Attached files
Exhibit 99.1
GOVERNMENT REGULATION AND GAMING ISSUES
The ownership and operation of gaming companies are subject to extensive regulation. In
particular, Indiana, Louisiana, Missouri, Nevada, New Jersey, and the Province of Neuquen in
Argentina have laws, statutes, ordinances and/or regulations (collectively, Gaming Laws)
affecting the operation of our gaming business and the ownership and disposition of our securities.
We summarize these Gaming Laws below.
Our certificate of incorporation requires that any person (as defined in our certificate of
incorporation) who owns or controls our securities must comply with Gaming Laws governing such
persons suitability as an investor. These provisions apply to all the securities offered by us.
Any purchaser or holder of securities that we have offered shall be deemed to have agreed to such
provisions. If a person owns or controls our securities or the securities of our affiliated
companies and is determined by a gaming authority to be unsuitable to own or control such
securities or in the sole discretion of our board of directors is deemed likely to jeopardize our
right to conduct gaming activities in any of the jurisdictions in which we conduct or intend to
conduct gaming activities, we may redeem, and if required by a gaming authority shall redeem, such
persons securities to the extent required by the gaming authority or deemed necessary or advisable
by us.
If a gaming authority requires us, or if we deem it necessary or advisable, to redeem a
holders securities, we will serve notice on the holder who holds the securities subject to
redemption and will call for the redemption of the securities of such holder at a redemption price
equal to that required to be paid by the gaming authority making the finding of unsuitability, or
if such gaming authority does not require a certain price per share to be paid, a sum deemed
reasonable by us.
Indiana. The ownership and operation of riverboat casinos at Indiana-based sites are subject
to extensive state regulation under the Indiana Riverboat Gambling Act (the Indiana Act), as well
as regulations which the Indiana Gaming Commission (the Indiana Commission) has adopted
pertaining to the Indiana Act. The Indiana Act grants broad and pervasive regulatory powers and
authorities to the Indiana Commission. The comprehensive regulations cover ownership, reporting,
rules of game and operational matters; thus, the Indiana Act and regulations are significant to
prospects for successfully operating the Belterra facility. The Indiana Act has been challenged
based on its constitutionality on two occasions and was found constitutional on both occasions.
The Indiana Act authorizes the issuance of up to ten riverboat owners licenses to be operated
from counties that are contiguous to the Ohio River and Lake Michigan. In October 2000, Belterra,
the tenth riverboat, commenced operations along the Ohio River. Five of the riverboats are in
counties contiguous to the Ohio River and five are in counties contiguous to Lake Michigan. The
Indiana Act originally included an eleventh license for a county contiguous to Patoka Lake. In
April 2003, the Indiana General Assembly passed legislation that eliminated the license for a
county contiguous to Patoka Lake, but authorized the establishment and operation of a riverboat
casino in Orange County, Indiana. Under this legislation, the Indiana Commission is authorized to
enter into an operating agreement for up to 20 years with a qualified operator for this facility.
The Indiana Commission has selected an operator for the facility and has entered into an operating
agreement with this operator. The Orange County riverboat casino began operations in November 2006.
In 2007, the Indiana General Assembly adopted legislation that authorized the holders of
Indianas two parimutuel racing permits to obtain gambling game licenses from the Indiana
Commission and install up to 2,000 slot machines at their respective racetracks. The first of
these new racinos opened on June 2, 2008 in Anderson, and the second racino opened one week later
in Shelbyville. Both racinos are regulated by the Indiana Commission.
A riverboat owners license is a revocable privilege and is not a property right under the
Indiana Act. An Indiana license entitles the licensee to own and operate one riverboat. In 2003,
the Indiana General Assembly passed legislation that permits a company to own up to 100% of two
separate riverboat owner licenses. Under the Indiana Act, however, no person may have an ownership
interest in more than two
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Indiana riverboat licenses. An Indiana riverboat owners license has an initial effective
period of five years; thereafter, a license is subject to annual renewal. After the expiration of
the initial license, the Indiana Commission will conduct a complete re-investigation every three
years, but the Indiana Commission reserves the right to investigate licenses at any times it deems
necessary. The Indiana Commission has broad discretion over the initial issuance of licenses and
over the renewal, revocation, suspension, restriction and control of riverboat owners licenses.
Officers, directors and principal owners of the actual license holder and employees who are to work
on the riverboat are subject to substantial disclosure requirements as a part of securing and
maintaining necessary licenses. The license granted to Belterra had an initial five-year term,
which expired on October 22, 2005. We submitted a formal request for a renewal of Belterras
riverboat owners license within the timetable established by the Indiana Commission, and on
November 17, 2005, the Indiana Commission approved the renewal of Belterras riverboat owners
license for a period of one year. Our riverboat owners license was renewed again on September 14,
2006 and will continue to be subject to annual renewal. The Indiana Commission completed its
triennial investigation of Belterra in 2009, and our most recent one-year renewal was granted by
the Indiana Commission on November 12, 2009, retroactive to October 23, 2009.
The 2009 General Assembly enacted legislation that allows the Indiana Commission to adopt a
resolution authorizing a trustee to temporarily conduct gambling operations on a riverboat if (1)
the Indiana Commission revokes or declines to renew the owners license; (2) a proposed transferee
is denied an owners license when attempting to purchase the riverboat and the person attempting to
sell the riverboat is unable or unwilling to retain ownership or control; or (3) a licensed owner
agrees in writing to relinquish control of the riverboat. Each riverboat licensee is required to
submit for approval by the Indiana Commission a written power of attorney identifying the person
who would serve as the licensed owners trustee to operate the riverboat. The Indiana Commission
has developed a model Power of Attorney (POA) that grants the trustee broad and exclusive
authority to exercise and perform those acts and powers concerning real and personal property
transactions, litigation, insurance, employees and banking transactions. The model POA, which each
licensee is required to execute by March 4, 2010, also authorizes the trustee, on behalf of the
licensee, to commence, manage, and consent to relief in a case involving the licensee under the
bankruptcy code without the consent of the licensee. A riverboats owner has 180 days after the
date that the resolution is adopted to sell the riverboat and its related properties to a suitable
owner who is approved by the Indiana Commission. If the owner is unable to sell the property
within that time frame, the trustee may take any action necessary to sell the property to a person
who meets the requirements for licensure under the Indiana Act. During the time period that the
trustee is operating the casino gambling operation, the trustee has exclusive and broad authority
over the casino gambling operations.
Contracts to which Belterra is party are subject to disclosure and approval processes imposed
by the regulations. A riverboat owner licensee may not enter into or perform any contract or
transaction in which it transfers or receives consideration which is not commercially reasonable or
which does not reflect the fair market value of the goods or services rendered or received. All
contracts are subject to approval by the Indiana Commission. Suppliers of gaming equipment and
materials must also be licensed under the Indiana Act.
Licensees are statutorily required to disclose to the Indiana Commission the identity of all
directors, officers and persons holding direct or indirect beneficial interests of 1% or greater.
The Indiana Commission also requires a broad and comprehensive disclosure of financial and
operating information on licensees and their principal officers, their parent corporations and
other upstream owners. The Indiana Act prohibits contributions to a candidate for a state,
legislative, or local office, to a candidates committee or to a regular party committee by the
holder of a riverboat owners license or a suppliers license, by an officer of a licensee, by an
officer of a person that holds at least a 1% interest in the licensee or by a person holding at
least a 1% interest in the licensee. The Indiana Commission has promulgated a rule requiring
quarterly reporting of such licensees, officers, and persons.
Prior to June 2002, riverboats were required to conduct excursions, which limited the times
during which patrons could enter the riverboat. In June 2002, the Indiana General Assembly
authorized riverboats to either continue conducting excursions or to implement a flexible boarding
schedule and remain dockside in order to allow patrons to enter the riverboat at any time during
operating hours. Each of the 10 riverboats in operation at the time implemented flexible scheduling. Belterra began dockside operation on August 1, 2002.
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The 2002 legislation also created a graduated wagering tax structure for riverboats
implementing flexible scheduling. Under the Indiana Act, adjusted gross receipts (AGR) means
the total of all cash and property received from gaming less cash paid out as winnings and
uncollectible gaming receivables (not to exceed 2%). Those riverboats electing to operate dockside
are subject to the following graduated wagering tax based on a state fiscal year (July 1 of one
year through June 30 of the following year):
| 15% of the first $25 million of AGR. | |
| 20% of AGR in excess of $25 million, but not exceeding $50 million. | |
| 25% of AGR in excess of $50 million, but not exceeding $75 million. | |
| 30% of AGR in excess of $75 million, but not exceeding $150 million. | |
| 35% of AGR in excess of $150 million, but not exceeding $600 million. | |
| 40% of AGR in excess of $600 million. |
The Indiana Act also prescribes an additional tax for admissions, based on $3 per person for
riverboats operated from counties contiguous to Lake Michigan and the Ohio, and $4 per person for
the riverboat in Orange County. Real property taxes are imposed on riverboats at rates determined
by local taxing authorities. Income to us from Belterra is subject to the Indiana adjusted gross
income tax. Sales on a riverboat and at related resort facilities are subject to applicable use,
excise and retail taxes. The Indiana Act requires a riverboat owner licensee to directly reimburse
the Indiana Commission for the costs of inspectors and agents required to be present while
authorized gaming is conducted.
