Nov 6, 2012
Operator
Good day, ladies and gentlemen, and welcome to the Q3 2012 Lakes Entertainment Earnings Conference Call. My name is Darcel, and I will be your operator for today.
[Operator Instructions] Later we will conduct a question-and-answer session. [Operator Instructions]
Operator
I would now like to turn the conference over to your host for today, Mr. Tim Cope, President and Chief Financial Officer.
Operator
Please proceed.
Timothy Cope
Thank you. Good afternoon.
Welcome to Lakes Entertainment's Third 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'd like to remind everyone that this call may contain forward-looking statements, including statements concerning business strategies and intended results and similar statements concerning anticipated future events.
Timothy Cope
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 our discussion today with the general overview and update on our casino projects. I will then discuss the third quarter financial results and recent business events and then we'll conduct a question and answer session.
Timothy Cope
Now I'll turn the call over to Lyle Berman.
Lyle Berman
Thank you, Tim, and welcome, everyone, to Lakes Third Quarter 2012 Earnings Call. As we previously reported on August 3, we closed on the purchase of the Rocky Gap Lodge & Golf Resort near Cumberland, Maryland.
Rocky Gap is a 3A, 4-diamond resort which includes a 250 room hotel, convention center, spa, 2 restaurants and the only Jack Nicklaus Signature golf course in Maryland. We are in the process of finalizing the development plans to renovate the existing facilities, to convert existing convention and meeting space into a gaming facility that will feature approximately 550 video lottery terminals, a casino center bar and a new hotel lobby bar and food outlet.
We also plan to include table games should they be approved today by the voters of Maryland.
Lyle Berman
We currently expect to open the gaming floor during the second quarter of 2013. The existing hotel, restaurants, spa and golf facilities will remain open during the renovation.
The total cost of the Rocky Gap project is currently expected to be approximately $30 million.
Lyle Berman
At the end of the third quarter, we had invested approximately $10 million in the project including the $6.8 million purchase price and the $2.1 million VLT license. Although we have enough cash on hand to fund the entire cost of the project, we may obtain third-party financing for a portion of project costs.
Lyle Berman
The Red Hawk Casino, located near Sacramento, California, again showed improvements in financial results during the third quarter of this year compared to the third quarter of 2011. Red Hawk has made several changes that have increased both top line and bottom line results, including opening a new quick-serve restaurant, consolidating the table games to one area and relocating the gift shop so that more slot machines can be placed in that high traffic area.
Lyle Berman
These changes have also resulted in labor efficiencies, increased energy and a favorable guest reviews. With the focus on strong business fundamentals and operating efficiencies, the property has been able to convert incremental revenue to improve profitability.
We are encouraged by the positive trend of this property.
Lyle Berman
Red Hawk was recently voted Best Casino in the 2012 Strictly Slots magazines, Best of Slots awards in the Native West category that includes Native American casinos in 9 Western states. Red Hawk took home 7 first-place wins, including Best Overall Casino, Best Casino for Real Slots, Best Slot Club, Best Comps, Best Casino for Progressive Slots, Best $0.50 slots and best 5-plus dollars slots.
Lyle Berman
We continue to maintain a 10% ownership interest in Rock Ohio ventures; 80% ownership in the open and operating Horseshoe Casino Cleveland; the casino under development in Cincinnati, which is expected to open in 2013; and the Thistle Downs racetrack.
Lyle Berman
The Horseshoe Casino in Cleveland opened during May and features approximately 2,100 slot machines, 63 table games, a 30-table poker room and multiple food and beverage outlets. The downtown 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, 85 table games, a 31 table World Series of poker -- World Series poker room, food and beverage outlets and a parking structure.
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'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 losses for the third quarter of 2012 were $1 million compared to net losses of less than $0.1 million in the third quarter of 2011.
Loss from operations was $2.5 million from the third quarter of 2012 compared to a loss from operations of $10.5 million for the third quarter of 2011.
Timothy Cope
Basic and diluted losses were $0.04 per share for the third quarter of 2012 compared to $0.00 per share for the third quarter of 2011.
Timothy Cope
Lakes Entertainment reported third quarter 2012 revenues of $3.6 million compared to prior year third quarter revenues of $0.3 million. The increase in revenues was partially due to an increase in fees earned from the management of the Red Hawk casino near Sacramento, California during the third quarter of 2012 compared to the third quarter of 2011.
Timothy Cope
Also positively impacting revenues during the third quarter of 2012 was the addition of $1.7 million in revenue related to the operation of the Rocky Gap resort since August 3.
