GOLDEN ENTERTAINMENT, INC. - Quarter Report: 2011 October (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended October 2, 2011

or

For the transition period from              to             

Commission File No. 0-24993

LAKES ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

(952) 449-9092

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

As of November 14, 2011, there were 26,405,679 shares of Common Stock, $0.01 par value per share, outstanding.

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LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

INDEX

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Part I.

Financial Information

ITEM  1. FINANCIAL STATEMENTS

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands)

See notes to consolidated financial statements.

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LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Earnings (Loss)

(In thousands, except per share data)

See notes to consolidated financial statements.

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LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Cash Flows

(In thousands)

See notes to consolidated financial statements.

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LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

1. Basis of Presentation

Interim Condensed Consolidated Financial Statements

The unaudited consolidated financial statements of Lakes Entertainment, Inc., a Minnesota corporation, and Subsidiaries (individually and collectively “Lakes” or the “Company”), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. Accordingly, certain information normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensed and/or omitted. For further information, please refer to the annual audited consolidated financial statements of the Company, and the related notes included within the Company’s Annual Report on Form 10-K, for the year ended January 2, 2011, previously filed with the SEC, from which the balance sheet information as of that date is derived. In the opinion of management, all adjustments considered necessary for a fair presentation have been included (consisting of normal recurring adjustments). The results for the current interim period are not necessarily indicative of the results to be expected for the full year.

Certain immaterial reclassifications to amounts previously reported have been made to conform to the current period presentation, affecting certain components of long-term assets related to Indian casino projects.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Lakes and its subsidiaries. In addition, as discussed in note 3, Investment in Evitts Resort, LLC and Development Services and Management Agreement, the financial position of Evitts Resort, LLC is consolidated in the Company’s consolidated balance sheet as of October 2, 2011, and its results of operations for the three and nine months ended October 2, 2011 are included in the Company’s consolidated statements of earnings (loss) and cash flows. At October 2, 2011, approximately $2.1 million of the Company’s consolidated total assets related to Evitts Resort, LLC.

All material intercompany accounts and transactions have been eliminated in consolidation.

Investments in unconsolidated investees, which are less than 20% owned and the Company does not have the ability to significantly influence the operating or financial decisions of the entity, are accounted for under the cost method. See note 8, Investment in Unconsolidated Investee.

2. New Accounting Standards

In April 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring (Topic 310) (“ASU 2011-02”). ASU 2011-02 clarifies the guidance on a creditor’s evaluation of whether a concession has been granted to a debtor and whether a debtor is experiencing financial difficulties. ASU 2011-02 is effective for the first interim or annual reporting period beginning on or after June 15, 2011. Lakes adopted ASU 2011-02 on July 4, 2011, which did not have an impact on its consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820) (“ASU 2011-04”). ASU 2011-04 includes updated accounting guidance to amend existing requirements for fair value measurements and disclosures. The guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value but whose fair value must be disclosed. It also clarifies and expands upon existing requirements for fair value measurements of financial assets and liabilities as well as instruments classified in

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shareholders’ equity. ASU 2011-04 is effective for the first interim or annual reporting period beginning after December 15, 2011. Lakes does not expect the adoption of ASU 2011-04 to have a material impact on its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), to increase the prominence of other comprehensive income in financial statements. Under this guidance, entities will have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. ASU 2011-05 eliminates the option in U.S. GAAP to present other comprehensive income in the statement of changes in equity and is effective for the first interim or annual reporting period beginning after December 15, 2011. Lakes does not expect the adoption of ASU 2011-05 to have a material impact on its consolidated financial statements.

