PENN Entertainment, Inc. - Quarter Report: 2015 March (Form 10-Q)

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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 March 31, 2015

 

OR

 

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

 

For the transition period from        to        

 

Commission File Number:  0-24206

 

PENN NATIONAL GAMING, INC.

(Exact name of registrant as specified in its charter)

 

 

825 Berkshire Blvd., Suite 200

Wyomissing, PA 19610

(Address of principal executive offices) (Zip Code)

 

610-373-2400

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

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

 

 

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

 

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

 

Title		Outstanding as of April 30, 2015
Common Stock, par value $.01 per share		79,812,962 (includes 134,629 shares of restricted stock)

 

 

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

 

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PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

 

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PART I.		FINANCIAL INFORMATION		4
ITEM 1.		FINANCIAL STATEMENTS (Unaudited)		4
		Condensed Consolidated Balance Sheets — March 31, 2015 and December 31, 2014		4
		Condensed Consolidated Statements of Income — Three Months Ended March 31, 2015 and 2014		5
		Condensed Consolidated Statements of Comprehensive Income — Three Months Ended March 31, 2015 and 2014		6
		Condensed Consolidated Statements of Changes in Shareholders’ Equity — Three Months Ended March 31, 2015 and 2014		7
		Condensed Consolidated Statements of Cash Flows — Three Months Ended March 31, 2015 and 2014		8
		Notes to the Condensed Consolidated Financial Statements		9
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		20
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		32
ITEM 4.		CONTROLS AND PROCEDURES		32
PART II.		OTHER INFORMATION		33
ITEM 1.		LEGAL PROCEEDINGS		33
ITEM 1A.		RISK FACTORS		33
ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		33
ITEM 3.		DEFAULTS UPON SENIOR SECURITIES		33
ITEM 4.		MINE SAFETY DISCLOSURES		33
ITEM 5.		OTHER INFORMATION		33
ITEM 6.		EXHIBITS		33
SIGNATURES				35
EXHIBIT INDEX				36

 

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

		March 31,			December 31,
		2015			2014
		(unaudited)
Assets
Current assets
Cash and cash equivalents		$	237,729		$	208,673
Receivables, net of allowance for doubtful accounts of $2,093 and $2,004 at March 31, 2015 and December 31, 2014, respectively		40,918			41,618
Prepaid expenses		82,381			68,947
Deferred income taxes		45,302			55,579
Other current assets		10,913			11,189
Total current assets		417,243			386,006
Property and equipment, net		802,520			769,145
Other assets
Investment in and advances to unconsolidated affiliates		175,574			179,551
Goodwill		276,173			277,582
Other intangible assets, net		370,602			370,562
Deferred income taxes		74,492			79,067
Advances to the Jamul Tribe		86,443			62,048
Other assets		77,631			87,318
Total other assets		1,060,915			1,056,128
Total assets		$	2,280,678		$	2,211,279
Liabilities
Current liabilities
Current maturities of long-term debt		$	40,890		$	30,853
Accounts payable		66,587			43,136
Accrued expenses		135,518			130,818
Accrued interest		11,427			5,163
Accrued salaries and wages		69,671			84,034
Gaming, pari-mutuel, property, and other taxes		55,762			52,132
Insurance financing		10,251			13,680
Other current liabilities		64,771			75,703
Total current liabilities		454,877			435,519
Long-term liabilities
Long-term debt, net of current maturities and debt issuance costs		1,235,061			1,204,828
Noncurrent tax liabilities		8,171			8,188
Other noncurrent liabilities		7,570			8,258
Total long-term liabilities		1,250,802			1,221,274
Shareholders’ equity
Series C Preferred stock ($.01 par value, 18,500 shares authorized, 8,624 shares issued at March 31, 2015 and December 31, 2014)		—			—
Common stock ($.01 par value, 200,000,000 shares authorized, 79,705,633 and 79,161,817 shares issued at March 31, 2015 and December 31, 2014, respectively)		791			786
Additional paid-in capital		929,598			918,370
Retained deficit		(352,392		)	(363,388		)
Accumulated other comprehensive loss		(2,998		)	(1,282		)
Total shareholders’ equity		574,999			554,486
Total liabilities and shareholders’ equity		$	2,280,678		$	2,211,279

 

See accompanying notes to the condensed consolidated financial statements.

