Golden Entertainment Inc (GDEN) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 Lakes Entertainment, Inc. conference call. My name is Deanna and I'll be the operator for today. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Tim Cope, President and Chief Financial Officer. Please proceed.

Thank you, Deanna. Good afternoon, everyone, and welcome to Lakes Entertainment's fourth quarter 2011 earnings conference call. On the call with me is Lyle Berman, Lakes' Chairman of the Board and Chief Executive Officer.

As we begin our prepared remarks, I would like to remind everyone that this call may contain forward-looking statements including statements concerning business strategies and their intended results and similar statements concerning anticipated future events. These statements are subject to risks and uncertainties including those risks described in our filings with the SEC and actual results may differ materially.

Lyle will begin our discussion today with a general overview and update on our casino projects. I will then discuss the fourth quarter financial results and recent business events. And then we'll conduct a question-and-answer session. Now I will turn the call over to Mr. Lyle Berman.

Thank you, Tim, and welcome, everyone, talk to Lakes' fourth quarter 2011 earnings call. As we recently announced on March 13th, we terminated our development and financing agreement with the Jamul Indian village. Lakes had an agreement with the Jamul Indian village to develop a gaming facility on its reservation located outside of San Diego.

Although we believe that the Jamul casino project continues to have great merit, we determined that the project does not fit with our current business plan for the future of Lakes. As of the date of termination, Lakes has advanced approximately $57.5 million including accrued interest. Due to the termination of the agreement with the Jamul tribe, Lakes determined the fair value of the notes receivable to be zero, which is reflected in Lakes' 2011 year-end financial statements.

Lakes recognized a net unrealized loss of $11.9 million on these notes receivable during 2011. During 2012, through the termination date, Lakes had advanced an additional $800,000 that will be reflected as losses in Lakes' consolidated statement of operations in the first quarter of 2012. Pursuant to the Jamul development agreement, Lakes is required to fund travel support costs of approximately $600,000 subsequent to the termination date and provide funding of certain professional fees for a period of 30 days from the termination date. These amounts will also be reflected losses during the fiscal 2012.

Although the Jamul tribe remains obligated to repay all advances including accrued interest, it is not contemplated that the Jamul tribe will have sufficient funds to make such payments unless it opens a gaming facility on its reservation. Lakes continues to have a collateral interest in all revenues from any future casino owned by the Jamul tribe, and the casino's furnishings and equipment. We have enjoyed our relationship with the Jamul tribe over the past several years and wish the tribe much success with its continued progress toward development of their casino.

We have also terminated our agreement to develop and manage the Sportsman Casino in to Tunica, Mississippi. We have no further obligations or responsibilities with respect to that development and suffered no loss as a result of the termination.

The Red Hawk casino located near Sacramento, California continues to aggressively market to one of the most economically challenged demographics in the country, and the efforts are generating positive results. Overall visitation to the casino is up substantially over prior year improving both non-gaming and gaming revenue.

Additionally, operational improvements have been made to improve bottom-line results offering the best gaming product while providing superior gift service continues to drive customer loyalty. We continue to work closely with the Shingle Springs gaming authority to help Red Hawk achieve strong operating results while focusing on guest loyalty, repeat customer visits, employee pride, and superior service to ensure that this property is operated as efficiently as possible for the benefit of the Shingle Springs tribe and Lakes.

We maintain a 10% interest in Rock Ohio venture's ownership in the planned casinos in Cincinnati and Cleveland, Ohio. The first phase of the casino project in Cleveland is well underway with an expected opening in May of this year. This phase of the casino is expected to feature approximately 2,100 slot machines, 63 table games, 30 table poker room and multiple food and beverage outlets. The Cincinnati casino is also under construction and is planned to open in 2013. The Cincinnati casino is planned to feature approximately 2,000 slot machines 116 table games including poker, food and beverage outlets, and a parking structure with approximately 2,500 spaces.

As recently announced, we reached an agreement to buy out our partners' interest in Evitts resort, which is the joint venture that submitted a response to a request for proposal by the State of Maryland video lottery facility location commission for a video lottery operation license at the Rocky Gap Lodge and Golf Resort in Cumberland, Maryland.

Subsequent to the buyout, Lakes will be the sole owner of Evitts. The buyout is contingent on Evitts being awarded the license by the location commission. Currently Lakes is the only applicant for the license at Rocky Gap. We currently expect the State to make a decision in the second quarter of 2012.

