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

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-Q
 
     
(Mark One)    
 
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended April 3, 2011
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission File No. 0-24993
LAKES ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
 
     
Minnesota
  41-1913991
(State or other jurisdiction
of incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
130 Cheshire Lane, Suite 101
Minnetonka, Minnesota
(Address of principal executive offices)
  55305
(Zip Code)
 
(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 o
 
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 o     No o
 
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):
 
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
As of May 5, 2011, there were 26,405,679 shares of Common Stock, $0.01 par value per share, outstanding.
 


 

 
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
 
INDEX
 
                 
        Page of
        Form 10-Q
 
PART I. FINANCIAL INFORMATION
  ITEM 1.     FINANCIAL STATEMENTS     3  
        Consolidated Balance Sheets as of April 3, 2011 (unaudited) and January 2, 2011     3  
        Unaudited Consolidated Statements of Earnings (Loss) for the three months ended April 3, 2011 and April 4, 2010     4  
        Unaudited Consolidated Statements of Cash Flows for the three months ended April 3, 2011 and April 4, 2010     5  
        Notes to Unaudited Consolidated Financial Statements     6  
  ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     14  
  ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     28  
  ITEM 4.     CONTROLS AND PROCEDURES     28  
 
PART II. OTHER INFORMATION
  ITEM 1.     LEGAL PROCEEDINGS     29  
  ITEM 1A.     RISK FACTORS     29  
  ITEM 6.     EXHIBITS     29  
 EX-31.1
 EX-31.2
 EX-32.1


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Part I.
Financial Information
 
ITEM 1.   FINANCIAL STATEMENTS
 
LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
 
Consolidated Balance Sheets
 
                 
    April 3, 2011     January 2, 2011  
    (Unaudited)        
    (In thousands)  
 
Assets
               
Current assets:
               
Cash and cash equivalents
  $ 31,426     $ 45,233  
Accounts receivable
    2,864       1,696  
Current portion of notes receivable from Indian casino projects
    1,696       2,405  
Income tax receivable
    929        
Other
    1,370       1,983  
                 
Total current assets
    38,285       51,317  
                 
Property and equipment, net
    5,051       5,103  
                 
Long-term assets related to Indian casino projects:
               
Notes and interest receivable, net of current portion and allowance
    31,808       31,192  
Notes receivable at fair value
    12,122       11,129  
Intangible assets, net of accumulated amortization of $24.9 and $22.9 million
    13,930       15,873  
Land held for development
    960       960  
Management fee receivable and other
    5,884       5,195  
                 
Total long-term assets related to Indian casino projects
    64,704       64,349  
                 
Other assets:
               
Investment in unconsolidated investees
    8,354       2,367  
Land held for development
    3,470       3,470  
Other
    40       40  
                 
Total other assets
    11,864       5,877  
                 
Total assets
  $ 119,904     $ 126,646  
                 
Liabilities and shareholders’ equity
               
Current liabilities:
               
Current portion of contract acquisition costs payable, net of $1.1 and $1.2 million discount
  $ 1,311     $ 1,326  
Income taxes payable
          7,822  
Accounts payable
    625       292  
Accrued payroll and related
    377       776  
Other accrued expenses
    543       615  
                 
Total current liabilities
    2,856       10,831  
Long-term contract acquisition costs payable, net of current portion and $2.2 and $2.4 million discount
    5,518       5,830  
                 
Total liabilities
    8,374       16,661  
                 
Commitments and contingencies
               
Shareholders’ equity:
               
Common stock, $.01 par value; authorized 200,000 shares;
               
26,406 and 26,369 common shares issued and outstanding
    264       264  
Additional paid-in capital
    203,313       203,148  
Deficit
    (92,047 )     (93,427 )
                 
Total shareholders’ equity
    111,530       109,985  
                 
Total liabilities and shareholders’ equity
  $ 119,904     $ 126,646  
                 
 
See notes to consolidated financial statements.


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LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
 
Unaudited Consolidated Statements of Earnings (Loss)
 
                 
    Three Months Ended  
    April 3, 2011     April 4, 2010  
    (In thousands, except per share data)  
 
Revenues:
               
Management fees
  $ 5,835     $ 6,937  
License fees and other
    58       17  
                 
Total revenues
    5,893       6,954  
                 
Costs and expenses:
               
Selling, general and administrative
    2,656       3,235  
Impairment losses — other
    874       2,664  
Amortization of intangible assets related to operating casinos
    1,943       2,785  
Depreciation
    57       65  
                 
Total costs and expenses
    5,530       8,749  
                 
Net unrealized gains on notes receivable
    862       1,770  
                 
Earnings (loss) from operations
    1,225       (25 )
                 
Other income (expense):
               
Interest income
    1,468       2,247  
Interest expense
    (321 )     (687 )
Equity in loss of unconsolidated investees
          (27 )
Other
          (72 )
                 
Total other income (expense), net
    1,147       1,461  
                 
Earnings before income taxes
    2,372       1,436  
Income taxes
    992       6,123  
                 
Net earnings (loss)
  $ 1,380     $ (4,687 )
                 
Weighted-average common shares outstanding
               
Basic
    26,398       26,361  
Dilutive effect of stock options and restrictive stock units
    30        
                 
Diluted
    26,428       26,361  
                 
Earnings (loss) per share
               
Basic
  $ 0.05     $ (0.18 )
Diluted
  $ 0.05     $ (0.18 )
 
See notes to consolidated financial statements.


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LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES
 
Unaudited Consolidated Statements of Cash Flows
 
                 
    Three Months Ended  
    April 3, 2011     April 4, 2010  
    (In thousands)  
 
OPERATING ACTIVITIES:
               
Net earnings (loss)
  $ 1,380     $ (4,687 )
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
               
Depreciation
    57       65  
Amortization of debt issuance costs and contract acquisition costs
    321       8  
Accretion and additions to long-term interest receivable
    (684 )     (1,165 )
Amortization of intangible assets related to operating casinos
    1,943       2,785  
Net tax benefits related to share-based compensation
          (406 )
Equity in loss of unconsolidated investees
          27  
Share-based compensation
    176       179  
Net unrealized gains on notes receivable
    (742 )     (1,770 )
Impairment losses — other
    874       2,664  
Changes in operating assets and liabilities:
               
Accounts receivable
    (1,168 )     (1,918 )
Other current assets
    (512 )     (144 )
Income taxes receivable and payable
    (8,750 )     5,881  
Accounts payable
    314       (70 )
Accrued expenses
    (478 )     210  
                 
Net cash provided by (used in) operating activities
    (7,269 )     1,659  
                 
INVESTING ACTIVITIES:
               
Sales / redemptions of investment securities
          2,400  
Payments to acquire investment in unconsolidated investee
    (4,862 )      
Increases in management fee receivable and other long-term assets related to Indian casino projects, net
    (670 )     (380 )
Purchase of property and equipment
    (5 )      
Advances on notes receivable
    (2,125 )     (1,256 )
Collection on notes receivable
    1,777       1,910  
Increase in other long-term assets
    (3 )     (2 )
                 
Net cash provided by (used in) investing activities
    (5,888 )     2,672  
                 
FINANCING ACTIVITIES:
               
Repayments of lines of credit
          (2,474 )
Proceeds from borrowings
          808  
Net tax benefits related to share-based compensation
          406  
Contract acquisition costs payable
    (650 )     (750 )
                 
Net cash used in financing activities
    (650 )     (2,010 )
                 
Net increase (decrease) in cash and cash equivalents
    (13,807 )     2,321  
Cash and cash equivalents — beginning of period
    45,233       3,751  
                 
Cash and cash equivalents — end of period
  $ 31,426     $ 6,072  
                 
 
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
 
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.
 
Management has evaluated the unaudited consolidated financial statements for subsequent events through the date this Quarterly Report on Form 10-Q was filed with the SEC. 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 minor 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.
 
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 does not expect the adoption of ASU 2011-02 to have material impact on its consolidated financial statements.
 
3.   Financial instruments
 
The Company’s financial instruments consist of cash and cash equivalents, accounts 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. The methods used in estimating the fair value of the Company’s notes and interest receivable from the Shingle Springs Tribe and the Iowa Tribe of Oklahoma (Note 5), investment in unconsolidated investees (Note 7), other long-term assets related to Indian casino projects (Note 6) and long-term contract acquisition costs payable (Note 9) are discussed in the referenced notes to the unaudited consolidated financial statements.
 
