EXHIBIT 99.1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Owners of
Virgin River Casino Corporation:

We have audited the accompanying consolidated balance sheets of Virgin River Casino Corporation as of December 31, 2005 and 2004, and the related consolidated statements of operations and comprehensive (loss) income, stockholder’s (deficit) equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

		/s/ Ernst & Young LLP
Las Vegas, Nevada
March 17, 2006

 

1

---

Virgin River Casino Corporation
Consolidated Balance Sheets
December 31, 2005 and 2004
(in thousands)

 

		December 31,
		2005			2004
Assets
Current assets:
Cash and cash equivalents		$	9,421		$	11,114
Accounts receivable, net of allowance of $295 and $261 for 2005 and 2004, respectively		1,241			809
Related party receivables		95			213
Related company receivables		395			1,250
Inventories		1,652			1,680
Property held for vacation interval sales		392			461
Prepaid expenses		3,194			2,911
Current portion of notes receivable		303			414
Total current assets		16,693			18,852
Property and equipment, net		123,092			114,142
Notes receivable, less current portion		1,821			2,487
Goodwill and other intangible assets, net		31,193			34,084
Deferred financing fees		8,337			9,173
Other assets		217			413
Total assets		$	181,353		$	179,151
Liabilities and Stockholder’s Deficit
Current liabilities:
Bank overdraft		$	548		$	1,480
Current portion of obligation under capital lease		—			18
Current portion of gaming equipment financing		2,528			582
Current portion of long-term debt		614			1,353
Accounts payable		2,784			3,271
Accrued liabilities		15,041			9,297
Related company payable		99			758
Total current liabilities		21,614			16,759
Gaming equipment financing, less current portion		3,306			189
Long-term debt, less current portion		172,333			165,588
Fair value of interest rate swaps		195			1,493
Commitments and contingencies
Minority interest		16,414			16,040
Stockholder’s deficit:
Additional paid-in capital		3,168			3,168
Accumulated deficit		(14,205		)	(3,414		)
Deemed distribution		(21,472		)	(20,672		)
Total stockholder’s deficit		(32,509		)	(20,918		)
Total liabilities and stockholder’s deficit		$	181,353		$	179,151

 

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

2

---

Virgin River Casino Corporation
Consolidated Statements of Operations and Comprehensive (Loss) Income
For the Years Ended December 31, 2005, 2004 and 2003
(in thousands)

 

		2005			2004			2003
Revenues
Casino		$	62,394		$	57,753		$	54,201
Food and beverage		30,350			30,509			28,293
Hotel		20,865			19,256			18,254
Related company rental income		6,300			6,300			6,300
Other		17,995			20,106			19,245
Total revenues		137,904			133,924			126,293
Less—promotional allowances		(19,323		)	(17,224		)	(17,424		)
Net revenues		118,581			116,700			108,869
Operating expenses:
Casino		30,688			28,809			28,005
Food and beverage		18,917			19,013			18,026
Hotel		6,333			7,200			6,875
Other		13,711			14,436			13,384
General and administrative		31,110			29,004			25,260
Depreciation and amortization		9,827			7,115			7,142
Loss on sale and disposal of assets		772			55			191
Total operating expenses		111,358			105,632			98,883
Operating income		7,223			11,068			9,986
Other (expense) income:
Interest expense		(18,060		)	(7,489		)	(7,801		)
Related party interest expense		—			(94		)	(76		)
Change in fair value of interest rate swaps		1,298			(1,493		)	—
Return on investment with MDW, LLC		906			—			—
Gain on termination of capital lease		—			1,279			—
Loss on early retirement of debt		—			(596		)	—
(Loss) income before minority interest		(8,633		)	2,675			2,109
Minority interest in (income) loss from RBG, LLC		(375		)	(1,326		)	721
Net (loss) income		(9,008		)	1,349			2,830
Change in fair value of interest rate swaps		—			—			2
Total comprehensive (loss) income		$	(9,008	)	$	1,349		$	2,832

 

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

3

---

Virgin River Casino Corporation
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2005, 2004 and 2003
(in thousands)

 

		2005			2004			2003
Cash flows from operating activities:
Net (loss) income		$	(9,008	)	$	1,349		$	2,830
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		9,827			7,115			7,142
Minority interest in income (loss) from RBG, LLC and Casablanca Resorts, LLC		375			1,326			(721		)
Change in fair value of interest rate swaps		(1,298		)	1,493			—
Loss on sale and disposal of assets		772			55			191
Gain on termination of capital lease		—			(1,279		)	—
Amortization of deferred financing fees		1,407			307			365
Accretion of senior subordinated notes		5,266			156			—
Interest on gaming equipment financing		327			—			—
Loss on early retirement of debt		—			596			—
Cost of vacation intervals sales		69			397			156
Change in operating assets and liabilities:
Accounts and related party and company receivables, net		541			433			396
Inventories		28			(55		)	(20		)
Prepaid expenses		(283		)	(74		)	(648		)
Accounts payable and accrued liabilities		3,798			1,054			97
Net cash provided by operating activities		11,821			12,873			9,788
Cash flows from investing activities:
Proceeds received from sale of assets		148			6			89
Capital expenditures		(9,551		)	(2,529		)	(2,609		)
Purchase price adjustment		(1,743		)	—			—
Decrease (increase) in notes receivable		777			237			(162		)
Net cash used in investing activities		(10,369		)	(2,286		)	(2,682		)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		2,673			2,405			628
Net proceeds from issuance of notes		—			3,402			—
Payment of gaming equipment financing		(774		)	(696		)	(998		)
Payment of long-term debt		(1,933		)	(11,687		)	(4,672		)
(Decrease) increase in bank overdraft		(932		)	216			275
Payment of obligations under capital lease		(18		)	(30		)	(30		)
Payment of financing fees		(571		)	(985		)	—
Change in other assets		193			(129		)	(82		)
Capital contributions		—			28			1,311
Distributions paid		(1,783		)	(881		)	(1,785		)
Net cash used in financing activities		(3,145		)	(8,357		)	(5,353		)
Net (decrease) increase in cash and cash equivalents		(1,693		)	2,230			1,753
Cash and cash equivalents at beginning of year		11,114			8,884			7,131
Cash and cash equivalents at end of year		$	9,421		$	11,114		$	8,884

 

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

4

---

Virgin River Casino Corporation
Consolidated Statements of Cash Flows (continued)
For the Years Ended December 31, 2005, 2004 and 2003
(in thousands)

 

		2005			2004			2003
Supplemental cash flow disclosure:
Cash paid for interest		$	6,588		$	6,742		$	7,436
Noncash operating activities:
Payment of accrued interest with proceeds from Buyout		$	—		$	226		$	—
Noncash investing and financing activities:
Acquisition of assets with long-term debt		$	—		$	144,296		$	—
Acquisition of assets with minority interest contribution		$	—		$	15,000		$	—
Acquisition of assets with contributed equity		$	—		$	1,021		$	—
Acquisition of assets with gaming financing		$	5,538		$	918		$	1,059
Distribution of property		$	—		$	851		$	—
Payment of financing fees with proceeds from Buyout		$	—		$	9,639		$	—
Payment of equity costs with proceeds from Buyout		$	—		$	274		$	—

