Lakes Entertainment LACO W
June 27, 2003 - 5:01pm EST by
2003 2004
Price: 7.50 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 80 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Trading at 54% of tangible book value, no debt and (soon) $4.00 per share in cash, Lakes Entertainment develops Indian casinos and owns the rights to the World Poker Tour. Lakes has three large gambling casinos under the final stages of development and two other long term casino projects. Lakes is conservatively worth $10+ a share today, book value of $14 a share once a casino ground breaking is announced and over $20 per share upon the successful opening of a casino in 2006.

Grand Casinos spun off Lakes Entertainment in 1999 when they merged with Park Place Entertainment. Lakes received the Indian casino properties as well as various parcels of real estate in Las Vegas. In May 2003, the company sold Polo Plaza, receiving $16.6 million in cash. It will shortly receive another $16 million for its share of the Shark Club.

Balance Sheet

Assets 3/31/03 6/30/03 Proj. 12/28/04 Proj.
Cash $5,500,000 $42,000,000 $38,000,000
Deferred Taxes $6,771,000 $6,771,000 $6,771,000
Other Current Assets $1,880,000 $1,880,000 $1,880,000
Land Held for Sale $29,053,000 $3,500,000 $0
Land Held for Dev. $29,224,000 $14,000,000 $14,000,000
Notes Receivable $72,740,000 $73,220,000 $77,430,000
Restricted Cash $8,313,000 $0 $0
Other Assets $14,167,000 $22,167,000 $14,167,000
Total Assets $168,648,000 $163,518,000 $152,248,000
Total Liabilities $15,019,000 $15,019,000 $15,019,000
Book Equity $153,629,000 $148,499,000 $137,229,000
Shares Outstanding 10,600,000 10,600,000 10,600,000
Book Value Per Share $14.49 $14.01 $12.95
Cash Per Share $.52 $3.96 $3.58

The increase in cash balances and other assets include:
1. $16.6 million from the sale of Polo Plaza
2. $16 million from the sale of Shark Club (an undeveloped time
share property that should close by June 30, 2003)
3. $5.9 million from previously restricted cash
4. An additional $8 million payment from the Polo Plaza sale (which
is classified in the above balance sheet under other assets)

This will leave the company with $42 million in cash, or almost $4.00 a share, by the end of the second quarter 2003. The company will burn through about $2 million a quarter until the opening of a casino, which is included in the above projections. (Lakes’ projected book value is lower than the current book value because the firm conservatively expenses development costs instead of capitalizing them on the balance sheet.)

The company had $8.3 million in restricted cash as of March 31, 2003. The restricted funds were left over from an indemnification agreement with Park Place that was used to limit the liability to Park Place from legal issues surrounding a previously failed investment in the Stratosphere Hotel in Las Vegas. Settlement claims of $2.4 million were paid during the second quarter, with the remaining $5.9 million now unrestricted.

Timing of Cash Flows

5/8/03 $5,900,000 previously restricted cash balance

5/16/03 $16,600,000 sale of Polo Plaza to Metroflag

by 6/30/03 $16,000,000 sale of Shark Club in Las Vegas

by 12/28/04 $3,500,000 sale of Travelodge property (under

by 12/28/04 $4,000,000 delayed sale proceeds from Polo Plaza

by 12/26/06 $4,000,000 delayed sale proceeds from Polo Plaza

Remaining Land Held for Sale and Development

$3.5 million relates to the Travelodge site in Las Vegas which is under contract to be sold to Metroflag. $14 million relates to undeveloped land intended for Indian casino projects.

Notes Receivable

$6.86 per share of the company’s book value consists of notes receivables due from Indian Tribes. The loans were used by the tribes to purchase tribal lands to build casinos. (Many of these Indian tribes don’t have existing Reservations and have to buy land to create a Reservation in order to build a casino.) The notes total $72 million, accrue interest from 5.25% to 6.25%, and amortize over 5 years once the underlying casino project opens. The three largest loans include $40 million for the New Buffalo, MI casino, $16 million for the Sacramento, CA casino, and $10 million for the San Diego, CA casino.

