ITEM 1. BUSINESS
Overview
Circus and Eldorado Joint Venture, a Nevada general partnership which is a joint venture between Eldorado Limited Liability Company and Galleon, Inc., owns and operates the Silver Legacy Resort Casino, a nineteenth century silver mining themed hotel-casino and entertainment complex in Reno, Nevada. Eldorado Limited Liability Company is a 96% owned subsidiary of Eldorado Resorts LLC, which owns the Eldorado Hotel & Casino, one of the two hotel casinos connected to Silver Legacy, and Galleon, Inc., the managing partner of Circus and Eldorado Joint Venture, is a wholly owned subsidiary of MGM MIRAGE, which owns Circus Circus Hotel and Casino, the other hotel casino which is connected to Silver Legacy.
On April 25, 2005, a wholly owned subsidiary of MGM MIRAGE was merged with and into Mandalay Resort Group, a Nevada corporation (“Mandalay”), which owns all of the issued and outstanding common stock of Galleon, Inc. As a result of the merger, Mandalay became a wholly owned subsidiary of MGM MIRAGE.
The terms “we,” “our” and “us,” as used in this annual report, refer to Circus and Eldorado Joint Venture and Silver Legacy Capital Corp. as a combined entity, except where it is clear that the terms mean only Circus and Eldorado Joint Venture or Silver Legacy Capital Corp. When we use the term “Partnership” it refers only to Circus and Eldorado Joint Venture, and when we use the term “Capital” it refers only to Silver Legacy Capital Corp. Capital was established solely for the purpose of serving as a co-issuer of $160 million principal amount 10 1/8% mortgage notes due 2012 co-issued by the Partnership and Capital and, as such, Capital does not have any operations, assets, or revenues. The term “Silver Legacy” refers to the Silver Legacy Resort Casino. References to the Circus Circus Hotel and Casino refer to the hotel-casino by that name located in Reno, Nevada. When we use the term “Reno market” we are referring to the Reno and Sparks areas as delineated by the Nevada Gaming Control Board.
Silver Legacy
We own and operate the Silver Legacy Resort Casino, a premier themed hotel-casino and entertainment complex designed based on Nevada’s rich mining heritage, located in Reno, Nevada. Silver Legacy is among the largest hotel-casinos in the Reno market. Silver Legacy offers a dynamic gaming environment and a wide variety of amenities delivered with special attention to personal service to appeal to our multiple customer segments, including preferred casino players.
Silver Legacy opened in July 1995, with a capital investment of over $360 million, and is strategically located on two city blocks in downtown Reno directly off Interstate 80, the principal highway connecting Reno with San Francisco, Sacramento and other cities in northern California. The casino and entertainment areas at Silver Legacy are seamlessly connected to the Eldorado Hotel & Casino and the Circus Circus Hotel and Casino by approximately 200-foot wide skyway corridors. Together the three properties comprise the heart of Reno’s gaming area and room base.
Silver Legacy has approximately 87,300 square feet of gaming space situated on two levels. At December 31, 2007, Silver Legacy featured 1,661 slot machines and 68 table games, including blackjack, craps, roulette, Pai Gow Poker, Let It Ride®, Baccarat and Pai Gow, in addition to keno and a race and sportsbook. “Club Legacy,” Silver Legacy’s players club, offers customers exciting special events and tournaments and convenient ways of earning complimentaries.
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. An enclosed, climate controlled skywalk over North Sierra Street links the hotel to the main casino, restaurants and additional public areas on the mezzanine level. The hotel currently offers 1,710 guest rooms, including 141 player spa suites, eight penthouse suites, and seven hospitality suites.
Silver Legacy’s dining options are offered in six venues:
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Sterling’s Seafood Steakhouse, which has 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, which has a seating capacity of approximately 500;
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Fairchild’s Oyster Bar, which has a seating capacity of approximately 55, offering a comfortable drink and specialized seafood dining;
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Café Sedona, which has a seating capacity of approximately 330, offering an extensive menu that includes American classics and Chinese cuisine 24-hours a day;
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Fresh Express Food Court, which has a seating capacity of approximately 110, offering a range of options including a deli and grill, authentic Asian cuisine and American classics; and
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Sips Coffee House, situated in the hotel lobby, offering gourmet coffee and teas.
Silver Legacy is downtown Reno’s leading convention destination, currently offering approximately 50,000 square feet of in-house exhibit and convention space that includes an approximately 20,000 square-foot divisible ballroom and approximately 30,000 square feet of space for additional breakout rooms, all located within the casino complex. We believe the additional hotel capacity and meeting space available at the adjoining Eldorado and Circus properties enhance our ability to attract conventions larger than those that can be serviced by the Silver Legacy alone. See “Adjoining Properties” below.
In addition to our in-house exhibit and convention space, we had since 1999 utilized an additional 40,000 square feet of space in the City Center Pavilion, which was located across North Virginia Street from Silver Legacy on a special events plaza then owned by our affiliates. The City Center Pavilion was removed in January 2007 to allow for the construction of a new city-owned ballroom facility on the plaza site. The new 50,000 square-foot facility, which opened in February 2008 and is operated and managed by Silver Legacy, together with Eldorado and Circus, complements the existing Reno Events Center and provides an elegant venue for large dinner functions and convention meeting space.
Silver Legacy’s amenities also include retail shops, exercise and spa facilities, a beauty salon, and an outdoor swimming pool and sundeck. Silver Legacy’s 10-story parking facility is capable of accommodating approximately 1,800 vehicles.
We carefully target our marketing programs to five segments of the gaming market:
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free and independent travelers,
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preferred casino customers,
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convention groups,
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local patrons, and
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wholesale/specialty and Internet groups.
We attract our target customers through newspaper, radio, television, Internet and direct mail campaigns locally and in northern California, the Pacific northwest and other regional travel markets. Silver Legacy utilizes a broad special events calendar, along with our guest development program, including selective casino credit, to attract and retain our target customers. In addition, we utilize our hotel rooms, restaurants and other amenities to offer complimentaries to a broad spectrum of established casino guests. “Club Legacy,” Silver Legacy’s players club, offers customers exciting special events and tournaments and convenient ways of earning complimentaries. Enhancements to Club Legacy, which were promoted as “Comp Yourself,” were implemented in January 2005. The revised club format is more user-friendly and enables casino players in our database to redeem their complimentaries directly at our restaurants, bars and retail outlets and upon hotel check-out. The convention groups and wholesale/specialty market segments contribute to our hotel occupancy during slower mid-week periods. For the twelve months ended December 31, 2007 and 2006, our average occupancy rates were 81.9% and 82.6%, respectively, compared to 75.4% and 76.6%, respectively, for the Reno market.
The primary source of our revenues is the casino, although the hotel, restaurants, bars, shops and other services are an important adjunct to the casino. The following table sets forth the respective contributions to our net revenues on a dollar and percentage basis of our major activities at Silver Legacy for each of the three most recent fiscal years.
(1) Casino revenues are the net difference between the sums received as winnings and the sums paid as losses, less cash incentives provided to customers.
(2) Hotel, food and beverage 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.
Methods of Competition
Silver Legacy competes for customers by offering our guests a fully integrated gaming, lodging, dining and entertainment experience in a convenient downtown Reno location. We believe the quality of our amenities, Silver Legacy’s overall atmosphere and competitive pricing enable us to attract multiple customer segments from the local area, northern California, the Pacific northwest and other regional travel markets.
Premier “Must See” Attraction. We believe Silver Legacy is a “must see” attraction for Reno visitors and residents. The property’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 interior showcases a casino built around Sam Fairchild’s famed 120-foot tall mining rig. 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 enter the casino.
Center of Three-Property Destination Resort. Silver Legacy, together with the Eldorado and Circus properties, comprises the heart of the Reno market’s prime gaming area and room base, providing the most extensive variety of gaming, lodging, dining and entertainment amenities in the Reno area. As of December 31, 2007, the three-property complex offered 4,097 rooms, 20 restaurants, 4,245 slot machines, 167 table games and parking to accommodate over approximately 6,200 vehicles, representing approximately 26.8% of the Reno market’s total room base, 23.1% of the Reno market’s total slot machines, and 32.7% of the Reno market’s total table games. We believe that the centralized location and critical mass of these three properties, together with the seamless connections between the facilities, provide Silver Legacy with significant advantages over other freestanding hotel-casinos in the Reno market.
Headliner Entertainment and Premium Dining. Our customers are attracted to Silver Legacy’s entertainment and award-winning cuisine. For the year ended December 31, 2007, approximately 50 nights of headliner entertainment were scheduled in our 1,600-seat Grande Exposition Hall making Silver Legacy a leading headliner entertainment venue in the Reno market. Entertainers who appeared at Silver Legacy during 2007 included Queen Latifah, Willie Nelson, Huey Lewis & the News, Hall & Oates and Bill Maher. Silver Legacy also features Catch a Rising Star, a 220-seat, nationally recognized comedy club. Throughout 2007, we also utilized the city-owned Reno Events Center as a venue for approximately 15 nights of entertainment which we co-sponsored or produced with one or more other downtown properties. We were able to take advantage of this facility’s larger seating capacity and attract popular headliner acts including Gwen Stefani, The Who, James Taylor, Ron White and Vicente Fernandez.
Quality Personal Service. We are committed to providing our customers with a high level of personal service, which we believe is an integral part of fostering customer loyalty and generating repeat business. We continually strive to instill in each employee a dedication to superior service designed to exceed our guests’ expectations.
Experienced Management Team. Silver Legacy has an experienced management team with an average of more than 25 years each of experience in the Reno gaming market. All of our senior management have been with Silver Legacy since it opened in July 1995. We have also benefited from the expertise of our joint venture partners and the leadership they have provided through our executive committee, which has included senior executives from Eldorado Resorts LLC and MGM MIRAGE.
Adjoining Properties
Enclosed, climate controlled corridors connect Silver Legacy with the Circus Circus Hotel and Casino and the Eldorado Hotel & Casino, each of which is owned and independently operated by an affiliate of one of the Partnership’s partners.
Circus Circus Hotel and Casino. The Circus Circus Hotel and Casino features 1,572 guestrooms and a 60,000 square-foot casino, which, as of December 31, 2007, featured 1,165 slot machines and 44 table games. The property offers its guests a variety of circus acts performed daily, free of charge, under a “Big Top” above the casino. A mezzanine area has a circus midway with carnival-style games and an arcade that offers a variety of amusement and electronic games. The property features two specialty restaurants, The Steakhouse at Circus and Kokopelli’s Sushi Bar, in addition to a 464-seat buffet, pizzeria, coffee shop, deli/bakery, fast food snack bar, cocktail lounges, gift shop, specialty shops, parking facilities for approximately 3,200 vehicles, and approximately 37,000 square feet of convention space.
Eldorado Hotel & Casino. This property is a luxurious hotel-casino offering approximately 76,500 square feet of gaming space. Its three hotel towers have a total of 815 guestrooms, including 18 specialty suites, 93 “Eldorado Player’s Spa Suites” with bedside spas and 26 one or two bedroom suites. As of December 31, 2007, this property’s casino featured 1,419 slot machines and 55 table games, as well as poker, keno and a race and sports book. The property is renowned for its eight restaurants, including Bistro Roxy, La Strada and a 600-seat buffet. Additional amenities include a casino cabaret, bars and lounges, parking facilities for approximately 1,200 vehicles, and approximately 12,400 square feet of convention space.
Reno Market
Reno is the second largest metropolitan area in Nevada, with a population of 409,000 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. 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 and Hot August Nights, a vintage car event. In addition, the National Bowling Stadium, located one block from Silver Legacy, is one of the largest bowling complexes in North America and has been selected to host multi-month tournaments in Reno two out of every three years through 2018.
According to the Nevada Commission on Tourism and the Reno-Sparks Convention & Visitors Authority, the greater Reno area attracted an estimated 5.0 million and 4.9 million visitors during the twelve months ended June 30, 2007 and 2006, respectively. The following table sets forth certain statistical information for the Reno market for the years 2003 through 2007 as reported by the Reno-Sparks Convention & 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.
(4) For the twelve months ended June 30 for each period shown.
Marketing Strategy
We target the following customer segments of the Reno gaming market: free and independent travelers, preferred casino customers, convention groups, local patrons, 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. For Reno, free and independent travelers consist principally of persons who typically travel on weekends from northern California, Oregon, Washington and western Canada. Silver Legacy targets this segment through advertising efforts, including television and newsprint exposure, emphasizing the exciting atmosphere and high level of relative value offered at Silver Legacy. Advertising efforts are directed principally to existing Reno gaming customers, as well as to experienced gaming customers of Las Vegas and other markets. Additionally, utilizing the unique theming of Silver Legacy, the variety, quality, and attractive pricing of its food and beverage outlets, and its close proximity to other hotel casinos in downtown Reno (including its connection with the Circus Circus Hotel and Casino and Eldorado Hotel & Casino), we target “walk-in” customers for Silver Legacy.
Preferred Casino Customers. 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 Silver Legacy. We also use television advertisements featuring the elegant image and exciting atmosphere at Silver Legacy to target preferred gaming customers. In addition, through specialized entertainment programs and special events, including boxing matches, and by highlighting Silver Legacy’s 141 player spa suites, eight penthouse suites (which have been designed specifically to cater to the needs of high end gaming customers), seven hospitality suites, and the property’s entertainment facilities, amenities and unique attractions, we seek to capture a significant portion of Reno’s valued gaming business. Our marketing efforts for gaming customers include the provision of complimentary rooms, food and beverages, air transportation and the extension of credit to qualified persons. “Club Legacy,” Silver Legacy’s players club, offers customers exciting special events and tournaments and convenient ways of earning complimentaries.
Convention Groups. Conventioneers and attendees of Reno area events are targeted by Silver Legacy, depending on management’s view of their relative propensity for gaming and the timing of the specific events or conventions relative to the historic seasonality of the gaming business in Reno. In so doing, we seek to increase Silver Legacy’s mid-week occupancies and mitigate the effects of seasonality on our operations. For example, Silver Legacy targets competitors at the National Bowling Stadium in Reno and their guests. Other special events groups, generally consisting of between 1,000 and 1,500 persons, are also targeted by Silver Legacy by invitations to concerts, shows, theme parties, boxing matches and other events.
Local Patrons. We seek to attract and retain local customers through frequent promotions that highlight our quality gaming and dining experience, as well as being an active supporter of numerous Reno market events and organizations.
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. Packages including Silver Legacy are marketed by wholesalers and travel agents principally to customers in Oregon, Washington and western Canada. This market segment allows us to utilize our rooms during slower mid-week periods. In addition, Internet customers, which are encompassed in this segment, continues to be a growing group as more customers utilize this option for its convenience and in an effort to obtain the most competitive rate.
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 we do. 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 our markets or changes to gaming laws in states surrounding Nevada could increase competition and could adversely affect our operations. We also compete, to a lesser extent, with gaming facilities in other jurisdictions with dockside gaming facilities, state-sponsored lotteries, on-and-off track pari-mutuel wagering, Internet gaming, card clubs, riverboat casinos and other forms of legalized gambling.
Of the 32 casinos currently operating in the Reno market, we compete principally with the six other hotel-casinos that, like Silver Legacy, each generate at least $36 million in annual gaming revenues, including the Circus Circus Hotel and Casino and the Eldorado Hotel & Casino. An existing hotel-casino, located outside of the downtown Reno district, completed an expansion project during the fourth quarter of 2007 which increased their number of hotel rooms and casino square footage along with other amenities including additional parking and restaurants. In addition, there have been several announcements of other pending expansion and/or new projects within the Reno market. At this time, we cannot predict the extent to which new and proposed projects will be undertaken or the extent to which current hotel and/or casino space may be expanded. We expect that any additional rooms added in the Reno market will increase competition for visitor revenue. There can be no assurance that any growth in Reno’s current room base or gaming capacity will not adversely affect our financial condition or results of operations.
We also compete with hotel-casinos located in the nearby Lake Tahoe region as well as those in other areas of Nevada, including Las Vegas. A substantial number of customers travel to both Reno and the Lake Tahoe area during their visits. Consequently, we believe that Silver Legacy’s success is influenced to some degree by the success of the Lake Tahoe market. While we do 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 our operations.
Land-based, riverboat or dockside casino gaming (other than that conducted on Native American-owned land) is currently legal in 11 states and tribal gaming on Native American-owned land is legal in a number of states, including California, Washington, and Oregon. 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.
On March 7, 2000, California voters approved Proposition 1A which amended the California constitution and legalized “Nevada-style” gaming on Native American reservations. The passage of this amendment has allowed the expansion of existing Native American gaming operations, as well as the opening of new Native American gaming facilities in California. Additionally, numerous tribes have announced that they intend to open gaming facilities. According to the California Gambling Control Commission, there are currently approximately 105 federally recognized Native American tribes in California of which approximately 67 have entered into compacts with the State of California. We believe that currently there are 57 Native American casinos in operation in California. Under their original compacts, most Native American tribes in California could operate up to 2,000 slot machines, and up to two gaming facilities on any one reservation. The number of 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 requisite approvals, such as has been the case with respect to a number of new or amended compacts which have been executed and approved since 2000.
In April 2007, the California Senate approved amendments to the compacts of five Native American tribes. In June 2007, the California Assembly approved four of these five compacts which increased the number of slot machines permitted to be operated by two of the four tribes from 2,000 to 5,000 each and increased the number that may be operated by each of the other two tribes from 2,000 to 7,500 each. California voters approved these four increases with their approval of gaming
referendums on their statewide ballot in February 2008. Management believes that the increase in the number of slot machines permitted to be operated by the four tribes will not significantly impact Silver Legacy’s operations since the casinos operated by those tribes are located in southern California. However, similar modifications to the compacts of tribes that operate casinos in central or northern California, where the largest number of slot machines currently permitted to be operated by a tribe is 2,700, could have a material adverse impact on our operations, depending on the number of tribes securing modification of their compacts, the number of additional machines permitted and the locations of the properties utilizing the additional machines.
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.
Many existing Native American gaming facilities in northern California are modest compared to Reno market casinos. However, there are a number of more significant Native American casinos which currently compete with the Reno market. In addition to existing gaming facilities, many Native American tribes have announced that they are in the process of developing or are considering establishing large-scale hotel and gaming facilities in northern California. Other tribes are at various stages of planning new or expanded facilities in northern California, including facilities within a one-hour drive of San Francisco or Sacramento.
The competitive impact on Nevada gaming establishments, in general, and our operations, in particular, from the continued growth of gaming outside Nevada cannot be determined at this time. We believe that the expansion of casino gaming on Native American lands in California, and to a lesser extent in Washington and Oregon, could have a material adverse affect on our operations depending on the nature, location, and scope of those operations.
Seasonality
Silver Legacy’s hotel-casino operations are subject to seasonal variation, with the strongest operating results generally occurring in the third quarter 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 our percentage of gross revenues by quarter for each of 2005, 2006 and 2007.
Employees
As of December 31, 2007, Silver Legacy employed approximately 2,110 persons, most of whom were full-time. Currently, none of our employees are employed pursuant to a collective bargaining agreement. The number of people employed at any time is subject to seasonal fluctuation. We believe that our employee relations are excellent.
Environmental Matters
As is the case with any owner or operator of real property, we are 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. We do not have environmental liability insurance to cover these events.
During the excavation for construction of Silver Legacy, petroleum contamination of soil and groundwater was discovered on the property. The apparent sources of this contamination were a former gasoline station and numerous abandoned heating oil tanks. Our contractors removed and disposed of contaminated soils, and we were successful in obtaining reimbursement and indemnification from Chevron Company USA. In addition, we received reimbursement from the State of Nevada Petroleum Fund, which was established to reimburse parties for costs incurred in cleaning up contamination from certain underground storage tanks. With the consent of the relevant county agency, the cleanup was completed leaving some contaminated soils in place (under structures and roads, for example), so that some additional soil contamination is known to remain in place. The Nevada Division of Environmental Protection has not, however, required us to conduct any further investigation or remediation.
Groundwater in the vicinity of the Silver Legacy property is also contaminated by a chlorinated solvent known as tetrachloroethene 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. The annual assessment to Silver Legacy is currently $229, plus an additional sum based on the amount of water used, which in our most recent annual assessment amounted to $29,777. Such amounts incurred in the prior year were $215 and $32,657, respectively. 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. We do not believe that we have contributed to this solvent contamination, however, we expect that we will be required to allow the Central Truckee Meadows Remediation District access to our property for continued investigation, including access to monitoring wells.
The possibility exists that additional contamination, as yet unknown, may exist at the Silver Legacy property. In all cases, however, we believe 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 our actions or operations. We do not believe that our expenditures for environmental investigations or remediation will have a material adverse effect on our financial condition or results of operations. Aside from the assessments discussed in the preceding paragraph, we did not incur any costs in connection with environmental matters during the years ended December 31, 2007 and 2006.
