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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period                to              

Commission File No. 001‑36629

ELDORADO RESORTS, INC.

(Exact name of registrant as specified in its charter)

Nevada
(State or other jurisdiction of
incorporation or organization)

46‑3657681
(I.R.S. Employer
Identification No.)

100 West Liberty Street, Suite 1150, Reno, Nevada 89501

(Address and zip code of principal executive offices)

(775) 328‑0100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b‑2 of the Exchange Act.

Large accelerated filer 

Accelerated filer 

Non‑accelerated filer 
(Do not check if a
smaller reporting company)

Smaller reporting company 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes   No 

The number of shares of the Registrant’s Common Stock, $0.00001 par value per share, outstanding as of July 29, 2016 was 47,075,635.

 

 

 

 


 

ELDORADO RESORTS, INC.

QUARTERLY REPORT FOR THE THREE AND SIX MONTHS ENDED

JUNE 30, 2016

TABLE OF CONTENTS

 

 

 

    

Page

PART I. FINANCIAL INFORMATION 

 

 

Item 1. 

FINANCIAL STATEMENTS

 

 

 

Consolidated Balance Sheets at June 30, 2016 (unaudited) and December 31, 2015

 

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (unaudited)

 

 

Condensed Notes to Unaudited Consolidated Financial Statements

 

Item 2. 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

23 

Item 3. 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

38 

Item 4. 

CONTROLS AND PROCEDURES

 

38 

PART II. OTHER INFORMATION 

 

 

Item 1. 

LEGAL PROCEEDINGS

 

39 

Item 1A. 

RISK FACTORS

 

39 

Item 2. 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

39 

Item 3. 

DEFAULTS UPON SENIOR SECURITIES

 

39 

Item 4. 

MINE SAFETY DISCLOSURES

 

39 

Item 5. 

OTHER INFORMATION

 

39 

Item 6. 

EXHIBITS

 

39 

SIGNATURES 

 

41 

 

 

 

 

 

 

 

1


 

PART I-FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

ELDORADO RESORTS, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

    

2016

    

2015

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

37,105

 

$

78,278

 

Restricted cash

 

 

3,870

 

 

5,271

 

Accounts receivable, net

 

 

14,524

 

 

9,981

 

Inventories

 

 

11,696

 

 

11,742

 

Prepaid income taxes

 

 

422

 

 

112

 

Prepaid expenses and other

 

 

13,320

 

 

10,795

 

Total current assets

 

 

80,937

 

 

116,179

 

INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

 

 

1,286

 

 

1,286

 

PROPERTY AND EQUIPMENT, NET

 

 

615,011

 

 

625,416

 

GAMING LICENSES AND OTHER INTANGIBLES, NET

 

 

489,630

 

 

492,033

 

GOODWILL

 

 

66,826

 

 

66,826

 

NON-OPERATING REAL PROPERTY

 

 

14,218

 

 

16,314

 

OTHER ASSETS, NET

 

 

6,777

 

 

6,954

 

Total assets

 

$

1,274,685

 

$

1,325,008

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

4,533

 

$

4,524

 

Accounts payable

 

 

23,031

 

 

17,005

 

Due to affiliates

 

 

73

 

 

129

 

Accrued property, gaming and other taxes

 

 

15,737

 

 

19,424

 

Accrued payroll and related

 

 

17,198

 

 

17,852

 

Accrued interest

 

 

14,230

 

 

14,978

 

Accrued other liabilities

 

 

30,848

 

 

31,798

 

Total current liabilities

 

 

105,650

 

 

105,710

 

LONG-TERM DEBT, LESS CURRENT PORTION

 

 

789,389

 

 

861,713

 

DEFERRED INCOME TAXES

 

 

86,093

 

 

78,797

 

OTHER LONG-TERM LIABILITIES

 

 

7,110

 

 

8,121

 

 

 

 

988,242

 

 

1,054,341

 

COMMITMENTS AND CONTINGENCIES (Note 10)

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

Common stock, 100,000,000 shares authorized, 47,075,635 and 46,817,829 issued and outstanding, par value $0.00001 as of June 30, 2016 and December 31, 2015, respectively

 

 

 —

 

 

 —

 

Paid-in capital

 

 

172,513

 

 

170,897

 

Retained earnings

 

 

113,918

 

 

99,758

 

Accumulated other comprehensive income

 

 

12

 

 

12

 

Total stockholders’ equity

 

 

286,443

 

 

270,667

 

Total liabilities and stockholders’ equity

 

$

1,274,685

 

$

1,325,008

 

 

The accompanying condensed notes are an integral part of these consolidated financial statements.

 

2


 

ELDORADO RESORTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Casino

 

$

178,459

 

$

156,788

 

$

347,537

 

$

304,450

 

Pari-mutuel commissions

 

 

2,893

 

 

3,056

 

 

3,577

 

 

4,261

 

Food and beverage

 

 

36,967

 

 

23,495

 

 

70,706

 

 

45,677

 

Hotel

 

 

25,677

 

 

8,444

 

 

45,842

 

 

15,478

 

Other

 

 

11,014

 

 

6,573

 

 

21,899

 

 

11,299

 

 

 

 

255,010

 

 

198,356

 

 

489,561

 

 

381,165

 

Less-promotional allowances

 

 

(23,695)

 

 

(15,723)

 

 

(44,680)

 

 

(31,081)

 

Net operating revenues

 

 

231,315

 

 

182,633

 

 

444,881

 

 

350,084

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Casino

 

 

100,374

 

 

91,066

 

 

196,636

 

 

177,884

 

Pari-mutuel commissions

 

 

2,931

 

 

3,093

 

 

4,255

 

 

4,789

 

Food and beverage

 

 

20,783

 

 

12,002

 

 

40,511

 

 

23,923

 

Hotel

 

 

7,979

 

 

2,313

 

 

15,108

 

 

4,503

 

Other

 

 

6,618

 

 

3,567

 

 

12,692

 

 

6,434

 

Marketing and promotions

 

 

9,766

 

 

7,404

 

 

19,341

 

 

14,505

 

General and administrative

 

 

32,380

 

 

23,053

 

 

64,035

 

 

46,597

 

Corporate

 

 

4,354

 

 

3,901

 

 

11,258

 

 

8,061

 

Depreciation and amortization

 

 

15,583

 

 

14,031

 

 

31,787

 

 

28,500

 

Total operating expenses

 

 

200,768

 

 

160,430

 

 

395,623

 

 

315,196

 

(LOSS) GAIN ON SALE OR DISPOSAL OF PROPERTY

 

 

(836)

 

 

3

 

 

(765)

 

 

4

 

ACQUISITION CHARGES

 

 

(56)

 

 

(253)

 

 

(576)

 

 

(337)

 

EQUITY IN INCOME OF UNCONSOLIDATED AFFILIATE

 

 

