Golden Entertainment 10Q 2011 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q


(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended July 3, 2011
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission FileNo. 0-24993

LAKES ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)


Minnesota		41-1913991
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

130 Cheshire Lane, Suite 101 Minnetonka, Minnesota (Address of principal executive offices)		55305 (Zip Code)

(952) 449-9092

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation 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 o

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


Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ

(Do not check if a smaller reporting company)

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

As of August 5, 2011, there were 26,405,679 shares of Common Stock, $0.01 par value per share, outstanding.

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

INDEX


			Page of
			Form 10-Q

PART I. FINANCIAL INFORMATION
	ITEM 1.	FINANCIAL STATEMENTS		3
		Consolidated Balance Sheets as of July 3, 2011 (unaudited) and January 2, 2011		3
		Unaudited Consolidated Statements of Earnings (Loss) for the three and six months ended July 3, 2011 and July 4, 2010		4
		Unaudited Consolidated Statements of Cash Flows for the six months ended July 3, 2011 and July 4, 2010		5
		Notes to Unaudited Consolidated Financial Statements		6
	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		16
	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		31
	ITEM 4.	CONTROLS AND PROCEDURES		31

PART II. OTHER INFORMATION
	ITEM 1.	LEGAL PROCEEDINGS		32
	ITEM 1A.	RISK FACTORS		32
	ITEM 6.	EXHIBITS		32
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

Part I.
Financial Information


ITEM 1.	*FINANCIAL STATEMENTS*

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Consolidated Balance Sheets


	July 3, 2011			January 2, 2011
	(Unaudited)
	(In thousands)

Assets
Current assets:
Cash and cash equivalents	$	60,386		$	45,233
Accounts receivable		20			1,696
Current portion of notes receivable from Indian casino projects		876			2,405
Other		1,184			1,983

Total current assets		62,466			51,317

Property and equipment, net		4,998			5,103

Long-term assets related to Indian casino projects:
Notes and interest receivable, net of current portion and allowance		32,583			31,192
Notes receivable at fair value		12,201			11,129
Intangible assets, net of accumulated amortization of $0.5 and $22.9 million		4,713			15,873
Land held for development		960			960
Management fee receivable and other		6,558			5,195

Total long-term assets related to Indian casino projects		57,015			64,349

Other assets:
Investment in unconsolidated investee		8,354			2,367
Land held for development		3,470			3,470
Other		130			40

Total other assets		11,954			5,877

Total assets	$	136,433		$	126,646

Liabilities and shareholders’ equity
Current liabilities:
Current portion of contract acquisition costs payable, net of $1.0 and $1.2 million discount	$	963		$	1,326
Income taxes payable		7,545			7,822
Accounts payable		780			292
Accrued payroll and related		433			776
Other accrued expenses		394			615

Total current liabilities		10,115			10,831
Long-term contract acquisition costs payable, net of current portion and $1.9 and $2.4 million discount		5,119			5,830

Total liabilities		15,234			16,661

Commitments and contingencies
Shareholders’ equity:
Common stock, $.01 par value; authorized 200,000 shares;
26,406 and 26,369 common shares issued and outstanding		264			264
Additional paid-in capital		203,497			203,148
Deficit		(82,562	)		(93,427	)

Total shareholders’ equity		121,199			109,985

Total liabilities and shareholders’ equity	$	136,433		$	126,646

See notes to consolidated financial statements.

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Earnings (Loss)


	Three Months Ended						Six Months Ended
	July 3, 2011			July 4, 2010			July 3, 2011			July 4, 2010
	(In thousands, except per share data)

Revenues:
Management fees	$	28,085		$	4,784		$	33,920		$	11,721
License fees and other		72			18			130			35

Total revenues		28,157			4,802			34,050			11,756

Costs and expenses:
Selling, general and administrative		2,286			3,253			4,942			6,488
Impairment losses — other		635			707			1,509			3,371
Amortization of intangible assets related to operating casinos		9,217			2,785			11,160			5,570
Depreciation		55			66			112			131

Total costs and expenses		12,193			6,811			17,723			15,560

Net unrealized gains (losses) on notes receivable		(124	)		(1,458	)		618			312

Earnings (loss) from operations		15,840			(3,467	)		16,945			(3,492	)

Other income (expense):
Interest income		1,513			1,847			2,981			4,094
Interest expense		(321	)		(545	)		(642	)		(1,232	)
Equity in loss of unconsolidated investee		—			(37	)		—			(64	)
Other		120			560			240			488

Total other income, net		1,312			1,825			2,579			3,286

Earnings (loss) before income taxes		17,152			(1,642	)		19,524			(206	)
Income taxes (benefit)		7,667			(5,551	)		8,659			572

Net earnings (loss)	$	9,485		$	3,909		$	10,865		$	(778	)

Weighted-average common shares outstanding
Basic		26,406			26,369			26,404			26,367
Dilutive effect of stock options and restrictive stock units		25			57			25			—

Diluted		26,431			26,426			26,429			26,367

Earnings (loss) per share
Basic	$	0.36		$	0.15		$	0.41		$	(0.03	)
Diluted	$	0.36		$	0.15		$	0.41		$	(0.03	)

See notes to consolidated financial statements.

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Cash Flows


	Six Months Ended
	July 3, 2011			July 4, 2010
	(In thousands)

OPERATING ACTIVITIES:
Net earnings (loss)	$	10,865		$	(778	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation		112			131
Amortization of debt issuance costs and contract acquisition costs		642			1,073
Accretion and additions to long-term interest receivable		(1,464	)		(2,004	)
Amortization of intangible assets related to operating casinos		11,160			5,570
Mark to market, trading securities		—			(8	)
Net tax benefits related to share-based compensation		—			(406	)
Equity in loss of unconsolidated investee		—			64
Share-based compensation		360			288
Net unrealized gains on notes receivable		(618	)		(312	)
Impairment losses — other		1,509			3,371
Changes in operating assets and liabilities:
Accounts and management fee receivable		356			(1,886	)
Other current assets		(326	)		87
Income taxes payable		(277	)		(1,159	)
Accounts payable		247			(20	)
Accrued expenses		(553	)		7

Net cash provided by operating activities		22,013			4,018

INVESTING ACTIVITIES:
Sales / redemptions of investment securities		—			24,325
Proceeds from divestiture of investment in unconsolidated investees		—			8,333
Payments to acquire investment in unconsolidated investee		(4,862	)		(223	)
Increases in long-term assets related to Indian casino projects, net		198			247
Purchase of property and equipment		(7	)		(3	)
Advances on notes receivable		(3,616	)		(2,215	)
Collection on notes receivable		3,165			4,196
Increase in other long-term assets		(7	)		—

Net cash provided by (used in) investing activities		(5,129	)		34,660

FINANCING ACTIVITIES:
Repayments of lines of credit		—			(21,340	)
Proceeds from borrowings		—			4,994
Net tax benefits related to share-based compensation		—			406
Contract acquisition costs payable		(1,731	)		(2,153	)

Net cash used in financing activities		(1,731	)		(18,093	)

Net increase in cash and cash equivalents		15,153			20,585
Cash and cash equivalents — beginning of period		45,233			3,751

Cash and cash equivalents — end of period	$	60,386		$	24,336

See notes to consolidated financial statements.

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements


1.	Basis of presentation

The unaudited consolidated financial statements of Lakes Entertainment, Inc., a Minnesota corporation, and Subsidiaries (individually and collectively “Lakes” or the “Company”), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. Accordingly, certain information normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensedand/or omitted.

Management has evaluated the unaudited consolidated financial statements for subsequent events through the date this Quarterly Report onForm 10-Q was filed with the SEC. For further information, please refer to the annual audited consolidated financial statements of the Company, and the related notes included within the Company’s Annual Report onForm 10-K, for the year ended January 2, 2011, previously filed with the SEC, from which the balance sheet information as of that date is derived.

In the opinion of management, all adjustments considered necessary for a fair presentation have been included (consisting of normal recurring adjustments). The results for the current interim period are not necessarily indicative of the results to be expected for the full year.

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


2.	Buy-Out and Termination Agreement

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


3.	New accounting standards

In April 2011, the FASB issued Accounting Standards Update (“ASU”)No. 2011-02,A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring (Topic 310)(“ASU2011-02”). ASU2011-02 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. ASU2011-02 is effective for the first interim or annual reporting period beginning on or after June 15, 2011. Lakes does not expect the adoption of ASU2011-02 to have material impact on its consolidated financial statements.

In May 2011, the FASB issued ASU2011-04,Fair Value Measurement (Topic 820)(“ASU2011-04”). ASU2011-04 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. ASU2011-04 is effective for the first interim or annual reporting period beginning after

December 15, 2011. Lakes does not expect the adoption of ASU2011-04 to have material impact on its consolidated financial statements.


4.	Financial instruments

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

For the Company’s cash and cash equivalents, accounts receivable, accounts payable and current portion of contract acquisition costs payable, the carrying amounts approximate fair value because of the short duration of these financial instruments. The methods used in estimating the fair value of the Company’s notes and interest receivable from the Shingle Springs Tribe and the Iowa Tribe of Oklahoma (Note 6), investment in unconsolidated investee (Note 8), other long-term assets related to Indian casino projects (Note 7) and long-term contract acquisition costs payable (Note 10) are discussed in the referenced notes to the unaudited consolidated financial statements.

Notes receivable from the Jamul Indian Village (the “Jamul Tribe”) are related to a project under development and are measured at estimated fair value on a recurring basis using unobservable (Level 3) inputs that reflect management’s estimates about the assumptions that market participants would use in pricing the asset or liability, including estimated cash flows and valuation metrics. The determination of fair value for these items is described in Note 5.


