Timothy J. Cope - President, Chief Financial Officer, Principal Accounting Officer, Treasurer and Director Lyle A.

Berman - Executive Chairman and Chief Executive Officer

David Hargreaves - Sterne Agee & Leach Inc., Research Division Timothy O'Brien Carl Hanson Paul Strigler James Kayler - BofA Merrill Lynch, Research Division

Thank you, operator. Good afternoon, and welcome to Lakes Entertainment's Fourth Quarter 2012 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 the actual results may differ materially. Lyle will begin our discussion today with a general overview and update our casino projects.

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

Lyle Berman.

Thank you, Tim, and welcome, everyone, to Lakes Fourth Quarter 2012 Earnings Conference Call. As we previously reported on August 3 last year, we closed on the purchase of the Rocky Gap Lodge & Golf Resort near Cumberland, Maryland.

Rocky Gap is a AAA 4-diamond resort that includes a hotel, convention center, spa, 2 restaurants and the only Jack Nicklaus Signature golf course in Maryland. Renovation of the existing facilities to convert convention and meeting space into a gaming facility is ongoing and expected to be completed in the second quarter of 2013.

When finished, the gaming facility will feature approximately 550 video lottery terminals, 10 table games, a casino-centered bar and a new hotel lobby bar and food outlet. The existing hotel, restaurants, spa and golf facilities have remain opened during the renovation.

In addition, we plan to begin construction on a new convention space and meeting rooms at Rocky Gap during the second quarter of 2013, which we expect to open during the fourth quarter of this year. The total cost of the Rocky Gap project is currently expected to be approximately $35 million.

During the fourth quarter of 2012, we closed on a $17.5 million financing facility that will be used to finance a portion of Rocky Gap renovation project. At the end of the fourth quarter, we had invested approximately $12 million in the project, including the $6.8 million purchase price and the $2.1 million VLT license fee.

Red Hawk Casino located near Sacramento, California again showed improvements in both top and bottom line financial results during the fourth quarter of this year compared to the fourth quarter of 2011. Red Hawk opened a new lounge that features a bar, stage, dance floor and space to host VIP events.

The lounge has received favorable guest reviews and is another example of how Red Hawk is improving the customers' experience, which translates into greater guest satisfaction and better financial results. With the continued 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 at this property. We continue to maintain a 10% ownership interest in Rock Ohio Ventures, 80% ownership in the open and operating Horseshoe Casino Cleveland; Horseshoe Casino Cincinnati, which opened March 4; and the ThistleDown Racino, which is expected to introduce VLTs next month.

The Horseshoe Casino in Cleveland opened during May of last year and features approximately 2,100 slot machines, 63 table games, a 30-table poker room and multiple food and beverage outlets. Horseshoe Casino in Cincinnati features approximately 2,000 slot machines, 85 table games, a 31-table World Series of Poker room, several food and beverage outlets and a parking structure.

The ThistleDown Racino in North Randall, Ohio is planned to feature its existing racetrack, 1,100 VLTs and new dining and nightlife options. Lakes previously loaned Dania Entertainment Center $4 million, which was written off in 2011 and had a management agreement to manage the Jai Alai facility, which was terminated in the initial transaction purchase -- the Jai Alai facility failed to close in 2011.

In February 28, Boyd Gaming Corporation announced that it had entered into a definitive agreement to sell the assets of Dania Jai Alai in Dania Beach, Florida to Dania Entertainment Center. The Dania Entertainment Center recently partnered with a third party, who's financing the acquisition and who will manage the facility, subject to the completion of the Jai Alai purchase transaction, which is expected to take place in the second quarter of this year.

Lakes promissory note has been converted into approximately 5% of Dania Entertainment Center. Lakes will have no management responsibility when this expected purchase closes.

As we enter 2013, 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.

With that, I'll turn the call back over to Tim to provide an overview of recent business issues and financial results.

Thank you, Lyle. Net earnings for the fourth quarter of 2012 were $2 million compared to net losses of $12.7 million in the fourth quarter of 2011.

Loss from operations was $1.9 million for the fourth quarter of 2012 compared to a loss from operations of $16.8 million for the fourth quarter of 2011. Basic and diluted earnings were $0.07 per share for the fourth quarter of 2012 compared to losses of $0.48 per share for the fourth quarter of 2011.

Lakes Entertainment reported fourth quarter 2012 revenues of $2.8 million compared to prior year fourth quarter revenues of $1.3 million. The increase in revenues was primarily due to the addition of $1.4 million in revenue related to the operation of the Rocky Gap Lodge & Golf Resort.

During the fourth quarter of 2012, property operating expenses for Rocky Gap, which is primarily related to rooms, food and beverage and golf, were $0.8 million. Since Rocky Gap was acquired in August 3, 2012, there were no such expenses for the fourth quarter of 2011.

For the fourth quarter of 2012, Lakes selling, general and administrative expenses were $3.1 million compared to $2 million in the fourth quarter of 2011. Included in these amounts were Lakes' corporate, selling, general and administrative expenses of $1.9 million during the fourth quarters of 2012 and 2011 and Rocky Gap selling, general and administrative expenses of $1.2 million during the fourth quarter of 2012 and administrative costs associated with the acquisition of the Rocky Gap Resort of less than $0.1 million during the fourth quarter of 2011.