 —

 

 

1,106

 

 

 —

 

 

588

 

OPERATING INCOME

 

 

29,655

 

 

23,059

 

 

47,917

 

 

35,143

 

OTHER EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(12,795)

 

 

(17,232)

 

 

(25,786)

 

 

(34,464)

 

Loss on early retirement of debt, net

 

 

(89)

 

 

 —

 

 

(155)

 

 

 —

 

Total other expense

 

 

(12,884)

 

 

(17,232)

 

 

(25,941)

 

 

(34,464)

 

NET INCOME BEFORE INCOME TAXES

 

 

16,771

 

 

5,827

 

 

21,976

 

 

679

 

PROVISION FOR INCOME TAXES

 

 

(5,980)

 

 

(1,032)

 

 

(7,816)

 

 

(2,048)

 

NET INCOME (LOSS)

 

$

10,791

 

$

4,795

 

$

14,160

 

$

(1,369)

 

Net Income (Loss) per share of Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.23

 

$

0.10

 

$

0.30

 

$

(0.03)

 

Diluted

 

$

0.23

 

$

0.10

 

$

0.30

 

$

(0.03)

 

Weighted Average Basic Shares Outstanding

 

 

47,071,608

 

 

46,516,614

 

 

46,966,391

 

 

46,505,687

 

Weighted Average Diluted Shares Outstanding

 

 

47,721,075

 

 

46,657,618

 

 

47,591,958

 

 

46,505,687

 

 

The accompanying condensed notes are an integral part of these consolidated financial statements.

3


 

ELDORADO RESORTS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

NET INCOME (LOSS)

 

$

10,791

 

$

4,795

 

$

14,160

 

$

(1,369)

 

Other Comprehensive Income (Loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Comprehensive Income (Loss), net of tax

 

$

10,791

 

$

4,795

 

$

14,160

 

$

(1,369)

 

 

The accompanying condensed notes are an integral part of these consolidated financial statements.

4


 

ELDORADO RESORTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

    

2016

    

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income (loss)

 

$

14,160

 

$

(1,369)

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

31,787

 

 

28,500

 

Amortization of debt issuance costs and (premium) discount

 

 

1,754

 

 

(5,044)

 

Equity in income of unconsolidated affiliate

 

 

 —

 

 

(588)

 

Loss on early retirement of debt, net

 

 

155

 

 

 —

 

Change in fair value of acquisition related contingencies

 

 

1

 

 

33

 

Stock-based compensation expense

 

 

2,033

 

 

821

 

Loss (gain) on sale or disposal of property

 

 

765

 

 

(4)

 

Provision for bad debts

 

 

329

 

 

238

 

Provision for deferred income taxes

 

 

7,052

 

 

1,242

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Restricted cash

 

 

1,401

 

 

(1,406)

 

Accounts receivable

 

 

(4,872)

 

 

(1,722)

 

Inventories

 

 

46

 

 

284

 

Prepaid expenses and other

 

 

(2,835)

 

 

(1,233)

 

Accounts payable

 

 

2,414

 

 

(1,438)

 

Interest payable

 

 

(748)

 

 

 —

 

Income taxes payable

 

 

 —

 

 

(137)

 

Accrued and other liabilities and due to affiliates

 

 

(4,786)

 

 

984

 

Net cash provided by operating activities

 

 

48,656

 

 

19,161

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Capital expenditures, net of payables

 

 

(20,345)

 

 

(17,863)

 

Net cash used in business combinations

 

 

(491)

 

 

 —

 

Net proceeds from sale of property and equipment

 

 

1,551

 

 

2

 

Reimbursement of capital expenditures from West Virginia regulatory authorities

 

 

3,676

 

 

 —

 

Decrease (increase) in other assets, net

 

 

177

 

 

(250)

 

Net cash used in investing activities

 

 

(15,432)

 

 

(18,111)

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Payments under New Term Loan

 

 

(2,125)

 

 

 —

 

Net payments under New Revolving Credit Facility

 

 

(71,500)

 

 

 —

 

Payments on capital leases

 

 

(136)

 

 

(27)

 

Debt issuance costs

 

 

(463)

 

 

 —

 

Taxes paid related to net share settlement of equity awards

 

 

(1,178)

 

 

 —

 

Proceeds from exercise of stock options

 

 

1,005

 

 

 —

 

Net cash used in financing activities

 

 

(74,397)

 

 

(27)

 

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

 

(41,173)

 

 

1,023

 

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

 

 

78,278

 

 

87,604

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

37,105

 

$

88,627

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

24,760

 

$

39,483

 

Cash paid during period for income taxes

 

 

1,054

 

 

848

 

NON-CASH FINANCING ACTIVITIES

 

 

 

 

 

 

 

Payables for capital expenditures

 

 

3,612

 

 

196

 

 

The accompanying condensed notes are an integral part of these consolidated financial statements.

5


 

ELDORADO RESORTS, INC.

 

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Organization and Basis of Presentation

 

Organization

 

The accompanying unaudited consolidated financial statements include the accounts of Eldorado Resorts, Inc. (“ERI” or the “Company”), a Nevada corporation formed in September 2013, and its consolidated subsidiaries. ERI was formed in September 2013 to be the parent company following the merger of wholly-owned subsidiaries of the Company into Eldorado HoldCo LLC (“HoldCo”), a Nevada limited liability company formed in 2009 that is the parent company of Eldorado Resorts LLC (“Resorts”), and MTR Gaming Group, Inc. (“MTR Gaming”), a Delaware corporation incorporated in 1988 (the “Merger”). Effective upon the consummation of the Merger on September 19, 2014 (the “Merger Date”), MTR Gaming and HoldCo each became a wholly-owned subsidiary of ERI and, as a result of such transactions, Resorts became an indirect wholly-owned subsidiary of ERI. The Merger has been accounted for as a reverse acquisition of MTR Gaming by HoldCo under accounting principles generally accepted in the United States (“US GAAP”). As a result, HoldCo is considered the acquirer of MTR Gaming for accounting purposes. Intercompany accounts and transactions have been eliminated in consolidation.

 

On November 24, 2015 (the “Acquisition Date”), Resorts consummated the acquisition of all of the assets and properties of Circus Circus Reno (“Circus Reno”) and the 50% membership interest in the joint venture (the “Silver Legacy Joint Venture”) owned by Galleon, Inc. (collectively, the “Circus Reno/Silver Legacy Purchase” or the “Acquisition”) pursuant to a Purchase and Sale Agreement, dated as of July 7, 2015 (the “Purchase Agreement”), entered into with Circus Circus Casinos, Inc. and Galleon, Inc., each an affiliate of MGM Resorts International, with respect to the acquisition. On the Acquisition Date, Resorts also exercised its right to acquire the 3.8% interest in Eldorado Limited Liability Company (“ELLC”) held by certain affiliates and shareholders of the Company. As a result of these transactions, ELLC and CC-Reno, LLC, a newly formed Nevada limited liability company, became wholly-owned subsidiaries of ERI, and Silver Legacy Joint Venture became an indirect wholly‑owned subsidiary of ERI. The accompanying unaudited consolidated financial statements for periods prior to the Acquisition Date do not include the results of operations for Circus Reno and account the Silver Legacy Joint Venture as an investment in an unconsolidated affiliate.

