Golden Entertainment Inc (GDEN) 2006 Q3 法說會逐字稿

Good afternoon. My name is Angela and I will be your conference operator today. At this time I would like to welcome everyone to the Lakes Entertainment third quarter 2006 fiscal year earnings call. [Operator Instructions] Thank you. Mr. Cope, you may begin your conference.

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

As we begin our prepared remarks, I'd like to remind everyone that this call may contain forward-looking statements under 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.

A replay of this call will be available beginning today at approximately 3:00 p.m. Central time through Friday, November 10th. You may access the replay by visiting the Lakes Entertainment website or by dialing 1-800-642-1687, using the pass code 9722520.

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

Lyle?

Good afternoon everyone and thank you for joining us today. As I've stated before, the casino projects we are undertaking with our tribal partners are grand in scale and require a great deal of collaboration between to design and build. We continue to be pleased on the progress we are making on our projects and greatly appreciate the dedication of the many individuals associated with the various tribes we have partnered with on these projects.

Projects of this magnitude also entail a variety of legal and regulatory issues, which I'll outline as part of each update.

As I review each casino project, 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.

I'll begin with Foothill Oaks Casino, which is with the Shingle Springs band of Miwok Indians near Sacramento, California. Lakes has contracts which have been approved by the National Indian Gaming Commission, NIGC, to develop and manage this casino, to be built on the rancheria of the Shingle Springs Tribe in Eldorado County, California, approximately thirty miles east of Sacramento.

During September of 2006, the Shingle Springs Tribe signed an intergovernmental agreement with the Eldorado County that will provide the county with at least $87 million in payments over 20 years for services and as a contribution to the county's general fund.

The agreement also provides that the Tribe will pay Eldorado County $5.2 million per year for 20 years to construct high-occupancy vehicle lanes on Highway 50.

Additionally, the agreement calls for the Tribe to make other periodic payments as detailed in the agreement with the county. The agreement is subject to the Tribe's casino operating with at least 2,000 Class 3 slot machines and will allot to the county an additional $100,000 a year for additional 100 machines, if the Tribe is allowed to operate more than the designated 2,000 machines.

The county in turn has agreed to drop all its federal and state court litigation against the Tribe and formally support the Tribe's interchange and casino projects.

Let me give you a bit of background on the existing legal proceedings surrounding the casino, how the agreement I just described affects some of this proceeding and where things stand in terms of concluding the remaining legal issues associated with Foothill Oaks Casino.

Because the county was the only plaintiff in the federal court case, that matter has been resolved in its entirety.

The remaining suit is the state court case filed by the Voices of Rural Living against the California Department of Transportation, which is called Caltrans, challenging the validity of environmental documents prepared for the approval of the interchange by Caltrans under California environmental quality act, called CEQA.

The case received an initial ruling in late December of 2003, which denied all claims the plaintiffs- - of the plaintiffs, except one. The plaintiff appealed that decision to the State Appeals Court. The judge then issued a final decision on the remaining item in September of 2004.

The Tribe's and the State's attorneys filed an appeal. In November of 2005, the Appeals Court issued their decision. The Tribe and Caltrans won their appeal of the September ruling.

However, the Appeals Court overturned two decisions of the trial court's original ruling requiring additional air quality evaluation and the evaluation of alternatives of varying size to the proposed casino project.

Although Caltrans can have no affect on the size of the proposed casino project, since it is located on sovereign lands, and the court so acknowledges that, Caltrans was required to comply with the appeals court order. The supplemental environmental impact report was completed and published for public review on June 7, 2006 and final public comments were submitted by July 6th. Responses were prepared and the final supplemental EIR was issues in August of 2006.

Caltrans issued a FONSI, which is a finding of no significant impact, and the documents were submitted on August 9th to the trial court for confirmation that the appeals court order had been satisfied. The hearing is actually scheduled for today and we anticipate the decision process will be completed within the next 90 days.

In September 2006, the Voices for Rural Living filed a second CEQA suit, case, alleging that Caltrans did not properly process the supplemental EIR, which is also part of the hearing process today.

