gden20151013

0001437749-15-018473.txt : 20151016 0001437749-15-018473.hdr.sgml : 20151016 20151016164552 ACCESSION NUMBER: 0001437749-15-018473 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20150731 ITEM INFORMATION: Completion of Acquisition or Disposition of Assets ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20151016 DATE AS OF CHANGE: 20151016 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOLDEN ENTERTAINMENT, INC. CENTRAL INDEX KEY: 0001071255 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 411913991 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-24993 FILM NUMBER: 151162403 BUSINESS ADDRESS: STREET 1: 130 CHESHIERE LANE CITY: MINNETONKA STATE: MN ZIP: 55305 BUSINESS PHONE: 6124499092 MAIL ADDRESS: STREET 1: 6595 S JONES BLVD CITY: LAS VEGAS STATE: NV ZIP: 89118 FORMER COMPANY: FORMER CONFORMED NAME: LAKES ENTERTAINMENT INC DATE OF NAME CHANGE: 20020806 FORMER COMPANY: FORMER CONFORMED NAME: LAKES GAMING INC DATE OF NAME CHANGE: 19980929 8-K/A 1 gden20151013_8ka.htm FORM 8-K/A gden20151013_8ka.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

(Amendment No. 1)

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): July 31, 2015

GOLDEN ENTERTAINMENT, INC.

_____________________________________________

(Exact name of registrant as specified in its charter)

Minnesota

000-24993

41-1913991

(State or other jurisdiction of

incorporation)

(Commission File Number)

(IRS Employer

Identification No.)

6595 S Jones Blvd., Las Vegas, Nevada		89118

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (702) 893-7777

Not Applicable

_________________________________________________

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.01 Completion of Acquisition or Disposition of Assets

On July 31, 2015, Golden Entertainment, Inc. (the “Company”) acquired Sartini Gaming, Inc., a Nevada corporation (“Sartini Gaming”), through the consummation of the merger of a wholly owned subsidiary of the Company with and into Sartini Gaming, with Sartini Gaming surviving as a wholly owned subsidiary of the Company (the “Merger”), as contemplated by that certain Agreement and Plan of Merger, dated as of January 25, 2015, by and among the Company, LG Acquisition Corporation, a Nevada corporation and wholly owned subsidiary of the Company, Sartini Gaming and The Blake L. Sartini and Delise F. Sartini Family Trust, as sole shareholder of Sartini Gaming (as amended, the “Merger Agreement”).

On August 4, 2015, the Company filed a Current Report on Form 8-K (the “Initial Form 8-K”) with the Securities and Exchange Commission (the “SEC”) disclosing that it had consummated the Merger and that the financial statements required by Item 9.01(a) and the pro forma financial information required by Item 9.01(b) of Form 8-K would be filed by amendment. This Amendment No. 1 to Current Report on Form 8-K (this “Amended Form 8-K”) contains the required financial statements and pro forma financial information.

This Amended Form 8-K should be read in conjunction with the Initial Form 8-K and the Company’s other filings with the SEC. Except as stated herein, this Amended Form 8-K does not reflect events occurring after the filing of the Initial Form 8-K with the SEC on August 4, 2015 and no attempt has been made in this Amended Form 8-K to modify or update other disclosures as presented in the Initial Form 8-K.

Item 9.01. Financial Statements and Exhibits.

(a)

Financial statements of business acquired

The following audited consolidated financial statements of Sartini Gaming are filed as Exhibit 99.1 hereto and incorporated herein by reference:

(i)

Independent Auditor’s Report

(ii)

Consolidated Balance Sheets as of December 31, 2014 and 2013

(iii)

Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012

(iv)

Consolidated Statements of Stockholder’s Deficit for the years ended December 31, 2014, 2013 and 2012

(v)

Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012

(vi)

Notes to Consolidated Financial Statements

The following unaudited consolidated financial statements of Sartini Gaming are filed as Exhibit 99.2 hereto and incorporated herein by reference:

(i)

Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014

(ii)

Consolidated Statements of Operations for the six-month periods ended June 30, 2015 and 2014

(iii)

Consolidated Statements of Stockholder’s Deficit for the six-month periods ended June 30, 2015 and 2014

(iv)

Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2015 and 2014

(v)

Notes to Consolidated Financial Statements

	(b)	Pro forma financial information

		The following unaudited pro forma condensed combined financial information is furnished as Exhibit 99.3 hereto and incorporated herein by reference:

(i)

Unaudited Pro Forma Condensed Combined Balance Sheet as of June 28, 2015

(ii)

Unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 28, 2014 and the six months ended June 28, 2015

(iii)

Notes to Unaudited Pro Forma Condensed Combined Financial Statements

(c)

Not applicable

(d)

Exhibits

23.1

Consent of McGladrey LLP, dated October 14, 2015

99.1

Audited consolidated financial statements of Sartini Gaming, Inc. as of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 2012 and the notes related thereto

99.2

Unaudited consolidated financial statements of Sartini Gaming, Inc. as of June 30, 2015 and December 31, 2014 and for the six months ended June 30, 2015 and 2014 and the notes related thereto

99.3

Unaudited pro forma condensed combined financial statements of Golden Entertainment, Inc. and Sartini Gaming, Inc. for the year ended December 28, 2014 and as of and for the six months ended June 28, 2015 and the notes related thereto

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	GOLDEN ENTERTAINMENT, INC. (Registrant)


Date: October 16, 2015	/s/ Matthew W. Flandermeyer
	Name:	Matthew W. Flandermeyer
	Title:	Executive Vice President and Chief Financial Officer

EXHIBIT INDEX

Exhibit Number		Description

23.1		Consent of McGladrey LLP, dated October 14, 2015

99.1		Audited consolidated financial statements of Sartini Gaming, Inc. as of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 2012 and the notes related thereto

99.2		Unaudited consolidated financial statements of Sartini Gaming, Inc. as of June 30, 2015 and December 31, 2014 and for the six months ended June 30, 2015 and 2014 and the notes related thereto

99.3		Unaudited pro forma condensed combined financial statements of Golden Entertainment, Inc. and Sartini Gaming, Inc. for the year ended December 28, 2014 and as of and for the six months ended June 28, 2015 and the notes related thereto

EX-23.1 2 ex23-1.htm EXHIBIT 23.1 ex23-1.htm

Exhibit 23.1

CONSENT OF INDEPENDENT AUDITOR

We consent to the incorporation by reference in the Registration Statement on Form S-3 (File No. 333-186211) and Registration Statements on Form S-8 (File Nos. 333-77247, 333-77249, 333-77591, 333-116674, 333-143985 and 333-162259) of Golden Entertainment, Inc. of our report dated April 8, 2015, relating to our audit of the consolidated financial statements of Sartini Gaming, Inc. as of December 31, 2014 and 2013 and for each of the three years in the period ended December 31, 2014, included in this Amendment No. 1 to Current Report on Form 8-K/A.

/s/ McGladrey LLP

McGladrey LLP

Certified Public Accountants

Las Vegas, Nevada
October 14, 2015

EX-99.1 3 ex99-1.htm EXHIBIT 99.1 lakesproxy.htm

Exhibit 99.1

INDEX TO SARTINI GAMING FINANCIAL STATEMENTS

Independent Auditor’s Report	1-2
Consolidated Balance Sheets as of December 31, 2014 and 2013	3
Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012	4
Consolidated Statements of Stockholder’s Deficit for the years ended December 31, 2014, 2013 and 2012	5
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012	6-7
Notes to the Consolidated Financial Statements	8-22

Independent Auditor’s Report

To the Board of Directors

Sartini Gaming, Inc.

Las Vegas, Nevada

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of Sartini Gaming, Inc. and its subsidiaries which comprise the consolidated balance sheets as of December 31, 2014 and 2013, and the related consolidated statements of income, stockholder’s deficit, and cash flows for each of the three years in the period ended December 31, 2014, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sartini Gaming, Inc. and their subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in accordance with accounting principles generally accepted in the United States of America.

/s/ McGladrey LLP

Las Vegas, Nevada

April 8, 2015

Sartini Gaming, Inc.

Consolidated Balance Sheets

December 31, 2014 and 2013

(Dollars in thousands)

Assets	2014			2013
Current Assets
Cash and cash equivalents	$	27,022		$	27,172
Accounts and notes receivable, net of allowance for doubtful accounts of $589 and $632, respectively		4,229			3,097
Inventories		2,703			2,908
Prepaid expenses and other		5,843			5,934
Total current assets		39,797			39,111

Property and Equipment, net		73,636			74,124
Goodwill		7,706			7,706
Intangible Assets, net		18,344			19,269
Notes Receivable		865			804
Debt Issuance Costs, net		139			185
Other Assets		896			350
	$	141,383		$	141,549

Liabilities and Stockholder's Deficit
Current Liabilities
Current maturities of long-term debt	$	6,409		$	6,452
Accounts payable		7,965			5,943
Accrued payroll and related		1,626			2,214
Accrued interest payable		7			794
Other accrued liabilities		2,603			2,654
Total current liabilities		18,610			18,057

Long-Term Debt, less current maturities		181,096			177,966
Warrant Liability		5,685			-
Deferred Rent and Asset Retirement Obligations		2,089			2,358
Total liabilities		207,480			198,381

Commitments and Contingencies (Notes 5 and 6)

Stockholder's Deficit
Common stock, no par value; 2,500 shares authorized; 711 shares issued and outstanding		28,803			28,803
Additional paid-in capital		46,330			46,330
Accumulated deficit		(141,230	)		(131,965	)
Total stockholder's deficit		(66,097	)		(56,832	)
	$	141,383		$	141,549

See Notes to Consolidated Financial Statements.

Sartini Gaming, Inc.

Consolidated Statements of Income

Years Ended December 31, 2014, 2013 and 2012

(Dollars in thousands)

	2014			2013			2012
Revenues:
Gaming	$	246,607		$	240,552		$	231,499
Food and beverage		45,912			44,800			43,714
Other		8,181			7,277			5,013
		300,700			292,629			280,226
Promotional allowances		(20,200	)		(20,544	)		(18,858	)
Net revenues		280,500			272,085			261,368

Costs and expenses:
Gaming		136,725			139,198			132,364
Food and beverage		17,370			16,656			16,142
Non-gaming payroll and related		45,680			45,682			44,149
Selling, general, and administrative		46,426			43,777			46,112
Depreciation and amortization		14,180			13,753			13,433
Preopening and business combination expenses		1,674			963			3,649
Gain on disposal of property and equipment		(293	)		(28	)		(21	)
Total costs and expenses		261,762			260,001			255,828

Income from operations		18,738			12,084			5,540

Other (expense) income:
Interest expense		(21,940	)		(25,583	)		(22,738	)
Loss on extinguishment of debt		-			(6,163	)		(2,898	)
Gain (loss) on warrant		(6,063	)		-			432
Total other expense, net		(28,003	)		(31,746	)		(25,204	)

Loss from continuing operations		(9,265	)		(19,662	)		(19,664	)
Income from discontinued operations		-			-			27,095

Net income (loss)		(9,265	)		(19,662	)		7,431
Net income attributable to the noncontrolling interest		-			-			(27,095	)

Net (loss) attributable to Sartini Gaming, Inc.	$	(9,265	)	$	(19,662	)	$	(19,664	)

See Notes to Consolidated Financial Statements.

Sartini Gaming, Inc.

Consolidated Statements of Stockholder's Deficit

Years Ended December 31, 2014, 2013 and 2012

(Dollars in thousands)


					Additional
	Common Stock Issued				Paid-In		Accumulated			Stockholder's			Noncontrolling			Total
	Shares		Amount		Capital		Deficit			Deficit			Interest			Deficit
Contribution of common stock of
Golden Gaming, Inc.		711	$	28,803	$	-	$	(92,639	)	$	(63,836	)	$	19,201		$	(44,635	)
Other contributions		-		-		46,330		-			46,330			-			46,330
Net (loss) income		-		-		-		(19,664	)		(19,664	)		27,095			7,431
Deconsolidation of noncontrolling interest		-		-		-		-			-			(46,296	)		(46,296	)
Balance, December 31, 2012		711		28,803		46,330		(112,303	)		(37,170	)		-			(37,170	)
Net (loss)		-		-		-		(19,662	)		(19,662	)		-			(19,662	)
Balance, December 31, 2013		711		28,803		46,330		(131,965	)		(56,832	)		-			(56,832	)
Net (loss)		-		-		-		(9,265	)		(9,265	)		-			(9,265	)
Balance, December 31, 2014		711	$	28,803	$	46,330	$	(141,230	)	$	(66,097	)	$	-		$	(66,097	)

See Notes to Consolidated Financial Statements.

Sartini Gaming, Inc.

Consolidated Statements of Cash Flows

Years Ended December 31, 2014, 2013 and 2012

(Dollars in thousands)

	2014			2013			2012
Cash Flows From Operating Activities
Continuing Operations:
Net income (loss)	$	(9,265	)	$	(19,662	)	$	7,431
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Income from discontinued operations		-			-			(27,095	)
Depreciation and amortization, including $1,386, $3,116 and $2,366 included in interest expense		15,566			16,869			15,799
Provision for doubtful accounts		-			(20	)		572
Deferred rent and asset retirement obligations		(269	)		344			(382	)
Loss on extinguishment of debt		-			6,163			2,898
Interest paid in kind on long-term debt		1,369			3,995			4,264
Gain (loss) on warrants		6,063			-			(432	)
Litigation settlement financed with long-term debt		-			-			2,409
Gain on disposal of property and equipment		(293	)		(28	)		(21	)
Changes in working capital components:
Accounts and notes receivable		(1,013	)		1,013			(3,030	)
Inventories and prepaid expenses and other		391			713			(2,660	)
Accounts payable and accrued expenses		596			(4,197	)		(1,219	)
Net cash provided by (used in) continuing operations		13,145			5,190			(1,466	)
Net cash provided by discontinued operations		-			-			657
Net cash provided by (used in) operating activities		13,145			5,190			(809	)

Cash Flows From Investing Activities
Continuing Operations:
Due (to) from related parties		-			(1,903	)		32,271
Cash paid in business combination, net of cash and cash equivalents acquired		-			-			(50,638	)
Expenditures for property and equipment		(7,777	)		(4,574	)		(5,430	)
Expenditures for intangible and other assets		(555	)		(1,219	)		(618	)
Acquisitions of businesses, net of cash acquired		(715	)		-			-
Collection of notes receivable		(61	)		1,300			653
Proceeds from sale of property and equipment		315			-			139
Net cash used in continuing operations		(8,793	)		(6,396	)		(23,623	)
Net cash used in discontinued operations		-			-			(697	)
Net cash used in investing activities		(8,793	)		(6,396	)		(24,320	)

(Continued)

Sartini Gaming, Inc.

