UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 ‑Q

(Mark One)

 

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

For the quarterly period ended June 30, 2016

OR

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

For the transition period                to              

Commission File No. 001 ‑36629

ELDORADO RESORTS, INC.

(Exact name of registrant as specified in its charter)

Nevada
(State or other jurisdiction of
incorporation or organization)

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

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

(Address and zip code of principal executive offices)

(775) 328 ‑0100

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer 

Accelerated filer 

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

Smaller reporting company 

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

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

 

 

 

 


 

ELDORADO RESORTS, INC.

QUARTERLY REPORT FOR THE THREE AND SIX MONTHS ENDED

JUNE 30, 2016

TABLE OF CONTENTS

 

 

 

    

Page

PART I. FINANCIAL INFORMATION  

 

 

Item 1.  

FINANCIAL STATEMENTS

 

 

 

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

 

 

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

 

 

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

 

 

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

 

 

Condensed Notes to Unaudited Consolidated Financial Statements

 

Item 2.  

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

 

23 

Item 3.  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

38 

Item 4.  

CONTROLS AND PROCEDURES

 

38 

PART II. OTHER INFORMATION  

 

 

Item 1.  

LEGAL PROCEEDINGS

 

39 

Item 1A.  

RISK FACTORS

 

39 

Item 2.  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

39 

Item 3.  

DEFAULTS UPON SENIOR SECURITIES

 

39 

Item 4.  

MINE SAFETY DISCLOSURES

 

39 

Item 5.  

OTHER INFORMATION

 

39 

Item 6.  

EXHIBITS

 

39 

SIGNATURES  

 

41 

 

 

 

 

 

 

 

1


 

PART I-FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

ELDORADO RESORTS, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

    

2016

    

2015

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

37,105

 

$

78,278

 

Restricted cash

 

 

3,870

 

 

5,271

 

Accounts receivable, net

 

 

14,524

 

 

9,981

 

Inventories

 

 

11,696

 

 

11,742

 

Prepaid income taxes

 

 

422

 

 

112

 

Prepaid expenses and other

 

 

13,320

 

 

10,795

 

Total current assets

 

 

80,937

 

 

116,179

 

INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

 

 

1,286

 

 

1,286

 

PROPERTY AND EQUIPMENT, NET

 

 

615,011

 

 

625,416

 

GAMING LICENSES AND OTHER INTANGIBLES, NET

 

 

489,630

 

 

492,033

 

GOODWILL

 

 

66,826

 

 

66,826

 

NON-OPERATING REAL PROPERTY

 

 

14,218

 

 

16,314

 

OTHER ASSETS, NET

 

 

6,777

 

 

6,954

 

Total assets

 

$

1,274,685

 

$

1,325,008

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

4,533

 

$

4,524

 

Accounts payable

 

 

23,031

 

 

17,005

 

Due to affiliates

 

 

73

 

 

129

 

Accrued property, gaming and other taxes

 

 

15,737

 

 

19,424

 

Accrued payroll and related

 

 

17,198

 

 

17,852

 

Accrued interest

 

 

14,230

 

 

14,978

 

Accrued other liabilities

 

 

30,848

 

 

31,798

 

Total current liabilities

 

 

105,650

 

 

105,710

 

LONG-TERM DEBT, LESS CURRENT PORTION

 

 

789,389

 

 

861,713

 

DEFERRED INCOME TAXES

 

 

86,093

 

 

78,797

 

OTHER LONG-TERM LIABILITIES

 

 

7,110

 

 

8,121

 

 

 

 

988,242

 

 

1,054,341

 

COMMITMENTS AND CONTINGENCIES (Note 10)

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

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

 

 

 —

 

 

 —

 

Paid-in capital

 

 

172,513

 

 

170,897

 

Retained earnings

 

 

113,918

 

 

99,758

 

Accumulated other comprehensive income

 

 

12

 

 

12

 

Total stockholders’ equity

 

 

286,443

 

 

270,667

 

Total liabilities and stockholders’ equity

 

$

1,274,685

 

$

1,325,008

 

 

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

 

2


 

ELDORADO RESORTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Casino

 

$

178,459

 

$

156,788

 

$

347,537

 

$

304,450

 

Pari-mutuel commissions

 

 

2,893

 

 

3,056

 

 

3,577

 

 

4,261

 

Food and beverage

 

 

36,967

 

 

23,495

 

 

70,706

 

 

45,677

 

Hotel

 

 

25,677

 

 

8,444

 

 

45,842

 

 

15,478

 

Other

 

 

11,014

 

 

6,573

 

 

21,899

 

 

11,299

 

 

 

 

255,010

 

 

198,356

 

 

489,561

 

 

381,165

 

Less-promotional allowances

 

 

(23,695)

 

 

(15,723)

 

 

(44,680)

 

 

(31,081)

 

Net operating revenues

 

 

231,315

 

 

182,633

 

 

444,881

 

 

350,084

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Casino

 

 

100,374

 

 

91,066

 

 

196,636

 

 

177,884

 

Pari-mutuel commissions

 

 

2,931

 

 

3,093

 

 

4,255

 

 

4,789

 

Food and beverage

 

 

20,783

 

 

12,002

 

 

40,511

 

 

23,923

 

Hotel

 

 

7,979

 

 

2,313

 

 

15,108

 

 

4,503

 

Other

 

 

6,618

 

 

3,567

 

 

12,692

 

 

6,434

 

Marketing and promotions

 

 

9,766

 

 

7,404

 

 

19,341

 

 

14,505

 

General and administrative

 

 

32,380

 

 

23,053

 

 

64,035

 

 

46,597

 

Corporate

 

 

4,354

 

 

3,901

 

 

11,258

 

 

8,061

 

Depreciation and amortization

 

 

15,583

 

 

14,031

 

 

31,787

 

 

28,500

 

Total operating expenses

 

 

200,768

 

 

160,430

 

 

395,623

 

 

315,196

 

(LOSS) GAIN ON SALE OR DISPOSAL OF PROPERTY

 

 

(836)

 

 

3

 

 

(765)

 

 

4

 

ACQUISITION CHARGES

 

 

(56)

 

 

(253)

 

 

(576)

 

 

(337)

 

EQUITY IN INCOME OF UNCONSOLIDATED AFFILIATE

 

 

 —

 

 

1,106

 

 

 —

 

 

588

 

OPERATING INCOME

 

 

29,655

 

 

23,059

 

 

47,917

 

 

35,143

 

OTHER EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(12,795)

 

 

(17,232)

 

 

(25,786)

 

 

(34,464)

 

Loss on early retirement of debt, net

 

 

(89)

 

 

 —

 

 

(155)

 

 

 —

 

Total other expense

 

 

(12,884)

 

 

(17,232)

 

 

(25,941)

 

 

(34,464)

 

NET INCOME BEFORE INCOME TAXES

 

 

16,771

 

 

5,827

 

 

21,976

 

 

679

 

PROVISION FOR INCOME TAXES

 

 

(5,980)

 

 

(1,032)

 

 

(7,816)

 

 

(2,048)

 

NET INCOME (LOSS)

 

$

10,791

 

$

4,795

 

$

14,160

 

$

(1,369)

 

Net Income (Loss) per share of Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.23

 

$

0.10

 

$

0.30

 

$

(0.03)

 

Diluted

 

$

0.23

 

$

0.10

 

$

0.30

 

$

(0.03)

 

Weighted Average Basic Shares Outstanding

 

 

47,071,608

 

 

46,516,614

 

 

46,966,391

 

 

46,505,687

 

Weighted Average Diluted Shares Outstanding

 

 

47,721,075

 

 

46,657,618

 

 

47,591,958

 

 

46,505,687

 

 

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

3


 

ELDORADO RESORTS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

NET INCOME (LOSS)

 

$

10,791

 

$

4,795

 

$

14,160

 

$

(1,369)

 

Other Comprehensive Income (Loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Comprehensive Income (Loss), net of tax

 

$

10,791

 

$

4,795

 

$

14,160

 

$

(1,369)

 

 

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

4


 

ELDORADO RESORTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

    

2016

    

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income (loss)

 

$

14,160

 

$

(1,369)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

31,787

 

 

28,500

 

Amortization of debt issuance costs and (premium) discount

 

 

1,754

 

 

(5,044)

 

Equity in income of unconsolidated affiliate

 

 

 —

 

 

(588)

 

Loss on early retirement of debt, net

 

 

155

 

 

 —

 

Change in fair value of acquisition related contingencies

 

 

1

 

 

33

 

Stock-based compensation expense

 

 

2,033

 

 

821

 

Loss (gain) on sale or disposal of property

 

 

765

 

 

(4)

 

Provision for bad debts

 

 

329

 

 

238

 

Provision for deferred income taxes

 

 

7,052

 

 

1,242

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Restricted cash

 

 

1,401

 

 

(1,406)

 

Accounts receivable

 

 

(4,872)

 

 

(1,722)

 

Inventories

 

 

46

 

 

284

 

Prepaid expenses and other

 

 

(2,835)

 

 

(1,233)

 

Accounts payable

 

 

2,414

 

 

(1,438)

 

Interest payable

 

 

(748)

 

 

 —

 

Income taxes payable

 

 

 —

 

 

(137)

 

Accrued and other liabilities and due to affiliates

 

 

(4,786)

 

 

984

 

Net cash provided by operating activities

 

 

48,656

 

 

19,161

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Capital expenditures, net of payables

 

 

(20,345)

 

 

(17,863)

 

Net cash used in business combinations

 

 

(491)

 

 

 —

 

Net proceeds from sale of property and equipment

 

 

1,551

 

 

2

 

Reimbursement of capital expenditures from West Virginia regulatory authorities

 

 

3,676

 

 

 —

 

Decrease (increase) in other assets, net

 

 

177

 

 

(250)

 

Net cash used in investing activities

 

 

(15,432)

 

 

(18,111)

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Payments under New Term Loan

 

 

(2,125)

 

 

 —

 

Net payments under New Revolving Credit Facility

 

 

(71,500)

 

 

 —

 

Payments on capital leases

 

 

(136)

 

 

(27)

 

Debt issuance costs

 

 

(463)

 

 

 —

 

Taxes paid related to net share settlement of equity awards

 

 

(1,178)

 

 

 —

 

Proceeds from exercise of stock options

 

 

1,005

 

 

 —

 

Net cash used in financing activities

 

 

(74,397)

 

 

(27)

 

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

 

(41,173)

 

 

1,023

 

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

 

 

78,278

 

 

87,604

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

37,105

 

$

88,627

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

24,760

 

$

39,483

 

Cash paid during period for income taxes

 

 

1,054

 

 

848

 

NON-CASH FINANCING ACTIVITIES

 

 

 

 

 

 

 

Payables for capital expenditures

 

 

3,612

 

 

196

 

 

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

5


 

ELDORADO RESORTS, INC.