The current facilities at Rocky Gap include a 225 room hotel, restaurants, convention center, and Jack Nicholas signature golf course. The plan we submitted provides for new construction of a 50,000 square foot gaming facility, which will feature approximately 800 video lottery terminals, a number of food and beverage outlets, and a retail component.

As a Company, Lakes continues to be uniquely positioned with a stable balance sheet and no debt. We continue to evaluate business opportunities to determine the best possible manner in which to increase shareholder value. With that, I'll turn the call back over to Tim to provide an overview of recent business issues and financial results.

Thank you, Lyle. Net losses for the fourth quarter of 2011 were $12.7 million compared to $28.1 million in the fourth quarter of 2010. Losses from operations were $16.8 million for the fourth quarter of 2011 compared to losses of $39.5 million for the fourth quarter of 2010. Basic and diluted losses were $0.48 per share for the fourth quarter of 2011 compared to losses of $1.07 per share for the fourth quarter of 2010.

Lakes Entertainment reported fourth quarter 2011 revenues of $1.3 million compared to fourth quarter 2010 revenues of $4.7 million. This decline was due to the elimination of management fees from the Four Winds casino resort as a result of the early buyout of the management agreement for that property during the second quarter of 2011.

For the fourth quarter of 2011, Lakes' selling general and administrative expenses were $2 million compared to $2.3 million in the fourth quarter of 2010. Selling and general administrative expenses consisted primarily of payroll and related expenses, travel expenses, and professional fees. This decline resulted primarily from decreases in payroll and related expenses and travel expenses during the fourth quarter of 2011 compared to the fourth quarter of 2010.

At the end of 2010, Lakes concluded that the notes receivable from the Shingle Springs tribal gaming authority were impaired resulting in an impairment charge of notes receivable of $21 million during the fourth quarter of 2010. This impairment was taken because it was estimated that substantial amounts due would not be repaid within the contract terms due to various factors, which negatively impacted cash flows for the property. No additional impairment charges were recorded during 2011.

Lakes recognized impairments and other losses of $5.9 million during the fourth quarter of 2011 and $18.8 million during the fourth quarter of 2010. Impairment losses for the fourth quarter of 2011 included losses of $3.3 million related to the early termination of the Company's airplane division. Also included were impairments of $1.3 million during the fourth quarter of 2011 and $1.6 million during the fourth quarter of 2010 due to declines in the estimated fair value of land owned by Lakes in Vicksburg, Mississippi.

Fourth quarter 2011 impairment losses of $1.3 million in 2011 and $500,000 in 2010 were due to the continuous uncertainty surrounding the completion of the project with Jamul tribe. As Lyle explained, during March 2012, Lakes determined that it would not continue to move forward with the Jamul casino project and terminated its agreement with the Jamul tribe.

In addition, the fourth quarter 2010 impairment losses included $16.7 million related to intangible assets associated with the Shingle Springs project. These intangible assets were impaired because the carrying value exceeded estimated future cash flows. There were no additional impairment charges taken on these intangible assets during 2011.

Amortization of intangible assets related to the operating casinos was $300,000 for the fourth quarter of 2011 and $2.8 million for the fourth quarter of 2010. The decrease in amortization expense relates primarily to the buyout of the management agreement for the Four Winds casino resort, which resulted in the full amortization of the remaining intangible assets associated with that project during the second quarter of 2011.

Net unrealized gains and losses on notes receivable relate to the Company's notes receivable from Indian tribes relating to casino projects that are not yet open, which are adjusted to estimated fair value based upon the current status of such projects and evolving marketing conditions. In the fourth quarter of 2011, net unrealized losses on notes receivable were $9.8 million compared to net unrealized gains on notes receivable of $800,000 in the prior year period.

The net unrealized losses in the fourth quarter of 2011 are primarily due to the termination of the agreement with the Jamul tribe. The net unrealized gains in the fourth quarter of 2010 consisted of gains related to the Jamul project due primarily to improvements in the credit markets during that period.

Other income net for the fourth quarter of 2011 was $1.3 million compared to $1 million for the fourth quarter of 2010, and in both periods consists primarily of interest earned on the notes receivable from the Shingle Springs tribe, a significant portion of which relates to non-cash interest income.

