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Section 1: 8-K/A (8-K/A)

8-K/A

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K/A

(Amendment No. 1)

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): August 7, 2018

 

 

Eldorado Resorts, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Nevada   001-36629   47-3657681

(State or other jurisdiction

of incorporation)

 

(Commission

File Number)

 

(IRS Employer

Identification No.)

 

100 West Liberty Street, Suite 1150

Reno, NV

  89501
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (775) 328-0100

Not Applicable

(Former name or former address, if changed since last report)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).

Emerging growth company  ☐

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

 

 

 


Explanatory Note

On August 7, 2018, Eldorado Resorts, Inc., a Nevada corporation (the “Company”), filed a Current Report on Form 8-K (the “Original 8-K”) to report the completion of its previously announced acquisition outstanding partnership interests of Elgin Riverboat Resort – Riverboat Casino d/b/a Grand Victoria Casino, an Illinois partnership (“Elgin”), the owner of Grand Victoria Casino, located in Elgin, Illinois (the “Acquisition”). The Acquisition was made pursuant to the Interest Purchase Agreement, dated as of April 15, 2018, by and among the Company, Elgin Holdings I LLC, a Delaware limited liability company and a direct wholly owned subsidiary of the Company, Elgin Holdings II LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of the Company, MGM Elgin Sub, Inc., a Nevada corporation, Illinois RBG, L.L.C., a Delaware limited liability company and Elgin. The Company is filing this amendment on Form 8-K/A, to (i) amend the Original 8-K, to include the financial information required by Item 9.01(a) and Item 9.01(b) of Form 8-K that was not included in the Original 8-K and (ii) file a consent of independent auditors as an exhibit to the Original 8-K. No other changes have been made to the Original 8-K.

 

Item 9.01

Financial Statements and Exhibits.

(a) Financial Statements of businesses acquired

The audited financial statements as of December 31, 2017 and 2016 and for the three years in the period ended December 31, 2017 and the unaudited financial statements as of June 30, 2018 and for the six month periods ended June 30, 2018 and 2017 are attached hereto as Exhibit 99.2

(b) Pro forma financial information

The selected unaudited pro forma condensed combined financial data for the year ended December 31, 2017 and as of and for the six months ended June 30, 2018 are attached hereto as Exhibit 99.3.

(d) Exhibits

The following exhibits are filed with this report:

 

Exhibit No.

  

Description

23.1    Consent of Deloitte & Touche LLP (as filed herewith).
99.2    Audited financial statements as of December 31, 2017 and 2016 and for the three years in the period ended December 31, 2017 and the unaudited financial statements as of June  30, 2018 and for the six month periods ended June 30, 2018 and 2017.
99.3    Selected unaudited pro forma condensed combined financial data for the year ended December 31, 2017 and as of and for the six months ended June 30, 2018.


SIGNATURES

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

 

        ELDORADO RESORTS, INC.,
        a Nevada corporation
  Date: September 5, 2018     By:  

/s/ Gary L. Carano

        Name: Gary L. Carano
        Title:   Chief Executive Officer
(Back To Top)

Section 2: EX-23.1 (EX-23.1)

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in Registration Statement No.’s (333-218775 and 333-220412) on Form S-3 and Registration Statement No’s (333-198830 and 333-203227) on Form S-8 of Eldorado Resorts, Inc. of our report dated February 13, 2018, relating to the financial statements of Elgin Riverboat Resort-Riverboat Casino (d/b/a Grand Victoria Casino) as of December 31, 2017 and 2016 and for the three years in the period ended December 31, 2017, appearing in this Current Report on Form 8-K/A of Eldorado Resorts, Inc. dated September 5, 2018.

/s/ DELOITTE & TOUCHE LLP

Indianapolis, Indiana

September 5, 2018

(Back To Top)

Section 3: EX-99.2 (EX-99.2)

EX-99.2

Exhibit 99.2

 

Elgin Riverboat Resort—Riverboat Casino

Financial Statements as of December 31, 2017 and 2016 and for the Three Years in the Period Ended December 31, 2017, and Independent Auditors’ Report


ELGIN RIVERBOAT RESORT—RIVERBOAT CASINO

TABLE OF CONTENTS

 

 

 

     Page

INDEPENDENT AUDITORS’ REPORT

   1–2

FINANCIAL STATEMENTS:

  

Balance Sheets as of December 31, 2017 and 2016

   3

Statements of Income for the three years in the period ended December 31, 2017

   4

Statements of Partners’ Equity for the three years in the period ended December 31, 2017

   5

Statements of Cash Flows for the three years in the period ended December 31, 2017

   6

Notes to Financial Statements

   7–12


LOGO        

Deloitte & Touche LLP

111 Monument Circle

Suite 4200

Indianapolis, IN 46204-5105

USA

 

Tel: +1 317 464 8600

Fax: +1 317 464 8500

www.deloitte.com

INDEPENDENT AUDITORS’ REPORT

To the Partners of the

Elgin Riverboat Resort—Riverboat Casino

Elgin, Illinois

We have audited the accompanying financial statements of Elgin Riverboat Resort—Riverboat Casino (the “Joint Venture”), which comprise the balance sheets as of December 31, 2017 and 2016, and the related statements of income, partners’ equity, and cash flows for the three years in the period ended December 31, 2017, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Joint Venture’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Joint Venture’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.


Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Elgin Riverboat Resort—Riverboat Casino as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the three years in the period ended December 31, 2017 in accordance with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP

Indianapolis, Indiana

February 13, 2018

 

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ELGIN RIVERBOAT RESORT—RIVERBOAT CASINO

BALANCE SHEETS    

AS OF DECEMBER 31, 2017 AND 2016    

 

 

     2017      2016  

ASSETS

     

CURRENT ASSETS:

     

Cash and cash equivalents

   $ 27,963,886      $ 27,817,301  

Accounts receivable—net of allowance for doubtful accounts of $15,000 and $10,000, respectively

     17,300        11,500  

Inventories

     258,541        249,587  

Prepaid expenses

     876,361        890,259  
  

 

 

    

 

 

 

Total current assets

     29,116,088        28,968,647  

PROPERTY AND EQUIPMENT—Net

     37,824,681        37,783,528  

OTHER ASSETS

     1,106,901        815,471  
  

 

 

    

 

 

 

TOTAL

   $ 68,047,670      $ 67,567,646  
  

 

 

    

 

 

 

LIABILITIES AND PARTNERS’ EQUITY

     

CURRENT LIABILITIES:

     

Accounts payable

   $ 1,485,540      $ 2,547,861  

Accrued liabilities

     15,979,827        16,238,566  

Due to affiliates

     126,293        125,710  
  

 

 

    

 

 

 

Total current liabilities

     17,591,660        18,912,137  

OTHER LIABILITIES

     1,013,920        727,491  
  

 

 

    

 

 

 

Total liabilities

     18,605,580        19,639,628  

COMMITMENTS AND CONTINGENCIES (Note 5 and 6)

     

PARTNERS’ EQUITY

     49,442,090        47,928,018  
  

 

 

    

 

 

 

TOTAL

   $ 68,047,670      $ 67,567,646  
  

 

 

    

 

 

 

See notes to financial statements.    

 

- 3 -


ELGIN RIVERBOAT RESORT—RIVERBOAT CASINO    

STATEMENTS OF INCOME    

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015    

 

 

     2017     2016     2015  

REVENUES:

      

Casino

   $ 156,971,760     $ 153,286,887     $ 161,788,497  

Food and beverage

     12,522,053       12,761,669       13,349,104  

Admissions and other

     6,391,097       6,231,450       7,375,416  
  

 

 

   

 

 

   

 

 

 

Total revenues

     175,884,910       172,280,006       182,513,017  

Less casino promotional allowances

     (11,775,461     (11,777,098     (12,695,760
  

 

 

   

 

 

   

 

 

 

Revenues—net

     164,109,449       160,502,908       169,817,257  
  

 

 

   

 

 

   

 

 

 

OPERATING EXPENSES:

      

Casino

     89,614,688       86,930,730       91,617,079  

Food and beverage

     4,499,429       4,400,335       4,532,953  

General and administrative

     11,436,103       10,205,071       10,715,562  

Charitable donations

     7,449,357       7,186,157       8,596,141  

Depreciation and amortization

     7,103,894       6,647,814       7,041,841  

Preferred distribution

     1,684,312       1,636,342       1,715,020  

Other operating expenses

     14,709,480       13,466,621       15,124,859  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     136,497,263       130,473,070       139,343,455  
  

 

 

   

 

 

   

 

 

 

OPERATING INCOME

     27,612,186       30,029,838       30,473,802  

OTHER INCOME—Net

     1,886       639,168       1,644  
  

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 27,614,072     $ 30,669,006     $ 30,475,446  
  

 

 

   

 

 

   

 

 

 

See notes to financial statements.    

 

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ELGIN RIVERBOAT RESORT—RIVERBOAT CASINO    

STATEMENTS OF PARTNERS’ EQUITY    

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015    

 

 

     Nevada
Landing
Partnership
    RBG, L.P.     Total  

BALANCE—January 1, 2015

   $ 24,491,783     $ 24,491,783     $ 48,983,566  

Net income

     15,237,723       15,237,723       30,475,446  

Distributions to partners

     (16,850,000     (16,850,000     (33,700,000
  

 

 

   

 

 

   

 

 

 

BALANCE—December 31, 2015

   $ 22,879,506     $ 22,879,506     $ 45,759,012  

Net income

     15,334,503       15,334,503       30,669,006  

Distributions to partners

     (14,250,000     (14,250,000     (28,500,000
  

 

 

   

 

 

   

 

 

 

BALANCE—December 31, 2016

     23,964,009       23,964,009       47,928,018  

Net income

     13,807,036       13,807,036       27,614,072  

Distributions to partners

     (13,050,000     (13,050,000     (26,100,000
  

 

 

   

 

 

   

 

 

 

BALANCE—December 31, 2017

   $ 24,721,045     $ 24,721,045     $ 49,442,090  
  

 

 

   

 

 

   

 

 

 

See notes to financial statements.    

