May 9, 2012
Operator
A very good day to you, ladies and gentlemen, and welcome to your First Quarter 2012 Lakes Entertainment Incorporated Earnings Conference call, hosted by Tim Cope and Lyle Berman. My name is Chris, and I'll be your conference coordinator for today.
[Operator Instructions] At this stage, I would like to turn the call over to Tim Cope to begin. Please go ahead.
Timothy Cope
Thank you, Chris. Good afternoon, and welcome to Lakes Entertainment's First Quarter 2012 Earnings Conference Call.
On the call with me is Lyle Berman, Lakes' Chairman of the Board and Chief Executive Officer.
Timothy Cope
As we begin our prepared remarks, I would like to remind everyone that this call may contain forward-looking statements, including statements concerning business strategies and their intended results and similar statements concerning anticipated future events. These statements are subject to risks and uncertainties, including those risks described in our filings with the SEC, and actual results may differ materially.
Lyle will begin our discussion today with a general overview and update on our casino projects. I'll then discuss the first quarter financial results, recent business events, and then we'll conduct a question-and-answer session.
Timothy Cope
Now I will turn the call over to Mr. Lyle Berman.
Lyle Berman
Thank you, Tim, and welcome, everyone, to Lakes' First Quarter 2012 Earnings Call. As we recently announced, we are pleased to report that the Maryland Video Lottery Facility Location Commission awarded Evitts Resort, a subsidiary of Lakes, the video lottery operation license for the Rocky Gap Lodge & Golf Resort in Cumberland, Maryland.
The unanimous decision to award the license to Evitts was made April 26, and is contingent on certain approvals by the Maryland State Board of Public Works, as well as Evitts obtaining construction financing. We've agreed to buyout our partner in the project, resulting in Lakes wholly owning Evitts Resort.
We are currently working through the buyout process, and expect it to be finalized within the second quarter. Our proposal for this project includes purchasing the existing 4-diamond Rocky Gap Lodge & Golf Resort, which includes a 215-room hotel, convention center spa, 2 restaurants and the only Jack Nicklaus Gulf Course in Maryland.
We also plan to expand parking, and initially construct approximately 50,000 square feet of new space. This new space is currently planned to open in the third quarter of 2013, with a minimum of 850 video lottery terminals, a new restaurant and live entertainment bar.
Lyle Berman
As we previously reported during March, we terminated our development and financing agreement with the Jamul Indian Village. Lakes had an agreement with the Jamul Indian Village to develop a gaming facility on its reservation located outside of San Diego.
Although we believe that the Jamul Casino project continues to have great merit, due to our corporate strategic objectives, we determined that we would not continue to move forward with the project. The Jamul tribe remains obligated to repay all of the advances, including accrued interest, but it is not contemplated that the Jamul tribe will have sufficient funds to make such payments unless it opens a gaming facility on its reservation.
Lakes continues to have a collateral interest in all revenue from any future casino owned by the Jamul tribe and the casino's furnishings and equipment.
Lyle Berman
The Red Hawk Casino located near Sacramento, California again showed improvements in both top line and bottom line results during the first quarter compared to the first quarter of the prior year. Visitation to the casino was up over the first quarter of last year, resulting in increased gaming and non-gaming revenue.
Recently, the property named Brian deLugo its new general manager. Brian is overseeing several key initiatives that have been a success for the property over the past 2 years.
We look forward to working closely with Brian in offering the best possible gaming product, while focusing on improving operational efficiencies at the Red Hawk Casino.
Lyle Berman
We maintained a 10% interest in the Rock Ohio Ventures' 80% ownership in the planned casinos in Cincinnati and Cleveland, Ohio. The first phase of the casino project in Cleveland is nearly complete, and is planned to open May 14.
This phase of the casino is expected to feature approximately 2,100 slot machines, 63 table games, a 30-table poker room and multiple food and beverage outlets. The Cincinnati casino is under construction and is planned to open in 2013.
The Cincinnati casino is planned to feature approximately 2,000 slot machines, 116 table games, including poker, food and beverage outlets and a parking structure with approximately 2,500 spaces. As a company, Lakes continues to be uniquely positioned with a stable balance sheet and no debt.
