GOLDEN ENTERTAINMENT, INC. - Annual Report: 2012 (Form 10-K)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

          (Mark One)

For the fiscal year ended January 1, 2012

Or

For the transition period from              to             

Commission File No. 0-24993

LAKES ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

130 Cheshire Lane, Suite 101, Minnetonka, Minnesota 55305

(Address of principal executive offices)

(952) 449-9092

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None.

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ¨    No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ¨    No  þ

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ

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 definition of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

As of March 12, 2012, 26,440,936 shares of the Registrant’s Common Stock were outstanding. Based upon the last sale price of the Common Stock as reported on the NASDAQ Global Market on July 1, 2011 (the last business day of the Registrant’s most recently completed second quarter), the aggregate market value of the Common Stock held by non-affiliates of the Registrant as of such date was $45.7 million. For purposes of these computations, affiliates of the Registrant are deemed only to be the Registrant’s executive officers and directors.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement for its 2012 Annual Meeting of Shareholders to be filed with the Commission within 120 days after the close of the Registrant’s fiscal year are incorporated by reference into Part III of this Annual Report on Form 10-K.

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Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain information included in this Annual Report on Form 10-K and other materials filed or to be filed by Lakes Entertainment, Inc. 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 Entertainment, Inc. 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 Entertainment, Inc.

These risks and uncertainties include, but are not limited to, need for potential future financing to meet Lakes Entertainment, Inc.’s development needs; those relating to the inability to complete or possible delays in completion of Lakes Entertainment, Inc.’s 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; Lakes Entertainment, Inc. operating in a highly competitive industry; possible changes in regulations; reliance on continued positive relationships with Indian tribes and repayment of amounts owed to Lakes Entertainment, Inc. by Indian tribes; possible need for future financing to meet Lakes Entertainment, Inc.’s expansion goals; risks of entry into new businesses, and reliance on Lakes Entertainment, Inc.’s management. For more information, review Lakes Entertainment, Inc.’s filings with the SEC. For further information regarding the risks and uncertainties, see the “Risk Factors” section in Item 1A of this Annual Report on Form 10-K.

PART I

ITEM 1.  BUSINESS

Business Overview

Lakes Entertainment, Inc., a Minnesota corporation (“Lakes”, “we” or “our”), develops, finances and manages casino properties. Lakes’ primary business historically has been to develop and manage Indian-owned casino properties that offer the opportunity for long-term development of related entertainment facilities, including hotels, golf courses, theaters, recreational vehicle parks and other complementary amenities. We are currently managing the Red Hawk Casino in California for the Shingle Springs Band of Miwok Indians (the “Shingle Springs Tribe”). We are also involved in other business activities, including the investment in non-Indian casinos being developed in Ohio and the potential development of a casino resort in Maryland, as further discussed below. See note 17, Segment Information, to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for information on our segments.

History

Lakes is a Minnesota corporation formed in 1998 under the name of GCI Lakes, Inc., which was changed to Lakes Gaming, Inc. in August 1998 and to Lakes Entertainment, Inc. in 2002. Lakes is the successor to the Indian gaming business of Grand Casinos, Inc. (“Grand Casinos”) and became a public company through a spin-off transaction in which shares of Lakes’ common stock were distributed to the shareholders of Grand Casinos. Before the spin-off, Grand Casinos had management contracts for Grand Casino Hinckley and Grand Casino Mille Lacs, both Indian-owned casinos in Minnesota. Those contracts ended before the spin-off. After the spin-off, Lakes managed two Indian-owned casinos in Louisiana previously managed by Grand Casinos. Lakes managed the largest casino resort in Louisiana, Grand Casino Coushatta, until the management contract expired in 2002. Lakes also had a management contract for Grand Casino Avoyelles, which was terminated through an

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early buy-out of the contract effective in 2000. Lakes had a management contract for the Cimarron Casino in Oklahoma from 2006 through May 2010 and for the Four Winds Casino Resort from August 2007 through June 2011. Lakes began managing the Red Hawk Casino in 2008.

Indian Casino Business

Development and Management of the Red Hawk Casino

Lakes developed, and has a seven-year contract to manage, the Red Hawk Casino that was built on the Rancheria of the Shingle Springs Tribe in El Dorado County, California, adjacent to U.S. Highway 50, approximately 30 miles east of Sacramento, California, and has direct freeway access from a dedicated interchange. Lakes began managing the Red Hawk Casino when it opened to the public on December 17, 2008. The Red Hawk Casino includes approximately 88,000 square feet of casino space and features approximately 2,200 slot machines and gaming devices, 70 table games, seven poker tables, five restaurants, four bars, retail space, a parking garage, and a child care facility and arcade.

On September 30, 2008, the California state legislature ratified an amended compact between the Shingle Springs Tribe and the State of California, and on November 28, 2008, the amended compact was approved by the Bureau of Indian Affairs (the “BIA”). The amended compact runs through 2029 and allows for a maximum of 5,000 class III slot machines at one gaming facility. The amended compact requires the Shingle Springs Tribe to share revenues with the State of California based on a sliding scale percentage of net win ranging from 20% to 25% from the operation of the slot machines. The Shingle Springs Tribe also contributes $4.6 million per year to the Revenue Sharing Trust Fund, which pays up to $1.1 million each year to each of the non-gaming tribes in California. The amended compact also allows for the Shingle Springs Tribe to deduct up to $5.2 million annually for 20 years from the payments made to the State of California from the operation of slot machines.

During July 2004, the National Indian Gaming Commission (the “NIGC”) approved the development and management agreements between the Shingle Springs Tribe and Lakes, permitting Lakes to manage a Class II and Class III casino on the Shingle Springs Rancheria. On June 28, 2007, an affiliate of the Shingle Springs Tribe closed on a $450 million senior note financing to fund the construction of the Red Hawk Casino and a dedicated interchange off U.S. Highway 50 to provide direct access to the Shingle Springs Rancheria and the Red Hawk Casino. On September 30, 2008, an affiliate of the Shingle Springs Tribe closed on a $77 million furniture, furnishings and equipment financing for the Red Hawk Casino. The proceeds from the financing arrangement were primarily used to purchase the various components of furniture, furnishings and equipment necessary to furnish the Red Hawk Casino project. Under the terms of the development and management agreement, as amended, Lakes made pre-construction advances to the Shingle Springs Tribe in the form of a transition loan of $74.4 million, including interest accrued during the pre-construction period. In addition, Lakes made advances of $8.8 million associated with land purchases. The land loan was repaid to Lakes, including accrued interest, on June 28, 2007 in connection with the close of the $450 million senior note financing. Advances on the transition loan of $66.7 million remain outstanding as of January 1, 2012.

The amended development and management agreement provided for Lakes to assist in the design, development and construction of the facility as well as manage the pre-opening, opening and continued operations of the Red Hawk Casino and related amenities for a period of seven years from the opening date. As compensation for Lakes’ management services, Lakes earns a management fee equal to 30% of net revenue (as defined by the development and management agreement) (“Net Revenue”) of the operations annually for the first five years. During years six and seven, Lakes will earn a fee equal to 25% of the first $90 million of Net Revenue per year, 15% of the next $60 million of Net Revenue per year and 5% of Net Revenue over $150 million per year. Payment of management fees is subordinated to the repayment of $450 million senior note financing of an affiliate of the Shingle Springs Tribe, the repayment of $30.7 million furniture, furnishings and equipment financing outstanding as of January 1, 2012 and a minimum priority payment to the Shingle Springs Tribe.

The opening of the Red Hawk Casino triggered the repayment terms of the notes receivable which are scheduled to be repaid over the original seven-year term at a rate per annum equal to the prime rate plus two percent

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(2%) (5.25% as of January 1, 2012). If, however, net revenues (as defined in the development and management agreement) from the project are insufficient, payments are deferred. The order of priority of payments from the Red Hawk Casino’s cash flows has been as follows: a certain minimum monthly guaranteed payment to the Shingle Springs Tribe, various debt with interest accrued thereon (including Lakes’ pre-construction advances), management fee due to Lakes, and other obligations, if any, and the remaining funds, if any, distributed to the Shingle Springs Tribe. In order to assist the Red Hawk Casino in increasing cash levels, Lakes will defer allowed payments of principal on the transition loan, if any, from March 2011 until December 2013. These deferrals, if any, do not constitute forgiveness of contractual principal amounts due to Lakes.

At January 1, 2012 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 continued significant economic pressures in the northern California market and competition in the market the property serves, both of which have negatively impacted cash flows for the property. Prior to the fourth quarter of fiscal 2010, Lakes had not experienced a three-month period in which all principal payments were deferred. As of January 2, 2011, an allowance of $21.0 million was established through an impairment charge on the notes receivable and is included in the consolidated statement of operations for fiscal 2010. In addition, due to the carrying amount of the intangible assets associated with the Shingle Springs Tribe exceeding the expected future cash flows from the management agreement for the Red Hawk Casino, impairment charges of $16.7 million were recognized during fiscal 2010. No additional impairment charges were recorded during fiscal 2011.

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

The management agreement with the Red Hawk Casino includes a minimum guaranteed payment to the Shingle Springs Tribe of $0.5 million a month for the duration of the agreement, which expires in December 2015. Lakes is obligated to advance funds for these minimum guaranteed monthly payments if the casino operating results are not sufficient to distribute such amount to the Shingle Springs Tribe, and is repaid the advances in subsequent periods when operating results are sufficient to distribute such amount to the Shingle Springs Tribe and repay such previous advances. As of January 1, 2012, $1.1 million was outstanding under this obligation, all of which was repaid during the first quarter of fiscal 2012 and therefore classified as a current note receivable. Lakes advanced $2.9 million and collected payments of $2.8 million under this obligation during fiscal 2011.

