Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q/A

(Amendment No.1)

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2015

 

OR

 

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

 

For the transition period from        to

 

Commission File Number:  0-24206

 

PENN NATIONAL GAMING, INC.

(Exact name of registrant as specified in its charter)

 

Pennsylvania

 

23-2234473

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

825 Berkshire Blvd., Suite 200

Wyomissing, PA 19610

(Address of principal executive offices) (Zip Code)

 

610-373-2400

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

 

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 o

 

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 o

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(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 Exchange Act).  Yes o No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Title

 

Outstanding as of April 30, 2015

Common Stock, par value $.01 per share

 

79,812,962 (includes 134,629 shares of restricted stock)

 

 

 



Table of Contents

 

EXPLANATORY NOTE

 

In this Quarterly Report on Form 10-Q/A (“Form 10-Q/A”), the terms “we”, “our”, the “Company” and “Penn” refer to Penn National Gaming, Inc. and its subsidiaries, unless the context indicates otherwise.

 

As previously disclosed in the Company’s Current Report on Form 8-K filed with the SEC on October 22, 2015, the Company is restating its unaudited financial statements for the interim periods ended March 31, 2015 and 2014.

 

The Company originally concluded that its Master Lease agreement (the “Master Lease”) with Gaming and Leisure Properties, Inc. (“GLPI”) should be accounted for as an operating lease under Generally Accepted Accounting Principles.  This accounting treatment was applied in the Company’s financial statements for the years ended December 31, 2014 and 2013, respectively, which were accompanied by unqualified opinions of Ernst & Young, LLP (“EY”), the Company’s independent registered public accounting firm.  Upon the Company’s recent reconsideration of that accounting treatment, the Company re-examined this accounting and the relevant accounting literature.  The restatement primarily results from the Company’s accounting for its November 1, 2013 spin-off of real estate assets to GLPI and entrance into the Master Lease, which was previously recognized as a sale-leaseback. As explained in Note 2 to the condensed consolidated financial statements included within this report, the Company did not meet all of the requirements for sale-leaseback accounting under Accounting Standards Codification (“ASC”) 840, “Leases”, and therefore the transaction should be accounted for as a failed spin-off-leaseback which resulted in the transaction being recorded as a financing obligation rather than a distribution of assets followed by an operating lease.  As a result, the Company is precluded from derecognizing the real estate assets and is instead required to recognize a financing obligation.  The restated condensed consolidated balance sheets therefore include an adjustment to property and equipment, net for the carrying value of the real property leased from GLPI of $2.02 billion and $2.04 billion at March 31, 2015 and December 31, 2014, respectively, and additional liabilities of $3.60 billion and $3.61 billion at March 31, 2015 and December 31, 2014, respectively, representing the present value of the future minimum lease payments due to GLPI under the Master Lease and the funded construction of certain leased real estate assets in development at the date of the spin-off.  Consequently, the restated condensed consolidated statements of operations no longer report rent expense for the obligations under the Master Lease, but rather include interest expense associated with the financing obligation and depreciation expense related to the real estate assets, along with the periodic reduction of the financing obligation reflected in the condensed consolidated balance sheets. The lease payment amounts previously recorded as rent expense were $108.8 million and $104.3 million for the three months ended March 31, 2015 and 2014, respectively. The increases to interest expense and depreciation expense as a result of this restatement are $96.0 million and $22.7 million, respectively, for the three months ended March 31, 2015, and $93.1 million and $22.3 million, respectively, for the three months ended March 31, 2014.

 

Additionally, this change in accounting treatment resulted in adjustments to the carrying amounts of the Company’s reporting units as well as differences in the allocation of the Company’s GLPI financing obligation to the impacted reporting units, which changed each reporting unit’s fair value.  This resulted in a net decrease to the Company’s previously recognized impairment charges related to goodwill and indefinite-lived gaming licenses for the year ended December 31, 2014.  The Company has also included in the restated condensed consolidated financial statements corrections of additional errors related to the accounting classification for payments made to relocate certain gaming operations in Ohio which opened in 2014, classification of an operating lease to a capital lease which resulted in an increase of $6.5 million and $7.0 million at March 31, 2015 and December 31, 2014 to net property and equipment and an increase to long term debt of $24.9 million at both March 31, 2015 and December 31, 2014, as well as certain other miscellaneous items described in Note 2 to the condensed consolidated financial statements included in this report.  Finally, the Company concluded that as a result of the failed spin-off-leaseback accounting treatment which resulted in a significant increase to our net deferred tax assets, a valuation allowance should be recorded on our net deferred tax assets given the significant negative evidence associated with being in a three year cumulative pre-tax loss position and the insufficient objectively verifiable positive evidence to support the realization of the Company’s deferred tax assets.

 

This Amendment No. 1 on Form 10-Q/A (“Form 10-Q/A”) to our Quarterly Report on Form 10-Q for the three months ended March 31, 2015, initially filed with the Securities and Exchange Commission (the “SEC”) on May 6, 2015 (the “Original Filing”), is being filed to reflect the restatement of (i) the Company’s condensed consolidated balance sheets at March 31, 2015 and December 31, 2014 and (ii) the Company’s condensed consolidated statements of income, comprehensive income, stockholders’ equity (deficit) and cash flows for the three months ended March 31, 2015 and 2014, and the notes related thereto. For a more detailed description of these restatements see Note 2 to the accompanying condensed consolidated financial statements in this Form 10-Q/A.

 

Notably, the adjustments in the Restatement did not have a significant impact on the Company’s leverage ratios under its senior credit facility and other debt instruments (as the terms of those obligations require the Master Lease to be treated as an operating lease regardless of the treatment required under GAAP) had no, and will have no future impact on the following indicators of the Company’s performance:

 

2



Table of Contents

 

·              the Company’s cash position;

 

·                          the Company’s revenues from continuing operations; or

 

·              the Company’s rental payments or other obligations under the Master Lease.

 

For the convenience of the reader, this Form 10-Q/A sets forth the Original Filing in its entirety. However, this Form 10-Q/A only amends and restates Items 1, 2, and 4 of Part I of the Original Filing, in each case, as a result of, and to reflect the restatement. No other information in the Original Filing is amended. In addition, pursuant to the rules of the SEC, Item 6 of Part II of the Original Filing has been amended to contain the currently-dated certifications from our Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of our Chief Executive Officer and Chief Financial Officer are attached to this Form 10-Q/A as Exhibits 31.1, 32.1, 31.2 and 32.2, respectively. For a more detailed description of these restatements see Note 2 to the accompanying consolidated financial statements in this Form 10-Q/A.

 

3



Table of Contents

 

