Mar 11, 2008
Executives
Lyle Berman – Chairman of the Board & Chief Executive Officer Timothy J. Cope – President, Chief Financial Officer & Treasurer
Analysts
Todd Eilers – Roth Capital Partners Michael J. Grondahl – Key Colony Funds [Rishi Parikh] – KBC Financial Clinton Morrison – Feltl & Company Alex Lieblong – [Inaudible]
Operator
Good afternoon ladies and gentlemen and welcome to the Lakes Entertainment fourth quarter results conference call. I would now like to turn the meeting over to Mr.
Tim Cope, President and CFO. Please go ahead Mr.
Cope.
Timothy J. Cope
Good afternoon and welcome to Lakes Entertainment’s fourth quarter 2007 earnings conference call. On the call with me is Lyle Berman, Lake’s Chairman of the Board and Chief Executive Officer.
As we begin our prepared remarks I’d like to remind everyone that this call may contain forward-looking statements within the meaning of Federal Securities law including statements concerning business strategies and their intended results and similar statements concerning anticipated future events and expectations that are not historical facts. These forward looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
These statements do not guarantee future performance and there undue reliance should not be placed upon them. Lyle will begin our discussion today with a general overview and updated on our casino projects.
I will then discuss the fourth quarter financial results and recent business events and then we’ll conduct a question and answer session.
Lyle Berman
Welcome everyone to Lakes’ fourth quarter earnings call. I’d like to start out off by saying that 2007 was a year of progress for Lake with the opening of the Four Winds Casino Resort as well as positive movement on other projects.
We plan to build on these accomplishments in 2008 with a pipeline of growth projects that we believe positions us well for long term revenues and earnings growth. The fourth quarter saw the first full quarter results from the new Four Winds Casino Resorts in New Buffalo, Michigan which we manage for the Pokagon Band of Potawatomi Indians.
We are pleased to note that since its opening key performance metrics for the casino have continued to improve. In addition, the Four Winds customer loyalty program continues to rapidly expand and our club membership has greatly exceeded our initial expectations.
While we are happy with the early results of the casino we are always working to improve the Four Winds guest experiencing and maximize the operating results. In addition to Four Winds, we continue to see strong results at the Cimarron Casino in Perkins, Oklahoma which we manage for the Iowa Tribe of Oklahoma.
The casino which contains 360 Class III slot machines doubled its profits in our first year of management and continues to show steady improvements. Obviously, we are very pleased with the full year results we saw from Cimarron and expect continued solid performance from Cimarron in 2008.
Moving to our development projects, as I review each casino projects please remember they are not in any order of significance or state of completion and of course estimated construction start dates and opening dates are subject to change. We’ll start with the Shingles Spring Casino project near Sacramento, California which is the casino development and management project currently under construction with the Shingle Springs Band of Miwok Indians.
We are pleased to note that the development of the casino remains within budget and on schedule for a planned grand opening in late fourth quarter 2008. We are currently in the process of arranging FF&E financing of approximately $65 million.
When completed the facility will host approximately 2,100 slot machines and gaming devices, 75 gaming tables, 10 different food and beverage outlets and approximately 3,200 covered parking spaces. We’ll also have a dedicated interchange from US Route 50 which is the road connecting San Francisco and Lake Tahoe allowing easy access for our customers to the casino only a few hundred yards away.
With 4 million people living within a 50 mile radius of the casino and only one major competitor in the region, we believe the Shingle Springs project is well positioned to achieve a strong ROI and create shareholder value. You can see webcam shots of the construction on our website at www.LakesEntertainment.com.
The Jamul Indian Village Casino project near San Diego has faced development challenges. There has been incremental progress in our quest to build the casino on the tribes existing six acre reservation as the tribe has recently been improving the road on the reservation to the highway.
As I mentioned on last quarter’s call Lakes as also acquired approximately 100 acres of land contiguous to the six acres of the reservation land that could be use for the casino support facilities if the land is taken into trust. Planning is ongoing to redesign the casino to provide for approximately 1,000 Class II gaming devices along with 25 Class II table games.
Along with the tribe we are working together to determine when the casino construction can begin, hopefully in late 2008 and we are shooting for operations to commence in 2010. Now, I’ll discuss our second project with the Iowa Tribe of Oklahoma, the Ioway Casino reserve located on US Route 66 near Chandler, Oklahoma and part of the greater Oklahoma City market.
Along with the tribe we are waiting on the Bureau of Indian Affairs for approval of the land blend on which the casino resort will be built. After the BIA approval is received we expect to rapidly receive [inaudible] approval of our management contract, the last step needed before design, financing and construction of the project begins.
Once approval is received we expect a 12 to 18 months development and construction time line with a possible open of the Iowa Casino in the fall of 2009. The casino is currently planned to have approximately 1,500 Class III slot machines, 50 table games, four restaurants and a 250 room hotel.
The facility is master planned for future development that may include additional gaming space, hotel rooms, a golf course and other market driven amenities. In Vicksburg, Mississippi, we own or have the option to own 400 plus acres of land in Vicksburg.