3. Investment in Evitts Resort, LLC and Development Services and Management Agreement

On September 22, 2011, Lakes entered into a joint venture with Addy Entertainment, LLC to form Evitts Resort, LLC (“Joint Venture”), which submitted a response to a request for proposal by the State of Maryland Video Lottery Facility Location Commission (“Commission”) for a video lottery operation license (“License”) in Allegany County, Maryland. The Commission will evaluate applications and award the License to operate a video lottery operation at the Rocky Gap Lodge & Golf Resort in Cumberland, Maryland (“the Resort”). The License has an initial term of 15 years and is expected to be awarded in late 2011. Lakes made an initial investment of approximately $2.1 million (“Initial Investment”) in the Joint Venture which was used to fund the application fee for its response to the request for proposal. The Initial Investment represents a majority ownership interest in the Joint Venture and as a result, the financial position and results of operations of the Joint Venture are included in the Company’s consolidated financial statements as of October 2, 2011. The Initial Investment will be returned by the Commission if the License is not awarded to the Joint Venture. If the Commission awards the License to the Joint Venture, under the Joint Venture agreement, Lakes must invest an additional $7.9 million and will continue to be the majority owner of the Joint Venture. The Joint Venture will be required to raise additional funds to fully finance the development.

Also on September 22, 2011, Lakes entered into a Development Services and Management Agreement (“Maryland Management Agreement”) with the Joint Venture, to develop and manage the gaming facility and existing facilities at the Resort. If the Joint Venture is awarded the License, as compensation for its services under the Maryland Management Agreement, Lakes will receive a monthly fee equal to two percent (2%) of total revenues, plus a monthly incentive fee equal to five percent (5%) of earnings before interest, taxes, depreciation, and amortization (“EBITDA”).

4. Convertible Note Receivable at Fair Value and Development Services and Management Agreement

On August 23, 2011, Lakes Florida Development, LLC, a wholly-owned subsidiary of Lakes, entered into an operating agreement with Dania Entertainment Center, LLC (“DEC”) for the management and redevelopment of the existing Dania Jai Alai fronton in Dania Beach, Florida (“the Casino”). DEC had previously entered into an asset purchase agreement to purchase the Dania Jai Alai fronton from Boyd Gaming Corporation (“Boyd Acquisition”). Lakes made an initial $4.0 million investment in the joint venture via a convertible promissory note which would automatically convert to equity on the closing of the Boyd Acquisition. The principal balance of the note bears interest at a fixed rate of two percent per annum.

On September 22, 2011, a lawsuit was filed by a third party against the city of Dania Beach, Florida alleging that the city of Dania Beach did not follow the proper process for approving the development agreement between DEC and the city of Dania Beach. On October 26, 2011, the Florida legislature introduced legislation proposing to permit full casino resorts in southern Florida. Due to these factors, and in addition to a deterioration of the credit market since entering into the operating agreement, DEC’s ability to obtain financing to close the Boyd Acquisition by the intended date of November 28, 2011 has been hindered. As a result, under the terms of Lakes’

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existing agreement with DEC as discussed above, the conversion of the note receivable to equity will likely not occur by November 28, 2011. Therefore, the convertible note receivable was written down to zero as of October 2, 2011 and a loss on convertible note receivable of $4.0 million is included in the accompanying consolidated statement of earnings (loss) for the three and nine months ended October 2, 2011.

Also on August 23, 2011, Lakes Florida Casino Management, LLC, a wholly-owned subsidiary of Lakes, entered into a Development Services and Management Agreement (“Florida Management Agreement”) with DEC, wherein Lakes agrees to perform certain development and management services for the redevelopment and management of the Casino. The Florida Management Agreement may be terminated only upon mutual agreement, upon a material default by Lakes (as that term is defined in the Florida Management Agreement), or if Lakes does not invest an additional $6.0 million and the Boyd Acquisition closes. As compensation for its services under the Florida Management Agreement, for each fiscal year of the Casino’s operation, Lakes would be entitled to compensation equal to a monthly fee in the amount of two percent (2%) of total revenues, plus a monthly incentive fee equal to five (5%) percent of EBITDA. If the Boyd Acquisition does not close, Lakes would not manage the Casino under this agreement.

