GOLDEN ENTERTAINMENT, INC. - Quarter Report: 2009 March (Form 10-Q)
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 10-Q
(Mark One) | ||
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 29, 2009 | ||
or | ||
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission File No. 0-24993
LAKES ENTERTAINMENT,
INC.
(Exact name of registrant as
specified in its charter)
Minnesota (State or other jurisdiction of incorporation or organization) |
41-1913991 (I.R.S. Employer Identification No.) |
|
130 Cheshire Lane, Suite 101 Minnetonka, Minnesota (Address of principal executive offices) |
55305 (Zip Code) |
(952) 449-9092
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
Large accelerated
filer o
|
Accelerated filer þ | |
Non-accelerated
filer o (Do
not check if a smaller reporting company)
|
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of May 5, 2009, there were 26,328,045 shares of
Common Stock, $0.01 par value per share, outstanding.
LAKES
ENTERTAINMENT, INC. AND SUBSIDIARIES
INDEX
2
Table of Contents
Part I.
Financial Information
Financial Information
ITEM 1. FINANCIAL
STATEMENTS
LAKES
ENTERTAINMENT, INC. AND SUBSIDIARIES
March 29, |
||||||||
2009 |
December 28, |
|||||||
(Unaudited) | 2008 | |||||||
(In thousands) | ||||||||
ASSETS
|
||||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$ | 9,866 | $ | 6,170 | ||||
Accounts receivable
|
3,588 | 2,407 | ||||||
Current portion of notes receivable from Indian tribes
|
7,070 | 9,151 | ||||||
Deferred tax asset
|
557 | | ||||||
Other current assets
|
742 | 1,232 | ||||||
Total current assets
|
21,823 | 18,960 | ||||||
Property and equipment, net
|
10,913 | 10,985 | ||||||
Long-term assets related to Indian casino projects:
|
||||||||
Notes receivable, net of current portion
|
56,032 | 54,705 | ||||||
Intangible assets, net of accumulated amortization of
$12.1 million and $9.7 million
|
45,163 | 47,586 | ||||||
Land held for development
|
1,810 | 1,810 | ||||||
Other
|
4,677 | 4,781 | ||||||
Total long-term assets related to Indian casino projects
|
107,682 | 108,882 | ||||||
Other assets:
|
||||||||
Investments in securities, including put rights
|
26,599 | 26,544 | ||||||
Other
|
62 | 73 | ||||||
Total other assets
|
26,661 | 26,617 | ||||||
Total assets
|
$ | 167,079 | $ | 165,444 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY
|
||||||||
Current liabilities:
|
||||||||
Line of credit
|
$ | 18,018 | $ | 18,152 | ||||
Current portion of contract acquisition costs payable, net of
$1.0 and $1.1 million discount
|
1,844 | 2,089 | ||||||
Accounts payable
|
659 | 531 | ||||||
Income taxes payable
|
16,913 | 16,241 | ||||||
Accrued payroll and related costs
|
2,052 | 1,745 | ||||||
Other accrued expenses
|
1,008 | 1,383 | ||||||
Total current liabilities
|
40,494 | 40,141 | ||||||
Long-term liabilities:
|
||||||||
Non-revolving line of credit
|
2,000 | 2,000 | ||||||
Contract acquisition costs payable, net of current portion and
$1.2 million and $1.4 million discount
|
4,893 | 5,253 | ||||||
Long-term liabilities
|
6,893 | 7,253 | ||||||
Total liabilities
|
47,387 | 47,394 | ||||||
Commitments and contingencies
|
||||||||
Shareholders equity:
|
||||||||
Common stock, $.01 par value; authorized
200,000 shares; 26,328 and 26,237 common shares issued and
outstanding at March 29, 2009 and December 28, 2008
|
263 | 262 | ||||||
Additional paid-in capital
|
201,698 | 201,082 | ||||||
Accumulated deficit
|
(82,269 | ) | (83,294 | ) | ||||
Total shareholders equity
|
119,692 | 118,050 | ||||||
Total liabilities and shareholders equity
|
$ | 167,079 | $ | 165,444 | ||||
See notes to unaudited consolidated financial statements
3
Table of Contents
LAKES
ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings (Loss) and Comprehensive Earnings (Loss)
Consolidated Statements of Earnings (Loss) and Comprehensive Earnings (Loss)
Three months ended | ||||||||
March 29, |
March 30, |
|||||||
2009 | 2008 | |||||||
(In thousands, |
||||||||
except per share data) | ||||||||
(Unaudited) | ||||||||
Revenues:
|
||||||||
Management fees
|
$ | 7,266 | $ | 4,580 | ||||
License fees
|
12 | 20 | ||||||
Total revenues
|
7,278 | 4,600 | ||||||
Costs and expenses:
|
||||||||
Selling, general and administrative
|
4,042 | 3,864 | ||||||
Ohio initiative costs
|
| 1,646 | ||||||
Impairment losses
|
569 | | ||||||
Amortization of intangible assets related to Indian casino
projects
|
2,479 | 1,681 | ||||||
Depreciation
|
73 | 88 | ||||||
Total costs and expenses
|
7,163 | 7,279 | ||||||
Net unrealized losses on notes receivable
|
(163 | ) | (1,983 | ) | ||||
Loss from operations
|
(48 | ) | (4,662 | ) | ||||
Other income (expense):
|
||||||||
Interest income
|
1,862 | 481 | ||||||
Interest expense
|
(395 | ) | (365 | ) | ||||
Other
|
(8 | ) | 52 | |||||
Total other income (expense), net
|
1,459 | 168 | ||||||
Earnings (loss) before income taxes and discontinued
operations
|
1,411 | (4,494 | ) | |||||
Income taxes
|
386 | 688 | ||||||
Earnings (loss) before discontinued operations
|
1,025 | (5,182 | ) | |||||
Discontinued operations, net of tax
|
| (1,723 | ) | |||||
Net earnings (loss) applicable to common shareholders
|
$ | 1,025 | $ | (6,905 | ) | |||
Other comprehensive loss:
|
||||||||
Unrealized loss on securities, net of tax
|
| (2,397 | ) | |||||
Other comprehensive earnings (loss)
|
$ | 1,025 | $ | (9,302 | ) | |||
Earnings (loss) applicable to common shareholders per
share basic continuing operations
|
$ | 0.04 | $ | (0.21 | ) | |||
Earnings (loss) applicable to common shareholders per
share basic discontinued operations
|
$ | | $ | (0.07 | ) | |||
Earnings (loss) applicable to common shareholders per
share basic
|
$ | 0.04 | $ | (0.28 | ) | |||
Earnings (loss) applicable to common shareholders per
share diluted continuing operations
|
$ | 0.04 | $ | (0.21 | ) | |||
Earnings (loss) applicable to common shareholders per
share diluted discontinued operations
|
$ | | $ | (0.07 | ) | |||
Earnings (loss) applicable to common shareholders per
share diluted
|
$ | 0.04 | $ | (0.28 | ) | |||
Weighted-average common shares outstanding
basic
|
26,325 | 24,604 | ||||||
Dilutive effect of common stock equivalents
|
61 | | ||||||
Weighted-average common shares outstanding
diluted
|
26,386 | 24,604 | ||||||
See notes to unaudited consolidated financial statements
4
Table of Contents
LAKES
ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
Three months ended | ||||||||
March 29, |
March 30, |
|||||||
2009 | 2008 | |||||||
(In thousands) | ||||||||
(Unaudited) | ||||||||
OPERATING ACTIVITIES:
|
||||||||
Net earnings (loss)
|
$ | 1,025 | $ | (6,905 | ) | |||
Loss from discontinued operations
|
| (1,723 | ) | |||||
Earnings (loss) from continuing operations
|
1,025 | (5,182 | ) | |||||
Adjustments to reconcile net earnings (loss) from continuing
operations to net cash provided by (used in) operating
activities:
|
||||||||
Depreciation
|
73 | 88 | ||||||
Amortization of debt issuance costs
|
8 | | ||||||
Accretion of contra note receivable
|
(714 | ) | | |||||
Mark to market, trading
|
(1,288 | ) | | |||||
Put rights loss
|
1,234 | | ||||||
Amortization of intangible assets related to Indian casino
projects
|
2,479 | 1,681 | ||||||
Share-based compensation
|
83 | 147 | ||||||
Impairment losses
|
569 | | ||||||
Net unrealized losses on notes receivable
|
163 | 1,983 | ||||||
Deferred income taxes
|
(557 | ) | 380 | |||||
Changes in operating assets and liabilities:
|
||||||||
Accounts receivable
|
(1,180 | ) | (2,446 | ) | ||||
Other current assets
|
493 | (546 | ) | |||||
Income taxes payable
|
672 | (800 | ) | |||||
Accounts payable
|
235 | 155 | ||||||
Accrued expenses
|
(66 | ) | 601 | |||||
Contract acquisition costs payable
|
(604 | ) | (301 | ) | ||||
Net cash provided by (used in) continuing operations
|
2,625 | (4,240 | ) | |||||
Net cash used in discontinued operations
|
| (2,690 | ) | |||||
Net cash provided by (used in) operating activities
|
2,625 | (6,930 | ) | |||||
INVESTING ACTIVITIES:
|
||||||||
Purchase of securities
|
| (2,700 | ) | |||||
Sale / redemption of securities
|
| 6,500 | ||||||
Collections on notes receivable
|
| 276 | ||||||
Increases in long-term assets related to Indian casino projects
|
(796 | ) | (2,153 | ) | ||||
Advances on notes receivable
|
(4 | ) | (1,117 | ) | ||||
Purchase of property and equipment
|
(3 | ) | (49 | ) | ||||
Proceeds from repayment of note receivable
|
1,476 | | ||||||
Increase in other long-term assets
|
| 29 | ||||||
Net cash provided by continuing operations
|
673 | 786 | ||||||
Net cash provided by discontinued operations
|
| 3,865 | ||||||
Net cash provided by investing activities
|
673 | 4,651 | ||||||
FINANCING ACTIVITIES:
|
||||||||
Repayment of line of credit
|
(135 | ) | | |||||
Cash proceeds from issuance of common and preferred stock
|
533 | 1,675 | ||||||
Net cash provided by financing activities
|
398 | 1,675 | ||||||
Net increase (decrease) in cash and cash
equivalents continuing operations
|
3,696 | (1,779 | ) | |||||
Cash and cash equivalents beginning of
period continuing operations
|
6,170 | 5,396 | ||||||
Cash and cash equivalents end of
period continuing operations
|
$ | 9,866 | $ | 3,617 | ||||
See notes to unaudited consolidated financial statements
5
Table of Contents
LAKES
ENTERTAINMENT, INC. AND SUBSIDIARIES
1. | Basis of presentation |
The unaudited consolidated financial statements of Lakes
Entertainment, Inc., a Minnesota corporation (Lakes
or the Company), have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission
(SEC) applicable to interim financial information.
Accordingly, certain information normally included in the annual
financial statements prepared in accordance with accounting
principles generally accepted in the United States has been
condensed
and/or
omitted. Lakes owned approximately 61% of the outstanding common
stock of WPT Enterprises, Inc. (WPTE), a separate
publicly-held media and entertainment company until
November 21, 2008 when all of these shares were distributed
to Lakes shareholders through a noncash dividend.
Operations of WPTE after the date of distribution are not
included in Lakes consolidated results of operations, and
historical operating results of WPTE up to that date are
presented as discontinued operations (see Note 2). For
further information, please refer to the annual audited
consolidated financial statements of the Company, and the
related notes included within the Companys Annual Report
on
Form 10-K
for the year ended December 28, 2008, previously filed with
the SEC on March 13, 2009, from which the balance sheet
information as of that date is derived.
In the opinion of management, all adjustments considered
necessary for a fair presentation have been included, consisting
only of normal recurring adjustments. The results for the
current interim period are not necessarily indicative of the
results to be expected for the full year.
Certain reclassifications to amounts previously reported have
been made to conform to the current period presentation.
2. | Discontinued operations |
On October 1, 2008, Lakes Board of Directors declared
a noncash dividend consisting of all of the shares of WPTE then
owned by Lakes. Lakes previously owned 12,480,000 or
approximately 61% of the outstanding common stock of WPTE, a
separate publicly-held media and entertainment company. The
record date for the dividend was October 24, 2008, which
established the shareholders of record entitled to the dividend,
thereby allowing the determination of the ratio of WPTE shares
to be distributed per Lakes share. The dividend ratio for
shareholders of record on the record date was approximately
0.479 shares of WPTE common stock for each share of Lakes
common stock. The date of distribution was November 21,
2008. Operations of WPTE after the date of distribution are not
included in Lakes consolidated results of operations, and
historical operating results of WPTE up to that date are
presented as discontinued operations.
Revenues, net loss before income taxes and income taxes for the
three months ended March 28, 2008, have been derived from
historical financial information and reported in discontinued
operations as follows (in thousands, unaudited):
Revenues
|
$ | 4,962 | ||
Net loss before income taxes
|
$ | (1,723 | ) | |
Income taxes
|
| |||
Discontinued operations
|
$ | (1,723 | ) | |
3. | Investments in securities |
The Companys investment portfolio is comprised of
investments in auction rate securities (ARS). The
types of ARS investments that the Company owns are backed by
student loans, the majority of which are guaranteed under the
Federal Family Education Loan Program (FFELP). As a
result of the liquidity issues surrounding the Companys
ARS, the Companys ARS have been classified as long-term
investments in securities. See also Note 7 for a discussion
of Lakes credit line agreement with UBS Financial
Services, Inc (UBS).
6
Table of Contents
LAKES
ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to
Unaudited Consolidated Financial
Statements (Continued)
In November 2008, the Company accepted an offer from UBS
granting nontransferable rights (the Rights) to sell
the Companys ARS held by UBS at par value to UBS at any
time during the period of June 30, 2010, through
July 2, 2012. The Rights represent a free standing asset
separate from the ARS. UBS obligation under the Rights are
not secured by its assets and do not require UBS to obtain any
financing to support its performance obligations under the
Rights. UBS has disclaimed any assurance that it will have
sufficient financial resources to satisfy its obligations under
the Rights.
