Nature of Business

12 Months Ended

Jan. 01, 2012

Nature of Business [Abstract]

Nature of Business

1.  Nature of Business

Overview

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

• Lakes developed, and has a seven-year contract to manage, the Red Hawk Casino that was built on the Rancheria of the Shingle Springs Band of Miwok Indians (the “Shingle Springs Tribe”) in El Dorado County, California, adjacent to U.S. Highway 50, approximately 30 miles east of Sacramento, California. Lakes began managing the Red Hawk Casino when it opened to the public on December 17, 2008. The Red Hawk Casino features approximately 2,200 slot machines and gaming devices, 70 table games, 7 poker tables, five restaurants, four bars, retail space, a parking garage and a child care facility and arcade.

• Lakes developed, and had a five-year contract to manage, the Four Winds Casino Resort for the Pokagon Band of Potawatomi Indians (the “Pokagon Band”) in New Buffalo Township, Michigan. Lakes 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. On June 30, 2011, Lakes entered into a Buy-Out and Termination Agreement (the “Buy-Out Agreement”) with the Pokagon Band for the management agreement for the Four Winds Casino Resort, which was scheduled to expire in August 2012. The buy-out of the management agreement was provided for in the original five-year management agreement. 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.

• Lakes initially entered into an agreement with the Jamul Indian Village (the “Jamul Tribe”) during 1999 to develop and manage a casino on behalf of the Jamul Tribe on the Jamul Tribe’s existing reservation approximately 20 miles east of San Diego, California (the “Jamul Casino Project”). The Jamul Tribe has a compact with the State of California and the two basic requirements to eventually build a successful project – federal recognition as an Indian tribe and Indian land eligible for gaming. On November 22, 2011, Lakes entered into an exclusive pre-development, development and financing arrangement agreement (the “Jamul Development Agreement”) with the Jamul Tribe. The Jamul Development Agreement superseded and replaced the previous development financing and services agreement entered into by Lakes and the Jamul Tribe in 2006. As a result of entering into the Jamul Development Agreement, accrued interest on amounts previously advanced by Lakes to the Jamul Tribe and on land that may be sold to the Jamul Tribe was decreased by approximately $19.6 million. As of January 1, 2012, Lakes had advanced approximately $56.5 million including accrued interest to the Jamul Tribe related to casino development efforts. Due to Lakes’ corporate strategic objectives, Lakes determined that it would not continue to move forward with the project with the Jamul Tribe and terminated the Jamul Development Agreement effective March 13, 2012 (the “Termination Date”). As a result, Lakes estimated the fair value of the notes receivable from the Jamul Tribe to be zero as of January 1, 2012 and incurred a net unrealized loss of approximately $11.9 million during fiscal 2011 related to the notes receivable. During fiscal 2012 through the Termination Date, Lakes had advanced an additional $0.8 million that will be reflected as losses in Lakes’ consolidated statement of operations in the first quarter of fiscal 2012. Pursuant to the Jamul Development Agreement, Lakes is required to fund tribal support costs of approximately $0.6 million subsequent to the Termination Date and provide funding of certain professional fees for a period of thirty days from the Termination Date (“Post-Termination Payments”). These amounts will also be reflected as losses during fiscal 2012. Although the Jamul Tribe remains obligated to repay all advances including accrued interest, it is not contemplated that the Jamul Tribe will have sufficient funds to make such payments unless it opens a gaming facility on its reservation. Lakes continues to have a collateral interest in all revenues from any future casino owned by the Tribe, and the casino’s furnishings and equipment.

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

• In October 2009, Lakes entered into an agreement with Rock Ohio Ventures, LLC (“Rock Ohio Ventures”) for the purpose of funding a percentage of costs associated with the referendum to amend the Ohio constitution to authorize casino gaming in Ohio, which in 2009. As of January 1, 2012, Lakes has contributed approximately $15.7 million to Rock Ohio Ventures related to the referendum effort and the development of casinos in Cleveland and Cincinnati, Ohio. The casino in Cleveland is currently expected to open in May 2012. Lakes currently plans to contribute additional capital as needed to maintain our equity position in Rock Ohio Ventures.

• In September 2011, Lakes entered into a joint venture with Addy Entertainment, LLC (“Addy”) to form Evitts Resort, LLC (“Evitts”), which submitted a response to a request for proposal by the State of Maryland Video Lottery Facility Location Commission (the “Commission”) for a video lottery operation license (the “License”) in Allegany County, Maryland. The Commission will evaluate applications and award the License to operate a video lottery operation at the Rocky Gap Lodge & Golf Resort in Cumberland, Maryland (the “Resort”). The License has an initial term of 15 years and is expected to be awarded during the second quarter of 2012. Lakes made an initial investment of approximately $2.1 million (the “Initial Investment”) in Evitts which was used to fund the application fee for its response to the request for proposal. The Initial Investment represents a majority ownership interest in Evitts and as a result, the financial position and results of operations of Evitts are included in the Company’s consolidated financial statements as of January 1, 2012. The Initial Investment will be returned by the Commission if the License is not awarded to Evitts. During February 2012, Lakes negotiated an agreement to buy out Addy’s interest in Evitts. Subsequent to the buy-out, Lakes will be the sole owner of Evitts. The buy-out is contingent on Evitts being awarded the license by the Commission. If the Commission awards the License to Evitts, Lakes currently plans to invest an additional $17.9 million and Evitts will be required to raise additional funds to fully finance the development.

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

Significant Customers and Concentrations of Credit Risk

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

The financial instruments that subject the Company to concentrations of credit risk consist principally of its notes receivable due from Indian tribes as further discussed in note 3, Long-Term Assets Related to Indian Casino Projects — Notes and Interest Receivable and Notes Receivable at Fair Value. The notes and interest receivable consist of amounts due related to the open project with the Shingle Springs Tribe as of January 1, 2012 and January 2, 2011. The notes receivable at fair value consist of amounts due related to the development project with the Jamul Tribe as of January 2, 2011. Lakes manages the risk related to open projects and related notes receivable by overseeing the day-to-day management of operations and evaluating collectability (the need for an allowance for doubtful collection and possible charge-off) of the notes receivable based upon operational performance on a case by case basis. For development projects, Lakes monitors the feasibility of the projects, including the likelihood the project will open and be financially successful, before making advances to the Indian tribes. In the event any of the receivables become uncollectible, the maximum losses to be sustained would be the carrying value of the receivables, plus the net carrying value of the related unamortized intangible assets.

Restructuring Activities

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