ITEM 1.
BUSINESS.
THE COMPANY
Overview of the Company
NGA Holdco, LLC, a Nevada limited liability company ("NGA"), was formed on January 8, 2007 at the direction of Newport Global Opportunities Fund LP, a Delaware limited partnership (“NGOF”) and an affiliate of Newport Global Advisors LP, a Delaware limited partnership (“Newport”). NGA was formed for the primary purpose of holding equity, directly or indirectly through its subsidiaries, in one or more entities related to the gaming industry. NGA has two wholly-owned subsidiaries, NGA Blocker, LLC, a Nevada limited liability company (“Blocker”), and AcquisitionCo, LLC, a Nevada limited liability company (“AcquisitionCo”), each of which was formed on January 8, 2007. References to the "Company" are to NGA and, unless the context otherwise requires, its subsidiaries.
The Company has had no revenue generating business since inception. Its current business plan consists primarily of its holding, through AcquisitionCo, of a 17.0359% equity interest in Eldorado Holdco LLC (the "Eldorado Interest"), a Nevada limited liability company ("Eldorado"), and a 40% equity interest in Mesquite Gaming LLC (the “Mesquite Interest”), a Nevada limited liability company (“Mesquite”). The Eldorado Interest was effectively acquired December 14, 2007 (the
“Eldorado Acquisition”), in exchange for certain first mortgage bonds and preferred equity interests (the “Eldorado-Shreveport Investments”) valued at $38,314,863. The Mesquite Interest was acquired August 1, 2011 (the “Mesquite Acquisition”), in exchange for $8,222,222 in cash, of which $7,222,222 and $1,000,000 were contributed to the Company by NGOF and Newport Global Credit Fund (“NGCF,” and collectively with NGOF, the “Newport Funds”), respectively.
Eldorado owns entities that own and operate the Eldorado Hotel & Casino located in Reno, Nevada ("Eldorado-Reno")and the Eldorado Resort Casino Shreveport located in Shreveport, Louisiana ("Eldorado-Shreveport"). One of the entities owned by Eldorado also owns an approximate 21% interest in a joint venture that owns and operates Tamarack Junction Casino & Restaurant, a small casino located in Reno, Nevada. In addition, an approximately 96% owned subsidiary of Eldorado owns a 50% interest in a joint venture that owns and operates the Silver Legacy Resort Casino, which is located in Reno, Nevada and is seamlessly connected to the Eldorado-Reno.
Mesquite is engaged in the casino resort industry in Mesquite, Nevada through wholly-owned subsidiaries that own and operate the CasaBlanca Resort/Golf/Spa, the Virgin River Hotel/Casino/Bingo, two championship golf courses, a full-service spa, a bowling center, restaurants, and banquet and conference facilities. Mesquite also owns real estate on which the Oasis Resort & Casino was located prior to its demolition.
The Company holds no equity interests other than its equity interests in Eldorado and Mesquite, along with any indirect interests it holds in other entities by virtue of its equity interests in Eldorado and Mesquite, and has no current plans to acquire any interest in another entity.
Formed in 2005, Newport is a Texas-based investment management firm focused on alternative fixed income strategies. The firm concentrates primarily on the stressed and distressed opportunities within the high yield debt and bank loan markets but may also include the acquisition and disposition of other types of corporate securities and claims. Newport has 11 employees, with its primary office in The Woodlands, TX. Newport’s principals include Timothy T. Janszen, CEO, Ryan Langdon, Senior Managing Director, and Roger A. May, Senior Managing Director. Collectively, the principals have over 35 years of experience investing in the high yield and distressed debt markets. Newport is registered with the Securities and Exchange Commission (the "Commission") as an investment adviser under the Investment Advisers Act of 1940, as amended. Newport is investment manager of the Newport Funds, private investment funds which seek attractive long-term risk adjusted returns by capitalizing on investments in the distressed debt markets and possibly control-oriented investments. The Newport Funds began investing in 2006.
Ownership of the Company
NGA's one issued and outstanding Class A Unit, representing all of its voting equity, is held by NGA VoteCo, LLC, a Nevada limited liability company (“VoteCo”). All of NGA's issued and outstanding Class B Units, representing all of its non-voting equity, are held by NGA No VoteCo, LLC, a Nevada limited liability company (“InvestCo”). At present, NGA has no plans to issue any additional Class A or Class B Units.
VoteCo is owned by Timothy T. Janszen and Ryan L. Langdon, each of whom owns a 42.85% interest, and Roger A. May, who owns a 14.3% interest. Messrs. Janszen, Langdon and May collectively are referred to as the “VoteCo Equityholders." InvestCo is owned by the Newport Funds, which hold all of InvestCo’s issued and outstanding voting securities.
The VoteCo Equityholders, through VoteCo, control all matters of the Company that are subject to the vote of members, including the appointment and removal of managers. Each of the VoteCo Equityholders is a member of NGA's board of managers, and Mr. Janszen is NGA's operating manager who has responsibility for the day-to-day management of the Company. The Class B Units issued to InvestCo allow it and its investors to invest in the Company without having any voting power or power to control the operations or affairs of the Company, except as otherwise required by law. If InvestCo and its investors had any of the power to control the operations or affairs of the Company afforded to holders of the Class A Units, they and their respective constituent equityholders would generally be required to be licensed or found suitable under applicable gaming laws and regulations, including those of the States of Nevada and Louisiana.
Management of the Company
A majority of NGA's managers may remove the operating manager from such position. The approval of a majority of the managers is required to elect a new operating manager, who must be selected from among the members of NGA's board of managers. Neither NGA's board of managers nor the operating manager may take, or cause NGA to take, the following actions without the approval of VoteCo:
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Materially change the business purpose of NGA or the nature of the business,
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Act to render it impossible to carry on the ordinary business of NGA,
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Remove or appoint any manager,
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Allow any voluntary withdrawal of any member from NGA,
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Make any assignment for the benefit of creditors, any voluntary bankruptcy of NGA, or any transaction to dissolve, wind up or liquidate NGA, or
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Make any transaction between NGA and any member or manager of NGA, or any affiliate or direct family member of any member or manager of NGA, that is not made on an arm’s-length basis.
Generally, in all other respects, VoteCo has no power or authority to participate in the management of NGA or to bind or act on behalf of NGA in any way or to render it liable for any purpose. Except as otherwise expressly required by applicable law, InvestCo has neither any right to vote on any matters to be voted on by the members of NGA, nor any power or authority to participate in the management of NGA or bind or act on behalf of NGA in any way or render it liable for any purpose.
Neither the operating manager nor any other manager has the authority to do any of the following acts on behalf of NGA without the approval of a majority of NGA's managers:
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Acquire, by purchase, lease, or otherwise, any real property on behalf of NGA;
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Give or grant any options, rights of first refusal, deeds of trust, mortgages, pledges, ground leases, security interests, or otherwise encumbering any stock, interest in a business entity, promissory note issued to NGA, or any other asset owned by NGA;
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Sell, convey, or refinance any interest, direct or indirect, in NGA’s unconsolidated investees;
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Cause or permit NGA to extend credit to or make any loans or become a surety, guarantor, endorser, or accommodation endorser for any person or enter into any contracts with respect to the operation or management of the business of NGA;
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Release, compromise, assign, or transfer any claims, rights, or benefits of NGA;
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Confess a judgment against NGA or submit an NGA claim to arbitration;
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File any petition for bankruptcy of NGA;
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Distribute any cash or property of NGA, other than as provided in NGA’s operating agreement;
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Admit a new member to NGA; or
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Do any act in contravention of NGA’s operating agreement or do any act which would make it impossible or unreasonably burdensome to carry on the business of NGA.
Notwithstanding the foregoing provisions, the operating manager has the authority under NGA’s operating agreement to take such actions as he, in his reasonable judgment, deems necessary for the protection and preservation of NGA assets if, under the circumstances, in his good faith estimation, there is insufficient time to obtain the approval of NGA’s board of managers and any delay would materially increase the risk to preservation of NGA’s assets.
Restrictions on Transfer
Unless approved in advance by the operating manager and by applicable gaming authorities, no member of the Company may transfer all or any portion of its membership units.
Member and Manager Compensation
No member or manager of NGA or either of its subsidiaries is entitled to receive any compensation from the Company for any services rendered to or on behalf of the Company, or otherwise, in his, her or its capacity as a member or manager of NGA or either of its subsidiaries. A manager of NGA is entitled to reimbursement from the first available funds for direct out-of-pocket costs and expenses incurred by the manager on behalf of the Company that directly relate to the business and affairs of the Company.
Dissolution and Termination
NGA will be dissolved upon the happening of any of the following events:
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Sale or other disposition of all or substantially all of NGA’s assets and receipt of all consideration therefore,
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Determination that an event has occurred that makes it unlawful, impossible or impracticable for NGA to carry on the business, or
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VoteCo decides NGA will be dissolved.
Following such an event or the determination by a court of competent jurisdiction that NGA has dissolved prior to the occurrence of such an event, the property of NGA, or the proceeds from the sale thereof, will be applied and distributed first to the payment and discharge of all of NGA’s debts and other liabilities to creditors (including members that are creditors), second to establishing any reserves that the managers of NGA determine, in their sole and absolute discretion, are necessary for any contingent, conditional or unmatured liabilities or obligations of NGA, and third to the members of NGA in proportion to their respective percentage interest in NGA.
Eldorado Acquisition
On December 14, 2007, the Company effectively acquired its Eldorado Interest by transferring the Eldorado-Shreveport Investments in part to Eldorado Resorts, LLC (“Resorts”) and in part to Donald L. Carano (“Carano”), free and clear of any liens, in exchange for a 17.0359% interest in Resorts (the “Resorts Interest”), of which 14.47% was acquired directly from Resorts and the balance from Carano. The Eldorado-Shreveport Investments included first mortgage bonds due 2012 (the “Mortgage Bonds”) and 11,000 preferred shares of a partner of the co-issuer of the Mortgage Bonds. The Mortgage Bonds were co-issued by Eldorado Casino Shreveport Joint Venture (the “Louisiana Partnership”) and Shreveport Capital Corporation, a wholly-owned subsidiary of the Louisiana Partnership (the “New Shreveport Notes”). The original principal amount of the Mortgage Bonds was $38,045,363. The 11,000 preferred shares were issued by Shreveport Gaming Holdings, Inc. (“SGH”), then a partner of the Louisiana Partnership, that is not affiliated with Resorts or the Company. In May 2007, NGOF had contributed the Eldorado-Shreveport Investments to the Company at the estimated fair value of such investments as of that date. Effective April 1, 2009, Resorts became a wholly-owned subsidiary of Eldorado and the Resorts Interest was exchanged for the Eldorado Interest when all of the members of Resorts, including AcquisitionCo, exchanged their interests in Resorts for identical interests in Eldorado.
The Eldorado Acquisition occurred pursuant to the terms and conditions of a purchase agreement, dated July 20, 2007 (the “Purchase Agreement”). The parties to the Purchase Agreement were Resorts, AcquisitionCo, and Carano, now the presiding member of Eldorado’s Board of Managers and the Chief Executive Officer of Eldorado who then held the same positions with Resorts. The closing of this transaction occurred after necessary gaming licenses and approvals were obtained from Nevada and Louisiana. Carano or members of his family continue to own directly or indirectly approximately 51% of Eldorado. Some other provisions of the Purchase Agreement included:
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At closing, Resorts and Carano paid Newport in cash the respective amounts owed to AcquisitionCo for interest on the respective amounts of New Shreveport Notes received at closing that were accrued and unpaid through the date of closing.
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Members of Resorts other than AcquisitionCo received distributions totaling $10 million, funded through borrowings under Resorts’ credit facility.
Put and Call Rights
At the time of closing under the Purchase Agreement, AcquisitionCo and the members of Resorts entered into an amendment and restatement of Resorts’ operating agreement (the “Resorts Operating Agreement”) and, when the equity interests in Resorts were exchanged for equivalent equity interests in Eldorado, the members of Eldorado entered into an operating agreement with substantially the same provisions included in the Resorts Operating Agreement (the “Eldorado Operating Agreement”). Under the terms of the Eldorado Operating Agreement, at any time after the occurrence of a “Material Event” (as defined) or at any time after June 14, 2015 (the “Trigger Date”) AcquisitionCo or its permitted assignee(s) (the “Interest Holder”) will have the right to sell (“Put”) 14.47% of its 17.0359% Eldorado Interest but not less, and Eldorado will have the right to purchase (“Call”) all but not less than all of the entire 17.0359% Eldorado Interest at a price equal to the estimated fair market value of such interest, without discounts for minority ownership and lack of marketability, as determined by mutual agreement of the Interest Holder and Eldorado. In the event that after 30 days the Interest Holder and Eldorado have not mutually agreed on a purchase price, the purchase price will be determined by the average of two appraisals by nationally recognized appraisers of private companies, provided the two appraisals are within a 5% range of value based upon the lowest of the two appraisals. If the two appraisals are not within the 5% range, the purchase price will be determined by the average of a third mutually acceptable, independent, nationally recognized appraiser of private companies and the next nearest of the first two appraisals unless the third appraisal is at the mid-point of the first two appraisals, in which event the third appraisal will be used to established the fair market value. So long as a Material Event that entitles the Interest Holder to exercise its Put right has not occurred, AcquisitionCo will have the right to unilaterally extend the Trigger Date for up to two one-year extension periods. Upon exercise of either the Call or the Put, the Eldorado Operating Agreement provides that the transaction close within one year of the exercise of the right unless delayed for necessary approvals from applicable gaming authorities.
As defined in the Eldorado Operating Agreement, a “Material Event” for the purpose of allowing Eldorado to exercise the right to Call the 17.0359% interest means the loss, forfeiture, surrender or termination of a material license or finding of unsuitability issued by one or more of the applicable gaming authorities with respect to AcquisitionCo or any transferee of AcquisitionCo or any affiliate of AcquisitionCo. If a Material Event occurs that permits Eldorado to exercise its Call right prior to the Trigger Date, the Interest Holder will be obligated to provide carry back financing to Eldorado on terms and conditions reasonably acceptable to Eldorado. If a Call is required or ordered by any applicable gaming authority, the Call will be on the terms provided for in the Eldorado Operating Agreement, unless other terms are required by any of the applicable gaming authorities, in which event the Call will be on those terms.
As defined in the Eldorado Operating Agreement, a “Material Event” for the purpose of allowing the Interest Holder to exercise the right to Put the 14.47% interest to Eldorado means the loss, forfeiture, surrender or termination of a material license or finding of unsuitability by any applicable gaming authority with respect to Eldorado, any affiliate of Eldorado (other than AcquisitionCo or its affiliates), including, but not limited to, the Eldorado-Reno, the Eldorado-Shreveport and Silver Legacy.
At the time of closing under the Purchase Agreement, Resorts, AcquisitionCo and Carano entered into a separate put-call agreement (as subsequently amended, the “Put-Call Agreement”). Under the terms of the Put-Call Agreement, the Interest Holder is entitled, if it exercises its Put rights under the Eldorado Operating Agreement as then in effect, to require Carano to purchase from it the portion of the 17.0359% interest acquired from Carano. In that event, the purchase price payable by Carano will be based on a fractional relationship of the purchase price payable to the Interest Holder for the 14.47% interest relative to the percentage interests being purchased by Carano. However, as a practical matter, restrictive covenants of Eldorado’s 2011 debt financing, discussed in the following paragraph may prevent the purchase of the 14.47% interest or the 17.0359% interest unless the transaction, at the time it occurs, can be funded within the covenants’ provisions. In the event of an initial public offering by Eldorado of any of its equity securities, the Put and Call provisions described above will terminate and be of no further force and effect.
On June 1, 2011, Resorts and Eldorado Capital Corp., a Nevada Corporation that is a wholly-owned subsidiary of Resorts, completed the issuance of $180 million of 8.625% Senior Secured Notes due June 15, 2019 (the “Resorts Senior Notes”). Also, on June 1, 2011, Resorts entered into a new $30 million senior secured revolving credit facility available until May 30, 2014 (the “Resorts New Credit Facility”), which consists of a $15 million term loan requiring principal payments of $1.25 million each quarter beginning September 30, 2011, and a $15 million revolving credit facility. Resorts does not intend to renew the Resorts New Credit Facility when it matures on May 30, 2014. Proceeds from the issuance of the Resorts Senior Notes, together with borrowings under the Resorts New Credit Facility, were used to redeem or otherwise retire approximately $ 230 million of previously outstanding debt owed by Resorts and its subsidiaries, of which approximately $31 million was held by Resorts. The remaining previously outstanding debt was called and redeemed on August 1, 2011 utilizing $9.7 million of restricted cash which was set aside on June 1, 2011 for the purpose of redeeming the notes that were called. Interest on the Resorts Senior Notes is payable semiannually each June 15 and December 15 (commencing on December 15, 2011) to holders of record on the preceding June 1 or December 1, respectively. Interest on the credit facility is payable on the last day of the loan in the case of a Eurodollar Rate loan, provided, however, that if the period exceeds three months the interest will be payable on the respective dates that fall every three months after the beginning of the loan period. For each Base Rate loan, interest is payable as of the end of the respective quarter. The interest period cannot exceed the maturity date of the credit facility for either a Eurodollar Rate loan or Base Rate loan.
The indenture relating to the Resorts Senior Notes contains various restrictive covenants including covenants relating to restricted payments and investments, additional liens, transactions with affiliates, covenants imposing limitations on additional debt, dispositions of property, mergers and similar transactions. As of December 31, 2013, Resorts was in compliance with all of the covenants under the indenture relating to the Resorts Senior Notes. So long as these covenants are in effect, they may limit or restrict entirely the ability of Eldorado to fund the purchase by Eldorado of the 14.47% interest in the event the Interest Holder exercises its Put right under the Eldorado Operating Agreement as well as the purchase of the 17.0359% interest in the event Eldorado exercises its Call right under the Eldorado Operating Agreement. Accordingly, there can be no assurance that the covenants then in effect will not preclude Eldorado from being able to conclude a Put or Call transaction, and, if so, that any waivers that may then be required to consummate the transaction can be obtained or that Resorts will be able to eliminate the covenant restrictions by the repayment of any indebtedness then owed to the creditors whom the covenants are intended to benefit or otherwise.
Registration Rights
In the event of a public offering by Eldorado of its equity securities in which any member of Eldorado is allowed to participate, the Interest Holder will have rights under the Eldorado Operating Agreement equivalent to other members of Eldorado to sell the equity securities of Eldorado held by the Interest Holder on a pro rata basis with the other members. At the
time of closing under the Purchase Agreement, AcquisitionCo and Resorts entered into a registration rights agreement (the “Registration Rights Agreement”). By an assignment and assumption of the Registration Rights Agreement, with the consent of AcquisitionCo, the rights and obligations of Resorts under the agreement were assigned to, and assumed by, Eldorado. Under the Registration Rights Agreement, AcquisitionCo and its permitted assigns have certain registration rights to conduct a secondary offering subsequent to any initial public offering of the equity securities of Eldorado.
Mesquite Acquisition
Mesquite is engaged in the hotel casino industry in Mesquite, Nevada through its wholly-owned subsidiaries, C & HRV, LLC (doing business as Virgin River Hotel/Casino/Bingo) and VRCC, LLC and its wholly-owned subsidiaries, 5.47 RBI, LLC and RBG, LLC (doing business as CasaBlanca Resort/Golf/Spa) and its wholly-owned subsidiary CasaBlanca Resorts, LLC (doing business as the Oasis Resort and Casino prior to its demolition which was substantially completed by August 31, 2013) and its wholly-owned subsidiaries Oasis Interval Ownership, LLC, Oasis Interval Management, LLC and Oasis Recreational Properties, Inc.
On August 1, 2011, the Company acquired its 40% Mesquite Interest in exchange for $8,222,222 in cash that was contributed to the Company by the Newport Funds in July 2011. The Mesquite Acquisition was completed upon the transfer to Mesquite of all of the assets of Black Gaming, LLC (“Black Gaming”), including Black Gaming’s direct and indirect ownership interests in its subsidiaries. The transfer of the Black Gaming assets to Mesquite and the acquisition by AcquisitionCo of the Mesquite Interest were pursuant to a joint plan of reorganization filed by Black Gaming and its subsidiaries with the United States Bankruptcy Court for the District of Nevada on March 1, 2010, and approved by the Court on June 28, 2010.
On August 1, 2011, Mesquite completed the issuance of $62.5 million of Senior Secured Notes under Mesquite’s New Loan Facility that provided for interest at an annual rate of LIBOR (1.5% floor and 4.5% ceiling) plus 700 basis points and were due and payable August 1, 2016 (the “Mesquite Senior Notes”), and entered into a new $10 million senior secured credit facility. Interest and principal on the Mesquite Senior Notes and interest on the Mesquite Credit Facility were payable quarterly.
On August 22, 2013, Mesquite completed its refinancing of the indebtedness then outstanding under the Mesquite Senior Notes and the Mesquite Credit Facility utilizing the following: (a) $20 million of First Lien Notes held by Nevada State Bank, due and payable August 21, 2019, that provide for interest at a 30 day LIBOR rate effective on the first day of each month plus an applicable margin which is determined by reference to Mesquite's senior leverage ratio (5.25% for a ratio greater than 2:1 and 4.75% for a ratio less than or equal to 2:1), (b) a three-year term, $6 million First Lien Revolver with Nevada State Bank, which is subject to the same interest terms as the First Lien Notes plus 0.25% quarterly on the unused principal portion of the First Lien Revolver, and (c) $35 million of Second Lien Notes held by Wilmington Trust, due and payable February 21, 2020, that provide for no principal amortization and payment of interest on the unpaid principal amount at the rate of 7% per annum over the period from August 22, 2013 to August 22, 2014, and at the rate of 8% per annum thereafter.
Organizational Diagrams
The Company
The diagram below depicts the general ownership of the entities related to the Company and its subsidiaries, as well as the Company’s ownership interests in Eldorado and Mesquite.
Eldorado
The diagram below depicts the current organizational structure of Eldorado, as well as Eldorado's ownership interest in other entities.
Mesquite
The diagram below depicts the current organizational structure of Mesquite and its subsidiaries.
ELDORADO
Introduction
Effective April 1, 2009, all of the equity interests of Resorts (including the 17.0359% interest then indirectly held by the Company through AcquisitionCo) were exchanged for equivalent equity interests of Eldorado and Resorts thus became a wholly- owned subsidiary of Eldorado. Eldorado conducts no operations other than those conducted indirectly through Resorts and its subsidiaries and investees.
In 1996, Resorts was formed and became the successor to a predecessor partnership in a reorganization in which all of the interests in the predecessor partnership were exchanged for membership interests in Resorts. Insofar as they relate to periods prior to July 1, 1996, the effective date of the reorganization, references to Resorts are to its predecessor partnership except to the extent the context requires otherwise. Eldorado Capital Corp., a Nevada corporation wholly owned by Resorts (“Eldorado Capital”), was incorporated with the sole purpose of serving as co-issuer of debt co-issued by Resorts and Eldorado Capital. Eldorado Capital holds no significant assets and conducts no business activity. Resorts’ other subsidiaries include Eldorado-
Shreveport #l, LLC (“ES#1”) and Eldorado-Shreveport #2, LLC (“ES#2”), Nevada limited liability companies wholly-owned by Resorts, and Eldorado Limited Liability Company, a Nevada limited liability company approximately 96% owned by Resorts (“ELLC”).
Eldorado, through Resorts, owns and operates Eldorado-Reno, a premier hotel/casino and entertainment facility in Reno, Nevada. The Eldorado-Reno is easily accessible both to vehicular traffic from Interstate 80, the principal highway linking Reno to its primary visitor markets in northern California, and to pedestrian traffic from nearby casinos.
Resorts indirectly owns 100% of the partnership interests of Eldorado Casino Shreveport Joint Venture, a Louisiana general partnership (the “Louisiana Partnership”). The Louisiana Partnership owns and Resorts manages the Eldorado Resort Casino Shreveport (the “Eldorado-Shreveport”), a 403-room all suite art deco-style hotel and a tri-level riverboat dockside casino complex situated on the Red River in Shreveport, Louisiana, which commenced operations under its previous owners in December 2000. Resorts acquired a majority ownership interest in the hotel and riverboat casino complex in July 2005, and acquired the remaining minority interest in March 2008. Resorts’ ownership interest in the Louisiana Partnership is held through ES#1 and ES#2.
ELLC, which is approximately 96%-owned by Resorts, is a 50% joint venture partner in a general partnership (the “Silver Legacy Joint Venture”) that owns Silver Legacy, a major themed hotel/casino which is situated between, and seamlessly connected at the casino level to, Eldorado-Reno and Circus Circus-Reno, a hotel casino owned and operated by the other partner in the Silver Legacy Joint Venture, Galleon, Inc., an indirect, wholly-owned subsidiary of MGM Resorts International (“MGM”).
Resorts also owns an approximate 21% interest in Tamarack Crossing, LLC, a Nevada limited liability company that owns and operates Tamarack Junction, a small casino in south Reno which commenced operations September 4, 2001. Tamarack Junction is situated on approximately 62,000 square feet of land with 13,230 square feet of gaming space and 460 slot machines as of December 31, 2013.
Management of Eldorado
Eldorado’s board of managers (the “Eldorado Board”) is currently composed of individuals designated by Eldorado's three managers, including Timothy T. Janszen designated by AcquisitionCo, Donald L. Carano, Gary L. Carano and Thomas R. Reeg designated by Recreational Enterprises, Inc. (“REI”), and Raymond J. Poncia, Jr. designated by Hotel-Casino Management, Inc. (“HCM”). AcquisitionCo, REI and HCM may change their respective representatives on the Eldorado Board from time to time by notice to Eldorado so long as they remain managers of Eldorado. Generally, any member of the Eldorado board may be removed from office with cause upon a vote of more than 50% of Eldorado’s membership interests.
Subject to the limitations described below, and except as otherwise delegated to Eldorado’s Chief Executive Officer (the “Eldorado CEO”), the Eldorado Board has control over the management of the business and affairs of Eldorado. Each board member has one vote and actions of the Eldorado Board generally require a majority vote of the board members. The members of the Eldorado Board are required to be licensed or found suitable by the relevant Nevada and Louisiana gaming authorities in order to engage in the management of Eldorado. For further information about these licensing and suitability requirements, see “Laws and Regulations,” below.
Under the Eldorado Operating Agreement, the Eldorado CEO is given the general powers and duties of management usually vested in the chief executive officer of a corporation along with such other powers and duties as may be prescribed by the Eldorado Board or the Eldorado Operating Agreement, including the supervision, direction and control of the day-to-day business and affairs of Eldorado. In addition to this general authority, the Eldorado CEO has the following specific rights which may be exercised on behalf of Eldorado:
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Develop, improve, maintain, operate and lease Eldorado’s property;
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In any single transaction or series of related transactions having a value of under $5,000,000, on behalf of Eldorado, contract to sell, lease, exchange, grant any option on, convert to condominiums or otherwise transfer or dispose of any of the real or personal property of Eldorado;
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Select and remove such officers, agents and employees of Eldorado to assist with the management or operation of Eldorado;
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Employ and terminate the services of such persons, firms, corporations or other entities, including any one or more of Eldorado’s members, for or in connection with the business of Eldorado or the acquisition, development, improvement, operation, maintenance, management, leasing, financing, refinancing, sale, exchange or other disposition of the property of Eldorado and perform Eldorado’s administrative services, accounting services, independent auditing services, legal and other services;
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Institute, prosecute, defend and settle any legal or administrative proceedings having an actual or potential value of under $5,000,000;
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In any single transaction or series of related transactions having a value of under $5,000,000, acquire real or tangible personal property to carry on the business of Eldorado, and sell, exchange or otherwise dispose of the same; and
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In any single transaction or series of related transactions having a value of under $5,000,000, enter into loans, mortgages and other financing arrangements or rearrangements, and grant such security interests in the assets of Eldorado, as may be necessary or desirable to carry on the business.
