NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1
—
Description of Business and Basis of Presentation
Organization and Description of Business
Caesars Acquisition Company (the "Company," "CAC," "we," "our" and "us"), a Delaware corporation, was formed on February 25, 2013 to make an equity investment in Caesars Growth Partners, LLC ("CGP LLC"), a joint venture between CAC and subsidiaries of Caesars Entertainment Corporation ("CEC" or "Caesars Entertainment"). CAC directly owns
100%
of the voting membership units of CGP LLC, a Delaware limited liability company, and accounts for its ownership in CGP LLC using the hypothetical liquidation at book value ("HLBV") approach to the equity method of accounting (see
Note 3
—
Equity Method Investment in Caesars Growth Partners, LLC
).
Proposed Merger of CAC with CEC
On
December 21, 2014
, the Company and CEC entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which, among other things, CAC will merge with and into CEC, with CEC as the surviving company (the "Proposed Merger").
On July 9, 2016, CAC and CEC agreed to amend and restate the Merger Agreement (the "Amended Merger Agreement"). In connection with the entry into the Amended Merger Agreement, on July 9, 2016, (i) CAC and Caesars Entertainment Operating Company, Inc. ("CEOC"), a majority owned subsidiary of CEC, agreed to amend and restate the Restructuring Support Agreement (as amended, the "CAC RSA"), dated as of June 12, 2016, among CAC, CEOC and CEC; (ii) CEC and CEOC agreed to amend the Restructuring Support, Settlement and Contribution Agreement, dated as of June 7, 2016 (as amended, the "CEC RSA" and, together with the CAC RSA, the "Caesars RSAs"), between CEC and CEOC; and (iii) CAC entered into a Voting Agreement (the "Voting Agreement") with Hamlet Holdings LLC ("Hamlet Holdings"), and solely with respect to certain provisions of the Voting Agreement, affiliates of Apollo Global Management, LLC and TPG Capital, LP and certain of their co-investors (collectively, the "Holders"). The Caesars RSAs were entered into with respect to the restructuring of CEOC's indebtedness (the "Restructuring") and, together with the Amended Merger Agreement, were consistent with the terms proposed under the second amended Joint Chapter 11 plan of reorganization (as amended, the "Merger Plan") of CEOC and each of the debtors (together with CEOC, the "Debtors") in the CEOC Chapter 11 Cases.
The Amended Merger Agreement also contains an amended "Go-Shop" provision on terms substantially the same as the "Go-Shop" provision originally set forth in the Merger Agreement. The Amended Merger Agreement also provides that (i) certain existing litigation, under specified circumstances, (ii) certain legislative changes and (iii) any change in the financial or securities markets or in the market price or valuation of any security or financial interest, or in the business, results of operations or prospects of either of CAC or CEC, subject to certain conditions, in each case will not provide cause for either the CAC board of directors (the "CAC Board") or the CEC board of directors (the "CEC Board") to effect an adverse recommendation change.
The Amended Merger Agreement was fully negotiated by and between the special committee of the CAC Board (the "CAC Special Committee") and the special committee of the CEC Board (the "CEC Special Committee"), each composed solely of independent directors, and was approved by the CAC Board and the CEC Board.
The closing of the merger is subject to the adoption of the Amended Merger Agreement by the affirmative vote of the holders of at least a majority of all outstanding shares of CAC's class A common stock, par value
$0.001
per share, and CAC's class B common stock, par value
$0.001
per share (collectively, the "CAC Common Stock") and CEC common stock, par value
$0.01
per share ("CEC Common Stock"), respectively. In addition to the closing conditions originally set forth in the Merger Agreement, each of CAC and CEC have agreed that their respective obligation to consummate the merger is subject to the fulfillment of the Merger Plan containing the Debtor Release, the Third-Party Release and the Exculpation. However, the Amended Merger Agreement eliminated from the closing conditions set forth in the Merger Agreement (i) minimum cash closing conditions for both parties and (ii) a closing condition that limited tax costs relating to the Restructuring to close the Proposed Merger.
The Amended Merger Agreement provides certain termination rights to each of CAC and CEC based on, among other things: (i) CEOC filing (including any of its debtor subsidiaries), without CAC's or CEC's prior written consent, respectively, (x) a plan of reorganization, a disclosure statement or a proposed order entered by the Bankruptcy Court confirming the Merger Plan that is materially consistent with the Caesars RSAs and the Merger Plan and otherwise acceptable to each of CAC and CEC ("Confirmation Order") that does not include the Debtor Release, the Third-Party Release or the Exculpation as to CAC, CGP LLC, their subsidiaries, and their respective representatives ("CAC Released Parties") or CEC, its subsidiaries, and their respective representatives ("CEC Released Parties"), respectively, in form and substance consistent in all material respects with such provisions as set forth in the Merger Plan or (y) any motion, pleading or other document with the Bankruptcy Court in the
CEOC Chapter 11 Cases that is otherwise materially inconsistent with the CAC RSA or CEC RSA, respectively, or the Merger Plan, (ii) the Confirmation Order (x) not including the Debtor Release, the Third-Party Release or the Exculpation as to the CAC Released Parties or the CEC Released Parties, respectively, in form and substance consistent in all material respect with such provisions as set forth in the Merger Plan or (y) not being otherwise materially consistent with the Merger Plan, (iii) the 105 Injunction Order no longer being in effect or, subject to certain conditions, CEOC failing to file a motion on or before August 14, 2016, or such earlier date as may be required by local rules governing the CEOC Chapter 11 Cases for the filing of such motion, seeking to extend the 105 Injunction Order currently in effect to the period ending on the confirmation date, (iv) either of the Caesars RSAs being terminated or becoming null and void or (v) the date on which the merger becomes effective not occurring by the close of business on December 31, 2017.
On February 20, 2017, CAC and CEC entered into the First Amendment to the Amended and Restated Agreement and Plan of Merger (the "Amendment"), which amends the Amended and Restated Agreement and Plan of Merger, dated as of July 9, 2016, between CAC and CEC (as amended by the Amendment, the "Amended Merger Agreement").
CEC's registration statement on Form S-4 filed with the Securities and Exchange Commission ("SEC") on March 13, 2017, as amended by Amendment No. 1 to such registration statement on Form S-4 filed with the SEC on June 5, 2017 and Amendment No. 2 to such registration statement on Form S-4 filed with the SEC on June 20, 2017 (as amended, the "Registration Statement"), was declared effective by the SEC on June 23, 2017. Special meetings of CEC and CAC stockholders were held on July 25, 2017, where a majority of stockholders agreed to, among other things, adopt the Merger Agreement and approve the Proposed Merger.
The Amendment provides for, among other things, a fixed exchange ratio such that upon consummation of the Merger, each share of CAC Common Stock, issued and outstanding immediately prior to the effective time of the Merger will be converted into, and become exchangeable for, that number of shares of CEC Common Stock, equal to
1.625
(the "Exchange Ratio"). The Exchange Ratio was calculated using the treasury stock method based on the daily volume-weighted average price of the CAC Common Stock and CEC Common Stock for the
20
consecutive trading days ended February 14, 2017 after taking into account the amount of CEC Common Stock to be issued pursuant to the Third Amended Joint Plan of Reorganization of CEOC, a majority owned subsidiary of CEC, and its debtor subsidiaries that was confirmed by the entry of an order by the United States Bankruptcy Court for the Northern District of Illinois on January 17, 2017 (the "Plan"), but without giving effect to the conversion of the convertible notes to be issued by CEC or the buy-back of CEC Common Stock from certain creditors of CEOC, each as contemplated by the Plan.