The initial scope of this potential casino project would be 12 to 1,500 slot machines, 40 to 50 table games, a 250 room hotel, meeting space, a poker room and multiple food and beverage outlets. However, we want to note that the financial environment is not conducive to casino development and we continue to evaluate whether to proceed with this project.
But, in any event we do not expect further development efforts before 2009. With that I’ll turn the call back over to Tim to provide an overview of recent business issues and financial results.
Timothy J. Cope
Let’s start with the fourth quarter results for Lakes Entertainment. Fourth quarter 2007 consolidated revenues were $8.3 million up 36% from the prior year period.
Revenue was boosted by a $3 million increase in management, consulting and development fees driven by fourth quarter contribution from Four Winds Casino Resort compared to no contribution from that property in the fourth quarter 2006. Management fees were $200,000 for the fourth quarter of 2006.
In accordance with the management cont Pokagon Band pre-opening expenses during the construction phase of the project are shared proportionality by Lakes during the first 12 months of Four Winds operations. To clarify, Lakes’ proportionate share is approximately $4 million over the first 12 months of operations and only the first 12 months.
There’s no impact on Lakes’ fee in subsequent years. Combined management fees of $3.2 million for the fourth quarter 2007 are net of Lakes’ share of these pre-opening expenses.
License fee income from WPTE related to the World Poker Tour Television series was down $2 million year-over-year to $3.1 million primarily due to the delivery of fewer episodies in the fourth quarter of 2007 versus the fourth quarter 2006. Consolidated selling, general and administrative expenses were up $1.9 million from the prior year period to $10.3 million due primarily to WPTE launch of season one of the TPTE’s Tractor Poker Tour in China as well as higher costs preparing for the launch of ClubWPTE.com.
Contributing to the increase in selling, general and administrative expenses were additional costs associated with decreased development and management activities related to Lakes’ Indian casino projects. Fourth quarter of 2007 Lakes’ selling, general and administrative expenses consisted primarily of payroll and related expenses of $2.7 million including stock compensation expense for all share base payment awards, travel related costs of $.6 million and additional fees of $1.1 million.
Other costs and expense in fourth quarter of 2007 includes the amortization of intangible assets of approximately $1.7 million associated with the casino project with the Pokagon Band which began when the Four Winds Casino project opened in 2007. Net realized and unrealized gains and losses on notes receivable relate primarily to the company’s notes receivable from Indian Tribes which are adjusted to estimate fair value based upon the current status of their related tribal casino projects.
In the fourth quarter of 2007 net unrealized losses on notes receivable were $1.3 million compared to net unrealized gains of $12.8 million in the prior year period as most of the games in the fourth quarter 2006 were related to the casino development project with the Pokagon Band. Net unrealized losses in the current year quarter related primarily to an increase from the discount rate associated with the casino development project with the Jamul Indian Village due to a decrease in estimated operating results from the casino operation once opened.
As previously announced, during March 2007 Lakes’ contract with a group of investors for their participation in loans made by Lakes to the Pokagon Band and assumed by the Pokagon Gaming Authority at an agreed upon price of 98% of the face value of the loans at the settlement date. Accordingly, as of December 31, 2006 the Pokagon Band notes receivable were adjusted to the negotiated participation price which resulted in unrealized gains in the fourth quarter of 2006.
This participation arrangement was accounted for as a sale during 2007. The sales did not have any effect on Lakes’ management agreement for the Four Winds Casino Resort.
Lakes reported a consolidated operating loss for the fourth quarter of $6.7 million, a decline of $13.8 million from the prior year period mainly due to the decrease in net unrealized gains on notes receivables while net loss for the quarter was $6.6 million down from net earnings of $4.7 million in the fourth quarter of 2006. Loss applicable for common shareholders per fully diluted share was $0.27 versus earnings applicable to common shareholders of $0.19 per fully diluted share in the prior year period.
Next, I’ll discuss full year results for 2007. Consolidated revenue for the full year 2007 totaled $28.5 million compared to $29.9 million for the full year 2006.
Revenue for both years was derived primarily from the operations of WPTE. WPTE related revenue was $21.7 million for 2007 compared to $29.3 million for 2006.
The decrease in revenue related primarily to the delivery of no episodes of the Professional Poker Tour television series during 2007 compared to the delivery of 24 episodes of the Professional Poker Tour during 2006. Revenue for 2007 also included management fees from the Cimarron Casino and management fees for approximately five months of operations from the Four Winds Casino Resort.
The combined management fees were $6.6 million for 2007 and management and consulting fees for 2006 were $.6 million. Net realized and unrealized gains on notes receivable were $7.2 million and $51.7 million for 2000 and 2006 respectively.
During 2007 net unrealized gains on notes receivable resulted primarily from favorable events occurring during 2007 related to the casino project with the Shingles Spring tribe which increased the estimated fair value of the related notes receivable. As previously announced during June, 2007 an affiliate of the Shingles Spring tribe closed on a $450 million senior note financing to fund the casino project and construction on the project began during the second quarter of 2007.