 

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Organization and Basis of Presentation

 

Organization

 

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

 

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

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

 

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

 

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

Basis of Presentation

 

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

6


 

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

 

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

 

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

 

Reclassifications

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

 

Recently Issued Accounting Pronouncements

 

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

 

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

 

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

 

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

7


 

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

 

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

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

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

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

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

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

8


 

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

Note 2. Acquisition and Final Purchase Accounting

 

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

 

 

 

 

 

 

 

 

 

 

Purchase consideration calculation (dollars in thousands)

 

Silver Legacy

 

Circus Reno

 

Total

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

 

$

56,500

 

$

16,000

 

$

72,500

Fair value of ERI’s preexisting 50% equity interest

 

 

56,500

 

 

 —

 

 

56,500

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

 

 

87,854

 

 

 —

 

 

87,854

Prepayment penalty (1)

 

 

1,831

 

 

 —

 

 

1,831

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

 

 

6,124

 

 

2,111

 

 

8,235

Reverse member note (3)

 

 

(6,107)

 

 

 —

 

 

(6,107)

Deferred tax liability

 

 

2,769

 

 

 —

 

 

2,769

Purchase consideration

 

$

205,471

 

$

18,111

 

$

223,582

 

 

(1)

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

(2)

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

(3)

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

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

Final Purchase Price Allocation – Silver Legacy and Circus Reno

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

 

 

 

 

 

 

 

 

 

 

 

 

Silver Legacy

 

Circus Reno

 

Total

Current and other assets, net

 

$

21,625

 

$

2,115

 

$

23,740

Property and equipment

 

 

168,037

 

 

14,996

 

 

183,033

Intangible assets (1)

 

 

5,000

 

 

1,000

 

 

6,000

Other noncurrent assets

 

 

10,809

 

 

 —

 

 

10,809

Net assets acquired

 

$

205,471

 

$

18,111

 

$

223,582

 

 

 

 

 

 

 

 

 

 

(1)

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

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

9


 

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

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

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

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

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

Unaudited Pro Forma Information

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

    

June 30, 2015

    

June 30, 2015

 

Net revenues

 

$

232,340

 

$

444,133

 

Net income

 

 

8,879

 

 

1,877

 

Net income per common share:

 

 

 

 

 

 

 

Basic

 

$

0.19

 

$

0.04

 

Diluted

 

$

0.19

 

$

0.04

 

Weighted shares outstanding:

 

 

 

 

 

 

 

Basic

 

 

46,550,042

 

 

46,550,042

 

Diluted

 

 

46,924,894

 

 

46,800,406

 

 

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

 

Note 3. Investment in Unconsolidated Affiliates

 

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

10


 

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

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

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

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

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

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Six months ended

 

 

    

June 30, 2015

    

June 30, 2015

    

 

 

(unaudited)

 

Net revenues

 

$

31,984

 

$

59,635

 

Operating expenses

 

 

(26,421)

 

 

(52,916)

 

Operating income

 

 

5,563

 

 

6,719

 

Other expense

 

 

(2,761)

 

 

(5,499)

 

Net income

 

$

2,802

 

$

1,220

 

 

 

 

 

Note 4. Stock-Based Compensation

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

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

11


 

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

 

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

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average

 

Weighted-Average

 

 

 

 

 

 

Equity

 

Grant Date

 

Remaining

 

Aggregate 

 

 

    

Awards

    

Fair Value

    

Contractual Life

    

Fair Value

 

 

 

 

 

 

 

 

(in years)

 

 

(in millions)

 

Unvested outstanding as of December 31, 2015

 

827,383

(1)

$

4.09

 

2.12

 

$

3.4

 

Granted

 

410,371

(2)

 

10.79

 

 

 

 

 

 

Vested

 

(202,431)

 

 

5.56

 

 

 

 

 

 

Unvested outstanding as of June 30, 2016

 

1,035,323

 

$

6.46

 

1.91

 

$

6.7

 

 

(1)

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

(2)

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

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

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

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average

 

 

 

 

 

 

 

 

Range of

 

Weighted-Average

 

Remaining

 

Aggregate

 

 

 

Options

    

Exercise Prices

    

Exercise Price

    

Contractual Life

    

Intrinsic Value

 

 

 

 

 

 

 

 

 

 

 

 

(in years)

 

(in millions)

 

Outstanding and Exercisable as of December 31, 2014

 

398,200

 

$
2.44

-

$16.27

 

$

7.88

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expired

 

(86,000)

 

 

 

$11.30

 

$

11.30

 

 

 

 

 

 

 

Outstanding and Exercisable as of December 31, 2015

 

312,200

 

$
2.44

-

$16.27

 

$

6.94

 

 

3.47

 

$

1.3

 

Exercised

 

(132,900)

 

$
2.44

-

$3.94

 

$

2.89

 

 

 

 

 

 

 

Outstanding and Exercisable as of             June 30, 2016

 

179,300

 

$
2.44

-

$16.27

 

$

9.94

 

 

3.24

 

$

0.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

    

June 30,

 

December 31,

 

 

    

2016

    

2015

 

 

 

(unaudited)

 

 

 

 

Goodwill

 

$

66,826

 

$

66,826

 

 

 

 

 

 

 

 

 

Gaming license (indefinite-lived)

 

$

482,074

 

$

482,074

 

Trade names

 

 

9,800

 

 

9,800

 

Loyalty programs

 

 

7,700

 

 

7,700

 

Subtotal

 

 

499,574

 

 

499,574

 

Accumulated amortization trade names

 

 

(3,418)

 

 

(2,462)

 

Accumulated amortization loyalty programs

 

 

(6,526)

 

 

(5,079)

 

Total gaming licenses and other intangible assets

 

$

489,630

 

$

492,033

 

 

 

 

 

 

 

 

 

Non-operating real property

 

$

14,218

 

$

16,314

 

 

 

 

 

 

 

 

 

Land held for development

 

$

906

 

$

906

 

Other

 

 

5,871

 

 

6,048

 

Total other assets, net

 

$

6,777

 

$

6,954

 

 

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

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

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

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

Note 6. Income Taxes

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

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

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

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

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

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

 

 

14


 

Note 7. Long ‑Term Debt

 

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

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2016

    

2015

 

 

 

(unaudited)

 

 

 

 

Senior Notes

 

$

375,000

 

$

375,000

 

Less: Unamortized debt issuance costs

 

 

(8,612)

 

 

(8,957)

 

Net

 

 

366,388

 

 

366,043

 

 

 

 

 

 

 

 

 

New Term Loan

 

 

420,750

 

 

422,875

 

Less: Unamortized discount and debt issuance costs

 

 

(13,590)

 

 

(14,465)

 

Net

 

 

407,160

 

 

408,410

 

 

 

 

 

 

 

 

 

New Revolving Credit Facility

 

 

22,000

 

 

93,500

 

Less: Unamortized debt issuance costs

 

 

(2,307)

 

 

(2,533)

 

Net

 

 

19,693

 

 

90,967

 

 

 

 

 

 

 

 

 

Capital leases

 

 

681

 

 

817

 

Less: Current portion

 

 

(4,533)

 

 

(4,524)

 

Total long-term debt

 

$

789,389

 

$

861,713

 

 

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

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

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

Refinancing Transaction and Senior Notes

 

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

 

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

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

15


 

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

 

 

 

 

 

Year

    

Percentage

 

2018

 

105.250

%

2019

 

103.500

%

2020

 

101.750

%

2021 and thereafter

 

100.000

%

 

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

 

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

 

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

 

·

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

 

·

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

 

·

create liens;

 

·

transfer and sell assets;

 

·

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

 

·

enter into certain transactions with affiliates;

 

·

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

 

·

create restrictions on dividends or other payments by restricted subsidiaries.

 

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

 

New Credit Facility

 

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

 

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

 

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

16


 

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

 

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

 

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

 

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

 

Note 8. Fair Value of Financial Instruments

 

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

 

·

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

 

·

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

 

·

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

 

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

 

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

 

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

17


 

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

 

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

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

December 31, 2015

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

    

Amount

    

Value

    

Amount

    

 Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

37,105

 

$

37,105

 

$

78,278

 

$

78,278

 

Restricted cash

 

 

3,870

 

 

3,870

 

 

5,271

 

 

5,271

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior Notes

 

$

366,388

 

$

388,125

 

$

366,043

 

$

367,500

 

New Term Loan

 

 

407,160

 

 

422,854

 

 

408,410

 

 

419,796

 

New Revolving Credit Facility

 

 

19,693

 

 

22,000

 

 

90,967

 

 

93,500

 

Acquisition-related contingent considerations

 

 

474

 

 

474

 

 

529

 

 

529

 

 

The following table represents the change in acquisition-related contingent consideration liabilities for the period December 31, 2015 to June 30, 2016:

 

 

 

 

 

 

Balance as of December 31, 2015

    

$

529

 

Amortization of present value discount (1)

 

 

34

 

Fair value adjustment for change in consideration expected to be paid (2)

 

 

1

 

Settlements

 

 

(90)

 

Balance as of June 30, 2016

 

$

474

 

 

(1)

Changes in present value are included as a component of interest expense in the consolidated statements of operations.

(2)

Fair value adjustments for changes in earn-out estimates are included in general and administrative expense in the consolidated statements of operations.

 

 

Note 9. Earnings per Share

 

The following table illustrates the reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share computations for the three and six months ended June 30, 2016 and 2015 (dollars in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

    

Six Months Ended

    

 

 

June 30,

 

June 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

(unaudited)

 

(unaudited)

 

Net income (loss) available to common stockholders

 

$

10,791

 

$

4,795

 

$

14,160

 

$

(1,369)

 

Shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

 

47,071,608

 

 

46,516,614

 

 

46,966,391

 

 

46,505,687

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

111,456

 

 

 —

 

 

130,107

 

 

 —

 

RSUs

 

 

538,011

 

 

141,004

 

 

495,460

 

 

 —

 

Weighted average shares outstanding - diluted

 

 

47,721,075

 

 

46,657,618

 

 

47,591,958

 

 

46,505,687

 

Basic net income (loss) per common share

 

$

0.23

 

$

0.10

 

$

0.30

 

$

(0.03)

 

Diluted net income (loss) per common share

 

$

0.23

 

$

0.10

 

$

0.30

 

$

(0.03)

 

 

 

 

18


 

 

Note 10. Commitments and Contingencies

 

 

Litigation.  The Company is a party to various lawsuits, which have arisen in the normal course of business. Estimated losses are accrued for these lawsuits and claims when the loss is probable and can be estimated. The current liability for the estimated losses associated with those lawsuits is not material to the consolidated financial condition and those estimated losses are not expected to have a material impact on the results of operations.

Ohio Gaming Referendum Challenge .  On October 21, 2011, the Ohio Roundtable filed a complaint in the Court of Common Pleas in Franklin County, Ohio against a number of defendants, including the Governor, the Ohio Lottery Commission and the Ohio Casino Control Commission. The complaint alleges a variety of substantive and procedural defects relative to the approval and implementation of video lottery terminals as well as several counts dealing with the taxation of standalone casinos. As interveners, we, along with four of the other racinos in Ohio, filed motions for judgment on the pleadings to supplement the position of the Racing Commission. In May 2012, the Court of Common Pleas dismissed the case; however, the plaintiffs filed an appeal and oral arguments were held on January 17, 2013 in the 10 th  District Court of Appeals. In March 2013, the Court of Appeals upheld the ruling. The decision of the Appeals Court was appealed to the Ohio Supreme Court by the plaintiffs on April 30, 2013 and the Ohio Supreme Court has elected to accept the appeal. The Ohio Supreme Court temporarily stayed the appeal until it first ruled on a matter with similar procedural issues. A decision was issued on that case on June 10, 2014. In response to a motion to dismiss as improvidently granted which was filed jointly by Appellees, the remaining propositions of law were briefed by the parties and oral argument before the Ohio Supreme Court was held on June 23, 2015. A decision on this case was issued by the Ohio Supreme Court on March 24, 2016 finding that the parties did not meet the threshold for standing to challenge the installation of video lottery terminals, but a single plaintiff was permitted to proceed with his challenge against the casinos under an equal protection claim. Accordingly, this case has been concluded as it relates to the race track defendants .    

