SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 1-10410
CAESARS ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 62-1411755 | |
| (State of incorporation) | (I.R.S. Employer Identification No.) | |
| One Caesars Palace Drive, Las Vegas, Nevada | 89109 | |
| (Address of principal executive offices) | (Zip code) | |
Registrant’s telephone number, including area code:
(702) 407-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
| Title of each class | Name of each exchange on which registered | |
| Common stock, $0.01 par value | NASDAQ Global Select Market | |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ¨ | Accelerated filer x | Non-accelerated filer ¨ | Smaller reporting company ¨ | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2011 was $468.8 million.
As of March 9, 2012, the registrant had 125,297,197 shares of Common Stock outstanding.
CAESARS ENTERTAINMENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page No. |
||||||
| Forward-Looking Statements | ||||||
| Part I | ||||||
| 3 | ||||||
| 9 | ||||||
| 24 | ||||||
| 25 | ||||||
| 27 | ||||||
| 27 | ||||||
| Part II | ||||||
| 28 | ||||||
| 29 | ||||||
| Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations |
30 | |||||
| Item 7A – Quantitative and Qualitative Disclosures About Market Risk |
46 | |||||
| 48 | ||||||
| 48 | ||||||
| 49 | ||||||
| 55 | ||||||
| Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
101 | |||||
| 101 | ||||||
| 103 | ||||||
| Part III | ||||||
| Item 10 – Directors, Executive Officers and Corporate Governance |
104 | |||||
| 110 | ||||||
| 146 | ||||||
| Item 13 – Certain Relationships and Related Transactions, and Director Independence |
149 | |||||
| 152 | ||||||
| Part IV | ||||||
| 154 | ||||||
| Signatures | 174 | |||||
We have proprietary rights to a number of trademarks used in this Form 10-K that are important to our business, including, without limitation, Caesars Entertainment, Caesars Palace, Harrah’s, Total Rewards, World Series of Poker, Horseshoe, Paris Las Vegas, Flamingo Las Vegas, and Bally’s Las Vegas. We have omitted the ® and ™ trademark designations for such trademarks named in this Form 10-K.
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| ITEM 1. | Business |
Overview
Caesars Entertainment Corporation (referred to in this discussion, together with its consolidated subsidiaries where appropriate, as “Caesars,” “Caesars Entertainment,” the “Company,” “we,” “our” and “us”), a Delaware corporation, is the world’s most diversified casino-entertainment provider and the most geographically diverse U.S. casino-entertainment company. Our business is primarily conducted through a wholly-owned subsidiary, Caesars Entertainment Operating Company, Inc. (“CEOC”) although certain material properties are not owned by CEOC. As of December 31, 2011, we owned, operated, or managed, through various subsidiaries, 52 casinos in 12 U.S. states and seven countries. The majority of these casinos operate in the United States and England. Our casino entertainment facilities operate primarily under the Harrah’s, Caesars, and Horseshoe brand names in the United States. Our casino entertainment facilities include 33 land-based casinos, 12 riverboat or dockside casinos, three managed casinos on Indian lands in the United States, one managed casino in Canada, one casino combined with a greyhound racetrack, one casino combined with a thoroughbred racetrack, and one casino combined with a harness racetrack. Our land-based casinos include one in Uruguay, nine in England, one in Scotland, two in Egypt, and one in South Africa. As of December 31, 2011, our facilities had an aggregate of approximately three million square feet of gaming space and approximately 43,000 hotel rooms. Our industry-leading customer loyalty program, Total Rewards, has over 40 million members. We use the Total Rewards system to market promotions and to generate customer play across our network of properties. In addition, we own an online gaming business, providing for real money casino, bingo, and poker games in the United Kingdom, alliances with online gaming providers in Italy and France, “play for fun” offerings in other jurisdictions, social games on Facebook and other social media websites, and mobile application platforms. We also own and operate the World Series of Poker tournament and brand.
We were incorporated on November 2, 1989 in Delaware and operated under predecessor companies prior to such date. Our principal executive offices are located at One Caesars Palace Drive, Las Vegas, Nevada 89109, telephone (702) 407-6000.
On January 28, 2008, Caesars was acquired by affiliates of Apollo Global Management, LLC (“Apollo”) and affiliates of TPG Capital, LP (together with such affiliates, “TPG” and, together with Apollo, the “Sponsors”) in an all-cash transaction, hereinafter referred to as the “Acquisition,” valued at approximately $30.7 billion, including the assumption of $12.4 billion of debt, and the incurrence of approximately $1.0 billion of acquisition costs. Subsequent to the Acquisition, our stock was no longer publicly traded.
Effective February 8, 2012, as the result of our public offering, our common stock trades on the NASDAQ Global Select Market under the symbol “CZR.” In connection with the public offering, the Company effected a 1.742-for-one split of its common stock. Unless otherwise stated, all applicable share and per-share data presented herein have been retroactively adjusted to give effect to this stock split.
Description of Business
We have established a rich history of industry-leading growth and expansion since we commenced casino operations in 1937. We own or manage casino entertainment facilities in more areas throughout the United States than any other participant in the casino industry. In addition to casinos, our facilities typically include hotel and convention space, restaurants, and non-gaming entertainment facilities. The descriptions below are as of December 31, 2011, except where otherwise noted.
In southern Nevada, Harrah’s Las Vegas, Rio All-Suite Hotel & Casino, Caesars Palace, Bally’s Las Vegas, Flamingo Las Vegas, Paris Las Vegas, Planet Hollywood Resort and Casino, Imperial Palace Hotel & Casino, Bill’s Gamblin’ Hall & Saloon, and Hot Spot Oasis are located in Las Vegas and draw customers from throughout the United States. Harrah’s Laughlin is located near both the Arizona and California borders and draws customers primarily from the southern California and Phoenix metropolitan areas and, to a lesser extent, from throughout the U.S. via charter aircraft.
In northern Nevada, Harrah’s Lake Tahoe and Harveys Resort & Casino are located near Lake Tahoe and Harrah’s Reno is located in downtown Reno. These facilities draw customers primarily from northern California, the Pacific Northwest, and Canada.
Our Atlantic City casinos, Harrah’s Resort Atlantic City, Showboat Atlantic City, Caesars Atlantic City, and Bally’s Atlantic City, draw customers primarily from the Philadelphia metropolitan area, New York, and New Jersey.
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Harrah’s Chester is a combination harness racetrack and casino located approximately six miles south of Philadelphia International Airport and draws customers primarily from the Philadelphia metropolitan area and Delaware. At December 31, 2011, we had a 95% ownership interest in and manage this property. In February 2012, we purchased an additional 4.5% interest, bringing our total ownership interest in this property to 99.5%.
Our Chicagoland dockside casinos, Harrah’s Joliet in Joliet, Illinois, and Horseshoe Hammond in Hammond, Indiana, draw customers primarily from the greater Chicago metropolitan area. In southern Indiana, we own Horseshoe Southern Indiana, a dockside casino complex located in Elizabeth, Indiana, which draws customers primarily from northern Kentucky, including the Louisville metropolitan area, and southern Indiana, including Indianapolis.
In Louisiana, we own Harrah’s New Orleans, a land-based casino located in downtown New Orleans, which attracts customers primarily from the New Orleans metropolitan area. In northwest Louisiana, Horseshoe Bossier City, a dockside casino, and Harrah’s Louisiana Downs, a thoroughbred racetrack with slot machines, both located in Bossier City, cater to customers in northwestern Louisiana and east Texas, including the Dallas/Fort Worth metropolitan area.
On the Mississippi gulf coast, we own the Grand Casino Biloxi, located in Biloxi, Mississippi, which caters to customers in southern Mississippi, southern Alabama, and northern Florida.
Harrah’s North Kansas City and Harrah’s St. Louis, both dockside casinos, draw customers from the Kansas City and St. Louis metropolitan areas, respectively. Harrah’s Metropolis is a dockside casino located in Metropolis, Illinois, on the Ohio River, drawing customers from southern Illinois, western Kentucky, and central Tennessee.
Horseshoe Tunica, Harrah’s Tunica, and Tunica Roadhouse Hotel & Casino, dockside casino complexes located in Tunica, Mississippi, are approximately 30 miles from Memphis, Tennessee and draw customers primarily from the Memphis area and, to a lesser extent, from throughout the U.S. via charter aircraft.
Horseshoe Casino and Bluffs Run Greyhound Park, a land-based casino and pari-mutuel facility, and Harrah’s Council Bluffs Casino & Hotel, a dockside casino facility, are located in Council Bluffs, Iowa, across the Missouri River from Omaha, Nebraska. At Horseshoe Casino and Bluffs Run Greyhound Park, we own the assets other than gaming equipment, and lease these assets to the Iowa West Racing Association, or IWRA, a nonprofit corporation, and we manage the facility for the IWRA under a management agreement expiring in October 2024. Iowa law requires that a qualified nonprofit corporation hold Bluffs Run’s gaming and pari-mutuel licenses and own its gaming equipment. The license to operate Harrah’s Council Bluffs Casino & Hotel is held jointly with IWRA, the qualified sponsoring organization. The Sponsorship and Operations Agreement between IWRA and us terminates on December 31, 2015, subject to our option to extend the term of the agreement for five succeeding three year terms, provided we are not in default.
Caesars Windsor, located in Windsor, Ontario, draws customers primarily from the Detroit metropolitan area. We have a 50% ownership interest in a company that manages Caesars Windsor. The Conrad Resort & Casino located in Punta Del Este, Uruguay, draws customers primarily from Argentina and Uruguay.
We own four casinos in London: the Sportsman, the Golden Nugget, The Playboy Club London (formerly known as the Rendezvous), and The Casino at the Empire. Our casinos in London draw customers primarily from the London metropolitan area as well as international visitors. We also own Alea Nottingham, Alea Glasgow, Alea Leeds, Manchester235, Rendezvous Brighton, and Rendezvous Southend-on-Sea in the provinces of the United Kingdom, which primarily draw customers from their local areas. Pursuant to a concession agreement, we also operate two casinos in Cairo, Egypt, The London Club Cairo (which is located at the Ramses Hilton) and Caesars Cairo (which is located at the Four Seasons Cairo), which draw customers primarily from other countries in the Middle East. Emerald Safari, located in the province of Gauteng in South Africa, draws customers primarily from South Africa.
We also earn fees through our management of three casinos for Indian tribes:
| • | Harrah’s Phoenix Ak-Chin, located near Phoenix, Arizona, which we manage for the Ak-Chin Indian Community under a management agreement that expires in December 2014. Harrah’s Phoenix Ak-Chin draws customers from the Phoenix metropolitan area; |
| • | Harrah’s Cherokee Casino and Hotel, which we manage for the Eastern Band of Cherokee Indians on their reservation in Cherokee, North Carolina under a management contract that expires in November 2018. Harrah’s Cherokee draws customers from eastern Tennessee, western North Carolina, northern Georgia and South Carolina; |
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| • | Harrah’s Rincon Casino and Resort, located near San Diego, California, which we manage for the Rincon San Luiseno Band of Mission Indians under a management agreement that expires in November 2013. Harrah’s Rincon draws customers from the San Diego metropolitan area and Orange County, California; and |
| • | We own and operate Bluegrass Downs, a harness racetrack located in Paducah, Kentucky, and we own a one-half interest in Turfway Park LLC, which is the owner of the Turfway Park thoroughbred racetrack in Boone County, Kentucky. Turfway Park LLC owns a minority interest in Kentucky Downs LLC, which is the owner of the Kentucky Downs racetrack located in Simpson County, Kentucky. |
We also own and operate Thistledown Racetrack, a thoroughbred racing facility, located near Cleveland, Ohio.
In December 2010, we formed a joint venture, Rock Ohio Caesars LLC, with Rock Gaming, LLC (“Rock Gaming”), to pursue casino developments in Cincinnati and Cleveland. We have a minority investment in the venture and will manage the two casinos, Horseshoe Cleveland and Horseshoe Cincinnati, being developed by the venture, which are expected to open in May 2012 and the second quarter of 2013, respectively. As part of our investment, we agreed to contribute Thistledown Racetrack to the venture, subject to certain conditions.
In March 2011, we acquired an interest in Sterling Suffolk Racecourse, LLC, which owns a horse-racing track in Boston, Massachusetts, along with an option to purchase additional interests and the right to manage a potential future gaming facility.
In May 2011, Caesars Interactive Entertainment Israel, Ltd. (“CIEI”), a subsidiary of Caesars Interactive Entertainment, Inc., which is a majority-owned subsidiary of Caesars Entertainment, acquired 51% of the voting equity interests of Playtika Ltd. (“Playtika”), a social games developer based in Israel. In December 2011, we purchased the remaining outstanding shares of Playtika.
In September 2011, we filed an application with the State of Maryland for the license to operate a video lottery terminal (“VLT”) facility in the City of Baltimore. The application was filed on behalf of a venture that includes Caesars Entertainment as the lead investor and facility manager, Rock Gaming, LLC, CVPR Gaming Holdings, LLC, and The Stronach Group.
We also operate the World Series of Poker tournaments, and we license trademarks for a variety of products and businesses related to this brand. We also offer real money online gaming in the United Kingdom under the WSOP and Caesars brands, as well as alliances with online poker providers in France and Italy. In addition, we offer online “play for fun” casino genre games to residents globally online, through Facebook and other social networks, and on iOS and Android mobile devices. Going forward, we intend to offer real money gaming in jurisdictions where it is legal.
We also own Caesars Golf Macau which operates a golf course on 175 acres of prime real estate through a land concession on the Cotai strip in Macau.
Additional information about our casino entertainment properties is set forth below in Item 2, “Properties.”
Sales and Marketing
We believe that our North American distribution system of casino entertainment provides us the ability to capture a disproportionate share of our customers’ entertainment wallet when they travel among markets, which is core to our cross-market strategy. In addition, we have several multi-property markets like Las Vegas, Atlantic City, and Tunica, and we have seen increased revenue from customers visiting multiple properties in the same market. We believe our industry-leading customer loyalty program, Total Rewards, in conjunction with this distribution system, allows us to capture a growing share of our customers’ entertainment budget and compete more effectively.
Our Total Rewards program is structured in tiers, providing customers an incentive to consolidate their entertainment spend at our casinos. Total Rewards customers are able to earn Reward Credits at essentially all of our casino entertainment facilities located in the U.S. and Canada for on-property entertainment expenses including gaming, hotel, dining, and retail shopping. Total Rewards members can also redeem Reward Credits for on-property amenities or other off-property items such as merchandise, gift cards, and travel. Depending on their level of play with us in a calendar year, customers earn status within the Total Rewards program, designated as Gold, Platinum, Diamond, or Seven Stars customers, each with increasing sets of benefits. Separately, customers are provided promotional offers and rewards based on the ways that they choose to engage with us. These benefits encourage new customers to join Total Rewards and provide existing customers an incentive to consolidate their play at our casinos.
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We have developed a database containing information about our customers, aspects of their casino gaming play, and their preferred spending choices outside of gaming. We use this information for marketing promotions, including through direct mail campaigns, the use of electronic mail, our website, mobile devices, social media, and interactive slot machines.
Patents and Trademarks
The development of intellectual property is part of our overall business strategy, and we regard our intellectual property to be an important element of our success. While our business as a whole is not substantially dependent on any one patent or combination of several of our patents or other intellectual property, we seek to establish and maintain our proprietary rights in our business operations and technology through the use of patents, copyrights, trademarks, and trade secret laws. We file applications for and obtain patents, copyrights, and trademarks in the United States and in foreign countries where we believe filing for such protection is appropriate. We also seek to maintain our trade secrets and confidential information by nondisclosure policies and through the use of appropriate confidentiality agreements. We currently have 31 active US cases (27 issued patents, 4 pending) and 7 active foreign cases (5 issued patents, 2 pending). The U.S. cases have patent terms that variously expire between 2012 and 2030.
We have not applied for patents or the registration of all of our technology or trademarks, as the case may be, and may not be successful in obtaining the patents and trademarks for which we have applied. Despite our efforts to protect our proprietary rights, parties may infringe our patents and use information that we regard as proprietary, and our rights may be invalidated or unenforceable. The laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States. In addition, others may be able independently to develop substantially equivalent intellectual property.
We hold the following trademarks used in this document: Harrah’s, Caesars, Grand Biloxi, Bally’s, Flamingo, Paris, Caesars Palace, Rio, Showboat, Bill’s, Harveys, Total Rewards, Bluffs Run, Louisiana Downs, Reward Credits, Horseshoe, Seven Stars, Tunica Roadhouse and World Series of Poker. Trademark rights are perpetual provided that the mark remains in use by us. In addition, we hold trademark licenses for Planet Hollywood used in connection with the Planet Hollywood Resort & Casino in Las Vegas, NV, which will expire on February 19, 2045, and for Imperial Palace used in connection with the Imperial Palace Las Vegas hotel and casino, which will expire on December 23, 2012. We consider all of these marks, and the associated name recognition, to be valuable to our business.
Competition
We own, operate or manage land-based, dockside, riverboat, and Indian casino facilities in most U.S. casino entertainment jurisdictions. We also own, operate, or manage properties in Canada, the United Kingdom, South Africa, Egypt, and Uruguay. We compete with numerous casinos and casino hotels of varying quality and size in the market areas where our properties are located. We also compete with other non-gaming resorts and vacation areas, and with various other entertainment businesses. The casino entertainment business is characterized by competitors that vary considerably by their size, quality of facilities, number of operations, brand identities, marketing and growth strategies, financial strength and capabilities, level of amenities, management talent, and geographic diversity.
In most markets, we compete directly with other casino facilities operating in the immediate and surrounding market areas. In some markets, we face competition from nearby markets in addition to direct competition within our market areas.
In recent years competition in existing markets has intensified. Many casino operators, including us, have invested in expanding existing facilities, developing new facilities, and acquiring established facilities in existing markets, such as our acquisition of Caesars Entertainment, Inc. in 2005 and Planet Hollywood in 2010, our renovated and expanded facility in Hammond, Indiana, and our expansion at Caesars Palace in Las Vegas. This expansion of existing casino entertainment properties, the increase in the number of properties, and the aggressive marketing strategies of many of our competitors has increased competition in many markets in which we compete, and this intense competition can be expected to continue.
The expansion of casino entertainment into new markets presents competitive issues for us which have had a negative impact on our financial results. In particular, our businesses have been adversely impacted by the additional gaming and room capacity in Nevada, New Jersey, New York, Connecticut, Pennsylvania, Mississippi, Missouri, Maryland, Michigan, Indiana, Iowa, Kansas, Illinois, Ohio, Louisiana, Ontario, South Africa, Uruguay, United Kingdom and Egypt. In addition, our operations located in New Jersey and Nevada have been adversely impacted by the expansion of Indian gaming in New York and California, respectively.
The casino entertainment industry is also subject to political and regulatory uncertainty. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Consolidated Operating Results” and “—Regional Operating Results.”
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2011 Events
Suffolk Downs
In March 2011, we acquired an interest in Sterling Suffolk Racecourse, LLC, which owns a horse-racing track in Massachusetts, along with an option to purchase additional interests and the right to manage a potential future gaming facility.
In November 2011, Massachusetts enacted a law that would allow three destination casinos and one slot parlor. Three regions were established for the casinos and the Commission is authorized to issue one casino license in each of these regions: Zone A–Suffolk/Middlesex/Essex/Worcester/Norfolk counties; Zone B–Hampshire/Hampden/Franklin/Berkshire counties; and Zone C–Bristol/Plymouth/Nantucket/Dukes/Barnstable counties. The law also allows for a single slot parlor license to be competitively bid. A gaming commission will be established under the law and establish a bid process for the gaming licenses.
Acquisition of Playtika Ltd
In May 2011, CIEI, a subsidiary of Caesars Interactive Entertainment, Inc., which is a majority-owned subsidiary of Caesars Entertainment, acquired 51% of the voting equity interests of Playtika. In December 2011, we purchased the remaining 49% of Playtika.
Baltimore, Maryland
In September 2011, we filed an application with the State of Maryland for the license to operate a video lottery terminal (“VLT”) facility in the City of Baltimore. The application was filed on behalf of a venture that includes Caesars Entertainment as the lead investor and facility manager, Rock Gaming, LLC, CVPR Gaming Holdings, LLC, and The Stronach Group.
Octavius and Linq Projects
In April 2011, the Company, together with certain indirect wholly-owned subsidiaries of CEOC (the “Borrowers”) entered into a credit agreement (the “Credit Agreement”) pursuant to which the Borrowers incurred financing to complete the development of the Octavius Tower at Caesars Palace Las Vegas and a retail, dining and entertainment corridor located between the Imperial Palace Hotel and Casino and the Flamingo Las Vegas on the Las Vegas strip (“Project Linq”). The Credit Agreement provides for a $450.0 million senior secured term facility (the “Term Facility”) with a six-year maturity, which is secured by all material assets of the Borrowers.
Amendment to CEOC Financing
In May 2011, CEOC amended its Credit Facilities to, among other things: (i) allow CEOC to buy back loans from individual lenders at negotiated prices at any time, which may be less than par, (ii) allow CEOC to extend the maturity of term loans or revolving commitments, as applicable, and for CEOC to otherwise modify the terms of loans or revolving commitments in connection with such an extension, and (iii) modify certain other provisions of the credit facilities. CEOC also extended its Credit Facilities by (i) converting $799.4 million of B-1, B-2 and B-3 term loans held by consenting lenders to B-5 term loans with an extended maturity date of January 28, 2018 and a higher interest rate with respect to such extended term loans (the “Extended Term Loans”) and (ii) converting $423.3 million of revolver commitments held by consenting lenders into Extended Term Loans.
Project Renewal
In the fourth quarter of 2010, we embarked on a reorganization we refer to as “Project Renewal.” Under Project Renewal, our management team was challenged to review all of our key decision making procedures and lines of business and to identify the optimum way of structuring them given our breadth and scale of product offerings. As a result of the process, in the third quarter of 2011, we designed a unique shared services organization that will enable more efficient decision making and sharing of best practices. This organization includes business analytics, meetings and conventions, retail, database marketing, VIP marketing, our flight program, and other key areas of our operations. We anticipate that our company will have a permanently lower cost structure and will benefit from greater concentration of specified talent and quicker decision making. To ensure that the impact from Project Renewal is reflected in our financial performance and that each planned initiative is executed, we track our progress centrally and in a detailed fashion. The savings value for each initiative is calculated by predicting the change in the expense level compared to the current expense level under constant business volumes and conditions. See “Risk Factors—Risks Related to our Business—We may not realize any or all of our projected cost savings, which would have the effect of reducing our LTM Adjusted EBITDA—Pro Forma, which would have a negative effect on our results of operations and negatively impact our covenant calculation and could have a negative effect on our stock price.