Regulation And Licensing
Silver Legacy, the partners of Circus and Eldorado Joint Venture, and their parent entities are subject to extensive regulation under laws, rules and supervisory procedures primarily in the jurisdictions where their facilities are located or docked. Some jurisdictions, including Nevada, empower their regulators to investigate participation by licensees in gaming outside their jurisdiction and require access to and periodic reports respecting those gaming activities. Violations of laws in one jurisdiction could result in disciplinary action in other jurisdictions.
Under provisions of gaming laws in jurisdictions in which we, our partners or their parent entities have operations and under our organizational documents certain of our securities are subject to restrictions on ownership which may be imposed by specified governmental authorities. The restrictions may require a holder of our securities to dispose of the securities or, if the holder refuses, or is unable, to dispose of the securities, we may be required to repurchase the securities.
The indenture governing our 10 1/8% mortgage notes due 2012 (the “Notes”) provides that each holder and beneficial owner of the Notes, by accepting or otherwise acquiring an interest in any of the Notes, will be deemed to have agreed that if the gaming authority of any jurisdiction in which we or either of the Partnership’s partners or their respective parents or other affiliated entities currently or in the future conduct or propose to conduct gaming requires that a person who is a holder or beneficial owner must be licensed, qualified or found suitable under applicable gaming laws, the holder or beneficial owner will apply for a license, qualification or finding of suitability within the required time period. If the person fails to apply or become licensed or qualified or is found unsuitable, we will have the right, at our option:
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to require the person to dispose of his or her Notes or beneficial interest in the Notes within 30 days of receipt of notice of our election or any earlier date that the relevant gaming authority may request or prescribe; or
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to redeem the Notes (possibly within less than 30 days following the notice of redemption if requested or prescribed by the gaming authority) at a redemption price equal to the lesser of:
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the person’s cost;
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100% of the principal amount, plus accrued and unpaid interest to the redemption date or the date of the finding of unsuitability, whichever is earlier; and
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any other amount required by applicable law or by order of any gaming authority.
We will not be responsible for any costs or expenses any holder or beneficial owner may incur in connection with its application for a license, qualification or finding of suitability.
Nevada Gaming Laws
The ownership and operation of casino gaming facilities in the State of Nevada are subject to the Nevada Gaming Control Act and the regulations promulgated under this Act and various local regulations. Silver Legacy’s operations are subject to the licensing and regulatory control of the Nevada Gaming Commission, the Nevada State Gaming Control Board and the City of Reno, which we refer to collectively as the “Nevada Gaming Authorities.”
The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy that are concerned with, among other things:
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the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity;
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the establishment and maintenance of responsible accounting practices and procedures;
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the maintenance of effective controls over the financial practices of licensees, including the establishment of 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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the prevention of cheating and fraudulent practices; and
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providing a source of state and local revenues through taxation and licensing fees.
Changes in these laws, regulations and procedures could have an adverse effect on our gaming operations.
Circus and Eldorado Joint Venture holds all licenses and approvals required to conduct its present gaming operations. The gaming license requires the periodic payment of fees and taxes and is not transferable. The parent entities of Circus and Eldorado Joint Venture’s partners, Eldorado Resorts LLC and MGM MIRAGE, are required to be registered by the Nevada Gaming Commission as, respectively, a privately owned holding company and as a publicly traded corporation, and are required periodically to submit detailed financial and operating reports to the Nevada Gaming Commission and to furnish any other information that the Nevada Gaming Commission may require. No person may become a stockholder of, or receive any percentage of profits from, a licensed entity such as Circus and Eldorado Joint Venture without first obtaining licenses and approvals from the Nevada Gaming Authorities. Circus and Eldorado Joint Venture and its parent entities have obtained from the Nevada Gaming Authorities the various registrations, findings of suitability, approvals, permits and licenses required in order to engage in gaming activities in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with us in order to determine whether the individual is suitable or should be licensed as a business associate of a gaming licensee. We and our officers, directors and key employees must file applications with the Nevada Gaming Authorities and may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause which they deem reasonable. 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 for 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 jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with us, we would have to sever all relationships with that person. In addition, the Nevada Gaming Commission may require us to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or questions pertaining to licensing are not subject to judicial review in Nevada.
We are required to submit detailed financial and operating reports to the Nevada Gaming Commission. Substantially all material loans, leases, sales of securities and similar financing transactions must be reported to, or approved by, the Nevada Gaming Commission.
If the Nevada Gaming Commission determined that we violated the Nevada Gaming Control Act or any of its regulations, it could limit, condition, suspend or revoke our gaming licenses. In addition, we and the persons involved could be subject to substantial fines for each separate violation of the Nevada Gaming Control Act or of the regulations of the Nevada Gaming Commission at the discretion of the Nevada Gaming Commission. Further, a supervisor could be appointed by the Nevada Gaming Commission to operate Silver Legacy 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 of our gaming licenses and the appointment of a supervisor could, or revocation of any gaming license would, have a material adverse effect on our gaming operations.
Any beneficial holder of an interest in Circus and Eldorado Joint Venture or of any of the equity securities of any partner of Circus and Eldorado Joint Venture, or of any interest in the parent entities of Circus and Eldorado Joint Venture’s members, regardless of the amount of interest owned or the number of shares held, may be required to file an application, be investigated, and have that person’s suitability as a beneficial holder of an equity interest determined if the Nevada Gaming Commission has reason to believe that the ownership would otherwise be inconsistent with the declared policies of the State of Nevada. The applicant must pay all costs of the investigation incurred by the Nevada Gaming Authorities in conducting any investigation.
The partners of Circus and Eldorado Joint Venture are required to obtain the prior approval of the Nevada Gaming Commission prior to their pledge of their interests in Circus and Eldorado Joint Venture as collateral for payment of any of our indebtedness. Eldorado Limited Liability Company and Galleon, Inc., the partners of Circus and Eldorado Joint Venture, obtained the required approvals of the Nevada Gaming Commission to pledge their interests in Circus and Eldorado Joint Venture as collateral for payment of the Notes. However, further approvals of the Nevada Gaming Commission must be obtained by any person, including the trustee under the Indenture relating to the Notes, before any execution on or transfer of the pledged interests may occur.
Nevada law requires any licensed gaming entity, such as Circus and Eldorado Joint Venture which has one or more classes of securities registered with the Securities and Exchange Commission pursuant to the provisions of the Securities Act of 1933, as amended, to additionally register with the Nevada Gaming Commission as a “publicly traded corporation.” Pursuant to the applicable provisions of Nevada gaming law, we received the requisite approvals of the Nevada Gaming Commission to be registered as a publicly traded corporation and to make our public offering of the Notes.
If the beneficial holder of an interest in Circus and Eldorado Joint Venture or in the equity securities of any of Circus and Eldorado Joint Venture’s partners, or of any interest in one of the parent entities 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 beneficial owners. The applicant is required to pay all costs of investigation.
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 Gaming Commission or by the Chairman of the Nevada State Gaming Control Board, or who refuses or fails to pay the investigative costs incurred by the gaming authorities in connection with the investigation of its application, may be found unsuitable. The same restrictions apply to a record owner 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 an interest in Circus and Eldorado Joint Venture or in the voting securities of any of Circus and Eldorado Joint Venture’s partners or of the parent entities beyond the period of time as may be prescribed by the Nevada Gaming Commission may be guilty of a criminal offense. We will be subject to disciplinary action if, after we receive notice that a person is unsuitable to hold an equity interest or to have any other relationship with us, we:
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pay that person any dividend or interest upon any partnership interest or other equity interest;
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allow that person to exercise, directly or indirectly, any voting right held by that person relating to Silver Legacy;
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pay remuneration in any form to that person for services rendered or otherwise; or
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fail to pursue all lawful efforts to require the unsuitable person to relinquish his interest in Circus and Eldorado Joint Venture or in its voting securities including, if necessary, the immediate purchase of the interest or voting securities for cash at fair market value.
The Nevada Gaming Commission may, in its discretion, require the holder of any debt security of a licensee or registered corporation to file applications, be investigated, and be found suitable to own the debt security of the licensee or registered corporation. If a holder of the Notes is required by the Nevada Gaming Commission to be found suitable, the burden of proving qualification to be found suitable as a holder of the Notes is at all times on the applicant and requires a determination by the Nevada Gaming Commission that the applicant is a person of good character, honesty and integrity. When making this determination, the Nevada Gaming Commission must be satisfied that the applicant is a person whose prior activities, criminal record (if any), reputation, habits and associations do not pose a threat to the interests of the State of Nevada, or to the effective regulation and control of gaming, or create or enhance the dangers of unsuitable, unfair, or illegal practices. If the Nevada Gaming Commission determines that a person is unsuitable to own the security, then under the Nevada Gaming Control Act, the licensee or registered corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Gaming 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 the unsuitable person in connection with the 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 transaction.
Our partners and their parent entities are required to maintain current stock ledgers in Nevada which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make the disclosure may be grounds for finding the record holder unsuitable. We are also required to render maximum assistance in determining the identity of the beneficial owner of any of our voting securities. The Nevada Gaming Commission has the power to require the stock certificates of any registered corporation to bear a legend indicating that the securities are subject to the Nevada Gaming Control Act.
We may not make a public offering of our securities without the prior approval of the Nevada Gaming Commission if we intend to use the securities or the proceeds from the offering to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for those purposes or for similar transactions.
We must obtain prior approval of the Nevada Gaming Commission with respect to a change in control through:
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merger;
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consolidation;
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stock or asset acquisitions;
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management or consulting agreements; or
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any act or conduct by a person whereby the person obtains control of us.
Entities seeking to acquire control of a registered corporation must satisfy the Nevada State Gaming Control Board and Nevada Gaming Commission with respect to a variety of stringent standards before assuming control of the registered corporation. The Nevada Gaming Commission may also require controlling stockholders, officers, directors and other persons having 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.
The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchase of voting securities and corporate defense tactics affecting Nevada gaming licenses, and registered corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Gaming Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada’s gaming industry and to further Nevada’s policy to:
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assure the financial stability of corporate gaming operators and their affiliates;
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preserve the beneficial aspects of conducting business in the corporate form; and
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promote a neutral environment for the orderly governance of corporate affairs.
Approvals may be required from the Nevada Gaming Commission before we can make exceptional repurchases of voting securities above their current market price and before a corporate acquisition opposed by management can be consummated. The Nevada Gaming Control Act also requires prior approval of a plan of recapitalization proposed by a registered corporation’s board of directors in response to a tender offer made directly to its stockholders for the purpose of acquiring control.
License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the counties and cities in which the licensed subsidiaries’ respective operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon either:
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a percentage of the gross revenues received;
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the number of gaming devices operated; or
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the number of table games operated.
A live entertainment tax is also paid by casino operations where entertainment is furnished in connection with the selling or serving of food or refreshments or the selling of merchandise.
Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with those persons (collectively, “licensees”), and who proposes to become involved in a gaming venture outside of Nevada, is required to deposit with the Nevada State Gaming Control Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation of the Nevada State Gaming Control Board of the licensee’s participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Gaming Commission.
Thereafter, licensees are required to comply with the reporting requirements imposed by the Nevada Gaming Control Act. A licensee is also subject to disciplinary action by the Nevada Gaming Commission if it:
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knowingly violates any laws of the foreign jurisdiction pertaining to the foreign gaming operation;
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fails to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations;
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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
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employs, contracts with or associates with a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability.
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. We are unable to predict the extent to which these requirements, if extended, might impede or otherwise adversely affect operations of, and/or income from, the other games.
Regulations adopted by the Financial Crimes Enforcement Network of the Treasury Department (“FINCEN”) and the Nevada gaming regulatory authorities 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 May 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. In addition to currency transaction reporting requirements, suspicious financial activity reports are also required to be reported to FINCEN.
Other Laws And Regulations
The sale of alcoholic beverages at Silver Legacy is 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 our operations.
The Silver Legacy Resort Casino is subject to extensive state and local regulations and, on a periodic basis, must obtain various licenses and permits, including those required to sell alcoholic beverages. We believe that we have obtained all required licenses and permits and that our business is conducted in substantial compliance with applicable laws.
Forward-Looking Statements
(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)
Certain information included in this annual report and other materials filed or to be filed by us with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements can be identified by the fact that they do not relate strictly to historical or current facts. We have based these forward-looking statements on our current expectations about future events. These forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, intentions, financial condition, results of operations, future performance and business, including:
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current and future operations; and
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statements that include the words “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan” or similar expressions.
Such statements include information relating to capital spending, financing sources and the effects of regulation (including gaming and tax regulation) and competition. From time to time forward-looking statements are also included in our periodic reports on Forms 10-Q and 8-K, press releases and other materials released to the public.
Any or all of the forward-looking statements in this annual report and in any other public statements we make may turn out to be wrong. This can occur as a result of inaccurate assumptions or as a consequence of known or unknown risks and uncertainties. Many factors discussed in this annual report, such as government regulation and the competitive environment, will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from our forward-looking statements.
We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures we make on related subjects in our subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted. The following risks, uncertainties and possible inaccurate assumptions relevant to our business include factors we believe could cause our actual results to differ materially from expected and historical results. Other factors beyond those listed below could also adversely affect us. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.
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As described under “Competition,” in this Item 1, we operate in a very competitive environment. The growth in the number of hotel rooms and/or casino capacity in Reno or the spread of legalized gaming in other jurisdictions, including the growth of Native American gaming in northern California and the northwestern United States, could negatively affect future operating results.
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As discussed under “Nevada Gaming Laws” in this Item 1, Silver Legacy’s gaming operations are highly regulated by governmental authorities in Nevada, and our future operations may be significantly impacted by this regulation.
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Changes in applicable gaming, tax or other laws or regulations could have a significant effect on our operations.
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Our operations are affected by changes in general economic and market conditions nationally as well as the general economic and market conditions in the Reno area where our operations are conducted and in those areas where our customers live, including California.
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Security concerns or terrorist activity, including any future security alerts and/or terrorist attacks similar to those that occurred on September 11, 2001, could adversely affect our operations.
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The highway between Reno and northern California, where a large number of Silver Legacy’s customers reside, experiences winter weather conditions from time to time that limit the number of customers who visit Reno during such periods.
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Because all of our operations are in Reno, we are subject to greater risk than a gaming company that is geographically diversified. Any economic, weather or other conditions that adversely impact gaming operations in the Reno area will impact Silver Legacy where all of our operations are conducted.
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The gaming industry represents a significant source of tax revenues to the state, county and local jurisdictions in which gaming is conducted and, in 2003, Nevada increased the state taxes we pay. From time to time, Nevada and federal legislators and officials have proposed a variety of changes in tax laws, or in the administration of the laws that could impact our operations, including proposals for a federal gaming tax.
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From time to time, the interest rate on a portion of our debt may be subject to fluctuation based on changes in short-term interest rates. Interest expense could increase as a result of this factor.
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Claims have been brought against us from time to time in various legal proceedings, and additional legal and tax claims arise from time to time. While we believe that the ultimate disposition of current matters will not have a material impact on our financial condition or results of operations, it is possible that our cash flows and results of operations could be affected from time to time by the resolution of one or more of these contingencies.
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There is intense competition to attract and retain management and key employees in the gaming industry. Our business could be adversely affected in the event of our inability to recruit or retain key personnel.
ITEM 1A.
ITEM 1A. RISK FACTORS
The following is a discussion of certain factors that currently impact or may impact our business, operating results and/or financial condition.
Risks Related to our Business
We face substantial competition in the hotel and casino industry.
The hotel and casino industry is very competitive. We 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, we compete principally with the six other hotel-casinos that, like the Silver Legacy Resort Casino, each generate at least $36 million in annual gaining revenues, including the Circus Circus Hotel and Casino and the Eldorado Hotel & Casino.
According to statistics published by the Reno-Sparks Convention & Visitors Authority, there were approximately 15,300 hotel rooms in the Reno area at December 31, 2007. An existing hotel-casino, located outside of the downtown Reno district, completed construction of an expansion project during the fourth quarter of 2007 which increased their number of hotel rooms and casino square footage along with other amenities including additional parking and restaurants. In addition, there have been
several other announcements of pending expansion and/or new projects within the Reno market. At this time, we cannot predict the extent to which new and proposed projects will be undertaken or the extent to which current hotel and/or casino space may be expanded in the future. There can be no assurance that any growth in Reno’s room base or gaming capacity will not adversely affect our financial condition or results of operations. See “Competition” in Item 1.
A substantial number of customers travel to both Reno and Lake Tahoe during their visits. Consequently, we believe that the Reno market’s visitation is influenced, to some degree, by the visitation of the Lake Tahoe market. While we do 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 our operations.
Reno casinos, including our own, also compete with Native American gaming in California and the northwestern United States. We also compete with hotel-casinos located in Las Vegas, Nevada and the Lake Tahoe area. To a lesser extent, we compete with hotel-casinos in other parts of the United States and with dockside gaming facilities, riverboat casinos, state-sponsored lotteries, on-and-off track pari-mutuel wagering, Internet gaming, card clubs, riverboat casinos and other forms of legalized gaming. Land-based, dockside or riverboat casino gaming, other than that conducted on Native American-owned land, is currently legal in 11 states and gaming on Native American-owned land is legal in a number of states, including California, Washington and Oregon.
Management believes the Reno market draws over 50% of its visitors from California. California allows other non-casino style gaming, including pari-mutuel wagering, a state-sponsored lottery, card clubs, bingo and off-track betting. Certain constituencies have proposed ballot initiatives from time to time in California that would legalize casino-style gaming generally. As a result, there can be no assurance that casino-style gaming in California will not be expanded beyond the currently legal Native American gaming. Any such expansion could have a material adverse effect on our operations.
The competitive impact on Nevada gaming establishments, in general, and our operations, in particular, from the continued growth of gaming outside Nevada cannot be determined at this time. We believe that the further expansion of casino gaming in markets close to Nevada, such as California, and to a lesser extent Washington and Oregon, could have a material adverse affect on our operations depending on the nature, location and scope of those operations.
Native American gaming in California could have a material adverse effect on the Reno market, in general, and on our operations, in particular.
On March 7, 2000, California voters approved Proposition 1A which amended the California constitution and legalized “Nevada-style” gaming on Native American reservations. The passage of this amendment has allowed the expansion of existing Native American gaming operations, as well as the opening of new Native American gaming facilities in California. Additionally, a number of other tribes have announced that they intend to open gaming facilities. According to the California Gambling Control Commission, there are currently approximately 105 federally recognized Native American tribes in California of which approximately 67 have entered into compacts with the State of California. Presently, we believe there are 57 Native American casinos in operation in California. Under their original compacts, most Native American tribes in California could operate up to 2,000 slot machines, and up to two gaming facilities on any one reservation. The number of 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 requisite approvals, such as has been the case with respect to a number of new or amended compacts which have been executed and approved since 2000.
In April 2007, the California Senate approved amendments to the compacts of five Native American tribes. In June 2007, the California Assembly approved four of these five compacts which increased the number of slot machines permitted to be operated by two of the four tribes from 2,000 to 5,000 each and increased the number that may be operated by each of the other two tribes from 2,000 to 7,500 each. California voters approved these four increases with their approval of gaming referendums on their statewide ballot in February 2008. Management believes that the increase in the number of slot machines permitted to be operated by the four tribes will not significantly impact Silver Legacy’s operations since the casinos operated by those tribes are located in southern California. However, similar modifications to the compacts of tribes that operate casinos in central or northern California, where the largest number of slot machines currently permitted to be operated by a tribe is 2,700, could have a material adverse impact on our operations, depending on the number of tribes securing modification of their compacts, the number of additional machines permitted and the locations of the properties utilizing the additional machines.
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.
Many existing Native American gaming facilities in northern California are modest compared to Reno market casinos. However, there are a number of more significant Native American casinos which currently compete with the Reno market. In addition to existing gaming facilities, many Native American tribes have announced that they are in the process of developing or are considering establishing large-scale hotel and gaming facilities in northern California. Other tribes are at various stages of planning new or expanded facilities in northern California, including facilities within a one-hour drive of San Francisco or Sacramento.
Our operations have been adversely impacted by the growth in Native American gaming in California that has occurred to date. The competitive impact on the Reno market, in general, and our operations, in particular, from the continued growth of gaming establishments in northern California remains uncertain. There can be no assurances as to the extent of any new or expanded facilities that may commence operations. We believe, however, that the continued expansion of Native American gaming in northern California could have a material adverse impact on the Reno gaming market and our gaming operations.
The terrorist attacks of September 11, 2001 adversely impacted our operations and any security alerts and/or similar attacks that may occur in the future could have a material adverse effect on our future operations.
