SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-24206
PENN NATIONAL GAMING, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania |
|
23-2234473 |
(State or other jurisdiction of |
|
(I.R.S. Employer |
825 Berkshire Blvd., Suite 200
Wyomissing, PA 19610
(Address of principal executive offices)
610-373-2400
(Registrants telephone number including area code:)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o
Indicate the number of shares outstanding of each of the registrants classes of common stock, as of the latest practicable date.
Title |
|
Outstanding as of August 8, 2003 |
Common Stock, par value $.01 per share |
|
39,565,534 Shares |
This report contains information that are not statements of historical fact, but merely reflect our intent, belief or expectations regarding the anticipated effect of events, circumstances and trends. Such statements should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although we believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, there can be no assurance that actual results will not differ materially from our expectations. Meaningful factors which could cause actual results to differ from expectations include, but are not limited to, risks related to the following: successful completion of capital projects; the activities of our competitors; the existence of attractive acquisition candidates; our ability to maintain regulatory approvals for our existing businesses and to receive regulatory approvals for our new businesses; the passage of state or federal legislation that would expand, restrict, further tax or prevent gaming operations in the jurisdictions in which we operate; our dependence on key personnel; our inability to realize the benefits of the integration of Hollywood Casino Corporation or any other acquired entity; the maintenance of agreements with our horsemen and pari-mutuel clerks; adverse business and economic conditions; the impact of terrorism and other international hostilities and other factors as discussed in our other filings with the United States Securities and Exchange Commission. We do not intend to update publicly any forward-looking statements except as required by law.
2
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
INDEX
3
Penn
National Gaming, Inc. and Subsidiaries
Consolidated Balance Sheet
(In thousands, except share and per share data)
|
|
December 31, |
|
June 30, |
|
||
|
|
|
|
(unaudited) |
|
||
Assets |
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
55,121 |
|
$ |
94,198 |
|
Receivables |
|
19,418 |
|
27,604 |
|
||
Prepaid income taxes |
|
6,415 |
|
|
|
||
Prepaid expenses and other current assets |
|
9,080 |
|
29,467 |
|
||
Deferred income taxes |
|
4,405 |
|
28,408 |
|
||
Total current assets |
|
94,439 |
|
179,677 |
|
||
|
|
|
|
|
|
||
Net property and equipment, at cost |
|
450,886 |
|
752,156 |
|
||
|
|
|
|
|
|
||
Other assets: |
|
|
|
|
|
||
Investment in and advances to unconsolidated affiliate |
|
16,152 |
|
16,667 |
|
||
Note receivable |
|
|
|
1,000 |
|
||
Excess of cost over fair market value of net assets acquired |
|
160,506 |
|
628,333 |
|
||
Management service contract (net of amortization of $4,206 and $5,461, respectively) |
|
21,539 |
|
20,283 |
|
||
Deferred financing costs, net |
|
10,463 |
|
30,411 |
|
||
Miscellaneous |
|
11,495 |
|
10,840 |
|
||
Total other assets |
|
220,155 |
|
707,534 |
|
||
|
|
$ |
765,480 |
|
$ |
1,639,367 |
|
Liabilities and Shareholders Equity |
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
||
Current maturities of long-term debt |
|
$ |
18 |
|
$ |
15,994 |
|
Accounts payable |
|
19,450 |
|
33,596 |
|
||
Accrued Liabilities: |
|
|
|
|
|
||
Expenses |
|
21,973 |
|
37,829 |
|
||
Interest |
|
18,041 |
|
32,693 |
|
||
Salaries and wages |
|
17,351 |
|
26,233 |
|
||
Gaming, pari-mutuel, property and other taxes |
|
9,282 |
|
25,283 |
|
||
Income taxes payable |
|
|
|
11,102 |
|
||
Other current liabilities |
|
6,867 |
|
10,282 |
|
||
Total current liabilities |
|
92,982 |
|
193,012 |
|
||
|
|
|
|
|
|
||
Long term liabilities: |
|
|
|
|
|
||
Long-term debt, net of current maturities |
|
375,000 |
|
1,133,530 |
|
||
Deferred income taxes |
|
50,498 |
|
36,139 |
|
||
Other non-current liabilities |
|
|
|
351 |
|
||
Total long-term liabilities |
|
425,498 |
|
1,170,020 |
|
||
|
|
|
|
|
|
||
Commitments and contingencies |
|
|
|
|
|
||
Shareholders equity: |
|
|
|
|
|
||
Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued |
|
|
|
|
|
||
Common stock, $.01 par value, 200,000,000 shares authorized; shares issued 40,033,684 and 40,399,184, respectively |
|
403 |
|
407 |
|
||
Treasury stock, at cost 849,400 shares |
|
(2,379 |
) |
(2,379 |
) |
||
Additional paid-in capital |
|
154,049 |
|
156,334 |
|
||
Retained earnings |
|
96,584 |
|
125,244 |
|
||
Accumulated other comprehensive loss |
|
(1,657 |
) |
(3,271 |
) |
||
Total shareholders equity |
|
247,000 |
|
276,335 |
|
||
|
|
$ |
765,480 |
|
$ |
1,639,367 |
|
See accompanying notes to consolidated financial statements.
4
Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
|
|
Six Months Ended |
|
||||
|
|
2002 |
|
2003 |
|
||
Revenues |
|
|
|
|
|
||
Gaming |
|
$ |
233,019 |
|
$ |
456,859 |
|
Racing |
|
59,135 |
|
56,380 |
|
||
Management service fee |
|
5,077 |
|
5,864 |
|
||
Food, beverage and other revenue |
|
33,853 |
|
62,486 |
|
||
Gross revenues |
|
331,084 |
|
581,589 |
|
||
Less: Promotional allowances. |
|
(13,649 |
) |
(31,663 |
) |
||
Net revenues |
|
317,435 |
|
549,926 |
|
||
|
|
|
|
|
|
||
Operating Expenses |
|
|
|
|
|
||
Gaming |
|
130,542 |
|
247,637 |
|
||
Racing |
|
43,051 |
|
40,921 |
|
||
Food, beverage and other expenses |
|
20,199 |
|
44,965 |
|
||
General and administrative |
|
55,715 |
|
94,610 |
|
||
Depreciation and amortization |
|
16,454 |
|
30,149 |
|
||
Total operating expenses |
|
265,961 |
|
458,282 |
|
||
Income from operations |
|
51,474 |
|
91,644 |
|
||
Other income (expenses) |
|
|
|
|
|
||
Interest expense |
|
(20,747 |
) |
(44,238 |
) |
||
Interest income |
|
851 |
|
917 |
|
||
Earnings from joint venture |
|
1,325 |
|
1,305 |
|
||
Other |
|
(97 |
) |
(1,442 |
) |
||
Loss on change in fair values of interest rate swaps |
|
(3,015 |
) |
(527 |
) |
||
Loss on early extinguishment of debt |
|
(7,924 |
) |
(1,310 |
) |
||
Total other expenses |
|
(29,607 |
) |
(45,295 |
) |
||
|
|
|
|
|
|
||
Income before income taxes |
|
21,867 |
|
46,349 |
|
||
Taxes on income |
|
8,569 |
|
17,689 |
|
||
Net income |
|
$ |
13,298 |
|
$ |
28,660 |
|
|
|
|
|
|
|
||
Per share data |
|
|
|
|
|
||
|
|
|
|
|
|
||
Basic |
|
|
|
|
|
||
Net income |
|
$ |
.37 |
|
$ |
.73 |
|
|
|
|
|
|
|
||
Diluted |
|
|
|
|
|
||
Net income |
|
$ |
.35 |
|
$ |
.71 |
|
|
|
|
|
|
|
||
Weighted shares outstanding |
|
|
|
|
|
||
Basic |
|
36,384 |
|
39,320 |
|
||
Diluted |
|
37,877 |
|
40,413 |
|
See accompanying notes to consolidated financial statements.
5
Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
|
|
Three Months Ended |
|
||||
|
|
2002 |
|
2003 |
|
||
Revenues |
|
|
|
|
|
||
Gaming |
|
$ |
119,480 |
|
$ |
273,006 |
|
Racing |
|
31,196 |
|
30,659 |
|
||
Management service fee |
|
2,678 |
|
3,165 |
|
||
Food, beverage and other revenue |
|
17,637 |
|
38,105 |
|
||
Gross revenues |
|
170,991 |
|
344,935 |
|
||
Less: Promotional allowances. |
|
(6,894 |
) |
(19,967 |
) |
||
Net revenues |
|
164,097 |
|
324,968 |
|
||
|
|
|
|
|
|
||
Operating Expenses |
|
|
|
|
|
||
Gaming |
|
66,587 |
|
148,213 |
|
||
Racing |
|
22,822 |
|
22,138 |
|
||
Food, beverage and other expenses |
|
10,849 |
|
28,610 |
|
||
General and administrative |
|
28,476 |
|
55,844 |
|
||
Depreciation and amortization |
|
8,388 |
|
17,320 |
|
||
Total operating expenses |
|
137,122 |
|
272,125 |
|
||
Income from operations |
|
26,975 |
|
52,843 |
|
||
Other income (expenses) |
|
|
|
|
|
||
Interest expense |
|
(9,955 |
) |
(27,886 |
) |
||
Interest income |
|
392 |
|
482 |
|
||
Earnings from joint venture |
|
550 |
|
719 |
|
||
Other |
|
(80 |
) |
(1,340 |
) |
||
Loss on change in fair values of interest rate swaps |
|
(3,015 |
) |
|
|
||
Total other expenses |
|
(12,108 |
) |
(28,025 |
) |
||
|
|
|
|
|
|
||
Income before income taxes |
|
14,867 |
|
24,818 |
|
||
Taxes on income |
|
5,705 |
|
9,343 |
|
||
Net income |
|
$ |
9,162 |
|
$ |
15,475 |
|
|
|
|
|
|
|
||
Per share data |
|
|
|
|
|
||
Basic |
|
$ |
.24 |
|
$ |
.39 |
|
|
|
|
|
|
|
||
Diluted |
|
$ |
.23 |
|
$ |
.38 |
|
|
|
|
|
|
|
||
Weighted shares outstanding |
|
|
|
|
|
||
Basic |
|
38,710 |
|
39,343 |
|
||
Diluted |
|
40,028 |
|
40,478 |
|
See accompanying notes to consolidated financial statements.
6
Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Shareholders Equity and Comprehensive Income
(Unaudited)
(In thousands, except share data)
|
|
|
|
Treasury |
|
Additional |
|
Retained Earnings |
|
Accumulated |
|
Total |
|
Comprehensive |
|
|||||||||
Shares |
|
Amount |
||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Balance, December 31, 2002 |
|
40,033,684 |
|
$ |
403 |
|
$ |
(2,379 |
) |
$ |
154,049 |
|
$ |
96,584 |
|
$ |
(1,657 |
) |
$ |
247,000 |
|
$ |
31,791 |
|
Exercise of stock options including tax benefit of $899 |
|
365,500 |
|
4 |
|
|
|
2,285 |
|
|
|
|
|
2,289 |
|
|
|
|||||||
Change in fair value of interest rate swap contracts, net of income tax benefit of $1,635 |
|
|
|
|
|
|
|
|
|
|
|
(2,669 |
) |
(2,669 |
) |
(2,669 |
) |
|||||||
Amortization of interest rate swap agreement, net of income taxes of $417 |
|
|
|
|
|
|
|
|
|
|
|
774 |
|
774 |
|
|
|
|||||||
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
281 |
|
281 |
|
281 |
|
|||||||
Net income for the period |
|
|
|
|
|
|
|
|
|
28,660 |
|
|
|
28,660 |
|
28,660 |
|
|||||||
Balance, June 30, 2003 |
|
40,399,184 |
|
$ |
407 |
|
$ |
(2,379 |
) |
$ |
156,334 |
|
$ |
125,244 |
|
$ |
(3,271 |
) |
$ |
276,335 |
|
$ |
28,561 |
|
See accompanying notes to consolidated financial statements.
7
Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
Six Months Ended |
|
||||
|
|
2002 |
|
2003 |
|
||
Cash flows from operating activities |
|
|
|
|
|
||
Net income |
|
$ |
13,298 |
|
$ |
28,660 |
|
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
|
||
Depreciation and amortization |
|
16,454 |
|
30,149 |
|
||
Amortization of deferred financing costs charged to interest expense |
|
1,082 |
|
1,876 |
|
||
Amortization of the unrealized loss on interest rate swap contracts charged to interest expense |
|
482 |
|
774 |
|
||
Loss on disposal of fixed assets |
|
360 |
|
1,250 |
|
||
Earnings from joint venture |
|
(1,325 |
) |
(1,305 |
) |
||
Loss relating to early extinguishment of debt |
|
5,906 |
|
1,310 |
|
||
Deferred income taxes |
|
1,796 |
|
4,494 |
|
||
Accelerated vesting of stock options |
|
434 |
|
|
|
||
Tax benefit from stock options exercised |
|
2,740 |
|
899 |
|
||
Loss on change in value of interest rate swap contracts |
|
3,015 |
|
527 |
|
||
Decrease (increase), net of businesses acquired in: |
|
|
|
|
|
||
Receivables |
|
3,339 |
|
(2,811 |
) |
||
Prepaid income taxes |
|
(1,700 |
) |
6,415 |
|
||
Prepaid expenses and other current assets |
|
(154 |
) |
(10,631 |
) |
||
Miscellaneous other assets |
|
(570 |
) |
10,312 |
|
||
Increase (decrease), net of businesses acquired in: |
|
|
|
|
|
||
Accounts payable |
|
87 |
|
1,939 |
|
||
Accrued liabilities |
|
1,883 |
|
(11,168 |
) |
||
Gaming, pari-mutuel, property and other taxes |
|
(1,164 |
) |
2,919 |
|
||
Income taxes payable |
|
(180 |
) |
11,102 |
|
||
Other current and non-current liabilities |
|
(94 |
) |
(1,915 |
) |
||
Net cash provided by operating activities |
|
45,689 |
|
74,796 |
|
||
|
|
|
|
|
|
||
Cash flows from investing activities |
|
|
|
|
|
||
Expenditures for property and equipment |
|
(52,967 |
) |
(32,461 |
) |
||
Payments to terminate interest rate swap contract |
|
|
|
(1,902 |
) |
||
Proceeds from sale of property and equipment |
|
239 |
|
508 |
|
||
Acquisition of business, net of cash acquired |
|
(7,114 |
) |
(264,081 |
) |
||
Cash in escrow |
|
500 |
|
1,000 |
|
||
Distributions from joint venture |
|
|
|
790 |
|
||
Net cash (used) in investing activities |
|
(59,342 |
) |
(296,146 |
) |
||
|
|
|
|
|
|
||
Cash flows from financing activities |
|
|
|
|
|
||
Proceeds from exercise of options and warrants |
|
10,072 |
|
1,390 |
|
||
Proceeds from sale of common stock |
|
96,041 |
|
|
|
||
Proceeds from credit facility |
|
179,252 |
|
700,000 |
|
||
Principal payments on long-term debt |
|
(258,891 |
) |
(422,223 |
) |
||
(Increase) in unamortized financing cost |
|
(3,266 |
) |
(19,021 |
) |
||
Net cash provided by financing activities |
|
23,208 |
|
260,146 |
|
||
Effect of exchange rate fluctuations on cash |
|
87 |
|
281 |
|
||
Net increase in cash and cash equivalents |
|
9,642 |
|
39,077 |
|
||
Cash and cash equivalents, at beginning of period |
|
38,378 |
|
55,121 |
|
||
Cash and cash equivalents, at end of period |
|
$ |
48,020 |
|
$ |
94,198 |
|
See accompanying notes to consolidated financial statements.
8
Notes to Consolidated Financial Statements
The consolidated financial statements are unaudited and include the accounts of Penn National Gaming, Inc. (Penn) and its subsidiaries (collectively, the Company). Investment in and advances to an unconsolidated affiliate that is 50% owned are accounted for under the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to current year presentation.
In the opinion of management, all adjustments (consisting of normal recurring accruals) have been made that are necessary to present fairly the financial position of the Company as of June 30, 2003 and the results of its operations for the three and six month periods ended June 30, 2002 and 2003. The results of operations experienced for the three and six month periods ended June 30, 2003 are not necessarily indicative of the results to be experienced for the fiscal year ended December 31, 2003.
The statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The accompanying notes should therefore be read in conjunction with the Companys December 31, 2002 annual consolidated financial statements.
On March 3, 2003, the Company completed its acquisition of Hollywood Casino Corporation and acquired 100 percent of its outstanding common stock for approximately $397.9 million in cash, including acquisition costs of $50.8 million. The results of operations for Hollywood CasinoÒ are included in the consolidated financial statements from March 1, 2003. Hollywood Casino Corporation owns and operates distinctively themed casino entertainment facilities in major gaming markets in Aurora, Illinois, Tunica, Mississippi and Shreveport, Louisiana. As a result of the acquisition, the Company believes it is the seventh largest gaming company in the United States (based on gaming revenues). The acquisition expanded the Companys customer base and provided increased geographic diversity. Under the terms of the purchase agreement, a wholly-owned subsidiary of the Company merged with and into Hollywood Casino, and Hollywood Casino stockholders received cash in the amount of $12.75 per share at closing or $328.1 million and holders of Hollywood Casino stock options received $19.0 million (representing the aggregate difference between $12.75 per share and their option exercise prices).
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.
At March 3, 2003
(In thousands)
Current assets |
|
$ |
167,049 |
|
Property and equipment |
|
299,519 |
|
|
Other assets, including deferred income taxes of $19,511 |
|
42,215 |
|
|
Goodwill |
|
467,462 |
|
|
Total assets acquired |
|
976,245 |
|
|
|
|
|
|
|
Current liabilities |
|
(72,157 |
) |
|
Other liabilities |
|
(8,466 |
) |
|
Debt, current and noncurrent |
|
(497,674 |
) |
|
Total liabilities assumed |
|
(578,297 |
) |
|
Net assets acquired |
|
$ |
397,948 |
|
9
In accordance with gaming industry practice, the Company recognizes casino revenues as the net of gaming wins less losses. Net revenues exclude the retail value of complimentary rooms, and food and beverage furnished gratuitously to customers. These amounts, which are included in promotional allowances, were as follows:
|
|
Three months ended |
|
Six months ended |
|
||||||||
|
|
2002 |
|
2003 |
|
2002 |
|
2003 |
|
||||
|
|
(In thousands) |
|
(In thousands) |
|
||||||||
|
|
|
|
|
|
|
|
|
|
||||
Rooms |
|
$ |
488 |
|
$ |
2,941 |
|
$ |
854 |
|
$ |
4,276 |
|
Food and beverage |
|
5,800 |
|
15,499 |
|
11,598 |
|
24,928 |
|
||||
Other |
|
606 |
|
1,527 |
|
1,197 |
|
2,459 |
|
||||
Total promotional allowances |
|
$ |
6,894 |
|
$ |
19,967 |
|
$ |
13,649 |
|
$ |
31,663 |
|
The estimated cost of providing such complimentary services, which is included in gaming expenses, was as follows:
|
|
Three months ended |
|
Six months ended |
|
||||||||
|
|
2002 |
|
2003 |
|
2002 |
|
2003 |
|
||||
|
|
(In thousands) |
|
(In thousands) |
|
||||||||
|
|
|
|
|
|
|
|
|
|
||||
Rooms |
|
$ |
294 |
|
$ |
2,182 |
|
$ |
533 |
|
$ |
3,245 |
|
Food and beverage |
|
3,179 |
|
12,032 |
|
6,287 |
|
18,346 |
|
||||
Other |
|
373 |
|
1,231 |
|
689 |
|
1,921 |
|
||||
Total cost of complimentary services |
|
$ |
3,846 |
|
$ |
15,445 |
|
$ |
7,509 |
|
$ |
23,512 |
|
Racing revenues include the Companys share of pari-mutuel wagering on live races after payment of amounts returned as winning wagers, the Companys share of wagering from import and export simulcasting, as well as its share of wagering from its OTWs.