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2012 Events
Chester Bond Offering
In February 2012, Chester Downs issued $330.0 million aggregate principal amount of 9.25% senior secured notes due 2020 through a private placement. Chester Downs used $232.4 million of the proceeds of the notes to repay its existing term loan plus accrued interest and a prepayment penalty. The remaining proceeds were used to make a distribution to Chester Downs’ managing member, Harrah’s Chester Downs Investment Company, LLC, a wholly-owned subsidiary of CEOC, and for other general corporate purposes.
Caesars public offering and stock split
In February 2012, CEC offered 1.8 million shares of its common stock in a public offering (the “Public Offering”), at $9.00 per share. The Company received net proceeds of approximately $15.2 million after taking into account expenses and underwriting commissions and giving effect to the exercise of the underwriters’ overallotment option. Under this option, the Company granted to the underwriters, and the underwriters subsequently exercised, a 30-day option to purchase 271,697 additional shares of its common stock at the initial price less underwriting discounts and commissions. CEC used the net proceeds from the Public Offering for general corporate purposes. As the result of our public offering, our common stock trades on the NASDAQ Global Select Market under the symbol “CZR.” In connection with the public offering, the Company effected a 1.742-for-one split of its common stock.
Co-Investors Transaction
In connection with the Company’s public offering, Caesars and the Sponsors agreed to release the contractual transfer restrictions on the shares of our common stock (the “Released Shares”) beneficially owned by certain indirect stockholders (the “Participating Co-Investors”). The Released Shares comprised 24.2 million shares of our common stock. In consideration for such release, the Participating Co-Investors agreed to direct the contribution to Caesars of a portion of the Released Shares beneficially owned by each Participating Co-Investor, which were sold by Caesars in its public offering in February 2012. Caesars agreed to cause the registration for resale under the Securities Act of 1933, as amended, of the remaining Released Shares not constituting Delivered Shares (the “Registered Shares”) and the listing of the Registered Shares on the NASDAQ Global Select Market. 50% of the Registered Shares were eligible for resale at the time of our equity offering in February 2012, and the Participating Co-Investors agreed not to offer or sell, dispose of or hedge, directly or indirectly, the remaining 50% of the Registered Shares without the permission of the underwriters in our equity offering until 180 days from the pricing of our public offering, subject to certain exceptions and automatic extension in certain circumstances. We refer to the transaction with the Participating Co-Investors as the “Co-Investors Transaction.”
CEOC Bond Offering
In February 2012, Caesars Operating Escrow LLC and Caesars Escrow Corporation, wholly owned subsidiaries of CEOC, completed the offering of $1,250.0 million aggregate principal amount of 8.5% senior secured notes due 2020, the proceeds of which were placed into escrow. On March 1, 2012, the escrow conditions were satisfied and CEOC assumed the notes. CEOC used $1,095.6 million of the net proceeds from this transaction to repay a portion of its credit facilities in connection with the amendment discussed below.
Amendment to CEOC Credit Facilities
On March 1, 2012, CEOC entered into an amendment to its outstanding senior secured credit agreement, to, among other things, (i) extend the maturity of B-1, B-2 and B-3 term loans held by consenting lenders from January 28, 2015 to January 28, 2018 and increase the interest rate with respect to such extended term loans (the “Term B-6 Loans”); (ii) convert original maturity revolver commitments held by consenting lenders to Term B-6 Loans and promptly following such conversion, repay Term B-6 Loans held by any consenting lender in an amount equal to 10% of the amount of revolver commitments that such lender elected to convert; (iii) extend the maturity of original maturity revolver commitments held by consenting lenders who elect not to convert their commitments to term loans, from January 28, 2014 to January 28, 2017 and increase the interest rate and the undrawn commitment fee with respect to such extended revolver commitments and upon the effectiveness of such
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extension, terminate 20% of extended revolver commitments on a pro rata basis; and (iv) modify certain other provisions of the credit facilities. In addition to the foregoing, the CEOC may elect to extend and/or convert additional term loans and/or revolver commitments from time to time.
Governmental Regulation
The gaming industry is highly regulated, and we must maintain our licenses and pay gaming taxes to continue our operations. Each of our casinos is subject to extensive regulation under the laws, rules, and regulations of the jurisdiction where it is located. These laws, rules, and regulations generally concern the responsibility, financial stability, and character of the owners, managers, and persons with financial interests in the gaming operations. Violations of laws in one jurisdiction could result in disciplinary action in other jurisdictions. A more detailed description of the regulations to which we are subject is contained in Exhibit 99.3 to this Annual Report on Form 10-K, which Exhibit is incorporated herein by reference.
Our businesses are subject to various foreign, federal, state, and local laws and regulations, in addition to gaming regulations. These laws and regulations include, but are not limited to, restrictions and conditions concerning alcoholic beverages, environmental matters, employees, currency transactions, taxation, zoning and building codes, and marketing and advertising. Such laws and regulations could change or could be interpreted differently in the future, or new laws and regulations could be enacted. Material changes, new laws or regulations, or material differences in interpretations by courts or governmental authorities could adversely affect our operating results.
Employee Relations
We have approximately 70,000 employees through our various subsidiaries. Approximately 28,000 employees are covered by collective bargaining agreements with certain of our subsidiaries, relating to certain casino, hotel and restaurant employees at certain of our properties. Most of our employees covered by collective bargaining agreements are located at our properties in Las Vegas and Atlantic City. Our collective bargaining agreements with employees located at our Atlantic City properties expire at various times throughout 2014 and 2016 and our collective bargaining agreements with our employees located at our Las Vegas properties expire at various times throughout 2012 and 2013.
Available Information
Our Internet address is www.caesars.com. We make available free of charge, on or through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”). We also make available through our website all filings of our executive officers and directors on Forms 3, 4, and 5 under Section 16 of the Exchange Act. These filings are also available on the SEC’s website at www.sec.gov. Our Code of Business Conduct and Ethics for Principal Officers is available on our website under the “Investor Relations” link. We will provide a copy of these documents without charge to any person upon receipt of a written request addressed to Caesars Entertainment Corporation, Attn: Corporate Secretary, One Caesars Palace Drive, Las Vegas, Nevada 89109. Reference in this document to our website address does not constitute incorporation by reference of the information contained on the website.
| ITEM 1A. | Risk Factors |
If we are unable to effectively compete against our competitors, our profits will decline.
The gaming industry is highly competitive and our competitors vary considerably in size, quality of facilities, number of operations, brand identities, marketing, and growth strategies, financial strength and capabilities, level of amenities, management talent, and geographic diversity. We also compete with other non-gaming resorts and vacation areas, and with various other entertainment businesses. Our competitors in each market that we participate may have substantially greater financial, marketing, and other resources than we do, and there can be no assurance that they will not, in the future, engage in aggressive pricing action to compete with us. Although we believe we are currently able to compete effectively in each of the various markets in which we participate, we cannot assure you that we will be able to continue to do so or that we will be capable of maintaining or further increasing our current market share. Our failure to compete successfully in our various markets could adversely affect our business, financial condition, results of operations, and cash flow.
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In recent years, many casino operators have been reinvesting in existing markets to attract new customers or to gain market share, thereby increasing competition in those markets. As companies have completed new expansion projects, supply has typically grown at a faster pace than demand in some markets, including Las Vegas, our largest market, and competition has increased significantly. For example, CityCenter, a large development of resorts and residences, opened in December 2009 in Las Vegas. The expansion of existing casino entertainment properties, the increase in the number of properties and the aggressive marketing strategies of many of our competitors have increased competition in many markets in which we operate, and this intense competition is expected to continue. These competitive pressures have and are expected to continue to adversely affect our financial performance in certain markets, including Atlantic City.
In particular, our business may be adversely impacted by the additional gaming and room capacity in Nevada, New Jersey, New York, Connecticut, Pennsylvania, Mississippi, Missouri, Maryland, Michigan, Indiana, Iowa, Kansas, Illinois, Ohio, Louisiana, Ontario, South Africa, Uruguay, United Kingdom, Egypt, and/or other projects not yet announced which may be competitive in the other markets where we operate or intend to operate. Several states, such as Kentucky, Texas and Indian tribes are also considering enabling the development and operation of casinos or casino-like operations in their jurisdictions. In addition, our operations located in New Jersey and Nevada may be adversely impacted by the expansion of Indian gaming in New York and California, respectively.
The recent downturn in the national economy, the volatility and disruption of the capital and credit markets, and adverse changes in the global economy could negatively impact our financial performance and our ability to access financing.
The severe economic downturn over the past few years and adverse conditions in the local, regional, national and global markets have negatively affected our operations, and may continue to negatively affect our operations in the future. During periods of economic contraction such as recently experienced, our revenues may decrease while some of our costs remain fixed or even increase, resulting in decreased earnings. Gaming and other leisure activities we offer represent discretionary expenditures and participation in such activities may decline during economic downturns, during which consumers generally earn less disposable income. For example, key determinants of our revenues and operating performance include hotel Average Daily Rate (“ADR”), number of gaming trips and average spend per trip by our customers. Given that 2007 was the peak year for our financial performance and the gaming industry in the United States in general, we may not attain those financial levels in the near term, or at all. If we fail to increase ADR or any other similar metric in the near term, our revenues may not increase and, as a result, we may not be able to pay down our existing debt, fund our operations, fund planned capital expenditures or achieve expected growth rates, all of which could have a material adverse effect on our business, financial condition and results of operations. Even an uncertain economic outlook may adversely affect consumer spending in our gaming operations and related facilities, as consumers spend less in anticipation of a potential economic downturn. Furthermore, other uncertainties, including national and global economic conditions, terrorist attacks or other global events, could adversely affect consumer spending and adversely affect our operations.
We are subject to extensive governmental regulation and taxation policies, the enforcement of which could adversely impact our business, financial condition, and results of operations.
We are subject to extensive gaming regulations and political and regulatory uncertainty. Regulatory authorities in the jurisdictions where we operate have broad powers with respect to the licensing of casino operations and may revoke, suspend, condition or limit our gaming or other licenses, impose substantial fines and take other actions, any one of which could adversely impact our business, financial condition and results of operations. For example, revenues and income from operations were negatively impacted during July 2006 in Atlantic City by a three-day government-imposed casino shutdown. Furthermore, in many jurisdictions where we operate, licenses are granted for limited durations and require renewal from time to time. For example, in Iowa, our ability to continue our gaming operations is subject to a referendum every eight years or at any time upon petition of the voters in the county in which we operate; the most recent referendum which approved our ability to continue to operate our casinos occurred in November 2010. There can be no assurance that continued gaming activity will be approved in any referendum in the future. If we do not obtain the requisite approval in any future referendum, we will not be able to operate our gaming operations in Iowa, which would negatively impact our future performance.
From time to time, individual jurisdictions have also considered legislation or referendums, such as bans on smoking in casinos and other entertainment and dining facilities, which could adversely impact our operations. For example, the City Council of Atlantic City passed an ordinance in 2007 requiring that we segregate at least 75% of the casino gaming floor as a nonsmoking area, leaving no more than 25% of the casino gaming floor as a smoking area. Illinois also passed the Smoke Free Illinois Act which became effective January 1, 2008, and bans smoking in nearly all public places, including bars, restaurants, work places, schools and casinos. The Act also bans smoking within 15 feet of any entrance, window or air intake area of these public places. These smoking bans have adversely affected revenues and operating results at our properties. The likelihood or outcome of similar legislation in other jurisdictions and referendums in the future cannot be predicted, though any smoking ban would be expected to negatively impact our financial performance.
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The casino entertainment industry represents a significant source of tax revenues to the various jurisdictions in which casinos operate. From time to time, various state and federal legislators and officials have proposed changes in tax laws, or in the administration of such laws, including increases in tax rates, which would affect the industry. If adopted, such changes could adversely impact our business, financial condition and results of operations.
The acquisition, development and construction of new hotels, casinos and gaming and non-gaming venues and the expansion of existing ones could have an adverse effect on our business, financial condition and results of operations due to various factors including delays, cost overruns and other uncertainties.
We intend to develop, construct and open or acquire new hotels, casinos and other gaming venues, as well as develop and manage non-gaming venues, in response to opportunities that may arise. Future development projects and acquisitions may require significant capital commitments, the incurrence of additional debt, guarantees of third party debt, the incurrence of contingent liabilities and an increase in depreciation and amortization expense , which could have an adverse effect upon our business, financial condition and results of operations. The development and construction of new hotels, casinos and gaming venues and the expansion of existing ones, such as our recent expansion at Caesars Palace in Las Vegas, as well as the development and construction of non-gaming venues such as Project Linq in Las Vegas and Caesars Palace Longmu Bay, are susceptible to various risks and uncertainties, such as:
| • | the existence of acceptable market conditions and demand for the completed project; |
| • | general construction risks, including cost overruns, change orders and plan or specification modification, shortages of equipment, materials or skilled labor, labor disputes, unforeseen environmental, engineering or geological problems, work stoppages, fire and other natural disasters, construction scheduling problems, and weather interferences; |
| • | changes and concessions required by governmental or regulatory authorities; |
| • | the ability to finance the projects, especially in light of our substantial indebtedness; |
| • | delays in obtaining, or inability to obtain, all licenses, permits and authorizations required to complete and/or operate the project; and |
| • | disruption of our existing operations and facilities. |
Moreover, our development and expansion projects are sometimes jointly pursued with third parties or by licensing our brands to third parties. These joint development, expansion projects or license agreements are subject to risks, in addition to those disclosed above, as they are dependent on our ability to reach and maintain agreements with third parties. For example, we made a bid with Rock Gaming LLC and other local investors for a video lottery terminal facility in Baltimore, Maryland and we can give no assurances that the bid will be awarded to us, that we will reach definitive agreements with the other parties that comprise the bid, or that the development project will be undertaken.
Our failure to complete any new development or expansion project, or consummate any joint development, expansion projects or projects where we license our brands, as planned, on schedule, within budget or in a manner that generates anticipated profits, could have an adverse effect on our business, financial condition and results of operations.
We may sell different properties as a result of our evaluation of our portfolio of businesses. Such divestitures would affect our costs, revenues, profitability and financial position.
From time to time, we evaluate our properties and may, as a result, sell or attempt to sell different properties. These divestitures affect our costs, revenues, profitability and financial position.
Divestitures have inherent risks, including possible delays in closing transactions (including potential difficulties in obtaining regulatory approvals), the risk of lower-than-expected sales proceeds for the divested businesses, and potential post-closing claims for indemnification. In addition, current economic conditions and relatively illiquid real estate markets may result in fewer potential bidders and unsuccessful sales efforts. Expected costs savings, which are offset by revenue losses from divested properties, may also be difficult to achieve or maximize due to our fixed cost structure.
We may incur impairments to goodwill, indefinite-lived intangible assets, or long-lived assets which could negatively affect our future profits.
In accordance with the authoritative accounting guidance for goodwill and other intangible assets, we test our goodwill and indefinite-lived intangible assets for impairment annually or if a triggering event occurs. Each year, we perform a preliminary annual impairment assessment of goodwill and other non-amortizing intangible assets as of September 30. In the fourth quarter of each year, we update our preliminary assessment once we finalize our long-term operating plan and certain other
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assumptions, however, as discussed below, if our estimates of projected cash flows related to these assets are not achieved, we may be subject to a future impairment charge, which could have a material adverse impact on our consolidated financial statements. In addition, in accordance with the provisions of the authoritative accounting guidance for the impairment or disposal of long-lived assets, we test long-lived assets for impairment if a triggering event occurs.
We are dependent upon our properties for future cash flows and our continued success depends on our ability to draw customers to our properties. Significant negative industry or economic trends, reduced estimates of future cash flows, disruptions to our business, slower growth rates or lack of growth in our business have resulted in significant write-downs and impairment charges during the years ended December 31, 2010 and 2009, and during the period from January 28, 2008 through December 31, 2008, and, if one or more of such events occurs in the future, additional impairment charges may be required in future periods. If we are required to record additional impairment charges, this could have a material adverse impact on our consolidated financial statements.
Acts of terrorism and war, natural disasters and severe weather may negatively impact our future profits.
Terrorist attacks and other acts of war or hostility have created many economic and political uncertainties. For example, a substantial number of our customers for our properties in Las Vegas use air travel. On September 11, 2001, acts of terrorism occurred in New York City, Pennsylvania and Washington, D.C. As a result of these terrorist acts, domestic and international travel was severely disrupted, which resulted in a decrease in customer visits to our properties in Las Vegas. We cannot predict the extent to which disruptions in air or other forms of travel as a result of any further terrorist act, security alerts or war, uprisings, or hostilities in places such as Iraq and Afghanistan, other countries throughout the world will continue to directly or indirectly impact our business and operating results. For example, our operations in Cairo, Egypt were negatively affected from the uprising there in January 2011. As a consequence of the threat of terrorist attacks and other acts of war or hostility in the future, premiums for a variety of insurance products have increased, and some types of insurance are no longer available. Given current conditions in the global insurance markets, we are substantially under insured for losses and interruptions caused by terrorist acts and acts of war. If any such event were to affect our properties, we would likely be adversely impacted.
In addition, natural and man-made disasters such as major fires, floods, hurricanes, earthquakes and oil spills could also adversely impact our business and operating results. For example, four of our properties were closed for an extended period of time due to the damage sustained from Hurricanes Katrina and Rita in August and September 2005, respectively. Such events could lead to the loss of use of one or more of our properties for an extended period of time and disrupt our ability to attract customers to certain of our gaming facilities. If any such event were to affect our properties, we would likely be adversely impacted. Seven of our properties were closed during the first half of 2011 due to flooding and severe weather conditions. Additionally, in August 2011, our casinos in Atlantic City were closed during a busy summer weekend due to Hurricane Irene.
In most cases, we have insurance that covers portions of any losses from a natural disaster, but it is subject to deductibles and maximum payouts in many cases. Although we may be covered by insurance from a natural disaster, the timing of our receipt of insurance proceeds, if any, is out of our control. In some cases, however, we will receive no proceeds from insurance, such as our August 2011 closing in Atlantic City.
Additionally, a natural disaster affecting one or more of our properties may affect the level and cost of insurance coverage we may be able to obtain in the future, which may adversely affect our financial position.
As our operations depend in part on our customers’ ability to travel, severe or inclement weather can also have a negative impact on our results of operations.
Our business is particularly sensitive to energy prices and a rise in energy prices could harm our operating results.
We are a large consumer of electricity and other energy and, therefore, higher energy prices may have an adverse effect on our results of operations. Accordingly, increases in energy costs may have a negative impact on our operating results. Additionally, higher electricity and gasoline prices which affect our customers may result in reduced visitation to our resorts and a reduction in our revenues. We may be indirectly impacted by regulatory requirements aimed at reducing the impacts of climate change directed at up-stream utility providers, as we could experience potentially higher utility, fuel, and transportation costs.
Work stoppages and other labor problems could negatively impact our future profits.
Some of our employees are represented by labor unions. A lengthy strike or other work stoppage at one of our casino properties or construction projects could have an adverse effect on our business and results of operations. From time to time, we have also experienced attempts to unionize certain of our non-union employees. While these efforts have achieved only limited success to date, we cannot provide any assurance that we will not experience additional and more successful union activity in the future. There has been a trend towards unionization for employees in Atlantic City and Las Vegas. The impact of this union activity is undetermined and could negatively impact our profits.
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Our obligation to fund multi-employer pension plans to which we contribute may have an adverse impact on us.
We contribute to and participate in various multi-employer pension plans for employees represented by certain unions. We are required to make contributions to these plans in amounts established under collective bargaining agreements. We do not administer these plans and, generally, are not represented on the boards of trustees of these plans. The Pension Protection Act enacted in 2006, or the PPA, requires under-funded pension plans to improve their funding ratios. Based on the information available to us, some of the multi-employer plans to which we contribute are either “critical” or “endangered” as those terms are defined in the PPA. We cannot determine at this time the amount of additional funding, if any, we may be required to make to these plans. However, plan assessments could have an adverse impact on our results of operations or cash flows for a given period. Furthermore, under current law, upon the termination of a multi-employer pension plan, or in the event of a withdrawal by us, which we consider from time to time, or a mass withdrawal or insolvency of contributing employers, we would be required to make payments to the plan for our proportionate share of the plan’s unfunded vested liabilities. Any termination of a multi-employer plan, or mass withdrawal or insolvency of contributing employers, could require us to contribute an amount under a plan of rehabilitation or surcharge assessment that would have a material adverse impact on our consolidated financial condition, results of operations and cash flows.
We extend credit to a portion of our customers and we may not be able to collect gaming receivables from our credit players.
We conduct our gaming activities on a credit and cash basis at many of our properties. Any such credit we extend is unsecured. Table games players typically are extended more credit than slot players, and high-stakes players typically are extended more credit than customers who tend to wager lower amounts. High-end gaming is more volatile than other forms of gaming, and variances in win-loss results attributable to high-end gaming may have a significant positive or negative impact on cash flow and earnings in a particular quarter. We extend credit to those customers whose level of play and financial resources warrant, in the opinion of management, an extension of credit. These large receivables could have a significant impact on our results of operations if deemed uncollectible. While gaming debts evidenced by a credit instrument, including what is commonly referred to as a “marker,” and judgments on gaming debts are enforceable under the current laws of the jurisdictions in which we allow play on a credit basis and judgments in such jurisdictions on gaming debts are enforceable in all states
under the Full Faith and Credit Clause of the U.S. Constitution, other jurisdictions may determine that enforcement of gaming debts is against public policy. Although courts of some foreign nations will enforce gaming debts directly and the assets in the U.S. of foreign debtors may be reached to satisfy a judgment, judgments on gaming debts from U.S. courts are not binding on the courts of many foreign nations.
We may not realize all of the anticipated benefits of current or potential future acquisitions.
Our ability to realize the anticipated benefits of acquisitions will depend, in part, on our ability to integrate the businesses of such acquired company with our businesses. The combination of two independent companies is a complex, costly and time consuming process. This process may disrupt the business of either or both of the companies, and may not result in the full benefits expected. The difficulties of combining the operations of the companies, including our recent acquisitions of Planet Hollywood in Las Vegas and Thistledown Racetrack in Cleveland, Ohio, include, among others:
| • | coordinating marketing functions; |
| • | undisclosed liabilities; |
| • | unanticipated issues in integrating information, communications and other systems; |
| • | unanticipated incompatibility of purchasing, logistics, marketing and administration methods; |
| • | retaining key employees; |
| • | consolidating corporate and administrative infrastructures; |
| • | the diversion of management’s attention from ongoing business concerns; and |
| • | coordinating geographically separate organizations. |
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We may be unable to realize in whole or in part the benefits anticipated for any current or future acquisitions.