5.	Fair value measurements

Notes receivable at fair value. Notes receivable from the Jamul Tribe for a project under development are carried at their estimated fair value of $12.2 million and $11.1 million as of July 3, 2011 and January 2, 2011, respectively. The most significant factors affecting the estimated cash flows and discount rates used in the Company’s valuation model for notes receivable from the Jamul Tribe for the project under development include:


	•	Probability of the casino opening based on the status of critical project milestones and the expected opening date,

	•	estimated pre- and post-opening interest rates,

	•	contractual interest rate and other terms,

	•	yield rates on US Treasury Bills and other financial instruments,

	•	the risk/return indicators of equity investments in general,

	•	specific risks associated with operating the casino and similar projects, and

	•	scenario weighting alternatives.

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


Balance, January 2, 2011	$	11,129
Net unrealized gains on notes receivable		618
Advances		2,053
Allocation of advances to intangible asset		(1,599	)

Balance, July 3, 2011(unaudited)	$	12,201

To value the Company’s notes receivable from Indian tribes for projects under development, the Company utilizes valuation models based on management’s estimates of expected cash flow streams, discount rates, and as applicable, probabilities of casinos opening and the expected opening dates, projected pre- and post-opening date interest rates. The discount rate for the projects is based on the yields available on certain financial instruments at the valuation date, the risk level of equity investments in general, and the specific operating risks associated with similar financial instruments. In estimating this discount rate, market data of other public gaming related companies

is also considered. The estimated casino opening date used in the valuations of the notes receivable related to Indian casino projects that are not yet under construction and in the development phase reflects the weighted-average of three scenarios: a base case (which is based on the Company’s forecasted casino opening date) and one and two years out from the base case. Once a casino project is under construction, the weighted-average scenarios are no longer used and only the planned opening date is used in the valuation. The projected pre- and post-opening interest rates are based upon the one year U.S. Treasury Bill spot-yield curve per Bloomberg and the specific assumptions on contract term, stated interest rate and casino opening date. The probability applied to each project is based upon a weighting of various possible scenarios with one scenario assuming the casino never opens. The other scenarios assume the casino opens but apply different opening dates. The probability-weighting applied to each scenario is intended to effectively capture the element of risk in these projects and is based upon the status of each project, review of the critical milestones and likelihood of achieving the milestones.

Land held for development. Land held for development is measured at estimated fair value on a nonrecurring basis using unobservable (Level 3) inputs that utilize the market approach technique and reflect management’s estimates about the assumptions that market participants would use in pricing the asset. Significant inputs include recent transactions of comparable properties as well as consideration of its highest and best use.


6.	Long-term assets related to Indian casino projects — Notes and interest receivable and Notes receivable at fair value

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

Information with respect to the notes and interest receivable at July 3, 2011 is summarized in the following table (in thousands):


	Shingle
	Springs			Iowa
	Tribe			Tribe			Total

Pre-construction advances	$	66,720		$	70		$	66,790
Minimum guarantee payment advances		806			—			806
Interest receivable		704			—			704
Unearned discount		(14,300	)		—			(14,300	)
Allowance for impaired notes receivable		(20,541	)		—			(20,541	)

Total notes and interest receivable, net of allowance		33,389			70			33,459
Less current portion of notes receivable		(806	)		(70	)		(876	)

Long-term notes and interest receivable, net of current portion and allowance	$	32,583		$	—		$	32,583

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


	Shingle
	Springs			Iowa
	Tribe			Tribe			Total

Pre-construction advances	$	66,720		$	1,431		$	68,151
Minimum guarantee payment advances		1,000			—			1,000
Interest receivable		335			—			335
Unearned discount		(14,914	)		—			(14,914	)
Allowance for impaired notes receivable		(20,975	)		—			(20,975	)

Total notes and interest receivable, net of allowance		32,166			1,431			33,597
Less current portion of notes receivable		(974	)		(1,431	)		(2,405	)

Long-term notes and interest receivable, net of current portion and allowance	$	31,192		$	—		$	31,192

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


Balance, January 2, 2011	$	20,975
Impairment charge on notes receivable		—
Recoveries		—
Charge-offs		—
Accretion included in interest income		(434	)

Balance, July 3, 2011	$	20,541

Shingle Springs Tribe. At July 3, 2011 and January 2, 2011, Lakes evaluated the notes receivable from the Shingle Springs Tribe for impairment and concluded that it was probable that substantial amounts due would not be repaid within the contract term and therefore determined that the notes receivable were impaired. This determination was based on the lack of previously expected improvements in operating results, the deferral of principal payments due to insufficient net revenues from which to make these payments and the continued significant economic pressures in the northern California market the property serves, all of which have negatively impacted cash flows for the property. As a result of these factors, Lakes determined it was probable that substantial amounts due would not be repaid within the contract term. In order to assist the Red Hawk Casino in increasing cash levels, Lakes will defer allowed payments of principal on the preconstruction advances, if any, beginning March 2011 through December 2013. These deferrals, if any, do not constitute forgiveness of contractual principal amounts due to Lakes. The notes and interest receivable carrying amounts at July 3, 2011 and January 2, 2011 represent the present value of expected future cash flows.

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

The management contract with the Red Hawk Casino includes a minimum guaranteed payment to the Shingle Springs Tribe of $0.5 million a month. Lakes is obligated to advance funds for these minimum guaranteed monthly payments when the casino operating results are not sufficient, and is repaid the advances in subsequent periods when operating results are sufficient. As of July 3, 2011, $0.8 million was outstanding under this obligation. Lakes advanced $1.6 million and collected payments of $1.8 million under this obligation during the six months ended July 3, 2011.

Management estimates the fair value of the notes and interest receivable from the Shingle Springs Tribe as of July 3, 2011 to be approximately $26.2 million using a discount rate of 23.75% and a remaining estimated term of 115 months. Management estimated the fair value of the notes and interest receivable from the Shingle Springs Tribe as of January 2, 2011, to be approximately $26.6 million using a discount rate of 22.5% and a remaining estimated term of 121 months.

Jamul Tribe. Notes receivable from the Jamul Tribe for a project under development are carried at their estimated fair value of $12.2 million and $11.1 million as of July 3, 2011 and January 2, 2011, respectively. The terms and assumptions used to value Lakes’ notes receivable from the Jamul Tribe at estimated fair value are as follows (dollars in thousands):


	As of July 3, 2011	As of January 2, 2011
	(Unaudited)

Face value of note (principal and interest)	$64,830	$61,108
	($41,691 principal and $23,139 interest)	($39,638 principal and $21,470 interest)
Estimated months until casino opens (weighted average of three scenarios)	66 months	66 months
Projected interest rate until casino opens	7.17%	7.29%
Projected interest rate during the loan repayment term	10.37%	10.19%
Discount rate	19.50%	20.00%
Repayment terms of note	120 months	120 months
Probability rate of casino opening (weighting of four scenarios)	50%	50%


7.	Intangible and other assets related to Indian casino projects

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

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


				Shingle
	Pokagon			Springs			Jamul
	*Band()**			Tribe			Tribe()**			Total

Balances, January 2, 2011	$	10,631		$	5,242		$	—		$	15,873
Allocation of advances		—			—			1,599			1,599
Amortization		(10,631	)		(529	)		—			(11,160	)
Impairment losses		—			—			(1,599	)		(1,599	)

Balances, July 3, 2011 (unaudited)	$	—		$	4,713		$	—		$	4,713


(*)		Due to the Buy-Out Agreement, the remaining estimated useful life of intangible assets associated with the Pokagon Band was revised and was determined to be through June 30, 2011 resulting in the intangible assets being fully amortized as of June 30, 2011.

(**)		Due to the continued uncertainty surrounding the Jamul Casino project, Lakes recognized an impairment of $0.7 million and $1.6 million related to the intangible assets associated with this project during the three and six months ended July 3, 2011, respectively.

Management fee receivable and other. Long-term assets include financial instruments related to deferred management fees and interest due from the Shingle Springs Tribe of $4.4 million and $3.1 million as of July 3, 2011 and January 2, 2011, respectively. As defined in the management and development agreement with the Shingle Spring Tribe, payment of management fees, if any, are deferred when operating results are not sufficient and are paid in subsequent periods when operating results are sufficient. In addition, long-term assets included amounts due from Mr. Kevin M. Kean (Note 10). Financial instruments related to Mr. Kean have a carrying value of $1.5 million and $1.8 million, net of current portion, as of July 3, 2011 and January 2, 2011, respectively. Management estimates the fair value of these financial instruments related to Mr. Kean and the Shingle Springs Tribe to be $4.9 million as of July 3, 2011 using a discount rate of 17.5%. Management estimated the fair value of these financial instruments

related to Mr. Kean and the Shingle Springs Tribe to be $4.2 million as of January 2, 2011 using a discount rate of 18.0%.


8.	Investment in unconsolidated investee

Lakes has an investment in Rock Ohio Ventures, LLC (“Rock Ohio Ventures”) for the potential casino developments in Cincinnati and Cleveland, Ohio. This investment is accounted for using the cost method since Lakes does not have the ability to significantly influence the operating and financial decisions of the entity. At July 3, 2011 and January 2, 2011, Lakes had invested a total of approximately $8.4 million and $2.4 million, respectively, in Rock Ohio Ventures, which is included in the Investment in Unconsolidated Investee in the accompanying consolidated balance sheets. Lakes has the right, but not the obligation, to make additional investments up to 10% of equity required by Rock Ohio Ventures to develop the potential casinos in Ohio in return for a corresponding equity interest in those casinos (Note 14). The fair value of the Company’s investment in Rock Ohio Ventures was not estimated as of July 3, 2011 or January 2, 2011, as there were no events or changes in circumstances that may have a significant adverse effect on the fair value of the investment, and Lakes’ management determined that it was not practicable to estimate the fair value of the investments. During August 2011, Lakes made an additional capital contribution of approximately $7.4 million (Note 16).


