Tim Cope - President, CFO Lyle Berman - Executive Chairman and CEO

Tim O'Brien - DG Capital Carl Hanson - Feltl & Company

Thank you, Phillip. Good afternoon, and welcome to Lakes Entertainment's second quarter 2013 earnings conference call.

On the call with me is Lyle Berman, Lakes' Chairman of the Board and Chief Executive Officer. 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 the general overview and update on our projects.

I'll then discuss the second quarter financial results and recent business events, and then we'll conduct a question-and-answer session. Now I'll turn the call over to Lyle Berman.

Thanks Tim and welcome everyone to Lakes’ second-quarter 2013 earnings call. We officially opened the Rocky Gap casino resort on May 22, 2013.

Rocky Gap is a AAA four-diamond resort that includes a casino, hotel, spa, four restaurants and the only Jack Nicklaus signature golf course in Maryland. The casino features 558 slot machines, 10 table games, a casino center bar and a new hotel lobby bar and food outlet.

Although initial results in May and June were below expectations, operations have shown significant improvement in the month of July and August at Rocky Gap. We've implemented marketing initiatives which made the surrounding communities better aware of our offering and we commenced the [busing] program which has been well received.

Hotel occupancy has also increased as we continue to focus on filling our hotel rooms with gaming customers. We look forward to a strong results through fall which has historically been a busy time of the year for the resort.

We also look forward to the expected fourth quarter opening of our new event center at Rocky Gap which will allow us to book group events and various entertainment functions at the property. The total cost of the Rocky Gap project is currently expected to be approximately $35 million.

As of June 30, 2013 we had drawn a total of 10.9 million on the 17.5 million financing facility for this project and during July we drew an additional 1.6 million. As we previously announced on July 17, 2013 we entered into a debt determination agreement with the Shingle Springs Band of Miwok Indians relating to loans Lakes made to tribe for the development of the Red Hawk casino located near Sacramento, California.

Upon satisfaction of certain conditions in the agreement Lakes will be paid a lump sum payment of 57.1 million on or before December 30, 2013, subject to extension up to 120 days which will constitute full and final payment of all debt owed to Lakes as of the debt the payment is made. Upon that date, the management agreement under which Lakes is managing the Red Hawk casino will also terminate.

Till then however, Lakes will continue to manage the Red Hawk and all existing agreements between the Tribe and Lakes will remain in effect. If the 57.1 million debt payment is not made, then all existing agreements between Lakes and the Tribe will remain in effect until the original expiration under their existing terms.

The Red Hawk casino continues to show strong results. Until our management agreement terminates we will continue to work with Red Hawk’s executive team as well as the Shingle Springs Tribal Gaming Authority to manage this property as effectively as possible.

We continue to maintain a 10% ownership interest in Rock Ohio Ventures’ 80% in the Horseshoe Casino in Cleveland, the Horseshoe Casino in Cincinnati, and the Thistledown Racino. The Horseshoe Casino in Cleveland features approximately 2100 slot machines, 89 table games, a 30-table poker room and multiple food and beverage outlets.

The Horseshoe Casino in Cincinnati features approximately 2,000 slot machines, 87 table games, a 31-table World Series of poker room, several food and beverage outlets and a parking structure. The Thistledown's Racino in North Randall, Ohio features its existing racetrack, 1,100 video lottery terminals and new dining and nightlife options.

Finally, we recently entered into an agreement with Dania Entertainment Holdings, LLC relating to the acquisition of Dania Jai Alai from Boyd Gaming Corp. Lakes previously loaned $4 million to Dania which was converted into an indirect ownership of approximately 5% of the company operating the Jai Alai fronton.

That company has a Florida gaming license and is in the development phase of expanding the existing property into a full scale casino operation. With that, I'll turn the call back over to Tim to provide an overview of financial results.

Tim?

Thank you, Lyle. Net earnings for the second of 2013 were $0.2 million compared to net earnings of $0.4 million in the second quarter of 2012.

Loss from operations was $1.2 million for the second quarter of 2013 compared to a loss from operations of $1.1 million for the second quarter of 2012. Basic and diluted earnings were $0.01 per share for the second quarter of 2013 compared to $0.02 per share for the second quarter of 2012.

Second quarter 2013 net revenues were $8.5 million compared to prior-year second quarter net revenues of $2.5 million. The increase was due primarily to the addition of $4.9 million in net revenue related to the operation of the Rocky Gap.

Also contributing to the increase in revenues was an additional $1.1 million in management fees earned during the second quarter of 2013 compared to the second quarter of 2012 related to the Red Hawk Casino. The increase in fees was due to a decrease in operating expenses at the property related to a favorable state revenue share audit.

