UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

Form 10-Q

Commission File No. 0-24993

LAKES ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

(952) 449-9092

(Registrant’s telephone number, including area code)

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

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

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

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

As of August 5,November 4, 2013, there were 26,440,93626,539,853 shares of Common Stock, $0.01 par value per share, outstanding.

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

INDEX

Part I.

Financial Information

ITEM 1.  FINANCIAL STATEMENTS

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands)

 

		(Unaudited)
		September 29, 2013				December 30, 2012
Assets
Current assets:
Cash and cash equivalents		$	41,932			$	32,480
Short-term investments			48,951				-
Income taxes receivable			2,166				2,161
Prepaid expenses			1,097				186
Other			1,096				1,069
Total current assets			95,242				35,896
Property and equipment			34,904				16,898
Accumulated depreciation			(4,972	)			(3,619	)
Property and equipment, net			29,932				13,279
Long-term assets related to Indian casino projects:
Notes and interest receivable, net of current portion and allowance			-				38,247
Intangible assets, net of accumulated amortization of $2.1 million			-				3,127
Management fees receivable and other			-				4,786
Total long-term assets related to Indian casino projects			-				46,160
Other assets:
Investment in unconsolidated investee			20,997				20,161
License fee			2,050				2,100
Land held for development			1,130				1,130
Other			931				996
Total other assets			25,108				24,387
Total assets		$	150,282			$	119,722
Liabilities and shareholders' equity
Current liabilities:
Current portion of contract acquisition costs payable, net of $0.7 million discount		$	-			$	1,265
Current portion of long-term debt			794				-
Accounts payable			656				433
Accrued taxes, other than income taxes			484				17
Accrued payroll and related			1,303				737
Other accrued expenses			1,936				1,791
Total current liabilities			5,173				4,243
Long-term contract acquisition costs payable, net of current portion and $0.7 million discount			-				3,302
Long-term debt, net of current portion			12,909				-
Total long-term liabilities			12,909				3,302
Total liabilities			18,082				7,545
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value; authorized 200,000 shares; 26,479 and 26,441 common shares issued and outstanding			264				264
Additional paid-in capital			204,486				203,964
Deficit			(72,541	)			(92,051	)
Accumulated other comprehensive loss			(9	)			-
Total shareholders' equity			132,200				112,177
Total liabilities and shareholders' equity		$	150,282			$	119,722

See notes to consolidated financial statements.

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Operations

(In thousands, except per share data)

 

		Three Months Ended								Nine Months Ended
		September 29, 2013				September 30, 2012				September 29, 2013				September 30, 2012
Revenues:
Management fees		$	1,384			$	1,885			$	7,762			$	6,331
Gaming			10,445				-				13,633				-
Room			1,849				763				2,728				763
Food and beverage			1,665				618				2,566				618
Other operating			647				358				1,154				358
License fees and other			26				15				66				51
Gross revenues			16,016				3,639				27,909				8,121
Less promotional allowances			524				-				564				-
Net revenues			15,492				3,639				27,345				8,121
Costs and expenses:
Gaming			6,037				-				8,055				-
Room			255				146				580				146
Food and beverage			1,393				471				2,455				471
Other operating			483				216				1,116				216
Selling, general and administrative			5,398				2,846				13,782				7,054
Recovery of impairment on notes receivable			(17,382	)			-				(17,382	)			-
Gain on extinguishment of liabilities			(3,752	)			-				(3,752	)			-
Impairments and other losses			3,356				1,986				3,356				4,314
Preopening expenses			-				-				1,163				-
Amortization of intangible assets related to Indian casino projects			187				264				716				792
Loss on disposal of property and equipment			-				-				143				-
Depreciation and amortization			759				229				1,476				335
Total costs and expenses			(3,266	)			6,158				11,708				13,328
Earnings (loss) from operations			18,758				(2,519	)			15,637				(5,207	)
Other income (expense):
Interest income			1,276				1,614				4,770				4,775
Interest expense			(450	)			(228	)			(922	)			(722	)
Other			15				55				25				113
Total other income, net			841				1,441				3,873				4,166
Earnings (loss) before income taxes			19,599				(1,078	)			19,510				(1,041	)
Income tax benefit			-				(87	)			-				(2,229	)
Net earnings (loss) including noncontrolling interest			19,599				(991	)			19,510				1,188
Net loss attributable to noncontrolling interests			-				-				-				61
Net earnings (loss) attributable to Lakes Entertainment, Inc.		$	19,599			$	(991	)		$	19,510			$	1,249
Other comprehensive loss			(9	)			-				(9	)			-
Comprehensive earnings (loss)		$	19,590			$	(991	)		$	19,501			$	1,249
Weighted-average common shares outstanding
Basic			26,464				26,441				26,449				26,438
Dilutive impact of stock options			368				-				221				-
Diluted			26,832				26,441				26,670				26,438
Earnings (loss) per share
Basic		$	0.74			$	(0.04	)		$	0.74			$	0.05
Diluted		$	0.73			$	(0.04	)		$	0.73			$	0.05