9.	Debt

Lakes has a two-year interest only $8.0 million non-revolving line of credit loan agreement (the “Loan Agreement”) with a bank that expires in October 2012. The Loan Agreement is collateralized by primarily all of Lakes’ interest in the real property it owns in Minnetonka, Minnesota. Amounts borrowed under the Loan Agreement bear interest at 8.95%. Lakes’ Chief Executive Officer, Lyle Berman, personally guaranteed the Loan Agreement on behalf of Lakes. As of July 3, 2011 and January 2, 2011, no amounts were outstanding under the Loan Agreement.


10.	Contract acquisition costs payable

Pokagon Band. The Company was obligated to an unrelated third party as part of an agreement associated with the Company obtaining the management contract with the Pokagon Band. As of January 2, 2011, the carrying amount of the liability, which approximates fair value, was $0.7 million, net of a discount of $0.1 million. Due to the Buy-out Agreement with the Pokagon Band and terms in the agreement with the unrelated third party, the Company made a final payment of $0.4 million on the obligation at a 9% discount. No additional amounts are owed under this obligation as of July 3, 2011.

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

Shingle Springs Tribe. During 2009, the Company became obligated to pay Mr. Jerry Argovitz and Mr. Kevin Kean each $1 million per year (prorated based on a 365 day year) during the remainder of the seven-year initial term of the Red Hawk Casino management contract, which commenced in December 2008. These obligations resulted from Mr. Argovitz’s and Mr. Kean’s elections under existing agreements with Lakes to relinquish their respective other rights related to the Red Hawk Casino project. As of July 3, 2011 and January 2, 2011, the remaining carrying amount of the liability, which approximates its estimated fair value, was $6.1 million and $6.5 million, net of a $2.9 million and $3.5 million discount, respectively. Amounts payable during the next 12 fiscal months totaling $1.0 million, net of related discount, are included in current contract acquisition costs payable as of July 3, 2011.


11.	Share-based compensation

Share-based compensation expense, which includes stock options and restricted stock units, for the three and six months ended July 3, 2011 and July 4, 2010, respectively, were as follows (unaudited):


	Three Months Ended				Six Months Ended
	July 3,		July 4,		July 3,		July 4,
	2011		2010		2011		2010
	(In thousands)

Total cost of share-based payment plans	$	183	$	109	$	360	$	288

Stock options. The Company uses the Black Scholes option pricing model to estimate the fair value and compensation cost associated with employee incentive stock options which requires the consideration of historical employee exercise behavior data and the use of a number of assumptions including volatility of the Company’s stock price, the weighted average risk-free interest rate and the weighted average expected life of the options. No options were granted during the three and six months ended July 3, 2011 and July 4, 2010.

The following table summarizes Lakes’ stock option activity during the three months ended July 3, 2011 and July 4, 2010 (unaudited):


	Number of Common Shares
								Weighted-Avg.
	Options					Available		Exercise
	Outstanding			Exercisable		for Grant		Price

2011
Balance at January 2, 2011		2,031,084			904,076		699,215	$	2.99
Restricted stock unit activity, net		—			—		1,667		3.25
Forfeited/cancelled/expired		(313,946	)		—		155,996		3.19

Balance at July 3, 2011(*)		1,717,138			683,620		856,878		2.95

2010
Balance at January 3, 2010		1,704,187			442,350		1,121,413	$	3.93
Restricted stock unit activity, net		—			—		3,333		3.25
Forfeited/cancelled/expired		(103,105	)		—		10,505		11.24

Balance at July 4, 2010 (**)		1,601,082			462,656		1,135,251		3.46


(*)		Options outstanding do not include 38,337 of outstanding restricted stock units.

(**)		Options outstanding do not include 86,662 of outstanding restricted stock units.

As of July 3, 2011, the options outstanding had a weighted average remaining contractual life of 7.6 years, weighted average exercise price of $2.95 and aggregate intrinsic value of $0.2 million. The options exercisable have a weighted average exercise price of $3.47, a weighted average remaining contractual life of 5.8 years and aggregate intrinsic value of zero as of July 3, 2011.

There were no options exercised during the three and six months ended July 3, 2011 and July 4, 2010. Lakes’ unrecognized share-based compensation related to stock options was approximately $1.0 million, as of July 3, 2011, which is expected to be recognized over a weighted-average period of 2.3 years.

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

Restricted stock units. The following table summarizes Lakes’ restricted stock unit activity during the three months ended July 3, 2011 and July 4, 2010 (unaudited):


				Weighted-Average
	Restricted			Grant-Date
Non-vested Shares:	Stock Units			Fair Value

2011
Balance at January 2, 2011		79,996		$	3.25
Vested		(39,992	)		3.25
Forfeited		(1,667	)		3.25

Balance at July 3, 2011		38,337			3.25

2010
Balance at January 3, 2010		135,000		$	3.25
Vested		(45,005	)		3.25
Forfeited		(3,333	)		3.25

Balance at July 4, 2010		86,662			3.25

During the six months ended July 3, 2011, 36,302 common shares were issued upon the vesting of restricted stock units, net of common shares redeemed at the election of the grantee for payroll tax payment. As of July 3, 2011, Lakes’ unrecognized share-based compensation was approximately $0.1 million related to non-vested restricted stock units, which is expected to be recognized over a weighted-average of 0.6 years.


12.	Earnings (loss) per share

For all periods, basic earnings (loss) per share (“EPS”) is calculated by dividing net earnings (loss) by the weighted-average common shares outstanding. Diluted EPS in profitable periods reflects the effect of all potentially dilutive common shares outstanding by dividing net earnings by the weighted-average of all common and potentially dilutive shares outstanding. Potentially dilutive stock options of 1,717,138 for the three and six months ended July 3, 2011 and 1,601,082 for the three and six months ended July 4, 2010, were not used to compute diluted earnings per share because the effects would have been anti-dilutive.


13.	Income taxes

The Company’s effective tax rate was 44% for the six months ended July 3, 2011. Deferred tax assets are evaluated by considering historical levels of income, estimates of future taxable income and the impact of tax planning strategies. As of July 3, 2011, the Company continues to provide a 100% valuation allowance against its deferred tax assets because management has evaluated all available evidence and has determined that negative evidence continues to outweigh positive evidence for the realization of deferred tax assets.

On March 17, 2011, Lakes and the Louisiana Department of Revenue entered into a settlement agreement whereby Lakes agreed to pay the Louisiana Department of Revenue $9.0 million in full and final payment related to a tax litigation matter (“Settlement Agreement”). In return, the Louisiana Department of Revenue agreed to dismiss the suit and discharge Lakes from all proceedings and liabilities relating to this matter. As of January 2, 2011, income tax payable included $9.0 million related to this Settlement Agreement. The Company issued the $9.0 million payment to the Louisiana Department of Revenue during the six months ended July 3, 2011.


14.	Commitments and contingencies

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

Rock Ohio Ventures, LLC. Lakes’ initial capital requirement for a 10% ownership in Rock Ohio Ventures, LLC was $2.8 million. As of July 3, 2011, Lakes has contributed approximately $8.4 million as required as of that date (Note 8). If Lakes chooses not to fund any additional amounts, it will maintain an ownership position in Rock Ohio Ventures, LLC in a pro rata amount of what its $2.8 million payment is to the total amount of equity funded to develop casino operations, and all equity funded in excess of the initial $2.8 million would be subject to a buy-out amount equal to the price paid. During August 2011, Lakes made an additional capital contribution of approximately $7.4 million (Note 16).

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


15.	Segment information

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

The Indian Casino Projects segment includes operations and assets related to the development, financing and management of gaming-related properties for the Shingle Springs Tribe, Pokagon Band, Jamul Tribe and Iowa Tribe. The Non-Indian Casino Projects segment includes operations and assets related to the development, financing and management of gaming-related properties in Mississippi and Ohio. The total assets in “Corporate and Eliminations” below primarily relate to Lakes’ cash and cash equivalents and the Lakes corporate office

building. Costs in “Corporate and Eliminations” below have not been allocated to the other segments because these costs are not easily allocable and to do so would not be practical.


	Indian		Non-Indian
	Casino		Casino		Corporate &
	Projects		Projects		Eliminations			Consolidated

Three months ended July 3, 2011
Revenue	$	28.1	$	—	$	0.1		$	28.2
Impairment losses — other		0.6		—		—			0.6
Earnings (loss) from operations		18.1		—		(2.3	)		15.8
Depreciation expense		—		—		0.1			0.1
Amortization of intangible assets related to operating casinos		9.2		—		—			9.2
Three months ended July 4, 2010
Revenue	$	4.8	$	—	$	—		$	4.8
Impairment losses — other		0.7		—		—			0.7
Earnings (loss) from operations		0.6		—		(4.1	)		(3.5	)
Depreciation expense		—		—		0.1			0.1
Amortization of intangible assets related to operating casinos		2.8		—		—			2.8
Six months ended July 3, 2011
Revenue	$	33.9	$	—	$	0.1		$	34.0
Impairment losses — other		1.5		—		—			1.5
Earnings (loss) from operations		21.8		—		(4.9	)		16.9
Depreciation expense		—		—		0.1			0.1
Amortization of intangible assets related to operating casinos		11.2		—		—			11.2
Six months ended July 4, 2010
Revenue	$	11.7	$	—	$	0.1		$	11.8
Impairment losses — other		3.4		—		—			3.4
Earnings (loss) from operations		3.0		—		(6.5	)		(3.5	)
Depreciation expense		—		—		0.1			0.1
Amortization of intangible assets related to operating casinos		5.6		—		—			5.6
As of July 3, 2011
Total assets	$	58.1	$	11.6	$	66.7		$	136.4
Investment in unconsolidated investees		—		8.4		—			8.4
As of January 2, 2011
Total assets	$	68.7	$	6.9	$	51.0		$	126.6
Investment in unconsolidated investees		—		2.4		—			2.4


16.	Subsequent events

During July 2011, Lakes entered into a program to locate a buyer for the land held for development in Vicksburg, Mississippi. As of January 2, 2011 and July 3, 2011, the land held for development was carried at its estimated fair value of $3.3 million on the consolidated balance sheets. Subsequent to the quarter ended July 3, 2011, the land held for development in Vicksburg, Mississippi will be classified as Assets held for sale on the consolidated balance sheet and recognized at the lower of its carrying value of $3.3 million or fair value less cost to sell. At the date this Quarterly Report onForm 10-Q was filed with the SEC, Lakes was unable to estimate the financial effect on the consolidated financial statements, if any.