Environmental Remediation.  In October 2004, the Company acquired   229 acres of real property, known as the International Paper site, as an alternative site to build Presque Isle Downs. In connection with the acquisition of the International Paper site, the Company entered into a consent order and decree (the “Consent Order”) with the PaDEP and International Paper insulating us from liability for certain pre ‑existing contamination, subject to compliance with the Consent Order, which included a proposed environmental remediation plan for the site, which was tied specifically to the use of the property as a racetrack. The proposed environmental remediation plan in the Consent Order was based upon a “baseline environmental report” and management estimated that such remediation would be subsumed within the cost of developing the property as a racetrack. The racetrack was never developed at this site. In October 2005, the Company sold 205 acres to GEIDC who assumed primary responsibility for the remediation obligations under the Consent Order relating to the property they acquired. However, the Company was advised by the PaDEP that it was not released from its liability and responsibility under the Consent Order. The Company also purchased an Environmental Risk Insurance Policy in the amount of $10.0 million with respect to the property, which was renewed in October 2015 for a period of one year. The Company believes that the insurance coverage is in excess of any exposure that we may have in this matter.

Regulatory Gaming Assessments.  The Pennsylvania Gaming Control Board (the “PGCB”), the Pennsylvania Department of Revenue and the Pennsylvania State Police (collectively, “the Borrowers”), were required to fund the costs they incurred in connection with the initial development of the infrastructure to support gaming operations in Pennsylvania as well as the initial ongoing costs of the Borrowers. The initial funding of these costs was provided from a loan from the Pennsylvania General Fund in the amount of $36.1 million, and further funding was provided from additional loans from the Pennsylvania Property Tax Reserve Fund in the aggregate amount of $63.8 million.

The Pennsylvania Department of Revenue will assess all licensees, including Presque Isle Downs, their proportionate share of amounts represented by the borrowings, which are in the aggregate amount of $99.9 million, once the designated number of Pennsylvania’s slot machine licensees is operational. On July 11, 2011, the PGCB issued an administrative order which established that payments associated with the $63.8 million that was borrowed from the Property Tax Reserve Fund would commence on January 1, 2012. The repayment allocation between all current licensees is based upon equal weighting of (1) cumulative gross slot revenue since inception in relation to the combined cumulative gross slot revenue for all licensees and (2) single year gross slot revenue (during the state’s fiscal year ending June 30) in relation to the combined single year gross slot revenue for all licensees; and amounts paid each year will be adjusted annually based upon changes in the licensee’s proportionate share of gross slot revenue. We have estimated that

19


 

our total proportionate share of the aggregate $63.8 million to be assessed to the gaming facilities will be $4.1 million and will be paid quarterly over a ten ‑year period, which began effective January 1, 2012. For the $36.1 million that was borrowed from the General Fund, payment is scheduled to begin after all fourteen licensees are operational. Although we cannot determine when payment will begin, it has considered a similar repayment model for the General Fund borrowings and estimated that its total proportionate share of the aggregate $36.1 million to all fourteen gaming facilities will approximate between $2.0 million and $2.1 million, which has been accrued in the accompanying consolidated balance sheet at June 30, 2016 and December 31, 2015.

The recorded estimate relative to the Property Tax Reserve Fund is subject to revision based upon future changes in the revenue assumptions utilized to develop the estimate. The estimated total obligation at June 30, 2016 and December 31, 2015, was $4.1 million and $4.3 million, respectively, of which the residual total amount, both current and long-term, of $2.0 million and $2.2 million at June 30, 2016 and December 31, 2015, respectively, are appropriately accrued in the accompanying consolidated balance sheet. The Company paid $0.2 million for the six months ended June 30, 2016.

Agreements with Horsemen and Pari-mutuel Clerks.  The Federal Interstate Horse Racing Act and the state racing laws in West Virginia, Ohio and Pennsylvania require that, in order to simulcast races, we have written agreements with the horse owners and trainers at those racetracks. In addition, in order to operate slot machines in West Virginia, we are required to enter into written agreements regarding the proceeds of the slot machines (a “proceeds agreement”) with a representative of a majority of the horse owners and trainers and with a representative of a majority of the pari ‑mutuel clerks. In Pennsylvania and Ohio, we must have an agreement with the representative of the horse owners. We have the requisite agreements in place with the horsemen at Mountaineer until December 31, 2018. With respect to the Mountaineer pari ‑mutuel clerks, we have a labor agreement in force until November 30, 2016 and a proceeds agreement until April 14, 2018. We are required to have a proceeds agreement in effect on July 1 of each year with the horsemen and the pari ‑mutuel clerks as a condition to renewal of our video lottery license for such year. If the requisite proceeds agreement is not in place as of July 1 of a particular year, Mountaineer’s application for renewal of its video lottery license could be denied, in which case Mountaineer would not be permitted to operate either its slot machines or table games. Scioto Downs has the requisite agreement in place with the OHHA until December 31, 2023, with automatic two ‑ year renewals unless either party requests re ‑negotiation pursuant to its terms. Presque Isle Downs has the requisite agreement in place with the Pennsylvania Horsemen’s Benevolent and Protective Association until May 1, 2019. With the exception of the respective Mountaineer, Presque Isle Downs and Scioto Downs horsemen’s agreements and the agreement between Mountaineer and the pari ‑mutuel clerks’ union described above, each of the agreements referred to in this paragraph may be terminated upon written notice by either party.

Note 11. Related Parties

 

The Company owns the entire parcel on which Eldorado Reno is located, except for approximately 30,000 square feet which is leased from C. S. & Y. Associates, a general partnership of which Donald L. Carano is a general partner. Mr. Carano is also a major shareholder in the Company. As of June 30, 2016 and December 31, 2015, the Company’s payable to C. S. & Y Associates amounted to $0.1 million. There were no payables to other related parties as of June 30, 2016 and December 31, 2015.

 

Note 12. Segment Information

 

The following table sets forth, for the periods indicated, certain operating data for our reportable segments. Management views each of our properties as an operating segment. Operating segments are aggregated based on their similar economic characteristics, types of customers, types of services and products provided, and their management and reporting structure. The Company’s principal operating activities occur in three geographic regions: Nevada, Louisiana and parts of the eastern United States. The Company has aggregated its operating segments into three reportable

20


 

segments: Eldorado Reno, Silver Legacy and Circus Reno as Nevada, Eldorado Shreveport as Louisiana, and Scioto Downs, Presque Isle and Mountaineer as Eastern.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

(in thousands, unaudited)

 

Revenues and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Nevada:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues

 

$

84,161

 

$

27,206

 

$

156,932

 

$

50,959

 

Expenses, excluding depreciation and corporate

 

 

(65,246)

 

 

(22,198)

 

 

(127,024)

 

 

(43,520)

 

(Loss) gain on sale or disposal of property

 

 

(214)

 

 

5

 

 

(180)

 

 

5

 

Equity in income of unconsolidated affiliate

 

 

 —

 

 

1,106

 

 

 —

 

 

588

 

Depreciation

 

 

(5,046)

 

 

(1,942)

 

 

(10,509)

 

 

(3,874)

 

Operating income—Nevada

 

$

13,655

 

$

4,177

 

$

19,219

 

$

4,158

 

Louisiana:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues

 

$

32,088

 

$

34,634

 

$

66,530

 

$

69,268

 

Expenses, excluding depreciation and amortization

 

 

(24,632)

 

 

(26,689)

 

 

(50,627)

 

 

(54,205)

 

Gain (loss) on sale or disposal of property

 

 

49

 

 

(1)

 

 

50

 

 

(1)

 

Depreciation and amortization

 

 

(1,964)

 

 

(1,888)

 

 

(3,910)

 

 

(3,807)

 

Operating income—Louisiana

 

$

5,541

 

$

6,056

 

$

12,043

 

$

11,255

 

Eastern:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues

 

$

115,066

 

$

120,793

 

$

221,419

 

$

229,857

 

Expenses, excluding depreciation, amortization and corporate

 

 

(90,953)

 

 

(93,611)

 

 

(174,927)

 

 

(180,910)

 

Loss on sale or disposal of property

 

 

(720)

 

 

(1)

 

 

(684)

 

 

 —

 

Depreciation and amortization

 

 

(8,459)

 

 

(10,107)

 

 

(17,143)

 

 

(20,632)

 

Operating income—Eastern

 

$

14,934

 

$

17,074

 

$

28,665

 

$

28,315

 

Corporate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate expenses

 

$

(4,354)

 

$

(3,901)

 

$

(11,258)

 

$

(8,061)

 

Acquisition charges

 

 

(56)

 

 

(253)

 

 

(576)

 

 

(337)

 

Gain on sale or disposal of property

 

 

49

 

 

 —

 

 

49

 

 

 —

 

Depreciation and amortization

 

 

(114)

 

 

(94)

 

 

(225)

 

 

(187)

 

Operating loss—Corporate

 

$

(4,475)

 

$

(4,248)

 

$

(12,010)

 

$

(8,585)

 

Total Reportable Segments

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues

 

$

231,315

 

$

182,633

 

$

444,881

 

$

350,084

 

Expenses, excluding depreciation and amortization

 

 

(185,185)

 

 

(146,399)

 

 

(363,836)

 

 

(286,696)

 

(Loss) gain on sale or disposal of property

 

 

(836)

 

 

3

 

 

(765)

 

 

4

 

Equity in income of unconsolidated affiliate

 

 

 —

 

 

1,106

 

 

 —

 

 

588

 

Acquisition charges

 

 

(56)

 

 

(253)

 

 

(576)

 

 

(337)

 

Depreciation and amortization

 

 

(15,583)

 

 

(14,031)

 

 

(31,787)

 

 

(28,500)

 

Operating income—Total Reportable Segments

 

$

29,655

 

$

23,059

 

$

47,917

 

$

35,143

 

Reconciliations to Consolidated Net Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income—Total Reportable Segments 

 

$

29,655

 

$

23,059

 

$

47,917

 

$

35,143

 

Unallocated income and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(12,795)

 

 

(17,232)

 

 

(25,786)

 

 

(34,464)

 

Loss on early retirement of debt

 

 

(89)

 

 

 —

 

 

(155)

 

 

 —

 

Provision for income taxes

 

 

(5,980)

 

 

(1,032)

 

 

(7,816)

 

 

(2,048)

 

Net income (loss)

 

$

10,791

 

$

4,795

 

$

14,160

 

$

(1,369)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

    

2016

    

2015

    

 

 

(in thousands, unaudited)

 

Capital Expenditures

    

 

    

    

 

    

 

Nevada

 

$

5,717

 

$

2,851

 

Louisiana

 

 

2,664

 

 

1,470

 

Eastern (1)

 

 

11,683

 

 

13,047

 

Corporate

 

 

281

 

 

495

 

Total

 

$

20,345

 

$

17,863

 

 

 

(1)

Amounts are before any West Virginia capital expenditure reimbursements.