Development and Management of the Four Winds Casino Resort

On August 2, 2007, the Four Winds Casino Resort opened to the public. The Four Winds Casino Resort was developed on approximately 675 acres of land, which is held in trust by the United States for the benefit of the Pokagon Band of Potawatomi Indians (the “Pokagon Band”) in New Buffalo Township, Michigan, near the first Interstate 94 exit in southwestern Michigan and approximately 75 miles east of Chicago. The facility features approximately 3,000 slot machines, table games, a poker room, a hotel, several restaurants and bars, a child care facility and arcade, retail space and a parking garage.

In 1999, Lakes and the Pokagon Band executed a development agreement and management contract governing their relationship during the development, construction and management of the casino. The terms set forth in the development agreement required Lakes to advance approximately $71.2 million for the purchase of land and for the initial development phase of the project. In March 2006, Lakes received notification from the NIGC that it had approved Lakes’ management agreement with the Pokagon Band to develop and manage the Four Winds Casino Resort. On June 22, 2006, the Pokagon Band closed on a $305 million senior note financing agreement and a $75 million commitment for furniture, furnishings and equipment to fund the Four Winds Casino Resort project.

The management contract was for five years from the date the casino opened and called for Lakes to receive a management fee equal to 24% of net income up to a certain threshold and 19% of net income over that threshold.

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Lakes’ management fee was subordinated to the $305 million senior note financing agreement and the $75 million furniture, furnishing and equipment financing agreement relating to the Four Winds Casino Resort and was also subject to a minimum guaranteed monthly payment to the Pokagon Band. Generally, the order of priority of payments from the Four Winds Casino Resort’s cash flows was as follows: a certain minimum monthly guaranteed payment to the Pokagon Band, repayment of various debt with interest accrued thereon, management fee to Lakes, and other obligations, with the remaining funds distributed to the Pokagon Band. On June 30, 2011, Lakes entered into a Buy-Out and Termination Agreement (“Buy-Out Agreement”) with the Pokagon Band for the management agreement for the Four Winds Casino Resort, which was scheduled to expire in August 2012. The buy-out of the management agreement was provided for in the original five-year management agreement. Pursuant to the Buy-Out Agreement, the Pokagon Band paid to Lakes a buy-out fee of approximately $24.5 million. The Buy-Out Agreement also terminated the management agreement resulting in Lakes having no further obligations or responsibilities with respect to the Four Winds Casino Resort.

Development and Financing of the Jamul Casino

Lakes initially entered into an agreement with the Jamul Indian Village (the “Jamul Tribe”) during 1999 to develop and manage a casino on behalf of the Jamul Tribe on the Jamul Tribe’s existing reservation approximately 20 miles east of San Diego, California (the “Jamul Casino Project”). The Jamul Tribe has a compact with the State of California and the two basic requirements to eventually build a successful project – federal recognition as an Indian tribe and Indian land eligible for gaming.

On November 22, 2011, Lakes entered into an exclusive pre-development, development and financing arrangement agreement (the “Jamul Development Agreement”) with the Jamul Tribe. The Jamul Development Agreement superseded and replaced the previous development financing and services agreement entered into by Lakes and the Jamul Tribe in 2006. As a result of entering into the Jamul Development Agreement, accrued interest on amounts previously advanced by Lakes to the Jamul Tribe and on land that may be sold to the Jamul Tribe was decreased by approximately $19.6 million. As of January 1, 2012, Lakes had advanced approximately $56.5 million including accrued interest to the Jamul Tribe related to casino development efforts. Due to Lakes’ corporate strategic objectives, Lakes determined that it would not continue to move forward with the project with the Jamul Tribe and terminated the Jamul Development Agreement effective March 13, 2012 (the “Termination Date”). As a result, Lakes estimated the fair value of the notes receivable from the Jamul Tribe to be zero as of January 1, 2012 and incurred a net unrealized loss of approximately $11.9 million during fiscal 2011 related to the notes receivable. During fiscal 2012 through the Termination Date, Lakes had advanced an additional $0.8 million that will be reflected as losses in Lakes’ consolidated statement of operations in the first quarter of fiscal 2012. Pursuant to the Jamul Development Agreement, Lakes is required to fund tribal support costs of approximately $0.6 million subsequent to the Termination Date and provide funding of certain professional fees for a period of thirty days from the Termination Date. These amounts will also be reflected as losses during fiscal 2012.

Although the Jamul Tribe remains obligated to repay all advances including accrued interest, it is not contemplated that the Jamul Tribe will have sufficient funds to make such payments unless it opens a gaming facility on its reservation. Lakes continues to have a collateral interest in all revenues from any future casino owned by the Jamul Tribe, and the casino’s furnishings and equipment.

Non-Indian Casino Business

As part of our business strategy, we also seek opportunities to develop and operate new business opportunities including developing our own casinos where applicable laws permit.

Investment in Rock Ohio Ventures, LLC

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 in 2009. As of January 1, 2012, Lakes has contributed approximately $15.7 million to Rock Ohio Ventures related to the referendum effort and the development of casinos in Cleveland and Cincinnati. The casino in Cleveland is currently expected to open in May 2012. Lakes currently plans to contribute additional capital as needed to maintain our equity position in Rock Ohio Ventures.

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Investment in Evitts Resort, LLC

In September 2011, Lakes entered into a joint venture with Addy Entertainment, LLC (“Addy”) to form Evitts Resort, LLC (“Evitts”), which submitted a response to a request for proposal by the State of Maryland Video Lottery Facility Location Commission (“Commission”) for a video lottery operation license (“License”) in Allegany County, Maryland. The Commission is in the process of evaluating applications and will award the License to operate a video lottery operation at the Rocky Gap Lodge & Golf Resort in Cumberland, Maryland (the “Resort”). The License has an initial term of 15 years and is expected to be awarded in the second quarter of 2012. Lakes made an initial investment of approximately $2.1 million (“Initial Investment”) in Evitts which was used to fund the application fee for its response to the request for proposal. The Initial Investment represents a majority ownership interest in Evitts and as discussed in note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, the financial position of Evitts is consolidated in Lakes’ consolidated balance sheet as of January 1, 2012, and its results of operations for the year ended January 1, 2012 are included in Lakes’ consolidated statements of operations and cash flows. The Initial Investment will be returned by the Commission if the License is not awarded to Evitts. During February 2012, Lakes negotiated an agreement to buy out Addy’s interest in Evitts. Subsequent to the buy-out, Lakes will be the sole owner of Evitts. The buy-out is contingent on Evitts being awarded the license by the Commission. If the Commission awards the License to Evitts, Lakes currently plans to invest an additional $17.9 million and Evitts will be required to raise additional funds to fully finance the development. Lakes also entered into a development services and management agreement with Evitts to develop and manage the gaming facility and existing facilities at the Resort if the License is awarded to Evitts.

Gaming Site, Vicksburg, Mississippi

Lakes either owns, or holds options for the purchase of, approximately 400 acres of land adjacent to the Mississippi River, located three miles south of downtown Vicksburg, in Warren County, Mississippi. In February 2005, Lakes received gaming site approval from the Mississippi Gaming Commission with respect to this proposed casino location. During July 2005, Lakes received approval from the Mississippi Gaming Commission of its development plan for a gaming project to be built on this site. However, due primarily to changes in the economic environment and credit markets, during July 2011, Lakes entered into a program to locate a buyer for the land located in Vicksburg, Mississippi. As a result, during fiscal 2011, Lakes reclassified the land as held for sale. As of January 1, 2012, the land is carried at $1.7 million, which is its estimated fair value less expected cost to sell. As of January 2, 2011, the land held for development was carried at its estimated fair value of $3.3 million. Due to continued declines in the estimated fair value of the land, Lakes recognized impairment charges of approximately $1.6 million during both fiscal 2011 and fiscal 2010.

Table Games

Lakes had a division that developed, bought, patented and licensed rights for new table game concepts to market/distribute and license to casinos. On November 1, 2011, Lakes sold the games and related patents and trademarks for “Four The Money,” “Bonus Craps,” “Roulette Craps” and “Rainbow Poker.” In consideration for the sale of these games, Lakes receives a percentage of revenue generated by these games. Lakes retained the rights to “World Poker Tour All In Hold’Em^TM.” The “World Poker Tour All In Hold’Em^TM” and “Bonus Craps” games are currently operating in several casinos across the United States. The revenues from these games are not significant to Lakes’ operating results.

Competition

The gaming industry is highly competitive and continues to proliferate throughout the country as more jurisdictions are choosing to allow gaming or the expansion thereof. Gaming activities include traditional land-based casinos, river boat and dockside gaming, casino gaming on Indian land, state-sponsored video lottery and video poker in restaurants, bars and hotels, pari-mutuel betting on horse racing and dog racing, sports bookmaking, card rooms and online gaming outside the United States. The casinos managed by Lakes compete with all of these forms of gaming, and will compete with any new forms of gaming that may be legalized in

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additional jurisdictions, as well as with other types of entertainment. Lakes also competes with other gaming companies for opportunities to acquire legal gaming sites in emerging gaming jurisdictions and for the opportunity to manage casinos on Indian land. Some of Lakes’ competitors have greater financial and other resources than Lakes. Further expansion of gaming could also significantly affect Lakes’ business.

According to NIGC tribal data reports, from the end of 2009 through 2010, there were 422 Indian gaming operations nationwide from which, during this same period, tribal gaming revenues remained flat at $26.5 billion. NIGC tribal data reports indicate that in California, Indian gaming is well-developed.