 

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Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(in thousands, except per share data)

(unaudited)

 

		Three Months Ended March 31,
		2015			2014
Revenues
Gaming		$	591,336		$	570,683
Food, beverage and other		108,763			104,870
Management service fee		1,927			2,458
Revenues		702,026			678,011
Less promotional allowances		(37,888		)	(36,931		)
Net revenues		664,138			641,080
Operating expenses
Gaming		294,895			286,077
Food, beverage and other		77,929			77,538
General and administrative		116,069			107,739
Rental expense related to Master Lease		108,845			104,309
Depreciation and amortization		42,922			47,366
Total operating expenses		640,660			623,029
Income from operations		23,478			18,051
Other income (expenses)
Interest expense		(12,163		)	(11,295		)
Interest income		1,870			467
Income from unconsolidated affiliates		3,982			2,483
Other		3,089			1,631
Total other expenses		(3,222		)	(6,714		)
Income from operations before income taxes		20,256			11,337
Income tax provision		9,260			6,800
Net income		$	10,996		$	4,537
Earnings per common share:
Basic earnings per common share		$	0.12		$	0.05
Diluted earnings per common share		$	0.12		$	0.05

 

See accompanying notes to the condensed consolidated financial statements.

 

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Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in thousands) (unaudited)

 

		Three Months Ended March 31,
		2015			2014
Net income		$	10,996		$	4,537
Other comprehensive loss, net of tax:
Foreign currency translation adjustment during the period		(1,716		)	(700		)
Other comprehensive loss		(1,716		)	(700		)
Comprehensive income		$	9,280		$	3,837

 

See accompanying notes to the condensed consolidated financial statements.

 

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Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(in thousands, except share data) (unaudited)

 

												Additional						Accumulated Other			Total
		Preferred Stock					Common Stock					Paid-In			Retained			Comprehensive			Shareholders’
		Shares		Amount			Shares		Amount			Capital			Deficit			Loss			Equity
Balance, December 31, 2013		8,624		$	—		77,788,393		$	775		$	887,556		$	(130,314	)	$	383		$	758,400
Share-based compensation arrangements, net of tax benefits of $7,752		—		—			766,722		5			15,907			—			—			15,912
Foreign currency translation adjustment		—		—			—		—			—			—			(700		)	(700		)
Net income		—		—			—		—			—			4,537			—			4,537
Balance, March 31, 2014		8,624		$	—		78,555,115		$	780		$	903,463		$	(125,777	)	$	(317	)	$	778,149
Balance, December 31, 2014		8,624		$	—		79,161,817		$	786		$	918,370		$	(363,388	)	$	(1,282	)	$	554,486
Share-based compensation arrangements, net of tax benefits of $6,379		—		—			543,816		5			11,228			—			—			11,233
Foreign currency translation adjustment		—		—			—		—			—			—			(1,716		)	(1,716		)
Net income		—		—			—		—			—			10,996			—			10,996
Balance, March 31, 2015		8,624		$	—		79,705,633		$	791		$	929,598		$	(352,392	)	$	(2,998	)	$	574,999

 

See accompanying notes to the condensed consolidated financial statements.

 

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Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands) (unaudited)

 

