UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to

 

Commission file number 333-114335

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý    No o

 

Indicate by check mark whether the registrant is an accelerated filer.  Yes o    No ý

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock, no par value, 100 outstanding shares as of November 12, 2004

 

 

Form 10-Q

 

TABLE OF CONTENTS

 

Part I.			Financial Information
Item 1.			Financial Statements
		a.	Poster Financial Group, Inc.
			Consolidated Balance Sheets as of December 31, 2003 and September 30, 2004 (unaudited)
			Consolidated Statement of Operations for the Three and Nine Months Ended September 30, 2004 (unaudited)
			Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2004 (unaudited)
			Notes to Consolidated Financial Statements (unaudited)
		b.	Golden Nugget Group (1)
			Combined Statements of Operations for the Three and Nine Months Ended September 30, 2003 and for the Period from January 1, 2004 to January 22, 2004 (Date Immediately Prior to Acquisition by Poster Financial) (unaudited)
			Combined Statements of Cash Flows for the Nine Months Ended September 30, 2003 and for the Period from January 1, 2004 to January 22, 2004 (Date Immediately Prior to Acquisition by Poster Financial) (unaudited)
			Notes to Combined Financial Statements (unaudited)
			(1)	Poster Financial Group, Inc. completed the acquisition of the Golden Nugget Group on January 23, 2004. When a registrant acquires a business, it is required under Rule 3-05 of Regulation S-X under the Securities Act to assess the significance of the acquired business to determine whether the acquired business’ historical financial statements must be included with any subsequent financial statements of the acquirer (this requirement relates to both audited annual financial statements and unaudited interim financial statements). The acquisition of the Golden Nugget Group was significant. Accordingly, the financial statements of the Golden Nugget Group are included in this Quarterly Report on Form 10-Q in order to comply with Rule 3-05 of Regulation S-X.
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosure About Market Risk
Item 4.	Controls and Procedures
Part II.	Other Information
Item 1.	Legal Proceedings
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits
Signature

 

2

 

Part I.              Financial Information

 

Item 1.           Financial Statements

 

a. Poster Financial Group, Inc.

 

Poster Financial Group, Inc.

(A Wholly Owned Subsidiary of PB Gaming, Inc.)

 

Consolidated Balance Sheets

(Thousands of dollars)

 

		December 31, 2003			September 30, 2004
					(unaudited)
Assets
Current Assets
Cash and cash equivalents		$	—		$	21,082
Restricted cash in escrow		159,548			—
Accounts receivable, net		—			12,867
Inventories		—			3,534
Prepaid expenses and other		122			7,440
Total current assets		159,670			44,923
Property and equipment, net		—			184,319
Investment in joint venture		—			5,192
Deposits and other assets, net		13,884			36,855
Total assets		$	173,554		$	271,289
Liabilities and Stockholder’s Equity
Current Liabilities
Accounts payable		$	7,696		$	13,431
Current portion of long-term debt		—			2,919
Other accrued liabilities		1,078			36,507
Amounts due to affiliates		376			—
Total current liabilities		9,150			52,857
Long-term debt, net of current portion		155,000			177,883
Total liabilities		164,150			230,740
Stockholder’s equity
Common stock (no par value; 10,000 shares authorized; 100 shares issued and outstanding)		—			—
Paid-in capital in excess of par value		10,883			50,000
Retained earnings (deficit)		(1,479		)	(9,451		)
Total stockholder’s equity		9,404			40,549
Total liabilities and stockholder’s equity		$	173,554		$	271,289

 

The accompanying notes are an integral part of these financial statements.

 

3

 

Poster Financial Group, Inc.
(A Wholly Owned Subsidiary of PB Gaming, Inc.)

 

Consolidated Statement of Operations

(Thousands of dollars)

(Unaudited)

 

		Three Months Ended						Period from Inception (June 2, 2003) to September 30, 2003			Nine Months Ended September 30, 2004
		September 30, 2003			September 30, 2004
Revenues
Casino		$	—		$	41,280		$	—		$	123,327
Rooms		—			11,861			—			34,599
Food and beverage		—			14,205			—			38,756
Entertainment, retail and other		—			3,430			—			9,487
Gross revenues		—			70,776			—			206,169
Promotional allowances		—			(9,882		)	—			(25,732		)
Net revenues		—			60,894			—			180,437
Cost and expenses
Casino		—			28,314			—			75,036
Rooms		—			5,555			—			14,649
Food and beverage		—			8,266			—			23,634
Entertainment, retail and other		—			2,528			—			7,343
Provision for doubtful accounts		—			935			—			2,010
General and administrative		—			15,510			—			39,338
(Gain) loss on sale of assets		—			(70		)	—			(70		)
Depreciation and amortization		—			4,204			—			11,285
Total cost and expenses		—			65,242			—			173,225
Operating income		—			(4,348		)	—			7,212
Other income (expense)
Equity in loss of joint venture		—			(126		)	—			(382		)
Interest income		—			17			—			106
Interest expense		—			(4,234		)	—			(12,391		)
Total other income (expense)		—			(4,343		)	—			(12,667		)
Net income (loss)		$	—		$	(8,691	)	$	—		$	(5,455	)

 

The accompanying notes are an integral part of these financial statements.

 

4

 

Poster Financial Group, Inc.

(A Wholly Owned Subsidiary of PB Gaming, Inc.)

 

Consolidated Statement of Cash Flows

(Thousands of dollars)

 

		Period from Inception (June 2, 2003) to September 30, 2003			Nine Months Ended September 30, 2004
Cash flows from operating activities:
Net income (loss)		$	—		$	(5,455	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization		—			11,285
Provision for doubtful accounts		—			2,010
Gain on sale of assets		—			(70		)
Equity in loss of joint venture		—			382
Changes in operating assets and liabilities, net of amounts resulting from acquisition of the Golden Nugget Group
Decrease (increase) in accounts receivable		—			(10,658		)
Decrease (increase) in inventories		—			384
Decrease (increase) in prepaid expenses and other assets		—			(2,672		)
(Decrease) increase in deposits and other		—			(432		)
(Decrease) increase in accounts payable		—			2,465
(Decrease) increase in other accrued payables		—			15,235
Net cash provided by operating activities		—			12,474
Cash flows from investing activities:
Acquisition of property, equipment and improvements		—			(11,458		)
Acquisition of Golden Nugget Group, net of cash acquired of $11,942		—			(201,781		)
Contributions to joint venture		—			(469		)
Decrease in restricted cash		—			159,548
Proceeds from sale of equipment		—			70
Net cash used in investing activities		—			(54,090		)
Cash flows from financing activities:
Proceeds from the issuance of term loan		—			20,000
Net borrowings under revolving credit facility		—			5,302
Change in bank overdraft included in accounts payable		—			796
Distributions of equity to principal stockholders		—			(2,517		)
Additional contributions of equity from principal stockholders		—			39,117
Net cash provided by financing activities		—			62,698
Net increase (decrease) in cash and cash equivalents		—			21,082
Cash and cash equivalents, beginning of period		—			—
Cash and cash equivalents, end of period		$	—		$	21,082

 

The accompanying notes are an integral part of these financial statements.

