SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): February 14, 2001
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PENN NATIONAL GAMING, INC.
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(Exact Name of Registrant Specified in Charter)
PENNSYLVANIA 0-24206 23-2234473
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(State or Other (Commission File (I.R.S. Employer
Jurisdiction of Number) Identification No.)
Incorporation)
825 Berkshire Boulevard
Wyomissing, PA 19610
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (610) 373-2400
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Not Applicable
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(Former Name or Former Address, if Changed Since Last Report)
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS.
(c) Exhibits.
99.1 Certain information that will be disclosed by the Company
in a proposed private placement of senior debt securities.
99.2 Rule 135 Press Release
ITEM 9. REGULATION FD DISCLOSURE.
We are pursuing a $200 million private placement of senior subordinated
notes to finance our acquisition of CRC Holdings, Inc., a privately held
Florida-based gaming company and to repay a portion of outstanding debt under
our credit facility. The acquisition of CRC includes our tender offer for
certain outstanding notes of a CRC subsidiary and the purchase of minority
interest in the same subsidiary that CRC does not currently own. However, if we
are unable to consummate the CRC acquisition by October 31, 2001, we expect to
use the entire net proceeds of the private placement to repay outstanding debt
under our senior credit facility. The notes will be sold in a private placement
and resold by the initial purchasers under Rule 144A of the Securities Act of
1933, as amended, and will be made only to qualified institutional buyers and to
investors in transactions exempt from registration under Regulation S under the
Securities Act. In connection with the offering of the senior notes, we
anticipate disclosing to prospective purchasers of the senior notes certain
information. We have elected to provide certain of this information in this
Current Report on Form 8-K as Exhibit 99.1 for informational purposes. None of
the information contained in this Form 8-K or the exhibit hereto should be
deemed to be filed under the Securities Exchange Act of 1934 or incorporated by
reference into any other filings we have made or may make pursuant to the
Securities Act of 1933 or into any other documents unless such portion of this
Current Report on Form 8-K is expressly and specifically identified in such
filing as being incorporated by reference therein.
No assurance can be made that the private placement of senior
subordinated notes will be completed. We presently expect to complete the
private placement of senior subordinated notes at the beginning of March 2001.
The senior subordinated notes have not been registered under the
Securities Act and may not be offered or sold in the United States absent
registration or an applicable exemption form the registration requirements. This
current report on Form 8-K does not constitute an offer to sell or the
solicitation of an offer to buy any security and shall not constitute an offer,
solicitation or sale of any securities in any jurisdiction in which such offer
or sale would be unlawful.
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This current report on Form 8-K together with the information attached as
an exhibit hereto, includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, regarding, among other things, our
business strategy, our prospects and our financial position. These statements
can be identified by the use of forward-looking terminology such as "believes,"
"estimates," "expects," "intends," "may," "will," "should," or "anticipates" or
the negative or other variation of these or similar words, or by discussions of
strategy or risks and uncertainties. Forward-looking statements in this
Form 8-K include, among others, statements concerning:
- projections of future results of operations or financial condition;
- our expectations for our Mississippi properties and the proposed CRC
acquisition;
- the timing, cost and expected impact on our results of operations of our
planned capital expenditures;
- the expected effect of regulatory changes that we are pursuing;
- our ability to consummate the proposed CRC acquisition; and
- expectations of the continued availability of capital resources.
Although we believe that the expectations reflected in such forward-looking
statements are reasonable, they are inherently subject to risks, uncertainties
and assumptions about us and our subsidiaries and, accordingly, we cannot assure
you that such expectations will prove to be correct. Important factors that
could cause actual results to differ materially from the forward-looking
statements made herein are set forth under the caption "Risk Factors" and
elsewhere in this Form 8-K and include, without limitation, risks
related to the following:
- our ability to integrate the full-scale casino operations of the
Mississippi properties and the proposed CRC acquisition into our business;
- capital expansions at our gaming and pari-mutuel facilities;
- the Showboat option at the Charles Town Entertainment Complex;
- the activities of our competitors;
- our ability to maintain regulatory approvals for our existing businesses
and to receive regulatory approvals for our new businesses;
- our dependence on key personnel;
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- the maintenance of agreements with our horsemen and pari-mutuel clerks;
- the various conditions to closing for the CRC acquisition; and
- our credit agreement.
All subsequent written and oral forward-looking statements attributable to
us or persons acting on our behalf are expressly qualified in their entirety by
the cautionary statements included in this Form 8-K. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
Form 8-K might not occur.
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SIGNATURE
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 hereunto duly authorized.
PENN NATIONAL GAMING, INC.
(Registrant)
By /S/ ROBERT S. IPPOLITO
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Robert S. Ippolito
Chief Financial Officer
Dated: February 14, 2001
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EXHIBIT INDEX
Exhibit
Number Description
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99.1 Certain Information that will be disclosed by the
Company in a proposed private placement of senior
debt securities.
99.2 Rule 135 Press Release
Exhibit 99.1
THE FOLLOWING INFORMATION WILL BE DISCLOSED BY THE COMPANY IN A
PROPOSED PRIVATE PLACEMENT OF SENIOR DEBT SECURITIES.
THE FINANCIAL INFORMATION PRESENTED IS FOR THE YEAR ENDED DECEMBER 31,
1999 OR THE NINE MONTHS OR TWELVE MONTHS ENDED SEPTEMBER 30, 2000 FOR ALL
ENTITIES EXCEPT CRC HOLDINGS, INC. -- GAMING DIVISION, WHICH IS FOR THE YEAR
ENDED NOVEMBER 30, 1999 OR THE NINE MONTHS OR TWELVE MONTHS ENDED AUGUST 31,
2000.
UNLESS SPECIFICALLY PROVIDED ELSEWHERE TO THE CONTRARY, THIS DOCUMENT
ASSUMES THAT OUR ACQUISITION OF THE GAMING DIVISION OF CRC HOLDINGS,
INC., INCLUDING THE ACQUISITION OF THE MINORITY INTEREST IN CRC'S MAJORITY
OWNED SUBSIDIARY, AS DISCUSSED BELOW HAS BEEN COMPLETED. HOWEVER, WE CANNOT
BE SURE THAT THE CRC ACQUISITION WILL BE CONSUMMATED ON THE TERMS OR TIMETABLE
CURRENTLY CONTEMPLATED, OR AT ALL.
FOR PURPOSES OF THIS DOCUMENT, THE "OFFERING" SHALL MEAN OUR PROPOSED
PRIVATE PLACEMENT OF $200 MILLION OF SENIOR DEBT SECURITIES AND THE "NOTES"
SHALL MEAN THE NOTES ISSUED PURSUANT TO THE OFFERING.
RECENT DEVELOPMENTS
FINANCIAL PERFORMANCE
On February 8, 2001, we reported our operating results for the fourth
quarter ended December 31, 2000. As announced, our revenues for the fourth
quarter of 2000 were approximately $91.9 million compared to approximately $45.7
million in the fourth quarter of 1999. EBITDA, before non-recurring charges, was
approximately $17.1 million in the fourth quarter of 2000 compared to
approximately $7.9 million in the fourth quarter of 1999. Revenues for the year
ended December 31, 2000 increased to approximately $294.1 million, from
approximately $171.5 million in 1999. EBITDA, before non-recurring charges, rose
to approximately $60.0 million for the year ended December 31, 2000, from
approximately $29.8 million for the year ended December 31, 1999.
The results of operations by property level (excluding corporate overhead)
for the years ended December 31, 1999 and 2000 are summarized as follows (in
thousands):
REVENUES(1) EBITDA(1)
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1999 2000 1999(2) 2000
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Charles Town Entertainment Complex.................... $ 80,015 $135,290 $16,023 $35,469
Casino Magic Bay St. Louis............................ 88,895 87,561 21,923 20,489
Boomtown Biloxi....................................... 67,826 65,846 13,282 11,684
Penn National Race Course and its OTWs................ 55,609 64,364 9,065 10,380
Pocono Downs and its OTWs............................. 36,324 37,573 8,955 7,792
Earnings from Pennwood Racing, Inc.................... 1,098 2,832(3) 1,098 2,832
Corporate Eliminations................................ (1,588) (1,630) -- --
-------- -------- ------- -------
Total................................................. $328,179 $391,836 $70,346 $88,646
======== ======== ======= =======
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(1) The results for our Mississippi properties, Casino Magic Bay St. Louis and
Boomtown Biloxi, give pro forma effect as if we had owned these properties
on the first day of each period presented.
