Aug 8, 2012
Operator
Good day ladies and gentlemen and welcome to the Second Quarter 2012 Lakes Entertainment Inc Earnings Conference Call. My name is Pam and I will be operator for today.
[Operator Instructions] As a remainder, this call is being recorded for replay purposes.
Operator
I would now like to turn the conference over to Mr. Tim Cope, President and Chief Financial Officer,
Timothy Cope
Thank you, Pam. Good afternoon and welcome to Lakes Entertainment’s second 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 preparatory marks I would like to remind everyone that this call may contain forward looking statements, including statements concerning business strategies and the 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.
Timothy Cope
Lyle will begin a discussion today with the general overview and update our casino projects. I will then discuss the second quarter financial results, recent business events and then conduct a question and answer.
Timothy Cope
Now I will turn the call over to Mr. Lyle Berman.
Lyle Berman
Thank you, Tim, and welcome, everyone to Lakes second quarter 2012 earnings call. As we recently announced we are pleased that on August 3 we closed on the purchase of the Rocky Gap Lodge & Golf Resort near Cumberland, Maryland.
Rocky Gap is a AAA 4-diamond resort which includes 215-room hotel, convention center, spa, 2 restaurants and the only Jack Nicklaus Signature golf course in Maryland.
Lyle Berman
With purchase price of approximately $6.8 million was paid at closing. Contemporaneous with the closing, Evitts Resort, our holding own subsidiary, entered into a lease with the Maryland Department of Natural Resources for approximately 260 acres of real property on which Rocky Gap is situated.
The initial lease term is 40 years.
Lyle Berman
Earlier this year, Evitts was awarded a video lottery operation license for Rocky Gap by the State of Maryland Video Lottery Facility Location Commission. The Commission recently approved Evitts’ revised development plan which include the renovation of the existing facilities to convert the approximately 24,000 square feet of convention and meeting space into a gaming facility that will feature a minimum of 500 video lottery terminals, a bar and a food outlet.
Lyle Berman
The total cost of the rocky gap acquisition and development project is expected to be between $25 million and $30 million. We currently plan to fund the entire cost for the project was company cash but they obtained third party financing for a portion of the project costs.
The Red Hawk Casino located near Sacramento, California again showed improvements in both top line and bottom line results during the second quarter of this year compared to the second quarter of the prior year.
Lyle Berman
Red Hawk has also seen increased spending per guest, which has resulted in increased gaming and non-gaming revenue. These improvements are largely attributed to attractive promotional offerings, liberal gaming products, excellent dining and Red Hawk philosophy of offering quality and value throughout the property.
Lyle Berman
Recently, the property enhanced the casino floor and opened a new fast serve dining venue also on the casino floor which have resulted in positive feedback from the guests. With a focus on strong business fundamentals and operating efficiencies, the property has been able to convert incremental revenue to improved profitability.
Lyle Berman
In addition to improved results, Red Hawk has again won the lion’s share of Viewers’ and Readers’ Choice recognition awards both locally and in the gaming publications including being named Sacramento area’s best casino.
Lyle Berman
We continue to own a 10% interest in Rock Ohio ventures, which owns 80% in the casino projects in Cincinnati, Cleveland, Ohio and Thistledown’s Race Track in Cleveland.
Lyle Berman
During the second quarter we made an additional investment of $4.5 million bringing our total investment in Rock Ohio of $20.2 million. The Horseshoe Casino in Cleveland opened during May and is performing well.
This casino features 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 the spring of 2013 and 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.
Lyle Berman
We continue to evaluate other business opportunities to determine the best possible manner in which to increase shareholder value. We remain well positioned to pursue these opportunities because of our stable balance sheet and no debt.
Lyle Berman
With that I will turn the call back over to Tim to provide an overview of recent business issues and financial results. Tim?
Timothy Cope
Thank you, Lyle. Net earnings for the second quarter of 2012 were $0.4 million compared to net earnings of $9.5 million in the second quarter of 2011.