We continue to evaluate business opportunities to determine the best possible manner in which to increase shareholder value.
Lyle Berman
With that, I'll turn the call back over to Tim to provide an overview of recent business issues and financial results.
Timothy Cope
Thank you, Lyle. Net earnings for the first quarter of 2012 were $1.8 million compared to net earnings of $1.4 million in the first quarter of 2011.
Loss from operations was $1.6 million for the first quarter of 2012 compared to earnings from operations of $1.2 million for the first quarter of 2011. Basic and diluted earnings were $0.07 per share for the first quarter of 2012 compared to earnings of $0.05 per share for the first quarter of 2011.
Timothy Cope
Lakes reported first quarter 2012 revenues of $2 million compared to prior year first quarter revenues of $5.9 million. The elimination of revenues from the management of the Four Winds Casino Resort in New Buffalo, Michigan is a result of the buyout of the management agreement for that property during the second quarter of 2011 was the primary reason for the decrease in revenues during the first quarter of 2012 compared to the first quarter of 2011.
The decrease was partially offset by an increase in fees earned from the management of the Red Hawk Casino during the first quarter of 2012 compared to the first quarter of 2011.
Timothy Cope
For the first quarter of 2012, selling, general and administrative expenses decreased in comparison to the first quarter of 2011 by approximately $0.4 million to $2.3 million. This decline resulted primarily from decreases in travel and related expenses due to the termination of the company's aircraft lease during the fourth quarter of 2011, as well as decreases in payroll and related expenses.
These decreases were partially offset by an increase in professional fees related to the Rocky Gap project in Maryland.
Timothy Cope
Impairments and other losses were $0.9 million during the first quarters of 2012 and 2011. The current quarter impairments and other losses were the result of the March 2012 termination of Lakes' agreement with the Jamul tribe.
The prior year first quarter impairments and other losses were due to uncertainty surrounding the completion of the project with the Jamul tribe. Due to the termination of Lakes' agreement with Jamul tribe and the previous write-down of the related notes receivable, there were no net unrealized gains or losses on notes receivable during the first quarter of 2012.
First quarter of 2011 net unrealized gains on notes receivable were $0.9 million related to the project with the Jamul tribe due primarily to improvements in the credit markets during that period.
Timothy Cope
Amortization of intangible assets related to the operating casinos was $0.3 million for the first quarter of 2012 compared to $1.9 million for the first quarter of 2011. The decrease in amortization cost is related primarily to the buyout of the casino agreement and the management agreement for the Four Winds Casino Resort, which resulted in the full amortization of the remaining intangible assets associated with that project during the second quarter of 2011.
Other income, net, was $1.3 million for the first quarter of 2012 compared to $1.3 million -- $1 million for the first quarter of 2011, a significant portion of which relates to non-cash accretion of interest on notes receivable.
Timothy Cope
The income tax benefit for the first quarter of 2012 was $2 million compared to a tax provision of $1 million for the first quarter of 2011. Lakes' income tax benefit in the current year quarter is primarily due to the company's ability to carry back its estimated 2012 taxable loss to the prior year and receive a refund of taxes previously paid.
Lakes' income tax provision in the prior-year period consisted primarily of current income tax provision.
Timothy Cope
In summary, the Red Hawk Casino continues to show improvements, and we'll continue to work closely with the Shingle Springs Tribal Gaming Authority as well as the properties' executive team with a goal of operating this property as effectively as possible. Additionally, we look forward to developing the Rocky Gap casino project as quickly as possible once all necessary conditions are met.
We continue to focus on existing operations and investments, as well as evaluate potential new projects in order to achieve increased shareholder value. I will turn the call over to the operator for questions.
Operator?
Operator
[Operator Instructions] And our first question today is from the line of Steven Chang from Rudgear Capital.
Steven Chang
Can I ask on the Red Hawk property, do you regularly get paid either your management fee or your -- or are there any regular repayments on the note receivable? And if not, how much do margins or revenue need to improve at Red Hawk so that you would start to see repayment?
