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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

(Mark One)

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

For the quarterly period ended June 30, 2017

OR

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

For the transition period                 to                 

Commission File No. 001‑36629

ELDORADO RESORTS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

46‑3657681

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

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

(Address and zip code of principal executive offices)

(775) 328‑0100

(Registrant’s telephone number, including area code)

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

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

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

 

Large accelerated filer

 

Accelerated filer

Non‑accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

The number of shares of the Registrant’s Common Stock, $0.00001 par value per share, outstanding as of August 4, 2017 was 76,676,607.

 

 

 

 


 

ELDORADO RESORTS, INC.

QUARTERLY REPORT FOR THE THREE AND SIX MONTHS ENDED

JUNE 30, 2017

TABLE OF CONTENTS

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

Item 1.

FINANCIAL STATEMENTS

 

 

 

Consolidated Balance Sheets at June 30, 2017 (unaudited) and December 31, 2016

 

2

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited)

 

3

 

Consolidated Statements of Comprehensive (Loss) Income for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited)

 

4

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (unaudited)

 

5

 

Condensed Notes to Unaudited Consolidated Financial Statements

 

6

Item 2.

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

 

32

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

53

Item 4.

CONTROLS AND PROCEDURES

 

53

PART II. OTHER INFORMATION

 

 

Item 1.

LEGAL PROCEEDINGS

 

55

Item 1A.

RISK FACTORS

 

55

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

56

Item 3.

DEFAULTS UPON SENIOR SECURITIES

 

56

Item 4.

MINE SAFETY DISCLOSURES

 

56

Item 5.

OTHER INFORMATION

 

56

Item 6.

EXHIBITS

 

57

SIGNATURES

 

60

 

1


 

PART I-FINANCIAL INFORMATION

Item 1.  Financial Statements.

ELDORADO RESORTS, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

103,624

 

 

$

 

61,029

 

Restricted cash

 

 

 

22,566

 

 

 

 

2,414

 

Marketable securities

 

 

 

17,437

 

 

 

 

 

Accounts receivable, net

 

 

 

21,862

 

 

 

 

14,694

 

Inventories

 

 

 

17,067

 

 

 

 

11,055

 

Prepaid income taxes

 

 

 

5,304

 

 

 

 

69

 

Prepaid expenses and other

 

 

 

31,117

 

 

 

 

12,492

 

Assets held for sale

 

 

 

143,592

 

 

 

 

 

Total current assets

 

 

 

362,569

 

 

 

 

101,753

 

INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

 

 

 

1,005

 

 

 

 

1,286

 

PROPERTY AND EQUIPMENT, NET

 

 

 

1,455,811

 

 

 

 

612,342

 

GAMING LICENSES AND OTHER INTANGIBLES, NET

 

 

 

956,690

 

 

 

 

487,498

 

GOODWILL

 

 

 

746,482

 

 

 

 

66,826

 

NON-OPERATING REAL PROPERTY

 

 

 

18,069

 

 

 

 

14,219

 

OTHER ASSETS, NET

 

 

 

17,314

 

 

 

 

10,120

 

Total assets

 

$

 

3,557,940

 

 

$

 

1,294,044

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

 

15,568

 

 

$

 

4,545

 

Accounts payable

 

 

 

30,547

 

 

 

 

21,576

 

Due to affiliates

 

 

 

 

 

 

 

259

 

Accrued property, gaming and other taxes

 

 

 

32,793

 

 

 

 

18,790

 

Accrued payroll and related

 

 

 

62,859

 

 

 

 

14,588

 

Accrued interest

 

 

 

22,944

 

 

 

 

14,634

 

Deferred proceeds for assets held for sale

 

 

 

20,000

 

 

 

 

 

Accrued other liabilities

 

 

 

62,200

 

 

 

 

27,648

 

Liabilities related to assets held for sale

 

 

 

5,449

 

 

 

 

 

Total current liabilities

 

 

 

252,360

 

 

 

 

102,040

 

