Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2014

 

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 October 30 2014

Common Stock, par value $.01 per share

 

78,703,844 (includes132,497 shares of restricted stock)

 

 

 



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, including favorable resolution of any related litigation, including the ongoing appeal by the Ohio Roundtable addressing the legality of video lottery terminals in Ohio; 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; 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; 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); with respect to our Massachusetts project, the ultimate location of the other gaming facilities in the state and; with respect to our joint venture project in New York, risks related to our ability to secure local support for our site, licensing from the state and the extent and location of other applications and competition; 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 and to agree to terms 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; changes in accounting standards; our dependence on key personnel; the impact of terrorism and other international hostilities; the impact of weather; and other factors as discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, subsequent Quarterly Reports on Form 10-Q 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.

 

2



Table of Contents

 

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

PART I.

FINANCIAL INFORMATION

4

 

 

 

ITEM 1.

FINANCIAL STATEMENTS (Unaudited)

4

 

Condensed Consolidated Balance Sheets — September 30, 2014 and December 31, 2013

4

 

Condensed Consolidated Statements of Operations — Three and Nine Months Ended September 30, 2014 and 2013

5

 

Condensed Consolidated Statements of Comprehensive Income — Three and Nine Months Ended September 30, 2014 and 2013

6

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity — Nine Months Ended September 30, 2014 and 2013

7

 

Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2014 and 2013

8

 

Notes to the Condensed Consolidated Financial Statements

9

 

 

 

ITEM 2.

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

23

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

42

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

42

 

 

 

PART II.

OTHER INFORMATION

42

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

42

 

 

 

ITEM 1A.

RISK FACTORS

43

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

43

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

43

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

43

 

 

 

ITEM 5.

OTHER INFORMATION

43

 

 

 

ITEM 6.

EXHIBITS

44

 

 

 

SIGNATURES

45

 

 

EXHIBIT INDEX

46

 

3



Table of Contents

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

230,707

 

$

292,995

 

Receivables, net of allowance for doubtful accounts of $2,243 and $2,752 at September 30, 2014 and December 31, 2013, respectively

 

42,303

 

52,538

 

Prepaid expenses

 

45,807

 

62,724

 

Deferred income taxes

 

74,589

 

71,093

 

Other current assets

 

10,667

 

29,511

 

Total current assets

 

404,073

 

508,861

 

Property and equipment, net

 

745,355

 

497,457

 

Other assets

 

 

 

 

 

Investment in and advances to unconsolidated affiliates

 

183,067

 

193,331

 

Goodwill

 

491,048

 

492,398

 

Other intangible assets

 

475,096

 

359,648

 

Debt issuance costs, net of accumulated amortization of $5,330 and $922 at September 30, 2014 and December 31, 2013, respectively

 

26,617

 

30,734

 

Deferred income taxes

 

8,898

 

 

Other assets

 

128,945

 

101,562

 

Total other assets

 

1,313,671

 

1,177,673

 

Total assets

 

$

2,463,099

 

$

2,183,991

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current maturities of long-term debt

 

$

30,547

 

$

27,598

 

Accounts payable

 

41,689

 

22,580

 

Accrued expenses

 

136,582

 

98,009

 

Accrued interest

 

7,457

 

5,027

 

Accrued salaries and wages

 

83,505

 

86,498

 

Gaming, pari-mutuel, property, and other taxes

 

65,290

 

52,053

 

Insurance financing

 

3,035

 

3,020

 

Other current liabilities

 

72,166

 

66,684

 

Total current liabilities

 

440,271

 

361,469

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

Long-term debt, net of current maturities

 

1,198,848

 

1,023,194

 

Deferred income taxes

 

 

13,912

 

Noncurrent tax liabilities

 

19,318

 

19,966

 

Other noncurrent liabilities

 

6,424

 

7,050

 

Total long-term liabilities

 

1,224,590

 

1,064,122

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Series B Preferred stock ($.01 par value, 1,000,000 shares authorized, 0 shares issued at September 30, 2014 and December 31, 2013)

 

 

 

Series C Preferred stock ($.01 par value, 18,500 shares authorized, 8,624 shares issued at September 30, 2014 and December 31, 2013)

 

 

 

Common stock ($.01 par value, 200,000,000 shares authorized, 78,653,531 and 77,788,393 shares issued at September 30, 2014 and December 31, 2013, respectively)

 

781

 

775

 

Additional paid-in capital

 

911,615

 

887,556

 

Retained deficit

 

(113,584

)

(130,314

)

Accumulated other comprehensive (loss) income

 

(574

)

383

 

Total shareholders’ equity

 

798,238

 

758,400

 

Total liabilities and shareholders’ equity

 

$

2,463,099

 

$

2,183,991

 

 

See accompanying notes to the condensed consolidated financial statements.

 

4



Table of Contents

 

Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Gaming

 

$

573,216

 

$

641,777

 

$

1,720,057

 

$

2,039,531

 

Food, beverage and other

 

107,266

 

112,687

 

322,710

 

355,591

 

Management service fee

 

3,240

 

3,685

 

8,803

 

10,399

 

Revenues

 

683,722

 

758,149

 

2,051,570

 

2,405,521

 

Less promotional allowances

 

(37,782

)

(43,714

)

(112,404

)

(131,469

)

Net revenues

 

645,940

 

714,435

 

1,939,166

 

2,274,052

 

Operating expenses

 

 

 

 

 

 

 

 

 

Gaming

 

288,355

 

325,576

 

858,539

 

1,029,483

 

Food, beverage and other

 

79,040

 

84,471

 

236,981

 

263,646

 

General and administrative

 

116,510

 

131,140

 

332,147

 

395,447

 

Rental expense related to Master Lease

 

104,625

 

 

313,547

 

 

Depreciation and amortization

 

40,253

 

79,968

 

134,802

 

237,654

 

Impairment losses

 

 

 

4,560

 

71,846

 

Insurance (recoveries) deductible charges

 

(5,674

)

 

(5,674

)

2,500

 

Total operating expenses

 

623,109

 

621,155

 

1,874,902

 

2,000,576

 

Income from operations

 

22,831

 

93,280

 

64,264

 

273,476

 

 

 

 

 

 

 

 

 

 

 

Other income (expenses)

 

 

 

 

 

 

 

 

 

Interest expense

 

(11,189

)

(25,060

)

(33,376

)

(80,044

)

Interest income

 

1,025

 

369

 

2,282

 

974

 

Income from unconsolidated affiliates

 

2,291

 

2,296

 

6,247

 

7,838

 

Other

 

1,583

 

(436

)

1,391

 

2,630

 

Total other expenses

 

(6,290

)

(22,831

)

(23,456

)

(68,602

)

 

 

 

 

 

 

 

 

 

 

Income from operations before income taxes

 

16,541

 

70,449

 

40,808

 

204,874

 

Income tax provision

 

8,042

 

29,132

 

23,596

 

110,466

 

Net income

 

$

8,499

 

$

41,317

 

$

17,212

 

$

94,408

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.10

 

$

0.43

 

$

0.20

 

$

0.98

 

Diluted earnings per common share

 

$

0.10

 

$

0.40

 

$

0.19

 

$

0.92

 

 

See accompanying notes to the condensed consolidated financial statements.

 

5



Table of Contents

 

Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in thousands) (unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

8,499

 

$

41,317

 

$

17,212

 

$

94,408

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment during the period

 

(876

)

302

 

(957

)

(697

)

Change in fair value of corporate debt securities

 

 

 

 

 

 

 

 

 

Unrealized holding losses on corporate debt securities arising during the period

 

 

 

 

(98

)

Less: Reclassification adjustments for gains included in net income

 

 

 

 

(1,296

)

Change in fair value of corporate debt securities, net

 

 

 

 

(1,394

)

Other comprehensive income (loss)

 

(876

)

302

 

(957

)

(2,091

)

Comprehensive income

 

$

7,623

 

$

41,619

 

$

16,255

 

$

92,317

 

 

See accompanying notes to the condensed consolidated financial statements.

 

6



Table of Contents

 

Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(in thousands, except share data) (unaudited)

 

 

 

Preferred Stock

 

Common Stock

 

Additional
Paid-In

 

Retained
Earnings

 

Accumulated Other
Comprehensive

 

Total
Shareholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

(Deficit)

 

Income (Loss)

 

Equity

 

Balance, December 31, 2012

 

12,275

 

$

 

77,446,601

 

$

769

 

$

1,451,965

 

$

795,173

 

$

3,022

 

$

2,250,929

 

Repurchase of preferred stock

 

(225

)

 

 

 

(22,275

)

 

 

(22,275

)

Share-based compensation arrangements, net of tax benefits of $7,805

 

 

 

1,837,927

 

16

 

71,238

 

 

 

71,254

 

Change in fair value of corporate debt securities

 

 

 

 

 

 

 

(1,394

)

(1,394

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

(697

)

(697

)

Net income

 

 

 

 

 

 

94,408

 

 

94,408

 

Balance, September 30, 2013

 

12,050

 

$

 

79,284,528

 

$

785

 

$

1,500,928

 

$

889,581

 

$

931

 

$

2,392,225

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2013

 

8,624

 

$

 

77,788,393

 

$

775

 

$

887,556

 

$

(130,314

)

$

383

 

$

758,400

 

Share-based compensation arrangements, net of tax benefits of $9,830

 

 

 

865,138

 

6

 

24,059

 

 

 

24,065

 

Distribution of net assets to Gaming and Leisure Properties, Inc (See Note 2)

 

 

 

 

 

 

(482

)

 

(482

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

(957

)

(957

)

Net income

 

 

 

 

 

 

17,212

 

 

17,212

 

Balance, September 30, 2014

 

8,624

 

$

 

78,653,531

 

$

781

 

$

911,615

 

$

(113,584

)

$

(574

)

$

798,238

 

 

See accompanying notes to the condensed consolidated financial statements.