On August 4, 2011, Lakes contributed additional capital of approximately $7.4 million to Rock Ohio Ventures (Note 8 and 14).


ITEM 2.	*MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS*

Overview

Lakes Entertainment, Inc. and subsidiaries (“Lakes”, “we, or “our”) primarily develops, finances and manages casino properties with a historical emphasis on those that are Indian-owned. We have development and management or financing agreements as follows:


	•	We developed, and had a five-year contract to manage, the Four Winds Casino Resort for the Pokagon Band of Potawatomi Indians (“Pokagon Band”) in New Buffalo Township, Michigan. We began managing the Four Winds Casino Resort when it opened to the public on August 2, 2007. The Four Winds Casino Resort is located near the first Interstate 94 exit in southwestern Michigan and approximately 75 miles east of Chicago. The facility features approximately 3,000 slot machines, 64 table games, a 12-table poker room, a 165-room hotel, five restaurants, three bars, a child care facility and arcade, retail space and a parking garage. On June 30, 2011, we entered into a Buy-out and Termination Agreement (“Buy-out Agreement”) with the Pokagon Band for the Third Amended and Restated Management Agreement (“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. The Buy-Out and Termination Agreement also terminated the Management Agreement resulting in Lakes having no further obligations or responsibilities with respect to the Four Winds Casino Resort.

	•	We developed, and have a seven-year contract to manage, the Red Hawk Casino that was built on the Rancheria of the Shingle Springs Band of Miwok Indians (“Shingle Springs Tribe”) in El Dorado County, California, adjacent to U.S. Highway 50, approximately 30 miles east of Sacramento, California. We began managing the Red Hawk Casino when it opened to the public on December 17, 2008. The Red Hawk Casino features approximately 2,150 slot machines, 68 table games, seven poker tables, five restaurants, four bars, retail space, a parking garage, a child care facility and arcade.

	•	We have contracts to develop and finance a casino to be built on the reservation of the Jamul Indian Village (the “Jamul Tribe”) located on State Highway 94, approximately 20 miles east of San Diego, California (the “Jamul Casino”). This project has been delayed due to various political and regulatory issues. Significant risk exists related to this project moving forward to completion, and we have recorded significant impairment charges against our investment in this project. However, the Jamul Tribe has the two basic requirements to eventually build a successful project — federal recognition as an Indian Tribe and Indian land eligible for gaming. We have concluded that it is not currently in our best interest to terminate our involvement with the Jamul Casino project and we will continue to monitor the status of this project.

We have also explored, and continue to explore, other casino development projects. In October 2009, we entered into an agreement with Rock Ohio Ventures, LLC (“Rock Ohio Ventures”) for the purpose of funding a percentage of costs associated with the referendum to amend the Ohio constitution to authorize casino gaming in Ohio, which passed on November 3, 2009. As of July 3, 2011, we have contributed approximately $8.4 million to Rock Ohio Ventures. We expect to contribute additional capital to Rock Ohio Ventures for the development of casinos in Cleveland and Cincinnati. If we choose not to fund any additional amounts, we will maintain an ownership position in Rock Ohio Ventures, LLC in a pro rata amount of what its $2.8 million payment is to the total amount of equity funded to develop casino operations, and all equity funded in excess of the initial $2.8 million would be subject to a buy-out amount equal to the price paid .

Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto included elsewhere in this Quarterly Report onForm 10-Q for the three and six months ended July 3, 2011.

Three months ended July 3, 2011, compared to the three months ended July 4, 2010

Revenues. Total revenues were $28.2 million for the second quarter of 2011 compared to $4.8 million for the second quarter of 2010. Contributing to the increase in revenues for the three months ended July 3, 2011 was the buy-out of the management agreement for the Four Winds Casino Resort. Under the Buy-Out and Termination 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. The increase was partially offset by a decrease in management fees due to the elimination of management fees from the Cimarron Casino project, as a result of the termination agreement between Lakes and the Iowa Tribe of Oklahoma (“Iowa Tribe”) in May 2010, as well as a decline in management fees associated with the Red Hawk Casino compared to the first quarter of 2010.

As a result of the buy-out of the management agreement for the Four Winds Casino Resort, Lakes’ consolidated statement of earnings (loss) will not include management fee revenues related to the Four Winds Casino Resort subsequent to June 30, 2011. Revenues in fiscal 2011 are expected be impacted by the anticipated lower management fees from the Red Hawk Casino due to the continued significant economic pressures in the northern California market the property serves.

Selling, general and administrative expenses. Selling, general and administrative expenses were $2.3 million in the second quarter of 2011 compared to $3.3 million for the second quarter of 2010. The decline in selling, general and administrative costs in the second quarter of 2011 compared to the second quarter of 2010 resulted primarily from decreases in payroll and related expenses, travel expenses and professional fees. For the second quarter of 2011, Lakes’ selling, general and administrative expenses consisted primarily of payroll and related expenses of $1.3 million, including share-based compensation, travel expenses of $0.4 million, and professional fees of $0.3 million. For the second quarter of 2010, Lakes’ selling, general and administrative expenses consisted primarily of payroll and related expenses of $1.7 million, including share-based compensation, travel expenses of $0.6 million, and professional fees of $0.5 million.

Impairment losses-other. Impairment losses-other were $0.6 million in the second quarter of 2011 compared to $0.7 million in the second quarter of 2010. Impairment losses — other are primarily due to the continued uncertainty surrounding the Jamul Casino project associated with delays in progress as well as ongoing issues in the credit markets.

Amortization of intangible assets related to operating casinos. Amortization of intangible assets related to operating casinos for the second quarter of 2011 was $9.2 million compared to $2.8 million for the second quarter of 2010. The increase in amortization costs primarily relates to the intangible assets associated with the Pokagon Band being fully amortized during the second quarter of 2011. As a result of the Buy-Out and Termination Agreement, Lakes evaluated the useful life of the intangible assets associated with the Pokagon Band during the second quarter of 2011 and determined that the useful life would be through June 30, 2011. Therefore, intangible assets associated with the Pokagon Band were fully amortized as of June 30, 2011.

Net unrealized losses on notes receivable. Net unrealized losses on notes receivable relate to our notes receivable from Indian tribes, which are adjusted to estimated fair value, based upon the current status of the related tribal casino projects and evolving market conditions. In the second quarter of 2011, we reported net unrealized losses on notes receivable of $0.1 million, compared to net unrealized losses of $1.5 million in the prior year period. The net unrealized losses in the second quarter of 2011 and 2010 related to the Jamul Casino project due primarily to ongoing issues in the credit markets.

Other income (expense), net. Other income (expense), net was $1.3 million for the second quarter of 2011 compared to $1.8 million for the second quarter of 2010. Other income (expense), net primarily consists of interest earned on the notes receivable from the Shingle Springs Tribe, a significant portion of which relates to non-cash interest income.

Income taxes. The income tax provision for the second quarter of 2011 was $7.7 million compared to a tax benefit of $5.6 million for the second quarter of 2010. Our effective tax rates were 45% and 338% for the second quarter of 2011 and 2010, respectively. For the three months ended July 3, 2011, the effective tax rate differs from the federal tax rate of 35% primarily due to state taxes and additional valuation allowance recorded due to projected

2011 timing differences. For the three months ended July 4, 2010, the effective tax rate differs from the federal tax rate of 35% primarily due to state taxes, discrete items recognized and additional valuation allowance recorded due to projected 2010 timing differences. Lakes’ income tax provision in the current year period consists primarily of current income tax provision of $6.9 million and additional valuation allowance of $0.8 million. In the prior period, the income tax benefit consisted primarily of current income tax benefit of $5.7 million.

Six months ended July 3, 2011, compared to the six months ended July 4, 2010

Revenues. Total revenues were $34.1 million for the six months ended July 3, 2011 compared to $11.8 million for the six months ended July 4, 2010. Contributing to the increase in revenues for the three months ended July 3, 2011 was the buy-out of the management agreement for the Four Winds Casino Resort. Under the Buy-Out and Termination 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. The increase was partially offset by the elimination of management fees from the Cimarron Casino project, as a result of the termination agreement between Lakes and the Iowa Tribe of Oklahoma (“Iowa Tribe”) in May 2010, as well as a decline in management fees associated with the Red Hawk Casino compared to the six months ended July 4, 2010.

As a result of the buy-out of the management agreement for the Four Winds Casino Resort, Lakes’ consolidated statement of earnings (loss) will not include management fee revenues related to the Four Winds Casino Resort subsequent to June 30, 2011. Revenues in fiscal 2011 will be impacted by the anticipated lower management fees from the Red Hawk Casino due to the continued significant economic pressures in the northern California market the property serves.

