Golden Entertainment Inc (GDEN) 2006 Q2 法說會逐字稿

Good afternoon. My name is Paige and I will be your conference operator today. At this time I would like to welcome everyone to the Lakes Entertainment second quarter fiscal year 2006 earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [OPERATOR INSTRUCTIONS]

I will now turn the call over to Mr. Tim Cope. You may begin your conference.

Thank you, and good afternoon, everyone. Thank you for joining us today for the Lakes Entertainment fiscal second quarter 2006 conference call. Here with me is Lyle Berman, Lake's Chairman of the Board and Chief Executive Officer.

As we begin our prepared remarks, I'd just like to remind everyone that this call may contain forward-looking statements within the meaning of the federal securities law, including statements concerning business strategies and intended results and similar statements concerning anticipated future events and expectations that are not historical facts.

These forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them.

Lyle will begin our discussion today with an update on our casino projects. I'll then discuss our second quarter financial results and our outlook for the future. Lyle?

Good afternoon and thank you for joining us today.

As I provide you with the status of our projects, I must begin by stating how pleased we are to continue our association with each out of our tribal partners. The projects are grand in scale and truly require collaborative effort as we build, design, open and manage each of the respective casinos. Again, we appreciate their time, effort and continued support.

As I review each casino projects, please keep in mind that they are not in any order of significance or state of completion. Dates of construction and anticipated openings are subject to change.

Each of the projects in our portfolio is with a fairly recognized Tribe. Each Tribe has what is legally deemed to be Indian land and each Tribe has a compact with its respective state.

Last quarter our management contracts for two projects received approval by the National Indian Gaming Commission, NIGC, while others continued to wait notification of this formal approval process. Nonetheless, projects of this magnitude entail a variety of legal and regulatory issues which I'll outline as part of each update.

The first casino I will talk about is Foothill Oaks Casino with the Shingle Springs Tribe. I'll begin with Foothill Oaks Casino which is the Single Springs Tribe near Sacramento, California.

Lakes has contracts which have been approved by the National Indian Gaming Commission to develop and manage this casino to be built on the Rancheria of the Shingle Springs Band of Miwok Indians in El Dorado County, California, approximately 30 miles east of Sacramento. The project is planned to include approximately 2,000 gaming devices and 100 table games along with other amenities.

Two lawsuits pending against this project still continue. The first is a federal lawsuit filed in Superior Court of the State of California by El Dorado County raising two issues.

First is the validity of the environmental assessment prepared by the NIGC as required for the approval of the management contract. The second issue challenges the validity of the Tribe and whether the Rancheria is properly Indian land, which would allow gaming.

In early 2005 the judge in this case issued a filing ruling dismissing all allegations against the BIA and NIGC. Positive news for the Tribe and Lakes.

The plaintiff's have filed an appeal and the decision is now pending in the Federal Appeals Court. The hearing of this appeal has been postponed pending settlement discussions with the County.

The second suit is a State Court case challenging the validity of the environmental documents prepared for the approval of Highway 50 interchange by Caltrans under the Californian Environmental Quality Act. This case received --

Yes, sir, your line is open now.

Do you know when it went off?

It has been about two minutes, sir.

Where should I start? I was talking for quite some time. Did I -- can someone tell you if we finished the Foothill commentary?

One moment, sir.

I was just advised that we had gone dead for about two minutes, and we are unable to find out exactly where we went dead so I'm going to start from the beginning which is with the Shingle Springs Tribe near Sacramento, California.

Lakes has contracts which have been approved by NIGC to develop and manage this casino to be built on the Rancheria of the Shingle Springs Band of Miwok Indians in El Dorado County, California, approximately 30 miles east of Sacramento. The project was planned to include approximately 2,000 gaming devices and 100 table games along with other amenities.

The two lawsuits pending against this project still continue. The first is a federal lawsuit filed in Superior Court of the State of California by El Dorado County raising two issues.