The estimated fair value of the Rights was $3.1 million and
$4.3 million as of March 29, 2009 and
December 28, 2008, respectively. The $1.2 million
decrease in the estimated fair value of the Rights is included
in interest income in the unaudited consolidated statement of
earnings (loss) and comprehensive earnings (loss) for the three
months ended March 29, 2009. The Rights do not meet the
definition of a derivative instrument under Statement of
Financial Accounting Standards (SFAS) SFAS 133,
Accounting for Derivative Instruments and Hedging
Activities. Therefore, the Company has elected to measure
the Rights at estimated fair value under SFAS 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159), which permits the Company to
elect the fair value option for recognized financial assets, to
match the changes in the estimated fair value of the ARS. The
Company expects that future changes in the estimated fair value
of the Rights will approximate fair value movements in the
related ARS.
The Company classifies its ARS as trading securities pursuant to
SFAS 115, Accounting for Certain Investments in Debt and
Equity Securities, which reflects managements intent
to exercise its Rights during the period June 30, 2010 to
July 3, 2012. As of March 29, 2009 and
December 28, 2008, investments in securities with original
maturity dates beyond three months consist of the following (in
thousands):
Gross |
Estimated |
|||||||||||
Unrealized |
Fair |
|||||||||||
Cost | Losses | Value | ||||||||||
(Note 4) | ||||||||||||
March 29, 2009 (unaudited)
|
||||||||||||
Maturity considered greater than one year
|
||||||||||||
Auction rate securities (trading securities)
|
$ | 26,775 | $ | (3,243 | ) | $ | 23,532 | |||||
December 28, 2008
|
||||||||||||
Maturity considered greater than one year
|
||||||||||||
Auction rate securities (trading securities)
|
$ | 26,775 | $ | (4,532 | ) | $ | 22,243 | |||||
The $1.3 million increase in the estimated fair value of
the ARS is included in interest income in the unaudited
consolidated statement of earnings (loss) and comprehensive
earnings (loss) for the three months ended March 29, 2009.
4. | Fair Value Measurement |
On December 31, 2007 (the first day of fiscal 2008), the
Company adopted the methods of estimating fair value as
described in Statement of Financial Accounting Standards 157,
Fair Value Measurements (SFAS 157), to
value certain of its financial assets. The adoption of
SFAS 157 did not affect net income. Financial Accounting
Standards Board (FASB) Staff Position
FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active (FSP
FAS 157-3),
was issued in October 2008, and was retroactively effective
for the quarter ended September 28, 2008. The
implementation of FSP
FAS 157-3
also did not have a material impact on the Companys
valuation techniques, financial position, results of operations
or cash flows.
The Companys financial instruments that are measured at
estimated fair value use inputs from among the three levels of
the fair value hierarchy set forth in SFAS 157, however,
none of the Companys financial assets that are presented
at their estimated fair value are measured using Level 1 or
Level 2 inputs. Level 3 inputs are unobservable inputs
that reflect managements estimates about the assumptions
that market participants would use
7
Table of Contents
LAKES
ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to
Unaudited Consolidated Financial
Statements (Continued)
in pricing the asset or liability. Management develops these
inputs based on the best information available, including
internally-developed data.
The Companys financial assets that are carried at
estimated fair value are summarized below (in thousands):
March 29, |
December 28, |
|||||||
2009 | 2008 | |||||||
(Unaudited) | ||||||||
Auction rate securities (ARS)(*)
|
$ | 23,532 | $ | 22,243 | ||||
Put Rights(*)(***)
|
3,067 | 4,301 | ||||||
Notes receivable from Indian Tribes(**)
|
10,711 | 10,703 | ||||||
$ | 37,310 | $ | 37,247 | |||||
(*) | See Note 3. | |
(**) | See Note 5. | |
(***) | The Company has elected the fair value option as offered by SFAS 159, only for its Rights. Therefore, material financial assets and liabilities not carried at fair value are still reported at carrying values. |
The Company utilizes valuation models based on managements
estimates of expected cash flow streams and discount rates to
value these assets.
The following is a list of the most significant factors
affecting the Companys cash flows and discount rate
estimates by financial asset type:
| ARS Credit ratings of the ARS and collateral securities, default rates, other market and liquidity circumstances. | |
| Put Rights Credit worthiness of UBS including its credit swap rate. | |
| Notes receivable from Indian Tribes Probability of the casino opening based on the status of critical project milestones and the expected opening date, estimated pre- and post-opening interest rates, contractual interest rate and other terms, yield rates on US Treasury Bills and other financial instruments, the risk/return indicators of equity investments in general, specific risks associated with operating the casino and similar projects, and scenario weighting alternatives. |
The following table summarizes the activity for the
Companys financial instruments that are reported at
estimated fair value utilizing Level 3 inputs (in
thousands):
Notes |
||||||||||||||||
Receivable |
||||||||||||||||
from |
||||||||||||||||
ARS | Rights | Indian Tribes | Total | |||||||||||||
Beginning balance December 28, 2008
|
$ | 22,243 | $ | 4,301 | $ | 10,703 | $ | 37,247 | ||||||||
Total realized and unrealized gains (losses):
|
||||||||||||||||
Gains (losses) included in earnings(*)
|
1,289 | (1,234 | ) | | 55 | |||||||||||
Unrealized gains on notes receivable
|
| | (163 | ) | (163 | ) | ||||||||||
Advances, net of allocation to intangible, other
|
| | 171 | 171 | ||||||||||||
Ending balance March 29, 2009 (unaudited)
|
$ | 23,532 | $ | 3,067 | $ | 10,711 | $ | 37,310 | ||||||||
(*) | See Note 3. |
8
Table of Contents
LAKES
ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to
Unaudited Consolidated Financial
Statements (Continued)
5. | Long-term assets related to Indian casino projects notes receivable |
The majority of the assets related to Indian casino projects are
in the form of notes receivable due from the Indian tribes
pursuant to the Companys development, financing,
consulting and management agreements. The repayment terms of the
loans are specific to each Indian tribe and are dependent upon
the successful development and operating performance of each
gaming facility. Repayment of the loans is required only if
distributable profits are available from the operation of the
related casinos. In addition, repayment of the loans and the
development, financing, consulting and management fees under
contracts are subordinated to certain other financial
obligations of the respective operations. Generally, the order
of priority of payments from the casinos cash flows is as
follows: a certain minimum monthly priority payment to the
Indian tribe; repayment of senior debt associated with
construction and equipping of the casino with interest accrued
thereon; repayment of various debt with interest accrued thereon
due to Lakes; development, financing, consulting and management
fees to Lakes, with the remaining funds distributed to the
Indian tribe.
Information with respect to the notes receivable activity is
summarized in the following table (in thousands):
Shingle |
||||||||||||||||
Springs |
Jamul |
|||||||||||||||
Tribe | Tribe | Other | Total | |||||||||||||
Balance, December 30, 2007
|
$ | 53,592 | $ | 21,406 | $ | 3,797 | $ | 78,795 | ||||||||
Advances, net
|
1,880 | 3,452 | 260 | 5,592 | ||||||||||||
Allocation of advances to intangible assets
|
(426 | ) | (2,116 | ) | (78 | ) | (2,620 | ) | ||||||||
Consulting contracts
|
| | (75 | ) | (75 | ) | ||||||||||
Current portion of notes receivable
|
(9,151 | ) | | | (9,151 | ) | ||||||||||
Changes in estimated fair value(*), (**)
|
(1,893 | ) | (15,626 | ) | (317 | ) | (17,836 | ) | ||||||||
Balance, December 28, 2008
|
44,002 | 7,116 | 3,587 | 54,705 | ||||||||||||
Advances
|
| 659 | 137 | 796 | ||||||||||||
Repayments
|
(1,476 | ) | | | (1,476 | ) | ||||||||||
Accretion of contra note receivable(**)
|
714 | | | 714 | ||||||||||||
Allocation of advances to intangible assets
|
| (569 | ) | (56 | ) | (625 | ) | |||||||||
Changes in estimated fair value(*)
|
| (4 | ) | (159 | ) | (163 | ) | |||||||||
Changes in current portion of notes receivable
|
2,081 | | | 2,081 | ||||||||||||
Balance, March 29, 2009 (unaudited)
|
$ | 45,321 | $ | 7,202 | $ | 3,509 | $ | 56,032 | ||||||||
(*) | The changes in estimated fair value of notes receivable related to Indian casino projects under development are recorded as unrealized gains (losses) within the consolidated financial statements. | |
(**) | The Company estimated the fair value of the notes receivable from the Shingle Springs Tribe in conjunction with the opening of the Red Hawk Casino on December 17, 2008. Pursuant to Lakes accounting policy (See critical accounting policy summary in Part I, Item 2 of this Quarterly Report on Form 10-Q), upon opening of the casino, the difference between the then estimated fair value of the notes receivable and the amount contractually due under the notes began being amortized into income using the effective interest method. This difference will fully amortize over the remaining term of the note. These notes are no longer adjusted to estimated fair value on a quarterly basis, but rather they are evaluated for impairment pursuant to SFAS 114, Accounting by Creditors for Impairment of a Loan. |
9
Table of Contents
LAKES
ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to
Unaudited Consolidated Financial
Statements (Continued)
Shingle Springs Tribe. The terms and
assumptions used to value Lakes notes receivable from the
Shingle Springs Tribe at estimated fair value at
December 17, 2008 are as follows (dollars in thousands):
As of December 17, 2008 | ||
Face value of note (principal and interest)
|
$74,372 | |
($49,512 principal and $24,860 interest) | ||
Projected interest rate during the loan repayment term
|
6.41% | |
Discount rate
|
18.50% | |
Repayment terms of note
|
84 months | |
Probability rate of casino opening
|
100% |
Jamul Tribe. The terms and assumptions
used to value Lakes notes receivable from the Jamul Tribe
at estimated fair value are as follows (dollars in thousands):
As of March 29, 2009 | As of December 28, 2008 | |||
(Unaudited) | ||||
Face value of note (principal and interest)
|
$50,492 | $49,171 | ||
($34,226 principal and $16,266 interest) | ($33,567 principal and $15,604 interest) | |||
Estimated months until casino opens (weighted average of three
scenarios)
|
64 months | 64 months | ||
Projected interest rate until casino opens
|
6.66% | 6.45% | ||
Projected interest rate during the loan repayment term
|
9.05% | 8.32% | ||
Discount rate(*)
|
24.50% | 23.50% | ||
Repayment terms of note
|
120 months | 120 months | ||
Probability rate of casino opening (weighting of four scenarios)
|
50% | 50% |
(*) | During the first quarter of 2009, Lakes increased the discount rate to 24.50% for this project, as continued issues in the credit markets and general economic uncertainties resulted in a higher required yield on the notes. The Jamul Casino project has been delayed due to various political and regulatory issues. Significant risk exists related to this project moving forward to completion, and Lakes has recorded significant impairment charges against its investment in this project. However, the Jamul Tribe has the two basic requirements to eventually build a successful project federal recognition as an Indian Tribe and Indian land eligible for gaming and Lakes currently expects to continue its involvement with this project. |
10
Table of Contents
LAKES
ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to
Unaudited Consolidated Financial
Statements (Continued)
Iowa Tribe. The terms and assumptions used to
value Lakes notes receivable from the Iowa Tribe at
estimated fair value are as follows (dollars in thousands):
As of March 29, 2009 | As of December 28, 2008 | |||
(Unaudited) | ||||
Face value of note (principal and interest)
|
$5,873 ($4,871 principal and $1,002 interest) |
$5,660 ($4,734 principal and $926 interest) |
||
Estimated months until casino opens
|
24 months | 20 months | ||
Projected interest rate until casino opens
|
5.77% | 5.93% | ||
Projected interest rate during the loan repayment term
|
6.84% | 6.24% | ||
Discount rate(*)
|
19.50% | 18.50% | ||
Repayment terms of note
|
24 months | 24 months | ||
Probability rate of casino opening
|
85% | 85% |
(*) | During the first quarter of 2009, Lakes increased the discount rate to 19.50% for this project, as continued issues in the credit markets and general economic uncertainties resulted in a higher required yield on the notes. |
6. | Other long-term assets related to Indian casino projects |
Intangible assets. Intangible assets consist
of costs associated with the acquisition of the management,
development, consulting or financing contracts related to tribal
gaming projects and are periodically evaluated for impairment
after they are initially recorded.
Information with respect to the intangible assets related to the
acquisition of management, development, consulting or financing
contracts by project is summarized as follows (in thousands):
Shingle |
||||||||||||||||||||
Pokagon |
Springs |
Jamul |
||||||||||||||||||
Band | Tribe | Tribe | Other | Total | ||||||||||||||||
Balance, December 30, 2007
|
$ | 30,775 | $ | 21,923 | $ | 11,972 | $ | 1,240 | $ | 65,910 | ||||||||||
Allocation of advances
|
| 426 | 2,116 | 78 | 2,620 | |||||||||||||||
Amortization
|
(6,715 | ) | (133 | ) | | (8 | ) | (6,856 | ) | |||||||||||
Impairment losses
|
| | (14,088 | ) | | (14,088 | ) | |||||||||||||
Balance, December 28, 2008
|
24,060 | 22,216 | | 1,310 | 47,586 | |||||||||||||||
Allocation of advances
|
| | 569 | 56 | 625 | |||||||||||||||
Amortization
|
(1,678 | ) | (798 | ) | | (3 | ) | (2,479 | ) | |||||||||||
Impairment losses(*)
|
| | (569 | ) | | (569 | ) | |||||||||||||
Balance, March 29, 2009 (unaudited)
|
$ | 22,382 | $ | 21,418 | $ | | $ | 1,363 | $ | 45,163 | ||||||||||
(*) | Due to continued uncertainty surrounding the Jamul Casino project, Lakes recognized an impairment of $0.6 million related to the intangible assets associated with this project during the first quarter of 2009. |
Land held for development. Land held
for development is comprised of land held for possible transfer
to Indian tribes for use in certain of the future casino resort
projects. In the event that this land is not transferred to the
tribes, the Company has the right to sell it. As of
March 29, 2009, land held for development related to Indian
casino
11
Table of Contents
LAKES
ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to
Unaudited Consolidated Financial
Statements (Continued)
projects was $1.8 million. Lakes currently owns
approximately 96 acres of land held for development located
adjacent to the Jamul Casino project location, which is carried
at $1.0 million as of March 29, 2009.
