-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RrdRC6ISMfdEtXwlv+7Oy551FcR7D2yJifz1TwXuK8rWaAVP71RSErBN8Cy7//8o jAfaAtINcxcXo84nEBEuqA== 0000950137-02-001706.txt : 20020415 0000950137-02-001706.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950137-02-001706 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20011230 FILED AS OF DATE: 20020328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LAKES GAMING INC CENTRAL INDEX KEY: 0001071255 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 411913991 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-24993 FILM NUMBER: 02590113 BUSINESS ADDRESS: STREET 1: 130 CHESHIERE LANE CITY: MINNETONKA STATE: MN ZIP: 55305 BUSINESS PHONE: 6124499092 MAIL ADDRESS: STREET 1: 130 CHESHIRE LANE CITY: MINNETONKA STATE: MN ZIP: 55305 10-K 1 c68243e10-k.txt ANNUAL REPORT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 30, 2001 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 of (I.R.S., Employer 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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE 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. [ ] As of March 19, 2002, 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 19, 2002 was $64,575,854. 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 29, 2002 are incorporated by reference into Items 10 through 13, inclusive. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 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." GENERAL 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. Lakes was formed in 1998 as the successor to the Indian gaming business of Grand Casinos, Inc. ("Grand Casinos"). Lakes has entered into the following 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 a contract to be the exclusive developer and manager of an Indian-owned gaming resort near New Buffalo, Michigan. - Lakes and another company have formed partnerships with contracts to develop and manage two casinos to be owned by Indian tribes in California, one near San Diego and the other near Sacramento. - Lakes and another company have formed a partnership with a contract to finance the construction of an Indian-owned casino 60 miles north of San Francisco, California. - Lakes has also signed contracts with a Massachusetts Indian tribe for development and management of a potential future gaming resort in the eastern United States; however, this tribe has received a negative finding regarding federal recognition from the Bureau of Indian Affairs (BIA). The tribe has indicated that it will submit additional information for reconsideration. HISTORY Lakes was established on December 31, 1998 through a spin-off of Lakes' shares by Grand Casinos. Lakes operates the Indian casino management business and holds other assets previously owned by Grand Casinos. Before the spin-off, Grand Casinos had management contracts for Grand Casino Hinckley and Grand Casino Mille Lacs, both Indian-owned casinos located in Minnesota. These management contracts both expired in 1998. After Lakes' inception, Lakes managed two Indian-owned casinos in Louisiana previously managed by Grand Casinos. Lakes' historical revenues since its inception have been derived almost exclusively from management fees for these casinos. Lakes managed the largest casino resort in Louisiana, Grand Casino Coushatta, until the management contract expired on January 16, 2002. For a portion of fiscal 2000 and prior, Lakes also had a management contract for Grand Casino Avoyelles, which was terminated through an early buyout of the contract effective March 31, 2000. Lakes also held several parcels of commercial property in Las Vegas at the time of the spin-off from Grand Casinos. In December 2001, Lakes sold a large portion of this property, subject to certain post-closing conditions. Lakes continues to hold a portion of this property with the intention of developing it. See Item 2 -- "Properties". 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 1 Indian casino management business. As the successor to Grand Casinos' Indian gaming business, Lakes enjoys a reputation as a 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 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, management and/or financing agreements relating to one casino project in Michigan, three casino projects in California, and one casino project on the east coast, with development of each subject to regulatory approvals. Lakes has also explored, and will continue to explore, numerous other possible development projects. See "Casino Projects and Agreements" below. Consistent with its past experience in managing the Louisiana casinos, Lakes is dedicated to developing superior facilities and providing guest service that exceeds expectations. Facilities managed by Lakes will be staffed with well-trained local casino employees and will 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 will offer reasonably priced, high-quality food. The second business strategy has been to remove a number of uncertainties surrounding Lakes since the spin-off in 1998. Consistent with this part of the Lakes strategy, in 2000 Lakes entered into settlement agreements regarding several significant shareholder litigation matters, for which Lakes is required to indemnify Grand Casinos. Lakes paid a total of $18 million into escrow in 2000, and this amount was distributed to the shareholder groups during 2001. Lakes' indemnification obligations continue with respect to certain other litigation matters, and $7.5 million paid into an escrow account for the benefit of Grand Casinos is included as restricted cash on the accompanying balance sheet as of December 30, 2001. See Item 7 -- "Management's Discussion and Analysis of Financial Condition and Results of Operations". Lakes has also addressed uncertainties relating to a portion of the land owned or controlled by the Company in Las Vegas. On December 28, 2001, the Company sold a portion of this site and certain property rights to two partnerships which are not affiliated with Lakes. The total sale price was approximately $30.9 million, including a $1.0 million down payment and two promissory notes for the balance. If certain administrative post-closing conditions are not satisfied within six months after the closing or waived by the buyers, the buyers have the right to require Lakes to repurchase the properties. This transaction allowed the Company to monetize a portion of its investment in property on the Las Vegas strip. The sale will provide resources that are currently planned to be used in Lakes' primary business, which is Indian gaming. See Item 2 -- "Properties". The other uncertainty facing Lakes relates to the proposed casino developments. At two of the California locations, the tribes need to resolve land issues related to their respective casino sites. At the third California location, access to the proposed casino site is subject to certain regulatory approvals. 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 is defending this lawsuit on behalf of the Secretary of Interior. At the east coast location, the tribe is attempting to obtain federal recognition, but there is no assurance that federal recognition will be obtained. Additionally, the National Indian Gaming Commission needs to approve Lakes' management contracts for each location. Lakes is actively working with the tribes to bring these issues to a successful conclusion. Diversification is important to Lakes' long-term success and is the third of the business strategies. Lakes currently intends 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 2 new opportunities to help enhance shareholder value. As part of the Company's effort to diversify, in March of 2002, Lakes announced that it had signed a letter of intent with respect to an investment in a joint venture with an experienced producer of televised poker tournaments. The purpose of the joint venture would be to launch the World Poker Tour and establish poker as the next significant televised mainstream sport. CASINO PROJECTS AND AGREEMENTS Partnership to Develop and Manage Casino Near San Diego, California. On May 12, 1999, the Company announced that it would form a partnership for the purpose of developing a gaming facility on Indian-owned land near San Diego, California. Under the agreement, Lakes has formed a limited liability company with Kean Argovitz Resorts, LLC ("KAR"), a limited liability company based in Houston, Texas. The partnership between Lakes and KAR holds a contract to develop and manage a casino resort facility with the Jamul Indian Village in California. The contract is subject to approval by NIGC. 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. Development and Management of Michigan Casino. 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 near New Buffalo, Michigan 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 in the District Court in the District of Columbia by a Michigan-based 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 is defending the suit on behalf of the Secretary of Interior. While the outcome of the suit cannot be predicted at this time, Lakes' management believes that this 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. Partnership to Develop and Manage Casino Near Sacramento, California. 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. Joint Venture for Further California Casinos, Including Financing of Cloverdale, California Casino. 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 3 Indians. However, in February 2001, Lakes announced its intention to discontinue its involvement with the Paskenta project. Lakes had made loans totaling $5.5 million to the joint venture (PCG Corning, LLC) for this project. During 2001, Lakes wrote off approximately $1.0 million as uncollectible relating to these loans. In October 2001, Lakes was repaid the outstanding balance of $4.5 million on these loans. Agreement for Possible Casino Development with Massachusetts Tribe. On July 9, 2001, the Company announced that it had signed development and management agreements with the Nipmuc Nation of Massachusetts for a potential future casino resort in the eastern United States. The Nipmuc Nation's petition for federal recognition received a proposed positive finding from the Bureau of Indian Affairs (BIA) in January 2001. However, in September 2001, that proposed positive finding was reversed by the BIA when it issued a negative finding relating to the Nipmuc Nation's request for federal recognition. The Nipmuc Nation has 180 days from the date of the negative finding to submit additional information for reconsideration. In addition, community groups will have an opportunity to submit comments and documentation. The tribe has indicated that it will submit additional information for reconsideration. If approval is received, the Nipmuc Nation would need to put land in trust and come to a gaming agreement with the state where the land is located before proceeding with any such enterprise. MARKETING Lakes' marketing strategy at its managed operations is to attract and retain the repeat customer. Management believes that Lakes' emphasis on providing superior guest service along with first-class facilities, coupled with targeted 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 options 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. Lakes emphasizes guest service as part of its operating strategy. High standards are set for well-trained and friendly employees so that customers can enjoy themselves in a fun-filled and entertaining atmosphere. 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. REGULATION GAMING REGULATION The ownership, management, and operation of gaming facilities are subject to extensive federal, state, provincial, tribal and/or local laws, regulations and ordinances, which are administered by the relevant regulatory agency or agencies in each jurisdiction (the "Regulatory Authorities"). These laws, regulations and ordinances vary from jurisdiction to jurisdiction, but generally concern the responsibility, financial stability and character of the owners and managers of gaming operations as well as persons financially interested or involved in gaming operations. Certain basic provisions that are currently applicable to Lakes in its management, development and financing activities are described below. 4 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. The NIGC may review any of Lakes' 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 5 gaming regulation and control, or create or enhance the chance of unsuitable activities in gaming or the business and financial arrangements incidental thereto. In addition, the NIGC will not approve a management contract if the management company or any of its agents have attempted to unduly influence any decision or process of tribal government relating to gaming, or if the management company has materially breached the terms of the management contract or the tribe's gaming ordinance, or a trustee, exercising due diligence, would not approve such management contract. A management contract can be approved only after NIGC determines that the contract provides, among other things, for (i) adequate accounting procedures and verifiable financial reports, which must be furnished to the tribe; (ii) tribal access to the daily operations of the gaming enterprise, including the right to verify daily 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. 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. 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 gaming management contracts is unclear. Lakes believes that ITLA is not applicable to its management 6 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. NON-GAMING REGULATIONS The Company and its subsidiaries are subject to certain federal, state and local, safety and health laws, 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 19, 2002, 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. THE CONSTRUCTION, OPERATION AND MANAGEMENT OF INDIAN CASINOS AND RESORTS REQUIRE THE SATISFACTION OF VARIOUS CONDITIONS, MANY OF WHICH ARE BEYOND LAKES' CONTROL AND THE FAILURE OF WHICH TO BE SATISFIED MAY SIGNIFICANTLY DELAY THE COMPLETION OF LAKES' CURRENT INDIAN CASINO DEVELOPMENT PROJECTS OR PREVENT THE COMPLETION OF SUCH PROJECTS ALTOGETHER. 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, the State of Michigan, or on the east coast. 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 that 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, the State of Michigan, and on the east coast, 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 7 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 delays 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 of 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. BECAUSE LAKES CURRENTLY GENERATES NO REVENUE FROM CASINO MANAGEMENT CONTRACTS WITH WHICH TO OFFSET THE INVESTMENT COSTS ASSOCIATED WITH ITS CASINO DEVELOPMENT PROJECTS, DELAYS IN THE COMPLETION OF THESE DEVELOPMENT PROJECTS OR THE NON-COMPLETION OF ANY SUCH PROJECT COULD MATERIALLY AND ADVERSELY AFFECT LAKES' POTENTIAL FOR PROFITABILITY. Since the expiration of its management contract for Grand Casino Coushatta (the last remaining Lakes' managed Indian-owned casino) on January 16, 2002, Lakes has generated no revenue from its casino management activities. Given the absence of current casino management-related operating revenue with which to offset the potentially significant investment costs associated with its current or future casino development projects, delays in the completion of Lakes' current development projects, or the failure of such projects to be completed at all, may cause Lakes' operating results to fluctuate significantly and may adversely affect Lakes' profitability. In addition, because Lakes' future growth in revenues and its ability to generate profits will depend to a large extent on Lakes' ability to increase the number of its managed casinos or develop new business opportunities, the delays in the completion or the non-completion of Lakes' current development projects may adversely affect Lakes' ability to realize future growth in revenues and future profits. PURSUANT TO THEIR TERMS, LAKES' CONTRACTS TO MANAGE CASINOS BEING DEVELOPED BY LAKES ON INDIAN LAND CAN BE TERMINATED BY THE TRIBES UNDER CERTAIN CIRCUMSTANCES, WHICH TERMINATION MAY HAVE A MATERIAL ADVERSE EFFECT ON THE RESULTS OF LAKES' OPERATIONS. The terms of Lakes' current management contracts provide that such contracts may be terminated under circumstances, including without limitation, upon the failure to obtain NIGC approval for the project, the loss of requisite gaming licenses, or an exercise by a tribe of its buy-out option. Without the realization of new business opportunities or new management contracts, management contract terminations could have a material adverse effect on Lakes' results of operations and financial conditions. IF LAKES IS REQUIRED TO MAKE SIGNIFICANT ADDITIONAL PAYMENTS IN SATISFACTION OF THE INDEMNIFICATION OBLIGATIONS LAKES INHERITED FROM GRAND CASINOS UPON LAKES' FORMATION, THOSE PAYMENTS MAY HAVE A MATERIAL ADVERSE EFFECT ON LAKES' ASSET POSITION. Under the documents relating to Lakes' spin-off from Grand Casinos and Grand Casinos' acquisition by Park Place, Lakes agreed to indemnify Grand Casinos and affiliates of Grand Casinos for (i) liabilities of Grand Casinos retained by Lakes in the spin-off, (ii) Grand Casinos' ongoing indemnification obligations to current and former directors and officers of Grand Casinos and (iii) contingent liabilities related to Stratosphere Corporation ("Stratosphere"). Lakes has previously entered into a settlement agreement dispensing with both the Stratosphere shareholders' litigation and the Grand Casinos, Inc. shareholders' 8 litigation, pursuant to which Lakes paid a total of $18.0 million to the Grand Casinos, Inc. shareholders and the Stratosphere shareholders for full and final settlement of all federal and state related actions. As described under Item 3 ("Legal Proceedings"), there are currently a number of other litigation matters for which Lakes has indemnification obligations to Grand Casinos. 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. IF LAKES' CURRENT CASINO DEVELOPMENT PROJECTS ARE NOT COMPLETED OR, UPON COMPLETION, FAIL TO SUCCESSFULLY COMPETE IN THE HIGHLY COMPETITIVE MARKET FOR GAMING ACTIVITIES, LAKES MAY LACK THE FUNDS TO COMPETE FOR AND DEVELOP FUTURE GAMING OR OTHER BUSINESS OPPORTUNITIES AND THE RESULTS OF LAKES' OPERATIONS MAY SUFFER ACCORDINGLY. 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. 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. 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. CHANGES IN THE LAWS, REGULATIONS, AND ORDINANCES (INCLUDING TRIBAL AND/OR LOCAL LAWS) TO WHICH THE GAMING INDUSTRY IS SUBJECT, OR THE INABILITY OF LAKES, ITS KEY PERSONNEL, SIGNIFICANT SHAREHOLDERS, OR JOINT VENTURE PARTNERS TO OBTAIN OR RETAIN REQUIRED GAMING REGULATORY LICENSES, COULD PREVENT THE COMPLETION OF LAKES' CURRENT CASINO DEVELOPMENT PROJECTS OR PREVENT LAKES FROM PURSUING FUTURE DEVELOPMENT PROJECTS. 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, and often require such parties to obtain certain licenses, permits and approvals. The rapidly-changing political and regulatory environment governing the gaming industry (including gaming operations which are conducted on Indian land) makes it impossible for Lakes to accurately predict the effects that an adoption of or changes in the gaming laws, regulations and ordinances will have on Lakes. However, the failure of Lakes, or any of Lakes' key personnel, significant shareholders or joint venture partners, to obtain or retain required gaming regulatory licenses could prevent Lakes from expanding into new markets, prohibit Lakes from generating revenues in certain jurisdictions, and subject Lakes to sanctions and fines. The political and regulatory environment in which Lakes is and will be operating, including with respect to gaming activities on Indian land, is discussed in greater detail in this Form 10-K under the caption "Regulation". IF THE NIGC ELECTS TO MODIFY THE TERMS OF LAKES' MANAGEMENT CONTRACTS WITH INDIAN TRIBES OR VOID SUCH CONTRACTS ALTOGETHER, LAKES' REVENUES FROM MANAGEMENT CONTRACTS MAY BE REDUCED OR DISCONTINUED. 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 9 company fails to obtain requisite approvals or to comply with applicable laws and regulations. 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. IF INDIAN TRIBES TO WHICH LAKES HAS LOANED MONEY DEFAULT ON THEIR REPAYMENT OBLIGATIONS OR WRONGFULLY TERMINATE THEIR MANAGEMENT CONTRACTS WITH LAKES, LAKES WILL BE FORCED TO RELY ON REVENUES, IF ANY, FROM CASINO OPERATIONS AS RECOURSE FOR COLLECTION OF INDEBTEDNESS OR MONEY DAMAGES AND, THEREFORE, LAKES MAY BE UNABLE TO COLLECT THE AMOUNTS DUE. 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. A DETERIORATION OF THE COMPANY'S RELATIONSHIP WITH AN INDIAN TRIBE COULD CAUSE DELAYS IN THE COMPLETION OF A CASINO DEVELOPMENT PROJECT WITH THAT TRIBE OR EVEN FORCE THE COMPANY TO ABANDON A CASINO DEVELOPMENT PROJECT ALTOGETHER. Good personal and professional relationships with Indian tribes and their officials are critical to Lakes' proposed and future Indian-related gaming operations and activities, including Lakes' ability to obtain, develop and effectuate management and other agreements. As sovereign nations, Indian tribes establish their own governmental systems under which tribal officials or bodies representing a tribe may be replaced by appointment or election or become subject to policy changes. Replacements of tribe officials or administrations, or changes in policies to which a tribe is subject, may deteriorate the Company's relationship with a tribe and lead to delays in the completion of a development project with that tribe or prevent the project's completion altogether, either of which will have an adverse effect on the results of the Company's operations. IF FUNDS FROM LAKES' OPERATIONS ARE INSUFFICIENT TO SUPPORT ITS CASH REQUIREMENTS AND LAKES IS UNABLE TO OBTAIN ADDITIONAL FINANCING IN ORDER TO SATISFY THESE REQUIREMENTS, EITHER ON TERMS ACCEPTABLE TO LAKES OR AT ALL, LAKES MAY BE FORCED TO DELAY, SCALE BACK OR ELIMINATE SOME OF ITS EXPANSION AND DEVELOPMENT GOALS, OR CEASE ITS OPERATIONS ENTIRELY. Lakes anticipates that its reserves of cash, interest expected to be earned on those reserves, and its anticipated revenues will be sufficient to finance its operations. However, it is likely additional financing will be required to complete one or more of its casino projects as soon as regulatory approvals are received and construction can begin. There can be no assurance 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, or might require Lakes to cease its operations entirely. Lakes' financial condition and resources are discussed in greater detail in Item 7. ("Management's Discussion and Analysis of Financial Condition and Results of Operations of Lakes -- Capital Resources, Capital Spending and Liquidity"). 10 A LARGE PORTION OF LAKES' ASSETS ARE REPRESENTED BY NOTES RECEIVABLE FROM INDIAN TRIBES AND OTHER PARTIES WITH VARYING DEGREES OF COLLECTION RISK, AND WITH REPAYMENT OFTEN DEPENDENT ON THE OPERATING PERFORMANCE OF EACH GAMING PROPERTY. IMPAIRMENT OF ONE OR MORE OF THESE LOANS COULD HAVE A SIGNIFICANT ADVERSE IMPACT ON LAKES' FINANCIAL RESULTS. At December 30, 2001, Lakes had $95.8 million in notes receivable, which represented nearly 50% of its total assets. See Note 3 to the Consolidated Financial Statements. Most of the notes receivable are advances made to Indian tribes for financing related to gaming properties being developed, managed or financed by Lakes. Other notes receivable relate to other business ventures in which Lakes has participated. All of the notes are subject to varying degrees of collection risk and there is no established market for any of the notes. For the notes representing indebtedness of Indian tribes, the repayment terms are specific to each tribe and are largely dependent upon the operating performance of each gaming property. Repayments of such 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. The fair value of the notes receivable may be lower than the carrying value reflected in Lakes' balance sheet, and it is possible that one or more of the loans will not be collectible, in whole or in part. Management periodically evaluates the recoverability of its notes receivable based on the current and projected operating results of the underlying facility or entity and historical collection experience. No impairment losses on such notes receivable have been recognized through December 30, 2001. If there are significant losses in the future relating to impairment of value of the notes, this could have a material adverse effect on Lakes' results of operations and financial condition. As Lakes' casino projects begin construction or Lakes enters into new business arrangements, Lakes expects to make additional advances to Indian tribes and other parties in the future, which will be subject to the risks described above. ENTRY INTO NEW BUSINESSES MAY RESULT IN FUTURE LOSSES. Lakes has announced that part of its strategy involves diversifying into other businesses. Such businesses involve business risks separate from the risks involved in casino development and these investments may result in future losses to Lakes. These risks include but are not limited to negative cash flow, initial high development costs of new products and/or services without corresponding sales pending receipt of corporate and regulatory approvals, market introduction and acceptance of new products and/or services, and obtaining regulatory approvals required to conduct the new businesses. There is no assurance that diversification activities will successfully add to Lakes' future revenues and income. LAKES IS HEAVILY DEPENDENT ON THE ONGOING SERVICES OF ITS CHAIRMAN AND CHIEF EXECUTIVE OFFICER, LYLE BERMAN, THE LOSS OF WHOM WOULD HAVE A DETRIMENTAL EFFECT ON THE PURSUIT OF LAKES' BUSINESS OBJECTIVE AND, CONSEQUENTLY, ITS PROFITABILITY AND THE PRICE OF ITS STOCK. 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. UNTIL LAKES HAS SATISFIED ITS INDEMNIFICATION OBLIGATIONS RELATED TO GRAND CASINOS, LAKES IS PROHIBITED FROM DECLARING DIVIDENDS ON ITS COMMON STOCK AND, CONSEQUENTLY, THE ONLY RETURN ON INVESTMENT FOR LAKES' SHAREHOLDERS, IF ANY, WILL OCCUR UPON THE SALE OF LAKES' STOCK. So long as Lakes is required to indemnify Grand Casinos 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 11 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 at Park Place's sole and absolute discretion. ITEM 2. PROPERTIES CORPORATE OFFICE FACILITY Pursuant to the terms of the Distribution Agreement, Grand Casinos assigned to Lakes, and Lakes assumed a lease agreement dated February 1, 1996 covering 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 was $768,300 plus building operating costs. During 2001, also pursuant to the terms of the Distribution Agreement, Lakes entered into a capital lease arrangement for the corporate office space. Accordingly, Lakes recorded a capital leased asset and liability in the amount of approximately $5.8 million. These amounts are included on the accompanying consolidated balance sheet as of December 30, 2001. On January 2, 2002, as per the terms of the agreement with Grand Casinos, Lakes purchased the building for $6.4 million. Lakes occupies approximately 22,000 square feet of the building and has leased the remaining space to outside tenants. LAS VEGAS LAND The Company owned, or held 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. On December 28, 2001, the Company sold the Polo Plaza shopping center property to Metroflag Polo, LLC. In conjunction with this sale, Lakes sold to Metroflag BP, LLC, rights to the adjacent Travelodge property consisting of a long-term land lease and a motel operation. The sale price for this combined transaction, which closed on December 28, 2001, was approximately $30.9 million. Terms of the transaction include a $1.0 million down payment, a note to Lakes in the amount of $23.3 million payable on September 30, 2002, and a second note payable to Lakes that is non-interest bearing in the amount of $7.5 million due on June 30, 2004. Lakes' collateral for the two notes is the property and lease rights described above which would revert back to Lakes in the event of default by Metroflag. The transaction was closed subject to certain administrative post-closing conditions that must be satisfied within six months after the closing. If the conditions are not satisfied or waived by Metroflag within the prescribed period, Metroflag has the right to require Lakes to repurchase the properties. Lakes continues to own the Shark Club property which is an approximate 3.4 acre undeveloped site adjacent to the Polo Plaza shopping center and Travelodge sites. Lakes is currently in negotiations with a joint venture partner to develop this site for an upscale time-share project. It is contemplated that Lakes will contribute the property, valued at $16.0 million, and be required to make no other material contributions of cash or property to the project. Lakes has written down the Shark Club site to the estimated market value during the fourth quarter of 2001. Further, the option to purchase the adjacent Cable property for $39.1 million was allowed to lapse during 2001. As a result of these transactions, a pre-tax loss on sale of land held for development in the amount of $25.8 million was recorded in other income (expense) and a pre-tax write-down of approximately $3.4 million was included in selling, general and administrative expenses in the accompanying consolidated statement of loss for the twelve months ended December 30, 2001. ITEM 3. LEGAL PROCEEDINGS The following summaries describe certain known legal proceedings to which Grand Casinos is a party which Lakes has assumed, or with respect to which Lakes has agreed to indemnify Grand Casinos, in connection with the Distribution. 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- 12 ORL-22 -- in which various parties (including Grand Casinos) 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 Casinos) 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 Casinos 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 Casinos 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 Casinos failed to perform under the Standby Equity Commitment entered into between Stratosphere and Grand Casinos 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 Casinos' 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 Casinos and/or officers and/or directors of Grand Casinos. The Stratosphere LLC has been substituted for IBJ Schroeder Bank & Trust Company, Inc. in this proceeding. In August 2000, the Court and the parties agreed to try the action upon an amended joint pre-trial order and a series of post-trial briefs. Post-trial briefing concluded on December 12, 2000 and oral argument was held on January 22, 2001. On April 4, 2001, the Court entered judgment in favor of Grand Casinos and issued 13 its findings of fact and conclusions of law. The plaintiff filed an appeal with the Ninth Circuit and filed its opening brief on November 23, 2001. Grand Casinos filed its answering brief on January 11, 2002. The plaintiff filed its reply brief on February 8, 2002, and the parties are awaiting the Ninth Circuit's scheduling of the matter for oral argument. STRATOSPHERE PREFERENCE ACTION In April 1998, Stratosphere served on Grand Casinos and Grand Media & Electronics Distributing, Inc., a wholly owned subsidiary of Grand Casinos ("Grand Media"), a complaint in the Stratosphere bankruptcy case seeking recovery of certain amounts paid by Stratosphere to (i) Grand Casinos as management fees and for costs and expenses under a management agreement between Stratosphere and Grand Casinos, 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 Casinos responded to Stratosphere's complaint. That response denies that Stratosphere is entitled to recover the amounts described in the complaint. Discovery is now complete and the matter is scheduled for trial on May 2, 2002. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 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 3, 2000 through December 30, 2001, 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 December 31, 2000: High............................................. $ 9.50 $10.13 $10.63 $9.38 Low.............................................. 7.50 6.63 8.50 7.13 Year Ended December 30, 2001: High............................................. $10.63 $10.25 $ 8.49 $7.00 Low.............................................. 8.25 5.00 4.95 5.08
On March 19, 2002, the last reported sale price for the Common Stock was $7.15 per share. As of March 19, 2002, the Company had approximately 1,026 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, 14 the Company's overall financial condition and any other factors deemed relevant by the Board of Directors. See "Risk Factors -- Operating Covenants -- Dividend Restrictions." ITEM 6. SELECTED FINANCIAL DATA The Selected Financial Data presented below should be read in conjunction with the Financial Statements and notes thereto included elsewhere in this Form 10-K, and in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K.
FISCAL YEARS ENDED OR AS OF: --------------------------------------------------------------------- DECEMBER 30, DECEMBER 31, JANUARY 2, JANUARY 3, DECEMBER 28, 2001 2000 2000 1999 1997 ------------ ------------ ----------- ---------- ------------ (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) LAKES HISTORICAL RESULTS OF OPERATIONS: Total revenue(1)................. $ 35 $ 59 $ 55 $ 92 $ 79 Total operating income........... 21 47 45 76 70 Net Earnings (loss).............. --(2) 16(3) 29 61 45 Net Earnings (loss) per share -- basic......................... (0.03)(2) 1.47(3) 2.72 5.80 4.32 Net Earnings (loss) per share -- diluted....................... (0.03)(2) 1.47(3) 2.67 5.71 4.20 OTHER OPERATING DATA: EBITDA(4)........................ 22 50 47 78 71 BALANCE SHEET: Cash and cash equivalents -- unrestricted.................. $ 43 $ 10 $ 24 $ 57 $ 33 Total assets..................... 197 213 184 161 132 Total debt....................... 7 2 2 1 1 Shareholders' equity............. 176 176 160 132 119
- --------------- (1) 2001 includes $34.6 million in revenues from the management contract for Grand Casino Coushatta that concluded January 16, 2002. 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. (2) Includes non-recurring, non-cash charges totaling $29.2 million related to the sale and write-down of certain land held for development in Las Vegas, Nevada. (3) Includes a non-recurring, non-cash $18.0 million provision for the Grand Casinos/Stratosphere litigation settlement and a $5.5 million charge for the write-off of unconsolidated affiliates. (4) EBITDA is earnings before interest, taxes, depreciation and amortization, which can be computed by adding depreciation and amortization to operating income. EBITDA excludes the $29.2 million charge related to the sale and write-down of certain land held for development in Las Vegas, Nevada in 2001 and the $18.0 million provision for the Grand Casinos/Stratosphere litigation settlement and the $5.5 million write-off of unconsolidated affiliates in 2000. 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 15 ended December 30, 2001, December 31, 2000, January 2, 2000, January 3, 1999 and December 28, 1997 totaled $1.0 million, $3.0 million, $2.0 million, $2.0 million, and $1.0 million, respectively. 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, to the shareholders of Grand Casinos, Inc. ("Grand Casinos"). As a result of the Distribution, Lakes operates the Indian casino management business and holds various other assets previously owned by Grand Casinos. 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 the following 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: (1) Lakes has a contract to be the exclusive developer and manager of an Indian-owned gaming resort near New Buffalo, Michigan. (2) Lakes and another company have formed partnerships with contracts to develop and manage two casinos to be owned by Indian tribes in California, one near San Diego and the other near Sacramento. (3) Lakes and another company have formed a partnership with a contract to finance the construction of an Indian-owned casino 60 miles north of San Francisco, California. (4) Lakes has also signed contracts with a Massachusetts Indian tribe for development and management of a potential future gaming resort in the eastern United States; however, this tribe has received a negative finding regarding federal recognition from the Bureau of Indian Affairs (BIA). The tribe has indicated that it will submit additional information for reconsideration. See Item 1 -- "Business". Lakes' historical revenues have been derived almost exclusively from management fees. During 2001, Lakes managed a land-based, Indian-owned casino, Grand Casino Coushatta, in Kinder, Louisiana ("Grand Casino Coushatta"). Pursuant to the Coushatta management contract, Lakes received a fee based on the net distributable profits (as defined in the contracts) generated by Grand Casino Coushatta. The management contract expired January 16, 2002, and will not be renewed. This non-renewal will result in the loss of revenues to the Company derived from such contract, which will have a material adverse effect on the Company's results of operations. The Company also managed a second land-based, Indian-owned casino in Marksville, Louisiana ("Grand Casino Avoyelles"). 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. 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. 16 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 opened and operating, Lakes will not recognize revenue related to Indian casino management. REALIZABILITY OF NOTES RECEIVABLE: The Company's notes receivable from Indian Tribes are generally for the 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 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 30, 2001, 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. The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto for the years ended December 30, 2001, December 31, 2000 and January 2, 2000. 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. FISCAL YEAR ENDED DECEMBER 30, 2001 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2000 Revenues. Total revenues were $34.9 million for the fiscal year ended December 30, 2001, compared to $59.0 million for the same period in the prior year. Revenues for the current year were derived from fees related to the management of Grand Casino Coushatta. Revenues for the current year were less than the same period last year primarily due to the early buyout of the Company's management contract for Grand Casino Avoyelles by the Tunica-Biloxi Tribe of Louisiana at the end of the first quarter 2000, pursuant to the terms of the contract. Revenues from Grand Casino Avoyelles contributed $19.8 million for the twelve months ended December 31, 2000, including approximately $16.0 million in management fee income recognized due to the buyout of the management contract. The decrease in revenues relates also to a decline in management fees of $4.2 million from Grand Casino Coushatta due to construction interruption on the main roads leading to the casino, along with intensive marketing campaigns implemented by casinos in the competitive Lake Charles market and adverse weather conditions in the area. The management contract for Grand Casino Coushatta expired January 16, 2002 and will not be renewed. This expiration will result in the loss of revenues to the Company derived from such contract, which will have a material adverse effect on the Company's results of operations. As of this filing, no revenues are being derived from casinos. Costs and Expenses. Total costs and expenses increased $2.0 million, to $13.9 million for the year ended December 30, 2001, from $11.9 million for the prior year. Selling, general and administrative expenses increased $3.6 million, to $12.6 million for the year ended December 30, 2001 from $9.0 million for the prior year. The increase primarily reflects the $3.4 million write-down of the Shark Club property in Las Vegas to $16.0 million during 2001, as well as a write-off of approximately $1.0 million in uncollectible loans relating to the Paskenta project. The use of the Shark Club property is discussed below under "Capital Resources, 17 Capital Spending and Liquidity". Depreciation and amortization expenses decreased $1.6 million, to $1.3 million for the year ending December 30, 2001 from $2.9 million for the prior year, due to the early buyout of the Avoyelles management contract in 2000. Taxes. Benefit for income taxes was $0.2 million for the year ended December 30, 2001, compared to a provision for income taxes of $12.9 million for the prior year. The effective tax rates for 2001 and 2000 were 41.0% and 45.0%, respectively. Other. Loss on sale of land held for development was $25.8 million for the year ended December 30, 2001. This amount includes losses incurred relating to the sale of the Polo Plaza property in Las Vegas, Nevada as well as the sale of the rights to the adjacent Travelodge property consisting of a long-term land lease and a motel operation. These transactions are discussed below under "Capital Resources, Capital Spending and Liquidity". The sale price for the combined transaction, which closed on December 28, 2001, was approximately $30.9 million. This transaction and the lapsed option on the Cable property in Las Vegas resulted in a pre-tax loss of approximately $25.8 million during 2001. In the year ended December 31, 2000, there was a provision for litigation loss of $18.0 million. 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 settlement 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 amounts were included as restricted cash on the accompanying consolidated balance sheet as of December 31, 2000. The settlement agreement received final approval by the respective courts, and distributions have been made in accordance with the settlement agreement. In June 2001, Lakes entered into an agreement with New Horizon Kids Quest (NHKQ), pursuant to which NHKQ would acquire Lakes' interest in NHKQ. As a result, Lakes incurred a one-time write-down charge, included as write-down of unconsolidated affiliates, of $0.7 million before tax, during 2001. For the 2000 year, 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 decreased $1.6 million to $6.3 million for the fiscal year ended December 30, 2001 from $7.9 million for the prior year, primarily due to the decline in market interest rates. Equity in loss of unconsolidated affiliates was $0.5 million and $2.9 million for the years ending December 30, 2001 and December 31, 2000, respectively, the current year decrease is the result of the write-off of investments in Fanball.com, Interactive Learning Group and Trak 21 at the end of 2000. Earning (Loss) per Common Share and Net Earnings (Loss). For the fiscal year ended December 30, 2001 basic and diluted losses per common share were $0.03. This compares to basic and diluted earnings per common share of $1.47 for the fiscal year ended December 31, 2000. Earnings decreased from $15.7 million for the fiscal year ended December 31, 2000 to a loss of $0.3 million for the fiscal year ended December 30, 2001. Outlook. Except for fees earned from the management of Grand Casino Coushatta through January 16, 2002, it is currently contemplated that there will be no additional operating revenues for the remainder of 2002. Although none of the existing casino development projects are expected to produce revenue in 2002, Lakes continues to evaluate potential new revenue-generating business opportunities. Lakes continues to closely monitor its operating expenses. The Company's strong cash position is considered adequate to cover expected 2002 operating expenses. 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 18 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 5.0% 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. 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 35.0%, to the Company's actual rate for each of the years is state income taxes, net of the federal income tax benefit of 6.0%, 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. 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 $0.3 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. CAPITAL RESOURCES, CAPITAL SPENDING, AND LIQUIDITY At December 30, 2001 Lakes had $51.8 million in restricted and unrestricted cash and cash equivalents. The Company also had $2.0 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 19 develop existing and anticipated Indian casino operations, 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. When approvals are received, additional financing will be needed to complete the projects. It is currently planned that this third-party financing will be obtained by each individual tribe. However, there can be no assurance that if third-party financing is not available, Lakes will not be required to finance these projects directly. If Lakes must provide this financing, Lakes expects to obtain debt or equity financing which it would loan to the respective tribes as necessary. As part of a recently announced letter of intent to invest in a joint venture which would televise poker tournaments, the Company would be required to invest $0.1 million for an approximately 78% ownership position in the joint venture. The Company would also be required to loan up to $3.2 million to the joint venture as needed. For the years ended December 30, 2001, December 31, 2000 and January 2, 2000, net cash provided by operating activities totaled $34.9 million, $35.1 million and $36.5 million, respectively. For the same periods, net cash utilized in investing activities totaled $2.2 million, $49.1 million and $69.3 million. Included in these investing activities for the years ended December 30, 2001, December 31, 2000 and January 2, 2000 are proceeds primarily from repayment of notes receivable from Indian-owned casinos of $16.7 million, $18.0 million and $12.0 million, respectively. Also, during these periods, payments for land held for development amounted to $13.6 million, $3.9 million and $22.9 million, respectively. As a part of the agreements resulting from Lakes' spin-off from Grand Casinos and related transactions, Lakes has agreed to indemnify Grand Casinos 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 Casinos 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 Casinos and to pay all related settlements and judgments. See Item 3. Legal Proceedings. As security to support Lakes' indemnification obligations to Grand Casinos, Lakes agreed to deposit, in trust for the benefit of Grand Casinos, 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 spin-off. 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 Casinos, 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. As the $18.0 million was paid out during 2001, the remaining deposit of $7.5 million is included as restricted cash on the accompanying balance sheet as of December 30, 2001. 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. On December 28, 2001, the Company sold the Polo Plaza shopping center property to Metroflag Polo, LLC. In conjunction with this sale, Lakes sold to Metroflag BP, LLC, rights to the adjacent Travelodge property consisting of a long-term land lease and a motel operation. The sale price for this combined transaction was approximately $30.9 million. Terms of the transaction include a $1.0 million down payment, a note to Lakes in the amount of $23.3 million payable on September 30, 2002, and a second note payable to Lakes that is non-interest bearing in the amount of $7.5 million due on June 30, 2004. Lakes' collateral for the two notes is the property and lease rights described above which would revert back to Lakes in the event of default by Metroflag. The transaction was closed subject to certain administrative post-closing conditions that must be satisfied within six months after the closing. If the conditions are not satisfied or waived by Metroflag within the prescribed period, Metroflag has the right to require Lakes to repurchase the properties. 20 In addition to the notes receivable from Metroflag, Lakes also has approximately $65.0 million in notes receivable from Indian tribes and other parties. Most of these amounts are advances made to the tribes for the development of gaming properties managed by Lakes. See Note 3 to the Consolidated Financial Statements. Lakes continues to own the Shark Club property which is an approximate 3.4 acre undeveloped site adjacent to the Polo Plaza shopping center and Travelodge sites. Lakes is currently in negotiations with a joint venture partner to develop this site for an upscale time-share project. It is contemplated that Lakes will contribute the property, valued at $16.0 million, and be required to make no other material contributions of cash or property to the project. Lakes has written down the Shark Club site to the estimated market value during the fourth quarter of 2001. As a result of this write-down, the Company incurred a pre-tax operating write-down of approximately $3.4 million. Further, the sale of the Polo Plaza property in Las Vegas, Nevada, the sale of the rights to the adjacent Travelodge property consisting of a long-term land lease and a motel operation, and the lapsed option on the adjacent Cable property during 2001 resulted in a pre-tax loss of approximately $25.8 million. Notes receivable from the Coushatta Tribe of Louisiana were $12.2 million at December 31, 2000 and $0.1 million at December 30, 2001. The outstanding balance was repaid at the conclusion of the management agreement on January 16, 2002. In addition, Lakes was previously the guarantor of a loan agreement entered into by the Coushatta Tribe in the amount of $25.0 million, with a balance of $6.8 million outstanding at December 30, 2001. Lakes was released from the guaranty agreement on January 16, 2002. On January 2, 2002, the Company completed the purchase of its corporate office building in Minnetonka, Minnesota. This transaction resulted in the extinguishment of the Company's capital lease obligation related to the building. OBLIGATIONS The Company has two notes payable with third parties. The first is collateralized by certificates of deposit, with $1.0 million outstanding at December 30, 2001 and December 31, 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 $0.4 million outstanding at December 30, 2001. Interest is compounded and paid on a quarterly basis at 8.5%. The principal and any unpaid interest are due October 9, 2002. Pursuant to the terms of the Distribution Agreement, Grand Casinos assigned to Lakes, and Lakes 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. During 2001, also pursuant to the terms of the Distribution Agreement, Lakes entered into a capital lease arrangement for the corporate office space at which time the operating lease was cancelled. Accordingly, Lakes recorded a capital leased asset and liability in the amount of approximately $5.8 million. These amounts are included on the accompanying consolidated balance sheet as of December 30, 2001. On January 2, 2002, as per the agreement with Grand Casinos, Lakes purchased the building. 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 21 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 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 industry; 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; and reliance on Lakes' management. 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 30, 2001. 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 30, 2001, 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 30, 2001, Lakes had $61.5 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 $3.8 million. A reference rate increase of 100 basis points would result in an increase in interest income of $0.6 million. A 100 basis point decrease in the reference rate would result in a decrease of $0.6 million in interest income over the same twelve-month period. 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA LAKES GAMING, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants.................... 24 Consolidated Balance Sheets as of December 30, 2001 and December 31, 2000......................................... 25 Consolidated Statements of Earnings (Loss) for the fiscal years ended December 30, 2001, December 31, 2000 and January 2, 2000........................................... 26 Consolidated Statements of Comprehensive Earnings (Loss) for the fiscal years ended December 30, 2001, December 31, 2000 and January 2, 2000.................................. 27 Consolidated Statements of Shareholders' Equity for the fiscal years ended December 30, 2001, December 31, 2000 and January 2, 2000....................................... 28 Consolidated Statements of Cash Flows for the fiscal years ended December 30, 2001, December 31, 2000 and January 2, 2000...................................................... 29 Notes to Consolidated Financial Statements.................. 30
