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. 40 -------------------------------------------------------------------------------- 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, 2014was approximately $3.9 millioncompared with a net loss of $2.6 millionfor 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, 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 May 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. 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 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. Operational highlights for Eldorado for the year ended December 31, 2013included net operating revenues of approximately $247.2 millionand operating expenses of approximately $224.6 million. Eldorado's equity in the net income of unconsolidated affiliates was approximately $3.4 millionand interest expense was approximately $15.7 millionfor the period. Net income for the year was approximately $18.9 million, compared with a net loss of approximately $1.0 millionfor the year ended December 31, 2012. The increase in net income of approximately $19.9 millionwas due primarily to a $12.0 milliongain on the extinguishment of debt of an unconsolidated affiliate during 2013 and a $12.3 millionincrease in equity in the net income of unconsolidated affiliates when comparing the year ended December 31, 2013to the prior year. Net income was positively affected by a a $5.2 millionreduction to operating expenses and a $0.4 millionreduction to interest expense. Offsetting items, which negatively affected net income, included a $7.6 milliondecrease to net operating revenues and $3.2 millionof acquisition charges incurred during 2013. Mesquite Mesquiteis engaged in the hotel casino industry in Mesquite, Nevadaand owns and operates the Virgin River Hotel/Casino/Bingoand 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, Mesquitecompleted the issuance of $62.5 millionof Senior Secured Notes under Mesquite'sNew 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 millionsenior 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, Mesquitecompleted 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 millionof 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'ssenior 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 millionFirst 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 41 -------------------------------------------------------------------------------- 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, 2013to August 22, 2014, and at the rate of 8% per annum thereafter. Operational highlights for Mesquitefor the year ended December 31, 2013included net operating revenues of approximately $93.8 millionand operating expenses of approximately $89.4 million. Interest expense during the period was approximately $5.8 millionand net income was approximately $1.7 million, compared with interest expense of approximately $5.9 millionand a net loss of approximately $5.1 millionfor the year ended December 31, 2012. The increase in net income of approximately $6.8 millionwas due primarily to a gain on the sale and disposal of assets of $3.7 millionduring 2013, along with a $7.2 milliondecrease to operating expenses and a $0.2 milliondecrease to interest expense, partially offset by a $3.8 milliondecrease to net revenues and a $0.6 millionincrease in the impairment of long-lived assets. Results of Operations, Year Ended February 28, 2014Compared to the Year Ended February 28, 2013For 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 Mesquiteaccounting for approximately $3.1 millionand $0.7 million, respectively. This is compared to equity in the net loss of unconsolidated investees of approximately $2.3 millionduring the year ended February 28, 2013, with Eldorado and Mesquiteaccounting for approximately $0.3 millionand $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 milliongain on the extinguishment of debt of one of its unconsolidated affiliates and $12.3 millionincrease in equity in the net income of unconsolidated affiliates, along with Mesquite's $7.2 milliondecrease to operating expenses and gain on the sale and disposal of assets of approximately $3.7 million. Expenses of $0.2 millionduring the year ended February 28, 2014decreased $0.1 millionwhen compared to the year ended February 28, 2013, and net income for the year was approximately $3.9 millioncompared to a net loss of approximately $2.6 millionfor 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, 2014and February 28, 2013, the Company incurred costs of approximately $0.2and $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 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, 2015. Proposed Eldorado Transaction On September 9, 2013, Eldoradoand 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 $5.15to $6.05and increased the aggregate amount available for the purchase of shares pursuant to the cash option from $30 millionto $35 million, with the $5 millionincrease 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 NewCoto 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 Investorsto 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 Investorswill 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 42 -------------------------------------------------------------------------------- shall mean the number of shares of NewCocommon 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 NewCocommon stock issuable at closing to all members of Eldorado shall be reduced by the number of shares of NewCocommon 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, 2014for 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 NewCoon November 4, 2013to be declared effective by the Securities and Exchange Commissionand 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 NewCovalued at $6.05per 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 NewCocommon 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 Mesquiteand 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 NewCoto 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 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 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. 43 -------------------------------------------------------------------------------- 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, 2013and February 28, 2013related 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.