Timothy Cope
During the third quarter of 2012, property operating expenses for the Rocky Gap was primarily related to rooms, food and beverage and golf for $0.8 million. There were no such expenses during the third quarter of 2011.
Timothy Cope
For the third quarter of 2012, Lakes' selling, general and administrative expenses were $2.8 million compared to $2.5 million in the third quarter of 2011. This increase was due to the addition of administrative costs associated with the operation of Rocky Gap, which were partially offset by decreases in Lakes corporate selling, general and administrative expenses.
Timothy Cope
During the third quarter of 2011, Lakes incurred a loss on convertible note receivable of $4 million related to the potential highlight fronton project in Florida. There were no such losses during the third quarter of 2012.
Timothy Cope
Lakes recognized impairments and other losses of $2 million and $1.1 million during the third quarters of 2012 and 2011, respectively. The current quarter impairments and other losses included $1.3 million related to the write-down of land held for sale near Vicksburg, Mississippi to its agreed-upon sale price.
Lakes expects to close on the sale of this land during the fourth quarter of 2012.
Timothy Cope
Also included in impairments and other losses for the 3 months ended September 30, 2012, were $0.7 million related to costs associated with the development plan for the Rocky Gap project, which were subsequently revised. The prior year third 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 third quarter of 2012 and for the third quarter of 2011. There were no net unrealized losses on notes receivable during the third quarter of 2012.
In the third quarter of 2011, net unrealized losses on notes receivable were $2.7 million related to the project with Jamul Tribe due primarily to ongoing issues in the credit markets.
Timothy Cope
Other income net of expense was $1.4 million for the third quarter of 2012 compared to $1.3 million for the third quarter of 2011, a significant portion of which relates to non-cash accretion of interest on the company's notes receivable.
Timothy Cope
The income tax benefit for the third quarter of 2012 was $0.1 million compared to a benefit of $9.1 million for the third quarter of 2011. Lakes income tax benefit in the current year quarter relates primarily to current income tax benefit.
Lakes income tax benefit in the prior year period was primarily due to 2011 timing differences and related valuation allowances.
Timothy Cope
In summary, we are excited to have closed on the purchase of the Rocky Gap Lodge & Golf Resort and are working diligently on our plan to convert existing convention and meeting space into a gaming facility.
Timothy Cope
Third quarter 2012 results showed improvements over third quarter 2011 at the Red Hawk Casino and we're encouraged by the improvements in results at this property. We continue to work closely with the Red Hawk's executive team, as well as the Shingle Springs Tribal Gaming Authority to manage this property as efficiently as possible.
Timothy Cope
Our focus remains managing our existing business as effectively as possible, while evaluating potential new investments that will enable growth to support creating shareholder value.
Timothy Cope
Now I'll turn the call over to the operator for questions.
Operator
[Operator Instructions] Your first question comes from the line of David Hargreaves with Stern Agee.
David Hargreaves
Could you talk a little bit about what's driving the revenue if it's a recovering economy or not, or sort of visitation and versus a spent per visit and what you see happening there?
Lyle Berman
Well, I think in general, it's 2 things. I think the economy is getting a little better but I think our overall strategy was to become much more focused on value and overall friendliness to the locals, so to speak, primarily in driving it with what we call the mailbox putting a free play into the mailbox for our good slot customers, coupled with incredible value in food pricing.
I think at the end of the day we've seen primarily more visitation. I don't think our revenue per guest has gone up significantly, but we are clearly driving more customers with all the strategy we just talked about.
David Hargreaves
You just said that you're adding some more slots. Could you give us what the unit count currently is?
And are you adding more Class II or Class III?
Lyle Berman
I think you misunderstood. Number 1, we are continually trying to put in more Class II relative to Class III, but if they can perform.
What we've done is rearrange slots to put more slots in -- the same slots but in 2 better areas. One was we combined the pits to the -- if you're going to the front door to the left side so that more slots could be put on the right side which is a more highly trafficked area.
And then we took the gift shop, which was in prime location and moved it to the back of the casino. So we basically took a low margin gift shop operation and put it in the, essentially, the worst slot location, in order to move slots from the worst location to probably now number 1.
So we didn't add any, I believe, we're at like 2,200, 2,150 somewhere in that neighborhood.
David Hargreaves
I see. And then is the CapEx associated with this has been material?
Timothy Cope
No, it hasn't. It's already approved early in the year as a capital improvement plan.
So it's been well managed throughout the year.
Lyle Berman
And most of this, of course, is CapEx is not buying hard goods. But it's just labor and rearranging things.
So it's an inconvenience but it's clearly not extraordinarily expensive.