23 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 30, 2001 and December 31, 2000 and the related consolidated statements of earnings (loss), comprehensive earnings (loss), shareholders' equity and cash flows for each of the three years in the period ended December 30, 2001. 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 30, 2001 and December 31, 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 30, 2001, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, January 25, 2002 24 LAKES GAMING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 30, 2001 AND DECEMBER 31, 2000 (IN THOUSANDS)
2001 2000 -------- -------- ASSETS Current Assets: Cash and cash equivalents................................. $ 42,638 $ 10,469 Short-term investments.................................... 2,027 32,477 Current installments of notes receivable.................. 28,273 16,679 Accounts receivable, net.................................. 3,601 2,373 Deferred tax asset........................................ 4,549 13,674 Other current assets...................................... 1,079 355 -------- -------- Total Current Assets........................................ 82,167 76,027 -------- -------- Property and Equipment-Net.................................. 7,524 1,414 -------- -------- Other Assets: Land held for development................................. 16,038 58,671 Notes receivable-less current installments................ 67,525 35,337 Cash and cash equivalents-restricted...................... 9,175 30,270 Investments in and notes from unconsolidated affiliates... 839 3,209 Interest receivable....................................... 6,147 2,028 Other long-term assets.................................... 7,527 5,853 -------- -------- Total Other Assets.......................................... 107,251 135,368 -------- -------- TOTAL ASSETS................................................ $196,942 $212,809 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable.......................................... $ 105 $ 79 Current maturities of long-term debt...................... 1,325 525 Current installments of capital lease obligations......... 123 -- Income taxes payable...................................... 3,906 5,479 Litigation and claims accrual............................. 6,572 25,078 Other accrued expenses.................................... 3,341 4,521 -------- -------- Total Current Liabilities................................... 15,372 35,682 -------- -------- Long-term Liabilities: Long-term debt-less current maturities.................... -- 1,325 Capital lease obligations-less current installments....... 5,591 -- Other long-term liabilities............................... 225 -- -------- -------- Total Long-Term Liabilities................................. 5,816 1,325 -------- -------- TOTAL LIABILITIES........................................... 21,188 37,007 -------- -------- COMMITMENTS AND CONTINGENCIES (NOTES 8 AND 9) Shareholders' Equity: Capital stock, $.01 par value; authorized 100,000 shares; 10,638 common shares issued and outstanding at December 30, 2001, and December 31, 2000........................ 106 106 Additional paid-in-capital................................ 131,525 131,525 Retained Earnings......................................... 44,183 44,504 Accumulated other comprehensive loss...................... (60) (333) -------- -------- Total Shareholders' Equity.................................. 175,754 175,802 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $196,942 $212,809 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. 25 LAKES GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA)
2001 2000 1999 -------- -------- ------- REVENUES: Management fee income..................................... $ 34,854 $ 59,044 $54,716 COSTS AND EXPENSES Selling, general and administrative....................... 12,599 9,025 7,750 Depreciation and amortization............................. 1,329 2,910 1,916 -------- -------- ------- Total Costs and Expenses............................... 13,928 11,935 9,666 -------- -------- ------- EARNINGS FROM OPERATIONS.................................... 20,926 47,109 45,050 -------- -------- ------- OTHER INCOME (EXPENSE): Interest income........................................... 6,297 7,943 7,580 Interest expense.......................................... (170) (97) (98) Equity in loss of unconsolidated affiliates............... (465) (2,904) (2,925) Loss on sale of land held for development................. (25,781) -- -- Gain on sale of securities................................ -- 61 1,264 Provision for litigation loss............................. -- (18,000) -- Write-down of unconsolidated affiliates................... (666) (5,522) -- Other..................................................... (684) 2 21 -------- -------- ------- Total other income (expense), net...................... (21,469) (18,517) 5,842 -------- -------- ------- Earnings (loss) before income taxes......................... (543) 28,592 50,892 Provision (benefit) for income taxes........................ (222) 12,915 22,065 -------- -------- ------- NET EARNINGS (LOSS)......................................... $ (321) $ 15,677 $28,827 ======== ======== ======= BASIC EARNINGS (LOSS) PER SHARE............................. $ (0.03) $ 1.47 $ 2.72 ======== ======== ======= DILUTED EARNINGS (LOSS) PER SHARE........................... $ (0.03) $ 1.47 $ 2.67 ======== ======== ======= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.................. 10,638 10,635 10,600 DILUTIVE EFFECT OF STOCK COMPENSATION PROGRAMS.............. -- 7 186 -------- -------- ------- WEIGHTED AVERAGE COMMON AND DILUTED SHARES OUTSTANDING...... 10,638 10,642 10,786 ======== ======== =======
The accompanying notes are an integral part of these consolidated financial statements. 26 LAKES GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS) YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000 (IN THOUSANDS)
2001 2000 1999 ------- ------- ------- NET EARNINGS (LOSS)......................................... $ (321) $15,677 $28,827 OTHER COMPREHENSIVE EARNINGS (LOSS), NET OF TAX: Unrealized gains (losses) on securities: Unrealized holding gains (losses) during the period.... (4) 181 (318) Reclassification adjustment for losses (gains) included in net earnings (loss)............................... 277 (36) (796) ------- ------- ------- COMPREHENSIVE EARNINGS (LOSS)............................... $ (48) $15,822 $27,713 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 27 LAKES GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000 (IN THOUSANDS)
ACCUMULATED OTHER COMMON STOCK ADDITIONAL COMPREHENSIVE TOTAL --------------- PAID-IN- RETAINED EARNINGS SHAREHOLDERS' SHARES AMOUNT CAPITAL EARNINGS (LOSS) EQUITY ------ ------ ---------- -------- ------------- ------------- 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 Other comprehensive earnings................. -- -- -- -- 273 273 Net loss.................... -- -- -- (321) -- (321) ------ ---- -------- ------- ------- -------- Balance, December 30, 2001.... 10,638 $106 $131,525 $44,183 $ (60) $175,754 ====== ==== ======== ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. 28 LAKES GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000 (IN THOUSANDS)
2001 2000 1999 -------- -------- -------- OPERATING ACTIVITIES: Net earnings (loss)....................................... $ (321) $ 15,677 $ 28,827 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization........................... 1,329 2,910 1,916 Loss (gain) on sale of securities....................... 277 (61) (1,264) Impairment loss......................................... 3,360 -- -- Equity in loss of unconsolidated affiliates............. 465 2,904 2,925 Write down of assets held as investments................ 666 5,522 -- Loss on sale of land held for development............... 25,781 -- -- Deferred income taxes................................... 9,192 (9,480) (276) Provision for litigation loss........................... -- 18,000 -- Changes in operating assets and liabilities: Accounts receivable................................... (3,307) 3,240 9,604 Income taxes.......................................... (1,573) (906) (4,638) Accounts payable...................................... 26 (409) 488 Accrued expenses...................................... (873) (1,001) (661) Other................................................. (77) (1,284) (465) -------- -------- -------- Net Cash Provided by Operating Activities................... 34,945 35,112 36,456 -------- -------- -------- INVESTING ACTIVITIES: Short-term investments, purchases......................... (12,708) (52,795) (28,829) Short-term investments, sales/maturities.................. 43,618 48,080 500 Payments for land held for development.................... (13,616) (3,858) (22,949) Advances on notes receivable.............................. (29,482) (37,402) (12,406) Proceeds from repayment of notes receivable............... 16,660 18,038 11,950 Investment in and notes receivable from unconsolidated affiliates.............................................. 1,144 (2,917) (8,035) Increase in restricted cash, net.......................... (2,974) (18,121) (7,157) Increase in other long-term assets........................ (3,567) (92) (2,539) Proceeds from sale of securities.......................... -- -- 389 Payments for property and equipment, net.................. (1,316) (47) (239) -------- -------- -------- Net Cash Used in Investing Activities....................... (2,241) (49,114) (69,315) -------- -------- -------- FINANCING ACTIVITIES: Proceeds from issuance of common stock.................... -- 79 477 Payments on long-term debt and capital lease obligations............................................. (535) -- -- -------- -------- -------- Net Cash Provided by (Used in) Financing Activities......... (535) 79 477 -------- -------- -------- Net increase (decrease) in cash and cash equivalents........ 32,169 (13,923) (32,382) Cash and cash equivalents -- beginning of period............ 10,469 24,392 56,774 -------- -------- -------- Cash and cash equivalents -- end of period.................. $ 42,638 $ 10,469 $ 24,392 ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest................................................ $ 170 $ 97 $ 98 Income taxes............................................ 4,002 23,090 23,676 Noncash investing and financing activities: Notes issued in exchange for property................... 30,826 -- -- Restricted cash payment related to Stratosphere litigation settlement.................................. (18,000) -- -- Capital leased asset and obligation incurred related to office building........................................ 5,724 -- --
The accompanying notes are an integral part of these consolidated financial statements. 29 LAKES GAMING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2001, DECEMBER 31, 2000, AND JANUARY 2, 2000 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 Casinos"). Pursuant to the terms of a Distribution Agreement entered into between Grand Casinos and Lakes and dated as of December 31, 1998 (the "Distribution Agreement"), Grand Casinos shareholders received .25 of one share of Lakes Common Stock for each share held in Grand Casinos. Immediately following the Distribution, Grand Casinos merged with a subsidiary of Park Place Entertainment Corporation, a Delaware corporation ("Park Place"), pursuant to which Grand Casinos became a wholly owned subsidiary of Park Place (the "Merger"), Grand Casinos shareholders received one share of Park Place common stock in the Merger for each share they held in Grand Casinos. The merger and distribution received all necessary shareholder and regulatory approvals and was completed on December 31, 1998. Grand Casinos obtained a ruling from the Internal Revenue Service (IRS) that the Distribution qualified as a tax-free transaction, solely with respect to Grand Casinos shareholders except to the extent that Grand Casinos shareholders received cash in lieu of fractional shares. During 2001, Lakes managed the largest casino resort in Louisiana and has entered into development and management agreements with four separate tribes for four new casino operations, one in Michigan, two in California, and one with the Nipmuc Nation on the east coast. The Company also has agreements for the development of a casino on Indian owned land in California through a joint venture. 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 $16.0 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 expired January 16, 2002, which is seven years from the date the casino opened, and was not renewed. This expiration will result in the loss of revenues to the Company derived from such contract, which will have a material adverse effect on the Company's results of operations. As of December 30, 2001, the Company has no other management contracts from which it will derive revenues in 2002. 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 30 LAKES GAMING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. During the reporting period, the most significant estimates relate to revenue recognition and realizability of notes receivable. 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 30, 2001 (2001), December 31, 2000 (2000), and January 2, 2000 (1999). 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 PCG Santa Rosa, LLC, a joint venture formed to develop a casino on Indian-owned land in California. Additionally, as a result of its spin-off from Grand Casinos, Lakes received a 27 percent ownership interest in New Horizon Kids Quest, Inc. (NHKQ), a publicly held provider of child care facilities. In June 2001, Lakes entered into an agreement with NHKQ, pursuant to which NHKQ would acquire Lakes' interest in NHKQ. As a result of this transaction, Lakes incurred a one-time write-down charge of $0.7 million before tax, during the second quarter of 2001. 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, Trak 21 Development, LLC, a developer of player tracking systems for the casino industry, and Interactive Learning Group, Inc., a consumer products company. 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, food and beverage operations, marketing and promotion, customer service, accounting, legal and other functions. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash on hand and in banks, interest-bearing deposits, money market funds and other instruments with original maturities of three months or less. Restricted cash and cash equivalents consist primarily of funds deposited as security to support Lakes' indemnification obligations to Grand Casinos 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 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 31 LAKES GAMING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) unrealized gains and losses reported as accumulated other comprehensive earnings (loss), net of income taxes, in the accompanying consolidated statements of shareholders' equity. 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. Included in the table below are available-for-sale securities that do not have a single maturity date. These available-for-sale securities have maturities over five years and less than ten years based on the securities' final maturity dates. As of December 30, 2001 and December 31, 2000, the cost basis, fair value, and unrealized losses of the Company's investments consist of the following (in thousands):
COST UNREALIZED FAIR BASIS LOSSES VALUE ------- ---------- ------- 2001 Available-for-sale securities........................ $ 2,132 $105 $ 2,027 2000 Available-for-sale securities........................ $33,042 $565 $32,477
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: Building.................................................... 40 years Leasehold improvements...................................... 15 years Furniture and equipment..................................... 3-10 years
Property and Equipment consist of the following (in thousands):
2001 2000 ------- ------- Land........................................................ $ 1,224 $ 875 Building under capital lease................................ 5,768 -- Leasehold improvements...................................... -- 376 Furniture and equipment..................................... 1,950 1,513 ------- ------- 8,942 2,764 Less: Accumulated depreciation.............................. (1,418) (1,350) ------- ------- Property and equipment, net................................. $ 7,524 $ 1,414 ======= =======
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 At December 30, 2001, land held for development consists of amounts related to an approximate 3.4 acre site in Las Vegas, Nevada, which the Company owns. Lakes is currently in negotiations with a joint venture partner to develop this site for an upscale time-share project. As a result of these negotiations, it is contemplated that Lakes will contribute the property, valued at $16.0 million, and be required to make no 32 LAKES GAMING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) additional material contributions of cash or property to the project. Lakes wrote down the Shark Club site to the $16.0 million market value from $19.4 million during 2001. As a result of this write-down, the Company incurred a pre-tax operating write-down of approximately $3.4 million, which is reflected in selling, general and administrative expenses in the accompanying consolidated statement of loss. On December 28, 2001, the Company sold the Polo Plaza shopping center property to Metroflag Polo, LLC. In conjunction with this sale, Lakes sold to Metroflag BP, LLC, rights to the adjacent Travelodge property consisting of a long-term land lease and a motel operation. The sale price for this combined transaction was approximately $30.9 million. Terms of the transaction include a $1.0 million down payment, a note to Lakes in the amount of $23.3 million payable on September 30, 2002, and a second non-interest bearing note payable to Lakes in the amount of $7.5 million due on June 30, 2004. Lakes' collateral for the two notes is the property and lease rights described above which would revert back to Lakes in the event of default by Metroflag. The transaction was closed subject to certain administrative post-closing conditions that must be satisfied within six months after the closing. If the conditions are not satisfied or waived by Metroflag within the prescribed period, Metroflag has the right to require Lakes to repurchase the properties. Further, the option to purchase the adjacent Cable property for $39.1 million was allowed to lapse during 2001. As a result of these transactions, a pre-tax loss on sale of land held for development and pre-tax write-off related to the lapsed option on the Cable property in the amount of $25.8 million is included in the accompanying consolidated statement of loss for the twelve months ended December 30, 2001. 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. Realizability of accrued interest on notes receivable is contingent upon the opening of the related casinos. 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 30, 2001. 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 For all periods, basic earnings per share (EPS) is calculated by dividing earnings (loss) by the weighted average common shares outstanding. Diluted EPS reflects the potential dilutive effect of all common stock equivalents outstanding by dividing net earnings (loss) by the weighted average of all common and dilutive shares outstanding. Stock options that could potentially dilute earnings (loss) per share in the future of 2,486,343 and 867,268 in 2001 and 2000, respectively, were not included in the computation of diluted earnings (loss) per share because to do so would have been anti-dilutive for the periods presented. 33 LAKES GAMING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 Pokagon Band of Potawatomi Indians, Metroflag Polo, LLC, and the Shingle Springs Band of Miwok 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 was required as of the beginning of fiscal year 2001 and had no material effect on the Company's financial position or results of operations. RECLASSIFICATIONS Certain amounts in the 2000 and 1999 consolidated financial statements have been reclassified to conform to the 2001 presentation. These reclassifications had no effect on previously reported net earnings or shareholders' equity. 2. MANAGEMENT CONTRACTS FOR INDIAN-OWNED CASINOS: The Company held a management contract with the Coushatta Tribe of Louisiana for a gaming facility in Kinder, Louisiana, that expired on January 16, 2002, which is seven years from the date the casino opened, and was not renewed. Substantially, all of the Company's revenues were derived from this contract during 2001. This expiration will result in the loss of revenues to the Company derived from such contract, which will have a material adverse effect on the Company's results of operations. 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, including $16.0 million related to the early buy-out of the agreement. The Company's revenues and earnings will not include contribution from this operation going forward. 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 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. 34 LAKES GAMING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. NOTES RECEIVABLE
DECEMBER 30, 2001 DECEMBER 31, 2000 ----------------- ----------------- Notes receivable consist of the following (in thousands): Notes from the Pokagon Band of Potawatomi Indians with variable interest rates, (not to exceed 10%), (5.75% at December 30, 2001), receivable in 60 monthly installments subsequent to commencement date.............................................. $ 35,236 $ 21,918 Note from Metroflag Polo, LLC, with variable interest rates (5.00% at December 30, 2001), receivable in monthly installments of interest only through September 30, 2002, at which time principal is due.................................. 23,706 -- Notes from the Shingle Springs Band of Miwok Indians with variable interest rates (6.75% at December 30, 2001), receivable in 12 monthly installments subsequent to commencement date................... 12,373 5,554 Notes from the Jamul Indian Village with variable interest rates (6.75% at December 30, 2001), receivable in 12 monthly installments subsequent to commencement date.............................. 7,554 3,372 Note from Metroflag BP, LLC, non-interest bearing with an implicit interest rate of 5.0%, receivable in full on June 28, 2004.......................... 7,120 -- Notes from ViatiCare Financial Services, LLC, with a fixed interest rate of 8.25% at December 30, 2001, receivable in full on December 31, 2002........... 4,000 3,740 Notes from the Coushatta Tribe with variable interest rates (5.75% at December 30, 2001), receivable in 84 monthly installments through January 2002...................................... 67 12,227 Other............................................... 5,742 5,205 -------- -------- Total notes receivable.............................. 95,798 52,016 Less -- current installments of notes receivable.... (28,273) (16,679) -------- -------- Notes receivable, less current installments......... $ 67,525 $ 35,337 ======== ========
The notes receivable from Indian Tribes are generally for the 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 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 30, 2001, no amounts have been withheld under these provisions. The terms of Lakes' current management contracts provide that such contracts may be terminated under circumstances, including without limitation, upon the failure to obtain NIGC approval for the project, the loss of requisite gaming licenses, or an exercise by a tribe of its buy-out option. Without the realization of new business opportunities or new management contracts, management contract terminations could have a material adverse effect on Lakes' results of operations and financial conditions. 35 LAKES GAMING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The notes receivable from Metroflag Polo, LLC and Metroflag BP, LLC relate to the sale of the Polo Plaza property in Las Vegas, Nevada and to the sale of rights to the adjacent Travelodge property consisting of a long-term land lease and motel operation. Lakes' collateral for the two notes is the property and lease rights described above which would revert back to Lakes in the event of default by Metroflag. 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 30, 2001. 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. 4. INCOME TAXES The provision (benefit) for income taxes attributable to earnings for 2001, 2000 and 1999 consisted of the following (in thousands):
YEARS ENDED --------------------------- 2001 2000 1999 ------- ------- ------- Current: Federal............................................... $(7,233) $17,602 $17,649 State................................................. (2,181) 4,793 4,692 ------- ------- ------- (9,414) 22,395 22,341 Deferred................................................ 9,192 (9,480) (276) ------- ------- ------- $ (222) $12,915 $22,065 ======= ======= =======
Reconciliations of the statutory federal income tax rate to the Company's actual rate based on earnings before income taxes for 2001, 2000, and 1999 are summarized as follows:
YEARS ENDED --------------------- 2001 2000 1999 ----- ---- ---- Statutory federal tax rate.................................. (35.0)% 35.0% 35.0% State income taxes, net of federal income taxes............. 68.6 6.0 6.0 Other, net.................................................. (74.6) 4.0 2.4 ----- ---- ---- (41.0)% 45.0% 43.4% ===== ==== ====
36 LAKES GAMING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's deferred income tax liabilities and assets are as follows (in thousands):
2001 2000 1999 ------ ------- ------- Current deferred tax asset: Accruals, reserves and other........................... $4,549 $13,674 $ 6,301 ====== ======= ======= Non-current deferred taxes: Unrealized investment losses (gains)................... 1,489 2,670 1,815 Capitalized interest................................... (434) (1,737) (1,737) Development cost amortization.......................... 98 (35) (784) Other.................................................. 101 423 (80) ------ ------- ------- Net non-current deferred tax asset (liability)........... $1,254 $ 1,321 $ (786) ====== ======= =======
Under the terms of its tax sharing agreement with Grand, any further tax benefits relating to capital losses resulting from the Company's write-off of its investment in Stratosphere will be shared equally by Lakes and Park Place up to a benefit of approximately $12.0 million to Lakes. 5. LONG-TERM DEBT The Company has two notes payable with third parties. The first is collateralized by certificates of deposit, with $1.0 million outstanding at December 30, 2001 and December 31, 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 $0.4 million outstanding at December 30, 2001. Interest is compounded and paid on a quarterly basis at 8.5%. The principal and any unpaid interest are due October 9, 2002. 6. CAPITAL LEASE OBLIGATIONS Pursuant to the terms of the Distribution Agreement, Grand Casinos assigned to Lakes, and Lakes 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. During 2001, also pursuant to the terms of the Distribution Agreement, Lakes entered into a capital lease arrangement for the corporate office space at which time the operating lease was cancelled. Accordingly, Lakes recorded a capital leased asset and liability in the amount of approximately $5.8 million. These amounts are included on the accompanying consolidated balance sheet as of December 30, 2001. 7. STOCK OPTIONS Grand Casinos 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 Casinos' common stock were granted to officers, directors, and employees. Upon the consummation of the Distribution, the holders of outstanding Grand Casinos 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 Casinos 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 Casinos on December 31, 1998. Additionally, Lakes has a 1998 Stock Option and Compensation Plan and a 1998 Director Stock Option Plan which are approved 37 LAKES GAMING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) to grant up to an aggregate of 2.5 million shares and 0.2 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 FOR OPTION PRICE OUTSTANDING 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) Granted...................................... 167,000 (167,000) (5.24- 7.75) Granted...................................... 20,000 (20,000) (9.88) Canceled..................................... (31,375) 31,375 (8.38-11.34) Exercised.................................... -- -- -- --------- ---------- ------------ Balance at December 30, 2001................... 2,486,343 1,206,481 $(5.24-17.72) ========= ========== Exercisable at December 30, 2001............... 1,419,343 $(7.42-17.72) ========= ============
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):
2001 2000 1999 ------ ------- ------- Net earnings (loss): As reported............................................ $ (321) $15,677 $28,827 Pro forma.............................................. (346) 15,644 28,431 Net earnings (loss) per share: As reported -- Basic................................... $(0.03) $ 1.47 $ 2.72 Pro forma -- Basic..................................... (0.03) 1.47 2.68 As reported -- Diluted................................. (0.03) 1.47 2.67 Pro forma -- Diluted................................... (0.03) 1.47 2.64
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 38 LAKES GAMING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Black-Scholes option-pricing model. The following assumptions were used to estimate the fair value of options:
2001 2000 1999 ----------- ----------- ----------- Risk-free interest rate...................... 5.21-5.68% 6.45-6.92% 5.20-6.50% Expected life................................ 10 years 10 years 10 years Expected volatility.......................... .394-.515 .453-.538 .452-.485 Expected dividend yield...................... -- -- -- Weighted average fair value.................. $5.07 $5.82 $5.69
8. EMPLOYEE RETIREMENT PLAN Lakes has a section 401(k) employee savings plan for all full-time employees. The savings plan allows participants to defer, on a pre-tax 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 $.10 million, $.09 million, and $.03 million during 2001, 2000, and 1999, respectively. Company contributions are vested over a period of five years. 9. COMMITMENTS AND CONTINGENCIES OPERATING LEASES During 2001 the Company leased certain property and equipment, including the corporate office building and an airplane, under non-cancelable operating leases. Rent expense, under non-cancelable operating leases, exclusive of real estate taxes, insurance, and maintenance expense was $1.2 million, $1.4 million, and $1.3 million for 2001, 2000 and 1999, respectively. In January 2002, the Company purchased the corporate office building; therefore, no rent payments will be due going forward related to the building. The airplane lease expires May 1, 2003 and provides for two one-year renewal terms. Approximate future minimum lease payments due under this lease as of December 30, 2001, considering both one-year renewals are taken are as follows (in thousands): 2002........................................................ $ 600 2003........................................................ 600 2004........................................................ 600 2005........................................................ 200 ------ $2,000 ======
PURCHASE OPTIONS The Company has the right to purchase the airplane it leases during the base lease term and any renewal term for approximately $8 million. During 2001, the Company sold its rights to the Travelodge property in Las Vegas, Nevada, including its option to purchase the Travelodge property. During 2001, the option to purchase the Cable property in Las Vegas, Nevada for the purchase price of $39.1 million was allowed to lapse. 39 LAKES GAMING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 loan term is approximately five years. As of December 30, 2001 and December 31, 2000, the amounts outstanding were $6.8 million and $13.0 million, respectively. Lakes was released from this guaranty agreement at the conclusion of the management agreement on January 16, 2002. INDEMNIFICATION AGREEMENT As a part of the Transaction, the Company has agreed to indemnify Grand Casinos 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 Casinos 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 Casinos and to pay all related settlements and judgments. As security to support Lakes' indemnification obligations to Grand Casinos under each of the Grand Casinos 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 Casinos, as a wholly owned subsidiary of Park Place, an aggregate of $30.0 million, to cover various commitments and contingencies related to or arising out of, Grand Casinos' 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 $18.0 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 the $18.0 million was paid out during 2001, the remaining $7.5 million is included as restricted cash on the accompanying balance sheet as of December 30, 2001. As part of the indemnification agreement, Lakes has agreed that it will not declare or pay any dividends, make any distribution of Lakes' equity interests, or otherwise purchase, redeem, defease or retire for value any equity interests in Lakes without the written consent of Park Place. The following summaries describe certain known legal proceedings to which Grand Casinos is a party which Lakes has assumed, or with respect to which Lakes has agreed to indemnify Grand Casinos, in connection with the Distribution. 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 Casinos) 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 40 LAKES GAMING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 Casinos) 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 Casinos 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 Casinos 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 Casinos failed to perform under the Standby Equity Commitment entered into between Stratosphere and Grand Casinos 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 Casinos' 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 Casinos and/or officers and/or directors of Grand Casinos. The Stratosphere LLC has been substituted for IBJ Schroeder Bank & Trust Company, Inc. in this proceeding. In August 2000, the Court and the parties agreed to try the action upon an amended joint pre-trial order and a series of post-trial briefs. Post-trial briefing concluded on December 12, 2000 and oral argument was held on January 22, 2001. On April 4, 2001, the Court entered judgment in favor of Grand Casinos and issued its findings of fact and conclusions of law. The plaintiff filed an appeal with the Ninth Circuit and filed its opening brief on November 23, 2001. Grand Casinos filed its answering brief on January 11, 2002. The plaintiff filed its reply brief on February 8, 2002, and the parties are awaiting the Ninth Circuit's scheduling of the matter for oral argument. 41 LAKES GAMING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STRATOSPHERE PREFERENCE ACTION In April 1998, Stratosphere served on Grand Casinos and Grand Media & Electronics Distributing, Inc., a wholly owned subsidiary of Grand Casinos ("Grand Media"), a complaint in the Stratosphere bankruptcy case seeking recovery of certain amounts paid by Stratosphere to (i) Grand Casinos as management fees and for costs and expenses under a management agreement between Stratosphere and Grand Casinos, 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 Casinos responded to Stratosphere's complaint. That response denies that Stratosphere is entitled to recover the amounts described in the complaint. Discovery is now complete and the matter is scheduled for trial on May 2, 2002. 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 sheets. Grand Casinos 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 Casinos' or the Company's consolidated financial position or results of operations. 10. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Year ended December 30, 2001 (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- -------- Net revenues..................................... $9,223 $9,599 $8,664 $ 7,368 Earnings from operations......................... 6,312 6,330 5,800 2,484 Net earnings (loss).............................. 4,717 4,180 4,143 (13,361) Earnings (loss) per share: Basic.......................................... $ .44 $ .39 $ .39 (1.25) Diluted........................................ .44 .39 .39 (1.25)
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 (.02)
42 LAKES GAMING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. SUBSEQUENT EVENTS (UNAUDITED) On January 2, 2002, the Company completed the purchase of its corporate office building in Minnetonka, Minnesota for $6.4 million, including transaction expenses. This transaction resulted in the extinguishment of the Company's capital lease obligation related to the building. On March 1, 2002, the Company announced it had signed a letter of intent with respect to an investment in a joint venture with Steven Lipscomb, an experienced producer of televised poker tournaments. The purpose of this joint venture would be to launch the World Poker Tour and establish poker as the next significant televised mainstream sport. The terms of this investment would require Lakes to make an investment of $100,000 for an approximate 78% ownership position in the joint venture. Lakes would also be required to lend up to $3.2 million to the joint venture as needed. The joint venture would issue a note to Lakes at 6.2% interest per annum with principal payable at the end of three years. The Lakes' note would be secured by a blanket security interest in all assets of the joint venture. If certain predetermined goals are not achieved by the joint venture, Lakes would have the right to stop advances on the note. If Lakes were to elect to stop funding the joint venture, all outstanding principal amounts would be due one year from the date Lakes stopped funding. 43 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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. 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.................... 24 Consolidated Balance Sheets as of December 30, 2001 and December 31, 2000......................................... 25 Consolidated Statements of Earnings (Loss) for the fiscal years ended December 30, 2001, December 31, 2000 and January 2, 2000........................................... 26 Consolidated Statements of Comprehensive Earnings (Loss) for the fiscal years ended December 30, 2001, December 31, 2000 and January 2, 2000.................................. 27 Consolidated Statements of Shareholders' Equity for the fiscal years ended December 30, 2001, December 31, 2000 and January 2, 2000....................................... 28 Consolidated Statements of Cash Flows for the fiscal years ended December 30, 2001, December 31, 2000 and January 2, 2000...................................................... 29 Notes to Consolidated Financial Statements.................. 30
- --------------- (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 Casinos, Inc. 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")
44
EXHIBITS DESCRIPTION - -------- ----------- 3.1 Articles of Incorporation of Lakes Gaming, Inc. (Incorporated herein by reference to Exhibit 3.1 to the Lakes Form 10.) 3.2 By-laws of Lakes Gaming, Inc. (Incorporated herein by reference to Exhibit 3.2 to the Lakes Form 10.) 10.1 Distribution Agreement by and between Grand Casinos, Inc. and Lakes Gaming, Inc., dated as of December 31, 1998. (Incorporated herein by reference to Exhibit 10.1 to Lakes' Form 8-K dated January 8, 1999.) 10.2 Employee Benefits and Other Employment Matters Allocation Agreement by and between Grand Casinos, Inc. and Lakes Gaming, Inc., dated as of December 31, 1998. (Incorporated herein by reference to Exhibit 10.2 to Lakes' Form 8-K dated January 8, 1999.) 10.3 Intellectual Property License Agreement by and between Grand Casinos, Inc. and Lakes Gaming, Inc., dated as of December 31, 1998. (Incorporated herein by reference to Exhibit 10.5 to Lakes' Form 8-K dated January 8, 1999.) 10.4 Tax Allocation and Indemnity Agreement by and between Grand Casinos, Inc. and Lakes Gaming, Inc., dated as of December 31, 1998. (Incorporated herein by reference to Exhibit 10.3 to Lakes' Form 8-K dated January 8, 1999.) 10.5 Tax Escrow Agreement by and among Grand Casinos, Inc., Lakes Gaming, Inc., and First Union National Bank as Escrow Agent, dated as of December 31, 1998. (Incorporated herein by reference to Exhibit 10.4 to Lakes' Form 8-K dated January 8, 1999.) 10.6 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). 10.7 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.) 10.8 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.) * 10.9 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.) * 10.10 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.) 10.11 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.) 10.12 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 December 31, 2000.) 10.13 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 December 31, 2000.) 10.14 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 December 31, 2000.)
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EXHIBITS DESCRIPTION - -------- ----------- 10.15 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 December 31, 2000.) 10.16 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 December 31, 2000.) 10.17 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 December 31, 2000.) 10.18 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 December 31, 2000.) 10.19 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 December 31, 2000.) 10.20 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 December 31, 2000.) 10.21 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 December 31, 2000.) 10.22 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 December 31, 2000.) 10.23 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 December 31, 2000.) 10.24 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 December 31, 2000.) 10.25 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 December 31, 2000.) 10.26 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 December 31, 2000.) 10.27 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 December 31, 2000.)
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EXHIBITS DESCRIPTION - -------- ----------- 10.28 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 December 31, 2000.) 10.29 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 December 31, 2000.) 10.30 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 December 31, 2000.) 10.31 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 December 31, 2000.) 10.32 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.) 10.33 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.) 10.34 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.) 10.35 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.) 10.36 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.) 10.37 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.) 10.38 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.) 10.39 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.) 10.40 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.) 10.41 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.)
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EXHIBITS DESCRIPTION - -------- ----------- 10.42 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.) 10.43 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.) 10.44 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.) 10.45 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.) 10.46 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.) 10.47 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.) 10.48 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.) 10.49 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.) 10.50 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.) 10.51 Gaming Development Agreement for Class III Gaming Facility by and between The Nipmuc Nation and Lakes Nipmuc, LLC, dated as of July 5, 2001. (Incorporated herein by reference to Exhibit 10.1 to Lakes' Report on Form 10-Q for the quarter ended July 1, 2001.) 10.52 Management Agreement for Class III Gaming Enterprise by and between The Nipmuc Nation and Lakes Nipmuc, LLC, dated as of July 5, 2001. (Incorporated herein by reference to Exhibit 10.2 to lakes' Report on Form 10-Q for the quarter ended July 1, 2001.) 10.53 Interim Promissory Note, dated as of July 5, 2001, by and between The Nipmuc Nation and Lakes Nipmuc, LLC. (Incorporated herein by reference to Exhibit 10.3 to Lakes' Report on Form 10-Q for the quarter ended July 1, 2001.) 10.54 Security Agreement by and between The Nipmuc Nation and Lakes Nipmuc, LLC, dated July 5, 2001. (Incorporated herein by reference to Exhibit 10.4 to Lakes' Report on Form 10-Q for the quarter ended July 1, 2001.) 10.55 Guaranty Agreement by Lakes Gaming, Inc. and agreed to by The Nipmuc Nation, dated as of July 5, 2001. (Incorporated herein by reference to Exhibit 10.5 to Lakes' Report on Form 10-Q for the quarter ended July 1, 2001.)
48
EXHIBITS DESCRIPTION - -------- ----------- 10.56 Purchase Agreement, dated as of December 28, 2001, by and among Grand Casinos Nevada I, Inc., a Minnesota corporation, and Metroflag Polo, LLC, a Nevada limited liability company. 10.57 Promissory Note dated as of the 28th day of December 2001, by and among Metroflag Polo, LLC, a Nevada limited liability company, and Grand Casinos Nevada I, Inc., a Minnesota corporation. 10.58 Deed of Trust, Assignment of Leases and Rents and Security Agreement, dated December 28, 2001, by and among Metroflag Polo, LLC, Lawyers Title of Nevada, Inc. as trusted, and Grand Casinos Nevada I, Inc. as beneficiary. 10.59 Purchase Agreement, dated as of December 28, 2001, by and among Grand Casinos Nevada I, Inc., a Minnesota corporation, and Metroflag BP, LLC, a Nevada limited liability company. 10.60 Promissory Note dated as of the 28th day of December 2001, by and among Metroflag BP, LLC, a Nevada limited liability company and Grand Casinos Nevada I, Inc., a Minnesota corporation. 10.61 Promissory Note dated as of the 28th day of December 2001, by and among Metroflag BP, LLC, a Nevada limited liability company, and Grand Casinos Nevada I, Inc., a Minnesota corporation. 10.62 Leasehold Deed of Trust, Assignment of Leases and Rents and Security Agreement, dated December 28, 2001, by and among Metroflag BP, LLC, Lawyers Title of Nevada, Inc. as trustee, and Grand Casinos Nevada I, Inc. and Grand Casinos, Inc. as beneficiaries. 10.63 Leasehold Deed of Trust, Assignment of Leases and Rents and Security Agreement, dated December 28, 2001 by and among Metroflag BP, LLC, Lawyers Title of Nevada, Inc. as trustee, and Grand Casinos Nevada I, Inc. as beneficiary. 21 Subsidiaries of the Company. 23 Consent of Independent Public Accountants Dated March 25, 2002. 99 Letter regarding Arthur Andersen LLP.