Three Months Ended March 31,		2015			2014
Operating activities
Net income		$	10,996		$	4,537
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		42,922			47,366
Amortization of items charged to interest expense		1,505			1,507
Accretion of settlement values on long term obligations		351			—
Loss (gain) on sale of fixed assets		153			(49		)
Income from unconsolidated affiliates		(3,982		)	(2,483		)
Distributions of earnings from unconsolidated affiliates		8,000			5,500
Deferred income taxes		15,374			1,803
Charge for stock-based compensation		2,084			2,579
Decrease (increase),
Accounts receivable		727			(599		)
Prepaid expenses and other current assets		(2,742		)	(12,739		)
Other assets		6,400			(1,854		)
Increase (decrease),
Accounts payable		2,887			2,186
Accrued expenses		4,985			(11,384		)
Accrued interest		6,264			2,484
Accrued salaries and wages		(14,363		)	(15,590		)
Gaming, pari-mutuel, property and other taxes		3,630			2,768
Income taxes		(9,529		)	(7,582		)
Other current and noncurrent liabilities		(11,620		)	669
Other noncurrent tax liabilities		1,519			4,489
Net cash provided by operating activities		65,561			23,608
Investing activities
Capital project expenditures, net of reimbursements		(36,929		)	(12,957		)
Capital maintenance expenditures		(11,860		)	(24,084		)
Advances to the Jamul Tribe		(16,341		)	—
Proceeds from sale of property and equipment		146			129
Investment in joint ventures		(328		)	—
Decrease in cash in escrow		—			18,000
Acquisition of gaming licenses		—			(25,586		)
Net cash used in investing activities		(65,312		)	(44,498		)
Financing activities
Proceeds from exercise of options		2,743			5,581
Proceeds from issuance of long-term debt, net of issuance costs		45,000			(327		)
Principal payments on long-term debt		(21,886		)	(6,898		)
Proceeds from insurance financing		885			14,335
Payments on insurance financing		(4,314		)	(4,853		)
Tax benefit from stock options exercised		6,379			7,752
Net cash provided by financing activities		28,807			15,590
Net increase (decrease) in cash and cash equivalents		29,056			(5,300		)
Cash and cash equivalents at beginning of year		208,673			292,995
Cash and cash equivalents at end of period		$	237,729		$	287,695
Supplemental disclosure
Interest expense paid, net of amounts capitalized		$	4,036		$	7,278
Income taxes paid		$	226		$	352

 

Non-cash transaction:  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 5 for further detail.

 

See accompanying notes to the condensed consolidated financial statements.

 

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Penn National Gaming, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

1.  Organization and Basis of Presentation

 

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

 

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

 

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

 

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

 

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

 

2.  Summary of Significant Accounting Policies

 

Revenue Recognition and Promotional Allowances

 

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

 

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

 

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

 

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

 

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

 

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

 

		Three Months Ended March 31,
		2015			2014
		(in thousands)
Rooms		$	8,336		$	8,071
Food and beverage		27,448			26,598
Other		2,104			2,262
Total promotional allowances		$	37,888		$	36,931

 

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

 

		Three Months Ended March 31,
		2015			2014
		(in thousands)
Rooms		$	1,054		$	1,013
Food and beverage		11,215			11,264
Other		1,052			1,233
Total cost of complimentary services		$	13,321		$	13,510

 

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. Finally, the Company recognizes purse expense based on the statutorily required percentage of revenue that is required to be paid out in the form of purses to the winning owners of horse races run at the Company’s racetracks in the period in which wagering occurs. For the three months ended March 31, 2015, these expenses, which are recorded primarily within gaming expense in the condensed consolidated statements of income, were $227.0 million, as compared to $219.5 million for the three months ended March 31, 2014.

 

Rental Expense related to the Master Lease

 

As of March 31, 2015, the Company leases from Gaming and Leisure Properties, Inc. (“GLPI”) real property assets associated with eighteen of the Company’s gaming and related facilities used in the Company’s operations under a “triple net” master lease agreement (“Master Lease”).

 

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

 

The Master Lease is commonly known as a triple-net lease. Accordingly, in addition to rent, the Company is required to pay the following, among other things: (1) all facility maintenance; (2) all insurance required in connection with the leased properties and the business conducted on the leased properties; (3) taxes levied on or with respect to the leased properties (other than taxes on the

 

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income of the lessor); and (4) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties. At the Company’s option, the Master Lease may be extended for up to four five-year renewal terms beyond the initial fifteen-year term, on the same terms and conditions.

