10-Q 1 a10-17262_110q.htm 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

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

 

For the quarterly period ended September 30, 2010

 

OR

 

o

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

 

For the transition period from        to         

 

Commission file number:  0-24206

 

PENN NATIONAL GAMING, INC.

(Exact name of registrant as specified in its charter)

 

Pennsylvania

 

23-2234473

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

825 Berkshire Blvd., Suite 200

Wyomissing, PA 19610

(Address of principal executive offices) (Zip Code)

 

610-373-2400

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

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

 

Title

 

Outstanding as of October 29, 2010

Common Stock, par value $.01 per share

 

78,019,629 (includes 569,800 shares of restricted stock)

 

 

 



 

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Actual results may vary materially from expectations. Although Penn National Gaming, Inc. and its subsidiaries (collectively, the “Company”) believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, there can be no assurance that actual results will not differ materially from our expectations. Meaningful factors that could cause actual results to differ from expectations include, but are not limited to, risks related to the following: our ability to receive regulatory approvals for our new businesses and to maintain regulatory approvals for our existing businesses; our ability to receive regulatory approvals required to complete, or other delays or impediments to completing, our obtaining control of the equity or assets of The M Resort LLC, including litigation from third parties; the passage of state, federal or local legislation (including referenda) that would expand, restrict, further tax, prevent or negatively impact operations in the jurisdictions in which we do business (such as a smoking ban at any of our facilities) or in jurisdictions where we seek to do business; the activities of our competitors and the emergence of new competitors; increases in the effective rate of taxation at any of our properties or at the corporate level; delays or changes to, or cancellations of, planned capital projects at our gaming and pari-mutuel facilities or an inability to achieve the expected returns from such projects; construction factors, including delays, unexpected remediation costs, local opposition and increased cost of labor and materials; the ability to recover proceeds on significant insurance claims; our ability to identify attractive acquisition and development opportunities and to agree to terms with partners for such transactions; the costs and risks involved in the pursuit of such opportunities and our ability to complete the acquisition or development of, and achieve the expected returns from, such opportunities; the availability and cost of financing; the maintenance of agreements and relationships with our horsemen, pari-mutuel clerks and other organized labor groups; the outcome of pending legal proceedings; the effects of local and national economic, credit, capital market, housing, and energy conditions on the economy in general and on the gaming and lodging industries in particular; changes in accounting standards; third-party relations and approvals; our dependence on key personnel; the impact of terrorism and other international hostilities; the impact of weather; and other factors as discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K as filed with the United States Securities and Exchange Commission.  The Company does not intend to update publicly any forward-looking statements except as required by law.

 

2



 

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

PART I.

FINANCIAL INFORMATION

4

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

4

 

Consolidated Balance Sheets — September 30, 2010 and December 31, 2009

4

 

Consolidated Statements of Income — Three and Nine Months Ended September 30, 2010 and 2009

5

 

Consolidated Statements of Changes in Shareholders’ Equity — Nine Months Ended September 30, 2010 and 2009

6

 

Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2010 and 2009

7

 

Notes to the Consolidated Financial Statements

8

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (unaudited)

28

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

46

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

46

 

 

 

PART II.

OTHER INFORMATION

47

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

47

 

 

 

ITEM 1A.

RISK FACTORS

47

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

47

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

47

 

 

 

ITEM 5.

OTHER INFORMATION

47

 

 

 

ITEM 6.

EXHIBITS

48

 

 

 

SIGNATURES

49

 

 

EXHIBIT INDEX

50

 

3



 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

Penn National Gaming, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

September 30,
2010

 

December 31,
2009

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

355,442

 

$

713,118

 

Receivables, net of allowance for doubtful accounts of $3,021 and $3,548 at September 30, 2010 and December 31, 2009, respectively

 

43,917

 

46,672

 

Insurance receivable

 

 

33,494

 

Prepaid expenses

 

42,841

 

70,947

 

Deferred income taxes

 

21,479

 

23,619

 

Other current assets

 

78,215

 

41,021

 

Total current assets

 

541,894

 

928,871

 

Property and equipment, net

 

1,945,538

 

1,837,504

 

Other assets

 

 

 

 

 

Investment in and advances to unconsolidated affiliates

 

70,936

 

26,305

 

Goodwill

 

1,375,948

 

1,379,961

 

Other intangible assets

 

420,304

 

386,531

 

Debt issuance costs, net of accumulated amortization of $42,193 and $39,703 at September 30, 2010 and December 31, 2009, respectively

 

30,782

 

40,889

 

Other assets

 

104,277

 

112,555

 

Total other assets

 

2,002,247

 

1,946,241

 

Total assets

 

$

4,489,679

 

$

4,712,616

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current maturities of long-term debt

 

$

2,970

 

$

86,071

 

Accounts payable

 

19,867

 

19,850

 

Accrued expenses

 

89,605

 

110,108

 

Accrued interest

 

32,408

 

61,786

 

Accrued salaries and wages

 

66,213

 

65,608

 

Gaming, pari-mutuel, property, and other taxes

 

51,945

 

38,943

 

Insurance financing

 

3,233

 

6,752

 

Other current liabilities

 

42,686

 

41,138

 

Total current liabilities

 

308,927

 

430,256

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

Long-term debt, net of current maturities

 

2,098,105

 

2,248,706

 

Deferred income taxes

 

126,029

 

127,107

 

Noncurrent tax liabilities

 

38,856

 

46,702

 

Other noncurrent liabilities

 

8,970

 

7,769

 

Total long-term liabilities

 

2,271,960

 

2,430,284

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Penn National Gaming, Inc. and subsidiaries shareholders’ equity:

 

 

 

 

 

Preferred stock ($.01 par value, 1,000,000 shares authorized, 12,275 and 12,500 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively)

 

 

 

Common stock ($.01 par value, 200,000,000 shares authorized, 77,906,575 and 78,972,256 shares issued at September 30, 2010 and December 31, 2009, respectively)

 

774

 

786

 

Additional paid-in capital

 

1,430,332

 

1,480,476

 

Retained earnings

 

491,072

 

397,407

 

Accumulated other comprehensive loss

 

(13,386

)

(26,028

)

Total Penn National Gaming, Inc. and subsidiaries shareholders’ equity

 

1,908,792

 

1,852,641

 

Noncontrolling interests

 

 

(565

)

Total shareholders’ equity

 

1,908,792

 

1,852,076

 

Total liabilities and shareholders’ equity

 

$

4,489,679

 

$

4,712,616

 

 

See accompanying notes to the consolidated financial statements.

 

4



 

Penn National Gaming, Inc. and Subsidiaries

Consolidated Statements of Income

(in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Gaming

 

$

582,307

 

$

565,483

 

$

1,668,870

 

$

1,651,776

 

Food, beverage and other

 

85,787

 

87,404

 

250,971

 

258,273

 

Management service fee

 

4,363

 

4,239

 

11,569

 

10,946

 

Gross revenues

 

672,457

 

657,126

 

1,931,410

 

1,920,995

 

Less promotional allowances

 

(34,201

)

(36,700

)

(102,520

)

(107,526

)

Net revenues

 

638,256

 

620,426

 

1,828,890

 

1,813,469

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

Gaming

 

309,991

 

303,420

 

890,473

 

887,602

 

Food, beverage and other

 

66,857

 

69,100

 

196,705

 

199,158

 

General and administrative

 

102,164

 

110,116

 

303,633

 

302,587

 

Depreciation and amortization

 

53,842

 

50,055

 

157,675

 

141,427

 

Impairment losses

 

816

 

120

 

31,542

 

11,809

 

Empress Casino Hotel fire

 

(5,876

)

211

 

(5,662

)

5,942

 

Total operating expenses

 

527,794

 

533,022

 

1,574,366

 

1,548,525

 

Income from operations

 

110,462

 

87,404

 

254,524

 

264,944

 

 

 

 

 

 

 

 

 

 

 

Other income (expenses)

 

 

 

 

 

 

 

 

 

Interest expense

 

(32,412

)

(36,785

)

(99,615

)

(97,874

)

Interest income

 

398

 

956

 

1,739

 

5,650

 

Loss from unconsolidated affiliates

 

(3,925

)

(36

)

(5,762

)

(755

)

Loss on early extinguishment of debt

 

 

(3,599

)

(519

)

(3,599

)

Other

 

8,259

 

(2,560

)

8,245

 

2,419

 

Total other expenses

 

(27,680

)

(42,024

)

(95,912

)

(94,159

)

 

 

 

 

 

 

 

 

 

 

Income from operations before income taxes

 

82,782

 

45,380

 

158,612

 

170,785

 

Taxes on income

 

34,437

 

24,029

 

67,140

 

80,293

 

Net income including noncontrolling interests

 

48,345

 

21,351

 

91,472

 

90,492

 

Less: Net loss attributable to noncontrolling interests

 

 

 

(2,193

)

 

Net income attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries

 

$

48,345

 

$

21,351

 

$

93,665

 

$

90,492

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries:

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.51

 

$

0.22

 

$

0.97

 

$

0.94

 

Diluted earnings per common share

 

$

0.46

 

$

0.20

 

$

0.88

 

$

0.85

 

 

See accompanying notes to the consolidated financial statements.