LONG-TERM DEBT, LESS CURRENT PORTION

 

 

 

2,211,023

 

 

 

 

795,881

 

DEFERRED INCOME TAXES

 

 

 

239,510

 

 

 

 

90,385

 

OTHER LONG-TERM LIABILITIES

 

 

 

30,123

 

 

 

 

7,287

 

 

 

 

 

2,733,016

 

 

 

 

995,593

 

COMMITMENTS AND CONTINGENCIES (Notes 1 and 11)

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

 

 

 

Common stock, 100,000,000 shares authorized, 76,625,525 and 47,105,744 issued and

   outstanding, par value $0.00001 as of June 30, 2017 and December 31, 2016,

   respectively

 

 

 

 

 

 

 

 

Paid-in capital

 

 

 

745,659

 

 

 

 

173,879

 

Retained earnings

 

 

 

79,253

 

 

 

 

124,560

 

Accumulated other comprehensive income

 

 

 

12

 

 

 

 

12

 

Total stockholders’ equity

 

 

 

824,924

 

 

 

 

298,451

 

Total liabilities and stockholders’ equity

 

$

 

3,557,940

 

 

$

 

1,294,044

 

 

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

2


 

ELDORADO RESORTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Casino

 

$

 

298,182

 

 

$

 

178,459

 

 

$

 

460,966

 

 

$

 

347,537

 

Pari-mutuel commissions

 

 

 

4,143

 

 

 

 

2,893

 

 

 

 

4,784

 

 

 

 

3,577

 

Food and beverage

 

 

 

46,438

 

 

 

 

36,967

 

 

 

 

75,951

 

 

 

 

70,706

 

Hotel

 

 

 

28,924

 

 

 

 

25,677

 

 

 

 

46,937

 

 

 

 

45,842

 

Other

 

 

 

11,550

 

 

 

 

11,014

 

 

 

 

20,145

 

 

 

 

21,899

 

 

 

 

 

389,237

 

 

 

 

255,010

 

 

 

 

608,783

 

 

 

 

489,561

 

Less-promotional allowances

 

 

 

(34,057

)

 

 

 

(23,695

)

 

 

 

(52,678

)

 

 

 

(44,680

)

Net operating revenues

 

 

 

355,180

 

 

 

 

231,315

 

 

 

 

556,105

 

 

 

 

444,881

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Casino

 

 

 

152,417

 

 

 

 

100,374

 

 

 

 

242,870

 

 

 

 

196,636

 

Pari-mutuel commissions

 

 

 

4,874

 

 

 

 

2,931

 

 

 

 

6,081

 

 

 

 

4,255

 

Food and beverage

 

 

 

22,834

 

 

 

 

20,783

 

 

 

 

40,255

 

 

 

 

40,511

 

Hotel

 

 

 

8,026

 

 

 

 

7,979

 

 

 

 

14,629

 

 

 

 

15,108

 

Other

 

 

 

5,644

 

 

 

 

6,618

 

 

 

 

10,923

 

 

 

 

12,692

 

Marketing and promotions

 

 

 

20,158

 

 

 

 

9,766

 

 

 

 

30,214

 

 

 

 

19,341

 

General and administrative

 

 

 

55,379

 

 

 

 

32,380

 

 

 

 

87,154

 

 

 

 

64,035

 

Corporate

 

 

 

7,442

 

 

 

 

4,354

 

 

 

 

14,016

 

 

 

 

11,258

 

Depreciation and amortization

 

 

 

24,909

 

 

 

 

15,583

 

 

 

 

40,513

 

 

 

 

31,787

 

Total operating expenses

 

 

 

301,683

 

 

 

 

200,768

 

 

 

 

486,655

 

 

 

 

395,623

 

LOSS ON SALE OF ASSET OR DISPOSAL OF PROPERTY

 

 

 

(89

)

 

 

 

(836

)

 

 

 

(57

)

 

 

 

(765

)

ACQUISITION CHARGES

 

 

 

(85,464

)

 

 

 

(56

)

 

 

 

(87,078

)