As of March 29, 2009, Lakes owns approximately
139 acres of land held for development located adjacent to
the Ioway Casino Resort project location. Lakes has invested
$0.8 million in land held for development, which is being
held for future transfer to the Iowa Tribe.
Other. As of March 29, 2009 and
December 28, 2008 these assets consist primarily of amounts
due from KAR Entities that were advanced in connection with the
acquisition of contracts rights related to the Red Hawk Casino
and the proposed Jamul Casino. See the discussion of these
arrangements below in Part I, Item 2 of this
Quarterly Report on
Form 10-Q,
included under the captions Description of each Indian
casino project and evaluation of critical milestones
Shingle Springs Tribe and Description of each Indian
casino project and evaluation of critical milestones
Jamul Tribe, respectively.
7. | Debt |
Credit Line. During 2008, Lakes entered into a
client agreement (the Credit Line) with UBS, which
is collateralized by Lakes ARS held at UBS
(Note 3) and is due and payable on demand with
interest at
30-day LIBOR
plus one percent. As of March 29, 2009, approximately
$18.0 million was outstanding under the Credit Line.
Non-revolving line of credit. Also during
2008, Lakes closed on a two-year interest only $8.0 million
non-revolving line of credit loan agreement (the Loan
Agreement) with First State Bank. The Loan Agreement is
collateralized by real property in Minnetonka, Minnesota, which
is carried at approximately $6.5 million and included
within property and equipment, net on the unaudited consolidated
balance sheet as of March 29, 2009. Amounts borrowed under
the Loan Agreement bear interest at 8.95%. As of March 29,
2009, Lakes had drawn $2 million under the Loan Agreement.
8. | Contract acquisition costs payable |
The Company is obligated to pay approximately $11 million
to an unrelated third party as part of an agreement associated
with the Company obtaining the management contract with the
Pokagon Band. The obligation is payable quarterly over the term
of the five-year management agreement for the Four Winds Casino
Resort. The Company is also obligated to pay approximately
$3 million over 24 months to a separate unrelated
third party on behalf of the Pokagon Band in accordance with the
management contract. As of March 29, 2009, remaining
amounts owed under these agreements were $6.7 million.
During 2006, the Lyle Berman Family Partnership (the
Partnership) purchased a portion of the
$11 million obligation discussed above from an unrelated
third party. The Partnership receives approximately
$0.3 million per year of the payment stream related to this
obligation during the five-year term of the management contract
of the Four Winds Casino Resort. Lyle Berman, Lakes
Chairman and Chief Executive Officer, does not have an ownership
or any other beneficial interest in the Partnership. Neil I.
Sell, a director of Lakes, is one of the trustees of the
irrevocable trusts for the benefit of Lyle Bermans
children who are the partners in and sole beneficiaries of the
Partnership.
9. | Share-based compensation |
Share-based compensation expense, which includes stock options
and restricted stock units, was $0.1 million for the three
months ended March 29, 2009 and March 30, 2008. See
Note 11 for a discussion of the income tax benefits related
to share-based compensation.
Stock options. The Company uses the Black
Scholes option pricing model to estimate the fair value and
compensation cost associated with employee incentive stock
options which requires the consideration of historical
12
Table of Contents
LAKES
ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to
Unaudited Consolidated Financial
Statements (Continued)
employee exercise behavior data and the use of a number of
assumptions including volatility of the Companys stock
price, the weighted average risk-free interest rate and the
weighted average expected life of the options.
The following values represent the average per grant for the
indicated variables used to value options granted during the
three months ended March 29, 2009 and March 30, 2008,
respectively. There have been no significant changes to the
assumptions thus far in 2009 and none are expected during the
remainder of 2009.
Three Months Ended | ||||||||
March 29, |
March 30, |
|||||||
Key valuation assumptions:
|
2009 | 2008 | ||||||
Expected dividend yield
|
| | ||||||
Risk-free interest rate
|
2.52 | % | 3.66 | % | ||||
Expected term (in years)
|
7.69 years | 8.18 years | ||||||
Expected volatility
|
79.82 | % | 48.77 | % | ||||
Forfeiture rate
|
| | ||||||
Weighted-average grant-date fair value per share
|
$ | 2.46 | $ | 3.35 |
| Expected dividend yield As the Company does not pay dividends, the dividend rate variable in the Black-Scholes model is zero. | |
| Risk free interest rate The risk free interest rate assumption is based on the U.S. Treasury yield curve in effect at the time of grant and with maturities consistent with the expected term of options. | |
| Expected term (in years) The expected term of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding. It is based upon an analysis of the historical behavior of option holders during the period from September 1995 to March 29, 2009. Management believes historical data is reasonably representative of future exercise behavior. | |
| Expected volatility The volatility assumption is based on the historical weekly price data of Lakes stock over a two-year period. Management evaluated whether there were factors during that period which were unusual and which would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors. | |
| Forfeiture rate As share-based compensation expense recognized is based on awards ultimately expected to vest, expense for grants beginning upon adoption of Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment-Revised 2004 (SFAS 123R) will be reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company has reviewed the historical forfeitures which are minimal, and as such will amortize the grants to the end of the vesting period and will adjust for forfeitures at the end of the term. |
13
Table of Contents
LAKES
ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to
Unaudited Consolidated Financial
Statements (Continued)
The following table summarizes Lakes stock option activity
during the three months ended March 29, 2009 and
March 30, 2008 (unaudited):
Number of common shares | ||||||||||||||||
Weighted-avg. |
||||||||||||||||
Options |
Available |
exercise |
||||||||||||||
outstanding | Exercisable | for grant | price | |||||||||||||
2009
|
||||||||||||||||
Balance at December 28, 2008
|
2,862,964 | 2,498,864 | 343,150 | $ | 6.60 | |||||||||||
Authorized
|
| | | | ||||||||||||
Granted(*)
|
337,000 | | (337,000 | ) | 3.25 | |||||||||||
Forfeited/cancelled/expired
|
(109,423 | ) | | 109,423 | 4.29 | |||||||||||
Exercised
|
(91,041 | ) | | | 3.80 | |||||||||||
Balance at March 29, 2009
|
2,999,500 | 2,455,700 | 115,573 | $ | 6.24 | |||||||||||
2008
|
||||||||||||||||
Balance at December 30, 2007
|
4,345,650 | 3,842,200 | 584,750 | $ | 6.08 | |||||||||||
Authorized
|
| | | | ||||||||||||
Granted
|
196,000 | | (196,000 | ) | 5.73 | |||||||||||
Forfeited/cancelled/expired
|
| | | | ||||||||||||
Exercised
|
(400,000 | ) | | | 4.19 | |||||||||||
Balance at March 30, 2008
|
4,141,650 | 3,798,200 | 388,750 | $ | 6.25 | |||||||||||
(*) | Includes 140,000 of restricted stock units granted during the first quarter of 2009. |
The following table summarizes significant ranges of Lakes
outstanding and exercisable options as of March 29, 2009
(unaudited):
Options outstanding at March 29, 2009 | ||||||||||||||||||||||||||||
Weighted- |
Options exercisable at March 29, 2009 | |||||||||||||||||||||||||||
Average |
Aggregate |
Aggregate |
||||||||||||||||||||||||||
Number |
Remaining |
Weighted-average |
intrinsic |
Number |
Weighted-average |
intrinsic |
||||||||||||||||||||||
Range of exercise prices | outstanding | contractual life | exercise price | value | exercisable | exercise price | value | |||||||||||||||||||||
Restricted stock units
|
140,000 | |||||||||||||||||||||||||||
$ (3.25 3.63)
|
744,600 | 3.9 years | $ | 3.30 | $ | | 547,600 | $ | 3.32 | $ | | |||||||||||||||||
(3.64 5.45)
|
300,300 | 3.4 years | 4.32 | | 221,925 | 4.34 | | |||||||||||||||||||||
(5.46 7.26)
|
174,750 | 7.3 years | 6.50 | | 89,625 | 6.57 | | |||||||||||||||||||||
(7.27 9.08)
|
1,353,000 | 4.5 years | 7.54 | | 1,352,625 | 7.54 | | |||||||||||||||||||||
(9.09 10.90)
|
109,250 | 3.8 years | 10.04 | | 89,525 | 10.14 | | |||||||||||||||||||||
(10.91 12.71)
|
18,000 | 6.8 years | 11.52 | | 9,600 | 11.56 | | |||||||||||||||||||||
(12.72 14.53)
|
89,600 | 5.8 years | 13.04 | | 85,800 | 13.05 | | |||||||||||||||||||||
(14.54 16.34)
|
30,000 | 6.0 years | 16.01 | | 19,000 | 15.96 | | |||||||||||||||||||||
(16.35 16.84)
|
40,000 | 4.4 years | 16.84 | | 40,000 | 16.84 | | |||||||||||||||||||||
2,999,500 | 4.7 years | $ | 6.24 | $ | | 2,455,700 | $ | 6.80 | $ | | ||||||||||||||||||
The aggregate intrinsic value in the preceding table represents
the total pre-tax intrinsic value which would have been received
by the option holders had all option holders exercised their
options as of that date. Based on Lakes closing stock
price of $2.17 on March 29, 2009, none of the stock options
granted by Lakes have an intrinsic value. The total intrinsic
value of options exercised during the three months ended
March 29, 2009 was not material. Options exercised during
the three months ended March 30, 2008 did not have an
intrinsic value. As of March 29,
14
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LAKES
ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to
Unaudited Consolidated Financial
Statements (Continued)
2009, Lakes unrecognized share-based compensation was
approximately $1.2 million, which is expected to be
recognized over a weighted-average period of 2.5 years.
Lakes issues new shares of common stock upon the exercise of
options.
Restricted stock units. The following table
summarizes Lakes restricted stock unit activity during the
three months ended March 29, 2009 (unaudited):
Weighted-average |
||||||||
Restricted |
grant- |
|||||||
stock units | date fair value | |||||||
Non-vested shares at December 28, 2008
|
| $ | | |||||
Granted
|
140,000 | 3.25 | ||||||
Vested
|
| | ||||||
Forfeited
|
| | ||||||
Non-vested shares at March 29, 2009
|
140,000 | $ | 3.25 | |||||
As of March 29, 2009, Lakes unrecognized share-based
compensation was approximately $0.4 million related to
non-vested shares, which is expected to be recognized over a
weighted-average of 2.8 years. No restricted stock units
vested during the three months ended March 29, 2009.
10. | Earnings (Loss) per share |
For all periods, basic earnings (loss) applicable to common
shareholders per share (EPS) is calculated by
dividing net earnings (loss) applicable to common shareholders
by the weighted-average common shares outstanding. Diluted EPS
in profitable years reflects the effect of all potentially
dilutive common shares outstanding by dividing net earnings
(loss) applicable to common shareholders by the weighted-average
of all common and potentially dilutive shares outstanding.
Potentially dilutive stock options applicable to common
shareholders of 631,908 shares for the three months ended
March 30, 2008, were not used to compute diluted loss per
share applicable to common shareholders because the effects
would have been anti-dilutive.
11. | Income Taxes |
At December 28, 2008, the Company had recorded a 100%
valuation allowance against the remaining deferred tax assets
arising from net operating loss carryforwards and capital loss
carryforwards. Management has evaluated all evidence and has
determined that cumulative net losses generated over the past
three years outweigh the current positive evidence that the
Company believes exists surrounding its ability to generate
significant income from its long-term assets related to Indian
casino projects. However, the Company expects to release
$3.3 million of deferred tax assets related to net
operating loss carryforwards that will offset current book
income, of which approximately $1.1 million will be
credited to additional paid-in capital relating to the release
of valuation allowances against tax windfall benefits related to
share-based compensation from prior years.
The Company recorded $0.2 million of interest related to
the uncertain tax positions to income tax expense for the three
months ended March 29, 2009.
12. | Contingencies |
Louisiana Department of Revenue litigation tax
matter. The Louisiana Department of Revenue
maintains a position that Lakes owes additional Louisiana
corporation income tax for the period ended January 3, 1999
and the tax years ended 1999 through 2001 and additional
Louisiana corporation franchise tax for the tax years ended 2000
through 2002. This determination is the result of an audit of
Louisiana tax returns filed by Lakes for the tax periods at
issue and relates to the reporting of income earned by Lakes in
connection with the managing of two Louisiana-based casinos. On
December 20, 2004, the Secretary of the Department of
Revenue of the State of Louisiana filed a
15
Table of Contents
LAKES
ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to
Unaudited Consolidated Financial
Statements (Continued)
petition to collect taxes in the amount of $8.6 million,
plus interest, against Lakes for the taxable periods set forth
above. Lakes maintains that it remitted the proper Louisiana
corporation income tax and Louisiana corporation franchise tax
for the taxable periods at issue. On February 14, 2005,
Lakes filed an answer to the petition to collect taxes asserting
all proper defenses and maintaining that no additional taxes
were owed and that the petition to collect taxes should be
dismissed. Management intends to continue to vigorously contest
this action by the Louisiana Department of Revenue. However,
Lakes may be required to pay up to the $8.6 million
assessment plus interest if Lakes is not successful in this
matter. Lakes has recorded an estimated liability related to
this examination including accrued interest and fees, which is
included as part of income taxes payable on the accompanying
consolidated balance sheets.
