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Winnebago on a roll to a financial empire

WINNEBAGO, Neb. - The Winnebago tribe is on a roll, expanding economic interests with its recent movement into convenience stores and a leveraged buyout of a Minnesota manufacturing company.

Just a few short years ago, the picture was very different for a tribe struggling to find a way to help tribal members. Restraint in distributing casino profits paired with the financial wizardry of a tribal member who traded a high-profile law career for a tribal economic development corporation, a made the difference.

Tribal Chairman John Blackhawk said the tribe's move to separate government from business ventures and the ability of Ho-Chunk Inc.'s CEO Lance Morgan propelled the tribe into the world of high finance. It is bringing with it opportunities for other tribes as the Winnebago continue to invest, he said.

The tribe, which gave 20 percent of its casino profits to the development corporation for two years, parlayed the investment into a corporate entity that is changing the face of how tribes can conduct business.

It's Internet company, billed as the largest site for American Indians, brings in a tidy profit.

"We put in place a long-term plan. It allows us to be flexible and to adapt. We've grown a real environment that's conducive to helping business grow. Our Internet company down the street has the two largest sites for Native Americans," Blackhawk said.

It is assisting other tribes in the region with the financing businesses. One example is a call center being built on the Pine Ridge Indian Reservation in South Dakota.

"We're financing the construction of the building. We're doing it in exchange in our equity interest in the company. We suspect we will be the largest private employer by this time next year on the Pine Ridge Indian Reservation," Morgan said.

Ho-Chunk Inc. is buying Dynamic Homes, the largest home manufacturer in Minnesota, a publicly traded company. HCI just received authorization from the Securities and Exchange Commission to complete the purchase, he said.

The deal was to be formalized at a shareholder meeting Dec. 28, Morgan said.

"It will be one of the first buyouts of a publicly traded company by an Indian tribe. You can buy its stock on the NASDAQ," he said prior to that event.

HCI bought 10 percent of the company and Morgan has a seat on the board of directors.

"They didn't want anything to do with the tribe. We formed a partnership with two other directors so it's a management lead, leveraged buyout," he said.

"When we get that done - we used to pay a certain amount in federal taxes, but we can internalize those dollars and use that to pay off the debt."

"The Winnebago Tribe is really on a roll," he said.

A camera shy Morgan sat in his chair in front of his computer donning a baseball cap, casual dress and a pair of sneakers ready to run to his next meeting while juggling the company's finances.

Speaking with pride of the tribe's more recent business venture into convenience stores, he said it has been a struggle to work around state tax laws to supply them with gas.

"We used to have pay the state taxes and apply for a refund. Ninety percent of our business was Indian, so one day I wrote a letter and told them that wasn't happening anymore and that we would send them the non-Indian money. We shifted the balance. In order to do that we had to apply for a wholesaler's license for gasoline so we bought the gas tax free," Morgan said.

They didn't like it, but they were OK because we kept sending them checks. Even the state's forms didn't have a place for accounting the sales tax so Nebraska had to change its forms, he said.

Tax revenue increased for the state.

Complicating the issue was the Omaha tribe, a Winnebago neighbor, making the decision to sell gas without remitting sales tax.

"The Omaha tribe decided they were going to sell gas tax free. I kept asking them how they were going to do it. Federal law requires we collect taxes on non-Indians unless the tribe has created some kind of value on the reservation. Nobody would sell it tax free. They weren't doing anything on the tobacco plant," he said.

"The problem is really making the state of Iowa mad. The state of Iowa has actually gone and threatened people who have actually sold gas to us, even though it is perfectly legal for us to buy gas as a wholesaler tax free. They have gone to them and said, 'If you sell to them and they sell to the Omaha tribe, we're going to assess the tax to you.'"

The state sued a wholesale vendor and nobody wanted to sell to the Winnebago-owned company.

"We asked Iowa to go into negotiations with us. They had it in a bill that was vetoed. We've been trying for the last year to do this. They have been making threats and there is a series of letters that go back and forth. At the same time, they were aggressively trying to build a case to stop us. For the last couple of months, nobody would sell any gas because of the threats from Iowa," Morgan said.

"Iowa had no ability to stop that because we were buying in it Nebraska. We were able to buy gas for our stores here. That made it expensive for us and it limited us."

At the same time, he said middle-level state officials launched a smear campaign to prevent the Winnebagos from buying and selling the gas.

The dispute is handled in the same way it would be in an interstate sale," he said.

Abolishing a 5-cent tax on non-Indians and implementing a 3-cent tax on anyone buying gas on the reservation allowed to tribe to apply taxation more fairly, he said.

"We didn't implement the tax until we had done enough value-added processes on the reservation to make it legal," he said.

