XML 84 R10.htm IDEA: XBRL DOCUMENT v2.4.0.6
Note 4. Investment in Evitts Resort, LLC and Acquisition of Rocky Gap Lodge & Golf Resort
 12 Months Ended
Dec. 30, 2012
Business Combination Disclosure [Text Block]
4.  Investment in Evitts Resort, LLC and Acquisition of Rocky Gap Lodge & Golf Resort

Background

In September 2011, Lakes entered into a joint venture with Addy Entertainment, LLC (“Addy”) to form Evitts Resort, LLC (“Evitts”). In April 2012, a video lottery operation license (“License”) for the Rocky Gap Lodge & Golf Resort in Allegany County, Maryland (the “Rocky Gap Resort”) was awarded to Evitts by the State of Maryland Video Lottery Facility Location Commission (the “Commission”).  In May 2012, Lakes paid Addy $0.6 million for its ownership interest in Evitts, giving Lakes full ownership of Evitts.

Acquisition of the Rocky Gap Resort and Application of the Acquisition Method of Accounting

On August 3, 2012, Lakes acquired the assets of the Rocky Gap Resort for $6.8 million.   The AAA Four Diamond Award® winning resort includes a hotel, spa, two restaurants and the only Jack Nicklaus signature golf course in Maryland.

The Rocky Gap Resort is currently undergoing renovation and upon completion will feature a gaming facility and an event center.  The gaming facility will include approximately 550 VLTs, 10 table games, a casino bar and a new lobby food and beverage outlet. The event center will be able to accommodate large groups and will feature multiple flexible use meeting rooms, including a formal high-end board room.  The total cost of the project is currently expected to be approximately $35.0 million.  On December 17, 2012, Lakes closed on a $17.5 million financing facility which will be used to finance a portion of the renovation and new meeting space construction costs.  Lakes is required to invest $17.5 million in the Rocky Gap Resort project, including the original purchase price of the property, prior to drawing on the financing facility.  As of December 30, 2012, no amounts had been drawn and no amounts were outstanding under the Facility.  See note 10, Loan Agreements, for further information.  The gaming facility is expected to open in the second quarter of 2013 and the event center is expected to be available for use in the fourth quarter of 2013.

The financial position of the Rocky Gap Resort is included in the Company’s consolidated balance sheet as of December 30, 2012 and its results of operations for the period from August 3, 2012 through December 30, 2012 are included in the Company’s consolidated statements of operations and cash flows for the three and twelve months ended December 30, 2012.  From the date of the acquisition of the Rocky Gap Resort on August 3, 2012 through December 30, 2012, Lakes recorded $3.2 million in revenue and $(0.8) million in net loss from the Rocky Gap Resort’s operations. The operating results of the Rocky Gap Resort are included in the Company’s consolidated statements of operations in the non-Indian casino projects segment.

Total assets related to Evitts were approximately $12.0 million as of December 30, 2012 which consisted primarily of property, equipment and intangible assets related to the acquisition of the Rocky Gap Resort, construction in process related to the renovation of the gaming facility and the license fee deposit paid by Evitts to the Commission during the third quarter of 2011. Total assets related to Evitts were approximately $2.3 million as of January 1, 2012 which consisted primarily of the license fee deposit.  Included in impairments and other losses during fiscal 2012 was $1.2 million related to costs associated with initial development plans for the Rocky Gap Resort which were subsequently revised.

The acquisition has been accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. Under the acquisition method of accounting, the total purchase price is allocated to the net tangible and intangible assets of the Rocky Gap Resort acquired in connection with the acquisition, based on their estimated fair values. The allocation of the purchase price to the assets acquired and liabilities assumed is as follows (in thousands):

    Amount  
Building
  $
2,788
 
Site improvements
   
2,091
 
Furniture and equipment
   
1,294
 
Intangible assets
    627  
Inventories
    126  
Other assets
   
136
 
Current liabilities assumed
   
(228)
 
Total purchase price
  $
6,834
 

The amounts assigned to intangible assets by category are summarized in the table below (in thousands):

 
 
Useful Life
(years)
 
Amount
Assigned
 
Advance bookings
1.4
  $ 179  
Memberships
25
    448  
Total intangible assets
    $ 627  

Advance bookings – Advance bookings are reservations that represent future cash flows the Company will enjoy when the guest visits the Rocky Gap Resort.  These reservations have been “pre-sold” as of the acquisition date of August 3, 2012 and would not require future sales or marketing expenses to be incurred.

Memberships – Memberships provide access to the golf course and related amenities in exchange for the payment of dues.  The portion of the Rocky Gap Resort’s income attributed to the possession of such membership contracts forms the basis of the intangible value.

Amortization expense related to the advance bookings and memberships intangible assets for the period from August 3, 2012 through December 30, 2012 was approximately $0.2 million.

See note 16, Financial Instruments and Fair Value Measurements, for further discussion regarding the valuation of the acquired tangible and intangible assets.

Operating Ground Lease

In connection with the closing of the acquisition of the Rocky Gap Resort, Lakes entered into a 40 year operating ground lease (the “Lease Agreement”) with the Maryland DNR for approximately 268 acres in the Rocky Gap State Park on which the Rocky Gap Resort is situated.  The Lease Agreement contains an option to renew for 20 years after the initial 40-year term.  Payments are due under the Lease Agreement according to the following terms:

 
·
From August 3, 2012 and until the casino opens for public play, rent in the form of surcharges is due and payable annually.  These surcharges are billed to and collected from guests and are $3.00 per room, per night and $1.00 per round of golf (“Surcharge Revenue”), with a minimum annual payment of $150,000.

 
·
From the date that the casino opens for public play through the remaining term of the Lease Agreement, total annual minimum rent in the amount of $425,000 plus 0.9% of any gross operator share of gaming revenue (as defined in the Lease Agreement) in excess of $275,000, and any Surcharge Revenue in excess of $150,000.

Unaudited Pro Forma Condensed Consolidated Financial Information

The following unaudited pro forma condensed consolidated financial results of operations for the fiscal years ended December 30, 2012 and January 1, 2012 are presented as if the acquisition had been completed at the beginning of each period presented:

   
Years Ended
 
 
 
 
December 30,
2012
   
January 1,
2012
 
   
(In thousands, except per-share data)
 
Pro forma total gross revenues
  $ 15,078     $ 44,332  
Pro forma net earnings (loss) attributable to Lakes Entertainment, Inc
    2,062       (2,276 )
                 
Pro forma earnings (loss) per share:
               
Basic
    0.08       (0.09 )
Diluted
    0.08       (0.09 )
                 
Weighted average common shares outstanding:
               
Basic
    26,438       26,403  
Diluted
    26,439       26,403  

These unaudited pro forma condensed consolidated financial results 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 each 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 in the table above:

 
·
Management and service fees paid by the Rocky Gap Resort to the previous management company have been excluded as the Rocky Gap Resort would not have incurred these costs if owned by Lakes.

 
·
Ground rent expense incurred by the Rocky Gap Resort has been adjusted to reflect the terms of the Lease Agreement that Lakes and the Maryland DNR entered into upon the acquisition of the Rocky Gap Resort.

 
·
Interest expense incurred by the Rocky Gap Resort has been excluded as Lakes did not assume the debt of the Rocky Gap Resort upon the acquisition of the property.