 

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ELGIN RIVERBOAT RESORT—RIVERBOAT CASINO

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015

 

 

     2017     2016     2015  

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income

   $ 27,614,072     $ 30,669,006     $ 30,475,446  

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     7,103,894       6,647,814       7,041,841  

Loss on disposal of assets

     —         (909     (386

Changes in assets and liabilities:

      

Accounts receivable

     (5,800     (21,414     103,141  

Inventories

     (8,954     88,745       13,673  

Prepaid expenses

     13,898       (80,408     (117,657

Other assets

     (291,430     (206,050     (77,245

Accounts payable

     (87,498     (418,442     112,791  

Accrued liabilities

     (258,739     (1,369,635     823,539  

Due to affiliates

     583       (22,370     8,142  

Other liabilities

     286,429       231,050       87,162  
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     34,366,455       35,517,387       38,470,447  
  

 

 

   

 

 

   

 

 

 

CASH FLOWS USED IN INVESTING ACTIVITIES:

      

Capital expenditures

     (7,876,738     (8,271,614     (4,912,148

Construction in progress

     (243,132     49,390       30,716  
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (8,119,870     (8,222,224     (4,881,432
  

 

 

   

 

 

   

 

 

 

CASH FLOWS USED IN FINANCING ACTIVITY—Distributions to partners

     (26,100,000     (28,500,000     (33,700,000
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (26,100,000     (28,500,000     (33,700,000
  

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     146,585       (1,204,837     (110,985

CASH AND CASH EQUIVALENTS:

      

Beginning of year

     27,817,301       29,022,138       29,133,123  
  

 

 

   

 

 

   

 

 

 

End of year

   $ 27,963,886     $ 27,817,301     $ 29,022,138  
  

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION—Capital expenditures incurred but not yet paid

   $ 615,640     $ 1,590,463     $ 127,452  
  

 

 

   

 

 

   

 

 

 

See notes to financial statements.

 

- 6 -


ELGIN RIVERBOAT RESORT—RIVERBOAT CASINO

NOTES TO FINANCIAL STATEMENTS

 

 

1.

BUSINESS

Elgin Riverboat Resort—Riverboat Casino (the “Joint Venture”), doing business as the Grand Victoria Casino, was formed in December 1992, as a partnership under the Joint Venture Agreement between RBG, L.P. (“Managing Partner”) and Nevada Landing Partnership, in which each owns a 50% interest.

The Joint Venture is licensed by the Illinois Gaming Board (“IGB”) to own and operate a riverboat casino on the Fox River in Elgin, Illinois. The original license was issued on October 6, 1994. On October 7, 2016, the IGB approved the renewal of the license for another term of four years.

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents—Cash and cash equivalents include investments and interest-bearing instruments with an original maturity of three months or less. Such investments are recorded at the lower of cost or market value. The Joint Venture maintains cash balances at a financial institution in excess of federally insured limits. Included in cash and cash equivalents is $300,000 of restricted cash related to the certificate of deposit used as collateral (refer to Note 9).

Inventories—Inventories, consisting of food, beverage and gift shop items, are stated at the lower of cost or market value. Cost is determined by the first-in, first-out method.

Property and Equipment—Property and equipment are stated at cost. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives are as follows:

 

Buildings

     39 years  

Riverboat

     20 years  

Leasehold improvements

     15 years  

Furniture, fixtures and equipment, and gaming equipment

     2–5 years  

Long-Lived Assets—The Joint Venture reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. If undiscounted expected future cash flows are less than the carrying value, an impairment loss would be recognized equal to an amount by which the carrying value exceeds the fair value of the asset. The factors considered by the Joint Venture in performing this assessment include current operating results, trends and prospects, as well as the effect of obsolescence, demand, competition and other economic factors. No impairment of long-lived assets was recognized by the Joint Venture during 2017, 2016, or 2015.

 

- 7 -


Reserve for Players’ Club—The Joint Venture’s players’ club allows customers to earn “points” based on the volume of slot play. Points are redeemable for cash back incentives.

The Joint Venture has accrued a liability for all points earned but not yet redeemed by active slot club members. This average cost has been determined to be 33.51% of the retail value.

Revenue Recognition—Casino revenues are recorded as the net win from gaming activities, which is the difference between gaming wins and losses, with liabilities recognized for funds deposited by customers before gaming play occurs and for chips in the customers’ possession. Jackpots, other than the incremental amount of progressive jackpots, are recognized at the time they are won by customers. The Joint Venture accrues the incremental amount of progressive jackpots as the progressive machine is played and the progressive jackpot amount increases, with a corresponding reduction of casino revenue. Food, beverage, admissions and other revenues are recorded as services are rendered.

Promotional Allowances—The retail value of food, beverage, admissions and other complimentary items furnished to customers without charge is included in gross revenue and then deducted as promotional allowances. The estimated costs of providing such promotional allowances have been included in casino expenses for the years ended December 31, 2017, 2016, and 2015, and are as follows:

 

     2017      2016      2015  

Food and beverage

   $ 7,989,205      $ 7,741,972        8,080,458  

Admissions and other

     4,255,556        4,210,739        4,792,750  
  

 

 

    

 

 

    

 

 

 
   $ 12,244,761      $ 11,952,711      $ 12,873,208  
  

 

 

    

 

 

    

 

 

 

Advertising Expenses— Advertising expenses are expensed as incurred and included in other operating expenses. Advertising expense for the years ended December 31, 2017, 2016, and 2015 was $7,183,307, $6,335,420, and $7,107,142, respectively.

Income Taxes—The Joint Venture is taxed as a partnership for federal and state income tax purposes. The financial statements do not include a provision for income taxes, since any income or losses allocated to the Members are reportable for income tax purposes by each Member. The Joint Venture’s income tax returns and the amount of allocable income are subject to examination by federal and state taxing authorities. If an examination results in a change to the Joint Venture’s income, the Members’ taxes may also change.

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

- 8 -


Gaming and Admission Taxes—The gaming tax payable to the State of Illinois is based on annual graduated rates ranging from 15% to 50% of adjusted gross receipts (as defined). In addition to the gaming tax, an admission tax of $3 per person entering the casino is assessed on the Joint Venture. Taxes are payable throughout the year in accordance with the schedule below:

 

Adjusted Gross Receipts     Tax Rate  
$ —       $ 25,000,000       15.0
  25,000,001       50,000,000       22.5  
  50,000,001       75,000,000       27.5  
  75,000,001       100,000,000       32.5  
  100,000,001       150,000,000       37.5  
  150,000,001       200,000,000       45.0  
  200,000,001       And above       50.0  

Gaming and admission taxes were approximately $55.47 million, $53.18 million, and $56.88 million for the years ended December 31, 2017, 2016, and 2015, respectively, and are included in casino expenses in the accompanying statements of income.

 

3.

PROPERTY AND EQUIPMENT

A summary of property and equipment as of December 31, 2017 and 2016 is as follows:

 

     2017      2016  

Buildings

   $ 46,911,579      $ 45,771,410  

Riverboat

     52,699,655        52,699,655  

Leasehold improvements

     5,020,886        5,020,886  

Furniture, fixtures and equipment, gaming equipment, and automotve

     64,525,064        60,753,063  

Construction in progress

     243,132        —    
  

 

 

    

 

 

 

Total property and equipment

     169,400,316        164,245,014  

Less accumulated depreciation and amortization

     (131,575,635      (126,461,486
  

 

 

    

 

 

 

Property and equipment - net

   $ 37,824,681      $ 37,783,528  
  

 

 

    

 

 

 

 

- 9 -


4.

ACCRUED LIABILITIES

A summary of accrued liabilities at December 31, 2017 and 2016 is as follows:

 

     2017      2016  

Accrued commitment to Grand Victoria Foundation and County of Kane

   $ 7,375,091      $ 7,144,360  

Accrued payroll, vacation, benefits and related taxes

     3,359,094        3,491,674  

Reserve for progressive jackpots

     1,579,416        1,456,860  

Accrued taxes

     823,076        1,070,559  

Reserve for slot club redemptions

     885,164        1,003,395  

Unredeemed chip/token liability

     676,504        737,841  

Accrued ground lease

     250,000        250,000  

Other

     1,031,482        1,083,877  
  

 

 

    

 

 

 

Total accrued liabilities

   $ 15,979,827      $ 16,238,566  
  

 

 

    

 

 

 

 

5.

LEASES

In accordance with the Ground Lease and Development Agreement, as amended, (the “Agreement”), the Joint Venture leased land for a term of 10 years, commencing with the initial issuance of the IGB license. The initial lease term expired in October 2004 and the third successive five-year term was renewed on October 31, 2014 until October 31, 2019. Effective January 1, 2015 the terms “Basic Rent” and “Percentage Rent” used throughout the Lease Agreement shall mean and be construed as the lesser of the Basic Rent or the Percentage Rent. Therefore, the annual lease payment is equal to the lesser of (i) $1,000,000 or (ii) 3% of the Joint Venture’s annual net operating income, as defined in the Agreement.

The Joint Venture leases certain electronic gaming devices from various approved manufacturers. The leases range from $15 to $100 per day and allow for either party to terminate the lease within 60 days of execution.

Rent expense for all operating leases for the years ended December 31, 2017, 2016, and 2015 was $3,203,675, $3,261,861, and $3,274,092, respectively.

 

6.

COMMITMENTS AND CONTINGENCIES

The Joint Venture has agreed to contribute to both the County of Kane and the Grand Victoria Foundation, a foundation established for the benefit of educational, environmental and economic development programs in the region. The total commitment is equal to 20% of adjusted net operating income, as defined. This commitment must be paid within 120 days of the end of the fiscal year for which it has been calculated. Combined donation expense for the County of Kane and the Grand Victoria Foundation for the years ended December 31, 2017, 2016, and 2015 was $7,375,091, $7,144,360, and $8,547,078, respectively.

