Lakes Entertainment Q3 2007 Earnings Call Transcript

Nov. 7.07 | About: Golden Entertainment, (GDEN)

LakesEntertainment, Inc. (LACO) Q32007 Earnings Call November 7, 2007 2:00 PM ET

Executives

TimothyCope - President and Chief Financial Officer

LyleBerman - Chairman of the Board and Chief Executive Officer

Analysts

JamesKayler - Banc of America

JustinGerbereux - T. Rowe Price

ToddEilers - Roth Capital Partners

JustinSebastiano - Nollenberger Capital

RushiBarrack - KBC Financial

ClintMorrison - Feltl and Company

ChrisKrueger - Northland Securities

WalterDavis - Walter Davis

Operator

Goodafternoon, ladies and gentlemen. Welcome to the Lakes Entertainment Q3 ResultsConference Call. I would now like to turn the meeting over to Mr. Timothy Cope,President and CFO.

Timothy Cope

Thankyou for joining today's conference call as we discuss Lakes Entertainment’sthird quarter 2007 financial results. Here with me is Lyle Berman, Lakes’Chairman of the Board and Chief Executive Officer.

Aswe begin our prepared remarks I would like to remind everyone that this callmay contain forward-looking statements within the meaning of the federal securitieslaw, including statements concerning business strategies and their intendedresults and similar statements concerning anticipated future events andexpectations that are not historical facts.

Theseforward-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 unduereliance should not be placed upon them. Lyle will begin our discussion todaywith an update on our casino projects.

I'llthen discuss the third quarter financial results and recent business events.

Lyle Berman

Thankyou Tim and good afternoon, everyone. Many investors have been asking about theSeptember SEC filing which relates to my sale of stock. Therefore, I willaddress the issue prior to reviewing our projects. I sold stock for personalreasons, as I needed to raise cash for personal reasons.

Additionally,18 months ago when Lakes stock was $9 I had an option to purchase 500,000shares of stock at $5.33. When I exercised the option, I had to pay taxes onthe difference. Therefore the sale of the 300,000 shares of stock is acontinuation of this transaction. Please note that I still own approximately 3million shares and firmly believe in Lakes and its future.

Movingto our projects, as I review each casino project please remember they are notin any order of significance or state of completion. Dates of construction andanticipated opening dates are subject to change.

I'llbegin with the Four Winds Casino Resort in New Buffalo, Michigan, which openedon August 2nd. The casino includes approximately 3,000 slot machines and 110table games, as well as restaurants, a hotel, retail shopping space, andseveral other amenities.

Theopening of the Four Winds Casino Resort in Michigan was a significant milestone for Lakes. We are nowfocused on the successful management of this property. Initial casino win wassomewhat disappointing.

However,Four Winds results and our related management piece have continued to improveas a result of modifications, which were made in a number of areas to meetcustomer demand and to improve operating efficiencies. We continue to be verypleased with the guest count numbers since Four Winds opening and as a resultkey performance metrics continued to improve.

Additionally,customer feedback and local media coverage of Four Winds is drawing comparisonsto amenities, game play, and service found in Las Vegas casinos. We are verypleased with these comparisons and feel this property is truly in a class byitself for the region. We look forward to this property's future performance.

Thenext project that I’ll discuss is the Foothill Oaks Casino near Sacramento, California, which is the development and management project with the ShingleSprings Band of Miwok Indians. The Shingle Springs Tribal Gaming Authorityclosed on a $450 million high-yield debt offering in June of 2007 andconstruction of the project began immediately.

TheAuthority will need to obtain up to $85 million of furniture, furnishings, andequipment financing. Once completed, the facility will host a total of 2,000 slotmachines and gaming devices, 100 gaming tables, several food and beverageoutlets, and approximately 3,200 covered parking spaces.

Rudolphand Sletten, one of the leading general contracting firms on the West Coastwith experience in building several Native American gaming and hospitalityresorts in California was selected as the general contractor for thecasino. C.C. Myers is the general contractor for construction on the highwayinterchange. Construction of this dedicated interchange, which connects theRancheria to highway 50, is also under progress allowing construction access tothe casino site.

Approximately90% of the mass earthwork related to the interchange portion of the project iscomplete. Construction on the fly over bridge has commenced with columns beingplaced. Formwork for the bridge is expected to commence by the end of thismonth. Approximately 90% of the mass earthwork related to the casino is alsocomplete.

Thefoundation of the parking garage is in and the first level of concrete slab forthe casino has been poured. All of the casino and site retaining walls arecomplete. The erection of steel is expected to commence by the end of thismonth.

Theconstruction of both the interchange and the casino is currently on scheduleand within budget and is progressing as anticipated. We expect this propertywill open late in the fourth quarter of 2008. We do have a webcam camera on thesite, and if you go to our website you can watch the daily progress of theconstruction, just as we had done with Pokagon.

NextI will discuss our project with the Jamul Indian Village. Lakes has an agreement for the development andfinancing of a casino resort operation with the Jamul Indian Village. The Jamul Tribe has a six-acre reservation onwhich the casino is planned to be built.

Lakeshas also acquired approximately 100 acres of land contiguous to the six acres of thereservation land that could be used for the casino support facilities if theland is taken into trust. Lakes and the Jamul Tribe have decided to moveforward with the operating a casino based solely on class 2 electronic gamingdevices.

Theagreement between Lakes and the Jamul Tribe is currently being modified toreflect the new economics of the revised smaller casino plan, which will notrequire 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 1,000class 2 gaming devices along with 20 class 2 table games.

Thesite has been cleared of all residents and all structures have been demolishedand removed. Soil drilling in preparation for the road construction hasstarted. We and the Tribe are currently evaluating the plan to determine whenthe casino construction will start and when the casino operations could begin.

NextI will discuss the current status of our agreements with the Pawnee Nation of Oklahoma. In January 2005 the Pawnee Business Council,which is the tribal government leadership of the Pawnee Nation approved atribal agreement ratifying consulting and management contracts between a Lakessubsidiary, the Pawnee Tribal Development Corporation and the Pawnee TDC gamingsubsidiaries comprised of the tribal entities that own and operate the tribalcasino.