 

7



Table of Contents

 

Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands) (unaudited)

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

2014

 

2013

 

Operating activities

 

 

 

 

 

Net income

 

$

17,212

 

$

94,408

 

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

 

 

 

 

 

Depreciation and amortization

 

134,802

 

237,654

 

Amortization of items charged to interest expense

 

4,532

 

6,450

 

Accretion of settlement value on long term obligations

 

456

 

1,217

 

Loss on sale of fixed assets

 

98

 

2,833

 

Hollywood Casino St. Louis tornado deductible charges

 

 

2,500

 

Income from unconsolidated affiliates

 

(6,247

)

(7,838

)

Distributions of earnings from unconsolidated affiliates

 

17,500

 

17,000

 

Deferred income taxes

 

(24,972

)

(16,567

)

Charge for stock-based compensation

 

8,012

 

18,070

 

Impairment losses and write downs

 

7,860

 

71,846

 

Gain on investment in corporate debt securities

 

 

(1,325

)

Gain on sale of Bullwhackers

 

 

(444

)

Decrease (increase), net of businesses acquired

 

 

 

 

 

Accounts receivable

 

9,469

 

9,443

 

Insurance receivable

 

 

(1,062

)

Prepaid expenses and other current assets

 

(4,467

)

(7,814

)

Other assets

 

4,325

 

(35,391

)

Increase (decrease), net of businesses acquired

 

 

 

 

 

Accounts payable

 

4,019

 

(2,672

)

Accrued expenses

 

(11,427

)

(30,700

)

Accrued interest

 

2,430

 

(9,288

)

Accrued salaries and wages

 

(2,993

)

(11,124

)

Gaming, pari-mutuel, property and other taxes

 

13,237

 

16,472

 

Income taxes

 

25,205

 

66,059

 

Other current and noncurrent liabilities

 

4,856

 

5,777

 

Other noncurrent tax liabilities

 

777

 

2,454

 

Net cash provided by operating activities

 

204,684

 

427,958

 

Investing activities

 

 

 

 

 

Capital project expenditures, net of reimbursements

 

(95,568

)

(96,967

)

Capital maintenance expenditures

 

(65,699

)

(62,106

)

Advances to Jamul Tribe

 

(30,499

)

 

Proceeds from sale of property and equipment

 

1,172

 

3,272

 

Proceeds from sale of investment in corporate debt securities

 

 

6,679

 

Proceeds from sale of Bullwhackers, net of cash on hand

 

 

4,996

 

Investment in joint ventures

 

(1,000

)

(500

)

Decrease in cash in escrow

 

18,000

 

26,000

 

Acquisition of businesses and gaming and other licenses

 

(118,678

)

(590

)

Net cash used in investing activities

 

(292,272

)

(119,216

)

Financing activities

 

 

 

 

 

Proceeds from exercise of options

 

6,223

 

45,379

 

Repurchase of preferred stock

 

 

(22,275

)

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

 

64,935

 

20,064

 

Principal payments on long-term debt

 

(40,703

)

(351,361

)

Principal payments on long-term obligations

 

(15,000

)

 

Proceeds from insurance financing

 

14,816

 

15,306

 

Payments on insurance financing

 

(14,801

)

(16,256

)

Tax benefit from share based awards exercised

 

9,830

 

7,805

 

Net cash provided by (used in) financing activities

 

25,300

 

(301,338

)

Net (decrease) increase in cash and cash equivalents

 

(62,288

)

7,404

 

Cash and cash equivalents at beginning of year

 

292,995

 

260,467

 

Cash and cash equivalents at end of period

 

$

230,707

 

$

267,871

 

 

 

 

 

 

 

Supplemental disclosure

 

 

 

 

 

Interest expense paid, net of amounts capitalized

 

$

25,946

 

$

82,296

 

Income taxes paid

 

$

11,247

 

$

58,349

 

 

See accompanying notes to the condensed consolidated financial statements.

 

8



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 September 30, 2014, 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. On July 30, 2014, the Company closed its facility in Sioux City, Iowa.  In addition, Beulah Park and Raceway Park in Ohio were closed as the racetracks were relocated to Hollywood Gaming at Mahoning Valley Race Course, which opened on September 17, 2014, and Hollywood Gaming at Dayton Raceway, which opened on August 28, 2014, respectively.

 

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, 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 nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The notes to the consolidated financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2013 should be read in conjunction with these condensed consolidated financial statements.  The December 31, 2013 financial information has been derived from the Company’s audited consolidated financial statements.

 

2.  Spin-Off of Real Estate Assets through a Real Estate Investment Trust

 

On November 1, 2013, the Company completed its plan to separate its gaming operating assets from its real property assets by creating a newly formed, publicly traded real estate investment trust (“REIT”), known as Gaming and Leisure Properties, Inc. (“GLPI”), through a tax free spin-off (the “Spin-Off”). Penn effected the Spin-Off by distributing one share of common stock of GLPI to the holders of Penn common stock and Series C Convertible Preferred Stock (“Series C Preferred Stock”) for every share of Penn common stock and every 1/1000th of a share of Series C Preferred Stock that they held at the close of business on October 16, 2013, the record date for the Spin-Off. In addition, through a series of internal corporate restructurings, Penn contributed to GLPI substantially all of the assets and liabilities associated with Penn’s real property interests and real estate development business, as well as all of the assets and liabilities of Hollywood Casino Baton Rouge and Hollywood Casino Perryville, which are referred to as the “TRS Properties.” As a result of the Spin-Off, GLPI owns substantially all of Penn’s former real property assets and leases back those assets (other than the TRS Properties) to Penn for use by its subsidiaries, under a “triple net” master lease agreement (the “Master Lease”) (which has a 15-year initial term that can be extended at Penn’s option for up to four five-year renewal terms), as well as owns and operates the TRS Properties. Penn continues to operate the leased gaming facilities and hold the associated gaming licenses with these facilities.

 

On November 1, 2013, Penn entered into a Tax Matters Agreement with GLPI, which governs the respective rights, responsibilities and obligations of the two companies after the Spin-Off with respect to payment of tax liabilities, entitlement of refunds, and filing of tax returns and sets forth certain covenants and indemnities.  Pursuant to the Tax Matters Agreement, Penn has prepared and filed a federal consolidated income tax return for 2013, which included a combination of Penn and GLPI legal entities for the activity prior to the Spin-Off. Adjustments in the future for the impact of the final consolidated income tax return will be recorded to either shareholders’ equity or the statement of income depending on the specific item giving rise to the adjustment. In

 

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conjunction with the filing of the final 2013 consolidated income tax return with the Internal Revenue Service, Penn recorded a decrease to shareholders’ equity of $0.5 million updated to reflect returns have been filed during the nine months ended September 30, 2014.

 

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 and nine months ended September 30, 2014 and 2013 are as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(in thousands)

 

Rooms

 

$

8,955

 

$

9,639

 

$

25,452

 

$

27,951

 

Food and beverage

 

26,228

 

31,327

 

79,620

 

95,049

 

Other

 

2,599

 

2,748

 

7,332

 

8,469

 

Total promotional allowances

 

$

37,782

 

$

43,714

 

$

112,404

 

$

131,469

 

 

The estimated cost of providing such complimentary services for the three and nine months ended September 30, 2014 and 2013 are as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(in thousands)

 

Rooms

 

$

2,737

 

$

2,946

 

$

7,949

 

$

8,741

 

Food and beverage

 

10,999

 

13,138

 

33,561

 

40,066

 

Other

 

1,320

 

1,396

 

3,875

 

4,485

 

Total cost of complimentary services

 

$

15,056

 

$

17,480

 

$

45,385

 

$

53,292

 

 

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

 

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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 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 and nine months ended September 30, 2014, these expenses, which are recorded primarily within gaming expense in the condensed consolidated statements of operations, were $221.5 million and $664.1 million, respectively, as compared to $251.2 million and $800.2 million for the three and nine months ended September 30, 2013, respectively.

 

Rental Expense related to the Master Lease

 

As of September 30, 2014, the Company leases from 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 up to 2% if certain rent coverage ratio thresholds are met, and a 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.

 

In April 2014, an amendment to the Master Lease was entered into in order to amend certain provisions relating to the Sioux City property.  In accordance with the amendment, upon the ceasing of gaming operations at Argosy Casino Sioux City on July 30, 2014 due to the termination of its gaming license, the annual rent payable to GLPI was reduced by $6.2 million.

 

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 rental expense under the Master Lease was $104.6 million and $313.5 million for the three and nine months ended September 30, 2014, respectively.

 

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 “Tribe”) had entered into definitive agreements to jointly develop a Hollywood Casino-branded casino on the 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 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 Tribe to fund certain development costs; and (iii) create an exclusive arrangement between the parties.

 

The 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 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 Tribe (the “Property”).  The Tribe exercises jurisdiction over the Property pursuant to its powers of self-government and consistent with the resolutions and ordinances of the Tribe.  The arrangement between the Tribe and the Company provides the 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.

