gcgc- final report - assignment# 1
TRANSCRIPT
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Contents A Note on Competitors ........................................................................................................................................................ 3
Current Assets: ..................................................................................................................................................................... 3
Cash and Cash Equivalents (pg. 13 Financial Assets) ...................................................................................................... 3
Accounts Receivable ......................................................................................................................................................... 6
Income Tax Receivables ................................................................................................................................................... 9
Prepaids, Deposits and Other Assets ............................................................................................................................... 9
Long- Term Assets: ............................................................................................................................................................... 9
Property, Plant, and Equipment ...................................................................................................................................... 9
Leases .............................................................................................................................................................................. 11
Intangible Assets ............................................................................................................................................................ 12
Goodwill .......................................................................................................................................................................... 14
Deferred Tax Assets and Liabilities ................................................................................................................................ 15
Other Assets ................................................................................................................................................................... 17
Current Liabilities ............................................................................................................................................................... 17
Accounts Payable and Accrued Liabilities ..................................................................................................................... 17
Income Taxes Payable .................................................................................................................................................... 19
Other Liabilities .............................................................................................................................................................. 19
Long Term Liabilities........................................................................................................................................................... 19
Long-Term Debt .............................................................................................................................................................. 19
Contingencies, Derivatives, Etc ...................................................................................................................................... 20
Deferred Credits, Provisions and Other Liabilities ........................................................................................................ 22
Shareholders’ Equity Analysis ............................................................................................................................................ 23
Share Capital & Reserves: (Note 15) .............................................................................................................................. 23
Revised Financial Statements ............................................................................................................................................ 26
Revenues ........................................................................................................................................................................ 26
Expenses ......................................................................................................................................................................... 28
Appendix ......................................................................................................................................................................... 31
Appendix A.1: Reconciliation of Cash and Cash Equivalents ........................................................................................ 31
Appendix B.1 – Adjusted Days Receivable .................................................................................................................... 31
Appendix B.2 – Receivables Seasonality ....................................................................................................................... 31
Appendix B.3 – Accounts Receivable Reconciliation ..................................................................................................... 32
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Appendix C.2 - Reconciliation of Carrying Value ........................................................................................................... 32
Appendix C.1 - Implied Useful Life Calculations ............................................................................................................ 32
Appendix D.1 - Lease Capitalization Schedule ............................................................................................................... 33
Appendix E.1 – Implied Useful Life Calculation ............................................................................................................. 33
Appendix E.2 – Intangible Reconciliations .................................................................................................................... 34
Appendix F.1 – Reconciliation of Goodwill .................................................................................................................... 34
Appendix G.1 – Adjustment to Days Payable ................................................................................................................ 35
Appendix G.2 – Accounts Payable Seasonality .............................................................................................................. 36
Appendix G.3 – Reconciliation of Accounts Payable and Accrued Liabilities ............................................................... 36
Appendix H.1 - Expected Payments by Period, Dec 31, 2014 ....................................................................................... 37
Appendix H.2 - Other Contractual Commitments ......................................................................................................... 37
Appendix I.1 - Breakdown of Deferred Credits ............................................................................................................. 38
Appendix I.2 – Reconciliation of Deferred Credits, Provisions and Other Liabilities ................................................... 38
Appendix J.1- Calculation of Share option value and dilutive effect of options .......................................................... 39
Appendix J.2 – Breakdown of Stock Option Plan .......................................................................................................... 40
Appendix J.3 – Reconciliation of Shares Repurchased .................................................................................................. 41
Appendix K.1 – Impairment Reversal Calculations ....................................................................................................... 41
Appendix L.1 - Breakdown of Senior Unsecured Notes ................................................................................................ 41
Appendix M.1 - Reconciliation of Non-Cash Working Capital ...................................................................................... 42
Appendix N.1 – Adjusted Statement of Financial Position ........................................................................................... 43
Appendix N.2 – Adjusted Statement of Consolidated Earnings ................................................................................... 44
Appendix N.3 – Ratio Analysis ....................................................................................................................................... 45
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A Note on Competitors
Competitors for GCGC were chosen following a certain criteria: This constituted of the competitors having the
similar market capitalization, business structure, operational geography and size of revenues.
Reference to these competitors will be made throughout the analysis.
The three competitors chosen are:
o GameHost (GH.TO)
o Churchill Downs Inc. (CHDN:NSDQ)
o Penn National Gaming Inc. (PENN : NSDQ)
GameHost This Company operates as a hotel and gaming company in Albert, Canada. It operated through Gaming, Hotel and
Food and Beverage segments. Its gaming activities include company owned and government owned slot machines,
video lottery terminals, and lottery ticket outlets.
The company operates BoomTown Casino, Fort McMurray and the Great Northern Casino. In addition, the
company also holds majority interest in Deerfoot Inn & Casino.
Churchill Downs Inc. This Company provide pari-mutuel horse racing, online wagering accounts on horse racing, and casino gaming
services. The company offers casino gaming through its casinos in Mississippi, its slot and other video operations in
Louisiana, its slot operations in Florida, and its casino in Maine.
It also operated racing facilities such as Churchill Downs Racetrack in Louisville, Kentucky; Arlington International
Race Course in New Orleans, and Calder Race Course in Miami Gardens, Florida. Furthermore, the company also
develops casual games for PCs and mobile devices in various genres, including social casino, match three, etc.
Penn National Gaming Inc. This Company owns and operated gaming and pari-mutuel properties, operating through the East/Midwest, West
and Southern Plains segments. The company is involved in gaming and racing operations, operating a grand total of
26 different facilities in 17 jurisdictions.
Current Assets:
Current assets includes cash and cash equivalents, Accounts receivable, Income taxes receivable, and prepaids,
deposits and other assets.
Cash and Cash Equivalents (pg. 13 Financial Assets)
Nature Cash and cash equivalents includes investments in short term deposits and bankers’ acceptances with maturities
that fall within three months of the original investment date.
As of December 2014, cash and cash equivalents consists of $243.7 in cash in banks, $10.1 in cash floats, and $70.6
in cash equivalents formed from short term investments
The cash floats that are observed exclude the cash floats of $ 16.2 given to the BCLC (British Columbia Lottery
Corporation) for BC casino operations since this section is operated by the British Columbia province. These cash
floats have collateral set aside in terms of letters of credit amounting to $28 which is shown in Note 25 a.
Current Assets
A Note on Competitors
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Cash in banks includes $0.2 and $0.5 of amounts related to horseman’s purse pools and future payments for
construction projects, respectively. This extra small amount of cash added will be left in the cash in banks since the
analysis is occurring as of today, and the cash will not be coming out until a future date.
Bank Indebtedness There is no bank loan in the current liabilities section. Therefore cash and cash equivalents are not netted against
any bank debt.
Fair Value The investment vehicles that are bought by the company are placed under one of the three categories depending
on the purpose and nature of the financial asset. Valued as “fair value through profit and loss”, “Held-to-maturity &
loans and receivables”, or “Available for sale”.
Held-to-maturity assets are non-derivative financial assets with fixed or determinable payments and a fixed
maturity; the firm plans to keep this asset to maturity. This aligns with the three month fixed income assets the
firm has invested in.
Financial assets that are classified as held-to-maturity are originally recorded at fair value and then are measured at
amortized cost using the effective interest method.
The fair values of cash and cash equivalents approximate their carrying value due to their short term nature
Financial Instrument Classification
Cash Loans and Receivables
Cash Equivalents Held-to-Maturity
Normal Cash Balance As of December 31,2014, cash and cash equivalents for the firm are $ 324.4 million, which is about 31.2% of Total
assets, a significant increase from 21.0% in of total assets in 2013
The increase in cash and cash equivalents is due to the large amount of investment by the firm in three-month
financial assets; a raise of approximately 134% from about $30 million to $70 million. The large increase in “cash in
banks” seems to come from the fact that the Company did not buy back shares in 2014, and also their lack of
capital expenditure investment.
This could also explain the big increase in short-term investments, since the company felt they had to invest their
extra cash in something rather than just keep it in the bank.
There is also a possibility that the company is holding large amounts of cash for an upcoming new project. There is
no disclosure from the notes, but we do know that the Washington branch is closing in Q1 2015, which could mean
the company is saving up for another big project.
Compared to the selected group above, GCGC holds more cash and cash equivalents on hand to total assets (about
32%) than their peer’s average of 7.2% in 2014.
Cash float has remained relatively constant for the past three years, so it will be prudent to maintain that section
the same. The cash float is the amount of money that is needed at the casinos in order to maintain liquidity for the
players. This float could change if there is an increase in the amount of customers who attend the casino
Cash in Banks as a percentage of current assets seems to remain around 70% which could mean that it is the one of
the requirements of this firm.
Adjustment: By taking the 2 year average of the line item "Cash in Banks" we can get a better understanding of the
cash that the company might need. This is cash that is just sitting in the bank and not being utilized for company-
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improving activities. The average for the 2 years cash in banks is $198.05 and the actual cash in banks in 2014 is
$243.7, so the difference of $45.65 will be removed from the cash and cash equivalents line item.
Cash Infusion There seems to be some signs of cash infusion. Looking at the quarterly reports for the company in the year 2014,
one can see that the normal cash entering the firm is always fluctuating, but by year end (Q4) there was an
abnormal cash increase of about $51. This could raise some suspicions, but more depth must be applied to this
problem.
Looking at other cash changes from previous years, one can see that the cash in banks for this firm is pretty volatile
but with a reoccurring cash outflow in Q3. The conclusion seems to be that there is no cash in infusion in Q4, but
rather some type of regular seasonality to the company’s cash flows.
2014 Quarter Cash in Banks Cash Change
1 166.8 14.4
2 206.8 40
3 192.4 -14.4
4 243.7 51.3
This increase in cash for the year end could be due to fact that the firm has events during that time of the year,
effectively raising the amount of cash that they place in the bank.
Interest Earned
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑎𝑟𝑛𝑒𝑑 =𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑
𝐴𝑣𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒 𝑜𝑓 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐵𝑒𝑎𝑟𝑖𝑛𝑔 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠
In 2014, the firm earned interest of $2.5 with an average cash equivalent balance of $50.35 (from (70.6+30.1) /2)
for a yield of 4.96%. Compared to the year 2013 the yield on their investment was of 7.98%, from the interest
earned of $1.6 and an average cash equivalent balance of $20.05.
These returns seem too high for the 3-month securities they invested in, so we decided to add the Cash in banks to
the equation realizing that since their cash is in the banks it could also be considered an interest bearing security.
The following calculation is the interest that the company has earned on their securities:
2014 2013 Comments
Interest income received $2.50 $1.60 X
Cash in Banks * $202.65 $134.15 Add
Cash Equivalents ** $50.48 $20 Add
Balance of interest bearing securities
253.13 154.15 Total
Interest Earned 0.99% 1.04% =X/Total
* Cash in Banks is the average for the four quarters to account for actual investment
** Cash Equivalents is the average for the four quarters to account for actual investment
Looking at the 2015 3-month bankers’ acceptance notes, one can see that they earned 0.92%, which makes this
0.99% interest earned in 2014 a reasonable amount.
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Reconciliation of Cash and Cash Equivalents – See Appendix A.1: Reconciliation of Cash and Cash Equivalents
Accounts Receivable
Nature Great Canadian Gaming Corporation’s accounts receivable includes trade receivables and receivables due from
NSPLCC.