Without the affirmative vote or written consent of all of Eldorado’s members, neither the Eldorado Board nor the Eldorado CEO may directly or indirectly:
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Act in contravention of the Eldorado Operating Agreement;
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Act to make it impossible to carry on Eldorado’s ordinary business, provided that actions of the managers in accordance with Eldorado’s purposes or the rights and powers granted under the Eldorado Operating Agreement will not be considered to breach this provision; or
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Commingle funds of Eldorado with funds of any other person.
Without the affirmative vote or written consent of members holding 65% of Eldorado’s outstanding membership interests, neither the Eldorado Board nor the Eldorado CEO may directly or indirectly:
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Amend the number of Eldorado’s authorized managers;
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Cause Eldorado to merge or otherwise engage in any kind of business combination or reorganization with another entity or other person;
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Approve, adopt and implement such new or additional incentive compensation policies and plans for the benefit of the managers, officers, agents and/or employees of Eldorado that contemplate the issuance of any form of equity interest in Eldorado;
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Cause Eldorado to enter into any joint venture or partnership or limited liability company agreement;
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Cause Eldorado to enter into any loan that results in assets of Eldorado being hypothecated in excess of 80% of the fair market value of all assets of Eldorado;
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Cause or permit any new issuance and sale of membership interests of Eldorado other than in connection with subsequent capital contributions in accordance with the Eldorado Operating Agreement;
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Cause or permit any person or entity to which a new issuance and sale of membership interests has been made by Eldorado other than in connection with subsequent capital contributions in accordance with the Eldorado Operating Agreement to become a member by reason of or in connection therewith;
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Possess Eldorado property, or assign rights in specific Eldorado property, for other than an Eldorado purpose;
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Purchase or lease Eldorado property from Eldorado or sell or lease property to Eldorado;
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Cause Eldorado to guarantee the indebtedness of any person or cause or suffer or permit any Eldorado property to secure or become collateral for any indebtedness of any person other than Eldorado;
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Cause or permit Eldorado at any time to have more than 100 members and/or interest holders; or
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Designate a new “Tax Matters Partner” as described in the Eldorado Operating Agreement.
Without the affirmative vote or written consent of members holding 75% of Eldorado’s outstanding membership interests, neither the Eldorado Board nor the Eldorado CEO may directly or indirectly request subsequent capital contributions from the members and interest holders of Eldorado.
Members of Eldorado and AcquisitionCo do not have the right to take part in the management or control of Eldorado. The members of Eldorado have voting rights generally limited to those required by law.
Proposed Eldorado Transaction
On September 9, 2013, Eldorado and MTR Gaming Group, Inc. (“MTR”), a publicly traded company, announced that they had entered into a definitive agreement (the “Merger Agreement”), which provides for the combination of MTR and Eldorado in a stock merger with a cash election option offered to MTR’s current stockholders. On November 18, 2013, Eldorado and MTR entered into Amendment No. 1 to the Merger Agreement, which increased the cash election option per share amount from $5.15 to $6.05 and increased the aggregate amount available for the purchase of shares pursuant to the cash
option from $30 million to $35 million, with the $5 million increase to be funded by Eldorado utilizing its cash on hand. MTR’s remaining common shares will be exchanged for shares in the combined new company, which is to be publicly traded under the name Eldorado Resorts, Inc. (“NewCo”).
On February 13, 2014, Eldorado and MTR entered into Amendment No. 2 to the Merger Agreement, which allows for the minority investors who own 3.8142% of ELLC (the "Minority Investors") to enter into agreements with Eldorado and MTR to transfer all of their interests in ELLC to Eldorado following closing of the merger for a portion (the "Retained Consideration") of the aggregate number of shares of NewCo to be delivered, as merger consideration, at closing to all members of Eldorado (collectively, the "Retained Interest Agreements"). Prior to its second amendment, the Merger Agreement required Minority Investors to transfer their respective interests in ELLC to a wholly-owned subsidiary of Eldorado on or prior to the closing date. Pursuant to the Retained Interest Agreements, the Minority Investors will grant a wholly-owned subsidiary of Eldorado a right, exercisable for three months commencing on the first business day after the first anniversary of the closing date of the mergers, to acquire all of their interests in ELLC in exchange for payment of the Retained Consideration. This wholly-owned subsidiary of Eldorado will grant a right, pursuant to the Retained Interest Agreements, to the Minority Investors, exercisable for three months commencing on the first business day after the second anniversary of the closing date of the mergers, to put to it all of the Minority Investors’ interests in ELLC in exchange for payment of the Retained Consideration. The Retained Consideration shall mean the number of shares of NewCo common stock equal to the estimated value of ELLC’s interest in Silver Legacy (as calculated in accordance with the provisions of the Merger Agreement), multiplied by the portion of the outstanding interests in ELLC (expressed as a percentage) represented by the interests in ELLC held by the Minority Investors. The number of shares of NewCo common stock issuable at closing to all members of Eldorado shall be reduced by the number of shares of NewCo common stock equal to the Retained Consideration.
On May 13, 2014, Eldorado and MTR entered into Amendment No. 3 to the Merger Agreement, which expands the circumstances under which either Eldorado or MTR may unilaterally extend the termination date from June 9, 2014 for 180 days to include a scenario in which MTR will not have obtained the requisite stockholder approval of the Merger Agreement by June 9, 2014. The parties entered into the amendment in order to allow for additional time for the registration statement on Form S-4 initially filed by NewCo on November 4, 2013 to be declared effective by the Securities and Exchange Commission and for MTR to obtain the requisite stockholder approval following such effectiveness.
Under the terms of the Merger Agreement, as amended, the transaction value of Eldorado will be determined by Eldorado’s adjusted EBITDA for the twelve-month period specified in the Merger Agreement multiplied by 6.81, less net debt and other adjustments. Based on Eldorado’s adjusted EBITDA for the twelve-month period ending on the most recent month end preceding the closing date by at least twenty days (including its interest in Silver Legacy), Eldorado’s owners, including the Company, would receive in exchange for their current interests in Eldorado, an aggregate of approximately 35.6 million shares, or approximately 55% of the total shares, in NewCo valued at $6.05 per share. These valuation metrics and the Company’s percentage ownership interest in Eldorado would yield a value to the Company that exceeds the Company’s current carrying value of its investment in Eldorado. Based upon this calculation, the Company would at closing acquire ownership of between 9% and 10% of NewCo, depending on the number of shares purchased pursuant to the cash option. The closing of the proposed transaction is subject to a number of conditions. The foregoing discussion is qualified in its entirety by reference to the Merger Agreement and to Amendments No. 1, No. 2 and No. 3 to the Merger Agreement, copies of which are included as exhibits to this report.
Upon closing of the aforementioned Merger Agreement, which is not assured, the Company may distribute the shares of NewCo common stock received at closing to NGOF. Should that occur, the Company's operations will, subsequent to such date, reflect only the Company's ownership of Mesquite and will no longer reflect the Company's current ownership of the Eldorado Interest. The Company is unable to determine at this time the impact on the Company if the transactions contemplated by the Merger Agreement are consummated and the Company ultimately does not distribute the shares of NewCo to NGOF.
Entry into a Material Definitive Agreement
As discussed under "Proposed Eldorado Transaction" above, on September 9, 2013, Eldorado, MTR Gaming Group, Inc., and Thomas Reeg, Robert Jones, and Gary Carano, as the representative of the members of Eldorado, entered into a Merger Agreement that if consummated would result in shares of NewCo being listed on The Nasdaq Stock Market (the "Nasdaq"). Consummation of the Mergers is subject to numerous conditions including, among others, MTR receiving a superior proposal. In addition, Eldorado has been advised by MTR that it has received proposals that may lead to a superior proposal that would entitle it to terminate the Merger Agreement by paying Eldorado a $5.0 million termination fee plus reimbursement for out-of-pocket costs not to exceed $500,000. Under certain circumstances of non-performance by MTR, Eldorado Holdco may terminate the Merger Agreement and receive a $6.0 million termination fee plus reimbursement of out-of-pocket costs not to exceed $1.0 million.
Accordingly, there can be no assurances that the transactions contemplated by the Merger Agreement will be consummated on the terms described herein or at all.
The Merger Agreement, as amended, provides that, upon completion of the Mergers, MTR stockholders will have the right to receive, at their election (but subject to customary procedures applicable to over subscription for cash consideration), either (i) one share of NewCo common stock, or (ii) $6.05 in cash in exchange for each share of MTR common stock they own immediately prior to completion of the Mergers (the "MTR Exchange Ratio"); provided that the total amount of cash consideration is limited to $35.0 million, and if the cash election is oversubscribed, the cash consideration will be payable to the MTR stockholders making the cash election only with respect to a portion of their shares selected by an equitable, pro rata procedure determined by NewCo. The members of Eldorado will collectively receive, in the aggregate, an amount of merger consideration (the "Eldorado Valuation") equal to the product of (a) Eldorado’s adjusted EBITDA for the twelve months ending on the most recent month end preceding the closing date by at least twenty days (the Report Date) and (b) 6.81, with such amount being adjusted for Eldorado’s excess cash, outstanding debt, and working capital based upon an agreed upon working capital target for Eldorado, an amount equal to certain transaction expenses of MTR which is capped at $7.0 million, the value of Eldorado’s interest in the Silver Legacy Joint Venture, and the amount of restricted cash on Eldorado’s balance sheet (if any) relating to the credit support required in connection with the Silver Legacy Joint Venture’s credit facility. The value of Eldorado’s interest in the Silver Legacy Joint Venture is equal to the product of (x) ELLC’s proportionate ownership interest in the Silver Legacy Joint Venture, which is currently 50%, and (y) the product of (A) the Silver Legacy Joint Venture’s adjusted EBITDA for the twelve months ending on the Report Date and (B) 6.81, with such amount being adjusted for the Silver Legacy Joint Venture’s excess cash, outstanding debt, and working capital based upon an agreed upon working capital target for the Silver Legacy Joint Venture (each such adjustment in proportion to Eldorado’s ownership interest), the amount of the subordinated notes made by Eldorado to the Silver Legacy Joint Venture, and Eldorado’s portion of the difference between the capital accounts of the members of the Silver Legacy Joint Venture. As a result, the members of Eldorado will receive, in the aggregate, the number of shares of NewCo common stock equal to the quotient obtained by dividing the merger consideration as calculated in the two preceding sentences by an implied price per share of $6.05 for NewCo common stock (the "Eldorado Merger Shares"). The number of Eldorado Merger Shares issued to Eldorado members is subject to a post-closing adjustment based on a final calculation of the components of the Eldorado Valuation as of the closing date. The MTR Exchange Ratio and the number of Eldorado Merger Shares are subject to customary anti-dilution adjustments in the event of stock splits, stock dividends and similar transactions involving MTR common stock. For federal income tax purposes, MTR common stockholders and Eldorado members are not expected to realize gain or loss with respect to the exchange of MTR common stock or Eldorado membership interests for ERI common stock, but gain or loss might be realized with respect to any merger consideration receive in the form of cash.
In accordance with the Merger Agreement, Eldorado (through its subsidiaries) will be permitted to participate in any buy-sell procedure initiated with respect to the Silver Legacy Joint Venture in accordance with the Silver Legacy Joint Venture’s operating agreement. Additionally, Eldorado shall, at its own expense, dispose of, or sell or assign to a third party, all of its interests in Tamarack.
NewCo filed a proxy statement and prospectus on Form S-4 (the "Registration Statement") with the Securities and Exchange Commission (the "SEC") to solicit proxies from MTR stockholders in connection with the MTR stockholder vote necessary to approve the MTR Merger and to register the shares of NewCo common stock to be issued in connection with the Mergers. Within forty days after the Registration Statement is declared effective by the SEC, the Merger Agreement provides that MTR shall take all action necessary to call and hold a meeting of its stockholders to approve the Merger Agreement. Eldorado members have unanimously approved the Merger Agreement.
At the request of Eldorado, MTR commenced an initial consent solicitation with respect to obtaining certain amendments and waivers of the indenture underlying MTR’s 11.5% Senior Secured Second Lien Notes due August 1, 2019 on terms and conditions agreed upon between Eldorado and MTR. Additionally, Eldorado agreed that each of the members of Eldorado and certain officer and senior managers of Eldorado will enter into non-competition agreements with NewCo that will become effective as of the closing of the Mergers.
The Merger, if consummated, will be accounted for as a reverse acquisition of MTR by Eldorado under accounting principles generally accepted in the United States. As a result, Eldorado will be considered the acquirer of MTR for accounting purposes. Additional information regarding MTR, Eldorado, NewCo, and the merger plans are included in the Registration Statement.
Silver Legacy Joint Venture
Background. The Silver Legacy Resort Casino was developed by the Silver Legacy Joint Venture, an unconsolidated investee of Resorts, which was formed pursuant to the Agreement of Joint Venture of Circus and Eldorado Joint Venture dated as of March 1, 1994 (as amended to date, the “Original Joint Venture Agreement”), between ELLC and Galleon, Inc. (“Galleon”). Under the terms of the Original Joint Venture Agreement, ELLC, which is approximately 96% owned by Resorts, and Galleon (each a “Partner” and, together, the “Partners”) each acquired a 50% interest in the Silver Legacy Joint Venture (each Partner’s “Percentage Interest”).
On March 5, 2002, the Silver Legacy Joint Venture and its wholly owned finance subsidiary, Silver Legacy Capital Corp., issued $160 million principal amount of 10⅛% mortgage notes due March 1, 2012 (the “Silver Legacy Notes”). The Silver Legacy Notes matured on March 1, 2012 and the Silver Legacy Joint Venture did not make the principal and interest payment due on such date. On May 17, 2012, the Silver Legacy Joint Venture and Silver Legacy Capital Corp. (the “Silver Legacy Debtors”) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code and on June 1, 2012 the Silver Legacy Debtors filed a joint plan of reorganization, which was subsequently amended on June 29, 2012 and August 8, 2012 (the “Plan of Reorganization”). On October 23, 2012, an order of confirmation relating to the Plan of Reorganization was entered by the bankruptcy court. On November 16, 2012, the effective date, as defined in the Plan of Reorganization, occurred. Concurrently, the Silver Legacy Joint Venture entered into a new $70 million credit facility (the “Silver Legacy Credit Facility”, issued $27.5 million in second lien notes (the “Silver Legacy Second Lien Notes”) and, in consideration of a $7.5 million contribution made by each of the Partners, issued $15 million in subordinated notes to the Partners (the “Partner Notes”). All creditors were paid under the terms of the Plan of Reorganization (with the exception of the quarterly installment payments to certain general unsecured creditors which are to be paid in full by November 16, 2013), the obligations under the Silver Legacy Notes were extinguished and the Silver Legacy Joint Venture emerged from bankruptcy. A final hearing was held and the Chapter 11 Case closed on March 20, 2013.
Under the Plan of Reorganization, each of ELLC and Galleon retained its 50% interest in the Silver Legacy Joint Venture, but was required to advance $7.5 million to the Silver Legacy Joint Venture in exchange for the Partner Notes and provide credit support by depositing $5.0 million of cash into bank accounts that are subject to a security interest in favor of the lender under the Silver Legacy Joint Venture Credit Facility. The $7.5 million Partner Note from ELLC to the Silver Legacy Joint Venture was issued on November 16, 2012 with a stated interest rate of 5% per annum and a maturity date of May 16, 2018. Payment of any interest or principal under the loan is subordinate to the senior indebtedness of the Silver Legacy Joint Venture, including the Silver Legacy Credit Facility and the Silver Legacy Second Lien Notes. Accrued interest under the Partner Notes will be added to the principal amount and may not be paid unless principal of the loan may be made in compliance with the terms of the senior indebtedness of the Silver Legacy Joint Venture, including the Silver Legacy Credit Facility or the Silver Legacy Second Lien Notes, or at maturity.
As a result of the identification of triggering events by Eldorado's management, Eldorado recognized non-cash impairment charges of $33.1 million in 2011 for its investment in the Silver Legacy Joint Venture. Such impairment charges eliminated Eldorado’s remaining investment in the Silver Legacy Joint Venture. Non-controlling interests in the Silver Legacy Joint Venture were allocated $4.8 million of the non-cash impairments, eliminating the remaining non-controlling interest. Assumptions used in such analyses were impacted by the default in the payment of principal and interest on the Silver Legacy Joint Venture’s debt obligations on March 1, 2012, the current cash flow forecasts and market conditions for the Silver Legacy Joint Venture. As a result of the elimination of Eldorado's remaining investment in the Silver Legacy Joint Venture, Eldorado discontinued the equity method of accounting for its investment in the Silver Legacy Joint Venture until the fourth quarter of 2012 when additional investments in the Silver Legacy Joint Venture were made by Eldorado. At such time, Eldorado recognized its share of the Silver Legacy Joint Venture's net losses not recognized during the period the equity method of accounting was suspended and resumed the equity method of accounting for its investment.
Eldorado's equity in income (losses) related to the Silver Legacy for the years ended December 31, 2013, 2012 and 2011 amounted to $2.3 million, ($9.7) million, and ($4.6) million, respectively. In addition, Eldorado recognized $12.0 million of gain from early extinguishment of debt of unconsolidated affiliate in connection with its investment in the Silver Legacy Joint Venture.
As a further consequence of the reorganization of the Silver Legacy Joint Venture through the bankruptcy process, on July 1, 2013, the Silver Legacy Joint Venture was converted into a Nevada limited liability company, Circus and Eldorado Joint Venture, LLC. Ownership interests held by ELLC and Galleon in the new entity are equal to the ownership interests held by each former partner in the joint venture, and the operating agreement of the limited liability company (the "Joint Venture Agreement") includes all of the material provisions of the Original Joint Venture Agreement with regard to management and operation of the Silver Legacy.
The Joint Venture Agreement provides equal voting rights for ELLC and Galleon (and procedures for resolving deadlocks) with respect to approval of the Silver Legacy Joint Venture’s annual business plan and the appointment and compensation of the general manager and gives each partner the right to terminate the general manager.
Silver Legacy Joint Venture Agreement. The following is a summary of certain provisions of the Joint Venture Agreement. The summary is qualified in its entirety by reference to the Joint Venture Agreement, which is incorporated by reference as an exhibit to this annual report.
Additional Capital Contributions. The Joint Venture Agreement provides that the Partners shall not be permitted or required to contribute additional capital to the Silver Legacy Joint Venture without the consent of the Partners, which consent may be given or withheld in each Partner’s sole and absolute discretion.
Partnership Distributions. In addition to distributions agreed to by the Partners and subject to any contractual restrictions, including the indenture relating to the Silver Legacy Second Lien Notes, prior to the occurrence of a “Liquidating Event” the Silver Legacy Joint Venture is required by the Joint Venture Agreement to make distributions to its Partners as follows:
(a) An amount equal to the estimated taxable income of the Silver Legacy Joint Venture allocable to each Partner multiplied by the greater of the maximum marginal income tax rate applicable to individuals for such period or the maximum marginal federal income tax rate applicable to corporations for such period; provided, however, that if the State of Nevada enacts an income tax (including any franchise tax based on income), the applicable tax rate for any tax distributions subsequent to the effective date of such income tax shall be increased by the higher of the maximum marginal individual tax rate or corporate income tax rate imposed by such tax (after reduction for the federal tax benefit for the deduction of state taxes, using the maximum marginal federal, individual or corporate rate, respectively).
(b) Annual distributions of remaining “Net Cash From Operations” as defined in the Joint Venture Agreement in proportion to the Percentage Interests of the Partners.
(c) Distributions of “Net Cash From Operations” in amounts or at times that differ from those described in (a) and (b) above, provided in each case that both Partners agree in writing to the distribution in advance thereof.
As defined in the Joint Venture Agreement, the term “Net Cash From Operations” means the gross cash proceeds received by the Silver Legacy Joint Venture, less the following amounts: (i) cash operating expenses and payments of other expenses and obligations of the Silver Legacy Joint Venture, including interest and scheduled principal payments on Silver Legacy Joint Venture indebtedness, including indebtedness owed to the Partners, if any, (ii) all capital expenditures made by the Silver Legacy Joint Venture, and (iii) such reasonable reserves as the Partners deem necessary in good faith and in the best interests of the Silver Legacy Joint Venture to meet anticipated future obligations and liabilities of the Silver Legacy Joint Venture (less any release of reserves previously established, as similarly determined).
The Managing Partner. The Joint Venture Agreement designates Galleon as the Silver Legacy Joint Venture’s managing partner with responsibility and authority for the day-to-day management of the business affairs of the Silver Legacy Joint Venture, including overseeing the day-to-day operations of Silver Legacy and other Silver Legacy Joint Venture business, preparation of the Silver Legacy Joint Venture’s budgets and implementation of the decisions made by the Partners. In the event Galleon resigns as managing partner, ELLC will have the right and option to become the managing partner. The managing partner is also responsible for the preparation and submission of the Silver Legacy Joint Venture’s annual business plan for review and approval by the Silver Legacy Joint Venture’s executive committee. The executive committee consists of five members, with three members appointed by the managing partner and two members appointed by the other Partner. However, some actions require unanimous approval of the Partners and the Joint Venture Agreement contains certain deadlock breaking protocols.
The Joint Venture Agreement provides that the managing partner shall appoint the general manager, subject to approval of the appointment by the executive committee. Under the terms of the Joint Venture Agreement, the general manager may be removed by ELLC or Galleon upon 30 days written notice. The Joint Venture Agreement also provides that the managing partner shall appoint the other principal senior management of the Silver Legacy Joint Venture and Silver Legacy, subject to approval of such appointments by the executive committee in the case of the general manager, who is the Partnership’s chief executive officer, and the controller, who is the Silver Legacy Joint Venture’s chief financial officer and accounting officer. The Silver Legacy Joint Venture’s senior management performs such functions, duties, and responsibilities as the managing partner may assign, and serves at the direction and pleasure of the managing partner.
The Joint Venture Agreement provides that the unanimous approval of both Partners is required for certain actions, including the admission of an additional partner, the purchase of additional real property, encumbrances on Silver Legacy, sales or other dispositions of all or substantially all of the assets of the Silver Legacy Joint Venture, refinancing or incurrence of
indebtedness involving in excess of $250,000 other than in the ordinary course of business, capital improvements involving more than $250,000 that are not included in an approved annual business plan, and any obligation, contract, agreement, or commitment with a partner or an affiliate of a partner which is not specifically permitted by the Joint Venture Agreement.
Replacement of the Managing Partner. If the actual net operating results of the business of the Silver Legacy Joint Venture for any four consecutive quarters are less than 80% of the projected amount as set forth in the Silver Legacy Joint Venture’s annual business plan, after appropriate adjustments for factors affecting similar business in the vicinity of the Silver Legacy, ELLC may require Galleon to resign from its position as managing partner.
In addition, in the event Galleon resigns as managing partner, ELLC will have the right and option to become the managing partner of the Silver Legacy Joint Venture and assume all the obligations of the managing partner under the Joint Venture Agreement, or the Partners are required to attempt to appoint a third party to manage the day-to-day business affairs of the Silver Legacy Joint Venture. In that event, if the Partners are unable to agree on a manager, then the Silver Legacy Joint Venture shall be dissolved and liquidated in accordance with the provisions of the Joint Venture Agreement.
The Executive Committee. An executive committee of the Silver Legacy Joint Venture is authorized to review, monitor and oversee the performance of the management of the Silver Legacy. The executive committee of the Silver Legacy Joint Venture shall consist of five members, with three members appointed by the managing partner and two members appointed by the other Partner. In the event that neither of the Partners is the managing partner, then the executive committee shall consist of five members, with two members appointed by each Partner and a fifth member appointed by a third party manager selected by the Partners. Each Partner may, at any time, appoint alternate members to the executive committee and the alternates will have all the powers of a regular committee member in the event of the absence or inability of a regular committee member to serve. With the exception of the special voting procedures described below, each member of the executive committee is entitled to one vote on each matter decided by the executive committee and each action of the executive committee must be approved by a majority of all of the members of the executive committee, who may be present or voting by proxy. The current members of the executive committee are James J. Murren, Corey I. Sanders and Donald D. Thrasher, each of whom was appointed by Galleon, and Robert M. Jones and Gene R. Carano, each of whom was appointed by ELLC.
Subject to the requirement of unanimous approval of the Partners for certain actions, the duties of the executive committee include, but are not limited to, (i) reviewing, adjusting, approving, developing, and supervising the Silver Legacy Joint Venture’s annual business plan, (ii) reviewing and approving the terms of any loans made to the Silver Legacy Joint Venture, (iii) approving all material purchases, sales, leases or other dispositions of Silver Legacy Joint Venture property, other than in the ordinary course of business, and (iv) approving the appointment of the General Manager, who is the Silver Legacy Joint Venture’s Chief Executive Officer, and the Controller, who is the Silver Legacy Joint Venture’s Chief Financial Officer and Accounting Officer, and determining the compensation of the General Manager and the Controller.
The Joint Venture Agreement provides special voting procedures for (i) the executive committee’s approval of the annual business plan, (ii) the appointment of the general manager and (iii) the determination of the general manager’s compensation. In voting on these matters, the members of the executive committee appointed by the managing partner shall have a total of two votes and the members of the executive committee appointed by the other Partner shall have a total of two votes. The managing partner shall designate which two of the three members of the executive committee appointed by the managing partner are to exercise the two votes. If the executive committee is deadlocked in deciding any matter which is subject to the special voting procedures, then the meeting may be adjourned to another meeting date. If the executive committee remains deadlocked with respect to its approval of an annual business plan until the end of the second month of the fiscal year described in the annual business plan, then either Partner may by written notice cause the approval of the annual business plan to be submitted to a nationally recognized accounting firm mutually agreeable to the Partners (the “Accountant”) for resolution. The Accountant shall consider the positions of the members of the executive committee and the Partners, and shall decide whether to approve the annual business plan, or to modify the annual business plan and approve it with such modifications. The decision of the Accountant on these matters shall have the same effect as the approval of the annual business plan by the executive committee. If the executive committee remains deadlocked with respect to its approval of the appointment of a general manager for a period of one month following the effective date of the resignation or removal of the previous general manager, then the executive committee shall assume the duties of the general manager until such time as the executive committee can reach a decision on the appointment and compensation of a new general manager. In exercising the duties of the general manager, the executive committee shall act and vote in accordance with the special voting procedures described above. If the executive committee remains deadlocked on the determination of the compensation of the general manager for a period of one month following the first meeting on the proposed compensation, then either Partner may by written notice cause the determination of such compensation to be submitted to the Accountant for resolution. In that event, the Accountant shall consider the positions of the executive committee, and shall adopt a compensation arrangement consistent with the position advocated by at least one member of the executive committee. The decision of the Accountant on any matter which is subject to the special voting procedures shall be final and binding on the executive committee and the Partners.
Transfer of Partnership Interests. Except as expressly permitted by the Joint Venture Agreement, neither Partner may transfer all or any portion of its interest in the Silver Legacy Joint Venture or any rights therein without the unanimous consent of both Partners. The Joint Venture Agreement provides that a Partner may transfer or convey all or any portion of its interest in the Silver Legacy Joint Venture to an affiliate of such Partner (subject to certain limitations), members of the Partner’s family (which includes the Partner’s spouse, natural or adoptive lineal descendants, and trusts for their benefit), another Partner, a personal representative of the Partner or any person or entity approved by the unanimous consent of the Partners.