Consolidated Statements of Cash Flows (Continued)

Years Ended December 31, 2014, 2013 and 2012

(Dollars in thousands)

	2014			2013			2012
Cash Flows From Financing Activities
Continuing Operations:
Proceeds from issuance of long-term debt	$	4,380		$	197,000		$	97,500
Principal payments on long-term debt		(8,504	)		(182,271	)		(89,291	)
Contributions		-			-			46,330
Repurchase of warrants		(378	)		-			-
Debt issuance costs		-			(5,292	)		(14,335	)
Net cash (used in) provided by continuing operations		(4,502	)		9,437			40,204
Net cash used in discontinued operations		-			-			(360	)
Net cash (used in) provided by financing activities		(4,502	)		9,437			39,844
Net increase (decrease) in cash and cash equivalents		(150	)		8,231			14,715

Cash and Cash Equivalents, beginning of year		27,172			18,941			4,226
Cash and Cash Equivalents, end of year	$	27,022		$	27,172		$	18,941

Supplemental Disclosure of Cash Payments for Interest	$	21,312		$	20,422		$	16,283

Supplemental Schedule of Noncash Investing and
Financing Activities:
Gaming equipment purchased through financing	$	2,563		$	2,220		$	955
Contribution of common stock of Golden Gaming, Inc.	$	-		$	-		$	(44,635	)

See Notes to Consolidated Financial Statements.

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

Note 1.

Basis of Presentation, Description of Business, and Summary of Significant Accounting Policies

Sartini Gaming, Inc, a Nevada corporation (Sartini), was formed in January 2012 with a contribution from The Blake L. Sartini and Delise F. Sartini Family Trust, its sole shareholder, of all of the outstanding common stock of Golden Gaming, Inc. In February 2012, Sartini formed 77 Golden Gaming, LLC as a wholly owned subsidiary. Also in February 2012, Golden Gaming, Inc. was converted from a corporation to a limited liability company and all of its outstanding membership units were contributed to 77 Golden Gaming, LLC.

The accompanying consolidated financial statements include the accounts of Sartini, 77 Golden Gaming, LLC, and its wholly owned subsidiaries Sartini Synergy Online, LLC and Golden Gaming, LLC. (G.G.I.), and G.G.I.’s wholly owned subsidiaries which include:

Golden Tavern Group, LLC (G.T.G.)

Golden Pahrump Nugget, LLC (G.P.N.)

Golden Pahrump Town, LLC (G.P.T.)

Golden Pahrump Lakeside, LLC (G.P.L.)

Golden Tavern Restaurants, LLC

Golden Aviation, LLC

Golden Golf Management, LLC

Golden HRC, LLC

Golden Route Operations LLC (G.R.O.) and its wholly owned subsidiaries:

Market Gaming, LLC

E-T-T, LLC and its wholly owned subsidiaries:

Cardivan, LLC and Corral Country Coin, LLC

G.T.G has more than 50 subsidiaries formed to operate 48 individual taverns in Nevada.

Also included through October 2012 in the consolidated financial statements is Golden Mardi Gras, Inc. (G.M.G.), which is a variable interest entity. The entities are collectively referred to as the “Company.”

G.R.O. is a gaming machine route operator in Nevada. Operations for G.R.O. involve the installation, operation and service of gaming machines (primarily video poker machines) under space leases and revenue participation agreements with local taverns and convenience stores. Both types of agreements provide G.R.O. with exclusive rights to install gaming machines at such locations and generally require G.R.O. to pay all installation and maintenance expenses related to the operations at each location. G.R.O. pays all applicable taxes under space leases and generally shares such taxes on the same basis as revenues under revenue participation agreements. G.R.O.’s gaming machines are located throughout Nevada.

G.T.G., which operates taverns under various brands throughout Nevada, is one of the largest operators of taverns in the state. G.T.G.’s principal operations include the operating activities of tavern locations in the Las Vegas area under the name PT’s Entertainment (PT’s), which include the brands Sierra Gold, PT’s Gold, PT’s Pub, PT’s Place and Sean Patricks, and tavern locations in Reno and the surrounding area under the name of Sierra Gold and Sierra Junction. All of the locations operate in a themed bar environment catering to local residents that prefer the smaller, more convenient entertainment option of the Company’s taverns to the larger, full-service hotel casinos. Each G.T.G. location has approximately 15 gaming machines and other non-gaming entertainment devices and amenities.

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

Note 1.

Basis of Presentation, Description of Business, and Summary of Significant Accounting Policies (Continued)

G.P.N. operates a casino hotel resort in Pahrump, Nevada which is approximately sixty miles from Las Vegas, Nevada. G.P.T. and G.P.L. operate Gold Town Pahrump and Lakeside Casino and RV Park, respectively, also in Pahrump. Pahrump is an unincorporated town with seasonal tourism, but is primarily a locals market. Between the three properties, gaming operations consist of slot machines, table games, poker room, bingo, and other non-gaming amenities such as cafes, steakhouses, buffets, snack bar, catering, conference centers and a bowling alley.

Sartini Synergy Online, LLC, Golden Aviation, LLC, Golden Golf Management, LLC, and Golden HRC, LLC are inactive. Golden Tavern Restaurants, LLC provides certain payroll services to G.T.G.

G.M.G. operated the Golden Mardi Gras Casino, Golden Gates Casino, and The Golden Gulch Casino in Black Hawk, Colorado until October 2012. Casinos in Black Hawk draw patrons primarily from the greater Denver, Colorado metropolitan area. Black Hawk is a mountain town with some seasonal tourism but is primarily a locals market, and its gaming market is subject to seasonal fluctuation mainly due to weather conditions.

A summary of the Company’s significant accounting policies follows:

Principles of consolidation: The consolidated financial statements include the accounts of Sartini and its wholly-owned subsidiaries along with, through October 31, 2012, the accounts of G.M.G., which is owned by the Company’s sole owner. G.M.G. is a variable interest entity as defined in the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) 810, Consolidations, and was considered to be a subsidiary of Golden Gaming, LLC through October 31, 2012. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant estimates include the fair value of assets and liabilities acquired in business combinations, the useful lives assigned to property and equipment and intangible assets, the fair value of warrants and future cash flows used to determine impairment losses. Management engages third party valuation specialists to assist in the determination of certain of these estimates. Actual results could differ from these estimates.

Cash and cash equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash consists primarily of cash in banks and cash on hand in the Company’s vaults and cages, and at slot route locations. At various times during the year, the Company maintained balances at a financial institution in excess of federally insured limits. The Company has not experienced any losses in such accounts.

Accounts and notes receivable: Accounts and notes receivable represent primarily amounts due from third-party locations serviced by G.R.O. and other miscellaneous receivables. The carrying amount of receivables is reduced by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. The Company has not historically charged interest on past due accounts receivable. Long-term notes receivable represent unsecured, non-interest bearing advances due from route customers at the maturity of their route contracts, which average approximately seven years in duration. Interest has been imputed, resulting in discounts of $108,000 and $292,000 at December 31, 2014 and 2013, respectively.

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

Note 1.

Basis of Presentation, Description of Business, and Summary of Significant Accounting Policies (Continued)

Inventories: Inventories are recorded at the lower of cost (first in, first out method) or market, and consist primarily of food, beverage, vending and gift shop items.

Promotional allowances: Gross revenues include the retail amount of accommodations, food, beverages and merchandise provided gratuitously to customers. When computing net revenues, the retail value of accommodations, food, beverages, and merchandise provided to customers without charge is deducted from gross revenues as promotional allowances. The estimated retail cost of such complimentary services for room, food, beverages, merchandise, and player points is charged to gaming and selling, general, and administrative expense.

Rent expense: Rent is recognized on the straight-line basis over the term of the lease. The amount by which the straight-line amount exceeds the amount of rent actually due is recorded as deferred rent.

Property and equipment: Property and equipment is recorded at cost. Assets that have been placed in service are depreciated on a straight-line basis over their estimated useful lives. Depreciation is computed using the straight-line method over the following estimated useful lives:

	Estimated
	Life in
	Years

Furniture, fixtures, and equipment		3-7
Land improvements		10
Building and building improvements		45
Leasehold improvements		1-15

The estimated lives for leasehold improvements are the lesser of economic life or the remainder of the lease term.

Goodwill: Goodwill represents the excess of costs over fair value of assets of the business acquired. Goodwill is not amortized, but rather is assessed for impairment annually or more frequently if circumstances indicate impairment may have occurred. This assessment can be made using either a qualitative or a quantitative approach. The Company performs its annual impairment assessment in the fourth quarter of each year.

The Company uses a two-step process for determining whether goodwill is impaired. If the Company elects to use the quantitative approach, the first step is to compare the fair value of the reporting unit to its carrying value. If the carrying value of the reporting unit exceeds fair value, a second step is followed to calculate the goodwill impairment. If the Company elects to use the qualitative approach, it assesses qualitative factors to determine whether it is more likely than not that goodwill is impaired. Under both the qualitative and the quantitative approaches, the second step involves determining the fair value of the reporting unit and allocating such fair value to the individual assets and liabilities of the reporting unit as if it were a business combination and calculating the implied fair value of goodwill.

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

Note 1.

Basis of Presentation, Description of Business, and Summary of Significant Accounting Policies (Continued)

To determine fair value, the Company engages a third party valuation specialist and uses a combination of the income approach, which is based on the cash flows that the reporting unit expects to generate in the future, precedent transaction approach and comparable company analysis approach. The income approach requires significant management judgments and estimates to project future revenues and expenses, changes in gross margins, cash flows and estimates of future capital expenditures for the reporting unit over a multi-year period, as well as the determination of weighted-average cost of capital to be used as a discount rate. The precedent transaction approach considers the prices paid by purchasers of similar companies under similar situations. The Company also uses the comparable company approach which considers the valuation multiples of companies with similar characteristics. The income approach is weighted more heavily.

The evaluation of goodwill inherently involves management judgments as to assumptions used to project these amounts and the impact of market conditions on those assumptions. The Company’s estimates may differ from actual results due to, among other matters, economic conditions, changes to its business model or changes in operating performance. Substantially all of the Company’s goodwill is amortizable for tax purposes.

Intangible assets and other assets: Intangible assets consist primarily of trademarks and other intellectual property, customer relationships, noncompete agreements and licenses. Customer relationships include the value of purchased route contracts. Amortization of customer relationships related to slot route operations is recorded primarily on an accelerated basis over eight years and is included in depreciation and amortization expense. Customer relationships related to the casino operations are amortized on an accelerated basis over ten to eleven years representing the estimated attrition of preferred customers. Non-compete agreements are amortized on a straight-line basis over one to five years. During the year ended December 31, 2013, the Company began amortizing its trademarks and licenses over ten years using the straight-line method. These assets were previously believed to have indefinite lives. The effect of this change was to decrease net income by approximately $207,000.

Impairment: In accordance with the provisions of ASC 360, Property, Plant, and Equipment, the Company evaluates the potential impairment of long-lived assets when events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. If it is determined that the carrying value of long-lived assets may not be recoverable based upon the relevant facts and circumstances, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the estimated undiscounted future cash flows is less than the carrying value of the asset, the asset is written down to its fair value.

No impairment was recorded during the three year period ended December 31, 2014.

Modification accounting: The Company evaluates amendments to its debt in accordance with ASC 540-50, Debt – Modifications and Extinguishments, for modification and extinguishment accounting. For debt amendments involving continuing existing lenders, this evaluation includes comparing the net present value of cash flows of the new debt to the old debt to determine if changes greater than 10 percent occurred. In instances where the net present value of future cash flows changed more than 10 percent, the Company applies extinguishment accounting and determines the fair value of its debt based on factors available to the Company. In instances where the change was less than 10 percent the Company applies modification accounting. For modification accounting, prior unamortized deferred loan costs and debt discounts and any new fees paid to the continuing lender are amortized over the revised term of the debt.

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

Note 1.

Basis of Presentation, Description of Business, and Summary of Significant Accounting Policies (Continued)

Debt issuance costs: Debt issuance costs consist of loan origination and financing fees paid in connection with long-term debt. These fees are being amortized to interest expense over the life of the long-term debt using the interest method.

Loyalty programs: The Company provides the Golden Rewards Club Program (the Club) for its customers. Members of the Club earn points based on gaming activity, and such points are redeemable for cash, free play, or complimentary goods and services such as accommodations, food and beverages. Club members may also earn special coupons or awards as determined during marketing promotions. Because redemption of points does not displace a significant number of paying customers and the value of the awards is not significant compared to the original revenue transaction, the Company records revenue for the original transaction and a liability for the value of points earned by Club members. The value of the points is determined by referencing the cash value of points expected to be redeemed for cash or free play and the incremental (departmental) cost of points expected to be redeemed for complimentary goods or services. The liability is reduced by points not expected to be redeemed. The cost of points redeemed for cash is recorded as a reduction of gaming revenue, and the cost of points redeemed for complimentary goods or services is recorded as an operating expense of the gaming department. As of December 31, 2014 and 2013, the Club liability was approximately $751,000 and $800,000, respectively, and was included in other accrued liabilities on the consolidated balance sheets.