Revenues from the management service contract the Company has with Casino Rama (the Casino Rama Management Contract) are based upon contractual terms and are recognized as those services are performed.
The weighted average number of shares of common stock and common stock equivalents used in the computation of basic and diluted earnings per share are set forth in the table below. For the three and six month periods ended June 30, 2002 and 2003, the effect of all outstanding stock options have been included in the calculation of diluted earnings per share.
|
|
Three months ended |
|
Six months ended |
|
||||
|
|
2002 |
|
2003 |
|
2002 |
|
2003 |
|
|
|
(In thousands) |
|
(In thousands) |
|
||||
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding-Basic earnings per share |
|
38,710 |
|
39,343 |
|
36,384 |
|
39,320 |
|
Dilutive effect of stock options |
|
1,318 |
|
1,135 |
|
1,493 |
|
1,093 |
|
Weighted average number of shares outstanding-Diluted earnings per share |
|
40,028 |
|
40,478 |
|
37,877 |
|
40,413 |
|
10
The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair market value of the shares at the date of grant. The Company accounts for stock option grants using the intrinsic-value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related Interpretations. Under the intrinsic-value method, because the exercise price of the Companys employee stock options is more than or equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
The Company accounts for the plan under the recognition and measurement principles of APB 25 and related Interpretations. No stock-based employee compensation cost is reflected in net income for options granted since all options granted under the plan had an exercise price equal to the fair market value of the underlying common stock on the date of grant. However, there are situations that may occur, such as the accelerated vesting of options, that require a current charge to income. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123) to stock-based employee compensation.
|
|
Three months ended |
|
Six months ended |
|
||||||||
|
|
2002 |
|
2003 |
|
2002 |
|
2003 |
|
||||
|
|
(In thousands) |
|
(In thousands) |
|
||||||||
|
|
|
|
|
|
|
|
|
|
||||
Net income, as reported |
|
$ |
9,162 |
|
$ |
15,475 |
|
$ |
13,298 |
|
$ |
28,660 |
|
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects |
|
301 |
|
|
|
434 |
|
|
|
||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
|
396 |
|
656 |
|
780 |
|
1,217 |
|
||||
Pro forma net income |
|
$ |
9,067 |
|
$ |
14,819 |
|
$ |
12,952 |
|
$ |
27,443 |
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings per share: |
|
|
|
|
|
|
|
|
|
||||
Basic-as reported |
|
$ |
.24 |
|
$ |
.39 |
|
$ |
.37 |
|
$ |
.73 |
|
Basic-pro forma |
|
$ |
.23 |
|
$ |
.38 |
|
$ |
.36 |
|
$ |
.70 |
|
Diluted-as reported |
|
$ |
.23 |
|
$ |
.38 |
|
$ |
.35 |
|
$ |
.71 |
|
Diluted-pro forma |
|
$ |
.23 |
|
$ |
.37 |
|
$ |
.34 |
|
$ |
.68 |
|
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants:
|
|
June 30 |
|
||
|
|
2002 |
|
2003 |
|
Risk-free interest rate |
|
3.0 |
% |
3.0 |
% |
Volatility |
|
50.0 |
% |
50.0 |
% |
Dividend yield |
|
0.0 |
% |
0.0 |
% |
Expected life (years) |
|
5 |
|
5 |
|
The effects of applying SFAS 123 in the above pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995. Additional awards in future years are anticipated.
At the annual meeting shareholders held on May 22, 2003, the Companys Board of Directors and shareholders adopted and approved the 2003 Long Term Incentive Compensation Plan. The plan is effective June 1, 2003.
The Companys operations are dependent on its continued licensing by state gaming and racing commissions. The loss of a license, in any jurisdiction in which the Company operates, could have a material adverse affect on future results of operations.
The Company is dependent on each gaming and racing propertys local market for a significant number of its patrons and revenues. If economic conditions in these areas deteriorate or additional gaming or racing licenses are awarded in these markets, the Companys results of operations could be adversely affected.
The Company is also dependant upon a stable gaming and admission tax structure in the states that it operates in. Any change in the tax structure could have a material adverse affect on future results of operations.
11
7. Property and Equipment
Property and equipment consist of the following:
|
|
December 31, |
|
June 30, |
|
||
|
|
(In thousands) |
|
||||
|
|
|
|
|
|
||
Land and improvements |
|
$ |
88,885 |
|
$ |
121,541 |
|
Building and improvements |
|
289,782 |
|
515,858 |
|
||
Furniture, fixtures, and equipment |
|
143,760 |
|
194,755 |
|
||
Transportation equipment |
|
1,127 |
|
1,099 |
|
||
Leasehold improvements |
|
14,657 |
|
15,912 |
|
||
Construction in progress |
|
3,880 |
|
20,802 |
|
||
Total property and equipment |
|
542,091 |
|
869,967 |
|
||
Less: accumulated depreciation and amortization |
|
91,205 |
|
117,811 |
|
||
Property and equipment, net |
|
$ |
450,886 |
|
$ |
752,156 |
|
Interest capitalized in connection with major construction projects was $1.6 million and $0.3 million for the year ended December 31, 2002 and for the six months ended June 30, 2003, respectively. Depreciation and amortization expense, for property and equipment, totaled $15.2 million and $28.9 million for the six months ended June 30, 2002 and June 30, 2003, respectively.
8. Supplemental Disclosures of Cash Flow Information
|
|
Six months ended |
|
||||
|
|
2002 |
|
2003 |
|
||
|
|
(In thousands) |
|
||||
Cash payments of interest |
|
$ |
17,495 |
|
$ |
21,109 |
|
Cash payments of income taxes |
|
7,097 |
|
|
|
||
|
|
|
|
|
|
||
Hollywood Casino Corporation Acquisition: |
|
|
|
|
|
||
Cash Paid |
|
|
|
397,948 |
|
||
Fair value of assets acquired, including cash acquired of $133,867 |
|
|
|
976,245 |
|
||
Fair value of liabilities assumed |
|
|
|
578,297 |
|
||
9. Long-term Debt
Long-term debt is as follows:
|
|
June 30, |
|
||||
|
|
2002 |
|
2003 |
|
||
|
|
(In thousands) |
|
||||
$800 million senior secured credit facility |
|
$ |
|
|
$ |
638,000 |
|
$200 million 11 1/8% senior subordinated notes. These notes are general unsecured obligations of the Company. |
|
200,000 |
|
200,000 |
|
||
$175 million 8 7/8% senior subordinated notes. These notes are general unsecured obligations of the Company. |
|
175,000 |
|
175,000 |
|
||
Hollywood Casino Shreveport non-recourse debt |
|
|
|
|
|
||
13% Shreveport First Mortgage Notes |
|
|
|
150,000 |
|
||
13% Shreveport Senior Secured Notes |
|
|
|
39,788 |
|
||
Less: Bond valuation allowance |
|
|
|
(69,544 |
) |
||
Capital leases |
|
|
|
16,262 |
|
||
Other notes payable |
|
18 |
|
18 |
|
||
|
|
375,018 |
|
1,149,524 |
|
||
Less: current maturities |
|
18 |
|
15,994 |
|
||
|
|
$ |
375,000 |
|
$ |
1,133,530 |
|
12
The following is a schedule of future minimum repayments of long-term debt as of June 30, 2003 (in thousands):
2003 (6 months) |
|
$ |
8,282 |
|
2004 |
|
16,070 |
|
|
2005 |
|
16,212 |
|
|
2006 |
|
136,593 |
|
|
2007 |
|
589,421 |
|
|
2008 |
|
205,246 |
|
|
Thereafter |
|
177,700 |
|
|
Total minimum payments |
|
$ |
1,149,524 |
|
$800 Million Senior Secured Credit Facility
On March 3, 2003, the Company entered into an $800 million senior secured credit facility with a syndicate of lenders that replaced the Companys $350 million credit facility.
The credit facility is comprised of a $100 million revolving credit facility maturing on September 1, 2007, a $100 million Term A facility loan maturing on September 1, 2007 and a $600 million Term B facility loan maturing on September 1, 2007. The maturity dates will be extended to the fifth anniversary dates for the revolving and Term A loans and the sixth anniversary date for the Term B loan if the outstanding 11 1/8% Senior Subordinated Notes due 2008 are refinanced in full to a date that is at least seven years and 181 days after March 3, 2003. Up to $20 million of the revolving credit facility may be used for the issuance of standby letters of credit. In addition, up to an additional $20 million of the revolving credit facility may be used for short-term credit to be provided to the Company on a same-day basis. On March 3, 2003 the Company borrowed the entire Term A and Term B term loans to complete the purchase of Hollywood Casino Corporation and to call Hollywood Casino Corporations $360 million senior secured notes.
At the Companys option, the revolving and the Term A credit facilities may bear interest at (1) the highest of ½ of 1% in excess of the federal funds effective rate or the base rate of interest that the Administrative Agent announces from time to time as its prime lending rate plus an applicable margin of up to 2.25%, or (2) a rate tied to a eurodollar rate plus an applicable margin up to 3.25%, in either case, with the applicable rate based on the Companys total leverage. The Term B credit facility may bear interest at (1) the highest of ½ of 1% in excess of the federal funds effective rate or the base rate of interest that the Administrative Agent announces from time to time as its prime lending rate plus an applicable margin of up to 3.00%, or (2) a rate tied to a eurodollar rate plus an applicable margin up to 4.00%, in either case, with the applicable rate based on the Companys total leverage.
At June 30, 2003, the Company had an outstanding balance of $ 638.0 million on term loans A and B and $92.6 million available to borrow under the revolving credit facility after giving effect to outstanding letters of credit of $7.4 million.
The terms of the Companys $800 million senior secured credit facility require the Company to satisfy certain financial covenants, including, but not limited to, leverage and fixed charges coverage ratios, and limitations on indebtedness, liens, investments and capital expenditures. At June 30, 2003, the Company was in compliance with all required financial covenants.
The $800 million senior secured credit facility is secured by substantially all of the assets of the Company, except for the assets of Hollywood Casino Shreveport, which serve as collateral for the notes of Hollywood Casino Shreveport. See Hollywood Casino Shreveport Notes below.
Hollywood Casino Corporation Notes and Cash in Escrow
On March 3, 2003, the date of closing for the Hollywood Casino Corporation (HWD:AMEX) acquisition, Hollywood Casino had outstanding long-term indebtedness of $310 million of 11.25% senior secured notes due 2007 and $50 million of floating rate senior secured notes, due 2006. As part of the closing, the Company placed $401 million in an escrow account to call the notes on May 1, 2003. The $401 million consisted of note principal of $360 million, accrued interest of $19 million and a note call premium of $22 million. This transaction was completed and the notes were retired on May 1, 2003.
13
Hollywood Casino - Aurora Capital Leases
Hollywood Casino-Aurora (HCA) leases two parking garages under capital lease agreements. The first lease has an initial 30-year term ending in June 2023 with the right to extend the term under renewal options for an additional 67 years. Rental payments through June 2012 equal the City of Auroras financing costs related to its general obligation bond issue used to finance the construction of the parking garage. The general obligation bond issue has an annual interest rate of approximately 5.6%. The second lease has an initial term ending in September 2026 with the right to extend the lease for up to 20 additional years. Rental payments during the first 15 years equal the lessors debt service costs related to the industrial revenue bond issue used to finance a portion of the construction costs of the parking garage. The remaining construction costs were funded by HCA. In addition, HCA currently pays base rent equal to $17,000 per month for improvements made to the lessors North Island Center banquet and meeting facilities. HCA is also responsible for additional rent, consisting of costs such as maintenance costs, insurance premiums and utilities, arising out of its operation of both parking garages. At June 30, 2003, HCA had a long-term capital lease obligation of $16.3 million.
Hollywood Casino Shreveport Notes
Hollywood Casino Shreveport and Shreveport Capital Corporation are co-issuers of $150 million aggregate principal amount of 13% first mortgage notes due 2006 and $39 million aggregate principal amount of 13% senior secured notes due 2006 (the Hollywood Shreveport Notes). Hollywood Casino Shreveport is a general partnership that owns the casino operations. Shreveport Capital Corporation is a wholly-owned subsidiary of Hollywood Casino Shreveport formed solely for the purpose of being a co-issuer of the Hollywood Shreveport Notes.
The Hollywood Shreveport Notes are non-recourse to Penn and its subsidiaries (other than Hollywood Casino Shreveport, Shreveport Capital Corporation, HCS I, Inc., HCS II, Inc. and HWCC-Louisiana, Inc., collectively the Shreveport Entities) and are secured by substantially all of the assets of the casino, and the partnership interests held by HCS I, Inc. and HCS II, Inc. and the stock held by HWCC-Louisiana, Inc.
The indentures governing the Hollywood Shreveport Notes require the issuers to make an offer to purchase the Hollywood Shreveport Notes at 101% of the principal amount thereof within ten days of the occurrence of a Change of Control as defined in the indentures. A Change of Control was deemed to have occurred under the indentures on March 3, 2003 as a result of the consummation of the merger of our wholly-owned subsidiary with and into Hollywood Casino Corporation. Hollywood Casino Shreveport determined that it did not have the liquidity to repurchase the Hollywood Shreveport Notes at 101% of their principal amount and, accordingly, could not make an offer to purchase the Hollywood Shreveport Notes as required under the indentures. As a result, a valuation allowance in the amount of $69.6 million was established to reduce the carrying amount to managements estimate of the fair value of the Hollywood Shreveport Notes, which is based on the fair value of the underlying collateral.
On March 14, 2003, Hollywood Casino Shreveport and Shreveport Capital Corporation were notified by an ad hoc committee of holders of the Hollywood Shreveport Notes that they had 60 days from receipt of the notice to cure the failure to offer to purchase the Hollywood Shreveport Notes or an event of default would have occurred under the indentures. Neither Hollywood Casino Shreveport nor Shreveport Capital Corporation made a Change of Control offer to purchase the Hollywood Shreveport Notes within the 60 days. There can be no assurance that the holders of the Hollywood Shreveport Notes will not pursue all rights and remedies that they may have under the indentures as a result of the event of default. Further, any action on the part of the noteholders may require the Shreveport Entities to seek the protection of the bankruptcy laws or other similar remedies. On August 1, 2003, interest payments of $12.3 million became due on the Hollywood Shreveport Notes. The managing general partner of Hollywood Casino Shreveport did not make that payment.
Interest Rate Swap Contracts
The Company has a policy designed to manage interest rate risk associated with its current and anticipated future borrowings. This policy enables the Company to use any combination of interest rate swaps, futures, options, caps and similar instruments. To the extent the Company employs such financial instruments pursuant to this policy, they are generally accounted for as hedging instruments. In order to qualify for hedge accounting, the underlying hedged item must expose the Company to risks associated with market fluctuations and the financial instrument used must be designated as a hedge and must reduce the Companys exposure to market fluctuations throughout the hedge period. If these criteria are not met, a change in the market value of the financial instrument is recognized as a gain or loss in the period of change. Net settlements pursuant to the financial instrument are included as interest expense in the period.
14
On March 27, 2003, the Company entered into interest rate swap agreements with a total notional amount of $375.0 million in accordance with the terms of the $800 million senior secured credit facility. There are three two-year swap contracts totaling $175 million with an effective date of March 27, 2003 and a termination date of March 27, 2005. Under these contracts, the Company pays a fixed rate of 1.92% and receives a variable rate based on the 90-day LIBOR rate. The Company also entered into three three-year swap contracts totaling $200 million with a termination date of March 27, 2006. Under these contracts, the Company pays fixed rates of 2.48% to 2.49% against a variable rate based on the 90-day LIBOR rate. The difference between amounts received and amounts paid under such agreements, as well as any costs or fees, is recorded as reduction of, or addition to, interest expense as incurred over the life of the swap. At June 30, 2003, the 90-day LIBOR rate was 1.0%.
The Company accounts for interest rate swaps as cash flow hedges whereby the fair value of the interest rate swap is reflected in other current liabilities in the accompanying consolidated balance sheet with the offset, net of income taxes and any hedge ineffectiveness, recorded as accumulated other comprehensive income (loss). The fair value of the interest rate swaps were not material as of June 30, 2003. Amounts in accumulated other comprehensive income are amortized as a yield adjustment of interest expense over the term of the related swaps, the term of the related hedge. Such amounts were not material during the year ended December 31, 2002 and the three month and six month periods ended June 30, 2003. Over the next twelve months, approximately $1.3 million, related to interest rate swaps existing at January 1, 2003, will be reclassified to income.
Termination of Interest Rate Swap Agreement
On March 3, 2003, in conjunction with the refinancing of the credit facility, the Company terminated its $36 million notional amount interest rate swap originally scheduled to expire in June 2004. The Company paid $1.9 million to terminate the swap agreement.
The Company currently operates in two segments: gaming and racing. The accounting policies for each segment are the same as those described in the Summary of Significant Accounting Policies section of the Companys Annual Report on Form 10-K for the year ended December 31, 2002.