Resorts owns and operates the Eldorado Resort Casino Reno, a premier hotel, casino and entertainment facility centrally located in downtown Reno, Nevada (“Eldorado Reno”), which opened for business in 1973. Resorts also owns Eldorado Resort Casino Shreveport (“Eldorado Shreveport”), a 403‑room all suite art deco‑style hotel and a tri‑level riverboat dockside casino complex situated on the Red River in Shreveport, Louisiana, which commenced operations under its previous owners in December 2000.

 

Prior to the Acquisition Date, Resorts owned a 48.1% interest in the Silver Legacy Joint Venture which owns the Silver Legacy Resort Casino (“Silver Legacy”), a major themed hotel and casino situated between and seamlessly connected at the mezzanine level to the Eldorado Reno and Circus Reno. Resorts acquired the remaining interest in Silver Legacy in 2015 as well as acquiring Circus Reno.

 

MTR Gaming operates as a hospitality and gaming company with racetrack, gaming and hotel properties in West Virginia, Pennsylvania and Ohio. MTR Gaming, through its wholly-owned subsidiaries, owns and operates Mountaineer Casino, Racetrack & Resort in Chester, West Virginia (“Mountaineer”), Presque Isle Downs & Casino in Erie, Pennsylvania (“Presque Isle Downs”), and Eldorado Gaming Scioto Downs (“Scioto Downs”) in Columbus, Ohio. Scioto Downs, through its subsidiary, RacelineBet, Inc., also operates Racelinebet.com, a national account wagering service that offers online and telephone wagering on horse races as a marketing affiliate of TwinSpires.com, an affiliate of Churchill Downs, Inc.

Basis of Presentation

 

The accompanying unaudited consolidated financial statements of the Company and its subsidiaries have been prepared in accordance under accounting principles generally accepted in the United States for interim financial information with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all

6


 

of the information and notes required by US GAAP for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, all of which are normal and recurring, considered necessary for a fair presentation and have been included herein. The results of operations for these interim periods are not necessarily indicative of the operating results for other quarters, for the full year or any future period. 

 

The executive decision makers of our Company review operating results, assess performance and make decisions on a “significant market” basis. The Company’s management views each of its properties as an operating segment. Operating segments are aggregated based on their similar economic characteristics, types of customers, types of services and products provided, the regulatory environments in which they operate, and their management and reporting structure. The Company’s principal operating activities occur in three geographic regions: Nevada, Louisiana and parts of the eastern United States. The Company has aggregated its operations into three reportable segments based on the similar characteristics of the operating segments within the regions in which they operate. We, therefore, consider Eldorado Reno, Silver Legacy and Circus Reno as Nevada, Eldorado Shreveport as Louisiana, and Scioto Downs, Presque Isle Downs and Mountaineer as Eastern.

 

These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. 

 

Reclassifications

Certain reclassifications of prior year presentations have been made to conform to the current period presentation.

 

Recently Issued Accounting Pronouncements

 

In May 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-12, “Revenue from Contracts with Customers  Narrow-Scope Improvements and Practical Expedients.” This pronouncement addresses narrow-scope improvements to the guidance on collectability, noncash consideration, and completed contracts at transition. Additionally, the amendments in this update provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. This update affects the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements for Topic 606. While we have not completed our impact analysis, we do not expect the adoption to have a material impact on our consolidated financial statements.

 

In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with CustomersIdentifying Performance Obligations and Licensing.” This pronouncement was issued to proactively address areas in which diversity in practice potentially could arise, as well as to reduce the cost and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis. The update guidance expands how an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update affects the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements for Topic 606. While we have not completed our impact analysis, we do not expect the adoption to have a material impact on our consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation—Stock Compensation.” This ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. These areas include income tax consequences, classification of awards as either equity or a liability, and classification on the statement of cash flow. The effective date is for annual and interim periods beginning after December 15, 2016, with early adoption permitted. We elected to early adopt this ASU prospectively in the first quarter of 2016. Under the new guidance, we recognized a reduction in income tax expense of $0.3 million and $0.7 million for the three and six months ended June 30, 2016, respectively. There were no excess tax benefits for the three and six months ended June 30, 2015.

 

In February 2016, the FASB issued ASU 2016-02 which addresses the recognition and measurement of leases. Under the new guidance, for all leases (with the exception of short-term leases), at the commencement date, lessees will

7


 

be required to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Further, the new lease guidance simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and liabilities, which no longer provides a source for off balance sheet financing. The effective date for this update is for the annual and interim periods beginning after December 15, 2018 with early adoption permitted. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are currently evaluating the impact of adopting this accounting standard on our consolidated financial statements.

 

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. This ASU eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment. The guidance is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, it is effective for fiscal years beginning after December 15, 2016. We have adopted this guidance, and it had no impact on our consolidated financial statements for the three and six months ended June 30, 2016.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory”, which requires that inventory within the scope of this ASU be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out (LIFO) and the retail inventory method are not impacted by the new guidance. This ASU applies to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of this ASU at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective for annual periods beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact on our financial statements and disclosures.

In April 2015, the FASB issued ASU 2015-03 which changes the presentation of debt issuance costs in financial statements. Under the new standard, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. The amortization of the costs is reported as interest expense. In August 2015, the FASB issued an accounting standards update which clarifies that companies may continue to present unamortized debt issuance costs associated with line of credit arrangements as an asset. The new guidance should be applied on a retrospective basis, wherein the balance sheet of each individual period should be adjusted to reflect the period-specific effects of applying the new guidance. The effective dates for these updates were for the annual and interim periods beginning after December 15, 2015. We elected to early adopt this guidance during the third quarter of 2015.

In February 2015, the FASB issued ASU 2015-02, “Amendments to the Consolidation Analysis”, which amends: the assessment of whether a limited partnership is a variable interest entity; the effect that fees paid to a decision maker have on the consolidation analysis; how variable interests held by a reporting entity’s related parties or de facto agents affect its consolidation conclusion; and for entities other than limited partnerships, clarifies how to determine whether the equity holders as a group have power over an entity. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. We elected to early adopt this guidance during the fourth quarter of 2015.

