Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-K
_________________________
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2016
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to __________
Commission File No. 001-36207
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CAESARS ACQUISITION COMPANY
(Exact name of registrant as specified in its charter)
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Delaware | 46-2672999 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
One Caesars Palace Drive, Las Vegas, Nevada | 89109 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant's telephone number, including area code:
(702) 407-6000
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Class A Common stock, $0.001 par value | NASDAQ Global Select Market | |
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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 x No o
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 x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes o
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 | o | Accelerated filer | x |
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of June 30, 2016, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the registrant's Class A common stock held by non-affiliates was $531.4 million.
As of February 10, 2017, the registrant had 138,795,500 shares of Class A Common Stock outstanding.
CAESARS ACQUISITION COMPANY
INDEX TO FINANCIAL STATEMENTS
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Caesars Acquisition Company and its subsidiaries have proprietary rights to a number of trademarks used in this Annual Report on Form 10-K that are important to its business, including, without limitation, The World Series of Poker. In addition, Caesars Entertainment Corporation, our joint venture partner in Caesars Growth Partners, LLC, and Caesars Entertainment Operating Company, Inc., and their respective subsidiaries, have proprietary rights to, among others, Caesars, Caesars Entertainment, Harrah's, Total Rewards, Horseshoe and Bally's. We have omitted the registered trademark (®) and trademark (™) symbols for such trademarks named in this Annual Report on Form 10-K.
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PART I
Item 1. Business.
Overview
Caesars Acquisition Company
Caesars Acquisition Company (the "Company," "CAC," "we," "our" and "us"), a Delaware corporation, directly owns 100% of the voting membership units of Caesars Growth Partners, LLC ("CGP LLC"), a Delaware limited liability company and a joint venture between CAC and subsidiaries of Caesars Entertainment Corporation ("CEC" or "Caesars Entertainment"). Our common stock trades on the NASDAQ Global Select Market ("NASDAQ") under the symbol "CACQ."
CAC serves as CGP LLC's managing member and sole holder of all of its outstanding voting units. CAC's primary asset is its membership interest in CGP LLC and does not have any operations other than through its interest in CGP LLC. Certain subsidiaries of Caesars Entertainment hold all of CGP LLC's outstanding non-voting units.
Asset Purchase Transactions
JCC Holding Company II, LLC and its subsidiaries (collectively known as "Harrah's New Orleans"), 3535 LV Corp. (formerly known as "The Quad" and recently rebranded as "The LINQ Hotel & Casino"), indirect subsidiaries of Parball Corporation (collectively known as "Bally's Las Vegas") and Corner Investment Company, LLC and its subsidiaries (collectively known as "The Cromwell") were direct wholly-owned subsidiaries of Caesars Entertainment Operating Company, Inc. ("CEOC").
On May 5, 2014, Caesars Growth Properties Holdings, LLC ("CGPH," an indirect, wholly-owned subsidiary of CGP LLC), acquired through one or more subsidiaries (i) The Cromwell, The LINQ Hotel & Casino, and Bally's Las Vegas, (ii) 50% of the ongoing management fees and any termination fees payable under the property management agreements entered between a property manager and the owners of each of these properties, and (iii) certain intellectual property that is specific to each of these properties (collectively referred to as the "First Closing" or "Acquired Properties Transaction"). On May 5, 2014, CGP LLC contributed the equity interests of PHWLV, LLC ("PHWLV") and a 50% interest in the management fee revenues of PHW Manager, LLC ("PHW Manager") to CGPH.
On May 20, 2014, CGPH through one or more subsidiaries acquired (i) Harrah's New Orleans, (ii) 50% of the ongoing management fees and any termination fees payable under the Louisiana property management agreement entered between a property manager and the owners of Harrah's New Orleans and (iii) certain intellectual property that is specific to Harrah's New Orleans (the "Second Closing" or "Harrah's Transaction").
In connection with the Acquired Properties Transaction and the Harrah's Transaction (collectively, the "Asset Purchase Transactions"), CGPH and Caesars Growth Properties Finance, Inc. issued $675.0 million aggregate principal amount of 9.375% second-priority senior secured notes due 2022 (the "2022 Notes"). On May 8, 2014, CGPH closed on $1.175 billion of term loans (the "CGPH Term Loan") and a $150.0 million revolving credit facility pursuant to a credit agreement.
Proposed Merger of CAC with CEC
On December 21, 2014, the Company and CEC entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which, among other things, CAC will merge with and into CEC, with CEC as the surviving company (the "Proposed Merger").
On July 9, 2016, CAC and CEC agreed to amend and restate the Merger Agreement (the "Amended Merger Agreement"). In connection with the entry into the Amended Merger Agreement, on July 9, 2016, (i) CAC and CEOC, a majority owned subsidiary of CEC, agreed to amend and restate the Restructuring Support Agreement (as amended, the "CAC RSA"), dated as of June 12, 2016, among CAC, CEOC and CEC; (ii) CEC and CEOC agreed to amend the Restructuring Support, Settlement and Contribution Agreement, dated as of June 7, 2016 (as amended, the "CEC RSA" and, together with the CAC RSA, the "Caesars RSAs"), between CEC and CEOC; and (iii) CAC entered into a Voting Agreement (the "Voting Agreement") with Hamlet Holdings LLC ("Hamlet Holdings"), and solely with respect to certain provisions of the Voting Agreement, affiliates of Apollo Global Management, LLC and TPG Capital, LP and certain of their co-investors (collectively, the "Holders"). The Caesars RSAs were entered into with respect to the restructuring of CEOC's indebtedness (the "Restructuring") and, together with the Amended Merger Agreement, are consistent with the terms proposed under the second amended Joint Chapter 11 plan of reorganization (as amended, the "Merger Plan") of CEOC and each of the debtors (together with CEOC, the "Debtors") in the CEOC Chapter 11 Cases.
The exchange ratio, pursuant to which shares of CAC's class A common stock, par value $0.001 per share (the "Class A Common Stock") and CAC's class B common stock, par value $0.001 per share (the "Class B Common Stock," and together with the Class A Common Stock, the "CAC Common Stock"), will become exchangeable for shares of CEC's common stock, par value $0.01 per share ("CEC Common Stock"), has been amended to ensure that holders of CAC Common Stock immediately
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prior to the closing of the Proposed Merger (the "Merger Closing") will receive 27% of the outstanding CEC Common Stock on a fully diluted basis (prior to conversion of the new CEC convertible notes) (and which, upon conversion at any time following the Merger Closing, will result in pro rata dilution to all holders of CEC Common Stock, including holders of CAC Common Stock immediately prior to the Merger Closing) (the "Exchange Ratio"). The Exchange Ratio may be adjusted pursuant to the Amended Merger Agreement and such adjustment will be determined on the earlier of (i) the date on which the special committee of CAC's Board of Directors (the "CAC Special Committee") and the special committee of CEC's Board of Directors (the "CEC Special Committee"), each composed solely of independent directors, agree in writing as to the Exchange Ratio, and (ii) the sixth business day following the date on which the Adjustment Period (as described below) ends.
The Adjustment Period is the 14 day period beginning on the date, as soon as reasonably practicable following the date of the Amended Merger Agreement, on which each of CAC and CEC has received written confirmation from the other party that it and its respective representatives have received certain information (which information must be provided on request as soon as reasonably practicable, but no later than 30 days following the confirmation date) necessary for such party's financial advisor to render a fairness opinion. During the Adjustment Period, the CAC Special Committee, on behalf of CAC, and the CEC Special Committee, on behalf of CEC, will determine whether and to what extent it is necessary, appropriate and advisable to adjust the Exchange Ratio. The Exchange Ratio may be adjusted solely to take into account certain tax costs and tax attributes (except as described below).
If at any time during the Adjustment Period the CAC Special Committee or the CEC Special Committee determines that (i) it cannot obtain a fairness opinion from its respective financial advisor as a result of an adjustment to the Exchange Ratio based solely on the factors set forth in the Amended Merger Agreement or (ii) an adjustment to the Exchange Ratio based solely on the factors set forth in the Amended Merger Agreement would not be advisable or would otherwise be inconsistent with the directors' fiduciary duties under applicable law, either the CAC Special Committee or the CEC Special Committee may notify the other party of such determination and, following delivery of such notice, the parties will instead take into account all other relevant facts and circumstances impacting the intrinsic value of CAC and CEC at such time.
If the CAC Special Committee, on behalf of CAC, or the CEC Special Committee, on behalf of CEC, (i) are unable to agree to an adjustment to the Exchange Ratio by the end of the Adjustment Period and determine in good faith, after consultation with outside legal counsel, that failure to terminate the Amended Merger Agreement would be reasonably likely to be inconsistent with the fiduciary duties of the directors of CAC or CEC, as applicable, under applicable law or (ii) have not received, as of a date that is reasonably proximate to the date on which the Adjustment Period ends, an opinion of an independent, nationally recognized financial advisor to the effect that, as of the date of such opinion, and based upon and subject to the various assumptions made, procedures followed, matters considered and limitations on the review undertaken in preparing such opinion as set forth therein, the Exchange Ratio is fair, from a financial point of view, to CAC or CEC, as applicable, then the Amended Merger Agreement may be terminated within five business days following the end of the Adjustment Period.
The Amended Merger Agreement also contains an amended "Go-Shop" provision on terms substantially the same as the "Go-Shop" provision originally set forth in the Merger Agreement. The Amended Merger Agreement also provides that (i) certain existing litigation, under specified circumstances, (ii) certain legislative changes and (iii) any change in the financial or securities markets or in the market price or valuation of any security or financial interest, or in the business, results of operations or prospects of either of CAC or CEC, subject to certain conditions, in each case will not provide cause for either the CAC board of directors (the "CAC Board") or the CEC board of directors (the "CEC Board") to effect an adverse recommendation change.
The Amended Merger Agreement was fully negotiated by and between the CAC Special Committee and the CEC Special Committee, was recommended by each of the CAC Special Committee and the CEC Special Committee and was approved by the CAC Board and the CEC Board. Stockholders of each of CAC and CEC will be asked to vote on the adoption of the Amended Merger Agreement at special meetings of CAC's stockholders and CEC's stockholders, respectively, that will each be held on a date to be announced. Pursuant to the Amended Merger Agreement, CAC and CEC, as applicable, have agreed to file a joint proxy statement/prospectus as soon as reasonably practicable following the date of the Amended Merger Agreement.
The closing of the merger is subject to the adoption of the Amended Merger Agreement by the affirmative vote of the holders of at least a majority of all outstanding shares of CAC Common Stock and CEC Common Stock, respectively. In addition to the closing conditions originally set forth in the Merger Agreement, each of CAC and CEC have agreed that their respective obligation to consummate the merger is subject to the fulfillment of the Merger Plan containing the Debtor Release, the Third-Party Release and the Exculpation. However, the Amended Merger Agreement eliminated from the closing conditions set forth in the Merger Agreement (i) minimum cash closing conditions for both parties and (ii) a closing condition that limited tax costs relating to the Restructuring to close the Proposed Merger.
The Amended Merger Agreement provides certain termination rights to each of CAC and CEC based on, among other things: (i) CEOC filing (including any of its debtor subsidiaries), without CAC's or CEC's prior written consent, respectively (x) a plan of reorganization, a disclosure statement or a proposed order entered by the Bankruptcy Court confirming the Merger
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Plan that is materially consistent with the RSAs and the Merger Plan and otherwise acceptable to each of CAC and CEC ("Confirmation Order") that does not include the Debtor Release, the Third-Party Release or the Exculpation as to CAC, CGP LLC, their subsidiaries, and their respective representatives ("CAC Released Parties") or CEC, its subsidiaries, and their respective representatives ("CEC Released Parties"), respectively, in form and substance consistent in all material respects with such provisions as set forth in the Merger Plan or (y) any motion, pleading or other document with the Bankruptcy Court in the CEOC Chapter 11 Cases that is otherwise materially inconsistent with the CAC RSA or CEC RSA, respectively, or the Merger Plan, (ii) the Confirmation Order (x) not including the Debtor Release, the Third-Party Release or the Exculpation as to the CAC Released Parties or the CEC Released Parties, respectively, in form and substance consistent in all material respect with such provisions as set forth in the Merger Plan or (y) not being otherwise materially consistent with the Merger Plan, (iii) the 105 Injunction Order no longer being in effect or, subject to certain conditions, CEOC failing to file a motion on or before August 14, 2016, or such earlier date as may be required by local rules governing the CEOC Chapter 11 Cases for the filing of such motion, seeking to extend the 105 Injunction Order currently in effect to the period ending on the confirmation date, (iv) either of the Caesars RSAs being terminated or becoming null and void or (v) the date on which the merger becomes effective not occurring by the close of business on December 31, 2017.
Caesars Growth Partners, LLC
CAC's primary asset is its interest in CGP LLC.
CGP LLC is a casino asset and entertainment company. Subsidiaries of Caesars Entertainment own all of the outstanding non-voting units of CGP LLC and are the majority economic owners of CGP LLC. Through its relationship with Caesars Entertainment, CGP LLC has the ability to access Caesars Entertainment's proven management expertise, brand equity, Total Rewards loyalty program and structural synergies.
CGP LLC's Interactive Entertainment business consists of two operating units: The World Series of Poker and regulated online real money gaming. CGP LLC's Casino Properties and Developments include Planet Hollywood Resort & Casino in Las Vegas ("Planet Hollywood"), The LINQ Hotel & Casino, Bally's Las Vegas, The Cromwell, Horseshoe Baltimore Casino ("Horseshoe Baltimore"), Harrah's New Orleans, and a 50% interest in the management fee paid in connection with the management agreements for each of these properties.
New investment and acquisition opportunities, except for any expansion, add-on or additional investment in respect of any existing gaming property of CGP LLC or its subsidiaries, or except for any potential future investment or acquisition by Caesars Interactive Entertainment, Inc. are required to be submitted to Caesars Entertainment. A committee of the board of directors of Caesars Entertainment comprised of disinterested directors will make the determination on behalf of Caesars Entertainment to (1) pursue any potential projects itself or (2) decline the project for itself, after which CGP LLC may elect or decline to pursue the project. The Amended and Restated Limited Liability Company Agreement of CGP LLC (the "CGP Operating Agreement") includes a framework with respect to the structuring of compensation related to future projects between Caesars Entertainment and CGP LLC. In the event Caesars Entertainment declines an opportunity and CGP LLC undertakes the opportunity, CGP LLC is expected to retain a 50% interest in the management fee to be received by Caesars Entertainment, unless otherwise agreed, and CGP LLC will acquire 100% of the new investment opportunity.
Caesars Enterprise Services, LLC ("CES"), a services joint venture among CEOC, Caesars Entertainment Resort Properties, LLC ("CERP"), a subsidiary of Caesars Entertainment, and the Company, (together the "Members" and each a "Member") manages CGP LLC's properties and provides CGP LLC with access to Caesars Entertainment's management expertise, intellectual property, back office services and Total Rewards loyalty program. CES also employs personnel under each property's corresponding property management agreement.
CES manages certain enterprise assets which include all intellectual property currently used, or contemplated to be used, in connection with the properties owned by CEOC, CERP and CGP LLC and their respective affiliates, including any and all intellectual property related to the Total Rewards program. On October 1, 2014, CES began operations in Nevada, Louisiana and certain other jurisdictions in which regulatory approval had been received or was not required, including through the commencement of direct employment by CES of certain designated enterprise-wide employees. CES also manages other assets it owns, licenses or controls, and employs certain of the corresponding employees and other employees who previously provided services to CEOC, CERP and CGP LLC, their affiliates and their respective properties and systems under each property's corresponding property management agreement. Operating expenses are allocated to each Member with respect to their respective properties serviced by CES in accordance with historical allocation methodologies, subject to annual revisions and certain prefunding requirements. Corporate expenses that are not allocated to the properties directly are allocated by CES to CEOC, CERP, and CGPH according to their allocation percentages (initially 70.0%, 24.6% and 5.4%, respectively), subject to annual review. As a result of an annual review undertaken in September 2015 but effective July 2015, the allocation percentages of CES members, CEOC, CERP and CGPH were revised to 65.4%, 21.8% and 12.8%, respectively. CGPH notified CES, CEOC and CERP that it objected to the September 2015 expense allocation but would pay the revised expense allocations under protest and reserved all rights. As a result of an annual review undertaken in August 2016 but effective January 2017, the allocation
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percentages for CEOC, CERP and CGPH were revised to 62.9%, 22.9% and 14.2%, respectively. CGPH notified CES, CEOC and CERP that it objects to the August 2016 expense allocation but will pay the revised expense allocations under protest and reserves all rights.
On May 20, 2014, the Members entered into an Omnibus License and Enterprise Services Agreement (the "Omnibus Agreement"), which granted licenses to the Members and certain of their affiliates in connection with the formation of CES. Pursuant to the Omnibus Agreement, CGP LLC has access to Caesars Entertainment's leading brand portfolio and management expertise and expects to benefit from its corporate scale, which CGP LLC believes provides a competitive advantage in the operation of CGP LLC's properties. CGP LLC also benefits from management agreements that CGP LLC entered into with management company subsidiaries of Caesars Entertainment, which were subsequently assigned to CES. CGP LLC also participates in Caesars Entertainment's industry-leading customer loyalty program, Total Rewards. CGP LLC uses the Total Rewards system to market promotions and to generate customer play within CGP LLC's properties.
Interactive Entertainment
On September 23, 2016, Caesars Interactive Entertainment, LLC ("CIE" or "Caesars Interactive", formerly Caesars Interactive Entertainment, Inc.), a subsidiary of CGP LLC, sold its social and mobile games business (the "SMG Business") for $4.4 billion subject to customary purchase price adjustments. In connection with the SMG Business sale and related restructuring, CIE retained its World Series of Poker ("WSOP") and regulated online real money gaming ("RMG") businesses. CIE also granted an exclusive, royalty bearing license to Playtika, Ltd. ("Playtika"), a former CIE subsidiary constituting part of the sold SMG Business, with respect to the WSOP and other WSOP-related trademarks owned by CIE or its affiliates and an exclusive royalty bearing sublicense with respect to certain trademarks for continued use in Playtika's social and mobile games business. In connection with the SMG Business sale, CIE repurchased, immediately prior to the closing of the sale of the SMG Business (the "SMG Business Sale Closing"), all of the shares of CIE common stock held by Rock Gaming Interactive LLC and by CIE's other minority investors (collectively, the "Minority Investors") and CIE became a wholly-owned subsidiary of CGP LLC. Details of CIE's two continuing operating units follow below.
Regulated Online Real Money Gaming. CIE has built a foundation for a regulated United States ("U.S.") online real money gaming business. CIE obtained a license in Nevada in December 2012 to operate online poker and launched WSOP.com in September 2013. A subsidiary of CIE applied for and received its internet gaming permit and launched online poker and online casino games in New Jersey in November 2013 under the WSOP, Caesars and Harrah's brands. CIE is actively participating in a U.S. lobbying effort for other states to follow Nevada, Delaware and New Jersey's lead.
While online real money gaming has not been legalized at the Federal level, Nevada has approved interactive gaming regulations allowing for intrastate online poker, and Delaware and New Jersey have each passed online real money gaming laws for both poker and casino games. In February 2014, Nevada and Delaware leaders signed the Multi-State Internet Gaming Agreement establishing a legal framework for the first authorized interstate Internet gambling, which launched in March 2015.
The World Series of Poker. The WSOP, which was founded in 1970, is the world's largest annual poker event and organizer of the most-attended regional poker tour. The flagship WSOP tournament series in Las Vegas had 107,833 entries, an event record, and awarded over $221 million in prize money in 2016. The 2016-17 WSOP Circuit is expected to include 22 scheduled stops at casinos throughout North America and 14 international stops. Since 2007, the WSOP has staged at least one international event series per year in venues including Paris, San Paulo and Melbourne. The WSOP benefits from a television programming rights agreement with ESPN through 2017 and sponsorship agreements with a number of leading brands.
Products
Regulated Online Real Money Gaming
In Nevada, CIE received its operator's license in December 2012 and launched WSOP.com in September 2013. In November 2013, CIE launched three regulated online real money gaming websites in New Jersey that use and promote the Caesars, Harrah's and WSOP brands: CaesarsCasino.com, HarrahsCasino.com and WSOP.com.
CIE's real money gaming software license agreements with 888 Atlantic Limited ("888") and NYX Gaming Group ("NYX") underpin its operations and preparation for further legalized real money gaming in the United States. 888 provides front and back office services for CIE's U.S. poker offerings, allowing CIE to focus on its strengths in branding and marketing, including the online acquisition and retention of customers. CIE operates WSOP.com in Nevada and WSOP.com and HarrahsCasino.com in New Jersey on 888's platform, and operates CaesarsCasino.com in New Jersey on the NYX casino platform. The combination of these agreements provides CIE with two software alternatives and the ability to employ a multi-brand and multi-platform strategy.
The World Series of Poker
CIE markets the WSOP brand through three distinct avenues: live events, licensing and sponsorships.
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Live Events. The signature WSOP live event, the WSOP Las Vegas, was established in 1970 and has occurred annually at the Rio Hotel and Casino ("Rio") in Las Vegas for twelve consecutive years, with an arrangement for the tournament to stay at the Rio through 2017. The 46th annual WSOP Las Vegas event in 2016 drew 107,833 entries from 107 different countries to the 69 events at the Rio to compete in the official WSOP "Gold Bracelet" events.
Since 2005, the WSOP Las Vegas has been complemented by a regular traveling tour of WSOP-branded poker tournaments running from August to May each year (the "WSOP Circuit Events") which culminates in a season-ending National Championship. In the 2015-16 season, the WSOP tour was linked globally for the first time, allowing qualifiers from the U.S. circuit to compete with those on the international circuit for the National Championship. The 2015-16 WSOP Circuit included 19 scheduled stops at casinos throughout North America and six international stops. The 2016-17 WSOP Circuit is expected to include 22 scheduled stops at casinos throughout North America and 14 international stops.
CIE's current contract with ESPN provides that the WSOP Las Vegas will be carried on ESPN and ESPN2 through 2017, with at least 32 hours of original programming annually. CIE receives advertising air-time within all aired episodes on every ESPN platform. ESPN's coverage of this season's WSOP began in August 2016 and ran through November 2016 on both ESPN and ESPN2, concluding coverage with a three-day live final table format.
Since 2007, the WSOP has organized at least one international series per year under the WSOP Europe or WSOP Asia-Pacific brands. The 2017 WSOP Europe will take place at King's Casino in Rozvadov, Czech Republic in October 2017 in what is now the largest live poker room in Europe. The 2016 WSOP Europe took place in Monte Carlo, Monaco. The 2015 WSOP Europe took place at Spielbank Casino in Berlin, Germany in October 2015 and was well-received and attended in its first time in Germany. The first two WSOP Asia-Pacific events were held in 2013 and 2014 in Melbourne, Australia.
Licensing. CIE licenses the WSOP brand for consumer products, allowing CIE to expand its brand through mainstream channels. WSOP licensed products, from playing cards and poker chips to lifestyle apparel, are sold at such retailers as Target and Lids. New Jersey runs a notable lottery offering in concert with the WSOP brand and eight states have also sold WSOP branded instant-win lottery tickets since 2009.
CIE also currently licenses the WSOP trademark to an affiliate of 888 for their use in 888's operation of WSOP.co.uk which is a regulated online real money gaming website in the UK primarily focused on poker. In addition, CIE currently licenses the Caesars trademark to Gamesys Limited for their use in the operation of regulated online real money gaming websites, CaesarsCasino.co.uk and CaesarsBingo.co.uk, in the UK which primarily focus on casino and bingo related games, respectively.
Starting in September 2016, CIE grants an exclusive, royalty bearing license to Playtika with respect to the WSOP and other WSOP-related trademarks owned by CIE or its affiliates and an exclusive royalty bearing sublicense with respect to certain trademarks for continued use in Playtika's social and mobile games business.
Sponsorships. CIE annually pursues promotional partnerships with a variety of brands. Event sponsors in 2016 included Black Clover and 888Poker. Event sponsors in 2015 included NJOY, Jostens, Black Clover, GPI and 888poker. These partnerships typically include both rights fees and marketing activities promoting the WSOP brand. 2014 was highlighted by a "Watch and Win" promotion distributed on more than 20 million packages of the Ruffles Brand of potato chips encouraging download of the WSOP social game and tune-in of the ESPN broadcast. CIE has the exclusive rights to sell camera-visible brand placements within its television and live Internet broadcast programming to third-party advertisers.
Information Technology
Regulated Online Real Money Gaming
888 provides CIE with 888's online gaming platform in addition to a suite of back-office operational services such as customer service, technical support and e-payments. Together with 888, CIE received regulatory certification in Nevada for the September 2013 launch of WSOP.com. 888 provides front and back office services for CIE's United States online real money poker offering for online real money casino under the Harrah's brand in New Jersey.
A subsidiary of CIE and affiliates of NYX entered into a platform and services agreement pursuant to which NYX provides online casino platform services including developing, launching, maintaining and operating its software platforms, in New Jersey in exchange for a share of net gaming revenue for the Caesars Casino brand.
Marketing
We believe the Caesars portfolio of properties (including the CEOC properties) that operate under the Total Rewards program enable us to capture a larger share of our customers' entertainment spending when they travel among markets versus that of a standalone property, which is core to our cross-market strategy. We believe that our high concentration of properties in the center of the Las Vegas Strip generates increased revenues and enables us to capture more of our customers' gaming dollars than in markets where we have single properties competing individually against outside competition.
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We believe the Total Rewards program, in conjunction with this distribution system, allows us to capture a growing share of our customers' entertainment spending and compete more effectively. Members earn Reward Credits at all Caesars-affiliated properties in the United States and Canada for on-property entertainment expenses, including gaming, hotel, dining and retail shopping. Members may also earn Reward Credits through the Total Rewards Visa credit card and can redeem Reward Credits with our many partners, including Starwood Hotels and Resorts and Norwegian Cruise Line. Total Rewards members can redeem Reward Credits for amenities or other items such as merchandise, gift cards, and travel. Total Rewards is structured in tiers (designated as Gold, Platinum, Diamond or Seven Stars), each with increasing member benefits and privileges.
Members are also provided promotional offers and rewards based on their engagement with Caesars-affiliated properties, aspects of their casino gaming play, and their preferred spending choices outside of gaming. Member information is also used for marketing promotions, including direct mail campaigns, electronic mail, our website, mobile devices, social media and interactive slot machines.
With respect to our Interactive Entertainment business, in Nevada and New Jersey, we believe the WSOP database of poker players and Total Rewards database of casino players will be important acquisition channels in addition to traditional techniques such as television and online advertising. CIE's WSOP events are primarily marketed through media features and news coverage.
Casino Properties and Developments
Details of CGP LLC's casino properties as of December 31, 2016 are shown in the table below.
Property | Location | Casino Space– Sq. Ft.(1) | Slot Machines(1) | Table Games(1) | Hotel Rooms & Suites(1) | |||||
Planet Hollywood Resort & Casino | Las Vegas, NV | 64,500 | 1,080 | 100 | 2,500 | |||||
The Cromwell | Las Vegas, NV | 40,000 | 390 | 50 | 188 | |||||
The LINQ Hotel & Casino(2) | Las Vegas, NV | 31,900 | 760 | 70 | 2,250 | |||||
Bally's Las Vegas | Las Vegas, NV | 68,400 | 1,000 | 70 | 2,810 | |||||
Harrah's New Orleans | New Orleans, LA | 125,100 | 1,580 | 150 | 450 | |||||
Horseshoe Baltimore | Baltimore, MD | 122,000 | 2,200 | 180 | — | |||||
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(1) | Approximate. |
(2) | Includes Strip-front property leased by an affiliate of Caesars Entertainment to The LINQ Hotel & Casino. |
Planet Hollywood Resort & Casino
Planet Hollywood, which was constructed in 2001, renovated in 2007 and undergoing an approximately $110 million partial renovation which is expected to be completed in 2017, is a casino resort located on the Las Vegas Strip in Las Vegas, Nevada. Planet Hollywood targets a growing younger demographic segment that values the offerings of non-gaming entertainment that complements the casino's gaming activities. Planet Hollywood benefits from its prime location on a 35-acre site on the east side of the Las Vegas Strip.
Planet Hollywood includes a 2,500-room hotel, which offers deluxe guestrooms and suites and a 64,500 square foot casino featuring approximately 1,080 slot machines and 100 table games. The facility also has food and beverage outlets, an outdoor pool area and a spa that is leased to a third party. In addition, the facility adjoins to a retail mall, the Miracle Mile Shops, with retailers and restaurants, and a timeshare tower operated by Hilton Grand Vacations. The adjoining mall and timeshare tower, as well as the additional amenities featured at Planet Hollywood, stimulate additional traffic through the Planet Hollywood complex, including the casino and its amenities.
Planet Hollywood also features over 80,000 square feet of convention, trade show and meeting facilities, including a main ballroom, pre-function space, breakout space in separate rooms and a theater which is owned by Planet Hollywood and has a booking and marketing relationship with Live Nation, the world's largest concert promoter. This theater, called The AXIS, is used for award shows, live music events and is currently home to Britney Spears' show Britney: Piece of Me and Jennifer Lopez's show Jennifer Lopez: ALL I HAVE. In addition, the property features a venue known as the Showroom, which is leased to BZ Clarity Theatrical-LV, LLC.
The Cromwell
The Cromwell underwent a $235 million renovation in 2014 to become a boutique "lifestyle" hotel and casino located at the heart of the Las Vegas Strip, offering a new, sophisticated Las Vegas experience that is intended to fill a gap in the market for an upscale, boutique "lifestyle" hotel. The Cromwell features 188 luxury hotel rooms, the GIADA restaurant opened by celebrity chef Giada De Laurentiis, a 40,000 square foot casino featuring approximately 390 slot machines and 50 table games, and a rooftop indoor/outdoor dayclub/nightclub and after hours club called Drai's, which was developed with nightclub operator Victor Drai.
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The LINQ Hotel & Casino
The LINQ Hotel & Casino is located on the Las Vegas Strip next to The LINQ Promenade, an outdoor retail and dining area. The LINQ Hotel & Casino underwent a $90 million partial renovation in 2012 and a further $223 million renovation that was completed in the first half of 2015. The LINQ Hotel & Casino features approximately 2,250 rooms, a 31,900 square foot casino with approximately 760 slot machines and 70 table games, several bars and restaurants including the Hash House A Go Go and Guy Fieri's first Las Vegas restaurant, distinctive entertainment offerings including Frank Marino's Divas Las Vegas and Mat Franco - Magic Reinvented Nightly, a pool deck offering two pools and a day club experience, a spa and fitness center, and conference and meeting space.
Bally's Las Vegas
Bally's Las Vegas opened in 1973 and is located on the Las Vegas Strip. The property features approximately 2,810 rooms and suites, a 68,400 square foot casino featuring approximately 1,000 slot machines and 70 table games, several restaurants, including BLT Steak restaurant, an Olympic-sized pool, a spa and salon, and retail shopping. In December 2013, the property completed the renovation to its south hotel tower. The Grand Bazaar, which is not owned by the Company or its subsidiaries, opened to the public in the first half of 2015 in the space directly in front of Bally's Las Vegas. Entertainment offerings include: Wayne Newton: Up Close and Personal and 50 SHADES! THE PARODY.
Bally's Las Vegas benefits from its large convention business, which it shares with Paris Las Vegas, and strong customer loyalty cultivated over more than 30 years. Bally's Las Vegas, having approximately 167,500 square feet of conference and meeting space, combined with Paris Las Vegas, having approximately 117,000 square feet of conference and meeting space, is the largest conference and meeting facility within Caesars Entertainment's network of properties.
Harrah's New Orleans
Harrah's New Orleans opened in 1999 and was fully renovated in 2006. The property is a French-themed resort and casino in the popular destination market of New Orleans, Louisiana. The property features approximately 450 rooms and suites, a 125,100 square foot casino featuring approximately 1,580 slot machines and 150 table games, restaurants and bars (including the popular Ruth's Chris Steakhouse, Besh Steak and Acme Oyster House), as well as the Masquerade nightclub. In addition, the Fulton Street Promenade, a pedestrian promenade featuring dining and outdoor concerts, lies just outside Harrah's New Orleans and is available for outdoor functions.
Horseshoe Baltimore
In July 2012, a consortium led by Caesars Entertainment was awarded the license to operate a casino in downtown Baltimore. In October 2012, Caesars Entertainment entered into definitive agreements with its partners to form a joint venture to build Horseshoe Baltimore which opened in August 2014. Offering world-class gaming amenities, the 122,000 square foot casino offers approximately 2,200 slot machines, 180 table games and a WSOP-branded poker room. The entertainment complex features a variety of nightlife options such as 14Forty, a 24 hour multi-level entertainment venue, and signature restaurants from celebrity chefs.
CEOC Notes
At December 31, 2013, CGP LLC owned $1.1 billion of aggregate principal amount of senior notes held by a subsidiary of Caesars Entertainment (the "CEOC Notes").
On May 5, 2014, CGP LLC entered into a Note Purchase Agreement (the "Note Purchase Agreement") by and among CEOC, CGP LLC and Caesars Growth Bonds, LLC ("CG Bonds"), a wholly owned subsidiary of CGP LLC. Pursuant to the Note Purchase Agreement, CGP LLC agreed to sell to CEOC the $427.3 million principal amount of 5.625% senior notes of CEOC due 2015 (the "2015 Notes") owned by CG Bonds at a price equal to $1,048.75 per $1,000 principal amount representing fair market value. On July 29, 2014, CGP LLC received approximately $451.9 million of consideration (including $3.8 million for interest) as part of the closing of the Note Purchase Agreement.
On August 6, 2014, CGP LLC effectuated a distribution of 100% of its remaining CEOC Notes as a dividend to its members, pro rata based upon each member's ownership percentage in CGP LLC (the "Notes Distribution"). CAC, as a member of CGP LLC and the holder of 42.4% of the economic interests in CGP LLC at the time of distribution, received in connection with the Notes Distribution $137.5 million in aggregate principal amount of the 6.50% Senior Notes, which matured in June 2016, and $151.4 million in aggregate principal amount of the 5.75% Senior Notes maturing in October 2017.
Pursuant to the terms of the Amended Merger Agreement, CAC does not expect to collect principal or interest receivable from these notes.
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Intellectual Property
The development of Intellectual Property ("IP") is part of CIE's overall business strategy, and we regard our IP to be an important element of our success. While the CIE business as a whole is not substantially dependent on any one intellectual property asset, we seek to establish and maintain our proprietary rights in our business operations through the use of copyrights, trademarks and trade secret laws. CIE files applications for copyrights and trademarks in the United States and in foreign countries where we believe filing for such protection is appropriate.
CIE's IP includes the WSOP brand and associated trademarks, copyrights and trade secrets that CIE uses in connection with its business operations. CIE seeks to establish and maintain its proprietary rights in its business operations through the use of copyrights, trademarks, trade secrets and other IP rights. CIE also seeks to maintain its trade secrets and confidential information by nondisclosure policies and through the use of appropriate confidentiality agreements.
CIE, either directly or indirectly through its subsidiaries, owns 33 trademarks as of December 31, 2016 registered with the U.S. Patent and Trademark Office, including the World Series of Poker and WSOP trademarks, for a variety of goods and services. CIE also owns one or more registered trademarks in many jurisdictions globally, including the World Series of Poker, WSOP, and World Series of Poker Europe trademarks.
CIE has additional applications pending in the U.S. and certain foreign countries and is continually adding new filings as it deems appropriate. CIE has not applied for registration of all of its copyrights or trademarks, as the case may be, and may not be successful in obtaining the copyrights and trademarks for which it has applied. Despite efforts to protect its proprietary rights, parties may infringe CIE's intellectual property and use information that it regards as proprietary and its rights may be invalidated or unenforceable.
PHW Las Vegas, LLC ("PHW Las Vegas") is party to a licensing agreement with Planet Hollywood Resorts International, LLC and Planet Hollywood Memorabilia, Inc. (together, the "PH Licensors"), which are affiliates of Robert Earl, the original founder of the Planet Hollywood brand. The licensing agreement grants to PHW Las Vegas rights to use certain trademarks, domain names and intellectual property and to display and exhibit certain memorabilia owned by the PH Licensors. The initial term of the agreement runs through 2045 and the parties may by mutual agreement extend the term for two successive terms of ten years each. The license agreement was assigned by PHW Las Vegas to PHWLV as described above, and Planet Hollywood Resorts International, LLC assigned the license agreement to PHRC License, LLC in 2014.
Subsidiaries of CGP LLC own certain intellectual property used in their properties. In addition, CAC and CGP LLC are parties to a management services agreement with CEOC in which, among other terms, CAC, CGP LLC and their subsidiaries are granted rights to use the Caesars trademark for corporate identification purposes. The term of the agreement is until such time as CAC and CGP LLC elect to terminate the agreement, upon mutual written consent of the parties, upon consummation of either the call right or the liquidation right, or at the election of the non-defaulting party upon the occurrence of an uncured default. The management services agreement was assumed by CES in 2014.
CES granted to the properties owned or controlled by the Members, and their respective affiliates, non-exclusive licenses to all intellectual property owned or used by such licensors, including all intellectual property (a) currently used, or contemplated to be used, in connection with the properties owned by the Members and their respective affiliates, including any and all intellectual property related to the Total Rewards program, and (b) necessary for the provision of services contemplated by the Omnibus Agreement and by the applicable management agreement for any such property. In addition, CES granted to the Harrah's New Orleans and Bally's Las Vegas managed facilities, an exclusive (subject to geographic restrictions) license in and to the "Harrah's" and "Bally's" names. CES granted to CEOC, Caesars License Company, LLC ("CLC"), Caesars World, Inc. ("CWI"), CGPH and the properties owned or controlled by the Members, including us, licenses to any intellectual property that CES develops or acquires in the future that is not a derivative of the intellectual property licensed to it. CES also granted to CEOC, CLC, CWI and CGPH a non-exclusive license to intellectual property specific to the properties controlled by CGPH, CERP and their subsidiaries for any uses consistent with the uses made by CEOC, CLC, CWI and CGPH with respect to such intellectual property prior to the date of the Omnibus Agreement.
Competition
Interactive Entertainment
CIE's competitors include regulated online gaming companies that operate in the U.S., poker tournament creators and other forms of casino and media entertainment.
Casino Properties and Developments
The casino entertainment business is highly competitive and characterized by competitors that vary considerably by their size, quality of facilities, number of operations, brand identities, marketing and growth strategies, financial strength and capabilities, level of amenities, management talent, and geographic diversity. In most markets, including Las Vegas, CGP LLC competes directly with other casino facilities operating in the immediate and surrounding market areas.
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The Las Vegas and Louisiana hotel/casino industries are highly competitive. Hotels on the Las Vegas Strip compete with other hotels on and off the Las Vegas Strip, including hotels in downtown Las Vegas, and hotels in Louisiana compete with other hotels in Louisiana and on the Gulf Coast. CGP LLC's Las Vegas Strip hotels and casinos also compete, in part, with each other and other Caesars Entertainment resorts. In recent years, many casino operators have been reinvesting in existing markets to attract new customers or to gain market share, thereby increasing competition in those markets. As companies have completed new expansion projects, supply has typically grown at a faster pace than demand in some markets, including Las Vegas, CGP LLC's largest market, and competition has increased significantly. For example, SLS Las Vegas opened in August 2014 on the northern end of the Strip, and the Genting Group has announced plans to develop a casino and hotel called Resorts World Las Vegas, which is expected to open in 2019 on the northern end of the Strip. Also, in response to changing trends, Las Vegas operators have been focused on expanding their non-gaming offerings, including upgrades to hotel rooms, new food and beverage offerings, and new entertainment offerings. MGM's The Park and joint venture with AEG, T-Mobile Arena, located between New York-New York and Monte Carlo, opened in April 2016 and includes retail and dining options and a 20,000 seat indoor arena for sporting events and concerts. In addition, in June 2016, MGM announced that the Monte Carlo Resort and Casino will undergo $450 million in non-gaming renovations focused on room, food and beverage and entertainment enhancements and is expected to re-open in late 2018 as two newly branded hotels. There have also been proposals for other large scale non-gaming development projects in Las Vegas by various other developers. The expansion of existing casino entertainment properties, the increase in the number of properties and the aggressive marketing strategies of many of CGP LLC's competitors have increased competition in many markets in which they operate, and this intense competition is expected to continue.
In addition, in the mid-Atlantic region, existing casino resorts provide a number of gaming options for customers, thereby creating significant competition for Horseshoe Baltimore. The casino resorts in the mid-Atlantic region compete with each other on the basis of overall atmosphere, range of amenities, level of service, price, location, entertainment offered and size. Further, MGM National Harbor in Maryland opened in December 2016 and may draw additional customers away from Horseshoe Baltimore. In addition, in June 2016, Maryland Live! announced plans to invest $200 million to construct a new hotel with additional food and beverage and entertainment options adjacent to its casino.
CGP LLC also competes with legalized gaming from casinos located on Native American tribal lands, primarily those located in California. While the competitive impact on CGP LLC's operations in Las Vegas from the continued growth of Native American gaming establishments in California remains uncertain, the proliferation of gaming in California and other areas located in the same regions as CGP LLC's properties could have an adverse effect on CGP LLC's results of operations.
In addition, certain states have legalized, and others may legalize, casino gaming in specific areas, including metropolitan areas from which CGP LLC traditionally attracts customers. A number of states have permitted or are considering permitting gaming, on Native American reservations and through expansion of state lotteries.
While CGP LLC does not believe it to be the case, some have suggested that internet gaming could create additional competition for CGP LLC and could adversely affect CGP LLC's brick and mortar operations. CGP LLC believes that internet gaming complements brick and mortar operations. CGP LLC also competes with other non-gaming resorts and vacation areas, with various other entertainment businesses, and with other forms of gaming, such as lotteries.
The current global trend toward liberalization of gaming restrictions and resulting proliferation of gaming venues could result in a decrease in the number of visitors to CGP LLC's Las Vegas facilities by attracting customers close to home and away from Las Vegas, which could have a material adverse effect on CGP LLC's businesses.
Seasonality
We believe that business at CGP LLC's properties is subject to seasonality based on the weather in the markets in which they operate, and the travel habits of visitors. For instance, visitation is lowest during the winter months; however, volume of business generated by our Las Vegas properties is generally lower during the summer months.
Business in CGP LLC's properties can also fluctuate from time to time due to specific events, such as Chinese New Year, the World Series of Poker tournament (with respect to CGP LLC's Las Vegas Properties), city-wide conventions, Mardi Gras (with respect to Harrah's New Orleans), a sporting event (including, with respect to Harrah's New Orleans, a Super Bowl or a NCAA Final Four Championship) or a concert, or visits by our premium players. Seasonality may cause CGP LLC's working capital cash flow requirements to vary from quarter to quarter depending on the variability in the volume and timing of sales. These factors, among other things, make forecasting more difficult and may adversely affect CGP LLC's ability to manage working capital and to predict financial results accurately, which could adversely affect the market price of our Class A common stock.
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Employees
As of December 31, 2016, CAC did not have any employees. The employees that work at CGP LLC's casino properties are employees of the respective property where they work. CGP LLC's casino properties had approximately 10,150 employees. Approximately 5,490 employees are covered by a collective bargaining agreement.
Governmental Regulation
The gaming industry is highly regulated, and we must maintain our licenses and pay gaming taxes to continue our operations. Our gaming facilities and online real money platforms are subject to extensive regulation under the laws, rules, and regulations of the jurisdiction in which the gaming facility is located and the online real money platform operates. These laws, rules, and regulations generally concern the responsibility, financial stability, and character of the owners, managers, and persons with financial interests in the gaming operations. Violations of laws in one jurisdiction could result in disciplinary action in other jurisdictions. A more detailed description of the regulations to which we are subject is contained in Exhibit 99.2 to this Form 10‑K.
Our businesses are subject to various foreign, federal, state, and local laws and regulations, in addition to gaming regulations. These laws and regulations include, but are not limited to, restrictions and conditions concerning alcoholic beverages, smoking, environmental matters, employees, currency transactions, taxation, zoning and building codes, construction, land use, and marketing and advertising. We also deal with significant amounts of cash in our operations and are subject to various reporting and anti-money laundering regulations. Such laws and regulations could change or could be interpreted differently in the future, or new laws and regulations could be enacted. Material changes, new laws or regulations, or material differences in interpretations by courts or governmental authorities could adversely affect our operating results. See Item 1A. Risk Factors for additional discussion.
Available Information
Our Internet address is www.caesarsacquisitioncompany.com. We make available free of charge, on or through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the "SEC"). We also make available through our website all filings of our executive officers and directors on Forms 3, 4, and 5 under Section 16 of the Exchange Act. These filings are also available on the SEC's website at www.sec.gov. Our Code of Business Conduct and Ethics is available on our website under the Investor Relations link. We will provide a copy of these documents without charge to any person upon receipt of a written request addressed to Caesars Acquisition Company, Attn: Corporate Secretary, One Caesars Palace Drive, Las Vegas, Nevada 89109. Reference in this document to our website address does not constitute incorporation by reference of the information contained on the website.
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Item 1A. Risk Factors.
Risks Related to the Pending Acquisition of the Company by Caesars Entertainment
We may not be able to consummate our announced acquisition by CEC in the anticipated timeframe, or at all.
As previously announced, on December 21, 2014, we entered into the Merger Agreement with CEC, pursuant to which, subject to satisfaction or waiver of certain conditions, CAC will merge with and into CEC, with CEC as the surviving company. On July 9, 2016, we agreed with CEC to amend and restate the Merger Agreement (as amended the "Amended Merger Agreement"). There are a number of risks and uncertainties associated with the consummation of the Proposed Merger with CEC, and completion of the Proposed Merger is contingent upon customary closing conditions, including approval of the Amended Merger Agreement by our stockholders as well as CEC's stockholders and receipt of certain regulatory approvals. In addition to obtaining the stockholder approvals, consummation of the Proposed Merger is also subject to other conditions, including the CEOC restructuring plan confirmed by the bankruptcy court containing the Debtor Release, the Third-Party Release and the Exculpation, each as defined in the CEOC restructuring plan. The order approving the disclosure statement and the order approving solicitation procedures for creditors to vote on the third amended joint plan of reorganization were both approved on June 28, 2016. On October 19, 2016, the objection and voting deadline for the third amended joint plan of reorganization was scheduled for November 21, 2016. The confirmation hearing was held on January 17, 2017, at which point the Bankruptcy Court approved CEOC's restructuring plan. Failure to obtain the other required approvals within the expected time frame, or having to make significant changes to the structure, terms, or conditions of the Proposed Merger to obtain such approvals, may result in a material delay in, or the abandonment of, the Proposed Merger. There can be no assurance that these conditions of the Proposed Merger will be satisfied, and if satisfied, when they will be satisfied. In no event will the Proposed Merger be completed later than December 31, 2017, unless CAC and CEC otherwise agree.
Though the CEOC restructuring plan confirmed by the bankruptcy court contains the Debtor Release, Third-Party Release and Exculpation, under certain circumstances the exchange ratio, pursuant to which shares of CAC's class A common stock, par value $0.001 per share (the "Class A Common Stock") and CAC's class B common stock, par value $0.001 per share (the "Class B Common Stock," and together with the Class A Common Stock, the "CAC Common Stock"), will become exchangeable for shares of CEC's common stock (the "Exchange Ratio"), may be adjusted or the Amended Merger Agreement may be terminated.
Additionally, CEC is subject to litigation which if decided adversely may increase the risk the conditions to consummation of the Proposed Merger are not satisfied. As further discussed in the section entitled Item 3. Legal Proceedings - CEOC Bondholder Litigation, or Noteholder Disputes, on July 22, 2015, the bankruptcy judge presiding over the CEOC bankruptcy denied CEOC's request to stay certain litigation against CEC including the Delaware Second Lien Lawsuit, the New York First Lien Lawsuit, the New York Second Lien Lawsuit and the Senior Unsecured Lawsuits and, following multiple appeals, on December 23, 2015, a panel of the Seventh Circuit Court of Appeals vacated the bankruptcy court's denial of CEOC's requested stay and remanded the issue to the bankruptcy court for further consideration. On January 11, 2015, CEOC petitioned the Seventh Circuit to rehear the appeal. CEOC's petition for rehearing was denied on January 25, 2016, and the case was remanded to the bankruptcy court on February 2, 2016. On February 26, 2016, the bankruptcy court issued a ruling granting CEOC's request to stay the litigation identified above until the earlier of (i) 60 days after the examiner files his initial final report and (ii) May 9, 2016. The second lien notes trustee BOKF, N.A. ("BOKF") sought limited relief from the bankruptcy court's order on March 3, 2016, requesting that all pre-trial matters and rulings be allowed to move forward. On March 10, 2016, the bankruptcy court modified the preliminary injunction to clarify that BOKF may engage in all pre-trial matters. On May 10, 2016, BOKF moved for partial summary judgment on claims related to breach of contract and violation of the Trust Indenture Act of 1939. The parties completed summary judgment briefing prior to the bankruptcy court's June 15, 2016 grant of a temporary stay through August 29, 2016 of the Parent Guarantee Lawsuits, as defined below. On October 5, 2016, the Bankruptcy Court granted CEOC's motion for a stay of the Parent Guarantee Lawsuits. The Bankruptcy Court ordered this stay to remain in effect until the earlier of (a) the first omnibus hearing after the Bankruptcy Court issues its decision confirming or denying confirmation of the CEOC reorganization plan (February 15, 2017), (b) the termination of the Second Lien RSA or (c) further order of the Bankruptcy Court. Adverse rulings may result in reinstatement of the CEC guarantee of certain CEOC debt which could increase the risk the conditions to consummation of the Proposed Merger are not satisfied. Adverse rulings may also result in the possibility that Caesars Entertainment enters bankruptcy or is unable to continue as a going concern.