The agreement between Shingle Springs Tribe and Eldorado County is very encouraging and we consider this a positive step forward for both the Tribe and the residents of Eldorado County. 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. Caltrans has indicated that it will immediately issue the final permit to allow construction of the interchange to commence, as soon as the state court issues a positive ruling.

We are looking forward to the decision of today's hearing so that we can take the next steps necessary to begin construction on the highway interchange and the casino project. Assuming a positive outcome in the state court case, construction of this casino could begin within 120 days after that ruling.

Once complete, the Foothill Oaks Casino will include at least 2,000 Class 3 slot machines and 100 gaming tables.

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 the Potawatomi Indians in New Buffalo Township, Michigan, approximately 75 miles east of Chicago.

With land in trust, a signed management contract and secured financing, Four Winds construction is moving along on track to be completed by our estimated August 2007 opening date. We are very pleased with this casino project and I encourage everyone to view construction via the webcam on our website.

Once complete, the Four Winds Casino will be the only land-based casino in the northern Indiana, western Michigan market and will feature approximately 3,000 slot machines and 110 table games, as well as restaurants, a hotel, enclosed parking and several other amenities.

Under the Jamul Casino project, 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 market, just 20 minutes from downtown San Diego. The casino's plan is to include approximately 2,000 gaming devices and 75 table games, along with related amenities.

The trust application has been completed for this project and the regional office of the DIA made its final positive recommendation. At this point, however, the Tribe has chosen to put the trust application on hold and plans to build the casino on its existing six-acre reservation. An architectural analysis has been completed and it has been determined that the casino project can be built on the existing reservation. The plans and specifications are estimated to be completed in the current quarter.

Although the Tribe is only required to prepare their current contract mandated environmental evaluation of the off-reservation impacts, the decision was made to complete a tribal environmental impact report statement, called TEIRS, in accordance with the newer 2004 compacts approved by the state. The Tribe has entered into discussions with the State of California to negotiate a new compact and all prior new compacts have required the more extensive TEIRS report.

The Tribe issued a notice of preparation, NOP, that provided the public an opportunity to comment on the preparation of the TEIRS- - of the TEIRS comments on the NOP received in July of 2006. The Tribe received comments, incorporated them into the draft TEIRS and, on August 25th, published the report for public comment. Comments were received and are being incorporated into the issuance of the final TEIRS report.

We anticipate construction to begin on this project in mid-2007, with an opening in late 2008.

Lakes has signed consulting and management 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.

The Trading Post is an existing property. It has been renovated and opened. Lakes assisted the Tribe under its consulting agreement with renovations to the Trading Post Casino by replacing 40 under-performing Class 2 machines with 66 newly compacted machines and completing some physical improvements in the interior of the property.

All work was completed on budget and the renovated casino is being operated by the Tribe with the assistance from Lakes under our consulting agreement.

The travel plaza casino is an expansion of the existing truck stop. The initial phase is planned to upgrade the facility with approximately 180 slot machines or electronic table games and a 65-seat restaurant. Future development of this property could include additional gaming, restaurant seating, hotel rooms and other amenities. We await approval of the NIGC management contract. Once the management contract is approved, we anticipate construction to begin in early 2007, with an opening approximately six months later.

The largest of the Pawnee Nation casino resort developments will be the [Chalaco] Casino located on approximately 800 acres of Indian gaming land owned by the Pawnee Nation in the Town of Chalaco in northern Oklahoma near the Kansas border. Once completed, this casino's plan to include 1,200 slot machines, 20 table games and 4 poker tables.

Support facilities are planned to include four restaurants, 150-room hotel, Kids Quest child care center and required back office spaces. Future development could include additional gaming, hotel rooms and events center, potential golf course and other market-driven amenities. '

We are awaiting final approval of the NIGC management contracts. Once received, construction is planned to begin with an anticipated opening date of early 2008.

In connection with its three planned Pawnee projects, in March 2005, Lakes and the Tribe submitted fully executed management agreements and related transaction documents to the NIGC for review and approval under the Indian Gaming Regulatory Act, called IGRA. NIGC's staff have reviewed the documents and requested certain modifications to the documents, prior to issuing NIGC approval. The parties have made such modifications to the documents as they have been deemed necessary and anticipate submitting the revised agreement to NIGC for final review and approval.