Relatingto the existing Trading Post Casino and two other proposed facilities, the Travel Plaza Casino and the Chilocco Casino. Subsequent to that time certain ofour agreements have been disputed by the Pawnee Business Council. Lakes and thePawnee Nation are currently in discussions to resolve outstanding issues.

NowI will discuss our projects with the Iowa Tribe of Oklahoma. Lakes has signed a consulting and managementagreement with the Iowa Tribe to assist in the development, construction,and management of two gaming facilities. The first one is the existing Cimarron facility, which is located in Perkins, Oklahoma, approximately eight miles from Stillwater, which we are currently managing.

Thiscasino has been renovated to increase gaming machines from 240 to 350 andincludes six electronic table games and food and beverage venues. We are verypleased to be working with the Iowa Tribe on this project. Business continues to bevery good. We are very proud of this local’s themed casino.

Thesecond project with the Iowa Tribe of Oklahoma is the development of afull-service casino and resort, which will be named the Ioway Casino on triballand located on Route 66 midway between Warwick and Chandler, Oklahoma. The Iowa Tribe has members that own a 74-acre allotment onthe U.S. Route 66 from whom the Iowa Tribe has acquired the rights to purchase and/orlease the land for the casino development.

Anadditional 100 acres of fee land has been acquired to provide thenecessary site area for the project. The long-term plan is to acquire anadditional 300 acres of non-trust land for the development of themajority of the non-gaming facility.

TheBureau of Indians Affairs, or the BIA, must approve the transfer of land to theTribe. To date approximately 80% of the allottees have transferred their landinterest to the Tribe with the BIA approval. The BIA must also approve theleasing of additional acreages of allottee land to complete the site. Thisrequires preparation of an environmental assessment for the proposed projectand the issuance of a finding of No Significant Impact by the BIA.

TheEA was completed and submitted to the BIA in March of 2007 for issuance of a FONSI,which will allow approval of the leases. We continue to work with the Tribe andthe BIA to receive final approval of the land leases. The master plan and draftenvironmental assessment have been submitted to the BIA and NIGC. Once approvedthe EA will pave the way for NIGC to approve the management contract.

TheNIGC has provided their final comments to the Tribe on the contract and subjectto these revisions and the issuance of the FONSI; the NIGC can approve themanagement contract. The proposed development is planned to have approximately1200 slot machines, 30 table games, 4 restaurants, 150-room hotel, smallconference room, a child care facility, parking in back of the house supportfacilities.

Futuredevelopment may include additional gaming, hotel rooms, meeting space, specialevents center, golf course, and other market-driven amenities. We anticipateconstruction to begin mid-2008 with an anticipated opening in the third quarterof 2009.

Thefinal project to discuss today is our own casino development plan in Vicksburg, Mississippi. Lakes has purchased land in Vicksburg just south of the downtown and adjacent to the Mississippi River. Our current site has been approved for gaming bythe Mississippi Gaming Commission.

Oncecomplete the casinos plan to house 1200 slot machines, 46 table games, 12 pokertables, 4 restaurants, a 250-room hotel with meeting rooms, parking, and apossible childcare facility. We currently anticipate construction to begin late2008 or early 2009 with a 14-month construction time frame.

Withthat, I'll turn the call back over to Tim to provide an overview of recentbusiness issues and financial results.

Timothy Cope

Thankyou, Lyle. Revenue for the quarter totaled $7 million, compared to $5.9 millionfor the third quarter ended October 1, 2006. Losses from operations were $6.3 million for thecurrent year quarter compared to earnings from operations of $1 million for theprior year comparable period.

Netlosses for the third quarter of 2007 were $5.2 million. Basic and dilutedlosses were $0.21 per share. This compares with net earnings of $3 million, andbasic and diluted earnings of $0.13 per share and $0.12 per share respectivelyin the third quarter of 2006.

Revenuesfor the third quarter of 2007 include management fees from existing Cimarron Casinoin Oklahoma which is owned by the Iowa Tribe of Oklahoma and management feesfor approximately eight weeks of operations from the Four Winds Casino Resortin New Buffalo, Michigan, which is owned by the Pokagon Band of PotawatomiIndians and open to the public on August 2, 2007.

Inaccordance with the management contract with the Pokagon Band, pre openingexpenses totaling approximately $15 million incurred during the constructionphase of the project are shared proportionally by Lakes during the first 12months of Four Winds operations.

Toclarify, Lakes' proportionate share is 24%, the same percentage as ourmanagement fee, which amounts to approximately $4 million over the first 12months of operations and only the first 12 months. There's no impact on Lakes'fees in subsequent years.

Thecombined management fees, which are net of Lakes' share of these pre openingexpenses, were $2.6 million for the third quarter of 2007. No management feeswere recognized during the third quarter of 2006.

Iwould like to emphasize that management fees for the third quarter of 2007represent fees for eight weeks of management of the Four Winds Casino Resort andfees for three months of management of the Cimarron Casino.

Iwould like to reiterate that we have received tremendous reviews for the newlyopened Four Winds project and based on guest counts we believe it has generatedstrong customer loyalty in a short time.

Theproperty is unique in the market and has been well accepted by the customer.For these reasons, as well as the improvements since opening that Lylementioned we anticipate an upward trend in management fees for the fourthquarter of 2007.

Revenuesfor the third quarter of 2006 were derived primarily from television licensefees related to the World Poker Tour television series and Lakes majority ownedsubsidiary WPT Enterprises, Inc.

Revenuefrom this license fee income decreased during third quarter of 2007 compared tothe third quarter of 2006 as a result of the delivery of no episodes of the ProfessionalPoker Tour television series in the 2007 period, versus the delivery of nineepisodes of the PPT in the third quarter of 2006. And the delivery of threeepisodes of season five of the World Poker Tour television series in the thirdquarter of 2007 versus the delivery of one episode of season five of the WPTtelevision series in the 2006 period.