(2) EBITDA for the year-ended December 31, 1999 excludes non-recurring charges
for litigation expense at Charles Town of $1.5 million; horsemen action
expense at Penn National Race Course of $1.25 million; and site development
and restructuring expenses of $0.5 million.
(3) Revenues for the year-ended December 31, 2000 exclude a non-recurring charge
of $0.5 million for the termination of the Garden State Park lease.
CRC's revenues for the year ended November 30, 2000 were approximately
$104.8 million compared to approximately $100.4 million for the year ended
November 30, 1999. CRC's EBITDA for the year ended November 30, 2000 was
approximately $28.3 million compared to approximately $30.0 million for the year
ended November 30, 1999.
EXECUTIVE MANAGEMENT ADDITION
In February 2001, Kevin DeSanctis joined the company. He will assume the
titles of President and Chief Operating Officer upon receipt of necessary
licensing and regulatory approvals in applicable jurisdictions. Mr. DeSanctis
has over 20 years of experience in managing and developing gaming operations in
various jurisdictions including, Las Vegas, Atlantic City, New Orleans and
Colorado. Prior to joining us, Mr. DeSanctis was Chief Operating Officer, North
America for Sun International Hotels Limited from 1995 to 2000.
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RISK FACTORS
RISKS RELATED TO OUR BUSINESS
WE HAVE LIMITED EXPERIENCE OPERATING CASINOS AND, PRIOR TO AUGUST 2000, HAVE
NOT MANAGED CASINO OPERATIONS SUCH AS THOSE THAT ARE PART OF OUR MISSISSIPPI
PROPERTIES OR THE CRC ACQUISITION.
We have limited experience in operating full-scale casino operations like
those associated with our Mississippi properties and the CRC acquisition. Our
Charles Town Entertainment Complex features gaming machines, but does not
include the full complement of casino, entertainment and other amenities
available at Casino Magic Bay St. Louis, Boomtown Biloxi, Casino Rouge or Casino
Rama. In addition, the Charles Town Entertainment Complex faces limited direct
competition, unlike the substantial competition faced by the operations at
Casino Magic Bay St. Louis, Boomtown Biloxi, Casino Rouge and Casino Rama. We
cannot be sure that we will be successful in managing and operating our business
in response to the new challenges of conducting full-scale casino operations in
highly competitive gaming markets. The significant expansion of our business and
the operational and geographic expansion associated with the Mississippi and CRC
acquisitions will place demands on our administrative, operational and financial
resources. Such strain, together with demands related to our contemplated
expansion of the Charles Town Entertainment Complex and Casino Magic Bay St.
Louis properties, may have a material adverse effect on our business, financial
condition and results of operations.
WE MAY FACE DISRUPTION IN INTEGRATING OUR OPERATIONS AFTER THE CRC ACQUISITION
AND IN MANAGING FACILITIES WE MAY ACQUIRE OR EXPAND.
The integration of the CRC operations following the acquisition will require
the dedication of management resources that may temporarily detract attention
from our day-to-day business. The process of integrating this organization may
also interrupt the activities of that business, which could have a material
adverse effect on our business, financial condition and results of operations.
We cannot assure you that we will be able to manage the combined operations
effectively or realize any of the anticipated benefits of the acquisition.
Our ability to achieve our objectives in connection with the CRC acquisition
is highly dependent on, among other things, our ability to maintain effective
senior management teams at Casino Rouge and Casino Rama. We plan to maintain
such management through the retention of certain current executives and the
attraction of new executives. If, for any reason, these executives do not
continue to be active in management after the acquisition or if we fail to
attract new capable executives, our operations after consummation of the CRC
acquisition could be materially adversely affected.
In addition, we may pursue expansion and acquisition opportunities in the
future and would face significant challenges not only in managing and
integrating the combined operations, but also in managing our expansion projects
and any other gaming operations that we might acquire in the future. Management
of such new projects will require that we increase our managerial resources. If
we fail to manage our growth effectively it could materially adversely affect
our operating results.
WE FACE RISKS RELATED TO THE DEVELOPMENT AND EXPANSION OF OUR CURRENT
PROPERTIES.
We will use a portion of our available cash for capital expenditures at the
Charles Town Entertainment Complex and at Casino Magic Bay St. Louis, including
the construction of new hotels at each of these facilities. The construction of
hotels involves substantial risks, including the possibility of
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construction cost over-runs and delays due to various factors (including
regulatory approvals, inclement weather, and labor or material shortages),
market or site deterioration after construction has begun, and the emergence of
competition from unanticipated sources. The opening of the new hotels will be
contingent upon, among other things, receipt of all required licenses, permits
and authorizations. The scope of the approvals required for a new hotel is
extensive, including, without limitation, state and local land-use permits,
building and zoning permits and health and safety permits. In addition,
unexpected changes or concessions required by local, regulatory and state
authorities could involve significant additional costs and could delay or
prevent the completion of construction or the opening of a new hotel. We cannot
be sure that we will obtain the necessary permits, licenses and approvals for
the construction and operation of the new hotels, or that we will obtain such
permits, licenses and approvals within the anticipated time frame.
In addition to the new hotels, we are planning enhancements at the Charles
Town Entertainment Complex, including the expansion of the gaming floor and the
construction of a structured parking lot and an entertainment venue; at Casino
Magic Bay St. Louis, we are planning to reconfigure the gaming floor and
construct three new restaurants. These planned enhancements involve similar
risks to hotel construction risks including cost over-runs, delays, market
deterioration and receipt of required licenses, permits or authorizations, among
others.
The opening of the new hotels and the other proposed enhancements also will
require the establishment of new work forces of significant sizes. We cannot be
certain that management will be able to hire and retain a sufficient number of
employees to operate these facilities at their optimum levels. The failure to
employ the proper work force could result in inadequate customer service which
could ultimately harm profitability.
WE FACE SIGNIFICANT COMPETITION.
GAMING OPERATIONS
The gaming industry is highly fragmented and characterized by a high degree
of competition among a large number of participants, many of which have
financial and other resources that are greater than our resources. Competitive
gaming activities include casinos, video lottery terminals and other forms of
legalized gaming in the United States and other jurisdictions.
Legalized gambling is currently permitted in various forms throughout the
United States and in several Canadian provinces. Other jurisdictions may
legalize gaming in the near future through the introduction of proposals to
legalize gaming in their state legislatures. In addition, established gaming
jurisdictions could award additional gaming licenses or permit the expansion of
existing gaming operations. New or expanded operations by other persons can be
expected to increase competition for our gaming operations and could have a
material adverse impact on us.
CHARLES TOWN, WEST VIRGINIA. Our gaming machine operations at the Charles
Town Entertainment Complex face competition from other gaming machine venues in
West Virginia and in neighboring states (including Dover Downs, Delaware Park
and Harrington Raceway in Delaware and the casinos in Atlantic City, New
Jersey). These venues also offer significantly higher stakes for their gaming
machines than in West Virginia. Atlantic City, New Jersey does not have a
per-pull limit on its gaming machines, while Delaware has a $25 per-pull limit.
Per-pull limits in West Virginia are only $2 per gaming machine. In addition to
existing competition, both Pennsylvania and Maryland have in the past considered
legislation to expand gaming in their respective states. The failure to attract
or retain gaming machine customers at the Charles Town Entertainment Complex,
whether arising from such competition or from other factors, could have a
material adverse effect on our business, financial condition and results of
operations.
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MISSISSIPPI GULF COAST. Dockside gaming has grown rapidly on the
Mississippi Gulf Coast, increasing from no dockside casinos in March 1992 to 12
operating dockside casinos at December 31, 2000. Nine of these facilities are
located in Biloxi, two are located in Gulfport and one is located in Bay St.
Louis. Our Mississippi casino operations have numerous competitors, many of
which have greater name recognition and financial and marketing resources than
we have. Competition in the Mississippi gaming market is significantly more
intense than the competition our gaming operations face in West Virginia or our
pari-mutuel operations face in Pennsylvania and New Jersey. We cannot be sure
that we will succeed in the competitive Mississippi Gulf Coast gaming market.
The failure to do so would have a material adverse effect on our business,
financial condition and results of operations.
