THE COMPANY Overview The Company and its subsidiaries were formed as legal entities in
January 2007for 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 Mesquitewere effectively acquired on December 14, 2007and August 1, 2011, respectively. In June 2012, the Company announced a change in its fiscal year end from December 31to the last day of February, effective January 1, 2012. As a result, the Company's current fiscal year comprises the twelve months ended February 28, 2013. Our previous fiscal year ended December 31, 2011. Consequently, we filed a transition report on Form 10-QT for the two month period ended February 29, 2012. The balance sheet comparisons in this discussion and analysis are as of February 28, 2013, and February 29, 2012, while comparisons of operating results relate to the twelve months ended February 28, 2013, and December 31, 2011and the two months ended February 29, 2012and February 28, 2011. 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 losses for the years ended February 28, 2013and February 29, 2012were approximately $2.6 millionand $7.2 million, respectively. Prior Period Reclassifications Certain reclassifications, which had no effect on the previously reported net income (loss) of the Company, have been made to the Company's consolidated statements of cash flows for the year ended December 31, 2011and the two months ended February 29, 2012to conform to its presentation for the year ended February 28, 2013. At the request of, and for the convenience of, the Company, disbursements of the Company for operating expenses are made by the Newport Funds directly to vendors and investees, and certain distributions from the Company's investees may be received directly by the Company's members and/or their beneficial owners. Prior to March 1, 2012, these activities were treated as non-cash operating and financing transactions. Subsequently, such transactions are treated as constructive cash inflows and outflows in the statements of cash flow, which management believes is a preferable method because it more accurately reflects the Company's operating requirements and capital resources. Under this method, net cash provided by operating activities is lower, and cash provided by financing activities is higher, by $290,289and $59,346for the year ended December 31, 2011and the two months ended February 29, 2012, respectively, after reclassification for comparability with the current period presentation. Eldorado Eldorado, through Resorts, owns and operates the Eldorado- Reno, a premier hotel/casino and entertainment facility in Reno, Nevadaand the Eldorado- Shreveport, an all-suite art deco-style hotel and a tri-level riverboat dockside casino complex situated on the Red Riverin 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 Corporationthat is a wholly-owned subsidiary of Resorts, completed the issuance of $180 millionof 8.625% Senior Secured Notes due June 15, 2019(the "Resorts Senior Notes"). Also, on June 1, 2011, Resorts entered into a new $30 millionsenior secured revolving credit facility available until June 30, 2014(the "Resorts New Credit Facility"), which consists of a $15 millionterm loan requiring principal payments of $1.25 millioneach quarter beginning September 30, 2011, and a $15 millionrevolving credit facility. Proceeds from the issuance of the Resorts Senior Notes, together with borrowings under the New Credit Facility, were used to redeem approximately $ 230 millionof previously outstanding debt owed by Resorts and its subsidiaries, of which approximately $31 millionwas held by Resorts. The remaining previously outstanding debt was called and redeemed on August 1, 2011utilizing $9.7 millionof restricted cash which was set aside on June 1, 2011for the purpose of redeeming the notes that were called. Interest on the Senior Secured Notes is payable semiannually each June 15and December 15(commencing on December 15, 2011) to holders of record on the preceding June 1or 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. In December 2013, Eldorado determined that an error in its financial statements occurred related to the recognition of its share of the net losses of the Silver Legacy Joint Venture under the equity method of accounting. Eldorado's previously issued consolidated financial statements did not properly reflect Eldorado's share of the net losses of the joint venture after making additional investments in, and guarantees on behalf of, the joint venture during the fourth quarter of 2012. Eldorado restated its audited consolidated financial statements as of December 31, 2012and for the year then ended to correct this error. Restated operational highlights for Eldorado for the year ended December 31, 2012included net operating revenues of approximately $254.7 millionand operating expenses of approximately $229.8 million. Eldorado's equity in the net loss of unconsolidated affiliates was approximately $9 millionand interest expense was approximately $16.1 millionfor the period. The net loss for the year was approximately $1 million, compared with a net loss of approximately $24.2 millionfor the year ended December 31, 2011. The decrease in net loss of approximately $23.2 millionwas due primarily to a $33.1 millionimpairment charge recorded during 2011 related to the impairment of Eldorado's investment in the Silver Legacy Joint Venture and a $5.3 millionincrease in equity in the net losses of unconsolidated affiliates when comparing the year ended December 31, 2012to the prior year. The net loss was positively affected by a a $2.5 millionreduction to operating expenses and a $2.4 millionreduction to interest