- --------------- * Management Compensatory Plan or Arrangement (b) Reports on Form 8-K. (i) A Form 8-K, Item 5. Other Events and Item 7, Financial Statements, Pro Forma Financial Information and Exhibits, was filed on January 2, 2002. (ii) A Form 8-K, Item 5, Other Events and Item 7, Financial Statements, Pro Forma Financial Information and Exhibits, was filed on February 4, 2002. (iii) A Form 8-K, Item 5, Other Events and Item 7, Financial Statements, Pro Forma Financial Information and Exhibits, was filed on March 1, 2002. 49 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, 2002 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, 2002.
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
50 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, 2002 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, 2002.
NAME TITLE ---- ----- Chairman of the Board and Chief Executive Officer ------------------------------------------------ (Principal Executive Officer) Lyle Berman Chief Financial Officer and Director (Principal ------------------------------------------------ Financial and Accounting Officer) Timothy J. Cope Director ------------------------------------------------ Morris Goldfarb Director ------------------------------------------------ Ronald Kramer Director ------------------------------------------------ Neil I. Sell
51 EX-10.56 3 c68243ex10-56.txt PURCHASE AGREEMENT EXHIBIT 10.56 PURCHASE AGREEMENT BY AND AMONG GRAND CASINOS NEVADA I, INC., A MINNESOTA CORPORATION AS SELLER AND METROFLAG POLO, LLC, A NEVADA LIMITED LIABILITY COMPANY AS BUYER EFFECTIVE DATE: DECEMBER 28, 2001 PURCHASE AGREEMENT THIS PURCHASE AGREEMENT ("AGREEMENT") is entered into this 28th day of December, 2001, by and between GRAND CASINOS NEVADA I, a Minnesota corporation ("GCN") (hereafter referred to as "GCN" or "SELLER") and METROFLAG POLO, LLC, a Nevada limited liability company ("BUYER"). RECITALS: 1. Seller is the fee owner of real property located in Las Vegas, Nevada, which is improved with an underground parking structure and a retail shopping center known as the "Polo Plaza" and which real property is legally described on EXHIBIT A attached hereto (the "POLO PROPERTY"). 2. Buyer desires to purchase the Polo Property, including any personal property owned by Seller and physically located on the Polo Property ("PERSONAL PROPERTY") all in accordance with the terms and conditions hereinafter set forth. The Polo Property and any Personal Property pertaining thereto and any appurtenant rights to the foregoing shall collectively be hereafter referred to as the "PROPERTY." 3. Seller is willing to grant and extend to Buyer such purchase right. 4. Seller is also the tenant under that certain Lease Agreement originally by and between Brooks Family Trust and Nevada Brooks Cook, as Landlord, and Cloobeck Enterprises, a California corporation ("CLOOBECK") and GCN, as Tenant, dated June 17, 1996 (the "BROOKS LEASE"), covering the real property located in Las Vegas, Nevada which is improved with a motel operating under the name of "Travelodge" and which real property is legally described on EXHIBIT B attached hereto (the "TRAVELODGE PARCEL"). 5. Simultaneously herewith, Metroflag BP, LLC, a Nevada limited liability company ("METROFLAG BP") and Seller have entered into that certain Purchase Agreement (the "TRAVELODGE PURCHASE AGREEMENT") whereby Metroflag BP has agreed to purchase and Seller has agreed to sell to Metroflag BP Seller's interest in the Brooks Lease and the Travelodge Parcel (Seller's interest in the Brooks Lease and the Travelodge Parcel shall hereinafter be collectively referred to as "TRAVELODGE PROPERTY"). NOW, THEREFORE, in consideration of the agreements hereinafter provided and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by Buyer and Seller, Seller agrees to sell to Buyer, and Buyer agrees to purchase from Seller the Property in its "As-Is, Where-Is, with All Faults" condition (except as otherwise specifically provided or represented in this Agreement) as more particularly set forth in this Agreement. 1 SECTION I PURCHASE PRICE It is hereby agreed that the purchase price for the Property shall be Twenty Three Million Seven Hundred Sixty Five Thousand and 00/100 Dollars ($23,765,000.00) (the "PURCHASE PRICE"). The Purchase Price shall be paid by Buyer to Seller as follows: (a) $500,000.00 cash (the "DOWN PAYMENT"), subject to prorations, payable by Buyer at Closing (as hereinafter defined). (b) Buyer shall execute and deliver to Seller at the Closing (i) a promissory note in the original principal amount of $23,265,000.00 (the "NOTE") substantially in the form of EXHIBIT C attached hereto payable to the order of Seller in such amount, and (ii) a first priority Deed of Trust (the "DEED OF TRUST") on the Polo Property securing the Note, substantially in the form of EXHIBIT D attached hereto. The Note shall provide for the payment of interest only at a fixed per annum interest rate of five percent (5%) for a period of not less than 180 days after the Closing Date decreasing to three percent (3%) thereafter. Subject to the extensions described below in this Section I(b) and the extensions described in Section V(b) hereof, the entire outstanding principal balance under the Note and any accrued interest thereon shall become due and payable on September 30, 2002 (the "MATURITY DATE"), provided that Buyer shall have the right to up to three (3) one-month extensions of the Maturity Date by, in each case, providing Seller with not less that ten (10) days written notice prior to the Maturity Date (as same may have been extended) of Buyer's election to extend the Maturity Date. In exchange for each extension, Buyer shall, in each case, within three (3) business days of Buyer's receipt of Seller's election, shall, at Seller's option, either (i) pay to Seller $50,000.00, in which case said $50,000.00 will not be credited toward the outstanding principal balance owed under the Note, or (ii) pay to Seller $100,000.00, in which case the $100,000.00 will be credited towards, and reduce, the outstanding principal balance owed under the Note. Any election by Buyer to extend shall not be effective until Buyer has paid the appropriate sum to Seller as set forth above. (c) Upon either the satisfaction of all the Post-Closing Conditions (as hereinafter defined), or Buyer's waiver of any unsatisfied Post-Closing Conditions, Buyer shall pay to Seller $500,000.00 (the "SECOND PAYMENT") and the Down Payment and the Second Payment shall become non-refundable. The Second Payment shall be deemed to be a partial prepayment of the Note and shall reduce the outstanding principal balance of the Note accordingly. Buyer contemplates obtaining financing of up to $4,000,000.00 (the "REDEVELOPMENT/CONSTRUCTION LOAN") for certain redevelopment and construction on the Property (the "LIMITED IMPROVEMENTS") which financing would be secured by a deed of trust on the Property. Provided that (i) Buyer can reasonably demonstrate to Seller that the Limited Improvements and the leasing of the Property at prevailing market rates can reasonably be expected to enhance the value of the Property by not less than an amount equal to one hundred and fifty percent (150%) of the principal amount of the Redevelopment/Construction Loan, (ii) Buyer provides Seller with assurances reasonably acceptable to Seller of the cost of construction and that any construction financed by the Redevelopment/Construction Loan shall be completed, (iii) the Redevelopment/Construction Loan is assumable by Seller, and (iv) the Limited 2 Improvements are bonded and on a guaranteed maximum general contract, Seller agrees to subordinate the Deed of Trust to any deed of trust securing a Redevelopment/Construction Loan and shall execute and deliver to any lending institution providing such Redevelopment/Construction Loan any and all reasonable and customary subordination agreements and other agreements required in connection therewith. SECTION II BUYER'S PUT RIGHT (a) In the event that: (i) (A) one or more of the representations and warranties set forth in Section III is breached, (B) Buyer notifies Seller thereof within the Post Closing Conditions Period, and (C) the aggregate reasonably foreseeable damages which Buyer could incur resulting therefrom could be expected to exceed $250,000.00 (either singly or in the aggregate for all such breaches), and (D) Seller fails to cure such breaches by the expiration of the Post-Closing Conditions Period; (ii) Seller does not satisfy all of the Post-Closing Conditions set forth in Section V hereof by the expiration of the Post-Closing Conditions Period, or (iii) if prior to the expiration of the Post Closing Conditions Period (as hereinafter defined), Buyer is unable to obtain an agreement satisfactory to Buyer with the Towers Parcel Owners (as defined in the Amended REA) pertaining to the cancellation of the Sign Easement (as defined in the Amended REA) or such other revisions to Article 7 of the Amended REA as Buyer may require in its sole discretion, then, at Buyer's option, Seller shall be obligated to repurchase the Property from Buyer (the "REPURCHASE") on the terms and conditions set forth below. Buyer shall provide written notice to Seller of its election to either require the Seller to consummate the Repurchase (the "REPURCHASE NOTICE") within five (5) business days after the expiration of the Post-Closing Conditions Period. The closing of such repurchase shall occur not later than fifteen (15) days after the date that the Repurchase Notice is delivered to Seller. (b) In the event Seller is required to repurchase the Property as described above, (i) Buyer shall convey the Property to Seller by the same form of grant bargain sale deed in its "AS-IS" - "WHERE-IS" condition subject to all matters affecting title thereto present on the Closing Date and any additional matters which may have arisen after the Closing Date (subject to Buyer's Post-Closing Covenants as defined below), (ii) the purchase price for such repurchase shall be $250,000.00 payable in cash (by certified check or wire transfer of immediately available funds), (iii) Seller shall assume any Redevelopment and Construction Loan, (iv) the Note shall be cancelled and Buyer shall no longer have any liability to Seller thereunder, provided that all interest accrued through the date of the Repurchase shall be paid to Seller at the closing of the Repurchase, (v) Seller shall assume the general contract and any other agreements or contracts entered into by Buyer in related to the planning, design and construction of the Limited Improvements, including, without limitation, any contracts with any architects, engineers, consultants, contractors, suppliers and materialmen and, subject to Buyer's Post-Closing Covenants, any leases entered into by Buyer affecting the Property (the "POST-CLOSING AGREEMENTS"), (vi) Seller shall have the option (but not the obligation) to assume all of Buyer's obligations under any contracts, agreements and obligations entered into by Buyer after the Closing Date other than the Post-Closing Agreements, (vii) subject to Buyer's Post-Closing Covenants, Buyer shall assign to Seller at the Closing of the Repurchase all of Buyer's right, title and interest to any plans, drawings, sketches, renderings and other work product of any 3 architects, engineers, contractors or consultants engaged by Buyer after the Closing hereunder, and (viii) Seller shall indemnify Buyer from any and all claims, damages or liabilities whatsoever in connection with any Post-Closing Agreements which accrue on and after the date of the Repurchase and Buyer shall indemnify Seller from any and all claims, damages or liabilities whatsoever in connection with any Post-Closing Agreements which accrue prior to the date of the Repurchase. (c) Buyer contemplates commencing pre-development activities, including, without limitation, planning, pre-leasing, surveying, demolition and construction on the Property (the "PRE-DEVELOPMENT ACTIVITIES") before the expiration of the Post-Closing Conditions Period. Buyer covenants to Seller that Buyer shall (i) not execute any leases affecting the Property unless such leases contain a provision allowing the landlord to terminate the lease upon ninety (90) days notice to the tenant, and (ii) not enter into any contracts or agreements with a term in excess of one (1) year affecting the Property other than the Post-Closing Agreements. The foregoing covenants in (i) and (ii) are collectively refereed to as "BUYER'S POST-CLOSING COVENANTS". SECTION III EXISTING LEASES Seller hereby represents and warrants to Purchaser that attached to this Agreement as composite EXHIBIT E is a complete and correct list of all written leases (and all amendments thereto, if applicable), tenancies or other occupancy arrangements affecting the Polo Property (collectively, the "LEASES"), setting forth the name of the tenant, the space affected, the rent, the term (including any options to renew), the security deposit, if any, and any special concessions, prepaid rent, options to purchase or rights of first refusal. Seller represents and warrants to Purchaser that: a. No other parties have any rights of occupancy or possession of the Property or any portions thereof except as set forth in EXHIBIT E attached hereto and no tenant of any portion of the Property has any option to purchase the Property or any portion thereof, nor any rights of first refusal with respect to same. b. Seller has not received security deposits under any of the Leases except the security deposits listed in EXHIBIT E, and Seller has not accepted payment of any rent under any of the Leases for more than one (1) month in advance. c. There are no modifications, understandings or agreements with respect to the Leases except as set forth in the Leases. d. All of the Leases are in good standing and without default on the part of Seller as of the date hereof. Seller has not delivered any notice of default to any of the tenants under the Leases and except as described in EXHIBIT E, Seller is not aware of any tenant defaults thereunder. This representation shall survive the Closing. e. There are no rental commissions due with respect to any of the Leases nor for 4 the renewal of same. f. Except for the Leases, the License Agreement, the Management Contract (which is to be terminated as provided in Section VI(a)(vi) herein) and the contracts and agreements listed on EXHIBIT F attached hereto, to the best of Seller's knowledge, Seller has not entered into (and the Property is not subject to) any contracts, arrangements, licenses, concessions, easements, or other agreements, including, without limitation, service arrangements and employment agreements, either recorded or unrecorded, written or oral, affecting the Property, or any portion thereof or the use thereof. Seller represents that it has provided Buyer with true, complete and correct copies of all contracts and agreements listed in EXHIBIT F. SECTION IV TITLE EVIDENCE Buyer has received and reviewed a title insurance commitment prepared by Lawyers Title Insurance Corporation of Nevada (the "Title Company") and that certain preliminary survey dated June 23, 2000, prepared by G.C. Wallace, Inc. (the "Survey") and has determined that the matters set forth in Exhibit G attached hereto are not acceptable to Buyer (the "Unacceptable Exceptions"). Any additional matters shown on any endorsement to the Commitment or an updated Survey arising prior to the Closing Date which, in Buyer's exclusive (but reasonable) discretion, adversely affect Buyer's ability to own, use and develop the Property in any material respect shall be deemed to be Unacceptable Exceptions. Seller has elected to satisfy or remove to Buyer reasonable satisfaction (and that of Title Company) all Unacceptable Exceptions so that such matters may be eliminated as exceptions to the Commitment. Seller shall use its reasonable best efforts to satisfy, remove by payment, bonding, or otherwise all of the Unacceptable Exceptions, including bringing suit, if necessary, to cure any such Unacceptable Exceptions. SECTION V POST-CLOSING CONDITIONS (a) Buyer and Seller acknowledge that the conditions set forth below in this paragraph (a) were expected to be satisfied prior to the Closing but because of Buyer and Seller's desire to close the transaction contemplated hereby on the Closing Date, Buyer and Seller have agreed that such conditions are to be satisfied as set forth in this paragraph. Consequently, Seller acknowledges and agrees that Seller shall be obligated to complete or satisfy the following conditions (collectively, the "POST CLOSING CONDITIONS") within ninety (90) days after the Closing Date: (i) the form of Amended and Restated Grant of Reciprocal Easements and Declaration of Covenants, Conditions and Restrictions (the "AMENDED REA") attached hereto as 5 EXHIBIT H which form has been approved by Buyer and Seller (or substantially the same form thereof with only such changes as may be acceptable to Buyer in its discretion) shall have been approved by all necessary parties (including, without limitation, the legal approval by any condominium or time share associations pertaining to the Towers Parcel (as defined in the Amended REA) in full compliance with their respective constituent and governing documents (the "ASSOCIATIONS")), and all conditions precedent therein shall have been satisfied, executed by all parties thereto (including all holders of deeds of trust or mortgages, to the extent legally required, consented to by the fee owner of the Travelodge Property and the signature by the Brooks Fee Owners of the Consent and Joinder of Brooks Fee Owners attached thereto), and filed for record, which will have the effect of amending and restating the 1996 REA and the 1998 REA (as those terms are defined in the Amended REA), superseding the 1996 REA and the 1998 REA in all respects and terminating the access easement for the "South Boundary Road" originally granted in 1991 in Parcel Map 69/37 affecting the Polo Property and any other easement affecting the Property as reasonably required by Buyer; (ii) that certain License Agreement (as defined in the Amended REA) shall have been terminated by an appropriate termination instrument approved (and all conditions precedent therein shall have been satisfied) and executed by all necessary parties thereto, and filed for record; (iii) Seller will cause to be executed and delivered to Buyer an agreement and acknowledgement by the Brooks Fee Owners (as defined in the Amended REA) in form and content reasonably acceptable to Buyer in which the Brooks Fee Owners acknowledge and agree that the Polo Property is not, and will not, be subject to any of the encumbrance and security agreement provisions in the Brooks Lease, unless the development on the Polo Property is an integrated project (i.e. has a common roof with) the leased premises under the Brooks Lease; (iv) Seller shall obtain an agreement executed by Seller and the Towers Parcel Owners (as defined in the Amended REA) and any other Association to the preliminary plan prepared by Buyer reflecting planned setbacks and variances for the future development of the Polo Property; (v) Seller shall cause the form of Post-Closing Agreement attached hereto as EXHIBIT I (the "POST CLOSING AGREEMENT") to be executed by all necessary parties; and (vi) Seller shall satisfy and/or remove all Unacceptable Exceptions, provided that if Seller has not caused the foregoing Post-Closing Conditions to be satisfied within the aforementioned 90-day period after diligent and continuous efforts to do so, then Buyer hereby grants to Seller and additional ninety (90) days to satisfy said conditions as set forth in this paragraph, provided that Seller continues to use diligent and continuous efforts to do so. (b) If one or more of the Post Closing Conditions are not satisfied by Seller within the initial 90-day period after the Closing Date, then the Maturity Date (as may be extended as set forth in Section I hereof) shall be extended by the same number of days elapsing after the Closing Date that any of the Post-Closing Conditions are not satisfied but in no event more than 6 ninety (90) days. The 180-day period after the Closing Date shall be referred to herein as the "POST-CLOSING CONDITIONS PERIOD". SECTION VI CLOSING CONDITIONS (a) The existing management contract with Accredited Realty (Glenda Shaw) (the "MANAGEMENT CONTRACT") shall have been terminated without liability to Buyer as of the Closing Date. Buyer and Seller agree that Buyer will manage the Property effective as of the day after the Closing Date. SECTION VII "AS-IS", "WHERE-IS" CONDITION Buyer acknowledges that it is purchasing the Property in its "as is", "where is", with all faults condition (except as specifically provided for or represented herein) relying otherwise solely on its own existing knowledge and inspection of the Property. Except as set forth herein, Seller makes no representations or warranties as to any matters affecting the Property or as to the quality and quantity of the Property, including, without limitation, to the condition of any improvements thereto. SECTION VIII CLOSING The closing of Buyer's purchase of the Property (the "CLOSING") shall occur simultaneously with the execution of this Agreement by the parties hereto and such date shall be referred to herein as the "CLOSING DATE". The Closing shall take place in the office of Seller's counsel in Las Vegas, Nevada on or before Closing Date. Possession of the Property shall be deemed to have been given by Seller to Buyer coincident with the Closing. The following procedure shall govern the Closing: (a) At the Closing, Seller shall deliver to Title Company a proposed grant bargain sale deed (the "DEED"), which shall be in recordable form and shall convey good and marketable record title to the Polo Property (using the legal description set forth on the Commitment) to Buyer, subject only to current real estate taxes and any encumbrances which are not Unacceptable Exceptions. (b) On the Closing Date Seller shall deliver the following: (i) the Deed properly executed and acknowledged along with a standard form Seller's Affidavit; 7 (ii) current real estate tax statements; (iii) properly executed assignments of Seller's interest in and to the Leases and any other documents necessary to transfer Seller's interest in such Leases to Buyer; (iv) a Quit Claim Bill of Sale to Personal Property; (v) a FIRPTA Affidavit; (vi) properly executed form of Post-Closing Agreement; (vii) properly executed form of Sign Cost Agreement attached hereto as EXHIBIT J (the "SIGN COST AGREEMENT"); (viii) such funds as may be required by Seller to pay Closing costs or charges properly allocable to Seller; and (ix) notices to tenants of the Polo Property directing future rentals to be paid to Buyer. (c) On the Closing Date, Buyer shall deliver the following: (i) the balance of the cash due at Closing; (ii) the Note and the Deed of Trust, all properly executed and in recordable form, along with all applicable fees, taxes and recording fees necessary to record the Deed of Trust; (iii) properly executed Post-Closing Agreement and Sign Cost Agreement; and (iv) such funds as may be required to pay Closing costs or charges properly allocable to Buyer, including but not limited to the cost of the Buyer's title insurance policy. Seller shall pay all installments of real estate taxes and installments of special assessments due and payable in calendar year 2001 and prior years. Buyer shall pay all installments of real estate taxes and installments of special assessments due and payable in calendar year 2002 and thereafter. Insurance and rents with respect to the Polo Property will be pro-rated at the Closing as of December 31, 2001. All other charges normal and customary in similar transactions shall be paid by the appropriate party who so customarily pays such charges. All rents collected by Buyer after Closing shall be deposited in Buyer's cash account and applied first to current rents due Buyer, second to delinquent rents due Buyer, and third to 8 delinquent rents due Seller. With respect to any delinquent rents due Seller, Buyer shall make reasonable efforts to collect the same after Closing in the usual course of operation of the Property and such collections (less Buyer's costs of collection, including attorneys' fees and costs, and reasonable management and administrative fees) shall be remitted to Seller promptly after receipt by Buyer. At Closing, Seller shall also give Buyer a credit against the Purchase Price, or shall transfer and deliver to Purchaser a sum equal to the aggregate of any security deposits shown on EXHIBIT E, and, if applicable interest, if any, earned thereon to the Date of Closing and any advance rents paid on behalf of any tenant, which advance rents shall be prorated to the Date of Closing. SECTION XI EXPENSE OF ENFORCEMENT If either party brings an action at law or in equity to enforce or interpret this Agreement, the prevailing party in such action shall be entitled to recover reasonable attorneys' fees and court costs in addition to any other remedy granted. SECTION XII NOTICE All notices, demands and requests required or permitted to be given under this Agreement must be in writing and shall be deemed to have been properly given or served either by personal delivery or by depositing the same in the United States mail, addressed to Seller or to Buyer, as the case may be, prepaid and registered or certified mail, return receipt requested, at the following addresses: TO SELLER: Grand Casinos Nevada I, Inc. 130 Cheshire Lane Minnetonka, Minnesota 55305 Attn: Chief Financial Officer WITH COPY TO: Maslon Edelman Borman & Brand, LLP 3300 Wells Fargo Center 90 South Seventh Street Minneapolis, Minnesota 55402 Attention: Neil I. Sell, Esq. TO BUYER: Metroplex, LLC 6430 Schirlls Avenue Las Vegas, Nevada 89118 Attention: Brett Torino and 9 Flag Luxury Properties, LLC 1370 Avenue of the Americas, 29th Floor New York, NY 10019 Attention: Paul C. Kanavos WITH COPY TO: Greenberg Traurig, P.A. 1221 Brickell Avenue Miami, FL 33131 Attention: Juan P. Loumiet, Esq. and Gordon & Silver, Ltd. 3960 Howard Hughes Parkway, 9th Floor Las Vegas, Nevada 89109 Attention: Stephen B. Yoken, Esq. Rejection or refusal to accept or the inability to deliver any notice hereunder because of a changed address of which no notice was given shall be deemed to be receipt of the notice, demand or request. Any party shall have the right from time to time and at any time upon at least ten (10) days' written notice thereof, to change their respective addresses, and each shall have the right to specify as its address any other address within the United States of America. SECTION XV MERGER/BINDING AGREEMENT; SURVIVAL All previous negotiations and understandings between Seller and Buyer or their respective agents and employees with respect to the purchase of the Property hereunder are merged in this Agreement, which alone fully and completely express the parties' rights, duties and obligations with respect to such purchase. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, heirs and personal representatives. The parties hereto agree that all covenants, representations warranties and any other obligations shall survive the Closing hereunder. SECTION XVII GOVERNING LAW This Agreement shall be deemed to be a contract made under the laws of the State of Nevada and for all purposes shall be governed and construed in accordance with the laws of said State. SECTION XVIII DAMAGES 10 Notwithstanding any other provision hereof to the contrary, Buyer hereby waives any claim against Seller, including, but not limited to, any claim for damages, for breach by Seller of any covenant, agreement, warranty or representation made hereunder, it being understood that the only remedy afforded Buyer for any such breach shall be the right afforded Buyer under Section II hereof to require Seller to consummate the Repurchase. Seller shall, however, continue to be liable hereunder to Buyer for third party claims that have been the subject of the indemnity provision of Sections II(b)(viii). SECTION XVIII CONFIDENTIALITY Neither party hereto will make any public disclosure or publicity release pertaining to the existence of this Agreement or the subject matter contained herein without the consent of the other party. [The remainder of this page has been intentionally left blank.] 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement intending to be bound by the provisions herein contained. SELLER: GRAND CASINOS OF NEVADA I, INC. a Minnesota corporation By: -------------------------------------------------- Its: -------------------------------------------------- BUYER: METROFLAG POLO, LLC, a Nevada limited liability company By: Metro One, LLC, a Nevada limited liability company, its member By: ------------------------------------------------ Brett Torino, Manager EXHIBIT A Legal description of Polo Property EXHIBIT B Legal description of Travelodge Property EXHIBIT C Note EXHIBIT D Deed of Trust on the Polo Property EXHIBIT E List of Leases EXHIBIT F Contracts and Agreements EXHIBIT G Unacceptable Exceptions EXHIBIT H Amended REA EXHIBIT I Post-Closing Agreement EXHIBIT J Sign Cost Agreement EXHIBIT E LIST OF LEASES 1. 2. 3. 4. Revocable License Agreement dated as of February 1, 2001 between Polo Towers Master Owners Association, Inc. and Seller, as same may have been modified or as subsequently modified (the "LICENSE AGREEMENT") EX-10.57 4 c68243ex10-57.txt PROMISSORY NOTE EXHIBIT 10.57 NOTE SECURED BY DEED OF TRUST $23,265,000 Las Vegas, Nevada December 28, 2001 For valuable consideration, Metroflag Polo, LLC, a Nevada limited liability company ("Promisor") does hereby promise to pay to the order of Grand Casinos Nevada I, Inc., a Minnesota corporation ("Promisee") the principal sum of Twenty-three Million Two Hundred Sixty-Five Thousand Dollars ($23,265,000), together with interest thereon, from date. Interest shall accrue at the rate of five percent (5%) per annum from the date hereof through and including June 26, 2002, and thereafter at the rate of three percent (3%) per annum. Interest only shall be paid on the last day of each calendar month commencing January 28, 2002, and ending September 30, 2002, at which time the entire unpaid balance, together with interest thereon, shall be due and payable unless extended as provided in the Purchase Agreement described below. Both principal and interest are payable at the office of Promisee, in Minnetonka, Minnesota, or at such place as the holder hereof may from time to time designate in writing. Provided Promisor has notified Promisee in writing of such prepayment at least ten (10) days in advance, Promisor may prepay this Note in full or in part at any time. Any prepayment of principal must be accompanied by payment of all interest then accrued under this Note but unpaid. This Note is secured by a Deed of Trust, Assignment of Leases and Rents and Security Agreement ("Deed of Trust") of even date herewith. Should any event of default, as hereinafter defined, occur, the whole sum of principal and interest hereunder shall, without notice, immediately become due at the option of the holder hereof. Any and all of the following shall constitute an event of default hereunder: (a) default in payment of any installment of principal or interest hereunder, or (b) default in performance of any obligation contained herein or in the Deed of Trust or nay other security instrument by which this Note is secured or any guaranty hereof or thereof. The sale, agreement to sell, transfer, assignment, mortgage, pledge, hypothecation or encumbrance, whether voluntary or involuntary, directly or indirectly, of the whole or any portion of Promisor's right, title or interest in and to the property subject to the Deed of Trust or any portion thereof, other than encumbrances permitted under, and complying with, that Purchase Agreement by and between Promisor and Promisee of even date, shall entitle Promisee to accelerate the indebtedness secured hereby in the same manner as in the case of any other default. Any lease for a term (including options to extend) of greater than twenty (20) years shall be deemed a sale for the purpose of this paragraph. For the purpose of this paragraph, the sale, transfer, assignment, mortgage, pledge, hypothecation, charging or encumbrance of the aggregate of greater than thirty percent (30%) of (a) the interests in any partnership or limited liability company then owning such property, whether directly or indirectly (such as by sale of stock in any corporate partner or member) or (b) any class of stock in a corporation then owning such property, whether directly or indirectly (such as by sale of stock in any parent corporation) shall be deemed a sale, transfer, assignment, mortgage, pledge, hypothecation or encumbrance, as the case may be, of an interest of Promisor in the property subject to the Deed of Trust. Promisor and all others who may become liable for the payment of all or any part of this obligation do hereby severally waive presentment for payment, protest and demand, notice of protest, demand and dishonor, and nonpayment of this Note and expressly agree that the maturity of this Note or any payment hereunder may be extended from time to time, at the option of the holder hereof, without in any way affecting the liability of each. Promisor agrees that the holder 2 hereof may release all or part of the security for the payment thereof or release any party liable for this obligation. Any such extension or release may be made without notice to any of the parties and without discharging their liability. Promisor promises to pay all costs incurred in collection and/or enforcement of this Note or any part thereof or otherwise in connection herewith, including but not limited to, reasonable attorneys' fees. In the event of court action, all costs and such additional sums and attorneys' fees as the court may adjudge reasonable shall be awarded to the prevailing party. The obligations of any party liable for the payment of all or any part of this obligation shall be joint and several. If any term, provision, covenant or condition of this Note, or any application thereof, should be held by a court of competent jurisdiction to be invalid, void, or unenforceable, all provisions, covenants and conditions of this Note and all applications thereof not held invalid, void or unenforceable, shall continue in full force and effect and shall in no way be affected, impaired or invalidated thereby. The laws of the State of Nevada shall govern the validity, construction, performance and effect of this Note. Any action to enforce Promisor's obligations hereunder may be brought in any court of competent jurisdiction in the State of Nevada, and Promisor hereby consents to the jurisdiction of Nevada courts over it. Metroflag Polo, LLC, a Nevada limited liability company By Its Member: Metro One, LLC, a Nevada limited liability company By: /s/ Brett Torino ------------------------------------- Brett Torino, Manager 3 EX-10.58 5 c68243ex10-58.txt DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS EXHIBIT 10.58 Assessor's Parcel No. 162-21-301-009 Send tax bills to: Metroflag, LLC 6430 Schiello Avenue Las Vegas, NV 87118 Attn: Steve Macie Re-Recording to correct date of Deed of Trust and to attach Exhibit "B" When recorded mail to: Lionel Sawyer & Collins 300 S. 4th Street, Ste 1700 Las Vegas, NV 89101 Attn: Jeff Zucker DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS AND SECURITY AGREEMENT Metroflag Polo, LLC Trustor Lawyers Title of Nevada, Inc. Trustee and Grand Casinos Nevada I, Inc. Beneficiary Dated: December 28, 2001 DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS AND SECURITY AGREEMENT THIS DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS AND SECURITY AGREEMENT ("DEED OF TRUST"), dated as of December 28, 2001, between Metroflag Polo, LLC, a Nevada limited liability company ("TRUSTOR"), Lawyers Title of Nevada, Inc., a Nevada corporation ("TRUSTEE") and Grand Casinos Nevada I, Inc., a Minnesota corporation ("BENEFICIARY"), W I T N E S S E T H: Trustor hereby covenants and agrees as follows: SECTION 1 Grant of Security Interests 1.01. Trustor irrevocably grants, bargains, sells, transfers and assigns to Trustee in trust, with power of sale, that improved real property in Clark County, Nevada, further described in Exhibit A attached hereto and incorporated herein by reference, together with all and singular the tenements, hereditaments and appurtenances now or hereafter belonging or in any way appertaining thereto; any easements benefiting such property; all right, title and interest of Trustor now owned or hereafter acquired in and to any land lying within the right-of-way of any street, open or proposed, adjoining such real property, and any and all sidewalks, alleys and strips and gores of land adjacent to or used in connection with such property; the reversion and reversions, remainder and remainders, rents issues and profits of such property, and all buildings, fixtures and other improvements now or hereafter located on or attached to or used in connection therewith and any estate, right, title or interest Trustor may hereafter acquire therein. (Said real property, together with said tenements, hereditaments, appurtenances, easements, interests, reversions, remainders, rents, issues, profits, holdings, fixtures, improvements and future interests are hereinafter referred to as the "REAL PROPERTY." Without limiting the generality of the foregoing, there shall be included in the Real Property any adjacent lands included in any enclosures or occupied by buildings partly located on the above-described property. 1.01.1. There is hereby assigned to Beneficiary the lessor's interest in any and all leases of the Real Property and/or Personal Property, as hereinafter defined, or any portion thereof, now or hereafter owned or entered into by Trustor or any other party claiming by, through or under Trustor, including, but not limited to, those leases described in Exhibit B attached hereto and by referenced incorporated herein, together with all rents, issues and profits arising therefrom or in connection with the Property, as hereinafter defined, or any portion thereof and all benefits and advantages to be derived from said leases, together with all rights against guarantors, if any, of the lessees' obligations under said leases. Trustor does hereby empower Beneficiary, its agents and attorneys, to collect, sue for, settle, compromise and give acquittance for all such rents, issues and profits. (All of said leases and any and all interest in said leases or any guarantee thereof shall hereinafter be referred to as the "LEASES.") 1.02.2. The lessees under the Leases may and shall rely upon the receipt of any notice from Beneficiary that Trustor is in default hereunder and thereafter Beneficiary, or Beneficiary's designee, shall be paid all rents due under the Leases until the lessees thereunder are notified otherwise in writing by Beneficiary or until directed otherwise by a final judgment of a court of competent jurisdiction. Trustor hereby covenants and agrees to save and hold harmless said lessees from any and all liability, loss, costs, charges, penalties, obligations, expenses, attorneys' fees, litigation, judgments, damages, claims and demands of any kind whatsoever arising from, by reason of, or in connection with such reliance. All amounts collected hereunder, after deducting the expenses of operating the Property and after deducting the expenses of collection and all other expenses incurred hereunder, including an administrative charge of ten percent (10%) of the sums collected and attorneys' fees, shall be applied in such manner as Beneficiary may elect in its sole and absolute discretion. Although it is the intention of the parties that this instrument shall be a present assignment, Beneficiary shall not exercise any of the rights or powers conferred in this Section 1.02 until a default shall occur under this Deed of Trust, but upon the occurrence of any such default Beneficiary shall be entitled to all the above-mentioned rents, issues, profits, rights and privileges, and to apply the same in its sole and absolute discretion. Trustor shall use reasonable efforts to cause to be included as terms in all Leases hereafter executed or renewed the provisions of the first and second sentences of this section and Section 2.21 hereof, and to cause such leases to provide that the refusal of any lessee under any such Lease to pay all rents due under the Leases to Beneficiary as aforesaid to be a breach of such Lease by the lessee thereof. Nothing herein shall be deemed to impose on Beneficiary any obligation to operate or maintain the Property or to enforce any Lease. Trustor shall deliver to the lessees under all presently existing Leases, upon demand therefore by Beneficiary, written notice of the provisions of the first two sentences of this Section 1.02.2. Notwithstanding the conveyance or transfer of title to any or all of the Property to any lessee under any of the Leases, the lessee's leasehold estate under such Lease shall not merge into the fee estate and the lessee shall remain obligated under such lease as assigned by this Deed of Trust. 1.03. Trustor grants Beneficiary, pursuant to the Nevada Uniform Commercial Code, a present and continuing security interest in and to all of the goods, equipment, fixtures, building materials, books and records of Trustor, now or which may hereafter be located on or used in connection with the Real Property, together with all contract rights, plans, specifications and other similar documents, rights under any declaration or plan, deposits, rights to trademarks and names of Trustor and goodwill associated therewith, general intangibles, accounts, investment property, deposit accounts, chattel paper, documents, letters of credit rights and instruments with respect to said Real Property and policies of insurance arising out of or in connection with the Real Property or the herein described property, all proceeds of any fire and/or builders right insurance policy or any other policy insuring the Real Property or the herein described property against any other perils, and all awards made in eminent domain proceedings, or purchase in lieu thereof, with respect to the Real Property or the herein described property, together with all additions to, substitutions for, proceeds of, changes in or replacements of the whole or any part of said personal property and this instrument shall constitute a security agreement with respect thereto. (All of the foregoing are herein referred to as "PERSONAL PROPERTY." The Personal Property, Real Property and Leases are collectively referred to as the "PROPERTY.") 1.04. This Deed of Trust is for the purpose of securing: (a) Performance of each and every term, covenant and condition incorporated by reference or contained herein. (b) Payment of the indebtedness evidenced by one promissory note (the "NOTE") of even date herewith, and any extension, modification or renewal thereof, in the principal sum of Twenty-three Million Two Hundred Sixty-five Thousand Dollars ($23,265,000) executed by Trustor in favor of Beneficiary or order. (c) Payment of such additional sums as may hereafter be advanced hereunder for the account of Trustor or its assigns by Beneficiary, with interest thereon. (d) Performance of each and every term, covenant and condition of each and every instrument and agreement securing payment of the Note or executed in connection therewith. SECTION 2 Warranties and Covenants of Trustor 2.01. Trustor represents and warrants that: (a) This Deed of Trust is and will remain a valid and enforceable first lien on the Property subject only to those exceptions permitted under that Purchase Agreement ("PURCHASE AGREEMENT") by and between Trustor and Beneficiary of even date. (b) Trustor has not performed any act and is not bound by any instrument which would prevent Beneficiary from enforcing this Deed of Trust. (c) The Note, Deed of Trust and all other instruments securing the Note, and all other instruments and agreements in connection therewith or the transactions in connection with which the Note is given are valid and binding obligations of the parties thereto, enforceable in accordance with their terms. (d) Trustor is not a foreign corporation, foreign partnership, foreign trust, or foreign estate (as those terms are defined in the Internal Revenue Service Code of 1986, as amended, or the regulations thereunder): Trustor's United States employer identification number is [applied for] and Trustor's office address is [see Section 4.03]. Trustor understands that the certification in this clause (d) may be disclosed to the Internal Revenue Service by Beneficiary and that any false statement contained herein could be punished by fine, imprisonment, or both. The person or persons executing this Deed of Trust each declares under penalties of perjury that he had examined this certification and to the best of his knowledge and belief it is true, correct and complete, and further declares that he has authority to sign this certification on behalf of Trustor. 2.02. Trustor shall complete in a good and workmanlike manner any building or other improvements which may be constructed on the Property and pay when due all claims for labor performed and materials furnished therefor. Trustor shall comply with all laws, rules, ordinances, regulations, covenants, conditions, restrictions, easements and agreements pertaining to the Property or Trustor's use thereof. Trustor shall not commit or permit any waste thereon, nor commit, suffer or permit any act to be done in or upon the Property in violation of the law. 2.03. Unless Trustor shall have obtained the written consent of Beneficiary, Trustor shall not be act or omission permit any lands or improvements not subject to the lien of this Deed of Trust to include the Property or any part thereof in fulfillment of any governmental requirement. Similarly, no lands or other improvements not subject to the lien of this Deed of Trust shall be included with the Property in fulfillment of any governmental requirement. Trustor shall not by act or omission impair the integrity of the Property as a single zoning lot separate and apart from all other premises. 2.04. Trustor shall at all times during the term hereof continue to operate a shopping center on the Real Property. Trustor shall not use the Property for any other purpose. Trustor shall not initiate or acquiesce in any change in any zoning or other land use classification now or hereafter in effect and affecting the Property or any part thereof nor shall Trustor otherwise change or attempt to change the use of the Property or any portion thereof without in each case obtaining Beneficiary's prior written consent thereto. 2.05. Trustor will keep and maintain or cause to be kept and maintained the Property in good order, condition and repair. 2.06. No building, structure, fixture or other improvement shall be erected, removed, demolished, or materially changed or altered without the prior written consent of Beneficiary. Trustor will not remove or permit the removal of the Personal Property or any part thereof (including renewals, replacements, and other after acquired property) from the Real Property without the prior written permission of Beneficiary, provided that obsolete and worn out articles may be removed concurrently with the replacement or renewal thereof with property of at least equal value and of equal usefulness in the operation of the Property. Trustor will promptly notify Beneficiary of any fire or other casualty causing damage to the Property. Trustor will promptly and in good and workmanlike manner repair and restore any improvement which may be damaged or destroyed. Trustor will promptly replace any lost, stolen, damaged or destroyed Personal Property. 2.07. Trustor agrees to pay and discharge all costs, fees and expenses in connection with this Deed of Trust, including, but not limited, to Beneficiary's and Trustee's costs and expenses including reasonable attorneys' fees, in any litigation with respect hereto, in connection herewith, any transactions related hereto, the Property or any interest therein and the cost of evidence of title and trustee's fees in connection with sale, whether completed or not, which amounts shall become due upon demand by either Beneficiary or Trustee. 