 

 

 

 

 

21


 

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

 

 

June 30,

 

December 31,

 

 

    

2016

    

2015

 

 

 

(unaudited)

 

 

 

 

 

 

(in thousands)

 

Total Assets

 

 

    

 

 

    

 

Nevada

 

$

358,936

 

$

376,760

 

Louisiana

 

 

128,946

 

 

135,403

 

Eastern

 

 

850,599

 

 

883,344

 

Corporate

 

 

413,981

 

 

495,202

 

Eliminating entries (1)

 

 

(477,777)

 

 

(565,701)

 

Total

 

$

1,274,685

 

$

1,325,008

 

 

 

 

 

 

 

 

 

(1)  Reflects the following eliminations for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intercompany receivables/payables, inclusive of allocated interest

 

$

320,059

 

$

406,325

 

Net investment in Silver Legacy/Circus Reno

 

 

88,619

 

 

88,314

 

Net investment in and advances to Silver Legacy

 

 

56,500

 

 

56,500

 

Net investment in and advances to Eldorado Shreveport

 

 

7,733

 

 

8,482

 

Net investment in MTR

 

 

5,000

 

 

5,000

 

Reclass deferred tax assets against deferred tax liabilities

    

 

(134)

    

 

1,080

 

 

 

$

477,777

 

$

565,701

 

 

 

 

 

Note 13.  Employee Benefit Plans

 

In August 2015, the Company’s Compensation Committee and Board of Directors approved the termination of then existing Resorts and MTR Gaming 401(k) plans and the establishment of a new consolidated ERI 401(k) plan which became effective in January 2016. The plan covering the Company’s employees allows for an employer contribution up to 50 percent of the first four percent of each participating employee’s contribution, up to a maximum of $1,000, subject to statutory and certain other limits.

 

 

 

22


 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

General

 

Eldorado Resorts, Inc. (“ERI” or the “Company”), a Nevada corporation, was formed in September 2013 to be the parent company following the merger of wholly-owned subsidiaries of the Company into Eldorado HoldCo LLC (“HoldCo”), a Nevada limited liability company formed in 2009 that is the parent company of Eldorado Resorts LLC (“Resorts”), and MTR Gaming Group, Inc. (“MTR Gaming”), a Delaware corporation incorporated in 1988 (the “Merger”). Effective upon the consummation of the Merger on September 19, 2014 (the “Merger Date”), MTR Gaming and HoldCo each became a wholly-owned subsidiary of ERI and, as a result of such transactions, Resorts became an indirect wholly-owned subsidiary of ERI.

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

Prior to November 24, 2015 (the “Acquisition Date”), Resorts owned a 48.1% interest in the joint venture (the “Silver Legacy Joint Venture”) which owns the Silver Legacy Resort Casino (“Silver Legacy”), a major themed hotel and casino situated between and seamlessly connected at the mezzanine level to the Eldorado Reno and Circus Reno, (collectively, the “Reno Tri-Properties”), a hotel and casino previously owned and operated by Galleon, Inc., an indirect, wholly-owned subsidiary of MGM Resorts International.

On the Acquisition Date, Resorts consummated the acquisition of all of the assets and properties of Circus Circus Reno (“Circus Reno”) and the 50% membership interest in the Silver Legacy Joint Venture owned by Galleon, Inc. (collectively, the “Circus Reno/Silver Legacy Purchase” or the “Acquisition”) pursuant to a Purchase and Sale Agreement, dated as of July 7, 2015 (the “Purchase Agreement”), entered into by certain of our subsidiaries with Circus Circus Casinos, Inc. and Galleon, Inc., each an affiliate of MGM Resorts International, with respect to the acquisition. On the Acquisition Date, Resorts also exercised its right to acquire the 3.8% interest in Eldorado Limited Liability Company (“ELLC”) held by certain affiliates and shareholders of the Company. As a result of these transactions, ELLC and CC-Reno, LLC, a newly formed Nevada limited liability company, became wholly-owned subsidiaries of ERI, and Silver Legacy became an indirect wholly ‑owned subsidiary of ERI.

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

Presentation of Financial Information

ERI and its subsidiaries are collectively referred to as “we,” “us,” “our” or the “Company.” The financial information included in this Item 2 for periods prior to the Acquisition Date are those of the Company and its subsidiaries including Eldorado Reno, Eldorado Shreveport, MTR Gaming and its interest in the Silver Legacy Joint Venture.

The presentation of information herein for the period after the Acquisition Date is not fully comparable because the results of operations for Circus Reno are not included for the period prior to the Acquisition Date and the results of operations of the Silver Legacy Joint Venture were not consolidated prior to the Acquisition Date.

23


 

Reportable Segments

The Company has aggregated its operating segments into three reportable segments: Eldorado Reno, Silver Legacy and Circus Reno as Nevada, Eldorado Shreveport as Louisiana, and Scioto Downs, Presque Isle Downs and Mountaineer as Eastern.

Significant Factors Impacting Financial Results

The following summary highlights the significant factors impacting our financial results for the three and six months ended June 30, 2016 and 2015.

 

·

Circus Reno/Silver Legacy Purchase - Pursuant to the Purchase Agreement in November 2015, ERI paid $80.2 million in cash, comprised of the $72.5 million purchase price plus $7.7 million in estimated working capital adjustments and the assumption of the amounts outstanding under Silver Legacy’s senior secured term loan facility. An additional $0.5 million was paid subsequent to the Acquisition Date representing the final working capital adjustment. ERI funded the purchase price for the Acquisition and repaid the borrowings outstanding under the Silver Legacy credit facility using a portion of the proceeds from the sale of its Senior Notes, borrowings under its revolving credit facility and cash on hand. Information presented prior to the Acquisition Date does not reflect the results of operations for Circus Reno, and only includes our interest in the Silver Legacy Joint Venture prior to the Acquisition as an investment in an unconsolidated affiliate. As a result, incremental increases in revenues and expenses attributable to the addition of Circus Reno and Silver Legacy are reflected in our results of operations for the three and six months ended June 30, 2016.

 

·

Execution of Cost Savings Program – Starting in the second quarter of 2015, we identified several areas to improve property level and consolidated margins through operating and cost efficiencies, and exercising financial discipline throughout the Company without impacting the player experience. In addition to cost savings relating to duplicative executive compensation, legal and accounting fees and other corporate expenses that have been eliminated as a result of the Merger, we have achieved savings in marketing, food and beverage costs, selling, general and administrative expenses, and other operating departments as a result of operating efficiencies and purchasing power of the combined MTR and Eldorado organization.  After a full year of the cost savings program, we exceeded our target of $10 million on an annual basis coming in saving just over $12.5 million. These cost savings, which began in the second quarter of 2015, were reflected in our operating results for the six months ended June 30, 2016 primarily due to year over year improvements during the first quarter of 2016 compared to the same prior year period. Moreover, in addition to generating incremental revenues, we have realized, and expect additional future savings resulting from cost synergies across the Reno Tri-Properties in 2016 as a result of the Acquisition.

 

·

Refinancing and Reduction in Interest Expense In July 2015, we successfully refinanced all of our indebtedness, including the debt we assumed in the Merger in 2014. We issued $375.0 million in Senior Notes and entered into a new $425.0 million term loan and a new $150.0 million revolving credit facility, with the net proceeds utilized to, among other things, purchase our Resorts senior secured notes and MTR second lien notes. The refinancing reduced our annualized cash interest payments by approximately $35.0 million. Moreover, as a result of significant reductions in our outstanding indebtedness totaling $38.1 million and $73.6 million for the three and six months ended June 30, 2016, respectively, we realized additional savings in interest expense. See “Liquidity and Capital Resources” for more information related to our 2015 refinancing .

 

·

West Virginia Smoking Ban   On August 26, 2014, the Board of Health of Hancock County, West Virginia adopted and approved the Clean Air Regulation Act of 2014 (“Regulation”), which became effective July 1, 2015. The Regulation bans smoking in public places in Hancock County including Mountaineer. To comply with the Regulation upon its effective date, Mountaineer built a 9,300 square foot smoking pavilion which opened on July 1, 2015. During the six months ended June 30, 2016, we added 61 slot machines bringing our total to 322 slot machines and four table games located in the smoking patio. Notwithstanding our efforts to mitigate the impact of the smoking ban, the Regulation had a negative impact on our business and results of operations at Mountaineer, and continued to have a significant negative impact on Mountaineers’ business and results of operations throughout the first half of 2016.

24


 

 

·

Property Enhancement Capital Expenditures   During the fourth quarter of 2015, we began to realize the benefits of our property enhancement initiatives which targeted product and service offering upgrades across our entire portfolio. The completion of these initiatives by year-end 2015, helped drive increased volume to our properties and continues to be well-received by our customers. Most notably, the opening of The Brew Brothers , a restaurant and microbrewery at Scioto Downs, provided a meaningful increase in traffic and video lottery terminals (VLT) revenues subsequent to its opening in October 2015. Additionally, we completed a $5.0 million five-phase design and facility enhancement program at Presque Isle Downs that added a new casino center bar, an improved high limit gaming area and new slot product. In 2015, over 200 rooms were remodeled at Eldorado Reno and we completely refurbished the exterior of the Eldorado Shreveport.

 

We have continued our property enhancement initiatives in 2016. We opened a third The Brew Brothers restaurant at Presque Isle Downs in May and an escalator in July to improve traffic flow to the restaurant. Across our Nevada properties, we are planning new food and beverage offerings, hotel room upgrades, enhanced entertainment venues and new amenities to enhance our player experience. On June 30, 2016, we opened a second smoking patio at Scioto Downs which features a casino bar and 119 new VLTs. Construction continues on the 118-room Hampton Inn Hotel at Scioto Downs and is expected to open in the fourth quarter of 2016. In Shreveport, we are remodeling the second floor of the casino and expect to add approximately 138 new slot machines by the end of 2016. We continue to evaluate the offerings at Mountaineer with a goal of maintaining a positive customer experience while right sizing the property to maximize free cash flow and operational efficiencies.

 

·

New Regulation   –   Effective January 1, 2016, the Ohio Lottery Commission enacted new regulation which resulted in the establishment of a $1.0 million progressive slot liability and a corresponding decrease in net slot win for the six months ended June 30, 2016. The changes are non-cash and related to prior years. The net non-cash impact to Scioto Down’s operating income was $0.6 million for the six months ended June 30, 2016.

 

Results of Operations

The following table highlights the results of our operations (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Six Months Ended

 

 

 

 

 

 

June 30,

 

 

 

June 30,

 

 

 

 

    

2016

    

2015

    

% Change

    

2016

    

2015

    

% Change

    

Net revenues

 

$

231,315

 

$

182,633

 

26.7

%

 

$

444,881

 

$

350,084

 

27.1

%

 

Operating income

 

 

29,655

 

 

23,059

 

28.6

%

 

 

47,917

 

 

35,143

 

36.3

%

 

Net income (loss)

 

 

10,791

 

 

4,795

 

125.0

%

 

 

14,160

 

 

(1,369)

 

1,134.3

%

 

 

Operating Results.  Net revenues increased 26.7% and 27.1% for the three and six months ended June 30, 2016, respectively, over the same prior year periods primarily due to incremental revenues attributable to the aforementioned Acquisition combined with higher revenues at Eldorado Reno and Scioto Downs. These increases in net revenues were partially offset by decreases in net revenues at Mountaineer, Eldorado Shreveport and, to a lesser extent, a slight decline at Presque Isle Downs. Operating income increased 28.6% and 36.3% for the three and six months ended June 30, 2016, respectively, compared to the same prior year periods due to higher overall revenues combined with improved operating margins associated with company-wide cost savings initiatives.