 

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

5

---

Virgin River Casino Corporation
Consolidated Statements of Stockholder’s (Deficit) Equity
For the Years Ended December 31, 2005, 2004 and 2003
(in thousands)

 

		Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Comprehensive Loss			Deemed Distribution			Total Stockholder’s (Deficit) Equity
Balance, January 1, 2003		$	8,343		$	4,093		$	(5,320	)	$	—		$	7,116
Net income		—			2,830			—			—			2,830
Change in fair value of interest rate swaps		—			—			2			—			2
Shareholder contribution		1,311			—			—						1,311
Distributions		—			(1,785		)	—			—			(1,785		)
Balance, December 31, 2003		9,654			5,138			(5,318		)	—			9,474
Net income		—			1,349			—			—			1,349
Redemption of equity		(7,261		)	(8,169		)	—			—			(15,430		)
Capital contribution		1,049			—			—			—			1,049
Equity costs		(274		)	—			—			—			(274		)
Recognition of other comprehensive loss into earnings		—			—			5,318			—			5,318
Deemed Distribution		—			—			—			(20,672		)	(20,672		)
Distributions		—			(1,732		)	—			—			(1,732		)
Balance, December 31, 2004		3,168			(3,414		)	—			(20,672		)	(20,918		)
Net loss		—			(9,008		)	—			—			(9,008		)
Deemed distribution		—			—			—			(800		)	(800		)
Distribution		—			(1,783		)	—			—			(1,783		)
Balance, December 31, 2005		$	3,168		$	(14,205	)	$	—		$	(21,472	)	$	(32,509	)

 

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

6

---

Notes to Consolidated Financial Statements

Virgin River Casino Corporation

1.     Basis of Presentation and Background

The accompanying are the consolidated financial statements of Virgin River Casino Corporation, which includes the accounts of RBG, LLC (doing business as CasaBlanca Resort/Casino/Golf/Spa) and its wholly owned subsidiary Casablanca Resorts, LLC (doing business as Oasis Resort & Casino) (collectively the “Company”). Virgin River Casino Corporation (“VRCC”) owned 61.54% of RBG, LLC (“RBG”) and Casablanca Resorts, LLC (“Resorts LLC”) prior to December 20, 2004. Four siblings owned 100% of the shares of VRCC and owned 8.47% of the membership interests in RBG individually. Those same four siblings also owned 93.28% of B & B B, Inc. (doing business as Virgin River Hotel/Casino/Bingo) (“B&BB”). The Company and B&BB are collectively referred to as the Companies. The Companies are operated under common management. Significant intercompany items and transactions of the Company have been eliminated.

B&BB and VRCC are Nevada corporations formed on December 7, 1989 and July 1, 1988, respectively, for the purpose of owning and operating Virgin River Hotel/Casino/Bingo located in Mesquite, Nevada. The hotel portion of the facility commenced operations on June 1, 1990, and the casino portion commenced operations on September 1, 1990. The land and buildings are owned by VRCC and leased to B&BB. Certain personal property including furniture and fixtures, leasehold improvements within the casino, and gaming equipment are owned by B&BB.

On March 17, 1997, RBG, a Nevada limited-liability company, was formed pursuant to an operating agreement (the “Operating Agreement”) between Robert R. Black, Sr. (“Mr. Black”) and R. Black, Inc., a Nevada corporation, for the purpose of acquiring the assets of Player’s Island Resort (the “Resort”) in Mesquite, Nevada, currently operating as the CasaBlanca Resort/Casino/Golf/Spa. On March 18, 1997, pursuant to an asset purchase agreement between RBG and certain subsidiaries of Players International, Inc., RBG purchased the Resort for $30.5 million. The Operating Agreement provides for the net income (loss) of RBG to be allocated among the members in proportion to their respective interest in RBG. The Operating Agreement terminates on February 18, 2027.

On May 31, 2001, Resorts, LLC a Nevada limited-liability company, was formed pursuant to an operating agreement (“Agreement”) by RBG, as the sole member, for the purpose of acquiring the assets of Si Redd’s Oasis Resort Hotel and Casino in Mesquite, Nevada. On June 30, 2001, pursuant to an asset purchase agreement between Resorts LLC, WSR, Inc., William S. Redd and Marilyn S. Redd Family Trust U/T/D 4/23/93, William S. Redd Family Trust U/T/D 9/22/92, Redd 1996 Trust U/T/D 10/14/96, and Arvada Ranch Properties, LLC, Resorts LLC purchased Si Redd’s Oasis Resort Hotel and Casino for $31.7 million.

The Agreement provides for the net income (loss) of Resorts LLC to be allocated to members in proportion to their respective interest in Resorts LLC. The operating agreement terminates when any of the following items have occurred (1) all interests in the property acquired by Resorts LLC have been sold or disposed of or have been abandoned, or (2) in the event that Resorts LLC is bankrupt, a member withdraws or is expelled, the assignment by any member’s interest without the written consent of the remaining members, or the admission of a new member without the written consent of the remaining members to the continuation of Resorts LLC.

7

---

Notes to Consolidated Financial Statements

Virgin River Casino Corporation (cont’d)

1.     Basis of Presentation and Background (cont’d)

On December 20, 2004, the Companies entered into a series of transactions whereby they issued $125.0 million aggregate principal amount of Senior Secured Notes due 2012 and $66.0 million aggregate principal amount at maturity ($39.9 million in gross proceeds) of Senior Subordinated Notes due 2013, and received a $16.0 million equity contribution from Mr. Black and R. Black, Inc. The Companies used the proceeds from the above offering to purchase the interests held by certain affiliated and unaffiliated shareholders (collectively known as the “Buyout”) for $101.4 million pursuant to the Agreement for Purchase and Sale or Redemption of Equity Interests (“Agreement for Purchase of Equity Interests”) between James A. Black Gaming Properties Trust, Gary W. Black Gaming Properties Trust, Michael T. Black Gaming Properties Trust, Jorco, Inc., Marcus A. Hall, James Ritchie and Barry Moore as Sellers and Robert R. Black, VRCC, and B&BB as Purchasers (see Note 3). As a result of the Buyout, Mr. Black obtained the remaining 80.97% interest in B&BB and 75.0% interest in VRCC. VRCC along with R. Black, Inc. obtained 32.69% of the membership interest in RBG that was being purchased. The remaining proceeds were utilized to repay $64.0 million owed under the Credit Agreement and the $2.0 million promissory note payable to a selling shareholder (See Note 7). Five days prior to the Buyout, RBG terminated the lease with MDW (see Note 8 and 11) and the Companies disposed of certain assets (see Note 8). As a result of these transactions, Mr. Black and R. Black, Inc. control VRCC, RBG and B&BB. In addition, VRCC, RBG and B&BB are co-issuers on the Companies’ Senior Secured and Senior Subordinated Notes and all three entities are jointly managed and share resources (see Note 7).

