to determine the significance of the air quality impact of the interchange operations considered the impact on attainment of the state ambient air quality standard for ozone. The California Department of Transportation (Caltrans) prepared and filed the clarification sought by the Court. Prior to the Court's determination of the adequacy of the clarification, El Dorado County appealed Judge Connelly's ruling to the California Court of Appeals. A ruling with respect to the casino development planned by the Shingle Springs Rancheria was issued June 21, 2004 by the Superior Court of California, County of Sacramento. The ruling indicates that the addendum previously provided to the court by Caltrans did not provide a quantitative showing to satisfy the court's earlier request for a clarification on meeting the state ambient ozone standard. The court recognized that the information provided by Caltrans does qualitatively show that the project may comply with the state standard, but concluded that is insufficient. Rather the court is requiring a quantitative analysis and the court recognizes that the methodology for that analysis "is not readily apparent". In addition, the ruling specifically states, "Moreover such methodology appears necessary for the CEQA analysis of transportation projects throughout the state, including transportation projects for which respondents (i.e. Caltrans) have approval authority." Caltrans, the Shingle Springs Tribe and Lakes responded to the court with a revised submission in August 2004. Representatives of the California Air Resources Board and the Sacramento Area Council of Governments filed declarations supporting our revised submission to the court. Opposition to that revised submission has been filed, and a hearing on the revised submission is scheduled on August 20, 2004. GRAND CASINOS, INC. LITIGATION In connection with the establishment of Lakes as a public corporation on December 31, 1998, via a distribution of its common stock to the shareholders of Grand, the Company and Grand entered into an agreement governing the sharing or allocation of tax benefits accruing to Grand and certain affiliated companies. On August 13, 2004, an arbitrator awarded to the Company partial summary judgment on certain of the Company's claims against Grand under the tax sharing agreement. The dollar amount that will be awarded to the Company on these claims has not been determined, certain other claims by the Company under the agreement have not been decided, and no hearing date has been set to determine such dollar amount or decide such claims. OTHER LITIGATION Lakes is 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, including the matters discussed above, is not likely to have a material adverse effect upon the Company's consolidated financial position or results of operations. 31 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES PART II OTHER INFORMATION (CONTINUED) ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Annual Meeting of Shareholders was held on June 11, 2004. (b) At the Annual Meeting: (1) All nominees for directors as listed in the proxy statement were elected with the following vote:
Affirmative Votes Authority Withheld ----------------- ------------------ Lyle Berman 9,421,862 1,371,751 Timothy J. Cope 9,421,373 1,372,240 Morris Goldfarb 10,642,051 151,562 Ronald Kramer 10,641,452 152,161 Ray Moberg 10,641,473 152,140 Neil I. Sell 9,282,334 1,511,279
(2) The proposal to approve the proposed amendments to the Lakes Entertainment, Inc. 1998 Stock Option and Compensation Plan was approved, with the following vote:
Affirmative Votes Negative Votes Abstentions Broker Non-Votes ----------------- -------------- ----------- ---------------- 7,118,235 206,114 10,797 3,458,467
(3) The proposal to approve the proposed amendments to the Lakes Entertainment, Inc. 1998 Director Stock Option Plan was approved, with the following vote:
Affirmative Votes Negative Votes Abstentions Broker Non-Votes ----------------- -------------- ----------- ---------------- 5,915,338 1,408,921 10,887 3,458,467
(4) The appointment of Deloitte & Touche, LLP as independent auditors of the Company was ratified with the following vote:
Affirmative Votes Negative Votes Abstentions ----------------- -------------- ----------- 10,619,462 164,128 10,023
32 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES PART II OTHER INFORMATION (CONTINUED) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31.1 Certification of CEO pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of CFO pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K (i) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial Information and Exhibits, and Item 9. Regulation FD Disclosure, was filed on April 7, 2004 (ii) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial Information and Exhibits, and Item 9. Regulation FD Disclosure, was filed on April 16, 2004 (iii) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial Information and Exhibits, and Item 9. Regulation FD Disclosure, was filed on April 19, 2004 (iv) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial Information and Exhibits, and Item 9. Regulation FD Disclosure, was filed on April 26, 2004 (v) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial Information and Exhibits, and Item 9. Regulation FD Disclosure, was filed on April 28, 2004 (vi) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial Information and Exhibits, and Item 9. Regulation FD Disclosure, was filed on May 4, 2004 (vii) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial Information and Exhibits, and Item 12. Results of Operations and Financial Condition, was filed on May 5, 2004 33 LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES PART II OTHER INFORMATION (CONTINUED) (b) Reports on Form 8-K (continued) (viii) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial Information and Exhibits, and Item 9. Regulation FD Disclosure, was filed on May 17, 2004 (ix) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial Information and Exhibits, and Item 9. Regulation FD Disclosure, was filed on May 18, 2004 (x) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial Information and Exhibits, and Item 12. Results of Operations and Financial Condition, was filed on May 19, 2004 (xi) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial Information and Exhibits, and Item 9. Regulation FD Disclosure, was filed on June 14, 2004 (xii) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial Information and Exhibits, and Item 9. Regulation FD Disclosure, was filed on June 15, 2004 (xiii) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial Information and Exhibits, and Item 9. Regulation FD Disclosure, was filed on June 22, 2004 (xiv) A Form 8-K, Item 7. Financial Statements, Pro Forma Financial Information and Exhibits, and Item 9. Regulation FD Disclosure, was filed on June 24, 2004 34 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: August 18, 2004 LAKES ENTERTAINMENT, INC. ------------------------- Registrant / s/ Lyle Berman --------------------------------- Lyle Berman Chairman of the Board and Chief Executive Officer /s/ Timothy J. Cope --------------------------------- Timothy J. Cope President and Chief Financial Officer 35