In its 2003 legislative session, the Indiana General Assembly authorized riverboat casinos to
remain open 24 hours per day, seven days a week, with those hours to be set at the election of the
riverboat. In July 2003, Belterra began continuous 24-hour gaming each day of the week. The 2003
Indiana General Assembly also imposed a retroactive wagering tax on all riverboats, moving the
effective date of the 2002 graduated wagering tax from August 1, 2002 to July 1, 2002. The State
Department of Revenue has assessed this retroactive tax on the riverboats, without providing an
offset for taxes paid at a higher tax rate during that one-month period. Belterra and the other
riverboat casinos filed protests with the state, asserting that this interpretation of the
legislation is erroneous and should be set aside. These protests were not successful.
Through the establishment of purchasing goals, the Indiana Act encourages minority and womens
business enterprise participation in the riverboat gaming industry. The Indiana Commission is
required to establish annual goals for the use of minority and women business enterprises by a
riverboat licensee. The goals must be derived from a statistical analysis of utilization study of
licensee contracts for goods and services. The Indiana Commission may suspend, limit or revoke the
owners license or impose a fine for failure to comply with the statutory goals. Under the goals in
effect through December 31, 2007, each riverboat licensee was required to expend at least 10% of
the total dollar value of the licensees qualified contracts for goods and services with minority
business enterprises and 5% with women business enterprises. In 2007, the Indiana Commission
completed a utilization study of expenditures made by Indiana riverboats from January 1, 2003 to
December 31, 2005 in four categories: construction; procurement/supplies; professional services;
and other services. The results indicated that the only statistically significant disparity existed
in expenditures made to women owned business enterprises in the construction category. On September
13, 2007, the Indiana Commission adopted a resolution establishing new expenditure goals solely in
the area where the significant statistical disparity existed. These goals, effective January 1, 2008, established a 10.9% annual goal for expenditures to women owned
business enterprises for the purchase of construction goods and services.
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Minimum and maximum wagers on games on the riverboat are left to the discretion of the
licensee. Wagering may not be conducted with money or other negotiable currency. There are no
statutory restrictions on extending credit to patrons with the exception of persons participating
in the voluntary exclusion program; however, the matter of credit continues to be a matter of
potential legislative action.
If an institutional investor acquires 5% or more of any class of voting securities of a
licensee (or a holding or intermediary company of a licensee), the investor is required to notify
the Indiana Commission and to provide additional information, and may be subject to a finding of
suitability. Institutional investors who acquire 15% or more of any class of voting securities are
subject to a finding of suitability. In addition, the Indiana Commission may require an
institutional investor that acquires 15% or more of certain non-voting equity units to apply for a
finding of suitability. Any other person who acquires 5% or more of any class of voting securities
of a licensee (or a holding or intermediary company of a licensee) is required to apply to the
Indiana Commission for a finding of suitability.
A riverboat licensee or an affiliate may not enter into a debt transaction of $1,000,000 or
more without approval of the Indiana Commission. The Indiana Commission has taken the position that
a debt transaction includes increases in maximum amount available under revolving credit
facilities. A riverboat owner licensee or any other person may not lease, hypothecate, borrow money
against or loan money against or otherwise securitize a riverboat owners license. Indiana
Commission regulations also require a licensee or applicant (or affiliate) to conduct due diligence
to ensure that each person with whom the licensee or applicant (or affiliate) enters into a debt
transaction would be suitable for licensure under the Indiana Act. The Indiana Commission rules
require that:
| a written request for approval of the debt transaction, along with relevant information regarding the debt transaction, be submitted to the Indiana Commission at least ten days prior to a scheduled meeting of the Indiana Commission; | |
| a representative of the riverboat licensee or applicant be present at the meeting to answer any questions; and | |
| a decision regarding the approval of the debt transaction be issued by the Indiana Commission at the next following meeting. |
The Indiana Commission rules also authorize the Executive Director of the Indiana Commission
to waive certain of these requirements with the approval of the chairperson of the Indiana
Commission and an outside financial expert retained by the Indiana Commission. A licensee, or its
parent company, that is publicly traded must notify the Indiana Commission of a public offering
that will be registered with the SEC. The licensee must notify the Indiana Commission within 10
business days of the initial filing of a registration statement with the SEC. An ownership interest
in a licensee may only be transferred in accordance with the Indiana Act and rules promulgated
thereunder.
The Indiana Commission has promulgated a rule that prohibits distributions, excluding
distributions for the payment of state or federal taxes, by a licensee to its partners,
shareholders, itself or any affiliated entity if the distribution would impair the financial
viability of the riverboat gaming operation. The Indiana Commission has also promulgated a rule
mandating licensees to maintain a cash reserve against defaults in gaming debts. The cash reserve
must be equal to licensees average payout for a three-day period based on the riverboats
performance the prior calendar quarter. The cash reserve can consist of cash on hand, cash
maintained in Indiana bank accounts and cash equivalents not otherwise committed or obligated.
Louisiana. The ownership and operation of our riverboat gaming vessels and the development of
our future gaming operations in Louisiana are subject to the Louisiana Gaming Control Law,
including the Louisiana Riverboat Economic Development and Gaming Control Act and applicable
regulations (collectively, the Louisiana Act). The Louisiana Gaming Control Board (the Board)
is the sole and exclusive regulatory and supervisory board for gaming operations and activities in
Louisiana. The
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Louisiana Department of Public Safety and Corrections, Office of State Police, Gaming
Enforcement Section (the Division) provides investigatory, regulatory, and enforcement services
to the Board in the implementation, administration, and enforcement of the Louisiana Act. The
Louisiana Attorney General acts as legal counsel to the Board.
The Louisiana Act is based upon the public policy declarations that the development of a
controlled gaming industry to promote economic development requires thorough and careful exercise
of legislative power to protect the general welfare of the people by keeping the state free from
criminal and corrupt elements. The Louisiana Act thus seeks, among other things, to (i) prevent
unsavory or unsuitable persons from having any direct or indirect involvement with gaming at any
time or in any capacity; (ii) establish and maintain responsible accounting practices and
procedures; (iii) maintain effective control over the financial practices of licensees, including
establishing procedures for reliable record keeping and making periodic reports to the Board; (iv)
prevent cheating and fraudulent practices; (v) develop and implement comprehensive compulsive and
problem gambling programs; (vi) provide a source of state and local revenues through fees; and
(vii) ensure that gaming licensees, to the extent practicable, employ and contract with Louisiana
residents, women, and minorities.
The Board is responsible for issuing gaming licenses and is empowered to issue up to fifteen
licenses to conduct gaming activities on riverboats in accordance with applicable law. However, no
more than six licenses may be granted to riverboats operating from any one designated waterway. The
Louisiana Act provides that an initial license to conduct gaming operations is valid for a term of
five years and may be renewed for successive five year terms after the initial term upon
application and continued satisfaction of suitability standards and other provisions of the
Louisiana Act.
Louisiana subsidiaries or our affiliates currently hold five riverboat gaming licenses: (i)
Louisiana-I Gaming, a Partnership in Commendam, the operator of Boomtown New Orleans, which license
expires March 22, 2015, subject to renewal; (ii) PNK (Bossier City), Inc., the operator of Boomtown
Bossier City, which license expires November 28, 2014, subject to renewal; (iii) PNK (Lake
Charles), L.L.C., the operator of LAuberge du Lac in Lake Charles, which license expires April 19,
2012, subject to renewal; (iv) PNK (SCB), L.L.C., the developer and future operator of Sugarcane
Bay in Lake Charles, which license expires December 6, 2014, subject to renewal; and (v) PNK (Baton
Rouge) Partnership, the developer and future operator of a project in East Baton Rouge Parish,
which license expires August 19, 2014, subject to renewal. All licensees are subject to the
specific conditions imposed on the license and to all applicable provisions of the Louisiana Act,
including requirements that a licensed riverboat gaming vessel replicate as nearly as practicable
historic Louisiana river borne steamboat passenger vessels of the nineteenth century era and that
the vessel be paddlewheel driven. All licensed riverboat gaming vessels are subject to periodic
inspection and/or certification by the United States Coast Guard (in the case of certificated
vessels) or by the Board-appointed third-party inspector (in the case of non-certificated vessels),
all in accordance with the Louisiana Act.
A gaming license is deemed to be a pure and absolute revocable privilege under the Louisiana
Act, and not a right. As such, a gaming license may be denied, revoked, suspended, conditioned, or
limited at any time by the Board. To issue a license, the Board must find that the applicant has
demonstrated by clear and convincing evidence that such applicant is suitable, which requires
submission of detailed personal and financial information followed by a thorough investigation.
