ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders of
Penn National Gaming, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Penn National Gaming, Inc. and Subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders' deficit and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Penn National Gaming, Inc. and Subsidiaries at December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Penn National Gaming, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 24, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
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Philadelphia, Pennsylvania
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February 24, 2017
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Penn National Gaming, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share data)
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December 31,
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2016
|
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2015
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Assets
|
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|
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Current assets
|
|
|
|
|
|
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Cash and cash equivalents
|
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$
|
229,510
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$
|
237,009
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|
Receivables, net of allowance for doubtful accounts of $3,180 and $2,428 at December 31, 2016 and December 31, 2015, respectively
|
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61,855
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|
|
45,186
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|
Prepaid expenses
|
|
|
59,707
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|
|
76,784
|
|
Other current assets
|
|
|
48,193
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|
|
13,497
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Total current assets
|
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399,265
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|
372,476
|
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Property and equipment, net
|
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2,820,383
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2,980,068
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Other assets
|
|
|
|
|
|
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Investment in and advances to unconsolidated affiliates
|
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156,176
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|
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168,149
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|
Goodwill
|
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989,685
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911,942
|
|
Other intangible assets, net
|
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435,494
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|
|
391,442
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Advances to the Jamul Tribe
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91,401
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197,722
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Other assets
|
|
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82,080
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|
|
116,953
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|
Total other assets
|
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1,754,836
|
|
|
1,786,208
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|
Total assets
|
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$
|
4,974,484
|
|
$
|
5,138,752
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|
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|
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Liabilities
|
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|
|
|
|
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Current liabilities
|
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|
|
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Current portion of financing obligation to GLPI
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$
|
56,595
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$
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50,548
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Current maturities of long-term debt
|
|
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85,595
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|
|
92,108
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Accounts payable
|
|
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35,091
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|
|
72,816
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Accrued expenses
|
|
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101,906
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|
|
93,666
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Accrued interest
|
|
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6,345
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|
|
7,091
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Accrued salaries and wages
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92,238
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98,671
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Gaming, pari-mutuel, property, and other taxes
|
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60,384
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57,486
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Insurance financing
|
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2,636
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|
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3,125
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Other current liabilities
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95,526
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|
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82,263
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Total current liabilities
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536,316
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557,774
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|
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|
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|
|
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Long-term liabilities
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Long-term financing obligation to GLPI, net of current portion
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3,457,485
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3,514,080
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Long-term debt, net of current maturities and debt issuance costs
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1,329,939
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|
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1,618,851
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Deferred income taxes
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|
|
126,924
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|
|
107,921
|
|
Noncurrent tax liabilities
|
|
|
26,791
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|
|
—
|
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Other noncurrent liabilities
|
|
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40,349
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|
|
18,169
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|
Total long-term liabilities
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4,981,488
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|
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5,259,021
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|
|
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|
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Shareholders’ deficit
|
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|
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Series B Preferred stock ($.01 par value, 1,000,000 shares authorized, no shares issued and outstanding at December 31, 2016 and 2015)
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—
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—
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Series C Preferred stock ($.01 par value, 18,500 shares authorized, no shares and 8,624 shares issued and outstanding at December 31, 2016 and 2015, respectively)
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—
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—
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Common stock ($.01 par value, 200,000,000 shares authorized, 93,289,701 and 83,056,668 shares issued, and 91,122,308 and 80,889,275 shares outstanding at December 31, 2016 and 2015, respectively)
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|
|
932
|
|
|
830
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|
Treasury stock, at cost (2,167,393 shares held at December 31, 2016 and 2015)
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(28,414)
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|
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(28,414)
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Additional paid-in capital
|
|
|
1,014,119
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|
|
988,686
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|
Retained deficit
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|
|
(1,525,281)
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|
|
(1,634,591)
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Accumulated other comprehensive loss
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|
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(4,676)
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|
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(4,554)
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|
Total shareholders’ deficit
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(543,320)
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(678,043)
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|
Total liabilities and shareholders’ deficit
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|
$
|
4,974,484
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$
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5,138,752
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See accompanying notes to the consolidated financial statements.
Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
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Year ended December 31,
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2016
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2015
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2014
|
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Revenues
|
|
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|
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|
|
|
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Gaming
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|
$
|
2,606,262
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$
|
2,497,497
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$
|
2,297,175
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|
Food, beverage, hotel and other
|
|
|
575,434
|
|
|
485,534
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|
432,021
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Management service and licensing fees
|
|
|
11,348
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|
|
10,314
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|
|
11,650
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Reimbursable management costs
|
|
|
15,997
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|
|
—
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|
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—
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Revenues
|
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3,209,041
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|
2,993,345
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2,740,846
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Less promotional allowances
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(174,661)
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(154,987)
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|
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(150,319)
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Net revenues
|
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|
3,034,380
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|
|
2,838,358
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|
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2,590,527
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Operating expenses
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|
|
|
|
|
|
|
|
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Gaming
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|
|
1,334,980
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|
1,271,679
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|
|
1,146,159
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|
Food, beverage, hotel and other
|
|
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406,871
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349,897
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|
319,792
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General and administrative
|
|
|
463,028
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|
|
449,433
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|
|
446,436
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Reimbursable management costs
|
|
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15,997
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|
|
—
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|
|
—
|
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Depreciation and amortization
|
|
|
271,214
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|
|
259,461
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|
|
266,742
|
|
Impairment losses
|
|
|
—
|
|
|
40,042
|
|
|
159,884
|
|
Insurance recoveries, net of deductible charges
|
|
|
(726)
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|
|
—
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|
|
(5,674)
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|
Total operating expenses
|
|
|
2,491,364
|
|
|
2,370,512
|
|
|
2,333,339
|
|
Income from operations
|
|
|
543,016
|
|
|
467,846
|
|
|
257,188
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
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Interest expense
|
|
|
(459,243)
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|
|
(443,127)
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|
|
(425,114)
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|
Interest income
|
|
|
24,186
|
|
|
11,531
|
|
|
3,730
|
|
Income from unconsolidated affiliates
|
|
|
14,337
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|
|
14,488
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|
|
7,949
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|
Other
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|
|
(1,679)
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|
|
5,872
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|
|
2,944
|
|
Total other expenses
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|
|
(422,399)
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|
|
(411,236)
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|
|
(410,491)
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|
Income (loss) from operations before income taxes
|
|
|
120,617
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|
|
56,610
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|
|
(153,303)
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|
Income tax provision
|
|
|
11,307
|
|
|
55,924
|
|
|
30,519
|
|
Net income (loss)
|
|
$
|
109,310
|
|
$
|
686
|
|
$
|
(183,822)
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|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
1.21
|
|
$
|
0.01
|
|
$
|
(2.34)
|
|
Diluted earnings (loss) per common share
|
|
$
|
1.19
|
|
$
|
0.01
|
|
$
|
(2.34)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
82,929
|
|
|
80,003
|
|
|
78,425
|
|
Weighted average diluted shares outstanding
|
|
|
91,407
|
|
|
90,904
|
|
|
78,425
|
|
See accompanying notes to the consolidated financial statements.
Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
Net income (loss)
|
|
$
|
109,310
|
|
$
|
686
|
|
$
|
(183,822)
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment during the period
|
|
|
(122)
|
|
|
(3,272)
|
|
|
(1,665)
|
|
Other comprehensive loss
|
|
|
(122)
|
|
|
(3,272)
|
|
|
(1,665)
|
|
Comprehensive income (loss)
|
|
$
|
109,188
|
|
$
|
(2,586)
|
|
$
|
(185,487)
|
|
See accompanying notes to the consolidated financial statements.
Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Deficit
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Other
|
|
Total
|
|
|
|
Preferred Stock
|
|
Common Stock
|
|
Treasury
|
|
Paid-In
|
|
Retained
|
|
Comprehensive
|
|
Shareholders’
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Stock
|
|
Capital
|
|
Deficit
|
|
Income (Loss)
|
|
Deficit
|
|
Balance, December 31, 2013
|
|
8,624
|
|
$
|
-
|
|
77,788,393
|
|
$
|
799
|
|
$
|
(28,414)
|
|
$
|
925,335
|
|
$
|
(1,448,955)
|
|
$
|
383
|
|
$
|
(550,852)
|
|
Share-based compensation arrangements, net of tax benefits of $10,360
|
|
-
|
|
|
-
|
|
1,373,424
|
|
|
14
|
|
|
-
|
|
|
30,811
|
|
|
-
|
|
|
-
|
|
|
30,825
|
|
Impact of Spin-Off to Gaming and Leisure Properties, Inc.
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,500)
|
|
|
-
|
|
|
(2,500)
|
|
Foreign currency translation adjustment
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,665)
|
|
|
(1,665)
|
|
Net loss
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(183,822)
|
|
|
-
|
|
|
(183,822)
|
|
Balance, December 31, 2014
|
|
8,624
|
|
|
-
|
|
79,161,817
|
|
|
813
|
|
|
(28,414)
|
|
|
956,146
|
|
|
(1,635,277)
|
|
|
(1,282)
|
|
|
(708,014)
|
|
Share-based compensation arrangements, net of tax benefits of $14,826
|
|
-
|
|
|
-
|
|
1,727,458
|
|
|
17
|
|
|
-
|
|
|
32,540
|
|
|
-
|
|
|
-
|
|
|
32,557
|
|
Foreign currency translation adjustment
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,272)
|
|
|
(3,272)
|
|
Net income
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
686
|
|
|
-
|
|
|
686
|
|
Balance, December 31, 2015
|
|
8,624
|
|
|
-
|
|
80,889,275
|
|
|
830
|
|
|
(28,414)
|
|
|
988,686
|
|
|
(1,634,591)
|
|
|
(4,554)
|
|
|
(678,043)
|
|
Share-based compensation arrangements, net of tax benefits of $6,896
|
|
-
|
|
|
-
|
|
1,609,033
|
|
|
16
|
|
|
-
|
|
|
25,519
|
|
|
-
|
|
|
-
|
|
|
25,535
|
|
Foreign currency translation adjustment
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(122)
|
|
|
(122)
|
|
Conversion of preferred stock
|
|
(8,624)
|
|
|
-
|
|
8,624,000
|
|
|
86
|
|
|
-
|
|
|
(86)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net income
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
109,310
|
|
|
-
|
|
|
109,310
|
|
Balance, December 31, 2016
|
|
-
|
|
$
|
-
|
|
91,122,308
|
|
$
|
932
|
|
$
|
(28,414)
|
|
$
|
1,014,119
|
|
$
|
(1,525,281)
|
|
$
|
(4,676)
|
|
$
|
(543,320)
|
|
See accompanying notes to the consolidated financial statements.
Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
109,310
|
|
$
|
686
|
|
$
|
(183,822)
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
271,214
|
|
|
259,461
|
|
|
266,742
|
|
Amortization of items charged to interest expense and interest income
|
|
|
7,200
|
|
|
6,599
|
|
|
6,040
|
|
Change in fair values of contingent purchase price
|
|
|
1,277
|
|
|
(5,374)
|
|
|
689
|
|
(Gain) loss on sale of property and equipment and assets held for sale
|
|
|
(2,471)
|
|
|
1,286
|
|
|
738
|
|
Income from unconsolidated affiliates
|
|
|
(14,337)
|
|
|
(14,488)
|
|
|
(7,949)
|
|
Distributions from unconsolidated affiliates
|
|
|
26,300
|
|
|
28,150
|
|
|
23,000
|
|
Deferred income taxes
|
|
|
8,736
|
|
|
57,236
|
|
|
2,908
|
|
Charge for stock-based compensation
|
|
|
6,871
|
|
|
8,223
|
|
|
10,666
|
|
Impairment losses and write downs
|
|
|
—
|
|
|
40,042
|
|
|
163,184
|
|
(Increase) decrease, net of businesses acquired
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(5,911)
|
|
|
710
|
|
|
10,046
|
|
Prepaid expenses and other current assets
|
|
|
(485)
|
|
|
10,345
|
|
|
(13,305)
|
|
Other assets
|
|
|
(4,879)
|
|
|
4,363
|
|
|
141
|
|
(Decrease) increase, net of businesses acquired
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(7,500)
|
|
|
2,113
|
|
|
2,028
|
|
Accrued expenses
|
|
|
1,519
|
|
|
7,243
|
|
|
(19,512)
|
|
Accrued interest
|
|
|
(746)
|
|
|
1,910
|
|
|
136
|
|
Accrued salaries and wages
|
|
|
(6,721)
|
|
|
8,454
|
|
|
(2,530)
|
|
Gaming, pari-mutuel, property and other taxes
|
|
|
3,379
|
|
|
3,933
|
|
|
(44)
|
|
Income taxes
|
|
|
19,112
|
|
|
(13,383)
|
|
|
5,193
|
|
Other current and noncurrent liabilities
|
|
|
(7,045)
|
|
|
(8,527)
|
|
|
(2,126)
|
|
Net cash provided by operating activities
|
|
|
404,823
|
|
|
398,982
|
|
|
262,223
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
Project capital expenditures, net of reimbursements
|
|
|
(18,740)
|
|
|
(136,548)
|
|
|
(144,707)
|
|
Maintenance capital expenditures
|
|
|
(78,505)
|
|
|
(62,692)
|
|
|
(83,438)
|
|
Advances to Jamul Tribe
|
|
|
(184,193)
|
|
|
(105,658)
|
|
|
(47,093)
|
|
Funds advanced to Jamul Tribe in connection with their refinancing
|
|
|
(98,000)
|
|
|
—
|
|
|
—
|
|
Reimbursement of advances with Jamul Tribe
|
|
|
341,864
|
|
|
—
|
|
|
—
|
|
Acquisition of land
|
|
|
(3,065)
|
|
|
—
|
|
|
—
|
|
Repayment/(Purchase) of note from the previous developer of the Jamul project
|
|
|
30,000
|
|
|
(24,000)
|
|
|
—
|
|
Proceeds from sale of property and equipment and assets held for sale
|
|
|
18,210
|
|
|
561
|
|
|
1,665
|
|
Investment in joint ventures
|
|
|
—
|
|
|
(2,555)
|
|
|
(1,285)
|
|
Decrease in cash in escrow
|
|
|
—
|
|
|
—
|
|
|
18,000
|
|
Acquisitions of businesses, gaming and other licenses, net of cash acquired
|
|
|
(86,859)
|
|
|
(450,113)
|
|
|
(118,678)
|
|
Net cash used in investing activities
|
|
|
(79,288)
|
|
|
(781,005)
|
|
|
(375,536)
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of options
|
|
|
11,601
|
|
|
9,399
|
|
|
9,799
|
|
Principal payments on financing obligation with GLPI
|
|
|
(50,548)
|
|
|
(46,885)
|
|
|
(42,222)
|
|
Proceeds from issuance of long-term debt, net of issuance costs
|
|
|
122,747
|
|
|
562,076
|
|
|
104,935
|
|
Principal payments on long-term debt
|
|
|
(407,662)
|
|
|
(115,195)
|
|
|
(49,541)
|
|
Payments of other long-term obligations
|
|
|
(13,772)
|
|
|
(3,307)
|
|
|
(15,000)
|
|
Payments of contingent purchase price
|
|
|
(1,807)
|
|
|
—
|
|
|
—
|
|
Proceeds from insurance financing
|
|
|
13,119
|
|
|
4,720
|
|
|
28,888
|
|
Payments on insurance financing
|
|
|
(13,608)
|
|
|
(15,275)
|
|
|
(18,228)
|
|
Tax benefit from stock options exercised
|
|
|
6,896
|
|
|
14,826
|
|
|
10,360
|
|
Net cash (used in) provided by financing activities
|
|
|
(333,034)
|
|
|
410,359
|
|
|
28,991
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(7,499)
|
|
|
28,336
|
|
|
(84,322)
|
|
Cash and cash equivalents at beginning of year
|
|
|
237,009
|
|
|
208,673
|
|
|
292,995
|
|
Cash and cash equivalents at end of year
|
|
$
|
229,510
|
|
$
|
237,009
|
|
$
|
208,673
|
|
Supplemental disclosure
|
|
|
|
|
|
|
|
|
|
|
Interest expense paid, net of amounts capitalized
|
|
$
|
452,842
|
|
$
|
434,175
|
|
$
|
418,544
|
|
Income taxes (refunds received)/taxes paid
|
|
$
|
(11,412)
|
|
$
|
5,116
|
|
$
|
23,185
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing activities
|
|
|
|
|
|
|
|
|
|
|
Accrued capital expenditures
|
|
$
|
6,749
|
|
$
|
5,890
|
|
$
|
19,741
|
|
Accrued advances to Jamul Tribe
|
|
$
|
6,962
|
|
$
|
39,625
|
|
$
|
7,978
|
|
See accompanying notes to the consolidated financial statements.
Non-cash transactions:
In conjunction with the purchase price of Rocket Speed on August 1, 2016, the Company increased its acquired assets and other current and noncurrent liabilities by $34.4 million for the fair value of the contingent purchase price consideration at the time of acquisition. The remaining portion of the purchase price was paid in cash.
In January 2015, a repayment obligation for a hotel and event center near Hollywood Casino Lawrenceburg was assumed by a subsidiary of the Company, which was financed through a loan with the City of Lawrenceburg Department of Redevelopment. This non-cash transaction increased property and equipment, net and total debt by $15.3 million. See Note 9 for further detail.
For the year ended December 31, 2014, the Company recognized an increase to the financing obligation and real property assets of $118.9 million related to the remaining real estate construction costs that were funded by Gaming and Leisure Properties, Inc. for the Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course facilities which opened in the third quarter of 2014. In addition during this same period, the Company recognized an increase to other intangible assets and debt of $150.0 million related to the relocation fees for Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning (see Note 9). Lastly, the Company increased other intangible assets and accrued expenses for $50.0 million related to the unpaid gaming license fees for Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course. In conjunction with the purchase of Plainridge Racecourse in April 2014, the Company increased its acquired assets and other noncurrent liabilities by $18.5 million for the fair value of the contingent purchase price consideration at the time of acquisition. The remaining portion of the purchase price was paid in cash.
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1.