 

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

 

Long-term asset related to the Jamul Tribe

 

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

 

The Jamul Tribe is a federally recognized Indian Tribe holding a government-to-government relationship with the U.S. through the U.S. Department of the Interior’s Bureau of Indian Affairs and possessing certain inherent powers of self-government.  The Jamul Tribe is the beneficial owner of approximately six acres of reservation land located within the exterior boundaries of the State of California held by the U.S. in trust for the Jamul Tribe (the “Property”).  The Jamul Tribe exercises jurisdiction over the Property pursuant to its powers of self-government and consistent with the resolutions and ordinances of the Jamul Tribe.  The arrangement between the Jamul Tribe and the Company provides the Jamul Tribe with the expertise, knowledge and capacity of a proven developer and operator of gaming facilities and provides the Company with the exclusive right to administer and oversee planning, designing, development, construction management, and coordination during the development and construction of the project as well as the management of a gaming facility on the Property.

 

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

 

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

 

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

 

Earnings Per Share

 

The Company calculates earnings per share (“EPS”) in accordance with ASC 260, “Earnings Per Share” (“ASC 260”). Basic EPS is computed by dividing net income applicable to common stock by the weighted-average number of common shares outstanding

 

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during the period. Diluted EPS reflects the additional dilution for all potentially-dilutive securities such as stock options and unvested restricted shares.

 

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

 

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

 

		Three Months Ended March 31,
		2015			2014
		(in thousands)
Net income		$	10,996		$	4,537
Net income applicable to preferred stock		1,077			452
Net income applicable to common stock		$	9,919		$	4,085

 

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

 

		Three Months Ended March 31,
		2015		2014
		(in thousands)
Determination of shares:
Weighted-average common shares outstanding		79,400		77,917
Assumed conversion of dilutive employee stock-based awards		2,296		2,003
Assumed conversion of restricted stock		72		135
Diluted weighted-average common shares outstanding before participating security		81,768		80,055
Assumed conversion of preferred stock		8,624		8,624
Diluted weighted-average common shares outstanding		90,392		88,679

 

Options to purchase 1,662,035 shares and 942,147 shares were outstanding during the three months ended March 31, 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 EPS for the Company’s common stock (in thousands, except per share data):

 

		Three Months Ended March 31,
		2015			2014
Calculation of basic EPS:
Net income applicable to common stock		$	9,919		$	4,085
Weighted-average common shares outstanding		79,400			77,917
Basic EPS		$	0.12		$	0.05

 

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

 

		Three months ended March 31,
		2015			2014
Calculation of diluted EPS using two-class method:
Net income applicable to common stock		$	9,919		$	4,085
Diluted weighted-average common shares outstanding before participating security		81,768			80,055
Diluted EPS		$	0.12		$	0.05

 

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 5.45 years, in order to match the expected life of the options at the grant date. Historically, at the grant date, there has been no expected dividend yield assumption since the Company has not paid any cash dividends on its common stock since its initial public offering in May 1994 and since the Company intends to retain all of its earnings to finance the development of its business for the foreseeable future. The weighted-average expected life was based on the contractual term of the stock option and expected employee exercise dates, which was based on the historical and expected exercise behavior of the Company’s employees.  The Company granted 1,662,035 stock options during the three months ended March 31, 2015.

 

Stock-based compensation expense for the three months ended March 31, 2015 was $2.1 million, as compared to $2.6 million for the three months ended March 31, 2014, and is included within the condensed consolidated statements of income under general and administrative expense.

 

The Company’s cash-settled phantom stock unit awards (“PSUs”), which vest over a period of three to five years, entitle employees and directors to receive cash based on the fair value of the Company’s common stock on the vesting date.  The PSUs are accounted for as liability awards and are re-measured at fair value each reporting period until they become vested with compensation expense being recognized over the requisite service period in accordance with ASC 718-30, “Compensation—Stock Compensation, Awards Classified as Liabilities.” The Company had a liability, which is included in accrued salaries and wages within the condensed consolidated balance sheets, associated with its PSUs of $7.0 million and $8.2 million at March 31, 2015 and December 31, 2014, respectively. For PSUs held by Penn employees, there was $26.2 million of total unrecognized compensation cost at March 31, 2015 that will be recognized over the grants remaining weighted average vesting period of 2.30 years. For the three months ended March 31, 2015, the Company recognized $4.5 million of compensation expense associated with these awards, as compared to $1.4 million for the three months ended March 31, 2014.  The increase was primarily due to the stock price increase year-over-year for both Penn and GLPI awards held by Penn employees.  Amounts paid by the Company for the three months ended March 31, 2015 on these cash-settled awards totaled $5.2 million, as compared to $5.5 million for the three months ended March 31, 2014.