There were 62 compacted Indian gaming facilities in the California and Northern Nevada region in 2010. There are two Indian-owned Las Vegas-style casinos located in the vicinity of the Red Hawk Casino. Based on NIGC tribal data reports, in California and Northern Nevada (which includes the Red Hawk Casino), tribal gaming revenues decreased from $7.0 billion in 2009 to $6.8 billion in 2010. This region has the highest tribal gaming revenues in the United States with approximately 26% of all reported Indian gaming revenue.

As previously discussed, the Ohio constitution was amended during 2009 to authorize casino gaming. Competition for Ohio casinos is currently expected to come from the other Ohio casinos to be developed, casinos located in the surrounding states and the possible installation of video lottery terminals at Ohio horse tracks.

Regulation

Gaming Regulation

The ownership, management and operation of gaming facilities are subject to extensive federal, state, provincial, tribal and/or local laws, regulations and ordinances, which are administered by the relevant regulatory agency or agencies in each jurisdiction (“Regulatory Authorities”). These laws, regulations and ordinances vary from jurisdiction to jurisdiction, but generally pertain to the responsibility, financial stability and character of the owners and managers of gaming operations as well as persons financially interested or involved in gaming operations. Certain basic provisions that are currently applicable to Lakes in its management, development and financing activities are described below.

Neither Lakes nor any subsidiary may own, manage or operate a gaming facility unless it obtains proper licenses, permits and approvals. An application for a license, permit or approval may be denied for any cause that the Regulatory Authorities deem reasonable. Most Regulatory Authorities also have the right to license, investigate and determine the suitability of any person who has a material relationship with Lakes or any of its subsidiaries, including officers, directors, employees and security holders of Lakes or its subsidiaries. In the event a Regulatory Authority finds a security holder to be unsuitable, Lakes may be sanctioned, and may lose its licenses and approvals if Lakes recognizes any rights in any entity with such unsuitable person in connection with such securities. Lakes may be required to repurchase its securities at fair market value from security holders that the Regulatory Authorities deem unsuitable. Lakes’ Articles of Incorporation authorize Lakes to redeem securities held by persons whose status as a security holder, in the opinion of the Lakes’ Board of Directors, jeopardizes gaming licenses or approvals of Lakes or its subsidiaries. Once obtained, licenses, permits and approvals must be periodically renewed and generally are not transferable. The Regulatory Authorities may at any time revoke, suspend, condition, limit or restrict a license for any cause they deem reasonable.

Fines for violations may be levied against the holder of a license and, in certain jurisdictions, gaming operation revenues can be forfeited to the state under certain circumstances. No assurance can be given that any licenses, permits or approvals will be obtained by Lakes or its subsidiaries, or if obtained, will be renewed or not revoked in the future. In addition, the rejection or termination of a license, permit or approval of Lakes or any of its employees or security holders in any jurisdiction may have adverse consequences in other jurisdictions. Certain jurisdictions require gaming operators licensed therein to seek approval from the state before conducting gaming in other jurisdictions. Lakes and its subsidiaries may be required to submit detailed financial and operating reports to Regulatory Authorities.

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The political and regulatory environment for gaming is dynamic and rapidly changing. The laws, regulations and procedures pertaining to gaming are subject to the interpretation of the Regulatory Authorities and may be amended. Any changes in such laws, regulations or their interpretations could have a material adverse effect on Lakes.

Certain specific provisions to which Lakes is currently subject are described below.

Indian Gaming Regulation

The terms and conditions of management contracts for the operation of Indian-owned casinos, and of all gaming on Indian land in the United States, are subject to the Indian Gaming Regulatory Act (“IGRA”), which is administered by the NIGC, and also are subject to the provisions of statutes relating to contracts with Indian tribes, which are administered by the Secretary of the Interior (“Secretary”) and the BIA. The regulations and guidelines under which NIGC will administer the IGRA are evolving. The IGRA and those regulations and guidelines are subject to interpretation by the Secretary and NIGC and may be subject to judicial and legislative clarification or amendment.

Lakes may need to provide the BIA or NIGC with background information on each of its directors and each shareholder who holds five percent or more of Lakes’ stock (“5% Shareholders”), including a complete financial statement, a description of such person’s gaming experience, and a list of jurisdictions in which such person holds gaming licenses. Background investigations of key employees also may be required. Lakes’ Articles of Incorporation contain provisions requiring directors and 5% Shareholders to provide such information.

The IGRA currently requires the NIGC to approve management contracts and certain collateral agreements for Indian-owned casinos. The NIGC may review any of Lakes’ management contracts and collateral agreements for compliance with the IGRA at any time. The NIGC will not approve a management contract if a director or a 5% Shareholder of the management company (i) is an elected member of the Indian tribal government that owns the facility purchasing or leasing the games; (ii) has been or is convicted of a felony gaming offense; (iii) has knowingly and willfully provided materially false information to the NIGC or an Indian tribe; (iv) has refused to respond to questions from the NIGC; or (v) is a person whose prior history, reputation and associations pose a threat to the public interest or to effective gaming regulation and control, or create or enhance the chance of unsuitable activities in gaming or the business and financial arrangements incidental thereto.

In addition, the NIGC will not approve a management contract if the management company or any of its agents have attempted to unduly influence any decision or process of tribal government relating to gaming, or if the management company has materially breached the terms of the management contract or the tribe’s gaming ordinance, or a trustee exercising due diligence would not approve such management contract.

A management contract can be approved only after the NIGC determines that the contract provides, among other things, for (i) adequate accounting procedures and verifiable financial reports, which must be furnished to the tribe; (ii) tribal access to the daily operations of the gaming enterprise, including the right to verify daily gross revenues and income; (iii) minimum guaranteed payments to the tribe, which must have priority over the retirement of development and construction costs; (iv) a ceiling on the repayment of such development and construction costs; and (v) a contract term not exceeding five years and a management fee not exceeding 30% of profits; provided that the NIGC may approve up to a seven-year term if the NIGC is satisfied that the capital investment required, the risk exposure and the income projections for the particular gaming activity justify the longer term.

The IGRA established three separate classes of tribal gaming — Class I, Class II and Class III. Class I includes all traditional or social games played by a tribe in connection with celebrations or ceremonies. Class II gaming includes games such as bingo, pull-tabs, punch boards, instant bingo and card games that are not played against the house. Class III gaming includes casino-style gaming including table games such as blackjack, craps and roulette, as well as gaming machines such as slots, video poker, lotteries and pari-mutuel wagering.

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The IGRA prohibits substantially all forms of Class III gaming unless a tribe has entered into a written agreement with the state in which the casino is located that specifically authorizes the types of commercial gaming the tribe may offer (a Tribal-state compact). The IGRA requires states to negotiate in good faith with tribes that seek Tribal-state compacts, and grants Indian tribes the right to seek a federal court order to compel such negotiations. Many states have refused to enter into such negotiations. Tribes in several states have sought federal court orders to compel such negotiations under the IGRA; however, the Supreme Court of the United States held in 1996 that the Eleventh Amendment to the United States Constitution immunizes states from suit by Indian tribes in federal court without the states’ consent.

Because Indian tribes are currently unable to compel states to negotiate tribal-state compacts, Lakes may not be able to develop and manage casinos in states that refuse to enter into or renew tribal-state compacts.

In addition to the IGRA, tribal-owned gaming facilities on Indian land are subject to a number of other federal statutes. The operation of gaming on Indian land is dependent upon whether the law of the state in which the casino is located permits gaming by non-Indian entities, which may change over time. Any such changes in state law may have a material adverse effect on the casinos managed by Lakes.

Title 25, Section 81 of the United States Code states that “no agreement or contract with an Indian tribe that encumbers Indian lands for a period of 7 or more years shall be valid unless that agreement or contract bears the approval of the Secretary of the Interior or a designee of the Secretary.” The Secretary of the Interior has issued regulations, 25 CFR Part 84, identifying the types of contracts and agreements with Indian tribes which are not subject to Section 81. If, however, an agreement or contract for services is determined to be subject to the requirements of Section 81, it will be void and unenforceable if not approved.

Indian tribes are sovereign nations with their own governmental systems which have primary regulatory authority over gaming on land within the tribe’s jurisdiction. Because of their sovereign status, Indian tribes possess immunity from lawsuits to which the tribes have not otherwise consented or otherwise waived their sovereign immunity defense. Therefore, no contractual obligations undertaken by tribes to Lakes would be enforceable by Lakes unless the tribe has expressly waived its sovereign immunity as to such obligations and, if involving service for Indians relative to their lands, approved by the Secretary. Lakes has obtained immunity waivers from each of the tribes to enforce the terms of its management agreements; however, the scope of those waivers has never been tested in court, and may be subject to dispute. Additionally, unless Lakes believes such approval is not necessary given the nature of a contract, all contracts involving services to Indians relative to their lands have been approved by the Secretary. However, there can be no assurance that the Secretary will agree that it is unnecessary to obtain such approval, and may render such contracts unenforceable. Additionally, persons engaged in gaming activities, including Lakes, are subject to the provisions of tribal ordinances and regulations on gaming. These ordinances are subject to review by the NIGC under certain standards established by the IGRA.

Non-Gaming Regulation

Lakes and its subsidiaries are subject to certain federal, state and local safety and health laws, regulations and ordinances that apply to non-gaming businesses generally, such as the Clean Air Act, Clean Water Act, Occupational Safety and Health Act, Resource Conservation Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act. We believe that we are currently in material compliance with such regulations. The coverage and attendant compliance costs associated with such laws, regulations and ordinances may result in future additional cost to our operations.

Intellectual Property

The following is a discussion of Lakes’ intellectual property, which did not provide a significant financial contribution to Lakes’ operations in fiscal 2011.

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Trademarks

Lakes has received approval for registration of the service mark CARLOS SOPRANO’S^tm, to be used in connection with restaurant and related entertainment services.