 

- 10 -


7.

RELATED-PARTY TRANSACTIONS

The Joint Venture employs the legal services of a firm that is affiliated with a member of the Joint Venture’s Executive Committee.

The Joint Venture is reimbursed for certain allocated employment expenses for a key Joint Venture employee that provides oversight and management to an affiliated entity of the Managing Partner.

Under Amendment No. 1 to the Amended and Restated Joint Venture Agreement dated April 25, 2005, the Managing Partner is allowed to receive one percent (1%) of adjusted gross receipts, as defined by the Illinois Riverboat Gambling Act, as a preferred distribution. The preferred distribution for the years ended December 31, 2017, 2016, and 2015 was $1,684,312, $1,636,342, and $1,715,020, respectively.

 

8.

RETIREMENT PLANS

The Joint Venture maintains a defined contribution plan under section 401(k) of the Internal Revenue Code for all employees with certain eligibility requirement as outlined in the plan document. The plan allows employees to defer a portion of their income on a pretax basis. The Joint Venture matches a portion of employee contributions in accordance with a safe harbor provision adopted in January 2007. Matching contribution expenses for the years ended December 31, 2017, 2016, and 2015 were $880,758, $903,698, and $885,127, respectively.

On January 1, 2010, the Joint Venture started a nonqualified deferred retirement plan for certain key employees. The plan allows these employees to defer a portion of their salary and/or bonus on a pre-tax basis. The Joint Venture voluntarily matches a portion of employee contributions up to a maximum amount on a three-year cliff vesting schedule. Matching contribution expenses for the years ended December 31, 2017, 2016, and 2015 were $0, $56,000, and $59,900, respectively. Subsequently, on January 1, 2016, the Joint Venture started a new deferred retirement plan for certain key employees. Under the new plan the Joint Venture voluntarily matches a portion of employee contributions up to a maximum amount on each pay period. The matching contribution expense for the year ended December 31, 2017 was $64,976.

 

9.

LETTER OF CREDIT

The Joint Venture has an irrevocable and unconditional letter of credit of $300,000, bearing no interest, for the benefit of Zurich American Insurance Company and American Zurich Insurance Company (collectively, “Zurich”). The letter of credit is being maintained as security for the reimbursement of deductibles or retention payments made on the Joint Venture’s behalf by Zurich. The letter of credit renews annually on September 30, and is extended for one year, unless prior written notice is provided to Zurich. The letter of credit is secured with a certificate of deposit equal to the amount of the letter of credit.

 

- 11 -


10.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. This ASU clarifies the principles for recognizing revenue and to develop a common revenue standard for US GAAP and IFRS. The amendments in this guidance state that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This new guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. In August 2015, FASB issued new guidance to defer the effective date of the pronouncement to annual reporting periods beginning after December 15, 2018. An entity should apply the amendments in this update retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application. The Joint Venture is currently evaluating the standard to understand the overall impact it will have on the financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which amends the FASB Accounting Standards Codification. The objective of the update is to improve financial reporting by increasing transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. It is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments is permitted for all entities. The Joint Venture is currently evaluating the impact that this amended guidance will have on its financial statements and related disclosures.

 

11.

SUBSEQUENT EVENTS

No events have occurred after December 31, 2017, but before February 13, 2018, the date the financial statements were available to be issued that require consideration as adjustments to or disclosures in the financial statements.

* * * * * *

 

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Elgin Riverboat Resort—Riverboat Casino

Unaudited Condensed Financial Statements as of June 30, 2018 and December 31, 2017 and for the six-months ended June 30, 2018 and June 30, 2017


ELGIN RIVERBOAT RESORT—RIVERBOAT CASINO

TABLE OF CONTENTS

 

 

     Page  

UNAUDITED CONDENSED FINANCIAL STATEMENTS AS OF JUNE 30, 2018 AND DECEMBER 31, 2017 AND FOR THE SIX-MONTHS ENDED JUNE 30, 2018 AND 2017:

  

Balance Sheets

     3  

Statements of Income

     4  

Statements of Cash Flows

     5  

Notes to Unaudited Condensed Financial Statements

     6–11  


ELGIN RIVERBOAT RESORT—RIVERBOAT CASINO

UNAUDITED CONDENSED BALANCE SHEETS

AS OF JUNE 30, 2018 AND DECEMBER 31, 2017

 

 

    

June 30,

2018

     December 31,
2017
 

ASSETS

     

CURRENT ASSETS:

     

Cash and cash equivalents

   $ 28,261,016      $ 27,963,886  

Accounts receivable—net of allowance for doubtful accounts of $23,566 and $15,000, respectively

     124,507        17,300  

Inventories

     393,419        258,541  

Prepaid expenses

     1,157,219        876,361  
  

 

 

    

 

 

 

Total current assets

     29,936,161        29,116,088  

PROPERTY AND EQUIPMENT—Net

     35,226,964        37,824,681  

OTHER ASSETS

     960,885        1,106,901  
  

 

 

    

 

 

 

TOTAL

   $ 66,124,010      $ 68,047,670  
  

 

 

    

 

 

 

LIABILITIES AND PARTNERS’ EQUITY

     

CURRENT LIABILITIES:

     

Accounts payable

   $ 914,482      $ 1,485,540  

Accrued liabilities

     19,280,933        15,979,827  

Due to affiliates

     130,158        126,293  
  

 

 

    

 

 

 

Total current liabilities

     20,325,573        17,591,660  

OTHER LIABILITIES

     867,905        1,013,920  
  

 

 

    

 

 

 

Total liabilities

     21,193,478        18,605,580  
  

 

 

    

 

 

 

COMMITMENTS AND CONTINGENCIES (Notes 5 and 6)

     

PARTNERS’ EQUITY

     44,930,532        49,442,090  
  

 

 

    

 

 

 

TOTAL

   $ 66,124,010      $ 68,047,670  
  

 

 

    

 

 

 

See notes to unaudited condensed financial statements.

 

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ELGIN RIVERBOAT RESORT—RIVERBOAT CASINO

UNAUDITED CONDENSED STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

 

    

June 30,

2018

   

June 30,

2017

 

REVENUES:

    

Casino

   $ 76,892,541     $ 80,455,807  

Food and beverage

     5,985,267       6,231,929  

Admissions and other

     2,665,900       2,877,425  
  

 

 

   

 

 

 

Total revenues

     85,543,708       89,565,161  

Less casino promotional allowances

     (5,296,233     (5,811,126
  

 

 

   

 

 

 

Revenues—net

     80,247,475       83,754,035  
  

 

 

   

 

 

 

OPERATING EXPENSES:

    

Casino

     41,971,574       45,549,816  

Food and beverage

     2,393,496       2,221,234  

General and administrative

     6,266,419       5,534,473  

Charitable donations

     4,596,876       4,668,843  

Depreciation and amortization

     3,692,946       3,550,677  

Preferred distribution

     807,569       863,799  

Other operating expenses

     5,733,195       6,649,421  
  

 

 

   

 

 

 

Total operating expenses

     65,462,075       69,038,263  
  

 

 

   

 

 

 

OPERATING INCOME

     14,785,400       14,715,772  

OTHER INCOME—net

     3,042       1,886  
  

 

 

   

 

 

 

NET INCOME

   $ 14,788,442     $ 14,717,658  
  

 

 

   

 

 

 

See notes to unaudited condensed financial statements.

 

- 4 -


ELGIN RIVERBOAT RESORT—RIVERBOAT CASINO

UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

 

    

June 30,

2018

   

June 30,

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 14,788,442     $ 14,717,658  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     3,692,946       3,550,677  

Changes in assets and liabilities:

    

Accounts receivable

     (107,207     (15,346

Inventories

     (134,878     17,432  

Prepaid expenses

     (280,858     (382,215

Other assets

     146,016       (135,016

Accounts payable

     (218,710     (1,364,503

Accrued liabilities

     3,301,106       2,007,385  

Due to affiliates

     3,865       17,715  

Other liabilities

     (146,015     130,016  
  

 

 

   

 

 

 

Net cash provided by operating activities

     21,044,707       18,543,803  
  

 

 

   

 

 

 

CASH FLOWS USED IN INVESTING ACTIVITIES:

    

Capital expenditures

     (1,427,417     (852,824

Construction in progress

     (20,160     (1,333,883
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,447,577     (2,186,707
  

 

 

   

 

 

 

CASH FLOWS USED IN FINANCING ACTIVITY—Distributions to partners

     (19,300,000     (14,200,000
  

 

 

   

 

 

 

Net cash used in financing activities

     (19,300,000     (14,200,000
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     297,130       2,157,096  

CASH AND CASH EQUIVALENTS:

    

Beginning of period

     27,963,886       27,817,301  
  

 

 

   

 

 

 

End of period

   $ 28,261,016     $ 29,974,397  
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION—Capital expenditures incurred but not yet paid

   $ 263,292     $ 1,333,883  
  

 

 

   

 

 

 

See notes to unaudited condensed financial statements.

 

- 5 -


ELGIN RIVERBOAT RESORT—RIVERBOAT CASINO

NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS

AS OF JUNE 30, 2018 AND DECEMBER 31, 2017 AND FOR SIX-MONTHS ENDED JUNE 30, 2018 AND 2017

 

 

1.

BUSINESS

Elgin Riverboat Resort—Riverboat Casino (the “Joint Venture”), doing business as the Grand Victoria Casino, was formed in December 1992, as a partnership under the Joint Venture Agreement between RBG, L.P. (“Managing Partner”) and Nevada Landing Partnership, in which each owns a 50% interest.

The Joint Venture is licensed by the Illinois Gaming Board (“IGB”) to own and operate a riverboat casino on the Fox River in Elgin, Illinois. The original license was issued on October 6, 1994. On October 7, 2016, the IGB approved the renewal of the license for another term of four years.

