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Long-Term Assets Related to Indian Casino Projects - Notes and Interest Receivable and Notes Receivable at Fair Value

9 Months Ended

Oct. 02, 2011

Convertible Note Receivable at Fair Value and Development Services and Management Agreement/Long-Term Assets Related to Indian Casino Projects - Notes and Interest Receivable and Notes Receivable at Fair Value [Abstract]

Long-Term Assets Related to Indian Casino Projects - Notes and Interest Receivable and Notes Receivable at Fair Value

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 October 2, 2011 is summarized in the following table (in thousands):


	Shingle Springs Tribe			Iowa Tribe			Total
Pre-construction advances	$	66,720		$	70		$	66,790
Minimum guarantee payment advances		877			—			877
Interest receivable		942			—			942
Unearned discount		(13,994	)		—			(13,994	)
Allowance for impaired notes receivable		(20,346	)		—			(20,346	)

Total notes and interest receivable, net of allowance		34,199			70			34,269
Less current portion of notes receivable		(624	)		(70	)		(694	)

Long-term notes and interest receivable, net of current portion and allowance	$	33,575		$	—		$	33,575

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


	Shingle Springs Tribe			Iowa 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		(629	)

Balance, October 2, 2011	$	20,346

Shingle Springs Tribe — Red Hawk Casino

At October 2, 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, from 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 October 2, 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 for the duration of the contract, which expires in December 2015. 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 October 2, 2011, $0.9 million was outstanding under this obligation, of which $0.6 million is expected to be repaid within twelve months and therefore classified as a current note receivable. Lakes advanced $2.4 million and collected payments of $2.5 million under this obligation during the nine months ended October 2, 2011.

Jamul Tribe

Notes receivable from the Jamul Tribe for a project under development are carried at their estimated fair value of $9.6 million and $11.1 million as of October 2, 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 October 2, 2011	As of January 2, 2011
	(Unaudited)
Face value of note (principal and interest)	$66,648	$61,108
	($42,642 principal and $24,006 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	6.27%	7.29%
Projected interest rate during the loan repayment term	8.43%	10.19%
Discount rate	21.50%	20.00%
Repayment terms of note	120 months	120 months
Probability rate of casino opening (weighting of four scenarios)	50%	50%