Partially offsetting the unrealized gains associated with the Shingle Springs project were unrealized losses associated with the casino development project with the Jamul tribe. As I mentioned earlier, he decrease in estimated fair value of the notes receivable from the Jamul tribe related primarily to an increase in the discount rate due to a decrease in estimated operating results from the casino operation once opened.
Of the $51.7 million in net unrealized gains on notes receivable during 2006, approximately $36 million was related to the casino development project with the Pokagon Band. The unrealized gains on the Pokagon Band notes receivable resulted from the combination of favorable events occurring during 2006 as well as the sale of the Pokagon notes.
Consolidated selling, general and administrative expense were $40.1 million in 2007 compared to $35.2 million in 2006. Approximately $4.1 million of the increase related to WPTE and was primarily due to WPTE’s efforts to develop their online gaming business including costs to develop infrastructure prior to entering into an agreement with [Crifta] Logic and headcount costs associated with WPTE’s Israel operations.
Increases were also associated with the development of the Tractor Poker Tour in China and infrastructure development costs associated with WPTE’s non-gaming website at WorldPokerTour.com and ClubWPTE.com. The remaining increase of $800,000 related to additional costs associated with increased development and management activities related to Lakes Indian casino projects.
For 2007 Lakes’ selling, general and administrative expenses consisted primarily of payroll and related expenses of $10.3 million including stock compensation expenses for all share based payment awards, travel related costs of $2.5 million and professional fees of $3.3 million. Other costs and expenses for 2007 included amortization of intangible assets of approximately $2.8 million associated with the casino project for the Pokagon Band.
The operating loss for the full year of 2007 was $18.8 million down $53 million from the prior year mainly due to the lower unrealized gains on notes receivable while net loss applicable to common shareholders for 2007 was $15 million down from net earnings applicable to common shareholders of $19.8 million in 2006. Loss applicable to common share holders per fully diluted share was $0.63 versus earnings applicable to common shareholders of $0.80 per fully diluted share in the prior year period.
Now, I’d like to discuss our liquidity and auction rate securities. As of December 30, 2007 we had $9.2 million in cash and cash equivalents.
Of this amount $5.3 million related to Lakes and $3.9 million related to WPTE. We also had $53.5 million in short term investments in marketable securities of which $30.5 million related to Lakes and $23 million related to WPTE.
All of Lakes’ shorter term investments in marketable securities and $7.8 million of WPTE’s short term investments and marketable securities were auction rate securities which I will refer to as 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 and all have credit ratings of Triple A when purchased.
Neither Lakes or WPTE own any other type of ASR investments. None of our investments in ARS qualify or have ever been classified in our financial statements as cash or cash equivalent.
The interest rates on these ARS are reset every seven to 35 days by an auction process. Historically, these types of ARS investments have been highly liquid.
As a result of the recent liquidity issues experienced in the global credit and capital markets in February and March of 2008 auctions for ARS investments held by us failed. An auction failure means that the amount of securities submitted for sale exceeds the amount of purchase orders and the parties wishing to sell the securities are instead required to hold the investment until a successful auction is completed.
The ARS investments continue to pay interest in accordance with the terms of the underlying security however, liquidity will be limited until there is a successful auction or until such time as other markets for these ARS investments develop. Account statements for February, 2008 received from the firms managing our investments indicated no decrease in the fair value of these securities and the underlying credit quality of the assets backing our ARS investments have not been impacted by the reduced liquidity of these ARS investments.
As a result of these recent events we are in the process of evaluating the extent of any impairment in our ARS investments resulting from the lack of liquidity. However, we are not yet able to quantify the amount of possible impairment, if any, that may occur in the foreseeable future.
Lakes’ current expects to be able to obtain funds in order to fulfill its future liquidity needs if it is unable to liquidate its ARS investments by mid 2008 as needed and is exploring several financing alternatives. WPTE does not believe that any lack of liquidity during the next 12 months relating to this matter will have an impact on its ability to fund its operations.
In addition to our financial results, we’re providing the following guidance for 2008. We currently plan for selling, general and administrative expenses to remain relatively flat for 2008 with anticipated increases in travel related, payroll related areas expected to be offset for the most part by projected decreases in professional fees.
In addition, we currently expect amortization of intangible assets related to Indian casino projects to increase in 2008 to approximately $7.2 million as a result of the full year amortization expense associated with the Four Winds Casino resort in 2008. Historically, Lakes’ revenues have primarily come from WPTE, during fiscal 2008 Lakes’ also expects significant revenues from the management of Indian casino properties including the Four Winds Casino resort.
However, due to the relatively short operating history of the casinos we currently manage we do not plan to provide revenue guidance for Lakes. Now, back to Lyle for the wrap up.
Lyle Berman
For 2008 Lakes remains focused on successfully managing our current operations and opening our existing projects under construction or in development. We will continue to work hand-in-hand with our tribal partners to bring our projects to fruition and with the capital we will accumulate over the next few years we will explore various alternatives in which to best utilize the funds while providing increasing long term value for our shareholders.
We are excited about our current position and the new year. With that, I’ll turn the call over to the operator for questions.