Netunrealized losses on notes receivable were $600,000 for the third quarter of2007, compared to net unrealized gains of $5.8 million for the third quarter of2006. The net unrealized losses in the third quarter of 2007 related tounrealized gains on Lakes notes receivable from the Shingle Springs Band of MiwokIndians in the amount of $1.2 million and unrealized losses of $1.8 million onthe Lakes notes receivable from the Jamul Indian Village.

Thesenotes receivable are adjusted to estimated fair value based upon the currentstatus of the related tribal casino projects. The increase in fair value of thenotes receivable from the Shingle Springs Tribe relates primarily to continuedprogress on the construction of this project, which is currently within budgetand on schedule.

Thedecrease in fair value of the notes receivable from the Jamul Tribe relatesprimarily to an increase in the discount rate which resulted from a decrease incurrent estimated win per unit for this project.

Netunrealized gains of $5.8 million during the third quarter of 2006 included $2.6million related to the adjustment to fair value notes receivable from the ShingleSprings Tribe due to favorable events occurring during the third quarter of2006.

Theremainder of the net unrealized gains during the three months ended October 1, 2006, related primarilyto increases in fair value of notes receivable from the Jamul Tribe and thePokagon Band.

Selling,general, and administrative expenses were $10.1 million during the thirdquarter of 2007 compared to $8.8 million in the third quarter of 2006. Theincrease primarily related to additional costs associated with WPTE's onlinegaming efforts, as well as increased costs associated with WPTE’s launch of theWPT China National Traktor Poker Tour.

Includedin costs and expenses for the third quarter of 2007 is amortization ofintangible assets of approximately $1.1 million associated with a casinoproject with the Pokagon Band. This amortization began when the Four WindsCasino Resort opened on October, on August 2, 2007, as previously discussed.

Otherincome for the third quarter of 2007 was $700,000 compared to other income of$5.3 million for the same period of 2006 Other income in the third quarter of2006 included a $4.5 million realized gain on the sale of WPTE's remaining450,000 shares of Poker Tech Inc. common stock.

Thedecrease in the income tax provision of $1.7 million for the three months endedSeptember 30, 2007, compared to thethree months ended October 1, 2006, was due primarily to the realized gain andWPTE's sale of Poker Tech common stock, which increased the provision duringthe third quarter of 2006.

Inclosing, across our company our focus is on successfully managing our openIndian casino projects and successfully developing and building our remainingprojects. We are committed to Indian gaming and we are very excited about theprogress these next few years will bring both for Lakes Entertainment and ourTribal partners.

Wecontinue to explore various alternatives to utilize the capital we plan toaccumulate over the next few years in a way that will allow us to achievelong-term sustainable growth for our shareholders. Our focus remains toincrease shareholder value.

Withthat I will turn the call over to the operator for questions.

Question-and-Answer Session

Operator

(OperatorInstructions) The first question is from James Kayler of the Banc of America.

James Kayler - Banc of America

Juston the obviously about the opening of Pokagon, the commentary was prettyspecific. It said in the release that initial casino win was somewhatdisappointing. Is there any way you could put some color around that, maybetalk about volumes versus the win? Were there any hold discrepancies, anythinglike that?

Lyle Berman

Ithink there was a little bit of everything. Whenever you open a casino, youhave a number of things, the hold discrepancy usually is, especially on tablegames because of dealer inefficiencies are below expectation. You budgetobviously a number of people dropping off the radar chart, so you have expensesthat are higher than plan as well.

James Kayler - Banc of America

Okay.Was win more disappointing than volume? I guess I'm trying to get a sense forhow the volumes in the property work, because, obviously there were a lot ofreports about how strong, just people?

Lyle Berman

Ithink in general the volume was, if you use coin in as a number for machines aswell as drop in the table games, the volume was very, very good. The holdpercentages were below expectation.

James Kayler - Banc of America

Thatis very helpful. Tim, are you willing to go through the management feecalculation or at least just theoretically?

Timothy Cope

Ican't talk about it real specific but I think you're familiar with the formula.We get 24% of net revenue

James Kayler - Banc of America

Okay.

Timothy Cope

And,of course, the net revenue is defined in such a way that our fees come down bythat our proportion share of that pre-opening expense. So that comes out to beabout $1 million a quarter our share of pre-opening expenses over the first 12months.

James Kayler - Banc of America

Justto clarify, if we walk through the sort of net revenue calculation as defined,take your 24%, and then for the first effectively four quarters, subtract $1million from that?

Timothy Cope

Foreach quarter.

James Kayler - Banc of America

Fortwo months in this past quarter.

Timothy Cope

Itwas eight weeks, so roughly that.

James Kayler - Banc of America

Okay.And that's sort of not dependant on when the pre-opening occurred; it'scapitalized and then amortized straight line over one year?

Timothy Cope

That'snot even an accounting thing. It was just strictly our arrangement that we madewith the Pokagon Band when we entered into the contract. Pre-opening expensesare expensed as incurred.

James Kayler - Banc of America

OnPokagon's income statement.

Timothy Cope

Sothey're already expensed, so it's not capitalized, it's just we're sharing inthat pre-opening of cost as part of our management agreement.

James Kayler - Banc of America

Verygood. Then just finally, also, on the commentary about the opening of Pokagon,you mentioned that you've started to make some changes to the property andimprove operating efficiencies etcetera. Could you just talk about what thingswent well, what things needed to be changed, some of the changes you've madesince opening - that would be helpful.

Lyle Berman

Well,certainly what went well was what we just said before, the biggest singlething, I think, that we were extraordinarily pleased with is that we opened ontime and on budget a fabulous facility. We had incredible customer guest countsand those guest counts have continued.

Andby the way we do this every month. It isn't just the first two months. We lookat our operating results virtually every single month of the year and say toourselves as a group, ‘okay, what can we do better?’ We listen to our marketingdepartment, our marketing department talks to our high roller customers inparticular.