 

 

 

(576

)

EQUITY IN LOSS OF UNCONSOLIDATED AFFILIATE

 

 

 

(60

)

 

 

 

 

 

 

 

(282

)

 

 

 

 

OPERATING (LOSS) INCOME

 

 

 

(32,116

)

 

 

 

29,655

 

 

 

 

(17,967

)

 

 

 

47,917

 

OTHER EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

 

(27,527

)

 

 

 

(12,795

)

 

 

 

(40,197

)

 

 

 

(25,786

)

Loss on early retirement of debt, net

 

 

 

(27,317

)

 

 

 

(89

)

 

 

 

(27,317

)

 

 

 

(155

)

Total other expense

 

 

 

(54,844

)

 

 

 

(12,884

)

 

 

 

(67,514

)

 

 

 

(25,941

)

NET (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME

   TAXES

 

 

 

(86,960

)

 

 

 

16,771

 

 

 

 

(85,481

)

 

 

 

21,976

 

BENEFIT (PROVISION) FOR INCOME TAXES

 

 

 

39,677

 

 

 

 

(5,980

)

 

 

 

39,219

 

 

 

 

(7,816

)

NET (LOSS) INCOME FROM CONTINUING OPERATIONS

 

 

 

(47,283

)

 

 

 

10,791

 

 

 

 

(46,262

)

 

 

 

14,160

 

INCOME FROM DISCONTINUED OPERATIONS, NET OF TAXES

 

 

 

955

 

 

 

 

 

 

 

 

955

 

 

 

 

 

NET (LOSS) INCOME

 

$

 

(46,328

)

 

$

 

10,791

 

 

$

 

(45,307

)

 

$

 

14,160

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income per common share attributable to common stockholders - basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income from continuing operations

 

$

 

(0.70

)

 

$

 

0.23

 

 

$

 

(0.81

)

 

$

 

0.30

 

Income from discontinued operations, net of income taxes

 

 

 

0.01

 

 

 

 

 

 

 

 

0.02

 

 

 

 

 

Net (loss) income attributable to common stockholders

 

$

 

(0.69

)

 

$

 

0.23

 

 

$

 

(0.79

)

 

$

 

0.30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income per common share attributable to common stockholders - diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income from continuing operations

 

$

 

(0.70

)

 

$

 

0.23

 

 

$

 

(0.81

)

 

$

 

0.30

 

Income from discontinued operations, net of income taxes

 

 

 

0.01

 

 

 

 

 

 

 

 

0.02

 

 

 

 

 

Net (loss) income attributable to common stockholders

 

$

 

(0.69

)

 

$

 

0.23

 

 

$

 

(0.79

)

 

$

 

0.30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Basic Shares Outstanding

 

 

 

67,453,095

 

 

 

 

47,071,608

 

 

 

 

57,405,834

 

 

 

 

46,966,391

 

Weighted Average Diluted Shares Outstanding

 

 

 

68,469,191

 

 

 

 

47,721,075

 

 

 

 

58,339,438

 

 

 

 

47,591,958

 

 

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

3


 

ELDORADO RESORTS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(dollars in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

NET (LOSS) INCOME

 

$

 

(46,328

)

 

$

 

10,791

 

 

$

 

(45,307

)

 

$

 

14,160

 

Other Comprehensive Income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (Loss) Income, net of tax

 

$

 

(46,328

)

 

$

 

10,791

 

 

$

 

(45,307

)

 

$

 

14,160

 

 

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

4


 

ELDORADO RESORTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

 

(45,307

)

 

$

 

14,160

 

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

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

40,513

 

 

 

 

31,787

 

Amortization of deferred financing costs

 

 

 

3,034

 

 

 

 

1,754

 

Equity in loss of unconsolidated affiliate

 

 

 

282

 

 

 

 

 

Loss on early extinguishment of debt

 

 

 

27,317

 

 

 

 

155

 

Change in fair value of acquisition related contingencies

 

 

 

37

 

 

 

 

1

 

