MINNEAPOLIS, Minnesota -- (PRESS RELEASE) -- Lakes Entertainment, Inc. (NASDAQ: LACO) today announced results for the fourth quarter and fiscal year ended December 30, 2007 ("2007"). The Company completed a successful year with the opening of the Four Winds Casino Resort for the Pokagon Band of Potawatomi Indians ("Pokagon Band") in New Buffalo, Michigan, and the start of construction on the casino project for the Shingle Springs Band of Miwok Indians ("Shingle Springs Tribe") near Sacramento, California.
Commenting on fourth quarter and full year results, Lyle Berman, Chief Executive Officer of Lakes, stated, "Significant Company milestones were reached during 2007 as we opened the Four Winds Casino Resort for the Pokagon Band and also began construction on the casino project for the Shingle Springs Tribe. We are proud to be associated with all of our tribal partners and look forward to the start of the Ioway Casino Resort in Oklahoma and the Jamul Casino project outside of San Diego. We remain committed to the successful development of all of our casino projects and we look forward to continued Company progress during 2008."
Tim Cope, President and Chief Financial Officer of Lakes stated, "The Four Winds Casino Resort is unique in its market and has quickly established a very strong customer following. Although the entire market was adversely impacted by severe weather conditions during December, our priority is to maintain and capitalize on the positive momentum we have generated at this property. In addition, we are very pleased with the progress of construction at Shingle Springs, which continues to be on schedule and within budget. We are looking forward to the opening of this project in late 2008."
Fourth Quarter Results
Lakes Entertainment reported consolidated fourth quarter 2007 revenues of $8.3 million, up 36.5% from the prior year period. Lakes' revenue was boosted by a $3 million increase in management, consulting and development fees, driven by a full quarter contribution from the Four Winds Casino Resort, which is owned by the Pokagon Band, compared to no contribution from Four Winds Casino Resort in the fourth quarter of 2006. License fee income from WPTE related to the World Poker Tour television series ("WPT") was down $2.0 million year-over-year to $3.1 million, primarily due to the delivery of fewer episodes in the fourth quarter of 2007 versus the fourth quarter of 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's launch of Season I of the WPTE's Traktor Poker Tour in China as well as higher costs preparing for the launch of ClubWPT.com. Contributing to the increase in selling, general and administrative expenses were additional costs associated with increased development and management activities related to Lakes' Indian casino projects. For the 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-based payment awards, travel-related costs of $0.6 million and professional fees of $1.1 million.
Other costs and expenses in fourth quarter 2007 included amortization of intangible assets of approximately $1.7 million associated with the casino project with the Pokagon Band which commenced upon the opening of the Four Winds Casino Resort in August 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 estimated fair value, based upon the current status of the 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 gains in the fourth quarter of 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 in the discount rate associated with the casino development project with the Jamul Indian Village ("Jamul Tribe") due to a decrease in estimated operating results from the casino operation once open.
As previously announced, during March 2007, Lakes contracted with a group of investors for their participation in the 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 as of 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 during the fourth quarter of 2006. This participation arrangement was accounted for as a sale during 2007. The sale 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 receivable, 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 to 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.
Full Year Results
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 ("PPT") during 2007 compared to the delivery of 24 episodes of the PPT during 2006.
Revenue for 2007 also included management fees from the Cimarron Casino in Oklahoma, which is owned by the Iowa Tribe of Oklahoma, and management fees for approximately five months of operations from the Four Winds Casino Resort, which opened to the public on August 2, 2007. The combined management fees were $6.6 million for 2007. Management and consulting fees for 2006 were $0.6 million.
Net realized and unrealized gains on notes receivable were $7.2 million and $51.7 million for 2007 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 Shingle Springs Tribe, which increased the estimated fair value of the related notes receivable. As previously announced, during June 2007, an affiliate of the Shingle Springs Tribe closed on a $450 million senior note financing to fund the casino project in Shingle Springs, California 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 discussed above, the 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 open.
Of the $51.7 million in net unrealized gains on notes receivable during 2006, approximately $36.0 million was related to the casino development project with the Pokagon Band. The unrealized gains on the Pokagon Band notes receivable resulted from a combination of favorable events occurring during 2006, as well as the sale of the Pokagon notes receivable discussed above.
Consolidated selling, general and administrative expenses 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 Cryptologic and headcount costs associated with WPTE's Israel operations. Increases were also associated with the development of the Traktor Poker Tour in China and infrastructure and development costs associated with WPTE's non-gaming website at Worldpokertour.com and ClubWPT.com.
The remaining increase of $0.8 million 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 expense 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 with the Pokagon Band.
The operating loss for the full year 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 $15.0 million, down from net earnings applicable to common shareholders of $19.8 million in 2006. Loss applicable to common shareholders 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.
Liquidity and Balance Sheet
As of December 30, 2007, the Company 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. As of December 30, 2007, the Company had $53.5 million in short-term investments in marketable securities of which $30.5 million related to Lakes and $23.0 related to WPTE. All of Lakes' short-term investments in marketable securities and $7.8 million of WPTE's short-term investments in marketable securities were 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), and all had credit ratings of AAA or Aaa when purchased. Neither Lakes nor WPTE own any other type of ARS investments. None of our investments in ARS qualify, or have ever been classified in our financial statements, as cash or cash equivalents.
The interest rates on these ARS are reset every 7 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 backed by student loans - including auctions for the ARS investments held by Lakes and WPTE - 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 that 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, both Lakes and WPTE are in the process of evaluating the extent of any impairment in its ARS investments resulting from the current 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 currently expects to be able to obtain funds in order to fulfill its potential 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 twelve months relating to this matter will have an impact on its ability to fund its operations.
Lakes also had $78.8 million in notes receivable from Indian tribes adjusted to their estimated fair value as of December 30, 2007. The corresponding face value of these notes, including accrued interest was $115.0 million. As of December 30, 2007, the Company had no interest-bearing long-term debt, and had $7.3 million in long-term contract acquisition costs payable.