 

For the Company’s stock appreciation rights (“SARs”), the fair value of the SARs is calculated during each reporting period and estimated using the Black-Scholes option pricing model based on the various inputs discussed below. The Company’s SARs, which vest over a period of four years, are accounted for as liability awards since they will be settled in cash. The Company had a liability, which is included in accrued salaries and wages within the condensed consolidated balance sheets, associated with its SARs of $9.1 million and $6.3 million at March 31, 2015 and December 31, 2014, respectively. For SARs held by Penn employees, there was $8.7 million of total unrecognized compensation cost at March 31, 2015 that will be recognized over the awards remaining weighted average vesting period of 2.92 years. For the three months ended March 31, 2015, the Company recognized $4.6 million of compensation expense associated with these awards, as compared to $0.3 million for the three months ended March 31, 2014. The increase was primarily due to the stock price increase year-over-year for both Penn and GLPI awards held by Penn employees.  Amounts paid by the Company for the three months ended March 31, 2015 on these cash-settled awards totaled $1.8 million, as compared to $0.5 million for the three months ended March 31, 2014.

 

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The following are the weighted-average assumptions used in the Black-Scholes option-pricing model at March

31, 2015 and 2014:

 

		2015		2014
Risk-free interest rate		1.54	%	1.68	%
Expected volatility		36.93	%	44.80	%
Dividend yield		—		—
Weighted-average expected life (years)		5.45		5.45

 

Segment Information

 

The Company’s Chief Executive Officer, who is the Company’s Chief Operating Decision Maker, as that term is defined in ASC 280, “Segment Reporting” (“ASC 280”), measures and assesses the Company’s business performance based on regional operations of various properties grouped together based primarily on their geographic locations. The Company’s reportable segments are: (i) East/Midwest, (ii) West, and (iii) Southern Plains.

 

The East/Midwest reportable segment consists of the following properties: Hollywood Casino at Charles Town Races, Hollywood Casino Bangor, Hollywood Casino at Penn National Race Course, Hollywood Casino Lawrenceburg, Hollywood Casino Toledo, Hollywood Casino Columbus, Hollywood Gaming at Dayton Raceway, which opened on August 28, 2014, and Hollywood Gaming at Mahoning Valley Race Course, which opened on September 17, 2014. It also includes the Company’s Casino Rama management service contract and Plainridge Park Casino in Massachusetts which the Company expects to open on June 24, 2015.

 

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

 

The Southern Plains reportable segment consists of the following properties: Hollywood Casino Aurora, Hollywood Casino Joliet, Argosy Casino Alton, Argosy Casino Riverside, Hollywood Casino Tunica, Hollywood Casino Gulf Coast, Boomtown Biloxi, and Hollywood Casino St. Louis, and includes the Company’s 50% investment in Kansas Entertainment, LLC (“Kansas Entertainment”), which owns the Hollywood Casino at Kansas Speedway. On July 30, 2014, the Company closed Argosy Casino Sioux City.

 

The Other category consists of the Company’s standalone racing operations, namely Rosecroft Raceway, Sanford-Orlando Kennel Club, and the Company’s joint venture interests in Sam Houston Race Park, Valley Race Park, and Freehold Raceway, as well as the Company’s 50% joint venture with the Cordish Companies in New York (which is in the process of being dissolved). 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.

 

See Note 7 for further information with respect to the Company’s segments.

 

Other Comprehensive Income

 

The Company accounts for comprehensive income in accordance with ASC 220, “Comprehensive Income,” which establishes standards for the reporting and presentation of comprehensive income in the consolidated financial statements. The Company presents comprehensive income in two separate but consecutive statements. For the three months ended March 31, 2015 and 2014, the only component of accumulated other comprehensive income was foreign currency translation adjustments.