Notes receivable from the Jamul Indian Village (the “Jamul Tribe”) are related to a project under development and are 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 or liability, including estimated cash flows and valuation metrics. The determination of fair value for these items is described in Note 4.
 
4.   Fair value measurements
 
Notes receivable at fair value.  Notes receivable from the Jamul Tribe for a project under development are carried at their estimated fair value of $12.1 million and $11.1 million as of April 3, 2011 and January 2, 2011,


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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:
 
  •  Probability of the casino opening based on the status of critical project milestones and the expected opening date,
 
  •  estimated pre- and post-opening interest rates,
 
  •  contractual interest rate and other terms,
 
  •  yield rates on US Treasury Bills and other financial instruments,
 
  •  the risk/return indicators of equity investments in general,
 
  •  specific risks associated with operating the casino and similar projects, and
 
  •  scenario weighting alternatives.
 
Changes in the carrying value of notes receivable from the Jamul Tribe is as follows (in thousands):
 
         
Balance, January 2, 2011
  $ 11,129  
Net unrealized gains on notes receivable
    742  
Advances, net of allocation to intangible, other
    251  
         
Balance, April 3, 2011(unaudited)
  $ 12,122  
         
 
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.
 
Land held for development.  Land held for development is measured at estimated fair value 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.
 
5.   Long-term assets related to Indian casino projects — notes and interest receivable
 
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


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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.
 
Information with respect to the long-term notes and interest receivable activity is summarized in the following table (in thousands):
 
                                 
    Shingle
                   
    Springs
    Jamul
    Iowa
       
    Tribe     Tribe     Tribe     Total  
 
Balance, January 2, 2011
  $ 32,166     $ 11,129     $ 1,431     $ 44,726  
Advances, net
    1,000       1,125             2,125  
Repayments
    (918 )           (859 )     (1,777 )
Accretion and additions to long-term interest receivable
    642             42       684  
Allocation of advances to intangible assets
          (874 )           (874 )
Unrealized gains
          742             742  
                                 
Balance, April 3, 2011 (unaudited)
    32,890       12,122       614       45,626  
Less current portion of notes receivable
    (1,082 )           (614 )     (1,696 )
                                 
Long-term notes and interest receivable, April 3, 2011 (unaudited)
  $ 31,808     $ 12,122     $     $ 43,930  
                                 
 
A summary of the activity in the allowance for impaired notes receivable follows (in thousands):
 
         
Balance, January 2, 2011
  $ 20,975  
Impairment charge on notes receivable
     
Recoveries
     
Charge-offs
     
Accretion included in interest income
    (167 )
         
Balance, April 3, 2011
  $ 20,808  
         
 
Shingle Springs Tribe.  At April 3, 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 defer allowed payments of principal on the preconstruction advances, if any, beginning March 2011 through December 2013. These deferrals, if any, do not constitute forgiveness of contractual principal amounts due to Lakes. The outstanding principal on the notes receivable from the Shingle Springs Tribe was $67.8 million as of April 3, 2011, which is comprised of $66.7 million related to pre-construction advances and $1.1 million of advances related to the minimum guaranteed monthly payment. The carrying amount of the notes and interest receivable, which is net of unearned discount of $14.6 million and allowance for impairment of $20.8 million, was $32.9 million as of April 3, 2011. The carrying amount of the notes receivable at January 2, 2011 was $32.2 million, which was net of unearned discount of $14.9 million and allowance for impairment of $21.0 million. The carrying amounts 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.


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Management estimates the fair value of the notes and interest receivable from the Shingle Springs Tribe as of April 3, 2011 to be approximately $25.8 million using a discount rate of 23.75% and a remaining estimated term of 118 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.
 
Jamul Tribe.  The terms and assumptions used to value Lakes’ notes receivable from the Jamul Tribe at estimated fair value are as follows (dollars in thousands):
 
         
    As of April 3, 2011   As of January 2, 2011
    (Unaudited)    
 
Face value of note (principal and interest)
  $63,056
($40,762 principal and $22,294 interest)
  $61,108
($39,638 principal and $21,470 interest)
Estimated months until casino opens (weighted average of three scenarios)
  66 months   66 months
Projected interest rate until casino opens
  7.60%   7.29%
Projected interest rate during the loan repayment term
  10.34%   10.19%
Discount rate
  19.50%   20.00%
Repayment terms of note
  120 months   120 months
Probability rate of casino opening (weighting of four scenarios)
  50%   50%
 
6.   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.
 
Information with respect to the intangible assets by project is summarized as follows (in thousands):
 
                                 
          Shingle
             
    Pokagon
    Springs
    Jamul
       
    Band     Tribe     Tribe(*)     Total  
 
Balances, January 2, 2011
  $ 10,631     $ 5,242     $     $ 15,873  
Allocation of advances
                874       874  
Amortization
    (1,678 )     (265 )           (1,943 )
Impairment losses
                (874 )     (874 )
                                 
Balances, April 3, 2011 (unaudited)
  $ 8,953     $ 4,977     $     $ 13,930  
                                 
 
 
(*) Due to the continued uncertainty surrounding the Jamul Casino project, Lakes recognized an impairment of $0.9 million related to the intangible assets associated with this project during the three months ended April 3, 2011.
 
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 $3.8 million and $3.1 million as of April 3, 2011 and January 2, 2011, respectively. In addition, long-term assets as of April 3, 2011 and January 2, 2011 included amounts due from Mr. Kevin M. Kean (Note 9). Financial instruments related to Mr. Kean have a carrying value of $1.7 million and $1.8 million, net of current portion, as of April 3, 2011 and January 2, 2011, respectively. Management estimates the fair value of these financial instruments related to Mr. Kean and the Shingle Springs Tribe to be $4.5 million as of April 3, 2011 using a discount rate of 17.5%. Management estimated the fair value of these financial instruments related to Mr. Kean and the Shingle Springs Tribe to be $4.2 million as of January 2, 2011 using a discount rate of 18.0%.


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7.   Investment in unconsolidated investees
 
Lakes has an investment in Rock Ohio Ventures, LLC (“Rock Ohio Ventures”) for the potential development of two casinos in 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 April 3, 2011 and January 2, 2011, Lakes had invested a total of approximately $8.4 million and $2.4 million, respectively, in Rock Ohio Ventures, which is included in the Investment in Unconsolidated Investees 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 potential casinos in Ohio in return for a corresponding equity interest in those casinos (Note 13). The fair value of the Company’s investment in Rock Ohio Ventures was not estimated as of April 3, 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.
 
8.   Debt
 
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 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 April 3, 2011 and January 2, 2011, no amounts were outstanding under the Loan Agreement.
 
9.   Contract acquisition costs payable
 
Pokagon Band.  The Company is 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 approximates fair value, was $0.7 million, net of a discount of $0.1 million. As of April 3, 2011, the remaining carrying amount of the liability, which approximates its estimated fair value, was $0.5 million, net of a discount of $0.1 million. Amounts payable during the next 12 fiscal months totaling $0.4 million, net of related discount, are included in current contract acquisition costs payable as of April 3, 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 receives 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. Lyle Berman, Lakes’ Chairman and 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.  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 April 3, 2011 and January 2, 2011, the remaining carrying amount of the liability, which approximates its estimated fair value, was $6.3 million and $6.5 million, net of a $3.3 million and $3.5 million discount, respectively. Amounts payable during the next 12 fiscal months totaling $0.9 million, net of related discount, are included in current contract acquisition costs payable as of April 3, 2011.
 
10.   Share-based compensation
 
Share-based compensation expense, which includes stock options and restricted stock units, was $0.2 million for each of the three months ended April 3, 2011 and April 4, 2010.
 
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 exercise behavior data and the use of a number of assumptions including volatility of the Company’s


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stock price, the weighted average risk-free interest rate and the weighted average expected life of the options. No options were granted during three months ended April 3, 2011 and April 4, 2010.
 
The following table summarizes Lakes’ stock option activity during the three months ended April 3, 2011 and April 4, 2010 (unaudited):
 
                                 
    Number of Common Shares  
                      Weighted-Avg.
 