CAC's and CEC's obligation to consummate the Proposed Merger remains subject to (i) the receipt of (x) applicable regulatory approvals, including, if required, the expiration or early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and (y) certain tax opinions regarding the tax treatment of certain transactions contemplated by the Plan, (ii) the substantially contemporaneous consummation of the Plan and (iii) other customary closing conditions.
Basis of Presentation
Our unaudited condensed financial statements are prepared in accordance with generally accepted accounting principles ("GAAP") in the United States, which require the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of expenses during the reporting periods. Management believes the accounting estimates are appropriate and reasonably stated. However, due to the inherent uncertainties in making these estimates, actual amounts could differ.
The unaudited interim financial statements furnished reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented.
The results of operations for our interim periods are not necessarily indicative of the results of operations that may be achieved for the
2017
fiscal year. The accompanying unaudited condensed financial statements are prepared under the rules and regulations of the Securities and Exchange Commission ("SEC") applicable for interim periods and, therefore, do not include all information and footnotes necessary for complete financial statements in conformity with GAAP. Accordingly, the accompanying unaudited condensed financial statements should be read in conjunction with the Company's audited financial statements presented in the Company's Annual Report on Form 10-K for the year ended
December 31, 2016
.
Given the significance of the investment in CGP LLC to the financial position and results of operations of CAC, we have elected to include interim selected financial information of CGP LLC as an exhibit to this Quarterly Report. As CAC is the parent company to CGP LLC, a joint venture accounted for using the HLBV approach to the equity method of accounting, and as the interim selected financial information of CGP LLC is included as an exhibit to this Quarterly Report on Form
10-Q
, segment reporting is not required.
Note 2
—
Recently Issued Accounting Pronouncements
In January 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-01,
Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,
which primarily affects the accounting for equity investments that do not result in consolidation and are not accounted for under the equity method, presentation of changes in the fair value of financial liabilities measured under the fair value option, and the presentation and disclosure requirements for financial instruments. The ASU also clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. The ASU is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years. Entities can early adopt certain provisions of ASU No. 2016-01. We are currently assessing the impact the adoption of this standard will have on our financial statements.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
, which replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses on certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For available-for-sale debt securities, ASU No. 2016-13 aligns the income statement recognition of credit losses with the reporting period in which changes occur by recording credit losses and subsequent reversals through an allowance rather than a write-down. For public business entities that are SEC filers, the amendments in this guidance are effective for fiscal years beginning after December 15, 2019, and interim periods within those years. Early application will be permitted for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. We are currently assessing the impact the adoption of this standard will have on our financial statements.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which addresses classification issues related to the statement of cash flows. The amendments in ASU No. 2016-15 provide guidance on the following eight specific cash flow issues: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies including bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization transactions, and (8) separately identifiable cash flows and application of the predominance principle. For public business entities, the ASU will be effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. We are currently assessing the impact the adoption of this standard will have on our financial statements.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Per ASU No. 2017-09, an entity should account for the effects of a modification unless there is no change to the fair value, vesting conditions, and classification. This ASU is effective for all entities for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. We are currently assessing the impact the adoption of this standard will have on our financial statements.
Note 3
—
Equity Method Investment in Caesars Growth Partners, LLC
CAC's earnings from CGP LLC using the HLBV form of the equity method of accounting for the
six months ended June 30, 2017
were equal to our pro rata distribution of CGP LLC's net assets as a result of the increase in CGP LLC's net assets subsequent to the sale of Caesars Interactive Entertainment, LLC's ("CIE", formerly Caesars Interactive Entertainment, Inc.) social and mobile games business (the "SMG Business") in September 2016. CAC's earnings from CGP LLC using the HLBV form of the equity method of accounting for the
six months ended June 30, 2016
were equal to our preferred return of
10.5%
of capital invested by CGP LLC. CAC also receives distributions from CGP LLC in accordance with the Amended and Restated Limited Liability Company Agreement, the transaction agreement related to the formation of CGP LLC, ("CGP Operating Agreement") for reimbursement of its expenses incurred. These distributions are recorded as reductions to the equity method investment in Caesars Growth Partners, LLC.
Our investee, CGP LLC, had the following financial results, recast for the sale of the SMG Business described below, as of or for the periods indicated (see CGP LLC financial information in
Exhibit
99.1
):
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
(In millions)
|
2017
|
|
2016
|
Statements of Operations
|
|
|
|
Revenues
|
|
|
|
Net revenues
|
$
|
856.0
|
|
|
$
|
861.6
|
|
Operating expenses
|
|
|
|
Direct operating expenses
|
378.3
|
|
|
392.1
|
|
Property, general, administrative and other
|
234.2
|
|
|
274.0
|
|
Write-downs, reserves and project opening costs, net of recoveries
|
14.9
|
|
|
1.8
|
|
Management fees to related parties
|
22.4
|
|
|
24.7
|
|
Depreciation and amortization
|
88.4
|
|
|
82.2
|
|
Total operating expenses
|
738.2
|
|
|
774.8
|
|
Income from operations
|
117.8
|
|
|
86.8
|
|
Interest expense, net of interest capitalized
|
(94.9
|
)
|
|
(100.1
|
)
|
Interest income
|
9.4
|
|
|
—
|
|
Loss on extinguishment of debt
|
(4.6
|
)
|
|
—
|
|
Other expense, net
|
(0.2
|
)
|
|
—
|
|
Income/(loss) from continuing operations before benefit from income taxes
|
27.5
|
|
|
(13.3
|
)
|
Benefit from income taxes
|
—
|
|
|
3.4
|
|
Net income/(loss) from continuing operations
|
27.5
|
|
|
(9.9
|
)
|
Discontinued operations
|
|
|
|
Income from discontinued operations before income taxes
|
—
|
|
|
118.4
|
|
Provision for income taxes related to discontinued operations
|
—
|
|
|
(47.3
|
)
|
Net income from discontinued operations
|
—
|
|
|
71.1
|
|
Net income
|
27.5
|
|
|
61.2
|
|
Less: net loss/(income) attributable to non-controlling interests
|
1.1
|
|
|
(6.8
|
)
|
Net income attributable to Caesars Growth Partners, LLC
|
$
|
28.6
|
|
|
$
|
54.4
|
|
|
|
|
|
Balance Sheet Data (at period end)
|
June 30, 2017
|
|
December 31, 2016
|
Current assets
|
$
|
4,049.5
|
|
|
$
|
4,197.0
|
|
Long-term assets
|
3,139.2
|
|
|
3,168.7
|
|
Current liabilities
|
348.1
|
|
|
418.8
|
|
Long-term liabilities
|
2,288.0
|
|
|
2,286.8
|
|
Redeemable non-controlling interests
|
0.3
|
|
|
0.4
|
|
Equity attributable to Caesars Growth Partners, LLC
|
4,549.7
|
|
|
4,655.3
|
|
Non-redeemable non-controlling interests
|
2.6
|
|
|
4.4
|
|
Disposition of SMG Business
During the
six months ended June 30, 2017
, the estimated current income tax expense on the portion of the gain attributable to CAC related to CIE's sale of its SMG Business on September 23, 2016 (such sale, together with transactions contemplated under the Stock Purchase Agreement, dated as of July 30, 2016, the "Sale") was reduced by
$26.3 million
to
$258.6 million
. CGP LLC amended the CGP Operating Agreement to clarify the manner that taxable income resulting from the Sale would be allocated amongst the members. This resulted in less taxable income being allocated to CAC with comparatively more taxable income allocated to the other members.