Unless otherwise agreed by Galleon, Carano or a member of his immediate family acceptable to Galleon, which acceptance may not be unreasonably withheld, or an affiliate controlled by Carano or a member of his immediate family acceptable to Galleon, which acceptance may not be unreasonably withheld, is required to be the manager of and control ELLC (or, if applicable, any entity that is a permitted transferee and to which ELLC has transferred its interest in the Silver Legacy Joint Venture). Unless otherwise agreed by ELLC, which may not be unreasonably withheld, Galleon (or, if applicable, any entity that is a permitted transferee and to which Galleon has transferred its interest in the Silver Legacy Joint Venture) is required to be controlled by Mandalay Resort Group. In the event the limitation in this paragraph with respect to either Partner is breached, the other Partner will have the right (but not be required) to exercise the buy-sell provisions described below.
Limitation on Partners’ Actions. The Joint Venture Agreement includes each Partner’s covenant and agreement not to (i) take any action to require partition or to compel any sale with respect to its Silver Legacy Joint Venture interest, (ii) take any action to file a certificate of dissolution or its equivalent with respect to itself, (iii) take any action that would cause a bankruptcy of such Partner, (iv) withdraw or attempt to withdraw from the Silver Legacy Joint Venture, (v) exercise any power under the Nevada Uniform Partnership Act to dissolve the Silver Legacy Joint Venture, (vi) transfer all or any portion of its interest in the Silver Legacy Joint Venture (other than as permitted thereunder), (vii) petition for judicial dissolution of the Silver Legacy Joint Venture, or (viii) demand a return of such Partner’s contributions or profits (or a bond or other security for the return of such contributions or profits) without the unanimous consent of the Partners. The Joint Venture Agreement also provides that if a Partner attempts to (A) cause a partition or (B) withdraw from the Silver Legacy Joint Venture or dissolve the Silver Legacy Joint Venture, or otherwise take any action in breach of its aforementioned agreements, the Silver Legacy Joint Venture shall continue and (1) the breaching Partner shall immediately cease to have the authority to act as a Partner, (2) the other Partner shall have the right (but shall not be obligated unless it was so obligated prior to such breach) to manage the affairs of the Silver Legacy Joint Venture, (3) the breaching Partner shall be liable in damages, without requirement of a prior accounting, to the Silver Legacy Joint Venture for all costs and liabilities that the Silver Legacy Joint Venture or any Partner may incur as a result of such breach, (4) distributions to the breaching Partner shall be reduced to 75% of the distributions otherwise payable to the breaching Partner and (5) the breaching Partner shall continue to be liable to the Silver Legacy Joint Venture for any obligations of the Silver Legacy Joint Venture pursuant to the Joint Venture Agreement, and to be jointly and severally liable with the other Partner(s) for any debts and liabilities (whether actual or contingent, known or unknown) of the Silver Legacy Joint Venture existing at the time the breaching Partner withdraws or dissolves.
Buy-Sell Provision. Either Partner (provided such Partner is not in default of any of the provisions of the Joint Venture Agreement) may make an offer to purchase (“Offer”) the interest of the other Partner, which will constitute an irrevocable offer by the Partner giving the Offer either to (i) purchase all, but not less than all, of the interest in the Silver Legacy Joint Venture of the other Partner free of liens and encumbrances for the amount specified in the Offer (the “Sales Price”), or (ii) sell all, but not less than all, of its interest in the Silver Legacy Joint Venture free of liens and encumbrances to the other Partner for the amount specified in the Offer (the “Purchase Price”). The Partner receiving an Offer will have a period of two months to accept the Offer to sell at the Sales Price or, in the alternative, to require that the offering Partner sell its interest to the other Partner at the Purchase Price. The closing of the transaction for the sale or purchase of the Silver Legacy Joint Venture interest shall occur not later than six months after the notice of election or at such other time as may be required by the Nevada Gaming Authorities. Subject to any agreements to which the Silver Legacy Joint Venture is a party, the Partner purchasing the Silver Legacy Joint Venture interest (the “Purchasing Partner”) shall be entitled to encumber the Silver Legacy Joint Venture property in order to finance the purchase, provided that the other Partner (the “Selling Partner”) will have no liability, contingent or otherwise, under such financing. The Purchasing Partner may assign all or part of its right to purchase the Silver Legacy Joint Venture interest of the Selling Partner to an affiliate of the Purchasing Partner, provided that no such assignment relieves the Purchasing Partner of its obligations in the event of a default by the affiliate.
Dissolution, Winding Up and Liquidation. The Joint Venture Agreement provides that the Silver Legacy Joint Venture shall dissolve and commence winding up and liquidating upon the first to occur of any of (i) January 1, 2053, (ii) the sale of all or substantially all of the Silver Legacy Joint Venture property, (iii) the unanimous vote of the Partners to dissolve, wind up, and liquidate the Silver Legacy Joint Venture, (iv) the happening of any other event that makes it unlawful or impossible to carry on the business of the Silver Legacy Joint Venture, (v) the occurrence of an Event of Bankruptcy (as defined the Joint Venture Agreement) of a Partner, or (vi) the Partners are unable to agree upon a replacement managing partner as provided in the Joint Venture Agreement (each, a “Liquidating Event”).
The Joint Venture Agreement also includes the Partners’ agreement that the Silver Legacy Joint Venture shall not dissolve prior to the occurrence of a Liquidating Event, notwithstanding any provision of the Nevada Uniform Silver Legacy Joint Venture Act to the contrary. If it is determined by a court of competent jurisdiction that the Silver Legacy Joint Venture has dissolved prior to the occurrence of a Liquidating Event, the Partners have agreed to continue the business of the Silver Legacy Joint Venture without a winding up or liquidation.
Upon the occurrence of a Liquidating Event, the Silver Legacy Joint Venture will continue solely for the purpose of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Partners. The managing partner will be responsible for overseeing the winding up and liquidation of the Silver Legacy Joint Venture, taking full account of the Silver Legacy Joint Venture’s liabilities and assets, causing the assets to be liquidated as promptly as is consistent with obtaining the fair market value thereof, and causing the proceeds therefrom, to the extent sufficient therefor, to be applied and distributed (i) first, to the payment and discharge of all of the Silver Legacy Joint Venture’s debts and liabilities to creditors other than Partners, (ii) second, to the payment and discharge of all of the Silver Legacy Joint Venture’s debts and liabilities to Partners, and (iii) the balance, if any, to the Partners in the amount of their respective capital accounts, after giving effect to all contributions, distributions, and allocations for all periods or portions thereof.
Eldorado's Business Strategy
Eldorado has an experienced management team that includes, among others, Donald L. Carano and several members of his immediate family. Donald L. Carano, the Chief Executive Officer and a member of the Board of Managers of Eldorado, co-founded Eldorado-Reno in 1973 and has been the driving force behind its development. In addition to Donald L. Carano, each of Eldorado’s other senior executives, other than Thomas Reeg, who joined Eldorado in January 2011 as Senior Vice President of Strategic Development, has in excess of thirty years of operating experience in the gaming industry. In addition to their roles in management of Eldorado, members of the Carano family currently indirectly own approximately 51% of Eldorado.
Eldorado’s business strategy draws upon its extensive gaming management experience gained from successfully operating Eldorado-Reno. Key elements of Eldorado’s strategy include the following:
Personal Service and High Quality Amenities. One of the cornerstones of Eldorado’s business strategy is to provide its customers with an extraordinary level of personal service. Eldorado’s senior management is actively involved in the daily operations of its properties, frequently interacting with hotel, restaurant and gaming patrons to ensure that they are receiving the highest level of personal attention. Eldorado’s management believes that personal service is an integral part of fostering customer loyalty and generating repeat business. Eldorado’s management continually monitors Eldorado’s casino operations to react to changing market conditions and customer demands. Eldorado targets premium-play customers as well as the value-conscious gaming patron with its state-of-the-art casino featuring the latest in game technology, electronic displays and customer-convenient features.
Marketing to Target Gaming Patrons. Eldorado primarily targets the following customer segments of the Reno and Shreveport/Bossier City gaming markets: free and independent travelers, preferred casino customers, convention groups, local patrons and wholesale/specialty and internet groups.
Free and Independent Travelers. This customer segment consists of persons who are not affiliated with travel groups and who make arrangements for their accommodations directly or through independent travel agents. Eldorado’s management targets this segment through advertising efforts, including television and newsprint exposure, emphasizing the exciting atmosphere and high level of relative value offered at our properties. Advertising efforts are directed principally to existing gaming customers of the Reno and Shreveport/Bossier City markets, as well as to experienced gaming customers of Las Vegas and other markets. Additionally, management targets “walk-in” customers to its casinos by utilizing (i) the unique theming of its casinos; (ii) the variety, quality, and attractive pricing of its food and beverage outlets; and, (iii) most notably in Reno, the close proximity to other hotel casinos.
Preferred Casino Customers. Eldorado’s management targets valued gaming customers through an aggressive development program. This program utilizes independent sales representatives to engage in one-on-one sales activities and marketing personnel trained to identify and target these individuals while they patronize Eldorado's casino facilities. Eldorado also uses television advertisements featuring the elegant image and exciting atmosphere at its properties to target preferred gaming customers. In addition, through specialized entertainment programs and special events, including boxing matches, and by highlighting Eldorado’s quality hotel rooms and suites, excellent restaurant venues, entertainment facilities, amenities and unique attractions, Eldorado’s management seeks to capture a significant portion of the valued gaming business of the Reno and Shreveport/Bossier City markets. Eldorado’s marketing efforts for gaming customers include the provision of complimentary rooms, food and beverages, air transportation and the extension of credit to qualified persons. Eldorado’s rewards programs offer customers exciting special events and tournaments and convenient ways of earning complimentaries.
Convention Groups. Eldorado targets conventioneers and attendees of events in its core markets, depending on Eldorado’s view of their relative propensity for gaming and, in Reno, the timing of the specific events or conventions relative to the historic seasonality of Eldorado's gaming business. In so doing, Eldorado seeks to increase its mid-week occupancies and mitigate the effects of seasonality on their operations. For example, management targets competitors at the National Bowling Stadium in Reno and their guests. Other special events groups are also targeted through invitations to concerts, shows, theme parties, boxing matches and other events.
Local Patrons. Management seeks to attract and retain local customers through frequent promotions that highlight Eldorado’s quality gaming and dining experiences, as well as by being an active supporter of numerous events and organizations in the Reno and Shreveport/Bossier City markets.
Wholesale/Specialty and Internet Groups. The wholesale/specialty segment consists of customers who utilize “packages” to reduce the cost of travel, lodging and entertainment. These packages are produced by wholesalers (such as major airlines) and travel agents, and emphasize mid-week stays. This market segment allows Eldorado to utilize rooms during slower mid-week periods. In addition, internet customers, who are encompassed in this segment, continue to expand as more customers utilize this option for its convenience and in an effort to obtain the most competitive rates.
Strategic Expansion and Improvements. Since opening Eldorado-Reno in 1973, Eldorado has employed a strategy of periodic expansion and improvement in order to maintain and enhance its position as a leader in the Reno market. Continuing this strategy, Eldorado-Reno and Eldorado-Shreveport are constantly updating their facilities in order to maintain their presence as premier hotels in the Reno and Shreveport/Bossier City market areas.
Eldorado’s Nevada Gaming Properties
Eldorado Hotel & Casino (Eldorado-Reno)
The Eldorado-Reno is an 814-room premier hotel, casino and entertainment facility centrally located in downtown Reno. Reno is the second largest metropolitan area in Nevada, with a population of approximately 426,000, and is located at the base of the Sierra Nevada Mountains along Interstate 80, approximately 60 miles from South Lake Tahoe, 135 miles east of Sacramento, California and 225 miles east of San Francisco, California. Reno is a destination market that attracts year-round visitation by offering gaming, numerous summer and winter recreational activities and popular special events such as national bowling tournaments.
Eldorado-Reno offers:
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Approximately 76,500 square feet of gaming space, with approximately 1,219 slot machines and 47 table games;
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814 finely-appointed guest rooms and suites, including 17 specialty suites, 93 “Eldorado Player’s Spa Suites” with bedside spas and 26 one- or two-bedroom penthouse suites;
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Nationally recognized cuisine which ranges from buffet to gourmet;
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A 566-seat showroom, a VIP lounge, three retail shops, a versatile 12,400 square foot convention center and an outdoor plaza located diagonally to Eldorado-Reno which hosts a variety of special events; and
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Parking facilities for over 1,130 vehicles, including a 643-space self-park garage, a 124-space surface parking lot and a 363-space valet parking facility.
The Eldorado-Reno is centrally positioned in the heart of Reno’s prime gaming area and room base and is easily accessible to both foot and vehicular traffic. With three towers, including a 26-story tower that lights up with over 2,000 feet of neon at night, Eldorado-Reno is visible from Interstate 80, attracting visitors to the downtown area and generating interest in the property. Eldorado's management believes that Eldorado-Reno serves as a downtown landmark, situated to attract foot traffic from other casinos as well as from the local populace. In addition, Eldorado-Reno is easily accessible to visitors competing in and attending the various bowling tournaments that are held in the National Bowling Stadium and to visitors attending events in the Reno Event Center and a city-owned downtown ballroom facility, all of which are located just one block away.
Eldorado’s management believes that Eldorado-Reno’s mix of slot machines and table games, including blackjack, craps, roulette, Pai Gow Poker, Let It Ride®, mini-baccarat, a keno lounge, a races and sport book and a poker room, makes it attractive to both middle-income and premium-play customers. Slot machines, which are offered in denominations from 1 cent to $100, generated approximately 72% of Eldorado-Reno’s total gaming revenues in 2013. A diverse selection of table games and a variety of table limits encourage play from a wide range of gaming customers, which management believes makes Eldorado-Reno one of the premier table games casinos in the Reno market.
The interior of the hotel is designed to create a European ambiance where hotel guests enjoy panoramic views of Reno’s skyline and the majestic Sierra Nevada mountain range. Eldorado’s management believes that attention to detail, decor and architecture have created an identifiable and innovative presence in the Reno market for Eldorado-Reno. In 2013 and 2012, Eldorado-Reno achieved average hotel occupancy of 82.9% and 80.6%, respectively. In 2013, Eldorado-Reno achieved an Average Daily Rate (“ADR”) of $65.34 compared with $62.81 in 2012.
The Eldorado-Reno is nationally recognized for its cuisine. Its nine dining venues, which have an aggregate seating capacity of more than 1,400, range from buffet to gourmet and offer high quality food at reasonable prices.
The Eldorado-Reno’s dining venues include the following:
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Roxy’s, which has a seating capacity of approximately 160, is a Parisian-style bistro, restaurant and bar with contemporary American influences offering French country fare, steaks and seafood along with an extensive wine list;
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Sushi Sake, located on the patio of Roxy’s, provides sushi and libations in a contemporary Euro-Asian setting with a seating capacity of 46;
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La Strada features northern Italian cuisine in an Italian countryside villa setting, and has a seating capacity of approximately 160;
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The Brew Brothers, which has a seating capacity of approximately 190, is the first microbrewery located in a hotel/casino;
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The Prime Rib Grill, which has a seating capacity of approximately 190, is a spirited, lively steak and seafood house specializing in prime rib and grilled entrees;
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The Buffet, which was totally remodeled in 2008 and has a seating capacity of approximately 340, offers a 200-foot long buffet with a variety of cuisines, including American, Italian, Chinese, Mexican, Hop Wok grill, a pizza station and salad, fruit and ice cream bars;
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Millies24, which offers a 24 hour-a-day "coffee shop" restaurant and bakery featuring breakfast, lunch and dinner along with gourmet coffees and specialty cocktails;
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Pho Mein, which has a seating capacity of approximately 120, is an authentic Asian noodle kitchen featuring an array of Chinese and Vietnamese favorites available for dine in or take out; and
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Eldorado Coffee Company features the Eldorado-Reno’s freshly roasted on-site blends, offering gourmet coffee and teas.
The Eldorado-Reno’s selection of high-quality food and beverages reflects the Carano family’s emphasis on the dining experience. Eldorado-Reno chefs utilize homemade pasta, carefully chosen imported ingredients, fresh seafood and top quality USDA choice cuts of beef. Throughout the property, beverage offerings include The Brew Brothers microbrewed beers and wines from the Ferrari-Carano Winery.
Silver Legacy Resort Casino (Silvery Legacy)
The Silver Legacy is seamlessly connected to the Eldorado-Reno and is owned and operated by the Silver Legacy Joint Venture, which is 50% owned by ELLC, a 96% owned subsidiary of Resorts.
Silver Legacy’s design is inspired by Nevada’s rich mining heritage and the legend of Sam Fairchild, a fictitious silver baron who “struck it rich” on the site of the casino. Silver Legacy’s hotel, the tallest building in northern Nevada, is a “Y”-shaped structure with three wings, consisting of 37-, 34- and 31-floor tiers. Silver Legacy’s opulent interior showcases a casino built around Sam Fairchild’s 120-foot tall mining rig, which appears to mine for silver. The rig is situated beneath a 180-foot diameter dome, which is a distinctive landmark on the Reno skyline. The interior surface of the dome features dynamic sound and laser light shows, providing visitors with a unique experience when they are in the casino.
Silver Legacy is situated on two city blocks, encompassing 240,000 square feet in downtown Reno. The hotel currently offers 1,711 guest rooms, including 141 player spa suites, eight penthouse suites and seven hospitality suites. Many of the Silver Legacy’s guest rooms feature views of Reno’s skyline and the Sierra Nevada mountain range. The Silver Legacy’s 10- story parking facility can accommodate approximately 1,760 vehicles. At December 31, 2013, the Silver Legacy’s casino featured approximately 89,200 square feet of gaming space with 1,400 slot machines and 63 table games, including blackjack, craps, roulette, Pai Gow Poker, Let It Ride®, Baccarat and Pai Gow, a keno lounge and a race and sports book. “Club Legacy,” the Silver Legacy’s slot club, offers customers exciting special events and tournaments and convenient ways of earning complimentaries and slot free play.
Silver Legacy’s dining options are offered in eight venues:
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Sterling’s Seafood Steakhouse, with a seating capacity of approximately 170, offering the finest in steaks and seafood along with an extensive wine list, tableside desserts and an extravagant Sunday Brunch;
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Flavors! The Buffet, has a seating capacity of approximately 500;
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Pearl Oyster Bar and grill, previously Fairchild’s Oyster Bar, opened in April of 2013 with a seating capacity of approximately 100 and offers seafood dining, an expanded bar and innovative new grill options;
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Café Central, with a seating capacity of approximately 170, offers a newly designed menu that includes American classics and Chinese cuisine 24-hours a day;
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Fresh Express Food Court, with a seating capacity of approximately 110, offering a range of options including a deli and grill, authentic Asian cuisine and American classics;
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Sips Coffee House, situated in the hotel lobby, offers gourmet coffee and teas;
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Starbuck's Coffee Company, a new licensed franchise which opened in March of 2013 and is located on the casino floor providing a popular attraction for the downtown Reno corridor and Silver Legacy guests; and
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Hussong's Cantina Taqueria, fabled to be the originator of the margarita, the landmark Hussong’s Cantina of Ensenada, Mexico, offers authentic Baja cuisine, sing-along rock n’ roll Mariachi bands and universal appeal. This new leased venue opened in April of 2013 and has a large bar and a seating capacity of approximately 80.
In addition, the hotel sponsors entertainment events which are held in the hotel’s convention area. Silver Legacy’s other amenities include retail shops, exercise and spa facilities, a beauty salon and an outdoor swimming pool and sundeck. A city-owned 50,000 square-foot ballroom facility is operated and managed by Silver Legacy, together with Eldorado-Reno and Circus Circus-Reno, and complements the existing Reno Events Center. It provides an elegant venue for large dinner functions and convention meeting space along with concert seating for approximately 3,000 attendees.
Tamarack Junction
Tamarack Crossings, LLC, an unconsolidated investee of Resorts which owns a 21.25% interest therein, owns Tamarack Junction, a small casino in south Reno. Tamarack Junction is situated on approximately 62,000 square feet with approximately 13,230 square feet of gaming space. At December 31, 2012, Tamarack Junction had approximately 465 slot machines, a keno game, a sports book and three themed restaurants. Four members of Tamarack Crossings, LLC, including Resorts and three unaffiliated third parties, manage the business and affairs of the Tamarack Junction. At December 31, 2013 and 2012, Resorts’ financial investment in Tamarack Crossings, LLC was approximately $5.3 million and $5.1 million, respectively. Resorts’ capital contribution to Tamarack Crossings, LLC represents its proportionate share of the total capital contributions of the members. Additional capital contributions of the members, including Resorts, may be required for certain purposes, including the payment of operating costs and capital expenditures or the repayment of loans, to the extent such costs are not funded by prior capital contributions and earnings.
Reno Market
Reno is the second largest metropolitan area in Nevada, with a population of 430,000 according to the most recently available census data, and is located at the base of the Sierra Nevada Mountains along Interstate 80, approximately 135 miles east of Sacramento, California and 225 miles east of San Francisco, California. Reno is a destination resort market that primarily attracts “drive-in” visitors by offering gaming as well as numerous other summer and winter recreational activities. In addition to gaming, the Reno area features national forests, mountains and lakes (including Lake Tahoe) and offers year-round opportunities for outdoor activities of all types. The Reno area enjoys relatively mild weather, with abundant sunshine throughout the year and low humidity. Reno’s annual snowfall is modest, although heavier snowfall in the mountain passes around Reno can obstruct traffic to Reno. Management believes that approximately two-thirds of visitors to the Reno market arrive by some form of ground transportation.
Popular special events include the National Championship Air Races, the Reno-Tahoe Open PGA tour event, Street Vibrations, a motorcycle event, and Hot August Nights, a vintage car event.
According to the Reno-Sparks Convention & Visitors Authority (the “Visitors Authority”), the greater Reno area attracted approximately 4.7 million and 4.5 million visitors during the years 2013 and 2012, respectively. The following table sets forth certain statistical information for the Reno market for the years 2009 through 2013 as reported by the Reno-Sparks Convention & Visitors Authority and the Nevada State Gaming Control Board.
(1)
For the twelve months ended December 31 for each period shown.
(2)
As of December 31 for each period shown.
(3)
Calculated from information provided by the Nevada State Gaming Control Board.
The National Bowling Stadium, located approximately one block from Eldorado-Reno and Silver Legacy, is one of the largest bowling complexes in North America and has been selected to host multi-month tournaments in Reno every year through 2018 except for 2017. It has also been selected to host 10 USBC tournaments from 2019 through 2030. During this period, two USBC Tournaments may be held in the same year. Through a one-time agreement, the National Bowling Stadium also hosted the USBC Open Tournament in Reno in 2011 and will host such tournament in 2014; usually off-years for Reno. Historically, these multi-month bowling tournaments have attracted a significant number of visitors to the Reno market and have benefited business in the downtown area, including Eldorado-Reno. In 2011, the USBC Open Tournament returned to the Reno market beginning in late February and continued through the end of June 2011. This tournament brought approximately 62,300 bowlers to the Reno area during the 2011 tournament period. The USBC Women’s Tournament took place in Reno beginning in mid-April through early July 2012 and attracted approximately 29,700 women bowlers. The USBC Tournaments brought approximately 73,000 bowlers to the Reno area during the 2013 tournament period which began on March 1st and continued through July 7th. Both tournaments will return to Reno in 2014. According to the Visitors Authority, bowling tournaments held at the National Bowling Stadium attract visitors from markets that do not normally contribute substantially to Reno’s visitor profile. The National Bowling Stadium also features a large-screen movie theater, retail space and can be configured to host special events and conventions.
Eldorado’s Louisiana Gaming Property
Eldorado Resort Casino Shreveport (Eldorado-Shreveport)
Eldorado-Shreveport, which is located in Shreveport, Louisiana, the largest gaming market in the state, is a premier resort-casino located adjacent to Interstate 20, a major highway that connects the Shreveport market with the attractive feeder markets of East Texas and Dallas/Fort Worth. Since Eldorado’s acquisition of a majority ownership interest in the property in 2005, Eldorado's management has taken steps to change the property’s theme from its original design and re-position it as a modern, Las Vegas-style resort with a gaming experience that appeals to both local gamers and out-of-town visitors. Eldorado-Shreveport’s integrated casino and entertainment resort benefits from the following features:
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A location that positions Eldorado-Shreveport as the first casino that customers reach when driving to Shreveport from its primary feeder markets and the airport;
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A purpose-built 50,000-square foot barge that houses 30,000 square feet of gaming space, as measured by the actual footprint of the gaming equipment;
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A gaming experience with a land-based feel without the extensive ramping systems of most of Eldorado-Shreveport’s competitors;
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The premier restaurant and entertainment pavilion in the Shreveport market, featuring a 60-foot high atrium that enables patrons to see the casino floor from almost anywhere in the pavilion, which Eldorado-Shreveport continues to update and refresh;
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A luxurious 403-room, all-suite, hotel, with updated rooms featuring modern décor and flat screen TVs;
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Part of the only “cluster” in Eldorado-Shreveport's market that allows for walkable visits between two gaming facilities with over 900 hotel rooms;
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A 400-seat ballroom with four breakout rooms, a 6,000-square foot spa, a fitness center and salon, a premium players’ club and an entertainment show room; and
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Two parking lots and an eight-story parking garage providing approximately 1,900 parking spaces that connects directly to the pavilion by an enclosed walkway, including valet parking for approximately 340 cars.
The casino contains approximately 59,000 square feet of space with approximately 1,500 slot machines, approximately 50 table games and a poker room. The centerpiece of Eldorado-Shreveport is an approximately 170,000 square foot land-based pavilion housing numerous restaurants and entertainment amenities, including a deli and ice cream shop, VIP check-in, a premium quality bar and a retail store. An 85-foot wide seamless entrance connects the casino to the land-based pavilion on all three levels resulting in the feel of a land-based casino.
Eldorado-Shreveport offers award-winning cuisine ranging from fine dining to a sports-themed casual diner. Eldorado-Shreveport’s four dining venues include the following:
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The Vintage, which has a seating capacity of approximately 140, is a gourmet steakhouse offering 100% USDA prime beef and fresh seafood along with an extensive wine list;
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The Cinema Café, which has a seating capacity of approximately 40, is a self-service deli featuring pre-made sandwiches, fresh pastries, salads, desserts and ice cream;
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The Buffet, which has a seating capacity of approximately 300, serves a variety of regional to ethnic dishes, including Mexican, steak and seafood buffet, fresh salads and desserts; and
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Sportsmans’ Paradise Café, which is located in the pavilion, offers 24-hours-a-day service with a menu featuring omelets and buttermilk pancakes to thick steaks and gourmet burgers as well as a wide variety of southern favorites and Asian cuisine.
The riverboat casino floats in a concrete and steel basin that raises the riverboat nearly 20 feet above the river. The basin virtually eliminates variation in the water height and allows the boat to be permanently moored to the land-based pavilion. The Eldorado-Shreveport’s computerized pumping system is designed to regulate the water level of the basin to a variance of no more than three inches.
Shreveport/Bossier City Market
Eldorado-Shreveport was built next to an existing riverboat gaming and hotel facility formerly operated by Harrah’s Entertainment and now operated by Boyd Gaming Corporation. The two casinos form the first and only “cluster” in the Shreveport/Bossier City market, allowing patrons to park once and easily walk between the two facilities. There are currently six casinos and a racino operating in the Shreveport/Bossier City market, which is the largest gaming market in Louisiana. The Shreveport/Bossier City gaming market permits continuous dockside gaming without cruising requirements or simulated cruising schedules, allowing casinos to operate 24 hours a day with uninterrupted access. Based on information published by the state of Louisiana, the six casino operators and racino in the Shreveport/Bossier City market generated approximately $727.3 million in gaming revenues in 2013, a decrease of approximately 2.0% from 2012.