The terrorist attacks on the World Trade Center in New York City and the Pentagon outside Washington, D.C. which occurred on September 11, 2001 had a pronounced impact on our operating results during the weeks immediately following the attacks. Silver Legacy’s hotel occupancy, gaming volume and customer traffic declined significantly during the post-September 11 portion of our 2001 third quarter compared with the levels we experienced in 2001 prior to the September 11 attacks. Because our operations during the fourth quarter of 2001 were impacted by a number of factors, including an economy that was already weakening before September 11 and increased competition from Native American casinos in northern California, we cannot measure the precise impact the September 11 attacks had on our fourth quarter results of operations, although we believe the negative effect the attacks had on the economy magnified market downtrends we experienced throughout 2001 and continued to depress gaming volume and hotel occupancy during the remainder of 2001. We cannot predict the extent to which any future security alerts and/or additional terrorist attacks such as those that occurred on September 11 might impact our future operations.
Our substantial indebtedness could adversely affect our financial results and prevent us from fulfilling our obligations, including our obligations under our 10 1/8% mortgage notes.
We have a significant amount of indebtedness. The amount of our total indebtedness at December 31, 2007 was $160.0 million.
Our significant indebtedness could have important consequences, such as:
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limiting our ability to satisfy our obligations, including our obligations under our 10 1/8% mortgage notes;
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limiting our ability to obtain additional financing to fund our working capital requirements, capital expenditures, debt service, general corporate or other obligations;
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limiting our ability to use operating cash flow in other areas of our business because we must dedicate a significant portion of these funds to make principal and/or interest payments on our indebtedness;
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causing our failure to comply with the financial and restrictive covenants contained in the indenture covering our 10 1/8% mortgage notes and our senior secured revolving credit facility which could cause a default under those instruments and which, if not cured or waived, could have a material adverse effect on us;
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placing us at a competitive disadvantage to our competitors who are not as highly leveraged; and
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increasing our vulnerability and limiting our ability to react to changing market conditions, changes in our industry and economic downturns.
In addition, we have the capacity to issue additional indebtedness, including the ability to incur additional indebtedness under our senior secured credit facility, subject to the limitations imposed by the covenants in the senior secured credit facility and the indenture governing our 10 1/8% mortgage notes. Moreover, we may be able to incur additional debt in the future. The indenture governing our 10 1/8% mortgage notes and our senior secured credit facility contain financial and other restrictive covenants, but do not fully prohibit us from incurring additional debt. If new debt is added to our current level of indebtedness, related risks that we face could increase.
If we do not generate sufficient cash from our operations to make scheduled payments on our 10 1/8% mortgage notes or to meet our other obligations, we will need to take one or more actions including the refinancing of our debt, obtaining additional financing, selling assets, obtaining additional equity capital, or reducing or delaying capital expenditures and our ability to take one or more of these actions may be limited by the financial and other restrictive covenants contained in the agreement and indenture governing our indebtedness. We cannot assure that our business will continue to generate cash flow or that we will be able to obtain funding sufficient to satisfy our debt service requirements.
Our senior secured credit facility and the indenture governing the notes contain covenants that restrict our ability to engage in certain transactions.
Our senior secured credit facility and the indenture governing our 10 1/8% mortgage notes impose operating and financial restrictions on us. The restrictions imposed under the senior secured credit facility and/or the indenture include, among other things, limitations on our ability to:
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incur additional debt;
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create liens or other encumbrances;
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pay dividends or make other restricted payments;
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prepay subordinated indebtedness;
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make investments, loans or guarantees;
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sell or otherwise dispose of a portion of our assets; or
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make acquisitions or merge or consolidate with another entity.
In addition, under our senior secured credit facility, we are required to satisfy certain financial covenants, including maintaining certain debt to earnings and earnings to fixed charges ratios. Our ability to comply with these provisions may be affected by general economic conditions, industry conditions and other events beyond our control. We cannot assure that we will be able to comply with these covenants. If we fail to comply with a financial covenant or other restriction contained in our senior secured credit facility, the indenture or any future financing agreements, an event of default could occur. An event of default could result in acceleration of some or all of our indebtedness and the inability to borrow additional funds under the senior secured credit facility. We would not have, and are not certain we would be able to obtain, sufficient funds to repay our indebtedness if it is accelerated, including our payments on the notes. See the discussion under the caption “Senior Secured Credit Facility” in the “Liquidity and Capital Resources” section of our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this annual report for information regarding the waiver obtained to maintain our compliance under these financial covenants and certain limitations on our ability to borrow under the credit facility.
Servicing our debt requires a significant amount of cash, and our ability to generate sufficient cash depends on many factors, some of which are beyond our control.
Our ability to make payments on and refinance our indebtedness and to fund our capital expenditures depends upon our ability to generate cash flow and secure financing in the future. Our ability to generate future cash flow depends upon:
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our future operating performance;
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the demand for services we provide;
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general economic conditions;
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competition; and
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legislative and regulatory factors affecting our operations and business.
Some of these factors are beyond our control. In addition, the ability to borrow funds under our senior secured credit facility in the future depends on our meeting the financial covenants in the senior secured credit facility. See the discussion under the caption “Senior Secured Credit Facility” in the “Liquidity and Capital Resources” section of our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this annual report for information regarding the waiver obtained to maintain our compliance under these financial covenants and certain limitations on our ability to borrow under the credit facility.
We cannot assure that our business will generate cash flow from operations or that future borrowings will be available to us under our senior secured credit facility or otherwise in an amount sufficient to enable us to pay our indebtedness, including our 10 1/8% mortgage notes, or to fund other liquidity needs. As a result, we may need to refinance all or a portion of our indebtedness, including our 10 1/8% mortgage notes, on or before maturity. We cannot assure that we will be able to refinance any of our indebtedness on favorable terms, or at all. Any inability to generate sufficient cash flow or refinance our indebtedness on favorable terms could have a material adverse effect on our financial condition.
Because we are entirely dependent upon the Silver Legacy Resort Casino for all of our cash flow, we are subject to greater risks than a gaming company that is geographically or otherwise diversified.
We are entirely dependent upon the Silver Legacy Resort Casino for all of our cash flow. Therefore, we are subject to greater degrees of risk than a gaming company that is geographically or otherwise diverse. The risks to which we have a greater degree of exposure include the following:
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local economic and competitive conditions;
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inaccessibility due to weather conditions, road construction or closure of primary access routes;
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changes in local and state governmental laws and regulations, including gaming laws and regulations;
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natural and other disasters;
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a decline in the number of residents near, or visitors to, the Silver Legacy Resort Casino; and
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a decrease in gaming activities at the Silver Legacy Resort Casino.
Any of the factors outlined above could adversely affect our ability to generate sufficient cash flow to make payments on our 10 1/8% mortgage notes or with respect to our other debt.
Our operations may be negatively affected by general economic conditions.
Any adverse change in general economic conditions can adversely affect consumer spending, which can have a negative impact on our ability to generate revenues from our operations. Increases in gasoline prices can adversely affect our operations because most of our patrons travel to Reno by car or on airlines that may pass on increases in fuel costs to their passengers in the form of higher ticket prices. We are a large consumer of electricity. Consequently, an increase in the cost of electric power increases our operating costs and, depending on the extent of any increase, could adversely affect our results of operations. We cannot be sure that any or all of these factors will not have an adverse impact on our results of operations in the future.
The hotel-casinos in the Reno market are highly dependent on surrounding market areas.
Management believes that visitors from California, Washington and Oregon account for approximately two thirds of the visitors to the Reno market. We are primarily dependent upon the gaming activities of customers visiting the Reno market from these areas for our revenues. A decline in the economies of any one or more of these areas, or a decline in the number of gaming customers traveling to Reno from these areas for any reason, including increased competition, such as Native American gaming in California, Washington and Oregon, could have a material adverse effect on our results of operations.
The hotel-casinos in the Reno market have been subject to seasonal variations and quarterly fluctuations in operating results.
Historically, hotel-casino operations in the Reno market have been subject to seasonal variations. Traditionally, the strongest operating results have occurred in the third quarter and the weakest results have occurred during the period from November through February when weather conditions have adversely affected operating results. Excessive snowfall during the winter months can make travel to the Reno area more difficult. This often results in significant declines in traffic on major highways, particularly on routes to and from northern California, and causes a downturn in customer volume. Furthermore, management believes that approximately two-thirds of visitors to the Reno market arrive by some form of ground transportation. Therefore, even normal winter weather may cause our revenues and cash flows to be adversely affected.
We expect the highest level of customer visits to occur during the summer months, because of the more favorable weather conditions. A poor summer season, due to any reason, including events outside our control, would adversely affect our business. Congestion on the roads leading to Reno, common during the peak summer season, holidays and other times, may discourage potential customers from traveling to our hotel-casino, particularly if road construction is in process. See “Seasonality” in Item 1.
Significant conflicts of interest may arise in the performance of the duties of the members of our executive committee and our executive officers.
The Silver Legacy Resort Casino is situated between the Circus Circus Hotel and Casino, which is wholly owned by MGM MIRAGE, and the Eldorado Hotel & Casino, which is wholly owned by Eldorado Resorts LLC. Our partners are a wholly owned subsidiary of MGM MIRAGE and a 96%-owned subsidiary of Eldorado Resorts LLC, and their respective personnel who participate in decisions that affect the Silver Legacy Resort Casino may be deemed to be in a conflict of interest position, to the extent they participate in decisions relating to the Silver Legacy Resort Casino that affect, or may be perceived to affect, the Circus Circus Hotel and Casino and/or the Eldorado Hotel & Casino. The potential for these conflicts of interest may be exacerbated by the design of the Silver Legacy Resort Casino, which connects its casino and core entertainment center with the Circus and Eldorado properties by enclosed skyways.
Each member of the executive committee of Circus and Eldorado Joint Venture is currently an employee of, and/or holds an executive position with, MGM MIRAGE or Eldorado Resorts LLC or one of their affiliates, and each of our executive officers had a similar relationship before assuming his present position with Circus and Eldorado Joint Venture. Accordingly, these individuals may be deemed to be in a conflict of interest position with respect to business decisions they make that affect, or may be perceived to affect, the Circus or Eldorado properties. Furthermore, a conflict of interest may be deemed to exist by reason of the access any of these individuals has to information or business opportunities that may be useful to the Eldorado or Circus properties. No specific procedures for resolving these conflicts of interest have been developed and there can be no assurance that effective procedures for addressing these matters can be developed. See “Directors and Executive Officers of the Registrants” in Item 10 and “Compensation Committee Interlocks and Insider Participation” in Item 11.
Our partnership agreement contains a buy-sell provision which, if exercised by either of our partners, could adversely affect our management and operations.
Our partnership agreement contains a buy-sell provision pursuant to which either of our partners may elect to offer to purchase the entire interest of our other partner. If either partner makes such an offer, our partnership agreement requires the other partner to either sell its partnership interest or purchase the partnership interest of the offering partner, in each case at the price proposed by the offering partner. An election by either of our partners to exercise its buy-sell right, which would result in the buy-out of one of our partners, could adversely effect the continuity of our management as well as any existing affiliate arrangements and agreements with the partner who had been bought out.
We are subject to extensive state and local regulation, and licensing and gaming authorities have significant control over our operations, which could have an adverse effect on our business.
The ownership and operation of casino gaming facilities are subject to extensive state and local regulation. Circus and Eldorado Joint Venture currently holds all state and local licenses and related approvals necessary to conduct its present gaming operations. Circus and Eldorado Joint Venture is required by the State of Nevada, as well as the applicable local authorities, to comply with all applicable gaming laws and regulations and to maintain its various licenses and registrations, findings of suitability, permits and approvals in good standing. The gaming authorities in Nevada may deny, limit, condition, suspend or revoke a gaming license or related approval for violations of applicable gaming laws and regulations and may impose substantial fines and take other actions, any one of which could have a significant adverse effect on our business, financial condition, and results of operations. If additional gaming laws or regulations are adopted, these regulations could impose restrictions or costs that could have a significant adverse effect on us. See “Regulation and Licensing” in Item 1.
The Nevada Gaming Commission may, in its discretion, require the holder of any securities that we issue, including our 10 1/8% mortgage notes, to file applications, be investigated, and be found suitable to own our securities if it has reason to believe that the security ownership would be inconsistent with the declared policies of the State of Nevada. Further, the costs of any investigation conducted by the Nevada Gaming Commission under these circumstances must be paid by the applicant and refusal or failure to pay these charges may constitute grounds for a finding that the applicant is unsuitable to own the securities. If the Nevada Gaming Commission determines that a person is unsuitable to own our securities, then, under the Nevada Gaming Control Act and the regulations promulgated under this Act, we can be sanctioned, including the loss of our approvals, if, without the prior approval of the Nevada Gaming Commission, we:
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pay to the unsuitable person any dividend, interest or any distribution whatsoever;
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recognize any voting right by the unsuitable person in connection with the securities;
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pay the unsuitable person remuneration in any form; or
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make any payment to the unsuitable person including any principal, redemption, conversion, exchange, liquidation or similar payment.
We may not make a public offering of our securities without prior approval of the Nevada Gaming Commission if we intend to use the securities or proceeds from the offering to:
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construct, acquire or finance gaming properties in Nevada; or
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retire or extend obligations incurred for these purposes or for similar transactions.
If the Nevada gaming authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with us, we would have to sever all relationships with that person. Furthermore, the Nevada Gaming Commission may require us to terminate the employment of any person who refuses to file appropriate applications. Either result could materially adversely affect our gaming operations.
Because we own real property, we are subject to extensive environmental regulation, which creates uncertainty regarding future environmental expenditures and liabilities.
We have incurred and may continue to incur costs to comply with environmental requirements, such as those relating to discharges into the air, water and land, the handling and disposal of solid and hazardous waste, and the cleanup of properties affected by hazardous substances. Under these and other environmental requirements, we, as an owner of the property on which the Silver Legacy Resort Casino is situated, may be required to investigate and clean up hazardous or toxic substances or chemical releases at that property. As an owner or operator, we could also be held responsible to a governmental entity or third parties for property damage, personal injury and for investigation and cleanup costs incurred by them in connection with the contamination. These laws typically impose cleanup responsibility and liability without regard to whether the owner or operator knew of or caused the presence of the contaminants and the liability under those laws has been interpreted to be joint
and several unless the harm is divisible and there is a reasonable basis for allocation of the responsibility. The costs of investigation, remediation or removal of those substances may be substantial, and the presence of those substances, or the failure to remediate a property properly, may adversely affect our ability to rent or otherwise utilize our property. In addition, environmental requirements address the impacts of development on wetlands.
Petroleum and chlorinated solvent contamination of soil and groundwater is known to exist at and in the vicinity of the Silver Legacy Resort Casino. No action in regard to these contaminants is currently required of us, however we are required to pay assessments averaging approximately $30,000 annually in contribution to a Washoe County special assessment district which is undertaking community wide remediation of groundwater solvent contamination. These assessments may increase in the future. State law exempts property owners who did not cause or contribute to the solvent contamination from civil and criminal liability for the cost of remediation and any related damages, except to the extent of unpaid assessments. This provision would not be effective to shield us from liability under federal laws.
The Silver Legacy Resort Casino site was previously required to be cleaned up under environmental laws to address petroleum contamination from leaking underground storage tanks and other sources. At the conclusion of that cleanup, with the permission of the relevant regulatory county authority, certain contaminated soils were permitted to remain in place. The Washoe County District Health Department issued a “no further action” letter with respect to that cleanup on February 20, 1996. The possibility exists that additional contamination, as yet unknown, may exist on the Silver Legacy Resort Casino site. Although we believe that any remaining contamination arose from activities of prior owners or occupants, or from offsite sources and not as a result of any of our actions or operations, we cannot make any assurances that we will not incur expenditures for environmental investigations or remediation in the future. See “Environmental Matters” in Item 1.
An earthquake could adversely affect our business.
The Reno area has been, and may in the future be, subject to earthquakes. Depending upon its magnitude, an earthquake could severely damage the Silver Legacy Resort Casino, which could adversely affect our business and operations. We currently maintain earthquake insurance for the Silver Legacy Resort Casino and the resulting business interruption. However, there is no assurance that our coverage will be sufficient if there is a major earthquake. In addition, upon the expiration of our current policies, which expire in July 2008, we cannot assure that adequate coverage will be available at economically justifiable rates, if at all.
We rely on our key personnel.
Our future success will depend upon, among other things, our ability to keep our senior executives and highly qualified employees. We compete with other potential employers for employees, and we may not succeed in hiring or retaining the executives and other employees that we need. We do not have employment contracts with any of our senior executives and we do not maintain key-man insurance policies for any of our executives. A sudden loss of or inability to replace key employees could have a material adverse effect on our financial condition and results of operation.
We may face difficulties in attracting and retaining qualified employees for our casino.
The operation of our business requires qualified executives, managers and skilled employees with gaming industry experience and qualifications who are able to obtain the requisite licenses and approval from the Nevada Gaming Commission. Currently, there is a shortage of skilled labor in the Reno area and the continued growth of Native American gaming in northern California may make it more difficult for us to attract qualified individuals in the future. While we believe that the Silver Legacy Resort Casino will continue to be able to attract and retain qualified employees, shortages of skilled labor will make it increasingly difficult and expensive to attract and retain the services of a satisfactory number of qualified employees, and we may incur higher costs than expected as a result.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
The Silver Legacy Resort Casino is located on two neighboring parcels of land, located at 407 North Virginia Street and 411 North Sierra Street in Reno, Nevada. We own both parcels, comprising 118,167 and 119,927 square feet, respectively. As of December 31, 2007, both parcels and the improvements located thereon were encumbered by liens securing the indebtedness incurred under our senior credit facility and the indebtedness evidenced by our 10 1/8% mortgage notes. At December 31, 2007, the aggregate principal amount of the indebtedness secured by these liens totaled $160.0 million. For information concerning the Silver Legacy Resort Casino, reference is made to the discussion under the caption “Silver Legacy” in Item 1 of this annual report, which is incorporated herein by this reference.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are from time to time involved in litigation arising in the ordinary course of our business. We do not believe that any litigation to which the Partnership or Capital is a party or of which any of our property is the subject will, individually or in the aggregate, have a material adverse effect on our financial position or the results of our operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANTS’ COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Capital is a wholly-owned subsidiary of the Partnership, which is owned 50% by Galleon, Inc. and 50% by Eldorado Limited Liability Company. Accordingly, there is no established public trading in the equity securities of Capital or the Partnership.
The Partnership’s partnership agreement, as currently in effect, provides that, subject to any contractual restrictions to which the Partnership is subject, including the indenture relating to the Notes, and prior to the occurrence of a “Liquidating Event,” the Partnership will be required to make distributions to its partners as follows:
(i) The estimated taxable income of the Partnership allocable to each partner multiplied by the greater of the maximum marginal federal 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).
(ii) Annual distributions of remaining “Net Cash From Operations” in proportion to the percentage interests of the partners.
(iii) Distributions of “Net Cash From Operations” in amounts or at times that differ from those described in (i) and (ii) above, provided in each case that both partners agree in writing to the distribution in advance thereof.
As defined in the partnership agreement, the term “Net Cash From Operations” means the gross cash proceeds received by the Partnership, less the following amounts: (i) cash operating expenses and payments of other expenses and obligations of the Partnership, including interest and scheduled principal payments on Partnership indebtedness, including indebtedness owed to the partners, if any, (ii) all capital expenditures made by the Partnership, and (iii) such reasonable reserves as the partners deem necessary in good faith and in the best interests of the Partnership to meet its anticipated future obligations and liabilities (less any release of reserves previously established, as similarly determined).
As a general partnership, the Partnership is not subject to Federal income tax liability. Consequently, the holders of the partnership interests in the Partnership are required to include their respective shares of the Partnership’s taxable income in their own income tax returns. The Partnership has, in the past, made distributions to its partners to cover such tax liabilities in accordance with its partnership agreement. The tax distributions of the Partnership to its partners aggregated $4.5 million and $3.2 million in 2007 and 2006, respectively. The 2007 tax distributions included a distribution of $2.26 million each to ELLC and Galleon representing fiscal 2007 tax distributions. The 2006 tax distributions included a distribution of $1.6 million each to ELLC and Galleon representing fiscal year 2006 tax distributions. A tax distribution for the fourth quarter of 2007 has not been paid to date and we do not anticipate a material additional distribution based on our expected final 2007 tax return. However, a special distribution was approved by the Partnership’s executive committee and paid by the Partnership in March 2008. The aggregate amount of the distribution was $10.0 million, of which $5.0 million was paid to each partner.
During the fiscal quarter ended December 31, 2007 neither the Partnership nor Capital issued any equity securities and, during such period, neither the Partnership nor Capital, nor any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) purchased any of the equity securities of the Partnership or Capital.