We may not realize any or all of our projected cost savings, which would have the effect of reducing our LTM Adjusted EBITDA, which would have a negative effect on our results of operations and negatively impact our covenant calculation and could have a negative effect on our stock price.
Beginning in the third quarter of 2008, we initiated a company-wide cost savings plan in an effort to align our expenses with current revenue levels. In addition, we embarked on Project Renewal in the fourth quarter of 2010 to identify the optimum way of structuring our business given our breadth and scale of product offerings. While these efforts have allowed us to realize substantial savings since we initiated our cost savings plan, our continued reduction efforts may fail to achieve similar or continued savings. Although we believe, as of December 31, 2011, once fully implemented, these cost savings programs will produce additional estimated annual cost savings of $198.3 million, we may not realize some or all of these projected savings without impacting our revenues. Our cost savings plans are intended to increase our effectiveness and efficiency in our operations without impacting our revenues and margins. Our cost savings plan is subject to numerous risks and uncertainties that may change at any time, and, therefore, our actual savings may differ materially from what we anticipate. For example, cutting advertising or marketing expenses may have an unintended negative affect on our revenues. In addition, our expected savings from procurement of goods may be affected by unexpected increases in the cost of raw materials. Furthermore, because we use our projected yet-to-be realized cost savings as a pro forma adjustment to calculate our LTM Adjusted EBITDA—Pro Forma—CEOC Restricted, our actual LTM Adjusted EBITDA would be reduced to the extent of the cost savings we do not achieve.
We may be required to pay our future tax obligation on our deferred cancellation of debt income.
Under the American Recovery and Reinvestment Act of 2009, or the ARRA, we will receive temporary federal tax relief under the Delayed Recognition of Cancellation of Debt Income, or CODI, rules. The ARRA contains a provision that allows for a deferral for tax purposes of CODI for debt reacquired in 2009 and 2010, followed by recognition of CODI ratably from 2014 through 2018. In connection with the debt that we reacquired in 2009 and 2010, we have deferred related CODI of $3.6 billion for tax purposes (net of Original Issue Discount (“OID”) interest expense, some of which must also be deferred to 2014 through 2018 under the ARRA). We are required to include one-fifth of the deferred CODI, net of deferred and regularly scheduled OID, in taxable income each year from 2014 through 2018. To the extent that our federal taxable income exceeds our available federal net operating loss carry forwards in those years, we will have a cash tax obligation. Our tax obligations related to CODI could be substantial and could materially and adversely affect our cash flows as a result of tax payments. For more information on the debt that we reacquired in 2009 and 2010, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation-Other Factors Affecting Net Income.”
The risks associated with our international operations could reduce our profits.
Some of our properties are located outside the United States, and our 2006 acquisition of London Clubs has increased the percentage of our revenue derived from operations outside the United States. International operations are subject to inherent risks including:
| • | political and economic instability; |
| • | variation in local economies; |
| • | currency fluctuation; |
| • | greater difficulty in accounts receivable collection; |
| • | trade barriers; and |
| • | burden of complying with a variety of international laws. |
For example, the political instability in Egypt due to the uprising in January 2011 has negatively affected our properties there.
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The loss of the services of key personnel could have a material adverse effect on our business.
The leadership of our chief executive officer, Mr. Loveman, and other executive officers has been a critical element of our success. The death or disability of Mr. Loveman or other extended or permanent loss of his services, or any negative market or industry perception with respect to him or arising from his loss, could have a material adverse effect on our business. Our other executive officers and other members of senior management have substantial experience and expertise in our business and have made significant contributions to our growth and success. The unexpected loss of services of one or more of these individuals could also adversely affect us. We are not protected by key man or similar life insurance covering members of our senior management. We have employment agreements with our executive officers, but these agreements do not guarantee that any given executive will remain with us.
If we are unable to attract, retain and motivate employees, we may not be able to compete effectively and will not be able to expand our business.
Our success and ability to grow are dependent, in part, on our ability to hire, retain and motivate sufficient numbers of talented people, with the increasingly diverse skills needed to serve clients and expand our business, in many locations around the world. Competition for highly qualified, specialized technical and managerial, and particularly consulting personnel, is intense. Recruiting, training, retention and benefit costs place significant demands on our resources. Additionally, our substantial indebtedness and the recent downturn in the gaming, travel and leisure sectors has made recruiting executives to our business more difficult. The inability to attract qualified employees in sufficient numbers to meet particular demands or the loss of a significant number of our employees could have an adverse effect on us.
We are controlled by the Sponsors, whose interests may not be aligned with ours.
Hamlet Holdings, the members of which are comprised of an equal number of individuals affiliated with each of the Sponsors, beneficially owns approximately 69.9% of our common stock pursuant to an irrevocable proxy providing Hamlet Holdings with sole voting and sole dispositive power over those shares. As a result, the Sponsors have the power to elect all of our directors. Therefore, the Sponsors have the ability to vote on any transaction that requires the approval of our Board or our stockholders, including the approval of significant corporate transactions such as mergers and the sale of substantially all of our assets. The interests of the Sponsors could conflict with or differ from the interests of other holders of our common stock. For example, the concentration of ownership held by the Sponsors could delay, defer or prevent a change of control of us or impede a merger, takeover or other business combination which another stockholder may otherwise view favorably. Additionally, the Sponsors are in the business of making or advising on investments in companies it holds, and may from time to time in the future acquire interests in or provide advice to businesses that directly or indirectly compete with certain portions of our business or are suppliers or customers of ours. One or both of the Sponsors may also pursue acquisitions that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. A sale of a substantial number of shares of stock in the future by funds affiliated with the Sponsors or their co-investors could cause our stock price to decline. So long as Hamlet Holdings continues to hold the irrevocable proxy, they will continue to be able to strongly influence or effectively control our decisions.
In addition, we have an executive committee that serves at the discretion of our Board and is authorized to take such actions as it reasonably determines appropriate. Currently, the executive committee may act by a majority of its members, provided that at least one member affiliated with TPG and Apollo must approve any action of the executive committee. See “Directors, Executive Officers and Corporate Governance—Executive Committee” for a further discussion.
Use of the “Caesars” brand name, or any of our other brands, by entities other than us could damage the brands and our operations and adversely affect our business and results of operations.
Our “Caesars” brand remains the most recognized casino brand in the world and our operations benefit from the global recognition and reputation generated by our brands. Generally and through Caesars Global Life, we are actively pursuing gaming and non-gaming management, branding, and development opportunities in Asia and other parts of the world where our brands and reputation are already well-recognized assets. In September 2011, we announced a management and branding agreement for a non-gaming development, whose equity will be provided by a third party, that will be called Caesars Palace Longmu Bay. In addition, we will continue to expand our World Series of Poker tournaments to international jurisdictions where we believe there is a likelihood of legalization of online gaming, in order to grow the brand’s awareness. In connection with such opportunities, we intend to grant third parties licenses to use our brands. Our business and results of operations may be adversely affected by the management or the enforcement of the “Caesars” and the “World Series of Poker” brand names, or any of our other brands, by third parties outside of our exclusive control.
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Any failure to protect our trademarks could have a negative impact on the value of our brand names and adversely affect our business.
The development of intellectual property is part of our overall business strategy, and we regard our intellectual property to be an important element of our success. For example, we own and operate the World Series of Poker tournaments, and we license trademarks for a variety of products and businesses related to this brand. While our business as a whole is not substantially dependent on any one trademark or combination of several of our trademarks or other intellectual property, we seek to establish and maintain our proprietary rights in our business operations and technology through the use of patents, copyrights, trademarks and trade secret laws. We file applications for and obtain patents, copyrights and trademarks in the United States and in foreign countries where we believe filing for such protection is appropriate. We also seek to maintain our trade secrets and confidential information by nondisclosure policies and through the use of appropriate confidentiality agreements. Despite our efforts to protect our proprietary rights, parties may infringe our trademarks and use information that we regard as proprietary and our rights may be invalidated or unenforceable. The laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States. Monitoring the unauthorized use of our intellectual property is difficult. Litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation of this type could result in substantial costs and diversion of resource. We cannot assure you that all of the steps we have taken to protect our trademarks in the United States and foreign countries will be adequate to prevent imitation of our trademarks by others. The unauthorized use or reproduction of our trademarks could diminish the value of our brand and its market acceptance, competitive advantages or goodwill, which could adversely affect our business.
Any violation of the Foreign Corrupt Practices Act or other similar laws and regulations could have a negative impact on us.
We are subject to risks associated with doing business outside of the United States, which exposes us to complex foreign and U.S. regulations inherent in doing business cross-border and in each of the countries in which it transacts business. We are subject to regulations imposed by the Foreign Corrupt Practices Act, or the FCPA, and other anti-corruption laws that generally prohibit U.S. companies and their intermediaries from offering, promising, authorizing or making improper payments to foreign government officials for the purpose of obtaining or retaining business. Violations of the FCPA and other anti-corruption laws may result in severe criminal and civil sanctions as well as other penalties and the SEC and U.S. Department of Justice have increased their enforcement activities with respect to the FCPA. Internal control policies and procedures and employee training and compliance programs that we have implemented to deter prohibited practices may not be effective in prohibiting our employees, contractors or agents from violating or circumventing our policies and the law. If our employees or agents fail to comply with applicable laws or Company policies governing our international operations, we may face investigations, prosecutions and other legal proceedings and actions which could result in civil penalties, administrative remedies and criminal sanctions. Any determination that we have violated the FCPA could have a material adverse effect on our financial condition. Compliance with international and U.S. laws and regulations that apply to our international operations increases our cost of doing business in foreign jurisdictions. We also deal with significant amounts of cash in our operations and are subject to various reporting and anti-money laundering regulations. Any violation of anti-money laundering laws or regulations by any of our resorts could have a negative effect on our results of operations.
We are or may become involved in legal proceedings that, if adversely adjudicated or settled, could impact our financial condition.
From time to time, we are defendants in various lawsuits or other legal proceedings relating to matters incidental to our business. The nature of our business subjects us to the risk of lawsuits filed by customers, past and present employees, competitors, business partners, Indian tribes and others in the ordinary course of business. As with all legal proceedings, no assurance can be provided as to the outcome of these matters and in general, legal proceedings can be expensive and time consuming. For example, we may have potential liability arising from a class action lawsuit against Hilton Hotels Corporation relating to employee benefit obligations. We may not be successful in the defense or prosecution of these lawsuits, which could result in settlements or damages that could significantly impact our business, financial condition and results of operations.
Our debt agreements contain restrictions that limit our flexibility in operating our business.
Our senior secured credit facilities, the CMBS mortgage loan and/or related mezzanine loans the (“CMBS Loans”), the indentures governing most of our existing notes, the senior secured loans related to the development of Octavius Tower at Caesars Palace Las Vegas and Project Linq, the senior secured loan of PHW Las Vegas, LLC and the senior secured notes of Chester Downs contain, and any future indebtedness of ours would likely contain, a number of covenants that impose significant operating and financial restrictions on us, including restrictions on our and our subsidiaries’ ability to, among other things:
| • | incur additional debt or issue certain preferred shares; |
| • | pay dividends on or make distributions in respect of our capital stock or make other restricted payments; |
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| • | make certain investments; |
| • | sell certain assets; |
| • | create liens on certain assets; |
| • | consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; |
| • | enter into certain transactions with our affiliates; and |
| • | designate our subsidiaries as unrestricted subsidiaries. |
As a result of these covenants, we are limited in the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs.
We have pledged and will pledge a significant portion of our assets as collateral under our senior secured credit facilities, our CMBS Loans, our first lien notes, our second lien notes, the senior secured loan of PHW Las Vegas, LLC, or PHW Las Vegas, the senior secured loan related to the development of the Octavius Tower at Caesars Palace Las Vegas, the Octavius Tower or Project Octavius, and a retail, dining and entertainment corridor located between the Imperial Palace Hotel and Casino and the Flamingo Las Vegas on the Las Vegas strip, or Project Linq, or the senior secured notes of Chester Downs. If any of these lenders accelerate the repayment of borrowings, there can be no assurance that we will have sufficient assets to repay our indebtedness.
Under our senior secured credit facilities, we are required to satisfy and maintain specified financial ratios. Our ability to meet those financial ratios can be affected by events beyond our control, and there can be no assurance that we will meet those ratios. A failure to comply with the covenants contained in our senior secured credit facilities or our other indebtedness could result in an event of default under the facilities or the existing agreements, which, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations. In the event of any default under our senior secured credit facilities or our other indebtedness, the lenders thereunder:
| • | will not be required to lend any additional amounts to us; |
| • | could elect to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be due and payable and terminate all commitments to extend further credit; or |
| • | require us to apply all of our available cash to repay these borrowings. |
Such actions by the lenders could cause cross defaults under our other indebtedness. If we were unable to repay those amounts, the lenders under our senior secured credit facilities, our CMBS financing and our first and second lien notes could proceed against the collateral granted to them to secure that indebtedness.
If the indebtedness under our first and second lien notes, senior secured credit facilities, CMBS financing or our other indebtedness were to be accelerated, there can be no assurance that our assets would be sufficient to repay such indebtedness in full.
Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from making debt service payments.
We are a highly leveraged company. As of December 31, 2011, we had $22,657.9 million face value of outstanding indebtedness and our current debt service obligation for the next 12 months is $1,693.0 million, which includes required interest payments of $1,647.7 million. As of December 31, 2011, CEOC had $19,088.5 million face value of outstanding indebtedness including $1,462.1 million owed to Caesars Entertainment, and CEOC’s debt service obligation for the next 12 months is $1,606.5 million, which includes required interest payments of $1,561.2 million.
In February 2012, subsidiaries of CEOC completed the offering of $1,250.0 million in first lien notes, and used the majority of the proceeds to pay down certain Term Loans. Also in February 2012, Chester Downs issued $330.0 million in bonds, using a majority of the proceeds to pay off its senior secured loans. In addition, on March 1, 2012, CEOC’s credit agreement was amended to create a new tranche of term loan due in 2018 and to revise interest rates on certain tranches of term loans outstanding. The full terms of these transactions are described in Note 22, “Subsequent Events,” to the consolidated financial statements included in Item 8 of this report. Had these transactions occurred on December 31, 2011, we would have had $22,983.4 million face value of outstanding indebtedness and our current debt service obligation for the next 12 months would be $1,764.8 million, which includes required interest payments of $1,741.3 million. As of December 31, 2011, CEOC would
17
have had $19,414.0 million face value of outstanding indebtedness including $1,462.1 million owed to Caesars Entertainment, and CEOC’s debt service obligation for the next 12 months would be $1,678.3 million, which includes required interest payments of $1,654.8 million.
Our substantial indebtedness could:
| • | limit our ability to borrow money for our working capital, capital expenditures, development projects, debt service requirements, strategic initiatives or other purposes; |
| • | make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the agreements governing our indebtedness; |
| • | require us to dedicate a substantial portion of our cash flow from operations to the repayment of our indebtedness thereby reducing funds available to us for other purposes; |
| • | limit our flexibility in planning for, or reacting to, changes in our operations or business; |
| • | make us more highly leveraged than some of our competitors, which may place us at a competitive disadvantage; |
| • | make us more vulnerable to downturns in our business or the economy; |
| • | restrict us from making strategic acquisitions, developing new gaming facilities, introducing new technologies or exploiting business opportunities; |
| • | affect our ability to renew gaming and other licenses; |
| • | limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds or dispose of assets; and |
| • | expose us to the risk of increased interest rates as certain of our borrowings are at variable rates of interest. |
Despite our substantial indebtedness, we may still be able to incur significantly more debt. This could intensify the risks described above.
We and our subsidiaries may be able to incur substantial indebtedness at any time, and from time to time, including in the near future. Although the terms of the agreements governing our indebtedness contain restrictions on our ability to incur additional indebtedness, these restrictions are subject to a number of important qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial.
For example, as of December 31, 2011, we had $938.2 million available for additional borrowing under our senior secured revolving credit facility after giving effect to $113.5 million in outstanding letters of credit thereunder, all of which would be secured. None of our existing indebtedness limits the amount of debt that may be incurred by Caesars Entertainment. Our senior secured credit facilities allow for one or more future issuances of additional secured notes or loans, which may include, in each case, indebtedness secured on a pari passu basis with the obligations under the senior secured credit facilities and our first lien notes. This indebtedness could be used for a variety of purposes, including financing capital expenditures, refinancing or repurchasing our outstanding indebtedness, including existing unsecured indebtedness, or for general corporate purposes. We have raised and expect to continue to raise debt, including secured debt, to directly or indirectly refinance our outstanding unsecured debt on an opportunistic basis, as well as development opportunities.
We may be unable to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness that may not be successful. If we are unable to satisfy or refinance our debt obligations as they come due, we cannot assure you that your investment in our company will retain any value.
Our ability to satisfy our debt obligations will depend upon, among other things:
| • | our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, many of which are beyond our control; and |
| • | our future ability to borrow under our senior secured credit facilities, the availability of which depends on, among other things, our complying with the covenants in our senior secured credit facilities. |
18
We may be unable to generate sufficient cash flow from operations, or unable to draw under our senior secured credit facilities or otherwise, in an amount sufficient to fund our liquidity needs. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. As of December 31, 2011, $11.1 billion face value of our indebtedness is scheduled to mature in 2015 (assuming the extension options with respect to the CMBS Financing and PHW Las Vegas senior secured loan are exercised), representing 49% of the total face value of our debt. In March 2012 we extended the maturity of $2.7 billion face value of debt from 2015 to 2018. For a discussion of our debt maturities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources-Guarantees of Third-Party Debt and Other Obligations and Commitments-Contractual Obligations.” We do not expect that our cash flow from operations will be sufficient to repay this indebtedness, and we will have to seek a refinancing. We cannot predict at this time whether we will be able to secure any such refinancing, even if market conditions and our financial condition improve between now and then. The market for CMBS financings has substantially decreased since we raised the CMBS financing and it is uncertain whether we will be able to refinance the entire outstanding principal amount of our indebtedness that will be due in 2015, including the CMBS Financing. Even if refinancing alternatives were available to us, we may not find them suitable or at comparable interest rates to the indebtedness being refinanced. In addition, the terms of existing or future debt agreements may restrict us from securing a refinancing on terms that are available to us at that time. In the absence of such operating results and resources, we would face substantial liquidity problems and would likely be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions for fair market value or at all. Furthermore, any proceeds that we could realize from any such dispositions may not be adequate to meet our debt service obligations then due. We could also be required to reorganize our Company in its entirety. Neither the Sponsors nor any of their respective affiliates has any continuing obligation to provide us with debt or equity financing. Even if we are able to refinance our debt, any refinancing could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. For example, the interest rates on our first and second lien notes are substantially higher than the interest rates under our senior secured credit facility. If we are unable to service our debt obligations generally, and if we are unable to refinance our debt obligations that mature in 2015 or thereafter, we cannot assure you that our company will continue in its current state or that your investment in our company will retain any value.
An active trading market for our common stock may not develop.
Prior to our listing in February 2012, there has not been a public market for our common stock. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market or how liquid that market might become. Our shares may be less liquid than the shares of other newly public companies and there may be imbalances between supply and demand for our shares. As a result, our share price may experience significant volatility and may not necessarily reflect the value of our expected performance. If an active trading market does not develop, owners of our common stock may have difficulty selling any of our common stock.
Future sales or the possibility of future sales of a substantial amount of our common stock may depress the price of shares of our common stock.
Future sales or the availability for sale of substantial amounts of our common stock in the public market could adversely affect the prevailing market price of our common stock and could impair our ability to raise capital through future sales of equity securities.
As of March 9, 2012, there were 125,297,197 shares outstanding all of which are the same class of voting common stock. All of the outstanding shares of our common stock will be eligible for resale under Rule 144 or Rule 701 of the Securities Act, subject to volume limitations, applicable holding period requirements and certain lockup agreements related to certain of our shareholders and management described below or other contractual restrictions. The Sponsors have the ability to cause us to register the resale of its shares, and our management members who hold shares will have the ability to include their shares in such registration.
In connection with the Co-Investors Transaction, we filed a shelf prospectus to register 22,339,143 shares of our common stock for resale on a continuous basis by the Participating Co-Investors, subject to the lockup agreements described herein. We may issue shares of common stock or other securities from time to time as consideration for future acquisitions and investments or for any other reason that our board of directors deems advisable. If any such acquisition or investment is significant, the number of shares of our common stock, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be substantial. We may also grant registration rights covering those shares of common stock or other securities in connection with any such acquisitions and investments.
19
We cannot predict the size of future issuances of our common stock or other securities or the effect, if any, that future issuances and sales of our common stock or other securities, including future sales by the Sponsors, will have on the market price of our common stock. Sales of substantial amounts of common stock (including shares of common stock issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.
The price and trading volume of our common stock may fluctuate significantly.
The market price of our common stock may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume of our common stock may fluctuate and cause significant price variations to occur. Volatility in the market price of our common stock may prevent a holder of our common stock from being able to sell their shares. The market price for our common stock could fluctuate significantly for various reasons, including:
| • | our operating and financial performance and prospects; |
| • | our quarterly or annual earnings or those of other companies in our industry; |
| • | conditions that impact demand for our products and services; |
| • | the public’s reaction to our press releases, other public announcements and filings with the SEC; |
| • | changes in earnings estimates or recommendations by securities analysts who track our common stock; |
| • | market and industry perception of our success, or lack thereof, in pursuing our growth strategy; |
| • | strategic actions by us or our competitors, such as acquisitions or restructurings; |
| • | changes in government and environmental regulation, including gaming taxes; |
| • | changes in accounting standards, policies, guidance, interpretations or principles; |
| • | arrival and departure of key personnel; |
| • | changes in our capital structure; |
| • | sales of common stock by us or members of our management team; |
| • | the expiration of contractual lockup agreements; and |
| • | changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural disasters, terrorist attacks, acts of war and responses to such events. |
In addition, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in the gaming, lodging, hospitality and entertainment industries. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our common stock could fluctuate based upon factors that have little or nothing to do with us, and these fluctuations could materially reduce our share price.
Our stockholders are subject to extensive governmental regulation and if a stockholder is found unsuitable by the gaming authority, that stockholder would not be able to beneficially own our common stock directly or indirectly.