The income tax benefit for the fourth quarter of 2011 was $2.7 million compared to $10.4 million for the fourth quarter of 2010. The fourth quarter 2011 benefit resulted from the Company's ability to carry back the 2011 taxable loss to the prior year. The fourth quarter 2010 tax benefit consisted primarily of an $8.5 million tax benefit related to the adjustment to reduce the liability previously recorded for an ongoing tax matter with the State of Louisiana due to the $9 million settlement amount, which was paid during the first quarter of 2011.

In summary, while the economy in Northern California continues to suffer especially in the Sacramento market, we are encouraged by improvements in both top line, bottom line results at the Red Hawk casino. We are continuing with our investments in Rock Ohio Ventures and its casino developments in Cincinnati and Cleveland, and we look forward to the opening of both of these projects. Finally, we look forward to the decision by the State of Maryland video lottery facility location commission related to our sponsor request for proposal for a video lottery operation license in Allegheny County, Maryland.

Now I'll turn the call over to the operator for questions.

(Operator Instructions) The first question will come from the line of Kyle Hanson, Lakes Entertainment.

Hi, Tim, Lyle. I'm wondering if you have any ongoing value or interest in the Jai-Alai matter in Florida?

At this point -- this is Lyle, at this point we do not. The -- our partners had a contract with Boyd Gaming to buy the Dania Jai-Alai. They weren't able to complete the purchase on the time. There is some litigation going on between the two, but we are not -- at this point we have no interest.

Well, the question on Ohio, I think you indicated the value once that opened might be very significant. Are you able to comment about that?

At this point we still believe it's a significant value to Lakes, but no, we aren't able to quantify that at this time.

Thank you.

(Operator Instructions) The next question comes from the line of Richard St. Jean, Web Gaming.

Gentlemen, a couple questions for you. Number one, you mentioned increased visitations at the Red Hawk property. How much of that would you attribute to what seems like to be an aggressive expanded bus program?

The bus program is nominal. We do have an aggressive bus program. It has been growing a little bit. As you probably know, the bus program is what we call -- it's a marginal business. It's not particularly lucrative but it does fill up your casino during off times, particularly. It is growing a little bit, but the more significant part is just the independent traveler coming on a regular basis through continually -- continual contact with our database.

Great. And the second question was in relation to the $30 million lawsuit that's been decided, any concerns regarding that?

Well, at this point, the tribe certainly is appealing the verdict. And there is -- they won the point where they didn't have to put up any money or put any money in escrow until it's finally adjudicated. The interesting part is that the entire process ran through state courts rather than federal courts, and now the tribe is aggressively appealing at the federal level.

Okay. Thank you.

(Operator Instructions) And we have a question from the line of [Amir] (inaudible).

I am relatively new to the Company. I look forward to learning more. I guess one question I had was going into the Rock holdings investment, can you describe the nature of your investment? Is it just you own 10% of the common equity of the project? And can you describe the other funding sources that went into it, and if there is a successful exit, what would actually happen for Lakes?

Well, first off just to bring you up to date, it came about by Rock Entertainment, which is primarily owned by Dan Gilbert, and Penn Gaming decided to run a referendum in Ohio to legalize for casinos. Two each -- each one had two. Rock had Cleveland and Cincinnati. Penn had Toledo and Columbus. They invited us in to participate in the referendum. And we put up 10% of the money, which was about $4 million.

And in return, we had the right to own 10% of the equity in each of -- the common equity in each of the four casinos with the proviso that, if additional equity or money was needed, we either would put up our share of that money or we would be diluted. We subsequently sold our interest in Penn Gaming -- the two casinos for Penn gaming. And we continued to own -- and we sold that for approximately $25 million.

Okay. So you exited that for $25 million, and how much money did you put into that venture?

We put $2 million into that.

Oh, wow.

And exited with $25 million. Then we continued and said we like -- we continued -- because we still had more funds now, we elected to continue to own the common equity interest in Rock Gaming. So Rock Gaming, as it turned out, they hired Caesars Palace -- Caesars Entertainment, I guess it's called, to manage the casinos and own part of it. So at this point, Rock Entertainment owns 80% of the two casinos, Cincinnati, Cleveland, and Thistledowns, which is a racetrack in Cleveland. They own 80%. We own 10% of Rock. There was a capital call of equity on Rock side of approximately $222 million. We elected to participate in that, so we put up -- we have put up or will put up 10% of that.