 

Net income increased 125.0% and 1,134.3% for the three and six months ended June 30, 2016, respectively, compared to the same prior year periods as a result of the same factors impacting operating income. For the three and six months ended June 30, 2016, net income was also favorably impacted by decreases in interest expense totaling $4.4 million and $8.7 million, respectively, resulting from our refinancing in July 2015. This growth in net income for the three and six months ended June 30, 2016 was partially offset by an $0.8 million loss on the sale and disposal of a building and equipment related to the closure of a detached fitness center facility at Mountaineer and incremental depreciation associated with assets purchased in the Acquisition.

25


 

Net Revenues and Operating Income (Loss)

The following table highlights our net revenues and operating income (loss) by reportable segment (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Revenues for the three months ended June 30,

 

Net Revenues for the six months ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Nevada

 

$

84,161

 

$

27,206

 

$

156,932

 

$

50,959

 

Louisiana

 

 

32,088

 

 

34,634

 

 

66,530

 

 

69,268

 

Eastern

 

 

115,066

 

 

120,793

 

 

221,419

 

 

229,857

 

Corporate

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total

 

$

231,315

 

$

182,633

 

$

444,881

 

$

350,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss) for the three months ended June 30,

 

Operating Income (Loss) for the six months ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Nevada

 

$

13,655

 

$

4,177

 

$

19,219

 

$

4,158

 

Louisiana

 

 

5,541

 

 

6,056

 

 

12,043

 

 

11,255

 

Eastern

 

 

14,934

 

 

17,074

 

 

28,665

 

 

28,315

 

Corporate

 

 

(4,475)

 

 

(4,248)

 

 

(12,010)

 

 

(8,585)

 

Total

 

$

29,655

 

$

23,059

 

$

47,917

 

$

35,143

 

 

26


 

Three Months Ended June 30, 2016 Compared to the Three Months Ended June 30, 2015

Net revenues and operating expenses were as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

    

2016

    

2015

    

    

Variance

    

Percent

 

    

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gaming and Pari-Mutuel Commissions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Nevada

 

$

45,511

 

$

16,688

 

$

28,823

 

172.7

%

 

Louisiana

 

 

29,550

 

 

31,801

 

 

(2,251)

 

(7.1)

%

 

Eastern

 

 

106,291

 

 

111,355

 

 

(5,064)

 

(4.5)

%

 

Total Gaming and Pari-Mutuel Commissions

 

 

181,352

 

 

159,844

 

 

21,508

 

13.5

%

 

Non-gaming:

 

 

 

 

 

 

 

 

 

 

 

 

 

Nevada

 

 

50,429

 

 

14,632

 

 

35,797

 

244.6

%

 

Louisiana

 

 

9,598

 

 

9,357

 

 

241

 

2.6

%

 

Eastern

 

 

13,631

 

 

14,523

 

 

(892)

 

(6.1)

%

 

Total Non-gaming

 

 

73,658

 

 

38,512

 

 

35,146

 

91.3

%

 

Total Gross Revenues

 

 

255,010

 

 

198,356

 

 

56,654

 

28.6

%

 

Promotional allowances:

 

 

 

 

 

 

 

 

 

 

 

 

 

Nevada

 

 

(11,779)

 

 

(4,114)

 

 

7,665

 

186.3

%

 

Louisiana

 

 

(7,060)

 

 

(6,524)

 

 

536

 

8.2

%

 

Eastern

 

 

(4,856)

 

 

(5,085)

 

 

(229)

 

(4.5)

%

 

Total Promotional Allowances

 

 

(23,695)

 

 

(15,723)

 

 

7,972

 

50.7

%

 

Total Net Revenues

 

 

231,315

 

 

182,633

 

 

48,682

 

26.7

%

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gaming and Pari-Mutuel Commissions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Nevada

 

 

20,742

 

 

7,099

 

 

13,643

 

192.2

%

 

Louisiana

 

 

16,313

 

 

17,447

 

 

(1,134)

 

(6.5)

%

 

Eastern

 

 

66,250

 

 

69,613

 

 

(3,363)

 

(4.8)

%

 

Total Gaming and Pari-Mutuel Commissions

 

 

103,305

 

 

94,159

 

 

9,146

 

9.7

%

 

Non-gaming

 

 

 

 

 

 

 

 

 

 

 

 

 

Nevada

 

 

25,657

 

 

8,412

 

 

17,245

 

205.0

%

 

Louisiana

 

 

1,787

 

 

2,067

 

 

(280)

 

(13.5)

%

 

Eastern

 

 

7,936

 

 

7,403

 

 

533

 

7.2

%

 

Total Non-gaming

 

 

35,380

 

 

17,882

 

 

17,498

 

97.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing and promotions

 

 

9,766

 

 

7,404

 

 

2,362

 

31.9

%

 

General and administrative

 

 

32,380

 

 

23,053

 

 

9,327

 

40.5

%

 

Corporate

 

 

4,354

 

 

3,901

 

 

453

 

11.6

%

 

Depreciation and amortization

 

 

15,583

 

 

14,031

 

 

1,552

 

11.1

%

 

Total Operating Expenses

 

$

200,768

 

$

160,430

 

$

40,338

 

25.1

%

 

Gaming Revenues and Pari-Mutuel Commissions .  Gaming revenues grew 13.5% for the three months ended June 30, 2016 compared to the same 2015 period mainly due to an increase in Nevada gaming revenues resulting from incremental gaming revenues attributable to the Acquisition and higher gaming revenues at Eldorado Reno. Gaming revenues in Louisiana decreased $2.3 million during the second quarter compared to the same 2015 period due to a decline in gaming revenues driven by decreased high-end play associated with weakness in the energy sector along with a lower table games hold percentage. The Eastern segment recorded a 4.5% decline in gaming revenues and pari-mutuel commissions during the second quarter compared to the same 2015 period mainly due to decreased gaming revenues at Mountaineer associated with the aforementioned smoking ban that has had a negative impact on the property’s operations along with a decline in pari-mutuel commissions attributable to a decrease in the number of live racing days at all of our Eastern properties. These decreases were partially offset by continued improvements in gaming revenues at Scioto Downs during the second quarter compared to the same 2015 period.

Non-gaming Revenues.  Non-gaming revenues increased $35.1 million for the three months ended June 30, 2016 compared to the same 2015 period mainly due to incremental non-gaming revenues consisting of food, beverage, hotel, entertainment, retail and other revenues. The Nevada segment increased $35.8 million during the second quarter

27


 

compared to the same 2015 period due to the Acquisition and increased non-gaming revenues at Eldorado Reno driven by higher food, beverage and hotel revenues attributable to increased visitation and growth in the property’s average daily room rate. The Louisiana segment reported a 2.6% increase in non-gaming revenues during the second quarter compared to the same 2015 period mainly due to increased food and beverage revenues. The Eastern segment posted a 6.1% decrease in non-gaming revenues primarily due to declines at Mountaineer and Presque Isle Downs resulting from strategic changes in our promotional offers along with additional volume declines at Mountaineer associated with the smoking ban impact .   These decreases were partially offset by incremental non-gaming revenues at Scioto Downs attributable to the opening of The Brew Brothers in October 2015.    

Promotional Allowances.  Promotional allowances, expressed as a percentage of gaming revenues and pari-mutuel commissions, increased to 13.1% for the three months ended June 30, 2016 compared to 9.8% in the same 2015 period. Nevada promotional allowances, as a percentage of gaming revenues, were 25.9% for the three months ended June 30, 2016 compared to 24.7% in the same 2015 period. Louisiana promotional allowances, as a percentage of gaming revenues, increased to 23.9% for the three months ended June 30, 2016 from 20.5% in the same 2015 period partially due to the decrease in the table games hold percentage which negatively impacted gaming revenues. Eastern promotional allowances for the three months ended June 30, 2016 remained at 4.6% as a percentage of the segment’s gaming revenues and pari-mutuel commissions.

Gaming Expenses and Pari-Mutuel Commissions .  Nevada gaming expenses increased $13.6 million for the three months ended June 30, 2016 compared to the same 2015 period primarily due to incremental gaming expenses generated as a result of the Acquisition along with an increase in gaming expenses at Eldorado Reno associated with increased gaming revenues and volume. Louisiana gaming expenses decreased 6.5% during the second quarter compared to the same 2015 period due to lower gaming revenues combined with efforts to reduce variable operating costs including payroll expenditures and slot participation fees. The Eastern segment posted a decline in gaming expenses and pari-mutuel commissions for the three months ended June 30, 2016 compared to the same 2015 period primarily due lower gaming taxes at Mountaineer in conjunction with decreased gaming revenues and decreased pari-mutuel commissions resulting from fewer race days at all of our Eastern properties.

Non-gaming Expenses Non-gaming expenses increased $17.5 million for the three months ended June 30, 2016 compared to the same 2015 period. This growth was driven by higher Nevada non-gaming expenses which increased $17.2 million due to incremental expenses associated with the properties purchased in the Acquisition and, to a lesser extent, an increase in food and beverage expenses at Eldorado Reno associated with the property’s increase in food and beverage revenues. Efforts to control costs resulted in improved food departmental profit margins at Eldorado Reno during the three months ended June 30, 2016 compared to the same 2015 period. Non-gaming expenses in Louisiana declined 13.5% resulting from successful efforts to reduce costs, while the Eastern segment increased 7.2% during the three months ended June 30, 2016 compared to the same 2015 period primarily due to the addition of The Brew Brothers at Scioto Downs in October 2015.

Marketing and Promotions Expenses.  Consolidated marketing and promotions expense increased 31.9% for the three months ended June 30, 2016 compared to the same 2015 period. This increase was primarily attributable to incremental expenses in the Nevada segment associated with the Acquisition offset by declines in the Louisiana and Eastern segments.

General and Administrative Expenses.  Total general and administrative expenses increased 40.5% for the three months ended June 30, 2016 compared to the same 2015 period primarily due to incremental expenses in the Nevada segment resulting from the operation of the properties purchased in the Acquisition offset by declines in the Louisiana and Eastern segments due to continued efforts to decrease variable expenses via cost savings initiatives. 

Corporate Expenses.  Corporate expenses totaled $4.4 million for the three months ended June 30, 2016 compared to $3.9 million for the same 2015 period. This increase was partially due to higher payroll related expenditures at the corporate level subsequent to the Acquisition in addition to an executive team restructuring that took place during the first quarter of 2016, which resulted in the reallocation of property executive management to corporate in order to more fully utilize their skills across defined regions. This increase was partially offset by declines in general and administrative costs at the property level for the three months ended June 30, 2016 compared to the same 2015 period. Additionally, stock compensation expense was higher during the second quarter compared to the same 2015 period due to the Company’s three year vesting schedule resulting in two years of expense versus one year of expense in the same 2015 period.