Operator
(Operator Instructions) Your first question comes from the line of Todd Eilers with Roth Capital Partners. Please proceed.
Todd Eilers – Roth Capital Partners
Just a couple of quick questions, just with regards to liquidity and financing needs, can you maybe tell us what your capital needs are for 08 and maybe what the potential options that are that you’re considering if you’re not able to liquidate or use the auction rate securities investments?
Timothy J. Cope
In terms of our capital needs, we have our operating expenses which you know are pretty well defined so we think we’re fine with that. Of course, any capital costs related to projects, it depends on the status of the development.
If we get approval at the IOWA project to move forward with that which would be good news or depending on how we end up with the Jamul project we’re continuing to develop. In terms of the liquidity needs, again we have short term we certainly have some cash available to cover the short term liquidity needs and we’re very confident at this point in time that we’ll have either a line of credit or some other form of liquidity available to us backed by the auction rate securities even if the auction rate securities aren’t able to be sold in the near future.
Todd Eilers – Roth Capital Partners
Okay. But, you’re anticipating some form of debt then not equity, is that what you’re saying?
Timothy J. Cope
That’s correct. We are very confident that that will take place.
Todd Eilers – Roth Capital Partners
Okay. Then also, I don’t know if I heard you guys or not, did you break out the contribution of management fees from Pokagon Four Winds versus your Oklahoma revenue?
Timothy J. Cope
No. Again, we do not break that out and as we discussed, it’s a little bit sensitive of course, the business we’re in with our Native American partners it’s very private to them what their type of operations are doing.
So, I think it’s far to say if you just look at comparisons year-over-year where you saw we had a limited amount of management fees in 06 versus what we’re producing in the five months of 07 I think you can garner that information very quickly.
Todd Eilers – Roth Capital Partners
Okay. Then, you mentioned the pre-opening costs, roughly $4 million for the first 12 months and that your management fee income or revenues reported after that.
So, to get kind of an apples-to-apples at least going forward after that is done, it’s simply just adding – is it roughly $1 million per quarter? Is that how it works out to be?
Timothy J. Cope
That’s correct. It’s about $1million a quarter.
That number is now set, whatever it is , it is, the total of that pre-opening. So, it amortizes monthly but it ends up being just about $1 million, a shade over $1 million a quarter.
Todd Eilers – Roth Capital Partners
Okay. So, if we assume that Oklahoma revenue is similar to what it was over the last several quarters then it looks like you guys are for Four Winds at maybe, $2.7, $2.8 million?
So, if we added $1 million to that, you know $3.7, $3.8 million in management fee revenue from that project, is that the correct way to look at it?
Timothy J. Cope
I think that’s fair.
Todd Eilers – Roth Capital Partners
Okay. Also, I noticed taxes in the quarter were a little bit higher than we were looking for.
Can you talk about that a little bit, what the increase was there?
Timothy J. Cope
On the tax provision what we did was we’ve been taking deferred tax assets or an allowance against potential capital gains and capital losses that we have recorded. And, what we have been doing is, assuming our capital losses will be covered by capital gains yet to be incurred in the future, that was predicated on a strategy of being able to monetize some amount of the World Poker Tour stock we own which has a zero tax basis and as the World Poker Tour’s stock has come down unfortunately, that offset isn’t as great as it use to be so now we’ve had to take some provision for the amount that we’re not able to cover with that.
Todd Eilers – Roth Capital Partners
Okay. How about going forward?
What should we expect in terms of taxes for you guys? Should we expect that to drop down to kind of where it was the last several quarters which is anywhere from $300,000 to $500,000?
Timothy J. Cope
I would say at this point I would expect it to stay similar to the fourth quarter.
Todd Eilers – Roth Capital Partners
Okay. Then last question, for your notes receivables you gave a fair value, total fair value, can you break that out between projects?
Timothy J. Cope
On the fair value, I can do that. The Jamul fair value is $21 million approximately.
Shingle Springs is approximately $54 million, Ioway is about $4.
Todd Eilers – Roth Capital Partners
Okay. Prefect.
Timothy J. Cope
Let me go one step further Todd, I’ll give you the actual face value of those too. Again, this is in our public filings so, the Jamul face value is approximately $42 million, this is principal and interest, Single Springs is approximately $67 million and Ioway is approximately $5 million.
Operator
Your next question comes from the line of Mike Grondahl with Key Colony Funds. Please proceed.
Michael J. Grondahl – Key Colony Funds
A couple of questions here, could you talk a little bit about the October, November and December results at Pokagon? In the press release you mentioned some December weather and I’m just curious how much of an effect that had on the month relative to October and November?
Then, could you also address your investment in World Poker Tour? Can you just help explain why you’re not taking cash out of that company?
Are you comfortable with their long term prospects? And, how do you really monetize that investment?
Lyle Berman
First off, we had some very severe weather in December and in January in Pokagon but we don’t have historical records to compare it to so it’s pretty hard. We can look at it day-by-day and what it could have been or should have been.
