Timothy Cope – President and CFO Lyle Berman – Chairman and CEO.

Good day, ladies and gentlemen. And welcome to the Q3 2014 Lakes Entertainment Inc. Earnings Conference Call. My name is Whitney, and I’ll be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session (Operator Instructions).

As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Tim Cope, President and Chief Financial Officer. Please proceed sir..

Thank you, Whitney. Good afternoon. And welcome to Lakes Entertainment’s third quarter 2014 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 a general overview and update on our projects.

I will then discuss the third quarter financial results, 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’ third quarter 2014 earnings call. During the third quarter we announced that we have retained the services of Macquarie Capital as our financial advisor in connection with the evaluation of strategic alternatives aimed at enhancing shareholder value.

Macquarie and other advisors have presented us with numerous potential opportunities, both in and outside the gaming industry.

We have conducted varying degrees of due diligence on several of the opportunities, but based on our due diligence review we determined that consummating tractions involving those opportunities were not in the best interest of the company or our shareholders.

However with the approximate $80 million in cash and short-term investments on our balance sheet we continue to evaluate new opportunities on an ongoing basis in order to maximize shareholder value which is our top priority. Next I will discuss the current status of our investments in certain gaming properties in Ohio.

Based on current information provided by Rock Ohio Ventures we had determined that there is now significant uncertainty surrounding the recovery of our $21 million investment in Rock Ohio Ventures which represents a 10% ownership interest in Rock Ohio Ventures’ 80% ownership in the Horseshoe Casino in Cleveland, the Horseshoe Casino in Cincinnati, the Thistledown Racino and Turfway Park, a thoroughbred race horse track in Kentucky.

The Ohio gaming properties have not performed as expected, which has led to forecasted potential working capital requirements issues that did not exist in prior quarters, based on the information previously available to us.

As a result, we determine that an impairment had occurred and reduced the carrying value of the investment at Rock Ohio Ventures to its estimated fair value of zero as of September 28, 2014.

In all periods prior to September 28, 2014 Lakes had determined that no impairments had occurred because based on the information Lakes received from Rock Ohio Ventures in those periods, there were no events or changes in circumstances that may have had a significant adverse effect on the fair value of the investment.

Our ownership position in Rock Ohio Ventures has not changed as a result of this impairment and we will continue to evaluate this investment at least quarterly. Moving on to operations, Rocky Gap our wholly-owned casino resort property in Western Maryland continues to meet or exceed financial projections.

Quarterly revenues and bottom line results were up from last quarter and from the third quarter last year. Solid results are continuing in October and early November as well. During the third quarter we added 150 new parking spaces, completed the expansion of the fitness center and the remodel of the golf shop.

Even with an increase of 19 more machines this year compared to 2013 we saw increased slot win per unit per day from $181 for the third quarter of 2013 to $199 for the third quarter of this year.

Rocky Gap is an AAA Four Diamond resort that includes a casino, hotel, event center, spa, four restaurants and the only Jack Nicklaus Signature golf course in Maryland. The casino currently features 577 slot machines, 15 table games, two poker tables, a casino center bar, a hotel lobby bar and several food outlets.

As we previously announced during the.

second quarter we entered into an agreement to sell our interest in the Dania Jai – Dania Casino and Jai Alai and highlight for approximately $2.6 million. We received an initial payment of $1 million in April at which time 40% of our original ownership in Dania was transferred to the buyer.

The remaining purchase price was scheduled to be paid in three equal semi-annual installments through October of 2015.

In place of the three remaining payments however Lakes and the buyer negotiated a discounted final payment amount of approximately $1.4 million in consideration of Lakes transferring its remaining ownership in Dania Jai Alai on October 17, 2014.

Finally the Jamul Indian Village is required to begin repayment of principal on our $60 million note receivable when and if a casino opens and certain third party construction and development funds have been repaid. Interest payments of 4.25% on our note receivable would be required immediately upon the casino opening.

This note was written off our books in prior years. The Jamul Tribe is working with Penn National Gaming to develop a casino on the Tribe’s existing reservation. Penn previously announced that it has launched construction activities at the site and is planning to open the casino in mid-2016.

With that I’ll turn the call back over to Tim to provide an overview of financial results.

Tim?.

Thank you, Lyle. Net losses for the third quarter of 2014 were $23.1 million compared to net earnings of $19.6 million for the third quarter of 2013. Losses from operations were $22.8 million for the third quarter of 2014 compared to earnings from operations of $18.8 million for the third quarter of 2013.

Basic and diluted losses per share were $1.72 for the third quarter of 2014, compared to basic and diluted earnings per share of $1.48 and a $1.46 respectively for the third quarter of 2013. Lakes reported third quarter 2014 net revenues of $15.9 million compared to prior year third quarter net revenues of $15.5 million.