 

5

 

Poster Financial Group, Inc.

(A Wholly Owned Subsidiary of PB Gaming, Inc.)

 

Condensed Notes to Consolidated Financial Statements (Unaudited)

 

1.  Organization

 

Poster Financial Group, Inc. (“Poster Financial” or the “Company”) is a Nevada corporation, formed on June 2, 2003 as a holding corporation for the purpose of completing the acquisition (the “Acquisition”) of the Golden Nugget Group (as defined below), as more fully described in Note 4. The Company is a wholly owned subsidiary of PB Gaming, Inc. (“PB Gaming” or the “Parent”).

 

After completion of the Acquisition, the Company owns and operates the following properties, which are collectively referred to as the “Golden Nugget Group”:

 

•                                          Golden Nugget—Las Vegas, a hotel-casino and entertainment resort located in downtown Las Vegas, Nevada and operated by GNLV, CORP., a Nevada corporation wholly owned by the Company (“GNLV”); and

 

•                                          Golden Nugget—Laughlin, a hotel-casino resort located in Laughlin, Nevada and operated by GNL, CORP., a Nevada corporation wholly owned by the Company (“GNL”).  On November 8, 2004, the Company entered into an agreement to sell GNL to an unrelated third party.  See Note 4.

 

GNLV also has a wholly owned subsidiary, Golden Nugget Experience, LLC (“GNE”), a Nevada limited liability company. GNE is a holding company that has an investment in The Fremont Street Experience Limited Liability Company, a Nevada limited liability company (the “Fremont Street Experience”), organized to enhance tourism in downtown Las Vegas, Nevada. The Fremont Street Experience is owned by a group of unrelated casino operators in downtown Las Vegas, and operates retail malls, parking garages, entertainment venues and a pedestrian mall that encloses a city street (Fremont Street), located adjacent to the Golden Nugget—Las Vegas. GNE holds 17.65% of the voting units and 50.0% of the non-voting units of the Fremont Street Experience, and accounts for its investment utilizing the equity method of accounting.  See Note 5.

 

2.  Significant Accounting Policies and Basis of Presentation

 

The consolidated financial statements of the Company as of September 30, 2004 and for the nine month period then ended have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments, consisting of normal recurring items and estimates necessary for a fair presentation of the results for interim periods, have been made. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto for the Company as of December 31, 2003 and for the period from June 2, 2003 (inception) through December 31, 2003.

 

Principles of Consolidation

 

All inter-company accounts and transactions between the Company and GNLV and GNL are eliminated in consolidation. All inter-company accounts and transactions between GNLV and GNE are eliminated in consolidation.

 

6

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of casino accounts receivable. The Company extends credit to approved casino customers following background checks and investigations of creditworthiness.

 

Trade receivables, including casino and hotel receivables, are typically noninterest bearing and are initially recorded at cost. Accounts are written off when management deems the account to be uncollectible. Recoveries of accounts previously written off are recorded when received. An estimated allowance for doubtful accounts is maintained to reduce the Company’s receivables to their carrying amount, which approximates fair value. The allowance is estimated based on specific review of customer accounts as well as historical collection experience and current economic and business conditions. Management believes that as of September 30, 2004, no significant concentrations of credit risk existed for which an allowance had not already been recorded.

 

Inventories

 

Inventories consisting principally of food and beverage and operating supplies are stated at the lower of cost or market value. Cost is determined by the first-in, first-out method.

 

Property and Equipment

 

Property and equipment are stated at cost. Depreciation expense is computed utilizing the straight-line method over the estimated useful lives of the depreciable assets, as follows:

 

Buildings and improvements		15-40 years
Land improvements		15-40 years
Equipment, furniture, fixtures and leasehold improvements		3-20 years

 

Certain equipment held under capital leases are classified as property and equipment and amortized using the straight-line method over the lease term and the related obligations are recorded as liabilities. Costs of major improvements are capitalized; costs of normal repairs and maintenance are charged to expense as incurred. Gains or losses on dispositions of property and equipment are recognized in the consolidated statements of operations when incurred.

 

Revenue Recognition and Promotional Allowances

 

Casino revenue is the aggregate net difference between gaming wins and losses, with liabilities recognized for funds deposited by customers before gaming play occurs (“casino front money”) and for chips in the customer’s possession (“outstanding chip liability”). Casino revenues are recognized net of certain sales incentives in accordance with the Emerging Issues Task Force (“EITF”) consensus on Issue 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).” Under the guidance of the EITF, the Company recognizes sales incentives as a reduction of revenue. In addition, accruals for the cost of cash-back points in point-loyalty programs, such as points earned in slot players clubs, are recorded as a reduction of revenue.

 

Hotel, food and beverage, entertainment and other operating revenues are recognized as services are performed. Advance deposits on rooms and advance ticket sales are recorded as accrued liabilities until services are provided to the customer. The retail value of accommodations, food and beverage, and other services furnished to hotel-casino guests without charge is included in gross revenue and then deducted as promotional allowances.

 

The estimated cost of providing such promotional allowances is primarily included in casino expenses as follows:

 

								Period from Inception
		Three Months Ended						(June 2, 2003) to			Nine Months Ended
		September 30, 2003			September 30, 2004			September 30, 2003			September 30, 2004
		(in thousands of dollars)
Rooms		$	—		$	1,867		$	—		$	5,137
Food and beverage		—			7,191			—			18,293
Other		—			767			—			1,750
		$	—		$	9,825		$	—		$	25,180

 

The estimated retail value of such promotional allowances is included in operating revenues as follows:

 

								Period from Inception
		Three Months Ended						(June 2, 2003) to			Nine Months Ended
		September 30, 2003			September 30, 2004			September 30, 2003			September 30, 2004
		(in thousands of dollars)
Rooms		$	—		$	3,153		$	—		$	8,677
Food and beverage		—			6,091			—			15,479
Other		—			639			—			1,576
		$	—		$	9,883		$	—		$	25,732

 

3.  Supplemental Cash Flows Information

 

The following information presents supplemental cash flow information of assets acquired and liabilities assumed in connection with the Acquisition (amounts in thousands) (see Note 4):

 

7

 

		Nine Months Ended September 30, 2004
Accounts receivable		$	4,219
Inventories		3,918
Prepaid expenses and other		4,646
Property and equipment		183,710
Tradename and other intangibles		18,009
Investment in joint venture		5,105
Deposits and other assets		4,966
Accounts payable		(2,098		)
Other accrued liabilities		(20,194		)
Notes payable		(500		)
		$	201,781
Plus, cash acquired		11,943
Total purchase price and acquisition costs		$	213,724

 

4.  Acquisitions and Dispositions

 

Golden Nugget Acquisition

 

On January 23, 2004, the Company completed the Acquisition of the Golden Nugget Group from MGM MIRAGE. The purchase price for the Acquisition was approximately $213.7 million, reflecting a base purchase price of $215.0 million less an adjustment for working capital at the date of the closing of approximately $4.8 million plus acquisition related expenses of approximately $3.5 million. There are no contingent payments.