See notes to consolidated financial statements.

LAKES ENTERTAINMENT, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Cash Flows

(In thousands)

		Nine Months Ended
		September 29, 2013				September 30, 2012
OPERATING ACTIVITIES:
Net earnings including noncontrolling interest		$	19,510			$	1,188
Adjustments to reconcile net earnings including noncontrolling interestto net cash provided by operating activities:
Depreciation and amortization			1,476				335
Amortization of debt issuance costs and imputed interest on contract acquisition costs			527				722
Accretion of interest and additions to long-term interest receivable			(3,573	)			(2,944	)
Amortization of intangible assets related to Indian casino projects			716				792
Share-based compensation			396				296
Loss on disposal of property and equipment			143				-
Recovery of impairment on notes receivable			(17,382	)			-
Gain on extinguishment of liabilities			(3,752	)			-
Impairments and other losses			3,356				4,314
Changes in operating assets and liabilities:
Management fees receivable			3,983				2,361
Deposits			-				150
Prepaid expenses			(911	)			-
Other current assets			(576	)			(458	)
Income taxes receivable			(5	)			(1,994	)
Accrued taxes, other than income taxes			437				17
Accounts payable and accrued expenses			996				1,347
Net cash provided by operating activities			5,341				6,126
INVESTING ACTIVITIES:
Acquisition of the Rocky Gap Resort			-				(6,834	)
Purchase of short-term investments			(48,960	)			-
Payments to acquire investment in unconsolidated investee			(836	)			(4,455	)
Changes in management fees receivable and other			-				190
Purchase of property and equipment			(18,215	)			(1,872	)
Proceeds from disposal of property and equipment			25				-
Advances on notes receivable			-				(2,069	)
Collection on notes receivable			59,253				1,076
Changes in other assets			348				25
Net cash used in investing activities			(8,385	)			(13,939	)
FINANCING ACTIVITIES:
Repayments of borrowings			(89	)			-
Proceeds from borrowings			13,792				-
Purchase of non-controlling interest			-				(590	)
Proceeds from issuance of common stock			126				-
Noncontrolling interest member contributions			-				139
Contract acquisition costs payable			(1,333	)			(1,500	)
Net cash provided by (used in) financing activities			12,496				(1,951	)
Net increase (decrease) in cash and cash equivalents			9,452				(9,764	)
Cash and cash equivalents - beginning of period			32,480				38,557
Cash and cash equivalents - end of period		$	41,932			$	28,793
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest		$	359			$	-
Income taxes			5				(242	)
Noncash investing activities:
Redemption of restricted stock for payment of accrued expenses			-				7
Capital expenditures in accounts payable and accrued expenses		$	1,064			$	405

 

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 condensed and/or omitted. For further information, please refer to the annual audited consolidated financial statements of the Company, and the related notes included within the Company’s Annual Report on Form 10-K, for the year ended December 30, 2012, 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.

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

Investments in unconsolidated investees, which are 20% or less owned and the Company does not have the ability to significantly influence the operating or financial decisions of the entity, are accounted for under the cost method. See note 6,9,Investment in Rock Ohio Ventures, LLCand note 7,10, Investment in Dania Entertainment Holdings, LLC.