Additionally, the significant amounts CEC has agreed to pay in connection with CEOC's reorganization raises substantial doubt about CEC's ability to continue as a going concern. It is possible that the amount of money CEC will be required to pay will be so substantial that it will diminish the value of CEC to such an extent that the proposed merger between CAC and CEC cannot be consummated. The proposed merger between CAC and CEC is subject to an exchange ratio governing the relative percentage ownership in the combined entity that CAC and CEC would each hold. Any revision to the exchange ratio must be approved by a special committee of the CAC board and ultimately by shareholder vote of CAC stockholders. Should CEC be required to pay such a substantial amount of money or other consideration to a reorganized CEOC that the value of CEC requires a revision to the exchange ratio for the merged entity, it is possible that the CAC special committee or CAC's
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stockholders would not approve the merger and the merger would not be consummated. See risk factor below entitled "If a court were to find in favor of the claimants in the Noteholder Disputes, it would likely have a material adverse effect on CEC's business, financial condition, results of operations and cash flows and, absent an intervening event, a reorganization under Chapter 11 of the Bankruptcy Code would likely be necessary due to the limited resources available at CEC to resolve such matters. The significant amounts CEC has agreed to pay in connection with CEOC's reorganization raise substantial doubt about CEC's ability to continue as a going concern. In addition, CEC estimates that it will require additional sources of funding to meet the ongoing financial commitments of the CEC holding company for amounts other than committed to under the RSAs."
We can therefore give you no assurance that the Proposed Merger will be consummated, in which case we would not realize the anticipated benefits of having completed the Proposed Merger, which may adversely affect us.
The combined company will require significant liquidity to fund CEOC's emergence from Chapter 11 and to achieve successful integration and achieve targeted synergies post-closing.
At emergence from Chapter 11, CEOC will be required to or may deem it advisable to settle in cash certain obligations (such as professional fees, certain accrued and unpaid interest and debt obligations) that matured during the Chapter 11 bankruptcy cases. Additionally, under the now confirmed CEOC restructuring plan, Caesars Entertainment will be required to (i) contribute over $400 million to pay a forbearance fee, for general corporate purposes and to fund sources and uses and (ii) purchase up to approximately $1.2 billion of new equity in the restructured CEOC and its subsidiaries. As a result of these payments and investments, Caesars Entertainment may have less cash available in future periods for investments and operating expenses and, as a result, the confirmation of the CEOC reorganization plan and emergence of CEOC from bankruptcy may have a negative impact on the combined company and on its ability to sustain its operations. An order approving the disclosure statement and an order approving solicitation procedures for creditors to vote on the third amended joint plan of reorganization were both approved on June 28, 2016. On October 19, 2016, the objection and voting deadline for the third amended joint plan of reorganization was scheduled for November 21, 2016. The confirmation hearing for the third amended joint plan was held on January 17, 2017, where the Bankruptcy Court confirmed the CEOC restructuring plan. CEOC believes that the restructuring plan may become effective as early as May 2017.
While the Proposed Merger with CEC is pending, we are subject to business uncertainties and contractual restrictions that could disrupt our business.
We have experienced and, whether or not the pending Proposed Merger with CEC is completed, we may continue to experience disruption of our current plans and operations due to the pending Proposed Merger, which could have an adverse effect on our business and financial results. Our employees and other key personnel may have uncertainties about the effect of the pending Proposed Merger, and those uncertainties may impact our ability to retain, recruit and hire key personnel while the Proposed Merger is pending or if it is not consummated. To date, we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the Proposed Merger with CEC, and these fees and costs are payable by us whether or not the Proposed Merger is consummated. Furthermore, we cannot predict how our suppliers and customers will view or react to the Proposed Merger, and some may be hesitant to do business with us in light of uncertainties about our ability to perform due to the proposed acquisition of us by CEC. If we are unable to reassure our customers and suppliers to continue transacting business with us, whether or not the Proposed Merger is consummated, our financial results may be adversely affected.
Under the terms of the Amended Merger Agreement, we are required to operate our business in the ordinary course, and we are also subject to certain restrictions on the conduct of our business prior to the consummation of the Proposed Merger without the consent of CEC, including, among other things, certain restrictions on our ability to enter new lines of business; make certain investments and acquisitions; sell, transfer, lease, dispose of or grant our assets; enter into certain contracts; incur indebtedness; and make certain capital expenditures. These restrictions, which could be in place for an extended period of time if the consummation of the Proposed Merger is delayed, could prevent us from pursuing otherwise attractive business opportunities, result in our inability to respond effectively to competitive pressures, industry developments and future opportunities and may otherwise harm our business, financial results and operations.
In the event that the pending Proposed Merger with CEC is not completed, the trading price of our common stock and our future business and financial results may be negatively impacted.
As noted above, the conditions to the completion of the Proposed Merger with CEC may not be satisfied, and even if the CEOC restructuring plan confirmed by the bankruptcy court contains such Debtor Release, Third-Party Release and Exculpation, under certain circumstances the Exchange Ratio may be adjusted or the Amended Merger Agreement may be terminated. If the Proposed Merger with CEC is not completed for any reason, we would still be liable for significant transaction costs and the focus of our management would have been diverted from seeking other potential opportunities without realizing any benefits of the completed Proposed Merger. If we do not complete the Proposed Merger, certain litigation against us such as the Debtor Release and the Third Party Release will remain outstanding and not be released. Furthermore, if we do not complete the Proposed Merger, it is possible that CEOC or its creditors could institute additional litigation against us, asserting claims
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such as those identified in the examiner's report. If we do not complete the Proposed Merger, the price of our common stock may decline significantly from the current market price, which may reflect a market assumption that the Proposed Merger will be completed.
If the Proposed Merger is not completed or we are not otherwise acquired, we may consider other strategic alternatives, which are subject to risks and uncertainties.
If the Proposed Merger with CEC is not completed, our Board will review and consider various alternatives available to us, including, among others, continuing as a public company with no material changes to our business or capital structure or other alternative transactions. Any alternative transaction may involve various additional risks to our business, including, among others, distraction of our management team and associated expenses similar to those described above in connection with the Proposed Merger, our ability to consummate an alternative transaction, the valuation assigned to our business in the alternative transaction, our ability or a potential buyer's ability to access capital on acceptable terms or at all and other variables that may adversely affect our operations.
We are subject to litigation initiated in connection with the Proposed Merger, which could be time consuming and divert the resources and the attention of management.
CAC and the individual members of our Board have been named as defendants in certain lawsuits relating to the Amended Merger Agreement and the Proposed Merger, and may be named in additional lawsuits relating to the Amended Merger Agreement and the Proposed Merger. The lawsuit filed to date generally alleges that the directors breached their fiduciary duties by engaging in a flawed sales process, by approving an inadequate price, and by agreeing to provisions that would allegedly preclude another interested buyer from making a financially superior proposal to acquire the company. The lawsuit filed to date was dismissed without prejudice for lack of prosecution on October 13, 2016. On November 14, 2016, the deadline to seek reinstatement of that lawsuit lapsed, without action by the plaintiff. The defense of any such lawsuits, and any additional lawsuits relating to the Amended Merger Agreement and the Proposed Merger, may be expensive and may divert management's attention and resources, which could adversely affect our business results of operations and financial condition.
The Proposed Merger may be completed on terms different than those contained in the Amended Merger Agreement.
Prior to the completion of the Proposed Merger, the parties may, by their mutual agreement, amend or alter the terms of the Amended Merger Agreement, including with respect to, among other things, the merger consideration to be received by our stockholders or any covenants or agreements with respect to the parties' respective operations pending completion of the Proposed Merger. In addition, either party may choose to waive certain requirements of the Amended Merger Agreement, including some conditions to closing the Proposed Merger. Any such amendments, alterations or waivers may have negative consequences to the other parties or their respective stockholders, including the possibility that consideration paid in the Proposed Merger may be reduced.
Our stockholders cannot be certain of the date they will receive the merger consideration or of the aggregate value of the merger consideration they will receive.
The date that our stockholders will receive the merger consideration depends on the completion date of the Proposed Merger, which is uncertain. In no event will the Proposed Merger be completed later than December 31, 2017 unless CAC and CEC otherwise agree. The date that the Proposed Merger becomes effective may be later than the date of the special meeting of our stockholders to approve the Proposed Merger, and at the time of our special meeting, our stockholders will not know the exact market value of the CEC common stock that they will receive upon completion of the Proposed Merger. The dollar value of the consideration received by our stockholders will depend upon the market value of CEC common stock at the effective time of the Proposed Merger, and such dollar value may be different from, and lower than, the dollar value of the merger consideration today or the date of the special meeting of our stockholders to approve the Proposed Merger.
CIE has a significant amount of cash held in escrow, and it is unclear whether and to what extent such cash will be released.
In connection with the RSAs, the amended and restated restructuring support agreement that we entered into with CEOC and the agreement for the sale of CIE's social and mobile games business, we entered into the CIE Proceeds and Reservation of Rights Agreement on September 9, 2016, with CIE, CEC and CEOC (the "CIE Proceeds Agreement"), pursuant to which CIE deposited into an escrow account $2.7 billion of the proceeds received from the sale of its social and mobile games business. The proceeds may only be released in accordance with the terms set forth in the CIE Proceeds Agreement, with the joint written consent of CIE and CEOC or pursuant to an order of a court of competent jurisdiction. As of December 31, 2016, $62.7 million has been distributed from the escrow account pursuant to the terms of the CIE Proceeds Agreement. The CIE Proceeds Agreement provides, that at the request of CIE, proceeds may be released to CAC or CGP LLC in the event that there is a full and final release, or a dismissal in full with prejudice of the claims for actual and constructive fraudulent conveyances and transfers against CAC, CIE, the purchaser of the social and mobile games business, or the company or any of the subsidiaries acquired by such purchaser ("Caesar Claims"), on the August 9, 2016 suit filed by CEOC, or if there is a judgment in such proceedings and such judgment has been satisfied in full by CAC and CIE, or a plan of reorganization for CEOC which
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provides that CAC, CIE, such purchaser, such purchaser's acquired company and any of its subsidiaries are fully and finally released of all liability arising for such Caesar Claims. Upon consummation of the CEOC restructuring plan confirmed on January 17, 2017, it is anticipated that the funds in the CIE Escrow Account, as defined in Note 3 — Development, Acquisition and Divestiture Activity to the CGP LLC Combined and Consolidated Financial Statements in Exhibit 99.1, will be released. We cannot provide assurance as to when the CEOC restructuring plan will be consummated.
In addition, CIE placed $264.0 million into escrow (the "Indemnity Escrow") to secure the potential indemnity claims of Purchaser for a period of twelve months from the SMG Business Sale Closing date pursuant to the terms of the Purchase Agreement. During the fourth quarter of 2016, upon finalization of the purchase price adjustment pursuant to the Purchase Agreement, CIE paid $4.5 million to Purchaser from the Indemnity Escrow account. At December 31, 2016, the remaining balance in the Indemnity Escrow was $259.5 million, which is included as short-term Restricted cash on CGP LLC's Consolidated Balance Sheet. There have been no claims made against the Indemnity Escrow account. It is unclear whether and to what extent the funds in the Indemnity Escrow will be released.
Risks Related to CGP LLC's Continued Dependence on Caesars Entertainment and CES
CAC and CGP LLC (including CGPH) are dependent on CES, CEOC and its subsidiaries to provide corporate services, back-office support and business advisory services through the CGP LLC Management Services Agreement and the Omnibus Agreement. CAC and CGP LLC cannot operate without the services provided by subsidiaries of Caesars Entertainment and will be adversely affected if either the CGP LLC Management Services Agreement or Omnibus Agreement is terminated.
CES, a services joint venture among CEOC, CERP, a subsidiary of CEC, and CGPH, (together the "Members" and each a "Member") manages our properties and provides us with access to Caesars Entertainment's management expertise, intellectual property, back office services and Total Rewards loyalty program. Pursuant to the CGP LLC Management Services Agreement, CEOC and its subsidiaries provide certain corporate services, back-office support and business advisory services to CAC and CGP LLC, however, generally, the services that would otherwise be performed under the CGP LLC Management Services Agreement are now performed by CES pursuant to other arrangements. Additionally, pursuant to the Omnibus License and Enterprise Services Agreement (the "Omnibus Agreement"), CES provides, among other services, corporate services and back-office support to CGPH. Moreover, CES provides management services to CGP LLC owned casinos. CAC and CGP LLC have a very short history of operating casinos and interactive entertainment. Therefore, the business and operations of CAC and CGP LLC are dependent on the services provided by Caesars Entertainment and its subsidiaries, and CAC and CGP LLC cannot operate without these services. If the quality of the services provided by Caesars Entertainment and its subsidiaries deteriorates, or if the terms under which Caesars Entertainment and its subsidiaries provide such services change in a manner that is adverse to CGP LLC, it could have a material adverse effect on CAC and CGP LLC's business, financial condition and operating results.
In addition, if the CGP LLC Management Services Agreement or the Omnibus Agreement were to be terminated and not replaced, or if Caesars Entertainment or its subsidiaries were to suffer significant liquidity or operational difficulties, becoming incapable of providing support and management services (or unable to provide such services at agreed upon levels) to CAC or CGP LLC or cease operations altogether, CAC and/or CGP LLC would no longer have access to the operational support and management expertise provided by Caesars Entertainment and its subsidiaries and it could have a material adverse effect on CAC and CGP LLC's business, financial condition and operating results. The management of Caesars Entertainment has concluded that, due to the material uncertainty related to certain of the litigation proceedings against Caesars Entertainment, as more fully described in Item 3. Legal Proceedings - CEOC Bondholder Litigation, or Noteholder Disputes, there is substantial doubt about Caesars Entertainment's ability to continue as a going concern. Adverse rulings may result in reinstatement of the CEC guarantee of certain CEOC debt which could increase the risk the conditions to consummation of the Proposed Merger are not satisfied. Adverse rulings may also result in the possibility that Caesars Entertainment enters bankruptcy or is unable to continue as a going concern.
If Caesars Entertainment were unable to continue as a going concern, CERP and CEOC, as subsidiaries of Caesars Entertainment, could be unable to provide CES with their respective contributions to CES's operating funds and capital, which would also render CES incapable of providing us with the support and management services we require. In addition, if CES were to become a debtor in a bankruptcy case, it may seek bankruptcy court approval to assume the Omnibus Agreement or the management agreements under the Bankruptcy Code, to assign such agreements to a third party or to reject such agreements. See "Our operations depend on material contracts with third parties, including Caesars Entertainment, the continued enforcement of which may be adversely impacted by a bankruptcy of Caesars Entertainment or CES." Any failure by CAC or CGP LLC to obtain the operational and management support of Caesars Entertainment and its subsidiaries, and particularly any failure by CGP LLC to obtain Caesars Entertainment's expertise in operating casinos or maintaining access to the Total Rewards loyalty program, would adversely affect CAC and/or CGP LLC's business, financial condition and operating results.
We do not control CES, and the interests of our co-investors may not align with our interests.
CEOC, CERP and CGPH are members of CES, and CGPH and its subsidiaries rely on CES to provide it with intellectual property licenses and property management services, among other services. Each member of CES is required to
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contribute as necessary to fund CES's operating costs and capital requirements in accordance with the terms of the operating agreement that governs CES. The amount CGPH will be required to fund in the future may be greater than its initial contribution, and will be subject to the review and approval of the CES steering committee. CGPH, CEOC and CERP control CES through its steering committee, which is comprised of one representative from each of CGPH, CEOC and CERP. In the event that CGPH's interests do not align with those of CEOC or CERP, the interests of CEOC or CERP may be met before CGPH. In addition, certain decisions by CES may not be made without unanimous consent of the members, including CGPH. These actions include any decision with respect to liquidation or dissolution of CES, merger, consolidation or sale of all or substantially all the assets of CES, usage of CES assets in a manner inconsistent with the purposes of CES, material amendment to CES's operating agreement, admission of new investors to CES and filing of any bankruptcy or similar action by CES. Thus, any Member may block those actions requiring unanimous consent of the Members notwithstanding that such actions are in our interest. As a result of an annual review undertaken in September 2015 but effective July 2015, the allocation percentages of CEOC, CERP and CGPH were revised to 65.4%, 21.8% and 12.8%, respectively. CGPH has notified CES, CEOC and CERP that it objected to the September 2015 expense allocation but would pay the revised expense allocations under protest and reserved all rights. As a result of an annual review undertaken in August 2016 but effective January 2017, the allocation percentages for CEOC, CERP and CGPH were revised to 62.9%, 22.9% and 14.2%, respectively. CGPH has notified CES, CEOC and CERP that it objects to the August 2016 expense allocation but will pay the revised expense allocations under protest and reserves all rights.
CGP LLC is dependent on the expertise of Caesars Entertainment's and CES senior management, who may not be directly invested in CGP LLC's success, which may have an adverse effect on CGP LLC and/or CAC's business, financial condition and operating results.
CGP LLC relies a great deal on the expertise and guidance of Caesars Entertainment's senior management who do not receive direct compensation from CGP LLC. As a result, Caesars Entertainment's senior management may devote substantially less time to the business and operations of CGP LLC than were they to be employed by CGP LLC. Senior management that is not invested in the success of CGP LLC's business may have an adverse effect on CGP LLC and/or CAC's business, financial condition and operating results.
Loss of the services of any key personnel from Caesars Entertainment or CES could have a material adverse effect on the business of CGP LLC.
The leadership of Caesars Entertainment's and CES' senior management has been a critical element of Caesars Entertainment's success. The advisory and management services provided to CGP LLC depend on this senior management. The death or disability of, or other extended or permanent loss of services, or any negative market or industry perception of Caesars Entertainment's or CES' senior management could have a material adverse effect on CGP LLC's business. CGP LLC is not protected by key man insurance or similar life insurance covering members of Caesars Entertainment's senior management, nor does CGP LLC have employment agreements with any of Caesars Entertainment's senior management.
A default by Caesars Entertainment on certain of its debt obligations could adversely affect CGP LLC's business, financial condition and operating results.
Caesars Entertainment (including its consolidated subsidiaries) is a highly leveraged company and has pledged a significant portion of its assets and the assets of its subsidiaries as collateral under certain of its debt obligations, including the trademarks for which CIE has licensed the right to use, including "Caesars," "Total Rewards" and "Harrah's." The stock of CEOC is also pledged to secure these debt obligations. CEOC and its subsidiaries that are the owners of these trademarks filed for bankruptcy in January 2015. If Caesars Entertainment or its subsidiaries were to default on these obligations, its lenders could exercise significant influence over CGP LLC's business. CGP LLC is dependent on a number of services from Caesars Entertainment, CEOC, CES and other subsidiaries of Caesars Entertainment, pursuant to the CGP LLC Management Services Agreement, the Omnibus Agreement and CIE's Shared Services Agreement. If Caesars Entertainment and/or its subsidiaries file for bankruptcy protection under the U.S. bankruptcy code, their filing may materially and adversely affect CGP LLC's assets and operations. For example, in the event of a default by Caesars Entertainment, its lenders or their successors may elect to reject the CGP LLC Management Services Agreement or the Omnibus Agreement as an executory contract in a bankruptcy proceeding. Furthermore, in the event of such a default, Caesars Entertainment's lenders also may seek to reject CIE's cross marketing and trademark license agreement with Caesars Entertainment in connection with a bankruptcy proceeding and, as a result, CIE would no longer have licenses to use certain trademarks owned by Caesars Entertainment or its subsidiaries. The result of this influence and any related disruption in CGP LLC's business could have a material adverse effect on CGP LLC's business, financial condition and operating results. Recent litigation against CEC may increase the risk these events occur. See Item 3. Legal Proceedings - CEOC Bondholder Litigation, or Noteholder Disputes.
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We attribute no value to the CEOC Notes held by CAC and such attribution could adversely affect the market price of our Class A common stock.
As a result of a pro rata dividend distribution to its members on 2014, CAC received $137.5 million in aggregate principal amount of 6.50% senior notes previously issued by CEOC, which matured on June 1, 2016, and $151.4 million in aggregate principal amount of 5.75% senior notes, maturing October 1, 2017. Under the CEOC restructuring plan confirmed on January 17, 2017, CAC receives no recovery for any of the CEOC Notes held by it, and CAC has written down the full value of such CEOC Notes for the calendar year 2016. Accordingly, we attribute no value to the CEOC Notes held by CAC and such attribution could adversely affect the market price of our Class A common stock.
CGP LLC has an obligation to give a right of first refusal for any development opportunities to Caesars Entertainment, but Caesars Entertainment has no obligation to give any development opportunities to CGP LLC. Caesars Entertainment may keep all potential development opportunities for itself. CGP LLC would need to rely on a separate party to pursue any opportunities without the approval and assistance of Caesars Entertainment.
Pursuant to the CGP Operating Agreement, CGP LLC is required to first provide any potential development opportunities to Caesars Entertainment to be considered by a committee of the Caesars Entertainment board of directors comprised of disinterested directors. CGP LLC can only proceed with such investment or opportunity to the extent such Caesars Entertainment committee declines the opportunity for itself or CEOC. If the committee provides an opportunity to CGP LLC, we expect that CGP LLC will retain a 50% interest in the management fee to be received by Caesars Entertainment, unless otherwise agreed. However, because each opportunity will be negotiated as a separate transaction, there can be no assurances that CGP LLC and Caesars Entertainment will share equally (or that CGP LLC will share at all) in the management fee. If the committee does not provide the opportunity to CGP LLC, the committee can also decide to keep the opportunity for Caesars Entertainment. No assurances can be provided that the committee will ever provide an opportunity to CGP LLC.
Although certain employees of Apollo Global Management, LLC ("Apollo") and TPG Global, LLC ("TPG" and, together with Apollo, the "Sponsors") are on the boards of directors of Caesars Entertainment and CAC, the certificates of incorporation of both companies provide that neither the Sponsors nor directors have any obligation to present any corporate opportunity to Caesars Entertainment or CAC. Accordingly, the Sponsors may pursue gaming, entertainment or other activities outside of Caesars Entertainment or CAC and have no obligation to present such opportunity to Caesars Entertainment or CAC; however, if any choose to present such opportunity to Caesars Entertainment or CAC, then such opportunity must follow the rights of first offer.
If the committee declines an opportunity altogether and CGP LLC pursues the opportunity without the support of Caesars Entertainment, CGP LLC will be required to identify and obtain the necessary services from a third-party. No assurances can be provided that CGP LLC will be able to find a third-party to pursue an opportunity without Caesars Entertainment and any services provided may be more expensive than, or of less quality than, those that are provided by Caesars Entertainment, and as a result, could have a material adverse impact on the success of the opportunity.
Caesars Entertainment's interests may conflict with CGP LLC's interests.
The interests of Caesars Entertainment could conflict with CGP LLC's interests. Caesars Entertainment is in a casino and entertainment business similar to CGP LLC and may, from time to time in the future, pursue for itself acquisitions that would be complementary to CGP LLC's business, in which case, and as a result, those acquisition opportunities would not be available to us. Without access to acquisition opportunities, CGP LLC will be limited in growing its business.
The success of CGP LLC's business depends in part on its continued participation in Caesars' Total Rewards loyalty program. If casinos owned by CGP LLC are unable to access the Total Rewards loyalty program database, it could have a material adverse impact on CGP LLC's business.
The success of CGP LLC's business depends in part on its ability to direct targeted marketing efforts to important casino and hospitality customers. The ability of CGP LLC's business to undertake those marketing efforts depends to a significant extent on its continued participation in the Total Rewards loyalty program owned and maintained by CEOC and its subsidiaries, and following its commencement of operations, licensed to CES. In connection with this program, the casinos owned by CGP LLC can develop information which allows them to track casino play and award complimentaries and other promotional opportunities to their customers. Complimentaries and other similar rewards are customarily offered by casino and gaming facilities to their customers and are important incentives to those customers. If the casinos owned by CGP LLC are unable to access the Total Rewards loyalty program database, it could have a material adverse impact on CGP LLC's business. Participation in the Total Rewards loyalty program is one of our competitive strengths and our business and growth strategy are, in part, based on tracked play and targeted marketing efforts.
In the past, the removal of the Total Rewards loyalty program from a casino property has resulted in negative impacts on such property's financial results. Similarly, if we are unable to access the Total Rewards loyalty program database, we expect our annual revenue would decline, which could have a material adverse impact on our business and results of operations.
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CIE and CGP LLC license their right to use and sublicense various trademarks and service marks from Caesars Entertainment and certain of its affiliates. Accordingly, if a third-party successfully challenges Caesars Entertainment or its affiliates' ownership of, or right to use, the Caesars-related marks or if CIE or CGP LLC is unable to stop unauthorized use of such marks, or if Caesars Entertainment or its affiliates use such marks in a way that negatively impacts the value of such marks, CIE's and CGP LLC's business or results of operations could be harmed.
CIE and CGP LLC have licensed the right to use certain trademarks and service marks owned or used by various affiliates of Caesars Entertainment, including Caesars World, Inc., Caesars License Company, LLC and CEOC. These licensed trademarks and service marks include, among others, "Caesars," "Harrah's," and "Total Rewards." CGP LLC's rights to use these trademarks and service marks are among its most valuable assets. Caesars World, Inc., Caesars License Company, LLC and CEOC filed for bankruptcy protection in January 2015, as more fully discussed in the risk factor above entitled "A default by Caesars Entertainment on certain of its debt obligations could adversely affect CGP LLC's business, financial condition and operating results."
If the existing licensing arrangements were terminated and CGP LLC fails to enter into new arrangements in respect of these marks, CGP LLC could lose their rights to use these marks and the corresponding domain names, which could have a material adverse effect on its business, financial condition and operating results. If a third-party successfully challenges Caesars Entertainment or its affiliates' ownership of, or right to use, these marks (including, for example, due to Caesars Entertainment or its affiliates' failure to file for protection of such marks), such a challenge could also have a material adverse effect on CIE's, and therefore CGP LLC's, business, financial condition and operating results.
In addition, these trademarks and service marks are used by Caesars Entertainment and its affiliates around the United States and internationally. Any negative events associated with the use of these marks by Caesars Entertainment or its affiliates may be out of CGP LLC's control, and may negatively impact the "Caesars," "Harrah's" or "Total Rewards" brands, which could harm CGP LLC's business and results of operations.
Failure by CES or CEOC and its subsidiaries to protect the trademarks, technology and other intellectual property that CGP LLC uses could have a negative impact on the value of CGPH's brand names and adversely affect our business. In addition, CES or CEOC and its subsidiaries may have the right to limit the expansion of scope or usage of our intellectual property.
CGP LLC currently licenses from CES and CEOC and its subsidiaries, intellectual property and technology material to its overall business strategy, and CGP LLC regards such intellectual property and technology to be an important element of its success. CGP LLC relies on CES and CEOC and its subsidiaries to seek to establish and maintain proprietary rights in such intellectual property and technology through the use of patents, copyrights, trademarks and trade secret laws. In addition, CGP LLC relies on CES and CEOC and its subsidiaries to maintain the trade secrets and confidential information licensed to CGP LLC by nondisclosure policies and through the use of appropriate confidentiality agreements. Despite these efforts to protect the proprietary rights on which CGP LLC relies, parties may infringe such intellectual property and use licensed information and technology that CGP LLC regards as proprietary and CGPH's rights may be invalidated or unenforceable. Monitoring the unauthorized use of CGP LLC's licensed intellectual property and technology is difficult. Litigation by CEOC and its subsidiaries or CES, as applicable, may be necessary to enforce the intellectual property rights and other rights on which we rely or to determine the validity and scope of the proprietary rights of others. Litigation of this type could result in substantial costs and diversion of resources. We cannot assure you that all of the steps that CGP LLC, CEOC and its subsidiaries or CES have taken or will take to protect the licensed trademarks that CGP LLC uses in the United States will be adequate to prevent imitation of such trademarks by others. The unauthorized use or reproduction of the trademarks that CGPH uses could diminish the value of its brand and its market acceptance, competitive advantages or goodwill, which could adversely affect its business. In addition, the expansion of the scope or use of CGP LLC's intellectual property licensed from CEOC or CES, as applicable, in many cases is subject to the consent of CEOC or CES. Accordingly, CGP LLC may not be able to take advantage of new applications or uses of these licensed trade names, trademarks or other intellectual property without the consent of CEOC or CES, which may adversely affect CGP LLC's ability to compete or expand its business scope.
CIE may be reliant on Caesars Entertainment or CEOC to obtain online gaming licenses in many commercial jurisdictions and if the affiliation is terminated, or costs to maintain such affiliation exceed revenue generated from such affiliation, it would adversely affect CIE's, and therefore CGP LLC's, business and results of operations.
Nevada, Delaware and New Jersey have enacted laws that require online casinos to also have a license to operate a brick-and-mortar casino, either directly or indirectly through an affiliate. If, like Nevada, Delaware and New Jersey, other U.S. jurisdictions enact legislation legalizing real money casino gaming subject to this brick-and-mortar requirement, CIE may be unable to offer online real money gaming in such jurisdictions if CIE does not have or is unable to establish an affiliation with a brick-and-mortar casino in such jurisdiction. If CIE is able to offer online real money gaming in such jurisdictions because of CIE's affiliation with Caesars Entertainment or CEOC, CIE will be reliant on continuing its relationship with Caesars Entertainment or CEOC, and there can be no assurances that Caesars Entertainment or CEOC will continue to maintain such affiliation. If CIE's affiliation with Caesars Entertainment or CEOC is terminated or the costs to maintain such affiliation exceed
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revenue generated from online real money gaming, it would adversely affect CIE's, and therefore CGP LLC's, business and results of operations.
A bankruptcy court may conclude that each of the formation transactions and the Asset Purchase Transactions constitutes a financing rather than a true sale, and as a result we would no longer have ownership and control over assets sold or contributed to CGP LLC to the same extent as we do now.
Caesars Entertainment and its consolidated subsidiaries, as well as CEOC and its consolidated subsidiaries, have reported significant net losses during the past three fiscal years. In a bankruptcy of Caesars Entertainment or any of its subsidiaries (such as the bankruptcy proceeding of CEOC and certain of its subsidiaries that was filed in January 2015) that sold or contributed assets to CGP LLC, including CEOC, the court may conclude that each of the formation transactions and the Asset Purchase Transactions constitutes a disguised financing rather than a true sale. In such case, the court would deem CGP LLC's assets as belonging to Caesars Entertainment, and consider us to be a lender to Caesars Entertainment or its subsidiaries to the extent of the purchase price CGP LLC paid for those assets. While we should have a claim against Caesars Entertainment and its subsidiaries for the amounts paid to them for the assets, we would no longer have ownership and control over the assets to the same extent as we do now. Moreover, if our claim against Caesars Entertainment and its subsidiaries is considered a financing, no guarantee exists that our claim will be deemed a secured claim entitled to a priority right of repayment from the assets, rather than a general unsecured claim against Caesars Entertainment's or CEOC's bankruptcy estate that shares pro rata with other creditors in any recovery from the residual value of the bankruptcy estate. Finally, a risk exists that any such claim might be primed in favor of a debtor-in-possession financing, or that the court might equitably subordinate our claim to those of other creditors, recharacterize the claim as equity or otherwise not allow the claim (including on equitable grounds).
A bankruptcy court may substantively consolidate the bankruptcy estates of Caesars Entertainment and its debtor subsidiaries with CGP LLC, which would, among other things, allow the creditors of the bankrupt entities to satisfy their claims from the combined assets of the consolidated entities, including CGP LLC.
Even though CGP LLC has certain bankruptcy remote features that restrict its ability to file for bankruptcy relief, there can be no assurance that a bankruptcy court will not direct CGP LLC's or any of its subsidiaries' substantive consolidation with Caesars Entertainment or a subsidiary of Caesars Entertainment in a bankruptcy case of Caesars Entertainment (including the pending bankruptcy of CEOC and certain of its subsidiaries filed in January 2015) or such subsidiary even if CGP LLC or its subsidiaries do not themselves file a bankruptcy petition. CGP LLC's or its subsidiaries' substantive consolidation with Caesars Entertainment or its subsidiaries in their bankruptcy cases would, among other things, allow the creditors of the bankrupt entities to satisfy their claims from the combined assets of the consolidated entities, including CGP LLC and its subsidiaries. This may dilute the value of distributions available for recovery to CGP LLC's creditors, and may prevent recovery by our stockholders of any value at all if the combined creditor claims exceed the combined value of the entities. In addition, substantive consolidation with Caesars Entertainment or its subsidiaries' bankruptcies may subject our assets and operations to the automatic stay, and may impair CGP LLC's ability to operate independently, as well as otherwise restrict our operations and capacity to function as a standalone enterprise.
An independent investigation of the formation transactions and the Asset Purchase Transactions in connection with CEOC's bankruptcy is currently ongoing, which will expose our and CGP LLC's contractual relationships with Caesars Entertainment and its subsidiaries to heightened scrutiny.
The Bankruptcy Court previously engaged an independent examiner to investigate possible claims CEOC might have against CEC, CAC, CGP LLC, other entities and certain individuals. On March 15, 2016, the examiner released his report in redacted form (to the public) and in unredacted form (to certain entities and individuals). On May 16, 2016, the examiner issued a substantially unredacted version of his report. CAC, CGP LLC and CIE do not have access to the unredacted report, and accordingly the description below is based on the substantially unredacted publicly-available report.
The examiner's report identifies a variety of potential claims against CAC, CGP LLC, CIE, other entities and certain individuals related to a number of transactions dating back to 2009. Most of the examiner's findings are based on his view that CEOC was "insolvent" at the time of the applicable transactions. The examiner's report includes his conclusions on the relative strength of these possible claims, many of which are described in Note 6 of the Notes to Financial Statements. The examiner calculates an estimated range of potential damages for these potential claims as against all parties from $3.6 billion to $5.1 billion. The examiner calculates an estimated range of potential damages for potential claims against CAC, CGP LLC and CIE from $1.7 billion to $2.3 billion, ignoring potential duplication of recovery from other defendants. Neither calculation takes into account probability of success, likelihood of collection, or the time or cost of litigation.
Although this report was prepared at the request of the Bankruptcy Court, none of the findings are legally binding on the Bankruptcy Court or any party. CAC, CGP LLC and CIE contest many of the examiner's findings, including his finding that CEOC did not receive fair value for assets transferred, any suggestion that certain of the potential claims against CAC, CGP LLC and CIE have merit, and his calculation of potential damages. CAC, CGP LLC and its subsidiaries believe that each of the
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disputed transactions involving them provided substantial value to CEOC that was reasonably equivalent to the value of the asset(s) transferred, and that they at all times acted in good faith.
On June 28, 2016, an order approving the disclosure statement and an order approving solicitation procedures for creditors to vote on the third amended joint plan of reorganization were entered in the bankruptcy court. On October 19, 2016, the objection and voting deadline for the third amended joint plan of reorganization was scheduled for November 21, 2016. The confirmation hearing for the third amended joint plan was held on January 17, 2017, where the Bankruptcy Court confirmed the CEOC restructuring plan. CEOC believes that the restructuring plan may become effective as early as May 2017.
We are subject to fraudulent transfer litigation that, if adversely decided, may require us to return the assets acquired in the formation transactions and the Asset Purchase Transactions, or their value, to Caesars Entertainment and its subsidiaries.
Creditors of Caesars Entertainment and its subsidiaries have sued CAC and CGP LLC under state law in an effort to recover, for their benefit, the assets CGP LLC acquired in the formation transactions and the Asset Purchase Transactions as fraudulent transfers. See Item 3. Legal Proceedings - CEOC Bondholder Litigation, or Noteholder Disputes for a discussion of these proceedings. As a general matter, fraudulent transfer law allows a creditor to recover assets, or their value, from an initial or subsequent transferee if the debtor conveyed the assets with an actual intent to hinder, delay or defraud its creditors, or if the transfer was a constructive fraudulent transfer. The principal elements of a constructive fraudulent transfer are a transfer, made while a debtor was insolvent or that rendered a debtor insolvent, for less than reasonably equivalent value.
CAC and CGP LLC strongly believe there is no merit to the actions described in Item 3. Legal Proceedings - CEOC Bondholder Litigation, or Noteholder Disputes and CAC and CGP LLC will defend themselves vigorously and seek appropriate relief should any action be brought. However, in the CEOC Bondholder Litigation, or Noteholder Disputes, plaintiffs seek, among other remedies, return to CEOC of six casino properties CGP LLC acquired in the formation transactions and the Asset Purchase Transactions for approximately $3.1 billion in cash and assumed debt. The six casino properties acquired in the formation transactions and the Asset Purchase Transactions are the only casino properties owned by CGP LLC and account for 100% of CGP LLC's revenue from casino operations. If CAC and CGP LLC lose the lawsuits described above, they may have to return the assets or their value to Caesars Entertainment and its subsidiaries, or be forced to pay additional amounts therefor. During the twelve months ended December 31, 2016, revenue from casino operations accounted for 97.3% of CGP LLC's total net revenue. If CGP LLC were forced to return the casino properties to Caesars Entertainment and its subsidiaries, that could cause it to lose the benefit of substantial revenue generated by those properties. Additionally, if a court were to find that the transfers and sales in the formation transactions and the Asset Purchase Transactions were improper, that could trigger a default under the debt that we raised to finance these transfers. These consequences could have a material adverse effect on our business, financial condition, results of operations and prospects.
CES may be subject to fraudulent transfer or other litigation that may result in its unwinding, or its licensing agreements with CEOC may otherwise be rescinded or terminated.
Creditors of Caesars Entertainment, CEOC and their subsidiaries may commence an action against CES under state or federal bankruptcy law in an effort to rescind, avoid or otherwise terminate, for their benefit, the licensing agreements CEOC entered into with CES. Alternatively, as CEOC and certain of its subsidiaries has filed for Chapter 11 bankruptcy, they may reject their licensing agreements with CES. If CES can no longer enforce such licensing agreements, it may be unable to perform under its licensing agreements with CGP LLC and its subsidiaries. As a result, among other things, CGP LLC and its subsidiaries may no longer have access to the Total Rewards loyalty program and may no longer be able to use certain intellectual property, such as the Caesars trademark, which could have a material adverse effect on CAC and CGP LLC's business, financial condition and operating results.
Our operations depend on material contracts with third parties, including Caesars Entertainment, the continued enforcement of which may be adversely impacted by a bankruptcy of Caesars Entertainment or CES.
A debtor operating under the protection of the Bankruptcy Code may exercise certain rights that may adversely affect our contractual relations and ability to participate in the Caesars Entertainment system. For example, the protection of the statutory automatic stay which arises by operation of Section 362 of the Bankruptcy Code upon the commencement of a bankruptcy case prohibits us from terminating a contract with CEOC or any of its debtor subsidiaries. The Bankruptcy Code also invalidates clauses that permit the termination of contracts automatically upon the filing by one of the parties of a bankruptcy petition or which are conditioned on a party's insolvency. Meanwhile in this circumstance, we would ordinarily be required to continue performing our obligations under such agreement. As a practical matter, legal proceedings to obtain relief from the automatic stay and to enforce rights to payments or terminate agreements can be time consuming, costly and uncertain as to outcome.
In addition, under Section 365 of the Bankruptcy Code, a debtor may decide whether to assume or reject an executory contract, including the CGP LLC Management Services Agreement, the management contracts for all of the casino properties owned by CGP LLC, the shared service agreement with CIE, or any licensing agreement with CES. Assumption of a contract
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would permit the debtor to continue operating under the assumed contract; provided that the debtor (i) immediately cures all existing defaults thereunder or provides adequate assurance that such defaults will be promptly cured, (ii) compensates the non-debtor party for any actual monetary loss incurred as a result of the debtor's default or provides adequate assurance that such compensation will be forthcoming and (iii) provides the non-debtor party with adequate assurance of future performance under the contract. As a general matter, a bankruptcy court approves a debtor's assumption of a contract as long as assumption appears to be in the best interest of the debtor's estate, the debtor is able to perform and it is a good business decision to assume the contract. Subject to bankruptcy court approval and satisfaction of the "business judgment" rule, a debtor in Chapter 11 may reject an executory contract, and rejection of an executory contract in a Chapter 7 case may occur automatically by operation of law. If a debtor rejects an executory contract, the non-debtor party to the contract generally has an unsecured claim against the debtor's bankruptcy estate for breach of contract damages arising from the rejection. On request of any party to such contract, a bankruptcy court may order the debtor to determine within a specific period of time whether to assume or reject an executory contract.
Further, CEOC and its subsidiaries that filed for bankruptcy protection, as debtors, may seek bankruptcy court approval to assume material contracts, including among others, the CGP LLC Management Services Agreement, the Omnibus Agreement, the CIE Cross-Marketing Agreement or other valuable license agreements under Section 365 of the Bankruptcy Code and may also seek to assign such agreement to a third-party. A debtor may also seek to reject such contracts. If CEOC, for example, rejects the Omnibus Agreement, CES may not be able to provide us operational support and management expertise, with the result that we may lack sufficient support to manage our operations, and may no longer be able to use certain licensed intellectual property, such as certain trademarks.
In addition, Caesars Entertainment, if it were to become a debtor for a bankruptcy, may attempt to reject the CGP Operating Agreement as an executory contract. This might affect our continued existence and other corporate governance rights. It may also relieve Caesars Entertainment from performing its obligations under CGP LLC's limited liability company agreement, including honoring its obligations under the liquidation right and call right.
Claims of our stockholders and CGP LLC against Caesars Entertainment or CEOC in a Caesars Entertainment or CEOC bankruptcy might be equitably subordinated or disallowed.
Bankruptcy law allows the court to equitably subordinate claims to those of other creditors or equity holders based on inequitable conduct. A bankruptcy court may also recharacterize a claim for debt as equity, or not allow a claim for other reasons including on equitable grounds. Claims of insiders, including stockholders, are subject to heightened scrutiny and a court may find inequitable conduct in the form of overreaching or self-dealing transactions. If a claim is subordinated to those of other creditors, or recharacterized as equity, the claim will likely receive no distribution from the bankruptcy estate unless the estate has enough assets to satisfy the non-subordinated creditors in full; a claim that is disallowed would not share in recoveries from the estate to the extent of such disallowance. The equitably subordinated or disallowed claim need not necessarily relate to the inequitable conduct. Therefore, a damages claim arising from the rejection of an executory contract may be subordinated or disallowed based on conduct wholly unrelated to the contractual relationship itself. Under these principles, should a court determine that they are triggered in the bankruptcy of CEOC or in a bankruptcy of CEC, if one were to occur, claims of our stockholders and CGP LLC, including claims based on notes issued by Caesars Entertainment or CEOC or guarantees by Caesars Entertainment, may not share ratably with claims from other general unsecured creditors or may be disallowed.
Following assignment of the management agreements to CES upon its commencing operations as of October 1, 2014, CGPH is dependent upon CES to operate CGPH's properties.
Each of CGPH's properties is managed by CES. CGPH is dependent upon CES to provide the services necessary to operate CGPH's properties. CGPH does not have a history of operating casinos. Therefore, CGPH's properties are dependent on the services provided by CES and CGPH cannot operate CGPH's properties without these services. If the quality of the services provided by CES deteriorates, or the terms under which CES provides services change in a manner that is adverse to CGPH, it could have a material adverse effect on CGPH's business, financial condition and operating results. Following the commencement of operations and receipt of regulatory approvals for CES, at CGPH's request, the property management agreements were assigned to CES. CES is a newly formed entity and will not receive the management fees under the property management agreements. Furthermore, CES is dependent upon its members (CGPH, CEOC and CERP) to provide it with the operating funds and capital requirements (the allocation of which shall be based on each member's ownership interest in CES) necessary to provide services under the property management agreements. If any of the members of CES fail to provide it with the operating funds necessary to operate CES, CES may not be able to fully provide the services required by the property management agreements to operate CGPH's properties.
In addition, if the property management agreements were to be terminated, or if CES were to suffer significant liquidity or operational difficulties, becoming incapable of providing property management services (or unable to provide such services at agreed upon level) to CGPH or cease operations altogether, CGPH may be unable to continue to operate its properties, which would have a material adverse effect on our business, financial condition and operating results.
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If a court were to find in favor of the claimants in the Noteholder Disputes, it would likely have a material adverse effect on CEC's business, financial condition, results of operations and cash flows and, absent an intervening event, a reorganization under Chapter 11 of the Bankruptcy Code would likely be necessary due to the limited resources available at CEC to resolve such matters. The significant amounts CEC has agreed to pay in connection with CEOC's reorganization raise substantial doubt about CEC's ability to continue as a going concern. In addition, CEC estimates that it will require additional sources of funding to meet the ongoing financial commitments of the CEC holding company for amounts other than committed to under the RSAs.
CEC is subject to a number of Noteholder Disputes related to various transactions that CEOC has completed since 2008. Plaintiffs in certain of these actions raise allegations of breach of contract, intentional and constructive fraudulent transfer, and breach of fiduciary duty, among other claims. Although the Delaware First Lien Lawsuit has been subject to a consensual stay pursuant to the First Lien Bond RSA since CEOC's filing for Chapter 11, and the Delaware Second Lien Lawsuit is not proceeding with respect to fraud or breach of fiduciary duty claims, should a court find in favor of the plaintiffs on such claims in any of the Noteholder Disputes, including the New York First Lien Lawsuit, the New York Second Lien Lawsuit or the Senior Unsecured Lawsuits, the transactions at issue in those lawsuits may be subject to rescission and/or CEC may be required to pay damages to the plaintiffs. In the event of an adverse outcome on one or all of these matters, it is likely that a reorganization under Chapter 11 of the Bankruptcy Code would be necessary for CEC due to the limited resources available at CEC to resolve such matters.
A number of the Noteholder Disputes also involve claims that CEC is liable for all amounts due and owing on certain notes issued by CEOC, based on allegations that provisions in the governing indentures pursuant to which CEC guaranteed CEOC's obligations under those notes remain in effect (the "Guarantee Claims"). Such Guarantee Claims were most recently raised against Caesars Entertainment in the New York Senior Notes Lawsuit. Adverse rulings on the Guarantee Claims in this action or any of the other Noteholder Disputes could negatively affect CEC's position on such Guarantee Claims in other Noteholder Disputes, or with respect to potential claims by other holders of certain other notes issued by CEOC. If the court in any of these Noteholder Disputes were to find in favor of the plaintiffs on the Guarantee Claims, CEC may become obligated to pay all principal, interest, and other amounts due and owing on the notes at issue. If CEC became obligated to pay amounts owed on CEOC's indebtedness as a result of the Guarantee Claims, it is likely that a reorganization of CEC under Chapter 11 of the Bankruptcy Code would be necessary due to the limited resources available at CEC to resolve such matters. However, on January 26, 2017, the Bankruptcy Court ordered the stay of the Guarantee Claims to remain in effect until the earlier of (a) the effective date of the plan of reorganization confirmed on January 17, 2017, (b) the termination of any restructuring support agreement with the Official Committee of Second Priority Noteholders, or (c) further order of the Bankruptcy Court.
In addition to the liquidity issues raised as a result of complying with the material commitments CEC made under the RSAs, CEC estimates that it will require additional sources of funding to meet the ongoing financial commitments of the CEC holding company for amounts other than committed to under the RSAs, primarily resulting from significant expenditures made to (1) defend CEC against the matters disclosed in "Legal Proceedings" and (2) support CEOC's plan of reorganization. As a result of the foregoing, there is substantial doubt about CEC's ability to continue as a going concern, which could have a materially adverse effect on CAC and CGP LLC, and could also have a material adverse effect on the Proposed Merger.
Risks Related to Caesars Growth Partners, LLC's Business
CGP LLC may not realize all of the anticipated benefits of current or potential future acquisitions.
On May 20, 2014, we closed a transaction whereby CGPH, an indirect, wholly-owned subsidiary of CGP LLC acquired from Caesars Entertainment certain of its properties and related assets as more fully described in the Company's Annual Report on Form 10-K for the year ended December 31, 2015. There are incremental risks and uncertainties related to the formation transactions and the Asset Purchase Transactions contemplated thereunder, many of which are outside of our control, including the following:
• | the diversion of our management's attention from our ongoing business concerns; |
• | the outcome of any legal proceedings that may be instituted against us and/or others relating to the formation transactions; and |
• | the amounts of the costs, fees, expenses and charges related to the Asset Purchase Transactions. |
For example, we and CGP LLC have been named in two separate lawsuits related to the Asset Purchase Transactions, as more fully described in Item 3. Legal Proceedings - CEOC Bondholder Litigation, or Noteholder Disputes.
In addition, CGP LLC's ability to realize the anticipated benefits of acquisitions, including, but not limited to the Asset Purchase Transactions, will depend, in part, on its ability to integrate the businesses acquired with its business. The combination of two independent companies is a complex, costly and time consuming process. This process may disrupt the business of either
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or both of the companies, and may not result in the full benefits expected. The difficulties of combining the operations of two companies include, among others:
• | coordinating marketing functions; |
• | undisclosed liabilities; |
• | unanticipated issues in integrating information, communications and other systems; |
• | unanticipated incompatibility of purchasing, marketing and administration methods; |
• | retaining key employees; |
• | consolidating corporate and administrative infrastructures; |
• | the diversion of management's attention from ongoing business concerns; |
• | coordinating geographically separate organizations; and |
• | obtaining all necessary gaming regulatory approvals. |
CGP LLC may sell or divest different properties or assets as a result of its evaluation of its portfolio of businesses. Such sales or divestitures could affect CGP LLC's costs, revenues, profitability and financial position.
From time to time, CGP LLC may evaluate its properties and portfolio of businesses and may, as a result, sell or attempt to sell, divest or spin-off different properties or assets. For example, on September 23, 2016, CIE sold its social and mobile games business.
These sales or divestitures may affect its costs, revenues, profitability, and financial position. Divestitures have inherent risks, including possible delays in closing transactions (including potential difficulties in obtaining regulatory approvals), the risk of lower-than-expected sales proceeds for the divested businesses, and potential post-closing claims for indemnification. In addition, current economic conditions and relatively illiquid real estate markets may result in fewer potential bidders and unsuccessful sales efforts. Expected costs savings, which are offset by revenue losses from divested properties, may also be difficult to achieve or maximize.