 

5



 

Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(in thousands, except share data) (unaudited)

 

 

 

Penn National Gaming, Inc. shareholders

 

 

 

 

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Additional
Paid-In

 

Retained

 

Accumulated Other
Comprehensive

 

Noncontrolling

 

Total
Shareholders’

 

Comprehensive

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Earnings

 

(Loss) Income

 

Interests

 

Equity

 

Income (Loss)

 

Balance, December 31, 2008

 

12,500

 

$

 

78,148,488

 

$

782

 

$

1,442,829

 

$

662,355

 

$

(48,693

)

$

 

$

2,057,273

 

 

 

Stock option activity, including tax benefit of $1,885

 

 

 

367,538

 

3

 

27,499

 

 

 

 

27,502

 

$

 

Restricted stock

 

 

 

105,500

 

 

1,738

 

 

 

 

1,738

 

 

Change in fair value of interest rate swap contracts, net of income taxes of $5,451

 

 

 

 

 

 

 

9,681

 

 

9,681

 

9,681

 

Change in fair value of corporate debt securities

 

 

 

 

 

 

 

6,537

 

 

6,537

 

6,537

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

907

 

 

907

 

907

 

Net income

 

 

 

 

 

 

90,492

 

 

 

90,492

 

90,492

 

Balance, September 30, 2009

 

12,500

 

$

 

78,621,526

 

$

785

 

$

1,472,066

 

$

752,847

 

$

(31,568

)

$

 

$

2,194,130

 

$

107,617

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2009

 

12,500

 

$

 

78,972,256

 

$

786

 

$

1,480,476

 

$

397,407

 

$

(26,028

)

$

(565

)

$

1,852,076

 

 

 

Repurchase of preferred stock

 

(225

)

 

 

 

(11,200

)

 

 

 

(11,200

)

$

 

Repurchase of noncontrolling interest

 

 

 

 

 

(27,758

)

 

 

2,758

 

(25,000

)

 

Stock option activity, including tax benefit of $402

 

 

 

315,609

 

3

 

20,203

 

 

 

 

20,206

 

 

Share activity

 

 

 

(1,526,400

)

(15

)

(35,843

)

 

 

 

(35,858

)

 

Restricted stock

 

 

 

145,110

 

 

4,454

 

 

 

 

4,454

 

 

Change in fair value of interest rate swap contracts, net of income taxes of $6,732

 

 

 

 

 

 

 

11,588

 

 

11,588

 

11,588

 

Change in fair value of corporate debt securities

 

 

 

 

 

 

 

780

 

 

780

 

780

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

274

 

 

274

 

274

 

Net income (loss)

 

 

 

 

 

 

93,665

 

 

(2,193

)

91,472

 

91,472

 

Balance, September 30, 2010

 

12,275

 

$

 

77,906,575

 

$

774

 

$

1,430,332

 

$

491,072

 

$

(13,386

)

$

 

$

1,908,792

 

$

104,114

 

 

See accompanying notes to the consolidated financial statements.

 

6



 

Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands) (unaudited)

 

Nine Months Ended September 30,

 

2010

 

2009

 

Operating activities

 

 

 

 

 

Net income including noncontrolling interests

 

$

91,472

 

$

90,492

 

Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

157,675

 

141,427

 

Amortization of items charged to interest expense and interest income

 

9,520

 

7,338

 

Loss (gain) on sale of fixed assets

 

923

 

(340

)

Loss from unconsolidated affiliates

 

5,762

 

755

 

Loss on early extinguishment of debt

 

519

 

3,599

 

Empress Casino Hotel fire

 

 

5,064

 

Loss on police services contract termination at Hollywood Casino Aurora

 

6,624

 

 

Gain on accelerated payment of other long-term obligations

 

 

(1,305

)

Gain on sale of corporate debt securities

 

 

(6,598

)

Deferred income taxes

 

(5,631

)

(13,091

)

Charge for stock-based compensation

 

19,757

 

21,904

 

Impairment losses

 

31,542

 

11,689

 

(Increase) decrease, net of businesses acquired

 

 

 

 

 

Accounts receivable

 

(447

)

(18,331

)

Insurance receivable

 

28,674

 

 

Prepaid expenses and other current assets

 

31,665

 

(1,520

)

Other assets

 

11,894

 

2,645

 

Increase (decrease), net of businesses acquired

 

 

 

 

 

Accounts payable

 

2,606

 

(2,648

)

Accrued expenses

 

(21,345

)

(4,065

)

Accrued interest

 

(11,058

)

(4,307

)

Accrued salaries and wages

 

605

 

12,155

 

Gaming, pari-mutuel, property and other taxes

 

13,002

 

6,278

 

Income taxes

 

 

13,184

 

Other current and noncurrent liabilities

 

2,749

 

8,402

 

Other noncurrent tax liabilities

 

(6,802

)

4,109

 

Net cash provided by operating activities

 

369,706

 

276,836

 

Investing activities

 

 

 

 

 

Expenditures for property and equipment

 

(285,284

)

(227,575

)

Proceeds from sale of property and equipment

 

1,425

 

2,120

 

Proceeds from sale of corporate debt securities

 

 

50,602

 

Proceeds from Empress Casino Hotel fire

 

4,821

 

17,000

 

Investment in joint ventures

 

(50,266

)

(12,500

)

Increase in cash in escrow

 

(30,264

)

(25,000

)

Acquisition of businesses and gaming licenses

 

(55,895

)

 

Net cash used in investing activities

 

(415,463

)

(195,353

)

Financing activities

 

 

 

 

 

Proceeds from exercise of options

 

3,989

 

4,299

 

Repurchase of common stock

 

(35,858

)

 

Repurchase of preferred stock

 

(11,200

)

 

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

 

56,733

 

628,108

 

Principal payments on long-term debt

 

(297,466

)

(697,650

)

Proceeds from insurance financing

 

6,222

 

12,727

 

Payments on insurance financing

 

(9,741

)

(12,721

)

Repurchase of noncontrolling interest

 

(25,000

)

 

Tax benefit from stock options exercised

 

402

 

1,885

 

Net cash used in financing activities

 

(311,919

)

(63,352

)

Net (decrease) increase in cash and cash equivalents

 

(357,676

)

18,131

 

Cash and cash equivalents at beginning of year

 

713,118

 

746,278

 

Cash and cash equivalents at end of period

 

$

355,442

 

$

764,409

 

Supplemental disclosure

 

 

 

 

 

Interest expense paid

 

$

104,969

 

$

99,692

 

Income taxes paid

 

$

50,357

 

$

58,741

 

 

See accompanying notes to the consolidated financial statements.

 

7



 

Penn National Gaming, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements

 

1.  Basis of Presentation

 

The accompanying unaudited consolidated financial statements of Penn National Gaming, Inc. (“Penn”) and its subsidiaries (collectively, the “Company”) have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The notes to the consolidated financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2009 should be read in conjunction with these consolidated financial statements. For purposes of comparability, certain prior year amounts have been reclassified to conform to the current year presentation. Operating results for the nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

 

2.  Summary of Significant Accounting Policies

 

Revenue Recognition and Promotional Allowances

 

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 chips and “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 increase.

 

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

 

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

 

Revenues are recognized net of certain sales incentives in accordance with Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 605-50, “Revenue Recognition—Customer Payments and Incentives” (“ASC 605-50”). The consensus in ASC 605-50 requires that sales incentives and points earned in point-loyalty programs be recorded as a reduction of revenue. The Company recognizes incentives related to gaming play and points earned in point-loyalty programs as a direct reduction of gaming revenue.