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation—The condensed financial statements are unaudited, but in our opinion include all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the results for the interim period. The interim financial results are not necessarily indicative of results that may be expected for any other interim period or the fiscal year.

Cash and Cash Equivalents—Cash and cash equivalents include investments and interest-bearing instruments with an original maturity of three months or less. Such investments are recorded at the lower of cost or market value. The Joint Venture maintains cash balances at a financial institution in excess of federally insured limits. Included in cash and cash equivalents as of June 30, 2018 and December 31, 2017 is $300,000 of restricted cash related to the certificate of deposit used as collateral (refer to Note 9).

Inventories—Inventories, consisting of food, beverage and gift shop items, are stated at the lower of cost or market value. Cost is determined by the first-in, first-out method.

Property and Equipment—Property and equipment are stated at cost. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives are as follows:

 

Buildings

     39 years  

Riverboat

     20 years  

Leasehold improvements

     15 years  

Furniture, fixtures and equipment, and gaming equipment

     2–5 years  

Long-Lived Assets—The Joint Venture reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. If undiscounted expected future cash flows are less than the carrying value, an impairment loss would be recognized equal to an amount by which the carrying value exceeds the fair value of the asset. The factors considered by

 

- 6 -


the Joint Venture in performing this assessment include current operating results, trends and prospects, as well as the effect of obsolescence, demand, competition and other economic factors. No impairment of long-lived assets was recognized by the Joint Venture for the six-months ended June 30, 2018 or 2017.

Reserve for Players’ Club—The Joint Venture’s players’ club allows customers to earn “points” based on the volume of slot play. Points are redeemable for cash back incentives. The Joint Venture has accrued a liability for all points earned but not yet redeemed by active slot club members.

Revenue Recognition—Casino revenues are recorded as the net win from gaming activities, which is the difference between gaming wins and losses, with liabilities recognized for funds deposited by customers before gaming play occurs and for chips in the customers’ possession. Jackpots, other than the incremental amount of progressive jackpots, are recognized at the time they are won by customers. The Joint Venture accrues the incremental amount of progressive jackpots as the progressive machine is played and the progressive jackpot amount increases, with a corresponding reduction of casino revenue. Food, beverage, admissions and other revenues are recorded as services are rendered.

Promotional Allowances—The retail value of food, beverage, admissions and other complimentary items furnished to customers without charge is included in gross revenue and then deducted as promotional allowances. The estimated costs of providing such promotional allowances have been included in casino expenses, and are as follows for the six-months ended June 30:

 

     2018      2017  

Food and beverage

   $ 3,619,653      $ 3,881,652  

Admissions and other

     1,821,765        2,026,224  
  

 

 

    

 

 

 
   $ 5,441,418      $ 5,907,876  
  

 

 

    

 

 

 

Advertising Expenses—Advertising expenses are expensed as incurred and included in general and administrative. Advertising expenses for the six-months ended June 30, 2018 and 2017 were $2,322,970 and $3,500,180, respectively.

Income Taxes—The Joint Venture is taxed as a partnership for federal and state income tax purposes. The unaudited condensed financial statements do not include a provision for income taxes, since any income or losses allocated to the Members are reportable for income tax purposes by each Member. The Joint Venture’s income tax returns and the amount of allocable income are subject to examination by federal and state taxing authorities. If an examination results in a change to the Joint Venture’s income, the Members’ taxes may also change.

Use of Estimates—The preparation of unaudited condensed financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

- 7 -


Gaming and Admission Taxes—The gaming tax payable to the State of Illinois is based on annual graduated rates ranging from 15% to 50% of adjusted gross receipts (as defined). In addition to the gaming tax, an admission tax of $3 per person entering the casino is assessed on the Joint Venture. Taxes are payable throughout the year in accordance with the schedule below:

 

Adjusted Gross Receipts     Tax Rate  
$ —       $ 25,000,000       15.0
  25,000,001       50,000,000       22.5  
  50,000,001       75,000,000       27.5  
  75,000,001       100,000,000       32.5  
  100,000,001       150,000,000       37.5  
  150,000,001       200,000,000       45.0  
  200,000,001       And above       50.0  

In the state of Illinois, gaming taxes are based on graduated rates. The Joint Venture records gaming tax expense at the Joint Venture’s estimated effective gaming tax rate on an annual basis, considering estimated taxable gaming revenue and the applicable rates. Such estimates are adjusted each interim period.

Gaming and admission taxes were approximately $26.01 million and $28.63 million for the six-months ended June 30, 2018 and 2017, respectively, and are included in casino expenses in the accompanying unaudited condensed statements of income.

 

3.

PROPERTY AND EQUIPMENT

A summary of property and equipment as of June 30, 2018 and December 31, 2017 is as follows:

 

    

June 30,

2018

     December 31,
2017
 

Buildings

   $ 46,911,579      $ 46,911,579  

Riverboat

     52,699,655        52,699,655  

Leasehold improvements

     5,020,886        5,020,886  

Furniture, fixtures and equipment, gaming equipment, and automotive

     65,600,133        64,525,064  

Construction in progress

     263,292        243,132  
  

 

 

    

 

 

 

Total property and equipment

     170,495,545        169,400,316  

Less accumulated depreciation and amortization

     (135,268,581      (131,575,635
  

 

 

    

 

 

 

Property and equipment—net

   $ 35,226,964      $ 37,824,681  
  

 

 

    

 

 

 

 

- 8 -


4.

ACCRUED LIABILITIES

A summary of accrued liabilities as of June 30, 2018 and December 31, 2017 is as follows:

 

    

June 30,

2018

     December 31,
2017
 

Deferred gaming taxes

   $ 6,061,901      $ —    

Accrued commitment to Grand Victoria Foundation and County of Kane

     4,553,320        7,375,091  

Accrued payroll, vacation, benefits and related taxes

     3,061,043        3,359,094  

Reserve for progressive jackpots

     1,632,383        1,579,416  

Reserve for slot club redemptions

     814,093        885,164  

Unredeemed chip/token liability

     663,047        676,504  

Accrued taxes

     853,445        823,076  

Accrued ground lease

     250,000        250,000  

Other

     1,391,701        1,031,482  
  

 

 

    

 

 

 

Total accrued liabilities

   $ 19,280,933      $ 15,979,827  
  

 

 

    

 

 

 

 

5.

LEASES

In accordance with the Ground Lease and Development Agreement, as amended, (the “Agreement”), the Joint Venture leased land for a term of 10 years, commencing with the initial issuance of the IGB license. The initial lease term expired in October 2004 and the third successive five-year term was renewed on October 31, 2014 until October 31, 2019. Effective January 1, 2015 the terms “Basic Rent” and “Percentage Rent” used throughout the Agreement shall mean and be construed as the lesser of the Basic Rent or the Percentage Rent. Therefore, the annual lease payment is equal to the lesser of (i) $1,000,000, as increased by the CPI index adjustment, or (ii) 3% of the Joint Venture’s annual net operating income, as defined in the Agreement.

The Joint Venture leases certain electronic gaming devices from various approved manufacturers. The leases range from $15 to $100 per day and allow for either party to terminate the lease within 60 days of execution.

Rent expense for all operating leases for the six-months ended June 30, 2018 and 2017, was $1,506,934 and $1,591,543, respectively.

 

6.

COMMITMENTS AND CONTINGENCIES

The Joint Venture has agreed to contribute to both the County of Kane and the Grand Victoria Foundation, a foundation established for the benefit of educational, environmental and economic development programs in the region. The total commitment is equal to 20% of adjusted net operating income, as defined in the agreements. This commitment must be paid within 120 days of the end of the fiscal year for which it has been calculated. Combined donation expense for the County of Kane and the Grand Victoria Foundation for the six-months ended June 30, 2018 and 2017, was $4,553,320 and $4,633,972, respectively.

 

- 9 -


7.

RELATED-PARTY TRANSACTIONS

The Joint Venture employs the legal services of a firm that is affiliated with a member of the Joint Venture’s Executive Committee. Related party legal expense for the six-months ended June 30, 2018 and 2017 was $662,508 and 148,762, respectively. These expenses are included in general and administrative expense.

The Joint Venture is reimbursed for certain allocated employment expenses for a key Joint Venture employee that provides oversight and management to an affiliated entity of the Managing Partner.

Under Amendment No. 1 to the Amended and Restated Joint Venture Agreement dated April 25, 2005, the Managing Partner is allowed to receive one percent (1%) of adjusted gross receipts, as defined by the Illinois Riverboat Gambling Act, as a preferred distribution. The preferred distribution for the six-months ended June 30, 2018 and 2017 was $807,569 and $863,799, respectively.

 

8.

RETIREMENT PLANS

The Joint Venture maintains a defined contribution plan under section 401(k) of the Internal Revenue Code for all employees with certain eligibility requirement as outlined in the plan document. The plan allows employees to defer a portion of their income on a pretax basis. The Joint Venture matches a portion of employee contributions in accordance with a safe harbor provision adopted in January 2007. Matching contribution expenses for the six-months ended June 30, 2018 and 2017, were $446,655 and $443,274, respectively.

On January 1, 2016, the Joint Venture started a new deferred retirement plan for certain key employees. Under the new plan the Joint Venture voluntarily matches a portion of employee contribution up to a maximum amount on each pay period. The matching contribution expenses for the six-months ended June 30, 2018 and 2017 were $37,440 and $39,280, respectively.

 

9.

LETTER OF CREDIT

The Joint Venture has an irrevocable and unconditional letter of credit of $300,000, bearing no interest, for the benefit of Zurich American Insurance Company and American Zurich Insurance Company (collectively, “Zurich”). The letter of credit is being maintained as security for the reimbursement of deductibles or retention payments made on the Joint Venture’s behalf by Zurich. The letter of credit renews annually on September 30, and is extended for one year, unless prior written notice is provided to Zurich. The letter of credit is secured with the certificate of deposit held with Zurich.