Stock compensation expense

 

 

 

3,062

 

 

 

 

2,033

 

Loss on disposal of assets

 

 

 

57

 

 

 

 

765

 

Provision for bad debts

 

 

 

756

 

 

 

 

329

 

(Benefit) provision for income taxes

 

 

 

(38,001

)

 

 

 

7,052

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

Restricted cash

 

 

 

481

 

 

 

 

1,401

 

Sale of trading securities

 

 

 

295

 

 

 

 

 

Accounts receivable

 

 

 

4,037

 

 

 

 

(4,872

)

Inventory

 

 

 

(630

)

 

 

 

46

 

Prepaid expenses and other assets

 

 

 

1,605

 

 

 

 

(2,835

)

Interest payable

 

 

 

8,310

 

 

 

 

(748

)

Income taxes receivable/payable

 

 

 

(197

)

 

 

 

 

Accounts payable and accrued liabilities

 

 

 

(2,126

)

 

 

 

(2,372

)

Net cash provided by operating activities

 

 

 

3,525

 

 

 

 

48,656

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Purchase of property and equipment, net

 

 

 

(29,824

)

 

 

 

(20,345

)

Restricted cash

 

 

 

100

 

 

 

 

 

Proceeds from sale of property and equipment

 

 

 

 

 

 

 

1,551

 

Net cash used in business combinations

 

 

 

(1,343,659

)

 

 

 

(491

)

Reimbursement of capital expenditures from West Virginia regulatory authorities

 

 

 

 

 

 

 

3,676

 

Decrease in other assets, net

 

 

 

 

 

 

 

177

 

Net cash used in investing activities

 

 

 

(1,373,383

)

 

 

 

(15,432

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of New Term Loan

 

 

 

1,450,000

 

 

 

 

 

Proceeds from issuance of 6% Senior Notes

 

 

 

375,000

 

 

 

 

 

Payments under Term Loan

 

 

 

(1,062

)

 

 

 

(2,125

)

Payments under New Term Loan

 

 

 

(3,625

)

 

 

 

 

Borrowings under New Revolving Credit Facility

 

 

 

148,953

 

 

 

 

 

Payments under New Revolving Credit Facility

 

 

 

(58,953

)

 

 

 

 

Borrowings under Revolving Credit Facility

 

 

 

41,000

 

 

 

 

(71,500

)

Payments under Revolving Credit Facility

 

 

 

(29,000

)

 

 

 

 

Retirement of Term Loan

 

 

 

(417,563

)

 

 

 

 

Retirement of Revolving Credit Facility

 

 

 

(41,000

)

 

 

 

 

Payments on capital leases

 

 

 

(210

)

 

 

 

(136

)

Debt issuance costs

 

 

 

(44,992

)

 

 

 

(463

)

Taxes paid related to net share settlement of equity awards

 

 

 

(8,993

)

 

 

 

(1,178

)

Proceeds from exercise of stock options

 

 

 

2,898

 

 

 

 

1,005

 

Net cash provided by (used in) financing activities

 

 

 

1,412,453

 

 

 

 

(74,397

)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

 

42,595

 

 

 

 

(41,173

)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

 

 

 

61,029

 

 

 

 

78,278

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

 

103,624

 

 

$

 

37,105

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

 

30,742

 

 

$

 

24,760

 

Cash paid during period for income taxes

 

 

 

589

 

 

 

 

1,054

 

NON-CASH FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

Payables for capital expenditures

 

 

 

(1,156

)

 

 

 

3,612

 

 

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

5


 

ELDORADO RESORTS, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Basis of Presentation

Organization

The accompanying unaudited consolidated financial statements include the accounts of Eldorado Resorts, Inc. (“ERI” or the “Company”), a Nevada corporation formed in September 2013, and its consolidated subsidiaries. The Company acquired Mountaineer, Presque Isle Downs and Scioto Downs in September 2014 pursuant to a merger (the “MTR Merger”) with MTR Gaming Group, Inc. (“MTR Gaming”) and in November 2015 it acquired Circus Reno and the interests in the Silver Legacy that it did not own prior to such date (the “Reno Acquisition”).