First, is the validity of the environmental assessment prepared by the NIGC as required for the approval of the management contract. The second issue challenges the validity of the Tribe and whether the Rancheria is properly Indian land, which would allow gaming.

In early 2005, the judge in this case issued a file ruling dismissing all allegations against the BIA and NIGC. Positive news for both the Tribe and Lakes.

The plaintiffs have filed an appeal and the decision is now pending in the Federal Appeals Court. The hearing of this appeal has been postponed pending settlement discussions with the county.

The second suit is a State Court case challenging the validity of the environmental documents prepared for approval of the Highway 50 interchange by Caltrans, under the California Environmental Quality Act. This case received an initial ruling in late December 2003 which denied all claims of the plaintiffs except one.

As a result of both sides appealing this ruling, the Appeals Court required from Caltrans an additional air quality evaluation and the evaluation of alternatives of varying sizes to the proposed casino project. At Caltrans' request, the Supreme Court depublished the Appeals Court decision, however, Caltrans must now comply with the Appeals Court decision, a supplemental EIR had been completed and published for public review and comment.

A public review meeting was held and final public comments have been received. Responses to comments will be prepared, the final supplemental EIR will be issued this month an updated [FONZI] and documents will be submitted to the trial court for confirmation. We anticipate the hearing and decision process to be completed in the fourth quarter of 2006.

All approvals have been received from the California Department of Transportation and the BIA to allow the highway interchange project to proceed. The design of the interchange is complete.

Upon issuance of a final ruling on the State lawsuit, Caltrans has indicated its willingness to immediately issue the final permit to allow construction of the interchange to commence.

Assuming a positive outcome in the State Court case construction of this casino could begin approximately 120 days later. We continue to estimate the Foothill Oaks Casino will open mid to late 2008.

The next project is the Four Winds Casino with the Pokagon Band of Potawatomi Indians. Lakes has contracts to develop and manage the Four Winds Casino Resort being built on land placed in trust for the Pokagon Band of Potawatomi Indians in New Buffalo Township, Michigan, approximately 75 miles east of downtown Chicago.

In the first quarter of 2006 we announced that the federal government had taken the necessary action to acquire the Pokagon Band's 675-acre parcel of land into trust for the Tribe, paving the way for the Pokagon Band to move forward on the Four Winds Casino. In early April, we received notification from the NIGC that it approved our management agreement with the Pokagon Band to develop and manage this casino.

On June 22nd, an affiliate of the Pokagon Band closed on a $350 million senior note financing in addition to a $75 million commitment for furniture, fixtures and equipment to fund the Four Winds Casino project. We are very pleased for the Pokagon Band and congratulate them on achieving this important milestone thus allowing the casino project to move forward.

With financing in place, construction has begun on the first phase of the development project, which includes approximately 3,000 slot machines, 110 table games, and a 164-room hotel as well as restaurants and closed parking and several other casino amenities. You can view the construction of this casino by webcam on Lake's Web site.

When complete, the Four Winds Casino will be the only land-based casino in the Northern Indiana-Western Michigan market. We expect to open this casino in August of 2007.

Moving back to California, Lakes has an agreement for the development and financing of a casino resort operation with the Jamul Indian Village located in what is rapidly developing into one of this country's most exciting gaming regions. The Jamul Casino boasts what may be considered the number one location in the greater San Diego market, just 20 minutes from downtown San Diego.

The casinos plan to include approximately 2,000 gaming devices and 75 table games along with related amenities. Under the terms of our agreement in addition to providing development, design, and construction oversight, Lakes will also advance the Jamul Tribe sufficient sums to finance the design and construction of the casino project.

Lakes will receive a flat fee of $15 million for its development, design services, and a flat fee of $15 million for its construction oversight services. Each of these fees will be payable to Lakes evenly over the first five years of the opening date of the casino project.