2.  New Accounting Standard

In July 2013, the FASB issued Accounting Standards Update “(ASU”) No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 requires entities to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss (“NOL”) or tax credit carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. This ASU requires entities to assess whether to net the unrecognized tax benefit with a deferred tax asset as of the reporting date. ASU 2013-11 will be effective for the Company’s first quarter of 2014. Lakes does not expect the adoption of ASU 2013-11 to have an impact on its consolidated financial statements.

3.  Debt Termination Agreement with the Shingle Springs Tribe

On July 17, 2013, Lakes entered into a Debt Termination Agreement (the “Debt Termination Agreement”) with the Shingle Springs Band of Miwok Indians (the “Shingle Springs Tribe”) relating to amounts Lakes had previously advanced to the Shingle Springs Tribe under the development and management agreement for the Red Hawk Casino between Lakes and the Shingle Springs Tribe (the “Shingle Springs Notes”). The Debt Termination Agreement required certain conditions to be met, including a lump sum payment by theShingle SpringsTribe to Lakes of $57.1 million (the “Debt Payment”). The Debt Payment was made on August 29, 2013 (the “Payment Date”) and constituted full and final payment of all debt owed to Lakes as of that date. As a result of the receipt of the Debt Payment, during the third quarter of 2013, Lakes recognized approximately $17.4 million in recovery of impairment on notes receivable because the Shingle Springs Notes had previously been impaired and were valued at $39.7 million(see note 7,Long-Term Assets Related to Indian Casino Projects – Notes and Interest Receivable). The face value of the Shingle Springs Notes including accrued interest was $69.7 million as of the Payment Date. The management agreement under which Lakes was managing the Red Hawk Casino also terminated on the Payment Date.

During the third quarter of 2013, Lakes also recognized a gain of $3.8 million on extinguishment of liabilities associated with contract acquisition costs related to the project with the Shingle Springs Tribe that were no longer owed upon the termination of the management agreement between Lakes and the Shingle Springs Tribe (see note 13,Contract Acquisition Costs Payable).

As of the Payment Date, $2.4 million of intangible assets related to the development and management agreement with the Shingle Springs Tribe were considered fully impaired and were written down to zero resulting in Lakes recognizing an impairment charge of $2.4 million during the third quarter of 2013. See note 8,Intangible and Other Assets Related to Indian Casino Projects.

4. Rocky Gap

In April 2012, a video lottery operation license (“License”) for the Rocky Gap Lodge & Golf Resort (“Rocky Gap”) was awarded to the Company by the State of Maryland Video Lottery Facility Location Commission. In August 2012, Lakes acquired the assets of Rocky Gap for $6.8 million and simultaneously entered into an operating lease for the underlying land (see note 16,19,Commitments and Contingencies). The AAA Four Diamond Award® winningresort included a hotel, convention center, spa, two restaurants and the only Jack Nicklaus signature golf course in Maryland.

After acquiring Rocky Gap, the Company converted the existing convention center space into a gaming facility and renamed the property Rocky Gap Casino Resort. The gaming facility opened to the public on May 22, 2013 and features approximately 550558 video lottery terminals (“VLTs”), 10 table games, three poker tables, a casino bar and a new lobby food and beverage outlet. A new event and conference center is being constructed which will be able to accommodate large groups and will feature multiple flexible use meeting rooms and is expected to be available for use in the fourth quartermid-November of 2013. The total initial cost of the Rocky Gap project is currently expected to be approximately $35.0 million, which includes the initial acquisition cost.

The operating results of Rocky Gap are included in the Company’s consolidated statements of operations in the non-Indian casino projects segment from the date of acquisition. Amortization of the License began on the date the gaming facility opened for public play and is being amortized over its 15 year term.