Trade receivables are mainly government and institutional based rather than guest based.
Receivables due from NSPLCC is recorded as a reimbursement of qualifying expenditures when there is an
insufficient balance in the Capital Reserve Account.
The company does not disclose composition of other receivables.
All receivables are significant as they reflect corporate economic activities and operations.
Allowance for Doubtful Account Allowance for doubtful accounts are assessed based on individual accounts and length of time outstanding, totaling
$0.8 million in 2014 and $0.6 million in 2013.
Compared with historical data, the $0.8 million doubtful account is consistent with those in previous years.
Allowance for doubtful accounts as percentage of gross trade receivables is 14% in 2014, both a high percentage
and a big increase from last year.
Allowance for doubtful account as percentage of gross receivables, including those due from NSPLCC and others, is
11% in 2014, also an increase compared with previous year.
Allowance for Doubtful Account (CAD, in millions) 2014 2013
Allowance for doubtful accounts (1) 0.8 0.6
Trade receivables (2) 4.9 5
Gross Trade Receivables (1+2) 5.7 7.2
Allowance for doubtful account as % of Gross Receivables 14% 8%
Allowance for Doubtful Account (CAD, in millions) 2014 2013
Allowance for doubtful accounts (1) 0.8 0.6
Account receivables (2) 6.3 7.2
Gross Trade Receivables (1+2) 7.1 7.8
Allowance for doubtful account as % of Gross Receivables 11% 8%
The company does not disclose specific days due in its receivable account and nothing is mentioned about bad debt
proportion – this would be useful information to include.
Receivables are mainly from provincial lottery corporations and federal governments whose probability of default
is low. No adjustment on write-off to bad debt will be done.
Economic Asset Trade and other receivables as well as receivables due from NSPLCC are considered to be an economic asset
because of the high likelihood of payment and the fact that they can be factored or securitized for cash.
Related Party The company had no related party transactions that could affect payment of receivables as of December 31, 2014.
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Valuation The company recognized the values of financial instruments in current assets approximate their carrying values due
to their short-term nature.
Main Customers Great Canadian Gaming Corporation provides gaming, entertainment, racetrack, and hospitality facilities among
which gaming revenue is its main business.
Major customers include individuals requiring entertainment services such as theaters, casinos, racetracks, and
hotels. Corporations such as provincial gaming companies are also its customers.
Credit Risk The company is exposed to credit risk measured as the carrying value of financial assets including cash in banks,
cash equivalents, and account receivable. (Note 26, p41)
Contribution to credit risk by receivables is believed to be low because on one hand, account receivables account
for 2% of total financial instruments that can bring credit risk. This is very low and when compared with 4% in 2013,
a decrease in risk can be seen.
Credit Risk (CAD, in millions) 2014 2013
Cash in banks 243.7 152.4
Cash equivalents 70.6 30.1
Account receivable 6.3 7.2
Total 320.6 189.7
Account receivable as % of Total 2% 4%
Most receivables are from federal governments, provincial gaming corporations with good credit records, and large
racetrack operators. So possibility of retrieval is high.
Revenue Recognition Gaming revenue and racetrack revenue are recorded when earned.
Hospitality, lease and other revenues are recorded when goods are delivered or services are performed.
Promotional allowances are recorded when furnished deducted from gross revenues.
All these revenue recognition methods are reasonable and based on prudence and relevance. So, no adjustment on
them will be made.
Deferred Revenue Deferred revenue comes from the agreement to build and operate parking garage in British Columbia. We are not
sure if the garages will be built. If yes, it will impact revenue because as long as the garages are built, cash will be
generated and go to both the company and Canada Line, and such joint venture can benefit both parties. But we
do not know about how much revenue will be generated. Nor do we know about the timing and possibility of
successfully building the garages. So we cannot adjust this kind of deferred revenue although it decreases every
year. Therefore, deferred revenue will not be added back to revenue account.
Days Receivable Industry days receivables are generally settled between 10 to 20 days, and US normally has a higher receivable
collection period than that in Canada because Canadian gaming is more conservative.
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Days Receivable (peers) 2014 2013 2012
GameHost 8.3 10.8 9.5
Churchill Downs 47.3 27.6 25.0
PENN 6.0 7.0 7.0
Average 20.5 15.1 13.8
The company’s unadjusted days receivable is 5.2 days in 2014 and 6.5 days in 2013. Compared with its competitor
collection time, the company is doing much better and has less risk than peers.
Days Receivable Pre-adjustment (CAD, in $MM except for days)
2014 2013
Revenue (A) 446.5 407.3
Account Receivables (B) 6.3 7.2
Days Receivable (B / A x 365) 5.2 6.5
For adjustment, both revenue and account receivables should be made. $0.8 million allowance should be added
back to reported account receivables.
According to the above adjustments, receivable value was 7.1 million at December 31, 2014, compared to the
similarly adjusted value of 7.8 million in 2012. There was a 9% year-over-year decrease in receivables. Days
receivable was 5.8 in 2014 and 7 in 2013, almost a 17% decrease. We think part of the reasons to explain for the
decrease is that the company decides to close its Great American Casino in Washington. And receivables from US
are normally higher than those in Canada because Canadian operations and rules for gambling are more
conservative.
See Appendix B.1 – Adjusted Days Receivable
Seasonality Adjustment Seasonality is also checked to see whether revenue matches with account receivables. It shows that revenue is
stable seasonally, with about 25% quarterly. So no adjustment on seasonality should be made.
See Appendix B.2 – Receivables Seasonality
Accounts Receivable vs. Revenue We compared the multi-year trend in Great Canadian Gaming Corporation’s receivables and revenues. We find that
revenues are growing while account receivables are decreasing. This is consistent with the fact that collection days
in receivables are decreasing, assuming a better quality of revenue as well as account receivables.
(CAD$,in millions) 2014 2013 2012 2011
Revenue 446.5 407.3 408.7 388.2
change 10% 0% 5% -
Account Receivable 6.3 7.2 7.7 8.9
change -13% -6% -13% -
See Appendix B.3 – Accounts Receivable Reconciliation
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Income Tax Receivables It seems like this is a one-time situation that occurred in the year 2013. We will not carry forward any other income
tax receivables for the foreseeable future. Notice that taxes payable were zero in this year, due to the fact that the
firm may have overpaid taxes in a previous period.
It does not affect the present income statement, so this line will be untouched.
Prepaids, Deposits and Other Assets Prepaid expenses, deposits and other are stable over years. They amount to $7.4 million in 2014 and $8 million in
2013, a 7.5% decrease which possibly indicates that the company overpaid last year and thus reduced its payment
this year. Since prepaid expenses represent approximately 0.75% of total assets in both 2014 and 2013, their
decrease is relatively not significant.
There are no disclosures relevant to prepaid expense, deposits, and other, and the amount is quite reasonable, no
adjustments will be made.
Long- Term Assets:
Property, Plant, and Equipment
Description Property, Plant, and Equipment consists of six categories: Land, Buildings, Building Improvements, Equipment,
Properties under Development, and Leasehold Improvements.
All of these assets can be isolated and sold, with the exception of Leasehold improvements. However, leasehold
improvements can be considered part of an operating asset, and should be included in the capitalization of
operating leases so we will not make adjustments.
All categories of PPE are recorded at cost plus accumulated amortization, impairments, and amounts approved
under the Capital Reserve Account. We feel that this method does not fully capture the economic value of each
asset. While it may be an appropriate method for equipment, leasehold improvements, and building
improvements, we feel buildings would more accurately portray their economic value if they were reported
utilizing the revaluation method.
The costs included in the capitalization of these assets consist of:
o Construction costs related directly to the creation of the asset, including costs of materials, delivery costs
of materials, installation of equipment and fixtures, etc.
o Overhead expenses attributable to the creation of the asset
o Borrowing costs directly attributable to the construction project
o Government subsidies reduce the cost of the constructed asset.
Government Subsidies: The BC Lottery Corporation (“BCLC”) manages The Facility Development Commission (“FDC”) program, which
reimburses the GCGC for gaming related (primarily capital) expenditures. The maximum subsidy amount is
calculated as a fixed percentage (between 3%-5%) of Gross Gaming Revenues generated by gaming properties in
British Columbia paid to the BCLC.
The FDC reimbursement is characterized as a reduction of the cost of the long term asset (or the operating
expenses) being reimbursed.
Long – Term Assets
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Any subsidy received should be added back to the cost of the asset. In 2014, there were no subsidies reported;
however, there were subsidies reported in 2013. For the purposes of calculating reasonability of amortization this
subsidy was added back to the cost of the assets.
There is a similar program available in Nova Scotia, for which little information was provided. No subsidies were
reported from the Nova Scotia development program.
Impairment Testing and Reversals: Higher of fair value less costs to sell and value in use.
Fair value is based on the amount GCGC could receive by a third party in an arm’s length transaction
Value in use method estimates the NPV of all future cash flows generated by the asset (or CGU)
In April 2014, GCGC signed an agreement with five other Ontario racetrack operators and the Ontario Racing
Commission, which secured funding for its Georgian Downs and Flamboro Downs racetracks.
As a result of this new agreement, GCGC reversed impairments associated with these PPE assets by an amount of
0.9 for Buildings and building improvements, and 0.1 for equipment.
Impairments were also recognized for leasehold improvements and equipment by values of 0.2 and 0.2
respectively.
These are all reasonable amounts and no adjustment will be made.
Capital Expenditures – is it enough?
Land is not depreciated, and neither are properties under development.
Buildings and Building improvements appear to be depreciating faster than they are being added to, by a significant
margin. For 2014, depreciation = 24.4 while additions and reclassifications = 1.1.
Leasehold improvements depreciated by 2.8, while additions and reclassifications = 1.1.
Equipment depreciated by 7.9, while additions and reclassifications = 4.3.
On average, the company does not appear to be investing enough to maintain their asset base. The same
conclusion is reached if the analysis is extended to 2013.
Reasonability of Amortization (See Appendix C.1 - Implied Useful Life Calculations):
Buildings:
They have an implied useful life of 28.9 years which is within the stated acceptable range of 40 years.
Building Improvements:
These costs and depreciation expenses are grouped together with buildings. It would be nice if they stated
improvements separately from buildings, that way we would know if their depreciation expenses are reasonable.
Leasehold Improvements:
We are not told how many remaining years are left on the leases.
Are they Investing Enough During 2014?
Land
Buildings and
Building
Improvements
Leasehold
Improvements Equipment
Properties
Under
Development Total
Depreciation 0.0 (24.4) (2.8) (7.9) 0.0 (35.1)
Additions & Reclassifications 0.1 1.1 1.1 4.3 4.8 11.1
Net Investment 0.1 (23.3) (1.7) (3.6) 4.8 (24.0)
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With an implied useful life of 30 years, we think this estimate is too low especially in the entertainment industry.
Assuming a 15 year lease term, adjusted depreciation = Total Cost/# of years = 82.6/15 = 5.5. As the current
statements already recognized 2.8, we need to add an additional 2.7 to depreciation expense for leasehold
improvements.
Equipment:
Equipment has an implied useful life of 14.9 years, which is well above the limit of 5 years. We will adjust for this by
increasing the depreciation.
Total Cost = 82.6 divided by 5 = 16.52, less 7.9 already depreciated = 8.62 additional depreciation for equipment.
PPE on the balance sheet will be decreased by an additional 8.6, while the income statement will have additional
depreciation expense of 8.6.