 

10.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. This ASU clarifies the principles for recognizing revenue and to develop a common revenue standard for US GAAP and IFRS. The amendments in this guidance state that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This new guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and

 

- 10 -


uncertainty of revenue that is recognized. In August 2015, FASB issued new guidance to defer the effective date of the pronouncement to annual reporting periods beginning after December 15, 2018. An entity should apply the amendments in this update retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application. The Joint Venture is currently evaluating the standard to understand the overall impact it will have on the unaudited condensed financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which amends the FASB Accounting Standards Codification. The objective of the update is to improve financial reporting by increasing transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. It is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early application of the amendments is permitted for all entities. The Joint Venture is currently evaluating the impact that this amended guidance will have on the unaudited condensed financial statements and related disclosures.

 

11.

SUBSEQUENT EVENTS

On August 7, 2018, Eldorado Resorts, Inc., a Nevada corporation (“Eldorado”) completed its previously announced acquisition of the Joint Venture (the “Acquisition”). The Acquisition was made pursuant to the Interest Purchase Agreement (the “Purchase Agreement”), dated as of April 15, 2018. As a result of the Acquisition, the Joint Venture will be an indirect wholly-owned subsidiary of Eldorado. Eldorado purchased the Joint Venture for $327.5 million, subject to a post-closing working capital adjustment.

In preparing these unaudited condensed financial statements, the Joint Venture has evaluated events and transactions for potential recognition or disclosure through August 24, 2018, the date the Joint Venture’s unaudited condensed financial statements were available to be issued.

* * * * * *

 

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Section 4: EX-99.3 (EX-99.3)

EX-99.3

Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED

FINANCIAL STATEMENTS

The following unaudited pro forma condensed combined financial information included herein presents the unaudited pro forma condensed combined balance sheet and the unaudited pro forma condensed combined statements of operations based upon the combined audited and unaudited historical financial statements of Eldorado Resorts, Inc., a Nevada corporation (“ERI” or the “Company”), Isle of Capri Casinos, Inc. (“Isle”) acquired on May 1, 2017 (the “Isle Acquisition”) and Elgin Riverboat Resort-Riverboat Casino, an Illinois general partnership (“Elgin”) after giving effect to the acquisitions, the sale of Presque Isle Downs and Lady Luck Nemacolin (the “Dispositions”), the Isle Transaction (consummated May 1, 2017) (together the “Combined Transactions”), and the adjustments described in the accompanying notes.

The Elgin Acquisition

On April 15, 2018, the Company entered into a definitive agreement to acquire the Grand Victoria Casino in Elgin, Illinois (the “Elgin Acquisition”) for $327.5 million in cash, as adjusted pursuant to a customary working capital adjustment. The transaction closed on August 7, 2018 and was funded using cash from the Company’s ongoing operations and borrowings under ERI’s revolving credit facility. As a result of the Elgin Acquisition, Elgin became a wholly-owned subsidiary of the Company. The Grand Victoria Casino Elgin is a riverboat casino located about forty miles west of Chicago, with an approximate 29,850 square feet facility consisting of approximately 1,100 slot machines and 36 table games.

The Dispositions

On February 28, 2018, ERI entered into an agreement to sell substantially all of the assets and liabilities of Presque Isle Downs and Lady Luck Vicksburg, subsidiaries of the Company, to Churchill Downs Incorporated (“CDI”). Under the terms of the agreements, CDI agreed to purchase Presque Isle Downs for cash consideration of approximately $178.9 million and Lady Luck Vicksburg for cash consideration of approximately $50.6 million, in each case subject to a customary working capital adjustment.

The definitive agreements provided that the transactions were subject to receipt of required regulatory approvals, termination of the waiting period under the Hart-Scott-Rodino Act and other customary closing conditions, including, in the case of Presque Isle Downs, the prior closing of the sale of Lady Luck Vicksburg or the entry into an agreement to acquire another asset of the Company. On May 7, 2018, the Company and CDI each received a Request for Additional Information and Documentary Materials, often referred to as a “Second Request,” from the Federal Trade Commission in connection with its review of the Lady Luck Vicksburg acquisition. Following receipt of, and in consideration of the time and expense needed to reply to, the Second Request, pursuant to a termination agreement and release, dated as of July 6, 2018, by and among CDI, ERI and a wholly-owned subsidiary of ERI, the Company and CDI mutually agreed to terminate the asset purchase agreement with respect to the Lady Luck Vicksburg transaction.

In connection with the termination of the Lady Luck Vicksburg acquisition, CDI agreed to pay the Company a $5.0 million termination fee, subject to the parties’ execution of a definitive agreement to acquire and assume the Company’s rights and obligations to operate Lady Luck Nemacolin. On August 13, 2018, ERI entered into an agreement pursuant to which CDI will acquire Nemacolin for cash consideration of $100,000, subject to a customary working capital adjustment. Substantially concurrent with the execution of the purchase agreement for the Nemacolin Transaction, CDI paid the Company the $5.0 million termination fee related Lady Luck Vicksburg.

The Isle Acquisition

On May 1, 2017, ERI completed the Isle Acquisition for a total purchase consideration of $1.93 billion and Isle became a wholly-owned subsidiary of ERI.

In connection with the Isle Acquisition, the Company completed a debt financing transaction comprised of: (a) a senior secured credit facility in an aggregate principal amount of $1.75 billion with a (i) term loan facility of $1.45 billion and (ii) revolving credit facility of $300.0 million and (b) $375.0 million of 6.0% senior unsecured notes.

Basis for Historical Information

The Unaudited Pro Forma Financial Statements have been prepared by management for illustrative purposes only and do not purport to represent what the results of operations, balance sheet data or other financial information of ERI would have been if the Combined Transactions had occurred as of the dates indicated or what such results will be for any future periods. The pro forma adjustments are based on the preliminary assumptions and


information available at the time of the preparation of this report. The historical financial information has been adjusted to give effect to pro forma events that are: (1) directly attributable to the Combined Transactions, (2) factually supportable, and (3) with respect to the Unaudited Pro Forma Income Statements, expected to have a continuing impact on the combined results of ERI. As such, the Unaudited Pro Forma Income Statements for the six months ended June 30, 2018 and for the year ended December 31, 2017 do not reflect non-recurring charges that will be incurred in connection with the Combined Transactions. The Unaudited Pro Forma Income Statements also do not reflect any cost savings from potential operating efficiencies or associated costs to achieve such savings or synergies that are expected to result from the Combined Transactions nor does it include any costs associated with severance, restructuring or integration activities resulting from the Combined Transactions, as they are currently not known, and, to the extent they arise, they are expected to be non-recurring and will not have been incurred at the closing date of the Combined Transactions. However, such costs could affect the combined company following the Combined Transactions in the period the costs are incurred. Further, the Unaudited Pro Forma Financial Statements do not reflect the effect of any regulatory actions that may impact the results of the combined company following the Combined Transactions.


UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF JUNE 30, 2018

(Dollars in Thousands)

 

    Historical     Pro Forma Adjustments        
    As of June 30, 2018     As of June 30, 2018     As of June 30, 2018  
    ERI     Elgin     ERI
Dispositions
(Note 3(i))
    Vicksburg
Reclassification
(Note 3(j))
    Elgin
Reclassification
Adjustments
(Note 4)
    Pro Forma
Adjustments
(Note 3)
    Pro Forma
Combined
 

ASSETS

             

CURRENT ASSETS:

             

Cash and cash equivalents

  $ 202,016     $ 28,261     $ 170,617     $ —       $ —       $ (196,058 ) (a)    $ 204,836  

Restricted cash

    4,683       —         —         —         —         —         4,683  

Marketable securities

    17,066       —         —         —         —         —         17,066  

Accounts receivable, net

    34,808       125       —         100       —         —         35,033  

Due from affiliates

    125       —         —         —         —         —         125  

Inventories

    14,847       393       —         252       —         —         15,492  

Prepaid income taxes

    187       —         —         —         —         —         187  

Prepaid expenses and other

    30,469       1,157       —         275       868       —         32,769  

Assets held for sale

    201,202       —         (153,197     (48,005     —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    505,403       29,936       17,420       (47,378     868       (196,058     310,191  

Property and equipment, net

    1,400,088       35,227       (5,041     35,852       —         23,753  (b)      1,489,879  

Goodwill

    719,254       —         —         8,806       —         54,952  (c)      783,012  

Non-operating real property

    14,030       —         —         —         —         —         14,030  

Intangible asset, net

    915,936       —         —         2,720       —         205,000  (c)      1,123,656  

Other assets, net

    45,035       961       —         —         (868     —         45,128  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 3,599,746     $ 66,124     $ 12,379     $ —       $ —       $ 87,647     $ 3,765,896  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

CURRENT LIABILITIES:

             

Current portion of long-term debt

  $ 486     $ —       $ —       $ —       $ —       $ —       $ 486  

Accounts payable

    28,949       914       —         175       61       —         30,099  

Due to affiliates

    20       130       —         —         —         —         150  

Accrued property, gaming and other taxes

    35,133       —         —         —         6,915       —         42,048  

Accrued payroll and related

    50,936       —         —         300       3,268       —         54,504  

Accrued interest

    26,788       —         —         —         —         —         26,788  

Income tax payable

    222       —         —         —         —         —         222  

Accrued other liabilities

    69,341       19,281       725       379       (9,376     (250 ) (d)      80,100  

Liabilities related to assets held for sale

    5,817       —         (4,963     (854     —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    217,692       20,325       (4,238     —         868       (250     234,397  

Long-term debt, less current portion

    2,190,749       —         —         —         —         128,358  (e)      2,319,107  

Deferred income taxes

    176,607       —         —         —         —         —         176,607  

Other long-term liabilities

    17,975       868       (2,780     —         (868     —         15,195  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    2,603,023       21,193       (7,018     —         —         128,108       2,745,306  