The principal target markets for Eldorado-Shreveport are patrons from the Dallas/Fort Worth Metroplex and East Texas. There are approximately 7.2 million adults who reside within approximately 200 miles of Shreveport/Bossier City. Eldorado-Shreveport is located approximately 180 miles east of Dallas and can be reached by car in approximately three hours. Flight times are less than one hour from both Dallas and Houston to the Shreveport Regional Airport.
The following table sets forth certain statistical information for the Shreveport/Bossier City market for the years 2009 through 2013 as reported by the Louisiana Gaming Control Board.
(1)
For the twelve months ended December 31 for each period shown.
(2)
As of December 31 for each period shown.
(3)
Calculated from information provided by the Louisiana Gaming Control Board.
Operations
The primary source of Eldorado’s revenues is its properties’ casinos, although their hotels, restaurants, bars, shops and other services are an important adjunct to the casinos. The following table sets forth the respective contributions to Eldorado’s net revenues on a dollar (in thousands) and percentage basis of the major activities, excluding that of its unconsolidated investees, the Silver Legacy Joint Venture and Tamarack Crossings LLC, for each of the years 2013 and 2012:
(1)
Casino revenues are the net difference between the sums received as winnings and the sums paid as losses.
(2)
Hotel, food, beverage, entertainment and other include the retail value of services which are provided to casino customers and others on a complimentary basis. Such amounts are then deducted as complimentary allowances to arrive at net revenue.
The net revenues of Eldorado’s unconsolidated investees, the Silver Legacy Joint Venture and Tamarack Crossings LLC, approximate $125.8 and $21.5 million, respectively, for 2013 and $114.8 and $17.8 million, respectively, for 2012. Eldorado accounts for its investments in unconsolidated investees using the equity method of accounting; however, as a result of the elimination during 2011 of Eldorado’s remaining investment in the Silver Legacy Joint Venture (see discussion on p. 13, under Silver Legacy Joint Venture), Eldorado discontinued the equity method for its investment in the Silver Legacy Joint Venture until the fourth quarter of 2012 when additional investments in the Silver Legacy Joint Venture were made by Eldorado. At such time, Eldorado recognized its share of the Silver Legacy Joint Venture's net losses not recognized during the period the equity method of accounting was suspended and resumed the equity method of accounting for its investment. Included in Eldorado’s operating income for the years ended December 31, 2013 and 2012, is equity in the net income (losses) of the Silver Legacy Joint Venture (approximately $2.3 million and ($9.7) million for 2013 and 2012, respectively) and equity in the net income of Tamarack Crossings, LLC (approximately $1.1 and $0.7 million for 2013 and 2012, respectively).
Seasonality
Hotel/casino operations in the Reno market are subject to seasonal variation, with the strongest operating results generally occurring in the second and third quarters of each year and the weakest results generally occurring during the period from November through February. Variations occur when weather conditions make travel to Reno by visitors from northern California and the Pacific Northwest difficult.
The following table shows Eldorado-Reno’s percentage of gross revenues by quarter for 2013 and 2012:
Hotel/casino operations in the Shreveport/Bossier City market are subject to slight seasonal variations, with the strongest operating results generally occurring in the first quarter of each year and the weakest results generally occurring during the fourth quarter.
The following table shows Eldorado-Shreveport’s percentage of gross revenues by quarter for 2012 and 2011:
Employees
As of December 31, 2013, there were approximately 1,500 employees at Eldorado-Reno and approximately 1,200 employees at Eldorado-Shreveport. At that date there were approximately 1,800 employees at Silver Legacy. A substantial majority of the employees at each property are non-management personnel. The number of people employed at any time at either of the Reno properties is subject to seasonal fluctuation. None of the employees at Eldorado-Reno, Eldorado-Shreveport or Silver Legacy are covered by a collective bargaining agreement. Eldorado believes that employee relations at Eldorado-Reno, Eldorado-Shreveport and Silver Legacy are excellent.
Competition
The gaming industry includes land-based casinos, dockside casinos, riverboat casinos, casinos located on Native American reservations and other forms of legalized gaming. There is intense competition among companies in the gaming industry, many of which have significantly greater resources than Eldorado. Certain states have legalized casino gaming and other states may legalize gaming in the future. Legalized casino gaming in these states and on Native American reservations near Eldorado’s markets or changes to gaming laws in states surrounding Nevada and Louisiana could increase competition and could adversely affect Eldorado’s operations. Eldorado also competes to a lesser extent with gaming facilities in other jurisdictions with dockside gaming facilities, state-sponsored lotteries, on-and-off track pari-mutual wagering, internet gaming, card clubs, riverboat casinos and other forms of legalized gambling. In addition, various forms of internet gaming have been approved in Nevada and New Jersey and legislation permitting internet gaming has been proposed by the federal government and other states. The expansion of internet gaming in Nevada and other jurisdictions could result in significant additional competition.
Eldorado-Reno and Silver Legacy compete for customers primarily on the basis of location, range and pricing of amenities and overall atmosphere. Of the 32 casinos currently operating in the Reno market, Eldorado-Reno and Silver Legacy compete principally with the six other hotel-casinos that, like Eldorado-Reno and Silver Legacy, each generate at least $36 million in annual gaming revenues. There can be no assurance that any growth in Reno’s current room base or gaming capacity will not adversely affect Eldorado’s financial condition or results of operations.
Eldorado-Reno and Silver Legacy also compete with hotel-casinos located in the nearby Lake Tahoe region as well as those in Las Vegas, Nevada. A substantial number of customers travel to both Reno and the Lake Tahoe area during their visits. Consequently, Eldorado believes that Eldorado-Reno’s success as well as that of Silver Legacy is influenced to some degree by the success of the Lake Tahoe market. Eldorado’s management does not anticipate a decline in the popularity of either Reno or Lake Tahoe as tourist destination areas in the foreseeable future. Any such decline could adversely affect the operations of Eldorado-Reno and Silver Legacy.
Since visitors from California comprise a significant portion of Eldorado-Reno's and Silver Legacy's customer base, both also compete with Native American gaming operations in California. In total, the State of California has signed and ratified compacts with 69 Native American tribes, and there are currently 60 Native American casinos operating in California, including casinos located in Northern California, which Eldorado's management considers to be a significant target market. These Native American tribes are allowed to operate slot machines, lottery games, and banking and percentage games on Native American lands. Although many existing Native American gaming facilities in Northern California are modest compared to Eldorado-Reno and Silver Legacy, a number of Native American tribes have established large-scale gaming facilities in California and some Native American tribes have announced that they are in the process of expanding, developing, or are considering establishing, large-scale hotel and gaming facilities in Northern California. A new 320,000 square foot gaming facility located in Sonoma County, California opened on November 5, 2013.
Under their current compacts, most Native American tribes in California may operate up to 2,000 slot machines, and up to two gaming facilities may be operated on any one reservation. However, under action taken by the National Indian Gaming Commission, gaming devices similar in appearance to slot machines, but which are deemed to be technological enhancements
to bingo style gaming, are not subject to such limits and may be used by tribes without state permission. The number of slot machines the tribes are allowed to operate may increase as a result of any new or amended compacts the tribes may enter into with the State of California that receive the requisite approvals, such as has been the case with respect to a number of new or amended compacts which have been executed and approved.
As Northern California's Native American gaming operations have expanded, Eldorado's management believes that the increasing competition generated by these gaming operations has negatively impacted, and may continue to negatively impact, principally drive-in, day-trip visitor traffic from main feeder markets in Northern California.
In addition, land-based, riverboat, or dockside casino gaming (other than that conducted on Native American-owned land) is currently legal in 17 states and casino gaming on Native American-owned land is legal in a number of states, including California, Washington, and Oregon. Eldorado’s management believes the Reno market draws over 50% of its visitors from California. In addition to gaming on Native American-owned land, California allows other non-casino style gaming, including pari-mutuel wagering, a state-sponsored lottery, card clubs, bingo, and off-track betting.
The Shreveport/Bossier City gaming market is characterized by intense competition and the market has not grown appreciably since Eldorado-Shreveport opened in December 2000. Eldorado-Shreveport competes directly with four casinos in the Shreveport/Bossier City market that have established customer bases, one casino which opened in June 2013, and also with various other gaming facilities throughout Louisiana and Oklahoma. Casino gaming currently is prohibited in several jurisdictions from which the Shreveport/Bossier City market draws customers, primarily Texas. Although casino gaming is currently not permitted in Texas, the Texas legislature has from time to time considered proposals to authorize casino gaming. Eldorado-Shreveport competes with several Native American casinos located in Oklahoma, certain of which are located near Eldorado's core Texas markets. WinStar Casinos, a Las Vegas-style gaming facility owned by the Chickasaw Nation, is located in Oklahoma approximately 60 miles north of the Dallas/Fort Worth area and has 500,000 square feet of gaming space, more than 6,700 electronic gaming devices, 74 table games, 46 poker tables, a 937-seat bingo hall and a 3,500-seat event center, two hotel towers with over 900 rooms and a spa. Eldorado-Shreveport also competes with Choctaw Casino Resort, a casino and hotel facility owned by the Choctaw Nation and located in Durant, Oklahoma, approximately 75 miles north of the Dallas/Fort worth area, with approximately 3,500 electronic gaming devices, 38 table games, 30 poker tables, a bingo hall, a 330-room hotel and event center, several restaurants, a buffet, concert hall, amphitheater, lounge, spa and RV park. Both the Chickasaw Nation and the Choctaw Nation are permitted to operate Class-III gaming devices in the state of Oklahoma, which permits them to offer Las Vegas-style gaming. Because we draw a significant amount of our customers from the Dallas/Fort Worth area, but are located approximately 190 miles from that area, we believe we will continue to face increased competition from gaming operations in Oklahoma, including the WinStar and Choctaw casinos, and would face significant competition that may have a material adverse effect on our business and results of operations if casino gaming were to be approved in Texas.
In June 2013, construction was completed on a new 30,000 square foot casino and 400-room hotel project in Bossier City across the Red River from Eldorado Shreveport. The facility, which also includes several restaurants and a 950-seat entertainment arena, received final approval from the Louisiana Gaming Control Board and opened on June 15, 2013. The owner acquired the license for an existing casino site in Lake Charles, Louisiana and received the required regulatory approvals to move the location to Bossier City.
MESQUITE
Introduction
Effective August 1, 2011, Mesquite Gaming, LLC (“Mesquite”) was formed and created as a successor to Black Gaming, LLC (“Black Gaming”). Mesquite was formed in a reorganization in which Black Gaming contributed all of its assets to Mesquite, which issued to investor parties, in exchange for cash contributions, 100% ownership in Mesquite.
Mesquite is engaged in the casino resort industry in Mesquite, Nevada through its wholly-owned subsidiaries that own and operate the CasaBlanca Resort/Golf/Spa, the Virgin River Hotel/Casino/Bingo, a full-service spa, a bowling center, restaurants, and banquet and conference facilities. In addition, the CasaBlanca Resort/Golf/Spa and one of its wholly-owned subsidiaries operate the CasaBlanca Golf Club and the Palms Golf Club, respectively, which are located on land leased by the CasaBlanca Resort/Golf/Spa and Oasis Recreational Properties, Inc., respectively. Mesquite also owns real estate on which the Oasis Resort & Casino was located prior to its demolition. The demolition, which included six hotel buildings, the casino, spa, go-cart track and pylon signs facing I-15, was substantially completed by August 31, 2013. Two buildings used for timeshares and a skywalk across Mesquite Boulevard remain.
Management of Mesquite
Mesquite’s board of managers (the “Mesquite Board”) is currently composed of five managers who are selected from Mesquite’s two Class A Member Groups, the Black Member Group, which selects three Managers, and the Newport Member Group, which selects the remaining two Managers. The current Managers chosen by the Newport Member Group are Timothy T. Janszen,, the Company’s operating manager, and Ryan L. Langdon, one of the Company’s Senior Managing Directors, while the current Managers chosen by the Black Member Group include individuals who were managers of Black Gaming prior to the Mesquite transaction. Under the terms of the Mesquite Operating Agreement, so long as AcquisitionCo remains a Class A Member of Mesquite, it may change its respective representatives on the Mesquite Board from time to time by notice to Mesquite. Any manager of Mesquite may be removed from office with cause upon a vote of at least two-thirds (2/3) of Mesquite’s Class A Membership interests.
Subject to the limitations described below, and except as otherwise delegated to Mesquite’s Chairman (the “Mesquite Chairman”),Chief Executive Officer (the “Mesquite CEO”), Chief Operating Officer (the “Mesquite COO”), or Chief Financial Officer (the “Mesquite CFO”), the Mesquite Board has control over the management of the business and affairs of Mesquite. Each manager has one vote and actions of the Mesquite Board generally require a majority vote of the managers. The members of the Mesquite Board are required to be licensed or found suitable by the relevant Nevada gaming authorities in order to engage in the management of Mesquite. For further information about these licensing and suitability requirements, see “Laws and Regulations” below.
The Mesquite CEO is given the general powers and duties of management usually vested in the chief executive officer of a corporation along with such other powers and duties as may be prescribed by the Mesquite Board or the Mesquite Operating Agreement, including the supervision, direction and control of the day-to-day business and affairs of Mesquite. In addition to this general authority, the Mesquite CEO may execute with the Mesquite Chairman or any other officer of Mesquite authorized by the Managers, such documents and instruments as may have been authorized by resolution of the Managers, except such documents and instruments, the signing or execution of which has been expressly delegated or reserved by the Mesquite Operating Agreement or the Managers to some other officer or agent of Mesquite, or as shall be required by law to be otherwise executed.
Under the Mesquite Operating Agreement, the Mesquite Board and the Mesquite CEO each has the right if, as and when it is necessary or appropriate on behalf of Mesquite, subject to the terms and conditions of the Mesquite Operating Agreement, to do the following:
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Mortgage, finance, refinance, sell, convey, assign, lease, transfer, exchange or otherwise dispose of or encumber Mesquite property, whether real or personal;
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Borrow money (whether from a Member or an unrelated party), issue evidence of indebtedness and secure the same by mortgage, deed of trust, security agreement, pledge, assignment or other lien or security interest;
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Enter into, sign on behalf of Mesquite and perform contracts and agreements of any kind or nature necessary or desirable for (i) the acquisition, financing, management, subdivision, development, improvement, lease, rental, operation and/or division of real property, (ii) the erection of buildings and other improvements on real property and/or (iii) the demolition or refurbishing of improvements, including contracts and agreements with any Member or Manager and/or any principal or affiliate of any Member or Manager;
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Invest Mesquite funds and do all acts which they deem necessary or appropriate for the protection and preservation of Mesquite assets;
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Pay Mesquite obligations, including tax obligations, and appeal, compromise or settle, and institute, prosecute and defend any and all decisions, actions or claims in favor of or against Mesquite or relating to its business;
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Enter into and execute on behalf of Mesquite any and all documents or instruments of any kind which they deem appropriate in exercising their authority under the provisions of the Mesquite Operating Agreement and/or carrying out the purposes of Mesquite, including, without limiting the foregoing, powers of attorney, joint venture and partnership agreements, limited-liability company operating agreements, management agreements, leases, rental agreements, construction contracts, architectural contracts, engineering contracts, sale contracts, escrow instructions, easements, covenants, conditions, restrictions, deeds, development agreements, deeds of trust, promissory notes, security agreements, assignments of rents and leases and Uniform Commercial Code financing statements, advertising agreements, insuring agreements and maintenance contracts;
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Exercise such further powers and to do such other acts as are necessary or appropriate in carrying out their rights and duties under the Mesquite Operating Agreement;
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Rent and lease real and personal Mesquite property and rent and lease real and personal property of others for the benefit of Mesquite on such terms and conditions and for such periods as they deem to be in the best interest of Mesquite;
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Make elections to cause the basis of Mesquite property to be adjusted for federal income tax purposes in the event of a transfer or assignment of a Member’s interest by a Member, the death of a Member or the distribution of any property of Mesquite to a Member;
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Exercise any and all rights of Mesquite incident to the ownership by Mesquite of stock, a venture interest, member’s interest, partnership interest, beneficial or trustee interest or other interest in any business enterprise or entity, including the right to attend meetings, vote and give consent or approval;
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Apply and petition with government agencies, departments and entities for master plan and general plan amendments, rezoning, use permits, variances, vacations, subdivisions, condition waivers, design review approvals, building permits and other similar licenses and approvals related to property; and
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Execute and deliver easements, rights of entry and right-of-way dedications relative to property;
Without the affirmative vote or written consent of at least four (4) of Mesquite’s Managers and Class A Members holding Eligible Units totaling at least two-thirds (2/3) of the Eligible Units held by all Class A Members, neither the Mesquite Board nor the Mesquite CEO has the right to do any of the following:
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Admit additional Members to Mesquite other than a substituted Member for an existing Member or pursuant to exercise of currently outstanding warrants (the "Warrants");
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Sell, transfer, convey or encumber all or substantially all Mesquite property;
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Incur an indebtedness obligation or series of related indebtedness obligations, whether directly by Mesquite or through any of its subsidiaries, in excess of three million dollars ($3,000,000);
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Enter into any transaction or series of related transactions for the purchase or sale of assets by Mesquite or any of its subsidiaries in which the purchase or sale price exceeds $3,000,000;
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Issue additional Units or warrants other than the Warrants and Units issued pursuant to the Warrants;
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Merger Mesquite with or into any other entity;
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Any distributions made pursuant to the provisions of Section 5.4 of the Mesquite Operating Agreement;
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Merger of any subsidiary of Mesquite with or into any entity other than Mesquite or another wholly-owned subsidiary of Mesquite;
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Issue additional equity interests in any subsidiary of Mesquite to a party other than Mesquite or a wholly-owned subsidiary of Mesquite; or
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Transfer any equity interest in any subsidiary of Mesquite to a party other than Mesquite or a wholly-owned subsidiary of Mesquite.
Business Strategy
Mesquite’s operating strategy emphasizes attracting and retaining customers primarily from the Utah, Las Vegas and Mesquite markets and, to a lesser extent, out-of-town visitors traveling through Mesquite on I-15. Mesquite’s properties attract customers through:
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Innovative, frequent and high-profile promotional programs directed towards the Utah, Las Vegas and Mesquite markets;
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Offering Mesquite’s customers the latest in technology;
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Focused marketing efforts targeting Mesquite’s customer database; and
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The development of strong relationships with Mesquite’s current customers, along with efforts to build relationships with potential new customers.
Providing a High-Value Experience. Because Mesquite targets repeat customers, it’s committed to providing a high-value entertainment experience for the customers in its restaurants, hotels, casinos and other amenities. Mesquite believes that the value offered by the restaurants at each of its casino properties is a major factor in attracting local gaming customers, as dining is a primary motivation for casino visits by many locals. Through its restaurants, each of which has a distinct style of cuisine, Mesquite’s casino properties offer generous portions of high-quality food at reasonable prices. Mesquite’s operating strategy focuses on slot and video poker machine play. Its target market consists of frequent gaming patrons who seek a friendly atmosphere and convenience. Because locals and repeat visitors demand variety and quality in their slot and video poker machine play, Mesquite offers the latest in slot and video poker technology at its casino properties. As part of its commitment
to providing a quality entertainment experience for its patrons, Mesquite is dedicated to ensuring a high level of customer satisfaction and loyalty by providing attentive customer service in a friendly, casual atmosphere.
Marketing and Promotion. Mesquite employs a marketing strategy that utilizes frequent high-profile promotional programs in order to attract customers and establish a high level of name recognition. In addition to advertising through television, radio and newspaper, Mesquite has created new branded promotions, such as its Lot-A-Bucks product and cash incentive promotions.
Mesquite’s player rewards program allows guests to earn points based on their level of gaming activity. Participants in the program can redeem points at any of Mesquite’s properties for cash and complimentary slot play, food, beverage, hotel rooms, merchandise, golf rounds and spa services.
Mesquite is heavily focused on driving customer traffic with the latest products for slots, bingo and keno. Mesquite believes that these products create sustainable competitive advantages and will continue to distinguish it from its competition.
Mesquite’s management endeavors to instill among its employees a sense of loyalty. Toward this end, Mesquite’s management takes a hands-on approach through active and direct involvement with employees at all levels. Mesquite’s management believes that it has very good employee relations.
Mesquite Gaming Properties
Virgin River Hotel/Casino/Bingo
The Virgin River Hotel & Casino (the “Virgin River”) has 717 guest rooms (includes six suites) and a 36,000 square-foot casino with approximately 831 video poker and slot machines, 12 table games, a full service race and sports book, a 183-seat bingo parlor and keno. The Virgin River offers various resort and entertainment amenities, including swimming pools and hot tubs, a 24-lane state-of-the art bowling center, an arcade and a lounge for entertainment and dancing. In addition, the Virgin River offers several affordable dining options, including a 182-seat 24-hour restaurant, the Chuckwagon, and a 178-seat buffet restaurant, Sierra’s Buffet, which has been voted the #1 buffet in Mesquite on multiple occasions. The Virgin River is situated on an approximately 32-acre site, with a parking lot that has a capacity for approximately 1,650 cars.
CasaBlanca Resort/Golf/Spa
The CasaBlance Resort & Casino (the “CasaBlanca”) includes a hotel with approximately 472 tower rooms (including 24 suites) and 24 timeshare units and a casino with approximately 27,000 square feet of space. The casino offers approximately 837 video poker and slot machines, 25 table games, a full service race and sports book, lounge entertainment and dancing. The CasaBlanca offers various resort and entertainment amenities, including a golf club, a full service spa, tennis courts, a lagoon swimming pool with a waterfall and slide, a hot tub, a sand volleyball court and an arcade. In addition, the CasaBlanca offers the Smorgasbord Buffett, a 320-seat buffet restaurant, The Fez, a 180-seat café, Katherine’s, a 136-seat fine dining restaurant, an ice cream parlor, a gift shop and a 10,000 square-foot banquet and conference facility and a 500-seat showroom. The CasaBlanca, situated on approximately 43 acres, has a parking lot with a capacity for approximately 1,940 cars as well as a 45-unit full service R.V. park. Approximately one mile from the CasaBlanca, situated on a 221-acre site, is the CasaBlanca Golf Club featuring an 18-hole, 7,011 yard championship course. The land on which the golf club is located is leased pursuant to a 99-year lease that expires in June 2094.
Oasis Hotel & Casino
Prior to December 5, 2008, the Oasis Hotel & Casino (the “Oasis”) was a full-service entertainment and resort destination with approximately 900 rooms. Due to deteriorating economic conditions, on December 5, 2008, operations at the Oasis were significantly reduced. In May 2009, due to the continued deterioration of economic conditions, the Oasis further reduced operations to 16 video poker and slot machines, the minimum number of machines required to maintain the requisite gaming approvals needed to operate this property’s casino, golf course operations and some of the hotel facilities used to accommodate overflow from the other hotels. During 2011, Mesquite's management put in place a plan for the demolition of the Oasis and some of its 900 rooms situated on an approximately 26-acre site. The demolition, which included six hotel buildings containing 574 rooms, the casino, spa, go-cart track and pylon signs facing I-15, was substantially completed by August 31, 2013. Two buildings used for timeshares and a skywalk across Mesquite Boulevard remain.
A parking lot with a capacity for approximately 1,800 cars as well as an 80 unit R.V. park remain on the Oasis site after the demolition. Approximately four miles from the Oasis site is the Palms Golf Course featuring an 18-hole, 7,008 yard championship course. The Palms Golf Course is located in Arizona just across the Nevada border and is situated on a 256-acre site, of which 109 acres are leased from the State of Arizona pursuant to a lease that expires in May 2015.
Oasis Ranch and Gun Club
The Oasis Ranch and Gun Club encompass over 95 acres of farmland, game pasture, and river bottom that is owned by Mesquite. Operations were suspended indefinitely at the club on November 22, 2010 due to the economic downturn in the region.
Mesquite Market
Mesquite has a population of approximately 15,300 according to the most recently available census data, and is located in the Virgin River Valley adjacent to the Arizona state line and 80 miles northeast of Las Vegas along Interstate 15. Mesquite is a market that attracts both “drive-in” visitors and visitors who are passing through on their way to other destinations by offering gaming as well as other summer and winter recreational activities. In addition to gaming, the Mesquite area features national parks and forests, mountains and lakes and offers year-round opportunities for outdoor activities of all types.
The Mesquite area enjoys relatively mild weather, with abundant sunshine throughout the year and low humidity. Mesquite’s annual snowfall is modest, although heavier snowfall in the mountain passes around Mesquite does occur. Considered by many to be a golfer’s paradise, Mesquite has seven championship courses including the nationally-ranked Wolf Creek Golf Club and the new Conestoga Golf Club. The RE/MAX World Long Drive Championships, along with additional Long Drivers of America events, are held annually at the Mesquite Sports and Event Complex. Mesquite also offers world-class mountain biking, ATVing and hiking trails, nature tours, sky diving, and more. According to the Las Vegas Convention and Visitors Authority (the “Visitors Authority”), the Mesquite area attracted an estimated one million visitors for the twelve months ended December 31, 2013.
The following table sets forth certain statistical information for the Mesquite market for the years 2009 through 2013 as reported by the Visitors Authority, the Nevada Commission on Tourism and the Nevada State Gaming Control Board.
(1)
For the twelve months ended December 31 for each period shown.
(2)
As of December 31 for each period shown.
(3)
Calculated from information provided by the Nevada State Gaming Control Board.
Competition
General. Mesquite faces competition in the market in which its gaming facilities are located as well as in or near any geographic area from which it attracts or expects to attract a significant number of its customers. As a result, Mesquite’s casino properties face direct competition from all other casinos and hotels in the Las Vegas, Nevada region and the Wendover, Nevada region as well as the California gaming market.
Many of Mesquite’s competitors have significantly greater name recognition and financial, marketing and other resources than Mesquite. Mesquite also competes, to some extent, with other forms of gaming on both a local and national level, including state-sponsored lotteries, internet gaming, on- and off-track wagering and card parlors. The recent and continued expansion of legalized casino gaming to new jurisdictions throughout the United States has increased competition faced by Mesquite and will continue to do so in the future. Additionally, if gaming were legalized or expanded in jurisdictions near Mesquite’s properties or any geographic area from which it expects to attract a significant number of its customers, Mesquite could face additional competition which could have a material adverse impact on its business, financial condition and results of operations. There can be no assurance that Mesquite will be able to continue to compete successfully in its existing markets or that it will be able to compete successfully against any such future competition.
Mesquite, Nevada. There are three operating hotel-casinos in Mesquite, Nevada, two of which are owned by Mesquite. Mesquite suspended operations at another of its hotel-casinos, the Oasis, on June 30, 2009 and surrendered its gaming license related to that property. Mesquite continued to use the hotel rooms, RV Park and timeshares at the Oasis until the recent demolition discussed previously and continues to utilized the timeshares now that the demolition is complete, as the structures housing those properties remain. As of December 31, 2013 there were approximately 1,736 hotel rooms in Mesquite, Nevada, 1,560 of which are owned by Mesquite. Within the three operating hotel-casinos there are eight dining options, five of which
are located at Mesquite properties. Mesquite also competes with free standing dining facilities in Mesquite, Nevada. The only other licensed resort gaming facility in Mesquite is the Eureka Casino Hotel (the “Eureka”). Mesquite believes that the hotel casinos are sufficiently distinct and diversified such that each property caters to a different type of clientele. For instance, the CasaBlanca, which contains a spacious casino floor and a tower hotel, appeals to the customer who seeks to enjoy a mega resort type experience that is away from the hustle and bustle of Las Vegas. On the other hand, the Virgin River caters to the local Mesquite customer who is more likely to be attracted by the intimate gaming atmosphere and amenities such as a bowling alley. With 210 rooms and 3 dining facilities, Mesquite believes that the Eureka targets the local Mesquite customer and competes directly with the Virgin River. There is no limit on the number of gaming licenses that may be granted in Mesquite or in some of the other gaming markets in which Mesquite competes. In particular, other than zoning limitations and licensing requirements of the City of Mesquite, there are no restrictions on additional casinos being constructed and opened in Mesquite, including by competitors that may have greater financial and other resources than Mesquite.