Reference is made to the information in Item 12 of this annual report beginning with the caption “Equity Compensation Plans”, which is incorporated herein by this reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(1) The Partnership is not subject to income taxes and the partners include their respective shares of partnership taxable income in their income tax returns. Therefore, a provision for income taxes is not included in our selected financial information. The partnership agreement requires the Partnership to make distributions to its partners in an amount equal to the maximum marginal federal income tax rate applicable to any partner multiplied by the income of the Partnership for the applicable period. See “Item 5” of this annual report for additional information concerning this provision of the Partnership agreement.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Effective March 1, 1994, Eldorado Limited Liability Company (“ELLC”), a Nevada limited liability company owned and controlled by Eldorado Resorts LLC, and Galleon, Inc. (“Galleon”), a Nevada corporation now owned and controlled by MGM MIRAGE, entered into a joint venture agreement to establish the Partnership for the purpose of constructing, owning and operating Silver Legacy. Capital, a wholly owned subsidiary of the Partnership, was incorporated for the sole purpose of serving as a co-issuer of the $160 million principal amount of 10 1/8% mortgage notes due 2012 co-issued by the Partnership and Capital (the “Notes”), and does not have any operations, assets or revenues.
On July 28, 1995, Silver Legacy commenced operations as a hotel-casino in downtown Reno, Nevada. Silver Legacy is a leader within the Reno market, offering the largest number of table games and the second largest number of slot machines and hotel rooms of any property in the Reno market. Silver Legacy’s net operating revenues and income are derived largely from our gaming activities. In an effort to enhance our gaming revenues, we attempt to maximize the use of our gaming facilities at Silver Legacy by providing a well-balanced casino environment that contains a mix of games attractive to multiple market segments. Rooms, food and beverage also contribute a large portion of our net revenues.
Our operating results are highly dependent on the volume of customers visiting and staying at our resort, which in turn impacts the price we can charge for our hotel rooms and other amenities. Key volume indicators include table games drop and slot handle, which refer to amounts wagered by our customers. The amount of volume we retain, which is not fully controllable by us, is recognized as casino revenues and is referred to as our win or hold. In addition, hotel occupancy and price per room designated by average daily rate (“ADR”) are key indicators for our hotel business.
Significant Factors Affecting Results of Operations
Expansion of Native American Gaming
A significant portion of Silver Legacy’s revenues and operating income are generated from patrons who are residents of northern California, and, as such, our results of operations have been adversely impacted by the growth in Native American gaming in northern California. Many existing Native American gaming facilities in northern California are modest compared to Silver Legacy. However, a number of Native American tribes have established large-scale gaming facilities in California and many 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. As northern California Native American gaming operations have expanded, we believe the increasing competition generated by these gaming operations has negatively impacted drive-in, day-trip visitor traffic from our main feeder markets in northern California.
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 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, as has been the case with respect to a number of new or amended compacts which have been executed and approved.
In April 2007, the California Senate approved amendments to the compacts of five Native American tribes. In June 2007, the California Assembly approved four of these five compacts which increased the number of slot machines permitted to be operated by two of the four tribes from 2,000 to 5,000 each and increased the number that may be operated by each of the other two tribes from 2,000 to 7,500 each. In February 2008, California voters approved these four increases with their approval of gaming referendums on their statewide ballot. Management believes that the increase in the number of slot machines permitted to be operated by the four tribes will not significantly impact Silver Legacy’s operations since the casinos operated by those tribes are located in southern California. However, similar modifications to the compacts of tribes that operate casinos in central or northern California, where the largest number of slot machines currently permitted to be operated by a tribe is 2,700, could have a material adverse impact on our operations, depending on the number of tribes securing modification of their compacts, the number of additional machines permitted and the locations of the properties utilizing the additional machines.
We believe the continued growth of Native American gaming establishments, including the addition of hotel rooms and other amenities, could continue to place additional competitive pressure on our operations. While we cannot predict the extent of any future impact, it could be significant.
Severe Weather
Silver Legacy’s operations are subject to seasonal variation, with the weakest results generally occurring during the winter months. Variations occur when weather conditions make travel to Reno by visitors from northern California, our main feeder market, difficult. From January through April 2005, our region experienced extremely poor weather, including 100-year record snowfall. In addition, our New Year’s Eve, which historically generates significant revenues, was negatively impacted by highway road closures due to flooding during the last week of December 2005. As a result, there was a significant adverse affect on our hotel occupancy and slots, table games, and restaurant volume during these months. During 2006, March was the only month in which we were impacted by extremely poor weather while January and February benefited from unseasonably mild weather. While weather conditions were not out of the ordinary in 2007, the Reno area and the nearby mountain passes have experienced an especially large amount of snowfall in the first part of 2008, which has negatively impacted business levels.
Bowling Tournaments Within the Reno Market
The National Bowling Stadium, located one block from Silver Legacy, is one of the largest bowling complexes in North America and has been selected to host multi-month tournaments in Reno two of every three years through 2018. Historically, these bowling tournaments have attracted a significant number of visitors to the Reno market and have benefited the downtown area. In 2007, the United States Bowling Congress Open Tournament (“USBC Open Tournament”) began in mid-February and continued through June. Both men and women bowlers participated in the USBC Open Tournament which attracted approximately 80,000 bowlers to the Reno market during the tournament period. In 2006, the United States Bowling Congress Women’s Bowling Tournament (“USBC Women’s Tournament”) took place from mid-March through the first week of July and brought approximately 50,000 bowlers to downtown Reno. There were no major bowling tournaments in the Reno market during 2005. The absence of a major bowling tournament in 2008 is anticipated to have a negative impact on operations in the first half of 2008. The USBC Women’s Tournament and USBC Open Tournament will return to the Reno market in 2009 and 2010, respectively.
Results of Operations
The following table highlights the results of our operations for the three years ended December 31, 2007, 2006 and 2005 (dollars in thousands):
Net Revenues. During 2007 compared to 2006, net revenues rose primarily due to increases in rooms, food and beverage and other revenues. However, positive gains achieved among all revenue segments during the first half of 2007 were offset by declines during the latter half of 2007 compared to the same prior year periods. The principal contributor to the revenue increases during the first half of 2007 was increased visitation generated by the previously discussed USBC Open Tournament which brought more bowlers to the Reno market than did the 2006 USBC Women’s Tournament. Conversely, business levels declined during the latter half of 2007 resulting in decreased net revenues in comparison to the same period in 2006. We believe these decreases were associated with factors impacting the national tourism market as a whole as a result of the downturn in the United States economy, including the troubled housing market, higher unemployment, credit concerns and lower consumer confidence, which appears to have had a negative impact on Reno and other mid-level markets beginning in the third quarter of 2007. Increased gasoline prices, the continued increase in competition generated by growth in Native American gaming, and a decline in city-wide convention room nights, factors that have continued into 2008, also contributed to the declines experienced during the latter half of 2007.
Net revenues increased in 2006 compared to 2005 mainly due to growth in rooms revenues combined with increased casino and food and beverage revenues. Increased convention business along with incremental visitation to the downtown Reno area generated by the USBC Women’s Tournament were the main drivers of the revenue increases during 2006. In addition, higher hold percentages in both table games and slots resulted in increased casino revenues in 2006 over 2005.
Operating Income and Net Income. During 2007 compared to 2006, operating income and net income both declined as a result of lower casino revenues combined with increases in promotional allowance costs, depreciation expense and selling, general and administrative expenditures along with higher food and beverage expenses.
Operating income increased in 2006 compared to 2005 due to increased departmental revenues, attributable in part to higher casino hold percentages, combined with operational efficiencies which produced improved margins in both the casino and rooms departments. As a result, our overall operating margin increased to 15.8% in 2006 from 13.2% in 2005. These factors also contributed to the increase in net income during 2006. Moreover, increased interest income earned on increased invested cash reserves produced a higher percentage increase in net income in 2006 over 2005.
Revenues
The following table highlights our sources of net operating revenues for the three years ended December 31, 2007, 2006 and 2005 (dollars in thousands):
Casino Revenues. During 2007 compared to 2006, table games drop rose 3.6% resulting from growth in cash play which was partially offset by declines in credit play associated with high-end customers. Overall slot handle declined 4.8% while tracked handle from players within our customer database fell 1.7% in 2007 compared to 2006. Table games play, and to a lesser extent, slot handle benefited from increased traffic associated with the USBC Open Tournament during the first half of 2007 which generated more visitation than did the USBC Women’s Tournament during the first half of 2006. Historically, the USBC Open Tournament has attracted more table games players as compared to the USBC Women’s Tournament, which has typically had a greater positive impact on slot volume. Gains in casino volume achieved during the first half of 2007 were offset by declines during the second half of 2007 compared to the same periods in 2006. These declines were attributable to the same factors which negatively impacted overall revenues over the same periods. In addition, we believe our slot system conversion combined with a completed migration to 100% ticket-in, ticket-out machines during the fourth quarter of 2007 also contributed to the declines in slot handle in 2007 compared to 2006. Moreover, casino revenues during 2007 compared to 2006 were also impacted by a lower table games hold percentage in 2007 combined with higher table games and slot promotional cash offers which are deducted from casino revenues.
Higher hold percentages in both table games and slots resulted in increased casino revenues in 2006 compared to 2005. However, table games drop declined 3.8% in 2006 compared to 2005 while slot handle remained flat for both periods. While aggressive casino promotions and direct mail programs along with the USBC Women’s Tournament benefited the casino departments during the first seven months of 2006, these programs were reduced during the latter half of the year as a result of increased convention business which lessened the number of rooms available for casino offers. As a result, increases in casino volume experienced during the first seven months of 2006 were offset by declines in casino volume during the latter portion of the year as compared to the same prior year periods.
Room Revenues. Despite a slight decline in hotel occupancy, our room revenues increased in 2007 over 2006 as a result of higher room rates. Our ADR and occupancy were $81.04 and 81.9%, respectively, compared to $73.19 and 82.6%, respectively, in 2007 compared to 2006. Increased promotional offers and growth in occupancy associated with the USBC Open Tournament during the first half of 2007 were offset by declines during the second half of 2007 due to fewer convention groups along with the aforementioned negative economic and regional factors. However, despite the challenging environment, we were able to maintain higher room rates throughout 2007 compared to 2006.
During 2006, room revenues experienced strong growth compared to 2005 due to higher ADR and occupancy. Our ADR and occupancy percentage were $73.19 and 82.6%, respectively, in 2006 compared to $68.17 and 79.5%, respectively, in 2005. These increases in ADR and occupancy were driven by growth in our convention segment attributable to the USBC Women’s Tournament and several large convention group bookings which enabled the hotel to attain a higher ADR across all room segments throughout 2006. Additional factors negatively impacting 2005, including poor weather and our rooms renovation project, also enabled the hotel department to achieve improved results in 2006 over 2005.
Food and Beverage Revenues. During 2007 compared to 2006, food and beverage revenues increased primarily due to increased beverage revenues generated by our new lounges, Drinx, which opened in December 2006 and Aura, which opened in October 2007. Additionally, food and beverage revenues benefited from increased traffic generated by the USBC Open Tournament during the first half of 2007 along with selective price increases among our buffet, steakhouse and coffee shop outlets, all of which have undergone recent renovations.
Food and beverage revenues grew in 2006 compared to 2005 due to increased visitors to our property in connection with the USBC Women’s Tournament, higher banquet revenues associated with incremental convention business, and an increase in our average restaurant check. Additionally, cash beverage sales continued to rise as a result of the popularity of our Rum Bullion’s Island Bar.
Other Revenues. Other revenues are comprised of revenues generated by our retail outlets, entertainment, events pavilion and other miscellaneous items. Other revenues increased in 2007 over 2006 primarily due to higher entertainment revenues attributable to additional concert dates along with a slight increase in retail revenues. These increases were partially offset by a decline in revenues associated with the absence of our events pavilion which was located across North Virginia Street from Silver Legacy on a special events plaza previously owned by our affiliates. The events pavilion was removed in January of 2007 to allow for the construction of a new city-owned ballroom facility on the plaza site which opened in February 2008. The new facility is operated and managed by Silver Legacy together with the adjoining Eldorado and Circus Circus properties. Several large banquet functions held in the events pavilion produced revenues throughout the first six months of 2006.
Retail revenues grew in 2006 compared to 2005 resulting from the addition of two new retail outlets, Bijoux Terner, an international accessory store which opened in February 2006, and Tradewinds, a casual menswear store which opened in August 2006. However, the increase in retail revenues was offset by a decrease in entertainment revenues resulting from 12 fewer concerts produced by Silver Legacy, in partnership with other downtown area casinos, at the downtown Reno Events Center during 2006 compared to 2005. In addition, our arcade permanently closed in December 2005 and was replaced by the aforementioned new retail outlets in addition to Harley Davidson, which is a retail outlet operated under a lease to a third party.
Promotional Allowances. Promotional allowances, expressed as a percentage of gross revenues, increased to 8.8% in 2007 compared to 8.1% in 2006. This increase was mainly due to increases in complimentary rooms, food, retail and concert ticket promotional offers to our casino customers during 2007 compared to 2006.
Promotional allowances, expressed as a percentage of gross revenues, declined to 8.1% in 2006 compared to 9.2% in 2005 primarily due to lower rooms and food complimentaries resulting from a decline in direct mail promotional offers, and to a lesser extent, fewer complimentary concert tickets associated with a reduction in the number of concert dates during 2006 compared to 2005.
Operating Expenses
The following table highlights our operating expenses for the three years ended December 31, 2007, 2006 and 2005 (dollars in thousands):
Casino Expenses. Declines in special events expenditures, marketing collateral and the expense related to the expiration of unredeemed complimentaries were offset by a large increase in the cost of rooms, food, beverage and retail complimentaries allocated to the casino department during 2007 compared to 2006.
Despite growth in casino revenues, casino expenses remained flat in 2006 compared to 2005. Savings in slots departmental payroll, both as a percentage of casino revenues and absolute dollars, and other variable casino expenses such as bad debt and supplies, were offset by an increase in the expense recorded for unredeemed complimentaries associated with our players’ club program.
Room Expenses. While hotel occupancy declined slightly, room expenses increased in 2007 over 2006 due to higher travel agent commissions attributable to the USBC Open Tournament combined with a marginal increase in payroll and supplies costs per occupied room associated with efforts to improve service standards and upgraded amenities for our guests. However, despite these additional expenses, the rooms department was able to attain a higher profit margin in 2007 compared to 2006 as a result of a higher ADR in the current year.
During 2006, room expenses increased over 2005 as a result of higher occupancy levels in 2006. The increase in our ADR in 2006, combined with additional expenses charged during 2005 associated with our room renovation project, resulted in an increased hotel profit margin in 2006.
Food and Beverage Expenses. During 2007 compared to 2006, food and beverage expenses increased primarily due to higher food cost of sales and labor in an effort to improve the quality and service throughout our newly renovated restaurant venues. Moreover, beverage expenses increased during the current year as a result of higher beverage revenues mainly attributable to our two new lounges, Drinx and Aura.
Food and beverage expenses increased in association with the increase in food and beverage revenues in 2006 compared to 2005. However, efforts to improve guest service provided by our restaurants and bars through increased staffing coverage resulted in increases in food and beverage labor, as a percentage of revenues, which produced a slightly lower profit margin in 2006 compared to 2005.
Other Operating Expenses. Other operating expenses are comprised of expenses associated with the operation of our retail outlets and events pavilion along with the entertainment department’s production costs and professional entertainer fees. During 2007 compared to 2006, other operating expenses declined primarily due to the previously discussed elimination of expenses associated with the events pavilion along with a decrease in retail expenses. These decreases were partially offset by a marginal increase in entertainment expenses driven by a more aggressive concert schedule in 2007 compared to 2006.
Other operating expenses declined in 2006 compared to 2005 mainly due to a decrease in entertainment expenses, principally professional entertainer fees, as a result of the decline in the number of concert dates in 2006 compared to 2005.
Selling, General and Administrative Expenses. Higher sales and marketing costs were the primary contributors to the increase in selling, general and administrative expenses in 2007 compared to 2006. Additional administrative expenses also drove the increase in expenses as a result of higher credit card discounts attributable to increased room revenues, professional fees associated with Sarbanes-Oxley compliance, and computer maintenance contracts, specifically related to our new slot system.
During 2006, selling general and administrative expenses increased primarily due to higher facilities costs including utilities, payroll, and building repairs and maintenance. In addition, advertising costs increased during 2006 compared to 2005 due to increased advertising production and professional services associated with marketing consulting fees. Additional administration expenses also contributed to the increases in 2006 as a result of increased credit card discounts associated with higher hotel sales volume, professional services fees, and equipment rental and maintenance contracts related to our computer information systems.
Depreciation Expense. Depreciation expense increased during 2007 and 2006 compared to the prior years primarily due to additional depreciation associated with new capital purchases.
Other (Income) Expense
Other (income) expense is comprised of interest expense, interest income and other, which was related to the change in market value of the funded portion of our supplemental executive retirement plan. Interest expense remained flat during 2007, 2006 and 2005 while interest income continued to increase due to the steady growth in our invested cash reserves.
Liquidity and Capital Resources
During 2007, we generated cash flows from operating activities of $21.7 million compared to $25.9 million in the prior year. The decrease in cash provided by operations was primarily due to the $0.8 million decline in net income combined with various changes in balance sheet accounts, including an increase in accounts payable associated with the purchase of property and equipment. The changes in these balance sheet accounts represented changes which occurred in the normal course of business. As of December 31, 2007, cash and cash equivalents were $52.5 million, sufficient for normal operating requirements.
Cash used in investing activities for 2007 was $11.8 million compared to $10.7 million for 2006, and related primarily to capital expenditures associated with a new lounge located on the casino floor, various renovation projects and equipment purchases. In addition, our capital expenditures for 2007 included $2.5 million for equipment purchases for a city-owned ballroom facility located across from Silver Legacy on a special events plaza which was previously owned by our affiliates and donated to the City of Reno in January 2007. In future years, we expect to make capital expenditures to the extent necessary to continue to maintain an attractive property and a competitive position in our marketplace. Our executive committee has approved $9.2 million in capital expenditures for 2008 in addition to the remaining $0.7 million of the previously approved $3.2 million for the ballroom facility which opened in February 2008.
Cash used in financing activities were $4.5 million and $3.2 million 2007 and 2006, respectively, representing tax distributions to our partners.
In July 2007, we renewed our general and liability insurance policies. Under these policies, the Partnership and the owner of the adjacent Eldorado property, Eldorado Resorts LLC (which is an affiliate of ELLC), have combined earthquake coverage of $350 million and combined flood coverage of $225 million. In the event that an earthquake causes damage only to the Partnership’s property, the Partnership is eligible to receive up to $350 million in coverage depending on the replacement cost. However, in the event that both properties are damaged, the Partnership is entitled to receive, to the extent of any replacement cost incurred, up to $220 million of the coverage amount (based on our percentage of the total earthquake coverage) and a portion of the other $130 million, if any, remaining after satisfaction of a claim of Eldorado Resorts LLC with respect to its adjoining property. In the event that a flood causes damage only to the Partnership’s property, the Partnership is eligible to receive up to $225 million in coverage depending on the replacement cost. However, in the event that both properties are damaged, the Partnership is entitled to receive, to the extent of any replacement cost incurred, up to $220 million of the coverage amount (based on our percentage of the total flood coverage) and a portion of the other $5 million remaining coverage amount, if any, remaining after satisfaction of a claim of Eldorado Resorts LLC with respect to its adjoining property.
Our insurance policy also includes combined terrorism coverage for Silver Legacy and the adjoining Eldorado property up to $500 million. In the event that an act of terrorism causes damage only to the Partnership’s property, the Partnership is eligible to receive up to $500 million in coverage depending on the replacement cost. However, in the event that both properties are damaged, the Partnership is entitled to receive, to the extent of any replacement cost incurred, up to $280 million of the coverage amount (based on our percentage of the total reported property values) and up to the portion of the other $220 million, if any, remaining after satisfaction of a claim of Eldorado Resorts LLC with respect to its adjoining property. This policy also covers an additional property located in Shreveport, LA which is owned by Eldorado Resorts LLC. In the event that an act of terrorism causes damage to all three properties, the Partnership is entitled to receive, to the extent of any replacement cost incurred, up to $200 million of the coverage amount (based on our percentage of the total reported property values) and up to the portion of the other $300 million, if any, remaining after satisfaction of the claims with respect to the other two properties.
The Partnership’s partnership agreement, as currently in effect, provides that, subject to any contractual restrictions to which the Partnership is subject, including the indenture relating to the Notes, and prior to the occurrence of a “Liquidating Event,” the Partnership will be required to make distributions to its partners as follows:
(i) The estimated taxable income of the Partnership allocable to each partner multiplied by the greater of the maximum marginal federal 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).