Business and Basis of Presentation
Penn National Gaming, Inc. (“Penn”) and together with its subsidiaries (collectively, the “Company”) is a geographically diversified, multi-jurisdictional owner and manager of gaming and racing facilities and video gaming terminal operations with a focus on slot machine entertainment. The Company was incorporated in Pennsylvania in 1982 as PNRC Corp. and adopted its current name in 1994, when the Company became a publicly traded company. In 1997, the Company began its 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. We, along with our joint venture partner, opened Hollywood Casino at Kansas Speedway in February 2012. In Ohio, the Company opened four new gaming properties, including: Hollywood Casino Toledo in May 2012, Hollywood Casino Columbus in October 2012, Hollywood Gaming at Dayton Raceway in August 2014, and Hollywood Gaming at Mahoning Valley Race Course in September 2014. In addition, in November 2012, the Company acquired Harrah’s St Louis, which was subsequently rebranded as Hollywood Casino St Louis. In 2015, the Company opened Plainridge Park Casino, an integrated racing and slots-only gaming facility in Plainville, Massachusetts, in June, completed the acquisition of our first Las Vegas strip asset, Tropicana Hotel and Casino in Las Vegas, Nevada in August, and acquired Illinois Gaming Investors, LLC (d/b/a Prairie State Gaming), one of the largest video gaming terminal route operators in Illinois, in September.
In addition, we are now managing Hollywood Casino Jamul-San Diego on the Jamul Indian Village land in trust near San Diego, California, which opened on October 10, 2016. In 2016, Prairie State Gaming also acquired two small video gaming terminal route operators in Illinois. Finally, the Company recently implemented our interactive gaming strategy through our subsidiary, Penn Interactive Ventures, which included launching our HollywoodCasino.com Play4Fun social gaming platform with Scientific Games and our HollywoodSlots.com mobile social gaming platform with OpenWager. On August 1, 2016, we completed our acquisition of Rocket Speed, a leading developer of social casino games.
As of December 31, 2016, the Company owned, managed, or had ownership interests in twenty‑seven facilities in the following seventeen jurisdictions: California, Florida, Illinois, Indiana, Kansas, Maine, Massachusetts, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Pennsylvania, Texas, West Virginia, and Ontario, Canada. 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 and Hollywood Gaming at Dayton Raceway, respectively, both of which opened in the third quarter of 2014. On January 8, July 31, and September 4, 2016, the Company sold Raceway Park in Toledo, Ohio, Rosecroft Raceway in Prince George’s county, Maryland and Beulah Park in Grove City, Ohio, respectively.
The preparation of financial statements in conformity with generally accepted accounting principles 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.
2.
Principles of Consolidation
The 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 (“VIEs”), are accounted for under the equity method. All intercompany accounts and transactions have been eliminated in consolidation.
3.
Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all cash balances and highly‑liquid investments with original maturities of three months or less to be cash and cash equivalents.
Concentration of Credit Risk
Financial instruments that subject the Company to credit risk consist of cash and cash equivalents, and accounts receivable.
The Company’s policy is to limit the amount of credit exposure to any one financial institution, and place investments with financial institutions evaluated as being creditworthy, or in short‑term money market and tax‑free bond funds which are exposed to minimal interest rate and credit risk. The Company has bank deposits and overnight repurchase agreements that exceed federally‑insured limits.
Concentration of credit risk, with respect to casino receivables, is limited through the Company’s credit evaluation process. The Company issues markers to approved casino customers only following credit checks and investigations of creditworthiness. Marker balances issued to approved casino customers were $4.4 million at December 31, 2016, compared to $4.7 million at December 31, 2015.
The Company’s receivables of $61.9 million and $45.2 million at December 31, 2016 and 2015, respectively, primarily consist of $5.0 million and $5.2 million, respectively, due from the West Virginia Lottery for gaming revenue settlements and capital reinvestment projects at Hollywood Casino at Charles Town Races, $11.8 million and $5.4 million, respectively, for reimbursement of expenses paid on behalf of Casino Rama and Hollywood Casino Jamul – San Diego, $4.0 million and $5.1 million, respectively, for racing settlements due from simulcasting at Hollywood Casino at Penn National Race Course, $3.4 million and $3.2 million, respectively, for reimbursement of payroll expenses paid on behalf of the Company’s joint venture in Kansas, $10.8 million and $5.5 million, respectively, for cash, credit card and other advances to customers, $3.2 million due from platform providers (Apple, Google, Amazon, Facebook) for social casino game revenues, and markers issued to customers mentioned above.
Accounts are written off when management determines that an account is uncollectible. Recoveries of accounts previously written off are recorded when received. An allowance for doubtful accounts is determined to reduce the Company’s receivables to their carrying value, which approximates fair value. The allowance is estimated based on historical collection experience, specific review of individual customer accounts, and current economic and business conditions. Historically, the Company has not incurred any significant credit‑related losses.
See Note 5 for a discussion of the credit risk associated with our advances to the Jamul Tribe.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Maintenance and repairs that neither add materially to the value of the asset nor appreciably prolong its useful life are charged to expense as incurred. Gains or losses on the disposal of property and equipment are included in the determination of income.
Depreciation of property and equipment is recorded using the straight‑ line method over the following estimated useful lives:
|
|
|
|
Land improvements
|
|
15
|
years
|
Building and improvements
|
|
5 to 31
|
years
|
Furniture, fixtures, and equipment
|
|
3 to 31
|
years
|
All costs funded by Penn considered to be an improvement to the real property assets owned by GLPI under the Master Lease are recorded as leasehold improvements. Leasehold improvements are depreciated over the shorter of the estimated useful life of the improvement or the related lease term.
The estimated useful lives are determined based on the nature of the assets as well as the Company’s current operating strategy.
The Company reviews the carrying value of its property and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on undiscounted estimated future cash flows expected to result from its use and eventual disposition. The factors considered by the Company in performing this assessment include current operating results, trends and prospects, as well as the effect of obsolescence, demand, competition and other economic factors. For purposes of recognizing and measuring impairment in accordance with Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 360, “Property, Plant, and Equipment,” assets are grouped at the individual property level representing the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. In assessing the recoverability of the carrying value of property and equipment, the Company must make assumptions regarding future cash flows and other factors. If these estimates or the related assumptions change in the future, the Company may be required to record an impairment loss for these assets. Such an impairment loss would be recognized as a non‑cash component of operating income.
Goodwill and Other Intangible Assets
At December 31, 2016, the Company had $989.7 million in goodwill and $435.5 million in other intangible assets within its consolidated balance sheet, respectively, resulting from the Company’s acquisition of other businesses and payment for gaming licenses. Two issues arise with respect to these assets that require significant management estimates and judgment: (i) the valuation in connection with the initial purchase price allocation; and (ii) the ongoing evaluation for impairment.
In connection with the Company’s acquisitions, valuations are completed to determine the allocation of the purchase prices. The factors considered in the valuations include data gathered as a result of the Company’s due diligence in connection with the acquisitions, projections for future operations, and data obtained from third-party valuation specialists as deemed appropriate. Goodwill represents the future economic benefits of a business combination measured as the excess purchase price over the fair market value of net assets acquired. Goodwill is tested annually, or more frequently if indicators of impairment exist, in two steps. In step 1 of the impairment test, the current fair value of each reporting unit is estimated using a discounted cash flow model which is then compared to the carrying value of each reporting unit. The Company adjusts the carrying value of each reporting unit that utilizes property that is subject to the Master Lease by an allocation of a pro-rata portion of the GLPI financing obligation based on the reporting unit’s estimated fair value as a percentage of the aggregate estimated fair value of all reporting units that utilize property that is subject to the Master Lease. If the carrying amount of a reporting unit exceeds its fair value in step 1 of the impairment test, then step 2 of the impairment test is performed to determine the implied fair value of goodwill for that reporting unit. If the implied fair value of goodwill is less than the goodwill allocated for that reporting unit, an impairment is recognized. In the event a reporting unit has a negative carrying amount, the Company first performs a qualitative evaluation to determine if it is more likely than not that a goodwill impairment exists, and if so, it performs a step 2 of the impairment test to measure the amount of the impairment charge, if any.
In accordance with ASC 350, “Intangibles‑Goodwill and Other,” the Company considers its gaming licenses and certain other intangible assets as indefinite‑life intangible assets that do not require amortization based on the Company’s future expectations to operate its gaming facilities indefinitely (notwithstanding our experience in 2014 in Iowa which the Company concluded was an isolated incident and the first time in the Company’s history a gaming regulator has taken an action which could cause it to lose its gaming license) as well as its historical experience in renewing these intangible assets at minimal cost with various state commissions. Rather, these intangible assets are tested annually for impairment, or more frequently if indicators of impairment exist, by comparing the fair value of the recorded assets to their carrying amount. If the carrying amounts of the indefinite‑life intangible assets exceed their fair value, an impairment loss is recognized. The Company completes its testing of its intangible assets prior to assessing the realizability of its goodwill.
The Company assessed the fair value of its indefinite‑life intangible assets (which are primarily gaming licenses) using the Greenfield Method under the income approach. The Greenfield Method estimates the fair value of the gaming license using a discounted cash flow model assuming the Company built a casino with similar utility to that of the existing facility. The method assumes a theoretical start‑up company going into business without any assets other than the intangible asset being valued. As such, the value of the gaming license is a function of the following items:
|
·
|
|
Projected revenues and operating cash flows (including an allocation of the Company’s projected financing payments to its reporting units consistent with how the GLPI financing obligation is allocated);
|
|
·
|
|
Theoretical construction costs and duration;
|
|
·
|
|
Pre‑opening expenses; and
|
|
·
|
|
Discounting that reflects the level of risk associated with receiving future cash flows attributable to the license.
|
The evaluation of goodwill and indefinite‑life intangible assets requires the use of estimates about future operating results of each reporting unit to determine the estimated fair value of the reporting unit and the indefinite‑lived intangible assets. The Company must make various assumptions and estimates in performing its impairment testing. The implied fair value includes estimates of future cash flows (including an allocation of the Company’s projected financing obligation to its reporting units) that are based on reasonable and supportable assumptions which represent the Company’s best estimates of the cash flows expected to result from the use of the assets including their eventual disposition. Changes in estimates, increases in the Company’s cost of capital, reductions in transaction multiples, changes in operating and capital expenditure assumptions or application of alternative assumptions and definitions could produce significantly different results. Future cash flow estimates are, by their nature, subjective and actual results may differ materially from the Company’s estimates. If the Company’s ongoing estimates of future cash flows are not met, the Company may have to record additional impairment charges in future accounting periods. The Company’s estimates of cash flows are based on the current regulatory and economic climates, recent operating information and budgets of the various properties where it conducts operations. These estimates could be negatively impacted by changes in federal, state or local regulations, economic downturns, or other events affecting the Company’s properties.
Forecasted cash flows (based on the Company’s annual operating plan as determined in the fourth quarter) can be significantly impacted by the local economy in which its reporting units operate. For example, increases in unemployment rates can result in decreased customer visitations and/or lower customer spend per visit. In addition, the impact of new legislation which approves gaming in nearby jurisdictions or further expands gaming in jurisdictions where the Company’s reporting units currently operate can result in opportunities for the Company to expand its operations. However, it also has the impact of increasing competition for the Company’s established properties which generally will have a negative effect on those locations’ profitability once competitors become established as a certain
level of cannibalization occurs absent an overall increase in customer visitations. Additionally, increases in gaming taxes approved by state regulatory bodies can negatively impact forecasted cash flows.
Assumptions and estimates about future cash flow levels and multiples by individual reporting units are complex and subjective. They are sensitive to changes in underlying assumptions and can be affected by a variety of factors, including external factors, such as industry, geopolitical and economic trends, and internal factors, such as changes in the Company’s business strategy, which may reallocate capital and resources to different or new opportunities which management believes will enhance its overall value but may be to the detriment of an individual reporting unit.
Once an impairment of goodwill or other indefinite‑life intangible assets has been recorded, it cannot be reversed. Because the Company’s goodwill and indefinite‑life intangible assets are not amortized, there may be volatility in reported income because impairment losses, if any, are likely to occur irregularly and in varying amounts. Intangible assets that have a definite‑life are amortized on a straight‑line basis over their estimated useful lives or related service contract. The Company reviews the carrying value of its intangible assets that have a definite‑life for possible impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. If the carrying amount of the intangible assets that have a definite‑life exceed their fair value, an impairment loss is recognized.
Failed Spin-Off-Leaseback Financing Obligation
The Company’s spin-off of real property assets and corresponding Master Lease Agreement with GLPI on November 1, 2013 did not meet all of the requirements for sale-leaseback accounting treatment under Accounting Standards Codification (ASC) 840 “Leases” and therefore is accounted for as a financing obligation rather than a distribution of assets followed by an operating lease. Specifically, the Master Lease contains provisions that would indicate the Company has prohibited forms of continuing involvement in the leased assets which are not a normal leaseback. As a result of the failed spin-off-leaseback accounting, the Company calculated a financing obligation at the inception of the Master Lease based on the future minimum lease payments discounted at 9.70%. The discount rate represents the estimated incremental borrowing rate over the lease term of 35 years, which included renewal options that were reasonably assured of being exercised given the high percentage of the Company’s earnings that are derived from the Master Lease properties operations to the Company and the lack of alternative economically feasible leasing options for such real estate. The minimum lease payments are recorded as interest expense and in part as a payment of principal reducing the financing obligation. Contingent rentals are recorded as additional interest expense. The real property assets in the transaction remain on the consolidated balance sheets and continue to be depreciated over the remaining useful lives.
Debt Issuance Costs
Debt issuance costs that are incurred by the Company in connection with the issuance of debt are deferred and amortized to interest expense using the effective interest method over the contractual term of the underlying indebtedness. These costs are classified as a direct reduction of long-term debt on the Company’s consolidated balance sheets in accordance with guidance issued in April 2015 by the FASB to simplify the presentation of debt issuance costs in the balance sheet.
Self-Insurance Reserves
The Company is self-insured for employee health coverage, general liability and workers compensation up to certain stop loss amounts. The Company uses a reserve method for each reported claim plus an allowance for claims incurred but not yet reported to a fully developed claims reserve method based on an actuarial computation of ultimate liability. Self-insurance reserves are included in accrued expenses on our consolidated balance sheets.
Contingent Purchase Price
The consideration for the Company’s acquisitions often includes future payments that are contingent upon the occurrence of a particular event. The Company records an obligation for such contingent payments at fair value at the acquisition date.
The Company revalues its contingent consideration obligations each reporting period. Changes in the fair value of the contingent consideration obligation are recognized in the Company’s consolidated statements of operations as a component of general and administrative expense. Changes in the fair value of the contingent purchase price obligation can result from changes to one or multiple inputs, including adjustments to the discount rate and changes in the assumed probabilities of successful achievement of certain financial targets.
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. For the years ended December 31, 2016, 2015 and 2014, the only component of accumulated other comprehensive income was foreign currency translation adjustments.
Income Taxes
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.
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.
ASC 740 also creates a single model to address uncertainty in tax positions, and clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in an enterprise’s financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.
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, hotel 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 (“OTWs’).
Revenue from our management service contracts for Casino Rama and Hollywood Casino Jamul – San Diego are based upon contracted terms and are recognized when services are performed and collection is reasonably assured.
The Company records revenues generated from its management service contract and licensing contract with the Jamul Tribe, as well as interest income associated with advances to the Jamul Tribe in accordance with ASC 605-25 “Multiple Element Arrangements.” The fair value of each arrangement element is based on the separate standalone selling price determined by either vendor-specific objective evidence (“VSOE”), if available, or third-party evidence ("TPE") if VSOE is not available. We concluded revenues generated with respect to each element contained within the arrangement is representative of the separate standalone selling price which is reflective of fair value.
Revenues include reimbursable costs associated with the Company’s management contract with Jamul Indian Village of California (the “Jamul Tribe”), which represent amounts received or due pursuant to the Company’s management agreement for the reimbursement of expenses, primarily payroll costs, incurred on their behalf. The Company recognizes the reimbursable costs associated with this contract as revenue on a gross basis, with an offsetting amount charged to operating expense as it is the primary obligor for these costs.
Revenues are recognized net of certain sales incentives in accordance with 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 years ended December 31, 2016, 2015 and 2014 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
Rooms
|
|
$
|
39,352
|
|
$
|
34,708
|
|
$
|
33,513
|
|
Food and beverage
|
|
|
126,438
|
|
|
111,144
|
|
|
106,908
|
|
Other
|
|
|
8,871
|
|
|
9,135
|
|
|
9,898
|
|
Total promotional allowances
|
|
$
|
174,661
|
|
$
|
154,987
|
|
$
|
150,319
|
|
The estimated cost of providing such complimentary services for the years ended December 31, 2016, 2015 and 2014 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
Rooms
|
|
$
|
5,291
|
|
$
|
4,199
|
|
$
|
3,664
|
|
Food and beverage
|
|
|
48,497
|
|
|
44,012
|
|
|
44,325
|
|
Other
|
|
|
3,518
|
|
|
3,582
|
|
|
3,635
|
|
Total cost of complimentary services
|
|
$
|
57,306
|
|
$
|
51,793
|
|
$
|
51,624
|
|
Player Loyalty Programs
The Company has a nationwide branding initiative and loyalty program, called Marquee Rewards. Marquee Rewards allows customers to earn points that are redeemable for slot play and complementaries. Complimentaries are usually in the form of monetary discounts and other rewards which generally can only be redeemed at our restaurant, hotel, retail and spa facilities. These points expire on a monthly basis after six months of inactivity. Customers earn points for their play across the vast majority of the Company’s casinos and can concurrently redeem them at our casinos.
The Company’s player loyalty liability recorded within accrued expenses on the consolidated balance sheets was $14.2 million and $13.8 million at December 31, 2016 and 2015, respectively. These liabilities are based on expected redemption rates and the estimated costs of the services or merchandise to be provided. These assumptions are periodically evaluated by comparing historical redemption experience and projected trends.
Gaming and Racing Taxes
The Company is subject to gaming and pari‑mutuel taxes based on gross gaming revenue and pari‑mutuel revenue in the jurisdictions in which it operates. The Company primarily recognizes gaming and pari‑mutuel tax expense based on the statutorily required percentage of revenue that is required to be paid to state and local jurisdictions in the states where or in which wagering occurs. In certain states in which the Company operates, gaming taxes are based on graduated rates. The Company records gaming tax expense at the Company’s estimated effective gaming tax rate for the year, considering estimated taxable gaming revenue and the applicable rates. Such estimates are adjusted each interim period. If gaming tax rates change during the year, such changes are applied prospectively in the determination of gaming tax expense in future interim periods. For the years ended December 31, 2016, 2015 and 2014, these expenses, which are recorded primarily within gaming expense in the consolidated statements of operations, were $962.7 million, $921.6 million, and $821.1 million, respectively.