Third quarter 2014 net revenues were related to the operation of Rocky Gap Casino Resort. Gaming operations began on May 22, 2013 at Rocky Gap. During the third quarter of 2013 net revenues of $14.1 million were related to the operation of Rocky Gap.

Also included in the prior year third quarter net revenues were $1.4 million of management fees related to the management of the Red Hawk Casino near Sacramento, California, owned by the Shingle Springs Band of Miwok Indians.

There were no management fees earned during the third quarter of 2014 due to the August 29, 2013 termination of the management agreement for the Red Hawk Casino.

During the third quarters of 2014 and 2013, property operating expenses for Rocky Gap were $8.9 million and $8.2 million respectively and primarily related to gaming operations, rooms, food and beverage and golf.

The increase in property operating expenses resulted primarily from an increase in gaming related expenses most notably the gaming taxes due to the increase in gaming related revenue in the current year quarter.

For the third quarter of 2014 selling and general and administrative expenses were $5.5 million compared to $5.4 million for the third quarter of 2013. Included in these amounts were Lake’s corporate selling general and administrative expenses of $1.5 million and $1.3 million during the third quarters of 2014 and 2013 respectively.

Lake’s corporate selling general and administrative expenses consist of primarily payroll and related expenses and professional fees. Rocky Gap selling general and administrative expenses were $4 million and $4.1 million during the third quarters of 2014 and 2013 respectively.

Lakes recognized approximately $17.4 million in recovery of impairment charges during the third quarter of 2013 related to a $57.1 million payment it received on notes receivables from the Shingle Springs tribe that had previously been impaired and were valued at $39.7 million as of the payment date.

During the third quarter of 2013, Lakes recognized a gain of $3.8 million and extinguishment of liabilities associated with contract acquisition cost related to the project with the Shingle Springs tribe due to the termination of the management agreement.

During the third quarter of 2014, Jerry Argovitz was awarded approximately $2.4 million related to an arbitration action brought by Argovitz against Lakes. As a result, Lakes recognized charges related to arbitration award of $2.5 million during the third quarter of 2014 which included the $2.4 million award and $0.1 million of legal fees.

The arbitration action was related to a previous agreement between Lakes and Argovitz. Lakes recognized non-cash impairments and other losses of $21 million during the third quarter of 2014 related to its investment in Rock Ohio Adventures as Lyle mentioned.

Lakes recognized impairments and other losses of $3.4 million during the third quarter of 2013.

Included in impairments were $2.4 million related to intangible assets associated with the development and management agreement with the Shingle Springs tribe which were considered fully impaired from the termination of the management agreement on August 29, 2013.

In addition receivables of approximately $1 million from related parties, that were directly related to the development and opening of Lakes’ Indian casino projects were determined to be uncollectable and were impaired during the third quarter of 2013.

Depreciation and amortization was $0.9 million for the third quarter of 2014 compared to the $0.8 million for the third quarter of 2013.

In summary we have retained the services of Macquarie Capital as our financial advisor and with approximately $80 million in cash and short-term investments on our balance sheet we continue to consider new business ventures and various other strategic alternatives to maximize shareholder value.

We are disappointed that the results of Ohio gaming properties have now caused uncertainty surrounding a recovery of our investment in Rock Ohio and have resulted in the impairment of this investment during the third quarter. It’s important to note however that this is a non-cash impairment which doesn’t affect our current cash position.

We are pleased with the performance of Rocky Gap through the first three quarters of the year and the positive trends that has continued through the first part of the fourth quarter. Now I’ll turn the call over to the operator for questions..

(Operator Instructions). And our first question comes from the line of [Sean Kurwitz at Fundy] Capital. Please proceed..

Good afternoon Lyle and Tim. I guess on a bright note congratulations on the strong performance of Rocky Gap, that continues to impress us. I guess my question is with respect to the Ohio situation and the stock in general, gentlemen on several occasion, Lyle you in particular have stated that in your opinion the stock is undervalued.

That was when the stock was much higher than it is today particularly rather even before today’s substantial decline. Now I fully respect the fact that over time you guys have been bound by confidentiality and other issues which have probably handcuffed your ability to comment on the Ohio assets. I understand and respect that.

But taking the accounting treatment out of the equation and I realize that something just triggered the accounting treatment. I think it seems fair to assume that you had some sense that perhaps the assets weren’t quite as much as you had once hoped or expected and yet nonetheless we are viewing the stock as extremely undervalued at higher levels.