The table below presents information about reported segments (in thousands):
|
|
Gaming(1) |
|
Racing |
|
Eliminations |
|
Total |
|
||||
As of and for the six months ended June 30, 2003 |
|
|
|
|
|
|
|
|
|
||||
Revenue |
|
$ |
499,684 |
|
51,061 |
|
$ |
(819 |
)(2) |
$ |
549,926 |
|
|
Income from operations |
|
85,747 |
|
5,897 |
|
|
|
91,644 |
|
||||
Depreciation and Amortization |
|
28,413 |
|
1,736 |
|
|
|
30,149 |
|
||||
Total Assets |
|
2,729,745 |
|
99,852 |
|
(1,190,230 |
)(3) |
1,639,367 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
As of and for the six months ended June 30, 2002 |
|
|
|
|
|
|
|
|
|
||||
Revenue |
|
$ |
265,147 |
|
$ |
53,246 |
|
$ |
(958 |
)(2) |
$ |
317,435 |
|
Income from operations |
|
44,945 |
|
6,529 |
|
|
|
51,474 |
|
||||
Depreciation and Amortization |
|
14,643 |
|
1,811 |
|
|
|
16,454 |
|
||||
Total Assets |
|
1,143,944 |
|
96,440 |
|
(509,591 |
)(3) |
730,793 |
|
||||
(1) Reflects results of Bullwhackers Casino since the April 25, 2002 acquisition and Hollywood Casino since the March 3, 2003 acquisition, which the Company accounts for as of March 1, 2003.
(2) Primarily reflects intercompany transactions related to import/export simulcasting.
(3) Primarily reflects elimination of intercompany investments, receivables and payables.
15
Penn and its subsidiaries are subject to various legal and administrative proceedings relating to personal injuries, employment matters, commercial transactions and other matters arising in the normal course of business. The Company does not believe that the final outcome of these matters will have a material adverse effect on the Companys consolidated financial position or results of operations. In addition, the Company maintains what it believes is adequate insurance coverage to further mitigate the risks of such proceedings. However, such proceedings can be costly, time consuming and unpredictable and, therefore, no assurance can be given that the final outcome of such proceedings may not materially impact the Companys consolidated financial condition or results of operations. Further, no assurance can be given that the amount or scope of existing insurance coverage will be sufficient to cover losses arising from such matters.
The following proceedings could result in costs, settlements or damages that materially impact the Companys consolidated financial condition or operating results. In each instance, the Company believes that it has meritorious defenses and/or counter-claims and intends to vigorously defend itself.
In August 2002, the lessor of the property on which Casino Rouge conducts a significant portion of its dockside operations filed a lawsuit against the Company in the 19th Judicial District Court for the Parish of East Baton Rouge, Louisiana seeking a declaratory judgment that the plaintiff is entitled to terminate the lease and/or void the Companys option to renew the lease due to certain alleged defaults by the Company or its predecessors-in-interest. The current term of the Companys lease expires in January 2004. The case is in the discovery phase at this time. A hearing date has been set for September, 2003.
In October 2002, in response to the Companys plans to relocate the river barge underlying the Boomtown Biloxi Casino to an adjacent property, the lessor of the property on which the Boomtown Biloxi Casino conducts a portion of its dockside operations, filed a lawsuit against the Company in the U.S. District Court for the Southern District of Mississippi seeking a declaratory judgment that (i) the Company must use the leased premises for a gaming use or, in the alternative, (ii) after the move, the Company will remain obligated to make the revenue based rent payments to plaintiff set forth in the lease. The plaintiff filed this suit immediately after the Mississippi Gaming Commission approved the Companys request to relocate the barge. Since such approval, the Mississippi Department of Marine Resources and the U.S. Army Corps of Engineers have also approved our plan to relocate the barge. The case is in the discovery phase at this time. A trial date has been set for February, 2004.
In April 2003, Planet Hollywood (Region IV) Inc. and Planet Hollywood International, Inc. filed a lawsuit against Hollywood Casino Corporation and certain of its subsidiaries in the U.S. District Court for the Northern District of Illinois seeking a declaratory judgment (i) that Planet Hollywood should be permitted to use certain of its restaurant-related trademarks in connection with, among other things, the potential future operation of a casino, (ii) that Hollywood Casino should be barred from asserting claims that such use by Planet Hollywood would constitute infringement or unfair competition by Planet Hollywood and (iii) that certain trademark registrations owned by Hollywood Casino should be cancelled. The trademark Hollywood Casino has been in use since 1993 and has been registered with the U.S. Patent and Trademark Office since 1994. The parties are currently filing and responding to preliminary pleadings. Discovery has not yet commenced.
16
12. Subsidiary Guarantors
Under the terms of the $800 million senior secured credit facility, all of the Companys domestic subsidiaries except for Onward Development, LLC, an inactive subsidiary, Tennessee Downs, Inc., an inactive subsidiary, HWCC-Louisiana, Inc., HWCC-Shreveport, Inc. HCS I, Inc, HCS II Inc., HCS-Golf Course, LLC, Hollywood Casino Shreveport and Shreveport Capital Corporation and their respective subsidiaries, if any, (Subsidiary Non-Guarantors), are guarantors under the agreement. Summarized financial information as of and for the six months ended June 30, 2003 for Penn, the Subsidiary Guarantors and Subsidiary Non-guarantors is as follows:
|
|
Penn |
|
Subsidiary |
|
Subsidiary Non-Guarantors |
|
Eliminations |
|
Consolidated |
|
|||||
As of June 30, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Condensed Consolidating Balance Sheet (In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|||||
Current assets |
|
$ |
8,421 |
|
$ |
137,002 |
|
$ |
35,446 |
|
$ |
(1,192 |
) |
$ |
179,677 |
|
Net property and equipment, at cost |
|
1,784 |
|
635,020 |
|
115,352 |
|
|
|
752,156 |
|
|||||
Other assets |
|
1,212,475 |
|
679,287 |
|
4,814 |
|
(1,189,042 |
) |
707,534 |
|
|||||
Total |
|
$ |
1,222,680 |
|
$ |
1,451,309 |
|
$ |
155,612 |
|
$ |
(1,190,234 |
) |
$ |
1,639,367 |
|
Current liabilities |
|
$ |
50,789 |
|
$ |
107,709 |
|
$ |
35,698 |
|
$ |
(1,196 |
) |
$ |
193,000 |
|
Long-term liabilities |
|
1,001,204 |
|
1,204,054 |
|
120,605 |
|
(1,155,843 |
) |
1,170,020 |
|
|||||
Shareholders equity |
|
170,687 |
|
139,546 |
|
(691 |
) |
(33,195 |
) |
276,347 |
|
|||||
Total |
|
$ |
1,222,680 |
|
$ |
1,451,309 |
|
$ |
155,612 |
|
$ |
(1,190,234 |
) |
$ |
1,639,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Six Months ended June 30, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Condensed Consolidating Statement of Income (In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|||||
Total revenues |
|
$ |
|
|
$ |
498,411 |
|
$ |
52,334 |
|
$ |
(819 |
) |
$ |
549,926 |
|
Total operating expenses |
|
9,572 |
|
400,641 |
|
48,888 |
|
(819 |
) |
458,282 |
|
|||||
Income from operations |
|
(9,572 |
) |
97,770 |
|
3,446 |
|
|
|
91,644 |
|
|||||
Other income (expense) |
|
29,916 |
|
(64,454 |
) |
(10,757 |
) |
|
|
(45,295 |
) |
|||||
Income before income taxes |
|
20,344 |
|
33,316 |
|
(7,311 |
) |
|
|
46,349 |
|
|||||
Taxes on income |
|
7,722 |
|
12,502 |
|
(2,807 |
) |
272 |
|
17,689 |
|
|||||
Net income (loss) |
|
$ |
12,622 |
|
$ |
20,814 |
|
$ |
(4,504 |
) |
$ |
(272 |
) |
$ |
28,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Three Months ended June 30, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Condensed Consolidating Statement of Income (In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|||||
Total revenues |
|
$ |
|
|
$ |
288,516 |
|
$ |
36,924 |
|
$ |
(472 |
) |
$ |
324,968 |
|
Total operating expenses |
|
4,973 |
|
231,925 |
|
35,699 |
|
(472 |
) |
272,125 |
|
|||||
Income from operations |
|
(4,973 |
) |
56,591 |
|
1,225 |
|
|
|
52,843 |
|
|||||
Other income (expense) |
|
19,991 |
|
(39,934 |
) |
(8,082 |
) |
|
|
(28,025 |
) |
|||||
Income before income taxes |
|
15,018 |
|
16,657 |
|
(6,857 |
) |
|
|
24,818 |
|
|||||
Taxes on income |
|
5,496 |
|
6,210 |
|
(2,635 |
) |
272 |
|
9,343 |
|
|||||
Net income (loss) |
|
$ |
9,522 |
|
$ |
10,447 |
|
$ |
(4,222 |
) |
$ |
(272 |
) |
$ |
15,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Condensed Consolidating Statement of Cash Flows (In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net cash provided by operating activities |
|
$ |
37,511 |
|
$ |
28,964 |
|
$ |
8,321 |
|
$ |
|
|
$ |
74,796 |
|
Net cash provided by (used in) investing activities |
|
(659,283 |
) |
363,206 |
|
(69 |
) |
|
|
(296,146 |
) |
|||||
Net cash provided by (used in) financing activities |
|
620,369 |
|
(359,776 |
) |
(447 |
) |
|
|
260,146 |
|
|||||
Effect of exchange rate fluctuations on cash |
|
125 |
|
156 |
|
|
|
|
|
281 |
|
|||||
Net increase (decrease) in cash and cash equivalents |
|
(1,278 |
) |
32,550 |
|
7,805 |
|
|
|
39,077 |
|
|||||
Cash and cash equivalents at beginning of period |
|
3,339 |
|
38,430 |
|
13,352 |
|
|
|
55,121 |
|
|||||
Cash and cash equivalents at end of period |
|
$ |
2,061 |
|
$ |
70,980 |
|
$ |
21,157 |
|
$ |
|
|
$ |
94,198 |
|
17
13. Unaudited Pro Forma Financial Information
Unaudited pro forma financial information for the three and six months ended June 30, 2002 and 2003, as though the Hollywood Casino acquisition had occurred on January 1, 2002, is as follows:
|
|
Three months ended |
|
Six months ended |
|
||||||||
|
|
2002 |
|
2003 |
|
2002 |
|
2003 |
|
||||
|
|
(In thousands) |
|
(In thousands) |
|
||||||||
Revenues |
|
$ |
287,724 |
|
$ |
324,968 |
|
$ |
564,246 |
|
$ |
631,173 |
|
Net income |
|
$ |
13,022 |
|
$ |
15,475 |
|
$ |
26,032 |
|
$ |
30,155 |
|
|
|
|
|
|
|
|
|
|
|
||||
Net income per common share |
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
0.34 |
|
$ |
0.39 |
|
$ |
0.72 |
|
$ |
0.77 |
|
Diluted |
|
$ |
0.33 |
|
$ |
0.38 |
|
$ |
0.69 |
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted shares outstanding |
|
|
|
|
|
|
|
|
|
||||
Basic |
|
38,710 |
|
39,343 |
|
36,384 |
|
39,320 |
|
||||
Diluted |
|
40,028 |
|
40,478 |
|
37,877 |
|
40,413 |
|
18
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes thereto included elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2002.
We derive substantially all of our revenues from gaming and racing operations. Since September 1997, our gaming revenues have accounted for an increasingly larger share of our total revenues. Our acquisition of Hollywood Casino Corporation (HWD:AMEX) in the first quarter of 2003 has impacted and will continue to impact our revenue mix between gaming and pari-mutuel revenues on a prospective basis. Our pari-mutuel revenues have been derived from wagering on our live races, wagering on import simulcasts at our racetracks and OTWs and through telephone account wagering, and fees from wagering on export simulcasting of our races at out-of-state locations. Our other revenues have been derived from admissions, program sales, food and beverage sales, concessions and certain other ancillary activities.
Critical Accounting Policies
Financial Reporting Release No. 60, which was recently released by the Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Our significant accounting policies are described in Note 1 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2002. The significant accounting policies that we believe are the most critical to aid in fully understanding our reported financial results include the following:
Revenue recognition
In accordance with common industry practice, our casino revenues are the net of gaming wins less losses. Racing revenues include our share of pari-mutuel wagering on live races after payment of amounts returned as winning wagers, and our share of wagering from import and export simulcasting as well as our share of wagering from our OTWs. The vast majority of wagers for both businesses are in the form of cash and we do not grant credit to our customers to a significant extent. Our receivables consist principally of amounts due from simulcasting of our races to other racetracks and their OTWs. We also have receivables due under our management service contract with Casino Rama for management fees and for expenses, primarily salaries and wages, payable in accordance with our contract. Historically, we have not experienced any significant bad debts from uncollected receivables.
Valuation of long-lived tangible and intangible assets, including goodwill
As a result of our acquisition of Hollywood Casino, goodwill increased significantly. Two issues arise with respect to these assets that require significant management estimates and judgment: a) the valuation in connection with the initial purchase price allocation and b) the ongoing evaluation for impairment.
In connection with this acquisition, a valuation was completed to determine the allocation of the purchase price. Upon completion of the valuation process, approximately $467.5 million was allocated to goodwill. The purchase price allocation process requires management to make estimates and judgments as to the remaining useful lives of the assets purchased. If growth rates, operating margins, or useful lives, among other assumptions, differ from the estimates and judgments used in the purchase price allocation, the amounts recorded in the financial statements could result in a possible impairment of goodwill.
At June 30, 2003, we had a net property and equipment balance of $752.2 million, representing 45.9% of total assets. We depreciate property and equipment on a straight-line basis over their estimated useful lives. The estimated useful lives are based on the nature of the assets as well as our current operating strategy. Future events such as property expansions, new competition and new regulations, could result in a change in the manner in which we are using certain assets requiring a change in the estimated useful lives of such assets. In assessing the recoverability of the carrying value of property and equipment, we must make assumptions regarding future cash flows and other factors. If these estimates or the related assumptions change in the future, we may be required to record impairment loss for these assets. Such an impairment loss would be recognized as a non-cash component of operating income.
19
Accounting for income taxes
We account for income taxes in accordance with FASB Statement No. 109, Accounting for Income Taxes (SFAS 109), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
The realizability of the deferred tax assets is evaluated by assessing the likelihood of realization and by adjusting the amount of the valuation allowance, if necessary. The factors used to assess the likelihood of realization are the forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. We have used tax-planning strategies to realize or renew net deferred tax assets in order to avoid the potential loss of future tax benefits.
In addition, we operate within multiple taxing jurisdictions and are subject to audit in each jurisdiction. These audits can involve complex issues that may require an extended period of time to resolve. In our opinion, adequate provisions for income taxes have been made for all periods.
Recent Accounting Standards
In January 2003, FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (Interpretation No. 46), which clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Interpretation No. 46 is applicable immediately for variable interest entities created after January 31, 2003. For variable interest entities created prior to January 31, 2003, the provisions of Interpretation No. 46 are applicable no later than July 1, 2003. We do not expect Interpretation No. 46 to have any effect on the consolidated financial statements.
20
Results of Operations
Three months ended June 30, 2003 compared to three months ended June 30, 2002
The following is a summary of the results of operations by property level for the three months ended June 30, 2002 and 2003:
|
|
Revenues |
|
EBITDA(1) |
|
||||||||
|
|
2002 |
|
2003 |
|
2002 |
|
2003 |
|
||||
Charles Town Racesä |
|
$ |
60,653 |
|
$ |
84,774 |
|
$ |
16,404 |
|
$ |
24,303 |
|
Casino Rouge |
|
25,398 |
|
26,259 |
|
6,317 |
|
7,146 |
|
||||
Casino Magic-Bay St. Louis |
|
24,090 |
|
26,616 |
|
4,806 |
|
5,654 |
|
||||
Boomtown Biloxi |
|
18,530 |
|
18,621 |
|
3,785 |
|
4,028 |
|
||||
Bullwhackers (2) |
|
4,841 |
|
6,539 |
|
999 |
|
824 |
|
||||
Casino Rama Management Contract |
|
2,678 |
|
3,165 |
|
2,487 |
|
2,930 |
|
||||
Pennsylvania Racing/OTWs |
|
28,427 |
|
27,646 |
|
4,278 |
|
4,255 |
|
||||
Hollywood Casino-Aurora (3) |
|
|
|
69,146 |
|
|
|
18,963 |
|
||||
Hollywood Casino-Tunica (3) |
|
|
|
28,914 |
|
|
|
4,777 |
|
||||
Hollywood Casino-Shreveport (3) |
|
|
|
33,760 |
|
|
|
3,346 |
|
||||
Earnings from Pennwood Racing, Inc (New Jersey) |
|
|
|
|
|
550 |
|
719 |
|
||||
Corporate eliminations (4) |
|
(525 |
) |
(472 |
) |
|
|
|
|
||||
Corporate overhead |
|
5 |
|
|
|
(3,514 |
) |
(5254 |
) |
||||
Total |
|
$ |
164,097 |
|
$ |
324,968 |
|
$ |
36,112 |
|
$ |
71,691 |
|
(1) EBITDA is income from operations excluding charges for depreciation and amortization and gain/loss on disposal of assets, and is inclusive of earnings from joint venture. EBITDA does not represent net income or cash flows from operations as those terms are defined by GAAP. EBITDA does not necessarily indicate whether cash flows will be sufficient to fund cash needs. A reconciliation of GAAP income for operations to EBITDA follows this table.
(2) Bullwhackers was acquired by Penn National Gaming on April 25, 2002.
(3) Hollywood Casino Aurora, Hollywood Casino Tunica and Hollywood Casino-Shreveport were acquired by Penn National Gaming, Inc. on March 3, 2003 and accounted for as of March 1, 2003.
(4) For intracompany transactions related to import/export simulcasting.