Payments related to the Master Lease
As of December 31, 2016, the Company financed with GLPI real property assets associated with eighteen of the Company’s gaming and related facilities used in the Company’s operations.
The payment structure under the Master Lease, which became effective November 1, 2013, includes a fixed component, a portion of which is subject to an annual escalator of up to 2% if certain 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 Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course in the third quarter of 2014, the Company’s annual payments related to the Master Lease increased by approximately $19 million, which approximates ten percent of the real estate construction costs paid for by GLPI related to these facilities.
In April 2014, an amendment to the Master Lease was entered into in order to revise certain provisions relating to the Sioux City property. In accordance with the amendment, upon the cessation of gaming operations at Argosy Casino Sioux City on July 30, 2014 due to the termination of its gaming license, the annual payment to GLPI was reduced by $6.2 million. Additionally, the Company finalized its calculation of the coverage ratio in accordance with the appropriate provisions of the Master Lease to determine if an annual base payment escalator is due. The calculation of the escalator resulted in an increase to the Company’s annual payment of $4.5 million, $5.0 million and $3.2 million starting on November 1, 2016, 2015 and 2014, respectively.
The Master Lease is commonly known as a triple-net lease. Accordingly, in addition to the required payments to GLPI, the Company is required to pay the following, among other things: (1) all facility maintenance; (2) all insurance required in connection with the leased properties and the business conducted on the leased properties; (3) taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor); and (4) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties. At the Company’s option, the Master Lease may be extended for up to four five‑year renewal terms beyond the initial fifteen‑year term, on the same terms and conditions.
Total payments made to GLPI under the Master Lease were $442.3 million, $437.0 million and $421.4 million for the years ended December 31, 2016, 2015 and 2014, respectively.
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.
During 2016, the Company’s 8,624 outstanding shares of Series C Preferred Stock were sold by the holders of these securities, and therefore automatically converted to 8,624,000 shares of common stock under previously agreed upon terms. As a result there are no longer any outstanding shares of Series C Preferred Stock as of December 31, 2016. At December 31, 2015 and 2014, the Company had outstanding 8,624 shares of Series C Preferred Stock. The Company determined that the preferred stock qualified as a participating security as defined in ASC 260 since these securities participate in dividends with the Company’s common stock. In accordance with ASC 260, a company is required to use the two‑class method when computing EPS when a company has a security that qualifies as a “participating security.” The two‑class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. A participating security is included in the computation of basic EPS using the two‑class method. Under the two‑class method, basic EPS for the Company’s common stock is computed by dividing net income applicable to common stock by the weighted‑average common shares outstanding during the period. Diluted EPS for the Company’s common stock is computed using the more dilutive of the two‑class method or the if-converted method.
Since the Company’s preferred shareholders are not obligated to fund the losses of the Company nor is the contractual principal of the Series C Preferred Stock reduced as a result of losses incurred by the Company, no allocation of the Company’s undistributed losses resulting from the net loss for the years ended December 31, 2014 is required. As such, since the Company reported a net loss for the years ended December 31, 2014, it was required by ASC 260 to use basic weighted-average common shares outstanding which totaled 78.4 million for those respective periods, rather than diluted weighted-average common shares outstanding, when calculating diluted EPS.
The following table sets forth the allocation of net income for the year ended December 31, 2016 and 2015 under the two class method:
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
|
|
(in thousands)
|
|
Net income
|
|
$
|
109,310
|
|
$
|
686
|
|
Net income applicable to preferred stock
|
|
|
8,662
|
|
|
67
|
|
Net income applicable to common stock
|
|
$
|
100,648
|
|
$
|
619
|
|
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 year ended December 31, 2016 and 2015:
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
|
|
(in thousands)
|
|
Determination of shares:
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
82,929
|
|
80,003
|
|
Assumed conversion of dilutive employee stock-based awards
|
|
1,299
|
|
2,217
|
|
Assumed conversion of restricted stock
|
|
42
|
|
60
|
|
Diluted weighted-average common share outstanding before participating security
|
|
84,270
|
|
82,280
|
|
Assumed conversion of preferred stock
|
|
7,137
|
|
8,624
|
|
Diluted weighted-average common shares outstanding
|
|
91,407
|
|
90,904
|
|
Options to purchase 3,036,819 shares, 1,635,929 shares and 6,633,622 shares were outstanding during the years ended December 31, 2016, 2015 and 2014, respectively, but were not included in the computation of diluted EPS because they were antidilutive.
The following table presents the calculation of basic and diluted EPS for the Company’s common stock for the year ended December 31, 2016 and 2015 (in thousands, except per share data):
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
Calculation of basic EPS:
|
|
|
|
|
|
|
|
Net income applicable to common stock
|
|
$
|
100,648
|
|
$
|
619
|
|
Weighted-average common shares outstanding
|
|
|
82,929
|
|
|
80,003
|
|
Basic EPS
|
|
$
|
1.21
|
|
$
|
0.01
|
|
Calculation of diluted EPS using two class method:
|
|
|
|
|
|
|
|
Net income applicable to common stock
|
|
$
|
100,648
|
|
$
|
619
|
|
Diluted weighted-average common shares outstanding before participating security
|
|
|
84,270
|
|
|
82,280
|
|
Diluted EPS
|
|
$
|
1.19
|
|
$
|
0.01
|
|
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.
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 5.40 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 following are the weighted‑average assumptions used in the Black‑Scholes option‑pricing model for the years ended December 31, 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
1.20
|
%
|
1.54
|
%
|
1.68
|
%
|
|
Expected volatility
|
|
31.23
|
%
|
36.68
|
%
|
44.80
|
%
|
|
Dividend yield
|
|
—
|
|
-
|
|
-
|
|
|
Weighted-average expected life (years)
|
|
5.40
|
|
5.45
|
|
5.45
|
|
|
See Note 14 for a discussion on the impact of the Spin‑Off on the Company’s stock‑based equity awards.
Segment Information
The Company’s Chief Executive Officer and President, who is the Company’s Chief Operating Decision Maker (“CODM”) 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. During the second quarter of 2016, the Company changed its three reportable segments from East/Midwest, West and Southern Plains to Northeast, South/West, and Midwest in connection with the addition of a new regional vice president and a realignment of responsibilities within our segments. This realignment changed the manner in which information is provided to the CODM and therefore how performance is assessed and resources are allocated to the business.
The Northeast 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 Toledo, Hollywood Casino Columbus, Hollywood Gaming at Dayton Raceway, which opened on August 28, 2014, Hollywood Gaming at Mahoning Valley Race Course, which opened on September 17, 2014, and Plainridge Park Casino, which opened on June 24, 2015. It also includes the Company’s Casino Rama management service contract.
The South/West reportable segment consists of the following properties: Zia Park Casino, Hollywood Casino Tunica, Hollywood Casino Gulf Coast, Boomtown Biloxi, M Resort, and Tropicana Las Vegas, which was acquired on August 25, 2015, as well as Hollywood Casino Jamul-San Diego, which opened on October 10, 2016, which we operate under our management contract with the Jamul Tribe.
The Midwest reportable segment consists of the following properties: Hollywood Casino Aurora, Hollywood Casino Joliet, Argosy Casino Alton, Argosy Casino Riverside, Hollywood Casino Lawrenceburg, Hollywood Casino St. Louis, and Prairie State Gaming, which the Company acquired on September 1, 2015, 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.
The Other category consists of the Company’s standalone racing operations, namely Rosecroft Raceway, which was sold on July 31, 2016, Sanford-Orlando Kennel Club, and the Company’s joint venture interests in Sam Houston Race Park, Valley Race Park, and Freehold Raceway. If the Company is successful in obtaining gaming operations at these locations, they would be assigned to one of the Company’s regional executives and reported in their respective reportable segment. The Other category also includes the Company’s corporate overhead operations, which does not meet the definition of an operating segment under ASC 280. Additionally, Penn Interactive Ventures, the Company’s wholly-owned subsidiary which represents its social online gaming initiatives, including the recently acquired Rocket Speed, meets the definition of an operating segment under ASC 280, but is quantitatively not significant to the Company’s operations as it represents 0.8% of net revenues and 0.4% of income from operations for the year ended December 31, 2016.
In addition to GAAP financial measures, management uses adjusted EBITDA as an important measure of the operating performance of its segments, including the evaluation of operating personnel and is especially relevant in evaluating large, long lived casino projects because it provides a perspective on the current effects of operating decisions separated from the substantial non-operational depreciation charges and financing costs of such projects. The Company defines adjusted EBITDA as earnings before interest, taxes, stock compensation, debt extinguishment charges, impairment charges, insurance recoveries and deductible charges, depreciation and amortization, changes in the estimated fair value of contingent purchase price, gain or loss on disposal of assets, and other income or expenses. Adjusted EBITDA is also inclusive of income or loss from unconsolidated affiliates, with the Company’s share of non-operating items (such as depreciation and amortization) added back for its joint venture in Kansas Entertainment. Adjusted EBITDA excludes payments associated with our Master Lease agreement with GLPI as the transaction is accounted for as a financing obligation. Adjusted EBITDA should not be construed as an alternative to income from operations, as an indicator of the Company’s operating performance, as an alternative to cash flows from operating activities, as a measure of liquidity, or as any other measure of performance determined in accordance with GAAP. The Company has significant uses of cash flows, including capital expenditures, interest payments, taxes and debt principal repayments, which are not reflected in adjusted EBITDA.
The prior year amounts were reclassified to conform to the Company’s new reporting structure in accordance with ASC 280. See Note 15 for further information with respect to the Company’s segments.
Statements of Cash Flows
The Company has presented the consolidated statements of cash flows using the indirect method, which involves the reconciliation of net (loss) income to net cash flow from operating activities.
Acquisitions
The Company accounts for its acquisitions in accordance with ASC 805, “Business Combinations.” The results of operations of acquisitions are included in the consolidated financial statements from their respective dates of acquisition.
Variable Interest Entities
In accordance with the authoritative guidance of ASC 810, “Consolidation” (“ASC 810”), the Company consolidates a VIE if the Company is the primary beneficiary, defined as the party that has both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses of or the right to receive benefits from the VIE that could potentially be significant to the VIE. A variable interest is a contractual, ownership or other interest that changes with changes in the fair value of the VIE’s net assets exclusive of variable interests. To determine whether a variable interest the Company holds could potentially be significant to the VIE, the Company considers both qualitative and quantitative factors regarding the nature, size and form of its involvement with the VIE. The Company assesses whether it is the primary beneficiary of a VIE or the holder of a significant variable interest in a VIE on an on-going basis for each such interest.
Certain Risks and Uncertainties
The Company faces intense gaming competition in most of the markets where its properties operate. Certain states are currently considering or implementing legislation to legalize or expand gaming. Such legislation presents potential opportunities for the Company to establish new properties; however, this also presents potential competitive threats to the Company’s existing properties. For example, the Company’s facility in Charles Town, West Virginia generated approximately 10% or more of our net revenues has faced new sources of significant competition. Namely, Hollywood Casino at Charles Town Races faced increased competition from the Baltimore, Maryland market, which
includes Maryland Live!, Horseshoe Casino Baltimore, which opened at the end of August 2014, and most recently, MGM National Harbor, which opened in December 2016.
The Company’s operations are dependent on its continued licensing by state gaming commissions. The loss of a license, in any jurisdiction in which the Company operates, could have a material adverse effect on future results of operations.
The Company is dependent on each gaming property’s local market for a significant number of its patrons and revenues. If economic conditions in these areas deteriorate or additional gaming licenses are awarded in these markets, the Company’s results of operations could be adversely affected.
The Company is dependent on the economy of the U.S. in general, and any deterioration in the national economic, energy, credit and capital markets could have a material adverse effect on future results of operations.
The Company is dependent upon a stable gaming and admission tax structure in the locations that it operates in. Any change in the tax structure could have a material adverse affect on future results of operations.
4.
New Accounting Pronouncements
Accounting Pronouncements Implemented in 2016
In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805) -Simplifying the Accounting for Measurement Period Adjustments.” This accounting standard seeks to simplify the accounting related to business combinations. Prior to the issuance of this standard, US GAAP required a retrospective adjustment for provisional amounts recognized during the measurement periods when facts and circumstances that existed at the measurement date, if known, would have affected the measurement of the accounts initially recognized. This standard eliminates the requirement for retrospective adjustments and requires adjustments to the consolidated financial statements as needed in current period earnings for the full effect of changes. The new guidance is effective for fiscal years and for interim periods within those fiscal years after December 15, 2015. The adoption of this pronouncement did not have a material impact to the Company’s consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810) – Amendments to the Consolidation Analysis,” consisting of new consolidation guidance which modifies the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The main provisions of the new guidance includes modifying the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, the evaluation of fees paid to a decision maker or a service provider as a variable interest, and the effect of fee arrangements and related parties on the primary beneficiary determination, as well as provides a scope exception for certain investment funds. The new guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the new guidance using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the new guidance retrospectively. The adoption of this pronouncement had no impact to the Company’s consolidated financial statements.
New Accounting Pronouncements to be Implemented
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting.” The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The new guidance is effective for fiscal years, and for interim periods within those fiscal
years, beginning after December 15, 2016. Early adoption is permitted for any organization in any interim or annual period. Management will adopt this change in accounting principle in 2017.
In March 2016, the FASB issued ASU No. 2016-07, "Investments – Equity Method and Joint Ventures (Topic 323) - Simplifying the Transition to the Equity Method of Accounting." This new guidance eliminates the requirement to apply the equity method of accounting, upon obtaining significant influence, as if it was applied to the investment from inception. Instead, at the date significant influence is obtained, companies should add the cost of the additional interest acquired to the current basis of the investment and apply the equity method prospectively. If an available-for-sale security becomes eligible for the equity method of accounting, any unrealized gains or losses within accumulated other comprehensive income should be recognized within earnings on the date the investment becomes qualified for use of the equity method. The new guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The Company does not anticipate a material impact from this new guidance.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230) – Clarification of Certain Cash Receipts and Cash Payments.” The amendments are intended to address diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on the following specific cash flow issues: (a) debt prepayment or debt extinguishment costs; (b) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (c) contingent consideration payments made after a business combination; (d) proceeds from the settlement of insurance claims; (e) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (f) distributions received from equity method investees; (g) beneficial interest in securitization transactions; and (h) separately identifiable cash flows and application of the predominance principle. The new guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently assessing the impact that the adoption of these amendments will have on our consolidated statements of cash flows and related disclosures.
In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory.” The new guidance requires that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset is sold to an outside party. The new guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual reporting period. The new guidance requires adoption on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently assessing the impact that the adoption of this new guidance will have on our consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which impacts virtually all aspects of an entity’s revenue recognition. The core principle of Topic 606 is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB deferred the effective date of the standard by one year which results in the new standard being effective for the Company at the beginning of its first quarter of fiscal year 2018. In addition, during March, April and May 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing and ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, respectively, which clarified the guidance on certain items such as reporting revenue as a principal versus agent, identifying performance obligations, accounting for intellectual property licenses, assessing collectability and presentation of sales taxes. Management has not yet completed its assessment of the impact of the new standard on the Company’s consolidated financial statements. Although the Company is currently
assessing the impact that the adoption of the new standard will have on its consolidated financial statements and related disclosures, we do believe that one area it will result in changes to is our accounting for loyalty points that are earned by our customers. The Company’s Marquee Rewards program allows customers, who are members and utilize their rewards membership card to earn promotional points that are redeemable for slot play and complimentaries. The accumulated points can be redeemed for food and beverages at our restaurants, and products offered at our retail stores across the vast majority of Penn’s casino properties. The estimated liability for unredeemed points is currently accrued based on expected redemption rates and the estimated costs of the services or merchandise to be provided. Under the new standard, we will need to defer the full retail value of the complimentaries until the future revenue transaction occurs. Although the exact amount of the increase to our point liabilities has not yet been determined, we do not anticipate it will have a significant impact on our earnings. Additionally, at this time, we expect to adopt Topic 606 using the modified retrospective method on January 1, 2018. The Company is continuing to evaluate the new guidance both internally and through following the industry working group and plans to provide additional information at a future date.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which will require, among other items, lessees to recognize a right-of-use asset and a lease liability for most leases. Extensive quantitative and qualitative disclosures, including significant judgments made by management, will be required to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing contracts. The accounting applied by a lessor is largely unchanged from that applied under the current standard. The standard must be adopted using a modified retrospective transition approach and provides for certain practical expedients. The new guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. Management has not yet completed its assessment of the impact of the new standard on the Company’s consolidated financial statements. However, the Company has numerous operating leases which, under the new standard, will need to be reported as an asset and a liability on our balance sheet. The precise amount of this asset and liability will be determined based on the leases that exist at the Company on the date of adoption.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805) : Clarifying the Definition of a Business,” in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently assessing the impact that the adoption of this new guidance will have on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This new guidance removed step two of the goodwill impairment test and specifies that an entity will recognize an impairment loss for the amount by which a reporting unit’s carrying amount exceeds its fair value. The new guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted on January 1, 2017. The Company is evaluating this new guidance and intends to early adopt the new guidance in 2017.
5.
Acquisitions and Other Recent Business Ventures
Rocket Speed, Inc.
On August 1, 2016, the Company acquired 100% of the outstanding equity securities of social casino game developer, Rocket Speed, Inc. (f/k/a Rocket Games, Inc., (“Rocket Speed”)), for initial cash consideration of $60.5 million subject to customary working capital adjustments. The Stock Purchase Agreement includes contingent consideration payments over the next two years that will be based on a multiple of 6.25 times Rocket Games’ then-trailing twelve months of earnings before interest, taxes, depreciation and amortization, subject to a cap of $110 million. Up to $10 million of the contingent consideration is accounted for as compensation as it is tied to continued employment over a two year period. The acquisition was funded by Penn with cash on hand and revolving commitments under the
Company’s senior secured credit facility. The preliminary fair value of the contingent purchase price was estimated to be $34.4 million at the acquisition date based on an income approach by applying an option pricing method to the Company’s internal earning projections using a Monte Carlo simulation. This acquisition complements Penn’s interactive gaming strategy through its wholly-owned subsidiary Penn Interactive Ventures which is included in the Other category. The preliminary purchase price allocation is detailed in the table below (in thousands). Current assets includes $4.1 million of cash acquired.