The following unaudited pro forma condensed consolidated financial results of operations for the sixthree and nine months ended July 1,September 30, 2012 are presented as if the acquisition had been completed at the beginning of the period. The amounts shown for the sixthree and nine months ended June 30,September 29, 2013 are based on actual results for the period:

These unaudited pro forma condensed consolidated financial results for the three and nine months ended September 30, 2012 have been prepared for illustrative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the first day of the 2012 fiscal period presented, or of future results of the consolidated entities. The unaudited pro forma condensed consolidated financial information does not reflect any operating efficiencies and cost savings that may be realized from the integration of the acquisition. The following adjustments have been made to the pro forma net earnings (loss) attributable to Lakes and pro forma earnings (loss) per share for the three and nine months ended September 30, 2012 in the table above:

3.5.  Short-Term Investments

Short-term investments consist of commercial paper and corporate bonds which are classified as available-for-sale securities and are carried at current fair market value, with the resulting unrealized gains and losses excluded from earnings and reported, net of tax, as a separate component of shareholders' equity until realized. If the carrying value of an investment is in excess of its fair market value, an impairment charge to adjust the carrying value to the fair market value is recorded if the impairment is considered other-than-temporary. There were no other-than-temporary impairments related to declines in fair market value of short-term investments during the three or nine months ended September 29, 2013. All short-term investments held as of September 29, 2013 have original maturity dates of twelve months or less and are classified as current assets. The Company held no short-term investments as of December 30, 2012. As of September 29, 2013, short-term investments consisted of the following (in thousands):

6. Property and Equipment, net

The following table summarizes the components of property and equipment, at cost (in thousands):

The increase in property and equipment, net primarily relates to the acquisition and renovation of Rocky Gap (see note 2,4,Rocky Gap).

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

Notes and interest receivable included in long-term assets related to Indian casino projects consistsas of December 30, 2012 consisted of notes and interest receivable due from the Shingle Springs Band of Miwok Indians (the “Shingle Springs Tribe”)Tribe pursuant to the Company’s development and management agreement with the Shingle Springs Tribe for the Red Hawk Casino. Under the terms of the development and management agreement, Lakes made advances to the Shingle Springs Tribe of $74.4 million including interest accrued through the opening date of the Red Hawk Casino on December 17, 2008 (the “Transition Loan”) and hashad an agreement to manage the property through December 17, 2015 (see2015.

The notes and related interest receivable were considered paid in full on August 29, 2013, when the Shingle Springs Tribe paid Lakes $57.1 million pursuant to the Debt Termination Agreement.See note 19,3,Subsequent EventDebt Termination Agreement with the Shingle Springs Tribe.). The repayment termsAs a result of the Transition Loan are dependent uponreceipt of the operating performanceDebt Payment, during the third quarter of 2013, Lakes recognized approximately $17.4 million in recovery of impairment on notes receivable because the Shingle Springs Notes had previously been impaired and were valued at $39.7 million. The face value of the Shingle Springs Notes including accrued interest was $69.7 million as of the Payment Date. The management agreement under which Lakes was managing the Red Hawk Casino. Repayment ofCasino also terminated on the Transition Loan is required only if distributable profits are available from the operation of the Red Hawk Casino. In addition, repayment of the Transition Loan and the management fees are subordinated to certain other financial obligations of the Red Hawk Casino. The order of priority of payments from the Red Hawk Casino’s cash flows has been as follows: a certain minimum monthly guaranteed payment to the Shingle Springs Tribe; repayment of various debt with interest accrued thereon (including the Transition Loan); management fees due to Lakes; other obligations, if any; and the remaining funds, if any, distributed to the Shingle Springs Tribe.Payment Date.

TheUntil the Payment Date, the Company performsperformed an impairment analysis on the notes receivable at least quarterly.Atquarterly.At January 2, 2011, Lakes evaluated the notes receivable from the Shingle Springs Tribe for impairment and concluded that it was probable that substantial amounts due would not be repaid within the contract term and therefore determined that the notes receivable were impaired. Lakes evaluated the notes receivable from the Shingle Springs Tribe for impairment as of June 30, 2013 and December 30, 2012 and concluded that the notes receivable continuecontinued to be impaired.