    Options
          Available
    Exercise
 
    Outstanding     Exercisable     for Grant     Price  
 
2011
                               
Balance at January 2, 2011
    2,031,084       904,076       699,215     $ 2.99  
Restricted stock unit activity, net
                       
Forfeited/cancelled/expired
    (151,667 )           1,667       3.24  
                                 
Balance at April 3, 2011(*)
    1,879,417       797,982       700,882       2.97  
                                 
2010
                               
Balance at January 3, 2010
    1,704,187       442,350       1,121,413     $ 3.93  
Restricted stock unit activity, net
                3,333       3.25  
Forfeited/cancelled/expired
    (98,955 )           6,355       11.58  
                                 
Balance at April 4, 2010(**)
    1,605,232       462,656       1,131,101       3.46  
                                 
 
 
(*) Options outstanding do not include 40,004 of outstanding restricted stock units.
 
(**) Options outstanding do not include 86,662 of outstanding restricted stock units.
 
As of April 3, 2011, the options outstanding had a weighted average remaining contractual life of 7.9 years, weighted average exercise price of $2.97 and aggregate intrinsic value of $0.5 million. The options exercisable have a weighted average exercise price of $3.46, a weighted average remaining contractual life of 6.4 years and aggregate intrinsic value of zero as of April 3, 2011.
 
There were no options exercised during the three months ended April 3, 2011 and April 4, 2010. Lakes’ unrecognized share-based compensation related to stock options was approximately $1.2 million, as of April 3, 2011, which is expected to be recognized over a weighted-average period of 2.5 years.
 
Lakes issues new shares of common stock upon the exercise of options.
 
Restricted stock units.  The following table summarizes Lakes’ restricted stock unit activity during the three months ended April 3, 2011 and April 4, 2010 (unaudited):
 
                 
          Weighted-Average
 
    Restricted
    Grant-Date
 
Non-vested Shares:
  Stock Units     Fair Value  
 
2011
               
Balance at January 2, 2011
    79,996     $ 3.25  
Vested
    (39,992 )     3.25  
                 
Balance at April 3, 2011
    40,004       3.25  
                 
2010
               
Balance at January 3, 2010
    135,000     $ 3.25  
Vested
    (45,005 )     3.25  
Forfeited
    (3,333 )     3.25  
                 
Balance at April 4, 2010
    86,662       3.25  
                 
 
During the three months ended April 3, 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 April 3,


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2011, Lakes’ unrecognized share-based compensation was approximately $0.1 million related to non-vested shares, which is expected to be recognized over a weighted-average of 0.8 years.
 
11.   Earnings (loss) per share
 
For all periods, basic earnings (loss) per share (“EPS”) is calculated by dividing net earnings (loss) 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 by the weighted-average of all common and potentially dilutive shares outstanding. Potentially dilutive stock options of 1,171,617 and 1,605,232 shares for the three months ended April 3, 2011 and April 4, 2010, were not used to compute diluted earnings per share because the effects would have been anti-dilutive.
 
12.   Income taxes
 
The Company’s effective tax rate was 42% for the three months ended April 3, 2011. As of April 3, 2011, the Company continues to provide a 100% valuation allowance against its deferred tax assets because management has evaluated all available evidence and has determined that cumulative net losses generated over the past three years outweigh existing positive evidence.
 
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 during the three months ended April 3, 2011.
 
The liability for uncertain tax positions related to the litigation with the Louisiana Department of Revenue, was considered an unrecognized tax benefit at January 2, 2011. A reconciliation of the unrecognized tax benefits for the three months ended April 3, 2011 is as follows:
 
         
Balance at January 2, 2011
  $ 8,000  
Settlement(*)
    (8,000 )
         
Balance at April 3, 2011
  $  
         
 
 
(*) Of the $9.0 million Settlement Agreement discussed above, $8.0 million relates to taxes and $1.0 million relates to fees.
 
13.   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 casinos 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 $2.4 million and during the three months ended April 3, 2011, Lakes contributed an additional $6.0 million. Therefore, as of April 3, 2011, Lakes has contributed approximately $8.4 million as required as of that date (Note 7). 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 $2.4 million payment is to the total amount funded to develop casino operations, and all equity funded in excess of the initial $2.4 million would be subject to a buy-out amount equal to the price paid for the subsequent equity funding.
 
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


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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.
 
14.   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, financing and management of gaming-related properties in 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.
 
                                 
    Indian
  Non-Indian
       
    Casino
  Casino
  Corporate &
   
    Projects   Projects   Eliminations   Consolidated
 
Three months ended April 3, 2011
                               
Revenue
  $ 5.8     $     $ 0.1     $ 5.9  
Impairment losses — other
    0.9                   0.9  
Earnings (loss) from operations
    3.7             (2.5 )     1.2  
Depreciation expense
                0.1       0.1  
Amortization of intangible assets related to operating casinos
    1.9                   1.9  
Three months ended April 4, 2010
                               
Revenue
  $ 6.9     $     $ 0.1     $ 7.0  
Impairment losses — other
    2.7                   2.7  
Earnings (loss) from operations
    2.4             (2.4 )      
Depreciation expense
                0.1       0.1  
Amortization of intangible assets related to operating casinos
    2.8                   2.8  
As of April 3, 2011
                               
Total assets
  $ 69.5     $ 11.7     $ 38.7     $ 119.9  
Investment in unconsolidated investees
          8.4             8.4  
As of January 2, 2011
                               
Total assets
  $ 68.7     $ 6.9     $ 51.0     $ 126.6  
Investment in unconsolidated investees
          2.4             2.4  


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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview
 
Lakes Entertainment, Inc. and subsidiaries (“Lakes”, “we, or “our”) primarily develops, finances and manages casino properties with a historical emphasis on those that are Indian-owned. We currently have development and management or financing agreements with three separate tribes for casino operations in Michigan and California for a total of three separate casino projects as follows:
 
  •  We developed, and have a five-year contract to manage, the Four Winds Casino Resort for the Pokagon Band of Potawatomi Indians (“Pokagon Band”) in New Buffalo Township, Michigan near Interstate 94. We began managing the Four Winds Casino Resort when it opened to the public on August 2, 2007. The Four Winds Casino Resort is located near the first Interstate 94 exit in southwestern Michigan and approximately 75 miles east of Chicago. The facility features approximately 3,000 slot machines, 64 table games, a 12-table poker room, a 165-room hotel, five restaurants, three bars, a child care facility and arcade, retail space and a parking garage.
 
  •  We developed, and have a seven-year contract to manage, the Red Hawk Casino that was built on the Rancheria of the Shingle Springs Band of Miwok Indians (“Shingle Springs Tribe”) in El Dorado County, California, adjacent to U.S. Highway 50, approximately 30 miles east of Sacramento, California. We began managing the Red Hawk Casino when it opened to the public on December 17, 2008. The Red Hawk Casino features approximately 2,150 slot machines, 68 table games, seven poker tables, five restaurants, four bars, retail space, a parking garage, a child care facility and arcade.
 
  •  We have contracts to develop and finance a casino to be built on the reservation of the Jamul Indian Village (the “Jamul Tribe”) located on State Highway 94, approximately 20 miles east of San Diego, California (the “Jamul Casino”). This project has been delayed due to various political and regulatory issues. Significant risk exists related to this project moving forward to completion, and we have recorded significant impairment charges against our investment in this project. However, the Jamul Tribe has the two basic requirements to eventually build a successful project — federal recognition as an Indian Tribe and Indian land eligible for gaming. We have concluded that it is not currently in our best interest to terminate our involvement with the Jamul Casino project and we will continue to monitor the status of this project.
 
We have also explored, and continue to explore, other casino development projects. An overview of our non-Indian projects are as follows:
 
  •  In October 2009, Lakes entered into an agreement with Rock Ohio Ventures, LLC (“Rock Ohio Ventures”) for the purpose of funding a percentage of costs associated with the referendum to amend the Ohio constitution to authorize casino gaming in Ohio, which passed on November 3, 2009. As of April 3, 2011, Lakes has contributed approximately $8.4 million to Rock Ohio Ventures. Lakes expects to contribute additional capital to Rock Ohio Ventures for the development of casinos in Cleveland and Cincinnati. If Lakes chooses not to fund any additional amounts, it will maintain an ownership position in Rock Ohio Ventures in a pro rata amount of what its $2.4 million payment is to the total amount funded to develop casino operations, and all equity funded in excess of the initial $2.4 million would be subject to a buy-out amount equal to the price paid for the subsequent equity funding.
 