5. Buy-Out and Termination Agreement

On June 30, 2011, the Pokagon Band of Potawatomi Indians (“Pokagon Band”) exercised its right to buy out the remaining term of the Third Amended and Restated Management Agreement (“Management Agreement”) between the Band and Great Lakes Gaming of Michigan, LLC, a wholly-owned subsidiary of Lakes, for the management of the Four Winds Casino Resort, which was scheduled to expire on August 1, 2012. Pursuant to the Buy-Out and Termination Agreement (“Buy-Out Agreement”), on June 30, 2011, the Pokagon Band paid to Lakes a buy-out fee of approximately $24.5 million and repaid in full all outstanding debt owed by the Pokagon Band to Lakes (which Lakes previously sold to unaffiliated investors). As a result of the previous sale of those receivables, Lakes did not receive any of the proceeds from the Pokagon Band’s repayment of that debt. The Buy-Out Agreement also terminated the Management Agreement resulting in Lakes having no further obligations or responsibilities with respect to the Four Winds Casino Resort. Due to the Buy-Out Agreement, the remaining estimated useful life of intangible assets associated with the Pokagon Band was revised and was determined to be through June 30, 2011 resulting in the intangible assets being fully amortized as of June 30, 2011 and additional amortization expense of $7.3 million during the three months ended July 3, 2011.

6. Long-Term Assets Related to Indian Casino Projects — Notes and Interest Receivable and Notes Receivable at Fair Value

The majority of the assets related to Indian casino projects are in the form of notes and interest receivable due from the Indian tribes pursuant to the Company’s development, financing, consulting, and management agreements. The repayment terms of the loans are specific to each Indian tribe and are dependent upon the successful development and operating performance of each gaming facility. Repayment of the loans is required only if distributable profits are available from the operation of the related casinos. In addition, repayment of the loans and the development, financing, consulting, and management fees under contracts are subordinated to certain other financial obligations of the respective operations. Generally, the order of priority of payments from the casinos’ cash flows is as follows: a certain minimum monthly priority payment to the Indian tribe; repayment of senior debt associated with construction and equipping of the casino with interest accrued thereon; repayment of various debt with interest accrued thereon due to Lakes; development, financing, consulting, and management fees to Lakes, with the remaining funds distributed to the Indian tribe.

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Information with respect to the notes and interest receivable at October 2, 2011 is summarized in the following table (in thousands):

Information with respect to the notes and interest receivable at January 2, 2011 is summarized in the following table (in thousands):

A summary of the activity in the allowance for impaired notes receivable follows (in thousands):

Shingle Springs Tribe — Red Hawk Casino

At October 2, 2011 and January 2, 2011, Lakes evaluated the notes receivable from the Shingle Springs Tribe for impairment and concluded that it was probable that substantial amounts due would not be repaid within the contract term and therefore determined that the notes receivable were impaired. This determination was based on the lack of previously expected improvements in operating results, the deferral of principal payments due to insufficient net revenues from which to make these payments, and the continued significant economic pressures in the northern California market the property serves, all of which have negatively impacted cash flows for the property. As a result of these factors, Lakes determined it was probable that substantial amounts due would not be repaid within the contract term. In order to assist the Red Hawk Casino in increasing cash levels, Lakes will

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defer allowed payments of principal on the preconstruction advances, if any, from March 2011 through December 2013. These deferrals, if any, do not constitute forgiveness of contractual principal amounts due to Lakes. The notes and interest receivable carrying amounts at October 2, 2011 and January 2, 2011 represent the present value of expected future cash flows.

While Lakes has concluded that it is probable that substantial amounts due from the Shingle Springs Tribe will not be repaid within the contract term, the Shingle Springs Tribe will remain legally obligated to repay any remaining amounts due to Lakes subsequent to the conclusion of the contract.

The management contract with the Red Hawk Casino includes a minimum guaranteed payment to the Shingle Springs Tribe of $0.5 million a month for the duration of the contract, which expires in December 2015. Lakes is obligated to advance funds for these minimum guaranteed monthly payments when the casino operating results are not sufficient, and is repaid the advances in subsequent periods when operating results are sufficient. As of October 2, 2011, $0.9 million was outstanding under this obligation, of which $0.6 million is expected to be repaid within twelve months and therefore classified as a current note receivable. Lakes advanced $2.4 million and collected payments of $2.5 million under this obligation during the nine months ended October 2, 2011.