2.     Summary of Significant Accounting Policies

Casino Revenue and Promotional Allowances—In accordance with industry practice, 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 (amounts in thousands):

 

 

The Company’s slot club program (the “One Card”) allows customers to redeem points earned from their gaming activity at any of the Companies’ properties for complimentary food, beverage, rooms, entertainment and merchandise. At the time redeemed, the retail value of complimentaries under the One Card 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 One Card is recorded in casino costs and expenses.

Vacation Interval Sales—The Company recognizes revenue on the sale of vacation intervals when a minimum of 10% of the sales price has been received in cash, collectibility of the receivable representing the remainder of the sales price is reasonably assured, and the Company has completed substantially all of the obligations with respect to any development related to the real estate sold.

8

---

Notes to Consolidated Financial Statements

Virgin River Casino Corporation (cont’d)

2.     Summary of Significant Accounting Policies (cont’d)

Cash and Cash Equivalents—The Company considers all highly liquid investments with purchased maturities of three months or less to be cash equivalents. Bank overdraft represents a negative cash balance that has been reclassified to current liabilities.

Related company receivables and payables—The Companies are under common management and ownership. Payroll and other operating expenses are shared and expensed to each entity as incurred. Related company receivables and payables represent amounts due from or due to B&BB for such expenses.

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

Property Held for Vacation Interval Sales—Property held for vacation interval sales includes the acquisition costs of the vacation intervals and renovations and the cost of land, development and construction of the vacation interval project. As intervals are sold, the cost of the interval and the estimated cost of renovations or the estimated total costs at completion for the project are charged ratably to cost of vacation interval sales. Interest on renovations or development and construction of vacation intervals is capitalized or charged to expense depending on the duration of the renovations.

Notes and Accounts Receivable—The Company’s notes receivables 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. Impairment is measured based on the fair value of the collateral. If the measurement of fair value is less than the Company’s recorded investment in the note receivable, the impairment is recognized by creating a specific allowance. Significant changes in the original assumptions of the measure of impairment are an adjustment to the specific allowance. The Company periodically reviews the relevant factors and the formula by which additions are made to the allowance for uncollectible notes receivable. The general allowance is provided based on a number of factors, including current economic trends, estimated collateral values, management’s assessment of credit risk inherent in the portfolio and historical loss experience.

The Company’s accounts receivable represent amounts due from patrons for gaming activities, hotel and other. Bad debt expense for notes and accounts receivable totaled $120,000, $285,000 and $237,000 during the years ended December 31, 2005, 2004 and 2003, 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 Companies Notes, approximates fair value primarily because of the short maturities of these instruments. The fair value on the Notes is based on quoted market prices.

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.

9

---

Notes to Consolidated Financial Statements

Virgin River Casino Corporation (cont’d)

2.     Summary of Significant Accounting Policies (cont’d)

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

 

 

The Company evaluates the carrying value for real estate inventories, including property held for vacation interval sales, in accordance with FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-lived Assets (“SFAS 144”). SFAS 144 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. Impairment write-downs are recorded to real estate inventories when indicators of impairment are present and the undiscounted cash flows estimated to be generated from those assets are less than the carrying amount of the assets. When an impairment write-down is required, the related assets are adjusted to their estimated fair value less costs to sell. The Company did not record any impairment losses during the years ended December 31, 2005, 2004 or 2003.

Income Taxes—VRCC has elected S Corporation status under the Internal Revenue Code. RBG and Resorts LLC are limited liability companies. 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.

Advertising Costs—Advertising costs incurred by the Company are expensed as incurred. Advertising costs were $5.0 million, $3.2 million and $3.3 million for the years ended December 31, 2005, 2004 and 2003, respectively.

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

Goodwill and Other Intangible Assets—Goodwill associated with the Buyout totaled $11.5 million at December 31, 2005. Other intangible assets, represent acquired customer lists, which is stated at cost net of accumulated amortization, and trademarks. Trademarks totaled $7.4 million at December 31, 2005. Customer lists totaled $12.3 million and $2.3 million as of December 31, 2005 and 2004, respectively. These costs, which during the year ended December 31, 2005 were amortized on a straight-line basis over three years, will be amortized on a straight-line basis over the assets’ revised estimated useful life of approximately seven years subsequent to December 31, 2005. Amortization expense was $753,000, $290,000 and $500,000 for the years ended December 31, 2005, 2004 and 2003, respectively. Future amortization expense of intangible assets is estimated to be approximately $2.3 million per annum.

The Company reviews intangible assets that are subject to amortization for impairment in accordance with SFAS 144. In accordance with SFAS 144, an impairment loss will be recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value. The Company did not record any impairment losses during the years ended December 31, 2005, 2004 or 2003.  After an impairment loss is recognized, the adjusted carrying amount of the intangible asset becomes the new accounting basis.

10

---

Notes to Consolidated Financial Statements

Virgin River Casino Corporation (cont’d)

2.     Summary of Significant Accounting Policies (cont’d)

Debt Guarantee—In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. FIN No. 45 elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued, and requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. A conclusion reached by the FASB in this Interpretation is the exclusion from the liability recognition provisions of guarantees issued between entities under common control or parent or subsidiary guarantees of third-party debt on behalf of that parent or subsidiary. Such guarantees, however, are not excluded from the enhanced disclosure provisions. The disclosure provisions have been reflected in the accompanying consolidated financial statements and footnotes.

Interest Rate Swaps—The Companies, from time to time, use interest rate swaps and similar financial instruments to assist in managing interest incurred on its long-term debt. The difference between amounts received and amounts paid under such agreements, as well as any costs or fees, is recorded as a reduction of, or addition to, interest expense as incurred over the life of the swap or similar financial instrument. The Companies account for interest rate swap agreements in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and its corresponding amendments under SFAS 138 and SFAS 149. SFAS 133 requires the Companies to measure every derivative instrument (including certain derivative instruments embedded in other contracts) at fair value and record them in the balance sheet as either an asset or liability. Changes in fair value of derivatives are recorded currently in earnings as a change in fair value of the swap unless special hedge accounting criteria are met whereby the change is recorded as a component of other comprehensive income. The Companies previously designated the interest rate swaps as cash flow hedges and, accordingly, the effective portions of changes in the fair value of the interest rate swaps are reported in other comprehensive income. Any ineffective portions of hedges are recognized in earnings in the current period. During the year ended December 31, 2004, the Companies’ cash flow hedge became ineffective and, accordingly, the change in fair value is being accounted for in earnings on the consolidated statements of operations for the years ending December 31, 2005 and 2004.

Use of Estimates—The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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.

Players Club Liability—The Company adopted the consensus provisions of EITF 00-22—”Accounting for Points and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future.” EITF 00-22 requires that the redemption of points, such as points earned in slot players clubs, be recorded as a reduction of revenue.