Although the revised agreements have been approved by the tribal gaming subsidiaries, which will own and operate the projects, the mission of the revised project documentation has been delayed for several months, due to a dispute between members of the Pawnee Business Council. It is uncertain at this time what action, if any, the Business Council will take in connection with approving the submission of the revised documentation to the NIGC. And it is unclear what impact these circumstances will have on final NIGC approval of each management agreement.

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 in Perkins and the other, a proposed new project, the Ioway Casino, which is located approximately 30 miles northeast of downtown Oklahoma City on historic Route 66.

The Cimarron Casino is a fully renovated facility that includes approximately 350 compacted gaming devices, including table games and poker, and a new snack bar. Additional land was purchased and parking space was added. We are pleased that the project came in substantially under budget, providing funds to facilitate additional project improvements.

The required NIGC approval was received in April 2006 and we are currently managing this facility.

The second project with the Iowa Tribe of Oklahoma, the Ioway Casino, is the development of a full service casino resort on tribal land on Route 66, midway between Warwick and Chandler, Oklahoma. The proposed development will have an initial phase of approximately 1,500 slot machines, 250-room hotel, four restaurants, a Kids Quest child care center, parking and required back-of-house support facilities. Future development could include additional gaming, hotel rooms, meeting space, special events center, golf course and other amenities.

The BIA will need to approve the transfer and leasing of the land to the tribe to complete the site. This requires the preparation of an environmental assessment for the proposed project and the issuance of a FONSI by the BIA. The same EA will be used to obtain NIGC management contract approval.

The master plan and draft environmental assessment for submission to the BIA and NIGC have been completed. The BIA and NIGC have provided their comments on the draft and are being incorporated into the document to allow completion and review process of the approval of the project. Once approved, construction will begin with an anticipated opening of the Ioway Casino in mid-2008.

The final casino project to be discussed today is our own casino project in Vicksburg, Mississippi. Lakes has purchased or acquired the rights to purchase approximately 600 acres in Vicksburg, just off Highway 61, approximately three miles south of downtown, adjacent to the Mississippi River.

The agreement has been reached between the city and the Kansas City Southern Railroad to acquire fee land owned by the railroad. This land will provide the access to the proposed site. We are working to finalize the site plans to include a casino facility that houses 1,200 slot machines, 46 table games, 12 poker tables, four restaurants, a 250-room hotel with meeting rooms, parking and possibly a Kids Quest child day care center.

We are working toward obtaining all necessary approvals to move forward with this project. However, we do not expect to have access to the capital necessary to make this a viable project for us until such time that one of our other casino projects is open. And, therefore, this is now planned to be a late 2007 project.

With that, I'll turn the call over to Tim to provide an overview of financial results.

Thank you, Lyle. For the three months ended October 1, 2006, revenue totaled $5.9 million, compared to $2.1 million for the three months ended October 2, 2005.

Earnings from operations were $0.9 million for the third quarter of 2006, compared to a loss from operations of $7.7 million for the third quarter of 2005.

For the quarter ended October 1, 2006, net earnings were $0.2 million and basic and diluted earnings were $0.01 per share. This compares with a net loss of $7 million and basic and diluted losses of $0.32 per share in the prior year period.

Revenues for both quarters were derived from the operations of Lakes' majority owned subsidiary, WPTE Enterprises, primarily from television license fees. The increase in revenues was primarily the result of the delivery of nine episodes of Season One of the Professional Poker Tour television series in the third quarter of 2006, versus no episodes of the Professional Poker Tour delivered in the same period in 2005, and an increase in on-line gaming revenue of $0.7 million, due to higher levels of player activity than in the prior year period.

Net unrealized gains on notes receivable were $5.8 million for the three months ended October 1, 2006, compared to net unrealized losses on notes receivable of $2.1 million for the three months ended October 2, 2005.

These net unrealized gains related to the adjustment to estimated fair value of the notes receivable from Indian tribes. Of the $5.8 million in net unrealized gains and notes receivable during the current quarter, $2.6 million related to the casino development project with the Shingle Springs Band of Miwok Indians. This increase was due to an increase in the estimated probably of opening for this project, because of the agreement reached between the Shingle Springs Tribe and Eldorado County during the third quarter of 2006, which Lyle outlined in his comments.