Theywill tell us whatever the complaint is, or the accolades that we get, themarketing department will give us back that feedback. So every month we'remaking changes. I would say in the first two, three, four months of a casinooperation, or maybe even in the first six months, you'll see the change is muchmore dramatic.

Whenyou get past six months you're more into a fine-tuning. Just as an example youlook at slot machine performance, and you find two-quarter machines andone-quarter machine had $10,000 a day go through the machine, the other had$2,000 a day. It doesn't take a rocket scientist to say let's get more of the $10,000sand let's get less of the $2,000s.

Soyour slot mix in particular is incredibly important. And again, when you open acasino a great deal of it is guesswork. You certainly listen to the salesmantelling you, if you're a casino like Boyd or Stations, they have a great dealof history, maybe even in the marketplace to put their assortment up.

Obviouslythis is the first casino that Lakes has opened of this size and magnitude,certainly in a market that we spent a lot of time in and we certainly saw whatother people were operating. So I think that if you understood our slot mixtoday, three months later, three-and-a-half months, and compared it to openingday it's, quite frankly, dramatically different.

Andthose differences make a great deal of hold and win coin in, as well as thehold of the machines. So I think we're looking at everything. We're looking atprices. When we opened, our buffet prices we felt were a little under market.We've raised some food prices along the way. So we're continually fine tuningand quite frankly, we're very pleased that our traffic has stayed equal to whatit was before and we've got an increased gaming win as well as revenue.

Operator

Thankyou. The next question is from Justin Gerbereux of T. Rowe Price.

Justin Gerbereux - T. Rowe Price

Iwas wondering if you could give me a little bit of an update on Shingle Springsin terms of where you might stand with getting a new compact with the state andalso just in terms of your hiring, if you have signed up a new GM in thatmarket yet.

Lyle Berman

Speakingof the GM, we're actively interviewing candidates at this point in time for aGM. No decision has yet been made there. With regards to the compactnegotiations, that's obviously between the state and the Tribe. We certainlyare supportive of their efforts to get a new compact and think this triballeadership is actively working with the governor to get that done.

Justin Gerbereux - T. Rowe Price

Isthere still an expectation that you or the Tribe will be able to get full ClassIII compact done sometime before opening?

Lyle Berman

That'sstill our expectations. I can't guarantee it, but that's certainly what we'reshooting to do.

Operator

Thankyou. The next question is from Todd Eilers of Roth Capital Partners.

Todd Eilers - Roth Capital Partners

First,for the third quarter, can you give an exact management fee number for thePokagon? I think in the press release you gave $2.6 million for the combinedmanagement fees. Can you give the exact number for the quarter?

Timothy Cope

We'renot giving the exact number at this point. I'll preface that by saying resultsfrom Native American casinos as I think you are aware of are a very safelyguarded secret.

Todd Eilers - Roth Capital Partners

Sure.

Timothy Cope

Asyou know, it's pretty hard to get any results from any Indian casino around thecountry. Because of that, we're certainly not giving out our specificinformation relating to Four Winds, just out of respect for the Tribe'sprivacy.

Todd Eilers - Roth Capital Partners

Okay.How about just going forward, would you ever look to give any sort of metricswith regards to the casino in terms of slot win, table win, revenue, EBITDAmargins, hotel occupancy, anything like that?

Timothy Cope

It'skind of almost the same answer. Again, I've talked with tribal leadersregarding this. If they choose do that through their quarterly call with theirbond investors that might happen, but at this point in time, we're just notunder guidelines where we can probably release that individual specificinformation.

Todd Eilers - Roth Capital Partners

Howabout with respect to your Oklahoma management fees? Was there anything in the quarter that wasmaterially different from the prior quarters? It was running at about $400,000a quarter. Is anything changed there?

Timothy Cope

Ithink that's a good way to interpolate the results. The Cimarron Casino doeswell and pretty much continues to do well as is. So we're happy about thoseresults as well.

Todd Eilers - Roth Capital Partners

Thatwould imply you did about, a little over $2 million in net management feesafter pre-opening expenses, roughly?

Timothy Cope

Thatwas the eight weeks, as Lyle mentioned, with the start-up issues as well.

Todd Eilers - Roth Capital Partners

Thenwith regards to Shingle Springs, do you have a similar agreement with them withregards to sharing pre-opening expenses? And if so, what's the estimate for pre-openingexpenses?

Timothy Cope

Wedo not have that same arrangement at Shingle Springs.

Todd Eilers - Roth Capital Partners

Okay.And then, with respect to the balance sheet, Tim, can you break down the notesreceivables by project, or at least what Shingle Springs and Jamul were for thequarter - the market value?

Timothy Cope

Thelong-term notes?

Todd Eilers - Roth Capital Partners

Yes.

Timothy Cope

Jamulis approximately $24 million. Shingle Springs is approximately $52 million. AndIowa's is approximately $3 million.

Todd Eilers - Roth Capital Partners

Okay.And then, given that the balance sheet continues to improve here for you, canyou maybe highlight what your priorities are in terms of capital allocation? Isit still Vicksburg investment, equity investment to get that project movingforward or how about, what are you thinking in terms of share buybacks givenwhere the stocks at, can you just refresh us on your priorities there?

Lyle Berman

Ifyou look at the cash on our balance sheet, remember, our balance sheet cash iscomprised of both our cash and our share of World Poker Tour's cash. Obviouslyit's nice cash at World Poker Tour, but we have no access to it.

Thecash that we have on our balance sheet is all committed to being used for ourvarious Indian projects up until we start substantially cash flowing as a companyonce Shingle Springs opens in late 2008. So we have no additional discretionaryfunds to do much of anything with--I'll give you the exceptions--until we startcash flowing.

Thatbeing said, we have no debt on our company whatsoever. We have the ShingleSprings note of approximately $52 million. And we certainly have the possibleability to monetize that, like we did the Pokagon $100 million note, bysyndicating that note, or possibility of borrowing against the cash flow ofthis company and that asset.