Red Hawk Casino. Lakes may be required
to pay Kevin Kean and Jerry Argovitz under their respective
agreements with Lakes resulting from the opening of the Red Hawk
Casino on December 17, 2008. See the discussion in
Part I, Item 2 of this Quarterly Report on
Form 10-Q
below included under the caption Description of each
Indian casino project and evaluation of critical
milestones Shingle Springs Tribe.
Miscellaneous legal matters. Lakes and
its subsidiaries are involved in various other inquiries,
administrative proceedings, and litigation relating to contracts
and other matters arising in the normal course of business.
While any proceeding or litigation has an element of
uncertainty, management currently believes that the likelihood
of an unfavorable outcome is remote, and is not likely to have a
material adverse effect upon Lakes unaudited consolidated
financial statements.
13. | Subsequent Events |
On April 1, 2009, the Company submitted an application to
the Kansas Lottery Commission for a Gaming Facility Manager
license to develop and operate a casino in the South Central
Kansas Gaming Zone. Lakes has not yet been notified whether or
not it will receive this license.
16
Table of Contents
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
We develop, finance and manage Indian-owned casino properties.
We currently have development and management or financing
agreements with four separate tribes for casino operations in
Michigan, California, and Oklahoma for a total of five separate
casino projects as follows:
| We developed, and have a five-year contract to manage, the Four Winds Casino Resort for the Pokagon Band in New Buffalo Township, Michigan near Interstate 94. We began managing the Four Winds Casino Resort when it opened to the public on August 2, 2007. The Four Winds Casino Resort is located near the first Interstate 94 exit in southwestern Michigan and approximately 75 miles east of Chicago. The facility features approximately 3,000 slot machines, 72 table games, a 12-table poker room, a 165-room hotel, five restaurants, three bars, a child care facility and arcade, retail space and a parking garage. | |
| We developed, and have a seven-year contract to manage, the Red Hawk Casino that was built on the Rancheria of the Shingle Springs Tribe in El Dorado County, California, adjacent to U.S. Highway 50, approximately 30 miles east of Sacramento, California. We began managing the Red Hawk Casino when it opened to the public on December 17, 2008. The Red Hawk Casino features approximately 2,100 electronic gaming devices, 75 table games, six restaurants, six bars, retail space, a parking garage, a child care facility and arcade. To provide direct freeway access to the Red Hawk Casino, an affiliate of the Shingle Springs Tribe constructed a dedicated inter-change on U.S. Highway 50. | |
| We are managing the Cimarron Casino for the Iowa Tribe in Perkins, Oklahoma, under a seven-year management contract, which commenced in 2006. The Cimarron Casino features approximately 375 electronic gaming machines. | |
| We have contracts to develop and finance a casino to be built on the reservation of the Jamul Indian Village (the Jamul Tribe) located on State Highway 94, approximately 20 miles east of San Diego, California (the Jamul Casino). This project has been significantly delayed due to various political and regulatory issues. Significant risk exists related to this project moving forward to completion, and we have recorded significant impairment charges against our investment in this project. However, the Jamul Tribe has the two basic requirements to eventually build a successful project federal recognition as an Indian Tribe and Indian land eligible for gaming and we currently expect to continue our involvement with this project. | |
| We have a consulting agreement and management contract with the Iowa Tribe in connection with developing, equipping and managing a casino resort which is planned to be built near Route 66 and approximately 25 miles northeast of Oklahoma City, Oklahoma (the Ioway Casino Resort). The Iowa Tribe is currently leasing and acquiring land from tribal members, which is held in trust for the individual tribal members by the United States Government. In January 2009, the BIA granted approval on the purchase of a 60-acre allotment. The remaining transactions for the final 14 acres still require BIA approval. Lakes submitted its management contract with the Iowa Tribe for the Ioway Casino Resort to the NIGC for review in 2005. The NIGC has stated that it is waiting for the BIA to approve all land leases before it will issue an opinion on the management contract. |
We have also explored, and continue to explore, other
development projects with Indian tribes. We also explore other
non-Indian casino development projects and other business
activities.
On October 1, 2008, Lakes Board of Directors declared
a noncash dividend consisting of all of the shares of WPTE then
owned by Lakes. Lakes previously owned 12,480,000 or
approximately 61% of the outstanding common stock of WPTE, a
separate publicly-held media and entertainment company. The
record date for the dividend was October 24, 2008, which
established the shareholders of record entitled to the dividend,
thereby allowing the determination of the ratio of WPTE shares
to be distributed per Lakes share. The date of distribution was
November 21, 2008. Operations of WPTE after the date of
distribution are not included in Lakes consolidated
results of operations, and historical operating results of WPTE
up to that date are presented as discontinued operations.
17
Table of Contents
Results
of Operations
The following discussion and analysis should be read in
conjunction with the unaudited consolidated financial statements
and notes thereto included elsewhere in this Quarterly Report on
Form 10-Q
for the three months ended March 29, 2009.
Three
months ended March 29, 2009 compared to the three months
ended March 30, 2008
Revenues. Total revenues were
$7.3 million for the first quarter of 2009 compared to
$4.6 million for the first quarter of 2008. Lakes
revenue increase of $2.7 million was primarily due to
improved results from the Four Winds Casino Resort during the
first quarter of 2009, as well as a full quarter contribution of
management fees from the Red Hawk Casino, which opened to the
public on December 17, 2008. The first quarter of 2009 and
2008 also included full quarter contributions from the Cimarron
Casino.
Selling, general and administrative
expenses. Selling, general and administrative
expenses were $4.0 million in the first quarter of 2009
compared to $3.9 million for the first quarter of 2008. For
the first quarter of 2009, Lakes selling, general and
administrative expenses consisted primarily of payroll and
related expenses of $2.2 million, including share-based
compensation, travel expenses of $0.9 million, and
professional fees of $0.6 million. For the first quarter of
2008, Lakes selling, general and administrative expenses
consisted primarily of payroll and related expenses of
$2.2 million, including share-based compensation, travel
expenses of $0.6 million, and professional fees of
$0.6 million.
Ohio initiative costs. Development costs
associated with the Ohio casino resort initiative, which was
terminated after the November 2008 election, were
$1.6 million during the first quarter of 2008.
Impairment losses. Impairment losses were
$0.6 million in the first quarter of 2009. There were no
impairment losses during the first quarter of 2008. Due to
continued uncertainty surrounding the Jamul Casino project
associated with delays in progress as well as ongoing issues in
the credit markets and general economic uncertainties, we
recognized an impairment during the first quarter of 2009.
Amortization of intangible assets related to Indian casino
projects. Amortization of intangible assets
related to Indian casino projects for the first quarter of 2009
was $2.5 million compared to $1.7 million for the
first quarter of 2008. The increase of $0.8 million related
to the amortization of intangible assets associated with the Red
Hawk Casino, which began when it opened to the public on
December 17, 2008. Amortization for the first quarter of
2008 related primarily to the intangible assets associated with
the Four Winds Casino Resort.
Net unrealized losses on notes receivable. Net
unrealized losses on notes receivable relate primarily to our
notes receivable from Indian tribes, which are adjusted to
estimated fair value, based upon the current status of the
related tribal casino projects and evolving market conditions.
In the first quarter of 2009, we reported net unrealized losses
on notes receivable of $0.2 million, compared to net
unrealized losses of $2.0 million in the prior-year period.
Net unrealized losses in the first quarter of 2009 were related
to the Jamul Casino project with the Jamul Tribe and Iowa
Tribes Ioway Casino project due primarily to ongoing
issues in the credit markets and general economic uncertainties.
Net unrealized losses in the first quarter of 2008 were due
primarily to a decrease in projected interest rates related to
the notes receivable related to the Red Hawk Casino project with
the Shingle Springs Tribe and the notes receivable related to
the Jamul Casino project with the Jamul Tribe.
Other income (expense), net. Other income
(expense), net for the first quarter of 2009 was
$1.5 million compared to $0.2 million for the first
quarter of 2008. Other income (expense), net in the first
quarter of 2009 is primarily associated with interest earned on
the notes receivable from the Shingle Springs Tribe.
Income Taxes. The income tax provision was
$0.4 million and $0.7 million for the three months
ended March 29, 2009 and March 30, 2008, respectively.
Our effective tax rates were 27% and 15% for the first quarter
of 2009 and the corresponding 2008 period, respectively.
Lakes income tax provision in the current year period
consists primarily of current income tax, and approximately
$0.2 million of interest on a Louisiana tax audit matter
(Note 12 to the unaudited consolidated financial statements
included in Part I, Item 1 of this Quarterly Report on
Form 10-Q).
In the prior year period, the income tax provision was primarily
related to a valuation allowance
18
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against deferred tax assets related to capital losses for the
portion that were not expected to be realized, and approximately
$0.3 million of interest on a Louisiana tax audit matter.
Liquidity
and Capital Resources
As of March 29, 2009, we had $9.9 million in cash and
cash equivalents and $23.5 million of long-term investments
in securities recorded at estimated fair value. We currently
believe that our cash and cash equivalents balance, our cash
flows from operations and the financing sources discussed below
will be sufficient to meet our working capital requirements
during the next 12 months. However, our operating results
and performance depend significantly on the current economic
conditions and their impact on consumer spending in the casinos
we manage. Declines in consumer spending may cause our revenue
generated from the management of Indian casinos to be adversely
impacted. Current economic conditions and issues in the credit
markets may impact our ability to finance projects under
development.
On October 1, 2008, Lakes Board of Directors declared
a noncash dividend consisting of all of the shares of WPTE then
owned by Lakes. The date of distribution was November 21,
2008. WPTE cash and investments have not been used in our
business. The exclusion of WPTE from our consolidated financial
statements does not have an impact on Lakes cash position.
All of our investments in securities are ARS, held by UBS and
are classified as trading securities as of March 29, 2009.
As a result of liquidity issues surrounding our ARS, our ARS are
classified as long-term investments in securities. The types of
ARS investments that we own are backed by student loans, the
majority of which are guaranteed under the Federal Family
Education Loan Program (FFELP). None of our
investments in ARS qualify, or have ever been classified in our
consolidated financial statements, as cash or cash equivalents.
In November 2008, we accepted an offer from UBS granting us
nontransferable rights (the Rights) to sell our ARS
held by UBS at par value to UBS at any time during the period of
June 30, 2010, through July 2, 2012. We expect to sell
our ARS under the Rights. However, if the Rights are not
exercised before July 2, 2012 they will expire and UBS will
have no further rights or obligation to buy our ARS. UBSs
obligation under the Rights are not secured by its assets and do
not require UBS to obtain any financing to support its
performance obligations under the Rights. UBS has disclaimed any
assurance that it will have sufficient financial resources to
satisfy its obligations under the Rights.
During 2008, we entered into a credit agreement with UBS (the
Credit Line) which is due and payable on demand with
interest at
30-day LIBOR
plus one percent. As of March 29, 2009, approximately
$18.0 million was outstanding under the Credit Line.
Also during 2008, we closed on a two-year interest only
$8.0 million non-revolving line of credit loan agreement
(the Loan Agreement) with First State Bank. Amounts
borrowed under the Loan Agreement bear interest at 8.95%. As of
March 29, 2009, Lakes has drawn $2 million under the
Loan Agreement.
During the first quarter of 2009, Lakes has recognized
significant revenues from the management of Indian casino
properties, and going forward Lakes expects this trend to
continue as Lakes is managing the Cimarron Casino, the Four
Winds Casino Resort and the Red Hawk Casino. However, because of
the relatively short operating history of the casinos we manage,
and the uncertainty in the economic environment, no assurance
can be given that this will occur. Lakes agreements with
tribal partners require that we provide certain financing for
project development in the form of loans, which has been a major
use of cash over the past three years, in addition to on-going
corporate costs and costs incurred during 2008 for the Ohio
casino resort initiative. These loans to our tribal partners are
interest bearing; however, the loans and related interest are
not due until the casino is built and has established profitable
operations. In the event that the casinos are not built, our
only recourse is to attempt to liquidate assets of the
development, if any, excluding any land in trust.
Our cash forecast requirements do not include
construction-related costs that will be incurred when pending
and future development projects begin construction. The
construction of our pending casino projects will depend on the
ability of the tribes
and/or Lakes
to obtain additional financing for the projects, which based on
the general economic environment, is subject to considerable
uncertainty. If such financing cannot be obtained on acceptable
terms, it may not be possible to complete these projects, which
could have a material adverse effect on our future results of
operations, cash flows and financial condition. In order to
assist the tribes, we may be required to
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guarantee the tribes debt financing or otherwise provide
support for the tribes obligations. Guarantees by us, if
any, will increase our potential exposure to losses and other
adverse consequences in the event of a default by any of these
tribes.
If our casino development projects with the Iowa Tribe and the
Jamul Tribe are not constructed or if constructed, do not
achieve profitable operations in the highly competitive market
for gaming activities, it is likely that we would incur
substantial or complete losses on our related notes receivable
and intangible assets associated with those projects. In
addition, we may lack the funds to compete for and develop
future gaming or other business opportunities and our business
could be adversely affected to the extent that we may be forced
to cease our operations entirely.
We have received various regulatory approvals to develop our own
casino near Vicksburg, Mississippi. However, uncertainty exists
surrounding the development of this project due primarily to
changes in the economic environment and credit markets. As a
result, the assets associated with the Vicksburg project are
recorded at their estimated fair value of $5.4 million as
of March 29, 2009.