(ii) Annual distributions of remaining “Net Cash From Operations” in proportion to the percentage interests of the partners.
(iii) Distributions of “Net Cash From Operations” in amounts or at times that differ from those described in (i) and (ii) above, provided in each case that both partners agree in writing to the distribution in advance thereof.
As defined in the partnership agreement, the term “Net Cash From Operations” means the gross cash proceeds received by the Partnership, less the following amounts: (i) cash operating expenses and payments of other expenses and obligations of the Partnership, including interest and scheduled principal payments on Partnership indebtedness, including indebtedness owed to the partners, if any, (ii) all capital expenditures made by the Partnership, and (iii) such reasonable reserves as the partners deem necessary in good faith and in the best interests of the Partnership to meet its anticipated future obligations and liabilities (less any release of reserves previously established, as similarly determined).
The Partnership’s partnership agreement provides that the partners shall not be permitted or required to contribute additional capital to the Partnership without the consent of the partners, which consent may be given or withheld in each partner’s sole and absolute discretion.
We believe we have sufficient capital resources to meet all of our obligations. These obligations include existing cash obligations, funding of capital commitments and servicing our debt. Our future sources of liquidity are anticipated to be from our operating cash flow and borrowings available under our senior secured credit facility. See “Senior Secured Credit Facility” below.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations and commitments to make future payments under certain contracts, including long-term debt obligations and operating leases, as of December 31, 2007 (in thousands):
The repayment of our long-term debt, which consists of our indebtedness under the Credit Facility and the indebtedness evidenced by the Notes, is subject to acceleration upon the occurrence of an event of default under the Credit Facility or the indenture relating to the Notes.
Tax distributions of the Partnership to our partners totaled $4.5 million, $3.2 million and $1.5 million in 2007, 2006 and 2005, respectively. A tax distribution for the fourth quarter of 2007 has not been paid to date and we do not anticipate a material additional distribution in 2008 based on our expected final 2007 tax return. However, a special distribution was approved by the Partnership’s executive committee and paid by the Partnership in March 2008. The aggregate amount of the distribution was $10.0 million, of which $5.0 million was paid to each partner.
We made cash interest payments of $16.3 million during the years ended December 31, 2007, 2006 and 2005, respectively. We anticipate that cash payments for interest in 2008 will be consistent with 2007 due to similar average outstanding borrowings.
The Notes
On March 5, 2002, the Partnership and Capital co-issued $160.0 million principal amount of senior secured mortgage notes due 2012 (“Notes”). The Notes are senior secured obligations which rank equally with all of the Partnership’s other outstanding senior debt and senior to any subordinated debt. The Notes are secured by a security interest in the Issuers’ existing and future assets, other than certain licenses which may not be pledged under applicable law, which is junior to a security interest in such assets securing the Partnership’s obligations under its credit facility and any refinancings of such facility that are permitted pursuant to the terms of the Notes. Each of the Partnership’s partners executed a pledge of all of its partnership interests in the Partnership to secure the Notes, which is junior to a pledge of such partnership interests to secure the Partnership’s obligations on the credit facility and any refinancings of such facility that are permitted pursuant to the terms of the indenture relating to the Notes. The Notes mature on March 1, 2012 and bear interest at the rate of 10 1/8% per annum, payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2002. At December 31, 2007, we were in compliance with all of the covenants in the indenture related to the Notes.
Senior Secured Credit Facility
We have a credit facility (as amended, the “Credit Facility”) which provides a $10.0 million revolving facility. Under the Credit Facility, as currently in effect, we must maintain a maximum ratio of total debt to EBITDA of 4.75 to 1.00 and are also required to maintain a minimum ratio of EBITDA to fixed charges of 1.10 to 1.00 at all times. The Credit Facility is secured by a first priority security interest in substantially all of our existing and future assets, other than certain licenses which may not be pledged under applicable law, and a first priority pledge of and security interest in all of the partnership interests in the Partnership held by its partners. The Credit Facility ranks equal in right of payment to our existing and future senior indebtedness, including the Notes, but the security interests securing our obligations under the Credit Facility are senior to the security interests securing our obligations on the Notes. The Credit Facility contains customary events of default and covenants, including covenants that limit or restrict our ability to incur additional debt; create liens or other encumbrances; pay dividends or make other restricted payments; prepay subordinated indebtedness; make investments, loans or other guarantees; sell or otherwise dispose of a portion of our assets; or make acquisitions or merge or consolidate with another entity.
On June 15, 2005, we executed an amendment to the Credit Facility to provide a conditional waiver of the facility’s financial covenants in respect of the quarter ended June 30, 2005, and each subsequent quarter through and including December 31, 2005, provided that no additional credit was extended under the Credit Facility during a quarter for which a waiver was relied upon. In addition, as a condition precedent to any draw on the Credit Facility subsequent to June 15, 2005, we must be in compliance with the Credit Facility’s financial covenants as to the then most recent fiscal quarter in respect of which we are required to deliver financial statements pursuant to the Credit Facility.
On March 2, 2006, the Partnership executed a further amendment to the Credit Facility which extended the previously granted waiver for any defaults under the Credit Facility’s covenants to cover the fiscal quarter ended March 31, 2006 and each subsequent fiscal quarter through and including December 31, 2006, provided that no additional credit was extended under the Credit Facility during such quarters. The March 2, 2006 amendment also waived for 2005 the covenant in Section 7.8 of the Credit Facility which then limited capital expenditures to $10.0 million within a calendar year, which the Partnership exceeded for the year ended December 31, 2005. In addition, the amendment raised the capital expenditure limit to $12.5 million for future calendar years.
On March 28, 2007, an additional amendment was executed to extend the Credit Facility’s original maturity date of March 31, 2007 for an additional year to March 31, 2008. This amendment also reduced the minimum ratio of EBITDA to fixed charges to 1.10 to 1.00 and raised the capital expenditure limit to an aggregate of $15.0 million in any twelve-month period. Furthermore, this amendment revised in its entirety Section 7.16 of the Credit Facility to allow for prepayments of the Notes provided certain conditions precedent are satisfied. There was no debt outstanding under the Credit Facility at December 31, 2007. As of such date, the Partnership was in compliance with all of the covenants in the Credit Facility and had the ability to borrow on a revolving basis all of the $10.0 million available under the Credit Facility.
On March 28, 2008, the Partnership executed an additional amendment to extend the Credit Facility’s maturity for an additional year to March 30, 2009 and reduce the revolving facility to $1,000,000.
Critical Accounting Policies
Our discussion and analysis of our results of operations and financial condition above are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires that we apply significant judgment in defining the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. Our judgments are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. Because of the uncertainty inherent in these matters, there is no assurance that actual results will not differ from our estimates used in applying the following critical accounting policies.
Gross Revenues and Promotional Allowances
In accordance with industry practice, we recognize as casino revenues the net win from gaming activities, which is the difference between gaming wins and losses. The retail value of food, beverage, rooms and other services furnished to customers on a complimentary basis is included in gross revenues and then is deducted as promotional allowances.
Players’ Club Point Liability
Our players’ club, which was revised in January 2005, allows customers to earn “points” based on the volume of their gaming activity. Under the terms of our program, these points are redeemable for certain complimentary services, at their discretion, including rooms, food, beverage, retail and entertainment tickets. We accrue the expense for unredeemed complimentaries, after consideration of estimated breakage, as they are earned. The value of the cost to provide the complimentaries is expensed as earned and is included in casino expense on our consolidated income statement. To arrive at the estimated cost associated with our players’ club, estimates and assumptions are made regarding incremental marginal costs of the benefits, breakage rates and the mix of goods and services for which the points will be redeemed. We use historical data to assist in the determination of estimated accruals. At December 31, 2007 and 2006, $0.9 million and $0.8 million, respectively, was accrued for the cost of the anticipated redemptions.
Property and Equipment and Other Long-Lived Assets
Property and equipment is recorded at cost and is depreciated over its estimated useful life. Judgments are made in determining estimated useful lives and salvage values of these assets. The accuracy of these estimates affects the amount of depreciation expense recognized in our financial results and whether we have a gain or loss on the disposal of assets. We review depreciation estimates and methods as new events occur, more experience is acquired, and additional information is obtained that would possibly change our current estimates. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In accordance with SFAS No. 144, an estimate of undiscounted future cash flows produced by the asset is compared to the carrying value to determine whether an impairment exists. If it is determined that the asset is impaired based on expected future cash flows, a loss, measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset, would be recognized. As of December 31, 2007, no events or changes in circumstances indicated that the carrying values of our long-lived assets may not be recoverable.
Reserve for Uncollectible Accounts Receivable
We make ongoing estimates relating to the collectibility of our accounts receivable and maintain a reserve for estimated losses resulting from the inability of our customers to make required payments. In determining the amount we reserve, we review our aged accounts receivables, consider our historical level of credit losses and make judgments about the creditworthiness of customers based on ongoing credit evaluations and relationships. Since we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates.
Self-Insurance Reserves
Silver Legacy is self insured up to certain limits for our general liability, group health insurance and workmens’ compensation programs. We analyze historical and current pending claims information to estimate amounts to be accrued. In order to mitigate our potential exposure, we have obtained certain stop loss policies.
Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board (the “FASB”) issued Statement No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of Statements No. 87, 88, 106, and 132(R) (“SFAS 158”). SFAS 158 required the full recognition, as an asset or liability, of the overfunded or underfunded status of a company-sponsored postretirement benefit plan. Adoption of SFAS 158 was effective for the Partnership’s fiscal year ending December 31, 2007 and did not have an impact on the Partnership’s Consolidated Statements of Income. See Note 9 in the Notes to Consolidated Financial Statements for additional information disclosed relating to the incremental impact of the adoption of SFAS 158 on the individual items in the Partnership’s Consolidated Balance Sheets as of December 31, 2007.
In December 2007, the FASB also issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - An Amendment of Accounting Research Bulletin No. 51,” the provisions of which are effective for periods beginning after December 15, 2008. This statement requires an entity to classify noncontrolling interests in subsidiaries as a separate component of equity. Additionally, transactions between an entity and noncontrolling interests are required to be treated as equity transactions. We are currently evaluating the impact, if any, the adoption of this statement will have on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits the measure of certain financial instruments and certain other items at fair value and establishes presentation and disclosure requirements to help financial statement users to understand these measurements and their impact on earnings. This statement is effective for the Partnership beginning January 1, 2008. We are currently evaluating the impact, if any, the adoption of this statement will have on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. In February 2008, the FASB deferred the adoption of SFAS 157 for one year as it applies to certain items, including assets and liabilities initially measured at fair value in a business combination, reporting units and certain assets and liabilities measured at fair value in connection with goodwill impairment tests in accordance with SFAS 142 and long-lived assets measured at fair value for impairment assessments under SFAS 144, “Accounting for the Impairment and Disposal of Long-Lived Assets.” This statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact, if any, the adoption of this statement will have on our consolidated financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are potentially exposed to market risk in the form of fluctuations in interest rates and their potential impact upon our variable rate debt outstanding. We evaluate our exposure to this market risk by monitoring interest rates in the marketplace and we have, on occasion, utilized derivative financial instruments to help manage this risk although we did not utilize any financial instruments in 2007. As of December 31, 2007, we had no variable rate debt outstanding.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the report of Deloitte & Touche LLP dated March 28, 2008 and the consolidated financial statements of Circus and Eldorado Joint Venture and Silver Legacy Capital Corp. appearing on pages 52 through 67 of this annual report, which are incorporated in this Item 8 by this reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9AT. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
An evaluation was performed by management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2007, our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in applicable rules and forms of the Securities and Exchange Commission.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal controls over financial reporting that occurred during the fourth quarter of 2007 that have materially affected, or are reasonably likely to materially affect, our 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 our financial reporting. The Partnership’s internal control system was designed to provide reasonable assurance that information contained in the Partnership’s consolidated financial statements is reliable, does not contain any untrue statement of a material fact or omit or 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 evaluated the 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 our evaluation as of December 31, 2007, management believes that the Partnership’s internal control over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of the Partnership’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to the attestation by the Partnership’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Partnership to provide only management’s report in this annual report.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
Overview
The current managing partner of the Partnership is Galleon, Inc. (“Galleon”). Under the terms of the partnership agreement, the managing partner is responsible for the day-to-day management of the business affairs of the Partnership. The managing partner has delegated a substantial portion of its duties to the general manager of Silver Legacy. Although the Partnership is a general partnership between Galleon, which is an indirect wholly-owned subsidiary of MGM MIRAGE, and Eldorado Limited Liability Company (“ELLC”), which is a 96%-owned subsidiary of Eldorado Resorts LLC, the Partnership employs its own separate management team to operate Silver Legacy. An executive committee of the Partnership is responsible for consulting with, reviewing, monitoring and overseeing the performance of the management of Silver Legacy. The executive committee, which functions in a capacity similar to a corporation’s board of directors, does not have any separately designated committees other than an audit committee.
The Managing Partner
The Partnership’s partnership agreement (the “Partnership Agreement”) designates Galleon as the Partnership’s managing partner with responsibility and authority for the day-to-day management of the business affairs of the Partnership, including overseeing the day-to-day operations of Silver Legacy and other Partnership business, preparation of the Partnership’s budgets and implementation of the decisions made by the partners. The managing partner is also responsible for the preparation and submission of the Partnership’s annual business plan for review and approval by the Partnership’s executive committee, utilizing the special voting procedures and the procedure for resolving deadlocks described below.
The Partnership Agreement provides that the managing partner shall appoint the general manager, subject to approval of the appointment by the executive committee, utilizing the special voting procedures and the procedure for resolving deadlocks described below. Under the terms of the Partnership Agreement, the general manager may be removed by either of the Partnership’s partners upon 30 days written notice. The Partnership Agreement also provides that the managing partner shall appoint the other principal senior management of the Partnership 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 Partnership’s chief financial officer and accounting officer. The Partnership’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 Partnership 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 Partnership, 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 Partnership Agreement.
Replacement of the Managing Partner
If the actual net operating results of the business of the Partnership for any four consecutive quarters are less than 80% of the projected amount as set forth in the Partnership’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 the event Galleon resigns as managing partner, ELLC will have the right and option to become the managing partner of the Partnership and assume all the obligations of the managing partner under the Partnership Agreement, or the partners are required to attempt to appoint a third party to manage the day-to-day business affairs of the Partnership. In that event, if the partners are unable to agree on a manager, then the Partnership shall be dissolved and liquidated in accordance with the provisions of the Partnership Agreement.
The Executive Committee
An executive committee of the Partnership is authorized to review, monitor and oversee the performance of the management of Silver Legacy. The executive committee of the Partnership consists 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 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, Frank R. Baldwin, and Gary N. Jacobs, 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 Partnership’s annual business plan, (ii) reviewing and approving the terms of any loans made to the Partnership, (iii) approving all material purchases, sales, leases or other dispositions of Partnership property, other than in the ordinary course of business, and (iv) approving the appointment of the general manager, who is the Partnership’s chief executive officer, and the controller, who is the Partnership’s chief financial officer and accounting officer, and determining the compensation of the general manager and the controller.
The Partnership Agreement provides special voting procedures for the executive committee’s approval of the annual business plan, the appointment of the general manager and 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.
Audit Committee Financial Expert
The Partnership’s executive committee and Capital’s Board of Directors have each determined that Robert M. Jones, who is a member of the executive committee and the Board of Directors, and also serves on their audit committee, 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, auditing, 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 Partnership’s financial statements, or experience actively supervising one or more persons engaged in such activities;
•
an understanding of internal control over financial reporting; and
•
an understanding of audit committee functions.
Mr. Jones is not independent as that term is defined under current rules of the New York Stock Exchange (“NYSE”). None of the Partnership’s or Capital’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 Partnership or Capital in the future.
Code of Ethics
The Partnership’s executive committee and Capital’s Board of Directors have adopted a code of ethics that applies to the Partnership’s and Capital’s principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions. The code of ethics, a copy of which is incorporated by reference as Exhibit 14 to this report, 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 documents that the Partnership files with, or submits to, the SEC and in other public communications made by the Partnership;
•
compliance with applicable governmental laws, rules and regulations;
•
the prompt internal reporting of violations of the code to an appropriate person identified in the code; and
•
accountability for adherence to the code.
Executive Officers, Members of the Executive Committee and Directors
The following table sets forth certain information concerning our current executive officers, the executive officers of our managing partner, Galleon, the members of the Partnership’s executive committee and the members of the board of directors of Capital.
Name
Age
Positions
Gary L. Carano
General Manager of Silver Legacy, Chief Executive Officer of the Partnership, and President and Chief Executive Officer of Capital
Glenn T. Carano
Executive Director of Marketing of Silver Legacy and Secretary of the Partnership and Capital
Bruce C. Sexton
Assistant General Manager of Silver Legacy and Vice President of Capital
Stephanie D. Lepori
Chief Financial Officer of Silver Legacy, Controller and Chief Accounting and Financial Officer of the Partnership, and Treasurer and Chief Accounting and Financial Officer of Capital
Frank R. Baldwin
Member of the Partnership’s Executive Committee and Director of Capital
Gene R. Carano
Member of the Partnership’s Executive Committee and Director of Capital
Name
Age
Positions
Gary N. Jacobs
Member of the Partnership’s Executive Committee and Audit Committee, Director of Capital, and Secretary of Galleon
Robert M. Jones
Member of the Partnership’s Executive Committee and Audit Committee and Director of Capital
J. Terrence Lanni
President of Galleon
James J. Murren
Member of the Partnership’s Executive Committee and Treasurer of Galleon
Bryan L. Wright
Assistant Secretary of Galleon
Gary L. Carano. Mr. Carano has served as General Manager of Silver Legacy and Chief Executive Officer of the Partnership since January 1995 and President and Chief Executive Officer of Capital since its incorporation in August 2001. He is also President and Chief Operating Officer, and a member of the board of managers, of the Eldorado Hotel & Casino and Treasurer of Recreational Enterprises, Inc. Previously, he served as Assistant General Manager, General Manager and Chief Operating Officer of the Eldorado Hotel & Casino from 1980 to 1994. Gary L. Carano, Glenn T. Carano and Gene R. Carano are brothers.
Glenn T. Carano. Mr. Carano has been the Director of Marketing of Silver Legacy since January 1995, Secretary of the Partnership since August 2001 and Secretary of Capital since November 2001. Prior to 1995, he served as Director of Marketing at the Eldorado Hotel & Casino for eight years. Mr. Carano has served as chairman of the board of directors of the Airport Authority of Washoe County and was a member of the board of the Reno-Sparks Convention & Visitors Authority. He is also presently a member of the board of managers of the Eldorado Hotel & Casino and Secretary of Recreational Enterprises, Inc. From 1977 to 1983, Mr. Carano was a quarterback for the Dallas Cowboys football team.
Bruce C. Sexton. Mr. Sexton has been the Assistant General Manager of Silver Legacy and Vice President of Capital since June 2006. From January 1995 to June 2006, Mr. Sexton was the Chief Financial Officer or Director of Finance and Administration of Silver Legacy and Controller and Chief Accounting and Financial Officer of the Partnership. He was Treasurer of Capital from its incorporation in August 2001, and its Chief Accounting and Financial Officer from November 2001, until June 2006. Mr. Sexton began working at the Circus Circus Hotel and Casino in Reno in 1978 as chief accountant and, before joining Silver Legacy, held the position of Controller at that property for eight years.
Stephanie D. Lepori. Ms. Lepori has been the Chief Financial Officer of Silver Legacy, Controller and Chief Accounting and Financial Officer of the Partnership, and Treasurer and Chief Accounting and Financial Officer of Capital since June 2006. Ms. Lepori was the Director of Finance or Controller of Silver Legacy from March 1995 until June 2006. From 1992 until she joined Silver Legacy, Ms. Lepori was employed by Arthur Andersen LLP, serving that firm in various positions. Ms. Lepori is a Certified Public Accountant.
Frank R. Baldwin. Mr. Baldwin has been a member of the executive committee of the Partnership and a director of Capital since March 2003. He is currently the Vice President and General Manager of the Circus Circus Hotel and Casino in Reno. From November 1997 until joining the Circus Circus Hotel and Casino in 2003, he was employed by the Luxor Hotel and Casino in Las Vegas, Nevada, most recently as the Director of Casino Operations. Prior to assuming that position in November 1999, Mr. Baldwin was Casino Shift Manager for a period of approximately two years.