LOUISIANA. Our operation of the Casino Rouge riverboat will face
competition from land-based and riverboat casinos throughout Louisiana and on
the Mississippi Gulf Coast, casinos on Native American lands and from non-casino
gaming opportunities within Louisiana. The Louisiana Riverboat Economic
Development and Gaming Control Act limits the number of gaming casinos in
Louisiana to fifteen riverboat casinos statewide and one land-based casino in
New Orleans. Fourteen of the fifteen available riverboat licenses are currently
issued and the fifteenth license currently is under consideration.
The principal competitor to the Casino Rouge is the Belle of Baton Rouge,
owned by Argosy Gaming, which is the only other licensed riverboat casino in
Baton Rouge. In February 2001, Argosy opened a new 300-room Sheraton hotel at
the casino. We also will also face competition from three major riverboat
casinos and one land-based casino in the New Orleans area, which is 75 miles
from Baton Rouge, and from three Native American casinos in Louisiana. The two
closest Native American casinos are land-based facilities located approximately
45 miles southwest and approximately 65 miles northwest of Baton Rouge. We also
will face competition from several truck stop gaming facilities located in
certain surrounding parishes that are authorized to operate up to 50 video poker
machines each.
ONTARIO. Our operation of Casino Rama through CHC Casinos Canada Limited
will face competition in Ontario from a number of casinos and racetracks with
gaming machine facilities. Currently, there are two other commercial casinos,
five charity casinos and eleven racetracks with gaming machines in the province
of Ontario. In 2001, four additional racetracks in Ontario are planning to open
gaming machine facilities. All of the casinos and gaming machine facilities are
operated on behalf of the Ontario Lottery and Gaming Corporation, an agency of
the Province of Ontario. The Ontario Lottery and Gaming Corporation also
operates several province-wide lotteries.
Casino Rama is located near Orillia, Ontario, approximately 90 miles north
of Toronto. There is one charity casino and five racetracks with gaming machine
facilities within a 150-mile radius of Casino Rama. The charity casino has 40
gaming tables and 450 gaming machines. The number of gaming machines at the
racetracks range from 100 to 1,700 each. Woodbine Racetrack, located
approximately 95 miles from Casino Rama, near Toronto, has 1,700 gaming
machines.
There is an interim commercial casino located in Niagara Falls, Ontario, 80
miles southwest of Toronto with approximately 135 gaming tables and 2,000 gaming
machines. It is contemplated that Niagara Falls will have a permanent casino
with a similar number of gaming tables and gaming machines as the interim casino
that is scheduled to be completed by the spring of 2002. In addition, it has
been proposed in connection with the City of Toronto's waterfront revitalization
project that a casino be located in downtown Toronto. However, there are no
definitive plans for the development of such a casino.
RACING AND PARI-MUTUEL OPERATIONS
Our racing and pari-mutuel operations face significant competition for
wagering dollars from other racetracks and OTWs (some of which also offer other
forms of gaming), other gaming venues such as
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casinos and state-sponsored lotteries, including the Pennsylvania, New Jersey,
Delaware and West Virginia lotteries. We may also face competition in the future
from new OTWs or from new racetracks. From time to time, states consider
legislation to permit other forms of gaming. If additional gaming opportunities
become available in or near our racing and pari-mutuel operations, such gaming
opportunities could have a material adverse effect on our business, financial
condition and results of operations.
Our OTWs compete with the OTWs of other Pennsylvania racetracks, and new
OTWs may compete with our existing wagering facilities. Our competitors have a
number of OTW facilities that are relatively close in distance to our OTWs.
Although only two competing OTWs remain authorized by law for future opening,
the opening of a new OTW in close proximity to our existing or future OTWs could
have a material adverse effect on our business, financial condition and results
of operations.
WE FACE EXTENSIVE REGULATION FROM GAMING AUTHORITIES.
LICENSING REQUIREMENTS. As owners and operators of gaming and pari-mutuel
betting facilities, we are subject to extensive state, local and, in Canada,
provincial regulation. State, local and provincial authorities require us and
our subsidiaries to demonstrate suitability to obtain and retain various
licenses and require that we have registrations, permits and approvals to
conduct gaming operations. Various regulatory authorities, including the
Pennsylvania State Horse Racing Commission, the Pennsylvania State Harness
Racing Commission, the New Jersey Racing Commission, the New Jersey Casino
Control Commission, the West Virginia Racing Commission, the West Virginia
Lottery Commission, the Mississippi Gaming Commission, the Louisiana Gaming
Control Board and the Alcohol and Gaming Commission of Ontario may, for any
reason set forth in the applicable legislation, limit, condition, suspend or
revoke a license or registration to conduct gaming operations or prevent us from
owning the securities of any of our gaming subsidiaries. Like all gaming
operators in the jurisdictions in which we operate, we must periodically apply
to renew our gaming licenses or registrations. We cannot assure you that we will
be able to obtain such renewals. Regulatory authorities may also levy
substantial fines against or seize the assets of our company, our subsidiaries
or the people involved in violating gaming laws or regulations. Any of these
events could have a material adverse effect on our business, financial condition
and results of operation.
We have demonstrated suitability to obtain and have obtained all
governmental licenses, registrations, permits and approvals necessary for us to
operate our existing gaming facilities. We cannot assure you that we will be
able to retain them or demonstrate suitability to obtain any new licenses,
registrations, permits or approvals. If we expand our gaming operations in West
Virginia, Mississippi, Pennsylvania, New Jersey or to new areas, we will have to
meet suitability requirements and obtain additional licenses, registrations,
permits and approvals from gaming authorities in these jurisdictions. The
approval process can be time-consuming and costly and we cannot be sure that we
will be successful.
Gaming authorities in the United States can generally require that any
beneficial owner of our securities, including holders of the new notes, file an
application for a finding of suitability. If a gaming authority requires a
record or beneficial owner of a new note to file a suitability application, the
owner must apply for a finding of suitability within 30 days or at an earlier
time prescribed by the gaming authority. The gaming authority has the power to
investigate an owner's suitability and the owner must pay all costs of the
investigation. If the owner is found unsuitable, then the owner may be required,
either by law or the terms of the new notes, to dispose of the new notes. In
addition, the issuance of the notes offered hereby is subject to approval by the
West Virginia Racing Commission and the West Virginia Lottery Commission.
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POTENTIAL CHANGES IN REGULATORY ENVIRONMENT. From time to time, legislators
and special interest groups have proposed legislation that would expand,
restrict or prevent gaming operations in the jurisdictions in which we operate.
Any expansion of gaming or restriction on or prohibition of our gaming
operations could have a material adverse effect on our operating results.
TAXATION. We believe that the prospect of significant additional revenue is
one of the primary reasons that jurisdictions permit legalized gaming. As a
result, gaming companies are typically subject to significant taxes and fees in
addition to normal federal, state, local and provincial income taxes, and such
taxes and fees are subject to increase at any time. We pay substantial taxes and
fees with respect to our operations. From time to time, federal, state, local
and provincial legislators and officials have proposed changes in tax laws, or
in the administration of such laws, affecting the gaming industry. In early
2000, for example, a bill was introduced in the Louisiana state legislature
that, had the bill been enacted into law, would have increased riverboat taxes.
It is not possible to determine with certainty the likelihood of changes in tax
laws or in the administration of such laws. Such changes, if adopted, could have
a material adverse effect on our business, financial condition and results of
operations.
COMPLIANCE WITH OTHER LAWS. We are also subject to a variety of other rules
and regulations, including zoning, environmental, construction and land-use laws
and regulations governing the serving of alcoholic beverages.
WE DEPEND ON OUR KEY PERSONNEL.
We are highly dependent on the services of Peter M. Carlino, our Chairman
and Chief Executive Officer, and other officers and key employees. We have
entered into employment agreements with Mr. Carlino and certain other officers.
However, the loss of the services of any of these individuals could have a
material adverse effect on our business, financial condition and results of
operations.
INCLEMENT WEATHER AND OTHER CONDITIONS COULD SERIOUSLY DISRUPT OUR OPERATIONS.
The operations of our facilities are subject to disruptions or reduced
patronage as a result of severe weather conditions. Our dockside facilities in
Mississippi and the Casino Rouge riverboat to be obtained in the CRC acquisition
are subject to risks in addition to those associated with land-based casinos,
including loss of service due to casualty, mechanical failure, extended or
extraordinary maintenance, flood, hurricane or other severe weather conditions.