Following the preliminary fair values reported in the Company’s 10-Q for the period ended September 30, 2016, additional analysis was performed on our initial contingent purchase price liability. This resulted in an adjustment to our contingent purchase price at the acquisition date of $21.6 million to $34.4 million. Additionally, acquisition date fair values for goodwill, intangible assets and deferred tax liabilities also decreased by $14.5 million, $8.0 million and $1.7 million, respectively, as compared to the provisional amounts previously reported at September 30, 2016, as a result of measurement period adjustments from obtaining final information underlying the identified intangible assets. The Company shortened the useful life assumptions for certain of its intangible assets which, in connection with the decrease in fair values of intangibles, would have resulted in $0.9 million of additional amortization expense for the two months ended September 30, 2016, that was recorded in the three months ended December 31, 2016.
|
|
|
|
|
August 1, 2016
|
|
|
|
Current assets
|
|
$
7,738
|
Fixed assets
|
|
235
|
Goodwill
|
|
67,164
|
Other intangible assets
|
|
35,383
|
Other assets
|
|
73
|
Total assets
|
|
$
110,593
|
|
|
|
Current liabilities
|
|
$
5,350
|
Deferred taxes
|
|
10,268
|
Other liabilities
|
|
100
|
Total liabilities
|
|
15,718
|
Cash paid
|
|
60,489
|
Contingent purchase price
|
|
34,386
|
Total consideration transferred
|
|
$
110,593
|
|
|
|
Developed technology intangible
|
|
$
17,969
|
User base intangible
|
|
11,563
|
Non-compete agreements intangible
|
|
5,851
|
Other intangible assets
|
|
$
35,383
|
The developed technology intangible represents the intellectual property embodied by the developed, completed gaming apps of the Rocket Speed as of the acquisition date. The Company used a multiple period excess earnings model under the income approach to estimate the fair value for this intangible asset and are amortizing the asset over four years on an accelerated basis. The user base intangible asset represents the estimated value of the acquired customer database. The Company used a replacement cost method to estimate the fair value for this intangible asset and are amortizing it on an accelerated basis over two years. Non-compete agreements limit specific employees from competing in related businesses. The Company used a with-and-without method under the income approach to estimate the fair value for this intangible asset and will amortize it over four years consistent with the length of the agreements.
The acquisition of Rocket Speed resulted in an increase the the Company’s reported net revenues of $17.3
million for the year ended December 31, 2016. Additionally, prior to the acquisition date, the Company incurred transactions costs of $1.0 million, which were reported in general and administrative expenses for the year ended December 31, 2016.
Slot Kings and Bell Gaming
On October 3, 2016 and November 1, 2016, the Company acquired 100% of Slot Kings, LLC and Bell Gaming, LLC for $17.1 million and $10.8 million, respectively, in all cash transactions. The transactions were funded by revolving commitments under the Company’s amended senior secured credit facility. The results of Slot Kings and Bell Gaming have been included in the Company’s consolidated financial statements since the acquisition dates. The Company’s preliminary purchase price allocations included $10.5 million in goodwill and $16.6 million in other intangible assets related to acquired customer contracts, as a result of these transactions. The goodwill recognized for these two transactions is deductible for tax purposes. The acquisitions of Slot Kings and Bell Gaming did not materially impact the 2016 consolidated results of operations.
Tropicana Las Vegas
On August 25, 2015, the Company acquired 100% of Tropicana Las Vegas Hotel and Casino in Las Vegas, Nevada from Trilliant Gaming Nevada, Inc. for the purchase price of $357.7 million. The purchase price for this cash transaction was funded by revolving commitments under the Company’s existing senior secured credit facility and approximately $280 million of incremental commitments under an amended senior secured credit facility. The results of the Tropicana Las Vegas facility have been included in the Company’s consolidated financial statements since the acquisition date. The preliminary purchase price allocation is detailed in the table below (in thousands). Current assets includes $8.0 million of cash acquired.
Tropicana Las Vegas, located on the strip in Las Vegas, Nevada, is situated on a 35-acre land parcel at the corner of Tropicana Boulevard and Las Vegas Boulevard. The resort features 1,183,984 of property square footage with 775 slot machines and 36 table games. Tropicana Las Vegas offers 1,470 guest rooms, a sports book, three full services restaurants, a food court, a 1,200-seat performance theater, a 300-seat comedy club, over 100,000 square feet of exhibition and meeting space, and a five-acre tropical beach event area and spa. The Company believes this acquisition fulfilled our strategic objective of obtaining a presence on the Las Vegas Strip.
|
|
|
|
|
August 25, 2015
|
|
|
|
Current assets
|
|
$
15,966
|
Property and equipment, net
|
|
365,492
|
Goodwill
|
|
14,821
|
Other assets
|
|
4,553
|
Total assets
|
|
$
400,832
|
|
|
|
|
|
|
Current liabilities
|
|
$
25,755
|
Other liabilities
|
|
17,417
|
Total liabilities
|
|
43,172
|
Cash paid / total consideration transferred
|
|
357,660
|
Prairie State Gaming
On September 1, 2015, the Company acquired 100% of Prairie State Gaming from The Robert H. Miller Trust and Illinois Funding, LLC in an all cash transaction. The transaction was funded by revolving commitments under the
Company’s amended senior secured credit facility. The results of Prairie State Gaming have been included in the Company’s consolidated financial statements since the acquisition date. The Company recorded $22.9 million and $15.7 million in goodwill and other intangible assets, respectively, from this transaction.
Prairie State Gaming is one of the largest slot-route operators in Illinois with operations that included, at the time of acquisition, more than 1,100 video gaming terminals across a network of 270 bar and retail gaming establishments throughout Illinois. The Company intends to leverage our gaming experience, relationships, and purchasing power to improve PSG’s performance and expand its network.
The unaudited pro forma financial information for the periods set forth below gives effect to the 2015 acquisitions described above as if they had occurred as of January 1, 2015. This incorporates the impacts on depreciation and amortization expense resulting from the Company’s purchase accounting adjustments to the acquired assets and liabilities. The pro forma results for the 2016 acquisitions are not materially different than reported results. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time (in thousands):
Pro Forma Financial Information (Unaudited)
|
|
|
|
Year ended December 31,
|
|
2015
|
Net Revenues
|
|
$
|
3,154,848
|
Income from continuing operations
|
|
|
540,992
|
The acquisitions of Tropicana Las Vegas Hotel and Casino and Prairie State Gaming resulted in an increase to the Company’s reported net revenues of $57.3 million and a decrease of $3.0 million to income from continuing operations for the year ended December 31, 2015. Additionally, prior to the acquisition dates, the Company incurred transaction costs of $1.9 million, which were reported in general and administrative expenses for the year ended December 31, 2015.
Jamul Indian Village
On April 5, 2013, the Company announced that, subject to final National Indian Gaming Commission approval, it and the Jamul Tribe had entered into definitive agreements to assist the Jamul Tribe in the development of a Hollywood Casino‑branded casino on the Jamul Tribe’s trust land in San Diego County, California. The definitive agreements were entered into to: (i) secure the development, management, and branding services of the Company to assist the Jamul Tribe during the pre‑development and entitlement phase of the project; (ii) set forth the terms and conditions under which the Company will provide a loan or loans to the Jamul Tribe to fund certain development costs; and (iii) create an exclusive arrangement between the parties.
The Jamul Tribe is a federally recognized Indian Tribe holding a government-to-government relationship with the U.S. through the U.S. Department of the Interior’s Bureau of Indian Affairs and possessing certain inherent powers of self-government. The Jamul Tribe is the beneficial owner of approximately six acres of reservation land located within the exterior boundaries of the State of California held by the U.S. in trust for the Jamul Tribe (the “Property”). The Jamul Tribe exercises jurisdiction over the Property pursuant to its powers of self-government and consistent with the resolutions and ordinances of the Jamul Tribe. The arrangement between the Jamul Tribe and the Company provides the Jamul Tribe with the expertise, knowledge and capacity of a proven developer and operator of gaming facilities and provides the Company with the exclusive right to administer and oversee planning, designing, development, construction management, and coordination during the development and construction of the project as well as the management of a gaming facility on the Property.
The Company considered whether the arrangement with the Jamul Tribe represents a variable interest that should be accounted for pursuant to the VIE subsections of ASC 810. The Company noted that the scope and scope
exceptions of ASC 810-10-15-12(e) states that a reporting entity shall not consolidate a government organization or financing entity established by a government organization (other than certain financing entities established to circumvent the provisions of the VIE subsections of ASC 810). Based on the status of the Tribe as a government organization, the Company concluded its arrangement with the Jamul Tribe is not within the scope defined by ASC 810.
Hollywood Casino Jamul – San Diego is a three-story gaming and entertainment facility of approximately 200,000 square feet featuring 1,731 slot machines, 40 live table games, multiple restaurants, bars and lounges and a partially enclosed parking structure with over 1,800 spaces. In mid-January 2014, the Company announced the commencement of construction activities at the site. The facility opened to the public on October 10, 2016. The Company currently provides a portion of the financing to the Jamul Tribe in connection with the project and, following the opening, now manages and provides branding for the casino.
The Company is accounting for the development agreement and related loan commitment letter with the Jamul Tribe as a loan (the “Loan”) with accrued interest in accordance with ASC 310, “Receivables.” The Loan represented advances made by the Company to the Jamul Tribe for the development and construction of a gaming facility for the Jamul Tribe on reservation land. As such, the Jamul Tribe owns the casino and its related assets and liabilities. Repayment of funds advanced to the Jamul Tribe is primarily predicated on cash flows from the operations of the facility. San Diego Gaming Ventures, LLC (a wholly-owned subsidiary of the Company) is a separate legal entity and, following completion of the project and subsequent commencement of gaming operations on the Property, is the Penn entity that receives management and licensing fees from the Jamul Tribe. The Company’s Loan with the Jamul Tribe totaled $197.7 million and $62.0 million, which includes accrued interest of $13.9 million, and $3.3 million, at December 31, 2015 and 2014, respectively.
Additionally, in December 2015, the Company entered into an agreement to purchase a $60 million subordinated note from the previous developer of the Jamul Indian Village project for $24 million. Interest on this subordinated Note, as of the effective date and at all times thereafter until the Loans has been paid in full, shall accrue as follows: as of the effective date, no interest shall accrue initially; at the opening date, interest shall accrue at a simple fixed rate of 4.25% per annum. The subordinated Note is subordinated to the Loan, and payments on the subordinated Note may only be made after all necessary payments are made on the Loan subject to certain limitations. The Company recorded the subordinated Note at its acquisition price of $24 million, which was considered to be its fair value. The Company has concluded that the $24 million carrying value, which is recorded within other assets on the consolidated balance sheet at December 31, 2015, represents the expected cash flows to be received. As described below, this subordinated note was repaid in connection with the Jamul Tribe refinancing of its existing indebtedness and the Company received a $6 million premium which is being accounted for as an origination fee on our new loan with the Tribe.
On October 20, 2016, the Jamul Tribe obtained long term secured financing, consisting of revolving and term loan credit facilities (the “Credit Facilities”) totaling approximately $460 million. The Credit Facilities, all of which are due in 2022, consist of a $5 million revolving credit facility, a $340 million term loan B facility and a $98 million term loan C facility. The revolving credit facility was provided by various commercial banks; the term loan B facility is held by an affiliate of Och-Ziff Real Estate; and the term loan C facility is held by the Company. The Company will also provide up to an additional $15 million of delayed draw term loan C commitments to fund certain roadway improvement costs. The various Credit Facilities rank pari passu with each other. However, if, on the first anniversary of the opening of Hollywood Casino Jamul – San Diego (the “Casino”), the Jamul Tribe has not achieved a senior secured net leverage ratio equal to or less than 5.0 to 1.0, then all or a portion of the term loan C facility will become subordinated to the other Credit Facilities to the extent necessary such that, after giving effect to such conversion, such senior secured net leverage ratio is 5.0 to 1.0. The rights of the Company to receive management and license fees are subordinated to the claims of the lenders under the Credit Facilities and are subject to certain conditions contained in the Credit Facilities. The Company’s Loan with the Jamul Tribe totaled $92.1 million (net of unamortized loan origination fee of $5.9 million and inclusive of a current portion of $0.7 million in other current assets) at December 31, 2016.
The Company was repaid on October 20, 2016, a net amount of approximately $274 million (consisting of reimbursements totaling approximately $372 million less funds advanced of $98 million) of the advances to the Jamul Tribe for the development and construction of the property as well as previously purchased Jamul Tribal debt. The Company used these funds to reduce borrowings under its revolving credit facility.
As a condition to the availability of the Credit Facilities, the Company provided a limited completion guarantee, in favor of the administrative agent under the Credit Facilities, to provide up to $15 million of additional loans related to the construction and opening of the Casino, as well as certain post opening construction costs. Of these loans, $10 million may be funded under the Credit Facilities as part of the term loan C facility, while any additional loans would be subordinated loans. The term loan C facility bears interest at LIBOR plus 8.50% with a 1% LIBOR floor (or, at the Jamul Tribe’s election, a base rate determined by reference to the prime rate, the federal funds effective rate or LIBOR, as applicable, plus 7.50%), and the subordinated loans will bear interest at 14.0% (with 12.0% to be paid in cash and 2.0% to be paid-in-kind).
As mentioned previously, the Company is accounting for its loan in accordance with ASC 310, “Receivables”. Although Hollywood Casino Jamul opened to strong business and earnings volumes in October 2016, which met our expectations, results began to soften earlier and with a steeper dropoff than anticipated. Based on the actual performance of the facility and projections for the first half of 2017, the Company believes the Tribe is likely to be in technical default of certain financial covenant requirements with respect to debt to earnings ratios at June 30, 2017, in the absence of a waiver being obtained prior to such date. As a result, we have concluded our Jamul loan is impaired at December 31, 2016. A loan is considered impaired when, based on current information, events and projections, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest when contractually due under the terms of the loan agreement. Impairment is measured by the present value of expected future cash flows discounted at the loan’s effective interest rate. An allowance for loan losses would be established in the event the carrying value exceeds the present value calculation previously described.
The Company performed a comprehensive review of various possible future cash flow projections for the facility that were benchmarked against recent openings in the Company’s regional operations. The expected cash flows were then discounted at the loans original interest rate in accordance with ASC 310 which was in excess of our loan’s carrying value of $92.1 million at December 31, 2016 and as such no reserve was required. The unpaid principal balance of our loan at December 31, 2016 was $98.0 million.
Plainridge Racecourse Acquisition
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 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 actual earnings of the gaming operations over the first ten years of gaming operations, which commenced on June 24, 2015. The first payment was made 60 days after the completion of the first four full fiscal quarters of operation, and subsequent payments will be made every year for nine years after the first payment. The fair value of this liability was determined to be $10.7 million, $13.8 million, and $19.2 million at December 31, 2016, 2015 and 2014, respectively, 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 other current and other non-current liabilities on the consolidated balance sheet. At each reporting period, the Company assesses the fair value of this obligation and changes in its value are recorded in earnings. The amount included in general and administrative expense related to the change in fair value of this obligation was a credit of $1.3
million and $5.4 million and a charge of $0.7 million for the years ended December 31, 2016, 2015 and 2014, respectively. In August 2016, the first payment of $1.8 million was made for the contingent purchase price.
Plainridge Park Casino, which opened on June 24, 2015, is located 20 miles southwest of the Boston beltway just off interstate 95 in Plainville, Massachusetts. Plainridge Park Casino features
196,473 of property square footage with 1,250 gaming devices. Plainridge Park Casino offers various restaurants, bars, 1,620 structured and surface parking spaces, and other amenities. Plainridge Park Casino also includes a 5/8-mile live harness racing facility with approximate 55,000 square foot, two story clubhouse for simulcast operations and live racing viewing.
6.
Investment In and Advances to Unconsolidated Affiliates
As of December 31, 2016, investment in and advances to unconsolidated affiliates primarily included the Company’s 50% investment in Kansas Entertainment, which is a joint venture with International Speedway Corporation (“International Speedway”), its 50% interest in Freehold Raceway, and its 50% joint venture with MAXXAM, Inc. (“MAXXAM”) that owns and operates racetracks in Texas.
These investments are more fully described below.
Kansas Joint Venture
The Company has a 50% investment in Kansas Entertainment, which owns the Hollywood Casino at Kansas Speedway. Hollywood Casino at Kansas Speedway is a Hollywood-themed facility, which features 244,791 of property square footage with 2,000 slot machines, 41 table games and 12 poker tables, a 1,253 space parking structure, as well as a variety of dining and entertainment facilities. As of December 31, 2016 and 2015, the Company’s investment balance was $93.8 million and $103.6 million, respectively. During the years ended December 31, 2016, 2015, and 2014, the Company received distributions from Kansas Entertainment totaling $25.8 million, $27.2 million and $23.0 million, respectively, which the Company deemed to be returns on its investment based on the source of those cash flows from the normal business operations of Kansas Entertainment.
The Company determined that Kansas Entertainment qualified as a VIE at December 31, 2016 and 2015. The Company did not consolidate its investment in Kansas Entertainment at, and for the years ended December 31, 2016 and 2015, as the Company determined that it did not qualify as the primary beneficiary of Kansas Entertainment at, and for the years ended December 31, 2016 and 2015, primarily as it did not have the ability to direct the activities of Kansas Entertainment that most significantly impacted Kansas Entertainment’s economic performance without the approval of International Speedway. In addition, the Company determined that International Speedway had substantive participating rights in Kansas Entertainment at, and for the years ended December 31, 2016 and 2015.
For the year ended December 31, 2016, the Company’s investment in Kansas Entertainment met the requirements of S-X Rule 4-08(g) to provide summarized financial information. The following table provides summary income statement information for Kansas Entertainment as required under S-X Rule 1-02(bb) for the comparative periods in the Company’s consolidated balance sheets and consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Current assets
|
|
$
|
16,638
|
|
$
|
16,550
|
|
$
|
21,978
|
Noncurrent assets
|
|
$
|
176,050
|
|
$
|
195,010
|
|
$
|
213,386
|
Current liabilities
|
|
$
|
15,351
|
|
$
|
14,544
|
|
$
|
14,626
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Net revenues
|
|
$
|
152,926
|
|
$
|
153,407
|
|
$
|
143,390
|
Operating expenses
|
|
|
121,006
|
|
|
122,828
|
|
|
122,051
|
Income from operations
|
|
|
31,920
|
|
|
30,579
|
|
|
21,339
|
Net income
|
|
$
|
31,920
|
|
$
|
30,579
|
|
$
|
21,339
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Penn
|
|
$
|
15,960
|
|
$
|
15,290
|
|
$
|
10,670
|
Texas Joint Venture
The Company has a 50% interest in a joint venture with MAXXAM, which owns and operates the Sam Houston Race Park in Houston, Texas and the Valley Race Park in Harlingen, Texas, and holds a license for a planned racetrack in Austin, Texas. Sam Houston Race Park hosts thoroughbred and quarter horse racing and offers daily simulcast operations, and Valley Race Park features dog racing and simulcasting.