 

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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, 50 live table games, including poker, multiple restaurants, bars and lounges and a partially enclosed parking structure with over 1,900 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 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 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 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 Tribe for the development and construction of a gaming facility for the Tribe on reservation land.  As such, the Tribe will own the casino and its related assets and liabilities.  The Company has a note receivable with the Tribe for $44.0 million and $7.0 million, which includes accrued interest of $2.1 million and $0.5 million, at September 30, 2014 and December 31, 2013, respectively.  The note receivable is included in other assets within the condensed consolidated balance sheets.  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 Tribe represents a variable interest that should be accounted for pursuant to the Variable Interest Entities (“VIE”) Subsections of ASC 810 “Consolidation”.  We 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 Tribe as a government organization, we believe our arrangement with the 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 September 30, 2014, the Company had outstanding 8,624 shares of Series C Preferred Stock and at September 30, 2013, had outstanding 12,050 shares of Series B Redeemable Preferred Stock (“Series B Preferred Stock”). The Company determined that both classes of 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 and nine months ended September 30, 2014 and 2013 under the two-class method:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

8,499

 

$

41,317

 

$

17,212

 

$

94,408

 

Net income applicable to preferred stock

 

841

 

7,691

 

1,708

 

17,692

 

Net income applicable to common stock

 

$

7,658

 

$

33,626

 

$

15,504

 

$

76,716

 

 

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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 and nine months ended September 30, 2014 and 2013:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(in thousands)

 

Determination of shares:

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

78,510

 

78,635

 

78,297

 

78,169

 

Assumed conversion of dilutive employee stock-based awards

 

1,832

 

2,929

 

1,998

 

3,020

 

Assumed conversion of restricted stock

 

51

 

111

 

82

 

101

 

Diluted weighted-average common shares outstanding before participating security

 

80,393

 

81,675

 

80,377

 

81,290

 

Assumed conversion of preferred stock

 

8,624

 

21,767

 

8,624

 

21,817

 

Diluted weighted-average common shares outstanding

 

89,017

 

103,442

 

89,001

 

103,107

 

 

Share-based equity awards of 954,709 and 935,147 were outstanding during the three and nine months ended September 30, 2014, respectively, but were not included in the computation of diluted EPS because they were antidilutive. Share-based equity awards of 20,625 and 30,625 were outstanding during the three and nine months ended September 30, 2013, respectively, but were not included in the computation of diluted EPS because they were antidilutive.

 

The following table presents the calculation of basic EPS for the Company’s common stock (in thousands, except per share data):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Calculation of basic EPS:

 

 

 

 

 

 

 

 

 

Net income applicable to common stock

 

$

7,658

 

$

33,626

 

$

15,504

 

$

76,716

 

Weighted-average common shares outstanding

 

78,510

 

78,635

 

78,297

 

78,169

 

Basic EPS

 

$

0.10

 

$

0.43

 

$

0.20

 

$

0.98

 

 

The following tables present the calculation of diluted EPS for the Company’s common stock (in thousands, except per share data):

 

 

 

Three months
ended September 30,

 

Nine months
ended September 30,

 

 

 

2014

 

2014

 

 

 

 

 

 

 

Calculation of diluted EPS using two-class method:

 

 

 

 

 

Net income applicable to common stock

 

$

7,658

 

$

15,504

 

Diluted weighted-average common shares outstanding before participating security

 

80,393

 

80,377

 

Diluted EPS

 

$

0.10

 

$

0.19

 

 

 

 

 

Three months
ended September 30,

 

Nine months
ended September 30,

 

 

 

2013

 

2013

 

 

 

 

 

 

 

Calculation of diluted EPS using if-converted method:

 

 

 

 

 

Net income

 

$

41,317

 

$

94,408

 

Diluted weighted-average common shares outstanding

 

103,442

 

103,107

 

Diluted EPS

 

$

0.40

 

$

0.92

 

 

Stock-Based Compensation

 

The Company accounts for stock compensation under ASC 718, “Compensation-Stock Compensation,” which requires the Company to expense the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This expense is recognized ratably over the requisite service period following the date of grant.

 

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The fair value for stock options was estimated at the date of grant using the Black-Scholes option-pricing model, which requires management to make certain assumptions. The risk-free interest rate was based on the U.S. Treasury spot rate with a term equal to the expected life assumed at the date of grant. Expected volatility was estimated based on the historical volatility of the Company’s stock price over a period of 5.45 years, in order to match the expected life of the options at the grant date. Historically, at the grant date, there has been no expected dividend yield assumption since the Company has not paid any cash dividends on its common stock since its initial public offering in May 1994 and since the Company intends to retain all of its earnings to finance the development of its business for the foreseeable future. The weighted-average expected life was based on the contractual term of the stock option and expected employee exercise dates, which was based on the historical and expected exercise behavior of the Company’s employees.  The Company granted 916,522 stock options during the nine months ended September 30, 2014.

 

The Company’s cash-settled phantom stock unit awards (“PSUs”), which vest over a period of three to five years, entitle employees and directors to receive cash based on the fair value of the Company’s common stock on the vesting date.  The PSUs are accounted for as liability awards and are re-measured at fair value each reporting period until they become vested with compensation expense being recognized over the requisite service period in accordance with ASC 718-30, “Compensation—Stock Compensation, Awards Classified as Liabilities.” The Company has a liability, which is included in accrued salaries and wages within the condensed consolidated balance sheets, associated with its PSUs of $5.5 million and $6.8 million at September 30, 2014 and December 31, 2013, respectively.

 

For the Company’s stock appreciation rights (“SARs”), the fair value of the SARs is calculated during each reporting period and estimated using the Black-Scholes option pricing model based on the various inputs discussed below. The Company’s SARs, which vest over a period of four years, are accounted for as liability awards since they will be settled in cash. The Company has a liability, which is included in accrued salaries and wages within the condensed consolidated balance sheets, associated with its SARs of $10.0 million and $11.4 million at September 30, 2014 and December 31, 2013, respectively.

 

In connection with the Spin-Off of GLPI, the Company’s employee stock options and SARs were converted into two awards, an award in Penn with an adjusted exercise price and an award in GLPI. The number of options and SARs and the exercise price of each converted award were adjusted to preserve the same intrinsic value of the awards that existed immediately prior to the Spin-Off. As such, no incremental compensation expense was recorded as a result of this conversion. In addition, holders of outstanding restricted stock awards and PSUs received an additional share of restricted stock or PSUs in GLPI common stock at the Spin-Off so that the intrinsic value of these awards were equivalent to those that existed immediately prior to the Spin-Off. The unrecognized compensation costs associated with GLPI restricted stock awards, GLPI PSUs, GLPI stock options and GLPI SARs held by Penn employees will continue to be recognized on the Company’s financial statements over the awards remaining vesting periods.

 

Stock-based compensation expense for the three and nine months ended September 30, 2014 was $2.9 million and $8.0 million, respectively, as compared to $6.4 million and $18.1 million for the three and nine months ended September 30, 2013, respectively. The decrease is primarily due to the fact that certain members of Penn’s executive management team transferred their employment to GLPI following the Spin-Off as well as lower aggregate executive compensation following the Spin-Off.

 

For PSUs held by Penn employees, there was $24.5 million of total unrecognized compensation cost at September 30, 2014 that will be recognized over the grants remaining weighted average vesting period of 2.61 years. For the three and nine months ended September 30, 2014, the Company recognized $2.1 million and $4.7 million, respectively, of compensation expense associated with these awards, as compared to $3.3 million and $8.3 million for the three and nine months ended September 30, 2013, respectively. Amounts paid by the Company for the nine months ended September 30, 2014 on these cash-settled awards totaled $6.0 million, compared to $3.7 million for the nine months ended September 30, 2013.

 

For SARs held by Penn employees, there was $7.3 million of total unrecognized compensation cost at September 30, 2014 that will be recognized over the awards remaining weighted average vesting period of 2.52 years. For the three and nine months ended September 30, 2014, the Company recognized $0.1 million and $0.2 million, respectively, of compensation expense associated with these awards, as compared to $0.4 million and $4.1 million for the three and nine months ended September 30, 2013, respectively. The reason for these declines was due to a drop in the stock prices of GLPI and Penn common stock during 2014.  Amounts paid by the Company for the three and nine months ended September 30, 2014 on these cash-settled awards totaled $0.4 million and $1.6 million, respectively, as compared to $0.2 million and $1.5 million for the three and nine months ended September 30, 2013, respectively.

 

The following are the weighted-average assumptions used in the Black-Scholes option-pricing model at September 30, 2014 and 2013:

 

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2014

 

2013

 

 

 

 

 

 

 

Risk-free interest rate

 

1.68

%

1.08

%

Expected volatility

 

44.80

%

46.27

%

Dividend yield

 

 

 

Weighted-average expected life (years)

 

5.45

 

6.57

 

 

Segment Information

 

The Company’s Chief Executive Officer, who is the Company’s Chief Operating Decision Maker, as that term is defined in ASC 280, “Segment Reporting” (“ASC 280”), measures and assesses the Company’s business performance based on regional operations of various properties grouped together based primarily on their geographic locations. In January 2014, the Company named Jay Snowden as its Chief Operating Officer and the Company decided in connection with this announcement to re-align its reporting structure. Starting in January 2014, the Company’s reportable segments are: (i) East/Midwest, (ii) West, and (iii) Southern Plains.

 

The East/Midwest reportable segment consists of the following properties: Hollywood Casino at Charles Town Races, Hollywood Casino Bangor, Hollywood Casino at Penn National Race Course, Hollywood Casino Lawrenceburg, Hollywood Casino Toledo, Hollywood Casino Columbus, Hollywood Gaming at Dayton Raceway, which opened on August 28, 2014, and Hollywood Gaming at Mahoning Valley Race Course, which opened on September 17, 2014.  It also includes the Company’s Casino Rama management service contract and the Plainville project in Massachusetts which the Company expects to open in June 2015. It also previously included Hollywood Casino Perryville, which was contributed to GLPI on November 1, 2013.

 

The West reportable segment consists of the following properties: Zia Park Casino and the M Resort, as well as the Jamul development project, which the Company anticipates completing in mid-2016.

 

The Southern Plains reportable segment consists of the following properties: Hollywood Casino Aurora, Hollywood Casino Joliet, Argosy Casino Alton, Argosy Casino Riverside, Hollywood Casino Tunica, Hollywood Casino Gulf Coast (formerly Hollywood Casino Bay St. Louis), Boomtown Biloxi, and Hollywood Casino St. Louis, and includes the Company’s 50% investment in Kansas Entertainment, LLC (“Kansas Entertainment”), which owns the Hollywood Casino at Kansas Speedway. On July 30, 2014, the Company closed Argosy Casino Sioux City. This segment also previously included Hollywood Casino Baton Rouge, which was contributed to GLPI on November 1, 2013.