The increase was due to the addition of administrative costs associated with the operation of Rocky Gap after it was acquired in August 3, 2012. Lakes recognized impairments and other losses of $0.1 million during the fourth quarter of 2012 compared to $5.9 million during the fourth quarter of 2011.

Impairments and other losses for the fourth quarter of 2011 included losses of $3.3 million related to the early termination of Lakes airplane lease. Also included were impairments of $1.3 million due to declines in the estimated fair value of land owned by Lakes in Vicksburg, Mississippi and impairments of $1.3 million due to the continued uncertainty surrounding the completion of the project with the Jamul Indian Village near San Diego, California.

Due to Lakes' corporate strategic objectives, during March 2012, Lakes determined that it would not continue to move forward at the Jamul Casino project and terminated its agreement with the Jamul Tribe. Amortization of intangible assets related to the operating casinos was $0.3 million for the fourth quarter of 2012 and for the fourth quarter of 2011.

There were no net unrealized losses on notes receivable during the fourth quarter of 2012. The net unrealized losses of $9.8 million in the fourth quarter of 2011 were primarily due to the termination of the agreement with the Jamul Tribe.

Other income net of expense was $3.6 million for the fourth quarter of 2012 compared to $1.3 million for the fourth quarter of 2011. The increase in other income net of expense during the fourth quarter of 2012 related to a favorable legal settlement of $2.2 million.

A significant portion of the remaining other income net of expense in both periods relates to noncash accretion of interest on notes receivable. The income tax benefit for the fourth quarter of 2012 was $0.2 million compared to a benefit of $2.7 million for the fourth quarter of 2011.

The income tax benefit in the fourth quarters of 2012 and 2011 resulted from our ability to carry back taxable losses to prior year and receive a refund of taxes previously paid. In summary, we look forward to opening the gaming facility at Rocky Gap, a company-owned asset that is expected to be accretive to our financial results.

Our stable balance sheet continues to provide us flexibility in evaluating new opportunities where we can potentially utilize our available free cash in our balance sheet. Management fees from the Red Hawk Casino were up over the prior fourth quarter and overall, compared to 2011 due to the continued improvements and performance at this property.

We continue to work with the Shingle Springs Gaming Authority to achieve the best possible results at the casino operation. Our focus remains on our existing operations, while evaluating business opportunities that will create shareholder value.

Now I'll turn the call over to the operator for questions.

Have you heard anything more about needing to contribute any money to Rock Ohio?

No, we haven't. They seem to be moving ahead well on their own with the funds they have.

And at this point, we have not been notified or requested for any additional capital.

Okay. And you don't think that will change?

We're not led to believe it will be at this time. Obviously, we still have that commitment.

But it doesn't appear that it's needed at this time.

Okay. Is there anything new on the Sharp Image lawsuit concerning the Red Hawk Casino?

Not to our knowledge. And we don't comment on litigation matters, but there's nothing new at this point that I'm aware of.

Okay. What kind of promotion or advertising are you planning for the opening of casino at Rocky Gap?

Well, generally as all other casinos do, we'll have an opening event. But that is in our busy season.

It's already an existing opening -- open operation and we'll open in middle to end of the second quarter. So it's already a busy season, therefore, that type of facility of lodge, resort.

So we expect a large demand already with existing customers. But certainly, we want to make the general public aware that's now a casino.

So there'll be a lot of marketing just to explain the fact not so much that it's open, but that it's now a casino that's open.

What kind of visibility do you have on the occupancy at the Rocky Gap at this time of the year?

Well, currently our occupancy is quite low. It's a seasonal business.

Plus, we're under renovation projects right now. So we are purposely not trying to fill the hotel to its maximum because we're redoing the hotel rooms as well.

So the rooms are under renovation, too. But as we proceed into the summer months, we certainly expect the occupancy to be quite high.

With respect to Red Hawk, I understand that there's a compact amendment going on and that there are certain requirements to reorganize certain obligations or change the various obligations associated of the tribe heads. And I'm wondering if you could give us any sort of comment on how that process is moving along.

It's probably a better question for the tribe, David. As we all know, the compact is public.

There's basically 3 criteria that the tribe needed to accomplish for the compact to become effective. And I think basically, they need to enter a new arrangement with the county, which I think they are -- have done or very close to have done.

They need to enter a new arrangement with Lakes, as far as Lakes debt. And they need to enter a new arrangement with the current noteholders as far as the noteholder debt.

So all up to the tribe at this point in time. There are certain timeframes, like for example, our situation has it -- basically at the end of 2015 date and I think the noteholders are another year passed that.

So it's in the works, I guess, I would say. But it's more of a question for the tribe.

Should I take that to mean that you haven't really started doing anything with respect to Lakes obligations then yet?

No, like I said, it's really up to the tribe at this point in time, so we certainly continue to work with them on the management of the operation at this point.

Could you give us any sense as to what the overall tone of business in the Sacramento area is like now? And whether you need...