28


 

Depreciation and Amortization Expense.  Total depreciation and amortization expense increased 11.1% for the three months ended June 30, 2016 compared to the same 2015 period mainly due to additional depreciation expense associated with acquired assets in conjunction with the Acquisition. The Nevada and Eastern segments contributed $5.0 million and $8.5 million, respectively, of depreciation and amortization expense for the three months ended June 30, 2016 compared to $1.9 million and $10.1 million in the same 2015 period, respectively.

Six Months Ended June 30, 2016 Compared to the Six Months Ended June 30, 2015

Net revenues and operating expenses were as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

    

2016

    

2015

    

    

Variance

    

Percent

 

    

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gaming and Pari-Mutuel Commissions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Nevada

 

$

84,413

 

$

31,118

 

$

53,295

 

171.3

%

 

Louisiana

 

 

61,197

 

 

63,724

 

 

(2,527)

 

(4.0)

%

 

Eastern

 

 

205,504

 

 

213,869

 

 

(8,365)

 

(3.9)

%

 

Total Gaming and Pari-Mutuel Commissions

 

 

351,114

 

 

308,711

 

 

42,403

 

13.7

%

 

Non-gaming:

 

 

 

 

 

 

 

 

 

 

 

 

 

Nevada

 

 

94,349

 

 

27,578

 

 

66,771

 

242.1

%

 

Louisiana

 

 

18,991

 

 

19,024

 

 

(33)

 

(0.2)

%

 

Eastern

 

 

25,107

 

 

25,852

 

 

(745)

 

(2.9)

%

 

Total Non-gaming

 

 

138,447

 

 

72,454

 

 

65,993

 

91.1

%

 

Total Gross Revenues

 

 

489,561

 

 

381,165

 

 

108,396

 

28.4

%

 

Promotional allowances:

 

 

 

 

 

 

 

 

 

 

 

 

 

Nevada

 

 

(21,830)

 

 

(7,737)

 

 

14,093

 

182.2

%

 

Louisiana

 

 

(13,658)

 

 

(13,480)

 

 

178

 

1.3

%

 

Eastern

 

 

(9,192)

 

 

(9,864)

 

 

(672)

 

(6.8)

%

 

Total Promotional Allowances

 

 

(44,680)

 

 

(31,081)

 

 

13,599

 

43.8

%

 

Total Net Revenues

 

 

444,881

 

 

350,084

 

 

94,797

 

27.1

%

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gaming and Pari-Mutuel Commissions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Nevada

 

 

39,660

 

 

13,685

 

 

25,975

 

189.8

%

 

Louisiana

 

 

33,442

 

 

35,446

 

 

(2,004)

 

(5.7)

%

 

Eastern

 

 

127,789

 

 

133,542

 

 

(5,753)

 

(4.3)

%

 

Total Gaming and Pari-Mutuel Commissions

 

 

200,891

 

 

182,673

 

 

18,218

 

10.0

%

 

Non-gaming

 

 

 

 

 

 

 

 

 

 

 

 

 

Nevada

 

 

49,898

 

 

16,600

 

 

33,298

 

200.6

%

 

Louisiana

 

 

3,720

 

 

4,038

 

 

(318)

 

(7.9)

%

 

Eastern

 

 

14,693

 

 

14,222

 

 

471

 

3.3

%

 

Total Non-gaming

 

 

68,311

 

 

34,860

 

 

33,451

 

96.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing and promotions

 

 

19,341

 

 

14,505

 

 

4,836

 

33.3

%

 

General and administrative

 

 

64,035

 

 

46,597

 

 

17,438

 

37.4

%

 

Corporate

 

 

11,258

 

 

8,061

 

 

3,197

 

39.7

%

 

Depreciation and amortization

 

 

31,787

 

 

28,500

 

 

3,287

 

11.5

%

 

Total Operating Expenses

 

$

395,623

 

$

315,196

 

$

80,427

 

25.5

%

 

 

Gaming Revenues and Pari-Mutuel Commissions .  Total gaming revenues increased 13.7% for the six months ended June 30, 2016 compared to the same 2015 period principally due to higher Nevada gaming revenues. This increase was mainly due to incremental gaming revenues attributable to the Acquisition and increased gaming revenues at Eldorado Reno during the six months ended June 30, 2016 compared to the same 2015 period. Gaming revenues in Louisiana decreased $2.5 million for the six months ended June 30, 2016 compared to the same 2015 period due to a decline in casino volume associated with weakness in the energy sector combined with a lower table games hold percentage. Gaming revenues and pari-mutuel commissions in the Eastern segment declined for the six months ended June 30, 2016 resulting in a 3.9% decrease compared to the same 2015 period. This decrease was mainly due to declines

29


 

in gaming revenues at Mountaineer associated with the aforementioned smoking ban that has had a negative impact on the property’s operations along with a decline in pari-mutuel commissions attributable to fewer live racing days across the Eastern properties. These decreases were partially offset by continued improvements in gaming revenues at Scioto Downs, despite the $1.0 million impact of the progressive liability change related to prior years during the first quarter of 2016, combined with higher gaming revenues at Presque Isle Downs for the six months ended June 30, 2016 compared to the same 2015 period.

Non-gaming Revenues.  Non-gaming revenues increased $66.0 million for the six months ended June 30, 2016 compared to the same 2015 period which were driven by incremental non-gaming revenues consisting of food, beverage, hotel, entertainment, retail and other revenues in the Nevada segment primarily as a result of the Acquisition combined with an increase in non-gaming revenues at Eldorado Reno. The Louisiana segment reported a slight decrease in non-gaming revenues for the six months ended June 30, 2016 compared to the same 2015 period. The Eastern segment posted a decrease in non-gaming revenues primarily due to the declines at Mountaineer and Presque Isle Downs resulting from strategic changes in our promotional offers along with additional volume declines at Mountaineer associated with the smoking ban impact .   Additionally, Presque Isle Downs experienced a decline in non-gaming revenues due to minor construction disruption for the six months ended June 30, 2016 related to the transformation of the old Clubhouse Restaurant into a new The Brew Brothers restaurant and installation of a brand new escalator going from the casino floor to the entrance of The Brew Brothers These decreases were partially offset by incremental non-gaming revenues at Scioto Downs for the six months ended June 30, 2016 compared to the same 2015 period attributable to the opening of The Brew Brothers in October 2015.  

Promotional Allowances.  Promotional allowances, expressed as a percentage of gaming revenues and pari-mutuel commissions, increased to 12.7% for the six months ended June 30, 2016 compared to 10.1% in the same 2015 period. Nevada promotional allowances, as a percentage of gaming revenues, were 25.9% for the six months ended June 30, 2016 compared to 24.9% in the same 2015 period. Louisiana promotional allowances, as a percentage of gaming revenues, increased to 22.3% for the six months ended June 30, 2016 from 21.2% in the same 2015 period. The Eastern segment’s promotional allowances for the six months ended June 30, 2016 declined to 4.5% as a percentage of the segment’s gaming revenues and pari-mutuel commissions compared to 4.6% in the same 2015 period. Reductions in promotional allowances, as a percentage of gaming revenues and pari-mutuel commissions in the Eastern segment were due to continued strategic revisions to our casino marketing programs in an effort to increase margins and maximize profitability.

Gaming Expenses and Pari-Mutuel Commissions .  Nevada gaming expenses increased $26.0 million for the six months ended June 30, 2016 compared to the same 2015 period primarily due to incremental gaming expenses generated as a result of the Acquisition along with an increase in gaming expenses at Eldorado Reno in conjunction with increased gaming revenues. Louisiana gaming expenses decreased 5.7% for the six months ended June 30, 2016 compared to the same 2015 period as a result of lower gaming revenues combined with efforts to reduce variable operating costs including payroll expenditures and slot participation fees. The Eastern segment’s gaming expenses and pari-mutuel commissions declined for the six months ended June 30, 2016 compared to the same 2015 period primarily due lower gaming taxes at Mountaineer in conjunction with decreased gaming revenues.

Non-gaming Expenses Non-gaming expenses increased $33.5 million for the six months ended June 30, 2016 compared to the same 2015 period . This growth was driven by higher Nevada non-gaming expenses which increased $33.3 million due to incremental expenses associated with the properties purchased in the Acquisition and, to a lesser extent, an increase in food expenses at Eldorado Reno associated with the property’s increase in food revenues. Efforts to control costs resulted in improved food departmental profit margins at Eldorado Reno for the six months ended June 30, 2016 compared to the same 2015 period . Non-gaming expenses in the Louisiana segment declined 7.9% mainly due to successful efforts to control costs while the Eastern segment’s non-gaming expenses increased 3.3% for the six months ended June 30, 2016 compared to the same 2015 period as a result of incremental revenues generated by the addition of The Brew Brothers at Scioto Downs in October 2015.

Marketing and Promotions Expenses.  Consolidated marketing and promotions expense increased 33.3% for the six months ended June 30, 2016 compared to the same 2015 period. This increase was primarily attributable to incremental expenses in the Nevada segment associated with the Acquisition offset by a decline in the Louisiana segment due to efforts to reduce advertising and promotional costs to maximize profitability. Marketing and promotions expense increased in the Eastern segment for the six months ended June 30, 2016 compared to the same 2015 period resulting from additional spending related to targeted e-commerce, marketing and promotional campaigns.

30


 

General and Administrative Expenses.  Total general and administrative expenses increased 37.4% for the six months ended June 30, 2016 compared to the same 2015 period primarily due to incremental expenses in the Nevada segment resulting from the operation of the properties purchased in the Acquisition offset by declines in the Louisiana and Eastern segments as the properties continued to decrease variable expenses via cost savings initiatives. 

Corporate Expenses.  Corporate expenses totaled $11.3 million for the six months ended June 30, 2016 compared to $8.1 million for the same 2015 period. This increase was partially due to higher payroll related expenditures at the corporate level subsequent to the Acquisition in addition to an executive team restructuring that took place during the first quarter of 2016. This restructuring resulted in the reallocation of property executive management to corporate in order to more fully utilize their skills across defined regions. This increase was partially offset by declines in general and administrative costs at the property level for the six months ended June 30, 2016 compared to the same 2015 period. Additionally, $1.5 million of severance costs were recorded for the six months ended June 30, 2016 along with $0.5 million of additional stock-based compensation expense as a result of severance related restricted stock units becoming fully vested during the current period. Also, stock compensation expense was higher for the six months ended June 30, 2016 compared to the same 2015 period due to the Company’s three year vesting schedule associated with the Company’s long-term incentive plan established in 2015 resulting in two years of expense in the current period versus one year of expense in the same 2015 period.

  Depreciation and Amortization Expense.  Total depreciation and amortization expense increased 11.5% for the six months ended June 30, 2016 compared to the same 2015 period mainly due to additional depreciation expense associated with acquired assets in conjunction with the Acquisition. The Nevada and Eastern segments contributed $10.5 million and $17.1 million, respectively, of depreciation and amortization expense for the six months ended June 30, 2016 compared to $3.8 million and $20.7 million in the same 2015 period, respectively.  