Industry Background

The Indian Gaming industry was established in 1979 with the opening of a casino by the Seminole Indians in Florida. Indian reservations are considered to be their own sovereignty, with thirty states having passed some form of legislation allowing for gaming on tribal lands.

There is a long process in order to get a license to open a casino on Indian property. First the tribe has to be authenticated by the Federal Bureau of Indian Affairs (BIA). The Indian tribe then usually hires a management company familiar with the trade to help develop the casino. The contracts with the management agency are strictly regulated by the BIA and are usually 5-7 years in length with a 30%-70% split, with the Indian tribe retaining the majority of the profits. After the initial contract expires, the Indian tribes have the option of retaining Lakes Entertainment to manage the property and split the revenue 10%-90%.

Future Revenues projected to begin 2006

The company currently has five projects under contract which are awaiting various levels of government approval. Three of them have already received federal clearance from the Bureau of Indian Affairs and are in their last stages of receiving local permission to build the casinos. Of the other two, one project for a large casino in Massachusetts was earlier rejected for Indian status by the BIA. The tribe is reapplying for approval. The other casino is a partnership between Lakes and another company to build a casino on the Cloverdale Rancheria reservation, 60 miles north of San Francisco. The Cloverdale Indians wish to terminate the partnership. Lakes believes their contract to be enforceable and has threatened to sue to build a casino. I have given no value to the two casino projects under dispute.

Lakes’ CEO has stated that he is hopeful that construction will commence before the end of the year on one or more of the properties. I have made rough estimates of projected earnings for the casinos. These are based on other Indian casinos’ revenue and profitability, such as Mohegan Sun, which had gaming revenue of roughly $870 million (after promotional activities) from 6,000 slot machines and 170 tables, with net income attributed to gaming of roughly $170 million last year.

New Buffalo, MI

Plans for a casino on the Pokagon Band of the Potawatomi Indians’ Reservation, which will be Michigan’s second largest casino, will include over 3,000 slot machines as well as 100 gaming tables. This is the largest of Lakes’ projects and is located just ninety minutes from downtown Chicago.

Michigan has 16 casinos located mostly in the northern part of the state and in Detroit. New Buffalo is located in the southwest corner of the state, just over the Indiana border. Most of the competitors in the Chicago area are riverboat casinos, which are much smaller than Lakes’ planned casino.

I spoke to the town supervisor who indicated that the best case scenario puts the groundbreaking in October or November 2003; otherwise the groundbreaking will be “after the holidays.” The casino’s opening has been pushed back by local environmentalists because of concerns for the surrounding Indiana bats and by lobbyists hired by a riverboat casino in Chicago. While environmentalists are almost always unsuccessful in blocking casinos, they have delayed approvals for construction.

(in millions)
Year 2006 2007 2008 2009 2010
Revenue $210 $315 $330 $347 $364
Net Income $42 $63 $66 $69 $72
Indian Take $29 $44 $46 $48 $51
Lake's Take $12.6 $18.9 $19.8 $20.8 $21.8
EPS $1.19 $1.78 $1.87 $1.97 $2.06

California Properties

California has by far the largest Indian casino industry, with fifty-one casinos and 48,000 slot machines. For 2002, revenues to Indian casinos increased 17% over 2001.

Lakes has a joint venture with Kean Argovitz Resorts, LLC (KAR) regarding two properties in California. In January, Lakes restructured the deal, giving KAR up to $2 million per project annually. Previously, the two California projects were set up as a joint agreement between Lakes and Kean Argovitz Resorts LLC. The new agreement allows Lakes to have 100% control of the project, and to pay KAR an annual payment.

The projects in California have met with heavy opposition from both Governor Davis and California Supervisor Dianne Jacob. The Governor and Jacob have used environmental regulations to block construction of the casinos. Although legal procedures have shown that there will be minimal environmental impact from the projects, continued opposition from the government might further delay the projects.