Throughout the three and six months ended June 30, 2017, ERI owned and operated the following properties:

 

Eldorado Resort Casino Reno (Eldorado Reno)A 814-room hotel, casino and entertainment facility connected via an enclosed skywalk to Silver Legacy and Circus Reno located in downtown Reno, Nevada that includes 1,142 slot machines, 46 table games and an 11 table poker room;

 

Silver Legacy Resort Casino (Silver Legacy)A 1,711-room themed hotel and casino connected via an enclosed skywalk to Eldorado Reno and Circus Reno that includes 1,212 slot machines and 63 table games;

 

Circus Circus Reno (Circus Reno)A 1,571-room hotel-casino and entertainment complex connected via an enclosed skywalk to Eldorado Reno and Silver Legacy that includes 695 slot machines and 27 table games;

 

Eldorado Resort Casino Shreveport (Eldorado Shreveport)A 403-room, all suite art deco-style hotel and tri-level riverboat dockside casino situated on the Red River in Shreveport, Louisiana that includes 1,387 slot machines, 52 table games and an eight table poker room;

 

Mountaineer Casino, Racetrack & Resort (Mountaineer)A 354-room hotel, casino and entertainment facility and live thoroughbred horse racing located on the Ohio River at the northern tip of West Virginias northwestern panhandle that includes 1,510 slot machines, 36 table games and a 10 table poker room;

 

Presque Isle Downs & Casino (Presque Isle Downs)A casino and live thoroughbred horse racing facility with 1,594 slot machines, 32 table games and a seven table poker room located in Erie, Pennsylvania; and

 

Eldorado Gaming Scioto Downs (Scioto Downs)A modern racino offering 2,206 video lottery terminals (VLT), harness racing and a 118-room third party hotel connected to Scioto Downs located 15 minutes from downtown Columbus, Ohio.

 

In addition, on May 1, 2017, the Company consummated its acquisition of Isle of Capri Casinos, Inc. and acquired the following properties:

 

Isle Casino HotelBlack Hawk (“Isle Black Hawk”)A land-based casino on an approximately 10-acre site in Black Hawk, Colorado that includes 1,086 slot machines, 25 table games, a nine table poker room and a 238-room hotel;

 

Lady Luck CasinoBlack Hawk (“Lady Luck Black Hawk”)A land-based casino across the intersection from Isle Casino Hotel in Black Hawk, Colorado, that includes 455 slot machines, 10 table games, five poker tables and a 164-room hotel with a parking structure connecting Isle Casino Hotel-Black Hawk and Lady Luck Casino-Black Hawk;

 

Isle Casino Racing Pompano Park (“Pompano”)A casino and harness racing track on an approximately 223-acre owned site in Pompano Beach, Florida, that includes 1,446 slot machines and a 42 table poker room;

 

Isle Casino Bettendorf (“Bettendorf”)A land-based single-level casino located off of Interstate 74 in Bettendorf, Iowa that includes 969 slot machines and 19 table games with two hotel towers with 509 hotel rooms;

 

Isle Casino Waterloo (“Waterloo”)A single-level land-based casino in Waterloo, Iowa that includes 948 slot machines, 25 table games, four poker tables and a 195-room hotel;

 

Isle of Capri Casino Hotel Lake Charles (“Lake Charles”)A gaming vessel on an approximately 19 acre site in Lake Charles, Louisiana, with 1,157 slot machines, 49 table games, including 13 poker tables and two hotels offering 493 rooms;

 

Isle of Capri Casino Lula (“Lula”)Two dockside casinos in Lula, Mississippi with 885 slot machines and 21 table games, two on-site hotels with a total of 451 rooms and a 28-space RV Park;

 

Lady Luck Casino Vicksburg (“Vicksburg”)A dockside casino in Vicksburg, Mississippi that includes 613 slot machines, 7 table games and a hotel with a total of 89 rooms;

6


 