In many jurisdictions, gaming laws can require any of our stockholders to file an application, be investigated, and qualify or have his, her or its suitability determined by gaming authorities. Gaming authorities have very broad discretion in determining whether an applicant should be deemed suitable. Subject to certain administrative proceeding requirements, the gaming regulators have the authority to deny any application or limit, condition, restrict, revoke or suspend any license, registration, finding of suitability or approval, or fine any person licensed, registered or found suitable or approved, for any cause deemed reasonable by the gaming authorities. For additional information on the criteria used in making determinations regarding suitability, see “Governmental Regulation”
For example, under Nevada gaming laws, each person who acquires, directly or indirectly, beneficial ownership of any voting security, or beneficial or record ownership of any non-voting security or any debt security, in a public corporation which is registered with the Nevada Gaming Commission, or the Gaming Commission, may be required to be found suitable if the Gaming Commission has reason to believe that his or her acquisition of that ownership, or his or her continued ownership in general, would be inconsistent with the declared public policy of Nevada, in the sole discretion of the Gaming Commission. Any person required by the Gaming Commission to be found suitable shall apply for a finding of suitability within 30 days after the Gaming Commission’s request that he or she should do so and, together with his or her application for suitability, deposit with the Nevada Gaming Control Board, or the Control Board, a sum of money which, in the sole discretion of the Control Board, will be adequate to pay the anticipated costs and charges incurred in the investigation and processing of that application for suitability, and deposit such additional sums as are required by the Control Board to pay final costs and charges. Additionally, under Ohio law, an institutional investor, which is broadly defined and includes any corporation that holds any amount of our stock, will be required to apply for and obtain a waiver of suitability determination.
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Furthermore, any person required by a gaming authority to be found suitable, who is found unsuitable by the gaming authority, may not hold directly or indirectly the beneficial ownership of any voting security or the beneficial or record ownership of any nonvoting security or any debt security of any public corporation which is registered with the gaming authority beyond the time prescribed by the gaming authority. A violation of the foregoing may constitute a criminal offense. A finding of unsuitability by a particular gaming authority impacts that person’s ability to associate or affiliate with gaming licensees in that particular jurisdiction and could impact the person’s ability to associate or affiliate with gaming licensees in other jurisdictions.
Many jurisdictions also require any person who acquires beneficial ownership of more than a certain percentage of voting securities of a gaming company and, in some jurisdictions, non-voting securities, typically 5%, to report the acquisition to gaming authorities, and gaming authorities may require such holders to apply for qualification or a finding of suitability, subject to limited exceptions for “institutional investors” that hold a company’s voting securities for investment purposes only.
Some jurisdictions may also limit the number of gaming licenses in which a person may hold an ownership or a controlling interest. In Indiana, for example, a person may not have an ownership interest in more than two Indiana riverboat owner’s licenses.
Because we have not paid dividends since the Acquisition and do not anticipate paying dividends on our common stock in the foreseeable future, holders of our common stock should not expect to receive dividends on shares of our common stock.
We have no present plans to pay cash dividends to our stockholders and, for the foreseeable future, intend to retain all of our earnings for use in our business. The declaration of any future dividends by us is within the discretion of our Board and will be dependent on our earnings, financial condition and capital requirements, as well as any other factors deemed relevant by our Board.
We are a “controlled company” within the meaning of the Nasdaq rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements.
Hamlet Holdings controls a majority of our voting common stock. As a result, we will be a “controlled company” within the meaning of Nasdaq corporate governance standards. Under the Nasdaq rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and we have elected not to comply with certain Nasdaq corporate governance requirements, including:
| • | the requirement that a majority of the Board consists of independent directors; |
| • | the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors; |
| • | the requirement that we have a compensation committee that is composed entirely of independent directors; and |
| • | the requirement for an annual performance evaluation of the nominating/corporate governance and compensation committees. |
As a result of these exemptions, we do not have a majority of independent directors nor do our nominating/corporate governance and compensation committees consist entirely of independent directors and we are not required to have an annual performance evaluation of the nominating/corporate governance and compensation committees. Accordingly, a holder of our common stock will not have the same protections afforded to stockholders of companies that are subject to all of the Nasdaq corporate governance requirements.
Our bylaws and certificate of incorporation contain provisions that could discourage another company from acquiring us and may prevent attempts by our stockholders to replace or remove our current management.
Provisions of our bylaws and our certificate of incorporation may delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace or remove our directors. These provisions include:
| • | establishing a classified board of directors; |
| • | establishing limitations on the removal of directors; |
| • | permitting only an affirmative vote of at least two-thirds of the Board to fix the number of directors; |
| • | prohibiting cumulative voting in the election of directors; |
21
| • | empowering only the Board to fill any vacancy on the Board, whether such vacancy occurs as a result of an increase in the number of directors or otherwise; |
| • | authorizing the issuance of “blank check” preferred stock without any need for action by stockholders; |
| • | eliminating the ability of stockholders to call special meetings of stockholders; |
| • | prohibiting stockholders from acting by written consent if less than 50.1% of our outstanding common stock is controlled by the Sponsors; |
| • | prohibiting amendments to the bylaws without the affirmative vote of at least two-thirds of the Board or the affirmative vote of at least two-thirds of the total voting power of the outstanding shares entitled to vote; |
| • | prohibiting amendments to the certificate of incorporation relating to stockholder meetings, amendments to the bylaws or certificate of incorporation, or the election or classification of the Board without the affirmative vote of two-thirds of the shares entitled to vote on any matter; and |
| • | establishing advance notice requirements for nominations for election to the Board or for proposing matters that can be acted on by stockholders at stockholder meetings. |
Our issuance of shares of preferred stock could delay or prevent a change of control of us. Our Board has the authority to cause us to issue, without any further vote or action by the stockholders, shares of preferred stock, par value $0.01 per share, in one or more series, to designate the number of shares constituting any series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices and liquidation preferences of such series. The issuance of shares of preferred stock may have the effect of delaying, deferring or preventing a change in control of our company without further action by the stockholders, even where stockholders are offered a premium for their shares.
Together, these charter and statutory provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock. Furthermore, the existence of the foregoing provisions, as well as the significant common stock controlled by Hamlet Holdings, could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.
PRIVATE SECURITIES LITIGATION REFORM ACT
This Annual Report on Form 10-K contains or may contain “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. We have based these forward-looking statements on our current expectations about future events. Further, statements that include words such as “may,” “will,” “project,” “might,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” “continue” or “pursue,” or the negative of these words or other words or expressions of similar meaning may identify forward-looking statements. These forward-looking statements are found at various places throughout the report. These forward-looking statements, including, without limitation, those relating to future actions, new projects, strategies, future performance, the outcome of contingencies such as legal proceedings, and future financial results, wherever they occur in this report, are necessarily estimates reflecting the best judgment of our management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward-looking statements should, therefore, be considered in light of various important factors set forth above and from time to time in our filings with the Securities and Exchange Commission.
In addition to the risk factors set forth above, important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include without limitation:
| • | the impact of our substantial indebtedness; |
| • | the impact, if any, of unfunded pension benefits under multi-employer pension plans; |
| • | the effects of local and national economic, credit and capital market conditions on the economy in general, and on the gaming industry in particular; |
| • | construction factors, including delays, increased costs of labor and materials, availability of labor and materials, zoning issues, environmental restrictions, soil and water conditions, weather and other hazards, site access matters and building permit issues; |
| • | the effects of environmental and structural building conditions relating to our properties; |
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| • | our ability to timely and cost-effectively integrate companies that we acquire into our operations; |
| • | our ability to realize the expense reductions from our cost savings programs; |
| • | access to available and reasonable financing on a timely basis; |
| • | changes in laws, including increased tax rates, smoking bans, regulations or accounting standards, third-party relations and approvals, and decisions, disciplines and fines of courts, regulators and governmental bodies; |
| • | litigation outcomes and judicial and governmental body actions, including gaming legislative action, referenda, regulatory disciplinary actions and fines and taxation; |
| • | the ability of our customer-tracking, customer loyalty and yield-management programs to continue to increase customer loyalty and same-store or hotel sales; |
| • | our ability to recoup costs of capital investments through higher revenues; |
| • | acts of war or terrorist incidents, severe weather conditions, uprisings or natural disasters; |
| • | access to insurance on reasonable terms for our assets; |
| • | abnormal gaming holds (“gaming hold” is the amount of money that is retained by the casino from wagers by customers); |
| • | the potential difficulties in employee retention and recruitment as a result of our substantial indebtedness, the ongoing downturn in the gaming industry, or any other factor; |
| • | the effects of competition, including locations of competitors and operating and market competition; and |
| • | the other factors set forth under “Risk Factors” above. |
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly update or release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect the occurrence of unanticipated events, except as required by law.
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| ITEM 1B. | Unresolved Staff Comments |
None.
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| ITEM 2. | Properties |
The following table sets forth information about our casino entertainment facilities as of December 31, 2011:
Summary of Property Information
| Property |
Type of Casino | Casino Space– Sq. Ft. (a) |
Slot Machines (a) |
Table Games (a) |
Hotel Rooms & Suites (a) |
|||||||||||||
| Atlantic City, New Jersey |
||||||||||||||||||
| Harrah’s Atlantic City |
Land-based | 179,800 | 2,870 | 180 | 2,590 | |||||||||||||
| Showboat Atlantic City |
Land-based | 120,100 | 2,600 | 110 | 1,330 | |||||||||||||
| Bally’s Atlantic City |
Land-based | 167,200 | 3,270 | 210 | 1,730 | |||||||||||||
| Caesars Atlantic City |
Land-based | 140,800 | 2,340 | 180 | 1,140 | |||||||||||||
| Las Vegas, Nevada |
||||||||||||||||||
| Harrah’s Las Vegas |
Land-based | 90,600 | 1,370 | 110 | 2,530 | |||||||||||||
| Rio |
Land-based | 117,300 | 1,090 | 90 | 2,520 | |||||||||||||
| Caesars Palace |
Land-based | 136,500 | 1,370 | 180 | 3,950 | |||||||||||||
| Paris Las Vegas |
Land-based | 95,300 | 1,070 | 90 | 2,920 | |||||||||||||
| Bally’s Las Vegas |
Land-based | 66,200 | 1,010 | 60 | 2,810 | |||||||||||||
| Flamingo Las Vegas (b) |
Land-based | 89,000 | 1,350 | 160 | 3,460 | |||||||||||||
| Imperial Palace |
Land-based | 118,000 | 780 | 50 | 2,550 | |||||||||||||
| Bill’s Gamblin’ Hall & Saloon |
Land-based | 42,500 | 360 | 50 | 200 | |||||||||||||
| Hot Spot Oasis |
Land-based | 1,000 | 15 | — | — | |||||||||||||
| Planet Hollywood Resort and Casino |
Land-based | 108,900 | 1,130 | 90 | 2,500 | |||||||||||||
| Laughlin, Nevada |
||||||||||||||||||
| Harrah’s Laughlin |
Land-based | 56,000 | 900 | 40 | 1,510 | |||||||||||||
| Reno, Nevada |
||||||||||||||||||
| Harrah’s Reno |
Land-based | 41,600 | 800 | 40 | 930 | |||||||||||||
| Lake Tahoe, Nevada |
||||||||||||||||||
| Harrah’s Lake Tahoe |
Land-based | 57,500 | 810 | 70 | 510 | |||||||||||||
| Harveys Lake Tahoe |
Land-based | 71,500 | 770 | 70 | 740 | |||||||||||||
| Chicago, Illinois area |
||||||||||||||||||
| Harrah’s Joliet (Illinois) (c) |
Dockside | 38,900 | 1,140 | 30 | 200 | |||||||||||||
| Horseshoe Hammond (Indiana) |
Dockside | 108,200 | 3,060 | 150 | — | |||||||||||||
| Metropolis, Illinois |
||||||||||||||||||
| Harrah’s Metropolis |
Dockside | 31,000 | 1,160 | 30 | 260 | |||||||||||||
| Southern Indiana |
||||||||||||||||||
| Horseshoe Southern Indiana |
Dockside | 86,600 | 1,770 | 110 | 500 | |||||||||||||
| Council Bluffs, Iowa |
||||||||||||||||||
| Harrah’s Council Bluffs |
Dockside | 28,000 | 800 | 30 | 250 | |||||||||||||
| Horseshoe Council Bluffs (d) |
Greyhound racing facility and land- based casino |
78,800 | 1,740 | 70 | — | |||||||||||||
| Tunica, Mississippi |
||||||||||||||||||
| Horseshoe Tunica |
Dockside | 63,000 | 1,470 | 90 | 510 | |||||||||||||
| Harrah’s Tunica |
Dockside | 136,000 | 1,350 | 70 | 1,360 | |||||||||||||
| Tunica Roadhouse Hotel & Casino |
Dockside | 31,000 | 770 | 20 | 130 | |||||||||||||
| Mississippi Gulf Coast |
||||||||||||||||||
| Grand Casino Biloxi |
Dockside | 28,800 | 750 | 30 | 490 | |||||||||||||
| St. Louis, Missouri |
||||||||||||||||||
| Harrah’s St. Louis |
Dockside | 109,000 | 2,430 | 90 | 500 | |||||||||||||
| North Kansas City, Missouri |
||||||||||||||||||
| Harrah’s North Kansas City |
Dockside | 60,100 | 1,530 | 60 | 390 | |||||||||||||
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| Property |
Type of Casino | Casino Space– Sq. Ft. (a) |
Slot Machines (a) |
Table Games (a) |
Hotel Rooms & Suites (a) |
|||||||||||||
| New Orleans, Louisiana |
||||||||||||||||||
| Harrah’s New Orleans |
Land-based | 125,100 | 1,990 | 120 | 450 | |||||||||||||
| Bossier City, Louisiana |
||||||||||||||||||
| Louisiana Downs (e) |
Thoroughbred racing facility |
14,900 | 1,070 | — | — | |||||||||||||
| Horseshoe Bossier City |
Dockside | 29,900 | 1,340 | 80 | 610 | |||||||||||||
| Chester, Pennsylvania |
||||||||||||||||||
| Harrah’s Chester (f) |
Harness racing facility
and based casino |
110,500 | 3,000 | 130 | — | |||||||||||||
| Phoenix, Arizona |
||||||||||||||||||
| Harrah’s Ak-Chin (g) |
Indian Reservation |
38,300 | 1,100 | 30 | 300 | |||||||||||||
| Cherokee, North Carolina |
||||||||||||||||||
| Harrah’s Cherokee (g) |
Indian Reservation |
138,800 | 3,120 | 50 | 1,110 | |||||||||||||
| San Diego, California |
||||||||||||||||||
| Harrah’s Rincon (g) |
Indian Reservation |
72,900 | 1,990 | 70 | 660 | |||||||||||||
| Punta del Este, Uruguay |
||||||||||||||||||
| Conrad Punta del Este Resort and Casino (h) |
Land-based | 44,500 | 520 | 70 | 300 | |||||||||||||
| Ontario, Canada |
||||||||||||||||||
| Caesars Windsor (i) |
Land-based | 100,000 | 2,330 | 80 | 760 | |||||||||||||
| United Kingdom |
||||||||||||||||||
| Golden Nugget |
Land-based | 5,100 | 50 | 20 | — | |||||||||||||
| Playboy Club London |
Land-based | 6,200 | 20 | 20 | — | |||||||||||||
| The Sportsman |
Land-based | 5,200 | 50 | 20 | — | |||||||||||||
| Rendezvous Brighton |
Land-based | 7,800 | 80 | 30 | — | |||||||||||||
| Rendezvous Southend-on-Sea |
Land-based | 8,700 | 50 | 30 | — | |||||||||||||
| Manchester235 |
Land-based | 11,500 | 60 | 40 | — | |||||||||||||
| The Casino at the Empire |
Land-based | 20,900 | 130 | 40 | — | |||||||||||||
| Alea Nottingham |
Land-based | 10,000 | 50 | 20 | — | |||||||||||||
| Alea Glasgow |
Land-based | 15,000 | 50 | 30 | — | |||||||||||||
| Alea Leeds |
Land-based | 10,300 | 50 | 30 | — | |||||||||||||
| Egypt |
||||||||||||||||||
| The London Clubs Cairo-Ramses (g) |
Land-based | 2,700 | 40 | 20 | — | |||||||||||||
| Caesars Cairo (g) |
Land-based | 5,500 | 30 | 30 | — | |||||||||||||
| South Africa |
||||||||||||||||||
| Emerald Safari (j) |
Land-based | 37,700 | 660 | 30 | 190 | |||||||||||||
| (a) | Approximate. |
| (b) | Information includes O’Shea’s Casino, which is adjacent to this property. |
| (c) | We have an 80% ownership interest in and manage this property. |
| (d) | The property is owned by the Company, leased to the operator, and managed by the Company for the operator for a fee pursuant to an agreement that expires in October 2024. This information includes the Bluffs Run greyhound racetrack that operates at the property. |
| (e) | We own a 49% share of a joint venture that owns a 150-room hotel located near the property. |
26
| (f) | At December 31, 2011, we had a 95% ownership interest in and manage this property. In February 2012, we purchased an additional 4.5% interest, bringing our total ownership interest in this property to 99.5%. |
| (g) | Managed. |
| (h) | We have approximately a 95% ownership interest and manage this property. |
| (i) | We have a 50% ownership interest in Windsor Casino Limited, which operates this property. The Province of Ontario owns the complex. |
| (j) | We have a 70% ownership interest in and manage this property. |
| ITEM 3. | Legal Proceedings |
The Company is party to ordinary and routine litigation incidental to our business. We do not expect the outcome of any pending litigation to have a material adverse effect on our consolidated financial position or results of operations.
| ITEM 4. | Mine Safety Disclosures |
Not applicable
27
| ITEM 5. | Market for the Company’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Effective February 8, 2012, our common stock trades on the NASDAQ Global Select Market under the symbol “CZR.” Subsequent to the Acquisition in 2008, and prior to the above date, our outstanding common stock was privately held, and there was no established public trading market for our common stock; therefore, there are no high and low sales prices for the common stock available for 2011 and 2010.
The following table sets forth repurchases of our equity securities during the fourth quarter of the fiscal year covered by this report after giving effect to the 1.742-for-one stock split effected by the Company in February 2012:
| Period |
Total Number
of Shares Purchased |
Average Price Paid Per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
||||||||||||
| 10/1/2011 – 10/31/2011 |
— | — | — | — | ||||||||||||
| 11/1/2011 – 11/30/2011 |
— | — | — | — | ||||||||||||
| 12/1/2011 – 12/31/2011 |
6,272 | $ | 20.09 | — | — | |||||||||||
As of March 9, 2012, there were 125,297,197 shares of common stock issues and outstanding that were held by 230 stockholders of record.
We did not pay any cash dividends in the years ended December 31, 2011, 2010, or 2009.
There have not been any sales by the Company of equity securities in the last fiscal year that have not been registered under the Securities Act of 1933.
28
| ITEM 6. | Selected Financial Data |
The selected financial data set forth below for the periods indicated, should be read in conjunction with the consolidated financial statements and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere in this Form 10-K.
| Successor | Predecessor | |||||||||||||||||||||||||
| (In millions, except per share data) |
2011 (a) | 2010 (b) | 2009 (c) | Jan. 28,
2008 through Dec. 31, 2008 (d) |
Jan. 1,
2008 through Jan. 27, 2008 (e) |
2007 (f) | ||||||||||||||||||||
| OPERATING DATA |
||||||||||||||||||||||||||
| Net revenues |
$ | 8,834.5 | $ | 8,818.6 | $ | 8,907.4 | $ | 9,366.9 | $ | 760.1 | $ | 10,825.2 | ||||||||||||||
| Income/(loss) from operations |
$ | 875.5 | $ | 532.3 | $ | (607.8 | ) | $ | (4,237.5 | ) | $ | (36.8 | ) | $ | 1,652.0 | |||||||||||
| Net (loss)/income |
$ | (666.7 | ) | $ | (823.3 | ) | $ | 846.4 | $ | (5,174.7 | ) | $ | (99.4 | ) | $ | 542.4 | ||||||||||
| Net (loss)/income attributable to Caesars |
$ | (687.6 | ) | $ | (831.1 | ) | $ | 827.6 | $ | (5,096.3 | ) | $ | (100.9 | ) | $ | 619.4 | ||||||||||
| COMMON STOCK DATA |
||||||||||||||||||||||||||
| Diluted (loss)/earnings per share (g) |
||||||||||||||||||||||||||
| From continuing operations |
$ | (5.50 | ) | $ | (8.37 | ) | $ | 3.95 | $ | (77.26 | ) | $ | (0.54 | ) | $ | 2.77 | ||||||||||
| Net (loss)/income |
$ | (5.50 | ) | $ | (8.37 | ) | $ | 3.95 | $ | (75.99 | ) | $ | (0.54 | ) | $ | 3.25 | ||||||||||
| Cash dividends declared per share |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | 1.60 | ||||||||||||||
| FINANCIAL POSITION DATA |
||||||||||||||||||||||||||
| Total assets |
$ | 28,515.6 | $ | 28,587.7 | $ | 28,979.2 | $ | 31,048.6 | $ | 23,371.3 | $ | 23,357.7 | ||||||||||||||
| Long-term debt |
$ | 19,759.5 | $ | 18,785.5 | $ | 18,868.8 | $ | 23,123.3 | $ | 12,367.5 | $ | 12,429.6 | ||||||||||||||
| Stockholders’ equity/(deficit) |
$ | 1,053.4 | $ | 1,672.6 | $ | (867.0 | ) | $ | (1,360.8 | ) | $ | 6,733.4 | $ | 6,679.1 | ||||||||||||
| (a) | The full year results of 2011 include $47.9 million in pre-tax gains on early extinguishments of debt, $11.0 million in pre-tax charges for impairment of goodwill and other non-amortizing intangible assets, and $96.0 million in net pre-tax charges for write-downs, reserves, recoveries, and project opening costs. |
| (b) | The full year results of 2010 include $115.6 million in pre-tax gains on early extinguishments of debt, $193.0 million in pre-tax charges for impairment of goodwill and other non-amortizing intangible assets, and $149.7 million in net pre-tax charges for write-downs, reserves, recoveries, and project opening costs. |
| (c) | The full year results of 2009 include $4,965.5 million in pre-tax gains on early extinguishments of debt, $1,638.0 million in pre-tax charges for impairment of goodwill and other non-amortizing intangible assets, and $111.5 million in net pre-tax charges for write-downs, reserves, recoveries, and project opening costs. |
| (d) | The Successor period of 2008 includes $5,489.6 million in pre-tax charges for impairment of goodwill and other non-amortizing intangible assets, $742.1 million in pre-tax gains on early extinguishment of debt, $24.0 million in pre-tax charges related to the sale of the Company, and $45.1 million in net pre-tax charges for write-downs, reserves, recoveries, and project opening costs. |
| (e) | The Predecessor period of 2008 includes $5.4 million in net pre-tax charges for write-downs, reserves, recoveries, and project opening costs and $125.6 million in pre-tax charges related to the sale of the Company. |
| (f) | The full year results of 2007 include $34.4 million in net pre-tax credits for write-downs, reserves, recoveries, and project opening costs and $13.4 million in pre-tax charges related to the proposed sale of the Company. The 2007 results also include the financial results of Bill’s Gamblin’ Hall & Saloon from its February 27, 2007 date of acquisition and Caesars Golf Macau from its September 12, 2007 date of acquisition. |
| (g) | As adjusted to reflect the impact of the February 2012 1.742-for-one split of our common stock on the years ended December 31, 2011, 2010, 2009 and January 28, 2008 through December 31, 2008. As the Predecessor operated under a different capital structure than the Successor, the earnings per share data does not reflect the stock split for the period from January 1, 2008 through January 27, 2008 and for the year ended December 31, 2007 (Predecessor). |
29
| ITEM 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read in conjunction with, and is qualified in its entirety by, the audited consolidated financial statements and the notes thereto and other financial information included elsewhere in this Form 10-K. Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements. See “ITEM 1A. Risk Factors—PRIVATE SECURITIES LITIGATION REFORM ACT.”