2.08. During the existence of this trust, Trustor agrees to maintain policies of insurance as follows: (a) Insuring the improvements and Personal Property which are now or shall hereafter constitute a portion of the Property against loss or damage by fire, and against such other risks of a similar or dissimilar nature as shall be insurable against under present or future forms of special form property insurance policies available to the owners of property similar to the Property in Clark County, Nevada, including vandalism, malicious mischief and replacement cost endorsements. Such insurance shall in no event be for less than the full replacement cost of said improvements and Personal Property. (b) Rental value and/or business income insurance in an amount of not less than twelve (12) times the total of the monthly payments of principal and interest due under the Note and the monthly payments on account of taxes and insurance provided for in Section 2.12 hereof, whether or not such payments are then being collected. (c) Commercial general liability insurance assuring against loss, damage or liability for injury or death to persons and loss and damage to property occurring from any cause whatsoever upon, in or about the Property. Such liability insurance shall be for at least Two Million Dollars ($2,000,000). (d) Workman's compensation insurance as required by law. (e) Flood insurance in form and substance satisfactory to Beneficiary, provided, however, that such insurance shall not be required during such periods as Trustor is able to provide Beneficiary with evidence, satisfactory to Beneficiary, that the Property is not within an area that has been identified by the Secretary of Housing and Urban Development as having special flood hazards and that such insurance is not required by law. (f) Any insurance required pursuant to any Lease. (g) Such other insurance in such amounts and against such other risks as Beneficiary may reasonably require. (h) All insurance provided for herein shall be effected under valid and enforceable policies, in form and substance then customary in Nevada and satisfactory to Beneficiary, issued by insurers of recognized responsibility approved of by Beneficiary. Upon the execution of this Deed of Trust, and thereafter thirty (30) days prior to the expiration dates of expiring policies theretofore furnished hereunder, originals of the policies, together with evidence that the premiums therefor have been paid, shall be delivered to Beneficiary. Without limiting the generality of the foregoing, all such policies shall contain an agreement by the insurers that such policies shall not be canceled or modified without at least thirty (30) days' prior written notice to Beneficiary and such other parties as Beneficiary may designate and shall provide that any loss shall be payable to Beneficiary notwithstanding (i) any act or negligence by Trustor or any lessee or other occupant of the Property which might otherwise result in forfeiture of said insurance; (ii) use of all or any portion of the Property for purposes more hazardous than permitted by such policy, (iii) any sale or other proceeding pursuant hereto or (iv) any change in title to or ownership of the Property or any portion thereof. All insurance with respect to damage or destruction to the Property shall provide that the proceeds thereof shall be payable to Beneficiary pursuant to a noncontributory mortgagee endorsement satisfactory to Beneficiary and all other insurance shall name Trustor and Beneficiary and such other parties as Beneficiary may designate as the insureds thereunder, as their respective interests may appear. All proceeds payable by reason of loss under any insurance policy provided for herein shall be paid to Beneficiary. Upon any default hereunder, Beneficiary is hereby authorized, but not required, on behalf of Trustor to adjust or compromise any losses under any insurance policy provided for herein. (i) Trustor shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained or suffer to be taken out separate insurance which would reduce the sums payable pursuant to any policy required hereunder unless Beneficiary is included thereon under a standard mortgagee endorsement acceptable to Beneficiary. Trustor shall immediately notify Beneficiary whenever any such separate insurance is taken out and shall promptly deliver to Beneficiary the policy or policies of such insurance. 2.09. Trustor immediately upon obtaining knowledge of the institution of any proceedings for the condemnation of the Property, any part thereof, or any interest therein, will notify Beneficiary of the pendency of such proceedings. Beneficiary may, but shall not be required to, participate in any such proceedings and Trustor from time to time will deliver to Beneficiary all instruments required by it to permit such participation. Trustor shall pay all of Beneficiary's costs and expenses, including, but not limited to, reasonable attorneys' fees, incurred in any such proceedings. In the event of such condemnation proceedings, any award or compensation shall be paid to Beneficiary and shall be applied, after payment of all costs and expenses of Beneficiary and/or Trustee incurred in collecting the same, in such manner as Beneficiary elects in its sole and absolute discretion, without regard to whether or not its security hereunder has been impaired. For the purposes hereof, any proceeding to acquire any interest in or affecting the value of the Property, or seeking damages therefor, including, but not limited to, severance or change of grade, whether by court action or purchase in lieu thereof, shall be deemed a proceeding for condemnation and any award for inverse condemnation shall be deemed condemnation proceeds. 2.10. Property insurance or condemnation proceeds remaining after payment of all costs and expenses of Beneficiary and/or Trustee in collecting the same ("NET PROCEEDS"), shall, so long as no default shall have occurred and be continuing hereunder, be paid, on such terms and conditions as Beneficiary may provide, for the restoration and repair of the improvements and/or Personal Property, as the case may be, damaged, destroyed or taken by such casualty or condemnation. The amount of such proceeds used toward payment of the cost of repair or restoration that is released to Trustee shall not be deemed a payment of any indebtedness or obligation secured hereby and shall be disbursed to Trustor under such reasonable disbursement procedures as may be prescribed by Beneficiary to ensure the full, prompt and lien free completion of such restoration, repair or alteration, which shall include, but are not limited to, the following: (a) Prior to commencement of the work, Trustor shall furnish to Beneficiary complete plans and specification for the work for Beneficiary's prior approval. Said plans and specifications shall bear the signed approval thereof by an architect licensed in the State of Nevada chosen by Trustor and reasonably satisfactory to Beneficiary ("ARCHITECT") and shall be accompanied by the Architect's and contractor's signed estimate of the entire cost of completing the work. (b) Prior to commencement of the work, Trustor shall furnish to Beneficiary certified or photostatic copies of all permits and approvals required by law in connection with the commencement and conduct of the work. (c) Trustor shall furnish to Beneficiary, prior to the commencement of the work, reasonable assurances that the cost of such work will be paid, which may include a surety bond for or guaranty of completion of and payment for the work, which bond or guaranty shall be: (i) issued by an institution with a net worth of no less than Two Hundred Fifty Million Dollars ($250,000,000) or another party acceptable to Beneficiary in its sole discretion. (ii) in form satisfactory to Beneficiary, and, (iii) in an amount not less than one hundred percent (100%) of the Architect's and contractor's estimate of the entire cost of completing the work, less the amount of Net Proceeds held by Beneficiary. (d) Beneficiary shall not be required to make disbursements more often than at thirty (30) day intervals. (e) Trustor shall make written request for each disbursement at least seven (7) days in advance and shall comply with the following requirements in connection with each disbursement: (i) Trustor shall deliver to Beneficiary, at the time of request for a disbursement, a certificate of the Architect, dated not more than ten (10) days prior to the application for withdrawal of funds, setting forth the following: (A) That the sum then requested to be withdrawn either has been paid by Trustor and/or is justly due to contractors, subcontractors, materialmen, engineers, architects or other Persons (whose names and addresses shall be stated) who have rendered or furnished services or materials for the work and giving a brief description of such services and materials and the principal subdivisions of categories thereof and respective amounts so paid or due to each of said Persons in respect thereof and stating the progress of the work up to the date of said certificates; (B) That the sum then requested to be withdrawn, plus all sums previously withdrawn, does not exceed the cost of the work insofar as actually accomplished up to the date of such certificate; (C) That the remainder of the Net Proceeds held by Beneficiary will be sufficient to pay in full the then estimated cost of completion of the work; and (D) That no part of the cost of the services and materials described in the foregoing Section2.10(c)(i)(A) has been or is being made the basis of the withdrawal of any funds in any previous or then pending application. (ii) Trustor shall execute and deliver to beneficiary at the time of the request a certificate, dated not more than 10 days prior to the application for withdrawal of funds, stating that, except for the amounts, if any, specified in Section 2.10(c)(i)(A) to be due for services or materials, there is no outstanding indebtedness known which is then due or payable for work, labor, services or materials in connection with the work which, if unpaid, might become the basis of a vendor's, mechanic's, laborer's or materialman's statutory or other similar __ upon the Property of any part thereof. (iii) Trustor shall deliver to Beneficiary at the time of the request satisfactory evidence that the Property and every part thereof and all materials and all property describe din the certificate furnished pursuant to Section 2.10(c)(i)(A) are free and clear of all mortgages, liens, charges or encumbrances, except this Deed of Trust and liens permitted under Section 2.17 hereof. (f) If the work involves restoration of the exterior of any improvements, then within ten (10) days after the date of such exterior is determinable, Trustor shall deliver to Beneficiary a survey of the Property, showing no encroachments by the work. (g) Such proceeds shall be used by Trustor only to pay or to cause to be paid to the Persons named in the certificate furnished pursuant to the foregoing Section 2.10(c)(i)(A) the respective amounts stated in said certificate to be due them. (h) If at any time Beneficiary determines in its sole and absolute discretion that the remainder of the Net Proceeds held by Beneficiary is not sufficient to pay in full the unpaid unbonded cost of completion of the work, Trustor shall on demand deposit with Beneficiary cash in an amount equal to the difference between the remainder of the Net Proceeds and the cost of completion of the work. Beneficiary shall not be required to make insurance or condemnation proceeds available for restoration and repair if (x) Trustor is in default hereunder. (x) Beneficiary, in the good faith exercise of its discretion, believes that (A) except in the case of a condemnation subject to the next sentence below, the remainder of the Property in question could not be restored so that the Property as so restored would be of equal utility and value as before such damage, destruction or taking. (B) It would not be feasible to restore the remainder of the Property in question for use comparable to that of the Property prior to such damage, destruction or taking. Or (C) such Property, as so restored, would not be in full compliance with all provisions hereof or (y) the contract for such work of restoration and repair does not provide that the same can be completed at least three (3) months prior to the maturity of the Note or (x) a material portion of the Lease in force immediately prior to the casualty or condemnation shall have been cancelled, or contain any still exercisable right to cancel, due to such damage, destruction or condemnation. All insurance and condemnation proceeds not applied to Beneficiary's or Trustee's cost of collecting the same or to restoration and repair as provided above shall be retained by Beneficiary elects in its sole and absolute discretion. Any such application, use or release shall not cure or waive any default or notice of default hereunder or invalidate any act done pursuant to such notice. Trustor shall not be entitled to interest on any Net Proceeds held by Beneficiary pursuant hereto. 2.11. Trustor shall pay when due, before delinquency, all taxes, assessments, levies, utility fees and all other fees and charges of every kind and nature, whether of a like or different nature, imposed upon or assessed against or which may become a lien on the Property, or any part thereof, or arising from, by reason of or in connection therewith, the use thereof or this Deed of Trust unless contested in good faith with reasonable security provided to Beneficiary. In addition, Trustor shall file all required tax forms with the appropriate governmental authorities on or before the day they become due. Trustor will, within thirty (30) days after the due date therfor, deliver to Beneficiary receipts evidencing payment of taxes, assessments, levies, fees and charges as required in this Section 2.11. Beneficiary may require Trustor to obtain and pay for a tax service satisfactory to Beneficiary in order to assure Beneficiary such taxes are paid. 2.12 After a default shall have occurred hereunder, Trustor shall pay to Beneficiary or such other depository to which Beneficiary instructs Trustor to make such payments, the amount of taxes and insurance premiums accrued since the last date on which the same were paid. Thereafter, Trustor shall pay, in addition to the installments payable under the Note, on the same date as such installments are due and payable, a sum equal to one-twelfth (1/12) of Beneficiary's estimate of annual taxes, assessments, levies, fees, charges and insurance premiums required to be paid by Trustor hereunder. If the amount so paid is not sufficient to pay such taxes, assessments, levies, fees, charges and premiums when due, then Trustor will immediately pay Beneficiary or such depository, as the case may be, on demand, amounts sufficient to pay the same. Sums deposited by Trustor pursuant hereto shall be used to pay such taxes, assessments, levies, fees, charges and insurance premiums when due provided that Trustor has furnished Beneficiary with all tax statements, premium notices and other such notices at least third (30) days prior to the date that any such taxes, assessments, levies, fees, charges or premiums in excess of the amount then deposited with Beneficiary or such depository pursuant hereto. In the event of any default hereunder or under any instrument or obligation secured hereby, Beneficiary may elect, at any time thereafter, to apply the funds deposited with it or such depository in such manner as Beneficiary may deem desirable, in its sole and absolute discretion. Beneficiary and any depository may commingle funds deposited hereunder with their general funds and no interest shall accrue or be allowed on any payments made pursuant to this section. Payments or deposits pursuant to this section, if made, shall not be deemed to be a waiver or release of any other right or remedy available hereunder to Beneficiary in the event of default. Transfer of title to the Property shall automatically transfer the interest of the then Trustor in any deposits made pursuant to this section. 2.13 If any action or proceeding shall be instituted for any purpose affecting the Property, any part thereof, any interest therein, title thereto or this Deed of Trust, or should Trustor receive any notice from any governmental agency relating to the structure, use of occupancy of the Property, Trustor will immediately upon service thereof on or by Trustor, deliver to Beneficiary true copies of each notice, petition, summons, complaint, notice of motion, order to show cause and all other process, pleadings, and papers however designated, served in any action or proceeding. Immediately upon becoming aware of any development or other information which may materially and adversely affect the property, business, prospects, profits or conditions (financial or otherwise) of Trustor or the Property of the ability of Trustor to perform the obligations secured hereby. Trustor shall notify Beneficiary of the nature of such development or information and such anticipated effect. Without limiting the generality of the foregoing, Trustor shall promptly notify Beneficiary of any substantial change in the occupancy rate of the Real Property. 2.14 Trustor promises and agrees that if during the existence of this Deed of Trust there be commenced or pending any suit, action, arbitration, or other proceeding affecting the Property, any part thereof, or in relating thereto, the title thereto or this Deed of Trust, or if any adverse claim for or against said Property, or any part thereof, be made or asserted, it will appear in and defend any such matter and will pay all costs and damages arising because of such proceeding. Upon any default hereunder, Beneficiary may elect to appear in any such action or proceeding. Beneficiary shall have the option to control such action or defense, whether or not Beneficiary elects to appear. If Beneficiary elects to appear in any such action or proceeding, Beneficiary shall have the right to retain counsel of its choice. Trustor shall solely responsible for any and all expenses and costs, including, but not limited to, the reasonable fees of counsel retained by Beneficiary, which are incurred pursuant to this section. Unless a default occurs, Trustor and Beneficiary shall be represented by joint counsel if not conflict of interest exists. If Beneficiary elects to appear in or control any action or proceeding, Trustor agrees to indemnify Beneficiary against, release Beneficiary from, and hold Beneficiary harmless from any damages, liability, costs, expenses, litigation or claims incurred in or in connection with such action or appearance or in the exercise of such control, except as a result of Beneficiary's gross negligence or willful misconduct. 2.15 Trustor will not permit or suffer the filing of any mechanics', materialman's, or other liens against the Property, any part thereof, any interest therein, or the revenue, rents, issues, income and profits arising therefrom. If any lien shall be filed against the Property, any part thereof, or any interest therein, Trustor agrees to commence a proceeding under NRS Chapter 108 to discharge the same of record within ten (10) days after the same shall have been filed or provide a bond or other reasonable security to protect Beneficiary's interests. 2.16 Trustor shall take any and all such action as may be necessary to prevent any third parties from acquiring any prescriptive easement upon, over, or across any part of the Property, or from acquiring any rights whatsoever to or against the Property by virtue of adverse possession. 2.17 Except as provided in Section 2.06 hereof and the Purchase Agreement, the sale, agreement to sell, transfer, assignment, mortgage, pledge, hypothecation or encumbrance, including, but not limited to, the granting of any option to do any of the foregoing, whether voluntary or involuntary, by agreement, operation of law or otherwise, of the whole or any portion of Trustor's right, title or interest in and to the Property or any portion thereof without the prior written consent of Beneficiary shall constitute a default hereunder and shall entitle Beneficiary to accelerate the indebtedness secured hereby in the same manner as in the case of any other default. Any lease for a term concluding options to extend greater than twenty (20) years shall be deemed a sale for the purpose of this Section 2.17. The sale, transfer, assignment, mortgage, pledge, hypothecation, charging or encumbrance in the aggregate of greater than thirty percent (30%) of the interests in any partnership or limited liability company. Trustor or any parent thereof, whether directly or indirectly (such as by sale of stock in any corporate partner or member) or the sale, transfer, assignment, mortgage, pledge, hypothecation or encumbrance in the aggregate of greater than thirty percent (30%) of any class of any corporate investor's stock, whether directly or indirectly (such as by sale of stock in any corporation owning Trustor's stock) shall also entitle Beneficiary to accelerate the indebtedness secured hereby. 2.18 [Intentionally deleted] 2.19 Immediately upon becoming aware of the occurrence of any (i) "reportable event," as such term is defined in Section 4043 of ERISA, or (ii) "prohibited transaction" as such term is defined in Section 4975 of the Internal Revenue Code of 1986, as amended, in connection with any pension plan or any trust created thereunder, a written notice specifying the nature thereof, what action Trustor is taking or proposes to take with respect thereto, and, when known, any action taken or proposed to be taken by the Internal Revenue Service and or the Department of Labor with respect thereto shall be delivered to Beneficiary. Trustor will not at any time permit any pension plan maintained by it or to which Trustor is a contributing employer to (a) engaged in any "prohibited transaction," as such term is defined in Section 4975 of the Internal Revenue Code of 1986, as amended, (b) incur any "accumulated funding deficiency," as such term is defined in Section 302 of ERISA, whether or not waived, or (c) terminate any such pension plan in a manner which could result in the imposition of a lien on the Property pursuant to Section 4086 of ERISA. Trustor shall not take any action which will cause or effect any withdrawal complete or partial, or any resulting withdrawal liability, with respect to any such plan. Trustor shall promptly pay all contributions to any employee benefit plan to which it is required to pay. 2.20 Trustor will diligently perform and observe all of the terms, covenants and conditions of the Lease to be performed and observed by Trustor to the end that all things shall be done which are necessary to keep unimpaired Trustor's rights under the Leases. Trustor will promptly advise Beneficiary in writing of the giving of any notice by the lessee under any Lease of any default by Trustor in the performance or observance of any of the terms, covenants or conditions thereof on the part of Trustor to be performed or observed and Trustor will deliver to Beneficiary a true copy of each such notice. Trustor shall enforce, short of termination thereof, the performance of each and every term, covenant and condition of each such Lease to be performed by the lessee thereunder. Trustor shall execute and deliver, on request of Beneficiary, such instruments as Beneficiary may deem useful or required to permit Beneficiary considers desirable to cure ore remedy the matter on default and preserve the interest of Beneficiary in the Leases and the Property. Trustor will promptly notify Beneficiary in writing of any default by the lessee under any Lease in the performance or observance of any of the terms, covenants or conditions on the part of said lessee to be performed or observed. Trustor shall not collect any of the rent, income and profits arising or accruing under the Lease more than once a month in advance, and in no event prior to the time when the same become due under the terms thereof. Trustor will not discount any future accruing rents. Except as provided in the Purchase Agreement. Trustor shall not execute any other assignments of the Lease or any interest therein or any of the rents thereunder. Trustor shall not alter, modify or change the terms of the Lease, but sufferance or otherwise, or cancel or terminate such Lease without the prior written consent of Beneficiary. Any other provision hereof to the contrary notwithstanding, no lien or other encumbrance may be prior to any Lease if the result of such priority might be to allow such Lease to be terminated without the consent of Beneficiary. 2.21 All Leases hereafter executed are and shall be subordinate hereto and upon any sale or deed in lieu of sale hereunder such lessees shall attorn to the purchaser or grantee, as the case may be, and recognize the same as lessor under said Lease as fully as if such purchaser or grantee had been named as lessor under such Leases, but without any claim or offset against such purchaser or grantee for any liability of any previous lessor. Such lessees, and to the extent permitted under the terms of any existing Lease, the lessees under the existing Lease shall from time to time during the term hereof, within ten (10) days after demand therefor by Beneficiary, a certificate in recordable form certifying that attached thereto is a true and correct copy of such lessee's Lease, the term of said Lease, the date to which all rentals and other charges have been paid, the amount of any security deposit, that no rent has been prepaid or discounted, that such Lease is in full force and effect, and that no defaults have occurred thereunder (or specifying the nature of such defaults) together with such other information with respect to such Lease and or lessee as Beneficiary may reasonably request. 2.22 Trustor shall furnish Beneficiary within sixty (60) days after the end of each of Trustor's fiscal years ending after (but not on) December 31, 2001, and at such other times as may reasonably be required by Beneficiary, audited financial statements covering the operations of the Property for such fiscal year. Said statements shall include, but need not be limited to, a balance sheet and a statement of profit and loss satisfactorily certified by an accounting firm deemed satisfactory by Beneficiary. Trustor's fiscal year ends ____________. The above required statements shall be in such detail as Beneficiary reasonably requests, shall segregate income and expense attributable to the Property and shall include the gross sales figures of any tenant paving percentage or other rental with respect thereto. 2.23 Trustor shall keep and maintain at an office in Las Vegas, Nevada, complete, accurate and customary records and books of account with respect to all of Trustor's business transactions with respect to the Property and shall retain the same intact throughout the term hereof. Beneficiary or its representatives shall be entitled to all reasonable times to inspect and make copies and extracts of all such records and books of account, which right of inspection, copying and extracting shall include the right to remove said records and books of account from Trustor's places of business for reasonable periods of time. 2.24 Trustor agrees at any time and from time to time during the term hereof and within ten (10) days after demand therefor from Beneficiary, to execute and deliver to Beneficiary, or any party designated by Beneficiary, a certificate in recordable form certifying the amount then due pursuant to this Deed of Trust and the obligations secured hereby, the terms of payment thereof, the dates to which payments have been paid, that this Deed of Trust and all instruments and obligations secured hereby are in full force and effect and that there are no defenses or offsets thereto, or specifying in what regards this Deed of Trust or such obligations are not in full force and effect and the nature of any defense or offsets thereto, together with such other information as Beneficiary may request. 2.25 Trustor agrees not to incorporate, or permit any other Person to incorporate, into the Property or utilize, or permit any other Person to utilize, on or in connection therewith, any personal property acquired under a conditional sales contract or any other contract or agreement whereby a vendor or lender retains title or a security interest therein. 2.26 Trustor shall execute, acknowledge and deliver to Beneficiary, and, if applicable, cause to be executed, recorded and or filed at Trustor's cost and expense, any and all such mortgages, assignments, transfers, assurances, control agreements, financing statements and other instruments and documents and so such acts as Beneficiary shall from time to time reasonably require for the better perfecting, assuring, conveying, assigning, transferring and confirming unto Beneficiary the property and rights herein conveyed or assigned or intended now or hereafter so to be. Trustor hereby authorizes Beneficiary to file any and all financing statements and amendments thereto in such form and in such locations as Beneficiary deems necessary or appropriate in connection herewith. The parties agree this Deed of Trust shall constitute a security agreement under the Uniform Commercial Code and that a carbon, photographic or other reproduction of this Deed of Trust or of a financing statement shall be sufficient as a financing statement. Trustor represents and warrants that (a) its chief executive office is in Las Vegas, Nevada (b) Trustor is a limited liability company duly organized and currently existing in good standing under the laws of the State of Nevada, and (c) Trustor has not executed, filed or authorized any Person, other than Beneficiary, to file any financing statement or amendment thereto with respect to all or any portion of the Property. Trustor has not within the five (5) year period prior to the date of this Deed of Trust changed its name, chief executive office or state of organization nor will Trustor do so without notifying Beneficiary at least sixty (60) days in advance. 2.27 Trustor will protect, indemnify, save harmless and defend Beneficiary and Trustee from and against any and all liability, loss, costs, charges, penalties, obligations, expenses, attorneys' fees, litigation, judgments, damages, claims and demands imposed upon or incurred by or asserted against Beneficiary and or Trustee by reason of (a) ownership by Trustee or Beneficiary of its interest in the Property pursuant to this Deed of Trust, (b) any accident or injury to or death of persons or loss of or damage to or loss of the use of property occurring on or about the Property or any part thereof or the adjoining sidewalks, curbs, vaults and vault spaces, if any, streets, alleys or ways, (c) any non-use or condition of the Property or any part thereof or of the adjoining sidewalks, curbs, vaults and vault spaces, if any, streets alleys or ways, (d) any failure on the part of Trustor to perform or comply with any of the terms of this Deed of Trust or any instrument or agreement secured hereby, (e) performance of any labor or services or the furnishing of any materials or other property in respect of the Property or any part thereof made or suffered to be made by or on behalf of Trustor, (f) any negligence or tortious act on the part of Trustor or any of its respective agents, contractors, lessees, licensees or invitees or (g) any work in connection with any alterations, changes, new construction or demolition of the Property, whether or not permitted hereunder. All amounts payable to Beneficiary or Trustee, as the case may be, under this Section 2.27 shall be payable on demand and shall be deemed indebtedness by this Deed of Trust. 2.28 All obligations of Trustor to any of its affiliates, including, but not limited to, any of its shareholders, partners or members, are hereby subordinated to the obligations secured by this Deed of Trust and none of such obligations shall be paid while any obligation secured hereby remains unsatisfied. SECTION 3 Trustee's and Beneficiary's Rights 3.01 The waiver or release by Beneficiary or Trustee of any default or of any of the provisions, covenants and conditions hereof on the part of Trustor to be kept and performed shall not be a waiver or release of any preceding or subsequent breach of the same or any other provision, covenant or condition contained herein. The subsequent acceptance of any sum in payment of any indebtedness secured hereby or any other payment hereunder by Trustor to Beneficiary or Trustee shall not be construed to be a waiver or release of any proceeding breached by Trustor of any provision, covenant or condition of this Deed of Trust other than the failure of Trustor to pay the particular sum so accepted, regardless of Beneficiary's or Trustee's knowledge of such preceding breach at the time of acceptance of such payment. No payment by Trustor or receipt by Beneficiary of a lesser amount than the amount herein provided shall be deemed to be other than on account of the earliest sums due and payable hereunder, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Beneficiary may accept any check or payment without prejudice to Beneficiary's right to recover the balance of such sum or pursue any other remedy provided in this Deed of Trust. The consent by Beneficiary or Trustee to any matter or event requiring such consent shall not constitute a waiver of the necessity for such consent to any subsequent matter or event. 3.02 Beneficiary shall be subrogated to the lien of any and all prior encumbrances, liens, or charges paid or discharged from the proceeds of the loan evidenced by the Note, and even though said prior liens may have been released of record, the repayment of the Note shall secured by such liens on the portions of the Property affected thereby to the extent of such payments. In consideration of the advances made to Trustor, Trustor hereby waives and releases all demands and causes of action for effects, payments and rentals to, upon, and in connection with said prior indebtedness. 3.03 Notwithstanding the right otherwise provided to Trustor to collect rent and other payments pursuant to the Leases while Trustor is not in default under the Note of this Deed of Trust, if there is filed any petition in bankruptcy, by or against any lessee under any of the Leases or there is appointed a receiver or trustee to take possession of all or a substantial portion of the assets of such lessee or there is a general assignment by such lessee for the benefit of creditors, or any action is taken by or against such lessee under any state or federal insolvency law or bankruptcy act, or any similar law now or hereafter in effect, Beneficiary is appointed a creditor of such lease and is entitled to recover on any claim or right of recover that Trustor may have against such lessee or its received or trustee, provided, however, that Beneficiary shall not be obligated to pursue any such claim or right of recovery. Beneficiary may apply any such recover against any obligation secured hereby in such manner as it may deem desirable, in its sole and absolute discretion. 3.04 Beneficiary may make or cause to be made reasonable entries upon and inspection of the Property. 3.05 Beneficiary may, at any time, by instrument in writing, appoint a successor or successors to the trustee named herein or acting hereunder, which instrument, executed and acknowledged by Beneficiary, and recorded in the Office of the County Recorder, Clark County, Nevada, shall be conclusive proof of the proper substitution of such successor trustee, who shall have all the estate, powers, duties and trusts in the premises vested in or conferred on the original trustee. If there be more than one trustee, either may act alone and execute these trusts upon the request of Beneficiary and his acts shall be deemed to be the acts of all trustees, and the recital in any conveyance executed by such sole trustee of such requests shall be conclusive evidence thereof and of the authority of such sole trustee to act. 3.06 Without affecting the liability of Trustor or any other Person, except any Person expressly released in writing, for payment of any indebtedness secured hereby or for performance of any of the obligations or any of the terms, covenants and conditions hereof, and without affecting the rights of Trustee and Beneficiary with respect to any security and not expressly released in writing at any time and from time to time, without notice of consent other than consent of Beneficiary. Trustee and Beneficiary may: (a) Release any Person liable for payment of all or any part of the indebtedness or for the performance of any obligation. (b) Make any agreement extending the time or otherwise altering the terms of payment of all or any part of said indebtedness or modifying or waiving any obligation or subordinating, modifying or otherwise dealing with the lien or charge hereof. (c) Exercise or refrain from exercising or waive any right either of them may have. (d) Accept additional security of any kind. (e) Release or otherwise deal with any property, real or personal, securing the obligations secured hereby. 3.07 If Trustor fails to execute, acknowledge or deliver to Beneficiary any and all mortgages, assignments, transfers, assurances, financing statements, maps and other instruments or documents required to be executed, acknowledged or delivered hereunder, within fifteen (15) days after Beneficiary's demand or such lesser period as may be provided elsewhere herein, then Trustor hereby appoints Beneficiary as Trustor's true and lawful attorney-in-fact to act in Trustor's name, place and stead to execute, acknowledge and deliver the same. 3.08 Whenever under any provision of this Deed of Trust, Trustor shall be obligated to make any payment or expenditure, or to do any act or thing, or to incur any liability whatsoever, and Trustor fails, refuses or neglects to perform as herein required. Beneficiary shall be entitled, but shall not be obligated, to make any such payment or expenditure or to do any such act or thing, or to incur any such liability, all on behalf of and at the cost and for the account of Trustor. In such event, the amount thereof with interest thereon at the rate provided in the Note ("Agreed Rate") shall be paid by Trustor to Beneficiary on demand. Without limiting the generality of the foregoing, any act or payment by Beneficiary to cure, forestall, prevent or mitigate default hereunder shall be at the sole option of Beneficiary, shall be at the cost of Trustor and shall be reimbursed to Beneficiary as above provided. Beneficiary shall not be bound to inquire into the validity of any apparent or threatened tax, assessment, adverse title, lien, encumbrance, claim or charge before making an advance for the purpose of preventing, removing or paying the same. Beneficiary shall be subrogated to all rights, equities and liens discharged by any such expenditure. All funds advanced by Beneficiary pursuant to this Section 3.08 or any other provision of this Deed of Trust for the performance of any obligation of Trustor or to protect Beneficiary's security shall be deemed obligatory advances regardless of the Person to whom such funds are furnished and such advances, together with interest thereon at the Agreed Rate, shall be secured by this Deed of Trust. 3.09 Any default in the performance of any term, covenant or condition contained herein or in any instrument or obligation secured hereby shall be a default hereunder. In addition, Trustor shall be in default hereunder if (a) Trustor shall abandon the Property, or any part thereof; (b) there is commenced any case in bankruptcy against Trustor or if an order for relief is entered against Trustor, or there is appointed a receiver or trustee to take possession of any of the assets of Trustor or of the Property or Trustor applies for or consents to such appointment, or there is a general assignment by Trustor for the benefit of creditors, or any action is taken by or against Trustor under any state or federal insolvency or bankruptcy act, or any similar law now or hereafter in effect, including, without limitation, the filing of any petition for or in reorganization, or should the Property, or any part thereof be taken or seized under levy of execution or attachment, or Trustor admits in writing its inability to pay its debts as they mature (c) there is (i) executed or verified by Trustor, or any receiver of Trustor, or any attorney or agent of Trustor, or of such receiver, a petition in bankruptcy with respect to Trustor, irrespective of whether such petition is filed, or (ii) executed or verified by any holder of a claim against Trustor, or an indenture trustee of such a holder, or any attorney or agent of such holder or indenture trustee, any petition in bankruptcy against Trustor, irrespective of whether such petition is filed; (d) the board of directors or managers of any corporate or limited liability company Trustor votes to seek any kind of relief under any bankruptcy, insolvency or similar law; (e) there is passed any law which renders payment by Trustor of any or all taxes levied upon this Deed of Trust or the Property or performance of any other term, covenant or condition hereof, or any obligation secured hereby, unlawful, usurious, inoperative, void or voidable, or which prohibits Beneficiary from exercising any of its rights hereunder or under any other instrument or agreement to which Trustor is a party or by which it is bound; (f) any representation, warranty, statement, certificate, schedule or report made by or on behalf of Trustor herein or in connection herewith is incorrect, false, or misleading in any material respect; (g) Trustor should dissolve, liquidate or terminate; (h) the priority of the security interest created hereby is impaired; (i) any license or permit necessary for operation of the Property or any portion thereof is revoked or any proceeding to revoke the same is commenced or threatened; (j) Trustor defaults under any obligation to or agreement with Beneficiary; or (k) there occurs any event which results in the acceleration of the maturity of the indebtedness of Trustor to others under any indenture, agreement or undertaking. If Trustor consists of more than one Person, the occurrence of any of the foregoing events with respect to any one or more of such Persons shall constitute a default hereunder. Similarly, if Trustor is a partnership or joint venture, the occurrence of any of the events enumerated above with regard to any general partner or joint venturer shall constitute a default hereunder. Trustor shall give Beneficiary prompt notice of the occurrence of any default hereunder. 3.10 The collection of rents and the application thereof by Beneficiary or any receiver obtained by Beneficiary shall not cure or waive any default or notice thereof, or invalidate any act of Beneficiary pursuant thereto. In the exercise of the powers herein granted Beneficiary, Beneficiary shall not be deemed to have affirmed any Lease or subordinate the lien hereof thereto not shall any liability be asserted or enforced against Beneficiary, all such liability being hereby expressly waived and released by Trustor. Neither Beneficiary nor any receiver shall be obligated to perform or discharge any obligation, duty or liability under any Lease or under or by reason of the assignment contained in this Deed of Trust and Trustor shall and does hereby agree to protect, indemnify, save harmless and defend Beneficiary and such receiver from and against any and all liability, loss, costs, charges, penalties, obligations, expenses, attorneys' fees, litigation, judgments, damages, claims and demands which they may or might incur by reason of, arising from, or in connection with the Leases, such assignment, any alleged obligations or undertakings on their part to perform or discharge any of the terms, covenants or agreements contained in the Leases, any alleged affirmative of or subordination to the Leases, or any action taken by Beneficiary or such receiver pursuant to any provision of this Deed of Trust. Without limiting the generality of the foregoing, no security deposited by the lessee with the lessor under the terms of any Lease hereby assigned has been transferred to Beneficiary, and Beneficiary assumes no liability for any security so deposited. 3.11 In the event of any default hereunder or in the performance of any of the obligations secured hereby, Beneficiary may exercise any and all of its rights provided hereunder or by law. Without limiting the generality of the foregoing, any Personal Property may, at the sole and absolute option of Beneficiary, (i) be sold hereunder, (ii) be sold pursuant to the Uniform Commercial Code of the State of Nevada, or (iii) be dealt with by Beneficiary in any other manner provided by statute, law or equity. Without limiting the foregoing, Beneficiary may require Trustor to assemble the Personal Property and make it available to Beneficiary at a place to be designated by Beneficiary. In the event of a default, Beneficiary shall be the attorney-in-fact of Trustor with respect to any and all matters pertaining to the Property with full power and authority to give instructions with respect to the collection and remittance of payments, to endorse checks, to enforce the rights and remedies of Trustor, and to execute on behalf of Trustor and in Trustor's name any instruction, agreement or other writing required therefor. This power shall be irrevocable and deemed to be a power coupled with an interest. Beneficiary may, in its sole discretion, appoint Trustee as the agent of Beneficiary for the purpose of disposition of the Personal Property in accordance with the Uniform Commercial Code. Trustor acknowledges and agrees that a disposition of the Personal Property in accordance with Beneficiary's rights and remedies in respect to real property as hereinabove provided is a commercially reasonable disposition thereof. Trustor acknowledges and agrees that the fact that the price obtained at a private sale may be less than the price which might have been obtained at a public sale does not render a private sale unreasonable even if Beneficiary accepts the first offer received and does not offer the subject property to more than one offeree. 3.12 In the event of any default hereunder or in the performance of the obligations secured hereby, Beneficiary may, to the full extent permitted by law, in addition to all other rights and remedies, forthwith after any such default enter upon and take possession of the Property, complete any buildings or other improvements under construction, construct new improvements and make modifications to and/or demolish any of the foregoing. In connection therewith Beneficiary shall have the power to file any and all notices and obtain any and all permits and licenses which Beneficiary, in its sole and absolute discretion, deems necessary or appropriate, including, but not limited to, the filing of notices of complete and the obtaining of certificates of occupancy. Beneficiary shall also have the right to receive all of the rents, issues and profits of the Property, overdue, due or to become due, and to apply the same, after payment of all necessary charges and expenses, including attorneys' fees, on account of the indebtedness secured hereby. Beneficiary may do any and all of the foregoing in its own name or in the name of Trustor and Trustor hereby irrevocably appoints Beneficiary as its attorney-in-fact for such purposes. Beneficiary may also, at any time after such default, apply to any court of competent jurisdiction for the appointment of a receiver and Trustor agrees that such appointment shall be made upon a prima facie showing of a claimed default without reference to any offsets or defenses against such default and without regard to whether any portion of the Property is in danger of being lost, removed, injured or destroyed or of waste, whether income from the Property is in danger of being lost or whether the Property is or may become insufficient to discharge the obligations secured by this Deed of Trust. Such receiver shall have all rights and powers provided Beneficiary pursuant to this section or otherwise provided hereunder or by law. Said receiver may borrow monies and issue certificates therefor. Said certificates shall be a lien on the Property, subordinate only to this Deed of Trust and the Leases, provided, however, that should any of said certificates be acquired by Beneficiary the amount thereof shall constitute additional indebtedness secured hereby. Such receiver may lease all or any portion of the Property on such terms and for such a term (which may extend beyond the terms of such receiver's appointment and/or if Beneficiary so consents, sale of the Property hereunder) as such receiver may deem appropriate in its sole and absolute discretion. The entering upon and taking possession of the property pursuant to this section and the collection of the rents, issues and profits therefrom shall not cure or waive any default or notice of default hereunder or invalidate any act of Beneficiary pursuant thereto. 