Selling, general and administrative expenses. Selling, general and administrative expenses were $4.9 million in the six months ended July 3, 2011 compared to $6.5 million in the prior year period. The decline in selling, general and administrative costs in the current year period compared to the prior year period resulted primarily from decreases in payroll and related expenses, travel expenses and professional fees. For the first six months of fiscal 2011, Lakes’ selling, general and administrative expenses consisted primarily of payroll and related expenses of $2.6 million, including share-based compensation, travel expenses of $0.8 million, and professional fees of $0.8 million. For the first six months of fiscal 2010, Lakes’ selling, general and administrative expenses consisted primarily of payroll and related expenses of $3.6 million, including share-based compensation, travel expenses of $1.2 million, and professional fees of $1.0 million.

Impairment losses-other. Impairment losses-other were $1.5 million in the six months ended July 3, 2011 compared to $3.4 million in the six months ended July 4, 2010. Due to the continued uncertainty surrounding the Jamul Casino project associated with delays in progress as well as ongoing issues in the credit markets, we recognized impairment losses of $1.6 million in the current year period and $1.3 million during the prior year period. In addition, due to the Iowa Tribe’s decision not to move forward with Lakes for the development and management of the Ioway Casino Resort, impairment losses of $2.1 million were recognized during the first six months of 2010 in connection with land and intangible assets related to the Ioway Casino Project.

Amortization of intangible assets related to operating casinos. Amortization of intangible assets related to operating casinos for the six months ended July 3, 2011 was $11.2 million compared to $5.6 million for the prior year period. The increase in amortization costs primarily relates to the intangible assets associated with the Pokagon Band being fully amortized during the second quarter of 2011. As a result of the Buy-Out and Termination Agreement, Lakes evaluated the useful life of the intangible assets associated with the Pokagon Band during the second quarter of 2011 and determined that the useful life would be through June 30, 2011. Therefore, intangible assets associated with the Pokagon Band were fully amortized as of June 30, 2011.

Net unrealized gains on notes receivable. Net unrealized gains on notes receivable relate to our notes receivable from Indian tribes, which are adjusted to estimated fair value, based upon the current status of the related tribal casino projects and evolving market conditions. In the first six months of 2011, we reported net unrealized gains on notes receivable of $0.6 million, compared to net unrealized gains of $0.3 million in the prior year period. The net unrealized gains in the current year period related to the Jamul Casino project due to improvements in the credit markets. The net unrealized gains in the first six months of 2010 consisted of $0.9 million resulting from the

termination of the project for the Ioway Casino with the Iowa Tribe of Oklahoma, which is offset by unrealized losses of $0.6 million related to the Jamul Casino project due primarily with ongoing issues in the credit markets.

Other income (expense), net. Other income (expense), net was $2.6 million for the six months ended July 3, 2011 compared to $3.3 million for the six months ended July 4, 2010. Other income (expense), net primarily consists of interest earned on the notes receivable from the Shingle Springs Tribe, a significant portion of which relates to non-cash interest income.

Income taxes. The income tax provision was $8.7 million compared to $0.6 million for the six months ended July 3, 2011 and July 4, 2010, respectively. Our effective tax rates were 44% and (278)% for the six months ended July 3, 2011 and July 4, 2010, respectively. For the six months ended July 3, 2011, the effective tax rate differs from the federal tax rate of 35% primarily due to state taxes and additional valuation allowance recorded due to projected 2011 timing differences. For the six months ended July 4, 2010, the effective tax rate differs from the federal tax rate of 35% primarily due to state income taxes, release of valuation allowance, stock based compensation deductions included in net operating loss carryforwards, and provisions for discrete items. Lakes’ income tax provision in the current year period consists primarily of current income tax provision of $7.8 million and additional valuation allowance of $0.8 million. In the prior period, the income tax provision consisted primarily of current income tax benefit of $0.1 million offset by approximately $0.2 million of interest related to a discrete item and an additional paid-in capital adjustment of $0.4 million.

Liquidity and Capital Resources

As of July 3, 2011, we had $60.4 million in cash and cash equivalents. We currently believe that our cash and cash equivalents balance and our cash flows from operations will be sufficient to meet our working capital requirements during the next 12 months. We currently expect to have the funds or be able to obtain the financing necessary to fulfill our potential future capital needs. However, such financing, if necessary, may not be available at all, or at acceptable terms, or it may be dilutive to our stockholders.

Our operating results and performance depend significantly on economic conditions and their effect on consumer spending in the casinos we manage. Declines in consumer spending cause our revenue generated from the management of Indian casinos to be adversely affected.

We have an interest-only $8.0 million non-revolving line of credit loan agreement (the “Loan Agreement”) with a bank that expires in October 2012. As of July 3, 2011 and January 2, 2011, no amounts were outstanding under the Loan Agreement.

During the six months ended July 3, 2011, we contributed additional capital of approximately $6.0 million to Rock Ohio Ventures resulting in a total investment of $8.4 million in Rock Ohio Ventures. On August 4, 2011, we contributed additional capital of approximately $7.4 million to Rock Ohio Ventures. Per our agreement with Rock Ohio Ventures related to potential casino developments in Cincinnati and Cleveland, we expect to invest additional funds in those projects. As a result we may need to obtain additional financing.

We derive our revenues from the management of the Cimarron Casino, the Four Winds Casino Resort and the Red Hawk Casino. Pursuant to the Buy-Out and Termination Agreement effective June 30, 2011 with the Pokagon Band, we received $24.5 million in management fees during the three months ended July 3, 2011 and we will no longer earn management fees related to the Four Winds Casino Resort. In addition, due to the May 2010 termination agreement with the Iowa Tribe, we will no longer receive management fees for the Cimarron Casino. Our sole remaining management contract is with the Red Hawk Casino and extends through fiscal December 2015.

The management contract 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 monthly payments when the casino operating results are not sufficient, and we are repaid the advances in subsequent periods when operating results are sufficient. As of July 3, 2011, $0.8 million was outstanding under this obligation. We advanced $1.6 million and collected payments of $1.8 million under this obligation during the six months ended July 3, 2011. We expect the requirement to advance funds for the minimum guaranteed payment to continue throughout the next twelve months based on the current projected operating results of the property. In addition, payment of our management fees, if any, is deferred when operating results are not sufficient.

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 July 3, 2011, 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 development notes receivable will be deferred through 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.

On March 17, 2011, we entered into a Settlement Agreement with the Louisiana Department of Revenue whereby Lakes agreed to pay the Louisiana Department of Revenue $9.0 million in full and final payment for all taxes, interest and fees relating to a revenue tax litigation matter. In return, the Louisiana Department of Revenue agreed to dismiss the suit and discharge us from all proceedings and liabilities relating to this matter. We made this payment during the three months ended April 3, 2011.

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 the tribesand/or 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.

If our casino development project with the Jamul Tribe is not constructed or if constructed, does not achieve profitable operations in the highly competitive market for gaming activities, our only recourse is to attempt to liquidate assets of the development, if any, excluding any land in trust and it is likely that we would incur complete losses on our notes receivable and any related intangible assets.

In order to assist the tribes, we may elect to guarantee the tribes’ debt financing or otherwise provide support for the tribes’ obligations. Guarantees by us, if any, will increase our potential exposure to losses and other adverse consequences in the event of a default by any of these tribes. In addition, we may lack the funds to compete for and develop future gaming or other business opportunities and our business could be adversely affected to the extent that we may be forced to cease our operations entirely.

Critical Accounting Policies and Estimates

This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet date and reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, long-term assets related to Indian casino projects, investment securities, litigation costs, income taxes, and share-based compensation. We base our estimates and judgments on historical experience and on various other factors that are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

We believe the following critical accounting policies involve the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue recognition: Revenue from the management, development, and financing of, and consulting with, casino gaming facilities is recognized as it is earned pursuant to each respective agreement. See further discussion below under the caption “Long-term assets related to Indian casino projects.”

Share-based compensation expense: Restricted stock units are valued at the Company’s stock price on the date of grant and amortized through expense over the requisite service period on a straight-line method. We use the Black-Scholes option pricing method to establish fair value of options. Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility and actual and projected employee stock option exercise behaviors. Any changes in these assumptions may materially affect the estimated fair value of the share-based award. We determine the estimated fair value per share of restricted stock units as the closing stock price on the date of grant, as reported by the NASDAQ Global Market.

Income taxes: We account for income taxes under the provisions of Accounting Standards Codification (“ASC”) 740,Income Taxes. The determination of our income tax-related account balances requires the exercise of significant judgment by management. Accordingly, we determine deferred tax assets and liabilities based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. We assess the likelihood that deferred tax assets will be recovered from future taxable income and establish a valuation allowance when management believes recovery is not likely.

We record estimated penalties and interest related to income tax matters, including uncertain tax positions as a component of income tax expense.

Long-term assets related to Indian casino projects:

Notes receivable. We have formal procedures governing our evaluation of opportunities for potential Indian-owned casino development projects that we follow before entering into agreements to provide financial support for the development of these projects. We determine whether there is probable future economic benefit prior to recording any asset related to the Indian casino project. We initially evaluate the following factors involving critical milestones that affect the probability of developing and operating a casino:


	•	Has the U.S. Government’s Bureau of Indian Affairs federally recognized the tribe as a tribe?

	•	Does the tribe hold or have the right to acquire land to be used for the casino site?

	•	Has the Department of the Interior put the land into trust for purposes of being used as a casino site?

	•	Has the tribe entered into a gaming agreement with the state in which the land is located, if required by the state?

	•	Has the tribe obtained approval by the National Indian Gaming Commission of the management agreement?

	•	Do other legal and political obstacles exist that could block development of the project and, if so, what is the likelihood of the tribe successfully prevailing?