For Complete PPE Reconciliations and Calculations, See Appendix C
Borrowing Costs for Capitalized Assets: These costs should be removed from the asset, and expensed under interest expense for the period.
This information is not provided in the annual report, so no adjustments will be made.
This is a piece of information we would consider useful.
A Note on Reconciliation of PPE Costs Because no information is provided on accumulated subsidies provided by the government of Nova Scotia and the
government of BC, a true reconciliation to cost cannot be performed. So we instead include a reconciliation to
carrying value in Appendix C.2 - Reconciliation of Carrying Value.
Leases
Nature A ground lease with the City of Surrey, BC for Fraser Downs Racetrack and Casino
An operating agreement with the City of Vancouver, BC for Hastings Racecourse
Slots Facility, property leases for the Company’s head office and Great American Gaming Corporation, and
A ground lease with the City of Sydney, NS for Casino Nova Scotia Sydney
The leasehold improvements have a useful life of the lesser of useful life or lease term
o Lease Term implied to be 10 years in the capitalization analysis
Lease revenues include income from OLG for leasing the slot machine areas at Georgian Downs and Flamboro
Downs since April 1, 2013
Capitalization Operating leases seem to be significant to the business of GCGC
o Decided to capitalize the operating leases and calculate the interest and depreciation expense.
o To derive the interest rate to discount back the future operating lease payments, we have taken the
Effective Annual Rate of 6.625%.
o Rate is associated with the $450m Senior Unsecured Notes and is payable semi-annually in arrears on
January 25 and July 25 of every year.
o Effective Annual Rate came up to be 6.735% and we have taken the expected future payments of the
operating leases from Note 26 (b).
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o Took the 2014 value from the previous annual report’s table from the expected payments value within a
year.
o Future cash flow commitments came up to be $21.80m.
The closing balance of obligation of $13.95m will be added to capital asset and capital lease obligation at December
2014.
o Derived the opening portion as the present value of taking one more year to the calculation.
Calculated the depreciation ($1.65m) and interest expense ($1.11m) for 2014 year
Added with current expenses
For a detailed schedule of operating lease capitalization calculations, see Appendix D.1 - Lease Capitalization
Schedule
Adjustments – Operating Leases Balance Sheet Adjustments:
Capital Asset Dr. $ 13.95 Capital Lease Obligation Cr $ 13.95
Income Statements Adjustments:
Amortization =$16.53/ 10 yrs $ 1.65 Interest =$16.53*6.73% $ 1.11
Intangible Assets
Nature BC Gaming Operating Agreements- $81.4 M as of December 31, 2014
Nova Scotia Gaming Operating Agreement - $31.6 M as of December 31, 2014
Ontario Siteholder/ Lease Agreements - $106 M as of December 31, 2014
Other - $2.5 M as of December 31, 2014
Valuation The company has finite-lived intangible assets which consist mostly of various government agreements that are
gaming-related. Intangible assets are created mainly through acquisitions and are amortized over their useful lives,
ranging from 3 to 20 years, using the straight-line method.
The company uses judgement to estimate the useful life of the intangible asset, which is based on various pertinent
factors, including the expected use of the asset, contractual provisions that enable renewal or extension of the
asset’s life.
Impairment Intangible assets are assessed for impairment at the end of each reporting period for events or circumstances that
indicate that the carrying value may not be recoverable.
The recoverable amount is tested individually if possible or else a cash generating unit (CGU) is used to test the
intangible assets’ value.
The recoverable value is the higher of fair value less costs to sell and the value in use. The fair value is best
represented in an active market where the asset could be sold, if such market does not exist, the value assigned is
the amount the company could receive from an arm’s length transaction. The value in use method estimates the
net present value of the future cash flows expected to be generated by the CGU, discounted by an after-tax
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discount rate. The company does not disclose anything about the assumptions used for the CGU, which is a
concern.
An impairment loss is recorded when the carrying value of an asset (or CGU) exceeds its estimated recoverable
amount.
In cases where an impairment loss subsequently reverses, the carrying amount of the asset (or CGU) is increased
to its current recoverable amount, to the extent that the new carrying amount does not exceed the carrying
amount that would have existed had the original impairment loss not been recorded.
On March 29, 2012, OLG provided notice that the site holder agreements with the Company’s Ontario racetracks
would terminate on March 31, 2013. Georgian Downs’ site holder agreement was otherwise scheduled to expire in
November 2021 and Flamboro Downs’ site holder agreement was otherwise scheduled to expire in April 2016.
As a result of the early termination of the Georgian Downs site holder agreement, the company recorded
impairments of intangibles $8.2.
The Company also recorded impairment of intangible assets of $24.2 in connection with the Flamboro Downs site
holder agreement.
Reversals On March 26, 2013, the Company and the Government of Ontario signed non-bidding letters of intent governing
horse racing operations at the Ontario racetracks.
During the first quarter of 2013, as a result of signing the non-binding letters of intent with OLG, the anticipated
future execution of definitive agreements, and the settlement payment received from OLG on April 26, 2013, the
Company recorded reversals of impairments related to Georgian Downs’ and Flamboro Downs’ intangible assets.
For the Ontario Siteholder/Lease Agreements there is an impairment reversal at the beginning of the year 2013 of
$15.3 for both Georgian Downs and Flamboro Downs. For 2104, the impairment reversal of $4.2 is in relation
Flamboro Downs racetracks that were impaired in 2012.
In April 2014, as a result of signing the Standardbred Alliance agreement with five other Ontario racetrack
operators and the Ontario Racing Commission, the Company secured racing funding for its Georgian Downs and
Flamboro Downs racetracks for up to five years and is working with the Standardbred Alliance to realize racing
operating cost efficiencies. As a result, Flamboro Downs recorded a $4.2 intangible assets impairment reversal at
March 31, 2014.
Other There is very little information about the Other Intangible assets.
Since we do not have information about this section, we will leave this account untouched. Also the amount does
not seem to be too large to materially affect the financial statement
Adjustment The BC Gaming Operating Agreements should have a useful life of 20 years maximum; so depreciation for this
intangible asset needs to be increased.
$81.4/ (Amortization) = 20 years
Amortization = $4.3
Amortization this year was $2.6, therefore the adjustment that must be made is the following:
o Increase Depreciation by $1.7 (from 4.3-2.6)
o Decrease the carrying value on the balance sheet by the same amount.
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Current Original Cost December 31, 2013 Amortization Balance at December
31, 2014
The BC Gaming Operating
Agreements $84.1 $30.9 (2.6) $28.3
Adjustment (20 years
Amort) Original Cost December 31, 2013 Amortization
Balance at December
31, 2014
The BC Gaming Operating
Agreements $84.1 $30.9 (4.3) $26.6
See Appendix E for implied useful life calculations and reconciliations.
Goodwill
Nature Goodwill represents the excess of the purchase price of acquired businesses minus all the impairment incurred
within the time period. The current value of goodwill is $21.1 million in 2014 and $20.6 million in 2013, a $0.5
million increase related to foreign exchange movement from operations in Washington.
The $21.1 million goodwill includes two parts. One is for the change in goodwill due to foreign exchange
movements related to Washington operations in 2014, accounting for a $0.5 million increase. The other parts
relate to the already acquired operations from last few years including the food and beverage operations in View
Royal and Coquitlam, and operations at Dawson Creek and Maple Ridge, Fraser Downs, and Washington. They are
recorded to be $20.6 million in total.
Economic Asset Goodwill is not an economic asset because it cannot be isolated or sold and should be removed from balance sheet.
Measurement Goodwill is measured at cost, as the excess of the purchase price of acquired businesses over the estimated fair
value of the tangible and intangible net assets at the date acquired, and is allocated to the cash generating unit
expected to benefit from the acquisition. The smallest CGU for Great Canadian Gaming Corporation is not
mentioned in the note. After initial recognition, goodwill is measured at cost less any accumulated impairment
losses.
Amortization Goodwill is not amortized.
Impairment The Company tests for impairment of goodwill at least annually or more if there are indications that carrying value
may not be fully recoverable. For impairment testing, any excess of carrying value over recoverable amount will be
recorded as impairment. Recoverable amount is based on value in use method which estimates net present value of
cash flows expected to be generated by the CGU with a growth rate ranging from 0 to 2% and discount rate based
on weighted average cost of capital. All these assumptions are made based on company’s historical performance
and the judgments are reasonable. For Great Canadian Gaming Corporation, no impairment is recorded for the year
2014.
When a business is disposed of, any related goodwill will be included as gain or loss on disposal.
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Reconciliation: See Appendix F.1 – Reconciliation of Goodwill The ending balance of goodwill is $21.1 million at the end of 2014 and should be removed out of the balance sheet
as an adjustment. No new acquisitions are made in 2013 or 2014.
Deferred Tax Assets and Liabilities
Both deferred tax assets and deferred tax liabilities will be discussed in the following section
Nature, Deferred Tax Assets The company’s federal and provincial statutory income tax rate changed from 25.75% in 2013 to 26% in 2014.
o This was because the provincial tax rate in British Columbia increased by a full 1%.
Deferred tax assets presented on the statements of financial position increased from 8.8 in 2013 to 8.9 in 2014
GCGC recognized deferred tax assets of about 7.9 in 2014 and 8.7 in 2013.
o These deferred tax assets depend on future taxable profits in excess of those that arise from the reversal
of existing temporary taxable differences.
Deferred tax assets is comprised of the following:
o Non-capital loss carry-forwards of about $0.8 in 2014 and $0.1 in 2013.
This value is available to reduce future years’ income for tax purposes.
Management believes the company will generate taxable profits in excess of the loss carry-
forwards in each accompanying jurisdiction in which the loss carry-forward originated.
These losses have expiration dates between 2029 and 2034
o Capital loss carry-forwards of $11.8 in 2014 and $9.2 in 2013.
These losses can be carried forward indefinitely.
This value may be used to offset future years’ capital gains.
Management believes the company will generate future capital gains in excess of the loss carry-
forwards in each accompanying jurisdiction in which the loss carry-forward originated.
Unrecognized Deferred Tax Assets The company also has capital losses carried forward which have not been recognized.
This value includes $4.1 for 2014 and $5.8 for 2013.
These values may only be used in future years to offset future capital gains.
These capital losses have an indefinite life, with the exception of about $3.5 which expire in 2017.
Why are these assets not recognized? No details are provided. We assume the company does not expect these
respective assets to have appreciation potential – or maybe these are connected with assets that have been
impaired.
In our view, deferred tax assets do not represent an actual economic asset, so will be removed from the balance sheet
in the amount of $8.9.
Deferred Tax Liabilities
Accounting Policy (Note 2, section U)
GCGC's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the
end of the reporting period.
Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities on the
consolidated statements of financial position and the corresponding tax bases used in the computation of taxable
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income, plus the benefit of tax losses allowed to be carried forward to future years to the extent it is probable it will
be realized.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which
the liability is settled or the asset is realized.
Deferred tax assets and liabilities are offset when there is legally enforceable right to set off current tax assets
against current tax liabilities.
When deferred assets and liabilities are levied by the same taxation authority, the Company intends to settle on net
basis.
Composition (Note 2, section U; Note 18)
Deferred tax liabilities are generally recognized for all taxable temporary differences associated with investments in
subsidiaries and associates.
The Company's deferred tax liability is comprised of both tangible assets that include PPE, deferred partnership
income and debt refinancing transaction costs, and intangible assets.