CGP LLC may require additional capital to support business growth, and this capital might not be available on acceptable terms or at all.
CGP LLC intends to continue to make significant investments to support its business growth and may require additional funds to respond to business challenges, expand into new markets, develop new games and features or enhance CIE's existing games, improve its operating infrastructure or acquire complementary businesses, personnel and technologies. Accordingly, CAC and CGP LLC may need to engage in equity or debt financings to secure additional funds. If CAC raises additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A common stock. Any debt financing we or CGP LLC secure in the future could involve restrictive covenants relating to capital raising activities and other financial and operational matters, which may make it more difficult to obtain additional capital and to pursue business opportunities, including potential acquisitions. CAC and CGP LLC are recently formed entities and may not be able to obtain additional financing on favorable terms, if at all. For instance, the lack of operating history and relationship with Caesars Entertainment may impede CGP LLC's ability to raise debt or equity financing on acceptable terms, if at all, and there can be no assurances that we could pursue a future offering of securities at an appropriate price to raise the necessary financing. If CAC and CGP LLC are unable to obtain adequate financing or financing on terms satisfactory to them when they require it, their ability to continue to support CGP LLC's business growth and to respond to business challenges could be significantly impaired, which could have a material adverse effect on CGP LLC's, business, financial condition and operating results.
CAC and CGP LLC do not have restrictions on their ability to raise debt and may highly leverage their capital structure, which could adversely affect CGP LLC's ability to pursue certain opportunities.
CAC and CGP LLC have no restrictions on their ability to raise a significant amount of debt financing and/or alter their capital structures. Should CAC or CGP LLC significantly leverage themselves, CAC or CGP LLC will be subject to considerable interest payment expenses that could adversely affect our ability to obtain additional financing. Further, once CAC has a highly leveraged capital structure, CGP LLC may lose certain advantages it has against competitors that have similar capital structures that makes pursuing new, capital-intensive opportunities more challenging.
We may not realize any or all of our projected cost savings, which would have a negative effect on our results of operations.
As part of our business strategy, CEC and CES have implemented certain cost savings programs and are in the process of identifying opportunities to improve profitability by reducing costs. For example, Caesars Entertainment and CES have identified cost savings, a portion of which would directly reduce our expenses. Any cost savings that we realize from such efforts
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may differ materially from our estimates. In addition, any cost savings that we realize may be offset, in whole or in part, by reductions in revenues, or through increases in other expenses. For example, cutting advertising or marketing expenses may have an unintended negative affect on our revenues. These cost savings plans are subject to numerous risks and uncertainties that may change at any time. We cannot assure you that cost-savings initiatives will be completed as anticipated or that the benefits we expect will be achieved on a timely basis or at all.
Our historical financial information may not be a reliable indicator of our future results.
The historical financial information we have included in this Form 10-K has been prepared using assumptions and allocations that we believe are reasonable. However, such historical financial information does not necessarily reflect what our financial position, results of operations and cash flows would have been as a stand-alone entity separate from Caesars Entertainment during the periods presented. In addition, the historical information is not necessarily indicative of what our results of operations, financial position and cash flows will be in the future.
CGP LLC's business may be subject to seasonal fluctuations which could result in volatility or have an adverse effect on the market price of our Class A common stock.
CGP LLC's business may be subject to some degree of seasonality. In the case of CGP LLC's casino properties, weather conditions may deter or prevent customers from reaching the facilities or undertaking trips. Such conditions would particularly affect customers who are traveling longer distances to visit CGP LLC's casino properties. We believe the number of customer visits to CGP LLC's casino properties will fluctuate based on the season, with winter months experiencing lower visitation; however, volume of business generated by our Las Vegas properties is generally lower during the summer months. Seasonality may cause CGP LLC's casino properties working capital cash flow requirements to vary from quarter to quarter depending on the variability in the volume and timing of sales. These factors, among other things, make forecasting more difficult and may adversely affect CGP LLC's casino properties ability to manage working capital and to predict financial results accurately, which could adversely affect the market price of our Class A common stock.
There may be a significant degree of difficulty in operating CGP LLC's businesses separately from Caesars Entertainment, and managing that process effectively could require a significant amount of management's time.
The separation from Caesars Entertainment could cause an interruption of, or loss of momentum in, the operation of CGP LLC's businesses. Management may be required to devote considerable amounts of time to the separation, which will decrease the time they will have to manage their ordinary responsibilities. If management is not able to manage the separation effectively, or if any significant business activities are interrupted as a result of the separation, CGP LLC's businesses and operating results could suffer.
We will be allocated taxable income from CGP LLC for U.S. federal income tax purposes regardless of whether we receive corresponding cash distributions from CGP LLC to pay our tax liability.
Because CGP LLC is a partnership for U.S. federal income tax purposes, we will be allocated taxable income from CGP LLC for U.S. federal income tax purposes for each fiscal year according to the terms of the CGP Operating Agreement. We will be required to pay U.S. federal income tax on such income at the current U.S. federal corporate income tax rate, regardless of whether CGP LLC makes corresponding cash distributions to us to pay our tax liability. The CGP Operating Agreement provides for quarterly cash tax distributions (other than in connection with a liquidation or certain partial liquidations) to be made to us and Caesars Entertainment, but there is no guarantee that such tax distributions (or other cash distributions from CGP LLC) will be sufficient for us to pay our tax liabilities.
There are no assurances that there will be future development opportunities for CGP LLC or that CGP LLC will obtain a development project.
CGP LLC's ability to expand into new markets to pursue development opportunities depends on passage of legislation that legalizes gambling in new markets and Caesars Entertainment not exercising its right of first offer. Although in the past few years a number of states have passed legislation permitting the development of gaming facilities, there can be no assurances that such trend will continue, and it is possible that legislatures and public sentiment will turn against permitting the development of gaming facilities. Should the states pass no additional legislation for issuing licenses or permitting the development of gaming facilities, CGP LLC will be unable to pursue development opportunities in new markets. Moreover, even if new markets open up, there can be no assurances that Caesars Entertainment and/or CGP LLC will be successful in the bid process for any new development opportunities; therefore, there can be no assurances that CGP LLC will be able to enter those new markets. For example, CGP LLC recently bid for a gaming license in the State of New York but was not selected. Further, there can be no assurances that Caesars Entertainment will not exercise its right of first refusal, thereby depriving CGP LLC of access to any potential development project.
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CGP LLC and CAC are subject to extensive governmental regulation and taxation policies, the enforcement of which could adversely impact CGP LLC's business, financial condition and results of operations.
CGP LLC and CAC are subject to extensive gaming regulations and political and regulatory uncertainty. Regulatory authorities in the jurisdictions where CGP LLC operates have broad powers with respect to the licensing of casino operations and may revoke, suspend, condition or limit the gaming or other licenses of CGP LLC's casino properties or developments, impose substantial fines and take other actions, any one of which could adversely impact CGP LLC's business, financial condition and results of operations. In addition, regulatory authorities in one or more jurisdictions may require CGP LLC or CAC to obtain new licenses in connection with the formation transactions and the Asset Purchase Transactions or due to future changes in regulation. For instance, the Missouri Gaming Commission has required that CAC obtain certain licenses after the closing of the formation transactions even though CGP LLC does not operate in Missouri. The failure of CAC to maintain a license from the Missouri Gaming Commission could, among other things, result in the loss of Caesars Entertainment's gaming license in Missouri. If other jurisdictions require CGP LLC or CAC to obtain new licenses in connection with its operations, the formation of CES or due to future changes in regulation, and CGP LLC or CAC is unable to obtain those licenses, it could adversely impact CGP LLC's business, financial condition and results of operations. As another example, CGP LLC's ability to expand its operations at Harrah's New Orleans, which could include increasing the number of rooms at the hotel or opening new restaurants at the complex, is subject to regulatory approval, and any such proposal may or may not be approved.
As a result of CIE holding an online gaming license, its operations and activities are subject to various gaming laws and laws in Nevada and New Jersey. We also expect CIE to be subject to these or similar laws as CIE seeks additional licenses for online real money gaming in the United States if additional states legalize and regulate online gaming. For example, CIE has obtained a license in Nevada as an "operator of an interactive gaming system" and obtained regulatory approval to launch online poker in Nevada. In addition, CIE holds a license in New Jersey to operate internet gaming in New Jersey. Among these laws are various "suitability" requirements which could limit CIE's ability to conduct business with certain third parties, make certain acquisitions and otherwise freely conduct its business. The results of such restrictions could have a material adverse effect on CIE's, and therefore CGP LLC's, business, financial condition and operating results.
Furthermore, interpretations of laws and local regulations and ordinances on which CGP LLC and CAC rely may change or be made conditional on certain other factors, which could adversely impact our business, financial condition and results of operations. For example, Harrah's New Orleans is currently subject to a local ordinance in New Orleans related to the minimum number of people who must be employed at Harrah's New Orleans. A change in the interpretation of this ordinance or a change in this ordinance could force a reevaluation of staffing at that property in a manner that could adversely affect the financial results of Harrah's New Orleans.
Furthermore, because CGP LLC and CAC are subject to regulation in each jurisdiction in which they operate, and because regulatory agencies within each jurisdiction review our compliance with gaming laws in other jurisdictions, it is possible that gaming compliance issues in one jurisdiction may lead to reviews and compliance issues in other jurisdictions.
From time to time, individual jurisdictions have also considered legislation or referendums, such as bans on smoking in casinos and other entertainment and dining facilities, which could adversely impact the operations of CGP LLC's casino properties. For example, Maryland law prohibits smoking inside the Horseshoe Baltimore facility. Additionally, the city council in New Orleans enacted an ordinance restricting smoking indoors in public places, including in Harrah's New Orleans, which went into effect in April 2015. The likelihood or outcome of similar legislation in such jurisdictions and referendums in the future cannot be predicted, though any smoking ban would be expected to negatively impact CGP LLC's financial performance.
The casino entertainment industry represents a significant source of tax revenues to the various jurisdictions in which casinos operate. From time to time, various state and federal legislators and officials have proposed changes in tax laws, or in the administration of such laws, including increases in tax rates, which would affect the industry. If adopted, such changes could adversely impact CGP LLC's business, financial condition and results of operations.
Acts of terrorism, natural disasters, severe weather and political, economic and military conditions may impede CGP LLC's ability to operate or harm its financial results.
Terrorist attacks and other acts of war or hostility have created many economic and political uncertainties. For example, a substantial number of the customers of CGP LLC's casinos in Las Vegas and New Orleans use air travel for transportation to and from the casino. As a result of terrorist acts, domestic and international travel was severely disrupted, which resulted in a decrease in customer visits to Las Vegas and New Orleans. We cannot predict the extent to which disruptions in air or other forms of travel as a result of any further terrorist act, security alerts or war, uprisings, or hostilities in places such as Iraq and Afghanistan, or other countries throughout the world, will continue to directly or indirectly impact CGP LLC's business and operating results. As a consequence of the threat of terrorist attacks and other acts of war or hostility in the future, premiums for a variety of insurance products have increased, and some types of insurance are no longer available. If any such event were to affect our properties, we would likely be adversely impacted. In addition, natural and man-made disasters such as major fires, floods, hurricanes, earthquakes and oil spills, or severe or inclement weather affecting the ability of CGP LLC's casino
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customers to travel can have a negative impact on its results of operations. In most cases, we have insurance that covers portions of any losses from a natural disaster, but it is subject to deductibles and maximum payouts in many cases. Although we may be covered by insurance from a natural disaster, the timing of our receipt of insurance proceeds, if any, is out of our control. In some cases, however, we may receive no proceeds from insurance. Additionally, a natural disaster affecting one or more of our properties may affect the level and cost of insurance coverage we may be able to obtain in the future, which may adversely affect our financial position. As our operations depend in part on our customers' ability to travel, severe or inclement weather can also have a negative impact on our results of operations.
Any violation of the Foreign Corrupt Practices Act or other similar laws and regulations could have a negative impact on us.
CGP LLC is subject to risks associated with doing business outside of the United States, which exposes CGP LLC to complex foreign and U.S. regulations inherent in engaging in a cross-border business and in each of the countries in which CGP LLC and its businesses transact business. CGP LLC is subject to requirements imposed by the Foreign Corrupt Practices Act ("FCPA") and other anti-corruption laws that generally prohibit U.S. companies and their affiliates from offering, promising, authorizing or making improper payments to foreign government officials for the purpose of obtaining or retaining business. Violations of the FCPA and other anti-corruption laws may result in severe criminal and civil sanctions as well as other penalties and the SEC and U.S. Department of Justice have increased their enforcement activities with respect to the FCPA. Policies and procedures and employee training and compliance programs that CGP LLC has implemented to deter prohibited practices may not be effective in prohibiting our employees, contractors or agents from violating or circumventing our policies and the law. If the employees, contractors or agents of CGP LLC's casino properties or CIE fail to comply with applicable laws or company policies governing its international operations, CGP LLC may face investigations, prosecutions and other legal proceedings and actions which could result in civil penalties, administrative remedies and criminal sanctions. Any determination that CGP LLC has violated any anti-corruption laws could have a material adverse effect on CGP LLC's financial condition. Compliance with international and U.S. laws and regulations that apply to CGP LLC's international operations increase CGP LLC's cost of doing business in foreign jurisdictions. CGP LLC and its businesses also deal with significant amounts of cash in its operations and are subject to various reporting and anti-money laundering ("AML") regulations. Any violation of AML or regulations, on which in recent years, governmental authorities have been increasingly focused, with a particular focus on the gaming industry, by any of our resorts could have a negative effect on our results of operations. As an example, a major gaming company recently settled a U.S. Attorney investigation into its AML practices. In October 2013, CEOC's subsidiary, Desert Palace, Inc. (the owner of and referred to herein as Caesars Palace), received a letter from Financial Crimes Enforcement Network of the United States Department of the Treasury ("FinCEN"), stating that FinCEN was investigating Caesars Palace for alleged violations of the Bank Secrecy Act to determine whether it is appropriate to assess a civil penalty and/or take additional enforcement action against Caesars Palace. Caesars Palace responded to FinCEN's letter in January 2014. Additionally, CEC was informed in October 2013 that a federal grand jury investigation regarding anti-money laundering practices of CEC and its subsidiaries had been initiated. CEC and Caesars Palace have been cooperating with FinCEN, the Department of Justice and the Nevada Gaming Control Board (the "GCB") on this matter. On September 8, 2015, FinCEN announced a settlement pursuant to which Caesars Palace agreed to an $8 million civil penalty for its violations of the Bank Secrecy Act, which penalty shall be treated as a general unsecured claim in Caesars Palace's bankruptcy proceedings. In addition, Caesars Palace agreed to conduct periodic external audits and independent testing of its AML compliance program, report to FinCEN on mandated improvements, adopt a rigorous training regime, and engage in a "look-back" for suspicious transactions. The terms of the FinCEN settlement were approved by the bankruptcy court on October 19, 2015. CEOC and the GCB reached a settlement on the same facts as above, wherein CEC agreed to pay $1.5 million and provide to the GCB the same information that is reported to FinCEN and to resubmit its updated AML policies. On September 17, 2015, the settlement agreement was approved by the Nevada Gaming Commission.
We are, or may become involved, in legal proceedings that if adversely adjudicated or settled, could impact our financial condition.
From time to time, CAC and CGP LLC are defendants in various lawsuits or other legal proceedings relating to matters incidental to our business. The nature of our business subjects CAC and CGP LLC to the risk of lawsuits filed by customers, past and present employees, competitors, business partners, and others in the ordinary course of business. As with all legal proceedings, however, no assurance can be provided as to the outcome of these matters and in general, legal proceedings can be expensive and time consuming. CAC and CGP LLC may not be successful in the defense or prosecution of these lawsuits, which could result in settlements or damages that could significantly impact our business, financial condition and results of operations.
CAC and CGP LLC are defendants in certain legal proceedings, including the lawsuits relating to the Amended Merger Agreement and the Proposed Merger, as discussed in Item 3. Legal Proceedings - CEOC Bondholder Litigation, or Noteholder Disputes. If a court were to find in favor of the claimants in these proceedings, such determination could have a material adverse effect on our business, financial condition, results of operations and prospects.
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Our obligation to fund multi-employer pension plans to which we contribute may have an adverse impact on us.
We contribute to and participate in various multi-employer pension plans for employees represented by certain unions. We are required to make contributions to these plans in amounts established under collective bargaining agreements. We do not administer these plans and, generally, are not represented on the boards of trustees of these plans. The Pension Protection Act enacted in 2006, or the PPA, requires under-funded pension plans to improve their funding ratios. Based on the information available to us, some of the multi-employer plans to which we contribute are either "critical" or "endangered" as those terms are defined in the PPA. Specifically, the Pension Plan of the UNITE HERE National Retirement Fund is less than 65% funded. We cannot determine at this time the amount of additional funding, if any, we may be required to make to these plans. However, plan assessments could have an adverse impact on our results of operations or cash flows for a given period. Furthermore, under current law, upon the termination of a multi-employer pension plan, due to the withdrawal of all its contributing employers (a mass withdrawal), or in the event of a withdrawal by us, which we consider from time to time, we would be required to make payments to the plan for our proportionate share of the plan's unfunded vested liabilities, that would have a material adverse impact on our consolidated financial condition, results of operations and cash flows. See also litigation between the National Retirement Fund and CEC described in Item 3. Legal Proceedings.
CGP LLC's Casino Properties and Developments business is particularly sensitive to reductions in discretionary consumer spending resulting from downturns in the economy, the volatility and disruption of the capital and credit markets, adverse changes in the global economy and other factors which could negatively impact our financial performance and our ability to access financing.
Changes in discretionary consumer spending or consumer preferences are driven by factors beyond CGP LLC's control, such as perceived or actual general economic conditions; high energy, fuel and other commodity costs; the cost of travel; the potential for bank failures; a soft job market; an actual or perceived decrease in disposable consumer income and wealth; fears of recession and changes in consumer confidence in the economy; and terrorist attacks or other global events. CGP LLC's Casino Properties and Developments business is particularly susceptible to any such changes because CGP LLC's casino properties offers a highly discretionary set of entertainment and leisure activities and amenities. If discretionary consumer spending declines, then CGP LLC's results of operations will be adversely impacted.
The adverse conditions in certain local, regional, national and global markets have negatively affected CGP LLC and may continue to negatively affect CGP LLC in the future. During periods of economic contraction, CGP LLC's revenues may decrease while some of its costs remain fixed or even increase, resulting in decreased earnings. In addition, CGP LLC may also be unable to find additional cost savings to offset any decrease in revenues. Even an uncertain economic outlook may adversely affect consumer spending in CGP LLC's gaming operations and related facilities, as consumers spend less in anticipation of a potential economic downturn.
Theoretical win rates for CGP LLC's casino operations depend on a variety of factors, some of which are beyond its control.
The gaming industry is characterized by an element of chance. Accordingly, CGP LLC's casino properties employ theoretical win rates to estimate what a certain type of game, on average, will win or lose in the long run. In addition to the element of chance, theoretical win rates are also affected by the spread of table limits and factors that are beyond CGP LLC's control, such as a player's skill and experience and behavior, the mix of games played, the financial resources of players, the volume of bets placed and the amount of time players spend gambling. As a result of the variability in these factors, the actual win rates at the casino may differ from the theoretical win rates and could result in the winnings of CGP LLC's gaming customers exceeding those anticipated. The variability of these factors, alone or in combination, have the potential to negatively impact our actual win rates, which may adversely affect CGP LLC's business, financial condition, results of operations and cash flows.
CGP LLC's casino operations extend credit to its customers and may not be able to collect gaming receivables from its credit players.
CGP LLC's casino properties conduct their gaming activities on a credit basis as well as a cash basis, which credit is unsecured. Table games players are typically extended more credit than slot players, and high stakes players are typically extended more credit than patrons who tend to wager lower amounts. High-end gaming is more volatile than other forms of gaming, and variances in win-loss results attributable to high-end gaming may have a significant positive or negative impact on cash flow and earnings in a particular quarter.
CGP LLC's casino properties extend credit to those customers whose level of play and financial resources warrant, in the opinion of management, an extension of credit. These receivables could have a significant impact on our results of operations if deemed uncollectible. While gaming debts are evidenced by a credit instrument, including what is commonly referred to as a "marker," and judgments on gaming debts are enforceable under the current laws of the jurisdictions in which CGP LLC allows play on a credit basis and judgments in such jurisdictions on gaming debts are enforceable in all states under the Full Faith and Credit Clause of the U.S. Constitution, other jurisdictions may determine that enforcement of gaming debts is against public
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policy. Although courts of some foreign nations will enforce gaming debts directly and the assets in the U.S. of foreign debtors may be reached to satisfy a judgment, judgments on gaming debts from U.S. courts are not binding on the courts of many foreign nations.
We face the risk of fraud and cheating.
Casino gaming customers may attempt or commit fraud or cheat in order to increase winnings. Acts of fraud or cheating could involve the use of counterfeit chips or other tactics, possibly in collusion with the employees of CGP LLC's casinos. Internal acts of cheating could also be conducted by employees through collusion with dealers, surveillance staff, floor managers or other casino or gaming area staff. Failure to discover such acts or schemes in a timely manner could result in losses in gaming operations. In addition, negative publicity related to such schemes could have an adverse effect on CGP LLC's reputation, potentially causing a material adverse effect on CGP LLC's business, financial condition, results of operations and cash flows.
Because a majority of CGP LLC's major gaming resorts are concentrated on the Las Vegas Strip, we are subject to greater risks than a gaming company that is more geographically diversified.
Given that a majority of CGP LLC's major resorts are concentrated on the Las Vegas Strip, CGP LLC's business may be significantly affected by risks common to the Las Vegas tourism industry. For example, the cost and availability of air services and the impact of any events that disrupt air travel to and from Las Vegas can adversely affect our business. We cannot control the number or frequency of flights to or from Las Vegas, but CGP LLC relies on air traffic for a significant portion of its visitors. Reductions in flights by major airlines as a result of higher fuel prices or lower demand can impact the number of visitors to CGP LLC's resorts. Additionally, there is one principal interstate highway between Las Vegas and Southern California, where a large number of CGP LLC's customers reside. Capacity constraints of that highway or any other traffic disruptions may also affect the number of customers who visit CGP LLC's facilities.
CGP LLC's business is particularly sensitive to energy prices and a rise in energy prices could harm its operating results.
CGP LLC is a large consumer of electricity and other energy and, therefore, higher energy prices may have an adverse effect on its results of operations. Accordingly, increases in energy costs may have a negative impact on its operating results. Additionally, higher electricity and gasoline prices that affect its customers may result in reduced visitation to its resorts and a reduction in its revenues. CGP LLC may be indirectly impacted by regulatory requirements aimed at reducing the impacts of climate change directed at up-stream utility providers, as it could experience potentially higher utility, fuel, and transportation costs.
If we are unable to effectively compete against our competitors, our profits will decline.
The gaming industry is highly competitive and CGP LLC's competitors vary considerably in size, quality of facilities, number of operations, brand identities, marketing and growth strategies, financial strength and capabilities, and geographic diversity. CGP LLC also competes with other non-gaming resorts and vacation areas, and with various other entertainment businesses. Competitors in each market that CGP LLC participates may have greater financial, marketing, or other resources than CGP LLC does, and there can be no assurance that they will not engage in aggressive pricing action to compete with CGP LLC. Although we believe CGP LLC is currently able to compete effectively in each of the various markets in which we participate, we cannot ensure that CGP LLC will be able to continue to do so or that they will be capable of maintaining or further increasing their current market share. CGP LLC's failure to compete successfully in their various markets could adversely affect their business, financial condition, results of operations, and cash flow.
In recent years, many casino operators have been reinvesting in existing markets to attract new customers or to gain market share, thereby increasing competition in those markets. As companies have completed new expansion projects, supply has typically grown at a faster pace than demand in some markets, including Las Vegas, CGP LLC's largest market, and competition has increased significantly. For example, SLS Las Vegas opened in August 2014 on the northern end of the Strip, and the Genting Group has announced plans to develop a casino and hotel called Resorts World Las Vegas, which is expected to open in 2019 on the northern end of the Strip. Also, in response to changing trends, Las Vegas operators have been focused on expanding their non-gaming offerings, including upgrades to hotel rooms, new food and beverage offerings, and new entertainment offerings. MGM's The Park and joint venture with AEG, T-Mobile Arena, located between New York-New York and Monte Carlo, opened in April 2016 and includes retail and dining options and a 20,000 seat indoor arena for sporting events and concerts. In addition, in June 2016, MGM announced that the Monte Carlo Resort and Casino will undergo $450 million in non-gaming renovations focused on room, food and beverage and entertainment enhancements and is expected to re-open in late 2018 as two newly branded hotels. There have also been proposals for other large scale non-gaming development projects in Las Vegas by various other developers. The expansion of existing casino entertainment properties, the increase in the number of properties and the aggressive marketing strategies of many of CGP LLC's competitors have increased competition in many markets in which they operate, and this intense competition is expected to continue. These competitive pressures have and are expected to continue to adversely affect CGP LLC's financial performance. Growth in consumer demand for non-gaming offerings could also negatively impact our gaming revenue.
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In addition, in the mid-Atlantic region, existing casino resorts provide a number of gaming options for customers, thereby creating significant competition for Horseshoe Baltimore. The casino resorts in the mid-Atlantic region compete with each other on the basis of overall atmosphere, range of amenities, level of service, price, location, entertainment offered and size. Further, MGM National Harbor in Maryland opened in December 2016 and may draw additional customers away from Horseshoe Baltimore. In addition, in June 2016, Maryland Live! announced plans to invest $200 million to construct a new hotel with additional food and beverage and entertainment options adjacent to its casino. If Horseshoe Baltimore is unable to effectively compete with other regional casino resorts or keep customers, this inability may negatively affect Horseshoe Baltimore's, and therefore CGP LLC's, business and operations.
CGP LLC also competes with legalized gaming from casinos located on Native American tribal lands, primarily those located in California. While the competitive impact on CGP LLC's operations in Las Vegas from the continued growth of Native American gaming establishments in California remains uncertain, the proliferation of gaming in California and other areas located in the same regions as CGP LLC's properties could have an adverse effect on CGP LLC's results of operations.
In addition, certain states have legalized, and others may legalize, casino gaming in specific areas, including metropolitan areas from which we traditionally attract customers. A number of states have permitted or are considering permitting gaming, on Native American reservations and through expansion of state lotteries.
The current global trend toward liberalization of gaming restrictions and resulting proliferation of gaming venues could result in a decrease in the number of visitors to our Las Vegas facilities by attracting customers close to home and away from Las Vegas, which could have an adverse effect on our financial condition, results of operations or cash flows.
The success of third parties adjacent to CGP LLC's properties is important to its ability to generate revenue and operate CGP LLC's business and any deterioration to their success could materially adversely affect our revenue and results of operations.
In certain cases, CGP LLC does not own the businesses and amenities adjacent to its properties. However, the adjacent third-party businesses and amenities stimulate additional traffic through its complexes. For example, the Grand Bazaar Shops located in front of Bally's Hotel and Casino in Las Vegas. Any decrease in the popularity of, or the number of customers visiting, these adjacent businesses and amenities may lead to a corresponding decrease in the traffic through our complexes, which would negatively affect CGP LLC's business and operating results. Further, if newly opened properties, such as The Cromwell, are not as popular as expected, CGP LLC will not realize the increase in traffic through CGP LLC's properties that it expects as a result of their opening, which would negatively affect its business projections.
CGP LLC's Casino Properties and Developments Business may be subject to material environmental liability, including as a result of unknown environmental contamination.
The Casino Properties and Developments Business is subject to certain federal, state and local environmental laws, regulations and ordinances which govern activities or operations that may have adverse environmental effects, such as emissions to air, discharges to streams and rivers and releases of hazardous substances and pollutants into the environment, as well as handling and disposal from municipal/non-hazardous waste, which also apply to current and previous owners or operators of real estate generally. Federal examples of these laws include the Clean Air Act, the Clean Water Act, the Resource Conservation Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act and the Oil Pollution Act of 1990. Certain of these environmental laws may impose cleanup responsibility and liability without regard to whether the owner or operator knew of or caused particular contamination or release of hazardous substances. Should unknown contamination be discovered on CGP LLC's property, or should a release of hazardous substances occur on CGP LLC's property, CGP LLC could be required to investigate and clean up the contamination and could also be held responsible to a governmental entity or third parties for property damage, personal injury or investigation and cleanup costs incurred in connection with the contamination or release, which may be substantial. Moreover, such contamination may also impair CGP LLC's ability to use the affected property. Such liability could be joint and several in nature, regardless of fault, and could affect CGP LLC even if such property is vacated. The potential for substantial costs and an inability to use the property could adversely affect our business.
Work stoppages and other labor problems could negatively impact our future profits.
Some of our employees are represented by labor unions and, accordingly, we are subject to the risk of work stoppages or other labor disruptions from time to time. We have two collective bargaining agreements covering stage production employees in Las Vegas expiring in 2017. We intend to negotiate renewal agreements for these two collective bargaining agreements and are hopeful that we will be able to reach agreements with the union without any work stoppage. Work stoppages and other labor disruptions could have a material adverse impact on our operations. Also, wage and/or benefit increases resulting from new labor agreements may be significant and could also have an adverse impact on our results of operations. From time to time, we have experienced attempts by labor organizations to organize certain of our non-union employees. To the extent that our non-union employees join unions, we could have greater exposure to risks associated with labor problems and could negatively impact our profits.
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CGP LLC's insurance coverage may not be adequate to cover all possible losses it could suffer, and, in the future, its insurance costs may increase significantly or it may be unable to obtain the same level of insurance coverage.
CGP LLC's casino properties may suffer damage to its property caused by a casualty loss (such as fire, natural disasters and acts of war or terrorism) that could severely disrupt its business or subject it to claims by third parties who are injured or harmed. Although CGP LLC maintains insurance (including property, casualty, terrorism and business interruption insurance), that insurance may be inadequate or unavailable to cover all of the risks to which its business and assets may be exposed. Should an uninsured loss or loss in excess of insured limits occur, it could have a significant adverse impact on CGP LLC's operations and revenues.
CGP LLC renews its insurance policies on an annual basis. If the cost of coverage becomes too high, CGP LLC may need to reduce its policy limits or agree to certain exclusions from its coverage in order to reduce the premiums to an acceptable amount. Among other factors, homeland security concerns, other catastrophic events or any change in the current U.S. statutory requirement that insurance carriers offer coverage for certain acts of terrorism could adversely affect available insurance coverage and result in increased premiums on available coverage (which may cause CGP LLC to elect to reduce its policy limits) and additional exclusions from coverage. Among other potential future adverse changes, in the future CGP LLC may elect to not, or may be unable to, obtain any coverage for losses due to acts of terrorism.
Planet Hollywood licenses the Planet Hollywood brand from affiliates of Robert Earl and there can be no assurances that the Planet Hollywood brand would not be negatively impacted by its use outside of our control.
Affiliates of Robert Earl license certain intellectual property relating to the operation of the Planet Hollywood Resort and Casino to Planet Hollywood. The license includes certain names and trademarks and the right to display certain memorabilia on the Planet Hollywood premises. Planet Hollywood has invested significant time and financing to establish its brand as a Hollywood-themed entertainment and non-gaming destination. The expiration or termination, or modification of the terms of this license may have a materially adverse effect on Planet Hollywood's, and therefore CGP LLC's, business, financial conditions and operating results.
In addition, the Planet Hollywood brand is used by affiliates of Robert Earl in Hollywood-themed restaurants, hotels and shops around the United States and internationally. Any negative events associated with the use of the Planet Hollywood brand with these restaurants and shops may be out of CGP LLC's control, and may negatively impact the brand's image for the Planet Hollywood casino, which could harm Planet Hollywood's, therefore CGP LLC's, business and results of operations.
The Maryland Joint Venture adds additional risk that may result in a material adverse effect on CGP LLC's business, financial condition and operating results.
CGP LLC indirectly holds approximately 40.9% interest in the equity interests of Caesars Baltimore Investment Company, LLC (the "Maryland Joint Venture"). While CGP LLC can influence the ownership of the Maryland Joint Venture through its equity ownership, CGP LLC relies on the other equity partners for providing certain funding for the Maryland Joint Venture and there can be no assurances that the other equity partners will provide sufficient funding, or any funding at all, if needed. The failure of other equity partners in the Maryland Joint Venture to provide the appropriate level of funding may result in a material adverse effect on CGP LLC's business, financial condition and operating results.
Risks Related to Our Class A Common Stock
Caesars Entertainment's call right on our Class A common stock may result in you being forced to sell our Class A common stock at a disadvantageous time and will cause you to own stock of Caesars Entertainment. This call right may not occur at all due to the discretion of Caesars Entertainment or the inability of Caesars Entertainment to meet the conditions required to exercise such right.
After October 21, 2016, Caesars Entertainment has the right, which it may assign to any of its affiliates or to any transferee of all non-voting units of CGP LLC held by Caesars Entertainment, to acquire all or a portion of the voting units of CGP LLC (or, at our option, shares of CAC's Class A common stock) not otherwise owned by Caesars Entertainment at such time. As a result, you may be forced to sell your shares of CAC's Class A common stock on little notice and at a value that may cause you to realize a loss. The exercise of this right by Caesars Entertainment will result in you receiving consideration entirely or partly in the form of stock of Caesars Entertainment, which may be a tax-free reorganization for U.S. federal income tax purposes in certain circumstances. If the exchange is not a tax-free reorganization, you may recognize gain or loss for U.S. federal income tax purposes on such exchange depending on the amount of cash and the value of the stock of Caesars Entertainment you receive in such exchange and the adjusted tax basis of your shares of CAC's Class A common stock. There can be no assurances that the stock of Caesars Entertainment will maintain its value from the time of Caesars Entertainment's exercise of the call right or be part of an active trading market. As a consequence, you may be forced to dispose of the stock of Caesars Entertainment at a great loss.
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In addition, Caesars Entertainment may exercise the call right in its sole discretion, subject to meeting certain conditions, or Caesars Entertainment may decide to not exercise the call right for any reason whatsoever. Moreover, if Caesars Entertainment does not meet certain liquidity requirements, debt leverage ratio and other requirements, it will be unable to exercise the call right. The uncertainty as to the timing of the exercise of the call right, if at all, by Caesars Entertainment may adversely affect the trading value of our stock.
CGP LLC is required to be liquidated on April 21, 2022, which may result in you receiving less than the full value of your Class A common stock.
Following October 21, 2018 and until April 21, 2022, our Board will have the right to cause a liquidation of CGP LLC, including the sale or winding up of CGP LLC or other monetization of all of its assets. On April 21, 2022 (unless otherwise agreed by Caesars Entertainment and CAC), if our Board has not previously exercised its liquidation right, CGP LLC shall, and our Board shall cause CGP LLC to, effect a liquidation. Because the liquidation will occur on a set schedule, it is possible that regulations or market factors at the time of liquidation may impede the ability to liquidate the assets of CGP LLC. If CGP LLC is unable to liquidate portions of its assets, proceeds from the liquidation will be negatively impacted. Moreover, the forced liquidation does not preserve the flexibility to maximize the value of CGP LLC's assets in a sale by waiting for an advantageous time. In addition, CAC's allocable portion of the gain (if any) on the liquidation of the assets of CGP LLC will generally be subject to U.S. federal income tax at the regular corporate rate. As a result, you may receive less than the full value of your Class A common stock should liquidation occur on April 21, 2022.
An active trading market for our Class A common stock may not develop.
Prior to our listing on the NASDAQ Global Select market on November 19, 2013, there had not been a public market for our Class A common stock. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market or how liquid that market might become. The Sponsors own approximately 65.0% of our Class A common stock and while the shares are eligible for resale, currently such shares are not available for the public market. As a result, our shares may be less liquid than the shares of other newly public companies or other public companies generally and there may be imbalances between supply and demand for our shares. As a result, our share price may experience significant volatility and may not necessarily reflect the value of our expected performance. If an active trading market does not develop, you may have difficulty selling any of our common stock that you buy. Consequently, you may not be able to sell our Class A common stock at prices equal to or greater than the price you paid.
Future sales or the possibility of future sales of a substantial amount of our Class A common stock may depress the price of shares of our Class A common stock.
Future sales or the availability for sale of substantial amounts of our Class A common stock in the public market could adversely affect the prevailing market price of our Class A common stock and could impair our ability to raise capital through future sales of equity securities.
All of the outstanding shares of our Class A common stock are eligible for resale under Rule 144 or Rule 701 of the Securities Act of 1933, as amended (the "Securities Act"), subject to volume limitations, applicable holding period requirements and the lock-up agreements or other contractual restrictions related to certain of our stockholders.
We cannot predict the size of future issuances of our Class A common stock or other securities or the effect, if any, that future issuances and sales of our Class A common stock or other securities, including future sales by Caesars Entertainment, will have on the market price of our Class A common stock. Sales of substantial amounts of Class A common stock (including shares of Class A common stock issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our Class A common stock.
The price and trading volume of our Class A common stock may fluctuate significantly, and you could lose all or part of your investment.
The market price of our Class A common stock may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume of our Class A common stock may fluctuate and cause significant price variations to occur. Volatility in the market price of our Class A common stock may prevent you from being able to sell your shares at or above the price you paid for your shares of Class A common stock. The market price for our Class A common stock could fluctuate significantly for various reasons, including:
• | our operating and financial performance and prospects; |
• | news and events regarding CEOC's bankruptcy and negotiations with its creditors; |
• | the outcome of litigation against CEC and its affiliates; |
• | our quarterly or annual earnings or those of other companies in our industry; |
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• | conditions that impact demand for the products and services of CGP LLC's businesses; |
• | the public's reaction to our press releases, other public announcements and filings with the SEC; |
• | changes in earnings estimates or recommendations by securities analysts who track our Class A common stock; |
• | market and industry perception of our success, or lack thereof, in pursuing our growth strategy; |
• | strategic actions by us or our competitors, such as acquisitions or restructurings; |
• | changes in government and environmental regulation, including gaming taxes; |
• | changes in accounting standards, policies, guidance, interpretations or principles; |
• | arrival and departure of key personnel; |
• | the small percentage of our shares that are publicly traded; |
• | changes in our capital structure; |
• | increases in market interests rates that would decrease the value of CGP LLC's fixed-rate securities; |
• | changes in the stock price of, or a restructuring of, Caesars Entertainment; |
• | sales of Class A common stock by us or affiliates of the Sponsors; |
• | the expiration of contractual lock-up agreements; and |
• | changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural disasters, terrorist attacks, acts of war and responses to such events. |
In addition, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in the gaming, lodging, hospitality and entertainment industries. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our Class A common stock could fluctuate based upon factors that have little or nothing to do with us, and these fluctuations could materially reduce our share price.
CGP LLC may incur impairments to goodwill, indefinite-lived intangible assets, or long-lived assets which could negatively affect our future profits.
We review CGP LLC's goodwill, intangible assets and long-lived assets on an annual basis and during interim reporting periods in accordance with the authoritative guidance. Significant negative trends, reduced estimates of future cash flows, disruptions to our business, slower growth rates or lack of growth have resulted in write-downs and impairment charges in the past and, if one or more of such events occurs in the future, additional impairment charges may be required in future periods. If CGP LLC is required to record additional impairment charges, this could have a material adverse impact on its consolidated results of operations.
Hamlet Holdings controls us and their interests may conflict with or differ from your interests as a stockholder.
Hamlet Holdings beneficially owns approximately 65.0% of our Class A common stock. Hamlet Holdings has the power to control our Board. Moreover, Hamlet Holdings has the ability to vote on any transaction that requires the approval of our stockholders, including the approval of significant corporate transactions such as mergers and the sale of substantially all of our assets. In addition, Hamlet Holdings, the members of which are comprised of individuals affiliated with the Sponsors, as of the date hereof beneficially owned a majority of Caesars Entertainment's common stock through an irrevocable proxy providing Hamlet Holdings with sole voting and sole dispositive power over those shares of stock that are held by funds affiliated with and controlled by the Sponsors and their co-investors, which gives them power to elect all of Caesars Entertainment's directors. As a result, even though an independent committee of the board of directors of Caesars Entertainment may make decisions with regard to development opportunities for CGP LLC, Hamlet Holdings is in a position to exert a significant influence over both of CAC and Caesars Entertainment and the direction of their business and operations.
The interests of Hamlet Holdings and the Sponsors could conflict with or differ from the interests of holders of our Class A common stock. Affiliates of the Sponsors are in the business of making or advising on investments in companies they hold, and may from time to time in the future acquire interests in or provide advice to businesses that directly or indirectly compete with certain portions of our business or are suppliers or customers of ours or may pursue acquisitions that may be complementary to our business, in which case and, as a result, those acquisition opportunities may not be available to us.
The concentration of ownership held by Hamlet Holdings could delay, defer or prevent a change of control of us or impede a merger, takeover or other business combination which another stockholder may otherwise view favorably. In addition, a sale of a substantial number of shares of stock in the future by Hamlet Holdings could cause our stock price to decline. So long
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as Hamlet Holdings continues to beneficially own a significant amount of the outstanding shares of our Class A common stock, Hamlet Holdings will continue to be able to exert strong influence over our decisions.
Our stockholders are subject to extensive governmental regulation and if a stockholder is found unsuitable by the gaming authority, that stockholder would not be able to beneficially own our Class A common stock directly or indirectly and we will have the right to redeem the Class A common stock of such disqualified holder.
In many jurisdictions, gaming laws can require any of our stockholders to file an application, be investigated and qualify or have his, her or its suitability determined by gaming authorities. Gaming authorities have very broad discretion in determining whether an applicant should be deemed suitable. Subject to certain administrative proceeding requirements, the gaming regulators have the authority to deny any application or limit, condition, restrict, revoke or suspend any license, registration, finding of suitability or approval, or fine any person licensed, registered or found suitable or approved, for any cause deemed reasonable by the gaming authorities. For additional information on the criteria used in making determinations regarding suitability, see "Gaming Regulation Overview" in Exhibit 99.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 2015.
For example, under Nevada gaming laws, each person who acquires, directly or indirectly, beneficial ownership of any voting security, or beneficial or record ownership of any non-voting security or any debt security, in a public corporation which is registered with the Nevada Gaming Commission, or the Gaming Commission, may be required to be found suitable if the Gaming Commission has reason to believe that his or her acquisition of that ownership, or his or her continued ownership in general, would be inconsistent with the declared public policy of Nevada, in the sole discretion of the Gaming Commission. Any person required by the Gaming Commission to be found suitable shall apply for a finding of suitability within 30 days after the Gaming Commission's request that he or she should do so and, together with his or her application for suitability, deposit with the GCB a sum of money which, in the sole discretion of the GCB, will be adequate to pay the anticipated costs and charges incurred in the investigation and processing of that application for suitability, and deposit such additional sums as are required by the GCB to pay final costs and charges.
Furthermore, any person required by a gaming authority to be found suitable, who is found unsuitable by the gaming authority, may not hold directly or indirectly the beneficial ownership of any voting security or the beneficial or record ownership of any non-voting security or any debt security of any public corporation which is registered with the gaming authority beyond the time prescribed by the gaming authority. Such a finding could result in an owner of our securities being required to dispose of their securities at prices less than the price paid for such securities. A violation of the foregoing may constitute a criminal offense. A finding of unsuitability by a particular gaming authority impacts that person's ability to associate or affiliate with gaming licensees in that particular jurisdiction and could impact the person's ability to associate or affiliate with gaming licensees in other jurisdictions. The Certificate of Incorporation contains provisions establishing the right to redeem our Class A common stock held by disqualified holders if such holder is determined by any gaming regulatory agency to be unsuitable.
Many jurisdictions also require any person who acquires beneficial ownership of more than a certain percentage of voting securities of a gaming company and, in some jurisdictions, non-voting securities, typically 5%, to report the acquisition to gaming authorities, and gaming authorities may require such holders to apply for qualification or a finding of suitability, subject to limited exceptions for "institutional investors" that hold a company's voting securities for investment purposes only. Under Maryland gaming laws, we may not sell or otherwise transfer more than 5% of the legal or beneficial interest in Horseshoe Baltimore without the approval of the Maryland Lottery and Gaming Control Commission, or the Maryland Commission, after the Maryland Commission determines that the transferee is qualified or grants the transferee an institutional investor waiver. Some jurisdictions may also limit the number of gaming licenses in which a person may hold an ownership or a controlling interest and in Maryland an individual or business entity may not own an interest in more than one video lottery facility. It is unclear whether and to what extent such prohibitions will apply to online real money gaming operations when and if such operations become legal in U.S. jurisdictions other than Nevada, New Jersey, and Delaware.
Your percentage ownership in us may be diluted in the future.
Your percentage ownership in CAC may be diluted in the future because of equity awards that may be granted to our directors, officers, employees and service providers in the future. We may decide to establish equity incentive plans that will provide for the grant of common stock-based equity awards to our directors, officers, employees and service providers. In addition, we may issue equity in order to raise capital or in connection with future acquisitions and strategic investments, which would dilute your percentage ownership.
Pursuant to the terms of the Amended Merger Agreement, it is anticipated that each share of our common stock issued and outstanding immediately prior to the effective date of the merger will be converted into, and become exchangeable for, shares of CEC common stock in a ratio to ensure that holders of our common stock receive shares equal to 27% of the outstanding CEC common stock on a fully diluted basis. This will result in pro rata dilution to all holders of CAC common stock immediately prior to the closing of the Amended Merger Agreement.
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Because we do not anticipate paying dividends on our Class A common stock in the foreseeable future, you should not expect to receive dividends on shares of our Class A common stock.
We have no present plans to pay cash dividends to our stockholders and, for the foreseeable future, intend to retain all of our earnings for use in our business. The declaration of any future dividends by us is within the discretion of our Board and will be dependent on our earnings, financial condition and capital requirements, as well as any other factors deemed relevant by our Board.
We are a parent company and our primary source of cash is and will be distributions from CGP LLC.
We are a parent company with limited business operations of our own. Our main asset is our units in CGP LLC. Accordingly, our primary sources of cash are dividends and distributions with respect to our ownership interests in CGP LLC. CGP LLC might not generate sufficient earnings and cash flow to pay dividends or distributions in the future.
We are a "controlled company" within the meaning of the NASDAQ Marketplace rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements.
Hamlet Holdings controls a majority of our voting Class A common stock. As a result, we are a "controlled company" within the meaning of the NASDAQ corporate governance standards. Under the NASDAQ Marketplace rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a "controlled company" and we have elected not to comply with certain NASDAQ corporate governance requirements, including:
• | the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors; |
• | the requirement that we have a compensation committee that is composed entirely of independent directors; and |
• | the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees. |
As a result of these exemptions, our nominating and corporate governance and compensation committees do not consist entirely of independent directors, and we are not required to have an annual performance evaluation of the nominating and corporate governance and compensation committees. Accordingly, a holder of our Class A common stock will not have the same protections afforded to stockholders of companies that are subject to all of the NASDAQ corporate governance requirements.
Our bylaws and certificate of incorporation contain provisions that could discourage another company from acquiring us and may prevent attempts by our stockholders to replace or remove our current management.
Provisions of our bylaws and our certificate of incorporation may delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace or remove our directors. These provisions include:
• | establishing a classified board of directors; |
• | establishing limitations on the removal of directors; |
• | permitting only an affirmative vote of at least two-thirds of the Board to fix the number of directors; |
• | prohibiting cumulative voting in the election of directors; |
• | empowering only the board of directors to fill any vacancy on the board of directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise; |
• | eliminating the ability of stockholders to call special meetings of stockholders; |
• | prohibiting stockholders from acting by written consent if the Company ceases to be a "controlled company" under the NASDAQ Marketplace rules; and |
• | establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings. |
Together, these charter and statutory provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock. Furthermore, the existence of the foregoing provisions, as well as the significant Class A Common Stock controlled by Hamlet Holdings, could limit the price that investors might be willing to pay in the future for shares of our Class A Common Stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your Class A Common Stock in an acquisition.
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We are an "emerging growth company" and our possible election to delay adoption of new or revised accounting standards applicable to public companies may result in our financial statements not being comparable to those of other public companies. As a result of this and other reduced disclosure requirements applicable to emerging growth companies, our Class A common stock may be less attractive to investors.
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies," including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards such that an "emerging growth company" can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
We have elected to delay such adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result, our financial statements may not be comparable to the financial statements of other public companies.
We may take advantage of these reporting exemptions until we are no longer an "emerging growth company." We will remain an "emerging growth company" until the earliest to occur of (i) the last day of the fiscal year during which our total annual gross revenues equal or exceed $1.0 billion, (ii) the last day of the fiscal year following the fifth anniversary of our initial public offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt or (iv) the date on which we are deemed a "large accelerated filer" under Rule 12b-2 of the Exchange Act.
We cannot predict if investors will find our Class A common stock less attractive because we will rely on certain of these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.
As a result of our becoming a company with publicly traded common stock, our expenses and administrative burden increased and will likely further increase particularly after we are no longer an "emerging growth company" as defined in the JOBS Act.
As a company with publicly traded common stock, we incur legal, accounting and other expenses that we did not incur as a company without a publicly traded equity security. In addition, our administrative staff is required to perform additional tasks. For example, we need to create or revise the roles and duties of our Board committees and retain a transfer agent. We are also required to hold an annual meeting for our stockholders, which will require us to expend resources to prepare, print and mail a proxy statement relating to the annual meeting.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and related regulations implemented by the SEC and the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), which amended the Sarbanes-Oxley Act, among other federal laws, are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. Dodd-Frank, signed into law on July 21, 2010, effects comprehensive changes to the regulation of financial services in the United States and will subject us to additional federal regulation. We cannot predict with any certainty the requirements of the regulations ultimately adopted or how Dodd-Frank and such regulations will impact the cost of compliance for a company with publicly traded common stock. We are currently evaluating and monitoring developments with respect to Dodd-Frank and other new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management's time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. We also expect that being a company with publicly traded common stock, these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our Board, particularly to serve on our audit committee, and qualified executive officers.