Gene R. Carano. Mr. Carano has been a member of the executive committee of the Partnership since December 2000 and a director of Capital since November 2001. Since June 2007, he has been the General Manager of Eldorado Resorts LLC, a position he previously held between 1998 and 2002. In addition, he has been the Vice President and a member of the board of managers of the Eldorado Hotel & Casino since 1996, the Vice President of Eldorado Resorts LLC or its predecessor since 1993, the Secretary of Eldorado Resorts LLC since June 1996, and Vice President of Recreational Enterprises, Inc. since 1983. Prior to 1993, Mr. Carano served as a Co-General Manager of the Eldorado Hotel & Casino and served as its Director of Gaming. Prior to joining Eldorado Resorts LLC, Mr. Carano held various positions at another major casino in northern Nevada, including slot floor supervisor and pit boss.
Gary N. Jacobs. Mr. Jacobs has been a member of the executive committee of the Partnership, director of Capital and Secretary of Galleon since April 2005. He is a member of the Partnership’s audit committee. Mr. Jacobs has served as Executive Vice President and General Counsel of MGM MIRAGE since June 2000 and as Secretary since January 2002. Prior thereto, he was a partner with the law firm of Christensen, Glaser, Fink, Jacobs, Weil & Shapiro, LLP, and is currently of counsel to that firm.
Robert M. Jones. Mr. Jones has been a member of the executive committee of the Partnership since November 1995 and a director of Capital since November 2001. He has been the Chief Financial Officer of Eldorado Resorts LLC or its predecessor since 1989. Prior to joining Eldorado Resorts LLC in 1984, Mr. Jones spent 14 years in public accounting, 10 of which were as an audit principal with the international accounting firm of Arthur Young & Company. Mr. Jones is a former Certified Public Accountant and is a member of the Partnership’s audit committee.
J. Terrence Lanni. Mr. Lanni has been President of Galleon since April 2005. Mr. Lanni has served as Chairman of MGM MIRAGE since July 1995. He served as Chief Executive Officer of MGM MIRAGE from June 1995 to December 1999, and since March 2001.
James J. Murren. Mr. Murren has been a member of the executive committee of the Partnership since November 2007 and Treasurer of Galleon since April 2005. Mr. Murren has served as President of MGM MIRAGE since December 1999 and Chief Operating Officer since August 2007. He was Chief Financial Officer from January 1998 to August 2007 and Treasurer from November 2001 to August 2007.
Bryan L. Wright. Mr. Wright has been Assistant Secretary of Galleon since April 2005. Mr. Wright has served as Senior Vice President and Assistant General Counsel of MGM MIRAGE since March 2005. He served as Vice President and Assistant General Counsel of MGM MIRAGE from July 2001 to March 2005. He has served as Assistant Secretary of MGM MIRAGE since January 2002. Prior to joining MGM MIRAGE, Mr. Wright served as Vice President and Assistant General Counsel of Boyd Gaming Corporation and in other legal capacities for Boyd Gaming Corporation from September 1993 to July 2001.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Overview of Compensation Program
Under the terms of the Partnership’s partnership agreement, the executive committee of the Partnership determines the compensation of the general manager, who is the Partnership’s chief executive officer (“CEO”), and the controller, who is the Partnership’s chief financial officer and accounting officer (“CFO”). The Partnership does not have a separate compensation committee. With the exception of the compensation of the CEO and CFO, which requires the executive committee’s approval, the CEO has responsibility for fixing the compensation of the other named executive officers. The Partnership’s executive committee approves any new elements or significant changes to the existing compensation program, such as the implementation of any new compensation components. In 2007, the Partnership did not grant any plan-based awards. The Partnership does not have publicly traded equity. Accordingly, it does not award any equity-based compensation or utilize any equity-based guidelines in determining the compensation of its named executive officers. There are currently no employment contracts with any of the named executive officers.
Compensation Objectives
All of the named executive officers have been with the Partnership since Silver Legacy opened in 1995 and have an average of 25 years of experience in the Reno gaming market. The Partnership has benefited from this experience and expertise, and its compensation objective is to retain its named executive officers in an effort to support its overall long-term strategic and performance goals. The Partnership attempts to retain its named executive officers by paying total compensation that is fair, competitive and reasonable and by using continued service as one of the determinates of total compensation through the utilization of its supplemental executive retirement program (“SERP”). As a result, the Partnership’s compensation of its named executive officers is designed to reward their continued service and their respective contributions to the maintenance of Silver Legacy’s position as an industry leader within the Reno market through its annual compensation and the utilization of its SERP.
Executive Compensation Components
During the year ended December 31, 2007, the components of compensation for the Partnership’s named executive officers were:
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base salary;
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bonuses;
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retirement benefits; and
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perquisites and other personal benefits.
Base Salary
The Partnership’s original executive committee approved the compensation amounts for Gary Carano, the Partnership’s CEO, and Glenn Carano, the Partnership’s Executive Director of Marketing, when the Partnership was established in 1995. Their base salaries were determined taking into account their extensive knowledge of the Reno market and prior experience in the operation of the adjoining Eldorado Hotel & Casino, which is majority-owned by members of the Carano family, over a period of more than 15 years. The base salaries paid to these named executive officers have not changed since 1995.
The salaries paid in 2007 and 2006 to the other two named executive officers, Bruce Sexton, the Partnership’s Assistant General Manager, and Stephanie Lepori, the Partnership’s CFO, were determined by the CEO, and approved by the Executive Committee in the case of Stephanie Lepori, on a subjective basis taking into account the salaries for comparable positions at the adjoining properties of our affiliates, Eldorado Hotel & Casino and Circus Circus Hotel-Casino, and other available compensation comparables within our market. In determining their salaries, consideration of his or her responsibility and experience were also taken into account. During 2006, both Bruce Sexton and Stephanie Lepori were promoted to their current positions and received salary increases upon promotion which took into account their increased responsibilities.
All of the salaries and bonuses of the named executive officers were paid in cash. With the exception of the salaries of Gary Carano and Glenn Carano which have not changed since 1995, salary levels are typically considered annually as part of the Partnership’s performance review process as well as upon a promotion or other change in job responsibility. Any merit based increase in salary is based on a subjective evaluation that, in addition to the factors discussed earlier, takes into account the individual’s performance.
Bonuses
The Partnership paid bonuses in 2006 for the first time since 2002 based on the recommendation of the CEO resulting from the Partnership’s improved financial performance in 2006. Based on the same parameters, similar bonus amounts were paid in 2007. The aggregate bonus amount paid to all of the Partnership’s salaried and supervisory employees, including the named executive officers, was based on the Partnership’s 2007 and 2006 financial results and was approved by its executive committee. The allocation of the aggregate bonus amount was determined by the CEO and was generally allocated among the employees receiving bonuses based on their respective positions within the organization, with selective adjustments for factors such as length of service, individual performance and merit. The highest individual bonus amount paid was $2,970, which was paid to 13 and 11 employees in 2007 and 2006, respectively, including two named executive officers, Bruce Sexton and Stephanie Lepori. Based on the amounts they are paid in base salaries, Gary Carano and Glenn Carano each elected not to take bonus payments in 2007 and 2006.
Retirement Benefits
The Partnership offers retirement benefits designed to retain employees and motivate long-term performance. All employees, including our named executive officers, are eligible to participate in the Partnership’s employee savings plan. In addition, certain named executive officers are entitled to participate in the Partnership’s SERP.
SERP
The Partnership established its SERP in 2002 as an important retention tool. The design of the Partnership’s SERP is intended to compensate participants upon retirement at a level equivalent to a percentage of their highest annual compensation received during the last five full calendar years preceding retirement. The percentages were set based on competitive data at the time the plan was implemented, and are evaluated by the Partnership’s retirement consultant and actuary on an annual basis. The Partnership balances the effectiveness of this plan as a compensation and retention tool with the cost to the Partnership of providing the plan. Based on budget and cost constraints, no newly hired or promoted key employees have been admitted to the SERP since its inception date in 2002. The SERP is an unfunded, unsecured obligation of the Partnership and is not qualified for tax purposes. The benefit formula under this plan is described under the caption “Pension Benefits”, below. Management believes the SERP is a strong retention tool because the benefits generally increase with the named executive officers’ continued employment and compensation. Also, plan benefits would be forfeited should a covered named executive officer enter into employment with a competitor of the Partnership after retirement or termination for cause.
Employee Savings Plan
The Partnership offers a defined contribution 401(k) plan which covers all employees who meet certain age and length of service requirements and allows an employer contribution of up to 25 percent of the first six percent of each participating employee’s compensation. The plan is qualified under Section 401(k) of the Internal Revenue Code. The Partnership maintains the plan to attract and retain qualified employees, including the named executive officers, and to encourage employees to save some percentage of their cash compensation for their eventual retirement.
Perquisites and Other Personal Benefits
The Partnership provides limited perquisites intended to serve specific business needs such as the entertainment of significant customers or other individuals doing business with the Partnership; however, it is understood that some may be used for personal reasons as well. In 2007 and 2006, the perquisites provided to the Partnership’s named executive officers consisted of dues for country club memberships, executive medical physicals, complimentary personal meals, and complimentary personal tickets for various events.
COMPENSATION COMMITTEE REPORT
The executive committee of the Partnership, which functions in a manner similar to the board of directors of a corporation and does not have a separate compensation committee, has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management. Based on the review and discussions referred to in the preceding sentence, the Partnership’s executive committee has recommended that the Compensation Discussion and Analysis be included in this annual report on Form 10-K for the year ended December 31, 2007.
THE EXECUTIVE COMMITTEE
Frank R. Baldwin
Gene R. Carano
Gary N. Jacobs
Robert M. Jones
James J. Murren
Summary Compensation Table
The following table summarizes the total compensation for the years ended December 31, 2007 and 2006 paid to or earned by each of the Partnership’s principal executive officer, principal financial officer and its two other executive officers whose total compensation exceeded $100,000. We refer to these individuals as our “named executive officers.” During the years ended December 31, 2007 and 2006, none of the directors or officers of Capital received any remuneration for their services in those capacities.
(1) This column sets forth the change in pension value in 2007 and 2006 for each of the named executive officers participating in the SERP. The value for each year was calculated as the difference between the present value of the named executive officer’s accrued benefit as of the end of the year, less the value calculated as of the end of the prior year. The present values were calculated using the same discount rate and mortality table that were used in our financial disclosures on those dates. Stephanie Lepori is not covered by the SERP.
(2) The Partnership provides limited perquisites and personal benefits intended to serve specific business needs such as the entertainment of significant customers or other individuals doing business with the Partnership; however, it is understood that some may be used for personal reasons as well. In 2007, the perquisites and personal benefits provided to the Partnership’s named executive officers consisted of dues for country club memberships, executive medical physicals, complimentary personal meals, and complimentary personal tickets for various events. The incremental cost to the Partnership on the perquisites and personal benefits received by Gary Carano and Glenn Carano during each year is included in the table. The value of the perquisites and personal benefits received by each of the two other named executive officers in each year, and in the case of Gary Carano for 2006, is not included in the table because the perquisites and personal benefits received by each of these individuals involved an aggregate incremental cost to the Partnership of less than $10,000. The incremental cost to the Partnership is calculated based on the amount the Partnership would not have otherwise incurred if the perquisites and personal benefits had not been received by the named executive officers.
(3) Includes $123 in premiums paid by the Partnership for life and accidental death insurance for the benefit of Gary Carano, $3,000 in matching contributions paid by the Partnership under the Partnership’s 401(k) savings plan for his account, and $12,342 of perquisites and personal benefits received in 2007.
(4) Includes $123 in premiums paid by the Partnership for life and accidental death insurance for the benefit of Glenn Carano, $3,875 in matching contributions paid by the Partnership under the Partnership’s 401(k) savings plan for his account, and $27,980 of perquisites and personal benefits received in 2007. These perquisites and personal benefits include golf membership dues for which the Partnership incurred a cost of $26,500 in 2007, representing the full amount of dues paid by the Partnership on account of Glenn Carano’s golf membership.
(5) Bruce Sexton held the position of Chief Financial Officer of Silver Legacy and Controller and Chief Accounting and Financial Officer of the Partnership until his promotion to Assistant General Manager of Silver Legacy effective June 13, 2006.
(6) The highest individual bonus amount paid to all of the Partnership’s salaried and supervisory employees including named executive officers, Bruce Sexton and Stephanie Lepori, was $2,970.
(7) Includes $123 in premiums paid by the Partnership for life and accidental death insurance for the benefit of Bruce Sexton and $2,250 in matching contributions paid by the Partnership under the Partnership’s 401(k) savings plan for his account in 2007.
(8) Stephanie Lepori was promoted to the position of Chief Financial Officer of Silver Legacy and Controller and Chief Accounting and Financial Officer of the Partnership effective June 13, 2006. Prior to such date, she was compensated for her position as Director of Finance for Silver Legacy.
(9) Includes $123 in premiums paid by the Partnership for life and accidental death insurance for the benefit of Stephanie Lepori and $1,147 in matching contributions paid by the Partnership under the Partnership’s 401(k) savings plan for her account in 2007.
Pension Benefits
The Partnership offers the SERP to seven of its current employees, including three of its named executive officers, to provide each participating employee a targeted income on retirement relative to the employee’s highest annual compensation amount within the last five full calendar years preceding retirement. The plan is unfunded and is not qualified for tax purposes. The participants’ benefits under the SERP are subject to the claims of general creditors should the Partnership become insolvent.
Depending on a participating named executive officer’s tier and years of service, the following percentages are applied to his highest annual compensation amount within the last five full calendar years preceding retirement to determine the annual benefit payable upon retirement at or after age 60:
(1) Each participating named executive officer had 13 years of service at December 31, 2007.
(2) Gary Carano is a Tier I participant.
(3) Glenn Carano and Bruce Sexton are Tier II participants.
Normal retirement under the plan is at age 65. Because each participating named executive officer has completed four years of service, early retirement benefits may commence for each upon attainment of age 55 at a reduced annual benefit. The annual benefit payable upon retirement before age 60 is reduced by 5% for each full or partial year the early retirement date precedes age 60. Benefits are not reduced for retirement at/or after age 60.
The following table sets forth information with respect to the SERP as of December 31, 2007:
Pension Benefits
As of December 31, 2007
(1) The accumulated benefit is based on service and earnings considered by the plan (base salary and bonus, as described above) for the period through December 31, 2007. The present value is calculated assuming the benefit commences at normal retirement age 65 and that the benefit is payable for life. It is also based on the assumptions included in the accompanying footnotes to the financial statements. As described in those footnotes, the assumed interest rate is 5.85%. If the assumed retirement age were changed to age 60, the present value for each of the named executive officers would instead be $1,698,359, $951,219, and $635,945 for Gary Carano, Glenn Carano and Bruce Sexton, respectively. The post-retirement mortality assumption is based on 110% of the RP2000-Mortality Table. All of the participating named executive officers were vested in the SERP as of December 31, 2007.
(2) Stephanie Lepori is not covered by the SERP.
Under the SERP, plan benefits vary depending on the event which causes the employment termination. The following is a brief description of the benefits payable upon different termination events:
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In the event a named executive officer enters into competitive employment after termination or retirement, the named executive officer’s subsequent pension payments will be forfeited. The forfeiture provision would be waived if the named executive officer’s termination occurs after a change in control.
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In the event of termination for cause, the named executive officer will forfeit all rights to benefits under the plan.
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In the event of death before retirement, the named executive officer’s beneficiary will be entitled to receive the present value of the benefit the named executive officer earned as of the date of death assuming it is payable at normal retirement.
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In the event a disability occurs before retirement, the named executive officer will receive an income equal to the accumulated benefit at the time the disability occurs, unreduced for the commencement of the benefit prior to age 65. The benefit will commence immediately if the named executive officer is 55 or older at the time the disability occurs, or, if the named executive officer has not reached the age of 55, once the named executive officer attains age 55 and, in either case, will continue as long as the named executive officer remains disabled.
The following table sets forth the respective amounts that would be payable under the SERP upon termination of employment for the reasons indicated assuming the termination event occurred on December 31, 2007.
Pension Benefits Payable Upon Termination
As of December 31, 2007
(1) Stephanie Lepori is not covered by the SERP.
Director Compensation
None of the members of the Partnership’s executive committee, which functions in a manner similar to a board of directors of a corporation, the executive officer or director of our managing partner, Galleon, or the members of the board of directors of Capital or its executive officers is compensated by the Partnership or Capital for his services in these capacities. The perquisites and personal benefits received by each member of the executive committee who received perquisites or personal benefits in 2007 and 2006, consisting of complimentary personal meals and tickets for various events, involved an aggregate incremental cost to the Partnership of less than $10,000. The incremental cost to the Partnership is calculated based on the amount the Partnership would not have otherwise incurred if the perquisites and personal benefits had not been received.
Compensation Committee Interlocks and Insider Participation
The compensation of the Partnership’s CEO and CFO is determined by the Partnership’s executive committee, and the compensation of the Partnership’s other executives is determined by the Partnership’s CEO. The only individuals who served on the Partnership’s executive committee during the year ended December 31, 2007 were Frank R. Baldwin, Gene R. Carano, Gary N. Jacobs, Robert M. Jones and James J. Murren, each of whom is currently an executive committee member, and Robert H. Baldwin, who was an executive committee member until his resignation in November 2007. None of the individuals who served on the executive committee during 2007 is or has ever been an officer or employee of the Partnership or any subsidiary of the Partnership, including Capital.
During the year ended December 31, 2007, Gary L. Carano, the Partnership’s Chief Executive Officer, served on the Board of Managers of Eldorado Resorts LLC, and Gene R. Carano, Vice President and Secretary of Eldorado Resorts LLC, served on the Partnership’s executive committee.
Three-Property Payments. Registered hotel guests at Silver Legacy have the ability to charge to their hotel rooms the costs incurred at the restaurants and shops located within Circus Circus Hotel and Casino, Eldorado Hotel & Casino and Silver Legacy. In addition, registered hotel guests at the Circus Circus Hotel and Casino and the Eldorado Hotel & Casino may charge costs incurred at Silver Legacy 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 Silver Legacy remits to the other two properties, and the other two properties remit to Silver Legacy, the respective amounts collected for charges incurred at the other properties. 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, 2007, the respective amounts paid for such complimentary charges by Silver Legacy to the Circus and Eldorado properties and the respective amounts received by Silver Legacy from the Circus and Eldorado properties.
The Eldorado Hotel & Casino is owned by Eldorado Resorts LLC, which is 51.0% owned directly or indirectly by members of the Carano family, including Gary L. Carano, the Partnership’s Chief Executive Officer, Glenn T. Carano, Secretary of the Partnership, and Gene R. Carano, a member of the Partnership’s executive committee.
Gary N. Jacobs has, since June 2000, been an executive officer of MGM MIRAGE which acquired Mandalay Resort Group on April 25, 2005 and, as a result of such acquisition, now owns and operates the Circus Circus Hotel and Casino through a wholly owned subsidiary. James J. Murren has since 1999 been an executive officer of MGM MIRAGE. Gene R. Carano is currently assistant general manager of the Eldorado Hotel & Casino and was their general manager from 1996 through 2001. In addition, he has been a vice president and a member of the board of managers of the Eldorado Hotel & Casino since July 1996 and, since July 1996, he and Robert M. Jones have been executive officers of Eldorado Resorts LLC, which owns 96% of ELLC.
Eldorado Limited Liability Company and Galleon, Inc. Subject to any contractual restrictions to which the Partnership is subject, including the indenture relating to the 10 1/8% mortgage notes due 2012 co-issued by the Partnership and Capital (the “Notes”), and prior to the occurrence of a “Liquidating Event,” the Partnership is required by the Agreement of Joint Venture of Circus and Eldorado Joint Venture dated as of March 1, 1994 (the “Original Partnership Agreement, as the same was amended concurrent with the issuance of the Notes and subsequently amended in April 2002, the “Partnership Agreement”) to make distributions to its partners as follows:
(a) For each year, an amount equal to the estimated taxable income of the Partnership allocable to each partner multiplied by the greater of the maximum marginal federal income tax rate applicable to individuals for such period or the maximum marginal federal income tax rate applicable for 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” 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 Partnership Agreement, the term “Net Cash From Operations” means the gross cash proceeds received by the Partnership, less the following amounts: (i) cash operating expenses and payments of other expenses and obligations of the Partnership, including interest and scheduled principal payments on Partnership indebtedness, including indebtedness owed to the partners, if any, (ii) all capital expenditures made by the Partnership, and (iii) such reasonable reserves as the partners deem necessary in good faith and in the best interests of the Partnership to meet anticipated future obligations and liabilities of the Partnership (less any release of reserves previously established, as similarly determined). As defined in the Partnership Agreement, the term “Liquidating Event” means the first to occur of any of (i) January 1, 2053, (ii) the sale of all or substantially all of the Partnership property, (iii) the unanimous vote of the partners to dissolve, wind up, and liquidate the Partnership, (iv) the happening of any other event that makes it unlawful or impossible to carry on the business of the Partnership, (v) the occurrence of an Event of Bankruptcy (as defined the Partnership Agreement) of a partner, or (vi) the partners are unable to agree upon a replacement managing partner as provided in the Partnership Agreement.