$240.0 million
was paid during the year ended
December 31, 2016
and the remaining
$18.6 million
accrual is included in Accrued income taxes on CAC's Condensed Balance Sheet. CGP LLC's short-term Restricted cash includes
$60.7 million
remaining reserved for paying CAC's income tax expense on the portion of the taxable income attributable to CAC.
Pursuant to the Stock Purchase Agreement and the CIE Proceeds and Reservation of Rights Agreement (including exhibits thereto), CIE agreed to hold a portion of the Sale proceeds in a separate maintenance account (the "CIE Escrow Account") until the occurrence of certain bankruptcy release events. At
June 30, 2017
and
December 31, 2016
, the balance in the CIE Escrow Account was
$2,581.0 million
and
$2,718.1 million
, respectively, which is included as short-term Restricted cash in CGP LLC's Consolidated Condensed Balance Sheets.
In addition, CIE placed
$264.0 million
into escrow (the "Indemnity Escrow") to secure the potential indemnity claims of the purchaser for a period of twelve months from the SMG Business Sale closing date pursuant to the terms of the Stock Purchase Agreement. At
June 30, 2017
and
December 31, 2016
, the balance in the Indemnity Escrow was
$259.9 million
and
$259.5 million
, respectively, which is included as short-term Restricted cash on CGP LLC's Consolidated Condensed Balance Sheets. There have been no claims made against the Indemnity Escrow account as of the date of the filing of this Form 10-Q.
At both
June 30, 2017
and
December 31, 2016
, CGP LLC has accrued
$63.1 million
in Accrued expenses and other current liabilities on its Consolidated Condensed Balance Sheets, representing the amounts still due to the minority investors and former holders of CIE equity awards for the release of proceeds held in the Indemnity Escrow.
Consolidation of CR Baltimore Holdings
CGP LLC consolidates into its financial statements the accounts of any variable interest entity for which it is determined to be the primary beneficiary. Caesars Baltimore Investment Company, LLC ("CBIC") is wholly-owned and consolidated by CGP LLC. CBIC indirectly holds interests in CBAC Borrower, LLC, owner of the Horseshoe Baltimore Casino, through its ownership interest in CR Baltimore Holdings ("CRBH"), a variable interest entity. The counterparty that owns the minority interest in CRBH is restricted from transferring its interest in CRBH without prior consent from CBIC. As a result, CBIC has been determined to be the primary beneficiary of CRBH, and therefore, consolidates CRBH into its financial statements. Under the existing terms of the agreement, the transfer restrictions are expected to expire in the third quarter of 2017, at which time CBIC would no longer be considered the primary beneficiary and would deconsolidate CRBH. CBIC would then record its interest in CRBH at fair value and account for it as an equity method investment from that point forward.
Note 4
—
Stockholders' Equity and Earnings Per Share
Stockholders' Equity
Common Stock
As of
June 30, 2017
and
December 31, 2016
, CAC had a total of
138,984,958
and
138,458,000
shares outstanding, respectively, of Class A common stock and
no
shares of Class B common stock outstanding.
Call Right
Pursuant to the certificate of incorporation of CAC and the CGP Operating Agreement, after October 21, 2016, Caesars Entertainment and/or its subsidiaries have the right, which it may assign to any of its affiliates or to any transferee of all non-voting units of CGP LLC held by subsidiaries of Caesars Entertainment, to acquire all or a portion of the voting units of CGP LLC (or, at the election of CAC, shares of CAC's Class A common stock) not otherwise owned by Caesars Entertainment and/or its subsidiaries at such time (the "Call Right"). The purchase consideration may be, at Caesars Entertainment's option, cash or shares of Caesars Entertainment's common stock valued at market value, net of customary market discount and expenses, provided that the cash portion will not exceed
50%
of the total consideration in any exercise of the call right. The purchase price will be the greater of (i) the fair market value of the voting units of CGP LLC (or shares of CAC's Class A common stock) at such time based on an independent appraisal or (ii) the initial capital contribution in respect of such units plus a minimum
10.5%
per annum return on such capital contribution, subject to a maximum return on such capital contribution of
25%
per annum, taking into account prior distributions with respect to such units. As of
June 30, 2017
, the Call Right was not exercised.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income consists of unrealized gain and losses on investments, net of taxes. For the
three and six months ended June 30, 2017 and 2016
, no amounts were reclassified out of Accumulated other comprehensive income.
Investment in Notes from Related Party
CAC owns
$137.5 million
in aggregate principal amount of
6.50%
senior notes previously issued by CEOC ("CEOC Notes"), which matured on June 1, 2016, and
$151.4 million
in aggregate principal amount of
5.75%
CEOC Notes, maturing October 1, 2017. Both of these notes were included as a reduction of Additional paid-in capital in the Condensed Balance Sheets and Condensed Statements of Stockholders' Equity along with interest receivable at the distribution date. These notes are held at the distributed value with no subsequent adjustments such as fair value adjustments or interest receivable. Pursuant to the terms of the Amended Merger Agreement, CAC does not expect to collect principal or interest receivable from these notes. See
Note 9
—
Related Party Transactions
.
Earnings Per Share
Basic earnings per share ("EPS") is calculated by dividing net income by the weighted average number of common shares outstanding during the period in which the net income was earned. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation plans using the treasury stock method.
The following table summarizes the computations of Basic EPS and Diluted EPS:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In millions, except per share data)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net (loss)/income
|
$
|
(2.7
|
)
|
|
$
|
8.5
|
|
|
$
|
(0.7
|
)
|
|
$
|
17.7
|
|
|
|
|
|
|
|
|
|
Shares used to compute EPS:
|
|
|
|
|
|
|
|
Weighted average common stock outstanding - basic
|
138.9
|
|
|
137.4
|
|
|
138.8
|
|
|
137.4
|
|
Dilutive potential common shares
|
—
|
|
|
0.2
|
|
|
—
|
|
|
0.2
|
|
Weighted average common stock outstanding - diluted
|
138.9
|
|
|
137.6
|
|
|
138.8
|
|
|
137.6
|
|
|
|
|
|
|
|
|
|
(Loss)/earnings per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.02
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.13
|
|
Diluted
|
$
|
(0.02
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.13
|
|
As a result of our net loss for the
three and six months ended June 30, 2017
, we have excluded all share-based payment awards from the diluted loss per share calculation as their inclusion would have had an anti-dilutive effect. Had we reported net income for these periods, an additional
0.5 million
shares would have been included in the number of shares used to calculate Diluted EPS in each period. There were
1.7 million
anti-dilutive shares excluded from the computation of diluted earnings per share for the
three and six months ended June 30, 2016
, respectively.
Note 5
—
Income Taxes
Total provision for income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Benefit from/(provision for) income taxes
|
$
|
0.6
|
|
|
$
|
(8.6
|
)
|
|
$
|
(1.9
|
)
|
|
$
|
(17.2
|
)
|
CAC classifies reserves for tax uncertainties separate from any related income tax payable or deferred income taxes. Reserve amounts relate to any potential income tax liabilities resulting from uncertain tax positions and potential interest or penalties associated with those liabilities.
Income taxes are recorded under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the expected future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and attributable to operating income and tax credit carryforwards. CAC's equity-method investee, CGP LLC, is a partnership for income tax purposes so the deferred tax assets and liabilities recognized by CAC are also impacted by the expected future tax consequences of temporary differences at CGP LLC.
The effective tax rate for the
three and six months ended June 30, 2017
was
18.2%
and
158.3%
, respectively, which differed from the federal statutory tax rate of
35.0%
primarily due to interest on uncertain tax positions. The effective tax rate for the
three and six months ended June 30, 2016
was
50.3%
and
49.3%
, respectively, which differed from the federal statutory tax rate of
35.0%
primarily due to a federal valuation allowance recorded against deferred tax assets related to the basis difference in the investment in notes from related party.