 

The retail value of accommodations, food and beverage, and other services furnished to guests without charge is included in gross revenues and then deducted as promotional allowances. The estimated cost of providing such promotional allowances is primarily included in food, beverage and other expense. The amounts included in promotional allowances for the three and nine months ended September 30, 2010 and 2009 are as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(in thousands)

 

Rooms

 

$

6,253

 

$

6,050

 

$

18,213

 

$

16,874

 

Food and beverage

 

25,541

 

27,963

 

76,576

 

82,531

 

Other

 

2,407

 

2,687

 

7,731

 

8,121

 

Total promotional allowances

 

$

34,201

 

$

36,700

 

$

102,520

 

$

107,526

 

 

The estimated cost of providing such complimentary services for the three and nine months ended September 30, 2010 and 2009 are as follows:

 

8



 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(in thousands)

 

Rooms

 

$

2,378

 

$

2,373

 

$

6,981

 

$

6,798

 

Food and beverage

 

19,137

 

20,809

 

57,332

 

58,193

 

Other

 

1,401

 

1,742

 

4,872

 

4,876

 

Total cost of complimentary services

 

$

22,916

 

$

24,924

 

$

69,185

 

$

69,867

 

 

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, excluding net income attributable to noncontrolling interests, 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.

 

In the fourth quarter of 2008, the Company issued 12,500 shares of Series B Redeemable Preferred Stock (the “Preferred Stock”), which the Company determined qualified as a participating security as defined in ASC 260. Under ASC 260, a security is considered a participating security if the security may participate in undistributed earnings with common stock, whether that participation is conditioned upon the occurrence of a specified event or not. 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 attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries 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. During the nine months ended September 30, 2010, the Company repurchased 225 shares of Preferred Stock for $11.2 million.

 

The following table sets forth the allocation of net income attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries for the three and nine months ended September 30, 2010 and 2009 under the two-class method:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(in thousands)

 

Net income attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries

 

$

48,345

 

$

21,351

 

$

93,665

 

$

90,492

 

Net income attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries applicable to preferred stock

 

9,252

 

4,098

 

17,853

 

17,459

 

Net income attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries applicable to common stock

 

$

39,093

 

$

17,253

 

$

75,812

 

$

73,033

 

 

The following table reconciles the weighted-average common shares outstanding used in the calculation of basic EPS to the weighted-average common shares outstanding used in the calculation of diluted EPS for the three and nine months ended September 30, 2010 and 2009:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(in thousands)

 

Determination of shares:

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

77,414

 

78,255

 

78,228

 

78,044

 

Assumed conversion of dilutive employee stock-based awards

 

817

 

1,186

 

796

 

998

 

Assumed conversion of preferred stock

 

27,278

 

27,778

 

27,428

 

27,778

 

Diluted weighted-average common shares outstanding

 

105,509

 

107,219

 

106,452

 

106,820

 

 

Reflecting the issuance of the Preferred Stock and the repurchase of 225 shares of Preferred Stock during the nine months ended September 30, 2010, the Company is required to adjust its diluted weighted-average common shares outstanding for the purpose of calculating diluted EPS as follows: 1) when the price of the Company’s Common Stock is less than $45, the diluted weighted-

 

9



 

average common shares outstanding is increased by 27,277,778 shares (regardless of how much the stock price is below $45); 2) when the price of the Company’s Common Stock is between $45 and $67, the diluted weighted-average common shares outstanding is increased by an amount which can be calculated by dividing $1.23 billion (face value) by the current price per share of the Company’s Common Stock, which will result in an increase in the diluted weighted-average common shares outstanding of between 18,320,896 shares and 27,277,778 shares; and 3) when the price of the Company’s Common Stock is above $67, the diluted weighted-average common shares outstanding is increased by 18,320,896 shares (regardless of how much the stock price exceeds $67).

 

Options to purchase 8,517,332 shares and 8,453,582 shares were outstanding during the three and nine months ended September 30, 2010, respectively, but were not included in the computation of diluted EPS because they were antidilutive. Options to purchase 4,729,502 shares and 8,435,832 shares were outstanding during the three and nine months ended September 30, 2009, 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:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(in thousands, except per share data)

 

Calculation of basic EPS attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries:

 

 

 

 

 

 

 

 

 

Net income attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries applicable to common stock

 

$

39,093

 

$

17,253

 

$

75,812

 

$

73,033

 

Weighted-average common shares outstanding

 

77,414

 

78,255

 

78,228

 

78,044

 

Basic EPS

 

$

0.51

 

$

0.22

 

$

0.97

 

$

0.94

 

 

 

 

 

 

 

 

 

 

 

Calculation of diluted EPS attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries:

 

 

 

 

 

 

 

 

 

Net income attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries

 

$

48,345

 

$

21,351

 

$

93,665

 

$

90,492

 

Diluted weighted-average common shares outstanding

 

105,509

 

107,219

 

106,452

 

106,820

 

Diluted EPS

 

$

0.46

 

$

0.20

 

$

0.88

 

$

0.85

 

 

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 5.68 years, in order to match the expected life of the options at the grant date. There is no expected dividend yield 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. Forfeitures are estimated at the date of grant based on historical experience. The following are the weighted-average assumptions used in the Black-Scholes option-pricing model at September 30, 2010 and 2009:

 

Nine Months Ended September 30,

 

2010

 

2009

 

Risk-free interest rate

 

2.00

%

2.63

%

Expected volatility

 

49.18

%

49.43

%

Dividend yield

 

 

 

Weighted-average expected life (years)

 

5.68

 

5.29

 

Forfeiture rate

 

5.00

%

4.00

%

 

10



 

Accounting for Derivatives and Hedging Activities

 

The Company uses fixed and variable-rate debt to finance its operations. Both funding sources have associated risks and opportunities, such as interest rate exposure, and the Company’s risk management policy permits the use of derivatives to manage this exposure. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. Thus, uses of derivatives are strictly limited to hedging and risk management purposes in connection with managing interest rate exposure. Acceptable derivatives for this purpose include interest rate swap contracts, futures, options, caps, and similar instruments.

 

When using derivatives, the Company’s intent is to obtain hedge accounting, which is conditional upon satisfying specific documentation and performance criteria. In particular, the underlying hedged item must expose the Company to risks associated with market fluctuations and the instrument used as the hedging derivative must generate offsetting effects in prescribed magnitudes. If these criteria are not met, a change in the market value of the financial instrument and all associated settlements would be recognized as gains or losses in the period of change.

 

Currently, the Company has a number of interest rate swap contracts in place. These contracts serve to mitigate income volatility for a portion of its variable-rate funding. Swap contract coverage extends out through 2011. In effect, these swap contracts synthetically convert the portion of variable-rate debt being hedged to the equivalent of fixed-rate funding. Under the terms of the swap contracts, the Company receives cash flows from the swap contract counterparties to offset the benchmark interest rate component of variable interest payments on the hedged financings, in exchange for paying cash flows based on the swap contracts’ fixed rates. These two respective obligations are net-settled periodically. The Company accounts for these swap contracts as cash flow hedges, which requires determining a division of hedge results deemed effective and deemed ineffective. However, most of the Company’s hedges were designed in such a way so as to perfectly offset specifically-defined interest payments, such that no ineffectiveness has occurred—nor would any ineffectiveness occur, as long as the forecasted cash flows of the designated hedged items and the associated swap contracts remain unchanged.  The notional value of the Company’s cash flow hedges totaled $1.3 billion at September 30, 2010.

 

The fair value of the Company’s interest rate swap contracts is measured as the present value of all expected future cash flows based on the LIBOR-based swap yield curve as of the date of the valuation, subject to a credit adjustment to the LIBOR-based yield curve’s implied discount rates. The credit adjustment reflects the Company’s best estimate as to the Company’s credit quality at September 30, 2010.

 

Under cash flow hedge accounting, effective derivative results are initially recorded in other comprehensive income (“OCI”) and later reclassified to earnings, coinciding with the income recognition relating to the variable interest payments being hedged (i.e., when the interest expense on the variable-rate liability is recorded in earnings). Any hedge ineffectiveness (which represents the amount by which hedge results exceed the variability in the cash flows of the forecasted transaction due to the risk being hedged) is recorded in current period earnings.

 

Under cash flow hedge accounting, derivatives are included in the consolidated balance sheets as assets or liabilities at fair value. The interest rate swap contract liabilities are included in accrued interest within the consolidated balance sheets at September 30, 2010 and December 31, 2009.