In connection with Lake's financing, the Jamul Tribe will pay interest over a 10-year period on sums advanced by Lakes equal to the rate charged to Lakes for obtaining the funds necessary plus 5%. Sums previously advanced by Lakes to the Jamul Tribe in connection with the Tribe's proposed casino resort on land adjacent to the reservation are included in the financing for this project.

The casino project presents a tremendous economic development opportunity for the Jamul Tribe. We are actively working through the design process and the Tribe is completing the environmental work required under the state compact. Construction is expected to begin within the next 12 months with an opening date in mid 2008.

Lakes has signed consulting and managing agreements for three casino projects in Oklahoma with the Pawnee Nation. One is the existing Trading Post Casino located in Pawnee, Oklahoma.

The second is the expansion of an existing travel plaza and convenience store to provide a gaming facility near Stillwater, Oklahoma. And the third is a full-scale casino resort project on the Tribe's trust land three miles south of the Kansas border.

The Pawnee Nation has signed the state compact for all three locations. Lakes and the Tribe are currently reviewing comments received from the NIGC pertaining to the proposed consulting and management contracts for each project.

Let me take a few moments to outline each of Pawnee Nation projects. The Trading Post and existing property has been renovated and open. Lakes assisted the Tribe under its consulting agreement with renovations to the Trading Post Casino, by replacing 40 underperforming Class 2 machines with 66 new Class 3 machines and completing some physical improvements to the interior of the property.

The Travel Plaza Casino is an expansion of the existing truck stop. An initial phase will upgrade the facility with approximately 200 gaming devices and a 65-seat restaurant.

Future development of this property could include additional gaming, restaurant seating, hotel rooms and other amenities. Once final approval of the management contract is received from the NIGC, construction will commence with an opening date approximately five months later.

The largest of the Pawnee Nation casino resort developments will be the Chilocco Casino located on approximately 800 acres of Indian gaming land, owned by the Pawnee Nation in northern Oklahoma near the Kansas border. This project is master-planned to include a large, first-class dynamic casino, hotel with meeting space, multiple restaurants and bar venues, an entertainment and event center, a golf course and various other casino amenities.

The first phase of the project is planned to include approximately 1200 gaming devices, various restaurants and bars, poker, 150-room hotel, and up to 24 table games subject to the final terms of the Nation's compact with the State of Oklahoma. We are awaiting approval of the NIGC's management contract. Once received, the project financing can be arranged and that construction can commence with an anticipated opening date in late 2007.

Also in Oklahoma, Lakes has signed consulting and management contracts with the Iowa Tribe of Oklahoma to assist in the development, construction and management of two gaming facilities on tribal lands.

One, the existing Cimarron Casino and the other a proposed new casino which is located approximately 30 miles northeast of downtown Oklahoma City on historic Route 66. The Cimarron Casino was 240 gaming machines and a 200-seat bingo parlor located on the northern edge of Perkins, Oklahoma, near Stillwater.

Lakes, in working with the Iowa Band renovated this property to provide space for 350 gaming devices, including video poker and video blackjack, a new food outlet and the necessary back office space within the existing structure. NIGC approved of our management contract for this project was received in May of 2006.

Renovations to the existing structure were quickly completed and the facility currently includes 277 gaming devices and a full-service food outlet. Additional gaming devices are expected to be added over the next few months.

The second project to be named the Iowa Casino Resort with the Iowa Tribe of Oklahoma is the development of a full-service casino resort on tribal land on Route 66 as part of the greater Oklahoma City metropolitan area, midway between Warwick and Chandler, Oklahoma.

The proposed development will have an additional phase of approximately 1500 slot machines, a 250-room hotel, four restaurants, a Kid's Quest child care center, parking and the required back office support facilities. Future development could include additional gaming, hotel rooms, meeting space, special events center, golf course and other amenities.

In preparation of the required environmental assessment for the approval of the NIGC management contract is underway. We anticipate construction on this new property will begin in early next year with an opening to follow in early 2008.

The final casino project to be discussed today is our own casino project in Vicksburg, Mississippi. We are working in cooperation with the Mississippi Gaming Commission to finalize the site plans and acquire all the necessary land.