David Hargreaves
I'm sure you guys probably noticed that Coyote Valley amendment that the governor signed off on. And it was interesting, his comments that accompanied that signing, that must be something that's being looked at.
I'm just wondering if you can let us know if there's any sort of compact discussions going on.
Lyle Berman
I'm going to sound ignorant to you, and I read all my trade magazines pretty good. I'm not familiar with the Coyote camp, what was...
David Hargreaves
They cut the revenue share portion to the Tribe. And specifically on the website, he cites that it was to comply with rigorous requirements that the tribe will be the primary beneficiary of any gaming.
Timothy Cope
Well, that was for the new compact. Yes.
When it comes to the old compact, the tribe with their attorneys, are in negotiations with the state, I think, regularly. But there's nothing that has come of it as of this point.
David Hargreaves
And any update on Sharp Image?
Lyle Berman
Actually, we just discussed that today. But no, it's an appeal.
We feel highly confident that's going to win. We will win the appeal, but again that's not money out of Lakes' pocket.
David Hargreaves
Okay. And there's been a lot of property level management turnover.
And I was just wondering if you guys could sort of bring us up-to-date on the changes and maybe if you feel more -- should we be anticipating more or should we think that things are stable?
Timothy Cope
I think actually it's fairly typical in most casino environments as you're well aware. I think we've certainly stabilized the general management, position some of the key positions underneath that are being filled.
So I think it's just a matter of continuing to look for the best possible team there.
David Hargreaves
Last question. So we're expecting positive comps in the third quarter.
Last year, the third quarter was kind of the weakest quarter. And I'm just thinking looking to the fourth quarter if that isn't somewhat of a more challenging comparison, and any comments you'd be willing to offer will be appreciated.
Timothy Cope
It's hard to comment on fourth quarter. So far so good, I guess would be my only comment through the first month.
But you're right, it's always hard to compare going forward this year. And remember there'll be some disruption going on with the current moves and renovation projects going on.
So I think we've picked a good time to do the upgrades in the casino floor, and I would hope that the comparisons would be satisfactory at the end of the quarter.
Operator
Next question comes from the line of Carl Hanson with Feltl.
Carl Hanson
I appreciate the progress. I think Rock Ohio, I think of it as an invisible growing asset.
I wonder if you've -- if they've been able to finance the continual development or whether they called for more money? And I also wonder if that entity is seeking additional adventures.
I know you said at your Annual Meeting, you thought that all the development could be taken care of by cash flow, which is wonderful but you'll have an asset that's really growing. Is there a way that you can show that?
Lyle Berman
Well, first off, we certainly believe it's a hidden growing asset as you do. We have a minimal investment in it, and we think in the long run it's going to be a very good asset although we're a silent partner and we don't, at this point it doesn't distribute cash.
Relative to the financing, the 3 entities, the Cleveland casino, of course, is fully financed and open. The Cincinnati casino is fully financed and will open in the spring of 2013.
And Thistledown's has been fully financed and is, I think, scheduled to open with about 1,200-plus slot machines, probably in the next 3 or 4 months. All of those facilities are fully financed and although Lakes has a commitment to put in a total of $24 million, I believe we have funded about $19 million although the last $5 million could be called at this point, it appears to us that it won't be.
There is one more entity that we would be partners in if and when -- well, anything that Rock Ohio does in Ohio, we're partners with but anything they do outside of Ohio we are not. They have the right to open one more casino in Cleveland, and if they do that, it's presumed that, that would be financed from the cash flow of the existing 3 operations.
But probably wouldn't be a start of construction for several years. But we don't anticipate other than those 4 things, 2 in Cleveland, Thistledown's and Cincinnati that that's the extent of our partnership with Rock Ohio.
Carl Hanson
The other question about Rocky Gap. You changed plans and took a write-down, kind of, what happened?
Lyle Berman
We originally planned to build an additional 50,000 square foot facility at a total cost in the $64 million range. And when we went out to get financing, unfortunately, we were not able to find the debt component of that.
We were prepared to put in about $20 million of equity and the debt was going to be the balance and we hired a very professional investment firm to go out and find the money for us but at the end of the day they were not able to. So we went back and looked and said what can we do that's going to be almost as good, maybe better, we'll see but we took the 25,000 square-foot convention space, remodeled that -- will be remodeling that completely into a new casino slightly smaller.
Instead of 800 machines, it'll be 550 machines. And then we will be adding more space and reconverting some of the hotel rooms to have meeting space because certainly we still want to be prepared to handle convention hotels -- conventions in Rocky Gap.
Carl Hanson
Well, it sounds like a good plan to me. How expensive is that compared to the $64 million on a new building?
Lyle Berman
About $30 million altogether.