 

The Other category consists of the Company’s standalone racing operations, namely Rosecroft Raceway, Sanford-Orlando Kennel Club, and the Company’s joint venture interests in Sam Houston Race Park, Valley Race Park, and Freehold Raceway, as well as the Company’s 50% joint venture with the Cordish Companies in New York. It also previously included the Company’s Bullwhackers property, which was sold in July 2013. If the Company is successful in obtaining gaming operations at these locations, they would be assigned to one of the Company’s reportable segments. The Other category also includes the Company’s corporate overhead operations which does not meet the definition of an operating segment under ASC 280.

 

The prior year amounts were reclassified to conform to the Company’s new reporting structure in accordance with ASC 280.  See Note 10 to the condensed consolidated financial statements for further information with respect to the Company’s segments.

 

Other Comprehensive Income

 

The Company accounts for comprehensive income in accordance with ASC 220, “Comprehensive Income,” which establishes standards for the reporting and presentation of comprehensive income in the consolidated financial statements. The Company presents comprehensive income in two separate but consecutive statements. The net of tax changes in accumulated other comprehensive income by component were as follows (in thousands):

 

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Foreign Currency

 

Available for
sale securities

 

Total

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

Balance at December 31, 2012

 

$

1,628

 

$

1,394

 

$

3,022

 

Foreign currency translation adjustment

 

(697

)

 

(697

)

Unrealized holding losses on corporate debt securities

 

 

(98

)

(98

)

Realized gain on redemption of corporate debt securities

 

 

(1,296

)

(1,296

)

Ending balance at September 30, 2013

 

$

931

 

$

 

$

931

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

$

383

 

$

 

$

383

 

Foreign currency translation adjustment

 

(957

)

 

(957

)

Ending balance at September 30, 2014

 

$

(574

)

$

 

$

(574

)

 

Fair Value of Financial Instruments

 

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

 

Cash and Cash Equivalents

 

The fair value of the Company’s cash and cash equivalents approximates the carrying value of the Company’s cash and cash equivalents, due to the short maturity of the cash equivalents.

 

Long-term Debt

 

The fair value of the Company’s Term Loan A and B components of its senior secured credit facility and senior unsecured notes is estimated based on quoted prices in active markets and as such is a Level 1 measurement. The fair value of the remainder of the Company’s senior secured credit facility approximates its carrying value as it is revolving, variable rate debt and as such is a Level 2 measurement.  The fair value of the Company’s contingent purchase price consideration related to its Plainridge Racecourse acquisition which is classified in other long-term obligations is estimated based on a discounted cash flow model (See Note 5 to the condensed consolidated financial statements) and as such is a Level 3 measurement.  There have been no changes in the estimated fair value of this Level 3 measurement since the acquisition. The fair value of the Company’s remaining other long-term obligations approximates its carrying value as the discount rate of 5% was determined based on an agreement with the State of Ohio (See Note 8 to the condensed consolidated financial statements) and as such is a Level 2 measurement.

 

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

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

Carrying
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

230,707

 

$

230,707

 

$

292,995

 

$

292,995

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

 

 

 

 

 

 

 

Senior secured credit facility

 

773,277

 

769,190

 

748,777

 

748,150

 

Senior unsecured notes

 

300,000

 

279,000

 

300,000

 

297,000

 

Other long-term obligations

 

153,956

 

153,956

 

 

 

 

4.  New Accounting Pronouncements

 

In April 2014, the FASB issued guidance that amends the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. Examples of a strategic shift that has (or will have) a major effect on an entity’s operations and financial results could include a disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity.  In addition, the amended guidance requires expanded disclosures for discontinued operations, including disclosures about a disposal of an individually significant component of an entity that does not qualify for

 

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discontinued operations presentation in the financial statements.  The amendments are effective for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance.  The Company early adopted this revised guidance and will apply the amendments to all disposals of a component of the Company going forward.

 

In May 2014, the FASB issued new revenue recognition guidance, which will supersede nearly all existing revenue recognition guidance. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve the core principle, the new guidance implements a five-step process for customer contract revenue recognition. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers. This new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early adoption is prohibited. Entities can transition to the new guidance either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact the new revenue recognition guidance will have on the consolidated financial statements but does not believe it will have a significant impact.

 

5.  Acquisitions

 

In September 2013, the Company entered into an option and purchase agreement to purchase Plainridge Racecourse in Massachusetts with the sellers having no involvement in the business or operations from that date forward.  The Company subsequently began to operate Plainridge Racecourse effective January 1, 2014 pursuant to a temporary operations agreement. On February 28, 2014, the Massachusetts Gaming Commission awarded the Company a Category Two slots-only gaming license, and in early March 2014, the Company exercised its option to purchase the Plainridge Racecourse. This acquisition reflects the continuing efforts of the Company to expand its gaming operations through the development of new gaming properties. The fixed portion of the purchase price was paid on April 11, 2014.  The option and purchase agreement also contained contingent purchase price consideration that is calculated based on the projected earnings of the gaming operations over the first ten years of operations.  Based on the option and purchase agreement, the first payment will be made 60 days after the completion of the first four full fiscal quarters of operation, and every year for ten years after the first payment. The fair value of this liability was determined to be $18.5 million based on an income approach from the Company’s internal earning projections and was discounted at a rate consistent with the risk a third party market participant would require holding the identical instrument as an asset. This liability is included in long-term debt on the condensed consolidated balance sheet at September 30, 2014.  At each reporting period, the Company will assess the fair value of this obligation and changes in its value will be recorded in earnings.  The preliminary purchase price allocation resulted in an increase in land and buildings of $57.9 million and $3.0 million of goodwill.

 

Plainridge Park Casino is anticipated to be a $225 million (inclusive of licensing fees) fully integrated racing and gaming facility featuring live harness racing and simulcasting with 1,250 slot machines, various dining options, structured and surface parking, a 26,000 square foot grandstand, and a 13,000 square foot clubhouse. On March 14, 2014, the Company broke ground on the facility, and on March 28, 2014, paid the $25 million gaming license fee associated with the facility which was recorded in other intangible assets on the condensed consolidated balance sheet.

 

6.  Property and Equipment

 

Property and equipment, net, consists of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(in thousands)

 

 

 

 

 

 

 

Land and improvements

 

$

42,350

 

$

14,714

 

Building and improvements

 

171,712

 

156,443

 

Furniture, fixtures, and equipment

 

1,206,020

 

1,190,252

 

Leasehold improvements

 

230,681

 

24,301

 

Construction in progress

 

44,148

 

25,389

 

Total property and equipment

 

1,694,911

 

1,411,099

 

Less accumulated depreciation

 

(949,556

)

(913,642

)

Property and equipment, net

 

$

745,355

 

$

497,457

 

 

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Property and equipment, net increased by $247.9 million for the nine months ended September 30, 2014 primarily due to the acquisition of Plainridge Racecourse (see Note 5 to the condensed consolidated financial statements), construction costs for the development of Plainridge Park Casino, the addition of a new hotel at Zia Park Casino and the addition of two new racinos in Ohio, as well as normal capitalized maintenance expenditures, all of which were partially offset by depreciation expense for the nine months ended September 30, 2014.  The increase also resulted from the relocation fees for the two racinos in Ohio which both opened in the third quarter of 2014.  In June 2013, the Company finalized the terms of its memorandum of understanding with the State of Ohio, which included an agreement by the Company to pay a relocation fee in return for being able to relocate its existing racetracks in Toledo and Grove City to Dayton and Austintown, respectively. Upon opening, the relocation fee for each new racino was recorded at the present value of the contractual obligation, which was calculated to be $75 million based on the 5% discount rate included in the agreement (see Note 8 to the condensed consolidated financial statements for further details on the obligation). Based on relevant authoritative accounting guidance, the Company determined that the relocation fee met the definition of a real estate preacquisition cost and as such was capitalized.

 

All construction costs funded by Penn are considered an improvement to the real property assets leased from GLPI under the Master Lease and as such are recorded as leasehold improvements. During the nine months ended September 30, 2014, certain costs associated with the new hotel at Zia Park Casino and the two new racinos in Ohio, including the relocation fees, all of which opened in the third quarter of 2014, were recorded as leasehold improvements.

 

Depreciation expense, totaled $39.7 million and $123.7 million for the three and nine months ended September 30, 2014, respectively, as compared to $74.9 million and $226.6 million for the three and nine months ended September 30, 2013, respectively. Interest capitalized in connection with major construction projects was $0.3 million and $0.5 million for the three and nine months ended September 30, 2014, respectively, as compared to $0.5 million and $0.9 million for the three and nine months ended September 30, 2013, respectively.  Depreciation expense decreased by $35.2 million and $102.9 million for the three and nine months ended September 30, 2014, respectively, as compared to the corresponding period in the prior year, primarily due to the contribution of real estate assets to GLPI on November 1, 2013 (see Note 2 to the condensed consolidated financial statements).

 

During the second quarter of 2014, the Company recorded a pre-tax impairment charge of $4.6 million ($2.8 million, net of taxes) to write-down certain idle assets to their estimated salvage value.

 

7.  Other Intangible Assets

 

The table below presents the gross carrying value, accumulated amortization, and net book value of each major class of other intangible assets at September 30, 2014 and December 31, 2013:

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

(in thousands)

 

 

 

Gross
Carrying
Value

 

Accumulated
Amortization

 

Net Book
Value

 

Gross

Carrying
Value

 

Accumulated
Amortization

 

Net Book
Value

 

Indefinite-life intangible assets

 

$

474,436

 

$

 

$

474,436

 

$

349,224

 

$

 

$

349,224

 

Argosy Casino Sioux City gaming license

 

20,949

 

20,949

 

 

20,949

 

12,569

 

8,380

 

Other intangible assets

 

56,126

 

55,466

 

660

 

55,665

 

53,621

 

2,044

 

Total

 

$

551,511

 

$

76,415

 

$

475,096

 

$

425,838

 

$

66,190

 

$

359,648

 

 

Indefinite-life intangible assets increased by $125.2 million for the nine months ended September 30, 2014 primarily due to the $100 million of gaming license fees for Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course, as well as the $25 million gaming license fee associated with Plainridge Park Casino (see Note 5 to the condensed consolidated financial statements).  Half of the gaming license fee for both Ohio racinos has been paid ($10 million for each facility in the second quarter of 2014 and $15 million upon opening for each facility) with the remaining $50 million ($25 million for each facility) due one year from commencement of operations. The remaining gaming license fees to be paid are included in accrued expenses within the condensed consolidated balance sheet at September 30, 2014.