Of the total $74.3 million deferred tax liabilities as of fiscal year 2014, $71.7 million are directly attributable to
temporary differences, it is assumed that the $2.6 million difference is a result of permanent difference.
Total deferred tax liabilities as a result of temporary differences increased by 6.3% from fiscal year 2013 to 2014
(2013 - $61.5 million; 2014 - $65.4 million). This increase is largely due to continuous capital investments by the
Company, and partially due to the overall statutory tax rate net increase of 0.25%.
Does Deferred Tax Liability represents an economic liability?
Nature
The Company has $74.3 of total deferred tax liabilities as of the end of fiscal 2014, which represents a 5.7% increase
from 2013 (after a tax rate net increase of 0.25%).
Economic Liability
We assume that because these tax liabilities do not represent actual balances owed, they do not represent an
actual economic liability.
Timing Differences
96% of total deferred tax liabilities arise as a result of temporary differences, and we assume the remaining 4% a
result of permanent differences.
The increase in tax liabilities account was mainly a result of increased capital investment, PPE in particular, thus we
are not concerned with earnings quality.
Effective Tax Rate
The effective tax rate for the fiscal year end of 2014 was 11% compared to 26% overall statutory rate; the effective
tax rate for 2013 was 11.7% and overall statutory rate 25.75%.
The YOY effective tax rate decrease appear to be reasonable as the total deferred tax liabilities went up.
The effective tax rate and statutory tax rate differ significantly largely because the Company is heavily committed in
capital assets where over 50% of Company assets are in PPE.
o The corollary is that the difference caused by straight-line depreciation for accounting purposes and
accelerated depreciated for tax purposes become very large.
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Special Note on Tax-Related Matters The CRA is currently auditing GCGC relating to its 2009 filing.
The CRA has taken the view that FDC should be included in taxable income for the company.
If this opinion holds, GCGC could be liable to pay tax on all FDC income for 2009 and subsequent years, in addition
to potential fines and interest fees.
There should be a provisional liability added to the balance sheet, although the magnitude of this amount is
uncertain.
It would be helpful if GCGC provided additional details relating to this matter. Even though they say they will
defend their position “vigorously”, it is difficult to estimate both the amount and probability and having to pay.
No adjustment will be made for these reasons.
Adjustments Neither deferred tax assets nor deferred tax liabilities represent actual amounts owing.
For this reason, these assets and liabilities will be removed from the balance sheet in the amount of $8.9 and $74.3
respectively.
Other Assets There is no notes disclosure on this item, but it has been relatively steady for the last two years.
No adjustment will be made for this line item, since the amount is relatively small and there is no legitimate proof
to remove it from the balance sheet.
Current Liabilities
Accounts Payable and Accrued Liabilities
Nature Account payables and accrued liabilities are obligations to pay for goods and services that have been acquired and
payments are due within one year. They are measured first at fair value and later at amortized cost.
Great Canadian Gaming Corporation does not disclose what are inside its Account Payable account. So no
adjustments can be made.
The company has a DSU liability of $nil in accounts payable and accrued liabilities in 2014.
Account payable and accrued liabilities are subject to foreign currency risk and any gains or losses go to OCI.
Accrued interest belongs to Accrued Liabilities. Interest on the Senior Unsecured Notes is payable semi-annually on
Jan 25 and July 25 of each year. However, on accounting basis, interest is recorded in December and June. So, this
policy difference causes an accrued interest and is considered into the Accrued Liability account.
Related Party Transactions Related party transactions mainly refer to human resources including salaries and short-term employee benefits
and share-based compensation among key management personnel. Account Payable due to related party
transactions amounts to $0.9 million in 2014 and $1.5 million in 2013 and will be written down for the adjustment.
Liquidity Risk Account Payable and accrued liabilities account for $60.3 million in 2014, 53.79% of total expected payments
within one year for the company. So, the short term one year liquidity risk is to a large degree dependent on
Account Payable and accrued liabilities.
Current Liabilities
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Days in Accounts Payable Days in Accounts Payable is calculated at Accounts Payable and accrued liabilities/Cost of Sales*365. Total Accounts
Payable and accrued liabilities is $60.3 million in 2014 and $67.9 million in 2013. Total expense is $341.8 million in
2014 and $320.3 in 2013. So, days payable as calculated is 64.4 in 2014 and 77.4 in 2013, a 16.78% decrease. This is
both due to an increase in expense and decrease in accounts payable.
Days Payable Pre-adjustment 2014 2013
(CAD$, in millions except for days)
Expenses 341.8 320.3
Accounts Payable and accrued liabilities 60.3 67.9
Days Payable 64.4 77.4
However, this calculation is misleading given that some operating expenses are not directly related to cost of sales.
Specifically, amortization, share-based compensation, restructuring costs, and reversal of impairment of long-lived
assets and impairment of goodwill are removed because they are not directly incurred while selling products.
Besides, expenses from non-operating activities including interest and financing costs and foreign exchange gain
should be excluded from cost of sales. Only human resources and property, marketing and administration expenses
are included as cost of sales. By adjusting expenses, days payable is 81.1 and 93.7 days in 2014 and 2013
respectively, a 13.4% decrease.
Meanwhile, related party transactions related to account payables are also deducted.
After adjusting for cost of sales, the company has a much longer payment time compared with its peers.
o Its adjusted days payable is 81.4 in 2014, compared to days payable of peers which averages 25.
o This is about 3 times longer than its other competitors, and we think this issue deserves greater attention.
Account Payable and days payable are both decreasing from 2013 to 2014 while total expenses before adjustment
as well as cost of sales increase at the same time. This indicates that the company is performing better, owing less
money and paying back sooner.
See Appendix G.1 – Adjustment to Days Payable
Seasonality Analysis Both quarterly expense and revenue are stable at about 25% of annual total, so there is no major seasonality for
Great Canadian Gaming Corporation. Therefore, no adjustment will be made.
o For detailed table, see Appendix G.2 – Accounts Payable Seasonality
Quarterly Account payables are also checked to see whether they are stable quarterly or bump up in one quarter
and drops down in others. It is found that payables are almost steady quarterly except that in quarter 2 and 4,
payables are a little bit higher than those in the rest two quarters. It is likely that more business will occur in
quarter 2 and 4.
o For detailed table, see Appendix G.2 – Accounts Payable Seasonality
For Reconciliations, see Appendix G.3 – Reconciliation of Accounts Payable and Accrued Liabilities
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Income Taxes Payable
The current income tax payable is based on taxable income for the year, thus it differs from accounting earnings
due to items of income or expense that are taxable or deductible or neither.
There is no note explaining the occurrence of $7.2 million income taxes payable this fiscal year 2014 while such
payable is nil for the last fiscal year.
A potential explanation is that the deadline for filing corporate tax return is usually in mid-June which differs from
its accounting fiscal year-end in December, therefore the payable has been calculated based on taxable income but
has not been paid yet.
Given its tax payable based on taxable income, it therefore represents a real liability; no adjustment is needed.
Other Liabilities
The current portion of the provisions, deferred credits, and other liabilities are provided in this line item.
See Deferred Credits, Provisions and Other Liabilities and Other Non-Current Liabilities:
Long Term Liabilities
Long-Term Debt
Use of Debt There does not seem to be an explanation as to where the long-term debt is being used
The objectives of long-term debt are to maintain a flexible capital structure that optimizes the cost of capital
The Company also mentions that some of proceeds from the issuance from the issuance of debt will be used for
“general corporate purposes”.
Debt composition As of December 31, 2014, the company has $442 ($441 in 2013) of long-term debt outstanding.
The company’s long-term debt facilities consist of Senior Unsecured Notes worth $450 and a Senior Secured
Revolving Credit Facility (“Revolver”) of $350.
The Company has $322 (350-28.0) of undrawn credit on its Revolving Credit Facility after deducting the outstanding
letters of credit of $28. The counterparties to this facility are major financial institutions with a minimum “A” credit
rating.
Long-term debt is denominated in Canadian dollars unless otherwise specified.
There are no financial covenants related to long term debt, but there are financial covenants related to the
Revolving Credit Facility. The financial which covenants are calculated quarterly on a trailing twelve month basis
are: Total Debt to Adjusted EBITDA ratio of 5.00 or less, Senior Secured Debt to Adjusted EBITDA ratio of 3.50 or
less, and Interest Coverage ratio of 2.25 or more.
As of December 31, 2014 the company does not have any convertible debt or redeemable preferred shares
outstanding.
Debt Repayment and Refinancing As of December 31, 2014, Senior Unsecured Notes are guaranteed by the company’s material restricted
subsidiaries.
Long – Term Liabilities
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Interest on the Senior Unsecured Notes is payable semi-annually in arrears on January 25 and July 25 of each year.
On July 24, 2012, the Company completed a long-term debt refinancing and issued $450 of 6.625% Senior
Unsecured Notes that are due on July 25, 2022 (10-year debt). The net proceeds were $439.5 after the transaction
costs of $10.5. The company amortized the transaction costs over a 10-year period using the effective interest
method, since every year there is a decrease in the amount that was taken off the long term debt. For example, the
unamortized transaction cost was $9.0 in 2013 and $8.0 in 2014.
Transaction costs of $10.5 associated with the issuance of the Senior Unsecured Notes were primarily related to
the underwriting fees, legal fees, and other expenses.
There were proceeds that the Company acquired from debt issuance. The proceeds ($439.5) were used by the
company for the repayment of the US$161.1 Senior Secured Term Loan B, repurchase or redemption of the
US$170.0 Senior Subordinated Notes, settlement of the derivative liabilities associated with the related cross-
currency interest rate and principal swaps, and the remainder ($108.4 – from $439.5 – ($161.1+$170)) was
retained for general corporate purposes.
Competitor companies hold a Long-term debt to Total Liabilities of around 47%.
Long-term debt accounts for around 70% of all liabilities, and the information on the account is not too explicit.
As an analyst, it is concerning to know that this amount of debt is held without providing appropriate disclosure on
its use.
See Appendix L.1 - Breakdown of Senior Unsecured Notes
Fair Value The company’s long-term debt instruments are Level 2 financial instruments as they are estimated based on
quoted prices that are observable for similar instruments or on the current rates offered to the Company for debt
of the same maturity.
As of December 31, 2014 the fair value of long-term debt instruments was $470.3 and a carrying value of $442.0
Operating Lease Capitalization As previously mentioned in the long-term assets section, operating leases held by the company were capitalized.
Reconciliation As per the balance sheet, we can see that long-term debt increased by $1; but this increase is due to the
amortization of the transaction costs. Therefore no new issuance of debt has actually occurred in 2014.
Capital Structure See Appendix N.3 – Ratio Analysis
Related Parties The Company does not have any long-term debt arrangements with any related parties.
Contingencies, Derivatives, Etc
Derivatives The Company does not have any derivatives in use for 2014. Although, they did have some derivative liabilities
associated with cross-currency interest rate and principal swaps in previous years.
Market Risk The risk that fair value or future cash flows of a financial instrument will fluctuate because of changes in interest
rates and/or foreign exchange rates.
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The accounts that could potentially be affected by changes in foreign currency rates are the following: Cash and
cash equivalents, Accounts receivable, and Account payable & accrued liabilities.
A change of 10% in the U.S. dollar either up or down, had no impact on the Accounts payable, and it has an impact
of $0.6 and $0.5 for cash and cash equivalents and Accounts payable & accrued liabilities respectively.