I believe to this point, we've put up around $15 million, and we have about $9 million yet to be called on. That money -- that $22 million gets a preferred return. They get a 15% interest PIK. A PIK right now probably to be funded on a refinancing in a few years. And then that new money also got 25% of the equity. So what we call old money, new money, our old money has a 75% pure equity interest, and our new money, which eventually will probably come to $22 million has a preferred interest PIK as well as 25% of the equity.

And our interest is totally passive. We are not involved in management in any way. We're just an investor.

Okay. So you're new return, is it going to be capped at a preferred interest rate, or would you also -- including getting preferred equity, would you then also be able to convert it to common if there is a successful --?

It is common. What we got for our new investment; and by the way, our partners got the same thing, you understand. We get a 15% interest, that's a PIK, and 25% -- the new money gets 25% of the common equity. Now, you might say, when does that get monetized? Well, we're not sure. The PIK interest is at least is projected to be paid on a refinancing once both casinos are open and we get into bank debt instead of high yield. And at that point, it's projected that we would get back our $22 million plus our PIK interest.

The common equity component both from the old money and the new money can be monetized perhaps in a variety of ways. And it's everything from the entire project could be sold, Caesars, now that they're public, could perhaps (inaudible) and buy the rest of the equity interest to be all part of that. They could take this product -- this project -- these projects together with -- we are not part of, but Rock and Caesars are going forward with another joint venture in Maryland. And that company could become public, or just start paying dividends.

Quick -- I didn't mean to cut you off, just quick question. Just to sum it up, you own 80% of Rock --

We own 10% of Rock.

10% of Rock, which owns 80% of the project. And you have that much common equity. You also have $22 million in payment in kind preferred, is that correct?

That is correct.

Okay. That's definitely exciting. And also just sorry, another quick question. When did you -- I know you had mentioned you think one of the casinos is going to open, the Cleveland one in May. When do you think the Cincinnati one was going to open? I know you had mentioned, I just missed that.

Again, and I am repeating what we read in newspapers. But I believe it's projected to open late in the first quarter or early in the second quarter. And again, both projects are fully financed and currently under construction.

Okay. That's definitely exciting. Do you mind if I ask another question?

Go ahead.

Once again, for someone who hasn't been following the Company for a while, I noticed that there was an IRS audit and -- that was just mentioned that the IRS is conducting an audit. Have you commented on what that was regarding or if it's tangible?

We have commented on that before. And we have commented that it's an audit in just the normal course of random audits by the IRS. It is not a specific audit of any kind or any particular issue they're looking at.

Okay. All right. I guess my final question was just I know you are putting out numbers that on a GAAP financial basis, the Company appears to be unprofitable. But how would you kind of explain the business model -- like, is the Company currently generating profits on a cash basis, or is it -- what -- how would you kind of describe the path towards profitability?

Well, we consider ourselves very much in a transition year. As you pointed out, a tremendous amount of our losses are non-cash losses. They are strictly write-down of assets and-or -- write-down relative to Indian gaming. Our current business model is we think we're a small public company. We have no debt. We have cash on our balance sheet.

We're currently managing one Native American casino. And we are currently looking to transition our Company away from Indian gaming per se into things that we would own long-term. So Maryland, we think was a very good project for us. It appears we will be owning the vast majority of the equity in it. Just to start, it's not the end. We are continuing to look for other gaming opportunities in our space. There are a number of casinos for sale that we continually look at.

And we think of ourselves this year as very much in a transition year in that we currently still manage the one casino in Sacramento. It's a very important project to us. But we are looking to develop projects that we own and operate, I must add, own and operator ourselves. We're not looking for additional passive investments like Ohio.

Okay. Thank you. I appreciate it.

There are no more questions at this time. I'd like to turn the call back to Lyle Berman, Chairman and CEO for closing remarks.

Well, thank you very much, operator, for all of your questions. We will focus on continuing to execute on our strategy of generating shareholder value. Thank you once again for interest in Lakes, and we will speak with you again on our next earnings call. Thank you.

Thank you again, ladies and gentlemen, for your participation. This concludes today's conference. You may now disconnect, and have a great day.