  •  We have received various regulatory approvals to develop a casino on approximately 400 acres near Vicksburg, Mississippi. However, uncertainty exists surrounding the development of this project due primarily to changes in the economic environment and credit markets. As a result, the assets associated with the Vicksburg project are recorded at their estimated fair value of $3.3 million as of April 3, 2011.
 
Results of Operations
 
The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q for the three months ended April 3, 2011.


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Three months ended April 3, 2011, compared to the three months ended April 4, 2010
 
Revenues.  Total revenues were $5.9 million for the first quarter of 2011 compared to $7.0 million for the first quarter of 2010. This decline was due to the elimination of management fees from the Cimarron Casino project, as a result of the termination agreement between Lakes and the Iowa Tribe of Oklahoma (“Iowa Tribe”) in May 2010, as well as a decline in management fees associated with the Red Hawk Casino compared to the first quarter of 2010. The decline was partially offset by an increase in management fees earned from the Four Winds Casino Resort during the first quarter of 2011 compared to the first quarter of 2010. Revenues in fiscal 2011 will be impacted by the anticipated lower management fees from the Red Hawk Casino due to the continued significant economic pressures in the northern California market the property serves.
 
Selling, general and administrative expenses.  Selling, general and administrative expenses were $2.7 million in the first quarter of 2011 compared to $3.2 million for the first quarter of 2010. For the first quarter of 2011, Lakes’ selling, general and administrative expenses consisted primarily of payroll and related expenses of $1.3 million, including share-based compensation, travel expenses of $0.4 million, and professional fees of $0.5 million. The decrease was primarily due to decreases in payroll and related expenses and travel expenses. For the first quarter of 2010, Lakes’ selling, general and administrative expenses consisted primarily of payroll and related expenses of $1.8 million, including share-based compensation, travel expenses of $0.5 million, and professional fees of $0.5 million.
 
Impairment losses-other.  Impairment losses-other were $0.9 million in the first quarter of 2011 compared to $2.7 million in the first quarter of 2010. Due to the continued uncertainty surrounding the Jamul Casino project associated with delays in progress as well as ongoing issues in the credit markets, we recognized impairment losses of $0.9 million in the first quarter of 2011 and $0.6 million during the first quarter of 2010. Impairment losses for the first quarter of 2010 also included $2.1 million related to the termination agreement with the Iowa Tribe.
 
Amortization of intangible assets related to operating casinos.  Amortization of intangible assets related to operating casinos for the first quarter of 2011 was $1.9 million compared to $2.8 million for the first quarter of 2010. The decrease in amortization costs related to the partial impairment of intangible assets associated with the Shingle Springs Tribe during the fourth quarter of 2010.
 
Net unrealized gains on notes receivable.  Net unrealized gains on notes receivable relate primarily to our notes receivable from Indian tribes, which are adjusted to estimated fair value, based upon the current status of the related tribal casino projects and evolving market conditions. In the first quarter of 2011, we reported net unrealized gains on notes receivable of $0.9 million, compared to net unrealized gains of $1.8 million in the prior year period. The net unrealized gains in the first quarter of 2011 primarily related to the Jamul Casino project due to improvements in the credit markets. The net unrealized gains in the first quarter of 2010 consisted of $0.9 million resulting from the termination of the project for the Ioway Casino with the Iowa Tribe of Oklahoma, and $0.9 million related to the Jamul Casino project due primarily to improvements in the credit markets.
 
Other income (expense), net.  Other income (expense), net was $1.1 million for the first quarter of 2011 compared to $1.5 million for the first quarter of 2010 which is primarily associated with interest earned on the notes receivable from the Shingle Springs Tribe.
 
Income Taxes.  The income tax provision for the first quarter of 2010 was $1.0 million compared to $6.1 million for the first quarter of 2010. Our effective tax rates were 42% and 426% for the first quarter of 2011 and 2010, respectively. For the three months ended April 3, 2011, the effective tax rate differs from the federal tax rate of 35% primarily due to state taxes. For the three months ended April 4, 2010, the effective tax rate differs from the federal tax rate of 35% primarily due to discrete items recognized and additional valuation allowance recorded due to projected 2010 timing differences. Lakes’ income tax provision in the current year period consists primarily of current income tax provision of $1.0 million. In the prior period, the income tax provision consisted primarily of current income tax provision of $5.6 million, $0.1 million of interest on a Louisiana tax audit matter and additional paid-in capital adjustment of $0.4 million.


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Liquidity and Capital Resources
 
As of April 3, 2011, we had $31.4 million in cash and cash equivalents. We currently believe that our cash and cash equivalents balance and our cash flows from operations will be sufficient to meet our working capital requirements during the next 12 months. We currently expect to be able to have or obtain funds necessary to fulfill our potential future capital needs. However, such financing, if necessary, may not be available at all, or at acceptable terms, or it may be dilutive to our stockholders.
 
Our operating results and performance depend significantly on economic conditions and their effect on consumer spending in the casinos we manage. Declines in consumer spending cause our revenue generated from the management of Indian casinos to be adversely affected.
 
We have an interest-only $8.0 million non-revolving line of credit loan agreement (the “Loan Agreement”) with a bank that expires in October 2012. As of April 3, 2011 and January 2, 2011, no amounts were outstanding under the Loan Agreement.
 
During the three months ended April 3, 2011, Lakes contributed additional capital of approximately $6.0 million to Rock Ohio Ventures resulting in a total investment of $8.4 million in Rock Ohio Ventures. Per our agreement with Rock Ohio Ventures related to two potential Ohio casinos, Lakes expects to invest additional funds in those projects. As a result we may need to obtain additional financing.
 
Lakes has derived its revenues from the management of the Cimarron Casino, the Four Winds Casino Resort and the Red Hawk Casino. Due to the May 2010 termination agreement with the Iowa Tribe, Lakes no longer receives management fees for the Cimarron Casino. Our management contracts with the Four Winds Casino Resort and the Red Hawk Casino extend through fiscal July 2012 and December 2015, respectively. Because of the relatively short operating history of the casinos we manage, and the economic pressures in the northern California market, the amount of our ongoing management fees is uncertain.
 
The management contract with the Red Hawk Casino includes a minimum guaranteed payment to the Shingle Springs Tribe of $0.5 million a month. 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 April 3, 2011, $1.1 million was outstanding under this obligation. Lakes advanced $1.0 million and collected payments of $0.9 million under this obligation during the three months ended April 3, 2011. We expect the requirement to advance funds for the minimum guaranteed payment to continue throughout the next twelve months based on the current projected operating results of the property.
 
At January 2, 2011, we evaluated the notes receivable with the Shingle Springs Tribe for impairment and concluded that the notes receivable were impaired because we determined it was probable that substantial amounts due would not be repaid within the contract term. At April 3, 2011, we evaluated the notes receivable with the Shingle Springs Tribe for impairment and concluded that the notes receivable continue to be impaired. Lakes continues to manage the Red Hawk Casino and will collect monthly interest as scheduled as well as repayments of any minimum guaranteed monthly payments as discussed above and management fees when allowed as determined by net revenue levels of the Red Hawk Casino. However, the collection of principal on development notes receivable will be deferred through December 2013.
 
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.
 
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 for all taxes, interest and fees relating to a revenue tax litigation matter. In return, the Louisiana Department of Revenue agreed to dismiss the suit and discharge Lakes from all proceedings and liabilities relating to this matter. Lakes made this payment during the three months ended April 3, 2011.
 
Lakes’ forecasted operating cash requirements do not include construction-related costs that will be incurred when pending and future development projects begin construction because the construction of our pending casino projects will depend on the ability of the tribes and/or Lakes or its partners to obtain additional financing for the


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projects, which based on the general economic environment, is subject to considerable uncertainty. If such financing cannot be obtained on acceptable terms, it may not be possible to complete these projects, which could have a material adverse effect on our future results of operations, cash flows and financial condition.
 
If our casino development project with the Jamul Tribe is not constructed or if constructed, does not achieve profitable operations in the highly competitive market for gaming activities, our only recourse is to attempt to liquidate assets of the development, if any, excluding any land in trust and it is likely that we would incur complete losses on our notes receivable and any related intangible assets.
 
In order to assist the tribes, we may elect to guarantee the tribes’ debt financing or otherwise provide support for the tribes’ obligations. Guarantees by us, if any, will increase our potential exposure to losses and other adverse consequences in the event of a default by any of these tribes. In addition, we may lack the funds to compete for and develop future gaming or other business opportunities and our business could be adversely affected to the extent that we may be forced to cease our operations entirely.
 