21
Reconciliation of Income From Operations (GAAP) To EBITDA (in thousands):
|
|
Income |
|
Depreciation |
|
(Gain)/loss |
|
Earnings |
|
EBITDA |
|
|||||
Three months ended June 30, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Charles Town Races |
|
$ |
20,036 |
|
$ |
3,782 |
|
$ |
485 |
|
$ |
|
|
$ |
24,303 |
|
Casino Rouge |
|
5,453 |
|
1,542 |
|
151 |
|
|
|
7,146 |
|
|||||
Casino Magic Bay St. Louis |
|
3,223 |
|
2,412 |
|
19 |
|
|
|
5,654 |
|
|||||
Boomtown Biloxi |
|
2,672 |
|
1,312 |
|
44 |
|
|
|
4,028 |
|
|||||
Bullwhackers (1) |
|
599 |
|
230 |
|
(5 |
) |
|
|
824 |
|
|||||
Casino Rama Management Contract |
|
2,930 |
|
|
|
|
|
|
|
2,930 |
|
|||||
Pennsylvania Racing/OTWs |
|
3,378 |
|
877 |
|
|
|
|
|
4,255 |
|
|||||
Earnings from Pennwood Racing, Inc. |
|
|
|
|
|
|
|
719 |
|
719 |
|
|||||
Hollywood Casino Aurora (2) |
|
16,571 |
|
2,392 |
|
|
|
|
|
18,963 |
|
|||||
Hollywood Casino Tunica (2) |
|
3,084 |
|
1,628 |
|
65 |
|
|
|
4,777 |
|
|||||
Hollywood Casino Shreveport (2) |
|
946 |
|
2,400 |
|
|
|
|
|
3,346 |
|
|||||
Corporate overhead |
|
(6,049 |
) |
745 |
|
50 |
|
|
|
(5,254 |
) |
|||||
Total |
|
$ |
52,843 |
|
$ |
17,320 |
|
$ |
809 |
|
$ |
719 |
|
$ |
71,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Three months ended June 30, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Charles Town Races |
|
$ |
14,396 |
|
$ |
1,965 |
|
$ |
43 |
|
$ |
|
|
$ |
16,404 |
|
Casino Rouge |
|
4,842 |
|
1,475 |
|
|
|
|
|
6,317 |
|
|||||
Casino Magic Bay St. Louis |
|
2,733 |
|
1,983 |
|
90 |
|
|
|
4,806 |
|
|||||
Boomtown Biloxi |
|
2,475 |
|
1,244 |
|
66 |
|
|
|
3,785 |
|
|||||
Bullwhackers (1) |
|
892 |
|
110 |
|
(3 |
) |
|
|
999 |
|
|||||
Casino Rama Management Contract |
|
2,487 |
|
|
|
|
|
|
|
2,487 |
|
|||||
Pennsylvania Racing/OTWs |
|
3,374 |
|
904 |
|
|
|
|
|
4,278 |
|
|||||
Earnings from Pennwood Racing, Inc. |
|
|
|
|
|
|
|
550 |
|
550 |
|
|||||
Hollywood Casino Aurora (2) |
|
|
|
|
|
|
|
|
|
|
|
|||||
Hollywood Casino Tunica (2) |
|
|
|
|
|
|
|
|
|
|
|
|||||
Hollywood Casino Shreveport (2) |
|
|
|
|
|
|
|
|
|
|
|
|||||
Corporate overhead |
|
(4,224 |
) |
707 |
|
3 |
|
|
|
(3,514 |
) |
|||||
Total |
|
$ |
26,975 |
|
$ |
8,388 |
|
$ |
199 |
|
$ |
550 |
|
$ |
36,112 |
|
(1) Bullwhackers was acquired by Penn National Gaming on April 25, 2002.
(2) Hollywood Casino Aurora, Hollywood Casino Tunica and Hollywood Casino Shreveport were acquired by Penn National Gaming, Inc. on March 3, 2003 and accounted for as of March 1, 2003.
EBITDA or earnings before interest, taxes, depreciation and amortization, loss on change in fair value of interest rate swaps and gain/loss on disposal of assets and inclusive of earnings from joint venture, is not a measure of performance or liquidity calculated in accordance with generally accepted accounting principles. EBITDA information is presented solely as a supplemental disclosure because management believes that it is a widely used measure of such performance in the gaming industry. EBITDA should not be construed as an alternative to operating income, as an indicator of our operating performance, or as an alternative to cash flows from operating activities, as a measure of liquidity, or as any other measure of performance determined in accordance with generally accepted accounting principles. We have significant uses of cash flows, including capital expenditures, interest payments, taxes and debt principal repayments, which are not reflected in EBITDA. It should also be noted that other gaming companies that report EBITDA information may calculate EBITDA in a different manner than us.
Revenues for the three months ended June 30, 2003 increased by $160.9 million, or 98.0%, to $325.0 million in 2003 from $164.1 million in 2002. The three new Hollywood Casino facilities contributed $131.8 million of the $160.9 million increase in revenues in the second quarter. Revenues increased at Charles Town by $24.1 million due to the addition of 710 slot machines since the second quarter of 2002. The remaining properties had a net revenue increase of approximately $5.0 million.
22
Operating expenses for the three months ended June 30, 2003 increased by $135.0 million, or 98.5%, to $272.1 million in 2003 from $137.1 million in 2002. The operating expenses for the three new Hollywood Casino facilities accounted for $111.2 million of the $135.0 million increase in operating expenses in the second quarter. At Charles Town operating expenses increased by $18.5 million as a result of adding approximately 30,000 square feet of gaming space and 710 slot machines to the facility. The remaining properties had a net increase in operating expenses of approximately $5.3 million.
Depreciation and amortization expense for the three months ended June 30, 2003 increased by $8.9 million from the corresponding period in 2002 as a result of the Hollywood Casino acquisition and capital expenditures in 2002 of $88.9 million. The Hollywood Casino facilities had depreciation and amortization expense of $6.4 million. At Charles Town depreciation and amortization increased by $1.8 million due to the addition of gaming space and slot machines. The increase in depreciation and amortization of $0.4 million at Casino Magic Bay St. Louis was primarily the result of the completion of the Bay Tower Hotel project in May 2002. The other properties accounted for the remaining $0.3 million increase.
EBITDA for the three months ended June 30, 2003 increased by $35.6 million, or 98.5%, to $71.7 million in 2003 from $36.1 million in 2002. The EBITDA contribution from the three Hollywood Casino facilities accounted for $27.1 million of the EBITDA increase, Charles Town, as a result of its expansion since the first quarter 2002, increased its EBITDA by $7.9 million. The other properties had a net increase in EBITDA of $2.3 million. Income from operations for the three months ended June 30, 2003 increased by $25.8 million, or 95.9%, to $52.8 million in 2003 from $27.0 million in 2002. The Hollywood Casino properties and Charles Town, as a result of its expansion accounted for $20.6 million and $5.6 million of the increase in income from operations, respectively. The other properties accounted for a $1.4 million increase. Corporate expenses increased by $1.8 million due to the addition of Hollywood and corporate management, Pennsylvania slot legislation and office expense in Wyomissing.
Interest expense for the three months ended June 30, 2003 increased $17.9 million, or 180.1%, from the corresponding period in 2002 due primarily to additional borrowings of approximately $700.0 million in March 2003 to finance the Hollywood Casino acquisition and the interest expense associated with the Shreveport bond issues.
Other expenses for the three months ended June 30,2003 increased by $1.3 million compared to 2002. Included in other expenses was a $0.5 million write off on an option to purchase a racetrack and $0.7 million for expenses incurred at Shreveport for discussions and negotiations with the Noteholder Group. The remaining expenses were for foreign currency translation losses.
Charles Town Entertainment Complex
Revenues for the three months ended June 30, 2003 increased by $24.1 million, or 39.7%, to $84.8 million in 2003 from $60.7 million in 2002. Gaming revenues increased by $23.3 million, or 44.5%, to $75.7 million in 2003 from $52.4 million in 2002. This revenue growth was primarily a result of an increase in the average number of slot machines from 2,002 in the second quarter of 2002 to 2,704 in the second quarter of 2003, the addition of 30,000 square feet of gaming space and a 1,500 car parking garage to accommodate more customers and a marketing program that is focused on creating awareness in the market place. We have currently defined our target markets as the area within a 75-mile radius of Charles Town, West Virginia and have been successful in increasing mid-week, drive-in play as well as weekend play. The success of the marketing program and the additional gaming capacity has resulted in an increase in our win per machine per day to $308 in 2003 from $288 in 2002. Racing revenues increased by $0.1 million, or 2.2%, to $5.7 million in 2003 from $5.6 million in 2002.
Total operating expenses for the three months ended June 30, 2003 increased by $16.2 million, or 36.6%, to $60.5 million in 2003 from $44.3 million in 2002. The increase was primarily due to an increase in gaming related taxes of $13.6 million, attributed to the increased gaming revenues. Salaries, wages and benefits increased by $1.9 million primarily due to costs of additional staffing levels to accommodate the expanded gaming floor and increased customer volumes compared to staffing levels in the prior period. Total other costs increased primarily due to an increase in operating expenses, insurance, property taxes, utilities and other costs associated with the expanded capacity of the facility. Total marketing expenses increased $0.3 million as a result of television advertising and in-house signage. Depreciation and amortization expense increased by $1.8 million due to the addition of 710 gaming machines and the completion of $50.4 million of capital projects in 2002. Income from operations increased by $5.6 million or 39.2% to $20.0 million in 2003 from $14.4 million in 2002.
On July 1, 2003, we completed construction on and opened Phase II of the Charles Town expansion project. The new gaming area consolidates the entire gaming floor by joining the original gaming floor in the main building, Slot CityTM and the OK Corral and added 723 slot machines. With the additional 723 slot machines, we now operate 3,450 slot machines at our facility. By year-end, we will add an additional 50 slot machines, bringing the total number of slot machines to 3,500.
23
Casino Rouge
Revenues for the three months ended June 30, 2003 increased by $0.9 million, or 3.5%, to $26.3 million in 2003 from $25.4 million in 2002. Gaming revenues for the three months ended June30, 2003 increased by $0.8 million, or 3.3%, to $25.7 million in 2003 from $24.9 million in 2002 due to attracting customers with higher gaming profiles, improved slot product and more focused marketing programs. We also added 54 new slot machines to our gaming floor bringing the total number of machines to 1,088 from 1.034 in the second quarter of 2002. The win per machine per day remained constant at $230 for both periods. Food, beverage and other revenues for the three months ended June 30, 2003 increased by $0.2 million, or 8.8%, to $2.3 million in 2003 from $2.1 million in 2002 as a result of Dockers Grill being opened this year and increased casino beverage service this year.
Total operating expenses for the three months ending June 30, 2003 increased by $0.2 million, or 1.2%, to $20.8 million in 2003 from $20.6 million in 2002. Gaming expenses increased by $0.3 million, or 2.7%, due to the tax effect of the increased gaming revenues and increases to player marketing and giveaway costs. Other operating expenses were down approximately $0.1 million while general and administrative expenses and depreciation and amortization expenses for the period were approximately the same as the prior year. Income from operations increased by $0.6 million, or 12.6%, to $5.4 million in 2003 from $4.8 million in 2002.
Casino Magic-Bay St. Louis
Revenues for the three months ended June 30, 2003 increased by $2.5 million, or 10.5%, to $26.6 million in 2003 from $24.1 million in 2002. Gaming revenues for the three months ended June 30, 2003 increased by $1.8 million, or 8.3%, to $23.0 million in 2003 from $21.2 million in 2002. The primary reason for the increase in gaming revenues over the prior year is the impact of the new 291 room Bay Tower Hotel, which opened in June 2002. In addition, we had several successful promotions during the second quarter of 2003, including several sold-out performances and functions. Slot coin-in for the three months ended June 30, 2003 increased $24.2 million, or 9.0%, to $294.9 million in 2003 from $270.7 million in 2002. Table drop increased by $0.1 million, or 0.4%, to $17.5 million in 2003 from $17.4 million in 2002. Hotel, food and beverage and other revenue for the three months ended June 30, 2003 increased by a combined $0.7 million, or 26.5%, to $3.6 million in 2003 from $2.9 million in 2002. The main reason for this increase was the June 2002 opening of the Bay Tower Hotel and a new restaurant.
Total operating expenses for the three months ended June 30, 2003 increased by $1.7 million, or 8.7%, to $21.0 million in 2003 from $19.3 million in 2002. Gaming and related expenses (including marketing expenses) for the three months ended June 30, 2003 increased by $1.2 million, or 9.7%, to $13.2 million in 2003 from $12.0 million in 2002. Gaming taxes on the additional $1.8 million of casino revenue accounted for $0.2 million of the increased gaming expenses. Increased marketing expenditures, primarily entertainment expenses, and expenses relating to giveaways, and VIP function-related expenses accounted for the majority of the balance of increased gaming and related costs. Non-gaming expenses for the three months ended June 30, 2003 increased by $0.6 million, or 27.6%, to $2.9 million in 2003 from $2.3 million in 2002, due to the additional costs associated with operating the new hotel, restaurant, spa and convention facilities. Administrative expenses for the three months ended June 30, 2003 decreased by $0.1 million, or 2.4%, to $4.8 million in 2003 from $4.9 million in 2002. Last year, administrative expenses included $0.8 million in pre-opening expenses for the new hotel complex. Depreciation and amortization expense was $0.4 million higher as a result of the completion of $22.5 million of capital projects in 2002. Income from operations increased by $0.5 million, or 17.9%, to $3.2 million in 2003 from $2.7 million in 2002.
Boomtown Biloxi
Revenues for the three months ended June 30, 2003, as compared to the three months ended June 30, 2002, increased by $0.1 million, or 0.5%, to $18.6 million from $18.5 million. Gaming revenues for the three months ended June 30, 2003 increased $0.2 million, or 1.4%, to $16.5 million in 2003 from $16.3 million in 2002. This variance is attributable to marketing programs being adjusted to focus on more profitable customers with higher margins. Food and beverage revenues for the three months ended June 30, 2003 decreased by $0.1 million, or 6.3%, to $1.6 million in 2003 from $1.7 million in 2002. Food and beverage revenues decreased due to increased competition and a change in marketing strategy to an emphasis on customers rather than consumers. Other revenues of $0.5 million, primarily related to family fun center and gift shop sales, were approximately the same as last year.
24
Total operating expenses for the three months ended June 30, 2003 decreased by $0.1 million, or 1.0%, to $14.6 million in 2003 from $14.7 million in 2002. Gaming expenses for the three months ended June 30, 2003 decreased by $0.3 million, or 3.8%, to $7.5 million in 2003 from $7.8 million in 2002. This is primarily due to lower slot participation costs. Food and beverage expenses for the three months ended June 30, 2003 were $1.8 million, which was approximately the same as in 2002. Administrative expenses for the three months ended June 30, 2003 increased by $0.2 million, or 5.0%, to $5.0 million in 2003 from $4.8 million in 2002. This is primarily due to an increase in property and liability insurance. Income from operations increased by $0.2 million, or 8.0%, to $2.7 million in 2003 from $2.5 million in 2002.
Bullwhackers
The acquisition of Bullwhackers was completed on April 25, 2002. Comparisons of a three-month period in 2003 to a two-month period in 2002 would not be meaningful and are not discussed. For the second quarter of 2003, Bullwhackers had revenues of $6.5 million consisting mainly of gaming revenue from slot machines, operating expenses of $5.9 million and income from operations of $0.6 million for the period.
The property did not do as well as expected due to an interior renovation project that was suppose to be completed in the first quarter lasting well into the second quarter. The project required the closing of gaming areas while construction was going on, reductions in the number of slot machines available for play and constant movement of machines to newly renovated areas. The disruptions to our customers resulted in lost slot play. A major benefit to the renovations was the opening of Penny Heaven in the mezzanine of Bullwhackers Casino. Penny Heaven contains 93 penny slot machines, which is the largest number of penny games in the Blackhawk market, and is very popular with our guests. In addition, the new games are ticket-in, ticket-out, (TITO) ready which should result in future cost savings. During the first quarter, we had 28 days of inclement weather that closed or partially closed the casino and road construction on the main highway into Blackhawk that had an affect on revenue. The management team is also reviewing staffing schedules to ensure that staffing matches business levels more closely.
Casino Rama
Management service fees earned under the Casino Rama Management Contract for the three months ended June 30, 2003 increased by $0.5 million, or 18.2%, to $3.2 million from $2.7 million in 2002. Total revenue increased at Casino Rama by 6.0% in 2003 compared to 2002. The increase in revenue was a result of marketing programs that focused on trip frequency, recent visits, the entertainment center and the opening of a hotel in June 2002.
Pennsylvania Racing Operations
Net revenues for the three months ended June 30, 2003 decreased by $0.8 million, or 2.7%, to $27.6 million in 2003 from $28.4 million in 2002. Restrictions placed on telephone and internet wagering account activity by various state gaming regulations resulted in call center revenue declining by $.4 million this quarter compared to 2002. Wagering at Penns facilities on live and simulcast races accounted for the remaining revenue decrease and was caused by a 7.1% decrease in attendance in 2003 compared to 2002.
Operating expenses for the three months ended June 30, 2003 decreased by $0.8 million, or 2.8%, to $24.3 million in 2003 from $25.1 million in 2002. The majority of this decrease is related to lower revenues, which decreased the associated direct costs of purses, simulcast and pari-mutuel tax expenses.
Hollywood Casino Corporation
The acquisition of Hollywood Casino Corporation was completed on March 3, 2003, but for accounting purposes was effective as of March 1, 2003. For the period from April 1, 2003 to June 30, 2003, the Hollywood Casino facilities in Aurora, Tunica and Shreveport had net revenues of $131.8 million consisting mainly of gaming revenues. Operating expenses totaled $111.2 million and consisted of gaming expense ($64.6 million), food, beverage and other expenses ($17.3 million), general and administrative expenses ($22.8 million) and depreciation and amortization ($6.4 million). Income from operations for the three months ended June 30, 2003 was $20.6 million.
25
Effective July 1, 2003, the state of Illinois increased the graduated gaming tax rate structure by increasing certain tax rates, adding new tax brackets and raising the highest marginal tax rate from 50% to 70%. This highest marginal tax rate applies to a licensees annual gaming revenues in excess of $250 million. Gaming tax expenses recorded in the second quarter reflect a weighted average rate, based upon anticipated annual revenues as well as the new tax structure that goes into effect on July 1. Additionally, the State increased the admission tax from $3 to $5 per person. No impact from the admission tax increase has been reflected in the accompanying financial statement. We are taking steps to mitigate the Illinois tax increase through a variety of methods including employee reduction, marketing and promotional program reductions, other cost reductions and the adoption of admission fees. This quarter reflects $1.0 million in pre-tax one-time cost for severance packages, legal and other professional cost for implementation of the cost savings.
New Jersey Joint Venture
We have an investment in Pennwood Racing, Inc., which operates Freehold Raceway in New Jersey. Our 50% share of Pennwoods net income was $0.7 million in the three months ended June 30, 2003, compared to $0.5 million in 2002, and was recorded as other income on the income statement. The increase in the joint ventures net income was due to an increase in revenue from the Atlantic City casinos and a decrease in the state racing commission program costs allocated to the tracks. This offset a small increase in racing operations expenses.
Corporate Overhead Expenses
Corporate overhead expenses for the three months ended June 30, 2003 increased by $1.8 million, or 49.2%, to $5.3 million in 2003 from $3.5 million in 2002. During the second quarter, we incurred expenses of approximately $0.4 million for Pennsylvania slot legislation, $0.5 million for Hollywood Casino corporate overhead expenses and $0.6 million for additional staffing and office expense in Wyomissing compared to 2002.