Ifwe do that, we have a variety of possible sources. One would be our Vicksburg project, which needs approximately $50 million ofequity, certainly there is the alternative of is the better use of those fundsbuying back our stock assuming it stayed at these lower levels, and/or otherprojects that possibly we're looking at. So at this point it’s kind of an openbook as to can we monetize, and if we do, how we'll use it.

Operator

Thankyou. The next question is from Justin Sebastiano of Nollenberger Capital.

Justin Sebastiano - NollenbergerCapital

Asfar as the slots at Four Winds, I know the video slot didn't do so well at theopening, and you replaced a lot of them actually with some of thereel-spinners. How have the reel-spinners performed since you put those in thevideo slots place?

Lyle Berman

Whenyou say they didn't do so well, it's interesting. In the retail business I usedto be in, if something is either good or bad usually, but in a slot machine ithas a lot to do with how many you have. You can have 20 of a certain model onthe floor and they do horrible. You can reduce that 20 to four, and they're four of your best machines. So it'sa balancing act.

Ibelieve when we opened it was fairly clear to us as we looked at the firstmonths' results that on a proportional basis our reel, meaning the three-reelor five-reel machines, were outperforming the video machines, and we have beenin the process of adjusting those.

Wemade one adjustment where I think we actually found a company, a new casinojust like ours that actually had the opposite problem in a differentmarketplace. We traded machines, several hundred machines, we gave them severalhundred of video machines and they gave us back several hundred or so of thereel machines.

Yes,the balancing is more proportionate and on a relative basis, we're doing betternow with all machines, because we made that change.

Justin Sebastiano - NollenbergerCapital

Okay.And as far as the poker room, do you plan on maybe downsizing that and addingmore slots with the freed up space that would occur?

Lyle Berman

That'salso something under consideration. As we always said, a poker table, be it anautomatic table that we have, or a dealer table, typically can never competewith a very good slot operation. So it's a balancing act. And if you look atour poker room today, we have 15 poker machines there but I believe we havecapacity to put in like 20 or 22.

Socertainly we're looking at as our machines' performance is becoming more whatwe expected it, we certainly are looking to the possibility of adding somemachines in that area and maybe fine tuning that area a little bit.

Justin Sebastiano - NollenbergerCapital

Okay.But that's nothing that would be within the next quarter or so?

Lyle Berman

Idon't believe it would be within the next quarter.

Justin Sebastiano - NollenbergerCapital

Okay.And, Tim, you had mentioned that you lowered the discount rate. What are youusing now for the notes receivable from the Jamul Tribe? It was 15.75% I thinkpreviously?

Timothy Cope

Yes,actually increased it.

Justin Sebastiano - NollenbergerCapital

Increasedit, I'm sorry, right.

Timothy Cope

Ithink it's more in the 17% range now. You understand we get this from athird-party valuation firm.

Justin Sebastiano - NollenbergerCapital

Andhow confident are you in your estimate to break ground on Vicksburg in late '08 or early '09?

Lyle Berman

Well,we're reasonably confident that we can acquire the $50 million to break ground.The question is a) can we get the money, of course, and then, of course, b) atthe time we can get the money we certainly have to look at the alternatives tousing that money; but right now, at this point we're still planning to goforward with the Vicksburg project.

Justin Sebastiano - NollenbergerCapital

Thatis still $225 million?

Lyle Berman

Yes.

Justin Sebastiano - NollenbergerCapital

Tim,I'm sorry if you said this before. There was a question posed about the Oklahoma consulting and development fees. I mean, it'sbeen around $400,000, but the first quarter it was $450,000, the second quarterit was $386,000; is $400,000 a good number as a run rate – $400,000-$450,000?

Timothy Cope

Ithink that's certainly in the ballpark.

Operator

Thankyou. The next question is from Rushi Barrack of KBC Financial.

Rushi Barrack - KBC Financial

Gentlemen,on Pokagon you said that it's finished on budget, do you have a final cost forthe facility at this point?

Timothy Cope

We'reworking on completing the construction contracts now. I think, as you'reprobably familiar under the bond indenture we have six months after opening tofinalize the contracts, close out the process. So we're in the middle of doingthat now.

Rushi Barrack - KBC Financial

Withrespect to the outstanding issue of a potential bond recall, can youcharacterize the magnitude of how much we'd be looking at having called in $5million, $20 million?

Timothy Cope

Again,that's what we're going through right now, just to determine that number.

Rushi Barrack - KBC Financial

There'sno way we could put some sort of outlying cuff on that or?

Timothy Cope

Notat this point.

Rushi Barrack - KBC Financial

IfI'm listening to you carefully, and I'm not always good with math, it soundslike based on the management fees you disclosed that extrapolating, it lookslike the property was operating at about $100 million EBITDA level. I'm justwondering if that's more or less in the ballpark as to what it was doing?

Timothy Cope

Dave,we really can't comment on that, as we mentioned earlier.

Rushi Barrack - KBC Financial

Theremight be another way to hit on that. In the 10-K you provided expectations, andI'm wondering if performance today is more consistent with your expectations?

Timothy Cope

Ithink on our second quarter Q we had put in a win per unit estimate. I'd saywe're more in line today with that estimate.

Rushi Barrack - KBC Financial

That'sreasonable. Okay. And could you talk about, with the initial performance, thereis different elements, one of them is market growth, one of them is thetenacity of your competitors and how aggressively they're marking, and then, ofcourse, there's your initial marketing effort in reaching out to the market,and could you talk about how those materialized and how they are now?

Isthe market growing to your expectations? I think we're looking at probably a 13%to 15% rate. Could you comment on that?

Lyle Berman

Well,overall, let me just talk about the marketing. First off, we've beenextraordinarily pleased with our sign-ups of what we call the Players Club,because that's the most important part of our marketing.

Wedo a lot of general marketing to bring people in for the first time, but oncethey sign up on their card we know a lot more about them, we know their habits,their play, and we've been very, very aggressive in marketing back to thosepeople with all different kinds of promotions and they've been extraordinarilysuccessful.

