Description

Overview:

Lakes Gaming (LACO) develops, constructs and manages casinos and related
hotel and entertainment facilities. The company's revenue is derived
almost exclusively from management fees. The company currently manages the
largest casino resort on Louisiana, Grand Casino Coushatta, in Kinder
Louisiana owned by the Coushatta Tribe of Louisiana. The Company has also
entered into development and management agreements with four separate tribes
for four new casino operations, one in Michigan, two in California and one
with the Nipmuc Nation on the east coast. In addition, the Company has
agreements for the development of one additional casino on Indian owned
land in California through a joint venture with MRD Gaming, and has
entered into a joint venture agreement for the development of land on the
Las Vegas strip.

Current Valuation:

Laco currently has about 10.6 million shares outstanding at $5.50 a share
for an equity market value of $58.5 MM. It has net cash of $23.9 MM for an
enterprise value of $34.7 MM.


Investment Thesis:

LACO basically helps tribes who are inexperienced at building and managing
casinos to build and manage casinos. In return for this help LACO collects
a management fee on the casinos. The deal they currently have with
Coushatta requires them to split the profits 60% to the tribe and 40% to
LACO. LACO over time has lost most of its contracts with casinos after
they have come up for renewal and recently announced that its last one,
Coushatta, will expire in January 2002 after the tribe decided to not
renew the contract. After a certain time the tribes feel they have gained
enough knowledge of the business and no longer feel the need to pay a
management fee to LACO.

The bad news is fairly obvious. Despite earning over $2 in EPS in 1999
LACO is expected to earn nothing for the most part of 2002. LACO is
currently in different stages of regulatory review for four new projects
for Indian gaming, however, due to the political, legal and social issues
related to gaming the timing of these outcomes are highly uncertain.
Despite this it is fairly logical to assume that some time over the next 2
years LACO should receive approval for at least one if not all of its
projects, which will bring the company back to profitability. LACO is
currently planning for four potential new casinos that may open up in the
next two years. The Michigan one is the one with greatest shot at getting
approved quickly. Important to note that the fee for that contract is
expected to be around 22% of income vs. the 40% deal with Coushatta.

While we wait for that rosy picture to develop we have some interesting
asset value to help us quell some of the uncertainty related to this
investment. Looking at the latest press release reveals that the company
has about $24 MM in net cash and book value of some Vegas strip land at
$72 MM or about $9 per share. In fact if we just take all assets less all
liabilities we get about $18 per share in value.

At these levels I feel you have a cheap call option on the business that
is supported by hard assets with no net debt. It appears they are getting
no value for any potential business they may get or at the very least the
assets they have on the balance sheet.

Some issues:

LACO does have a lawsuit outstanding related to its involvment in the
bankrupt Stratosphere project. LACO has appropriately taken a litigation
liability on its balance sheet for the expected amount as well as placed
money in a restricted cash account, which I have not included in my cash
balance.

The CFO said that they plan on making a decision on what to do with the
land in Vegas in the next six months. They either want to sell it for
cash, at which he thinks he may get less than book due to the current climate,
or develop the land with a partner.

If and when LACO gets the new casinos up and running the contracts will
only last for seven years. As a result, the company will have to find a
new business outside the Indian scene. However, seven years is a decent
time to find what else to do.

Catalyst

Getting approval for any of its 4 major projects as well as any
rationalization of value of its Vegas strip land. I don't consider this a
Coke like investment but rather a "cigar butt" type.