As part of the impairment analysis, the Company estimatesestimated the timing and amount of future repayments on the notes receivable by analyzing actual payments received on the notes receivable compared to scheduled payments required under the contractual terms of the notes receivable. The Company also considersconsidered forecasts for future periods which arewere based on a variety of factors including actual historical performance, changes in competition in the market the property serves, changes in the economic environment in the market the property serves, any regulatory changes, marketing initiatives and property offerings. Estimates of timing and amount of future repayments arewere then compared to payments required per the contractual terms of the notes receivable to estimate the remaining amounts due on the notes receivable at the end of the contract term with the Shingle Springs Tribe, which expires in December 2015. PerTribe. Prior to entering into the Debt Termination Agreement, the contractual terms of the notes receivable required that all amounts due on the notes receivable arewere to be repaid during the contract term.Due to improvements in certain of the factors considered in the impairment analysis, including operational results, the estimated amounts due at the end of the contract term decreased as of June 30, 2013 and December 30, 2012 compared to the estimated amounts due at the end of the contract term as of January 2, 2011. Although the estimated amounts due at the end of the contract term decreased, the estimated amounts due remained significant and as a result, the Company determined that a significant change that would cause the impairment on the notes receivable to be remeasured had not occurred as of June 30, 2013 and December 30, 2012.

The Shingle Springs Tribe will remain legally obligated to repay any remaining amounts due to Lakes subsequent to the conclusion of the agreement. 

In order to assist the Red Hawk Casino in increasing cash levels, allowed payments of principal on the Transition Loan to Lakes, if any, are being deferred from March 2011 through December 2013. These deferrals, if any, do not constitute forgiveness of contractual principal amounts due to Lakes.

The management agreement for the Red Hawk Casino includes a minimum guaranteed payment to the Shingle Springs Tribe of $0.5 million a month for the duration of the agreement. 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 June 30, 2013 and December 30, 2012, no amount was outstanding under this obligation.

Information with respect to the notes and interest receivable as of December 30, 2012 is summarized in the following table (in thousands):. There were no notes and interest receivable related to Indian casino projects as of September 29, 2013.

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

5.8.  Intangible and Other Assets Related to Indian Casino Projects

Intangible Assets

Intangible assets consistrelated to Indian casino projects consisted of costs associated with the acquisition of the development financing and management agreement with the Shingle Springs Tribe for the Red Hawk Casino and are evaluated for impairment at least quarterly. Thewhich were being amortized through the end of the management contract.In accordance with the Debt Termination Agreement with the Shingle Springs Tribe as discussed in note 3, Debt Termination Agreement with the Shingle Springs Tribe, the management agreement under which Lakes was managing the Red Hawk Casino terminated as of August 29, 2013.Therefore, Lakes will earn no fees from the management of the Red Hawk Casino subsequent to August 29, 2013. As a result, as of the Payment Date, the intangible assets related to the Shingle Springs Tribe are being amortized through the end of the management contract, which expires in December 2015.were considered fully impaired and were written down to zero.

Information with respect to the intangible assets related to the Shingle Springs Tribe is summarized as follows (in thousands):

Management Fees Receivable and Other

Management fees receivable and other includeincluded financial instruments related to deferred management fees and interest due from the Shingle Springs Tribe and other receivables of zero and $4.0$4.8 million as of June 30, 2013 and December 30, 2012, respectively. As defined in2012. Per the management agreement withterms of the Shingle Springs Tribe, payment ofDebt Termination Agreement, all earned and unpaid management fees if any, are deferred when operating results are not sufficient and arewere paid in subsequent periods when operating resultsfull on August 29, 2013. Other receivables of approximately $1.0 million from related parties that are sufficient. In addition,directly related to the development and opening of Lakes’ Indian casino projects were determined to be uncollectible and were impaired during the three months ended September 29, 2013. As a result, there were no management fees receivable and other include amounts due from Mr. Kevin M. Kean (see note 10,Contract Acquisition Costs Payable). Financial instruments related to Mr. Kean have a carrying value of $0.5 million and $0.8 million, net of current portion of $0.5 million as of June 30, 2013 and December 30, 2012, respectively.September 29, 2013.

6.9.  Investment in Rock Ohio Ventures, LLC

Lakes has ana 10% ownership investment in Rock Ohio Ventures, LLC (“Rock Ohio Ventures”), a privately-held company, that owns 80% of the Horseshoe Casino Cleveland in Cleveland, Ohio which opened to the public in May 2012, the Horseshoe Casino Cincinnati in Cincinnati, Ohio which opened in March 2013, and the Thistledown Racino in North Randall, Ohio which added VLTs to its existing racetrack in April 2013. This investment is accounted for using the cost method since Lakes owns less than 20% of Rock Ohio Ventures and does not have the ability to significantly influence the operating and financial decisions of the entity. At June 30,September 29, 2013 and December 30, 2012, Lakes had invested a total of $21.0 million and $20.2 million, respectively, in Rock Ohio Ventures, which is included in investment in unconsolidated investee in the accompanying consolidated balance sheets.