Pursuant to the Louisiana Act, suitable means that the applicant (i) is a person of good
character, honesty, and integrity; (ii) is a person whose prior activities, criminal record, if
any, reputation, habits and associations do not pose a threat to the public interest of the State
of Louisiana or to the effective regulation and control of gaming, or create or enhance the dangers
of unsuitable, unfair, or illegal practices, methods, and activities in the conduct of gaming or
the carrying on of business and financial arrangements in connection therewith; (iii) is capable of
and likely to conduct the activities for which such applicant is licensed pursuant to the Louisiana
Act; and (iv) is not otherwise disqualified pursuant to the Louisiana Act. In addition, the Board
will not grant any license unless it finds that (i) the applicant is capable of conducting gaming
operations, which means that the applicant can demonstrate the capability, either through training,
education, business experience, or a combination of the above, to operate a gaming casino; (ii) the
proposed financing of the riverboat and the gaming operations is adequate for the nature of the
proposed operation and from a source suitable and acceptable to the Board; (iii) the applicant
demonstrates a proven ability to operate a vessel of comparable
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size, capacity, and complexity to a riverboat in its application for a license; (iv) the
applicant designates the docking facilities to be used by the riverboat; (v) the applicant shows
adequate financial ability to construct and maintain a riverboat; (vi) the applicant has a good
faith plan to recruit, train, and upgrade minorities in all employment classifications; and (vii)
the applicant will provide the maximum practical opportunities for participation by the broadest
number of minority-owned businesses.
Once the Board has issued a license, the licensee must maintain suitability throughout the
term of the license and any renewal terms and has a continuing duty to inform the Board of any
possible violation of the Louisiana Act. In addition, other persons may be subject to the
suitability standards of the Louisiana Act and may be required to hold certain permits under the
Louisiana Act, including without limitation the following: (i) certain of our and the licensees
officers, directors, key gaming employees, and non-key gaming employees; (ii) persons who
manufacture any gaming device, supplies, or equipment for use under the provisions of the Louisiana
Act; (iii) persons who supply, sell, lease, or repair, or contract to supply, sell, lease, or
repair gaming devices, equipment, and supplies to a licensee; and (iv) persons who furnish services
or goods to a licensee and receive compensation or remuneration in excess of two hundred thousand
dollars per calendar year for such goods or services. We believe that we have obtained or applied
for all necessary findings of suitability and/or permits with respect to such persons associated
with us or our Louisiana licensed riverboat gaming vessels. The Board may, however, in its
discretion require additional persons to file applications for permits or findings of suitability.
A licensee may conduct its gaming operations and develop its future operations only in
accordance with the terms of the license, including the specific conditions imposed by the Board on
each license, and also must comply with all restrictions and conditions relating to development of
future operations and the current operation of riverboat gaming, as specified in the Louisiana Act,
including provisions governing riverboat design and inspection, gaming space, rules and odds of
authorized games, and permitted devices. The Louisiana Act was amended in 2001 to provide, with
exceptions not applicable to the location of any of the Companys licensees, that gaming may only
be conducted on a riverboat while it is docked and that the licensee shall not conduct cruises or
excursions. The Louisiana Act also prescribes grounds for the revocation, limitation, or suspension
of licenses or permits, which may include failure to comply with license conditions. If a licensee
holds more than one license and has a license suspended or revoked, the Board may suspend or revoke
all licenses. In addition, the Division may take enforcement action against a licensee or other
person who has been disciplined in another jurisdiction for gaming related activity.
A licensee must periodically report the following information to the Board, which is not
confidential and is to be available for public inspection: (i) the licensees net gaming proceeds
from all authorized games; (ii) the amount of net gaming proceeds tax paid; and, (iii) all
quarterly and annual financial statements presenting historical data that are submitted to the
Board, including annual financial statements that have been audited by an independent certified
public accountant. An annual license fee is payable to the State of Louisiana in the amount of
$50,000 for each riverboat for the first year of operation and $100,000 for each year thereafter.
In addition, our Louisiana riverboat gaming vessels are subject to annual license and franchise
fees in the amount of 21.5% of net gaming proceeds. The local governing authority of the parish or
municipality in which the licensed berth of a riverboat is located may also levy certain admission
fees, computed in various ways as provided by the Louisiana Act. As to Boomtown Bossier City, the
Louisiana Act establishes that the admission fee for any riverboat located within Bossier City in
Bossier Parish shall be four and five-tenths percent of monthly net gaming proceeds. For Boomtown
New Orleans, the Louisiana Act provides that the admission fee for any riverboat licensed to
operate within the unincorporated area of Jefferson Parish on the West Bank of the Mississippi
River shall be six percent of weekly net gaming proceeds. As to LAuberge du Lac and Sugarcane Bay,
the Louisiana Act provides that the local governing authority in Calcasieu Parish may, in lieu of
the admission fee, levy a fee not to exceed four and five-tenths percent of the monthly net gaming
proceeds, which fee shall be established by contract between the governing authority and the
licensee. As to the project in East Baton Rouge Parish, the Louisiana Act provides that the local
governing authority may, in lieu of the admission fee, levy a fee not to exceed four and
five-tenths percent of the monthly net gaming proceeds, which fee shall be established by contract
between the governing authority and the licensee.
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The transfer of a license or an interest in a license is prohibited. The sale, assignment,
transfer, pledge, or disposition of a security or securities that represent 5% or more of the total
outstanding shares issued by a holder of a license is conditional and ineffective if disapproved by the Board.
Moreover, the prior written approval of the Board is required of all persons involved in the sale,
purchase, assignment, lease, grant or foreclosure of a security interest, hypothecation, transfer,
conveyance or acquisition of an ownership interest (other than in a corporation) or economic
interest of 5% or more in any licensee. Failure to obtain approval of a transfer is grounds for
license revocation. A security issued by a holder of a license must generally disclose these
restrictions.
Any person with an ownership interest or economic interest in a licensee may be required to
submit to an investigation by the Board to determine suitability. Any person acquiring a 5% or more
ownership interest or economic interest shall be subject to a suitability determination, unless
otherwise exempted. Under certain circumstances, an institutional investor or an institutional
lender otherwise required to be found suitable or qualified shall be presumed suitable or
qualified upon submitting documentation sufficient to establish qualifications as an institutional
investor or as an institutional lender, each as defined in the Louisiana Act. An institutional
investor must also certify that (i) it owns, holds, or controls publicly traded securities of a
licensee or its parent company in the ordinary course of business for investment purposes only;
(ii) it does not exercise influence over the affairs of the issuer of the securities or of the
licensee; and (iii) it does not intend to exercise influence over the affairs of the issuer of the
securities or of the licensee. The Division also applies to institutional lenders the
certification requirements imposed on institutional investors by the Louisiana Act. The exercise
of voting privileges with regard to publicly traded securities shall not be deemed to constitute
the exercise of influence over the affairs of a licensee. Notwithstanding presumptions of
suitability, the Board may investigate the suitability or qualifications of an institutional
investor or institutional lender should the Board or the Division become aware of facts or
information which may result in such institutional investor or institutional lender being found
unsuitable or disqualified.
If the Board finds that the individual owner or holder of a security of a corporate licensee
or intermediary company or any person with an economic interest in a licensee is not qualified
under the Louisiana Act, the Board may require, under penalty of suspension or revocation of the
license, that the person not (i) receive dividends or interest on securities of the licensee or
company holding a license, (ii) exercise directly or indirectly a right conferred by securities of
the licensee or company holding a license, (iii) receive remuneration or economic benefit from the
licensee or company holding a license, or (iv) continue in an ownership or economic interest in the
licensee, or remain as a manager, officer, director, or partner of a licensee.
In addition to its obligation to periodically submit detailed financial and operating reports
to the Board, a licensee or person acting on a licensees behalf must notify the Board and obtain
prior written approval whenever it (i) applies for, receives, accepts, or modifies the terms of any
loan, line of credit, third-party financing agreement, sale with buy-back or lease-back provisions,
or similar financing transaction; (ii) makes use of any cash, property, credit, loan, or line of
credit; or (iii) guarantees or grants any other form of security for a loan. Exceptions to the
requirement of prior written approval include, without limitation, transactions not exceeding
$2,500,000 in which all of the lending institutions are federally regulated; transactions that do
not substantially modify or alter the terms of an existing, previously approved loan transaction,
or transactions involving publicly registered debt and securities sold pursuant to a firm
underwriting agreement. Transactions involving publicly registered debt and securities registered
with the Securities and Exchange Commission and sold pursuant to a firm underwriting agreement are,
however, subject to certain notice and reporting requirements.
If it should be determined that the Louisiana Act has been violated by us or any of our
Louisiana subsidiaries holding riverboat gaming licenses, the Board could revoke, suspend, limit,
or condition the licenses, subject to compliance with certain statutory and regulatory procedures.