Although the consensus reached in EITF 00-22 applies to a redemption of points for cash as opposed to a redemption of points for free products and services, management believes the premise of EITF 00-22 applies to the Company’s slot club program, which provides for the redemption of points for only free products and services (and not for cash). The Company’s One Card player card allows customers to redeem points earned from their gaming activity at all the Companies’ properties for complimentary food, beverage, rooms, entertainment and merchandise. At the time redeemed, the retail value of complimentaries is recorded as revenue with a corresponding offsetting amount included in promotional

11

---

Notes to Consolidated Financial Statements

Virgin River Casino Corporation (cont’d)

2.     Summary of Significant Accounting Policies (cont’d)

allowances. 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 One Card.

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 twelve-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.

Segment Information—It is management’s belief that the Company’s operations are part of a single segment which is the casino and hotel business and related amenities. The Company believes that it meets the “economic similarity” criteria established by SFAS No. 131, and as a result, the Company aggregates all of its properties into one operating segment. All of our properties offer the similar products, cater to the same customer base, are all located in the Mesquite, Nevada, area, have the same regulatory and tax structure, share the same marketing techniques and are all directed by a centralized management structure. In addition, management believes that all of its ancillary operations such as golf course operations, spa, timeshare and other amenities are in place to increase and enhance the casino and hotel business.

Recently Issued Accounting Standards—In 2003, the FASB issued Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable Interest Entities.” The objective of FIN 46R is to improve financial reporting by companies involved with variable interest entities. FIN 46R changes certain consolidation requirements by requiring a variable interest entity to be consolidated by a company that is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The Company has determined that the variable interest entity it holds an investment in at December 31, 2005 does not require consolidation under the provisions of FIN 46R as the Company is not subject to a majority of the risk of loss or entitled to receive a majority of the variable interest entity’s residual returns.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. On October 29, 2003, the FASB voted to defer for an indefinite period the application of the guidance in SFAS No. 150 to non-controlling interests that are classified as equity in the financial statements of the subsidiary but would be classified as a liability in the parent’s financial statements under SFAS No. 150. The FASB decided to defer the application of SFAS No. 150 to these non-controlling interests until it could consider some of the resulting implementation issues associated with the measurement and recognition guidance for these non-controlling interests. The Company currently has no instruments impacted by the adoption of this statement and, therefore, the adoption did not have a significant impact on our results of operations or financial position.

 

12

Notes to Consolidated Financial Statements

Virgin River Casino Corporation (cont’d)

2.             Summary of Significant Accounting Policies (cont’d)

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs.” The statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is currently evaluating the provisions of SFAS No. 151 to determine its impact on its future financial statements.

In December 2004, the FASB issued SFAS 152, “Accounting for Real Estate Time-Sharing Transactions.” SFAS 152 amends existing accounting guidance to reference the financial accounting and reporting guidance for real estate time-sharing transactions provided in AICPA Statement of Position 04-02, “Accounting for Real Estate Time-Sharing Transactions.” SFAS 152 is effective for our financial statements issued after January 1, 2006. The new accounting guidance requires, among other things, that costs incurred to sell timeshare units generally be charged to expense as incurred, including marketing expenses. The new standard will also require a change in the classification of certain items currently reported as expenses, requiring these items to be reflected as reductions of revenue. The Company is in the process of evaluating the impact of SFAS 152; however, the impact to reported revenue and net income is not expected to be significant.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets.” This statement is based on the principle that exchanges of nonmonetary assets should be measured based on fair value of the assets exchanged. This statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company is currently evaluating the provisions of SFAS No. 153 to determine its impact on our future financial statements.

3.             Purchase of Equity Interests

On December 20, 2004, pursuant to the Agreement for Purchase of Equity Interests described in Note 1, Mr. Black and R. Black, Inc. acquired certain interests in B&BB, VRCC and RBG for $101.4 million. During the year ended December 31, 2005, the Company paid an additional $1.8 million to the previous owners pursuant to the Agreement for Purchase of Equity Interests. In addition, the Companies incurred approximately $10.6 million in capitalized deferred financing fees related to the issuance of the Notes, $9.2 million of which was incurred by the Company of which $7.9 million is recorded in the accompanying consolidated balance sheet at December 31, 2005. The Company also incurred $274,000 in costs associated with the Agreement for Purchase of Equity Interests which were charged to equity in the accompanying consolidated balance sheet. Management originally valued the assets acquired in the transaction as follows. Current assets and liabilities were recorded at book value, which approximated their estimated market values at the date of acquisition. Land, buildings and building improvements were valued based upon comparable values of recent sales in the Mesquite, Nevada market and 3rd party market valuations of comparable assets in Mesquite, Nevada. For equipment, management recorded these assets at book value, which was deemed to be fair value, considering the relative age and working condition of the equipment. Intangible assets, representing the Companies’ customer list and slot club program, were recorded at fair value, which was calculated based upon comparable customer lists and slot programs with other casinos operating in the Las Vegas and surrounding market. In accordance with the provisions of SFAS No. 141, the remainder of the purchase price was allocated to goodwill. Management believes that the goodwill arose from the Companies’ dominance in and the growing Mesquite, Nevada market, the value of the existing workforce and existing accounting and operating infrastructure.

13

---

 

Notes to Consolidated Financial Statements

Virgin River Casino Corporation (cont’d)

3.             Purchase of Equity Interests (cont’d)

Subsequent to management’s initial valuation, a third-party business valuation was obtained in the fourth quarter of 2005. Based upon the independent valuation, a final allocation of the purchase price was prepared.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed by the Companies at the date of acquisition based upon the final valuation.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed related to the Company at the date of acquisition based upon the final valuation.

 

14

---

Notes to Consolidated Financial Statements

Virgin River Casino Corporation (cont’d)

3.             Purchase of Equity Interests (cont’d)

The following unaudited pro forma combined financial information for the Company has been prepared assuming the Buyout occurred on January 1, 2004 and 2003, respectively (in thousands):

		Year Ended December 31, 2004			Year Ended December 31, 2003
Net revenues		$	116,700		$	108,869
Income from operations		$	8,765		$	7,683
Net loss		$	(10,869	)	$	(12,719	)

 

4.             Property and Equipment

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

 

The Company owns the Virgin River Convention Center which is opened as needed during the year to provide additional rooms for the Company’s operations. As of December 31, 2005 and 2004, these assets are reported in the accompanying consolidated balance sheets at $5.3 million and $5.6 million, net of accumulated depreciation, respectively.

5.             Notes Receivable

Notes receivable consist of the following (in thousands):

 

Notes generated from the sale of vacation intervals generally bear interest at annual rates ranging from 12.75% to 14.75% and have terms of 5 to 7 years. The vacation interval notes receivable are collateralized by the right to use and deeds of trust on the vacation interval sold and serve as collateral to the Hypothecation Note (see Note 7).

15

---

Notes to Consolidated Financial Statements

Virgin River Casino Corporation (cont’d)

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 less than one year to up to three years without interest. In the event that an agreement with a gaming manufacturer extends past a year, the Company will impute interest at a rate of 8%.