 

3.  New Accounting Pronouncements

 

In April 2015, the FASB issued revised guidance to simplify the presentation of debt issuance costs in the balance sheet.  The revised guidance requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the existing presentation of debt discounts.  The recognition and measurement guidance for debt issuance costs are not affected by this revised guidance, and therefore there is no impact to the statement of income.  The revised guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of this revised guidance is permitted for financial statements that have not been previously issued. An entity should apply the revised guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the revised guidance. The Company has elected to early adopt the revised guidance and as such debt issuance costs are now presented as a direct reduction of

 

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long-term debt on the Company’s condensed consolidated balance sheets.  See Note 5 for further information regarding debt issuance costs.

 

In February 2015, the FASB issued new consolidation guidance to modify 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 include 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. Early adoption is permitted, including adoption in an interim period.  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.  Management is in the process of assessing the impact of the new guidance on existing consolidation conclusions and equity method investments, but does not anticipate any change.

 

In May 2014, the FASB issued new revenue recognition guidance, which will supersede nearly all existing revenue recognition guidance. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve the core principle, the new guidance implements a five-step process for customer contract revenue recognition. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers. This new guidance was originally to be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early adoption is prohibited. In April 2015, the FASB issued a one-year deferral of the effective date of this new guidance resulting in it now being effective for the Company beginning in fiscal year 2018.  Entities can transition to the new guidance either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact the new revenue recognition guidance will have on the consolidated financial statements.

 

4.  Property and Equipment

 

Property and equipment, net, consists of the following:

 

		March 31,			December 31,
		2015			2014
		(in thousands)
Land and improvements		$	43,211		$	42,350
Building and improvements		187,695			173,043
Furniture, fixtures, and equipment		1,218,830			1,213,143
Leasehold improvements		245,272			246,047
Construction in progress		115,955			69,367
Total property and equipment		1,810,963			1,743,950
Less accumulated depreciation		(1,008,443		)	(974,805		)
Property and equipment, net		$	802,520		$	769,145

 

Property and equipment, net increased by $33.4 million for the three months ended March 31, 2015 primarily due to the City of Lawrenceburg’s conveyance of a hotel and event center near Hollywood Casino Lawrenceburg (see Note 5 for further detail) and construction costs for the development of Plainridge Park Casino as well as normal capital maintenance expenditures, all of which were partially offset by depreciation expense for the three months ended March 31, 2015.

 

Depreciation expense totaled $42.9 million for the three months ended March 31, 2015, as compared to $42.0 million for the three months ended March 31, 2014.  Interest capitalized in connection with major construction projects was $0.6 million for the three months ended March 31, 2015, as compared to $0.1 million for the three months ended March 31, 2014.

 

5.  Long-term Debt

 

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

 

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		March 31,			December 31,
		2015			2014
		(in thousands)
Senior secured credit facility		$	830,625		$	807,500
$300 million 5.875% senior unsecured notes due November 1, 2021		300,000			300,000
Other long term obligations		169,840			154,189
Capital leases		188			199
		1,300,653			1,261,888
Less current maturities of long-term debt		(40,890		)	(30,853		)
Less discount on senior secured credit facility Term Loan B		(1,014		)	(1,056		)
Less debt issuance costs, net of accumulated amortization of $8.3 million and $6.8 million, respectively		(23,688		)	(25,151		)
		$	1,235,061		$	1,204,828

 

The following is a schedule of future minimum repayments of long-term debt as of March 31, 2015 (in thousands, excluding other long-term obligations attributable to the contingent purchase price consideration related to the purchase of Plainridge Racecourse further discussed below):

 

Within one year		$	40,890
1-3 years		123,828
3-5 years		500,989
Over 5 years		615,406
Total minimum payments		$	1,281,113

 

Senior Secured Credit Facility

 

The 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.  At March 31, 2015, the Company’s senior secured credit facility had a gross outstanding balance of $830.6 million, consisting of a $468.7 million Term Loan A facility, a $246.9 million Term Loan B facility, and $115.0 million outstanding on the revolving credit facility.  Additionally, at March 31, 2015, the Company was contingently obligated under letters of credit issued pursuant to the senior secured credit facility with face amounts aggregating $22.7 million, resulting in $362.3 million of available borrowing capacity as of March 31, 2015 under the revolving credit facility.