 

Intangible asset amortization expense was $0.6 million and $11.1 million for the three and nine months ended September 30, 2014, respectively, as compared to $5.1 million and $11.0 million for the three and nine months ended September 30, 2013, respectively. The amortization of the gaming license for Argosy Casino Sioux City, which began in April 2013 with the awarding of the gaming license to another gaming operator, was completed in June 2014 (see Note 9 to the condensed consolidated financial statements for further details).

 

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8.  Long-term Debt

 

Long-term debt, net of current maturities, is as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(in thousands)

 

 

 

 

 

 

 

Senior secured credit facility

 

$

774,375

 

$

750,000

 

$300 million 5.875% senior unsecured notes due November 1, 2021

 

300,000

 

300,000

 

Other long term obligations

 

153,956

 

 

Capital leases

 

2,162

 

2,015

 

 

 

1,230,493

 

1,052,015

 

Less current maturities of long-term debt

 

(30,547

)

(27,598

)

Less discount on senior secured credit facility Term Loan B

 

(1,098

)

(1,223

)

 

 

$

1,198,848

 

$

1,023,194

 

 

The following is a schedule of future minimum repayments of long-term debt as of September 30, 2014 (in thousands):

 

Within one year

 

$

30,547

 

1-3 years

 

112,819

 

3-5 years

 

454,720

 

Over 5 years

 

632,407

 

Total minimum payments

 

$

1,230,493

 

 

Senior Secured Credit Facility

 

On October 30, 2013, the Company entered into a new senior secured credit facility. The new senior secured credit facility consists of a five year $500 million revolver, a five year $500 million Term Loan A facility, and a seven year $250 million Term Loan B facility. The Company’s senior secured credit facility had a gross outstanding balance of $774.4 million at September 30, 2014, consisting of a $481.3 million Term Loan A facility, a $248.1 million Term Loan B facility, and $45.0 million outstanding on the revolving credit facility. This compares with a $750 million gross outstanding balance at December 31, 2013 which consisted of a $500 million Term Loan A facility and a $250 million Term Loan B facility. No balances were outstanding on the revolving credit facility at December 31, 2013. Additionally, at September 30, 2014 and December 31, 2013, the Company was contingently obligated under letters of credit issued pursuant to the senior secured credit facility with face amounts aggregating $22.8 million and $22.1 million, respectively, resulting in $432.2 million and $477.9 million of available borrowing capacity as of September 30, 2014 and December 31, 2013, respectively, under the revolving credit facility.

 

Other Long Term Obligations

 

Other long term obligations at September 30, 2014 of $154.0 million include $18.5 million for the contingent purchase price consideration related to the purchase of Plainridge Racecourse (See Note 5 to the condensed consolidated financial statements) and $135.5 million related to the relocation fees for Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course (see Note 6 to the condensed consolidated financial statements).  The relocation fee for each facility is payable as follows: $7.5 million upon the opening of the facility and eighteen semi-annual payments of $4.8 million beginning one year from the commencement of operations. This obligation was measured at its present value and is accreted to interest expense at an effective yield of 4.9%. The amount included in interest expense related to other long-term obligations was $0.5 million for the three and nine months ended September 30, 2014.

 

Covenants

 

The Company’s senior secured credit facility and $300 million 5.875% senior unsecured notes require it, among other obligations, to maintain specified financial ratios and to satisfy certain financial tests, including fixed charge coverage, interest coverage, senior leverage and total leverage ratios. In addition, the Company’s senior secured credit facility and $300 million 5.875% senior unsecured notes restrict, among other things, its ability to incur additional indebtedness, incur guarantee obligations, amend

 

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debt instruments, pay dividends, create liens on assets, make investments, engage in mergers or consolidations, and otherwise restrict corporate activities.

 

At September 30, 2014, the Company was in compliance with all required covenants.

 

9.  Commitments and Contingencies

 

Litigation

 

The Company is subject to various legal and administrative proceedings relating to personal injuries, employment matters, commercial transactions and other matters arising in the normal course of business. The Company does not believe that the final outcome of these matters will have a material adverse effect on the Company’s consolidated financial position or results of operations. In addition, the Company maintains what it believes is adequate insurance coverage to further mitigate the risks of such proceedings. However, such proceedings can be costly, time consuming and unpredictable and, therefore, no assurance can be given that the final outcome of such proceedings may not materially impact the Company’s consolidated financial condition or results of operations. Further, no assurance can be given that the amount or scope of existing insurance coverage will be sufficient to cover losses arising from such matters.

 

The following proceedings could result in costs, settlements, damages, or rulings that materially impact the Company’s consolidated financial condition or operating results. The Company believes that it has meritorious defenses, claims and/or counter-claims with respect to these proceedings, and intends to vigorously defend itself or pursue its claims.

 

After the February 28, 2014 Massachusetts Gaming Commission (“Commission”) slots parlor license award to the Company’s subsidiary Springfield Gaming and Redevelopment LLC (“SGR”), individuals and entities associated with Raynham Park, LLC, an unsuccessful bidder for the same license which did not receive any votes in the application process, filed a writ of certiorari and mandamus action on May 9, 2014 in the Supreme Judicial Court for Suffolk County seeking to annul or revoke the license award and named the Commission and SGR as defendants.  The plaintiffs alleged that the Commission’s decision was arbitrary and capricious because it awarded the license to an applicant whose license application failed to disclose pertinent information.  Plaintiffs also contended that the seller of Plainridge Park property retained an improper interest in the operation.  SGR contends that all required information was submitted to and carefully considered by the Commission including the specific items that are discussed in the plaintiffs’ action.  SGR also contends that the seller of the Plainridge Park property will have no involvement in the operation.  The Company’s motion to dismiss the action was granted and the case has ended.

 

Gaming licenses in Iowa are typically issued jointly to a gaming operator and a local charitable organization known as a QSO. The agreement between the Company’s gaming operator subsidiary in Iowa, Belle of Sioux City, L.P. (“Belle”), and its QSO, Missouri River Historical Development, Inc. (“MRHD”), expired in early July 2012. On July 12, 2012, when presented with an extension of the Company’s QSO/operating agreement for the Sioux City facility through March 2015, the Iowa Racing and Gaming Commission (“IRGC”) refused to approve the extension.  The IRGC nevertheless concluded that the casino could continue to operate without an effective operating agreement. The IRGC also announced a schedule for requests for proposals for a new land-based Woodbury County casino. Under protest, the Company submitted two proposals for a new gaming and entertainment destination in Woodbury County for the IRGC’s consideration. On April 18, 2013, the IRGC awarded the license to another gaming operator. In August 2013, the IRGC formally denied the Company’s application for a renewal of its state license; however, the IRGC affirmed its intention to permit the Company to continue operations at its Sioux City facility until such time as the new casino opens to the public, but not beyond. The Belle has filed numerous petitions challenging the IRGC’s actions in the Iowa District Court in Polk County, Iowa.  The Company contends that the IRGC violated the Belle’s constitutional rights, Iowa State law, and its own rules and regulations in the actions the IRGC has taken against Belle and its license.

 

In addition, the Ohio Racing Commission’s decision to permit Raceway Park to relocate its Toledo racetrack to Dayton was challenged in the Franklin County Court of Common Pleas by Lebanon Trotting Club, Inc., the prior owner of a neighboring racetrack.  The Ohio Racing Commission and Raceway Park filed briefs requesting the Franklin County Court to uphold the Ohio Racing Commission’s decision.  In July 2014, the lawsuit was dismissed by the court and Lebanon Trotting Club, Inc. did not appeal making the decision final.

 

On March 5-6, 2014, the IRGC held a contested case hearing to determine whether Belle could retain its gaming license.  On April 17, 2014, the IRGC ruled that Argosy Casino Sioux City must cease operations by July 1, 2014.  In response, the Company filed a petition for judicial review to vacate or reverse the IRGC’s April 17, 2014 order. This petition was dismissed by the court and the Company has appealed this dismissal order to the Iowa Supreme Court, along with a request to keep the casino open pending a decision on the appeal. On July 25, 2014, the Iowa Supreme Court denied the request to stay closure while the appeal is pending. 

 

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Therefore, on July 30, 2014, Argosy Casino Sioux City ceased its operations.  The Company’s appeal of its closure order remains pending.

 

The Company has also appealed numerous actions taken by the IRGC that resulted in the license awarded for a land-based casino in Woodbury County.  This preceding is pending.

 

10.  Segment Information

 

The following tables present certain information with respect to the Company’s segments. Intersegment revenues between the Company’s segments were not material in any of the periods presented below.