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

 

		December 31,
		2005			2004
Gaming equipment financing to purchase 205 games, no payments for one year and monthly payments of $106 for 24 months beginning February 2006		$	2,320		$	—
Gaming equipment financing to purchase 68 games, no payments for one year and monthly payments of $43 for 24 months beginning January 2006		945			—
Gaming equipment financing to purchase 70 games, no payments for one year and monthly payments of $39 for 24 months beginning March 2006		838			—
Gaming equipment financing to purchase 60 games, monthly payments of $20 for 36 months beginning April 2005		513			—
Gaming equipment financing to purchase 64 games, no payments for one year and monthly payments of $26 for 24 months beginning February 2006		577			—
Gaming equipment financing to purchase 38 games, monthly payments of $13 for 36 months beginning April 2005		312			—
Gaming equipment financing to purchase 20 games, no payments for one year and monthly payments of $8 for 24 months beginning January 2006		174			189
Gaming equipment financing. monthly payments of $3 for 36 months beginning January 2005		59			—
Gaming equipment financing with terms of less than 12 months		96			582
		5,834			771
Less: current portion		(2,528		)	(582		)
Gaming equipment financing, long-term portion		$	3,306		$	189

 

Maturities of gaming equipment financing are as follows (in thousands):

 

Years ending December 31:
2006		$	2,528
2007		2,932
2008		423
		5,883
Less debt discount		(49		)
		$	5,834

 

16

---

Notes to Consolidated Financial Statements

Virgin River Casino Corporation (cont’d)

7.             Long-term Debt

Long-term debt consists of the following (in thousands):

 

		December 31,
		2005			2004
Revolving credit facility totaling $15 million with Wells Fargo Foothill at a margin above prime or LIBOR, as defined; collateralized by substantially all assets of the Companies as defined		$	2,000		$	—
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 increase accreted value until January 15, 2009. Beginning January 15, 2009, interest payable semiannually, principal due January 15, 2013, callable January 15, 2009		45,333			40,068
Promissory note payable to Wells Fargo Equipment Finance, Inc. payable in monthly installments of $37 at an interest rate of 6.97%, due June 2006		363			757
Promissory note payable to Wells Fargo Equipment Finance, Inc. payable in monthly installments of $24 at an interest rate of 7.00%, due November 2005		—			251
Hypothecation Note at prime plus 3.0% (10.25 at December 31, 2005), collateralized by certain notes receivable as defined; guaranteed by one of the Initial Members, due April 2004		94			572
Promissory note payable to Wells Fargo Equipment Finance, Inc. payable in monthly installments of $14 at an interest rate of 6.21%, due December 2006		157			293
		172,947			166,941
Less—current portion		(614		)	(1,353		)
Total long-term debt		$	172,333		$	165,588

 

Maturities of long-term debt are as follows (in thousands):

 

Years ending December 31:
2006		$	614
2007		—
2008		2,000
2009		—
2010		—
Thereafter		191,000
		193,614
Less debt discount		(20,667		)
		$	172,947

 

New Revolving Facility

Concurrent with the Buyout, the Companies entered into a four-year $15.0 million senior secured credit facility (“Foothill Facility”) on December 20, 2004 with Wells Fargo Foothill, Inc. that matures in December 2008. The Foothill Facility is secured by substantially all the assets of the Companies. During the life of the Foothill Facility, the Companies 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. At December 31, 2005, the Bank Product Reserve was approximately $202,000 and is based on the fair market value at December 31, 2005 of the interest rate

17

---

Notes to Consolidated Financial Statements

Virgin River Casino Corporation (cont’d)

7.             Long-term Debt (cont’d)

swap owed to Wells Fargo Foothill, Inc. Accordingly, the availability under the Foothill Facility at December 31, 2005 was limited to $12.8 million as $2.0 million was drawn as of December 31, 2005.

Under the terms of the Foothill Facility, interest accrues on the outstanding principal balance at LIBOR plus the LIBOR Rate Margin, which is 3.5%, or the Base Rate, as defined, plus the Base Rate Margin, which is 2%. LIBOR was approximately 4.8 % and prime was 7.25% at December 31, 2005. The Foothill Facility also contains certain financial and other covenants. These include a minimum trailing twelve-month Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) of $15,000,000 for the Companies and limitations on other indebtedness and capital expenditures, as defined.

As part of the costs of entering into the Foothill Facility, the Companies incurred approximately $0.5 million of deferred financing fees, all of which is recorded on the Company’s consolidated balance sheet at December 31, 2005, that will be amortized over the life of the facility on a straight-line basis, which approximates the effective-interest method.

Senior Secured and Senior Subordinated Notes

In December 2004, as part of the Buyout, the VRCC, RBG and B&BB (the “Issuers”) issued $125.0 million of 9% senior secured notes (“Senior Notes”) due on January 15, 2012 and $39.9 million in gross proceeds of 12¾% senior subordinated notes (“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. Although the Notes are joint and several obligations of the Issuers, the allocation of the balance of the Notes to the individual balance sheets of B&BB, VRCC and RBG was according to the flow of funds at the date of the Buyout with the proceeds of the Senior Notes necessary to purchase the interests of B&BB recorded on the balance sheet of B&BB and the remaining proceeds of the Senior Notes and Senior Sub Notes recorded on the consolidated balance sheet of VRCC. The consolidated balance sheet of the Company reflects the full obligation of the Notes at December 31, 2005 with the amount recorded on the balance sheet of B&BB recognized as a deemed distribution to reflect the net obligation of the Notes recorded on the consolidated balance sheet of the Company at December 31, 2005. At December 31, 2005 and 2004, the net amount of the Notes recorded on the Company’s consolidated balance sheet is $149.7 million and $144.5 million, respectively.

The Senior Notes pay interest semiannually while the Senior Sub Notes accrue interest in the form of increased accreted value until January 15, 2009, when the carrying book value of the Senior Sub Notes will be $66.0 million. At that point the Senior Sub Notes will pay interest semiannually on the same dates as the Senior Notes.

The indentures (the “Indentures”) governing the Companies’ Notes contain certain customary financial and other covenants, which limit the Companies’ ability to incur additional debt. The Indentures provide that the Companies 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 December 31, 2005, the Companies have a Consolidated Coverage Ratio of 1.18 to 1.00 and have incurred $0 of 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

18

---

Notes to Consolidated Financial Statements

Virgin River Casino Corporation (cont’d)

7.             Long-term Debt (cont’d)

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 December 31, 2005.

The Senior Notes are secured by substantially all existing and future assets of the Issuers and the Guarantors, as defined, as well as the equity interest of the Guarantors, the equity interests of the Acquiring Shareholder and his Affiliate in the Issuers. The Guarantors are all the wholly owned subsidiaries of the Issuers. The Senior Notes are subordinated to the security interests of the Foothill Facility. The Senior Sub Notes are subordinate to the Senior Notes and all other indebtedness of the Companies.