Licenses

Lakes has a worldwide, royalty-bearing license to all patent, copyright and other intellectual property rights related to a casino table game developed by Sklansky Games, LLC, subject to certain marketing restrictions. This license also includes the right to use the trademark World Poker Tour ALL-IN HOLD’EM POKER^TM. Lakes also has a worldwide, royalty-bearing license to use the name “World Poker Tour”, a tutorial video and the trademark WORLD POKER TOUR and design in connection with any casino table game or video-enhanced table game used in any legal commercial gaming establishment. Both licenses may be terminated by either party upon thirty days written notice.

Real Estate Holdings

Lakes owns parcels of undeveloped land in California related to its previous involvement in a potential Indian casino project with the Jamul Tribe, in Mississippi related to a former potential casino project which is currently being marketed for sale, and undeveloped land in Oklahoma related to its previous involvement in a potential casino project with the Iowa Tribe of Oklahoma (“Iowa Tribe”). Lakes also owns an office building and related land in Minnesota for its corporate offices.

Employees

At January 1, 2012, Lakes had 19 full-time employees. Lakes believes its relations with employees are satisfactory.

Lakes has assembled a strong team of gaming industry experts, well-versed in all aspects of casino development, construction and management, many of whom were involved with the success of Grand Casinos. The Lakes team has individual specialists on staff mirroring each of the functional areas found in a casino project. The functional areas include gaming operations, construction and development, finance/accounting, legal/regulatory, systems/information technology, food and beverage, marketing and human resources.

Lakes’ management believes this team represents a valuable asset that provides a competitive advantage in creating and enhancing relationships with Indian tribes in the Indian casino business and in the pursuit of non-Indian casino opportunities.

Website and Available Information

Our website is located at www.lakesentertainment.com. Information on the website does not constitute part of this Annual Report on Form 10-K.

We make available, free of charge, our Annual Reports on Form 10-K, our Proxy Statement on Form DEF 14A, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 as soon as reasonably practicable after such forms are filed with or furnished to the SEC. Copies of these documents are available to our shareholders at our website or upon written request to our President and Chief Financial Officer at 130 Cheshire Lane, Suite 101, Minnetonka, MN 55305.

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ITEM 1A.  RISK FACTORS

In addition to factors discussed elsewhere in this Annual Report on Form 10-K, the following are important factors that could cause actual results or events to differ materially from those contained in any forward-looking statement made by or on behalf of us.

Current economic conditions may cause further declines in casino gaming activity and other consumer spending which could adversely affect the financial performance of the casinos we manage and result in lower management fee revenue to us.

Our operating results and performance depend significantly on the current economic conditions and their impact on consumer spending in the casinos we manage. The decline in consumer spending resulting from the recession and the deterioration of capital and credit markets may cause our revenue generated from the management of casinos to be adversely impacted.

Because our primary source of revenue is generated from our management agreement with the Shingle Springs Tribe for the Red Hawk Casino which has a finite term, our failure to develop new business opportunities would impact our future growth, cash flow and profitability.

The primary source of our revenues in fiscal 2011 was generated from our management agreements relating to the Four Winds Casino Resort, which was terminated in June 2011, and the Red Hawk Casino, which expires in December 2015. If we fail to develop new business opportunities that generate cash receipts, or if our remaining management contract continues to generate only revenues which are deferred, our future growth, cash flow and profitability will be adversely impacted.

Our entry into new businesses may result in future losses.

We have announced that part of our strategy involves diversifying into other businesses which could include developing and operating our own casino. Such businesses involve business risks separate from the risks involved in casino development and these investments may result in future losses to us. These risks include but are not limited to negative cash flow, initial high development costs of new products and/or services without corresponding sales pending receipt of corporate and regulatory approvals, market introduction and acceptance of new products and/or services and obtaining regulatory approvals required to conduct the new businesses. Diversification activities may never successfully add to our future revenues and income.

The commencement or completion of casino development projects may be significantly delayed or prevented due to a variety of factors, many of which are beyond our control, which could have a material adverse effect on our profitability, cash flow and financial condition.

The opening of a future facility will be contingent upon, among other things, receipt of all regulatory licenses, permits, allocations and authorizations, the completion of construction and the hiring and training of sufficient personnel. The scope of the approvals required to construct and open a facility will be extensive, and the failure to obtain such approvals could prevent or delay the completion of construction or opening of all or part of a facility or otherwise affect the design and features of a proposed casino.

Even once a schedule for such construction and development activities is established, such development activities may not begin or be completed on time, or at any other time. The budget for a project may also be exceeded.

In addition, the regulatory approvals necessary for the construction and operation of casinos are often challenged in litigation brought by government entities, citizens groups and other organizations and individuals. Such litigation can significantly delay the construction and opening of casinos.

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Major construction projects entail significant risks, including shortages of materials or skilled labor; unforeseen engineering, environmental and geological problems; work stoppages; weather interference; unanticipated cost increases; and non-availability of construction equipment. These factors or other delays or difficulties in obtaining any of the requisite licenses, permits and authorizations from regulatory authorities could increase the total cost, delay, or prevent the construction or opening of any of the planned casino development, or otherwise affect its design.

Because our operating results are highly dependent on the timing of our project under development, delays could cause our results to fluctuate significantly and may adversely affect our profitability, cash flow and financial condition.

Failure of our existing, proposed and other prospective casino projects to successfully compete may have a material adverse effect on our results of operations, cash flow and financial condition.

The gaming industry is highly competitive. Gaming activities include: traditional land-based casinos; river boat and dockside gaming; casino gaming on Indian land; state-sponsored lotteries and video poker in restaurants, bars and hotels; pari-mutuel betting on horse racing and dog racing; sports bookmaking; online gaming; and card rooms. The casinos to be managed or owned by us compete, and will in the future compete, with all these forms of gaming, and will compete with any new forms of gaming that may be legalized in additional jurisdictions, as well as with other types of entertainment.

We also compete with other gaming companies for opportunities to acquire legal gaming sites in emerging and established gaming jurisdictions and for the opportunity to manage casinos on Indian land. Many of our competitors have more personnel and may have greater financial and other resources than us. Such competition in the gaming industry could adversely affect our ability to attract customers which would adversely affect our operating results. In addition, further expansion of gaming into new jurisdictions could also adversely affect our business by diverting customers from our planned managed casinos to competitors in such jurisdictions.

The early termination or modification of our management agreement with the Shingle Springs Tribe may reduce or eliminate our revenues under such agreement.

Our current management agreement has a finite life and provides that such agreement may be terminated under certain circumstances including, without limitation, upon the failure to maintain the NIGC’s approval for such agreements, the loss of requisite gaming licenses, or an exercise by the Shingle Springs Tribe of its buy-out option. In addition, the NIGC has the authority to require a modification of such agreement in a manner which may have an adverse effect on us. Such termination or modification may have a material adverse effect on our results of operations, cash flow and financial condition.

If we fail to comply with the laws, regulations and ordinances (including tribal or local laws) applicable to gaming facilities, we may be unable to operate or develop casino projects.

The ownership, management and operation of gaming facilities are subject to extensive federal, state, tribal and local laws, regulations and ordinances, which are administered by the relevant regulatory agency or agencies in each jurisdiction. These laws, regulations and ordinances vary from jurisdiction to jurisdiction, but generally concern the responsibility, financial stability and character of the owners and managers of gaming operations as well as persons financially interested or involved in gaming operations, and often require such parties to obtain certain licenses, permits and approvals.

The rapidly-changing political and regulatory environment governing the gaming industry (including gaming operations which are conducted on Indian land) makes it impossible for us to accurately predict the effects that an adoption of or changes in the gaming laws, regulations and ordinances will have on us. However, our failure, or the failure of any of our key personnel, significant shareholders, or joint venture

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partners, to obtain or retain required gaming regulatory licenses could prevent us from expanding into new markets, prohibit us from generating revenues in certain jurisdictions, and subject us to sanctions and fines.

If Indian tribes default on their repayment obligations or wrongfully terminate their management, development, consulting or financing agreements with us, we may be unable to collect the amounts due.

We have made, and may make, substantial loans to Indian tribes for the construction, development, equipment and operations of casinos to be managed by us. Our only recourse for collection of indebtedness from an Indian tribe or money damages for breach or wrongful termination of a management, development, consulting or financing agreement is from revenues, if any, from casino operations.

In addition, we have subordinated, and may in the future subordinate, the repayment of loans made to an Indian tribe and other distributions due from an Indian tribe (including management fees) in favor of other obligations of the Indian tribe to other parties related to the development and operation of the casinos. Accordingly, in the event of a default by an Indian tribe under such obligations, our loans and other claims against the Indian tribe will not be repaid until such default has been cured or the Indian tribe’s senior casino-related creditors have been repaid in full.

A deterioration of our relationship with an Indian tribe could cause delay or termination of a casino project and prevent or significantly impede recovery of our investment therein.

Good personal and professional relationships with Indian tribes and their officials are critical to our existing and future Indian-related gaming operations and activities, including our ability to obtain, develop and execute management and other agreements. As sovereign nations, Indian tribes establish their own governmental systems under which tribal officials or bodies representing an Indian tribe may be replaced by appointment or election or become subject to policy changes. Replacements of Indian tribal officials or administrations, changes in policies to which an Indian tribe is subject, or other factors that may lead to the deterioration of our relationship with an Indian tribe may lead to termination of a management agreement, which may have an adverse effect on the future results of our operations.

If we are unable to obtain additional financing in order to satisfy our cash requirements, we may be forced to delay, scale back or eliminate some of our expansion and development goals.