We'vebeen very successful at sending people incentives to come back. One of them,the promotion of course is free play. We had one promotion where people felt,based on their theoretical loss, or their actual loss on a daily basis, on aper trip basis we would send them a coupon for maybe up to 20-25% of theirtheoretical daily loss.

Afree gift, ‘come in on Tuesday, use this coupon and it’s your money.’ And we'vehad high returns on those promotions, as well as win per day increases. We'vealso done some car giveaways; we've done some coffee making giveaways. We'vedone a lot of what we call direct marketing and we're continuing to do more ofthat.

Weare also building our database and one of the keys to this property is thehigh-end play. We believe we have the best facility in the area, and the higherend play typically, not always, but have a tendency gravitate to betterproperty, where there's better food and better amenities.

Andas we grow, just based on time, virtually every day we get high rollers comingin. We introduce ourselves to them; we get them to recruit their friends tocome in. So, it's a building process, but a very important one and we see ourhigh-end growth, our play in our high-end customers growing on a regular basis.

Wehave hired a number of casino hosts from other casinos. They technically can'tjust take their black book and call everybody. That customer has to come in ontheir own the first time, and then we can call back once they've beenintroduced to them. So, it's a little bit slower process but it's definitely abuilding process.

Rushi Barrack - KBC Financial

Canyou characterize the size of your database now?

Lyle Berman

Notat liberty to give that out, but it exceeds our expectations by almost double.

Rushi Barrack - KBC Financial

Onour last trip out to visit the property we saw Harrah's giving away a Bentley,Resorts giving away free gas for a year and Majestic offering five times cashback, almost suicidal. What are these guys doing today?

Lyle Berman

Ican't tell you. I'm not familiar with what the other people are doing, per se.We look at our database, of course, and a high percentage of our customers comefrom the Western Michigan and Northern Indianamarket, which in fact, we're closer to than some of those people.

OurChicago market is not as big as we would like, and we'recompeting that so I think a lot of their promotion is to keep what they have.And as you said, it gets very expensive, especially when they're in the highertax rate as opposed to us. And any kind of a marketing war that we're going toget into with any of our competitors I think we're going to win by just the economicsof our tax rate versus theirs.

Rushi Barrack - KBC Financial

Obviously,the room rates, your room metrics have been extraordinary. Do you have plans toaddress building a hotel addition any time soon?

Lyle Berman

Yes.We are in discussions with the Tribe now with some land planners to see what'sthe most effective use of what we want to put up, but clearly the big part ofthe growth of this casino will come with an addition of 600 to 800 rooms and theassociated amenities that you expect to find. It's our vision, as well as theTribe’s, that this truly will become a full-service destination resort in theupper Midwest and obviously you can't do that without a largeroom base.

Rushi Barrack - KBC Financial

Soundslike you would wait six months to a year though before moving forward on that tosee what the level of business is?

Lyle Berman

Ittakes six to eight months to do the planning and the architectural drawings so,I think it would be fair to say that you wouldn't see construction startprobably much before a year, but there's an awful lot of planning that goesinto that before that time.

Rushi Barrack - KBC Financial

Whatcan you say about your staffing levels now versus where you want to be?

Lyle Berman

I'dsay we're real close to on plan right now and on budget. We had a largeturnover of workforce. It's scary when you think about just the first day howmany people don't show up even the second day for their job. But that's goodnews, because every month that goes by we have a higher trained workforcethat's used to our way of doing business, and of course, we have a very highenergetic, high demanding jobs because of the number of people that come in.

Andtherefore some people can't handle that and don't make it. Many people thriveon it. Certainly, our hosts and hostesses that serve drinks, they love the factthat people are coming in. The more drinks they can serve the more tips they'regoing to get. So, some people thrive on that high energy, high consumer demandand some people don't and they go by the wayside.

Rushi Barrack - KBC Financial

Turningto Shingle, I know that the Tribe’s negotiations are the Tribe’s negotiations,but there's definitely a tone to the environment out there and some oppositionto changes and new compacts. Can you talk a little bit about the environmentthat they're dealing with right now?

Lyle Berman

Thegood news was of course the Governor signed and the legislature ratified Ithink it's called the Golden Five compacts. What's interesting is that provideda rather substantial increase in gaming, whereas when our Tribe is looking, theShingle Springs Tribe they're trying to legitimately just get a compact forwhat they're entitled to.

Thatbeing said, the legislature did approve it. However, the antis are trying toput on the ballot the denial of the Tribes to have expansion. What I'm told isthey're collecting signatures. They'll probably get the right number ofsignatures. That's not so difficult to do. And then we'll see what happens inthe election, but right now I know the polls that I've read or the ragmagazines that I read indicate that the population is in favor of the newcompacts.

Rushi Barrack - KBC Financial

Tothe extent that people voted against it it's not clear to me what happens atthat point. Does it get remanded back to the legislature?

Lyle Berman

Idon't know the answer to that myself.

Rushi Barrack - KBC Financial

Whatcan we expect out of this Sharper Image lawsuit? I believe there's a datecoming up November 29th, is that correct? When are we going to get moreinformation?

Lyle Berman

Right,but the Sharper lawsuit is not against Lakes, it's against the Tribe, but we'reheld harmless by the Tribe in that lawsuit. So it really doesn't affect us andwon't affect the casino operations. Tim, can you add something?

Timothy Cope

Ithink that's a fair statement. There's no new news on that. Again, it'sproprietary to the Tribe and we don't anticipate that affecting the opening ofthe casino.

Rushi Barrack - KBC Financial

Okay.Now, the recent announcement of the termination of Rob Wyre, really, therewasn't any color around that. Could you tell us anything more about whathappened there?

Lyle Berman

Wedon't comment on personnel decisions in the public domain. I think it's fair tosay that there was no specific event, there wasn't like all of a sudden therewas a major issue that caused his termination or some kind of a smoking gun, aswe say, but that being said, we're not going to comment on it.

