Mirage sues to clear the way for new Strip resort

Mirage Resorts Inc. is asking a court to clear up a dispute threatening to block construction of a new resort south of Bellagio on the Strip.

Mirage and its subsidiary Boardwalk Casino Inc. filed a lawsuit Thursday in District Court against five investment firms holding unexercised warrants to buy Boardwalk stock.

The warrants entitle the holders to buy a total of 1.9 million Boardwalk common shares for $6 each -- $1 more than the price Mirage paid to acquire each of Boardwalk's outstanding shares in a deal that closed last June 30.

Boardwalk stock had been trading at $3.85 a share just before Mirage made its $5-per-share cash tender offer in late 1997, so the defendants had no incentive to exercise their warrants. Since then, the stock's price hasn't exceeded $5 a share.

The defendants had received the warrants as partial consideration for a $40 million loan made to Boardwalk in 1995.

The defendants include Franklin Custodian Funds Inc., which made the loan; Franklin Advisers Inc., and three companies that acted as placement agents -- Brenner Securities Corp., the Holdridge Investment Corp. and Asset Management Corp.

A spokeswoman for Franklin Custodian said today the company hasn't seen a copy of the lawsuit, but doesn't comment on pending litigation. None of the other defendants could be reached for comment.

The lawsuit asked that District Court rule that the warrant holders have no equity interest in Boardwalk because the price of the underlying stock didn't exceed $6.

"The right to pay $6 to receive $5 obviously has little value," the suit said.

Nevertheless, Mirage said that according to the loan agreement, the defendants could obtain Boardwalk shares by exercising their warrants.

But that would "impair" Mirage's ability to operate Boardwalk as a wholly owned subsidiary, the lawsuit said, causing "immediate damage" to Mirage.

So the lawsuit requested a ruling that, should the defendants exercise their warrants, Mirage be allowed to pay them $5 cash for each share instead of turning over actual equity interests to them.

"Boardwalk is currently in a moribund financial situation, and Mirage must determine whether it should recapitalize the corporation," the suit said.

Until the dispute is resolved, Mirage said, it can't move ahead with plans to build "a major new casino resort" on a 50-acre site just south of Bellagio, the $1.6 billion hotel-casino it opened last October.

"It is Mirage's intent to close and demolish the Boardwalk" -- which sits on 8.8 acres in the center of the site -- "to enable construction of the new resort casino, the lawsuit said.

"If the warrant holders are found to have continuing equity interest in Mirage's Boardwalk subsidiary, then it may affect Mirage's decision of whether or not to include the Boardwalk site or Boardwalk subsidiary in construction of the new resort."

In addition, Mirage said, it may use off-balance-sheet debt -- loans secured by the new resort, not the parent company -- or intercompany loans rather than make equity investments into "a subsidiary that may not be wholly owned."

Mirage also said it is the sole secured creditor on more than $70 million of defaulted debt owed by Boardwalk, which has "little prospect" of paying the obligation. The status of the warrants' conversion rights must be resolved before Mirage can determine how to deal with the debt, the suit said.

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