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As discussed elsewhere in this Annual Report on Form 10-K, as an "emerging growth company" as defined in the JOBS Act, we may take advantage of certain temporary exemptions from various reporting requirements, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. When these exemptions cease to apply, we expect to incur additional expenses and devote increased management effort toward ensuring compliance with them. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Form 10-K contains or may contain "forward-looking statements" intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You should not place undue reliance on such statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy. These statements contain words such as "may," "will," "project," "might," "expect," "believe," "anticipate," "intend," "could," "would," "estimate," "continue," or "pursue," or the negative of these words or other words or expressions of similar meaning that may identify forward-looking statements and are found at various places throughout this Form 10-K. These forward-looking statements, including, without limitation, those relating to future actions, new projects, strategies, future performance, the outcome of contingencies such as legal proceedings, and future financial results, wherever they occur in this Form 10-K, are based on our current expectations about future events and are estimates reflecting the best judgment of CAC and CGP LLC's management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements.
Investors are cautioned that forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that cannot be predicted or quantified, and, consequently, the actual performance of CAC and CGP LLC may differ materially from those expressed or implied by such forward-looking statements. We disclose important factors that could cause actual results to differ materially from our expectations under "Risk Factors" and elsewhere in this Form 10-K and the documents incorporated by reference. Such risks and uncertainties include, but are not limited to, the following factors, as well as other factors described from time to time in the Company's reports filed with the SEC (including the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained therein):
• | CAC and CGP LLC's dependence on Caesars Entertainment and its subsidiaries, including CES, to provide support and services, as well as CGP LLC's dependence on Caesars Entertainment's and CES' senior management's expertise and its participation in Caesars Entertainment's Total Rewards loyalty program; |
• | the effects of a default by Caesars Entertainment or CEOC on certain debt obligations; |
• | the ability of Caesars Entertainment to meet its financial obligations in light of its limited cash balances; |
• | Caesars Entertainment's interests may conflict with CAC and CGP LLC's interests; |
• | the adverse effects due to the bankruptcy filing of CEOC and certain of its subsidiaries; |
• | the effects if a third-party successfully challenges Caesars Entertainment or its affiliates' ownership of, or right to use, the intellectual property owned or used by subsidiaries of Caesars Entertainment, which CIE and CGP LLC license for use in its businesses; |
• | CIE's reliance on subsidiaries of Caesars Entertainment to obtain online gaming licenses in certain jurisdictions, such as New Jersey; |
• | the difficulty of operating CGP LLC's business separately from Caesars Entertainment and managing that process effectively could take up a significant amount of management's time; |
• | CGP LLC's business model and short operating history; |
• | the effects of any lawsuits against CAC, CGP LLC or CGPH related to the formation transactions, the Asset Purchase Transactions and the proposed CAC and Caesars Entertainment merger transaction; |
• | the Proposed Merger may not be consummated on the terms contemplated or at all; |
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• | the adverse effects if extensive governmental regulation and taxation policies, which are applicable to CGP LLC, are enforced; |
• | the effects of local and national economic, credit and capital market conditions on the economy in general, and on the gaming industry in particular; |
• | the sensitivity of CGP LLC's business to reductions in discretionary consumer spending; |
• | the rapidly growing and changing industry in which CGP LLC operates, such as CIE's internet gaming business; |
• | any failure to protect CGP LLC's trademarks or other intellectual property, such as CIE's ownership of the WSOP trademark; |
• | abnormal gaming holds ("gaming hold" is the amount of money that is retained by the casino from wagers by customers); |
• | the effects of competition, including locations of competitors and operating and market competition, particularly the intense competition CGP LLC's casino properties face in their respective markets; |
• | the effect on CGP LLC's business strategy if online real money gaming is not legalized in states other than Delaware, Nevada or New Jersey in the United States, is legalized in an unfavorable manner or is banned in the United States; |
• | political and economic uncertainty created by terrorist attacks and other acts of war or hostility; and |
• | the other factors set forth under "Risk Factors." |
Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. CAC and CGP LLC disclaim any obligation to update the forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date stated or, if no date is stated, as of the date of this Form 10-K.
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Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
The following table sets forth information about our portfolio of casino properties, each of which is more fully described in Item 1. Business, as of December 31, 2016:
Summary of Property Information
_________________________
Property | Location | Type of Casino | Casino Space – Sq. Ft.(1) | Slot Machines(1) | Table Games(1) | Hotel Rooms & Suites(1) | ||||||
Planet Hollywood Resort & Casino | Las Vegas, NV | Land-based | 64,500 | 1,080 | 100 | 2,500 | ||||||
The Cromwell | Las Vegas, NV | Land-based | 40,000 | 390 | 50 | 188 | ||||||
The LINQ Hotel & Casino(2) | Las Vegas, NV | Land-based | 31,900 | 760 | 70 | 2,250 | ||||||
Bally's Las Vegas | Las Vegas, NV | Land-based | 68,400 | 1,000 | 70 | 2,810 | ||||||
Harrah's New Orleans | New Orleans, LA | Land-based | 125,100 | 1,580 | 150 | 450 | ||||||
Horseshoe Baltimore | Baltimore, MD | Land-based | 122,000 | 2,200 | 180 | — | ||||||
Hot Spot Oasis | Las Vegas, NV | Land-based | 1,000 | 15 | — | — | ||||||
(1) | Approximate. |
(2) | Includes Strip-front property leased by an affiliate of Caesars Entertainment to The LINQ Hotel & Casino. |
CAC and CGP LLC use space in the corporate offices of CEOC for their corporate headquarters pursuant to a management services agreement with Caesars Entertainment. CAC and CGP LLC also lease office space in Santa Monica, California used for corporate functions.
We believe the space available for CAC and CGP LLC's businesses are adequate for their current needs.
CIE uses space in the corporate offices of CEOC for its corporate headquarters pursuant to a shared services agreement with Caesars Entertainment.
For greater detail on the properties, see Item 1. Business.
Item 3. Legal Proceedings.
From time to time, CAC or CGP LLC may be subject to legal proceedings and claims in the ordinary course of business.
CAC-CEC Proposed Merger
On December 30, 2014, Nicholas Koskie, on behalf of himself and, he alleges, all others similarly situated, filed a lawsuit (the "Nevada Lawsuit") in the Clark County District Court in the State of Nevada against CAC, CEC and members of the CAC board of directors Marc Beilinson, Philip Erlanger, Dhiren Fonseca, Don Kornstein, Karl Peterson, Marc Rowan, and David Sambur (the individual defendants collectively, the "CAC Directors"). The Nevada Lawsuit alleges claims for breach of fiduciary duty against the CAC Directors and aiding and abetting breach of fiduciary duty against CAC and CEC. It seeks (1) a declaration that the claim for breach of fiduciary duty is a proper class action claim; (2) to order the CAC Directors to fulfill their fiduciary duties to CAC in connection with the Proposed Merger, specifically by announcing their intention to (a) cooperate with bona fide interested parties proposing alternative transactions, (b) ensure that no conflicts exist between the CAC Directors' personal interests and their fiduciary duties to maximize shareholder value in the Proposed Merger, or resolve all such conflicts in favor of the latter, and (c) act independently to protect the interests of the shareholders; (3) to order the CAC Directors to account for all damages suffered or to be suffered by the plaintiff and the putative class as a result of the Proposed Merger; and (4) to award the plaintiff for his costs and attorneys' fees. It is unclear whether the Nevada Lawsuit also seeks to enjoin the Proposed Merger. On October 13, 2016, the Nevada Lawsuit was dismissed without prejudice by the court for lack of prosecution. On November 14, 2016, the deadline to seek reinstatement of the lawsuit lapsed, without action by the plaintiff. If the litigation is refiled, CAC and the CAC Directors believe this lawsuit is without merit and will defend themselves vigorously.
We cannot provide assurance as to the outcome of this matter or of the range of reasonably possible losses should this matter ultimately be resolved against us due to the inherent uncertainty of litigation and the stage of the related litigation.
CEOC Bondholder Litigation, or Noteholder Disputes
On August 4, 2014, Wilmington Savings Fund Society, FSB, solely in its capacity as successor indenture trustee for the 10% Second-Priority Senior Secured Notes due 2018 (the "Notes"), on behalf of itself and, it alleges, derivatively on behalf of
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CEOC, filed a lawsuit (the "Delaware Second Lien Lawsuit") in the Court of Chancery in the State of Delaware against CEC, CEOC, CGP LLC, CAC, CERP, CES, Eric Hession, Gary Loveman, Jeffrey D. Benjamin, David Bonderman, Kelvin L. Davis, Marc C. Rowan, David B. Sambur, and Eric Press. The lawsuit alleges claims for breach of contract, intentional and constructive fraudulent transfer, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and corporate waste. The lawsuit seeks (1) an award of money damages; (2) to void certain transfers, the earliest of which dates back to 2010; (3) an injunction directing the recipients of the assets in these transactions to return them to CEOC; (4) a declaration that CEC remains liable under the parent guarantee formerly applicable to the Notes; (5) to impose a constructive trust or equitable lien on the transferred assets; and (6) an award to the plaintiffs for their attorneys' fees and costs. The only claims against CAC and CGP LLC are for intentional and constructive fraudulent transfer. CAC and CGP LLC believe this lawsuit is without merit and will defend themselves vigorously. A motion to dismiss this action was filed by CEC and other defendants in September 2014, and the motion was argued in December 2014. During the pendency of its Chapter 11 bankruptcy proceedings, the action has been automatically stayed with respect to CEOC. The motion to dismiss with respect to CEC was denied on March 18, 2015. In a Verified Supplemental Complaint filed on August 3, 2015, the plaintiff stated that due to CEOC's bankruptcy filing, the continuation of all claims was stayed pursuant to the bankruptcy except for Claims II, III, and X. These are claims against CEC only, for breach of contract in respect of the release of the parent guarantee formerly applicable to the Notes, for declaratory relief in respect of the release of this guarantee, and for violations of the Trust Indenture Act in respect of the release of this guarantee. CEC has informed us that fact discovery in the case is substantially complete, and cross-motions for summary judgment have been filed by the parties. On October 5, 2016, the Bankruptcy Court granted CEOC's motion for a stay of this proceeding (and others). The Bankruptcy Court ordered the stay to remain in effect until the earlier of (a) the first omnibus hearing after the Bankruptcy Court issues its decision confirming or denying confirmation of the CEOC restructuring plan (February 15, 2017), (b) the termination of the restructuring support agreement with the Official Committee of Second Priority Noteholders (the "Second Lien RSA"), or (c) further order of the Bankruptcy Court.
On September 3, 2014, holders of approximately $21 million of CEOC Senior Unsecured Notes due 2016 and 2017 filed suit in federal district court in United States District Court for the Southern District of New York against CEC and CEOC, claiming broadly that an August 12, 2014 Note Purchase and Support Agreement between CEC and CEOC (on the one hand) and certain other holders of the CEOC Senior Unsecured Notes (on the other hand) impaired their own rights under the Senior Unsecured Notes. The lawsuit seeks both declaratory and monetary relief. On October 2, 2014, other holders of CEOC Senior Unsecured Notes due 2016 purporting to represent a class of all holders of these Notes from August 11, 2014 to the present filed a substantially similar suit in the same court, against the same defendants, relating to the same transactions. Both lawsuits (the "Senior Unsecured Lawsuits") were assigned to the same judge. The claims against CEOC have been automatically stayed during its Chapter 11 bankruptcy proceedings. The court denied a motion to dismiss both lawsuits with respect to CEC. The parties have completed fact discovery with respect to both plaintiffs' claims against CEC. On October 23, 2015, plaintiffs in the Senior Unsecured Lawsuits moved for partial summary judgment, and on December 29, 2015, those motions were denied. On December 4, 2015, plaintiff in the action brought on behalf of holders of CEOC's 6.50% Senior Unsecured Notes moved for class certification and briefing has been completed. The judge presiding over these cases thereafter retired, and a new judge was appointed to preside over these lawsuits. That judge set a new summary judgment briefing schedule, and the parties filed cross-motions for summary judgment which remain pending. On October 5, 2016, the Bankruptcy Court granted CEOC's motion for a stay of these proceedings (and others). The stay will remain in effect until the earlier of (a) the first omnibus hearing after the Bankruptcy Court issues its decision confirming or denying confirmation of the CEOC restructuring plan (February 15, 2017), (b) the termination of the Second Lien RSA or (c) further order of the Bankruptcy Court. CAC and CGP LLC are not parties to these lawsuits.
On November 25, 2014, UMB Bank ("UMB"), as successor indenture trustee for CEOC's 8.5% senior secured notes due 2020, filed a verified complaint (the "Delaware First Lien Lawsuit") in Delaware Chancery Court against CEC, CEOC, CERP, CAC, CGP LLC, CES, and against an individual, and past and present members of the CEC and CEOC Boards of Directors, Gary Loveman, Jeffrey Benjamin, David Bonderman, Kelvin Davis, Eric Press, Marc Rowan, David Sambur, Eric Hession, Donald Colvin, Fred Kleisner, Lynn Swann, Chris Williams, Jeffrey Housenbold, Michael Cohen, Ronen Stauber, and Steven Winograd, alleging generally that defendants have improperly stripped CEOC of prized assets, have wrongfully affected a release of a CEC parental guarantee of CEOC debt and have committed other wrongs. Among other things, UMB has asked the court to appoint a receiver over CEOC. In addition, the Delaware First Lien Lawsuit pleads claims for fraudulent conveyances/transfers, insider preferences, illegal dividends, declaratory judgment (for breach of contract as regards to the parent guarantee and also as to certain covenants in the bond indenture), tortious interference with contract, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, usurpation of corporate opportunities, and unjust enrichment, and seeks monetary and equitable as well as declaratory relief. CAC and CGP LLC believe this lawsuit is without merit and will defend themselves vigorously. All of the defendants have moved to dismiss the lawsuit, and that motion has been fully briefed. In addition, this lawsuit has been automatically stayed with respect to CEOC during the Chapter 11 process and, pursuant to the (a) Fifth Amended and Restated Restructuring Support and Forbearance Agreement dated October 7, 2015, with certain holders of claims in respect of claims under CEOC's first lien notes (the "First Lien Bond RSA") and (b) Restructuring Support and Forbearance Agreement dated August 21, 2015, with certain holders of claims in respect of claims under CEOC's first lien credit agreement
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(the "First Lien Bank RSA" and, together with the First Lien Bond RSA, the "RSAs"), has been subject to a consensual stay for all.
On February 13, 2015, Caesars Entertainment received a Demand For Payment of Guaranteed Obligations (the "February 13 Notice") from Wilmington Savings Fund Society, FSB, in its capacity as successor Trustee for CEOC's 10.00% Second-Priority Notes. The February 13 Notice alleges that CEOC's commencement of its voluntary Chapter 11 bankruptcy case constituted an event of default under the indenture governing the 10.00% Second-Priority Notes; that all amounts due and owing on the 10.00% Second-Priority Notes therefore immediately became payable; and that Caesars Entertainment is responsible for paying CEOC's obligations on the 10.00% Second-Priority Notes, including CEOC's obligation to timely pay all principal, interest, and any premium due on these notes, as a result of a parent guarantee provision contained in the indenture governing the notes that the February 13 Notice alleges is still binding. The February 13 Notice accordingly demands that Caesars Entertainment immediately pay Wilmington Savings Fund Society, FSB, cash in an amount of not less than $3.7 billion, plus accrued and unpaid interest (including without limitation the $184 million interest payment due December 15, 2014 that CEOC elected not to pay) and accrued and unpaid attorneys' fees and other expenses. The February 13 Notice also alleges that the interest, fees and expenses continue to accrue. CAC and CGP LLC are not parties to this demand.
On February 18, 2015, Caesars Entertainment received a Demand For Payment of Guaranteed Obligations (the "February 18 Notice") from BOKF, N.A. ("BOKF"), in its capacity as successor Trustee for CEOC's 12.75% Second-Priority Senior Secured Notes due 2018 (the "12.75% Second-Priority Notes"). The February 18 Notice alleges that CEOC's commencement of its voluntary Chapter 11 bankruptcy case constituted an event of default under the indenture governing the 12.75% Second-Priority Notes; that all amounts due and owing on the 12.75% Second-Priority Notes therefore immediately became payable; and that CEC is responsible for paying CEOC's obligations on the 12.75% Second-Priority Notes, including CEOC's obligation to timely pay all principal, interest and any premium due on these notes, as a result of a parent guarantee provision contained in the indenture governing the notes that the February 18 Notice alleges is still binding. The February 18 Notice therefore demands that CEC immediately pay BOKF cash in an amount of not less than $750 million, plus accrued and unpaid interest, accrued and unpaid attorneys' fees, and other expenses. The February 18 Notice also alleges that the interest, fees and expenses continue to accrue. CAC and CGP LLC are not parties to this demand.
On March 3, 2015, BOKF filed a lawsuit (the "New York Second Lien Lawsuit") against CEC in federal district court in Manhattan, in its capacity as successor trustee for CEOC's 12.75% Second-Priority Notes. On June 15, 2015, UMB filed a lawsuit (the "New York First Lien Lawsuit") against CEC, also in federal district court in Manhattan, in its capacity as successor trustee for CEOC's 11.25% Senior Secured Notes due 2017, 8.50% Senior Secured Notes due 2020, and 9.00% Senior Secured Notes due 2020. Plaintiffs in these actions allege that CEOC's filing of its voluntary Chapter 11 bankruptcy case constitutes an event of default under the indenture governing these notes, causing all principal and interest to become immediately due and payable, and that CEC is obligated to make those payments pursuant to a parent guarantee provision in the indentures governing these notes that plaintiffs allege are still binding. Both plaintiffs bring claims for violation of the Trust Indenture Act of 1939, breach of contract, breach of duty of good faith and fair dealing and for declaratory relief and BOKF brings an additional claim for intentional interference with contractual relations. The cases were assigned to the same judge presiding over the other Parent Guarantee Lawsuits. CEC filed its answer to the BOKF complaint on March 25, 2015, and to the UMB complaint on August 10, 2015. On June 25, 2015, and June 26, 2015, BOKF and UMB, respectively, moved for partial summary judgment, specifically on their claims alleging a violation of the Trust Indenture Act of 1939, seeking both declaratory relief and damages. On August 27, 2015, those motions were denied. The court, on its own motion, certified its order with respect to the interpretation of the Trust Indenture Act for interlocutory appeal to the United States Court of Appeals for the Second Circuit, and on December 22, 2015, the appellate court denied CEC's motion for leave to appeal. On November 20, 2015, BOKF and UMB again moved for partial summary judgment. Those motions likewise were denied. The judge presiding over these cases thereafter retired, and a new judge was appointed to preside over these lawsuits. That judge set a new summary judgment briefing schedule, and the parties submitted cross-motions for summary judgment which remain pending. On October 5, 2016, the Bankruptcy Court granted CEOC's motion for a stay of the New York First Lien Lawsuit and the New York Second Lien Lawsuit (and others). The Bankruptcy Court ordered the stay to remain in effect until the earlier of (a) the first omnibus hearing after the Bankruptcy Court issues its decision confirming or denying confirmation of the CEOC restructuring plan (February 15, 2017), (b) the termination of the Second Lien RSA or (c) further order of the Bankruptcy Court.
On October 20, 2015, Wilmington Trust, National Association ("Wilmington Trust"), filed a lawsuit (the "New York Senior Notes Lawsuit" and, together with the Delaware Second Lien Lawsuit, the Delaware First Lien Lawsuit, the Senior Unsecured Lawsuits, the New York Second Lien Lawsuit, and the New York First Lien Lawsuit, the "Parent Guarantee Lawsuits") against CEC in federal district court in Manhattan in its capacity as successor indenture trustee for CEOC's 10.75% Senior Notes due 2016 (the "10.75% Senior Notes"). Plaintiff alleges that CEC is obligated to make payment of amounts due on the 10.75% Senior Notes pursuant to a parent guarantee provision in the indenture governing those notes that plaintiff alleges is still in effect. Plaintiff raises claims for violations of the Trust Indenture Act of 1939, breach of contract, breach of the implied duty of good faith and fair dealing, and for declaratory judgment, and seeks monetary and declaratory relief. CEC filed its answer to the complaint on November 23, 2015. As with the other parent guarantee lawsuits taking place in Manhattan, the judge
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presiding over these cases retired and a new judge was appointed to preside over these lawsuits. That judge set a new summary judgment briefing schedule and the parties submitted cross-motions for summary judgment which remain pending. On October 5, 2016, the Bankruptcy Court granted CEOC's motion for a stay of this proceeding (and others). The Bankruptcy Court ordered the stay to remain in effect until the earlier of (a) the first omnibus hearing after the Bankruptcy Court issues its decision confirming or denying confirmation of the CEOC reorganization plan (February 15, 2017), (b) the termination of the Second Lien RSA or (c) further order of the Bankruptcy Court.
In accordance with the terms of the applicable indentures and as previously disclosed, Caesars Entertainment believes that it is not subject to the above-described guarantees. As a result, Caesars Entertainment believes the demands for payment are without merit. The claims against CEOC have been stayed due to the Chapter 11 process and, except as described above, the actions against CEC have been allowed to continue.
CAC and CGP LLC believe that the claims and demands described above against CAC and CGP LLC in the Delaware First Lien Lawsuit and Delaware Second Lien Lawsuit are without merit and intend to defend themselves vigorously. For the Delaware First Lien Lawsuit and Delaware Second Lien Lawsuit, at the present time, CAC and CGP LLC believe it is not probable that a material loss will result from the outcome of these matters. However, given the uncertainty of litigation, CAC and CGP LLC cannot provide assurance as to the outcome of these matters or of the range of reasonably possible losses should the matters ultimately be resolved against them. Should these matters ultimately be resolved through litigation outside of the financial restructuring of CEOC, which CAC and CGP LLC believe these matters would likely be long and protracted, and were a court to find in favor of the claimants in the Delaware First Lien Lawsuit or the Delaware Second Lien Lawsuit, such determination could have a material adverse effect on CAC and CGP LLC's business, financial condition, results of operations, and cash flows.
As part of CEOC's bankruptcy proceeding, the Official Committee of Second Priority Noteholders ("Second Priority Noteholders") filed a standing motion in bankruptcy court on May 13, 2016 seeking standing to commence claims on behalf of CEOC's estate. The proposed complaint names as potential defendants CAC, CGP LLC, CIE, and CES as well as CEC and CERP among others, and seeks recovery of assets transferred from CEOC. The proposed complaint alleges claims on behalf of CEOC's estate ranging in value from $8.1 billion to $12.6 billion against all defendants, as valued by the Second Priority Noteholders. Of this amount, the Second Priority Noteholders allege potential claims against CAC, CGP LLC, and CIE ranging from $3.7 billion to $7.9 billion, without taking into account any duplicative recovery, based on calculations in an exhibit to the revised disclosure statement filed in the bankruptcy court on May 27, 2016. A hearing on the standing motion was held on October 19, 2016, and the standing motion was continued until January 17, 2017. Following the confirmation of the CEOC restructuring plan on January 17, 2017, the bankruptcy court continued the Second Priority Noteholders' standing motion until April 19, 2017.
On October 5, 2016, CEOC announced the execution of, or amendment and restatement of, restructuring support agreements with representatives of all of CEOC's major creditor groups, as well as agreement to the terms of CEOC's third amended plan of reorganization. Included among these was the Second Lien RSA. Pursuant to the terms of the Second Lien RSA, CEOC and the Second Priority Noteholders have agreed to stay certain discovery deadlines and to hold in abeyance various proceedings pending before the bankruptcy court. The Second Priority Noteholders' standing motion, various claim objections and motions to compel will all be held in abeyance until (a) the date on which the Debtors' third amended plan becomes effective or (b) seven days after the termination of the Second Lien RSA for any reason, whichever is earlier. The Second Lien RSA further requires the consenting Second Priority Noteholders to vote in favor of the plan.
On August 9, 2016, CEOC and certain of its affiliates, each debtor in the Chapter 11 bankruptcy proceedings, filed an adversary complaint as part of the Chapter 11 bankruptcy proceeding against CAC, CIE, CGP LLC, and CGPH, among others, including CEC, CES, and certain current and former directors of CEOC and CEC. In this adversary complaint, the plaintiffs assert claims against CAC for actual and constructive fraudulent conveyances and transfers. The plaintiffs allege, among other things, that certain transactions in which CAC purchased assets from CEOC constituted fraudulent conveyances, and that CAC did not provide CEOC with reasonably equivalent value for the assets acquired. The plaintiffs also claim certain transactions involving CIE constituted fraudulent transfers. The plaintiffs seek, among other relief, avoidance and/or rescission of the disputed transactions; return of assets transferred in those transactions; compensation from defendants for CEOC's alleged losses and damages; and an award to plaintiffs of the costs of the actions, including attorney's fees.
CAC, CIE, CGP LLC, and CGPH believe the above-referenced adversary complaint is without merit and intend to defend it vigorously, including by filing a motion to dismiss at the appropriate time. The status and timing of the adversary proceeding is affected by the Bankruptcy proceedings. On August 10, 2016, CEOC filed an emergency motion seeking, among other relief, to stay the above-referenced adversary proceeding. On August 23, 2016, the bankruptcy court granted the relief requested until the October 19, 2016 omnibus hearing. At the October 19, 2016 omnibus hearing, the bankruptcy court continued the adversary proceeding until the November 16, 2016 omnibus hearing. Following the confirmation of the CEOC restructuring plan on January 17, 2017, the bankruptcy court continued the adversary proceeding until April 19, 2017.
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Report of Bankruptcy Examiner
The Bankruptcy Court previously engaged an independent examiner to investigate possible claims CEOC might have against CEC, CAC, CGP LLC, other entities and certain individuals. On March 15, 2016, the examiner released his report in redacted form (to the public) and in unredacted form (to certain entities and individuals). On May 16, 2016, the examiner issued a substantially unredacted version of his report. CAC, CGP LLC and CIE do not have access to the unredacted report, and accordingly the description below is based on the substantially unredacted publicly-available report.
The examiner's report identifies a variety of potential claims against CAC, CGP LLC, CIE, other entities and certain individuals related to a number of transactions dating back to 2009. Most of the examiner's findings are based on his view that CEOC was "insolvent" at the time of the applicable transactions. The examiner's report includes his conclusions on the relative strength of these possible claims, many of which are described above. The examiner calculates an estimated range of potential damages for these potential claims as against all parties from $3.6 billion to $5.1 billion. The examiner calculates an estimated range of potential damages for potential claims against CAC, CGP LLC and CIE from $1.7 billion to $2.3 billion, ignoring potential duplication of recovery from other defendants. Neither calculation takes into account probability of success, likelihood of collection, or the time or cost of litigation.
Although this report was prepared at the request of the Bankruptcy Court, none of the findings are legally binding on the Bankruptcy Court or any party. CAC, CGP LLC and CIE contest many of the examiner's findings, including his finding that CEOC did not receive fair value for assets transferred, any suggestion that certain of the potential claims against CAC, CGP LLC and CIE have merit, and his calculation of potential damages. CAC, CGP LLC and its subsidiaries believe that each of the disputed transactions involving them provided substantial value to CEOC that was reasonably equivalent to the value of the asset (s) transferred, and that they at all times acted in good faith.
National Retirement Fund
In January 2015, a majority of the Trustees of the National Retirement Fund ("NRF"), a multi-employer defined benefit pension plan, voted to expel CEC and its participating subsidiaries, the CEC Group, from the plan. Neither CAC, CGP LLC nor any of their subsidiaries are part of the CEC Group. NRF claims that CEOC's bankruptcy presents an "actuarial risk" to the plan because, depending on the outcome of the bankruptcy proceeding, CEC might no longer be liable to the plan for any partial or complete withdrawal liability. NRF has advised the CEC Group that its expulsion has triggered withdrawal liability with a present value of approximately $360 million, payable in 80 quarterly payments of about $6 million.
Prior to NRF's vote, the CEC Group reiterated its commitment to remain in the plan and not seek rejection of any collective bargaining agreements in which the obligation to contribute to NRF exists. The CEC Group was current with respect to pension contributions at the time of their expulsion.
On December 5, 2016, an interlocutory judgment was entered against CEC and CERP comprising the first quarterly payment of withdrawal liability referred to above, interest and liquidated damages under the Employee Retirement Income Security Act of 1974. On December 19, 2016, CEC and CERP filed a motion to certify a final judgment under Rule 54(b) of the Federal Rules of Civil Procedure for immediate appeal and to stay the plaintiffs' motions to amend and for summary judgment, as described below. On January 11, 2017, the District Court granted the motion to certify a final judgment under Rule 54(b) in the amount of $9 million, but denied the motion for a stay, and a judgment in that amount was entered the next day. CEC has appealed this decision to the Second Circuit, and has bonded the judgment pending appeal.
On December 23, 2016, the plaintiffs filed a motion to amend their complaint to add claims for the second through eighth quarterly payments of withdrawal liability, which the plaintiffs contended were past due, as well as for injunctive relief requiring the defendants to pay all further quarterly payments as they purportedly became due. Also on December 23, 2016, the plaintiffs simultaneously filed a motion for summary judgment against CEC and CERP for payment of the second through eighth quarterly payments of withdrawal liability, for interest, liquidated damages, attorneys' fees and costs, and for injunctive relief requiring the defendants to pay all further quarterly payments as they purportedly became due. These motions have not yet been fully submitted to the District Court.
CEC believes its legal arguments against the actions undertaken by NRF are strong and will pursue them vigorously, and will defend vigorously against the claims raised by the NRF in the NRF action. Since settlement discussions with the NRF are continuing and no material discovery has yet been performed with respect to any of the above actions, CEC cannot currently provide assurance as to the ultimate outcome of the matters at issue.
Other Matters
In recent years, governmental authorities have been increasingly focused on anti-money laundering ("AML") policies and procedures, with a particular focus on the gaming industry. In October 2013, CEOC's subsidiary, Desert Palace, Inc. (the owner of and referred to herein as Caesars Palace), received a letter from the Financial Crimes Enforcement Network of the United States Department of the Treasury ("FinCEN"), stating that FinCEN was investigating Caesars Palace for alleged
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violations of the Bank Secrecy Act to determine whether it is appropriate to assess a civil penalty and/or take additional enforcement action against Caesars Palace. Caesars Palace responded to FinCEN's letter in January 2014. Additionally, CEC was informed in October 2013 that a federal grand jury investigation regarding anti-money laundering practices of CEC and its subsidiaries had been initiated. CEC and Caesars Palace have been cooperating with FinCEN, the Department of Justice and the Nevada Gaming Control Board (the "GCB") on this matter. On September 8, 2015, FinCEN announced a settlement pursuant to which Caesars Palace agreed to an $8 million civil penalty for its violations of the Bank Secrecy Act, which penalty shall be treated as a general unsecured claim in Caesars Palace's bankruptcy proceedings. In addition, Caesars Palace agreed to conduct periodic external audits and independent testing of its AML compliance program, report to FinCEN on mandated improvements, adopt a rigorous training regime, and engage in a "look-back" for suspicious transactions. The terms of the FinCEN settlement were approved by the bankruptcy court on October 19, 2015.
CEOC and the GCB reached a settlement on the same facts as above, wherein CEC agreed to pay $1.5 million and provide to the GCB the same information that is reported to FinCEN and to resubmit its updated AML policies. On September 17, 2015, the settlement agreement was approved by the Nevada Gaming Commission. CEOC continues to cooperate with the Department of Justice in its investigation of this matter.
The Company is party to ordinary and routine litigation incidental to our business. We do not expect the outcome of any such litigation to have a material effect on our financial position, results of operations, or cash flows, as we do not believe it is reasonably possible that we will incur material losses as a result of such litigation.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our Class A common stock trades on the NASDAQ Global Select Market under the symbol "CACQ." The following table sets forth the high and low intra-day sales price per share of our Class A common stock on the NASDAQ Global Select Market for indicated periods.
High | Low | ||||||
Fiscal Year Ended December 31, 2015: | |||||||
First Quarter | $ | 10.49 | $ | 6.18 | |||
Second Quarter | 8.48 | 6.00 | |||||
Third Quarter | 8.23 | 4.82 | |||||
Fourth Quarter | 8.26 | 6.03 | |||||
Fiscal Year Ended December 31, 2016: | |||||||
First Quarter | $ | 7.35 | $ | 4.48 | |||
Second Quarter | 12.15 | 5.43 | |||||
Third Quarter | 13.00 | 10.10 | |||||
Fourth Quarter | 13.53 | 10.00 | |||||
As of February 10, 2017, there were 138,795,500 shares of common stock issued and outstanding that were held by 40 stockholders of record.
Dividends
We did not pay any cash dividends in the period from our date of incorporation (February 25, 2013) through December 31, 2016. We currently do not anticipate paying cash dividends on our common stock in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant. The Merger Agreement contains provisions that restrict dividend payments.
Unregistered Sales of Equity Securities
There have not been any sales by the Company of equity securities in the period from our date of incorporation (February 25, 2013) through December 31, 2016 that have not been registered under the Securities Act.
Share Repurchases
The Company did not repurchase shares of our common stock during the years ended December 31, 2016 and 2015.
Performance Graph
The graph depicted below compares the cumulative total stockholder return on our common stock with the cumulative total return on the Standard & Poor's 500 Stock Index ("S&P 500"), the NASDAQ Composite Index, the NASDAQ Internet Index ("QNET"), and the Dow Jones U.S. Gambling Total Stock Market Index ("Dow Jones U.S. Gambling") for the period beginning on November 19, 2013 (the date our common stock commenced trading on the NASDAQ Global Select Market) and ending on December 31, 2016. NASDAQ OMX furnished the data. The performance graph assumes a $100 investment in our stock and each of the four indices, respectively, on November 19, 2013, and that all dividends were reinvested. Stock price performance, presented for the period from November 19, 2013 to December 31, 2016, is not necessarily indicative of future results.
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November 19, 2013 | December 31, 2013 | December 31, 2014 | December 31, 2015 | December 31, 2016 | |||||||||||||||
CACQ | $ | 100.00 | $ | 109.14 | $ | 93.30 | $ | 61.63 | $ | 122.17 | |||||||||
S&P 500 | 100.00 | 103.63 | 117.81 | 119.44 | 133.73 | ||||||||||||||
Dow Jones U.S. Gambling | 100.00 | 115.75 | 96.02 | 80.00 | 101.47 | ||||||||||||||
NASDAQ | 100.00 | 106.34 | 122.02 | 130.52 | 142.09 | ||||||||||||||
QNET | 100.00 | 108.46 | 107.32 | 128.82 | 133.63 | ||||||||||||||
The performance graph should not be deemed filed or incorporated by reference into any other of our filings under the Securities Act or the Exchange Act, unless we specifically incorporate the performance graph by reference therein.
Equity Compensation Plan Information
_________________________
Plan Category | Number of Securities to be Issued Upon Vesting or Exercise of Shares | Weighted-average exercise price(2) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | ||||||
Equity compensation plans approved by security holders(1) | 1,495,561 | 9.43 | 188,973 | ||||||
(1) | Shares granted pursuant to the Caesars Acquisition Company 2014 Performance Incentive Plan as described in Note 7 — Stock-based Compensation contained in the CAC Audited Financial Statements included in Item 8 of this Annual Report on Form 10-K. |
(2) | Restricted stock unit awards do not have an exercise price and therefore are not included in the calculation of the weighted-average exercise price. |
CAC holds all of the voting units in CGP LLC but does not consolidate CGP LLC into its financial statements. Equity compensation plans for employees of CGP LLC and its subsidiaries are described in Note 15 — Stock-based Compensation and Employee Benefit Plans contained in the CGP LLC Audited Financial Statements included in Exhibit 99.1 of this Annual Report on Form 10-K.
Item 6. Selected Financial Data.
The following table presents financial data of CAC and combined financial data of the assets and entities that were acquired by or contributed to CGP LLC in the formation transactions, the Acquired Properties Transaction and the Harrah's Transaction through the May 2014 acquisition dates. Periods prior to the formation transactions are referred to in the aggregate as Predecessor Growth Partners, which is considered to be the predecessor to CAC. The combined financial data of Predecessor Growth Partners is presented as if those businesses and assets acquired in the formation transactions, the Acquired Properties Transaction and the Harrah's Transaction were combined into one reporting entity for the periods presented, and have been derived from the historical accounting records of Caesars Entertainment.
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The historical financial data of CAC should be read in conjunction with Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and the audited financial statements and related notes of CAC included elsewhere in this Form 10-K.
Caesars Acquisition Company | Predecessor Growth Partners(1) | ||||||||||||||||||||||
(In millions, except per share data) | Year Ended December 31, 2016 | Year Ended December 31, 2015 | Year Ended December 31, 2014 | February 25 Through December 31, 2013 | January 1 Through October 21, 2013 | Year Ended December 31, 2012 | |||||||||||||||||
Statements of Operations | |||||||||||||||||||||||
Revenues | |||||||||||||||||||||||
Net revenues | $ | — | $ | — | $ | — | $ | — | $ | 845.9 | $ | 1,095.6 | |||||||||||
Operating expenses | |||||||||||||||||||||||
Direct operating expenses | — | — | — | — | 399.8 | 532.4 | |||||||||||||||||
Property, general, administrative and other | 30.0 | 31.2 | 25.4 | 0.4 | 244.3 | 307.6 | |||||||||||||||||
Write-downs, reserves and project opening costs, net of recoveries | — | — | — | — | 15.6 | 8.4 | |||||||||||||||||
Management fees to related parties | — | — | — | — | 14.2 | 16.1 | |||||||||||||||||
Depreciation and amortization | — | — | — | — | 66.8 | 85.0 | |||||||||||||||||
Total operating expenses | 30.0 | 31.2 | 25.4 | 0.4 | 740.7 | 949.5 | |||||||||||||||||
Income from equity method investment in Caesars Growth Partners, LLC | 820.6 | 97.4 | 79.4 | 7.3 | N/A | N/A | |||||||||||||||||
Income from operations | 790.6 | 66.2 | 54.0 | 6.9 | 105.2 | 146.1 | |||||||||||||||||
Interest expense, net of interest capitalized | — | — | — | — | (60.5 | ) | (56.1 | ) | |||||||||||||||
Interest income - related party | — | — | — | — | 138.5 | 145.1 | |||||||||||||||||
Loss on extinguishment of debt | — | — | — | — | (0.7 | ) | — | ||||||||||||||||
Other income, net | — | — | — | — | 0.5 | 1.5 | |||||||||||||||||
Income before provision for income taxes | 790.6 | 66.2 | 54.0 | 6.9 | 183.0 | 236.6 | |||||||||||||||||
Provision for income taxes | (171.5 | ) | (34.2 | ) | (39.4 | ) | (2.4 | ) | (74.4 | ) | (89.5 | ) | |||||||||||
Net income from continuing operations | 619.1 | 32.0 | 14.6 | 4.5 | 108.6 | 147.1 | |||||||||||||||||
Discontinued operations | |||||||||||||||||||||||
Income from discontinued operations before income taxes | — | — | — | — | 6.8 | 71.6 | |||||||||||||||||
Benefit from/(provision for) income taxes related to discontinued operations | — | — | — | — | 6.4 | (19.0 | ) | ||||||||||||||||
Net income from discontinued operations | — | — | — | — | 13.2 | 52.6 | |||||||||||||||||
Net income | 619.1 | 32.0 | 14.6 | 4.5 | 121.8 | 199.7 | |||||||||||||||||
Less: net loss/(income) attributable to non-controlling interests | — | — | — | — | 5.1 | (0.6 | ) | ||||||||||||||||
Net income attributable to CAC and Predecessor Growth Partners, respectively | $ | 619.1 | $ | 32.0 | $ | 14.6 | $ | 4.5 | $ | 126.9 | $ | 199.1 | |||||||||||
Common Stock Data | |||||||||||||||||||||||
Earnings per share - basic | $ | 4.50 | $ | 0.23 | $ | 0.11 | $ | 0.19 | |||||||||||||||
Earnings per share - diluted | $ | 4.49 | $ | 0.23 | $ | 0.11 | $ | 0.19 | |||||||||||||||
Balance Sheet Data (at period end) | |||||||||||||||||||||||
Total assets | $ | 1,821.5 | $ | 1,137.4 | $ | 1,059.3 | $ | 1,155.3 | $ | 3,974.7 | |||||||||||||
Total debt(2) | — | — | — | — | 873.8 | ||||||||||||||||||
Equity | 1,698.8 | 1,067.4 | 1,023.1 | 1,153.4 | 2,573.4 | ||||||||||||||||||
_________________________
(1) | Results have been recast to reflect the portion of CIE's business disposed of as discontinued operations as a result of the sale of CIE's SMG Business in September 2016. |
(2) | Total debt is comprised of third-party debt, debt to related party and convertible notes issued to related party. |
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The following table presents financial data of Caesars Growth Partners, LLC for the period subsequent to the formation transactions. The financial data of CGP LLC should be read in conjunction with Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and the audited financial statements and related notes of CGP LLC included in Exhibit 99.1 of this Annual Report on Form 10-K pursuant to Rule 3-09 of Regulation S-X.
Caesars Growth Partners, LLC (1) | |||||||||||||||
(In millions) | Year Ended December 31, 2016 | Year Ended December 31, 2015 | Year Ended December 31, 2014 | October 22 Through December 31, 2013 | |||||||||||
Statements of Operations | |||||||||||||||
Revenues | |||||||||||||||
Net revenues | $ | 1,696.5 | $ | 1,620.2 | $ | 1,318.5 | $ | 206.8 | |||||||
Operating expenses | |||||||||||||||
Direct operating expenses | 777.9 | 765.5 | 649.2 | 97.8 | |||||||||||
Property, general, administrative and other | 672.4 | 498.1 | 489.6 | 95.2 | |||||||||||
Write-downs, reserves and project opening costs, net of recoveries | 2.8 | 12.0 | 53.1 | 3.9 | |||||||||||
Management fees to related parties | 44.2 | 55.9 | 37.0 | 2.2 | |||||||||||
Depreciation and amortization | 180.1 | 148.6 | 115.1 | 17.5 | |||||||||||
Impairment of goodwill, tangible and other intangible assets | — | 1.0 | 147.5 | — | |||||||||||
Change in fair value of contingently issuable non-voting membership units | — | (117.2 | ) | 38.7 | 138.7 | ||||||||||
Total operating expenses | 1,677.4 | 1,363.9 | 1,530.2 | 355.3 | |||||||||||
Income/(loss) from operations | 19.1 | 256.3 | (211.7 | ) | (148.5 | ) | |||||||||
Interest expense, net of interest capitalized | (198.0 | ) | (195.5 | ) | (171.8 | ) | (16.3 | ) | |||||||
Interest income | 3.4 | — | 1.0 | — | |||||||||||
Interest income - related party | — | — | 119.2 | 35.8 | |||||||||||
Impairment of investment in notes from related party | — | — | (63.5 | ) | — | ||||||||||
Gain on sale of investment in notes from related party | — | — | 99.4 | — | |||||||||||
Loss on extinguishment of debt | — | — | (23.8 | ) | (0.9 | ) | |||||||||
Other income, net | — | 4.0 | — | — | |||||||||||
(Loss)/income from continuing operations before benefit from income taxes | (175.5 | ) | 64.8 | (251.2 | ) | (129.9 | ) | ||||||||
Benefit from income taxes | 4.6 | 1.9 | 3.9 | 4.3 | |||||||||||
Net (loss)/income from continuing operations | (170.9 | ) | 66.7 | (247.3 | ) | (125.6 | ) | ||||||||
Discontinued operations | |||||||||||||||
Income from discontinued operations before income taxes, including $4,179.9 gain on sale of SMG Business in 2016 and $1.4 of gain on disposal during 2014 | 4,109.6 | 226.0 | 86.8 | 12.3 | |||||||||||
Provision for income taxes related to discontinued operations | (9.8 | ) | (63.8 | ) | (52.7 | ) | (11.4 | ) | |||||||
Net income from discontinued operations | 4,099.8 | 162.2 | 34.1 | 0.9 | |||||||||||
Net income/(loss) | 3,928.9 | 228.9 | (213.2 | ) | (124.7 | ) | |||||||||
Less: net loss/(income) attributable to non-controlling interests | 28.3 | (7.1 | ) | 33.0 | 4.6 | ||||||||||
Net income/(loss) attributable to Caesars Growth Partners, LLC | $ | 3,957.2 | $ | 221.8 | $ | (180.2 | ) | $ | (120.1 | ) | |||||
Balance Sheet Data (at period end) | |||||||||||||||
Total assets | $ | 7,365.7 | $ | 4,533.3 | $ | 4,591.5 | $ | 5,444.2 | |||||||
Total debt(2) | 2,275.5 | 2,337.3 | 2,351.1 | 1,102.4 | |||||||||||
Equity | 4,659.7 | 1,731.2 | 1,303.8 | 3,461.1 | |||||||||||
(1) | Results have been recast to reflect the portion of CIE's business disposed of as discontinued operations as a result of the sale of CIE's SMG Business in September 2016. |
(2) | Total debt is comprised of third-party debt, debt to related party and convertible notes issued to related party. |
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with, and is qualified in its entirety by, the audited financial statements and the notes thereto of CAC and CGP LLC, and other financial information included elsewhere in this Form 10-K. Certain statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements. See Item 1A. Risk Factors — CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 of this Form 10-K.
Basis of Presentation and Discussion
Caesars Acquisition Company, a Delaware corporation, directly owns 100% of the voting membership units in CGP LLC, a Delaware limited liability company and a joint venture between CAC and subsidiaries of CEC. CAC serves as CGP LLC's managing member and sole holder of all of its outstanding voting units, and subsidiaries of Caesars Entertainment hold all of CGP LLC's outstanding non-voting units. However, based upon the structure of CGP LLC and the related economics, CGP LLC has been determined to be a variable interest entity of which Caesars Entertainment is the primary beneficiary. Therefore, CAC does not consolidate CGP LLC into its financial statements. Instead, CAC accounts for its investment in CGP LLC using a balance sheet approach to the equity method of accounting, referred to as hypothetical liquidation at book value ("HLBV") accounting.
CAC's primary asset is its membership interest in CGP LLC. We have presented financial statements of CGP LLC pursuant to Rule 3-09 of Regulation S-X as CGP LLC represents a significant equity method investment of CAC. As we believe that the comparative information for CAC's investment in CGP LLC is material to investors in CAC, we also have presented information for CGP LLC in this Management's Discussion and Analysis of Financial Condition and Results of Operations.
Proposed Merger of CAC with CEC
On December 21, 2014, the Company and CEC entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which, among other things, CAC will merge with and into CEC, with CEC as the surviving company (the "Proposed Merger").
On July 9, 2016, CAC and CEC agreed to amend and restate the Merger Agreement (the "Amended Merger Agreement"). In connection with the entry into the Amended Merger Agreement, on July 9, 2016, (i) CAC and CEOC, a majority owned subsidiary of CEC, agreed to amend and restate the Restructuring Support Agreement (as amended, the "CAC RSA"), dated as of June 12, 2016, among CAC, CEOC and CEC; (ii) CEC and CEOC agreed to amend the Restructuring Support, Settlement and Contribution Agreement, dated as of June 7, 2016 (as amended, the "CEC RSA" and, together with the CAC RSA, the "Caesars RSAs"), between CEC and CEOC; and (iii) CAC entered into a Voting Agreement (the "Voting Agreement") with Hamlet Holdings LLC ("Hamlet Holdings"), and solely with respect to certain provisions of the Voting Agreement, affiliates of Apollo Global Management, LLC and TPG Capital, LP and certain of their co-investors (collectively, the "Holders"). The Caesars RSAs were entered into with respect to the restructuring of CEOC's indebtedness (the "Restructuring") and, together with the Amended Merger Agreement, are consistent with the terms proposed under the second amended Joint Chapter 11 plan of reorganization (as amended, the "Merger Plan") of CEOC and each of the debtors (together with CEOC, the "Debtors") in the CEOC Chapter 11 Cases.
The exchange ratio, pursuant to which shares of CAC's class A common stock, par value $0.001 per share (the "Class A Common Stock") and CAC's class B common stock, par value $0.001 per share (the "Class B Common Stock," and together with the Class A Common Stock, the "CAC Common Stock"), will become exchangeable for shares of CEC's common stock, par value $0.01 per share ("CEC Common Stock"), has been amended to ensure that holders of CAC Common Stock immediately prior to the closing of the Proposed Merger (the "Merger Closing") will receive 27% of the outstanding CEC Common Stock on a fully diluted basis (prior to conversion of the new CEC convertible notes) (and which, upon conversion at any time following the Merger Closing, will result in pro rata dilution to all holders of CEC Common Stock, including holders of CAC Common Stock immediately prior to the Merger Closing) (the "Exchange Ratio"). The Exchange Ratio may be adjusted pursuant to the Amended Merger Agreement and such adjustment will be determined on the earlier of (i) the date on which the special committee of CAC's Board of Directors (the "CAC Special Committee") and the special committee of CEC's Board of Directors (the "CEC Special Committee"), each composed solely of independent directors, agree in writing as to the Exchange Ratio, and (ii) the sixth business day following the date on which the Adjustment Period (as described below) ends.
The Adjustment Period is the 14 day period beginning on the date, as soon as reasonably practicable following the date of the Amended Merger Agreement, on which each of CAC and CEC has received written confirmation from the other party that it and its respective representatives have received certain information (which information must be provided on request as soon as reasonably practicable, but no later than 30 days following the confirmation date) necessary for such party's financial advisor to render a fairness opinion. During the Adjustment Period, the CAC Special Committee, on behalf of CAC, and the CEC Special Committee, on behalf of CEC, will determine whether and to what extent it is necessary, appropriate and advisable to adjust the
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Exchange Ratio. The Exchange Ratio may be adjusted solely to take into account certain tax costs and tax attributes (except as described below).