 

During the three and nine months ended September 30, 2010 and 2009, the Company had certain derivative instruments that were not designated to qualify for hedge accounting. The periodic change in the mark-to-market of these derivative instruments is recorded in current period earnings in interest expense in the consolidated statements of income.  The notional value of these derivatives at September 30, 2010 was $948.0 million.

 

Credit risk relating to derivative counterparties is mitigated by using multiple, highly-rated counterparties, and the credit quality of each is monitored on an ongoing basis.

 

3.  New Accounting Pronouncements

 

In July 2010, the FASB issued guidance to improve the disclosures about the credit quality of financing receivables and the allowance for credit losses.  The disclosures are effective for interim and annual reporting periods after December 15, 2010. The Company does not anticipate the adoption of this pronouncement to have an impact on its consolidated financial statements as the majority of the Company’s receivables are short term in nature (i.e. due in less than one year).

 

In April 2010, the FASB issued guidance on accruing for jackpot liabilities. The guidance clarifies that an entity should not accrue jackpot liabilities (or portions thereof) before a jackpot is won if the entity can avoid paying that jackpot. Jackpots should be accrued and charged to revenue when an entity has the obligation to pay the jackpot. This guidance applies to both base jackpots and

 

11



 

the incremental portion of progressive jackpots. However, the guidance is expected to only affect the accounting for base jackpots, as the guidance uses the same principle that is currently applied by the Company to the incremental portion of progressive jackpots. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. This guidance should be applied by recording a cumulative-effect adjustment to opening retained earnings in the period of adoption. The Company is currently determining the impact of this guidance on its consolidated financial statements.

 

In January 2010, the FASB issued guidance to improve disclosures about fair value measurements. The guidance provides amendments to require new disclosures regarding transfers in and out of Levels 1 and 2 of the fair value measurement hierarchy, and activity in Level 3, and to clarify existing disclosures regarding the level of disaggregation, inputs and valuation techniques. The guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the new disclosures regarding purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company adopted the guidance, except for the new disclosures regarding purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, as of January 1, 2010, as required. The January 1, 2010 adoption did not have a material impact on the Company’s consolidated financial statements.

 

In June 2009, the FASB issued amended guidance for variable interest entities. The objective of the amended guidance is to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. The amended guidance was effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application was prohibited. The Company adopted the amended guidance as of January 1, 2010, as required. The amended guidance did not have a material impact on the Company’s consolidated financial statements. In February 2010, the FASB deferred the effective date of the amendments in this guidance for a reporting entity’s interest in certain entities. The deferral did not have an impact on the Company’s consolidated financial statements.

 

4.  Investment In and Advances to Unconsolidated Affiliates

 

Investment in and advances to unconsolidated affiliates primarily includes the Company’s 50% interest in Freehold Raceway and Kansas Entertainment, LLC (“Kansas Entertainment”), which is a joint venture with International Speedway Corporation (“International Speedway”), and the Company’s 49% interest in Maryland RE & R LLC, a joint venture with MI Developments, Inc. (“MI Developments”) that owns and operates the Maryland Jockey Club (the “Maryland Joint Venture”), which the Company closed on July 1, 2010.

 

Kansas Entertainment

 

In December 2009, Kansas Entertainment was selected by the Kansas Lottery Gaming Facility Review Board to develop and operate a facility in the North East Gaming Zone in Wyandotte County, Kansas, and in February 2010, Kansas Entertainment received the final approval under the Kansas Expanded Lottery Act, along with its gaming license from the Kansas Racing and Gaming Commission, to proceed with the development of an approximately $411 million Hollywood-themed destination facility overlooking Turn 2 at Kansas Speedway.

 

The approximately $411 million facility, inclusive of licensing fees, is expected to feature a 82,000 square foot casino with approximately 2,000 slot machines, 52 table games and 12 poker tables, a 1,253 space parking structure, as well as a variety of dining and entertainment amenities. The Company and International Speedway will share equally the cost of developing and constructing the proposed facility and are currently pursuing third party financing for the project jointly. The Company estimates that its share of the project will be approximately $155 million.

 

The Company determined that Kansas Entertainment qualified as a variable interest entity (“VIE”) at September 30, 2010. The Company did not consolidate its investment in Kansas Entertainment at, and for the three and nine months ended September 30, 2010, as the Company determined that it did not qualify as the primary beneficiary of Kansas Entertainment at, and for the three and nine months ended September 30, 2010, 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 input of International Speedway. In addition, the Company determined that International Speedway had substantive participating rights in Kansas Entertainment at, and for the three and nine months ended September 30, 2010.

 

Maryland Jockey Club

 

The Maryland Jockey Club is the owner and operator of two racing venues, Pimlico Race Course (“Pimlico”) and Laurel Park. Pimlico, opened in 1870, is the country’s second oldest racetrack and is the annual host of the Preakness (R) Stakes, the second

 

12



 

leg in thoroughbred racing’s Triple Crown and the cornerstone event in the facility’s annual eight week spring meet. Pimlico features a one-mile oval track, a 7/8-mile turf course and fixed seating for approximately 15,000 spectators. Laurel Park, the sister track to Pimlico, opened in 1911 and hosts a 3 1/2month winter meet beginning in January as well as a four month fall meet beginning in September. Laurel Park features a 1 1/8 mile oval track and a one mile turf course with fixed seating for approximately 5,000 spectators.

 

The Company and MI Developments plan to work collaboratively to maximize the use and value of the Maryland Jockey Club’s real estate assets and to pursue other opportunities to maximize the value of the business, as a result of the negative outcome of the November 2, 2010 zoning referendum in Anne Arundel County, Maryland.

 

The Company determined that the Maryland Joint Venture did not qualify as a VIE at September 30, 2010. Using the guidance for entities that are not VIEs, the Company determined that it did not have a controlling financial interest in the Maryland Joint Venture at, and for the three and nine months ended September 30, 2010, primarily as it did not have the ability to direct the activities of the Maryland Joint Venture that most significantly impacted the Maryland Joint Venture’s economic performance without the input of MI Developments. Therefore, the Company did not consolidate its investment in the Maryland Joint Venture at, and for the three and nine months ended September 30, 2010.

 

5.  Property and Equipment

 

Property and equipment, net, consists of the following:

 

 

 

September 30,
2010

 

December 31,
2009

 

 

 

(in thousands)

 

Land and improvements

 

$

293,614

 

$

239,933

 

Building and improvements

 

1,515,837

 

1,433,611

 

Furniture, fixtures, and equipment

 

927,593

 

849,071

 

Leasehold improvements

 

17,288

 

17,204

 

Construction in progress

 

83,609

 

47,299

 

Total property and equipment

 

2,837,941

 

2,587,118

 

Less accumulated depreciation

 

(892,403

)

(749,614

)

Property and equipment, net

 

$

1,945,538

 

$

1,837,504

 

 

Depreciation expense, for property and equipment, totaled $52.3 million and $152.7 million for the three and nine months ended September 30, 2010, respectively, as compared to $48.3 million and $136.4 million for the three and nine months ended September 30, 2009, respectively.  Interest capitalized in connection with major construction projects was $1.6 million and $4.4 million for the three and nine months ended September 30, 2010, respectively, as compared to $0.1 million and $6.5 million for the three and nine months ended September 30, 2009, respectively.

 

On May 4, 2010, in a statewide election in Ohio, the voters determined that the Company’s casino in Columbus will be located at the site of the former Delphi Automotive plant along Columbus’s West Side. As a result of the election, the Company initiated the process to sell the parcel of land that it purchased in Columbus’s Arena District and reclassified the land as held for sale. The Company obtained an appraisal to determine the estimated fair market value of the land and recorded a pre-tax impairment charge of $0.8 million and $31.3 million during the three and nine months ended September 30, 2010, respectively, which was comprised of the difference between the land’s estimated fair market value less costs to sell and its carrying value.

 

6.  Goodwill and Other Intangible Assets

 

In accordance with ASC 350, “Intangibles-Goodwill and Other,” the Company does not amortize goodwill, rather it is tested annually, or more frequently if indicators of impairment exist, for impairment by comparing the fair value of the reporting units to their carrying amount.  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 value of goodwill for that reporting unit.  If the implied value of goodwill is less than the goodwill allocated for that reporting unit, an impairment loss is recognized.  Additionally, the Company considers its gaming license, racing permit and trademark 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 as well as the Company’s historical experience in renewing these intangible assets at minimal cost with various state gaming commissions.