Revenue recognition: Gaming revenue is (a) the net win from gaming activities, which is the difference between gaming wins and losses, less sales incentives and other adjustments and (b) revenue from gaming-related activities such as poker, blackjack, and tournaments. Jackpots, other than the incremental amount of progressive jackpots, are recognized at the time they are won by customers. The Company accrues the incremental amount of progressive jackpots as the progressive machine is played and the progressive jackpot amount increases, with a corresponding reduction of gaming revenue.

G.R.O. recognizes gaming revenues from gaming machine route operations, under both space leases and revenue participation arrangements, as the net win from gaming operations. Gaming revenues also include fees charged to route customers for the costs of the Company’s gaming management system and the Club. Revenue participation and space lease payments to route locations are recorded as gaming expenses. The Company estimates and accrues its share of the cash that has not been collected from gaming machines at the end of the year, but that is collected on regularly scheduled collection dates within one week after the end of the year.

Rooms, food, beverage, and merchandise revenues are recognized when goods and services are provided to customers. Other revenue represents revenue from ATM fees, vending machines, and arcade machines. Other revenue is recognized when services are provided to customers.

The Company reports revenues net of sales taxes collected and remitted.

Preopening expenses: Preopening expenses are charged to expense as incurred in accordance with ASC 720, Other Expenses.

Income taxes: Sartini has elected, with its stockholder’s consent, to be taxed under the provision of Sub-chapter S of the Internal Revenue Code. Under this provision, the Company does not pay federal corporate income taxes on its taxable income. Instead, the stockholder is liable for individual income taxes on the Company's taxable income. Sartini’s subsidiaries are limited liability companies and their income or loss is allocated to their members.

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

Note 1.

Basis of Presentation, Description of Business, and Summary of Significant Accounting Policies (Continued)

Management evaluates the Company’s tax positions on an annual basis and has concluded that the Company has taken no uncertain tax positions that require adjustment to the consolidated financial statements to comply with the provisions of this guidance. All of the Company’s tax returns are subject to examination by U.S. federal, state and local tax authorities.

Gaming taxes: The Company is subject to taxes based on non-restricted gross gaming revenue and annual and quarterly fees at all locations. These gaming taxes are recorded as an expense within the “Gaming” line item in the accompanying consolidated statements of income. These taxes totaled approximately $7,084,000, $6,288,000, and $5,746,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

Asset retirement obligations: The Company records a liability for the estimated fair value of a required asset retirement obligation (ARO) when such obligation is incurred. The Company’s AROs are primarily associated with leasehold improvements which, at the end of a lease, the Company is contractually obligated to remove in order to comply with the lease agreement. At the inception of a lease with such conditions, the Company records an ARO liability and a corresponding leasehold improvement in an amount equal to the estimated fair value of the obligation. The liability is estimated based on a number of assumptions requiring management’s judgment, including store closing costs, cost inflation rates and discount rates, and is accreted to its projected future value over time. The capitalized asset is depreciated as a leasehold improvement. Upon satisfaction of the ARO conditions, any difference between the recorded ARO liability and the actual retirement costs incurred is recognized as an operating gain or loss in the consolidated statements of income.

Fair value of financial instruments: The carrying amounts of cash and cash equivalents, accounts and notes receivable, and accounts payable approximate fair value because of the short-term nature of these instruments. Based on the borrowing rates currently available to the Company for bank loans with similar items and average maturities, the fair value of the Company’s long-term debt approximates its carrying value.

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at December 31, 2014 and 2013.

Fair value measurements: In accordance with ASC 820, Fair Value Measurements, assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

● Level 1: Quoted market prices in active markets for identical assets or liabilities.

● Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

● Level 3: Unobservable inputs that are not corroborated by market data.

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

Note 1.

Basis of Presentation, Description of Business, and Summary of Significant Accounting Policies (Continued)

During the year ended December 31, 2012, the Company issued warrants for the purchase of membership interests of 77 Golden Gaming, LLC, which are measured at fair value on a recurring basis. The fair value of the warrants has been determined under Level 3. At December 31, 2014 and 2013, the Company did not have any assets or liabilities measured at fair value on a non-recurring basis.

Recent accounting pronouncements: In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for reporting discontinued operations. Under ASU 2014-08, only disposals representing a strategic shift in operations should be presented as discontinued operations. ASU 2014-08 also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. ASU 2014-08 will be effective prospectively for the Company for annual reporting periods beginning after December 15, 2014. The adoption of ASU 2014-08 is not expected to have a material effect on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in accounting principles generally accepted in the United States of America when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. The updated standard will be effective for annual reporting periods beginning after December 15, 2017. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on the consolidated financial statements.

Subsequent events: The Company has evaluated subsequent events through April 8, 2015, the date on which the consolidated financial statements were available for issuance.

Note 2.

Property and Equipment

Property and equipment consists of the following at December 31 (dollars in thousands):

	2014			2013

Furniture, fixtures, and equipment	$	102,055		$	93,976
Land, land improvements, and water rights		26,072			26,072
Building and building improvements		26,211			26,210
Leasehold improvements		46,702			44,282
Construction in process		2,105			4,057
		203,145			194,597
Less accumulated depreciation		(129,509	)		(120,473	)
Property and equipment, net	$	73,636		$	74,124

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

Note 3.

Intangible Assets

Intangible assets consist of the following at December 31 (dollars in thousands):

	2014			2013

Customer relationships	$	23,057		$	23,057
Trademarks		1,240			1,200
Non-compete		3,624			2,862
Licenses and other		3,045			1,378
		30,966			28,497
Accumulated amortization		(12,622	)		(9,228	)
Intangible assets, net	$	18,344		$	19,269

Total amortization expense related to intangible assets for the years ended December 31, 2014, 2013 and 2012 was approximately $3,395,000, $4,359,000 and $3,037,000, respectively.

Amortization expense (dollars in thousands) for each of the five succeeding years and thereafter is expected to be as follows:

Years ending December 31,

2015	$	3,248
2016		3,038
2017		2,697
2018		2,121
2019		1,976
Thereafter		5,264
	$	18,344

Note 4.

Long-Term Debt

Long-term debt consists of the following at December 31 (dollars in thousands):

	2014			2013
First lien loans, net of unamortized discount, 2014, $759; 2013, $965	$	75,241		$	79,035
Second lien loans, net of unamortized discount, 2014, $4,695; 2013, $5,828		104,070			101,567
Revolving credit facility		2,100			-
Business combination obligations		3,068			-
Notes issued in connection with legal settlement		754			1,476
Other		2,272			2,340
		187,505			184,418
Less current maturities		(6,409	)		(6,452	)
	$	181,096		$	177,966

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

Note 4.

Long-Term Debt (Continued)

In connection with the transactions with Affinity Gaming, LLC described in Note 7, the Company amended its existing revolving credit and term loan facility in February 2012 to provide for a $110,000,000 first lien secured term loan repayable in quarterly principal installments of $275,000 with the balance due March 1, 2016, and a $50,000,000 second lien secured loan repayable on March 1, 2017. Mandatory prepayments were required based on “Excess Cash Flow” as defined in the agreement. The first lien secured term loan provided for interest at a Base Rate or the LIBOR Rate plus applicable margins that are initially 7 percent and 8 percent, respectively. For the first year of the loan only, 1 percent of the applicable margin was paid in-kind. Interest on the second lien secured term loan was initially payable monthly at the co-borrowers’ election of (a) 15 percent or (b) 12.5 percent plus 5 percent payment-in-kind (PIK election).

Interest for both the first and second lien secured term loans was subject to reduction based on the achievement of certain financial ratios. The first lien secured term loan required the payment of a lender fee of 1 percent of the principal balance at closing and an additional 1 percent of the then outstanding balance in February 2013.

During the year ended December 31, 2013, the Company entered into a new first lien credit agreement that provides for a $40,000,000 Term A loan, a $40,000,000 Term B loan, and a $5,000,000 revolving credit facility. The Term A loan is repayable in quarterly principal installments of $1,000,000 with the balance due September 16, 2018, which is also the maturity date of the Term B loan and revolving credit facility. The Company also amended its second lien credit agreement to increase the loan to $107,000,000 and adjust the maturity date to March 16, 2019. The credit agreements also provide for additional mandatory prepayments based on “Excess Cash Flow” as defined in each agreement. The first lien secured term loans and revolving credit facility provide for interest at a Base Rate or the LIBOR Rate plus applicable margins. For the Term A loan and the revolving credit facility, the applicable margins are 2.25 percent for Base Rate Loans and 3.25 percent for LIBOR Rate Loans. For the Term B loan, the applicable margins are 5.5 percent for Base Rate Loans and 6.5 percent for LIBOR Rate Loans. Interest on the second lien secured term loan is payable monthly at 13.25 percent plus 1.25 percent payment-in-kind (PIK interest), subject to adjustment if on or after June 30, 2014, the ratio of First Lien Debt to EBITDA ratio, as defined, is greater than 2.75:1.00. The effective interest rate for the revolving credit facility and the Term A and Term B loans was 4.00 percent, 4.00 percent and 7.25 percent, respectively, at both December 31, 2014 and 2013. Both facilities are collateralized by substantially all assets of the Company.

During the year ended December 31, 2012, the Company incurred approximately $14,335,000 of fees and costs in connection with the February 2012 restructuring of its indebtedness, including a $962,600 loan prepayment penalty. Of the total incurred, approximately $271,000 was capitalized as debt issuance costs, $8,705,000 was recorded as a discount on the first lien term loans, $3,689,000 was recorded as a discount on second lien term loan and $1,670,000 was charged to loss on extinguishment of debt along with approximately $1,228,000 of debt issuance costs capitalized during 2011. The debt discount is amortized over the life of the related loan using the interest method.

During the year ended December 31, 2013, the Company incurred approximately $5,292,000 of fees in connection with the refinancing of its indebtedness, of which $1,035,000 was capitalized as debt issuance costs, $3,367,000 was recorded as a discount on the second lien loan and $890,000 was charged to loss on extinguishment of debt along with approximately $5,273,000 of unamortized debt discount recorded in connection with the February 2012 restructuring.

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

Note 4.

Long-Term Debt (Continued)

In connection with two business combinations during the year ended December 31, 2014 described in Note 7, the Company recorded an obligation under a Revenue Sharing Agreement which is described in Note 7 and issued two promissory notes to the sellers. One note, in the original amount of $1,250,000, requires six monthly payments of $125,000 through July 2014, and thereafter, six monthly payments of $83,333, including interest at 0.3 percent. The note is unsecured. The other note, in the original amount of $1,500,000, requires principal payments of $250,000 in September 2015 and 2016 with a final payment of $1,000,000 in September 2017, plus interest at one month LIBOR plus 3 percent. The note is collateralized by the assets acquired in the business combination.

During the year ended December 31, 2013, the Company settled certain litigation for $3,300,000, of which $300,000 was paid in cash with the balance due in monthly installments of $71,667 through April 2015, and $21,667 thereafter through June 2017. The obligation is non-interest bearing but has been discounted at 12 percent. The discounted settlement was $2,709,159 which was charged to selling, general and administrative expenses.

Other long-term debt consists primarily of gaming equipment obligations that bear interest at rates ranging from 0 percent to 8.5 percent and were due during 2014. These obligations were collateralized by the gaming equipment.

In April 2011, the Company issued to The Blake L. Sartini and Delise F. Sartini Family Trust four notes payable subordinated to the Company’s credit facilities in the aggregate amount of $5,000,000. Principal plus interest at 5 percent was due in April 2017. The notes were repaid during the year ended December 31, 2013.

Scheduled maturities of long-term debt as of December 31, 2014 are as follows (dollars in thousands):

Years ending December 31,

2015	$	6,689
2016		5,434
2017		5,604
2018		66,187
2019		108,864
Thereafter		181
	$	192,959

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

Note 5.

Warrants

In February 2012, 77 Golden Gaming, LLC issued to the Company’s second lien lenders detachable warrants for the purchase of 11,110 membership interests of 77 Golden Gaming, LLC at an exercise price of $.01 per membership interest. 77 Golden Gaming, LLC currently has 88,890 membership interests outstanding. The warrants expire in February 2022 and contain certain anti-dilutive provisions. The lenders can require 77 Golden Gaming, LLC to redeem 75 percent of the outstanding warrants upon the occurrence of a Trigger Event, defined as the occurrence of the a) maturity of the warrants, b) acceleration under the Company’s second lien credit agreement, c) certain refinancing or repayment of debt, or d) a Liquidity Event, as defined in the warrant. The repurchase value of the warrants is based on terms specified in the warrant. Upon a Trigger Event, the repurchase value is equal to the greater of (a) seven times twelve month trailing EBITDA of the Company less Outstanding Indebtedness, or (b) the fair market value of the membership interests, without discounts, determined by an independent investment bank. Upon a Liquidity Event, the repurchase value is based on the transaction consideration in connection with the Liquidity Event. 77 Golden Gaming, LLC has the right to repurchase the warrants in February 2022 on terms set forth in the warrant.

The $432,000 estimated fair value of the warrants at the time of issuance was accounted for as a discount on the second lien loans.

In September 2014, one of the warrant holders exercised its right to require the repurchase of a warrant for the purchase of 1,111 member interests for $377,528. The estimated fair value of the warrants at December 31, 2014 and 2013 was $5,685,000 and $0, respectively. Fair value was determined by a third party valuation specialist based on applying a multiple of trailing EBITDA less outstanding indebtedness with a discount for lack of marketability.

Note 6.