The Company determined that the Texas joint venture did not qualify as a VIE at December 31, 2016 and 2015. Using the guidance for entities that are not VIEs, the Company determined that it did not have a controlling financial interest in the joint venture at, and for the years ended December 31, 2016 and 2015, primarily as it did not have the ability to direct the activities of the joint venture that most significantly impacted the joint venture’s economic performance without the input of MAXXAM. Therefore, the Company did not consolidate its investment in the joint venture at, and for the years ended December 31, 2016 and 2015.
New Jersey Joint Venture
Through its joint venture with Greenwood Limited Jersey, Inc. (“Greenwood”), the Company owns 50% of Freehold Raceway, located in Freehold, New Jersey. The property features a half-mile standardbred race track and a grandstand.
The Company determined that the New Jersey joint venture did not qualify as a VIE at December 31, 2016 and 2015. Using the guidance for entities that are not VIEs, the Company determined that it did not have a controlling financial interest in the joint venture at, and for the years ended December 31, 2016 and 2015, primarily as it did not have the ability to direct the activities of the joint venture that most significantly impacted the joint venture’s economic performance without the input of Greenwood. Therefore, the Company did not consolidate its investment in the joint venture at, and for the years ended December 31, 2016 and 2015.
7.
Property and Equipment
Property and equipment, net, consists of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Property and equipment - non-master lease
|
|
|
|
|
|
|
|
Land and improvements
|
|
$
|
294,590
|
|
$
|
288,910
|
|
Building and improvements
|
|
|
404,158
|
|
|
396,497
|
|
Furniture, fixtures and equipment
|
|
|
1,355,615
|
|
|
1,303,153
|
|
Leasehold improvements
|
|
|
118,940
|
|
|
129,012
|
|
Construction in progress
|
|
|
16,375
|
|
|
9,175
|
|
|
|
|
2,189,678
|
|
|
2,126,747
|
|
Less Accumulated depreciation
|
|
|
(1,224,596)
|
|
|
(1,093,115)
|
|
|
|
|
965,082
|
|
|
1,033,632
|
|
Property and equipment - master lease
|
|
|
|
|
|
|
|
Land and improvements
|
|
|
382,246
|
|
|
382,246
|
|
Building and improvements
|
|
|
2,219,018
|
|
|
2,219,018
|
|
|
|
|
2,601,264
|
|
|
2,601,264
|
|
Less accumulated depreciation
|
|
|
(745,963)
|
|
|
(654,828)
|
|
|
|
|
1,855,301
|
|
|
1,946,436
|
|
Property and equipment, net
|
|
$
|
2,820,383
|
|
$
|
2,980,068
|
|
Property and equipment, net decreased by $159.7 million primarily due to depreciation expense partially offset by maintenance capital expenditures and improvements at Tropicana Las Vegas during the twelve months ended December 31, 2016.
Depreciation expense, for property and equipment as well as capital leases, totaled $261.9 million, $258.9 million, and $255.4 million in 2016, 2015 and 2014. Depreciation expense on the Master Lease assets was $91.1 million, $92.4 million and $89.8 million for the years ended December 31, 2016, 2015, and 2014 respectively. Interest capitalized in connection with major construction projects was $0.1 million, $1.8 million, and $0.9 million in 2016, 2015 and 2014, respectively.
During the years ended December 31, 2016 and 2015, the Company recorded no long-lived asset impairment charges. During the second quarter of 2014, the Company recorded a long-lived asset impairment charge of $4.6 million to write-down certain idle assets to their estimated salvage value.
8.
Goodwill and Other Intangible Assets
A reconciliation of goodwill and accumulated goodwill impairment losses is as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2014 :
|
|
|
|
|
Goodwill
|
|
$
|
2,137,749
|
|
Accumulated goodwill impairment losses
|
|
|
(1,263,565)
|
|
Goodwill, net
|
|
$
|
874,184
|
|
Goodwill acquired
|
|
|
37,758
|
|
Balance at December 31, 2015 :
|
|
|
|
|
Goodwill
|
|
$
|
2,175,507
|
|
Accumulated goodwill impairment losses
|
|
|
(1,263,565)
|
|
Goodwill, net
|
|
$
|
911,942
|
|
Goodwill acquired
|
|
|
77,743
|
|
Balance at December 31, 2016:
|
|
|
|
|
Goodwill
|
|
$
|
2,253,250
|
|
Accumulated goodwill impairment losses
|
|
|
(1,263,565)
|
|
Goodwill, net
|
|
$
|
989,685
|
|
Indefinite‑life intangible assets consist primarily of gaming licenses. The table below presents the gross carrying value, accumulated amortization, and net book value of each major class of other intangible assets at December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
|
(in thousands)
|
|
|
|
Gross
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
Accumulated
|
|
Net Book
|
|
Carrying
|
|
Accumulated
|
|
Net Book
|
|
|
|
Value
|
|
Amortization
|
|
Value
|
|
Value
|
|
Amortization
|
|
Value
|
|
Indefinite-life intangible assets
|
|
$
|
375,405
|
|
$
|
—
|
|
$
|
375,405
|
|
$
|
375,405
|
|
$
|
—
|
|
$
|
375,405
|
|
Other intangible assets
|
|
|
125,584
|
|
|
65,495
|
|
|
60,089
|
|
|
72,223
|
|
|
56,186
|
|
|
16,037
|
|
Total
|
|
$
|
500,989
|
|
$
|
65,495
|
|
$
|
435,494
|
|
$
|
447,628
|
|
$
|
56,186
|
|
$
|
391,442
|
|
Total other intangible assets increased by $44.1 million for the year ended December 31, 2016 primarily due to $52.0 million of definite-lived other intangible assets related to Rocket Speed and Illinois slot operator acquisitions in 2016 partially offset by amortization for the year ended December 31, 2016. Other intangible assets have a weighted average remaining amortization period of 5.8 years.
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 of these facilities in 2014, 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 and was capitalized as an indefinite-lived intangible asset (See Note 9 for further details on the obligation). In addition, the gaming license fee of $50 million for each Ohio racino has been paid ($25 million for each facility in 2014, and $25 million for each facility in 2015).
For the year ended December 31, 2015, the Company recorded other intangible assets impairment charges of $40.0 million, as of the valuation date of October 1, 2015 (the date of our annual impairment test), related to the write-off of our Plainridge Park Casino gaming license and a partial write-down of the gaming license at Hollywood Gaming at Dayton Raceway due to a reduction in the long term earnings forecast at both of these locations.
For the year ended December 31, 2014, the Company recorded goodwill and other intangible assets impairment charges of $80.8 million and $74.5 million, respectively, as of valuation date of October 1, 2014 (the date of our annual impairment test), as we determined that a portion of the value of our goodwill and other intangible assets was impaired due to the Company’s outlook of continued challenging regional gaming conditions at certain properties which persisted in 2014 in its Midwest segment, as well as for the write off of a trademark intangible asset in the South/West segment.
The Company’s intangible asset amortization expense was $9.3 million, $0.5 million, and $11.4 million for the years ended December 31, 2016, 2015 and 2014, respectively.
The following table presents expected intangible asset amortization expense based on existing intangible assets at December 31, 2016 (in thousands):
|
|
|
|
|
2017
|
|
$
|
18,142
|
|
2018
|
|
|
11,844
|
|
2019
|
|
|
7,660
|
|
2020
|
|
|
5,233
|
|
2021
|
|
|
3,331
|
|
Thereafter
|
|
|
13,879
|
|
Total
|
|
$
|
60,089
|
|
The Company’s remaining goodwill and other intangible assets by reporting unit at December 31, 2016 is shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Intangible
|
|
Reporting Unit
|
|
Goodwill
|
|
Assets
|
|
Hollywood Casino St. Louis
|
|
$
|
205,783
|
|
$
|
58,418
|
|
Hollywood Casino Aurora
|
|
|
207,207
|
|
|
-
|
|
Argosy Casino Riverside
|
|
|
154,332
|
|
|
4,964
|
|
Zia Park Casino
|
|
|
142,359
|
|
|
—
|
|
Hollywood Gaming at Dayton Raceway
|
|
|
15,339
|
|
|
110,436
|
|
Hollywood Gaming at Mahoning Valley Race Course
|
|
|
—
|
|
|
125,000
|
|
Penn Interactive Ventures
|
|
|
67,164
|
|
|
29,555
|
|
Hollywood Casino at Penn National Race Course
|
|
|
1,497
|
|
|
67,607
|
|
Prairie State Gaming
|
|
|
33,515
|
|
|
29,822
|
|
Hollywood Casino Lawrenceburg
|
|
|
63,189
|
|
|
—
|
|
Hollywood Casino Tunica
|
|
|
44,042
|
|
|
—
|
|
Boomtown Biloxi
|
|
|
22,365
|
|
|
—
|
|
Argosy Casino Alton
|
|
|
9,863
|
|
|
8,284
|
|
Tropicana Las Vegas
|
|
|
14,821
|
|
|
—
|
|
Others
|
|
|
8,209
|
|
|
1,408
|
|
Total
|
|
$
|
989,685
|
|
$
|
435,494
|
|
9.
Long‑term Debt
Long‑term debt, net of current maturities, is as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Senior secured credit facility
|
|
$
|
976,845
|
|
$
|
1,259,740
|
|
$300 million 5.875 % senior unsecured notes due November 1, 2021
|
|
|
300,000
|
|
|
300,000
|
|
Other long-term obligations
|
|
|
154,084
|
|
|
146,992
|
|
Capital leases
|
|
|
1,760
|
|
|
28,466
|
|
|
|
|
1,432,689
|
|
|
1,735,198
|
|
Less current maturities of long-term debt
|
|
|
(85,595)
|
|
|
(92,108)
|
|
Less net discounts
|
|
|
(620)
|
|
|
(686)
|
|
Less debt issuance costs, net of accumulated amortization of $20.5 million and $13.3 million, respectively
|
|
|
(16,535)
|
|
|
(23,553)
|
|
|
|
$
|
1,329,939
|
|
$
|
1,618,851
|
|
The following is a schedule of future minimum repayments of long-term debt as of December 31, 2016 (in thousands):
|
|
|
|
|
2017
|
|
$
|
85,504
|
|
2018
|
|
|
687,552
|
|
2019
|
|
|
19,773
|
|
2020
|
|
|
253,059
|
|
2021
|
|
|
330,912
|
|
Thereafter
|
|
|
55,889
|
|
Total minimum payments
|
|
$
|
1,432,689
|
|
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 Term Loan A facility was priced at LIBOR plus a spread (ranging from 2.75% to 1.25%) based on the Company’s consolidated total net leverage ratio as defined in the new senior secured credit facility. The Term Loan B facility was priced at LIBOR plus 2.50%, with a 0.75% LIBOR floor. In connection with the repayment of the previous senior secured credit facility, the Company recorded a $21.5 million loss on the early extinguishment of debt for the year ended December 31, 2013 related to debt issuance costs write‑offs and the write‑off of the discount on the Term Loan B facility of the previous senior secured credit facility.
On April 28, 2015, the Company entered into an agreement to amend its senior secured credit facility. In August 2015, the amendment to the senior secured credit facility went into effect increasing the capacity under an existing five year revolver from $500 million to $633.2 million and increased the existing five year $500 million Term Loan A facility by $146.7 million. The seven year $250 million Term Loan B facility remained unchanged.
The Company’s senior secured credit facility had a gross outstanding balance of $976.8 million at December 31, 2016, consisting of a $543.3 million Term Loan A facility, a $242.5 million Term Loan B facility, and $191.0 million outstanding on the revolving credit facility. This compares with a $1,259.7 million gross outstanding balance at December 31, 2015 which consisted of a $592.7 million Term Loan A facility, a $245.0 million Term Loan B facility
and $422.0 million outstanding on the revolving credit facility. Additionally, at December 31, 2016 and 2015, the Company was contingently obligated under letters of credit issued pursuant to the senior secured credit facility with face amounts aggregating $23.0 million and $23.4 million, respectively, resulting in $419.1 million and $187.7 million of available borrowing capacity as of December 31, 2016 and 2015, respectively, under the revolving credit facility.
The payment and performance of obligations under the senior secured credit facility are guaranteed by a lien on and security interest in substantially all of the assets (other than excluded property such as gaming licenses) of the Company and its subsidiaries. In January 2017, the Company completed a refinancing and used the proceeds to payoff its existing senior secured credit facility. See Note 20 “Subsequent Events” for more information.
5.875% Senior Unsecured Notes
On October 30, 2013, the Company completed an offering of $300 million 5.875% senior unsecured notes that mature on November 1, 2021 (the “5.875% Notes”) at a price of par. Interest on the 5.875% Notes is payable on May 1 and November 1 of each year. The 5.875% Notes are senior unsecured obligations of the Company. The 5.875% Notes will not be guaranteed by any of the Company’s subsidiaries except in the event that the Company in the future issues certain subsidiary‑guaranteed debt securities. The Company may redeem the 5.875% Notes at any time, and from time to time, on or after November 1, 2016, at the declining redemption premiums set forth in the indenture governing the 5.875% Notes, together with accrued and unpaid interest to, but not including, the redemption date. Prior to November 1, 2016, the Company may redeem the 5.875% Notes at any time, and from time to time, at a redemption price equal to 100% of the principal amount of the 5.875% Notes redeemed plus a “make‑whole” redemption premium described in the indenture governing the 5.875% Notes, together with accrued and unpaid interest to, but not including, the redemption date. In addition, the 5.875% Notes may be redeemed prior to November 1, 2016 from net proceeds raised in connection with an equity offering as long as the Company pays 105.875% of the principal amount of the 5.875% Notes, redeems the 5.875% Notes within 180 days of completing the equity offering, and at least 60% of the 5.875% Notes originally issued remains outstanding.
The Company used the proceeds of the new senior secured credit facility, new 5.875% Notes, and cash on hand, to repay its previous senior secured credit facility, to fund the cash tender offer to purchase any and all of its previously issued 8
3
/
4
% Notes and the related consent solicitation to make certain amendments to the indenture governing the 8
3
/
4
% Notes, to satisfy and discharge such indenture, to pay related fees and expenses and for working capital purposes.
In January 2017, the Company completed an offering of $400 million 5.625% senior unsecured notes that mature on January 19, 2027, and used the proceeds to payoff its existing senior unsecured notes. See Note 20 “Subsequent Events” for more information.
Other Long‑Term Obligations
Other long term obligations at December 31, 2016 and 2015 of $154.1 million and $147.0 million, respectively, included $118.9 million and $131.7 million, respectively, related to the relocation fees for Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course. At December 31, 2016 and 2015, $14.4 million and $15.3 million, respectively, related to the repayment obligation of a hotel and event center located near Hollywood Casino Lawrenceburg and $20.8 million related to a corporate airplane loan; all of which are more fully described below.
Ohio Relocation Fees
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 Mahoning Valley, respectively. Upon opening of these two racinos in Ohio in the third quarter of 2014, 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. 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 is accreted to interest expense at an effective yield of 5.0%. The amount included in interest expense related to this obligation was $6.2 million and $6.7 million for the year ended December 31, 2016 and 2015, respectively.
Event Center
The City of Lawrenceburg Department of Redevelopment completed construction of a hotel and event center located less than a mile away from Hollywood Casino Lawrenceburg. Effective in mid-January 2015, by contractual agreement, a repayment obligation for the hotel and event center was assumed by a wholly-owned subsidiary of the Company in the amount of $15.3 million, which was financed through a loan with the City of Lawrenceburg Department of Redevelopment, in exchange for conveyance of the property. The Company is obligated to make annual payments on the loan of approximately $1 million for twenty years beginning January 2016. This obligation is accreted to interest expense at its effective yield of 3.0%. The amount included in interest expense related to this obligation was $0.4 million for the years ended December 31, 2016 and 2015.
Corporate Airplane Loan
On September 30, 2016, the Company acquired a previously leased corporate airplane that was accounted for as a capital lease and financed the purchase price with an amortizing loan at a fixed interest rate of 5.22% for a term of five years with monthly payments of $220 thousand and a balloon payment of $12.6 million at the end of the loan term. The loan was subsequently repaid in full on January 19, 2017.
Covenants
The Company’s senior secured credit facility and senior unsecured notes require us, 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 senior unsecured notes restrict, among other things, its ability to incur additional indebtedness, incur guarantee obligations, amend debt instruments, pay dividends, create liens on assets, make investments, engage in mergers or consolidations, and otherwise restrict corporate activities.
At December 31, 2016, the Company was in compliance with all required financial covenants.
10.
Master Lease Financing Obligation
The Company’s lease obligation with GLPI that is described in Note 3 to the consolidated financial statements is accounted for as a financing obligation. The obligation was calculated at the inception of the transaction based on the future minimum lease payments discounted at 9.70%, which represented the Company’s estimated incremental borrowing rate at lease inception over the lease term, including renewal options, that were reasonably assured of being exercised and the funded construction of certain leased real estate assets in development at the date of the Spin-Off. Total payments to GLPI under the Master Lease were $442.3 million, $437.0 million and $421.4 million for the years ended December 31, 2016, 2015 and 2014, respectively, of which $391.7 million, $390.1 million and $379.2 million respectively, were recognized as interest expense. The interest expense recognized for the years ended December 31, 2016, 2015 and 2014 includes $43.8 million, $43.5 million and $40.9 million, respectively from contingent payments associated with the monthly variable components for Hollywood Casino Columbus and Hollywood Casino Toledo.
The future minimum payments related to the Master Lease financing obligation with GLPI, at December 31, 2016 are as follows (in thousands):
|
|
|
|
|
2017
|
|
$
|
389,496
|
|
2018
|
|
|
378,716
|
|
2019
|
|
|
324,819
|
|
2020
|
|
|
324,819
|
|
2021
|
|
|
324,819
|
|
Thereafter
|
|
|
8,715,981
|
|
Total minimum payments
|
|
|
10,458,650
|
|
Less amounts representing interest at 9.70%
|
|
|
(7,332,321)
|
|
Plus residual values
|
|
|
387,751
|
|
Present value of future minimum payments
|
|
|
3,514,080
|
|
Less current portion of financing obligation
|
|
|
(56,595)
|
|
Long-term portion of financing obligation
|
|
$
|
3,457,485
|
|
11.