The Casino Rouge also is subject to risks associated with the movement of
vessels on inland waterways, including risks of casualty due to river turbulence
and severe weather conditions. Reduced patronage and the loss of a dockside
casino or riverboat from service for any period of time due to severe weather
could adversely affect our business, financial condition and results of
operations.
WE DEPEND ON AGREEMENTS WITH OUR HORSEMEN AND PARI-MUTUEL CLERKS TO OPERATE
OUR BUSINESS.
The Federal Horseracing Act, the West Virginia Racing Act and the
Pennsylvania Racing Act require that, in order to simulcast races, we have
written agreements with the horse owners and trainers at our West Virginia and
Pennsylvania race tracks. In addition, in order to operate gaming machines in
West Virginia, we are required to enter into written agreements regarding the
proceeds of the gaming machines with a representative of a majority of the horse
owners and trainers, a representative of a majority of the pari-mutuel clerks
and a representative of a majority of the horse breeders. On March 23, 1999, we
signed a new horsemen agreement with the Pennsylvania Thoroughbred Horsemen at
Penn National Race Course with an initial term that expires on January 1, 2004.
Our agreement with the Pennsylvania Harness Horsemen was entered into in
November 1999 and expires on January 16, 2003. At the Charles Town Entertainment
Complex, we have an agreement with the Charles Town Horsemen that expires on
December 31, 2002. Our agreement with the pari-mutuel clerks at Charles Town
expires on December 31, 2004.
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If we fail to maintain operative agreements with the horsemen at a track, we
will not be permitted to conduct live racing and export and import simulcasting
at that track, and, in West Virginia, we will not be permitted to operate our
gaming machines. In addition, our simulcasting agreements are subject to the
horsemen's approval. In February 1999, the Pennsylvania Thoroughbred Horsemen
stopped racing at Penn National Race Course and withdrew their permission for us
to import simulcast races from other racetracks, resulting in the closure of
Penn National Race Course and its six OTWs. As a result of this action, our
operations at Penn National Race Course and its OTWs were suspended for more
than five weeks, we lost 46 race days at Penn National Race Course, and it took
nearly six months from the beginning of the action before we returned to
pre-action levels of racing and operations. If we fail to renew or modify
existing agreements on satisfactory terms, this failure could have a material
adverse effect on our business, financial condition and results of operations.
In addition, pursuant to the New Jersey Simulcasting Racing Act, our New
Jersey joint venture, Pennwood Racing, Inc., must maintain written agreements
with the horsemen at Freehold Raceway and Garden State Park in order to
simulcast races to the Atlantic City casinos. Horsemen agreements are currently
in effect at both facilities.
RISKS RELATED TO THE PROPOSED ACQUISITION OF CRC HOLDINGS, INC.
THE CONSUMMATION OF THE CRC ACQUISITION IS SUBJECT TO A NUMBER OF CLOSING
CONDITIONS THAT COULD PREVENT US FROM CONSUMMATING THE TRANSACTION ON OUR
CURRENT TIMETABLE, OR AT ALL.
On July 31, 2000, we entered into an agreement to purchase by merger the
gaming business of CRC Holdings. The agreement will terminate if we do not
complete the acquisition by October 31, 2001, and we will forfeit all amounts in
escrow. In addition to customary closing conditions, the consummation of the CRC
acquisition is subject to the following conditions:
- the completion of CRC's divestiture of its non-gaming assets;
- the consent of the Louisiana Gaming Control Board to the change of control
of CRC and LCCI;
- the consent of the Ontario Lottery and Gaming Corporation, Mnjikaning
First Nation and the Bank of Nova Scotia to the change in control of CRC;
and
- our ability to meet the minimum operating requirements contained in our
existing credit facility.
If any of the above conditions or the other customary closing conditions are
not satisfied, we may not be able to consummate the CRC acquisition on the terms
described in this offering memorandum and on our planned timetable, or at all.
WE WILL OPERATE CASINO RAMA UNDER A DEVELOPMENT AND OPERATING AGREEMENT THAT
IS TERMINABLE IF WE FAIL TO ATTAIN SPECIFIC OPERATING RESULTS.
As the operator of Casino Rama under a Development and Operating Agreement,
CHC Casinos, a subsidiary of CRC, is entitled to a base fee equal to two percent
of gross revenues at Casino Rama and an incentive fee equal to five percent of
the net operating margins at the casino. The term of the agreement extends until
July 31, 2011, but may be terminated by the Ontario Lottery and Gaming
Corporation prior to that date if certain events occur. Specifically, the
Ontario Lottery and Gaming Corporation may terminate the agreement if, in any
three of five consecutive years, Casino Rama's actual gross revenues for the
year are less than 85% of budgeted gross revenue for the same period. The
termination of the Development and Operating Agreement prior to July 31, 2011
could have a material adverse effect on our business, financial condition and
results of operations.
7
CAPITALIZATION
The following table sets forth our consolidated cash and cash equivalents
and capitalization as of September 30, 2000, on a pro forma basis for this
offering assuming the CRC acquisition is not consummated and on a pro forma
basis for this offering giving effect to the consummation of the CRC
acquisition, in each case including the application of the net proceeds of the
offering. You should read this information in conjunction with the various
sections generally entitled "Selected Consolidated Historical Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto included elsewhere in
this document.
AS OF SEPTEMBER 30, 2000
-------------------------------------------------------
PRO FORMA FOR THIS
OFFERING AND ASSUMING PRO FORMA FOR THIS
THE CRC ACQUISITION OFFERING AND THE CRC
ACTUAL IS NOT CONSUMMATED ACQUISITION
-------- --------------------- --------------------
(IN THOUSANDS)
Cash and cash equivalents..................... $ 20,402 $ 20,402 $ 24,402
======== ======== ========
Long-term debt, including current portion
Senior secured credit facility:
Revolving credit facility................. $ 36,000 $ 36,000 $ 10,459
Term loans................................ 272,625 79,625 272,625
Other long-term debt........................ 174 174 7,699
% senior subordinated notes due 2009...... -- 200,000 200,000
-------- -------- --------
Total long-term debt...................... 308,799 315,799 490,783
Shareholders' equity.......................... 76,163 76,163 76,163
-------- -------- --------
Total capitalization........................ $384,962 $391,962 $566,946
======== ======== ========
8
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated statements of operations and
the unaudited pro forma consolidated balance sheet present pro forma results
assuming the issuance of these notes and assuming (1) the CRC acquisition is not
consummated, and (2) the CRC acquisition is consummated. In the pro forma
consolidated statements of operations, we have consolidated our historical
results with the historical results of operations of the Mississippi properties
acquired for such periods and reflected the issuance of the notes in this
offering and the use of the majority of the proceeds of the notes to repay a
portion of our outstanding term loan indebtedness senior secured credit
facility, as if the CRC acquisition is not consummated. These results are then
further adjusted to reflect an assumed reborrowing under the senior secured
credit facility which, together with cash on LCCI's balance sheet, is used to
finance the CRC acquisition, including the repayment of existing indebtedness of
LCCI. See "Risk Factors--The consummation of the CRC acquisition is subject to a
number of closing conditions that could prevent us from consummating the
transaction on our current timetable, or at all."
The accompanying unaudited pro forma consolidated statements of operations
for the year ended December 31, 1999, for the nine months ended September 30,
2000 and for the twelve months ended September 30, 2000 were prepared giving
effect to the acquisition of the Mississippi properties and CRC and the
refinancing of our long-term debt as if the events occurred on January 1, 1999.
The accompanying unaudited pro forma consolidated balance sheet has been
prepared as if the acquisition of CRC occurred on September 30, 2000.
You should read the following pro forma consolidated financial statements in
conjunction with the historical consolidated financial statements of Penn
National, Casino Magic Corp. (d/b/a/ Casino Magic Bay St. Louis), Mississippi-I
Gaming, L.P. (d/b/a Boomtown Biloxi) and CRC Holdings, Inc.--Gaming Division
included elsewhere in this document. This unaudited pro forma consolidated
financial information is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that
would have occurred if all of the events as described above had occurred on
the first day of the respective periods presented nor is it necessarily
indicative of our future operating results or financial position.