Commitments and Contingencies

Leases: The Company leases buildings, land and parking lot space, and equipment and vehicles under noncancelable operating leases. The original terms of the leases range from 1 to 15 years with various renewal options from 1 to 15 years. Operating lease rental expense, which is calculated on a straight-line basis, was approximately $9,000,000 for each of the years ended December 31, 2014 and 2013 and for the period ended December 31, 2012. The Company has operating leases with affiliated companies for certain of its tavern locations and its office building. The leases expire between July 2015 and February 2028. The Company paid approximately $2,404,000, $3,144,000 and $3,051,000 to these affiliates for the years ended December 31, 2014, 2013 and 2012, respectively. Future minimum rentals under noncancelable operating leases are as follows (dollars in thousands):

Years ending December 31,
	Office				Tavern
	Building		Equipment		Locations		Total

2015	$	942	$	2,882	$	8,613	$	12,437
2016		-		766		8,217		8,983
2017		-		108		6,958		7,066
2018		-		20		5,296		5,316
2019		-		8		4,777		4,785
Thereafter		-		-		32,341		32,341
	$	942	$	3,784	$	66,202	$	70,928

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

Note 6.

Commitments and Contingencies (Continued)

The total minimum rentals for tavern locations include rentals payable to related parties totaling approximately $13.6 million.

Gaming regulations: The Company’s operations are subject to the licensing and regulatory requirements of the Nevada State Gaming Control Board and the Nevada Gaming Commission. The Company’s gaming licenses are subject to certain conditions and periodic renewal. Management believes that the conditions will continue to be satisfied and that subsequent license renewals will be granted.

Litigation: The Company is involved in litigation from time to time arising in the normal course of business. In the opinion of management, such litigation and claims will not have a material effect on the Company’s financial condition, results of operations, or cash flows.

Note 7.

Business Combinations

In February 2012, G.M.G. sold and leased back from Affinity Gaming Black Hawk, LLC, G.M.G.’s real property for $77,530,707, resulting in a gain of approximately $26,560,000. Simultaneously, the Company purchased from Affinity Gaming, LLC, all of the outstanding member interests in E-T-T, LLC, Market Gaming, LLC, Cardivan, LLC, and Corral Country Coin, LLC for $73,225,505. The acquired entities are engaged in the installation, operation, and service of approximately 5,400 gaming machines under space leases and revenue participation agreements with various retail and convenience stores, bars, and restaurants in the state of Nevada, and also own and operate two casinos now operating under the names Gold Town Pahrump and Lakeside Casino and RV Park, both in Pahrump, Nevada. The acquisitions were made to strengthen the Company’s existing market positions.

The estimated fair values of the acquired net assets are as follows (in thousands):

Cash	$	22,588
Accounts receivable, inventories and prepaid expenses		1,408
Property and equipment		18,660
Customer relationships		23,198
Notes receivable		2,757
Goodwill		7,206
Accounts payable and accrued expenses		(2,591	)
	$	73,226

The fair value of the businesses acquired was estimated by applying the income approach. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement as described in ASC 820-10-35. Key assumptions include a discount rate of 13 percent and a terminal value based on earnings before interest, taxes, depreciation, and amortization capitalized at approximately 12 percent. The goodwill of $7,206,000 arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company with the businesses acquired.

The Company incurred business combination costs of approximately $2,268,000. The costs were expensed as incurred.

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

Note 7.

Business Combinations (Continued)

G.M.G. leased back the real property from Affinity Gaming Black Hawk, LLC until October 31, 2012, at which time Affinity Gaming Black Hawk LLC purchased G.M.G.’s gaming property and assumed certain related liabilities for $10. During the term of the lease, G.M.G. paid to Affinity Gaming Black Hawk, LLC, rent totaling $6,106,000. As a result of these transactions, G.M.G. satisfied its obligation as a co-borrower under the existing credit facility and was released from all obligations under that credit agreement. The accounts of G.M.G. were deconsolidated as of October 31, 2012.

G.M.G. did not receive the proceeds from the sale of its assets. Instead, G.G.I. received the $4,305,202 difference between the amount it owed Affinity Gaming, LLC for the assets it purchased and the proceeds from the sale of the Company’s net assets. G.M.G. recorded a $29,020,926 reduction in G.M.G.’s debt obligation to Sartini, due from G.G.I. of $2,200,000 and the remaining $46,309,781 as a distribution to its stockholder. Sartini then recorded $46,309,781 as a capital contribution.

On January 1, 2014, the Company completed the acquisition of certain assets of Strategic Gaming Management, LLC, a privately-held slot route operator in northern Nevada (the Route Acquisition). As consideration for the acquisition, the Company provided the seller with cash of $1,000,000 and a $1,250,000 promissory note. In addition, the Company entered into a Revenue Sharing Agreement under which the Company is obligated to pay to the seller 20 percent of the Net Gaming Revenue, as defined therein, subject to reduction if annual Net Gaming Revenue is less than $2,700,000. The Revenue Sharing Agreement extends for 42 months unless terminated sooner pursuant to terms of the Agreement. The Company has the right to terminate the Revenue Sharing Agreement at any time during the first eighteen months of the Revenue Sharing Agreement term by paying to the seller $1,750,000, less amounts paid under the Revenue Sharing Agreement prior to its termination. The seller agreed not to compete for 42 months. Payments under the Revenue Sharing Agreement were due beginning August 2014 and totaled $265,628 for the year ended December 31, 2014.

In September 2014, the Company completed the acquisition of the assets used in the operation of four taverns (the Tavern Acquisition) for consideration consisting of cash of $500,000 plus a $1,500,000 promissory note.

The estimated fair value of the net assets acquired is as follows (dollars in thousands):

	Route			Tavern
	Acquisition			Acquisition

Cash	$	785		$	-
Accounts receivable		119			-
Prepaid expenses		96			-
Property and equipment		1,103			1,460
Intangible assets		1,897			540
Revenue sharing obligation		(1,750	)		-
Note payable		(1,250	)		(1,500	)
Cash paid at closing	$	1,000		$	500

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

Note 8.

Discontinued Operations

Summarized operating results for G.M.G. for the ten months ended October 31, 2012 are as follows (dollars in thousands):

Revenues	$	35,769
Operating expenses		35,071
Income from operations		698
Gain on sale of assets		26,560
Interest expense		(163	)
Net income	$	27,095

Summarized cash flow information for G.M.G. for the period ended October 31, 2012 is as follows (dollars in thousands):

Cash Flows From Operating Activities
Net income	$	27,095
Depreciation and amortization		1,425
(Gain) on sale of property and equipment		(26,560	)
Other adjustments		125
Changes in working capital components		(1,428	)
Net cash provided by operating activities	$	657

Cash Flows From Investing Activities
Expenditures for property and equipment	$	(697	)

Cash Flows From Financing Activities
Principal payment of long-term debt	$	(360	)

Note 9.

Subsequent Events

On January 25, 2015, Sartini entered into an Agreement and Plan of Merger (the Merger Agreement) with Lakes Entertainment, Inc., a Minnesota corporation (Lakes), LG Acquisition Corporation, a Nevada corporation and wholly owned subsidiary of Lakes (the Merger Subsidiary), and The Blake L. Sartini and Delise F. Sartini Family Trust (the Sartini Trust), pursuant to which, on and subject to the terms and conditions set forth in the Merger Agreement, the Merger Subsidiary will merge with and into Sartini, with Sartini surviving as a wholly owned subsidiary of Lakes (the Merger).

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

Note 9.

Subsequent Events (Continued)

Under the terms of the Merger Agreement, Lakes is valued at $9.57 per share (representing an approximate 37 percent premium to the closing share price for the common stock of Lakes on January 23, 2015), subject to working capital and various other adjustments under the Merger Agreement. The value of Sartini under the Merger Agreement will be determined by multiplying 7.5 times the Company’s trailing twelve-month consolidated EBITDA (adjusted for non-cash or non-recurring expenses, losses and charges and certain other expenses), less the aggregate principal amount of the Company’s indebtedness, subject to working capital and various other adjustments under the Merger Agreement.

The Company has agreed that prior to the closing of the Merger, it will use commercially reasonable efforts to enter into an agreement with one or more lenders to refinance or amend its existing credit agreements (either with the existing or new lenders), on such terms and subject to such conditions as shall have been reasonably approved by Lakes. In addition, the Company has made certain customary representations, warranties and covenants in the Merger Agreement which survive the closing of the transaction, and a portion of the shares of Lake’s common stock to be issued to the Sartini Trust under the Merger Agreement will be placed into escrow to satisfy the indemnification obligations of the Sartini Trust described in the Merger Agreement.

In March 2015, Lakes, the Merger Subsidiary, Sartini Gaming, the Sartini Trust and members of Lakes Board of Directors were named as defendants in three lawsuits related to the Merger Agreement and the proposed Merger. The lawsuits allege that, in negotiating the Merger Agreement and related transactions and documentation, the defendants have breached their fiduciary duties to Lakes shareholders and/or have aided and abetted such breaches. Such claims seek, among other things, injunctive relief. One of the conditions to the closing of the Merger is that no restraining order, injunction, judgment, order or decree shall be in effect that prohibits the consummation of the Merger. Consequently, any lawsuit with respect to the Merger may prevent the Merger from becoming effective within the expected time frame, or at all. Although management believes these lawsuits are without merit, the claims could result in delay of the closing of the Merger.

On April 3, 2015, the Company entered into a Warrant Repurchase Agreement with the warrantholders, pursuant to which each warrantholder has agreed to sell its warrants immediately prior to the closing of the Merger either to Sartini Gaming for cash or to Lakes for shares of Lakes common stock, as elected by such holder, and effective upon such sale the warrants will be cancelled.

If a warrantholder elects to receive cash for its warrants, the purchase price will be calculated as the greater of (i) the repurchase value of the warrants calculated in accordance with a formula therein or (ii) the value of such warrantholder’s pro rata share of the shares of Lakes common stock issuable to the Sartini Trust under the Merger Agreement (based on its warrant percentage) multiplied by the average closing price for Lakes common stock for the 20 consecutive trading days ending 30 days prior to the closing of the Merger. If a warrantholder elects to receive shares of Lakes common stock, such shares will be deducted from the shares otherwise issuable to the Sartini Trust as merger consideration under the Merger Agreement, such that the total number of shares of Lakes common stock issued in connection with the Merger remains the same.

EX-99.2 4 ex99-2.htm EXHIBIT 99.2 ex99-2.htm

Exhibit 99.2

Sartini Gaming, Inc.

Consolidated Balance Sheets

June 30, 2015 and December 31, 2014

(Dollars in thousands)

Assets	As of June 30, 2015 (Unaudited)			As of December 31, 2014
Current Assets
Cash and cash equivalents	$	26,214		$	27,022
Accounts and notes receivable, net of allowance for doubtful accounts of $519 and $589, respectively		4,721			4,229
Inventories		2,383			2,703
Prepaid expenses and other		6,487			5,843
Total current assets		39,805			39,797

Property and Equipment, net		72,660			73,636
Goodwill		7,706			7,706
Intangible Assets, net		16,722			18,344
Notes Receivable		813			865
Debt Issuance Costs, net		116			139
Other Assets		861			896
	$	138,683		$	141,383
Liabilities and Stockholder's Deficit
Current Liabilities
Current maturities of long-term debt	$	5,901		$	6,409
Accounts payable		8,151			7,965
Accrued payroll and related		1,569			1,626
Accrued interest payable		44			7
Warrant liability		7,804			-
Other accrued liabilities		2,052			2,603
Total current liabilities		25,521			18,610

Long-Term Debt, less current maturities		179,662			181,096
Warrant Liability		-			5,685
Deferred Rent and Asset Retirement Obligations		2,195			2,089
Total liabilities		207,378			207,480

Commitments and Contingencies (Notes 5 and 6)
Stockholder's Deficit
Common stock, no par value; 2,500 shares authorized; 711 shares issued and outstanding		28,803			28,803
Additional paid-in capital		46,330			46,330
Accumulated deficit		(143,828	)		(141,230	)
Total stockholder's deficit		(68,695	)		(66,097	)
	$	138,683		$	141,383

See Notes to Consolidated Financial Statements.

Sartini Gaming, Inc.

Consolidated Statements of Operations

Six-month Periods Ended June 30, 2015 and 2014

(Unaudited)

(Dollars in thousands)

	Six Months Ended June 30,
	2015			2014
Revenues:
Gaming	$	127,669		$	125,886
Food and beverage		23,413			22,648
Other		4,076			3,726
		155,158			152,260
Promotional allowances		(10,492	)		(10,161	)
Net revenues		144,666			142,099

Costs and expenses:
Gaming		70,210			68,919
Food and beverage		8,676			8,658
Non-gaming payroll and related		22,807			22,837
Selling, general and administrative		23,747			22,592
Depreciation and amortization		7,015			7,031
Merger expenses		1,284			-
Preopening and business combination expenses		459			512
(Gain) loss on disposal of property and equipment		29			(5	)
Total costs and expenses		134,227			130,544
Income from operations		10,439			11,555

Other (expense) income:
Interest expense, net		(10,918	)		(10,543	)
Loss on extinguishment of debt		-			(4	)
Loss on warrant		(2,119	)		(3,420	)
Total other expense, net		(13,037	)		(13,967	)
Net loss	$	(2,598	)	$	(2,412	)

See Notes to Consolidated Financial Statements.

Sartini Gaming, Inc.

Consolidated Statements of Stockholder's Deficit

Six-month Periods Ended June 30, 2015 and 2014

(Unaudited)

(Dollars in thousands)

					Additional
	Common Stock Issued				Paid-In		Accumulated			Stockholder's
	Shares		Amount		Capital		Deficit			Deficit
Balance, December 31, 2013		711	$	28,803	$	46,330	$	(131,965	)	$	(56,832	)
Net loss		-		-		-		(2,412	)		(2,412	)
Balance, June 30, 2014		711	$	28,803	$	46,330	$	(134,377	)	$	(59,244	)

Balance, December 31, 2014		711	$	28,803	$	46,330	$	(141,230	)	$	(66,097	)
Net loss		-		-		-		(2,598	)		(2,598	)
Balance, June 30, 2015		711	$	28,803	$	46,330	$	(143,828	)	$	(68,695	)

See Notes to Consolidated Financial Statements.

Sartini Gaming, Inc.