Results of Operations
Six months ended June 30, 2003 compared to six months ended June 30, 2002
The following is a summary of the results of operations by property level for the six months ended June 30, 2002 and 2003:
|
|
Revenues |
|
EBITDA(1) |
|
||||||||
|
|
2002 |
|
2003 |
|
2002 |
|
2003 |
|
||||
Charles Town Racesä |
|
$ |
117,602 |
|
$ |
155,258 |
|
$ |
30,924 |
|
$ |
43,367 |
|
Casino Rouge |
|
52,332 |
|
55,328 |
|
13,761 |
|
16,191 |
|
||||
Casino Magic-Bay St. Louis |
|
47,031 |
|
53,201 |
|
9,748 |
|
11,864 |
|
||||
Boomtown Biloxi |
|
38,234 |
|
37,537 |
|
7,948 |
|
8,386 |
|
||||
Bullwhackers (2) |
|
4,841 |
|
12,624 |
|
999 |
|
1,266 |
|
||||
Casino Rama Management Contract |
|
5,077 |
|
5,864 |
|
4,681 |
|
5,424 |
|
||||
Pennsylvania Racing/OTWs |
|
53,246 |
|
51,064 |
|
7,862 |
|
7,162 |
|
||||
Hollywood Casino-Aurora (3) |
|
|
|
93,937 |
|
|
|
26,397 |
|
||||
Hollywood Casino-Tunica (3) |
|
|
|
39,462 |
|
|
|
6,992 |
|
||||
Hollywood Casino-Shreveport (3) |
|
|
|
46,470 |
|
|
|
6,122 |
|
||||
Earnings from Pennwood Racing, Inc (New Jersey) |
|
|
|
|
|
1,325 |
|
1,305 |
|
||||
Corporate eliminations (4) |
|
(957 |
) |
(819 |
) |
|
|
|
|
||||
Corporate overhead |
|
29 |
|
|
|
(7,579 |
) |
(9,736 |
) |
||||
Total |
|
$ |
317,435 |
|
$ |
549,926 |
|
$ |
69,669 |
|
$ |
124,740 |
|
(1) EBITDA is income from operations excluding charges for depreciation and amortization and gain/loss on disposal of assets, and is inclusive of earnings from joint venture. EBITDA does not represent net income or cash flows from operations as those terms are defined by GAAP. EBITDA does not necessarily indicate whether cash flows will be sufficient to fund cash needs. A reconciliation of GAAP income for operations to EBITDA follows this table.
(2) Bullwhackers was acquired by Penn National Gaming on April 25, 2002.
(3) Hollywood Casino Aurora, Hollywood Casino Tunica and Hollywood Casino Shreveport were acquired by Penn National Gaming, Inc. on March 3, 2003 and accounted for as of March 1, 2003.
(4) For intracompany transactions related to import/export simulcasting.
26
Reconciliation of Income From Operations (GAAP) To EBITDA (in thousands):
|
|
Income |
|
Depreciation |
|
(Gain)/loss |
|
Earnings |
|
EBITDA |
|
|||||
Six months ended June 30, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Charles Town Races |
|
$ |
35,233 |
|
$ |
7,379 |
|
$ |
755 |
|
$ |
|
|
$ |
43,367 |
|
Casino Rouge |
|
12,970 |
|
3,070 |
|
151 |
|
|
|
16,191 |
|
|||||
Casino Magic Bay St. Louis |
|
6,715 |
|
4,805 |
|
344 |
|
|
|
11,864 |
|
|||||
Boomtown Biloxi |
|
5,681 |
|
2,598 |
|
107 |
|
|
|
8,386 |
|
|||||
Bullwhackers (1) |
|
793 |
|
432 |
|
41 |
|
|
|
1,266 |
|
|||||
Casino Rama Management Contract |
|
5,424 |
|
|
|
|
|
|
|
5,424 |
|
|||||
Pennsylvania Racing/OTWs |
|
5,429 |
|
1,736 |
|
(3 |
) |
|
|
7,162 |
|
|||||
Earnings from Pennwood Racing, Inc. |
|
|
|
|
|
|
|
1,305 |
|
1,305 |
|
|||||
Hollywood Casino Aurora (2) |
|
23,142 |
|
3,255 |
|
|
|
|
|
26,397 |
|
|||||
Hollywood Casino Tunica (2) |
|
4,721 |
|
2,204 |
|
67 |
|
|
|
6,992 |
|
|||||
Hollywood Casino Shreveport (2) |
|
2,931 |
|
3,191 |
|
|
|
|
|
6,122 |
|
|||||
Corporate overhead |
|
(11,395 |
) |
1,479 |
|
180 |
|
|
|
(9,736 |
) |
|||||
Total |
|
$ |
91,644 |
|
$ |
30,149 |
|
$ |
1,642 |
|
$ |
1,305 |
|
$ |
124,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Six months ended June 30, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Charles Town Races |
|
$ |
26,763 |
|
$ |
4,031 |
|
$ |
130 |
|
$ |
|
|
$ |
30,924 |
|
Casino Rouge |
|
10,888 |
|
2,852 |
|
21 |
|
|
|
13,761 |
|
|||||
Casino Magic Bay St. Louis |
|
5,867 |
|
3,779 |
|
102 |
|
|
|
9,748 |
|
|||||
Boomtown Biloxi |
|
5,347 |
|
2,454 |
|
147 |
|
|
|
7,948 |
|
|||||
Bullwhackers (1) |
|
892 |
|
110 |
|
(3 |
) |
|
|
999 |
|
|||||
Casino Rama Management Contract |
|
4681 |
|
|
|
|
|
|
|
4,681 |
|
|||||
Pennsylvania Racing/OTWs |
|
6,051 |
|
1,811 |
|
|
|
|
|
7,862 |
|
|||||
Earnings from Pennwood Racing, Inc. |
|
|
|
|
|
|
|
1,325 |
|
1,325 |
|
|||||
Hollywood Casino Aurora (2) |
|
|
|
|
|
|
|
|
|
|
|
|||||
Hollywood Casino Tunica (2) |
|
|
|
|
|
|
|
|
|
|
|
|||||
Hollywood Casino Shreveport (2) |
|
|
|
|
|
|
|
|
|
|
|
|||||
Corporate overhead |
|
(9,015 |
) |
1,417 |
|
19 |
|
|
|
(7,579 |
) |
|||||
Total |
|
$ |
51,474 |
|
$ |
16,454 |
|
$ |
416 |
|
$ |
1,325 |
|
$ |
69,669 |
|
(1) Bullwhackers was acquired by Penn National Gaming on April 25, 2002.
(2) Hollywood Casino Aurora, Hollywood Casino Tunica and Hollywood Casino Shreveport were acquired by Penn National Gaming, Inc. on March 3, 2003 and accounted for as of March 1, 2003.
EBITDA or earnings before interest, taxes, depreciation and amortization, loss on change in fair value of interest rate swaps and gain/loss on disposal of assets and inclusive of earnings from joint venture, is not a measure of performance or liquidity calculated in accordance with generally accepted accounting principles. EBITDA information is presented solely as a supplemental disclosure because management believes that it is a widely used measure of such performance in the gaming industry. EBITDA should not be construed as an alternative to operating income, as an indicator of our operating performance, or as an alternative to cash flows from operating activities, as a measure of liquidity, or as any other measure of performance determined in accordance with generally accepted accounting principles. We have significant uses of cash flows, including capital expenditures, interest payments, taxes and debt principal repayments, which are not reflected in EBITDA. It should also be noted that other gaming companies that report EBITDA information may calculate EBITDA in a different manner than us.
Effective July 1, 2003, the state of Illinois increased the graduated gaming tax rate structure by increasing certain tax rates, adding new tax brackets and raising the highest marginal tax rate from 50% to 70%. This highest marginal tax rate applies to a licensees annual gaming revenues in excess of $250 million. Gaming tax expenses recorded in the second quarter reflect a weighted average rate, based upon anticipated annual revenues as well as the new tax structure that goes into effect on July 1. Additionally, the State increased the admission tax from $3 to $5 per person. No impact from the admission tax increase has been reflected in the accompanying financial statement. We are taking steps to mitigate the Illinois tax increase through a variety of methods including employee layoffs, marketing and promotional program reductions, other cost reductions and the adoption of admission fees. This quarter reflects $1.0 million in pre-tax one-time cost for severance packages, legal and other professional cost for implementation of the cost savings.
27
Revenues for the six months ended June 30, 2003 increased by $232.5 million, or 73.2%, to $549.9 million in 2003 from $317.4 million in 2002. The three new Hollywood Casino facilities contributed $179.9 million of the $232.5 million increase in revenues in the second quarter. Revenues increased at Charles Town by $37.7 million due to the addition of 710 slot machines since the first quarter of 2002. Bullwhackers revenues increased by $7.8 million due to six months of operations in 2003 compared to 2 months in 2002. The remaining properties had a revenue increase of approximately $ 7.1 million.
Operating expenses for the six months ended June 30, 2003 increased by $192.3 million, or 72.3%, to $458.3 million in 2003 from $266.0 million in 2002. The operating expenses for the three new Hollywood Casino facilities accounted for $149.1 million of the $192.3 million increase in operating expenses in the second quarter. At Charles Town operating expenses increased by $29.2 million as a result of adding approximately 30,000 square feet of gaming space and 710 slot machines to the facility. Bullwhackers expenses increased by $7.9 million due to six months of operations in 2003 compared to 2 months in 2002. The remaining properties had a net expense increase of approximately $ 6.1 million.
Depreciation and amortization expense for the six months ended June 30, 2003 increased by $13.7 million or 83.2% from the corresponding period in 2002 as a result of the Hollywood Casino acquisition and capital expenditures in 2002 of $88.9 million. The Hollywood Casino facilities had depreciation and amortization expense of $8.6 million. At Charles Town depreciation and amortization increased by $3.3 million due to the addition of gaming space and slot machines. The increase in depreciation and amortization of $1.0 million at Casino Magic Bay St. Louis was primarily the result of the completion of the Bay Tower Hotel project in May 2002. The other properties accounted for the remaining $0.7 million increase.
EBITDA for the six months ended June 30, 2003 increased by $55.1 million, or 79.1%, to $124.7 million in 2003 from $69.7 million in 2002. The EBITDA contribution from the three Hollywood Casino facilities accounted for $39.5 million of the EBITDA increase, Charles Town, as a result of its expansion since the first quarter 2002, increased its EBITDA by $12.4 million. The other properties had a net increase in EBITDA of $3.2 million. Income from operations for the six months ended June 30, 2003 increased by $40.1 million, or 77.9%, to $91.6 million in 2003 from $51.5 million in 2002. The Hollywood Casino properties and Charles Town, as a result of its expansion accounted for $30.8 million and $8.5 million of the increase in income from operations, respectively. The other properties accounted for a $5.3 million increase. Corporate expenses increased by $2.1 million due to the addition of operations management and legal staff.
Interest expense for the six months ended June 30, 2003 increased $23.5 million, or 113.2%, from the corresponding period in 2002 due primarily to additional borrowings of approximately $700.0 million in March 2003 to finance the Hollywood Casino acquisition and the interest expense associated with the Shreveport bond issues.
Other expenses for the six months ended June 30,2003 increased by $1.3 million compared to 2002. Included in other expenses was a $0.5 million write off on an option to purchase a racetrack and $0.7 million for expenses incurred at Shreveport for discussions and negotiations with the Noteholder Group. The remaining expenses were for foreign currency translation losses.
In March 2003, we expensed prepayment fees of $1.3 million relating to the early extinguishment of debt.
Charles Town Entertainment Complex
Revenues for the six months ended June 30, 2003 increased by $37.7 million, or 32.1%, to $155.3 million in 2003 from $117.6 million in 2002. Gaming revenues increased by $37.6 million, or 37.0%, to $139.3 million in 2003 from $101.7 million in 2002. This revenue growth was primarily a result of an increase in the average number of slot machines from 2,001 in the six months of 2002 to 2,707 in the six months of 2003, the addition of 30,000 square feet of gaming space and a 1,500 car parking garage to accommodate more customers and a marketing program that is focused on creating awareness in the market place. We have currently defined our target markets as the area within a 75-mile radius of Charles Town, West Virginia and have been successful in increasing mid-week, drive-in play as well as weekend play. The success of the marketing program and the additional gaming capacity has resulted in an increase in our win per machine per day to $284 in 2003 from $281 in 2002. Racing revenues decreased by $0.8 million, or 7.1%, to $10.0 million in 2003 from $10.8 million in 2002. The decrease in racing revenues was due to inclement weather conditions in January and February in the mid-atlantic region that caused a decrease in attendance and wagering and the loss of 18 live race days. Other revenues increased by $0.8 million due to the opening of the new food court in July 2002.
28
Total operating expenses for the six months ended June 30, 2003 increased by $29.2 million, or 32.1%, to $120.0 million in 2003 from $90.8 million in 2002. The increase was primarily due to an increase in gaming related taxes of $21.4 million, attributed to the increased gaming revenues. Salaries, wages and benefits increased by $2.8 million primarily due to costs of additional staffing levels to accommodate the expanded gaming floor and increased customer volumes compared to staffing levels in the prior period. Total other costs increased primarily due to an increase in operating expenses, insurance, property taxes, utilities and other costs associated with the expanded capacity of the facility. Total marketing expenses increased $0.4 million as a result of television advertising and in-house signage. Depreciation and amortization expense increased by $3.3 million due to the addition of 710 gaming machines and the completion of $50.4 million of capital projects in 2002. Income from operations increased by $8.5 million or 31.6% to $35.2 million in 2003 from $26.7 million in 2002.
On July 1, 2003, we completed construction on Phase II of the Charles Town expansion project and opened this area to the public. The new gaming area consolidates the entire gaming floor by joining the original gaming floor in the main building, Slot City and the OK Corral and adds 750 gaming machines. By year-end, we will add another 50 machines to the gaming floor bring the total number of gaming machines to 3,500.
Casino Rouge
Revenues for the six months ended June 30, 2003 increased by $3.0 million, or 5.7%, to $55.3 million in 2003 from $52.3 million in 2002. Gaming revenues for the six months ended June30, 2003 increased by $3.0 million, or 5.8%, to $54.3 million in 2003 from $51.3 million in 2002 due to attracting customers with higher gaming profiles, improved slot product and more focused marketing programs. We also added 54 new slot machines to our gaming floor bringing the total number of machines to 1,088 from 1.034 in the second quarter of 2002. The win per machine per day increased to $241 in 2003 from $236 in 2002. Food, beverage and other revenues for the six months ended June 30, 2003 increased by $0.3 million, or 7.0%, to $4.6 million in 2003 from $4.3 million in 2002 as a result of Dockers Grill opening this year and increased casino beverage service this year.
Total operating expenses for the six months ended June 30, 2003 increased by $0.9 million, or 2.2%, to $42.3 million in 2003 from $41.4 million in 2002. Gaming expenses increased by $0.8 million, or 2.7%, due to the tax effect of the increased gaming revenues and increases to player marketing and giveaway costs. Other operating expenses increased by approximately $0.1 million, including general and administrative expenses and depreciation and amortization expenses. Income from operations increased by $2.1 million or 19.1% to $13.0 million in 2003 from $10.9 million in 2002.
Casino Magic-Bay St. Louis
Revenues for the six months ended June 30, 2003 increased by $6.2 million, or 13.1%, to $53.2 million in 2003 from $47.0 million in 2002. Gaming revenues for the six months ended June30, 2003 increased by $4.5 million, or 10.7%, to $46.1 million in 2003 from $41.6 million in 2002. The primary reason for the increase in gaming revenues over prior year is the impact of the new 291 room Bay Tower Hotel, which was opened in June 2002. In addition, we had several successful promotions during the second quarter of 2003, including several sold-out performances and functions. Slot coin-in for the six months ended June 30, 2003 increased $60.2 million, or 11.4%, to $588.3 million in 2003 from $528.1 million in 2002. Table drop increased by $0.6 million, or 1.8%, to $35.0 million in 2003 from $35.6 million in 2002. Hotel, food and beverage and other revenue for the six months ended June 30, 2003 increased by a combined $1.7 million, or 31.8%, to $7.1 million in 2003 from $5.4 million in 2002. The main reason for this increase was the June 2002 opening of the Bay Tower Hotel and a new restaurant.
Total operating expenses for the six months ended June 30, 2003 increased by $5.3 million, or 12.9%, to $46.5 million in 2003 from $41.2 million in 2002. Gaming and related expenses (including marketing expense) for the six months ended June 30, 2003 increased by $2.3 million, or 9.7%, to $26.2 million in 2003 from $23.9 million in 2002. Gaming taxes on the additional $4.5 million of casino revenue accounted for $0.6 million of the increased gaming expenses. Increased marketing expenditures, primarily entertainment expenses, and expenses relating to giveaways, and VIP function-related expenses accounted for the majority of the balance of increased gaming and related costs. Non-gaming expenses for the six months ended June 30, 2003 increased by $1.3 million, or 31.1%, to $5.6 million in 2003 from $4.3 million in 2002, due to the additional costs associated with operating the new hotel, restaurant, spa and convention facilities. Administrative expenses for the six months ended June 30, 2003 increased by $0.4 million, or 4.4%, to $9.5 million in 2003 from $9.1 million in 2002. Last year, administrative expenses included $1.2 million in pre-opening expenses for the new hotel complex. Depreciation and amortization expense was $1.0 million higher as a result of the completion of $22.5 million of capital projects in 2002. Income from operations increased by $0.8 million, or 14.4%, to $6.7 million in 2003 from $5.9 million in 2002.
29
Boomtown Biloxi
Revenues for the six months ended June 30, 2003, as compared to the six months ended June 30, 2002, decreased by $0.7 million, or 1.8%, to $37.5 million from $38.2 million. Gaming revenues for the six months ended June 30, 2003 increased $0.4 million, or 1.0%, to $33.3 million in 2003 from $33.7 million in 2002. This variance is attributable to marketing programs being adjusted to focus on more profitable customers with higher margins. Food and beverage revenues for the six months ended June 30, 2003 decreased by $0.3 million, or 8.5%, to $3.2 million in 2003 from $3.5 million in 2002. Food and beverage revenues decreased due to increased competition and a change in marketing strategy to an emphasis on customers rather than consumers. Other revenues of $1.0 million, primarily related to family fun center and gift shop sales, were approximately the same as last year.
Total operating expenses for the six months ended June 30, 2003 decreased by $1.0 million, or 2.7%, to $31.8 million in 2003 from $32.8 million in 2002. Gaming expenses for the six months ended June 30, 2003 decreased by $1.2 million, or 7.1%, to $15.2 million in 2003 from $16.4 million in 2002. This is primarily due to lower slot participation costs. Food and beverage expenses for the six months ended June 30, 2003 decreased by $0.2 million to $3.5 million from $3.7 million in 2002. Administrative expenses for the six months ended June 30, 2003 increased by $0.4 million, or 3.6%, to $10.0 million in 2003 from $9.6 million in 2002. This is primarily due to an increase in property and liability insurance. Income from operations increased by $0.3 million, or 6.2%, to $5.7 million in 2003 from $5.4 million in 2002.