Liquidity Risk The risk that the Company will encounter difficulty in meeting obligations with its financial liabilities. The Company
manages its liquidity risk by monitoring its capital structure, monitoring forecast and actual cash flows, managing
the maturity profiles of financial assets and liabilities and maintaining a credit capacity with their Revolving Credit
Facility.
The company’s financial liabilities consist of Accounts payable & accrued liabilities ($60.3) and Long Term debt
issued in 2012 of $445. For the long-term debt payments occur semi-annually. Of a total of $668.4 Senior
Unsecured Notes, $29.8 (4.3% of total) is due within 1-year, $59.6 (8.65% of total) is due in 2-3 years, $59.6 (8.65%
of total) due in 4-5 years and the balance being extended past 5 years.
Accounts payable & accrued liabilities payment of $60.3 (100% of total) is all due within 1 year.
Total Financial obligations (including purchase commitments and operating leases) amount to $60.8 of which $13.1
(21.5% of total) is due within 1 year and $18.8 (30.9% of total) is due 2-3 years, $8.9 (14.6% of total) is due 4-5
years and the balance being extended more than 5 years.
The Company does have enough cash and cash equivalents ($334) in 2014 to successfully cover their financial
commitments and obligations when they are due.
See Appendix H.1 - Expected Payments by Period, Dec 31, 2014
Credit Risk The risk that a party to one of the Company’s financial instruments will cause a financial loss to the Company by
failing to discharge an obligation.
The accounts that have maximum credit risk exposure are: Cash in banks ($243), cash equivalents ($70.6) and
accounts receivable ($6.3).
Cash and cash equivalents’ credit risk is minimized substantially by ensuring that these financial assets are placed
primarily with major financial institutions that have a minimum grade “A” credit rating
Accounts receivable’s risk is minimized due to their nature. The majority of these receivable balances are due from
the federal government for sales tax rebates, provincial gaming corporations, racetrack operators and financial
institutions.
The company does not use any financial instruments to hedge against its credit risk exposure.
Contingencies Provision are accrued for liabilities with uncertain timing or amounts. If, in the opinion of management, it is both
likely that ta future event will confirm that a liability had been incurred at the date of the consolidated financial
statements of financial position and the amount can be reasonably estimated.
In cases where it is not possible to determine whether such liability has occurred, or to reasonably estimate the
amount of loss until the performance of some future event, no accrual is made until that time.
The Company does not record contingent assets.
The Company’s contingent future trailing payments are recurring Level 3 financial instruments as they require
management to make assumptions regarding the measurement of fair value using significant inputs that are not
based on observable market data.
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As of December 31, 2014, the fair value and carrying value of the Company’s contingent future trailing payments
was $3.5.
Letters of Credit As of December 31, 2014, letters of credit in the amount of $28.0 were outstanding as security in connection with
gaming cash floats, bonds with local municipality to secure commitments under construction permits and
provincial gaming corporation payables.
Commitments The Company has other contractual commitment that include the acquisition of property, plant and equipment of
$2.0, various service contracts of $13.6, and amounts committed to NSCPLCC to fun responsible gaming programs
over the remaining 10.5-year term of the AROC of $17.1.
Under the terms of the of the contract option extension with NSCPLCC, the Company has committed to make
capital investments totalling $10.0 in the Nova Scotia casino properties, subject to a Renovation Plan and Schedule
approved by NSCPLCC.
Other Contractual Commitments The value of $6.50m for 2014 was taken from the previous year’s annual report under the term “Within 1 year”.
The rate is taken as the Effective Annual Rate of the 6.625%.
After the calculation we have decided to increase the contractual commitment and the repayment by $33.03m.
Deferred Credits, Provisions and Other Liabilities
Deferred Credits
Nature: True Liability: an agreement with South Coast British Columbia Transportation Authority (“TransLink”) and
Canada Line Rapid Transit Inc. (“Canada Line”)
Agreement initiated in 2008
GCGC received unearned revenue of $21.7m to construct and maintain a 1,200 stall multi-level parking garage at Bridgeport Station
Benefits for GCGC: o Better convenience of car parking for their customers o More customers will come and hence a chance for higher revenue
Benefits for TransLink and Canada Line: o Better future parking services for their passengers o More people commuting as there is a better accessibility in parking o More people travelling to view and enjoy on the GCGC entity
TransLink provided land (FV : $17.2m; non-monetary transaction) and cash (FV: $4.5m; recorded in cash and cash equivalents) in 2008
Equivalent credit in Deferred Credits; amortized over 32 years on a straight-line method o 32 years sounds reasonable
Annual Amortization : ($17.2 + $4.5) / 32 years = $0.678m o This amortization amount is going to Other Liabilities in Current (Note 11)
Translink has the right to buy back the parking garage if: o repositioning of River Rock casino, or o GCGC failing to deliver suitable access to the parking stalls for the passengers of the Canada Line
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Provisions:
Nature
Liabilities to GCGC in which there is uncertainty in the amount or timing
Present obligation on account of past events
Probable (chance of occurring > 50%) that an expenditure will be needed to settle the obligation, and amount can be reliably estimated
Measured at present value of the expected expenditures required using a discount rate that reflects current market assessments
Increase is adjusted in “interest and financing costs, net”
Not recorded for future operating losses
Allocation
Provisions of 1.7m has been transferred to current liabilities and the overall balance in non-current fell from $3.8m to $3.6m in 2014
The expected payments from provisions in Note 26(b) seem to be stable and can be spread over a period of 11 years from 2015.
Income Tax Provisions: (Note 18 d) Company is against CRA’s rule that FDC be included in taxable income when received. The effect would speed up the timing of when company recognizes taxable income. Kept provision to defend the position in interest or penalties
Other Non-Current Liabilities:
Nature
Closing Balance of $6.1m in 2014 and $4.2m in 2013
Exposed to Liquidity and Market Risks (Interest Rate risk and Currency risk)
Including DSU and RSU liabilities totaling $5.3 in 2014 (2013 - $3.3) o Includes $0.9m related to the employee RSU incentive program. o Re-valued at each reporting period and when unit holder ends being a director
Adjustment of Related Party Transactions: Key management personnel liabilities of $4.7m in 2014 ($3.3m in 2013) need to be adjusted with the balance.
See Appendix H.1 - Expected Payments by Period, Dec 31, 2014, Appendix H.2 - Other Contractual Commitments, Appendix I.1 - Breakdown of Deferred Credits, Appendix I.2 – Reconciliation of Deferred Credits, Provisions and Other Liabilities
Shareholders’ Equity Analysis
Share Capital & Reserves: (Note 15)
Nature: Authorized shares: can issue unlimited number of common shares with no par value stated.
Listed on the Toronto Stock Exchange (“TSX”) under TSX symbol: “GC”
Common Shareholders:
Participate in electing the board of directors and vote on corporate policy
Take the last level of priorities in times of company liquidation and have rights to the assets
Shareholders’ Equity Analysis
24
o After bondholders, preferred shareholders and debtholders have been fully compensated
Assessment and Reconciliation: Book Value per share increased from $4.49 ($307.5m / 68,559,932) to $5.90 ($400.3m / 67,863,629)
$5.90 per share seems reasonable for analysis
Took the weighted average of common shares and the diluted net EPS of $1.12 was calculated in the Treasury Stock Method. The dilutive adjustment for stock options is 1.9 million shares which sounds justified. No anti-dilutive stock options.
Normal Course Bid: Company authorized for repurchasing up to 4,231,075 shares
In 2014 they purchased 800 common shares only at $14.02
This number of common shares is quite insignificant when compared historically
The consolidated statements of changes in equity highlight this information but the amount of $11,216 (800* $14.02) is very trivial in a table representing millions of dollars.
Strange for the company as in the previous year they bought back and cancelled 4.51m common shares outstanding at an amount of $17.7m. This reduced their retained earnings for 2013.
During this year, they made fewer share repurchase increasing the retained earnings drastically from $2m to $80m in a year. The entire increase was related to the net earnings for the year.
The common shares have increased in 2014 due to the exercise of incentive stock options of 1.48m common shares. This has been against the norm as historically they have repurchased more common shares than the exercise of options. (4.5m repurchased against 1.4m shares options exercised in 2013)
The company has neither invested much on their capital expenditures nor repurchased its common shares. Further information and reasoning is needed to figure out the primary reason for keeping excess cash in the business
Planned to purchase over 5 million common shares in the following year o 10% of common shares in public float
Reconciliation is provided in Appendix
Share Option Plan: (Note 15 b) The plans are provided to employees and non-employees of the company.
1.48 million Options were exercised in 2014 at a weighted-average exercise price of $7.62 leading to an increase of $11.3m in Share Captial (1.48m * $7.62)
Share Capital increased by $14.7m which was offset by Reserves of $3.4m
The exercising shares passed the vesting period and were issued at a lower exercise price of $7.62 when compared with the newly granted options’ exercise price of $13.64
Vesting period is 3 years and Options expire after 5 years according to company policy. Granted 1.493 million options in 2015 at exercise price of $20.12
See Appendix J.1- Calculation of Share option value and dilutive effect of options
Share-based Compensation:
Equity-Settled:
Company applies Fair Value method of accounting to price options using Black-Scholes option pricing model.
Assumptions of the expected life, current price, expected volatility, estimate of future dividends, risk-free rate, and expected forfeiture rate
Compensation expense for this employee share option awards is recognized annually, recorded in income statement and is based on the number of share options expected to vest during the year.
Payments are measured at fair value of goods and services received or of equity instrument granted, depending on the extent of fair value measured reliably
25
The equity-settled compensation was $2.4m (2013: $2.3m)
Cash-Settled:
Cost of this compensation takes in to account an estimated forfeiture rate based on historical employee retention.
In our calculation we have taken the ratio of options forfeited during the year by the number of options outstanding at the beginning of the year to be an estimate of the forfeiture rate.
When the actual rate will differ from the expected rate, the change will be reflected in compensation expense.
The Cash-settled compensation was $2.4m (2013: $2.6m), including $0.9m related to RSU incentive program. Total compensation expense came up to be $4.8m in 2014 (2013: $9.7m) in the income statement
Special Share-Based Award
In 2013 there is a cash-settled share-based compensation expense of $4.8m related to a specific group of employees. This is a related party item that needs to be adjusted.
Adjustment of Related Party Transactions: $2.6m in 2014 (2013: $5.6m) which needs to be deducted from $4.8m (2013:$9.7m)
Deferred Share Units (DSU): Compensation provided to non-employee directors of the company
No vesting period and re-measured annually and initial liability and subsequent changes recorded in ‘share-based compensation’ every year
Outstanding balance is reduced which seems reasonable as more DSU’s have been settled (79,000) than Issued (13,000) in 2014
Restricted Share Units (RSU): Granted to employees who have reached a determined target
Alternative form of a performance bonus. After granted, have a vesting period of 1-2 years
Liability is given on “share-based compensation” and “deferred credits, provisions, and other liabilities” and re-measured at each period.
Company has settled in cash and discontinued RSUs in May 2013.
DSU & RSU ASSESSMENT: Total liability of $5.3m is recorded in “deferred credits, provisions, and other liabilities” (2013: $3.3m).
Need to have more information to evaluate the findings of this amount.