CAC files income tax returns with federal and state jurisdictions. The 2016, 2015, 2014 and 2013 tax years are open for examination for CAC's federal and state jurisdictions.
CAC believes that it is reasonably possible that the unrecognized tax benefits will not materially change within the next 12 months. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although we believe that adequate provision has been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on our earnings. Conversely, if these issues are resolved favorably in the future, the related provision would be reduced, thus having a favorable impact on earnings.
Note 6
—
Litigation, Contractual Commitments and Contingent Liabilities
From time to time, CAC or CGP LLC may be subject to legal proceedings and claims in the ordinary course of business.
CEOC Bondholder Litigation, or Noteholder Disputes
On August 4, 2014, Wilmington Savings Fund Society, FSB, solely in its capacity as successor indenture trustee for the
10%
Second-Priority Senior Secured Notes due 2018 (the "Notes"), on behalf of itself and, it alleges, derivatively on behalf of
CEOC, filed a lawsuit (the "Delaware Second Lien Lawsuit") in the Court of Chancery in the State of Delaware against CEC, CEOC, CGP LLC, CAC, Caesars Entertainment Resort Properties, LLC ("CERP"), Caesars Enterprise Services, LLC ("CES"), Eric Hession, Gary Loveman, Jeffrey D. Benjamin, David Bonderman, Kelvin L. Davis, Marc C. Rowan, David B. Sambur, and Eric Press. The lawsuit alleges claims for breach of contract, intentional and constructive fraudulent transfer, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and corporate waste. The lawsuit seeks (1) an award of money damages; (2) to void certain transfers, the earliest of which dates back to 2010; (3) an injunction directing the recipients of the assets in these transactions to return them to CEOC; (4) a declaration that CEC remains liable under the parent guarantee formerly applicable to the Notes; (5) to impose a constructive trust or equitable lien on the transferred assets; and (6) an award to the plaintiffs for their attorneys' fees and costs. The only claims against CAC and CGP LLC are for intentional and constructive fraudulent transfer. CAC and CGP LLC believe this lawsuit is without merit and will defend themselves vigorously. A motion to dismiss this action was filed by CEC and other defendants in September 2014, and the motion was argued in December 2014. During the pendency of its Chapter 11 bankruptcy proceedings, the action has been automatically stayed with respect to CEOC. The motion to dismiss with respect to CEC was denied on March 18, 2015. In a Verified Supplemental Complaint filed on August 3, 2015, the plaintiff stated that due to CEOC's bankruptcy filing, the continuation of all claims was stayed pursuant to the bankruptcy except for Claims II, III, and X. These are claims against CEC only, for breach of contract in respect of the release of the parent guarantee formerly applicable to the Notes, for declaratory relief in respect of the release of this guarantee, and for violations of the Trust Indenture Act in respect of the release of this guarantee. CEC has informed us that fact discovery in the case is substantially complete, and cross-motions for summary judgment have been filed by the parties. On October 5, 2016, the Bankruptcy Court granted CEOC's motion for a stay of this proceeding (and others). On January 26, 2017, the Bankruptcy Court extended the stay to remain in effect until the earlier of (a) the effective date of the plan of reorganization confirmed on January 17, 2017, (b) the termination of any restructuring support agreement with the Official Committee of Second Priority Noteholders (the "Second Lien RSA") or (c) further order of the Bankruptcy Court.
On September 3, 2014, holders of approximately
$21 million
of CEOC Senior Unsecured Notes due 2016 and 2017 filed suit in federal district court in United States District Court for the Southern District of New York against CEC and CEOC, claiming broadly that an August 12, 2014 Note Purchase and Support Agreement between CEC and CEOC (on the one hand) and certain other holders of the CEOC Senior Unsecured Notes (on the other hand) impaired their own rights under the Senior Unsecured Notes. The lawsuit seeks both declaratory and monetary relief. On October 2, 2014, other holders of CEOC Senior Unsecured Notes due 2016 purporting to represent a class of all holders of these Notes from August 11, 2014 to the present filed a substantially similar suit in the same court, against the same defendants, relating to the same transactions. Both lawsuits (the "Senior Unsecured Lawsuits") were assigned to the same judge. The claims against CEOC have been automatically stayed during its Chapter 11 bankruptcy proceedings. The court denied a motion to dismiss both lawsuits with respect to CEC. The parties have completed fact discovery with respect to both plaintiffs' claims against CEC. On October 23, 2015, plaintiffs in the Senior Unsecured Lawsuits moved for partial summary judgment, and on December 29, 2015, those motions were denied. On December 4, 2015, plaintiff in the action brought on behalf of holders of CEOC's
6.50%
Senior Unsecured Notes moved for class certification and briefing has been completed. The judge presiding over these cases thereafter retired, and a new judge was appointed to preside over these lawsuits. That judge set a new summary judgment briefing schedule, and the parties filed cross-motions for summary judgment which remain pending. On October 5, 2016, the Bankruptcy Court granted CEOC's motion for a stay of these proceedings (and others). On January 26, 2017, the Bankruptcy Court extended the stay to remain in effect until the earlier of (a) the effective date of the plan of reorganization confirmed on January 17, 2017, (b) the termination of the Second Lien RSA or (c) further order of the Bankruptcy Court.
On November 25, 2014, UMB Bank ("UMB"), as successor indenture trustee for CEOC's
8.5%
senior secured notes due 2020, filed a verified complaint (the "Delaware First Lien Lawsuit") in Delaware Chancery Court against CEC, CEOC, CERP, CAC, CGP LLC, CES, and against an individual, and past and present members of the CEC and CEOC Boards of Directors, Gary Loveman, Jeffrey Benjamin, David Bonderman, Kelvin Davis, Eric Press, Marc Rowan, David Sambur, Eric Hession, Donald Colvin, Fred Kleisner, Lynn Swann, Chris Williams, Jeffrey Housenbold, Michael Cohen, Ronen Stauber, and Steven Winograd, alleging generally that defendants have improperly stripped CEOC of prized assets, have wrongfully affected a release of a CEC parental guarantee of CEOC debt and have committed other wrongs. Among other things, UMB has asked the court to appoint a receiver over CEOC. In addition, the Delaware First Lien Lawsuit pleads claims for fraudulent conveyances/transfers, insider preferences, illegal dividends, declaratory judgment (for breach of contract as regards to the parent guarantee and also as to certain covenants in the bond indenture), tortious interference with contract, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, usurpation of corporate opportunities, and unjust enrichment, and seeks monetary and equitable as well as declaratory relief. CAC and CGP LLC believe this lawsuit is without merit and will defend themselves vigorously. All of the defendants have moved to dismiss the lawsuit, and that motion has been fully briefed. In addition, this lawsuit has been automatically stayed with respect to CEOC during the Chapter 11 process and, pursuant to the (a) Fifth Amended and Restated Restructuring Support and Forbearance Agreement dated October 7, 2015, with certain holders of claims in respect of claims under CEOC's first lien notes (the "First Lien Bond RSA") and (b) Restructuring Support and Forbearance Agreement dated August 21, 2015, with certain holders of claims in respect of claims under CEOC's first lien credit agreement
(the "First Lien Bank RSA" and, together with the First Lien Bond RSA, the "RSAs"), has been subject to a consensual stay for all.