 

The transaction has been accounted for as a purchase and, accordingly, the purchase price has been allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of the Acquisition. Results of operations for the acquired companies have been reflected in the Company’s financial statements from the day the Acquisition closed.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of the Acquisition. The allocation of the purchase price to the fair value of net assets acquired has been based on appraisals of the assets acquired (amounts in thousands):

 

		At January 23, 2004			Revision in Estimate			Adjusted Purchase Price Allocation
Working Capital Items
Cash and cash equivalents		$	11,943		$	—		$	11,943
Accounts receivable, net		4,219			—			4,219
Inventories		3,918			—			3,918
Prepaid expenses and other		4,646			—			4,646
Deposits and other assets		2,357			—			2,357
Accounts payable and accrued liabilities		(22,292		)	—			(22,292		)
Notes payable		(500		)	—			(500		)
Subtotal—Working Capital Items		4,291			—			4,291
Long-lived Assets:
Property & Equipment
Land		19,992			1,071			21,063
Buildings		132,620			(4,699		)	127,921
Construction in Progress		2,686			162			2,848
FFE and Equipment		29,900			1,978			31,878
Intangibles
Tradename		12,458			666			13,124
Player Club		4,585			300			4,885
Artwork and Display Nugget		2,432			177			2,609
Investment in Joint Venture		4,760			345			5,105
Subtotal—long-lived assets		209,433			—			209,433
Total purchase price allocated		$	213,724		$	—		$	213,724

 

In the quarter ended September 30, 2004 the Company adjusted its initial purchase price allocation to reflect the results of a detailed cost segregation stock of the GNLV buildings.  The study resulted in a reduction in the net allocated cost to the building of approximately $4.7 million, offset by pro-rata adjustments to other long-lived assets, and is reflected in the amounts presented above.  There was no goodwill resulting from the Acquisition.

 

8

 

Approximately $13.1 million was assigned to the trademarks used by GNLV and GNL, and approximately $2.6 million was assigned to unique artwork and a gold nugget on display in the hotel lobby of the Golden Nugget—Las Vegas. Such assets are considered to have an indefinite life, and are not subject to amortization. In accordance with accounting principals generally accepted in the United States of America, they will be subject to analysis for impairment from time to time, at least on an annual basis. Approximately $4.9 million was assigned to the Golden Nugget Group’s slot player club, which has been determined to have a useful life of seven years, based on the Golden Nugget Group’s historical experience and the composition of players in the Club.

 

Had the Acquisition taken place on January 1, 2003, results of operations would have reflected the following pro forma amounts for the nine months ended September 30, 2004 and the comparable period in 2003 (amounts in thousands):

 

		Nine Months Ended September 30,
		2003			2004
Net revenues		$	173,822		$	195,242
Operating income		$	15,807		$	10,686
Net income		$	3,127		$	(2,151	)

 

The principal differences between reported amounts and the pro forma amounts result from the addition of historical operating results for the Golden Nugget Group, elimination of the MGM MIRAGE management fee, changes in depreciation and amortization resulting from the new basis in assets acquired, and elimination of the provision for income taxes due to the election of PB Gaming to have each of its subsidiaries treated as a qualified Subchapter S corporation subsidiary for income tax purposes. In addition, signing bonuses paid to key executives upon completion of the Acquisition of approximately $1.6 million are included in the actual results for the nine months ended September 30, 2004 but has been excluded from the pro forma results presented above because such bonuses are non-recurring in nature, are directly related to the Acquisition, and are not reflective of the results of operations on a pro forma basis.

 

Golden Nugget-Laughlin Disposition

 

On November 8, 2004 the Company entered into a stock purchase agreement to sell GNL for a total sales price of approximately $31.0 million plus an adjustment for net working capital at the closing date (approximately $4.0 million at September 30, 2004).  The transaction is subject to customary closing conditions, including a finding of suitability of the buyer by the Nevada regulatory authorities.  Under certain specified circumstances, including if the buyer elects not to proceed with the transaction, the Company will be entitled to receive $1.0 million, which amount has been placed in escrow by the buyer.

 

The net consideration for the GNL sale and the estimated market value of the hotel exceed the carrying value of the related assets at September 30, 2004.  Accordingly, no impairment is indicated and no adjustments have been reflected in the accompanying financial statements.  For periods after November 8, 2004 the Company will reflect the GNL assets as held for sale in the balance sheet and will report financial results as a component of discontinued operations.  GNL has previously operated as a business segment of the Company; see Note 6 for additional information about the segment’s financial position and results of operations.

 

5.  Fremont Street Experience

 

In connection with the Acquisition, the Company now also indirectly owns 17.65% of the voting units and 50.0% of the non-voting units of the Fremont Street Experience. This investment is accounted for under the equity method of accounting. Under the equity method, the carrying value of the investment is adjusted by the Company’s share of earnings, losses, capital contributions and distributions. Activity relating to the Company’s investment in the Fremont Street Experience for the period January 23, 2004 to September 30, 2004 is as follows (amounts in thousands):

 

Acquisition of investment		$	5,105
Contributions to joint venture		469
Equity in loss of joint venture		(382		)
Investment Balance-end of period		$	5,192

 

The investment balance reflects the Company’s member’s equity in Fremont Street Experience, comprised of cumulative contributions, adjusted for the Golden Nugget Group’s proportional interest in profits or losses ($3.3 million at September 30, 2004), as well as an additional $1.8 million contribution made by the Golden Nugget Group in 1995 on a voluntary basis, and used by the Fremont Street Experience to acquire additional fixed assets used in its operations.

 

The $5.2 million member’s equity carried by the Company is approximately $0.9 million less than the proportional amount of members’ capital reported by the Fremont Street Experience due to values assigned in the allocation of purchase price resulting from the Acquisition.