Bullwhackers
The acquisition of Bullwhackers was completed on April 25, 2002. Comparisons of a six-month period in 2003 to a two-month period in 2002 would not be meaningful and are not discussed. For the six months ended June 30, 2003, Bullwhackers had revenues of $12.6 million consisting mainly of gaming revenue from slot machines, operating expenses of $11.8 million and income from operations of $0.8 million for the period.
The property did not do as well as expected due to an interior renovation project that was suppose to be completed in the first quarter lasting well into the second quarter. The project required the closing of gaming areas while construction was going on, reductions in the number of slot machines available for play and constant movement of machines to newly renovated areas. The disruptions to our customers resulted in lost slot play. A major benefit to the renovations was the opening of Penny HeavenÔ in the mezzanine of Bullwhackers Casino. Penny Heaven contains 93 penny slot machines, which is the largest number of penny games in the Blackhawk market, and is very popular with our guests. In addition, the new games are TITO ready which should result in future cost savings. During the first quarter, we had 28 days of inclement weather that closed or partially closed the casino and road construction on the main highway into Blackhawk that had an affect on revenue. The management team is also reviewing staffing schedules to ensure that staffing matches business levels more closely.
Casino Rama
Management service fees earned under the Casino Rama Management Contract for the six months ended June 30, 2003 increased by $0.8 million, or 15.5%, to $5.9 million from $5.1 million in 2002. The increase in fees earned was a result of successful marketing programs that focused on trip frequency, recent visits and the entertainment center at Casino Rama that resulted in increased property revenues. Revenue at Casino Rama also increased due to opening of a hotel in June 2002.
Pennsylvania Racing Operations
Revenues for the six months ended June 30, 2003 decreased by $2.2 million, or 4.1%, to $51.1 million in 2003 from $53.3 million in 2002. Restrictions placed on telephone and internet wagering account activity by various state gaming regulations resulted in call center revenue declining by $0.5 million in 2003 compared to 2002. Nine live race days at Penn National Race Course and one live race day at Pocono Downs were cancelled in 2003 due to adverse weather conditions and many others were affected in both attendance and wagering whereas in 2002 there were no cancellations. As a result, wagering at our facilities for the period decreased by $5.9 million, or 2.8%, to $197.8 in 2003 from $203.7 in 2002 and attendance decreased by 7.8% compared to last year. The weather conditions also affected our export simulcast revenue as wagering on our export signals fell $11.2 million, or 10.4% to $96.3 million in 2003 from $107.5 million in 2002.
Operating expenses for the six months ended June 30, 2003 decreased by $1.6 million, or 3.3%, to $45.6 million in 2003 from $47.2 million in 2002. The majority of this decrease is related to lower revenues, which decreased the associated direct costs of purses, simulcast and pari-mutuel tax expenses. Income from operations decreased by $0.6 million or 10.3% to $5.4 million in 2003 from $6.0 million in 2002.
30
Hollywood Casino Corporation
The acquisition of Hollywood Casino Corporation was completed on March 3, 2003, but for accounting purposes was effective as of March 1, 2003. For the period from March 1, 2003 to June 30, 2003, the Hollywood Casino facilities in Aurora, Tunica and Shreveport had net revenues of $179.9 million consisting mainly of gaming revenues. Operating expenses totaled $149.1 million and consisted of gaming expense ($87.1 million), food, beverage and other expenses ($23.4 million), general and administrative expenses ($29.9 million) and depreciation and amortization ($8.6 million). Income from operations for the six months ended June 30, 2003 was $30.8 million.
New Jersey Joint Venture
We have an investment in Pennwood Racing, Inc., which operates Freehold Raceway in New Jersey. Our 50% share of Pennwoods net income was $1.3 million for the six months ended June 30, 2003, and 2002, and was recorded as other income on the income statement. Freehold Raceway ran six fewer live race days in 2003 compared to 2002 and experienced declines in live racing handle, simulcast wagering and attendance at the facility. The decrease in the racing revenues were offset by an increase in revenue from the Atlantic City casinos, a decrease in the state racing commission program costs allocated to the tracks and a decrease in direct racing expenses.
Corporate Overhead Expenses
Corporate overhead expenses for the six months ending June 30, 2003 increased by $2.1 million, or 28.3%, to $9.7 million in 2003 from $7.6 million in 2002. During the period, we incurred expenses of approximately $0.6 million for Pennsylvania slot legislation, $0.7 million for Hollywood Casino corporate overhead expenses and $0.8 million for additional staffing and office expense in Wyomissing compared to 2002.
Liquidity and Capital Resources
Historically, our primary sources of liquidity and capital resources have been cash flow from operations, borrowings from banks and proceeds from the issuance of debt and equity securities.
Net cash provided by operating activities was $74.8 million for the six months ended June 30, 2003. This consisted of net income of $28.7 million, non-cash reconciling items of $40.0 million and net increases in current liability accounts along with net decreases in current asset accounts of $6.1 million, net of assets and liabilities acquired in the Hollywood Casino acquisition.
Cash flows used in investing activities totaled $296.1 million for the six months ended June 30, 2003. Expenditures for property, plant, and equipment totaled $32.5 million. This primarily consisted of $15.0 million on the Charles Town Phase II project, $7.5 million on Bullwhackers renovations, and $9.4 million for maintenance capital expenditures. Payments made to terminate an interest rate swap contract totaled $1.9 million. Proceeds from the sale of property and equipment were $0.5 million. The aggregate purchase price for the Hollywood Casino acquisition, net of cash acquired was $264.1 million. Cash in escrow decreased by $1.0 million as a result of closing on the Bullwhackers land lease. Proceeds from New Jersey joint venture distribution were $.8 million.
Cash flows from financing activities provided net cash flow of $260.1 million for the six months ended June 30, 2003. Proceeds from the exercise of stock options totaled $1.4 million. Aggregate proceeds from the $800 million credit facility were $700 million. Payment on long-term debt totaled $422.2 million, which consisted of a $62.2 million payment on the $800 million credit facility and a $360 million payment for the early extinguishment of the Hollywood Casino Corporation senior secured notes. Net payments for deferred financing fees were $19.0 million.
Capital Expenditures
The following table summarizes our planned capital expenditures, other than maintenance capital expenditures, by property for the fiscal year ended December 31, 2003 (in thousands):
|
|
Year Ending |
|
Expenditures |
|
Balance |
|
|||
Property |
|
|
|
|
|
|
|
|||
Charles Town Entertainment Complex |
|
$ |
24,000 |
|
$ |
14,987 |
|
$ |
9,013 |
|
Boomtown Biloxi |
|
24,000 |
|
299 |
|
23,701 |
|
|||
Bullwhackers Casino |
|
10,000 |
|
7,454 |
|
2,546 |
|
|||
Corporate |
|
600 |
|
291 |
|
309 |
|
|||
Totals |
|
$ |
58,600 |
|
$ |
23,031 |
|
$ |
35,569 |
|
31
The Charles Town facility added 38,300 square feet of gaming space, which houses 723 additional slot machines, expands the food court and provides space for an entertainment facility. Cost of the construction and related activities was estimated at $24.0 million, of which we have contracts in the amount of $6 million still remaining at June 30, 2003. The additional gaming space was opened to the public on July 1, 2003. There is still work to complete in the food court area and entertainment facility during the third quarter of 2003.
In January 2002, we signed an option to purchase approximately 4 acres of land adjacent to our Boomtown Biloxi property for $4.0 million. The purchase is contingent upon receiving certain governmental and third-party consents, authorizations, approvals and licenses which we expect could occur in 2003. If successful, we expect to use the land for additional parking for our Boomtown Biloxi facility and to develop the property in the event that we move the boat.
In 2002, we began refurbishing the Bullwhackers facade and interior. We expect to spend an additional $4.0 million, which includes the purchase of $1.0 million of slot machines and related equipment, in 2003 on this project. As of June 30, 2003, we have completed the purchase of the slot machines and opened Penny Heaven in the mezzanine of the Bullwhackers Casino. Renovations are continuing in other areas of the facility. This project is scheduled for completion in the third quarter of 2003. On April 24, 2003, we completed the purchase of the land lease for Bullwhackers Casinos for $6.1 million including closing costs. The purchase will save approximately $1 million per year in rent expense based on current operating performance.
In 2003, we are expanding our corporate offices to provide additional workstation and office space due to increased personnel. The first portion of this project was completed in the second quarter of 2003.
For 2003, we expect to expend approximately $30 million for maintenance capital expenditures at our properties, including the Hollywood Casino properties. As of June 30, 2003 we have spent $9.4 million of the $30 million budgeted.
We expect to use cash generated from operations and cash available under the revolver portion of our senior secured credit facility to fund our anticipated capital expenditure and maintenance capital expenditures in 2003. See Outlook below.
Senior Secured Credit Facility
On March 3, 2003, we entered into a $800 million senior secured credit facility with a syndicate of lenders that replaced our $350 million credit facility.
The credit facility is comprised of a $100 million revolving credit facility maturing on September 1, 2007, a $100 million Term A facility loan maturing on September 1, 2007 and a $600 million Term B Facility loan maturing on September 1, 2007. The maturity dates will be extended to the fifth anniversary dates for the revolving and Term A loans and the sixth anniversary date for the Term B loan if the outstanding 11 1/8% Senior Subordinated Notes due 2008 are refinanced in full to a date that is at least seven years and 181 days after March 3, 2003. Up to $20 million of the revolving credit facility may be used for the issuance of standby letters of credit. In addition, up to $20 million of the revolving credit facility also may be used for short-term credit to be provided to the Company on a same-day basis. On March 3, 2003 we borrowed the entire Term A and Term B term loans to complete the purchase of Hollywood Casino and to call Hollywood Casinos $360 million senior secured notes.
At the our option, the revolving and the Term A credit facilities may bear interest at (1) the highest of ½ of 1% in excess of the federal funds effective rate or the base rate of interest that the Administrative Agent announces from time to time as its prime lending rate plus an applicable margin of up to 2.25%, or (2) a rate tied to a eurodollar rate plus an applicable margin up to 3.25%, in either case, with the applicable rate based on the Companys total leverage. The Term B credit facility may bear interest at (1) the highest of ½ of 1% in excess of the federal funds effective rate or the base rate of interest that the Administrative Agent announces from time to time as its prime lending rate plus an applicable margin of up to 3.00%, or (2) a rate tied to a eurodollar rate plus an applicable margin up to 4.00%, in either case, with the applicable rate based on the Companys total leverage.
At June 30, 2003, we had an outstanding balance of $638.0 million on term loans A and B and $92.6 million to borrow under the revolving credit facility after giving effect to outstanding letters of credit of $7.4 million.
The terms of the Companys $800 million senior secured credit facility require the Company to satisfy certain financial covenants, such as leverage and fixed charges coverage ratios, and limitations on indebtedness, liens, investments and capital expenditures. At June 30, 2003, we were in compliance with all required financial covenants.
32
11 1/8% Senior Subordinated Notes due 2008
On March 12, 2001, we completed a private offering of $200 million of our 11 1/8% senior subordinated notes due 2008. The net proceeds of the 11 1/8% notes were used, in part, to finance our acquisition of Casino Rouge and the Casino Rama Management Contract, including the repayment of certain existing indebtedness at Casino Rouge. Interest on the 11 1/8% notes is payable on March 1 and September 1 of each year.
The 11 1/8% notes mature on March 1, 2008. As of June 30, 2003, all of the principal amount of the 11 1/8% notes is outstanding.
We may redeem all or part of the 11 1/8% notes on or after March 1, 2005 at certain specified redemption prices. Prior to March 1, 2004, we may redeem up to 35% of the 11 1/8% notes from proceeds of certain sales of our equity securities. The 11 1/8% notes also are subject to redemption requirements imposed by state and local gaming laws and regulations.
The 11 1/8% notes are general unsecured obligations and are guaranteed on a senior subordinated basis by certain of our current and future wholly-owned domestic subsidiaries. The 11 1/8% notes rank equally with our future senior subordinated debt and junior to our senior debt, including debt under our senior credit facility. In addition, the 11 1/8% notes will be effectively junior to any indebtedness of our non-U.S. or unrestricted subsidiaries, none of which have guaranteed the 11 1/8% notes.
The 11 1/8% notes and guarantees were originally issued in a private placement pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended. On July 30, 2001, we completed an offer to exchange the 11 1/8% notes and guarantees for 11 1/8% notes and guarantees registered under the Securities Act of 1933, as amended, having substantially identical terms.
8 7/8% Senior Subordinated Notes due 2010
On February 28, 2002, we completed a public offering of $175,000,000 of our 8 7/8% senior subordinated notes due 2010. Interest on the 8 7/8% notes is payable on March 15 and September 15 of each year, beginning September 15, 2002. The 8 7/8% notes mature on March 15, 2010. As of June 30, 2003, all of the principal amount of the 8 7/8% notes is outstanding. We used the net proceeds from the offering, totaling approximately $170.1 million after deducting underwriting discounts and related expenses, to repay term loan indebtedness under the $350 million credit facility.
We may redeem all or part of the 8 7/8% notes on or after March 15, 2006 at certain specified redemption prices. Prior to March 15, 2005, we may redeem up to 35% of the 8 7/8% notes from proceeds of certain sales of our equity securities. The 8 7/8% notes also are subject to redemption requirements imposed by state and local gaming laws and regulations.
The 8 7/8% notes are general unsecured obligations and are guaranteed on a senior subordinated basis by certain of our current and future wholly-owned domestic subsidiaries. The 8 7/8% notes rank equally with our future senior subordinated debt, including the 11 1/8% senior subordinated notes, and junior to our senior debt, including debt under our senior credit facility. In addition, the 8 7/8% notes will be effectively junior to any indebtedness of our non-U.S. or unrestricted subsidiaries, none of which have guaranteed the 8 7/8% notes.
Hollywood Casino Shreveport Notes
Hollywood Casino Shreveport and Shreveport Capital Corporation are co-issuers of $150 million aggregate principal amount of 13% first mortgage notes due 2006 and $39 million aggregate principal amount of 13% senior secured notes due 2006 (the Hollywood Shreveport Notes). Hollywood Casino Shreveport is a general partnership that owns the casino operations. Shreveport Capital Corporation is a wholly-owned subsidiary of Hollywood Casino Shreveport formed solely for the purpose of being a co-issuer of the Hollywood Shreveport Notes.
The Hollywood Shreveport Notes are non-recourse to Penn and its subsidiaries (other than Hollywood Casino Shreveport, Shreveport Capital Corporation, HCS I, Inc., HCS II, Inc. and HWCC-Louisiana, Inc., collectively the Shreveport Entities) and are secured by substantially all of the assets of the casino, and the partnership interests held by HCS I, Inc. and HCS II, Inc. and the stock held by HWCC-Louisiana, Inc.
The indentures governing the Hollywood Shreveport Notes require the issuers to make an offer to purchase the Hollywood Shreveport Notes at 101% of the principal amount thereof within ten days of the occurrence of a Change of Control as defined in the indentures. A Change of Control was deemed to have occurred under the indentures on March 3, 2003 as a result of the consummation of the merger of our wholly-owned subsidiary with and into Hollywood Casino Corporation. Hollywood Casino Shreveport determined that it does not have the liquidity to repurchase the Hollywood Shreveport Notes at 101% of their principal amount and, accordingly, could not make an offer to purchase the Hollywood Shreveport Notes as required under the indentures. As a result, a valuation allowance in the amount of $69.6 million was established to reduce the carrying amount to managements estimate of the fair value of the Hollywood Shreveport Notes, which is based on the fair value of the underlying collateral.
33
On March 14, 2003, the Hollywood Casino Shreveport and Shreveport Capital Corporation were notified by an ad hoc committee of holders of the Hollywood Shreveport Notes that they have 60 days from receipt of the notice to cure the failure to offer to purchase the Hollywood Shreveport Notes or an event of default will have occurred under the indentures. Neither Hollywood Casino Shreveport nor Shreveport Capital Corporation made an offer to purchase the Hollywood Shreveport Notes and an event of default occurred under the indentures on May 13, 2003. There can be no assurance that the holders of the Hollywood Shreveport Notes will not pursue all rights and remedies that they may have under the indentures as a result of the event of default. Further, any action on the part of the noteholders may require the Shreveport Entities to seek the protection of the bankruptcy laws or other similar remedies. On August 1, 2003, interest payments of $12.3 million became due on the Hollywood Shreveport Notes. The managing general partner of Hollywood Casino Shreveport did not make that payment.
Hollywood Casino Corporation Notes
On March 3, 2003, the date of closing for the Hollywood Casino acquisition, Hollywood Casino had outstanding long-term indebtedness of $310 million of 11.25% senior secured notes due 2007 and $50 million of floating rate senior secured notes, due 2006. As part of the closing, we placed $401 million in an escrow account to call the notes on May 1, 2003. The $401 million consisted of note principal of $360 million, accrued interest of $19 million and a note call premium of $22 million. This transaction was completed and the notes were retired on May 1, 2003.
Hollywood Casino-Aurora Capital Leases
Hollywood Casino-Aurora (HCA) leases two parking garages under capital lease agreements. The first lease has an initial 30-year term ending in June 2023 with the right to extend the term under renewal options for an additional 67 years. Rental payments through June 2012 equal the City of Auroras financing costs related to its general obligation bond issue used to finance the construction of the parking garage. The general obligation bond issue has an annual interest rate to approximately 5.6%. The second lease has an initial term ending in September 2026 with the right to extend the lease for up to 20 additional years. Rental payments during the first 15 years equal the lessors debt service costs related to the industrial revenue bond issue used to finance a portion of the construction costs of the parking garage. The remaining construction costs were funded by HCA. In addition, HCA currently pays base rent equal to $17,000 per month for improvements made to the lessors North Island Center banquet and meeting facilities. HCA is also responsible for additional rent, consisting of costs such as maintenance costs, insurance premiums and utilities, arising out of its operation of both parking garages. At June 30, 2003, HCA had a long-term capital lease obligation of $16.3 million.