Well, I'd say it's probably very competitive. As you're probably aware of, in Thunder Valley has certainly become very competitive with their marketing campaigns, as well as Jackson Rancheria.

They've just recently completed their new, I think, $80 million renovation that's completed there in the last few months. So that's become more competitive.

Everybody's looking forward to the Graton Rancheria opening probably the fourth quarter of this year. And so there's certainly going to be some effect on everybody at that point.

Do you think that, that's something that could reach as far as Shingle Springs with a great impact?

I think so. Only from the standpoint, customers in San Francisco will now have another choice, right?

They can choose to go to Red Hawk, Thunder Valley, Cache Creek or, now, Graton Rancheria. So I am sure there'll be some impact.

Okay. Any words on Buena Vista and their efforts to debt financing and open something?

Not to my knowledge. It hasn't been accomplished.

So other than that, I don't know.

All right. And Boyd, I think, was working with the Sacramento area tribe and seeking to get land into trust.

Do you know if they filed anything? Or...

Not that I'm aware of.

I guess, just first, can you elaborate on what you mean by, "it's up to the tribe" at this point? Have you started negotiations with them?

Or is that something that's not even come up yet?

This is Lyle. I think it's fair to say we have -- we are -- have ongoing preliminary negotiations with the tribe, but certainly nothing of substance has been agreed to yet.

Okay. Is it contemplated that it only -- you'd only consider a new agreement with regards to the debt and that you'll continue to manage the property going forward?

Or is that also up for negotiation?

I think everything is up for negotiation. So it's kind of a fluid thing.

But it's clearly -- it's a black piece of paper that everything is negotiable.

Got it. In terms of Maryland, do you have a breakout on how much you think you'll spend of your cash versus how much you'll use the credit facility?

I think it's 50-50. We think it's a $35 million total all-in, and we intend to use $17.5 million of our cash and $17.5 million of the credit facility.

Got it, okay. And looks like right now, you're running about, if my numbers are right here, about $3 million a quarter for SG&A now with Rocky Gap.

Are there any areas where you feel that you can cut to lower SG&A expense, especially if the Shingle management fees go away?

We have done a great deal of looking at reducing our SG&A. Our SG&A, I believe, several years ago was in the -- Tim, correct me, in the $12 million to $13 million range.

And I'm discussing now cash out. I think this coming year, it's going to be more like in the $7 million range, $7 million to $8 million.

But on the other hand, the Rocky Gap, of course, includes -- bumps that up quite a bit.

So, is that $7 million to $8 million with Rocky Gap now?

No, $7 million to $8 million without.

And then how much do you think Rocky Gap will add to that?

Tim?

Yes. Well, we're working on that forecast right now on the budget.

But when we talk about SG&A Rocky Gap, you got to remember it includes things like credit card fees, marketing, media placements. Those are the bigger numbers when you talk about an SG&A number at Rocky Gap operation as compared to when you're thinking of just an corporate overhead-type of a layer.

Right. I guess with operations minus Shingle Springs, do you think you can run the business and generate cash and be free cash flow positive?

If we were not to have Shingle Springs fees?

Yes.

No, we would be in a position to substantially reduce SG&A at the corporation.

I noticed the Jai Lai thing, I haven't seen any previous announcement. Is that sort of a resurrection of the $4 million note matter that you wrote off?

Yes, that's correct. That has to do with the same situation, same facility.

And you'll be making an announcement at such time as you make a formal commitment, is that what's -- why you haven't announced it earlier?

Yes, that's correct. The transaction between the new owner and Boyd has yet to close.

But it will -- you have an additional investment on your part?

No.

No. We will make no more cash investment.

Oh, okay. So you're going to have an interest because of the note matter?

That's correct.

And I think you said 5%?

That's correct.

Well, that sounds better than what you had.

That's correct, too.

Anyway, the Rock Ohio matter, there's got to be huge surprises going on there. Is there any way that numbers will be reflected where we can see them?

I know you won't -- you don't plan on taking anything in the income until you get dividends. And as long as they're continuing to plow the money back in further development, which is wonderful, you won't be recording any income.

At some point because Caesar's manages it and Caesar's is a public company with a republic -- reporting entity, I believe at the year end of their statement, they will be disclosing the financial results, for at least the revenue line and their management fees.

And will it be readily easy to determine what Lakes is going to get out, what value?

Well, I think so. Because once they've disclosed that publicly, then we'll be able to -- or people who follow us, investment bankers will be able to ascertain at least an idea of what it's worth.

Can we just get some more detail on the legal settlement?

Sure. That had to do with -- actually it was -- it goes back to the WPTE situation when we were a large owner of WPTE.

They actually settled the lawsuit with the Deloitte & Touche, and we were the recipient of our share.

And then in terms of the change in cash from Q3, so you have $2.2 million there. I think you mentioned the -- some tax return money.

Anything else that was an inflow?

Other than management fees and some deferred payments under deferred management fees from Red Hawk, that's the cash inflow.

My questions actually were answered.

Well, we want to thank you. Tim and I want to thank you all for joining our conference call and we look forward to another one in another 3 months.