As part of the costs of issuing the Notes, the Companies incurred approximately $10.6 million in deferred financing fees, of which $9.2 million was incurred by the Company. Within the $10.6 million in deferred financing fees is $7.7 million in underwriter fees associated with the Notes. These costs are being amortized over the life of the Notes on a straight-line basis, which approximates the effective-interest method.

Old Revolving Facility

On June 28, 2001, the Companies entered into a Credit Agreement (“Original Credit Agreement”) with Bank of America, N.A., Wells Fargo Bank, N.A. and U.S. Bank, N.A (the “Bank Group”). Proceeds from the Original Credit Agreement were used to refinance the existing debt of B&BB, VRCC and RBG and to purchase the assets of Si Redd’s Oasis Resort Hotel and Casino. Under the terms of the Original Credit Agreement, the Companies had the ability to borrow up to $80 million. Similar to the Notes, B&BB, VRCC and RBG were jointly obligated under the Original Credit Agreement. The allocation of the balance of the Original Credit Agreement to the individual balance sheets of B&BB, VRCC and RBG

19

---

Notes to Consolidated Financial Statements

Virgin River Casino Corporation (cont’d)

7.             Long-term Debt (cont’d)

was based on amounts utilized from the Original Credit Agreement to refinance the existing debt of B&BB, VRCC and RBG and purchase Si Redd’s Oasis Resort Hotel and Casino.

Under the terms of the Original Credit Agreement, interest accrued on the outstanding principal balance on the Original Credit Agreement at the Base Rate, defined as the lower of prime or federal funds rate plus fifty basis points, plus the Applicable Margin, as defined, or LIBOR Rate, as defined, plus the Applicable Margin, as defined. The Original Credit Agreement also contained certain financial and other covenants. These include a Leverage Ratio, as defined, an Adjusted Fixed Charge Ratio, as defined, of no less than 1.25 to 1.00 and commencing June 30, 2002, a minimum trailing twelve-month Adjusted EBITDA, as defined, of no less than $23.0 million. The Original Credit Agreement also contained limitations on incurrence of additional indebtedness, limitation on distributions and minimum and maximum levels of capital expenditures.

As of December 31, 2002, the Companies were not in compliance with certain covenants as specified in the Original Credit Agreement, as amended as of such date. As a result of this non-compliance, the Companies entered into the second amendment (Second Amendment) to the Credit Agreement dated March 31, 2003 which provided the following:

1)  One-time waiver of the Companies non-compliance with certain covenants as of December 31, 2002;

2)  Amended the minimum trailing twelve-month Adjusted EBITDA requirement to $19.5 million commencing March 31, 2003 and $23.0 million commencing June 30, 2004 to the termination of the Original Credit Agreement.

The Original Credit Agreement, as amended, is referred to as the Credit Agreement. As of March 31, 2004 and December 31, 2003, the Companies were not in compliance with the Adjusted Fixed Charge Coverage Ratio and the minimum trailing twelve-month Adjusted EBITDA along with the Leverage Ratio at December 31, 2003 and March 31, 2004 as specified in the Credit Agreement, among other financial covenant violations. On July 6, 2004, the Companies entered into a Forbearance Agreement with the Bank Group whereby the Bank Group agreed to forbear exercising their legal remedies under the Credit Agreement by reason of technical default while the Credit Agreement was renegotiated. On November 4, 2004, the Companies renegotiated the Credit Agreement with the Bank Group which waived all past covenant violations and extended the maturity date to June 2006.

Proceeds from the Buyout were used to repay the $64.0 million still owed on the Credit Agreement at December 20, 2004. As a result of repaying the Credit Agreement, the Companies recorded a loss on early retirement of debt of approximately $596,000 which represents unamortized deferred financing fees that were written off. All of the loss was recorded on the consolidated statements of operations of the Company.

Interest Rate Swaps

During 2001, as part of entering into the Original Credit Agreement, the Companies entered into two interest-rate swaps, each with notional amounts equal to $28.0 million (the “Swaps”), to reduce Companies’ exposure to changes in interest rates. The Swaps effectively converted $56.0 million of the

20

---

Notes to Consolidated Financial Statements

Virgin River Casino Corporation (cont’d)

7.             Long-term Debt (cont’d)

Companies’ floating rate debt to a fixed rate. The Swaps became effective on June 29, 2001 and terminate on June 30, 2006. The Companies paid a fixed rate of 5.88% on the Swaps, which was priced to assume no value at inception.

The Swaps are accounted for under the guidance of SFAS No. 133, “Accounting for Derivative Instruments in Hedging Activities.” Since the notional amount of the Swaps was always to be less than the principal amount of the debt, and the interest periods and interest rates were the same on both the swap and the debt, there was to be no ineffectiveness in the swap. Based on these assumptions, the Swaps qualified as hedge instruments and met the requirements under SFAS No. 133 to be accounted for as a cash flow hedge. As a result, the change in fair market value of the Swaps during the year ended December 31, 2003 is recorded as a comprehensive loss in the accompanying consolidated statements of operations and comprehensive (loss) income.

Given the Companies’ noncompliance with the terms of the Credit Agreement and subsequently as a result of the Buyout, during the year ended December 31, 2004, the Swaps lost their effectiveness and the ability to qualify as a hedge instrument. Accordingly, for the years ended December 31, 2005 and 2004, the change in fair value of the Swaps was accounted for as income to current earnings. Specifically, for the year ended December 31, 2004, the Companies recorded a loss relating to the change in the fair value of the Swaps totaling $1.5 million, which was equal to the write-off of the cumulative comprehensive loss of $5.3 million, net of the current year increase in fair value of the Swaps of $3.8 million. The total amount of the loss was recorded in the accompanying consolidated statement of operations of the Company. As of December 31, 2005, the Companies have no plans of reestablishing the Swaps as hedges. The fair value of the Swaps at December 31, 2005 was $0.2 million and is included in the accompanying consolidated balance sheet. The notional amount of the Swaps at December 31, 2005 was $33.6 million.

Similar to the Notes, B&BB, VRCC and RBG are jointly obligated under the Swaps. The allocation of the balance of the Swaps to the individual balance sheets of B&BB, VRCC and RBG was based on original allocation of the balance of the Original Credit Agreement. The consolidated balance sheet of the Company reflects the full obligation of the Swaps at December 31, 2005 and 2004.

Other Indebtedness

During 2002, B&BB, RBG and Resorts LLC entered into separate promissory notes with Wells Fargo Equipment Finance, Inc. totaling approximately $2.3 million to finance the acquisition of a player tracking system for each of the casinos. Each of the notes is separately guaranteed by B&BB, VRCC, RBG and Resorts LLC.

During 2002, Resorts LLC entered into a promissory note for approximately $574,000 with Wells Fargo Equipment Finance, Inc. to finance the acquisition of laundry equipment. The promissory note is guaranteed by B&BB, VRCC and RBG.

During 2001, RBG and Resorts LLC entered into a promissory note for approximately $1 million with Wells Fargo Equipment Finance, Inc. to finance the acquisition of golf course maintenance equipment. The promissory note is guaranteed by B&BB and VRCC.