Lakes’ cash forecast requirements do not include construction-related costs that will be incurred if a project begins construction. The construction of future casino projects will depend on our ability or our partners’ ability to obtain additional financing for our projects. Given the current state of the debt markets, obtaining such capital on terms that make the projects financially viable may be difficult. If such financing cannot be obtained on acceptable terms, it may not be possible to complete future projects, which could have a material adverse effect on our results of operations and financial condition.

If additional financing is in the form of equity financing, it will be dilutive to our shareholders, and any debt financing may involve additional restrictive covenants and further leveraging of our finite assets. An inability to raise such funds when needed might require us to delay, scale back or eliminate some of our expansion and development goals.

If our Indian casino projects fail, or do not achieve sufficient results of operations, our recorded assets related to those projects will be impaired and there may be a material adverse impact on our financial condition, results of operations and cash flow.

The majority of our assets related to Indian casino projects are classified as long-term on our consolidated balance sheet and are in the form of loans to the Shingle Springs Tribe. These loans, except for the current portion, are included as notes receivable on the consolidated balance sheet, under the category “long-term

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assets related to Indian casino projects”. At January 1, 2012, we had $46.6 million in long-term assets related to Indian casino projects, of which $34.0 million was in the form of notes receivable to the Shingle Springs Tribe. The notes receivable represented approximately 29% of our total assets. All of the loans are subject to collection risk and there is no established market. The repayment terms of these notes receivable are largely dependent upon the operating performance of the Red Hawk Casino. Repayments of such loans are required to be made only if distributable profits are available from the operation of the Red Hawk Casino. Repayments are also the subject of certain distribution priorities specified in the agreement with the Shingle Springs Tribe. In addition, repayment to us of the loans and the manager’s fees under our management agreement is subordinated to certain other financial obligations of the Shingle Springs Tribe.

Related to our decision in March 2012 to terminate the Jamul Development Agreement with the Jamul Tribe, we determined the fair value of the notes receivable from the Jamul Tribe to be zero. During fiscal 2011, Lakes recorded a net unrealized loss on notes receivable of $11.9 million related to these notes receivable. Although the Jamul Tribe remains obligated to repay all advances including accrued interest, it is not contemplated that the Jamul Tribe will have sufficient funds to make such payments unless it opens a gaming facility on its reservation. Lakes continues to have a collateral interest in all revenues from any future casino owned by the Tribe, and the casino’s furnishings and equipment. We cannot be assured of the repayment of these amounts. Further, during fiscal 2010, we recorded an impairment charge on notes receivable of $21.0 million related to the Shingle Springs casino project due to the continued significant economic pressures in the northern California market and competition in the market the property serves, both of which have negatively impacted cash flows for the property. In order to assist the Red Hawk Casino in increasing cash levels, Lakes will defer allowed payments of principal on the transition loan, if any, from March 2011 until December 2013.

Included in long-term assets related to Indian casino projects at January 1, 2012 are intangible assets related to the acquisition of management contracts of $4.2 million, land held for development of $1.0 million and deferred management fees and amounts due from related parties of $7.3 million. During fiscal 2010, we recorded an impairment charge on intangible assets of $16.7 million related to the Shingle Springs casino project due to the issues discussed in the preceding paragraph. We also recorded an impairment charge of $3.6 million and $2.5 million for the years ended January 1, 2012 and January 2, 2011, respectively, on assets related to the Jamul Casino Project.

The litigation brought forth by Sharp Image Gaming, Inc. against the Shingle Springs Tribe could impact the timing of management fee payments and/or loan repayments to Lakes.

During 2007, Sharp Image Gaming, Inc. (“Sharp Image”) filed a lawsuit against the Shingle Springs Tribe seeking amounts from the Shingle Springs Tribe related to prior loans and an alleged agreement for the supplying of gaming machines to the Shingle Springs Tribe. The amount sought in the lawsuit filed by Sharp Image was in excess of $100 million. During December 2011, Sharp Image obtained a judgment against the Shingle Springs Tribe in the amount of approximately $30.0 million. The Shingle Springs Tribe is appealing the judgment and believes that the judgment is against legal precedent and that the judgment cannot be collected from the Shingle Springs Tribe or the Red Hawk Casino. However, if the judgment is upheld on appeal and results in any impact to the Red Hawk Casino’s cash position, Lakes’ management fee payments and/or loan repayments could be delayed.

We are dependent on the ongoing services of our senior corporate management, and the loss of their services could have a detrimental effect on the pursuit of our business objectives, profitability and the price of our common stock.

Our success depends largely on the efforts and abilities of our senior corporate management, particularly Lyle Berman, our Chairman and Chief Executive Officer. The loss of the services of Mr. Berman or other members of senior corporate management could have a material adverse effect on us. Although we have obtained a $8.0 million key man life insurance policy on Mr. Berman, we do not maintain key man life insurance on other members of senior corporate management.

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Our Articles of Incorporation and Bylaws may discourage lawsuits and other claims against our directors.

Our Articles of Incorporation and Bylaws provide, to the fullest extent permitted by Minnesota law, that our directors shall have no personal liability for breaches of their fiduciary duties to us. In addition, our Bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by Minnesota law. These provisions reduce the likelihood of derivative litigation against our directors and may discourage shareholders from bringing a lawsuit against directors for a breach of their duty.

Our Articles of Incorporation contain provisions that could discourage or prevent a potential takeover, even if the transaction would be beneficial to our shareholders.

Our Articles of Incorporation authorize our Board of Directors to issue up to 200 million shares of capital stock, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by our shareholders. The Board of Directors may authorize additional classes or series of shares that may include voting rights, preferences as to dividends and liquidation, conversion and redemptive rights and sinking fund provisions that could adversely affect the rights of holders of our common stock and reduce the value of our common stock. Additional classes of stock that may be authorized by our Board of Directors for issuance in the future could make it more difficult for a third party to acquire us, even if a majority of our holders of common stock approved of such acquisition.

The price of our common stock may be adversely affected by significant price fluctuations due to a number of factors, many of which are beyond our control.

The market price of our common stock has experienced significant fluctuations and may continue to fluctuate in the future. The market price of our common stock may be significantly affected by many factors, including:

We have issued numerous options to acquire our common stock and have the ability to issue additional options, each of which could have a dilutive effect on our common stock.

As of January 1, 2012, we had options outstanding to acquire 1.6 million shares of our common stock, exercisable at prices ranging from $1.89 to $6.43 per share, with a weighted average exercise price of approximately $3.18 per share. As of January 1, 2012, we had restricted stock units outstanding to acquire 38,337 shares of our common stock with a weighted average grant date fair value of $3.25 and under the existing stock option plans, there were 874,627 remaining shares available to grant.

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The market price of our common stock may be reduced by future sales of our common stock in the public market.

Sales of substantial amounts of our common stock in the public market that are not currently freely tradable, or even the potential for such sales, could have an adverse effect on the market price for shares of our common stock and could impair the ability of purchasers of our common stock to recoup their investment or make a profit. As of January 1, 2012, these shares consist of approximately 6.8 million shares beneficially owned by our executive officers and directors.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.  PROPERTIES

Corporate Office Facility

Lakes owns its corporate office building located in Minnetonka, Minnesota and occupies approximately 22,000 square feet of the 65,000 square foot building and has leased a portion of the remaining space to outside tenants. A lease for a tenant occupying a substantial portion of the building expired on June 30, 2010 and was not renewed. We are currently searching for a tenant or tenants to lease that space.

ITEM 3.  LEGAL PROCEEDINGS

Louisiana Department of Revenue Tax Litigation Matter

At January 2, 2011, the Louisiana Department of Revenue maintained a position that Lakes owed additional Louisiana corporation income tax for the period ended January 3, 1999 and the tax years ended 1999 through 2001 and additional Louisiana corporation franchise tax for the tax years ended 2000 through 2002. This determination was the result of an audit of Louisiana tax returns filed by Lakes for the tax periods at issue and related to the reporting of income earned by Lakes in connection with the managing of two Louisiana-based casinos. 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 this matter. In return, the Louisiana Department of Revenue agreed to dismiss the suit and forever discharge Lakes from all proceedings and liabilities relating to this matter. Lakes issued such payment during March 2011.

Other Litigation

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, management currently believes that the likelihood of an unfavorable outcome is remote. No provision for loss has been recorded in connection therewith.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS

                AND ISSUER PURCHASES OF EQUITY SECURITIES

Lakes’ common stock currently trades on the NASDAQ Global Market under the ticker symbol LACO. The high and low sales prices per share of Lakes’ common stock for each full quarterly period within the two most recent fiscal years are indicated below, as reported on the NASDAQ Global Market:

On March 12, 2012, the last reported sale price for the common stock was $1.99 per share. As of March 12, 2012, Lakes had approximately 836 shareholders of record.

Lakes has never paid any cash dividends with respect to its common stock and the current policy of the Board of Directors is to retain any earnings to provide for the growth of Lakes. The payment of cash dividends in the future, if any, will be at the discretion of the Board of Directors and will depend upon such factors as earnings levels, capital requirements, Lakes’ overall financial condition and any other factors deemed relevant by the Board of Directors.

No repurchases of Lakes’ common stock were made during the fourth quarter of Lakes’ fiscal year ended January 1, 2012.

ITEM 6.  SELECTED FINANCIAL DATA

Not applicable.

ITEM 7.  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. During fiscal 2011, we had development and management or financing agreements as follows:

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We have also explored, and continue to explore, other casino development projects. An overview of our non-Indian projects are as follows:

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On October 15, 2010, we implemented a reduction in force resulting in the termination of 13 employees. These actions were designed to streamline and reduce our cost structure, increase our financial strength and align our workforce with anticipated staffing needs. Lakes incurred charges of approximately $0.5 million, which related to cash outlays for employee severance benefits. All amounts were paid as of January 2, 2011.