	•	An evaluation by management of the financial projections of the project given the project’s geographic location and the feasibility of the project’s success given such location;

	•	The structure and stability of the tribal government;

	•	The scope of the proposed project, including the physical scope of the contemplated facility and the expected financial scope of the related development;

	•	An evaluation of the proposed project’s ability to be built as contemplated and the likelihood that financing will be available; and

	•	The nature of the business opportunity to us, including whether the project would be a financing, developmentand/or management opportunity.

We account for our notes receivable from the tribes as in-substance structured notes in accordance with the guidance contained in ASC 320,Investments — Debt and Equity Securities. Under their terms, the notes do not become due and payable unless the projects are completed and operational, and distributable profits are available

from the operations. However, in the event our development activity is terminated prior to completion, we generally retain the right to collect in the event of completion by another developer. Because the stated rate of the notes receivable alone is not commensurate with the risk inherent in these projects (at least prior to commencement of operations), the estimated fair value of the notes receivable is generally less than the amount advanced. At the date of each advance, the difference between the estimated fair value of the note receivable and the actual amount advanced is recorded as an intangible asset, and the two assets are accounted for separately.

Subsequent to its initial recording at estimated fair value, the note receivable portion of the advance is adjusted to its current estimated fair value at each balance sheet date using then current assumptions including typical market discount rates, and expected repayment terms as may be affected by estimated future interest rates and opening dates, with the latter affected by changes in project-specific circumstances such as ongoing litigation, the status of regulatory approval and other factors previously noted. The notes receivable are not adjusted to a fair value estimate that exceeds the face value of the note plus accrued interest, if any. Due to uncertainties surrounding the projects, no interest income is recognized during the development period, but changes in estimated fair value of the notes receivable still held as of the balance sheet date are recorded as unrealized gains or losses in our consolidated statement of earnings (loss).

Upon opening of the casino, any difference between the then estimated fair value of the notes receivables and the amount contractually due under the notes is amortized into income using the effective interest method over the remaining term of the note. Notes receivable are stated at the amount of unpaid principal and are net of unearned discount and, if applicable, an allowance for impaired notes receivable.

Notes receivable for open casinos are periodically evaluated for impairment pursuant to ASC 310,Receivables(“ASC 310”). Lakes considers a note receivable to be impaired when, based on current information and events, it is determined that Lakes will not be able to collect all amounts due according to the terms of the note receivable agreement. Impairment is measured based on the present value of expected future cash flows discounted at the note receivable’s effective interest rate. Interest income for impaired notes receivable will be accrued on the net carrying amount of the impaired note receivable under the effective interest method with significant changes to expected cash flows reflected in the impairment charge on notes receivable.

Additionally, upon significant changes in the development activity prior to the opening of a casino, including termination of the project, notes receivable would be evaluated for impairment pursuant to ASC 310 and any necessary decline in the carrying amount will be recorded as unrealized losses in our consolidated statement of earnings (loss). Subsequent to the initial impairment evaluation, we continue to monitor the note receivable for any changes in expected cash flows and recognize those changes in accordance with ASC 310.

Intangible assets related to Indian casino projects. Intangible assets related to the acquisition of the management, development, consulting or financing contracts are accounted for using the guidance in ASC 350,Intangibles — Goodwill and Other(“ASC 350”). In accordance with ASC 350, we amortize the intangible assets related to the acquisition of the management, development, consulting or financing contracts under the straight-line method over the term of the respective contracts which commence when the related casinos open. In addition to the intangible asset associated with the cash advances to tribes described above, these assets include actual costs incurred to acquire our interest in the projects from third parties.

Pursuant to ASC 350, the intangible assets are periodically evaluated for impairment based on the estimated cash flows from the respective contract on an undiscounted basis. In the event the carrying value of the intangible assets, in combination with the carrying value of land held for development and other assets associated with the Indian casino projects described below, were to exceed the undiscounted cash flow, an impairment would be recorded. Such an impairment would be measured based on the difference between the fair value and carrying value of the intangible assets. We principally use internal forecasts to estimate the undiscounted future cash flows used in our impairment analyses. These forecasts and fair value assumptions are highly subjective and judgmental and are primarily based on management’s judgment which takes into account the casino industry, known operating results and trends, and the current economic environment that the casino serves to develop an applied discount rate. During periods of economic instability, we may not be able to accurately forecast future cash flows from our Indian casino projects. Therefore, our estimates and assumptions may change, and are reasonably likely to change in future periods. These changes could adversely affect our consolidated statements of earnings.

Land held for development. Included in land held for development is land held for possible transfer to Indian tribes for use in certain of the future casino resort projects. In the event that this land is not transferred to the tribes, we have the right to sell it. We evaluate these assets for impairment in combination with intangible assets related to acquisition of management, development, consulting or financing contracts and other assets related to the Indian casino projects as discussed above.

Management fee receivable and other. Other assets primarily consist of amounts due from related parties that are directly related to the development and opening of Lakes’ Indian casino project in addition to deferred management fees and related interest due from the Shingle Springs Tribe. See Note 17 to the consolidated financial statements included in Item 8 of our Annual Report onForm 10-K. Also included in this category are costs incurred related to the Indian casino projects, which have not yet been included as part of the notes receivable because of timing of the payment of these costs.

In addition, we incur certain non-reimbursable costs related to the projects that are not included in notes receivable, which are expensed as incurred. These costs include salaries, travel and certain legal costs.

Long-term assets related to Indian Casino projects. The consolidated balance sheets as of July 3, 2011 (unaudited) and January 2, 2011 include long-term assets related to Indian casino projects of $57.0 million and $64.3 million, respectively, which primarily related to three separate projects. The amounts are as follows by project (in thousands):


	July 3, 2011
			Shingle
	Pokagon		Springs		Jamul
	Band		Tribe		Tribe		Other		Total
	(Unaudited)

Notes and interest receivable, net of current portion and allowance for impaired notes receivable	$	—	$	32,583	$	—	$	—	$	32,583
Notes receivable at fair value		—		—		12,201		—		12,201
Intangible assets related to Indian casino projects		—		4,713		—		—		4,713
Land held for development		—		—		960		—		960
Management fee receivable and other(*)		60		4,414		556		1,528		6,558

	$	60	$	41,710	$	13,717	$	1,528	$	57,015


	January 2, 2011
			Shingle
	Pokagon		Springs		Jamul
	Band		Tribe		Tribe		Other		Total

Notes and interest receivable, net of current portion and allowance for impaired notes receivable	$	—	$	31,192	$	—	$	—	$	31,192
Notes receivable at fair value		—		—		11,129		—		11,129
Intangible assets related to Indian casino projects		10,631		5,242		—		—		15,873
Land held for development		—		—		960		—		960
Management fee receivable and other(*)		60		3,001		315		1,819		5,195

	$	10,691	$	39,435	$	12,404	$	1,819	$	64,349


(*)		Primarily includes deferred management fees due from the Shingle Springs Tribe for the management of the Red Hawk Casino of $4.4 million and $2.9 million as of July 3, 2011 and January 2, 2011, respectively, and notes receivable from related parties of $1.5 million and $1.8 million, net of current portion, as of July 3, 2011 and January 2, 2011, respectively.

The key assumptions, estimates and criteria used in the determination of the estimated fair value of the notes receivable are primarily unobservable level three inputs, which are casino opening dates, pre- and post-opening date interest rates, discount rates and probabilities of projects opening. The estimated casino opening dates used in the

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

Shingle Springs

Lakes concluded that it was probable that substantial amounts due would not be repaid within the contract term and therefore determined that the notes were impaired as of July 3, 2011 and January 2, 2011. This determination was based on the continued significant economic pressures in the northern California market and increased competition in the market the property serves, all of which have negatively impacted expected future cash flows for the property. The outstanding principal on the notes receivable from the Shingle Springs Tribe was $67.5 million as of July 3, 2011, which is comprised of $66.7 million related to pre-construction advances and $0.8 million of advances related to the minimum guaranteed monthly payment. The carrying amount of long-term notes and interest receivable, which is net of current portion $0.8 million, unearned discount of $14.3 million and allowance for impairment of $20.5 million, was $32.6 million as of July 3, 2011. The carrying amount of long-term notes and interest receivable at January 2, 2011 was $31.2 million, which was net of current portion of $1.0 million, unearned discount of $14.9 million and allowance for impairment of $21.0 million. The carrying amounts represent the present value of expected future cash flows.

Jamul Tribe

The following table provides the key assumptions used to value the notes receivable from the Jamul Tribe at estimated fair value (dollars in thousands):


	As of July 3, 2011	As of January 2, 2011
	(Unaudited)

Face value of note (principal and interest)	$64,830 ($41,691 principal and $23,139 interest)	$61,108 ($39,638 principal and $21,470 interest)
Estimated months until casino opens (weighted-average of three scenarios)	66 months	66 months
Projected interest rate until casino opens	7.17%	7.29%
Projected interest rate during the loan repayment term	10.37%	10.19%
Discount rate	19.50%	20.00%
Repayment terms of note	120 months	120 months
Probability rate of casino opening (weighting of four scenarios)	50%	50%

The following table represents a sensitivity analysis prepared by Lakes as of July 3, 2011 on the notes receivable from the Jamul Tribe, based upon changes in the probability rate of the casino opening by five percentage points and the estimated casino opening date by one year:


	Sensitivity Analysis

Estimated fair value of notes receivable	$	12,201
5% less probable		10,811
One year delay		10,794
Both 5% less probable and one year delay		9,519
5% increased probability		13,650
One year sooner		13,827
Both 5% increased probability and one year sooner		15,406

The assumption changes used in the sensitivity analysis above are hypothetical. The effect of the variation in the probability assumption and estimated opening date on the estimated fair value of the notes receivable from Indian tribes was calculated without changing any other assumptions; however, in reality, changes in these factors may result in changes in another. For example, the change in probability could be associated with a change in discount rate, which might magnify or counteract the sensitivities.

