High-stakes gamble

As a poker player, Lyle Berman, who's won more than $1.5 million of official poker tournaments since the early 1990s, knows when to fold 'em.

As CEO, he apparently does, too.

He's decided to reinvent his nine-year-old Lakes Entertainment Inc., which develops and manages Indian-owned casinos. But just what the Minnetonka-based company will become, he's holding close to the vest.

"Indian gaming is a very good business for us, but it's not where we intend to invest the revenue in the future," Berman, 66, said during a recent interview. "Indian gaming is not a growth business."

Indeed, Lakes Entertainment hasn't signed a new casino management contract in nearly three years, as the pipeline of large new projects has nearly run its course and fewer Indian tribes seek outside help running casinos.

The stock has languished on Wall Street, falling 40 percent since April; it hit a 52-week low of $7.57 Friday and closed at $7.72 a share. The decline has erased more than $140 million in market value over the past six months.

Further unnerving investors was Berman's decision in September to unload 300,000 shares of Lakes Entertainment stock. It was Berman's first sale since the former Grand Casinos Inc. spun off Lakes at the end of 1998. Berman, who owns 15 percent of Lakes, insists he was merely paying down personal debt, but investment analysts fear he may have an ulterior motive.

"Their attitude is, 'Don't bug us, trust us,'" said Clinton Morrison, an analyst with Feltl & Co. in Minneapolis. "But if you're running a company, part of your job is to define what your vision is."

Blustery or optimistic?

Now, as the company casts about for a new strategy, Berman's erratic record as a chief executive may be coming back to haunt him.

In its nine years as a public company, Lakes has bounced from $2 a share to as high as $18 a share, before retreating again. Twice in three years, the company revised its financial statements because of accounting mistakes. And last week, the company announced it had fired its senior vice president of operations, Robert Wyre, the company's third-highest-paid executive, but declined to give a reason.

Analysts who follow Lakes' stock say Berman and his team have lost some credibility on Wall Street by announcing overly aggressive timelines for new casinos.

For instance, in 2003, Berman said construction would start in the first half of 2003 on two Indian-owned casinos, one near Sacramento and the other 70 miles from Chicago in southwestern Michigan. One just opened in August and the other won't open until late next year -- four years later than planned.

Even so, unflagging optimism is one of Berman's strongest traits, say analysts. It's helped him rebound from past mistakes and consistently find new opportunities to make money.

In 1997, for instance, Berman resigned as chairman of Stratosphere Corp., the owner of an ill-conceived casino in Las Vegas that went bankrupt quickly after it opened, but only after investors poured $550 million into the project.

Berman was also criticized for conflict of interest when, in 1999, he tried to arrange the merger of Rainforest Cafe to Lakes Gaming Inc., now Lakes Entertainment. Berman was chairman of both companies. Rainforest Cafe ultimately was sold to another company, Landry's Seafood Restaurants Inc., for $125 million.

A gaming guy

Yet Berman proved adept at gaining management contracts with Indian tribes. In 1999, within a year after Lakes was spun off from Grand Casinos, the company obtained contracts to manage large Indian casinos in California, Michigan and Massachusetts.

Then, in 2003, as regulatory and legal delays were souring investors on Lakes, Berman launched the World Poker Tour on the Travel Channel. The tournaments revolutionized televised poker by allowing viewers to see the players' "hole cards," or down cards.

At the peak of the poker craze shares in WPT Enterprises, a publicly traded subsidiary of Lakes that operates the World Poker Tour, hit $25. They now trade at about $2.50.

Lakes Entertainment is highly profitable -- it made $20.2 million last year on revenues of $29.9 million -- yet the bulk of its revenue comes from WPT Enterprises instead of its core, casino development business.

"Lyle is obviously pretty smart in this sector," Morrison said. "He's made some pretty good money for a lot of people."

The two long-awaited casinos near Sacramento and Chicago will generate up to $60 million in management fees, doubling current revenue, according to Todd Eilers, an analyst at Roth Capital Partners. Lakes also expects to start development next year of a casino and resort hotel in Vicksburg, Miss.

But a string of negative surprises has kept investors from rushing in.

Last month, for instance, the company said its financial results for 2006 and part of 2007 should not be relied upon because of an accounting error related to an exercise of stock warrants. The change will reduce the company's earnings per share last year to 87 cents from 92 cents, though it will increase this year's earnings by 10 cents.

In 2005, the company had to restate its financial statements for 2002 and 2003, following a dispute with the Securities and Exchange Commission over the accounting of loans to Indian tribes.

Crowded business

And a dispute with a tribal council -- that highlights the risks of the Indian gaming business -- has left the company in the hole on a $5 million loan. In January 2005, the Pawnee Nation of Oklahoma hired Lakes to manage one casino and two other proposed facilities, all in Oklahoma. But new members of the Pawnee Tribal Council disputed the agreement. Lakes has written off the loan.

Repayment of casino loans is never certain. Because of tribes' status as sovereign nations, collecting on loans that have fallen into default can be difficult or impossible. Lakes has about $80 million tied up in casino projects, largely in the form of development loans.

Also, the time between signing a management contract with an Indian tribe and opening a new casino is simply too long, Berman said, and the management contracts -- typically five to seven years -- aren't in place long enough to justify the risk.

Besides, most federally recognized tribes that are located near attractive markets already have casinos. All told, 222 Indian tribes operate 423 Indian gaming operations nationwide, according to the National Indian Gaming Association. Nationwide, revenue from Indian gaming has nearly tripled from $8.5 billion in 1998 to $25 billion last year.

On the professional poker circuit, Berman is known as someone who excels at virtually any game, from no-limit Texas Hold 'Em to pot-limit Seven Card Stud.

He is a regular at a high-stakes poker event known as "The Big Game" that draws some of the world's most elite players. Games switch every eight or 10 hands, "so you really have to be versatile at all aspects of poker," said Berman, who in 2002 was inducted into the Poker Hall of Fame.

That versatility may be needed as Lakes seeks to invest that newly flowing cash. Berman said if he sticks to gaming, he'd prefer to use the money to start his own casino, but he's not ruling out the possibility of acquiring a business in a different industry.

"Give me a company with a lot of money and we'll find something to do," he said.

Chris Serres • 612-673-4308

Chris Serres • cserres@startribune.com