The Company's cost method investment is evaluated, on at least a quarterly basis, for potential other-than-temporary impairment, or when an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. Lakes monitors this investment for impairment by considering all information available to the Company including the economic environment of the markets served by the properties Rock Ohio Ventures owns; market conditions including existing and potential future competition; recent or expected changes in the regulatory environment; operational performance and financial results; known changes in the objectives of Rock Ohio Venture’s management; known or expected changes in ownership of Rock Ohio Ventures; and any other known significant factors relating to the business underlying the investment.

As part of the review of operational performance and financial results for considering if there are indications of impairment, the Company utilizes financial statements of Rock Ohio Ventures and its owned gaming properties to assess the investee’s ability to operate from a financial standpoint. The Company also analyzes Rock Ohio Ventures’ cash flows and working capital to determine if the Company’s investment in this entity has experienced an other-than-temporary impairment. As part of this process, the Company analyzes actual historical results compared to forecast and has periodic discussions with management of Rock Ohio Ventures to obtain additional information related to the Company’s investment in Rock Ohio Ventures to determine whether any events have occurred that would necessitate further analysis of the Company’s recorded investment in Rock Ohio Ventures for impairment. Based on these procedures, no events or changes in circumstances were identified that would require further analysis as to whether the Company’s investment in Rock Ohio has experienced an other-than-temporary impairment as of June 30,September 29, 2013 and December 30, 2012.

The fair value of this cost method investment is considered impracticable to estimate.  The impracticability in developing such an estimate is due primarily to insufficient information necessary to prepare a valuation model to determine fair value.

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 gaming properties in Ohio in return for a corresponding equity interest in those casinos (see note 16,19,Commitments and Contingencies).

7.10.  Investment in Dania Entertainment Holdings, LLC

On May 22, 2013, Dania Entertainment Center, LLC (“DEC”) purchased the Dania Jai Alai property located in Dania Beach, Florida, from Boyd Gaming Corporation, for $65.5 million.

As part of a previous plan to purchase the property, during fiscal 2011 Lakes loaned $4.0 million to DEC (the “Loan”) which was written down to zero during the third quarter of 2011 when the acquisition did not close. During fiscal 2013, the Loan was exchanged for a 20% ownership interest in Dania Entertainment Holdings, LLC (“DEH”). DEH maintains a 25% ownership interest in DEC resulting in Lakes effectively holding a 5% ownership in DEC, which now owns and operates the Dania Jai Alai property. Lakes will have no operational responsibility of DEC or DEH and will not be required to invest any additional money in either entity.

The Company accounts for its investment in DEH as a cost method investment. At the time the Loan was exchanged for an equity investment in DEH, Lakes determined its value remained at zero due to the negative cash flows of the existing operations of the Dania Jai Alai property as well as uncertainty surrounding completion of the project. Therefore, no value associated with this investment is recorded in the Company’s accompanying consolidated balance sheet as of June 30,September 29, 2013. Should Lakes receive any distributions in the form of dividends from its investment in DEH, the distributions will be recorded as income in the Company’s consolidated statement of earnings as of the date of distribution.

The fair value of this investment was considered impracticable to estimate without incurring excessive costs relative to the materiality of the investment. 

8.11.  Land

Lakes owns parcels of undeveloped land related to its previous involvement in a potential casino project with the Jamul Indian Village (“Jamul(the “Jamul Tribe”) near San Diego, California.During the third quarter of fiscal 2012, Lakes entered into a ten-year option agreement with Penn National Gaming, Inc. (“Penn National”) that grants Penn National the right to purchase this land. The purchase price for the land is $7.0 million and increases annually by 1%. Pursuant to the agreement, annual option payments of less than $0.1 million are required to be made by Penn National to Lakes.

Lakes also owns undeveloped land in Oklahoma related to its previous involvement in a potential casino project with the Iowa Tribe of Oklahoma.