 

9

 

The additional contribution of $1.8 million represents a non-voting interest which has been treated as a redeemable preferred member contribution of the Fremont Street Experience. The redeemable preferred member contribution does not have any profit distribution and must be repaid before any distributions are made on voting interests.

 

Summarized financial information of the Fremont Street Experience is as follows (amounts in thousands):

 

		As of September 30, 2004
Current assets		$	1,764
Non-current assets		43,346
Total assets		$	45,110
Current liabilities		$	294
Non-current liabilities		17,329
Preferred member contribution		3,040
Members’ capital		24,447
Total liabilities and members’ capital		$	45,110

 

		Three Months Ended September  30, 2004			January 23, 2004 to September 30, 2004
Total revenues		$	1,474		$	3,618
Costs and expenses		2,190			5,784
Net loss		$	(716	)	$	(2,166	)

 

6.  Segment Information

 

The Company owns and operates two properties as follows: a casino-hotel resort located in downtown Las Vegas, Nevada which is operated by GNLV, and a casino and nearby hotel located in Laughlin, Nevada which is operated by GNL. The properties market in each of their segments primarily to middle-income guests. The major products offered in each segment are as follows: casino entertainment, hotel rooms, and food and beverage. The accounting policies of each business segment are the same as those described in the summary of significant accounting policies. There are minimal inter-segment sales.  As more fully explained in Note 4, the Company recently entered into an agreement to sell GNL.

 

A summary of operations by business segment for the period from the date of the Acquisition (January 23, 2004) through September 30, 2004, and a summary of the segment assets as of September 30, 2004 is presented below (amounts in thousands):

 

		Three Months Ended September 30, 2004			For the Period Jan 23, 2004 (Acquistion) Through September 30, 2004
Net revenues
GNLV		$	49,598		$	147,497
GNL		11,296			32,940
Total		$	60,894		$	180,437
Income (loss) from operations
GNLV		$	(4,489	)	$	5,434
GNL		295			2,415
Poster Financial (corporate)		(154		)	(637		)
Total		$	(4,348	)	$	7,212
Segment depreciation and amortization
GNLV		$	3,890		$	10,378
GNL		314			907
Total		$	4,204		$	11,285
Expenditures for additions to long-lived assets, exclusive of the Acquisition
GNLV		$	1,361		$	10,226
GNL		330			1,232
Total		$	1,691		$	11,458

 

10

 

		As of September 30, 2004
Segment assets
GNLV		$	217,204
GNL		43,475
Poster Financial (Corporate)		10,610
Total		$	271,289

 

7.  Licensing Contingency

 

Licensing Contingency - - The Company conducts licensed gaming operations in Nevada. The Nevada gaming authorities control approval of ownership interests in gaming operations. 

 

On January 22, 2004, the Nevada Gaming Commission found the principal shareholders (the “Shareholders”) of PB Gaming (who are also the Chief Executive Officer and Chief Operating Officer of Poster Financial) suitable as officers, directors and shareholders of PB Gaming and as officers and directors of Poster Financial, and issued licenses to them as officers and directors of GNLV and GNL. The findings of suitability and licenses issued to the Shareholders expire in January 2008. Following the one-year anniversary of such issuances, the Shareholders may apply for new unlimited findings of suitability and licenses. No assurance can be given that such applications would be granted without further limitation or at all. If the Shareholders were found unsuitable, they would be required to be removed from their positions as officers and directors of the Company, PB Gaming, GNLV and GNL and PB Gaming could be required to redeem the stock in PB Gaming held by them at a price equal to fair market value. Such an event could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

Land Purchase Commitment – The Company is currently in the process of obtaining land and developing plans for the expansion of the Golden Nugget - Las Vegas property.  The design, budget and schedule of the expansion are at an early stage, and the ultimate timing, cost and scope of the project is subject to risks attendant to large-scale projects.

 

In addition to the land purchase identified in Note 8 to these financial statements, on October 5, 2004, GNLV entered into a Purchase and Sales Agreement with 1^st Rainbow LLC, a Nevada limited liability company, to purchase 0.17-acre parcel of land and improvements thereon for the purchase price of $1.6 million, of which $250,000 was put on deposit. This parcel is adjacent to the parcel mentioned above.

 

8. Transactions with Affiliates

 

On June 29, 2004, GNLV made a non-interest bearing loan to Lopo, LLC, a Nevada limited liability company (“Lopo”), the member’s interests of which are held by the sole stockholders of the Company’s parent corporation, in the aggregate principal amount of $1.6 Million (the “Loan”), the funds of such Loan to be used by Lopo for the express and sole purpose of facilitating the acquisition of certain real property located near the Golden Nugget-Las Vegas by Lopo, upon Lopo’s agreement to convey the property to GNLV as repayment for the Loan within 90 days of the effective date of the Loan.  During the third fiscal quarter of 2004, the land was conveyed to the Company at the amount paid by Lopo, and the loan was cancelled.

 

Effective July 1, 2004, the Company entered into lease agreements with its sole stockholders to lease their interests in certain aircraft to be used primarily in the furtherance of the Company’s business, such as transporting executives to business meetings and customer transportation to and from our gaming properties. The lease payments are based on the estimated fair market value of the interests owned and the Company believes equates to the cost for such services. Annual lease payments are approximately $365,000, paid in monthly installments.

 

9. Long-term debt

 

Notes

 

On December 3, 2003, the Company issued $155 million aggregate principal amount of 8 3/4% Senior Secured Notes due 2011 (the “Notes”) to finance a portion of the purchase price of the Acquisition.  All payments with respect to the Notes are fully, unconditionally and irrevocably guaranteed, jointly and severally, by all the Company’s current and future restricted subsidiaries on a senior secured basis. The Company’s “restricted subsidiaries,” which are subject to many of the restrictive covenants in the indenture governing the Notes, currently are GNLV and GNL the Company’s wholly owned subsidiaries, and GNE, a wholly owned subsidiary of GNLV.  The Notes and the guarantees are secured by a pledge of capital stock of the Company’s restricted subsidiaries and a security interest in substantially all of the Company’s and the guarantors’ current and future assets.  Such security interest is junior to the security interest granted to the lenders under the Company’s Credit Facility (as defined below).  Interest on the Notes is payable on June 1 and December 1 of each year. 

 

Credit Facility

 

                On January 23, 2004, the Company entered into a $35 million senior secured credit facility (the “Credit Facility”), which was established pursuant to a Loan and Security Agreement with Wells Fargo Foothill, Inc. as administrative agent.  The Credit Facility consists of a $20 million amortizing term loan and a $15 million revolver. 