On February 13, 2015, Caesars Entertainment received a Demand For Payment of Guaranteed Obligations (the "February 13 Notice") from Wilmington Savings Fund Society, FSB, in its capacity as successor Trustee for CEOC's
10.00%
Second-Priority Notes. The February 13 Notice alleges that CEOC's commencement of its voluntary Chapter 11 bankruptcy case constituted an event of default under the indenture governing the
10.00%
Second-Priority Notes; that all amounts due and owing on the
10.00%
Second-Priority Notes therefore immediately became payable; and that Caesars Entertainment is responsible for paying CEOC's obligations on the
10.00%
Second-Priority Notes, including CEOC's obligation to timely pay all principal, interest, and any premium due on these notes, as a result of a parent guarantee provision contained in the indenture governing the notes that the February 13 Notice alleges is still binding. The February 13 Notice accordingly demands that Caesars Entertainment immediately pay Wilmington Savings Fund Society, FSB, cash in an amount of not less than
$3.7 billion
, plus accrued and unpaid interest (including without limitation the
$184 million
interest payment due December 15, 2014 that CEOC elected not to pay) and accrued and unpaid attorneys' fees and other expenses. The February 13 Notice also alleges that the interest, fees and expenses continue to accrue. CAC and CGP LLC are not parties to this demand.
On February 18, 2015, Caesars Entertainment received a Demand For Payment of Guaranteed Obligations (the "February 18 Notice") from BOKF, N.A. ("BOKF"), in its capacity as successor Trustee for CEOC's
12.75%
Second-Priority Senior Secured Notes due 2018 (the "
12.75%
Second-Priority Notes"). The February 18 Notice alleges that CEOC's commencement of its voluntary Chapter 11 bankruptcy case constituted an event of default under the indenture governing the
12.75%
Second-Priority Notes; that all amounts due and owing on the
12.75%
Second-Priority Notes therefore immediately became payable; and that CEC is responsible for paying CEOC's obligations on the
12.75%
Second-Priority Notes, including CEOC's obligation to timely pay all principal, interest and any premium due on these notes, as a result of a parent guarantee provision contained in the indenture governing the notes that the February 18 Notice alleges is still binding. The February 18 Notice therefore demands that CEC immediately pay BOKF cash in an amount of not less than
$750 million
, plus accrued and unpaid interest, accrued and unpaid attorneys' fees, and other expenses. The February 18 Notice also alleges that the interest, fees and expenses continue to accrue. CAC and CGP LLC are not parties to this demand.
On March 3, 2015, BOKF filed a lawsuit (the "New York Second Lien Lawsuit") against CEC in federal district court in Manhattan, in its capacity as successor trustee for CEOC's
12.75%
Second-Priority Notes. On June 15, 2015, UMB filed a lawsuit (the "New York First Lien Lawsuit") against CEC, also in federal district court in Manhattan, in its capacity as successor trustee for CEOC's
11.25%
Senior Secured Notes due 2017,
8.50%
Senior Secured Notes due 2020, and
9.00%
Senior Secured Notes due 2020. Plaintiffs in these actions allege that CEOC's filing of its voluntary Chapter 11 bankruptcy case constitutes an event of default under the indenture governing these notes, causing all principal and interest to become immediately due and payable, and that CEC is obligated to make those payments pursuant to a parent guarantee provision in the indentures governing these notes that plaintiffs allege are still binding. Both plaintiffs bring claims for violation of the Trust Indenture Act of 1939, breach of contract, breach of duty of good faith and fair dealing and for declaratory relief and BOKF brings an additional claim for intentional interference with contractual relations. The cases were assigned to the same judge presiding over the other Parent Guarantee Lawsuits. CEC filed its answer to the BOKF complaint on March 25, 2015, and to the UMB complaint on August 10, 2015. On June 25, 2015, and June 26, 2015, BOKF and UMB, respectively, moved for partial summary judgment, specifically on their claims alleging a violation of the Trust Indenture Act of 1939, seeking both declaratory relief and damages. On August 27, 2015, those motions were denied. The court, on its own motion, certified its order with respect to the interpretation of the Trust Indenture Act for interlocutory appeal to the United States Court of Appeals for the Second Circuit, and on December 22, 2015, the appellate court denied CEC's motion for leave to appeal. On November 20, 2015, BOKF and UMB again moved for partial summary judgment. Those motions likewise were denied. The judge presiding over these cases thereafter retired, and a new judge was appointed to preside over these lawsuits. That judge set a new summary judgment briefing schedule, and the parties submitted cross-motions for summary judgment which remain pending. On October 5, 2016, the Bankruptcy Court granted CEOC's motion for a stay of the New York First Lien Lawsuit and the New York Second Lien Lawsuit (and others). On January 26, 2017, the Bankruptcy Court extended the stay to remain in effect until the earlier of (a) the effective date of the plan of reorganization confirmed on January 17, 2017, (b) the termination of the Second Lien RSA or (c) further order of the Bankruptcy Court.
On October 20, 2015, Wilmington Trust, National Association ("Wilmington Trust"), filed a lawsuit (the "New York Senior Notes Lawsuit" and, together with the Delaware Second Lien Lawsuit, the Delaware First Lien Lawsuit, the Senior Unsecured Lawsuits, the New York Second Lien Lawsuit, and the New York First Lien Lawsuit, the "Parent Guarantee Lawsuits") against CEC in federal district court in Manhattan in its capacity as successor indenture trustee for CEOC's
10.75%
Senior Notes due 2016 (the "
10.75%
Senior Notes"). Plaintiff alleges that CEC is obligated to make payment of amounts due on the
10.75%
Senior Notes pursuant to a parent guarantee provision in the indenture governing those notes that plaintiff alleges is still in effect. Plaintiff raises claims for violations of the Trust Indenture Act of 1939, breach of contract, breach of the implied duty of good faith and fair dealing, and for declaratory judgment, and seeks monetary and declaratory relief. CEC filed its answer to the complaint on November 23, 2015. As with the other parent guarantee lawsuits taking place in Manhattan, the judge
presiding over these cases retired and a new judge was appointed to preside over these lawsuits. That judge set a new summary judgment briefing schedule and the parties submitted cross-motions for summary judgment which remain pending. On October 5, 2016, the Bankruptcy Court granted CEOC's motion for a stay of this proceeding (and others). On January 26, 2017, the Bankruptcy Court extended the stay to remain in effect until the earlier of (a) the effective date of the plan of reorganization confirmed on January 17, 2017, (b) the termination of the Second Lien RSA or (c) further order of the Bankruptcy Court.
In accordance with the terms of the applicable indentures and as previously disclosed, it is our understanding that CEC believes that it is not subject to the above-described guarantees. As a result, it is our understanding that CEC believes the demands for payment are without merit. The claims against CEOC have been stayed due to the Chapter 11 process and, except as described above, the actions against CEC have been allowed to continue.
CAC and CGP LLC believe that the claims and demands described above against CAC and CGP LLC in the Delaware First Lien Lawsuit and Delaware Second Lien Lawsuit are without merit and intend to defend themselves vigorously. For the Delaware First Lien Lawsuit and Delaware Second Lien Lawsuit, at the present time, CAC and CGP LLC believe it is not probable that a material loss will result from the outcome of these matters. However, given the uncertainty of litigation, CAC and CGP LLC cannot provide assurance as to the outcome of these matters or of the range of reasonably possible losses should the matters ultimately be resolved against them. Should these matters ultimately be resolved through litigation outside of the financial restructuring of CEOC, which such matters CAC and CGP LLC believe would likely be long and protracted, and were a court to find in favor of the claimants in the Delaware First Lien Lawsuit or the Delaware Second Lien Lawsuit, such determination could have a material adverse effect on CAC and CGP LLC's business, financial condition, results of operations, and cash flows.