 

 

 

East/Midwest

 

West

 

Southern Plains

 

Other

 

Total

 

 

 

(in thousands)

 

Three months ended September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

371,505

 

$

58,626

 

$

210,309

 

$

5,500

 

$

645,940

 

Income (loss) from operations

 

17,842

 

5,054

 

24,195

 

(24,260

)

22,831

 

Depreciation and amortization

 

24,304

 

2,018

 

12,264

 

1,667

 

40,253

 

Income (loss) from unconsolidated affiliates

 

 

 

2,546

 

(255

)

2,291

 

Capital expenditures

 

63,979

 

8,091

 

7,124

 

1,759

 

80,953

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

403,900

 

57,463

 

246,443

 

6,629

 

714,435

 

Income (loss) from operations

 

85,162

 

7,402

 

35,176

 

(34,460

)

93,280

 

Depreciation and amortization

 

39,741

 

3,487

 

32,697

 

4,043

 

79,968

 

Income (loss) from unconsolidated affiliates

 

 

 

2,599

 

(303

)

2,296

 

Capital expenditures

 

23,185

 

3,396

 

15,976

 

(101

)

42,456

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

1,082,310

 

178,579

 

658,792

 

19,485

 

1,939,166

 

Income (loss) from operations

 

44,447

 

20,536

 

63,392

 

(64,111

)

64,264

 

Depreciation and amortization

 

77,038

 

5,259

 

47,088

 

5,417

 

134,802

 

Income (loss) from unconsolidated affiliates

 

 

 

7,619

 

(1,372

)

6,247

 

Impairment losses

 

4,560

 

 

 

 

4,560

 

Capital expenditures

 

91,077

 

24,138

 

40,457

 

5,595

 

161,267

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

1,293,391

 

181,057

 

773,548

 

26,056

 

2,274,052

 

Income (loss) from operations

 

288,808

 

33,708

 

56,595

 

(105,635

)

273,476

 

Depreciation and amortization

 

121,898

 

10,115

 

93,411

 

12,230

 

237,654

 

Income (loss) from unconsolidated affiliates

 

 

 

8,383

 

(545

)

7,838

 

Impairment losses

 

 

 

71,846

 

 

71,846

 

Capital expenditures

 

90,127

 

6,313

 

58,205

 

4,428

 

159,073

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance sheet at September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

968,114

 

271,898

 

908,674

 

314,413

 

2,463,099

 

Investment in and advances to unconsolidated affiliates

 

52

 

 

117,868

 

65,147

 

183,067

 

Goodwill and other intangible assets, net

 

264,147

 

146,474

 

551,446

 

4,077

 

966,144

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance sheet at December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

590,606

 

212,098

 

945,472

 

435,815

 

2,183,991

 

Investment in and advances to unconsolidated affiliates

 

79

 

 

127,749

 

65,503

 

193,331

 

Goodwill and other intangible assets, net

 

120,458

 

146,012

 

566,016

 

19,560

 

852,046

 

 

11.  Income Taxes

 

At September 30, 2014 and December 31, 2013, the Company had a net deferred tax asset balance of $83.5 million and $57.2 million, respectively, within its condensed consolidated balance sheets. The Company accounts for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). Under ASC 740, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and are measured at the prevailing enacted tax rates that will be in effect when these differences are settled or realized. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized.

 

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The realizability of the net deferred tax assets is evaluated quarterly by assessing the valuation allowance and by adjusting the amount of the allowance, if necessary. The Company considers all available positive and negative evidence including projected future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets.  The evaluation of both positive and negative evidence is a requirement pursuant to ASC 740 in determining more-likely-than-not the net deferred tax assets will be realized.  In the event the Company determines that the deferred income tax assets would be realized in the future in excess of their net recorded amount, an adjustment to the valuation allowance would be recorded, which would reduce the provision for income taxes. As such, the Company reduced the valuation allowance for the three months ended September 30, 2014 in the amount of $1.0 million pertaining to a partial utilization of a capital loss carry forward.

 

As of September 30, 2014 and December 31, 2013, the Company was in a three-year pre-tax cumulative loss position which is significant negative evidence in the determination of whether a valuation allowance is required on deferred tax assets, due to significant goodwill and intangible asset impairment charges of $1,058.4 million incurred in the fourth quarter of 2013, as a result of the Spin-Off to GLPI.  Absent these significant charges, the Company would have recorded pretax earnings for 2013 and would not have been in a three year pre-tax cumulative loss position.  Additionally, for the nine months ended September 30, 2014, the Company recorded pretax earnings of $40.8 million.

 

As of September 30, 2014, the Company has concluded that it is more-likely-than-not that the net deferred tax assets of $83.5 million will be realized based on projected future taxable income and tax planning strategies and the fact that the significant impairment charges recorded in 2013 are not anticipated to impact the future earnings of the Company.  The Company made this determination after considering both positive and negative evidence in accordance with ASC 740.

 

12.  Insurance Recoveries

 

Hollywood Casino St. Louis Tornado

 

On May 31, 2013, Hollywood Casino St. Louis sustained damage as a result of a tornado and was forced to close for approximately fourteen hours. At the time of the tornado, the Company carried property insurance coverage with a limit of $600 million for both property damage and business interruption applicable to this event. This coverage included a $2.5 million property damage deductible and two days of business interruption deductible for the peril of a tornado.

 

The Company received $8.7 million in insurance proceeds related to the tornado at Hollywood Casino St. Louis, with $5.7 million received in 2014 and $3.0 million received in 2013. As the insurance recovery amount exceeded the net book value of assets believed to be damaged or destroyed and other costs incurred as a result of the tornado at Hollywood Casino St. Louis in 2013, the Company recorded a pre-tax gain of $5.7 million during the three months ended September 30, 2014. During the third quarter of 2014, the insurance claim for the tornado at Hollywood Casino St. Louis was settled and no further proceeds will be received.

 

Previously, the Company recorded a $2.5 million pre-tax loss for the property damage insurance deductible during the three months ended June 30, 2013, and a $2.4 million pre-tax gain for proceeds received that exceeded the net book value of assets believed to be damaged or destroyed and other costs incurred as a result of the tornado at Hollywood Casino St. Louis during the three months ended December 31, 2013.

 

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

 

Our Operations

 

We are a leading, diversified, multi-jurisdictional owner and manager of gaming and pari-mutuel properties. As of September 30, 2014, we 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. On July 30, 2014, the Company closed its facility in Sioux City, Iowa.  In addition, Beulah Park and Raceway Park in Ohio were closed as the racetracks were relocated to Hollywood Gaming at Mahoning Valley Race Course, which opened on September 17, 2014, and Hollywood Gaming at Dayton Raceway, which opened on August 28, 2014, respectively.  We believe that our portfolio of assets provides us with geographically diversified cash flows from operations.

 

We have made significant acquisitions in the past, and expect to continue to pursue additional acquisition and development opportunities in the future. In 1997, we began our transition from a pari-mutuel company to a diversified gaming company with the acquisition of the Charles Town property and the introduction of video lottery terminals in West Virginia. Since 1997, we have continued to expand our gaming operations through strategic acquisitions, greenfield projects, and property expansions.

 

As mentioned above, in the third quarter of 2014, we opened two facilities in Dayton and Austintown, Ohio, which feature 1,000 and 850 video lottery terminals, respectively, as well as various restaurants, bars, and other amenities, in the third quarter of 2014. In addition, we are in the process of constructing an integrated racing and gaming facility in Plainville, Massachusetts, which we expect to open in June 2015, as well as the Jamul development project near San Diego, California, which the Company anticipates completing in mid-2016.

 

The vast majority of our revenue is gaming revenue, derived primarily from gaming on slot machines (which represented approximately 83% and 84% of our gaming revenue in 2013 and 2012, respectively) and to a lesser extent, table games, which is highly dependent upon the volume and spending levels of customers at our properties. Other revenues are derived from our management service fee from Casino Rama, our transition service fees from Gaming and Leisure Properties, Inc., or GLPI, our hotel, dining, retail, admissions, program sales, concessions and certain other ancillary activities, and our racing operations. Our racing revenue includes our share of pari-mutuel wagering on live races after payment of amounts returned as winning wagers, our share of wagering from import and export simulcasting, and our share of wagering from our off-track wagering facilities.

 

Key performance indicators related to gaming revenue are slot handle and table game drop (volume indicators) and “win” or “hold” percentage. Our typical property slot hold percentage is in the range of 6% to 10% of slot handle, and our typical table game win percentage is in the range of 12% to 25% of table game drop.

 

Slot handle is the gross amount wagered for the period cited. The win or hold percentage is the net amount of gaming wins and losses, with liabilities recognized for accruals related to the anticipated payout of progressive jackpots. Our slot hold percentages have consistently been in the 6% to 10% range over the past several years. Given the stability in our slot hold percentages, we have not experienced significant impacts to earnings from changes in these percentages.

 

For table games, customers usually purchase cash chips at the gaming tables. The cash and markers (extensions of credit granted to certain credit worthy customers) are deposited in the gaming table’s drop box. Table game win is the amount of drop that is retained and recorded as casino gaming revenue, with liabilities recognized for funds deposited by customers before gaming play occurs and for unredeemed gaming chips. As we are focused on regional gaming markets, our table win percentages are fairly stable as the majority of these markets do not regularly experience high-end play, which can lead to volatility in win percentages. Therefore, changes in table game win percentages do not typically have a material impact to our earnings.

 

Our properties generate significant operating cash flow, since most of our revenue is cash-based from slot machines, table games, and pari-mutuel wagering. Our business is capital intensive, and we rely on cash flow from our properties to generate operating cash to pay rent to GLPI under the Master Lease, repay debt, fund capital maintenance expenditures, fund new capital projects at existing properties and provide excess cash for future development and acquisitions.

 

We continue to expand our gaming operations through the implementation and execution of a disciplined capital expenditure program at our existing properties, the pursuit of strategic acquisitions and the development of new gaming properties, particularly in attractive regional markets. Current capital projects are ongoing at several of our properties. Additional information regarding our capital projects is discussed in detail in the section entitled “Liquidity and Capital Resources—Capital Expenditures” below.