Las Vegas, Nevada. Many of Mesquite’s competitors in the Las Vegas market have significantly greater name recognition and financial, marketing and other resources than does Mesquite. However, Mesquite’s focus on providing value-oriented amenities with a quality casino experience attracts many Las Vegas locals who want to enjoy a weekend getaway. In response to the recent economic downturn and increased inventory of rooms, many properties in the Las Vegas market have significantly reduced their room rates, which has made it more difficult for Mesquite to compete with those properties.
West Wendover, Nevada. West Wendover, Nevada is located on the eastern border of Nevada in Elko County. The city is contiguous with Wendover, Utah and is approximately 120 miles west of Salt Lake City, Utah, less than half the distance between Mesquite and Salt Lake City, Utah. According to the Nevada State Gaming Control Board, the West Wendover casinos collectively contain approximately 3,900 slot machines and 140 games and tables as of December 31, 2013. Mesquite competes with these casinos for gaming customers located in Salt Lake City, Utah and the outlying areas. Nonetheless, Mesquite believes that it benefits from a more favorable climate and more attractive amenities. In West Wendover, during September through December, the average number of days with precipitation ranges from five to nine days with temperatures ranging from 38 to 58 degrees Fahrenheit. Mesquite, on the other hand, has on average three to four days of precipitation with temperatures ranging from 48 to approximately 72 degrees Fahrenheit during the same period.
California Gaming Market. Reference is made to the discussion appearing under “ELDORADO - Competition” regarding the development of Native American casinos in the state of California.
Operations
The primary source of Mesquite’s revenues is its properties’ casinos, although their hotels, restaurants, bars, shops and other services are an important adjunct to the casinos. The following table sets forth the respective contributions to Mesquite’s net revenues on a dollar (in thousands) and percentage basis of the major activities at Mesquite’s properties for each of the years 2013 and 2012:
(1)
Casino revenues are the net difference between the sums received as winnings and the sums paid as losses.
(2)
Hotel, food, beverage, entertainment and other include the retail value of services which are provided to casino customers and others on a complimentary basis. Such amounts are then deducted as promotional allowances to arrive at net revenue.
Seasonality
Mesquite’s results of operations tend to be highly seasonal in nature. During the year ended December 31, 2013, approximately 62% of its operating income (without considering depreciation and amortization and other non-cash items) was
generated in the first quarter and approximately 40% was generated in the second quarter with the remainder being an operating loss of approximately 3% during the final half of the year.
Employees
As of December 31, 2013, Mesquite employed approximately 1,509 employees, none of whom are covered by a collective bargaining agreement. Mesquite believes that its relationship with its employees is good.
LAWS AND REGULATIONS
Gaming Regulation Overview
Eldorado and Mesquite and their operations are subject to extensive regulation under laws, rules and supervisory procedures primarily in the jurisdictions where their facilities are located or docked. If additional gaming regulations are adopted in Nevada or Louisiana where their operations are conducted, those regulations could impose additional restrictions or costs that could have a significant adverse effect on those operations. From time to time, various proposals have been introduced in the legislatures of the two jurisdictions in which Eldorado and Mesquite conduct operations which, if enacted, could adversely affect the tax, regulatory, operational or other aspects of the gaming industry and those operations. We do not know whether or when such legislation will be enacted. Gaming companies are currently subject to significant state and local taxes and fees in addition to normal federal and state corporate income taxes, and such taxes and fees are subject to increase at any time. Any material increase in these taxes or fees could adversely affect Eldorado's or Mesquite's, or their respective subsidiaries’, operations.
Some jurisdictions, including Nevada and Louisiana, empower their regulators to investigate participation by licensees in gaming outside their jurisdiction and require licensees to file periodic reports regarding those gaming activities. Violations of gaming laws or regulations in one jurisdiction could result in disciplinary action in other jurisdictions.
Under provisions of gaming laws in jurisdictions in which Eldorado and Mesquite have operations, and under their organizational documents, certain of their securities are subject to restrictions on ownership which may be imposed by specified governmental authorities. The restrictions may require a holder of those securities to dispose of the securities or, if the holder refuses, or is unable, to dispose of the securities, the issuer may be required to repurchase the securities.
NGA has been approved by the Nevada and Louisiana gaming authorities to hold equity interests in Eldorado and Mesquite and is subject to extensive ongoing regulation by the gaming authorities of these jurisdictions.
Nevada Regulation and Licensing
The ownership and operation of casino gaming facilities in Nevada are subject to the Nevada Gaming Control Act (the “Nevada Act”) and regulations promulgated thereunder and to the licensing and regulatory control of the Nevada Gaming Commission (the “Nevada Commission”), the Nevada State Gaming Control Board (the “Nevada Board”) and various local governmental authorities (collectively, the “Nevada Gaming Authorities”).
The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy that seek to:
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Prevent unsavory or unsuitable persons from having any direct or indirect involvement with gaming at any time or in any capacity;
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Establish and maintain responsible accounting practices and procedures;
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Maintain effective control over the financial practices of licensees, including establishing minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities;
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Prevent cheating and fraudulent practices; and
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Provide a source of state and local revenues through taxation and licensing fees.
Changes in these regulations and procedures could have an adverse effect on gaming operations at Nevada casinos, including those of Eldorado and Mesquite.
Resorts, which owns and operates Eldorado-Reno, and Mesquite, which owns and operates Virgin River and CasaBlanca, are licensed by the Nevada Gaming Authorities as corporate licensees (“Corporate Licensees”) under the terms of the Nevada Act. Resorts is also registered with the Nevada Commission as a holding company in connection with its 96% interest in Eldorado Limited Liability Company, a 50% (effectively) joint venture partner in Silver Legacy, and as a manager and member
of Tamarack Junction. Each of Eldorado-Reno, Silver Legacy, Tamarack Junction, Virgin River and CasaBlanca are licensed as non-restricted (casino) gaming operations under Nevada law. No person may become a member of, or receive any percentage of the profits from, Eldorado or Mesquite without first obtaining licenses and approvals from the Nevada Gaming Authorities. All of the members of Eldorado and Mesquite have obtained the licenses and approvals necessary to own their respective interests in Eldorado and Mesquite, respectively. Eldorado and its affiliated entities have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in gaming activities at Eldorado-Reno and to own its interests in ELLC, a joint venture partner in Silver Legacy, and its interests in Tamarack Junction. Likewise, Mesquite and its affiliated entities have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in gaming activities at Virgin River and CasaBlanca and to own its interests in VRCC, LLC and C & HRV, LLC.
Prior to the closing of the Resorts Transaction, NGA and its affiliated entities and controlling persons obtained certain approvals from the Nevada Gaming Authorities. These approvals included the following:
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NGA was registered as a publicly traded corporation as that term is defined by the Nevada Act,
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NGA, VoteCo, Blocker, and AcquisitionCo were registered as holding or intermediary companies and were found suitable in such capacities, and
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The VoteCo equityholders were licensed as members and managers, as applicable, of VoteCo and found suitable as controlling managers, as applicable, of NGA, Blocker, and AcquisitionCo.
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In addition, the Nevada Commission issued a variety of approvals in connection with the Resorts Transaction, including:
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Approval of the disposition of the Resorts 3% equity interest by Carano to AcquisitionCo; and
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Approval of the issuance of the 14.47% new membership interest by Resorts and transfer of the interest to AcquisitionCo.
Similarly, prior to the closing of the Mesquite Acquistion, NGA and its affiliated entities and controlling persons obtained certain approvals from the Nevada Gaming Authorities including, among others:
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NGA was confirmed as being registered as a publicly traded corporation as that term is defined by the Nevada Act,
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NGA, VoteCo, Blocker, and AcquisitionCo were confirmed as being registered as holding or intermediary companies and were found suitable in such capacities, and
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The VoteCo equityholders were confirmed as being licensed as members and managers, as applicable, of VoteCo and found suitable as controlling managers, as applicable, of NGA, Blocker, and AcquisitionCo.
The Nevada Gaming Authorities have found NGA, VoteCo, Blocker and AcquisitionCo and each such company’s respective members and managers suitable in connection with the interests held in Eldorado and Mesquite. While the direct and indirect holders of Class B Membership Units of NGA are not mandatorily required to be found suitable in connection with NGA’s holdings in Eldorado and Mesquite, they remain subject to the discretionary authority of the Nevada Commission and can be required to file an application and have their suitability determined, or to dispose of their investment in NGA. NGA has been approved to be registered by the Nevada Commission as a “publicly traded corporation” as that term is defined in the Nevada Act. NGA is deemed a publicly traded corporation under the Nevada Act because its Class A Units are registered under the Securities Exchange Act of 1934 and NGA is accordingly required to file periodic reports pursuant to that Act. There is currently only one Class A Unit issued and outstanding and it is not currently anticipated that any of NGA’s membership units or any other securities of NGA will be listed for trading or trade with any frequency.
No person may become a stockholder or member of, or receive any percentage of the profits of, an intermediary or holding company or gaming licensee without first obtaining licenses and approvals from the Nevada Gaming Authorities. The Nevada Gaming Authorities may investigate any individual who has a material relationship to or material involvement with NGA or its affiliates to determine whether the individual is suitable or should be licensed as a business associate of a gaming licensee. Certain of the officers, managers and key employees of Eldorado, Mesquite, NGA, VoteCo, Blocker and AcquisitionCo have been or may be required to file applications with the Nevada Gaming Authorities and are or may be required to be licensed or found suitable by the Nevada Gaming Authorities in connection with the Resorts and Mesquite Transactions. The Nevada Gaming Authorities may deny any application for licensing for any reason which they deem appropriate. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. An applicant for licensing or an applicant for a finding of suitability must pay or must cause to be paid all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and, in addition to their authority to deny an application for a finding of suitability or licensing, the Nevada Gaming Authorities have the authority to disapprove changes in a corporate position.
If the Nevada Gaming Authorities were to find an officer, manager or key employee of Eldorado, Mesquite, NGA, VoteCo, Blocker or AcquisitionCo unsuitable for licensing or unsuitable to continue having a continuing relationship with any of these entities, the companies involved would have to sever all relationships with such person. The Nevada Gaming Authorities may deny an application for any cause which they deem reasonable. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada.
If it were determined that the Nevada Act was violated by Eldorado, Mesquite, NGA, VoteCo, Blocker or AcquisitionCo, the gaming licenses and approvals they hold could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, any such violation and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act or of the regulations of the Nevada Commission, at the discretion of the Nevada Commission. Furthermore, the Nevada Commission could appoint a supervisor to operate Eldorado and Mesquite’s Nevada operations and, under specified circumstances, earnings generated during the supervisor’s appointment (except for the reasonable rental value of the premises) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any gaming license or the appointment of a supervisor could (and revocation of any gaming license would) impact Eldorado and Mesquites casino revenues and cause NGA to suffer financial loss.
The Second Revised Order of Registration issued on July 28, 2011 by the Nevada Commission in connection with the Company’s holdings in Eldorado and Mesquite (the “Order of Registration”) contains certain conditions, including conditions that (1) prohibit VoteCo, InvestCo or their respective affiliates from selling, assigning, transferring, pledging or otherwise disposing of Class A Membership Units or Class B Membership Units of Eldorado or Mesquite or any other security convertible into or exchangeable for Class A Membership Units or Class B Membership Units of Eldorado or Mesquite, without the prior approval of the Nevada Commission, and (2) prohibit NGA from declaring cash dividends or distributions on any class of membership unit of NGA beneficially owned in whole or in part by InvestCo, VoteCo, or their respective affiliates, without the prior approval of the Nevada Commission.
The Order of Registration also requires NGA, VoteCo, Blocker and AcquisitionCo to submit detailed financial and operating reports to the Nevada Gaming Authorities on an ongoing basis. Substantially all material loans, leases, sales of securities and similar financing transactions by NGA, VoteCo, Blocker and AcquisitionCo must be reported to, and in some cases approved by, the Nevada Commission.
Regardless of the number of shares held, any beneficial holder of voting securities issued by NGA may be required to file an application, be investigated and have that person’s suitability as a beneficial holder of voting securities determined if the Nevada Commission has reason to believe that the ownership would otherwise be inconsistent with the declared policies of the State of Nevada. If the beneficial holder of such voting securities who must be found suitable is a corporation, partnership, limited partnership, limited liability company or trust, it must submit detailed business and financial information, including a list of its beneficial owners. The applicant must pay all costs of the investigation incurred by the Nevada Gaming Authorities in conducting any investigation.
The Nevada Act requires any person who individually or in association with others acquires, directly or indirectly, beneficial ownership of more than 5% of the voting securities of a publicly traded corporation registered with the Nevada Commission to report the acquisition to the Nevada Commission, and such person may be required to be found suitable. The Nevada Act requires that each person who, individually or in association with others, acquires, directly or indirectly, beneficial ownership of more than 10% of the voting securities of a publicly traded corporation registered with the Nevada Commission to apply to the Nevada Commission for a finding of suitability within 30 days after the Chairman of the Nevada Board mails written notice to the person requiring such filing. Under certain circumstances, an “institutional investor,” as defined in the Nevada Act, which acquires more than 10%, but not more than 25%, of the voting securities of a registered publicly traded corporation may apply to the Nevada Commission for a waiver of a finding of suitability if the institutional investor holds the voting securities for investment purposes only. Also under certain circumstances, an institutional investor that has obtained a waiver may hold up to 29% of the voting securities of such company if it first obtains a finding from the Nevada Commission to the effect that its holdings do not constitute an acquisition of control of the publicly traded corporation. An institutional investor will not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the registered publicly traded corporation, a change in the corporate charter, bylaws, management, policies or operations of the registered publicly traded corporation, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding such a company’s voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include:
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Voting on all matters voted on by stockholders or interest holders;
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Making financial and other inquiries of management of the types normally made by securities analysts for informational purposes and not to cause a change in management, policies or operations; and
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Other activities that the Nevada Commission may determine to be consistent with such investment intent.
Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board may be found unsuitable. The same restrictions apply to a record owner of equity securities if the record owner, after request, fails to identify the beneficial owner. Any person found unsuitable and who holds, directly or indirectly, any beneficial ownership of the equity securities of a publicly traded corporation registered with the Nevada Commission beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. NGA is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a member or hold a voting security or other equity security issued by NGA or to have any other relationship with NGA, NGA:
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Pays that person any dividend or interest with respect to voting securities of NGA,
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Allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person,
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Pays remuneration in any form to that person for services rendered or otherwise, or
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Fails to pursue all lawful efforts to require such unsuitable person to relinquish his or her voting securities, including, if necessary, the immediate purchase of said voting securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any debt or non-voting security of a registered publicly traded corporation to file applications, be investigated, and be found suitable to own the debt or non-voting security of such corporation. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the registered publicly traded corporation can be sanctioned, including by revocation of its approvals, if without the prior approval of the Nevada Commission, it:
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Pays to the unsuitable person any dividend, interest, or any distribution whatsoever,
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Recognizes any voting right by such unsuitable person in connection with such securities,
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Pays the unsuitable person remuneration in any form, or
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Makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transactions.
NGA may not make a public offering of its securities without the prior approval of the Nevada Commission if the securities or the proceeds derived from the offering are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes.
Changes in control of NGA through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby the person obtains control, may not occur without the prior approval of the Nevada Commission. Entities and person seeking to acquire control of a registered publicly traded corporation must satisfy the Nevada Commission with respect to a variety of stringent standards prior to assuming control of such corporation. The Nevada Commission may also require controlling stockholders, members, partners, officers, directors and other persons having an ownership interest in or a material relationship or involvement with the entity proposing to acquire control to be investigated and licensed as part of the approval process relating to the transaction.
Any person who is licensed, required to be licensed, registered, required to be registered, or under common control with such persons, and who proposes to become involved or is involved in a gaming venture outside of Nevada (“Foreign Gaming”), is required to deposit certain funds with the Nevada Board in order to pay the expenses of investigation of the Nevada Board of their participation in such Foreign Gaming. Thereafter, such persons are required to comply with certain reporting requirements imposed by the Nevada Act. A licensee is also subject to disciplinary action by the Nevada Commission if it knowingly violates any laws of the foreign jurisdiction pertaining to the Foreign Gaming operation, fails to conduct the Foreign Gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engages in activities or enters into associations that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employs, contract with, or associates with, a person in a Foreign Gaming operation who has been denied a license or finding of suitability in Nevada for the reason of personal unsuitability.
Louisiana Regulation and Licensing
In the State of Louisiana, Resorts, through two wholly owned subsidiaries, owns 100% interest in and operates Eldorado-Shreveport. The operation and management of a riverboat casino in Louisiana is subject to extensive state regulation. The
Louisiana Riverboat Economic Development and Gaming Control Act, or the Riverboat Act, became effective on July 19, 1991.
The Riverboat Act states, among other things that certain of the policies of the State of Louisiana are to:
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Develop a historic riverboat industry that will assist in the growth of the tourism market;
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License and supervise the riverboat industry from the period of construction through actual operation;
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Regulate the operators, manufacturers, suppliers and distributors of gaming devices; and
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License all entities involved in the riverboat gaming industry.
The Riverboat Act makes it clear, however, that no holder of a license or permit possesses any vested interest in such license or permit and that the license or permit may be revoked at any time.
In a special session held in April 1996, the Louisiana Legislature passed the Louisiana Gaming Control Act, or the Gaming Control Act, which created the Louisiana Gaming Control Board, or the Gaming Control Board. Pursuant to the Gaming Control Act, all of the regulatory authority, control and jurisdiction of licensing for riverboats were transferred to the Gaming Control Board. The Gaming Control Board is made up of nine members and two ex-officio members (the Secretary of Revenue and Taxation and the Superintendent of the Louisiana State Police). It is domiciled in Baton Rouge and regulates riverboat gaming, the land-based casino in New Orleans, racetrack slot facilities and video poker. The Attorney General acts as legal counsel to the Gaming Control Board. Any material alteration in the method whereby riverboat gaming is regulated in the State of Louisiana could have an adverse effect on the operations of Eldorado-Shreveport.
The Louisiana Legislature also passed legislation requiring each parish (county) where riverboat gaming is currently authorized to hold an election in order for the voters to decide whether riverboat gaming will remain legal in that parish. Eldorado-Shreveport is located in Caddo Parish, Louisiana, which approved riverboat gaming at the special election held on November 6, 1996.
The Riverboat Act approved the conduct of gaming activities on riverboats, in accordance with the Riverboat Act, on twelve separate waterways in Louisiana. The Riverboat Act allows the Gaming Control Board to issue up to fifteen licenses to operate riverboat gaming projects within the state, with no more than six in any one parish. There are presently fifteen licenses issued and thirteen riverboats currently operating. Two riverboats in other areas of the State are not operational; however, they are being developed. Pursuant to the Riverboat Act and the regulations promulgated thereunder, each applicant which desired to operate a riverboat casino in Louisiana was required to file a number of separate applications for a Certificate of Preliminary Approval, all necessary gaming licenses, and a Certificate of Final Approval. No final Certificate was issued without all necessary and property certificates from all regulatory agencies, including the U.S. Coast Guard, the U.S. Army Corps of Engineers, local port authorities and local levee authorities.
Eldorado-Shreveport, as operated by Eldorado subsidiaries, received its license and related approvals in July 2005 and renewed the license in 2009. This license is subject to periodic renewal and is subject to certain general operational conditions. The property was formerly operated and licensed as the Hollywood Casino Shreveport.
Eldorado and certain of its members, officers, and certain of its key personnel were found suitable to operate riverboat gaming in the State of Louisiana. New members, officers, and certain key employees associated with gaming must also be found suitable by the Gaming Control Board prior to working in gaming-related areas. These approvals may be immediately revoked for a number of causes as determined by the Gaming Control Board. The Gaming Control Board may deny any application for a certificate, permit or license for any cause found to be reasonable by the Gaming Control Board. The Gaming Control Board has the authority to require Eldorado to sever its relationships with any persons for any cause deemed reasonable by the Gaming Control Board or for the failure of that person to file necessary applications with the Gaming Control Board.
The State of Louisiana imposes a gaming tax equal to 21.5% of the net gaming proceeds generated by the Louisiana Partnership. Additionally, each local government may charge a boarding fee or admissions tax. Eldorado-Shreveport currently pays admission taxes of 4.75% of its adjusted gross receipts to various local governmental bodies. Any increase in these fees or taxes could have a material and detrimental effect on the operations of Eldorado-Shreveport.
At any time, the Gaming Control Board may investigate and require the finding of suitability of any member, beneficial owner, or officer of Eldorado or of any of its subsidiaries. The Gaming Control Board requires all holders of more than a 5% interest in the license holder (regardless of whether the interest is a voting or non-voting interest) to submit to suitability requirements. Additionally, if a member or beneficial owner who must be found suitable is a corporate, limited liability company, or partnership entity, then the shareholders, members, or partners of the entity must also submit to investigation. The sale or transfer of an interest in any interest in a riverboat licensee is subject to Gaming Control Board approval.
Pursuant to the regulations promulgated by the Gaming Control Board, all licensees are required to inform the Gaming Control Board of all debt, credit, financing and loan transactions, including the identity of debt holders and in some cases prior approval from the Gaming Control Board is required prior to entering into any such debt transactions. Eldorado and its subsidiaries that own Eldorado-Shreveport are subject to these regulations. In addition, the Gaming Control Board, in its sole discretion, may require the holders of such debt securities to file applications and obtain suitability certificates from the Gaming Control Board. Additionally, if the Gaming Control Board finds that any holder exercises a material influence over the gaming operations, a suitability finding will be required. If the Gaming Control Board determines that a person is unsuitable to own such a security or to hold such indebtedness, the Gaming Control Board may propose any action which it determines proper and necessary to protect the public interest, including the suspension or revocation of the license. The Gaming Control Board may also, under the penalty of revocation of license, issue a condition of disqualification naming the person(s) and declaring that such person(s) may not:
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Receive dividends or interest in debt or securities;
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Exercise directly or through a nominee a right conferred by the securities or indebtedness;
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Receive any remuneration from the licensee;
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Receive any economic benefit from the licensee; or
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Continue in an ownership or economic interest in a licensee or remain as a member, beneficial owner, officer, or partner of a licensee.
Any violation of the Riverboat Act or the rules promulgated by the Gaming Control Board could result in substantial fines, penalties (including a revocation of the license), and criminal actions. Additionally, all licenses and permits issued by the Gaming Control Board are revocable privileges and may be revoked at any time by the Gaming Control Board.
Internal Revenue Service Regulations
The Internal Revenue Service requires operators of casinos located in the United States to file information returns for U.S. citizens, including names and addresses of winners, for keno, bingo and slot machine winnings in excess of stipulated amounts. The Internal Revenue Service also requires operators to withhold taxes on some keno, bingo and slot machine winnings of nonresident aliens. The Company is unable to predict the extent to which these requirements, if extended, might impede or otherwise adversely affect the operations or its investees.
Regulations adopted by the Financial Crimes Enforcement Network of the Treasury Department require the reporting of currency transactions in excess of $10,000 occurring within a gaming day, including identification of the patron by name and social security number. This reporting obligation began in 1985 and may have resulted in the loss of gaming revenues to jurisdictions outside the United States which are exempt from the ambit of these regulations.
Other Laws and Regulations
The sale of alcoholic beverages at Eldorado-Reno, Eldorado-Shreveport, Silver Legacy, Tamarack Junction, Virgin River and CasaBlanca are subject to licensing, control and regulation by applicable local regulatory agencies. All licenses are revocable and are not transferable. The agencies involved have full power to limit, condition, suspend or revoke any license, and any disciplinary action could, and revocation would, have a material adverse effect upon Eldorado's and/or Mesquite's operations.
Eldorado-Reno, Eldorado-Shreveport, Silver Legacy, Tamarack Junction, Virgin River and CasaBlanca are subject to extensive state and local regulations and, on a periodic basis, they must obtain various licenses and permits, including those required to sell alcoholic beverages. Eldorado and Mesquite believe that they and their subsidiaries have obtained all required licenses and permits and that their business, which is conducted through their subsidiaries, is conducted in substantial compliance with applicable laws.
Environmental Matters
Eldorado
As is the case with any owner or operator of real property, Eldorado is subject to a variety of federal, state and local governmental regulations relating to the use, storage, discharge, emission and disposal of hazardous materials. Federal, state and local environmental laws and regulations also impose liability on potentially responsible parties, including the owners or operators of real property, to clean up, or contribute to the cost of cleaning up, sites at which hazardous wastes or materials were disposed of or released. Eldorado does not have environmental liability insurance to cover such events.
In 1998, Silver Legacy received reimbursement and indemnification from Chevron Company USA for petroleum contamination identified on Silver Legacy property. In addition, reimbursement for some of the expenditures has been, and further reimbursement may be, obtained from the State of Nevada Petroleum Fund which has been established to reimburse parties for costs incurred in clean-up of underground storage tank related contamination. In 2005, Eldorado demolished two motels it owned across the street from and west of Eldorado-Reno. It was determined that contamination of the soil existed and Eldorado sought and received reimbursement from the State of Nevada Petroleum Fund for expenditures of approximately $20,000 incurred in the clean-up relating to the contamination
Groundwater in the vicinity of the Eldorado-Reno property is also contaminated by a chlorinated solvent known as perchloroethylene or “PCE.” This contaminant is widespread in the Reno/Sparks area. The Central Truckee Meadows Remediation District, encompassing much of the cities of Reno and Sparks, was established pursuant to state legislation to address this contamination. The Central Truckee Meadows Remediation District is managed by Washoe County under the direction of the Nevada Division of Environmental Protection, and is currently conducting investigations and developing a remediation plan. Funding for the Central Truckee Meadows Remediation District is provided through assessments to water customers which are calculated on the basis of water use. Eldorado-Reno has paid annual assessments of approximately $7,500 or less per year since 2010 (the Silver Legacy has paid assessments of $25,000 or less per year since 2010). It is possible that additional assessments may be made against properties that receive special benefits from the Central Truckee Meadows Remediation District, such as clean-up of contamination affecting a specific parcel. The legislation implementing this program exempts property owners who did not cause or contribute to the contamination from civil and criminal liability for the cost of remediation and any related damages, except to the extent of unpaid assessments. Eldorado's management does not believe that Eldorado-Reno has contributed to this solvent contamination; however, Eldorado's management expects that Eldorado-Reno and Silver Legacy will continue to be required to allow the Central Truckee Meadows Remediation District access to their respective properties for continued investigation, including access to monitoring wells.
Asbestos has been determined to be present in the acoustic ceilings of approximately 216 of the Eldorado-Reno’s older hotel rooms. Removal of the asbestos will be required only in the event of the demolition of the affected rooms or if the asbestos is otherwise disturbed. Eldorado's management currently has no plans to renovate or demolish the affected rooms in a manner that would require removal of the asbestos.
The possibility exists that additional contamination, as yet unknown, may exist at Eldorado-Reno or Silver Legacy. In all cases, however, Eldorado's management believes that any such contamination would have arisen from activities of prior owners or occupants, or from offsite sources and not as a result of any of Eldorado-Reno's or Silver Legacy’s actions or operations. Eldorado's management does not believe that its expenditures for environmental investigations or remediation will have a material adverse effect on its financial condition or results of operations.