This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements can be identified by the use of forward-looking terminology such as “believes,” “estimates,” “expects,” “intends,” “may,” “will,” “should” or “anticipates” or the negative or other variation of these or similar words, or by discussions of future events, strategies, or risks and uncertainties.  Actual results may vary materially from expectations.  Although Penn National Gaming, Inc. (“Penn”) and its subsidiaries (together with Penn, collectively, the “Company”) believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business, there can be no assurance that actual results will not differ materially from our expectations.  Meaningful factors that could cause actual results to differ from expectations include, but are not limited to, risks related to the following: our ability to obtain timely regulatory approvals required to own, develop and/or operate our facilities, or other delays or impediments to completing our planned acquisitions or projects; our ability to secure federal, state and local permits and approvals necessary for our construction projects; construction factors, including delays, unexpected remediation costs, local opposition, organized labor, and increased cost of labor and materials; our ability to maintain agreements with our horsemen, pari-mutuel clerks and other organized labor groups; the passage of state, federal or local legislation (including referenda) that would expand, restrict, further tax, prevent or negatively impact operations in or adjacent to the jurisdictions in which we do or seek to do business (such as a smoking ban at any of our facilities); the effects of local and national economic, credit, capital market, housing, and energy conditions on the economy in general and on the gaming and lodging industries in particular; the activities of our competitors and the rapid emergence of new competitors (traditional, internet and sweepstakes based and taverns); increases in the effective rate of taxation at any of our properties or at the corporate level; our ability to identify attractive acquisition and development opportunities (especially in new business lines) and to agree to terms with, and maintain good relationships with partners/municipalities for such transactions; the costs and risks involved in the pursuit of such opportunities and our ability to complete the acquisition or development of, and achieve the expected returns from, such opportunities; our expectations for the continued availability and cost of capital; the outcome of pending legal proceedings, including the ongoing appeal by the Ohio Roundtable addressing the legality of video lottery terminals in Ohio and litigation surrounding our withdrawal from a gaming project in Western Pennsylvania; changes in accounting standards; the impact of weather; the remediation of any material weaknesses and the costs to strengthen its internal control structure, potential investigations, litigation, or other proceedings by governmental authorities, stockholders or other parties, and risks related to the impact of the restatement on the Company’s reputation, development projects, joint ventures and other commercial contracts; the ability of the Company to generate sufficient future taxable income to realize its deferred tax assets; with respect to the proposed Jamul project near San Diego, California, particular risks associated with financing a project of this type, sovereign immunity, local opposition (including several pending lawsuits), and building a complex project on a relatively small parcel; with respect to our Massachusetts project, the ultimate location of the other gaming facilities in the state; with respect to our pending acquisition of Tropicana Las Vegas, risks relating to required regulatory approvals and other conditions to closing, higher leverage, the successful integration of the acquisition, our ability to successfully leverage our player database, market conditions affecting the Las Vegas Strip, ongoing litigation, labor relations, future capital expenditures, the risks associated with construction projects (such as delays and unexpected costs including but not limited to remediation of known and unknown asbestos or other environmental conditions) and the availability and cost of capital; and other factors as discussed in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2014, and Current Reports on Form 8-K as filed with the United States Securities and Exchange Commission.  The Company does not intend to update publicly any forward-looking statements except as required by law.

 

4



Table of Contents

 

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

EXPLANATORY NOTE

 

 

 

 

PART I.

FINANCIAL INFORMATION

6

 

 

 

ITEM 1.

FINANCIAL STATEMENTS (Unaudited)

6

 

Condensed Consolidated Balance Sheets — March 31, 2015 and December 31, 2014

6

 

Condensed Consolidated Statements of Income — Three Months Ended March 31, 2015 and 2014

7

 

Condensed Consolidated Statements of Comprehensive Income — Three Months Ended March 31, 2015 and 2014

8

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Deficit) — Three Months Ended March 31, 2015 and 2014

9

 

Condensed Consolidated Statements of Cash Flows — Three Months Ended March 31, 2015 and 2014

10

 

Notes to the Condensed Consolidated Financial Statements

11

 

 

 

ITEM 2.

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

33

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

46

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

46

 

 

 

PART II.

OTHER INFORMATION

47

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

47

 

 

 

ITEM 1A.

RISK FACTORS

47

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

47

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

47

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

47

 

 

 

ITEM 5.

OTHER INFORMATION

47

 

 

 

ITEM 6.

EXHIBITS

48

 

 

 

SIGNATURES

49

 

 

 

EXHIBIT INDEX

50

 

5



Table of Contents

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (As Restated, See Note 2)

(in thousands, except share and per share data)

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(Restated)

 

(Restated)

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

237,729

 

$

208,673

 

Receivables, net of allowance for doubtful accounts of $2,093 and $2,004 at March 31, 2015 and December 31, 2014, respectively

 

40,918

 

41,618

 

Prepaid expenses

 

86,420

 

70,785

 

Deferred income taxes

 

33,907

 

40,343

 

Other current assets

 

10,913

 

11,189

 

Total current assets

 

409,887

 

372,608

 

Property and equipment, net

 

2,682,661

 

2,669,732

 

Other assets

 

 

 

 

 

Investment in and advances to unconsolidated affiliates

 

175,574

 

179,551

 

Goodwill

 

874,184

 

874,184

 

Other intangible assets, net

 

418,105

 

419,453

 

Advances to the Jamul Tribe

 

86,443

 

62,048

 

Other assets

 

77,631

 

87,318

 

Total other assets

 

1,631,937

 

1,622,554

 

Total assets

 

$

4,724,485

 

$

4,664,894

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current portion of financing obligation to GLPI

 

$

47,057

 

$

46,884

 

Current maturities of long-term debt

 

40,890

 

30,853

 

Accounts payable

 

66,587

 

43,136

 

Accrued expenses

 

137,739

 

133,092

 

Accrued interest

 

11,427

 

5,163

 

Accrued salaries and wages

 

69,671

 

84,034

 

Gaming, pari-mutuel, property, and other taxes

 

55,726

 

51,972

 

Insurance financing

 

10,251

 

13,680

 

Other current liabilities

 

64,771

 

75,773

 

Total current liabilities

 

504,119

 

484,587

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

Long-term financing obligation to GLPI, net of current portion

 

3,551,981

 

3,564,629

 

Long-term debt, net of current maturities and debt issuance costs

 

1,240,459

 

1,210,577

 

Deferred income taxes

 

90,336

 

78,633

 

Noncurrent tax liabilities

 

7,108

 

7,035

 

Other noncurrent liabilities

 

27,110

 

27,447

 

Total long-term liabilities

 

4,916,994

 

4,888,321

 

 

 

 

 

 

 

Shareholders’ equity (deficit)

 

 

 

 

 

Series C Preferred stock ($.01 par value, 18,500 shares authorized, 8,624 shares issued and outstanding at March 31, 2015 and December 31, 2014)

 

 

 

Common stock ($.01 par value, 200,000,000 shares authorized, 81,873,026 and 81,329,210 shares issued and 79,705,633 and 79,161,817 shares outstanding, at March 31, 2015 and December 31, 2014, respectively)

 

818

 

813

 

Treasury stock, at cost (2,167,393 shares held at March 31, 2015 and December 31, 2014)

 

(28,414

)

(28,414

)

Additional paid-in capital

 

967,374

 

956,146

 

Retained deficit

 

(1,633,408

)

(1,635,277

)

Accumulated other comprehensive loss

 

(2,998

)

(1,282

)

Total shareholders’ equity (deficit)

 

(696,628

)

(708,014

)

Total liabilities and shareholders’ equity (deficit)

 

$

4,724,485

 

$

4,664,894

 

 

See accompanying notes to the condensed consolidated financial statements.

 

6



Table of Contents

 

Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (As Restated, See Note 2)

(in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

 

 

(Restated)

 

(Restated)

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

Gaming

 

$

591,336

 

$

570,683

 

Food, beverage and other

 

108,763

 

104,870

 

Management service fee

 

1,927

 

2,458

 

Revenues

 

702,026

 

678,011

 

Less promotional allowances

 

(37,888

)

(36,931

)

Net revenues

 

664,138

 

641,080

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

Gaming

 

294,895

 

283,268

 

Food, beverage and other

 

77,929

 

77,538

 

General and administrative

 

116,256

 

107,575

 

Depreciation and amortization

 

63,369

 

70,185

 

Total operating expenses

 

552,449

 

538,566

 

Income from operations

 

111,689

 

102,514

 

 

 

 

 

 

 

Other income (expenses)

 

 

 

 

 

Interest expense

 

(108,346

)

(104,514

)

Interest income

 

1,870

 

467

 

Income from unconsolidated affiliates

 

3,982

 

2,483

 

Other

 

3,089

 

1,631

 

Total other expenses

 

(99,405

)

(99,933

)

 

 

 

 

 

 

Income from operations before income taxes

 

12,284

 

2,581

 

Income tax provision

 

10,415

 

2,001

 

Net income

 

$

1,869

 

$

580

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

Basic earnings per common share

 

$

0.02

 

$

0.01

 

Diluted earnings per common share

 

$

0.02

 

$

0.01

 

 

See accompanying notes to the condensed consolidated financial statements.