 

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Spin-Off of Real Estate Assets through a Real Estate Investment Trust

 

On November 1, 2013, we completed our plan to separate our gaming operating assets from our real property assets by creating GLPI, a newly formed, publicly traded REIT, through a tax free Spin-Off. Penn effected the Spin-Off by distributing one share of common stock of GLPI to the holders of Penn common stock and Series C Preferred Stock for every share of Penn common stock and every 1/1000th of a share of Series C Preferred Stock that they held at the close of business on October 16, 2013, the record date for the Spin-Off.  In addition, through a series of internal corporate restructurings, Penn contributed to GLPI substantially all of the assets and liabilities associated with Penn’s real property interests and real estate development business, as well as all of the assets and liabilities of Hollywood Casino Baton Rouge and Hollywood Casino Perryville, which are referred to as the “TRS Properties.” As a result of the Spin-Off, GLPI owns substantially all of Penn’s former real property assets and leases back those assets (other than the TRS Properties) to Penn for use by its subsidiaries, under a “triple net” Master Lease (which has a 15-year initial term that can be extended at Penn’s option for up to four five-year renewal terms), as well as owns and operates the TRS Properties. Penn continues to operate the leased gaming facilities and hold the associated gaming licenses with these facilities.

 

On November 1, 2013, Penn entered into a Tax Matters Agreement with GLPI, which governs the respective rights, responsibilities and obligations of the two companies after the Spin-Off with respect to payment of tax liabilities, entitlement of refunds, and filing of tax returns and sets forth certain covenants and indemnities.  Pursuant to the Tax Matters Agreement, Penn has prepared and filed a federal consolidated income tax return for 2013, which included a combination of Penn and GLPI legal entities for the activity prior to the Spin-Off. Adjustments in the future for the impact of the final consolidated income tax return may be recorded to either shareholders’ equity or the statement of income depending on the specific item giving rise to the adjustment. In conjunction with the filing of the final 2013 consolidated income tax return with the Internal Revenue Service, Penn recorded a decrease to shareholders’ equity of $0.5 million updated to reflect returns have been filed during the nine months ended September 30, 2014.

 

Segment Information

 

The Company’s Chief Executive Officer, who is the Company’s Chief Operating Decision Maker, as that term is defined in ASC 280, measures and assesses the Company’s business performance based on regional operations of various properties grouped together based primarily on their geographic locations. In January 2014, the Company named Jay Snowden as its Chief Operating Officer and the Company decided in connection with this announcement to re-align its reporting structure. Starting in January 2014, the Company’s reportable segments are: (i) East/Midwest, (ii) West, and (iii) Southern Plains. The prior year amounts were reclassified to conform to the Company’s new reporting structure in accordance with ASC 280.

 

The East/Midwest reportable segment consists of the following properties: Hollywood Casino at Charles Town Races, Hollywood Casino Bangor, Hollywood Casino at Penn National Race Course, Hollywood Casino Lawrenceburg, Hollywood Casino Toledo, Hollywood Casino Columbus, Hollywood Gaming at Dayton Raceway, which opened on August 28, 2014, and Hollywood Gaming at Mahoning Valley Race Course, which opened on September 17, 2014.  It also includes the Company’s Casino Rama management service contract and the Plainville project in Massachusetts which the Company expects to open in June 2015.  It also previously included Hollywood Casino Perryville, which was contributed to GLPI on November 1, 2013.

 

The West reportable segment consists of the following properties: Zia Park Casino and the M Resort, as well as the Jamul development project, which the Company anticipates completing in mid-2016.

 

The Southern Plains reportable segment consists of the following properties: Hollywood Casino Aurora, Hollywood Casino Joliet, Argosy Casino Alton, Argosy Casino Riverside, Hollywood Casino Tunica, Hollywood Casino Gulf Coast (formerly Hollywood Casino Bay St. Louis), Boomtown Biloxi, and Hollywood Casino St. Louis, and includes the Company’s 50% investment in Kansas Entertainment, which owns the Hollywood Casino at Kansas Speedway. On July 30, 2014, the Company closed Argosy Casino Sioux City. It also previously included Hollywood Casino Baton Rouge, which was contributed to GLPI on November 1, 2013.

 

The Other category consists of the Company’s standalone racing operations, namely Rosecroft Raceway, Sanford-Orlando Kennel Club, and the Company’s joint venture interests in Sam Houston Race Park, Valley Race Park, and Freehold Raceway, as well as the Company’s 50% joint venture with the Cordish Companies in New York. It also previously included the Company’s Bullwhackers property, which was sold in July 2013. If the Company is successful in obtaining gaming operations at these locations, they would be assigned to one of the Company’s reportable segments. The Other category also includes the Company’s corporate overhead operations which does not meet the definition of an operating segment under ASC 280.

 

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Executive Summary

 

Continued sluggish economic conditions and the expansion of newly constructed gaming facilities continue to impact the overall domestic gaming industry as well as our operating results. We believe that current economic conditions, including, but not limited to, a weak economic recovery, low levels of consumer confidence, and higher taxes paid by individuals, have resulted in reduced levels of discretionary consumer spending compared to historical levels. Additionally, the expansion of newly constructed gaming facilities has substantially increased competition in many of our regional markets (including some of our larger facilities).

 

We operate a geographically diversified portfolio comprised largely of new and well maintained regional gaming facilities. This has allowed us to develop what we believe to be a solid base for future growth opportunities. We have also made investments in joint ventures that we believe may allow us to capitalize on additional gaming opportunities in certain states if legislation or referenda are passed that permit and/or expand gaming in these jurisdictions and we are selected as a licensee.

 

Financial Highlights:

 

We reported net revenues and income from operations of $645.9 million and $22.8 million, respectively, for the three months ended September 30, 2014, compared to $714.4 million and $93.3 million, respectively, for the corresponding period in the prior year and net revenues and income from operations of $1,939.2 million and $64.3 million, respectively, for the nine months ended September 30, 2014, compared to $2,274.1 million and $273.5 million, respectively, for the corresponding period in the prior year. The major factors affecting our results for the three and nine months ended September 30, 2014, as compared to the three and nine months ended September 30, 2013, were:

 

·                  Rental expense for real property assets leased from GLPI of $104.6 million and $313.5 million for the three and nine months ended September 30, 2014, respectively.

 

·                  The opening of Hollywood Gaming at Dayton Raceway on August 28, 2014 in our East/Midwest segment, which generated $8.9 million of net revenues for the three and nine months ended September 30, 2014.

 

·                  The opening of Hollywood Gaming at Mahoning Valley Race Course on September 17, 2014 in our East/Midwest segment, which generated $6.3 million of net revenues for the three and nine months ended September 30, 2014.

 

·                  A pre-tax impairment charge of $4.6 million for Hollywood Casino Lawrenceburg in our East/Midwest segment during the nine months ended September 30, 2014, as compared to a pre-tax goodwill and other intangible asset impairment charge of $71.8 million for Argosy Casino Sioux City in our Southern Plains segment during the nine months ended September 30, 2013.

 

·                  New competition in our East/Midwest segment for Hollywood Casino Lawrenceburg, namely the March 2013 opening of Horseshoe Casino in Cincinnati, Ohio, as well as to a lesser extent the openings of a racino at Miami Valley Gaming in mid-December 2013, a racino at Belterra Park in May 2014, and our own Dayton facility in late August 2014.

 

·                  The continued impact of the opening of a casino complex at the Arundel Mills mall in Maryland in 2012, which added table games in April 2013 and a 52 table poker room in late August 2013, which has negatively impacted Hollywood Casino at Charles Town Races in our East/Midwest segment.

 

·                  Contribution of Hollywood Casino Perryville and Hollywood Casino Baton Rouge to GLPI on November 1, 2013.

 

·                  The closure of Argosy Casino Sioux City in our Southern Plains segment on July 30, 2014.

 

·                  A pre-tax insurance gain of $5.7 million at Hollywood Casino St. Louis during the three and nine months ended September 30, 2014, as compared to a pre-tax insurance loss of $2.5 million at Hollywood Casino St. Louis during the nine months ended September 30, 2013.

 

·                  Lower general and administrative expenses for Other of $35.7 million for the nine months ended September 30, 2014, compared to the corresponding period in the prior year, primarily due to lower liability based stock compensation charges of $7.5 million and lower stock-based compensation costs of $10.1 million primarily due to lower aggregate executive compensation following the Spin-Off to GLPI, lower Spin-Off transaction and development costs of $15.2 million, lower lobbying costs of $0.3 million,

 

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and a reduction in various other items due to cost containment measures, all of which was partially offset by a favorable franchise tax resolution for $1.1 million in the third quarter of 2013.

 

·                  Depreciation and amortization expense decreased by $39.7 million and $102.9 million for the three and nine months ended September 30, 2014, respectively, as compared to the three and nine months ended September 30, 2013, primarily due to the contribution of real estate assets to GLPI on November 1, 2013.

 

·                  Net income decreased by $32.8 million and $77.2 million for the three and nine months ended September 30, 2014, respectively, as compared to the three and nine months ended September 30, 2013, primarily due to the variances explained above, as well as decreased interest expense primarily due to our lower levels of indebtedness subsequent to the Spin-Off, and decreased income taxes.

 

Segment Developments:

 

The following are recent developments that have had or will have an impact on us by segment:

 

East/Midwest

 

·                  In June 2012, we announced that we had filed applications with the Ohio Lottery Commission for Video Lottery Sales Agent Licenses for our Ohio racetracks, Raceway Park and Beulah Park, and with the Ohio State Racing Commission for permission to relocate the racetracks to Dayton and Austintown, respectively. On May 1, 2013, we received approval from the Ohio Racing Commission for our relocation plans. Hollywood Gaming at Mahoning Valley Race Course, which opened on September 17, 2014, features a thoroughbred track and 850 video lottery terminals. Hollywood Gaming at Dayton Raceway, which opened on August 28, 2014, features a standardbred track and 1,000 video lottery terminals. See the section entitled “Liquidity and Capital Resources—Capital Expenditures” below for further details.