If at any time during the Adjustment Period the CAC Special Committee or the CEC Special Committee determines that (i) it cannot obtain a fairness opinion from its respective financial advisor as a result of an adjustment to the Exchange Ratio based solely on the factors set forth in the Amended Merger Agreement or (ii) an adjustment to the Exchange Ratio based solely on the factors set forth in the Amended Merger Agreement would not be advisable or would otherwise be inconsistent with the directors' fiduciary duties under applicable law, either the CAC Special Committee or the CEC Special Committee may notify the other party of such determination and, following delivery of such notice, the parties will instead take into account all other relevant facts and circumstances impacting the intrinsic value of CAC and CEC at such time.
If the CAC Special Committee, on behalf of CAC, or the CEC Special Committee, on behalf of CEC, (i) are unable to agree to an adjustment to the Exchange Ratio by the end of the Adjustment Period and determine in good faith, after consultation with outside legal counsel, that failure to terminate the Amended Merger Agreement would be reasonably likely to be inconsistent with the fiduciary duties of the directors of CAC or CEC, as applicable, under applicable law or (ii) have not received, as of a date that is reasonably proximate to the date on which the Adjustment Period ends, an opinion of an independent, nationally recognized financial advisor to the effect that, as of the date of such opinion, and based upon and subject to the various assumptions made, procedures followed, matters considered and limitations on the review undertaken in preparing such opinion as set forth therein, the Exchange Ratio is fair, from a financial point of view, to CAC or CEC, as applicable, then the Amended Merger Agreement may be terminated within five business days following the end of the Adjustment Period.
The Amended Merger Agreement also contains an amended "Go-Shop" provision on terms substantially the same as the "Go-Shop" provision originally set forth in the Merger Agreement. The Amended Merger Agreement also provides that (i) certain existing litigation, under specified circumstances, (ii) certain legislative changes and (iii) any change in the financial or securities markets or in the market price or valuation of any security or financial interest, or in the business, results of operations or prospects of either of CAC or CEC, subject to certain conditions, in each case will not provide cause for either the CAC board of directors (the "CAC Board") or the CEC board of directors (the "CEC Board") to effect an adverse recommendation change.
The Amended Merger Agreement was fully negotiated by and between the CAC Special Committee and the CEC Special Committee, was recommended by each of the CAC Special Committee and the CEC Special Committee and was approved by the CAC Board and the CEC Board. Stockholders of each of CAC and CEC will be asked to vote on the adoption of the Amended Merger Agreement at special meetings of CAC's stockholders and CEC's stockholders, respectively, that will each be held on a date to be announced. Pursuant to the Amended Merger Agreement, CAC and CEC, as applicable, have agreed to file a joint proxy statement/prospectus as soon as reasonably practicable following the date of the Amended Merger Agreement.
The closing of the merger is subject to the adoption of the Amended Merger Agreement by the affirmative vote of the holders of at least a majority of all outstanding shares of CAC Common Stock and CEC Common Stock, respectively. In addition to the closing conditions originally set forth in the Merger Agreement, each of CAC and CEC have agreed that their respective obligation to consummate the merger is subject to the fulfillment of the Merger Plan containing the Debtor Release, the Third-Party Release and the Exculpation. However, the Amended Merger Agreement eliminated from the closing conditions set forth in the Merger Agreement (i) minimum cash closing conditions for both parties and (ii) a closing condition that limited tax costs relating to the Restructuring to close the Proposed Merger.
The Amended Merger Agreement provides certain termination rights to each of CAC and CEC based on, among other things: (i) CEOC filing (including any of its debtor subsidiaries), without CAC's or CEC's prior written consent, respectively, (x) a plan of reorganization, a disclosure statement or a proposed order entered by the Bankruptcy Court confirming the Merger Plan that is materially consistent with the RSAs and the Merger Plan and otherwise acceptable to each of CAC and CEC ("Confirmation Order") that does not include the Debtor Release, the Third-Party Release or the Exculpation as to CAC, CGP LLC, their subsidiaries, and their respective representatives ("CAC Released Parties") or CEC, its subsidiaries, and their respective representatives ("CEC Released Parties"), respectively, in form and substance consistent in all material respects with such provisions as set forth in the Merger Plan or (y) any motion, pleading or other document with the Bankruptcy Court in the CEOC Chapter 11 Cases that is otherwise materially inconsistent with the CAC RSA or CEC RSA, respectively, or the Merger Plan, (ii) the Confirmation Order (x) not including the Debtor Release, the Third-Party Release or the Exculpation as to the CAC Released Parties or the CEC Released Parties, respectively, in form and substance consistent in all material respect with such provisions as set forth in the Merger Plan or (y) not being otherwise materially consistent with the Merger Plan, (iii) the 105 Injunction Order no longer being in effect or, subject to certain conditions, CEOC failing to file a motion on or before August 14, 2016, or such earlier date as may be required by local rules governing the CEOC Chapter 11 Cases for the filing of such motion, seeking to extend the 105 Injunction Order currently in effect to the period ending on the confirmation date, (iv) either of the Caesars RSAs being terminated or becoming null and void or (v) the date on which the merger becomes effective not occurring by the close of business on December 31, 2017.
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CAESARS ACQUISITION COMPANY
Operating Results
Income from Equity Method Investment
For the years ended December 31, 2016, 2015 and 2014, CAC recognized $820.6 million, $97.4 million and $79.4 million, respectively, of income before tax from its equity method investment in CGP LLC. For the years ended December 31, 2015 and 2014, income before tax from its equity method investment in CGP LLC equals the amount of income that CAC was entitled to under its minimum guarantee return. Income from equity method investment in Caesars Growth Partners, LLC increased in 2016 due to the increase in CAC's contractual claim on CGP LLC's accounting balance sheet as a result of the sale of CIE's SMG Business in September 2016.
Operating Expenses
In addition to its income from equity method investment, CAC incurs direct expenses which are primarily related to professional services fees, payroll and related expenses as well as general liability insurance, licenses and fees. For the years ended December 31, 2016, 2015 and 2014, CAC incurred operating expenses of $30.0 million, $31.2 million and $25.4 million, respectively. Operating expenses for 2016 decreased by $1.2 million, or 3.8%, when compared with 2015 primarily due to decreases in stock-based compensation expense partially offset by increases in professional services expenses. Operating expenses for 2015 increased by $5.8 million, or 22.8%, when compared with 2014 primarily due to professional services fees mainly driven by an increase in legal and advisory fees. CAC receives distributions from CGP LLC in accordance with the CGP Operating Agreement for reimbursement of its expenses incurred.
Provision for Income Taxes
The provision for income taxes for the years ended December 31, 2016, 2015 and 2014 was $171.5 million, $34.2 million and $39.4 million, respectively. The effective tax rates for the years ended December 31, 2016, 2015 and 2014 were 21.7%, 51.7% and 72.9%, respectively. The decrease in the effective tax rate for 2016 as compared to 2015 is primarily due to a decrease in the federal valuation allowance recorded against deferred tax assets related to the basis difference in the investment in notes from a related party as a result of the sale of CIE's social mobile games business by CGP LLC and the federal tax benefit for the dividends received deduction related to dividends received from CIE through its investment in CGP LLC. The decrease in the effective tax rate for 2015 as compared to 2014 is primarily due to a lesser change in the federal valuation allowance recorded against deferred tax assets related to the basis difference in the investment in notes from related party.
Liquidity and Capital Resources
CAC's primary source of funds is distributions from CGP LLC. To the extent that CAC requires additional funds, CAC may borrow funds or issue additional equity. However, as CAC does not have operations of its own, it is expected that CAC will not have a significant need for additional liquidity.
CAC's expenses incurred in the normal course of business, including income tax obligations, are paid by CGP LLC on behalf of CAC pursuant to the CGP Operating Agreement. These transactions are accounted for as distributions from CGP LLC to CAC.
CAC has not incurred, nor is it expected to incur, material capital expenditures in the normal course of business or to pursue acquisition opportunities other than through CGP LLC. See Liquidity and Capital Resources for CGP LLC.
Pursuant to the certificate of incorporation of CAC and the CGP Operating Agreement, after October 21, 2016, Caesars Entertainment and/or its subsidiaries will have the right, which it may assign to any of its affiliates or to any transferee of all non-voting units of CGP LLC held by subsidiaries of Caesars Entertainment, to acquire all or a portion of the voting units of CGP LLC (or, at the election of CAC, shares of CAC's Class A common stock) not otherwise owned by Caesars Entertainment and/or its subsidiaries at such time.
Following October 21, 2018 and until April 21, 2022, our Board of Directors (the "Board") will have the right to cause a liquidation of CGP LLC, including the sale or winding up of CGP LLC, or other monetization of all of its assets and the distribution of the proceeds remaining after satisfaction of all liabilities of CGP LLC to the holders of CGP LLC's units according to the terms of the CGP Operating Agreement. On April 21, 2022 (unless otherwise agreed by Caesars Entertainment and CAC), if our Board has not previously exercised its liquidation right, the CGP Operating Agreement provides that CGP LLC shall, and our Board shall cause CGP LLC to effect a liquidation. The conditions upon which the call right may be exercised, the distribution waterfall for net cash and other assets upon a liquidation, and other information related to the potential liquidation are further discussed in Note 4 — Stockholders' Equity and Earnings Per Share to the CAC Financial Statements included in Item 8 of this Annual Report.
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Off-Balance Sheet Arrangements
CAC did not have any off-balance sheet arrangements at December 31, 2016 or 2015.
Critical Accounting Policies and Estimates
We prepare our financial statements in conformity with accounting principles generally accepted in the United States ("GAAP").
Certain of our accounting policies require that we apply significant judgment in defining the appropriate assumptions for calculating financial estimates. By their nature, these judgments will be subject to an inherent degree of uncertainty. Our judgments are based upon the historical experience of both Caesars Entertainment and Caesars Acquisition Company, terms of existing contracts, observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. For a summary of our significant accounting policies, please refer to Note 1 — Description of Business and Summary of Significant Accounting Policies to the CAC Financial Statements included in Item 8 of this Annual Report.
We consider accounting estimates to be critical accounting policies when:
• | the estimates involve matters that are highly uncertain at the time the accounting estimate is made; and |
• | different estimates or changes to estimates could have a material impact on the reported financial position, changes in financial position or results of operations. |
When more than one accounting principle, or method of its application, is generally accepted, we select the principle or method that we consider to be the most appropriate when given the specific circumstances. Application of these accounting principles requires us to make estimates about the future resolution of existing uncertainties. Due to the inherent uncertainty involving estimates, actual results reported in the future may differ from our estimates.
We are an emerging growth company as defined in the JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards such that an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to delay such adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result, our financial statements may not be comparable to the financial statements of other public companies. We may take advantage of these reporting exemptions until we are no longer an emerging growth company.
Consolidation
We consolidate into our financial statements the accounts of any variable interest entity for which we are determined to be the primary beneficiary. We analyze our variable interests to determine if the entity that is party to the variable interest is a variable interest entity in accordance with GAAP. This analysis requires significant judgment on the part of management, and any changes to that judgment could result in reaching a different consolidation conclusion. Our analysis includes both quantitative and qualitative reviews. Quantitative analysis is based on the forecasted cash flows of the entity. Qualitative analysis is based on our review of the design of the entity, its organizational structure including decision-making ability, and financial agreements.
Because the equity holders in CGP LLC receive returns disproportionate to their voting interests and substantially all the activities of CGP LLC are related to Caesars Entertainment, CGP LLC has been determined to be a variable interest entity. Additionally, while CAC is the sole voting member of CGP LLC, CAC is not deemed to be the primary beneficiary of CGP LLC, and therefore we do not consolidate CGP LLC into our financial statements.
We consolidate into our financial statements the accounts of any wholly-owned subsidiaries and any partially-owned subsidiaries that are not deemed to be variable interest entities and for which we have the ability to control. Control generally equates to ownership percentage, whereby investments that are more than 50% owned are consolidated, investments in affiliates of 50% or less but greater than 20% are generally accounted for using the equity method, and investments in affiliates of 20% or less are accounted for using the cost method. At December 31, 2016 or 2015, we had no consolidated subsidiaries.
Impairment of Equity Method Investments
CAC's primary asset is its investment in CGP LLC. We review this investment quarterly for indicators of other-than-temporary impairment. This determination requires significant judgment. In making this judgment, we consider available quantitative and qualitative evidence in evaluating potential impairment of this investment. If the carrying value of our investment exceeds its estimated fair value, we evaluate, among other factors, general market conditions, the duration and extent to which the estimated fair value is less than our carrying value, and our intent and ability to hold, or plans to sell, the
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investment. We also consider specific adverse conditions related to the financial health of and business outlook for the investee, CGP LLC, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new carrying basis in the investment will be established.
Income Taxes
We record income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the expected future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and attributable to operating loss and tax credit carryforwards. We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically based on the more likely than not realization threshold. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience and the experience of Caesars Entertainment with operating loss and tax credit carryforwards not expiring unused and tax planning alternatives.
The effect on the income tax provision and deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Recently Issued Accounting Pronouncements
The information regarding recent accounting pronouncements is included in Note 2 — Recently Issued Accounting Pronouncements to the CAC Financial Statements included in Item 8 of this Annual Report.
CAESARS GROWTH PARTNERS, LLC
Overview
Pursuant to the terms of the CGP Operating Agreement, in conjunction with CGP LLC's acquisition of CIE from Caesars Entertainment, CGP LLC was obligated to issue additional non-voting membership units to Caesars Entertainment to the extent that the earnings from a specified portion of CIE's social and mobile games business exceeded a pre-determined threshold amount in 2015. Accordingly, in April 2016, CGP LLC issued approximately 31.9 million additional Class B non-voting units.
On May 5, 2014, CGP LLC contributed the equity interests of PHWLV and a 50% interest in the management fee revenues of PHW Manager to CGPH, an indirect wholly owned subsidiary of CGP LLC. JCC Holding Company II, LLC and its subsidiaries (collectively known as "Harrah's New Orleans"), 3535 LV Corporation (formerly known as "The Quad" and recently rebranded as "The LINQ Hotel & Casino"), indirect subsidiaries of Parball Corporation (collectively known as "Bally's Las Vegas") and Corner Investment Company, LLC and its subsidiaries (collectively known as "The Cromwell") were direct wholly-owned subsidiaries of CEOC, which is a majority-owned subsidiary of CEC. On May 5, 2014, CGPH through one or more subsidiaries acquired (i) The Cromwell, The LINQ Hotel & Casino and Bally's Las Vegas, (ii) 50% of the ongoing management fees and any termination fees payable under property management agreements entered into between an affiliate of CEOC acting as property manager and the CGPH subsidiary which owns each of these respective properties, and (iii) certain intellectual property that is specific to each of these properties.
On May 20, 2014, CGPH through one or more subsidiaries acquired (i) Harrah's New Orleans, (ii) 50% of the ongoing management fees and any termination fees payable under the Louisiana property management agreement entered between an affiliate of CEOC acting as property manager and the owners of Harrah's New Orleans and (iii) certain intellectual property that is specific to Harrah's New Orleans.
CGPH paid $2.0 billion, less outstanding debt assumed, for the May 2014 transactions above.
The acquisitions of Harrah's New Orleans, The LINQ Hotel & Casino, Bally's Las Vegas and The Cromwell and the contribution of Planet Hollywood to CGPH are herein referred to as the "Acquired Properties."
On September 23, 2016, CIE, a Delaware limited liability company, a subsidiary of CGP LLC, sold its SMG Business for $4.4 billion, subject to customary purchase price adjustments, to Alpha Frontier Limited, a Cayman Islands exempted company ("Purchaser") (such sale, together with the transactions contemplated under the Purchase Agreement, the "Sale"), pursuant to the Stock Purchase Agreement, dated as of July 30, 2016 (the "Purchase Agreement"), entered into by and among CIE, Purchaser, and, solely for certain limited purposes described therein, CGP LLC, and CIE Growth, LLC, a Delaware limited liability company. The Purchaser was backed by a consortium that includes Giant Investment (HK) Limited, an affiliate of Shanghai Giant Network Technology Co., Ltd.; Yunfeng Capital; China Oceanwide Holdings Group Co., Ltd.; China Minsheng Trust Co., Ltd.; CDH China HF Holdings Company Limited and Hony Capital Fund. CGP LLC recognized a pre-tax gain of approximately $4.2 billion from the Sale.
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Presentation
The financial information for the periods presented reflect the financial statements of CGP LLC on a combined and consolidated basis, giving regard to all impacts of the May 2014 transactions.
As a result of the May 2014 transactions described above, one or more indirect subsidiaries of CGP LLC acquired Bally's Las Vegas, The Cromwell, The LINQ Hotel & Casino and Harrah's New Orleans from CEOC. Because these acquisitions were accounted for as transactions among entities under common control, the financial information herein has been recast to include the financial results for these properties as if those businesses were combined into the CGP LLC reporting entity for all periods presented. Therefore, the financial information contained herein provides comparable operating results for all periods presented.
As a result of the SMG Business sale in September 2016, the historical results of CGP LLC have been recast to reflect the portion of the CIE business disposed of as discontinued operations for all periods presented herein.
CGP LLC's Interactive Entertainment operating unit consists of CIE, which is comprised of two distinct but complementary businesses: World Series of Poker and regulated online real money gaming. CGP LLC's Casino Properties and Developments operating unit consists of Planet Hollywood Resort & Casino, Harrah's New Orleans, The LINQ Hotel & Casino, Bally's Las Vegas, The Cromwell and CGP LLC's interest in the Maryland Joint Venture.
Consolidated Operating Results of CGP LLC
Year Ended December 31, | |||||||||||
(In millions) | 2016 | 2015 | 2014 | ||||||||
Net revenues | $ | 1,696.5 | $ | 1,620.2 | $ | 1,318.5 | |||||
Income/(loss) from operations | 19.1 | 256.3 | (211.7 | ) | |||||||
Net (loss)/income from continuing operations | (170.9 | ) | 66.7 | (247.3 | ) | ||||||
Adjusted EBITDA (1) | 420.1 | 347.6 | 214.1 | ||||||||
_________________________
(1) | See Reconciliations of Adjusted Earnings before Interest Income/Expense, Income Taxes, Depreciation and Amortization ("Adjusted EBITDA") to Net Income/(Loss) from Continuing Operations. |
Performance of the Casino Properties and Developments operating unit is measured in part through tracking of trips by rated customers, which means a customer whose gaming activity is tracked through the Total Rewards system, referred to as "trips," and spend per rated customer trip, referred to as "spend per trip." A trip is created by a Total Rewards card holder engaging in one or more of the following activities while at our property: (1) hotel stay, (2) gaming activity or (3) a comp redemption, which means the receipt of a complimentary item given out by the casino. Lodgers are guests registered with the Total Rewards program who stay at our property and non-lodgers are guests registered with the Total Rewards program not staying at the property. Customer spend means the cumulative rated theoretical spend (which is the amount of money expected to be retained by the casino based upon the mathematics underlying the particular game as a fraction of the amount of money wagered by the customer) across all game types for a specific customer. The average combined gross hold is the percentage of the amount wagered across all game types (including table games and slot machines) that the casino retained.
Year ended December 31, 2016 results compared to Year ended December 31, 2015
Net revenues were impacted primarily by the following:
• | Continued expansion of entertainment options at Planet Hollywood positively impacted other revenues; |
• | Increases in all categories of revenues as a result of renovations at The LINQ Hotel & Casino; and |
• | Increase in casino revenues at Horseshoe Baltimore due to increases in both slot and table volumes. |
• | These increases were partially offset by lower revenues at Harrah's New Orleans as a result of the April 2015 smoking ban. |
Net revenues for 2016 increased by $76.3 million, or 4.7%, when compared to 2015. Total trips decreased by approximately 5.4% in 2016 when compared to 2015. Gross casino hold increased to 12.2% for 2016 from 11.9% for 2015. Cash average daily room rates for 2016 increased to $132, or 7.3%, when compared to $123 for 2015. Average daily occupancy was 94.3% and 92.4%, respectively, for 2016 and 2015. Revenue per available room for 2016 and 2015 was $122 and $112, respectively, or an increase of 8.9%.
Income from operations for 2016 was $19.1 million as compared to $256.3 million for 2015, which was a decrease of $237.2 million, or 92.5%. The decrease in income from operations is primarily attributable to an increase in stock-based compensation expense and transaction related costs associated with the Sale and the change in the fair value of contingently
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issuable non-voting membership units recognized in the prior year with no comparable change recognized subsequent to December 31, 2015, partially offset by the income impact of increases in net revenues. In connection with the Sale, CIE accelerated the vesting of all of the outstanding options, restricted stock units and warrants of CIE (collectively, "CIE Equity Awards"), and, effective immediately prior to the closing, canceled the CIE Equity Awards in exchange for the right to receive cash payments, resulting in the accelerated recognition of stock-based compensation expense associated with such awards. Excluding the impact of stock-based compensation expense, transaction costs related to the Sale and the change in fair value of contingently issuable non-voting membership units, income from operations for 2016 increased by $55.7 million when compared to the same period in 2015 primarily due to the income impact of increased revenues as discussed above and reductions in labor and marketing expenses partially offset by an increase in general and administrative expenses related to the expansion of entertainment options at Planet Hollywood and an increase in depreciation expense at Planet Hollywood resulting from the acceleration of depreciation for assets that will be replaced as a result of renovations.
Adjusted EBITDA for 2016 was $420.1 million as compared to $347.6 million for 2015, which was an increase of $72.5 million, or 20.9%, driven primarily by the income impact of increased revenues and reductions in labor expenses partially offset by an increase in general and administrative expenses related to the expansion of entertainment options at Planet Hollywood.
Year ended December 31, 2015 results compared to Year ended December 31, 2014
Net revenues were impacted primarily by the following:
• | The openings of The Cromwell in May 2014 and Horseshoe Baltimore in August 2014; and |
• | Increased rates and the availability of rooms as a result of the completion of renovations at The LINQ Hotel & Casino which was substantially completed and available to guests in early May 2015. |
• | These increases were partially offset by lower casino revenues at Harrah's New Orleans due to the April 2015 smoking ban. |
Net revenues for 2015 increased by $301.7 million, or 22.9%, when compared to 2014. Total trips increased by approximately 25.8% in 2015 when compared to 2014. Gross casino hold increased to 11.9% for 2015 from 11.2% for 2014. Cash average daily room rates for 2015 increased to $123, or 13.9%, when compared to $108 for 2014. Average daily occupancy was 92.4% and 89.7%, respectively, for 2015 and 2014. Revenue per available room for 2015 and 2014 was $112 and $98, respectively, or an increase of 14.3%.
Income from operations for 2015 was $256.3 million as compared to a loss of $211.7 million in 2014, which was an improvement of $468.0 million. The improvement was primarily attributable to the income impact of increased revenues, a decrease in the fair value of contingently issuable non-voting membership units in 2015 and the impairment of goodwill for Bally's Las Vegas recognized in the fourth quarter of 2014, offset by increased expenses resulting from the opening of Horseshoe Baltimore. Excluding the impact of the change in fair value of contingently issuable non-voting membership units as well as the impairment of goodwill for Bally's Las Vegas, income from operations for 2015 improved by $165.6 million primarily due to the income impact of increased revenues partially offset by operating expenses incurred after the opening of Horseshoe Baltimore.
Adjusted EBITDA for 2015 was $347.6 million as compared to $214.1 million for 2014, which was an increase of $133.5 million, or 62.4%, driven primarily by the income impact of increased revenues partially offset by operating expenses incurred after the opening of Horseshoe Baltimore.
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Other Factors Affecting Net Income
Year Ended December 31, | |||||||||||
(In millions) | 2016 | 2015 | 2014 | ||||||||
Interest expense, net of interest capitalized | $ | (198.0 | ) | $ | (195.5 | ) | $ | (171.8 | ) | ||
Interest income | 3.4 | — | 1.0 | ||||||||
Interest income - related party | — | — | 119.2 | ||||||||
Impairment of investment in notes from related party | — | — | (63.5 | ) | |||||||
Gain on sale of investment in notes from related party | — | — | 99.4 | ||||||||
Loss on extinguishment of debt | — | — | (23.8 | ) | |||||||
Other income, net | — | 4.0 | — | ||||||||
Benefit from income taxes (1) | 4.6 | 1.9 | 3.9 | ||||||||
Net income from discontinued operations | 4,099.8 | 162.2 | 34.1 | ||||||||
Net loss/(income) attributable to non-controlling interests (2) | 28.3 | (7.1 | ) | 33.0 | |||||||
_________________________
(1) | The benefit from income taxes for CGP LLC for 2016, 2015 and 2014, represents the income taxes from its corporate subsidiary, CIE, which was taxed as a corporation for federal, state and foreign income tax purposes through September 22, 2016. CGP LLC's benefit from income taxes also includes the allocated income taxes from the consolidated Caesars Entertainment provision for income taxes for the period up to the date of acquisition by CGP LLC for the properties acquired from CEOC in May 2014. No provision for income taxes is reported for properties within the Casino Properties and Developments operating unit of CGP LLC that were acquired in 2013 as such properties are taxed as a partnership for federal and state income tax purposes whereby any income or losses were allocated to the CGP LLC members and taxed by each member. |
(2) | CGP LLC's non-controlling interest reflects the non-controlling interest associated with CIE through September 22, 2016 and the Maryland Joint Venture into CGP LLC. |
Interest Expense, Net of Interest Capitalized
The table below summarizes CGP LLC's interest expenses, net of interest capitalized:
Year Ended December 31, | |||||||||||
(In millions) | 2016 | 2015 | 2014 | ||||||||
CGPH Term Loan, Revolving Credit Facility, and 2022 Notes | $ | (145.8 | ) | $ | (147.7 | ) | $ | (126.3 | ) | ||
Cromwell Credit Facility | (20.6 | ) | (21.5 | ) | (16.6 | ) | |||||
Planet Hollywood Loan Agreement | — | — | (14.9 | ) | |||||||
Baltimore Credit and FF&E Facilities | (29.9 | ) | (30.2 | ) | (11.5 | ) | |||||
Other interest (expense)/income, net of interest capitalized | (1.7 | ) | 3.9 | (2.5 | ) | ||||||
Interest expense, net of interest capitalized | $ | (198.0 | ) | $ | (195.5 | ) | $ | (171.8 | ) | ||
Interest Income
For the years ended December 31, 2016 and 2014, Interest income was $3.4 million and $1.0 million, respectively. Interest income for 2016 primarily relates to interest income on the proceeds from CIE's sale of its SMG Business held in restricted cash.
Interest Income - Related Party
CGP LLC recognized interest income on the CEOC Notes through the third quarter of 2014. The CEOC Notes had fixed interest rates ranging from 5.625% to 6.50% and maturities ranging from 2015 to 2017. During the third quarter of 2014, CGP LLC sold a portion of the notes to CEOC and distributed the remaining notes as a dividend to its members, pro-rata based upon each member's ownership percentage in CGP LLC.
Impairment of Investment in Notes from Related Party
On August 6, 2014, CGP LLC effectuated a distribution of its 5.75% and 6.50% face value aggregate principal amount of CEOC Notes as a dividend to its members, pro-rata based upon each member's ownership percentage in CGP LLC. Immediately prior to the Notes Distribution, CGP LLC recorded an impairment charge of $63.5 million to release losses that had been accumulated in equity, given that CGP LLC would not recover its amortized cost basis in the CEOC Notes.
Gain on Sale of Investment in Notes from Related Party
On May 5, 2014 CGP LLC entered into a note purchase agreement to sell a portion of its CEOC Notes back to CEOC at fair market value. On July 29, 2014, CGP LLC received $451.9 million of consideration (including $3.8 million for interest) in connection with the Note Purchase Agreement and recognized a gain of $99.4 million.
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Loss on Extinguishment of Debt
The Planet Hollywood secured loan contained excess cash flow provisions which required mandatory prepayments when certain conditions were met. Prepayments in excess of the recorded book value of principal owed were recorded in Loss on extinguishment of debt in the Combined and Consolidated Statements of Operations of CGP LLC, inclusive of the impact of the loan payoff in conjunction with the Second Lien Intercreditor Agreement as defined in Intercreditor Agreement and Collateral Agreements section of Note 7 — Debt to the CGP LLC Combined and Consolidated Financial Statements in Exhibit 99.1.
Other Income, Net
For the year ended December 31, 2015, Other income, net was $4.0 million primarily related to CIE's gain recognized on a contract termination.
Benefit from Income Taxes
The benefit from income taxes for CGP LLC represents the income taxes from its subsidiary, CIE, which was taxed as a corporation for federal, state and foreign income tax purposes through September 22, 2016. No provision for income taxes is reported for CIE subsequent to the September 2016 sale of the SMG Business, at which point remaining activities of CIE were transferred to subsidiaries which are treated as business units of CGP LLC and taxed as a partnership for federal and state income tax purposes. CGP LLC's provision for income taxes also includes the allocated income taxes from the consolidated Caesars Entertainment provision for income taxes for the period up to the date of acquisition by CGP LLC for the properties acquired from CEOC in May 2014. The provision for income taxes for CGP LLC differs from the expected federal tax rate of 35.0% primarily due to CGP LLC income not taxed at the CGP LLC entity level.
The effective tax rates for December 31, 2016, 2015 and 2014 were 2.6%, (2.9)%, and 1.6%, respectively. The increase in the effective tax rate for 2016 as compared to 2015 is primarily due to an increase in nondeductible stock-based compensation and the recognition of a tax gain on the distribution of the real money games assets offset by CGP LLC losses not tax benefitted at the CGP LLC entity level. The decrease in the effective tax rate for 2015 as compared to 2014 is primarily due to CGP LLC income not taxed at the CGP LLC entity level in 2015 versus CGP LLC losses not tax benefitted at the CGP LLC entity level in 2014.
Net Income from Discontinued Operations
Net income from discontinued operations was $4,099.8 million for 2016 as compared to $162.2 million for 2015, which was an increase of $3,937.6 million. The increase in Net income from discontinued operations was primarily due to the recognition of a pre-tax gain of $4.2 billion from CIE's sale of the SMG Business.
Net income from discontinued operations was $162.2 million for 2015 as compared to $34.1 million for 2014, which was an increase of $128.1 million. The increase in Net income from discontinued operations was primarily due to the income impact of increased revenues from CIE's SMG Business.
Net Loss/(Income) Attributable to Non-controlling Interests
CGP LLC's non-controlling interest reflects the non-controlling interest associated with consolidating CIE and the Maryland Joint Venture into CGP LLC. As a result of the Sale, all CIE shares held by the non-controlling interest holders were repurchased at the estimated fair value of the share price as of the closing date of the Sale. Net loss attributable to non-controlling interests in Caesars Interactive for 2016 was $32.0 million. Net income attributable to non-controlling interests in Caesars Interactive for 2015 was $20.2 million. Net loss attributable to non-controlling interests in Caesars Interactive for 2014 was $4.5 million. Net income attributable to non-controlling interests in the Maryland Joint Venture was $3.7 million for 2016. Net loss attributable to non-controlling interests in the Maryland Joint Venture was $13.1 million and $28.5 million for the years ended years ended December 31, 2015 and 2014, respectively.
Reconciliations of Net Income/(Loss) from Continuing Operations to Adjusted EBITDA
CGP LLC uses Adjusted EBITDA as a supplemental measure of its financial performance. EBITDA is comprised of income/(loss) from continuing operations before (i) interest expense, net of capitalized interest, (ii) interest income, (iii) provision for income taxes, and (iv) depreciation and amortization expense. Adjusted EBITDA is comprised of EBITDA, further adjusted for certain items that CGP LLC does not consider indicative of its ongoing operating performance.
The financial statements are prepared in accordance with GAAP. Adjusted EBITDA is a non-GAAP financial measure that is reconciled to its most comparable GAAP measure below. Adjusted EBITDA is included because management believes that Adjusted EBITDA provides investors with additional information that allows a better understanding of the results of operational activities separate from the financial impact of capital investment decisions made for the long-term benefit of CGP LLC. Because not all companies use identical calculations, the presentation of CGP LLC's EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures of other companies.
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Year Ended December 31, | |||||||||||
(In millions) | 2016 | 2015 | 2014 | ||||||||
Net (loss)/income from continuing operations | $ | (170.9 | ) | $ | 66.7 | $ | (247.3 | ) | |||
Benefit from income taxes | (4.6 | ) | (1.9 | ) | (3.9 | ) | |||||
(Loss)/income from continuing operations before income taxes | (175.5 | ) | 64.8 | (251.2 | ) | ||||||
Interest expense, net of interest capitalized | 198.0 | 195.5 | 171.8 | ||||||||
Interest income, including related party | (3.4 | ) | — | (120.2 | ) | ||||||
Depreciation and amortization | 180.1 | 148.6 | 115.1 | ||||||||
EBITDA | 199.2 | 408.9 | (84.5 | ) | |||||||
Other income, net | — | (4.0 | ) | — | |||||||
Loss on extinguishment of debt (1) | — | — | 23.8 | ||||||||
Write-downs, reserves and project opening costs, net of recoveries (2) | 2.8 | 12.0 | 53.1 | ||||||||
Change in fair value of contingently issuable non-voting membership units (3) | — | (117.2 | ) | 38.7 | |||||||
Impairment of goodwill, tangible and other intangible assets | — | 1.0 | 147.5 | ||||||||
Gain on sale of investment in notes from related party | — | — | (99.4 | ) | |||||||
Impairment on investment in notes from related party | — | — | 63.5 | ||||||||
Stock-based compensation (4) | 194.3 | 35.5 | 50.3 | ||||||||
Other (5) | 23.8 | 11.4 | 21.1 | ||||||||
Adjusted EBITDA | $ | 420.1 | $ | 347.6 | $ | 214.1 | |||||
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(1) | Amounts represent the difference between the fair value of consideration paid and the book value, net of deferred financing costs, of debt retired through debt extinguishment transactions, which are capital structure related, rather than operational type costs. |
(2) | Amounts primarily represent development costs related to the construction of The Cromwell and Horseshoe Baltimore, and the renovation of The LINQ Hotel & Casino and Planet Hollywood. |
(3) | Amounts represent the change in fair value of contingently issuable non-voting membership units associated with the CIE earn-out calculation related to the transactions establishing CGP LLC. |
(4) | Amounts represent stock-based compensation expense related to stock options, restricted stock and restricted stock units and warrants. |
(5) | Amounts represent other add-backs and deductions to arrive at Adjusted EBITDA but not separately identified, such as transaction costs associated with the Sale, other acquisition and integration costs and lobbying expenses. |
Liquidity and Capital Resources
Capital Spending
CGP LLC incurs capital expenditures in the normal course of business and performs ongoing refurbishment and maintenance at its existing casino entertainment facilities. Cash used for capital expenditures in the normal course of business is typically made available from cash flows generated by operating activities while cash used for development projects is typically funded from specific project financing and additional debt offerings.
CGP LLC's capital spending and maintenance, if they go forward, could require significant capital commitments and, if completed, may result in significant additional revenues. The commitment of capital, the timing of completion, and the commencement of operations of development projects are contingent upon, among other things, negotiation of final agreements and receipt of requisite approvals from the applicable political and regulatory bodies. Excluding amounts spent for the purchases of businesses, CGP LLC's cash used for capital spending from continuing operations for the years ended December 31, 2016, 2015 and 2014 were $71.2 million, $165.9 million and $561.0 million, respectively.
The majority of capital spending in 2016 related to property renovations at Planet Hollywood. The majority of the 2015 capital spending related to the renovation of The LINQ Hotel & Casino. The renovation of The LINQ Hotel & Casino was substantially completed and available to guests in early May 2015. The majority of the 2014 capital spending related to The Cromwell which was completed and reopened in the second quarter of 2014, Horseshoe Baltimore which opened in August 2014, and the renovation of The LINQ Hotel & Casino. Capital expenditures net of related payables for Planet Hollywood was $41.8 million for the year ended December 31, 2016. Capital expenditures net of related payables for The LINQ Hotel & Casino were $112.0 million and $111.8 million, respectively, for the years ended December 31, 2015 and 2014. Capital expenditures net of related payables for Horseshoe Baltimore was $258.6 million for the year ended December 31, 2014. Capital expenditures net of related payables for The Cromwell was $139.0 million for the year ended December 31, 2014.
Liquidity
CGP LLC and its subsidiaries' primary sources of liquidity include currently available cash and cash equivalents, cash flows generated from its operations and borrowings under the $150.0 million CGPH revolving credit agreement ("Revolving Credit Facility"), which is intended to satisfy CGPH's short-term liquidity needs. CGP LLC's cash and cash equivalents,
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excluding restricted cash, totaled $1,049.8 million and $790.7 million, respectively, as of December 31, 2016 and 2015. As of December 31, 2015, there was $111.0 million included in Assets held for sale for discontinued operations.
Payments of short-term debt obligations and other commitments are expected to be made from operating cash flows. Long-term obligations are expected to be paid through operating cash flows, refinancing of existing debt or the issuance of new debt, or, if necessary, additional investments from its equity holders. CGP LLC's operating cash inflows are used for operating expenses, debt service costs, working capital needs and capital expenditures in the normal course of business. CGP LLC's ability to refinance debt will depend upon numerous factors such as market conditions, CGP LLC's financial performance, and the limitations applicable to such transactions under CGP LLC's and its subsidiaries' financing documents. Additionally, CGP LLC's ability to fund operations, pay debt obligations, and fund planned capital expenditures depends, in part, upon economic and other factors that are beyond CGP LLC's control, and disruptions in capital markets and restrictive covenants related to CGP LLC's existing debt could impact CGP LLC's ability to fund liquidity needs, pay indebtedness and secure additional funds through financing activities.
CGP LLC's restricted cash totaled $3,045.7 million and $11.5 million, respectively, as of December 31, 2016 and 2015. As of December 31, 2015, there was $1.0 million included in Assets held for sale for discontinued operations. The classification of restricted cash between current and long-term is dependent upon the intended use of each particular reserve. As of December 31, 2016, Restricted cash includes $2,718.1 million restricted under the terms of the Stock Purchase Agreement, and under the CIE Proceeds and Reservation of Rights Agreement entered into between CIE, CAC, CEC and CEOC on September 9, 2016 which requires certain proceeds from the Sale ("CIE Proceeds") to be deposited into the CIE escrow account (the "CIE Escrow Account"). Amounts may be distributed from the CIE Escrow Account only: (i) pursuant to the terms of the term sheet included in the CIE Proceeds and Reservation of Rights Agreement and the agreement entered into among Wilmington Trust, National Association (the "Escrow Agent"), CIE and CEOC, governing the CIE Escrow Account (the "Escrow Agreement"), (ii) with the joint written consent of CIE and CEOC, or (iii) pursuant to an order of a court of competent jurisdiction. $62.7 million was distributed during 2016 from the CIE Escrow Account. In addition, CIE placed $264.0 million into escrow (the "Indemnity Escrow") to secure the potential indemnity claims of Purchaser for a period of twelve months from the SMG Business Sale Closing pursuant to the terms of the Purchase Agreement. During the fourth quarter of 2016, upon finalization of the purchase price adjustment pursuant to the Purchase Agreement, CIE paid $4.5 million to Purchaser from the Indemnity Escrow account. At December 31, 2016, the remaining balance in the Indemnity Escrow was $259.5 million, which is included as short-term Restricted cash on CGP LLC's Consolidated Balance Sheet. There have been no indemnity claims made against the Indemnity Escrow account. Restricted cash and cash equivalents also include amounts restricted under the terms of the Baltimore Credit Facility.
CGPH and Caesars Growth Properties Finance, Inc. (together, the "Issuers") issued $675.0 million aggregate principal amount of their 9.375% Second-Priority Senior Secured Notes due 2022 pursuant to an indenture dated as of April 17, 2014, among the Issuers and US Bank National Association, as trustee. On May 8, 2014, CGPH closed on $1.175 billion of term loans pursuant to a credit agreement. CGPH filed a registration statement on Form S-4 (the "Registration Statement") on March 30, 2015 and amendments to such Registration Statement on May 18, 2015 and May 29, 2015 to initiate an offer to exchange the 2022 Notes and certain related guarantees in a private offering for a like aggregate amount of CGPH's registered 9.375% Second-Priority Senior Secured Notes due 2022 and certain related guarantees (collectively refer to as the "Exchange Notes"). The Registration Statement was declared effective on June 26, 2015 (the "Effective Date"). The exchange offer was consummated on July 28, 2015.
As of December 31, 2016, CGPH had $1,119.2 million and $662.1 million, respectively, in book value of indebtedness outstanding for the CGPH Term Loan and 2022 Notes. As of December 31, 2015, CGPH had $1,125.7 million, $660.3 million and $45.0 million, respectively, in book value of indebtedness outstanding for the CGPH Term Loan, 2022 Notes and Revolving Credit Facility. As of December 31, 2016, the assets of Harrah's New Orleans, Bally's Las Vegas, Planet Hollywood and The LINQ Hotel & Casino were pledged as collateral for certain of CGPH's outstanding debt securities.
In November 2012, Corner Investment Propco, LLC ("PropCo") entered into a $185.0 million, seven-year senior secured credit facility bearing interest at the London Inter-Bank Offered Rate ("LIBOR") plus 9.75% with a LIBOR floor of 1.25% (the "Cromwell Credit Facility") to fund the renovation of The Cromwell into a boutique lifestyle hotel. As of December 31, 2015, the assets of The Cromwell were pledged as collateral for the Cromwell Credit Facility.
As of December 31, 2016 and 2015, CGP LLC had $2,329.5 million and $2,402.3 million, respectively, of face value of indebtedness outstanding, including capital lease indebtedness. Cash paid for interest for the years ended December 31, 2016, 2015 and 2014 were $207.8 million, $190.9 million and $117.4 million, respectively.
CGP LLC believes that its cash and cash equivalents balance and its cash flows from operations will be sufficient to meet its normal operating and debt service requirements during the next 12 months and the foreseeable future and to fund capital expenditures expected to be incurred in the normal course of business.
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Capital Resources
The debt agreements included in Capital Resources are defined in Note 7 — Debt of the Combined and Consolidated Financial Statements of CGP LLC included in Exhibit 99.1. The following table presents CGP LLC's outstanding third-party debt as of December 31, 2016 and 2015.
Final Maturity | Interest Rates at December 31, 2016 | Face Value at December 31, 2016 | Book Value at December 31, | ||||||||||||
(In millions) | 2016 | 2015 | |||||||||||||
Secured debt | |||||||||||||||
Caesars Growth Properties Holdings Revolving Credit Facility(1) | 2019 | variable | $ | — | $ | — | $ | 45.0 | |||||||
Caesars Growth Properties Holdings Term Loan | 2021 | 6.25% | 1,145.6 | 1,119.2 | 1,125.7 | ||||||||||
Caesars Growth Properties Holdings Notes | 2022 | 9.375% | 675.0 | 662.1 | 660.3 | ||||||||||
Horseshoe Baltimore Credit and FF&E Facilities | 2019 - 2020 | 8.25% - 8.75% | 318.8 | 308.9 | 315.0 | ||||||||||
Cromwell Credit Facility | 2019 | 11.00% | 171.4 | 167.2 | 169.2 | ||||||||||
Capital lease obligations | 2017 | various | 0.1 | 0.1 | 1.2 | ||||||||||
Other financing obligations | 2018 | 8.00% | 4.7 | 4.1 | 3.8 | ||||||||||
Unsecured debt | |||||||||||||||
Special Improvement District Bonds | 2037 | 5.30% | 13.7 | 13.7 | 14.1 | ||||||||||
Other financing obligations | 2017 | various | 0.2 | 0.2 | 3.0 | ||||||||||
Total debt | 2,329.5 | 2,275.5 | 2,337.3 | ||||||||||||
Current portion of total debt | (20.9 | ) | (20.9 | ) | (69.7 | ) | |||||||||
Long-term debt | $ | 2,308.6 | $ | 2,254.6 | $ | 2,267.6 | |||||||||
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(1) | Variable interest rate calculated as LIBOR plus 5.00%. |
As of December 31, 2016, CGP LLC is in compliance with all affirmative and negative covenants related to debt instruments.
As of December 31, 2016, no borrowings were outstanding under the Revolving Credit Facility and $0.1 million was committed to outstanding letters of credit. Borrowings under the Revolving Credit Facility are each subject to separate note agreements executed based on the provisions of the Credit Agreement.
The Horseshoe Baltimore Credit Facility also provides for a $10.0 million revolving credit agreement with a five-year maturity that remained undrawn at December 31, 2016.
See Note 7 — Debt of the CGP LLC Combined and Consolidated Financial Statements in Exhibit 99.1 for further details.
CIE Credit Facility
Caesars Interactive entered into a credit facility whereby Caesars Entertainment provided to Caesars Interactive unsecured intercompany loans as requested by CIE and approved by Caesars Entertainment on an individual transaction basis. Borrowings under the CIE Credit Facility were primarily used for SMG Business acquisitions. No principal payments were required on the unsecured intercompany loans until their maturity date of November 29, 2016. The unsecured intercompany loans bore interest on the unpaid principal amounts at a rate per annum equal to LIBOR plus 5%. This credit facility did not have any restrictive or affirmative covenants. During the year ended December 31, 2015, CIE repaid in full the $39.8 million outstanding balance.
Rock Promissory Notes
In March 2012, Rock Gaming Interactive LLC ("Rock Interactive") and CIE entered into an agreement pursuant to which Rock Interactive purchased approximately 6,155 shares of CIE common stock for $30.4 million in cash and agreed to purchase additional shares of CIE common stock on or before July 2, 2012. CIE used the proceeds from this sale to prepay a portion of the then outstanding balance on the credit facility. In June 2012, CIE and Rock Interactive modified the agreement with Rock Interactive such that CIE issued to Rock Interactive approximately 382 shares of CIE common stock and a promissory note for $28.5 million in exchange for $30.4 million in cash. The promissory note was convertible into approximately 5,773 shares of CIE common stock, upon the satisfaction of certain criteria. In November 2012, CIE issued to Rock Interactive an additional promissory note for $19.2 million in exchange for $19.2 million in cash. The additional promissory note was convertible into approximately 3,140 shares of CIE common stock, upon the satisfaction of certain criteria. Both promissory notes automatically converted into 8,913 shares of CIE common stock in November 2014.
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Contingently Issuable Non-voting Membership Units
Pursuant to the terms of the CGP Operating Agreement, in conjunction with CGP LLC's acquisition of CIE from Caesars Entertainment, CGP LLC was obligated to issue additional non-voting membership units to Caesars Entertainment to the extent that the earnings from a specified portion of CIE's social and mobile games business exceeded a predetermined threshold amount in 2015. The change in fair value was a decrease of $117.2 million for 2015 and an increase of $38.7 million for 2014, which were reported within CGP LLC's Combined and Consolidated Statements of Operations. The estimated fair value of the contingently issuable non-voting membership units was adjusted to $228.0 million at December 31, 2015 and CGP LLC reclassified the balance for Contingently issuable non-voting membership units from Liabilities to Additional paid-in capital as the number of CGP LLC non-voting membership units were no longer variable. During the year ended December 31, 2016, CGP LLC issued approximately 31.9 million additional Class B non-voting units pursuant to the terms of the CGP Operating Agreement.
Investment in Senior Notes Previously Issued by a Related Party
At December 31, 2013, CGP LLC owned $1.1 billion of aggregate principal amount of the CEOC Notes.
On May 5, 2014 CGP LLC entered into a note purchase agreement to sell a portion of its CEOC Notes back to CEOC at fair market value. On July 29, 2014, CGP LLC received $451.9 million of consideration (including $3.8 million for interest) in connection with the CEOC Notes purchase transaction and recognized a gain of $99.4 million.
On August 6, 2014, CGP LLC effectuated a distribution of its 5.75% and 6.50% face value aggregate principal amount of notes previously issued by CEOC as a dividend to its members, pro rata based upon each member's ownership percentage in CGP LLC. CAC, as a member of CGP LLC and the holder of 42.4% of the economic interests in CGP LLC at the time of the Notes Distribution, received in connection with the Notes Distribution $137.5 million in aggregate principal amount of the 6.50% Senior Notes and $151.4 million in aggregate principal amount of the 5.75% Senior Notes.
Pursuant to the terms of the Amended Merger Agreement, CAC does not expect to collect principal or interest receivable from these notes.
Other Obligations and Commitments
The table below summarizes, as of December 31, 2016, CGP LLC's contractual obligations and other commitments through their respective maturity or ending dates.
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Payments Due by Period | |||||||||||||||||||
(In millions) | Total | Less than 1 year | 1-3 years | 3-5 years | After 5 years | ||||||||||||||
Debt payable to third parties, face value | $ | 2,329.5 | $ | 20.9 | $ | 222.7 | $ | 1,399.3 | $ | 686.6 | |||||||||
Estimated interest payments to third parties(1) | 862.3 | 183.9 | 384.9 | 256.4 | 37.1 | ||||||||||||||
Operating lease obligations | 1,181.8 | 47.8 | 98.1 | 97.3 | 938.6 | ||||||||||||||
Other contractual obligations(2) | 105.6 | 50.4 | 24.9 | 13.0 | 17.3 | ||||||||||||||
$ | 4,479.2 | $ | 303.0 | $ | 730.6 | $ | 1,766.0 | $ | 1,679.6 | ||||||||||
(1) | Estimated interest for variable rate debt included in this table is based on rates at December 31, 2016. |
(2) | Included in Other contractual obligations are entertainment obligations which represent obligations to pay performers that have contracts for future performances. This amount does not include estimated obligations for future performances where payment is only guaranteed when the performances occur and/or is based on factors contingent upon the profitability of the performances. |
Off-Balance Sheet Arrangements
CGP LLC did not have any off-balance sheet arrangements at December 31, 2016 or 2015.
Critical Accounting Policies and Estimates
CGP LLC prepares its financial statements in conformity with GAAP. Certain accounting policies, including useful lives of property, equipment and intangible assets, income taxes, and the evaluation of goodwill and long-lived assets for impairment, require that CGP LLC apply significant judgment in defining the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. CGP LLC's judgments are based on historical experience, terms of existing contracts, observance of trends in the industry, information provided by customers and information available from other outside sources, as appropriate. For a summary of CGP LLC's significant accounting policies, please refer to the notes to the audited consolidated financial statements included in Note 1 — Description of Business and Summary of Significant Accounting Policies of the CGP LLC consolidated financial statements in Exhibit 99.1.