3.13 Should default me made by Trustor in payment or performance of any indebtedness or other obligation of agreement secured hereby and or in performance of any agreement herein or should Trustor otherwise be in default hereunder. Beneficiary may, subject to NRS 107.080 declare all sums secured hereby immediately due by delivery to Trustee of a written notice of breach and election to sell (which notice Trustee shall cause to be recorded and mailed as required by law) and shall surrender to Trustee this Deed of Trust and the Note. 3.14 After three (3) months shall have elapsed following recordation of any such notice of breach, Trustee shall sell the property subject hereto at such time and at such place in the State of Nevada as Trustee, in its sole discretion, shall deem best to accomplish the objects of these trusts, having first given notice of such sale as then required by law. In the conduct of any such sale Trustee may act itself or through any auctioneer, agent or attorney. The place of sale may be either in the county in which the property to be sold, or any part hereof, is situated, or at an office in the Trustee located in the State of Nevada. (a) Upon the request of Beneficiary or if required by law Trustee shall postpone Sale of all or any portion of said property or interest therein by public announcement at the time fixed by said notice of sale, and shall thereafter postpone said sale from time to time by public announcement at the time previously appointed. (b) At the time of sale so fixed, Trustee shall sell the property so advertised or any part thereof or interest therein either as a whole or in separate parcels, as Beneficiary may determine in its sole and absolute discretion, to the highest bidder for cash in lawful money of the United States, payable at time of sale, and shall deliver to such purchaser a deed or deeds or other appropriate instruments conveying the property so sold, but without covenant or warranty, express implied. Beneficiary and Trustee may bid and purchase at such sale. To the extent of the indebtedness secured hereby. Beneficiary need not bid for cast at any sale of all or any portion of the Property pursuant hereto, but the amount of any successful bid by Beneficiary shall be applied in reduction of said indebtedness. Trustor hereby agrees, if it is then still in possession, to surrender, immediately and without demand, possession of said property to any purchaser. 3.15 Trustee shall apply the proceeds of any such sale to payment of expenses of sale and all charges and expenses of Trustee and of these trusts, including cost of evidence of title and Trustee's fee in connection with sale, all sums expended under the terms hereof, not then repaid, with accrued interest at the Agreed Rate, all other sums then secured hereby, and the remainder, if any, to the Person or Persons legally entitled thereto. 3.16 Beneficiary, from time to time before Trustee's sale, may rescind any notice of breach and election to sell by executing, delivering and causing Trustee to record a written notice of such rescission. The exercise by Beneficiary of such right of rescission shall not constitute a waiver of any breach or default then existing or subsequently occurring, or impair the right of Beneficiary to execute and deliver to Trustee, as above provided, other notices of breach and election to sell, nor otherwise affect any term, covenant or condition hereof or under any obligation secured hereby or any of the rights, obligations or remedies of the parties thereunder. SECTION 4 Miscellaneous 4.01 Upon receipt of written request from Beneficiary reciting that all sums secured hereby have been paid and upon surrender of this Deed of Trust and the Note secured hereby to Trustee for cancellation and upon payment of its fees. Trustee shall reconvey without warranty the property then held hereunder. The recitals in such reconveyance may be described in general terms as "the person or persons legally entitled thereto." 4.02 Trustor, for itself and for all Persons hereafter claiming through or under it or who may at any time hereafter become holders of liens junior to the lien of this Deed of Trust, hereby expressly waives and releases all rights to direct the order in which any of the Property or any interest therein shall be sold in the event of any sale or sales pursuant hereto and to have any of the Property and or any other property now or hereafter constitute security for any of the indebtedness secured hereby or any interest therein marshaled upon any sale under this Deed of Trust or of any other security for any of said indebtedness. 4.03 Any and all notices and demands to Trustor or to Beneficiary, required or desired to be given hereunder shall be in writing and shall be given by deposit in the United States mail, certified or registered, postage prepaid, return receipt requested or if made by Federal Express or other similar delivery service keeping records of deliveries and attempted deliveries or made by telecopy. Service by United States Mail or by Federal Express or other similar delivery service shall shall be conclusively deemed made on the first business day delivery is attempted or upon receipt, whichever is sooner; provided, however, that service of any notice of breach or notice of sale as required by law will, if mailed, be effective on the date of mailing. Facsimile transmissions received during business hours during a business day shall be deemed received on such business day. Facsimile transmissions received at any other time shall be deemed received on the next business day. Any notice or demand to Beneficiary shall be addressed to Beneficiary at Grand Casinos Nevada 1, Inc., 130 Cheshire Lane, Minnetonka, Minnesota 55305, Attention Chief Financial Officer, Telecopy No. ( ) , with a copy to Maslon Edelman Borman & Brand, LLP, 3300 Wells Fargo Center, 90 South Seventh Street, Minneapolis, Minnesota 55402, Attention Neil I. Sell, Esq., Telecopy No. ( ) . Any notice or demand to Trustor shall be addressed to Trustor at Metroflag BP, LLC, c/o Flag Luxury Properties, LLC, 1370 Avenue of the Americas, 29th Floor, New York, New York 10019, Attention Paul C. Kavanos, Telecopy No. ( ) , with a copy to Greenberg Traurig, P.A., 1221 Brickell Avenue, Miami, Florida 33131, Attention Juan P. Loumiet, Esq., Telecopy No. ( ) ; and, Gordon & Silver, Ltd., 3960 Howard Hughes Parkway, 9th Floor, Las Vegas, Nevada 89109, Attention Steve Yoken, Esq., Telecopy No. ( ) . Any party hereto may change its address for the purpose of receiving notices or demands as herein provided by a written notice given in the manner aforesaid to the other party hereto, which notice of change of address shall not become effective, however, until the actual receipt thereof by the other party. Whenever any law requires Beneficiary to give reasonable notice of any act, election, or event, or proposed act, election, or event, said requirement shall be deemed complied with if Beneficiary gives Trustor ten (10) days written notice as herein provided. Information concerning the security interest may be obtained from Beneficiary at the above address. 4.04 This Deed of Trust applies to, inures to the benefit of, and binds all parties hereto, their heirs, legatees, devisees, administrators, executors, successors and assigns. 4.05 Trustee accepts these trusts when this Deed of Trust, duly executed and acknowledged, is made a public record as provided by law. 4.06 Where any provision in this Deed of Trust refers to action to be taken by Trustor, or which Trustor is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by Trustor. 4.07 If any term, provision, covenant or condition of this Deed of Trust, or any application thereof, should be held by a court of competent jurisdiction to be invalid, void, or unenforceable, all provisions, covenants and conditions of this Deed of Trust and all applications thereof not held invalid, void or unenforceable, shall continue in full force and effect and shall in no way be affected, impaired or invalidated thereby. If the lien of this Deed of Trust is invalid or unenforceable as to any part of the Property, or if the lien is invalid or unenforceable as to any part of the indebtedness secured hereby, the unsecured or partially unsecured portion of such indebtedness shall be completely paid prior to the payment of the remaining and secured or partially secured portion of such indebtedness, and all payments made on such indebtedness, whether voluntary or under foreclosure or other enforcement action or procedure, shall be considered to have been first paid on and applied to the full payment of that portion of such indebtedness which is not secured or fully secured by the lien of this Deed of Trust. 4.08 In the event that Trustor shall consist of more than one Person then and in such event all of such Persons shall be jointly and severally liable hereunder. 4.09 The laws of the State of Nevada shall govern the validity, construction, performance and effect of this Deed of Trust. 4.10 This Deed of Trust shall be construed in accordance with its intent and without regard to any presumption or other rule requiring construction against the party causing the same to be drafted. 4.11 The various rights, options, elections and remedies of Beneficiary and Trustee hereunder shall be cumulative and no one of them shall be construed as exclusive of any other, or of any right, option, election or remedy provided in any agreement or by law. 4.12 Time is of the essence of this Deed of Trust and all of the terms, provisions, covenants and conditions hereof. 4.13 Whenever any provision of this Deed of Trust requires Beneficiary's consent or approval, unless otherwise specifically provided, the same may be granted or withheld by Beneficiary in its sole and absolute discretion. 4.14 EACH OF TRUSTOR AND BENEFICIARY BY ITS ACCEPTANCE OF HIS DEED OF TRUST IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM WHETHER BASED ON CONTRACTOR OR OTHERWISE ARISING OUT OF OR RELATING TO THE NOTE. THIS DEED OF TRUST OR ANY INSTRUMENT OR AGREEMENT SECURED HEREBY OR RELATED THERETO OR THE ACTIONS OF TRUSTOR OR BENEFICIARY IN THE NEGOTIATION ADMINISTRATION PERFORMANCE OR ENFORCEMENT THEREOF. 4.15 In this Deed of Trust, whenever the context so requires any gender includes the others, and the singular number includes the plural and vice-versa the term Beneficiary shall include any future holder, including pledges of the Note secured hereby and the term Trustor shall mean the original signator hereof the successors and assigns thereof and any future owners of any interest in the Property or any portion thereof. In the event the ownership of any or all portion of such property becomes vested in a Person other than the signator hereof, Beneficiary may, without notice to such signator, deal with such successor or successors with reference to this Deed of Trust and to indebtedness hereby secured in the same manner as with the signator, without in any way vitiating or discharging such signator's liability hereunder or upon the indebtedness hereby secured. In this Deed of Trust , the use of words such as "including" or "such as" shall not be deemed to limit the generality of the term or clause to which they have reference, whether or not non-limiting language (such as "without limitation," or "but not limited to," or words of similar import) is used with reference thereto, but rather shall be deemed to refer to all other items or matters that could reasonably fall within the broadest possible scope of such general statement term or matter. The captions appearing at the commencement of the sections hereof are descriptive only and for convenience in reference to this Deed of Trust and in no way whatsoever define, limit or describe the scope or intent of this Deed of Trust, nor in any way affect this Deed of Trust. As used in this Deed of Trust the term "Person" means any individual, partnership, limited partnership, corporation, limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity and any government and any political subdivision and agency thereof. 4.16 Where not inconsistent with the above, the following covenants, Nos. 1, 2 (full replacement value); 3, 4 (Agreed Rate); 5, 6, 7 (a reasonable percentage); 8 and 9 of NRS 107.030 are hereby adopted and made a part of this Deed of Trust. IN WITNESS WHEREOF, Trustor has executed this Deed of Trust the day and year first above written. Metroflag Polo, LLC a Nevada limited liability company By Its Member: Metro One, LLC a Nevada limited liability company By: /s/ Brett Torino ---------------------------------------- Brett Torino, Manager STATE OF NEVADA ) ) ss. COUNTY OF CLARK ) This instrument was acknowledged before me on December 28, 2001 by Brett Torino as Manager of Metro One LLC, a Nevada limited liability company. /s/ Linda Ann Thomas ------------------------------------------- NOTARY PUBLIC My Commission Expires 11/26/2002 -------------------- EX-10.59 6 c68243ex10-59.txt PURCHASE AGREEMENT EXHIBIT 10.59 PURCHASE AGREEMENT BY AND AMONG GRAND CASINOS NEVADA I, INC., A MINNESOTA CORPORATION as Seller and Metroflag BP, LLC, a Nevada limited liability company as Buyer Effective Date: December 28, 2001 1 PURCHASE AGREEMENT THIS PURCHASE AGREEMENT ("AGREEMENT") is entered into this 28th day of December, 2001, by and between GRAND CASINOS NEVADA I, a Minnesota corporation ("GCN") (hereafter referred to as "GCN" or "SELLER") and METROFLAG BP, LLC, a Nevada limited liability company ("BUYER"). RECITALS: 1. Seller is the tenant under that certain Lease Agreement originally by and between Brooks Family Trust and Nevada Brooks Cook, as Landlord, and Cloobeck Enterprises, a California corporation ("CLOOBECK") and GCN, as Tenant, dated June 17, 1996 (the "BROOKS LEASE"), covering the real property located in Las Vegas, Nevada which is improved with a motel operating under the name of "Travelodge" and which real property is legally described on EXHIBIT A attached hereto (the "TRAVELODGE PARCEL"). 2. Buyer desires to purchase the Seller's interest in the Travelodge Parcel, including Seller's leasehold interest under the Brooks Lease, Seller's option to purchase the Travelodge Parcel as provided in the Brooks Lease (collectively, the "TRAVELODGE PROPERTY"), and any personal property owned by Seller and physically located on the Travelodge Property ("PERSONAL PROPERTY") all in accordance with the terms and conditions hereinafter set forth. the travelodge property and any personal property pertaining thereto and any appurtenant rights to the foregoing shall collectively be hereafter referred to as the "PROPERTY." 3. Seller is willing to grant and extend to Buyer such purchase right. 4. Seller is also the fee owner of real property located in Las Vegas, Nevada, which is improved with an underground parking structure and a retail shopping center known as the "Polo Plaza" and which real property is legally described on EXHIBIT B attached hereto (the "POLO PROPERTY"). 5. Simultaneously herewith, Metroflag Polo, LLC, a Nevada limited liability company ("METROFLAG POLO") and Seller have entered into that certain Purchase Agreement (the "POLO PURCHASE AGREEMENT") whereby Metroflag Polo has agreed to purchase and Seller has agreed to sell to Metroflag Polo the Polo Property. NOW, THEREFORE, in consideration of the agreements hereinafter provided and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by Buyer and Seller, Seller agrees to sell to Buyer, and Buyer agrees to purchase from Seller the Property in its "As-Is, Where-Is, with All Faults" condition (except as otherwise specifically provided or represented in this Agreement) as more particularly set forth in this Agreement. 2 SECTION I PURCHASE PRICE; REDEVELOPMENT/CONSTRUCTION LOAN AND DEFICIT NOTE (a) It is hereby agreed that the purchase price for the Property shall be Eight Million and 00/100 Dollars ($8,000,000.00) (the "PURCHASE PRICE"). THE PURCHASE PRICE SHALL BE PAID BY BUYER TO SELLER AS FOLLOWS: (i) $500,000.00 cash (the "DOWN PAYMENT"), subject to prorations, payable by Buyer at Closing (as hereinafter defined). (ii) Buyer shall execute and deliver to Seller at the Closing (i) a promissory note in the original principal amount of $7,500,000.00 (the "NOTE") substantially in the form of EXHIBIT C attached hereto payable to the order of Seller in such amount, and (ii) a first priority Deed of Trust (the "DEED OF TRUST") on the Property securing the Note, substantially in the form of EXHIBIT D attached hereto. The Note shall provide that the principal balance thereunder shall not accrue interest. The entire outstanding principal balance under the Note shall become due and payable on June 28, 2004 (the "MATURITY DATE"). (iii) Upon either, the satisfaction of all the Post-Closing Conditions (as hereinafter defined), or Buyer's waiver of any unsatisfied Post-Closing Conditions, Buyer shall pay to Seller $500,000.00 (the "SECOND PAYMENT") and the Down Payment and the Second Payment shall become non-refundable. The Second Payment shall be deemed to be a partial prepayment of the Note and shall reduce the outstanding principal balance of the Note accordingly. (b) Buyer contemplates obtaining financing of up to $4,000,000.00 (the "REDEVELOPMENT/CONSTRUCTION LOAN") for certain redevelopment and construction on the Property (the "LIMITED IMPROVEMENTS") which financing would be secured by a deed of trust on the Property. Provided that (i) Buyer can reasonably demonstrate to Seller that the Limited Improvements and the leasing of the Property at prevailing market rates can reasonably be expected to enhance the value of the Property by not less than an amount equal to one hundred and fifty percent (150%) of the principal amount of the Redevelopment/Construction Loan, (ii) Buyer provides Seller with assurances reasonably acceptable to Seller of the cost of construction and that any construction financed by the Redevelopment/Construction Loan shall be completed, (iii) the Redevelopment/Construction Loan is assumable by Seller, and (iv) the Limited Improvements are bonded and on a guaranteed maximum general contract, Seller agrees to subordinate the Deed of Trust to any deed of trust securing a Redevelopment/Construction Loan and shall execute and deliver to any lending institution providing such Redevelopment/Construction Loan any and all reasonable and customary subordination agreements and other agreements required in connection therewith. (c) During the term of the Note, Seller acknowledges and agrees that Seller shall advance to Buyer on a monthly basis an amount equal to one-half (1/2) of the monthly cash operating deficit from the operation of the Property for the prior calendar month; provided, however, that Seller shall not be obligated to advance more than $3,000,000.00 in the aggregate for such cash operating deficits. Buyer shall be obligated to repay any such amounts advanced to Buyer pursuant to the form of Deficit Note attached hereto as EXHIBIT I (the "DEFICIT NOTE"). SECTION II BUYER'S PUT RIGHT (a) In the event that: (i) (A) one or more of the representations and warranties set forth in Section III is breached, (B) Buyer notifies Seller thereof within the Post Closing Conditions Period, and (C) the aggregate reasonably foreseeable damages which Buyer could incur resulting therefrom could be expected to exceed $250,000.00 (either singly or in the aggregate for all such breaches), and (D) Seller fails to cure such breaches by the expiration of the Post-Closing Conditions Period; or (ii) Seller does not satisfy all of the Post-Closing Conditions set forth in Section V hereof by the expiration of the Post-Closing Conditions Period, then, at Buyer's option, Seller shall be obligated to repurchase the Property from Buyer (the "REPURCHASE") on the terms and conditions set forth below. Buyer shall provide written notice to Seller of its election to either require the Seller to consummate the Repurchase (the "REPURCHASE NOTICE") within five (5) business days after the expiration of the Post-Closing Conditions Period. The closing of such repurchase shall occur not later than fifteen (15) days after the date that the Repurchase Notice is delivered to Seller. (b) In the event Seller is required to repurchase the Property as described above, (i) Buyer shall convey the Property to Seller by the same form of assignment of the Brooks Lease in its "AS-IS" - "WHERE-IS" condition subject to all matters affecting title thereto present on the Closing Date and any additional matters which may have arisen after the Closing Date (subject to Buyer's Post-Closing Covenants as defined below), (ii) the purchase price for such repurchase shall be $500,000.00 payable in cash (by certified check or wire transfer of immediately available funds), (iii) Seller shall assume any Redevelopment and Construction Loan, (iv) the Note and Deficit Note shall be cancelled and Buyer shall no longer have any liability to Seller thereunder, (v) Seller shall assume the general contract and any other agreements or contracts entered into by Buyer in related to the planning, design and construction of the Limited Improvements, including, without limitation, any contracts with any architects, engineers, consultants, contractors, suppliers and materialmen and, subject to Buyer's Post-Closing Covenants, any leases entered into by Buyer affecting the Property (the "POST-CLOSING AGREEMENTS"), (vi) Seller shall have the option (but not the obligation) to assume all of Buyer's obligations under any contracts, agreements and obligations entered into by Buyer after the Closing Date other than the Post-Closing Agreements, (vii) subject to Buyer's Post-Closing Covenants, Buyer shall assign to Seller at the Closing of the Repurchase all of Buyer's right, title and interest to any plans, drawings, sketches, renderings and other work product of any architects, engineers, contractors or consultants engaged by Buyer after the Closing hereunder, and (viii) Seller shall indemnify Buyer from any and all claims, damages or liabilities whatsoever in connection with any Post-Closing Agreements which accrue on and after the date of the Repurchase and Buyer shall indemnify Seller from any and all claims, damages or liabilities whatsoever in connection with any Post-Closing Agreements which accrue prior to the date of the Repurchase. (c) Buyer contemplates commencing pre-development activities, including, without limitation, planning, pre-leasing, surveying, demolition and construction on the Property (the "PRE-DEVELOPMENT ACTIVITIES") before the expiration of the Post-Closing Conditions Period. Buyer covenants to Seller that Buyer shall (i) not execute any leases affecting the Property unless such leases contain a provision allowing the landlord to terminate the lease upon ninety (90) days notice to the tenant, and (ii) not enter into any contracts or agreements with a term in excess of one (1) year affecting the Property other than the Post-Closing Agreements. The foregoing covenants in (i) and (ii) are collectively refereed to as "BUYER'S POST-CLOSING COVENANTS". SECTION III EXISTING LEASES Seller hereby represents and warrants to Purchaser that attached to this Agreement as composite EXHIBIT E is a complete and correct list of all written leases (other than the Brooks Lease) and subleases (and all amendments thereto, if applicable), tenancies or other occupancy arrangements affecting the Travelodge Property (collectively, the "Leases"), setting forth the name of the tenant, the space affected, the rent, the term (including any options to renew), the security deposit, if any, and any special concessions, prepaid rent, options to purchase or rights of first refusal. Seller represents and warrants to Purchaser that: a. No other parties have any rights of occupancy or possession of the Property or any portions thereof except as set forth in EXHIBIT E attached hereto and no tenant of any portion of the Property has any option to purchase the Property or any portion thereof, nor any rights of first refusal with respect to same (other than rights of Seller under the Brooks Lease). b. Seller has not received security deposits under any of the Leases except the security deposits listed in EXHIBIT E, and Seller has not accepted payment of any rent under any of the Leases for more than one (1) month in advance. c. There are no modifications, understandings or agreements with respect to the Leases except as set forth in the Leases. d. All of the Leases are in good standing and without default on the part of Seller as of the date hereof. Seller has not delivered any notice of default to any of the tenants under the Leases and except as described in EXHIBIT E, Seller is not aware of any tenant defaults thereunder. This representation shall survive the Closing. e. There are no rental commissions due with respect to any of the Leases nor for the renewal of same. f. Except for the Leases and the contracts and agreements listed on EXHIBIT F attached hereto, to the best of Seller's knowledge, Seller has not entered into (and the Property is not subject to) any contracts, arrangements, licenses, concessions, easements, or other agreements, including, without limitation, service arrangements and employment agreements, either recorded or unrecorded, written or oral, affecting the Property, or any portion thereof or the use thereof. Seller represents that it has provided Buyer with true, complete and correct copies of all contracts and agreements listed in EXHIBIT F. SECTION IV TITLE EVIDENCE Buyer has received and reviewed a title insurance commitment prepared by Lawyers Title of Nevada, Inc. (the "Title Company") and that certain preliminary survey dated June 23, 2000, prepared by G. C. Wallace, Inc. (the "Survey") and has determined that the matters set forth in EXHIBIT G attached hereto are not acceptable to Buyer (the "Unacceptable Exceptions"). Any additional matters shown on any endorsement to the Commitment or an updated Survey arising prior to the Closing Date which, in Buyer's exclusive (but reasonable) discretion, adversely affect Buyer's ability to own, use and develop the Property in any material respect shall be deemed to be Unacceptable Exceptions. Seller has elected to satisfy or remove to Buyer's reasonable satisfaction (and that of Title Company) all Unacceptable Exceptions so that such matters may be eliminated as exceptions to the Commitment. Seller shall use its reasonable best efforts to satisfy, remove by payment, bonding, or otherwise all of the Unacceptable Exceptions, including bringing suit, if necessary, to cure any such Unacceptable Exceptions. SECTION V POST-CLOSING CONDITIONS Buyer and Seller acknowledge that the conditions set forth below in this Section were expected to be satisfied prior to the Closing but because of Buyer and Seller's desire to close the transaction contemplated hereby on the Closing Date, Buyer and Seller have agreed that such conditions are to be satisfied as set forth in this Section. Consequently, Seller acknowledges and agrees that Seller shall be obligated to complete or satisfy the following conditions (collectively, the "POST CLOSING CONDITIONS") within one hundred eighty (180) days after the Closing Date (the "POST CLOSING CONDITIONS Period"): (a) the form of Amended and Restated Grant of Reciprocal Easements and Declaration of Covenants, Conditions and Restrictions (the "AMENDED REA") attached hereto as EXHIBIT H which form has been approved by Buyer and Seller (or substantially the same form thereof with only such changes as may be acceptable to Buyer in its discretion) shall have been approved by all necessary parties (including, without limitation, the legal approval by any condominium or time share associations pertaining to the Towers Parcel (as defined in the Amended REA) in full compliance with their respective constituent and governing documents (the "ASSOCIATIONS")), and all conditions precedent therein shall have been satisfied, executed by all parties thereto (including all holders of deeds of trust or mortgages, to the extent legally required, consented to by the fee owner of the Travelodge Property and the signature by the Brooks Fee Owners of the Consent and Joinder of Brooks Fee Owners attached thereto), and filed for record, which will have the effect of amending and restating the 1996 REA and the 1998 REA (as those terms are defined in the Amended REA), superceding the 1996 REA and the 1998 REA in all respects and any easement affecting the Property as reasonably required by Buyer; and (b) Seller shall satisfy and/or remove all Unacceptable Exceptions. SECTION VI CLOSING CONDITIONS Buyer and Seller acknowledge and agree that the closing of the transaction contemplated under the Polo Purchase Agreement shall occur simultaneously with the Closing hereunder. SECTION VII "AS-IS", "WHERE-IS" CONDITION Buyer acknowledges that it is purchasing the Property in its "as is", "where is", with all faults condition (except as specifically provided for or represented herein) relying otherwise solely on its own existing knowledge and inspection of the Property. Except as set forth herein, Seller makes no representations or warranties as to any matters affecting the Property or as to the quality and quantity of the Property, including, without limitation, to the condition of any improvements thereto. SECTION VIII CLOSING The closing of Buyer's purchase of the Property (the "CLOSING") shall occur simultaneously with the execution of this Agreement by the parties hereto and such date shall be referred to herein as the "CLOSING DATE". The Closing shall take place in the office of Seller's counsel in Las Vegas, Nevada on or before Closing Date. Possession of the Property shall be deemed to have been given by Seller to Buyer coincident with the Closing. The following procedure shall govern the Closing: (a) At the Closing, Seller shall deliver to Title Company an appropriate form of Assignment and Assumption of Lease Agreement and Landlord Consent assigning the Brooks Lease (the "ASSIGNMENT") BY SELLER AND THE CURRENT OWNERS OF THE LANDLORD'S INTEREST UNDER THE BROOKS LEASE TO BUYER, WHICH ASSIGNMENT WILL NOT BE RECORDED AND A MEMORANDUM OF SAID ASSIGNMENT (THE "MEMORANDUM") WHICH SHALL BE IN RECORDABLE FORM AND SHALL CONVEY GOOD AND MARKETABLE RECORD TITLE TO THE SELLER'S INTEREST IN THE TRAVELODGE PARCEL (USING THE LEGAL DESCRIPTION SET FORTH ON THE COMMITMENT) TO BUYER, SUBJECT ONLY TO CURRENT REAL ESTATE TAXES AND ANY ENCUMBRANCES WHICH ARE NOT UNACCEPTABLE EXCEPTIONS. (b) On the Closing Date Seller shall deliver the following: (i) the Assignment and the Memorandum properly executed and acknowledged along with a standard form Seller's Affidavit if required by the County Recorder; (ii) current real estate tax statements; (iii) properly executed assignments of Seller's interest in and to the Leases and any other documents necessary to transfer Seller's interest in such Leases to Buyer; (iv) a Quit Claim Bill of Sale to Personal Property; (v) a FIRPTA Affidavit; (vi) properly executed form of Post-Closing Agreement attached hereto as EXHIBIT J (the "POST CLOSING AGREEMENT"); (vii) such funds as may be required by Seller to pay Closing costs or charges properly allocable to Seller; and (viii) notices to tenants of the Travelodge Property directing future rentals to be paid to Buyer. (c) On the Closing Date, Buyer shall deliver the following: (i) the balance of the cash due at Closing; (ii) properly executed Assignment (as same pertains to the assumption by Seller of the obligations of tenant thereunder); (iii) the Note, Deficit Note, the Deed of Trust and the Indemnity Deed of Trust attached hereto as EXHIBIT K (the "INDEMNITY DEED OF TRUST"), all properly executed and, with respect to the Deed of Trust and Indemnity Deed of Trust, in recordable form, along with all applicable fees, taxes and recording fees necessary to record the Deed of Trust and the Indemnity Deed of Trust; (iv) the Option Agreement (and a memorandum thereof, if necessary) in the form attached hereto as EXHIBIT L (the "OPTION AGREEMENT") (v) properly executed Post-Closing Agreement; and (vi) such funds as may be required to pay Closing costs or charges properly allocable to Buyer, including but not limited to the cost of the Buyer's title insurance policy. Seller shall pay all installments of real estate taxes and installments of special assessments due and payable in calendar year 2001 and prior years. Buyer shall pay all installments of real estate taxes and installments of special assessments due and payable in calendar year 2002 and thereafter. Insurance and rents with respect to the Property will be pro-rated at the Closing as of December 31, 2001. All other charges normal and customary in similar transactions shall be paid by the appropriate party who so customarily pays such charges. All rents collected by Buyer after Closing shall be deposited in Buyer's cash account and applied first to current rents due Buyer, second to delinquent rents due Buyer, and third to delinquent rents due Seller. With respect to any delinquent rents due Seller, Buyer shall make reasonable efforts to collect the same after Closing in the usual course of operation of the Property and such collections (less Buyer's costs of collection, including attorneys' fees and costs, and reasonable management and administrative fees) shall be remitted to Seller promptly after receipt by Buyer. At Closing, Seller shall also give Buyer a credit against the Purchase Price, or shall transfer and deliver to Purchaser a sum equal to the aggregate of any security deposits shown on EXHIBIT E, and, if applicable interest, if any, earned thereon to the Date of Closing and any advance rents paid on behalf of any tenant, which advance rents shall be prorated to the Date of Closing. SECTION IX EXPENSE OF ENFORCEMENT If either party brings an action at law or in equity to enforce or interpret this Agreement, the prevailing party in such action shall be entitled to recover reasonable attorneys' fees and court costs in addition to any other remedy granted. SECTION X NOTICE All notices, demands and requests required or permitted to be given under this Agreement must be in writing and shall be deemed to have been properly given or served either by personal delivery or by depositing the same in the United States mail, addressed to Seller or to Buyer, as the case may be, prepaid and registered or certified mail, return receipt requested, at the following addresses: TO SELLER: Grand Casinos Nevada I, Inc. 130 Cheshire Lane Minnetonka, Minnesota 55305 Attn: Chief Financial Officer WITH COPY TO: Maslon Edelman Borman & Brand, LLP 3300 Wells Fargo Center 90 South Seventh Street Minneapolis, Minnesota 55402 Attention: Neil I. Sell, Esq. TO BUYER: Metroplex, LLC 6430 Schirlls Avenue Las Vegas, Nevada 89118 Attention: Brett Torino and Flag Luxury Properties, LLC 1370 Avenue of the Americas, 29th Floor New York, NY 10019 Attention: Paul C. Kanavos WITH COPY TO: Greenberg Traurig, P.A. 1221 Brickell Avenue Miami, FL 33131 Attention: Juan P. Loumiet, Esq. and Gordon & Silver, Ltd. 3960 Howard Hughes Parkway, 9th Floor Las Vegas, Nevada 89109 Attention: Stephen B. Yoken, Esq. Rejection or refusal to accept or the inability to deliver any notice hereunder because of a changed address of which no notice was given shall be deemed to be receipt of the notice, demand or request. Any party shall have the right from time to time and at any time upon at least ten (10) days' written notice thereof, to change their respective addresses, and each shall have the right to specify as its address any other address within the United States of America. SECTION XI MERGER/BINDING AGREEMENT; SURVIVAL All previous negotiations and understandings between Seller and Buyer or their respective agents and employees with respect to the purchase of the Property hereunder are merged in this Agreement, which alone fully and completely express the parties' rights, duties and obligations with respect to such purchase. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, heirs and personal representatives. The parties hereto agree that all covenants, representations warranties and any other obligations shall survive the Closing hereunder. SECTION XII GOVERNING LAW This Agreement shall be deemed to be a contract made under the laws of the State of Nevada and for all purposes shall be governed and construed in accordance with the laws of said State. SECTION XIII DAMAGES Notwithstanding any other provision hereof to the contrary, Buyer hereby waives any claim against Seller, including, but not limited to, any claim for damages, for breach by Seller of any covenant, agreement, warranty or representation made hereunder, it being understood that the only remedy afforded Buyer for any such breach shall be the right afforded Buyer under Section II hereof to require Seller to consummate the Repurchase. Seller shall, however, continue to be liable hereunder to Buyer for third party claims that have been the subject of the indemnity provision of Sections II(b)(viii). SECTION XIV CONFIDENTIALITY Neither party hereto will make any public disclosure or publicity release pertaining to the existence of this Agreement or the subject matter contained herein without the consent of the other party. [The remainder of this page has been intentionally left blank.] IN WITNESS WHEREOF, the parties hereto have executed this Agreement intending to be bound by the provisions herein contained. SELLER: GRAND CASINOS OF NEVADA I, INC. a Minnesota corporation By: --------------------------------- Its: --------------------------------- BUYER: METROFLAG BP, LLC, a Nevada limited liability company By: Metro Two, LLC, a Nevada limited liability company, its member By: --------------------------- Brett Torino, Manager EXHIBIT A Legal description of Travelodge Property EXHIBIT B Legal description of Polo Property EXHIBIT C Note EXHIBIT D Deed of Trust on the Travelodge Property EXHIBIT E List of Leases EXHIBIT F Contracts and Agreements EXHIBIT G Unacceptable Exceptions EXHIBIT H Amended REA EXHIBIT I Deficit Note EXHIBIT J Post-Closing Agreement EXHIBIT K Indemnity Deed of Trust EXHIBIT L Option Agreement EXHIBIT E LIST OF LEASES 1. 2. 3. 4. EX-10.60 7 c68243ex10-60.txt PROMISSORY NOTE EXHIBIT 10.60 NOTE SECURED BY DEED OF TRUST $7,500,000 Las Vegas, Nevada December 28, 2001 For valuable consideration, Metroflag BP, LLC, a Nevada limited liability company ("Promisor") does hereby promise to pay to the order of Grand Casinos Nevada I, Inc., a Minnesota corporation ("Promisee") the principal sum of Seven Million Five Hundred Thousand Dollars ($7,500,000). Said amount shall be due and payable in full on June 28, 2004. Both principal and interest are payable at the office of Promisee, in Minnetonka, Minnesota, or at such place as the holder hereof may from time to time designate in writing. Provided Promisor has notified Promisee in writing of such prepayment at least ten (10) days in advance, Promisor may prepay this Note in full, or in party at any time. This Note is secured by a Leasehold Deed of Trust, Assignment of Leases and Rents and Security Agreement ("Deed of Trust") of even date herewith. Should any event of default, as hereinafter defined, occur, the whole sum of principal and interest hereunder shall, without notice, immediately become due at the option of the holder hereof. Any and all of the following shall constitute an event of default hereunder. (a) default in payment of any installment of principal or interest hereunder; or (b) default in performance of any obligation contained herein or in the Deed of Trust or any other security instrument by which this Note is secured or any guaranty hereof or thereof. The sale, agreement to sell, transfer, assignment, mortgage, pledge, hypothecation or encumbrance, whether voluntary or involuntary, directly or indirectly, of the whole or any portion of Promisor's right, title or interest in and to the property subject to the Deed of Trust or any portion thereof, other than encumbrances permitted under, and complying with, the Purchase Agreement of even date by and between Promisor and Promisee, shall entitle Promisee to accelerate the indebtedness secured hereby in the same manner as in the case of any other default. Any lease for a term (including options to extend) of greater than twenty (20) years shall be deemed a sale for the purpose of this paragraph. For the purpose of this paragraph, the sale, transfer, assignment, mortgage, pledge, hypothecation, charging or encumbrance of the aggregate of greater than thirty percent (30%) of (a) the interests in any partnership or limited liability company then owning such property, whether directly or indirectly (such as by sale of stock in any corporate partner or member) or (b) any class of stock in a corporation then owning such property, whether directly or indirectly (such as by sale of stock in any parent corporation) shall be deemed a sale, transfer, assignment, mortgage, pledge, hypothecation or encumbrance, as the case may be, of an interest of Promisor in the property subject to the Deed of Trust. Promisor and all others who may become liable for the payment of all or any part of this obligation do hereby severally waive presentment for payment, protest and demand, notice of protest, demand and dishonor, and nonpayment of this Note and expressly agree that the maturity of this Note or any payment hereunder may be extended from time to time, at the option of the holder hereof, without in any way affecting the liability of each. Promisor agrees that the holder hereof may release all or part of the security for the payment thereof or release any party liable for this obligation. Any such extension or release may be made without notice to any of the parties and without discharging their liability. Promisor promises to pay all costs incurred in collection and/or enforcement of this Note or any part thereof or otherwise in connection herewith, including, but not limited to, reasonable attorneys' fees. In the event of court action, all costs and such additional sums and attorneys' fees as the court may adjudge reasonable shall be awarded to the prevailing party. The obligations of any party liable for the payment of all or any part of this obligation shall be joint and several. If any term, provision, covenant or condition of this Note, or any application thereof, should be held by a court of competent jurisdiction to be invalid, void or unenforceable, all provisions, covenants and conditions of this Note and all applications thereof not held invalid, void or unenforceable, shall continue in full force and effect and shall in no way be affected, impaired or invalidated thereby. The laws of the State of Nevada shall govern the validity, construction, performance and effect of this Note. Any action to enforce Promisor's obligations hereunder may be brought in any court of competent jurisdiction of the State of Nevada, and Promisor hereby consents to the jurisdiction of Nevada courts over it. Metroflag, BP, LLC a Nevada limited liability company By Its Member: Metro Two, LLC A Nevada limited liability company By: /s/ Brett Torino --------------------------------- Brett Torino, Manager EX-10.61 8 c68243ex10-61.txt PROMISSORY NOTE EXHIBIT 10.61 DEFICIT NOTE $3,000,000.00 Las Vegas, Nevada December 28, 2001 FOR VALUABLE CONSIDERATION, METROFLAG BP, LLC, a Nevada limited liability company ("PROMISER") does hereby promise to pay to the order of GRAND CASINOS NEVADA I, INC., a Minnesota corporation ("PROMISEE"), the principal sum of Three Million and no/100 Dollars ($3,000,000.00) or such lesser principal sum as may be hereafter advanced by Promisee to Promisor pursuant to the terms hereof, together with interest thereon, from date of any advance, at the rate of eight percent (8%) per annum. For purposes of this Deficit Note, the term "Negative Cash Flow" shall mean all of the ownership and other carrying costs paid in cash, net of any leasing or other operating revenues received by Promisor, with respect to the real property located in Clark County, Nevada, commonly known as the Travelodge Property and legally described in EXHIBIT A hereto attached ("TRAVELODGE PROPERTY"), such costs to include without limitation (a) the rent due the lessor under the Travelodge Ground Lease; (b) all property taxes, special assessments, maintenance and utility costs required to satisfy any leases, other agreements and safe occupancy laws or regulations; (c) premiums for general liability and property insurance in amounts customary for such properties or required by any leases; and (d) the employee compensation, other payroll costs, employee benefits and other cash expenses (excluding any overhead costs for operations not located on the Travelodge Property) necessary to operate the hotel and parking lot now located on the Travelodge Property, the retail space leased to third parties and any other activities on the Travelodge Property (other than development activities). Negative Cash Flow shall not take into account any accrued but unpaid costs or revenues, any non-cash expenses such as depreciation or amortization, nor any interest or principal payments on debt, whether or not secured by the Travelodge Property. Any payment of the purchase price for the fee interest in the Travelodge Property shall not be treated as an operating expense included in any Negative Cash Flow. For the period beginning on the date hereof and ending January 31, 2002, and for each subsequent calendar month ending before the earlier of (i) June 28, 2004, or (ii) the date Promisor pays in full its $7,500,000.00 note ("$7,500,000.00 NOTE") to Promisee, dated of even date herewith, (the earlier said date is hereafter referred to as the "LAST ADVANCE DATE"), Promisor shall determine any Negative Cash Flow (or positive cash flow determined in the same manner as Negative Cash Flow) with respect to the Travelodge Property. If Promisor has paid any amount of Negative Cash Flow for such period with respect to the Travelodge Property, Promisor shall promptly send Promisee a written request for a loan disbursement (along with a reasonably detailed accounting of the revenues and costs resulting in such amount) equal to fifty percent (50%) of such Negative Cash Flow and, within ten (10) days after receiving such request, Promisee shall advance to Promisor as a principal loan advance hereunder fifty percent (50%) of such amount of Negative Cash Flow. The aggregate amount of all such principal advances by Promisee to Promisor hereunder, outstanding at any one time, shall not exceed Three Million and no/100 Dollars ($3,000,000.00). This Deficit Note possesses a revolving feature and evidences a line of credit. The Promisee is not obligated to make any advances except as stated herein and in all events no advances shall be made after the Last Advance Date and Promisee is not obligated to make any advances herein if Promisor is in default under its $7,500,000.00 Note executed by Promisee, payable to