Note 5. Long-Term Assets Related to Indian Casino Projects - Notes and Interest Receivable

12 Months Ended

Dec. 30, 2012

Long Term Assets Related To Indian Casino Projects Notes And Interest Receivable

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

The majority of the assets related to Indian casino projects is in the form of notes and interest receivable due from the Shingle Springs Tribe pursuant to the Company’s development and management agreement with the Shingle Springs Tribe for the Red Hawk Casino. 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 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”).

The opening of the Red Hawk Casino triggered the repayment terms of the Transition Loan which is scheduled to be repaid over the original seven-year term at the stated interest rate of prime plus 2% (5.25% as of December 30, 2012). Repayment of the Transition Loan and the management fees is 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. If, however, net revenues (as defined in the management and development agreement) from the project are insufficient, payments are deferred.

In addition, in order to assist the Red Hawk Casino in increasing cash levels, allowed payments of principal on the Transition Loan made by Lakes, if any, are being deferred 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 do not meet the criteria for a troubled debt restructuring under ASC 310-40, Troubled Debt Restructurings by Creditors. The Transition Loan carrying amount at December 30, 2012 and January 1, 2012 represent the present value of expected future cash flows.

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 again evaluated the notes receivable from the Shingle Springs Tribe for impairment as of December 30, 2012 and January 1, 2012 and concluded that the notes receivable continue to be impaired. This determination was based on the continued 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 has concluded it is probable that substantial amounts due will not be repaid within the contract term. However, the Shingle Springs Tribe will remain legally obligated to repay any remaining amounts due to Lakes subsequent to the conclusion of the agreement.

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, 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 December 30, 2012, no amount was outstanding under this obligation. Lakes collected payments of $1.1 million related to amounts previously advanced under this obligation during fiscal 2012.

The management agreement includes provisions that allow the Shingle Springs Tribe to buy-out the management agreement 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 agreement, discounted back to the present value at the time the buy-out occurs. If the Shingle Springs Tribe elects to buy out the agreement, all outstanding amounts owed to Lakes would immediately become due and payable.

Information with respect to the notes and interest receivable is summarized in the following table (in thousands):

	December 30, 2012			January 1, 2012
Transition loan	$	66,720		$	66,720
Minimum guarantee payment advances		—			1,076
Interest receivable		2,704			1,217
Unearned discount		(12,299	)		(13,659	)
Allowance for impaired notes receivable		(18,878	)		(20,118	)
Total notes and interest receivable, net of allowance		38,247			35,236
Less current portion of notes receivable		—			(1,076	)
Long-term notes and interest receivable, net of current portion, discount and allowance	$	38,247		$	34,160

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

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
Impairment charge on notes receivable		—
Recoveries		—
Charge-offs		—
Accretion of impairment charge on notes receivable included in interest income		(1,240	)
Allowance for impaired notes balance, December 30, 2012	$	18,878