 

Other Long Term Obligations

 

Other long term obligations at March 31, 2015 of $169.8 million included $19.5 million for the contingent purchase price consideration related to the purchase of Plainridge Racecourse, $135.0 million related to the relocation fees for Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course, and $15.3 million related to the repayment obligation of a hotel and event center located near Hollywood Casino Lawrenceburg; all of which are more fully described below.

 

Plainridge Racecourse

 

On April 11, 2014, the Company purchased Plainridge Racecourse in Massachusetts, at which the Company expects to open a slots-only gaming facility on June 24, 2015. The associated option and purchase agreement contained contingent purchase price consideration that is calculated based on the actual earnings over the first ten years of operations following the commencement of gaming. The first payment is due 60 days after the completion of the first four full fiscal quarters of operation following the commencement of gaming, and additional payments are due every year for nine years after the first payment. The fair value of this liability was 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. 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 interest expense related to the accretion of this obligation was $0.4 million for the three months ended March 31, 2015.

 

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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 Austintown, 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 $1.7 million for the three months ended March 31, 2015.

 

Event Center

 

The City of Lawrenceburg Department of Redevelopment recently 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.  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 $0.1 million for the three months ended March 31, 2015.

 

Debt Issuance Costs

 

As discussed in Note 3, the Company elected to early adopt accounting guidance issued in April 2015 to simplify the presentation of debt issuance costs.  This change in accounting principle was implemented retrospectively as of March 31, 2015 and had the effect of lowering other assets and long-term debt by $23.7 million and $25.2 million as of March 31, 2015 and December 31, 2014, respectively. 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.

 

Covenants

 

The Company’s senior secured credit facility and $300 million 5.875% senior unsecured notes require it, among other obligations, to maintain specified financial ratios and to satisfy certain financial tests, including fixed charge coverage, interest coverage, senior leverage and total leverage ratios. In addition, the Company’s senior secured credit facility and $300 million 5.875% senior unsecured notes restrict, among other things, its ability to incur additional indebtedness, incur guarantee obligations, amend debt instruments, pay dividends, create liens on assets, make investments, engage in mergers or consolidations, and otherwise restrict corporate activities.

 

At March 31, 2015, the Company was in compliance with all required financial covenants.

 

6.  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 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.

 

7.  Segment Information

 

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

 

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		East/Midwest			West			Southern Plains			Other			Total
		(in thousands)
Three months ended March 31, 2015
Net revenues		$	386,544		$	62,585		$	210,269		$	4,740		$	664,138
Income (loss) from operations		19,094			6,509			24,574			(26,699		)	23,478
Depreciation and amortization		28,273			2,387			10,782			1,480			42,922
Income from unconsolidated affiliates		—			—			3,788			194			3,982
Capital expenditures		38,574			2,851			6,448			916			48,789
Three months ended March 31, 2014
Net revenues		$	349,449		$	60,920		$	223,757		$	6,954		$	641,080
Income (loss) from operations		9,602			8,057			21,227			(20,835		)	18,051
Depreciation and amortization		26,823			1,549			17,251			1,743			47,366
Income from unconsolidated affiliates		—			—			2,452			31			2,483
Capital expenditures		10,110			6,430			19,343			1,158			37,041
Balance sheet at March 31, 2015
Total assets		1,034,441			313,306			576,528			356,403			2,280,678
Investment in and advances to unconsolidated affiliates		93			—			111,257			64,224			175,574
Goodwill and other intangible assets, net		264,162			145,079			233,456			4,078			646,775
Balance sheet at December 31, 2014
Total assets		990,031			289,026			592,405			339,817			2,211,279
Investment in and advances to unconsolidated affiliates		94			—			115,469			63,988			179,551
Goodwill and other intangible assets, net		264,147			145,054			234,865			4,078			648,144

 

8.  Income Taxes

 

At March 31, 2015 and December 31, 2014, the Company had a net deferred tax asset balance of $119.8 million and $134.6 million, respectively, within its condensed consolidated balance sheets. The Company accounts for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). Under ASC 740, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and are measured at the prevailing enacted tax rates that will be in effect when these differences are settled or realized. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized.

 

9.  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.

 

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