But, it clearly did impact not just us, the entire market especially in December because almost every weekend we had snow storms. With regard to World Poker Tour, as you know World Poker Tour is a separate public company and certainly we could, I guess we could, the company could decide to dividend out money to its shareholders but other than that there really is no access for us to get at that cash.
We are very comfortable that the company has long term viability. I think we’ll know a great deal more as we said at the end of this year.
We have three major prongs of revenue growing: the online gaming, the WPTE club which is the domestic tournament style that people pay month fee to play and of course, Tractor Poker in China where we started the whole Tractor Poker Tour. I think that the company itself will know a great deal more the next six months on how each of these three revenue prongs are doing.
Currently, we make the show and sell it to the channel and make money. We’re like some sort of brand and we syndicate the show but then our corporate overhead pretty much eat up the profits from those things.
So, we’re really looking to monetize the brand in the three areas that I just said but, certainly at this point we’re still reasonably confident that the company is very viable and has long term growth to it. If those things don’t happen by the end of this year we’ll be very much looking at alternatives.
Michael J. Grondahl – Key Colony Funds
Okay. Good.
Well I just think with your ownership stake in that company and with the fact that you guys are on the board, we want you to be very careful with that capital.
Lyle Berman
I can assure that not only do we share your – we want to be very careful with that capital as we want to have a company that if things aren’t working out that a great deal of that capital is still preserved to pursue other alternatives. I can assure you that Steve Lipscomb, CEO and a major shareholder of the company after ours is as equally concerned of that as we are.
Michael J. Grondahl – Key Colony Funds
Just switching over to cost, could you talk a little bit about your cost structure? Is there anything that you can do to floor the cost?
Then one specific question I had is can you address how travel expenses are $600,000 in a quarter or I think you said $2.5 million a year?
Timothy J. Cope
I can start to answer that question. I think it’s a fair point, some of our costs clearly are related to the development efforts of our projects.
Remember we have roughly 50 full time employees and we have currently three active projects. One in Cimarron, one in Four Winds and Shingle Springs and there’s a tremendous amount of effort, work, travel related costs associated with getting, say for instance, Four Winds opened.
Our crew basically lived at Four Winds for six months which in our P&L is all travel related costs, we’re incurring the same phenomena at Shingle Springs. We provide a turnkey operation, we do all the training, the internal controls, the planning, the design, the construction overview, the staffing so there’s a tremendous amount of effort incurred at our level to get these projects open.
Some of you can see that when we incur professional fees. Those professional fees a lot of it – well, last year some of it was related certainly with the refilling issues we had with the SEC but some of it also is certainly related to construction project oversight that we have on a project specific basis that then go away once the project opens.
I think from that perspective you’ll see those professional fees start to come down as the projects open. I think you’ll see our travel and travel related costs come down also because while we’ll be traveling to each of our projects on a regular basis we won’t be there seven days a week for months at a time.
Lyle Berman
Again, we take great pride in the fact that we’re a true management company. As Tim said we employee approximately 50 people.
But, you have to measure our work product against what we really produce. We are managing casinos by the end of this year that on a run rate, I’m talking about when Single Springs is open that we have a run rate in the casinos that we will be managing that have an in excess of $300 million of EBITDA.
Now unfortunately, we don’t get the benefit of that $300 million of EBITDA, obviously, we only get our share of the net profit but we do the work load as though we were managing and owned for our own account that size of a company and therefore one has to measure that and look at that in relationship to what we’re producing as opposed to just looking at it relative to our fees.
Michael J. Grondahl – Key Colony Funds
Okay. Lastly, Jamul last time I thought you guys had said, “Hey we’re at the architectural plan phase, we’re waiting for those plans and then we’re going to move on to breaking ground.”
And it seems like we’re no longer there. Can you kind of give us a detailed update as to where you are.
Lyle Berman
I don’t think we’ve said that in the past. I don’t think we said we’re at that point yet.
What we are working with is there are a lot of legal issues and working with the Jamul Band and the Band and with our concurrence has agreed again to stop pursuing opening a casino under their current compact which we have legal advice that then takes away the options of the state to try to stop us. Right now the Band has a legal opinion that they’re able to construct the road, go through the road and through the highway and use that as egress and exit.
They’re in the process of completing that and we are somewhat waiting to make sure that all goes smoothly before we actually commence. We have done some work on the architectural plans but before we recommence and spend a great deal of money to design the final phase and raise money to raise it.
Tim, would you want to add anything?
Timothy J. Cope
I think it’s gone slower than expected but I will say that the road on the reservation is actively being constructed. We are moving dirt, we’re building the road out from where the casino will sit out to Highway 94.
Part of the process of doing that it the surrounding infrastructure, the water and electrical that’s needed to get to the property that’s part of running up to that road. So, it’s just taking longer to coordinate with local providers than expected but, we are actually moving dirt on that site with anticipation of cutting into that road in the near future.
Lyle Berman
There is no question that the tribe has a local opposition and apparently they’re what I call the vocal minority but they have vocal opposition and the tribe has legal opinions that at this point they think they are free to go forward but each day we are taking it one day at a time.