Commitments and Contingencies
Litigation
Bankruptcy Litigation
As described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, with the acquisition of Tropicana Las Vegas and its associated entities (“Tropicana Las Vegas”) on August 24, 2015, the Company assumed litigation arising from the Bankruptcy Chapter 11 reorganization (“Tropicana Bankruptcy”) of Tropicana Las Vegas’ former affiliate, Tropicana Entertainment Holdings, LLC (“TEH”). In this Bankruptcy proceeding, there was an unresolved dispute whereby TEH claimed that Tropicana Las Vegas was responsible for the payment of certain professional fees and expenses incurred in the Tropicana Bankruptcy. On May 23, 2016, an agreement was reached to settle the dispute for $3.1 million. The settlement agreement was approved by the bankruptcy court on June 23, 2016, and payment was made in July 2016.
The Company is subject to various legal and administrative proceedings relating to personal injuries, employment matters, commercial transactions and other matters arising in the ordinary 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.
Legal 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.
Operating Lease Commitments
The Company is liable under numerous operating leases for various assets, including but not limited to automobiles, and other equipment. The majority of these lease arrangements are cancelable within 30 days. Total rental
expense under all operating lease agreements was $40.3 million, $37.9 million, and $33.3 million for the years ended December 31, 2016, 2015 and 2014, respectively.
The future minimum lease commitments relating to the base lease rent portion of noncancelable operating leases at December 31, 2016 are as follows (in thousands):
|
|
|
|
Year ending December 31,
|
|
Total
|
2017
|
|
$
|
5,366
|
2018
|
|
|
4,379
|
2019
|
|
|
2,393
|
2020
|
|
|
1,184
|
2021
|
|
|
999
|
Thereafter
|
|
|
13,959
|
Total
|
|
$
|
28,280
|
Capital Expenditure Commitments
The Company’s current construction program for 2017 includes capital expenditures of approximately $36.7 million, of which the Company was contractually committed to spend approximately $11.0 million at December 31, 2016.
Purchase obligations
The Company has obligations to purchase various goods and services totaling $57.3 million at December 31, 2016, of which $33.5 million will be incurred in 2017.
Employee Benefit Plans
The Company maintains a qualified retirement plan under the provisions of Section 401(k) of the Internal Revenue Code of 1986, as amended, which covers all eligible employees. The plan enables participating employees to defer a portion of their salary in a retirement fund to be administered by the Company. The Company makes a discretionary match contribution, where applicable, of 50% of employees’ elective salary deferrals, up to a maximum of 6% of eligible employee compensation. The matching contributions for the qualified retirement plan for the years ended December 31, 2016, 2015 and 2014 were $5.3 million, $5.0 million, and $4.7 million, respectively.
The Company also has a defined contribution plan, the Charles Town Races Future Service Retirement Plan, covering substantially all of its union employees at Hollywood Casino at Charles Town Races. Hollywood Casino at Charles Town Races makes annual contributions to this plan for the eligible union employees and to the Penn National Gaming, Inc. 401(k) Plan for the eligible non‑union employees for an amount equal to the amount accrued for retirement expense, which is calculated as 0.25% of the daily mutual handle, 1.0% of net video lottery revenue up to a base and, after the base is met, it reverts to 0.5% and 0.84% of table and poker revenue, respectively. The contributions for the two plans at Hollywood Casino at Charles Town Races for the years ended December 31, 2016, 2015 and 2014 were $2.8 million, $2.9 million, and $3.0 million, respectively.
The Company maintains a non‑qualified deferred compensation plan that covers most management and other highly‑compensated employees. This plan was effective March 1, 2001. The plan allows the participants to defer, on a pre‑tax basis, a portion of their base annual salary and/or their annual bonus, and earn tax‑deferred earnings on these deferrals. The plan also provides for matching Company contributions that vest over a five‑year period. The Company has established a Trust, and transfers to the Trust, on a periodic basis, an amount necessary to provide for its respective future liabilities with respect to participant deferral and Company contribution amounts. The Company’s matching contributions for the non‑qualified deferred compensation plan for the years ended December 31, 2016, 2015 and 2014
were $2.2 million, $2.0 million, and $1.9 million, respectively. The Company’s deferred compensation liability, which was included in other current liabilities within the consolidated balance sheets, was $59.4 million and $52.7 million at December 31, 2016 and 2015, respectively.
Labor Agreements
The Company is required to have agreements with the horsemen at the majority of its racetracks to conduct its live racing and/or simulcasting activities. In addition, in order to operate gaming machines and table games in West Virginia, the Company must maintain agreements with each of the Charles Town horsemen, pari‑mutuel clerks and breeders.
At Hollywood Casino at Charles Town Races, the Company renewed an agreement with the Charles Town Horsemen’s Benevolent and Protective Association that expires on June 18, 2018. Hollywood Casino at Charles Town Races also renewed an agreement with the breeders that expires on June 30, 2017. Additionally, the pari‑mutuel clerks at Charles Town are represented under a collective bargaining agreement with the West Virginia Union of Mutuel Clerks, which expired on December 31, 2010 and has been extended on a month‑to‑month basis.
The Company’s agreement with the Pennsylvania Horsemen’s Benevolent and Protective Association at Hollywood Casino at Penn National Race Course was renewed through January 31, 2018. The Company has an agreement with Laborers’ International Union of North America (LIUNA) Local 108, regarding both on-track and off-track pari-mutuel clerks and admission staff which expired in December 2016 and a new contract is currently being negotiated. In August 2015, the Company entered into a three year collective bargaining agreement with the International Chapter of Horseshoers and Allied Equine Trades Local 947.
The Company’s agreement with the Maine Harness Horsemen Association at Bangor Raceway continued through the conclusion of the 2018 racing season.
In March of 2014, Hollywood Gaming at Mahoning Valley Race Course entered into an agreement with the Ohio Horsemen’s Benevolent and Protective Association. The term is for a period of ten years from the September 2014 commencement of video lottery terminal operations at that facility.
In September 2015, Hollywood Gaming at Dayton Raceway entered into an agreement with the Ohio Harness Horsemen’s Association for racing at the property. The term is for a period of ten years from the September 2015 effective date.
In January 2014, the Company entered into an agreement with the Harness Horsemen’s Association of New England at Plainridge Park Casino which remains in effect through December 31, 2018.
Across certain of the Company’s properties, SEATU represents approximately 1,711 of the Company’s employees under a National Agreement that expires on January 24, 2032 and Local Addenda that expire at various times between June 2021 and October 2024.
SEATU agreements are in place at Hollywood Casino Joliet, Hollywood Casino Lawrenceburg, Argosy Casino Riverside, Argosy Casino Alton, Hollywood Casino Kansas Speedway, Hollywood Gaming Dayton, Hollywood Gaming at Mahoning Valley and Plainridge Park Casino. Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course have a wage reopener in February 2018; the remainder of the SEATU agreements have expiration dates in 2018 and beyond.
At Hollywood Casino Joliet, the Hotel Employees and Restaurant Employees Union Local 1 represents approximately 176 employees under a collective bargaining agreement which expires on March 31, 2019. At Hollywood Casino Columbus and Hollywood Casino Toledo, a council comprised of the United Auto Workers and the United Steel
Workers represents approximately 1,361 employees under a collective bargaining agreement which ends on November 15, 2019.
On August 25, 2015, the Company acquired Tropicana Las Vegas Hotel & Casino, which had seven existing collective bargaining agreements with the following unions: (1) Culinary & Bartenders (with a wage/reopener in 2017; expires on May 31, 2018.), (2) United Brotherhood of Carpenters (expires on July 31, 2019), (3) International Brotherhood of Electrical Workers (expires on February 28, 2017), (4) International Alliance of Theatrical Stage Employees (expires on December 31, 2018), (5) International Union of Painters and Allied Trades (expires on June 30, 2018), (6)/(7) Teamsters (front and back of the house, both expire on March 31, 2018).
The Company is also the developer, lender and manager of the Hollywood Casino Jamul – San Diego, which the Company opened on October 10, 2016. Unite Here! International Union and Local 30 represents employees in stewarding, facilities, accounting, food and beverage, and operations classifications, and the parties are scheduled to begin negotiating their first collective bargaining agreement in 2017
In addition, at some of the Company’s properties, the Security Police and Fire Professionals of America, the International Brotherhood of Electrical Workers Local 649, the LIUNA Public Serviced Employees Local 1290PE, The International Association of Machinists and Aerospace Workers, Locals 447 and 264, the United Industrial, Service, Transportation, Professional and Government Workers of North America, and the United Steel Workers represent certain of the Company’s employees under collective bargaining agreements that expire at various times between February 2017 and September 2025. None of these additional unions represent more than 79 of the Company’s employees.
If the Company fails to maintain operative agreements with the horsemen at a track, it will not be permitted to conduct live racing and export and import simulcasting at that track and OTWs and, in West Virginia, the Company will not be permitted to operate its gaming machines and table games unless the state intervenes or changes the statute. In addition, the Company’s simulcasting agreements are subject to the horsemen’s approval. If the Company fails to renew or modify existing agreements on satisfactory terms, this failure could have a material adverse effect on its business, financial condition and results of operations. Except for the closure of the facilities at Penn National Race Course and its OTWs from February 16, 1999 to March 24, 1999 due to a horsemen’s strike, and a few days at other times and locations, the Company has been able to maintain the necessary agreements. There can be no assurance that the Company will be able to maintain the required agreements.
12.
Income Taxes
The following table summarizes the tax effects of temporary differences between the financial statement carrying value of assets and liabilities and their respective tax basis, which are recorded at the prevailing enacted tax rate that will be in effect when these differences are settled or realized. These temporary differences result in taxable or deductible amounts in future years. The Company assessed all available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of our existing deferred tax assets. In connection with the failed spin-off-leaseback, the Company continued to record real property assets and a financing obligation of $2.00 billion and $3.52 billion, respectively, on November 1, 2013, which resulted in a substantial increase to our net deferred tax assets of $599.9 million. ASC 740 suggests that additional scrutiny should be given to deferred taxes of an entity with cumulative pre-tax losses during the three most recent three years. Positive evidence of sufficient quantity and quality is required to overcome such significant negative evidence to conclude that a valuation allowance is not warranted. As with all key factors, a cumulative loss is simply one component and is not a bright line test that is in itself determinative of the need for a valuation allowance. Despite the fact we have experienced cumulative losses since the Spin-Off transaction, we returned to a near break-even three year cumulative pretax income position in the amount of $23.9 million as of December 31, 2016. As a result of evaluating all available evidence, the Company intends to continue to maintain a full valuation allowance on its net deferred tax assets, excluding the reversal of deferred tax
liabilities related to indefinite-lived assets, until there is sufficient objectively verifiable positive evidence to support the realization of all or some portion of these deferred tax assets.
The components of the Company’s deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
17,773
|
|
$
|
36,243
|
|
Accrued expenses
|
|
|
64,175
|
|
|
59,196
|
|
Intangibles
|
|
|
—
|
|
|
11,590
|
|
Financing obligation to GLPI
|
|
|
1,359,193
|
|
|
1,374,268
|
|
Unrecognized tax benefits
|
|
|
9,377
|
|
|
9,858
|
|
Net operating losses and tax credit carryforwards
|
|
|
78,021
|
|
|
81,109
|
|
Gross deferred tax assets
|
|
|
1,528,539
|
|
|
1,572,264
|
|
Less valuation allowance
|
|
|
(828,501)
|
|
|
(844,258)
|
|
Net deferred tax assets
|
|
|
700,038
|
|
|
728,006
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Property, plant and equipment, non-master lease
|
|
|
(69,151)
|
|
|
(80,930)
|
|
Property, plant and equipment, master lease
|
|
|
(717,602)
|
|
|
(750,407)
|
|
Investments in unconsolidated affiliates
|
|
|
(1,383)
|
|
|
(3,024)
|
|
Accumulated other comprehensive gain
|
|
|
—
|
|
|
(1,566)
|
|
Undistributed foreign earnings
|
|
|
(8,596)
|
|
|
—
|
|
Intangibles
|
|
|
(30,230)
|
|
|
—
|
|
Net deferred tax liabilities
|
|
|
(826,962)
|
|
|
(835,927)
|
|
Noncurrent deferred tax liabilities, net
|
|
$
|
(126,924)
|
|
$
|
(107,921)
|
|
The realizability of the net deferred tax assets is evaluated quarterly by assessing the need for a valuation allowance and by adjusting the amount of the allowance, if necessary. The Company gives appropriate consideration to 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 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.
In September 2016, we accepted a settlement with the U.S. and Canada competent authorities resolving a transfer pricing issue that arose under audit of tax years 2004 – 2009 as well as the anticipated adjustments for tax years 2010 – 2014. In general, it’s the practice and intention of the Company to reinvest the earnings of its non-U.S. subsidiaries in those operations. We consider the earnings of our Canadian subsidiary to be indefinitely re-invested outside the U.S. on the basis of our internal projections showing future domestic cash generation will be sufficient to meet future domestic cash needs. Separate from the earnings of our Canadian operations, due to a triggering event from the recent settlement, the Company has recorded a provision for the tax on the dividend and the Canadian withholding taxes of approximately $7.4 million and $0.8 million, respectively for the anticipated amount we intend to repatriate. Apart from this settlement, there were no other taxes calculated for those undistributed foreign earnings that are intended to be indefinitely reinvested outside the U.S. which totaled $21.5 million at December 31, 2016.
Following the ownership change of the Tropicana Las Vegas, the Company has a total federal net operating loss carry-forwards and general business credit carryforwards in the amount of $171.6 million for the year ended December 31, 2016, which will expire on various dates from 2029 through 2034. These tax attributes are subject to limitations under the Internal Revenue Code and underlying Treasury Regulations, however we believe it is more likely than not
that the benefit from these tax attributes will not be realized. In the recognition of this risk, we have provided a full valuation allowance on the deferred tax assets related to these net operating and general business credit carryforwards. In the event our assumptions change, which allows the Company to realize these acquired tax attributes, the benefits related to any reversal of the valuation allowance on the deferred tax assets as of December 31, 2016, will be recognized as a reduction of income tax expense.
For state income tax reporting, the Company has gross state net operating loss carry-forwards aggregating approximately $220.9 million available to reduce future state income taxes, primarily for the Commonwealth of Pennsylvania and the States of Missouri, New Mexico, Maine and Ohio localities as of December 31, 2016. The tax benefit associated with these net operating loss carry-forwards is approximately $10.4 million. Due to statutorily limited operating loss carry-forwards and income and loss projections in the applicable jurisdictions, a full valuation allowance has been recorded to reflect the net operating losses which are not presently expected to be realized. If not used, substantially all the carry-forwards will expire at various dates from December 31, 2017 to December 31, 2036.
Also, certain subsidiaries have accumulated gross state and federal net operating loss carry-forwards aggregating approximately $1.5 billion for which no benefit has been recorded as they are attributable to uncertain tax positions and excess tax benefits from stock option deductions. The unrecognized tax benefits as of December 31, 2016 attributable to these net operating losses was approximately $86.1 million. Due to the uncertain tax position and excess tax benefits from stock option deductions, these net operating losses are not included as components of deferred tax assets as of December 31, 2016. In the event of any benefit from realization of these net operating losses, $13.9 million would be treated as an increase to equity, and the remainder would be treated as a reduction of tax expense. If not used, substantially all the carry-forwards will expire at various dates from December 31, 2017 to December 31, 2036.
Additionally, included in the Company’s full valuation allowance is $0.2 million for federal capital losses that will expire if not used via the realization of capital gains by December 31, 2018. Overall the Company’s valuation allowance at December 31, 2016 decreased from December 31, 2015 by a net amount of $15.8 million primarily due to the acquired deferred tax liabilities related to Rocket Speed of $10.3 million and other realized deferred tax assets during the year of $5.5 million.
The provision for income taxes charged to operations for the years ended December 31, 2016, 2015 and 2014 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
(in thousands)
|
|
Current tax (benefit) expense
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
8,721
|
|
$
|
(5,158)
|
|
$
|
14,275
|
|
State
|
|
|
3,489
|
|
|
133
|
|
|
5,821
|
|
Foreign
|
|
|
(9,639)
|
|
|
3,713
|
|
|
7,515
|
|
Total current
|
|
|
2,571
|
|
|
(1,312)
|
|
|
27,611
|
|
Deferred tax expense
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
5,457
|
|
|
51,817
|
|
|
2,357
|
|
State
|
|
|
3,279
|
|
|
5,419
|
|
|
551
|
|
Total deferred
|
|
|
8,736
|
|
|
57,236
|
|
|
2,908
|
|
Total income tax provision
|
|
$
|
11,307
|
|
$
|
55,924
|
|
$
|
30,519
|
|
The following table reconciles the statutory federal income tax rate to the actual effective income tax rate for 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
Percent of pretax income
|
|
|
|
|
|
|
|
Federal taxes
|
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
State and local income taxes
|
|
1.2
|
%
|
6.1
|
%
|
1.6
|
%
|
Permanent differences
|
|
(0.6)
|
%
|
5.8
|
%
|
(20.9)
|
%
|
Foreign
|
|
(8.5)
|
%
|
5.2
|
%
|
(2.2)
|
%
|
Valuation allowance
|
|
(17.1)
|
%
|
55.3
|
%
|
(31.1)
|
%
|
Other miscellaneous items
|
|
(0.6)
|
%
|
(8.6)
|
%
|
(2.3)
|
%
|
|
|
9.4
|
%
|
98.8
|
%
|
(19.9)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
(in thousands)
|
|
Amount of pretax income
|
|
|
|
|
|
|
|
|
|
|
Federal taxes
|
|
$
|
42,216
|
|
$
|
19,814
|
|
$
|
(53,656)
|
|
State and local income taxes
|
|
|
1,498
|
|
|
3,435
|
|
|
(2,470)
|
|
Permanent differences
|
|
|
(690)
|
|
|
3,276
|
|
|
32,019
|
|
Foreign
|
|
|
(10,268)
|
|
|
2,955
|
|
|
3,337
|
|
Valuation allowance
|
|
|
(20,675)
|
|
|
31,288
|
|
|
47,703
|
|
Other miscellaneous items
|
|
|
(774)
|
|
|
(4,844)
|
|
|
3,586
|
|
|
|
$
|
11,307
|
|
$
|
55,924
|
|
$
|
30,519
|
|
A reconciliation of the beginning and ending amount for the liability for unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
Unrecognized
|
|
|
|
tax benefits
|
|
|
|
(in thousands)
|
|
Unrecognized tax benefits
|
|
$
|
44,477
|
|
Cumulative advance deposits on account
|
|
|
(37,441)
|
|
Balance at December 31, 2014
|
|
$
|
7,036
|
|
Additions based on current year positions
|
|
|
561
|
|
Additions based on prior year positions
|
|
|
6,371
|
|
Decreases due to settlements and/or reduction in reserves
|
|
|
(4,743)
|
|
Currency translation adjustments
|
|
|
(9,097)
|
|
Settlement payments
|
|
|
(4,000)
|
|
Unrecognized tax benefits
|
|
|
33,569
|
|
Cumulative advance deposits on account
|
|
|
(31,371)
|
|
Balance at December 31, 2015
|
|
$
|
2,198
|
|
Additions based on current year positions
|
|
|
-
|
|
Additions based on prior year positions
|
|
|
3,749
|
|
Decreases due to settlements and/or reduction in reserves
|
|
|
(9,091)
|
|
Currency translation adjustments
|
|
|
2,565
|
|
Settlement payments
|
|
|
(4,000)
|
|
Unrecognized tax benefits balance at December 31, 2016
|
|
$
|
26,792
|
|
The Company is required under ASC 740 to disclose its accounting policy for classifying interest and penalties, the amount of interest and penalties charged to expense each period, as well as the cumulative amounts recorded in the consolidated balance sheets. The Company will continue to classify any income tax‑related penalties and interest accrued related to unrecognized tax benefits in taxes on income within the consolidated statements of operations.