"The key determinant in that balancing test is what the tribe does on the reservation. We buy the fuel and blend it in our ethanol blending plants. That is considered a manufacturing process by the federal government."

"Each stage of the process happens on the reservation. It is all coordinated by Native American companies. It is delivered to a tribally owned store. The employees are tribal members. The profit goes back to the tribe and the tax goes back to the tribal roads department."

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Morgan said the tribe was really forced into creating a tax structure to fuel its business environment.

"It is something that was incrementally developed and we've been forced into. Now the end result is that we have three businesses that will generate $250,000 to $300,000 in tax revenue - a tribe that has almost no tax revenue.

"This is the largest ever tax for us," he said.

HCI's convenience stores, including those in Sioux City, Iowa, are selling the least expensive gas in the region on average upsetting non-Indian competitors.

"It is certainly perceived as unfair, but it is certainly our right to implement any tax we want," he said.

"We went to the trouble of buying all the stations on the reservations so we wouldn't have to directly put anyone out of business and the political ramifications," he said.

While the owners of competing convenience stores are grumbling, he said, they will have to live the competition.

"We can't fail to run our government because we're afraid of upsetting some non Indian business owners," he said.

The tribe still has a fair number of passive investments such as motels, but has begun a divestiture in the motel business in favor of investments offering a higher return.

"As we get older, we anticipated, we're getting smarter and more sophisticated," Morgan said.

Blackhawk said, "Sometimes its hard for government leaders - to trust them to do those things. That's the real difference.

"We have had many, many people in our community, non-Indians who have raised their children here selling gas, selling groceries and doing things on this reservation. I know this because I went to school with them. They had cars and I didn't.

"They paid minimum wage and worked hard. They didn't have lucrative contracts with outsiders. They did all the work themselves and so I know there are ways to generate revenue if we do it correctly."

Being autonomous permits creativity in approaching business interests and Blackhawk is quick to credit Morgan for much of the success.

"But you have to be real fortunate. Where else would we get somebody to do those things? Where else would we get somebody that graduated from Harvard and worked at a prestigious law firm? Where else would you get a tribal member to come back and do those things?" Blackhawk said.

While Morgan might find critics, the tribe can hardly argue with the company's profit and loss statement.

"You can't fight with Ho-Chunk Inc. when you look at the revenue and the amount of success. Five years ago, we had zero. Now they have about $20 million in assets. We charged them with generating revenue for the tribe and they're doing that," Blackhawk said.

Trying to hold back the fray of tribal members who want a slice of the pie when it comes to revenue is no easy task, but Blackhawk reminds tribal members the investments are for the long-term strength of the tribe.

"What some of our members want is that revenue right now. I say no, no, no. We can wait. Let's wait until it's $120 million. Then, when you talk about 3 percent or 5 percent, there is a lot of difference than with $20 million," he said.

"Because if you are really committed, as a tribal leader this goes beyond this. This goes beyond our lives. I'll never see it. I may be dead and gone. Our tribe will be strong and do what ever we want to do in terms of education, welfare and whatever.

"We have to have that patience. We have to make big sacrifices. Because if we are not willing do that, I really question your ability to lead the people."

While adult tribal members may not reap the rewards and even those growing up may not see it, their grandchildren will so long as the tribe continues to invest, he said.

"I'm very, very proud that since we started this investment portfolio in 1994, we've not touched it.

"It's difficult because I could sure use $1 million to look good here or there," he said.

One year ago when the revenue was low because of riverboat casinos moving into Iowa, tribal leaders had to explain to tribal members why revenue had diminished.

"We tried our best to keep gaming out of Iowa. It is a difficult, expensive proposition," he said.

"We pay thousands of dollars for a lobbyist in Washington. We have a lobbyist on board in Iowa and Nebraska, but these things are expensive things, but they are worthwhile. We are aware of these legislative things that go down."

Instead of a knee-jerk reaction, Blackhawk said tribal leadership is able to respond before deadlines move closer. And, the tribe has been educating legislators so they understand the impact of state lawmaking on tribal communities.

One of the other keys to success is the tribe's effort to give back to the surrounding communities by donating to an assortment of programs, Blackhawk said.

"We gave $35,000 to the Ronald McDonald House a few years back and we bought them a van. We're having a meeting today at the Sanford Center. We're helping put a roof on their building. They provide athletic programs in Sioux City for some on our reservation," he said.

While Blackhawk concedes local businesses complain about the competition, he says it is really not much different than a clientele frequently going to Wal-Mart versus smaller local stores.

About 600 people leave Iowa Beef Processing Plant during shift changes that bring plenty of buyers to pumps of the Winnebago convenience store in South Sioux City. Blackhawk says if the market becomes more competitive, the tribe is ready for it.

"We welcome that competition. It makes us a little leaner and meaner in terms of what we do," he said.