The following table summarizes the remaining contractual
obligations as of March 29, 2009 (in millions):
Payment due by period | ||||||||||||||||||||
Less than |
More than |
|||||||||||||||||||
Contractual obligations
|
Total | 1 year | 1-3 years | 3-5 years | 5 years | |||||||||||||||
(Unaudited) | ||||||||||||||||||||
Remaining casino development commitment(1)
|
||||||||||||||||||||
Jamul Tribe(2)
|
$ | | $ | | $ | | $ | | $ | | ||||||||||
Shingle Springs Tribe(3)
|
| | | | | |||||||||||||||
Pokagon Band(4)
|
6.7 | 1.8 | 3.7 | 1.2 | | |||||||||||||||
Iowa Tribe Ioway Casino project(5)
|
| | | | | |||||||||||||||
Non-revolving line of credit(6)
|
2.0 | | 2.0 | | | |||||||||||||||
Lakes operating lease(7)
|
4.5 | 0.4 | 0.9 | 0.9 | 2.3 | |||||||||||||||
$ | 13.2 | $ | 2.2 | $ | 6.6 | $ | 2.1 | $ | 2.3 | |||||||||||
(1) | We may be required to provide a guarantee of tribal debt financing or otherwise provide support for the tribal obligations related to any of the projects (see (2) and (5) below). Any guarantees by us or similar off-balance sheet liabilities will increase our potential exposure in the event of a default by any of these tribes. No such guarantees or similar off-balance sheet liabilities existed at March 29, 2009. | |
(2) | Effective March 30, 2006, we entered into a development financing and services agreement with the Jamul Tribe. As part of the agreement, we will use our best efforts to obtain financing of up to $350 million from which advances will be made to the Jamul Tribe to pay for the design and construction of a casino project. The current plan is for a smaller scale gaming facility that will become a solely class II electronic gaming device facility which will not require a compact with the State of California. The agreement between Lakes and the Jamul Tribe is being modified to reflect the new economics of the revised casino plan but is not currently believed to require approval by the State of California or the NIGC. | |
(3) | We may be required to pay Mr. Kean and Mr. Argovitz under their respective agreements with Lakes resulting from the opening of the Red Hawk Casino on December 17, 2008. See also the discussion below included under the caption Description of each Indian casino project and evaluation of critical milestones Shingle Springs Tribe. | |
(4) | We are obligated to pay approximately $11 million to an unrelated third party as part of an agreement associated with us obtaining the management contract with the Pokagon Band, payable in quarterly installments over five years. We are also obligated to pay approximately $3 million over 24 months to a separate, unrelated third party on behalf of the Pokagon Band in accordance with the management contract. (Note 8 to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q). | |
(5) | We have agreed to make advances to the Iowa Tribe subject to a project budget to be agreed upon by us and the Iowa Tribe and certain other conditions. The development loan will be for preliminary development costs under |
20
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the Ioway project budget. We have also agreed to use reasonable efforts to assist the Iowa Tribe in obtaining permanent financing for any projects developed under the Iowa consulting agreement. | ||
(6) | During 2008, Lakes closed on a two-year interest only $8.0 million non-revolving line of credit (the Loan Agreement) with First State Bank. Amounts borrowed under the Loan Agreement bear interest at 8.95%. See Note 7 to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q). | |
(7) | Lakes leases an airplane under a non-cancelable operating lease that expires on March 1, 2018 and has certain other operating leases. |
Critical
Accounting Policies and Estimates
This Managements Discussion and Analysis of Financial
Condition and Results of Operations discusses our consolidated
financial statements, which have been prepared in accordance
with United States generally accepted accounting principles. The
preparation of these financial statements requires us to make
estimates that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and
liabilities at the balance sheet date and reported amounts of
revenue and expenses during the reporting period. On an ongoing
basis, we evaluate our estimates and judgments, including those
related to revenue recognition, share-based compensation, income
taxes, and long-term assets related to Indian casino projects.
We base our estimates and judgments on historical experience and
on various other factors that are reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates.
We believe the following critical accounting policies involve
the more significant judgments and estimates used in the
preparation of our consolidated financial statements.
Revenue recognition. Revenue from the
management, development, and financing of, and consulting with,
Indian-owned casino gaming facilities is recognized as it is
earned pursuant to each respective agreement. See further
discussion below under the caption Long-term assets
related to Indian casino projects.
Share-based compensation expense. We
use the Black-Scholes option pricing method to establish fair
value of options. Our determination of fair value of share-based
payment awards on the date of grant using an option-pricing
model is affected by our stock price as well as assumptions
regarding a number of highly complex and subjective variables.
These variables include, but are not limited to, our expected
stock price volatility and actual and projected employee stock
option exercise behaviors. Any changes in these assumptions may
materially affect the estimated fair value of the share-based
award. We determine the estimated fair value per share of
restricted stock units as the closing stock price on the date of
grant, as reported by the Nasdaq Global Market.
Income taxes. We account for income
taxes under the provisions of SFAS 109, Accounting for
Income Taxes. The determination of our income
tax-related account balances requires the exercise of
significant judgment by management. Accordingly, in estimating
the annual effective income tax rate for interim financial
reporting purposes, we assess the likelihood that deferred tax
assets will be recovered from future taxable income and
establish an appropriate valuation allowance when management
believes recovery it is not more likely than not.
We also account for income tax uncertainties under the
provisions of Financial Accounting Standards Board
(FASB) Interpretation 48, Accounting for
Uncertainty in Income Taxes and record estimated penalties
and interest related to income tax matters, including uncertain
tax positions, as a component of income tax expense.
Long-term
assets related to Indian casino projects:
Notes receivable. We have formal procedures
governing our evaluation of opportunities for potential
Indian-owned casino development projects that we follow before
entering into agreements to provide financial support for the
development of these projects. We determine whether there is
probable future economic benefit prior to recording any asset
related to the Indian casino project. We initially evaluate the
following factors involving critical milestones that affect the
probability of developing and operating a casino:
| Has the U.S. Governments Bureau of Indian Affairs federally recognized the tribe as a tribe? |
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| Does the tribe hold or have the right to acquire land to be used for the casino site? | |
| Has the Department of the Interior put the land into trust for purposes of being used as a casino site? | |
| Has the tribe entered into a gaming agreement with the state in which the land is located, if required by the state? | |
| Has the tribe obtained approval by the National Indian Gaming Commission of the management agreement? | |
| Do other legal and political obstacles exist that could block development of the project and, if so, what is the likelihood of the tribe successfully prevailing? | |
| An evaluation by management of the financial projections of the project given the projects geographic location and the feasibility of the projects success given such location; | |
| The structure and stability of the tribal government; | |
| The scope of the proposed project, including the physical scope of the contemplated facility and the expected financial scope of the related development; | |
| An evaluation of the proposed projects ability to be built as contemplated and the likelihood that financing will be available; and | |
| The nature of the business opportunity to us, including whether the project would be a financing, development and/or management opportunity. |
We account for our notes receivable from the tribes as
in-substance structured notes in accordance with the guidance
contained in Emerging Issues Task Force
96-12,
Recognition of Interest Income and Balance Sheet
Classification of Structured Notes. Under their terms, the
notes do not become due and payable unless the projects are
completed and operational, and distributable profits are
available from the operations. However, in the event our
development activity is terminated prior to completion, we
generally retain the right to collect in the event of completion
by another developer. Because the stated rate of the notes
receivable alone is not commensurate with the risk inherent in
these projects (at least prior to commencement of operations),
the estimated fair value of the notes receivable is generally
less than the amount advanced. At the date of each advance, the
difference between the estimated fair value of the note
receivable and the actual amount advanced is recorded as an
intangible asset, and the two assets are accounted for
separately.
Subsequent to its initial recording at estimated fair value, the
note receivable portion of the advance is adjusted to its
current estimated fair value at each balance sheet date using
then current assumptions including typical market discount
rates, and expected repayment terms as may be affected by
estimated future interest rates and opening dates, with the
latter affected by changes in project-specific circumstances
such as ongoing litigation, the status of regulatory approval
and other factors previously noted. The notes receivable are not
adjusted to a fair value estimate that exceeds the face value of
the note plus accrued interest, if any. Due to uncertainties
surrounding the projects, no interest income is recognized
during the development period, but changes in estimated fair
value of the notes receivable still held as of the balance sheet
date are recorded as unrealized gains or losses in our unaudited
consolidated statement of earnings (loss) and comprehensive
earnings (loss).
Upon opening of the casino, any difference between the then
estimated fair value of the notes receivables and the amount
contractually due under the notes is amortized into income using
the effective interest method over the remaining term of the
note. Such notes would then be evaluated for impairment pursuant
to SFAS 114 Accounting by Creditors for Impairment of a
Loan (SFAS 114).
Intangible assets related to Indian casino
projects. Intangible assets related to the
acquisition of the management, development, consulting or
financing contracts are accounted for using the guidance in
SFAS 142, Goodwill and Other Intangible Assets
(SFAS 142) and FASB Staff Position
142-3,
Determination of the Useful Life of Intangible Assets
(FSP 142-3).
Pursuant to SFAS 142, the assets are periodically evaluated
for impairment based on the estimated cash flows from the
contract on an undiscounted basis. In the event the carrying
value of the intangible assets, in combination with the carrying
value of land held for development and other assets associated
with the Indian casino projects described below, were to exceed
the undiscounted cash flow, an impairment would
22
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be recorded. Such an impairment would be measured based on the
difference between the fair value and carrying value of the
assets. In accordance with
FSP 142-3,
we amortize the intangible assets related to the acquisition of
the management, development, consulting or financing contracts
under the straight-line method over the term of the contracts
which commence when the related casinos open. In addition to the
intangible asset associated with the cash advances to tribes
described above, these assets include actual costs incurred to
acquire our interest in the projects from third parties.
Land held for development. Included in land
held for development is land held for possible transfer to
Indian tribes for use in certain of the future casino resort
projects. In the event that this land is not transferred to the
tribes, we have the right to sell it. We evaluate these assets
for impairment in combination with intangible assets related to
acquisition of management, development, consulting or financing
contracts and other assets related to the Indian casino projects
as discussed above.
Other. Included in this category are costs
incurred related to the Indian casino projects, which have not
yet been included as part of the notes receivable because of
timing of the payment of these costs. When paid, these amounts
are allocated between notes receivable and intangible assets
related to the acquisition of management, development,
consulting or financing contracts and will be evaluated for
changes in fair value or impairment, respectively, as described
above. These amounts vary from period to period due to timing of
payment of these costs. Also included in this category are
receivables from related parties that are directly related to
the development and opening of Lakes Indian casino
projects.
In addition, we incur certain non-reimbursable costs related to
the projects that are not included in notes receivable, which
are expensed as incurred. These costs include salaries, travel
and certain legal costs.
The consolidated balance sheets as of March 29, 2009 and
December 28, 2008 include long-term assets related to
Indian casino projects of $107.7 million and
$108.9 million, respectively. The amounts are as follows by
project (in thousands):
March 29, 2009 | ||||||||||||||||||||||||
Shingle |
||||||||||||||||||||||||
Pokagon |
Springs |
Jamul |
Iowa |
|||||||||||||||||||||
Band | Tribe | Tribe | Tribe | Other | Total | |||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||
Notes receivable(*)
|
$ | | $ | 45,321 | $ | 7,202 | $ | 3,509 | $ | | $ | 56,032 | ||||||||||||
Intangible assets related to Indian casino projects
|
22,382 | 21,418 | | 1,363 | | 45,163 | ||||||||||||||||||
Land held for development
|
| | 960 | 850 | | 1,810 | ||||||||||||||||||
Other
|
60 | 767 | 761 | 370 | 2,719 | 4,677 | ||||||||||||||||||
$ | 22,442 | $ | 67,506 | $ | 8,923 | $ | 6,092 | $ | 2,719 | $ | 107,682 | |||||||||||||
December 28, 2008 | ||||||||||||||||||||||||
Shingle |
||||||||||||||||||||||||
Pokagon |
Springs |
Jamul |
Iowa |
|||||||||||||||||||||
Band | Tribe | Tribe | Tribe | Other | Total | |||||||||||||||||||
Notes receivable(*)
|
$ | | $ | 44,002 | $ | 7,116 | $ | 3,587 | $ | | $ | 54,705 | ||||||||||||
Intangible assets related to Indian casino projects
|
24,060 | 22,216 | | 1,310 | | 47,586 | ||||||||||||||||||
Land held for development
|
| | 960 | 850 | | 1,810 | ||||||||||||||||||
Other
|
60 | 767 | 847 | 388 | 2,719 | 4,781 | ||||||||||||||||||
$ | 24,120 | $ | 66,985 | $ | 8,923 | $ | 6,135 | $ | 2,719 | $ | 108,882 | |||||||||||||
(*) | In conjunction with the opening of the Red Hawk Casino on December 17, 2008 and pursuant to Lakes accounting policy, the notes receivable from the Shingle Springs Tribe are no longer adjusted to estimated fair value on a quarterly basis, but rather they are evaluated for impairment pursuant to SFAS 114. Approximately $7.1 million and $9.2 million of the notes receivable from the Shingle Springs Tribe are due within the next |
23
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fiscal year and have been classified as a current asset in the unaudited consolidated balance sheet as of March 29, 2009 and December 28, 2008, respectively. |
The key assumptions, estimates and criteria used in the
determination of the estimated fair value of the notes
receivable are primarily unobservable level three inputs, which
are casino opening dates, pre- and post-opening date interest
rates, discount rates and probabilities of projects opening. The
estimated casino opening dates used in the valuations of the
notes receivable related to Indian casino projects that are not
yet under construction reflect the weighted-average of three
scenarios: a base case (which is based on our forecasted casino
opening date) and one and two years out from the base case. Once
a casino project is under construction, the weighted-average
scenarios are no longer used and only the planned opening date
is used in the valuation. The interest rates are based upon the
one year U.S. Treasury Bill spot yield curve per Bloomberg
and the specific assumptions on contract term, stated interest
rate and casino opening date. The discount rate for the projects
is based on the yields available on certain financial
instruments at the valuation date, the risk level of equity
investments in general, and the specific operating risks
associated with open and operating gaming enterprises similar to
each of the projects. In estimating this discount rate, market
data of other public gaming related companies is considered. The
probability applied to each project is based upon a weighting of
various possible scenarios with one scenario assuming the casino
never opens. The other scenarios assume the casino opens but
apply different opening dates. The probability-weighting applied
to each scenario is intended to effectively capture the element
of risk in these projects and is based upon the status of each
project, review of the critical milestones and likelihood of
achieving the milestones.