34
Commitments and Contingencies
Contractual Cash Obligations
As discussed above, we completed our purchase of Hollywood Casino and refinanced our senior secured credit facility. As of August 8, 2003, there was no indebtedness outstanding under the credit facility and there was approximately $92.6 million available for borrowing under the revolving credit portion of the credit facility (after giving effect to outstanding letters of credit). The following table is as of June 30, 2003 and reflects our new senior secured credit facility:
|
|
|
|
Payments Due By Period |
|
|||||||||||
(in thousands) |
|
Total |
|
July 1,
2003 |
|
2004 - 2005 |
|
2006 - 2007 |
|
2008 and |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
$ 800 million senior secured credit facility. This credit facility is secured by substantially all of the assets of the Company |
|
|
|
|
|
|
|
|
|
|
|
|||||
Term A |
|
$ |
40,240 |
|
$ |
4,236 |
|
$ |
16,943 |
|
$ |
19,061 |
|
$ |
|
|
Term B |
|
597,760 |
|
2,996 |
|
11,984 |
|
582,780 |
|
|
|
|||||
Hollywood Casino Corporation |
|
|
|
|
|
|
|
|
|
|
|
|||||
11.25% senior secured notes, due 2007 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Floating rate senior secured notes, due 2006 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Hollywood Shreveport non-recourse debt |
|
|
|
|
|
|
|
|
|
|
|
|||||
13% Shreveport First Mortgage Notes and 13% Shreveport Senior Secured Notes |
|
189,000 |
|
|
|
|
|
189,000 |
|
|
|
|||||
Interest |
|
86,400 |
|
12,342 |
|
49,372 |
|
24,686 |
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
11 1/8% senior subordinated notes due 2008 (1) |
|
|
|
|
|
|
|
|
|
|
|
|||||
Principal |
|
200,000 |
|
|
|
|
|
|
|
200,000 |
|
|||||
Interest |
|
111,250 |
|
11,125 |
|
44,500 |
|
44,500 |
|
11,125 |
|
|||||
8 7/8% senior subordinated notes due 2010 (2) |
|
|
|
|
|
|
|
|
|
|
|
|||||
Principal |
|
175,000 |
|
|
|
|
|
|
|
175,000 |
|
|||||
Interest |
|
108,720 |
|
7,766 |
|
31,063 |
|
31,063 |
|
38,828 |
|
|||||
Operating leases |
|
22,520 |
|
2,812 |
|
6,845 |
|
3,638 |
|
9,225 |
|
|||||
Total |
|
$ |
1,530,890 |
|
$ |
41,277 |
|
$ |
160,707 |
|
$ |
894,728 |
|
$ |
434,178 |
|
(1) The $200.0 million aggregate principal amount of 11 1/8% notes matures on March 1, 2008. Interest payments of approximately $11.1 million are due on each March 1 and September 1 until March 1, 2008.
(2) The $175.0 million aggregate principal amount of 8 7/8% notes matures on March 15, 2010. Interest payments of approximately $7.8 million are due on each March 15 and September 15 until March 15, 2010.
Other Commercial Commitments
The following table presents our material commercial commitments as of June 30, 2003 for the following future periods:
|
|
|
|
Amount of Commitment Expiration Per Period |
|
|||||||||||
(in thousands) |
|
Total |
|
2003 |
|
2004 - 2005 |
|
2006 - 2007 |
|
2008 and |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Revolving Credit Facility (1) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Letters of Credit (1) |
|
7,414 |
|
7,414 |
|
|
|
|
|
|
|
|||||
Guarantees of New Jersey Joint Venture Obligations (2) |
|
9,199 |
|
383 |
|
8,816 |
|
|
|
|
|
|||||
Total |
|
$ |
16,613 |
|
$ |
7,797 |
|
$ |
8,816 |
|
$ |
|
|
$ |
|
|
(1) The available balance under the revolving portion of the $100 million senior secured credit facility is diminished by outstanding letters of credit.
(2) In connection with our 50% ownership interest in Pennwood Racing, our joint venture in New Jersey, we have entered into a debt service maintenance agreement with Pennwoods lender to guarantee up to 50% of Pennwoods $23.0 million term loan. Our obligation as of June 30, 2003 under this guarantee is approximately $9.2 million.
35
Outlook
Based on our current level of operations, and anticipated revenue growth, we believe that cash generated from operations and amounts available under our credit facility will be adequate to meet our anticipated debt service requirements, capital expenditures and working capital needs for the foreseeable future. We cannot assure you, however, that our business will generate sufficient cash flow from operations, that our anticipated revenue growth will be realized, or that future borrowings will be available under our credit facility or otherwise will be available to enable us to service our indebtedness, including the credit facility and the notes, to retire or redeem our outstanding indebtedness when required or to make anticipated capital expenditures. In addition, if we consummate significant acquisitions in the future, our cash requirements may increase significantly and we may need to refinance all or a portion of our debt on or before maturity. Our future operating performance and our ability to service or refinance our debt will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On December 20, 2000, we entered into an interest rate swap with a notional amount of $100 million and a termination date of December 22, 2003. Under this agreement, we pay a fixed rate of 5.835% against a variable interest rate based on the 90-day LIBOR rate. On August 3, 2001, we entered into an interest rate swap with a notional amount of $36 million with a termination date of June 30, 2004. Under this agreement, we paid a fixed rate of 4.8125% against a variable interest rate based on the 90-day LIBOR rate. On March 3, 2003, we terminated our $36 million notional amount interest rate swap originally scheduled to expire in June 2004. We paid $1.9 million to terminate the swap agreement.
We have a policy designed to manage interest rate risk associated with our current and anticipated future borrowings. This policy enables us to use any combination of interest rate swaps, futures, options, caps and similar instruments. To the extent we employ such financial instruments pursuant to this policy, they are accounted for as hedging instruments. In order to qualify for hedge accounting, the underlying hedged item must expose us to risks associated with market fluctuations and the financial instrument used must be designated as a hedge and must reduce our exposure to the market in fluctuations throughout the hedge period. If these criteria are not met, a change in the market value of the financial instrument is recognized as a gain or loss in the period of change. Interest paid or received pursuant to the financial instrument is included as interest expense in the period.
On March 27, 2003, we entered into forward interest rate swap agreements with a total notional amount of $375.0 million in accordance with the terms of the $800 million senior secured credit facility. There are three two-year swap contracts totaling $175 million with an effective date of March 27, 2003 and a termination date of March 27, 2005. Under these contracts, we pay a fixed rate of 1.92% against a variable rate based on the 90-day LIBOR rate. We also entered into three three-year swap contracts totaling $200 million with a termination date of March 27, 2006. Under these contracts, we pay a fixed rate of 2.48% to 2.49% against a variable rate based on the 90-day LIBOR rate. The difference between amounts received and amounts paid under such agreements, as well as any costs or fees, is recorded as reduction of, or addition to, interest expense as incurred over the life of the swap or similar financial instrument. At June 30, 2003, the 90-day LIBOR rate was 1.00%.
ITEM 4. CONTROLS AND PROCEDURES
Our management, under the supervision and with the participation of the principal executive officer and principal financial officer, have evaluated the effectiveness of our controls and procedures related to our reporting and disclosure obligations as of June 30, 2003, which is the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the principal executive officer and principal financial officer have concluded that these disclosure controls and procedures are sufficient to provide that (a) material information relating to us, including our consolidated subsidiaries, is made known to these officers by other employees of us and our consolidated subsidiaries, particularly material information related to the period for which this periodic report is being prepared; and (b) this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the rules and forms of the Securities and Exchange Commission.
There were no changes that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonable likely to materially affect, our internal controls over financial reporting.
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Information in response to this Item is incorporated by reference to the information set forth in Note 11. Litigation in the Notes to Consolidated Financial Statements in Part I of this Quarterly Report on Form 10-Q.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As discussed in Note 9 of the Notes to Consolidated Financial Statements and the Liquidity and Capital Resources Section of Managements Discussion and Analysis of Financial Condition and Results of Operations, following the March 3, 2003 consummation of the merger of our wholly-owned subsidiary with and into Hollywood Casino Corporation, Hollywood Casino Shreveport and Shreveport Capital Corporation were required under the indentures governing the Hollywood Shreveport Notes, of which there were aggregate of $189 million outstanding, to make an offer to purchase the Hollywood Shreveport Notes. On March 14, 2003, the Hollywood Casino Shreveport and Shreveport Capital Corporation were notified by an ad hoc committee of holders of the Hollywood Shreveport Notes that they have 60 days from receipt of the notice to cure the failure to offer to purchase the Hollywood Shreveport Notes or an event of default will have occurred under the indentures. Neither Hollywood Casino Shreveport nor Shreveport Capital Corporation made a Change of Control offer to purchase the Hollywood Shreveport Notes within the 60 days. There can be no assurance that the holders of the Hollywood Shreveport Notes will not pursue all rights and remedies that they may have under the indentures as a result of the event of default. Further, any action on the part of the noteholders may require the Shreveport Entities to seek the protection of the bankruptcy laws or other similar remedies. On August 1, 2003, interest payments of $12.3 million became due on the Hollywood Shreveport Notes. The managing general partner of Hollywood Casino Shreveport did not make that payment.
The Hollywood Shreveport Notes are non-recourse to Penn and its subsidiaries (other than Hollywood Casino Shreveport, Shreveport Capital Corporation, HCS I, Inc., HCSII, Inc. and HWCC-Louisiana, Inc.) and are secured by substantially all of the assets of the casino, and the partnership interests held by HCS I, Inc. and HCS II, Inc. and the stock held by HWCC-Louisiana, Inc.
ITEM 4. SUMMISION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Our Annual Meeting of Shareholders was held on May 22, 2003.
(b) David A. Handler and John M. Lacquemin were elected at the Meeting. The following directors terms continued after the meeting: Peter Carlinio, Harold Cramer and Robert Levy.
(c) Certain matters voted upon at the Meeting and the votes cast with respect to such matters are as follows:
(i) Election of Directors:
Name |
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Votes For |
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Votes Witheld |
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David A. Handler |
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28,068,761 |
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10,151,357 |
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John M. Jacquemin |
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28,072,493 |
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10,147,625 |
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(ii) Ratification of the appointment of BDO Seidman, LLP, as independent auditors of our books, records and accounts for the year ending December 31, 2003:\
Votes For |
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Votes Against |
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Abstain |
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28,517,408 |
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9,696,876 |
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5,834 |
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(iii) Approval of our 2003 Long Term Incentive Compensation Plan:
Votes For |
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Votes Against |
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Abstain |
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18,389,832 |
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12,758,391 |
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1,288,110 |
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit |
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Description of Exhibit |
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3.5 |
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Amended and Restated Bylaws of Penn National Gaming, Inc., Effective as of May 22, 2003. |
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3.6 |
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Specimen Common Stock Certificate of Penn National Gaming, Inc. |
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10.1 |
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Employment agreement dated June 10, 2003 between the Company and Leonard DeAngelo |
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31.1 |
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CEO Certification pursuant to rule 13a-14(a And 15d-14(a of the Securities Exchange Act of 1934) |
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31.2 |
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CFO Certification pursuant to rule 13a-14(a And 15d-14(a of the Securities Exchange Act of 1934) |
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32.1 |
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Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. |
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32.2 |
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Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. |
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(b) |
Reports on Form 8-K |
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Report |
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Item(s) No. |
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Date of Report |
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Date Filed or Furnished |
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Form 8-K |
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7 and 9 |
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May 1, 2003 |
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Furnished May 1, 2003 |
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Form 8-K/A |
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2 and 7 |
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March 3, 2003 |
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Filed May 12, 2003 |
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Form 8-K |
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5 |
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May 14, 2003 |
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Filed May 14, 2003 |
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Form 8-K |
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9 |
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June 10, 2003 |
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Furnished June 12, 2003 |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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PENN NATIONAL GAMING, INC. |
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August 13, 2003 |
By: |
/s/ William J. Clifford |
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William J. Clifford |
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Senior Vice President-Finance |
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Exhibit 3.5
AMENDED AND RESTATED BYLAWS
OF
PENN NATIONAL GAMING, INC.
(a Pennsylvania Corporation)
Effective as of May 22, 2003
Notice given by facsimile transmission, e-mail or other electronic communication shall be deemed to have been given to the person entitled thereto when sent. A notice of meeting shall specify the place, day and hour of the meeting and any other information required by any other provision of the Business Corporation Law, the Articles or these Bylaws.
2
(a) Any director may participate in meetings of the board of directors by conference telephone, similar communications equipment or other electronic technology by means of which all persons participating in the meeting can hear each other. Directors so participating will be deemed present at the meeting.
(b) Shareholders may participate in any shareholders meeting by conference telephone, similar communications equipment or other electronic means, including, without limitation, the Internet. Shareholders so participating will be deemed present at the meeting.
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4
5
6
7
shareholders of record has been made as provided in this section for purposes of a meeting, the determination shall apply to any adjournment thereof unless the board fixes a new record date for the adjourned meeting.
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adopting such rules for and in conducting the meeting. The presiding officer shall announce at the meeting when the polls close for each matter voted upon. If no announcement is made, the polls shall be deemed to have closed upon the final adjournment of the meeting. After the polls close, no ballots, proxies or votes, nor any revocations or changes thereto, may be accepted.
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10
11
12
(3) Who has been determined to be unsuitable to serve as a director by (A) any federal, state or local regulatory body having jurisdiction over the corporation and its activities, or (B) the compliance committee.
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the directors present and voting at a meeting at which a quorum is present shall be the acts of the board of directors.
14
15
16
17
these Bylaws or applicable provisions of law and the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. The provisions of this section shall not apply to the responsibility or liability of an officer, as such, pursuant to any criminal statute or for the payment of taxes pursuant to local, state or federal law.
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19
(1) Certifying Employee means an employee of the corporation requested, as part of the corporations disclosure controls and procedures and in connection with the performance of the employees responsibilities in service to the corporation, to provide to the corporation a certification or certifications to be used by the corporation in connection with the preparation of its periodic reports under the Securities Exchange Act of 1934, as amended;
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21
Notwithstanding the foregoing, the Indemnified Representative may elect to retain counsel at the Indemnified Representatives own cost and expense to participate in the defense of such proceeding.
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Representative cannot agree on the selection of the third arbitrator within 30 days after such time as the corporation and the Indemnified Representative have each been notified of the selection of the others arbitrator, the necessary arbitrator or arbitrators shall be selected by the presiding judge of the court of general jurisdiction in such county. The arbitration shall be conducted pursuant to the Federal Arbitration Act and such procedures as the parties subject to such arbitration (each, a Party) may agree, or, in the absence of or failing such agreement, pursuant to the AAA Rules. Notwithstanding the foregoing: (a) each Party shall provide to the other, reasonably in advance of any hearing, copies of all documents which a Party intends to present in such hearing; (b) each Party shall be allowed to conduct reasonable discovery through written document requests and depositions, the nature and extent of which discovery shall be determined by the Parties; provided, however, that if the Parties cannot agree on the terms of such discovery, the nature and extent thereof shall be determined by the Panel which shall take into account the needs of the Parties and the purposes of arbitration to make discovery expeditious and cost effective; (c) each Party shall be entitled to make an oral presentation to the Panel; and (d) the Panel shall select as a resolution the position of either Party for each item of disagreement and may not impose an alternative resolution. The award shall be in writing and shall specify the factual and legal basis for the award.
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pursuant to which the corporation and each Indemnified Representative intend to be legally bound. Any repeal, amendment or modification hereof shall be prospective only and shall not affect any rights or obligations then existing.
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partnership, joint venture, trust or other enterprise in which one or more of its directors or officers are directors or officers or have a financial or other interest, shall not be void or voidable solely for that reason, or solely because the director or officer is present at or participates in the meeting of the board of directors that authorizes the contract or transaction, or solely because his, her or their votes are counted for that purpose, if:
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the person who seeks the right of inspection, the demand shall be accompanied by a verified power of attorney or other writing that authorizes the attorney or other agent to so act on behalf of the shareholder. The demand shall be directed to the corporation (i) at its registered office in the Commonwealth of Pennsylvania, (ii) at its principal place of business wherever situated, or (iii) in care of the person in charge of an actual business office of the corporation.
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Exhibit 3.6
SPECIMEN COMMON STOCK CERTIFICATE
[LOGO OF PENN NATIONAL GAMING, INC.]
COMMON STOCK
$.01 PAR VALUE
PENN NATIONAL GAMING, INC.
INCORPORATED UNDER THE LAW OF THE COMMONWEALTH OF PENNSYLVANIA
CUSIP 707569 10 9
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK OF
PENN NATIONAL GAMING, INC.
transferable on the books of the Corporation by the holder hereof, in person or by duly authorized attorney, upon the surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar.
Witness the facsimile seal of said Corporation and the facsimile signatures of its duly authorized officers.
Dated:
Countersigned and Registered:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY |
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TRANSFER AGENT AND REGISTRAR |
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BY |
SPECIMEN |
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AUTHORIZED SIGNATURE |
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[CORPORATE SEAL OF PENN NATIONAL GAMING, INC.]
/s/ |
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CHAIRMAN |
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/s/ |
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SECRETARY |
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The Corporation will furnish without charge to each shareholder who so requests a statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock of the Corporation or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Any such request may be addressed to the Corporation or its Transfer Agent.
The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants in common
UNIF GIFT MIN ACT- |
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Custodian |
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(Cust) |
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(Minor) |
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under Uniform Gifts to Minor Act |
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(State) |
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Additional abbreviations may also be used though not in the above list.
For value received, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE:
&nb sp;
(NAME AND ADDRESS OF TRANSFEREE SHOULD BE PRINTED OR TYPEWRITTEN)
&nbs p; Shares of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises.
Dated |
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Signature |
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2
NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
SIGNATURE(S) GUARANTEED
By: |
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THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM, PURSUANT TO S.E.C. RULE 17Ad-15.
This certificate also evidences and entitles the holder hereof to certain Rights as set forth in the Rights Agreement between Penn National Gaming, Inc. (the Company) and Continental Stock Transfer and Trust Company (the Rights Agent) dated as of March 2, 1999 (the Rights Agreement), and as the same may be amended from time to time, the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal offices of the Company. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. The Company will mail to the holder of this certificate a copy of the Rights Agreement, as in effect on the date of mailing, without charge promptly after receipt of a written request therefor. Under certain circumstances set forth in the Rights Agreement, Rights issued to, or held by, any Person who is, was or becomes an Acquiring Person, an Adverse Person or any Affiliate or Associate thereof (as such terms are defined in the Rights Agreement), whether currently held by or on behalf of such Person or by any subsequent holder, may become null and void.
3
Exhibit 10.1
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the Agreement) is entered into as of this 10th day of June, 2003 by and between Penn National Gaming, Inc., a Pennsylvania corporation (the Company), and Leonard DeAngelo, an individual residing in New Jersey (Executive).
WHEREAS, Executive desires to become employed by the Company, and the Company desires to employ Executive upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows:
1. Employment. The Company hereby agrees to employ Executive and Executive hereby accepts such employment, in accordance with the terms, conditions and provisions hereinafter set forth.
1.1. Duties and Responsibilities. Executive shall serve as Executive Vice President, Operations of the Company. Executive shall perform all duties and accept all responsibilities incident to such position as may be reasonably assigned to him by the President and Chief Operating Officer or by the Board of Directors of the Company (the Board). Executives principal place of employment shall be in Wyomissing, Pennsylvania.