As previously mentioned, we reached a settlement with the U.S. and Canadian competent authorities resolving a transfer pricing item. This settlement resulted in a $10.3 million benefit to the tax provision due to the release of the uncertain tax position previously established for the treatment of the Casino Rama management fee received from our non-U.S. subsidiary. In addition, we estimate receiving within the next twelve months $12.0 million and $23.0 million cash refund from U.S. and Canada (inclusive of advances on account), respectively, which is classified in other current assets. As part of the settlement, tax years 2004 through 2014 are under review by both the Internal Revenue Service and Canada Revenue Agency for the sole purpose of processing the agreed upon refunds.
During the year ended December 31, 2016, the Company recorded no tax reserves and accrued interest related to current year uncertain tax positions. In regards to prior year tax positions, the Company recorded $3.7 million of tax reserves and accrued interest and reversed $4.9 million and $4.2 million of previously recorded tax reserves and accrued interest, respectively, for uncertain tax positions that have settled and/or closed. The unrecognized tax benefits of $26.8 million is classified in other noncurrent tax liabilities. Overall, the Company recorded a net tax benefit of $9.0 million in connection with its uncertain tax positions for the year ended December 31, 2016.
Included in the liability for unrecognized tax benefits at December 31, 2016 and 2015 were $9.4 million and $10.0 million, respectively, of tax positions that, if reversed, may not affect the effective tax rate as a result of the Company’s full valuation allowance.
Included in the liability for unrecognized tax benefits at December 31, 2016 and 2015 were $1.7 million and $3.0 million gain of currency translation related to foreign currency tax positions and the settlement receivable on account, respectively.
During the years ended December 31, 2016 and 2015, the Company recognized approximately $0.3 million and $1.4 million, respectively, of interest and penalties, net of deferred taxes. In addition, due to settlements and/or reductions in previously recorded liabilities, the Company had reductions in previously accrued interest and penalties of $3.5 million, net of deferred taxes. These accruals are included in noncurrent tax liabilities and prepaid expenses within the consolidated balance sheets at December 31, 2016 and 2015, respectively.
The Company is currently in various stages of the examination process in connection with its open audits. Generally, it is difficult to determine when these examinations will be closed, but the Company reasonably expects that its ASC 740 liabilities will not significantly change over the next twelve months.
As of December 31, 2016, the Company is subject to U.S. federal income tax examinations for the tax years 2013, 2014, and 2015. In addition, the Company is subject to state and local income tax examinations for various tax years in the taxing jurisdictions in which the Company operates.
At December 31, 2016 and 2015, prepaid expenses within the consolidated balance sheets included prepaid income taxes of $30.1 million and $48.9 million, respectively. The Company anticipates receiving federal income tax refunds of $26.9 million within the next twelve months as a result of a net operating loss carryback, general business credit carryback and a prior year overpayment.
13.
Shareholders’ Equity
Preferred Equity Investment
On June 15, 2007, the Company announced that it had entered into a merger agreement that, at the effective time of the transactions contemplated thereby, would have resulted in the Company’s shareholders receiving $67.00 per share. Specifically, the Company, PNG Acquisition Company Inc. (“Parent”) and PNG Merger Sub Inc., a wholly‑owned subsidiary of Parent (“Merger Sub”), announced that they had entered into an Agreement and Plan of
Merger, dated as of June 15, 2007 (the “Merger Agreement”), that provided, among other things, for Merger Sub to be merged with and into the Company, as a result of which the Company would have continued as the surviving corporation and would have become a wholly‑owned subsidiary of Parent. Parent is indirectly owned by certain funds managed by affiliates of Fortress Investment Group LLC (“Fortress”) and Centerbridge Partners, L.P. (“Centerbridge”).
On July 3, 2008, the Company entered into an agreement with certain affiliates of Fortress and Centerbridge, terminating the Merger Agreement. In connection with the termination of the Merger Agreement, certain affiliates of Fortress and Centerbridge agreed to pay the Company a total of $1.475 billion, consisting of a nonrefundable $225 million cash termination fee and a $1.25 billion, zero coupon, preferred equity investment (the “Investment”). On October 30, 2008, the Company closed the sale of the Investment and issued 12,500 shares of the Series B Preferred Stock. During the year ended December 31, 2010, the Company repurchased 225 shares of Series B Preferred Stock for $11.2 million.
As part of the Spin‑Off, the Company entered into an agreement (the “Exchange Agreement”) with FIF V PFD LLC, an affiliate of Fortress, providing for the exchange of shares of the Company’s Series B Preferred Stock for shares of a new class of preferred stock, Series C Preferred Stock, in contemplation of the Spin‑Off.
The Exchange Agreement provided Fortress with the right to exchange its 9,750 shares of Series B Preferred Stock for fractional shares of Series C Preferred Stock at an exchange ratio that treated each such fractional share (and therefore each share of common stock into which such fractional share was convertible) as worth $67 per share, which was the “ceiling price” at which the shares of Series B Preferred Stock were redeemable by the Company at maturity. Any shares of Series B Preferred Stock that were not exchanged for shares of Series C Preferred Stock prior to the second business day before October 16, 2013, the record date established for the distribution of GLPI common stock in the Spin‑Off, were automatically exchanged for shares of Series C Preferred Stock on such date. Subsequently, the Company had the right to purchase from Fortress, prior to the record date for the Spin‑Off, a number of shares of Series C Preferred Stock, at a price of $67 per fractional share of Series C Preferred Stock, such that, immediately following the consummation of the Spin‑Off, Fortress would not own more than 9.9% of GLPI’s common stock.
On October 11, 2013, the Company completed its exchange and repurchase transactions with Fortress and repurchased all of the 2,300 shares of Series B Preferred Stock held by Centerbridge at par and issued to the affiliate of Fortress 14,553 shares of non-voting Series C Preferred Stock in order to redeem all of the previously outstanding shares of Series B Preferred Stock. The Company then repurchased 5,929 shares of Series C Preferred Stock from Fortress. Additionally, in February 2013, the Company repurchased 225 shares of Series B Preferred Stock from WF Investment Holdings, LLC at a slight discount to par. In these transactions, the Company paid a total of $649.5 million, which was primarily funded by borrowings under the revolving credit facility, to the affiliates of Fortress, Centerbridge and WF Investment Holdings, LLC, As a result of these transactions, there are currently no outstanding shares of Series B Preferred Stock and Fortress held 8,624 shares of Series C Preferred Stock at December 31, 2015 and 2014.
During 2016, Fortress sold all 8,624 shares of Series C Preferred Stock, which converted upon sale into 8,624,000 shares of common stock under previously agreed upon terms. As a result, no shares of Series C Preferred Stock are outstanding at December 31, 2016.
The following table below discloses the changes in each class of the Company’s preferred stock for the year ended December 31, 2016. No changes in the Company’s preferred stock occurred in the years ended December 31, 2015 and 2014.
|
|
|
|
|
|
Series C
|
|
|
|
Preferred Stock
|
|
Shares outstanding at December 31, 2015
|
|
8,624
|
|
Conversion of Series C Preferred Stock to Common Stock
|
|
(8,624)
|
|
Shares outstanding at December 31, 2016
|
|
—
|
|
14.
Stock‑Based Compensation
On April 16, 2003, the Company’s Board of Directors adopted and approved the 2003 Long Term Incentive Compensation Plan (the “2003 Plan”). On May 22, 2003, the Company’s shareholders approved the 2003 Plan. The 2003 Plan was effective June 1, 2003 and permitted the grant of options to purchase common stock and other market‑based and performance‑based awards. Up to 12,000,000 shares of common stock were available for awards under the 2003 Plan. The 2003 Plan provided for the granting of both incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended, and nonqualified stock options, which do not so qualify. The exercise price per share may be no less than (i) 100% of the fair market value of the common stock on the date an option is granted for incentive stock options and (ii) 85% of the fair market value of the common stock on the date an option is granted for nonqualified stock options. However the shares which remained available for issuance under such plan as of November 12, 2008 are no longer available for issuance and all future equity awards will be pursuant to the 2008 Long Term Incentive Compensation Plan (the “2008 Plan”) described below.
On August 20, 2008, the Company’s Board of Directors adopted and approved the 2008 Plan. On November 12, 2008, the Company’s shareholders approved the 2008 Plan. The 2008 Plan permits the Company to issue stock options (incentive and/or non‑qualified), stock appreciation rights, restricted stock, phantom stock units and other equity and cash awards to employees. Non‑ employee directors are eligible to receive all such awards, other than incentive stock options. On June 9, 2011, the Company’s shareholders approved an amendment to the 2008 Plan to increase the aggregate number of shares of common stock that may be issued by 2,350,000 to 9,250,000, and on June 12, 2014 the Company’s shareholders approved an amendment to increase the aggregate number of shares of common stock that may be issued from 9,250,000 to 16,350,000. Awards of stock options and stock appreciation rights will be counted against the 16,350,000 limit as one share of common stock for each share granted. However, each share awarded in the form of restricted stock, or any other full value stock award, will be counted as issuing 2.44 shares of common stock for purposes of determining the number of shares available for issuance under the plan. Any awards that are not settled in shares of common stock shall not count against this limit. At December 31, 2016, there were 3,856,137 options available for future grants under the 2008 Plan.
On February 9, 2016, the Company’s Compensation Committee of the Board of Directors adopted a Performance Share Program (the “Performance Share Program”) pursuant to the 2008 Plan, which contains performance‑based vesting for a meaningful portion of restricted stock awards. The Performance Share Program was adopted to provide key executives with equity‑based compensation tied directly to Company performance to further align their interests with those of shareholders, and to provide compensation only if the designated performance goal is met for the applicable performance period. The Company’s named executive officers and other key executives are eligible to participate in the Performance Share Program. An aggregate of 189,085 performance shares were awarded on February 9, 2016, with each award having a three-year award period consisting of three one-year performance periods and a three-year service period. The performance goal for each performance period will be an adjusted EBITDA goal established for each one-year performance period. The awards will potentially be earned between 0% and 150% of the shares awarded in one-third increments depending on achievement of the annual performance goals, but remain subject to vesting for the full three-year service term.
At December 31, 2016, the adjusted EBITDA target for the second and third tranches of the performance awards have not yet been established and therefore the Company concluded a grant date has not occurred under ASC 718. Stock based compensation expense will be measured for the first tranche based on the fair value of the restricted stock awards using Penn’s closing stock price since all key terms for this specific tranche were established and mutually understood by the Company and the individuals receiving the awards. At each reporting period, accurals of stock based compenstation expense are based on the probable outcome of the performance condition.
In connection with the Spin-Off of GLPI, the Company’s employee stock options and cash-settled stock appreciation rights (“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 cash-settled phantom stock unit awards (“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.
The unrecognized compensation costs associated with GLPI restricted stock awards, GLPI PSUs, GLPI stock options and GLPI SARs held by former Penn employees (including but not limited to the Company’s former Chief Executive Officer, Chief Financial Officer, and Senior Vice President of Corporate Development) who are now employed by GLPI effective November 1, 2013, will be recorded on GLPI’s financial statements.
Stock options that expire between March 19, 2017 and July 18, 2023, have been granted to officers, directors, employees, and predecessor employees to purchase common stock at prices ranging from $6.76 to $18.61 per share. All options were granted at the fair market value of the common stock on the date the options were granted and have contractual lives ranging from 7 to 10 years. The Company issues new authorized common shares to satisfy stock option exercises as well as restricted stock lapses.
The following table contains information on stock options issued under the plans for the year ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Aggregate
|
|
|
|
Number of Option
|
|
Weighted-Average
|
|
Contractual
|
|
Intrinsic Value
|
|
|
|
Shares
|
|
Exercise Price
|
|
Term (in years)
|
|
(in thousands)
|
|
Outstanding at December 31, 2015
|
|
6,381,576
|
|
$
|
9.97
|
|
|
|
|
|
|
Granted
|
|
1,573,651
|
|
|
12.92
|
|
|
|
|
|
|
Exercised
|
|
(1,526,226)
|
|
|
7.77
|
|
|
|
|
|
|
Canceled
|
|
(102,408)
|
|
|
13.76
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
6,326,593
|
|
$
|
11.17
|
|
3.93
|
|
$
|
16,988,875
|
|
The weighted‑average grant‑date fair value of options granted during the years ended December 31, 2016 and 2015 were $3.97 and $4.85, respectively.
The aggregate intrinsic value of stock options exercised during the years ended December 31, 2016, 2015, and 2014 was $10.3 million, $19.5 million, and $8.2 million, respectively.
At December 31, 2016, there were 3,110,050 shares that were exercisable, with a weighted‑average exercise price of $9.34, a weighted‑average remaining contractual term of 2.37 years, and an aggregate intrinsic value of $13.9 million.
The following table summarizes information about stock options outstanding at December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price Range
|
|
Total
|
|
|
|
$6.76 to
|
|
$11.12 to
|
|
$16.59 to
|
|
$6.76 to
|
|
|
|
$10.26
|
|
$15.45
|
|
$18.61
|
|
$18.61
|
|
Outstanding options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number outstanding
|
|
|
2,229,210
|
|
|
4,026,349
|
|
|
71,034
|
|
|
6,326,593
|
|
Weighted-average remaining contractual life (years)
|
|
|
1.55
|
|
|
5.22
|
|
|
5.73
|
|
|
3.93
|
|
Weighted-average exercise price
|
|
$
|
8.10
|
|
$
|
12.76
|
|
$
|
17.26
|
|
$
|
11.17
|
|
Exercisable options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number outstanding
|
|
|
1,805,807
|
|
|
1,288,869
|
|
|
15,374
|
|
|
3,110,050
|
|
Weighted-average exercise price
|
|
$
|
9.53
|
|
$
|
13.06
|
|
$
|
17.86
|
|
$
|
11.03
|
|
The following table contains information on restricted stock awards issued under the plans for the year ended December 31, 2016:
|
|
|
|
|
|
Number of Award
|
|
|
|
Shares
|
|
Outstanding at December 31, 2015
|
|
126,996
|
|
Awarded
|
|
113,766
|
|
Released
|
|
(50,860)
|
|
Canceled
|
|
(14,016)
|
|
Outstanding at December 31, 2016
|
|
175,886
|
|
Stock-based compensation expenses for the years ended December 31, 2016, 2015 and 2014 totaled $6.9 million, $8.2 million and $10.7 million, respectively, and are included within the consolidated statements of operations under general and administrative expense.
At December 31, 2016, 2015 and 2014, the total compensation cost related to nonvested awards not yet recognized equaled $11.6 million, $11.2 million and $10.9 million, respectively, including $9.9 million, $8.8 million and $7.3 million for stock options, respectively, and $1.7 million, $2.4 million and $3.6 million for restricted stock, respectively. This cost is expected to be recognized over the remaining vesting periods, which will not exceed four years.
The Company’s PSUs, which vest over a period of three to four 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 consolidated balance sheets, associated with its PSUs of $5.6 million and $7.8 million at December 31, 2016 and 2015, respectively.
For PSUs held by Penn employees, there was $6.6 million of total unrecognized compensation cost at December 31, 2016 that will be recognized over the grants remaining weighted average vesting period of 1.37 years. For the years ended December 31, 2016, 2015 and 2014, the Company recognized $8.5 million, $14.1 million, and $8.3 million of compensation expense associated with these awards, respectively. The reason for the decrease was primarily due to a decrease in the stock price of Penn common stock during 2016. Amounts paid by the Company for the years ended December 31, 2016, 2015, and 2014 on these cash-settled awards totaled $10.7 million, $14.5 million, and $6.9 million, respectively.
For the Company’s 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 in Note 3. 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 consolidated balance sheets, associated with its SARs of $7.3 million and $8.0 million at December 31, 2016 and 2015, respectively.
For SARs held by Penn employees, there was $4.5 million of total unrecognized compensation cost at December 31, 2016 that will be recognized over the awards remaining weighted average vesting period of 2.45 years. For the years ended December 31, 2016 and 2015, the Company recognized $2.4 million and $5.1 million of compensation expense associated with these awards. For the year ended December 31, 2014, the Company recognized $2.9 million of compensation benefits associated with these awards. The reason for the decrease was primarily due to a decrease in the stock price of Penn common stock during 2016. Amounts paid by the Company for the years ended December 31, 2016, 2015 and 2014 on these cash-settled awards totaled $3.3 million, $3.4 million and $2.2 million, respectively.
15.