 

The Credit Facility contains covenants, including, among other things, financial covenants, limitations on the Company from disposing of assets, entering into mergers and certain acquisitions, incurring liens or indebtedness, and entering into transactions with affiliates.  The Company’s obligations under the Credit Facility are fully, unconditionally and irrevocably guaranteed, jointly and severally, by all the Company’s subsidiaries.  The Company’s obligations under the Credit Facility are also secured by a pledge of capital stock of the Company’s restricted subsidiaries and the Company’s interest in the Fremont Street Experience, as well as a first priority lien on substantially all of the Company’s and the guarantors’ current and future assets. Interest on the Credit Facility accrues on all individual borrowings at an interest rate determined at the option of the Company, at either the LIBOR Index plus a 4% margin, or the Base Rate, defined as the bank’s prime rate plus a 3% margin.

 

At September 30, 2004, the Company failed to satisfy two of the three financial covenants under the Loan and Security Agreement.  The lenders under the Credit Facility waived compliance with the Fixed Charge Coverage Ratio and the Senior Debt to EBITDA Ratio for the quarter ended September 30, 2004.  The Company is currently negotiating amendments to the financial covenants to reflect the Company’s expected financial results as well as the proposed sale of GNL.

 

10.  Summarized Financial Information

 

Separate financial statements and other disclosures concerning each of the subsidiary guarantors are not presented below because management believes they are not material to investors. The following information represents the summarized financial information of the Company and the subsidiary guarantors on a consolidating basis as of September 30, 2004 and for the nine month period ended September 30, 2004, reflecting the Acquisition completed in January 2004.

 

11

 

CONDENSED CONSOLIDATING BALANCE SHEETS

September 30, 2004

(Thousands of dollars)

(Unaudited)

 

		Poster Financial			Guarantor Subsidiaries			Consolidating/ Eliminating Entries			Total
Assets
Current Assets
Cash and cash equivalents		$	—		$	21,082		$	—		$	21,082
Accounts receivable, net		—			12,867			—			12,867
Inventories		—			3,534			—			3,534
Prepaid expenses and other		—			7,440			—			7,440
Intercompany receivables		—			5,818			(5,818		)(a)	—
Total current assets		—			50,741			(5,818		)	44,923
Property and equipment, net		—			184,319			—			184,319
Investment in subsidiaries		221,215			—			(221,215		)(b)	—
Investment in joint venture		—			5,192			—			5,192
Deposits and other assets, net		10,610			36,288			(10,043		)(c)	36,855
Total assets		$	231,825		$	276,540		$	(237,076	)	$	271,289
Liabilities and Stockholder’s Equity
Current Liabilities
Accounts payable		$	158		$	13,273		$	—		$	13,431
Current portion of long-term debt		2,800			2,919			(2,800		)(c)	2,919
Other accrued liabilities		4,889			31,618			—			36,507
Amounts due to affiliates		5,818			—			(5,818		)(a)	—
Total current liabilities		13,665			47,810			(8,618		)	58,967
Long-term debt, net of current portion		177,611			171,883			(177,611		)(c)	177,883
Total liabilities		191,276			225,693			(186,229		)	230,740
Stockholder’s equity		40,549			50,847			(50,847		)	40,549
Total liabilities and stockholder’s equity		$	231,825		$	276,540		$	(237,076	)	$	271,289

 

(a)   To eliminate intercompany receivables and payables in consolidation.

 

(b)   To eliminate investment in subsidiaries in consolidation.

 

(c)   To eliminate notes payable and related debt issuance costs pushed down to the guarantor subsidiaries to reflect the impact of the Acquisition, in accordance with the requirements of Staff Accounting Bulletin Topic 5(J) of the SEC.

 

12

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the nine months ended September 30, 2004

(Thousands of dollars)

(Unaudited)

 

		Poster Financial			Guarantor Subsidiaries			Consolidating/ Eliminating Entries			Total
Net revenues		$	—		$	180,437		$	—		$	180,437
Cost and expenses
Casino-hotel operations		—			122,672			—			122,672
General and administrative		637			38,631			—			39,268
Depreciation and amortization		—			11,285			—			11,285
Total cost and expenses		637			172,588			—			173,225
Operating income		(637		)	7,849			—			7,212
Other income (expense)
Equity in loss of joint venture		—			(382		)	—			(382		)
Equity in income (loss) of subsidiaries		(4,869		)	—			(4,869		)(a)	—
Interest income		51			55			—			106
Interest expense		(12,360		)	(12,391		)	12,360		(b)	(12,391		)
Total other income (expense)		(17,178		)	(12,718		)	17,229			(12,667		)
Net income (loss)		$	(17,815	)	$	(4,869	)	$	17,229		$	(5,455	)

 

(a)   To eliminate equity in income of subsidiaries in consolidation.

 

(b)   To eliminate interest expense on the Notes and term loan pushed down to the guarantor subsidiaries to reflect the impact of the Acquisition, in accordance with Staff Accounting Bulletin Topic 5(J) of the SEC.

 

13

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the nine months ended September 30, 2004

(Thousands of dollars)

(Unaudited)

 

		Poster Financial			Consolidating/ Guarantor Subsidiaries			Eliminating Entries			Total
Cash flows from operating activities:		$	331		$	12,143		$	—		$	12,474
Cash flows from investing activities:
Acquisition of property, equipment and improvements					(11,458		)				(11,458		)
Acquisition of Golden Nugget Group, net of cash acquired of $11,942		(201,781		)							(201,781		)
Contributions to joint venture					(469		)				(469		)
Decrease in restricted cash		159,548									159,548
Proceeds from sale of equipment					70						70
Net cash used in investing activities		(42,233		)	(11,857		)	—			(54,090		)
Cash flows from financing activities:
Proceeds from the issuance of term loan		20,000									20,000
Net borrowings under revolving credit facility		5,302									5,302
Change in bank overdraft					796						796
Contributions to subsidiaries using funds drawn under term loan		(20,000		)	20,000						—
Distributions of equity to parent		(2,517		)							(2,517		)
Additional contributions of equity from parent		39,117									39,117
Net cash provide by financing activities		41,902			20,796			—			62,698
Net increase in cash and cash equivalents		—			21,082			—			21,082
Cash and cash equivalents, beginning of period		—			—						—
Cash and cash equivalents, end of period		$	—		$	21,082		$	—		$	21,082

 

14

 

b. Golden Nugget Group

 

Golden Nugget Group

(Previously a division of MGM MIRAGE)

 

Combined Statements of Operations and Changes in Division Equity

(Thousands of dollars)