During the second quarter of 2013, property operating expenses for Rocky Gap which primarily related to gaming operations, rooms, food and beverage and golf were $3.4 million. For the second quarter of 2013 selling, general and administrative expenses were $4.6 million compared to $1.9 million in the second quarter of 2012.

Included in these amounts were Lakes corporate selling, general and administrative expenses of $2.0 million and $1.9 million during the second quarters of 2013 and 2012, respectively. The increase in Lakes corporate selling, general and administrative expenses were due primarily to an increase in professional fees which was partially offset by a decrease in payroll and related expenses and travel expenses.

Rocky Gap selling, general and administrative expenses were $2.6 million during the second quarter of 2013. We expensed certain project preopening costs as incurred.

During the second quarter of 2013, we recognized preopening expenses of $0.9 million related to the Rocky Gap project. There were no preopening expenses during the second quarter of 2012.

There were no impairments and other losses during the second quarter of 2013. We recognized impairments and other losses of $1.4 million during the second quarter of 2012 which included $0.8 million due to the March 2012 determination that we would not continue to move forward with the casino project with the Jamul Indian Village near San Diego, California, and the termination of our agreement with the Jamul Tribe.

Also included in impairments and other losses for the three months ended July 1, 2012 were $0.6 million related to costs associated with development plans for the Rocky Gap project which were subsequently revised. Amortization of intangible assets related to Indian casino projects was $0.3 million for each of the second quarters of 2013 and 2012.

Depreciation and amortization of $0.5 million for the three months ended June 30, 2013 compared to $0.1 million for the three months ended July 1, 2012. The increase related to depreciation on Rocky Gap fixed assets.

Other income, net, was $1.5 million for the second quarter of 2013 compared to $1.4 million for the second quarter of 2012, a significant portion of which relates to non-cash accretion of interest on notes receivable. As of June 30, 2013, Lakes was in a year-to-date pre-tax book loss position.

There was no income tax benefit for the second quarter of 2013 because we have utilized all carry-back potential and future realization of benefits is uncertain. The income tax benefit for the second quarter of 2012 was $0.1 million and resulted from our ability to carry back taxable losses to a prior year and receive a refund of taxes previously paid.

We are excited to have opened new gaming facility at our Rocky Gap Casino Resort. Construction of the event center at Rocky Gap is on track and we expect to open that space during the fourth quarter of this year.

Although initial results at Rocky Gap were somewhat below expectation, we have implemented new marketing plans and we have seen increases in visitation and a growth in revenue. July’s gaming revenue was $3.5 million, an increase of approximately $1 million over June resulting in a slot machine win per unit per day of approximately $175 in July compared to slot win per unit per day of $128 in June.

We have continued to see the same business trends now in July. I will now turn it back over to Lyle to provide a company recap.

Lyle?

Thank you. Rocky Gap is open and currently exceeding budget as we head into the busy fall season.

We anticipate receiving a 57.1 million payment from Shingle Springs within the next 30 to 60 days but of course, it could go to the end of the year, or even longer. Of the $21 million we currently have invested in Ohio properties, 18.2 million is earning 15% payment in kind interest.

Although this interest has not been recorded on Lakes books, 18.2 million will be worth approximately 25 million by the end of the year. We also indirectly own approximately 8% of the Cleveland and Cincinnati casinos and the Thistledown Racino.

Additionally our note with Jamul Tribe, which is capped at $60 million will become due and payable when and if the casino currently in the pre-development by Penn National opens and any third-party casino development funds have been repaid. We will begin receiving cash interest payments of 4.25% once the casino opens.

This note was written off in prior years. In summary, we believe that if we received the 57.1 million payment from Shingle Springs, Rocky Gap performs to expectations and we have no other needs we will have a year-end cash balance of approximately $87 million.

We believe our overall assets have substantial value that are not fully reflected in our balance sheet. And when considered with our cash position gives us flexibility when considering new opportunities that will enhance shareholder value.

I’ll now turn the call over to the operator for questions.

Dania is my question. Two years ago you wrote off $4 million as an impairment charge and the sale was completed during the second quarter, I believe you announced.

Why was not that impairment charge reversed?

This is Tim. We can’t write off impairment charges at this point in time because the project has not yet been completely financed or has received the development approvals necessary to for us to put in type of other value on them.

So it will happen in the next quarter or two?

We don’t think so because it’s just a cost investment, cost accounting investment. So once they start actually operating and distributing their cash to us in some form we will recognize that at that time.

Just first on Rocky Gap. So it looks like during the quarter you guys operated about a little bit over a $1 million loss.

Is this just mainly a revenue issue, or is there anything obviously, you were just open for a portion of the quarter. I think there were some weather issues as well, but anything you could do from a cost side to improve the cost structure of Rocky Gap?

Well, this is Lyle. Any time you open a new facility you do over-staff a little bit.