DSU Liability is nil in current year (2013: $0.5m)
The employee RSU Incentive program started from this year for eligible employees to bypass a specified target for the previous year. The breakdown is given below.
Share Based Compensation
2014 2013
Equity-based 2.4 2.3
Cash-Based 2.4 2.6
Special Share-based Award - 4.8
Total in Cash Flow Statement $4.8 $9.7
26
Employee RSU Incentive Program (Effective Jan 1, 2014)
Expected Payments
Expected Date
Months to Maturity
Effective months in 2014
Pmt * (12 / Total period)
1 $ 1.30m Mar-16 27 12 $ 0.5 2 $ 1.30m Mar-17 39 12 $ 0.4
Amount that is included in share-based compensation expense & “Deffered Credits, provisions & other Liabilities” in 2014
$ 0.9
Employee Share Purchase Plan:
Eligible Employees can have a part of their gross pay to buy the shares in open market
By 2014, 757,795 shares are held by employees as 22% of them are involved in this plan
Further analysis can be done to decide whether to adjust this number of shares
For a breakdown of the stock option plan and a reconciliation of shares repurchased, see Appendix J.2 – Breakdown
of Stock Option Plan and Appendix J.3 – Reconciliation of Shares Repurchased
Revised Financial Statements
Revenues
Sources of Revenue Revenues for Great Canadian Gaming Corporation primarily come from gaming revenue and hospitality, lease and
other revenues, which account for 93.3% of the total revenue in 2014.
The other major revenue sources are revenue from facility development and commission and racetrack revenues.
Revenues increased by 9.6% from 2013 to 2014, with Revenues from gaming, hospitality and lease increasing by 12.26% and 1.41% for the rest.
Compared with other competitors, there is also an increase in revenue from 2013 to 2014 at about 5% on average, though lower than the increase seen in Great Canadian Gaming Corporation.
Revenue 2014 2013 2012
GameHost 83.7 77.6 76.6
change 8% 1% -
Churchill Downs 812.9 779.3 732.4
change 4% 6% -
PENN 2,590.5 2,918.8 2,899.5
change -11% 1% -
Revenue Recognition Policies Gaming revenue which mainly includes revenue from table games, slot machines, and bingo games is recorded
when earned, which seems reasonable. Reclassified revenue of $6.4 million is recorded as gaming revenue since a
site holder agreement has been terminated and replaced. The gaming revenue is net of gaming and other revenues
payable to BCLC, OLG and NSPLCC as well as gaming taxes payable to Washington State.
Revised Financial Statements
27
Racetrack revenue is also recorded when earned. This is the net revenue after deducting money returned as
winning wagers, provincial and federal taxes, and purses for wagering.
Hospitality, lease and other revenues are recorded when goods are delivered or services are performed. Lease
revenue also includes income from OLG for leasing the slot machine areas at Georgian Downs and Flamboro Downs
since April 1, 2013. No disclosure is made on what is included in the other revenues, so only with more information
can we decide on whether its recognition policy is reasonable.
All these revenue recognition policies are reasonable and reflect economic transactions. So no further adjustment
will be made.
Promotional allowances are recorded when incentives are furnished to guests without charge and are deducted
from gross revenues. This seems reasonable so no adjustments will be made.
Revenue 2014 2013
Gaming Revenue 308.4 274.2
Facility Development and Commission 37.7 34.1
Hospitality, lease and other revenues 108.4 103.2
Racetrack revenues 14.6 14.3
Gross Revenue 469.1 425.8
Promotional Allowances -22.6 -18.5
Gross Revenue net of Allowances 446.5 407.3
Seasonality of Total Revenue No seasonality is observed in revenue as quarterly revenue accounts for almost 25% in 2014.
No last minute inflows were noted.
No adjustments are necessary
Revenue Breakdown Canadian Great Gaming Corporation does not provide a full breakdown of Revenues into their individual
components. So no adjustments can be made.
Net vs. Gross Sales The company does not provide a breakdown of Gross/Net Revenues
No adjustments are needed
Adjustments for Acquisition and Additions The company made no acquisition during 2014
Foreign Exchange Rate Used As mentioned earlier in the Current Assets section, no related party transactions were disclosed. Therefore, no
adjustments will be made.
Related Party Transactions The company reports no significant related party transactions
28
No adjustment are to be made
Price Spikes The company does not indicate any significant price spikes in 2014
No adjustment are to be made
Barter Transactions The company does not indicate any barter transactions in 2014
No adjustment are to be made
Deferred Revenue No deferred revenue are recorded in 2014. There is an amount of $17.7 million non-current deferred revenue in
2014, but we do not recognize it as deferred revenue.
For detailed explanation of the reason, please refer to earlier section in Account Receivable.
Accounts Receivable Changes vs. Revenues No adjustments are to be made.
For a detailed discussion of Accounts Receivables, please refer to the earlier section in Account Receivable.
Government Financing and Assistance The company does not indicate any government grants/subsidies or financing in 2014
No adjustment are to be made
Investment and Interest Income The company has interest income of $2.5 million in 2014 and $1.7 million in 2013.
Finance Income is set apart from operating income and so no adjustments are needed to be made.
Expenses
Nature We considered Operating expenses to be the expenses that the Company has to incur in order to operate their
business. These include: Human Resources, Property, marketing and administration, Share-based compensation
and Restructuring & other.
For the year 2014, there are related party transactions for both human resources and shared-based compensation
of $2.3 and $2.6 respectively.
The total operating expenses (net of related party transactions) for 2014 is $ 267.1 which is a 2.57% increase from
2013 operating expenses (net of related party transactions) of $260.4
The Great Canadian Gaming Corporation does not present COGS or COS, so there is no gross profit line in the
original income statement.
PENN National Gaming Inc. does not break down the COS or COGS, but Churchill Downs and GameHost do break
down their COGS in their income statement, providing more transparency for shareholders
Interest and Financing Cost (net) Interest and financing costs are composed of interest and financing costs on long-term debt, bank charges, and net
of interest income. This is reasonable because both bank charges and interest costs are part of financing costs and
they stay stable over years.
Total net interest and financing costs decreased from $32.8 million to $31.6 million. Among all these costs, interest
and financing costs on long-term debt account for the main part and decreased by $0.1 million from 2013 to 2014.
29
Bank charges and others decreased from $0.8 million to $0.5 million and interest income increased from $1.7
million to $2.5 million. All these indicate that financing is decreasing for the company this year and it is earning a
higher interest income than before.
Gain on Foreign Exchange Gain or loss on foreign exchange is mainly attributed to the change in the value of cash and cash equivalents and
Account payable and accrued liabilities. The value for them goes up because they are USD denominated and when
the foreign exchange rate between USD and Canadian dollar appreciates, a gain on foreign exchange will be
recorded.
The amount for 2014 and 2013 was $2.4 million and $0.9 million respectively, a 166.7% increase. This huge change
is likely due to an increase in USD exchange rate. However, there are no disclosures on the detailed composition of
the gain and how much the exchange rate has gone, so no adjustments are made on it.
Reversal of impairment of long-lived assets and impairment of goodwill (net) Reversals mainly come from reversal of impairment of PPE, intangible assets and goodwill. As the company is
working with Standardbred Alliance to realize its cost efficiency since April 2014, one of its racetracks, Flambro
Downs recorded a $5.2 million long-lived asset impairment reversal in 2014 in which PPE accounts for $1 million
and intangible assets account for $4.2 million. In 2013, reversal of impairment of PPE was $13.2 million and that for
intangible assets was $15.3 million. No reversal of impairment is recorded for goodwill.
Impairment loss for PPE is $0.4 million, and that for goodwill is $0.1million in 2014. No impairment loss is recorded
for the year 2013.
So the net amount of reversal of impairment is $4.7 million in 2014 and 28.5 in 2013.
See Appendix K.1 – Impairment Reversal Calculations
Restructuring and other Restructuring cost includes severance expense, business development, acquisition-related contingent future
trailing payments, and others. The amount in 2014 is $0.8 million and $2 million in 2013. The decrease is mainly
due to a reduction in severance expense and acquisition related contingent future trailing payments.
All these expenses are necessary and normal for business operations; therefore no adjustments need to be made.
No disclosures are made on the composition of “Other” costs so that no adjustments can be made until we know
more about it.
Human Resources Human resources contains salaries and other short-term employee benefits.
The amount allocated to Human resources seems relatively steady year-over-year, with a slight decrease of $0.1
The Human resources line item accounts for around 62% of total operating expenses, which makes since this
company relies mostly on personnel to run their company operations.
Property, Marketing and administration There is barely any disclosure for this section by the company, except for some disclosure related to marketing
expense. This line item accounts for 38% percent of total operating expenses, which causes concerns since there is
no breakdown for the allocation of each of these costs.
The Company contributes 0.6% of the gross gaming revenues in three of its BC casinos and its two BC racing
properties to BCLC as contributions towards marketing programs. BCLC uses the contributions to fund various BCLC
30
marketing programs. The Company records its contributions when incurred as property, marketing and
administration expenses.
The total amount disclosed is around $2.7 (from 0.6% *$446.5) for marketing, which means that the allocation of
the remaining $98.9 is unknown.
Amortization Amortizations are the amortized annual costs from current PP&E, intangible assets, and operating leases.
o We must add $1.65 for operating leases, $1.7 for intangibles, and $11.3 for additional PPE depreciation.
o This gives a total of $14.65 to add to the current period depreciation, for a total of $60.0
The potential issues are with amortization compared to estimated useful lives of assets. There were some
adjustments made from the previous analysis.
Share-based Compensation
The Company has equity-settled and cash-settled share-based compensation plans
For the equity-settled share based compensation portion, the Company applies the fair value method of
accounting for share option awards using the Black Scholes option pricing model. Using this method, the
Company recognizes compensation expense for employee share option awards, based on the grant date fair
value, over the vesting period of the option.
For the cash-settled share-based compensation portion, the Company provides Deferred Share Units (DSUs)
and Restricted Share Units (RSUs). For DSUs the initial liability and subsequent charges are recorded as “share-
based compensation”, for the RSUs the liability which is based on the number of RSUs expected to vest, is
recorded as “share-based compensation” on the statement of earnings and is re-measured at each reporting
period based on the value of the underlying common shares until the redemption date.
There was a decrease for this line item from $9.7 in 2013 to $4.8 in 2014, this could be due to the fact that the
Company discontinued the RSUs granted to directors and settled all RSUs in May 2013
The Company also had related party transactions that included both equity and cash-settled share-based
compensation of $2.6 and $5.6 in 2014 and 2013 respectively.
See Appendix N.1 – Adjusted Statement of Financial Position and Appendix N.2 – Adjusted Statement of
Consolidated Earnings
31
Appendix
Appendix A.1: Reconciliation of Cash and Cash Equivalents
Opening $192.60
Change in Cash from Operating Activities 163.1
Change in Cash from Investing Activities -12
Change in Cash from Financing Activities -20.9
Foreign Exchange effect 1.6
Closing 324.4
Appendix B.1 – Adjusted Days Receivable
Days Receivable Adjusted (CAD, in $MM except for days)
2014 2013
Revenue 446.5 407.3
Revenue from related party 0 0
Deferred revenue 0 0
Adjusted Revenue 446.5 407.3
Account Receivables 6.3 7.2
Allowance for Doubtful Account 0.8 0.6
Adjusted Account Receivables 7.1 7.8
Days Receivable 5.8 7.0
Appendix B.2 – Receivables Seasonality
Seasonality Adjustment
(CAD$,in mns except for day)2014 2013
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Revenue 103.8 114.7 112.3 115.7 100.5 102.1 102.1 102.6
% of Total 23% 26% 25% 26% 25% 25% 25% 25%
Account Receivable 8.7 6.6 6.5 6.3 7 5.4 6.4 7.2
% of Total 31% 23% 23% 22% 27% 21% 25% 28%
days receivable 30.6 21.0 21.1 19.9 25.4 19.3 22.9 25.6
32
Appendix B.3 – Accounts Receivable Reconciliation The negative $0.7 million difference from reconciliation is likely due to foreign exchange because Great Canadian
Gaming Corporation operates in different countries including US and Canada, or from acquisitions.