COMMITMENTS AND CONTINGENCIES

             

STOCKHOLDERS’ EQUITY:

             

Common stock

    1       —         —         —         —         —         1  

Paid-in capital

    744,020       —         —         —         —         —         744,020  

Retained earnings / partners’ equity

    252,623       44,931       19,397       —         —         (40,461 ) (f)      276,490  

Accumulated other comprehensive income

    79       —         —         —         —         —         79  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ / partners’ equity

    996,723       44,931       19,397       —         —         (40,461     1,020,590  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ / partners’ equity

  $ 3,599,746     $ 66,124     $ 12,379     $ —       $ —       $ 87,647     $ 3,765,896  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 


UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE

YEAR ENDED DECEMBER 31, 2017

(Dollars in Thousands, Except Share and Per Share Data)

 

     Pro Forma     Historical     Pro Forma Adjustments        
     Fiscal Year Ended
December 31, 2017
    Twelve Months
Ended
December 31, 2017
    Twelve Months Ended December 31, 2017     Fiscal Year Ended
December 31, 2017
 
     ERI (Adjusted for
acquisition of Isle)
(Note 3(l))
    Elgin     ERI
Dispositions
(Note 3(i))
    Elgin
Reclassification
Adjustments
(Note 4)
    Pro Forma
Adjustments
(Note 3)
    Pro Forma
Combined
 

REVENUES:

            

Casino

   $ 1,356,764     $ 156,972     $ (143,806   $ (7,794   $ —       $ 1,362,136  

Pari-mutuel commissions

     18,442       —         (2,630     —         —         15,812  

Food and beverage

     231,001       12,522       (11,089     189       —         232,623  

Hotel

     147,895       —         —         —         —         147,895  

Other

     55,265       6,391       (2,785     (4,171     —         54,700  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     1,809,367       175,885       (160,310     (11,776     —         1,813,166  

Less: promotional allowances

     —         (11,776     —         11,776       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating revenues

     1,809,367       164,109       (160,310     —         —         1,813,166  

EXPENSES:

            

Casino

     685,187       89,615       (97,484     (17,328     —         659,990  

Pari-mutuel commissions

     17,177       —         (3,259     —         —         13,918  

Food and beverage

     185,335       4,499       (9,894     7,384       —         187,324  

Hotel

     53,413       —         —         —         —         53,413  

Other

     34,214       14,710       (1,778     (9,028     —         38,118  

Marketing and promotions

     103,008       —         (7,627     10,104       —         105,485  

General and administrative

     297,355       11,436       (20,953     18,001       —         305,839  

Corporate

     39,186       —         —         —         —         39,186  

Impairment charges

     38,016       —         —         —         —         38,016  

Depreciation and amortization

     125,066       7,104       (7,898     —         5,249  (b), (c)      129,521  

Charitable donations

     —         7,449       —         (7,449     —         —    

Preferred distribution

     —         1,684       —         (1,684     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     1,577,957       136,497       (148,893     —         5,249       1,570,810  

Gain (loss) on sale of disposal of property and equipment

     (470     —         120       —         —         (350

Proceeds from terminated sale

     20,000       —         —         —         —         20,000  

Transaction expenses

     (92,777     —         —         —         —         (92,777

Equity loss of unconsolidated affiliates

     (367     —         —         —         —         (367
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     157,796       27,612       (11,297     —         (5,249     168,862  

OTHER INCOME (EXPENSE):

            

Interest expense, net

     (119,324     2       5,573       —         (6,572 )(e)      (120,321

Loss from extinguishment of debt

     (40,220     —         —         —         —         (40,220
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (159,544     2       5,573       —         (6,572     (160,541
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS) BEFORE INCOME TAXES

     (1,748     27,614       (5,724     —         (11,821     8,321  

(Provision) benefit for income taxes

     104,787       —         3,866       —         (6,318 )(k)      102,335  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 103,039     $ 27,614     $ (1,858   $ —       $ (18,139   $ 110,656  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income per share of Common Stock:

            

Basic

   $ 1.53             $ 1.65  

Diluted

   $ 1.51             $ 1.62  

Weighted Average Basic Shares Outstanding

     67,133,531               67,133,531  

Weighted Average Diluted Shares Outstanding

     68,102,814               68,102,814  

 


UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE

SIX MONTHS ENDED JUNE 30, 2018

(Dollars in Thousands, Except Share and Per Share Data)

 

     Historical     Pro Forma Adjustments        
           Six Months Ended
June 30, 2018
    Six Months Ended June 30, 2018     Six Months Ended
June 30, 2018
 
     ERI     Elgin     ERI
Dispositions
(Note 3(i))
    Elgin
Reclassification

Adjustments
(Note 4)
    Pro Forma Adjustments
(Note 3)
    Pro Forma
Combined
 

REVENUES:

            

Casino

   $ 683,133     $ 76,892     $ (78,667   $ (3,456   $ —       $ 677,902  

Pari-mutuel commissions

     9,115       —         (1,005     —         —         8,110  

Food and beverage

     106,491       5,985       (5,750     —         —         106,726  

Hotel

     69,667       —         —         —         —         69,667  

Other

     28,588       2,666       (1,565     (1,840     —         27,849  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     896,994       85,543       (86,987     (5,296     —         890,254  

Less: promotional allowances

     —         (5,296     —         5,296       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating revenues

     896,994       80,247       (86,987     —         —         890,254  

EXPENSES:

            

Casino

     331,203       41,972       (53,893     (7,568     —         311,714  

Pari-mutuel commissions

     8,293       —         (1,373     —         —         6,920  

Food and beverage

     89,546       2,393       (4,970     3,256       —         90,225  

Hotel

     26,201       —         —         —         —         26,201  

Other

     15,715       5,733       (746     (3,711     —         16,991  

Marketing and promotions

     43,133       —         (3,226     3,399       —         43,306  

General and administrative

     147,947       6,266       (12,190     10,029       (380 )  (g)      151,672  

Corporate

     23,801       —         —         —         —         23,801  

Impairment charges

     9,815       —         —         —         —         9,815  

Charitable donations

     —         4,597       —         (4,597     —         —    

Depreciation and amortization

     63,444       3,693       (1,577     —         2,483   (b), (c)      68,043  

Preferred distribution

     —         808       —         (808     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     759,098       65,462       (77,975     —         2,103       748,688  

Loss sale of disposal of property and equipment

     (283     —         (16     —         —         (299

Transaction expenses

     (5,952     —         —         —         1,316   (h)      (4,636

Equity loss of unconsolidated affiliates

     (53     —         —         —         —         (53
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

     131,608       14,785       (9,028     —         (787     136,578  

OTHER INCOME (EXPENSE):

            

Interest expense, net

     (62,494     3       3,287       —         (3,286 )  (e)      (62,490

Loss on extinguishment of debt

     (162     —         —         —         —         (162
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (62,656     3       3,287       —         (3,286     (62,652
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS) BEFORE INCOME TAXES

     68,952       14,788       (5,741     —         (4,073     73,926  

(Provision) benefit for income taxes

     (11,301     —         1,040       —         (2,678 )  (k)      (12,939
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 57,651     $ 14,788     $ (4,701   $ —       $ (6,751   $ 60,987  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income per share of Common Stock:

            

Basic

   $ 0.74             $ 0.79  

Diluted

   $ 0.74             $ 0.78  

Weighted Average Basic Shares Outstanding

     77,406,447               77,406,447  

Weighted Average Diluted Shares Outstanding

     78,169,629               78,169,629  


Note 1—BASIS OF PRESENTATION

The following unaudited pro forma condensed combined financial information presents the pro forma effects of the following transactions:

 

   

the Elgin Acquisition;

 

   

the Dispositions; and

 

   

the Isle Acquisition.

The unaudited pro forma condensed combined financial information is prepared in accordance with Article 11 of Regulation S-X. The historical financial information has been adjusted to give effect to transactions that are (i) directly attributable to the Combined Transactions, (ii) factually supportable and (iii) with respect to the unaudited pro forma condensed combined statement of operations, expected to have a continuing impact on the operating results of the combined company. The historical information of ERI (including Isle) and Elgin is presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

The unaudited pro forma condensed combined balance sheet (the “Unaudited Pro Forma Balance Sheet”) as of June 30, 2018 was prepared using the historical unaudited consolidated balance sheets of ERI and Elgin as of June 30, 2018, respectively, and shows the combined financial position of ERI and Elgin as if the Elgin Acquisition and the Dispositions had occurred on June 30, 2018. The Isle Acquisition is already reflected in ERI’s historical unaudited consolidated balance sheet as of June 30, 2018. Therefore, no pro forma balance sheet adjustments are necessary to show the pro forma impact of the Isle Acquisition.

The unaudited pro forma condensed combined statements of operations (the “Unaudited Pro Forma Income Statements”) for the six months ended June 30, 2018 and the year ended December 31, 2017, give effect to the Elgin Acquisition, the Dispositions, and the Isle Acquisition as if they had occurred on January 1, 2017 and reflect pro forma adjustments that are expected to have a continuing impact on the results of operations. The Isle Acquisition was consummated on May 1, 2017, and as such, is already reflected in ERI’s historical audited consolidated statement of operations for the period from May 1, 2017 to December 31, 2017 and historical unaudited consolidated statement of operations for the six months ended June 30, 2018. Accordingly, the effect of the Isle Acquisition for the period January 1, 2017 to April 30, 2017 is included in ERI’s unaudited pro forma condensed statement of operations for the fiscal year ended December 31, 2017 (see Note 3(l) for additional discussion).

ERI’s historical financial and operating data for the year ended December 31, 2017 and the six months ended June 30, 2018 is derived from the financial data in its audited consolidated financial statements for the year ended December 31, 2017 and from its unaudited consolidated financial statements for the six months ended June 30, 2018. The historical financial and operating data for Elgin for the year ended December 31, 2017 and the six months ended June 30, 2018 is derived from the financial data in its audited consolidated financial statements for the year ended December 31, 2017 and from its unaudited consolidated financial statements for the six months ended June 30, 2018.