As of June 30,September 29, 2013 and December 30, 2012, these parcels of land are carried at a total of $1.1 million on the accompanying consolidated balance sheets. The Company performs an impairment analysis on the land it owns at least quarterly and determined that no impairment had occurred as of June 30,September 29, 2013 and December 31, 2012.

9.12. Loan Agreements

Lakes has a two-year interest-only $8.0 million revolving line of credit loan agreement (the “Loan Agreement”) with Centennial Bank that expires in October 2014. 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, if any, bear interest at 8.95%. Lakes’ Chief Executive Officer, Lyle Berman, personally guaranteed the Loan Agreement on behalf of Lakes. As of June 30,September 29, 2013 and December 30, 2012, no amounts were outstanding under the Loan Agreement.

In December 2012, Lakes closed on a $17.5 million financing facility with Centennial Bank (the “Facility”). The Facility is being used to finance a portion of the renovation and new event and conference center construction costs of Rocky Gap. Lakes was required to invest $17.5 million in the Rocky Gap project prior to drawing on the Facility.AmountsFacility.Amounts borrowed under the Facility bear interest at 10.5%.The Facility is collateralized by the leasehold estate and the furniture, fixtures and equipment of Rocky Gap. In addition, Lakes guaranteed repayment of the loan and granted a second mortgage on its real property located in Minnetonka, Minnesota. Repayment of the loan will be interest-only for the first year, with payments of principal and interest amortized and paid over the subsequent seven years. As of June 30,September 29, 2013, $10.9$13.4 million had been drawn and was outstanding under the Facility. As of December 30, 2012, no amounts were outstanding under the Facility. During July

Effective November 1, 2013, Lakes made an additional $1.6 million drawamended the Facility with Centennial Bank to reduce the interest rate from 10.5% to 5.5%. Monthly payments of principal and interest will begin on December 1, 2013 and continue for 84 months. Although Lakes does not currently plan to make further draws on the Facility.Facility, Lakes has the ability to draw the remaining $4.1 million on the Facility through December 31, 2018. Lakes is currently evaluating the impact that the amendment will have on its consolidated financial statements.

10.13.  Contract Acquisition Costs Payable

During 2009, the Company became obligated to pay Mr. Jerry Argovitz and Mr. Kevin M. 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 agreement, as long as Lakes is the manager of the Red Hawk Casino. The management agreement 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 June 30, 2013 and December 30, 2012, the remaining carrying amount of the liability was $3.9 million and $4.6 million, net of a $1.0 million and $1.4 million discount,discount. As a result of the August 2013 termination of the management agreement between Lakes and the Shingle Springs Tribe for the management of the Red Hawk Casino, Lakes is no longer obligated to make payments under the existing agreements between Lakes and Mr. Kean and Mr. Argovitz, respectively. Amounts payableAs a result, Lakes recognized a gain of $3.8 million on extinguishment of these liabilities during the next 12 fiscalthree months totaling $1.4 million, net of related discount, are included in current contract acquisition costs payable as of June 30, 2013.ended September 29, 2103.

11.14. Promotional Allowances

The retail value of accommodations,rooms, food and beverage, and other services furnished to guests without charge is included in gross revenues and then deducted as promotional allowances.The estimated costretail value of providing suchthese promotional allowances is included in gaming expense.The amounts included in promotional allowances and theas follows (in thousands):

The estimated cost of providing suchthese promotional allowances, for the threewhich are included in gaming costs and six months ended June 30, 2013 were each less than $0.1 million.expenses, is as follows (in thousands):

12.15.  Share-Based Compensation

Share-based compensation expense, which includes stock options and restricted stock units, for the three and sixnine months ended June 30,September 29, 2013 and July 1,September 30, 2012, respectively, were as follows:

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.There were zero6,000 and 443,500449,500 options granted during the three and sixnine months ended June 30,September 29, 2013, respectively. There were no options granted during the three and sixnine months ended July 1,September 30, 2012.

The following table summarizes Lakes’ stock option activity during the sixnine months ended June 30,September 29, 2013 and July 1,September 30, 2012:

As of June 30,September 29, 2013, the options outstanding had a weighted average remaining contractual life of 7.26.8 years, weighted average exercise price of $2.95$2.94 and aggregate intrinsic value of $1.2$2.2 million. The options exercisable have a weighted average exercise price of $3.03, a weighted average remaining contractual life of 6.46.0 years and aggregate intrinsic value of $0.7$1.4 million as of June 30,September 29, 2013.