Critical Accounting Policies and Estimates
 
This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet date and reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, long-term assets related to Indian casino projects, investment securities, litigation costs, income taxes, and share-based compensation. We base our estimates and judgments on historical experience and on various other factors that are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
 
We believe the following critical accounting policies involve the more significant judgments and estimates used in the preparation of our consolidated financial statements.
 
Revenue recognition:  Revenue from the management, development, and financing of, and consulting with, casino gaming facilities is recognized as it is earned pursuant to each respective agreement. See further discussion below under the caption “Long-term assets related to Indian casino projects.”
 
Share-based compensation expense:  Restricted stock units are valued at the Company’s stock price on the date of grant and amortized through expense over the requisite service period on a straight-line method. We use the Black-Scholes option pricing method to establish fair value of options. Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility and actual and projected employee stock option exercise behaviors. Any changes in these assumptions may materially affect the estimated fair value of the share-based award. We determine the estimated fair value per share of restricted stock units as the closing stock price on the date of grant, as reported by the NASDAQ Global Market.
 
Income taxes:  We account for income taxes under the provisions of Accounting Standards Codification (“ASC”) 740, Income Taxes.  The determination of our income tax-related account balances requires the exercise of significant judgment by management. Accordingly, we determine deferred tax assets and liabilities based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. We assess the likelihood that deferred tax assets will be recovered from future taxable income and establish a valuation allowance when management believes recovery is not likely.
 
We record estimated penalties and interest related to income tax matters, including uncertain tax positions as a component of income tax expense.


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Long-term assets related to Indian casino projects:
 
Notes receivable.  We have formal procedures governing our evaluation of opportunities for potential Indian-owned casino development projects that we follow before entering into agreements to provide financial support for the development of these projects. We determine whether there is probable future economic benefit prior to recording any asset related to the Indian casino project. We initially evaluate the following factors involving critical milestones that affect the probability of developing and operating a casino:
 
  •  Has the U.S. Government’s Bureau of Indian Affairs federally recognized the tribe as a tribe?
 
  •  Does the tribe hold or have the right to acquire land to be used for the casino site?
 
  •  Has the Department of the Interior put the land into trust for purposes of being used as a casino site?
 
  •  Has the tribe entered into a gaming agreement with the state in which the land is located, if required by the state?
 
  •  Has the tribe obtained approval by the National Indian Gaming Commission of the management agreement?
 
  •  Do other legal and political obstacles exist that could block development of the project and, if so, what is the likelihood of the tribe successfully prevailing?
 
  •  An evaluation by management of the financial projections of the project given the project’s geographic location and the feasibility of the project’s success given such location;
 
  •  The structure and stability of the tribal government;
 
  •  The scope of the proposed project, including the physical scope of the contemplated facility and the expected financial scope of the related development;
 
  •  An evaluation of the proposed project’s ability to be built as contemplated and the likelihood that financing will be available; and
 
  •  The nature of the business opportunity to us, including whether the project would be a financing, development and/or management opportunity.
 
We account for our notes receivable from the tribes as in-substance structured notes in accordance with the guidance contained in ASC 320, Investments — Debt and Equity Securities. Under their terms, the notes do not become due and payable unless the projects are completed and operational, and distributable profits are available from the operations. However, in the event our development activity is terminated prior to completion, we generally retain the right to collect in the event of completion by another developer. Because the stated rate of the notes receivable alone is not commensurate with the risk inherent in these projects (at least prior to commencement of operations), the estimated fair value of the notes receivable is generally less than the amount advanced. At the date of each advance, the difference between the estimated fair value of the note receivable and the actual amount advanced is recorded as an intangible asset, and the two assets are accounted for separately.
 
Subsequent to its initial recording at estimated fair value, the note receivable portion of the advance is adjusted to its current estimated fair value at each balance sheet date using then current assumptions including typical market discount rates, and expected repayment terms as may be affected by estimated future interest rates and opening dates, with the latter affected by changes in project-specific circumstances such as ongoing litigation, the status of regulatory approval and other factors previously noted. The notes receivable are not adjusted to a fair value estimate that exceeds the face value of the note plus accrued interest, if any. Due to uncertainties surrounding the projects, no interest income is recognized during the development period, but changes in estimated fair value of the notes receivable still held as of the balance sheet date are recorded as unrealized gains or losses in our consolidated statement of earnings (loss).
 
Upon opening of the casino, any difference between the then estimated fair value of the notes receivables and the amount contractually due under the notes is amortized into income using the effective interest method over the remaining term of the note. Notes receivable are stated at the amount of unpaid principal and are net of unearned discount and, if applicable, an allowance for impaired notes receivable.


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Notes receivable for open casinos are periodically evaluated for impairment pursuant to ASC 310, Receivables (“ASC 310”). Lakes considers a note receivable to be impaired when, based on current information and events, it is determined that Lakes will not be able to collect all amounts due according to the terms of the note receivable agreement. Impairment is measured based on the present value of expected future cash flows discounted at the note receivable’s effective interest rate. Interest income for impaired notes receivable will be accrued on the net carrying amount of the impaired note receivable under the effective interest method with significant changes to expected cash flows reflected in the impairment charge on notes receivable.
 
Additionally, upon significant changes in the development activity prior to the opening of a casino, including termination of the project, notes receivable would be evaluated for impairment pursuant to ASC 310 and any necessary decline in the carrying amount will be recorded as unrealized losses in our consolidated statement of earnings (loss). Subsequent to the initial impairment evaluation, we continue to monitor the note receivable for any changes in expected cash flows and recognize those changes in accordance with ASC 310.
 
Intangible assets related to Indian casino projects.  Intangible assets related to the acquisition of the management, development, consulting or financing contracts are accounted for using the guidance in ASC 350, Intangibles — Goodwill and Other (“ASC 350”). In accordance with ASC 350, we amortize the intangible assets related to the acquisition of the management, development, consulting or financing contracts under the straight-line method over the term of the respective contracts which commence when the related casinos open. In addition to the intangible asset associated with the cash advances to tribes described above, these assets include actual costs incurred to acquire our interest in the projects from third parties.
 
Pursuant to ASC 350, the intangible assets are periodically evaluated for impairment based on the estimated cash flows from the respective contract on an undiscounted basis. In the event the carrying value of the intangible assets, in combination with the carrying value of land held for development and other assets associated with the Indian casino projects described below, were to exceed the undiscounted cash flow, an impairment would be recorded. Such an impairment would be measured based on the difference between the fair value and carrying value of the intangible assets. We principally use internal forecasts to estimate the undiscounted future cash flows used in our impairment analyses. These forecasts and fair value assumptions are highly subjective and judgmental and are primarily based on management’s judgment which takes into account the casino industry, known operating results and trends, and the current economic environment that the casino serves to develop an applied discount rate. During periods of economic instability, we may not be able to accurately forecast future cash flows from our Indian casino projects. Therefore, our estimates and assumptions may change, and are reasonably likely to change in future periods. These changes could adversely affect our consolidated statements of earnings.
 
Land held for development.  Included in land held for development is land held for possible transfer to Indian tribes for use in certain of the future casino resort projects. In the event that this land is not transferred to the tribes, we have the right to sell it. We evaluate these assets for impairment in combination with intangible assets related to acquisition of management, development, consulting or financing contracts and other assets related to the Indian casino projects as discussed above.
 
Management fee receivable and other.  Other assets primarily consist of amounts due from related parties that are directly related to the development and opening of Lakes’ Indian casino project in addition to deferred management fees and related interest due from the Shingle Springs Tribe. See Note 17 to the consolidated financial statements included in Item 8 of our Annual Report on Form 10-K. Also included in this category are costs incurred related to the Indian casino projects, which have not yet been included as part of the notes receivable because of timing of the payment of these costs.
 
In addition, we incur certain non-reimbursable costs related to the projects that are not included in notes receivable, which are expensed as incurred. These costs include salaries, travel and certain legal costs.
 