RBG has a financing commitment, dated April 2, 1998 for up to $10 million under a Hypothecation Note (the Hypothecation Note) with Equivest Capital, Inc. f/k/a Resort Funding, Inc. whereby RBG may borrow against notes receivable pledged as collateral (see Note 5). On December 24, 2003, RBG amended

21

---

Notes to Consolidated Financial Statements

Virgin River Casino Corporation (cont’d)

7.             Long-term Debt (cont’d)

the Hypothecation Note extending the maturity date until April 2, 2004 to allow time for a new financing commitment to be entered into by RBG and Resorts LLC; however, as of December 31, 2005, no new commitment is in place.

The estimated fair value of the Senior Notes was $127.5 million and for the Senior Sub Notes was $45.4 million and $41.3 million, respectively, at December 31, 2005 and 2004. 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.

8.             Related Party Transactions

Wingnuts, Inc. is a company that owns an airplane used by the Company. Wingnuts, Inc. is owned by the Mr. Black along with various former shareholders of the Companies. Wingnuts, Inc. charges the Company for business usage of the airplane using hourly rates for actual air time. Total charges for the years ended December 31, 2005, 2004 and 2003 were $0, $46,000 and $38,000, respectively.

MJB Development is a real estate construction company owned by a former shareholder of the Companies which provided construction services associated with hotel facilities of the Company. When performing construction services, the actual costs of construction, overhead charges, and a profit are charged to the Company. In addition to construction services, MJB Development has also leased containers for storage to the Company. Total charges for construction and leasing of storage containers totaled $2,000, $23,000, and $94,000 during the years ended December 31, 2005, 2004 and 2003, respectively, and are included in the accompanying consolidated statements of operations. In addition, during the year ended December 31, 2005, the Company paid MJB Development $68,000 to purchase previously leased storage containers.

MDW is a Nevada limited-liability company in which Mr. Black has an interest. MDW owns a condominium complex located in Mesquite, Nevada. The Company had entered into a lease agreement with MDW whereby MDW gave the members of the CasaBlanca Vacation Club (the timeshare club

22

---

Notes to Consolidated Financial Statements

Virgin River Casino Corporation (cont’d)

8.             Related Party Transactions (cont’d)

associated with the CasaBlanca) the right to use and occupy the timeshare units located on the leasehold property. The remaining units at the condominium complex were utilized by the CasaBlanca for hotel and apartment purposes. On December 15, 2004, pursuant to a termination agreement, the Company terminated its lease with MDW. The rent payments paid by the Company to MDW during the years ended December 31, 2005, 2004, and 2003 were $0, $739,000, and $734,000, respectively, and are included in the consolidated statements of operations. The Company recorded approximately $0.9 million in other income related to the condominium sales during the year ended December 31, 2005. In addition, pursuant to the lease termination agreement, the Company owes MDW $16,000 at December 31, 2005.

Virgin River Foodmart, Inc., a Nevada corporation, (“Foodmart”) is owned by Mr. Black and former shareholders of VRCC. Pursuant to a lease agreement dated November 1996, VRCC leased to Foodmart certain real property and the structures and improvements contained thereon for the purposes of operating the Virgin River Food Mart. The term of the lease was for 30 years at approximately $18,500 a month with Foodmart having the option to extend the lease for two additional ten year periods. Pursuant to the Buyout, the real property, structures and improvements previously leased to Foodmart were not acquired by Mr. Black, but were distributed to the shareholders of VRCC; therefore the lease between VRCC and Foodmart was terminated. Lease payments made to VRCC were $0, $222,000 and $222,000 for the years ended December 31, 2005, 2004 and 2003 and are included in the accompanying consolidated statements of operations.

In addition, participants in the Company’s slot club program are able to redeem their points for gasoline at the Foodmart. Foodmart charges the Company the retail amount of gas purchased with player points. For the years ended December 31, 2005, 2004 and 2003, Foodmart has charged the Company $113,000, $150,000 and $159,000, respectively, for gasoline purchased with points from the Company’s slot club program.

Black, LoBello & Pitegoff is a law firm managed by the daughter of Mr. Black. The Company retains Black, LoBello & Pitegoff as outside legal counsel, and Black, LoBello & Pitegoff has received legal fees for legal services in the amount of $112,000, $153,000 and $127,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

Pursuant to the Indenture, Mr. Black is entitled to a management fee for his management of the Companies of up to 5% of EBITDA, as defined. The Company has expensed and recorded a liability of $0.8 million as of December 31, 2005. In addition, Mr. Black received management fees totaling $5,000 for the year ended December 31, 2003.

Gaming Research is a consulting firm retained to perform marketing research for the Company. The principal of Gaming Research is the father of the Company’s chief operating officer. Gaming research received consulting fees of $70,000 for the year ended December 31, 2005.

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 is a receivable for $95,000 and $213,000 related to amounts owed for those services as of December 31, 2005 and 2004, respectively.

23

 

Notes to Consolidated Financial Statements

Virgin River Casino Corporation (cont’d)

9.             401(k) Plan

The Companies implemented 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. 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’s portion of the Companies’ matching contributions for the years ended December 31, 2005, 2004 and 2003 was $183,000, $182,000 and $222,000, respectively.

10.          Rental revenue

In 1990, the Company, as lessor, entered into a lease with B&BB for the land and building that currently contain the Virgin River Hotel/Casino/Bingo operations. The lease has a term of 30 years, ending in May 2020, with the ability to extend the lease for two ten year periods at the option of B&BB. The lease provides for monthly payments of $525,000 through May 2020. Annually during the renewal period, the monthly lease payments shall increase based on the change in the consumer price index.

In 1990, the Company entered into a lease agreement, which was last amended in April 1995, with Westates Theater, Inc. to lease and operate theaters at the Virgin River Hotel/Casino/Bingo. The term of the lease is for 15 years from the last amendment date. The lease calls for monthly lease payments, which currently approximate $10,600, in addition to a percentage rent that is calculated annually based on 7% of gross revenue from the theater operation in excess of $800,000. Annually the monthly lease payment shall increase based on the change in the consumer price index.

In 2001, the Company entered into a lease agreement with McDonald’s Corporation (McDonald’s) for certain real property located adjacent to the Virgin River Foodmart for the purpose of operating a restaurant. The term of the lease was for 20 years with the annual lease beginning at $50,000 and escalating to $76,000 at the end of the original lease term with McDonald’s holding an option to extend the lease for four successive periods of 5 years each. Pursuant to the Buyout, the real property leased to McDonald’s was not acquired by Mr. Black, but were distributed to the shareholders of VRCC; therefore the lease between VRCC and McDonald’s was terminated.