1.2. Term.
(a) Initial Term. The term of this Agreement shall begin on a date to be agreed upon in writing between Executive and the Company, but in no event later than February 1, 2004 (the Commencement Date), and shall terminate at the close of business on the third anniversary of the Commencement Date (the Initial Term), unless earlier terminated in accordance with Section 3 hereof.
(b) Renewal Terms. This Agreement may be renewed for such additional periods as the parties may agree (each, a Renewal Term and, together with the Initial Term, the Employment Term) only upon execution of a written renewal agreement signed by each party. In the event the parties have not executed a renewal agreement prior to the expiration of the Employment Term but Executive continues to be employed by the Company after such time, Executive shall be deemed to be employed at will and the parties will have no further obligations to each other under this Agreement other than under Sections 3.4(b), 5, 7 and 9 through 19.
1.3. Extent of Service. Executive agrees to use Executives best efforts to carry out Executives duties and responsibilities and, consistent with the other provisions of this Agreement, to devote substantially all of Executives business time, attention and energy thereto. The foregoing shall not be construed as preventing Executive from serving on the board of philanthropic organizations (so long as such service does not materially interfere with Executives duties hereunder) or investing assets in such form or manner as will not require services on the part of Executive.
CONFIDENTIAL
1
2. Compensation. For all services rendered by Executive to the Company, the Company shall compensate Executive as set forth below.
2.1. Base Salary. The Company shall pay Executive a base salary (Base Salary), commencing on the Commencement Date, at the annual rate of $450,000, payable in installments at such times as the Company customarily pays its other senior executives (Peer Executives). Executives performance and Base Salary shall be reviewed annually. Any changes in Base Salary or other compensation shall be made at the discretion of the President and Chief Operating Officer, subject to the review of the compensation committee of the Board (the Compensation Committee).
2.2. Cash Bonuses.
(a) Annual Bonus. Executive shall participate in the Companys Senior Management Incentive Compensation Plan as such may be adopted, amended and approved, from time to time, by the Compensation Committee. Executives participation in such plan shall be pro rated during Executives first year of employment based on the number of days of actual employment.
(b) Start Bonus. Executive shall receive a cash bonus of $150,000 on the Commencement Date. Such bonus shall be paid together with the first payment of Base Salary in accordance with the Companys standard payroll practices.
(c) Transition Bonus. In the event that Executive is unable to commence employment with the Company prior to December 31, 2003 due to contractual obligations to Executives prior employer and such prior employer fails to pay Executive the full amount of Executives 2003 bonus as required by the terms of Executives employment agreement with such prior employer, then the Company will pay to Executive an amount equal to such shortfall up to a maximum of $100,000 (the Transition Bonus). Such payment shall be conditioned upon Executive providing a written statement to the Company setting forth the amount of such shortfall, the formula Executive believes should have been used to calculate such bonus and such other detail or documents as may be reasonably necessary for the Company to verify the basis of such claim. Such payment shall be made as soon as possible following the Companys review and verification of such claim.
2.3. Equity Compensation. The Company shall grant to Executive options pursuant to, and subject to the terms and conditions of, the then current equity compensation plan of Penn National Gaming, Inc. for 150,000 shares of Penn National Gaming, Inc. common stock at an exercise price based on the closing market price of the stock on the Commencement Date. Such options will vest as follows:
i. 25% on the first anniversary of the Commencement Date;
ii. 25% on the second anniversary of the Commencement Date;
iii. 25% on the third anniversary of the Commencement Date; and
iv. 25% on the fourth anniversary of the Commencement Date.
2
2.4. Other Benefits. Executive shall be entitled to participate in all other employee benefit plans and programs, including, without limitation, health, vacation, retirement, deferred compensation or SERP, made available to other Peer Executives, as such plans and programs may be in effect from time to time and subject to the eligibility requirements of the each plan. Nothing in this Agreement shall prevent the Company from amending or terminating any retirement, welfare or other employee benefit plans or programs from time to time, as the Company deems appropriate. In the event that Executive is not immediately eligible for medical coverage on Commencement Date, the Company shall reimburse Executive for any COBRA payments from the Commencement Date until such time as the Companys medical coverage commences.
2.5. Insurance. The Company shall maintain life insurance on the life of Executive in the amount of $1,000,000, to the extent it can be issued at standard rates, and Executive may name the beneficiary of such policy.
2.6. Vacation, Sick Leave and Holidays. Executive shall be entitled in each calendar year to four (4) weeks of paid vacation time, prorated for the current year. Each vacation shall be taken by Executive at such time or times as agreed upon by the Company and Executive, and any portion of Executives allowable vacation time not used during the calendar year shall be subject to the Companys payroll policies regarding carryover vacation. Executive shall be entitled to holiday and sick leave in accordance with the Companys holiday and other pay for time not worked policies.
2.7. Reimbursement of Expenses. Executive shall be provided with reimbursement of reasonable expenses related to Executives employment by the Company on a basis no less favorable than that authorized from time to time for Peer Executives.
3. Termination. Executives employment may be terminated prior to the end of the Employment Term in accordance with, and subject to the terms and conditions, set forth below.
3.1. Termination by the Company.
(a) Without Cause. The Company may terminate Executive at any time without Cause (as defined in subsection (b) below) upon the delivery of written notice to Executive, which notice shall set forth the effective date of such termination.
(b) With Cause. The Company may terminate Executive at any time for Cause effective immediately upon delivery of written notice to Executive. As used herein, the term Cause shall mean:
(i) Executive shall have been convicted of a felony or any misdemeanor involving allegations of fraud, theft, perjury or conspiracy;
(ii) Executive is found disqualified or not suitable to hold a casino or other gaming license by a governmental gaming authority in any jurisdiction where Executive is required to be found qualified, suitable or licensed;
3
(iii) Executive materially breaches any Company policy and fails to cure such breach within 15 days after receipt of written notice thereof or Executive materially breaches the terms of Sections 4, 5 or 6 this Agreement; or
(iv) Executive misappropriates corporate funds or commits other acts of dishonesty as determined in good faith by the Board.
3.2. Termination by the Executive. Executive may voluntarily terminate employment for any reason effective upon 60 days prior written notice to the Company, unless the Company waives such notice requirement (in which case the Company shall notify Executive in writing as to the effective date of termination). The Company and Executive, however, recognize and agree that they mutually agreed upon term of this Agreement and that Executive is expected to complete fully the Employment Term. In the event Executive terminates employment under this Section 3.2 prior to the completion of the Initial Term, the Company may, without limiting any other rights or remedies available to it, request that Executive repay any bonuses paid under Sections 2.2(b) or 2.2(c) pro rata to the number of days remaining in the Initial Term following the effective date of termination. Such payment shall be made in cash within 10 days of delivery of written notice from the Company to Executive.
3.3. Termination for Death or Disability. In the event of the death or total disability of Executive, this Agreement shall terminate effective as of the date of Executives death or total disability. The term total disability shall have the definition set forth in the Companys Long Term Disability Insurance Policy in effect at the time of such determination.
3.4. Payments Due Upon Termination.
(a) Generally. Upon any termination described in Sections 3.1, 3.2 or 3.3 above, Executive shall be entitled to receive any amounts due for Base Salary earned or expenses incurred through the effective date of termination and any benefits accrued or earned on or prior to such date in accordance with the terms of any applicable benefit plans and programs.
(b) Without Cause. In the event the Company terminates Executives employment without Cause (either before or after expiration of the Employment Term), and subject to Executive executing a mutual release in a form reasonably acceptable to the Company and Executive, Executive shall be entitled to receive the following in lieu of any other severance:
(i) Executive shall receive a cash payment equal to Executives monthly Base Salary at the rate in effect on the effective date of termination multiplied by the greater of (i) the number of months remaining in the Initial Term or (ii) twelve months (the Severance Period).
(ii) Executive shall continue to receive the health benefits coverage in effect on the effective date of termination (or as the same may be changed from time to time for Peer Executives) for Executive and, if any, Executives spouse and dependents for the Severance Period. At the option of the Company, the Company may elect to pay Executive cash in lieu of such coverage in an amount equal to Executives after-tax cost of obtaining generally comparable coverage for such period.
4
(c) Death or Disability. In the event the Company terminates Executives employment due to the death or total disability of Executive, Executive shall be entitled to receive the following in lieu of any other severance:
(i) Executive shall receive a cash payment equal to 175% of Executives monthly Base Salary at the rate in effect on the effective date of termination multiplied by the number of months remaining in the Severance Period.
(ii) Executive shall continue to receive the health benefits coverage in effect on the effective date of termination (or as the same may be changed from time to time for Peer Executives) for Executive and, if any, Executives spouse and dependents for the Severance Period. At the option of the Company, the Company may elect to pay Executive cash in lieu of such coverage in an amount equal to Executives after-tax cost of obtaining generally comparable coverage for such period.
(d) Payments. All payments due under this Section 3.4 shall be made within 15 days of the effective date of termination provided the release, if applicable, has been executed by Executive. Except as otherwise provided in this Section 3.4 or Section 8 below, no other payments or benefits shall be due under this Agreement to Executive.
3.5. Options. Except as otherwise provided in the relevant option plan or option agreement or as otherwise approved by the Compensation Committee, all options granted to Executive shall cease vesting on the effective date of termination, regardless of the reason therefore.
3.6. Notice of Termination. Any termination of Executives employment shall be communicated by a written notice of termination delivered within the time period specified in this Section 3. The notice of termination shall (i) indicate the specific termination provision in this Agreement relied upon, (ii) briefly summarize the facts and circumstances deemed to provide a basis for a termination of employment and the applicable provision hereof, and (iii) specify the termination date in accordance with the requirements of this Agreement.
4. No Conflicts of Interest. Executive agrees that throughout the period of Executives employment hereunder or otherwise, Executive will not perform any activities or services, or accept other employment relationship that would interfere with or present a conflict of interest concerning Executives employment with the Company. Executive agrees and acknowledges that Executives employment by the Company is conditioned upon Executive adhering to and complying with the business practices and requirements of ethical conduct set forth in writing from time to time by the Company in its employee manual or similar publication. Executive represents and warrants that no other contract, agreement or understanding to which Executive is a party or may be subject will be violated by the execution of this Agreement by Executive.
5. Confidentiality. Executive recognizes and acknowledges that Executive will have access to certain confidential information of the Company and that such information constitutes valuable, special and unique property of the Company (including, but not limited to, information such as business strategies, identity of acquisition or growth targets, marketing plans, customer lists, and other business related information for the Compans customers). Executive agrees
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that Executive will not, for any reason or purpose whatsoever, during or after the term of employment, disclose any of such confidential information to any party, and that Executive will keep inviolate and secret all confidential information or knowledge which Executive has access to by virtue of Executives employment with the Company, except as otherwise may be necessary in the ordinary course of performing Executives duties with the Company.
6. Non-Competition.
(a) As used herein, the term Restriction Period shall mean a period equal to the remainder of the Employment Term in effect on the effective date of termination.
(b) During Executives employment by the Company and for the duration of the Restriction Period thereafter, Executive shall not, except with the prior written consent of the Company, directly or indirectly, own, manage, operate, join, control, finance or participate in the ownership, management, operation, control or financing of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with, or use or permit Executives name to be used in connection with, any business or enterprise which owns or operates a gaming or pari-mutuel facility located within 150 miles of any gaming or pari-mutuel facility owned or operated by the Company or any of its affiliates; provided, however, that this Section 6(b) shall not apply in the event the Company terminates Executive without cause under Section 3.1(a).
(c) The foregoing restrictions shall not be construed to prohibit Executives ownership of less than 5% of any class of securities of any corporation which is engaged in any of the foregoing businesses and has a class of securities registered pursuant to the Securities Exchange Act of 1934, provided that such ownership represents a passive investment and that neither Executive nor any group of persons including Executive in any way, either directly or indirectly, manages or exercises control of any such corporation, guarantees any of its financial obligations, otherwise takes any part in its business, other than exercising Executives rights as a shareholder, or seeks to do any of the foregoing.
7. Non-Solicitation. During Executives employment by the Company and for a period equal to the greater of the Restriction Period or one year after the effective date of termination, Executive will not, except with the prior written consent of the Company, (i) directly or indirectly, solicit or hire, or encourage the solicitation or hiring of, any person who is, or was within a six month period prior to such solicitation or hiring, an employee of the Company or any of its affiliates for any position as an employee, independent contractor, consultant or otherwise or (ii) divert or attempt to divert any existing business of the Company or any of its affiliates.
8. Change of Control. In the event that a change in control of the Company occurs (as such may be defined by the Companys current equity compensation plan, a Change of Control), Executive shall be entitled to any payments and/or benefits that may become payable as a result of such event on substantially the same terms and conditions as any payments and/or benefits provided to Peer Executives taking into account Executives position as the Executive Vice President, Operations.
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9. Document Surrender. Upon the termination of Executives employment for any reason, Executive shall immediately surrender and deliver to the Company all documents, correspondence and any other information, of any type whatsoever, from the Company or any of its agents, servants, employees, suppliers, and existing or potential customers, that came into Executives possession by any means whatsoever, during the course of employment.
10. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws (and not the law of conflicts) of the Commonwealth of Pennsylvania.
11. Jurisdiction. The parties hereby irrevocably consent to the jurisdiction of the courts of the Commonwealth of Pennsylvania for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be commenced, prosecuted and continued only in the state or federal courts having jurisdiction for matters arising in Wyomissing, Pennsylvania, which shall be the exclusive and only proper forum for adjudicating such a claim.
12. Notices. All notices and other communications required or permitted under this Agreement or necessary or convenient in connection herewith shall be in writing and shall be deemed to have been given when hand delivered, delivered by guaranteed next-day delivery or sent by facsimile (with confirmation of transmission) or shall be deemed given on the third business day when mailed by registered or certified mail, as follows (provided that notice of change of address shall be deemed given only when received):
If to the Company, to:
Penn National Gaming, Inc.
825 Berkshire Boulevard, Suite 200
Wyomissing, PA 19610
Fax: (610) 376-2842
Attention: President
If to Executive, to:
Leonard DeAngelo
c/o Penn National Gaming, Inc.
825 Berkshire Boulevard, Suite 200
Wyomissing, PA 19610
Fax: (610) 373-4966
or to such other names or addresses as the Company or Executive, as the case may be, shall designate by notice to each other person entitled to receive notices in the manner specified in this Section.
13. Contents of Agreement; Amendment and Assignment.
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13.1. This Agreement sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior or contemporaneous agreements or understandings with respect to thereto and cannot be changed, modified, extended, waived or terminated except upon a written instrument signed by the party against which it is to be enforced.
13.2. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, executors, administrators, legal representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of Executive under this Agreement are of a personal nature and shall not be assignable or delegatable in whole or in part by Executive.
14. Severability. If any provision of this Agreement or application thereof to anyone or under any circumstances is adjudicated to be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect any other provision or application of this Agreement which can be given effect without the invalid or unenforceable provision or application and shall not invalidate or render unenforceable such provision or application in any other jurisdiction. If any provision is held void, invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other circumstances.
15. Remedies.
15.1. No remedy conferred upon a party by this Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to any other remedy given under this Agreement or now or hereafter existing at law or in equity.
15.2. No delay or omission by a party in exercising any right, remedy or power under this Agreement or existing at law or in equity shall be construed as a waiver thereof, and any such right, remedy or power may be exercised by such party from time to time and as often as may be deemed expedient or necessary by such party in its sole discretion.
15.3. In the event the Company, in the exercise of its sole reasonable judgment, determines that Executive has breached any term or condition of Sections 5, 6 or 7 of this Agreement, the Company may, by delivering written notice to Executive, (i) terminate and declare null and void any and all vested options, (ii) demand repayment of the proceeds of all option shares sold by Executive during the preceding 12 month period, and/or (iii) demand repayment of all amounts paid as severance hereunder or otherwise. Any repayments to be made by Executive shall be made within five business days of the giving of such notice. This subsection (c) shall terminate and be of no further force and effect immediately prior to a Change of Control.
16. Beneficiaries/References. Executive shall be entitled, to the extent permitted under any applicable law, to select and change a beneficiary or beneficiaries to receive any compensation or benefit payable under this Agreement following Executives death by giving the Company written notice thereof. In the event of Executives death or a judicial determination of
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Executives incompetence, reference in this Agreement to Executive shall be deemed, where appropriate, to refer to Executives beneficiary, estate or other legal representative.
17. Withholding. All payments under this Agreement shall be made subject to applicable tax withholding, and the Company shall withhold from any payments under this Agreement all federal, state and local taxes, as the Company is required to withhold pursuant to any law or governmental rule or regulation. Except as specifically provided otherwise in this Agreement, Executive shall bear all expense of, and be solely responsible for, all federal, state and local taxes due with respect to any payment received under this Agreement.
18. Regulatory Compliance. The terms and provisions hereof shall be conditioned on and subject to compliance with all laws, rules, and regulations of all jurisdictions, or agencies, boards or commissions thereof, having regulatory jurisdiction over the employment or activities of Executive hereunder.
19. Legal Fees. Each party shall bear its own costs and expenses with respect hereto except that the Company will defend, indemnify and hold harmless Executive for any costs and expenses relating to claims made by any third party with respect to Executives employment with the Company or this Agreement.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have executed this Agreement as of the date first above written.
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PENN NATIONAL GAMING, INC. |
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By: |
/s/ Kevin G. DeSanctis |
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Name: Kevin G. DeSanctis |
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Title: President and Chief Operating |
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Officer |
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EXECUTIVE |
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/s/ Leonard DeAngelo |
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Leonard DeAngelo |
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Exhibit 31.1
CERTIFICATION
PURSUANT TO RULE 13a-14(a) AND 15d-14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date: August 13, 2003 |
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/s/Peter M.Carlino |
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Peter M. Carlino |
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Chairman and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
PURSUANT TO RULE 13a-14(a) AND 15d-14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934
I, William J. Clifford, certify that:
Date: August 13, 2003 |
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/s/ William J. Clifford |
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William J. Clifford |
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Senior Vice President-Finance and |
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Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Penn National Gaming, Inc. (the Company) on Form 10-Q for the quarter ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Peter M. Carlino, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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By: |
/s/ Peter M. Carlino |
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Peter M. Carlino |
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Chairman and Chief Executive Officer |
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August 13, 2003 |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Penn National Gaming, Inc. (the Company) on Form 10-Q for the quarter ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, William J. Clifford, Senior Vice President-Finance and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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By: |
/s/ William J. Clifford |
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William J. Clifford |
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Senior Vice President-Finance and |
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Chief Financial Officer |
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August 13, 2003 |