In addition, we, the Louisiana subsidiaries holding riverboat gaming licenses, and the persons
involved in any violations of the Louisiana Act could be subject to substantial fines for each
separate violation of the Louisiana Act at the discretion of the Board. To the extent a decision of
the Board is appealable, such appeal may be made to the 19th Judicial District Court for the Parish
of East Baton Rouge, State of Louisiana.
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Certain related Louisiana legislation required statewide local elections on a parish-by-parish
basis to determine whether to prohibit or continue to permit licensed riverboat gaming. The
applicable local elections have occurred in all parishes in which we operate our riverboat gaming vessels, and
the voters in those parishes voted to continue licensed riverboat gaming. However, it is noteworthy
that the current legislation does not provide for any moratorium on future local elections on
gaming.
Missouri. On November 3, 1992, a statewide referendum authorized gaming in the State of
Missouri on the Missouri and the Mississippi Rivers. On April 29, 1993, Missouri enacted revised
legislation (as amended, the Missouri Gaming Law) which amended the existing legislation. In a
decision handed down on January 25, 1994, the Missouri Supreme Court held that games of chance were
prohibited under the Missouri constitution. In a statewide election held on November 8, 1994,
Missouri voters approved the adoption of an amendment to the Missouri Constitution which permits
the legislature to allow games of chance to be conducted on excursion boats and floating facilities
on the Mississippi River and the Missouri River. As a result of the amendment, games of chance are
also permitted subject to Missouri Gaming Law. Pursuant to the Missouri Gaming Law, there are
twelve operating riverboat gaming facility sites in Missouri: one in Caruthersville; one in
Boonville; four in the St. Louis area; four in the Kansas City area; one in LaGrange; and one in
St. Joseph.
On September 1, 2004, the Missouri Gaming Commission selected one of our subsidiaries, Casino
One Corporation (Casino One) as a priority to be investigated to determine suitability for Class
A licenses in both the City of St. Louis and in the County of St. Louis. Subsequent to receipt of
these designations, Casino One filed on behalf of both the City of St. Louis and the St. Louis
County sites applications to obtain permanent docking and placement of the gaming facilities in a
basin within 1,000 feet of the Mississippi River. Approval for placement and permanent docking are
required under the Missouri Gaming Law. On January 12, 2005 and on May 25, 2005, the Missouri
Gaming Commission granted approval to Casino One of the location of the City of St. Louis and the
St. Louis County gaming facilities.
In December 2006, Pinnacle acquired 100% of the stock of President Riverboat Casino Missouri
(PRC-MO). PRC-MO is a licensee authorized to conduct gaming in Missouri and Pinnacle is a
holding company of PRC-MO. PRC-MO is operating a gaming facility in St. Louis, Missouri. Pinnacle
is also the holding company of Casino One which obtained a Class A license to operate a gaming
facility known as Lumiere Place in St. Louis, Missouri, on November 27, 2007. Casino One also
filed an application before the Missouri Gaming Commission to construct, own and operate a casino
in St. Louis County, Missouri. On July 26, 2006, Pinnacle was licensed in Missouri as a key
person business entity for the applicant for license, Casino One. As a key person business entity,
Pinnacle is licensed and regulated by the Missouri Gaming Commission, and its ability to engage in
certain transactions is restricted.
Effective May 30, 2008, certain amendments were made to Missouris gaming regulations,
including 11 CSR 45-4.020(10) that provide for the division of Missouri gaming licenses into Class
A and Class B Licenses. Pinnacle now holds a Class A License which allows Pinnacle to operate the
PRC-MO and Casino One business entities. PRC-MO and Casino One now hold Class B Licenses allowing
them to operate the respective riverboat gaming operations in Missouri. Based on these amended
regulations, PRC-MO as operator of the President Riverboat Casino gaming facility and Casino One as
operator of the Lumiere Place gaming facility became Class B license holders. Pinnacle, as the
holding and parent company of PRC-MO and Casino One, holds a Class A license. Because of the change
in gaming regulations establishing the new Class B Licenses, the Missouri Gaming Commission
requested that Pinnacle establish a new business entity in Missouri to act as Class B Applicant for
Pinnacles St. Louis County casino which is nearing completion. At this request of the Missouri
Gaming Commission, Pinnacle renamed an existing Missouri limited liability company, PNK (River
City), LLC (River City), which became the Class B applicant for the St. Louis County Casino known
as River City Casino in December of 2009. Pinnacle will remain the Class A Licensee for River
City.
Pinnacle must obtain advance approval of the Missouri Gaming Commission to transfer or issue
any ownership interest in Pinnacle, PRC-MO, and/or Casino One, and/or River City or to enter into
any contract or arrangement, whereby a person or group of persons acting in concert (A) owns,
controls, or has power to vote twenty-five percent or more of the voting ownership interest in
Pinnacle or PRC-MO, Casino One or River City, or (B) controls the election of a majority of the
directors or managers of Pinnacle or PRC-MO, Casino One or River City.
8
Pinnacle may not transfer or issue any ownership interest in PRC-MO, Casino One or River City
without providing sixty days advance notice to the Missouri Gaming Commission. During the notice
period the Commission may disapprove the transaction or require the transaction to be delayed
pending further investigation.
Pinnacle may not pledge or hypothecate its ownership interest in PRC-MO, Casino One or River
City, or subject such ownership interests to any type of security interest held by any entity or
person other than a financial institution without providing sixty days advance notice to, and
without obtaining prior approval from, the Missouri Gaming Commission. During the notice period the
Commission may disapprove the transaction or require the transaction to be delayed pending further
investigation. If a transfer of ownership is involved, separate notice must be provided at least
thirty days prior to the transfer, and this restriction must be specifically included in the grant
of the pledge, hypothecation, or security interest.
Neither the Missouri Gaming licenses of PRC-MO and Casino One, nor any interest in such
licenses may be pledged, hypothecated, or transferred in any way.
The Missouri Gaming Commission must be notified of the intention to consummate any of the
following transactions at least fifteen days prior to consummation, and the Commission may reopen
the licensing hearing of PRC-MO or Casino One, or reconsider the application of River City, to
consider the effect of the transaction on suitability for each or either licensee: (A) any issuance
of an ownership interest in Pinnacle or PRC-MO, Casino One or River City if such issuance will
involve five percent or greater of the ownership interest of Pinnacle or PRC-MO, Casino One or
River City, assuming that all of the ownership interest in the issuance is issued and outstanding;
(B) any private incurrence of debt equal to or exceeding one million dollars by Pinnacle or PRC-MO,
Casino One or River City; (C) any public issuance of debt by Pinnacle or PRC-MO, Casino One or
River City; or (D) any transaction involving PRC-MO, Casino One or River City and a related party
(any key person or holding company of PRC-MO, Casino One or River City, including Pinnacle and
Casino Magic Corporation, another subsidiary of Pinnacle; any person under the control of PRC-MO,
Casino One or River City, or any of its key persons, including Pinnacle; or any person sharing a
holding company in common with PRC-MO, Casino One or River City) where the transaction involves any
of the following: (1) consideration paid for services provided by the related party or personnel
working on behalf of the related party; (2) any arrangement in which consideration paid to the
related party is based upon any measure of financial or business production of PRC-MO or Casino
One; (3) any allocation of expenses between related parties; or (4) any loan or credit issued from
the related party to PRC-MO, Casino One or River City at a rate of interest that is at least one
percent higher than the bank prime loan rate as reported by the Federal Reserve System Board of
Governors on Form H.15. Pinnacle must report the consummation of any of the following transactions
to the Missouri Gaming Commission within seven days: (A) any transfer or issuance of ownership
interest in Pinnacle or PRC-MO, Casino One or River City that has resulted in an entity or group of
entities acting in concert owning a total ownership interest equaling five percent or greater of
the ownership interest of Pinnacle or PRC-MO, Casino One or River City, or (B) any pledge or
hypothecation of, or grant of a security interest in, five percent or more of the ownership
interest of Pinnacle or PRC-MO, Casino One or River City, provided that if any ownership interest
is transferred pursuant to a pledge, hypothecation, or security interest, separate notice to the
Commission is required not later than seven days after consummation of the transfer.
PRC-MO and Casino One must notify the Missouri Gaming Commission no later than seven days
following the consummation of any transaction by Pinnacle, PRC-MO, or Casino One, or River City, or
any entity affiliated with PRC-MO and/or Casino One and/or River City that involves or relates to
PRC-MO and/or Casino One and/or River City and has a dollar value equal to or greater than one
million dollars.
River City is also required to disclose any of the above transactions to the Missouri Gaming
Commission that may occur with respect to Pinnacle, and the Missouri Gaming Commission can then
take into account the continuing suitability of River City to construct, own and operate the St.
Louis County facilities.