Future minimum lease payments under operating leases for the five years subsequent to December 31, 2005 are as follows (in thousands):

 

Years ending December 31:
2006		$		6,427
2007		6,427
2008		6,427
2009		6,427
2010		6,332
Thereafter		59,325
		$	91,365

24

---

Notes to Consolidated Financial Statements

Virgin River Casino Corporation (cont’d)

11.          Commitments and Contingencies

Capital Leases—During 2001, Resorts LLC signed a lease agreement with Textron Financial Corporation to lease golf carts for the Palms golf course over a four-year period beginning December 2001. The aggregate monthly payments, including interest and taxes are $2,442 a month. This lease terminated during the year ended December 31, 2005.

During 1997, RBG signed a lease agreement with MDW Mesquite, LLC (“MDW”) for the use of their condominium complex, to be used to sell Vacation Intervals, for a period of fifty years. Mr. Black is a member of MDW. The obligation under this capital lease provides for aggregate monthly payments, including interest and taxes of $49,800 determined using an interest rate of 9.25%. On January 5, 1999, the lease agreement was amended to provide for additional monthly rental payments of $12,750 to MDW Mesquite, LLC.

Effective December 15, 2004, RBG and MDW terminated their lease agreement. Pursuant to the agreement, the rental units under the original lease agreement would be converted to condominiums to be offered for sale. In total, 197 condominiums will be offered for sale for approximately $44,000 to $69,000 a unit, depending on the size of the unit. Mr. Black will receive 6% of the net sales proceeds from the sale of the condominium units, as defined (the “fee”). MDW also will convey to RBG three timeshare units. During the sales process, MDW and RBG will share equally the rental income from the remaining rental units pending their sale (“rental income”) and share equally the expenses of the condominium project, including debt service and the fee (“project expenses”). MDW also will pay RBG 44% of the net sales proceeds from the sale of the condominium units less the fair market value of the three timeshare units conveyed to RBG. RBG advanced project expenses for a six-month period beginning on December 15, 2004 to the extent MDW did not have sufficient funds to pay the project expenses, provided, however, that the aggregate amount of the advances would not exceed $150,000. Until the aggregate amount of any such advances plus an additional payment of approximately 15% of the aggregate amount of such advances is repaid to RBG, all net sales proceeds and rental income would be payable to RBG. The Company recorded approximately $0.9 million in other income related to the condominium sales during the year ended December 31, 2005. In addition, pursuant to the lease termination agreement, Management has determined under the provisions of FIN 46R that they are not the primary beneficiary of MDW and accordingly have not consolidated MDW in these consolidated financial statements. As of December 31, 2005, MDW had total assets of $1.0 million (unaudited), liabilities of $10,000 (unaudited) and members’ equity of $0.9 million (unaudited). Under the terms of the MDW, LLC operating agreement and lease termination agreement, management believes that Mr. Black does not have the ability to exercise control or significant influence over the operations of MDW and accordingly the Company recorded a gain relating to the lease termination of approximately $1.3 million in the accompanying consolidated financial statements for the year ended December 31, 2004.

Operating Leases—

In October 2005, the Companies entered into an agreement with Wells Fargo Financial Leasing to lease golf maintenance equipment totaling approximately $1.3 million. The term of the lease is 36 months at a rate of $29,000 per month.

In May 2005, the Companies entered into a lease arrangement with Dell Financial Services to lease desktop computers and servers. The term of the lease is 18 months at a rate of approximately $29,000 a month. The lease also provides for a renewal period of an additional 18 months at approximately $6,000 a month.

25

---

Notes to Consolidated Financial Statements

Virgin River Casino Corporation (cont’d)

11.          Commitments and Contingencies (cont’d)

During 2003, RBG signed a lease agreement with Wells Fargo Equipment Finance to lease golf carts for the Resort golf course over a three-year period beginning November 2003. The aggregate monthly payments, including interest and taxes are $5,500 a month.

During 2002, RBG signed a lease agreement with IBM Credit LLC to lease computer hardware for the Companies over a three-year period beginning January 2002. The aggregate monthly payments, including interest and taxes are $9,100 a month.

As part of the acquisition of the Oasis Resort Hotel and Casino, Resorts LLC has been assigned the rights to an agreement to lease the land which contains a portion of the golf course of the Oasis Casino and Hotel from the state of Arizona. The lease agreement is for a term of ten years that began in May 1998 at an annual rate of $26,650 and increases every year until the last year of the lease when the annual lease rate is $135,750.

As part of the acquisition of the Resort, RBG has been assigned the rights to an agreement to lease the land and water rights which contain the golf course of the Resort. 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 5 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 December 31, 2005 are as follows (in thousands): Years ending December 31:

 

 

Rent expense for the years ended December 31, 2005, 2004 and 2003 were $1.1 million, $1.1 million and $1.2 million, respectively.

Workmans’ Compensation Claim—In February 2004, an employee of Resorts LLC was killed while performing maintenance work on the Palms Golf Course. As a result of the death, the Company has recorded a liability as of December 31, 2005 of $116,000, which represents the Company’s obligation to the family of the deceased under their workmans’ compensation policy and the workmans’ compensation laws of the State of Nevada.

Litigation—From time to time the Company is party to various legal proceedings, most of which relate to routine matters incidental to the business. Management does not believe that the outcome of such proceedings will have a material adverse effect on the Company’s consolidated financial position, cash flows or results of operations.

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

26

---

Notes to Consolidated Financial Statements

Virgin River Casino Corporation (cont’d)

11.          Commitments and Contingencies (cont’d)

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. As of December 31, 2005 and 2004, respectively, no costs were incurred in connection with this matter.

Purchasing Commitments—In September 2005, the Companies entered into an agreement with Agilysys NV, LLC to purchase a new property management IT system for the three properties. Implementation is expected to begin in December 2005 with a completion date expected to occur before the end of the second quarter 2006. The estimated cost of this project is approximately $1.7 million.

In September 2005, the Companies entered into an agreement with Infinium Software, Inc. to purchase a new financial management IT system. Implementation is expected to begin in December 2005 with an completion date expected to occur before the end of the second quarter in 2006. The estimated cost of this project is approximately $615,000.

12.          Subsequent Events (Unaudited)

In January 2006, Oasis Interval Ownership, LLC entered into an agreement with Global Exchange Development Corp. to sell substantially all of the unsold time share intervals at the Oasis Hotel and Casino. The sale is expected to close in three separate closings each involving approximately one-third of the unsold time share intervals at the Oasis Hotel and Casino. Each close is expected to occur within 6 months of the preceding close. Within each close, Global Exchange Development Corp. will pay 20% of the purchase price in cash and execute a note for the remaining 80% of the purchase price. Each note will be due one year from issuance and provide an interest rate equivalent to the federal rate for short term notes. The first closing occurred in January 2006 for $280,000. As part of the close, Global Exchange Development Corp. executed a note payable to Oasis Interval Ownership, LLC in the amount of $224,000 due January 2007 at an interest rate of 4.38%.

13.          Selected Quarterly Financial Data (Unaudited)

Selected quarter financial data (unaudited) for the year ended December 31, 2005 is as follows:

 

 

Selected quarter financial data (unaudited) for the year ended December 31, 2004 is as follows:

 

 

27