Consolidated Statements of Cash Flows

Six-month Periods Ended June 30, 2015 and 2014

(Unaudited)

(Dollars in thousands)

	Six Months Ended June 30,
	2015			2014
Cash Flows From Operating Activities
Net loss	$	(2,598	)	$	(2,412	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization, including $694 and $450 included in interest expense, respectively		7,709			7,481
Deferred rent and asset retirement obligations		106			(269	)
Interest paid-in-kind on long-term debt		685			677
Loss on warrants		2,119			3,420
(Gain) loss on disposal of property and equipment		29			(5	)
Changes in working capital components:
Accounts and notes receivable		(492	)		(1,132	)
Inventories and prepaid expenses and other		(289	)		296
Accounts payable and accrued expenses		(385	)		589
Net cash provided by operating activities		6,884			8,645

Cash Flows From Investing Activities
Expenditures for property and equipment		(3,266	)		(4,027	)
Net change in intangible and other assets		35			(617	)
Acquisitions of businesses, net of cash acquired		(370	)		-
(Disbursements on) collection of notes receivable		52			(61	)
Proceeds from sale of property and equipment		-			8
Net cash used in investing activities		(3,549	)		(4,697	)

Cash Flows From Financing Activities
Proceeds from issuance of long-term debt		800			1,250
Principal payments on long-term debt		(4,943	)		(3,791	)
Net cash used in financing activities		(4,143	)		(2,541	)
Net increase (decrease) in cash and cash equivalents		(808	)		(150	)

Cash and Cash Equivalents, beginning of period		27,022			27,172
Cash and Cash Equivalents, end of period	$	26,214		$	27,022

Supplemental Disclosure of Cash Payments for Interest	$	10,187		$	10,887

Supplemental Schedule of Noncash Investing and Financing Activities
Gaming equipment purchased through financing	$	245		$	383

See Notes to Consolidated Financial Statements.

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1.

Basis of Presentation, Description of Business, and Summary of Significant Accounting Policies

Sartini Gaming, Inc., a Nevada corporation (Sartini), was formed in January 2012 with a contribution from The Blake L. Sartini and Delise F. Sartini Family Trust, its sole shareholder, of all of the outstanding common stock of Golden Gaming, Inc. In February 2012, Sartini formed 77 Golden Gaming, LLC as a wholly owned subsidiary. Also in February 2012, Golden Gaming, Inc. was converted from a corporation to a limited liability company and all of its outstanding membership units were contributed to 77 Golden Gaming, LLC. Sartini and its consolidated subsidiaries are referred to herein collectively as the Company.

The accompanying consolidated financial statements include the accounts of Sartini, 77 Golden Gaming, LLC, and its wholly owned subsidiaries Sartini Synergy Online, LLC and Golden Gaming, LLC (G.G.I.), and G.G.I.’s wholly owned subsidiaries which include:

Golden Tavern Group, LLC (G.T.G.)

Golden Pahrump Nugget, LLC (G.P.N.)

Golden Pahrump Town, LLC (G.P.T.)

Golden Pahrump Lakeside, LLC (G.P.L.)

Golden Tavern Restaurants, LLC

Golden Aviation, LLC

Golden Golf Management, LLC

Golden HRC, LLC

Golden Route Operations LLC (G.R.O.) and its wholly owned subsidiaries:

Market Gaming, LLC

E-T-T, LLC and its wholly owned subsidiaries:

Cardivan, LLC and Corral Country Coin, LLC

G.T.G has more than 50 subsidiaries formed to operate 48 individual taverns in Nevada.

G.T.G., which operates taverns under various brands throughout Nevada, is one of the largest operators of taverns in the state. G.T.G.’s principal operations include the operating activities of tavern locations in the Las Vegas area under the name PT’s Entertainment (PT’s), which include the brands Sierra Gold, PT’s Gold, PT’s Pub, PT’s Place, and Sean Patricks, and tavern locations in Reno and the surrounding area under the name of Sierra Gold and Sierra Junction. All of the locations operate in a themed bar environment catering to local residents that prefer the smaller, more convenient entertainment option of the Company’s taverns to the larger, full-service hotel casinos. Each G.T.G. location has approximately 15 gaming machines and other non-gaming entertainment devices and amenities.

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1.

Basis of Presentation, Description of Business, and Summary of Significant Accounting Policies (Continued)

Sartini Synergy Online, LLC, Golden Aviation, LLC, Golden Golf Management, LLC, and Golden HRC, LLC are inactive. Golden Tavern Restaurants, LLC provides certain payroll services to G.T.G.

A summary of the Company’s significant accounting policies follows:

Principles of consolidation: The consolidated financial statements include the accounts of Sartini and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Cash and cash equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash consists primarily of cash in banks and cash on hand in the Company’s vaults and cages, and at slot route locations. At various times during the year, the Company maintained balances at a financial institution in excess of federally insured limits. The Company has not experienced any losses in such accounts.

Accounts and notes receivable: Accounts and notes receivable represent primarily amounts due from third-party locations serviced by G.R.O. and other miscellaneous receivables. The carrying amount of receivables is reduced by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. The Company has not historically charged interest on past due accounts receivable. Long-term notes receivable represent unsecured, noninterest-bearing advances due from route customers at the maturity of their route contracts, which average approximately seven years in duration.

Inventories: Inventories are recorded at the lower of cost (first in, first out method) or market, and consist primarily of food, beverage, vending and gift shop items.

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1.

Basis of Presentation, Description of Business, and Summary of Significant Accounting Policies (Continued)

Promotional allowances: Gross revenues include the retail amount of accommodations, food, beverages, and merchandise provided gratuitously to customers. When computing net revenues, the retail value of accommodations, food, beverages, and merchandise provided to customers without charge is deducted from gross revenues as promotional allowances. The estimated retail cost of such complimentary services for room, food, beverages, merchandise, and player points is charged to gaming and selling, general and administrative expense.

Rent expense: Rent is recognized on the straight-line basis over the term of the lease. The amount by which the straight-line amount exceeds the amount of rent actually due is recorded as deferred rent.

Property and equipment: Property and equipment is recorded at cost. Assets that have been placed in service are depreciated on a straight-line basis over their estimated useful lives. Depreciation is computed using the straight-line method over the following estimated useful lives:

	Estimated
	Life in
	Years

Furniture, fixtures and equipment		3-7
Land improvements		10
Building and building improvements		45
Leasehold improvements		1-15

The estimated lives for leasehold improvements are the lesser of economic life or the remainder of the lease term.

Substantially all of the Company’s goodwill is amortizable for tax purposes.

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1.

Basis of Presentation, Description of Business, and Summary of Significant Accounting Policies (Continued)

Intangible assets and other assets: Intangible assets consist primarily of trademarks and other intellectual property, customer relationships, noncompete agreements, and licenses. Customer relationships include the value of purchased route contracts. Amortization of customer relationships related to slot route operations is recorded primarily on an accelerated basis over eight years and is included in depreciation and amortization expense. Customer relationships related to the casino operations are amortized on an accelerated basis over ten to eleven years representing the estimated attrition of preferred customers. Non-compete agreements are amortized on a straight-line basis over one to five years. Trademarks and licenses are amortized on a straight-line basis over ten years.

Impairment: In accordance with the provisions of the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) 360, Property, Plant, and Equipment, the Company evaluates the potential impairment of long-lived assets when events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. If it is determined that the carrying value of long-lived assets may not be recoverable based upon the relevant facts and circumstances, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the estimated undiscounted future cash flows is less than the carrying value of the asset, the asset is written down to its fair value.

No impairment was recorded during the six-month periods ended June 30, 2015 and 2014.

Modification accounting: The Company evaluates amendments to its debt in accordance with ASC 540-50, Debt – Modifications and Extinguishments, for modification and extinguishment accounting. For debt amendments involving continuing existing lenders, this evaluation includes comparing the net present value of cash flows of the new debt to the old debt to determine if changes greater than 10 percent occurred. In instances where the net present value of future cash flows changed more than 10 percent, the Company applies extinguishment accounting and determines the fair value of its debt based on factors available to the Company. In instances where the change was less than 10 percent, the Company applies modification accounting. For modification accounting, prior unamortized deferred loan costs and debt discounts and any new fees paid to the continuing lender are amortized over the revised term of the debt.

Debt issuance costs: Debt issuance costs consist of loan origination and financing fees paid in connection with long-term debt. These fees are being amortized to interest expense over the life of the long-term debt using the interest method.

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1.

Basis of Presentation, Description of Business, and Summary of Significant Accounting Policies (Continued)

Loyalty programs: The Company provides the Golden Rewards Club Program (the Club) for its customers. Members of the Club earn points based on gaming activity, and such points are redeemable for cash, free play, or complimentary goods and services such as accommodations, food and beverages. Club members may also earn special coupons or awards as determined during marketing promotions. Because redemption of points does not displace a significant number of paying customers and the value of the awards is not significant compared to the original revenue transaction, the Company records revenue for the original transaction and a liability for the value of points earned by Club members. The value of the points is determined by referencing the cash value of points expected to be redeemed for cash or free play and the incremental (departmental) cost of points expected to be redeemed for complimentary goods or services. The liability is reduced by points not expected to be redeemed. The cost of points redeemed for cash is recorded as a reduction of gaming revenue, and the cost of points redeemed for complimentary goods or services is recorded as an operating expense of the gaming department. As of June 30, 2015 and December 31, 2014, the Club liability was approximately $703,000 and $751,000, respectively, and was included in other accrued liabilities on the consolidated balance sheets.

Revenue recognition: Gaming revenue is (a) the net win from gaming activities, which is the difference between gaming wins and losses, less sales incentives and other adjustments and (b) revenue from gaming-related activities such as poker, blackjack, and tournaments. Jackpots, other than the incremental amount of progressive jackpots, are recognized at the time they are won by customers. The Company accrues the incremental amount of progressive jackpots as the progressive machine is played and the progressive jackpot amount increases, with a corresponding reduction of gaming revenue.

The Company reports revenues net of sales taxes collected and remitted.

Preopening expenses: Preopening expenses are charged to expense as incurred in accordance with ASC 720, Other Expenses.

Income taxes: Sartini has elected, with its stockholder’s consent, to be taxed under the provision of Sub-chapter S of the Internal Revenue Code. Under this provision, the Company does not pay federal corporate income taxes on its taxable income. Instead, the stockholder is liable for individual income taxes on the Company's taxable income. Sartini’s subsidiaries are limited liability companies and their income or loss is allocated to their members.

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1.

Basis of Presentation, Description of Business, and Summary of Significant Accounting Policies (Continued)

Gaming taxes: The Company is subject to taxes based on non-restricted gross gaming revenue and annual and quarterly fees at all locations. These gaming taxes are recorded as an expense within the “Gaming” line item in the accompanying consolidated statements of operations. These taxes totaled approximately $3,389,000 and $3,564,000 for the six-month periods ended June 30, 2015 and 2014, respectively.

Asset retirement obligations: The Company records a liability for the estimated fair value of a required asset retirement obligation (ARO) when such obligation is incurred. The Company’s AROs are primarily associated with leasehold improvements which, at the end of a lease, the Company is contractually obligated to remove in order to comply with the lease agreement. At the inception of a lease with such conditions, the Company records an ARO liability and a corresponding leasehold improvement in an amount equal to the estimated fair value of the obligation. The liability is estimated based on a number of assumptions requiring management’s judgment, including store closing costs, cost inflation rates, and discount rates, and is accreted to its projected future value over time. The capitalized asset is depreciated as a leasehold improvement. Upon satisfaction of the ARO conditions, any difference between the recorded ARO liability and the actual retirement costs incurred is recognized as an operating gain or loss in the consolidated statements of operations.

Fair value of financial instruments: The carrying amounts of cash and cash equivalents, accounts and notes receivable, and accounts payable approximate fair value because of the short-term nature of these instruments. Based on the borrowing rates currently available to the Company for bank loans with similar items and average maturities, the fair value of the Company’s long-term debt approximates its carrying value.

Fair value measurements: In accordance with ASC 820, Fair Value Measurements, assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

● Level 1: Quoted market prices in active markets for identical assets or liabilities.

● Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

● Level 3: Unobservable inputs that are not corroborated by market data.

During the year ended December 31, 2012, the Company issued warrants for the purchase of membership interests of 77 Golden Gaming, LLC, which are measured at fair value on a recurring basis. The fair value of the warrants has been determined under Level 3. At June 30, 2015 and December 31, 2014, the Company did not have any assets or liabilities measured at fair value on a non-recurring basis.

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1.

Basis of Presentation, Description of Business, and Summary of Significant Accounting Policies (Continued)

Recent accounting pronouncements: In April 2014, the FASB issued Accounting Standards Update (ASU) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for reporting discontinued operations. Under ASU 2014-08, only disposals representing a strategic shift in operations should be presented as discontinued operations. ASU 2014-08 also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. ASU 2014-08 will be effective prospectively for the Company for annual reporting periods beginning after December 15, 2014. The adoption of ASU 2014-08 is not expected to have a material effect on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in accounting principles generally accepted in the United States of America when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. On July 9, 2015, the FASB voted to defer the effective date of ASU 2014-09 by one year and it will be effective for annual reporting periods beginning after December 15, 2018. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on the consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30):

Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The

ASU will be effective for annual reporting periods beginning after December 15, 2015. The adoption of

ASU 2015-03 is not expected to have a material effect on the Company’s consolidated financial statements or disclosures.

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements, which made changes to clarify the Codification, correct unintended application of guidance, and make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice. ASU 2015-10 is not expected to have a material effect on the Company’s consolidated financial statements or disclosures.

In August 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, to address concerns about the complexity of its guidance on measuring inventory. This update does not apply to inventory measured using the last-in, first-out method or the retail inventory method. The ASU applies to all other inventory, which includes inventory measured using the first-in, first-out method or the average cost method. Inventory within the scope of ASU 2015-11 now is required to be measured at the lower of cost and net realizable value. Net realizable value is defined as “the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.” The ASU will be effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. ASU 2015-11 is not expected to have a material effect on the Company’s consolidated financial statements or disclosures.