9
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
PRO FORMA
PRO FORMA FOR
FOR MISSISSIPPI
MISSISSIPPI PROPERTIES,
Mississippi PROPERTIES THIS OFFERING
PENN Mississippi Pro Forma This AND THIS CRC Pro Forma AND THE CRC
NATIONAL Properties Adjustments Offering OFFERING Acquisition Adjustments ACQUISITION
(1) (2) (3) (4) (5) (6a) (7) (8)
-------- ----------- ----------- -------- ----------- ----------- ----------- -------------
Revenues
Gaming..................... $ 55,415 $138,540 $ -- $ -- $193,955 $ 82,250 $ -- $276,205
Racing..................... 102,827 -- -- -- 102,827 -- -- 102,827
Management service fees.... -- -- -- -- -- 15,790 -- 15,790
Other...................... 13,216 18,181 -- -- 31,397 2,408 -- 33,805
-------- -------- -------- ------- -------- -------- -------- --------
Total revenues............... 171,458 156,721 -- -- 328,179 100,448 -- 428,627
Operating expenses
Gaming..................... 34,952 76,812 -- -- 111,764 38,439 -- 150,203
Racing..................... 68,808 -- -- -- 68,808 -- -- 68,808
Other operating expenses... 11,173 16,459 -- -- 27,632 1,659 -- 29,291
General and
administrative........... 30,030 28,245 -- -- 58,275 30,323 (1,186)(a) 87,412
Depreciation and
amortization............. 8,679 9,795 229 (a) 875 (a) 19,578 5,628 5,225 (b) 30,431
-------- -------- -------- ------- -------- -------- -------- --------
Total operating expenses..... 153,642 131,311 229 875 286,057 76,049 4,039 366,145
Income from operations....... 17,816 25,410 (229) (875) 42,122 24,399 (4,039) 62,482
Interest income.............. 1,368 110 -- -- 1,478 2,200 -- 3,678
Interest expense............. (8,667) (181) (21,811)(b) (1,000)(b) (31,659) (8,478) (8,587)(c) (48,724)
Other income (expense),
net........................ (8) 66 -- -- 58 (1,601) -- (1,543)
-------- -------- -------- ------- -------- -------- -------- --------
Income before taxes, minority
interest and extraordinary
item....................... 10,509 25,405 (22,040) (1,875) 11,999 16,520 (12,626) 15,893
Income tax expense........... 3,777 5,656 (4,160)(c) (713)(c) 4,560 7,191 (5,712)(d) 6,039
-------- -------- -------- ------- -------- -------- -------- --------
Income before minority
interest and extraordinary
item....................... 6,732 19,749 (17,880) (1,162) 7,439 9,329 (6,914) 9,854
Minority interest............ -- -- -- -- -- 221 (221)(e) --
-------- -------- -------- ------- -------- -------- -------- --------
Income before extraordinary
item....................... $ 6,732 $ 19,749 $(17,880) $(1,162) $ 7,439 $ 9,108 $ (6,693) $ 9,854
======== ======== ======== ======= ======== ======== ======== ========
EBITDA....................... $ 26,495 $ 35,205 $ -- $ -- $ 61,700 $ 30,027 $ 1,186 $ 92,913
======== ======== ======== ======= ======== ======== ======== ========
10
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS)
PRO FORMA
FOR
MISSISSIPPI
Mississippi PROPERTIES
PENN Mississippi Pro Forma This AND THIS CRC Pro Forma
NATIONAL Properties Adjustments Offering OFFERING Acquisition Adjustments
(1) (2) (3) (4) (5) (6c) (7)
-------- ----------- ----------- -------- ----------- ----------- -----------
Revenues
Gaming............................... $ 99,895 $84,840 $ -- $ -- $184,735 $67,751 $ --
Racing............................... 87,913 -- -- -- 87,913 -- --
Management service fees.............. -- -- -- -- -- 10,177 --
Other................................ 14,453 12,362 -- -- 26,815 1,577 --
-------- ------- -------- ------- -------- ------- -------
Total revenues......................... 202,261 97,202 -- -- 299,463 79,505 --
Operating expenses
Gaming............................... 59,050 47,516 -- -- 106,566 31,603 --
Racing............................... 59,065 -- -- -- 59,065 -- --
Other operating expenses............. 11,980 9,961 -- -- 21,941 908 --
General and administrative........... 29,316 17,104 -- -- 46,420 25,315 (2,170)(a)
Depreciation and amortization........ 8,457 5,070 2,659 (a) 656 (a) 16,842 3,833 4,308 (b)
-------- ------- -------- ------- -------- ------- -------
Total operating expenses............... 167,868 79,651 2,659 656 250,834 61,659 2,138
Income from operations................. 34,393 17,551 (2,659) (656) 48,629 17,846 (2,138)
Interest income........................ 1,334 3 -- -- 1,337 1,237 --
Interest expense....................... (11,004) (93) (12,052)(b) (750)(b) (23,899) (5,486) (7,314)(c)
Other income (expense), net............ 1 (301) -- -- (300) (364) 269(f)
-------- ------- -------- ------- -------- ------- -------
Income before taxes, minority interest
and extraordinary item............... 24,724 17,160 (14,711) (1,406) 25,767 13,233 (9,183)
Income tax expense..................... 8,876 3,946 (2,496)(c) (534)(c) 9,792 5,466 (3,928)(d)
-------- ------- -------- ------- -------- ------- -------
Income before minority interest and
extraordinary item................... 15,848 13,214 (12,215) (872) 15,975 7,767 (5,255)
Minority interest...................... -- -- -- -- -- 2,346 (2,346)(e)
-------- ------- -------- ------- -------- ------- -------
Income before extraordinary item....... $ 15,848 $13,214 $(12,215) $ (872) $ 15,975 $ 5,421 $(2,909)
======== ======= ======== ======= ======== ======= =======
EBITDA................................. $ 42,850 $22,621 $ -- $ -- $ 65,471 $21,679 $ 2,170
======== ======= ======== ======= ======== ======= =======
PRO FORMA
FOR
MISSISSIPPI
PROPERTIES,
THIS OFFERING
AND THE CRC
ACQUISITION
(8)
-------------
Revenues
Gaming............................... $252,486
Racing............................... 87,913
Management service fees.............. 10,177
Other................................ 28,392
--------
Total revenues......................... 378,968
Operating expenses
Gaming............................... 138,169
Racing............................... 59,065
Other operating expenses............. 22,849
General and administrative........... 69,565
Depreciation and amortization........ 24,983
--------
Total operating expenses............... 314,631
Income from operations................. 64,337
Interest income........................ 2,574
Interest expense....................... (36,699)
Other income (expense), net............ (395)
--------
Income before taxes, minority interest
and extraordinary item............... 29,817
Income tax expense..................... 11,330
--------
Income before minority interest and
extraordinary item................... 18,487
Minority interest...................... --
--------
Income before extraordinary item....... $ 18,487
========
EBITDA................................. $ 89,320
========
11
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS)
Mississippi
PENN Mississippi Pro Forma This
NATIONAL Properties Adjustments Offering
(1) (2) (3) (4)
-------- ----------- ----------- --------
Revenues
Gaming........................... $115,241 $117,288 $ -- $ --
Racing........................... 114,678 -- -- --
Management service fees.......... -- -- -- --
Other............................ 18,061 16,741 -- --
-------- -------- -------- -------
Total revenues..................... 247,980 134,029 -- --
Operating expenses
Gaming........................... 68,800 66,028 -- --
Racing........................... 77,090 -- -- --
Other operating expenses......... 14,958 13,736 -- --
General and administrative....... 38,466 24,174 -- --
Depreciation and amortization.... 10,667 7,487 1,221 (a) 875 (a)
-------- -------- -------- -------
Total operating expenses........... 209,981 111,425 1,221 875
Income from operations............. 37,999 22,604 (1,221) (875)
Interest income.................... 1,727 113 -- --
Interest expense................... (13,164) (274) (17,374)(b) (1,000)(b)
Other income (expense), net........ -- (210) -- --
-------- -------- -------- -------
Income before taxes, minority
interest and extraordinary item.. 26,562 22,233 (18,595) (1,875)
Income tax expense................. 9,382 4,534 (2,440)(c) (713)(c)
-------- -------- -------- -------
Income before minority interest and