Jamul Tribe

Notes receivable from the Jamul Tribe for a project under development are carried at their estimated fair value of $9.6 million and $11.1 million as of October 2, 2011 and January 2, 2011, respectively. The terms and assumptions used to value Lakes’ notes receivable from the Jamul Tribe at estimated fair value are as follows (dollars in thousands):

7. Intangible and Other Assets Related to Indian Casino Projects

Intangible assets

Intangible assets consist of costs associated with the acquisition of the management, development, consulting, or financing contracts related to tribal gaming projects and are periodically evaluated for impairment after they are initially recorded.

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Information with respect to the intangible assets by project is summarized as follows (in thousands):

Management fee receivable and other

Long-term assets include financial instruments related to deferred management fees and interest due from the Shingle Springs Tribe of $4.7 million and $3.1 million as of October 2, 2011 and January 2, 2011, respectively. As defined in the management and development agreement with the Shingle Springs Tribe, payment of management fees, if any, are deferred when operating results are not sufficient and are paid in subsequent periods when operating results are sufficient. In addition, long-term assets include amounts due from Mr. Kevin M. Kean (see note 11, Contract Acquisition Costs Payable). Financial instruments related to Mr. Kean have a carrying value of $1.4 million and $1.8 million, net of current portion of $0.5 million as of October 2, 2011 and January 2, 2011.

8. Investment in Unconsolidated Investee

Lakes has an investment in Rock Ohio Ventures, LLC (“Rock Ohio Ventures”) for the casino development projects in Cincinnati and Cleveland, Ohio. This investment is accounted for using the cost method since Lakes does not have the ability to significantly influence the operating and financial decisions of the entity. At October 2, 2011 and January 2, 2011, Lakes had invested a total of $15.7 million and $2.4 million, respectively, in Rock Ohio Ventures, which is included in Investment in Unconsolidated Investee in the accompanying consolidated balance sheets. Lakes has the right, but not the obligation, to make additional investments up to 10% of equity required by Rock Ohio Ventures to develop the casinos in Ohio in return for a corresponding equity interest in those casinos (see note 16, Commitments and Contingencies).

9. Land Held for Sale

During July 2011, Lakes entered into a program to locate a buyer for the land located in Vicksburg, Mississippi which was previously being held for development. As a result, during the third quarter of 2011, Lakes reclassified the land as held for sale and recorded $0.3 million in estimated selling costs, which is included in impairments and other losses in the consolidated statement of earnings (loss). As of October 2, 2011, the land is carried at $3.0 million on the accompanying consolidated balance sheet, which is its estimated fair value less expected cost to sell. As of January 2, 2011, the land was carried at fair value of $3.3 million on the accompanying consolidated balance sheet.

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10. Loan Agreement

Lakes has a two-year interest only $8.0 million non-revolving line of credit loan agreement (the “Loan Agreement”) with a bank that expires in October 2012. The Loan Agreement is collateralized by primarily all of Lakes’ interest in the real property it owns in Minnetonka, Minnesota. Amounts borrowed under the Loan Agreement bear interest at 8.95%. Lakes’ Chief Executive Officer, Lyle Berman, personally guaranteed the Loan Agreement on behalf of Lakes. As of October 2, 2011 and January 2, 2011, no amounts were outstanding under the Loan Agreement.

11. Contract Acquisition Costs Payable

Pokagon Band — Four Winds Casino Resort

The Company was obligated to an unrelated third party as part of an agreement associated with the Company obtaining the management contract with the Pokagon Band. As of January 2, 2011, the carrying amount of the liability, which approximated fair value, was $0.7 million, net of a discount of $0.1 million. Due to the Buy-Out Agreement with the Pokagon Band and terms in the agreement with the unrelated third party, the Company made a final payment of $0.4 million on the obligation at a 9% discount. No additional amounts are owed under this obligation as of October 2, 2011.

During 2006, the Lyle Berman Family Partnership (the “Partnership”) purchased a portion of the obligation discussed above from the unrelated third party. The Partnership received approximately $0.3 million per year of the payment stream related to this obligation during the five-year term of the management contract of the Four Winds Casino Resort. The Partnership received a final payment of $0.4 million during the three months ended July 3, 2011 which represented the remaining obligation at a 9% discount. Lyle Berman, Lakes’ Chief Executive Officer, does not have an ownership or any other beneficial interest in the Partnership. However, Neil I. Sell, a director of Lakes, is one of the trustees of the irrevocable trusts for the benefit of Lyle Berman’s children who are partners in the Partnership.