Carl Hanson
Including the purchase price?
Lyle Berman
Yes, including everything.
Carl Hanson
That sounds pretty darn good.
Lyle Berman
Well, we like it and hopefully it will perform well enough so that we'll want to expand very quickly and build it somewhat bigger.
Carl Hanson
Quick question, on the Jamul Tribe, have they made any progress in getting someone else to further their cause?
Lyle Berman
We're not real privy to what's going on there, but we do hear the rumors and we have our inside rumor people. And rumors have it that they are getting very close to making a deal with the casino company which is very good for us and we hope they do.
Carl Hanson
Yes. You can have another hidden asset there.
Lyle Berman
Very much so.
Carl Hanson
And lastly here, the tax loss carry forward, do you still have a big one?
Lyle Berman
Yes. It's in the...
Timothy Cope
By the time we close our 2012, we anticipate to have about a $50 million loss carryforward.
Lyle Berman
But we would very much like to replace that with a $50 million of profits. We look forward to the day when we'll be paying taxes again.
Operator
[Operator Instructions] Your next question comes from the line of Roy Barry [ph]
Unknown Analyst
I'm asking a question about the conference call after quarter 1. And during that conference call, I got cut off, so I'll apologize if I've got my facts wrong.
But anyway, after quarter 1, I remember you were talking about negotiations with the Ohio group. I think you call them Rocks Caesars Ohio that was for some type of convertible bond with up to a 24% premium and then I never heard another word on them.
What is or was the status of those negotiations?
Lyle Berman
I think you might be a little confused. I think what you're talking about was, when we, as well as Rock, put up -- we originally put up $2 million for our share of the referendum.
And had they been able to finance the entire casino projects without any more money, we would have owned our 8% for no more money other than our $2 million. What happened was they needed what amounted to -- our share was $22 million additional monies maybe, up to $22 million, and that represented 8%, so it was in the close to $300 million they needed for what we would call pseudo-equity.
And that money was raised with our money -- we committed to $22 million we put in $16 million, $17 million. So we have about $5 million left.
That new money received a 15% called a pick, payment in kind, meaning we get a 15% interest, but we don't get paid right away. It just accrues.
And then that new money also got 25% of the equity. And I think that's maybe what you're talking about and that's what happened.
But because we're on both sides of the fence, we do get a 15% interest rate accrued on our new money, and then we still own 100% of our equity, 8% of the equity because we participated in both.
Unknown Analyst
Are you taking that money that's accruing in the income or is it just another hidden asset?
Lyle Berman
No. That one is not accrued -- that does not come into income.
Unknown Analyst
Okay. People are discovering lots of hidden assets.
Second question and this one I probably know the answer but I've been reading about Rocks Caesar's Ohio, buying an out-of-state business called the shares in Caesar's Interactive, which is the World Series of Poker and an Internet Poker thing. And are you at all possible that you might be invited into that situation?
Lyle Berman
No, we are not. We are not part of that.
We were not consulted on it and that is a separate entity between a different Rock, same owners, different legal entity than the one we're in. We weren't asked to join, I might have, I think long-term it's a good asset but no, we are not part of that nor do we intend to be.
Operator
Your next question comes from the line of Paul Strigler with Esplanade.
Paul Strigler
Two quick ones. One, given what you said about Rocky Gap generating about $1.7 million in revenue and about, looks like, $800,000 in costs.
Did it actually generate profit this quarter?
Timothy Cope
Yes, it did. Remember, we bought it in August 3.
And so for the first almost full 2 months, net profit was about $180,000.
Paul Strigler
Well, that's a turnaround from when Maryland operated it.
Timothy Cope
Well, we had 2 good months. It's a seasonal business there, so as the winter hits things will probably go the other way.
Paul Strigler
And then can you just talk about what cash flow, operating cash flow was because if you net out the Rocky Gap acquisition it looks like either you were neutral on cash or maybe generated a tiny bit of cash?
Timothy Cope
Yes, I think there's a -- probably, you'll see it in the 10-Q, the cash flow statement, which we'll file tomorrow. But you're right, we generated just slightly positive cash for the quarter.
Operator
And your next question comes from the line of David Hargreaves with Stern Agee.
David Hargreaves
Sorry just a quick follow up, I was wondering when you're going to be reporting the Shingle Springs numbers, the detailed release.
Timothy Cope
It is going to -- the conference call is planned for next Tuesday, and there'll be an announcement going out.
Operator
And there are no further questions at this time.
Lyle Berman
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 earning call. Goodbye.
Operator
Ladies and gentlemen, that concludes today's conference. Thank you for your participation.
You may now disconnect. Have a great day.