The following represents the nature of the advances to the tribes for Jamul project under development, which represent the principal amount of the notes receivable, as of July 3, 2011 and January 2, 2011 (in thousands).


	July 3,		January 2,
Advances Principal Balance	2011		2011

Note receivable, pre-construction(a)	$	40,741	$	38,688
Note receivable, land(b)		950		950

	$	41,691	$	39,638


(a)		We fund certain costs incurred to develop the casino project. These costs relate to construction costs, legal fees in connection with various regulatory approvals and litigation, environmental costs and design consulting, and we, in order to obtain the development agreement and management contract, agree to advance a monthly amount used by the tribe for a variety of tribal expenses.

(b)		We purchased land to be used and transferred to the tribe in connection with the casino project.

The notes receivable pre-construction advances consist of the following principal amounts advanced to the Jamul Tribe as of July 3, 2011 and January 2, 2011 (in thousands):


	July 3,		January 2,
	2011		2011

Monthly stipend	$	7,284	$	6,923
Construction		2,645		2,546
Legal		5,807		5,218
Environmental		3,829		3,603
Design		17,205		16,508
Gaming license		1,274		1,193
Lobbyist		2,697		2,697

	$	40,741	$	38,688

Evaluation of impairment related to long-term assets related to Indian casino projects, excluding the notes receivable. Management periodically evaluates the intangible assets, land held for development and other costs associated with each of the projects for impairment based on the estimated undiscounted cash flows from the applicable management contract on an undiscounted basis. In the event the carrying value of the intangible assets, in combination with the carrying value of land held for development and other assets associated with the Indian casino

projects were to exceed the undiscounted cash flow, an impairment loss would be recorded, based on the difference between the estimated fair value and carrying value of the assets.

The financial models prepared by management for each project are based upon the scope of each of the projects, which are supported by a feasibility study as well as a market analysis where the casino will be built. We (as predecessor to Grand Casinos Inc.) began developing Indian casino projects in 1990 and demonstrated success from the day the first Indian casino opened in 1991 through the expiration of the Coushatta management contract in 2002. Additionally, we managed the Cimarron Casino in Oklahoma from 2006 through May 2010 and have been managing the Four Winds Casino Resort since August of 2007 and the Red Hawk Casino since December of 2008. Our successful history legitimizes many of the key assumptions supporting the financial models. Forecasts for each applicable casino development were developed based on analysis of published information pertaining to the particular markets in which our Indian casinos will be located and are updated quarterly based on evolving events and market conditions. In addition, we have many years of casino operations experience, which provides an additional resource on which to base our revenue expectations. The forecasts were prepared by us not for purposes of the valuation at hand but rather for purposes of our and the tribes’ business planning.

Shingle Springs

Due to the carrying amount of the intangibles associated with the Shingle Springs Tribe exceeding the expected future cash flows from the management agreement for the Red Hawk Casino, the intangible assets were deemed impaired as of January 2, 2011. This determination was based on the continued significant economic pressures in the northern California market and increased competition in the market the property serves, all of which have negatively impacted expected future cash flows for the property. No impairment losses were recognized during the three and six months ended July 3, 2011 and July 4, 2010.

Jamul Tribe

The primary assumptions included within management’s financial model for the Jamul Casino project are as follows:


	July 3,		January 2,
	2011		2011

No. of Class II electronic gaming devices		1,000		1,000
No. of Table games		20		20
No. of Poker tables		5		5
Win/Class II electronic gaming devices/day — 1st year	$	172	$	172
Win/Table game/day — 1st year	$	471	$	471
Win/Poker table/day — 1st year	$	312	$	312

Lakes and the Jamul Tribe have consulted with third party advisors as to the architectural feasibility of a plan to build a casino with related amenities such as parking on the six acres of reservation land held by the Jamul Tribe and have concluded that such a project could be successfully built assuming adequate financing can be obtained. The gaming facility is currently planned to be a class II electronic gaming device facility which will not require a compact. The agreement between Lakes and the Jamul Tribe will also be modified as the political, regulatory and access issues move closer to resolution.

The Jamul Casino project has been significantly delayed due to various political and regulatory issues. Significant risk exists related to this project moving forward to completion, and we have recorded significant impairment charges against our investment in this project. However, the Jamul Tribe has the two basic requirements to eventually build a successful project — federal recognition as an Indian Tribe and Indian land eligible for gaming and Lakes currently expects to continue its involvement with this project.

Description of each Indian casino project and evaluation of critical milestones:

Pokagon Band

Business arrangement. On August 2, 2007, the Four Winds Casino Resort in New Buffalo, Michigan opened to the public. 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 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.

Shingle Springs

Business arrangement. On December 17, 2008, the Red Hawk Casino opened to the public. We earn a management fee equal to 30% of net income (as defined by the management contract) of the operations annually for the first five years, with a declining percentage in years six and seven. Payment of our management fee is subordinated to the repayment of $450 million senior note financing of an affiliate of the Shingle Springs Tribe, the repayment of $38.4 million furniture, furnishings and equipment financing as of July 3, 2011 and a minimum priority payment to the Shingle Springs Tribe. Generally, the order of priority of payments from the Red Hawk Casino’s cash flows is as follows: a certain minimum monthly guaranteed payment to the Shingle Springs Tribe, repayment of various debt with interest accrued thereon, management fee to Lakes, and other obligations, with the remaining funds distributed to the Shingle Springs Tribe. In order to assist the Red Hawk Casino in increasing cash levels, Lakes is deferring allowed payments of principal on its preconstruction advances, if any, from March 2011 through December 2013. These deferrals, if any, do not constitute forgiveness of contractual principal amounts due to Lakes. The management contract includes provisions that allow the Shingle Springs Tribe to buy-out the management contract after four years from the opening date. The buy-out amount is calculated by multiplying the previous 12 months of management fees earned by the remaining number of years under the contract, discounted back to the present value at the time the buy-out occurs. If the Shingle Springs Tribe elects to buy out the contract, all outstanding amounts owed to Lakes immediately become due and payable. The NIGC approved the management contract in July 2004, which was subsequently amended in April 2007.

We acquired our initial interest in the development and management contracts for the Shingle Springs Casino from KAR — Shingle Springs in 1999 and formed a joint venture, in which the contracts were held, between us and KAR — Shingle Springs. On January 30, 2003, we purchased the remaining KAR — Shingle Springs’ partnership interest in the joint venture. In connection with the purchase transaction, we entered into separate agreements with the two individual owners of KAR — Shingle Springs (Kevin M. Kean and Jerry A. Argovitz).

During 2009, Lakes became obligated to pay Mr. Argovitz $1 million per year (prorated based on a 365 day year) during the remainder of the seven-year initial term of the management contract which commenced in December 2008 between Lakes and the Shingle Springs Tribe, as a result of Mr. Argovitz’s election under an existing agreement related to this project. Also as a result of this election, Mr. Argovitz will not be entitled to obtain a 15% equity interest in the Lakes’ entity that holds the rights to the management fees earned by Lakes from the Red Hawk Casino operations.

During 2009, Lakes became obligated to pay to Mr. Kean $1 million per year (prorated based on a 365 day year) during the remainder of the seven-year initial term of the management contract which commenced in December 2008 between Lakes and the Shingle Springs Tribe, as a result of Mr. Kean’s election under an existing

agreement related to this project. Also as a result of this election, Mr. Kean will not be entitled to receive consulting fees equal to 15% of the management fees earned by Lakes from the Red Hawk Casino operations.

See Note 10 to the unaudited consolidated financial statements for further discussion.

Jamul Tribe

The Jamul Casino project has been significantly delayed due to various political and regulatory issues, including those related to access from State Highway 94 to the proposed casino site. In addition, the California Department of Transportation (“CalTrans”) issued a letter in 2008 to the Jamul Tribe indicating that it would not allow access to a casino operation from State Highway 94. In January 2011, the Jamul Tribe and CalTrans entered into an agreement whereby CalTrans agreed to review and process the Jamul Tribe’s encroachment permit application relating to the access, and provided that if the Jamul Tribe’s application meets certain legal requirements, issue the encroachment permit. The Jamul Tribe is currently performing various environmental and traffic studies necessary for the permit application.

Business arrangement. The Jamul Tribe has an approximatesix-acre reservation on which the casino project is currently planned to be built. The reservation is located near San Diego, California. Under the current compact that the Jamul Tribe has with the State of California (the “State”) and based upon requirements in other compacts approved by the State in 2004, the Jamul Tribe completed a Tribal Environmental Impact Statement/Report that was approved by the Jamul Tribe’s General Council with a record of decision issued by the Jamul Tribe on December 16, 2006. Since that time, the Jamul Tribe has received comments from various state agencies including the representative from the California Governor’s office. The Jamul Tribe and the State have met on several occasions in an attempt to address the State’s comments related to compact requirements. Lakes and the Jamul Tribe have continued to evaluate the Jamul Tribe’s alternatives of pursuing a new compact, complying with certain requirements in their existing compact or building and operating a casino based solely on class II electronic gaming devices. The agreement between Lakes and the Jamul Tribe (discussed below) will also be modified as the political, regulatory and access issues move closer to resolution.