 

		Three Months Ended September 30, 2003			Nine Months Ended September 30, 2003			Period from January 1, 2004 to January 22, 2004 (Date Immediately Prior to Acquisition by Poster Financial)
		(unaudited)			(unaudited)			(unaudited)
Revenues:
Casino		$	38,910		$	116,806		$	10,121
Rooms		10,586			33,653			2,795
Food and beverage		11,965			36,554			3,034
Entertainment retail and other		3,813			10,728			817
Gross revenues		65,274			197,741			16,767
Promotional allowances		(8,302		)	(23,919		)	(1,962		)
Net revenues		56,972			173,822			14,805
Cost and expenses:
Casino		22,235			65,124			5,441
Rooms		5,272			15,511			1,304
Food and beverage		7,844			23,686			2,003
Entertainment retail and other		2,459			7,874			568
Provision for doubtful accounts		113			603			107
General and administrative		11,618			32,979			2,524
(Gain)/loss on disposal of fixed assets		(3		)	(43		)	—
MGM/MIRAGE management fee		3,271			9,891			844
Depreciation and amortization		3,382			10,301			806
Total cost and expenses		56,191			165,926			13,597
Operating income		781			7,896			1,208
Other income (expense):
Equity in loss of joint venture		(225		)	(611		)	(26		)
Interest income		8			27			2
Interest expense		(800		)	(2,554		)	(3		)
Intercompany interest expense		(13		)	(40		)	(206		)
Total other income (expense)		(1,030		)	(3,178		)	(233		)
Income before income taxes		(249		)	4,718			975
Income tax provision		39			(1,521		)	(307		)
Net income (loss)		$	(210	)	$	3,197		$	668

 

The accompanying notes are an integral part of these financial statements.

 

15

 

Golden Nugget Group

(Previously a division of MGM MIRAGE)

 

Combined Statement of Cash Flows

(Thousands of dollars)

 

		Nine Months Ended September 30, 2003			Period from January 1, 2004 to January 22, 2004 (Date Immediately Prior to Acquisition by Poster Financial)
		(Unaudited)			(Unaudited)
Cash flows from operating activities:
Net income (loss)		$	3,197		$	668
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation		10,301			806
Provision for doubtful accounts		603			107
Equity in loss of joint venture		611			26
Changes in operating assets and liabilities
Decrease (Increase) in accounts receivable		1,288			923
Decrease (increase) in due from Poster Financial					376
Decrease (increase) in inventories		1,919			95
Decrease (Increase) in prepaid expenses and other assets		(721		)	633
(Decrease) increase in deposits and other		(1,348		)	22
(Decrease) increase in accounts payable		13,830			(380		)
(Decrease) increase in other accrued payables		(1,129		)	1,736
Net cash provided by operating activities		28,551			5,012
Cash flows from investing activities:
Acquisition of property, equipment and improvements		(5,590		)	(4,436		)
Contributions to joint venture		(753		)	(235		)
Net cash used in investing activities		(6,343		)	(4,671		)
Cash flows from financing activities:
Repayment of other debt		(100		)	—
Change in bank overdraft		(6,548		)	(4,996		)
Change in amounts payable to MGM MIRAGE an affiliates, net		(13,324		)	(3,456		)
Net cash used in financing activities		(19,972		)	(8,452		)
Net increase (decrease) in cash and cash equivalents		2,236			(8,111		)
Cash and cash equivalents, beginning of period		17,340			23,904
Cash and cash equivalents, end of period		$	19,576		$	15,793

 

The accompanying notes are an integral part of these financial statements.

 

16

 

Golden Nugget Group

(Previously a division of MGM MIRAGE)

 

Condensed Notes to Combined Financial Statements (Unaudited)

 

1.  Organization

 

Prior to January 23, 2004, the Golden Nugget Group (the “Group”) was an operating division of MGM MIRAGE (“MGM MIRAGE” or “Parent”), a publicly held Delaware corporation. The Group is comprised of the following entities:

 

•                                          GNLV, CORP., a Nevada corporation formerly wholly owned by MGM MIRAGE (“GNLV”), which owns and operated the Golden Nugget—Las Vegas, a hotel-casino entertainment resort located in downtown Las Vegas, Nevada; and

 

•                                          GNL, CORP., a Nevada corporation formerly wholly owned by MGM MIRAGE (“GNL”), which owns and operated the Golden Nugget—Laughlin Las Vegas, a hotel-casino resort in Laughlin, Nevada.

 

GNLV also has a wholly owned subsidiary, Golden Nugget Experience, LLC (“GNE”), a Nevada limited liability company. GNE is a holding company that has an investment in The Fremont Street Experience Limited Liability Company, a Nevada limited liability company (the “Fremont Street Experience”), organized to enhance tourism in downtown Las Vegas, Nevada. The Fremont Street Experience is owned by a group of unrelated casino operators in downtown Las Vegas, and operates retail malls, parking garages, entertainment venues and a pedestrian mall that encloses a city street (Fremont Street), located adjacent to the Golden Nugget—Las Vegas. GNE holds 17.65% of the voting units and 50.0% of the non-voting units of the Fremont Street Experience, and accounts for its investment utilizing the equity method of accounting.

 

The management of MGM MIRAGE has made all significant operational and financial decisions of the Group during the periods presented.

 

On January 23, 2004, Poster Financial Group, Inc. (“Poster Financial”), a party unrelated to MGM MIRAGE, completed the acquisition of the Group from MGM MIRAGE (the “Acquisition”). The purchase price for the Acquisition was approximately $213.7 million, reflecting a base purchase price of $215.0 million less an adjustment for working capital at the date of the closing of approximately $4.8 million plus acquisition related expenses of approximately $3.5 million.

 

2.  Significant Accounting Policies and Basis of Presentation

 

The combined financial statements of the Group for the period January 1, 2004 through January 22, 2004 and for the three and nine months ended September 30, 2003, have been prepared by the Group, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The preparation of the combined financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments, consisting of normal recurring items and estimates necessary for a fair presentation of the results for interim periods, have been made. These combined financial statements should be read in conjunction with the financial statements and notes thereto for the Group as of December 31, 2003 and for the year then ended.

 

17

 

Principles of Presentation

 

All inter-company accounts and transactions between GNLV and GNE are eliminated in consolidation. All inter-company accounts and transactions between GNLV and GNL are eliminated in combination to arrive at the financial statements of the Group. The Group is not a separate reporting entity and has not previously presented financial statements on a stand-alone basis. Certain estimates, including allocations from the Parent, have been made to provide financial information for stand-alone reporting purposes. Management of the Group believes that the presentations and disclosures herein are adequate to make the information not misleading. In the opinion of management, all adjustments necessary to fairly state the financial statements have been reflected.