So with that said isn’t it incumbent on you and the Board to try to buyback substantial amount of stock with the stock at these levels, particularly given the balance sheet and particularly given that you have decided not to pursue some other uses of the cash that seem like it did have a very high bar to exceed versus just buying back stock at today’s level.

Can you talk about that a little bit?.

Well, this is Lyle speaking. We continually, as I have said in the past continue to evaluate options of buying back stock. At this point we are still actively looking at other opportunities. I think we have said if we get to the point where we find that we don’t – we have exhausted our at least realistic opportunities we simply would consider that.

If we did buyback stock you can buy back in the open market or you can buyback through a tender offer.

I think we have looked at that and said if we did it would only make sense to do a tender buying back in the open market our stock does not trade at probably high enough levels that we can buyback a significant amount in without doing a tender offer. So we continue to evaluate it and we evaluate it against other opportunities.

Obviously our stock went down significantly today based on this news, although based on the undervaluation prior to this, we didn’t feel that the Street was giving us, our investors were giving us much value in that asset.

That being said to the extent that it was undervalue before, it’s not as undervalued as it was before, obviously because we [inaudible].

However, bear in mind that the write-off is being done to be what we think is the value but it’s not – we didn’t give up our interest or anything just like we did with Jamul, when it was very much uncertain we did write it off and yet we still continue to think that if Jamul opens and performs as we expect, that asset will be put back on our books.

Tim, anything add to that?.

No, I think that’s a fair statement. Lyle we have certainly continually have those discussions on a regular basis at the Board level..

Your next question comes from the line of [Ronald Forest with RLR Partners]. Please proceed..

Just got a couple of questions. First of all, Lyle you just stated that if Penn opens successful you will get your $60 million back. I thought they just have to open where even if they are unsuccessful in operating it, as long as they open then you are entitled to your $60 million and I have a question on that $60 million of [inaudible] $60 million.

How much is that net of taxes that will be added to your cash? And then the other question I have is related to Rock Ohio.

Do you have any further obligation to make capital, contributions if they start running in deficits to maintain your ownership position?.

Let me address the first with Jamul. I think when they open they are obligated to make a cash payment to us on a, I think it’s a quarterly basis of 4.25%. The principal amount of $60 million is not due and payable till after they have reduced the indebtedness to borrowing money to open the casino which we assume would be about seven years.

So our repayment of the debt, I believe comes due at the end of seven years but is not due before unless they have repaid all of the rest of the capital. So but from a real practical standpoint if the casino is not successful, quite frankly they won’t have the ability to pay us back.

So the success of casino is still very much important to us to get payback the money and to get the interest on our loan until the loan is paid back.

With reference to Rock Ohio, we have – they – I am going to put this – they have the right to call an additional approximately $4 million from us which would represent 8% of the total call, which comes to about $4 million. We don’t have an obligation to do it. We only have a right.

However if we don’t put up – right now the 18.5 – we have $21 million invested but the $18.5 million that we’ve invested in the casino’s in an equity position carries a PIK dividend of approximately 15% annually.

If we do not put up the last $4 million and after that we have no obligation whatsoever or rights but after that I am sorry – if we do not put up the $4 million we lose the accumulated PIK interest that is due us.

They have indicated that probably within the next three to four weeks they probably will make that cash call and we will have to address that at that time to see if we believe it’s a valid investment in that..

Okay, you do make that cash call and say further down the line they still have continued losses, would you have any obligations to contribute further capital to retain your still ownership position in Rock Ohio?.

We would have no obligation to put up any more money but obviously new money gets what new money is worth. So certainly if they had another cash call certainly the old equity could be diluted substantially based on the terms and conditions that the new lenders be it Rock Ohio as a lender or outside lenders demand for the new investment..

Okay, and then getting back to my first question about Jamul, $60 assuming you would get that all back, is that net of taxes or is there what would be the tax liability against that $60 million?.

We currently have approximately an NOL of $72 million. So if we would get it all back and all things being equal we show no other profits, it would be all tax free..

Okay, great, thank you so much..

(Operator Instruction). Your next question comes from the line of [John Perry] with Singular Research. Please proceed..

Yeah, good morning gentlemen, little point of clarification on the Rock Ohio investment.

So you got $18.5 million cash investment and total investment of about $21 plus million and the difference between the two is the accumulated PIK interest?.

No, the difference is the cost that we contributed to the referendum to win the right to open the four casinos.

So I think we contributed about $2.5 million for the referendum and then based on basically a cash call of overall potential cash call we were not obligated but had the right to put up no more than $21.6 million and again $22 million we put about $18 million, so we have about $4 million more that they can call which we then have the right to pass on if we choose..

Okay and if you pass on that you will – the accumulated PIK, dividends..