The following table provides the key assumptions used to value
the notes receivable at estimated fair value (dollars in
thousands):
Jamul
Tribe:
As of March 29, 2009 | As of December 28, 2008 | |||
(Unaudited) | ||||
Face value of note (principal and interest)
|
$50,492 | $49,171 | ||
($34,226 principal and $16,266 interest) | ($33,567 principal and $15,604 interest) | |||
Estimated months until casino opens (weighted-average of three
scenarios)
|
64 months | 64 months | ||
Projected interest rate until casino opens
|
6.66% | 6.45% | ||
Projected interest rate during the loan repayment term
|
9.05% | 8.32% | ||
Discount rate(*)
|
24.50% | 23.50% | ||
Repayment terms of note
|
120 months | 120 months | ||
Probability rate of casino opening (weighting off our scenarios)
|
50% | 50% |
(*) | During the first quarter of 2009, Lakes increased the discount rate to 24.50% for this project, as continued issues in the credit markets and general economic uncertainties resulted in a higher required yield on the notes. See also the discussion below included under the caption Description of each Indian casino project and evaluation of critical milestones Jamul Tribe. |
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Table of Contents
Iowa
Tribe:
As of March 29, 2009 | As of December 28, 2008 | |||
(Unaudited) | ||||
Face value of note (principal and interest)
|
$5,873 | $5,660 | ||
($4,871 principal and $1,002 interest) | ($4,734 principal and $926 interest) | |||
Estimated months until casino opens
|
24 months | 20 months | ||
Projected interest rate until casino opens
|
5.77% | 5.93% | ||
Projected interest rate during the loan repayment term
|
6.84% | 6.24% | ||
Discount rate(*)
|
19.50% | 18.50% | ||
Repayment terms of note
|
24 months | 24 months | ||
Probability rate of casino opening
|
85% | 85% |
(*) | During the first quarter of 2009, Lakes increased the discount rate to 19.50% for this project, as continued issues in the credit markets and general economic uncertainties resulted in a higher required yield on the notes. See also the discussion below included under the caption Description of each Indian casino project and evaluation of critical milestones Iowa Tribe. |
The following table represents a sensitivity analysis prepared
by Lakes as of March 29, 2009 on the notes receivable from
the Jamul Tribe and Iowa Tribes Ioway Casino, based upon
changes in the probability rate of the casino opening by five
percentage points and the estimated casino opening date by one
year:
Estimated fair |
Sensitivity analysis | |||||||||||||||||||||||||||
value notes |
5% less |
One year |
5% increased |
One year |
||||||||||||||||||||||||
receivable | probable | delay | Both | probability | sooner | Both | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Jamul Tribe
|
$ | 7,202 | $ | 6,514 | $ | 6,228 | $ | 5,638 | $ | 7,890 | $ | 8,336 | $ | 9,137 | ||||||||||||||
Iowa Tribe
|
3,509 | 3,307 | 3,115 | 2,932 | 3,721 | 3,964 | 4,197 | |||||||||||||||||||||
$ | 10,711 | $ | 9,821 | $ | 9,343 | $ | 8,570 | $ | 11,611 | $ | 12,300 | $ | 13,335 | |||||||||||||||
The assumption changes used in the sensitivity analysis above
are hypothetical. The effect of the variation in the probability
assumption and estimated opening date on the estimated fair
value of the notes receivable from Indian tribes was calculated
without changing any other assumptions; however, in reality,
changes in these factors may result in changes in another. For
example, the change in probability could be associated with a
change in discount rate, which might magnify or counteract the
sensitivities.
The following represents the nature of the advances to the
tribes for projects under development (the Jamul Tribe and the
Iowa Tribe), which represent the principal amount of the notes
receivable, as of March 29, 2009 and December 28, 2008
(in thousands).
As of March 29, 2009 | ||||||||||||
Jamul |
Iowa |
|||||||||||
Advances Principal Balance
|
Tribe | Tribe | Total | |||||||||
(Unaudited) | ||||||||||||
Note receivable, pre-construction(a)
|
$ | 33,276 | $ | 3,769 | $ | 37,045 | ||||||
Note receivable, land(b)
|
950 | 1,102 | 2,052 | |||||||||
$ | 34,226 | $ | 4,871 | $ | 39,097 | |||||||
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As of December 28, 2008 | ||||||||||||
Jamul |
Iowa |
|||||||||||
Advances Principal Balance
|
Tribe | Tribe | Total | |||||||||
Note receivable, pre-construction(a)
|
$ | 32,617 | $ | 3,746 | $ | 36,363 | ||||||
Note receivable, land(b)
|
950 | 988 | 1,938 | |||||||||
$ | 33,567 | $ | 4,734 | $ | 38,301 | |||||||
(a) | We fund certain costs incurred to develop the casino project. These costs relate to construction costs, legal fees in connection with various regulatory approvals and litigation, environmental costs and design consulting, and we, in order to obtain the development agreement and management contract, agree to advance a monthly amount used by the tribe for a variety of tribal expenses. | |
(b) | We purchased land to be used and transferred to the tribe in connection with the casino project. |
The notes receivable pre-construction advances consist of the
following principal amounts advanced to the Jamul Tribe and Iowa
Tribe at March 29, 2009 and December 28, 2008 (in
thousands):
March 29, |
December 28, |
|||||||
Jamul Tribe
|
2009 | 2008 | ||||||
(Unaudited) | ||||||||
Monthly stipend
|
$ | 5,842 | $ | 5,687 | ||||
Construction
|
2,213 | 2,102 | ||||||
Legal
|
4,672 | 4,598 | ||||||
Environmental
|
2,292 | 2,292 | ||||||
Design
|
14,608 | 14,324 | ||||||
Gaming license
|
952 | 917 | ||||||
Lobbyist
|
2,697 | 2,697 | ||||||
$ | 33,276 | $ | 32,617 | |||||
March 29, |
December 28, |
|||||||
Iowa Tribe
|
2009 | 2008 | ||||||
(Unaudited) | ||||||||
Construction
|
$ | 253 | $ | 253 | ||||
Legal
|
256 | 252 | ||||||
Design
|
3,235 | 3,216 | ||||||
Gaming license
|
25 | 25 | ||||||
$ | 3,769 | $ | 3,746 | |||||
Evaluation
of impairment related to our long-term assets related to Indian
casino projects, excluding the notes receivable, which are
valued at fair value:
Management periodically evaluates the intangible assets, land
held for development and other costs associated with each of the
projects for impairment based on the estimated undiscounted cash
flows from the applicable management contract on an undiscounted
basis. In the event the carrying value of the intangible assets,
in combination with the carrying value of land held for
development and other assets associated with the Indian casino
projects were to exceed the undiscounted cash flow, an
impairment loss would be recorded, based on the difference
between the estimated fair value and carrying value of the
assets.
The financial models prepared by management for each project are
based upon the scope of each of the projects, which are
supported by a feasibility study as well as a market analysis
where the casino will be built. We (as Lakes predecessor Grand
Casinos Inc.) began developing Indian casino projects in 1990
and demonstrated success from the day the first Indian casino
opened in 1991 through the expiration of the Coushatta
management contract in 2002. Additionally, we have been managing
the Cimarron Casino since 2006, the Four Winds Casino Resort
since August of 2007, and the Red Hawk Casino since December of
2008. Our successful history legitimizes many of the key
assumptions supporting the financial models. Forecasts for each
applicable casino development
26
Table of Contents
were developed based on analysis of published information
pertaining to the particular markets in which our Indian casinos
will be located and are updated quarterly based on evolving
events and market conditions. In addition, we have many years of
casino operations experience, which provides an additional
resource on which to base our revenue expectations. The
forecasts were prepared by us not for purposes of the valuation
at hand but rather for purposes of our and the tribes
business planning.
The primary assumptions included within managements
financial model for the Jamul Casino project and the Ioway
Casino project are as follows:
Jamul
Tribe
Lakes and the Jamul Tribe have consulted with third party
advisors as to the architectural feasibility of a plan to build
a casino with related amenities such as parking on the six acres
of reservation land held by the Jamul Tribe and have concluded
that such a project could be successfully built assuming
adequate financing can be obtained. The gaming facility is
currently planned to be a class II electronic gaming device
facility which will not require a compact. The agreement between
Lakes and the Jamul Tribe will also be modified to reflect the
new economics of the revised casino plan but is not currently
believed to require approval by the State or the NIGC.
March 28, |
December 28, |
|||||||
2009 | 2008 | |||||||
(Unaudited) | ||||||||
No. of Class II electronic gaming devices
|
1,000 | 1,000 | ||||||
No. of Table games
|
20 | 20 | ||||||
No. of Poker tables
|
5 | 5 | ||||||
Win/Class II electronic gaming devices/day 1st
year
|
$ | 172 | $ | 172 | ||||
Win/Table game/day 1st year
|
$ | 471 | $ | 471 | ||||
Win/Poker table/day 1st year
|
$ | 312 | $ | 312 |
The Jamul Casino project has been significantly delayed due to
various political and regulatory issues. Significant risk exists
related to this project moving forward to completion, and we
have recorded significant impairment charges against our
investment in this project. However, the Jamul Tribe has the two
basic requirements to eventually build a successful project
federal recognition as an Indian Tribe and Indian
land eligible for gaming and Lakes currently expects to continue
its involvement with this project.
Iowa
Tribe
March 28, |
December 28, |
|||||||
2009 | 2008 | |||||||
(Unaudited) | ||||||||
No. of Class II electronic gaming devices
|
1,000 | 1,200 | ||||||
No. of Table games
|
25 | 20 | ||||||
No. of Poker tables
|
| 5 | ||||||
Win/Class II electronic gaming devices/day 1st
year
|
$ | 160 | $ | 232 | ||||
Win/Table game/day 1st year
|
$ | 450 | $ | 1,171 | ||||
Win/Poker table/day 1st year
|
$ | | $ | 529 |
Description
of each Indian casino project and evaluation of critical
milestones:
Pokagon
Band
Business arrangement. On August 2, 2007,
the Four Winds Casino Resort in New Buffalo, Michigan opened to
the public. We receive approximately 24% of net income up to a
certain level and 19% of net income over that level, as a
management fee. The term of the management contract is five
years, which began on August 2, 2007. Payment of our
management fee is subordinated to the Pokagon Gaming
Authoritys senior indebtedness relating to the Four Winds
Casino Resort. The Pokagon Band may also buy out the management
contract after two years from the opening date. The buy out
amount is calculated based upon the previous 12 months of
management fees earned multiplied by the remaining number of
years under the management contract, discounted back to the
present value at the time the buy-out occurs. The NIGC approved
the management contract in March 2006.
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Shingle
Springs Tribe
Business arrangement. On December 17,
2008, the Red Hawk Casino opened to the public. We receive a
management fee equal to between 21% and 30% of net income (as
defined by the management contract) of the operations annually
for the first five years, with a declining percentage in years
six and seven. Payment of our management fee is subordinated to
the repayment of $450 million senior note financing of an
affiliate of the Shingle Springs Tribe, the repayment of
$77 million furniture, furnishings and equipment financing
and a minimum priority payment to the Shingle Springs Tribe.
Generally, the order of priority of payments from the Red Hawk
Casinos cash flows is as follows: a certain minimum
monthly guaranteed payment to the Shingle Springs Tribe,
repayment of various debt with interest accrued thereon,
management fee to Lakes, and other obligations, with the
remaining funds distributed to the Shingle Springs Tribe. The
management contract includes provisions that allow the Shingle
Springs Tribe to buy-out the management contract after four
years from the opening date. The buy-out amount is based upon
the previous 12 months of management fees earned multiplied
by the remaining number of years under the contract, discounted
back to the present value at the time the buy-out occurs. If the
Shingle Springs Tribe elects to buy out the contract, all
outstanding amounts owed to Lakes immediately become due and
payable. The NIGC approved the management contract in July 2004,
which was subsequently amended in April 2007.
We acquired our initial interest in the development and
management contracts for the Red Hawk Casino from
KAR Shingle Springs in 1999 and formed a joint
venture, in which the contracts were held, between us and
KAR Shingle Springs. On January 30, 2003, we
purchased the remaining KAR Shingle Springs
partnership interest in the joint venture. In connection with
the purchase transaction, we entered into separate agreements
with the two individual owners of KAR Shingle
Springs (Kevin M. Kean and Jerry A. Argovitz).
Under the agreement with Mr. Kean, he may elect to serve as
a consultant to us during the term of the casino management
contract if he is found suitable by relevant gaming regulatory
authorities. In such event, Mr. Kean will be entitled to
receive annual consulting fees equal to 15% of the management
fees received by us from the Red Hawk Casino operations, less
certain costs of these operations. If Mr. Kean is not found
suitable by relevant gaming regulatory authorities or otherwise
elects not to serve as a consultant, he will be entitled to
receive annual payments of $1 million from the Red Hawk
Casino project from the date of election through the term of the
management contract (but not during any renewal term of such
management contract). Under the agreement with
Mr. Argovitz, if he is found suitable by relevant gaming
regulatory authorities he may elect to re-purchase his
respective original equity interest in our subsidiary and then
be entitled to obtain a 15% equity interest in our entity that
holds the rights to the management contract with the Red Hawk
Casino project. If he is not found suitable or does not elect to
purchase equity interests in our subsidiary, Mr. Argovitz
would receive annual payments of $1 million from the Red
Hawk Casino project from the date of election through the term
of the casino management contract (but not during any renewal
term of such management contract). As of March 29, 2009,
neither Mr. Kean nor Mr. Argovitz had provided
evidence of suitability by relevant gaming authorities or
elected to receive annual payments of $1 million as
described above.