Results of Continuing Operations

The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K for the year ended January 1, 2012.

Fiscal Year Ended January 1, 2012 (“Fiscal 2011”) Compared to Fiscal Year Ended January 2, 2011 (“Fiscal 2010”)

Revenues

Total revenues were $35.6 million for fiscal 2011 compared to $24.6 million for fiscal 2010. Contributing to the increase in revenues was the Buy-Out Agreement for the Four Winds Casino Resort, which occurred during the three months ended July 3, 2011. Under the Buy-Out Agreement, Lakes was compensated in the amount of $24.5 million for the management fees it would have received had it managed the Four Winds Casino Resort through the original contract expiration date which was August 2012.

As a result of the Buy-Out Agreement for the Four Winds Casino Resort, Lakes’ consolidated statement of operations does not include management fee revenues related to the Four Winds Casino Resort subsequent to June 30, 2011 and our total revenues in fiscal 2012 will be significantly reduced.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $9.5 million for fiscal 2011 compared to $11.8 million for fiscal 2010. The decline in selling, general and administrative expenses was primarily due to a reduction in payroll and travel expenses. For fiscal 2011, Lakes’ selling, general and administrative expenses included payroll and related expenses of $4.9 million (including share-based compensation), travel expenses of $1.5 million and professional fees of $1.6 million. For fiscal 2010, Lakes’ selling, general and administrative expenses included payroll and related expenses of $6.7 million (including share-based compensation), travel expenses of $2.0 million and professional fees of $1.6 million.

Loss on Convertible Note Receivable

Loss on convertible note receivable was $4.0 million for fiscal 2011. There was no loss on convertible note receivable for fiscal 2010. In August 2011, Lakes entered into an operating agreement with Dania Entertainment Center, LLC (“Dania”) for the management and redevelopment of the existing Dania Jai Alai fronton in Dania

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Beach, Florida, to convert it into a destination casino. Dania previously entered into an asset purchase agreement to purchase the Dania Jai Alai fronton from a subsidiary of Boyd Gaming Corporation (“Boyd Gaming”). Lakes made an initial $4.0 million investment in the joint venture via a convertible promissory note. As a result of ongoing litigation, the Florida legislature introducing legislation to permit full casino resorts in southern Florida and the deterioration of the credit markets since entering into the operating agreement, the convertible note receivable was written down to zero during the third quarter of fiscal 2011. In addition, because of Dania’s inability to close the purchase transaction by November 28, 2011, Boyd Gaming issued a letter to Dania formally terminating the asset purchase agreement.

Impairment Charge on Notes Receivable

The impairment charge on notes receivable of $21.0 million for fiscal 2010 relates to Lakes’ impairment analysis of the notes receivable with the Shingle Springs Tribe. At 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 continued significant economic pressures in the northern California market and competition in the market the property serves, both of which have negatively impacted cash flows for the property. There were no additional impairment charges on notes receivable during fiscal 2011.

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.

Impairments and Other Losses

Impairments and other losses were $8.5 million in fiscal 2011 and $22.8 million in fiscal 2010. Due to Lakes determining that it would not continue to move forward with the project with the Jamul Tribe, we recognized impairment charges of $3.6 million during fiscal 2011. During fiscal 2010, we recognized impairment charges of $2.5 million due to the continued uncertainty surrounding the completion of the Jamul Casino Project associated with delays in progress as well as ongoing issues in the credit markets. Also included in impairments and other losses were impairment charges of $1.6 million in both fiscal 2011 and fiscal 2010 related to land owned by Lakes in Vicksburg, Mississippi due to continued declines in its estimated fair value. Also during fiscal 2011, we terminated our aircraft lease with Banc of America Leasing & Capital, LLC, which was set to expire in 2018. As a result of the early termination of the lease, we incurred a loss of approximately $3.3 million. We determined that the costs associated with operating and maintaining the aircraft over the remaining lease term significantly exceeded the amount of the loss we recognized as a result of the early lease termination.

Due to the carrying amount of the intangible assets associated with the Shingle Springs Tribe exceeding the expected future cash flows from the management agreement for the Red Hawk Casino, impairment charges of $16.7 million were recognized during fiscal 2010. There were no additional impairment charges of the intangible assets during fiscal 2011. Further, due to the Iowa Tribe’s decision not to move forward with Lakes for the development and management of the Ioway Casino Resort, impairment charges of $2.0 million were recognized in connection with the land and intangible assets related to the Ioway Casino project during fiscal 2010.

Amortization of Intangible Assets Related to Indian Casino Projects

Amortization of intangible assets related to Indian casino projects was $11.7 million for fiscal 2011 compared to $11.1 million for fiscal 2010. In conjunction with the Buy-out Agreement for the management of the Four Winds Casino Resort during the second quarter of fiscal 2011, the remaining intangible assets associated with that project were fully amortized resulting in an increase in amortization compared to fiscal 2010. Partially offsetting this increase was decreased amortization taken during fiscal 2011 compared to fiscal 2010 on the intangible assets associated with the Red Hawk Casino project as a result of the fiscal 2010 impairment of a portion of these intangible assets.

Net Unrealized Gains (Losses) on Notes Receivable

For the year ended January 1, 2012, net unrealized losses on notes receivable were $11.9 million, compared to net unrealized gains of $1.6 million in fiscal 2010. The net unrealized losses in the current year consisted of

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losses related to Lakes determining that it would not continue to move forward with the project with the Jamul Tribe. The net unrealized gains in fiscal 2010 consisted of gains related to the Iowa Tribe of $0.9 million which resulted from the termination agreement with the Iowa Tribe in May 2010 and net gains of $0.7 million related to the Jamul Tribe due primarily to improvement in the credit markets during that period.

Other Income (Expense), net

Other income (expense), net was $5.2 million for fiscal 2011 compared to $28.1 million for fiscal 2010. For fiscal 2011 and fiscal 2010, other income (expense), net includes interest earned on the notes receivable from the Shingle Springs Tribe, a significant portion of which relates to non-cash interest income. Also included in other income (expense), net for fiscal 2010 is a gain on divestiture of a cost method investment of $23.1 million. During the third quarter of fiscal 2010, Lakes entered into a Termination Agreement with Penn Ventures, LLC in which Lakes divested its interest in the entity to be formed in collaboration with Penn Ventures, LLC in exchange for a $25 million payment from Penn Ventures, LLC resulting in this gain.

Income Taxes

The income tax benefit was $3.2 million in fiscal 2011 compared to an income tax provision of $1.2 million in fiscal 2010. Our effective tax rates for fiscal 2011 and fiscal 2010 were (63.7)% and 9.1%, respectively. For fiscal 2011, the effective tax rate differs from the federal tax rate of 35% due primarily to a change in the valuation allowance. For fiscal 2010, the effective tax rate differs from the federal tax rate of 35% due primarily to a change in the valuation allowance and a tax benefit related to an adjustment to the liability for uncertain tax positions, in addition to state income taxes. The liability for uncertain tax position was decreased from $9.0 million as of January 2, 2011 to zero as of January 1, 2012 which represents the amount Lakes agreed to pay in accordance with the Settlement Agreement with the Louisiana Department of Revenue. In fiscal 2011, the income tax benefit results from Lakes’ ability to carry back the 2011 taxable loss to the prior year. In fiscal 2010, the provision primarily consists of changes in valuation allowance of $10.8 million and $1.1 million related to state taxes, offset by $8.5 million of tax benefit for a reduction in the uncertain tax position and current tax benefit of $2.2 million.

As of January 1, 2012, we evaluated the ability to utilize existing deferred tax assets arising from other ordinary items and determined that, due to a lack of sufficient positive evidence that future income will support the recognition of those other deferred tax assets, a 100% valuation allowance against deferred tax assets continues to be appropriate for those items at January 1, 2012.

Liquidity and Capital Resources

As of January 1, 2012, we had $38.6 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 and we currently expect to be able to obtain the financing necessary for our planned development projects. 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 develop and/or manage. Declines in consumer spending cause our revenue generated from the management of the casinos to be adversely affected.

During the fiscal year ended 2011, our revenues were derived from the management of the Four Winds Casino Resort (through June 2011) and the Red Hawk Casino. Pursuant to the Buy-Out Agreement effective June 30, 2011, the Pokagon Band paid to Lakes a buy-out fee of approximately $24.5 million. As a result of the Buy-Out Agreement, we will no longer earn management fees related to the Four Winds Casino Resort. Our remaining management contract is with the Red Hawk Casino and continues through December 2015.

The management agreement with the Red Hawk Casino includes a minimum guaranteed payment to the Shingle Springs Tribe of $0.5 million a month. We are obligated to advance funds for these minimum guaranteed

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monthly payments when the casino operating results are not sufficient to distribute such amount to the Shingle Springs Tribe, and we are repaid the advances in subsequent periods when operating results are sufficient to distribute such amount to the Shingle Springs Tribe and repay such previous advances. As of January 1, 2012, $1.1 million was outstanding under this obligation. We advanced $2.9 million and collected payments of $2.8 million under this obligation during fiscal 2011. We expect to continue to advance funds for the minimum guaranteed payment 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 January 1, 2012, we evaluated the notes receivable with the Shingle Springs Tribe for impairment and concluded that the notes receivable continue to be impaired. We continue 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 the transition loan will be deferred until December 2013. While we have 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 us subsequent to the conclusion of the contract.