San Diego, CA

Lakes plans on building a casino near San Diego for the Jamul tribe consisting of 1,700 slots and various other gaming activities. The infrastructure for roads to the casino have been built, however, the casino is still waiting for final local governmental approval. The Jamul Indian Chief has emailed me about the opening of the casino. “There is no official groundbreaking date scheduled for our casino project. We are moving forward and will be making announcements about construction soon.” He would not give me a firm timeline for the opening of the casino.

(in millions)
Year 2006 2007 2008 2009 2010
Revenue $110 $178 $187 $196 $206
Net Income $22 $35 $37 $39 $41
Indian Take $15.4 $24.9 $26.2 $27.5 $28.9
Investor's Take $6.6 $10.7 $11.2 $11.8 $12.4
KAR Take $2 $2 $2 $2 $2
Lakes Take $4.6 $8.7 $9.2 $9.8 $10.4
EPS $0.43 $0.82 $0.87 $0.93 $0.98

There are currently a few other gambling casinos on Indian reservations in the San Diego region, most notably Harrah’s Rincon Casino, which has 1,500 slots, and the Barona Valley Ranch Casino and Sycuan Casino with 2,000 slots.

Sacramento, CA

The Shingle Springs Band is located near Sacramento in northern California. The planned casino includes a 300 unit hotel as well as 2,000 slot machines.

(in millions)
Year 2006 2007 2008 2009 2010
Revenue $130 $210 $220 $231 $243
Net Income $26 $42 $44 $46 $48
Indian Take $18.2 $29.4 $30.8 $32.4 $34.0
Investor's Take $7.8 $12.6 $13.2 $13.8 $14.5
KAR Take $2 $2 $2 $2 $2
Total Lakes $5.8 $10.6 $11.2 $11.9 $12.5
EPS $0.55 $1.00 $1.06 $1.12 $1.19

There are various other Indian casinos in the Sacramento area such as Feather Falls casino which has 1,000 slots and Thunder Valley Casino opened June 9, 2003 with 1,900 slots.

Revenue Projections (per share)

Casinos 2006 2007 2008 2009 2010
New Buffalo $1.19 $1.78 $1.87 $1.97 $2.06
San Diego $0.43 $0.82 $0.87 $0.93 $0.98
Sacramento $0.55 $1.00 $1.06 $1.12 $1.19
Total EPS $2.17 $3.60 $3.80 $4.14 $4.23

World Poker Tour

The company has developed a televised program known as The World Poker Tour which airs each Wednesday from 9-11 PM on The Travel Channel. The program is aimed at both professional gamblers and beginners learning how to play. Lou Diamond Phillips has recently been hired to host the program for special tournaments. Initial reaction has been excellent and the show already commands the Travel Channel’s highest number of viewers. During Q1, the company received $600,000 in revenue from the show, which should grow rapidly in the upcoming quarters as the show is given more airtime. This is pure option value to which I have given zero value.


Lakes Entertainment trades for just 54% of tangible book value with both short and longer term catalysts that should significantly move the value of the stock over the next 6-36 months. The company’s $40MM cash balance is more than enough to finance operating expenses until one or more casinos are opened over the next 2-4 years. While the realization of operating EPS is still a few years away, I would expect the stock to rally on any news that the casinos have received final construction approvals. Those approvals could be received as early as this Fall.


1. Groundbreaking announcements on any of the three casinos. Timing
should be later this year.

2. Receipt of cash from the sale of:
a. Shark Club
b. Travelodge
c. Polo Plaza

3. Signing of a long-term contract for the World Poker Tour with The
Travel Channel or another



1. Groundbreaking announcements on any of the three casinos. Timing
should be later this year.

2. Receipt of cash from the sale of:
a. Shark Club
b. Travelodge
c. Polo Plaza

3. Signing of a long-term contract for the World Poker Tour with The
Travel Channel or another
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