Loss from operations was $1.1 million for the second quarter of 2012 compared to earnings from operations of $15.8 million for the second quarter of 2011. Basic and diluted earnings were $0.02 per share for the second quarter of 2012 compared to earnings of $0.36 per share for the second quarter of 2011.
Timothy Cope
Second quarter 2012 revenues were $2.5 million compared to the prior year second quarter revenue of $28.2 million. The decrease in revenue was primarily due to the buyout and the management agreement for the Four Winds Casino Resorts in New Buffalo, Michigan during June 2011.
Pursuant to the buyout agreement the Pokagon Band of Potawatomi Indians paid the Lakes a buyout fee of approximately $24.5 million.
Timothy Cope
The decrease was partially offset by an increase in fees earned from the management of the Red Hawk Casino during the second quarter of 2012 compared to the second quarter of 2011. Revenues in the current year quarter related to the management of the Red Hawk Casino.
Timothy Cope
For the second quarter of 2012, Lakes’ Selling, General & Administrative expenses decreased in comparison to the second quarter of 2011 by approximately $0.4 million to $1.9 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.
Timothy Cope
Lakes recognized impairments and other losses are $1.4 million and $0.6 million during the second quarters of 2012 and 2011, respectively. The current quarter impairments and other losses included $0.8 million during March 2012 determination that Lakes would not continue to move forward with the casino project with the Jamul Indian Village near Santiago, California and the termination of Lakes Agreement with the Jamul Tribe.
Timothy Cope
Also included impairments and other losses for the 3 months ended July 1 2012 were $0.6 million related to costs associated with development plans for the Rocky Gap project which was subsequently revised. The prior year second quarter impairments and other losses were due primarily to uncertainties surrounding the completion of the project with the Jamul Tribe.
Timothy Cope
Amortization of intangible assets related to the operating casinos was $0.3 million for the second quarter of 2012 compared to $9.2 million for the second quarter of 2011. The decrease in amortization costs related primarily to the buyout of 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.
Timothy Cope
Net unrealized gains on losses on notes receivable relate to the company’s notes receivable from Indian tribes for casino projects that are not yet opened which are adjusted to estimated fair value, based on the current status of the related tribal casino projects and evolving market conditions.
Timothy Cope
There were no net unrealized gains or losses on notes receivable during the second quarter of 2012. In the second quarter of 2011, net unrealized losses on notes receivable were $0.1 million related to the project with the Jamul Tribe due primarily to ongoing issues in the credit markets.
Timothy Cope
The net amount of other income was $1.4 million for the second quarter of 2012 compared to $1.3 million for the second quarter of 2011, a significant portion of which relates to non-cash accretion of interest on the Company’s notes receivables.
Timothy Cope
The income tax benefit for the second quarter of 2012 was $0.1 million compared to a tax provision of $7.7 million for the second quarter of 2011. Lakes’ income tax benefit in the current year quarter was primarily associated with the Company’s ability to carry back its estimated 2012 taxable loss to a prior year and receive a refund of taxes previously paid.
This benefit was partially offset by current income tax provision. Lakes’ income tax provision in the prior year period consisted primarily of current income tax provision.
Timothy Cope
We are pleased that second quarter 2012 results showed improvements over the second quarter of 2011 at the Red Hawk Casino and we continue to work closely with the property’s executive team as well as the Shingle Springs Tribal Gaming Authority to manage this property as efficiently as possible with the goal of continuing this positive trend.
Timothy Cope
We are also very excited to proceed with the development of a gaming facility at the Rocky Gap property. We are currently operating the existing hotel, golf course, restaurants and spa, all of which are planned to remain open during development.
We currently expect the gaming facility to open in mid-2013.
Timothy Cope
We also remain optimistic about our investment in Rock Ohio Ventures which recently opened its first casino in Ohio and the development of the second casino and the track is well are underway.
Timothy Cope
Our focus remains on achieving increased shareholder value by maximizing returns from existing operations and investments as well as evaluating potential new projects.
Timothy Cope
Now I’ll turn the call over to the operator for questions.
Operator
[Operator Instructions] And your first question comes from the line of David Hargreaves with Sterne Agee.