9
All direct, indirect or beneficial owners of our common stock, holding an interest of 5% or
more in us, are subject to licensing requirements of the Missouri Gaming Commission that require
the filing of an application that includes extensive suitability and financial information and is
subject to review and approval of Missouri Gaming Commission. We are permitted to require any such
key person or business that either fails to file for a license with the Missouri Gaming
Commission or is not found suitable by the Missouri Gaming Commission, to divest itself of all such
common stock in accordance with our certificate of incorporation. The Missouri Gaming Commission or
its Director may also determine that any other holder of our common stock is subject to the above
licensing requirements regardless of the percentage interest of ownership in us. Additionally, an
institutional investor holding an interest of 20% or less in us for only passive investment
purposes, may be exempted from these licensure requirements by the Missouri Gaming Commission.
Under the Missouri Gaming Law, the ownership and operation of riverboat gaming facilities in
Missouri are subject to extensive state and local regulation. After the receipt of licensing
approval from and in the discretion of the Missouri Gaming Commission, the construction of the St.
Louis County facilities and the commencement of operations of the St. Louis County facilities, we,
River City, our subsidiary that will operate the County project, any subsidiaries, and some of
their officers and employees are and will be subject to specific regulations, including ongoing
licensing requirements. As part of the application and licensing process for a gaming license, the
applicant must submit detailed financial, operating and other reports to the Missouri Gaming
Commission. Each applicant has an ongoing duty to update the information provided to the Missouri
Gaming Commission in the application, usually within seven days of a material change in the
information on file with the Commission. Casino One, PRC-MO and now River City frequently updated
its application materials for the Class B License. In addition to the information required of the
applicant, directors, officers, affiliated business entities and other defined key persons (which
include individuals and companies designated by the Missouri Gaming Commission) must submit
Personal Disclosure Forms, which include detailed financial information, and are subject to
thorough investigations. In addition, we and some of our officers and directors have submitted
Personal Disclosure Forms and applications to the Missouri Gaming Commission. All gaming employees
must obtain an occupational license issued by the Missouri Gaming Commission. Suppliers are also
subject to licensing requirements of the Missouri Gaming Commission.
The Class A (parent organization or controlling entity) and Class B (operator of the gaming
facility) licenses are issued through application to the Missouri Gaming Commission, which
requires, among other things:
| suitability investigations into an applicants character, financial responsibility, experience, and qualifications; | |
| suitability investigations into each designated key person or affiliated business entitys character, financial responsibility, experience and qualifications; | |
| disclosure of required financial (see above) and other personal information on each key person or designated affiliated business entity; | |
| disclosure of detailed information about the applicants history, business, affiliations, officers, directors and owners; | |
| an affirmative action plan for the hiring and training of minorities and women; and | |
| an economic development or impact report. |
License fees cover all related costs of the Missouri Gaming Commission investigation and are a
minimum of $50,000 for the initial application and $25,000 annually thereafter. We, Casino One and
River City each are undergoing a full licensing investigation and hearing in connection with its
licensing as above stated.
The Missouri Gaming Law and implementing regulations impose restrictions on the use of and do
not permit the transfer of the gaming licenses as well as limitations on transactions engaged in by
licensees. The licenses issued by the Missouri Gaming Commission may not be transferred nor pledged
as collateral. The Missouri Gaming Law regulations bar a licensee from taking any of the following actions
without prior notice to, and approval by, the Missouri Gaming Commission:
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| any transfer or issuance of an ownership interest in a gaming licensee that is not a publicly held company; | |
| any transfer or issuance of an ownership interest of five percent or more of the issued and outstanding ownership interest of a company which is publicly traded and is a holding company; | |
| any private incurrence of debt by the licensee or any holding company of $1,000,000 or more; | |
| any public issuance of debt by a licensee or its holding company; and | |
| defined significant related party transactions. |
In addition, the licensee must notify the Missouri Gaming Commission of other transactions
that include the transfer of five percent or more of an ownership interest in the licensee or
holding company if publicly held and any transaction of at least $1,000,000.
The restrictions on transfer of ownership apply to us as well as the direct licensee, Casino
One. Gaming equipment may not be pledged. Corporate stock of some licensees may not be pledged
except in narrow circumstances and subject to regulatory conditions.
Missouri statutes and administrative rules contain detailed requirements and conditions
concerning the operation of a licensed excursion gaming boat facility, including, but not limited
to the following:
| a charge of two dollars per gaming customer per excursion that licensees must either collect from each customer or pay itself to the Missouri Gaming Commission; | |
| minimum payouts; | |
| the payment of a 21% tax on adjusted gross receipts; | |
| prohibitions against providing credit to gaming customers; | |
| the use of credit cards and the cashing of checks by customers; | |
| providing security on the excursion gambling boat, including a requirement that each licensee reimburse the Missouri Gaming Commission for all costs of any Missouri Gaming Commission staff, including Missouri Highway Patrol Officers necessary to protect the public on the licensees riverboat; | |
| the receipt of liquor licenses from the Missouri Gaming Commission and local jurisdictions; and | |
| the adoption of minimum control standards for the conduct of gaming and the operation of the facility approved by the Missouri Gaming Commission. |
The Missouri Gaming Commission has the power, as well as broad discretion in exercising this
power, to revoke or suspend gaming or occupational licenses and impose other penalties for
violations of the Missouri Gaming Law and the rules and regulations promulgated thereunder,
including without limitation, forfeiture of all gaming equipment used for improper gaming and fines
of up to three times a licensees highest daily gross receipts during the preceding twelve months.
The Class A license issued to Casino One in November 2007 for Lumiere Place was issued for a
period of ninety days or for the period through the March 2008 Commission meeting, pending the
completion of certain American Bureau of Shipping certifications as to the installation of certain
strain gauge devices (the Devices) by Casino One at the casino dock site. Casino One and
Pinnacle signed a hold harmless agreement with the Missouri Gaming Commission indemnifying the
Missouri Gaming Commission as to claims and costs incurred as a result of issuance of the license to Casino
One. The hold harmless agreement related to the Devices.
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On December 19, 2008, the Missouri Gaming Commission issued Casino One a Class B license for a
period of one year, expiring December 19, 2009, and terminated the hold harmless agreement
previously executed by Casino One and Pinnacle. The Class B license rather than a Class A license
was issued by the Commission as a result of the May 30, 2008, amendments to the Missouri gaming
regulations. A key person business entity license was issued to Pinnacle on July 26, 2006,
expiring October 31, 2011. Pinnacle became a Class A Licensee by virtue of the May 30, 2008,
amendments. The Class B License of Casino One was renewed by the Missouri Gaming Commission for a
period of two years on December 2, 2009, effective December 19, 2009.
Although the Missouri Gaming Law provides no limit on the amount of riverboat space that may
be used for gaming, the Missouri Gaming Commission is empowered to impose space limitations through
the adoption of rules and regulations.
Previously, the Missouri Gaming Law imposed as to each customer a $500 loss limit per two-hour
period established by each licensee with the approval of the Missouri Gaming Commission. However,
Missouri registered voters approved of Proposition A on November 4, 2008, which amended Section
313.805(3) RSMo to provide that the Missouri Gaming Commission shall not establish any regulations
or policies that limit the amount of wagers, losses, or buy-in amounts.
Specifically, Proposition A, which was a ballot referendum (1) repealed the maximum loss limit
for gambling; (2) repealed the current individual maximum loss limit for gambling; (3) prohibited
any future loss limits; (4) required identification to enter the gambling area only if necessary to
establish that an individual is at least 21 years old; (5) restricted the number of casinos to
those already built or being built; (6) increased the casino gambling tax from 20% to 21%; (7)
created a new specific education fund from additional gambling tax proceeds generated as a result
of this measure called the Schools First Elementary and Secondary Education Improvement Fund; and
(8) required annual audits of this new fund.
In addition, the Missouri Gaming Commission is empowered to determine on a city and
county-specific basis where dockside or permanently-docked gaming is appropriate and may be
permitted. The Missouri Gaming Commission has authorized all twelve licensed sites to operate all
or a portion of their facilities on a continuously docked basis.
Nevada. The ownership and operation of casino gaming facilities in Nevada are subject to: (i)
the Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, the Nevada
Act); and (ii) various local regulations. Our gaming operations are subject to the licensing and
regulatory control of the Nevada Gaming Commission (the Nevada Commission), the Nevada State
Gaming Control Board (the Nevada Board) and the City of Reno. The Nevada Commission, the Nevada
Board and the City of Reno are collectively referred to as the Nevada Gaming Authorities.
The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based
upon declarations of public policy which are concerned with, among other things: (i) the prevention
of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any
time or in any capacity; (ii) the establishment and maintenance of responsible accounting practices
and procedures; (iii) 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; (iv) the prevention of cheating and fraudulent
practices; and (v) providing a source of state and local revenues through taxation and licensing
fees. Changes in such laws, regulations and procedures could have an adverse effect on Boomtown
Renos gaming operations.