In January 2015, the FASB issued ASU No. 2015‑1, “Income Statement—Extraordinary and Unusual Items” (Subtopic 225‑20) which eliminates the concept of accounting of Extraordinary Items, previously defined as items that are both unusual and infrequent, which were reported as a separate item on the income statement, net of tax, after income from continuing operations. The elimination of this concept is intended to simplify accounting for unusual items and more closely align with international accounting practices. This amendment is effective for annual periods ending after December 15, 2015 and for subsequent interim and annual periods thereafter. Early adoption is permitted. We believe that the effects, if any, of the adoption of this guidance will not have a material impact on our consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014‑15, “Presentation of Financial Statements—Going Concern” (Subtopic 205‑40) which amends the current guidance in ASC Topic 205 by adding Subtopic 40. Subtopic 40 requires management to evaluate whether there are conditions or events that in aggregate would raise substantial doubt about an

8


 

entity’s ability to continue as a going concern for one year from the date the financial statements are issued or available to be issued. If substantial doubt existed, management would be required to make certain disclosures related to nature of the substantial doubt and under certain circumstances, how that substantial doubt would be mitigated. This amendment is effective for annual periods ending after December 15, 2016 and for subsequent interim and annual periods thereafter. Early adoption is permitted. We are currently evaluating the effects, if any, adoption of this guidance will have on our consolidated financial statements.

Note 2. Acquisition and Final Purchase Accounting

 

On November 24, 2015, the Company acquired all of the assets and properties of Circus Reno and the 50% membership interest in the Silver Legacy Joint Venture owned by Galleon, Inc. As of June 30, 2016, the Company finalized its accounting related to the Circus Reno/Silver Legacy Purchase. The total purchase consideration was $223.6 million as presented in the following table.

 

 

 

 

 

 

 

 

 

 

Purchase consideration calculation (dollars in thousands)

 

Silver Legacy

 

Circus Reno

 

Total

Cash consideration paid by ERI for MGM’s 50% equity interest and MGM’s member note

 

$

56,500

 

$

16,000

 

$

72,500

Fair value of ERI’s preexisting 50% equity interest

 

 

56,500

 

 

 —

 

 

56,500

Settlement of Silver Legacy’s long-term debt (1) 

 

 

87,854

 

 

 —

 

 

87,854

Prepayment penalty(1)

 

 

1,831

 

 

 —

 

 

1,831

Closing Silver Legacy and Circus Reno net working capital (2) 

 

 

6,124

 

 

2,111

 

 

8,235

Reverse member note(3)

 

 

(6,107)

 

 

 —

 

 

(6,107)

Deferred tax liability

 

 

2,769

 

 

 —

 

 

2,769

Purchase consideration

 

$

205,471

 

$

18,111

 

$

223,582

 

 

(1)

Represents $5.0 million of short-term debt, $75.5 million of long-term debt, the remaining 50% of the $11.5 million of member notes (net of discount), and accrued interest. Additionally, the Company paid a $1.8 million prepayment penalty as a result of the early payoff of the Silver Legacy long-term debt.

(2)

Per the Purchase and Sale Agreement, the purchase price was $72.5 million plus the Final Closing Net Working Capital (as defined in the Purchase and Sale Agreement). As agreed by both parties, the final working capital adjustment was $8.2 million.

(3)

Represents 50% of the $11.5 million of member notes (net of discount) due to ERI, and related accrued interest. This amount was settled in conjunction with the final, agreed-upon purchase consideration.

The transaction was accounted for using the acquisition method. No goodwill resulted from the recording of this transaction. 

Final Purchase Price Allocation – Silver Legacy and Circus Reno

The following table summarizes the allocation of the final purchase consideration to the identifiable assets acquired and liabilities assumed in the Circus Reno/Silver Legacy Purchase. The fair values were based on management’s analysis, including work performed by third‑party valuation specialists. The following table summarizes the final purchase price allocation of the acquired assets and assumed liabilities as of June 30, 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Silver Legacy

 

Circus Reno

 

Total

Current and other assets, net

 

$

21,625

 

$

2,115

 

$

23,740

Property and equipment

 

 

168,037

 

 

14,996

 

 

183,033

Intangible assets(1)

 

 

5,000

 

 

1,000

 

 

6,000

Other noncurrent assets

 

 

10,809

 

 

 —

 

 

10,809

Net assets acquired

 

$

205,471

 

$

18,111

 

$

223,582

 

 

 

 

 

 

 

 

 

 

(1)

Intangible assets consist of trade names which are non-amortizable, and loyalty programs which are amortized over one year.

For the three months ended June 30, 2016, the Company finalized its valuation procedures and adjusted the preliminary purchase price allocations, as disclosed in the March 31, 2016 Form 10-Q and December 31, 2015 Form 10-K, to their updated values. The finalized purchase price allocations resulted in a $1.3 million decrease in property and

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equipment. This change related to management refining certain assumptions used in the valuation of property and equipment to its fair value. Accordingly, the Company adjusted depreciation expense from the Acquisition date through June 30, 2016, based on the revised measurement of property and equipment. The depreciation expense adjustment was not material.

Fair valuation methods used for the identifiable net assets acquired in the Acquisition make use of quoted prices in active markets and discounted cash flows using current interest rates and are provisional pending development of a final valuation.

Trade receivables and payables, inventory and other current and noncurrent assets and liabilities were valued at the existing carrying values as they represented the fair value of those items at the Acquisition, based on management’s judgments and estimates.

The fair value estimate of property and equipment utilized a combination of the cost and market approaches, depending on the characteristics of the asset classification. The fair value of land was determined using the market approach, which considers sales of comparable assets and applies compensating factors for any differences specific to the particular assets. With respect to personal property components of the assets (gaming equipment, furniture, fixtures and equipment, computers, and vehicles) the cost approach was used, which is based on replacement or reproduction costs of the asset. Building and site improvements were valued using the cost approach using a direct cost model built on estimates of replacement cost.

Trade names were valued using the relief‑from‑royalty method. The loyalty program was valued using a comparative business valuation method. Management has assigned trade names an indefinite useful life, in accordance with its review of applicable guidance of ASC Topic No. 350, Intangibles—Goodwill and Other. The standard required management to consider, among other things, the expected use of the asset, the expected useful life of other related asset or asset group, any legal, regulatory, or contractual provisions that may limit the useful life, the Company’s own historical experience in renewing similar arrangements, the effects of obsolescence, demand and other economic factors, and the maintenance expenditures required to obtain the expected cash flows. In that analysis, management determined that no legal, regulatory, contractual, competitive, economic or other factors limit the useful lives of these intangible assets. The loyalty program is being amortized on a straight‑line basis over a one year useful life.

Unaudited Pro Forma Information

The following unaudited pro forma information presents the results of operations of the Company for the three and six months ended June 30, 2015, as if the Acquisition had occurred on January 1, 2015 (in thousands except per share data).