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CGP LLC considers accounting estimates to be critical accounting policies when:
• | the estimates involve matters that are highly uncertain at the time the accounting estimate is made; and |
• | different estimates or changes to estimates could have a material impact on the reported financial position, changes in financial position or results of operations. |
When more than one accounting principle, or method of its application, is generally accepted, CGP LLC selects the principle or method that it considers to be the most appropriate when given the specific circumstances. Application of these accounting principles requires CGP LLC to make estimates about the future resolution of existing uncertainties. Due to the inherent uncertainty involving estimates, actual results reported in the future may differ from those estimates. In preparing these financial statements, CGP LLC has made its best estimates and judgments of the amounts and disclosures included in the financial statements, giving regard to materiality.
Principles of Consolidation
CGP LLC consolidates into its financial statements the accounts of any variable interest entity for which it is determined to be the primary beneficiary. CGP LLC analyzes its variable interests to determine if the entity that is party to the variable interest is a variable interest entity in accordance with GAAP. This analysis requires significant judgment on the part of management, and any changes to that judgment could result in reaching a different consolidation conclusion. CGP LLC's analysis includes both quantitative and qualitative reviews. Quantitative analysis is based on the forecasted cash flows of the entity. Qualitative analysis is based on CGP LLC's review of the design of the entity, its organizational structure including decision-making ability, financial agreements and operating agreements. Caesars Baltimore Investment Company, LLC ("CBIC") is wholly-owned and consolidated by CGP LLC. CBIC indirectly holds interests in CBAC Borrower, LLC ("CBAC"), owner of the Horseshoe Baltimore Casino ("Horseshoe Baltimore"), through its ownership interest in CR Baltimore Holdings ("CRBH"), a variable interest entity. The counterparty that owns the minority interest in CRBH is restricted from transferring its interest in CRBH without prior consent from CBIC. As a result, CBIC has been determined to be the primary beneficiary of CRBH, and therefore, consolidates CRBH into its financial statements. Under the existing terms of the agreement, the transfer restrictions will expire in the third quarter of 2017, at which time CBIC would no longer be considered the primarily beneficiary and would deconsolidate CRBH. CRBH would then be accounted for as an equity method investment.
CGP LLC also consolidates into its financial statements the accounts of any wholly-owned subsidiaries and any partially-owned subsidiaries that are not deemed to be variable interest entities and for which CGP LLC has the ability to control. Control generally equates to ownership percentage, whereby investments that are more than 50% owned are consolidated, investments in affiliates of 50% or less but greater than 20% are generally accounted for using the equity method, and investments in affiliates of 20% or less are accounted for using the cost method.
CGP LLC's consolidated financial statements include the elimination of all intercompany accounts and transactions.
Investment in CES
Investment in CES consists of membership interests in CES which is a variable interest entity of which CGP LLC owns less than 20% and is not the primary beneficiary and therefore, CGP LLC accounts for the investment using the equity method (see Note 19 — Related Party Transactions to the CGP LLC Combined and Consolidated Financial Statements in Exhibit 99.1). CGP LLC reviews this investment quarterly for indicators of other-than-temporary impairment. This determination requires significant judgment. In making this judgment, CGP LLC considers available quantitative and qualitative evidence in evaluating potential impairment of this investment. If the carrying value of CGP LLC's investment exceeds its estimated fair value, CGP LLC evaluates, among other factors, general market conditions, the duration and extent to which the estimated fair value is less than CGP LLC's carrying value, and CGP LLC's intent and ability to hold, or plans to sell, the investment. CGP LLC also considers specific adverse conditions related to the financial health of and business outlook for the investee, including operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new carrying basis in the investment will be established. CGP LLC did not recognize an impairment charge in fiscal years 2016, 2015 and 2014 on this investment.
Long-Lived Assets
CGP LLC has significant capital invested in its long-lived assets and judgments are made in determining the estimated useful lives of assets, salvage values to be assigned to assets, and if or when an asset has been impaired. The accuracy of these estimates affects the amount of depreciation and amortization expense recognized in the financial results and whether CGP LLC has a gain or loss on the disposal of an asset. CGP LLC assigns lives to its assets based on its standard policy, which is established by management as representative of the useful life of each category of asset. CGP LLC reviews the carrying value of its long-lived assets whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. The factors considered by management in performing this assessment include current operating results, trends and prospects, as well as the effect of obsolescence,
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demand, competition, and other economic factors. In estimating expected future cash flows for determining whether an asset is impaired, assets are grouped at the asset group level, which, for most of CGP LLC's assets, is the individual property.
Goodwill and Other Non-Amortizing Intangible Assets
The purchase price of an acquisition is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. CGP LLC determined the estimated fair values of assets acquired and liabilities assumed after review and consideration of relevant information including discounted cash flows, quoted market prices, and estimates made by management. To the extent the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired and liabilities assumed, such excess is recorded as goodwill.
CGP LLC performs its annual goodwill impairment assessment as of October 1, or more frequently if impairment indicators exist. CGP LLC determines the estimated fair value of each reporting unit based on a combination of EBITDA and estimated future cash flows discounted at rates commensurate with the capital structure and cost of capital of comparable market participants, giving appropriate consideration to the prevailing borrowing rates within the casino industry in general. CGP LLC also evaluates the aggregate fair value of all of its reporting units and other non-operating assets in comparison to its aggregate debt and equity market capitalization at the test date. EBITDA multiples and discounted cash flows are common measures used to value businesses in CGP LLC's industry.
CGP LLC performs its annual impairment assessment of other non-amortizing intangible assets as of October 1 or more frequently if impairment indicators exist. CGP LLC determines the estimated fair value of non-amortizing intangible assets by primarily using the "Relief from Royalty Method" and "Excess Earnings Method" under the income approach.
The annual evaluation of goodwill and other non-amortizing intangible assets requires the use of estimates about future operating results, valuation multiples, and discount rates to determine their fair value. Changes in these assumptions can materially affect these estimates. Thus, to the extent the gaming volumes deteriorate in the near future, discount rates increase significantly, or CGP LLC does not meet its projected performance, CGP LLC could have impairments to record in the next twelve months, and such impairments could be material.
As of December 31, 2016, CGP LLC had approximately $214.1 million in total book value of goodwill and $121.3 million of other non-amortizing intangible assets that are at risk of further partial or total impairment should CGP LLC experience adverse changes in its significant assumptions in the future. Of this amount, $148.7 million of goodwill is allocated to Planet Hollywood and Harrah's New Orleans. These reporting units have estimated fair values significantly in excess of their carrying values and therefore, are not at risk of partial or total impairment outside of drastic, unforeseen circumstances. Specifically, Planet Hollywood's estimated fair value exceeded its carrying value by a margin of 233%, Harrah's New Orleans' estimated fair value exceeded its carrying value by a margin of 36%. The remaining $65.4 million of goodwill is allocated to our Bally's Las Vegas reporting unit, at which we recorded impairment charges in the fourth quarter of 2014. At December 31, 2016, Bally's Las Vegas' estimated fair value exceeded its carrying value by a margin of 18%. The non-amortizing intangible assets include $98.8 million for WSOP trade name assets at CIE and $22.5 million for gaming licenses at Horseshoe Baltimore. CIE's estimated fair value of WSOP trade name assets exceeded its carrying value by a margin of 69% and Horseshoe Baltimore's estimated fair value for gaming licenses exceeded its carrying value by a margin of 91%. Thus, to the extent gaming volumes deteriorate in the near future, discount rates increase significantly, or we do not meet our projected performance, we could have impairments to record in the next twelve months, and such impairments could be material. Impairment charges related to goodwill or intangible assets other than goodwill are recognized in impairment of goodwill or impairment of non-amortizing intangible assets in the Combined and Consolidated Statements of Operations. See Note 5 — Goodwill and Other Intangible Assets of the CGP LLC Combined and Consolidated Financial Statements in Exhibit 99.1 for additional information.
Investment in Senior Notes Previously Issued by a Related Party
CGP LLC's investments in senior notes of approximately $1.1 billion, issued by CEOC, a related party, were classified as available for sale investments and recorded at fair value with changes in fair value being recorded in Accumulated other comprehensive income. The CEOC Notes had fixed interest rates ranging from 5.625% to 6.50% and maturities ranging from 2015 to 2017. Any discount or premium was amortized to interest income using the effective interest method. CGP LLC classified the investment in notes from related party as current or long-term depending on the maturity of the instruments along with management's intent on holding such instruments.
On May 5, 2014, CGP LLC entered into a note purchase agreement to sell a portion of its CEOC Notes back to CEOC at fair market value. On July 29, 2014, CGP LLC received $451.9 million of consideration (including $3.8 million for interest) in connection with the CEOC Notes purchase transaction and recognized a gain of $99.4 million.
On August 6, 2014, CGP LLC effectuated a distribution of its 5.75% and 6.50% CEOC Notes as a dividend to its members, pro-rata based upon each member's ownership percentage in CGP LLC. Immediately prior to the Notes Distribution, CGP LLC recorded an impairment charge of $63.5 million to recognize losses that had been accumulated in equity, given that CGP LLC would not recover its amortized cost basis in the CEOC Notes.
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Income Taxes
CGP LLC records income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the expected future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and attributable to operating loss and tax credit carryforwards. CGP LLC reduces the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically based on the more likely than not realization threshold. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, CGP LLCs' experience with operating loss and tax credit carryforwards not expiring unused and tax planning alternatives.
The effect on the income tax provision and deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
For the period from October 22, 2013 through May 2014, the provision for income taxes for CGP LLC represents the income taxes from its corporate subsidiary, CIE, which was taxed as a corporation for federal, state and foreign income tax purposes, and also includes the allocated income taxes from the consolidated Caesars Entertainment provision for income taxes for the period up to the date of acquisition by CGP LLC for the properties acquired from CEOC in May 2014. For periods subsequent to the May 2014 acquisitions, the provision for income taxes for CGP LLC represents the income taxes from its corporate subsidiary, CIE. No provision for income taxes is reported for CIE subsequent to the September 2016 SMG Business Sale Closing, at which point remaining activities of CIE were transferred to subsidiaries which are treated as business units of CGP LLC and taxed as a partnership for federal and state income tax purposes.
Recently Issued Accounting Pronouncements
The information regarding recently issued accounting pronouncements is included in Note 2 — Recently Issued Accounting Pronouncements to the CGP LLC Combined and Consolidated Financial Statements in Exhibit 99.1.
Other Items
Formation of Caesars Enterprise Services, LLC
CES, a services joint venture among CEOC, CERP, a subsidiary of Caesars Entertainment, and CGPH, manages CGP LLC's properties and provides CGP LLC with access to Caesars Entertainment's management expertise, intellectual property, back office services and Total Rewards loyalty program. On October 1, 2014, CES began operations in Nevada, Louisiana and certain other jurisdictions in which regulatory approval had been received or was not required, including through the commencement of direct employment by CES of certain designated enterprise-wide employees. CES also employs personnel under each property's corresponding property management agreement. Operating expenses are allocated to each Member with respect to their respective properties serviced by CES in accordance with historical allocation methodologies, subject to annual revisions and certain prefunding requirements. Corporate expenses that are not allocated to the properties directly are allocated by CES to CEOC, CERP, and CGPH according to their allocation percentages (initially 70.0%, 24.6% and 5.4%, respectively), subject to annual review. As a result of an annual review undertaken in September 2015 but effective July 2015, the allocation percentages of CES members, CEOC, CERP and CGPH were revised to 65.4%, 21.8% and 12.8%, respectively. CGPH notified CES, CEOC and CERP that it objected to the September 2015 expense allocation but would pay the revised expense allocations under protest and reserved all rights. As a result of an annual review undertaken in August 2016 but effective January 2017, the allocation percentages for CEOC, CERP and CGPH were revised to 62.9%, 22.9% and 14.2%, respectively. CGPH notified CES, CEOC and CERP that it objects to the August 2016 expense allocation but will pay the revised expense allocations under protest and reserves all rights.
Omnibus License and Enterprise Services Agreement
On May 20, 2014, the Members entered into the Omnibus Agreement, which granted licenses to the Members and certain of their affiliates in connection with the formation of CES. Initial contributions by the Members included a $22.5 million cash payment by CGP LLC on behalf of CGPH. Pursuant to a capital call during the fourth quarter of 2014, CGP LLC contributed an additional $0.1 million on behalf of CGPH. Pursuant to capital calls during the years ended December 31, 2016 and 2015, CGPH contributed an additional $3.8 million and $3.9 million, respectively, to CES. During the year ended December 31, 2016, CGPH's investment in CES decreased by $1.2 million due to the allocation of depreciation related to assets in the investment. On October 1, 2014 and January 1, 2015, the Members transitioned certain executives and employees to CES and the services of such employees were available as part of CES's provision of services to the Members and certain of their affiliates that own properties that require CES services under the Omnibus Agreement.
Under the Omnibus Agreement, CEOC, CLC, CWI, CGPH and certain of their subsidiaries that granted CES a non-exclusive, irrevocable, world-wide, royalty-free license in and to all intellectual property owned or used by such licensors,
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including all intellectual property (a) currently used, or contemplated to be used, in connection with the properties owned by the Members and their respective affiliates, including any and all intellectual property related to the Total Rewards program, and (b) necessary for the provision of services contemplated by the Omnibus Agreement and by the applicable management agreement for any such property (collectively, the "Enterprise Assets").
CES granted to the properties owned or controlled by the Members, and their respective affiliates, non-exclusive licenses to the Enterprise Assets. CES granted to CEOC, CLC, CWI, CGPH and the properties owned or controlled by the Members licenses to any intellectual property that CES develops or acquires in the future that is not a derivative of the intellectual property licensed to it. CES also granted to CEOC, CLC, CWI and CGPH a non-exclusive license to intellectual property specific to the properties controlled by CGPH, CERP and their subsidiaries for any uses consistent with the uses made by CEOC, CLC, and CWI with respect to such intellectual property prior to the date of the Omnibus Agreement.
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Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
CAESARS ACQUISITION COMPANY
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices.
Market Risks Related to Investments
CAC's primary exposure to market risk is related to concentration of credit risk associated with its investments in debt securities which are included as a component of equity in our Balance Sheets as these investments are not diversified across industries or companies.
CAC does not purchase or hold any derivative financial instruments for hedging or trading purposes.
CAESARS GROWTH PARTNERS, LLC
Market Risks Related to Debt
Planet Hollywood had an interest rate cap agreement for a notional amount of $501.4 million at a LIBOR cap rate of 7.0%, which matured on April 9, 2015.
Assuming a constant outstanding balance for our variable rate debt, a hypothetical 1.0% increase in interest rates would increase interest expense for the next twelve months by $14.9 million. At December 31, 2016, the weighted average U.S. Dollar LIBOR rate on our variable rate debt was 0.98%. A hypothetical reduction of this rate to zero would have no impact on interest expense for the next twelve months.
CGP LLC does not purchase or hold any derivative financial instruments for trading purposes.
As of December 31, 2016, CGP LLC's third party long-term variable rate debt reflects borrowings under their credit facilities provided to CGP LLC by a consortium of banks with a total capacity of $1,795.7 million. The interest rates charged on borrowings under these facilities are a function of LIBOR. As such, the interest rates charged to CGP LLC for borrowings under the facilities are subject to change as LIBOR changes.
Debt covenant compliance is disclosed in the Liquidity and Capital Resources section above.
Market Risks Related to Foreign Currency
CGP LLC's foreign currency risk primarily related to social and mobile games revenue generated outside of the United States with cash denominated in foreign currencies. Through the date of the sale of the SMG Business, CGP LLC had operations in Argentina, Belarus, Canada, Israel, Japan, Romania, Ukraine, and the United Kingdom.
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Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Caesars Acquisition Company
We have audited the accompanying balance sheets of Caesars Acquisition Company (the "Company") as of December 31, 2016 and 2015, and the related statements of operations and comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Caesars Acquisition Company as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 6 to the financial statements, the Company is a defendant in litigation related to certain transactions with related parties.
As discussed in Note 1 to the financial statements, on December 21, 2014, the Company and Caesars Entertainment Corporation entered into an Agreement and Plan of Merger, pursuant to which, among other things, the Company plans to merge with and into Caesars Entertainment Corporation, with Caesars Entertainment Corporation as the surviving company.
/s/ Deloitte & Touche LLP
Las Vegas, Nevada
February 14, 2017
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CAESARS ACQUISITION COMPANY
BALANCE SHEETS
(In millions, except par value and share data)
December 31, | |||||||
2016 | 2015 | ||||||
Assets | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 27.5 | $ | 19.1 | |||
Receivable from related party | 45.8 | 0.9 | |||||
Prepayments and other current assets | 1.8 | 21.5 | |||||
Total current assets | 75.1 | 41.5 | |||||
Equity method investment in Caesars Growth Partners, LLC | 1,605.8 | 1,095.9 | |||||
Deferred tax assets | 140.6 | — | |||||
Total assets | $ | 1,821.5 | $ | 1,137.4 | |||
Liabilities and Stockholders' Equity | |||||||
Accrued income taxes | $ | 28.5 | $ | 0.1 | |||
Total current liabilities | 28.5 | 0.1 | |||||
Deferred tax liabilities | — | 69.9 | |||||
Deferred credits and other | 94.2 | — | |||||
Total liabilities | 122.7 | 70.0 | |||||
Commitments and contingencies (Note 6) | |||||||
Stockholders' Equity | |||||||
Common stock: $0.001 par value; 300,000,000 Class A shares and 900,000,000 Class B shares authorized at December 31, 2016 and December 31, 2015; 138,458,000 and 137,341,569 Class A shares issued and outstanding, respectively | 0.1 | 0.1 | |||||
Additional paid-in capital | 1,028.5 | 1,016.2 | |||||
Retained earnings | 670.2 | 51.1 | |||||
Total stockholders' equity | 1,698.8 | 1,067.4 | |||||
Total liabilities and stockholders' equity | $ | 1,821.5 | $ | 1,137.4 | |||
See accompanying Notes to Financial Statements.
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CAESARS ACQUISITION COMPANY
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In millions, except per share data)
Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Revenues | $ | — | $ | — | $ | — | |||||
Operating expenses | 30.0 | 31.2 | 25.4 | ||||||||
Loss from operations | (30.0 | ) | (31.2 | ) | (25.4 | ) | |||||
Income from equity method investment in Caesars Growth Partners, LLC | 820.6 | 97.4 | 79.4 | ||||||||
Income before provision for income taxes | 790.6 | 66.2 | 54.0 | ||||||||
Provision for income taxes | (171.5 | ) | (34.2 | ) | (39.4 | ) | |||||
Net income | 619.1 | 32.0 | 14.6 | ||||||||
Other comprehensive income, net of income taxes | — | — | — | ||||||||
Comprehensive income | $ | 619.1 | $ | 32.0 | $ | 14.6 | |||||
Earnings per share | |||||||||||
Basic | $ | 4.50 | $ | 0.23 | $ | 0.11 | |||||
Diluted | $ | 4.49 | $ | 0.23 | $ | 0.11 | |||||
Weighted average common shares outstanding | |||||||||||
Basic | 137.6 | 136.6 | 135.9 | ||||||||
Diluted | 137.9 | 136.9 | 136.0 | ||||||||
See accompanying Notes to Financial Statements.
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CAESARS ACQUISITION COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions)
Class A Common Stock | Additional Paid-in Capital | Retained Earnings | Total Stockholders' Equity | ||||||||||||
Balance at January 1, 2014 | $ | 0.1 | $ | 1,148.8 | $ | 4.5 | $ | 1,153.4 | |||||||
Net income | — | — | 14.6 | 14.6 | |||||||||||
Stock-based compensation | — | 2.8 | — | 2.8 | |||||||||||
Common stock issuances per PIP Plan | — | (0.2 | ) | — | (0.2 | ) | |||||||||
Common stock issuances per CAC Equity-Based Compensation Plan for CEC Employees | — | 4.8 | — | 4.8 | |||||||||||
Investment in notes from related party, net of interest received and taxes | — | (152.3 | ) | — | (152.3 | ) | |||||||||
Balance at December 31, 2014 | 0.1 | 1,003.9 | 19.1 | 1,023.1 | |||||||||||
Net income | — | — | 32.0 | 32.0 | |||||||||||
Stock-based compensation | — | 8.1 | — | 8.1 | |||||||||||
Common stock issuances per PIP Plan | — | (0.4 | ) | — | (0.4 | ) | |||||||||
Common stock issuances per CAC Equity-Based Compensation Plan for CEC Employees | — | 4.6 | — | 4.6 | |||||||||||
Balance at December 31, 2015 | 0.1 | 1,016.2 | 51.1 | 1,067.4 | |||||||||||
Net income | — | — | 619.1 | 619.1 | |||||||||||
Stock-based compensation | — | 4.4 | — | 4.4 | |||||||||||
Common stock issuances per PIP Plan | — | 3.5 | — | 3.5 | |||||||||||
Common stock issuances per CAC Equity-Based Compensation Plan for CEC Employees | — | 4.4 | — | 4.4 | |||||||||||
Balance at December 31, 2016 | $ | 0.1 | $ | 1,028.5 | $ | 670.2 | $ | 1,698.8 | |||||||
See accompanying Notes to Financial Statements.
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CAESARS ACQUISITION COMPANY
STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Cash flows from operating activities | |||||||||||
Net income | $ | 619.1 | $ | 32.0 | $ | 14.6 | |||||
Adjustments to reconcile net income to cash flows provided by operating activities | |||||||||||
Income from equity method investment in Caesars Growth Partners, LLC | (820.6 | ) | (97.4 | ) | (79.4 | ) | |||||
Distributions from equity method investee Caesars Growth Partners, LLC | 269.6 | 34.8 | 36.3 | ||||||||
Stock-based compensation | 4.4 | 8.1 | 2.8 | ||||||||
Related party bond interest tax provision | — | — | (1.4 | ) | |||||||
Deferred income taxes | (210.5 | ) | 34.3 | 40.9 | |||||||
Net change in long-term accounts | 94.2 | — | — | ||||||||
Change in assets and liabilities: | |||||||||||
Prepayments and other current assets | 19.7 | (1.0 | ) | (12.9 | ) | ||||||
Accounts payable | — | — | (1.4 | ) | |||||||
Payable to related party | — | — | (0.1 | ) | |||||||
Accrued income taxes | 28.4 | (0.5 | ) | 0.6 | |||||||
Cash flows provided by operating activities | 4.3 | 10.3 | — | ||||||||
Cash flows provided by investing activities | — | — | — | ||||||||
Cash flows from financing activities | |||||||||||
Issuance of common stock | 4.1 | — | — | ||||||||
Interest received from related party | — | — | 8.8 | ||||||||
Cash flows provided by financing activities | 4.1 | — | 8.8 | ||||||||
Net increase in cash and cash equivalents | 8.4 | 10.3 | 8.8 | ||||||||
Cash and cash equivalents, beginning of period | 19.1 | 8.8 | — | ||||||||
Cash and cash equivalents, end of period | $ | 27.5 | $ | 19.1 | $ | 8.8 | |||||
See accompanying Notes to Financial Statements.
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CAESARS ACQUISITION COMPANY
NOTES TO FINANCIAL STATEMENTS
Note 1 — Description of Business and Summary of Significant Accounting Policies
Organization and Description of Business
Caesars Acquisition Company (the "Company," "CAC," "we," "our" and "us"), a Delaware corporation, directly owns 100% of the voting membership units of Caesars Growth Partners, LLC ("CGP LLC"), a Delaware limited liability and a joint venture between CAC and subsidiaries of Caesars Entertainment Corporation ("CEC" or "Caesars Entertainment"). CAC accounts for its ownership in CGP LLC using the hypothetical liquidation at book value ("HLBV") approach to the equity method of accounting (see Note 3 — Equity Method Investment in Caesars Growth Partners, LLC). Our common stock trades on the NASDAQ Global Select Market under the symbol "CACQ."
Pursuant to the terms of the Amended and Restated Limited Liability Company Agreement of CGP LLC (the "CGP Operating Agreement"), in conjunction with CGP LLC's acquisition of Caesars Interactive Entertainment, Inc. from Caesars Entertainment, CGP LLC was obligated to issue additional non-voting membership units to Caesars Entertainment to the extent that the earnings from a specified portion of Caesars Interactive Entertainment, Inc.'s social and mobile games business exceeded a pre-determined threshold amount in 2015. Accordingly, in April 2016, CGP LLC issued approximately 31.9 million additional Class B non-voting units.
CAC serves as CGP LLC's managing member and sole holder of all of its outstanding voting units. CAC's primary asset is its membership interest in CGP LLC and does not have any operations other than through its interest in CGP LLC. Certain subsidiaries of Caesars Entertainment hold all of CGP LLC's outstanding non-voting units.
Asset Purchase Transactions
JCC Holding Company II, LLC and its subsidiaries (collectively known as "Harrah's New Orleans"), 3535 LV Corp. (formerly known as "The Quad" and recently rebranded as "The LINQ Hotel & Casino"), indirect subsidiaries of Parball Corporation (collectively known as "Bally's Las Vegas") and Corner Investment Company, LLC and its subsidiaries (collectively known as "The Cromwell") were direct wholly-owned subsidiaries of Caesars Entertainment Operating Company, Inc. ("CEOC").
On May 5, 2014, Caesars Growth Properties Holdings, LLC ("CGPH,", an indirect, wholly-owned subsidiary of CGP LLC), acquired through one or more subsidiaries (i) The Cromwell, The LINQ Hotel & Casino, and Bally's Las Vegas, (ii) 50% of the ongoing management fees and any termination fees payable under the property management agreements entered between the property manager and the owners of each of these properties and (iii) certain intellectual property that is specific to each of these properties (collectively referred to as the "First Closing" or "Acquired Properties Transaction"). On May 5, 2014, CGP LLC contributed the equity interests of PHWLV, LLC and a 50% interest in the management fee revenues of PHW Manager, LLC to CGPH.
On May 20, 2014, CGPH through one or more subsidiaries acquired (i) Harrah's New Orleans, (ii) 50% of the ongoing management fees and any termination fees payable under the Louisiana property management agreement entered between the property manager and the owners of Harrah's New Orleans and (iii) certain intellectual property that is specific to Harrah's New Orleans (the "Second Closing" or "Harrah's Transaction").
CGPH paid $2.0 billion, less outstanding debt assumed, for the Acquired Properties Transaction and the Harrah's Transaction.
In connection with the Acquired Properties Transaction and the Harrah's Transaction, CGPH and Caesars Growth Properties Finance, Inc. issued $675.0 million aggregate principal amount of 9.375% second-priority senior secured notes due 2022. On May 8, 2014, CGPH closed on $1.175 billion of term loans and a $150.0 million revolving credit facility pursuant to a credit agreement.
The acquisitions of Harrah's New Orleans, The LINQ Hotel & Casino, Bally's Las Vegas and The Cromwell, and the contribution of Planet Hollywood Resort & Casino in Las Vegas ("Planet Hollywood") to subsidiaries of CGPH are herein referred to as the "Acquired Properties." Harrah's New Orleans owns an entertainment facility located in downtown New Orleans, Louisiana, composed of a casino, a hotel, multiple restaurants, and retail outlets. Planet Hollywood, The LINQ Hotel & Casino, Bally's Las Vegas and The Cromwell each own casino and hotel entertainment facilities located on Las Vegas Boulevard in Las Vegas, Nevada. Each of the Acquired Properties has entered into property management agreements with affiliates of Caesars Entertainment.
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Proposed Merger of CAC with CEC
On December 21, 2014, the Company and CEC entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which, among other things, CAC will merge with and into CEC, with CEC as the surviving company (the "Proposed Merger").
On July 9, 2016, CAC and CEC agreed to amend and restate the Merger Agreement (the "Amended Merger Agreement"). In connection with the entry into the Amended Merger Agreement, on July 9, 2016, (i) CAC and CEOC, a majority owned subsidiary of CEC, agreed to amend and restate the Restructuring Support Agreement (as amended, the "CAC RSA"), dated as of June 12, 2016, among CAC, CEOC and CEC; (ii) CEC and CEOC agreed to amend the Restructuring Support, Settlement and Contribution Agreement, dated as of June 7, 2016 (as amended, the "CEC RSA" and, together with the CAC RSA, the "Caesars RSAs"), between CEC and CEOC; and (iii) CAC entered into a Voting Agreement (the "Voting Agreement") with Hamlet Holdings LLC ("Hamlet Holdings"), and solely with respect to certain provisions of the Voting Agreement, affiliates of Apollo Global Management, LLC and TPG Capital, LP and certain of their co-investors (collectively, the "Holders"). The Caesars RSAs were entered into with respect to the restructuring of CEOC's indebtedness (the "Restructuring") and, together with the Amended Merger Agreement, are consistent with the terms proposed under the second amended Joint Chapter 11 plan of reorganization (as amended, the "Merger Plan") of CEOC and each of the debtors (together with CEOC, the "Debtors") in the CEOC Chapter 11 Cases.
The exchange ratio, pursuant to which shares of CAC's class A common stock, par value $0.001 per share (the "Class A Common Stock") and CAC's class B common stock, par value $0.001 per share (the "Class B Common Stock," and together with the Class A Common Stock, the "CAC Common Stock"), will become exchangeable for shares of CEC's common stock, par value $0.01 per share ("CEC Common Stock"), has been amended to ensure that holders of CAC Common Stock immediately prior to the closing of the Proposed Merger (the "Merger Closing") will receive 27% of the outstanding CEC Common Stock on a fully diluted basis (prior to conversion of the new CEC convertible notes) (and which, upon conversion at any time following the Merger Closing, will result in pro rata dilution to all holders of CEC Common Stock, including holders of CAC Common Stock immediately prior to the Merger Closing) (the "Exchange Ratio"). The Exchange Ratio may be adjusted pursuant to the Amended Merger Agreement and such adjustment will be determined on the earlier of (i) the date on which the special committee of CAC's Board of Directors (the "CAC Special Committee") and the special committee of CEC's Board of Directors (the "CEC Special Committee"), each composed solely of independent directors, agree in writing as to the Exchange Ratio, and (ii) the sixth business day following the date on which the Adjustment Period (as described below) ends.
The Adjustment Period is the 14 day period beginning on the date, as soon as reasonably practicable following the date of the Amended Merger Agreement, on which each of CAC and CEC has received written confirmation from the other party that it and its respective representatives have received certain information (which information must be provided on request as soon as reasonably practicable, but no later than 30 days following the confirmation date) necessary for such party's financial advisor to render a fairness opinion. During the Adjustment Period, the CAC Special Committee, on behalf of CAC, and the CEC Special Committee, on behalf of CEC, will determine whether and to what extent it is necessary, appropriate and advisable to adjust the Exchange Ratio. The Exchange Ratio may be adjusted solely to take into account certain tax costs and tax attributes (except as described below).
If at any time during the Adjustment Period the CAC Special Committee or the CEC Special Committee determines that (i) it cannot obtain a fairness opinion from its respective financial advisor as a result of an adjustment to the Exchange Ratio based solely on the factors set forth in the Amended Merger Agreement or (ii) an adjustment to the Exchange Ratio based solely on the factors set forth in the Amended Merger Agreement would not be advisable or would otherwise be inconsistent with the directors' fiduciary duties under applicable law, either the CAC Special Committee or the CEC Special Committee may notify the other party of such determination and, following delivery of such notice, the parties will instead take into account all other relevant facts and circumstances impacting the intrinsic value of CAC and CEC at such time.
If the CAC Special Committee, on behalf of CAC, or the CEC Special Committee, on behalf of CEC, (i) are unable to agree to an adjustment to the Exchange Ratio by the end of the Adjustment Period and determine in good faith, after consultation with outside legal counsel, that failure to terminate the Amended Merger Agreement would be reasonably likely to be inconsistent with the fiduciary duties of the directors of CAC or CEC, as applicable, under applicable law or (ii) have not received, as of a date that is reasonably proximate to the date on which the Adjustment Period ends, an opinion of an independent, nationally recognized financial advisor to the effect that, as of the date of such opinion, and based upon and subject to the various assumptions made, procedures followed, matters considered and limitations on the review undertaken in preparing such opinion as set forth therein, the Exchange Ratio is fair, from a financial point of view, to CAC or CEC, as applicable, then the Amended Merger Agreement may be terminated within five business days following the end of the Adjustment Period.
The Amended Merger Agreement also contains an amended "Go-Shop" provision on terms substantially the same as the "Go-Shop" provision originally set forth in the Merger Agreement. The Amended Merger Agreement also provides that (i) certain existing litigation, under specified circumstances, (ii) certain legislative changes and (iii) any change in the financial
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or securities markets or in the market price or valuation of any security or financial interest, or in the business, results of operations or prospects of either of CAC or CEC, subject to certain conditions, in each case will not provide cause for either the CAC board of directors (the "CAC Board") or the CEC board of directors (the "CEC Board") to effect an adverse recommendation change.
The Amended Merger Agreement was fully negotiated by and between the CAC Special Committee and the CEC Special Committee, was recommended by each of the CAC Special Committee and the CEC Special Committee and was approved by the CAC Board and the CEC Board. Stockholders of each of CAC and CEC will be asked to vote on the adoption of the Amended Merger Agreement at special meetings of CAC's stockholders and CEC's stockholders, respectively, that will each be held on a date to be announced. Pursuant to the Amended Merger Agreement, CAC and CEC, as applicable, have agreed to file a joint proxy statement/prospectus as soon as reasonably practicable following the date of the Amended Merger Agreement.
The closing of the merger is subject to the adoption of the Amended Merger Agreement by the affirmative vote of the holders of at least a majority of all outstanding shares of CAC Common Stock and CEC Common Stock, respectively. In addition to the closing conditions originally set forth in the Merger Agreement, each of CAC and CEC have agreed that their respective obligation to consummate the merger is subject to the fulfillment of the Merger Plan containing the Debtor Release, the Third-Party Release and the Exculpation. However, the Amended Merger Agreement eliminated from the closing conditions set forth in the Merger Agreement (i) minimum cash closing conditions for both parties and (ii) a closing condition that limited tax costs relating to the Restructuring to close the Proposed Merger.
The Amended Merger Agreement provides certain termination rights to each of CAC and CEC based on, among other things: (i) CEOC filing (including any of its debtor subsidiaries), without CAC's or CEC's prior written consent, respectively, (x) a plan of reorganization, a disclosure statement or a proposed order entered by the Bankruptcy Court confirming the Merger Plan that is materially consistent with the RSAs and the Merger Plan and otherwise acceptable to each of CAC and CEC ("Confirmation Order") that does not include the Debtor Release, the Third-Party Release or the Exculpation as to CAC, CGP LLC, their subsidiaries, and their respective representatives ("CAC Released Parties") or CEC, its subsidiaries, and their respective representatives ("CEC Released Parties"), respectively, in form and substance consistent in all material respects with such provisions as set forth in the Merger Plan or (y) any motion, pleading or other document with the Bankruptcy Court in the CEOC Chapter 11 Cases that is otherwise materially inconsistent with the CAC RSA or CEC RSA, respectively, or the Merger Plan, (ii) the Confirmation Order (x) not including the Debtor Release, the Third-Party Release or the Exculpation as to the CAC Released Parties or the CEC Released Parties, respectively, in form and substance consistent in all material respect with such provisions as set forth in the Merger Plan or (y) not being otherwise materially consistent with the Merger Plan, (iii) the 105 Injunction Order no longer being in effect or, subject to certain conditions, CEOC failing to file a motion on or before August 14, 2016, or such earlier date as may be required by local rules governing the CEOC Chapter 11 Cases for the filing of such motion, seeking to extend the 105 Injunction Order currently in effect to the period ending on the confirmation date, (iv) either of the Caesars RSAs being terminated or becoming null and void or (v) the date on which the merger becomes effective not occurring by the close of business on December 31, 2017.
Basis of Presentation
Our financial statements are prepared in accordance with generally accepted accounting principles ("GAAP") in the United States, which require the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of expenses during the reporting periods. Management believes the accounting estimates are appropriate and reasonably stated. However, due to the inherent uncertainties in making these estimates, actual amounts could differ.
As CAC is the parent company to CGP LLC, a joint venture accounted for using the equity method, and as the financial statements of CGP LLC are included in this Annual Report on Form 10-K, segment reporting is not required. Given the significance of the investment in CGP LLC to the financial position and results of operations of CAC, we are required to include consolidated financial statements of CGP LLC as an exhibit to this annual report under Rule 3-09 of Regulation S-X.
In May 2014, CGP LLC completed the Acquired Properties Transaction and the Harrah's Transaction. Because these acquisitions were accounted for as transactions among entities under common control, the financial information for CGP LLC has been recast to include the financial results for these properties as if those businesses were combined into the CGP LLC reporting entity for all periods presented. Income recognized by CAC from its equity method investment in CGP LLC was not impacted or adjusted as a result of recasting the historical financial information of CGP LLC.
Principles of Consolidation
We consolidate into our financial statements the accounts of all wholly-owned subsidiaries and any partially-owned subsidiary that we have the ability to control. Control generally equates to ownership percentage, whereby investments that are more than 50% owned are consolidated, investments in affiliates of 50% or less but greater than 20% are generally accounted for
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using the equity method, and investments in affiliates of 20% or less are accounted for using the cost method. Up through and including December 31, 2016, we had no wholly-owned subsidiaries or any partially-owned subsidiaries.
We also consolidate into our financial statements the accounts of any variable interest entity for which we are determined to be the primary beneficiary. Up through and including December 31, 2016, we analyzed our variable interests to determine if the entity that is party to the variable interest is a variable interest entity in accordance with GAAP. Our analysis included both quantitative and qualitative reviews. Qualitative analysis is based on our review of the design of the entity, its organizational structure including decision-making ability, financial agreements and operating agreements.
CAC serves as CGP LLC's managing member and sole holder of all of its outstanding voting units, and subsidiaries of Caesars Entertainment hold all of CGP LLC's outstanding non-voting units. However, based upon the structure of CGP LLC and the related economics, CGP LLC has been determined to be a variable interest entity of which Caesars Entertainment is the primary beneficiary. Therefore, CAC does not consolidate CGP LLC into its financial statements. Instead, CAC accounts for its investment in CGP LLC using a balance sheet approach to the equity method of accounting, referred to as HLBV accounting.
Up through and including December 31, 2016, we had no consolidated variable interest entities.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with maturities of less than three months from the date of purchase and are stated at the lower of cost or market value.
Equity Method Investment in Caesars Growth Partners, LLC
CAC accounts for its investment in CGP LLC using the HLBV form of the equity method of accounting. Under the HLBV form of equity method accounting, we record our interest in the CGP LLC entity based upon our contractual claim on CGP LLC's accounting balance sheet pursuant to the mandatory liquidation provisions of the CGP Operating Agreement. Under this approach, our income or loss that we recognize in any period will represent the increase or decrease in our claim on CGP LLC's balance sheet assuming a hypothetical liquidation at the end of that reporting period when compared with our claim on CGP LLC's balance sheet assuming a hypothetical liquidation at the beginning of that reporting period, after removing any contributions or distributions. See Note 3 — Equity Method Investment in Caesars Growth Partners, LLC.
We review this investment quarterly for indicators of other-than-temporary impairment. This determination requires significant judgment. In making this judgment, we consider available quantitative and qualitative evidence in evaluating potential impairment of this investment. If we determine that an indicator of impairment exists, we assess whether the carrying value exceeds the fair value of the asset. If the carrying value of our investment exceeds its fair value, we will evaluate, among other factors, general market conditions, the duration and extent to which the carrying value is greater than the fair value, and our intent and ability to hold, or plans to sell, the investment. We also consider specific adverse conditions related to the financial health of and business outlook for the investee, CGP LLC, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge will be recorded and a new carrying basis in the investment will be established.
Income Taxes
CAC is subject to the statutory tax jurisdictions of the United States and the States of Louisiana and Maryland. Income taxes are recorded under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the expected future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and the expected future tax consequences attributable to operating loss and tax credit carryforwards. Our equity method investee, CGP LLC, is a partnership for income tax purposes so the deferred tax assets and liabilities recognized by CAC are also impacted by the expected future tax consequences of temporary differences at CGP LLC. The carrying amounts of deferred tax assets are reduced by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets are assessed periodically based on the more likely than not realization threshold. This assessment considers, among other matters, the nature, frequency, and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards not expiring unused, and tax planning alternatives.
We classify reserves for tax uncertainties within Deferred credits and other in our Balance Sheets, separate from any related income tax payable or deferred income taxes. Reserve amounts relate to any potential income tax liabilities resulting from uncertain tax positions and potential interest or penalties associated with those liabilities.
Stock-based Compensation
CAC may grant stock-based compensation awards in CAC Class A common stock, par value $0.001 per share to certain officers, employees, directors, individual consultants and advisers of the Company and its subsidiaries under the Caesars
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Acquisition Company 2014 Performance Incentive Plan ("the PIP Plan"). The PIP Plan is intended to promote the success of the Company and to increase stockholder value by providing an additional means, through the grant of awards, to attract, motivate, retain and reward employees and other eligible persons. The PIP Plan provides for the plan to be administered by the Human Resources Committee of the Board of Directors of Caesars Acquisition Company (the "Committee"). Through December 31, 2016, CAC has granted restricted stock units ("RSUs") and stock options to certain of its employees, directors, individual consultants, and advisers. RSUs and options are equity-classified and generally measured at fair value at the date of grant as of December 31, 2016. Certain RSUs and options were equity classified and remeasured at the end of each reporting period. A description of the components of the PIP Plan is provided in Note 7 — Stock-based Compensation.
Note 2 — Recently Issued Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40), amending the existing requirements for disclosing information about an entity's ability to continue as a going concern. The guidance explicitly requires management to assess an entity's ability to continue as a going concern and to provide related footnote disclosure in certain circumstances. We adopted ASU No. 2014-15 as of December 31, 2016. The adoption of ASU No. 2014-15 and the resulting assessment of our ability to continue as a going concern did not have an effect on our financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which primarily affects the accounting for equity investments that do not result in consolidation and are not accounted for under the equity method, presentation of changes in the fair value of financial liabilities measured under the fair value option, and the presentation and disclosure requirements for financial instruments. The ASU also clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. The ASU is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years. Entities can early adopt certain provision of ASU No. 2016-01. We are currently assessing the impact the adoption of this standard will have on our financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which (1) requires that all income tax effects of awards be recognized in the income statement when the awards vest or are settled, (2) requires that companies present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity, (3) allows employers to withhold up to the maximum statutory tax rates in the applicable jurisdictions without triggering liability accounting, (4) allows companies to make a policy election to either account for forfeitures as they occur or estimate forfeitures, and (5) includes nonpublic entity practical expedients. For public business entities, the amendments in this guidance are effective for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. We have adopted ASU No. 2016-09 during the year ended December 31, 2016. The adoption of this ASU had an immaterial impact on our financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses on certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For available-for-sale debt securities, ASU No. 2016-13 aligns the income statement recognition of credit losses with the reporting period in which changes occur by recording credit losses and subsequent reversals through an allowance rather than a write-down. For public business entities that are Securities and Exchange Commission ("SEC") filers, the amendments in this guidance are effective for fiscal years beginning after December 15, 2019, and interim periods within those years. Early application will be permitted for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. We are currently assessing the impact the adoption of this standard will have on our financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses classification issues related to the statement of cash flows. The amendments in ASU No. 2016-15 provide guidance on the following eight specific cash flow issues: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies including bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization transactions, and (8) separately identifiable cash flows and application of the predominance principle. For public business entities, the ASU will be effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. We are currently assessing the impact the adoption of this standard will have on our financial statements.
In October 2016, the FASB issued ASU No. 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control, which amends ASU No. 2015-02, Consolidation (Topic 810): Amendments to the
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Consolidation Analysis. The amendment alters how a decision maker should consider indirect interests in a variable interest entity ("VIE") held through an entity under common control. If a decision maker is required to evaluate whether it is the primary beneficiary of a VIE, it will need to consider only its proportionate indirect interest in the VIE held through a common control party. ASU No. 2016-17 does not change the characteristics of a primary beneficiary in the VIE model. This ASU is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. We are currently assessing the impact the adoption of this standard will have on our financial statements.
Note 3 — Equity Method Investment in Caesars Growth Partners, LLC
CAC accounts for its investment in CGP LLC using the HLBV form of the equity method of accounting. Under the HLBV form of equity method accounting, we record our interest in the CGP LLC entity based upon our contractual claim on CGP LLC's accounting balance sheet pursuant to the mandatory liquidation provisions of the CGP Operating Agreement. Under this approach, the income or loss that is recognized in any period will represent the increase or decrease in our claim on CGP LLC's balance sheet assuming a hypothetical liquidation at the end of that reporting period when compared with our claim on CGP LLC's balance sheet assuming a hypothetical liquidation at the beginning of that reporting period, after removing any contributions or distributions.
In connection with the closing of the sale of the SMG Business (the "SMG Business Sale Closing") (see Disposition of SMG Business below), on September 23, 2016, CAC, CEC and certain subsidiaries of CEC (the "CEC Members") entered into an amendment to the CGP Operating Agreement, as amended on October 7, 2016 and further amended on February 13, 2017 (such amendments, the "CGP Operating Agreement Amendment"), to, among other things, permit CGP LLC following the SMG Business Sale Closing to make one or more non-pro rata special distributions ("Special Distributions") to (a) the CEC Members of (i) up to $235 million for professional fees and certain payment obligations as set forth in the CIE Proceeds Agreement and the Caesars RSAs, (ii) up to $50 million to replenish a deposit previously made by CEC for the support of a proposed casino project in South Korea, and (iii) a $35 million special distribution to satisfy certain payment obligations as set forth in the CIE Proceeds Agreement, and (b) CAC of up to $300 million to pay tax liabilities resulting from the Sale. The CGP Operating Agreement Amendment also provides that upon a liquidation, partial liquidation or sale of material assets, following the existing preferential return to all units held by CAC, the CEC Members shall receive an amount equal to the difference between (x) the amount the CEC Members would have received had the special distributions been made pro rata based on the members' respective company percentage interests in CGP LLC as of the SMG Business Sale Closing and (y) the amount of special distributions actually received by the CEC Members. In addition, the CGP Operating Agreement Amendment also provides for the tax treatment of the allocations of net profits and net losses of the capital accounts of CGP LLC with respect to the distributions made to CAC and the CEC Members pursuant to the CGP Operating Agreement Amendment. During 2016, CGP LLC distributed $62.7 million to CEC for professional fees and $240.0 million to CAC for payment of tax liabilities.
CAC's claim on CGP LLC's book value is based on the terms of the CGP Operating Agreement, as amended, which generally requires the allocation of the net proceeds of a liquidation of CGP LLC, after the payment and discharge of all of CGP LLC's debts and liabilities, to the members as follows:
1. | First, to the voting units held by CAC, to the extent of contributed capital and an annually compounded preferred return of 10.5% on the invested portion of CAC's contributed capital; |
2. | Second, to the non-voting units held by Caesars Entertainment and/or its subsidiaries in an amount equal to the difference between (x) the amount Caesars Entertainment and/or its subsidiaries would have received had non-pro rata special distributions made in connection with Caesars Interactive Entertainment, LLC's ("CIE" or "Caesars Interactive", formerly Caesars Interactive Entertainment, Inc.) sale of its social and mobile games business in September 2016 been made pro rata based on the members' respective company percentage interests in CGP LLC as of the closing of the sale and (y) the amount of Special Distributions actually received by Caesars Entertainment and/or its subsidiaries; |
3. | Third, to the non-voting units held by Caesars Entertainment and/or its subsidiaries until Caesars Entertainment catches up (on a per unit basis) to its respective amount distributed in provision (1) (including the 10.5% per annum of return on investment); |
4. | Finally, to all unit holders on a pro-rata basis. |
CAC's earnings from CGP LLC was equal to our preferred return of 10.5% of capital invested by CGP LLC through the second quarter of 2016. CAC's earnings from CGP LLC increased starting in the third quarter of 2016 as a result of the increase in CGP LLC's net assets subsequent to the sale of CIE's social and mobile games business in September 2016. CAC's earnings from CGP LLC for the years ended December 31, 2015 and 2014 were equal to our preferred return of 10.5% of capital invested by CGP LLC. CAC also receives distributions from CGP LLC in accordance with the CGP Operating Agreement for reimbursement of its expenses incurred. These distributions are recorded as reductions to the Equity method investment in Caesars Growth Partners, LLC.