Our subsidiary which operates Boomtown Reno and two other gaming operations that have only
slot machines (the Gaming Subsidiary) is required to be licensed by the Nevada Gaming
Authorities. The gaming licenses require the periodic payment of fees and taxes and are not
transferable. We are currently registered by the Nevada Commission as a publicly traded corporation
(a Nevada Registered
12
Corporation) and have been found suitable as the parent company of the Gaming Subsidiary,
which is a gaming licensee under the terms of the Nevada Act. As a Registered Corporation, we are
required periodically to submit detailed financial and operating reports to the Nevada Commission
and furnish any other information which the Nevada Commission may require. No person may become a
stockholder of, or holder of an interest of, or receive any percentage of profits from, a gaming
licensee without first obtaining licenses and approvals from the Nevada Gaming Authorities. We and
the Gaming Subsidiary 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 or the Gaming Subsidiary in order to determine whether such
individual is suitable or should be licensed as a business associate of a gaming licensee. Our and
the Gaming Subsidiarys officers, directors and certain 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. Our officers, directors and key employees who are actively and directly
involved in gaming activities of the Gaming Subsidiary 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. The applicant for licensing or a finding of suitability must pay 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 licensure, the Nevada Gaming Authorities have 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 or the Gaming
Subsidiary, the companies involved would have to sever all relationships with such person. In
addition, the Nevada Commission may require us or the Gaming Subsidiary to terminate the employment
of any person who refuses to file appropriate applications. Determinations of suitability or of
questions pertaining to licensing are not subject to judicial review in Nevada.
We and the Gaming Subsidiary are required to submit detailed financial and operating reports
to the Nevada Commission. Substantially all material loans, leases, sales of securities and similar
financing transactions by us and the Gaming Subsidiary must be reported to or approved by the
Nevada Commission.
If it were determined that the Nevada Act was violated by the Gaming Subsidiary, the gaming
licenses it holds could be limited, conditioned, suspended or revoked, subject to compliance with
certain statutory and regulatory procedures. In addition, we, the Gaming Subsidiary and the persons
involved could be subject to substantial fines for each separate violation of the Nevada Act at the
discretion of the Nevada Commission. Further, a supervisor could be appointed by the Nevada
Commission to operate Boomtown Reno and, under certain circumstances, earnings generated during the
supervisors appointment (except for reasonable rental value of the casino) could be forfeited to
the State of Nevada. Limitation, conditioning or suspension of the gaming licenses of the Gaming
Subsidiary or the appointment of a supervisor could (and revocation of any gaming license would)
negatively affect our gaming operations.
Any beneficial holder of our voting or non-voting securities, regardless of the number of
shares owned, may be required to file an application, be investigated, and be found suitable as a
beneficial holder of our voting securities if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the State of Nevada. The
applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in
conducting any such investigation.
The Nevada Act requires any person who acquires beneficial ownership of more than 5% of a
Nevada Registered Corporations voting securities to report the acquisition to the Nevada
Commission. The Nevada Act requires that beneficial owners of more than 10% of a Nevada Registered
Corporations voting securities apply to the Nevada Commission for a finding of suitability within
thirty days after the Chairman of the Nevada Board mails the written notice requiring such filing.
However, an institutional investor, as defined in the Nevada Act, which beneficially owns more
than 10% but not more than 11% of a Nevada Registered Corporations voting securities as a result
of a stock repurchase by the Nevada Registered Corporation may not be required to file such an
application. Further, an institutional investor which
13
acquires more than 10%, but not more than 25%, of a Nevada Registered Corporations voting
securities may apply to the Nevada Commission for a waiver of such finding of suitability if such
institutional investor holds the voting securities for investment purposes only. An institutional
investor that has obtained a waiver may hold more than 25% but not more than 29% of a Nevada
Registered Corporations voting securities and maintain the waiver where the additional ownership
results from a stock repurchase by the Nevada registered Corporation. An institutional investor
shall not be deemed to hold voting securities for investment purposes unless the voting securities
were acquired and are held in the ordinary course of business as an institutional investor and not
for the purpose of causing, directly or indirectly, the election of a majority of the members of
the board of directors of the Nevada Registered Corporation, any change in the Nevada Registered
Corporations corporate charter, restated bylaws, management, policies or operations of the Nevada
Registered Corporation, or any of its gaming affiliates, or any other action which the Nevada
Commission finds to be inconsistent with holding the Nevada Registered Corporations voting
securities for investment purposes only. Activities which are not deemed to be inconsistent with
holding voting securities for investment purposes only include: (i) voting on all matters voted on
by stockholders; (ii) making financial and other inquiries of management of the type normally made
by securities analysts for informational purposes and not to cause a change in its management,
policies or operations; and (iii) such other activities as the Nevada Commission may determine to
be consistent with such investment intent. If the beneficial holder of voting securities who must
be found suitable is a corporation, partnership 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
thirty days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada
Board, may be found unsuitable. The same restrictions apply to a record owner if the record owner,
after request, fails to identify the beneficial owner. Any security holder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the security beyond such period of time
as may be prescribed by the Nevada Commission may be guilty of a criminal offense. We are subject
to disciplinary action if, after we receive notice that a person is unsuitable to be a security
holder or to have any other relationship with us or the Gaming Subsidiary, we: (i) pay that person
any dividend or interest upon our voting securities, (ii) allow that person to exercise, directly
or indirectly, any voting right conferred through securities held by that person, (iii) pay
remuneration in any form to that person for services rendered or otherwise, or (iv) fail to pursue
all lawful efforts to require such unsuitable person to relinquish such persons voting securities
including, if necessary, the immediate purchase of said securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any debt security of a
Nevada Registered Corporation to file applications, be investigated and be found suitable to own
the debt or other security of a Nevada Registered Corporation if the Nevada Commission has reason
to believe that such holders acquisition of such debt or other security would otherwise be
inconsistent with the policy of the State of Nevada. If the Nevada Commission determines that a
person is unsuitable to own such security, then pursuant to the Nevada Act, the Nevada Registered
Corporation can be sanctioned, including the loss of its approvals if, without the prior approval
of the Nevada Commission, it: (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection
with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any
payment to the unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.
We are required to maintain a current stock ledger 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 such 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. The Nevada Commission has the power to require that our stock certificates
bear a legend indicating that the securities are subject to the Nevada Act. However, to date the
Nevada Commission has not imposed such a requirement on us.
14
We are not permitted to make a public offering of our securities without the prior approval of
the Nevada Commission if the securities or the proceeds therefrom are intended to be used to
construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such
purposes. On February 19, 2009, the Nevada Commission granted us prior approval to make public
offerings for a period of two years, subject to certain conditions (the Nevada Shelf Approval).
The Nevada Shelf Approval also applies to any affiliated company wholly owned by us (an
Affiliate), which is a publicly traded corporation or would thereby become a publicly traded
corporation pursuant to a public offering. The Nevada Shelf Approval, however, may be rescinded for
good cause without prior notice upon the issuance of an interlocutory stop order by the Chairman of
the Nevada Board. The Nevada Shelf Approval does not constitute a finding, recommendation or
approval of the Nevada Gaming Authorities as to the accuracy or the adequacy of the prospectus or
the investment merits of the securities offered thereby. Any representation to the contrary is
unlawful.
Changes in control of a Nevada Registered Corporation through merger, consolidation, stock or
asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby
such person obtains control, may not occur without the prior approval of the Nevada Commission.
Entities seeking to acquire control of a Nevada Registered Corporation must satisfy the Nevada
Board and Nevada Commission in a variety of stringent standards prior to assuming control of such
Nevada Registered Corporation. The Nevada 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,
repurchases of voting securities and corporate defense tactics affecting Nevada corporate gaming
licensees, and Nevada Registered Corporations that are affiliated with those operations, may be
injurious to stable and productive corporate gaming. The Nevada Commission has established a
regulatory scheme to ameliorate the potentially adverse effects of these business practices upon
Nevadas gaming industry and to further Nevadas policy to: (i) assure the financial stability of
corporate gaming licensees and their affiliates; (ii) preserve the beneficial aspects of conducting
business in the corporate form; and (iii) promote a neutral environment for the orderly governance
of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission
before the Nevada Registered Corporation can make exceptional repurchases of voting securities
above the current market price thereof and before a corporate acquisition opposed by management can
be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed
by the Nevada Registered Corporations Board of Directors in response to a tender offer made
directly to the Nevada Registered Corporations stockholders for the purposes of acquiring control
of the Nevada Registered Corporation.
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 City of Reno, in which the Gaming
Subsidiarys 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: (i) a
percentage of the gross revenues received; (ii) the number of gaming devices operated; or (iii) the
number of table games operated. An entertainment tax is also paid by casino operations where live
entertainment is furnished in connection with an admission charge and the serving or selling of
food or refreshments, or the selling of any merchandise.