Lakes terminated the Jamul Development Agreement with the Jamul Tribe effective March 13, 2012. As of January 1, 2012, Lakes had advanced approximately $56.5 million including accrued interest to the Jamul Tribe related to casino development efforts. During fiscal 2012 through the Termination Date, Lakes had advanced an additional $0.8 million that will be reflected as losses in Lakes’ consolidated statement of operations in the first quarter of fiscal 2012. Pursuant to the Jamul Development Agreement, Lakes is required to fund tribal support costs of approximately $0.6 million subsequent to the Termination Date and provide funding of Post-Termination Payments. These amounts will also be reflected as losses during fiscal 2012. Although the Jamul Tribe remains obligated to repay all advances including accrued interest, it is not contemplated that the Jamul Tribe will have sufficient funds to make such payments unless it opens a gaming facility on its reservation. Lakes continues to have a collateral interest in all revenues from any future casino owned by the Tribe, and the casino’s furnishings and equipment. We cannot be assured of the repayment of these amounts.

During fiscal 2011, we contributed approximately $12.2 million to Rock Ohio Ventures resulting in a total investment of $15.7 million in Rock Ohio Ventures. Per our agreement with Rock Ohio Ventures related to potential casino developments in Cincinnati and Cleveland, Ohio, we currently plan to invest additional funds in those projects. As a result, we may need to obtain additional financing.

In September 2011, we made an initial investment of approximately $2.1 million in Evitts, which was used to fund the application fee for its response to the request for proposal by the State of Maryland Video Lottery Facility Location Commission for a video lottery operation license in Allegany County, Maryland. The initial investment will be returned if the License is not awarded to Evitts. During February 2012, Lakes negotiated an agreement to buy out Addy’s interest in Evitts. Subsequent to the buy-out, Lakes will be the sole owner of Evitts. The buy-out is contingent on Evitts being awarded the license by the Commission. If the Commission awards the License to Evitts, Lakes currently plans to invest an additional $17.9 million and Evitts will be required to raise additional funds to fully finance the development.

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 January 1, 2012 and January 2, 2011, no amounts were outstanding under the Loan Agreement.

Our 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 Lakes or its partners to obtain additional financing for the 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.

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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, 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.

See note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for our critical accounting policies that involve the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Long-Term Assets Related to Indian Casino Projects

The consolidated balance sheets as of January 1, 2012 and January 2, 2011 include long-term assets related to Indian casino projects of $46.6 million and $64.3 million, respectively, which primarily related to three separate projects. The amounts are as follows by project (in thousands):

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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:

We account for our notes receivable from the tribes as in-substance structured notes in accordance with the guidance contained in Accounting Standards Codification (“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. 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 include:

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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 operations.

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.

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. 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.

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Shingle Springs Tribe

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 January 1, 2012 and January 2, 2011. This determination was based on the continued significant economic pressures in the northern California market and competition in the market the property serves, both of which have negatively impacted cash flows for the property. The outstanding amounts on the notes and interest receivable from the Shingle Springs Tribe was $69.0 million as of January 1, 2012, which is comprised of $66.7 million related to pre-construction advances, $1.1 million of advances related to the minimum guaranteed monthly payment and $1.2 million related to interest receivable. The carrying amount of the notes and interest receivable, which is net of unearned discount of $13.7 million and allowance for impairment of $20.1 million, was $35.2 million as of January 1, 2012. 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 as of January 2, 2011 and the face value of the notes as of January 1, 2012 (dollars in thousands):

(*) As a result of entering into the Jamul Development Agreement, accrued interest was decreased by approximately $11.3 million.

(**) During March 2012, Lakes terminated the Jamul Development Agreement with the Jamul Tribe. As a result, during fiscal 2011, Lakes recorded an unrealized loss on notes receivable of $11.9 million after determining the fair value of the notes receivable from the Jamul Tribe to be zero. Although the Jamul Tribe remains obligated to repay all advances including accrued interest, it is not contemplated that the Jamul Tribe will have sufficient funds to make such payments unless it opens a gaming facility on its reservation. Lakes continues to have a collateral interest in all revenues from any future casino owned by the Tribe, and the casino’s furnishings and equipment.

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The primary assumptions included within management’s financial model for the Jamul Casino Project as of January 2, 2011 are as follows:

We funded certain costs incurred related to the potential development of the Jamul Casino Project. These costs related 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, agreed to advance a monthly amount used by the tribe for a variety of tribal expenses. The following represents the nature and amounts of the advances to the Jamul Tribe, which represent the principal amount of the notes receivable as of January 1, 2012 and January 2, 2011 (in thousands):

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 charge would be recorded. Such an impairment charge 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

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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 operations.

Land Held for Development

Included in land held for development is land held for possible sale to the Jamul Tribe. In the event that this land is not sold to the Jamul Tribe, we have the right to sell it to a third party. We evaluate this asset for impairment in combination with intangible assets related to the 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 projects in addition to deferred management fees and interest due from the Shingle Springs Tribe. See note 16, Related Party Transactions, to the consolidated financial statements included in Item 8 of this 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.

Description of Each Indian Casino Project and Evaluation of Critical Milestones

Shingle Springs Tribe – Red Hawk Casino

Business Arrangement.

On December 17, 2008, the Red Hawk Casino opened to the public. We earn a management fee equal to 30% of Net Revenue of the operations annually for the first five years. During years six and seven, Lakes will earn a fee equal to 25% of the first $90 million of Net Revenue per year, 15% of the next $60 million of Net Revenue per year and 5% of Net Revenue over $150 million per year. 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 $30.7 million furniture, furnishings and equipment financing as of January 1, 2012 and a minimum monthly 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. The management contract includes provisions that allow the Shingle Springs Tribe to buy out the management agreement 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 agreements 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

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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 agreement 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 16, Related Party Transactions, to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion.

Pokagon Band – Four Winds Casino Resort

Business Arrangement

On August 2, 2007, the Four Winds Casino Resort in New Buffalo, Michigan opened to the public. During the term of the management agreement, we received 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 was five years, which began on August 2, 2007. The NIGC approved the management contract in March 2006.

On June 30, 2011, the Pokagon Band exercised its right to buy out the remaining term of the management agreement between the Pokagon Band and Great Lakes Gaming of Michigan, LLC, a wholly owned subsidiary of Lakes, for the management of the Four Winds Casino Resort, which was scheduled to expire on August 1, 2012. Pursuant to the Buy-Out Agreement, on June 30, 2011, the Pokagon Band paid to Lakes a buy-out fee of approximately $24.5 million and repaid in full all outstanding debt owed by the Pokagon Band to Lakes (which Lakes previously sold to unaffiliated investors). As a result of the previous sale of those receivables, Lakes did not receive any of the proceeds from the Pokagon Band’s repayment of that debt. The Buy-Out Agreement also terminated the Management Agreement resulting in Lakes having no further obligations or responsibilities with respect to the Four Winds Casino.

Jamul Tribe

Business Arrangement

Lakes initially entered into an agreement with the Jamul Tribe during 1999 to develop and manage a casino on behalf of the Jamul Tribe on the Jamul Tribe’s existing reservation approximately 20 miles east of San Diego, California. The Jamul Tribe has a compact with the State of California and the two basic requirements to eventually build a successful project – federal recognition as an Indian tribe and Indian land eligible for gaming.

On November 22, 2011, Lakes entered into the Jamul Development Agreement with the Jamul Tribe. The Jamul Development Agreement superseded and replaced the previous development financing and services agreement entered into by Lakes and the Jamul Tribe in 2006. As a result of entering into the Jamul Development Agreement, accrued interest on amounts previously advanced by Lakes to the Jamul Tribe and on land that may be sold to the Jamul Tribe was decreased by approximately $19.6 million. As of January 1, 2012, Lakes had advanced approximately $56.5 million including accrued interest to the Jamul Tribe related to casino development efforts. Due to Lakes’ corporate strategic objectives, Lakes determined that it would not continue to move forward with the project with the Jamul Tribe and terminated the Jamul Development Agreement effective March 13, 2012. As a result, Lakes estimated the fair value of the notes receivable from the Jamul Tribe to be zero as of January 1, 2012 and incurred a net unrealized loss of approximately $11.9 million during fiscal 2011 related to the notes receivable. During fiscal 2012 through the Termination Date, Lakes had advanced an additional $0.8 million that will be reflected as losses in Lakes’ consolidated statement of operations in the first quarter of fiscal 2012. Pursuant to the Jamul Development Agreement,

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Lakes is required to fund tribal support costs of approximately $0.6 million subsequent to the Termination Date and provide funding of certain Post-Termination Payments. These amounts will also be reflected as losses during fiscal 2012.

Although the Jamul Tribe remains obligated to repay all advances including accrued interest, it is not contemplated that the Jamul Tribe will have sufficient funds to make such payments unless it opens a gaming facility on its reservation. Lakes continues to have a collateral interest in all revenues from any future casino owned by the Tribe, and the casino’s furnishings and equipment.

Our Evaluation of the Critical Milestones

The following table outlines the status of each of the following primary milestones necessary to complete the Jamul casino project as of the end of fiscal 2010. Both the positive and negative evidence was reviewed during our evaluation of the critical milestones.

Recently Issued Accounting Pronouncements

For information related to recently issued accounting pronouncements, see note 2, Summary of Significant Accounting Policies, to the consolidated financial statements in Item 8 of this Annual Report on 10-K.

Seasonality

We believe that the operations of all casinos managed by us are affected by seasonal factors, including holidays, weather and travel conditions.

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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.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not applicable.

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

Lakes Entertainment, Inc.

Minnetonka, Minnesota

We have audited the accompanying consolidated balance sheets of Lakes Entertainment, Inc. and Subsidiaries (the Company) as of January 1, 2012 and January 2, 2011, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of January 1, 2012 and January 2, 2011, and the consolidated results of its operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.

/s/  Piercy Bowler Taylor & Kern

Piercy Bowler Taylor & Kern

Certified Public Accountants

Las Vegas, Nevada

March 16, 2012

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LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

See notes to consolidated financial statements.