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

    

June 30, 2015

    

June 30, 2015

 

Net revenues

 

$

232,340

 

$

444,133

 

Net income

 

 

8,879

 

 

1,877

 

Net income per common share:

 

 

 

 

 

 

 

Basic

 

$

0.19

 

$

0.04

 

Diluted

 

$

0.19

 

$

0.04

 

Weighted shares outstanding:

 

 

 

 

 

 

 

Basic

 

 

46,550,042

 

 

46,550,042

 

Diluted

 

 

46,924,894

 

 

46,800,406

 

 

These pro forma results do not necessarily represent the results of operations that would have been achieved if the Acquisition had taken place on January 1, 2015, nor are they indicative of the results of operations for future periods. The pro forma amounts include the historical operating results of the Company, the Silver Legacy and Circus Reno prior to the Acquisition, with adjustments directly attributable to the Acquisition.

 

Note 3. Investment in Unconsolidated Affiliates

 

Hotel Partnership.  The Company holds a 42.1% variable interest in a partnership with other investors to develop a new 118-room Hampton Inn & Suites hotel to be developed at Scioto Downs. Pursuant to the terms of the

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partnership agreement, the Company contributed $1.0 million of cash and 2.4 acres of a leasehold immediately adjacent to The Brew Brothers microbrewery and restaurant at Scioto Downs. The partnership will be responsible for the construction of the hotel at an estimated cost of $15.0 million and other investor members have been identified to operate the hotel upon completion. The Company is not the primary beneficiary, and therefore, the entity is accounted for under the equity method of accounting. At June 30, 2016, the Company’s investment in the partnership was $1.3 million, classified as “Investment in and advances to unconsolidated affiliates” in the consolidated balance sheets, representing the Company’s maximum exposure to loss.

Silver Legacy Joint Venture.  Effective March 1, 1994, ELLC and Galleon entered into the Silver Legacy Joint Venture pursuant to a joint venture agreement to develop the Silver Legacy. The Silver Legacy consists of a casino and hotel located in Reno, Nevada, which began operations on July 28, 1995.  Prior to the Acquisition Date, each partner owned a 50% interest in the Silver Legacy Joint Venture. Also prior to the Acquisition Date, Resorts owned a 48.1% interest in the Silver Legacy Joint Venture by means of its 96.2% ownership of ELLC, which owned a 50% interest in the Silver Legacy Joint Venture.

On the Acquisition Date, Resorts consummated the Acquisition of the other 50% membership interest in the Silver Legacy Joint Venture owned by Galleon, Inc. pursuant to the Purchase Agreement and also exercised its right to acquire the 3.8% interest in ELLC held by certain affiliates of the Company. As a result of these transactions, ELLC became a wholly-owned subsidiary of ERI and Silver Legacy became an indirect wholly‑owned subsidiary of ERI. In conjunction with the Acquisition, we recorded a $35.6 million gain related to the valuation of our pre-acquisition investment in the Silver Legacy Joint Venture.

As consideration for the noncontrolling interest, the Company issued 373,135 shares of common stock. Subsequent to this action, the Company owned 100% of ELLC. The Company valued the shares at the market price on the day the shares were issued to the noncontrolling interest holders. The value of the total consideration paid was $3.6 million.

On December 16, 2013, the Silver Legacy Joint Venture entered into a new senior secured term loan facility totaling $90.5 million (the “New Silver Legacy Credit Facility”) to refinance its indebtedness under its then existing senior secured term loan and Silver Legacy Second Lien Notes. The New Silver Legacy Credit Facility was scheduled to mature on November 16, 2017, which was the maturity date of the original Silver Legacy credit facility. In connection with the Circus Reno/Silver Legacy Purchase, all amounts outstanding under the New Silver Legacy Credit Facility were paid in full and the cash collateral securing such obligations were released.

Equity in income related to the Silver Legacy Joint Venture for the three and six months ended June 30, 2015 was $1.1 million and $0.6 million, respectively.

 

Summarized results of operations for the Silver Legacy Joint Venture in 2015 prior to the Acquisition were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Six months ended

 

 

    

June 30, 2015

    

June 30, 2015

    

 

 

(unaudited)

 

Net revenues

 

$

31,984

 

$

59,635

 

Operating expenses

 

 

(26,421)

 

 

(52,916)

 

Operating income

 

 

5,563

 

 

6,719

 

Other expense

 

 

(2,761)

 

 

(5,499)

 

Net income

 

$

2,802

 

$

1,220

 

 

 

 

 

Note 4. Stock-Based Compensation

The Company has authorized common stock of 100,000,000 shares, par value $0.00001 per share.

The Company accounts for stock-based compensation in accordance with ASC 718, Compensation—Stock Compensation. Total stock-based compensation expense recognized was $0.6 million and $0.2 million for the three months ended June 30, 2016 and 2015, respectively, and $2.0 million and $0.8 million for the six months ended June 30,

11


 

2016 and 2015, respectively. These amounts are included in corporate expenses in the Company’s consolidated statements of operations.

 

The Board of Directors (“BOD”) adopted the Eldorado Resorts, Inc. 2015 Equity Incentive Plan (“2015 Plan”) on January 23, 2015 and our shareholders subsequently approved the adoption of the 2015 Plan on June 23, 2015. The Plan permits the granting of stock options, including incentive stock options (“ERI Stock Options”), stock appreciation rights (“SARs”), restricted stock or restricted stock units (“RSUs”), performance awards, and other stock-based awards and dividend equivalents. ERI Stock Options primarily vest ratably over three years and RSUs granted to employees and executive officers primarily vest and become non-forfeitable upon the third anniversary of the date of grant. RSUs granted to non-employee directors vest immediately and are delivered upon the date that is the earlier of termination of service on the BOD or the consummation of a change of control of the Company. The performance awards relate to the achievement of defined levels of performance and are generally measured over a one or two-year performance period depending upon the award agreement. If the performance award levels are achieved, the awards earned will vest and become payable at the end of the vesting period, defined as either a one or two calendar year period following the performance period. Payout ranges are from 0% up to 200% of the award target.

 

On January 22, 2016, the Company granted 367,519 RSUs to executive officers and key employees, and 34,920 RSUs to non-employee members of the BOD under the 2015 Plan. The RSUs had a fair value of $10.77 per unit which was the NASDAQ closing price on that date. An additional 7,932 RSUs were also granted to key employees during the six months ended June 30, 2016. 

 

A summary of the RSU activity for the six months ended June 30, 2016 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average

 

Weighted-Average

 

 

 

 

 

 

Equity

 

Grant Date

 

Remaining

 

Aggregate 

 

 

    

Awards

    

Fair Value

    

Contractual Life

    

Fair Value

 

 

 

 

 

 

 

 

(in years)

 

 

(in millions)

 

Unvested outstanding as of December 31, 2015

 

827,383

(1)

$

4.09

 

2.12

 

$

3.4

 

Granted

 

410,371

(2)

 

10.79

 

 

 

 

 

 

Vested

 

(202,431)

 

 

5.56

 

 

 

 

 

 

Unvested outstanding as of June 30, 2016

 

1,035,323

 

$

6.46

 

1.91

 

$

6.7

 

 

(1)

Includes 475,409 of performance awards at 135% of target and 351,974 time-based awards at 100% of target.