 

Isle of Capri Casino Boonville (“Boonville”)A single-level dockside casino in Boonville, Missouri that includes 914 slot machines, 20 table games and a 140-room hotel;

 

Isle Casino Cape Girardeau (“Cape Girardeau”)A dockside casino and pavilion and entertainment center in Cape Girardeau, Missouri that includes 930 slot machines, 22 table games and 4 poker tables;

 

Lady Luck Casino Caruthersville (“Caruthersville”)—A riverboat casino located along the Mississippi River in Caruthersville, Missouri that includes 557 slot machines and nine table games;

 

Isle of Capri Casino Kansas City (“Kansas City”)A dockside casino located close to downtown Kansas City, Missouri offering 977 slot machines and 18 table games; and

 

Lady Luck Casino Nemacolin (“Nemacolin”)A casino property located on the 2,000-acre Nemacolin Woodlands Resort in Western Pennsylvania that includes 597 slot machines and 29 table games.

 

On August 22, 2016, Isle entered into an agreement to sell Lake Charles for aggregate consideration of $134.5 million, subject to certain adjustments. The transaction (the “Lake Charles Disposition”) is expected to be completed in 2017, subject to Louisiana Gaming Control Board approval and other customary closing conditions.

Acquisition of Isle of Capri Casinos, Inc.

On May 1, 2017 (the “Isle Acquisition Date”), the Company completed its acquisition of Isle of Capri Casinos, Inc. pursuant to the Agreement and Plan of Merger (the “Merger Agreement”) dated as of September 19, 2016 with Isle of Capri Casinos, Inc., a Delaware corporation (“Isle” or “Isle of Capri”), Eagle I Acquisition Corp., a Delaware corporation and a direct wholly-owned subsidiary of the Company, and Eagle II Acquisition Company LLC, a Delaware limited liability company and a direct wholly-owned subsidiary of the Company (the “Isle Acquisition” or the “Isle Merger”). As a result of the Isle Merger, Isle became a wholly-owned subsidiary of ERI and, at the effective time of the Isle Merger, each outstanding share of Isle’s stock converted into the right to receive $23.00 in cash or 1.638 shares of ERI common stock (the “Stock Consideration”), at the election of the applicable Isle shareholder and subject to proration such that the outstanding shares of Isle common stock were exchanged for aggregate consideration comprised of 58% cash, or $552.0 million, and 42% ERI common stock, or 28.5 million newly issued shares of ERI common stock. The total purchase consideration was $1.93 billion (See Note 2).

In connection with the Isle Acquisition, the Company completed a debt financing transaction comprised of: (a) a senior secured credit facility in an aggregate principal amount of $1.75 billion with a (i) term loan facility of $1.45 billion and (ii) revolving credit facility of $300.0 million and (b) $375.0 million of senior unsecured notes. The proceeds of such borrowings were used (v) to pay the cash portion of the consideration payable in the Isle Merger, (w) refinance all of Isle’s existing credit facilities, (x) redeem or otherwise repurchase all of Isle’s senior and senior subordinated notes, (y) refinance the Company’s existing credit facility and (z) pay transaction fees and expenses related to the foregoing (See Note 8 for further discussion of the refinancing transaction and terms of such indebtedness).

Acquisition charges attributed to the Isle Acquisition are reported on the accompanying income statement related to legal, accounting, financial advisory services, severance, stock awards and other costs totaling $85.5 million and $87.1 million during the three and six months ended June 30, 2017, respectively, and $0.1 million and $0.6 million for the three and six months ended June 30, 2016. As of June 30, 2017, $0.7 million of accrued costs and expenses related to the Isle Acquisition are included in accrued other liabilities. Additionally, we recognized a loss of $26.6 million related to the extinguishment of Isle debt and the payment of interest and call premiums in conjunction with the Isle Acquisition.