 

7



Table of Contents

 

Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss) (As Restated, see Note 2)

(in thousands) (unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

 

 

(Restated)

 

(Restated)

 

 

 

 

 

 

 

Net income

 

$

1,869

 

$

580

 

Other comprehensive loss, net of tax:

 

 

 

 

 

Foreign currency translation adjustment during the period

 

(1,716

)

(700

)

Other comprehensive loss

 

(1,716

)

(700

)

Comprehensive income (loss)

 

$

153

 

$

(120

)

 

See accompanying notes to the condensed consolidated financial statements.

 

8



Table of Contents

 

Penn National Gaming, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Deficit) (As Restated, see Note 2)
(in thousands, except share data) (unaudited)

 

 

 

Preferred Stock

 

Common Stock

 

Treasury

 

Additional
Paid-In

 

Retained

 

Accumulated Other
Comprehensive

 

Total
Shareholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Stock

 

Capital

 

Deficit

 

Loss

 

Equity (Deficit)

 

Balance, December 31, 2013 (as restated)

 

8,624

 

$

 

77,788,393

 

$

799

 

$

(28,414

)

$

925,335

 

$

(1,448,955

)

$

383

 

$

(550,852

)

Share-based compensation arrangements, net of tax benefits of $7,752

 

 

 

766,722

 

8

 

 

15,907

 

 

 

15,915

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

(700

)

(700

)

Net income (as restated)

 

 

 

 

 

 

 

580

 

 

580

 

Balance, March 31, 2014 (as restated)

 

8,624

 

$

 

78,555,115

 

$

807

 

$

(28,414

)

$

941,242

 

$

(1,448,375

)

$

(317

)

$

(535,057

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014 (as restated)

 

8,624

 

$

 

79,161,817

 

$

813

 

$

(28,414

)

$

956,146

 

$

(1,635,277

)

$

(1,282

)

$

(708,014

)

Share-based compensation arrangements, net of tax benefits of $6,379

 

 

 

543,816

 

5

 

 

11,228

 

 

 

11,233

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

(1,716

)

(1,716

)

Net income (as restated)

 

 

 

 

 

 

 

1,869

 

 

1,869

 

Balance, March 31, 2015 (as restated)

 

8,624

 

$

 

79,705,633

 

$

818

 

$

(28,414

)

$

967,374

 

$

(1,633,408

)

$

(2,998

)

$

(696,628

)

 

See accompanying notes to the condensed consolidated financial statements.

 

9



Table of Contents

 

Penn National Gaming, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (As Restated, See Note 2)
(in thousands) (unaudited)

 

Three Months Ended March 31,

 

2015

 

2014

 

 

 

(Restated)

 

(Restated)

 

Operating activities

 

 

 

 

 

Net income

 

$

1,869

 

$

580

 

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

 

 

 

 

 

Depreciation and amortization

 

63,369

 

70,185

 

Amortization of items charged to interest expense

 

1,505

 

1,507

 

Accretion of settlement value on other noncurrent liabilities

 

351

 

 

Loss (gain) on sale of fixed assets

 

153

 

(49

)

Income from unconsolidated affiliates

 

(3,982

)

(2,483

)

Distributions of earnings from unconsolidated affiliates

 

8,000

 

5,500

 

Deferred income taxes

 

18,648

 

288

 

Charge for stock-based compensation

 

2,084

 

2,579

 

Decrease (increase),

 

 

 

 

 

Accounts receivable

 

727

 

(599

)

Prepaid expenses and other current assets

 

(2,742

)

(13,104

)

Other assets

 

6,400

 

7,087

 

Increase (decrease),

 

 

 

 

 

Accounts payable

 

2,887

 

2,186

 

Accrued expenses

 

4,931

 

(14,266

)

Accrued interest

 

6,264

 

2,484

 

Accrued salaries and wages

 

(14,363

)

(15,630

)

Gaming, pari-mutuel, property and other taxes

 

3,754

 

2,741

 

Income taxes

 

(11,738

)

(7,582

)

Other current and noncurrent liabilities

 

(11,690

)

807

 

Other noncurrent tax liabilities

 

1,609

 

1,205

 

Net cash provided by operating activities

 

78,036

 

43,436

 

Investing activities

 

 

 

 

 

Capital project expenditures, net of reimbursements

 

(36,929

)

(12,957

)

Capital maintenance expenditures

 

(11,860

)

(24,084

)

Advances to the Jamul Tribe

 

(16,341

)

(8,573

)

Proceeds from sale of property and equipment

 

146

 

129

 

Investment in joint ventures

 

(328

)

 

Decrease in cash in escrow

 

 

18,000

 

Acquisition of gaming license

 

 

(25,586

)

Net cash used in investing activities

 

(65,312

)

(53,071

)

Financing activities

 

 

 

 

 

Proceeds from exercise of options

 

2,743

 

5,581

 

Principal payments on financing obligation with GLPI

 

(12,475

)

(11,255

)

Proceeds from issuance of long-term debt, net of issuance costs

 

45,000

 

(327

)

Principal payments on long-term debt

 

(21,886

)

(6,898

)

Proceeds from insurance financing

 

885

 

14,335

 

Payments on insurance financing

 

(4,314

)

(4,853

)

Tax benefit from stock options exercised

 

6,379

 

7,752

 

Net cash provided by financing activities

 

16,332

 

4,335

 

Net increase (decrease) in cash and cash equivalents

 

29,056

 

(5,300

)

Cash and cash equivalents at beginning of year

 

208,673

 

292,995

 

Cash and cash equivalents at end of period

 

$

237,729

 

$

287,695

 

 

 

 

 

 

 

Supplemental disclosure

 

 

 

 

 

Interest expense paid, net of amounts capitalized

 

$

100,179

 

$

99,325

 

Income taxes paid

 

$

226

 

$

352

 

 

Non-cash transactions:  In January 2015, a repayment obligation for a hotel and event center near Hollywood Casino Lawrenceburg was assumed by a subsidiary of the Company, which was financed through a loan with the City of Lawrenceburg Department of Redevelopment. This non-cash transaction increased property and equipment, net and total debt by $15.3 million. See Note 6 for further detail.

 

For the three months ended March 31, 2014, the Company recognized an increase to the financing obligation and real property assets of $25.6 million related to real estate construction costs that were funded by Gaming and Leisure Properties, Inc. for the Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course facilities. In conjunction with exercising its option to purchase Plainridge Racecourse in March 2014, the Company increased its acquired assets, other current liabilities, and other noncurrent liabilities by $60.5 million, $42.0 million, and $18.5 million, respectively. The fixed portion of the purchase price was paid on April 11, 2014 in cash.

 

See accompanying notes to the condensed consolidated financial statements.

 

10



Table of Contents

 

Penn National Gaming, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

 

1.     Organization and Basis of Presentation

 

Penn National Gaming, Inc. (“Penn”) and together with its subsidiaries (collectively, the “Company”) is a diversified, multi-jurisdictional owner and manager of gaming and pari-mutuel properties. As of March 31, 2015, the Company owned, managed, or had ownership interests in twenty-six facilities in the following seventeen jurisdictions: Florida, Illinois, Indiana, Kansas, Maine, Maryland, Massachusetts, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Pennsylvania, Texas, West Virginia and Ontario, Canada.