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1.

Basis of Presentation, Description of Business, and Summary of Significant Accounting Policies (Continued)

In September 2015, the FASB issued ASU 2015-15, Interest – Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements – Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. In June 2015, the Emerging Issues Task Force (EITF) announced that it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. This ASU codifies this announcement. ASU 2015-15 is not expected to have a material effect on the Company’s consolidated financial statements or disclosures.

Subsequent events: The Company has evaluated subsequent events through October 14, 2015, the date on which the consolidated financial statements were available for issuance.

Note 2.

Property and Equipment

Property and equipment consists of the following at June 30, 2015 and December 31, 2014

(dollars in thousands):

	2015			2014
Furniture, fixtures and equipment	$	103,640		$	102,055
Land, land improvements and water rights		26,072			26,072
Building and building improvements		30,696			26,211
Leasehold improvements		41,973			46,702
Construction in process		3,771			2,105
		206,152			203,145
Less accumulated depreciation		(133,492	)		(129,509	)
Property and equipment, net	$	72,660		$	73,636

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Note 3.

Intangible Assets

Intangible assets consist of the following at June 30, 2015 and December 31, 2014

(dollars in thousands):

	2015			2014
Customer relationships	$	23,057		$	23,057
Trademarks		1,240			1,240
Non-compete		3,624			3,624
Licenses and other		3,045			3,045
		30,966			30,966
Less accumulated amortization		(14,244	)		(12,622	)
Intangible assets, net	$	16,722		$	18,344

Total amortization expense related to intangible assets for the periods ended June 30, 2015 and 2014 was approximately $1,623,000 and $2,009,000, respectively.

Amortization expense for each of the five succeeding years and thereafter is expected to be as follows (dollars in thousands):

Years ending June 30,

2016	$	3,143
2017		2,867
2018		2,409
2019		2,049
2020		1,899
Thereafter		4,355
	$	16,722

Note 4.

Long-Term Debt

Long-term debt consists of the following at June 30, 2015 and December 31, 2014 (dollars in thousands):

	2015			2014
First lien loans, net of unamortized discount, 2015, $655; 2014, $759	$	73,345		$	75,241
Second lien loans, net of unamortized discount, 2015, $4,127; 2014, $4,695		105,323			104,070
Revolving credit facility		3,200			2,100
Business combination obligations		1,700			3,068
Notes issued in connection with legal settlement		461			754
Other		1,534			2,272
		185,563			187,505
Less current maturities		(5,901	)		(6,409	)
Long-Term Debt, less current maturities	$	179,662		$	181,096

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Note 4.

Long-Term Debt (Continued)

During the year ended December 31, 2013, the Company entered into a new first lien credit agreement that provided for a $40,000,000 Term A loan, a $40,000,000 Term B loan, and a $5,000,000 revolving credit facility. The Term A loan was repayable in quarterly principal installments of $1,000,000 with the balance due September 16, 2018, which was also the maturity date of the Term B loan and revolving credit facility. The Company also amended its second lien credit agreement to increase the loan to $107,000,000 and adjust the maturity date to March 16, 2019. The credit agreements also provided for additional mandatory prepayments based on “Excess Cash Flow” as defined in each agreement. The first lien secured term loans and revolving credit facility provided for interest at a Base Rate or the LIBOR Rate plus applicable margins. For the Term A loan and the revolving credit facility, the applicable margins as of June 30, 2015 were 2.25 percent for Base Rate Loans and 3.25 percent for LIBOR Rate Loans. For the Term B loan, the applicable margins as of June 30, 2015 were 5.5 percent for Base Rate Loans and 6.5 percent for LIBOR Rate Loans. Interest on the second lien secured term loan was payable monthly at 13.25 percent plus 1.25 percent payment-in-kind (PIK interest), subject to adjustment if on or after June 30, 2014, the ratio of First Lien Debt to EBITDA ratio, as defined, was greater than 2.75:1.00. The effective interest rate for the revolving credit facility and the Term A and Term B loans was 4.00 percent, 4.00 percent, and 7.25 percent, respectively, at both June 30, 2015 and December 31, 2014. Both facilities are collateralized by substantially all assets of the Company. Subsequent to June 30, 2015, the indebtedness under the credit agreements was repaid and discharged. See Note 8.

In connection with two business combinations during the year ended December 31, 2014 described in Note 7, the Company recorded an obligation under a Revenue Sharing Agreement which is described in Note 7 and issued two promissory notes to the sellers. One note, in the original amount of $1,250,000, requires six monthly payments of $125,000 through July 2014, and thereafter, six monthly payments of $83,333, including interest at 0.3 percent. The note is unsecured. The other note, in the original amount of $1,500,000, requires principal payments of $250,000 in September 2015 and 2016 with a final payment of $1,000,000 in September 2017, plus interest at the one month LIBOR plus 3 percent. The note is collateralized by the assets acquired in the business combination.

Other long-term debt consists primarily of gaming equipment obligations that bear interest at rates ranging from 0 percent to 8.5 percent.

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Note 4.

Long-Term Debt (Continued)

Scheduled maturities of long-term debt as of June 30, 2015 were as follows (dollars in thousands):

Years ending June 30,

2016	$	5,901
2017		4,924
2018		36,255
2019		143,131
2020		134
	$	190,345

Note 5.

Warrants

In February 2012, 77 Golden Gaming, LLC issued to the Company’s second lien lenders detachable warrants for the purchase of 11,110 membership interests of 77 Golden Gaming, LLC at an exercise price of $.01 per membership interest. As of June 30, 2015, 77 Golden Gaming, LLC had 88,890 membership interests outstanding. The warrants were scheduled to expire in February 2022 and contained certain anti-dilutive provisions. The lenders had the right to require 77 Golden Gaming, LLC to redeem 75 percent of the outstanding warrants upon the occurrence of a Trigger Event, defined as the occurrence of the (a) maturity of the warrants, (b) acceleration under the Company’s second lien credit agreement, (c) certain refinancing or repayment of debt, or (d) a Liquidity Event, as defined in the warrant. The repurchase value of the warrants was based on terms specified in the warrant. Upon a Trigger Event, the repurchase value was equal to the greater of (a) seven times twelve month trailing EBITDA of the Company less Outstanding Indebtedness or (b) the fair market value of the membership interests, without discounts, determined by an independent investment bank. Upon a Liquidity Event, the repurchase value was based on the transaction consideration in connection with the Liquidity Event.

The $432,000 estimated fair value of the warrants at the time of issuance was accounted for as a discount on the second lien loans.

In September 2014, one of the warrant holders exercised its right to require the repurchase of a warrant for the purchase of 1,111 member interests for $377,528. The estimated fair value of the warrants outstanding at June 30, 2015 and December 31, 2014 was $7,804,000 and $5,685,000, respectively. Fair value at June 30, 2014 was determined based on applying a multiple of trailing EBITDA less outstanding indebtedness with a discount for lack of marketability. Fair value at June 30, 2015 approximates the amount at which the warrants were redeemed on July 31, 2015. Subsequent to June 30, 2015, all remaining outstanding 77 Golden Gaming LLC warrants were repurchased and canceled. See Note 8.

Note 6.

Commitments and Contingencies

Leases: The Company leases buildings, land and parking lot space, and equipment and vehicles under noncancelable operating leases. The original terms of the leases range from 1 to 15 years with various renewal options from 1 to 15 years. Operating lease rental expense, which is calculated on a straight-line basis, was approximately $5,000,000 and $4,000,000 for the six-month periods ended June 30, 2015 and 2014, respectively. The Company has operating leases with affiliated companies for certain of its tavern locations and its office building. The leases expire between July 2015 and July 2025. The office building lease was renewed in June 2015 for ten years effective August 2015 through July 2025. Monthly payments for this office lease are approximately $100,000. The Company paid approximately $1,263,000 and $1,646,000 to affiliates for the six-month periods ended June 30, 2015 and 2014, respectively.

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Note 6.

Commitments and Contingencies (Continued)

Future minimum rentals under noncancelable operating leases are as follows (dollars in thousands):

Years ending June 30,	Office Building		Equipment		Tavern Locations		Total

2016	$	1,419	$	1,451	$	8,750	$	11,620
2017		1,219		472		8,178		9,869
2018		1,199		64		6,475		7,738
2019		1,199		11		5,262		6,472
2020		1,199		3		4,784		5,986
Thereafter		6,096		-		29,132		35,228
	$	12,331	$	2,001	$	62,581	$	76,913

The total minimum rentals for tavern locations include rentals payable to related parties totaling approximately $7,700,000.

Note 7.

Business Combinations

In January 2014, the Company completed the acquisition of certain assets of Strategic Gaming Management, LLC, a privately-held slot route operator in northern Nevada (Route Acquisition A). As consideration for the acquisition, the Company provided the seller with cash of $1,000,000 and a $1,250,000 promissory note. In addition, the Company entered into a Revenue Sharing Agreement under which the Company is obligated to pay to the seller 20 percent of the Net Gaming Revenue, as defined therein, subject to reduction if annual Net Gaming Revenue is less than $2,700,000. The Revenue Sharing Agreement extends for 42 months unless terminated sooner pursuant to terms of the Agreement. The Company has the right to terminate the Revenue Sharing Agreement at any time during the first eighteen months of the Revenue Sharing Agreement term by paying to the seller $1,750,000, less amounts paid under the Revenue Sharing Agreement prior to its termination. The seller agreed not to compete for 42 months. Payments under the Revenue Sharing Agreement, which directly offset the promissory note, were due beginning August 2014 and totaled $293,076 and $0 for the six-month periods ended June 30, 2015 and 2014, respectively.

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Note 7.

Business Combinations (Continued)

In January 2015, the Company completed the acquisition of certain assets of The Holder Group Vending Company, LLC, a privately-held slot route operator in northern Nevada (Route Acquisition B). As consideration for the acquisition, the Company provided the seller with cash of $400,000 and a $300,000 promissory note. The seller agreed not to compete for 24 months.

	Route
	Acquisition B
	(dollars in thousands)

Cash	$	30
Prepaid expenses		35
Property and equipment		635
Note payable		(300	)
Cash paid at closing	$	400

Note 8.

Merger

Pursuant to the agreement and plan of merger, dated as of January 25, 2015, by and among Lakes Entertainment, Inc., (Lakes), LG Acquisition Corporation, a wholly-owned subsidiary of Lakes (the Merger Subsidiary), Sartini, and The Blake L. Sartini and Delise F. Sartini Family Trust, as sole shareholder of Sartini Gaming (the Sartini Trust), as amended, on July 31, 2015, the Merger Subsidiary merged with and into Sartini, with Sartini surviving as a wholly owned subsidiary of Lakes (the Merger). In connection with the Merger, Lakes’ name was changed to Golden Entertainment, Inc. Costs associated with the Merger have been expensed as incurred.

On April 3, 2015, Sartini entered into a warrant repurchase agreement with the holders of the 77 Golden Gaming, LLC warrants, pursuant to which each warrantholder agreed to sell its warrants immediately prior to the closing of the Merger either to Sartini for cash or to Lakes for shares of Lakes common stock, as elected by such holder, and effective upon such sale the warrants would be canceled. On July 31, 2015, Lakes purchased 5,555 of such warrants in exchange for 457,172 shares of Lakes common stock and Sartini purchased the remaining 4,444 warrants for $3,435,417. All warrants were canceled upon purchase.

Sartini Gaming, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Note 8.

Merger (Continued)

On July 31, 2015, Golden Entertainment, Inc. entered into a credit agreement that provides for a $120 million senior secured term loan, which was fully drawn at closing, and a $40 million senior secured revolving credit facility, of which $25 million was drawn at closing. The term loan and revolving credit facilities mature in July 2020. Borrowings under the credit agreement bear interest, at Golden Entertainment, Inc.’s option, at either (1) the highest of the federal funds rate plus 0.50 percent, the Eurodollar rate for a one-month interest period plus 1.00 percent, or the administrative agent’s prime rate as announced from time to time, or (2) the Eurodollar rate for the applicable interest period, plus, in each case, an applicable margin based on Golden Entertainment, Inc.’s leverage ratio. Outstanding borrowings under the term loan must be repaid in four quarterly payments of $1.5 million each, commencing December 31, 2015, followed by eight quarterly payments of $2.25 million each, followed by four quarterly payments of $3.0 million each, followed by four quarterly payments of $4.5 million each, followed by a final installment of $66 million at maturity. The commitment fee for the revolving credit facility is payable quarterly at a rate of between 0.25 percent and 0.30 percent, depending on Golden Entertainment, Inc.’s leverage ratio. The credit agreement is guaranteed by all present and future direct and indirect wholly-owned subsidiaries of Golden Entertainment, Inc. including the Company (other than certain insignificant or unrestricted subsidiaries), and is secured by substantially all present and future personal and real property of Golden Entertainment, Inc. and the subsidiary guarantors (subject to receipt of certain regulatory approvals). Net proceeds from the term loan were used by Golden Entertainment, Inc. and its subsidiaries to repay and discharge all of the outstanding senior secured indebtedness of the Company.

EX-99.3 5 ex99-3.htm EXHIBIT 99.3 ex99-3.htm

Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma condensed combined financial statements are based on the historical consolidated financial statements of Lakes Entertainment, Inc., a Minnesota corporation (“Lakes” or the “Company”) and Sartini Gaming, Inc. (“Sartini Gaming”), after giving effect to the merger of a wholly-owned subsidiary of the Company with and into Sartini Gaming with Sartini Gaming surviving as a wholly-owned subsidiary of the Company (the “Merger”), accounted for under the purchase method of accounting, and reclassifications and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements. While Lakes was renamed Golden Entertainment, Inc. in connection with the Merger, the Company will be referred to as “Lakes” and, together with its pre-Merger subsidiaries, the “Lakes Group” in this discussion and presentation of pro forma condensed combined financial statements as of June 28, 2015 and for the periods ended December 28, 2014 and June 28, 2015 as it relates to Lakes’ pre-Merger financial information.