 

13



 

A reconciliation of goodwill and accumulated goodwill impairment losses is as follows (in thousands):

 

Balance at December 31, 2009:

 

 

 

Goodwill

 

$

2,024,963

 

Accumulated goodwill impairment losses

 

(645,002

)

Goodwill, net

 

$

1,379,961

 

Other

 

(4,013

)

Balance at September 30, 2010:

 

 

 

Goodwill

 

$

2,020,950

 

Accumulated goodwill impairment losses

 

(645,002

)

Goodwill, net

 

$

1,375,948

 

 

The table below presents the gross carrying value, accumulated amortization, and net book value of each major class of intangible asset at September 30, 2010 and December 31, 2009:

 

 

 

September 30, 2010

 

December 31, 2009

 

 

 

(in thousands)

 

 

 

Gross

 

 

 

 

 

Gross

 

 

 

 

 

 

 

Carrying

 

Accumulated 

 

Net Book

 

Carrying

 

Accumulated 

 

Net Book

 

 

 

Value

 

Amortization

 

Value

 

Value

 

Amortization

 

Value

 

Indefinite-life intangible assets

 

$

417,037

 

$

 

$

417,037

 

$

378,463

 

$

 

$

378,463

 

Other intangible assets

 

49,600

 

46,333

 

3,267

 

49,396

 

41,328

 

8,068

 

Total

 

$

466,637

 

$

46,333

 

$

420,304

 

$

427,859

 

$

41,328

 

$

386,531

 

 

The Company’s intangible asset amortization expense was $1.6 million and $5.0 million for the three and nine months ended September 30, 2010, respectively, as compared $1.7 million and $5.0 million for the three and nine months ended September 30, 2009, respectively.

 

Indefinite-life intangible assets increased by $38.6 million primarily due to the gaming license for table games at Hollywood Casino at Penn National Race Course and the indefinite-life intangible assets, primarily a racing permit, acquired as part of Beulah Park.

 

The following table presents expected intangible asset amortization expense based on existing intangible assets at September 30, 2010 (in thousands):

 

2010 (3 months)

 

$

801

 

2011

 

2,134

 

2012

 

237

 

2013

 

38

 

2014

 

38

 

Thereafter

 

19

 

Total

 

$

 

3,267

 

 

7.  Investments in Corporate Securities

 

The Company has an investment in the corporate debt securities of another gaming company that matures on November 1, 2012 and whose fair value totaled $5.7 million and $4.6 million at September 30, 2010 and December 31, 2009, respectively.  This investment is accounted for as an available-for-sale investment and is included in other assets within the consolidated balance sheets at September 30, 2010 and December 31, 2009. This investment was acquired at a discount to its par value and accretion of $0.1 million and $0.3 million was recorded for the three and nine months ended September 30, 2010, respectively, compared to $0.1 million and $1.4 million for the three and nine months ended September 30, 2009, respectively.

 

14



 

At September 30, 2010, the investment had been in an unrealized loss position for twelve consecutive months however the loss has declined to $0.4 million from $1.2 million at December 31, 2009.  As of September 30, 2010, management has concluded that the unrealized loss is temporary in nature since the Company does not intend to sell this investment, and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be maturity.

 

The following is a schedule of the contractual maturities of the Company’s investment in corporate securities at September 30, 2010 (in thousands):

 

Within one year

 

$

 

1-3 years

 

5,670

 

Total

 

$

5,670

 

 

8.  Long-term Debt and Derivatives

 

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

 

 

 

September 30,
2010

 

December 31,
2009

 

 

 

(in thousands)

 

Senior secured credit facility due October 2012

 

$

1,518,125

 

$

1,755,602

 

$250 million 6 3/4% senior subordinated notes due March 2015

 

250,000

 

250,000

 

$325 million 8 3/4% senior subordinated notes due August 2019

 

325,000

 

325,000

 

Other long-term obligations

 

3,723

 

 

Capital leases

 

4,227

 

4,175

 

 

 

2,101,075

 

2,334,777

 

Less current maturities of long-term debt

 

(2,970

)

(86,071

)

 

 

$

2,098,105

 

$

2,248,706

 

 

The following is a schedule of future minimum repayments of long-term debt as of September 30, 2010 (in thousands):

 

Within one year

 

$

2,970

 

1-3 years

 

1,521,246

 

3-5 years

 

250,182

 

Over 5 years

 

326,677

 

Total minimum payments

 

$

2,101,075

 

 

At September 30, 2010, the Company was contingently obligated under letters of credit issued pursuant to the senior secured credit facility with face amounts aggregating $36.5 million.

 

Senior Secured Credit Facility

 

The senior secured credit facility historically consisted of three credit facilities comprised of a $750 million revolving credit facility with a maturity date of October 3, 2010, a $325 million Term Loan A Facility with a maturity date of October 3, 2011 and a $1.65 billion Term Loan B Facility with a maturity date of October 3, 2012. In September 2009, all of the outstanding borrowings under the Term Loan A Facility were repaid. In addition, in September 2009, the Company amended its senior secured credit facility, in order to increase the borrowing capacity and to extend the term under the revolving credit facility portion of the senior secured credit facility. Under the new revolving credit facility, two tranches were created, one for those participants who agreed to extend and one for those that did not extend, and the total borrowing capacity was increased to $1 billion.

 

In May 2010, the Company repaid all of the outstanding borrowings under the Tranche A Revolving Loan using cash on hand and in connection therewith terminated this part of the senior secured credit facility.  During the nine months ended September 30, 2010, the Company recorded a $0.5 million loss on early extinguishment of debt for the write-off of debt issuance costs related to the termination of the Tranche A Revolving Loan.

 

15



 

The senior secured credit facility is currently comprised of a Term Loan B Facility which had $1,518.1 million outstanding at September 30, 2010 and a Tranche B Revolving Loan which provides for borrowing capacity of $640.6 million through July 3, 2012.  The Tranche B Revolving Loan was undrawn at September 30, 2010.

 

Other Long-Term Obligations

 

In April 2010, the Company entered into a termination contract with the city of Aurora, Illinois, whereby the Company will pay $7 million in lieu of perpetual annual payments (of approximately $1 million) to have off duty Aurora police officials provide security at Hollywood Casino Aurora each day.  Payments of $1.5 million were made on June 1, 2010 and September 1, 2010 and additional payments of $2.0 million and $2.0 million are due on June 1, 2011 and June 1, 2012, respectively.  This liability was discounted using the Company’s estimate of its incremental borrowing rate over the term of the obligation.  The accretion of this discount is recorded in interest expense in the consolidated statements of income.

 

Interest Rate Swap Contracts

 

In accordance with the terms of its senior secured credit facility, the Company was required to enter into fixed-rate debt or interest rate swap agreements in an amount equal to 50% of the Company’s consolidated indebtedness, excluding the revolving credit facility, within 100 days of the closing date of the senior secured credit facility.

 

The effect of derivative instruments on the consolidated statement of income for the three months ended September 30, 2010 was as follows (in thousands):

 

 

 

Gain (Loss)

 

Location of Gain (Loss)

 

Gain (Loss)

 

 

 

 

 

 

 

Recognized in

 

Reclassified from

 

Reclassified from

 

Location of Gain (Loss)

 

Gain (Loss)

 

Derivatives in a

 

OCI on Derivative

 

AOCI into Income

 

AOCI into Income

 

Recognized in Income on

 

Recognized in Income on

 

Cash Flow Hedging Relationship

 

(Effective Portion)

 

(Effective Portion)

 

(Effective Portion)

 

Derivative (Ineffective Portion)

 

Derivative (Ineffective Portion)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

(3,462

)

Interest expense

 

$

(6,363

)

None

 

$

 

Total

 

$

(3,462

)

 

 

$

(6,363

)

 

 

$

 

 

 

 

Location of Gain (Loss)

 

 

 

Derivatives Not Designated as

 

Recognized in Income

 

Gain (Loss) Recognized

 

Hedging Instruments

 

on Derivative

 

in Income on Derivative

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

Interest expense

 

$

(18

)

Total

 

 

 

$

(18

)

 

The effect of derivative instruments on the consolidated statement of income for the nine months ended September 30, 2010 was as follows (in thousands):

 

 

 

Gain (Loss)

 

Location of Gain (Loss)

 

Gain (Loss)

 

 

 

 

 

 