Rushi Barrack - KBC Financial

Andanything happening with your partners--Kean and Argovitz--in terms of theirgetting licensed?

Lyle Berman

They'restill both in the queue. As far as we know with NIGC. They have applied forlicensing. Obviously NIGC doesn’t confer with us. They're both anxious to getlicensed and we have no idea if they will or they won't.

Rushi Barrack - KBC Financial

Asyou go forward in choosing the direction of the company, I was a little shockedto see something like that come up in a periodical.

Lyle Berman

Letme just say that certainly we didn't seek the article. The writer for thebusiness journal at the Star Tribune contacted us and said he was writing anarticle about us and, therefore, would we be willing to talk to him, andcertainly I always believe that regardless of the writer's point of view, thearticle will come out better if we talk to them than we don't.

So,we certainly have an open policy that we're always going to talk to anybody inthe media who wants to write about us or speak about us. That being said, Iguess the article was considered fairly neutral to a little negative about ourcompany, although I can tell you I couldn't find anything that he didn't speakthe truth on.

Ihave publicly stated for the last several years, and I'll say it on this phonecall, that Lakes Gaming, when we become a cash flow machine in the 2009 periodand out, certainly do not expect to reinvest our funds in Indian gaming.

Indiangaming is certainly our major core business. We're very good at it, and we willbe in it for a long time. After all, Shingle Springs doesn't open for a yearand then we have a seven year contract, so that's eight years. Jamul will keepus in there for another year after that, so even without renewals we will be amajor force in Indian gaming working with our Tribes and managing those casinosfor the next ten years.

But,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 wesigned with the Tribe, and we invested well over $150 million. Most of theIndian opportunities out there today are of a similar or worse nature.

Basicallyevery Tribe that has a decent site and legal rights to open a casino is eitherin the process of or already has and, therefore, the big opportunities inIndian gaming going forward are very limited.

Anda couple things they have in common is they're going to take a long period oftime, and I'll quantify that as maybe in the 7 to 10-year range, with maybe afew exceptions, and also a fair amount of money.

Andtherefore, although we continue to look at Indian gaming opportunities, we havenot found a single one that was worthwhile for our company since we signed withthe two Oklahoma properties. And I've probably looked at  few dozen operations since that time.

So,I've clearly said that when we get these funds we're going to be looking toinvest those funds primarily outside of Indian gaming. Whether it would be ingaming or not, I don't know. Right now we're very focused in the rest of thisyear or next year in building, opening, and operating casinos, but as we enterthe cash flow years of 2009 and out, we will be looking to diversify this companyjust like we did with World Poker Tour at other opportunities that we thinkhave more of a long-term PE value than a seven year management contract.

We'revery committed to Indian gaming, we believe in it, we're very good at it, butit's not something that our growth will be in the out years with the funds thatwe reap from our current endeavors.

Rushi Barrack - KBC Financial

Thanksso much for those detailed answers. We're all for getting the company's storyout too.

Operator

Thankyou. Your next question is from Clint Morrison with Feltl and Company.

Clint Morrison - Feltl and Company

Ibelieve you've got a third-party that got their fingers in your Pokagonmanagement fee pie. Was any of that in that $2.6 million or how was itaccounted for? Could you kind of review through how that works?

Timothy Cope

That2.6 isn't affected by that.

Clint Morrison - Feltl and Company

Okay.

Timothy Cope

It'scalled amortization of intangible assets.

Clint Morrison - Feltl and Company

So,that was in this quarter?

Timothy Cope

Partof it, the eight weeks portion was in this quarter.

Clint Morrison - Feltl and Company

Andkind of what was the net of that when you add it up; what percentage of yourmanagement fee ends up going into that?

Timothy Cope

It'snot based on a percentage. It's an agreed-on amount.

Clint Morrison - Feltl and Company

Okay.

Timothy Cope

There'stwo pieces of it. One was a prior manager that Pokagon had and that basicallyis about a $3 million fee or expense. It will come out as an expense to us,over the next two years. It's about $3 million, but just the way the accountingworks that will actually get amortized over the life of our contract. So, thatwill get spread over five years that $3 million.

Andthen on the other side, with the BPTC or CRC companies’ agreement, again,that's a flat fixed amount. That's about $11 million, which will also beexpensed over the five years of our contract, just ratably over the five years.

Clint Morrison - Feltl and Company

Okay.And obviously these numbers, and you can't quite get to it, but they imply somesort of run rate for the first eight weeks of your management fee and clearlyyou're ramping up and doing better now and I think you are continuing to makeprogress. Can you give us some sort of sense as to how far up the curb you go?

Inother words, if this implies x, potentially, do you think you'll level out at 5%or 10% better than sort of what your initial run rate was, or do we have 20% or30% upside? Give us some sort of sense of that.

Timothy Cope

No.I don't know if I can really give that you guidance because we probably don'tknow ourselves at this point. Eight weeks of a new operation in the new marketthere, frankly, until we do the first 12 months we're probably not going toknow a normalized run rate ourselves.

Clint Morrison - Feltl and Company

Okay.And then finally, with regard to Shingle Springs, I assume that your current discountrate and probabilities and all that are based on a non-compact kind of asituation?

Timothy Cope

That'scorrect.

Clint Morrison - Feltl and Company

Okay.Any sense of if the compact goes through, how that changes the equation?

Timothy Cope

Well,the metrics, basically remember our probability of opening.

Clint Morrison - Feltl and Company

Okay.But it's also based on sort of win rates and that kind of stuff, too, right?

Timothy Cope

Thatjust supports the fact that the valuation is there to cover our notesreceivable, which clearly is not an issue.

Clint Morrison - Feltl and Company

Okay.

Timothy Cope

So,we're very comfortable with being on time on budget. And that's really whatdrives that valuation.

Clint Morrison - Feltl and Company

Okay.So, the compact wouldn't really change it too much. And then the final questionis has anything changed in the world or any reason to think that if you did goout to try to monetize that Shingle Springs note at some point in the futurethat the result would be dramatically different from Pokagon?