I would say it was mainly a revenue issue but there are certainly efficiencies that we will start -- we will have implemented it, and we will continue implement, and of course, with the revenue increase we believe we will be in a profitable state.

In terms of marketing that's just started in the current quarter. Now do you guys have a budget for marketing?

So we prepare budgets in advance, we have an annual budget and obviously we allocate that to appropriate months in the particular markets that we are targeting.

However remember that when you are in a tax state where you have a 50% tax, that does impact your ability to spend marketing dollars.

And you mentioned the bus program. Where are you guys running the bus programs from?

We are running them from within probably 100 miles of the facility right now. We have reached out to a little bit further west away such as Baltimore, Washington DC and Pittsburgh areas, but it’s interesting that we are getting a very favorable responses from the community that’s probably within 60 to 70 miles away.

And are these bus programs operating at others that are competitor casinos in close proximity to you guys, or are these new bus programs just set up for your casino?

Yes, some of it is, some clearly are going to other casinos, some go to Atlantic city and some go to the Hollywood casino in West Virginia, some go to the Pittsburgh area. But we are generally – at closest casino to those markets where they start from.

So that does give us a little bit of a competitive advantage.

And then lastly obviously with the money expected to come back to you guys from the Shingle note, you mentioned it allows flexibility for new opportunities to enhance shareholder value. Could you just talk about sort of where a dividend to shareholders might sort of stack up in the things you're considering?

This is Lyle again. We are considering any and all, we are looking at opportunities, I would say certainly a share buyback as an opportunity.

A special dividend would be an opportunity, looking at other companies to invest in both within and without the gaming industry are our opportunities. We have been reluctant to making firm plans until such time as we actually get the money – after all we just signed that agreement a little while ago, we thought we would probably be getting the money perhaps a later in the year.

It appears that we’re probably going to get it sooner. So we and the board are starting to focus on those things.

I mean Shingle is out right now with looking to refi those bonds or their capital structure, and obviously that includes paying your money back. So just how do you guys think about buybacks versus a dividend?

Obviously your stock doesn't trade very much or isn't very liquid. I think maybe doing a stock buyback might be more difficult instead of providing value to shareholders in maybe a dividend.

do you guys [think as well]?

I would agree with both of those that it’s very hard to do a share buyback if you trade by appointment. All I can say at this point because we don’t have any concrete analysis to make but all I will say there is a list of opportunities that we’re looking at, and they are certainly all under consideration.

We have talked to a number of our shareholders who have indicated that they very much look at the dividend as a very favorable use of funds.

Just wondered on the $57 million that you will be getting, some of it will represent the remainder of the contract, and some repayment of the notes. I think the notes have -- you've taken a write-down on them in the past but of the $57 million, how much will apply to the notes and will that be at a gain or a loss?

100% of the payback is regarding to the notes. The notes had a face value of approximately $70 million.

So when we receive the $57 million we will be incurring approximately a $15 million tax loss carry forward coupled with our write-down of the Jamul note, we will have on our book of approximately $65 million tax loss carry forward. But 100% of the 57.1 million relates to the cancellation of the note.

Different subject, on the Jamul Tribe matter, has there been any movement as far as resolving the roads issues?

We are not really – you understand that it’s Penn Gaming that’s their sponsor now and going to be their management company, and we are not privy to any of that, we don’t know any more than what we read in the newspapers and haven’t heard anything about that lately. So we just don’t know the status.

I do know that they announced some time ago they were planning to start construction by the end of this year. However we speculate that was a little bit optimistic and probably won't happen but that’s just the guess on our part.

Hello, gentlemen. I thought it was a nice quarter.

I expected a lot of expense inside Rocky Gap, and at least you broke even for the quarter. I have a question concerning the new convention center that you're building.

That's going to be open, I understand, sometime in the fourth quarter. Do I have that right?

That’s correct.

Have you started doing any marketing for that? Because it occurs to me that that convention center could bring in a lot of people as soon as the word gets around that it's available.

Can you give me a little thought on how you're going to go about marketing this?

Frank, this is Tim. Nice to hear from you again.

We have started that process, when we purchased the property, we didn’t – we were able to maintain all the prior group contacts they had, and we started reaching out to those groups that had been there previously, as well as now starting to market to new groups that, may have they have more of a gaming customer related to more of corporate groups versus say wedding as an example. So we have started the process, we had to wait a little bit to know for sure when the facility was going to be available.

It looks like it certainly is planned to be available now in the November timeframe. So we are starting to ramp up the marketing efforts.

It just occurs to me that that could, I mean if you get a decent size convention, that could bring a lot of people into the hotel, the food business, the gaming business, everything else that you do here, besides them having their meetings?

That’s the intent and I think that’s the main purpose of having that additional space.

Thank you very much operator, for all of your 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 will speak with you again on our next earnings call. Thank you.