Supplemental Unaudited Presentation of Consolidated Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and Adjusted EBITDA for the Three and Six Months Ended June 30, 2016 and 2015

Adjusted EBITDA (defined below), a non GAAP financial measure, has been presented as a supplemental disclosure because it is a widely used measure of performance and basis for valuation of companies in our industry and we believe that this non GAAP supplemental information will be helpful in understanding the Company’s ongoing operating results. Adjusted EBITDA represents operating income (loss) before depreciation and amortization, stock based compensation, (gain) loss on the sale or disposal of property, severance expenses, equity in income of unconsolidated affiliate, acquisition charges, S-1 expenses and other regulatory gaming assessments, including the impact of the change in regulatory reporting requirements, to the extent that such items existed in the periods presented. Adjusted EBITDA is not a measure of performance or liquidity calculated in accordance with US GAAP, is unaudited and should not be considered an alternative to, or more meaningful than, net income (loss) as an indicator of our operating performance. Uses of cash flows that are not reflected in Adjusted EBITDA include capital expenditures, interest payments, income taxes, debt principal repayments and certain regulatory gaming assessments, which can be significant. As a result, Adjusted EBITDA should not be considered as a measure of our liquidity. Other companies that provide EBITDA information may calculate EBITDA differently than we do. The definition of Adjusted EBITDA may not be the same as the definitions used in any of our debt agreements.

31


 

The following table summarizes our Adjusted EBITDA for our operating segments for the three and six months ended June 30, 2016 and 2015, in addition to reconciling Adjusted EBITDA to operating income (loss) in accordance with US GAAP (unaudited, in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2016

 

 

 

Operating Income (Loss)

 

Depreciation and Amortization

 

Stock-Based Compensation

 

Transaction Expenses

 

Severance Expense

 

Other (4)

 

Adjusted EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nevada

 

$

13,655

 

$

5,046

 

$

 —

 

$

 —

 

$

 —

 

$

214

 

$

18,915

 

Louisiana

 

 

5,541

 

 

1,964

 

 

 —

 

 

 —

 

 

 —

 

 

(49)

 

 

7,456

 

Eastern

 

 

14,934

 

 

8,459

 

 

 —

 

 

 —

 

 

 —

 

 

646

 

 

24,039

 

Corporate

 

 

(4,475)

 

 

114

 

 

579

 

 

56

 

 

17

 

 

(49)

 

 

(3,758)

 

Total

 

$

29,655

 

$

15,583

 

$

579

 

$

56

 

$

17

 

$

762

 

$

46,652

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2015

 

 

 

Operating Income (Loss)

 

Depreciation and Amortization

 

Stock-Based Compensation

 

Transaction Expenses

 

Severance Expense

 

Other (4)

 

Adjusted EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nevada

 

$

10,759

 

$

4,647

 

$

 —

 

$

 —

 

$

40

 

$

(1,111)

 

$

14,335

 

Louisiana

 

 

6,056

 

 

1,888

 

 

 —

 

 

 —

 

 

 —

 

 

1

 

 

7,945

 

Eastern

 

 

17,074

 

 

10,107

 

 

 —

 

 

 —

 

 

12

 

 

(99)

 

 

27,094

 

Corporate

 

 

(4,248)

 

 

94

 

 

231

 

 

253

 

 

 —

 

 

1

 

 

(3,669)

 

Total (3)

 

$

29,641

 

$

16,736

 

$

231

 

$

253

 

$

52

 

$

(1,208)

 

$

45,705

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2016

 

 

 

Operating Income (Loss)

 

Depreciation and Amortization

 

Stock-Based Compensation (2)

 

Transaction Expenses

 

Severance Expense

 

Other (4)

 

Adjusted EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nevada

 

$

19,219

 

$

10,509

 

$

 —

 

$

 —

 

$

 —

 

$

180

 

$

29,908

 

Louisiana

 

 

12,043

 

 

3,910

 

 

 —

 

 

 —

 

 

 —

 

 

(50)

 

 

15,903

 

Eastern (1)

 

 

28,665

 

 

17,143

 

 

 —

 

 

 —

 

 

 —

 

 

1,136

 

 

46,944

 

Corporate

 

 

(12,010)

 

 

225

 

 

2,033

 

 

574

 

 

1,461

 

 

(49)

 

 

(7,766)

 

Total

 

$

47,917

 

$

31,787

 

$

2,033

 

$

574

 

$

1,461

 

$

1,217

 

$

84,989

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2015

 

 

 

Operating Income (Loss)

 

Depreciation and Amortization

 

Stock-Based Compensation

 

Transaction Expenses

 

Severance Expense

 

Other (4)

 

Adjusted EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nevada

 

$

11,942

 

$

10,315

 

$

 —

 

$

 —

 

$

41

 

$

(593)

 

$

21,705

 

Louisiana

 

 

11,255

 

 

3,807

 

 

 —

 

 

 —

 

 

25

 

 

1

 

 

15,088

 

Eastern

 

 

28,315

 

 

20,632

 

 

 —

 

 

 —

 

 

95

 

 

(120)

 

 

48,922

 

Corporate

 

 

(8,585)

 

 

187

 

 

821

 

 

337

 

 

11

 

 

1

 

 

(7,228)

 

Total (3)

 

$

42,927

 

$

34,941

 

$

821

 

$

337

 

$

172

 

$

(711)

 

$

78,487

 

(1)

Effective January 1, 2016, the Ohio Lottery Commission enacted a regulatory change which resulted in the establishment of a $1.0 million progressive slot liability and a corresponding decrease in net slot win in during the first quarter of 2016. The changes are non-cash and related primarily to prior years. The net non-cash impact to Adjusted EBITDA was $0.6 million for the six months ended June 30, 2016.

(2)

Included in stock-based compensation expense for the six months ended June 30, 2016 is $0.5 million of additional stock-based compensation expense as a result of severance related restricted stock units becoming fully vested during the first quarter of 2016.

(3)

Nevada results of operations for the three and six months ended June 30, 2015 include the operations of Silver Legacy and Circus Reno, which were acquired by ERI on November 24, 2015, as if the acquisition occurred on January 1, 2015. Such presentation does not conform with GAAP or the Securities and Exchange Commission rules for pro forma presentation; however, we have included the combined information because we believe it provides a meaningful comparison for the periods presented.

(4)

Other is comprised of (gain) loss on the sale or disposal of property, equity in income of unconsolidated affiliate and other regulatory gaming assessments, including the item listed in footnote (1) above.

 

32


 

Liquidity and Capital Resources

 

The primary sources of liquidity and capital resources have been existing cash, cash flow from operations, borrowings under our revolving credit facility and proceeds from the issuance of debt securities.

We expect that our primary capital requirements going forward will relate to the operation and maintenance of our properties and servicing our outstanding indebtedness. During the remainder of 2016, we plan to spend $29.7 million, net of reimbursements from West Virginia, on qualified capital expenditures, $22.7 million to pay interest on our outstanding indebtedness and $2.1 million for principal payments on our term loan. We expect that cash generated from operations will be sufficient to fund our operations and capital requirements, and service our outstanding indebtedness for the foreseeable future.

ERI is a holding company and its only significant assets are ownership interests in its subsidiaries. ERI’s ability to fund its obligations depends on the cash flow of its subsidiaries and the ability of its subsidiaries to distribute or otherwise make funds available to ERI.

At June 30, 2016, we had consolidated cash and cash equivalents of $41.0 million, including restricted cash of $3.9 million.

Operating Cash Flow.  For the six months ended June 30, 2016, cash flows provided by operating activities totaled $48.7 million compared to $19.2 million during the same prior year period. The increase in operating cash was primarily due to the increase in net income, including incremental net income associated with the Acquisition, the refinancing of our debt resulting in lower interest expense and changes in the balance sheet accounts in the normal course of business.

 

Investing Cash Flow.  Net cash flows used in investing activities totaled $15.4 million for the six months ended June 30, 2016, compared to $18.1 million for the same prior year period. Net cash flows used in investing activities for the six months ended June 30, 2016, primarily consisted of $20.3 million in capital expenditures for various property enhancement and maintenance projects and equipment purchases partially offset by West Virginia’s reimbursement of capital expenditures totaling $3.7 million.

 

Financing Cash Flow.  Net cash flows used in financing activities for the six months ended June 30, 2016, totaled $74.4 million and primarily consisted of net payments totaling $71.5 million on the New Revolving Credit Facility and $2.1 million in payments on the New Term Loan.

 

Capital Expenditures

 

For the six months ended June 30, 2016, additions to property and equipment aggregated $20.3 million, which included $5.7 million in Nevada, $2.7 million in Louisiana, $11.7 million attributable to the Eastern properties and $0.2 million at corporate.

Under legislation approved by West Virginia in July 2011, Mountaineer participates in a modernization fund which provides for reimbursement from amounts paid to the West Virginia Lottery Commission in an amount equal to $1 for each $2 expended for certain qualifying capital expenditures having a useful life of more than three years and placed into service after July 1, 2011. Qualifying capital expenditures include the purchase of slot machines and related equipment to the extent such slot machines are retained by Mountaineer at its West Virginia location for not less than five years. Any unexpended balance from a given fiscal year will be available for one additional fiscal year, after which time the remaining unused balance carried forward will be forfeited. As of June 30, 2016, Mountaineer remains eligible for $2.1 million under annual modernization fund grants that expire in varying dates through June 30, 2017. We can make no assurances Mountaineer will be able to make qualifying capital expenditure purchases sufficient to receive reimbursement of the available funds prior to their expiration nor that the modernization funds will continue to be available.

We anticipate spending on capital expenditures for the remainder of 2016 to be approximately $30.8 million, or $29.7 million after anticipated reimbursements from West Virginia on qualified capital expenditures.

33


 

Debt Obligations

Refinancing Transaction and Senior Notes

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

 

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

 

On or after August 1, 2018, the Company may redeem all or a portion of the Senior Notes upon not less than 30 nor more than 60 days’ notice, at the redemption prices (expressed as percentages of the principal amount) set forth below plus accrued and unpaid interest and additional interest, if any, on the Senior Notes redeemed, to the applicable redemption date, if redeemed during the twelve month period beginning on August 1 of the years indicated below:

 

 

 

Year

Percentage

2018

105.250% 

2019

103.500% 

2020

101.750% 

2021 and thereafter

100.000% 

 

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

 

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

 

·

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

·

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

·

create liens;

·

transfer and sell assets;

·

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

·

enter into certain transactions with affiliates;

·

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

·

create restrictions on dividends or other payments by restricted subsidiaries.

 

These covenants are subject to a number of exceptions and qualifications as set forth in the Indenture. The Indenture also provides for customary events of default which, if any of them occurs, would permit or require the

34


 

principal of and accrued interest on such Senior Notes to be declared due and payable. As of June 30, 2016, the Company was in compliance with all of the covenants under the Indenture relating to the Senior Notes .

 

New Credit Facility

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

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

The New Term Loan bears interest at a rate per annum of, at the Company’s option, either (x) LIBOR plus 3.25%, with a LIBOR floor of 1.0%, or (y) a base rate plus 2.25%. Borrowings under the New Revolving Credit Facility bear interest at a rate per annum of, at the Company’s option, either (x) LIBOR plus a spread ranging from 2.5% to 3.25% or (y) a base rate plus a spread ranging from 1.5% to 2.25%, in each case with the spread determined based on the Company’s total leverage ratio. Additionally, the Company pays a commitment fee on the unused portion of the New Revolving Credit Facility not being utilized in the amount of 0.50% per annum.

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

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

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

Contractual Obligations

 

There have been no material changes during the six months ended June 30, 2016 to our contractual obligations as disclosed in our Annual Report on Form 10 ‑K for the year ended December 31, 2015.