In addition to the annual assessments referred to above, Resorts has expended approximately $0.9 million in connection with environmental matters from January 1, 1993 through December 31, 2013, of which expenditures were less than $1,000 during each of 2013, 2012, and 2011.
Mesquite
Mesquite is subject to various federal, state and local environmental laws, ordinances and regulations, including those governing discharges to air and water, the generation, handling, management and disposal of petroleum products and hazardous substances, and the health and safety of Mesquite’s employees. Permits may be required for Mesquite’s operations and these permits are subject to renewal, modification and, in some cases, revocation. In addition, as a property owner and operator, Mesquite may be liable for the costs of investigating and remediating hazardous substances or petroleum products on, under, or in its properties, without regard to whether Mesquite knew of, or caused, the presence of the contaminants, and regardless of whether the practices that resulted in the contamination were legal at the time they occurred. The presence of, or failure to remediate properly, the substances may adversely affect Mesquite’s ability to sell or rent its properties or to borrow funds using the properties as collateral. Additionally, Mesquite may be subject to claims by third parties based on damages and costs resulting from environmental contamination emanating from its properties.
Mesquite has reviewed environmental assessments, and limited soil and groundwater testing, relating to its properties. As a result, Mesquite has become aware that there is contamination present on some of its properties apparently due to past operations, which included a truck stop and a gas station. In particular, groundwater contamination at Mesquite’s Oasis property (which appears to have migrated onto its CasaBlanca property) is the subject of investigation and cleanup activities being conducted by WSR, Inc. (“WSR”), the prior owners of the Oasis. The water supply for the Oasis property and the CasaBlanca property does not come from ground water that has been contaminated. Although Mesquite believes that the prior owners are responsible for such matters under an indemnity agreement it negotiated at the time it purchased the Oasis, there can be no assurance that Mesquite will not incur costs related to this matter. Further, Mesquite could be held strictly liable for the
environmental clean-up of the contaminated properties. In anticipation of marketing the golf course property during 2006, CasaBlanca Resorts, LLC, entered into several agreements with WSR to terminate WSR’s remaining rights in the golf course property, among other matters, for approximately $1.1 million. Pursuant to the agreements, the funds paid to WSR are to be used by WSR to remediate the existing environmental liability at the Oasis site which continues to be an obligation of WSR.
Mesquite does not anticipate any material adverse effects on its earnings or competitive position relating to environmental matters, but it is possible that future developments could lead to material environmental compliance costs or other liabilities for Mesquite and that these costs could have a material adverse effect on its business and financial condition.
ITEM 1A.
ITEM 1A.
RISK FACTORS.
Not applicable.
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2.
ITEM 2.
PROPERTIES.
The Company
The Company owns no real property, but it owns equity interests in Eldorado and Mesquite, which own real estate and personal property associated with the following casino resorts:
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Eldorado-Reno is situated on an approximately 159,000 square foot parcel at 345 North Virginia Street, Reno, Nevada. Resorts, a wholly-owned subsidiary of Eldorado, owns the entire parcel, except for approximately 30,000 square feet which is leased from C, S and Y Associates, a general partnership of which Donald Carano is a general partner. The lease expires on June 30, 2027. Annual rent is equal to the greater of (i) $400,000 or (ii) an amount based on a decreasing percentage of Eldorado-Reno’s gross gaming revenues ranging from 3% of the first $6.5 million of gross gaming revenues to 0.1% of gross gaming revenues in excess of $75.0 million. Rent in 2013 totaled approximately $589,000 compared with $594,000 in 2012. As of February 28, 2014, repayment of an aggregate $170.5 million of indebtedness was secured by a first deed of trust and security interest in substantially all of Resorts’ Reno and Shreveport real property interests and fixtures, including Eldorado-Reno and Eldorado-Shreveport, a 31,000 square foot parcel of property across the street from and west of Eldorado-Reno, two other parcels of property adjacent to Eldorado-Reno totaling 18,687 square feet, certain parking facilities, all related personal property, substantially all other assets of Resorts and a pledge of Resorts’ interest in ELLC.
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Silver Legacy is situated on two parcels adjacent to the Eldorado-Reno and located at 407 North Virginia Street and 411 North Sierra Street in Reno, Nevada. Silver Legacy Joint Venture owns both parcels comprising 118,167 and 119,927 square feet. As of February 28, 2014, both parcels and the improvements located thereon were subject to encumbrances securing repayment of indebtedness in the aggregate principal amount of $90.5 million.
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Eldorado-Shreveport is situated on approximately nine acres of leased land in Shreveport, Louisiana. The Louisiana Partnership also leases other properties in the Shreveport area for office space, employee parking and storage. As of February 28, 2013, repayment of an aggregate $170.5 million of indebtedness was secured by a first deed of trust and security interest in substantially all of Resorts’ Shreveport real property interests and fixtures, including the Eldorado-Shreveport.
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Tamarack Junction is a small casino in south Reno that is owned by an entity that is 21.25% owned by Resorts. Tamarack Junction is situated on approximately 62,000 square feet with approximately 13,230 square feet of gaming space. Tamarack Junction is not a subsidiary of Resorts and did not guarantee the Resorts Senior Notes or borrowings under the Resorts New Credit Facility. As of February 28, 2014, repayment of an aggregate $1.9 million of indebtedness was secured by a first deed of trust and security interest in substantially all of Tamarack Crossings, LLC's real property interests and fixtures, including the Tamarack Junction.
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Virgin River Hotel/Casino/Bingo is situated on an approximately 32-acre site in Mesquite, Nevada that is owned by Mesquite. As of February 28, 2014, the repayment of an aggregate $58.6 million of indebtedness was secured by a first deed of trust and security interest in substantially all of Mesquite’s real property interests and fixtures, including the Virgin River Hotel/Casino/Bingo.
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CasaBlanca Resort/Golf/Spa is situated on approximately 43 acres in Mesquite, Nevada that is owned by Mesquite. Approximately one mile from the CasaBlanca, situated on a 221-acre site, is the CasaBlanca Golf Club featuring an 18-hole, 7,011 yard championship course. The land on which the golf club is located is leased pursuant to a 99-year lease that expires in June 2094. As of February 28, 2014, the repayment of an aggregate $58.6 million of indebtedness was
secured by a first deed of trust and security interest in substantially all of Mesquite’s real property interests and fixtures, including the CasaBlanca Resort/Golf/Spa.
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Oasis Hotel & Casino, which was demolished in 2013, was situated on an approximately 26-acre site in Mesquite, Nevada that continues to be owned by Mesquite. Approximately four miles from that site is the Palms Golf Course featuring an 18-hole, 7,008 yard championship course. The Palms Golf Course straddles the Nevada/Arizona border and is situated on a 256-acre site, of which 109 acres are leased from the State of Arizona pursuant to a lease that expires in May 2015. The Oasis Ranch and Gun Club, which suspended its operations on November 22, 2010, encompasses over 95 acres of farmland, game pasture, and river bottom that is owned by Mesquite. As of February 28, 2014, the repayment of an aggregate $58.6 million of indebtedness was secured by a first deed of trust and security interest in substantially all of Mesquite’s real property interests and fixtures, including these assets. The demolition of the Oasis, which included six hotel buildings, the casino, spa, go-cart track and pylon signs facing I-15, was substantially completed by August 31, 2013. Two buildings used for timeshares and a skywalk across Mesquite Boulevard remain.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS.
As of the date of this report, the Company is not a party to any pending legal proceeding and to its knowledge, no action, suit or proceeding against it has been threatened by any person.
ITEM 4.
ITEM 4.
MINE SAFETY DISCLOSURES.
Not applicable.
Part II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
No established public trading market exists for the Company’s membership units. There are no plans, proposals, arrangements or understandings with any person with regard to the development of a trading market in any of the Company’s membership units.
The only classes of equity securities of the Company currently outstanding are its Class A Units, which is the Company’s only class of voting securities, and its Class B Units. As of the date of this report, VoteCo is the holder of record of one Class A Unit, which is the only Class A Unit issued and outstanding, and InvestCo is the holder of record of all the Company’s 9,999 Class B Units. The Company did not issue any equity securities during the year ended February 28, 2014, nor did the Company or any “affiliated purchaser” (as defined in Rule 10b-18 (a) (3) under the Securities Exchange Act of 1934) purchase any equity securities of the Company during the year ended February 28, 2014.
The Company has not in the past paid, and does not, other than discussed under "Proposed Eldorado Transaction" in Item 1, expect to pay in the foreseeable future, any dividends or other distributions with respect to its membership units.
Reference is made to the information appearing under the caption “Equity Compensation Plans” in Item 12 of this report, which information is incorporated in this Item 5 by this reference.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA.
Not applicable.
ITEM 7.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
THE COMPANY
Overview
The Company and its subsidiaries were formed as legal entities in January 2007 for the primary purpose of holding equity in one or more entities related to the gaming industry, and to exercise the rights, and manage the distributions received, in connection with those holdings. The Company’s 17.0359% interest in Eldorado and 40% interest in Mesquite were effectively acquired on December 14, 2007 and August 1, 2011, respectively.
The Company has had no revenue generating business since inception. Its only operations have consisted of equity in the net income (losses) of Eldorado and Mesquite, interest income earned on the Eldorado-Shreveport Investments, and nominal administrative expenses. The Company’s net income for the year ended February 28, 2014 was approximately $3.9 million compared with a net loss of $2.6 million for the year ended February 28, 2013.
Eldorado
Eldorado, through Resorts, owns and operates the Eldorado-Reno, a premier hotel/casino and entertainment facility in Reno, Nevada and the Eldorado-Shreveport, an all-suite art deco-style hotel and a tri-level riverboat dockside casino complex situated on the Red River in Shreveport, Louisiana. Eldorado also owns, through Resorts, an approximate 21% interest in Tamarack Junction, a small casino in south Reno. In addition, an approximately 96% owned subsidiary of Resorts owns a 50% interest in a joint venture that owns the Silver Legacy Resort Casino, a major, themed hotel/casino located adjacent to Eldorado-Reno.
On June 1, 2011, Resorts and Eldorado Capital Corp., a Nevada Corporation that is a wholly-owned subsidiary of Resorts, completed the issuance of $180 million of 8.625% Senior Secured Notes due June 15, 2019 (the “Resorts Senior Notes”). Also, on June 1, 2011, Resorts entered into a new $30 million senior secured revolving credit facility available until May 30, 2014 (the “Resorts New Credit Facility”), which consists of a $15 million term loan requiring principal payments of $1.25 million each quarter beginning September 30, 2011, and a $15 million revolving credit facility. Resorts does not intend to renew the Resorts New Credit Facility when it matures on May 30, 2014. Proceeds from the issuance of the Resorts Senior Notes, together with borrowings under the Resorts New Credit Facility, were used to redeem approximately $230 million of previously outstanding debt owed by Resorts and its subsidiaries, of which approximately $31 million was held by Resorts. The remaining previously outstanding debt was called and redeemed on August 1, 2011 utilizing $9.7 million of restricted cash which was set aside on June 1, 2011 for the purpose of redeeming the notes that were called. Interest on the Senior Secured Notes is payable semiannually each June 15 and December 15 (commencing on December 15, 2011) to holders of record on the preceding June 1 or December 1, respectively. Interest on the credit facility is payable on the last day of the Eurodollar Rate loan, provided, however, that if the period exceeds three months the interest will be payable on the respective dates that fall every three months after the beginning of the loan period. For each Base Rate loan, interest is payable as of the end of the respective quarter. The interest period cannot exceed the maturity date of the credit facility for either a Eurodollar Rate loan or Base Rate loan.
Operational highlights for Eldorado for the year ended December 31, 2013 included net operating revenues of approximately $247.2 million and operating expenses of approximately $224.6 million. Eldorado’s equity in the net income of unconsolidated affiliates was approximately $3.4 million and interest expense was approximately $15.7 million for the period. Net income for the year was approximately $18.9 million, compared with a net loss of approximately $1.0 million for the year ended December 31, 2012. The increase in net income of approximately $19.9 million was due primarily to a $12.0 million gain on the extinguishment of debt of an unconsolidated affiliate during 2013 and a $12.3 million increase in equity in the net income of unconsolidated affiliates when comparing the year ended December 31, 2013 to the prior year. Net income was positively affected by a a $5.2 million reduction to operating expenses and a $0.4 million reduction to interest expense. Offsetting items, which negatively affected net income, included a $7.6 million decrease to net operating revenues and $3.2 million of acquisition charges incurred during 2013.
Mesquite
Mesquite is engaged in the hotel casino industry in Mesquite, Nevada and owns and operates the Virgin River Hotel/Casino/Bingo and the CasaBlanca Resort/Golf/Spa. In addition to casino hotel activities, Mesquites’ operations also include vacation ownership interval sales, two golf courses, a bowling center, a gun club, and banquet and conference facilities.
On August 1, 2011, Mesquite completed the issuance of $62.5 million of Senior Secured Notes under Mesquite’s New Loan Facility that provided for interest at an annual rate of LIBOR (1.5% floor and 4.5% ceiling) plus 700 basis points and were due and payable August 1, 2016 (the “Mesquite Senior Notes”), and entered into a new $10 million senior secured revolving credit facility. Interest and principal on the Mesquite Senior Notes and interest on the senior secured revolving credit facility were payable quarterly.
On August 22, 2013, Mesquite completed its refinancing of the indebtedness then outstanding under the Mesquite Senior Notes and the senior secured credit facility utilizing the proceeds from the following: (a) $20 million of First Lien Notes issued to Nevada State Bank, due and payable August 21, 2019, that provide for interest at a 30 day LIBOR rate effective on the first day of each month plus an applicable margin which is determined by reference to Mesquite's senior leverage ratio (5.25% for a ratio greater than 2:1 and 4.75% for a ratio less than or equal to 2:1), (b) a three-year term, $6 million First Lien Revolver with Nevada State Bank, which is subject to the same interest terms as the First Lien Notes plus 0.25% quarterly on the unused
principal portion of the First Lien Revolver, and (c) $35 million of Second Lien Notes issued to Wilmington Trust, due and payable February 21, 2020, that provide for no principal amortization and the payment of interest on the unpaid principal amount at the rate of 7% per annum over the period from August 22, 2013 to August 22, 2014, and at the rate of 8% per annum thereafter.
Operational highlights for Mesquite for the year ended December 31, 2013 included net operating revenues of approximately $93.8 million and operating expenses of approximately $89.4 million. Interest expense during the period was approximately $5.8 million and net income was approximately $1.7 million, compared with interest expense of approximately $5.9 million and a net loss of approximately $5.1 million for the year ended December 31, 2012. The increase in net income of approximately $6.8 million was due primarily to a gain on the sale and disposal of assets of $3.7 million during 2013, along with a $7.2 million decrease to operating expenses and a $0.2 million decrease to interest expense, partially offset by a $3.8 million decrease to net revenues and a $0.6 million increase in the impairment of long-lived assets.
Results of Operations, Year Ended February 28, 2014 Compared to the Year Ended February 28, 2013
For the year ended February 28, 2014, the Company’s equity in the net income of its unconsolidated investees was approximately $3.8 million, with Eldorado and Mesquite accounting for approximately $3.1 million and $0.7 million, respectively. This is compared to equity in the net loss of unconsolidated investees of approximately $2.3 million during the year ended February 28, 2013, with Eldorado and Mesquite accounting for approximately $0.3 million and $2.0 million, respectively. The increase in equity in net income of unconsolidated investees is attributable to 2013 investee activity including Eldorado's $12.0 million gain on the extinguishment of debt of one of its unconsolidated affiliates and $12.3 million increase in equity in the net income of unconsolidated affiliates, along with Mesquite's $7.2 million decrease to operating expenses and gain on the sale and disposal of assets of approximately $3.7 million.
Expenses of $0.2 million during the year ended February 28, 2014 decreased $0.1 million when compared to the year ended February 28, 2013, and net income for the year was approximately $3.9 million compared to a net loss of approximately $2.6 million for the prior period. The increase in net income was primarily due to changes in the Company’s equity in the net losses of its unconsolidated investees as explained above.
Liquidity and Capital Resources
During the year ended February 28, 2014 and February 28, 2013, the Company incurred costs of approximately $0.2 and $0.3 million, respectively, associated with the Company’s ownership of its interests in Eldorado and Mesquite.
For the year ending February 28, 2015, the Company expects to incur approximately $0.2 million in costs associated with the Company’s ownership of its interests in Eldorado and Mesquite. These costs are expected to be funded by the Newport Funds. The Company has no current plans to make any additional investments and thus believes it has the resources to fund its operations and commitments during the year ending February 28, 2015.
Proposed Eldorado Transaction
On September 9, 2013, Eldorado and MTR Gaming Group, Inc. (“MTR”), a publicly traded company, announced that they had entered into a definitive agreement (the “Merger Agreement”), which provides for the combination of MTR and Eldorado in a stock merger with a cash election option offered to MTR’s current stockholders. On November 18, 2013, Eldorado and MTR entered into Amendment No. 1 to the Merger Agreement, which increased the cash election option per share amount from $5.15 to $6.05 and increased the aggregate amount available for the purchase of shares pursuant to the cash option from $30 million to $35 million, with the $5 million increase to be funded by Eldorado utilizing its cash on hand. MTR’s remaining common shares will be exchanged for shares in the combined new company, which is to be publicly traded under the name Eldorado Resorts, Inc. (“NewCo”).
On February 13, 2014, Eldorado and MTR entered into Amendment No. 2 to the Merger Agreement, which allows for the minority investors who own 3.8142% of ELLC (the "Minority Investors") to enter into agreements with Eldorado and MTR to transfer all of their interests in ELLC to Eldorado following closing of the merger for a portion (the "Retained Consideration") of the aggregate number of shares of NewCo to be delivered, as merger consideration, at closing to all members of Eldorado (collectively, the "Retained Interest Agreements"). Prior to its second amendment, the Merger Agreement required Minority Investors to transfer their respective interests in ELLC to a wholly-owned subsidiary of Eldorado on or prior to the closing date. Pursuant to the Retained Interest Agreements, the Minority Investors will grant a wholly-owned subsidiary of Eldorado a right, exercisable for three months commencing on the first business day after the first anniversary of the closing date of the mergers, to acquire all of their interests in ELLC in exchange for payment of the Retained Consideration. This wholly-owned subsidiary of Eldorado will grant a right, pursuant to the Retained Interest Agreements, to the Minority Investors, exercisable for three months commencing on the first business day after the second anniversary of the closing date of the mergers, to put to it all of the Minority Investors’ interests in ELLC in exchange for payment of the Retained Consideration. The Retained Consideration
shall mean the number of shares of NewCo common stock equal to the estimated value of ELLC’s interest in Silver Legacy (as calculated in accordance with the provisions of the Merger Agreement), multiplied by the portion of the outstanding interests in ELLC (expressed as a percentage) represented by the interests in ELLC held by the Minority Investors. The number of shares of NewCo common stock issuable at closing to all members of Eldorado shall be reduced by the number of shares of NewCo common stock equal to the Retained Consideration.
On May 13, 2014, Eldorado and MTR entered into Amendment No. 3 to the Merger Agreement, which expands the circumstances under which either Eldorado or MTR may unilaterally extend the termination date from June 9, 2014 for 180 days to include a scenario in which MTR will not have obtained the requisite stockholder approval of the Merger Agreement by June 9, 2014. The parties entered into the amendment in order to allow for additional time for the registration statement on Form S-4 initially filed by NewCo on November 4, 2013 to be declared effective by the Securities and Exchange Commission and for MTR to obtain the requisite stockholder approval following such effectiveness.
Under the terms of the Merger Agreement, as amended, the transaction value of Eldorado will be determined by Eldorado’s adjusted EBITDA for the twelve-month period specified in the Merger Agreement multiplied by 6.81, less net debt and other adjustments. Based on Eldorado’s adjusted EBITDA for the twelve-month period ended September 30, 2013(including its interest in Silver Legacy), Eldorado’s owners, including the Company, would receive in exchange for their current interests in Eldorado, an aggregate of approximately 35.6 million shares, or approximately 55% of the total shares, in NewCo valued at $6.05 per share. These valuation metrics and the Company’s percentage ownership interest in Eldorado would yield a value to the Company that exceeds the Company’s current carrying value of its investment in Eldorado. Based upon this calculation, the Company would at closing acquire ownership of between 9% and 10% of NewCo, depending on the number of shares purchased pursuant to the cash option. The closing of the proposed transaction is subject to a number of conditions. The foregoing discussion is qualified in its entirety by reference to the Merger Agreement and to Amendments No. 1, No. 2 and No. 3 to the Merger Agreement, copies of which are included as exhibits to this report.
Upon closing of the aforementioned Merger Agreement, which is not assured, the Company may distribute the shares of NewCo common stock received at closing to NGOF. Should that occur, the Company's operations will, subsequent to such date, reflect only the Company's ownership of Mesquite and will no longer reflect the Company's current ownership of the Eldorado Interest. The Company is unable to determine at this time the impact on the Company if the transactions contemplated by the Merger Agreement are consummated and the Company ultimately does not distribute the shares of NewCo to NGOF.
Critical Accounting Estimates and Policies
Investment in Unconsolidated Investees
The Company accounts for its 17.0359% and 40% investments in Eldorado and Mesquite, respectively, using the equity method of accounting. The Company considers on a quarterly basis whether the fair value of each of its equity method investments has declined below its carrying value whenever adverse events or changes in circumstances indicate that the recorded value may not be recoverable. If the Company considers any such decline to be other than temporary, then the investment would be written-down to its estimated fair value. Evidence of a loss in value that may be other than temporary might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the Company’s investment or the inability of Eldorado or Mesquite to sustain an earnings capacity that would justify the carrying amount of the investment. In evaluating whether the loss in value is other than temporary, the Company considers: (1) the length of time and the extent to which the fair value has been less than cost; (2) the financial condition and near-term prospects of Eldorado and Mesquite, including any specific events which may influence the operations of either company; (3) the Company’s intent and ability to retain its investments in Eldorado and Mesquite for a period of time sufficient to allow for any anticipated recovery in fair value; (4) the condition and trend of the economic cycle; (5) Eldorado’s and Mesquite’s historical and forecasted financial performance; (6) trends in the general market; and (7) Eldorado’s and Mesquite’s capital strength and liquidity.
In determining whether the fair value of the investments in Eldorado and Mesquite are less than their carrying value, the Company uses a discounted cash flow model as its principal technique. The Company’s model incorporates an estimated weighted-average cost of capital that a market participant would use in evaluating the investment in a purchase transaction. The estimated weighted-average cost of capital is based on the risk free interest rate and other factors such as current risk premiums. The Company uses the discounted cash flow model as it provides greater detail and opportunity to reflect specific facts, circumstances and economic conditions for its investment. Comparable business transactions are often limited in number, contain dated information, and require significant adjustments due to differences in the size of the business, markets served and other factors. The Company therefore believes that in its circumstance, this makes comparisons to business transactions less reliable than the discounted cash flows model. However, the Company does consider market transactions as corroborative indicators of value.
When estimating the fair value of the investments in Eldorado and Mesquite, management takes steps to ensure that forecasted prospective financial results are based on appropriate and reasonable operating and cash flow assumptions. Management also performs sensitivity analyses on the key assumptions used, including the weighted-average cost of capital.
The Company did not record any impairment for the years ended February 28, 2013 and February 28, 2013 related to its equity method investments in Eldorado and Mesquite.
Recently Issued Accounting Standards
No recently issued accounting pronouncements not yet adopted are expected to have a material impact on our future financial position, results of operations, or cash flows.
Off Balance Sheet Arrangements
The Company currently has no off-balance sheet arrangements.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the financial statements included on pages through, which financial statements are incorporated herein by reference.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), an evaluation was performed by management, with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are effective as of February 28, 2014.
Changes in Internal Control Over Financial Reporting
As required by Rule 13a-15(d) under the Exchange Act, our management, including our principal executive officer and principal financial officer, has evaluated our internal control over financial reporting. Based on that evaluation, there have been no changes in our internal control over financial reporting during the fourth fiscal quarter of the fiscal year covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control system was designed to provide reasonable assurance that information contained in the Company’s consolidated financial statements is reliable, does not contain any untrue statement of a material fact or omit to state a material fact, and fairly presents in all material respects the financial condition, results of operations and cash flows as of and for the periods presented in this annual report.
All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls provide only reasonable assurances with respect to financial statement preparation. In addition, the effectiveness of internal controls may vary over time due to changes in conditions.
Our management, with the participation of our principal executive officer and principal financial officer, assessed the effectiveness of the Company’s internal control over financial reporting using the criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on its assessment, management has concluded that, as of February 28, 2014, the Company’s internal control over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the rules of the Commission.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION.
None
Part III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
NGA is managed by a board of managers which has three members who are Timothy T. Janszen (who is also the NGA’s Operating Manager), Ryan Langdon and Roger May. Each of NGA’s managers may be removed from the Company’s board of managers at any time, with or without cause, by VoteCo as the holder of all of NGA’s voting equity. A majority of NGA’s managers may remove the Operating Manager from the position of Operating Manager (but not from the position of manager). The approval of a majority of NGA’s managers is required to elect a new Operating Manager, who must be selected from among the members of NGA’s board of managers. Other than its Operating Manager, NGA does not have any executive officers.
Each of NGA’s managers is the owner of an equity interest in VoteCo, which holds all of NGA’s voting equity, and collectively they own all of VoteCo’s equity interests. Because of NGA’s structure, which gives all of its voting power to VoteCo, and because NGA pays no compensation, it believes the attribute that best qualifies each of its managers to hold his position as a manager of the Company is his equity interest in VoteCo. Moreover, each individual has company and industry knowledge and experience which further qualifies each of NGA’s managers to hold his position.
The following table sets forth information as of the date of this report, regarding each manager of NGA and each manager of Eldorado and Mesquite.
(1)
Mr. Janszen has been a manager of NGA since July 1, 2007 and its operating manager since December 1, 2010. In his capacity as NGA’s Operating Manager, Mr. Janszen performs certain services for NGA commonly performed by a principal executive officer. Mr. Janszen is the designated representative on Eldorado’s board of managers of AcquisitionCo, which became a member of Resorts’ board of managers upon the closing of the Company’s acquisition of its interest in Resorts on December 14, 2007 and a member of Eldorado’s board of managers effective April 1, 2009 when Resorts became the wholly owned subsidiary of Eldorado. Mr. Janszen is also one of the two members of Mesquite’s board of managers designated as such by AcquisitionCo, which became a member of Mesquite’s board of managers upon the closing of the Company’s acquisition of its interest in Mesquite on August 1, 2011.
(2)
Mr. Langdon has been a manager of NGA since July 1, 2007 and is one of the two members of Mesquite’s board of managers designated as such by AcquisitionCo, which became a member of Mesquite’s board of managers upon the closing of NGA’s acquisition of its interest in Mesquite on August 1, 2011.
(3)
Mr. May has been a manager of NGA since July 1, 2007. In his capacity as a manager of NGA, Mr. May performs certain services for NGA commonly performed by a principal financial officer.
(4)
Mr. Carano is a designated representative on Eldorado’s board of managers of Recreational Enterprises, Inc., a Nevada corporation, which has been a member of Resorts’ board of managers since 1996 and a member of Eldorado’s board of managers since April 1, 2009 when Resorts became the wholly owned subsidiary of Eldorado.
(5)
Mr. Carano is a designated representative on Eldorado’s board of managers of Recreational Enterprises, Inc., a Nevada corporation, which has been a member of Resorts’ board of managers since 1996 and a member of Eldorado’s board of managers since April 1, 2009 when Resorts became the wholly owned subsidiary of Eldorado.