There were 38,548 options exercised during the three and nine months ended September 29, 2013 and no options exercised during the three and sixnine months ended JuneSeptember 30, 2012. The total intrinsic value of options exercised during the three and nine months ended September 29, 2013 and July 1, 2012.was less than $0.1 million. Lakes’ unrecognized share-based compensation expense related to stock options was approximately $0.8$0.6 million as of June 30,September 29, 2013, which is expected to be recognized over a weighted-average period of 2.32.2 years.

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

Restricted Stock Units  

There was no restricted stock activity during the sixnine months ended June 30,September 29, 2013. The following table summarizes Lakes’ restricted stock unit activity during the sixnine months ended July 1,September 30, 2012:

During the sixnine months ended July 1,September 30, 2012, 35,257 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.

13.16.  Earnings (Loss) per Share

For all periods, basic earnings (loss) per share (“EPS”) is calculated by dividing net earnings (loss) attributable to Lakes Entertainment, Inc. by the weighted-average common shares outstanding. Diluted EPS in profitable periods reflects the effect of all potentially dilutive common shares outstanding by dividing net earnings attributable to Lakes Entertainment, Inc. by the weighted-average of all common and potentially dilutive shares outstanding. Potentially dilutive stock options of 1,710,6451,467,885 and 1,912,4811,614,994 for the three and sixnine months ended June 30,September 29, 2013, respectively, and 1,527,5451,528,039 and 1,527,7261,527,661 for the three and sixnine months ended July 1,September 30, 2012, respectively, were not used to compute diluted earnings (loss) per share because the effects would have been anti-dilutive.

14.17.  Income Taxes

There was no income tax benefitprovision for the first sixnine months of 2013because there is no remaining potentialthe Company released valuation allowance against deferred tax assets available to carry back losses to prior years and future realization of the benefit is uncertain.offset current income. The income tax benefit for the sixnine months ended July 1,September 30, 2012 was $2.0$2.2 million and resulted from Lakes’ability to carry back its taxable losses to a prior year and receive a refund of taxes previously paid.Thepaid.The Company’s effective tax rates were 0% and (2,186)(227)% for the sixnine months ended June 30,September 29, 2013 and July 1,September 30, 2012, respectively. For the sixnine months ended June 30,September 29, 2013, the effective tax rate differs from the federal tax rate of 35% primarily due to limitationtherelease of the benefit because of uncertainty of future realization.valuation allowance against deferred tax assets which were available to offset current income. For the sixnine months ended July 1,September 30, 2012, the effective tax rate differs from the federal tax rate of 35%primarily due to state taxes and discrete items recognized.recognized.

Lakes has recorded income taxes receivable of $2.2 million for the periods ended June 30,September 29, 2013 and December 30, 2012 related to the Company’s ability to carry back 2012 taxable losses to a prior year and receive a refund of taxes previously paid.

Deferred tax assets are evaluated by considering historical levels of income, estimates of future taxable income and the impact of tax planning strategies.  Management has evaluated all available evidence and has determined that negative evidence continues to outweigh positive evidence for the realization of deferred tax assets and as a result continues to provide a full valuation allowance against its deferred tax assets.

15.18. Financial Instruments and Fair Value Measurements

Overview

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

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

For the Company’s cash and cash equivalents, accounts payable, and current portion of contract acquisition costs payable and long-term debt, the carrying amounts approximate fair value because of the short duration of these financial instruments.The fair value of the Company’s long-term debt approximates the carrying value based upon the Company's expected borrowing rate for debt with similar remaining maturities and comparable risk.

Balances Measured at Fair Value on a Recurring Basis

The following table shows certain of the Company’s financial instruments measured at fair value on a recurring basis as of September 29, 2013 (in thousands):

Balances Disclosed at Fair Value

The following table shows certain of the Company’s financial instruments disclosed at estimated fair value as of December 30, 2012 (in thousands):. There were no such financial instruments as of September 29, 2013.