Jamul
Tribe
The Jamul Casino project has been delayed due to various
political and regulatory issues related to access from State
Highway 94 to the proposed casino site. The Jamul Tribe first
requested approval on a driveway road connection to State
Highway 94, but was denied a permit by San Diego County
(the County).
In September 2008, the BIA notified the Jamul Tribe that an
access road on its land had been approved as an Indian
Reservation Road (IRR), which would allow the Jamul
Tribe to construct a second potential access point to the
reservation without the need for a permit from County. The Jamul
Tribe notified CalTrans of this additional access option but
CalTrans viewed this access point no differently than the
proposed driveway road connection to State Highway 94. The Jamul
Tribe has filed a federal complaint requesting the Federal Court
to order CalTrans to cease its efforts to impede the Jamul Tribe
from using its lands for economic development purposes. After
losing a motion to dismiss, CalTrans denied the allegations. The
parties subsequently reached an agreement whereby the Jamul
Tribe dismissed its lawsuit and CalTrans removed its contention
of its ability to restrict access to the reservation, and agreed
to work positively with the Jamul Tribe to expeditiously process
the encroachment permit application.
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Table of Contents
Business arrangement. The Jamul Tribe has an
approximate
six-acre
reservation on which the casino project is currently planned to
be built. The reservation is located near San Diego,
California. Under the current compact that the Jamul Tribe has
with the State of California (the State) and based
upon requirements in other compacts approved by the State in
2004, the Jamul Tribe completed a Tribal Environmental Impact
Statement/Report that was approved by the Jamul Tribes
General Council with a record of decision issued by the Jamul
Tribe on December 16, 2006. Since that time, the Jamul
Tribe has received comments from various state agencies
including the representative from the California Governors
office. The Jamul Tribe and the State have met on several
occasions in an attempt to address the States comments
related to compact requirements. Throughout fiscal 2007, Lakes
and the Jamul Tribe were evaluating the Jamul Tribes
alternatives of pursuing a new compact, complying with certain
requirements in their existing compact or building and operating
a casino based solely on class II electronic gaming
devices. The proposed gaming facility has been reduced in size
and scope because the States comments on the Jamul
Tribes existing compact or a proposed new contract is
expected to take more time than is currently acceptable to the
Jamul Tribe. The current plan is for a smaller scale gaming
facility that will become a solely class II electronic
gaming device facility which will not require a compact. The
agreement between Lakes and the Jamul Tribe (discussed below)
will also be modified to reflect the new economics of the
revised casino plan but is not currently believed to require
approval by the State or the NIGC.
Effective March 30, 2006, Lakes entered into a development
financing and services agreement with the Jamul Tribe to assist
the Jamul Tribe in developing the Jamul Casino which the Jamul
Tribe will manage. As part of the current agreement, Lakes will
use its best efforts to obtain financing of up to
$350 million, from which advances will be made to the Jamul
Tribe to pay for the design and construction of the Jamul
Casino. Under the current development financing and services
agreement, Lakes is entitled to receive a flat fee of
$15 million for its development design services, and a flat
fee of $15 million for its construction oversight services,
payable evenly over the first five years after the opening date
of the Jamul Casino. In connection with Lakes financing of
the Jamul Casino, the Jamul Tribe is required to pay interest
over a ten-year period on sums advanced by Lakes equal to the
rate charged to Lakes for obtaining the necessary funds plus
five percent. Amounts previously advanced by Lakes to the Jamul
Tribe in connection with the Jamul Tribes proposed casino
resort are included in the development financing and services
agreement financing amount. However, as discussed above, this
agreement is planned to be modified with resulting lower fees to
Lakes. There is also no assurance that third party financing
will be available with acceptable terms. If Lakes is unable to
obtain the appropriate amount of financing for this project, the
project may not be completed as planned.
Lakes acquired its initial interest in the development agreement
and management contract for the Jamul casino from
KAR Jamul in 1999 and formed a joint venture in
which the contracts were held between Lakes and KAR
Jamul. This development agreement and a management contract have
been submitted to the NIGC for approval. On January 30,
2003, Lakes purchased the remaining KAR Jamuls
partnership interest in the joint venture. In connection with
the purchase transaction, Lakes entered into separate agreements
with the two individual owners of KAR Jamul
(Mr. Kean and Mr. Argovitz). The term of the contract
is expected to be five or seven years. Under the current
agreement with Mr. Kean, he may elect to serve as a
consultant to Lakes during the term of the casino agreement if
he is found suitable by relevant gaming regulatory authorities.
In such event, Mr. Kean will be entitled to receive annual
consulting fees equal to 20% of the management fees received by
Lakes from the Jamul Casino operations, less certain costs of
these operations. If Mr. Kean is not found suitable by
relevant gaming regulatory authorities or otherwise elects not
to serve as a consultant, he will be entitled to receive annual
payments of $1 million from the Jamul Casino project during
the term of the respective casino agreement (but not during any
renewal term of such agreement).
Under the current agreement with Mr. Argovitz, if he is
found suitable by relevant gaming regulatory authorities he may
elect to re- purchase his respective original equity interest in
the Lakes subsidiary and then be entitled to obtain a 20%
equity interest in the Lakes entity that holds the rights
to the development financing and services agreement with the
Jamul Tribe. If he is not found suitable or does not elect to
purchase equity interests in the Lakes subsidiary,
Mr. Argovitz may elect to receive annual payments of
$1 million from the Jamul Casino project from the date of
election through the term of the respective casino agreement
(but not during any renewal term of such agreement).
29
Table of Contents
Our evaluation of the critical milestones. The
following table outlines the status of each of the following
primary milestones necessary to complete the Jamul project as of
March 29, 2009, December 28, 2008 and
December 30, 2007. Both the positive and negative evidence
was reviewed during our evaluation of the critical milestones.
Critical milestone | March 29, 2009 | December 28, 2008 | December 30, 2007 | ||||||
Federal recognition of the tribe
|
Yes | Yes | Yes | ||||||
Possession of usable land corresponding with needs based on Lakes project plan | Yes | Yes | Yes | ||||||
Usable land placed in trust by Federal government | Not necessary, as the land is reservation land. | Not necessary, as land is reservation land. | Not necessary, as land is reservation land. | ||||||
Usable county agreement, if applicable | N/A | N/A | N/A | ||||||
Usable state compact that allows for gaming consistent with that outlined in Lakes project plan | N/A the Jamul Tribes current plan is to operate a solely class II electronic gaming device facility, which does not require a compact with the State. | N/A the Jamul Tribes current plan is to operate a solely class II electronic gaming device facility, which does not require a compact with the State. | N/A the Jamul Tribes current plan is to operate a solely class II electronic gaming device facility, which does not require a compact with the State. | ||||||
NIGC approval of management contract in current and desired form | N/A as the Jamul Tribes current plan is to operate a solely class II electronic gaming device facility, which does not need to be approved by the NIGC. | N/A as the Jamul Tribes current plan is to operate a solely class II electronic gaming device facility, which does not need to be approved by the NIGC. | N/A as the Jamul Tribes current plan is to operate a solely class II electronic gaming device facility, which does not need to be approved by the NIGC. | ||||||
Resolution of all litigation and legal obstacles | N/A, there has been some local opposition regarding the project. | No, see discussion above regarding the federal complaint filed by the Jamul Tribe against CalTrans. | N/A, there has been some local opposition regarding the project. | ||||||
Financing for construction | No, however, preliminary discussions with investment bankers regarding assisting in obtaining financing have taken place. The current general economic environment may limit our ability to obtain financing at desirable levels in the near-term. | No, however, preliminary discussions with investment bankers regarding assisting in obtaining financing have taken place. The current general economic environment may limit our ability to obtain financing at desirable levels in the near-term. | No, however, preliminary discussions with investment bankers regarding assisting in obtaining financing have taken place. | ||||||
Any other significant project milestones or contingencies, the outcome of which could have a material affect on the probability of project completion as planned | Yes. The current plan is for the gaming facility to be a solely class II electronic gaming device facility. The agreement between Lakes and the Jamul Tribe will also be modified to reflect the new economics of the revised casino plan but is not currently believed to require approval by the State or the NIGC. | Yes. The current plan is for the gaming facility to be a solely class II electronic gaming device facility. The agreement between Lakes and the Jamul Tribe will also be modified to reflect the new economics of the revised casino plan but is not currently believed to require approval by the State or the NIGC. | Yes. The current plan is for the gaming facility to be a solely class II electronic gaming device facility. The agreement between Lakes and the Jamul Tribe will also be modified to reflect the new economics of the revised casino plan but is not currently believed to require approval by the State or the NIGC. | ||||||
Our evaluation and conclusion regarding the above critical
milestones and progress. We entered into a
development financing and services agreement with the Jamul
Tribe in March 2006, as discussed above which eliminated the
need for land contiguous to the reservation land to be taken
into trust. We believe that there is no requirement that the
NIGC approve the development financing and services agreement.
The Jamul Casino is planned to be built on the Jamul
Tribes existing six acres of reservation land. Reservation
land qualifies for gaming without going through a
land-in-trust
process. We have consulted with third-party advisors as to the
architectural feasibility of the alternative plan and have been
assured that the project can be successfully built on the
reservation land.
30
Table of Contents
The Jamul Casino project has been significantly delayed due to
various political and regulatory issues. Significant risk exists
related to this project moving forward to completion, and we
have recorded significant impairment charges against our
investment in this project. However, the Jamul Tribe has the two
basic requirements to eventually build a successful project
federal recognition as an Indian Tribe and Indian
land eligible for gaming and Lakes currently expects to continue
its involvement with this project.
Iowa
Tribe
Business arrangement. On March 15, 2005,
Lakes entered into consulting agreements and management
contracts with the Iowa Tribe of Oklahoma, a federally
recognized Indian Tribe, and The Iowa Tribe of Oklahoma, a
federally-chartered corporation (collectively, the Iowa
Tribe). The agreements became effective as of
January 27, 2005. Lakes will consult on development of the
Ioway Casino Resort, a new first class casino with ancillary
amenities and facilities to be located on Indian land
approximately 25 miles northeast of Oklahoma City along
Route 66, until regulatory approvals are received for the
management contract for the Ioway Casino Resort. Lakes also
manages operations at the Cimarron Casino, located in Perkins
Oklahoma.
Each of the projects has a gaming consulting agreement
(Iowa Consulting Agreement) and a management
contract (Iowa Management Contract), independent of
the other project. Key terms relating to the agreements for the
projects are as follows:
Ioway Casino Resort. For its gaming
development consulting services under the Iowa Consulting
Agreement related to the Ioway Casino Resort, Lakes will receive
a development fee of $4 million paid upon the opening of
the Ioway Casino Resort, and a flat monthly fee of $500,000 for
120 months commencing upon the opening of the project.
Lakes has also agreed to make advances to the Iowa Tribe,
subject to a project budget to be agreed upon by Lakes and the
Iowa Tribe and certain other conditions. The development loan
will be for preliminary development costs under the Ioway Casino
Resort budget. Lakes has also agreed to use reasonable efforts
to assist the Iowa Tribe in obtaining permanent financing for
any projects developed under the Iowa Consulting Agreement.
The Iowa Management Contract for the Ioway Casino Resort is
subject to the approval of the NIGC and certain other
conditions. For its performance under the Iowa Management
Contract, Lakes will be entitled to receive management fees of
approximately 30% of net income, as defined in the agreement,
for each month during the term of the Iowa Management Contract.
The Iowa Management Contract term is seven years from the first
day that Lakes is able to commence management of the Ioway
Casino Resort gaming operations under all legal and regulatory
requirements (the Commencement Date), provided that
the Iowa Tribe has the right to buy out the remaining term of
the Iowa Management Contract after the Ioway Casino Resort has
been in continuous operation for four years, for an amount based
on the then present value of estimated future management fees.
If the Iowa Tribe elects to buy-out the contract, all
outstanding amounts owed to Lakes become immediately due and
payable if not already paid. Subject to certain conditions,
Lakes agreed to make advances for the Ioway Casino Resorts
working capital requirements, if needed, during the first month
after the Commencement Date. The advances are to be repaid
through an operating note payable from revenues generated by
future operations of the Ioway Casino Resort bearing interest at
two percent over the prime rate. Lakes also agrees to fund any
shortfall in certain minimum monthly Ioway Casino Resort
payments to the Iowa Tribe by means of non-interest bearing
advances under the same operating note.
Cimarron Casino. Lakes has entered into a
separate gaming consulting agreement (the Cimarron
Consulting Agreement) and management contract (the
Cimarron Management Contract) with the Iowa Tribe
with respect to the Cimarron Casino. Lakes has been operating
under the Cimarron Management Contract since mid- 2006 after it
was approved by the NIGC. Prior to that time, Lakes operated
under the Cimarron Consulting Agreement and earned a flat
monthly fee of $50,000. The annual fee under the Cimarron
Management Contract is 30% of net income in excess of
$4 million. The Cimarron Casino features approximately 375
electronic gaming machines.
Arrangement with Consultant. Lakes has an
agreement with Kevin Kean that will compensate him for his
consulting services (relating to the Iowa Tribe) rendered to
Lakes. Under this arrangement, subject to Mr. Kean
obtaining certain regulatory approvals, Mr. Kean will
receive 20% of Lakes fee compensation that is received
under the Iowa Consulting Agreement, Iowa Management Contract
and Cimarron Management Contract with the Iowa Tribe (i.e., six
percent of the incremental total net income or 20% of
Lakes 30% share). This agreement
31
Table of Contents
provides that payments will be due to Mr. Kean when Lakes
is paid by the Iowa Tribe, assuming he has been found suitable
by the NIGC.