Additionally, we have had discussions with potential lenders and are confident that the required construction financing will be available for this project once one of our other projects opens. This project could begin construction sometime in late 2007.

Our table game business continues to move forward as we roll out our World Poker Tour All-In Hold'em game, which is now in approximately 15 casino locations. We continue to work hard to expand the table games' presence in other games a across the country. Other casinos planning to have the game soon include Fox Woods Casino, Golden Moon, Paragon Casino and Silver Star.

With that, I'll turn the call back over to Tim to provide you with an overview of recent business issues and financial results.

Thank you, Lyle.

Revenue for the three months ended July 2, 2006 totaled $11.2 million compared to $6.6 million for the three months ended July 3, 2005. Earnings from operations were $15.5 million for the second quarter of 2006 compared to a loss from operations of $5.8 million for the second quarter of 2005.

Net earnings for the quarter ended July 2, 2006 were $3.2 million and basic and diluted earnings were $0.14 per share and $0.13 per share respectively. This compares with a net loss of $5.7 million and basic and diluted losses of $0.25 per share in the prior year period.

Revenues for both quarters were derived from the operations at Lakes majority owned subsidiary, WPT Enterprises, primarily from television license fees related to the World Poker Tour television series. The increase in revenues was primarily the result of the delivery of ten WPT episodes versus the delivery of eight WPT episodes in the same period in 2005, and the delivery of nine Professional Poker Tour episodes during the second quarter of 2006 versus no episodes of the PPT delivered in the same period in 2005.

During the first quarter of 2006 WPTE and the Travel Channel entered into an agreement to air WPTE's Professional Poker Tour television series. The Professional Poker Tour features a series of invitation-only tournaments that are limited to the highest ranked players in the world. The PPT began airing in July of 2006.

During the second quarter of 2006 we reported net unrealized gains on notes receivable of $17.6 million for the three months ended July 2, 2006 compared to a net unrealized loss on note receivable of $1 million for the three months ended July 3, 2005. These amounts related to the adjustment to estimated fair value of the Company's notes receivable from Indian Tribes.

The increased unrealized gains was primarily due to the increase to fair value of notes receivable related to the casino development project with the Pokagon Band of Potawatomi Indians in New Buffalo, Michigan. This increase was partially due to favorable events occurring during the second quarter of 2006, which increased the estimated probability opening for the project.

Specifically during June of 2006, an affiliate of the Pokagon Band closed on a $305 million senior note financing in addition to a $75 million commitment for furniture, fixture and equipments to fund the Four Winds Casino project in New Buffalo Township. The closing of this finance triggered a retroactive interest rate adjustment on the Pokagon Band loans payable to Lakes, which required the recalculation of interest costs as if a fixed rate had been in effect for the entire period the loans were outstanding.

This fixed interest rate of 9% was included as part of the fair value calculation related to the notes receivable from the Pokagon Band as of July 2, 2006 and also contributed to the increase in fair value of those notes receivable during the current year quarter.

Construction on this project began during June of 2006. As a result, unrealized gains on notes receivable associated with the Pokagon Band project during the second quarter of 2006 were $12.4 million compared to $200,000 for the prior year quarter.

The remainder of the increase in net unrealized gains and notes receivable related primarily to the Kickapoo Traditional Tribe of Texas project. The Kickapoo Tribe and Lakes terminated their business relationship during 2005, however, during the second quarter of 2006, Lakes received releases from various vendors for $2.8 million of related liabilities previously recorded on Lakes books. During the second quarter of 2005, unrealized losses on these notes receivable related to the Kickapoo Tribe project were $1.3 million.

Selling, general and administrative expenses were $8.8 million for the second quarter of 2006 compared to $7 million for the second quarter of 2005. The increase of approximately $1.8 million was primarily due to the adoption of the Statement of Financial Accounting Standards 123R which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee and director stock options and stock purchases based on estimated fair values.