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

 

The condensed consolidated financial statements include the accounts of Penn and its subsidiaries. Investment in and advances to unconsolidated affiliates, that do not meet the consolidation criteria of the authoritative guidance for voting interest, controlling interest or variable interest entities (“VIE”), are accounted for under the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses for the reporting periods. Actual results could differ from those estimates.  For purposes of comparability, certain prior period amounts have been reclassified to conform to the current year presentation.

 

Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. The notes to the consolidated financial statements contained in the Annual Report on Form 10-K/A for the year ended December 31, 2014 should be read in conjunction with these condensed consolidated financial statements.  The December 31, 2014 financial information has been derived from the Company’s audited consolidated financial statements.

 

2.     Restatement

 

The restatement of the Company’s financial statements primarily results from the Company’s accounting for its November 1, 2013 distribution of real estate assets to Gaming and Leisure Properties, Inc. (GLPI) under the Master Lease Agreement (the “Master Lease”), which was previously recognized as a sale-leaseback. Upon further consideration, the Company did not meet all of the requirements for sale-leaseback accounting under Accounting Standards Codification (“ASC”) 840, “Leases”, and therefore the transaction should be accounted for as a financing obligation rather than a distribution of assets followed by an operating lease.  Specifically, the lease contains provisions that would indicate that the Company has prohibited forms of continuing involvement in the leased property such that sale-leaseback accounting would not be permitted. As a result, the Company is precluded from derecognizing the real estate assets and is instead required to recognize a financing obligation for the minimum lease payments due under the Master Lease.  The restated condensed consolidated balance sheets therefore include an adjustment to property and equipment, net for the carrying value of the real property of $2.02 billion and $2.04 billion at March 31, 2015 and December 31, 2014, respectively, and additional liabilities of $3.60 billion and $3.61 billion at March 31, 2015 and December 31, 2014, respectively, representing the present value of the future minimum lease payments due to GLPI under the Master Lease and the funded construction of certain leased real assets in development at the date of the Spin-Off.  Consequently, the condensed restated consolidated statements of operations no longer report rent expense for the obligations under the Master Lease, but rather include interest expense associated with the financing obligation and depreciation expense related to the real estate assets. The lease payment amounts previously recorded as rent expense were $108.8 million and $104.3 million for the three months ended March 31, 2015 and 2014, respectively. The increases to interest expense and depreciation expense as a result of the correction of the accounting for the Master Lease are $96.0 million and $22.7 million, respectively, for the three months ended March 31, 2015, and $93.1 million and $22.3 million, respectively, for the three months ended March 31, 2014.

 

11



Table of Contents

 

This change in accounting treatment also resulted in adjustments to the carrying values of the Company’s reporting units as well as differences in the allocation of the GLPI rental obligation to the impacted reporting units, which altered each reporting unit’s fair value.

 

As part of its restatement, the Company also identified certain other errors affecting the condensed consolidated financial statements as of March 31, 2015 and December 31, 2014:

 

·                                          The Company had originally recorded goodwill and other intangible asset impairment charges of $312.5 million and $745.9 million at October 1, 2013, the date of its annual impairment test, and November 1, 2013 (the Spin-Off date), respectively, and impairment charges of $316.5 million at October 1, 2014.  The Company corrected certain errors in its goodwill and indefinite-lived gaming license intangible asset impairment analyses which incorporated the adjustments to the carrying amounts and estimated fair values of the Company’s reporting units mentioned above as well as the impact of its deferred tax valuation allowance.  This resulted in a decrease to the Company’s previously recognized impairment charges of $161.2 million and $334.1 million for the years ended December 31, 2014 and 2013, respectively, which along with the relocation fee accounting error described below, resulted in a significant increase to the Company’s goodwill and other intangible assets at both March 31, 2015 and December 31, 2014.

 

·                                          During 2014, the Company incurred an aggregate liability of $150 million to the State of Ohio in return for the right to locate its racing operations from Toledo, Ohio to Dayton, Ohio (Hollywood Gaming at Dayton Raceway) and from Grove City, Ohio to Austintown, Ohio (Hollywood Gaming at Mahoning Valley).  The Company originally accounted for these amounts as a cost of the real estate and was therefore including them in property and equipment, net and was amortizing them over the fifteen year base lease term of the Master Lease.  The Company has now concluded that these costs should have been recognized as an additional cost incurred for obtaining the gaming licenses for these two properties and capitalized as other intangible assets that are not amortized, but are considered for impairment on an annual basis or more frequently if impairment indicators exist.  This resulted in a decrease to depreciation expense of $2.7 million for the three months ended March 31, 2015.

 

·                                          The Company corrected the classification of a corporate airplane lease that had previously been accounted for as an operating lease but upon review should have been accounted for as a capital lease. This resulted in an increase to net property and equipment of $6.5 million and $7.0 million at March 31, 2015 and December 31, 2014, respectively, as well as an increase to long term debt of $24.9 million at both March 31, 2015 and December 31, 2014, respectively.  It also resulted in an increase to interest expense, with an offsetting decrease to general and administrative costs of $0.2 million for the three months ended March 31, 2015 and 2014 as well as an increase to depreciation expense of $0.5 million for the three months ended March 31, 2015 and 2014.

 

·                                          The Company concluded that as a result of the failed spin-off-leaseback accounting treatment which resulted in a significant increase to our deferred tax assets, a valuation allowance should be recorded on the Company’s deferred tax assets given the significant negative evidence associated with being in a three year cumulative pre-tax loss position and the insufficient objectively verifiable positive evidence to support the realization of the Company’s deferred tax assets.  This resulted in an increase to the Company’s income tax provision of $5.1 million and $0.2 million for the three months ended March 31, 2015 and 2014, respectively.

 

·                                          The Company concluded that the Carlino exchange transaction should have been accounted for as a treasury stock transaction that is measured using the fair value of the exchanged instruments.  See Note 3 in the Company’s Form 10-K/A for additional information.

 

·                                          The Company reclassified a contingent earn-out liability from long-term debt to other non-current liabilities which totaled $19.5 million and $19.2 million at March 31, 2015 and December 31, 2014, respectively.  Additionally, changes in the fair value of this liability which totaled $0.3 million for the three months ended March 31, 2015, were reclassified from interest expense to general and administrative expenses.

 

·                                          The Company corrected the income tax provision and related income tax balances on the condensed consolidated balance sheet and condensed consolidated statements of cash flows for each of the previously identified errors.

 

·                                          The Company corrected certain other errors that were not individually material to the condensed consolidated financial statements.

 

The condensed consolidated financial statements included in this Form 10-Q/A have been restated to reflect the adjustments described above. The following is a summary of the effect of the restatement on (i) the Company’s condensed consolidated balance

 

12



Table of Contents

 

sheets at March 31, 2015 and December 31, 2014 (ii) the Company’s condensed consolidated statements of operations for the three months ended March 31, 2015 and 2014 and (iii) the Company’s condensed consolidated statements of cash flows for the three months ended March 31, 2015 and 2014. The Company did not present a summary of the effect of the restatement on the condensed consolidated statement of changes in shareholders’ equity (deficit) for any of the above referenced periods because the impact to retained earnings on the condensed consolidated statement of changes in shareholders’ equity (deficit) is reflected below in the balance sheet. The Company did not present a summary of the effect of the restatement on the condensed consolidated statement of comprehensive income (loss) for any of the above referenced periods because the impact to net income is reflected below in the restated condensed consolidated statement of income and the restatement adjustments did not affect any other component of comprehensive income (loss).