Report of Bankruptcy Examiner
The Bankruptcy Court previously engaged an independent examiner to investigate possible claims CEOC might have against CEC, CAC, CGP LLC, other entities and certain individuals. On March 15, 2016, the examiner released his report in redacted form (to the public) and in unredacted form (to certain entities and individuals). On May 16, 2016, the examiner issued a substantially unredacted version of his report. CAC, CGP LLC and CIE do not have access to the unredacted report, and accordingly the description below is based on the substantially unredacted publicly-available report.
The examiner's report identifies a variety of potential claims against CAC, CGP LLC, CIE, other entities and certain individuals related to a number of transactions dating back to 2009. Most of the examiner's findings are based on his view that CEOC was "insolvent" at the time of the applicable transactions. The examiner's report includes his conclusions on the relative strength of these possible claims, many of which are described above. The examiner calculates an estimated range of potential damages for these potential claims as against all parties from
$3.6 billion
to
$5.1 billion
. The examiner calculates an estimated range of potential damages for potential claims against CAC, CGP LLC and CIE from
$1.7 billion
to
$2.3 billion
, ignoring potential duplication of recovery from other defendants. Neither calculation takes into account probability of success, likelihood of collection, or the time or cost of litigation.
Although this report was prepared at the request of the Bankruptcy Court, none of the findings are legally binding on the Bankruptcy Court or any party. CAC, CGP LLC and CIE contest many of the examiner's findings, including his finding that CEOC did not receive fair value for assets transferred, any suggestion that certain of the potential claims against CAC, CGP LLC and CIE have merit, and his calculation of potential damages. CAC, CGP LLC and its subsidiaries believe that each of the disputed transactions involving them provided substantial value to CEOC that was reasonably equivalent to the value of the asset
(s) transferred, and that they at all times acted in good faith.
National Retirement Fund
In January 2015, a majority of the Trustees of the National Retirement Fund ("NRF"), a multi-employer defined benefit pension plan, voted to expel CEC and its participating subsidiaries, the CEC Group, from the plan. Neither CAC, CGP LLC nor any of their subsidiaries are part of the CEC Group. NRF claims that CEOC's bankruptcy presents an "actuarial risk" to the plan because, depending on the outcome of the bankruptcy proceeding, CEC might no longer be liable to the plan for any partial or complete withdrawal liability. NRF has advised the CEC Group that its expulsion has triggered withdrawal liability with a present value of approximately
$360 million
, payable in
80
quarterly payments of about
$6 million
.
Prior to NRF's vote, the CEC Group reiterated its commitment to remain in the plan and not seek rejection of any collective bargaining agreements in which the obligation to contribute to NRF exists. The CEC Group was current with respect to pension contributions at the time of their expulsion.
On December 5, 2016, an interlocutory judgment was entered against CEC and CERP comprising the first quarterly payment of withdrawal liability referred to above, interest and liquidated damages under the Employee Retirement Income Security Act of 1974. On December 19, 2016, CEC and CERP filed a motion to certify a final judgment under Rule 54(b) of the Federal Rules of Civil Procedure for immediate appeal and to stay the plaintiffs' motions to amend and for summary judgment, as described below. On January 11, 2017, the District Court granted the motion to certify a final judgment under Rule 54(b) in
the amount of
$9 million
, but denied the motion for a stay, and a judgment in that amount was entered the next day. CEC has appealed this decision to the Second Circuit, and has bonded the judgment pending appeal.
On December 23, 2016, the plaintiffs filed a motion to amend their complaint to add claims for the second through eighth quarterly payments of withdrawal liability, which the plaintiffs contended were past due, as well as for injunctive relief requiring the defendants to pay all further quarterly payments as they purportedly became due. Also on December 23, 2016, the plaintiffs simultaneously filed a motion for summary judgment against CEC and CERP for payment of the second through eighth quarterly payments of withdrawal liability, for interest, liquidated damages, attorneys' fees and costs, and for injunctive relief requiring the defendants to pay all further quarterly payments as they purportedly became due. The magistrate judge has not yet ruled on these motions.
On March 13, 2017, CEC, CERP, CEOC (on behalf of itself and each of the Debtors and its other direct and indirect subsidiaries), the NRF, the NRF's Legacy Plan, the NRF's Trustees, and others entered into a Settlement Agreement (the "NRF Settlement Agreement"). Under the NRF Settlement Agreement, on the effective date of CEOC's plan of reorganization, CEC would pay
$45 million
to the NRF (the "NRF Payments") in three different baskets: (1) a settlement basket consisting of
$10 million
as litigation settlement and
$5 million
for legal fee reimbursement; (2) a contribution basket consisting of
$15 million
, which sum will grow at
3.1%
per year and which, beginning
17.5
years after the plan effective date, will be applied to offset the first
$8 million
of contributions to the Legacy Plan annually until completely utilized; and (3) a withdrawal liability basket of
$15 million
, which does not grow, to be applied if there is a partial or complete withdrawal at any time after the plan effective date. Upon the NRF Payments being made, mutual releases will be exchanged between the CEC-affiliated parties and the NRF-affiliated parties to the NRF Settlement Agreement. On March 20, 2017, the Debtors moved for the NRF Settlement Agreement to be approved by the Bankruptcy Court. Litigation among the parties would be stayed upon Bankruptcy Court approval of the NRF Settlement Agreement, and would be dismissed with prejudice once the Debtors' reorganization plan takes effect and the NRF Payments are made. On April 19, 2017, the Bankruptcy Court approved the NRF Settlement Agreement, and all actions and appeals have been stayed pending the settlement becoming final.
Other Matters
In recent years, governmental authorities have been increasingly focused on anti-money laundering ("AML") policies and procedures, with a particular focus on the gaming industry. In October 2013, CEOC's subsidiary, Desert Palace, Inc. (the owner of and referred to herein as Caesars Palace), received a letter from the Financial Crimes Enforcement Network of the United States Department of the Treasury ("FinCEN"), stating that FinCEN was investigating Caesars Palace for alleged violations of the Bank Secrecy Act to determine whether it is appropriate to assess a civil penalty and/or take additional enforcement action against Caesars Palace. Caesars Palace responded to FinCEN's letter in January 2014. Additionally, CEC was informed in October 2013 that a federal grand jury investigation regarding anti-money laundering practices of CEC and its subsidiaries had been initiated. CEC and Caesars Palace have been cooperating with FinCEN, the Department of Justice and the Nevada Gaming Control Board (the "GCB") on this matter. On September 8, 2015, FinCEN announced a settlement pursuant to which Caesars Palace agreed to an
$8 million
civil penalty for its violations of the Bank Secrecy Act, which penalty shall be treated as a general unsecured claim in Caesars Palace's bankruptcy proceedings. In addition, Caesars Palace agreed to conduct periodic external audits and independent testing of its AML compliance program, report to FinCEN on mandated improvements, adopt a rigorous training regime, and engage in a "look-back" for suspicious transactions. The terms of the FinCEN settlement were approved by the bankruptcy court on October 19, 2015.
CEOC and the GCB reached a settlement on the same facts as above, wherein CEC agreed to pay
$1.5 million
and provide to the GCB the same information that is reported to FinCEN and to resubmit its updated AML policies. On September 17, 2015, the settlement agreement was approved by the Nevada Gaming Commission. CEOC continues to cooperate with the Department of Justice in its investigation of this matter.
The Company is party to ordinary and routine litigation incidental to our business. We do not expect the outcome of any such litigation to have a material effect on our financial position, results of operations, or cash flows, as we do not believe it is reasonably possible that we will incur material losses as a result of such litigation.