The unaudited pro forma condensed combined balance sheet as of June 28, 2015 is derived from Lakes’ unaudited consolidated balance sheet as of June 28, 2015 and Sartini Gaming’s unaudited consolidated balance sheet as of June 30, 2015 and is presented as if the Merger had occurred on June 28, 2015. The unaudited pro forma condensed combined statements of operations for the year ended December 28, 2014 and for the six months ended June 28, 2015 are presented as if the Merger had occurred on December 30, 2013, with recurring Merger-related adjustments reflected in that period. The unaudited pro forma condensed combined statement of operations as of December 28, 2014 is derived from Lakes’ audited consolidated statement of operations for the year ended December 28, 2014 and Sartini Gaming’s audited consolidated statement of income for the year ended December 31, 2014. The unaudited pro forma condensed combined statement of operations for the six months ended June 28, 2015 is derived from Lakes’ unaudited consolidated statement of operations for the six months ended June 28, 2015 and Sartini Gaming’s unaudited consolidated statement of operations for the six months ended June 30, 2015.

The unaudited pro forma condensed combined financial statements should be read in conjunction with Lakes’ historical audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 28, 2014 and with Sartini Gaming’s historical audited consolidated financial statements and accompanying notes for the year ended December 31, 2014 filed with the Company’s Amendment No. 1 to Current Report on Form 8-K/A dated July 31, 2015.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

As of June 28, 2015

(In thousands)

	Lakes		Sartini Gaming			Pro Forma				Pro Forma
	As of June 28, 2015		As of June 30, 2015			Adjustments				Combined
Assets
Current assets:
Cash and cash equivalents	$	42,459	$	26,214		$	(13,398	)	(a), (g)	$	55,275
Short-term investments		40,593		-			-				40,593
Income taxes receivable		2,093		-			-				2,093
Accounts and notes receivable		843		4,721			-				5,564
Inventories		474		2,383			-				2,857
Prepaid expenses and other		1,742		6,487			-				8,229
Total current assets		88,204		39,805			(13,398	)			114,611

Noncurrent assets:
Property and equipment, net		27,846		72,660			11,444		(b)		111,950
Goodwill		-		7,706			82,933		(c), (j)		90,639
Intangible assets, net		1,805		16,722			63,978		(b)		82,505
Land held for development		960		-			-				960
Notes receivable		-		813			-				813
Other		411		977			-				1,388
Total noncurrent assets		31,022		98,878			158,355				288,255
Total assets	$	119,226	$	138,683		$	144,957			$	402,866

Liabilities and shareholders' equity
Current liabilities:
Current portion of long term debt, net of discount	$	1,361	$	5,901		$	-			$	7,262
Accounts payable		535		8,151			-				8,686
Accrued taxes, other than income taxes		357		-			-				357
Accrued payroll and related		1,319		1,569			-				2,888
Deposits		326		-			-				326
Warrant liability		-		7,804			(7,804	)	(a)		-
Other accrued expenses		1,206		2,096			(1,443	)	(g)		1,859
Total current liabilities		5,104		25,521			(9,247	)			21,378

Noncurrent liabilities:
Long-term debt, net of current portion and discount		8,273		179,662			-				187,935
Deferred rent, asset retirement obligations and other		-		2,195			(1,752	)	(h)		443
Total liabilities		13,377		207,378			(10,999	)			209,756

Commitments and contingencies
Shareholders' equity (deficit)		105,849		(68,695	)		155,956		(d), (g), (j)		193,110
Total liabilities and shareholders' equity	$	119,226	$	138,683		$	144,957			$	402,866

See notes to unaudited pro forma condensed combined financial statements.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the Year Ended December 28, 2014

(In thousands, except for per share data)

	Lakes			Sartini Gaming
	Year Ended			Year Ended			Pro Forma				Pro Forma
	December 28, 2014			December 31, 2014			Adjustments				Combined

Net revenues	$	55,172		$	280,500		$	-			$	335,672
Expenses:
Operating expenses		31,915			154,095			-				186,010
Selling, general and administrative		22,566			92,106			(497	)	(g)		114,175
Gain on sale of cost method investment		(2,391	)		-			-				(2,391	)
Impairments and other losses		20,997			-			-				20,997
Charges related to arbitration award		2,530			-			-				2,530
Preopening and business combination expenses		-			1,674			-				1,674
Depreciation and amortization		3,513			14,180			10,876		(e)		28,569
Other		(7	)		(293	)		-				(300	)
Total expenses		79,123			261,762			10,379				351,264

Income (loss) from operations		(23,951	)		18,738			(10,379	)			(15,592	)

Other income (expense):
Interest income		151			-			-				151
Interest expense		(1,209	)		(21,940	)		-				(23,149	)
Loss on warrant		-			(6,063	)		6,063		(i)		-
Other		164			-			-				164
Total other income (expense), net		(894	)		(28,003	)		6,063				(22,834	)

Loss before income taxes		(24,845	)		(9,265	)		(4,316	)			(38,426	)
Income tax benefit		-			-			(12,728	)	(j)		(12,728	)
Net loss	$	(24,845	)	$	(9,265	)	$	8,412			$	(25,698	)

Weighted-average common shares outstanding
Basic		13,379						8,230		(f)		21,609
Dilutive impact of stock options		-						-				-
Diluted		13,379						8,230				21,609

Loss per share
Basic	$	(1.86	)								$	(1.19	)
Diluted	$	(1.86	)								$	(1.19	)

See notes to unaudited pro forma condensed combined financial statements.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the Six Months Ended June 28, 2015

(In thousands, except for per share data)

	Lakes			Sartini Gaming
	Six Months Ended			Six Months Ended			Pro Forma				Pro Forma
	June 28, 2015			June 30, 2015			Adjustments				Combined

Net revenues	$	28,095		$	144,666		$	-			$	172,761
Expenses:
Operating expenses		16,057			78,886			-				94,943
Selling, general and administrative		11,674			47,838			(2,530	)	(g)		56,982
Gain on sale of cost method investment		(750	)		-			-				(750	)
Impairments and other losses		682			29			-				711
Depreciation and amortization		1,759			7,015			5,513		(e)		14,287
Other		(2	)		459			-				457
Total expenses		29,420			134,227			2,983				166,630

Income (loss) from operations		(1,325	)		10,439			(2,983	)			6,131

Other income (expense):
Interest income		93			-			-				93
Interest expense		(536	)		(10,918	)		-				(11,454	)
Loss on warrant		-			(2,119	)		2,119		(i)		-
Other		36			-			-				36
Total other income (expense), net		(407	)		(13,037	)		2,119				(11,325	)

Loss before income taxes		(1,732	)		(2,598	)		(864	)			(5,194	)
Income tax provision		172			-			-				172
Net loss	$	(1,904	)	$	(2,598	)	$	(864	)		$	(5,366	)

Weighted-average common shares outstanding
Basic		13,391						8,230		(f)		21,621
Dilutive impact of stock options		-						-				-
Diluted		13,391						8,230				21,621

Loss per share
Basic	$	(0.14	)								$	(0.25	)
Diluted	$	(0.14	)								$	(0.25	)

See notes to unaudited pro forma condensed combined financial statements.

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

1.	Basis of Pro Forma Presentation

Pursuant to that certain Agreement and Plan of Merger, dated as of January 25, 2015, by and among Lakes, LG Acquisition Corporation, a Nevada corporation and wholly-owned subsidiary of Lakes (the “Merger Subsidiary”), Sartini Gaming and The Blake L. Sartini and Delise F. Sartini Family Trust, as the sole stockholder of Sartini Gaming (the “Sartini Trust”), as amended by that certain First Amendment to Agreement and Plan of Merger, dated as of June 4, 2015, by and among Lakes, Sartini Gaming, the Merger Subsidiary and the Sartini Trust (as amended, the “Merger Agreement”), on July 31, 2015, the Merger Subsidiary merged with and into Sartini Gaming, with Sartini Gaming surviving as a wholly-owned subsidiary of the Company, was consummated. In connection with the Merger, the Company’s name was changed to Golden Entertainment, Inc.

The Merger will be accounted for under the purchase method of accounting in accordance with ASC Topic 805, Business Combinations. Under the purchase method, the total estimated purchase price, or consideration transferred, is measured at the Merger closing date. The Merger consideration issued by the Company on the Merger closing date was based on preliminary estimates of the pre-Merger values of Lakes and Sartini Gaming, which are subject to post-closing adjustment, under the Merger Agreement.

Certain of the assets and liabilities of Sartini Gaming have been measured based on provisional valuations and are subject to adjustment as valuations are reviewed and finalized. However, as indicated in the accompanying unaudited pro forma condensed combined financial statements, the Company has made certain adjustments to the June 30, 2015 historical book values of the assets and liabilities of Sartini Gaming to reflect certain estimates of the fair values necessary to prepare the pro forma financial statements. Actual results may differ from the pro forma financial statements once the Company has finalized the valuations that support the provisional purchase price allocation. Such finalization could result in changes to the pro forma financial statements. The allocation of the purchase price will be revised, if necessary, once the valuations are finalized.

The unaudited pro forma condensed combined financial statements are prepared for illustrative purposes only and are not necessarily indicative of or intended to represent the results that would have been achieved had the Merger been consummated as of the dates indicated or that may be achieved in the future. The unaudited pro forma condensed combined financial statements do not reflect any operating efficiencies and associated cost savings that may be achieved with respect to the combined companies. In addition, since the unaudited pro forma condensed combined financial data have been prepared based on preliminary estimates of purchase consideration and fair values of assets acquired and liabilities assumed, the actual amounts recorded may differ materially from the information presented. We therefore caution you not to place undue reliance on the unaudited pro forma condensed combined financial statements. The unaudited pro forma condensed combined financial statements should be read in conjunction with Lakes’ historical audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 28, 2014 and with Sartini Gaming’s historical audited consolidated financial statements and accompanying notes for the year ended December 31, 2014 filed with the Company’s Amendment No. 1 to Current Report on Form 8-K/A dated July 31, 2015.

2.	Calculation of Estimated Purchase Consideration

On July 31, 2015, the Company acquired Sartini Gaming, a diversified group of gaming companies that focus on distributed gaming (including tavern gaming) and casinos, through the consummation of the Merger. At the effective time of the Merger, all issued and outstanding shares of capital stock of Sartini Gaming were canceled and converted into the right to receive shares of Company common stock. At the closing of the Merger, the Company issued 7,772,736 shares of its common stock to the Sartini Trust (as the sole stockholder of Sartini Gaming), of which 388,637 shares are being held in escrow as security for the post-closing adjustment in accordance with the Merger Agreement, and 777,274 shares are being held in escrow as security for claims for indemnifiable losses in accordance with the Merger Agreement. In addition, the Company issued 457,172 shares of its common stock to holders of warrants issued by a subsidiary of Sartini Gaming that elected to receive shares of Company common stock in exchange for their warrants. As a result, the estimated value of the purchase consideration, based on preliminary estimates, was $75.3 million. This amount is the product of the 8,229,908 total common shares issued upon the Merger closing and the $9.15 per share closing price of the Company's common stock on July 31, 2015.

Calculation of Value of Merger Consideration

Under the Merger Agreement, the number of shares of the Company’s common stock issued in connection with the acquisition of Sartini Gaming in the Merger reflect the pre-Merger value of Sartini Gaming relative to the pre-Merger value of the Lakes Group, which are calculated in accordance with formulas set forth in the Merger Agreement, as described below. To determine the number of shares of Lakes common stock issued in connection with the Merger, the sum of the number of shares of Lakes common stock outstanding immediately prior to the Merger and the number of shares issuable upon the exercise of outstanding in-the-money stock options are divided by the percentage of the total pre-Merger value of both companies that represents the Lakes Group’s pre-Merger value to determine the total number of fully diluted shares immediately following the Merger. The number of shares issued in connection with the Merger is the difference between the total number of fully diluted shares immediately following the Merger and the total number of fully diluted shares immediately prior to the Merger. No fractional shares of Lakes common stock are issued in connection with the Merger, and any fractional share was rounded to the nearest whole share.

The Merger Agreement specifies the procedure for determining the pre-Merger values of Sartini Gaming and the Lakes Group. In accordance with the Merger Agreement, prior to the closing of the Merger, Lakes and Sartini Gaming each delivered to the other a statement of its estimate of its pre-Merger value, which preliminary estimates were used to determine the number of shares of Lakes common stock to be issued at the closing of the Merger. The final pre-Merger values of Lakes and Sartini Gaming are in the process of being determined pursuant to the post-closing adjustment provisions of the Merger Agreement, and the number of shares issued in connection with the Merger will be trued up accordingly; see “Post-Closing “True-Up” Adjustment” below.