 

13



Table of Contents

 

Penn National Gaming, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in thousands, except share and per share data)

 

The following table presents the condensed consolidated balance sheet as previously reported, restatement adjustments and the condensed consolidated balance sheet as restated at March 31, 2015:

 

 

 

As Previously

 

Restatement

 

 

 

 

 

Reported

 

Adjustments

 

As Restated

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

237,729

 

$

 

$

237,729

 

Receivables, net of allowance for doubtful accounts of $2,093

 

40,918

 

 

40,918

 

Prepaid expenses

 

82,381

 

4,039

 

86,420

 

Deferred income taxes

 

45,302

 

(11,395

)

33,907

 

Other current assets

 

10,913

 

 

10,913

 

Total current assets

 

417,243

 

(7,356

)

409,887

 

Property and equipment, net

 

802,520

 

1,880,141

 

2,682,661

 

Other assets

 

 

 

 

 

 

 

Investment in and advances to unconsolidated affiliates

 

175,574

 

 

 

175,574

 

Goodwill

 

276,173

 

598,011

 

874,184

 

Other intangible assets, net

 

370,602

 

47,503

 

418,105

 

Deferred income taxes

 

74,492

 

(74,492

)

 

Advances to the Jamul Tribe

 

86,443

 

 

86,443

 

Other assets

 

77,631

 

 

77,631

 

Total other assets

 

1,060,915

 

571,022

 

1,631,937

 

Total assets

 

$

2,280,678

 

$

2,443,807

 

$

4,724,485

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Current portion of financing obligation to GLPI

 

$

 

$

47,057

 

$

47,057

 

Current maturities of long-term debt

 

40,890

 

 

40,890

 

Accounts payable

 

66,587

 

 

66,587

 

Accrued expenses

 

135,518

 

2,221

 

137,739

 

Accrued interest

 

11,427

 

 

11,427

 

Accrued salaries and wages

 

69,671

 

 

69,671

 

Gaming, pari-mutuel, property, and other taxes

 

55,762

 

(36

)

55,726

 

Insurance financing

 

10,251

 

 

10,251

 

Other current liabilities

 

64,771

 

 

64,771

 

Total current liabilities

 

454,877

 

49,242

 

504,119

 

 

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

 

 

Long-term financing obligation to GLPI, net of current portion

 

 

3,551,981

 

3,551,981

 

Long-term debt, net of current maturities and debt issuance costs

 

1,235,061

 

5,398

 

1,240,459

 

Deferred income taxes

 

 

90,336

 

90,336

 

Noncurrent tax liabilities

 

8,171

 

(1,063

)

7,108

 

Other noncurrent liabilities

 

7,570

 

19,540

 

27,110

 

Total long-term liabilities

 

1,250,802

 

3,666,192

 

4,916,994

 

 

 

 

 

 

 

 

 

Shareholders’ equity (deficit)

 

 

 

 

 

 

 

Series C Preferred stock ($.01 par value, 18,500 shares authorized, 8,624 shares issued and outstanding at March 31, 2015)

 

 

 

 

Common stock ($.01 par value, 200,000,000 shares authorized, 81,873,026 shares issued and 79,705,633 shares outstanding, at March 31, 2015)

 

791

 

27

 

818

 

Treasury stock, at cost (2,167,393 shares issued and held at March 31, 2015)

 

 

(28,414

)

(28,414

)

Additional paid-in capital

 

929,598

 

37,776

 

967,374

 

Retained deficit

 

(352,392

)

(1,281,016

)

(1,633,408

)

Accumulated other comprehensive (loss) income

 

(2,998

)

 

(2,998

)

Total shareholders’ equity (deficit)

 

574,999

 

(1,271,627

)

(696,628

)

Total liabilities and shareholders’ equity (deficit)

 

$

2,280,678

 

$

2,443,807

 

$

4,724,485

 

 

14



Table of Contents

 

Penn National Gaming, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in thousands, except share and per share data)

 

The following table presents the condensed consolidated balance sheet as previously reported, restatement adjustments and the condensed consolidated balance sheet as restated at December 31, 2014:

 

 

 

As Previously

 

Restatement

 

 

 

 

 

Reported

 

Adjustments

 

As Restated

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

208,673

 

$

 

$

208,673

 

Receivables, net of allowance for doubtful accounts of $2,004

 

41,618

 

 

41,618

 

Prepaid expenses

 

68,947

 

1,838

 

70,785

 

Deferred income taxes

 

55,579

 

(15,236

)

40,343

 

Other current assets

 

11,189

 

 

11,189

 

Total current assets

 

386,006

 

(13,398

)

372,608

 

Property and equipment, net

 

769,145

 

1,900,587

 

2,669,732

 

Other assets

 

 

 

 

 

 

 

Investment in and advances to unconsolidated affiliates

 

179,551

 

 

179,551

 

Goodwill

 

277,582

 

596,602

 

874,184

 

Other intangible assets, net

 

370,562

 

48,891

 

419,453

 

Deferred income taxes

 

79,067

 

(79,067

)

 

Advances to Jamul Tribe

 

62,048

 

 

 

62,048

 

Other assets

 

87,318

 

 

87,318

 

Total other assets

 

1,056,128

 

566,426

 

1,622,554

 

Total assets

 

$

2,211,279

 

$

2,453,615

 

$

4,664,894

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Current portion of financing obligation to GLPI

 

 

46,884

 

46,884

 

Current maturities of long-term debt

 

30,853

 

 

30,853

 

Accounts payable

 

43,136

 

 

43,136

 

Accrued expenses

 

130,818

 

2,274

 

133,092

 

Accrued interest

 

5,163

 

 

5,163

 

Accrued salaries and wages

 

84,034

 

 

84,034

 

Gaming, pari-mutuel, property, and other taxes

 

52,132

 

(160

)

51,972

 

Insurance financing

 

13,680

 

 

13,680

 

Other current liabilities

 

75,703

 

70

 

75,773

 

Total current liabilities

 

435,519

 

49,068

 

484,587

 

 

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

 

 

Long-term financing obligation to GLPI, net of current portion

 

 

3,564,629

 

3,564,629

 

Long-term debt, net of current maturities and debt issuance costs

 

1,204,828

 

5,749

 

1,210,577

 

Deferred income taxes

 

 

78,633

 

78,633

 

Noncurrent tax liabilities

 

8,188

 

(1,153

)

7,035

 

Other noncurrent liabilities

 

8,258

 

19,189

 

27,447

 

Total long-term liabilities

 

1,221,274

 

3,667,047

 

4,888,321

 

 

 

 

 

 

 

 

 

Shareholders’ equity (deficit)

 

 

 

 

 

 

 

Series C Preferred stock ($.01 par value, 18,500 shares authorized, 8,624 shares issued and outstanding at December 31, 2014)

 

 

 

 

Common stock ($.01 par value, 200,000,000 shares authorized, 81,329,210 shares issued and 79,161,817 share outstanding, at December 31, 2014)

 

786

 

27

 

813

 

Treasury stock, at cost (2,167,393 shares held at December 31, 2014)

 

 

(28,414

)

(28,414

)

Additional paid-in capital

 

918,370

 

37,776

 

956,146

 

Retained deficit

 

(363,388

)

(1,271,889

)

(1,635,277

)

Accumulated other comprehensive (loss) income

 

(1,282

)

 

(1,282

)

Total shareholders’ equity (deficit)

 

554,486

 

(1,262,500

)

(708,014

)

Total liabilities and shareholders’ equity (deficit)

 

$

2,211,279

 

$

2,453,615

 

$

4,664,894

 

 

15



Table of Contents

 

Penn National Gaming, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share data)

 

The following table presents the condensed consolidated statement of income as previously reported, restatement adjustments and the condensed consolidated statement of income as restated for the three months ended March 31, 2015:

 

 

 

As Previously

 

Restatement

 

 

 

 

 

Reported

 

Adjustments

 

As Restated

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

Gaming

 

$

591,336

 

$

 

$

591,336

 

Food, beverage and other

 

108,763

 

 

108,763

 

Management service fee

 