Reconciliation - Accounts Receivable (CAD$,in millions)
Opening Balance 7.2
Change in non-cash WC -0.2
Irreconcilable difference -0.7
Closing Balance 6.3
Appendix C.2 - Reconciliation of Carrying Value
Reconciliation of PPE, Net Book Value
Land
Buildings and Building
Improvements Leasehold
Improvements Equipment
Properties Under
Development Total
Carrying Value, Jan 1, 2014 71.4 478.7 24.8 17.8 3.6 596.3
Additions (0.2) 0.1 0.1 3.0 8.1 11.1
Disposals 0.0 0.0 0.0 (0.4) 0.0 (0.4)
Reclassifications 0.0 1.0 1.0 1.3 (3.3) 0.0
Translation and Other 0.2 1.0 0.4 0.5 0.0 2.1
Amortization 0.0 (24.4) (2.8) (7.9) 0.0 (35.1)
Disposals 0.0 0.0 0.0 0.4 0.0 0.4
Impairment reversals 0.0 0.9 0.0 0.1 0.0 1.0
Impairment 0.0 0.0 (0.2) (0.2) 0.0 (0.4)
Translation and other 0.0 (0.3) (0.2) (0.5) 0.0 (1.0)
Carrying Value, Dec 31, 2014 71.4 457.0 23.1 14.1 8.4 574.0
Appendix C.1 - Implied Useful Life Calculations Implied Useful Life Calculation
Land
Buildings and Building
Improvements Leasehold
Improvements Equipment
Properties Under
Development Total
Cost of Asset 82.6 673.2 82.6 117.8 0.0 963.2
Plus any Subsidies 0.0 31.5 0.0 0.0 0.0 31.5
Total Cost of Asset 82.6 704.7 82.6 117.8 0.0 994.7
Depreciation Expense 0.0 (24.4) (2.8) (7.9) 0.0 (35.1)
Useful Life (cost/depr'n expense) N/A 28.9 Years 29.5 Years 14.9 Years N/A 28.3
Years
33
Stated Useful Life
Buildings Lesser of useful life or 40 years
Building Improvements Lesser of useful life or 5 years
Equipment 1 to 5 years
Leasehold Improvements Lesser of useful life or lease term, including renewal term
Appendix D.1 - Lease Capitalization Schedule Fair Value $450 m Periods: 2 (Semi-Annual)
I/Y 6.625% Int. Rate = (1+(6.625%/2))^2-1 = 6.735%
EAR
Operating Leases Closing Opening
Expected Payments Yrs Int. rate PV Yrs Int. rate PV
2014 $ 3.70 1 1.06735 3.47
2015 $ 3.90 1 1.06735 3.65 2 1.13923 3.42
2016 $ 2.35 2 1.13923 2.06 3 1.21595 1.93
2017 $ 2.35 3 1.21595 1.93 4 1.29785 1.81
2018 $ 1.65 4 1.29785 1.27 5 1.38525 1.19
2019 $ 1.65 5 1.38525 1.19 6 1.47854 1.12
2020 $ 1.65 6 1.47854 1.12 7 1.57812 1.05
2021 $ 1.65 7 1.57812 1.05 8 1.68440 0.98
2022 $ 1.65 8 1.68440 0.98 9 1.79784 0.92
2023 $ 1.25 9 1.79784 0.70 10 1.91892 0.65
Total $ 21.80 $ 13.95 $ 16.53
Appendix E.1 – Implied Useful Life Calculation
Intangible Asset Useful life Original Cost/Amortization Adjustment
BC Gaming operating
Agreements 3-20 years 81.4/2.6 = 31.3 years
Depreciation for this asset is not high
enough. It will be depreciated at a higher
rate to bring useful life to 20 years.
Nova Scotia Gaming
operating
Agreements
3-20 years 34.6/2 = 17.3 years This useful life falls in the range.
Ontario Siteholder/
Lease Agreement 3-20 years 106/5.4 = 19.6 years This useful life falls in the range.
Other 3-20 years 2.5/0.2 = 12.5 years The useful life falls in the range, but there is
no disclosure about this asset
34
Appendix E.2 – Intangible Reconciliations
Intangible Amortization Reconciliation
Opening 148.7 Comments
Amortization
BC Gaming Agreements 2.6
Nova Scotia Agreement 2
Ontario Siteholder 1.2 From (5.4 amort. – 4.2 reversal)
Other 0.2
Closing 154.7
Intangible Reconciliation Total
Original Cost $ 224.5
Balance December 31, 2013 (148.7)
Amortization (10.2)
Impairment Reversal 4.2
Carrying Amount (Dec. 31, 2014) $ 69.8
Intangible Cost Reconciliation
Cost has remained constant for the past 3 years at least, so there is no need for a reconciliation
Appendix F.1 – Reconciliation of Goodwill The ending balance of goodwill is $21.1 million at the end of 2014 and should be removed out of the balance sheet
for adjustment. No new acquisitions are made in 2013 or 2014.
Goodwill (CAD, in millions) 2014
Beginning 20.6
Foreign Exchange Movement 0.6
Acquisition 0
impairments -0.1
Closing 21.1
35
Appendix G.1 – Adjustment to Days Payable Days Payable Adjusted 2014 2013
(CAD$,in millions except for days)
Expenses 341.8 320.3
-Amortization -45.3 -48.5
-Share-based compensation -4.8 -9.7
-Reversal of impairment of long term assets 4.7 28.5
-Foreign exchange gain and other 2.4 0.9
-Restructuring and
other -0.8 -2
-Interest and financing cost -31.6 -32.8
Adjusted Cost of Sales 266.4 256.7
Account Payables and accrued liabilities 60.3 67.9
Related party transaction -0.9 -1.5
Ajusted Account Payable and accrued liabilities 59.4 66.4
Days Payable 81.4 94.4
Compared with peers, the company has a much longer payment time. Days payable is almost 3 times longer than
its other competitors and is worth the attention.
Days Payable (peers) 2014 2013 2012
GameHost 31.4 41.3 36.6
Churchill Downs 36.6 41.5 47.6
PENN 6 2 6
Average 24.66667 28.26667 30.06667
36
Accounts Payable and days payable are both decreasing in 2014 while total expenses before adjustment increase at
the same time. This indicates that the company is performing better, owing less money and paying back sooner.
(CAD$,in millions) 2014 2013 2012 2011
Expense 266.4 256.7 261.1 249.3
change 4% -2% 5% -
Account Payable and accrued liabilities 60.3 67.9 60.4 59
change -11% 12% 2% -
Appendix G.2 – Accounts Payable Seasonality Seasonality Adjustment 2014
(CAD$, in millions) Q1 Q2 Q3 Q4
Revenue 103.8 114.7 112.3 115.7
% of total 23% 26% 25% 26%
Adj Expense(Cost of Sales) 65.7 65.2 66.8 68.7
% of total 25% 24% 25% 26%
2014 2013
(CAD$, in millions) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Account Payable and accrued liabilities 54.3 55 50 60.3 55 65.6 51.7 67.9
% of total 25% 25% 23% 27% 23% 27% 22% 28%
Appendix G.3 – Reconciliation of Accounts Payable and Accrued Liabilities Reconcilliation-Account Payable and
accrued liabilities (CAD$, In millions)
Opening Balance 67.9
Change in non-cash WC -3.7
Irreconcilable difference -3.9
Closing Balance 60.3
37
Appendix H.1 - Expected Payments by Period, Dec 31, 2014
Appendix H.2 - Other Contractual Commitments Other Contractual Commitments Details Amount $ Expected Time Amount $
Acquisition of PPE 4.7% $ 2.00 Within 1 Yr 21.55% $ 9.20 Service Contracts 31.9% $ 13.60 2-3 Years 33.02% $ 14.10 Amounts to NSPLCC 40.0% $ 17.10 4-5 Years 13.11% $ 5.60 Capital Investments 23.4% $ 10.00 > 5 Yrs 32.32% $ 13.80
Total $ 42.70 Total $ 42.70
Rate of Senior Unsecured Notes: Fair Value $450 m Period: 2 (Semi-Annual)
I/Y 6.625% Int. Rate = (1+(6.625%/2))^2-1 = 6.735%
EAR
Operating Leases Closing Opening
Expected Payments Years Int. rate PV Years Int. rate PV
2014 $ 6.50 1 1.06735 6.09
2015 $ 9.20 1 1.06735 8.62 2 1.13923 8.08
2016 $ 7.05 2 1.13923 6.19 3 1.21595 5.80
2017 $ 7.05 3 1.21595 5.80 4 1.29785 5.43
2018 $ 2.80 4 1.29785 2.16 5 1.38525 2.02
2019 $ 2.80 5 1.38525 2.02 6 1.47854 1.89
2020 $ 2.80 6 1.47854 1.89 7 1.57812 1.77
2021 $ 2.80 7 1.57812 1.77 8 1.68440 1.66
2022 $ 2.80 8 1.68440 1.66 9 1.79784 1.56
2023 $ 2.80 9 1.79784 1.56 10 1.91892 1.46
2024 $ 2.60 10 1.91892 1.35 11 2.04816 1.27
Total $ 49.20 $ 33.03 $ 37.03 Balance Sheet Adjustments:
Contractual Commitment Asset $ 33.03 Contractual Commitment Liability $ 33.03
Expected Payments by period as of December 31, 2014
Within 1
year 2-3 years 4-5 years
More than
5 years Total
Accounts Payable and Accrued Liabilities 60.3 0 0 0 60.3
Income Taxes Payable 7.2 0 0 0 7.2
Senior Unsercured Notes 29.8 59.6 59.6 539.4 688.4
Provisions 1.7 0.9 2.1 6 10.7
Operating Leases 3.9 4.7 3.3 6.2 18.1
Other Contractual Agreements 9.2 14.1 5.6 13.8 42.7
Total 112.1 79.3 70.6 565.4 827.4
38
Appendix I.1 - Breakdown of Deferred Credits
Fair Value
Land $ 17.20 Dr. Deferred Credits $ 21.70 Cr. Cash $ 4.50 Dr. Years 32
Amortization $ 0.678
Carrying Amount
2008 2009 2010 2011 2012 2013 2014
$ 21.70 $ 21.02 $ 20.34 $ 19.67 $ 18.99 $ 18.31 $ 17.63
NBV t = NBV t-1 - Amortization
Accumulated Amortization
$ 0.68 $ 1.36 $ 2.03 $ 2.71 $ 3.39 $ 4.07
Appendix I.2 – Reconciliation of Deferred Credits, Provisions and Other Liabilities
Reconciliation of Deferred Credits, Provisions and Other Liabilities
Deferred Credits Provisions Other
Liabilities 2013 Balance $18.4 $3.8 $4.2 Transfer to Current Liabilities ($0.7) ($1.7) ($0.2) Unreconciled Balance - $1.5 $2.1 2014 Balance $17.7 $3.6 $6.1
The un-reconciled balance is due to the other provisions and liabilities involved regarding the cash-settled share-based compensation, other contingencies, provisions for senior unsecured notes and revolving credit facility, intangible assets.