OVERVIEW
We are the world’s most diversified casino-entertainment provider and the most geographically diverse U.S. casino-entertainment company. As of December 31, 2011, we owned, operated, or managed, through various subsidiaries, 52 casinos in 12 U.S. states and seven countries. The majority of these casinos operate in the United States and England. Our casino entertainment facilities operate primarily under the Harrah’s, Caesars, and Horseshoe brand names in the United States. Our casino entertainment facilities include 33 land-based casinos, 12 riverboat or dockside casinos, three managed casinos on Indian lands in the United States, one managed casino in Canada, one casino combined with a greyhound racetrack, one casino combined with a thoroughbred racetrack, and one casino combined with a harness racetrack. Our 33 land-based casinos include one in Uruguay, nine in England, one in Scotland, two in Egypt, and one in South Africa. As of December 31, 2011, our facilities had an aggregate of approximately three million square feet of gaming space and approximately 43,000 hotel rooms. Our industry-leading customer loyalty program, Total Rewards, has over 40 million members. We use the Total Rewards system to market promotions and to generate customer play across our network of properties. In addition, we own an online gaming business, providing for real money casino, bingo, and poker games in the United Kingdom, alliances with online gaming providers in Italy and France, “play for fun” offerings in other jurisdictions, social games on Facebook and other social media websites, and mobile application platforms. We also own and operate the World Series of Poker tournament and brand.
REGIONAL AGGREGATION
The executive officers of our Company review operating results, assess performance, and make decisions related to the allocation of resources on a property-by-property basis. We believe, therefore, that each property is an operating segment and that it is appropriate to aggregate and present the operations of our Company as one reportable segment. To provide more meaningful information than would be possible on a consolidated basis, our casino properties (as of December 31, 2011 , or otherwise noted below) have been grouped into seven regions as follows to facilitate discussion of our operating results:
| Las Vegas |
Atlantic City |
Louisiana/Mississippi |
Iowa/Missouri | |||
| Caesars Palace | Harrah’s Atlantic City | Harrah’s New Orleans | Harrah’s St. Louis | |||
| Bally’s Las Vegas | Showboat Atlantic City | Harrah’s Louisiana Downs | Harrah’s North Kansas City | |||
| Flamingo Las Vegas(a) | Bally’s Atlantic City | Horseshoe Bossier City | Harrah’s Council Bluffs | |||
| Harrah’s Las Vegas | Caesars Atlantic City | Grand Biloxi | Horseshoe Council Bluffs/Bluffs Run | |||
| Paris Las Vegas | Harrah’s Chester(h) | Harrah’s Tunica | ||||
| Rio | Horseshoe Tunica | |||||
| Imperial Palace | Tunica Roadhouse Hotel & Casino | |||||
| Bill’s Gamblin’ Hall & Saloon | ||||||
| Planet Hollywood Resort & Casino(b) |
| Illinois/Indiana |
Other Nevada |
Managed/International and Other | ||
| Horseshoe Southern Indiana | Harrah’s Reno | Harrah’s Ak-Chin(e) | ||
| Harrah’s Joliet(d) | Harrah’s Lake Tahoe | Harrah’s Cherokee(e) | ||
| Horseshoe Hammond | Harveys Lake Tahoe | Harrah’s Rincon(e) | ||
| Harrah’s Metropolis | Harrah’s Laughlin | Conrad Punta del Este(c) | ||
| Caesars Windsor(f) | ||||
| London Clubs International(g) |
30
| (a) | Includes O’Shea’s Casino, which is adjacent to this property. |
| (b) | Acquired February 2010. |
| (c) | We have an approximately 95% ownership interest in and manage this property. |
| (d) | We have an 80% ownership interest in and manage this property. |
| (e) | Managed. |
| (f) | We have a 50% ownership interest in Windsor Casino Limited, which operates this property. The province of Ontario owns the complex. |
| (g) | We own, operate, or manage 10 casino clubs in the provinces of the United Kingdom and two in Egypt. We have a 70% ownership interest in and manage one casino club in South Africa. |
| (h) | At December 31, 2011, we had a 95% ownership interest in and manage this property. In February 2012, we purchased an additional 4.5% interest, bringing our total ownership interest in this property to 99.5%. |
CONSOLIDATED OPERATING RESULTS
| Percentage Favorable/(Unfavorable) |
||||||||||||||||||||
| ($ in millions) |
2011 | 2010 | 2009 | 2011 vs. 2010 | 2010 vs. 2009 | |||||||||||||||
| Casino revenues |
$ | 6,637.1 | $ | 6,917.9 | $ | 7,124.3 | (4.1 | )% | (2.9 | )% | ||||||||||
| Net revenues |
8,834.5 | 8,818.6 | 8,907.4 | 0.2 | % | (1.0 | )% | |||||||||||||
| Income/(loss) from operations |
875.5 | 532.3 | (607.8 | ) | 64.5 | % | * | |||||||||||||
| Net (loss)/income attributable to Caesars |
(687.6 | ) | (831.1 | ) | 827.6 | 17.3 | % | * | ||||||||||||
| Operating margin** |
9.9 | % | 6.0 | % | (6.8 | )% | 3.9 | pts | 12.8 | pts | ||||||||||
| * | Not meaningful |
| ** | Operating margin is calculated as income/(loss) from operations divided by net revenues for the respective period. |
Year ended December 31, 2011 compared to December 31, 2010
Despite a decline in casino revenues, net revenues for 2011 were $8,834.5 million, an increase of $15.9 million, or 0.2%, from 2010, as favorable results in Las Vegas and from our international and online businesses, including revenues related to Playtika, which we acquired during the year, were somewhat offset by revenue declines at properties in the Midwest and Atlantic City.
For 2011, income from operations increased $343.2 million, or 64.5%, to $875.5 million from 2010. This increase was due mainly to a $182.0 million decrease from 2010 in impairment charges related to goodwill and other non-amortizing intangible assets, the effects of cost-reduction efforts under cost savings programs, including Project Renewal, and a $53.7 million reduction in write-downs, reserves, recoveries, and project opening costs.
Net loss attributable to Caesars for 2011 decreased 17.3% to $687.6 million from $831.1 million in 2010, due primarily to higher income from operations and an increase in the benefit for income taxes, partially offset by higher interest expense in 2011, due mainly to certain interest rate swaps no longer qualifying for hedge accounting and gains on the early extinguishment of debt recognized in 2010 that were not as significant in 2011.
Year ended December 31, 2010 compared to December 31, 2009
Our 2010 net revenues decreased 1.0% to $8,818.6 million from $8,907.4 million in 2009, as incremental revenues associated with our February 2010 acquisition of Planet Hollywood were unable to offset the continuing impact of the weak economic environment on customers’ discretionary spending.
Income from operations for 2010 was $532.3 million, compared with a loss from operations of $607.8 million for the same period in 2009. Included in income/(loss) from operations for 2010 and 2009 were impairment charges for goodwill and other non-amortizing intangible assets totaling $193.0 million and $1,638.0 million, respectively. Prior to consideration of these impairment charges, income from operations for 2010 decreased to $725.3 million from $1,030.2 million in the prior year. The decline was driven by the income impact of reduced revenues and the contingent liability reserve and asset reserve charges recorded during 2010 described above, which were partially offset by a tangible asset impairment charge in 2009 that did not recur in 2010 and a favorable $23.5 million property tax accrual adjustment recorded in 2010.
31
Net loss attributable to Caesars for 2010 was $831.1 million compared with net income attributable to Caesars of $827.6 million for 2009. The loss for 2010 included (i) the aforementioned impairment charges for intangible assets and (ii) pre-tax gains related to the early extinguishment of debt of $115.6 million. The income for 2009 included (i) the aforementioned impairment charges for intangible assets and (ii) pre-tax gains related to the early extinguishment of debt of $4,965.5 million. Gains on early extinguishments of debt in 2009 represented discounts related to the exchange of certain outstanding debt for new debt in the second quarter, CMBS debt repurchases in the fourth quarter, and purchases of certain of our debt in the open market during 2009. The gains were partially offset by the write-off of market value premiums and unamortized debt issue costs. These events are discussed more fully in the “Liquidity and Capital Resources” section that follows herein.
Performance Metrics
The Company measures its performance in part through tracking of trips by rated customers, which means a customer whose gaming activity is tracked through our Total Rewards customer-loyalty system (“trips”), and by spend per rated customer trip (“spend per trip”). A trip is created by a Total Rewards card holder engaging in one or more of the following activities while at one of our properties: (1) hotel stay, (2) gaming activity, or (3) a comp redemption, which means the receipt of a complimentary item given out by our casinos. In markets where we have multiple properties, customers often engage in trip generating activities at more than one property in a day. In these instances, we consider the market as a whole and do not count multiple trips. Customer spend means the cumulative rated theoretical spend (which is the amount of money expected to be retained by the casino based upon the mathematics underlying the particular game as a fraction of the amount of money wagered by the customer) across all game types for a specific customer. For the Atlantic City region, the Company refers to customers that stay at a hotel in one of our properties as lodgers and customers that may play at a casino located in one of our properties but do not stay at a hotel at such property as non-lodgers.
The following table reflects the percentage increase/(decrease) in trips and spend per trip for the U.S. regions for 2011 as compared to 2010.
| Trips | Spend
per Trip |
|||||||
| Consolidated Caesars |
(6.8 | )% | 3.6 | % | ||||
| Las Vegas region |
2.5 | % | 2.7 | % | ||||
| Atlantic City region: |
||||||||
| Lodgers |
(0.2 | )% | (2.2 | )% | ||||
| Non-lodgers |
(5.6 | )% | (0.7 | )% | ||||
| All other regions |
(9.7 | )% | 3.2 | % | ||||
For 2011, trips on a consolidated basis declined from 2010 due to (i) new competition in the Atlantic City, Iowa/Missouri, and Illinois/Indiana regions, (ii) reduced access to one of our properties due to a bridge closure in the Illinois/Indiana region beginning in the first week of September 2011 that reopened in February 2012, (iii) temporary closures in the Atlantic City region during the third quarter of 2011 due to Hurricane Irene, (iv) temporary closures of seven properties in the Illinois/Indiana and Louisiana/Mississippi regions during the first half of 2011 due to flooding and severe weather conditions, and (v) the impact of marketing programs on trip frequency of certain customer segments in all U.S. regions. These decreases in trips were partially offset by an increase in trips for the Las Vegas region during 2011.
On a consolidated basis, cash average daily room rates for 2011 increased to $91 from $86, or 6.4%, when compared to 2010. Total occupancy percentages in 2011 increased 1.4 percentage points when compared to 2010.
The following table reflects the percentage increase/(decrease) in trips and spend per trip for our U.S. regions for 2010 as compared to 2009.
| Trips | Spend
per Trip |
|||||||
| Consolidated Caesars |
(2.1 | )% | (1.6 | )% | ||||
| Las Vegas region |
1.6 | % | (2.3 | )% | ||||
| Atlantic City region: |
||||||||
| Lodgers |
(4.3 | )% | (3.9 | )% | ||||
| Non-lodgers |
(0.1 | )% | (7.8 | )% | ||||
| All other regions |
(3.5 | )% | 1.3 | % | ||||
32
For 2010, trips on a consolidated basis, declined from 2009 as a result of new competition in the Atlantic City and Iowa/Missouri regions, the impact of the weak economic environment, and mid-2010 introduction of table games in the Pennsylvania market. These decreases in trips were partially offset by an increase in trips for the Las Vegas region during 2010.
On a consolidated basis, cash average daily room rates for 2010 decreased to $86 from $88, or 3.1%, when compared to 2009. Total occupancy percentages in 2010 increased 1.1 percentage points when compared to 2009.
REGIONAL OPERATING RESULTS
Las Vegas Region
| Percentage Favorable/(Unfavorable) |
||||||||||||||||||||
| ($ in millions) |
2011 | 2010 | 2009 | 2011 vs. 2010 | 2010 vs. 2009 | |||||||||||||||
| Casino revenues |
$ | 1,582.5 | $ | 1,544.4 | $ | 1,476.0 | 2.5 | % | 4.6 | % | ||||||||||
| Net revenues |
3,013.1 | 2,834.8 | 2,698.0 | 6.3 | % | 5.1 | % | |||||||||||||
| Income/(loss) from operations |
495.5 | 349.9 | (681.0 | ) | 41.6 | % | * | |||||||||||||
| Operating margin** |
16.4 | % | 12.3 | % | (25.2 | )% | 4.1 | pts | 37.5 | pts | ||||||||||
| * | Not meaningful |
| ** | Operating margin is calculated as income/(loss) from operations divided by net revenues for the respective period. |
Strengthening fundamentals in the overall Las Vegas market positively impacted the Company’s results in the region. Increases in trips, spend per trip, cash average daily room rates, and total occupancy contributed to a $178.3 million, or 6.3% increase in the Company’s Las Vegas region net revenues for 2011 from 2010. Hotel revenues in the region increased 11.4%, cash average daily room rates increased 8.0% to $92 from $85 and total occupancy percentages rose 3.2 percentage points for 2011, marking our highest occupancy percentage in the Las Vegas region in six years. For 2011, income from operations increased $145.6 million, or 41.6%, from 2010 due to the impact of increased revenues and a decrease in remediation costs related to the properties in the region.
For 2010, hotel occupancy remained above 90%, and net revenues increased 5.1% in the Las Vegas region from 2009 due to the Planet Hollywood acquisition in February 2010. On a same-store basis, revenues declined 3.5% for 2010, resulting primarily from decreased spend per trip. Increased labor and depreciation expenses in the region combined with the income impact of reduced same-store revenues resulted in reduced income from operations for 2010, before consideration of impairment charges. Income from operations for 2010 includes incremental depreciation associated with the Caesars Palace expansions placed into service late in 2009, increased levels of remediation costs during 2010 at two properties within the region, and the write-off of assets associated with certain capital projects. Loss from operations for 2009 includes charges of $1,130.9 million related to impairment of intangible assets in the region. Increased labor and depreciation expenses in the region combined with the income impact of reduced same-store revenues resulted in reduced income from operations for 2010, before consideration of the 2009 impairment charges. Income from operations for 2010 includes incremental depreciation associated with the Caesars Palace expansions placed into service late in 2009, increased levels of remediation costs during 2010 at two properties within the region, and the write-off of assets associated with certain capital projects.
The opening of the 662-room Octavius Tower in early January 2012 marked the substantial completion of the $860 million Caesars Palace expansion announced in 2007. In addition to the tower, the expansion included 110,000-square-feet of additional meeting and convention space, three 10,000-square-foot luxury villa suites, and an expanded pool and garden area.
During 2011, we also commenced construction on Project Linq, a dining, entertainment, and retail development between our Flamingo and Imperial Palace casinos, on the east side of the Las Vegas Strip, which is scheduled to open in phases in mid to late 2013. See Note 7, “Debt—Octavius and Linq Projects,” for discussion of the financing related to these projects.
33
Atlantic City Region
| Percentage Favorable/(Unfavorable) |
||||||||||||||||||||
| ($ in millions) |
2011 | 2010 | 2009 | 2011 vs. 2010 | 2010 vs. 2009 | |||||||||||||||
| Casino revenues |
$ | 1,584.9 | $ | 1,696.8 | $ | 1,894.5 | (6.6 | )% | (10.4 | )% | ||||||||||
| Net revenues |
1,839.1 | 1,899.9 | 2,025.9 | (3.2 | )% | (6.2 | )% | |||||||||||||
| Income from operations |
79.6 | 83.7 | 28.3 | (4.9 | )% | 195.8 | % | |||||||||||||
| Operating margin** |
4.3 | % | 4.4 | % | 1.4 | % | (0.1 | ) pts | 3.0 | pts | ||||||||||
| ** | Operating margin is calculated as income/(loss) from operations divided by net revenues for the respective period. |
Atlantic City region net revenues declined $60.8 million, or 3.2%, for 2011 from 2010 due to declines in trips and spend per trip in both lodger and non-lodger segments. Trip declines resulted from temporary closures of the properties in the region during the third quarter of 2011 due to Hurricane Irene, the continued effect of competition from new casinos and the mid-2010 introduction of table games in the Pennsylvania market. Income from operations declined $4.1 million, or 4.9%, for 2011 from 2010 due to lower revenues, which was mostly offset by reduced property operating expenses as a result of our cost reduction activities.
Reduced spend per trip, declines in overall trip frequency and increased competition from other markets, including the mid-2010 introduction of table games in the Pennsylvania market, led to lower Atlantic City region revenues during 2010. Income from operations for 2009 included a charge of $178.7 million related to impairment of goodwill and other non-amortizing intangible assets at certain of the region’s properties. Income from operations for 2010 was lower than the prior year, prior to consideration of the impairment charge, as cost-saving initiatives were unable to offset the income impact of reduced revenues and increased marketing and labor-related expenses.
Louisiana/Mississippi Region
| Percentage Favorable/(Unfavorable) |
||||||||||||||||||||
| ($ in millions) |
2011 | 2010 | 2009 | 2011 vs. 2010 | 2010 vs. 2009 | |||||||||||||||
| Casino revenues |
$ | 1,012.0 | $ | 1,096.4 | $ | 1,140.8 | (7.7 | )% | (3.9 | )% | ||||||||||
| Net revenues |
1,104.4 | 1,193.4 | 1,245.2 | (7.5 | )% | (4.2 | )% | |||||||||||||
| Income from operations |
122.0 | 69.9 | 181.4 | 74.5 | % | (61.5 | )% | |||||||||||||
| Operating margin** |
11.0 | % | 5.9 | % | 14.6 | % | 5.1 | pts | (8.7 | ) pts | ||||||||||
| ** | Operating margin is calculated as income/(loss) from operations divided by net revenues for the respective period. |
Louisiana/Mississippi region net revenues decreased $89.0 million, or 7.5%, for 2011 from 2010 due to a decrease in trips, which were negatively impacted by the temporary closure of three properties in the first half of 2011 due to flooding and severe weather conditions. Income from operations increased $52.1 million, or 74.5%, in 2011 from 2010. This increase was due mainly to reduced property operating expenses and a $48.0 million decrease from 2010 in impairment charges related to goodwill and other non-amortizing intangible assets, partially offset by the impact of lower revenues. Certain costs incurred during 2011 in connection with the closures of several properties due to flooding were not expensed but instead have been recovered from, or recorded as receivables from, third-party insurance providers.
For 2010, reduced trips and spend per trip unfavorably impacted the Louisiana/ Mississippi region revenues. Income from operations for 2010 included a charge of $51.0 million related to impairment of goodwill and other non-amortizing intangible assets at one of the region’s properties. Income from operations for 2009 included a charge of $6.0 million related to impairment of intangible assets at one of the region’s properties. Income from operations for 2010 was lower than in 2009, prior to consideration of impairment charges, as cost-saving initiatives were unable to offset the income impact of reduced revenues and increased marketing expenses.
34
Iowa/Missouri Region
| Percentage Favorable/(Unfavorable) |
||||||||||||||||||||
| ($ in millions) |
2011 | 2010 | 2009 | 2011 vs. 2010 | 2010 vs. 2009 | |||||||||||||||
| Casino revenues |
$ | 678.3 | $ | 688.4 | $ | 707.3 | (1.5 | )% | (2.7 | )% | ||||||||||
| Net revenues |
724.4 | 735.4 | 756.6 | (1.5 | )% | (2.8 | )% | |||||||||||||
| Income from operations |
180.9 | 171.0 | 187.5 | 5.8 | % | (8.8 | )% | |||||||||||||
| Operating margin** |
25.0 | % | 23.3 | % | 24.8 | % | 1.7 | pts | (1.5 | ) pts | ||||||||||
| ** | Operating margin is calculated as income/(loss) from operations divided by net revenues for the respective period. |
Iowa/Missouri region net revenues declined $11.0 million, or 1.5%, for 2011 from 2010 as the impact of higher spend per trip was more than offset by lower trips largely resulting from modifications to marketing programs to certain customer segments. For 2011, income from operations increased $9.9 million, or 5.8%, from 2010. This increase was due mainly to a $9.0 million decrease from 2010 in impairment charges related to goodwill and other non-amortizing intangible assets, while the decrease in net revenues was offset by lower property operating expenses as a result of our cost reduction activities.
For 2010, revenues in the region declined from 2009 due to new competition in the region and lower spend per trip. Income from operations for 2010 included a charge of $9.0 million related to impairment of goodwill and other non-amortizing intangible assets at one of the region’s properties. Income from operations for 2010 declined from 2009 primarily due to the income impact of revenue declines.