For the three months ended July 2, 2006 share-based compensation expense recognized under the Statement of Financial Standards 123R was approximately $1.4 million, of which approximately $700,000 related to WPT and $700,000 related to Lakes. Under the previous accounting methodology, there was no share-based compensation expense recognized related to employee and director stock options and stock purchases during the three months ended July 3, 2005.

Remaining increase in selling, general and administrative expenses in the second quarter of 2006 as compared to the second quarter of 2005 was due primarily to additional headcount related costs.

The increase in income tax provision of $3.5 million for the three months ended July 2, 2006 compared to the three months ended July 3, 2005 was due primarily to the previously disclosed Internal Revenue Service examination of Lakes income tax returns.

WPTE's production costs decreased to $4.2 million in the second quarter of 2006 from $4.4 million in the second quarter of 2005. The decrease was primarily due to lower recognized PPT production costs as WPTE began capitalizing these costs in the first quarter of 2006 upon reaching a distribution agreement with the Travel Channel versus previously expensing them during 2005.

During the second quarter production costs associated with the PPT were $900,000 compared to $1.5 million in the prior year's quarter. Additionally, a decrease of $500,000 in non-cash compensation expense related to consultant stock options contributed a favorable variance.

The variance was partially offset by $400,000 in online gaming costs during the second quarter of 2006 compared to no cost in the same period in the prior year and higher costs related to the delivery of additional episodes of the World Poker Tour Series in the second quarter of 2006 compared to the 2005 period.

Net other expense was $7.5 million in the second quarter of 2006 compared to other income of $400,000 in the second quarter of 2005. The fluctuation in the second quarter of 2006 related primarily to a loss on extinguishment of debt of $6.8 million related to the payoff of a financing facility with an affiliate, Apprentice Capital Management LP, during June of 2006 with a then outstanding principal amount of $25 million.

During June of 2006, Lakes, through a wholly owned subsidiary closed on a $105 million credit agreement with Bank of America as administrative agent. Bank of America Securities LLC served as sole lead arranger and sole book manger for the transaction.

Approximately $25 million of the proceeds from the B of A credit agreement were used to repay the Apprentice Financing facility and approximately $22.5 million was used to fund Lakes remaining obligation to the Pokagon Band. The remaining proceeds will be used for, among other things, funding the interest reserve under the B of A credit agreement for Lakes other casino development projects and for working capital purposes.

All funds drawn under the B of A credit agreement bear interest at the rate of LIBOR plus 6.25% per annum subject to change pursuant to terms of the B of A credit agreement and are due and payable on the fourth anniversary of the closing and are secured by substantially all of the material assets of Lakes.

A condition of the B of A $105 million financing requires Lakes to maintain an interest rate swap agreement. Therefore, the interest rate on the $105 million will be fixed at 11.9% for the first 18 months.

As a result of repaying the Apprentice financing facility in full without any additional draws, 1.25 million warrants to purchase Lakes common stock issued Apprentice will remain outstanding and exercisable and approximately 3.21 million warrants issued Apprentice will lapse and not become exercisable.

While the funds provided by the $105 million credit agreement with B of A allow us to move forward with our various other casino development projects, we expect to require additional financing during fiscal 2007 to meet the other operational developmental needs. We will continue to explore additional financing alternatives if and when needed.

With that, I will now turn the call back over to the operator for questions.

[OPERATOR INSTRUCTIONS] We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Todd Eilers with Roth Capital Partners.

Hi guys, can you hear me?

Yes, hi, Todd.

Just a couple of top level questions to start off with

Number one it seems nowadays that the NIGC seems to be scrutinizing management and development agreements a little bit closer. Do you guys see any risk to your remaining potential management agreements that still need approval?

And then I guess specifically with the Jamul project, you've got the development and construction agreement there, do you anticipate getting the management agreement there or proceeding forward with what you have?

