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

12 Months Ended

Jan. 01, 2012

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

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

Receivable at Fair Value

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

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


	Shingle Springs Tribe
Pre-construction advances	$	66,720
Minimum guarantee payment advances		1,076
Interest receivable		1,217
Unearned discount		(13,659)
Allowance for impaired notes receivable		(20,118)

Total notes and interest receivable, net of allowance		35,236
Less current portion of notes receivable		(1,076)

Long-term notes and interest receivable, net of current portion, discount and allowance	$	34,160

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 of Oklahoma		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, discount and allowance	$	31,192	$	—	$	31,192

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


Allowance for impaired notes balance, January 3, 2010	$	—
Recoveries		—
Charge-offs		—
Impairment charge on notes receivable		20,975

Allowance for impaired notes balance, January 2, 2011	$	20,975
Impairment charge on notes receivable		—
Recoveries		—
Charge-offs		—
Accretion of impairment charge on notes receivable included in interest income		(857)

Allowance for impaired notes balance, January 1, 2012	$	20,118

Shingle Springs Tribe – Red Hawk Casino

At January 1, 2012 and January 2, 2011, Lakes evaluated the notes receivable from the Shingle Springs Tribe for impairment and concluded that it was probable that substantial amounts due would not be repaid within the contract term and therefore determined that the notes receivable were impaired. This determination was based on the continued significant economic pressures in the northern California market and competition in the market the property serves, both of which have negatively impacted cash flows for the property. As a result of these factors, Lakes determined it was probable that substantial amounts due would not be repaid within the contract term. As of January 2, 2011, an allowance of $21.0 million was established through an impairment charge on the notes receivable and is included in the consolidated statement of operations for fiscal 2010. The outstanding principal on the notes and interest receivable from the Shingle Springs Tribe was $69.0 million as of January 1, 2012, which is comprised of $66.7 million related to pre-construction advances, $1.1 million of advances related to the minimum guaranteed monthly payment and $1.2 million related to interest receivable. The carrying amount of the notes and interest receivable, which is net of unearned discount of $13.7 million and allowance for impairment of $20.1 million, was $35.2 million as of January 1, 2012. The outstanding amount on the notes and interest receivable from the Shingle Springs Tribe was $68.0 million as of January 2, 2011, which was comprised of $66.7 million related to pre-construction advances, $1.0 million of advances related to the minimum guaranteed monthly payment and $0.3 million related to interest receivable. The carrying amount of the notes and interest receivable, which was net of unearned discount of $14.9 million and allowance for impairment of $21.0 million, was $32.1 million as of January 2, 2011. The carrying amount as of January 1, 2012 represents 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.

Lakes entered into a development and management agreement with the Shingle Springs Tribe in 1999 to develop and manage the Red Hawk Casino which is located adjacent to US Highway 50, approximately 30 miles east of Sacramento, California. The Shingle Springs Tribe obtained $450 million of senior note financing and $77 million for furniture, furnishings and equipment financing, and under the terms of the development and management agreement, Lakes made pre-construction advances to the Shingle Springs Tribe of $74.4 million, including interest accrued during the pre-construction period. The Red Hawk casino opened on December 17, 2008.

The opening of the Red Hawk Casino triggered the repayment terms of the notes receivable which are scheduled to be repaid over the original seven-year term at the stated interest rate of prime plus 2% (5.25% as of January 1, 2012). If, however, net revenues (as defined in the management and development agreement) from the project are insufficient, payments are deferred. Lakes classifies principal amounts expected to be received within the next fiscal year, if any, as current portion of notes receivable from casino projects on the consolidated balance sheets. The order of priority of payments from the Red Hawk Casino’s cash flows has been as follows: a certain minimum monthly guaranteed payment to the Shingle Springs Tribe, various debt with interest accrued thereon (including Lakes’ pre-construction advances), management fee due to Lakes and other obligations, if any, and the remaining funds, if any, distributed to the Shingle Springs Tribe. In order to assist the Red Hawk Casino in increasing cash levels, Lakes will defer allowed payments of principal on the transition loan, if any, from March 2011 through December 2013. These deferrals, if any, do not constitute forgiveness of contractual principal amounts due to Lakes. Due to the temporary nature of the principal payment suspension and no forgiveness of principal is being granted, any such deferrals would not meet the criteria for a troubled debt restructuring under ASC 310-40, Troubled Debt Restructurings by Creditors.

The management agreement 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 based upon the previous year of management fees earned multiplied 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 would immediately become due and payable.

Jamul Tribe

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

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

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

Notes receivable from the Jamul Tribe (“Jamul notes receivable”) are carried at their estimated fair value of zero and $11.1 million as of January 1, 2012 and January 2, 2011, respectively. 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, and 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. The terms and assumptions used to value the notes receivable at estimated fair value related to the Jamul Tribe are as follows (dollars in thousands):


	As of January 1, 2012	As of January 2, 2011
Face value of note (principal and interest)	$56,490	$61,108
	($43,746 principal and $12,744 interest*)	($39,638 principal and $21,470 interest)
Estimated months until casino opens (weighted average of three scenarios)	(**)	66 months
Projected interest rate until casino opens	(**)	7.29%
Projected interest rate during the loan repayment term	(**)	10.19%
Discount rate	(**)	20.00%
Repayment terms of note	(**)	120 months
Probability rate of casino opening	(**)	50%

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

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

Changes in the carrying value of the Jamul notes receivable are as follows (in thousands):


Balance, January 3, 2010	$	9,761
Net unrealized gains on notes receivable		735
Advances		3,131
Allocation of advances to intangible asset		(2,498)

Balance, January 2, 2011	$	11,129
Net unrealized losses on notes receivable		(11,892)
Advances		4,108
Allocation of advances to intangible asset		(3,345)

Balance, January 1, 2012	$	—

See note 14, Financial Instruments and Fair Value Measurements, for further discussion regarding the valuation of the Jamul notes receivable.