1,927

 

 

1,927

 

Revenues

 

702,026

 

 

702,026

 

Less promotional allowances

 

(37,888

)

 

(37,888

)

Net revenues

 

664,138

 

 

664,138

 

Operating expenses

 

 

 

 

 

 

 

Gaming expense

 

294,895

 

 

294,895

 

Food, beverage and other

 

77,929

 

 

77,929

 

General and administrative

 

116,069

 

187

 

116,256

 

Rental expense related to Master Lease

 

108,845

 

(108,845

)

 

Depreciation and amortization

 

42,922

 

20,447

 

63,369

 

Total operating expenses

 

640,660

 

(88,211

)

552,449

 

Income from operations

 

23,478

 

88,211

 

111,689

 

 

 

 

 

 

 

 

 

Other income (expenses)

 

 

 

 

 

 

 

Interest expense

 

(12,163

)

(96,183

)

(108,346

)

Interest income

 

1,870

 

 

1,870

 

Income from unconsolidated affiliates

 

3,982

 

 

3,982

 

Other

 

3,089

 

 

3,089

 

Total other expenses

 

(3,222

)

(96,183

)

(99,405

)

 

 

 

 

 

 

 

 

Income from operations before income taxes

 

20,256

 

(7,972

)

12,284

 

Income tax (benefit) provision

 

9,260

 

1,155

 

10,415

 

Net income

 

$

10,996

 

$

(9,127

)

$

1,869

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.12

 

$

(0.10

)

$

0.02

 

Diluted earnings per common share

 

$

0.12

 

$

(0.10

)

$

0.02

 

 

16



Table of Contents

 

Penn National Gaming, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share data)

 

The following table presents the condensed consolidated statement of income as previously reported, restatement adjustments and the condensed consolidated statement of income as restated for the three months ended March 31, 2014:

 

 

 

As Previously

 

Restatement

 

 

 

 

 

Reported

 

Adjustments

 

As Restated

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

Gaming

 

$

570,683

 

$

 

$

570,683

 

Food, beverage and other

 

104,870

 

 

104,870

 

Management service fee

 

2,458

 

 

2,458

 

Revenues

 

678,011

 

 

678,011

 

Less promotional allowances

 

(36,931

)

 

(36,931

)

Net revenues

 

641,080

 

 

641,080

 

Operating expenses

 

 

 

 

 

 

 

Gaming expense

 

286,077

 

(2,809

)

283,268

 

Food, beverage and other

 

77,538

 

 

77,538

 

General and administrative

 

107,739

 

(164

)

107,575

 

Rental expense related to Master Lease

 

104,309

 

(104,309

)

 

Depreciation and amortization

 

47,366

 

22,819

 

70,185

 

Total operating expenses

 

623,029

 

(84,463

)

538,566

 

Income from operations

 

18,051

 

84,463

 

102,514

 

 

 

 

 

 

 

 

 

Other income (expenses)

 

 

 

 

 

 

 

Interest expense

 

(11,295

)

(93,219

)

(104,514

)

Interest income

 

467

 

 

467

 

Income from unconsolidated affiliates

 

2,483

 

 

2,483

 

Other

 

1,631

 

 

1,631

 

Total other expenses

 

(6,714

)

(93,219

)

(99,933

)

 

 

 

 

 

 

 

 

Income from operations before income taxes

 

11,337

 

(8,756

)

2,581

 

Income tax (benefit) provision

 

6,800

 

(4,799

)

2,001

 

Net income

 

$

4,537

 

$

(3,957

)

$

580

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.05

 

$

(0.04

)

$

0.01

 

Diluted earnings per common share

 

$

0.05

 

$

(0.04

)

$

0.01

 

 

17



Table of Contents

 

Penn National Gaming, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(in thousands)

 

The following table presents the condensed consolidated statement of cash flow as previously reported, restatement adjustments and the condensed consolidated statement of cash flows as restated for the three months ended March 31, 2015:

 

 

 

As Previously

 

Restatement

 

 

 

 

 

Reported

 

Adjustments

 

As Restated

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2015:

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

 

Net income

 

$

10,996

 

$

(9,127

)

$

1,869

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

42,922

 

20,447

 

63,369

 

Amortization of items charged to interest expense

 

1,505

 

 

1,505

 

Accretion of settlement value on other noncurrent liabilities

 

351

 

 

351

 

Loss on sale of fixed assets

 

153

 

 

153

 

Income from unconsolidated affiliates

 

(3,982

)

 

(3,982

)

Distributions of earnings from unconsolidated affiliates

 

8,000

 

 

8,000

 

Deferred income taxes

 

15,374

 

3,274

 

18,648

 

Charge for stock-based compensation

 

2,084

 

 

2,084

 

Decrease (increase)

 

 

 

 

 

 

 

Accounts receivable

 

727

 

 

727

 

Prepaid expenses and other current assets

 

(2,742

)

 

(2,742

)

Other assets

 

6,400

 

 

6,400

 

Increase (decrease)

 

 

 

 

 

 

 

Accounts payable

 

2,887

 

 

2,887

 

Accrued expenses

 

4,985

 

(54

)

4,931

 

Accrued interest

 

6,264

 

 

6,264

 

Accrued salaries and wages

 

(14,363

)

 

(14,363

)

Gaming, pari-mutuel, property and other taxes

 

3,630

 

124

 

3,754

 

Income taxes

 

(9,529

)

(2,209

)

(11,738

)

Other current and noncurrent liabilities

 

(11,620

)

(70

)

(11,690

)

Other noncurrent tax liabilities

 

1,519

 

90

 

1,609

 

Net cash provided by operating activities

 

65,561

 

12,475

 

78,036

 

Investing activities

 

 

 

 

 

 

 

Capital project expenditures, net of reimbursements

 

(36,929

)

 

(36,929

)

Capital maintenance expenditures

 

(11,860

)

 

(11,860

)

Advances to Jamul Tribe

 

(16,341

)

 

(16,341

)

Proceeds from sale of property and equipment

 

146

 

 

146

 

Investment in joint ventures

 

(328

)

 

(328

)

Net cash used in investing activities

 

(65,312

)

 

(65,312

)

Financing activities

 

 

 

 

 

 

 

Proceeds from exercise of options

 

2,743

 

 

 

2,743

 

Principal payments on financing obligation with GLPI

 

 

(12,475

)

(12,475

)

Proceeds from issuance of long-term debt, net of issuance costs

 

45,000

 

 

45,000

 

Principal payments on long-term debt

 

(21,886

)

 

(21,886

)

Proceeds from insurance financing

 

885

 

 

885

 

Payments on insurance financing

 

(4,314

)

 

(4,314

)

Tax benefit from stock options exercised

 

6,379

 

 

6,379

 

Net cash provided by (used in) financing activities

 

28,807

 

(12,475

)

16,332

 

Net increase (decrease) in cash and cash equivalents

 

29,056

 

 

29,056

 

Cash and cash equivalents at beginning of year

 

208,673

 

 

208,673

 

Cash and cash equivalents at end of year

 

$

237,729

 

$

 

$

237,729

 

 

 

 

 

 

 

 

 

Supplemental disclosure

 

 

 

 

 

 

 

Interest expense paid, net of amounts capitalized

 

$

4,036

 

$

96,143

 

$

100,179

 

Income taxes paid

 

$

226

 

$

 

$

226

 

 

18



Table of Contents

 

Penn National Gaming, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(in thousands)

 

The following table presents the condensed consolidated statement of cash flow as previously reported, restatement adjustments and the condensed consolidated statement of cash flows as restated for the three months ended March 31, 2014:

 

 

 

As Previously

 

Restatement

 

 

 

 

 

Reported

 

Adjustments

 

As Restated

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2014:

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

 

Net income

 