 

Recognized in

 

Reclassified from

 

Reclassified from

 

Location of Gain (Loss)

 

Gain (Loss)

 

Derivatives in a

 

OCI on Derivative

 

AOCI into Income

 

AOCI into Income

 

Recognized in Income on

 

Recognized in Income on

 

Cash Flow Hedging Relationship

 

(Effective Portion)

 

(Effective Portion)

 

(Effective Portion)

 

Derivative (Ineffective Portion)

 

Derivative (Ineffective Portion)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

(13,640

)

Interest expense

 

$

(19,222

)

None

 

$

 

Total

 

$

(13,640

)

 

 

$

(19,222

)

 

 

$

 

 

 

 

Location of Gain (Loss)

 

 

 

Derivatives Not Designated as

 

Recognized in Income

 

Gain (Loss) Recognized

 

Hedging Instruments

 

on Derivative

 

in Income on Derivative

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

Interest expense

 

$

(56

)

Total

 

 

 

$

(56

)

 

16



 

The effect of derivative instruments on the consolidated statement of income for the three months ended September 30, 2009 was as follows (in thousands):

 

 

 

Gain (Loss)

 

Location of Gain (Loss)

 

Gain (Loss)

 

 

 

 

 

 

 

Recognized in

 

Reclassified from

 

Reclassified from

 

Location of Gain (Loss)

 

Gain (Loss)

 

Derivatives in a

 

OCI on Derivative

 

AOCI into Income

 

AOCI into Income

 

Recognized in Income on

 

Recognized in Income on

 

Cash Flow Hedging Relationship

 

(Effective Portion)

 

(Effective Portion)

 

(Effective Portion)

 

Derivative (Ineffective Portion)

 

Derivative (Ineffective Portion)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

(11,363

)

Interest expense

 

$

(6,587

)

None

 

$

 

Total

 

$

(11,363

)

 

 

$

(6,587

)

 

 

$

 

 

 

 

Location of Gain (Loss)

 

 

 

Derivatives Not Designated as

 

Recognized in Income

 

Gain (Loss) Recognized

 

Hedging Instruments

 

on Derivative

 

in Income on Derivative

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

Interest expense

 

$

(132

)

Total

 

 

 

$

(132

)

 

The effect of derivative instruments on the consolidated statement of income for the nine months ended September 30, 2009 was as follows (in thousands):

 

 

 

Gain (Loss)

 

Location of Gain (Loss)

 

Gain (Loss)

 

 

 

 

 

 

 

Recognized in

 

Reclassified from

 

Reclassified from

 

Location of Gain (Loss)

 

Gain (Loss)

 

Derivatives in a

 

OCI on Derivative

 

AOCI into Income

 

AOCI into Income

 

Recognized in Income on

 

Recognized in Income on

 

Cash Flow Hedging Relationship

 

(Effective Portion)

 

(Effective Portion)

 

(Effective Portion)

 

Derivative (Ineffective Portion)

 

Derivative (Ineffective Portion)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

(19,462

)

Interest expense

 

$

(23,717

)

None

 

$

 

Total

 

$

(19,462

)

 

 

$

(23,717

)

 

 

$

 

 

 

 

Location of Gain (Loss)

 

 

 

Derivatives Not Designated as

 

Recognized in Income

 

Gain (Loss) Recognized

 

Hedging Instruments

 

on Derivative

 

in Income on Derivative

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

Interest expense

 

$

409

 

Total

 

 

 

$

409

 

 

In addition, during the three and nine months ended September 30, 2010, the Company amortized $4.2 million and $12.7 million, respectively, in OCI related to the derivatives that were de-designated as hedging instruments under ASC 815, “Derivatives and Hedging,” as compared to $6.6 million and $10.9 million for the three and nine months ended September 30, 2009, respectively.

 

In the coming twelve months, the Company anticipates that approximately $24.4 million loss will be reclassified from OCI to earnings, as part of interest expense. As this amount represents effective hedge results, a comparable offsetting amount of incrementally lower interest expense will be realized in connection with the variable funding being hedged.

 

The following table sets forth the fair value of the interest rate swap contract liabilities included in accrued interest within the consolidated balance sheets at September 30, 2010 and December 31, 2009:

 

17



 

 

 

September 30, 2010

 

December 31, 2009

 

 

 

(in thousands)

 

 

 

Balance Sheet

 

Fair

 

Balance Sheet

 

Fair

 

 

 

Location

 

Value

 

Location

 

Value

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

Accrued interest

 

$

17,885

 

Accrued interest

 

$

23,485

 

Total derivatives designated as hedging instruments

 

 

 

$

17,885

 

 

 

$

23,485

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

Accrued interest

 

$

7,924

 

Accrued interest

 

$

20,440

 

Total derivatives not designated as hedging instruments

 

 

 

$

7,924

 

 

 

$

20,440

 

 

 

 

 

 

 

 

 

 

 

Total derivatives

 

 

 

$

25,809

 

 

 

$

43,925

 

 

Covenants

 

The Company’s senior secured credit facility and $325 million 83/4% and $250 million 63/4% senior subordinated notes require it, among other obligations, to maintain specified financial ratios and to satisfy certain financial tests, including fixed charge coverage, senior leverage and total leverage ratios. In addition, the Company’s senior secured credit facility and $325 million 83/4% and $250 million 63/4% senior subordinated notes restrict, among other things, the Company’s ability to incur additional indebtedness, incur guarantee obligations, amend debt instruments, pay dividends, create liens on assets, make investments, make acquisitions, engage in mergers or consolidations, make capital expenditures, or engage in certain transactions with subsidiaries and affiliates and otherwise restricts corporate activities.

 

At September 30, 2010, the Company was in compliance with all required financial covenants.

 

9.  Income Taxes

 

A reconciliation of the liability for unrecognized tax benefits is as follows:

 

 

 

Noncurrent
tax liabilities

 

 

 

(in thousands)

 

Balance at January 1, 2010

 

$

46,702

 

Additions based upon current year positions

 

3,566

 

Additions based upon prior year positions

 

2,762

 

Decreases due to settlements and/or reduction in liabilities

 

(15,456

)

Currency translation adjustments

 

1,282

 

Balance at September 30, 2010

 

$

38,856

 

 

The decrease in the Company’s liability for unrecognized tax benefits during the nine months ended September 30, 2010 was primarily due to the Commonwealth of Pennsylvania officially closing its tax litigation case against one of the Company’s direct subsidiaries.  Based upon the executed “Stipulation of Judgment” that was submitted in the Commonwealth Court of Pennsylvania, the Company no longer views this matter as an uncertain tax position, as defined under ASC 740, “Income Taxes.” Therefore, the Company reversed previously recorded tax reserves of $6.3 million and interest accruals of $1.8 million. In addition, the Company received from Ontario’s Ministry of Revenue Notices of Reassessment (“Notice”) for the taxation years covered under the Competent Authority settlement.  In accordance with the terms of the Notice, the Company paid CND$5.3 million but later was provided interest relief of CND$922,000 from the Ontario’s Ministry of Revenue.

 

18



 

10.  Commitments and Contingencies

 

Litigation

 

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

 

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

 