Illinois/Indiana Region
| Percentage Favorable/(Unfavorable) |
||||||||||||||||||||
| ($ in millions) |
2011 | 2010 | 2009 | 2011 vs. 2010 | 2010 vs. 2009 | |||||||||||||||
| Casino revenues |
$ | 1,010.9 | $ | 1,152.9 | $ | 1,180.7 | (12.3 | )% | (2.4 | )% | ||||||||||
| Net revenues |
1,059.5 | 1,160.1 | 1,172.3 | (8.7 | )% | (1.0 | )% | |||||||||||||
| Income/(loss) from operations |
145.8 | 119.0 | (35.4 | ) | 22.5 | % | * | |||||||||||||
| Operating margin** |
13.8 | % | 10.3 | % | (3.0 | )% | 3.5 | pts | 13.3 | pts | ||||||||||
| * | Not meaningful |
| ** | Operating margin is calculated as income/(loss) from operations divided by net revenues for the respective period. |
Despite an increase in spend per trip, Illinois/Indiana region net revenues decreased $100.6 million, or 8.7%, for 2011 from 2010, as trips declined due to the impact of temporary closures of four properties in the first half of 2011 as a result of flooding and severe weather conditions, reduced access to one of our properties in the region resulting from a bridge closure beginning in the first week of September 2011 that reopened in February 2012, and new competition. Income from operations for 2011 increased $26.8 million, or 22.5%, to $145.8 million from $119.0 million in 2010. This increase was primarily due to lower property operating expenses and a $58.0 million decrease from 2010 in impairment charges related to goodwill and other non-amortizing intangible assets, partially offset by the impact of lower revenues and a favorable $23.5 million property tax adjustment recorded in the fourth quarter of 2010 that did not recur in 2011.
Revenues in the region decreased for 2010 from 2009 due to decreased spend per trip. Income from operations for 2010 included a charge of $58.0 million related to impairment of goodwill and other non-amortizing intangible assets at certain of the region’s properties, partially offset by a favorable $23.5 million property tax accrual adjustment recorded in 2010 as mentioned above. Loss from operations for 2009 included a charge of $180.7 million related to impairment of intangible assets at certain of the region’s properties. Income from operations, prior to consideration of impairment charges, increased for 2010 relative to 2009 as a result of reduced marketing expenses and the aforementioned property tax accrual adjustment.
35
Other Nevada Region
| Percentage Favorable/(Unfavorable) |
||||||||||||||||||||
| ($ in millions) |
2011 | 2010 | 2009 | 2011 vs. 2010 | 2010 vs. 2009 | |||||||||||||||
| Casino revenues |
$ | 349.8 | $ | 351.0 | $ | 372.0 | (0.3 | )% | (5.6 | )% | ||||||||||
| Net revenues |
450.0 | 447.5 | 472.6 | 0.6 | % | (5.3 | )% | |||||||||||||
| Income/(loss) from operations |
46.6 | (13.9 | ) | 47.3 | * | * | ||||||||||||||
| Operating margin** |
10.4 | % | (3.1 | )% | 10.0 | % | 13.5 | pts | (13.1 | ) pts | ||||||||||
| * | Not meaningful |
| ** | Operating margin is calculated as income/(loss) from operations divided by net revenues for the respective period. |
Net revenues in the Other Nevada region for 2011 increased slightly from 2010 as an increase in number of trips more than offset a decrease in spend per trip. Income/(loss) from operations improved by $60.5 million for 2011 from 2010 primarily due to a $49.0 million decrease in impairment charges related to goodwill and other non-amortizing intangible assets, higher net revenues and lower property operating expenses.
Results for 2010 in the region declined from 2009 due to reduced trips and decreased spend per trip. Also contributing to the decline in income from operations for 2010 was a charge of $49.0 million related to the impairment of goodwill and other non-amortizing intangible assets at one of the region’s properties.
Managed, International and Other
Managed, International and Other results include our three Managed, Indian-owned casinos and Thistledown Racetrack, the results of our International properties, and Other, which is comprised of corporate expenses, including administrative, marketing and development costs; income from certain non-consolidated affiliates and the results of Caesars Interactive Entertainment, which consists of the businesses related to our World Series of Poker® (“WSOP”) brand, our online real money business in the U.K. and alliances with online gaming providers in Italy and France, and “for fun” gaming offerings, including the results of recently acquired Playtika Ltd., a social media and mobile gaming business, since the date of our initial acquisition.
| Percent Favorable/(Unfavorable) |
||||||||||||||||||||
| ($ in millions) |
2011 | 2010 | 2009 | 2011 vs. 2010 | 2010 vs. 2009 | |||||||||||||||
| Net revenues |
||||||||||||||||||||
| Managed |
$ | 48.1 | $ | 43.9 | $ | 56.3 | 9.6 | % | (22.0 | )% | ||||||||||
| International |
462.2 | 431.1 | 403.8 | 7.2 | % | 6.8 | % | |||||||||||||
| Other |
133.7 | 72.5 | 76.7 | 84.4 | % | (5.5 | )% | |||||||||||||
|
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|
|
|
|
|
|||||||||||||||
| Total net revenues |
$ | 644.0 | $ | 547.5 | $ | 536.8 | 17.6 | % | 2.0 | % | ||||||||||
|
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|
|
|
|||||||||||||||
| (Loss)/income from operations |
||||||||||||||||||||
| Managed |
6.0 | 11.9 | 19.4 | (49.6 | )% | (38.7 | )% | |||||||||||||
| International |
38.8 | 10.5 | (23.0 | ) | 269.5 | % | * | |||||||||||||
| Other |
(239.7 | ) | (269.7 | ) | (332.3 | ) | 11.1 | % | 18.8 | % | ||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Total loss from operations |
$ | (194.9 | ) | $ | (247.3 | ) | $ | (335.9 | ) | 21.2 | % | 26.4 | % | |||||||
|
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|
|
|
|
|
|||||||||||||||
| Operating margin** |
||||||||||||||||||||
| Managed |
12.5 | % | 27.1 | % | 34.5 | % | (14.6 | ) pts | (7.4 | ) pts | ||||||||||
| International |
8.4 | % | 2.4 | % | (5.7 | )% | 6.0 | pts | 8.1 | pts | ||||||||||
| Other |
(179.3 | )% | (372.0 | )% | (433.2 | )% | 192.7 | pts | 61.2 | pts | ||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Total operating margin |
(30.3 | )% | (45.2 | )% | (62.6 | )% | 14.9 | pts | 17.4 | pts | ||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| * | Not meaningful |
| ** | Operating margin is calculated as income/(loss) from operations divided by net revenues for the respective period. |
Net revenues in the Managed, International, and Other businesses, for 2011, increased $96.5 million, or 17.6%, from 2010 due mainly to increases in spend per trip at the Company’s Uruguay and London Clubs properties and to the addition of revenues from our 2011 acquisition of Playtika. Net revenues for 2011 increased despite declines experienced by our two properties in Egypt due to uprisings earlier in the year. Loss from operations decreased $52.4 million, or 21.2%, due to the
36
strong performance of our international businesses and the results of our online businesses, and by an $18.0 million decrease from 2010 in impairment charges related to goodwill and other non-amortizing intangible assets, partially offset by lower results at Thistledown Racetrack.
Net revenues for 2010 increased over 2009 primarily due to increased visitation and increased spend per trip at our Uruguay and London Clubs properties. Income from operations for 2010 included a charge of $6.0 million related to impairment of goodwill and other non-amortizing intangible assets at our international properties. Income from operations for 2009 included a charge of $31.0 million related to impairment of goodwill and other non-amortizing intangible assets. Prior to consideration of impairment charges, income from operations increased slightly for 2010 when compared with 2009 due to strong revenue performance and cost-saving initiatives at our international properties, offset in part by lower income from our managed properties.
OTHER FACTORS AFFECTING NET INCOME
| Percentage Favorable/(Unfavorable) |
||||||||||||||||||||
| Expense/(income) (In millions) |
2011 | 2010 | 2009 | 2011 vs. 2010 | 2010 vs. 2009 | |||||||||||||||
| Write-downs, reserves, recoveries, and project opening costs |
$ | 96.0 | $ | 149.7 | $ | 111.5 | 35.9 | % | (34.3 | )% | ||||||||||
| Impairment of goodwill and other non-amortizing intangible assets |
11.0 | 193.0 | 1,638.0 | * | * | |||||||||||||||
| Corporate expense |
152.8 | 140.9 | 150.7 | (8.4 | )% | 6.5 | % | |||||||||||||
| Amortization of intangible assets |
156.7 | 160.8 | 174.8 | 2.5 | % | 8.0 | % | |||||||||||||
| Interest expense, net of interest capitalized |
2,122.3 | 1,981.6 | 1,892.5 | (7.1 | )% | (4.7 | )% | |||||||||||||
| Gains on early extinguishments of debt |
(47.9 | ) | (115.6 | ) | (4,965.5 | ) | (58.6 | )% | (97.7 | )% | ||||||||||
| Other income, including interest income |
(25.3 | ) | (41.7 | ) | (33.0 | ) | (39.3 | )% | 26.4 | % | ||||||||||
| (Benefit)/provision for income taxes |
(506.9 | ) | (468.7 | ) | 1,651.8 | 8.2 | % | * | ||||||||||||
| * | Not meaningful |
Write-downs, reserves, recoveries, and project opening costs
Given the nature of the transactions included within write-downs, reserves, recoveries, and project opening costs, these amounts are not expected to be comparable from year-to-year, nor are the amounts expected to follow any particular trend.
Write-downs, reserves, recoveries, and project opening costs for 2011 decreased $53.7 million, or 35.9%, driven primarily by a $31.7 million reduction in remediation costs associated with Las Vegas properties and $77.2 million in 2010 expenses that did not recur in 2011, consisting of a $52.2 million write-down of a note receivable related to a venture for development of a casino project in Philadelphia, Pennsylvania, and a $25.0 million expense related to a previously disclosed contingency. These reductions were partially offset by a $45.2 million increase in 2011 costs associated with identification and implementation of our efficiency projects, and 2011 charges of $28.2 million to write off specific assets as a result of the termination of a development stage project in Spain.
Write-downs, reserves, recoveries, and project opening costs for 2010 were $149.7 million, compared with $111.5 million in 2009. Included in write-downs, reserves, recoveries, and project opening costs for 2010, with no comparable amounts in 2009, are the charge of $52.2 million to fully reserve the note receivable balance and the contingency accrual of $25.0 million. Also included in write-downs, reserves, recoveries, and project costs for 2010 were charges of $29.0 million to write-off assets associated with certain capital projects in the Las Vegas and Atlantic City regions.
For additional discussion, refer to Note 11, “Write-downs, Reserves, Recoveries, and Project Opening Costs,” to our consolidated financial statements, included elsewhere in this Form 10-K.
Impairment of goodwill and other non-amortizing intangible assets
Each year we perform a preliminary annual impairment assessment of goodwill and other non-amortizing intangible assets as of September 30. In the fourth quarter of each year, we update our preliminary assessment, once we finalize the long-term operating plan for the next fiscal year and certain other assumptions. We perform assessments more frequently if impairment indicators exist.
Our preliminary annual impairment assessment as of September 30, 2011 did not result in any impairment charges. We finalized our annual impairment assessment during the fourth quarter of 2011 and, as a result of the final assessment, we recorded an impairment charge of $11.0 million, primarily as a result of adjustments to our long-term operating plan.
37
During 2010, due to the relative impact of weak economic conditions on certain properties in the Other Nevada and Louisiana/Mississippi regions, we performed an interim impairment assessment during the second quarter, which resulted in an impairment charge of $100.0 million. During the third quarter, we completed our preliminary annual impairment assessment as of September 30, 2010, which resulted in an impairment charge of $44.0 million. We finalized our annual impairment assessment during the fourth quarter 2010, and as a result of the final assessment, we recorded an impairment charge of $49.0 million, which brought the aggregate charges recorded for 2010 to $193.0 million.
During 2009, we performed an interim impairment assessment during the second quarter, due to the relative impact of weak economic conditions on certain properties in the Las Vegas market, which resulted in an impairment charge of $297.1 million.
During the third quarter, we completed our preliminary annual assessment as of September 30, 2009, which resulted in an impairment charge of $1,328.6 million. We finalized our annual impairment assessment during the fourth quarter, and as a result of the final assessment, we recorded an impairment charge of $12.3 million, which brought the aggregate charges recorded for 2009 to $1,638.0 million.
For additional discussion of impairments, refer to Note 5, “Goodwill and Other Intangible Assets,” to our consolidated financial statements, included elsewhere in this Form 10-K.
Corporate Expense
Corporate expense increased in 2011 from the comparable period in 2010 due primarily to increases in variable compensation accruals.
Amortization of intangible assets
Amortization of intangible assets was lower in 2011 when compared to 2010, due to lower intangible asset balances as a result of certain contract rights being fully amortized during 2011.
Amortization expense associated with intangible assets for 2010 was lower than the amounts recorded in 2009 due to lower intangible asset balances as a result of certain contract rights being fully amortized during 2009.
Interest Expense, net of interest capitalized
Interest expense, net of interest capitalized, increased by $140.7 million for 2011, compared to the same period in 2010. Interest expense is reported net of interest capitalized of $22.8 million and $1.4 million for 2011 and 2010, respectively. The majority of the interest capitalized in 2011 relates to the completion of the Octavius Tower at Caesars Palace Las Vegas. Prior to the consideration of interest capitalized, interest expense increased by $162.1 million for 2011, compared to the same period in 2010. During the fourth quarter 2011, the Company amended certain of its interest rate swap agreements and modified the interest rate election on a portion of its portfolio of underlying term loans. As a result, the Company determined that all of its interest rate swap agreements no longer qualified as hedging instruments for accounting purposes, and was required to reclassify $183.2 million of accumulated other comprehensive losses into interest expense. Prior to consideration of this non-cash charge, interest expense decreased by $21.1 million for 2011 from the same period in 2010. Incremental interest expense associated with debt issued in April 2011 to complete the Company’s Linq and Octavius projects was more than offset by reduced interest associated with debt retired in connection with the fourth quarter 2010 exchange of debt for equity. Interest expense was favorably impacted by lower interest rates obtained through the amendments to our interest rate swap agreements completed in the second quarter of 2011. Interest expense for 2011, as a result of interest rate swap agreements and interest rate cap agreements, included (i) $53.4 million of gains due to measured ineffectiveness for derivatives designated as hedging instruments; (ii) $16.9 million of gains due to changes in fair value for derivatives not designated as hedging instruments; and (iii) $265.7 million of expense due to amortization and reclassification of deferred losses frozen in accumulated other comprehensive loss (“AOCL”).
Interest expense, net of interest capitalized, increased by $89.1 million for 2010, compared to the same period in 2009. Interest expense is reported net of interest capitalized of $1.4 million and $32.4 million for 2010 and 2009, respectively. The majority of the interest capitalized in 2009 related to the Caesars Palace expansion in Las Vegas. Prior to the consideration of interest capitalized, interest expense increased by $58.1 million for 2010, compared to the same period in 2009 due primarily to (i) debt issuances that occurred in the second quarter of 2010 that resulted in higher debt levels and a higher weighted average interest rate; and (ii) changes in hedging designations related to our $6,500.0 million interest rate cap agreement related to our CMBS Financing and one interest rate swap agreement. Interest expense for 2010, as a result of interest rate swap agreements and interest rate cap agreements, included (i) $76.6 million of gains due to measured ineffectiveness for derivatives designated as hedging instruments; (ii) $1.9 million of expense due to changes in fair value for derivatives not designated as hedging instruments; and (iii) $36.3 million of expense due to amortization of deferred losses frozen in AOCL. At December 31, 2010, our variable-rate debt, excluding $6,500.0 million of variable-rate debt for which we entered into interest rate swap agreements, represented approximately 30% of our total debt, while our fixed-rate debt was approximately 70% of our total debt.
38
For additional discussion of interest expense, refer to Note 7, “Debt,” and Note 17, “Supplemental Cash Flow Information,” to our consolidated financial statements, included elsewhere in this Form 10-K.
Gains on early extinguishments of debt
During 2011, we recognized a $47.9 million gain on early extinguishments of debt as the result of March and April 2011 CMBS Loan repurchases. During 2010, we recognized $115.6 million of gains on early extinguishments of debt as a result of repurchases of CMBS Loans and completion of an offering that retired outstanding senior and senior subordinated notes. Gains on early extinguishments of debt of $4,965.5 million in 2009 related to multiple debt transactions initiated throughout the year,
For additional discussion of extinguishments of debt, refer to Note 7, “Debt,” to our consolidated financial statements, included elsewhere in this Form 10-K.
Other income, including interest income
Other income for all periods presented included interest income on the cash surrender value of life insurance policies and insurance policy proceeds related to our deferred compensation plan.
As a result of the cancellation of our debt investment in certain predecessor entities of PHW Las Vegas in exchange for the equity of PHW Las Vegas, we recognized a gain of $7.1 million to adjust our investment to reflect the estimated fair value of consideration paid for the acquisition. This gain is reflected in other income, including interest income, in our consolidated statement of operations for the year ended December 31, 2010.
(Benefit)/provision for income taxes
For 2011, we recorded an income tax benefit of $506.9 million on loss before income taxes of $1,173.6 million, compared with an income tax benefit of $468.7 million on loss before income taxes of $1,292.0 million for 2010.
The Company’s full year 2011 effective tax rate benefit was 43.2%, compared with an effective tax rate benefit of 36.3% for full year 2010. The increase in the effective tax rate benefits for 2011 was due to (i) a deferred tax benefit of $46.4 million from a correction of an error in the deferred tax liabilities primarily relating to transaction costs incurred in connection with the acquisition in 2008 that were incorrectly recorded in 2008 and not properly adjusted upon the 2009 receipt of the final transaction cost reports, (ii) state deferred tax benefits resulting from the reorganization of certain of the Company’s state operations, and (iii) other discrete items. The income tax benefit for 2010 was favorably impacted by the effects of state income tax benefits and other discrete items.
Beginning in 2012, income tax benefits are projected to be lower than in 2010 and 2011 as a result of state operating losses which will not be tax benefited starting in 2012. The Company estimates that the projected effective tax rate benefit will be 3% to 4% lower due to these reduced state income tax benefits.
Under the American Recovery and Reinvestment Act of 2009, or the ARRA, the Company received temporary federal tax relief under the Delayed Recognition of Cancellation of Debt Income, or CODI, rules. The ARRA contains a provision that allowed for a deferral for tax purposes of CODI for debt reacquired in 2009 and 2010, following by recognition of CODI ratably from 2014 to 2018. In connection with the debt that the Company reacquired in 2009 and 2010, the Company deferred related CODI of $3.6 billion for tax purposes (net of Original Issue Discount (“OID”) interest expense, some of which must also be deferred to 2014 through 2018 under the ARRA). The Company is required to include one-fifth of the deferred CODI, net of deferred and regularly scheduled OID, in taxable income each year from 2014 through 2018. For state income tax purposes, certain states have conformed to the Act and others have not.
Refer to Note 12 “Income Taxes,” to our consolidated financial statements, included elsewhere in this Form 10-K, for additional information.
LIQUIDITY AND CAPITAL RESOURCES
Cost Savings Initiatives
Caesars Entertainment has undertaken comprehensive cost-reduction efforts to right size expenses with business levels. In the fourth quarter of 2010, we embarked on a reorganization we referred to as “Project Renewal,” an initiative designed to reinvent certain aspects of the Company’s functional and operating units to gain significant further cost reductions and streamline its operations. As part of Project Renewal, we have implemented a shared-services organization that will enable more efficient decision making and sharing of best practices. Caesars anticipates that the Company will have a permanently lower cost structure and will benefit from greater concentration of specified talent and quicker decision making. We estimate that Project Renewal and previous cost-savings programs produced $268.9 million in incremental cost savings for 2011 when compared to prior year. Additionally, as of December 31, 2011, we estimate that, once fully implemented, these cost-savings programs will produce additional annual cost savings of $198.3 million.
39
Capital Spending and Development
In addition to the development and expansion projects discussed in the “Regional Operating Results” section, we incur capital expenditures in the normal course of business, and we perform ongoing refurbishment and maintenance at our existing casino entertainment facilities, to maintain our quality standards. We also continue to pursue development and acquisition opportunities for additional casino entertainment and other hospitality facilities that meet our strategic and return on investment criteria.
Our planned development projects, if they go forward, will require, individually and in the aggregate, significant capital commitments and, if completed, may result in significant additional revenues. The commitment of capital, the timing of completion, and the commencement of operations of development projects are contingent upon, among other things, negotiation of final agreements and receipt of approvals from the appropriate political and regulatory bodies. We must also comply with covenants and restrictions set forth in our debt agreements. Our capital spending for the year ended December 31, 2011 totaled $303.8 million, which includes an increase of $20.6 million of construction payables.
Our capital spending in 2010 and 2009 totaled $153.9 million and $409.3 million, which includes a decrease in construction payables of $6.8 million and $55.2 million, respectively.
Cash used for capital expenditures in the normal course of business is typically made available from cash flows generated by our operating activities while cash used for development projects, including projects currently under development as well as additional projects being pursued, is expected to be funded from established debt programs, specific project financing, and additional debt offerings. Estimated total capital expenditures for 2012, including 2012 expenditures associated with Project Linq, are expected to be between $590.0 million and $640.0 million.
Liquidity
Our cash and cash equivalents, excluding restricted cash, totaled $904.6 million, excluding restricted cash, at December 31, 2011 compared to $987.0 million at December 31, 2010. Restricted cash, including $66.6 million included in prepayments and other current assets, totaled $517.7 million at December 31, 2011. Nearly all of the restricted cash consists of cash reserved under loan agreements for development projects and certain expenditures incurred in the normal course of business, such as interest service, real estate taxes, property insurance, and capital improvements.
We are a highly leveraged company and a significant amount of our liquidity needs are for debt service. As of December 31, 2011, we had $19,799.9 million book value of indebtedness outstanding and cash paid for interest for the year ended December 31, 2011 was $1,685.0 million. Payments of short-term debt obligations and other commitments are expected to be made from operating cash flows and from borrowings under our established debt programs. Long-term obligations are expected to be paid through operating cash flows, refinancing of debt, or, if necessary, additional debt or equity offerings. We do not expect that any new financing is required to meet our obligations during the next 12 months.
Our operating cash inflows are used for operating expenses, debt service costs, working capital needs, and capital expenditures in the normal course of business. From time to time, we retire portions of our outstanding debt through open market purchases, privately negotiated transactions, or otherwise, using available cash on hand or established debt programs.
Included as an operating cash inflow in 2010 was an income tax refund of $220.8 million, which resulted from our implementation of several accounting method changes for tax purposes including a method change to deduct currently certain repairs and maintenance expenditures which had been previously capitalized. As a result of the combination of the tax accounting method changes with our net operating loss, we reported a taxable loss for 2009 of $1,248.9 million. Of this loss, $170.9 million was carried back to the 2008 tax year to offset federal taxable income recognized and tax payable from that year. In addition, under a new tax law, we elected to extend our loss carryback period. As a result, $630.3 million of the 2009 taxable loss was carried back to 2006. The amount refunded was net of interest due on the 2008 tax payable.