Operator
Your next question comes from the line of [Rishi Parikh] with KBC Financial. Please proceed.
[Rishi Parikh] – KBC Financial
On the last call you sited some dealer inefficiencies at Pokagon, can you talk about what the situation is there now?
Lyle Berman
I think that’s pretty much be resolved. Certainly, when we first opened you have dealer inefficiencies from two major aspects, one is mistakes, just flat out mistakes that they misread a hand and they pay off a customer where we should have won and they’re paying them off.
But, more importantly is productivity. Productivity is how many hands per hour you deal because as you know the more hands per hour you deal the more handle we get and the more theoretical profit we should have.
Both of those have pretty much been corrected however, one understand as you have labor turnover, the more turnover you have the more new dealers you have and the more change you have. But, I think we’ve seen that in the last several months our hold of percent of drop has kind of gotten more back to normal.
[Rishi Parikh] – KBC Financial
Now, you guys also – now I guess you mentioned weather in December.
Lyle Berman
And January.
[Rishi Parikh] – KBC Financial
Right. That’s what I was going to get at, looking to the first quarter things look a lot worse and I’m wondering if we should be changing our expectations accordingly?
Timothy J. Cope
Well, when you say worse, I’m not sure what you mean? Worse than what?
What are you comparing to?
[Rishi Parikh] – KBC Financial
According to the National Weather Service there was something like one inch of accumulation in December and then three in January and two in February.
Timothy J. Cope
There’s no doubt that we’ve had unusual level currents and I’ve been here many days when snow storms or many days when it’s clear and when it’s clear you get much more better business. I think what you’ll see is January was certainly affected somewhat by weather, February also but not as much and we’re expecting March to clear up as the spring hits.
[Rishi Parikh] – KBC Financial
Are there any offsetting considerations or impacts that we can hope might help? Number of tournaments perhaps?
Or, your marketing strategies, maybe timing of spend? Anything of that nature?
Timothy J. Cope
I would say from a marketing spend strategy our expectation we have a number of promotional event type of events taking place that clearly, again back to weather, when it’s clear we can see the positive of those marketing events. I think we have a pretty solid marketing program.
As Lyle mentioned earlier, we have a fantastic amount of participants in our players’ club program that we have a very strong direct mail program associated with that. I don’t think marketing necessarily is the detriment of the issue right now.
I think it’s just a matter of letting people get to the property.
[Rishi Parikh] – KBC Financial
In the Shingle Springs is there any kind of updated expectations or intent with respect to a new compact? Something that would allow more Class III machines?
Lyle Berman
Well, the tribe is currently negotiating with the Governor’s office and I think it’s fair to say that we expect the tribe will be signing a new compact with the Governor’s office that has to be ratified through the legislature but we’re still pursuing that, the tribe is still pursuing that with our full support.
[Rishi Parikh] – KBC Financial
Any updates as to the law suit with the tribe’s former partners?
Lyle Berman
I don’t think so but that really has no affect on us.
Timothy J. Cope
No, I think that’s fair. There’s really no update on that, it’s just kind of going through the legal process and again, as Lyle mention it certainly has no affect on the operations of the casino.
But, I think it has a long way to go there in terms of the legal process.
[Rishi Parikh] – KBC Financial
Anything you could say about the status of the KAR Partners and their licensing process?
Lyle Berman
All I can say to that is that they are actively being investigated. They both applied for licensing with the National Gaming Commission.
To our knowledge that’s still going on. They neither have been licensed or been denied a license and we have no, I don’t think we’re privy to any other information other than that?
[Rishi Parikh] – KBC Financial
When did they apply? How long has it been so far?
Lyle Berman
Oh, quite a long time.
Timothy J. Cope
Years.
Lyle Berman
It’s in the years. But, I will say this, it’s been years but NGA because they’re over worked and under paid as they claim, they generally don’t work real hard on one until a need and like in Jerry [Argovitz’s] case there’s no need until Shingle Springs opens.
So, it’s not on the forefront of their list and the same goes for Kevin [Cane] with regards to Shingle Springs and Jamul although he has applied for licensing for small fees in Cimarron.
[Rishi Parikh] – KBC Financial
Any thoughts about timing of expanding the hotel or building some sort of expansion at Pokagon?
Lyle Berman
Yes. We’ve been actively working with the tribe, they clearly want to do some expansion, the major part of the expansion would be hotel rooms and then amenities to go with those hotel rooms and maybe some casino expansion but not a great deal.
They’re actively working on it, we’re working on it and I would say being optimistic we would probably like to see construction start within a year.
[Rishi Parikh] – KBC Financial
And in the past I think you guys have said you thought the property could benefit from as much as 800 rooms?
Lyle Berman
Yes, 600 to 800 rooms and then the associated amenities, spa a few more restaurants, convention space, that would all go with that.
[Rishi Parikh] – KBC Financial
Not to beat a dead horse but looking back to the third quarter and trying to reconcile management fees to the EBITDA, now that they’ve reported the $21.5 million and that’s be made public record, I’m wondering if we can find a way to reconcile it because adding back $1 million and dividing by 24% doesn’t get you in the same zip code and there’s got to be a way for us to somehow model the company going forward. I mean, we want to be interested in the company and try to promote the story and it would help a lot if we could get from point A to point B.