David Hargreaves
I was wondering if you could give us any updates on the Sacramento market and what you’re seeing in that environment.
Timothy Cope
This is Tim. I guess in general based on obviously the results at Red Hawk, there seems to be a slight improvement in the market based on what we just internally evaluate our competition there.
I would say that we’re more than holding our own, but the economy in general, I think, continues to be challenging in Northern California or in general.
David Hargreaves
You probably heard there’s a high-yield bond deal out for the Graton Rancheria now. What is your perspective on how that might impact Shingle?
Timothy Cope
Well, it’s Tim. I guess my initial reaction is any new competition, any new casino project in that general Northern California market would certainly have some effect.
But I do think it won’t have a material effect in Red Hawk just simply due to location. Graton proposed project is in the North Bay area, our primary bay area customers comes from the South Bay or East Bay, so it’s a little tough -- it’s just a tougher drive to get from -- around the bay there from where Graton is to get over to Red Hawk Casino.
They potentially will affect the casinos closer to them in that northern part of the city.
David Hargreaves
Any updates you’re able to provide on a potential compact amendment or negotiating process?
Timothy Cope
No, I think in compact, negotiations are really strictly between the tribe themselves and the state.
David Hargreaves
I see. And any key dates we should be aware of and with respect to the Sharp Image appeal that are coming up?
Timothy Cope
I wish I could tell you on, but we don’t know of any key dates coming up, either.
David Hargreaves
And at the property, has the leadership transition and -- what can you can say about continuity there?
Timothy Cope
I think it’s been very well received. I mean the nice part of the new general manager, Brian deLugo, he had been there already for a couple of years as the gaming vice president and it is a casino and so it’s very nice to have the continuity of the senior leader coming from the gaming side of operations and I think we’re seeing the benefit of some of the initiatives that are taking place there.
Operator
[Operator Instructions] And your next question comes from the line of Carl Hanson [ph] with Philips [ph].
Unknown Analyst
Tim and Lyle. It’s nice to see the success going forward.
I wonder about Ohio -- Rock Ohio operations whether you will be picking up any equity and earnings in your accounting statements and also if there is going to be any additional investment or what the cash flow kind of carry at this point?
Timothy Cope
Well, this is Tim, and speak to the accounting we -- because we own 10% of Rock’s 80% since we were an 8% owner, as a result our accounting rules, our purchase accounting is basically just cost accounting process in cost basis. So our line item on the balance sheet won’t change until such time is their dividends issue.
Lyle Berman
Well, this is Lyle Berman. When it comes to additional moneys, we were originally obligated.
We’re -- to commit certain amounts of moneys to the project and we’ve committed $20 million and we have approximately I think $5.5 million to $6 million left. We don’t know if that’s going to be needed or not.
We hope not, I think our partners hope not too. If we do it, the casino in Cleveland is already open and funded as is the Cincinnati Casino, all funded.
They may need a little more, what I’ll call pseudo-equity for the Thistledown’s Racetrack, but it’s going to open -- primarily it’s going to open as a temporary facility in its current location and then I believe their overall plan is to move it, I think it’s to the Akron area, I think it’s Akron.
Lyle Berman
So at this point, there is a possibility we will contribute $6 million more, but very possibly not.
Unknown Analyst
Does that mean your cash flow from the existing casino is already throwing off some pretty good cash?
Lyle Berman
Well, I’m sure it’s throwing off cash, but we don’t get it, I mean it’s not distributing cash because there’s a high debt service on it.
Unknown Analyst
And I guess, getting back to Rocky Gap, you have enough cash on hand to finance the redevelopment so to speak, but once it’s complete -- or you have to find long-term financing?
Lyle Berman
We are very apt to find long-term financing once it’s complete. However, we may even find long-term financing before it’s complete.
Unknown Analyst
Sounds good to me. It looks like next year you’re going to have several gaming operations.
Lyle Berman
Yes, hopefully and hopefully we’ll be announcing one or two more.
Operator
And your next question comes from the line of Steven Chang with Rudgear Capital.
Steven Chang
With Red Hawk, it appears that you received some payments back from them? Is that correct and was that interest or principal payments or payments for your management services?