Long-term assets related to Indian Casino projects.  The consolidated balance sheets as of April 3, 2011 (unaudited) and January 2, 2011 include long-term assets related to Indian casino projects of $64.7 million and


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$64.3 million, respectively, which primarily related to three separate projects. The amounts are as follows by project (in thousands):
 
                                                 
    April 3, 2011  
          Shingle
                         
    Pokagon
    Springs
    Jamul
    Iowa
             
    Band     Tribe     Tribe     Tribe     Other     Total  
    (Unaudited)  
 
Notes and interest receivable, net of current portion and allowance for impaired notes receivable
  $     $ 31,808     $     $     $     $ 31,808  
Notes receivable at fair value
                12,122                   12,122  
Intangible assets related to Indian casino projects
    8,953       4,977                         13,930  
Land held for development
                960                   960  
Management fee receivable and other(*)
    60       3,836       334       237       1,417       5,884  
                                                 
    $ 9,013     $ 40,621     $ 13,416     $ 237     $ 1,417     $ 64,704  
                                                 
 
                                                 
    January 2, 2011  
          Shingle
                         
    Pokagon
    Springs
    Jamul
    Iowa
             
    Band     Tribe     Tribe     Tribe     Other     Total  
 
Notes and interest receivable, net of current portion and allowance for impaired notes receivable
  $     $ 31,192     $     $     $     $ 31,192  
Notes receivable at fair value
                11,129                   11,129  
Intangible assets related to Indian casino projects
    10,631       5,242                         15,873  
Land held for development
                960                   960  
Management fee receivable and other(*)
    60       3,001       315       257       1,562       5,195  
                                                 
    $ 10,691     $ 39,435     $ 12,404     $ 257     $ 1,562     $ 64,349  
                                                 
 
 
(*) Primarily includes deferred management fees due from the Shingle Springs Tribe for the management of the Red Hawk Casino of $3.7 million and $2.9 million as of April 3, 2011 and January 2, 2011, respectively, and notes receivable from related parties of $1.7 million and $1.8 million, net of current portion, as of April 3, 2011 and January 2, 2011, respectively.
 
The key assumptions, estimates and criteria used in the determination of the estimated fair value of the notes receivable are primarily unobservable level three inputs, which are casino opening dates, pre- and post-opening date interest rates, discount rates and probabilities of projects opening. The estimated casino opening dates used in the valuations of the notes receivable related to Indian casino projects that are not yet under construction reflect the weighted-average of three scenarios: a base case (which is based on our 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 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 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 open and operating gaming enterprises similar to each of the projects. In estimating this discount rate, market data of other public gaming related companies is considered. 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.


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Shingle Springs
 
Lakes concluded that it was probable that substantial amounts due would not be repaid within the contract term and therefore determined that the notes were impaired as of April 3, 2011 and January 2, 2011. This determination was based on the continued significant economic pressures in the northern California market and increased competition in the market the property serves, all of which have negatively impacted expected future cash flows for the property. The outstanding principal on the notes receivable from the Shingle Springs Tribe was $67.8 million as of April 3, 2011, which is comprised of $66.7 million related to pre-construction advances and $1.1 million of advances related to the minimum guaranteed monthly payment. The carrying amount of long-term notes and interest receivable, which is net of current portion $1.1 million, unearned discount of $14.6 million and allowance for impairment of $20.8 million, was $31.8 million as of April 3, 2011. The carrying amount of long-term notes and interest receivable at January 2, 2011 was $31.2 million, which was net of current portion of $1.0 million, unearned discount of $14.9 million and allowance for impairment of $21.0 million. The carrying amounts represent the present value of expected future cash flows.
 
Jamul Tribe
 
The following table provides the key assumptions used to value the notes receivable from the Jamul Tribe at estimated fair value (dollars in thousands):
 
         
    As of April 3, 2011   As of January 2, 2011
    (Unaudited)    
 
Face value of note (principal and interest)
  $63,056
($40,762 principal and $22,294 interest)
  $61,108
($39,638 principal and $21,470 interest)
Estimated months until casino opens (weighted-average of three scenarios)
  66 months   66 months
Projected interest rate until casino opens
  7.60%   7.29%
Projected interest rate during the loan repayment term
  10.34%   10.19%
Discount rate
  19.50%   20.00%
Repayment terms of note
  120 months   120 months
Probability rate of casino opening (weighting of four scenarios)
  50%   50%
 
The following table represents a sensitivity analysis prepared by Lakes as of April 3, 2011 on the notes receivable from the Jamul Tribe, based upon changes in the probability rate of the casino opening by five percentage points and the estimated casino opening date by one year:
 
         
    Sensitivity Analysis  
 
Estimated fair value of notes receivable
  $ 12,122  
5% less probable
    10,714  
One year delay
    10,751  
Both 5% less probable and one year delay
    9,480  
5% increased probability
    13,530  
One year sooner
    13,640  
Both 5% increased probability and one year sooner
    15,200  
 
The assumption changes used in the sensitivity analysis above are hypothetical. The effect of the variation in the probability assumption and estimated opening date on the estimated fair value of the notes receivable from Indian tribes was calculated without changing any other assumptions; however, in reality, changes in these factors may result in changes in another. For example, the change in probability could be associated with a change in discount rate, which might magnify or counteract the sensitivities.


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The following represents the nature of the advances to the tribes for Jamul project under development, which represent the principal amount of the notes receivable, as of April 3, 2011 and January 2, 2011 (in thousands).
 
                 
    April 3,
    January 2,
 
Advances Principal Balance
  2011     2011  
 
Note receivable, pre-construction(a)
  $ 39,812     $ 38,688  
Note receivable, land(b)
    950       950  
                 
    $ 40,762     $ 39,638  
                 
 
 
(a) We fund certain costs incurred to develop the casino project. These costs relate to construction costs, legal fees in connection with various regulatory approvals and litigation, environmental costs and design consulting, and we, in order to obtain the development agreement and management contract, agree to advance a monthly amount used by the tribe for a variety of tribal expenses.
 
(b) We purchased land to be used and transferred to the tribe in connection with the casino project.
 
The notes receivable pre-construction advances consist of the following principal amounts advanced to the Jamul Tribe as of April 3, 2011 and January 2, 2011 (in thousands):
 
                 
    April 3,
    January 2,
 
    2011     2011  
 
Monthly stipend
  $ 7,129     $ 6,923  
Construction
    2,564       2,546  
Legal
    5,459       5,218  
Environmental
    3,816       3,603  
Design
    16,908       16,508  
Gaming license
    1,239       1,193  
Lobbyist
    2,697       2,697  
                 
    $ 39,812     $ 38,688  
                 
 
Evaluation of impairment related to long-term assets related to Indian casino projects, excluding the notes receivable.  Management periodically evaluates the intangible assets, land held for development and other costs associated with each of the projects for impairment based on the estimated undiscounted cash flows from the applicable management contract on an undiscounted basis. In the event the carrying value of the intangible assets, in combination with the carrying value of land held for development and other assets associated with the Indian casino projects were to exceed the undiscounted cash flow, an impairment loss would be recorded, based on the difference between the estimated fair value and carrying value of the assets.
 
The financial models prepared by management for each project are based upon the scope of each of the projects, which are supported by a feasibility study as well as a market analysis where the casino will be built. We (as predecessor to Grand Casinos Inc.) began developing Indian casino projects in 1990 and demonstrated success from the day the first Indian casino opened in 1991 through the expiration of the Coushatta management contract in 2002. Additionally, we managed the Cimarron Casino in Oklahoma from 2006 through May 2010 and have been managing the Four Winds Casino Resort since August of 2007 and the Red Hawk Casino since December of 2008. Our successful history legitimizes many of the key assumptions supporting the financial models. Forecasts for each applicable casino development were developed based on analysis of published information pertaining to the particular markets in which our Indian casinos will be located and are updated quarterly based on evolving events and market conditions. In addition, we have many years of casino operations experience, which provides an additional resource on which to base our revenue expectations. The forecasts were prepared by us not for purposes of the valuation at hand but rather for purposes of our and the tribes’ business planning.


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Shingle Springs
 
Due to the carrying amount of the intangibles associated with the Shingle Springs Tribe exceeding the expected future cash flows from the management agreement for the Red Hawk Casino, the intangible assets were deemed impaired as of January 2, 2011. This determination was based on the continued significant economic pressures in the northern California market and increased competition in the market the property serves, all of which have negatively impacted expected future cash flows for the property. No impairment losses were recognized during the quarters ended April 3, 2011 and April 4, 2010.
 