(6)
Mr. Poncia is the designated representative of Hotel-Casino Management, Inc., a Nevada corporation, which has been a member of Resorts’ board of managers since 1996 and a member of Eldorado’s board of managers since April 1, 2009 when Resorts became the wholly owned subsidiary of Eldorado.
(7)
Mr. Reeg has been a member of Resorts’ Board of Managers since December 2007 and a member of Eldorado's board of managers since April 1, 2009 when Resorts became the wholly owned subsidiary of Eldorado. Mr. Reeg became the Senior Vice President of Strategic Development for Resorts in January 2011
(8)
Mrs. Banuelos has been a member of Mesquite’s Board of Managers since August 2011.
(9)
Mr. Toti has served as Chief Executive Officer and Chairman of Mesquite’s Board of Managers since August 2011, and as Chief Operating Officer since January 2014.
(10)
Mr. Gaughan has served as a member of Mesquite’s Board of Managers since January 2014.
Timothy T. Janszen. Mr. Janszen has been the Chief Executive Officer of Newport Global Advisors L.P. since September 14, 2005. Prior to joining Newport Global Advisors L.P., Mr. Janszen held a number of positions, most recently Managing Director and portfolio manager, in the High Yield Group of AIG Global Investment Group over a period of more than five years. Mr. Janszen joined AIG Global Investment Group with the acquisition of American General Investment Management (“AGIM”) in 2001. Mr. Janszen was responsible for the management of AIG Global Investment Group’s high yield group. Mr. Janszen was also the lead portfolio manager of all general and separate high yield accounts. Previously, Mr. Janszen was head of high yield portfolio management at AIG Global Investment Group. At AGIM, he was head of credit research. Prior to rejoining AGIM, Mr. Janszen served as director of research for Pacholder Associates, an independent money manager focused on high yield and distressed investing. Prior to that, Mr. Janszen worked for American General as a senior investment manager. For the four years prior to originally joining American General, Mr. Janszen served in a variety of senior management positions including the last two years as president of ICO, Inc., a public oil service company affiliated with Pacholder. Mr. Janszen spent the first four years of his career as a high yield trader and analyst at Pacholder. Mr. Janszen received a Bachelor of Science in Business Administration, cum laude, from Xavier University in Cincinnati, Ohio, in 1986.
Ryan Langdon. Mr. Langdon has been a Senior Managing Director of Newport Global Advisors L.P. since September 14, 2005. Prior to joining Newport Global Advisors L.P., Mr. Langdon held a number of positions, most recently that of Managing Director and portfolio manager in the High Yield Group of AIG Global Investment Group from 2002 to September 2005. Mr. Langdon was responsible for managing the distressed portfolio. Mr. Langdon joined AIG Global Investment Group’s High Yield Group in 2002 as a senior high yield investment analyst following the telecommunications and cable sectors. Prior to joining AIG Global Investment Group, Mr. Langdon worked at ABN AMRO as a senior high yield telecommunications and cable analyst. Mr. Langdon started his career as a vice president and high yield investment analyst at Pacholder Associates. He received a Bachelor of Science in Business Economics from Miami University in 1994 and a Master of Arts in Economics from Miami University in 1995. Mr. Langdon serves on the board of directors of iPCS, Inc.
Roger A. May, CFA. Mr. May has been a Senior Managing Director of Newport Global Advisors L.P. since September 14, 2005. Prior to joining Newport Global Advisors L.P., Mr. May held a number of positions, most recently that of Managing Director in the High Yield Group of AIG Global Investment Group over a period of more than five years. Mr. May was co-head of research for the High Yield Group, as well as the senior analyst in the healthcare, pharmaceuticals and utilities sectors. Mr. May joined AIG Global Investment Group with the acquisition of AGIM in 2001. Mr. May joined AGIM in 1999 as a senior fixed income investment manager covering the healthcare, lodging and service sectors. Mr. May received a Bachelor of Science in Mathematics from Louisiana State University in 1989 and a Master of Business Administration from the University of Houston in 1996. Mr. May is a Chartered Financial Analyst.
Donald L. Carano. Mr. Carano has served as Chief Executive Officer of, and has, individually or together with members of his immediate family, owned a controlling interest in, Eldorado or its predecessor since 1973. Mr. Carano served as President of Resorts or its predecessor from 1973 until 2004, and as a member of Resorts board of managers since its formation in 1996 and as President and as a director of Capital since its incorporation in 1996. Previously, he was an attorney with the firm of McDonald Carano Wilson LLP, with which he maintains an “of counsel” relationship. Mr. Carano has been involved in the gaming industry and has been a licensed casino operator since 1969. Mr. Carano’s commitment to the development and promotion of tourism in Reno has earned him several awards, including the Nevada Food and Beverage Directors Association Man-of-the-Year Award, the American Lung Association 1993 Distinguished Community Service Award and the 1992 Hotelier of the Year Award. Also, since 1984, Mr. Carano has been the Chief Executive Officer of the Ferrari Carano Winery. He is the father of Gary Carano.
Gary L. Carano. Mr. Carano has been a designated representative of Recreational Enterprises, Inc., a manager of Eldorado, and in that capacity served on the board of managers of Resorts since 1996 and, since April 1, 2009 when Resorts became the wholly owned subsidiary of Eldorado, has served in that capacity on the board of managers of Eldorado. Mr. Carano has served as General Manager of the Silver Legacy since 1995. Mr. Carano has served as President and Chief Operating Officer of Resorts since 2004 and Eldorado since April 1, 2009, when Resorts became the wholly owned subsidiary of Eldorado. Previously, he served as Assistant General Manager, General Manager and Chief Operating Officer of the Eldorado from 1980 to 1994. Mr. Carano holds a Bachelor’s Degree in Business Administration from the University of Nevada, Reno.
Raymond J. Poncia, Jr. Mr. Poncia has been the designated representative on the Eldorado board of managers of Hotel-Casino Management, Inc., since April 1, 2009 when Resorts became the wholly owned subsidiary of Eldorado, and has served in that capacity on the board of managers of Resorts since 1996. Mr. Poncia has had an ownership interest in the Eldorado-Reno since 1973 and has been involved in the gaming industry since 1968. He has been involved with the Eldorado-Reno in the areas of development, architectural and interior design, construction financing and business planning. Mr. Poncia received his architectural degree from Case-Reserve University and has been a licensed architect in private practice since 1960.
Thomas R. Reeg, CFA. Mr. Reeg has been a member of Resorts’ Board of Managers since December 2007 and a member of the Board of Managers of Eldorado since April 1, 2009 when Resorts became the wholly owned subsidiary of Eldorado. Mr. Reeg became the Senior Vice President of Strategic Development for Eldorado in January 2011. Mr. Reeg was the Senior Managing Director of Newport Global Advisors L.P. from September 2005 through November 2010. Prior to joining Newport Global Advisors L.P., Mr. Reeg held a number of positions, most recently Managing Director and portfolio manager, in the High Yield Group of AIG Global Investment Group from 2002 to September 2005. Mr. Reeg was responsible for co-management of the high yield mutual fund portfolios. Mr. Reeg joined AIG Global Investment Group in 2002 as a senior high yield investment analyst where he coordinated credit research in the gaming, lodging and utilities sectors. Prior to joining AIG Global Investment Group, Mr. Reeg was a senior high yield research analyst covering telecommunications, casino, lodging and leisure sectors at Bank One Capital Markets. Mr. Reeg’s previous experience also includes similar high yield research positions with ABN AMRO and Bank of America Securities. Mr. Reeg was a member of the Board of Managers of NGA HoldCo, LLC from January 2007 through November 2010. He received a Bachelor of Business Administration in Finance from the University of Notre Dame in 1993. Mr. Reeg is a Chartered Financial Analyst.
Katherine Ann Banuelos. Mrs. Banuelos has been a member of Mesquite’s Board of Managers since August 1, 2011. She received a Bachelor of Science in Hotel Administration with an emphasis in Gaming from the University of Nevada, Las Vegas in 2001 and received her first key employee gaming license in 1999 at the age of twenty-one. Mrs. Banuelos has been a management consultant for the Michael J. Gaughan Airport Slot Concession and currently manages the Rocking K Ranch in Weatherford, TX and operates and manages the Rocking K Arena in Las Vegas, NV where she, her husband, and daughter breed and train champion cutting horses.
Anthony Toti. Mr. Toti has served as Chief Executive Officer and Chairman of the Board for Mesquite Gaming, LLC since August 1, 2011. Mr. Toti served as Vice President of Gaming Operations from November 2007 through December 2008 and as Chief Operating Officer from December 2008 through August 1, 2011 for Black Gaming, LLC. Mr. Toti has approximately 32 years of experience in the gaming industry, including Director of Casino Operations at the Suncoast Hotel and Casino from October 2006 to October 2007. From July 2000 to October 2006, Mr. Toti served as Casino Manager at the Suncoast Hotel and Casino.
Brendan Gaughan. Mr. Gaughan has been a member of Mesquite's Board of Managers since January 1, 2014. He received a Bachelor of Science in Business Administration with an emphasis in Human Resources while at Georgetown University. Mr. Gaughan drives the RCR No. 62 South Point Hotel and Casino Chevrolet Camaro for the Richard Childress Racing team in the NASCAR Nationwide Series.
Audit Committee Financial Expert
NGA’s Board of Managers, which does not have a separate audit committee, has determined that Timothy T. Janszen, who is a member of the Board of Managers and NGA’s Operating Manager, is an “audit committee financial expert” in that he has the following attributes:
•
an understanding of generally accepted accounting principles and financial statements;
•
the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves;
•
experience preparing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Company’s financial statements or experience actively supervising one or more persons engaged in such activities;
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an understanding of internal control over financial reporting; and
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an understanding of audit committee functions.
Reference is made to the description of Mr. Janszen’s business experience which appears above. The Board of Managers has also determined that no member of the Board of Managers, including Mr. Janszen, is “independent” as that term is defined under current rules of the New York Stock Exchange (the “NYSE”). None of NGA’s securities are listed on the NYSE or any other national securities exchange or any national securities association, nor is there any current intention to so list any securities of the Company in the future.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires NGA's managers, executive officers and persons who own more than ten percent of a registered class of our equity securities (collectively, the “reporting persons”) to file reports of ownership and changes in ownership with the Securities and Exchange Commission and to furnish us with copies of these reports. Based on written representations received from our reporting persons, we believe that no filings were required to be made by those reporting persons for the period March 1, 2012 through February 28, 2013.
Code of Ethics
NGA’s Board of Managers has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions. The code of ethics is a written standard designed to deter wrongdoing and to promote
•
honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
•
full, fair, accurate, timely and understandable disclosure in reports and other documents that the Company files with, or submits to, the Securities and Exchange Commission or any applicable gaming regulatory authority and in other public communications made by the Company;
•
compliance with applicable governmental laws, rules and regulations;
•
the prompt internal reporting of violations of the code in the manner provided in the code; and
•
accountability for adherence to the code.
A copy of the code of ethics is incorporated by reference as Exhibit 14.1 to this report.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION.
NGA’s managers, including its Operating Manager, are not entitled to compensation from the Company for any services rendered to or on behalf of the Company, or otherwise, in their capacities as managers of NGA and, accordingly, no compensation for such services has been paid to the Company’s managers by or on behalf of NGA. NGA’s managers, including the Operating Manager, also are not compensated by or on behalf of the Company for any other services they provide to the Company, including the services performed by Mr. Janszen that are commonly performed by a principal executive officer and the services performed by Mr. May that are commonly performed by a principal financial officer or a principal accounting officer. NGA’s managers are entitled to reimbursement from the first available funds of the Company for direct out-of-pocket costs and expenses they incur on behalf of the Company that directly relate to the business and affairs of the Company. During the year ended February 28, 2014, NGA did not have any named executive officers other than its Operating Manager, Timothy T. Janszen, who during the year performed services for the Company commonly performed by a principal executive officer, for which he received no compensation from the Company. Roger A. May, a Manager of NGA, performed services for the Company during the year ended February 28, 2014 commonly performed by a principal financial officer, for which Mr. May received no compensation from the Company.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth, as of the date of this report, information regarding the beneficial ownership of NGA’s voting securities by all persons known to be the beneficial owners of more than 5% of any voting class of NGA securities.
(1)
The address for each beneficial owner is:
c/o Newport Global Advisors LP
21 Waterway Avenue, Suite 150
The Woodlands, TX 77380
(2)
Beneficial ownership is determined in accordance with the Exchange Act, as amended, and the rules and regulations promulgated thereunder.
(3)
VoteCo directly owns one Class A Unit of NGA, which is the only Class A Unit of NGA that is issued and outstanding.
(4)
Timothy T. Janszen is a member of NGA’s and VoteCo’s board of managers and the operating manager of VoteCo and NGA.
(5)
Timothy T. Janszen, Ryan Langdon and Roger A. May (collectively, the “VoteCo Equityholders”) are the voting members of VoteCo holding 42.85, 42.85 and 14.3 VoteCo Units, respectively. These individuals may be deemed to form a “group” holding all 100 VoteCo Units and, as a result, each such individual may be deemed to be a beneficial owner of the Class A Unit of NGA directly held by VoteCo.
(6)
Mr. Langdon is a member of NGA’s and VoteCo’s board of managers.
(7)
Mr. May is a member of NGA’s and VoteCo’s board of managers.
The following table sets forth, as of the date of this report, information regarding the beneficial ownership by each of NGA’s managers, Timothy T. Janszen, Ryan Langdon and Roger A. May, of each class of equity securities of NGA, NGA’s parent or NGA’s subsidiaries of which he owns any beneficial interest. Mr. Janszen, who is NGA’s operating manager, and performs services for NGA commonly performed by a principal financial officer, is NGA’s only named executive officer.
(1)
The address for each manager of NGA is:
c/o Newport Global Advisors LP
21 Waterway Avenue, Suite 150
The Woodlands, TX 77380
(2)
Beneficial ownership is determined in accordance with the Exchange Act, as amended, and the rules and regulations promulgated thereunder.
(3)
Timothy T. Janszen is the operating manager of VoteCo, NGA, Blocker and AcquisitionCo. Mr. Janszen performs services for the Company commonly performed by a principal executive officer.
(4)
Timothy T. Janszen is the listed owner of these securities.
(5)
VoteCo is the listed owner of one Class A Unit of NGA, which is the only Class A Unit of NGA that is issued and outstanding. Timothy T. Janszen, Ryan Langdon and Roger A. May each may be deemed to be a member of a “group” holding all 100 VoteCo Units and, as a result, each may be deemed to be a beneficial owner of the Class A Unit of NGA, representing the only Class A Unit of NGA issued and outstanding, directly held by VoteCo.
(6)
NGA is the listed owner of all 100 Blocker Units. Timothy T. Janszen, Ryan Langdon and Roger A. May each may be deemed to be a member of a “group” holding all 100 VoteCo Units and, as a result, each may be deemed to be a beneficial owner of all Blocker Units directly held by NGA.
(7)
Blocker is the listed owner of all 100 AcquisitionCo Units. Timothy T. Janszen, Ryan Langdon and Roger A. May each may be deemed to be a member of a “group” holding all 100 VoteCo Units and, as a result, each may be deemed to be a beneficial owner of all AcquisitionCo Units directly held by Blocker.
(8)
Ryan Langdon is a manager of VoteCo, NGA, Blocker and AcquisitionCo.
(9)
Ryan Langdon is the listed owner of these securities.
(10)
Roger A. May is a manager of VoteCo, NGA, Blocker and AcquisitionCo. Mr. May performs services for NGA commonly performed by a principal financial officer or a principal accounting officer.
(11)
Roger A. May is the listed owner of these securities.
(12)
NGA currently has no executive officers, but Timothy T. Janszen, NGA’s operating manager, performs services for NGA commonly performed by a principal executive officer and Roger A. May, a manager of NGA, performs services for NGA commonly performed by a principal financial officer or a principal accounting officer.
Equity Compensation Plans
The following tables set forth certain information relating to equity compensation plans as of February 28, 2014 for the Company, which has no equity compensation plan.
Equity Compensation Plan Information
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Director Independence
NGA’s Board of Managers has determined that none of NGA’s managers is “independent” as that term is defined under current rules of the New York Stock Exchange (the “NYSE”). None of NGA’s securities are listed on the NYSE or any other national securities exchange or any national securities association, nor is there any current intention to so list any securities of NGA in the future.
The Board of Managers of Eldorado has determined that no member of Eldorado’s Board of Managers is “independent” as that term is defined under current rules of the NYSE. None of Eldorado’s securities are listed on the NYSE or any other national securities exchange or any national securities association, nor is there any current intention to so list any securities of Eldorado in the future.
The Board of Managers of Mesquite has determined that no member of Mesquite’s Board of Managers is “independent” as that term is defined under current rules of the NYSE. None of Mesquite’s securities are listed on the NYSE or any other national securities exchange or any national securities association, nor is there any current intention to so list any securities of Mesquite in the future.
NGA’s Parent
NGA’s only parent is VoteCo, which holds 100% of the voting securities of NGA. The equity owners of VoteCo are Timothy T. Janszen and Ryan Langdon, each of whom owns a 42.85% interest, and Roger A. May, who owns a 14.3% interest. These individuals may be deemed to form a “group” holding all 100 VoteCo Units and, as a result, each such individual may be deemed to be a beneficial owner of the Class A Unit of NGA directly held by VoteCo.
Related Transactions
Eldorado
Until July 1, 1996, Resorts had historically paid a management fee to each of Recreational Enterprises, Inc. and Hotel Casino Management, Inc. A portion of these fees represented compensation for services provided to Resorts by certain members of the Carano family. Effective July 1, 1996, Resorts entered into a new management agreement (the “Eldorado Management Agreement”) with Recreational Enterprises, Inc. and Hotel Casino Management, Inc. which provides that Recreational Enterprises, Inc. and Hotel Casino Management, Inc. (collectively, the “Managers”) will, among other things, (a) develop strategic plans for Resorts’ business, including preparing annual budgets and capital expenditure plans, (b) provide advice and oversight with respect to financial matters of Resorts, (c) establish and oversee the operation of financial accounting systems and controls and regularly review Resorts’ financial reports, (d) provide planning, design and architectural services to Resorts and (e) furnish advice and recommendations with respect to certain other aspects of Resorts’ operations. In consideration for such services, Resorts pays to the Managers a management fee not to exceed 1.5% of Resorts’ annual net revenues. In connection with the refinancing of Resorts’ debt obligations in June 2011, the management agreement was amended which, among other things, imposed a limit on the annual management fee payment of $600,000. There is no minimum payment required to be paid to the Managers pursuant the Eldorado Management Agreement. The current term of the Eldorado Management Agreement will continue in effect until July 1, 2014, and the term will continue to be automatically extended for additional three-year periods until it is terminated by one of the parties. Total management fees paid by Resorts to Recreational Enterprises, Inc. and Hotel Casino Management were $600,000 for each of the years ended December 31, 2013, 2012 and 2011. There can be no assurance that the terms of the Eldorado Management Agreement are at least as favorable to Resorts as could be obtained from unaffiliated third parties. Recreational Enterprises, Inc. is beneficially owned by members of the Carano family and Hotel Casino Management, Inc. is beneficially owned by members of the Poncia family. Donald M. Carano and Raymond J. Poncia, Jr. are members of Resorts’ and Eldorado’s boards of managers.
Resorts owns the parcel on which the Eldorado-Reno is located, except for approximately 30,000 square feet which is leased from C, S and Y Associates, a general partnership of which Donald Carano is a general partner (the “CSY Lease”). The CSY Lease expires on June 30, 2027. Annual rent is payable in an amount equal to the greater of (i) $400,000 or (ii) an amount based on a decreasing percentage of Eldorado-Reno’s gross gaming revenues for the year ranging from 3% of the first $6.5 million of gross gaming revenues to 0.1% of gross gaming revenues in excess of $75 million. Rent pursuant to the CSY Lease amounted to approximately $589,000, $594,000 and $580,000 in 2013, 2012 and 2011, respectively. In the opinion of Resorts’ management, the terms of the CSY Lease are at least as favorable to Resorts as could have been obtained from unaffiliated third parties. On May 30, 2011, Resorts and C. S. & Y Associates entered into a fourth amendment to the CSY Lease. C. S & Y Associates agreed to execute and deliver the deeds of trust encumbering the approximately 30,000 square feet leased from C. S. & Y Associates on which a portion of Eldorado-Reno is located as security for Senior Secured Notes and the New Credit Facility. In exchange for this subordination, a fee of $100,000, which will be in addition to any rent payable under the CSY Lease, will be paid annually during the term of the indenture relating to Eldorado’s senior secured notes. Resorts paid $100,000 to C. S. & Y Associates for this subordination in each of the years ended December 31, 2013, 2012 and 2011.
Resorts currently retains the firm of McDonald Carano Wilson LLP (“McDonald Carano”) in connection with a variety of legal matters. Donald Carano was an attorney with McDonald Carano from 1961 until 1980. Mr. Carano has maintained an “of counsel” relationship with McDonald Carano, but is not involved in the active practice of law or in the representation of Resorts or any of its affiliates as an attorney. Mr. Carano receives no compensation from McDonald Carano. In addition, Anthony Carano, Donald Carano’s grandson, is an associate at McDonald Carano and is currently involved in matters related to Eldorado, including the pending merger discussed under "Proposed Eldorado Transaction" in Item 7, and is compensated by McDonald Carano. In the opinion of Eldorado’s management, the fees paid to McDonald Carano are at least as favorable to Eldorado as could be obtained from any other law firm for comparable services. During the years ended December 31, 2013, 2012 and 2011, total fees and costs paid to McDonald Carano by the Company were approximately $590,000, $212,000 and $218,800, respectively.
From time to time Resorts leases aircraft owned by Recreational Enterprises, Inc., for use in operating its business. In 2013, 2012 and 2011, lease payments for the aircraft totaled approximately $0.8 million, $0.8 million and $0.7 million, respectively. In the opinion of Eldorado’s management, the lease terms were at least as favorable to Resorts as could have been obtained from an unaffiliated third party.
From time to time Resorts leases a yacht owned by Sierra Adventure Equipment, a limited liability company beneficially owned by Recreational Enterprises, Inc., for use in operating its business. In 2013, 2012 and 2011, lease payments for the yacht totaled approximately $13,000, $8,000 and $43,500, respectively. In the opinion of Resorts’ management, the lease terms were at least as favorable to Resorts as could have been obtained from an unaffiliated third party.
Resorts occasionally purchases wine directly from the Ferrari Carano Winery, which is owned by Recreational Enterprises, Inc. and Donald Carano. The wine purchases are sent directly to customers in appreciation of their patronage. In 2013, 2012 and 2011, Resorts spent approximately $1,000, $23,000 and $23,000, respectively, for these products. In the opinion of the Resorts’ management, the purchases were on terms as least as favorable to Resorts as could have been obtained from an unaffiliated third party.
In 2013, 2012 and 2011, $6.1 million, $4.1 million and $1.7 million, respectively, in distributions were made by Resorts to Eldorado and, in turn, by Eldorado to its members, including Donald Carano and members of his immediate family, for the members’ Louisiana Partnership composite tax.
During the year ended December 31, 2013, Gary L. Carano, the Silver Legacy Joint Venture’s Chief Executive Officer, served on the Board of Managers of Eldorado, a position he has held since April 1, 2009 when Resorts became the wholly owned subsidiary of Eldorado.
Resorts owns the skywalk that connects the Silver Legacy with Eldorado-Reno. The charges from the service provider for the utilities associated with this skywalk are billed to the Silver Legacy together with the charges for the utilities associated with the Silver Legacy. Such charges are paid to the service provider by Silver Legacy, and the Silver Legacy is reimbursed by Eldorado-Reno for the portion of the charges allocable to the utilities provided to the skywalk. In 2013, 2012 and 2011, the charges for the utilities provided to the skywalk totaled $58,000, $53,000 and $52,200, respectively.
In October 2005, the Silver Legacy began providing on-site laundry services for Eldorado-Reno related to the cleaning of certain types of linens. Although there is no agreement obligating Eldorado-Reno to utilize this service, it is anticipated that the Silver Legacy will continue to provide these laundry services in the future. The Silver Legacy charges Eldorado-Reno for labor and laundry supplies on a per unit basis which totaled $143,000, $135,000 and $129,100 during 2013, 2012, and 2011, respectively. We believe the terms on which the Silver Legacy provided these services were at least as favorable to it as those that would have been obtained in comparable transactions with an unaffiliated third party.
Since 1998, the Silver Legacy has purchased from Eldorado-Reno homemade pasta and other products for use in the restaurants at Silver Legacy and it is anticipated that Silver Legacy will continue to make similar purchases in the future. For purchases of these products during 2013, 2012 and 2011, which are billed to Silver Legacy at cost plus associated labor, the Silver Legacy paid Eldorado-Reno $46,000, $56,000 and $56,600, respectively.
In April 2008, the Silver Legacy and Eldorado-Reno began combining certain back-of-the-house and administrative departmental operations, including purchasing, advertising, information systems, surveillance, retail and engineering, of Eldorado-Reno and Silver Legacy in an effort to achieve payroll cost savings synergies at both properties. Payroll costs associated with the combined operations are shared equally and are billed at cost plus an estimated allocation for related benefits and taxes. During 2013, 2012 and 2011, the Silver Legacy reimbursed Eldorado-Reno $584,000, $691,000 and $657,000, respectively, for Silver Legacy’s allocable portion of the shared administrative services costs associated with the operations performed at Eldorado-Reno and Eldorado-Reno reimbursed the Silver Legacy $260,000, $308,000 and $304,000, respectively, for Eldorado-Reno’s allocable portion of the shared administrative services costs associated with the operations performed at Silver Legacy.
The Louisiana Partnership utilizes the services of Newport Global Advisors, LP, a financial advisory firm of which one of Resort’s directors is the Senior Managing Partner. Expenses incurred amounted to $75,000 during 2013, 2012 and 2011, respectively. Amounts payable with respect to such charges outstanding at December 31, 2013, 2012 and 2011 amounted to $19,000, $0 and $0, respectively.
Registered hotel guests at Eldorado-Reno have the ability to charge to their hotel rooms the costs incurred at the restaurants and shops located within Eldorado-Reno and Silver Legacy. In addition, registered hotel guests at the Silver Legacy may charge costs incurred at Eldorado-Reno outlets to their hotel rooms. Any of these charges that are incurred by a paying guest are paid by the guest when he or she checks out and Eldorado-Reno remits to the other property, and the other property remits to Eldorado-Reno, the respective amounts collected for charges incurred at the property. In the case of registered guests who are provided room, food, beverage and other services on a complimentary basis, the property where the guest is registered pays the other property the respective amounts of any charges to the guest’s room for services provided on a complimentary basis by the other property. The following table sets forth for the year ended December 31, 2013, the respective amounts paid for such complimentary charges by Eldorado-Reno to the Silver Legacy and by the Silver Legacy to the Eldorado-Reno.
The identification and review of related party transactions involving Eldorado or its subsidiaries is not covered by any formal policies or procedures but is accomplished through informal discussion and examination among executive management and Eldorado’s or Resorts’ Board of Managers. Transactions with related parties are subjected to the prior review of Eldorado’s or Resorts’ management and Board of Managers. Related party transactions typically involve various transactions with affiliates, or entities in which an affiliate has an interest, that generally provide an opportunity for Eldorado or a subsidiary to obtain favorable terms and/or premium products. However, all related party transactions are reviewed to ensure that the terms are, in the opinion of Eldorado’s or Resorts’ management, at least as favorable to Eldorado or Resorts as those obtainable from an unaffiliated third party. There has not been any transaction since the beginning of Eldorado's last fiscal year that would have been required to be reported pursuant to Items 404(a) of Securities and Exchange Commission Regulation S-K if Eldorado or Resorts had been subject to the periodic reporting requirements under the Securities Exchange Act of 1934 that was not so reviewed and approved.