$

4,537

 

$

(3,957

)

$

580

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

47,366

 

22,819

 

70,185

 

Amortization of items charged to interest expense

 

1,507

 

 

1,507

 

Gain on sale of fixed assets

 

(49

)

 

(49

)

Income from unconsolidated affiliates

 

(2,483

)

 

(2,483

)

Distributions of earnings from unconsolidated affiliates

 

5,500

 

 

5,500

 

Deferred income taxes

 

1,803

 

(1,515

)

288

 

Charge for stock-based compensation

 

2,579

 

 

2,579

 

Decrease (increase)

 

 

 

 

 

 

 

Accounts receivable

 

(599

)

 

(599

)

Prepaid expenses and other current assets

 

(12,739

)

(365

)

(13,104

)

Other assets

 

(1,854

)

8,941

 

7,087

 

Increase (decrease)

 

 

 

 

 

 

 

Accounts payable

 

2,186

 

 

2,186

 

Accrued expenses

 

(11,384

)

(2,882

)

(14,266

)

Accrued interest

 

2,484

 

 

2,484

 

Accrued salaries and wages

 

(15,590

)

(40

)

(15,630

)

Gaming, pari-mutuel, property and other taxes

 

2,768

 

(27

)

2,741

 

Income taxes

 

(7,582

)

 

(7,582

)

Other current and noncurrent liabilities

 

669

 

138

 

807

 

Other noncurrent tax liabilities

 

4,489

 

(3,284

)

1,205

 

Net cash provided by operating activities

 

23,608

 

19,828

 

43,436

 

Investing activities

 

 

 

 

 

 

 

Capital project expenditures, net of reimbursements

 

(12,957

)

 

(12,957

)

Capital maintenance expenditures

 

(24,084

)

 

(24,084

)

Advances to Jamul Tribe

 

 

(8,573

)

(8,573

)

Proceeds from sale of property and equipment

 

129

 

 

129

 

Decrease in cash in escrow

 

18,000

 

 

18,000

 

Acquisition of gaming license

 

(25,586

)

 

(25,586

)

Net cash used in investing activities

 

(44,498

)

(8,573

)

(53,071

)

Financing activities

 

 

 

 

 

 

 

Proceeds from exercise of options

 

5,581

 

 

5,581

 

Principal payments on financing obligation with GLPI

 

 

(11,255

)

(11,255

)

Proceeds from issuance of long-term debt, net of issuance costs

 

(327

)

 

(327

)

Principal payments on long-term debt

 

(6,898

)

 

(6,898

)

Proceeds from insurance financing

 

14,335

 

 

14,335

 

Payments on insurance financing

 

(4,853

)

 

(4,853

)

Tax benefit from stock options exercised

 

7,752

 

 

7,752

 

Net cash provided by (used in) financing activities

 

15,590

 

(11,255

)

4,335

 

Net increase (decrease) in cash and cash equivalents

 

(5,300

)

 

(5,300

)

Cash and cash equivalents at beginning of year

 

292,995

 

 

292,995

 

Cash and cash equivalents at end of year

 

$

287,695

 

$

 

$

287,695

 

 

 

 

 

 

 

 

 

Supplemental disclosure

 

 

 

 

 

 

 

Interest expense paid, net of amounts capitalized

 

$

7,278

 

$

92,047

 

$

99,325

 

Income taxes paid

 

$

352

 

$

 

$

352

 

 

19



Table of Contents

 

3.  Summary of Significant Accounting Policies

 

Revenue Recognition and Promotional Allowances

 

Gaming revenue consists mainly of slot and video lottery gaming machine revenue as well as to a lesser extent table game and poker revenue. Gaming revenue is the aggregate net difference between gaming wins and losses, with liabilities recognized for funds deposited by customers before gaming play occurs, for “ticket-in, ticket-out” coupons in the customers’ possession, and for accruals related to the anticipated payout of progressive jackpots. Progressive slot machines, which contain base jackpots that increase at a progressive rate based on the number of coins played, are charged to revenue as the amount of the jackpots increases. Table game revenue is the aggregate of table drop adjusted for the change in aggregate table chip inventory. Table drop is the total dollar amount of the currency, coins, chips, tokens and outstanding markers (credit instruments) that are removed from the live gaming tables.

 

Food, beverage and other revenue, including racing revenue, is recognized as services are performed. Racing revenue includes the Company’s share of pari-mutuel wagering on live races after payment of amounts returned as winning wagers, its share of wagering from import and export simulcasting, and its share of wagering from its off-track wagering facilities.

 

Revenue from the management service contract for Casino Rama is based upon contracted terms and is recognized when services are performed.

 

Revenues are recognized net of certain sales incentives in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-50, “Revenue Recognition—Customer Payments and Incentives.” The Company records certain sales incentives and points earned in point-loyalty programs as a reduction of revenue.

 

The retail value of accommodations, food and beverage, and other services furnished to guests without charge is included in gross revenues and then deducted as promotional allowances. The estimated cost of providing such promotional allowances is primarily included in food, beverage and other expense.

 

The amounts included in promotional allowances for the three months ended March 31, 2015 and 2014 are as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

Rooms

 

$

8,336

 

$

8,071

 

Food and beverage

 

27,448

 

26,598

 

Other

 

2,104

 

2,262

 

Total promotional allowances

 

$

37,888

 

$

36,931

 

 

The estimated cost of providing such complimentary services for the three months ended March 31, 2015 and 2014 are as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

Rooms

 

$

936

 

$

872

 

Food and beverage

 

10,833

 

10,975

 

Other

 

832

 

843

 

Total cost of complimentary services

 

$

12,601

 

$

12,690

 

 

Gaming and Racing Taxes

 

The Company is subject to gaming and pari-mutuel taxes based on gross gaming revenue and pari-mutuel revenue in the jurisdictions in which it operates. The Company primarily recognizes gaming and pari-mutuel tax expense based on the statutorily required percentage of revenue that is required to be paid to state and local jurisdictions in the states where or in which wagering occurs. In certain states in which the Company operates, gaming taxes are based on graduated rates. The Company records gaming tax expense at the Company’s estimated effective gaming tax rate for the year, considering estimated taxable gaming revenue and the applicable rates. Such estimates are adjusted each interim period. If gaming tax rates change during the year, such changes are applied

 

20



Table of Contents

 

prospectively in the determination of gaming tax expense in future interim periods. Finally, the Company recognizes purse expense based on the statutorily required percentage of revenue that is required to be paid out in the form of purses to the winning owners of horse races run at the Company’s racetracks in the period in which wagering occurs. For the three months ended March 31, 2015, these expenses, which are recorded primarily within gaming expense in the condensed consolidated statements of income, were $227.0 million, as compared to $216.7 million for the three months ended March 31, 2014.

 

Failed Spin-Off-Leaseback Financing Obligation

 

The Company’s spin-off of real property assets and corresponding Master Lease Agreement with GLPI on November 1, 2013 did not meet all of the requirements for sale-leaseback accounting treatment under Accounting Standards Codification (ASC) 840 “Leases” and therefore is accounted for as a financing obligation rather than a distribution of assets followed by an operating lease.  Specifically, the Master Lease contains provisions that would indicate the Company has prohibited forms of continuing involvement in the leased assets which are not a normal leaseback.  As a result of the failed spin-off-leaseback accounting, the Company calculated a financing obligation at the inception of the Master Lease based on the future minimum lease payments discounted at 9.70%.  The discount rate represents the estimated incremental borrowing rate over the lease term of 35 years, which included renewal options that were reasonably assured of being exercised given the high percentage of the Company’s earnings that are derived from the Master Lease properties operations to the Company and the lack of alternative economically feasible leasing options for such real estate.  The minimum lease payments are recorded as interest expense and in part as a payment of principal reducing the financing obligation.  Contingent rentals are recorded as additional interest expense.  The real property assets in the transaction remain on the consolidated balance sheets and continue to be depreciated over the remaining useful lives.