Any person who is licensed, required to be licensed, registered, required to be registered, or
is under common control with such persons (collectively, Licensees), and who proposes to become
involved in a gaming venture outside of Nevada, is required to deposit with the Nevada Board, and
thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation
by the Nevada Board of such Licensees participation in such foreign gaming. The revolving fund is
subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, Licensees
are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are
also subject to disciplinary action by the Nevada Commission if they knowingly violate any laws of
the foreign jurisdiction pertaining to the foreign gaming operation, fail to conduct the foreign
gaming operation in accordance with the standards of honesty and integrity required of Nevada
gaming operations, engage in activities or enter into associations that are harmful to the State of
Nevada or its ability to collect gaming taxes and fees, or employ, contract with, or associate with
a person in the foreign operation who has been denied a license or finding of suitability in Nevada
on the ground of unsuitability.
15
New Jersey. The ownership and operation of casino facilities and the conduct of gaming
activities in Atlantic City, New Jersey, are subject to extensive state regulation under the New
Jersey Casino Control Act (the New Jersey Act), the regulations of the New Jersey Casino Control
Commission (the New Jersey Commission), and the recommendations and investigative powers of the
New Jersey Division of Gaming Enforcement (the New Jersey Division).
The New Jersey Act and regulations concern primarily (i) the financial stability, business
ability, and good character, honesty and integrity of casino licensees and casino service industry
enterprise (CSIE) licensees, their intermediary and holding companies, and the directors,
employees, security holders and lenders of each (with the exception of banks or other licensed
lending institutions that make loans or hold mortgages or other liens acquired in the ordinary
course of business); (ii) the nature of hotel and casino facilities; and (iii) the operating
methods and financial and accounting practices used in connection therewith.
The New Jersey Act imposes a tax of eight percent (8%) on gross gaming revenues and an
investment alternative tax of two and one-half percent (2.5%) of gross gaming revenues that can be
fully offset by investment tax credits equal to one and one-quarter percent (1.25%) of gross gaming
revenues. Credits are obtained by purchasing bonds issued by, or investing in housing or other
development projects approved by, the Casino Reinvestment Development Authority. Casinos are
subject to additional taxes and fees, including, among others, an annual license fee of $500.00 on
every slot machine in use or maintained for use.
The Company is subject to the jurisdiction of the New Jersey Commission and the New Jersey Act
by reason of (i) having been granted a Statement of Compliance that the Company is qualified to be
a holding company of a casino licensee; and (ii) being an applicant for a gaming-related CSIE
license. The CSIE license application was required by the New Jersey Commission as a condition of,
among other things, the Companys being able to possess, store and transport slot machines in
connection with the closing of the Sands Hotel and Casino. The Company has put its New Jersey
properties up for sale and does not anticipate needing to qualify as a casino holding company or,
once the New Jersey properties are sold, needing a CSIE license.
The New Jersey Commission has broad discretion regarding the issuance, renewal, revocation,
suspension and control of all gaming licenses. Casino licenses and CSIE licenses are not
transferable, but control of an entity that holds a casino license can be transferred with the
express prior written approval of the New Jersey Commission. By comparison, if control of an entity
that holds a CSIE license is transferred, the license is forfeited, and the newly-controlled entity
must reapply for a license. Applicants for gaming-related CSIE licenses can do business with casino
licensees pursuant to transactional waivers sought by petition to the New Jersey Commission.
Participation in casino operations as a licensee is deemed a revocable privilege, not a
property right. It is conditioned on the proper and continued qualification of the licensee and
upon the discharge of the affirmative responsibility of each such licensee to provide to the
regulatory and investigatory authorities any assistance and information necessary to ensure that
the policies declared by the New Jersey Act are achieved.
The New Jersey Act imposes restrictions on the ownership and transfer of equity or debt
instruments issued by an entity that holds a casino license or is deemed a holding company,
intermediary company, subsidiary or entity qualifier of a casino licensee (collectively,
affiliates). The New Jersey Act provides that the corporate charter of a publicly traded
affiliate of a casino licensee must require that a holder of the affiliates securities dispose of
them if the New Jersey Commission finds that the holder is not qualified under the New Jersey Act
(is disqualified). The Act also requires that the corporate charter (or certificate of formation
for an LLC) of a casino licensee or a privately-held affiliate of the licensee must:
| establish the right of prior approval by the New Jersey Commission with regard to the transfer of any interest in the entity; and | |
| create the absolute right of the entity to repurchase any security, share or other interest in the entity at the market price or purchase price, whichever is less, if the New Jersey Commission disapproves a transfer of the interest in accordance with the provisions of the New Jersey Act. |
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The Companys corporate charter would be amended to conform to the requirements of the New
Jersey Act before an affiliate of the Company would be granted a casino license. The organic
documents for any subsidiary that would become a New Jersey casino licensee and any other
affiliates in the chain of ownership of the licensee would likewise need to conform.
If the New Jersey Commission finds that an individual owner or holder of the securities or
other interests of a casino licensee, a CSIE licensee, or any of their affiliates is disqualified
under the New Jersey Act, the New Jersey Commission may propose remedial action, including
divestiture of the securities or other interests. If disqualified persons fail to divest the
interests, the New Jersey Commission may revoke or suspend the license; however, if an affiliate of
a casino licensee is a publicly traded company, and the New Jersey Commission makes a
disqualification finding with respect to an owner or holder of any interest therein, and the New
Jersey Commission also finds that:
| the affiliate has adopted the required charter provisions; | ||
| the affiliate has made a good faith effort, including the prosecution of all legal remedies, to comply with any order of the New Jersey Commission requiring the divestiture of the interest held by the disqualified owner or holder; and | ||
| the disqualified owner or holder does not have the ability to control the affiliate or the licensee, or to elect one or more members of the board of directors of the affiliate or licensee, then the New Jersey Commission will not take action against the casino licensee or its affiliate with respect to the continued ownership of the interest by the disqualified owner or holder. |
Before a casino license or CSIE license will be granted or renewed, all security holders of a
publicly traded holding company of the applicant or licensee must qualify under the New Jersey Act
or have the qualification requirement waived or deemed inapplicable. Under the New Jersey Act, a
security holder is presumed to have the ability to control a publicly traded corporation or to
elect one or more members of its board of directors, and thus to be ineligible for waiver, if the
holder owns or beneficially holds five percent (5%) or more of the voting securities of the
corporation. Typically, the publicly traded issuer or its licensed casino affiliate will seek a
blanket waiver for persons holding less than five percent (5%) of the issuers voting securities.
(Holders of less than 5% of the voting securities of a CSIE or its affiliates are not qualifiers
and therefore do not need a waiver of the qualification requirement.) The presumption of control
can be rebutted by clear and convincing evidence, including a showing that a holder is an
institutional investor, as that term is defined under the New Jersey Act, and satisfies the
conditions for institutional investor waiver described below.
An institutional investor is defined by the New Jersey Act as: any retirement fund
administered by a public agency for the exclusive benefit of federal, state, or local public
employees; any investment company registered under the Investment Company Act of 1940, any
collective investment trust organized by banks under Part Nine of the Rules of the Comptroller of
the Currency; any closed end investment trust; any chartered or licensed life insurance company or
property and casualty insurance company; any banking or other chartered or licensed lending
institution; any investment adviser registered under the Investment Advisers Act of 1940; and such
other persons as the New Jersey Commission may determine for reasons consistent with the policies
of the New Jersey Act.
An institutional investor is entitled to a waiver of qualification if it holds less than ten
percent (l0%) of the equity securities (interpreted by the New Jersey Commission to mean the
voting securities) of a publicly traded holding or intermediary company of a casino licensee or
gaming-related CSIE licensee, or of the CSIE licensee itself, and:
| the securities were purchased for investment purposes only; | ||
| the New Jersey Commission finds no cause to believe the institutional investor may be found unqualified; and |
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| upon request by the New Jersey Commission, the institutional investor files a certified statement to the effect that it has no intention of influencing or affecting the affairs of the issuer, the licensee, or any of the licensees other affiliates. Voting on matters put to the vote of the outstanding security holders does not constitute an attempt to influence. |
The New Jersey Commission may grant a waiver of qualification to an institutional investor
holding ten percent (10%) or more of the equity securities of a publicly traded affiliate of a
casino licensee or gaming-related CSIE licensee, or of the CSIE licensee itself, upon a showing of
good cause and if the conditions specified above are met.
Institutional holders of publicly traded debt securities of an affiliate of a casino licensee
are entitled to a waiver of qualification if the holders position in the aggregate is not more
than twenty percent (20%) of the total outstanding debt of the affiliate and not more than fifty
percent (50%) of any outstanding publicly traded debt issue of the affiliate (such as individual
series of subordinated debt ), and if the institutional investor satisfies the conditions specified
above. As with equity securities, the New Jersey Commission may grant a waiver of qualification to
institutional investors holding larger positions upon a showing of good cause and if the
institutional investor satisfies all the conditions specified above.
The New Jersey Act and regulations do not specifically call for the qualification of holders
of publicly traded debt of CSIEs, but the New Jersey Commission could at any time require such
qualification, in which case similar waiver requirements to those applied to the holders of
publicly traded debt of affiliates of casino licensees would likely apply.