Note that certain reclassifications have been made to the historical financial statements of Elgin to align their presentation in the Unaudited Pro Forma Financial Statements. Additionally, in May 2014 (amended January 2017), the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” (ASC Topic 606) which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and eliminates existing industry guidance, including revenue recognition guidance specific to the gaming industry. Public entities were required to adopt ASC Topic 606 effective for interim and annual periods beginning after December 15, 2017. ERI adopted this standard effective January 1, 2018, and elected to apply the full retrospective adoption method. Elgin had not adopted this standard prior to the acquisition by ERI.

The Unaudited Pro Forma Financial Statements have been prepared using the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations, with ERI treated as the accounting acquirer of the Elgin Acquisition and the Isle Acquisition, and reflect the preliminary allocation of the purchase price to the acquired assets and liabilities based upon a preliminary estimate of fair values, using the assumptions set forth in the notes to the unaudited pro forma condensed combined financial information.


Note 2—CALCULATION OF ESTIMATED PURCHASE CONSIDERATION

The total estimated purchase consideration for the purpose of this pro forma financial information is $328.9 million. The purchase consideration in the acquisition was determined with reference to its acquisition date fair value.

Purchase Price Calculation

 

Purchase consideration calculation
(dollars in thousands)

      

Cash consideration paid

   $ 327,500  

Estimated working capital and other adjustments

     1,386  
  

 

 

 

Estimated purchase consideration

   $ 328,886  
  

 

 

 

For pro forma purposes, the fair value of consideration given and thus the estimated purchase price was determined based upon the gross purchase of $327.5 million, and estimated working capital and other adjustments of $1.4 million. The working capital adjustment is subject to finalization within 100 days of the Elgin Acquisition date pursuant to the terms of the purchase agreement; however, no material adjustments are anticipated.

Preliminary Purchase Price Accounting

Under the acquisition method of accounting, the identifiable assets acquired and liabilities assumed of Elgin are recorded at the acquisition date fair values and added to those of ERI. The pro forma adjustments on the condensed combined balance sheet are preliminary and based on estimates of the fair value and useful lives of the assets acquired and liabilities assumed as of June 30, 2018 and have been prepared to illustrate the estimated effect of the Elgin Acquisition. The allocation is dependent upon certain valuation and other studies that have not yet been completed. Accordingly, the pro forma purchase price accounting is subject to further adjustment as additional information becomes available and as additional analyses and final valuations are completed. There can be no assurances that these additional analyses and final valuations will not result in significant changes to the estimates of fair value set forth below.

The following table summarizes the preliminary allocation of the purchase consideration to the identifiable assets acquired and liabilities assumed of Elgin, with the excess recorded as goodwill (dollars in thousands):

 

Current and other assets

   $ 30,804  

Property and equipment

     58,980  

Goodwill

     54,952  

Intangible assets(i)

     205,000  

Other noncurrent assets

     93  
  

 

 

 

Total assets

     349,829  

Current liabilities

     (20,943
  

 

 

 

Total liabilities

     (20,943
  

 

 

 

Net assets acquired

   $ 328,886  
  

 

 

 

 

  (i)

Intangible assets consist of gaming license, trade name, and player relationships.


Note 3—UNAUDITED PRO FORMA FINANCIAL STATEMENTS TRANSACTION ADJUSTMENTS

 

a)

The following table illustrates the pro forma adjustments to cash and cash equivalents for the period ended June 30, 2018 (dollars in thousands):

 

     June 30, 2018  

Borrowings under ERI’s credit facility

   $ 128,358  

Cash consideration

     (328,886

Transaction costs

     (530

Vicksburg termination fee

     5,000  
  

 

 

 

Net cash outflow

   $ (196,058
  

 

 

 

 

b)

Represents the estimated adjustment to step up Elgin’s property, plant and equipment (“PP&E”) to a fair value of approximately $59.0 million, an increase of approximately $23.8 million from the carrying value. The fair value estimate is preliminary and subject to change.

The fair value of land was determined using the market approach, which arrives at an indication of value by comparing the site being valued to sites that have been recently acquired in arm’s-length transactions. The market data is then adjusted for any significant differences, to the extent known, between the identified comparable sites and the site being valued. Building and site improvements were valued using the cost approach using a direct cost model built on estimates of replacement cost. With respect to personal property components of the assets, personal property assets with an active and identifiable secondary market such as riverboats, gaming equipment, computer equipment and vehicles were valued using the market approach. Other personal property assets such as furniture, fixtures, computer software, and restaurant equipment were valued using the cost approach which is based on replacement or reproduction costs of the asset.

The cost approach is an estimation of fair value developed by computing the current cost of replacing a property and subtracting any depreciation resulting from one or more of the following factors: physical deterioration, functional obsolescence, and/or economic obsolescence. The income approach incorporates all tangible and intangible property and served as a ceiling for the fair values of the acquired assets of the ongoing business enterprise, while still taking into account the premise of highest and best use. In the instance where the business enterprise value developed via the income approach was exceeded by the initial fair values of the underlying assets, an adjustment to reflect economic obsolescence was made to the tangible assets on a pro rata basis to reflect the contributory value of each individual asset to the enterprise as a whole.

Adjustments to depreciation expense for property and equipment were based on comparing the historical depreciation recorded during the periods presented to the revised depreciation. The revised depreciation was calculated by dividing, on a straight-line basis, the fair value assigned to Elgin’s property and equipment by the estimated remaining useful lives assigned to the assets. The following table illustrates the pro forma adjustments to depreciation expense (dollars in thousands):

 

     Six months
ended
June 30, 2018
     Year ended
December 31,

2017
 

To eliminate historical depreciation related to PP&E

   $ (3,693    $ (7,104

To record new depreciation expense related to the fair value adjustments to PP&E

     2,551        5,103  
  

 

 

    

 

 

 

Total adjustments to depreciation of PP&E

   $ (1,142    $ (2,001
  

 

 

    

 

 

 

 

c)

Represents the estimated adjustment for Elgin’s intangible assets and the recognition of the preliminary goodwill for the purchase consideration in excess of the fair value of net assets acquired in connection with the Elgin Acquisition.


The fair value of Elgin’s intangible assets is approximately $205.0 million. The fair value estimate is preliminary and subject to change. Preliminary identifiable intangible assets in the unaudited pro forma condensed combined financial statements consist of the following (dollars in thousands):

 

     Fair Value      Useful Life  

Trade Name(s)

   $ 12,500        Indefinite  

Gaming License

     163,500        Indefinite  

Player Relationships

     29,000        4  
  

 

 

    

Total Value of Intangible Assets

   $ 205,000     
  

 

 

    

The fair value of the gaming license was determined using the excess earnings or replacement cost methodology based on whether the license resides in gaming jurisdictions where competition is limited to a specified number of licensed gaming operators. The excess earnings methodology is an income approach methodology that estimates the projected cash flows of the business attributable to the gaming license intangible asset, which is net of charges for the use of other identifiable assets of the business including working capital, fixed assets and other intangible assets. Under the state’s gaming legislation, the property specific license can only be acquired if a theoretical buyer were to acquire each existing facility. The existing license could not be acquired and used for a different facility. The properties’ estimated future cash flows were the primary assumption in the respective valuations. Cash flow estimates included net gaming revenue, gaming operating expenses, general and administrative expenses, and tax expense. The replacement cost methodology is a cost approach methodology based on replacement or reproduction cost of the gaming license as an indicator of fair value.

ERI has preliminarily assigned an indefinite useful life to the gaming licenses, in accordance with its review of the applicable guidance of ASC 350. The standard required ERI 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, ERI’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, ERI determined that no legal, regulatory, contractual, competitive, economic or other factors limit the useful lives of these intangible assets. The renewal of a state’s gaming license depends on a number of factors, including payment of certain fees and taxes, providing certain information to the state’s gaming regulator, and meeting certain inspection requirements. However, ERI’s historical experience has not indicated, nor does ERI expect, any limitations regarding its ability to continue to renew each license. No other competitive, contractual, or economic factor limits the useful lives of this asset. Accordingly, ERI has preliminarily concluded that the useful lives of this license is indefinite.

Trademarks are valued using the relief from royalty method, which presumes that without ownership of such trademarks, ERI would have to make a stream of payments to a brand or franchise owner in return for the right to use their name. By virtue of this asset, ERI avoids any such payments and record the related intangible value of ERI’s ownership of the brand name. The primary assumptions in the valuation included revenue, pre-tax royalty rate, and tax expense. ERI has preliminarily assigned an indefinite useful life to the trademark.

Player relationships were valued using the cost approach and the incremental cash flow method under the income approach. The incremental cash flow method is used to estimate the fair value of an intangible asset based on a residual cash flow notion. This method measures the benefits (e.g., cash flows) derived from ownership of an acquired intangible asset as if it were in place, as compared to the acquirer’s expected cash flows as if the intangible asset were not in place (i.e., with-and-without). The residual or net cash flows of the two models is ascribable to the intangible asset.

Adjustments to amortization expense for definite-lived intangibles were based on comparing the historical amortization recorded during the periods presented to the revised amortization. The revised amortization was based on the estimated fair value amortized over the respective useful lives of the intangible assets. The following table illustrates the pro forma adjustments to amortization expense (dollars in thousands):

 

     Six months
ended
June 30,
2018
     Year ended
December 31,
2017
 

To record new amortization expense related to the fair value adjustments to intangible assets

   $ 3,625      $ 7,250  
  

 

 

    

 

 

 

Total adjustments to amortization of intangible assets

   $ 3,625      $ 7,250  
  

 

 

    

 

 

 


The following table illustrates the pro forma adjustments to goodwill (dollars in thousands):

 

To record preliminary goodwill for the purchase consideration in excess of the fair value of net assets acquired in connection with the Acquisition

   $ 54,952  
  

 

 

 

Total adjustments to goodwill

   $ 54,952  
  

 

 

 

 

d)

Reflects the elimination of Elgin’s deferred rent liabilities of $0.3 million as a purchase accounting adjustment.