Shingle Springs Tribe — Red Hawk Casino

During 2009, the Company became obligated to pay Mr. Jerry Argovitz and Mr. Kevin Kean each $1 million per year (prorated based on a 365 day year) during the remainder of the seven-year initial term of the Red Hawk Casino management contract, which commenced in December 2008. These obligations resulted from Mr. Argovitz’s and Mr. Kean’s elections under existing agreements with Lakes to relinquish their respective other rights related to the Red Hawk Casino project. As of October 2, 2011 and January 2, 2011, the remaining carrying amount of the liability was $5.9 million and $6.5 million, net of a $2.6 million and $3.5 million discount, respectively. Amounts payable during the next 12 fiscal months totaling $1.0 million, net of related discount, are included in current contract acquisition costs payable as of October 2, 2011.

12. Share-Based Compensation

Share-based compensation expense, which includes stock options and restricted stock units, for the three and nine months ended October 2, 2011 and October 3, 2010, respectively, were as follows (unaudited):

Stock options

The Company uses the Black Scholes option pricing model to estimate the fair value and compensation cost associated with employee incentive stock options which requires the consideration of historical employee

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exercise behavior data and the use of a number of assumptions including volatility of the Company’s stock price, the weighted average risk-free interest rate and the weighted average expected life of the options. Four thousand options were granted during the three and nine months ended October 2, 2011. There were no options granted during the three and nine months ended October 3, 2010.

The following table summarizes Lakes’ stock option activity during the nine months ended October 2, 2011 and October 3, 2010 (unaudited):

As of October 2, 2011, the options outstanding had a weighted average remaining contractual life of 7.5 years, weighted average exercise price of $2.95 and aggregate intrinsic value of $0.3 million. The options exercisable have a weighted average exercise price of $3.44, a weighted average remaining contractual life of 6.6 years and aggregate intrinsic value of zero as of October 2, 2011.

There were no options exercised during the three and nine months ended October 2, 2011 and October 3, 2010. Lakes’ unrecognized share-based compensation related to stock options was approximately $0.8 million, as of October 2, 2011, which is expected to be recognized over a weighted-average period of 2.1 years.

Lakes issues new shares of common stock upon the exercise of options.

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Restricted stock units

The following table summarizes Lakes’ restricted stock unit activity during the three months ended October 2, 2011 and October 3, 2010 (unaudited):

During the nine months ended October 2, 2011, 36,302 common shares were issued upon the vesting of restricted stock units, net of common shares redeemed at the election of the grantee for payroll tax payment. As of October 2, 2011, Lakes’ unrecognized share-based compensation was approximately $0.1 million related to non-vested restricted stock units, which is expected to be recognized over a weighted-average period of 0.3 years.

13. Earnings (Loss) per Share

For all periods, basic earnings (loss) per share (“EPS”) is calculated by dividing net earnings (loss) attributable to Lakes Entertainment, Inc. by the weighted-average common shares outstanding. Diluted EPS in profitable periods reflects the effect of all potentially dilutive common shares outstanding by dividing net earnings (loss) attributable to Lakes Entertainment, Inc. by the weighted-average of all common and potentially dilutive shares outstanding. Potentially dilutive stock options of 1,672,138 for the three and nine months ended October 2, 2011 and 1,580,566 for the three and nine months ended October 3, 2010, were not used to compute diluted earnings per share because the effects would have been anti-dilutive.

14. Income Taxes

The Company’s effective tax rate was (5)% for the nine months ended October 2, 2011. Deferred tax assets are evaluated by considering historical levels of income, estimates of future taxable income and the impact of tax planning strategies. As of October 2, 2011, deferred tax assets were $0.3 million related to the Company’s federal net operating loss which can be carried back to the 2010 tax year. Management has evaluated all available evidence and has determined that negative evidence continues to outweigh positive evidence for the realization of deferred tax assets outside of the federal net operating loss and as a result continues to provide a valuation allowance against its other deferred tax assets.

The Company is currently under IRS audit for the 2009 tax year and no adjustments have been made in the current period.