Jamul Tribe
 
The primary assumptions included within management’s financial model for the Jamul Casino project are as follows:
 
                 
    April 3,
  January 2,
    2011   2011
 
No. of Class II electronic gaming devices
    1,000       1,000  
No. of Table games
    20       20  
No. of Poker tables
    5       5  
Win/Class II electronic gaming devices/day — 1st year
  $ 172     $ 172  
Win/Table game/day — 1st year
  $ 471     $ 471  
Win/Poker table/day — 1st year
  $ 312     $ 312  
 
Lakes and the Jamul Tribe have consulted with third party advisors as to the architectural feasibility of a plan to build a casino with related amenities such as parking on the six acres of reservation land held by the Jamul Tribe and have concluded that such a project could be successfully built assuming adequate financing can be obtained. The gaming facility is currently planned to be a class II electronic gaming device facility which will not require a compact. The agreement between Lakes and the Jamul Tribe will also be modified as the political, regulatory and access issues move closer to resolution.
 
The Jamul Casino project has been significantly delayed due to various political and regulatory issues. Significant risk exists related to this project moving forward to completion, and we have recorded significant impairment charges against our investment in this project. However, the Jamul Tribe has the two basic requirements to eventually build a successful project — federal recognition as an Indian Tribe and Indian land eligible for gaming and Lakes currently expects to continue its involvement with this project.
 
Description of each Indian casino project and evaluation of critical milestones:
 
Pokagon Band
 
Business arrangement.  On August 2, 2007, the Four Winds Casino Resort in New Buffalo, Michigan opened to the public. We receive approximately 24% of net income up to a certain level and 19% of net income over that level, as a management fee. The term of the management contract is five years, which began on August 2, 2007. Payment of our management fee is subordinated to the Pokagon Gaming Authority’s senior indebtedness relating to the Four Winds Casino Resort. The Pokagon Band may also buy out the management contract. The buy-out amount is calculated by multiplying the previous 12 months of management fees earned by the remaining number of years under the management contract, discounted back to the present value at the time the buy-out occurs. The NIGC approved the management contract in March 2006.
 
Shingle Springs
 
Business arrangement.  On December 17, 2008, the Red Hawk Casino opened to the public. We earn a management fee equal to 30% of net income (as defined by the management contract) of the operations annually for the first five years, with a declining percentage in years six and seven. Payment of our management fee is subordinated to the repayment of $450 million senior note financing of an affiliate of the Shingle Springs Tribe, the repayment of $42.2 million furniture, furnishings and equipment financing as of April 3, 2011 and a minimum


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priority payment to the Shingle Springs Tribe. Generally, the order of priority of payments from the Red Hawk Casino’s cash flows is as follows: a certain minimum monthly guaranteed payment to the Shingle Springs Tribe, repayment of various debt with interest accrued thereon, management fee to Lakes, and other obligations, with the remaining funds distributed to the Shingle Springs Tribe. In order to assist the Red Hawk Casino in increasing cash levels, Lakes is deferring allowed payments of principal on its 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 management contract includes provisions that allow the Shingle Springs Tribe to buy-out the management contract after four years from the opening date. The buy-out amount is calculated by multiplying the previous 12 months of management fees earned by the remaining number of years under the contract, discounted back to the present value at the time the buy-out occurs. If the Shingle Springs Tribe elects to buy out the contract, all outstanding amounts owed to Lakes immediately become due and payable. The NIGC approved the management contract in July 2004, which was subsequently amended in April 2007.
 
We acquired our initial interest in the development and management contracts for the Shingle Springs Casino from KAR — Shingle Springs in 1999 and formed a joint venture, in which the contracts were held, between us and KAR — Shingle Springs. On January 30, 2003, we purchased the remaining KAR — Shingle Springs’ partnership interest in the joint venture. In connection with the purchase transaction, we entered into separate agreements with the two individual owners of KAR — Shingle Springs (Kevin M. Kean and Jerry A. Argovitz).
 
During 2009, Lakes became obligated to pay Mr. Argovitz $1 million per year (prorated based on a 365 day year) during the remainder of the seven-year initial term of the management contract which commenced in December 2008 between Lakes and the Shingle Springs Tribe, as a result of Mr. Argovitz’s election under an existing agreement related to this project. Also as a result of this election, Mr. Argovitz will not be entitled to obtain a 15% equity interest in the Lakes’ entity that holds the rights to the management fees earned by Lakes from the Red Hawk Casino operations.
 
During 2009, Lakes became obligated to pay to Mr. Kean $1 million per year (prorated based on a 365 day year) during the remainder of the seven-year initial term of the management contract which commenced in December 2008 between Lakes and the Shingle Springs Tribe, as a result of Mr. Kean’s election under an existing agreement related to this project. Also as a result of this election, Mr. Kean will not be entitled to receive consulting fees equal to 15% of the management fees earned by Lakes from the Red Hawk Casino operations.
 
See Note 9 to the unaudited consolidated financial statements for further discussion.
 
Jamul Tribe
 
The Jamul Casino project has been significantly delayed due to various political and regulatory issues, including those related to access from State Highway 94 to the proposed casino site. In addition, the California Department of Transportation (“CalTrans”) issued a letter in 2008 to the Jamul Tribe indicating that it would not allow access to a casino operation from State Highway 94. In January 2011, the Jamul Tribe and CalTrans entered into an agreement whereby CalTrans agreed to review and process the Jamul Tribe’s encroachment permit application relating to the access, and provided that if the Jamul Tribe’s application meets certain legal requirements, issue the encroachment permit. The Jamul Tribe is currently performing various environmental and traffic studies necessary for the permit application.
 
Business arrangement.  The Jamul Tribe has an approximate six-acre reservation on which the casino project is currently planned to be built. The reservation is located near San Diego, California. Under the current compact that the Jamul Tribe has with the State of California (the “State”) and based upon requirements in other compacts approved by the State in 2004, the Jamul Tribe completed a Tribal Environmental Impact Statement/Report that was approved by the Jamul Tribe’s General Council with a record of decision issued by the Jamul Tribe on December 16, 2006. Since that time, the Jamul Tribe has received comments from various state agencies including the representative from the California Governor’s office. The Jamul Tribe and the State have met on several occasions in an attempt to address the State’s comments related to compact requirements. Lakes and the Jamul Tribe have continued to evaluate the Jamul Tribe’s alternatives of pursuing a new compact, complying with certain requirements in their existing compact or building and operating a casino based solely on class II electronic gaming devices. The current plan is for a smaller scale gaming facility that will become a solely class II electronic gaming


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device facility which will not require a compact. The agreement between Lakes and the Jamul Tribe (discussed below) will also be modified as the political, regulatory and access issues move closer to resolution.
 
Effective March 30, 2006, Lakes entered into a development financing and services agreement with the Jamul Tribe to assist the Jamul Tribe in developing the Jamul Casino which the Jamul Tribe will manage. As part of the current agreement, Lakes will use its best efforts to obtain financing, from which advances will be made to the Jamul Tribe to pay for the design and construction of the Jamul Casino. Under the current development financing and services agreement, Lakes is entitled to receive a flat fee for its development design services, and a flat fee for its construction oversight services, payable evenly over the first five years after the opening date of the Jamul Casino. In connection with Lakes’ financing of the Jamul Casino, the Jamul Tribe is required to pay interest over a ten-year period on sums advanced by Lakes equal to the rate charged to Lakes for obtaining the necessary funds plus five percent. Amounts previously advanced by Lakes to the Jamul Tribe in connection with the Jamul Tribe’s proposed casino resort are included in the development financing and services agreement financing amount. However, as discussed above, this agreement is planned to be modified as the political, regulatory and access issues move closer to resolution. Third party financing may not be available with acceptable terms and if Lakes or the Jamul Tribe is unable to obtain the appropriate amount of financing for this project, the project may not be completed as planned.
 
Lakes acquired its initial interest in the development agreement and management contract for the Jamul casino from Kean Argovitz Resorts — Jamul, LLC (“KAR — Jamul”) in 1999 and formed a joint venture in which the contract was held between Lakes and KAR — Jamul. This development agreement and a management contract has been submitted to the NIGC for approval. On January 30, 2003, Lakes purchased the remaining KAR — Jamul’s partnership interest in the joint venture. In connection with the purchase transaction, Lakes entered into separate agreements with the two individual owners of KAR — Jamul (Mr. Kean and Mr. Argovitz).
 