 

Payments related to the Master Lease

 

As of March 31, 2015, the Company financed with GLPI real property assets associated with eighteen of the Company’s gaming and related facilities used in the Company’s operations.

 

The rent structure under the Master Lease, which became effective November 1, 2013, includes a fixed component, a portion of which is subject to an annual  escalator of up to 2% if certain rent coverage ratio thresholds are met, and a variable component that is based on the performance of the facilities, which is prospectively adjusted, subject to a floor of zero (i) every five years by an amount equal to 4% of the average change to net revenues of all facilities under the Master Lease (other than Hollywood Casino Columbus and Hollywood Casino Toledo) during the preceding five years, and (ii) monthly by an amount equal to 20% of the change in net revenues of Hollywood Casino Columbus and Hollywood Casino Toledo during the preceding month.  In addition, with the openings of Hollywood Gaming at Mahoning Valley Race Course and Hollywood Gaming at Dayton Raceway in the third quarter of 2014, these properties began paying rent subject to the terms of the Master Lease, for which the rental obligation is calculated as ten percent of the real estate construction costs paid for by GLPI related to these facilities.

 

The Master Lease is commonly known as a triple-net lease. Accordingly, in addition to rent, the Company is required to pay the following, among other things: (1) all facility maintenance; (2) all insurance required in connection with the leased properties and the business conducted on the leased properties; (3) taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor); and (4) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties. At the Company’s option, the Master Lease may be extended for up to four five-year renewal terms beyond the initial fifteen-year term, on the same terms and conditions.

 

Total payments under the Master Lease were $108.8 million for the three months ended March 31, 2015, as compared to $104.3 million for the three months ended March 31, 2014.

 

Long-term asset related to the Jamul Tribe

 

On April 5, 2013, the Company announced that, subject to final National Indian Gaming Commission approval, it and the Jamul Indian Village of California (the “Jamul Tribe”) had entered into definitive agreements to jointly develop a Hollywood Casino-branded casino on the Jamul Tribe’s trust land in San Diego County, California.  The definitive agreements were entered into to: (i) secure the development, management, and branding services of the Company to assist the Jamul Tribe during the pre-development and entitlement phase of the project; (ii) set forth the terms and conditions under which the Company will provide a loan or loans to the Jamul Tribe to fund certain development costs; and (iii) create an exclusive arrangement between the parties.

 

The Jamul Tribe is a federally recognized Indian Tribe holding a government-to-government relationship with the U.S. through the U.S. Department of the Interior’s Bureau of Indian Affairs and possessing certain inherent powers of self-government.  The Jamul Tribe is the beneficial owner of approximately six acres of reservation land located within the exterior boundaries of the State of California held by the U.S. in trust for the Jamul Tribe (the “Property”).  The Jamul Tribe exercises jurisdiction over the

 

21



Table of Contents

 

Property pursuant to its powers of self-government and consistent with the resolutions and ordinances of the Jamul Tribe.  The arrangement between the Jamul Tribe and the Company provides the Jamul Tribe with the expertise, knowledge and capacity of a proven developer and operator of gaming facilities and provides the Company with the exclusive right to administer and oversee planning, designing, development, construction management, and coordination during the development and construction of the project as well as the management of a gaming facility on the Property.

 

The proposed $360 million development project will include a three-story gaming and entertainment facility of approximately 200,000 square feet featuring over 1,700 slot machines, 43 live table games, including poker, multiple restaurants, bars and lounges and a partially enclosed parking structure with over 1,800 spaces.  In mid-January 2014, the Company announced the commencement of construction activities at the site and it is anticipated that the facility will open in mid-2016.  The Company may, under certain circumstances, provide backstop financing to the Jamul Tribe in connection with the project and, upon opening, will manage and provide branding for the casino. The Company has a conditional loan commitment to the Jamul Tribe (that can be terminated under certain circumstances) for up to $400 million and anticipates it will fund approximately $360 million related to this development.

 

The Company is accounting for the development agreement and related loan commitment letter with the Jamul Tribe as a loan (note receivable) with accrued interest in accordance with ASC 310 “Receivables.”  The loan represents advances made by the Company to the Jamul Tribe for the development and construction of a gaming facility for the Jamul Tribe on reservation land.  As such, the Jamul Tribe will own the casino and its related assets and liabilities.  San Diego Gaming Ventures, LLC (a wholly owned subsidiary of the Company) is a separate legal entity established to account for the loan and, upon completion of the project and subsequent commencement of gaming operations on the Property, will be the Penn entity which receives management and branding fees from the Jamul Tribe.  The Company has a note receivable with the Jamul Tribe for $86.4 million and $62.0 million, which includes accrued interest of $5.0 million and $3.3 million, at March 31, 2015 and December 31, 2014, respectively. Collectability of the note receivable will be derived from the revenues of the casino operations once the project is completed.  Based on the Company’s current progress with this project, the Company believes collectability of the note is highly certain.  However, in the event that the Company’s internal projections related to the profitability of this project and/or the timing of the opening are inaccurate, the Company may be required to record a reserve related to the collectability of this note receivable.

 

The Company considered whether the arrangement with the Jamul Tribe represents a variable interest that should be accounted for pursuant to the VIE Subsections of ASC 810 “Consolidation” (“ASC 810”).  The Company noted that the scope and scope exceptions of ASC 810-10-15-12(e) states that a reporting entity shall not consolidate a government organization or financing entity established by a government organization (other than certain financing entities established to circumvent the provisions of the VIE Subsections of ASC 810).  Based on the status of the Jamul Tribe as a government organization, the Company believes its arrangement with the Jamul Tribe is not within the scope defined by ASC 810.

 

Earnings Per Share

 

The Company calculates earnings per share (“EPS”) in accordance with ASC 260, “Earnings Per Share” (“ASC 260”). Basic EPS is computed by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the additional dilution for all potentially-dilutive securities such as stock options and unvested restricted shares.

 

At March 31, 2015 and 2014, the Company had outstanding 8,624 shares of Series C Convertible Preferred Stock. The Company determined that the preferred stock qualified as a participating security as defined in ASC 260 since these securities participate in dividends with the Company’s common stock. In accordance with ASC 260, a company is required to use the two-class method when computing EPS when a company has a security that qualifies as a “participating security.” The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. A participating security is included in the computation of basic EPS using the two-class method. Under the two-class method, basic EPS for the Company’s common stock is computed by dividing net income applicable to common stock by the weighted-average common shares outstanding during the period. Diluted EPS for the Company’s common stock is computed using the more dilutive of the two-class method or the if-converted method.

 

The following table sets forth the allocation of net income for the three months ended March 31, 2015 and 2014 under the two-class method:

 

22



Table of Contents

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

 

 

(Restated)

 

(Restated)

 

 

 

(in thousands)

 

Net income

 

$

1,869

 

$

580

 

Net income applicable to preferred stock

 

183

 

58

 

Net income applicable to common stock

 

$

1,686

 

$

522

 

 

The following table reconciles the weighted-average common shares outstanding used in the calculation of basic EPS to the weighted-average common shares outstanding used in the calculation of diluted EPS for the three months ended March 31, 2015 and 2014:

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

Determination of shares:

 

 

 

 

 

Weighted-average common shares outstanding

 

79,400

 

77,917

 

Assumed conversion of dilutive employee stock-based awards

 

2,296

 

2,003

 

Assumed conversion of restricted stock

 

72

 

135

 

Diluted weighted-average common shares outstanding before participating security

 

81,768

 

80,055

 

Assumed conversion of preferred stock

 

8,624