The accompanying unaudited consolidated financial statements for periods prior to the Isle Acquisition Date are those of ERI and its subsidiaries. The presentation of information herein for periods prior to the Isle Acquisition Date and after the Isle Acquisition Date are not fully comparable because the results of operations for Isle are not included for periods prior to the Isle Acquisition Date. Summary financial results of Isle for the three and nine months ended January 22, 2017 are included in Isle’s Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission (“SEC”). In conjunction with the Isle Acquisition, Isle is no longer required to file quarterly and annual reports with the SEC, and terminated its registration on May 11, 2017.

Basis of Presentation

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

7


 

statements contain all adjustments, all of which are normal and recurring, considered necessary for a fair presentation and have been included herein. The results of operations for these interim periods are not necessarily indicative of the operating results for other quarters, for the full year or any future period.

The executive decision maker of our Company reviews operating results, assess performance and make decisions on a “significant market” basis. The Company’s management views each of its properties as an operating segment. Operating segments are aggregated based on their similar economic characteristics, types of customers, types of services and products provided, the regulatory environments in which they operate, and their management and reporting structure. Prior to the Isle Acquisition, the Company’s principal operating activities occurred in three geographic regions: Nevada, Louisiana and parts of the eastern United States. The Company aggregated its operations into three reportable segments based on the similar characteristics of the operating segments within the regions in which they operated. Following the Isle Acquisition, the Company’s principal operating activities occur in four geographic regions and reportable segments based on the similar characteristics of the operating segments within the regions in which the Company operates: West, Midwest, South, and East (See Note 13 for the list of properties included in each segment for the three and six months ended June 30, 2017 and 2016).

These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Summary of Significant Accounting Policies - Updates

Marketable securities consist primarily of trading securities held by the Company’s captive insurance subsidiary. The trading securities are primarily debt and equity securities that are purchased with the intention to resell in the near term. The trading securities are carried at fair value with changes in fair value recognized in current period income in the accompanying statements of operations. This accounting policy was implemented as of the Isle Acquisition Date.

Recently Issued Accounting Pronouncements – New Developments

In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-09, which amends the scope of modification accounting for share-based payment arrangements. An entity should account for the effects of a modification unless the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The standard is effective for the financial statements issued for annual periods and interim periods within those annual periods, beginning after December 15, 2017, and early adoption is permitted. We anticipate adopting this accounting standard during the first quarter of 2018, and are evaluating the impact on our consolidated financial statements.

 

In May 2014 (amended January 2017), FASB issued ASU No. 2014‑09, “Revenue from Contracts with Customers,” which provides guidance for revenue recognition. The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and eliminates existing industry guidance, including revenue recognition guidance specific to the gaming industry. The FASB has also recently issued several amendments to the standard, including narrow-scope improvements and practical expedients (ASU 2016-12) and clarification on accounting for and identifying performance obligations (ASU 2016-10). The core principle of the revenue model indicates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is designed to create greater comparability for financial statement users across industries and jurisdictions and also requires enhanced disclosures. The guidance is effective for interim and annual periods beginning after December 15, 2017, and should be applied using the full retrospective method or retrospectively with the cumulative effect initially applying the guidance recognized at the date of initial application. While early adoption is permitted for interim and annual periods beginning after December 15, 2016, we anticipate adopting this standard on January 1, 2018. We are currently in the process of evaluating the full impact adoption of ASU 2014‑09 (as amended) will have on our consolidated financial statements including any new considerations with respect to the Isle Acquisition. We anticipate this new standard will likely have a material impact on our consolidated financial statements.

We expect the most significant effect upon adoption of ASU 2014-09 (as amended) will likely be related to 1) the accounting for our customer loyalty program (no longer be recorded at cost, and a deferred revenue model will likely be used to account for the classification and timing of revenue recognized as well as the classification of related expenses for loyalty point redemptions) and 2) the elimination of promotional allowances (the presentation of goods and services provided to our customers without charge, included in gross revenue with a corresponding reduction in promotional allowances, will no longer be reported as revenue and will be recognized based on relative standalone selling prices for transactions with more than one performance obligation). As a result, we expect that gaming revenues will be reduced with a corresponding increase, in total, to food and beverage, hotel, and other revenues. Given our evaluation process is ongoing, the quantitative effects of these changes have not yet been fully determined and are still being analyzed.