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Our investee, CGP LLC, had the following financial results, recast for the sale of the SMG Business described below, as of or for the periods indicated (see CGP LLC financial statements in Exhibit 99.1):
Year Ended December 31, | |||||||||||
(In millions) | 2016 | 2015 | 2014 | ||||||||
Statements of Operations | |||||||||||
Revenues | |||||||||||
Net revenues | $ | 1,696.5 | $ | 1,620.2 | $ | 1,318.5 | |||||
Operating expenses | |||||||||||
Direct operating expenses | 777.9 | 765.5 | 649.2 | ||||||||
Property, general, administrative and other | 672.4 | 498.1 | 489.6 | ||||||||
Write-downs, reserves and project opening costs, net of recoveries | 2.8 | 12.0 | 53.1 | ||||||||
Management fees to related parties | 44.2 | 55.9 | 37.0 | ||||||||
Depreciation and amortization | 180.1 | 148.6 | 115.1 | ||||||||
Impairment of goodwill, tangible and other intangible assets | — | 1.0 | 147.5 | ||||||||
Change in fair value of contingently issuable non-voting membership units | — | (117.2 | ) | 38.7 | |||||||
Total operating expenses | 1,677.4 | 1,363.9 | 1,530.2 | ||||||||
Income/(loss) from operations | 19.1 | 256.3 | (211.7 | ) | |||||||
Interest expense, net of interest capitalized | (198.0 | ) | (195.5 | ) | (171.8 | ) | |||||
Interest income | 3.4 | — | 1.0 | ||||||||
Interest income - related party | — | — | 119.2 | ||||||||
Impairment of investment in notes from related party | — | — | (63.5 | ) | |||||||
Gain on sale of investment in notes from related party | — | — | 99.4 | ||||||||
Loss on extinguishment of debt | — | — | (23.8 | ) | |||||||
Other income, net | — | 4.0 | — | ||||||||
(Loss)/income from continuing operations before benefit from income taxes | (175.5 | ) | 64.8 | (251.2 | ) | ||||||
Benefit from income taxes | 4.6 | 1.9 | 3.9 | ||||||||
Net (loss)/income from continuing operations | (170.9 | ) | 66.7 | (247.3 | ) | ||||||
Discontinued operations | |||||||||||
Income from discontinued operations before income taxes, including $4,179.9 gain on sale of SMG Business in 2016 and $1.4 of gain on disposal during 2014 | 4,109.6 | 226.0 | 86.8 | ||||||||
Provision for income taxes related to discontinued operations | (9.8 | ) | (63.8 | ) | (52.7 | ) | |||||
Net income from discontinued operations | 4,099.8 | 162.2 | 34.1 | ||||||||
Net income/(loss) | 3,928.9 | 228.9 | (213.2 | ) | |||||||
Less: net loss/(income) attributable to non-controlling interests | 28.3 | (7.1 | ) | 33.0 | |||||||
Net income/(loss) attributable to Caesars Growth Partners, LLC | $ | 3,957.2 | $ | 221.8 | $ | (180.2 | ) | ||||
Balance Sheet Data (at period end) | December 31, 2016 | December 31, 2015 | |||||||||
Current assets | $ | 4,197.0 | $ | 1,250.0 | |||||||
Long-term assets | 3,168.7 | 3,283.3 | |||||||||
Current liabilities | 418.8 | 388.2 | |||||||||
Long-term liabilities | 2,286.8 | 2,413.4 | |||||||||
Redeemable non-controlling interests | 0.4 | 0.5 | |||||||||
Equity attributable to Caesars Growth Partners, LLC | 4,655.3 | 1,691.0 | |||||||||
Non-redeemable non-controlling interests | 4.4 | 40.2 | |||||||||
Disposition of SMG Business
On September 23, 2016, CIE, a Delaware limited liability company, a subsidiary of CGP LLC, sold its social and mobile games business (the "SMG Business") for $4.4 billion, subject to customary purchase price adjustments, to Alpha Frontier Limited, a Cayman Islands exempted company ("Purchaser") (such sale, together with the transactions contemplated under the Purchase Agreement, the "Sale"), pursuant to the Stock Purchase Agreement, dated as of July 30, 2016 (the "Purchase Agreement"), entered into by and among CIE, Purchaser, and, solely for certain limited purposes described therein, CGP LLC, and CIE Growth, LLC, a Delaware limited liability company. The Purchaser was backed by a consortium that includes Giant Investment (HK) Limited, an affiliate of Shanghai Giant Network Technology Co., Ltd.; Yunfeng Capital; China Oceanwide Holdings Group Co., Ltd.; China Minsheng Trust Co., Ltd.; CDH China HF Holdings Company Limited and Hony Capital Fund.
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As a result of the Sale, the historical results of CGP LLC have been recast to reflect the portion of the CIE business disposed of as discontinued operations for all periods presented herein.
CGP LLC recognized a pre-tax gain of approximately $4.2 billion from the Sale. An estimated current income tax expense on the portion of the gain attributable to CAC in the amount of $284.9 million was recorded on CAC's Balance Sheet within Accrued income taxes during 2016. CAC also recorded a Receivable from related party and a corresponding reduction in its Equity method investment in Caesars Growth Partners, LLC for $284.9 million, as CGP LLC is required under the terms of the CGP Operating Agreement to pay CAC's tax obligations. During the fourth quarter of 2016, CGP LLC made a payment of $240.0 million toward CAC's estimated tax liability. At December 31, 2016, the remaining $44.9 million accrual is included in Accrued income taxes on CAC's Balance Sheet and CGP LLC's short-term Restricted cash includes $60.0 million remaining reserved for paying CAC's income tax expense on the portion of the gain attributable to CAC.
Pursuant to the Purchase Agreement, CIE agreed to hold a portion of the Sale proceeds in a separate maintenance account (the "CIE Escrow Account") until the occurrence of certain bankruptcy release events. At December 31, 2016, the balance in the CIE Escrow Account was $2,718.1 million, which is included as short-term Restricted cash in CGP LLC's Consolidated Balance Sheet.
In addition, CIE placed $264.0 million into escrow (the "Indemnity Escrow") to secure the potential indemnity claims of Purchaser for a period of twelve months from the SMG Business Sale Closing pursuant to the terms of the Purchase Agreement. During the fourth quarter of 2016, CIE paid $4.5 million to Purchaser from the Indemnity Escrow account based upon the finalization of the purchase price adjustment pursuant to the Purchase Agreement. At December 31, 2016, the remaining balance in the Indemnity Escrow was $259.5 million, which is included as short-term Restricted cash on CGP LLC's Consolidated Balance Sheet. There have been no claims made against the Indemnity Escrow account.
In connection with the SMG Business Sale Closing, CIE repurchased, immediately prior to the SMG Business Sale Closing, all of the shares of CIE common stock held by Rock Gaming Interactive LLC and by CIE's other minority investors (collectively, the "Minority Investors") for the right to receive cash payments representing the fair market value of such shares of CIE common stock at the SMG Business Sale Closing, determined as their pro-rata portion of the aggregate of (a) the Sale proceeds, (b) the fair market value of the World Series of Poker and online real money gaming businesses remaining with CIE following the Sale, and (c) CIE cash on hand at the SMG Business Sale Closing. The difference between the consideration paid and the carrying value of the minority interest was recorded as a reduction to Additional paid-in capital in CGP LLC's Consolidated Balance Sheet.
None of the outstanding CIE stock options, restricted stock units or warrants were assumed by the Purchaser in the Sale. In connection with the Sale, and pursuant to the permitted authority under the Purchase Agreement and CIE's Amended and Restated Management Equity Incentive Plan, CIE accelerated the vesting of all of the outstanding options, restricted stock units and warrants of CIE (collectively, "CIE Equity Awards"), and, effective immediately prior to the SMG Business Sale Closing, canceled all such CIE Equity Awards in exchange for the right to receive cash payments equal to the intrinsic value of such awards. Expense related to the acceleration of the vesting of the CIE Equity Awards for employees who had historically provided services to the SMG Business was recorded to Discontinued operations and the expense related to the acceleration of the vesting of other CIE Equity Awards was recorded to Property, general, administrative and other in CGP LLC's Combined and Consolidated Statement of Operations.
The total pro-rata share of Sale proceeds delivered to the Minority Investors and former holders of CIE Equity Awards was subject to the purchase price adjustment pursuant to the Purchase Agreement, which as described above was finalized during the fourth quarter of 2016, and is subject to the release of proceeds, if any, from the Indemnity Escrow at the end of the escrow period, to be paid to the Minority Investors and the former holders of CIE Equity Awards as and when such amounts are paid to CIE under the Purchase Agreement. The total amount distributed to Minority Investors and former holders of CIE Equity Awards in connection with the SMG Business Sale Closing was approximately $1,083.0 million.
At December 31, 2016, CGP LLC has accrued $63.1 million in Accrued expenses and other current liabilities on its Consolidated Balance Sheet, representing the amounts still due to the Minority Investors and former holders of CIE Equity Awards for the release of proceeds held in the Indemnity Escrow.
Contingently Issuable Non-voting Membership Units
Pursuant to the terms of the transaction agreement related to the formation of CGP LLC, CGP LLC was obligated to issue additional non-voting membership units to Caesars Entertainment to the extent that the earnings from a specified portion of CIE's social and mobile games business exceeded a predetermined threshold amount in 2015. Accordingly, in April 2016, CGP LLC issued approximately 31.9 million additional Class B non-voting units. As a result, CAC's economic ownership of CGP LLC decreased to approximately 38.8% in April 2016 from approximately 42.6% at March 31, 2016.
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Note 4 — Stockholders' Equity and Earnings Per Share
Stockholders' Equity
Common Stock
As of February 25, 2013 (the date of incorporation), the Company was authorized to issue 1,000 shares of CAC Class A common stock, par value $0.001 per share. In October 2013, the Certificate of Incorporation was amended and restated to authorize the Company to issue 1,200,000,000 shares of common stock, par value $0.001 per share. The common stock consists of two classes: 300,000,000 shares of Class A common stock and 900,000,000 shares of Class B common stock. The holders of shares of Class A common stock shall be entitled to one vote for each such share of Class A common stock on all matters to be voted on by the stockholders of the corporation. The holders of shares of Class B common stock shall not be entitled to vote.
As of December 31, 2016 and December 31, 2015, CAC had a total of 138,458,000 and 137,341,569 shares outstanding, respectively, of Class A common stock and no shares of Class B common stock outstanding.
Call Right
Pursuant to the certificate of incorporation of CAC and the CGP Operating Agreement, after October 21, 2016, Caesars Entertainment and/or its subsidiaries have the right, which it may assign to any of its affiliates or to any transferee of all non-voting units of CGP LLC held by subsidiaries of Caesars Entertainment, to acquire all or a portion of the voting units of CGP LLC (or, at the election of CAC, shares of CAC's Class A common stock) not otherwise owned by Caesars Entertainment and/or its subsidiaries at such time (the "Call Right"). The purchase consideration may be, at Caesars Entertainment's option, cash or shares of Caesars Entertainment's common stock valued at market value, net of customary market discount and expenses, provided that the cash portion will not exceed 50% of the total consideration in any exercise of the Call Right. The purchase price will be the greater of (i) the fair market value of the voting units of CGP LLC (or shares of CAC's Class A common stock) at such time based on an independent appraisal or (ii) the initial capital contribution in respect of such units plus a minimum 10.5% per annum return on such capital contribution, subject to a maximum return on such capital contribution of 25% per annum, taking into account prior distributions with respect to such units.
The Call Right may be exercisable in part by Caesars Entertainment (up to three times), but until the Call Right is exercised in full, any voting units of CGP LLC (or shares of CAC's Class A common stock) acquired by Caesars Entertainment will be converted into non-voting units of CGP LLC (or non-voting shares of CAC's Class B common stock). Additionally, the Call Right may only be exercised by Caesars Entertainment and/or its subsidiaries if, at the time of such exercise, (w) Caesars Entertainment and CAC enter into a resale registration rights agreement with respect to the shares of Caesars Entertainment common stock used as all or a portion of the purchase consideration in connection with the exercise of the Call Right, (x) the common stock of Caesars Entertainment (i) is registered with the SEC, (ii) is listed for trading and trades on a national securities exchange, and (iii) issuable upon exercise of the Call Right will represent, in the aggregate, not more than one half of the total Caesars Entertainment's common stock issued and outstanding giving effect to the exercise of the Call Right, (y) Caesars Entertainment has a minimum liquidity of $1.0 billion and a maximum net debt leverage ratio of 9.00 to 1.00, and (z) no event of default has occurred and is in effect under any financing agreement of Caesars Entertainment or its subsidiaries. Further, in the event that a stockholder vote of Caesars Entertainment is required in connection with the exercise of such Call Right, receipt of affirmative approval of such vote will be a condition to the exercise of the Call Right and at the closing of the formation transactions, affiliates of Apollo Global Management, LLC and affiliates of TPG Global, LLC entered into a voting support agreement in favor of any such stockholder approval. In addition, a majority of the independent directors of the board of directors of Caesars Entertainment must approve the exercise of the Call Right by Caesars Entertainment and/or its subsidiaries. The Call Right will be transferable to a transferee that also receives a transfer of all the non-voting units of CGP LLC, and exercisable by the transferee upon the same terms and conditions as apply to Caesars Entertainment and its subsidiaries.
Following October 21, 2018 and until April 21, 2022, our Board will have the right to cause a liquidation of CGP LLC, including the sale or winding up of CGP LLC, or other monetization of all of its assets and the distribution of the proceeds remaining after satisfaction of all liabilities of CGP LLC to the holders of CGP LLC's units according to the waterfall described below. On April 21, 2022 (unless otherwise agreed by Caesars Entertainment and CAC), if our Board has not previously exercised its liquidation right, the CGP Operating Agreement provides that CGP LLC shall, and our Board shall cause CGP LLC to effect a liquidation.
Upon a liquidation, partial liquidation or sale of material assets, all net cash and other assets not monetizable of CGP LLC shall, subject to applicable gaming regulatory laws, be distributed as follows: (i) first, to the voting units held by CAC, to the extent of contributed capital and an annually compounded preferred return of 10.5% on the invested portion of CAC's contributed capital; (ii) second, to the non-voting units held by Caesars Entertainment and/or its subsidiaries in an amount equal to the difference between (x) the amount Caesars Entertainment and/or its subsidiaries would have received had non-pro rata special distributions made in connection with CIE's sale of its social and mobile games business in September 2016 been made pro rata based on the members' respective company percentage interests in CGP LLC as of the closing of the sale and (y) the
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amount of special distributions actually received by Caesars Entertainment and/or its subsidiaries; (iii) third, to all units held by Caesars Entertainment and/or its subsidiaries until Caesars Entertainment catches up to its respective amount distributed in provision (i) (including the 10.5% per annum of return on the initial capital contribution) and (iv) fourth, to all holders of units pro rata.
The structure pursuant to which CGP LLC will effect a liquidating distribution, sale of CGP LLC or other similar transaction that provides liquidity to the holders of CGP LLC's units as described above will be determined by a special-purpose Liquidation Committee that will include representatives from Caesars Entertainment and CAC. In connection with any liquidation of CGP LLC, CAC will have an approval right over any sale or other monetization of assets of CGP LLC that would not exceed the greater of (x) the book value of CGP LLC, and (y) the value of CGP LLC as determined by an appraiser selected by CAC.
As of December 31, 2016, the Call Right was not exercised.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income consists of unrealized gain and losses on investments, net of taxes. For the years ended December 31, 2016, 2015 and 2014, no amounts were reclassified out of Accumulated other comprehensive income.
Investment in Notes from Related Party
CAC owns $137.5 million in aggregate principal amount of 6.50% senior notes previously issued by CEOC ("CEOC Notes"), which matured on June 1, 2016, and $151.4 million in aggregate principal amount of 5.75% CEOC Notes, maturing October 1, 2017. Both of these notes were included as a reduction of Additional paid-in capital in the Balance Sheets and Statements of Stockholders' Equity along with interest receivable at the distribution date. These notes are held at the distributed value with no subsequent adjustments such as fair value adjustments or interest receivable. Pursuant to the terms of the Amended Merger Agreement, CAC does not expect to collect principal or interest receivable from these notes. See Note 9 — Related Party Transactions.
Earnings Per Share
Basic earnings per share ("EPS") is calculated by dividing net income by the weighted average number of common shares outstanding during the period in which the net income was earned. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation plans using the treasury stock method.
The following table summarizes the computations of Basic EPS and Diluted EPS:
Year Ended December 31, | |||||||||||
(In millions, except per share data) | 2016 | 2015 | 2014 | ||||||||
Net income | $ | 619.1 | $ | 32.0 | $ | 14.6 | |||||
Shares used to compute EPS: | |||||||||||
Weighted average common stock outstanding - basic | 137.6 | 136.6 | 135.9 | ||||||||
Dilutive potential common shares | 0.3 | 0.3 | 0.1 | ||||||||
Weighted average common stock outstanding - diluted | 137.9 | 136.9 | 136.0 | ||||||||
Earnings per share: | |||||||||||
Basic | $ | 4.50 | $ | 0.23 | $ | 0.11 | |||||
Diluted | $ | 4.49 | $ | 0.23 | $ | 0.11 | |||||
There were no anti-dilutive shares excluded from the computation of diluted EPS for the year ended December 31, 2016. There were 1.8 million and 0.6 million, respectively, of anti-dilutive shares excluded from the computation of diluted earnings per share for the years ended December 31, 2015 and 2014.
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Note 5 — Income Taxes
The components of income before income taxes and the related provision for U.S. and other income taxes were as follows:
Year Ended December 31, | |||||||||||
(In millions) | 2016 | 2015 | 2014 | ||||||||
Income before income taxes | |||||||||||
United States | $ | 790.6 | $ | 66.2 | $ | 54.0 | |||||
Outside of the United States | — | — | — | ||||||||
Total income before income taxes | $ | 790.6 | $ | 66.2 | $ | 54.0 | |||||
Year Ended December 31, | |||||||||||
(In millions) | 2016 | 2015 | 2014 | ||||||||
Provision for income taxes | |||||||||||
Current | |||||||||||
Federal | $ | 378.9 | $ | — | $ | — | |||||
State | 3.1 | — | — | ||||||||
Deferred | |||||||||||
Federal | (207.8 | ) | 34.2 | 38.4 | |||||||
State | (2.7 | ) | — | 1.0 | |||||||
Total provision for income taxes | $ | 171.5 | $ | 34.2 | $ | 39.4 | |||||
The differences between the United States statutory federal income tax rate and the effective tax rate expressed as a percentage of income before taxes were as follows:
Year Ended December 31, | ||||||||
2016 | 2015 | 2014 | ||||||
Statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||
Increases/(decreases) in tax resulting from: | ||||||||
State tax, net of federal tax benefit | 0.2 | 0.1 | 1.2 | |||||
Change in valuation allowance | (11.0 | ) | 16.7 | 36.5 | ||||
Dividends received deduction | (2.6 | ) | — | — | ||||
Nondeductible expenses from CGP LLC | 0.1 | 0.3 | 0.4 | |||||
Federal tax credits from CGP LLC | (0.1 | ) | (0.4 | ) | (0.5 | ) | ||
Other | 0.1 | — | 0.3 | |||||
Effective tax rate | 21.7 | % | 51.7 | % | 72.9 | % | ||
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The major components of the Deferred tax assets and liabilities in our Balance Sheets were as follows:
December 31, | |||||||
(In millions) | 2016 | 2015 | |||||
Deferred tax assets | |||||||
Federal net operating loss carryover | $ | — | $ | 2.4 | |||
State net operating loss carryovers | 0.6 | 1.4 | |||||
Federal tax credit carryover | — | 0.8 | |||||
Indirect tax benefits of state uncertain tax positions | 1.0 | — | |||||
Compensation programs | 2.3 | 2.1 | |||||
Investment in CGP LLC | 44.9 | — | |||||
Investment in notes from related party | 91.1 | 89.6 | |||||
Other | 2.3 | 1.4 | |||||
Total deferred tax assets | 142.2 | 97.7 | |||||
Less: valuation allowance | (0.9 | ) | (87.7 | ) | |||
Total deferred tax assets, less valuation allowance | 141.3 | 10.0 | |||||
Deferred tax liabilities | |||||||
Investment in CGP LLC | — | 79.1 | |||||
Prepaid expenses | 0.7 | 0.8 | |||||
Total deferred tax liabilities | 0.7 | 79.9 | |||||
Net deferred tax asset/(liability) | $ | 140.6 | $ | (69.9 | ) | ||
The change from a deferred tax liability related to the investment in CGP LLC to a deferred tax asset is primarily due to the sale of the CIE social mobile games business within CGP LLC. For tax purposes, CAC accounts for its investment in CGP LLC using its relative ownership in CGP LLC.
As of December 31, 2016 and 2015, CAC had federal net operating loss ("NOL") carryforwards of zero and $6.7 million, respectively. In addition, as of December 31, 2016 and 2015, CAC had federal general business tax credit carryforwards of zero and $0.8 million, respectively. As of December 31, 2016, no valuation allowance had been established for CAC's federal deferred tax assets. A valuation allowance of $84.8 million was recorded against CAC's federal deferred tax assets which were not deemed realizable as of 2015. As a result of the capital gains generated from the sale of the CIE SMG Business, the deferred tax assets were deemed realizable and the valuation allowance was released.
As of December 31, 2016 and 2015, CAC had state NOL carryforwards of $22.6 million and $35.3 million, respectively. These NOLs will begin to expire in 2029. A valuation allowance had been established for a portion of CAC's state NOL carryforwards deferred tax assets that were not deemed realizable based on estimates of future state income. A valuation allowance of $2.9 million was recorded against CAC's state deferred tax assets which were not deemed realizable as of 2015. As a result of the sale of the CIE SMG Business, certain state deferred tax assets were deemed realizable during 2016 and a valuation allowance, of approximately $2.0 million, was released.
Reserve amounts related to potential income tax liabilities resulting from uncertain tax positions were as follows:
(In millions) | |||
Balance at January 1, 2016 | $ | — | |
Additions for tax positions of current year | 94.6 | ||
Additions for tax positions of prior years | — | ||
Reductions for tax positions of prior years | — | ||
Expiration of statutes | — | ||
Balance at December 31, 2016 | $ | 94.6 | |
CAC classifies reserves for tax uncertainties within Deferred credits and other in our Balance Sheets, separate from any related income tax payable or deferred income taxes. In accordance with Accounting Standards Codification 740, reserve amounts relate to any possible income tax liabilities resulting from uncertain tax positions as well as possible interest or penalties associated with those liabilities. CAC had no uncertain tax positions in 2015 or 2014.
CAC recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. There were no accruals for interest and penalties for CAC in 2016, 2015 or 2014. Included in the balances of unrecognized tax benefits, as of December 31, 2016, are $2.3 million of unrecognized tax benefits that, if recognized, would impact the effective tax rate.
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CAC files income tax returns with federal and state jurisdictions. The 2016, 2015 and 2014 tax years are open for examination for CAC's federal and state jurisdictions.
CAC believes that it is reasonably possible that the unrecognized tax benefits will not materially change within the next 12 months. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although we believe that adequate provision has been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on our earnings. Conversely, if these issues are resolved favorably in the future, the related provision would be reduced, thus having a favorable impact on earnings.
Note 6 — Litigation, Contractual Commitments and Contingent Liabilities
From time to time, CAC or CGP LLC may be subject to legal proceedings and claims in the ordinary course of business.
CAC-CEC Proposed Merger
On December 30, 2014, Nicholas Koskie, on behalf of himself and, he alleges, all others similarly situated, filed a lawsuit (the "Nevada Lawsuit") in the Clark County District Court in the State of Nevada against CAC, CEC and members of the CAC board of directors Marc Beilinson, Philip Erlanger, Dhiren Fonseca, Don Kornstein, Karl Peterson, Marc Rowan, and David Sambur (the individual defendants collectively, the "CAC Directors"). The Nevada Lawsuit alleges claims for breach of fiduciary duty against the CAC Directors and aiding and abetting breach of fiduciary duty against CAC and CEC. It seeks (1) a declaration that the claim for breach of fiduciary duty is a proper class action claim; (2) to order the CAC Directors to fulfill their fiduciary duties to CAC in connection with the Proposed Merger, specifically by announcing their intention to (a) cooperate with bona fide interested parties proposing alternative transactions, (b) ensure that no conflicts exist between the CAC Directors' personal interests and their fiduciary duties to maximize shareholder value in the Proposed Merger, or resolve all such conflicts in favor of the latter, and (c) act independently to protect the interests of the shareholders; (3) to order the CAC Directors to account for all damages suffered or to be suffered by the plaintiff and the putative class as a result of the Proposed Merger; and (4) to award the plaintiff for his costs and attorneys' fees. It is unclear whether the Nevada Lawsuit also seeks to enjoin the Proposed Merger. On October 13, 2016, the Nevada Lawsuit was dismissed without prejudice by the court for lack of prosecution. On November 14, 2016, the deadline to seek reinstatement of the lawsuit lapsed, without action by the plaintiff. If the litigation is refiled, CAC and the CAC Directors believe this lawsuit is without merit and will defend themselves vigorously.
We cannot provide assurance as to the outcome of this matter or of the range of reasonably possible losses should this matter ultimately be resolved against us due to the inherent uncertainty of litigation and the stage of the related litigation.
CEOC Bondholder Litigation, or Noteholder Disputes
On August 4, 2014, Wilmington Savings Fund Society, FSB, solely in its capacity as successor indenture trustee for the 10% Second-Priority Senior Secured Notes due 2018 (the "Notes"), on behalf of itself and, it alleges, derivatively on behalf of CEOC, filed a lawsuit (the "Delaware Second Lien Lawsuit") in the Court of Chancery in the State of Delaware against CEC, CEOC, CGP LLC, CAC, Caesars Entertainment Resort Properties, LLC ("CERP"), Caesars Enterprise Services, LLC ("CES"), Eric Hession, Gary Loveman, Jeffrey D. Benjamin, David Bonderman, Kelvin L. Davis, Marc C. Rowan, David B. Sambur, and Eric Press. The lawsuit alleges claims for breach of contract, intentional and constructive fraudulent transfer, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and corporate waste. The lawsuit seeks (1) an award of money damages; (2) to void certain transfers, the earliest of which dates back to 2010; (3) an injunction directing the recipients of the assets in these transactions to return them to CEOC; (4) a declaration that CEC remains liable under the parent guarantee formerly applicable to the Notes; (5) to impose a constructive trust or equitable lien on the transferred assets; and (6) an award to the plaintiffs for their attorneys' fees and costs. The only claims against CAC and CGP LLC are for intentional and constructive fraudulent transfer. CAC and CGP LLC believe this lawsuit is without merit and will defend themselves vigorously. A motion to dismiss this action was filed by CEC and other defendants in September 2014, and the motion was argued in December 2014. During the pendency of its Chapter 11 bankruptcy proceedings, the action has been automatically stayed with respect to CEOC. The motion to dismiss with respect to CEC was denied on March 18, 2015. In a Verified Supplemental Complaint filed on August 3, 2015, the plaintiff stated that due to CEOC's bankruptcy filing, the continuation of all claims was stayed pursuant to the bankruptcy except for Claims II, III, and X. These are claims against CEC only, for breach of contract in respect of the release of the parent guarantee formerly applicable to the Notes, for declaratory relief in respect of the release of this guarantee, and for violations of the Trust Indenture Act in respect of the release of this guarantee. CEC has informed us that fact discovery in the case is substantially complete, and cross-motions for summary judgment have been filed by the parties. On October 5, 2016, the Bankruptcy Court granted CEOC's motion for a stay of this proceeding (and others). The Bankruptcy Court ordered the stay to remain in effect until the earlier of (a) the first omnibus hearing after the Bankruptcy Court issues its decision confirming or denying confirmation of the CEOC restructuring plan (February 15, 2017), (b) the termination of the restructuring support agreement with the Official Committee of Second Priority Noteholders (the "Second Lien RSA"), or (c) further order of the Bankruptcy Court.
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On September 3, 2014, holders of approximately $21 million of CEOC Senior Unsecured Notes due 2016 and 2017 filed suit in federal district court in United States District Court for the Southern District of New York against CEC and CEOC, claiming broadly that an August 12, 2014 Note Purchase and Support Agreement between CEC and CEOC (on the one hand) and certain other holders of the CEOC Senior Unsecured Notes (on the other hand) impaired their own rights under the Senior Unsecured Notes. The lawsuit seeks both declaratory and monetary relief. On October 2, 2014, other holders of CEOC Senior Unsecured Notes due 2016 purporting to represent a class of all holders of these Notes from August 11, 2014 to the present filed a substantially similar suit in the same court, against the same defendants, relating to the same transactions. Both lawsuits (the "Senior Unsecured Lawsuits") were assigned to the same judge. The claims against CEOC have been automatically stayed during its Chapter 11 bankruptcy proceedings. The court denied a motion to dismiss both lawsuits with respect to CEC. The parties have completed fact discovery with respect to both plaintiffs' claims against CEC. On October 23, 2015, plaintiffs in the Senior Unsecured Lawsuits moved for partial summary judgment, and on December 29, 2015, those motions were denied. On December 4, 2015, plaintiff in the action brought on behalf of holders of CEOC's 6.50% Senior Unsecured Notes moved for class certification and briefing has been completed. The judge presiding over these cases thereafter retired, and a new judge was appointed to preside over these lawsuits. That judge set a new summary judgment briefing schedule, and the parties filed cross-motions for summary judgment which remain pending. On October 5, 2016, the Bankruptcy Court granted CEOC's motion for a stay of these proceedings (and others). The stay will remain in effect until the earlier of (a) the first omnibus hearing after the Bankruptcy Court issues its decision confirming or denying confirmation of the CEOC restructuring plan (February 15, 2017), (b) the termination of the Second Lien RSA or (c) further order of the Bankruptcy Court. CAC and CGP LLC are not parties to these lawsuits.
On November 25, 2014, UMB Bank ("UMB"), as successor indenture trustee for CEOC's 8.5% senior secured notes due 2020, filed a verified complaint (the "Delaware First Lien Lawsuit") in Delaware Chancery Court against CEC, CEOC, CERP, CAC, CGP LLC, CES, and against an individual, and past and present members of the CEC and CEOC Boards of Directors, Gary Loveman, Jeffrey Benjamin, David Bonderman, Kelvin Davis, Eric Press, Marc Rowan, David Sambur, Eric Hession, Donald Colvin, Fred Kleisner, Lynn Swann, Chris Williams, Jeffrey Housenbold, Michael Cohen, Ronen Stauber, and Steven Winograd, alleging generally that defendants have improperly stripped CEOC of prized assets, have wrongfully affected a release of a CEC parental guarantee of CEOC debt and have committed other wrongs. Among other things, UMB has asked the court to appoint a receiver over CEOC. In addition, the Delaware First Lien Lawsuit pleads claims for fraudulent conveyances/transfers, insider preferences, illegal dividends, declaratory judgment (for breach of contract as regards to the parent guarantee and also as to certain covenants in the bond indenture), tortious interference with contract, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, usurpation of corporate opportunities, and unjust enrichment, and seeks monetary and equitable as well as declaratory relief. CAC and CGP LLC believe this lawsuit is without merit and will defend themselves vigorously. All of the defendants have moved to dismiss the lawsuit, and that motion has been fully briefed. In addition, this lawsuit has been automatically stayed with respect to CEOC during the Chapter 11 process and, pursuant to the (a) Fifth Amended and Restated Restructuring Support and Forbearance Agreement dated October 7, 2015, with certain holders of claims in respect of claims under CEOC's first lien notes (the "First Lien Bond RSA") and (b) Restructuring Support and Forbearance Agreement dated August 21, 2015, with certain holders of claims in respect of claims under CEOC's first lien credit agreement (the "First Lien Bank RSA" and, together with the First Lien Bond RSA, the "RSAs"), has been subject to a consensual stay for all.
On February 13, 2015, Caesars Entertainment received a Demand For Payment of Guaranteed Obligations (the "February 13 Notice") from Wilmington Savings Fund Society, FSB, in its capacity as successor Trustee for CEOC's 10.00% Second-Priority Notes. The February 13 Notice alleges that CEOC's commencement of its voluntary Chapter 11 bankruptcy case constituted an event of default under the indenture governing the 10.00% Second-Priority Notes; that all amounts due and owing on the 10.00% Second-Priority Notes therefore immediately became payable; and that Caesars Entertainment is responsible for paying CEOC's obligations on the 10.00% Second-Priority Notes, including CEOC's obligation to timely pay all principal, interest, and any premium due on these notes, as a result of a parent guarantee provision contained in the indenture governing the notes that the February 13 Notice alleges is still binding. The February 13 Notice accordingly demands that Caesars Entertainment immediately pay Wilmington Savings Fund Society, FSB, cash in an amount of not less than $3.7 billion, plus accrued and unpaid interest (including without limitation the $184 million interest payment due December 15, 2014 that CEOC elected not to pay) and accrued and unpaid attorneys' fees and other expenses. The February 13 Notice also alleges that the interest, fees and expenses continue to accrue. CAC and CGP LLC are not parties to this demand.
On February 18, 2015, Caesars Entertainment received a Demand For Payment of Guaranteed Obligations (the "February 18 Notice") from BOKF, N.A. ("BOKF"), in its capacity as successor Trustee for CEOC's 12.75% Second-Priority Senior Secured Notes due 2018 (the "12.75% Second-Priority Notes"). The February 18 Notice alleges that CEOC's commencement of its voluntary Chapter 11 bankruptcy case constituted an event of default under the indenture governing the 12.75% Second-Priority Notes; that all amounts due and owing on the 12.75% Second-Priority Notes therefore immediately became payable; and that CEC is responsible for paying CEOC's obligations on the 12.75% Second-Priority Notes, including CEOC's obligation to timely pay all principal, interest and any premium due on these notes, as a result of a parent guarantee
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provision contained in the indenture governing the notes that the February 18 Notice alleges is still binding. The February 18 Notice therefore demands that CEC immediately pay BOKF cash in an amount of not less than $750 million, plus accrued and unpaid interest, accrued and unpaid attorneys' fees, and other expenses. The February 18 Notice also alleges that the interest, fees and expenses continue to accrue. CAC and CGP LLC are not parties to this demand.
On March 3, 2015, BOKF filed a lawsuit (the "New York Second Lien Lawsuit") against CEC in federal district court in Manhattan, in its capacity as successor trustee for CEOC's 12.75% Second-Priority Notes. On June 15, 2015, UMB filed a lawsuit (the "New York First Lien Lawsuit") against CEC, also in federal district court in Manhattan, in its capacity as successor trustee for CEOC's 11.25% Senior Secured Notes due 2017, 8.50% Senior Secured Notes due 2020, and 9.00% Senior Secured Notes due 2020. Plaintiffs in these actions allege that CEOC's filing of its voluntary Chapter 11 bankruptcy case constitutes an event of default under the indenture governing these notes, causing all principal and interest to become immediately due and payable, and that CEC is obligated to make those payments pursuant to a parent guarantee provision in the indentures governing these notes that plaintiffs allege are still binding. Both plaintiffs bring claims for violation of the Trust Indenture Act of 1939, breach of contract, breach of duty of good faith and fair dealing and for declaratory relief and BOKF brings an additional claim for intentional interference with contractual relations. The cases were assigned to the same judge presiding over the other Parent Guarantee Lawsuits. CEC filed its answer to the BOKF complaint on March 25, 2015, and to the UMB complaint on August 10, 2015. On June 25, 2015, and June 26, 2015, BOKF and UMB, respectively, moved for partial summary judgment, specifically on their claims alleging a violation of the Trust Indenture Act of 1939, seeking both declaratory relief and damages. On August 27, 2015, those motions were denied. The court, on its own motion, certified its order with respect to the interpretation of the Trust Indenture Act for interlocutory appeal to the United States Court of Appeals for the Second Circuit, and on December 22, 2015, the appellate court denied CEC's motion for leave to appeal. On November 20, 2015, BOKF and UMB again moved for partial summary judgment. Those motions likewise were denied. The judge presiding over these cases thereafter retired, and a new judge was appointed to preside over these lawsuits. That judge set a new summary judgment briefing schedule, and the parties submitted cross-motions for summary judgment which remain pending. On October 5, 2016, the Bankruptcy Court granted CEOC's motion for a stay of the New York First Lien Lawsuit and the New York Second Lien Lawsuit (and others). The Bankruptcy Court ordered the stay to remain in effect until the earlier of (a) the first omnibus hearing after the Bankruptcy Court issues its decision confirming or denying confirmation of the CEOC restructuring plan (February 15, 2017), (b) the termination of the Second Lien RSA or (c) further order of the Bankruptcy Court.
On October 20, 2015, Wilmington Trust, National Association ("Wilmington Trust"), filed a lawsuit (the "New York Senior Notes Lawsuit" and, together with the Delaware Second Lien Lawsuit, the Delaware First Lien Lawsuit, the Senior Unsecured Lawsuits, the New York Second Lien Lawsuit, and the New York First Lien Lawsuit, the "Parent Guarantee Lawsuits") against CEC in federal district court in Manhattan in its capacity as successor indenture trustee for CEOC's 10.75% Senior Notes due 2016 (the "10.75% Senior Notes"). Plaintiff alleges that CEC is obligated to make payment of amounts due on the 10.75% Senior Notes pursuant to a parent guarantee provision in the indenture governing those notes that plaintiff alleges is still in effect. Plaintiff raises claims for violations of the Trust Indenture Act of 1939, breach of contract, breach of the implied duty of good faith and fair dealing, and for declaratory judgment, and seeks monetary and declaratory relief. CEC filed its answer to the complaint on November 23, 2015. As with the other parent guarantee lawsuits taking place in Manhattan, the judge presiding over these cases retired and a new judge was appointed to preside over these lawsuits. That judge set a new summary judgment briefing schedule and the parties submitted cross-motions for summary judgment which remain pending. On October 5, 2016, the Bankruptcy Court granted CEOC's motion for a stay of this proceeding (and others). The Bankruptcy Court ordered the stay to remain in effect until the earlier of (a) the first omnibus hearing after the Bankruptcy Court issues its decision confirming or denying confirmation of the CEOC reorganization plan (February 15, 2017), (b) the termination of the Second Lien RSA or (c) further order of the Bankruptcy Court.
In accordance with the terms of the applicable indentures and as previously disclosed, Caesars Entertainment believes that it is not subject to the above-described guarantees. As a result, Caesars Entertainment believes the demands for payment are without merit. The claims against CEOC have been stayed due to the Chapter 11 process and, except as described above, the actions against CEC have been allowed to continue.
CAC and CGP LLC believe that the claims and demands described above against CAC and CGP LLC in the Delaware First Lien Lawsuit and Delaware Second Lien Lawsuit are without merit and intend to defend themselves vigorously. For the Delaware First Lien Lawsuit and Delaware Second Lien Lawsuit, at the present time, CAC and CGP LLC believe it is not probable that a material loss will result from the outcome of these matters. However, given the uncertainty of litigation, CAC and CGP LLC cannot provide assurance as to the outcome of these matters or of the range of reasonably possible losses should the matters ultimately be resolved against them. Should these matters ultimately be resolved through litigation outside of the financial restructuring of CEOC, which CAC and CGP LLC believe these matters would likely be long and protracted, and were a court to find in favor of the claimants in the Delaware First Lien Lawsuit or the Delaware Second Lien Lawsuit, such determination could have a material adverse effect on CAC and CGP LLC's business, financial condition, results of operations, and cash flows.
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As part of CEOC's bankruptcy proceeding, the Official Committee of Second Priority Noteholders ("Second Priority Noteholders") filed a standing motion in bankruptcy court on May 13, 2016 seeking standing to commence claims on behalf of CEOC's estate. The proposed complaint names as potential defendants CAC, CGP LLC, CIE, and CES as well as CEC and CERP among others, and seeks recovery of assets transferred from CEOC. The proposed complaint alleges claims on behalf of CEOC's estate ranging in value from $8.1 billion to $12.6 billion against all defendants, as valued by the Second Priority Noteholders. Of this amount, the Second Priority Noteholders allege potential claims against CAC, CGP LLC, and CIE ranging from $3.7 billion to $7.9 billion, without taking into account any duplicative recovery, based on calculations in an exhibit to the revised disclosure statement filed in the bankruptcy court on May 27, 2016. A hearing on the standing motion was held on October 19, 2016, and the standing motion was continued until January 17, 2017. Following the confirmation of the CEOC restructuring plan on January 17, 2017, the bankruptcy court continued the Second Priority Noteholders' standing motion until April 19, 2017.
On October 5, 2016, CEOC announced the execution of, or amendment and restatement of, restructuring support agreements with representatives of all of CEOC's major creditor groups, as well as agreement to the terms of CEOC's third amended plan of reorganization. Included among these was the Second Lien RSA. Pursuant to the terms of the Second Lien RSA, CEOC and the Second Priority Noteholders have agreed to stay certain discovery deadlines and to hold in abeyance various proceedings pending before the bankruptcy court. The Second Priority Noteholders' standing motion, various claim objections and motions to compel will all be held in abeyance until (a) the date on which the Debtors' third amended plan becomes effective or (b) seven days after the termination of the Second Lien RSA for any reason, whichever is earlier. The Second Lien RSA further requires the consenting Second Priority Noteholders to vote in favor of the plan.
On August 9, 2016, CEOC and certain of its affiliates, each debtor in the Chapter 11 bankruptcy proceedings, filed an adversary complaint as part of the Chapter 11 bankruptcy proceeding against CAC, CIE, CGP LLC, and Caesars Growth Properties Holdings, LLC ("CGPH"), among others, including CEC, CES, and certain current and former directors of CEOC and CEC. In this adversary complaint, the plaintiffs assert claims against CAC for actual and constructive fraudulent conveyances and transfers. The plaintiffs allege, among other things, that certain transactions in which CAC purchased assets from CEOC constituted fraudulent conveyances, and that CAC did not provide CEOC with reasonably equivalent value for the assets acquired. The plaintiffs also claim certain transactions involving CIE constituted fraudulent transfers. The plaintiffs seek, among other relief, avoidance and/or rescission of the disputed transactions; return of assets transferred in those transactions; compensation from defendants for CEOC's alleged losses and damages; and an award to plaintiffs of the costs of the actions, including attorney's fees.
CAC, CIE, CGP LLC, and CGPH believe the above-referenced adversary complaint is without merit and intend to defend it vigorously, including by filing a motion to dismiss at the appropriate time. The status and timing of the adversary proceeding is affected by the Bankruptcy proceedings. On August 10, 2016, CEOC filed an emergency motion seeking, among other relief, to stay the above-referenced adversary proceeding. On August 23, 2016, the bankruptcy court granted the relief requested until the October 19, 2016 omnibus hearing. At the October 19, 2016 omnibus hearing, the bankruptcy court continued the adversary proceeding until the November 16, 2016 omnibus hearing. Following the confirmation of the CEOC restructuring plan on January 17, 2017, the bankruptcy court continued the adversary proceeding until April 19, 2017.
Report of Bankruptcy Examiner
The Bankruptcy Court previously engaged an independent examiner to investigate possible claims CEOC might have against CEC, CAC, CGP LLC, other entities and certain individuals. On March 15, 2016, the examiner released his report in redacted form (to the public) and in unredacted form (to certain entities and individuals). On May 16, 2016, the examiner issued a substantially unredacted version of his report. CAC, CGP LLC and CIE do not have access to the unredacted report, and accordingly the description below is based on the substantially unredacted publicly-available report.
The examiner's report identifies a variety of potential claims against CAC, CGP LLC, CIE, other entities and certain individuals related to a number of transactions dating back to 2009. Most of the examiner's findings are based on his view that CEOC was "insolvent" at the time of the applicable transactions. The examiner's report includes his conclusions on the relative strength of these possible claims, many of which are described above. The examiner calculates an estimated range of potential damages for these potential claims as against all parties from $3.6 billion to $5.1 billion. The examiner calculates an estimated range of potential damages for potential claims against CAC, CGP LLC and CIE from $1.7 billion to $2.3 billion, ignoring potential duplication of recovery from other defendants. Neither calculation takes into account probability of success, likelihood of collection, or the time or cost of litigation.
Although this report was prepared at the request of the Bankruptcy Court, none of the findings are legally binding on the Bankruptcy Court or any party. CAC, CGP LLC and CIE contest many of the examiner's findings, including his finding that CEOC did not receive fair value for assets transferred, any suggestion that certain of the potential claims against CAC, CGP LLC and CIE have merit, and his calculation of potential damages. CAC, CGP LLC and its subsidiaries believe that each of the disputed transactions involving them provided substantial value to CEOC that was reasonably equivalent to the value of the
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asset (s) transferred, and that they at all times acted in good faith.
National Retirement Fund
In January 2015, a majority of the Trustees of the National Retirement Fund ("NRF"), a multi-employer defined benefit pension plan, voted to expel CEC and its participating subsidiaries, the CEC Group, from the plan. Neither CAC, CGP LLC nor any of their subsidiaries are part of the CEC Group. NRF claims that CEOC's bankruptcy presents an "actuarial risk" to the plan because, depending on the outcome of the bankruptcy proceeding, CEC might no longer be liable to the plan for any partial or complete withdrawal liability. NRF has advised the CEC Group that its expulsion has triggered withdrawal liability with a present value of approximately $360 million, payable in 80 quarterly payments of about $6 million.
Prior to NRF's vote, the CEC Group reiterated its commitment to remain in the plan and not seek rejection of any collective bargaining agreements in which the obligation to contribute to NRF exists. The CEC Group was current with respect to pension contributions at the time of their expulsion.
On December 5, 2016, an interlocutory judgment was entered against CEC and CERP comprising the first quarterly payment of withdrawal liability referred to above, interest and liquidated damages under the Employee Retirement Income Security Act of 1974. On December 19, 2016, CEC and CERP filed a motion to certify a final judgment under Rule 54(b) of the Federal Rules of Civil Procedure for immediate appeal and to stay the plaintiffs' motions to amend and for summary judgment, as described below. On January 11, 2017, the District Court granted the motion to certify a final judgment under Rule 54(b) in the amount of $9 million, but denied the motion for a stay, and a judgment in that amount was entered the next day. CEC has appealed this decision to the Second Circuit, and has bonded the judgment pending appeal.
On December 23, 2016, the plaintiffs filed a motion to amend their complaint to add claims for the second through eighth quarterly payments of withdrawal liability, which the plaintiffs contended were past due, as well as for injunctive relief requiring the defendants to pay all further quarterly payments as they purportedly became due. Also on December 23, 2016, the plaintiffs simultaneously filed a motion for summary judgment against CEC and CERP for payment of the second through eighth quarterly payments of withdrawal liability, for interest, liquidated damages, attorneys' fees and costs, and for injunctive relief requiring the defendants to pay all further quarterly payments as they purportedly became due. These motions have not yet been fully submitted to the District Court.
CEC believes its legal arguments against the actions undertaken by NRF are strong and will pursue them vigorously, and will defend vigorously against the claims raised by the NRF in the NRF action. Since settlement discussions with the NRF are continuing and no material discovery has yet been performed with respect to any of the above actions, CEC cannot currently provide assurance as to the ultimate outcome of the matters at issue.
Other Matters
In recent years, governmental authorities have been increasingly focused on anti-money laundering ("AML") policies and procedures, with a particular focus on the gaming industry. In October 2013, CEOC's subsidiary, Desert Palace, Inc. (the owner of and referred to herein as Caesars Palace), received a letter from the Financial Crimes Enforcement Network of the United States Department of the Treasury ("FinCEN"), stating that FinCEN was investigating Caesars Palace for alleged violations of the Bank Secrecy Act to determine whether it is appropriate to assess a civil penalty and/or take additional enforcement action against Caesars Palace. Caesars Palace responded to FinCEN's letter in January 2014. Additionally, CEC was informed in October 2013 that a federal grand jury investigation regarding anti-money laundering practices of CEC and its subsidiaries had been initiated. CEC and Caesars Palace have been cooperating with FinCEN, the Department of Justice and the Nevada Gaming Control Board (the "GCB") on this matter. On September 8, 2015, FinCEN announced a settlement pursuant to which Caesars Palace agreed to an $8 million civil penalty for its violations of the Bank Secrecy Act, which penalty shall be treated as a general unsecured claim in Caesars Palace's bankruptcy proceedings. In addition, Caesars Palace agreed to conduct periodic external audits and independent testing of its AML compliance program, report to FinCEN on mandated improvements, adopt a rigorous training regime, and engage in a "look-back" for suspicious transactions. The terms of the FinCEN settlement were approved by the bankruptcy court on October 19, 2015.
CEOC and the GCB reached a settlement on the same facts as above, wherein CEC agreed to pay $1.5 million and provide to the GCB the same information that is reported to FinCEN and to resubmit its updated AML policies. On September 17, 2015, the settlement agreement was approved by the Nevada Gaming Commission. CEOC continues to cooperate with the Department of Justice in its investigation of this matter.
The Company is party to ordinary and routine litigation incidental to our business. We do not expect the outcome of any such litigation to have a material effect on our financial position, results of operations, or cash flows, as we do not believe it is reasonably possible that we will incur material losses as a result of such litigation.
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Note 7 — Stock-based Compensation
On April 9, 2014, the Board of Directors (the "Board") of the Company approved the PIP Plan, subject to approval of the PIP Plan by the Company's stockholders. The PIP Plan was approved by the Company's stockholders on May 8, 2014. The Committee administers the PIP Plan. Under the PIP Plan, the Company is authorized to grant stock options, stock appreciation rights, stock bonuses, restricted stock, performance stock, stock units, phantom stock, dividend equivalents, cash awards, rights to purchase or acquire shares or similar securities in the form of or with a value related to our common stock, to officers, employees, directors, individual consultants and advisers of the Company and its subsidiaries. The PIP Plan will terminate ten years after approval by the Board. Subject to adjustments in connection with certain changes in capitalization, the maximum number of shares of our common stock that may be delivered pursuant to awards under the PIP Plan is 3,000,000.
Restricted Stock Units
On April 9, 2014, grants of RSUs to certain eligible individuals were approved by the Committee in accordance with the PIP Plan and the grants became effective based upon the May 8, 2014 stockholder approval of the PIP Plan. For accounting purposes, the grants were determined to occur in connection with the stockholder approval of the PIP Plan. Subsequently, additional grants of RSUs to eligible individuals were approved. RSU grants which are equity-classified, measured at fair value at the date of grant, and recognized as a component of Additional paid-in capital in the Balance Sheets vest according to the following vesting schedules:
• | Five-month vesting period were vested on October 9, 2014, |
• | Three-and-one-half-year vesting period vest 25% on October 21 in each year 2014, 2015, 2016 and 2017, |
• | Four-year vesting period vest 25% on each of the first four anniversaries of the April 9 grant date, and |
• | One and a half year vesting period vest 100% on the vest date. |
In December 2014, the Company awarded 375,000 RSUs to a related party consultant under the PIP Plan. During the three-month period ended March 31, 2015, the service period for these grants was accelerated to end in July 2015. This award was equity classified and remeasured at fair value at the end of each reporting period through July 2015.
In June 2016, the Company awarded 272,976 RSUs to a related party consultant under the PIP Plan. One-third of the grant vests on each of the three anniversaries of the June grant date. This award is equity classified and remeasured at fair value at the end of each reporting period through the end of the service period.