 

·                  On October 21, 2011, the Ohio Roundtable filed a complaint in the Court of Common Pleas in Franklin County, Ohio against a number of defendants, including the Governor, the Ohio Lottery Commission and the Ohio Casino Control Commission. The complaint alleges a variety of substantive and procedural defects relative to the approval and implementation of video lottery terminals as well as several counts dealing with the taxation of standalone casinos. As intervenors, we, along with the other two casinos in Ohio, filed motions for judgment on the pleadings to supplement the position of the Racing Commission. In May 2012, the complaint was dismissed, and in March 2013, the Ohio appeals court upheld the ruling. On April 30, 2013, plaintiffs requested the Ohio Supreme Court to hear an appeal of the decision, and the Ohio Supreme Court elected to accept the appeal; however, the court stayed the appeal until it first ruled in another matter with related issues. Oral arguments in the other matter were heard on November 6, 2013, and on June 10, 2014, the Ohio Supreme Court ruled the plaintiff in the other pending matter lacked standing. As a result, we requested the court dismiss the current appeal as moot. The Ohio Supreme Court denied our motion to dismiss in part, allowing some issues related to standing to be heard.

 

·                  In addition, the Ohio Racing Commission’s decision to permit Raceway Park to relocate its Toledo racetrack to Dayton was challenged in the Franklin County Court of Common Pleas by Lebanon Trotting Club, Inc., the prior owner of a neighboring racetrack. The Ohio Racing Commission and Raceway Park filed briefs requesting the Franklin County Court to uphold the Ohio Racing Commission’s decision. In July 2014, the lawsuit was dismissed by the court, and Lebanon Trotting Club, Inc did not appeal making the decision final.

 

·                  Hollywood Casino Lawrenceburg faced increased competition, and their results have been and will continue to be negatively impacted by the openings of Horseshoe Casino in Cincinnati, Ohio in March 2013, as well as to a lesser extent, a racino at Miami Valley Gaming in mid-December 2013, a racino at Belterra Park in May 2014, and our own Dayton facility in August 2014.

 

·                  Hollywood Casino at Charles Town Races faced increased competition and their results have been negatively impacted by the opening of a casino complex, Maryland Live!, at the Arundel Mills mall in Anne Arundel, Maryland. The casino opened on June 6, 2012 with approximately 3,200 slot machines and significantly increased its slot machine offerings by mid-September 2012 to approximately 4,750 slot machines. In addition, the Anne Arundel facility opened table games on April 11, 2013 and opened a 52 table poker room in late August 2013.

 

·                  On February 28, 2014, the Massachusetts Gaming Commission awarded the Company a Category Two slots-only gaming license for its planned $225 million (including licensing fees) Plainridge Park Casino in Plainville, Massachusetts.  On March 14, 2014, the Company broke ground on the 106,000 square foot facility, which will feature live harness racing and simulcasting, along with 1,250 slot machines, various dining options, structured and surface parking, a 26,000 square foot grandstand, and a 13,000 square foot clubhouse. The Company expects the facility to open in June 2015.  In June 2014, the Massachusetts Supreme Judicial

 

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Court ruled to permit a referendum to repeal the enabling legislation in Massachusetts to be included in the November 4, 2014 general election ballot, but this referendum was defeated and the enabling legislation was therefore confirmed.

 

·                  Through CHC Casinos Canada Limited (“CHC Casinos”), our indirectly wholly-owned subsidiary, we manage Casino Rama, a full service gaming and entertainment facility, on behalf of the Ontario Lottery and Gaming Corporation. The Development and Operating Agreement (the “Agreement”), which we refer to as the management service contract for Casino Rama, sets out the duties, rights and obligations of CHC Casinos and our indirectly wholly-owned subsidiary, CRC Holdings, Inc. In June 2014, we signed an agreement to extend the Casino Rama Agreement, which was to expire on September 30, 2014, on a month-to-month basis with a 60-day notice period for up to a maximum period of forty-eight months.

 

West

 

·                  On April 5, 2013, we announced that, subject to final National Indian Gaming Commission approval, we and the Tribe had entered into definitive agreements (including management, development, branding and lending arrangements), to jointly develop a Hollywood Casino-branded casino on the Tribe’s trust land in San Diego County, California. The proposed facility is located approximately 20 miles east of downtown San Diego. 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, 50 live table games, including poker, multiple restaurants, bars and lounges and a partially enclosed parking structure with over 1,900 spaces. In mid-January 2014, we announced the commencement of construction activities at the site and it is anticipated that the facility will open in mid-2016. We may, under certain circumstances, provide backstop financing to the Tribe in connection with the project and, upon opening, we will manage and provide branding for the casino.

 

Southern Plains

 

·                  As discussed in Note 9 to the condensed consolidated financial statements, on July 30, 2014, Argosy Casino Sioux City ceased its operations.

 

Critical Accounting Estimates

 

We make certain judgments and use certain estimates and assumptions when applying accounting principles in the preparation of our consolidated financial statements. The nature of the estimates and assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain factors or the susceptibility of such factors to change. We have identified the accounting for long-lived assets, goodwill and other intangible assets, income taxes and litigation, claims and assessments as critical accounting estimates, as they are the most important to our financial statement presentation and require difficult, subjective and complex judgments.

 

We believe the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations and, in certain situations, could have a material adverse effect on our consolidated financial condition.

 

For further information on our critical accounting estimates, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013. There has been no material change to these estimates for the nine months ended September 30, 2014.

 

Results of Operations

 

The following are the most important factors and trends that contribute to our operating performance:

 

·                  The fact that most of our properties operate in mature competitive markets. As a result, we expect a majority of our future growth to come from prudent acquisitions of gaming properties (such as our November 2012 acquisition of Harrah’s St. Louis gaming and lodging facility from Caesars Entertainment), jurisdictional expansions (such as our planned June 2015 opening of a slots-only gaming facility in Massachusetts, the September 2014 opening of Hollywood Gaming at Mahoning Valley Race Course, the August 2014 opening of Hollywood Gaming at Dayton Raceway, the October 2012 opening of Hollywood Casino Columbus, and the May 2012 opening of Hollywood Casino Toledo), expansions of gaming in existing jurisdictions (such as the introduction of table games in July 2010 at Hollywood Casino at Charles Town Races and Hollywood Casino at Penn National Race Course, and at Hollywood Casino Bangor in March 2012) and expansions/improvements of existing properties (such as a hotel at Zia Park which opened on August 28, 2014).

 

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·                  The fact that a number of states (such as New York) are currently considering or implementing legislation to legalize or expand gaming. Such legislation presents both potential opportunities to establish new properties (for example, in Massachusetts, where we were awarded the slots-only gaming license on February 28, 2014, in Kansas, where we opened a casino through a joint venture in February 2012, and in Ohio, where we opened casinos in Toledo and Columbus in May 2012 and October 2012, respectively, and opened video lottery terminal facilities at two racetracks in the third quarter of 2014) and increased competitive threats to business at our existing properties (such as the introduction/expansion of commercial casinos in Kansas, Maryland, Ohio, and potentially Kentucky, Nebraska and Illinois, and the introduction of tavern licenses in several states, most significantly in Illinois).

 

·                  The actions of government bodies can affect our operations in a variety of ways. For instance, the continued pressure on governments to balance their budgets could intensify the efforts of state and local governments to raise revenues through increases in gaming taxes and/or property taxes, or via an expansion of gaming. In addition, government bodies may restrict, prevent or negatively impact operations in the jurisdictions in which we do business (such as the implementation of smoking bans).

 

·                  The continued demand for, and our emphasis on, slot wagering entertainment at our properties.

 

·                  The successful execution of our development and construction activities, as well as the risks associated with the costs, regulatory approval and the timing of these activities.

 

·                  The risks related to economic conditions and the effect of such prolonged sluggish conditions on consumer spending for leisure and gaming activities, which may negatively impact our operating results and our ability to continue to access financing at favorable terms.

 

The consolidated results of operations for the three and nine months ended September 30, 2014 and 2013 are summarized below:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(in thousands)

 

Revenues:

 

 

 

 

 

 

 

 

 

Gaming

 

$

573,216

 

$

641,777

 

$

1,720,057

 

$

2,039,531

 

Food, beverage and other

 

107,266

 

112,687

 

322,710

 

355,591

 

Management service fee

 

3,240

 

3,685

 

8,803

 

10,399

 

Revenues

 

683,722

 

758,149

 

2,051,570

 

2,405,521

 

Less promotional allowances

 

(37,782

)

(43,714

)

(112,404

)

(131,469

)

Net revenues

 

645,940

 

714,435

 

1,939,166

 

2,274,052

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Gaming

 

288,355

 

325,576

 

858,539

 

1,029,483

 

Food, beverage and other

 

79,040

 

84,471

 

236,981

 

263,646

 

General and administrative

 

116,510

 

131,140

 

332,147

 

395,447

 

Rental expense related to the Master Lease

 

104,625

 

 

313,547

 

 

Depreciation and amortization

 

40,253

 

79,968

 

134,802

 

237,654

 

Impairment losses

 

 

 

4,560

 

71,846

 

Insurance (recoveries) deductible charges

 

(5,674

)

 

(5,674

)

2,500

 

Total operating expenses

 

623,109

 

621,155

 

1,874,902

 

2,000,576

 

Income from operations

 

$

22,831

 

$

93,280

 

$

64,264

 

$

273,476

 

 

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Certain information regarding our results of operations by segment for the three and nine months ended September 30, 2014 and 2013 is summarized below:

 

 

 

Net Revenues

 

Income (loss) from Operations

 

Three Months Ended September 30,

 

2014

 

2013

 

2014

 

2013

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

East/Midwest

 

$

371,505

 

$

403,900

 

$

17,842

 

$

85,162

 

West

 

58,626

 

57,463

 

5,054

 

7,402

 

Southern Plains

 

210,309

 

246,443

 

24,195

 

35,176

 

Other

 

5,500

 

6,629

 

(24,260

)

(34,460

)

Total

 

$

645,940

 

$

714,435

 

$

22,831

 

$

93,280

 

 

 

 

Net Revenues

 

Income (loss) from Operations

 

Nine Months Ended September 30,

 

2014

 

2013

 

2014