8


 

In February 2016, the FASB issued ASU No. 2016-02 which addresses the recognition and measurement of leases. Under the new guidance, for all leases (with the exception of short-term leases), at the commencement date, lessees will be required to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use (“ROU”) asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Further, the new lease guidance simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and liabilities, which no longer provides a source for off balance sheet financing. The effective date for this update is for the annual and interim periods beginning after December 15, 2018 with early adoption permitted. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements.

Currently, we do not have any material capital leases nor any material operating leases where we are the lessor. Our operating leases, primarily relating to certain ground leases and slot machines or video lottery terminals (VLTs), will be recorded on the balance sheet as an ROU asset with a corresponding lease liability, which will be amortized using the effective interest rate method as payments are made. The ROU asset will be depreciated on a straight-line basis and recognized as lease expense. The qualitative and quantitative effects of adoption of ASU 2016-02 are still being analyzed, and we are in the process of evaluating the full effect the new guidance will have on our consolidated financial statements including any new considerations with respect to the Isle Acquisition.

 

Note 2. Isle Acquisition and Preliminary Purchase Price Accounting

On May 1, 2017, the Company completed its acquisition of Isle. The total purchase consideration in the Isle Merger was determined with reference to the fair value on the date of the Merger Agreement as follows:

 

Purchase consideration calculation (dollars in thousands, except shares and stock price)

 

Shares

 

 

Per share

 

 

 

 

Cash paid for outstanding Isle common stock (1)

 

 

 

 

 

 

 

 

 

 

 

$

 

552,050

 

Shares of ERI common stock issued for Isle common stock (2)

 

 

 

28,468,182

 

 

$

 

19.12

 

 

 

 

544,312

 

Cash paid by ERI to retire Isle's long-term debt (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

828,000

 

Shares of ERI common stock for Isle equity awards (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

10,383

 

Purchase consideration

 

 

 

 

 

 

 

 

 

 

 

$

 

1,934,745

 

 

(1)

The cash component of the consideration represents 58% of the aggregate consideration paid in the Isle Merger. The Merger Agreement provided that Isle stockholders could elect to exchange each share of Isle common stock for either $23.00 in cash or 1.638  shares of ERI common stock, subject to proration such that the outstanding shares of Isle common stock will be exchanged for aggregate consideration comprised of 58% cash and 42% ERI common stock. See discussion of Stock Consideration component in note (2) below.

(2)

The Stock Consideration component of the consideration represents 42% of the aggregate consideration paid in the Isle Merger. The Merger Agreement provided that 58% of the aggregate consideration would be paid by ERI in cash, as described in note (1) above. The remaining 42% of the aggregate consideration was paid in shares of ERI common stock. The total Stock Consideration and per share consideration above were based on the ERI stock price on April 28, 2017 (the last business day prior to Isle Acquisition Date) which was $19.12 per share.

(3)

In addition to the cash paid to retire the principal amounts outstanding of Isle’s long-term debt, ERI paid $26.6 million in premiums and interest.

(4)

This amount represents consideration paid for the replacement of Isle’s outstanding equity awards. As discussed in Note 1, Isle’s outstanding equity awards were replaced by ERI equity awards with similar terms. A portion of the fair value of ERI awards issued represents consideration transferred, while a portion represents compensation expense based on the vesting terms of the equity awards.

9


 

Preliminary Purchase Price Accounting

The following table summarizes the preliminary accounting of the estimated purchase consideration to the identifiable assets acquired and liabilities assumed in the Isle Acquisition as of the Isle Acquisition Date, with the excess recorded as goodwill. The fair values were based on management’s analysis, including preliminary work performed by third-party valuation specialists. The following table summarizes the preliminary purchase price accounting of the acquired assets and liabilities as of June 30, 2017 (dollars in thousands):

 

Current and other assets, net

 

$

 

134,143