Our evaluation of the Ioway Casino Resort. The
following table outlines the status of each of the following
primary milestones necessary to complete the Ioway Casino Resort
as of March 29, 2009, December 28, 2008 and
December 30, 2007. Both the positive and negative evidence
was reviewed during our evaluation of the critical milestones:
Critical milestone | March 29, 2009 | December 28, 2008 | December 30, 2007 | ||||||
Federal recognition of the tribe
|
Yes | Yes | Yes | ||||||
Possession of usable land corresponding with needs based on Lakes project plan | Yes, the Iowa Tribe has members that own a 74-acre allotment on US Route 66 midway between the access points to Warwick and Chandler, Oklahoma from I44. The Iowa Tribe has obtained the rights to purchase and/or lease substantially all of this parcel from the allottees. Approval from the BIA was obtained in January 2009 for 60 acres of the 74-acre allotment. The remaining 14 acres still require BIA approval. An additional 100 acres of fee land has been optioned to provide the necessary site area for the beginning of the project before the casino resort development can begin. | Yes, the Iowa Tribe has members that own a 74-acre allotment on US Route 66 midway between the access points to Warwick and Chandler, Oklahoma from I44. The Iowa Tribe has obtained the rights to purchase and/or lease substantially all of this parcel from the allottees. Approval from the BIA was obtained in January 2009 for 60 acres of the 74-acre allotment. The remaining 14 acres still require BIA approval. An additional 100 acres of fee land has been optioned to provide the necessary site area for the beginning of the project before the casino resort development can begin. | Yes, the Iowa Tribe has members that own a 74-acre allotment on US Route 66 midway between the access points to Warwick and Chandler, Oklahoma from I44. The Iowa Tribe has obtained the rights to purchase and/or lease substantially all of this parcel from the allottees. An additional 100 acres of fee land has been optioned to provide the necessary site area for the beginning of the project before the casino resort development can begin. | ||||||
Usable land placed in trust by Federal government | Yes, the Iowa Tribe is currently leasing and acquiring land from tribal members, which is held in trust for the individual tribal members by the United States Government. These transactions will need to be approved by the BIA. | Yes, the Iowa Tribe is currently leasing and acquiring land from tribal members, which is held in trust for the individual tribal members by the United States Government. These transactions will need to be approved by the BIA. | Yes, the Iowa Tribe is currently leasing and acquiring land from tribal members, which is held in trust for the individual tribal members by the United States Government. These transactions will need to be approved by the BIA. | ||||||
Usable county agreement, if applicable | N/A | N/A | N/A | ||||||
Usable state compact that allows for gaming consistent with that outlined in Lakes project plan | Yes | Yes | Yes | ||||||
NIGC approval of management contract in current and desired form | No, submitted to the NIGC for review on April 22, 2005. An EA was prepared and on September 12, 2007, the NIGC issued their notice of approval of a Finding Of No Significant Impact (FONSI) for the EA. The 30 day public comment period for the FONSI ended on November 2, 2007 without any comment from the public. The expiration of the comment period now allows the NIGC to approve the management contract. The NIGC has stated that it is waiting for the BIA to approve all land leases before it will issue an opinion on the management contract. There have been no comments on the consulting agreement from the NIGC and is therefore considered operative. | No, submitted to the NIGC for review on April 22, 2005. An EA was prepared and on September 12, 2007, the NIGC issued their notice of approval of a Finding Of No Significant Impact (FONSI) for the EA. The 30 day public comment period for the FONSI ended on November 2, 2007 without any comment from the public. The expiration of the comment period now allows the NIGC to approve the management contract. The NIGC has stated that it is waiting for the BIA to approve all land leases before it will issue an opinion on the management contract. There have been no comments on the consulting agreement from the NIGC and is therefore considered operative. | No, submitted to the NIGC for review on April 22, 2005. An EA was prepared and on September 12, 2007, the NIGC issued their notice of approval of a Finding Of No Significant Impact (FONSI) for the EA. The 30 day public comment period for the FONSI ended on November 2, 2007 without any comment from the public. The expiration of the comment period now allows the NIGC to approve the management contract. The NIGC has stated that it is waiting for the BIA to approve all land leases before it will issue an opinion on the management contract. There have been no comments on the consulting agreement from the NIGC and is therefore considered operative. | ||||||
Resolution of all litigation and legal obstacles | None at this time. | None at this time. | None at this time. | ||||||
Financing for construction | No, however, preliminary discussions with lending institutions have occurred. | No, however, preliminary discussions with lending institutions have occurred. | No, however, preliminary discussions with lending institutions have occurred. | ||||||
Any other significant project milestones or contingencies, the outcome of which could have a material affect on the probability of project completion as planned | No others known at this time by Lakes. | No others known at this time by Lakes. | No others known at this time by Lakes. | ||||||
32
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Our evaluation and conclusion regarding the above critical
milestones and progress. Long-term assets have
been recorded as it is considered probable that the Ioway Casino
Resort will result in economic benefit to us sufficient to
recover our investment. Based upon the above status of all
primary milestones and the projected fees to be earned under the
consulting agreements and management contracts, no impairment
has been recorded.
The Iowa Tribe is currently leasing and acquiring land from
tribal members, which is held in trust for the individual tribal
members by the United States Government. In January 2009, the
BIA granted approval on the purchase of a
60-acre
allotment. The remaining transactions for the final
14 acres still require BIA approval. Lakes submitted its
management contract with the Iowa Tribe for the Ioway Casino
Resort to the NIGC for review in 2005. The NIGC has stated that
it is waiting for the BIA to approve all land leases before it
will issue an opinion on the management contract. Subject to
obtaining the necessary regulatory approvals and availability of
financing for the project, the Ioway Casino Resort could open as
early as the spring of 2011.
Recently
issued accounting pronouncements
In April 2009, the FASB issued FASB Staff Position
157-4,
Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly
(FSP 157-4),
which provides additional guidance for estimating fair value in
accordance with SFAS 157, when the volume and level of
activity for the asset or liability have significantly
decreased.
FSP 157-4
is effective for interim and annual reporting periods ending
after June 15, 2009. The implementation of this standard is
not expected to have a material impact on our future financial
position, results of operations or cash flows.
In April 2009, the FASB issued FASB Staff Position
107-1 and
APB 28-1,
Interim Disclosures about Fair Value of Financial Instruments
(FSP 107-1),
which, when effective, will require additional disclosures about
fair value of financial instruments for interim reporting
periods.
FSP 107-1
is effective for interim and annual reporting periods ending
after June 15, 2009. The implementation of this standard is
not expected to have a material impact on our future financial
position, results of operations or cash flows. In April 2009,
the FASB also issued FASB Staff Positions
FAS 115-2
and
FAS 124-2,
Recognition and Presentation of Other-Than-Temporary
Impairments (FSP
FAS 115-2
and
FAS 124-2),
which amends the other-than-temporary impairment guidance in
U.S. Generally Accepted Accounting Principles for debt
securities to make the guidance more operational and to improve
the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in the financial
statements. FSP
FAS 115-2
and
FAS 124-2
will be effective for interim and annual reporting periods
ending after June 15, 2009. The implementation of these
three standards is not expected to have a material impact on our
future financial position, results of operations or cash flows.
Seasonality
We believe that the operations of all casinos managed by us will
be affected by seasonal factors, including holidays, weather and
travel conditions.
Regulation
and taxes
We and the owners of the existing and planned casinos that we
are and will be working with are subject to extensive regulation
by state gaming authorities. We will also be subject to
regulation, which may or may not be similar to current state
regulations, by the appropriate authorities in any jurisdiction
where we may conduct gaming activities in the future. Changes in
applicable laws or regulations could have an adverse effect on
us.
The gaming industry represents a significant source of tax
revenues to regulators. From time to time, various federal
legislators and officials have proposed changes in tax law, or
in the administration of such law, affecting the gaming
industry. It is not possible to determine the likelihood of
possible changes in tax law or in the administration of such
law. Such changes, if adopted, could have a material adverse
effect on our future financial position, results of operations
and cash flows.
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Off-balance
sheet arrangements
We have no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures
or capital resources that is material to investors, except for
the financing commitments previously discussed.
Private
Securities Litigation Reform Act
The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements. Certain
information included in this Quarterly Report on
Form 10-Q
and other materials filed or to be filed by Lakes with the
United States Securities and Exchange Commission
(SEC) as well as information included in oral
statements or other written statements made or to be made by
Lakes contain statements that are forward-looking, such as plans
for future expansion and other business development activities
as well as other statements regarding capital spending,
financing sources and the effects of regulation (including
gaming and tax regulation) and competition.
Such forward looking information involves important risks and
uncertainties that could significantly affect the anticipated
results in the future and, accordingly, actual results may
differ materially from those expressed in any forward-looking
statements made by or on behalf of Lakes.
These risks and uncertainties include, but are not limited to,
need for potential future financing to meet Lakes
development needs; those relating to the inability to complete
or possible delays in completion of Lakes casino projects,
including various regulatory approvals and numerous other
conditions which must be satisfied before completion of these
projects; possible termination or adverse modification of
management or development contracts; Lakes operates in a highly
competitive industry; possible changes in regulations; reliance
on continued positive relationships with Indian tribes and
repayment of amounts owed to Lakes by Indian tribes; possible
need for future financing to meet Lakes expansion goals;
risks of entry into new businesses, and reliance on Lakes
management. For more information, review Lakes filings
with the Securities and Exchange Commission. For further
information regarding the risks and uncertainties, see the
Risk Factors section in Item 1A of this Annual
Report on
Form 10-K
for the year ended December 28, 2008.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our financial instruments include cash and cash equivalents and
investments in securities. Our main investment objectives are
the preservation of investment capital and the maximization of
after-tax returns on our investment portfolio. Consequently, we
invest with only high-credit-quality issuers and limit the
amount of credit exposure to any one issuer.
Our cash and cash equivalents are not subject to significant
interest rate risk due to the short maturities of these
instruments. As of March 29, 2009, the carrying value of
our cash and cash equivalents approximates fair value. We also
hold investments in debt securities (consisting of ARS). The
types of ARS investments that we own are backed by student
loans, the majority of which are guaranteed under the FFELP.
None of our investments in ARS qualify, or have ever been
classified in our consolidated financial statements, as cash or
cash equivalents.
In November 2008, we accepted an offer from UBS granting us
nontransferable rights to sell our ARS held by UBS at par value
to UBS at any time during the period of June 30, 2010,
through July 2, 2012. We expect to sell our ARS under the
Rights. However, if the Rights are not exercised before
July 2, 2012 they will expire and UBS will have no further
rights or obligation to buy our ARS. UBSs obligation under
the Rights are not secured by its assets and do not require UBS
to obtain any financing to support its performance obligations
under the Rights. UBS has disclaimed any assurance that it will
have sufficient financial resources to satisfy its obligations
under the Rights. During 2008, we entered into a Credit Line
with UBS which is secured by our ARS held at UBS and is due and
payable on demand with interest at
30-day LIBOR
plus one percent.
If UBS does not perform on its obligation to buy Lakes ARS
during the period of June 30, 2010, through July 2,
2012, and if uncertainties in the capital and credit markets
continue, these markets deteriorate further or we
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experience any ratings downgrades on any ARS investments in our
portfolio, then we may incur losses on our ARS or the associated
Rights, which would negatively affect our financial condition,
cash flow
and/or
reported earnings.
Our primary exposure to market risk associated with changes in
interest rates involves our long-term assets related to Indian
casino projects in the form of notes receivable due from our
tribal partners for the development and construction of
Indian-owned casinos. The loans earn interest based upon a
defined reference rate. The floating interest rate will generate
more or less interest income if interest rates rise or fall. Our
notes receivable from Indian tribes bear interest generally at
prime plus one percent or two percent, however, the interest is
only payable if the casino is successfully opened and
distributable profits are available from casino operations. As
of March 29, 2009, we had $63.1 million of notes
receivable, with a floating interest rate (principal amount of
$112.0 million). Based on the applicable current reference
rates and assuming all other factors remain constant, interest
income for a 12 month period would be approximately
$5.9 million. A reference rate increase of 100 basis
points would result in an increase in interest income of
$1.1 million. A 100 basis point decrease in the
reference rate would result in a decrease of $1.1 million
in interest income over the same 12 month period.
ITEM 4. | CONTROLS AND PROCEDURES |
Under the supervision and with the participation of our
management, including our chief executive officer and chief
financial officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined under
Rules 13a-15(e)
and Rule 15d 15(e) promulgated under the
Securities Exchange Act of 1934, as amended, as of the end of
the period covered by this quarterly report. Based on their
evaluation, our chief executive officer and chief financial
officer concluded that Lakes Entertainment, Inc.s
disclosure controls and procedures are effective.
There have been no changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in
our internal control over financial reporting during the three
months ended March 29, 2009 that have materially affected,
or are reasonably likely to materially affect, our internal
control over financial reporting.
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Part II.
Other Information
Other Information
ITEM 1. | LEGAL PROCEEDINGS |
We and our subsidiaries are involved in various other inquiries,
administrative proceedings, and litigation relating to contracts
and other matters arising in the normal course of business.
While any proceeding or litigation has an element of
uncertainty, management currently believes that the likelihood
of an unfavorable outcome is remote, and is not likely to have a
material adverse effect upon our unaudited consolidated
financial statements.
ITEM 1A. | RISK FACTORS |
There have been no material changes to our risk factors
identified in the Risk Factors section in
Item 1A of our Annual Report on
Form 10-K,
for the year ended December 28, 2008.
ITEM 6. | EXHIBITS |
Exhibits
|
Description
|
|||
31 | .1 | Certification of CEO pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31 | .2 | Certification of CFO pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
32 | .1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report on
Form 10-Q
to be signed on its behalf by the undersigned, thereunto duly
authorized.
LAKES ENTERTAINMENT, INC.
Registrant
Registrant
/s/ LYLE
BERMAN
|
Lyle Berman
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
/s/ TIMOTHY
J. COPE
|
Timothy J. Cope
President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: May 8, 2009
37