Note 7
—
Stock-based Compensation
Restricted Stock Units
The following is a summary of CAC's restricted stock unit ("RSU") activity for the
six months ended June 30, 2017
:
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Fair Value
(1)
|
Outstanding at January 1, 2017
|
493,061
|
|
|
$
|
11.82
|
|
Vested
|
(126,663
|
)
|
|
11.70
|
|
Outstanding at June 30, 2017
|
366,398
|
|
|
11.86
|
|
_________________________
|
|
(1)
|
Represents the weighted-average grant date fair value per RSU.
|
As of
June 30, 2017
, there was approximately
$4.3 million
of total unrecognized compensation cost related to RSUs granted under the Caesars Acquisition Company 2014 Performance Incentive Plan (the "PIP Plan"), which is expected to be recognized over a weighted-average remaining period of
1.8 years
using the straight-line method.
During the
three and six months ended June 30, 2017
, total compensation expense recorded in earnings for RSUs granted under the PIP Plan was
$1.6 million
and
$2.8 million
, respectively. During the
three and six months ended June 30, 2016
, total compensation expense recorded in earnings for RSUs granted under the PIP Plan was
$1.1 million
and
$1.5 million
, respectively. This expense was included in Operating expenses in the Condensed Statements of Operations and Comprehensive (Loss)/Income.
Stock Options
The following is a summary of CAC's stock option activity for the
six months ended June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted Average Exercise Price
|
|
Fair Value
(1)
|
|
Weighted Average Remaining Contractual Term (years)
|
|
Aggregate Intrinsic Value
(in millions)
|
Outstanding at January 1, 2017
|
1,002,500
|
|
|
$
|
9.43
|
|
|
$
|
4.70
|
|
|
7.8
|
|
$
|
4.1
|
|
Exercised
|
(450,375
|
)
|
|
9.68
|
|
|
5.57
|
|
|
|
|
2.2
|
|
Outstanding at June 30, 2017
|
552,125
|
|
|
9.22
|
|
|
4.00
|
|
|
7.3
|
|
5.4
|
|
Vested and expected to vest at June 30, 2017
|
552,125
|
|
|
9.22
|
|
|
4.00
|
|
|
7.3
|
|
5.4
|
|
Exercisable at June 30, 2017
|
542,125
|
|
|
9.25
|
|
|
4.01
|
|
|
7.3
|
|
5.3
|
|
_________________________
|
|
(1)
|
Represents the weighted-average grant date fair value per option.
|
There were
no
stock options granted or canceled during the
six months ended June 30, 2017
. The weighted-average grant date fair value of stock options exercised during the
six months ended June 30, 2017
was
$5.57
. There were
no
stock options exercised during the
six months ended June 30, 2016
.
There were no stock option valuations required during the
three and six months ended June 30, 2017 and 2016
.
As of
June 30, 2017
, there is less than
$0.1 million
of total unrecognized compensation expense related to stock options granted under the PIP Plan, which is expected to be recognized over a weighted-average period of
1.9 years
.
During the
three and six months ended June 30, 2017
, there was an immaterial amount of compensation expense recorded in earnings for stock options. During the
three and six months ended June 30, 2016
, total compensation expense recorded in earnings for stock options was
$0.3 million
and
$0.7 million
, respectively. This expense was included in Operating expenses in the Condensed Statements of Operations and Comprehensive (Loss)/Income.
During the
six months ended June 30, 2017
, certain RSUs vested and options under the PIP Plan were exercised. CAC issued approximately
526,958
shares. In accordance with the CGP Operating Agreement, CGP LLC issued an equivalent number of Class A voting units to CAC, such that the number of shares of CAC stock outstanding equals the number of Class A voting units of CGP LLC owned by CAC. CAC's economic ownership of CGP LLC was
39.08%
at
June 30, 2017
.
Note 8
—
Supplemental Cash Flow Information
Significant non-cash transactions for the
six months ended June 30, 2017
included (1)
$18.5 million
in income from our equity method investment in CGP LLC, (2)
$18.0 million
of fees and expenses paid directly by CGP LLC that were incurred by CAC and also accounted for as a non-cash distribution from CGP LLC and (3) a
$26.3 million
adjustment for the estimated tax provision related to the gain on the Sale to be paid by CGP LLC on behalf of CAC.
Significant non-cash transactions for the
six months ended June 30, 2016
included (1)
$48.8 million
in income from our equity method investment in CGP LLC and (2)
$10.5 million
of fees and expenses paid directly by CGP LLC that were incurred by CAC and accounted for as a non-cash distribution from CGP LLC.
CAC's expenses incurred in the normal course of business are expected to be paid by CGP LLC on behalf of CAC in accordance with the CGP Operating Agreement.
During the
six months ended June 30, 2017
, CAC made a tax payment of
$2.5 million
. During the
six months ended June 30, 2016
, CAC did
no
t make any tax payments and C
GP LLC did
no
t make tax
paym
ents on behalf of CAC.
There was
no
interest expense incurred or cash paid for interest during the
six months ended June 30, 2017 and 2016
.
Note 9
—
Related Party Transactions
Management Services Agreement with CES
CES provides (a) certain corporate services and back office support, including payroll, accounting, risk management, tax, finance, recordkeeping, financial statement preparation and audit support, legal, treasury functions, regulatory compliance, insurance, information systems, office space and corporate, and other centralized services, (b) certain advisory and business management services, including developing business strategies, executing financing transactions and structuring acquisitions and joint ventures and (c) other services from time to time to CAC. In connection with the CGP Operating Agreement, CGP LLC pays for these services on behalf of CAC. CAC accounts for these amounts as non-cash distributions from CGP LLC, thereby reducing CAC's investment in CGP LLC.
Share-based Payments to Non-employees of CAC or CGP LLC
On April 9, 2014, the CAC Board approved the CAC Equity-Based Compensation Plan for CEC Employees (the "Equity Plan"). Under the Equity Plan, CEC is authorized to grant stock options, stock appreciation rights, stock bonuses, restricted stock, performance stock, stock units, phantom stock, dividend equivalents, cash awards, rights to purchase or acquire shares or similar securities in the form of or with a value related to our common stock to officers, employees, directors, individual consultants and advisers of CEC and its subsidiaries. The Equity Plan will terminate on April 9, 2024. Subject to adjustments in connection with certain changes in capitalization, the maximum value of the shares of our common stock that may be delivered pursuant to awards under the Equity Plan is
$25.0 million
. During the year ended
December 31, 2016
, shares granted under the Equity Plan vested. During the
three and six months ended June 30, 2016
, CGP LLC management fee expense associated with the Equity Plan was
$0.7 million
and
$1.4 million
, respectively.
Stock-based Compensation Granted to Related Parties
In May 2014, CAC granted RSUs to an employee. During the three month period ended March 31, 2016, this individual terminated employment and became a related party consultant. The vesting period and service period remained unchanged. Expense recognized for the RSU grants during the
three and six months ended June 30, 2017 and 2016
was immaterial.
Investment in Notes from Related Party
CAC owns
$137.5 million
in aggregate principal amount of
6.50%
CEOC Notes, which matured on June 1, 2016, and
$151.4 million
in aggregate principal amount of
5.75%
CEOC Notes, maturing October 1, 2017. Both of these notes were included as a reduction of Additional paid-in capital in the Condensed Balance Sheets and Condensed Statements of Stockholders' Equity along with interest receivable at the distribution date. These notes are held at the distributed value with no subsequent adjustments such as fair value adjustments or interest receivable. Pursuant to the terms of the Amended Merger Agreement, CAC does not expect to collect principal or interest receivable from these notes. For accounting purposes, the fair value of the distribution of these notes from CGP LLC reduced the deployed capital upon which the minimum guaranteed return to CAC has been calculated prospectively from the August 6, 2014 distribution date.