(2)

Includes 178,172 of performance awards at 100% of target and 232,199 time-based awards at 100% of target.

As of June 30, 2016, the Company had approximately $3.9 million of unrecognized compensation expense related to unvested RSUs that is expected to be recognized over a weighted-average period of approximately 1.91 years.

In the first quarter of 2016, the Company’s chief operating officer terminated employment and the chief financial officer retired. In conjunction with the termination and retirement, unvested RSUs totaling 167,511, which were outstanding as of December 31, 2015, immediately vested representing an additional $0.5 million included in stock compensation expense during the first quarter of 2016. Additionally, severance costs totaling $1.4 million were recognized in the first quarter of 2016.

On September 19, 2014, as a result of the Merger, all outstanding MTR Gaming stock options (“MTR Stock Options”) vested (to the extent not already vested) and converted into an option or right to purchase the same number of shares of ERI common stock (at the same exercise price per share as in effect prior to such conversion). All other terms, except vesting requirements, applicable to such stock options remain the same.

 

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A summary of the ERI Stock Option activity for the years ended December 31, 2014 and 2015 and the six months ended June 30, 2016 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average

 

 

 

 

 

 

 

 

Range of

 

Weighted-Average

 

Remaining

 

Aggregate

 

 

 

Options

    

Exercise Prices

    

Exercise Price

    

Contractual Life

    

Intrinsic Value

 

 

 

 

 

 

 

 

 

 

 

 

(in years)

 

(in millions)

 

Outstanding and Exercisable as of December 31, 2014

 

398,200

 

$
2.44

-

$16.27

 

$

7.88

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expired

 

(86,000)

 

 

 

$11.30

 

$

11.30

 

 

 

 

 

 

 

Outstanding and Exercisable as of December 31, 2015

 

312,200

 

$
2.44

-

$16.27

 

$

6.94

 

 

3.47

 

$

1.3

 

Exercised

 

(132,900)

 

$
2.44

-

$3.94

 

$

2.89

 

 

 

 

 

 

 

Outstanding and Exercisable as of             June 30, 2016

 

179,300

 

$
2.44

-

$16.27

 

$

9.94

 

 

3.24

 

$

0.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 5. Goodwill, Intangible Assets, Non-Operating Real Property and Other, net

 

Goodwill, intangible assets, non-operating real property and other, net, consisted of the following amounts (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

June 30,

 

December 31,

 

 

    

2016

    

2015

 

 

 

(unaudited)

 

 

 

 

Goodwill

 

$

66,826

 

$

66,826

 

 

 

 

 

 

 

 

 

Gaming license (indefinite-lived)

 

$

482,074

 

$

482,074

 

Trade names

 

 

9,800

 

 

9,800

 

Loyalty programs

 

 

7,700

 

 

7,700

 

Subtotal

 

 

499,574

 

 

499,574

 

Accumulated amortization trade names

 

 

(3,418)

 

 

(2,462)

 

Accumulated amortization loyalty programs

 

 

(6,526)

 

 

(5,079)

 

Total gaming licenses and other intangible assets

 

$

489,630

 

$

492,033

 

 

 

 

 

 

 

 

 

Non-operating real property

 

$

14,218

 

$

16,314

 

 

 

 

 

 

 

 

 

Land held for development

 

$

906

 

$

906

 

Other

 

 

5,871

 

 

6,048

 

Total other assets, net

 

$

6,777

 

$

6,954

 

 

Goodwill, the excess of the purchase price of acquiring MTR Gaming over the fair market value of the net assets acquired, in the amount of $66.8 million was recorded as of June 30, 2016. For financial reporting purposes, goodwill is not amortized, but is reviewed no less than annually or when events or circumstances indicate the carrying value might exceed the market value to determine if there has been an impairment in the recorded value.

Included in gaming licenses is the Eldorado Shreveport gaming license recorded at $20.6 million at both June 30, 2016 and December 31, 2015. The license represents an intangible asset acquired from the purchase of a gaming entity located in a gaming jurisdiction where competition is limited, such as when only a limited number of gaming operators are allowed to operate in the jurisdiction. Also included in gaming licenses are the gaming and racing licenses of Mountaineer, Presque Isle Downs and Scioto Downs recorded at $461.5 million at both June 30, 2016 and December 31, 2015. Total gaming licenses of $482.1 million reflects the fair value of these licenses calculated as of June 30, 2016 and December 31, 2015, and these gaming license rights are not subject to amortization as the Company has determined that they have an indefinite useful life.

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Trade names related to the Merger are amortized on a straight‑line basis over a 3.5 year useful life. Trade names related to the Acquisition are non-amortizable, and loyalty programs are amortized on a straight‑line basis over a one year useful life. Amortization expense with respect to trade names and the loyalty program for the three and six months ended June 30, 2016 amounted to $1.2 million and $2.4 million, respectively, and $1.7 million and $3.6 million for the three and six months ended June 30, 2015, respectively, which is included in depreciation and amortization expense in the consolidated statements of operations. Such amortization expense is expected to be $2.1 million for the remainder of 2016, $1.9 million for the year ended December 31, 2017, and $0.4 million for the year ended December 31, 2018.

Non-operating real property totaled $14.2 million at June 30, 2016 and $16.3 million at December 31, 2015. The $2.1 million decrease was primarily due to the Company recording a $2.1 million sale of land (non-operating) at Presque Isle Downs during the three and six months ended June 30, 2016. This transaction resulted in a $0.1 million gain net of costs.    

Note 6. Income Taxes

Prior to the Merger Date, HoldCo was taxed as a partnership under the Internal Revenue Code pursuant to which income taxes were primarily the responsibility of the partners. On September 19, 2014, in connection with the Merger, the Company became a C corporation subject to federal and state corporate-level income taxes at prevailing corporate tax rates. The Company and its subsidiaries file US federal tax returns and various state and local income tax returns. With few exceptions, the Company is no longer subject to US federal or state and local tax examinations by tax authorities for years before 2012.

The Company estimates an annual effective income tax rate based on projected results for the year and applies this rate to income before taxes to calculate income tax expense. Any refinements made due to subsequent information that affects the estimated annual effective income tax rate are reflected as adjustments in the current period. For years prior to 2016, the income tax provision resulted in an effective tax rate that had an unusual relation to pretax income (loss). This was due to the federal and state valuation allowances on deferred tax assets as discussed below.

For the three and six months ended June 30, 2016, the difference between the effective rate and the statutory rate is attributed primarily to state and local income taxes less the benefit of the early adoption of ASU 2016-09 (Stock Compensation).