Segment Information
During the second quarter of 2016, the Company changed its three reportable segments from East/Midwest, West and Southern Plains to Northeast, South/West, and Midwest in connection with the addition of a new regional vice president and a realignment of responsibilities within the Company’s segments. Segment information for prior periods has been restated for comparability. The following tables (in thousands) 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. The income (loss) from operations by segment presented below does not include allocations for corporate overhead costs or expenses associated with utilizing property subject to the Master Lease.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
Northeast
|
|
South/West
|
|
Midwest
|
|
Other (1)
|
|
Total
|
|
Income (loss) from operations
|
|
$
|
397,524
|
|
$
|
92,629
|
|
$
|
223,180
|
|
$
|
(170,317)
|
|
$
|
543,016
|
|
Charge for stock compensation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,871
|
|
|
6,871
|
|
Insurance recoveries
|
|
|
—
|
|
|
—
|
|
|
(726)
|
|
|
—
|
|
|
(726)
|
|
Depreciation and amortization
|
|
|
92,373
|
|
|
35,831
|
|
|
38,210
|
|
|
104,800
|
|
|
271,214
|
|
Contingent purchase price
|
|
|
(1,277)
|
|
|
—
|
|
|
6
|
|
|
2,548
|
|
|
1,277
|
|
Loss (gain) on disposal of assets
|
|
|
450
|
|
|
109
|
|
|
334
|
|
|
(3,364)
|
|
|
(2,471)
|
|
Income (loss) from unconsolidated affiliates
|
|
|
—
|
|
|
—
|
|
|
15,960
|
|
|
(1,623)
|
|
|
14,337
|
|
Non-operating items for Kansas JV
|
|
|
—
|
|
|
—
|
|
|
10,311
|
|
|
—
|
|
|
10,311
|
|
Adjusted EBITDA
|
|
$
|
489,070
|
|
$
|
128,569
|
|
$
|
287,275
|
|
$
|
(61,085)
|
|
$
|
843,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
328,567
|
|
$
|
102,380
|
|
$
|
225,526
|
|
$
|
(188,627)
|
|
$
|
467,846
|
|
Charge for stock compensation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,223
|
|
|
8,223
|
|
Impairment losses
|
|
|
40,042
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
40,042
|
|
Depreciation and amortization
|
|
|
93,299
|
|
|
25,793
|
|
|
39,917
|
|
|
100,452
|
|
|
259,461
|
|
Contingent purchase price
|
|
|
(5,374)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,374)
|
|
Loss on disposal of assets
|
|
|
65
|
|
|
677
|
|
|
208
|
|
|
336
|
|
|
1,286
|
|
Income (loss) from unconsolidated affiliates
|
|
|
—
|
|
|
—
|
|
|
15,289
|
|
|
(801)
|
|
|
14,488
|
|
Non-operating items for Kansas JV
|
|
|
—
|
|
|
—
|
|
|
10,377
|
|
|
—
|
|
|
10,377
|
|
Adjusted EBITDA
|
|
$
|
456,599
|
|
$
|
128,850
|
|
$
|
291,317
|
|
$
|
(80,417)
|
|
$
|
796,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
297,674
|
|
$
|
101,156
|
|
$
|
37,362
|
|
$
|
(179,004)
|
|
$
|
257,188
|
|
Charge for stock compensation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,666
|
|
|
10,666
|
|
Impairment losses
|
|
|
—
|
|
|
1,420
|
|
|
158,464
|
|
|
—
|
|
|
159,884
|
|
Insurance recoveries
|
|
|
—
|
|
|
—
|
|
|
(5,674)
|
|
|
—
|
|
|
(5,674)
|
|
Depreciation and amortization
|
|
|
87,018
|
|
|
19,493
|
|
|
61,389
|
|
|
98,842
|
|
|
266,742
|
|
Contingent purchase price
|
|
|
689
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
689
|
|
Loss (gain) on disposal of assets
|
|
|
54
|
|
|
183
|
|
|
523
|
|
|
(22)
|
|
|
738
|
|
Income (loss) from unconsolidated affiliates
|
|
|
—
|
|
|
51
|
|
|
10,669
|
|
|
(2,771)
|
|
|
7,949
|
|
Non-operating items for Kansas JV
|
|
|
—
|
|
|
—
|
|
|
11,809
|
|
|
—
|
|
|
11,809
|
|
Adjusted EBITDA
|
|
$
|
385,435
|
|
$
|
122,303
|
|
$
|
274,542
|
|
$
|
(72,289)
|
|
$
|
709,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast
|
|
South/West
|
|
Midwest
|
|
Other (1)
|
|
Total
|
|
|
|
(in thousands)
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,568,514
|
|
$
|
546,608
|
|
$
|
877,567
|
|
$
|
41,691
|
|
$
|
3,034,380
|
|
Capital expenditures
|
|
|
30,677
|
|
|
30,458
|
|
|
30,921
|
|
|
5,189
|
|
|
97,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,505,838
|
|
$
|
478,128
|
|
$
|
833,455
|
|
$
|
20,937
|
|
$
|
2,838,358
|
|
Capital expenditures
|
|
|
155,413
|
|
|
16,805
|
|
|
22,679
|
|
|
4,343
|
|
|
199,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,275,651
|
|
$
|
441,718
|
|
$
|
848,868
|
|
$
|
24,290
|
|
$
|
2,590,527
|
|
Capital expenditures
|
|
|
140,047
|
|
|
40,140
|
|
|
41,991
|
|
|
5,967
|
|
|
228,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet at December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
861,951
|
|
|
840,076
|
|
|
1,103,231
|
|
|
2,169,226
|
|
|
4,974,484
|
|
Investment in and advances to unconsolidated affiliates
|
|
|
76
|
|
|
—
|
|
|
93,768
|
|
|
62,332
|
|
|
156,176
|
|
Goodwill and other intangible assets, net
|
|
|
324,285
|
|
|
224,719
|
|
|
775,377
|
|
|
100,798
|
|
|
1,425,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet at December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
918,292
|
|
|
968,152
|
|
|
1,091,514
|
|
|
2,160,794
|
|
|
5,138,752
|
|
Investment in and advances to unconsolidated affiliates
|
|
|
84
|
|
|
—
|
|
|
103,608
|
|
|
64,457
|
|
|
168,149
|
|
Goodwill and other intangible assets, net
|
|
|
324,285
|
|
|
224,746
|
|
|
750,127
|
|
|
4,226
|
|
|
1,303,384
|
|
|
(1)
|
|
Includes depreciation expense associated with the real property assets under the Master Lease with GLPI. In addition, total assets include these assets. The interest expense associated with the financing obligation is reflected in the other category. Net revenues and income (loss) from unconsolidated affiliates relate to the Company’s stand-alone racing operations, namely Rosecroft Raceway, which the Company sold on July 31, 2016, Sanford Orlando Kennel Club and the Company’s Texas and New Jersey joint ventures (see Note 6 to the consolidated financial statements) which do not have gaming operations.
Other also includes the recently created Penn Interactive Ventures, which is a wholly-owned subsidiary that is pursuing the Company’s interactive gaming strategy and its recent acquisition of Rocket Speed.
|
16.
Summarized Quarterly Data (Unaudited)
The following table summarizes the quarterly results of operations for the years ended December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter
|
|
|
|
First
|
|
Second
|
|
Third (1)
|
|
Fourth (2)
|
|
|
|
(in thousands, except per share data)
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
756,451
|
|
$
|
769,422
|
|
$
|
765,597
|
|
$
|
742,910
|
|
Income from operations
|
|
|
140,531
|
|
|
149,337
|
|
|
139,300
|
|
|
113,848
|
|
Net income
|
|
|
23,708
|
|
|
34,035
|
|
|
46,535
|
|
|
5,032
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.26
|
|
$
|
0.38
|
|
$
|
0.52
|
|
$
|
0.06
|
|
Diluted earnings per common share
|
|
$
|
0.26
|
|
$
|
0.37
|
|
$
|
0.51
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter
|
|
|
|
First
|
|
Second
|
|
Third (3)
|
|
Fourth
|
|
|
|
(in thousands, except per share data)
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
664,138
|
|
$
|
700,956
|
|
$
|
739,297
|
|
$
|
733,967
|
|
Income from operations
|
|
|
111,689
|
|
|
123,361
|
|
|
142,172
|
|
|
90,624
|
|
Net income (loss)
|
|
|
1,869
|
|
|
2,983
|
|
|
4,900
|
|
|
(9,066)
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
0.02
|
|
$
|
0.03
|
|
$
|
0.06
|
|
$
|
(0.11)
|
|
Diluted earnings (loss) per common share
|
|
$
|
0.02
|
|
$
|
0.03
|
|
$
|
0.05
|
|
$
|
(0.11)
|
|
|
(1)
|
|
On August 1, 2016 the Company acquired Rocket Speed, Inc.
|
|
(2)
|
|
On October 3, 2016 and November 1, 2016 the Company acquired Slot Kings, LLC and Bell Gaming, LLC, respectively.
|
|
(3)
|
|
On August 25, 2015 and September 1, 2015 the Company acquired Tropicana Las Vegas and Prairie State Gaming, LLC, respectively.
|
During the fourth quarter of 2015, the Company recorded other intangible assets impairment charges of $40.0 million related to the write-off of its Plainridge Park Casino gaming license and a partial write-down of the gaming license at Hollywood Gaming at Dayton Raceway due to a reduction in the long term earnings forecast at both of these locations. In addition, the three months ended December 31, 2015 included favorable property tax settlements of approximately $16.8 million.
17.
Related Party Transactions
The Company currently leases executive office buildings in Wyomissing, Pennsylvania from affiliates of its Chairman of the Board of Directors. Rent expense for the years ended December 31, 2016, 2015 and 2014 amounted to $1.2 million, $1.2 million, and $1.1 million, respectively. The leases for the office space all expire in May 2019. The future minimum lease commitments relating to these leases at December 31, 2016 are $2.9 million.
18.
Fair Value Measurements
ASC 820, “Fair Value Measurements and Disclosures,” establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach). The levels of the hierarchy are described below:
|
·
|
|
Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.
|
|
·
|
|
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets, such as interest rates and yield curves that are observable at commonly quoted intervals.
|
|
·
|
|
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions, as there is little, if any, related market activity.
|
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy.
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.
Advances to Jamul Tribe
The fair value of the Company’s advances to the Jamul Tribe was based on market interest rates for similarly rated observable instruments. Although we determined that these inputs fell within Level 2 of the fair value hierarchy, the probability of the Company’s loan being subordinated is based on internal projections of the cash flows of the facility which is a Level 3 measurement. Therefore, the Company concluded that this instrument should be classified as a Level 3 measurement due to the high probability of the loan being subordinated. See Note 5 for further details.
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.
Other long term obligations at December 31, 2016 include the relocation fees for Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course, and the repayment obligation of a hotel and event center located near Hollywood Casino Lawrenceburg. The fair value of the relocation fees for Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course approximates its carrying value as the discount rate of 5.0% approximates the market rate of similar debt instruments and as such is a Level 2 measurement. Finally, the fair value of the repayment obligation for the hotel and event center is estimated based on a rate consistent with comparable municipal bonds and as such is a Level 2 measurement.
Other Liabilities
Other liabilities at December 31, 2016, include the contingent purchase price consideration related to the purchase of Plainridge Racecourse and Rocket Speed. The fair value of the Company’s contingent purchase price consideration related to its Plainridge Racecourse acquisition is estimated based on an income approach using a discounted cash flow model and as such is a Level 3 measurement. The fair value of the Company’s contingent purchase price consideration related to its Rocket Speed acquisition is estimated by applying an option pricing method using a Monte Carlo simulation which is a quantitative technique that estimates the distribution of an outcome variable that depends on probabilistic input variables and as such is a Level 3 measurement. At each reporting period, the Company assesses the fair value of this obligation and changes in its value are recorded in earnings. The amount included in general and administrative expenses related to the change in fair value of these obligations was a charge of $1.3 million for the year ended December 31, 2016 compared to a reduction of $5.4 million for the year ended December 31, 2015 and a charge of $0.7 million for the year ended December 31, 2014.
The carrying amounts and estimated fair values by input level of the Company’s financial instruments during the years ended December 31, 2016 and 2015 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
229,510
|
|
$
|
229,510
|
|
$
|
229,510
|
|
$
|
—
|
|
$
|
—
|
|
Advances to Jamul Tribe
|
|
|
92,100
|
|
|
98,000
|
|
|
—
|
|
|
—
|
|
|
98,000
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured credit facility
|
|
|
962,703
|
|
|
976,092
|
|
|
785,092
|
|
|
191,000
|
|
|
—
|
|
Senior unsecured notes
|
|
|
296,895
|
|
|
312,000
|
|
|
312,000
|
|
|
—
|
|
|
—
|
|
Other long-term obligations
|
|
|
154,084
|
|
|
152,132
|
|
|
—
|
|
|
152,132
|
|
|
—
|
|
Other liabilities
|
|
|
48,244
|
|
|
48,244
|
|
|
—
|
|
|
—
|
|
|
48,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
237,009
|
|
$
|
237,009
|
|
$
|
237,009
|
|
$
|
—
|
|
$
|
—
|
|
Advances to Jamul Tribe
|
|
|
197,722
|
|
|
197,722
|
|
|
—
|
|
|
—
|
|
|
197,722
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured credit facility
|
|
|
1,239,049
|
|
|
1,251,975
|
|
|
829,975
|
|
|
422,000
|
|
|
—
|
|
Senior unsecured notes
|
|
|
296,252
|
|
|
291,000
|
|
|
291,000
|
|
|
—
|
|
|
—
|
|
Other long-term obligations
|
|
|
146,992
|
|
|
147,358
|
|
|
—
|
|
|
147,358
|
|
|
—
|
|
Other liabilities
|
|
|
13,815
|
|
|
13,815
|
|
|
—
|
|
|
—
|
|
|
13,815
|
|
The following table summarizes the changes in fair value of the Company’s Level 3 liabilities (in thousands):
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
|
December 31, 2016 and 2015
|
|
|
|
Liabilities
|
|
|
|
Contingent
|
|
|
|
Purchase Price
|
|
|
|
|
|
|
Balance at January 1, 2015
|
|
$
|
19,189
|
|
Included in earnings
|
|
|
(5,374)
|
|
Balance at December 31, 2015
|
|
$
|
13,815
|
|
Additions
|
|
|
34,945
|
|
Payments
|
|
|
(1,793)
|
|
Included in earnings
|
|
|
1,277
|
|
Balance at December 31, 2016
|
|
$
|
48,244
|
|
The following table summarizes the significant unobservable inputs used in calculating fair value for our Level 3 liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
|
|
Unobservable
|
|
|
|
|
|
|
|
|
Technique
|
|
Input
|
|
Discount Rate
|
|
|
Volatility Rate
|
|
Contingent purchase price - Plainridge
|
|
Discounted cash flow
|
|
Discount rate
|
|
8.30
|
%
|
|
N/A
|
%
|
Contingent purchase price - Rocket Speed
|
|
Option pricing method
|
|
Discount rate, Volatility rate
|
|
11.50
|
%
|
|
87.32
|
%
|
The following table sets forth the assets measured at fair value on a non-recurring basis during the year ended December 31, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reduction in
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Fair Value
|
|
|
|
Balance
|
|
|
|
|
|
|
|
December 31,
|
|
Recorded during
|
|
|
|
Sheet
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
the year ended
|
|
|
|
Location
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
December 31, 2015,
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
Other intangible assets
|
|
$
|
—
|
|
$
|
—
|
|
$
|
110,436
|
|
$
|
110,436
|
|
$
|
(40,042)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(40,042)
|
|
Goodwill and intangible assets
The valuation technique used to measure the fair value of goodwill and intangible assets was the income approach. See Note 3 for a description of the inputs and the information used to develop the inputs in calculating the fair value measurements of goodwill and indefinite-life intangible assets.
For the year ended December 31, 2015, the Company recorded other intangible assets impairment charges of $40.0 million, as of the valuation date of October 1, 2015, related to the write-off of our Plainridge Park Casino gaming license and a partial write-down of the gaming license at Hollywood Gaming at Dayton Raceway due to a reduction in the long term earnings forecast at both of these locations.
19.
Insurance Recoveries and Deductibles
Argosy Casino Alton
Argosy Casino Alton closed on the evening of December 28, 2015 and did not reopen until the evening of January 3, 2016 due flooding in the surrounding area. The main bridge to the property also remained closed through January 13, 2016. As a result, the company received $0.7 million in insurance proceeds for business interruption in 2016.
20.
Subsequent Events
Refinancing Transactions
On January 19, 2017, the Company issued $400.0 million of 5.625% senior notes due 2027 (the “5.625% Notes”) and entered into $1,500.0 million of amended credit facilities, comprised of a $300.0 million Term Loan A Facility with a maturity of five years, a $500.0 million Term Loan B Facility with a maturity of seven years and a $700.0 million revolving credit facility with a maturity of five years (the “Amended Credit Facilities”).
The Company used a portion of the proceeds from the issuance of the 5.625% Notes to retire its existing 5.875% Notes and to fund related transaction fees and expenses.
The Company used loans funded under the Amended Credit Facilities and a portion of the proceeds of the 5.625% Notes to repay amounts outstanding under its existing Credit Agreement and to fund related transaction fees and expenses and for general corporate purposes.
The 5.625% Notes mature on January 15, 2027 at a price of par. Interest on the 5.625% Notes is payable on January 15 and July 15 of each year. The 5.625% Notes are senior unsecured obligations of the Company. The 5.625% Notes will not be guaranteed by any of the Company’s subsidiaries except in the event that the Company in the future issues certain subsidiary-guaranteed debt securities. The Company may redeem the 5.625% Notes at any time on or after January 15, 2022, at the declining redemption premiums set forth in the indenture governing the 5.625% Notes, and, prior to January 15, 2022, at a “make-whole” redemption premium set forth in the indenture governing the 5.625% Notes. In addition, prior to January 15, 2020, the Company may redeem the Notes with an amount equal to the net proceeds from one or more equity offerings, at a redemption price equal to 105.625% of the principal amount of the Notes redeemed, together with accrued and unpaid interest to, but not including, the redemption date, so long as at least 60% of the aggregate principal amount of the notes originally issued under the indenture remains outstanding and such redemption occurs within 180 days of closing of the related equity offering.
In connection with the Refinancing Transactions, the Company incurred $25.2 million of debt extinguishment and financing charges (inclusive of the $13.2 million call premium on the 5.875% Notes) which will be recorded in other expenses on our consolidated statement of operations for the three months ending March 31, 2017.
Share Repurchase Program
On February 3, 2017, our Board of Directors authorized a $100 million share repurchase program which can be executed over a two year period.