expense. Offsetting items included a $1.3 milliondecrease to net operating revenues and the absence of a $2.5 milliongain on the early retirement of debt in 2011. In addition, non-controlling interests in the Silver Legacy Joint Venture were eliminated in 2011 due to their being allocated $4.8 millionof the aforementioned $33.1 millionimpairment recorded by Eldorado. Mesquite Mesquiteis engaged in the hotel casino industry in Mesquite, Nevadaand owns and operates the Virgin River Hotel/Casino/Bingo, the CasaBlanca Resort/Golf/Spa, and the Oasis Resort and Casino. In addition to casino hotel activities, Mesquites' operations also included vacation ownership interval sales, two golf courses, a bowling center, a gun club, and banquet and conference facilities. On August 1, 2011, Mesquitecompleted the issuance of $62.5 millionof Senior Secured Notes under Mesquite'sNew Loan Facility with an annual interest rate of six month LIBOR (1.5% floor and 4.5% ceiling) plus 700 basis points (the "Mesquite Senior Notes"). Principal payments on the Mesquite Senior Notes are payable quarterly commencing on September 30, 2012and culminating in a final payment on June 30, 2016of the entire amount of the principal balance outstanding and unpaid as of that date. Interest payments are payable quarterly, unless the interest rate chosen is the Eurodollar rate and then the payments are due at varying intervals. Also on August 1, 2011, Mesquiteentered into a new $10 millionsenior secured credit facility, with an annual interest rate of thirty day LIBOR plus 3.25%, which matures on August 1, 2013and is renewable on a yearly basis with the consent of the lenders (the "Mesquite Credit Facility"). Interest on the secured credit facility is payable monthly. Operational highlights for Mesquitefor the year ended December 31, 2012included net operating revenues of approximately $97.5 millionand operating expenses of approximately $96.7 million. Interest expense during the period was $5.9 millionand the net loss was $5.1 million, compared with a net income of $86.1 millionfor the year ended December 31, 2011. The increase in net loss of approximately $91.2 millionwas due primarily to the absence of a gain associated with 4 -------------------------------------------------------------------------------- reorganizational items of approximately $90.5 millionduring 2011, along with a $0.7 milliondecrease to net revenues and a $2.6 millionincrease to interest expense, partially offset by a $2.6 milliondecrease to operating expenses. Results of Operations, Year Ended February 28, 2013(Restated) Compared to the Year Ended December 31, 2011For the year ended February 28, 2013, the Company's equity in the net loss of its unconsolidated investees was approximately $2.3 million, with Eldorado and Mesquiteaccounting for approximately $0.3 millionand $2.0 millionequity in net loss, respectively. This is compared to equity in the net loss of the Company's unconsolidated investees of approximately $6.9 millionduring the year ended December 31, 2011, with Eldorado and Mesquiteaccounting for approximately $4.2 millionand $2.6 million, respectively. The decreased loss was primarily attributable to the impairment of Eldorado's investment in the Silver Legacy Joint Venture during 2011. The Company's 40% interest in Mesquitewas not acquired until August 1, 2011. Expenses of $0.3 millionduring the year ended February 28, 2013were consistent with the year ended December 31, 2011, and the net loss for the year was approximately $2.6 millioncompared to a net loss of approximately $7.2 millionfor the prior period. The decrease in net loss was primarily due to changes in the Company's equity in the net losses of its unconsolidated investees as explained above. Results of Operations, Two Months Ended February 29, 2012Compared to the Two Months Ended February 28, 2011For the two months ended February 29, 2012and February 28, 2011, the Company had no significant operations or change in accounting principles. Liquidity and Capital Resources During the year ended February 28, 2013and February 29, 2012, the Company incurred costs of approximately $0.3 millionassociated with the Company's ownership of its interests in Eldorado and Mesquite. Costs incurred from March 1, 2011through July 31, 2011were funded by NGOF on behalf and for the convenience of the Company, while those incurred beginning August 1, 2011, the date of the closing of the Mesquitetransaction, were funded by the Newport Funds on a pro rata basis. For the year ending February 28, 2014, the Company expects to incur approximately $0.3 millionin 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, 2014. 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 Mesquiteto 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 Mesquitefor 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'shistorical and forecasted financial performance; (6) trends in the general market; and (7) Eldorado's and Mesquite'scapital strength and liquidity. In determining whether the fair value of the investments in Eldorado and Mesquiteare 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 5 -------------------------------------------------------------------------------- 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. In performing this impairment test, the Company takes steps to ensure that forecasted prospective financial results are based on appropriate and reasonable operating and cash flow assumptions. The Company 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, 2013and December 31, 2011and the two months ended February 29, 2012related 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.