Timothy Cope
We were seeing some from the deferred management fees that have been accrued from earlier period.
Lyle Berman
Just to clarify, we get fees from, we earn management fees, sometimes they are payable, sometimes they are accrued, depending on whether the waterfall does allow to be paid. We get interest on our debt and we do not get, we have waved any principle repayments on our debt until, I believe, 2014.
In addition, anytime the tribe, the waterfall does not provide the tribe with $500,000 we lend the tribe $500,000 and then it gets paid back when the waterfall allows it. So, sometimes we have been accrual both for management fees and that $500,000.
I believe as we speak today, we are all even on the $500,000 loans, is that correct Tim?
Timothy Cope
That is correct.
Lyle Berman
And we have, we do have -- I think in the neighborhood of $4 million to $4.5 million of earned management fees but not paid. They are 100% current and always have been, the interest on our loan, and like I said, we voluntarily agreed with the tribe, principle repayments in the first I think it goes for 2 years until 2014.
Steven Chang
But the fact that they did pay some of the management fee payable, that indicates that there is a level of, it’s generating enough cash to make that payment.
Lyle Berman
That is correct.
Steven Chang
And with Rocky Gap, when would you need to start spending on the construction of that?
Lyle Berman
We expect to start around November 1. And it will be about a 6-month project, we’re not building a new building, we’re redoing the 24,000 convention space, and we’re adding a little more parking but not a parking deck.
So, it shouldn’t be more than a 6-month period, so we expect to open sometime in the second quarter of 2013 as opposed to our older plan was over a year impact for construction.
Operator
And your next question comes from the line of Shawn Kravetz with Esplanade Capital.
Shawn Kravetz
My question has been answered.
Operator
And the next question comes from the line of Roy Barry [ph] with -- a private investor.
Unknown Attendee
And if I’m repeating something, I got cut off twice, so I may have missed something. But I have 2 questions for Tim Cope.
Tim, according to your 2011 end of the year statement, there is a $20 million allowance for impaired notes receivable on Red Hawk. Now the Red Hawk is profitable, when do you envision taking that $20 million back into income?
Timothy Cope
Roy [ph] , it’s a good question. And really what that impairment is based on is long-term forecast of future cash flows and if they’re -- it’s assured in such that they can repay our notes 100% over a certain period of time.
So, we’ll certainly be evaluating that again at the end of this year but as of right now we wouldn’t make the change until we go back through and work with the property and determine another long-term cash plan.
Unknown Attendee
Okay. So, it’s possibly in the end of the year situation?
Timothy Cope
It’s possible. We certainly will evaluate it again at the end of the year.
Unknown Attendee
Okay. It would go back to income in the balance sheet?
Timothy Cope
That would be true.
Unknown Attendee
Okay. My second question is, on Ohio future income; hopefully you’ll be getting some we’ll get a lot to praise in the papers.
Will you be using the cost method or the equity method of income reporting? I think they both are available.
Timothy Cope
It’s cost method because of -- basically because of our percentage ownership, lack of in-control, just a strictly passive investment. So, we are using the cost method.
Unknown Attendee
So, in effect, if they don’t distribute money, you don’t report income?
Timothy Cope
That’s correct.
Unknown Attendee
Unless they keep it for, say something like Cincinnati?
Timothy Cope
I think it really needs to be distributed out of the company to us before we could report it as income.
Unknown Attendee
Okay. So, in other words, if they hold Cincinnati money, do they -- are they required to distribute it before you put money back in Cincinnati, or are they, do they -- can they put money in the say, we put money in you or for Cincinnati?
Timothy Cope
Well, they couldn’t do it on our behalf. I mean, our obligation, as Lyle mentioned earlier is to fund up to that another $5 million approximately to keep our 10% interest.
And that includes the money into Cincinnati.
Lyle Berman
However, when you say Cincinnati, you are aware that the Casino is completely funded?
Unknown Attendee
No I’m not.
Lyle Berman
Yes, the Cincinnati Casino is completely funded 100%.
Unknown Attendee
So, in other words, right now it’s just a pre-opening situation?