 

35


 

Other Liquidity Matters

 

The Pennsylvania Gaming Control Board (the “PGCB”), the Pennsylvania Department of Revenue and the Pennsylvania State Police (collectively “the Borrowers”), were required to fund the costs they incurred in connection with the initial development of the infrastructure to support gaming operations in Pennsylvania as well as the initial ongoing costs of the Borrowers. The initial funding of these costs was provided from a loan from the Pennsylvania General Fund in the amount of $36.1 million, and further funding was provided from additional loans from the Pennsylvania Property Tax Reserve Fund in the aggregate amount of $63.8 million.

The Pennsylvania Department of Revenue will assess all licensees, including Presque Isle Downs, their proportionate share of amounts represented by the borrowings, which are in the aggregate amount of $99.9 million, once the designated number of Pennsylvania’s slot machine licensees is operational. On July 11, 2011, the PGCB issued an administrative order which established that payments associated with the $63.8 million that was borrowed from the Property Tax Reserve Fund would commence on January 1, 2012. The repayment allocation between all current licensees is based upon equal weighting of (i) cumulative gross slot revenue since inception in relation to the combined cumulative gross slot revenue for all licensees and (ii) single year gross slot revenue (during the state’s fiscal year ending June 30) in relation to the combined single year gross slot revenue for all licensees; and amounts paid each year will be adjusted annually based upon changes in the licensee’s proportionate share of gross slot revenue. We have estimated that our total proportionate share of the aggregate $63.8 million to be assessed to the gaming facilities will be $4.1 million and will be paid quarterly over a ten ‑year period, which began effective January 1, 2012. For the $36.1 million that was borrowed from the General Fund, payment is scheduled to begin after all fourteen licensees are operational. Although we cannot determine when payment will begin, we have considered a similar repayment model for the General Fund borrowings and estimated that our total proportionate share of the aggregate $36.1 million to all fourteen gaming facilities will approximate between $2.0 million and $2.1 million , which has been accrued in the accompanying consolidated balance sheet at June 30, 2016 and December 31, 2015 .

The recorded estimate relative to the Property Tax Reserve Fund is subject to revision based upon future changes in the revenue assumptions utilized to develop the estimate. Our estimated total obligation at June 30, 2016 and December 31, 2015, was $4.1 million and $4.3 million, respectively, of which the residual total amount, both current and long-term, of $2.0 million and $2.2 million at June 30, 2016 and December 31, 2015, respectively, are appropriately accrued in the accompanying consolidated balan ce sheet . The Company paid $0.2 million for the six months ended June 30, 2016.

We are faced with certain contingencies involving litigation and environmental remediation and compliance. These commitments and contingencies are discussed in “Part II, Item 1. Legal Proceedings” and Note 10 to our unaudited consolidated financial statements, both of which are included elsewhere in this report. In addition, new competition may have a material adverse effect on our revenues, and could have a similar adverse effect on our liquidity. See “Part I, Item 1A. Risk Factors—Risks Related to Our Business” which is included in our Annual Report on Form 10-K for the year ended December 31, 2015 .

 

Critical Accounting Policies

 

Our critical accounting policies disclosures are included in our Annual Report on Form 10 ‑K for the year ended December 31, 2015. Management believes there have been no material changes since December 31, 2015. We have not substantively changed the application of our policies and there have been no material changes in assumptions or estimation techniques used as compared to prior periods.

 

Off ‑Balance Sheet Arrangements

 

We are not party to any off ‑balance sheet arrangements.

 

Cautionary Statement Regarding Forward ‑Looking Information

 

This report includes “forward ‑looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward ‑looking statements include statements regarding our strategies, objectives and plans for future development or acquisitions of properties or operations, as well as expectations, future operating results and other information that is not historical information.

36


 

When used in this report, the terms or phrases such as “anticipates,” “believes,” “projects,” “plans,” “intends,” “expects,” “might,” “may,” “estimates,” “could,” “should,” “would,” “will likely continue,” and variations of such words or similar expressions are intended to identify forward ‑looking statements. Forward ‑looking statements in this report include, among other things, statements concerning:

 

·

projections of future results of operations or financial condition;

 

·

expectations regarding our business and results of operations of our existing casino properties and prospects for future development;

 

·

expenses and our ability to operate efficiently;

 

·

expectations regarding trends that will affect our market and the gaming industry generally and the impact of those trends on our business and results of operations;

 

·

our ability to comply with the covenants in the agreements governing our outstanding indebtedness;

 

·

our ability to meet our projected debt service obligations, operating expenses, and maintenance capital expenditures;

 

·

expectations regarding availability of capital resources;

 

·

our intention to pursue development opportunities and acquisitions and obtain financing for such development and acquisitions; and

 

·

the impact of regulation on our business and our ability to receive and maintain necessary approvals for our existing properties and future projects.

 

Any forward ‑looking statement is based upon a number of estimates and assumptions that, while considered reasonable by us, is inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control, and are subject to change. Actual results of operations may vary materially from any forward ‑looking statement made herein. Forward ‑looking statements should not be regarded as a representation by us or any other person that the forward ‑looking statements will be achieved. Undue reliance should not be placed on any forward ‑looking statements. Some of the contingencies and uncertainties to which any forward ‑looking statement contained herein is subject include, but are not limited to, the following:

 

·

our substantial indebtedness and significant financial commitments could adversely affect our results of operations and our ability to service such obligations;

 

·

restrictions and limitations in agreements governing our debt could significantly affect our ability to operate our business and our liquidity;

 

·

our facilities operate in very competitive environments and we face increasing competition;

 

·

our dependence on our Nevada, Louisiana, West Virginia, Pennsylvania and Ohio casinos for substantially all of our revenues and cash flows;

 

·

our operations are particularly sensitive to reductions in discretionary consumer spending and are affected by changes in general economic and market conditions;

 

·

our gaming operations are highly regulated by governmental authorities and the cost of complying or the impact of failing to comply with such regulations;

 

·

changes in gaming taxes and fees in jurisdictions in which we operate;

 

·

risks relating to pending claims or future claims that may be brought against us;

37


 

 

·

changes in interest rates and capital and credit markets;

 

·

our ability to comply with certain covenants in our debt documents;

 

·

the effect of disruptions to our information technology and other systems and infrastructure;

 

·

construction factors relating to maintenance and expansion of operations;

 

·

our ability to attract and retain customers;

 

·

weather or road conditions limiting access to our properties;

 

·

the effect of war, terrorist activity, natural disasters and other catastrophic events;

 

·

the intense competition to attract and retain management and key employees in the gaming industry; and

 

·

the other factors set forth in Part I, Item 1A. “Risk Factors” included in our Annual Report on Form 10 ‑K for the year ended December 31, 2015.

 

In light of these and other risks, uncertainties and assumptions, the forward ‑looking events discussed in this report might not occur. Any forward ‑looking statement speaks only as of the date on which that statement is made. We do not intend to update publicly any forward ‑looking statement to reflect events or circumstances that occur after the date on which the statement is made, except as may be required by law.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

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. We do not hold any market risk sensitive instruments for trading purposes. Our primary exposure to market risk is interest rate risk, specifically long ‑term U.S. treasury rates and the applicable spreads in the high ‑yield investment risk, short ‑term and long ‑term LIBOR rates, and short ‑term Eurodollar rates, and their potential impact on our long ‑term debt. We attempt to limit our exposure to interest rate risk by managing the mix of our long ‑term fixed ‑rate borrowings and short ‑term borrowings under the New Credit Facility. We do not currently utilize derivative financial instruments for trading or speculative purposes. (See also “Liquidity and Capital Resources” above for additional information related to the refinancing of our long ‑term debt.)

 

As of June 30, 2016, our long ‑term variable ‑rate borrowings totaled $442.8 million comprised of $420.8 million under the New Term Loan and $22.0 million under the New Revolving Credit Facility and represented approximately 54% of our long ‑term debt.

 

There was no material change in interest rate risk for the six months ended June 30, 2016.

 

ITEM 4.  CONTROLS AND PROCEDURES.

 

(a)

Evaluation of Disclosure Controls and Procedures

 

We have established and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports that we file under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, evaluated and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost ‑benefit relationship of possible controls and procedures.

38


 

 

Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a ‑ 15(e) and 15d ‑15(e)) as of the end of the period covered by this Form 10 ‑Q Quarterly Report. They have concluded that our disclosure controls and procedures are effective to ensure that the information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized, evaluated and reported within the time periods specified in SEC rules and forms.

(b)

Changes in Internal Controls

 

There were no significant changes in our internal control over financial reporting identified in connection with the above evaluation that occurred during the period covered by this Form 10 ‑Q Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II

OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

 

We are a party to various lawsuits, which have arisen in the normal course of our business. Estimated losses are accrued for these lawsuits and claims when the loss is probable and can be estimated. The current liability for the estimated losses associated with those lawsuits is not material to our consolidated financial condition and those estimated losses are not expected to have a material impact on our results of operations.

 

Legal matters are discussed in greater detail in “Part I, Item 3. Legal Proceedings” and Note 16 to our Consolidated Financial statements included in our Annual Report on Form 10 ‑K for the year ended December 31, 2015.

 

ITEM 1A.  RISK FACTORS

 

A description of our risk factors can be found in “Part I, Item 1A. Risk Factors” included in our Annual Report on Form 10 ‑K for the year ended December 31, 2015. There have been no material changes to those risk factors during the six months ended June 30, 2016.

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4.  MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5.  OTHER INFORMATION.

 

None.

 

ITEM 6.  EXHIBITS.

 

Exhibit
Number

    

Description of Exhibit

    

Method of Filing

 

 

 

 

 

 

 

 

 

 

31.1 

 

Certification of Gary L. Carano pursuant to Rule 13a ‑14a and Rule 15d ‑14(a)

 

Filed herewith.

 

 

 

 

 

31.2 

 

Certification of Thomas R. Reeg pursuant to Rule 13a ‑14a and Rule 15d ‑14(a)

 

Filed herewith.

39


 

 

 

 

 

 

32.1 

 

Certification of Gary L. Carano in accordance with 18 U.S.C. Section 1350

 

Filed herewith.

 

 

 

 

 

32.2 

 

Certification of Thomas R. Reeg in accordance with 18 U.S.C. Section 1350

 

Filed herewith.

 

 

 

 

 

101.1 

 

XBRL Instance Document

 

Filed herewith.

 

 

 

 

 

101.2 

 

XBRL Taxonomy Extension Schema Document

 

Filed herewith.

 

 

 

 

 

101.3 

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

Filed herewith.

 

 

 

 

 

101.4 

 

XBRL Taxonomy Extension Definition Linkbase Document

 

Filed herewith.

 

 

 

 

 

101.5 

 

XBRL Taxonomy Extension Label Linkbase Document

 

Filed herewith.

 

 

 

 

 

101.6 

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

Filed herewith.

 

40


 

 

SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

ELDORADO RESORTS, INC.

 

 

 

 

Date: August 9, 2016

/s/ Gary L. Carano

 

Gary L. Carano

 

Chief Executive Officer and Chairman of the Board

 

 

 

 

Date: August 9, 2016

/s/ Thomas R. Reeg

 

Thomas R. Reeg

 

President and Chief Financial Officer

 

(Principal Financial and Accounting Officer)

 

 

41


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