Generally, the New Jersey Commission requires that institutional holders seeking waiver of
qualification execute a certification stating that:
| the holder has reviewed the definition of institutional investor under the New Jersey Act and believes that it meets the definition of institutional investor; | ||
| the holder purchased the securities for investment purposes only and holds them in the ordinary course of business; | ||
| the holder has no involvement in the business activities of, and no intention of influencing or affecting the affairs of, the issuer, the licensee or any affiliate; | ||
| if the holder subsequently determines to influence or affect the affairs of the issuer, the licensee or any affiliate, it will provide not less than 30 days notice of its intent and will file an application for qualification with the New Jersey Commission before taking the action; and | ||
| the holder acknowledges that it is subject to the jurisdiction of the New Jersey Commission and the requirements of the New Jersey Act and the regulations promulgated thereunder. |
With respect to non-institutional holders of publicly traded debt securities, the New Jersey
Commission generally waives the qualification requirement for holders of less than 15.0% of a
series of publicly-traded debt as long as the securities remain widely distributed and freely
traded in the public market, and the holder has no ability to control the issuer or the licensee.
We cannot assure you that the New Jersey Commission will continue to apply the 15.0% qualification
threshold. The New Jersey Commission could at any time establish a lower threshold.
Beginning on the date that the New Jersey Commission serves notice on a casino licensee or
affiliate that a holder of a security or other interest has been disqualified, it will be unlawful
for the holder to:
| receive any dividends or interest upon any such security or other interest; | |
| exercise, directly or through any trustee or nominee, any right conferred by such security or other interest; or |
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| receive any remuneration in any form from the casino licensee for services rendered or otherwise. |
Persons required to qualify under the New Jersey Act because they hold debt or equity
securities of a casino licensee or its affiliates and who are not already qualified are required
either to (i) divest within 120 days such securities as the New Jersey Commission may require to
remove the need for qualification or, in the alternative, (ii) file a completed application for
qualification and place the securities into an interim casino authorization (ICA) trust pending
qualification. Unless and until the New Jersey Commission denies ICA or finds reasonable cause to
believe that the investor may not be found qualified, the investor will retain the ability to
direct the trustee how to vote, or whether to dispose of, the securities. If the New Jersey
Commission denies ICA or finds reasonable cause to believe that the investor may be found
unqualified, the New Jersey Commission can order that the trust become operative, in which case
the investor will lose voting power, if any, over the securities but will retain the right to
petition the New Jersey Commission to order the trustee to dispose of the securities.
Once an ICA trust is funded, and regardless of whether it becomes operative, the investor has
no right to receive a return on the investment until the investor becomes fully qualified. Should
an investor ultimately be found unqualified, the trustee would dispose of the trust property, and
the proceeds would be distributed to the unqualified applicant only in an amount not to exceed the
lower of the actual cost of the trust property to the unqualified applicant or the value of such
trust property calculated as if the investment had been made on the date the trust became
operative. Any excess proceeds would be paid to the State of New Jersey. If the securities were
sold by the trustee pending qualification, the investor would receive only actual cost, with
disposition of the remainder of the proceeds, if any, to await the investors qualification
hearing.
The Company must notify the New Jersey Commission and the New Jersey Division of any new debt
or equity issued and must provide them with the related documentation, including lists of holders
if requested. The Company may have to petition the New Jersey Commission for waiver of the
qualification requirement for particular security holders subsequent to such issuance of debt or
equity securities. If necessary waivers are not granted, the holders of such debt or equity
securities will either have to be found qualified by the New Jersey Commission or divest enough
securities to permit waiver. There can be no assurance that necessary waivers will be granted.
If a casino license is not renewed, is suspended for more than 120 days or revoked, the New
Jersey Commission can appoint a conservator to preserve and operate the business. Upon appointment,
the conservator is vested with title to all the property relating to the casino hotel, subject to
any and all valid liens, claims, and encumbrances. While the conservator is operating the business,
the former or suspended casino licensee is entitled to a fair rate of return from net earnings,
with any excess to be paid to the State. The New Jersey Commission can authorize the conservator to
sell the property in bulk, subject to valid liens, claims and encumbrances, after the resolution of
any suspensions of, or appeals by, the former or suspended licensee, after appropriate prior
consultation with the licensee as to the reasonableness of the terms of sale, upon prior written
notice to all creditors and other parties in interest, and only to persons eligible to apply for
and able to qualify for a casino license under the New Jersey Act. The former or suspended licensee
is entitled to the net proceeds of the sale after payment of all obligations owed to the State and
to the conservator.
Argentina. In Argentina, the regulation of gaming is generally under the jurisdiction of the
provinces of the country. All of our casinos in Argentina are located in the province of Neuquén.
In May 1994, the Provincial Government of Neuquén enacted a casino privatization program to issue
twelve-year exclusive concession agreements to operate existing casinos. The concession agreements
are renewable for five or ten years, provided that certain conditions are met. The Executive Power
of Neuquén granted a casino license to Casino Magic Corporation pursuant to a Concession Agreement
dated December 21, 1994, between the Provincial Government of Neuquén and Casino Magic Neuquén S.A
(the Concession Agreement). Casino Magic Corporation and Casino Magic Neuquén S.A. are direct or
indirectly wholly-owned subsidiaries of ours. The Concession Agreement granted Casino Magic Neuquén
S.A. the exclusive right to operate casinos in the cities of Neuquén and San Martín de los Andes in
the Province of Neuquén. The Concession Agreement also granted Casino Magic Neuquén S.A. the
exclusive right to operate casinos
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within 50 kilometers (31.05 miles) of its existing properties as long as those casinos are
within the Province of Neuquén. It should be noted that we still retain a priority to match any
bidding offer to open and operate other casinos within the Province of Neuquén, however, such
casinos would not be covered by the exclusivity provisions of the Concession Agreement and provided
that in the corresponding bidding process our original offer is not lower than 15% of that of the
best offerors. We also opened a new facility in the city of Junín de los Andes, in the Province of
Neuquén. This casino was opened under the scope of the existing casino license for the property
located in San Martín de los Andes. In July 2005, we closed the largest of our casinos located in
the city of Neuquén, which had been operating since 1995, and opened a larger facility including a
more lavish casino; an upscale restaurant; a wine bar; three other casino bars; and a large
entertainment venue, one mile away from the original location on approximately 20 acres owned by
us. Additionally, we have obtained a casino license to open casinos in the cities of Caviahue and
Copahue, in the Province of Neuquén. These casino licenses are for a term of 12 years and are
renewable for an additional 10 year term at the discretion of the granting authority. In light of
the above, we are currently operating four casinos in the Province of Neuquén (in the cities of
Neuquén, San Martín de los Andes, Junín de los Andes, and Caviahue), and the one in Copahue in the
same Province, in west central Argentina, seasonally.
On July 14, 2003, the Executive Power of Neuquén approved the terms of an agreement
establishing the conditions for the renewal of our casino license pursuant to which we operate our
three Neuquén casinos, either for a five year or for a ten year term. In July 2005, we opened the
new facility in order to qualify for and obtain the ten year extension through 2016, extension
which has already been formally granted. We have finalized the construction of a hotel facility by
the casino in the city of Neuquén which, upon approval by the authorities, would grant us an
additional 5 year extension in the terms of our casino license, through 2021. The Concession
Agreement establishes that the shareholders approved by the Provincial Government of Neuquén shall
maintain control (i.e., 51% of the shareholding of the corporate capital with voting power) of the
licensee. It also establishes that any transfer of shares up to 49% of its shareholding in the
licensee shall not require prior authorization. Otherwise, prior authorization from the Provincial
Government of Neuquén shall be required. Notwithstanding that, no transfer of shares shall be
performed to those persons detailed under Section 5 of the bidding terms approved under the casino
privatization program (i.e., among others, foreign persons or legal entities if in their country
there are no regulations prohibiting money laundering, natural or legal persons that cannot
contract with the Province of Neuquén). We cannot predict what effect the enactment of any laws,
regulations or pronouncements relating to casino operations would have on the operations of Casino
Magic Argentina.
Other. In addition to the requirements discussed above, if we sought to establish gaming
operations in any jurisdiction in which we currently do not operate, we would need to be
registered, licensed, or found suitable to conduct gaming activities in that jurisdiction and, if
successful in doing so, would be subject to such jurisdictions regulatory requirements applicable
to gaming companies. Holders of our securities would also be subject to additional requirements
regarding the ownership and disposition of their securities, including possibly being called
forward by applicable gaming authorities to be licensed or found suitable to be the beneficial
owner of our securities.
From time to time, legislators and special interest groups have proposed legislation that
would restrict or prevent gaming operations. In addition, changes in regulations affecting the
casino business can impact our existing or proposed operations. Any new restriction on or
prohibition of our gaming operations could force us to curtail operations and incur significant
losses.
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