On March 17, 2011, Lakes and the Louisiana Department of Revenue entered into a settlement agreement whereby Lakes agreed to pay the Louisiana Department of Revenue $9.0 million in full and final payment related to a tax litigation matter (“Settlement Agreement”). In return, the Louisiana Department of Revenue agreed to dismiss the suit and discharge Lakes from all proceedings and liabilities relating to this matter. As of January 2, 2011, income tax payable included $9.0 million related to this Settlement Agreement. The Company issued the $9.0 million payment to the Louisiana Department of Revenue in March 2011.

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15. Financial Instruments and Fair Value Measurements

Overview

Estimates of fair value for financial assets and liabilities are based on the framework established in the accounting guidance for fair value measurements. The framework defines fair value, provides guidance for measuring fair value, and requires certain disclosures. The framework discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The framework utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, convertible note receivable, notes receivable and other long-term assets related to Indian casino projects, cost method investments, accounts payable and contract acquisition costs payable.

For the Company’s cash and cash equivalents, accounts receivable, accounts payable and current portion of contract acquisition costs payable, the carrying amounts approximate fair value because of the short duration of these financial instruments.

Balances Measured at Fair Value on a Recurring Basis

Jamul notes receivable

Notes receivable from the Jamul Tribe (“Jamul notes receivable”) for a project under development are measured at estimated fair value on a recurring basis using unobservable (Level 3) inputs and carried at their estimated fair value of $9.6 million and $11.1 million as of October 2, 2011 and January 2, 2011, respectively. The most significant factors affecting the estimated cash flows and discount rates used in the Company’s valuation model for notes receivable from the Jamul Tribe for the project under development include:

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Changes in the carrying value of the Jamul notes receivable is as follows (in thousands):

To value the Company’s notes receivable from Indian tribes for projects under development, the Company utilizes valuation models based on management’s estimates of expected cash flow streams, discount rates, and as applicable, probabilities of casinos opening and the expected opening dates, projected pre- and post-opening date interest rates. The discount rate for the projects is based on the yields available on certain financial instruments at the valuation date, the risk level of equity investments in general, and the specific operating risks associated with similar financial instruments. In estimating this discount rate, market data of other public gaming related companies is also considered. The estimated casino opening date used in the valuations of the notes receivable related to Indian casino projects that are not yet under construction and in the development phase reflects the weighted-average of three scenarios: a base case (which is based on the Company’s forecasted casino opening date) and one and two years out from the base case. Once a casino project is under construction, the weighted-average scenarios are no longer used and only the planned opening date is used in the valuation. The projected pre- and post-opening interest rates are based upon the one year U.S. Treasury Bill spot-yield curve per Bloomberg and the specific assumptions on contract term, stated interest rate and casino opening date. The probability applied to each project is based upon a weighting of various possible scenarios with one scenario assuming the casino never opens. The other scenarios assume the casino opens but apply different opening dates. The probability-weighting applied to each scenario is intended to effectively capture the element of risk in these projects and is based upon the status of each project, review of the critical milestones and likelihood of achieving the milestones.

Convertible note receivable

The convertible note receivable is measured at estimated fair value on a recurring basis using unobservable (Level 3) inputs that reflect management’s estimates about the assumptions that market participants would use in pricing the asset. Due to the factors described in note 4, Convertible Note Receivable at Fair Value and Development Services and Management Agreement, the convertible note receivable was written down to zero as of October 2, 2011.

Changes in the carrying value of the convertible note receivable is as follows (in thousands):

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Balances Measured at Fair Value on a Nonrecurring Basis

The following table shows the amounts of certain of the Company’s assets measured at fair value on a nonrecurring basis (in thousands):

Land held for development and land held for sale — During July 2011, Lakes entered into a program to locate a buyer for the land located in Vicksburg, Mississippi which was previously being held for development. As a result, during the third quarter of 2011, Lakes reclassified the land as held for sale and recorded $0.3 million in estimated selling costs. As of October 2, 2011, the land is carried at $3.0 million on the accompanying consolidated balance sheet, which is its estimated fair value less expected cost to sell. As of January 2, 2011, the land was carried at its estimated fair value of $3.3 million on the accompanying consolidated balance sheet and was included in land held for development. Land held for development and land held for sale are measured on a nonrecurring basis using unobservable (Level 3) inputs that utilize the market approach technique and reflect management’s estimates about the assumptions that market participants would use in pricing the asset. Significant inputs include recent transactions of comparable properties as well as consideration of its highest and best use.