 

e)

Reflects adjustments to current and long-term debt for anticipated borrowings to fund the Elgin acquisition. The adjustments to current and long-term debt are summarized as follows (dollars in thousands):

 

Anticipated new borrowings(i)

   $ 128,358  

Less: Increase to current portion of long-term debt

     —    
  

 

 

 

Increase to long-term debt

   $ 128,358  
  

 

 

 

 

  (i)

Reflects estimated borrowings as of June 30, 2018 to consummate the Elgin Acquisition. Actual future borrowings may vary based on working capital needs, including statutory cage cash requirements, to operate the business following the Elgin Acquisition.

The following table illustrates the pro forma adjustments to interest expense for the six months ended June 30, 2018 and the year ended December 31, 2017 (dollars in thousands):

 

     Six months ended
June 30, 2018
     Year ended
December 31, 2017
 

Interest expense on borrowings

   $ (3,286    $ (6,572

 

f)

ERI and Elgin estimate incurring approximately $0.2 million and $0.3 million, respectively, for a total of $0.5 million in transaction related costs, as described in Note (1) as cash payout. Such costs consist primarily of legal, financial advisor, gaming license transfer fees, accounting and consulting costs, and was shown as a pro forma adjustment reducing retained earnings. These costs are not reflected in the unaudited pro forma condensed combined statement of operations because they are nonrecurring items that are directly related to the acquisitions.

The following table illustrates the pro forma adjustments to ERI and Elgin’s historical retained earnings (dollars in thousands):

 

     ERI      Elgin      Total  

To record estimated transaction costs

   $ (250    $ (280    $ (530

To record Vicksburg’s termination fee

     5,000        —          5,000  

To eliminate Elgin’s historical partners’ equity

     —          (44,931      (44,931
  

 

 

    

 

 

    

 

 

 

Total adjustments to ERI historical retained earnings

   $ 4,750      $ (45,211    $ (40,461
  

 

 

    

 

 

    

 

 

 

 

g)

Reflects the elimination of transaction related costs incurred by Elgin of $0.4 million during the six months ended June 30, 2018, as transaction related costs do not have a continuing effect on the combined company.

 

h)

Reflects the elimination of transaction related costs incurred by ERI of $1.3 million during the six months ended June 30, 2018, as transaction related costs do not have a continuing effect on the combined company.

 

i)

Column reflects pro forma adjustments related to the dispositions of Presque Isle Downs and Nemacolin. The pro forma adjustments on the Unaudited Pro Forma Balance Sheet reflects the elimination of assets and liabilities of Presque Isle Downs and Nemacolin, the net proceeds from Presque Isle Downs for $171.2 million, inclusive of fees and working capital adjustment of $7.7 million, and the net proceeds from Nemacolin for $(0.6) million, inclusive of fees and net of working capital adjustment of $1.4 million. The estimated gain from the sale of Presque Isle Downs is approximately $23.0 million and the estimated loss from the sale of Nemacolin is approximately $3.6 million, reflected as an adjustment to retained earnings. The estimated gains and loss related to dispositions has not been reflected in the pro forma consolidated statement of operations as it is considered to be nonrecurring in nature. The pro forma adjustments on the Unaudited Pro Forma Statement of Operations reflect the elimination of historical


  revenues, expenses, and other income of Presque Isle Downs and Nemacolin for the twelve months ended December 31, 2017 and six months ended June 30, 2018. The adjustment also reflects the estimated income tax effect of the pro-forma adjustments. The tax effect of the pro-forma adjustments was calculated using the historical statutory rates in effect for the periods presented.

 

j)

Column reflects pro forma adjustments related to the terminated sale of Lady Luck Vicksburg in July 2018. The pro forma adjustments on the Unaudited Pro Forma Balance Sheet reflects the reclassification of assets and liabilities of Lady Luck Vicksburg from assets held-for-sale.

 

k)

Reflects the pro forma adjustment for the income tax effect of the historical income of Elgin as a result of its acquisition by ERI, as well as the income tax effect of the pro forma adjustments. With respect to the Unaudited Pro Forma Income Statements, a blended federal and state statutory tax rate of 25% and 40%, for the six months ended June 30, 2018 and the year ended December 31, 2017, respectively, has been assumed for the pro forma adjustments.


l)

Isle Acquisition

As described in the section discussing the Isle Acquisition above, ERI acquired Isle of Capri on May 1, 2017. The following tables discuss the pro forma adjustments related to the Isle Acquisition (dollars in thousands):

 

     Historical           Pro Forma  
     Fiscal Year Ended
December 31, 2017
    Period from January 1,
2017 to April 30, 2017
          Fiscal Year Ended
December 31, 2017
 
     ERI     Isle of Capri Casinos Inc     Pro Forma
Adjustments
    ERI
(adjusted for acquisition of Isle)
 

REVENUES:

        

Casino

   $ 1,085,014     $ 271,750     $ —       $ 1,356,764  

Pari-mutuel commissions

     14,013       4,429       —         18,442  

Food and beverage

     198,246       32,755       —         231,001  

Hotel

     133,338       14,557       —         147,895  

Other

     50,187       5,078       —         55,265  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

     1,480,798       328,569       —         1,809,367  

EXPENSES:

        

Casino

     547,438       137,749       —         685,187  

Pari-mutuel commissions

     13,651       3,526       —         17,177  

Food and beverage

     169,848       15,487       —         185,335  

Hotel

     50,575       2,838       —         53,413  

Other

     32,156       2,058       —         34,214  

Marketing and promotions

     83,174       19,834       —         103,008  

General and administrative

     241,037       56,318       —         297,355  

Corporate

     30,739       8,447       —         39,186  

Impairment charges

     38,016       —         —         38,016  

Depreciation and amortization

     105,891       22,499       (3,324 )  (a)      125,066  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     1,312,525       268,756       (3,324     1,577,957  

Gain (loss) on sale of disposal of property and equipment

     (319     (151     —         (470

Proceeds from terminated sale

     20,000       —         —         20,000  

Transaction expenses

     (92,777     —         —         (92,777

Equity in income (loss) of unconsolidated affiliates

     (367     —         —         (367
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     94,810       59,662       3,324       157,796  

OTHER INCOME (EXPENSE):

        

Interest expense, net

     (99,769     (21,549     1,994   (b)      (119,324

Loss on extinguishment of debt

     (38,430     (1,790     —         (40,220
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (138,199     (23,339     1,994       (159,544
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS) BEFORE INCOME TAXES

     (43,389     36,323       5,318       (1,748

(Provision) benefit for income taxes

     116,769       (9,854     (2,128 )  (c)      104,787  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 73,380     $ 26,469     $ 3,190     $ 103,039  
  

 

 

   

 

 

   

 

 

   

 

 

 

The related impact to the unaudited pro forma condensed combined statement of operations as a result of the fair value adjustments of the assets and liabilities of Isle of Capri as a result of the Isle Acquisition have been included in the discussion of pro forma adjustments above.

 

a)

Represents an adjustment to historical depreciation and amortization expense as a result of fair value of PP&E and intangible assists recognized for the period from January 1, 2017 to April 30, 2017.

b)

Represents additional interest expense of $19.6 million for the period from January 1, 2017 to April 30, 2017 as a result of refinancing activity incurred in conjunction with the Isle Acquisition off-set by the write off of Isle historical interest expenses of $21.5 million for the period from January 1, 2017 to April 30, 2017 as a result of debt paying down by ERI.

c)

The income tax adjustment assumes income taxes based on ERI’s historical statutory tax rate.


Note 4—UNAUDITED PRO FORMA FINANCIAL STATEMENT RECLASSIFICATION ADJUSTMENTS

Certain reclassifications have been recorded to the historical financial statements of Elgin to provide comparability and consistency for the anticipated post-combined company presentation.

Reclassifications were made between certain balance sheet accounts to provide consistency in presentation.

Reclassifications were made among revenue components to classify certain revenue streams consistently between the companies.

Reclassifications were also made between expense line items, such as casino, gaming taxes and other costs, as well as marketing and promotions and general and administrative. Certain reclassifications were required to remain consistent with the changes made within revenue reclassifications.

As indicated in Note 1, ERI adopted ASC Topic 606 effective January 1, 2018, and elected to apply the full retrospective adoption method. Elgin had not adopted this standard prior to the acquisition by ERI. Accordingly, reclassifications and adjustments were made to reflect the adoption of ASC Topic 606 to the historical financial statements of Elgin to provide comparability and consistency for the anticipated post-combined company presentation.

The reclassifications reflect the anticipated presentation of the post-combination company’s financial statements and are subject to change.

Note 5—BORROWINGS

The unaudited condensed combined pro forma financial statements reflect the amount of estimated borrowings required to complete the Elgin Acquisition. The actual amount of available cash at closing (including cash balances related to the sale of Presque Isle Downs and Nemacolin) may vary materially from preliminary estimates. The pro forma financial statements also reflect an estimate of interest rates for the borrowings based on current market conditions and rates currently available and based on facilities with similar terms and tenors. However, the actual interest incurred may vary significantly based upon, among other things, market considerations, the amount of borrowing utilized.

A sensitivity analysis on interest expense for the six months ended June 30, 2018 and the year ended December 31, 2017 has been performed to assess the effect of a change of 12.5 basis points of the hypothetical interest rate would have on the borrowings.

The following table shows the change in interest expense for the debt financing (dollars in thousands):

 

Interest expense assuming

   Six months ended
June 30, 2018
     Year ended
December 31, 2017
 

Increase of 0.125%

   $ 2,937      $ 5,874  

Decrease of 0.125%

     2,777        5,553  
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