For the three and six months ended June 30, 2015, the difference between the effective rate and the statutory rate is attributed primarily to the federal and state valuation allowances on deferred tax assets. As a result of net operating losses and the net deferred tax asset position (after exclusion of certain deferred tax liabilities that generally cannot be offset against deferred tax assets, known as “Naked Credits”), the Company provided for a full valuation allowance against substantially all of the net federal and state deferred tax assets.

For income tax purposes the Company amortizes or depreciates certain assets that have been assigned an indefinite life for book purposes. The incremental amortization or depreciation deductions for income tax purposes result in an increase in certain deferred tax liabilities that cannot be used as a source of future taxable income for purposes of measuring the Company’s need for a valuation allowance against the net deferred tax assets. Therefore, we expect to record non cash deferred tax expense as we amortize these assets for tax purposes.

For the three and six months ended June 30, 2016, the Company’s tax expense was $6.0 million and $7.8 million, respectively. For the three and six months ended June 30, 2015, the Company’s tax expense was $1.0 million and $2.0 million, respectively. As of June 30, 2016 and 2015, there were no unrecognized tax benefits and the Company does not expect a significant increase or decrease to the total amounts of unrecognized tax benefits within the next twelve months.

 

 

14


 

Note 7. Long‑Term Debt

 

Long‑term debt consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2016

    

2015

 

 

 

(unaudited)

 

 

 

 

Senior Notes

 

$

375,000

 

$

375,000

 

Less: Unamortized debt issuance costs

 

 

(8,612)

 

 

(8,957)

 

Net

 

 

366,388

 

 

366,043

 

 

 

 

 

 

 

 

 

New Term Loan

 

 

420,750

 

 

422,875

 

Less: Unamortized discount and debt issuance costs

 

 

(13,590)

 

 

(14,465)

 

Net

 

 

407,160

 

 

408,410

 

 

 

 

 

 

 

 

 

New Revolving Credit Facility

 

 

22,000

 

 

93,500

 

Less: Unamortized debt issuance costs

 

 

(2,307)

 

 

(2,533)

 

Net

 

 

19,693

 

 

90,967

 

 

 

 

 

 

 

 

 

Capital leases

 

 

681

 

 

817

 

Less: Current portion

 

 

(4,533)

 

 

(4,524)

 

Total long-term debt

 

$

789,389

 

$

861,713

 

 

Scheduled maturities of long‑term debt are $22.0 million in 2020, $395.3 million in 2022 and $375.0 million in 2023. Debt issuance costs and the discount associated with the issuance of the Senior Notes, New Term Loan and New Revolving Credit Facility (as such terms are defined below) in July 2015 totaled $26.3 million. Amortization of debt issuance costs is computed using the effective interest method and is included in interest expense. Amortization of the debt issuance costs and the discount associated with the Senior Notes and New Credit Facility (as defined below) totaled $0.9 million and $1.8 million for the three and six months ended June 30, 2016, respectively.

In 2015, amortization of Resorts’ bond costs was computed using the straight‑line method, which approximated the effective interest method, over the term of the bonds, and was included in interest expense. Amortization expense with respect to deferred financing costs on Resorts senior secured notes amounted to $0.2 million and $0.4 million for three and six months ended June 30, 2015, respectively.

We are a holding company with no independent assets or operations. Our Senior Notes are fully and unconditionally guaranteed, on a joint and several basis, by substantially all of our subsidiaries. Any subsidiaries which have not guaranteed such notes are “minor” (as defined in Rule 3-10(h) of Regulation S-X). As of June 30, 2016, there were no significant restrictions on the ability of our subsidiaries to distribute cash to us or our guarantor subsidiaries. 

Refinancing Transaction and Senior Notes

 

On July 23, 2015, the Company issued $375.0 million in aggregate principal amount of 7.0% senior notes due 2023 (“Senior Notes”) pursuant to the indenture, dated as of July 23, 2015 (the “Indenture”), at an issue price equal to 100.0% of the aggregate principal amount of the Senior Notes. The Senior Notes are guaranteed by all of the Company’s direct and indirect restricted subsidiaries. CC-Reno, LLC and the Silver Legacy Joint Venture became guarantors in June 2016 upon receipt of the required gaming regulatory approval which occurred in May 2016. The Senior Notes will mature on August 1, 2023, with interest payable semi-annually in arrears on February 1 and August 1 of each year.

 

The Company used the net proceeds from the Senior Notes offering together with borrowings under the New Term Loan and the New Revolving Credit Facility (as defined below) to (i) purchase or otherwise redeem (a) all of the outstanding Resorts senior secured notes and (b) all of the outstanding MTR second lien notes, (ii) pay a portion of the purchase price for the Circus Reno/Silver Legacy Purchase and repay all amounts outstanding under the Silver Legacy Joint Venture credit facility, and (iii) pay fees and costs associated with such transactions. Net proceeds from the Senior Notes offering totaling $50.0 million were used for the Circus Reno/Silver Legacy Purchase on the Acquisition Date. As a result of the July 2015 refinancing, we recognized a $2.0 million net loss on the early retirement of debt.

On or after August 1, 2018, the Company may redeem all or a portion of the Senior Notes upon not less than 30

15


 

nor more than 60 days’ notice, at the redemption prices (expressed as percentages of the principal amount) set forth below plus accrued and unpaid interest and additional interest, if any, on the Senior Notes redeemed, to the applicable redemption date, if redeemed during the twelve month period beginning on August 1 of the years indicated below:

 

 

 

 

 

Year

    

Percentage

 

2018

 

105.250

%

2019

 

103.500

%

2020

 

101.750

%

2021 and thereafter

 

100.000

%

 

Prior to August 1, 2018, the Company may redeem all or a portion of the Senior Notes at a price equal to 100% of the Senior Notes redeemed plus accrued and unpaid interest to the redemption date, plus a make-whole premium. At any time prior to August 1, 2018, the Company is also entitled to redeem up to 35% of the original aggregate principal amount of the Senior Notes with proceeds of certain equity financings at a redemption price equal to 107% of the principal amount of the Senior Notes redeemed, plus accrued and unpaid interest. If the Company experiences certain change of control events (as defined in the Indenture), it must offer to repurchase the Senior Notes at 101% of their principal amount, plus accrued and unpaid interest to the applicable repurchase date. If the Company sells assets under certain circumstances and does not use the proceeds for specified purposes, the Company must offer to repurchase the Senior Notes at 100% of their principal amount, plus accrued and unpaid interest to the applicable repurchase date.

 

The Senior Notes are subject to redemption imposed by gaming laws and regulations of applicable gaming regulatory authorities.