That’s correct..

And how much are those accumulated to….

For the whole company it’s about, not our company but the whole Rock, the PIK interest – PIK dividend is about close to $300 million. I think our share of that is $6 million to $7 million. So Tim would that be about right?..

Correct, that’s above the right level..

And have you’ve been booking that as a non-cash income and through the income statement, and I don’t believe so..

No, there is been no book entry for that because it’s basically PIK equity. So it’s equity on equity..

Okay equity on equity so it’s not really interest income..

Correct..

You’ve talked about possibly going outside the gaming industry to maybe make some investments to enhance shareholder value.

The management team at this point has done I expect most of its fine in the casino industry what would make me think that you could go outside of your demonstrated expertise to go outside of the gaming industry to make an investment.

If you can find something in gaming wouldn’t it just be better to sell off remaining operations and distribute all the cash back to the shareholders, if you can’t find anything in gaming..

That’s certainly a possibility. We do have of course been in gaming, we have a variety of other expertise as we open and manage a great deal have open and managed a great deal restaurants, we’ve opened up hotels, golf courses, many other kinds of hospitality. My former career, I was in the retail business, consumer products businesses.

So I think we do believe that we do have expertise outside of just the gaming industry or casino, the casino, managing casinos. That being said we certainly have said publicly, now there is a few things we don’t look at. We don’t look at high technology, we don’t look at anything medical, we don’t look at business plans.

We’re not venture capital per se in that regard..

Okay, and then in terms of just how long this process might go on? Is it going to be kind of an open ended process or would you say maybe over the course of the next say to 12 to 18 months if you can’t something than something else would be done..

I would say that would be the outside. I would say if we can’t do anything within the next probably 12 months something else would be done..

Okay..

Your next question comes from the line of [Rod Berry with Afila]. Please proceed..

Now I’ve question for Lyle then there’s an opinion question. But basically when I saw your write off this morning I looked at [Tim National] and Tim National seems to – during the third quarter they made a profit on Ohio. And why if Tim National making a profit and if it feels that he just can’t.

They got the smaller casinos and everything you got the largest city in Bronx, Ohio..

Hi this is Lyle again. I’m not familiar with the results in Pan Ohio. I’m just not familiar enough with it. It’s possible they didn’t invest as much money to build the casinos as Rock Ohio did. Tim do you have any comment on that I just don’t..

I think my general comment is that the tiers that the operations in Ohio are operated similarly in terms of profit margins and ability to operate in their particular locations. And this is just speculation of my part but it’s probably related to the capital structure on each of the various companies.

I mean Ten as we know as is a well-capitalized company with deep pockets a lot of cash in the balance sheet. So I’m guessing there is some benefit to them for that reason..

Going back to the same reasoning – have been come out with their third quarter they come out with the Monday. If they don’t have a write down and you do. What should we put in to that think about it? I love – I’d like to have Lyle comment on that subject..

Well obviously we don’t have any control over what Caesar’s does. Certainly we analyze this very, very judiciously and came to conclusion that there was very speculative whether that amount of money is going to be gotten back. I can’t really comment.

If they don’t take a write-down I would be surprised if they didn’t but I don’t know the ramifications of that..

Okay.

My last question is how is the occupancy rate in Rocky Gap and its hotel expenses in the future?.

The hotel occupancy has been very good although we are now coming into our slow season that pretty much runs from now until New Year. We have no plans at this time to expand the hotel or the casino at this point.

We’re comfortable with the size and scope of what it is don’t believe the results would warrant at this point doing expansion of either the hotel or the gaming floor..

Okay.

Is there a potential for now that you have expanded the hotels considerably as far as amenities is there a potential for rise in rate increase?.

There certainly is the rise in rate increase but there is also equally important a rise in marketing to the high gamer in the outside of the let’s just say two to three hour drive. There is somewhere in the neighborhood of 10 million people as you know two hour drive from Baltimore or two hour drive from Washington D.C.

and a three hour drive from the two and half hour drive from Pittsburg. We think their biggest potential rather than rate increase would be to fill those rooms up higher gamers with higher revenue, higher gaming budgets..

Okay. My only question and I thank you and I am going to play attention to what Caesar says Monday about if they say anything..

I think we will do that also..

Okay, thank you..

There are no further questions in queue..

Well there are no further questions. We want to thank everybody very much for tuning in and listening to us we’re obviously disappointed in the Ohio operation.

But I think we are focused very, very much certainly on two thing aspects we’re certainly focused on continuing to improve Rocky Gap but I think equal or even more important we’re very focused on looking at new opportunities hopefully, on the next call we’ll be able to give more clarification to that. For that I thank you. Bye now..

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day..