the order of Promisor dated of even date herewith. Promisor may be entitled to borrow up to the full principal amount of the Deficit Note and to repay and reborrow from time to time during the term of this Deficit Note. Promisee shall maintain a record of the amounts loaned to and repaid by Promisor under this Deficit Note. The aggregate unpaid principal amount shown on such record shall be rebuttable presumptive evidence of the principal amount owing and unpaid on this Deficit Note. The Promisee's failure to record the date and amount of any loan or advance shall not limit or otherwise affect the obligations of the Promisor under this Deficit Note to repay the principal amount of the loans or advances together with all interest accruing thereon. Promisor shall be entitled to inspect or obtain a copy of the record during Promisee's business hours. If Promisee has any positive cash flow (determined in the same manner as Negative Cash Flow) from the Travelodge Property for any month, such positive cash flow amount shall be payable by Promisor to Promisee in partial repayment of the then unpaid balance of this Deficit Note, with any such payment to be applied first to the principal balance and then to the accrued interest. Notwithstanding any other provisions hereof to the contrary, in the event Promisee reacquires title to Promisor's interest in the Travelodge Property, the balance, if any, of this Deficit Note shall be deemed forgiven and Promisor shall have no obligation to make further advances hereunder. Within sixty (60) days after each fiscal year of Promisor, Promisor shall report to Promisee any amount of such Negative Cash 'Flow paid (or positive cash flow received) by Promisor during such fiscal year with respect to the Travelodge Property, along with a reasonably detailed accounting of the revenues and costs resulting in such amount. Until this Deficit Note has been repaid in full, Promisee shall have the right to have its authorized agents review or audit those records of Promisor directly or indirectly relating to its costs and revenues with respect to the Travelodge Property, with reasonable advance notice, during Promisee's customary business hours and no more often than once in each calendar quarter. Both principal and interest are payable at the office of Promisee, in Minnetonka, Minnesota, or at such place as the holder hereof may from time to time designate in writing. Provided Promisor has notified Promisee in writing of such prepayment at least ten (10) days in advance, Promisor may prepay this Note in full, or in part at any time. Any prepayment of principal must be accompanied by payment of all interest then accrued and unpaid. Should any event of default, as hereinafter defined, occur, the whole sum of principal and interest hereunder shall, without notice, immediately become due at the option of the holder hereof and Promisee shall no longer be obligated to make any further advances hereunder. A default in payment of any installment of principal or interest hereunder when owed shall constitute an event of default hereunder. Promisor and all others who may become liable for the payment of all or any part of this obligation do hereby severally waive presentment for payment, protest and demand, notice of protest, demand and dishonor, and nonpayment of this Note and expressly agree that the maturity of this Note or any payment hereunder may be extended from time to time, at the option of the holder hereof, without in any way affecting the liability of each. Promisor agrees that the holder hereof may release all or part of the security for the payment thereof or release any party liable for this obligation. Any such extension or release may be made without notice to any of the parties and without discharging their liability. Promisor promises to pay all costs incurred in collection and/or enforcement of this Note or any part thereof or otherwise in connection herewith, including, but not limited to, reasonable attorneys' fees, and, in the event of court action, all costs and such additional sums and attorneys' fees as the court may adjudge reasonable. The obligations of any party liable for the payment of all or any part of this obligation shall be joint and several. If any term, provision, covenant or condition of this Deficit Note, or any application thereof, should be held by a court of competent jurisdiction to be invalid, void, or unenforceable, all provisions, covenants and conditions of this Deficit Note and all applications thereof not held invalid, void or unenforceable, shall continue in full force and effect and shall in no way be affected, impaired or invalidated thereby. The laws of the State of Nevada shall govern the validity, construction, performance and effect of this Deficit Note. Any action to enforce Promisor's obligations hereunder may be brought in any court of competent jurisdiction in the State of Nevada, and Promisor hereby consents to the jurisdiction of Nevada courts over it. METROFLAG BP, LLC By Its Member Metro Two, LLC, a Nevada limited liability company By: /s/ Brett Torino --------------------------------- Brett Torino Its: Manager EX-10.62 9 c68243ex10-62.txt LEASEHOLD DEED OF TRUST EXHIBIT 10.62 Assessor's Parcel No. 162-21-301-002 Re-Recording to attach Exhibit "B" 162-21-301-003 162-21-301-004 162-21-301-007 162-21-301-008 Send tax bills to: Metroflag, LLC 6430 Schillo Avenue Las Vegas, NV 87118 Attn: Steve Macie Re-Recording to correct date of Deed of Trust and to attach Exhibit "B" When recorded mail to: Lionel Sawyer & Collins 300 S. 4th Street, Ste 1700 Las Vegas, NV 89101 Attn: Jeff Zucker LEASEHOLD DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS AND SECURITY AGREEMENT Metroflag Polo, LLC Trustor Lawyers Title of Nevada, Inc. Trustee and Grand Casinos Nevada I, Inc. and Grand Casinos, Inc. Beneficiary Dated: December 28, 2001 LEASEHOLD DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS AND SECURITY AGREEMENT THIS LEASEHOLD DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS AND SECURITY AGREEMENT ("DEED OF TRUST"), dated as of December 28, 2001, between Metroflag BP, LLC, a Nevada limited liability company ("TRUSTOR"), Lawyers Title of Nevada, Inc., a Nevada corporation ("TRUSTEE") and Grand Casinos Nevada I, Inc., a Minnesota corporation ("GRAND") and Grand Casinos, Inc., a Minnesota corporation ("PARK") (collectively "BENEFICIARY"), WITNESSETH: Trustor hereby covenants and agrees as follows: SECTION 1 Grant of Security Interests 1.01. Trustor irrevocably grants, bargains, sells, transfers and assigns to Trustee in trust, with power of sale, all right title and interest, now held or at any time hereinafter acquired by Trustor, in and to that improved real property in Clark County, Nevada, further described in Exhibit A attached hereto and incorporated herein by reference, together with all and singular the tenements, hereditaments and appurtenances now or hereafter belonging or in any way appertaining thereto; any easements benefiting such property; all right, title and interest of Trustor now owned or hereafter acquired in and to any land lying within the right-of-way of any street, open or proposed, adjoining such real property, and any and all sidewalks, alleys and strips and gores of land adjacent to or used in connection with such property; the reversion and reversions, remainder and remainders, rents issues and profits of such property, and all buildings, fixtures and other improvements now or hereafter located on or attached to or used in connection therewith and any estate, right, title or interest Trustor may hereafter acquire therein, including but not limited to, all of Trustor's right, title and interest in and to that lease ("GROUND LEASE") described in Exhibit B attached hereto and incorporated herein by reference. (Said real property, together with said tenements, hereditaments, appurtenances, easements, interests, reversions, remainders, rents, issues, profits, buildings, fixtures, improvements and future interests are hereinafter referred to as the "REAL PROPERTY." Without limiting the generality of the foregoing, there shall be included in the Real Property any adjacent lands included in any enclosures or occupied by buildings partly located on the above-described property. 1.02. There is hereby assigned to Beneficiary the Lessor's interest in any and all leases of the Real Property and/or Personal Property, as hereinafter defined, or any portion thereof, now or hereafter owned or entered into by Trustor or any other party claiming by, through or under Trustor, together with all rents, issues and profits arising therefrom or in connection with the Property, as hereinafter defined, or any portion thereof and all benefits and advantages to be derived from said leases, together with all rights against guarantors, if any, of the lessees' obligations under said leases. Trustor does hereby empower Beneficiary, its agents and attorneys, to collect, sue for, settle, compromise and give acquittance for all such rents, issues and profits. (All of said leases and any and all interest in said leases or any guarantee thereof shall hereinafter be referred to as the "LEASES."). Although it is the intention of the parties that this instrument shall be a present assignment, Beneficiary shall not exercise any of the rights or powers conferred in this Section 1.02 until a default shall occur under this Deed of Trust, but upon the occurrence of any such default Beneficiary shall be entitled to all the above-mentioned rents, issues, profits, rights and privileges and to apply the same its sole and absolute discretion. Nothing herein shall be deemed to impose on Beneficiary any obligation to operate or maintain the Property or to enforce any Lease. 1.03. Trustor grants Beneficiary pursuant to the Nevada Uniform Commercial Code, a present and continuing security interest in and to all of the goods, equipment, fixtures, building materials, books and records of Trustor now or which may hereafter be located on or used in connection with the Real Property, together with all contract rights, plans, specifications and other similar documents rights under any declaration or plan, deposits, rights to trademarks and names of trustor and goodwill associated therewith, general intangibles, accounts, investment property, deposit accounts, chattel paper documents, letter of credit rights and instruments with respect to said Real Property and policies of insurance arising out of or in connection with the Real Property or the herein described property of any fire and/or builders risk insurance policy or any other policy insuring the Real Property or the herein described property against any other perils, and all awards made in eminent domain proceedings, or purchase in lieu thereof, with respect to the Real Property or the herein described property, together with all additions to, substitutions for, proceeds of, changes in or replacements of the whole or any part of said personal property and this instrument shall constitute a security agreement with respect thereto. (All of the foregoing are herein referred to as "PERSONAL PROPERTY." The Personal Property, Real Property and Leases are collectively referred to as the "PROPERTY.") 1.04. This Deed of Trust is for the purpose of securing: (a) Performance of each and every term, covenant and condition incorporated by reference or contained herein. (b) Payment of all sums due Beneficiary or either of them under the Metroflag Indemnity as defined and provided in that Assignment, Assumption of Lease Agreement and Landlord's Consent of even date by and between Trustor and Grand consented to by Royal Land Holding, LLC and Nevada Brooks Cook as trustee. (c) Payment of such additional sums as may hereafter be advanced hereunder for the account of Trustor or its assigns by Beneficiary, with interest thereon. (d) Performance of each and every term, covenant and condition of each and every instrument and agreement securing payment of the Note or executed in connection therewith. SECTION 2 Warranties and Covenants of Trustor 2.01. Trustor represents and warrants that Trustor is not a foreign corporation, foreign partnership, foreign trust, or foreign estate (as those terms are defined in the Internal Revenue Code of 1986, as amended, or the regulations thereunder); Trustor's United States employer identification number is [applied for] and Trustor's office address is [see ss.4.03]. Trustor understands that the certification in this clause (d) may be disclosed to the Internal Revenue Service by Beneficiary and that any false statement contained herein could be punished by fine, imprisonment, or both. The person or persons executing this Deed of Trust each declares under penalties of perjury that he had examined this certification and to the best of his knowledge and belief it is true, correct and complete, and further declares that he has authority to sign this certification on behalf of Trustor. 2.02.1. Trustor will pay or cause to be paid, as the case may be, payments and charges required to be paid by Trustor under or pursuant to the provisions of the Ground Lease. 2.02.2. Trustor will diligently perform and observe all of the terms, covenants and conditions of the Ground Lease required to be performed and observed by Trustor to the end that all things shall be done which are necessary to keep unimpaired Trustor's rights under the Ground Lease. 2.02.3. Trustor will promptly advise Beneficiary in writing of the giving of any notice by Landlord under the Ground Lease ("LANDLORD") of any default by Trustor in the performance or observance of any of the terms, covenants or conditions of the Ground Lease on the part of Trustor to be performed or observed and Trustor will deliver to Beneficiary a true copy of each such notice. 2.02.4. Trustor will not release, surrender or terminate the Ground Lease without the prior written consent of Beneficiary nor without similar consent of Beneficiary modify the Ground Lease on any manner whatsoever, whether or not such modification would impair the security of this Deed of Trust. 2.02.5. Trustor shall not consent to any encumbrance of the land now owned by Landlord without the prior written consent of Beneficiary. 2.02.6. Without the written consent of Beneficiary, the estate created by the Ground Lease shall not merge with any other estate in the Property, but any interest in the Property hereinafter acquired by Trustor shall also be encumbered hereby. 2.02.7. Trustor shall enforce with due diligence all of the obligations of landlord under the ground lease to the end that Trustor may enjoy all of the rights and privileges granted to it under the Ground Lease. 2.02.8. Trustor hereby acknowledges that if the Ground Lease shall be terminated prior to the natural expiration of its term due to default by the lessee thereunder and if pursuant to the Ground Lease or otherwise Beneficiary or its designee shall acquire from Landlord a new lease of the Property or any portion thereof, Trustor shall have no right, title or interest in or to such lease or the leasehold estate created hereby. 2.02.9. Nothing contained in this Section 2.02 or elsewhere in this Deed of Trust and no exercise of any rights or remedies by Beneficiary, shall constitute or shall be deemed in any manner or at any time to constitute an assumption by Beneficiary of any obligations under the Ground Lease. 2.02.10. Trustor will, within fifteen (156) days after demand from Beneficiary, request from Landlord and deliver to Beneficiary a certificate that the Ground Lease is unmodified and in full force and effect and the date to which the rentals and other charges payable thereunder have been paid and stating whether to Landlord's knowledge Trustor is in default in the performance of any covenants, agreements, or conditions contained in the General Lease and, if so, specifying each such default. 2.03. Trustor shall complete in a good and workmanlike manner any building or other improvements which may be constructed on the Property and pay when due all claims for labor performed and materials furnished therefor. Trustor shall comply with all laws, rules, ordinances, regulations, covenants, conditions, restrictions, easements and agreements pertaining to the Property or Trustor's use thereof. Trustor shall not commit or permit any waste thereon, nor commit, suffer or permit any act to be done in or upon the Property in violation of the law. 2.04. Trustor will keep and maintain or cause to be kept and maintained the Property in good order, condition and repair. 2.05. Trustor agrees to pay and discharge all costs, fees and expenses in connection with this Deed of Trust, including, but not limited, to Beneficiary's and Trustee's costs and expenses including reasonable attorneys' fees, in any litigation with respect hereto, in connection herewith, any transactions related hereto, the Property or any interest therein and the cost of evidence of title and trustee's fees in connection with sale, whether completed or not, which amounts shall become due upon demand by either Beneficiary or Trustee. 2.06. Trustor immediately upon obtaining knowledge of the institution of any proceedings for the condemnation of the Property, any part thereof, or any interest therein, will notify Beneficiary of the pendency of such proceedings. Beneficiary may, but shall not be required to, participate in any such proceedings and Trustor from time to time will deliver to Beneficiary all instruments required by it to permit such participation. Trustor shall pay all of Beneficiary's costs and expenses, including, but not limited to, attorneys' fees, incurred in any such proceedings. 2.07. Trustor shall pay or cause to be paid when due, before delinquency, all taxes, assessments, levies, utility fees and all other fees and charges of every kind and nature, whether of a like or different nature, imposed upon or assessed against or which may become a lien on the Property, or any part thereof, or arising from, by reason of or in connection therewith, the use thereof or this Deed of Trust unless contested in good faith with reasonable security provided to Beneficiary. In addition, Trustor shall file all required tax forms with the appropriate governmental authorities on or before the day they become due. Trustor will, within thirty (30) days after the due date therfor, deliver to Beneficiary receipts evidencing payment of taxes, assessments, levies, fees and charges as required in this Section 2.07. 2.08. If any action or proceeding shall be instituted to evict Trustor, to recover possession of the Property, or for any other purpose affecting the Ground Lease, the leasehold created thereby the Property, any part thereof, any interest therein, title thereto or this Deed of Trust or should Trustor receive any notice from any governmental agency relating to the structure, use or occupancy of the Property, Trustor will immediately upon service thereof on or by Trustor, deliver to Beneficiary true copies of each notice, petition, summons, complaint, notice of motion, order to show cause and all other process, pleadings and papers, however designated, served in any action or proceeding. Immediately upon becoming aware of any development or other information which may materially and adversely affect the property, business prospects, profits or condition (financial or otherwise) of Trustor or the Property or other ability of Trustor to perform the obligations secured hereby Trustor shall notify Beneficiary of the nature of such development or information and such anticipated effect. 2.09. Trustor promises and agrees that if during the existence of this Deed of Trust there be commenced or pending any suit, action, arbitration, or other proceeding affecting the Ground Lease, the Leasehold created thereby or the Property, any part thereof, or in relating thereto, the title thereto or this Deed of Trust, or if any adverse claim for or against any of the foregoing, be made or asserted, it will appear in and defend any such matter and will pay all costs and damages arising because of such proceeding. Beneficiary may elect to appear in any such action or proceeding. If Beneficiary elects to appear in any such action or proceeding Beneficiary shall have the right to retain counsel of its choice. Trustor shall be solely responsible for any and all expenses and costs, including but not limited to, the reasonable fees of counsel retained by Beneficiary, which are incurred pursuant to this section. Unless a default occurs Trustor and Beneficiary shall be represented by joint counsel if no conflict of interest exists. 2.10. Trustor will not permit or suffer the filing of any mechanics', materialman's, or other liens against the Property, any part thereof, any interest therein, or the revenue, rents, issues, income and profits arising therefrom. If any lien shall be filed against the Property, any part thereof, or any interest therein, Trustor agrees to commence a proceeding under NRS Chapter 108 to discharge the same of record within ten (10) days after the same shall have been filed or provide a bond or other reasonable security to protect Beneficiary's interests. 2.11. Trustor shall take any and all such action as may be necessary to prevent any third parties from acquiring any prescriptive easement upon, over, or across any part of the Property, or from acquiring any rights whatsoever to or against the Property by virtue of adverse possession. 2.12. The lien of this Deed of Trust is and shall be subordinate to the lien of any deed of trust now or hereafter granted in good faith by Trustor to an independent third party. The subordination provided in this Section is automatic and Beneficiary shall not be required to execute any further instrument or agreement to effectuate the same. 2.13. Trustor shall execute, acknowledge and deliver to Beneficiary, and, if applicable, cause to be executed, recorded and or filed at Trustor's cost and expense, any and all such mortgages, assignments, transfers, assurances, control agreements, financing statements and other instruments and documents and so such acts as Beneficiary shall from time to time reasonably require for the better perfecting, assuring, conveying, assigning, transferring and confirming unto Beneficiary the property and rights herein conveyed or assigned or intended now or hereafter so to be. Trustor hereby authorizes Beneficiary to file any and all financing statements and amendments thereto in such form and in such locations as Beneficiary deems necessary or appropriate in connection herewith. The parties agree this Deed of Trust shall constitute a security agreement under the Uniform Commercial Code and that a carbon, photographic or other reproduction of this Deed of Trust or of a financing statement shall be sufficient as a financing statement. Trustor represents and warrants that (a) its chief executive office is in Las Vegas, Nevada (b) Trustor is a limited liability company duly organized and currently existing in good standing under the laws of the State of Nevada. Trustor has not within the five (5) year period prior to the date of this Deed of Trust changed its name, chief executive office or state of organization nor will Trustor do so without notifying Beneficiary at least sixty (60) days in advance. 2.14. Trustor will protect, indemnify, save harmless and defend Beneficiary and Trustee from and against any and all liability, loss, costs, charges, penalties, obligations, expenses, attorneys' fees, litigation, judgments, damages, claims and demands imposed upon or incurred by or asserted against Beneficiary and/or Trustee by reason of (a) ownership by Trustee or Beneficiary of its interest in the Property pursuant to this Deed of Trust, (b) any accident or injury to or death of persons or loss of or damage to or loss of the use of property occurring on or about the Property or any part thereof or the adjoining sidewalks, curbs, vaults and vault spaces, if any, streets, alleys or ways, (c) any non-use or condition of the Property or any part thereof or of the adjoining sidewalks, curbs, vaults and vault spaces, if any, streets alleys or ways, (d) any failure on the part of Trustor to perform or comply with any of the terms of this Deed of Trust or any instrument or agreement secured hereby, (e) performance of any labor or services or the furnishing of any materials or other property in respect of the Property or any part thereof made or suffered to be made by or on behalf of Trustor, (f) any negligence or tortious act on the part of Trustor or any of its respective agents, contractors, lessees, licensees or invitees or (g) any work in connection with any alterations, changes, new construction or demolition of the Property, whether or not permitted hereunder. All amounts payable to Beneficiary or Trustee, as the case may be, under this Section 2.14 shall be payable on demand and shall be deemed indebtedness by this Deed of Trust. 2.15. All obligations of Trustor to any of its affiliates, including, but not limited to, any of its shareholders, partners or members, are hereby subordinated to the obligations secured by this Deed of Trust and none of such obligations shall be paid while any obligation secured hereby remains unsatisfied. SECTION 3. Trustee's and Beneficiary's Rights 3.01. The waiver or release by Beneficiary or Trustee of any default or of any of the provisions, covenants and conditions hereof on the part of Trustor to be kept and performed shall not be a waiver or release of any preceding or subsequent breach of the same or any other provision, covenant or condition contained herein. The subsequent acceptance of any sum in payment of any indebtedness secured hereby or any other payment hereunder by Trustor to Beneficiary or Trustee shall not be construed to be a waiver or release of any proceeding breached by Trustor of any provision, covenant or condition of this Deed of Trust other than the failure of Trustor to pay the particular sum so accepted, regardless of Beneficiary's or Trustee's knowledge of such preceding breach at the time of acceptance of such payment. No payment by Trustor or receipt by Beneficiary of a lesser amount than the amount herein provided shall be deemed to be other than on account of the earliest sums due and payable hereunder, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Beneficiary may accept any check or payment without prejudice to Beneficiary's right to recover the balance of such sum or pursue any other remedy provided in this Deed of Trust. The consent by Beneficiary or Trustee to any matter or event requiring such consent shall not constitute a waiver of the necessity for such consent to any subsequent matter or event. 3.02. Beneficiary may, at any time, by instrument in writing, appoint a successor or successors to the trustee named herein or acting hereunder, which instrument, executed and acknowledged by Beneficiary, and recorded in the Office of the County Recorder, Clark County, Nevada, shall be conclusive proof of the proper substitution of such successor trustee, who shall have all the estate, powers, duties and trusts in the premises vested in or conferred on the original trustee. If there be more than one trustee, either may act alone and execute these trusts upon the request of Beneficiary and his acts shall be deemed to be the acts of all trustees, and the recital in any conveyance executed by such sole trustee of such requests shall be conclusive evidence thereof and of the authority of such sole trustee to act. 3.03. Without affecting the liability of Trustor or any other Person, except any Person expressly released in writing, for payment of any indebtedness secured hereby or for performance of any of the obligations or any of the terms, covenants and conditions hereof, and without affecting the rights of Trustee and Beneficiary with respect to any security and not expressly released in writing at any time and from time to time, without notice of consent other than consent of Beneficiary. Trustee and Beneficiary may: (a) Release any Person liable for payment of all or any part of the indebtedness or for the performance of any obligation. (b) Make any agreement extending the time or otherwise altering the terms of payment of all or any part of said indebtedness or modifying or waiving any obligation or subordinating, modifying or otherwise dealing with the lien or charge hereof. (c) Exercise or refrain from exercising or waive any right either of them may have. (d) Accept additional security of any kind. (e) Release or otherwise deal with any property, real or personal, securing the obligations secured hereby. 3.04. If Trustor fails to execute, acknowledge or deliver to Beneficiary any and all mortgages, assignments, transfers, assurances, financing statements, maps and other instruments or documents required to be executed, acknowledged or delivered hereunder, within fifteen (15) days after Beneficiary's demand or such lesser period as may be provided elsewhere herein, then Trustor hereby appoints Beneficiary as Trustor's true and lawful attorney-in-fact to act in Trustor's name, place and stead to execute, acknowledge and deliver the same. 3.05. Any default in the performance of any term, covenant or condition contained herein or in any instrument or obligation secured hereby shall be a default hereunder. In addition, Trustor shall be in default hereunder if (a) Trustor shall abandon the Property, or any part thereof; (b) there is commenced any case in bankruptcy against Trustor or if an order for relief is entered against Trustor, or there is appointed a receiver or trustee to take possession of any of the assets of Trustor or of the Property or Trustor applies for or consents to such appointment, or there is a general assignment by Trustor for the benefit of creditors, or any action is taken by or against Trustor under any state or federal insolvency or bankruptcy act, or any similar law now or hereafter in effect, including, without limitation, the filing of any petition for or in reorganization, or should the Property, or any part thereof be taken or seized under levy of execution or attachment, or Trustor admits in writing its inability to pay its debts as they mature (c) there is (i) executed or verified by Trustor, or any receiver of Trustor, or any attorney or agent of Trustor, or of such receiver, a petition in bankruptcy with respect to Trustor, irrespective of whether such petition is filed, or (ii) executed or verified by any holder of a claim against Trustor, or an indenture trustee of such a holder, or any attorney or agent of such holder or indenture trustee, any petition in bankruptcy against Trustor, irrespective of whether such petition is filed; (d) the board of directors or managers of any corporate or limited liability company Trustor votes to seek any kind of relief under any bankruptcy, insolvency or similar law; (e) there is passed any law which renders payment by Trustor of any or all taxes levied upon this Deed of Trust or the Property or performance of any other term, covenant or condition hereof, or any obligation secured hereby, unlawful, usurious, inoperative, void or voidable, or which prohibits Beneficiary from exercising any of its rights hereunder or under any other instrument or agreement to which Trustor is a party or by which it is bound; (f) any representation, warranty, statement, certificate, schedule or report made by or on behalf of Trustor herein or in connection herewith is incorrect, false, or misleading in any material respect; (g) Trustor should dissolve, liquidate or terminate; (h) Trustor defaults under any obligation to or agreement with Beneficiary; (i) there occurs any event which results in the acceleration of the maturity of the indebtedness of Trustor to others under any indenture, agreement or undertaking; or (j) a default occurs under any obligation of Trustor's affiliate Metroflag Polo, LLC to Beneficiary and the holder of such obligation elects to accelerate the same. If Trustor consists of more than one Person, the occurrence of any of the foregoing events with respect to any one or more of such Persons shall also constitute a default hereunder. Similarly, if Trustor is a partnership or joint venture, the occurrence of any of the events enumerated above with regard to any general partner or joint venturer shall constitute a default hereunder. Trustor shall give Beneficiary prompt notice of the occurrence of any default hereunder. 3.06. The collection of rents and the application thereof by Beneficiary or any receiver obtained by Beneficiary shall not cure or waive any default or notice thereof, or invalidate any act of Beneficiary pursuant thereto. In the exercise of the powers herein granted Beneficiary, Beneficiary shall not be deemed to have affirmed any Lease or subordinate the lien hereof thereto not shall any liability be asserted or enforced against Beneficiary, all such liability being hereby expressly waived and released by Trustor. Neither Beneficiary nor any receiver shall be obligated to perform or discharge any obligation, duty or liability under the Ground Lease, any Lease or under or by reason of the assignment contained in this Deed of Trust and Trustor shall and does hereby agree to protect, indemnify, save harmless and defend Beneficiary and such receiver from and against any and all liability, loss, costs, charges, penalties, obligations, expenses, attorneys' fees, litigation, judgments, damages, claims and demands which they may or might incur by reason of, arising from, or in connection with the Ground Lease, or the Leases, any alleged affirmative of or subordination to the Leases, or any action taken by Beneficiary or such receiver pursuant to any provision of this Deed of Trust. Without limiting the generality of the foregoing, no security deposited by the lessee with the lessor under the terms of any Lease hereby assigned has been transferred to Beneficiary, and Beneficiary assumes no liability for any security so deposited. 3.07. In the event of any default hereunder or in the performance of any of the obligations secured hereby, Beneficiary may exercise any and all of its rights provided hereunder or by law. Without limiting the generality of the foregoing, any Personal Property may, at the sole and absolute option of Beneficiary, (i) be sold hereunder, (ii) be sold pursuant to the Uniform Commercial Code of the State of Nevada, or (iii) be dealt with by Beneficiary in any other manner provided by statute, law or equity. Without limiting the foregoing, Beneficiary may require Trustor to assemble the Personal Property and make it available to Beneficiary at a place to be designated by Beneficiary. In the event of a default, Beneficiary shall be the attorney-in-fact of Trustor with respect to any and all matters pertaining to the Property with full power and authority to give instructions with respect to the collection and remittance of payments, to endorse checks, to enforce the rights and remedies of Trustor, and to execute on behalf of Trustor and in Trustor's name any instruction, agreement or other writing required therefor. This power shall be irrevocable and deemed to be a power coupled with an interest. Beneficiary may, in its sole discretion, appoint Trustee as the agent of Beneficiary for the purpose of disposition of the Personal Property in accordance with the Uniform Commercial Code. Trustor acknowledges and agrees that a disposition of the Personal Property in accordance with Beneficiary's rights and remedies in respect to real property as hereinabove provided is a commercially reasonable disposition thereof. Trustor acknowledges and agrees that the fact that the price obtained at a private sale may be less than the price which might have been obtained at a public sale does not render a private sale unreasonable even if Beneficiary accepts the first offer received and does not offer the subject property to more than one offeree. 3.08. In the event of any default hereunder or in the performance of the obligations secured hereby, Beneficiary may, to the full extent permitted by law, in addition to all other rights and remedies, forthwith after any such default enter upon and take possession of the Property, complete any buildings or other improvements under construction, construct new improvements and make modifications to and/or demolish any of the foregoing. In connection therewith Beneficiary shall have the power to file any and all notices and obtain any and all permits and licenses which Beneficiary, in its sole and absolute discretion, deems necessary or appropriate, including, but not limited to, the filing of notices of complete and the obtaining of certificates of occupancy. Beneficiary shall also have the right to receive all of the rents, issues and profits of the Property, overdue, due or to become due, and to apply the same, after payment of all necessary charges and expenses, including attorneys' fees, on account of the indebtedness secured hereby. Beneficiary may do any and all of the foregoing in its own name or in the name of Trustor and Trustor hereby irrevocably appoints Beneficiary as its attorney-in-fact for such purposes. Beneficiary may also, at any time after such default, apply to any court of competent jurisdiction for the appointment of a receiver and Trustor agrees that such appointment shall be made upon a prima facie showing of a claimed default without reference to any offsets or defenses against such default and without regard to whether any portion of the Property is in danger of being lost, removed, injured or destroyed or of waste, whether income from the Property is in danger of being lost or whether the Property is or may become insufficient to discharge the obligations secured by this Deed of Trust. Such receiver shall have all rights and powers provided Beneficiary pursuant to this section or otherwise provided hereunder or by law. Said receiver may borrow monies and issue certificates therefor. Said certificates shall be a lien on the Property, subordinate only to this Deed of Trust and the Leases, provided, however, that should any of said certificates be acquired by Beneficiary the amount thereof shall constitute additional indebtedness secured hereby. Such receiver may lease all or any portion of the Property on such terms and for such a term (which may extend beyond the terms of such receiver's appointment and/or if Beneficiary so consents, sale of the Property hereunder) as such receiver may deem appropriate in its sole and absolute discretion. The entering upon and taking possession of the property pursuant to this section and the collection of the rents, issues and profits therefrom shall not cure or waive any default or notice of default hereunder or invalidate any act of Beneficiary pursuant thereto. 3.09. Should default me made by Trustor in payment or performance of any indebtedness or other obligation of agreement secured hereby and/or in performance of any agreement herein or should Trustor otherwise be in default hereunder. Beneficiary may, subject to NRS 107.080 declare all sums secured hereby immediately due by delivery to Trustee of a written notice of breach and election to sell (which notice Trustee shall cause to be recorded and mailed as required by law) and shall surrender to Trustee this Deed of Trust. 3.10. After three (3) months shall have elapsed following recordation of any such notice of breach, Trustee shall sell the property subject hereto at such time and at such time and at such place in the State of Nevada as Trustee, in its sole discretion, shall deem best to accomplish the objects of these trusts, having first given notice of such sale as then required by law. In the conduct of any such sale Trustee may act itself or through any auctioneer, agent or attorney. The place of sale may be either in the county in which the property to be sold, or any part hereof, is situated, or at an office in the Trustee located in the State of Nevada. (a) Upon the request of Beneficiary or if required by law Trustee shall postpone Sale of all or any portion of said property or interest therein by public announcement at the time fixed by said notice of sale, and shall thereafter postpone said sale from time to time by public announcement at the time previously appointed. (b) At the time of sale so fixed, Trustee shall sell the property so advertised or any part thereof or interest therein either as a whole or in separate parcels, as Beneficiary may determine in its sole and absolute discretion, to the highest bidder for cash in lawful money of the United States, payable at time of sale, and shall deliver to such purchaser a deed or deeds or other appropriate instruments conveying the property so sold, but without covenant or warranty, express implied. Beneficiary and Trustee may bid and purchase at such sale. To the extent of the indebtedness secured hereby. Beneficiary need not bid for cast at any sale of all or any portion of the Property pursuant hereto, but the amount of any successful bid by Beneficiary shall be applied in reduction of said indebtedness. Trustor hereby agrees, if it is then still in possession, to surrender, immediately and without demand, possession of said property to any purchaser. 3.11. Trustee shall apply the proceeds of any such sale to payment of expenses of sale and all charges and expenses of Trustee and of these trusts, including cost of evidence of title and Trustee's fee in connection with sale, all sums expended under the terms hereof, not then repaid, with accrued interest at the rate of ten percent (10%) per annum ("AGREED RATE"); all other sums then secured hereby and the remainder, if any, to the Person or Persons legally entitled thereto. 3.12. Beneficiary, from time to time before Trustee's sale, may rescind any notice of breach and election to sell by executing, delivering and causing Trustee to record a written notice of such rescission. The exercise by Beneficiary of such right of rescission shall not constitute a waiver of any breach or default then existing or subsequently occurring, or impair the right of Beneficiary to execute and deliver to Trustee, as above provided, other notices of breach and election to sell, nor otherwise affect any term, covenant or condition hereof or under any obligation secured hereby or any of the rights, obligations or remedies of the parties thereunder. 3.13. Each of Beneficiary shall be entitled to separately enforce this Deed of Trust and neither of Beneficiary shall be entitled to waive of any right or remedy of the other hereunder. SECTION 4. Miscellaneous 4.01. Upon receipt of written request from Beneficiary reciting that all sums secured hereby have been paid and upon surrender of this Deed of Trust to Trustee for cancellation and upon payment of its fees. Trustee shall reconvey without warranty the property then held hereunder. The recitals in such reconveyance of any matters of fact shall be conclusive proof of the truth thereof. The grantee in such reconveyance may be described in general terms as "the person or persons legally entitled thereto." 4.02. Trustor hereby expressly waives and releases all rights to direct the order in which any of the Property or any interest therein shall be sold in the event of any sale or sales pursuant hereto and to have any of the Property and/or any other property now or hereafter constitute security for any of the indebtedness secured hereby or any interest therein marshaled upon any sale under this Deed of Trust or of any other security for any of said indebtedness. 4.03. Any and all notices and demands to Trustor or to Beneficiary, required or desired to be given hereunder shall be in writing and shall be given by deposit in the United States mail, certified or registered, postage prepaid, return receipt requested or if made by Federal Express or other similar delivery service keeping records of deliveries and attempted deliveries or made by telecopy. Service by United States Mail or by Federal Express or other similar delivery service shall be conclusively deemed made on the first business day delivery is attempted or upon receipt wither is sooner provided, however, that service of any notice of breach or notice of sale as required by law will, if mailed, be effective on the date of mailing. Facsimile transmissions received during business hours during a business day shall be deemed received on such business day. Facsimile transmissions received at any other time shall be deemed received on the next business day. Any notice on demand to Grand shall be addressed to Grand at 130 Cheshire Lane, Minnetonka, Minnesota 55305, attention Chief Financial Officer, Telecopy No. (952) 449-7003 with a copy to Maslon Edelman Borman & Brand, LLP, 3300 Wells Fargo Center, 90 South Seventh Street, Minneapolis, Minnesota 55402, Attention Neil Sell, Esq., Telecopy (612) 642-8337. Any notice or demand to Park shall be addressed to Park at __________________________________________________________ Any notice or demand to Trustor shall be addressed to Trustor at Metroflag BP, LLC, c/o Flag Luxury Properties, LLC, 1370 Avenue of the Americas, 29th Floor, New York, New York 10019, Attention Paul C. Kanavos, Telecopy No.: (___) _____-________ with a copy to Greenberg Traurig, P.A., 1221 Brickell Avenue, Miami, Florida 33131, Attention Juan P. Loumiet, Esq., Telecopy No. (___) ___-____; and Gordon & Silver, Ltd, 3960 Howard Hughes Parkway, 9th Floor, Las Vegas, Nevada 89109, Attention Steve Yoken, Esq., Telecopy No.: (702) 369-2666. Any party hereto may change its address for the purpose of receiving notices or demands as herein provided by a written notice given in the manner aforesaid to the other party hereto, which notice of change of address shall not become effective, however, until the actual receipt thereof by the other party. Whenever any law requires Beneficiary to give reasonable notice of any act, election or event, or proposed act, election, or event said requirement shall be deemed complied with if Beneficiary gives Trustor ten (10) days written notice as herein provided. Information concerning the security interest may be obtained from Beneficiary at the above address. 4.04. This Deed of Trust applies to inures to the benefit of and binds all parties hereto, their heirs, legatees, devisees, administrators, executors, successors and assigns. 4.05. Trustee accepts these trusts when this Deed of Trust, duly executed and acknowledged, is made a public record as provided by law. 4.06. Where any provision in this Deed of Trust refers to action to be taken by Trustor or which Trustor is prohibited from taking such provision shall be applicable whether such action is taken directly or indirectly by Trustor. 4.07. If any term, provision, covenant or condition of this Deed of Trust or any application thereof, should be held by a court of competent jurisdiction to be invalid, void, or unenforceable, all provisions, covenants and conditions of this Deed of Trust and all applications thereof not held invalid, void or unenforceable shall continue in full force and effect and shall in no way be affected, impaired or invalidated thereby. If the lien of this Deed of Trust is invalid or unenforceable as to any part of the Property or if the lien is invalid or unenforceable as to any part of the indebtedness secured hereby, the unsecured or partially unsecured portion of such indebtedness shall be completely paid prior to the payment of the remaining and secured or partially secured portion of such indebtedness and all payments made on such indebtedness whether voluntary or under foreclosure or other enforcement action or procedure, shall be considered to have been first paid on and applied to the full payment of that portion of such indebtedness which is not secured or fully secured by the lien of this Deed of Trust. 4.08. In the event that Trustor shall consist of more than one Person then and in such event all of such Persons shall be jointly and severally liable hereunder. 4.09. The laws of the State of Nevada shall govern the validity, construction, performance and effect of this Deed of Trust. 4.10. This Deed of Trust shall be construed in accordance with its intent and without regard to any presumption or other rule requiring construction against the party causing the same to be drafted. 