Balances Disclosed at Fair Value

The following table shows the amounts of certain of the Company’s financial instruments disclosed at fair value (in thousands):

Shingle Springs notes receivable — Management estimates the fair value of the notes and interest receivable from the Shingle Springs Tribe as of October 2, 2011 to be approximately $19.7 million using a discount rate of 30.4% and a remaining estimated term of 112 months. Management estimated the fair value of the notes and interest receivable from the Shingle Springs Tribe as of January 2, 2011, to be approximately $26.6 million using a discount rate of 22.5% and a remaining estimated term of 121 months.

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Other assets related to Indian casino projects — These assets include financial instruments related to deferred management fees and interest due from the Shingle Springs Tribe and amounts due from Mr. Kevin M. Kean (see note 7, Intangible and Other Assets Related to Indian Casino Projects). The Company estimates the fair value of other assets related to the Shingle Springs Tribe and Mr. Kean to be $4.8 million as of October 2, 2011 using a discount rate of 19.5%. Management estimated the fair value of these financial instruments related to the Shingle Springs Tribe and Mr. Kean to be $4.2 million as of January 2, 2011 using a discount rate of 18.0%.

Investment in unconsolidated investee — The fair value of the Company’s investment in unconsolidated investee was not estimated as of October 2, 2011 or January 2, 2011, as there were no events or changes in circumstances that may have a significant adverse effect on the fair value of the investment, and Lakes’ management determined that it was not practicable to estimate the fair value of the investments.

Contract acquisition costs payable — The carrying amount of the liability approximates its estimated fair value of $5.9 million and $6.5 million as of October 2, 2011 and January 2, 2011, respectively (see note 11, Contract Acquisition Costs Payable).

16. Commitments and Contingencies

General

The decline in general economic conditions in the United States may have or continue to have a negative impact on the local economic conditions near the casino Lakes manages and may negatively impact Lakes’ management fees and the availability of credit to finance Lakes’ development projects.

Rock Ohio Ventures, LLC

Lakes’ initial capital requirement for a 10% ownership in Rock Ohio Ventures, LLC was $2.8 million. As of October 2, 2011, Lakes has contributed approximately $15.7 million as required as of that date (see note 8, Investment in Unconsolidated Investee). If Lakes chooses not to fund any additional amounts, it will maintain an ownership position in Rock Ohio Ventures, LLC in a pro rata amount of what its $2.8 million payment is to the total amount of equity funded to develop casino operations, and all equity funded in excess of the initial $2.8 million would be subject to a buy-out amount equal to the price paid.

Miscellaneous Legal Matters

Lakes and its subsidiaries are involved in various other inquiries, administrative proceedings, and litigation relating to contracts and other matters arising in the normal course of business. While any proceeding or litigation has an element of uncertainty, and although unable to estimate the minimum costs, if any, to be incurred in connection with these matters, management currently believes that the likelihood of an unfavorable outcome is remote, and is not likely to have a material adverse effect upon Lakes’ unaudited consolidated financial statements. Accordingly, no provision has been made with regard to these matters.

17. Segment Information

Lakes’ segments reported below (in millions) are the segments of the Company for which separate financial information is available and for which operating results are evaluated by the chief operating decision-maker in deciding how to allocate resources and in assessing performance.

The Indian Casino Projects segment includes operations and assets related to the development, financing, and management of gaming-related properties for the Shingle Springs Tribe, Pokagon Band, Jamul Tribe and Iowa Tribe. The Non-Indian Casino Projects segment includes operations and assets related to the development,

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financing, and/or management of gaming-related properties in Florida, Maryland, Mississippi and Ohio. The total assets in “Corporate and Eliminations” below primarily relate to Lakes’ cash and cash equivalents and the Lakes corporate office building. Costs in “Corporate and Eliminations” below have not been allocated to the other segments because these costs are not easily allocable and to do so would not be practical.