Under the current agreement with Mr. Kean, he may elect to serve as a consultant to Lakes during the term of the casino management agreement if he is found suitable by relevant gaming regulatory authorities. In such event, Mr. Kean will be entitled to receive annual consulting fees equal to 20% of the management fees received by Lakes from the Jamul Casino operations, less certain costs of operations. If Mr. Kean is not found suitable by relevant gaming regulatory authorities or otherwise elects not to serve as a consultant, he will be entitled to receive annual payments of $1 million from the Jamul Casino project during the term of the respective casino management agreement (but not during any renewal term of such agreement).
 
Under the current agreement with Mr. Argovitz, if he is found suitable by relevant gaming regulatory authorities he may elect to re- purchase his respective original equity interest in Lakes Kean Argovitz Resorts-California, LLC and then be entitled to obtain a 20% equity interest in such. If he is not found suitable or does not elect to purchase equity interests in Lakes Kean Argovitz Resorts — California, LLC, Mr. Argovitz may elect to receive annual payments of $1 million from the Jamul Casino project from the date of election through the term of the respective casino management agreement (but not during any renewal term of such agreement).


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Our evaluation of the critical milestones.  The following table outlines the status of each of the following primary milestones necessary to complete the Jamul project as of April 3, 2011 and January 2, 2011. Both the positive and negative evidence was reviewed during our evaluation of the critical milestones.
 
         
    April 3,
  January 2,
Critical Milestone
  2011   2011
 
Federal recognition of the tribe
  Yes   Yes
Possession of usable land corresponding with needs based on Lakes’ project plan
  Yes   Yes
Usable land placed in trust by Federal government
  Not necessary, as land is reservation land.   Not necessary, as land is reservation land.
Usable county agreement, if applicable
  N/A   N/A
Usable state compact that allows for gaming consistent with that outlined in Lakes’ project plan
  N/A — the Jamul Tribe’s current plan is to operate a solely class II electronic gaming device facility, which does not require a compact with the State.   N/A — the Jamul Tribe’s current plan is to operate a solely class II electronic gaming device facility, which does not require a compact with the State.
NIGC approval of management contract in current and desired form
  N/A as the Jamul Tribe’s current plan is to operate a solely class II electronic gaming device facility, which does not need to be approved by the NIGC.   N/A as the Jamul Tribe’s current plan is to operate a solely class II electronic gaming device facility, which does not need to be approved by the NIGC.
Resolution of all litigation and legal obstacles
  N/A, there has been some local opposition regarding the project and various political and regulatory issues related to site access.   N/A, there has been some local opposition regarding the project and various political and regulatory issues related to site access.
Financing for construction
  No, however, preliminary discussions with investment bankers regarding assisting in obtaining financing have taken place. The current general economic environment may limit our ability to obtain financing at desirable levels in the near-term.   No, however, preliminary discussions with investment bankers regarding assisting in obtaining financing have taken place. The current general economic environment may limit our ability to obtain financing at desirable levels in the near-term.
Any other significant project milestones or contingencies, the outcome of which could have a material affect on the probability of project completion as planned
  Yes. The current plan is for the gaming facility to be a solely class II electronic gaming device facility. The agreement between Lakes and the Jamul Tribe will also be modified as the political, regulatory and access issues move closer to resolution.   Yes. The current plan is for the gaming facility to be a solely class II electronic gaming device facility. The agreement between Lakes and the Jamul Tribe will also be modified as the political, regulatory and access issues move closer to resolution.
 
Our evaluation and conclusion regarding the above critical milestones and progress.  We entered into a development financing and services agreement with the Jamul Tribe in March 2006, as discussed above which eliminated the need for land contiguous to the reservation land to be taken into trust. We believe that there is no requirement that the NIGC approve the development financing and services agreement. The Jamul Casino is planned to be built on the Jamul Tribe’s existing six acres of reservation land. Reservation land qualifies for gaming without going through a land-in-trust process. We have consulted with third-party advisors as to the architectural feasibility of the alternative plan and have been assured that the project can be successfully built on the reservation land.


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The Jamul Casino project has been significantly delayed due to various political and regulatory issues. Significant risk exists related to this project moving forward to completion, and we have recorded significant impairment charges against our investment in this project. However, the Jamul Tribe has the two basic requirements to eventually build a successful project — federal recognition as an Indian Tribe and Indian land eligible for gaming and Lakes currently expects to continue its involvement with this project. The Jamul Casino could open as early as April 2016.
 
Recently issued accounting pronouncements
 
For information related to recently adopted pronouncements see Note 2 to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
 
Seasonality
 
We believe that the operations of all casinos managed by us are affected by seasonal factors, including holidays, weather and travel conditions.
 
Regulation and taxes
 
We and the owners of the existing and planned casinos that we are and will be working with are subject to extensive regulation by state gaming authorities. We will also be subject to regulation, which may or may not be similar to current state regulations, by the appropriate authorities in any jurisdiction where we may conduct gaming activities in the future. Changes in applicable laws or regulations could have an adverse effect on us.
 
The gaming industry represents a significant source of tax revenues to regulators. From time to time, various federal legislators and officials have proposed changes in tax law, or in the administration of such law, affecting the gaming industry. It is not possible to determine the likelihood of possible changes in tax law or in the administration of such law. Such changes, if adopted, could have a material adverse effect on our future financial position, results of operations and cash flows.
 
Off-balance sheet arrangements
 
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors, except for the financing commitments previously discussed.
 
Private Securities Litigation Reform Act
 
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain information included in this Quarterly Report on Form 10-Q and other materials filed or to be filed by Lakes with the United States Securities and Exchange Commission (“SEC”) as well as information included in oral statements or other written statements made or to be made by Lakes contain statements that are forward-looking, such as plans for future expansion and other business development activities as well as other statements regarding capital spending, financing sources and the effects of regulation (including gaming and tax regulation) and competition.
 
Such forward looking information involves important risks and uncertainties that could significantly affect the anticipated results in the future and, accordingly, actual results may differ materially from those expressed in any forward-looking statements made by or on behalf of Lakes.
 
These risks and uncertainties include, but are not limited to, the need for current financing to meet Lakes’ operational and development needs; the inability to complete or possible delays in completion of Lakes’ casino projects, including various regulatory approvals and numerous other conditions which must be satisfied before completion of these projects; possible termination or adverse modification of management or development contracts; the highly competitive industry in which Lakes operates; possible changes in regulations; reliance on continued positive relationships with Indian tribes and repayment of amounts owed to Lakes by Indian tribes;


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possible need for future financing to meet Lakes’ expansion goals; risks of entry into new businesses, and reliance on Lakes’ management. For more information, review Lakes’ filings with the Securities and Exchange Commission. For further information regarding the risks and uncertainties, see the “Risk Factors” section in Item 1A of this Annual Report on Form 10-K for the year ended January 2, 2011.
 
ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable
 
ITEM 4.   CONTROLS AND PROCEDURES
 
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, (the “1934 Act”) as of the end of the period covered by this quarterly report. Based on their evaluation, our chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the 1934 Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information required to be disclosed by the Company in the reports that it files or submits under the 1934 Act is accumulated and communicated to the Company’s management, including its chief executive officer and chief financial officer as appropriate to allow timely decisions regarding required disclosure.
 
There have been no changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal control over financial reporting during the three months ended April 3, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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Part II.
Other Information
 
ITEM 1.   LEGAL PROCEEDINGS
 
We are involved in various inquiries, administrative proceedings, and litigation relating to various contracts and other matters arising in the normal course of business. While any proceeding or litigation has an element of uncertainty, management currently believes that the likelihood of an unfavorable outcome is remote, and is not likely to have a material adverse effect upon our unaudited consolidated financial statements.
 
ITEM 1A.   RISK FACTORS
 
There have been no material changes to our risk factors identified in the “Risk Factors” section in Item 1A of our Annual Report on Form 10-K, for the year ended January 2, 2011.
 
ITEM 6.   EXHIBITS
 
         
Exhibits
 
Description
 
  31 .1   Certification of CEO pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31 .2   Certification of CFO pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32 .1   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
 
LAKES ENTERTAINMENT, INC.
Registrant
 
/s/  LYLE BERMAN
Lyle Berman
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
 
/s/  TIMOTHY J. COPE
Timothy J. Cope
President and Chief Financial Officer
(Principal Financial and Accounting Officer)
 
Dated: May 11, 2011


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