4.11. The various rights, options, elections and remedies of Beneficiary and Trustee hereunder shall be cumulative and no one of them shall be construed as exclusive of any other, or of any right, option, election, or remedy provided in any agreement or by law. 4.12. Time is of the essence of this Deed of Trust and all of the terms, provisions, covenants and conditions hereof. 4.13. Whenever any provision of this Deed of Trust requires Beneficiary's consent or approval, unless otherwise specifically provided, the same may be granted or withheld by Beneficiary in its sole and absolute discretion. 4.14. EACH OF TRUSTOR AND BENEFICIARY BY ITS ACCEPTANCE OF HIS DEED OF TRUST IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM WHETHER BASED ON CONTRACTOR OR OTHERWISE ARISING OUT OF OR RELATING TO THIS DEED OF TRUST OR ANY INSTRUMENT OR AGREEMENT SECURED HEREBY OR RELATED THERETO OR THE ACTIONS OF TRUSTOR OR BENEFICIARY IN THE NEGOTIATION ADMINISTRATION PERFORMANCE OR ENFORCEMENT THEREOF. 4.15. In this Deed of Trust, whenever the context so requires any gender includes the others, and the singular number includes the plural and vice-versa and the term Trustor shall mean the original signator hereof, the successors and assigns thereof and any future owners of any interest in the Property or any portion thereof now held or hereafter acquired by the signator hereof. In the event the ownership of any or all portion of such property becomes vested in a Person other than the signator hereof, Beneficiary may, without notice to such signator, deal with such successor or successors with reference to this Deed of Trust and to the indebtedness hereby secured in the same manner as with the signator, without in any way vitiating or discharging such signator's liability hereunder or upon the indebtedness hereby secured. In this Deed of Trust , the use of words such as "including" or "such as" shall not be deemed to limit the generality of the term or clause to which they have reference, whether or not non-limiting language (such as "without limitation," or "but not limited to," or words of similar import) is used with reference thereto, but rather shall be deemed to refer to all other items or matters that could reasonably fall within the broadest possible scope of such general statement term or matter. The captions appearing at the commencement of the sections hereof are descriptive only and for convenience in reference to this Deed of Trust and in no way whatsoever define, limit or describe the scope or intent of this Deed of Trust, nor in any way affect this Deed of Trust. As used in this Deed of Trust the term "Person" means any individual, partnership, limited partnership, corporation, limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity and any government and any political subdivision and agency thereof. 4.16. Where not inconsistent with the above, the following covenants, Nos. 1, 2 (full replacement value); 3, 4 (Agreed Rate); 5, 6, 7 (a reasonable percentage); 8 and 9 of NRS 107.030 are hereby adopted and made a part of this Deed of Trust. IN WITNESS WHEREOF, Trustor has executed this Deed of Trust the day and year first above written. Metroflag Polo, LLC a Nevada limited liability company By Its Member: Metro One, LLC a Nevada limited liability company By: /s/ Brett Torino --------------------------------- Brett Torino, Manager STATE OF NEVADA ) ) ss. COUNTY OF CLARK ) This instrument was acknowledged before me on December 28, 2001 by Brett Torino as Manager of Metro One LLC, a Nevada limited liability company. /s/ Linda Ann Thomas ----------------------------------- NOTARY PUBLIC My Commission Expires 11/26/2002 ------------- EX-10.63 10 c68243ex10-63.txt LEASEHOLD DEED OF TRUST EXHIBIT 10.63 Assessor's Parcel No. 162-21-301-002 Re-Recording to attached Exhibit "B: 162-21-301-003 162-21-301-004 162-21-301-007 162-21-301-008 Send tax bills to: Metroplex, LLC 6430 Schiello Las Vegas, NV 89119 Attn: Steve Macie When recorded mail to: Lionel Sawyer & Collins 300 S. 4th Street, Ste 1700 Las Vegas, NV 89101 Attn: Jeff Zucker LEASEHOLD DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS AND SECURITY AGREEMENT Metroflag BP, LLC Trustor Lawyers Title of Nevada, Inc. Trustee and Grand Casinos Nevada I, Inc. Beneficiary Dated: December 28, 2001 LEASEHOLD DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS AND SECURITY AGREEMENT THIS LEASEHOLD DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS AND SECURITY AGREEMENT ("DEED OF TRUST"), dated as of December 28, 2001, between Metroflag BP, LLC, a Nevada limited liability company ("TRUSTOR"), Lawyers Title of Nevada, Inc., a Nevada corporation ("TRUSTEE") and Grand Casinos Nevada I, Inc., a Minnesota corporation ("BENEFICIARY"), WITNESSETH: Trustor hereby covenants and agrees as follows: SECTION 1. Grant of Security Interests 1.01. Trustor irrevocably grants, bargains, sells, transfers and assigns to Trustee in trust, with power of sale, all right, title and interest, now held or at any time hereinafter acquired by Trustor, in and to that improved real property in Clark County, Nevada, further described in Exhibit A attached hereto and incorporated herein by reference, together with all and singular the tenements, hereditaments and appurtenances now or hereafter belonging or in any way appertaining thereto; any easements benefitting such property; all right, title and interest of Trustor now owned or hereafter acquired in and to any land lying within the right-of-way of any street, open or proposed, adjoining such real property, and any and all sidewalks, alleys and strips and gores of land adjacent to or used in connection with such property; the reversion and reversions, remainder and remainders, rents issues and profits of such property, and all buildings, fixtures and other improvements now or hereafter located on or attached to or used in connection therewith and any estate, right, title or interest Trustor may hereafter acquire therein, including but not limited to, all of Trustor's right, title and interest in and to that lease ("GROUND LEASE") described in Exhibit B attached hereto and incorporated herein by reference. (Said real property, together with said tenements, hereditaments, appurtenances, easements, interests, reversions, remainders, rents, issues, profits, buildings, fixtures, improvements and future interests are hereinafter referred to as the "REAL PROPERTY.") Without limiting the generality of the foregoing, there shall be included in the Real Property any adjacent lands included in any enclosures or occupied by buildings partly located on the above-described property. 1.02. 1.02.1. There is hereby assigned to Beneficiary the Lessor's interest in any and all leases of the Real Property and/or Personal Property, as hereinafter defined, or any portion thereof, now or hereafter owned or entered into by Trustor or any other party claiming by, through or under Trustor, together with all rents, issues and profits arising therefrom or in connection with the Property, as hereinafter defined, or any portion thereof and all benefits and advantages to be derived from said leases, together with all rights against guarantors, if any, of the lessees' obligations under said leases. Trustor does hereby empower Beneficiary, its agents and attorneys, to collect, sue for, settle, compromise and give acquittance for all such rents, issues and profits. (All of said leases and any and all interest in said leases or any guarantee thereof shall hereinafter be referred to as the "LEASES.") 1.02.2. The lessees under the Leases may and shall rely upon the receipt of any notice from Beneficiary that Trustor is in default hereunder and thereafter Beneficiary, or Beneficiary's designee, shall be paid all rents due under the Leases until the lessees thereunder are notified otherwise in writing by Beneficiary or until directed otherwise by a final judgment of a court of competent jurisdiction. Trustor hereby covenants and agrees to save and hold harmless said lessees from any and all liability, loss, costs, charges, penalties, obligations, expenses, attorneys' fees, litigation, judgments, damages, claims and demands of any kind whatsoever arising from, by reason of, or in connection with such reliance. All amounts collected hereunder, after deducting the expenses of operating the Property and after deducting the expenses of collection and all other expenses incurred hereunder, including an administrative charge of ten percent (10%) of the sums collected and attorneys' fees, shall be applied in such manner as Beneficiary may elect in its sole and absolute discretion. Although it is the intention of the parties that this instrument shall be a present assignment, Beneficiary shall not exercise any of the rights or powers conferred in this Section 1.02 until a default shall occur under this Deed of Trust, but upon the occurrence of any such default Beneficiary shall be entitled to all the above-mentioned rents, issues, profits, rights and privileges, and to apply the same in its sole and absolute discretion. Trustor shall use reasonable efforts to cause to be included as terms in all Leases hereafter executed or renewed the provisions of the first and second sentences of this section and Section 2.22 hereof, and to cause such leases to provide that the refusal of any lessee under any such Lease to pay all rents due under the Leases to Beneficiary as aforesaid to be a breach of such Lease by the lessee thereof. Nothing herein shall be deemed to impose on Beneficiary any obligation to operate or maintain the Property or to enforce any Lease. Trustor shall deliver to the lessees under all presently existing Leases, upon demand therefore by Beneficiary, written notice of the provisions of the first two sentences of this Section 1.02.2. Notwithstanding the conveyance or transfer of title to any or all of the Property to any lessee under any of the Leases, the lessee's leasehold estate under such Lease shall not merge into the fee estate and the lessee shall remain obligated under such lease as assigned by this Deed of Trust. 1.03. Trustor grants Beneficiary, pursuant to the Nevada Uniform Commercial Code, a present and continuing security interest in and to all of the goods, equipment, fixtures, building materials, books and records of Trustor, now or which may hereafter be located on or used in connection with the Real Property, together with all contract rights, plans, specifications and other similar documents, rights under any declaration or plan, deposits, rights to trademarks and names of Trustor and goodwill associated therewith, general intangibles, accounts, investment property, deposit accounts, chattel paper, documents, letter of credit rights and instruments with respect to said Real Property and policies of insurance arising out of or in connection with the Real Property or the herein described property, all proceeds of any fire and/or builders risk insurance policy or any other policy insuring the Real Property or the herein described property against any other perils, and all awards made in eminent domain proceedings, or purchase in lieu thereof, with respect to the Real Property or the herein described property, together with all additions to, substitutions for, proceeds of, changes in or replacements of the whole or any part of said personal property and this instrument shall constitute a security agreement with respect thereto. (All of the foregoing are herein referred to as "PERSONAL PROPERTY." The Personal Property, Real Property and Leases are collectively referred to as the "PROPERTY.") 1.04. This Deed of Trust is for the purpose of securing: (a) Performance of each and every term, covenant and condition incorporated by reference or contained herein. (b) Payment of the indebtedness evidenced by one promissory note (the "PURCHASE NOTE") of even date herewith, and any extension, modification or renewed thereof, in the principal sum of Seven Million Five Hundred Thousand Dollars ($7,500,000) executed by Trustor in favor of Beneficiary or order. (c) Payment of the indebtedness evidenced by that Deficit Note ("DEFICIT NOTE") of even date herewith, and any extension, modification or renewal thereof, in the amount of Three Million Dollars ($3,000,000) executed by Trustor in favor of Beneficiary. (The Purchase Note and the Deficit Note are referred to herein collectively as the "NOTE".) (d) Payment of such additional sums as may hereafter be advanced hereunder for the account of Trustor or its assigns by Beneficiary, with interest thereon. (e) Performance of each and every term, covenant and condition of each and every instrument and agreement securing payment of the Note or executed in connection therewith. SECTION 2. Warranties and Covenants of Trustor 2.01. Trustor represents and warrants that (a) This Deed of Trust is and will remain a valid and enforceable first lien on the lessee's interest in the Ground Lease and all other interests in the Property encumbered hereby, subject only to those exceptions permitted under that Purchase Agreement ("PURCHASE AGREEMENT") by and between Trustor and Beneficiary of even date. (b) Trustor has not performed any act and is not bound by any instrument which would prevent Beneficiary from enforcing this Deed of Trust. (c) The Note, Deed of Trust and all other instruments securing the Note, and all other instruments and agreements in connection therewith or the transactions in connection with which the Note is given are valid and binding obligations of the parties thereto, enforceable in accordance with their terms. (d) Trustor is not a foreign corporation, foreign partnership, foreign trust, or foreign estate (as those terms are defined in the Internal Revenue Code of 1986, as amended, or the regulations thereunder; Trustor's United States employer identification number is [applied for] and Trustor's office address is [see Section 4.03]. Trustor understands that the certification in this clause (d) may be disclosed to the Internal Revenue Service by Beneficiary and that any false statement contained herein could be punished by fine, imprisonment, or both. The person or persons executing this Deed of Trust each declares under penalties of perjury that he had examined this certification and to the best of his knowledge and belief it is true, correct and complete, and further declares that he has authority to sign this certification on behalf of Trustor. 2.02.1. Trustor will pay or cause to be paid, as the case may be, payments and charges required to be paid by Trustor under or pursuant to the provisions of the Ground Lease. Within ten (10) days after the date of each such payment, Trustor shall deliver to Beneficiary reasonable evidence of payment of such rents and impositions and other payments and charges. 2.02.2. Trustor will diligently perform and observe all of the terms, covenants and conditions of the Ground Lease required to be performed and observed by Trustor to the end that all things shall be done which are necessary to keep unimpaired Trustor's rights under the Ground Lease. 2.02.3. Trustor will promptly advise Beneficiary in writing of the giving of any notice by landlord under the Ground Lease ("LANDLORD") of any default by Trustor in the performance or observance of any of the terms, covenants or conditions of the Ground Lease on the part of Trustor to be performed or observed and Trustor will deliver to Beneficiary a true copy of each such notice. 2.02.4. Trustor shall execute and deliver, on request of Beneficiary, such instruments as Beneficiary may deem useful or required to permit Beneficiary to cure any default under the Ground Lease or permit Beneficiary to take such other actions as Beneficiary considers desirable to cure or remedy the matter in default and preserve the interest of Beneficiary in the Ground Lease, the leasehold created thereby and the Property. 2.02.5. Trustor will promptly notify Beneficiary in writing of any default by Landlord in the performance or observation of any of the terms, covenants or conditions on the part of Landlord to be performed or observed. 2.02.6. Trustor will, promptly upon request by Beneficiary, give its unqualified consent in writing to any and all modifications of the Ground Lease which Landlord agrees to make at the request of Beneficiary for the purpose of improving, maintaining or preserving Beneficiary's security in the Ground Lease or the Property. 2.02.7. Whenever, pursuant to the terms of the Ground Lease, Trustor provides Landlord or any other Person any document, notice, request, correspondence or information Trustor shall currently therewith provide a copy of the same to Beneficiary. If such document, notice, request, or information is certified, said certificate shall also run to the benefit of Beneficiary. 2.02.8. Trustor will not release, surrender or terminate the Ground Lease without the prior written consent of Beneficiary nor without similar consent of Beneficiary modify the Ground Lease in any manner whatsoever, whether or not such modification would impair the security of this Deed of Trust. 2.02.9. Trustor shall not consent to any encumbrance of the land now owned by Landlord without the prior written consent of Beneficiary. 2.02.10. Without the written consent of Beneficiary, the estate created by the Ground Lease shall not merge with any other estate in the Property, but any interest in the Property hereinafter acquired by Trustor shall also be encumbered hereby. 2.02.11. Notwithstanding anything to the contrary herein contained with respect to the Ground Lease: (a) The lien of this Deed of Trust attaches to all of Trustor's rights and remedies at any time arising under or pursuant to Subsection 365(h) of Title 11 of the United States Code entitled "Bankruptcy," as now or hereafter in effect (together with any successor statute, the "BANKRUPTCY CODE"), including, without limitation, all of Trustor's rights to remain in possession of the Real Property. (b) Trustor shall not, without Beneficiary's written consent, elect to treat the Ground Lease as terminated under Subsection 365(h)(1) of the Bankruptcy Code. Any such election made without Beneficiary's prior written consent shall be void. If Landlord rejects the Ground Lease under Section 365 of the Bankruptcy Code, Trustor shall remain in possession of the Property. Neither the lien of this Deed of Trust nor Beneficiary's rights with respect to the Ground Lease shall be affected or impaired by Landlord's rejection of the Ground Lease under Section 365 of the Bankruptcy Code. (c) As further security for the obligations secured hereby, Trustor hereby unconditionally assigns, transfers and sets over to Beneficiary all of Trustor's claims and rights to the payment of damages arising from any rejection by Landlord of the Ground Lease under the Bankruptcy Code. Beneficiary shall have the right, but not the obligation, to proceed in its own name or in the name of Trustor in respect of any claim, suit, action or proceeding relating to the rejection of the Ground Lease, including, without limitation, the right to file and prosecute any proof of claim, complaints, motions, applications, notices and other documents in any case in respect of Landlord under the Bankruptcy Code. This assignment constitutes a present, irrevocable and unconditional assignment of the foregoing claims, rights and remedies, and shall continue in effect until this Deed of Trust has been released of record or all of the obligations secured by this Deed of Trust shall have been satisfied and discharged in full. Any amounts received by Beneficiary or Trustor as damages arising out of the rejection of the Ground Lease as aforesaid shall be applied first to all reasonable costs and expenses of Beneficiary and Trustee (including, without limitation, attorneys' fees and costs) incurred in connection with the exercise of any of its rights or remedies under this Section 2.02.11 and then in accordance with the other applicable provisions of this Deed of Trust. (d) If, pursuant to any applicable section of the Bankruptcy Code, Trustor seeks to offset, counterclaim, deduct, and/or assert a defense against the rent or other sums due under the Ground Lease, the amount of any damages caused by the non-observance and/or non-performance of Landlord under the Ground Lease, Trustor shall, prior to such offset, counterclaim, defense and/or deduction notify Beneficiary of its intent to do so, setting forth with specificity the amounts proposed to be offset, counterclaimed, deducted, and/or defended against and for what purposes. Beneficiary shall thereupon have the right, but not the obligation, to object to all or any part of such offset, counterclaim, deduction and/or defense and, in the event of such objection. Trustor shall not affect any such offset, counterclaim and/or deduction. Neither Beneficiary's failure to object to any such offset, counterclaim, deduction and/or defense nor any objection or other communication between Beneficiary and Trustor shall constitute an approval of any such offset, counterclaim, deduction and/or defense by Beneficiary. Trustor expressly agrees to pay, protect, indemnify and save harmless Beneficiary from and against any and all claims, demands, actions, suit, proceedings, damages, losses, liabilities, judgments, costs and expenses of every kind and nature (including reasonable attorneys' fees) arising from or relating to any offset, counterclaim, deduction and/or assertion of a defense by Trustor as herein described. (e) If any action, proceeding, motion and/or notice shall be commenced or filed with respect to Landlord or the Property, or any part thereof, in connection with the Bankruptcy Code, Beneficiary shall have the right, but not the obligation, to the exclusion of Trustor, exercisable upon five (5) days prior written notice, to conduct and control any litigation with counsel of Beneficiary's choice. Beneficiary may proceed in its own name or in the name of Trustor in connection with any such litigation, and Trustor expressly agrees to execute and deliver all and every power, consent, authorization and other documents required by Beneficiary in connection therewith. Trustor shall pay to Beneficiary on demand any and all costs and expenses (including reasonable attorneys' fees) paid or incurred and payable by Beneficiary in connection with such proceedings and the costs and expenses shall be secured by the lien of this Deed of Trust. Trustor also agrees not to commence any action, suit, proceeding and/or case or file any application or make any motion in respect of the Ground Lease in the event of Landlord's bankruptcy without the prior written consent of Beneficiary. (f) Trustor shall promptly after obtaining knowledge thereof notify Beneficiary orally of any filing by or against Landlord of a petition under the Bankruptcy Code. Trustor shall thereafter promptly give written notice of such filing to Beneficiary, setting forth any information available to Trustor as to the date of such filing, the court in which such petition was filed, and the relief sought therein. Trustor shall promptly deliver to Beneficiary, following its receipt thereof, copies of any and all notices, summonses, pleadings, applications and other documents received by Trustor in connection with any such petition and any proceedings relating thereto. (g) If there shall be filed by or against Trustor a petition under the Bankruptcy Code and Trustor, as lessee under the Ground Lease, shall determine to reject the Ground Lease, Trustor shall give Beneficiary not less than ten (10) days prior notice of the date on which Trustor shall apply to the bankruptcy court or other judicial body with appropriate jurisdiction or authority to reject the Ground Lease. Beneficiary shall have the right, but not the obligation, to serve upon Trustor within such ten (10) day period a notice stating that (i) Beneficiary demands that Trustor assume and assign the Ground Lease to Beneficiary pursuant to Section 365 of the Bankruptcy Code and (ii) Beneficiary covenants to cure or provide adequate assurance of prompt cure of all defaults and provide adequate assurance of future performance under the Ground Lease. If Beneficiary serves upon Trustor the notice described in the preceding sentence, Trustor shall not seek to reject the Ground Lease and shall comply with the demand provided for in clause (i) of the preceding sentence within thirty (30) days after the notice shall have been given, subject to the performance by Beneficiary of the covenant provided for in clause (ii) of the preceding sentence. Effective upon the entry of an order for relief in respect of Trustor under Chapter 7 of the Bankruptcy Code Trustor hereby assigns and transfers to Beneficiary a non-exclusive right to apply to the bankruptcy court or other judicial body with appropriate jurisdiction for an order extending the period during which the Ground Lease may be rejected or assumed. (h) All references herein to sections of the Bankruptcy Code shall also constitute references to successors to such sections and similar provisions of any law. 2.02.12. Trustor shall enforce with due diligence all of the obligations of Landlord under the Ground Lease, to the end that Trustor may enjoy all of the rights and privileges granted to it under the Ground Lease. 2.02.13. Trustor hereby acknowledges that if the Ground Lease shall be terminated prior to the natural expiration of its term due to default by the lessee thereunder, and if pursuant to the Ground Lease or otherwise, Beneficiary or its designee shall acquire from Landlord a new lease of the Property or any portion thereof, Trustor shall have no right, title or interest in or to such lease or the leasehold estate created thereby. 2.02.14. Nothing contained in this Section 2.02 or elsewhere in this Deed of Trust, and no exercise of any rights or remedies by Beneficiary, shall constitute, or shall be deemed in any manner or at any time to constitute, an assumption by Beneficiary of any obligations under the Ground Lease. 2.02.15. Trustor will, within fifteen (15) days after demand from Beneficiary, request from Landlord and deliver to Beneficiary a certificate that the Ground Lease is unmodified and in full force and effect and the date to which the rentals and other charges payable thereunder have been paid and stating whether to Landlord's knowledge Trustor is in default in the performance of any covenants, agreements, or conditions contained in the Ground Lease and, if so, specifying each such default. 2.03. Trustor shall complete in a good and workmanlike manner any building or other improvements which may be constructed on the Property and pay when due all claims for labor performed and materials furnished therefor. Trustor shall comply with all laws, rules, ordinances, regulations, covenants, conditions, restrictions, easements and agreements pertaining to the Property or Trustor's use thereof. Trustor shall not commit or permit any waste thereon, nor commit, suffer or permit any act to be done in or upon the Property in violation of law. 2.04. Unless Trustor shall have obtained the written consent of Beneficiary, Trustor shall not by act or omission permit any lands or improvements not subject to the lien of this Deed of Trust to include the Property or any part thereof in fulfillment of any governmental requirement. Similarly, no lands or other improvements not subject to the lien of this Deed of Trust shall be included with the Property in fulfillment of any governmental requirement. Trustor shall not by act or omission impair the integrity of the Property as a single zoning lot separate and apart from all other premises. 2.05. Trustor shall at all times during the term hereof continue to operate a motel on the Real Property. Trustor shall not use the Property for any other purpose. Trustor shall not initiate or acquiesce in any change in any zoning or other land use classification now or hereafter in effect and affecting the Property or any part thereof not shall Trustor otherwise change or attempt to change the use of the Property or any portion thereof without in each case obtaining Beneficiary's prior written consent thereto. 2.06. Trustor will keep and maintain or cause to be kept and maintained the Property in good order, condition and repair. 2.07. No building, structure, fixture or other improvement shall be erected, removed, demolished, or materially changed or altered without the prior written consent of Beneficiary. Trustor will not remove or permit the removal of the Personal Property or any part thereof (including renewals, replacements and other after acquired property) from the Real Property without the prior written permission of Beneficiary, provided that obsolete and worn out articles may be removed concurrently with the replacement or renewal thereof with property of at least equal value and of equal usefulness in the operation of the Property. Trustor will promptly notify Beneficiary of any fire or other casualty causing damage to the Property. Trustor will promptly and in good and workmanlike manner repair and restore any improvement which may be damaged or destroyed. Trustor will promptly replace any lost, stolen, damaged or destroyed Personal Property. 2.08. Trustor agrees to pay and discharge all costs, fees and expenses in connection with this Deed of Trust, including, but not limited, to Beneficiary's and Trustee's costs and expenses, including reasonable attorneys' fees, in any litigation with respect hereto, in connection herewith, any transactions related hereto, the Property or any interest therein and the cost of evidence of title and trustee's fees in connection with sale, whether completed or not, which amounts shall become due upon demand by either Beneficiary or Trustee. 2.09. During the existence of this trust, Trustor agrees to maintain policies of insurance as follows: (a) Insuring the improvements and Personal Property which are now or shall hereafter constitute a portion of the Property against loss or damage by fire, and against such other risks of a similar or dissimilar nature as shall be insurable against under present or future forms of special form property insurance policies available to the owners of property similar to the Property in Clark County, Nevada, including vandalism, malicious mischief and replacement cost endorsements. Such insurance shall in no event be for less than the full replacement cost of said improvements and Personal Property. (b) Rental value and/or business income insurance in an amount of not less than twenty-four (24) times the total of the monthly payments of principal and interest due under the Note and the monthly payments on account of taxes and insurance provided for in Section 2.13 hereof, whether or not such payments are then being collected. (c) Commercial general liability insurance assuring against loss, damage or liability for injury or death to persons and loss and damage to property occurring from any cause whatsoever upon, in or about the Property. Such liability insurance shall be for at least Two Million Dollars ($2,000,000). (d) Workmen's compensation insurance as required by law. (e) Flood insurance in form and substance satisfactory to Beneficiary; provided, however, that such insurance shall not be required during such periods as Trustor is able to provide Beneficiary with evidence, satisfactory to Beneficiary, that the Property is not within an area that has been identified by the Secretary of Housing and Urban Development as having special flood hazards and that such insurance is not required by law. (f) Any insurance required pursuant to any Lease or the Ground Lease. (g) Such other insurance in such amounts and against such other risks as Beneficiary may reasonably require. (h) All insurance provided for herein shall be effected under valid and enforceable policies, in form and substance then customary in Nevada and satisfactory to Beneficiary, issued by insurers of recognized responsibility approved of by Beneficiary. Upon the execution of this Deed of Trust, and thereafter thirty (30) days prior to the expiration dates of expiring policies theretofore furnished hereunder, originals of the policies, together with evidence that the premiums therefore have been paid, shall be delivered to Beneficiary. Without limiting the generality of the foregoing, all such policies shall contain an agreement by the insurers that such policies shall not be canceled or modified without at least thirty (30) days' prior written notice to Beneficiary and such other parties as Beneficiary may designate and shall provide that any loss shall be payable to Beneficiary notwithstanding (i) any act or negligence by Trustor or any lessee or other occupant of the Property which might otherwise result in forfeiture of said insurance, (ii) use of all or any portion of the Property for purposes more hazardous than permitted by such policy, (iii) any sale or other proceeding pursuant hereto or (iv) any change in title to or ownership of the Property or any portion thereof. All insurance with respect to damage or destruction to the Property shall provide that the proceeds thereof shall be payable to Beneficiary pursuant to a noncontributory mortgagee endorsement satisfactory to Beneficiary and all other insurance shall name Trustor and Beneficiary and such other parties as Beneficiary may designate as the insureds thereunder, as their respective interests may appear. All proceeds payable by reason of loss under any insurance policy provided for herein shall be paid to Beneficiary. Upon any default hereunder Beneficiary is hereby authorized, but not required, on behalf of Trustor to adjust or compromise any losses under any insurance policy provided for herein. (i) Trustor shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained or suffer to be taken out separate insurance which would reduce the sums payable pursuant to any policy required hereunder unless Beneficiary is included thereon under it standard mortgagee endorsement acceptable to Beneficiary. Trustor shall immediately notify Beneficiary whenever any such separate insurance is taken out and shall promptly deliver to Beneficiary the policy or policies of such insurance. 2.10. Trustor immediately upon obtaining knowledge of the institution of any proceedings for the condemnation of the Property, any part thereof, or any interest therein, will notify Beneficiary of the pendency of such proceedings. Beneficiary may, but shall not be required to, participate in any such proceedings and Trustor from time to time will deliver to Beneficiary all instruments requested by it to permit such participation. Trustor shall pay all of Beneficiary's costs and expenses, including, but not limited to, reasonable attorneys' fees, incurred in any such proceedings. In the event of such condemnation proceedings, any award or compensation shall be paid to Beneficiary and shall be applied, after payment of all costs and expenses of Beneficiary and/or Trustee incurred in collecting the same, in such manner as Beneficiary elects in its sole and absolute discretion, without regard to whether or not its security hereunder has been impaired, provided that any award for the Land, as defined in the Ground Lease, shall be paid as provided in the Ground Lease. For the purposes hereof, any proceeding to acquire any interest in or affecting the value of the Property, or seeking damages therefore, including, but not limited to, severance or change of grade, whether by court action or purchase in lieu thereof, shall be deemed a proceeding for condemnation and any award for inverse condemnation shall be deemed condemnation proceeds. 2.11. Property insurance and condemnation proceeds remaining after payment of all costs and expenses of Beneficiary and/or Trustee in collecting the same ("NET PROCEEDS"), shall, so long as no default shall have occurred and be continuing hereunder, be paid, on such terms and conditions as Beneficiary may provide, for the restoration and repair of the improvements and/or Personal Property, as the case may be, damaged, destroyed or taken by such casualty or condemnation. The amount of such proceeds used toward payment of the cost of repair or restoration that is released to Trustor shall not be deemed a payment of any indebtedness or obligation secured hereby and shall be disbursed to Trustor under such reasonable disbursement procedures as may be prescribed by Beneficiary to ensure the full, prompt and lien free completion of such restoration, repair or alteration, which shall include, but are not limited to, the following: (a) Prior to commencement of the work, Trustor shall furnish to Beneficiary complete plans and specifications for the work for Beneficiary's prior approval. Said plans and specifications shall bear the signed approval thereof by an architect licensed in the State of Nevada chosen by Trustor and reasonably satisfactory to Beneficiary ("ARCHITECT") and shall be accompanied by the Architect's and contractor's signed estimate of the entire cost of completing the work. (b) Prior to commencement of the work, Trustor shall furnish to Beneficiary certified or photostatic copies of all permits and approvals required by law in connection with the commencement and conduct of the work. (c) Trustor shall furnish to Beneficiary, prior to the commencement of the work, reasonable assurances that the cost of such work will be paid, which may include a surety bond for or guaranty of completion of and payment for the work, which bond or guaranty shall be (i) issued by an institution with a net worth of no less than Two Hundred Fifty Million Dollars ($250,000,000) or another party acceptable to Beneficiary in its sole discretion, (ii) in form satisfactory to Beneficiary, and (iii) in an amount not less than one hundred percent (100%) of the Architect's and contractor's estimate of the entire cost of completing the work, less the amount of Net Proceeds held by Beneficiary. (d) Beneficiary shall not be required to make disbursements more often than at thirty (30) day intervals. (e) Trustor shall make written request for each disbursement at least seven days in advance and shall comply with the following requirements in connection with each disbursement. (i) Trustor shall deliver to Beneficiary, at the time of request for a disbursement, a certificate of the Architect, dated not more than ten (10) days prior to the application for withdrawal of funds, setting forth the following: (A) That the sum then requested to be withdrawn either has been paid by Trustor and/or is justly due to contractors, subcontractors, materialmen, engineers, architects or other Persons (whose names and addresses shall be stated) who have rendered or furnished services or materials for the work and giving a brief description of such services and materials and the principal subdivisions or categories thereof and respective amounts so paid or due to each of said persons in respect thereof and stating the progress of the work up to the date of said certificates; (B) That the sum then requested to be withdrawn, plus all sums previously withdrawn, does not exceed the cost of the work insofar as actually accomplished up to the date of such certificate; (C) That the remainder of the Net Proceeds held by Beneficiary will be sufficient to pay in full the then estimated cost of completion of the work; and (D) That no part of the cost of the services and materials described in the foregoing Section 2.11(e)(i)(A) has been or is being made the basis if the withdrawal of any funds in any previous or then pending application. (ii) Trustor shall execute and deliver to Beneficiary at the time of the request a certificate, dated not more than 10 days prior to the application for withdrawal of funds, stating that, except for the amounts, if any, specified in Section 2.11(e)(i)(A) to be due for services or materials, there is no outstanding indebtedness known which is then due or payable for work, labor, services, or materials in connection with the work which, if unpaid, might become the basis of a vendor's, mechanic's, laborer's or materialman's statutory or other similar lien upon the Property or any part thereof. (iii) Trustor shall deliver to Beneficiary at the time of the request satisfactory evidence that the Property and every part thereof, and all materials and all property described in the certificate furnished pursuant to Section 2.1(e)(i)(A) are free and clear of all mortgages, liens, charges or encumbrances, except this Deed of Trust and liens permitted under Section 2.18 hereof. (f) If the work involves restoration of the exterior of any improvements, then within ten (10) days after the date such exterior is determinable, Trustor shall deliver to Beneficiary a survey of the Property, showing no encroachments by the work. (g) Such proceeds shall be used by Trustor only to pay or to cause to be paid the Persons named in the certificate furnished pursuant to the foregoing Section 2.11(e)(i)(A) the respective amounts stated in said certificate to be due them. (h) If at any time Beneficiary determines in its sole and absolute discretion that the remainder of the Net Proceeds held by Beneficiary is not sufficient to pay in full the unpaid unbonded cost of completion of the work, Trustor shall on demand deposition with Beneficiary cash in an amount equal to the difference between the remainder of the Net Proceeds and the cost of completion of the work. Beneficiary shall not be required to make insurance or condemnation proceeds available for restoration and repair if (w) Trustor is in default hereunder. (x) Beneficiary, in the good faith exercise of its discretion, believes that (A) except in the case of a condemnation subject to the next sentence below, the remainder of the Property in question could not be restored so that the Property as so restored would be of equal utility and value as before such damage, destruction or taking, (B) it would not be feasible to restore the remainder of the Property in question for use comparable to that of the Property prior to such damage, destruction or taking, or (C) such Property, as so restored, would not be in full compliance with all provisions hereof or (y) the contract for such work of restoration and repair does not provide that the same can be completed at least one (1) year prior to the maturity of the Purchase Note or (z) a material portion of the Leases in force immediately prior to the casualty or condemnation or the Ground Lease, shall have been cancelled, or contain any still exercisable right to cancel, due to such damage, destruction or condemnation. All insurance and condemnation proceeds not applied to Beneficiary's or Trustee's cost of collecting the same or to restoration and repair as provided above shall be retained by Beneficiary and applied against the indebtedness secured hereby in such manner as Beneficiary elects in its sole and absolute discretion. Any such application, use or release shall not cure or waive any default or notice of default hereunder or invalidate any act done pursuant to such notice. Trustor shall not be entitled to interest on any Net Proceeds held by Beneficiary pursuant hereto. Beneficiary shall notify Landlord, by notice to the address given in the Ground Lease for such other address of which Landlord notifies Beneficiary pursuant to Section 4.03 of this Deed of Trust given as provided in Section 4.03 of this Deed of Trust, of the failure of Trustor to satisfy the requirements of 2.11(a), (b), (c), (f) or (h) and of the failure of any disbursement request to comply with the requirements of Section 2.11(c). Landlord shall have fifteen (15) days after such notice to cure the failures specified in the notice. 2.12. Trustor shall pay or cause to be paid when due, before delinquency, all taxes, assessments, levies, utility fees and all other fees and charges of every kind and nature, whether of a like or different nature, imposed upon or assessed against or which may become a lien on the Property, or any part thereof, or arising from, by reason of or in connection therewith, the use thereof or this Deed of Trust unless contested in good faith with reasonable security provided to Beneficiary. In addition, Trustor shall file all required tax forms with the appropriate governmental authorities on or before the day they become due. Trustor will, within thirty (30) days after the due date therfor, deliver to Beneficiary receipts evidencing payment of taxes, assessments, levies, fees and charges as required in this Section 2.12. Beneficiary may require Trustor to obtain and pay for a tax service satisfactory to Beneficiary in order to assure Beneficiary such taxes are paid. 2.13. After a default shall have occurred hereunder, Trustor shall pay to Beneficiary or such other depository to which Beneficiary instructs Trustor to make such payments, the amount of taxes and insurance premiums accrued since the last date on which the same were paid. Thereafter, Trustor shall pay, in addition to the installments payable under the Note, on the same date as such installments are due and payable, a sum equal to one-twelfth (1/12) of Beneficiary's estimate of annual taxes, assessments, levies, fees, charges and insurance premiums required to be paid by Trustor hereunder. If the amount so paid is not sufficient to pay such taxes, assessments, levies, fees, charges and premiums when due, then Trustor will immediately pay Beneficiary or such depository, as the case may be, on demand, amounts sufficient to pay the same. Sums deposited by Trustor pursuant hereto shall be used to pay such taxes, assessments, levies, fees, charges and insurance premiums when due provided that Trustor has furnished Beneficiary with all tax statements, premium notices and other such notices at least third (30) days prior to the date that any such taxes, assessments, levies, fees, charges or premiums may be due. Nothing herein shall impose on Beneficiary or such depository the obligation to pay any amount on account of taxes, assessments, levies, fees, charges or premiums in excess of the amount then deposited with Beneficiary or such depository pursuant hereto. In the event of any default hereunder or under any instrument or obligation secured hereby, Beneficiary may elect, at any time thereafter, to apply the funds deposited with it or such depository in such manner as Beneficiary may deem desirable, in its sole and absolute discretion. Beneficiary and any depository may commingle funds deposited hereunder with their general funds and no interest shall accrue or be allowed on any payments made pursuant to this section. Payments or deposits pursuant to this section, if made, shall not be deemed to be a waiver or release of any other right or remedy available hereunder to Beneficiary in the event of default. Transfer of title to the Property shall automatically transfer the interest of the then Trustor in any deposits made pursuant to this section. 2.14. If any action or proceeding shall be instituted to evict the Trustor to recover possession of the Property or for any other purpose affecting the Ground Lease, the Leasehold created thereby, the Property, any part thereof, any interest therein, title thereto or this Deed of Trust, or should Trustor receive any notice from any governmental agency relating to the structure, use of occupancy of the Property, Trustor will immediately upon service thereof on or by Trustor, deliver to Beneficiary true copies of each notice, petition, summons, complaint, notice of motion, order to show cause and all other process, pleadings, and papers however designated, served in any action or proceeding. Immediately upon becoming aware of any development or other information which may materially and adversely affect the property, business, prospects, profits or conditions (financial or otherwise) of Trustor or the Property of the ability of Trustor to perform the obligations secured hereby. Trustor shall notify Beneficiary of the nature of such development or information and such anticipated effect. 