Timothy Cope
A couple of answers to that question. Regarding the notes payable, if you recall, a year ago, we agreed, in conjunction with the tribe, to defer the receipt of any principal payments on the Lakes' notes until the beginning of 2014, which is after the FF&E notes are paid.
So currently, we are not getting any note payments on our principal. We do, however, each month get interest paid.
Current cash interest is paid each month to Lakes. And as far as the management fees are concerned, we earn management fees on a monthly basis, depending again on the net income calculation, and we are paid on management fees as allowed to the waterfall process.
So each month stands alone on the waterfall calculation.
Steven Chang
And a bigger picture question. Obviously, every casino project has risks, and is it fair to say that for Red Hawk and for the project with the Jamul tribe that those were particularly difficult because they were planned years ago before the recession?
So when we look at future projects, there's unlikely -- you can plan the economics of future projects around the current environment. Would that be a fair way of looking at the -- how past projects compared to future projects?
Lyle Berman
I think -- this is Mr. Berman talking.
I think that's a fair statement. Certainly, in the Red Hawk case, the economy of Sacramento is one of the -- was and is one of the worst in the country.
And our benchmark of success there was the success that Thunder Valley had before the recession, and we know that their numbers have gone down substantially as well. With Jamul, the same is true.
But of course, we haven't even opened yet because of a bunch of difficulties. So by the time that opens, if and when it ever does, the economy might be different.
Operator
We have no further questions at this time. [Operator Instructions] We have another question from Steven Chang.
Steven Chang
On the last call, I know you mentioned the future projects would most likely be casinos that you own and operate yourself rather than with a partner or as a passive investment. How does that change the prospects of future casinos?
Lyle Berman
I think what we said was -- I don't think we said we wouldn't do things with partners. What we said is that we are primarily in the past have been focused on Native American gaming, and we don't see much opportunity in that space in the future.
Almost every tribe that has a good location and has all the rights to open a casino has already done so. The ones that are available now are typically tribes that need federal recognition or land in trust and they cost a great deal of money and probably take 5 to 10 years if ever to develop, and we don't see that as our modus operandi.
So we are looking for other opportunities with or without partners. For example, in Maryland, we saw an opportunity that fit us and we started with a partner, but then decided the partner -- that we would buy the partner out and would do it on our own.
We could may or may not bring in a partner in the future there. So we're not objecting to partners, but we are saying we're focusing on things that we can own and operate.
Steven Chang
With Maryland, would you -- is there capital you need to commit before construction begins? Or would you be...
Lyle Berman
Yes, yes, absolutely. We're talking about a project that's in the neighborhood of $60 million to $65 million total investment, and I believe we are -- at least, we -- I think we've stated to the commission that we plan to finance about $40 million of it and we would commit about $20 million of our own capital unless we have partners and/or unless we can borrow more and put up less.
Steven Chang
In the tax rate, the gaming tax rate at 50% is obviously higher than what's the tax rate in Ohio. Does that change the upside you have in -- with that property?
Lyle Berman
It clearly changes the upside. However, it's not quite 50% because in this case, the state of Maryland buys all of the slot machines.
So we don't put out any capital for that. And they have certain responsibilities for maintenance and improvement on those same machines.
So that is one benefit. Number two, because we aren't in a location that has direct competition right next door, you can assume that the marketing cost will be somewhat less than you would find in a market where your competitors are next door to each other.
So there are some offsets, but clearly, you have to run leaner and meaner in a market that has a 50% tax. As you know, originally, it was 67% in this location and nobody even applied for the license.
It wasn't until 50% that they got a little applicants. However, the rest of Maryland is still 67%.
Operator
We have no further questions at this time.
Lyle Berman
Thank you, everyone, for listening in, and we look forward to talking to you with more -- hopefully more good news at the next conference call. Thank you.
Bye now.
Operator
Thank you very much, Tim. Thank you very much, Lyle.
Ladies and gentlemen, that does now conclude your conference call for today, and you may now disconnect your lines. Have a great day.
Thank you very much for joining.