Determination of Lakes Pre-Merger Value

The pre-Merger value of Lakes is determined for the Lakes Group on a consolidated basis and is based on an estimated value of $135,245,106 (the product of $9.57 per share multiplied by 14,132,195 shares), subject to the following adjustments under the Merger Agreement:

●

by adding the amount by which the cash proceeds of the sale of the Lakes' corporate office building located in Minnetonka, Minnesota, (net of commissions, taxes, fees and other transaction costs) exceeded $4,000,000;

●

by adding the amount by which at closing excess cash of the Lakes Group exceeds $77,500,000, or by subtracting the amount by which $77,500,000 exceeds such excess cash amount, with excess cash calculated as (i) the aggregate amount (positive or negative) calculated by subtracting from cash and cash equivalents of the Lakes Group (but excluding the sum of any proceeds in excess of $5,500,000 received from the sale of specified land owned by the Lakes Group in Jamul, California, cash and cash equivalents received from the sale of the corporate office building located in Minnetonka, Minnesota, and cash and cash equivalents from the exercise of options for shares of Lakes common stock), normalized operating cash of $4,000,000, plus (ii) all severance payments, transition payments, legal and other advisor fees and other fees, costs or expenses incurred by the Lakes Group in connection with the Merger and paid on or prior to the closing date, plus (iii) legal and other advisor fees, commitment fees, funding fees, arranging fees, prepayment penalties or premiums and other fees, costs, charges and expenses incurred and paid by the Lakes Group in connection with the refinancing or amendment of Sartini Gaming’s existing indebtedness;

●

by adding the amount by which at closing $12,500,000 exceeds the aggregate principal amount of outstanding indebtedness of the Lakes Group, or by subtracting the amount by which such aggregate principal amount exceeds $12,500,000;

●

by adding the amount by which at closing $5,000,000 exceeds the aggregate amount of severance payments, transition payments, legal and other advisor fees and other fees, costs or expenses incurred by the Lakes Group in connection with the Merger, whether or not paid prior to the Merger, or by subtracting the amount by which such aggregate amount exceeds $5,000,000;

●

by adding the amount by which the net working capital balance of the Lakes Group exceeds $2,457,000, or by subtracting the amount by which $2,457,000 exceeds such net working capital balance, such net working capital balance being the amount, determined on a consolidated basis in accordance with generally accepted accounting principles (“GAAP”), by which accounts and notes receivable, prepaid assets, inventories and other current assets (excluding cash and cash equivalents in excess of $4,000,000 and including income tax receivables up to a maximum of $2,155,000 in the aggregate) exceeds accrued expenses, payroll, accounts payable and other current liabilities (excluding the current portions of outstanding indebtedness, severance payments, transition payments, legal and other advisor fees and other fees, costs or expenses incurred and paid by the Lakes Group in connection with the Merger, and any amounts payable prior to the effective time of the Merger in connection with the settlement or other resolution of the Quest litigation referred to below); and

●

by subtracting any amounts payable by the Lakes Group after the Merger in connection with any settlement or other resolution prior to the Merger of the litigation captioned Quest Media Group, LLC vs. Lakes Ohio Development, LLC and Lakes Entertainment, Inc., et al.

Determination of Sartini Gaming Pre-Merger Value

The Sartini Gaming preliminary pre-Merger value is determined for Sartini Gaming and its subsidiaries on a consolidated basis and is based on the sum of (i) Sartini Gaming’s Adjusted EBITDA, multiplied by a factor of 7.5, plus (ii) the aggregate amount of specified investments, acquisitions and contributions to capital (but only so long as and to the extent that such amounts so expended or obligations so incurred do not exceed $5,000,000) made between October 31, 2014 and July 31, 2015, subject to the adjustments under the Merger Agreement set forth below.

For purposes of this determination, Sartini Gaming’s Adjusted EBITDA is measured for the period of 12 consecutive calendar months ended June 30, 2015 (being the last full month ended at least 30 days prior to the Merger), and equals the net income or loss generated by Sartini Gaming for such period, plus (without duplication, and to the extent deducted in calculating such net income or loss) (i) interest, fees, charges and related expenses paid or payable for such period in connection with borrowed money or the deferred purchase price for assets, and rent paid or payable under capital leases treated as interest, (ii) expenses for income taxes paid or accrued, (iii) depreciation and amortization, (iv) non-cash or non-recurring expenses, losses or charges, (v) fees, costs, expenses, discounts, premiums and commissions incurred, paid or deducted in connection with the refinancing of Sartini Gaming’s indebtedness, any dispositions or acquisitions, and any restructuring, integration, severance or retention costs, accruals or reserves relating to or resulting from acquisitions, and (vi) severance payments, transition payments, legal and other advisor fees and other fees, costs or expenses incurred and paid by Sartini Gaming in connection with the Merger and the transactions contemplated by the Merger Agreement. The calculation of Adjusted EBITDA also reflects annualized results for four specified Sartini Gaming taverns that Sartini Gaming acquired after the beginning of the measurement period.

The so calculated pre-Merger value of Sartini Gaming is subject to the following adjustments under the Merger Agreement:

●

by adding the amount at closing of excess cash of Sartini Gaming, with excess cash calculated as (i) the aggregate amount (positive or negative) calculated by subtracting from Sartini Gaming’s cash and cash equivalents, normalized operating cash of $23,200,000, plus (ii) all severance payments, transition payments, legal and other advisor fees and other fees, costs or expenses incurred by Sartini Gaming in connection with the Merger and paid on or prior to the closing date, plus (iii) legal and other advisor fees, commitment fees, funding fees, arranging fees, prepayment penalties or premiums and other fees, costs, charges and expenses incurred and paid by Sartini Gaming in connection with the refinancing or amendment of Sartini Gaming’s existing indebtedness;

●

by subtracting the aggregate outstanding principal amount of indebtedness of Sartini Gaming at closing;

●

by adding the amount by which at closing $500,000 exceeds the aggregate amount of severance payments, transition payments, legal and other advisor fees and other fees, costs or expenses incurred by Sartini Gaming in connection with the Merger, whether or not paid prior to the Merger, or subtracting the amount by which such aggregate amount exceeds $500,000; and

●

by adding the amount by which the net working capital balance of Sartini Gaming exceeds $20,830,000, or by subtracting the amount by which $20,830,000 exceeds such net working capital balance, such net working capital balance being the amount, determined on a consolidated basis in accordance with GAAP, by which accounts and notes receivable, prepaid assets, inventories and other current assets (excluding cash and cash equivalents in excess of $23,200,000) exceeds accrued expenses, payroll, accounts payable and other current liabilities (excluding the current portions of outstanding indebtedness, severance payments, transition payments, legal and other advisor fees and other fees, costs or expenses incurred and paid by Sartini Gaming in connection with the Merger, and legal and other advisor fees, commitment fees, funding fees, arranging fees, prepayment penalties or premiums and other fees, costs, charges and expenses incurred and paid by Sartini Gaming in connection with the refinancing or amendment of Sartini Gaming’s existing indebtedness, but including payments (other than payments made in the form of shares of Lakes common stock or with cash or cash equivalents of Sartini Gaming on or prior to the closing date) required to be made by Sartini Gaming in connection with the purchase of warrants issued by a subsidiary of Sartini Gaming.

Determination of Lakes Shares Outstanding (Fully Diluted Basis)

The total number of shares of Lakes common stock outstanding (on a fully diluted basis) immediately prior to the Merger to be used in calculating the number of shares of Lakes common stock issued in connection with the Merger is the sum of (i) all shares of Lakes common stock then issued and outstanding, plus (ii) all shares of Lakes common stock then issuable upon the exercise, conversion or exchange of outstanding options, warrants or other convertible securities, but excluding currently outstanding options exercisable for 12,500 shares at an exercise price of $12.85 per share. Such sum equaled 14,132,195 shares as of July 31, 2015.

Preliminary Estimated Pre-Merger Value Calculations

The following calculations illustrate the pre-Merger values of both Lakes and Sartini Gaming used in connection with the closing of the Merger on July 31, 2015 and the resulting number of shares of Lakes common stock issued in connection with the Merger. These calculations are based on the preliminary estimated pre-Merger values delivered by Lakes and Sartini Gaming prior to the closing of the Merger and are subject to final review and adjustment post-closing (see “Post-Closing “True-Up” Adjustment” below).

The preliminary estimated pre-Merger value of Sartini Gaming as of July 31, 2015 was as follows:

Sartini Gaming Estimated Adjusted EBITDA	$	35,568,583
Adjusted EBITDA Multiple	7.5x
Subtotal	$	266,764,374
(+) Permitted Sartini Gaming Acquisitions and Investments		-
Estimated Sartini Gaming Pre-Merger Value	$	266,764,374
(+) Sartini Gaming Excess Cash		1,612,329
(-) Sartini Gaming Outstanding Debt		(190,354,606	)
(+/-) Sartini Gaming Merger Expenses Adjustment		(905,229	)
(+) Sartini Gaming Net Working Capital Balance		22,360,002
(-) Sartini Gaming Working Capital Target		(20,830,000	)
Preliminary Estimated Sartini Gaming pre-Merger Value	$	78,646,870

The preliminary estimated pre-Merger value of Lakes as of July 31, 2015 was as follows:

Pre-Merger Value	$	9.57
Fully Diluted Pre-Closing Lakes Shares		14,132,195
Subtotal	$	135,245,106
(+) Office Building Adjustment		427,403
(+/-) Lakes Excess Cash Adjustment		532,119
(-) Lakes Outstanding Debt Adjustment		1,799,712
(+/-) Lakes Merger Expenses Adjustment		(4,445,453	)
(+) Lakes Net Working Capital Balance		3,948,577
(-) Lakes Working Capital Target		(2,457,000	)
Preliminary Estimated Lakes pre-Merger Value	$	135,050,464

The total number of shares of Lakes common stock issued in connection with the Merger on July 31, 2015 was based on these preliminary estimated pre-Merger values, subject to final review and adjustment post-closing:

Pre-Merger

Value of Lakes

Lakes %

Pre-Merger

Value of Sartini

Gaming

Sartini

Gaming %

Total

Post-Closing

Shares⁽¹⁾

Total Shares

Issued in Connection
with Merger⁽²⁾

$135,050,464

63.2%

$78,646,870

36.8%

22,368,603

8,229,908

(1)

Calculated as the number of shares of Lakes common stock outstanding immediately after the Merger (on a fully diluted basis, including shares issuable upon the exercise of outstanding in-the-money stock options).

(2)

Includes 457,172 shares of Lakes common stock that were issued to certain former holders of warrants issued by a subsidiary of Sartini Gaming upon the closing of the Merger.

Post-Closing “True-Up” Adjustment

The number of shares of Lakes common stock issued in connection with the Merger will be adjusted to reflect the pre-Merger values of Lakes and Sartini Gaming, as finally determined following the Merger in accordance with the provisions of the Merger Agreement. On September 29, 2015, the Company prepared and delivered a closing report setting forth its determinations of the pre-Merger values of Lakes and Sartini Gaming, which closing report is currently under review in accordance with the terms of the Merger Agreement. Upon finalization, the number of shares of Lakes common stock issued in connection with the Merger will be trued up accordingly.

3.	Preliminary Purchase Price Allocation

The preliminary purchase price allocation as of July 31, 2015 (the closing date of the Merger) and giving effect to the purchase price allocation adjustments similar to those made in the pro forma financial statements, is as follows (unaudited, in thousands):

	Amount
Cash	$	25,539
Other current assets		16,534
Property and equipment		84,104
Intangible assets		80,700
Goodwill		90,639
Current liabilities		(13,245	)
Warrant liability		(3,435	)
Debt		(190,587	)
Deferred tax liability		(12,728	)
Other long-term liabilities		(2,217	)
Total assumed purchase price	$	75,304

The preliminary amounts assigned to property and equipment by category are summarized in the table below (unaudited, amount assigned in thousands):

	Remaining Useful Life (Years)	Amount Assigned
Land	Not applicable	$	12,470
Land improvements	10		4,030
Building and improvements	25		21,310
Leasehold improvements	4		20,793
Furniture, fixtures and equipment	1		22,866
Construction in process	Not applicable		2,635
Total property and equipment		$	84,104

The preliminary amounts assigned to intangible assets by category are summarized in the table below (unaudited, amount assigned in thousands):

	Remaining Useful Life (Years)		Amount Assigned
Trade names		10	$	12,200
Player relationships		8-14		7,600
Customer relationships		13-16		59,200
Gaming License		Indefinite		900
Other intangible assets		2-10		800
Total intangible assets			$	80,700

4.	Pro Forma Adjustments

The pro forma adjustments included in the unaudited pro forma condensed combined financial statements are as follows:

(a)

Reflects the elimination of warrants issued by a subsidiary of Sartini Gaming which were purchased for $3.4 million in cash and for 457,172 shares of the Company’s common stock (equivalent to $4.4 million based on the Merger per share price).

(b)

Represents the preliminary allocation of the fair value of the consideration transferred to the acquired tangible and intangible assets of Sartini Gaming based on their estimated fair value.

(c)

Represents the difference between the estimated purchase price and the estimated fair values of the identified assets acquired and liabilities assumed, which is recorded as goodwill.

(d)

Reflects the elimination of Sartini Gaming's historical stockholders' deficit and the preliminary allocation of the fair value of the consideration transferred.

(e)

Represents the additional depreciation expense of property, plant and equipment, and additional amortization expense of intangible assets acquired in the Merger based on their estimated fair values and estimated useful lives. Depreciation and amortization expense will be calculated on a straight-line basis.

(f)

Represents the impact of issuance of 8,229,908 shares on July 31, 2015 in connection with the Merger based on the parties’ preliminary estimated pre-Merger values delivered prior to the closing of the Merger.

(g)

Lakes and Sartini Gaming estimate incurring transaction-related costs of $9.8 million and $1.5 million, respectively, for a total of $11.3 million, which consist primarily of severance, financial advisor, legal, accounting and consulting costs. For the periods ended June 28, 2015 and December 28, 2014, the historical combined financial statements reflect expense of approximately $2.5 million and $0.5 million, respectively, related to transaction-related costs, which were shown as pro forma adjustments reducing selling, general and administrative costs. As of June 28, 2015, $1.2 million in transaction-related costs was included in other accrued expenses and was shown as a pro forma adjustment reducing other accrued expenses and cash and cash equivalents. The remaining $8.3 million of anticipated transaction-related costs as of June 28, 2015 was shown as a pro forma adjustment reducing retained earnings and cash and cash equivalents.

(h)

Represents the derecognition of deferred rent.

(i)

Reflects the elimination of the warrants issued by a subsidiary of Sartini Gaming.

(j)

Includes $12.7 million related to the assumption of a net deferred tax liability generated from the intangible assets acquired in the Merger. The increase to retained earnings and income tax benefit is the result of the release of existing valuation allowance resulting from the assumption of this net deferred tax liability.