 

Stock Based Compensation

 

Prior to the Acquisition, certain employees were eligible to participate in the stock option plans of MGM MIRAGE. The Group does not have a stock option plan. The Group accounts for stock-based compensation, including employee stock option plans, in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and the Financial Accounting Standards Board’s Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25”, and discloses supplemental information in accordance with Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (“SFAS 148”). The Group does not incur compensation expense for employee stock options when the exercise price is at least 100% of the market value of the Group’s common stock on the date of grant. For disclosure purposes, employee stock options are measured at fair value, compensation is assumed to be amortized over the vesting periods of the options, and pro forma results are disclosed as if the Group had applied SFAS 123.

 

Had the Group accounted for these plans under the fair value method allowed by SFAS 123, the Group’s net income would have been reduced to recognize the fair value of employee stock options. The following are required disclosures under SFAS 123 and SFAS 148 (amounts in thousands):

 

		Three Months Ended September 30, 2003			Nine Months Ended September 30, 2003			Period from Jan 1, 2004 through Jan 22, 2004
Net income (loss) as reported		$	(210	)	$	3,197		$	668
Stock based compensation under SFAS 123		(334		)	(1,002		)	(56		)
Pro Forma		$	(544	)	$	2,195		$	612

 

The stock-based compensation included in the table above represents the after-tax amount of pro forma compensation related to stock option plans.

 

3.  Golden Nugget Acquisition

 

On January 23, 2004, Poster Financial, a party unrelated to MGM MIRAGE, completed the Acquisition of the Group from MGM MIRAGE. The purchase price for the acquisition was approximately $213.7 million, reflecting a base purchase price of $215.0 million less an adjustment for estimated working capital at the date of closing of approximately $4.8 million plus acquisition related expenses of approximately $3.5 million.

 

18

 

The transaction was accounted for as a purchase and, accordingly, the purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of the Acquisition. Results of operations of the acquired companies were reflected in the acquirer’s financial statements from the day of the Acquisition.

 

4.  Fremont Street Experience

 

Through its wholly-owned subsidiary, GNE, the Group indirectly owns 17.65% of the voting units and 50.0% of the non-voting units of the Fremont Street Experience. This investment is accounted for under the equity method of accounting.

 

Summarized financial information of the Fremont Street Experience for the three and nine months ended September 30, 2003 and for the period from January 1, 2004 through January 22, 2004 is as follows (amounts in thousands):

 

		Three Months Ended September 30, 2003			Nine Months Ended September 30, 2003			Period from Jan 1, 2004 through Jan 22, 2004
Total revenues		$	509		$	3,214		$	274
Total costs and expenses		1,508			6,400			423
Net loss		$	(999	)	$	(3,186	)	$	(149	)

 

5.  Segment Information

 

The Group owns and operates two properties as follows: a casino-hotel resort located in downtown Las Vegas, Nevada; and a casino and nearby hotel located in Laughlin, Nevada. The properties market in each of their segments primarily to middle-income guests. The major products offered in each segment are as follows: casino entertainment, hotel rooms, and food and beverage. The accounting policies of each business segment are the same as those described in the summary of significant accounting policies. There are minimal inter-segment sales.

 

19

 

A summary of operations by business segment for the three and nine months ended September 30, 2003 and for the period from January 1, 2004 through January 22, 2004 (the date immediately prior to Acquisition) is presented below (amounts in thousands):

 

		Three Months Ended September 30, 2003			Nine Months Ended September 30, 2003			For the Period Jan 1, 2004 through Jan 22, 2004
Net revenues
GNLV		$	46,681		$	142,171		$	12,167
GNL		10,291			31,651			2,638
Total		$	56,972		$	173,822		$	14,805
Income (loss) from operations
GNLV		$	1,082		$	8,169		$	1,052
GNL		(301		)	(273		)	156
Total		$	781		$	7,896		$	1,208
Segment depreciation and amortization
GNLV		$	3,155		$	9,611		$	782
GNL		227			690			24
Total		$	3,382		$	10,301		$	806
Expenditures for additions to long-lived assets
GNLV		$	934		$	4,566		$	3,772
GNL		186			1,024			664
Total		$	1,120		$	5,590		$	4,436

 

20

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

In this report, unless the context requires otherwise, the terms the “Company,” “we,” “us,” and “our” refer to Poster Financial Group, Inc. and its subsidiaries and the term “Poster Financial” refers only to Poster Financial Group, Inc. and not its subsidiaries. In this report, our parent company, PB Gaming, Inc., is referred to as “PB Gaming.”

 

This report on Form 10-Q contains certain forward-looking statements regarding our future results of operations and performance. Important factors that could cause differences in results of operations include, but are not limited to, general economic conditions in the markets in which the Company operates, competition from other gaming operations, leverage, the inherent uncertainty and costs associated with litigation and governmental and regulatory investigations, and licensing and other regulatory risks.  See “—Cautionary Statement Regarding Forward-Looking Statements.”

 

OVERVIEW

 

The Company

 

We own and operate the Golden Nugget hotel-casinos in Las Vegas and Laughlin, Nevada, which are referred to in this report as the “Golden Nugget-Las Vegas” and the “Golden Nugget-Laughlin,” respectively. The following table sets forth information about each of the Golden Nugget properties as of September 30, 2004:

 

Property		Slot Machines		Table Games		Casino Space (square feet)		Hotel Rooms
Golden Nugget-Las Vegas		1,208		68		35,000		1,907
Golden Nugget-Laughlin		945		21		32,000		300
Total		2,153		89		67,000		2,207

 

We believe that the Golden Nugget brand name is one of the most recognized in the gaming industry and we expect to continue to capitalize on the strong name recognition and high level of quality and value associated with it. We target out-of-town customers at both of our properties while also catering to the local customer base. We believe that the Golden Nugget-Las Vegas is the leading downtown destination for out-of-town customers. The property offers the same complement of services as our Las Vegas Strip competitors, but we believe that our customers prefer the boutique experience we offer and the downtown environment. We emphasize the property’s wide selection of amenities and provide a luxury room product and personalized services at an attractive value. At the Golden Nugget-Laughlin, we focus on providing a high level of customer service, a quality dining experience at an appealing value, a slot product with highly competitive pay tables and a superior player rewards program.  As further discussed under the heading “— Recent Developments,” November 8, 2004 we entered into an agreement to sell the Golden Nugget-Laughlin.