extraordinary item............... 17,180 17,699 (16,155) (1,162)
Minority interest.................. -- -- -- --
-------- -------- -------- -------
Income before extraordinary item... $ 17,180 $ 17,699 $(16,155) $(1,162)
======== ======== ======== =======
EBITDA............................. $ 48,666 $ 30,091 $ -- $ --
======== ======== ======== =======
PRO FORMA
PRO FORMA FOR
FOR MISSISSIPPI
MISSISSIPPI PROPERTIES,
PROPERTIES THIS OFFERING
AND THIS CRC Pro Forma AND THE CRC
OFFERING Acquisition Adjustments ACQUISITION
(5) (6b) (7) (8)
----------- ----------- ----------- -------------
Revenues
Gaming........................... $232,529 $ 88,001 $ -- $320,530
Racing........................... 114,678 -- -- 114,678
Management service fees.......... -- 14,173 -- 14,173
Other............................ 34,802 2,159 -- 36,961
-------- -------- -------- --------
Total revenues..................... 382,009 104,333 -- 486,342
Operating expenses
Gaming........................... 134,828 41,401 -- 176,229
Racing........................... 77,090 -- -- 77,090
Other operating expenses......... 28,694 1,206 -- 29,900
General and administrative....... 62,640 33,843 (2,448)(a) 94,035
Depreciation and amortization.... 20,250 5,328 5,525 (b) 31,103
-------- -------- -------- --------
Total operating expenses........... 323,502 81,778 3,077 408,357
Income from operations............. 58,507 22,555 (3,077) 77,985
Interest income.................... 1,840 1,726 -- 3,566
Interest expense................... (31,812) (7,415) (9,650)(c) (48,877)
Other income (expense), net........ (210) (914) 269 (855)
-------- -------- -------- --------
Income before taxes, minority
interest and extraordinary item.. 28,325 15,952 (12,458) 31,819
Income tax expense................. 10,763 6,836 (5,508)(d) 12,091
-------- -------- -------- --------
Income before minority interest and
extraordinary item............... 17,562 9,116 (6,950) 19,728
Minority interest.................. -- 2,397 (2,397)(e) --
-------- -------- -------- --------
Income before extraordinary item... $ 17,562 $ 6,719 $ (4,553) $ 19,728
======== ======== ======== ========
EBITDA............................. $ 78,757 $ 27,883 $ 2,448 $109,088
======== ======== ======== ========
12
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The following notes describe the column headings in the pro forma
consolidated statements of operations and the pro forma adjustments that have
been made to the unaudited pro forma consolidated statements of operations:
(1) Reflects the consolidated historical statement of operations of Penn
National Gaming, Inc. and subsidiaries.
(2) Represents the combined historical statements of operations for Casino
Magic and Boomtown Biloxi for each of the periods presented. We acquired
the Mississippi properties on August 8, 2000. As a result, the operating
results of the Mississippi properties for the period from August 8, 2000
through September 30, 2000 are included in our operating results.
(3) Reflects the following pro forma adjustments to the operating results:
(a) Adjustments to reflect the acquisition of the Mississippi properties
(dollars in thousands):
TWELVE MONTHS
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, ENDED SEPTEMBER 30,
1999 SEPTEMBER 30, 2000 2000
------------ ------------------ -------------
Net (decrease)/increase in expense
resulting from the depreciation
of $139.4 million of property
using lives ranging from 5 to 39
years............................ $(1,595) $1,122 $ (882)
Amortization of goodwill of $56.8
million using a life of 40
years............................ 1,420 1,064 1,420
Net increase in expense resulting
from the amortization of $9.5
million in deferred financing
costs over the six-year term of
the notes payable under the
senior credit facility........... 404 473 683
------- ------ ------
$ 229 $2,659 $1,221
======= ====== ======
(b) Increase in interest expense resulting from our entering into a
$350 million senior secured credit facility. The proceeds of the
credit facility were used to finance the Mississippi acquisitions, to
pay off our existing bank debt, to tender for our 1997 senior notes
and for working capital purposes.
(c) Reflects the net income tax adjustments associated with the pro forma
adjustments described in (a) and (b) above and to adjust for Boomtown
Biloxi becoming a consolidated tax payor with Penn National upon
consummation of the Mississippi acquisition.
(4) Reflects the issuance of the senior subordinated notes and the
application of the net proceeds therefrom to reduce outstanding
indebtedness under our existing $350 million senior secured credit
facility if we do not consummate the CRC acquisition.
(a) Increase in expense resulting from the amortization of $7.0 million
in deferred financing costs over the eight-year term of the notes.
(b) Net increase in interest expense from the issuance of $200 million of
senior subordinated notes and corresponding reduction of outstanding
indebtedness under the
13
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
$350 million senior secured credit facility. Assumes an interest rate
of 10.25% on the notes. Interest expense would increase by
$500,000 per annum for every 25 basis point increase in coupon.
(c) Reflects the income tax adjustments associated with the pro forma
adjustments described in (a) and (b) above.
(5) Reflects the unaudited pro forma consolidated statement of operations of
Penn National as adjusted for the Mississippi properties and this
offering.
(6) (a) Reflects the historical results of operations of CRC for the year
ended November 30, 1999.
(b) Reflects the unaudited historical results of operations of CRC for
the twelve months ended August 31, 2000.
(c) Reflects the unaudited historical results of operations of CRC for
the nine months ended August 31, 2000.
(7) Reflects pro forma adjustments relating to the CRC acquisition as
follows:
(a) Adjustments to reflect the elimination of (dollars in thousands):
NINE TWELVE
MONTHS MONTHS
YEAR ENDED ENDED ENDED
NOVEMBER 30, AUGUST 31, AUGUST 31,
1999 2000 2000
------------ ---------- ----------
Management fees..................... $ (538) $ (455) $ (574)
Royalty fees........................ (648) (515) (674)
Management bonus.................... -- (1,000) (1,000)
Other charges....................... -- (200) (200)
------- ------- -------
$(1,186) $(2,170) $(2,448)
======= ======= =======
14
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(b) Adjustments to reflect our acquisition of CRC (dollars in thousands):
NINE TWELVE
MONTHS MONTHS
YEAR ENDED ENDED ENDED
NOVEMBER 30, AUGUST 31, AUGUST 31,
1999 2000 2000
------------ ---------- ----------
Net (decrease) in expense resulting
from the depreciation of $97
million of property using lives
ranging from 5 to 39 years........ $ (778) $ (195) $ (478)
Amortization of goodwill of
$80.2 million using a life of 40
years, net of historical
amortization related to
$3.3 million of existing goodwill
of CRC............................ 1,908 1,432 1,908
Amortization of the fair value of a
management contract of $43 million
over its 10 1/2-year term......... 4,095 3,071 4,095
------ ------ ------
$5,225 $4,308 $5,525
====== ====== ======
(c) Reflects the net increase in interest expense resulting from
reborrowings under the credit facility necessitated by the
consummation of the CRC acquisition and repayment of existing debt of
LCCI.
(d) Adjustment to reflect the income tax adjustments associated with the
pro forma adjustments other than in (e) and to adjust for LCCI
becoming a consolidated tax payor with CRC/Penn upon consummation of
the acquisition.
(e) Adjustment to reflect elimination of minority interest in LCCI.
(f) Adjustment to reflect elimination of $269,000 of legal fees and other
expenses paid by CRC in connection with the acquisition.
(8) Reflects the unaudited pro forma consolidated statement of operations of
Penn National, as adjusted for the Mississippi properties, this offering
and the CRC acquisition for the periods presented.