Lyle Berman
That’s funded too. We don’t expect to see any money from the Cleveland operation going to supplement Cincinnati at this time, I mean it could happen but I don’t believe it...
Unknown Attendee
So, your only real funding requirement is the Rocky Gap?
Lyle Berman
And we’re obligated for $6 million more -- up to $6 million more, we’d say possibly might need for Thistledowns.
Unknown Attendee
Okay. Then I’ve got the third question on that since Thistledown is rearing its -- into the future sometime next spring, will you be a part of the Thistledown situation?
Lyle Berman
Yes, we are. We own 8% of that as well.
Unknown Attendee
So, there may be some funding on Thistledown later on?
Lyle Berman
Only up to our $6 million obligation, that’s the most we have to put back in.
Unknown Attendee
Now, let me ask another question while I’m thinking about it. You are operating the motel at Rocky Gap right now?
Lyle Berman
We’d like to call the hotel.
Unknown Attendee
Hotel. Yes, it’s beautiful, by the way.
I love the picture. Will you be reporting in the next quarter profit and loss from the hotel operation?
Timothy Cope
Yes, we will.
Unknown Attendee
Have you got a handle on any -- whether it’s going to be profitable or not or you’re just starting?
Timothy Cope
Well, we’re just starting. Obviously, it’s a very seasonal project right now obviously because it’s a resort destination.
So, we’re entering into the fourth quarter, which will obviously be the slower part of the season. But it’s hard to tell.
It’s -- it’s a property that has been under the guidance -- potential sale for since -- for 5 years since Maryland had authorized a casino license to be placed there. So, historically, through no fault of their own, they’ve been hesitant to do any proactive operations.
So, as a result of that, hotel occupancy has suffered because we didn't know if we had a place to sell or not, or any rooms to sell. So, I think our challenge right now is to improve the existing operations.
And then as we enter into the slower period, get the renovation, construction period started like Lyle mentioned. So, we can open the first part of next year, second quarter with a casino operation as we head into their tour season.
Unknown Attendee
I might have one more question. According to this morning’s Maryland Paper, the governor of Maryland wants to authorize Black Jack and table games and in this special session.
Have you got any plans for expansion in the Black Jack and table games if they should suddenly open up in the next month or so?
Timothy Cope
Absolutely, our redesign plan is configured in such a way that we would include table games.
Operator
And your next question comes from the line of Jerry Lintner [ph], Private Investor.
Unknown Attendee
My question relates to Cincinnati and Cleveland Casinos. As I understand the conversation about the equity method of accounting, no income will be recognized by the company until there is a cash distribution received.
I guess, the question would be, as I’m thinking through the dynamics of that, my assumption is that all the cash will be dedicated to paying debt service for a few years as provided in the loan documents. Can you share with us, when under those loan documents that cash might be available to be distributed out to Lakes?
Timothy Cope
This is Tim. I’m certainly not privy to that particular loan arrangements or other future forecasts, and we wouldn’t be able to comment on that anyway.
We don’t comment really on future operations and certainly not our own operations. So, unfortunately I just would not be able to give you a good guess on that.
Unknown Attendee
Is that loan document a public document somewhere?
Timothy Cope
I don’t believe it is.
Operator
And your next question comes from the line of Kent Green with Boston American Asset Management.
Kent Green
Yes, my question pertains to just a housekeeping question. And Tim, I’m sure you could answer this.
Invest for the consolidated investee -- that’s your Ohio operations?
Timothy Cope
That’s correct.
Kent Green
And then, the notes of interest receivable, $36 million, do you anticipate any more impairment of that particular amount?
Timothy Cope
Not at this time. That is the fair value at this point on the Shingle Springs note.
Operator
And with no further questions in queue, I would like to turn the call back over to Tim Cope for closing remarks.
Timothy Cope
Well, thank you operator and thank everyone for the questions. We will focus on continuing to execute on our strategy of generating shareholder value.
Thank you once again for your interest in Lakes. And we’ll speak with you again on our next earnings call.
Operator
Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation.
You may now disconnect. And have a great day.