Lyle Berman

Well,as you know, the high-yield market has changed a great deal since then.

Clint Morrison - Feltl and Company

Yes.That's sort of what my question is how might things have changed? Do you gotany sense of that?

Lyle Berman

Whatwas interesting is that with the Pokagon note, we received, I believe it wasvery close to 9% and we monetized it at 9%. So, it was a neutral transactionfor us, actually very positive because on our $100 million loan, we were in the11% range.

Today,it might be that we probably couldn't monetize Shingle Springs note at the samerate that we're collecting. And, of course, the high-yield market is upsidedown or has been for a while, but that all corrects itself, too, so we'll belooking at that possibility after the first of the year.

Operator

Thankyou. The next question is from Chris Krueger of Northland Securities.

Chris Krueger - Northland Securities

Imissed a little bit of the call, but on the time frame for a couple of yourfuture 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.I know last quarter I think you indicated you felt the construction would beginin the first quarter of '08 and open 12 months later. Is that more maybe likethe first half of '08 now or how would we look at that?

Timothy 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 startconstruction on the casino.

Casinoconstruction there will be about a 16-month-18-month build because of thenature of the site itself. So, I think the issue right now is when can weactually start the construction. And as you mentioned, we have started drillingon the roadwork there, which is the first piece of the project to get the roadcompleted.

Sowe can start bringing in the construction equipment to do the building. Sowe're progressing on the roadwork right now, and then I think it's going to beagain subject to discussions with the Tribe and after the first of the yearwhen we feel we can start the casino construction.

Chris Krueger - Northland Securities

Thefires that happened out there, is there any impact from that?

Timothy Cope

Weand the Tribe I would say were quite fortunate in that regard. All thebuildings had already been removed from the reservation, so although there wassome fire that came very close and on the site there's actually a church, andthat church was protected from the fire so there really was no physical damageoccurred.

Chris Krueger - Northland Securities

Samekind of question on the Ioway Casino. Is your stance on the time frame the sameas it was last quarter?

Timothy Cope

Ithink we did give some guidelines here about the Ioway project, and as we kindof repeatedly say, each quarter we say, yes, it's going to be this time frame,then we move it out three more months, unfortunately in this project. Becauseright now we're dealing with getting back with the federal government in termsof BIA review and approval of their land lease situation, which is essentiallyout of our control.

Operator

Thankyou. The next question is from Roy Berry, who is a private investor.

Roy Berry

Inoticed your decades-long fight with the Louisiana Tax Authority is up to about$0.60 to $0.65 a share. Have you got a tax court date on that yet where you canget it settled down?

Timothy Cope

Wedo not have a court date. We've just gone through a number of depositions. Weare now taking depositions from them, and more to come, but there's no courtdate arranged at this point.

Roy Berry

Doyou expect the settle at a lesser amount? Of course you do.

Timothy Cope

Wealways like to settle for a lesser amount but yet to be determined.

Operator

Thankyou. The next question is from Walter Davis of Walter Davis.

Walter Davis - Walter Davis

Whatis causing the elongated delay on your casino in Vicksburg? I thought it was supposed to be breaking groundin the first quarter of '08.

Lyle Berman

What'sdelayed Vicksburg is financials. The project has been budgetedabout $225 million to $230 million. We've been told that--and this was beforethe bond market was where it's at today--we would need about $50 million ofequity or something that looks like equity.

AsI said, we have three ways to get that equity. One way is to monetize theShingle Springs notes which we didn't think would be appropriate at this stageuntil after the first of the year due to the high yield market. Two would be toborrow against that. Three would be to wait until we had cash flow. So what'sholding that project up is the viable financing of it.

Walter Davis - Walter Davis

What'sthe chances of your making a stock swap and picking up the additional 39% onWorld Poker Tour?

Lyle Berman

Well,certainly World Poker Tour's stock is as disappointing as ours is and wecontinually talk about different possibilities with World Poker Tour, but atthe present time, I guess you could anticipate the status quo being about whatit is. We do continue to look at that as a possibility.

Operator

(OperatorInstructions) The next question is from Justin Sebastiano of NollenbergerCapital.

Justin Sebastiano - NollenbergerCapital

Justa quick follow-up. Tim, could you just run through how you're getting paid outon Jamul? From what I have, I see you have a $15 million up-front flat fee fromdevelopment services, $15 million payable evenly over five years forconstruction services, and then $50 million payable evenly over 10 years forfinancing services, is this correct?

Timothy Cope

Currentlythe agreement is all fees that we earn are earned prior to the project openingbased on, as you mentioned, either oversight of construction, oversight of thedevelopment, or for providing the financing. All those fees are then spread outover the life of a 10-year contract.

Justin Sebastiano - NollenbergerCapital

Okay.So the development service is not a $15 million up-front flat fee?

Timothy Cope

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

Justin Sebastiano - NollenbergerCapital

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

Timothy Cope

That'sthe current plan.

Justin Sebastiano - NollenbergerCapital

Sounder the current plan then, you're going to get paid out on the $80 million, Iguess, regardless of what the casino does. Is that correct then?

Timothy Cope

Well,no, only if it's successful. They can't pay us if they don't have the money,right?

Justin Sebastiano - NollenbergerCapital

Well,what's considered successful? Do they have to hit a certain threshold, and thenpay you out when they hit?

Timothy Cope

There'sno thresholds with this particular arrangement. Just cash flow.

Justin Sebastiano - NollenbergerCapital

Okay.They so let's say you are due $8 million in year one. If they net $8 millionthen you get it all, and the Tribe gets zero?

Lyle Berman

Intheory that would be correct; in practicality, probably not.

Justin Sebastiano - NollenbergerCapital

Okay.I just wanted to make sure that there is no threshold and that you will getpaid out.

Lyle Berman

Nothreshold whatsoever.

Operator

Thankyou. There are no further questions registered at this time.

Lyle Berman

Ijust want to thank you all for listening, and we'll look forward to talking toyou in three months from now. Thank you very much. Bye.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!