15
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
(IN THOUSANDS)
PRO FORMA
AS ADJUSTED
FOR THIS
PRO FORMA OFFERING AND
PENN This FOR THIS CRC Pro Forma FOR THE CRC
NATIONAL Offering OFFERING Acquisition Adjustments ACQUISITION
(1) (2) (3) (4) (5) (6)
--------- -------- --------- ----------- ----------- ------------
ASSETS
Current assets
Cash and cash equivalents...... $ 20,402 $ -- $ 20,402 $21,533 $(17,533)(a) $ 24,402
Accounts receivable............ 8,494 -- 8,494 9,719 -- 18,213
Prepaid expenses and other
current assets............... 6,927 -- 6,927 8,245 -- 15,172
Deferred income taxes.......... -- -- -- 667 -- 667
-------- ------ -------- ------- -------- --------
Total current assets............. 35,823 -- 35,823 40,164 (17,533) 58,454
-------- ------ -------- ------- -------- --------
Property, plant and equipment,
net............................ 282,569 -- 282,569 42,980 54,020 (b) 379,569
-------- ------ -------- ------- -------- --------
Other assets
Investments and advances to
unconsolidated affiliate..... 14,507 -- 14,507 -- -- 14,507
Cash in escrow................. 5,008 -- 5,008 -- (5,008)(a) --
Intangible assets.............. 79,660 -- 79,660 3,293 119,915 (b) 202,868
Deferred financing costs....... 9,860 7,000(a) 16,860 865 (865)(c) 16,860
Miscellaneous.................. 3,307 -- 3,307 4,163 (2,665)(d) 4,805
-------- ------ -------- ------- -------- --------
Total other assets............... 112,342 7,000 119,342 8,321 111,377 239,040
-------- ------ -------- ------- -------- --------
Total assets..................... $430,734 $7,000 $437,734 $91,465 $147,864 $677,063
======== ====== ======== ======= ======== ========
16
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
(IN THOUSANDS)
PRO FORMA
AS ADJUSTED
FOR THIS
PRO FORMA OFFERING AND
PENN This FOR THIS CRC Pro Forma FOR THE CRC
NATIONAL Offering OFFERING Acquisition Adjustments ACQUISITION
(1) (2) (3) (4) (5) (6)
--------- -------- --------- ----------- ----------- ------------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities
Current maturities of
long-term debt.............. $ 10,563 $ -- $ 10,563 $ 6,275 $ -- $ 16,838
Accounts payable.............. 13,578 -- 13,578 2,847 -- 16,425
Due to affiliates............. -- -- -- 168 (168)(d) --
Purses due horsemen........... 1,009 -- 1,009 -- -- 1,009
Uncashed pari-mutuel
tickets..................... 1,150 -- 1,150 -- -- 1,150
Accrued expenses.............. 7,555 -- 7,555 13,024 5,000 (b) 25,579
Accrued interest.............. 1,372 -- 1,372 -- -- 1,372
Accrued salaries and wages.... 4,943 -- 4,943 -- -- 4,943
Customer deposits............. 1,006 -- 1,006 -- -- 1,006
Taxes, other than income
taxes....................... 2,014 -- 2,014 -- -- 2,014
-------- ------ -------- ------- -------- --------
Total current liabilities....... 43,190 -- 43,190 22,314 4,832 70,336
-------- ------ -------- ------- -------- --------
Long-term liabilities
Long-term debt................ 298,236 7,000(a) 305,236 54,250 114,459 (a) 473,945
Deferred compensation plan
benefits.................... -- -- -- 2,085 -- 2,085
Deferred income taxes......... 13,145 -- 13,145 4,478 36,868 (e) 54,491
Other liabilities............. -- -- -- 43 -- 43
-------- ------ -------- ------- -------- --------
Total long-term liabilities..... 311,381 7,000 318,381 60,856 151,327 530,564
-------- ------ -------- ------- -------- --------
Minority interest............... -- -- -- 1,365 (1,365)(d) --
Shareholders' equity
Common stock.................. 154 -- 154 54 (54)(d) 154
Treasury stock................ (2,379) -- (2,379) -- -- (2,379)
Additional paid-in capital.... 39,152 -- 39,152 2,268 (2,268)(d) 39,152
Retained earnings............. 39,236 -- 39,236 4,617 (4,617)(d) 39,236
Cumulative translation
adjustment.................. -- -- -- (9) 9 (d) --
-------- ------ -------- ------- -------- --------
Total shareholders' equity...... 76,163 -- 76,163 6,930 (6,930) 76,163
-------- ------ -------- ------- -------- --------
Total liabilities and
shareholders' equity.......... $430,734 $7,000 $437,734 $91,465 $147,864 $677,063
======== ====== ======== ======= ======== ========
17
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
We will account for the acquisition of CRC under the purchase method of
accounting for a business combination. The unaudited pro forma consolidated
balance sheet is presented as if the acquisition of CRC, the issuance of the
notes and the refinancing of certain existing debt obligations had taken place
on September 30, 2000.
The following notes describe the column headings in the unaudited pro forma
consolidated balance sheet and the pro forma adjustments that have been made to
the unaudited pro forma consolidated balance sheet:
(1) Reflects the balance sheet of Penn National Gaming, Inc. and subsidiaries as
reported on Form 10-Q at September 30, 2000.
(2) Reflects the issuance of $200 million of the senior subordinated notes
as if the entire proceeds of this offering were used to pay down
$200 million of our existing indebtedness under our credit facility.
(a) Financing fees of $7.0 million were paid using additional borrowings
under our revolving portion of our senior credit facility.
(3) Reflects unaudited pro forma consolidated balance sheet as adjusted for this
offering.
(4) Reflects the historical balance sheet of CRC as of August 31, 2000.
(5) Reflects pro forma adjustments of the CRC acquisitions as follows (numbers
in thousands):
(a) Payment of CRC purchase price, net of cash in escrow of
$5,008...................................................... $123,292
Payment of tender offer premium on LCCI 11% senior secured
notes....................................................... 7,700
Payment of acquisition fees................................. 1,000
Reclassification of CRC cash................................ (17,533)
--------
Net increase in borrowings under our credit facility........ $114,459
========
We also anticipate repaying the LCCI $53 million 11% senior
secured notes with borrowings from our revolving line of
credit.
(b) Pro forma purchase price allocation
CRC acquisition consideration............................... $128,300
Tender offer premium on LCCI 11% senior secured notes....... 7,700
Other accrued acquisition costs............................. 5,000
Acquisition fees............................................ 1,000
--------
Pro forma purchase price.................................... $142,000
========
Pro forma purchase price allocation:
Property, plant and equipment............................... $ 97,000
Management contract......................................... 43,000
Net operating liabilities................................... (41,340)
Goodwill.................................................... 80,208
Deferred income tax liability............................... (36,868)
--------
$142,000
========
18
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET--(CONTINUED)
Property, plant and equipment -- adjusted to fair value as
follows:
Property, plant and equipment acquired at cost.............. $ 42,980
Adjustment to increase property, plant and equipment to fair
value....................................................... 54,020
--------
Property, plant and equipment at fair value................. $ 97,000
========
All operating assets, net of certain liabilities, were
recorded at historical cost at the acquisition date, which
approximates their market value.
Concurrent with the acquisition of CRC, we will pay off the
LCCI 11% senior secured notes and a tender premium of
$7,700.
Intangible assets recorded in connection with CRC
acquisition:
Goodwill.................................................... $ 80,208
Management contract......................................... 43,000
--------
123,208
Less: Elimination of goodwill related to CRC................ (3,293)
--------
$119,915
========
The goodwill will be amortized over a 40-year period. The
management contract will be amortized over the life of the
contract, which is 10.5 years.
(c) To write off deferred financing costs related to repayment
of the LCCI 11% senior secured notes.
(d) To eliminate CRC's amount due to affiliate, minority
interest and equity accounts.
(e) To record Deferred Tax Liability of $36,868 attributable to
the difference between the tax and accounting basis of the
management contract and property, plant, and equipment
acquired from CRC.
(6) Unaudited pro forma consolidated balance sheet as adjusted for this offering
and the CRC acquisition.
19
SELECTED CONSOLIDATED HISTORICAL FINANCIAL AND OPERATING DATA --
PENN NATIONAL
The following selected consolidated financial and operating data of Penn
National for the years ended December 31, 1995, 1996, 1997, 1998 and 1999,
except for Other data, are derived from financial statements that have been
audited by BDO Seidman, LLP, independent certified public accountants, adjusted
as described in the notes below. The selected consolidated financial and
operating data of Penn National as of and for the nine months ended
September 30, 1999 and 2000 have been prepared on the same basis as the
historical information derived from audited financial statements and, in the
opinion of management, contains all adjustments, consisting only of normal
recurring accruals, necessary for the fair presentation of the results of
operations for such periods and financial positions as of such dates. The
selected consolidated financial and operating data should be read in conjunction
with the consolidated financial statements of Penn National and Notes thereto,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the other financial information included herein.