Timothy J. Cope
Commenting on your $21 million, first of all I don’t think there’s been any public numbers released at Four Winds and I’m not sure where the $21 million is coming from but if you’re even using that number for our third quarter, remember that’s eight weeks. So, again, I’m not sure where you’re getting the number from but when you say third quarter in this case, that’s an eight week period.
[Rishi Parikh] – KBC Financial
Okay. Maybe we could follow up off line about that then.
I guess now also with respect to your forward plans, there’s a lot of new properties that are opening up for possible acquisition around the country and I’m wondering where your priorities stand in terms of Vicksburg versus possibly acquiring something else for sale out there?
Lyle Berman
Well, we certainly are looking at those opportunities. There’s no question that there are other opportunities.
There are a number of properties for sale and will become for sale and we continue to evaluate all of those.
[Rishi Parikh] – KBC Financial
Alright. Mr.
Berman if you could comment on your personal thoughts about where the stock is trading and your intentions in terms of whether you would anticipate making any additional sales this year of stock because I know that you’ve got needs and funding requirements and what not.
Lyle Berman
First off, certainly I am just absolutely shocked that our stock is as low as it is.
[Rishi Parikh] – KBC Financial
It’s killing me. It’s hurting me.
Lyle Berman
Well, it’s hurting me also. You know the deal seems more sellers than buyers but in truth we’re trading substantially below our liquid – well, I won’t say our liquid but our realistic book value which is composed of primarily hard assets and loans to tribes.
So, I’m quite shocked, I mean its trading below if you looked at our future – the future cash flow of the company is valued at minus. It’s valued today at a minus number.
In terms of my own personal plans at this point I guess I can’t say until I do buy some or don’t, I don’t think I would put that out in the public domain whether I’m planning to our not.
Operator
Your next question comes from the line Clint Morrison with Feltl & Company. Please proceed.
Clinton Morrison – Feltl & Company
Start with Jamul, you obviously took a little whack at the valuation again as you did in the previous quarter and I think you indicated that it was sort of a reduced expectation but, the time frames also been pushed out a little bit. Why do we think sort of the returns and the profitability at Jamul are different now than we thought a quarter ago?
Or, is part of that discount the fact that we’re kind of next year as opposed to the middle of this year for a start?
Timothy J. Cope
Pertaining to the time, unfortunately, before we actually start construction the time just keep going and that’s just a function of where we’re at in the project in terms of getting the road done or whatever takes place out there to move that full construction forward.
Clinton Morrison – Feltl & Company
So that wasn’t a factor of the decrease in the valuation?
Timothy J. Cope
No, I’ll tell you the discount went up based on what we currently feel now looking at the market and based on the fact that some of the surrounding companies – surrounding properties, casinos, have now – we’re seeing new compacts. So they’re actually rapidly expanding Class III operations.
We just think its become more competitive at this point in time until we can actually get open and/or ratify the compact there and also utilize the full Class III casino environment.
Clinton Morrison – Feltl & Company
Cimarron, I know you’re not breaking it out but was there any sort of seasonality or weather impacts that affect or affected that casino? Or, should we rightly kind of assume that the management fee there was probably similar in the fourth quarter as to the third quarter?
Timothy J. Cope
Well, I think Cimarron does well and continues to improve although again, it’s not a big, big number in the scheme of our projects but is very similar, it’s turned up just slightly.
Clinton Morrison – Feltl & Company
Okay. But, there’s no sort of seasonality and there’s no reason for us to think it’s too out of whack with what it did in the previous quarter.
Timothy J. Cope
No, I think that’s a fair estimate.
Clinton Morrison – Feltl & Company
Okay. Your adjustable rate securities, failed auctions I understand some of those tend to reset and some of them reset up, can you give us a sense as to kind of what might have changed in terms of the interest rate you’re getting on that $30ish million?
Timothy J. Cope
Some of them have a penalty rate associated with them that go up in to the teens but on an annual average I think, just from my understanding there’s kind of an overall Federal limitation on government backed bonds that would limit it back to the stated coupon rate of the roughly 4%.
Lyle Berman
If I understand it correct, and I’m learning a little bit more about it, it’s almost a function of prepaid interest. It’s like a penalty where they paid some prepaid interest.
But, if you look at it over a year’s time frame the rate is really pretty much flat. Is that Tim, what you’re understanding is as well?
Timothy J. Cope
Yep, that’s right.
Clinton Morrison – Feltl & Company
Okay. So we aren’t expecting change.
When’s the next auction coming up for your holdings? Do you know?
Timothy J. Cope
You know we have several and they’re all in different states so I can’t give you the exact date of the next one but, they probably – some come up every week.
Clinton Morrison – Feltl & Company
Fair enough. Tax rate you said kind of similar to last quarter, are you referring to absolute or percentage basis?
Timothy J. Cope
Percentage basis.