2.15. Trustor promises and agrees that if during the existence of this Deed of Trust there be commenced or pending any suit, action, arbitration, or other proceeding affecting the Ground Lease, the Leasehold created thereby or the Property, any part thereof, or in relating thereto, the title thereto or this Deed of Trust, or if any adverse claim for or against said Property, or any part thereof, be made or asserted, it will appear in and defend any such matter and will pay all costs and damages arising because of such proceeding. Beneficiary may elect to appear in any such proceeding. Upon any default hereunder, Beneficiary shall have the option to control such action or defense, whether or not Beneficiary elects to appear. If Beneficiary elects to appear in any such action or proceeding, Beneficiary shall have the right to retain counsel of its choice. Trustor shall solely responsible for any and all expenses and costs, including, but not limited to, the reasonable fees of counsel retained by Beneficiary, which are incurred pursuant to this section. Unless a default occurs, Trustor and Beneficiary shall be represented by joint counsel if not conflict of interest exists. If Beneficiary elects to appear in or control any action or proceeding, Trustor agrees to indemnify Beneficiary against, release Beneficiary from, and hold Beneficiary harmless from any damages, liability, costs, expenses, litigation or claims incurred in or in connection with such action or appearance or in the exercise of such control, except as a result of Beneficiary's gross negligence or willful misconduct. 2.16. Trustor will not permit or suffer the filing of any mechanics', materialmen's other liens against the Property, any part thereof, any interest therein or the revenue, rents issues, income and profits arising therefrom. If any lien shall be filed against the Property, any part thereof or any interest therein Trustor agrees to commence a proceeding under NRS Chapter 108 to discharge the same of record within ten (10) days after the same shall have been filed or provide a bond or other reasonable security to protect Beneficiary's interest. 2.17. Trustor shall take any and all such action as may be necessary to prevent any third parties from acquiring any prescriptive easement upon, over, or across any part of the Property, or from acquiring any rights whatsoever to or against the Property by virtue of adverse possession. 2.18. Except as provided in Section 2.07 hereof and the Purchase Agreement, the sale, agreement to sell, transfer, assignment, mortgage, pledge, hypothecation or encumbrance, including, but not limited to, the granting of any option to do any of the foregoing, whether voluntary or involuntary, by agreement, operation of law or otherwise, of the whole or any portion of Trustor's right, title or interest in and to the Property or any portion thereof without the prior written consent of Beneficiary shall constitute a default hereunder and shall entitle Beneficiary to accelerate the indebtedness secured hereby in the same manner as in the case of any other default. Any lease for a term (including options to extend) greater than twenty (20) years shall be deemed a sale for the purpose of this Section 2.18. The sale, transfer, assignment, mortgage, pledge, hypothecation, charging or encumbrance in the aggregate of greater than thirty percent (30%) of the interests in any partnership or limited liability company. Trustor or any parent thereof, whether directly or indirectly (such as by sale of stock in any corporate partner or member) or the sale, transfer, assignment, mortgage, pledge, hypothecation or encumbrance in the aggregate of greater than thirty percent (30%) of any class of any corporate investor's stock, whether directly or indirectly (such as by sale of stock in any corporation owning Trustor's stock) shall also entitle Beneficiary to accelerate the indebtedness secured hereby. 2.19. [Intentionally deleted] 2.20. Immediately upon becoming aware of the occurrence of any (i) "reportable event," as such term is defined in Section 4043 of ERISA, or (ii) "prohibited transaction" as such term is defined in Section 4975 of the Internal Revenue Code of 1986, as amended, in connection with any pension plan or any trust created thereunder, a written notice specifying the nature thereof, what action Trustor is taking or proposes to take with respect thereto, and, when known, any action taken or proposed to be taken by the Internal Revenue Service and or the Department of Labor with respect thereto shall be delivered to Beneficiary. Trustor will not at any time permit any pension plan maintained by it or to which Trustor is a contributing employer to (a) engaged in any "prohibited transaction," as such term is defined in Section 4975 of the Internal Revenue Code of 1986, as amended, (b) incur any "accumulated funding deficiency," as such term is defined in Section 302 of ERISA, whether or not waived, or (c) terminate any such pension plan in a manner which could result in the imposition of a lien on the Property pursuant to Section 4086 of ERISA. Trustor shall not take any action which will cause or effect any withdrawal complete or partial, or any resulting withdrawal liability, with respect to any such plan. Trustor shall promptly pay all contributions to any employee benefit plan to which it is required to pay. 2.21. Trustor will diligently perform and observe all of the terms, covenants and conditions of the Leases to be performed and observed by Trustor to the end that all things shall be done which are necessary to keep unimpaired Trustor's rights under the Leases. Trustor will promptly advise Beneficiary in writing of the giving of any notice by the lessee under any Lease of any default by Trustor in the performance or observance of any of the terms, covenants or conditions thereof on the part of Trustor to be performed or observed and Trustor will deliver to Beneficiary a true copy of each such notice. Trustor shall enforce, short of termination thereof, the performance of each and every term, covenant and condition of each such Lease to be performed by the lessee thereunder. Trustor shall execute and deliver, on request of Beneficiary, such instruments as Beneficiary may deem useful or required to permit Beneficiary to take such other actions as Beneficiary considers desirable to cure ore remedy the matter on default and preserve the interest of Beneficiary in the Leases and the Property. Trustor will promptly notify Beneficiary in writing of any default by the lessee under any Lease in the performance or observance of any of the terms, covenants or conditions on the part of said lessee to be performed or observed. Trustor shall not collect any of the rent, income and profits arising or accruing under the Lease more than once a month in advance, and in no event prior to the time when the same become due under the terms thereof. Trustor will not discount any future accruing rents. Except as provided in the Purchase Agreement. Trustor shall not execute any other assignments of the Lease or any interest therein or any of the rents thereunder. Trustor shall not alter, modify or change the terms of the Lease, by sufferance or otherwise, or cancel or terminate such Lease without the prior written consent of Beneficiary. Any other provision hereof to the contrary notwithstanding, no lien or other encumbrance may be prior to any Lease if the result of such priority might be to allow such Lease to be terminated without the consent of Beneficiary. 2.22. All Leases hereafter executed are and shall be subordinate hereto and upon any sale or deed in lieu of sale hereunder such lessees shall attorn to the purchaser or grantee, as the case may be, and recognize the same as lessor under said Lease as fully as if such purchaser or grantee had been named as lessor under such Leases, but without any claim or offset against such purchaser or grantee for any liability of any previous lessor. Such lessees, and to the extent permitted under the terms of any existing Lease, the lessees under the existing Lease shall from time to time during the term hereof, within ten (10) days after demand therefor by Beneficiary, execute and deliver to Beneficiary, or any party designated by Beneficiary, a certificate in recordable form certifying that attached thereto is a true and correct copy of such lessee's Lease, the term of said Lease, the date to which all rentals and other charges have been paid, the amount of any security deposit, that no rent has been prepaid or discounted, that such Lease is in full force and effect, and that no defaults have occurred thereunder (or specifying the nature of such defaults) together with such other information with respect to such Lease and/or lessee as Beneficiary may reasonably request. 2.23. Trustor shall furnish Beneficiary within sixty (60) days after the end of each of Trustor's fiscal years ending after (but not on) December 31, 2001, and at such other times as may reasonably be required by Beneficiary, audited financial statements covering the operations of the Property for such fiscal year. Said statements shall include, but need not be limited to, a balance sheet and a statement of profit and loss satisfactorily certified by an accounting firm deemed satisfactory by Beneficiary. Trustor's fiscal year ends _______________. The above required statements shall be in such detail as Beneficiary reasonably requests, shall segregate income and expense attributable to the Property and shall include the gross sales figures of any tenant paying percentage or other rental with respect thereto. 2.24. Trustor shall keep and maintain at an office in Las Vegas, Nevada, complete, accurate and customary records and books of account with respect to all of Trustor's business transactions with respect to the Property and shall retain the same intact throughout the term hereof. Beneficiary or its representatives shall be entitled to all reasonable times to inspect and make copies and extracts of all such records and books of account, which right of inspection, copying and extracting shall include the right to remove said records and books of account from Trustor's places of business for reasonable periods of time. 2.25. Trustor agrees at any time and from time to time during the term hereof and within ten (10) days after demand therefor from Beneficiary, to execute and deliver to Beneficiary, or any party designated by Beneficiary, a certificate in recordable form certifying the amount then due pursuant to this Deed of Trust and the obligations secured hereby, the terms of payment thereof, the dates to which payments have been paid, that this Deed of Trust and all instruments and obligations secured hereby are in full force and effect and that there are no defenses or offsets thereto, or specifying in what regards this Deed of Trust or such obligations are not in full force and effect and the nature of any defense or offsets thereto, together with such other information as Beneficiary may request. 2.26. Trustor agrees not to incorporate, or permit any other Person to incorporate, into the Property or utilize, or permit any other Person to utilize, on or in connection therewith, any personal property acquired under a conditional sales contract or any other contract or agreement whereby a vendor or lender retains title or a security interest therein. 2.27. Trustor shall execute, acknowledge and deliver to Beneficiary, and, if applicable, cause to be executed, recorded and or filed at Trustor's cost and expense, any and all such mortgages, assignments, transfers, assurances, control agreements, financing statements and other instruments and documents and so such acts as Beneficiary shall from time to time reasonably require for the better perfecting, assuring, conveying, assigning, transferring and confirming unto Beneficiary the property and rights herein conveyed or assigned or intended now or hereafter so to be. Trustor hereby authorizes Beneficiary to file any and all financing statements and amendments thereto in such form and in such locations as Beneficiary deems necessary or appropriate in connection herewith. The parties agree this Deed of Trust shall constitute a security agreement under the Uniform Commercial Code and that a carbon, photographic or other reproduction of this Deed of Trust or of a financing statement shall be sufficient as a financing statement. Trustor represents and warrants that (a) its chief executive office is in Las Vegas, Nevada (b) Trustor is a limited liability company duly organized and currently existing in good standing under the laws of the State of Nevada, and (c) Trustor has not executed, filed or authorized any Person, other than Beneficiary, to file any financing statement or amendment thereto with respect to all or any portion of the Property. Trustor has not within the five (5) year period prior to the date of this Deed of Trust changed its name, chief executive office or state of organization nor will Trustor do so without notifying Beneficiary at least sixty (60) days in advance. 2.28. Trustor will protect, indemnify, save harmless and defend Beneficiary and Trustee from and against any and all liability, loss, costs, charges, penalties, obligations, expenses, attorneys' fees, litigation, judgments, damages, claims and demands imposed upon or incurred by or asserted against Beneficiary and or Trustee by reason of (a) ownership by Trustee or Beneficiary of its interest in the Property pursuant to this Deed of Trust, (b) any accident or injury to or death of persons or loss of or damage to or loss of the use of property occurring on or about the Property or any part thereof or the adjoining sidewalks, curbs, vaults and vault spaces, if any, streets, alleys or ways, (c) any use, non-use or condition of the Property or any part thereof or of the adjoining sidewalks, curbs, vaults and vault spaces, if any, streets alleys or ways, (d) any failure on the part of Trustor to perform or comply with any of the terms of this Deed of Trust or any instrument or agreement secured hereby, (e) performance of any labor or services or the furnishing of any materials or other property in respect of the Property or any part thereof made or suffered to be made by or on behalf of Trustor, (f) any negligence or tortious act on the part of Trustor or any of its respective agents, contractors, lessees, licensees or invitees or (g) any work in connection with any alterations, changes, new construction or demolition of the Property, whether or not permitted hereunder. All amounts payable to Beneficiary or Trustee, as the case may be, under this Section 2.28 shall be payable on demand and shall be deemed indebtedness by this Deed of Trust. 2.29. All obligations of Trustor to any of its affiliates, including, but not limited to, any of its shareholders, partners or members, are hereby subordinated to the obligations secured by this Deed of Trust and none of such obligations shall be paid while any obligation secured hereby remains unsatisfied. SECTION 3. Trustee's and Beneficiary's Rights 3.01. The waiver or release by Beneficiary or Trustee of any default or of any of the provisions, covenants and conditions hereof on the part of Trustor to be kept and performed shall not be a waiver or release of any preceding or subsequent breach of the same or any other provision, covenant or condition contained herein. The subsequent acceptance of any sum in payment of any indebtedness secured hereby or any other payment hereunder by Trustor to Beneficiary or Trustee shall not be construed to be a waiver or release of any preceding breach by Trustor of any provision, covenant or condition of this Deed of Trust other than the failure of Trustor to pay the particular sum so accepted, regardless of Beneficiary's or Trustee's knowledge of such preceding breach at the time of acceptance of such payment. No payment by Trustor or receipt by Beneficiary of a lesser amount than the amount herein provided shall be deemed to be other than on account of the earliest sums due and payable hereunder, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Beneficiary may accept any check or payment without prejudice to Beneficiary's right to recover the balance of such sum or pursue any other remedy provided in this Deed of Trust. The consent by Beneficiary or Trustee to any matter or event requiring such consent shall not constitute a waiver of the necessity for such consent to any subsequent matter or event. 3.02. Beneficiary shall be subrogated to the lien of any and all prior encumbrances, liens, or charges paid or discharged from the proceeds of the loan evidenced by the Note, and even though said prior liens may have been released of record, the repayment of the Note shall be secured by such liens on the portions of the Property affected thereby to the extent of such payments. In consideration of the advances made to Trustor, Trustor hereby waives and releases all demands and causes of action for offsets, payments and rentals to, upon, and in consideration with said prior indebtedness. 3.03. Notwithstanding the right otherwise provided to Trustor to collect rent and other payments pursuant to the Leases while Trustor is not in default under the Note or this Deed of Trust, if there is filed any petition in bankruptcy by or against any lessee under any of the Leases or there is appointed a receiver or trustee to take possession of all or a substantial portion of the assets of such lessee or there is a general assignment by such lessee for the benefit of creditors, or any action is taken by or against such lessee under any state or federal insolvency law or bankruptcy act, or any similar law now or hereafter in effect. Beneficiary is appointed a creditor of such lessee and is entitled to recover on any claim or right of recovery that Trustor may have against such lessee or its receiver or trustee; provided, however, that Beneficiary shall not be obligated to pursue any such claim or right of recovery. Beneficiary may apply any such recovery against any obligation secured hereby in such manner as it may deem desirable, in its sole and absolute discretion. 3.04. Beneficiary may make or cause to be made reasonable entries upon and inspection of the Property. 3.05. Beneficiary may, at any time, by instrument in writing, appoint a successor or successors to the Trustee named herein or acting hereunder, which instrument, executed and acknowledged by Beneficiary, and recorded in the Office of the County Recorder, Clark County, Nevada, shall be conclusive proof of the proper substitution of such successor trustee, who shall have all the estate powers, duties and trusts in the premises vested in or conferred on the original trustee. If there be more than one trustee, either may act alone and execute these trusts upon the request of Beneficiary and his acts shall be deemed to be the acts of all trustees, and the recital in any conveyance executed by such sole trustee of such requests shall be conclusive evidence thereof, and of the authority of such sole trustee to act. 3.06. Without affecting the liability of Trustor or any other Person, except any Person expressly released in writing, for payment of any indebtedness secured hereby or for performance of any of the obligations or any of the terms, covenants and conditions hereof, and without affecting the rights of Trustee and Beneficiary with respect to any security not expressly released in writing at any time and from time to time, without notice or consent other than consent of Beneficiary, Trustee and/or Beneficiary may: (a) Release any Person liable for payment of all or any part of the indebtedness or for the performance of any obligation. (b) Make any agreement extending the time or otherwise altering the terms of payment of all or any part of said indebtedness or modifying or waiving any obligation or subordinating, modifying or otherwise dealing with the lien or charge hereof. (c) Exercise or refrain from exercising or waive any right either of them may have. (d) Accept additional security of any kind. (e) Release or otherwise deal with any property, real or personal, securing the obligations secured hereby. 3.07. If Trustor fails to execute, acknowledge or deliver to Beneficiary any and all mortgages, assignments, transfers, assurances, financing statements, maps and other instruments or documents required to be so executed, acknowledged or delivered hereunder, within fifteen (15) days after Beneficiary's demand or such lesser period as may be provided elsewhere herein, then Trustor hereby appoints Beneficiary as Trustor's true and lawful attorney-in-fact to act in Trustor's name, place and stead to execute, acknowledge and deliver the same. 3.08. Whenever under any provision of this Deed of Trust Trustor shall be obligated to make any payment or expenditure, or to do any act or thing, or to incur any liability whatsoever, and Trustor fails, refuses or neglects to perform as herein required, Beneficiary shall be entitled, but shall not be obligated, to make any such payment or expenditure or to do any such act or thing, or to incur any such liability, all on behalf of and at the cost and for the account of Trustor. In such event, the amount thereof with interest thereon at the rate of ten percent (10%) per annum ("Agreed Rate") shall be paid by Trustor to Beneficiary on demand. Without limiting the generality of the foregoing, any act or payment by Beneficiary to cure, forestall, prevent or mitigate default hereunder shall be at the sole option of Beneficiary, shall be at the cost of Trustor and shall be reimbursed to Beneficiary as above provided. Beneficiary shall not be bound to inquire into the validity of any apparent or threatened tax, assessment, adverse title, lien, encumbrance, claim, or charge before making an advance for the purpose of preventing, removing or paying the same. Beneficiary shall be subrogated to all rights, equities and liens discharged by any such expenditure. All funds advanced by Beneficiary pursuant to this Section 3.08 or any other provision of this Deed of trust for the performance of any obligation of Trustor or to protect Beneficiary's security shall be deemed obligatory advanced regardless of the Person to whom such funds are furnished and such advances, together with interest thereon at the Agreed Rate, shall be secured by this Deed of Trust. 3.09. Any default in the performance of any term, covenant or condition contained herein or in any instrument or obligation secured hereby shall be a default hereunder. In addition, Trustor shall be in default hereunder if (a) Trustor shall abandon the Property, or any part thereof; (b) there is commenced any case in bankruptcy against Trustor or if an order for relief is entered against Trustor, or there is appointed a receiver or trustee to take possession of any of the assets of Trustor or of the Property, or Trustor applies for or consents to such appointment, or there is a general assignment by Trustor for the benefit of creditors, or any action is taken by or against Trustor under any state or federal insolvency or bankruptcy act, or any similar law now or hereafter in effect, including, without limitation, the filing of any petition for or in reorganization, or should the Property, or any part thereof, be taken or seized under levy of execution or attachment, or Trustor admits in writing its inability to pay its debts as they mature; (c) there is (i) executed or verified by Trustor, or any receiver of Trustor, or any attorney or agent of Trustor, or of such receiver, a petition in bankruptcy with respect to Trustor, irrespective of whether such petition is filed, or (ii) executed or verified by any holder of a claim against Trustor, or an indenture trustee of such a holder, or any attorney or agent of such holder or indenture trustee, any petition in bankruptcy against Trustor, irrespective of whether such petition is filed, (d) the board of directors or managers of any corporate or limited liability company Trustor votes to seek any kind of relief under any bankruptcy, insolvency or similar law; (e) there is passed any law which renders payment by Trustor of any or all taxes levied upon this Deed of Trust or the Property or performance of any other term, covenant or condition hereof, or any obligation secured hereby, unlawful, usurious, inoperative, void or voidable, or which prohibits Beneficiary from exercising any of its rights hereunder or under any other instrument or agreement to which Trustor is a party or by which t is bound; (f) any representation, warranty, statement, certificate, schedule or report made by or on behalf of Trustor herein or in connection herewith is incorrect, false, or misleading in any material respect; (g) Trustor should dissolve, liquidate or terminate; (h) the value or priority of the security interest created hereby is impaired; (i) any license or permit necessary for operation of the Property or any portion thereof is revoked or any proceeding to revoke the same is commenced or threatened; (j) Trustor defaults under any obligation to or agreement with Beneficiary; (k) there occurs any event which results in the acceleration of the maturity of the indebtedness of Trustor to others under any indenture, agreement or undertaking; or (l) a default occurs under any obligation of Trustor's affiliate, Metroflag Polo, LLC to Beneficiary and the holder of such obligation elects to accelerate the same. If Trustor consists of more than one Person, the occurrence of any of the foregoing events with respect to any one or more of such Persons shall constitute a default hereunder. Similarly, if Trustor is a partnership or joint venture, the occurrence of any of the events enumerated above with regard to any general partner or joint venturer shall constitute a default hereunder. Trustor shall give Beneficiary prompt notice of the occurrence of any default hereunder. 3.10. The collection of rents and the application thereof by Beneficiary or any receiver obtained by Beneficiary shall not cure or waive any default or notice thereof, or invalidate any act of Beneficiary pursuant thereto. In the exercise of the powers herein granted Beneficiary, Beneficiary shall not be deemed to have affirmed any Lease or subordinate the lien hereof thereto not shall any liability be asserted or enforced against Beneficiary, all such liability being hereby expressly waived and released by Trustor. Neither Beneficiary nor any receiver shall be obligated to perform or discharge any obligation, duty or liability under any Lease or under or by reason of the assignment contained in this Deed of Trust and Trustor shall and does hereby agree to protect, indemnify, save harmless and defend Beneficiary and such receiver from and against any and all liability, loss, costs, charges, penalties, obligations, expenses, attorneys' fees, litigation, judgments, damages, claims and demands which they may or might incur by reason of, arising from, or in connection with the Leases, such assignment, any alleged obligations or undertakings on their part to perform or discharge any of the terms, covenants or agreements contained in the Leases, any alleged affirmative of or subordination to the Leases, or any action taken by Beneficiary or such receiver pursuant to any provision of this Deed of Trust. Without limiting the generality of the foregoing, no security deposited by the lessee with the lessor under the terms of any Lease hereby assigned has been transferred to Beneficiary, and Beneficiary assumes no liability for any security so deposited. 3.11. In the event of any default hereunder or in the performance of any of the obligations secured hereby, Beneficiary may exercise any and all of its rights provided hereunder or by law. Without limiting the generality of the foregoing, any Personal Property may, at the sole and absolute option of Beneficiary, (i) be sold hereunder, (ii) be sold pursuant to the Uniform Commercial Code of the State of Nevada, or (iii) be dealt with by Beneficiary in any other manner provided by statute, law or equity. Without limiting the foregoing, Beneficiary may require Trustor to assemble the Personal Property and make it available to Beneficiary at a place to be designated by Beneficiary. In the event of a default, Beneficiary shall be the attorney-in-fact of Trustor with respect to any and all matters pertaining to the Property with full power and authority to give instructions with respect to the collection and remittance of payments, to endorse checks, to enforce the rights and remedies of Trustor, and to execute on behalf of Trustor and in Trustor's name any instruction, agreement or other writing required therefor. This power shall be irrevocable and deemed to be a power coupled with an interest. Beneficiary may, in its sole discretion, appoint Trustee as the agent of Beneficiary for the purpose of disposition of the Personal Property in accordance with the Uniform Commercial Code. Trustor acknowledges and agrees that a disposition of the Personal Property in accordance with Beneficiary's rights and remedies in respect to real property as hereinabove provided is a commercially reasonable disposition thereof. Trustor acknowledges and agrees that the fact that the price obtained at a private sale may be less than the price which might have been obtained at a public sale does not render a private sale unreasonable even if Beneficiary accepts the first offer received and does not offer the subject property to more than one offeree. 3.12. In the event of any default hereunder or in the performance of the obligations secured hereby, Beneficiary may, to the full extent permitted by law, in addition to all other rights and remedies, forthwith after any such default enter upon and take possession of the Property, complete any buildings or other improvements under construction, construct new improvements and make modifications to and/or demolish any of the foregoing. In connection therewith Beneficiary shall have the power to file any and all notices and obtain any and all permits and licenses which Beneficiary, in its sole and absolute discretion, deems necessary or appropriate, including, but not limited to, the filing of notices of complete and the obtaining of certificates of occupancy. Beneficiary shall also have the right to receive all of the rents, issues and profits of the Property, overdue, due or to become due, and to apply the same, after payment of all necessary charges and expenses, including attorneys' fees, on account of the indebtedness secured hereby. Beneficiary may do any and all of the foregoing in its own name or in the name of Trustor and Trustor hereby irrevocably appoints Beneficiary as its attorney-in-fact for such purposes. Beneficiary may also, at any time after such default, apply to any court of competent jurisdiction for the appointment of a receiver and Trustor agrees that such appointment shall be made upon a prima facie showing of a claimed default without reference to any offsets or defenses against such default and without regard to whether any portion of the Property is in danger of being lost, removed, injured or destroyed or of waste, whether income from the Property is in danger of being lost or whether the Property is or may become insufficient to discharge the obligations secured by this Deed of Trust. Such receiver shall have all rights and powers provided Beneficiary pursuant to this section or otherwise provided hereunder or by law. Said receiver may borrow monies and issue certificates therefor. Said certificates shall be a lien on the Property, subordinate only to this Deed of Trust and the Leases, provided, however, that should any of said certificates be acquired by Beneficiary the amount thereof shall constitute additional indebtedness secured hereby. Such receiver may lease all or any portion of the Property on such terms and for such a term (which may extend beyond the terms of such receiver's appointment and/or, if Beneficiary so consents, sale of the Property hereunder) as such receiver may deem appropriate in its sole and absolute discretion. The entering upon and taking possession of the Property pursuant to this section and the collection of the rents, issues and profits therefrom shall not cure or waive any default or notice of default hereunder or invalidate any act of Beneficiary pursuant thereto. 3.13. Should default be made by Trustor in payment or performance of any indebtedness or other obligation or agreement secured hereby and/or in performance of any agreement herein or should Trustor otherwise be in default hereunder, Beneficiary may, subject to NRS 107.080 declare all sums secured hereby immediately due by deliver to Trustee of a written notice of breach and election to sell (which notice Trustee shall cause to be recorded and mailed as required by law) and shall surrender to Trustee this Deed of Trust and the Note. 3.14. After three (3) months shall have elapsed following recordation of any such notice of breach, Trustee shall sell the property subject hereto at such time and at such place in the State of Nevada as Trustee in its sole discretion shall deem best to accomplish the objects of these trusts having first given notice of such sale as then required by law. In the conduct of any such sale Trustee may act itself or through any suctioneer, agent or attorney. The place of sale may be either in the county in which the property to be sold, or any part thereof, is situated or at an office of the Trustee located in the State of Nevada. (a) Upon request of Beneficiary or if required by law Trustee shall postpone sale of all or any portion of said property or interest therein by public announcement at the time fixed by said notice of sale and shall thereafter postpone said sale from time to time by public announcement at the time previously appointed. (b) At the time of sale so fixed, Trustee shall see the property so advertised or any part thereof or interest therein either as a whole or in separate parcels as Beneficiary mat determine in its sole and absolute discretion to the highest bidder for cash in lawful money of the United States, payable at time of sale, and shall deliver to such purchaser a deed or deeds or other appropriate instruments conveying the property so sold, but without covenant or warranty, express or implied Beneficiary and Trustee may bid and purchase at such sale. To the extent of the indebtedness secured hereby Beneficiary need not bid for cash at any sale of all or any portion of the Property pursuant hereto but the amount of any successful bid by Beneficiary shall be applied in reduction of said indebtedness. Trustor hereby agrees if it is then still in possession to surrender immediately and without demand, possession of said property to any purchaser. 3.15. Trustee shall apply the proceeds of any such sale to payment of expenses of sale and all charges and expenses of Trustee and of these trusts including cost of evidence of title and Trustee's fee in connection with sale all sums expended under the terms hereof, not then repaid with accrued interest at the Agreed Rate all other sums then secured hereby and the remainder, if any, to the Person or Persons legally entitled thereto. 3.16. Beneficiary from time to time before Trustee's sale may rescind any notice of breach and election to sell by executing, delivering and causing trustee to record a written notice of such rescission. The exercise by Beneficiary of such right of rescission shall not constitute a waiver of any breach or default then existing or subsequently occurring or impair the right of Beneficiary to execute and deliver to Trustee, as above provided, other notices of breach and election to sell, nor otherwise affect any term, covenant or condition hereof or under any obligation secured hereby or any of the rights, obligations or remedies of the parties thereunder. SECTION 4. Miscellaneous 4.01. Should Trustor pay in full the Purchase Note when due and pay all other sums then due hereunder or secured hereby, Beneficiary shall surrender this Deed of Trust and the Purchase Note to Trustee for cancellation and upon payment of its fees. Trustee shall reconvey without warranty the property then held hereunder. The recitals in such reconveyance of any matters of fact shall be conclusive proof of the truth thereof. The grantee in such reconveyance may be described in general terms as "the person or persons legally entitled thereto." 4.02. Trustor, for itself and for all Persons hereafter claiming through or under it or who may at any time hereafter become holders of liens junior to the lien of this Deed of Trust, hereby expressly waives and releases all rights to direct the order in which any of the Property or any interest therein shall be sold in the event of any sale or sales pursuant hereto and to have any of the Property and/or any other property now or hereafter constituting security for any of the indebtedness secured hereby or any interest therein marshaled upon any sale under this Deed of Trust or of any other security for any of said indebtedness. 4.03. Any and all notices and demands to Trustor or to Beneficiary, required or desired to be given hereunder shall be in writing and shall be given by deposit in the United States mail, certified or registered, postage prepaid, return receipt requested or if made by Federal Express or other similar delivery service keeping records of deliveries and attempted deliveries or made by telecopy. Service by United States Mail or by Federal Express or other similar delivery service shall be conclusively deemed made on the first business day delivery is attempted or upon receipt, whichever is sooner; provided, however, that service of any notice of breach or notice of sale as required by law will, if mailed, be effective on the date of mailing. Facsimile transmissions received during business hours during a business day shall be deemed received on such business day. Facsimile transmissions received at any other time shall be deemed received on the next business day. Any notice or demand to Beneficiary shall be addressed to Beneficiary at Grand Casinos Nevada 1, Inc., 130 Cheshire Lane, Minnetonka, Minnesota 55305, Attention Chief Financial Officer, Telecopy No. ( ) , with a copy to Maslon Edelman Borman & Brand, LLP, 3300 Wells Fargo Center, 90 South Seventh Street, Minneapolis, Minnesota 55402, Attention Neil I. Sell, Esq., Telecopy No. ( ) . Any notice or demand to Trustor shall be addressed to Trustor at Metroflag BP, LLC, c/o Flag Luxury Properties, LLC, 1370 Avenue of the Americas, 29th Floor, New York, New York 10019, Attention Paul C. Kavanos, Telecopy No. ( ) , with a copy to Greenberg Traurig, P.A., 1221 Brickell Avenue, Miami, Florida 33131, Attention Juan P. Loumiet, Esq., Telecopy No. ( ) ; and, Gordon & Silver, Ltd., 3960 Howard Hughes Parkway, 9th Floor, Las Vegas, Nevada 89109, Attention Steve Yoken, Esq., Telecopy No. ( ) . Any party hereto may change its address for the purpose of receiving notices or demands as herein provided by a written notice given in the manner aforesaid to the other party hereto, which notice of change of address shall not become effective, however, until the actual receipt thereof by the other party. Whenever any law requires Beneficiary to give reasonable notice of any act, election, or event, or proposed act, election, or event, said requirement shall be deemed complied with if Beneficiary gives Trustor ten (10) days written notice as herein provided. Information concerning the security interest may be obtained from Beneficiary at the above address. 4.04. This Deed of Trust applies to, mures to the benefit of, and binds all parties hereto, their heirs, legatees, devisees, administrators, executors, successors and assigns. 4.05. Trustee accepts these trusts when this Deed of Trust, duly executed and acknowledged, is made a public record as provided by law. 4.06. Where any provision in this Deed of Trust refers to action to be taken by Trustor, or which Trustor is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by Trustor. 4.07. If any term, provision, covenant or condition of this Deed of Trust, or any application thereof, should be held by a court of competent jurisdiction to be invalid, void, or unenforceable, all provisions, covenants and conditions of this Deed of Trust and all applications thereof not held invalid, void or unenforceable, shall continue in full force and effect and shall in no way be affected, impaired or invalidated thereby. If the lien of this Deed of Trust is invalid or unenforceable as to any part of the Property, or if the lien is invalid or unenforceable as to any part of the indebtedness secured hereby, the unsecured or partially unsecured portion of such indebtedness shall be completely paid prior to the payment of the remaining and secured or partially secured portion of such indebtedness, and all payments made on such indebtedness, whether voluntary or under foreclosure or other enforcement action or procedure, shall be considered to have been first paid on and applied to the full payment of that portion of such indebtedness which is not secured or fully secured by the lien of this Deed of Trust. 4.08. In the event that Trustor shall consist of more than one Person then and in such event all of such Persons shall be jointly and severally liable hereunder. 4.09. The laws of the State of Nevada shall govern the validity, construction, performance and effect of this Deed of Trust. 4.10. This Deed of Trust shall be construed in accordance with its intent and without regard to any presumption or other rule requiring construction against the party causing the same to be drafted. 4.11. The various rights, options, elections and remedies of Beneficiary and Trustee hereunder shall be cumulative and no one of them shall be construed as exclusive of any other, or of any right, option, election or remedy provided in any agreement or by law. 4.12. Time is of the essence of this Deed of Trust and all of the terms, provisions, covenants and conditions hereof. 4.13. Whenever any provision of this Deed of Trust requires Beneficiary's consent or approval, unless otherwise specifically provided, the same may be granted or withheld by Beneficiary in its sole and absolute discretion. 4.14. EACH OF TRUSTOR AND BENEFICIARY BY ITS ACCEPTANCE OF THIS DEED OF TRUST IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THE NOTE, THIS DEED OF TRUST OR ANY INSTRUMENT OR AGREEMENT SECURED THEREBY OR RELATED THERETO OR THE ACTIONS OF TRUSTOR OR BENEFICIARY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF. 4.15. In this Deed of Trust, whenever the context so requires any gender includes the others, and the singular number includes the plural, and vice-versa, the term Beneficiary shall include any future holder, including pledges, of the Note secured hereby, and the term Trustor shall mean the original signator hereof, the successors and assigns thereof and any future owners of any interest in the property or any portion thereof now held or hereafter acquired by the signator hereof. In the event the ownership of all or any portion of such property becomes vested in a Person other than the signator hereof, Beneficiary may, without notice to such signator, deal with such successor or successors with reference to this deed of Trust and to the indebtedness hereby secured in the same manner as with the signator, without in any way vitiating or discharging such signator's liability hereunder or upon the indebtedness hereby secured. In this Deed of Trust, the use of words such as "including" or "such as" shall not be deemed to limit the generality of the term or clause to which they have reference, whether or not non-limiting language (such as "without limitation," or "but not limited to," or words of similar import) is used with reference thereto, but rather shall be deemed to refer to all other items or matters that could reasonably fall within the broadest possible scope of such general statement, term or matter. The caption appearing at the commencement of the sections hereof are descriptive only and for convenience in reference to this Deed of Trust and in no way whatsoever define, limit or describe the scope or intent of this Deed of Trust, nor in any way affect this Deed of Trust. As used in this Deed of Trust, the term "Person" means any individual, partnership, limited partnership, corporation, limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity and any government and any political subdivision and agency thereof. 4.16. Where not inconsistent with the above the following covenants, Nos. 1; 2 (full replacement value); 3; 4 (Agreed Rate); 5; 6; 7 (a reasonable percentage); 8 and 9 of NRS 107.030 are hereby adopted and made a part of this Deed of Trust. IN WITNESS WHEREOF, Trustor has executed this Deed of Trust the day and year first above written. Metroflag BP, LLC, A Nevada limited liability company By Its Member: Metro Two, LLC, A Nevada limited liability company By /s/ Brett Torino -------------------------------------- Brett Torino, Manager STATE OF NEVADA ) ) ss. COUNTY OF CLARK ) This instrument was acknowledged before me on September 28, 2001 by Brett Torino, as Manager of Metroflag BP, LLC, a Nevada limited liability company. /s/ Linda Ann Thomas -------------------------------------- NOTARY PUBLIC My commission Expires 11/26/2002 ---------------- EX-21 11 c68243ex21.txt SUBSIDIARIES OF THE COMPANY EXHIBIT 21 SUBSIDIARIES OF LAKES GAMING, INC. 1. Grand Casinos Nevada I, Inc., a Minnesota corporation (i) Metroplex-Lakes, LLC, a Minnesota limited liability company 2. Grand Casinos Pechanga, Inc., a Minnesota corporation 3. Grand Casinos Washington, Inc., a Minnesota corporation 4. Grand Media & Electronics Distributing, Inc., a Minnesota corporation 5. Riverside Entertainment Corp., a Pennsylvania corporation 6. Grand Casinos & Resorts of Canada, Inc., a Canadian corporation 7. Grand Casinos Ontario, Inc., a Canadian corporation 8. Mille Lacs Gaming, LLC, a Minnesota limited liability company (i) Mille Lacs Gaming, LLP, a Minnesota limited liability partnership 9. Grand Casinos of Louisiana, LLC -- Tunica-Biloxi, a Minnesota limited liability company 10. Grand Casinos of Louisiana, LLC -- Coushatta, a Minnesota limited liability company (i) Magnum Investments of Lake Charles, Inc., a Louisiana corporation (ii) R & W Investments of Lake Charles, Inc., a Louisiana corporation 11. Trak 21, LLC, a Minnesota limited liability company 12. Great Lakes Gaming of Michigan, LLC, a Minnesota limited liability company 13. Lakes Jamul, Inc., a Minnesota corporation (i) Lakes Kean Argovitz Resorts -- California, LLC 14. Lakes Shingle Springs, Inc., a Minnesota corporation (i) Lakes Kean Argovitz Resorts -- Shingle Springs, LLC 15. RFC Acquisition, Co., a Minnesota corporation 16. Lakes Game Development, LLC, a Minnesota limited liability company 17. Lakes Nipmuc, LLC, a Minnesota limited liability company 18. Lakes California Land Development, Inc., a Minnesota Corporation (i) 2022 Ranch, LLC, a California limited liability company 19. Lakes Cloverdale, LLC, a Minnesota limited liability company (i) Pacific Coast Gaming -- Santa Rosa, LLC, a Minnesota limited liability company 20. Lakes Corning, LLC, a Minnesota limited liability company (i) Pacific Coast Gaming -- Corning, LLC, a Minnesota limited liability company 21. Lakes Gaming and Resorts, LLC, a Minnesota limited liability company 22. Lakes Pauma, LLC, a Minnesota limited liability company
EX-23 12 c68243ex23.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23 Consent of independent public accountants As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement File Nos. 333-77591, 333-77247 and 333-77249. Arthur Andersen LLP Minneapolis, Minnesota, March 25, 2002 EX-99 13 c68243ex99.txt LETTER REGARDING ARTHUR ANDERSEN LLP EXHIBIT 99 March 25, 2002 Securities and Exchange Commission Judiciary Plaza 450 Fifth St. N.W. Washington, D.C. 20549 To Whom It May Concern: Arthur Andersen LLP has represented to Lakes Gaming, Inc. and Subsidiaries that its audit for the year ended December 30, 2001 was subject to Andersen's quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards and that there was appropriate continuity of Andersen personnel working on the audit and availability of national office consultation. Availability of personnel at foreign affiliates of Andersen is not relevant to this audit. Very truly yours, LAKES GAMING, INC. Timothy J. Cope Executive Vice President Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----