The remainder of the net unrealized gains during the three months ended October 1, 2006 related primarily to increases in fair value of notes receivable related to the casino development projects with the Jamul Indian Village and the Pokagon Band of Potawatomi Indians.

During the third quarter of 2005, net unrealized losses on notes receivable related primarily to the Kickapoo Traditional Tribe of Texas project. The Kickapoo Tribe and Lakes terminated their business relationship during 2005, which resulted in an unrealized loss on notes receivable of $4.1 million during the three months ended October 2, 2005.

This loss was partially offset by net unrealized gains associated with the Pokagon Band and the Jamul Tribe projects during that third quarter of 2005.

Selling, general and administrative expenses were $8.8 million for the third quarter of 2006, compared to $6.9 million for the third quarter of 2005. The increase of approximately $1.9 million was primarily due to the adoption of Statement of Financial Accounting Standards number 123(R), share-based payment, which requires a measurement and recognition of compensation expense for all share-based payment awards made to employees and director, including employee and director stock options based on estimated fair values.

For the three months ended October 1, 2006, share-based compensation expense recognized under SFAS 123(R) was approximately $1.3 million, of which approximately $0.6 million related to WPTE and $0.7 million related to Lakes.

Under the previous accounting methodology, there was no share-based compensation expense recognized- - related to employee and director stock options during the three months ended October 2, 2005.

The remaining increase in selling, general administrative expenses in the third quarter of 2006 as compared to the third quarter of 2005 was due primarily to increased head count in WPTE legal fees associated with development, growth and regulatory compliance costs.

The increase in the income tax provision of $1.8 million for the three months ended October 1, 2006, compared to the three months ended October 2, 2005, was due primarily to the realized gain on WPTE's sale of PokerTek, Inc. common stock during the third quarter of 2006.

WPTE's production costs increased to $1.7 million in the third quarter of 2006, from $0.6 million in the third quarter of 2005. The increase was primarily due to increased on-line gaming costs of $0.5 million, as the 2006 period had higher levels of player activity versus the 2005 period, increasing the amount of the fees paid to the service provider, which are based on percentage of gross revenue.

Further, an amendment of the agreement with the service provider, effective in July of 2006, significantly increased the percentage of revenue paid to that party, which contributed to the increase.

Additionally, cost of revenues associated with the Professional Poker Tour was $0.7 million in the current year quarter, compared to $0.3 million in the prior year quarter. The increase was primarily due to the delivery of nine episodes of the Professional Poker Tour in the third quarter of 2006 versus no episodes being delivered in the prior year period.

Other income was $2.5 million in the third quarter of 2006, compared to $0.4 million in the third quarter of 2005. The increase in the third quarter of 2006 included a $4.5 million gain- - realized gain on the sale of WPTE's remaining 450,000 shares of PokerTek common stock, which was partially offset by interest expense of $3.2 million related to Lakes' $105 million credit agreement with Bank of America. The remaining increase was the result of additional interest income during the current year quarter, resulting from higher cash balances and interest rates.

Overall, I'm pleased with the progress we're making on all our casino projects. Pokagon is on schedule and within budget and we are encouraged by the recent agreement between the Shingle Springs Tribe and Eldorado County. We are actively managing the Cimarron project and preparing architectural plans for the new Ioway casino. Everyone remains focused on completing the necessary approvals on all other projects, so that construction can begin at the earliest possible date.

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

Thank you. [Operator Instructions] Your first question comes from Todd Eilers of Roth Capital Partners.

Hi guys. Can you hear me?

Yes.

Sorry about that. Not sure what was going on. First question I have, Tim could you, could you maybe break down the fair value of the notes receivables by tribal project? And also, what your current probability assumption is for each, each of those projects?

I can give you the notes receivable balance and then when we publish the 10Q next week, you'll see the probability as well.

Okay.

On the notes receivable balance, on the balance sheet now, is approximately $149 million in total.

Okay.

And of that $149 million there's approximately $84 million related to Pokagon, approximately $34 million related to Shingle Springs, approximately $25 million related to Jamul, Pawnee comprised of $4.4 million and the Iowa Tribe is about $1.6 million.