In addition to cash flows from operations, available sources of cash include amounts available under our current revolving credit facility. At December 31, 2011, our additional borrowing capacity under the credit facility was $938.2 million.
Our ability to fund our operations, pay our debt obligations, and fund planned capital expenditures depends, in part, upon economic and other factors that are beyond our control, and disruptions in capital markets and restrictive covenants related to our existing debt could impact our ability to secure additional funds through financing activities. We believe that our cash and cash equivalents balance, our cash flows from operations and the financing sources discussed herein will be sufficient to meet our normal operating requirements during the next 12 months and to fund capital expenditures.
40
In February 2012, Chester Downs issued $330.0 million aggregate principal amount of 9.25% senior secured notes due 2020 through a private placement. Chester Downs used $232.4 million of the proceeds of the notes to repay its existing term loan plus accrued interest and a prepayment penalty. The remaining proceeds were used to make a distribution to Chester Downs’ managing member, Harrah’s Chester Downs Investment Company, LLC, a wholly-owned subsidiary of CEOC, and for other general corporate purposes.
Effective February 8, 2012, as the result of the Company’s initial public offering, our common stock trades on the NASDAQ Global Select Market under the symbol “CZR.” The net proceeds to the Company were approximately $15.2 million, taking into account expenses and underwriting commissions and giving effect to the exercise of the underwriters’ overallotment option. In connection with the public offering, the Company effected a 1.742-for-one split of its common stock. Unless otherwise stated, all applicable share and per-share data presented herein have been retroactively adjusted to give effect to this stock split. See Note 22, “Subsequent Events,” for additional discussion of the public offering.
In February 2012, Caesars Operating Escrow LLC and Caesars Escrow Corporation, wholly owned subsidiaries of CEOC, completed the offering of $1,250.0 million aggregate principal amount of 8.5% senior secured notes due 2020, the proceeds of which were placed into escrow. On March 1, 2012, the escrow conditions were satisfied and CEOC assumed the notes. CEOC used $1,095.6 million of the net proceeds from this transaction to repay a portion of its credit facilities in connection with the amendment discussed below.
On March 1, 2012, CEOC entered into an amendment to its outstanding senior secured credit agreement, to, among other things, (i) extend the maturity of B-1, B-2 and B-3 term loans held by consenting lenders from January 28, 2015 to January 28, 2018 and increase the interest rate with respect to such extended term loans (the “Term B-6 Loans”); (ii) convert original maturity revolver commitments held by consenting lenders to Term B-6 Loans and promptly following such conversion, repay Term B-6 Loans held by any consenting lender in an amount equal to 10% of the amount of revolver commitments that such lender elected to convert; (iii) extend the maturity of original maturity revolver commitments held by consenting lenders who elect not to convert their commitments to term loans, from January 28, 2014 to January 28, 2017 and increase the interest rate and the undrawn commitment fee with respect to such extended revolver commitments and upon the effectiveness of such extension, terminate 20% of extended revolver commitments on a pro rata basis; and (iv) modify certain other provisions of the credit facilities. In addition to the foregoing, the CEOC may elect to extend and/or convert additional term loans and/or revolver commitments from time to time.
After giving effect to the credit agreement amendment, there are $2,113.1 million of existing B-1, B-2 and B-3 term loans outstanding with a maturity of January 28, 2015, $1,862.9 million of extended Term B-6 Loans outstanding with a maturity of January 28, 2018, $25.0 million of extended revolver commitments with a maturity of January 28, 2017 and $1,104.5 million of existing revolving commitments outstanding with a maturity of January 28, 2014. The Term B-6 Loans will have a springing maturity to April 14, 2017 if more than $250.0 million of the Company’s 11.25% Senior Secured Notes due 2017 remain outstanding on April 14, 2017. As part of the amendment, CEOC’s existing tranche of $1,222.7 million of B-5 term loans maturing on January 28, 2018 was also modified to provide for the same springing maturity that applies to the Term B-6 Loans.
The following table summarizes the annual maturities of the face value of our long-term debt as of December 31, 2011, and after consideration of the 2012 debt offerings and the credit agreement amendment discussed above.
| (in millions) |
2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | Total | |||||||||||||||||||||
| Actual (1) |
$ | 45.3 | $ | 170.7 | $ | 193.9 | $ | 11,123.6 | $ | 1,856.9 | $ | 9,267.5 | $ | 22,657.9 | ||||||||||||||
| As adjusted (1) |
23.5 | 148.9 | 172.1 | 8,265.8 | 1,699.2 | 12,673.9 | 22,983.4 | |||||||||||||||||||||
| (1) | Maturities assume the extension of the CMBS Loans and PHW Las Vegas senior secured loan from 2013 to 2015. |
We cannot assure you that our business will generate sufficient cash flows from operations, or that future borrowings will be available to us, to fund our liquidity needs and pay our indebtedness. If we are unable to meet our liquidity needs or pay our indebtedness when it is due, we may have to reduce or delay refurbishment and expansion projects, reduce expenses, sell assets, or attempt to restructure our debt. Any such actions could negatively impact our competitive position and revenue generation. In addition, we have pledged a significant portion of our assets as collateral under certain of our debt agreements, and, if any of those lenders accelerate the repayment of borrowings, there can be no assurance that we will have sufficient assets to repay our indebtedness.
Capital Resources
A substantial portion of our financing is comprised of credit facility and notes financing obtained by CEOC. The CEOC financings are neither secured nor guaranteed by Caesars’ other wholly-owned subsidiaries, including certain subsidiaries that own properties that secure $5,031.5 million face value, as of December 31, 2011, of the CMBS Loans.
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Please refer to Note 7, “Debt,” to our consolidated financial statements for details on our debt outstanding. This detail includes, among other things, a table presenting details on our individual borrowings outstanding as of December 31, 2011 and December 31, 2010, changes in our debt outstanding and certain changes in the terms of existing debt for the year ended December 31, 2011. Note 7 also includes details on interest and fees, restrictive covenants related to certain of our borrowings, and the use of interest rate swap and interest rate cap derivatives to manage the mix of our debt between fixed and variable rate instruments.
Assuming extensions permitted under the CMBS Financing and the PHW Las Vegas senior secured loan discussed in Note 7 to our consolidated financial statements, the majority of our debt is due in 2015 and beyond. Payments of short-term debt obligations and other commitments are expected to be made from operating cash flows and from borrowings under our established debt programs. Long-term obligations are expected to be paid through operating cash flows, refinancing of debt, or, if necessary, additional debt offerings.
As described in detail in Note 7 to our consolidated financial statements, certain of our borrowings have covenants and requirements that include, among other things, the maintenance of specific levels of financial ratios. Failure to comply with these covenants can result in limiting our long-term growth prospects by hindering our ability to incur future indebtedness or grow through acquisitions.
We believe we are in compliance with CEOC’s senior secured credit facilities and indentures, including the senior secured leverage ratio, as of December 31, 2011. If our LTM Adjusted EBITDA—Pro Forma—CEOC Restricted were to decline significantly from the level achieved at December 31, 2011, it could cause us to exceed the senior secured leverage ratio and could be an event of default under CEOC’s credit agreement. However, we could implement certain actions in an effort to minimize the possibility of a breach of the senior secured leverage ratio, including reducing payroll and other operating costs, deferring or eliminating certain maintenance, delaying or deferring capital expenditures, or selling assets. In addition, under certain circumstances, our senior secured credit facilities allow us to apply cash contributions received by CEOC as a capital contribution to cure covenant breaches. However, there is no guarantee that such contributions will be able to be secured.
Guarantees of Third-Party Debt and Other Obligations and Commitments
The following table summarizes our contractual obligations and other commitments as of December 31, 2011, prior to consideration of the 2012 capital transactions mentioned above.
| Payments due by Period | ||||||||||||||||||||
| Contractual Obligations (a) |
Total | Less than 1 year |
1-3 years |
4-5 years |
After
5 years |
|||||||||||||||
| (In millions) | ||||||||||||||||||||
| Debt, face value (c) |
$ | 22,644.3 | $ | 38.5 | $ | 357.8 | $ | 12,980.5 | $ | 9,267.5 | ||||||||||
| Capital lease obligations |
13.6 | 6.8 | 6.8 | — | — | |||||||||||||||
| Estimated interest payments (b) (c) |
8,368.3 | 1,647.7 | 3,314.9 | 2,174.6 | 1,231.1 | |||||||||||||||
| Operating lease obligations |
2,168.7 | 85.4 | 143.6 | 121.2 | 1,818.5 | |||||||||||||||
| Purchase order obligations |
56.4 | 56.4 | — | — | — | |||||||||||||||
| Community reinvestment |
81.4 | 6.4 | 13.0 | 12.8 | 49.2 | |||||||||||||||
| Construction commitments |
281.8 | 213.7 | 68.1 | — | — | |||||||||||||||
| Entertainment obligations (d) |
247.2 | 66.2 | 85.2 | 39.9 | 55.9 | |||||||||||||||
| Letters of credit |
113.5 | 113.5 | — | — | — | |||||||||||||||
| Minimum payments to tribes (e) |
86.6 | 13.8 | 26.3 | 24.0 | 22.5 | |||||||||||||||
| Other contractual obligations |
593.1 | 106.7 | 138.6 | 118.8 | 229.0 | |||||||||||||||
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| $ | 34,654.9 | $ | 2,355.1 | $ | 4,154.3 | $ | 15,471.8 | $ | 12,673.7 | |||||||||||
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| (a) | In addition to the contractual obligations disclosed in this table, we have unrecognized tax benefits that, based on uncertainties associated with the items, we are unable to make reasonably reliable estimates of the period of potential cash settlements, if any, with taxing authorities. (See Note 12, “Income Taxes,” to our consolidated financial statements included elsewhere in this Form 10-K.) |
| (b) | Estimated interest for variable rate debt included in this table is based on rates at December 31, 2011. Estimated interest includes the estimated impact of our interest rate swap and interest rate cap agreements. |
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| (c) | Debt maturities and estimated interest assumes the extension of maturities of the CMBS Loans and the PHW Las Vegas senior secured loan from 2013 to 2015, resulting in a net increase of interest of approximately $435.2 million. Amounts presented do not include the impact of our 2012 transactions as discussed in Note 22, “Subsequent Events.” |
| (d) | Entertainment obligations represent obligations to pay performers that have contracts for future performances at one or more of our properties. |
| (e) | The agreements pursuant to which we manage casinos on Indian lands contain provisions required by law that provide that a minimum monthly payment be made to the tribe. That obligation has priority over scheduled repayments of borrowings for development costs and over the management fee earned and paid to the manager. In the event that insufficient cash flow is generated by the operations to fund this payment, we must pay the shortfall to the tribe. Subject to certain limitations as to time, such advances, if any, would be repaid to us in future periods in which operations generate cash flow in excess of the required minimum payment. These commitments will terminate upon the occurrence of certain defined events, including termination of the management contract. Our aggregate monthly commitment for the minimum guaranteed payments pursuant to the contracts for the three managed Indian-owned facilities now open is $1.2 million per month. Each of these casinos currently generates sufficient cash flows to cover all of its obligations, including its debt service. |
COMPETITIVE PRESSURES
The gaming industry is highly competitive and our competitors vary considerably in size, quality of facilities, number of operations, brand identities, marketing and growth strategies, financial strength and capabilities, level of amenities, management talent and geographic diversity. We also compete with other non-gaming resorts and vacation areas, and with various other entertainment businesses. Our competitors in each market may have substantially greater financial, marketing and other resources than we do and there can be no assurance that they will not in the future engage in aggressive pricing action to compete with us. Although we believe we are currently able to compete effectively in each of the various markets in which we participate, we cannot make assurances that we will be able to continue to do so or that we will be capable of maintaining or further increasing our current market share. Our failure to compete successfully in our various markets could adversely affect our business, financial condition, results of operations and cash flow.
In recent years, many casino operators have been reinvesting in existing markets to attract new customers or to gain market share, thereby increasing competition in those markets. As companies have completed expansion projects, supply has typically grown at a faster pace than demand in some markets and competition has increased significantly. The expansion of existing casino entertainment properties, the increase in the number of properties and the aggressive marketing strategies of many of our competitors have increased competition in many markets in which we operate, and this intense competition is expected to continue. These competitive pressures have affected, and are expected to continue to adversely affect our financial performance in certain markets.
Several states and Indian tribes are also considering enabling the development and operation of casinos or casino-like operations in their jurisdictions.
Although, historically, the short-term effect of such competitive developments on us generally has been negative, we are not able to determine the long-term impact, whether favorable or unfavorable, that development and expansion trends and events will have on current or future markets. We also cannot determine the long-term impact of the financial crisis on the economy, and casinos specifically. In the short-term, the current financial crisis has stalled or delayed some of our capital projects, as well as those of many of our competitors. In addition, our substantial indebtedness could limit our flexibility in planning for, or reacting to, changes in our operations or business and restrict us from developing new gaming facilities, introducing new technologies or exploiting business opportunities, all of which could place us at a competitive disadvantage. We believe that the geographic diversity of our operations; our focus on multi-market customer relationships; our service training, our rewards and customer loyalty programs; and our continuing efforts to establish our brands as premier brands upon which we have built strong customer loyalty have well-positioned us to face the challenges present within our industry. We utilize the unique capabilities of WINet, a sophisticated nationwide customer database, and Total Rewards, a nationwide loyalty program that allows our customers to earn complimentary items and other benefits for playing at our casinos. We believe these sophisticated marketing tools provide us with competitive advantages, particularly with players who visit more than one market.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”). Certain of our accounting policies, including the estimated lives assigned to our assets, the determination of bad debt, asset impairment, Total Rewards point liability, self-insurance reserves, the purchase price allocations made in connection with our acquisitions/merger, the fair value of derivative instruments, and the calculation of our income tax liabilities, require that we apply significant judgment in defining the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. Our judgments are based on our historical experience, terms of existing contracts, observance of
43
trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. Actual results may differ from our estimates. For a summary of our significant accounting policies, please refer to the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.
We consider accounting estimates to be critical accounting policies when:
| • | the estimates involve matters that are highly uncertain at the time the accounting estimate is made; and |
| • | different estimates or changes to estimates could have a material impact on the reported financial position, changes in financial position, or results of operations |
When more than one accounting principle, or method of its application, is generally accepted, we select the principle or method that we consider to be the most appropriate when given the specific circumstances. Application of these accounting principles requires us to make estimates about the future resolution of existing uncertainties. Estimates are typically based upon historical experience, current trends, contractual documentation, and other information, as appropriate. Due to the inherent uncertainty involving estimates, actual results reported in the future may differ from those estimates. In preparing our financial statements, we have made our best estimates and judgments of the amounts and disclosures included in the financial statements, giving regard to materiality.
Property and Equipment
We have significant capital invested in our property and equipment and judgments are made in determining the estimated useful lives of assets, salvage values to be assigned to assets, and if or when an asset has been impaired. The accuracy of these estimates affects the amount of depreciation expense recognized in our financial results and whether we have a gain or loss on the disposal of an asset. We assign lives to our assets based on our standard policy, which is established by management as representative of the useful life of each category of asset. We review the carrying value of our property and equipment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. The factors considered by management in performing this assessment include current operating results, trends and prospects, as well as the effect of obsolescence, demand, competition, and other economic factors. In estimating expected future cash flows for determining whether an asset is impaired, assets are grouped at the reporting unit level, which, for most of our assets, is the individual property.
Goodwill and Other Intangible Assets
The purchase price of an acquisition is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. We determine the estimated fair values after review and consideration of relevant information including discounted cash flows, quoted market prices and estimates made by management. To the extent the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired and liabilities assumed, such excess is allocated to goodwill.
Each year, we perform a preliminary annual impairment assessment of goodwill and other non-amortizing intangible assets as of September 30. In the fourth quarter of each year, we update our preliminary assessment once we finalize our long-term operating plan and certain other assumptions. We perform assessments more frequently if impairment indicators exist.
For our impairment assessment, we determine estimated fair value of a reporting unit as a function, or multiple, of EBITDA, combined with estimated future cash flows discounted at rates commensurate with prevailing rates of return within the casino industry in general. We determine the estimated fair values of our non-amortizing intangible assets by using the relief from royalty and excess earnings methods under the income approach.
The annual evaluation of goodwill and other non-amortizing intangible assets requires the use of estimates about future operating results, valuation multiples, and discount rates to determine their estimated fair value. Changes in these assumptions can materially affect these estimates. Thus, to the extent the economy deteriorates further in the near future, discount rates increase significantly, or we do not meet our projected performance, we could have additional impairment to record in the next twelve months within our financial statements, and such impairments could be material. This is especially true for our Las Vegas region, which has a significant portion of our total goodwill balance. In accordance with GAAP, once an impairment of goodwill or other intangible asset has been recorded, it cannot be reversed.
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Total Rewards Point Liability Program
Our customer loyalty program, Total Rewards, offers incentives to customers who gamble at certain of our casinos throughout the United States. Under the program, customers are able to accumulate, or bank, reward credits over time that they may redeem at their discretion under the terms of the program. The reward credit balance will be forfeited if the customer does not earn a reward credit over the prior six-month period. As a result of the ability of the customer to bank the reward credits, we accrue the expense of reward credits, after consideration of estimated forfeitures (referred to as “breakage”), as they are earned. The value of the cost to provide reward credits is expensed as the reward credits are earned and is included in casino expense on our Consolidated Statements of Operations. To arrive at the estimated cost associated with reward credits, estimates and assumptions are made regarding incremental costs of the benefits, breakage rates, and the mix of goods and services for which reward credits will be redeemed. We use historical data to assist in the determination of estimated accruals.
In addition to reward credits, customers at certain of our properties can earn points based on play that are redeemable in the form of credits playable at the gaming machine. We accrue the cost of redeemable points, after consideration of estimated breakage, as they are earned. The cost is recorded as contra-revenue and included in casino promotional allowances on our Consolidated Statements of Operations.
Allowance for Doubtful Accounts - Gaming
We reserve an estimated amount for gaming receivables that may not be collected. Methodologies for estimating the allowance for doubtful accounts range from specific reserves to various percentages applied to aged receivables. Historical collection rates are considered, as are customer relationships, in determining specific reserves. As with many estimates, management must make judgments about potential actions by third parties in establishing and evaluating our reserves for allowance for doubtful accounts.
Self-Insurance Accruals
We are self-insured up to certain limits for costs associated with general liability, workers’ compensation, and employee health coverage. Insurance claims and reserves include accruals of estimated settlements for known claims, as well as accruals of actuarial estimates of incurred but not reported claims. In estimating these reserves, we consider historical loss experience and make judgments about the expected levels of costs per claim. We also utilize consultants to assist in the determination of certain estimated accruals. These claims are accounted for based on actuarial estimates of the undiscounted claims, including those claims incurred but not yet reported. We believe the use of actuarial methods to account for these liabilities provides a consistent and effective way to measure these highly judgmental accruals; however, changes in health care costs, accident frequency and severity, and other factors can materially affect the estimates for these liabilities. We regularly monitor the potential for changes in estimates, evaluate our insurance accruals, and adjust our recorded provisions.
Income Taxes
We are subject to income taxes in the United States (including federal and state) and numerous foreign jurisdictions in which we operate. We record income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the expected future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and attributable to operating loss and tax credit carryforwards. We will record a reduction of the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically based on the “more likely than not” realization threshold. This assessment considers, among other matters, the nature, frequency, and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards not expiring unused, and tax planning alternatives.
The effect on the income tax provision and deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We have previously provided a valuation allowance on foreign tax credits, certain foreign and state net operating losses (“NOLs”), and other deferred foreign and state tax assets. Certain foreign and state NOLs and other deferred foreign and state tax assets were not deemed realizable because they are attributable to subsidiaries that are not expected to produce future earnings.
We classify reserves for tax uncertainties within accrued expenses and deferred credits and other in our Consolidated Balance Sheets, separate from any related income tax payable, which is also reported within accrued expenses, or deferred income taxes. Reserve amounts for uncertain tax positions relate to any potential income tax liabilities resulting from uncertain tax positions, as well as potential interest or penalties associated with those liabilities.
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We file income tax returns, including returns for our subsidiaries, with federal, state, and foreign jurisdictions. We are under regular and recurring audit by the Internal Revenue Service (“IRS”) and various state taxing authorities on open tax positions, and it is possible that the amount of the liability for unrecognized tax benefits could change during the next twelve months.
Derivative Instruments
We record all derivative instruments at fair value in the financial statements. Any changes in fair value are recorded in the statements of operations or in other comprehensive income/(loss) within the equity section of the balance sheets, depending upon whether or not the derivative is designated and qualifies for hedge accounting, the type of hedge transaction, and the effectiveness of the hedge. The estimated fair values of our derivative instruments are based on market prices obtained from dealer quotes. Such quotes represent the estimated amounts we would receive or pay to terminate the contracts.
Our derivative instruments contain a credit risk that the counterparties may be unable to meet the terms of the agreements. We minimize that risk by evaluating the creditworthiness of our counterparties, which are limited to major banks and financial institutions. Our derivatives are recorded at their fair values, adjusted for the credit rating of the counterparty if the derivative is an asset, or adjusted for our credit rating if the derivative is a liability.
RECENTLY ISSUED AND PROPOSED ACCOUNTING STANDARDS
For discussions of the adoption and potential impacts of recently issued accounting standards, refer to Note 2, “Recently Issued Accounting Pronouncements,” to our consolidated financial statements, included in Item 8 of this Form 10-K.
| ITEM 7A. | Quantitative and Qualitative Disclosure About Market Risk |
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with our debt. We attempt to limit our exposure to interest rate risk by managing the mix of our debt between fixed-rate and variable-rate obligations. Of our $22,657.9 million face value of debt, including capital lease obligations, at December 31, 2011, we have entered into interest rate swap agreements to fix the interest rate on $5,750.0 million of variable rate debt, and $7,849.4 million of debt remains subject to variable interest rates.
We use interest rate swaps to manage the mix of our debt between fixed and variable rate instruments. As of December 31, 2011, we have entered into eight interest rate swap agreements for notional amounts totaling $5,750.0 million. The difference to be paid or received under the terms of the interest rate swap agreements is accrued as interest rates change and recognized as an adjustment to interest expense for the related debt. Changes in the variable interest rates to be paid or received pursuant to the terms of the interest rate swap agreements will have a corresponding effect on future cash flows.