In conjunction with the Company’s acquisition of Argosy Gaming Company (“Argosy”) in 2005, and subsequent disposition of the Argosy Casino Baton Rouge property, the Company became responsible for litigation initiated in 1997 related to the Baton Rouge casino license formerly owned by Argosy. On November 26, 1997, Capitol House filed an amended petition in the Nineteenth Judicial District Court for East Baton Rouge Parish, State of Louisiana, amending its previously filed but unserved suit against Richard Perryman, the person selected by the Louisiana Gaming Division to evaluate and rank the applicants seeking a gaming license for East Baton Rouge Parish, and adding state law claims against Jazz Enterprises, Inc., the former Jazz Enterprises, Inc. shareholders, Argosy, Argosy of Louisiana, Inc. and Catfish Queen Partnership in Commendam, d/b/a the Belle of Baton Rouge Casino. This suit alleged that these parties violated the Louisiana Unfair Trade Practices Act in connection with obtaining the gaming license that was issued to Jazz Enterprises, Inc./Catfish Queen Partnership in Commendam. The plaintiff, an applicant for a gaming license whose application was denied by the Louisiana Gaming Division, sought to prove that the gaming license was invalidly issued and to recover lost profits that the plaintiff contended it could have earned if the gaming license had been issued to the plaintiff. On October 2, 2006, the Company prevailed on a partial summary judgment motion which limited plaintiff’s damages to its out-of-pocket costs in seeking its gaming license, thereby eliminating any recovery for potential lost gaming profits. On February 6, 2007, the jury returned a verdict of $3.8 million (exclusive of statutory interest and attorneys’ fees) against Jazz Enterprises, Inc. and Argosy. After ruling on post-trial motions, on September 27, 2007, the trial court entered a judgment in the amount of $1.4 million, plus attorneys’ fees, costs and interest. The Company has the right to seek indemnification from two of the former Jazz Enterprises, Inc. shareholders for any liability suffered as a result of such cause of action, however, there can be no assurance that the former Jazz Enterprises, Inc. shareholders will have assets sufficient to satisfy any claim in excess of Argosy’s recoupment rights. The Company established an appropriate reserve and bonded the judgment pending its appeal. Both the plaintiff and the Company appealed the judgment to the First Circuit Court of Appeals in Louisiana. On August 31, 2009, the appellate court reversed the trial court’s decision and dismissed the case against Argosy in its entirety. Capitol House requested that the Louisiana Supreme Court take its appeal of the dismissal and that request was denied on February 12, 2010. Capitol House requested that the U.S. Supreme Court hear the case and the Company filed a brief opposing that request.  In October 2010, the U.S. Supreme Court declined to hear the case and as a result, all appeals have been exhausted, and the order dismissing the case has become a final order, ending this lengthy litigation. As a result, during the three and nine months ended September 30, 2010, the Company reversed the previously accrued reserves associated with this case of $9.6 million within other income (expenses) on its consolidated statements of income.

 

The Illinois Legislature passed into law House Bill 1918, effective May 26, 2006, which singled out four of the nine Illinois casinos, including the Company’s Empress Casino Hotel and Hollywood Casino Aurora, for a 3% tax surcharge to subsidize local horse racing interests. On May 30, 2006, Empress Casino Hotel and Hollywood Casino Aurora joined with the two other riverboats affected by the law, Harrah’s Joliet and the Grand Victoria Casino in Elgin (collectively, the “Four Casinos”), and filed suit in the Circuit Court of the Twelfth Judicial District in Will County, Illinois (the “Court”), asking the Court to declare the law unconstitutional. Empress Casino Hotel and Hollywood Casino Aurora began paying the 3% tax surcharge into a protest fund which accrues interest during the pendency of the lawsuit. In two orders dated March 29, 2007 and April 20, 2007, the Court declared the law unconstitutional under the Uniformity Clause of the Illinois Constitution and enjoined the collection of this tax surcharge. The State of Illinois requested, and was granted, a stay of this ruling. As a result, Empress Casino Hotel and Hollywood Casino Aurora continued paying the 3% tax surcharge into the protest fund until May 25, 2008, when the 3% tax surcharge expired. The State of Illinois appealed the ruling to the Illinois Supreme Court. On June 5, 2008, the Illinois Supreme Court reversed the trial court’s ruling and issued a decision upholding the constitutionality of the 3% tax surcharge. On January 21, 2009, the Four Casinos filed a petition for certiorari, requesting the U.S. Supreme Court to hear the case. Seven amicus curiae briefs supporting the plaintiffs’ request were also filed. On June 8, 2009, the U.S. Supreme Court decided not to hear the case. On June 10, 2009, the Four Casinos filed a petition with the Court to open the judgment based on new evidence that came to light during the investigation of former Illinois Governor

 

19



 

Rod Blagojevich that the 2006 law was procured by corruption. On August 17, 2009, the Court dismissed the Four Casinos’ petition to reopen the case, and the Four Casinos have decided not to pursue an appeal of the dismissal. The monies paid into the protest fund have been transferred by the State of Illinois to the racetracks. However, the racetracks have been temporarily restrained from disbursing any funds pursuant to an order of the Seventh Circuit Court of Appeals issued in connection with the lawsuit described below.

 

On December 15, 2008, former Illinois Governor Rod Blagojevich signed Public Act No. 95-1008 requiring the Four Casinos to continue paying the 3% tax surcharge to subsidize Illinois horse racing interests. On January 8, 2009, the Four Casinos filed suit in the Court, asking it to declare the law unconstitutional. The 3% tax surcharge being paid pursuant to Public Act No. 95-1008 was being paid into a protest fund where it accrued interest. The defendants filed a motion to dismiss, which was granted on August 17, 2009. The Four Casinos appealed the dismissal and filed motions to keep the funds in the protest fund while the appeal is being litigated. These motions were denied and the funds have been released to the racetracks. However, currently these funds are also subject to the order issued by the Seventh Circuit Court of Appeals described below.

 

On June 12, 2009, the Four Casinos filed a lawsuit in Illinois Federal Court naming former Illinois Governor Rod Blagojevich, his campaign fund, racetrack owner John Johnston, and his two racetracks as defendants alleging a civil conspiracy in violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §1962(c),(d) (“RICO”), based on an illegal scheme to secure the enactment of the 3% tax surcharge legislation in exchange for the payment of money by Johnston and entities controlled by him. The Four Casinos also seek to impose a constructive trust over all funds paid under the tax surcharge, and therefore all of the Illinois racetracks are named as parties to the lawsuit. The defendants in the RICO case filed motions to dismiss. On December 7, 2009, the district court denied the motions to dismiss the RICO count, but it granted the motion to dismiss the constructive trust count, stating that it did not have jurisdiction in this case to impose the constructive trust. The Four Casinos have appealed this dismissal to the Seventh Circuit Court of Appeals. The appellate court has ordered that any monies disbursed to the tracks be maintained until the appeal has been decided. Since the passing of House Bill 1918 into law, Empress Casino Hotel and Hollywood Casino Aurora have recognized approximately $47.5 million in incremental gaming tax expense as a result of the 3% tax surcharge, including $2.4 million and $7.5 million during the three and nine months ended September 30, 2010, respectively. The incremental tax is included in gaming expense within the consolidated statements of income.

 

On July 16, 2008, the Company was served with a purported class action lawsuit brought by plaintiffs seeking to represent a class of shareholders who purchased shares of the Company’s Common Stock between March 20, 2008 and July 2, 2008. The lawsuit alleges that the Company’s disclosure practices relative to the proposed transaction with Fortress Investment Group LLC (“Fortress”) and Centerbridge Partners, L.P. (“Centerbridge”) and the eventual termination of that transaction were misleading and deficient in violation of the Securities Exchange Act of 1934. The complaint, which seeks class certification and unspecified damages, was filed in federal court in Maryland. The complaint was amended, among other things, to add three new named plaintiffs and to name Peter M. Carlino, Chairman and Chief Executive Officer, and William J. Clifford, Senior Vice President and Chief Financial Officer, as additional defendants. The Company filed a motion to dismiss the complaint in November 2008, and the court granted the motion and dismissed the complaint with prejudice. The plaintiffs filed a motion for reconsideration, which was denied on October 21, 2009. The plaintiffs subsequently appealed the decision to the Fourth Circuit Court of Appeals and an oral argument was heard on October 26, 2010.

 

On September 11, 2008, the Board of County Commissioners of Cherokee County, Kansas (the “County”) filed suit against Kansas Penn Gaming, LLC (“KPG,” a wholly-owned subsidiary of Penn created to pursue a development project in Cherokee County, Kansas) and the Company in the District Court of Shawnee County, Kansas. The petition alleges that KPG breached its pre-development agreement with the County when KPG withdrew its application to manage a lottery gaming facility in Cherokee County and seeks in excess of $50 million in damages. In connection with their petition, the County obtained an ex-parte order attaching the $25 million privilege fee paid to the Kansas Lottery Commission in conjunction with the gaming application for the Cherokee County zone. The defendants have filed motions to dissolve and reduce the attachment. Those motions were denied. Discovery is underway.

 

On September 23, 2008, KPG filed an action against HV Properties of Kansas, LLC (“HV”) in the U.S. District Court for the District of Kansas seeking a declaratory judgment from the U.S. District Court finding that KPG has no further obligations to HV under a Real Estate Sale Contract (the “Contract”) that KPG and HV entered into on September 6, 2007, and that KPG properly terminated this Contract under the terms of the Repurchase Agreement entered into between the parties effective September 28, 2007. HV filed a counterclaim claiming KPG breached the Contract, and seeks $37.5 million in damages. On October 7, 2008, HV filed suit against the Company claiming the Company is liable to HV for KPG’s alleged breach based on a Guaranty Agreement signed by the Company. Both cases were consolidated. Following extensive discovery and briefings, on July 23, 2010, the court granted KPG’s motion for summary judgment and dismissed HV’s claim.  KPG has filed a motion requesting reimbursement of the attorney’s fees and costs incurred in litigating this case pursuant to the terms of the Contract.