Note 10
—
Subsequent Event
Because significant recent developments and subsequent events related to our equity method investee could be impactful to our financial performance, we have elected to include disclosure of such items herein.
On July 7, 2017, CBAC Borrower, LLC (the "Borrower") borrowed
$300.0 million
of term loans (the "Term Loan") pursuant to a Credit Agreement among the Borrower, the lenders party thereto, Wells Fargo Gaming Capital, LLC, as Administrative Agent (the "Administrative Agent"), and Wells Fargo Securities, LLC, Macquarie Capital (USA) Inc. and Nomura Securities International, Inc., as Joint Lead Arrangers and Joint Bookrunners (the "Credit Agreement"). The Credit Agreement also provides for a
$15.0 million
revolving credit facility (the "Revolving Credit Facility"). The Borrower is the owner of the Horseshoe Baltimore and is a subsidiary of a joint venture among CGP LLC, an affiliate of Jack Entertainment LLC and other local investors.
Credit Agreement
The Term Loan matures in 2024 and the Revolving Credit Facility matures in 2022 and includes a letter of credit sub-facility. The Term Loan requires scheduled quarterly payments in amounts equal to
0.25%
of the original aggregate principal amount of the Term Loan, with the balance due at maturity. As of the closing date, no borrowings were outstanding under the Revolving Credit Facility, and no amounts were committed to outstanding letters of credit.
The Credit Agreement allows the Borrower to request one or more incremental term loan facilities and/or increase its commitments under the Revolving Credit Facility in an aggregate amount of up to the sum of (x) the greater of (1)
$40.0 million
and
0.69
times EBITDA (as defined in the Credit Agreement) plus (y) the amount of certain voluntary prepayments plus (z) such additional amount so long as, (i) in the case of loans under additional credit facilities that rank pari passu with the liens on the collateral securing the Credit Agreement, the Borrower's senior secured leverage ratio on a pro forma basis would not exceed (A) on any date on or prior to December 31, 2017,
3.75
to
1.00
and (B) on any date on or after January 1, 2018,
4.25
to
1.00
, (ii) in the case of loans under additional credit facilities that rank junior to the liens on the collateral securing the Credit Agreement, the Borrower's total secured leverage ratio on a pro forma basis would not exceed
4.50
to
1.00
and (iii) in the case of loans under additional credit facilities that are unsecured, the Borrower's interest coverage ratio on a pro forma basis would not be less than
2.00
to
1.00
, in each case, subject to certain conditions and receipt of commitments by existing or additional financial institutions or institutional lenders.
All future borrowings under the Credit Agreement are subject to the satisfaction of customary conditions, including the absence of a default and the accuracy of representations and warranties.
Interest and Fees
Borrowings under the Credit Agreement bear interest at a rate equal to, at the Borrower's option, either (a) the London Inter-Bank Offered Rate ("LIBOR") determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, subject to a floor of
0%
or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus
0.50%
, (ii) the prime rate as determined by the administrative agent under the Credit Agreement and (iii) the one-month adjusted LIBOR rate plus
1.00%
, in each case plus an applicable margin.
Such applicable margin shall be (a) if the Borrower's debt ratings from Moody's and S&P are both B2 (with a stable outlook) and B (with a stable outlook), or better,
3.75%
per annum for LIBOR loans and
2.75%
per annum for base rate loans and (b) if either such rating is not maintained at such time,
4.00%
per annum for LIBOR loans and
3.00%
per annum for base rate loans, in each case, subject to a
0.25%
step down with respect to the revolving loans based on the Borrower's senior secured leverage ratio.
In addition, on a quarterly basis, the Borrower is required to pay each lender under the Revolving Credit Facility a commitment fee in respect of any unused commitments under the Revolving Credit Facility in the amount of
0.50%
of the principal amount of unused commitments of such lender, subject to a stepdown to
0.375%
based upon the Borrower's senior secured leverage ratio. The Borrower is also required to pay customary agency fees as well as letter of credit participation fees computed at a rate per annum equal to the applicable margin for LIBOR borrowings on the dollar equivalent of the daily stated amount of outstanding letters of credit, plus such letter of credit issuer's customary documentary and processing fees and charges and a fronting fee in an amount equal to
0.125%
of the daily stated amount of such letter of credit.
Mandatory and Voluntary Prepayments
The Credit Agreement requires the Borrower to prepay outstanding term loans, subject to certain exceptions, with:
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50%
(which percentage will be reduced to
25%
if the senior secured leverage ratio is greater than
2.75
to
1.00
but less than or equal to
3.25
to
1.00
, and to
0%
if the Borrower's senior secured leverage ratio is less than or equal to
2.75
to
1.00
) of the Borrower's annual excess cash flow to the extent such amount exceeds
$3.0 million
, as defined under the Credit Agreement;
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100%
of the net cash proceeds of certain non-ordinary course asset sales or certain casualty events, in each case subject to certain exceptions and provided that the Borrower may (a) reinvest within 12 months or (b) contractually commit to reinvest those proceeds within 12 months and so reinvest such proceeds within 6 months following the end of such 12 month period, to be used in its business, or certain other permitted investments; and
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100%
of the net cash proceeds of any issuance or incurrence of debt, other than proceeds from debt permitted under the Credit Agreement.
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Collateral and Guarantors
The borrowings under the Credit Agreement will be guaranteed by the material, domestic wholly owned subsidiaries of the Borrower (subject to exceptions), and will be secured by a pledge (and, with respect to real property, mortgage) of substantially all of the existing and future property and assets of the Borrower and the guarantors (subject to exceptions),
including a pledge of the capital stock of the domestic subsidiaries held by the Borrower and the guarantors and
65%
of the capital stock of the first-tier foreign subsidiaries held by the Borrower and the guarantors, in each case subject to exceptions.
Restrictive Covenants and Other Matters
The Credit Agreement includes a maximum first-priority net senior secured leverage ratio financial covenant which is applicable to the Revolving Credit Facility only. In addition, for purposes of determining compliance with such financial maintenance covenant for any fiscal quarter, the Borrower may exercise an equity cure by issuing certain permitted securities for cash or otherwise receiving cash contributions to the capital of the Borrower or any of its direct or indirect parents that will, upon the receipt by the Borrower of such cash, be included in the calculation of EBITDA pro forma. The equity cure right may not be exercised in more than
two
fiscal quarters during any period of
four
consecutive fiscal quarters or more than
five
fiscal quarters during the term of the Revolving Credit Facility. Under the Credit Agreement, the Borrower may also be required to meet specified leverage ratios in order to take certain actions, such as incurring certain debt or making certain acquisitions and asset sales. In addition, the Credit Agreement includes negative covenants, subject to certain exceptions, restricting or limiting the Borrower's ability and the ability of its restricted subsidiaries to, among other things: (i) make non-ordinary course dispositions of assets; (ii) make certain mergers and acquisitions; (iii) make dividends and stock repurchases and optional redemptions (and optional prepayments) of subordinated debt; (iv) incur indebtedness; (v) make certain loans and investments; (vi) create liens; (vii) transact with affiliates; (viii) change the business of the Borrower and its restricted subsidiaries; (ix) enter into sale/leaseback transactions; (x) allow limitations on negative pledges and the ability of restricted subsidiaries to pay dividends or make distributions; (xi) change the fiscal year and (xii) modify subordinated debt documents.