Lakes Conference Call

Lakes Entertainment recently had a conference call to talk about their Q3 financial reports. The Jamul Indian Casino project was mentioned briefly a few times; these parts are excerpted from the transcript:

Next I will discuss our project with the Jamul Indian village. Lakes has an agreement for the development and financing of a casino resort operation with the Jamul Indian Village. The Jamul tribe has a six-acre reservation on which the casino is planned to be built. Lakes has also acquired approximately 100 acres of land contiguous to the six acres of the reservation land that could be used for the casino support facilities if the land is taken into trust. Lakes and the Jamul tribe have decided to move forward with the operating a casino based solely on class 2 electronic gaming devices. The agreement between Lakes and the Jamul tribe is currently being modified to reflect the new economics of the revised smaller casino plan which will not require a compact and will not be subject to approval by the state or NIGC. Planning is underway to redesign the casino to provide for approximately 1,000 class 2 gaming devices along with 20 class 2 table games. The site has been cleared of all residents and all structures have been demolished and removed. Soil drilling in preparation for the road construction has started. We and the tribe are currently evaluating the plan to determine when the casino construction will start and when the casino operations could begin.
...
Revenue from this license fee income decreased during third quarter of 2007 compared to the third quarter of 2006 as a result of the delivery of no episodes of the professional poker tour television series in the 2007 period, versus the delivery of nine episodes of the PPT in the third quarter of 2006 and the delivery of three episodes of season five of the world poker tour television series in the third quarter of 2007 versus the delivery of one episode of season five of the WPT television series in the 2006 period. Net unrealized losses on notes receivable were $600,000 for the third quarter of 2007, compared to net unrealized gains of $5.8 million for the third quarter of 2006. The net unrealized losses in the third quarter of 2007 related to unrealized gains on Lakes' notes receivable from the Shingle Springs Band and Miwok Indians in the amount of $1.2 million and unrealized losses of $1.8 million on the Lakes notes receivable from the Jamul Indian Village.

These notes receivable are adjusted to estimated fair value based upon the current status of the related tribal casino projects. The increase in fair value of the notes receivable from the Shingle Springs tribe relates primarily to continued progress on the construction of this project which is currently within budget and on schedule. The decrease in fair value of the notes receivable from the Jamul tribe relates primarily to an increase in the discount rate which resulted from a decrease in current estimated win per unit for this project.
...
TODD EILERS: Okay. And then, let's see, I guess with respect to the balance sheet, Tim, can you break down the notes receivables by project, or at least what Shingle Springs and Jamul were for the quarter, the market value?

TIM COPE: The long-term notes?

TODD EILERS: Yes.

TIM COPE: Jamul is approximately 24 million. Shingle Springs is approximately 52 million. And Iowa's is approximately 3 million.
...
JUSTIN SEBASTIANO: Okay. And, Tim, you had mentioned that you lowered the discount rate. What are you using now for the notes receivable from the Jamul Tribe? It was 15.75% I think previously?

TIM COPE: Yes, actually increased it.

JUSTIN SEBASTIANO: Increased it, I'm sorry, right.

TIM COPE: I think it's more in the 17% range now. You understand we get this from a third-party valuation firm.
...
I have publicly stated for the last several years, and I'll say it on this phone call, that Lakes Gaming, when we become a cash flow machine in the 2009 period and out, certainly do not expect to reinvest our funds in Indian gaming. Indian gaming is certainly our major core business. We're very good at it, and we will be in it for a long time. After all, Shingle Springs doesn't open for a year and then we have a seven-year contract, so that's eight years. Jamul will keep us in there for another year after that, so even without renewals we will be a major force in Indian gaming working with our Tribes and managing those casinos for the next 10 years. That being said, as we accumulate the cash from these operations, as you know, the majority of these operations took us seven or eight years from the time we signed with the Tribe, and we invested well over $150 million. Most of the Indian opportunities out there today are of a similar or worse nature.
...
CHRIS KRUEGER: Hi. I missed a little bit of the call but on the time frame for a couple of your future projects, I heard you mention on the Jamul that the site is cleared, there's some prep work beginning and that you're evaluating the plan right now. Does that mean -- I know last quarter I think you indicated you felt the construction would begin in the first quarter of '08 and open 12 months later. Is that more maybe like the first half of '08 now or how would we look at that?

TIM COPE: Actually, the last quarter I think we said the same thing we're saying this quarter. We're continuing to work with the tribe to evaluate when we can start construction on the casino. Casino construction there will be about a 16-month, 18-month build because of the nature of the site itself. So I think the issue right now is when can we actually start the construction. And as you mentioned, we have started drilling on the road work there, which is the first piece of the project to get the road completed, so we can start breaking in the construction equipment to do the building. So we're progressing on the road work right now, and then I think it's going to be again subject to discussions with the tribe and after the first of the year when we feel we can start the casino construction.

CHRIS KRUEGER: The fires that happened out there is there any impact from that?

TIM COPE: We and the Tribe I would say were quite fortunate in that regard. All the buildings had already been removed from the reservation, so although there was some fire that came very close and on the site there's actually a -- it backs up to a church, and that church was protected from the fire so there really was no physical damage occurred.
...
JUSTIN SEBASTIANO: Just a quick follow-up. Tim, could you just run through how you're getting paid out on Jamul? From what I have, I see you have a $15 million up-front flat fee from development services, 15 million payable evenly over five years for construction services, and then 50 million payable evenly over 10 years for financing services, is this correct?

TIM COPE: Currently the agreement is all fees that we earn are earned prior to the project opening based on, as you mentioned, either oversight of construction, oversight of the development, or for providing the financing. All those fees are then spread out over the life of a 10-year contract.

JUSTIN SEBASTIANO: Okay. So -- oh, so the development service is not a $15 million up-front flat fee?

TIM COPE: No, and there's nothing paid up-front. Everything is earned up-front.

JUSTIN SEBASTIANO: Understood. So they're all paid out evenly over 10 years?

TIM COPE: That's the current plan.

JUSTIN SEBASTIANO: So under the current plan then, you're going to get paid out on the amounts -- the $80 million, I guess, regardless of what the casino does. Is that correct then?

TIM COPE: Well, no, only if it's successful. Again, it's paid out -- they can't pay us if they don't have the money, right.

JUSTIN SEBASTIANO: Well, what's considered successful? Then they just have to cover -- do they have to hit a certain threshold, and then pay you out when they hit?

TIM COPE: There's no thresholds this particular arrangement. Just cash flow.

JUSTIN SEBASTIANO: Okay. So let's say you are due $8 million in year one. If they net $8 million then you get it all, and the Tribe gets 0?

LYLE BERMAN: In theory that would be correct. In practicality, probably not.

JUSTIN SEBASTIANO: I just wanted to make sure that there is no threshold and that you guys will get paid out.

LYLE BERMAN: No threshold whatsoever.

There are some interesting nuggets of information in there, but nothing particularly surprising. It certainly doesn't sound like Lakes has written Jamul off, darn it…