Okay. That helps. And then, I guess moving to Shingle Springs, you guys obviously had the- - the settlement, or the tribe had the settlement with the, the county there. That's obviously positive news. Regarding the current group that still has a lawsuit outstanding, the state lawsuit outstanding, you mentioned that they also filed a second lawsuit. I guess I'm just- - can you help me understand? Let's say you guys, you have a hearing today on the existing lawsuit. If you guys get a favorable ruling here sometime over the next 90 days, how does this, how does the second lawsuit play into the picture? I guess I'm just trying to understand that a little better.

The second lawsuit, again as you mentioned, filed by Voices for Rural Living, the same plaintiffs in the original lawsuit, basically their second lawsuit says that the responses that Caltrans have filed with the lower court, which are being heard today, are inadequate. So, there really are no new issues. They're just making another claim that the- - now that the responses are completed that whatever the responses are, they're inadequate. And that is part of the hearing process today.

Okay, so if you guys get a favorable ruling by the judge on the hearing that's, that's going today, then that project should move forward.

That's our best understanding at this point, yes.

Okay. And then, let's see, with the Jamul project, you mentioned that the, the tribe has entered into negotiations with the state, or are looking to renegotiate the compact with the state. Can you maybe talk a little bit more about it? Is, will this project, I guess is it, is it going to be impacted by the negotiations for a new compact at all? Or is that? I guess what I'm trying to understand is will this project move forward regardless of what happens with the compact negotiations? And then, and then just trying to get a feeling for, you know, what's going on with the negotiations. Does it look like you guys might be able to come to a resolution with the state and have a new compact there?

This is Lyle answering. The project will go forward regardless. Right now, they have a compact with the state and that compact gives them the unilateral right to have 349 Class 3 machines and then they can have the balance Class 3 machines up to 2,000 subject to getting licenses on a defined number of slot machines in California, which at this time allegedly are used up, depending on who wants to interpret how many they can have.

But, we believe that the Class 2 machines that are out there today are very viable machines. Although that being said, we would much prefer to- - and the tribe would much prefer- - to enter into a new compact with the governor. Pay the State of California what they require and have all Class 3 machines. We believe that the governor's office is sympathetic to that. They've been renegotiating compacts with virtually a large number of tribes.

But, we intend to go forward, whether it's all Class- - whether it's 349 Class 3 and the balance Class 2, or all Class 3.

Okay, that, that helps. And then- -

Currently, the tribe and ourselves are currently in negotiations with the governor's office and we believe logic prevails over anything else. And at the end of the day, we want Class 3 and the state wants more money.

Okay. That helps. And then, you know, I guess that begs to question is the Shingle Springs Tribe interested in renegotiating the existing compact there as well?

Yes. They actually are in even further negotiations with the state and Jamul Tribe.

Oh, okay.

And they're, they're goals are exactly what I just said.

Okay. Perfect. I think that does it. Thanks guys.

Thank you.

[Operator Instructions] Our next question comes from Clint Morrison of Feltil.

Just one quick question. You were talking about the Chalaco Casino, I think. And you indicated that the, there, it seemed like there was some unrest in the Business Council. I'm just trying to get a sense as to sort of what that means. Does it have to do with their relationship with you or what they're going to actually do? And how is that potentially changing the project?

First off, we don't think it changes the project at all. We're not sure exactly what the contention is at the Council level. But there has been some issues and they've put this, the resubmission of our contract somewhat on hold. But our contract actually isn't with the Council, it's with their business committee and at this point, we plan to go forward with the business committee. However, the tribe has scheduled a meeting coming up in the next several weeks and we hope to get more clarification on that at this time. I think it's in the next three weeks. Tim?

Yes, that's correct.

So, at the moment the clock isn't running with negativeness. We're kind of waiting to get through that before we can hopefully get into the- -

We're waiting for this last meeting before we submit the contracts to NIGC, yes.

Okay, so we don't think it has anything to do with us and our relationship in there.

Okay, thanks. That's all I needed.

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

Yes, I do. Thank you for participating in today's call and thank you for your continued support of Lakes Entertainment. We are very pleased with our third quarter results. Our team of dedicated employees and our close 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.

This will conclude our call. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.