Clinton Morrison – Feltl & Company
Then finally, Shingle Springs, a new compact signed, when and if it happened would that cause a revaluation of those notes?
Timothy J. Cope
Probably, it certainly good although as we get closer to opening, you know we have a high probability on those notes already.
Clinton Morrison – Feltl & Company
Are those at 95%?
Timothy J. Cope
That’s correct.
Clinton Morrison – Feltl & Company
So, it could go up a little bit.
Operator
Your next question comes from the line of James Taylor with Banc of America Securities. Please proceed with your question.
James Taylor – Banc of America Securities
Just a housekeeping point, Tim, if we did see the Pokagon financials, is the management fee that they report in their financials the same from an accounting perspective that you report as revenue? Or, are there differences there?
Timothy J. Cope
No, it should be the same.
James Taylor – Banc of America Securities
It should be the same number?
Timothy J. Cope
Right.
James Taylor – Banc of America Securities
Very good. Last quarter when you guys had just opened Pokagon we talked a little bit about some of the sort of startup issues and/or there’s always changes you want to make.
Can you maybe kind of give us a recap about things that you changed that worked and maybe kind of where you stand? Are things kind of set or are there additional changes that you’re sort of making and still tweaking the property?
Lyle Berman
I think they’re rather set in the context of from the pre-opening because you realize that a slot mix, hold percentages, all of those things you look on at a quarterly or monthly basis and you do tweak and make some changes. But, I think, the major changes that we did have been done.
We did a great deal of changing out our machines, not model changes but a big change was any reel machine can become another reel and any video can become another video but you can’t make a reel a video and we have too many videos and not enough reels. We were very lucky to find a brand new casino that had just opened that had too many reels and not enough videos and we traded and that amounted to I think about 300 machines on our part so that was a very big major change.
Certainly, adjusting your labor and your labor schedules and your people, certainly you over higher when you first open a casino, you weed out a lot, a lot of people self weed out, they just don’t like the position, the job, the energy and they leave. We also see that some people go that don’t measure up so you start getting a much more mature labor force that keeps maturing but you get a lot of changes early on.
Scheduling is another one especially in both table games and restaurants those are two big areas of using people. You deliberately over staff to begin with and then you start getting down to where you need and we’ve pretty much adjusted those schedules.
So we’ve done a great deal there. Some of the hold percentages on the machines you look at and you may adjust those either up or down.
We’ve made some reasonable adjustments in those.
James Taylor – Banc of America Securities
Is it fair to say that margins in the fourth quarter are Pokagon reflect sort of what you think the run rate is going to be or is there still potential improvement?
Lyle Berman
I think we might be more concern to say maybe the first quarter of this year, the first second quarter of this year probably will get real normalized.
James Taylor – Banc of America Securities
Okay. So, there’s probably still some [inaudible] you’re looking at in the fourth quarter number?
Lyle Berman
Yes, absolutely. No question about that.
Operator
(Operator Instructions) Your next question comes from the line of Alex Lieblong with [Inaudible]. Please proceed.
Alex Lieblong – [Inaudible]
I appreciate the further disclosure this time and its very helpful. When you’re looking at these other properties that are out there for sale right now, I mean I just hope when you look at things if you can buy something at X and we’re selling for 75% of X we make sure and do all the math.
Lyle Berman
Oh, I agree with you and as you know, in recent years, I can’t talk about just the last month or two but, casino properties have been going for quite high numbers relative times EBITDA. Quite frankly, I have no interesting buying something that pencils out to me breaking even.
There’s also a very big concern when you talk about a major gaming company that can finance an acquisition at 6 or 7% is a great deal different when Lakes would have to probably finance at 11 to 12%. What might be wonderful for Steven Wynn or Harrahs doesn’t work particularly well for Lakes.
Alex Lieblong – [Inaudible]
Let me ask you Lyle, have you thought about, and I’m sure have gone through the mechanics of the notes and said, “Okay, if we had to discount the notes and sell them for X and if we could buy back two times X stock.” I know we’d be taking a hit on the notes but if we make it up on the other side do you go through that exercise?
Lyle Berman
We clearly have gone through that exercise. One of course the unknowns is that when you’re stock is real low and I won’t even use today’s price but let’s use a couple of days ago price and you say to yourself can I really buy that much at that price?
That’s kind of the unknown because if you liquidated the notes and let’s just say the $60 million range, could you really buy that many shares back at $6 a share?
Alex Lieblong – [Inaudible]
It sounds like you’re making sure you’re doing the math and you are. I appreciate that.
If you guys would give me a chance sometimes would you give me a buzz. I’d appreciate that.
Lyle Berman
I will. I will do that.
Operator
There are no additional questions at this time. I would like to turn the call over to Lyle Berman for closing remarks.
Lyle Berman
I just want to thank you all for your support listening to our story, asking the questions and if you have any other questions don’t hesitate to call Tim Cope or myself. Thank you very much.
Timothy J. Cope
Thank you everybody.
Operator
Thank you for your participation in today’s conference. This concludes the presentation.
You may now disconnect. Have a good day.