The payments, representing tax distributions, made to the Partnership’s partners during the year ended December 31, 2007 were as follows:
A special distribution totaling $10.0 million, $5.0 million each to ELLC and Galleon, was approved by the Partnership’s executive committee and paid by the Partnership in March 2008.
ELLC is 96% owned by Eldorado Resorts LLC, which is 51.0% owned directly or indirectly by members of the Carano family, including Gary L. Carano, the Partnership’s Chief Executive Officer, Glenn T. Carano, Secretary of the Partnership and Gene R. Carano, a member of the Partnership’s executive committee.
Recreational Enterprises, Inc. From time to time, Silver Legacy has utilized a King Air aircraft owned by King Air Operations LLC, a wholly owned subsidiary of Recreational Enterprises, Inc. (“REI”), for the purpose of providing air service to select customers. During the year ended December 31, 2007, the Partnership paid $28,100 for such services. We believe the terms on which we have utilized this service are at least as favorable to us as those that would be available from an unrelated third party. Although there is no agreement obligating the Partnership to utilize the plane or entitling it to do so, it is anticipated that the Partnership will continue to utilize this service from time to time in the future on terms mutually acceptable to the parties. REI, which owns 47% of Eldorado Resorts LLC, is owned by various members of the Carano family, including Gary L. Carano, Silver Legacy’s General Manager, Glenn T. Carano, Silver Legacy’s Executive Director of Marketing, and Gene R. Carano, a member of the Partnership’s executive committee, each of whom owns an approximately 10.1% beneficial interest in REI, and Donald L. Carano, the father of Gary, Glenn and Gene Carano, who owns an approximately 49.5% interest in REI.
Sierra Adventure Equipment Leasing, Inc. From time to time, Silver Legacy’s marketing and sales departments have utilized a yacht owned by Sierra Adventure Equipment Leasing, Inc. (“Sierra Leasing”) for various promotional events. The payments made by the Partnership to Sierra Leasing for the use of the yacht during the year ended December 31, 2007 were based on a flat rate per trip of $3,000 ($2,000 if the trip was shared with our partner, ELLC) and totaled $61,000. Although there is no agreement obligating the Partnership to utilize the yacht or entitling it to do so, it is anticipated that the Partnership will continue to utilize this service from time to time in the future on terms mutually acceptable to the parties. Sierra Leasing is owned by Donald L. Carano, the father of Gary L. Carano, Silver Legacy’s General Manager, Glenn T. Carano, Silver Legacy’s Executive Director of Marketing, and Gene R. Carano, a member of the Partnership’s executive committee.
Eldorado Resorts LLC. Eldorado Resorts LLC owns the skywalk that connects Silver Legacy with the Eldorado Hotel & Casino. The charges from the service provider for the utilities associated with this skywalk are billed to the Partnership together with the charges for the utilities associated with Silver Legacy. Such charges are paid to the service provider by the Partnership, and the Partnership is reimbursed by Eldorado Resorts LLC for the portion of the charges allocable to the utilities provided to the skywalk. The charges for the utilities provided to the skywalk during the year ended December 31, 2007 totaled $77,200.
In October 2005, the Partnership began providing on-site laundry services for Eldorado Resorts LLC related to the cleaning of certain types of linens. Although there is no agreement obligating Eldorado Resorts LLC to utilize this service, it is anticipated that the Partnership will continue to provide these laundry services in the future. The Partnership charges Eldorado Resorts LLC for labor and laundry supplies on a per unit basis which totaled $53,100 during the year ended December 31, 2007. We believe the terms on which the Partnership 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 Partnership has purchased from Eldorado Resorts LLC homemade pasta and other products for use in the restaurants at Silver Legacy and it is anticipated that the Partnership will continue to make similar purchases in the future. For purchases of these products during the year ended December 31, 2007, which are billed to the Partnership at cost plus associated labor, the Partnership paid Eldorado Resorts LLC $42,800. ELLC, which owns 50% of the Partnership, is 96% owned by Eldorado Resorts LLC.
MGM MIRAGE. Silver Legacy utilizes 235 spaces in the parking garage at the Circus Circus Hotel and Casino to provide parking for employees of Silver Legacy. In consideration for its use of the spaces, the Partnership pays the Circus Circus Hotel and Casino rent in the amount of $5,000 per month. We believe the terms on which we have utilized this service are at least as favorable as those that would have been available from an unrelated third party. Although there is no agreement obligating the Partnership to continue utilizing the spaces or entitling it to do so, it is anticipated that the Partnership will continue this arrangement for the foreseeable future. The Circus Circus Hotel and Casino is owned by a wholly owned subsidiary of MGM MIRAGE.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Capital
All of the issued and outstanding capital stock of Capital is owned by the Partnership.
The Partnership
The Partnership is a joint venture in the form of a general partnership in which Galleon, Inc., a wholly owned subsidiary of MGM MIRAGE and the Partnership’s managing partner, and Eldorado Limited Liability Company, a 96% owned subsidiary of Eldorado Resorts LLC, each owns a 50% equity interest.
The following table sets forth certain information as of the date hereof with respect to the beneficial ownership of partnership interests in the Partnership by (i) each person known by the Partnership to be a beneficial owner of a greater than 5% interest in the Partnership, (ii) each partner in the Partnership, (iii) each member of the executive committee of the Partnership, (iv) each director of Capital, (v) each executive officer of the Partnership and Capital, (vi) each executive officer of Galleon, (vii) all executive committee members and executive officers of the Partnership, as a group, and (viii) all directors and executive officers of Capital, as a group. Except as otherwise indicated in the footnotes to the table below, Galleon, Inc. and Eldorado Limited Liability Company each has sole voting and dispositive power with respect to its interest in the Partnership.
(1) Galleon, Inc. is a wholly owned subsidiary of MGM MIRAGE. Under Rule 13d-3 of the Securities Exchange Act of 1934, MGM MIRAGE may be deemed to be an indirect beneficial owner of the interest in the Partnership owned by Galleon, Inc. by virtue of its ownership of Galleon, Inc. The address of Galleon, Inc. and MGM MIRAGE is 3600 Las Vegas Boulevard South, Las Vegas, Nevada 89109.
(2) Eldorado Limited Liability Company is a 96% owned subsidiary of Eldorado Resorts LLC. Under Rule 13d-3 of the Securities Exchange Act of 1934, Eldorado Resorts LLC may be deemed to be an indirect beneficial owner of the interest in the Partnership owned by Eldorado Limited Liability Company by virtue of its direct and/or indirect controlling interest in Eldorado Limited Liability Company. The address of Eldorado Limited Liability Company and Eldorado Resorts LLC is P.O. Box 3399, Reno, Nevada 89505.
Transfer of Partnership Interests
Except as expressly permitted by the Partnership Agreement, neither partner may transfer all or any portion of its interest in the Partnership or any rights therein without the unanimous consent of both partners. The Partnership Agreement provides that a partner may transfer or convey all or any portion of its interest in the Partnership 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, Donald L. Carano or a member of his immediate family acceptable to Galleon, which acceptance may not be unreasonably withheld, or an affiliate controlled by Donald L. 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 Partnership). 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 Partnership) is required to be controlled by Mandalay Resort Group, a wholly owned subsidiary of MGM MIRAGE. 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.
Incorporated herein by reference is the information concerning our partners’ pledges of their interests in the Partnership to secure the repayment of the indebtedness incurred pursuant to the Credit Facility and the Notes included under the captions “The Notes” and “Senior Secured Credit Facility” in the Liquidity and Capital Resources section of our Management’s Discussion and Analysis of our Financial Condition and Results of Operations in Item 7 of this report.
Limitation on Partners’ Actions
The Partnership 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 Partnership 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 Partnership, (v) exercise any power under the Nevada Uniform Partnership Act to dissolve the Partnership, (vi) transfer all or any portion of its interest in the Partnership (other than as permitted hereunder), (vii) petition for judicial dissolution of the Partnership, 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 Partnership Agreement also provides that if a partner attempts to (A) cause a partition or (B) withdraw from the Partnership or dissolve the Partnership, or otherwise take any action in breach of its aforementioned agreements, the Partnership 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 Partnership, (3) the breaching partner shall be liable in damages, without requirement of a prior accounting, to the Partnership for all costs and liabilities that the Partnership 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 Partnership for any obligations of the Partnership pursuant to the Partnership Agreement, and to be jointly and severally liable with the other partners for any debts and liabilities (whether actual or contingent, known or unknown) of the Partnership 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 Partnership 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 Partnership 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 Partnership 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 Partnership 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 Partnership is a party, the partner purchasing the Partnership interest (the “Purchasing Partner”) shall be entitled to encumber the Partnership 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 Partnership 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 Partnership Agreement provides that the Partnership 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 Partnership property, (iii) the unanimous vote of the partners to dissolve, wind up, and liquidate the Partnership, (iv) the happening of any other event that makes it unlawful or impossible to carry on the business of the Partnership, (v) the occurrence of an Event of Bankruptcy (as defined the Partnership Agreement) of a partner, or (vi) the partners are unable to agree upon a replacement managing partner as provided in the Partnership Agreement (each, a “Liquidating Event”).
The Partnership Agreement also includes the partners’ agreement that the Partnership shall not dissolve prior to the occurrence of a Liquidating Event, notwithstanding any provision of the Nevada Uniform Partnership Act to the contrary. If it is determined by a court of competent jurisdiction that the Partnership has dissolved prior to the occurrence of a Liquidating Event, the partners have agreed to continue the business of the Partnership without a winding up or liquidation.
Upon the occurrence of a Liquidating Event, the Partnership 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 Partnership, taking full account of the Partnership’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 therefore, to be applied and distributed (i) first, to the payment and discharge of all of the Partnership’s debts and liabilities to creditors other than partners, (ii) second, to the payment and discharge of all of the Partnership’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.
Equity Compensation Plans
The following tables set forth certain information relating to equity compensation plans as of December 31, 2007 for the Partnership and Capital, respectively.
Equity Compensation Plan Information-The Partnership
Equity Compensation Plan Information-Capital
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
For information concerning certain transactions, including transactions with entities of which a member of the Partnership’s executive committee is an executive officer or owns a beneficial interest in excess of 10%, see the discussion under the heading “Compensation Committee Interlocks and Insider Participation” in Item 11 of this annual report, which is incorporated herein by reference.
None of the members of the Partnership’s executive committee or its audit committee is independent as that term is defined under the current rules of the NYSE. None of the Partnership’s and Capital’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 Partnership or Capital in the future.
The Partnership has written policies and procedures related to the identification, review and approval of related party transactions. Related party transactions typically involve various transactions with our affiliates, or subsidiaries of our affiliates, which generally provide the Partnership with an opportunity to obtain favorable terms and/or premium products. However, pursuant to the Partnerships’s policies and procedures, all related party transactions are reviewed by the executive committee to ensure that the terms are at least comparable with those obtainable from an unaffiliated third party. Since the beginning of the Partnership’s last fiscal year, there has not been any transaction required to be reported pursuant to Item 404(a) of Securities and Exchange Commission Regulation S-K that was not subject to the prior review and approval of the executive committee, or not so reviewed and approved, pursuant to the Partnership’s policies and procedures.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table summarizes amounts billed by our auditors, Deloitte & Touche LLP, for accounting fees and services for the years ended December 31, 2007 and 2006.
Audit fees include the aggregate fees billed for professional services rendered for the audit of our annual financial statements and the review of financial statements included in our quarterly reports on Form 10-Q.
We have an established policy which requires the prior approval by our audit committee of any services provided by our auditors, Deloitte & Touche LLP. All of the services provided by Deloitte & Touche LLP for 2007 and 2006 were approved by our audit committee in accordance with our prior approval policy.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Consolidated Financial Statements:
Incorporated by reference in Item 8 of this annual report and included on pages 52 through 67 hereof are the following consolidated financial statements of Circus and Eldorado Joint Venture and Silver Legacy Capital Corp. and the report thereon of independent registered public accounting firm:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2007 and 2006
Consolidated Statements of Income for the Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements of Partners’ Equity for the Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005
Notes to Consolidated Financial Statements
(a)(2) Supplemental Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
We have omitted schedules other than the one listed above because they are not required or are not applicable, or the required information is shown in the financial statements or notes to the financial statements.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
(a)(3) The following exhibits are filed as part of this annual report or incorporated herein by reference:
* Constitutes a management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their 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 registrants and in the capacities and on the dates indicated.
Signature
Title(s)
Date
/S/ Gary L. Carano
Gary L. Carano
Chief Executive Officer of Circus and Eldorado Joint Venture and President and Chief Executive Officer of Silver Legacy Capital Corp. (Principal Executive Officer of each Registrant)
March 28, 2008
/S/ Stephanie D. Lepori
Stephanie D. Lepori
Controller and Chief Accounting and Financial Officer of Circus and Eldorado Joint Venture and Treasurer and Chief Accounting and Financial Officer of Silver Legacy Capital Corp. (Principal Accounting Officer and Principal Financial Officer of each Registrant)
March 28, 2008
/S/ Frank R. Baldwin
Frank R. Baldwin
Member of the Executive Committee of Circus and Eldorado Joint Venture and Director of Silver Legacy Capital Corp.
March 28, 2008
/S/ Gene R. Carano
Gene R. Carano
Member of the Executive Committee of Circus and Eldorado Joint Venture and Director of Silver Legacy Capital Corp.
March 28, 2008
/S/ Gary N. Jacobs
Gary N. Jacobs
Member of the Executive Committee of Circus and Eldorado Joint Venture and Director of Silver Legacy Capital Corp.
March 28, 2008
/S/ Robert M. Jones
Robert M. Jones
Member of the Executive Committee of Circus and Eldorado Joint Venture and Director of Silver Legacy Capital Corp.
March 28, 2008
/S/ James J. Murren
James J. Murren
Member of the Executive Committee of Circus and Eldorado Joint Venture and Director of Silver Legacy Capital Corp.
March 28, 2008
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THIS ACT.
Other than copies of its annual reports filed with the Securities and Exchange Commission on Form 10-K, the Partnership and Capital do not provide annual reports to their security holders, and no proxy soliciting material has been sent, or is currently anticipated to be sent, to securities holders.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2007 and 2006
Consolidated Statements of Income for the years ended December 31, 2007, 2006 and 2005
Consolidated Statements of Partners’ Equity for the years ended December 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of
Circus and Eldorado Joint Venture
(doing business as Silver Legacy Resort Casino):
We have audited the accompanying consolidated balance sheets of Circus and Eldorado Joint Venture (doing business as Silver Legacy Resort Casino) and subsidiary (collectively, the “Joint Venture”) as of December 31, 2007 and 2006, and the related consolidated statements of income, partners’ equity and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the consolidated financial statement schedule included in Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Joint Venture’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Joint Venture 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 Joint Venture’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 audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Circus and Eldorado Joint Venture (doing business as Silver Legacy Resort Casino) and subsidiary as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 9 to the consolidated financial statements, on December 31, 2007, the Joint Venture adopted the provisions of Statement of Financial Accounting Standard No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.
/s/ DELOITTE & TOUCHE LLP
Las Vegas, Nevada
March 31, 2008
CIRCUS AND ELDORADO JOINT VENTURE
(doing business as Silver Legacy Resort Casino)
CONSOLIDATED BALANCE SHEETS
As of December 31, 2007 and 2006
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
CIRCUS AND ELDORADO JOINT VENTURE
(doing business as Silver Legacy Resort Casino)
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2007, 2006 and 2005
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
CIRCUS AND ELDORADO JOINT VENTURE
(doing business as Silver Legacy Resort Casino)
CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY
For the Years Ended December 31, 2007, 2006 and 2005
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
CIRCUS AND ELDORADO JOINT VENTURE
(doing business as Silver Legacy Resort Casino)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2007, 2006 and 2005
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
CIRCUS AND ELDORADO JOINT VENTURE
(doing business as Silver Legacy Resort Casino)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies and Basis of Presentation
Principles of Consolidation/Operations
Effective March 1, 1994, Eldorado Limited Liability Company (a Nevada limited liability company owned and controlled by Eldorado Resorts, LLC) (“ELLC”) and Galleon, Inc. (a Nevada corporation owned and controlled by MGM MIRAGE and previously owned and controlled by Mandalay Resort Group (“Mandalay”) (“Galleon” and, collectively with ELLC, the “Partners”), entered into a joint venture agreement to establish Circus and Eldorado Joint Venture (the “Partnership”), a Nevada general partnership. The Partnership owns and operates a casino and hotel located in Reno, Nevada (“Silver Legacy”), which began operations on July 28, 1995. ELLC contributed land to the Partnership with a fair value of $25,000,000 and cash of $26,900,000 for a total equity investment of $51,900,000. Galleon contributed cash to the Partnership of $51,900,000 to comprise their total equity investment. Each partner has a 50% interest in the Partnership.
On April 25, 2005, a wholly owned subsidiary of MGM MIRAGE was merged with and into Mandalay as a result of which Mandalay became a wholly owned subsidiary of MGM MIRAGE. With the consummation of the merger, MGM MIRAGE acquired Mandalay’s ownership of Galleon, Inc.
The consolidated financial statements include the accounts of the Partnership and its wholly owned subsidiary, Silver Legacy Capital Corp. (“Capital”). Capital was established solely for the purpose of serving as a co-issuer of $160,000,000 principal amount of 10 1/8% mortgage notes due 2012 issued by the Partnership and Capital and, as such, Capital does not have any operations, assets, or revenues. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. Those principles require the Partnership’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Outstanding Chips and Tokens
The Partnership recognizes the impact on gaming revenues on an annual basis to reflect an estimate of the change in the value of outstanding chips and tokens that are not expected to be redeemed. This estimate is determined by measuring the difference between the total value of chips and tokens placed in service less the value of chips and tokens in the inventory of chips and tokens under our control. This measurement is performed on an annual basis utilizing methodology in which a consistent formula is applied to estimate the percentage value of chips and tokens not in custody that are not expected to be redeemed. In addition to the formula, certain judgments are made with regard to various denominations and souvenir chips and tokens.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, as well as investments purchased with maturities of three months or less at the date of acquisition.
Accounts Receivable and Credit Risk
Financial instruments that potentially subject the Partnership to concentrations of credit risk consist principally of casino accounts receivable. The Partnership issues markers to approved casino customers following background checks and investigations of creditworthiness. Trade receivables, including casino and hotel receivables, are typically non-interest bearing and are initially recorded at cost. Accounts are written off when management deems the account to be uncollectible. Recoveries of accounts previously written off are recorded when received. An estimated allowance for doubtful accounts is maintained to reduce the Partnership’s receivables to their carrying amount, which approximates fair value. The allowance is estimated based on specific review of customer accounts as well as historical collection experience and current economic and business conditions. Management believes that as of December 31, 2007, no significant concentrations of credit risk existed for which an allowance had not already been recorded.
Inventories
Inventories consist of food and beverage, retail merchandise and operating supplies, and are stated at the lower of cost or market. Cost is determined primarily by the average cost method for food and beverage and supplies and the retail inventory or specific identification methods for retail merchandise.
Property and Equipment
Property and equipment and other long-lived assets are stated at cost. Depreciation is computed using the straight-line method over the estimated useful life of the asset as follows:
Estimated Service Life
(Years)
Building and other improvements
15-45
Furniture, fixtures, and equipment
3-15
Costs of major improvements are capitalized, while costs of normal repairs and maintenance are expensed as incurred. Gains or losses on dispositions of property and equipment are included in the determination of operating income.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” an estimate of undiscounted future cash flows produced by the asset is compared to the carrying value to determine whether an impairment exists. If it is determined that the asset is impaired based on expected future cash flows, a loss, measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset, would be recognized. As of December 31, 2007, no events or changes in circumstances indicated that the carrying values of our long-lived assets may not be recoverable.
Capitalization of Interest
The Partnership’s policy is to capitalize interest on funds disbursed during the active construction and development phases of its facilities and other major projects. When no debt is specifically identified as being incurred in connection with such construction projects, the Partnership capitalizes interest on amounts expended on the project at our weighted average cost of borrowings. The Partnership capitalized interest related to its room renovation project totaling $126,000 for the year ended December 31, 2005. There was no interest capitalized in 2007 or 2006.