39
Appendix J.1- Calculation of Share option value and dilutive effect of options
Share Option Value from BS option pricing model (Dec 31st 2014)
Option type: 1=call, -1=put
Call options 1
Stock price weighted average price $ 19.14
Strike price From Options Granted $ 13.64
Expected Lives: Assumptions from Note 15(b): All
of the assumptions are reasonable and fairly addressed
3.50
Risk-free rate: 1.30%
Dividend yield: 0.00%
Volatility: 23.30%
Options Granted in 2014 Note 15 (b) 1,511,000
Vesting period (yrs): Company Policy 3
Rate of forfeiture (f): Avg. of 2013-14
Avg. (forfeited/ beg. options bal) 1.64%
Black-Scholes Option Pricing Model Value
d1 1.10
d2 0.664
N(d1) 0.864
N(d2) 0.747
BS Value per option $ 6.81
No. of Options Expected Options * {(1-f)^vesting period} 1,438,071
Fair Value of Options Granted
Options Expected * BS Value $ 9,795,533
Compensation Exp. Increase Adjustment: FV of Options
granted by vesting period
$ 3,265,178
Contributed Surplus Increase
$ 3,265,178
{Adj. amount will be expensed over vesting period (2014-16) along with new options granted}
Options settled in Equity: Increase in Contributed Surplus
Options settled in Cash: Increase in Liability
40
Dilutive Effect of Options in 2014
New Strike price from Options Exercisable $ 8.07
Options Outstanding Note 15 (b) 4,123,000
Black-Scholes Option Pricing Model Value
d1 2.3035686
d2 1.8676655
N(d1) 0.9893766
N(d2) 0.9690956
BS Value per option $ 11.464
Fair Value of Options Out. Options Out. * BS Value $ 47,265,779
No. of Shares in 2014 Basic weighted average 67,863,629
No. of Options / No. of Shares
6.08%
Market Capitalization No. of Shares * Stock Price $ 1,298,909,859
Dilutive Share Price (Mkt Cap - FV of Options) / #
Shares $ 18.44
Dilutive Effect per share Share Price - Diluted Price $ 0.70
Appendix J.2 – Breakdown of Stock Option Plan
Number (000's)
Weighted Avg. Price
Percentage Number (000's)
Weighted Avg. Price
Percentage
2014 2013
Total outstanding shares at yr end 67,864 $ 19.14 68,560 $ 11.75
Stock options outstanding, beg. 4,155 $ 8.02 4,493 $ 7.08
Granted 1,511 $ 13.64 36.65% 1,432 $ 9.11 34.46%
Exercised (1,482) $ 7.62 -35.94% (1,409) $ 5.00 -33.91%
Forfeited (61) $ 12.14 -1.48% (81) $ 8.68 -1.95%
Expired - $ - (280) $ 13.40
Stock options outstanding, end 4,123 $ 10.17 4,155 $ 8.02
Exercisable, end of year 2,217 $ 8.07 53.77% 2,854 $ 7.72 68.69%
41
Appendix J.3 – Reconciliation of Shares Repurchased Reconciliation of Shares Repurchased
2014 2013
Number of shares repurchased 800 4,511,644
Weighted-average price per share $ 14.02 $ 10.32
Total CAD paid (Changes in Equity) $ 11,216 $ 46,560,166
Book Value Per Share $ 5.90 $ 4.49
Less total book value per share $ 4,719 $ 20,235,296
Irreconcilable portion $ - $ 2,575,130
Portion charged to retained earnings $ 6,497 $ 28,900,000
Source: GCGC Annual Report 2014
Appendix K.1 – Impairment Reversal Calculations Reversal of impairment of long-lived assets and
impairment of goodwill,(Net) 2014 2013
Reversal of impairment of PPE 1 13.2
Reversal of impairment of Intangible 4.2 15.3
Reversal of impairment of goodwill 0 0
Gross Reversal of impairment 5.2 28.5
Impairment of PPE -0.4 0
Impairment of intangible 0 0
Impairment of goodwill -0.1 0
Net Reversal of impairment 4.7 28.5
Appendix L.1 - Breakdown of Senior Unsecured Notes
Breakdown of Senior Unsecured Notes
Face Value $ 450.0 Transaction Costs $ (10.5) Repayment of Term Loan B $ (161.1) Repurchase of Subordinated Notes $ (170.0)
For Settlement of derivative liab. & general corp. purpose $ 108.4
Face Value 450 Start 24-Jul-12 Interest Rate 6.63% End 25-Jul-22 Period 2 Years 10
PMTs/period =PMT(ir/2,n*2,-PV,FV,0) $14.91
42
Periods Month-Yr Payments PV Carrying Amount
0 Jul-2012 $ - $ - $ 439.5
1 Jan-2013 $14.91 $ 14.43
2 Jul-2013 $14.91 $ 13.97 $ 441
3 Jan-2014 $14.91 $ 13.52
4 Jul-2014 $14.91 $ 13.08 $ 442
5 Jan-2015 $14.91 $ 12.66
6 Jul-2015 $14.91 $ 12.26 $ 443
7 Jan-2016 $14.91 $ 11.87
8 Jul-2016 $14.91 $ 11.49 $ 444
9 Jan-2017 $14.91 $ 11.12
10 Jul-2017 $14.91 $ 10.76 $ 445
11 Jan-2018 $14.91 $ 10.42
12 Jul-2018 $14.91 $ 10.08 $ 446
13 Jan-2019 $14.91 $ 9.76
14 Jul-2019 $14.91 $ 9.45 $ 447
15 Jan-2020 $14.91 $ 9.14
16 Jul-2020 $14.91 $ 8.85 $ 448
17 Jan-2021 $14.91 $ 8.57
18 Jul-2021 $14.91 $ 8.29 $ 449
19 Jan-2022 $14.91 $ 8.03
20 Jul-2022 $464.91 $ 242.27 $ 450
Appendix M.1 - Reconciliation of Non-Cash Working Capital
Reconciliation of Non-Cash Working Capital
2014 2013
Accounts Receivable 0.2 1.5
Prepaid expenses, deposits and other 0.6 -1.9
Accounts payable and accrued liabilities -3.7 3.7
-2.9 3.3
43
Appendix N.1 – Adjusted Statement of Financial Position
2014 Adjustment Revised
Cash and cash equivalents 324.4 (45.7) 278.8
Accounts Receivable 6.3 0.0 6.3
Income taxes Receivable 0.0 0.0 0.0
Prepaids, Deposits, and Other Assets 7.4 0.0 7.4
338.1 (45.7) 292.5
Property and equipment 574.0 (11.3) 562.7
Capital asset (finance lease) 0.0 14.0 14.0
Intangible assets 69.8 (1.7) 68.1
Contractual Commitment Asset 0.0 33.0 33.0
Goodwill 21.1 (21.1) 0.0
Deferred Tax Assets 8.9 (8.9) 0.0
Other Assets 2.2 0.0 2.2
1,014.1 (41.7) 972.4
Accounts payable and accrued liabilities 60.3 (0.9) 59.4
Income Taxes Payable 7.2 0.0 7.2
Other Liabilities 2.6 0.0 2.6
70.1 (0.9) 69.2
Long-term debt 442.0 28.3 470.3
Deferred Credits, Provistions and Other Liabilities 27.4 (4.7) 22.7
Deferred tax liability 74.3 (74.3) 0.0
Contractual Commitment Liability 0.0 33.0 33.0
Capital Lease Obligation 0.0 14.0 14.0
613.8 (4.6) 609.2
Share Capital and Reserves 318.8 0.0 318.8
Accumulated and OCI 1.1 0.0 1.1
Contributed Surplus 0.0 2.0 2.0
Retained Earnings 80.4 (39.0) 41.4
400.3 (37.1) 363.2
1,014.1 (41.7) 972.4
Consolidated Statement of Financial Position at At December 31, 2014
(Stated in $MM CAD)
Assets
Current assets:
Non-current assets:
Total liabilities and shareholders' equity
Total assets
Liabilities and shareholders' equity
Current liabilities:
Non-current liabilities:
Total liabilities
Shareholder's equity:
Total shareholders' equity
44
Appendix N.2 – Adjusted Statement of Consolidated Earnings
Revenue
Gaming Revenue
Facility Development and Commission
Hospitality, lease and other revenues
Racetrack revenues
Gross Revenue
Promotional Allowance
Gross Revenue net of Allowances
Operating Expense
Human resources
Property, marketing, and administrationCash Settled Share-Based Compensation
Equity Settled Share-Based Compensation
Restructuring and other
Earning from operations
Non-Operating Expense
Operating Leases Amortization
Additional PPE amotization
Intangible Depreciation
Reversal of impairment of long-lived assets and impairment of goodwill, net
Interest expense on capital leases
Interest and financing costs on long-term debt
Bank charges and other
Interest income
Foreign exchange gain and other
Income taxes
Basic
Diluted
Number of shares outstanding
Number of diluted shares outstanding
Net earnings 78.4 (14.1) 64.3
Earnings before income taxes 104.7 (14.1) 90.6
0.0
0.0
0.0
26.3 0.0 26.3
101.6 0.0
14.6 0.0 14.6
469.1 0.0 469.1
(22.6) 0.0
10.2 1.7 11.9
1.2 0.9
1.1 0.9
67,863,629
69,788,529
174.5 1.6 176.1
0.0 1.7 1.7
(4.7) 0.0 (4.7)
0.0
0.5
Adjusted Consolidated Statement of Earnings, For the year ended December 31
37.7 0.0 37.7
108.4 0.0 108.4
Earnings per share:
446.5 0.0 446.5
164.8 (2.3) 162.5
(2.5)
(2.4)
0.5
(2.5)
(2.4)
(22.6)
(Stated in $MM CAD)
308.4$
2014 Adjustment Revised
-$ 308.4$
33.6 0.0 33.6
11.335.1 46.4
101.6
0.8 0.0 0.8
2.4 2.0 4.4
1.1 1.1
2.4 (1.3) 1.1
45
Appendix N.3 – Ratio Analysis
Ratio Analysis:
Great Canadian Gaming
CorporationGameHost Churchill Downs
PENN National
Gaming Inc.
2014 Revised 2013 2014 2013 2014 2013 2014 2013
Current Ratio 4.82 4.23 3.00 0.60 0.64 0.72 0.75 0.89 1.41
LT Debt/Equity Ratio 1.10 1.31 1.43 0.11 0.15 1.08 0.52 2.22 1.35
Leverage Ratio (Assets/Equity) 2.53 2.71 2.98 1.49 1.50 3.37 1.92 4.03 2.88
Net Debt to EBITDA 1.08 1.52 2.30 0.56 0.69 4.34 2.15 0.35 0.19
Net Profit Margin 17.6% 13.3% 15.5% 28.6% 27.7% 5.7% 7.0% -9.0% -27.2%
ROE (Net Income/Equity) 19.6% 16.6% 20.5% 20.4% 18.3% 6.6% 7.8% -42.1% -104.7%