In addition to the swap agreements, we have an interest rate cap agreement for a notional amount of $6,500.0 million at a London Inter-Bank Offered Rate (“LIBOR”) cap rate of 4.5% and an interest rate cap agreement for a notional amount of $517.7 million at a LIBOR cap rate of 7.0%. Assuming a constant outstanding balance for our variable rate debt for the next twelve months, a hypothetical 1% increase in interest rates would increase interest expense for the next twelve months by approximately $68.7 million. At December 31, 2011, the weighted average USD LIBOR rate on our variable rate debt was 0.348%. A hypothetical reduction of this rate to 0% would decrease interest expense for the next twelve months by approximately $23.9 million.
We do not purchase or hold any derivative financial instruments for trading purposes.
The table below provides information as of December 31, 2011, about our financial instruments that are sensitive to changes in interest rates, including the cash flows associated with the principal amounts of debt obligations, the notional amounts of interest rate derivative instruments and related weighted average interest rates. Principal amounts are used to calculate the payments to be exchanged under the related agreement(s) and weighted average variable rates are based on implied forward rates in the yield curve as of December 31, 2011.
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| Expected Maturity Date | ||||||||||||||||||||||||||||||||
| ($ in millions) |
2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | Total | Fair Value | ||||||||||||||||||||||||
| Liabilities |
||||||||||||||||||||||||||||||||
| Long-term debt |
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| Fixed rate |
$ | 14.9 | $ | 140.8 | $ | 15.0 | $ | 5,540.8 | $ | 728.8 | $ | 7,618.7 | $ | 14,059.0 | $ | 12,203.1 | ||||||||||||||||
| Average interest rate |
8.5 | % | 8.4 | % | 8.4 | % | 10.1 | % | 10.4 | % | 5.7 | % | 9.0 | % | ||||||||||||||||||
| Variable rate (1) |
$ | 30.4 | $ | 29.9 | $ | 178.9 | $ | 5,582.8 | $ | 1,128.1 | $ | 1,648.8 | $ | 8,598.9 | $ | 6,178.5 | ||||||||||||||||
| Average interest rate |
4.8 | % | 5.0 | % | 5.4 | % | 6.5 | % | 7.1 | % | 4.6 | % | 5.4 | % | ||||||||||||||||||
| Interest Rate Derivatives |
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| Interest rate swaps |
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| Variable to fixed (2) |
$ | 5,750.0 | $ | (336.1 | ) | |||||||||||||||||||||||||||
| Average pay rate |
3.1 | % | 3.1 | % | 3.3 | % | 3.3 | % | — | — | 3.2 | % | ||||||||||||||||||||
| Average receive rate |
0.3 | % | 0.4 | % | 0.7 | % | 0.8 | % | — | — | 0.5 | % | ||||||||||||||||||||
| Interest rate caps (3) |
$ | 7,017.7 | $ | — | ||||||||||||||||||||||||||||
| (1) | Maturities assume the extension of the CMBS Loans and PHW Las Vegas senior secured loan from 2013 to 2015. |
| (2) | Expire in 2015. |
| (3) | Expire in 2013. |
As of December 31, 2011 and 2010, our long-term variable rate debt reflects borrowings under our senior secured credit facilities provided to us by a consortium of banks with a total capacity of $8,410.0 and $8,435.1 million, respectively. The interest rates charged on borrowings under these facilities are a function of LIBOR. As such, the interest rates charged to us for borrowings under the facilities are subject to change as LIBOR changes.
Foreign currency transaction gains and losses were not material to our results of operations for the years ended December 31, 2011, 2010, and 2009. Our only material ownership interests in businesses in foreign countries are London Clubs, Caesars Golf Macau, and an approximate 95% ownership of a casino in Uruguay. Therefore, we have not been subject to material foreign currency exchange rate risk from the effects that exchange rate movements of foreign currencies would have on our future operating results or cash flows.
From time to time, we hold investments in various available-for-sale equity securities; however, our exposure to price risk arising from the ownership of these investments is not material to our consolidated financial position, results of operations, or cash flows.
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| ITEM 8. | Financial Statements and Supplementary Data |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Caesars Entertainment Corporation:
We have audited the accompanying consolidated balance sheets of Caesars Entertainment Corporation and subsidiaries (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ (deficit)/equity and comprehensive income/(loss), and cash flows for each of the three years in the period ended December 31, 2011. Our audits also included the consolidated financial statement schedule included in Item 15(a)(2). These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Caesars Entertainment Corporation and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 14, 2012, expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
Las Vegas, Nevada
March 14, 2012
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CAESARS ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except for par value)
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
| Assets |
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| Current assets |
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| Cash and cash equivalents |
$ | 904.6 | $ | 987.0 | ||||
| Receivables, less allowance for doubtful accounts of $202.3 and $216.3 |
489.2 | 393.2 | ||||||
| Deferred income taxes |
170.5 | 175.8 | ||||||
| Prepayments and other current assets |
228.0 | 184.1 | ||||||
| Inventories |
44.9 | 50.4 | ||||||
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|||||
| Total current assets |
1,837.2 | 1,790.5 | ||||||
| Property and equipment, net of accumulated depreciation of $2,681.3 and $1,991.5 |
17,266.0 | 17,766.6 | ||||||
| Goodwill |
3,464.8 | 3,420.9 | ||||||
| Intangible assets other than goodwill |
4,655.9 | 4,711.8 | ||||||
| Investments in and advances to non-consolidated affiliates |
94.2 | 94.0 | ||||||
| Restricted cash |
451.1 | — | ||||||
| Deferred charges and other |
746.4 | 803.9 | ||||||
|
|
|
|
|
|||||
| $ | 28,515.6 | $ | 28,587.7 | |||||
|
|
|
|
|
|||||
| Liabilities and Stockholders’ Equity |
||||||||
| Current liabilities |
||||||||
| Accounts payable |
$ | 293.9 | $ | 251.4 | ||||
| Interest payable |
191.4 | 201.5 | ||||||
| Accrued expenses |
1,077.1 | 1,074.3 | ||||||
| Current portion of long-term debt |
40.4 | 55.6 | ||||||
|
|
|
|
|
|||||
| Total current liabilities |
1,602.8 | 1,582.8 | ||||||
| Long-term debt |
19,759.5 | 18,785.5 | ||||||
| Deferred credits and other |
901.8 | 923.1 | ||||||
| Deferred income taxes |
5,198.1 | 5,623.7 | ||||||
|
|
|
|
|
|||||
| 27,462.2 | 26,915.1 | |||||||
|
|
|
|
|
|||||
| Stockholders’ equity |
||||||||
| Common stock; voting; $0.01 par value; 1,250.0 shares authorized; 125.1 shares issued and outstanding (net of 0.3 shares held in treasury) |
0.7 | 0.7 | ||||||
| Additional paid-in capital |
6,885.1 | 6,906.5 | ||||||
| Accumulated deficit |
(5,782.7 | ) | (5,105.6 | ) | ||||
| Accumulated other comprehensive loss |
(96.4 | ) | (168.8 | ) | ||||
|
|
|
|
|
|||||
| Total Caesars stockholders’ equity |
1,006.7 | 1,632.8 | ||||||
| Non-controlling interests |
46.7 | 39.8 | ||||||
|
|
|
|
|
|||||
| Total stockholders’ equity |
1,053.4 | 1,672.6 | ||||||
|
|
|
|
|
|||||
| $ | 28,515.6 | $ | 28,587.7 | |||||
|
|
|
|
|
|||||
See accompanying Notes to Consolidated Financial Statements.
49
CAESARS ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| Revenues |
||||||||||||
| Casino |
$ | 6,637.1 | $ | 6,917.9 | $ | 7,124.3 | ||||||
| Food and beverage |
1,534.4 | 1,510.6 | 1,479.3 | |||||||||
| Rooms |
1,208.2 | 1,132.3 | 1,068.9 | |||||||||
| Management fees |
35.8 | 39.1 | 56.6 | |||||||||
| Other |
682.5 | 576.3 | 592.4 | |||||||||
| Less: casino promotional allowances |
(1,263.5 | ) | (1,357.6 | ) | (1,414.1 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net revenues |
8,834.5 | 8,818.6 | 8,907.4 | |||||||||
|
|
|
|
|
|
|
|||||||
| Operating expenses |
||||||||||||
| Direct |
||||||||||||
| Casino |
3,746.5 | 3,948.9 | 3,925.5 | |||||||||
| Food and beverage |
665.7 | 621.3 | 596.0 | |||||||||
| Rooms |
287.1 | 259.4 | 213.5 | |||||||||
| Property, general, administrative, and other |
2,118.5 | 2,061.7 | 2,018.8 | |||||||||
| Depreciation and amortization |
712.5 | 735.5 | 683.9 | |||||||||
| Write-downs, reserves, recoveries, and project opening costs |
96.0 | 149.7 | 111.5 | |||||||||
| Impairment of goodwill and other non-amortizing intangible assets |
11.0 | 193.0 | 1,638.0 | |||||||||
| Loss on interests in non-consolidated affiliates |
7.9 | 1.5 | 2.2 | |||||||||
| Corporate expense |
152.8 | 140.9 | 150.7 | |||||||||
| Acquisition and integration costs |
4.3 | 13.6 | 0.3 | |||||||||
| Amortization of intangible assets |
156.7 | 160.8 | 174.8 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total operating expenses |
7,959.0 | 8,286.3 | 9,515.2 | |||||||||
|
|
|
|
|
|
|
|||||||
| Income/(loss) from operations |
875.5 | 532.3 | (607.8 | ) | ||||||||
| Interest expense, net of interest capitalized |
(2,122.3 | ) | (1,981.6 | ) | (1,892.5 | ) | ||||||
| Gains on early extinguishments of debt |
47.9 | 115.6 | 4,965.5 | |||||||||
| Other income, including interest income |
25.3 | 41.7 | 33.0 | |||||||||
|
|
|
|
|
|
|
|||||||
| (Loss)/income before income taxes |
(1,173.6 | ) | (1,292.0 | ) | 2,498.2 | |||||||
| Benefit/(provision) for income taxes |
506.9 | 468.7 | (1,651.8 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| Net (loss)/income |
(666.7 | ) | (823.3 | ) | 846.4 | |||||||
| Less: net income attributable to non-controlling interests |
(20.9 | ) | (7.8 | ) | (18.8 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net (loss)/income attributable to Caesars |
(687.6 | ) | (831.1 | ) | 827.6 | |||||||
| Preferred stock dividends |
— | — | (354.8 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| Net (loss)/income attributable to common stockholders |
$ | (687.6 | ) | $ | (831.1 | ) | $ | 472.8 | ||||
|
|
|
|
|
|
|
|||||||
| (Loss)/earnings per share |
||||||||||||
| Basic |
$ | (5.50 | ) | $ | (8.37 | ) | $ | 6.67 | ||||
|
|
|
|
|
|
|
|||||||
| Diluted |
$ | (5.50 | ) | $ | (8.37 | ) | $ | 3.95 | ||||
|
|
|
|
|
|
|
|||||||
| Weighted-average common shares outstanding |
||||||||||||
| Basic |
125.1 | 99.3 | 70.9 | |||||||||
|
|
|
|
|
|
|
|||||||
| Diluted |
125.1 | 99.3 | 209.4 | |||||||||
|
|
|
|
|
|
|
|||||||
See accompanying Notes to Consolidated Financial Statements.
50
CAESARS ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT)/EQUITY
AND COMPREHENSIVE INCOME/(LOSS)
(In millions)
| Common Stock | Additional Paid-in- Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Loss |
Non-controlling Interests |
Total | Comprehensive Income/(Loss) |
||||||||||||||||||||||||||
| Shares Outstanding |
Amount | |||||||||||||||||||||||||||||||
| Balance at December 31, 2008 |
70.9 | 0.4 | $ | 3,825.1 | $ | (5,096.3 | ) | $ | (139.6 | ) | $ | 49.6 | $ | (1,360.8 | ) | $ | — | |||||||||||||||
| Net income |
— | — | — | 827.6 | — | 18.8 | 846.4 | 846.4 | ||||||||||||||||||||||||
| Share-based compensation |
— | — | 16.4 | — | — | — | 16.4 | — | ||||||||||||||||||||||||
| Repurchase of treasury shares |
* | * | (1.3 | ) | — | — | — | (1.3 | ) | — | ||||||||||||||||||||||
| Cumulative preferred stock dividends |
— | — | (354.8 | ) | — | — | — | (354.8 | ) | — | ||||||||||||||||||||||
| Related party debt exchange transaction, net of tax |
— | — | 80.1 | — | — | — | 80.1 | — | ||||||||||||||||||||||||
| Defined benefit plan adjustments, net of tax |
— | — | — | — | (14.1 | ) | — | (14.1 | ) | (14.1 | ) | |||||||||||||||||||||
| Foreign currency translation adjustments, net of tax |
— | — | — | — | 19.0 | 4.8 | 23.8 | 23.8 | ||||||||||||||||||||||||
| Change in fair market value of derivatives, net of taxes |
— | — | — | — | 3.4 | — | 3.4 | 3.4 | ||||||||||||||||||||||||
| Adjustment for ASC 740 tax implications |
— | — | (2.4 | ) | — | — | — | (2.4 | ) | — | ||||||||||||||||||||||
| Purchase of additional interest in subsidiary |
— | — | (83.7 | ) | — | — | (3.3 | ) | (87.0 | ) | — | |||||||||||||||||||||
| Distributions to non-controlling interests, net of contributions |
— | — | — | — | — | (14.0 | ) | (14.0 | ) | — | ||||||||||||||||||||||
| Reclassification of loss on derivative instruments from other comprehensive income to interest expense, net of taxes |
— | — | — | — | (2.7 | ) | — | (2.7 | ) | (2.7 | ) | |||||||||||||||||||||
| Other |
— | — | 0.6 | (0.6 | ) | — | — | — | — | |||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||
| 2009 Comprehensive Income |
— | — | — | — | — | — | — | $ | 856.8 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at December 31, 2009 |
70.9 | 0.4 | $ | 3,480.0 | $ | (4,269.3 | ) | $ | (134.0 | ) | $ | 55.9 | $ | (867.0 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| * | Amount rounds to zero. |
See accompanying Notes to Consolidated Financial Statements.
51
CAESARS ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY/(DEFICIT)
AND COMPREHENSIVE INCOME/(LOSS)
(In millions)
| Common Stock | Additional Paid-in- Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Loss |
Non-controlling Interests |
Total | Comprehensive Income/(Loss) |
||||||||||||||||||||||||||
| Shares Outstanding |
Amount | |||||||||||||||||||||||||||||||
| Balance at December 31, 2009 |
70.9 | 0.4 | $ | 3,480.0 | $ | (4,269.3 | ) | $ | (134.0 | ) | $ | 55.9 | $ | (867.0 | ) | $ | — | |||||||||||||||
| Net (loss)/income |
— | — | (831.1 | ) | — | 7.8 | (823.3 | ) | (823.3 | ) | ||||||||||||||||||||||
| Share-based compensation |
— | — | 17.9 | — | — | 0.2 | 18.1 | — | ||||||||||||||||||||||||
| Repurchase of treasury shares |
* | * | (1.6 | ) | — | — | — | (1.6 | ) | — | ||||||||||||||||||||||
| Cumulative preferred stock dividends |
— | — | (64.6 | ) | — | — | — | (64.6 | ) | — | ||||||||||||||||||||||
| Cancellation of cumulative preferred stock dividends in connection with conversion of preferred stock to common stock |
— | — | 717.2 | — | — | — | 717.2 | — | ||||||||||||||||||||||||
| Conversion of non-voting perpetual preferred stock to non-voting common stock |
34.6 | 0.2 | 1,989.6 | — | — | — | 1,989.8 | — | ||||||||||||||||||||||||
| Private Placement |
19.6 | 0.1 | 768.0 | — | — | — | 768.1 | — | ||||||||||||||||||||||||
| Defined benefit plan adjustments, net of tax |
— | — | — | — | (6.1 | ) | — | (6.1 | ) | (6.1 | ) | |||||||||||||||||||||
| Foreign currency translation adjustments, net of tax |
— | — | — | — | 8.2 | (4.2 | ) | 4.0 | 4.0 | |||||||||||||||||||||||
| Change in fair market value of derivatives, net of taxes |
— | — | — | — | (60.7 | ) | — | (60.7 | ) | (60.7 | ) | |||||||||||||||||||||
| Reclassification of loss on derivative instruments from other comprehensive loss to interest expense, net of tax |
— | — | — | — | 22.2 | — | 22.2 | 22.2 | ||||||||||||||||||||||||
| Unrealized gains on investments, net of tax |
— | — | — | — | 1.6 | — | 1.6 | 1.6 | ||||||||||||||||||||||||
| Distributions to non-controlling interests, net of contributions |
— | — | — | — | — | (10.1 | ) | (10.1 | ) | — | ||||||||||||||||||||||
| Effect of deconsolidation of variable interest entities |
— | — | — | (5.2 | ) | — | (9.8 | ) | (15.0 | ) | — | |||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||
| 2010 Comprehensive Loss |
— | — | — | — | — | — | — | $ | (862.3 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at December 31, 2010 |
125.1 | 0.7 | $ | 6,906.5 | $ | (5,105.6 | ) | $ | (168.8 | ) | $ | 39.8 | $ | 1,672.6 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| * | Amount rounds to zero. |
See accompanying Notes to Consolidated Financial Statements.
52
CAESARS ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY/(DEFICIT)
AND COMPREHENSIVE INCOME/(LOSS)
(In millions)
| Common Stock | Additional Paid-in- Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Loss |
Non-controlling Interests |
Total | Comprehensive Income/(Loss) |
||||||||||||||||||||||||||
| Shares Outstanding |
Amount | |||||||||||||||||||||||||||||||
| Balance at December 31, 2010 |
125.1 | 0.7 | $ | 6,906.5 | $ | (5,105.6 | ) | $ | (168.8 | ) | $ | 39.8 | $ | 1,672.6 | $ | — | ||||||||||||||||
| Effect of change in accounting for accruals for casino jackpot liabilities, net of tax |
— | — | — | 10.7 | — | — | 10.7 | — | ||||||||||||||||||||||||
| Net (loss)/income |
— | — | — | (687.6 | ) | — | 20.9 | (666.7 | ) | (666.7 | ) | |||||||||||||||||||||
| Share-based compensation |
— | — | 22.1 | — | — | 0.1 | 22.2 | — | ||||||||||||||||||||||||
| Repurchase of treasury shares |
* | * | (1.7 | ) | — | — | — | (1.7 | ) | — | ||||||||||||||||||||||
| Defined benefit plan adjustments, net of tax |
— | — | — | — | (39.5 | ) | — | (39.5 | ) | (39.5 | ) | |||||||||||||||||||||
| Foreign currency translation adjustments, net of taxes |
— | — | — | — | (2.1 | ) | 1.3 | (0.8 | ) | (0.8 | ) | |||||||||||||||||||||
| Change in fair market value of derivatives, net of tax |
— | — | — | — | (35.9 | ) | — | (35.9 | ) | (35.9 | ) | |||||||||||||||||||||
| Reclassification of loss on derivative instruments from other comprehensive loss to interest expense, net of tax |
— | — | — | — | 148.4 | — | 148.4 | 148.4 | ||||||||||||||||||||||||
| Unrealized gains on investments, net of tax |
— | — | — | — | 1.5 | — | 1.5 | 1.5 | ||||||||||||||||||||||||
| Distributions to non-controlling interests, net of contributions |
— | — | — | — | — | (5.8 | ) | (5.8 | ) | — | ||||||||||||||||||||||
| Changes in non-controlling interests |
— | — | — | — | — | (9.6 | ) | (9.6 | ) | — | ||||||||||||||||||||||
| Purchase of additional interest in subsidiary |
— | — | (31.5 | ) | — | — | — | (31.5 | ) | — | ||||||||||||||||||||||
| Other |
— | — | (10.3 | ) | (0.2 | ) | — | — | (10.5 | ) | — | |||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||
| 2011 Comprehensive Loss |
— | — | — | — | — | — | — | $ | (593.0 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at December 31, 2011 |
125.1 | 0.7 | $ | 6,885.1 | $ | (5,782.7 | ) | $ | (96.4 | ) | $ | 46.7 | $ | 1,053.4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| * | Amount rounds to zero. |
See accompanying Notes to Consolidated Financial Statements.
53
CAESARS ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| Cash flows from operating activities |
||||||||||||
| Net (loss)/income |
$ | (666.7 | ) | $ | (823.3 | ) | $ | 846.4 | ||||
| Adjustments to reconcile net (loss)/income to cash flows provided by operating activities: |
||||||||||||
| Gains on early extinguishments of debt |
(47.9 | ) | (115.6 | ) | (4,965.5 | ) | ||||||
| Depreciation and amortization |
881.4 | 907.8 | 872.0 | |||||||||
| Amortization of deferred finance costs and debt discount/premium |
227.5 | 240.1 | 255.0 | |||||||||
| Reclassification from, and amortization of, accumulated other comprehensive loss |
266.5 | 36.3 | 18.2 | |||||||||
| Non-cash write-downs, reserves, and recoveries |
27.1 | 108.1 | 32.0 | |||||||||
| Impairment of goodwill and other non-amortizing intangible assets |
11.0 | 193.0 | 1,638.0 | |||||||||
| Share-based compensation expense |
22.2 | 18.1 | 16.4 | |||||||||
| Deferred income taxes |
(503.5 | ) | (467.3 | ) | 1,541.2 | |||||||
| Federal income tax refund received |
— | 220.8 | — | |||||||||
| Net change in long-term accounts |
(71.5 | ) | (12.3 | ) | 74.7 | |||||||
| Net change in working capital accounts |
(26.1 | ) | (150.6 | ) | (117.4 | ) | ||||||
| Other |
3.1 | 15.7 | 9.2 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash flows provided by operating activities |
123.1 | 170.8 | 220.2 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash flows from investing activities |
||||||||||||
| Acquisitions of property and equipment, net of change in construction payables |
(283.2 | ) | (160.7 | ) | (464.5 | ) | ||||||
| Change in restricted cash |
(517.7 | ) | — | — | ||||||||
| Payments to acquire businesses, net of transaction costs and cash acquired |
(19.0 | ) | (30.6 | ) | — | |||||||
| Purchase of additional interests in subsidiary |
(75.4 | ) | (19.5 | ) | — | |||||||
| Payments made to acquire certain gaming rights |
(22.7 | ) | (16.5 | ) | — | |||||||
| Investments in/advances to non-consolidated affiliates and other |
(76.0 | ) | (64.0 | ) | (66.9 | ) | ||||||
| Other |
(23.0 | ) | 3.4 | 8.1 | ||||||||
|
|
|
|
|
|
|
|||||||
| Cash flows used in investing activities |
||||||||||||