Revenue Recognition and Promotional Allowances
In accordance with industry practice, the Partnership recognizes as casino revenue the net win from gaming activities, which is the difference between gaming wins and losses. Hotel, food and beverage, and other operating revenues are recognized as services are performed. Advance deposits on rooms and advance ticket sales are recorded as accrued liabilities until services are provided to the customer. Gaming revenues are recognized net of certain cash sales incentives. The retail value of food, beverage, rooms and other services furnished to customers on a complimentary basis is included in gross revenues and then deducted as promotional allowances. The retail value of complimentaries included in promotional allowances is as follows (in thousands):
The estimated costs of providing such promotional allowances are included in casino expenses and consist of the following (in thousands):
Advertising
Advertising costs are expensed in the period the advertising initially takes place. Advertising costs included in selling, general and administrative expenses were $6,977,000, $6,187,000 and $6,054,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
Federal Income Taxes
The Partnership is not subject to income taxes; therefore, no provision for income taxes has been made, as the Partners include their respective share of the Partnership income in their income tax returns. The Partnership Agreement provides for the Partnership to make distributions to the Partners in an amount equal to the maximum marginal federal income tax rate applicable to any Partner multiplied by the income of the Partnership for the applicable period (see Note 11).
The reported amounts of the Partnership’s assets and liabilities exceeded the net tax basis by $40,786,500 and $39,764,900, at December 31, 2007 and 2006, respectively.
Fair Value of Financial Instruments
Except for the Partnership’s 10 1/8% mortgage notes, management is of the opinion that the fair value of all of its financial instruments are not materially different from their carrying values. The approximate fair value of the Partnership’s 10 1/8% mortgage notes, based on quoted market prices, was approximately $165,600,000 at December 31, 2007. The carrying value of the Partnership’s 10 1/8% mortgage notes at December 31, 2007 was $160,000,000.
Other Comprehensive Income
Other comprehensive income consists of revenues, expenses, gains and losses which do not affect net income under accounting principles generally accepted in the United States of America. Other comprehensive income for the years ended December 31, 2007 and 2006 includes an adjustment to the minimum pension liability and was computed as follows (in thousands):
The reconciliation of accumulated other comprehensive loss as of December 31, 2007 and 2006 are as follows (in thousands):
Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board (the “FASB”) issued Statement No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of Statements No. 87, 88, 106, and 132(R) (“SFAS 158”). SFAS 158 required the full recognition, as an asset or liability, of the overfunded or underfunded status of a company-sponsored postretirement benefit plan. Adoption of FASB 158 was required effective for the Partnership’s fiscal year ending December 31, 2007. See Note 9 for additional information disclosed in accordance with SFAS 158 as it relates to the Partnership’s Supplemental Executive Retirement Plan and the incremental impact on the Partnership’s Consolidated Financial Statements.
In December 2007, the FASB also issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements-An Amendment of Accounting Research Bulletin No. 51,” the provisions of which are effective for periods beginning after December 15, 2008. This statement requires an entity to classify noncontrolling interests in subsidiaries as a separate component of equity. Additionally, transactions between an entity and noncontrolling interests are required to be treated as equity transactions. We are currently evaluating the impact, if any, the adoption of this statement will have on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits the measure of certain financial instruments and certain other items at fair value and establishes presentation and disclosure requirements to help financial statement users to understand these measurements and their impact on earnings. This statement is effective for the Partnership beginning January 1, 2008. We are currently evaluating the impact, if any, the adoption of this statement will have on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. In February 2008, the FASB deferred the adoption of SFAS 157 for one year as it applies to certain items, including assets and liabilities initially measured at fair value in a business combination, reporting units and certain assets and liabilities measured at fair value in connection with goodwill impairment tests in accordance with SFAS 142 and long-lived assets measured at fair value for impairment assessments under SFAS 144, “Accounting for the Impairment and Disposal of Long-Lived Assets.” This statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact, if any, the adoption of this statement will have on our consolidated financial statements.
Reclassifications
The consolidated financial statements for prior years reflect certain reclassifications, which have no effect on previously reported net income, to conform to the current year presentation.
Note 2. Accounts Receivable
Accounts receivable, net at December 31, 2007 and 2006 consisted of the following (in thousands):
The provision for bad debt expense for the years ended December 31, 2007, 2006 and 2005, was $567,000, $371,000 and $452,000 respectively.
Note 3. Property and Equipment
Property and equipment at December 31, 2007 and 2006 consisted of the following (in thousands):
Substantially all property and equipment of the Partnership collateralize its long-term debt (see Note 6).
Note 4. Other Assets
Other assets, net at December 31, 2007 and 2006 consisted of the following (in thousands):
The initial inventory of china, glassware and silverware has been amortized to 50% of cost with the balance kept as base stock. Additional purchases of china, glassware and silverware are placed into inventory and expensed as used.
The Partnership incurred costs in connection with its issuance of mortgage notes and in connection with its bank credit facility (see Note 6). Debt issuance costs are capitalized when incurred and amortized to interest expense based on the related debt maturities using the straight-line method, which approximates the effective interest method. At December 31, 2007, the unamortized balance related to the Partnership’s bank credit facility was $3,200 and is amortized over the remaining term of the facility through March 31, 2008. Included in other assets at December 31, 2007 was $2,520,100 in costs related to the completed offering of mortgage notes. The amortization of debt issuance costs included in interest expense was $685,800 for the year ended December 31, 2007 and $722,000 for the years ended December 31, 2006 and 2005.
The Partnership accounts for its Supplemental Executive Retirement Plan (“SERP”) according to SFAS No. 158, “Employers’ Accounting for Pensions” (“SFAS 158”), which was adopted in 2007, and SFAS No. 132R, “Employers’ Disclosures about Pension and Other Postretirement Benefits” (see Note 9). Prior to 2007, the Partnership accounted for its SERP according to SFAS No. 87. Since the accumulated benefit obligation, which is the present value of benefits to be paid based on services provided and existing compensation levels, exceeded the fair value of plan assets, SFAS 87 required the recognition of a liability (including unfunded accrued pension cost) that was at least equal to the unfunded accumulated benefit obligation. An intangible asset of $905,000 at December 31, 2006 was established for the difference between such liability and the unfunded accrued pension cost.
Note 5. Accrued and Other Liabilities
Accrued and other liabilities at December 31, 2007 and 2006 consisted of the following (in thousands):
Note 6. Long-Term Debt
Long-term debt at December 31, 2007 and 2006 consisted of the following (in thousands):
Scheduled maturities of long-term debt are as follows at December 31, 2007 (in thousands):
On March 5, 2002, the Partnership and Capital (collectively, the “Issuers”) co-issued $160,000,000 principal amount of senior secured mortgage notes due 2012 (“Notes”). Concurrent with issuing the Notes, the Partnership entered into a new senior secured credit facility (the “Credit Facility”) for $40,000,000. The proceeds from the Notes, together with $26,000,000 in borrowings under the Credit Facility, were used to repay $150,200,000 representing all of the indebtedness outstanding under a prior bank credit facility and to fund $30,000,000 of distributions to the Partners. In addition, the remaining proceeds along with operating cash flows were used to pay $6,300,000 in related fees and expenses of the transactions. These fees were capitalized and are included in other assets (see Note 4).
The Notes are senior secured obligations which rank equally with all of the Partnership’s outstanding senior debt and senior to any subordinated debt. The Notes are secured by a security interest in the Issuers’ existing and future assets, which is junior to a security interest in such assets securing the Partnership’s obligations on the Credit Facility and any refinancings of such facility that are permitted pursuant to the terms of the Notes. Each of the Partners executed a pledge of all of its partnership interests in the Partnership to secure the Notes, which is junior to a pledge of such partnership interests to secure the Partnership’s obligations on the Credit Facility and any refinancings of such facility that are permitted pursuant to the terms of the Notes. The Notes mature on March 1, 2012 and bear interest at the rate of 10 1/8% per annum, payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2002.
The Credit Facility originally provided for a $20,000,000 senior secured revolving credit facility and a $20,000,000 five-year term loan facility, each of which provided for the payment of interest at floating rates based on LIBOR plus a spread. The commitment under the term loan facility originally provided for periodic reductions with the remaining balance due March 31, 2007.
The Notes and Credit Facility contain various restrictive covenants including the maintenance of certain financial ratios and limitations on additional debt, disposition of property, mergers and similar transactions. On November 4, 2003, the Partnership, U.S. Bank, N.A. and Bank of America, N.A., executed an amendment to the Credit Facility which reduced the revolving facility to $10,000,000 and revised certain covenant ratios with retroactive effect to September 30, 2003. On June 15, 2005, the parties executed a further amendment to the Credit Facility to provide a conditional waiver of the facility’s financial covenants in respect of the quarter ended June 30, 2005, and each subsequent quarter through and including December 31, 2005, provided that no additional credit is extended under the Credit Facility during the quarter for which the waiver is relied upon. In addition, as a condition precedent to any draw on the Credit Facility subsequent to June 15, 2005, the Partnership must be in compliance with the Credit Facility’s financial covenants as to the then most recent fiscal quarter in respect of which the Partnership is required to deliver financial statements pursuant to section 6.1 of the Credit Facility.
On March 2, 2006, the Partnership executed a further amendment to the Credit Facility which extended the previously granted waiver for any defaults under the Credit Facility’s financial covenants to cover the fiscal quarter ended March 31, 2006, and each subsequent fiscal quarter through and including December 31, 2006, provided that no additional credit is extended under the Credit Facility during such quarters. The March 2, 2006 amendment also waived for 2005 the covenant in Section 7.8 of the Credit Facility which then limited capital expenditures to $10,000,000 within a calendar year, which the Partnership exceeded for the year ended December 31, 2005. In addition, the amendment raised the capital expenditure limit to $12,500,000 for future calendar years.
On March 28, 2007, an additional amendment was executed to extend the Credit Facility’s original maturity date of March 31, 2007 for an additional year to March 31, 2008. This amendment also reduced the minimum ratio of EBITDA to fixed charges to 1.10 to 1.00 and raised the capital expenditure limit to an aggregate of $15,000,000, in any twelve-month period. Furthermore, this amendment revised in its entirety Section 7.16 of the Credit Facility to allow for prepayments of the Notes provided certain conditions precedent are satisfied. Fees totaling $13,000, which were capitalized and are included in other assets, were paid in relation to the transaction. There was no debt outstanding under the Credit Facility at December 31, 2007. As of such date, the Partnership was in compliance with all of the covenants in the Credit Facility and had the ability to borrow on a revolving basis all of the $10,000,000 available under the Credit Facility. As of December 31, 2007, the Partnership also was in compliance with the covenants in the indenture relating to the Notes.
On March 28, 2008, the Partnership and Bank of America, N.A. executed an additional amendment to extend the Credit Facility’s maturity for an additional year to March 30, 2009 and reduce the revolving facility to $1,000,000.
Note 7. Other Long-term Liabilities
Other long-term liabilities at December 31, 2007 and 2006 consisted of the following (in thousands):
Note 8. Related Parties
An affiliate of each of our Partners owns and operates a casino attached and adjacent to Silver Legacy. Our Partners may be deemed to be in a conflict of interest position with respect to decisions they make relating to the Partnership as a result of the interests their affiliates have in the Eldorado Hotel & Casino and Circus Circus Hotel & Casino-Reno, respectively.
We believe that all of the transactions mentioned below are on terms at least as favorable to us as would have been obtained from an unrelated party.
Silver Legacy has utilized a King Air aircraft owned by King Air Operations LLC, a wholly owned subsidiary of Recreational Enterprises, Inc. (“REI”), for the purpose of providing air service to select customers. During the years ended December 31, 2007, 2006 and 2005, the Partnership paid $28,100, $38,600 and $22,500, respectively, for such services. Although there is no agreement obligating the Partnership to utilize the plane or entitling it to do so, it is anticipated that the Partnership will continue to utilize this service from time to time in the future on terms mutually acceptable to the parties. REI, which owns 55% of ELLC, is owned by various members of the Carano family, including Gary L. Carano, Silver Legacy’s General Manager, Glenn T. Carano, Silver Legacy’s Executive Director of Marketing, and Gene R. Carano, a member of the Partnership’s Executive Committee, each of whom owns an approximately 10.1% beneficial interest in REI, and Donald L. Carano, the father of Gary, Glenn and Gene Carano, who owns an approximately 49.5% interest in REI.
Silver Legacy’s marketing and sales departments have utilized a yacht owned by Sierra Adventure Equipment Leasing, Inc. (“Sierra Leasing”) at a flat rate per trip of $3,000 during 2007 and 2006 and $2,500 in 2005 ($2,000 in 2007 and 2006 and $1,250 in 2005 if the trip was shared with our Partner, ELLC) for various promotional events. The payments made by the Partnership to Sierra Leasing for the use of the yacht totaled $61,000, $13,300 and $15,000 during 2007, 2006 and 2005, respectively. Although there is no agreement obligating the Partnership to utilize the yacht or entitling it to do so, it is anticipated that the Partnership will continue to utilize this service from time to time in the future on terms mutually acceptable to the parties. Sierra Leasing is owned by Donald L. Carano, the father of Gary L. Carano, Silver Legacy’s General Manager, Glenn T. Carano, Silver Legacy’s Executive Director of Marketing, and Gene R. Carano, a member of the Partnership’s executive committee.
Eldorado Resorts LLC owns the skywalk that connects Silver Legacy with the Eldorado Hotel & Casino. The charges from the service provider for the utilities associated with this skywalk are billed to the Partnership together with the charges for the utilities associated with Silver Legacy. Such charges are paid to the service provider by the Partnership, and the Partnership is reimbursed by Eldorado Resorts LLC for the portion of the charges allocable to the utilities provided to the skywalk. The charges for the utilities provided to the skywalk during the years ended December 31, 2007, 2006, and 2005 were $77,200, $88,500 and $80,400, respectively.
Since 1998, the Partnership has purchased from Eldorado Resorts LLC homemade pasta and other products for use in the restaurants at Silver Legacy and it is anticipated that the Partnership will continue to make similar purchases in the future. For purchases of these products during the years ended December 31, 2007, 2006 and 2005, which are billed to the Partnership at cost plus associated labor, the Partnership paid Eldorado Resorts LLC $42,800, $48,100 and $56,700, respectively.
Beginning in October 2005, the Partnership began providing on-site laundry services for Eldorado Resorts LLC related to the cleaning of certain types of linens. Although there is no agreement obligating Eldorado Resorts LLC to utilize this service, it is anticipated that the Partnership will continue to provide these laundry services in the future. The Partnership charges Eldorado Resorts LLC for labor and laundry supplies on a per unit basis which totaled $53,100, $51,000 and $6,000 during the years ended December 31, 2007, 2006 and 2005, respectively. We believe the terms of which the Partnership 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.
In April 2001, the Partnership began utilizing 235 spaces in the parking garage at Circus Circus Hotel and Casino-Reno. The spaces are utilized to provide parking for employees of Silver Legacy. In consideration for its use of the spaces, the Partnership pays Circus Circus Hotel and Casino-Reno rent in the amount of $5,000 per month. Although there is no agreement obligating the Partnership to continue utilizing the spaces or entitling it to do so, it is anticipated that the Partnership will continue this agreement for the foreseeable future.
Note 9. Employee Retirement Plans
The Partnership instituted a defined contribution 401(k) plan in September 1995 which covers all employees who meet certain age and length of service requirements and allows an employer contribution up to 25 percent of the first six percent of each participating employee’s compensation. Plan participants can elect to defer before tax compensation through payroll deductions. Those deferrals are regulated under Section 401(k) of the Internal Revenue Code. The Partnership’s matching contributions were $281,700, $251,300 and $239,000, respectively, for the years ended December 31, 2007, 2006 and 2005.
Effective January 1, 2002, the Partnership adopted a Supplemental Executive Retirement Plan (“SERP”) for a select group of highly compensated management employees. The SERP provides for a lifetime benefit at age 65, based on a formula which takes into account a participant’s highest annual compensation, years of service, and executive level. The SERP also provides an early retirement benefit at age 55 with at least four years of service, a disability provision, and a lump sum death benefit. The obligation is being funded through life insurance contracts on the participants and related cash surrender value. The Partnership’s periodic pension costs were $1,059,000, $868,000 and $926,000, respectively, for the years ended December 31, 2007, 2006 and 2005.
The following information summarizes activity in the SERP for the years ended December 31, 2007 and 2006 (in thousands):
The components of net periodic pension cost were as follows for the years ended December 31, 2007, 2006 and 2005 (in thousands):
The application of SFAS 158 had the following effect on the individual items in the Consolidated Balance Sheets at December 31, 2007. There was no effect on the Consolidated Statement of Income for year ended December 31, 2007.
The following benefit payments, which reflect expected future service as appropriate, are expected to be paid over the next ten years:
(1) While the SERP is an unfunded plan, the Partnership is informally funding the plan through life insurance contracts on the participants. The life insurance contracts had cash surrender values totaling $5,736,300 and $4,588,100 at December 31, 2007 and 2006, respectively. The life insurance contracts had a face value of $10,950,000 at December 31, 2007 and 2006.
Note 10. Commitments and Contingencies
Letters of Credit
The Credit Facility does not allow for the issuance of letters of credit beyond the revolving portion of the Credit Facility of which none was outstanding as of December 31, 2007.
Operating Leases
The Partnership leases land and equipment under operating leases. Future minimum payments under noncancellable operating leases with initial terms of one year or more consisted of the following at December 31, 2007 (in thousands):
Total rental expense under operating leases was $444,800, $206,000 and $148,000 for the years ended December 31, 2007, 2006 and 2005, respectively, which include rental payments associated with cancellable operating leases with terms less than one year.
Litigation
The Partnership is party to various litigation arising in the normal course of business. Management is of the opinion that the ultimate resolution of these matters will not have a material effect on the financial position or the results of operations of the Partnership.
Note 11. Partnership Agreement
Under the Partnership’s original partnership agreement, as long as ELLC had the right to select the General Manager of the Silver Legacy, Galleon was entitled annually on a non-cumulative basis, commencing with the eight-month period ending December 31, 1997 and for each subsequent 12-month period, to a priority allocation of the Partnership’s operating income (the “Priority Allocation”) in an amount equal to approximately 11.54% of the average of the “Adjusted Initial Investment” (as defined) for the period. If, after deducting equal shares of interest expense, a Partner’s share of the priority allocation is less than zero, additional operating income is allocated to that Partner to bring their allocation to zero. For purposes of determining the amount of the Priority Allocation for any period, the term “Adjusted Initial Investment” means $290,000,000 (the “Initial Investment”) as adjusted at the end of the year by subtracting (i) the depreciation on the Initial Investment taken in such year in accordance with the depreciation schedule agreed to by the Partners and (ii) the principal payments which would have been made in repayment of the original bank financing utilized for the development, construction and completion of the Silver Legacy.
As a result of the Priority Allocation, each of the Partners received 50% of the operating income through April 30, 1997 and Galleon received 100% of operating income for the remaining eight months ending December 31, 1997 and for the twelve months ending December 31, 1998. The total allocations to the two Partners for the years ended December 31, 2001 and 2000, were $10,560,000 and $11,935,000 to ELLC and $10,560,000 and $9,835,000 to Galleon, respectively. The allocation to ELLC for the year ended December 31, 2000 included $1,050,000 to adjust for an excess allocation in the same amount to Galleon for the year ended December 31, 1999.
Concurrent with the issuance of the Notes on March 5, 2002, the Partnership’s original partnership agreement was amended and restated in its entirety and was further amended in April 2002 (the “New Partnership Agreement”). The New Partnership Agreement provides for, among other items, profits and losses to be allocated to the Partners in proportion to their percentage interests, separate capital accounts to be maintained for each Partner, provisions for management of the Partnership and payment of distributions and bankruptcy and/or dissolution of the Partnership. The April 2002 amendments were principally (i) to provide equal voting rights for ELLC and Galleon with respect to approval of the partnership’s annual business plan and the appointment and compensation of the general manager, and (ii) to give each Partner the right to terminate the general manager. In conjunction with issuance of the Notes, a $2,100,000 distribution was paid to Galleon representing the remaining Priority Allocation payment to MRG pursuant to the Partnership’s original partnership agreement and a special distribution was paid to ELLC and Galleon of $10,000,000 and $20,000,000, respectively.
Total distributions for the year ended December 31, 2007 totaled $4,526,000 and included a distribution of $2,263,000 each to ELLC and Galleon representing fiscal 2007 tax distributions. Total distributions for the year ended December 31, 2006 totaled $3,232,000 and included a distribution of $1,616,000 each to ELLC and Galleon representing fiscal 2006 tax distributions. Total distributions for the year ended December 31, 2005 totaled $1,538,000 and included a distribution of $769,000 each to ELLC and Galleon representing fiscal 2005 tax distributions.
A special distribution totaling $10,000,000, which included a distribution of $5,000,000 each to ELLC and Galleon, was approved by the Partnership’s executive committee and paid by the Partnership in March 2008.