 

The Indenture contains certain covenants limiting, among other things, the Company’s ability and the ability of its subsidiaries (other than its unrestricted subsidiaries) to:

 

·

pay dividends or distributions or make certain other restricted payments or investments;

 

·

incur or guarantee additional indebtedness or issue disqualified stock or create subordinated indebtedness that is not subordinated to the Senior Notes or the guarantees of the Senior Notes;

 

·

create liens;

 

·

transfer and sell assets;

 

·

merge, consolidate, or sell, transfer or otherwise dispose of all or substantially all of the Company’s assets;

 

·

enter into certain transactions with affiliates;

 

·

engage in lines of business other than the Company’s core business and related businesses; and

 

·

create restrictions on dividends or other payments by restricted subsidiaries.

 

These covenants are subject to a number of exceptions and qualifications as set forth in the Indenture. The Indenture also provides for customary events of default which, if any of them occurs, would permit or require the principal of and accrued interest on such Senior Notes to be declared due and payable. As of June 30, 2016, the Company was in compliance with all of the covenants under the Indenture relating to the Senior Notes.

 

New Credit Facility

 

On July 23, 2015, the Company entered into a new $425.0 million seven year term loan (the “New Term Loan”) and a new $150.0 million five year revolving credit facility (the “New Revolving Credit Facility” and, together with the New Term Loan, the “New Credit Facility”).

 

As of June 30, 2016, the Company had $420.8 million outstanding on the New Term Loan and $22.0 million outstanding under the New Revolving Credit Facility. The Company had $128.0 million of available borrowing capacity under its New Revolving Credit Facility as of June 30, 2016. At June 30, 2016, the interest rate on the New Term Loan was 4.25%, and the interest rate on the New Revolving Credit Facility was 5.50%.

 

The New Term Loan bears interest at a rate per annum of, at the Company’s option, either (x) LIBOR plus 3.25%, with a LIBOR floor of 1.0%, or (y) a base rate plus 2.25%. Borrowings under the New Revolving Credit Facility bear interest at a rate per annum of, at the Company’s option, either (x) LIBOR plus a spread ranging from 2.5% to 3.25% or (y) a base rate plus a spread ranging from 1.5% to 2.25%, in each case with the spread determined based on the

16


 

Company’s total leverage ratio. Additionally, the Company pays a commitment fee on the unused portion of the New Revolving Credit Facility not being utilized in the amount of 0.50% per annum.

 

The New Credit Facility is secured by substantially all of the Company’s personal property assets and substantially all personal property assets of each subsidiary that guaranties the New Credit Facility (other than certain subsidiary guarantors designated as immaterial) (the “New Credit Facility Guarantors”), whether owned on the closing date of the New Credit Facility or thereafter acquired, and mortgages on the real property and improvements owned or leased us or the New Credit Facility Guarantors. The New Credit Facility is also secured by a pledge of all of the equity owned by us and the New Credit Facility Guarantors (subject to certain gaming law restrictions). The credit agreement governing the New Credit Facility contains a number of customary covenants that, among other things, restrict, subject to certain exceptions, the Company’s ability and the ability of the New Credit Facility Guarantors to incur additional indebtedness, create liens on collateral, engage in mergers, consolidations or asset dispositions, make distributions, make investments, loans or advances, engage in certain transactions with affiliates or subsidiaries or make capital expenditures.

 

The credit agreement governing the New Credit Facility also includes requirements the Company maintains a maximum total leverage ratio and a minimum interest coverage ratio (adjusting over time). The Company is required to maintain a maximum total leverage ratio of 6.00 to 1.00 from January 1, 2016 to December 31, 2017 and 5.00 to 1.00 thereafter. In addition, the Company is required to maintain a minimum interest coverage ratio of 2.75 to 1.00 from January 1, 2016 through December 31, 2016 and 3.00 to 1.00 thereafter. A default of the financial ratio covenants shall only become an event of default under the New Term Loan if the lenders providing the New Revolving Credit Facility take certain affirmative actions after the occurrence of a default of such financial ratio covenants.

 

The credit agreement governing the New Credit Facility contains a number of customary events of default, including, among others, for the non-payment of principal, interest or other amounts, the inaccuracy of certain representations and warranties, the failure to perform or observe certain covenants, a cross default to other indebtedness including the Senior Notes, certain events of bankruptcy or insolvency, certain ERISA events, the invalidity of certain loan documents, certain changes of control and the loss of certain classes of licenses to conduct gaming. If any event of default occurs, the lenders under the New Credit Facility would be entitled to take various actions, including accelerating amounts due thereunder and taking all actions permitted to be taken by a secured creditor. As of June 30, 2016, the Company was in compliance with the covenants under the New Credit Facility.

 

Note 8. Fair Value of Financial Instruments

 

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Accordingly, fair value is a market based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, there is a three‑tier fair value hierarchy, which prioritizes the inputs used in measuring fair values as follows:

 

·

Level 1: Quoted market prices in active markets for identical assets or liabilities.

 

·

Level 2: Observable market‑based inputs or unobservable inputs that are corroborated by market data.

 

·

Level 3: Unobservable inputs that are not corroborated by market data.

 

The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practical to estimate fair value:

 

Cash and Cash Equivalents:  Cash equivalents include investments in money market funds. Investments in this category can be redeemed immediately at the current net asset value per share. A money market fund is a mutual fund whose investments are primarily in short‑term debt securities designed to maximize current income with liquidity and capital preservation, usually maintaining per share net asset value at a constant amount, such as one dollar. The carrying amounts approximate the fair value because of the short maturity of those instruments.

 

Restricted Cash:  Restricted cash includes unredeemed winning tickets from the Company’s racing operations, funds related to horsemen’s fines and certain simulcasting funds that are restricted to payments for improving horsemen’s facilities and racing purses at Scioto Downs, cash deposits that serve as collateral for letters of credit, surety

17


 

bonds and short-term certificates of deposit that serve as collateral for certain bonding requirements. Restricted cash is classified as Level 1 as its carrying value approximates market prices.

 

Long‑term Debt:  The Senior Notes are classified as Level 2 based upon market inputs. The New Term Loan under the credit facility is classified as Level 2 as it is tied to market rates of interest and its carrying value approximates market value. The fair value of the Senior Notes was based on quoted market prices at June 30, 2016.

 

Acquisition-Related Contingent Considerations:  Contingent consideration related to the July 2003 acquisition of Scioto Downs represents the estimate of amounts to be paid to former stockholders of Scioto Downs under certain earn-out provisions. The Company considers the acquisition related contingency’s fair value measurement, which includes forecast assumptions, to be Level 3 within the fair value hierarchy. 

 

The estimated fair values of the Company’s financial instruments are as follows (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

December 31, 2015

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

    

Amount

    

Value

    

Amount

    

 Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

37,105

 

$

37,105

 

$

78,278

 

$

78,278

 

Restricted cash

 

 

3,870

 

 

3,870

 

 

5,271

 

 

5,271

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior Notes