 

We also have an investment in The Fremont Street Experience Limited Liability Company (“The Fremont Street Experience LLC”), the entity which owns and operates The Fremont Street Experience. The Fremont Street Experience is a unique entertainment attraction located in the center of downtown Las Vegas on Fremont Street, where the Golden Nugget-Las Vegas is located.

 

The Acquisition and Poster Financial

 

Poster Financial is a holding company that was incorporated in June 2003 for the purpose of acquiring the entities that own and operate the Golden Nugget hotel-casinos in Las Vegas and Laughlin, Nevada. On June 24, 2003, Poster Financial entered into a stock purchase agreement with MGM MIRAGE, as parent, Mirage Resorts, Incorporated, as seller, GNLV, CORP. (“GNLV”), GNL, CORP. (“GNL”), and Golden Nugget Experience, LLC (“Golden Nugget Experience”), a wholly owned subsidiary of GNLV, in which Poster Financial agreed to purchase all the issued and outstanding shares of capital stock of GNLV and GNL from Mirage Resorts, Incorporated (the “Acquisition”). GNLV and GNL, respectively, own and operate the Golden Nugget-Las Vegas and the Golden Nugget-Laughlin. GNLV and its subsidiaries and GNL are collectively referred to in this report as the “Golden Nugget Group.” On January 23, 2004, Poster Financial completed the Acquisition and acquired all the issued and outstanding shares of capital stock of GNLV and GNL and, as a result, indirect ownership of the Golden Nugget-Las Vegas and the Golden Nugget-Laughlin.

 

Certain financial statements for Poster Financial are included in this report, but such historical operating results will not be indicative of future operating results. Our future operating results are subject to significant business, economic, regulatory and competitive uncertainties and contingencies, many of which are beyond our control.

 

PB Gaming has elected to be taxed as a Subchapter S corporation and has elected to have each of Poster Financial, GNLV and GNL treated as a qualified Subchapter S corporation subsidiary for U.S. federal income tax purposes.

 

The Golden Nugget Group

 

The operations of the Golden Nugget Group consist of two hotel-casinos located in Las Vegas and Laughlin, Nevada, referred to in this report as the Golden Nugget-Las Vegas and the Golden Nugget-Laughlin, respectively. Our business strategy is to create the best possible gaming and entertainment experience for our customers by providing a combination of comfortable and attractive surroundings with attentive service from friendly and experienced employees. In addition, the Golden Nugget properties offer a wide selection of high-quality amenities to complement their guests’ gaming experience.

 

Key gaming volume indicators are table game “drop” and slot machine “handle”. Table game drop and slot machine handle are casino industry specific terms that are used to identify the amount wagered by patrons at a casino table game or slot machine, respectively. The revenues of the Golden Nugget properties can also be affected by the percentage of gaming volume retained by them, indicated by “win” or “hold” percentages, which we cannot fully control. Hold is calculated by dividing the amount won by the casino by the amount wagered by patrons. Hold percentages vary based on the mix of games on the floor. In addition, while hold percentage is reasonably predictable over periods greater than twelve months, it can fluctuate significantly over shorter periods of time, such as a fiscal quarter, which can affect comparability between periods.

 

In the hotel operations of the Golden Nugget properties, key measures are occupancy rates (a volume indicator) and average daily room rate (“ADR,” a price indicator). Revenues of the Golden Nugget Group can also be affected by economic and other factors. Domestic leisure travel is dependent on the national economy and the level of consumers’ disposable income.

 

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RESULTS OF OPERATIONS

 

Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003

 

Combined net revenues for the three months ended September 30, 2004 amounted to $ 60.9 million, an increase of $3.9 million, or 6.8%, over the three months ended September 30, 2003. Net revenues at the Golden Nugget–Las Vegas for the three months ended September 30, 2004 accounted for $49.6 million, or 81.4% of combined net revenues, an increase of $2.9 million compared to the three months ended September 30, 2003. The increase of 6.2% in net revenues at the Golden Nugget–Las Vegas was attributable to an increase in table game drop, slot machine handle, and room occupancy and ADR for the three months ended September 30, 2004 compared to the three months ended September 30, 2003. Net revenues at the Golden Nugget–Laughlin for the three months ended September 30, 2004 accounted for $11.3 million, or 18.6% of combined net revenues, an increase of $1.0 million as compared to the three months ended September 30, 2003. The increase of 9.8% in net revenues at the Golden Nugget–Laughlin was primarily attributable to an increase in table game drop and hold percentage and slot machine handle for the three months ended September 30, 2004 compared to the three months ended September 30, 2003.

 

The following table presents detail of our net revenues:

 

		Golden Nugget-Las Vegas								Golden Nugget-Laughlin
		Three Months Ended September 30,								Three Months Ended September 30,
								Percentage								Percentage
		2003			2004			Change		2003			2004			Change
		(In thousands)								(In thousands)
Casino revenue, net:
Table games		$	8,912		$	10,373		16.4	%	$	573		$	998		74.2	%
Slots		21,070			21,608			2.6	%	7,352			7,962			8.2	%
Other		806			110			-86.4	%	196			230			21.4	%
Casino revenue, net		30,788			32,091			4.2	%	8,121			9,190			13.2	%
Non-casino revenue:
Rooms		9,633			10,871			12.9	%	954			991			3.9	%
Food and beverage		9,436			11,501			21.9	%	2,529			2,704			6.9	%
Entertainment, retail and other		3,364			3,199			-4.9	%	449			231			-48.6	%
Non-casino revenue		22,433			25,571			14.0	%	3,932			3,926			-0.2	%
		53,221			57,662			8.3	%	12,053			13,116			8.8	%
Less: Promotional allowances		(6,540		)	(8,064		)	23.3	%	(1,762		)	(1,820		)	3.3	%
		$	46,681		$	49,598		6.2	%	$	10,291		$	11,296		9.8	%

 

Casino Revenues

 

Combined casino revenues during the three months ended September 30, 2004 totaled $41.3 million, an increase of $2.4 million over the three months ended September 30, 2003. Slot machine revenues accounted for $29.6 million, or 71.7% of combined casino revenues, and table games revenues accounted for $11.4 million, or 27.6% of the combined casino revenues for the three months ended September 30, 2004.

 

Average win per slot machine per day at the Golden Nugget–Las Vegas for the three months ended September 30, 2004 increased by 5.7%, as compared to the three months ended September 30, 2003. Slot machine handle increased 5.4%, and table game drop increased 78.7%, as compared to the three months ended September 30, 2003. Win per table game increased 24.9% over the prior period. These increases reflect the success of the casino’s promotional events, additional casino marketing staff and changes to table limits and odds. Increases can also be attributed to the opening of the High Limit Pit with nine table games added to the casino floor in early June.

 

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