Mesquite
Mesquite Travel Center - FC C-Store LLC, (the “Travel Center”) is partly owned by Anthony Toti ("Mr. Toti") and by Robert R. Black, Sr. (“Mr. Black”). Mesquite obtains gasoline for department vehicles from the Travel Center. In 2013, 2012, and 2011, the Travel Center charged Mesquite approximately $42,000, $46,000 and $49,000, respectively.
Black & LoBello is a law firm managed by the daughter of Mr. Black. Mesquite, which retains Black & LoBello as outside legal counsel, has paid legal fees for legal services in the amounts of $0, $6,000, and $39,000 during 2013, 2012 and 2011, respectively.
Mesquite provided management and other services to Grand Destinations Vacation Club ("GDVC"), Peppermill Palms Property Owners ("PPPOA"), and CasaBlanca Vacation Club ("CBVC"), three related parties that manage and operate the home owners associations of the vacation intervals at the Mesquite properties. Included in the accompanying consolidated balance sheets of Mesquite are receivables of approximately $14,048, $23,296 and $23,031 as of December 31, 2013 and approximately $37,056, $23,891 and $22,454 as of December 31, 2012 for GDVC, PPPOA, and CBVC, respectively.
On August 1, 2011, Michael J. Gaughan Family, LLC acquired a 25% ownership interest in Mesquite Gaming, LLC. The Manager of Michael J. Gaughan Family, LLC is the owner and President of South Point Hotel, Casino & Spa. At the time of the acquisition, there was an existing agreement with South Point Hotel, Casino & Spa under which South Point Hotel, Casino & Spa operates the sports book facilities located in the Virgin River Hotel and Casino and CasaBlanca Hotel and Casino. Under the term of the agreement, Mesquite Gaming, LLC receives a prorated share of the net income or net loss from the sports book operations of South Point Hotel, Casino and Spa. For the years ended December 31, 2013 and 2012, and for the five months ended December 31, 2011 (Successor), Mesquite's share of the sports book income was approximately $617,000, $379,000 and $197,000, respectively. Included in accrued liabilities at December 31, 2013, 2012 and 2011 was approximately $52,000, $77,000 and $95,000, respectively, due to South Point Hotel, Casino & Spa.
Beano's is a company that is partly owned by Robert R. Black, Sr., who has served as Mesquite's Chief Operating Officer and as a member of Mesquite’s Board of Managers since August 2011. In February 2012, Mesquite entered into a lease agreement with Beano's for an outdoor billboard located in Las Vegas, Nevada. The rent expense for the years ended December 31, 2013 and 2012 was $2,000 and $23,000, respectively.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following table sets forth fees billed to the Company for the fiscal years ended February 28, 2014 and February 28, 2013 by the Company’s registered public accounting firm, Piercy, Bowler, Taylor & Kern, Certified Public Accountants and Business Advisors, a Professional Corporation (“PBTK”).
(1)
Audit Fees. This category includes fees and expenses billed by PBTK for the audits of the Company’s financial statements and for the reviews of the financial statements included in the Company’s filings with the Securities and Exchange Commission, including its quarterly and annual reports filed pursuant to Section 13 of the Securities Exchange Act of 1934, as amended.
The Board of Managers has established pre-approval policies and procedures pursuant to which the Board of Managers approves the services provided by our principal accounting firm. The services provided to us by our principal accounting firm in 2014 and 2013 were pre-approved by our Board of Managers. Consistent with the Board of Managers’ responsibility for engaging our independent auditors, all audit and permitted non-audit services require pre-approval by the Board of Managers. Requests or applications to provide services that require specific approval by the Board of Managers will be submitted to the Board of Managers by both the independent auditor and Roger A. May, who performs for the Company the services commonly performed by a principal financial officer. Mr. May will immediately report to the Board of Managers any breach of this policy that comes to his attention.
Part IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following documents are filed as a part of the report:
Description
Page No.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Changes in Members’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(b) Exhibits The exhibits in the accompanying Exhibit Index are incorporated by reference into this Item 15.
NGA HoldCo, LLC and Subsidiaries
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Changes in Members’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
NGA Holdco LLC
The Woodlands, Texas
We have audited the accompanying consolidated balance sheet of NGA Holdco, LLC and subsidiaries (the “Company”) as of February 28, 2014 and 2013, and the related consolidated statements of operations, changes in members’ equity, and cash flows for the years then ended (collectively, the Consolidated Financial Statements). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the Consolidated Financial Statements present fairly, in all material respects, the financial position of the Company as of February 28, 2014 and 2013, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ PIERCY BOWLER TAYLOR & KERN
Las Vegas, Nevada
June 11, 2014
NGA HOLDCO, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, 2014 AND 2013
See notes to consolidated financial statements.
NGA HOLDCO, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY 28, 2014 AND 2013
See notes to consolidated financial statements.
NGA HOLDCO, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS’ EQUITY
FOR THE YEARS ENDED FEBRUARY 28, 2014 AND 2013
See notes to consolidated financial statements.
NGA HOLDCO, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28, 2014 AND 2013
See notes to consolidated financial statements.
NGA HOLDCO, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 28, 2014 AND 2013
1. Organization
Business activities
NGA HoldCo, LLC, a Nevada limited liability company (“NGA”), was formed on January 8, 2007 at the direction of Newport Global Opportunities Fund LP, a Delaware limited partnership (“NGOF”) and an affiliate of Newport Global Advisors LP, a Delaware limited partnership (“Newport”). NGA was formed for the primary purpose of holding equity, directly or indirectly through its subsidiaries, in one or more entities related to the gaming industry. The Company has two wholly-owned subsidiaries, NGA Blocker, LLC, a Nevada limited liability company (“Blocker”), and AcquisitionCo, LLC, a Nevada limited liability company (“AcquisitionCo”), each of which was formed on January 8, 2007 (collectively with NGA, the “Company”).
The Company has had no revenue generating business since inception. Its current business plan consists primarily of its holding, through AcquisitionCo, of a 17.0359% equity interest in Eldorado HoldCo LLC (the “Eldorado Interest”), a Nevada limited liability company (“Eldorado”) and a 40% equity interest in Mesquite Gaming LLC (the “Mesquite Interest”), a Nevada limited liability company (“Mesquite”). The Eldorado Interest was effectively acquired December 14, 2007 (the “Eldorado Acquisition”), in exchange for certain first mortgage bonds and preferred equity interests (the “Eldorado-Shreveport Investments”) valued at $38,314,863. The Mesquite Interest was acquired August 1, 2011 (the “Mesquite Acquisition”), in exchange for $8,222,222 in cash, of which $7,222,222 and $1,000,000 were contributed to the Company by NGOF and Newport Global Credit Fund (“NGCF”), respectively (collectively, the “Newport Funds”).
Eldorado owns entities that own and operate the Eldorado Hotel & Casino located in Reno, Nevada and the Eldorado Resort Casino Shreveport located in Shreveport, Louisiana. One of the entities owned by Eldorado also owns an approximate 21% interest in a joint venture that owns and operates Tamarack Junction Casino & Restaurant, a small casino located in Reno, Nevada. In addition, an approximately 96% owned subsidiary of Eldorado owns a 50% interest in a joint venture that owns and operates the Silver Legacy Resort Casino (which is seamlessly connected to the Eldorado Hotel & Casino).
Mesquite is engaged in the casino resort industry in Mesquite, Nevada through wholly-owned subsidiaries that own and operate the CasaBlanca Resort/Golf/Spa, the Virgin River Hotel/Casino/Bingo, two championship golf courses, a full-service spa, a bowling center, a gun club, restaurants, and banquet and conference facilities. Mesquite also owns the Oasis Resort & Casino, the majority of which is currently being demolished.
Other than its equity interests in Eldorado and Mesquite, along with any indirect interest it may subsequently hold in another entity by virtue of its equity interests in Eldorado and Mesquite, the Company has no current plans to acquire any equity interest in another entity.
Formed in 2005, Newport is a Texas-based investment management firm focused on alternative fixed income strategies. The firm concentrates primarily on the stressed and distressed opportunities within the high yield debt and bank loan markets but may also include the acquisition and disposition of other types of corporate securities and claims. Newport has 11 employees, with its primary office in The Woodlands, TX. Newport’s principals include Timothy T. Janszen, CEO, Ryan Langdon, Senior Managing Director, and Roger A. May, Senior Managing Director. Collectively, the principals have over 40 years of experience investing in the high yield and distressed debt markets. Newport is registered with the Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended. Newport is investment manager of the Newport Funds, private investment funds which seek attractive long-term risk adjusted returns by capitalizing on investments in the distressed debt markets and possibly control-oriented investments. The Newport Funds began investing in 2006.
Concentrations and economic uncertainties
NGA and its consolidated subsidiaries expect to be economically dependent upon relatively few investments in the gaming industry. The United States recently experienced a recession accompanied by, among other things, weakness in the commercial and investment banking systems resulting in reduced credit and capital financing availability, and highly curtailed gaming, other recreational, construction and real estate market activities and general discretionary consumer spending. Although capital market activity and liquidity are reported to have improved of late, the recovery from this recession period is fragile and there can be no assurance that the Company’s business and that of its investees, which have been severely affected by the downturn, will fully recover to pre-recession levels. In addition, the Company carries cash on deposit with financial institutions substantially in excess of federally-insured limits. The extent of any loss that might be incurred as a result of uninsured deposits in the event of a future failure of a bank or other financial institutions is not subject to estimation at this time.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Accounting and Presentation
The Company prepares its financial statements on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (GAAP). The consolidated financial statements include the accounts of the NGA and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Investments in Eldorado and Mesquite (Notes 4 and 5) are accounted for using the equity method of accounting. Accordingly, the Company measures all of its assets and liabilities on the historical cost basis of accounting except as required by GAAP. Such assets are evaluated at least annually (and more frequently when circumstances warrant) to determine if events or changes in circumstances indicate that the carrying value may not be recoverable. Examples of such events or changes in circumstances that might indicate impairment testing is warranted might include an adverse change in the legal, regulatory or business climate relative to gaming nationally or in the jurisdictions in which the Company’s investees operate, or a significant long-term decline in historical or forecasted earnings or cash flows of the investee or the fair value of its property or business, possibly as a result of competitive or other economic or political factors. In evaluating whether a loss in value is other than temporary, the Company considers: (1) the length of time and the extent to which the fair value has been less than cost; (2) the financial condition and near-term prospects of the investee, including any specific events which may influence the operations; (3) the Company’s intent and ability to retain its investments in the investee for a period of time sufficient to allow for any anticipated recovery in fair value; (4) the condition and trend of the economic cycle; (5) the investee’s historical and forecasted financial performance; (6) trends in the general market; and (7) the investee’s capital strength and liquidity.
In determining whether the carrying value of the Company’s investment in an investee is less than its estimated fair value of the investment, a discounted cash flow approach to value is used and is based on Level 3 inputs as defined by GAAP. The Company’s valuation model incorporates an estimated weighted-average cost of capital (effectively, a discount rate) and terminal value multiples that are used by market participant. The estimated weighted-average cost of capital is based on the risk free interest rate at the time, adjusted for specific risk factors. The Company also considers the metrics of specific business transactions that may be comparable to varying degrees. The weight assigned to these approaches to value in the Company’s impairment evaluation may vary from period to period depending upon evolving events. Forecasted prospective financial information used in the model is based on management’s excepted course of action. Sensitivity analyses are also performed related to key assumptions used, including possible variations in the weighted-average cost of capital and terminal value multiples, among others.
Equity in the net income (loss) and other comprehensive income (loss) of unconsolidated investees
The Company recognizes equity in the net income (loss) and other comprehensive income (loss) of its unconsolidated investees on a calendar year basis. For example, the Company’s net income for the year ended February 28, 2014 includes equity in the net income of its investees for the calendar year ended December 31, 2013.
Use of estimates
Timely preparation of financial statements in accordance with GAAP requires management to make estimates that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting periods. Actual results could differ from those estimates. Management estimates that the Company will eventually sell its investments in unconsolidated investees following an expected economic recovery at a price sufficient to realize the carrying value of the Company’s assets which estimates are subject to material variation over the next year.
Income Taxes
The Company records estimated penalties and interest, if any, related to income tax matters, including uncertain tax positions, if any, as a component of income tax expense (Note 7). At least annually, management evaluates positions taken (or to be taken) on tax returns that remain subject to examination by federal and state authorities (i.e., tax years 2010 and thereafter) to determine if there are “uncertain tax positions” as defined by GAAP.
Members’ capital
Allocations of net income and distributions to the Members are determined in accordance with the Company’s operating agreement.
3. Ownership and Management of the Company
Ownership
The Company’s one issued and outstanding Class A Unit, representing all of its voting equity, is held by NGA VoteCo, LLC, a Nevada limited liability company (“VoteCo”). All of the Company’s issued and outstanding Class B Units, representing all of its non-voting equity, are held by NGA No VoteCo, LLC, a Nevada limited liability company (“InvestCo”). At present, the Company has no plans to issue any additional Class A or Class B Units.
VoteCo is owned by Timothy T. Janszen and Ryan L. Langdon, each of whom owns a 42.85% interest, and Roger A. May, who owns a 14.3% interest. Messrs. Janszen, Langdon and May collectively are referred to as the “VoteCo Equityholders”. InvestCo is owned by the Newport Funds. Newport holds all of InvestCo’s issued and outstanding voting securities.
Management
The VoteCo Equityholders, through VoteCo, control all matters of the Company that are subject to the vote of members, including the appointment and removal of managers. Each of the VoteCo Equityholders is a member of the Company’s board of managers, and Mr. Janszen is the Company’s operating manager who has responsibility for the day-to-day management of the Company. The Class B Units issued to InvestCo allow it and its investors to invest in the Company without having any voting power or power to control the operations or affairs of the Company, except as otherwise required by law. If InvestCo and its investors had any of the power to control the operations or affairs of the Company afforded to holders of the Class A Units, they and their respective constituent equityholders would generally be required to be licensed or found suitable under the gaming laws and regulations of the States of Nevada and Louisiana.
Neither the Company’s board of managers nor the operating manager may take, or cause the Company to take, the following actions without the approval of VoteCo as the holder of the Company’s voting equity:
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Materially change in the business purpose of the Company or the nature of the business,
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Act to render it impossible to carry on the ordinary business of the Company,
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Remove or appoint any Company manager,
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Allow any voluntary withdrawal of any member from the Company,
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Make any assignment for the benefit of creditors, any voluntary bankruptcy of the Company, or any transaction to dissolve, wind up or liquidate the Company, or
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Make any transaction between the Company and any member or manager of the Company, or any affiliate or direct family member of any member or manager of the Company, that is not made on an arm’s-length basis.
Generally, in all other respects, VoteCo has no power or authority to participate in the management of the Company or to bind or act on behalf of the Company in any way or to render it liable for any purpose. Except as otherwise expressly required by applicable law, InvestCo has neither any right to vote on any matters to be voted on by the members of the Company, nor any power or authority to participate in the management of the Company or bind or act on behalf of the Company in any way or render it liable for any purpose.
Notwithstanding the foregoing provisions, the operating manager has the authority under the Company’s operating agreement to take such actions as he, in his reasonable judgment, deems necessary for the protection and preservation of Company assets if, under the circumstances, in his good faith estimation, there is insufficient time to obtain the approval of the Company’s board of managers and any delay would materially increase the risk to preservation of the Company’s assets.
Unless approved in advance by the operating manager and by applicable gaming authorities, no member of the Company may transfer all or any portion of its membership units.
No member or manager of the Company is entitled to receive any compensation from the Company for any services rendered to or on behalf of the Company, or otherwise, in his, her or its capacity as a member or manager of the Company.
4. Investment in Eldorado
On December 14, 2007, the Company effectively acquired its Eldorado Interest by transferring the Eldorado-Shreveport Investments in part to Eldorado Resorts, LLC (“Resorts”) and the balance to Donald L. Carano (“Carano”), free and clear of any liens. The Eldorado-Shreveport Investments included first mortgage bonds due 2012 (the “Mortgage Bonds”) and 11,000 preferred shares of a partner of the co-issuer of the Mortgage Bonds. The Mortgage Bonds were co-issued by Eldorado Casino Shreveport Joint Venture (the “Louisiana Partnership”) and Shreveport Capital Corporation, a wholly-owned subsidiary of the Louisiana Partnership (the “New Shreveport Notes”). The original principal amount of the Mortgage Bonds was $38,045,363. The 11,000 preferred shares were issued by Shreveport Gaming Holdings, Inc. (“SGH”), then a partner of the Louisiana Partnership, that is not affiliated with Resorts or the Company. In May 2007, NGOF had contributed the Eldorado-Shreveport Investments to the Company at the estimated fair value of such investments as of that date. Effective April 1, 2009, Resorts became a wholly-owned subsidiary of Eldorado when all of the members of Resorts, including AcquisitionCo, exchanged their interests in Resorts for identical interests in Eldorado. Approximately 85% of the Company’s Eldorado Interest was acquired directly from Resorts and the balance from Carano, 14.47% and 2.5659%, respectively.
The Company’s interest in Eldorado was recorded at estimated fair value based on the quoted market price of the Eldorado-Shreveport Investments ($38,314,863) on the acquisition date, which is considered a level 2 fair value input in GAAP. Such value exceeded 17.0359% of the carrying (or book) value of Resorts’ equity by approximately $14.8 million. The Company attributed $16.1 million of its $38.3 million acquisition price to intangible assets, $15.4 million to indefinite-lived intangibles assets and $0.8 million to definite-lived intangibles assets. Subsequently, the Company has adjusted its equity in the net income (loss) of Eldorado by amortization of the excess purchase price attributed to the definite-lived intangibles, approximately $108,000 annually using an estimated economic life of seven years.
The Company acquired its interest in Eldorado pursuant to the terms and conditions of a purchase agreement, dated July 20, 2007. The parties to the agreement were Resorts, AcquisitionCo, and Carano, now the presiding member of Eldorado’s board of managers and the chief executive officer of Eldorado who then held the same positions with Resorts. Carano or members of his family continue to own directly or indirectly approximately 51% of Eldorado.
Eldorado’s five member board of managers is composed of individuals designated by the parties to the purchase agreement, including one member to be designated by AcquisitionCo, currently Timothy T. Janszen. Members of the board of managers are required to be licensed or found suitable by the relevant Nevada and Louisiana gaming authorities.
As a limited liability company, Eldorado is generally not subject to federal income taxes and its members are required to include their respective shares of Eldorado’s taxable income in their respective income tax returns. Eldorado’s operating agreement provides that the board of managers will distribute each year to each member an amount equal to such member’s allocable share of taxable income multiplied by the highest marginal combined federal, state, and local income tax rate applicable to the members for that year.
Changes in the Company’s investment in Eldorado during the years ended February 28, 2014 and 2013 are as follows:
The Company did not record any impairment related to its equity method investment in Eldorado during the years ended February 28, 2014 and 2013.
The following tables present condensed financial information of Eldorado as of December 31, 2013 and 2012, and for the years then ended (in thousands).
The following tables present condensed financial information of one of Eldorado’s unconsolidated investees, the Silver Legacy Joint Venture, as of December 31, 2013 and 2012 and for the years then ended (in thousands).
On September 9, 2013, Eldorado and MTR Gaming Group, Inc. (“MTR”), a publicly traded company, announced that they had entered into a definitive agreement (the “Merger Agreement”), which provides for the combination of MTR and
Eldorado in a stock merger with a cash election option offered to MTR’s current stockholders. On November 18, 2013, Eldorado and MTR entered into Amendment No. 1 to the Merger Agreement, which increased the cash election option per share amount from $5.15 to $6.05 and increased the aggregate amount available for the purchase of shares pursuant to the cash option from $30 million to $35 million, with the $5 million increase to be funded by Eldorado utilizing its cash on hand. MTR’s remaining common shares will be exchanged for shares in the combined new company (“NewCo”).
If consummated, the merger would result in shares of NewCo being listed on The Nasdaq Stock Market (the "Nasdaq"). Pursuant to the terms of the merger, the members of Eldorado will collectively receive, in the aggregate, consideration equal to the product of (a) Eldorado’s adjusted EBITDA for the twelve months ending on the most recent month end preceding the closing date by at least twenty days and (b) 6.81. The amount of consideration is subject to adjustment depending on Eldorado’s excess cash, outstanding debt, and working capital based upon an agreed upon working capital target for Eldorado, an amount equal to certain transaction expenses of MTR which is capped at $7.0 million, the value of Eldorado’s interest in the Silver Legacy Joint Venture, and the amount of restricted cash on Eldorado’s balance sheet (if any) relating to the credit support required in connection with the Silver Legacy Joint Venture’s credit facility.
Consummation of the Mergers is subject to numerous conditions including, among others, MTR not receiving and accepting a superior proposal. In addition, Eldorado has been advised by MTR that it has received proposals that may lead to a superior proposal that would entitle it to terminate the Merger Agreement by paying Eldorado a $5.0 million termination fee plus reimbursement for out-of-pocket costs not to exceed $500,000. Under certain circumstances of non-performance by MTR, Eldorado Holdco may terminate the Merger Agreement and receive a $6.0 million termination fee plus reimbursement of out-of-pocket costs not to exceed $1.0 million. Accordingly, there can be no assurances that the transactions contemplated by the Merger Agreement will be consummated on the terms described herein or at all.
Upon closing of the aforementioned Merger Agreement, the Company may distribute the shares of NewCo’s common stock received at closing to NGOF. Should that occur, the Company's operations will, subsequent to such date, reflect only the Company's ownership of Mesquite. Management is unable to determine at this time the impact on the Company if the transactions contemplated by the Merger Agreement are consummated and the Company ultimately does not distribute the shares of NewCo to NGOF.
5. Investment in Mesquite
Mesquite is engaged in the hotel casino industry in Mesquite, Nevada through its wholly-owned subsidiaries C & HRV, LLC (doing business as Virgin River Hotel/Casino/Bingo) and VRCC, LLC and its wholly-owned subsidiaries 5.47 RBI, LLC and RBG, LLC (doing business as CasaBlanca Resort/Golf/Spa) and its wholly-owned subsidiary CasaBlanca Resorts, LLC (doing business as the Oasis Resort and Casino prior to its demolition which was substantially completed by August 31, 2013) and its wholly-owned subsidiaries Oasis Interval Ownership, LLC, Oasis Interval Management, LLC and Oasis Recreational Properties, Inc.
On August 1, 2011, the Company acquired the 40% Mesquite Interest in exchange for $8,222,222 in cash that was contributed to the Company by the Newport Funds in July 2011. The acquisition was completed upon the transfer to Mesquite of all of the assets of Black Gaming, LLC (“Black Gaming”), including Black Gaming’s direct and indirect ownership interests in its subsidiaries. The transfer of the Black Gaming assets to Mesquite and the acquisition by AcquisitionCo of the Mesquite Interest were pursuant to a joint plan of reorganization (the “Plan”) filed by Black Gaming and its subsidiaries with the United States Bankruptcy Court for the District of Nevada (the “Court”) on March 1, 2010, and approved by the Court on June 28, 2010.
Changes in the Company’s investment in Mesquite during the years ended February 28, 2014 and 2013 are as follows:
The Company did not record any impairment related to its equity method investment in Mesquite during the years ended February 28, 2014 and February 28, 2013.
The following tables present condensed financial information of Mesquite as of December 31, 2013 and 2012 and for the years then ended (in thousands).
6. Note Receivable, Mesquite
On August 22, 2013, the Company, through Blocker, loaned $14 million to Mesquite under a Second Lien Credit Agreement, dated as of August 22, 2013 (the “Mesquite Credit Agreement”), pursuant to which Mesquite borrowed a total of $35 million from the Company and other lenders not affiliated with the Company for the purpose of refinancing a portion of its existing indebtedness. Each of the other lenders, consisting of limited liability companies and trusts, has an ownership interest in Mesquite or has one or more members or beneficiaries who hold an ownership interest in Mesquite. The repayment of the indebtedness outstanding under the Mesquite Credit Agreement is secured by a second lien on substantially all of Mesquite’s real property, including that relating to its Casablanca Resort & Casino, its Virgin River Hotel and Casino, and the remaining assets at the Oasis site (the demolition of the Oasis Resort and Casino was largely completed in August 2013), each located in Mesquite, Nevada. The terms of the loan provide for the payment by Mesquite to each lender, including Blocker, of interest on the unpaid principal amount owed to such lender at the rate of 7% per annum over the period from August 22, 2013 to August 22, 2014, and at the rate of 8% per annum thereafter. During the term of the loan, interest is payable in cash, in arrears, monthly on the first day of each month, commencing on September 1, 2013. The principal amount of the loan, along with any accrued and unpaid interest, becomes due and payable on February 21, 2020. The indebtedness may, at the option of Mesquite, be prepaid in whole or in part, at any time without penalty, and repayment of the indebtedness may be accelerated upon the occurrence of an event of default, in accordance with the terms of the Mesquite Credit Agreement.
The Company's participation as a lender under the Credit Agreement was funded utilizing $1 million of cash on hand and a capital contribution from InvestCo in the amount of $13 million, which was provided to InvestCo by its equity owners, NGOF and NGCF, in the respective amounts of $11.3 million and $1.7 million.
6. Transactions with the Newport Funds
In 2007, NGOF received $5,118,172 of interest on the Mortgage Bonds and $61,600 of preferred dividends on behalf of (but did not remit to) the Company which are reflected in the accompanying balance sheets as due from the Newport Funds. There is no formal agreement outlining the settlement of this receivable (and payable discussed in the following paragraph) and, accordingly, the receivable is reflected as a non-current asset.
At February 28, 2014 and 2013, the Company owed $3,450,793 and $3,233,115, respectively, to the Newport Funds for expenses paid on the Company’s behalf since inception of the Company. There have been no repayments of such amounts advanced to the Company. The Newport Funds have agreed to waive demand of payment of the amounts advanced to the Company through March 1, 2015, and, accordingly, the liability is also reflected as long-term.
7. Income Taxes
Blocker, a wholly-owned subsidiary, has elected to be taxed as a corporation. Accordingly, equity in the flow-through earnings of Eldorado and Mesquite is taxed to Blocker. NGA incurs certain other costs, primarily associated with being a public company, including professional and other fees, which, for tax purposes, flow through to its members.
A reconciliation between the Company’s effective tax rate and the statutory tax rate for the years ended February 28, 2014 and 2013 follows:
The Company has recorded a valuation allowance of 100% of its net deferred tax assets as of February 28, 2014 and 2013, as realization of the deferred tax asset is not considered more likely than not. In assessing the realizability of the deferred tax assets management considered whether future taxable income will be sufficient during the periods in which those temporary differences are deductible or before NOLs expire. Management considers the scheduled reversal of deferred tax liabilities, projected taxable income and tax planning strategies in making this assessment.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used to determine taxable income for income tax reporting purposes. The following table presents the significant components of the non-current deferred tax assets (liabilities) of the Company and its consolidated subsidiaries related to its investments in Eldorado and Mesquite as of February 28, 2014 and 2013.
8. Financial Instruments
Except for cash, the fair value of which equals its carrying value, the only significant financial instruments the Company has are its investments in unconsolidated investees accounted for on the equity method for which fair value disclosure is not required and amounts due to and from members. There is no formal agreement between the Company and its members related to the amounts due to and from the members, including no stated right of offset, repayment terms, and interest rate or method. Accordingly, it is not practical to estimate the fair value of such financial instruments.
9. Subsequent Events
In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued and has disclosed certain subsequent events in these consolidated financial statements, as appropriate.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Exhibit Index
Exhibit
No.
Description