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

3 Months Ended

Mar. 31, 2013

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

3. 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 consists of notes and interest receivable due from the Shingle Springs Band of Miwok Indians (the “Shingle Springs 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”). The repayment terms of the Transition Loan are dependent upon the operating performance of the Red Hawk Casino. Repayment of 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.

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 March 31, 2013 and December 30, 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 determined it was probable that substantial amounts due would 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.

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, 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 March 31, 2013 and December 30, 2012, no amount was outstanding under this obligation.

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

	March 31, 2013			December 30, 2012
Transition loan	$	66,720		$	66,720
Minimum guarantee payment advances		—			—
Interest receivable		3,178			2,704
Unearned discount		(11,887	)		(12,299	)
Allowance for impaired notes receivable		(18,508	)		(18,878	)
Total notes and interest receivable, net of discount and allowance	$	39,503		$	38,247

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

2013
Allowance for impaired notes balance, December 30, 2012	$	18,878
Impairment charge on notes receivable		—
Recoveries		—
Charge-offs		—
Accretion of impairment charge on notes receivable included in interest income		(370	)
Allowance for impaired notes balance, March 31, 2013	$	18,508

2012
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		(255	)
Allowance for impaired notes balance, April 1, 2012	$	19,863