The following is a summary of CAC's RSU activity under the PIP Plan for the year ended December 31, 2016:
Restricted Stock Units | Fair Value(1) | |||||
Outstanding at January 1, 2016 | 525,997 | $ | 12.19 | |||
Granted | 361,349 | 10.52 | ||||
Vested | (394,285 | ) | 11.13 | |||
Outstanding at December 31, 2016 | 493,061 | 11.82 | ||||
_________________________
(1) | Represents the weighted-average grant date fair value per RSU. |
The grant date fair value of RSUs is based on the quoted market price of our common stock on the date of grant. The weighted-average grant date fair value of RSUs granted during the years ended December 31, 2016, 2015 and 2014 was $10.52, $7.73 and $12.12, respectively. The fair value of RSUs vested during the years ended December 31, 2016, 2015 and 2014 was $3.8 million, $3.5 million and $1.9 million, respectively.
As of December 31, 2016, there was approximately $5.1 million of total unrecognized compensation cost related to RSUs granted under the PIP Plan, which is expected to be recognized over a weighted-average remaining period of 1.9 years using the straight-line method.
For the years ended December 31, 2016, 2015 and 2014, total compensation expense recorded in earnings for RSUs granted under the PIP Plan was $3.3 million, $4.6 million and $2.4 million, respectively. This expense was included in Operating expenses in the Statements of Operations and Comprehensive Income.
Stock Options
On October 7, 2014, certain eligible individuals were granted a total of 725,000 options to purchase shares in accordance with the PIP Plan. These options were subject to a two-year vesting period and vested 100% on the second anniversary of the effective date. Options granted under the PIP Plan expire ten years from the date of grant. These options are equity classified and measured at fair value at the date of grant, and recognized as a component of Additional paid-in capital in the Balance Sheets.
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In December 2014, CAC also granted to a related party consultant, 675,000 options to purchase shares in accordance with the PIP Plan. During the three-month period ended March 31, 2015, the service period for these grants was accelerated to July 2015. These options are equity classified and were remeasured at fair value at the end of each reporting period through July 2015.
The following is a summary of CAC's stock option activity for the year ended December 31, 2016:
Options | Weighted Average Exercise Price | Fair Value(1) | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value (in millions) | ||||||||||||
Outstanding at January 1, 2016 | 1,420,000 | $ | 9.51 | $ | 4.99 | 8.9 | $ | — | ||||||||
Exercised | (417,500 | ) | 9.71 | 5.69 | 1.1 | |||||||||||
Outstanding at December 31, 2016 | 1,002,500 | 9.43 | 4.70 | 7.8 | 4.1 | |||||||||||
Vested and expected to vest at December 31, 2016 | 1,002,500 | 9.43 | 4.70 | 7.8 | 4.1 | |||||||||||
Exercisable at December 31, 2016 | 987,500 | 9.45 | 4.73 | 7.8 | 4.0 | |||||||||||
_________________________
(1) | Represents the weighted-average grant date fair value per option. |
There were no stock options granted during the year ended December 31, 2016. The weighted-average grant date fair value of stock options granted during the years ended December 31, 2015 and 2014 was $3.10 and $5.02, respectively. The weighted-average grant date fair value of stock options exercised during the year ended December 31, 2016 was $5.69. There were no stock options exercised during the year ended December 31, 2015 and no stock options vested during the year ended December 31, 2014.
As CAC does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term, it was calculated through the Black-Scholes model assuming that the options will be disposed of either post-vesting but prior to a liquidity event, at the date of a liquidity event or after a liquidity event. Expected volatility was based on the historical volatility of the common stock of CAC's competitor peer group for a period approximating the expected life. CAC has no current intention to pay dividends on its common stock. The risk-free interest rate within the expected term was based on the U.S. Treasury yield curve in effect at the time of grant. There were no stock option valuations required during the year ended December 31, 2016. Valuation assumptions for CAC's stock options used in the Black-Scholes model to estimate fair value during the years ended December 31, 2015 and 2014 were as follows:
Year Ended December 31, 2015 | Year Ended December 31, 2014 | ||
Expected volatility | 39.9% - 45.7% | 45.0% - 49.7% | |
Weighted-average volatility | 45.5% | 47.2% | |
Expected dividend yield | —% | —% | |
Expected term (in years) | 5.8 - 9.4 | 5.5 - 10.0 | |
Risk-free interest rate | 1.8% - 2.3% | 1.9% - 2.4% | |
As of December 31, 2016, there is less than $0.1 million of total unrecognized compensation expense related to stock options granted under the PIP Plan, which is expected to be recognized over a weighted-average period of 2.4 years.
During the years ended December 31, 2016, 2015 and 2014, total compensation expense recorded in earnings for stock options was $1.1 million, $3.5 million and $0.4 million, respectively. This expense was included in Operating expenses in the Statements of Operations and Comprehensive Income.
During 2016, 2015 and 2014 RSUs and options under the PIP Plan and under the Equity Plan (as defined in Note 9 — Related Party Transactions) vested. Pursuant to these vesting events and any related option exercises, CAC issued approximately 1,116,000 shares, 955,000 shares and 615,000 shares, respectively. In accordance with the CGP Operating Agreement, CGP LLC issued an equivalent number of Class A voting units to CAC, such that the number of shares of CAC stock outstanding equals the number of Class A voting units of CGP LLC owned by CAC. CAC's economic ownership of CGP LLC was 39.0% at December 31, 2016.
Note 8 — Supplemental Cash Flow Information
Significant non-cash transactions for the year ended December 31, 2016 included (1) $820.6 million in income from our equity method investment in CGP LLC, (2) $26.4 million of fees and expenses paid directly by CGP LLC that were incurred by CAC and also accounted for as a non-cash distribution from CGP LLC, (3) estimated net $284.9 million tax provision related to the gain on the Sale to be paid by CGP LLC on behalf of CAC offset by existing prepaid taxes previously recorded at CAC
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and (4) CAC's contribution of 363,077 shares of CAC common stock to CGP LLC on October 21, 2016 issued pursuant to the Equity Plan (as defined in Note 9 — Related Party Transactions) and valued at $4.4 million.
Significant non-cash transactions for the year ended December 31, 2015 included (1) $97.4 million in income from our equity method investment in CGP LLC, (2) $24.9 million of fees and expenses paid directly by CGP LLC that were incurred by CAC and accounted for as a non-cash distribution from CGP LLC and (3) CAC's contribution of 648,046 shares of CAC common stock to CGP LLC on October 21, 2015 issued pursuant to the Equity Plan and valued at $4.6 million.
Significant non-cash transactions for the year ended December 31, 2014 included (1) $159.7 million related to the distribution of the CEOC notes from CGP LLC to CAC which was accounted for as a non-cash distribution from CGP LLC to CAC thereby reducing CAC's investment in CGP LLC and (2) $79.4 million in income from our equity method investment in CGP LLC, (3) $36.3 million of fees and expenses paid directly by CGP LLC that were incurred by CAC and also accounted for as a non-cash distribution from CGP LLC and (4) CAC's contribution of 521,218 shares of CAC common stock to CGP LLC on October 21, 2014 issued pursuant to the Equity Plan and valued at $4.8 million.
CAC's expenses incurred in the normal course of business are expected to be paid by CGP LLC on behalf of CAC in accordance with the CGP Operating Agreement.
During the year ended December 31, 2016, CGP LLC made a payment of $240.0 million toward CAC's estimated tax liability for the sale of the SMG Business. During the year ended December 31, 2015, CGP LLC did not make tax payments on behalf of CAC. During the year ended December 31, 2014, CGP LLC paid $12.7 million in tax on behalf of CAC which was accounted for as distributions from CGP LLC to CAC.
There was no interest expense incurred or cash paid for interest during the years ended December 31, 2016, 2015 and 2014.
Note 9 — Related Party Transactions
Formation of Caesars Enterprise Services, LLC
Caesars Enterprise Services, LLC, a services joint venture among CEOC, CERP, a subsidiary of Caesars Entertainment, and CGPH, (together the "Members" and each a "Member") manages CGP LLC's properties and provides CGP LLC with access to Caesars Entertainment's management expertise, intellectual property, back office services and Total Rewards loyalty program. On October 1, 2014, CES began operations in Nevada, Louisiana and certain other jurisdictions in which regulatory approval had been received or was not required, including through the commencement of direct employment by CES of certain designated enterprise-wide employees. CES also employs personnel under each property's corresponding property management agreement. Operating expenses are allocated to each Member with respect to their respective properties serviced by CES in accordance with historical allocation methodologies, subject to annual revisions and certain prefunding requirements. Corporate expenses that are not allocated to the properties directly are allocated by CES to CEOC, CERP, and CGPH according to their allocation percentages (initially 70.0%, 24.6% and 5.4% respectively), subject to annual review. As a result of an annual review undertaken in September 2015 but effective July 2015, the allocation percentages of CES members, CEOC, CERP and CGPH were revised to 65.4%, 21.8% and 12.8%, respectively. CGPH notified CES, CEOC and CERP that it objected to the September 2015 expense allocation but would pay the revised expense allocations under protest and reserved all rights. As a result of an annual review undertaken in August 2016 but effective January 2017, the allocation percentages for CEOC, CERP and CGPH were revised to 62.9%, 22.9% and 14.2%, respectively. CGPH notified CES, CEOC and CERP that it objects to the August 2016 expense allocation but will pay the revised expense allocations under protest and reserves all rights.
Omnibus License and Enterprise Services Agreement
On May 20, 2014, the Members entered into an Omnibus License and Enterprise Services Agreement (the "Omnibus Agreement"), which granted licenses to the Members and certain of their affiliates in connection with the formation of CES. Initial contributions by the Members included a $22.5 million cash payment by CGP LLC on behalf of CGPH. Pursuant to a capital call during the fourth quarter of 2014, CGP LLC contributed an additional $0.1 million on behalf of CGPH. Pursuant to capital calls during the years ended December 31, 2016 and 2015, CGPH contributed an additional $3.8 million and $3.9 million, respectively, to CES. During the year ended December 31, 2016, CGPH's investment in CES decreased by $1.2 million due to the allocation of depreciation related to assets in the investment. On October 1, 2014 and January 1, 2015, the Members transitioned certain executives and employees to CES and the services of such employees were available as part of CES's provision of services to the Members and certain of their affiliates that own properties that require CES services under the Omnibus Agreement.
Under the Omnibus Agreement, CEOC, Caesars License Company, LLC ("CLC"), Caesars World, Inc. ("CWI"), CGPH and certain of their subsidiaries that granted CES a non-exclusive, irrevocable, world-wide, royalty-free license in and to all intellectual property owned or used by such licensors, including all intellectual property (a) currently used, or contemplated to be used, in connection with the properties owned by the Members and their respective affiliates, including any and all intellectual
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property related to the Total Rewards program, and (b) necessary for the provision of services contemplated by the Omnibus Agreement and by the applicable management agreement for any such property (collectively, the "Enterprise Assets").
CES granted to the properties owned or controlled by the Members, and their respective affiliates, non-exclusive licenses to the Enterprise Assets. CES granted to CEOC, CLC, CWI, CGPH and the properties owned or controlled by the Members licenses to any intellectual property that CES develops or acquires in the future that is not a derivative of the intellectual property licensed to it. CES also granted to CEOC, CLC, CWI and CGPH a non-exclusive license to intellectual property specific to the properties controlled by CGPH, CERP and their subsidiaries for any uses consistent with the uses made by CEOC, CLC, and CWI with respect to such intellectual property prior to the date of the Omnibus Agreement.
Transaction Fees and Expenses
For the years ended December 31, 2016, 2015 and 2014, CGP LLC paid approximately $14.5 million, $5.8 million and $14.3 million, respectively, on CAC's behalf primarily for legal and accounting fees and expenses incurred by CAC in connection with various transactions and potential transactions such as acquisitions and expenses associated with the Merger Agreement between CAC and CEC. These payments are accounted for as non-cash distributions from CGP LLC by CAC thereby reducing CAC's investment in CGP LLC.
Share-based Payments to Non-employees of CAC or CGP LLC
On April 9, 2014, our Board approved the CAC Equity-Based Compensation Plan for CEC Employees (the "Equity Plan"). Under the Equity Plan, CEC is authorized to grant stock options, stock appreciation rights, stock bonuses, restricted stock, performance stock, stock units, phantom stock, dividend equivalents, cash awards, rights to purchase or acquire shares or similar securities in the form of or with a value related to our common stock to officers, employees, directors, individual consultants and advisers of CEC and its subsidiaries. The Equity Plan will terminate on April 9, 2024. Subject to adjustments in connection with certain changes in capitalization, the maximum value of the shares of our common stock that may be delivered pursuant to awards under the Equity Plan is $25.0 million.
On May 8, 2014, CEC granted awards to officers, employees, directors, individual consultants and advisers of CEC and its subsidiaries in accordance with the Equity Plan in order to reward and provide incentive for services provided in their capacity, promote the success of CGP LLC, and more closely align the interests of such individuals with those of the stockholders of the Company. Awards under this plan vested one-third on each of October 21, 2014, 2015 and 2016. Expense associated with the vesting of such awards was recorded as management fee expense by CGP LLC, totaling $1.9 million, $11.9 million and $9.9 million for the years ended December 31, 2016, 2015 and 2014, respectively. As the service period for a portion of the awards was accelerated to end in July 2015, management fee expense also included expenses associated with the service period acceleration. Upon issuance of shares pursuant to this plan, such shares were contributed to CGP LLC by CAC as additional investment into that entity, at which time CGP LLC settled its management fee obligation with CEC and its subsidiaries through a distribution of such shares to CEC. Also upon issuance of shares pursuant to this plan, CGP LLC issued an equivalent number of voting units in CGP LLC and distributed those units to CAC. As CAC received voting units in CGP LLC in exchange for the shares of CAC issued pursuant to this plan, there was no dilutive impact to CAC's EPS (see Note 4 — Stockholders' Equity and Earnings Per Share).
On October 21, 2014, 521,218 CAC shares valued at $4.8 million were issued pursuant to the Equity Plan. On October 21, 2015, 648,046 CAC shares valued at $4.6 million were issued pursuant to the Equity Plan. On October 21, 2016, 363,077 CAC shares valued at $4.4 million were issued pursuant to the Equity Plan. These shares were contributed to CGP LLC by CAC as an additional investment into CGP LLC, at which time CGP LLC settled its management fee obligation with CEC and its subsidiaries through a distribution of such shares to CEC. CGP LLC issued an equivalent number of voting units in CGP LLC to CAC.
Stock-based Compensation Granted to Related Parties
In June 2016, CAC granted RSU awards to a related party consultant under the PIP Plan. During the year ended December 31, 2016, $0.6 million of expense was recognized related to these grants.
In December 2014, CAC granted RSU awards and options to a related party consultant under the PIP Plan. During the three month period ended March 31, 2015, the service period for these grants was accelerated to end in July 2015. The vesting period remained unchanged. During the years ended December 31, 2015 and 2014, $4.4 million and $0.1 million expense was recognized related to these grants, respectively. As the service period ended on July 2015, there was no expense recognized for these grants during the year ended December 31, 2016.
In May 2014, CAC granted RSUs to an employee. During the three month period ended March 31, 2016, this individual terminated employment and became a related party consultant. The vesting period and service period remained unchanged. Expense recognized for the RSU grants during the year ended December 31, 2016 was immaterial.
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Investment in Notes from Related Party
CAC owns $137.5 million in aggregate principal amount of 6.50% CEOC Notes, which matured on June 1, 2016, and $151.4 million in aggregate principal amount of 5.75% CEOC Notes, maturing October 1, 2017. Both of these notes were included as a reduction of Additional paid-in capital in the Balance Sheets and Statements of Stockholders' Equity along with interest receivable at the distribution date. These notes are held at the distributed value with no subsequent adjustments such as fair value adjustments or interest receivable. Pursuant to the terms of the Amended Merger Agreement, CAC does not expect to collect principal or interest receivable from these notes. For accounting purposes, the fair value of the distribution of these notes from CGP LLC reduced the deployed capital upon which the minimum guaranteed return to CAC has been calculated prospectively from the August 6, 2014 distribution date.
Note 10 — Quarterly Results of Operations (Unaudited)
(In millions, except per share data) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||
2016 | |||||||||||||||
Equity method investment income | $ | 24.4 | $ | 24.4 | $ | 672.5 | (a) | $ | 99.3 | ||||||
Loss from operations | (6.6 | ) | (7.3 | ) | (9.3 | ) | (6.8 | ) | |||||||
Net income | 9.2 | 8.5 | 521.9 | (a) | 79.5 | ||||||||||
Earnings per share - basic | 0.07 | 0.06 | 3.80 | 0.58 | |||||||||||
Earnings per share - diluted | 0.07 | 0.06 | 3.78 | 0.57 | |||||||||||
2015 | |||||||||||||||
Equity method investment income | $ | 24.2 | $ | 24.4 | $ | 24.4 | $ | 24.4 | |||||||
Loss from operations | (7.1 | ) | (8.1 | ) | (9.2 | ) | (6.8 | ) | |||||||
Net income | 8.7 | 7.8 | 7.0 | 8.5 | |||||||||||
Earnings per share - basic and diluted | 0.06 | 0.06 | 0.05 | 0.06 | |||||||||||
_________________________
(a) | Equity method investment income and Net income includes an increase in CAC's contractual claim on CGP LLC's accounting balance sheet as a result of the sale of the SMG Business in September 2016. |
Note 11 — Subsequent Events
Amendment to the CGP Operating Agreement
On February 13, 2017, CAC, CEC and certain subsidiaries of CEC (the "CEC Members") entered into the third amendment to the CGP Operating Agreement to, among other things, (a) provide for the tax treatment of the allocations of net profits and net losses of the capital accounts of CGP LLC regarding certain non-pro rata distributions made to CAC and the CEC Members pursuant to the CGP Operating Agreement Amendment and (b) permit a $35 million special distribution to the CEC Members to satisfy certain payment obligations as set forth in the CIE Proceeds Agreement.
Acceleration of CAC Equity Awards in connection with Proposed Merger
In connection with the Proposed Merger and pursuant to the permitted authority under the PIP Plan, the Committee has approved the accelerated vesting of all of the outstanding options and RSUs of CAC held by Mitch Garber, Craig Abrahams and Michael Cohen, effective immediately prior to the Merger Closing.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
(a) | Disclosure Controls and Procedures |
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized, and reported within the specified time periods and accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
Our management, with the participation of our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Exchange Act) as of December 31, 2016. Based on these evaluations, our CEO and CFO concluded that our disclosure controls and procedures required by paragraph (b) of Rules 13a-15 or 15d-15 were effective as of December 31, 2016, at a reasonable assurance level.
(b) | Management's Report on Internal Control Over Financial Reporting |
Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, misstatements due to error or fraud may not be prevented or detected on a timely basis.
Our management performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2016, utilizing the criteria discussed in the "Internal Control - Integrated Framework (2013)" issued by the Committee of Sponsoring Organizations of the Treadway Commission. The objective of this assessment was to determine whether our internal control over financial reporting was effective as of December 31, 2016. Based on management's assessment, we have concluded that our internal control over financial reporting was effective as of December 31, 2016.
(c) | Changes in Internal Control over Financial Reporting |
We have commenced several transformation initiatives, including implementing new general ledger software to automate and simplify our business processes. These are long-term initiatives that we believe will enhance our internal control over financial reporting due to increased automation and integration of related processes. We will continue to monitor and evaluate our internal control over financial reporting throughout the transformation.
There have not been any other changes in our internal control over financial reporting during the three months ended December 31, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
Amendment to the CGP Operating Agreement
On February 13, 2017, CAC, CEC and certain subsidiaries of CEC (the "CEC Members") entered into the third amendment to the CGP Operating Agreement to, among other things, (a) provide for the tax treatment of the allocations of net profits and net losses of the capital accounts of CGP LLC regarding certain non-pro rata distributions made to CAC and the CEC Members pursuant to the CGP Operating Agreement, as amended on September 23, 2016 and October 7, 2016 and by the third amendment referred to herein (such amendments, the "CGP Operating Agreement Amendment") and (b) permit a $35 million special distribution to the CEC Members to satisfy certain payment obligations as set forth in the CIE Proceeds Agreement. The foregoing description of the third amendment to the CGP Operating Agreement does not purport to be complete and is qualified in its entirety by reference to the third amendment to the CGP Operating Agreement, which is filed as Exhibit 10.58 hereto and incorporated herein by reference.
Acceleration of CAC Equity Awards in connection with Proposed Merger
In connection with the Proposed Merger and pursuant to the permitted authority under the Caesars Acquisition Company 2014 Performance Incentive Plan, the Human Resources Committee of the Board of Directors of Caesars Acquisition Company has approved the accelerated vesting of all of the outstanding options and restricted stock units of CAC held by Mitch Garber, Craig Abrahams and Michael Cohen, effective immediately prior to the Merger Closing.
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PART III
Item 10. Directors, Executive Officers, and Corporate Governance.
We expect to furnish the information regarding Directors, Executive Officers and Corporate Governance in an amendment to this Form 10-K to be filed with the SEC.
Item 11. Executive Compensation.
We expect to furnish the information regarding Executive Compensation in an amendment to this Form 10-K to be filed with the SEC.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
We expect to furnish the information regarding Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters in an amendment to this Form 10-K to be filed with the SEC.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
We expect to furnish the information regarding Certain Relationships and Related Transactions, and Director Independence in an amendment to this Form 10-K to be filed with the SEC.
Item 14. Principal Accounting Fees and Services.
We expect to furnish the information regarding Principal Accounting Fees and Services in an amendment to this Form 10-K to be filed with the SEC.
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) Documents filed as part of this report
1. | Financial statements of the Company (including related notes to financial statements) filed as part of this report are listed below: |
• | Report of Independent Registered Public Accounting Firm. |
• | Balance Sheets as of December 31, 2016 and 2015. |
• | Statements of Operations and Comprehensive Income for the years ended December 31, 2016, 2015 and 2014. |
• | Statements of Stockholders' Equity for the years ended December 31, 2016, 2015 and 2014. |
• | Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014. |
2. | Financial statement schedules of the Company as follows: |
• | Schedules I through V are not applicable and have therefore been omitted. |
• | Since October 21, 2013, we have had an investment in Caesars Growth Partners, LLC that we account for using the equity method of accounting. The financial statements as of December 31, 2016 and 2015 and for the years ended December 31, 2016, 2015 and 2014 of Caesars Growth Partners, LLC are filed as Exhibit 99.1 hereto and incorporated herein by reference in this Form 10-K pursuant to Rule 3-09 of Regulation S-X. |
Financial statement schedules of Caesars Growth Partners, LLC as follows:
• | Schedule I and III through V are not applicable and have therefore been omitted. |
• | Schedule II - Combined and Consolidated Valuation and Qualifying Accounts for the years ended December 31, 2016, 2015 and 2014. |
3. | Exhibits |
Incorporated by Reference | ||||||||||||
Exhibit Number | Exhibit Description | Filed Herewith | Form | Period Ending | Exhibit | Filing Date | ||||||
2.1 | Transaction Agreement, dated March 1, 2014, by and among the Caesars Entertainment Corporation, Caesars Entertainment Operating Company, Inc., Caesars License Company, LLC, Harrah's New Orleans Management Company, Corner Investment Company, LLC, 3535 LV Corp., Parball Corporation, JCC Holding Company II, LLC, Caesars Acquisition Company and Caesars Growth Partners, LLC. | — | 8-K | — | 2.1 | 3/3/2014 | ||||||
2.2 | First Amendment to Transaction Agreement, dated May 5, 2014, by and among the Caesars Entertainment Corporation, Caesars Entertainment Operating Company, Inc., Caesars License Company, LLC, Harrah's New Orleans Management Company, Corner Investment Company, LLC, 3535 LV Corp., Parball Corporation, JCC Holding Company II, LLC, Caesars Acquisition Company, Caesars Growth Partners, LLC. | — | 8-K | — | 2.1 | 5/6/2014 | ||||||
2.3 | Agreement and Plan of merger, dated as of December 21, 2014, between Caesars Acquisition Company and Caesars Entertainment Corporation. | — | 8-K | — | 2.1 | 12/22/2014 | ||||||
2.4 | Amended and Restated Agreement and Plan of Merger, dated as of July 9, 2016, between Caesars Acquisition Company and Caesars Entertainment Corporation. | — | 8-K | — | 2.1 | 7/11/2016 | ||||||
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Incorporated by Reference | ||||||||||||
Exhibit Number | Exhibit Description | Filed Herewith | Form | Period Ending | Exhibit | Filing Date | ||||||
2.5 | Stock Purchase Agreement, dated as of July 30, 2016, by and among Caesars Interactive Entertainment, Inc., Alpha Frontier Limited, Caesars Growth Partners, LLC and CIE Growth, LLC. | — | 8-K | — | 2.1 | 8/1/2016 | ||||||
3.1 | First Amended and Restated Certificate of Incorporation of Caesars Acquisition Company, dated October 21, 2013. | — | 10-Q | 9/30/2013 | 3.1 | 11/20/2013 | ||||||
3.2 | Amended and Restated Bylaws of Caesars Acquisition Company, adopted October 21, 2013. | — | 10-Q | 9/30/2013 | 3.2 | 11/20/2013 | ||||||
4.1 | Indenture, dated as of April 17, 2014, among Caesars Growth Properties Holdings, LLC, Caesars Growth Properties Finance, Inc. and U.S. Bank National Association, as trustee, relating to the 9.375% Second-Priority Senior Secured Notes due 2022. | — | 8-K | — | 4.1 | 4/17/2014 | ||||||
4.2 | First Supplemental Indenture, dated as of April 25, 2014, among Caesars Growth Properties Holdings, LLC, Caesars Growth Properties Finance, Inc., the guarantors party thereto and U.S. Bank National Association, as trustee. | — | 10-K | 12/31/2015 | 4.2 | 2/26/2016 | ||||||
4.3 | Joinder Agreement to Registration Rights Agreement, dated as of April 25, 2014, by and among Caesars Growth Properties Holdings, LLC, Caesars Growth Properties Finance, Inc. and the other parties thereto. | — | 10-K | 12/31/2015 | 4.3 | 2/26/2016 | ||||||
4.4 | Second Supplemental Indenture, dated as of March 30, 2015, among Caesars Growth Properties Holdings, LLC, Caesars Growth Properties Finance, Inc., the guarantors party thereto and U.S. Bank National Association, as trustee. | — | 10-K | 12/31/2015 | 4.4 | 2/26/2016 | ||||||
4.5 | Registration Rights Agreement, dated as of April 17, 2014, by and among Caesars Growth Properties Holdings, LLC, Caesars Growth Properties Finance, Inc. and Citigroup Global Markets Inc., as representative of the initial purchasers. | — | 8-K | — | 4.2 | 4/17/2014 | ||||||
10.1 | Amended and Restated Limited Liability Company Agreement of Caesars Growth Partners, LLC, dated as of October 21, 2013. | — | 8-K | — | 10.2 | 10/24/2013 | ||||||
10.2 | Amended and Restated Caesars Interactive Entertainment, Inc. Management Investor Rights Agreement, dated November 22, 2010. | — | S-1/A | — | 10.5 | 8/12/2013 | ||||||
10.3 | First Amendment to Amended and Restated Caesars Interactive Entertainment, Inc. Management Investor Rights Agreement, dated as of September 28, 2013. | — | S-1/A | — | 10.24 | 10/4/2013 | ||||||
10.4 | Restructuring Support Agreement, dated as of June 12, 2016, among Caesars Entertainment Operating Company, Inc., on behalf of itself and each of the debtors in the Chapter 11 Cases, Caesars Acquisition Company, and Caesars Entertainment Corporation. | — | 8-K | — | 10.1 | 6/13/2016 | ||||||
97
Incorporated by Reference | ||||||||||||
Exhibit Number | Exhibit Description | Filed Herewith | Form | Period Ending | Exhibit | Filing Date | ||||||
10.5 | Voting Agreement, dated as of July 9, 2016, among Caesars Acquisition Company, Hamlet Holdings LLC and the Holders party thereto. | — | 8-K | — | 10.1 | 7/11/2016 | ||||||
10.6 | Amended and Restated Restructuring Support Agreement, dated as of July 9, 2016, between Caesars Acquisition Company and Caesars Entertainment Operating Company, Inc. | — | 8-K | — | 10.2 | 7/11/2016 | ||||||
†10.7 | Caesars Interactive Entertainment, Inc. Liquidity Plan. | — | 8-K | — | 10.1 | 2/14/2014 | ||||||
†10.8 | Form of Indemnification Agreement between Caesars Acquisition Company and its directors and officers. | — | S-1/A | — | 10.14 | 10/11/2013 | ||||||
†10.9 | Caesars Acquisition Company 2014 Performance Incentive Plan. | — | 8-K | — | 10.1 | 4/16/2014 | ||||||
†10.10 | Form Nonqualified Option Award Agreement under the Caesars Acquisition Company 2014 Performance Incentive Plan. | — | 8-K | — | 10.2 | 4/16/2014 | ||||||
†10.11 | Form Restricted Stock Award Agreement under the Caesars Acquisition Company 2014 Performance Incentive Plan. | — | 8-K | — | 10.3 | 4/16/2014 | ||||||
†10.12 | Form Restricted Stock Unit Award Agreement under the Caesars Acquisition Company 2014 Performance Incentive Plan. | — | 8-K | — | 10.4 | 4/16/2014 | ||||||
†10.13 | Caesars Interactive Entertainment, Inc. Amended and Restated Management Equity Incentive Plan, dated October 16, 2015. | — | 8-K | — | 10.1 | 10/23/2015 | ||||||
†10.14 | Caesars Interactive Entertainment, Inc. Form of Performance Stock Option Agreement. | — | 8-K | — | 10.2 | 10/23/2015 | ||||||
†10.15 | Caesars Interactive Entertainment, Inc. Form of Restricted Stock Unit Award Agreement. | — | 10-K | — | 10.1 | 2/26/2016 | ||||||
†10.16 | Employment Agreement, dated August 12, 2012, between Caesars Interactive Entertainment, Inc. and Mitch Garber. | — | 10-K | 12/31/2013 | 10.6 | 3/28/2014 | ||||||
†10.17 | Tax Reimbursement and Indemnity Agreement, dated as of September 23, 2016, by and between Caesars Interactive Entertainment, Inc. and Mitchell Garber. | — | 8-K | — | 10.2 | 9/26/2016 | ||||||
†10.18 | Employment Agreement, dated as of June 15, 2012, between Caesars Interactive Entertainment, Inc. and Craig Abrahams. | — | S-1/A | — | 10.2 | 8/12/2013 | ||||||
†10.19 | Employment Agreement, dated as of September 30, 2016, by and between Caesars Acquisition Company and Craig Abrahams. | — | 8-K | — | 10.1 | 9/30/2016 | ||||||
†10.20 | Tax Reimbursement and Indemnity Agreement, dated as of September 23, 2016, by and between Caesars Interactive Entertainment, Inc. and Craig Abrahams. | — | 8-K | — | 10.3 | 9/26/2016 | ||||||
†10.21 | Employment Agreement, dated as of April 4, 2014, by and between Caesars Interactive Entertainment, Inc. and Michael D. Cohen. | — | 10-K | 12/31/2014 | 10.13 | 3/16/2015 | ||||||
98
Incorporated by Reference | ||||||||||||
Exhibit Number | Exhibit Description | Filed Herewith | Form | Period Ending | Exhibit | Filing Date | ||||||
†10.22 | Employment Agreement, dated as of September 30, 2016, by and between Caesars Acquisition Company and Michael Cohen. | — | 8-K | — | 10.2 | 9/30/2016 | ||||||
†10.23 | Form of Amended and Restated Indemnification Agreement between Caesars Acquisition Company and Michael D. Cohen. | — | 10-Q | 9/30/2016 | 10.11 | 11/7/2016 | ||||||
10.24 | Shared Services Agreement, dated as of May 1, 2009, among Caesars Entertainment Operating Company, Inc., Caesars Interactive Entertainment, Inc. and HIE Holdings, Inc. | — | S-1/A | — | 10.6 | 8/12/2013 | ||||||
10.25 | Cross Marketing and Trademark License Agreement, dated as of September 29, 2011, among Caesars Entertainment Corporation, Caesars Entertainment Operating Company, Inc., certain other licensors party thereto and Caesars Interactive Entertainment, Inc. | — | S-1/A | — | 10.7 | 8/12/2013 | ||||||
†10.26 | Management Agreement, dated as of February 19, 2010, between PHW Las Vegas LLC and PHW Manager, LLC. | — | S-1/A | — | 10.9 | 8/12/2013 | ||||||
10.27 | Second Amended Credit Agreement, dated November 29, 2011, between Caesars Interactive Entertainment, Inc. and Caesars Entertainment Corporation. | — | S-1/A | — | 10.12 | 8/12/2013 | ||||||
10.28 | Transaction Agreement, dated as of October 21, 2013, among Caesars Acquisition Company, Caesars Growth Partners, LLC, Caesars Entertainment Corporation, HIE Holdings, Inc., Harrah's BC, Inc., PHW Las Vegas, LLC, PHW Manager, LLC, Caesars Baltimore Acquisition Company, LLC and Caesars Baltimore Management Company, LLC. | — | 8-K | — | 10.1 | 10/24/2013 | ||||||
10.29 | Credit Agreement, dated as of July 2, 2013, by and among CBAC Borrower, LLC, the lenders party thereto from time to time and Wells Fargo Gaming Capital, LLC, as administrative agent and collateral agent. | — | S-1/A | — | 10.15 | 8/12/2013 | ||||||
10.30 | Credit Agreement, dated as of July 2, 2013, by and among CBAC Borrower, LLC, the lenders party hereto from time to time, Deutsche Bank AG New York Branch, as administrative agent for the lenders, and Deutsche Bank Trust Company Americas, as collateral agent for the lenders, and other parties party thereto. | — | S-1/A | — | 10.24 | 8/12/2013 | ||||||
10.31 | Adoption Agreement, dated as of March 30, 2012, among Rock Gaming Interactive LLC, Caesars Interactive Entertainment, Inc., HIE Holdings, Inc. and Caesars Entertainment Corporation. | — | S-1/A | — | 10.16 | 8/12/2013 | ||||||
10.32 | Trademark License Agreement, dated as of September 1, 2011, by and between Caesars Interactive Entertainment, Inc. and Caesars Entertainment Corporation. | — | S-1/A | — | 10.18 | 8/12/2013 | ||||||
99
Incorporated by Reference | ||||||||||||
Exhibit Number | Exhibit Description | Filed Herewith | Form | Period Ending | Exhibit | Filing Date | ||||||
10.33 | Trademark Sublicense Agreement, dated as of September 1, 2011, by and between Caesars Tournament, LLC and Caesars Entertainment Corporation. | — | S-1/A | — | 10.19 | 8/12/2013 | ||||||
†10.34 | Management Agreement, dated as of October 23, 2012, made and entered into by and between CBAC Gaming, LLC, a Delaware limited liability company, or its successors and permitted assigns and Caesars Baltimore Management Company, LLC, a Delaware limited liability company. | — | 10-K | 12/31/2014 | 10.24 | 3/16/2015 | ||||||
10.35 | Omnibus Amendment, dated September 30, 2013, by and among CR Baltimore Holdings, LLC, a Delaware limited liability company, CBAC Gaming, LLC, a Delaware limited liability company, CBAC Borrower, LLC, a Delaware limited liability company, and Caesars Baltimore Management Company, LLC, a Delaware limited liability company, CVPR Gaming Holdings, LLC, a Maryland limited liability company, STRON-MD Limited Partnership, a Delaware limited partnership and PRT Two LLC, a Maryland limited liability company. | — | 10-K | 12/31/2014 | 10.25 | 3/16/2015 | ||||||
†10.36 | Management Services Agreement, dated as of October 21, 2013, among Caesars Acquisition Company, Caesars Growth Partners, LLC and Caesars Entertainment Operating Company, Inc. | — | 8-K | — | 10.3 | 10/24/2013 | ||||||
†10.37 | Management Agreement, dated May 5, 2014, by and between The Quad Manager, LLC, 3535 LV NewCo, LLC, and solely for purposes of Article VII and Sections 16.1.2, 17.5.5, 17.7.3, 17.7.4, 17.7.5, 18.3 and 19.2, Caesars License Company, LLC. | — | 8-K | — | 10.2 | 5/6/2014 | ||||||
†10.38 | Management Agreement, dated May 5, 2014, by and between Cromwell Manager, LLC, Corner Investment Company, LLC, and solely for purposes of Article VII and Sections 16.1.2, 17.5.5, 17.7.3, 17.7.4, 17.7.5, 18.3 and 19.2, Caesars License Company, LLC. | — | 8-K | — | 10.1 | 5/6/2014 | ||||||
†10.39 | Management Agreement, dated May 5, 2014, by and between Bally's Las Vegas Manager, LLC, Parball NewCo, LLC, and solely for purposes of Article VII and Sections 16.1.2, 17.5.5, 17.7.3, 17.7.4, 17.7.5, 18.3 and 19.2, Caesars License Company, LLC. | — | 8-K | — | 10.3 | 5/6/2014 | ||||||
†10.40 | Management Agreement, dated as of May 20, 2014, by and between Harrah's New Orleans Management Company, Jazz Casino Company, L.L.C., and solely for purposes of Article VII and Sections 16.1.2, 17.5.5, 17.7.3, 17.7.4, 17.7.5, 18.3 and 19.2, Caesars License Company, LLC. | — | 8-K | — | 10.1 | 5/21/2014 | ||||||
100
Incorporated by Reference | ||||||||||||
Exhibit Number | Exhibit Description | Filed Herewith | Form | Period Ending | Exhibit | Filing Date | ||||||
10.41 | Omnibus License and Enterprise Services Agreement, dated as of May 20, 2014, by and among Caesars Enterprise Services, LLC, Caesars Entertainment Operating Company, Inc., Caesars Entertainment Resort Properties LLC and Caesars Growth Properties Holdings, LLC. | — | 8-K | — | 2.1 | 5/21/2014 | ||||||
10.42 | Registration Rights Agreement, dated as of October 21, 2013, among Caesars Acquisition Company, Caesars Growth Partners, LLC and certain subsidiaries of Caesars Entertainment Corporation. | — | 8-K | — | 10.4 | 10/24/2013 | ||||||
10.43 | Registration Rights Agreement, dated as of October 21, 2013, between Caesars Entertainment Corporation and Caesars Acquisition Company. | — | 8-K | — | 10.5 | 10/24/2013 | ||||||
10.44 | Registration Rights and Cooperation Agreement by and between Caesars Acquisition Company and Caesars Entertainment Operating Company, Inc., dated as of August 6, 2014. | — | 8-K | — | 10.1 | 08/07/14 | ||||||
10.45 | Note Purchase Agreement, dated May 5, 2014, by and among Caesars Entertainment Operating Company, Inc., Caesars Growth Partners, LLC and Caesars Growth Bonds, LLC. | — | 8-K | — | 10.5 | 5/6/2014 | ||||||
10.46 | Credit Agreement, dated November 2, 2012, by and among Caesars Entertainment Corporation, Corner Investment Propco, LLC, the lenders party thereto and Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent. | — | 8-K | — | 10.6 | 5/6/2014 | ||||||
10.47 | Irrevocable Proxy, dated October 21, 2013, among Apollo Hamlet Holdings, LLC, Apollo Hamlet Holdings B, LLC, TPG Hamlet Holdings, LLC, TPG Hamlet Holdings B, LLC, Co-Invest Hamlet Holdings, Series LLC and Co-Invest Hamlet Holdings B, LLC. | — | 10-K | 12/31/2013 | 10.24 | 3/28/2014 | ||||||
10.48 | Omnibus Voting Agreement, dated as of October 21, 2013, among Apollo Hamlet Holdings, LLC, Apollo Hamlet Holdings B, LLC, TPG Hamlet Holdings, LLC, TPG Hamlet Holdings B, LLC, Co-Invest Hamlet Holdings, Series LLC, Co-Invest Hamlet Holdings B, LLC, Hamlet Holdings LLC, Caesars Entertainment Corporation and Caesars Acquisition Company. | — | 8-K | — | 10.6 | 10/24/2013 | ||||||
10.49 | Tax Matters Agreement, dated as of October 21, 2013, by and among Caesars Entertainment Corporation, a Delaware corporation, and Caesars Interactive Entertainment, Inc., a Delaware corporation, and all of its direct and indirect subsidiaries. | — | 10-Q | 9/30/2013 | 10.9 | 11/20/2013 | ||||||
101
Incorporated by Reference | ||||||||||||
Exhibit Number | Exhibit Description | Filed Herewith | Form | Period Ending | Exhibit | Filing Date | ||||||
10.50 | First Lien Credit Agreement, dated as of May 8, 2014, among Caesars Growth Properties Parent, LLC ("Parent"), the Borrower, the lenders party thereto, Credit Suisse AG, Cayman Islands Branch, as Administrative Agent, and Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc., Deutsche Bank Securities Inc.,UBS Securities LLC, J.P Morgan Securities LLC, Morgan Stanley & Co. LLC, Macquarie Capital (USA) Inc. and Nomura Securities International, Inc., as Co-Lead Arrangers and Bookrunners. | — | 8-K | — | 10.2 | 5/9/2014 | ||||||
10.51 | Second Lien Intercreditor Agreement, dated as of May 20, 2014, by and among Credit Suisse AG, Cayman Islands Branch, as credit agreement agent and U.S. Bank National Association, second priority agent. | — | 8-K | — | 10.2 | 5/21/2014 | ||||||
10.52 | Collateral Agreement (First Lien), dated as of May 20, 2014, by and among Caesars Growth Properties Holdings, LLC, as borrower, Caesars Growth Properties Finance, Inc., PHWLV, LLC, TSP Owner LLC, Caesars Growth Cromwell, LLC, Caesars Growth Quad, LLC, 3535 LV NewCo, LLC, Caesars Growth Bally's LV, LLC, FHR NewCo, LLC, LVH NewCo, LLC, Flamingo-Laughlin NewCo, LLC, Parball NewCo, LLC, Caesars Growth Harrah's New Orleans, LLC, Jazz Casino Company, L.L.C., JCC Holding Company II LLC, Caesars Growth PH Fee, LLC, Caesars Growth PH, LLC and JCC Fulton Development, L.L.C. as subsidiary parties, and Credit Suisse AG, Cayman Islands Branch, as collateral agent. | — | 8-K | — | 10.3 | 5/21/2014 | ||||||
10.53 | Collateral Agreement (Second Lien), dated as of May 20, 2014, by and among Caesars Growth Properties Holdings, LLC and Caesars Growth Properties Finance, Inc., as issuers, PHWLV, LLC, TSP Owner LLC, Caesars Growth Cromwell, LLC, Caesars Growth Quad, LLC, 3535 LV NewCo, LLC, Caesars Growth Bally's LV, LLC, FHR NewCo, LLC, LVH NewCo, LLC, Flamingo-Laughlin NewCo, LLC, Parball NewCo, LLC, Caesars Growth Harrah's New Orleans, LLC, Jazz Casino Company, L.L.C., JCC Holding Company II LLC, Caesars Growth PH Fee, LLC, Caesars Growth PH, LLC and JCC Fulton Development, L.L.C. as subsidiary parties, and U.S. Bank National Association, as collateral agent. | — | 8-K | — | 10.4 | 5/21/2014 | ||||||
102
Incorporated by Reference | ||||||||||||
Exhibit Number | Exhibit Description | Filed Herewith | Form | Period Ending | Exhibit | Filing Date | ||||||
10.54 | CIE Proceeds and Reservation of Rights Agreement, dated as of September 9, 2016 entered into by and among Caesars Interactive Entertainment, Inc., Caesars Acquisition Company, on behalf of itself and each of its direct and indirect subsidiaries, Caesars Entertainment Corporation, on behalf of itself and each of its direct and indirect subsidiaries, other than Caesars Entertainment Operating Company, Inc., and Caesars Entertainment Operating Company, Inc. on behalf of itself and each of the debtors in the Chapter 11 Cases. | — | 8-K | — | 10.1 | 9/12/2016 | ||||||
10.55 | Amendment No. 1 to CIE Proceeds and Reservation of Rights Agreement, dated as of October 7, 2016, by and among Caesars Interactive Entertainment, LLC, Caesars Acquisition Company, on behalf of itself and each of its direct and indirect subsidiaries, Caesars Entertainment Corporation, on behalf of itself and each of its direct and indirect subsidiaries, other than Caesars Entertainment Operating Company, Inc., and Caesars Entertainment Operating Company, Inc. on behalf of itself and each of the debtors in the Chapter 11 Cases. | — | 8-K | — | 10.1 | 10/7/2016 | ||||||
10.56 | First Amendment to the Amended and Restated Limited Liability Company Agreement of Caesars Growth Partners, LLC, dated as of October 21, 2013, dated as of September 23, 2016, entered into by and among (i) Caesars Acquisition Company, in its capacity as Caesars Growth Partners, LLC's managing member and as a member of Caesars Growth Partners, LLC, (ii) HIE Holdings, Inc., (iii) Harrah's BC, Inc. and (iv) Caesars Entertainment Corporation. | — | 8-K | — | 10.1 | 9/26/2016 | ||||||
10.57 | Second Amendment to the Amended and Restated Limited Liability Company Agreement of Caesars Growth Partners, LLC, dated as of October 21, 2013, dated as of October 7, 2016, entered into by and among (i) Caesars Acquisition Company, in its capacity as Caesars Growth Partners, LLC's managing member and as a member of Caesars Growth Partners, LLC, (ii) HIE Holdings, Inc., (iii) Harrah's BC, Inc. and (iv) Caesars Entertainment Corporation. | — | 8-K | — | 10.2 | 10/7/2016 | ||||||
10.58 | Third Amendment to the Amended and Restated Limited Liability Company Agreement of Caesars Growth Partners, LLC, dated as of February 13, 2017, entered into by and among Caesars Acquisition Company, in its capacity as Caesars Growth Partners, LLC's managing member and as a member of Caesars Growth Partners, LLC, HIE Holdings, Inc., Harrah's BC, Inc. and Caesars Entertainment Corporation. | X | ||||||||||
103
Incorporated by Reference | ||||||||||||
Exhibit Number | Exhibit Description | Filed Herewith | Form | Period Ending | Exhibit | Filing Date | ||||||
10.59 | Consent to CIE Sale Transaction, dated as of July 30, 2016, by and between Caesars Acquisition Company and Caesars Entertainment Corporation. | — | 8-K | — | 10.1 | 8/1/2016 | ||||||
10.60 | Restructuring Support, Forbearance and Settlement Agreement, dated as of October 4, 2016, among Caesars Acquisition Company (solely for Sections 2(b)(vii), 5(g) and 30), Caesars Entertainment Operating Company, Inc., on behalf of itself and each of the debtors in the Chapter 11 Cases, Caesars Entertainment Corporation, each of the holders of Second Lien Bond Claims party thereto and the Second Lien Committee. | — | 8-K | — | 10.1 | 10/5/2016 | ||||||
14 | Code of Business Conduct and Ethics, adopted October 18, 2013. | — | 10-K | 12/31/2013 | 14 | 3/28/2014 | ||||||
21 | List of Subsidiaries. | X | ||||||||||
23.1 | Caesars Acquisition Company Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm. | X | ||||||||||
23.2 | Caesars Growth Partners, LLC Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm. | X | ||||||||||
31.1 | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||
31.2 | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||
* 32.1 | Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | — | ||||||||||
* 32.2 | Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | — | ||||||||||
99.1 | Consolidated financial statements of Caesars Growth Partners, LLC as of December 31, 2016 and 2015 and for the years ended December 31, 2016, 2015 and 2014. | X | ||||||||||
99.2 | Gaming Regulation Overview. | X | ||||||||||
101 | The following financial statements from the Company's Form 10-K for the year ended December 31, 2016, formatted in XBRL: (i) Balance Sheets, (ii) Statements of Operations and Comprehensive Income, (iii) Statements of Stockholders' Equity, (iv) Statements of Cash Flows, (v) Notes to Financial Statements. | X | ||||||||||
* | Furnished herewith. |
† | Denotes a management contract or compensatory plan or arrangement. |
104
Schedule II
CAESARS GROWTH PARTNERS, LLC
COMBINED AND CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(In millions)
Description | Balance at Beginning of Year | Charged to Income | Charge-offs Less Recoveries | Balance at End of Year | |||||||||||
Allowance for doubtful accounts | |||||||||||||||
Year ended December 31, 2016 | $ | 9.2 | $ | 4.5 | $ | (6.3 | ) | $ | 7.4 | ||||||
Year ended December 31, 2015 | $ | 8.4 | $ | 2.8 | $ | (2.0 | ) | $ | 9.2 | ||||||
Year ended December 31, 2014 | $ | 8.4 | $ | 1.9 | $ | (1.9 | ) | $ | 8.4 | ||||||
105
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CAESARS ACQUISITION COMPANY | ||
February 14, 2017 | By: | /S/ MITCH GARBER |
Mitch Garber, President and Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ MITCH GARBER | President and Chief Executive Officer | February 14, 2017 | ||
Mitch Garber | (Principal Executive Officer) | |||
/s/ CRAIG ABRAHAMS | Chief Financial Officer | February 14, 2017 | ||
Craig Abrahams | (Principal Financial Officer) | |||
/s/ TROY J. VANKE | Chief Accounting Officer | February 14, 2017 | ||
Troy J. Vanke | (Principal Accounting Officer) | |||
/s/ MARC BEILINSON | Director | February 14, 2017 | ||
Marc Beilinson | ||||
/s/ PHILIP ERLANGER | Director | February 14, 2017 | ||
Philip Erlanger | ||||
/s/ DHIREN FONSECA | Director | February 14, 2017 | ||
Dhiren Fonseca | ||||
/s/ DON KORNSTEIN | Director | February 14, 2017 | ||
Don Kornstein | ||||
Director | ||||
Karl Peterson | ||||
/s/ MARC ROWAN | Director | February 14, 2017 | ||
Marc Rowan | ||||
/s/ DAVID SAMBUR | Director | February 14, 2017 | ||
David Sambur | ||||
106