Effective March 30, 2006, Lakes entered into a development financing and services agreement with the Jamul Tribe to assist the Jamul Tribe in developing the Jamul Casino which the Jamul Tribe will manage. As part of that agreement, Lakes agreed to use its best efforts to obtain financing, from which advances will be made to the Jamul Tribe to pay for the design and construction of the Jamul Casino. Under the current development financing and services agreement, Lakes is entitled to receive a flat fee for its development design services, and a flat fee for its construction oversight services, payable evenly over the first five years after the opening date of the Jamul Casino. In connection with Lakes’ financing of the Jamul Casino, the Jamul Tribe is required to pay interest over a ten-year period on sums advanced by Lakes equal to the rate charged to Lakes for obtaining the necessary funds plus five percent. Amounts previously advanced by Lakes to the Jamul Tribe in connection with the Jamul Tribe’s proposed casino resort are included in the development financing and services agreement financing amount. However, as discussed above, this agreement is planned to be modified as the political, regulatory and access issues move closer to resolution. Third party financing may not be available with acceptable terms and if Lakes or the Jamul Tribe is unable to obtain the appropriate amount of financing for this project, the project may not be completed as planned.

Lakes acquired its initial interest in the development agreement and management contract for the Jamul casino from Kean Argovitz Resorts — Jamul, LLC (“KAR — Jamul”) in 1999 and formed a joint venture in which the contract was held between Lakes and KAR — Jamul. This development agreement and a management contract has been submitted to the NIGC for approval. On January 30, 2003, Lakes purchased the remaining KAR — Jamul’s partnership interest in the joint venture. In connection with the purchase transaction, Lakes entered into separate agreements with the two individual owners of KAR — Jamul (Mr. Kean and Mr. Argovitz).

Under the current agreement with Mr. Kean, he may elect to serve as a consultant to Lakes during the term of a casino management agreement if he is found suitable by relevant gaming regulatory authorities. In such event, Mr. Kean will be entitled to receive annual consulting fees equal to 20% of the management fees received by Lakes from the Jamul Casino operations, less certain costs of operations. If Mr. Kean is not found suitable by relevant gaming regulatory authorities or otherwise elects not to serve as a consultant, he will be entitled to receive annual

payments of $1 million from the Jamul Casino project during the term of the respective casino management agreement (but not during any renewal term of such agreement).

Under the current agreement with Mr. Argovitz, if he is found suitable by relevant gaming regulatory authorities he may elect to re- purchase his respective original equity interest in Lakes Kean Argovitz Resorts-California, LLC and then be entitled to obtain a 20% equity interest in such. If he is not found suitable or does not elect to purchase equity interests in Lakes Kean Argovitz Resorts — California, LLC, Mr. Argovitz may elect to receive annual payments of $1 million from the Jamul Casino project from the date of election through the term of the respective casino management agreement (but not during any renewal term of such agreement).

Our evaluation of the critical milestones. The following table outlines the status of each of the following primary milestones necessary to complete the Jamul project as of July 3, 2011 and January 2, 2011. Both the positive and negative evidence was reviewed during our evaluation of the critical milestones.


	July 3,	January 2,
Critical Milestone	2011	2011

Federal recognition of the tribe	Yes	Yes
Possession of usable land corresponding with needs based on Lakes’ project plan	Yes	Yes
Usable land placed in trust by Federal government	Not necessary, as land is reservation land.	Not necessary, as land is reservation land.
Usable county agreement, if applicable	N/A	N/A
Usable state compact that allows for gaming consistent with that outlined in Lakes’ project plan	N/A — the Jamul Tribe’s current plan is to operate a solely class II electronic gaming device facility, which does not require a compact with the State.	N/A — the Jamul Tribe’s current plan is to operate a solely class II electronic gaming device facility, which does not require a compact with the State.
NIGC approval of management contract in current and desired form	N/A as the Jamul Tribe’s current plan is to operate a solely class II electronic gaming device facility, which does not need to be approved by the NIGC.	N/A as the Jamul Tribe’s current plan is to operate a solely class II electronic gaming device facility, which does not need to be approved by the NIGC.
Resolution of all litigation and legal obstacles	N/A, there has been some local opposition regarding the project and various political and regulatory issues related to site access.	N/A, there has been some local opposition regarding the project and various political and regulatory issues related to site access.
Financing for construction	No, however, preliminary discussions with investment bankers regarding assisting in obtaining financing have taken place. The current general economic environment may limit our ability to obtain financing at desirable levels in the near-term.	No, however, preliminary discussions with investment bankers regarding assisting in obtaining financing have taken place. The current general economic environment may limit our ability to obtain financing at desirable levels in the near-term.
Any other significant project milestones or contingencies, the outcome of which could have a material affect on the probability of project completion as planned	Yes. The current plan is for the gaming facility to be a solely class II electronic gaming device facility. The agreement between Lakes and the Jamul Tribe will also be modified as the political, regulatory and access issues move closer to resolution.	Yes. The current plan is for the gaming facility to be a solely class II electronic gaming device facility. The agreement between Lakes and the Jamul Tribe will also be modified as the political, regulatory and access issues move closer to resolution.

Our evaluation and conclusion regarding the above critical milestones and progress. We entered into a development financing and services agreement with the Jamul Tribe in March 2006, as discussed above which eliminated the need for land contiguous to the reservation land to be taken into trust. We believe that there is no requirement that the NIGC approve the development financing and services agreement. The Jamul Casino is planned to be built on the Jamul Tribe’s existing six acres of reservation land. Reservation land qualifies for gaming without going through aland-in-trust process. We have consulted with third-party advisors as to the architectural feasibility of the alternative plan and have been assured that the project can be successfully built on the reservation land.

Recently issued accounting pronouncements

For information related to recently adopted pronouncements see Note 3 to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report onForm 10-Q.

Seasonality

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

Regulation and taxes

We and the owners of the existing and planned casinos that we are and will be working with are subject to extensive regulation by state gaming authorities. We will also be subject to regulation, which may or may not be similar to current state regulations, by the appropriate authorities in any jurisdiction where we may conduct gaming activities in the future. Changes in applicable laws or regulations could have an adverse effect on us.

The gaming industry represents a significant source of tax revenues to regulators. From time to time, various federal legislators and officials have proposed changes in tax law, or in the administration of such law, affecting the gaming industry. It is not possible to determine the likelihood of possible changes in tax law or in the administration of such law. Such changes, if adopted, could have a material adverse effect on our future financial position, results of operations and cash flows.

Off-balance sheet arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors, except for the financing commitments previously discussed.

Private Securities Litigation Reform Act

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain information included in this Quarterly Report onForm 10-Q and other materials filed or to be filed by Lakes with the United States Securities and Exchange Commission (“SEC”) as well as information included in oral statements or other written statements made or to be made by Lakes contain statements that are forward-looking, such as plans for future expansion and other business development activities as well as other statements regarding capital spending, financing sources and the effects of regulation (including gaming and tax regulation) and competition.

Such forward looking information involves important risks and uncertainties that could significantly affect the anticipated results in the future and, accordingly, actual results may differ materially from those expressed in any forward-looking statements made by or on behalf of Lakes.

These risks and uncertainties include, but are not limited to, the need for current financing to meet Lakes’ operational and development needs; the inability to complete or possible delays in completion of Lakes’ casino projects, including various regulatory approvals and numerous other conditions which must be satisfied before completion of these projects; possible termination or adverse modification of management or development contracts; the highly competitive industry in which Lakes operates; possible changes in regulations; reliance on continued positive relationships with Indian tribes and repayment of amounts owed to Lakes by Indian tribes; possible need for future financing to meet Lakes’ expansion goals; risks of entry into new businesses, and reliance on Lakes’ management. For more information, review Lakes’ filings with the Securities and Exchange Commission. For further information regarding the risks and uncertainties, see the “Risk Factors” section in Item 1A of this Annual Report onForm 10-K for the year ended January 2, 2011.


ITEM 3.	*QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK*

Not applicable


ITEM 4.	*CONTROLS AND PROCEDURES*

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined inRule 13a-15(e) under the Securities Exchange Act of 1934, as amended, (the “1934 Act”) as of the end of the period covered by this quarterly report. Based on their evaluation, our chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the 1934 Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information required to be disclosed by the Company in the reports that it files or submits under the 1934 Act is accumulated and communicated to the Company’s management, including its chief executive officer and chief financial officer as appropriate to allow timely decisions regarding required disclosure.

There have been no changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal control over financial reporting during the three months ended July 3, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II.
Other Information


ITEM 1.	*LEGAL PROCEEDINGS*

We are involved in various inquiries, administrative proceedings, and litigation relating to various contracts and other matters arising in the normal course of business. While any proceeding or litigation has an element of uncertainty, management currently believes that the likelihood of an unfavorable outcome is remote, and is not likely to have a material adverse effect upon our unaudited consolidated financial statements.


ITEM 1A.	*RISK FACTORS*

There have been no material changes to our risk factors identified in the “Risk Factors” section in Item 1A of our Annual Report onForm 10-K, for the year ended January 2, 2011.


ITEM 6.	*EXHIBITS*


Exhibits			Description

	31	.1	Certification of CEO pursuant to Securities Exchange ActRules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31	.2	Certification of CFO pursuant to Securities Exchange ActRules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	101	.INS	XBRL Instance Document
	101	.SCH	XBRL Taxonomy Extension Schema Document
	101	.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
	101	.LAB	XBRL Taxonomy Extension Label Linkbase Document
	101	.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report onForm 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

LAKES ENTERTAINMENT, INC.
Registrant

/s/ LYLE BERMAN

Lyle Berman

Chairman of the Board and

Chief Executive Officer

(Principal Executive Officer)

/s/ TIMOTHY J. COPE

Timothy J. Cope

President and Chief Financial Officer

(Principal Financial and Accounting Officer)

Dated: August 10, 2011

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. junior Avg

Golden Entertainment (GDEN) 10-Q2011 Q2 Quarterly report

Content analysis

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents