Exhibit 99.1

 

BLACK GAMING, LLC AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

 

		Page
Independent Accountant’s Review Report			1
Consolidated Financial Statements
Consolidated Balance Sheets			2-3
Consolidated Statements of Operations			4
Consolidated Statements of Members’ Deficit			5
Consolidated Statements of Cash Flow			6-7
Notes to Consolidated Financial Statements			8-38

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CONWAY, STUART & WOODBURY

Certified Public Accountants

 

PARTNERS   Greg Stuart		4021 MEADOWS LANE LAS VEGAS, NEVADA 89107 (702) 877-6800 OFFICE FAX: (702) 878-6888		PARTNERS   BOYD R. BUXTON

INDEPENDENT ACCOUNTANT’S REVIEW REPORT

The Members of Black Gaming, LLC

Mesquite, Nevada

We have reviewed the accompanying consolidated balance sheet of Black Gaming, LLC and subsidiaries as of June 30, 2011 and the related consolidated statements of operations and cash flows for the six months ended June 30, 2011 and 2010 and the statement of members’ deficit for the six months ended June 30, 2011. A review includes primarily applying analytical procedures to management’s financial data and making inquiries of management. A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the consolidated financial statements as a whole. Accordingly, we do not express such an opinion.

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the consolidated financial statements.

Our responsibility is to conduct the review in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. Those standards require us to perform procedures to obtain limited assurance that there are no material modifications that should be made to the consolidated financial statements. We believe that the results of our procedures provide a reasonable basis for our report.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.

The consolidated balance sheet and statement of members’ deficit for the year ended December 31, 2010 was audited by us and we expressed an unqualified opinion on it in our report dated April 29, 2011, but we have not performed any auditing procedures since that date.

Conway, Stuart & Woodbury

Las Vegas, Nevada

October 10, 2011

 

		Members American Institute Of Certified Public Accountants		-1-

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

CONSOLIDATED BALANCE SHEETS

(In Thousands)

ASSETS

 

		JUNE 30,				DECEMBER 31,
		2011				2010
		(unaudited)				(audited)
CURRENT ASSETS:
Cash and cash equivalents		$	14 776			$	7 918
Accounts receivable (net of allowance of $892 and $877 as of June 30, 2011 and December 31, 2010, respectively)			529				1 253
Related party receivables			55				70
Inventories			1 175				1 238
Prepaid expenses			2 956				3 233
Current portion of notes receivable			9				25
TOTAL CURRENT ASSETS			19 500				13 737
PROPERTY AND EQUIPMENT, net			81 683				83 461
NOTES RECEIVABLE, less current portion			-				5
INTANGIBLE ASSETS, net			5 031				6 515
DEFERRED FINANCING FEES			246				25
OTHER ASSETS			2 266				2 343
		$	108 726			$	106 086

 

		See accompanying independent accountants’ review report and notes to reviewed financial statements.		-2-

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In Thousands)

LIABILITIES AND MEMBERS’ DEFICIT

 

		JUNE 30,				DECEMBER 31,
		2011				2010
		(unaudited)				(audited)
CURRENT LIABILITIES:
Debt in default		$	14 495			$	14 600
Current portion of gaming equipment financing			648				130
Accrued interest			101				105
Accounts payable			2 094				2 643
Accrued liabilities			8 074				8 463
TOTAL CURRENT LIABILITIES:			25 412				25 941
Gaming equipment financing, less current portion			434				-
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE			25 846				25 941
Liabilities subject to compromise			218 613				218 613
TOTAL LIABILITIES			244 459				244 554
COMMITMENTS AND CONTINGENCIES (Note 12)
MEMBERS’ DEFICIT			(135 733	)			(138 468	)
		$	108 726			$	106 086

 

		See accompanying independent accountants’ review report and notes to reviewed financial statements.		-3-

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In Thousands)

 

		SIX MONTHS ENDED
		JUNE 30, 2011				JUNE 30, 2010
REVENUES:
Casino		$	34 477			$	33 655
Food and beverage			12 622				12 213
Hotel			10 660				11 120
Other			5 676				6 105
TOTAL REVENUES			63 435				63 093
Less: promotional allowances			(9 788	)			(9 383	)
NET REVENUES			53 647				53 710
OPERATING EXPENSES:
Casino			17 534				17 104
Food and beverage			8 212				7 855
Hotel			3 410				3 288
Other			3 723				3 978
General and administrative			11 466				12 613
Depreciation and amortization			5 279				5 548
Loss (gain) on sale and disposal of assets			(1	)			158
TOTAL OPERATING EXPENSES			49 623				50 544
OPERATING INCOME			4 024				3 166
OTHER EXPENSE:
Interest expense, net (contractual interest for the six months ended June 30, 2011 and 2010 was $10,462 and $10,515, respectively			(672	)			(4 047	)
(LOSS) INCOME BEFORE REORGANIZATION ITEMS			3 352				(881	)
Reorganization items			(617	)			(3 979	)
NET (LOSS) INCOME		$	2 735			$	(4 860	)

 

		See accompanying independent accountants’ review report and notes to reviewed financial statements.		-4-

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF MEMBERS’ DEFICIT

(In Thousands)

 

			0000000000000000
Balance December 31, 2009 (Audited)		$	(125 182	)
Net loss (Audited)			(14 298	)
Member contribution (Audited)			1 012
Balance December 31, 2010 (Audited)			(138 468	)
Net income for the six months ended June 30, 2011 (unaudited)			2 735
Balance June 30, 2011 (unaudited)		$	(135 733	)

 

		See accompanying independent accountants’ review report and notes to reviewed financial statements.		-5-

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Thousands)

 

		SIX MONTHS ENDED
		JUNE 30, 2011				JUNE 30, 2010
OPERATING ACTIVITIES:
Net (loss) income		$	2 735			$	(4 860	)
ADJUSTMENTS TO RECONCILE NET (LOSS) INCOME TO NET CASH PROVIDED BY OEPRATING ACTIVITIES:
Depreciation and amortization			5 279				5 548
(Gain) loss on sale and disposal of assets			(1	)			158
Amortization of deferred financing fees			25				253
Reorganization items			617				3 979
Change in operating assets and liabilities:
Accounts and related party receivables, net			1 560				374
Inventories			63				87
Prepaid expenses			277				(905	)
Notes receivable			21				53
Change in other assets			(32	)			(321	)
Accounts payable and accrued liabilities			(1 802	)			(334	)
Accrued interest			(3	)			3 072
NET CASH PROVIDED BY OPERATING ACTIVITIES BEFORE REORGANIZATIONAL ITEMS			8 739				7 104
Net cash used for reorganizational items			(588	)			(3 344	)
NET CASH PROVIDED BY OPERATING ACTIVITIES			8 151				3 760
INVESTING ACTIVITIES, capital expenditures			(628	)			(3 115	)

 

		See accompanying independent accountants’ review report and notes to reviewed financial statements.		-6-

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED (UNAUDITED)

(In Thousands)

 

		SIX MONTHS ENDED
		JUNE 30, 2011				JUNE 30, 2010
FINANCING ACTIVITIES:
Proceeds from issuance of debt			616				762
Payment of gaming equipment financing			(315	)			(388	)
Payment of debt			(720	)			(810	)
Payment of financing costs			(246	)			-
Payment of obligations under capital lease			-				(92	)
NET CASH USED IN FINANCING ACTIVITIES			(665	)			(528	)
NET INCREASE IN CASH AND CASH EQUIVALENTS			6 858				117
CASH AND CASH EQUIVALENTS, beginning of period			7 918				14 709
CASH AND CASH EQUIVALENTS, end of period		$	14 776			$	14 826
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest		$	651			$	721
NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of assets with gaming equipment financing		$	1 270			$	-

 

		See accompanying independent accountants’ review report and notes to reviewed financial statements.		-7-

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION AND BACKGROUND

Black Gaming, LLC (“BG LLC”), through its wholly owned subsidiaries, B & B B, Inc. (doing business as Virgin River Hotel/Casino/Bingo) (“B&BB”) and Virgin River Casino Corporation (“VRCC”) and its wholly owned subsidiaries R. Black, Inc. (“RBI”) and RBG, LLC (doing business as CasaBlanca Resort/Casino/Golf/Spa) (“RBG”) and its wholly owned subsidiary CasaBlanca Resorts, LLC (doing business as Oasis Resort & Casino) (“Resorts LLC”) and its wholly owned subsidiaries Oasis Interval Ownership, LLC, Oasis Interval Management, LLC and Oasis Recreational Properties, Inc. (collectively the “Company”) is engaged in the hotel casino industry in Mesquite, Nevada.

The accompanying consolidated balance sheet as of December 31, 2010 and the unaudited consolidated financial statements for the six months ended June 30, 2011 and 2010 include the accounts of the Company and all of its subsidiaries and are maintained in accordance with U.S. generally accepted accounting principles.

CHAPTER 11 REORGANIZATION

Due to the economic conditions, including the credit crisis and a decrease in consumer confidence levels, the Company experienced a significant reduction in revenues. Although the Company engaged in cost reductions, reductions in workforce and other efforts to mitigate the impact of the decline in revenues, the results of operations of the Company were materially and adversely impacted by the economic downturn and its ability to service its debt obligations was impaired. In addition, the decline in real estate values in Nevada adversely affected the value of the Company’s assets. The resulting deterioration of the Company’s results of operations and asset values, coupled with the Company’s high leverage and the general unavailability of credit, negatively impacted the Company’s ability to service its outstanding indebtedness or otherwise raise capital for restructuring.

On March 1, 2010 (Petition Date), the Company and its Subsidiaries filed voluntary petitions for relief under Chapter 11 of Title 11 (the “Chapter 11 Case”) of the United States Code (Bankruptcy Code) in the United States Bankruptcy Court for the District of Nevada, Northern Division (Bankruptcy Court). The Company will continue to operate the businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. As debtors-in-possession, the Company is authorized to continue to operate as ongoing businesses, but may not engage in transactions outside the ordinary course of

 

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

business without approval of the Bankruptcy Court, after notice and an opportunity for a hearing.

 

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 1 – BASIS OF PRESENTATION AND BACKGROUND (CONTINUED)

 

Under the Bankruptcy Code, actions to collect prepetition indebtedness, as well as most pending litigation, are stayed and other contractual obligations against the Company generally may not be enforced. Absent an order of the Bankruptcy Court, substantially all prepetition liabilities are subject to settlement under a plan of reorganization to be voted upon by creditors and other stakeholders and approved by the Bankruptcy Court.

On June 28, 2010, the Bankruptcy Court entered an order confirming the Company’s joint plan of reorganization (the “Plan”). Under the Plan, the following shall occur: (i) The Company shall contribute all of its assets, to New Black Gaming; (ii) New Black Gaming will issue, in exchange for a cash contribution of $18.25 million, to the Michael Gaughan, Anthony Toti, Randy Black Sr. and Newport Global Advisors LLC (collectively the “Investor Parties”) 100% of the New Black Gaming Equity Interests subject to dilution by the warrants, representing 5% of the fully diluted equity of New Black Gaming, issued to holders of the Senior Sub Notes, in full satisfaction of their claims; (iii) all amounts owed on the Foothills Facility will be paid in full; and (iv) New Black Gaming shall enter into the New Senior Secured Credit Agreement totaling $62.5 million with holders of the Senior Notes at an interest rate of either (i) LIBOR plus 700 basis or (ii) a “Base Rate,” which will be the greater of the prime lending rate or 1/2 of 1% over the Federal Funds rate, plus 700 basis points (subject in any event to a rate collar that imposes a maximum interest rate of 11.50% and a minimum interest rate of 8.50% per annum), with a term of five years, collateralized by substantially the same collateral presently securing the Senior Notes. In addition, the holders of the Senior Notes will receive in full satisfaction of their claim a cash payment of $9.25 million and, if available, an amount based on the following calculation:

 

a)

Cash on hand at the substantial consummation of the Plan plus;

 

b)

$9,000,0000 less;

 

c)

$10,000,000 less;

 

d)

Amounts owed on the Foothill Facility which totaled $14.5 million in unpaid principal and approximately $101,000 in unpaid interest at June 30, 2011, less;

 

e)

The Disputed Claim Reserve, as defined;

 

-10-

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company’s ability to continue as a going concern is dependent upon, among other things, its ability to emerge from bankruptcy with viable operations and with adequate liquidity.

 

-11-

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 1 – BASIS OF PRESENTATION AND BACKGROUND (CONTINUED)

 

Prior to filing petitions for relief under Chapter 11, the Company negotiated the terms of the Plan with and obtained the support of creditors holding a majority of its secured debt and its largest unsecured creditor in the capacity of a new investor party. This support is evidenced by the Lockup Agreement (Lockup), which the parties filed contemporaneously with the commencement of the Company’s Chapter 11 Cases. The parties to the Lockup have agreed to support the Plan and not to support any other plan in exchange for the Company’s agreement to implement all steps necessary to solicit the requisite acceptances of the Plan and obtain from the Bankruptcy Court an order confirming the Plan in accordance with the terms of the Lockup. The Lockup may be terminated in the event that the Plan is not consummated within a certain period of time after its confirmation, and in certain other situations. At this time, it is not possible to predict with certainty the effect of the Chapter 11 Cases on the Company’s business or its various creditors, or when it will emerge from Chapter 11. If the Plan is not consummated, the Company may be unable to pay its debts as presently scheduled, which would require it to seek protection in Chapter 11 without the support of its creditors and could force the Company to liquidate under Chapter 7 of the Bankruptcy Code due to its limited unencumbered available resources. Accordingly, the Company may not be able to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

The consolidated balance sheets as of June 30, 2011 and December 31, 2010, reflect all of the Company’s indebtedness, with the exception of those classified as liabilities subject to compromise, as current liabilities since non-payment of interest when due created an event of default allowing the debt to be accelerated. The financial statements do not give effect to any adjustments in the carrying values of assets or liabilities that will be recorded upon implementation of the Plan nor the adoption of fresh-start accounting. Reorganization items, which included legal expenses incurred in connection with negotiations to restructure the Foothill Facility, the Senior and Senior Subordinated Notes (defined below in Note 7), as well as expenses incurred in connection with preparing for the bankruptcy filing, have been reported separately as reorganization items in the Company’s consolidated statements of operations for the six months ended June 30, 2011 and 2010.

 

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

Interim Financial Statements – The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by

 

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 1 – BASIS OF PRESENTATION AND BACKGROUND (CONTINUED)

 

U.S. generally accepted accounting principles for complete financial statements. In the opinion of management of the Company, all adjustments considered necessary for a fair presentation are included and are of a normal recurring nature. Our results of operations tend to be seasonal in nature and operating results for the six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

The consolidated balance sheet at December 31, 2010 has been derived from the audited consolidated financial statements at that date.

In preparing the accompanying unaudited consolidated financial statements, the Company has reviewed, as determined necessary by the Company’s management, events that have occurred after June 30, 2011, up until the issuance of the financial statements, which occurred on October 10, 2011.

Restructuring Costs – Restructuring costs are comprised of expenses related to the evaluation of financial and strategic alternatives, and include fees for services from financial, legal and accounting advisors.

Accounting for Reorganization – Accounting Standards Codification (“ASC”) Topic 852, Reorganizations (“ASC Topic 852”) provides accounting guidance for financial reporting by entities in reorganization under the Bankruptcy Code including companies in Chapter 11, and generally does not change the manner in which financial statements are prepared. The consolidated financial statements have been prepared on a going-concern basis, which assumes continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business. The Chapter 11 Cases create substantial doubt about Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not reflect any adjustments relating to the recoverability of assets and the classification of liabilities that might result from the outcome of these uncertainties. In addition, the plan of reorganization could materially change the amounts and classifications reported in the consolidated financial statements, and the accompanying consolidated financial statements do not give effect to any adjustments to the carrying values of assets or amounts of liabilities that might be necessary as a consequence of confirmation of the plan of reorganization. The Company’s ability to continue as a going concern is

 

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

contingent upon, among other things, its ability to (i) generate sufficient cash flow

 

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 1 – BASIS OF PRESENTATION AND BACKGROUND (CONTINUED)

 

from operations; and (ii) ability to emerge from bankruptcy with viable operations and with adequate liquidity. In the event Company’s restructuring activities are not successful and it is required to liquidate, the Company will be required to adopt the liquidation basis of accounting. Under the liquidation basis of accounting, assets are stated at their estimated net realizable values and liabilities are stated at their estimated settlement amounts.

ASC Topic 852 requires that the financial statements for periods subsequent to the filing of the Chapter 11 Case distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. As a result, revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business were reported separately as reorganization items in the statements of operations. ASC Topic 852 also requires that the balance sheet distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities that are not subject to compromise and from post-petition liabilities, and requires that cash used for reorganization items be disclosed separately in the statement of cash flows. The Company adopted ASC Topic 852 on March 1, 2010 and has segregated those items as outlined above for all reporting periods subsequent to such date.

Recently Issued Accounting Standards – In June, 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). This statement requires companies to present the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements of net income and other comprehensive income. This guidance is effective for interim and annual periods beginning after December 15, 2011. ASU 2011-05 also requires an entity to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The guidance requires changes in presentation only and will have no impact on the Company’s financial position or results of operations.

 

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASINO REVENUE

The Company recognizes as casino revenue the net win from gaming activities, which is the difference between gaming wins and losses. The retail value of rooms, food and beverage furnished to customers without charge is included in gross revenues and then deducted as promotional allowances. The estimated departmental costs of providing such promotional allowances are included in casino costs and expenses and consist of the following (in thousands):

 

		JUNE 30, 2011				JUNE 30, 2010
Food and beverage			4 373				3 720
Hotel			1 873				2 029
Other			400				406
		$	6 646			$	6 155

The Company’s One Card Slot Program (Slot Program) allows customers to redeem points earned from their gaming activity at all the Company’s properties for complimentary food, beverage, rooms, entertainment, and merchandise. Beginning April 1, 2010, the Slot Program allowed customers to redeem points for cash, in addition to food, beverage, rooms, entertainment, and merchandise. At the time redeemed, the retail value of complimentaries under the Slot Program is recorded as revenue with a corresponding offsetting amount included in promotional allowances. The cost associated with complimentary food, beverage, rooms, entertainment, and merchandise redeemed under the Slot Program is recorded in casino expenses. The Company also records a liability for the estimated cost of the outstanding points related to the Slot Program. This liability is included in accrued liabilities on the Company’s consolidated balance sheets.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with purchased maturities of three months or less to be cash equivalents.

INVENTORIES

Inventories are stated at the lower of cost or market value. Cost is determined by the first-in, first-out method.

 

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

NOTES AND ACCOUNTS RECEIVABLES

The Company’s notes receivables originate from the Company’s time share operations and are considered homogenous and are evaluated for impairment collectively, except for individual receivables placed on nonaccrual status, in which case receivables are reviewed individually for impairment. In the years where the Company’s time share operation has sold units, the Company has utilized the provisions of Subsequent Measurement subsection of Accounting Standards Codification (ASC) Topic 978, Real Estate – Time-Sharing Activities, 310 Receivables, (ASC Topic 978-310). ASC Topic 978-310 provides accounting guidance for real estate time-sharing transactions in determining the allowance for possible credit losses, the Company uses a technique referred to as static pool analysis, which tracks uncollectible notes receivable based on each year’s sales over the entire life of those notes. The Company considers whether the historical economic conditions were comparable to current economic conditions. If current economic conditions differ from the economic conditions in effect when the historical experience was generated, the Company adjusts the allowance for possible credit losses to reflect the expected effects of current economic conditions on uncollectibility. The Company groups all notes receivables in one pool for analytical purposes based on historical collectibility and customer demographics. The Company ceased selling time share units in 2006. The Company’s allowance is based on a combination of the results of the static pool analysis and a review of individual notes receivables.

The Company’s accounts receivable represent amounts due from patrons for gaming activities, hotel, and other in addition to amounts due from on-line wholesalers.

Bad debt expense for notes and accounts receivable totaled approximately $14,000 and $104,000 for the six months ended June 30, 2011 and 2010, respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of the Company’s cash and cash equivalents, receivables, accounts payable, and debt, other than the Company’s debt in default and liabilities subject to compromise (see Note 7), approximates fair value primarily because of the short maturities of these instruments. The fair value on the debt in default is based on quoted market prices.

 

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost, including interest capitalized on internally constructed assets calculated at the overall weighted-average borrowing rate of interest.

Depreciation and amortization is provided on a straight-line basis over the assets’ estimated useful lives. The estimated useful lives are as follows:

 

Buildings			31.5 to 39.5 years
Land improvements			15 years
Leasehold improvements			5 to 10 years
Furniture, fixtures, and equipment			5 years

The Company evaluates the carrying value for long-lived assets to be held and used, including property held for vacation interval sales, in accordance with the guidance in the Impairment or Disposal of Long Lived Assets subsection of ASC Topic 360, Property, Plant, and Equipment (ASC Topic 360). ASC Topic 360 requires that when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, companies should evaluate the need for an impairment write-down. If an indicator of impairment exists, we compare the estimated future cash flows of the asset, on an undiscounted basis, to the carrying value of the asset. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, then an impairment is measured based on fair value less cost of disposal, compared to carrying value, with fair value typically based on a discounted cash flow model. When an impairment write-down is required, the related assets are adjusted to their estimated fair value less costs to sell. See Note 10, Impairment of Long-Lived Assets, Goodwill, and Intangibles, for a discussion of impairment charges related to our long-lived assets.

INCOME TAXES

The Company is a limited liability company. As such, federal income taxes are an obligation of the individual owners and no provision for income taxes is reflected in the accompanying consolidated financial statements.

 

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

INCOME TAXES (Continued)

On January 1, 2009, the Company adopted accounting standards related to accounting for uncertain income tax positions and did not record any cumulative effect adjustment to retained earnings as a result of this adoption. Under the accounting standards, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than a 50% likelihood of being realized upon ultimate settlement. The accounting standards also provide guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods, and disclosure requirements for uncertain tax positions.

The Company files income tax returns in the US federal jurisdiction. The statute of limitation for Internal Revenue Service (IRS) examination of the Company’s federal tax returns is determined by the statute governing the tax returns of its members. The Company is subject to routine audits by taxing jurisdictions; however, there are no audits for any tax periods in process. Management believes it is no longer subject to income tax examinations for years prior to 2007.

ADVERTISING COSTS

The Company expenses advertising costs the first time the advertising takes place. Advertising expense, which is generally included in selling, general and administrative expenses in the accompanying consolidated statements of operations, was approximately $1.2 million for each of the six months ended June 30, 2011 and 2010.

CONCENTRATION OF RISK

The Company faces competition in the market in which its gaming facilities are located as well as in or near any geographic area from which it attracts or expects to attract a significant number of patrons. As a result, the casino properties face direct competition from all other casinos and hotels in the Las Vegas, Nevada, region and the Wendover, Nevada, region as well as the California gaming market. Many of the Company’s competitors have significantly greater name recognition and financial, marketing, and other resources. The Company also competes, to some extent, with other forms of gaming on both a local and national level, including state-sponsored lotteries, internet gaming, on- and off-track wagering, and card parlors.

 

-20-

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

DEFERRED FINANCING COSTS

Deferred financing costs are amortized to interest expense over the term of the related financing.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill represents the amount of an acquired company’s acquisition cost in excess of the fair value of assets acquired and liabilities assumed. The Company evaluates goodwill for impairment annually and whenever events and circumstances indicate that an impairment may have occurred, such as a significant adverse change in the business climate or a decision to sell or dispose of a reporting unit. See Note 10, Impairment of Long-Lived Assets, Goodwill, and Intangibles, for a discussion of impairment charges related to the Company’s intangible assets.

Other intangible assets represent acquired customer lists, which are stated at cost net of accumulated amortization, and trademarks. The Company evaluates other intangible assets for impairment annually and whenever events and circumstances indicate that an impairment may have occurred, such as a significant adverse change in the business climate. Trademarks totaled $4.4 million at June 30, 2011 and December 31, 2010, respectively. Customer lists were originally valued at $21.3 million. They were written down at December 31, 2008 due to a $1.3 million impairment loss that was recognized when operations were suspended at the Oasis Resort and Casino. The unamortized cost totaled $600 thousand and $2.1 million as of June 30, 2011 and December 31, 2010, respectively. These costs are being amortized on a straight-line basis over the assets’ revised estimated useful life of approximately 5.7 years. Total accumulated amortization related to customer lists was approximately $19.4 million and $17.9 million as of June 30, 2011 and December 31, 2010. Amortization expense was $1.5 million for each of the six months ended June 30, 2011 and 2010. See Note 10, Impairment of Long-Lived Assets, Goodwill, and Intangibles, for a discussion of impairment charges related to the Company’s intangible assets.

USE OF ESTIMATES

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

PLAYERS CLUB LIABILITY

The Company adopted the provisions of ASC Topic 605, Revenue Recognition, 50 Customer Payments and Incentives (ASC Topic 605-50). ASC Topic 605-50 requires that the redemption of points, such as points earned in slot players clubs, be recorded as a reduction of revenue.

The Company’s Slot Program allows customers to redeem points earned from their gaming activity at all the Company’s properties for complimentary food, beverage, rooms, entertainment, and merchandise. Beginning April 1, 2010, the Slot Program also allowed customers to redeem their points for cash including previously earned points. At the time redeemed, the retail value of complimentaries is recorded as revenue with a corresponding offsetting amount included in promotional allowances. Cash redemptions will be recorded as an offset to casino revenue. The cost associated with complimentary food, beverage, rooms, entertainment, and merchandise redeemed is recorded in casino costs and expenses. The Company also records a liability for the estimated cost of the outstanding points related to the Slot Program.

SELF-INSURANCE RESERVES

The Company reviews self-insurance reserves at least quarterly. The amount of reserve is determined by reviewing actual expenditures for the previous 12-month period and reviewing reports prepared by the third-party plan administrator for any significant unpaid claims. The reserve is accrued at an amount that approximates the amount needed to pay both reported and unreported claims as of the balance sheet date, which management believes are adequate.

REOGRANIZATION ITEMS

Reorganization items are comprised of expenses related to the evaluation of financial and strategic alternatives, fees for services from financial, legal, and accounting advisors, and the write off of deferred financing fees related to liabilities subject to compromise.

SUBSEQUENT EVENTS

The Company has evaluated subsequent events through October 10, 2011, which is the issuance date of these consolidated financial statements, and did not note any items that would require adjustment to, or disclosure in, the financial statements, except as disclosed in Note 13.

 

-22-

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment consists of the following (in thousands):

 

			DECEMBER 31,				DECEMBER 31,
		JUNE 30, 2011				DECEMBER 31, 2010
Land		$	27 376			$	27 375
Building			70 013				64 672
Land and leasehold improvements			16 950				21 448
Furniture and fixtures			87 158				84 186
Construction in progress			1 213				3 810
			202 710				201 491
Less: accumulated depreciation			(121 027	)			(118 030	)
Property and equipment, net		$	81 683			$	83 461

NOTE 4 – NOTES RECEIVABLE

Notes receivable consist of the following (in thousands):

 

			DECEMBER 31,				DECEMBER 31,
		JUNE 30, 2011				DECEMBER 31, 2010
Vacation interval notes receivable		$	305			$	327
Allowance for possible credit losses			(296	)			(297	)
Total notes receivable			9				30
Less: current portion			(9	)			(25	)
Non-current notes receivable		$	-			$	5

Notes generated from the sale of vacation intervals generally bear interest at annual rates ranging from 10.75% to 12.75% and have terms of five to seven years. The vacation interval notes receivable are collateralized by the right to use and deeds of trust on the vacation interval sold.

NOTE 5 – ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):

 

			DECEMBER 31,				DECEMBER 31,
		JUNE 30, 2011				DECEMBER 31, 2010
Accrued taxes		$	584			$	697
Accrued insurance			1 130				1 210
Accrued slot program			3 265				3 487
Accrued wages, benefits and other personnel costs			2 557				2 546
Accrued other			538				523
Total accrued liabilities		$	8 074			$	8 463

 

-23-

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 6 – GAMING EQUIPMENT FINANCING

The Company from time to time enters into agreements with gaming manufacturers to finance the purchase of gaming equipment. Contractual terms of the agreements with the gaming manufacturers consist of payment terms of eighteen months up to two years without interest. The Company imputes interest at a rate of 8%.

Gaming equipment financing consists of the following (in thousands):

 

		JUNE 30,      2011				DECEMBER 31, 2010
Gaming equipment financing, monthly payments of $10 for 28 months beginning October 2008		$	-			$	11
Gaming equipment financing, varying monthly payments for 11 months with the balance due on the 12th month beginning December 2009 (amendment due April 2011)			-				119
Gaming equipment financing, varying monthly payments for 17 months with the balance due on the 18th month beginning May 2011			227				-
Gaming equipment financing, monthly payments of $44 for two years beginning April 2011			855				-
			1 082				130
Less: current portion			(648	)			(130	)
Gaming equipment financing, long-term portion		$	434			$	-

 

Years Ending     June 30,		Maturities
2012			$	648
2013				434
			$	1 082

 

-24-

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 7 –   DEBT IN DEFAULT AND LIABILITIES SUBJECT TO COMPROMISE

Debt in default and liabilities subject to compromise consists of the following (in thousands):

 

			00000000000000				00000000000000
		JUNE 30, 2011				DECEMBER 31, 2010
Revolving credit facility totaling $15 million with Wells Fargo Foothill, due June 30, 2011, at a margin above prime or LIBOR, as defined; collateralized by substantially all assets of the Company as defined		$	14 495			$	14 600
9% senior secured notes, interest payable semiannually, principal due January 15, 2012, callable January 15, 2009			125 000				125 000
12  3/4 % senior subordinated notes, non-cash interest will accrue at an annual rate of 12  3/4 % in the form of increased accreted value until January 15, 2009. Beginning July 15, 2009, interest payable semiannually, principal due January 15, 2013, callable January 15, 2009			66 000				66 000
			205 495				205 600
Less: current portion – debt in default			(14 495	)			(14 600	)
Liabilities subject to compromise			(191 000	)			(191 000	)
Total long-term debt		$	-			$	-

LIABILITIES SUBJECT TO COMPROMISE

Under bankruptcy law, actions by creditors to collect upon liabilities of the Debtors incurred prior to the Petition Date are stayed and certain other pre-petition contractual obligations may not be enforced against the Debtors without approval of the Court. In accordance with ASC Topic 852, these liabilities are classified as liabilities subject to compromise in our consolidated balance sheets as of June 30, 2011 and December 31, 2010, and are adjusted to the expected amount of the allowed claims, even if they may be settled for lesser amounts. Adjustments to the claims may result from negotiations, payments authorized by the Court, interest accruals, or other events. It is anticipated that such adjustments, if any, could be material. Liabilities subject to compromise are subject to the treatment set forth in the Joint Plan of Reorganization. Liabilities subject to compromise are classified separately from long-term obligations and current liabilities on the accompanying consolidated balance sheets.

 

-25-

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 7 – DEBT IN DEFAULT AND LIABILITIES SUBJECT TO COMPROMISE (CONTINUED)

 

The following table summarizes the components of liabilities subject to compromise (in thousands):

 

			00000000000000				00000000000000
		JUNE 30, 2011				DECEMBER 31, 2010
9% senior secured notes		$	125 000			$	125 000
12  3/4% senior subordinated note			66 000				66 000
Accrued interest			27 607				27 607
Accounts payable and other accrued liabilities			6				6
Total liabilities subject to compromise		$	218 613			$	218 613

INTEREST EXPENSE

In accordance with ASC Topic 852, interest expense is recognized only to the extent that it will be paid during the bankruptcy proceeding or that it is probable that it will be an allowed claim. Currently the Company is not accruing interest for the senior secured or the senior subordinated notes. As a result, post-petition interest expense is lower than pre-petition interest expense. The write-off of deferred financing fees related to liabilities subject to compromise also reduces post-petition interest expense as there are no longer any non-cash amortization charges related to these items.

REVOLVING FACILITY

The Foothill Facility is secured by substantially all the assets of the Company. During the life of the Foothill Facility, the Company may borrow up to the lesser of (1) $15.0 million less the Letter of Credit Usage, as defined, less the Bank Product Reserve, as defined, or (2) the Borrowing Base, as defined, less the Letter of Credit Usage. Under the terms of the Foothill Facility, interest accrues on the outstanding principal balance at LIBOR plus the LIBOR Rate Margin, as defined and amended, which is 5.0%, or the Base Rate, plus the Base Rate Margin, which is 5.0%, as defined and amended. LIBOR was approximately .185% and the Base Rate was 3.25% at June 30, 2011.

On November 3, 2008, the Company entered into a Forbearance, Consent and Third Amendment to Credit Agreement (“Forbearance Agreement”) with respect to the amended Foothill Facility. The Forbearance Agreement amended the Foothill Facility and provided that the lender would forbear from exercising certain rights and remedies under the amended Foothill Facility and other loan documents as a result of the existing

 

-26-

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

default described above, and modified certain financial covenants, calculations and

 

-27-

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 7 – DEBT IN DEFAULT AND LIABILITIES SUBJECT TO COMPROMISE (CONTINUED)

 

REVOLVING FACILITY (Continued)

rates of the Foothill Facility through January 15, 2009 (“Forbearance Period”). The Forbearance Agreement provided, among other things, for the following:

 

•

The LIBOR Rate Margin was increased to 5% from 3.50%, and the Base Rate Margin was increased to 5% from 2%. Therefore, the interest rate premium payable in respect of loans available under the Foothill Facility has been increased accordingly;

 

•

The minimum EBITDA covenant was reduced from $15.0 million to $10.0 million for the September 2008 through December 2008 reporting periods;

 

•

The Borrowing Base multiple was increased from 1.0x to 1.5x from the execution of the Forbearance Agreement until January 15, 2009;

 

•

The Company was allowed to temporarily reduce operations at the Oasis Resort & Casino (“Oasis”) during the Forbearance Period.

On January 15, 2009, the Company entered into a First Amendment to Forbearance, Consent and Third Amendment to Credit Agreement (“First Amendment to Forbearance”) with respect to the Foothill Facility. The First Amendment to Forbearance extended the Forbearance Period from January 15, 2009 to February 2, 2009 (“Amended Forbearance Period”). No other provisions of the Forbearance Agreement were amended, the terms of the Forbearance Agreement remained in full force and effect in accordance with their respective terms.

On February 2, 2009, the Company entered into a Second Amendment to Forbearance, Consent and Third Amendment to Credit Agreement (“Second Amendment to Forbearance”) with respect to the Foothill Facility. The Second Amendment to Forbearance extended the Amended Forbearance Period from February 2, 2009 to February 12, 2009. Section 3 of the Forbearance Agreement was also amended to allow the Company to transfer slot machines and video poker machines from the Suspended Location, as defined in the Forbearance Agreement, to one of the Company’s other operating casino locations. No other provisions of the Forbearance Agreement were amended, and the terms of the Forbearance Agreement remained in full force and effect in accordance with their respective terms.

 

-28-

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 7 – DEBT IN DEFAULT AND LIABILITIES SUBJECT TO COMPROMISE (CONTINUED)

 

REVOLVING FACILITY (Continued)

On February 12, 2009, the Company entered into an Amended and Restated Forbearance Agreement (“Amended and Restated Forbearance Agreement”) with respect to the Foothill Facility. Pursuant to the Amended and Restated Forbearance Agreement, during the Forbearance Period (as defined in the Amended and Restated Forbearance Agreement) Wells Fargo Foothill agreed to forbear from enforcing its rights under the Foothill Facility that arise because of certain Designated Events of Default (as defined in the Amended and Restated Forbearance Agreement) including the non-payment of interest on the Senior Secured Notes. Upon the expiration of the Forbearance Period, the forbearance terminated and Wells Fargo Foothill has the right to exercise any and all rights and remedies under the Foothill Facility, including the acceleration of the Company’s obligations under the Foothill Facility of approximately $14.6 million. Under the Amended and Restated Forbearance Agreement, Wells Fargo Foothill also consented to the continued reduction of operations at the Oasis during the Forbearance Period.

On February 25, 2009, the Company entered into a Second Amended and Restated Forbearance Agreement (“Second Amended Forbearance”) with respect to the Foothill Facility. The Second Amended Forbearance amended and restated in its entirety the Amended and Restated Forbearance Agreement. Pursuant to the Second Amended Forbearance, during the Forbearance Period (as defined in the Second Amended Forbearance Agreement), Wells Fargo Foothill agreed to forbear from enforcing its rights under the Foothill Facility that arise because of certain Designated Events of Default (as defined in the Second Amended Forbearance Agreement). Upon the expiration of the Forbearance Period, the forbearance terminated and Wells Fargo Foothill has the right to exercise any and all rights and remedies under the Foothill Facility, including the acceleration of the Company’s obligations under the Foothill Facility of approximately $14.6 million. The Forbearance Termination Date (as defined in the Second Amended Forbearance Agreement) was March 2, 2009, subject to extension to March 9, 2009 if the Company provided a restructuring term sheet to Wells Fargo Foothill by March 2, 2009. The Company also agreed to provide Wells Fargo Foothill with certain projections by March 6, 2009. Under the Second Amended Forbearance, Wells Fargo Foothill also consented to the continued reduction of operations at the Oasis during the Forbearance Period and to the ability of the Company to transfer equipment from the Oasis to one of the Company’s other operating casino locations.

 

-29-

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 7 – DEBT IN DEFAULT AND LIABILITIES SUBJECT TO COMPROMISE (CONTINUED)

 

REVOLVING FACILITY (Continued)

Although, the Company did provide a restructuring term sheet and certain projections to Wells Fargo Foothill by the required date, the extended Forbearance Period has expired, and Wells Fargo Foothill has the right to exercise any and all rights and remedies under the Foothill Facility, including the acceleration of the Company’s obligations under the Foothill Facility of approximately $14.6 million. The Company is continuing to evaluate its financial and strategic alternatives in light of the expiration of the Forbearance Period. Accordingly, the Company’s obligations under the Foothill Facility are classified as current in the accompanying balance sheet.

On May 6, 2009, the Company received a Notice of Default and Reservation of Rights letter from Wells Fargo Foothill.

On September 3, 2009, the Company received a Notice of Default, Imposition of Default Rate of Interest, and Reservation of Rights letter (Notice) from Wells Fargo Foothill. The Notice states that as a result of events of default the applicable rate of interest under the Foothill Facility has been increased to the default rate, which is 2% above the per annum rate otherwise applicable under the Foothill Facility, retroactive to March 9, 2009. The retroactive default interest amounted to approximately $150,000. The Notice further states that the Wells Fargo Foothill is under no further obligation to extend further credit under the Foothill Facility and is continuing to evaluate its response to the events of default, and reserve all of its rights and remedies under the Foothill Facility.

On September 22, 2009, the Company received a second Notice of Default, Imposition of Default Rate of Interest, and Reservation of Rights letter (Second Notice) from Wells Fargo Foothill. The Second Notice included the election of Wells Fargo Foothill to extend the retroactive default interest period to November 19, 2008. The retroactive default interest amounts to approximately $240,000 through September 21, 2009.

At December 31, 2010, approximately $14.6 million was drawn under the Foothill Facility. The outstanding balance on the Foothill Facility is a joint and several obligation of the Company. The Company’s obligations under the Foothill Facility are classified as current in the Company’s consolidated balance sheets as of June 30, 2011 and December 31, 2010. The Lenders under the Foothill Facility will receive payment in full of their outstanding claims on the Substantial Consummation Date (as defined in the Lockup Agreement).

As of June 30, 2011, Wells Fargo Foothill has not elected to accelerate the indebtedness under the Foothill Facility.

 

-30-

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 7 – DEBT IN DEFAULT AND LIABILITIES SUBJECT TO COMPROMISE (CONTINUED)

 

SENIOR SECURED AND SENIOR SUBORDINATED NOTES

The Company is currently in default under the Senior Secured and Senior Subordinated Notes (collectively, the Notes). The amounts outstanding under the Notes are classified as liabilities subject to compromise and current liabilities in the Company’s consolidated balance sheets as of June 30, 2011 and December 31, 2010, respectively.

In December 2004, VRCC, RBG and B&BB (the “Issuers”) issued $125.0 million of Senior Notes due on January 15, 2012 and $39.9 million in gross proceeds of Senior Sub Notes due January 15, 2013 (collectively the “Notes”). The Notes are joint and several obligations of the Issuers and all current and future subsidiaries of the Issuers. The Senior Notes pay interest semiannually while the Senior Sub Notes accrue interest in the form of increased accreted value through January 15, 2009, when the carrying book value of the Senior Sub Notes was $66.0 million. Beginning on July 15, 2009, the Senior Sub Notes will cash pay interest semiannually similar to the Senior Notes. The Indentures governing the Notes (the “Indentures”) contain certain customary financial and other covenants, which limit the Company’s ability to incur additional debt. The Indentures provide that the Company may not incur additional indebtedness, other than specified types of indebtedness, unless the Consolidated Coverage Ratio, on a pro-forma basis after the incurrence of the additional indebtedness is at least 2.00 to 1.00. As of June 30, 2009, the Company has a Consolidated Coverage Ratio that is less than 2.00 to 1.00 and accordingly has incurred no additional indebtedness as defined. The Indentures also contain other covenants which limit the ability of the Issuers and Guarantors, as defined, to pay dividends, redeem stock, or make other distributions, make investments, create certain liens, enter into certain transactions with affiliates, utilize proceeds from asset sales, transfer or sell assets, issue or sell equity interests of subsidiaries and enter into certain mergers and consolidations, as defined in the Indentures. There are no restrictions related to the transfer of funds between the Issuers, Guarantors and their respective subsidiaries. The Issuers were in compliance with these covenants at June 30, 2011 and December 31, 2010; however, the Company is in default with respect to certain other covenants.

The Senior Notes are secured by substantially all existing and future assets of the Issuers and the Guarantors, as well as the equity interest of the Black Trust in BG LLC. The Guarantors are all the wholly owned subsidiaries of the Issuers. The Senior Notes are subordinate to the security interests of the Foothill Facility. The Senior Sub Notes are subordinate to the Senior Notes and all other indebtedness of the Company.

 

-31-

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 7 – DEBT IN DEFAULT AND LIABILITIES SUBJECT TO COMPROMISE (CONTINUED)

 

SENIOR SECURED AND SENIOR SUBORDINATED NOTES (Continued)

On January 15, 2009, the Company failed to make the $5.625 million semi-annual interest payment then due on the Senior Notes. The Company’s 30-day grace period expired on February 15, 2009. The Company is in discussions with an ad hoc committee of Senior Noteholders regarding the Company’s financial alternatives. Because the interest payment was not made prior to the expiration of the 30-day grace period, the aggregate principal amount of the Senior Notes, plus the unpaid interest payment and any other amounts due and owing on the Senior Notes could be declared immediately due and payable by the Trustee under the Indenture or by holders of 25% or more of the aggregate principal amount of the Senior Notes. The acceleration of the Company’s obligation under the Senior Notes would constitute an event of default under the Senior Sub Notes. In such event, the aggregate principal amount of the Senior Sub Notes, plus accrued and unpaid interest, if any, and any other amounts due and owing on the Senior Sub Notes could be declared immediately due and payable by the Trustee under the indenture governing the Senior Sub Notes or by holders of 25% or more of the aggregate principal amount of the Senior Sub Notes. Failure to make the interest payment on the Senior Notes also constituted an event of default under the Foothill Facility. Both Wells Fargo Foothill and the Senior Noteholders are currently able to declare the Company’s obligations under the Foothill Facility and Indentures immediately due and payable.

On February 19, 2009, the Company entered into a Forbearance Agreement (“Noteholders Forbearance Agreement”) with a group of Senior Noteholders who have represented that they hold more than 75% of the Senior Notes. The Noteholders Forbearance Agreement provided that during the Forbearance Period (as defined in the Noteholders Forbearance Agreement) the Senior Noteholders would forbear from exercising rights and remedies that are available under the Indenture governing the Senior Notes and the other Loan Documents (as defined in the Noteholders Forbearance Agreement) relating to certain Specified Defaults (as defined in the Noteholders Forbearance Agreement) including the Company’s failure to make the interest payment on the Senior Notes. The Senior Noteholders also agreed to forbear from taking any action to cause the Trustee under the Indenture to exercise any of the Trustee’s rights or remedies arising out of the Specified Defaults, and, if the Trustee did take any action with respect to any of the Specified Defaults during the Forbearance Period, to the extent provided for in the Loan Documents, the Senior Noteholders would cause the Trustee to forbear from exercising any of its rights or remedies under the Loan Documents. The Forbearance Period commenced on the Effective Date and went through March 9, 2009, provided that (i) the Company provided a restructuring term

 

-32-

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 7 – DEBT IN DEFAULT AND LIABILITIES SUBJECT TO COMPROMISE (CONTINUED)

 

SENIOR SECURED AND SENIOR SUBORDINATED NOTES (Continued)

sheet to the professional advisors of the Senior Noteholders by March 2, 2009 and (ii) the Company provided certain projections to the professional advisors of the Senior Noteholders by March 6, 2009.

On July 15, 2009, the Company failed to make the second $5.625 million semiannual interest payment then due on the Senior Notes and the $4.208 million semiannual interest payment then due on the Senior Sub Notes. Pursuant to the subordination provisions of the indenture governing the Company’s Senior Sub Notes, the Company is prohibited from making the semiannual interest payment on the Senior Sub Notes until the payment default under the Senior Notes has been cured or waived. If the scheduled interest payment on the Senior Sub Notes is not made within 30 days of the scheduled payment date, an event of default will occur under the indenture governing the Senior Sub Notes, and the aggregate principal amount of the Senior Sub Notes, plus the unpaid interest payment and any other amounts due and owing on the Senior Sub Notes could be declared immediately due and payable by the trustee or by holders of 25% or more of the aggregate principal amount of the Senior Sub Notes. The failure to make the semiannual interest payment under the Senior Sub Notes within the 30-day grace period would constitute an additional event of default under the Foothill Facility. The acceleration of the Company’s obligations under the Senior Sub Notes would constitute an additional event of default under the Senior Notes. The Company did not make the interest payment on the Senior Sub Notes within the 30-day grace period and is effectively in default under the Senior Sub Notes.

The estimated fair value of the Company’s Senior Notes and Senior Sub Notes at June 30, 2011, was 60 million and $0 million, respectively. The estimated fair value amounts were based on quoted market prices. For all other indebtedness, the fair value approximates the carrying amount of the debt due to the short-term maturities of the individual components of the debt.

NOTE 8 – LEASES

OPERATING LEASES

As part of the acquisition of the Oasis Resort & Casino, the Company had been assigned the rights to an agreement to lease the land which underlies a portion of the golf course of the Oasis Resort & Casino from the state of Arizona. The initial lease agreement was for a term of ten years which expired in May 2008. The Company had been in negotiations with the Arizona State Land Department (ASLD) to renew or

 

-33-

---

BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 8 – LEASES

OPERATING LEASES (Continued)

otherwise extend the lease. On February 2, 2010, the Company and the ASLD executed a Settlement Agreement to renew the lease which includes the land which underlies a portion of the golf course of the Oasis Resort & Casino. The Settlement Agreement is for a term of seven years with the first year’s rent set at $90,000. Every year thereafter until the end of the term, the previous year’s rent will be increased by 5% or that year’s Consumer Price Index, whichever is higher.

As part of the acquisition of the CasaBlanca, the Company has been assigned the rights to an agreement to lease the land and water rights which underlies the golf course of the CasaBlanca. The lease agreement is for a term of 99 years that began in June 1995 at a monthly lease rate of $18,000. In June 2005 and every five years thereafter, the lease rate will be adjusted based on the increase in the Consumer Price Index, as defined.

Future minimum lease payments under operating leases for the five years subsequent to June 30, 2011 are as follows (in thousands):

 

			000000000000
Years Ending     June 30,		Maturities
2012		$	400
2013			415
2014			421
2015			426
2016			442
Thereafter			26 242
		$	28 346

Rent expense for the six months ended June 30, 2011 and 2010 was $450,000 and $310,000, respectively.

NOTE 9 – RELATED PARTY TRANSACTIONS

Mesquite Travel Center – FC C-Store LLC, (the “Travel Center”) is partly owned by Mr. Black. Participants in the Company’s slot club program are able to redeem their points for gasoline at the Travel Center. The Travel Center charges the Company the retail amount of gas purchased with player points. Charges associated with the point redemption for gasoline at the Travel Center were $5,000 for each of the six months ending June 30, 2011 and 2010.

 

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 9 – RELATED PARTY TRANSACTIONS (CONTINUED)

 

Black & LoBello is a law firm managed by the daughter of Mr. Black. The Company, which retains Black & LoBello as outside legal counsel, has received legal fees for legal services in the amount of $0 and $10,000 for the six months ended June 30, 2011 and 2010, respectively.

The Company provided management and other services to two related parties that manage and operate the home owners associations of the vacation intervals sold at the property. Included in the accompanying consolidated balance sheets at June 30, 2011 and December 31, 2010, is a receivable for $55,000 and $70,000, respectively, related to amounts owed for those services.

NOTE 10 – IMPAIRMENT OF LONG LIVED ASSETS

In accordance with Section 10-15, Impairment or Disposal of Long Lived Assets, in ASC Topic 360, Property, Plant, and Equipment, the Company reviews identified intangible and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. If such events or changes in circumstances are present, an impairment loss would be recognized if the sum of the expected future net cash flows is less than the carrying amount of the asset. For purposes of testing the Company’s long-lived assets, the Company estimated its fair value using several techniques including third-party evaluations and tax assessed values.

During the six month period ended June 30, 2011 and 2010, there were no write-downs to long-lived assets.

NOTE 11 – 401(K) PLAN AND OTHER BENEFIT PLANS

The Company offers a defined contribution 401(k) plan, which covers all employees who meet certain age and length of service requirements and allows an employer contribution up to 40% of the first 6% of each participating employee’s compensation. Effective January 1, 2008, the Company suspended all matching employer contributions. The plan participants can elect to defer before tax compensation through payroll deductions. These deferrals are regulated under Section 401(k) of the Internal Revenue Code. The Company made no matching contributions for the six months ended June 30, 2011 and 2010.

 

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 12 – COMMITMENTS AND CONTINGENCIES

 

Sales and Use Tax on Complimentary Meals – On March 27, 2008, in the matter captioned Sparks Nugget, Inc. vs. State ex rel. Department of Taxation, the Nevada Supreme Court ruled that complimentary meals provided to employees and patrons are not subject to Nevada use tax. On April 24, 2008, the Department filed a Petition for Rehearing (the Petition) on the decision. Additionally, on the same date the Nevada Legislature filed an Amicus Curiae brief in support of the Department’s position. The Nevada Supreme Court denied the Department’s Petition on July 17, 2008. Through June 2008, the Company paid use tax on these items and filed for refunds for the periods from July 2000 to June 2008. The amount subject to these refunds is approximately $1.8 million. As of June 30, 2011, the Company had not recorded a receivable related to this matter because the refund claims are subject to audit and it is unclear whether the Department will pursue alternative legal theories in connection with certain issues raised in the Supreme Court case in any audit of the refund claims. However, the Company is claiming the exemption on sales and use tax returns for periods subsequent to March 2008 based on the Nevada Supreme Court decision.

ENVIRONMENTAL MATTER

The Company has become aware that there is contamination present on some of its properties apparently due to past operations, which included a truck stop and gas station. In particular, groundwater contamination at the Oasis property (which appears to have migrated onto the CasaBlanca property) is the subject of investigation and cleanup activities being conducted by the prior owners of the Oasis. Management believes that the prior owners are responsible for such matters under an indemnity agreement negotiated at the time the Oasis was purchased; however, there is no assurance that the Company will not incur costs related to this matter. Moreover, it is possible that future developments could lead to material environmental compliance costs or other liabilities for the Company and these costs could have a material adverse effect on our combined financial position or results of operations.

OASIS RESORT & CASINO

On May 20, 2009, the Company announced its decision to further reduce operations at the Oasis Resort & Casino (Oasis) beginning on May 20, 2009. The Company issued Worker Adjustment and Retraining Notification Act (WARN) notices to the affected employees and the appropriate government officials on the same date. The reduction in operations affected approximately 147 of the Company’s 1,700 plus employees and was completed by July 19, 2009. The Company recorded approximately $466,000 in net charges related to the reduction in operations at the Oasis, primarily related to employee severance costs. These costs were settled against a reserve

 

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 12 – COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

OASIS RESORT & CASINO (Continued)

established at December 31, 2008. The remaining balance in the reserve after application of these payments was approximately $616,000 which was written off against selling, general and administrative expenses during year ended December 31, 2009. There are no additional reserves established for the Oasis closure.

In order to further reduce fixed overhead and operating costs, the Company is considering utilizing the Oasis facility for other than gaming purposes. This modification in usage of the facility might require demolition of a part or all of the facility. As of June 30, 2011, the Company has not committed to a plan.

NOTE 13 – SUBSEQUENT EVENT

The Final Plan of Reorganization has been substantially consummated. The Substantial Consummation Date was August 1, 2011. All conditions for the occurrence of Substantial Consummation Date have been satisfied. The Company has received the cash investment from the Investor Parties (NGA Acquisitions Co, LLC, Michael J. Gaughan Family LLC, Anthony Toti, and Robert R. Black, Sr.) in total of $18.25 million. Since the Effective Date, all allowed administrative claims, allowed priority tax claims, allowed Class 1 other priority claims, allowed Class 3 Senior Credit Facility (Wells Fargo Foothill) claims, and allowed Class 4 general unsecured claims have been paid in full in accordance with Sections 2.2, 2.2.2., 4.1, 4.3, and 4.4 of the Plan.

In accordance with Section 5.1 of the Plan, the Class 5 Senior Secured Noteholders: (i) have received promissory notes under the New Senior Credit Agreement in the amount of $62.5 million; (ii) have received the Cash Contribution of $9.25 million; and (iii) pursuant to the Cash payment calculation set forth in the Plan, no Cash Payment was required to be tendered.

Pursuant to Section 5.2 of the Plan, the Class 6 Senior Secured Note Facility Unsecured Claims were not entitled to any distribution under the Plan. Accordingly, no distribution has been tendered.

 

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BLACK GAMING, LLC AND SUBSIDIARIES

(DEBTOR AND DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (CONTINUED)

 

NOTE 13 – SUBSEQUENT EVENT (CONTINUED)

 

Pursuant to Section 5.3 of the Plan and the Warrant Agreement attached as Exhibit “1” to the Plan, to the extent that the Holders of the Senior Subordinated Note Claims: (i) delivered a fully-completed and executed copy of the Notice of Holder of Warrant substantially in the form attached as Exhibit “A” to the Warrant Agreement to Mesquite Gaming, LLC; and (ii) obtained all required Gaming Approvals (together, the “Warrant Requirement”), then such Holders would receive the Senior Subordinated Note Warrants. As none of the Holders of the Senior Subordinated Note Claims satisfied either of the two Warrant Requirements, no Senior Subordinated Note Warrants were issued.

All additional conditions for the occurrence of the Substantial Consummation Date have also been satisfied. Specifically and pursuant to the “Conditions to Substantial Confirmation” set forth in Section 9.4 of the Plan: (a) all approvals required for the transactions set forth in the Plan have been obtained from the applicable Governmental and Regulatory Authorities; (ii) none of the Consenting Lenders, Investor Parties, or Reorganized Debtors are in material breach of the Plan or any other effectuating documents in effect from the Effective Date through the Substantial Consummation Date: and (iii) the Bankruptcy Court has authorized the assumptions and rejections of Executory Contracts and Unexpired Leases by the Reorganized Debtors, Black Gaming, and Mesquite Gaming as contemplated by the Plan.

Pursuant to Sections 6.1, 6.2, 6.4, and 6.5 of the Plan, Black Gaming, LLC has been dissolved, Black Gaming, LLC’s equity interests have been cancelled and extinguished, Mesquite Gaming, LLC (“Mesquite”) has been formed, Mesquite’s operating documents have filed with the Nevada Secretary of State, Black Gaming, LLC has transferred its assets to Mesquite, and Mesquite has issued its equity interests to the Investor Parties.

All other Debtors, other than Black Gaming, LLC, continue to exist and operate as separate reorganized entities by operation of a merger, consolidation or otherwise contemplated by Sections 1.1.96 and 6.3 of the Plan. There are no pending contested matters or adversary proceedings.

On September 27, 2011, the United States Bankruptcy Court for the District of Nevada read and considered the Motion filed by Reorganized Debtors, and determined that proper notice of the Motion had been provided, and that no opposition had been filed. The Court stated its findings of fact and conclusions of law on the record at the Hearing, and the Motion was granted and the Chapter 11 Cases, jointly administered under case number BK-10-13301-BAM, were closed.

 

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