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LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

See notes to consolidated financial statements.

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LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

See notes to consolidated financial statements.

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LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

See notes to consolidated financial statements.

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LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Nature of Business

Overview

Lakes Entertainment Inc. and subsidiaries (collectively “the Company” or “Lakes”) develops, finances and manages casino properties with a historical emphasis on those that are Indian-owned. During fiscal 2011, Lakes had development and management or financing agreements as follows:

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Lakes has also explored, and continues to explore, other casino development projects. An overview of the non-Indian projects are as follows:

Also during September 2011, Lakes entered into a development services and management agreement with Evitts, to develop and manage the gaming facility and existing facilities at the Resort if the License is awarded to Evitts.

Significant Customers and Concentrations of Credit Risk

Fees earned for services related to the Four Winds Casino Resort in fiscal 2011 were in excess of ten percent of consolidated revenues in the accompanying consolidated statements of operations. Fees earned for services related to the Red Hawk Casino and the Four Winds Casino Resort in fiscal 2010 were each in excess of ten percent of consolidated revenues in the accompanying consolidated statements of operations. The decline in general economic conditions in the United States has negatively impacted the local economic conditions near the Red Hawk Casino Resort and has negatively impacted Lakes’ management fees and the availability of credit to finance Lakes’ development projects.

The financial instruments that subject the Company to concentrations of credit risk consist principally of its notes receivable due from Indian tribes as further discussed in note 3, Long-Term Assets Related to Indian Casino Projects — Notes and Interest Receivable and Notes Receivable at Fair Value. The notes and interest receivable consist of amounts due related to the open project with the Shingle Springs Tribe as of January 1, 2012 and January 2, 2011. The notes receivable at fair value consist of amounts due related to the development project with the Jamul Tribe as of January 2, 2011. Lakes manages the risk related to open projects and related notes receivable by overseeing the day-to-day management of operations and evaluating collectability (the need for an allowance for doubtful collection and possible charge-off) of the notes receivable based upon operational

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performance on a case by case basis. For development projects, Lakes monitors the feasibility of the projects, including the likelihood the project will open and be financially successful, before making advances to the Indian tribes. In the event any of the receivables become uncollectible, the maximum losses to be sustained would be the carrying value of the receivables, plus the net carrying value of the related unamortized intangible assets.

Restructuring Activities

On October 15, 2010, the Company implemented a reduction in force resulting in the termination of 13 employees. These actions were designed to streamline and reduce the Company’s cost structure, increase its financial strength and align its workforce with anticipated staffing needs. The Company incurred charges of approximately $0.5 million, which related to cash outlays for employee severance benefits. The charges incurred are included in selling, general and administrative expenses on the consolidated statement of operations and relate to the Corporate segment. All amounts were paid as of January 2, 2011.

2.  Summary of Significant Accounting Policies

Use of Estimates

Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates that affect the reported amounts of assets and liabilities and disclosures at the date of the financial statements and the reported amounts of net earnings (loss) during the reporting periods. Actual results could differ from those estimates. Significant estimates that are particularly susceptible to change materially within the next year relate to: valuation and the realizability of notes receivable and other long-term assets related to Indian casino projects, fair value measurements, income tax liabilities and deferred income tax asset valuation allowances.

Year End

The Company has a 52- or 53-week accounting period ending on the Sunday closest to December 31 of each year. The Company’s fiscal years for the periods shown on the accompanying consolidated statements of operations ended on January 1, 2012 (“fiscal 2011”) and January 2, 2011 (“fiscal 2010”).

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Lakes and its subsidiaries. In addition, as discussed in note 1, Nature of Business, the financial position of Evitts is consolidated in the Company’s consolidated balance sheet as of January 1, 2012, and its results of operations for the period ended January 1, 2012 are included in the Company’s consolidated statements of operations and cash flows. At January 1, 2012, approximately $2.3 million of the Company’s consolidated total assets related to Evitts.

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

Investments in unconsolidated investees, which are less than 20% owned and the Company does not have the ability to significantly influence the operating or financial decisions of the entity, are accounted for under the cost method. See note 6, Investment in Unconsolidated Investee.

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

Revenue Recognition

Revenue from the management, development, financing of and consulting with Indian-owned 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.” Accounts receivable deemed uncollectible are charged off through a provision for uncollectible accounts. No amounts were deemed uncollectible during fiscal 2011 and fiscal 2010.

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Cash and Cash Equivalents

Cash and cash equivalents consist of highly-liquid investments with original maturities of three months or less.

Investment in Unconsolidated Investee

Investments in an entity where the Company owns less than 20% of the voting stock of the entity and does not exercise significant influence over operating and financial policies of the entity are accounted for using the cost method. Investments in the entity where the Company owns twenty percent or more but not in excess of fifty percent of the voting stock of the entity or less than twenty percent and exercises significant influence over operating and financial policies of the entity are accounted for using the equity method. The Company has a policy in place to review its investments at least annually, to evaluate the accounting method and carrying value of the investments in these companies. The cost method investments are subject to impairment assessment if there are identified events or changes in circumstance that may have a significant adverse affect on the fair value of the respective investment. If the Company believes that the carrying value of an investment is in excess of estimated fair value, it is the Company’s policy to record an impairment charge to adjust the carrying value to the estimated fair value, if the impairment is considered other-than-temporary.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation. Depreciation of property and equipment is computed using the straight-line method over the following estimated useful lives:

Long-Term Assets Related to Indian Casino Projects

Notes Receivable

Lakes has formal procedures governing its evaluation of opportunities for potential Indian-owned casino development projects that it follows before entering into agreements to provide financial support for the development of these projects. Lakes determines whether there is probable future economic benefit prior to recording any asset related to the Indian casino project. Lakes’ management initially evaluates the following factors involving critical milestones that affect the probability of developing and operating a casino:

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Lakes accounts for its notes receivable from the tribes as in-substance structured notes. Under their terms, the notes do not become due and payable unless the projects are completed and operational, and distributable profits are available from their operations. However, in the event its development activity is terminated prior to completion, Lakes generally retains 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 until the casino opens 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 Lakes’ consolidated statement of operations.

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.

Lakes monitors the credit quality of notes receivable through ongoing review of the casino’s financial position, operating results and projected operating results that are available to Lakes in its capacity as manager of the casino. In addition, Lakes continuously monitors the economic, political, regulatory and competitive conditions that may adversely impact casinos’ projected operating results.

Notes receivable for open casinos are periodically evaluated for impairment pursuant to Accounting Standards Codification (“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. 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. 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.

The allowance for impaired notes receivable is established through a charge to expense. Any note receivable principal considered to be uncollectible by management is charged against the allowance for impaired notes receivable.

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Intangible Assets Related to Indian Casino Projects

Intangible assets related to the acquisition of the management, development, consulting or financing contracts are periodically evaluated for impairment based on the estimated cash flows from the 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, exceeds the undiscounted cash flow, an impairment charge is recorded. Such an impairment charge is measured based on the difference between the fair value and carrying value of the assets. Lakes amortizes the intangible assets related to the acquisition of the management, development, consulting or financing contracts under the straight-line method over the lives of the contracts commencing when the related casino opens. In addition to the intangible asset associated with the cash advances to tribes described above, these assets include actual costs incurred to acquire Lakes interest in the projects from third parties.

Land Held for Development

Included in land held for development is land held for possible sale to the Jamul Tribe. In the event that this land is not sold to the Jamul Tribe, the Company has the right to sell it to a third party. Lakes evaluates this asset for impairment in combination with intangible assets related to the acquisition of the management, development, consulting or financing contracts and other assets related to the Indian casino projects as discussed above.

Management Fees Receivable and Other

Other assets include amounts due from related parties that are directly related to the development and opening of Lakes’ Indian casino projects in addition to deferred management fees and interest due from the Shingle Springs Tribe. 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, Lakes incurs 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.

Share-Based Compensation Expense

Lakes has various share-based compensation programs, which provide for equity awards including stock options and restricted stock. Lakes uses the straight-line method to recognize compensation expense associated with share-based awards based on the fair value on the date of grant, net of the estimated forfeiture rate, if any. Expense is recognized over the requisite service period related to each award, which is the period between the grant date and the award’s stated vesting term. The fair value of stock options is estimated using the Black-Scholes option pricing model. All of Lakes’ stock compensation expense is recorded in selling, general and administrative expenses in the consolidated statements of operations. See note 10, Share-Based Compensation, for additional discussion.

Income Taxes

The determination of the Company’s income tax-related account balances requires the exercise of significant judgment by management. Accordingly, the Company determines 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. Management assesses the likelihood that deferred tax assets will be recovered from future taxable income and establishes a valuation allowance when management believes recovery is not likely.

The Company records estimated penalties and interest related to income tax matters, including uncertain tax positions as a component of income tax expense.

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Litigation Costs

The Company does not accrue for future litigation costs, if any, to be incurred in connection with outstanding litigation and other dispute matters but rather records such costs when the legal and other services are rendered.

New Accounting Standards

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

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820) (“ASU 2011-04”). ASU 2011-04 includes updated accounting guidance to amend existing requirements for fair value measurements and disclosures. The guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value but whose fair value must be disclosed. It also clarifies and expands upon existing requirements for fair value measurements of financial assets and liabilities as well as instruments classified in shareholders’ equity. ASU 2011-04 is effective for the first interim or annual reporting period beginning after December 15, 2011. Lakes does not expect the adoption of ASU 2011-04 to have a material impact on its consolidated financial statements.

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

3.  Long-Term Assets Related to Indian Casino Projects — Notes and Interest Receivable and Notes

     Receivable at Fair Value

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

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Information with respect to the notes and interest receivable at January 1, 2012 is summarized in the following table (in thousands):

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