First off, we don't see any risk in getting our management contracts approved because we have already gone through the process three times they've approved our contracts. And more important, because they've approved them, we now know the language that they require so we're able to structure our contracts even though with less comment from them because they're done the right way in the first place.

With Jamul, at this point we're going forward with the financing, you know, development construction management, not management, but development and construction opening contract and then we do a financing arrangement.

Okay. That helps.

My next question has to do with some of your competitors have mentioned that they're looking to offer some consulting-type services to tribes. And in lieu of going after kind of the more lucrative management and development agreements, do you see opportunities out there to do that and if so, are you planning to pursue any of those given your financial situation with ability to obviously, you know, provide loans and what not?

Well, certainly we've always considered doing some consulting work. The problem with that is, of course, casinos have to be opened and operating before you can do consulting work. Tribes that don't have casinos open and operating generally need financial support, and therefore the consulting that you could give them just to open their casino, they probably can't afford to pay for.

The problem with consulting contracts is they're just not high profit margins, they take up a lot of time and effort and they're not real profitable. So right now our plate is pretty full with all the projects we have in the development stage.

So at the present time we are not pursuing any consulting contracts. We have looked at some in the past, and we will in the future consider to look at some.

Okay.

And then with respect to California, it looks like the Governor's administration has opened up discussions with some of the larger tribes in the State that haven't signed new compacts. Can you comment on that?

Are you guys, are the tribes that you're partnered with in California, are they looking to enter into new negotiations, compact negotiations, with the State or are you guys, or they planning to proceed forward with the compacts that they already have?

I think both. They're certainly planning to proceed with the compacts they have, but they are actively negotiating with the State because they would very much like to sign new compacts with the new rules.

Okay.

And then lastly, Tim, could you maybe break down your total tribal assets provided in the balance sheet by actual project or your three largest projects, anyway?

Total tribal assets.

Yeah, the notes and the intangibles, just the total asset by project.

Let's see, the biggest one obviously is Pokagon. Our notes receivable at Pokagon are approximately at this point in time $82 million.

The Jamul is approximately $22 million, Shingle Springs is approximately $30 million. Those are the three main notes that we have.

Okay.

And if that helps on Pokagon we also have in intangible assets, we have $23 million of intangible assets related to Pokagon. Shingle Springs intangible is about $19 million. So those are the main intangible assets.

Okay. Thanks, guys.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Rishe Parik with KBC Financial.

How are you doing? I've got just a couple of quick questions.

With regards to Single Springs, do you have a date of when the judge is going to review the environmental impact study by the [inaudible]?

The response is due back to the lower court on August 10th. So in a week from now they'll have the response back. At that point in time, really up to now the court's docket, we would expect that to happen within approximately 90 days.

Okay.

And with regards to Jamul, and the environmental report, can you give us an idea of what happens and when you expect to complete that and when you expect to have that reviewed?

The environmental report at Jamul has been prepared in draft form, has been sent out for comments. We received comments, we are now drafting a response to the comments to complete, you know, come up with the final environmental report.

Again, we anticipate that all happening before the end of this month. And then there's, you know, you go through a 45-day formal comment period when we'll actually have open meetings with the community. Let them come in one more time for their final review and then it will be issued.

And again, remember in this case, we're doing this in conjunction with working with the State of California under the compact requirements. That's not a matter -- the environmental report is done under the environmental ordinance of the Jamul Band and subject to the approval from the Jamul Band and just reported to the State.

Okay. Great. Thank you.

At this time, there are no further questions. Do you have any closing remarks?

Yes, this is Lyle Berman again. Thank you for participating in today's call and thank you for your continued support of Lakes Entertainment.

We are very pleased with our second quarter results. Our team of dedicated employees and our excellent working relationships with the many Indian Tribes allow us to continue moving forward on our various casino projects.

I look forward to providing you an update next quarter. And until then have an enjoyable remainder of your summer. Thank you.

Thank you. This does conclude the Lakes Entertainment second quarter fiscal year 2006 earnings conference call. You may now disconnect.