 

20



 

Operating Lease Commitments

 

The Company is liable under numerous operating leases for airplanes, automobiles, land for the property on which some of its casinos operate, other equipment and buildings, which expire at various dates through 2093. Total rental expense under these agreements was $7.7 million and $22.8 million for the three and nine months ended September 30, 2010, respectively, as compared to $8.1 million and $23.9 million for the three and nine months ended September 30, 2009, respectively.

 

The leases for land consist of annual base lease rent payments plus, in some instances, a percentage rent based on a percent of adjusted gaming wins, as described in the respective leases.

 

The Company has an operating lease with the City of Bangor which covers the permanent facility that opened on July 1, 2008. Under the lease agreement, there is a fixed rent provision, as well as a revenue-sharing provision which is equal to 3% of gross slot revenue. The final term of the lease, which commenced with the opening of the permanent facility, is for an initial term of fifteen years, with three ten-year renewal options.

 

On March 23, 2007, BTN, Inc. (“BTN”), one of the Company’s wholly-owned subsidiaries, entered into an amended and restated ground lease (the “Amended Lease”) with Skrmetta MS, LLC. The lease amends the prior ground lease, dated October 19, 1993. The Amended Lease requires BTN to maintain a minimum gaming operation on the leased premises and to pay rent equal to 5% of adjusted gaming win after gaming taxes have been deducted. The term of the Amended Lease expires on January 1, 2093.

 

The future minimum lease commitments relating to the base lease rent portion of noncancelable operating leases at September 30, 2010 are as follows (in thousands):

 

Within one year

 

$

 7,161

 

1-3 years

 

11,079

 

3-5 years

 

6,973

 

Over 5 years

 

34,384

 

Total

 

$

59,597

 

 

11.   Shareholders’ Equity

 

In connection with the termination of the merger agreement between the Company and certain affiliates of Fortress and Centerbridge, the Company agreed to receive 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 Preferred Stock. During the nine months ended September 30, 2010, the Company repurchased 225 shares of Preferred Stock for $11.2 million.

 

The repurchase of up to $200 million of the Company’s Common Stock over the twenty-four month period ending July 2010 was authorized by the Company’s Board of Directors in June 2008. On June 9, 2010, the Company’s Board of Directors authorized the repurchase of up to $300 million of the Company’s Common Stock effective immediately and continuing until the Annual Meeting of Shareholders in 2011, unless otherwise extended or shortened by the Board of Directors.  This new repurchase program replaces the program authorized by the Board of Directors in June 2008. During the three months ended September 30, 2010, the Company repurchased 1,117,610 shares of its Common Stock in open market transactions for approximately $26.0 million at an average price of $23.21 per share.  During the nine months ended September 30, 2010, the Company repurchased 1,526,400 shares of its Common Stock in open market transactions for approximately $35.9 million at an average price of $23.49 per share. The Company did not repurchase any shares of its Common Stock in 2009.

 

12.   Noncontrolling Interests

 

In November 2009, the Company entered into a Funding and Option agreement with Lakes Entertainment, Inc. (“Lakes”), permitting Lakes to invest up to a 10% equity interest in each of the Company’s proposed facilities in Columbus and Toledo, Ohio.

 

During the nine months ended September 30, 2010, Lakes made no contribution to the Company towards the proposed facilities, and its portion of the net loss for the proposed facilities was $2.2 million. During the year ended December 31, 2009, Lakes contributed $1.9 million to the Company towards the proposed facilities, and its portion of the net loss for the proposed facilities was $2.5 million.

 

21



 

On July 16, 2010, the Company paid $25 million to Lakes to terminate the agreement.  In exchange for this payment, Lakes agreed to relinquish all of its rights, title and interests held in connection with these two projects.  In accordance with ASC 810, “Consolidation,” the Company accounted for this change in ownership interest as an adjustment through equity attributable to the parent. Therefore, the Company recorded the $25 million payment and the cumulative $2.8 million loss attributable to noncontrolling interests from previous periods to additional paid in capital.

 

13.  Subsidiary Guarantors

 

Under the terms of the senior secured credit facility, many of Penn’s subsidiaries are guarantors under the agreement. Each of the subsidiary guarantors is directly or indirectly 100% owned by Penn. In addition, the guarantees provided by such subsidiaries under the terms of the senior secured credit facility are full and unconditional, joint and several. There are no significant restrictions within the senior secured credit facility on the Company’s ability to obtain funds from its subsidiaries by dividend or loan. However, in certain jurisdictions, the gaming authorities may impose restrictions pursuant to the authority granted to them with regard to Penn’s ability to obtain funds from its subsidiaries.

 

During the year ended December 31, 2008, the Company placed some of the funds received from the issuance of its Preferred Stock into unrestricted subsidiaries, in order to allow for maximum flexibility in the deployment of the funds and this resulted in significant independent assets. Condensed consolidating balance sheets at September 30, 2010 and December 31, 2009, condensed consolidating statements of income for the three and nine months ended September 30, 2010 and 2009, and condensed consolidating statements of cash flows for the nine months ended September 30, 2010 and 2009, for Penn, the subsidiary guarantors of the senior secured credit facility and the subsidiary non-guarantors are presented below.

 

The Company’s $250 million 63/4% senior subordinated notes and $325 million 83/4% senior subordinated notes are not guaranteed by the Company’s subsidiaries.

 

22



 

 

 

Penn

 

Subsidiary
Guarantors

 

Subsidiary
Non-
Guarantors

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Senior Secured Credit Facility

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2010

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidating Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

$

102,015

 

$

254,412

 

$

170,441

 

$

15,026

 

$

541,894

 

Property and equipment, net

 

15,150

 

1,778,955

 

151,433

 

 

1,945,538

 

Total other assets

 

3,839,554

 

4,939,370

 

179,775

 

(6,956,452

)

2,002,247

 

Total assets

 

$

3,956,719

 

$

6,972,737

 

$

501,649

 

$

(6,941,426

)

$

4,489,679

 

Total current liabilities

 

$

7,966

 

$

271,853

 

$

14,119

 

$

14,989

 

$

308,927

 

Total long-term liabilities

 

2,039,962

 

3,167,443

 

45,685

 

(2,981,130

)

2,271,960

 

Total shareholders’ equity

 

1,908,791

 

3,533,441

 

441,845

 

(3,975,285

)

1,908,792

 

Total liabilities and shareholders’ equity

 

$

3,956,719

 

$

6,972,737

 

$

501,649

 

$

(6,941,426

)

$

4,489,679

 

Three Months Ended September 30, 2010

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidating Statement of Income

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

 

$

628,425

 

$

9,831

 

$

 

$

638,256

 

Total operating expenses

 

23,849

 

490,155

 

13,790

 

 

527,794

 

(Loss) income from operations

 

(23,849

)

138,270

 

(3,959

)

 

110,462

 

Other income (expenses)

 

19,551

 

(43,237

)

(3,994

)

 

(27,680

)

(Loss) income from operations before income taxes

 

(4,298

)

95,033

 

(7,953

)

 

82,782

 

Taxes on income

 

(7,124

)

45,604

 

(4,043

)

 

34,437

 

Net income (loss) including noncontrolling interests

 

2,826

 

49,429

 

(3,910

)

 

48,345

 

Less: Net loss attributable to noncontrolling interests

 

 

 

 

 

 

Net income (loss) attributable to the shareholders of Penn National Gaming, Inc. and subsidiaries

 

$

2,826

 

$

49,429

 

$

(3,910

)

$

 

$

48,345

 

Nine Months Ended September 30, 2010

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidating Statement of Income

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

 

$

1,804,509

 

$

24,381

 

$

 

$

1,828,890

 

Total operating expenses

 

68,192

 

1,444,942

 

61,232

 

 

1,574,366

 

(Loss) income from operations

 

(68,192

)

359,567

 

(36,851

)

 

254,524

 

Other income (expenses)

 

65,874

 

(156,804

)

(4,982

)

 

(95,912

)

(Loss) income from operations before income taxes

 

(2,318

)

202,763

 

(41,833

)