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT RATIOS)
INCOME STATEMENT DATA:
Revenue
Gaming....................................... $ -- $ -- $ 5,730 $37,665 $55,415 $40,069 $99,895
Racing....................................... 50,772 55,066 98,402 106,850 102,827 76,062 87,913
Other........................................ 6,904 7,768 7,404 9,550 13,216 9,608 14,453
------- ------- -------- ------- ------- ------- -------
Total revenues................................. 57,676 62,834 111,536 154,065 171,458 125,739 202,261
------- ------- -------- ------- ------- ------- -------
Operating expenses:
Gaming....................................... -- -- 4,134 26,544 34,952 25,202 59,050
Racing....................................... 33,837 36,114 65,810 70,303 68,808 50,784 59,065
Selling, general and administrative.......... 8,214 13,881 26,234 29,680 38,709 27,348 37,773
Other........................................ 7,370 3,379 5,623 8,080 11,173 8,195 11,980
------- ------- -------- ------- ------- ------- -------
Total operating expenses....................... 49,421 53,374 101,801 134,607 153,642 111,529 167,868
------- ------- -------- ------- ------- ------- -------
Income from operations......................... 8,255 9,460 9,735 19,458 17,816 14,210 34,393
Other income (expenses)........................ 208 (156) (3,658) (7,436) (7,307) (5,539) (9,669)
------- ------- -------- ------- ------- ------- -------
Income before income taxes and extraordinary
item......................................... 8,463 9,304 6,077 12,022 10,509 8,671 24,724
Taxes on income................................ 3,467 3,794 2,308 4,519 3,777 3,271 8,876
------- ------- -------- ------- ------- ------- -------
Income before extraordinary item............... 4,996 5,510 3,769 7,503 6,732 5,400 15,848
Extraordinary item -- loss on early
extinguishment of debt, net of income taxes
of $1,001 in 1997 and $4,615 in 2000......... -- -- 1,482 -- -- -- 6,583
------- ------- -------- ------- ------- ------- -------
Net income..................................... $ 4,996 $ 5,510 $ 2,287 $ 7,503 $ 6,732 $ 5,400 $ 9,265
======= ======= ======== ======= ======= ======= =======
OTHER DATA:
Depreciation and amortization.................. $ 881 $ 1,433 $ 4,040 $ 5,748 $ 8,679 $ 6,469 $ 8,457
Interest expense............................... 71 506 4,591 8,374 8,667 6,508 11,004
EBITDA......................................... 9,136 10,893 13,775 25,206 26,495 20,679 42,850
Non-recurring expenses:
Horsemen action expenses..................... -- -- -- -- 1,250 1,250 --
Litigation expenses.......................... -- -- -- -- 1,500 -- --
Site development and restructuring charges... -- -- 2,437 -- 535 -- --
------- ------- -------- ------- ------- ------- -------
Adjusted EBITDA................................ $ 9,136 $10,893 $ 16,212 $25,206 $29,780 $21,929 $42,850
Ratio of Adjusted EBITDA to interest expense... NM NM 3.5x 3.0x 3.4x 3.4x 3.9x
Capital expenditures........................... $ 3,958 $ 6,995 $ 29,196 $22,333 $13,243 $ 5,002 $17,348
Ratio of earnings to fixed charges(1).......... NM NM 2.2x 2.3x 2.1x 2.2x 3.0x
AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 7,514 $ 5,634 $ 21,854 $ 6,826 $ 9,434 $ 9,777 $ 20,402
Total assets............................... 27,532 96,723 158,878 160,798 190,600 177,856 430,734
Total debt................................. 390 47,517 80,336 78,256 91,213 83,702 308,799
Shareholders' equity....................... 20,802 27,881 53,856 59,036 66,272 64,938 76,163
- ---------------
(1) In computing the ratio of earnings to fixed charges: (i) earnings were
calculated from income from continuing operations, before income taxes and
fixed charges, and excluding capitalized interest; and (ii) fixed charges
were computed from interest expense, amortization of debt issuance costs,
capitalized interest and the estimated interest included in rental expense.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- PENN NATIONAL
OVERVIEW
We derive substantially all of our revenues from gaming and pari-mutuel
operations. Since September 1997, revenues from our gaming machines at the
Charles Town Entertainment Complex have accounted for an increasingly large
share of our total revenues. 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 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.
Our acquisition of the Mississippi properties and the consummation of the
CRC acquisition will impact our revenue mix between gaming and pari-mutuel
revenues on a prospective basis. We expect that in future periods gaming revenue
as a percentage of our total revenues will continue to increase as we continue
to focus on our gaming operations. For the year ended December 31, 1999 and the
twelve months ended September 30, 2000, gaming revenue represented approximately
32% and 47% of our total revenue, respectively. On a pro forma basis for the
Mississippi and CRC acquisitions, gaming revenues for the year ended
December 31, 1999 and the twelve months ended September 30, 2000 would have been
approximately 64% and 66% of total revenues, respectively.
THE PENDING CRC ACQUISITION
On July 31, 2000, we entered into an agreement to acquire by merger all of
the gaming assets of CRC Holdings, Inc. for approximately $181.3 million,
including amounts required to refinance certain existing indebtedness and to
acquire the minority interest in CRC's majority owned subsidiary. The closings
of the agreements with the minority owners and CRC are conditioned upon one
another. We expect to close the CRC acquisition by early 2001 and in no event
later than October 31, 2001. We expect to incur approximately $15.7 million in
one-time acquisition and financing related costs related to the closing of the
CRC acquisition.
The proceeds of this offering of notes will be used, in part, to finance the
CRC acquisition; however, if we do not consummate the CRC acquisition by
October 31, 2001, we will use the entire net proceeds of this offering to repay
outstanding term loan indebtedness under our senior credit facility.
MISSISSIPPI ACQUISITION
On August 8, 2000, we completed our acquisition of the Casino Magic Bay St.
Louis casino and the Boomtown Biloxi casino from Pinnacle Entertainment for
approximately $201.3 million in cash. The purchase price was funded with a
portion of the proceeds from our $350 million senior secured credit facility. As
a result of the refinancing and repayment of existing debt, the Company recorded
an $11.2 million extraordinary charge which was included in the results of
operations for the nine months ended September 30, 2000. The results of
operations for these properties from the period August 8, 2000 to September 30,
2000 are included in the results of operations discussed below.
21
RESULTS OF OPERATIONS
The results of operations by property level for the nine months ended
September 30, 1999 and 2000 are summarized as follows:
REVENUES EBITDA(1)
------------------- -------------------
1999 2000 1999 2000
-------- -------- -------- --------
Charles Town Entertainment Complex.................... $ 58,267 $100,194 $11,986 $26,470
Casino Magic Bay St. Louis(2)......................... -- 12,362 -- 2,417
Boomtown Biloxi(2).................................... -- 9,474 -- 1,419
Penn National Race Course and its OTWs................ 39,471 49,939 6,210 8,537
Pocono Downs and its OTWs............................. 28,398 29,317 7,094 6,541
Earnings from Pennwood Racing, Inc.................... 516 2,244 514 2,240
Corporate eliminations(3)............................. (913) (1,269) -- --
Corporate overhead.................................... -- -- (3,875) (4,774)
-------- -------- ------- -------
Total............................................... $125,739 $202,261 $21,929 $42,850
======== ======== ======= =======
The results of operations by property level for the years ended
December 31, 1997, 1998, 1999 are summarized as follows:
REVENUES EBITDA(1)
------------------------------ ------------------------------
1997 1998 1999 1997 1998 1999
-------- -------- -------- -------- -------- --------
Charles Town Entertainment Complex........ $ 16,483 $ 56,883 $ 80,015 $ (640) $ 7,103 $16,023
Penn National Race Course and its OTWs.... 63,563 63,620 55,609 12,419 13,039 9,065
Pocono Downs and its OTWs................. 33,458 35,576 36,324 7,471 8,719 8,955
Earnings from Pennwood Racing, Inc........ -- -- 1,098 -- -- 1,098
Corporate eliminations(3)................. (1,968) (2,014) (1,588) -- -- --
Corporate overhead........................ -- -- -- (3,038) (3,655) (5,361)
-------- -------- -------- ------- ------- -------
Total $111,536 $154,065 $171,458 $16,212 $25,206 $29,780
======== ======== ======== ======= ======= =======
- ------------
(1) Reflects property level EBITDA and excludes non-recurring expenses.
(2) Reflects results since the August 8, 2000 acquisition from Pinnacle
Entertainment.
(3) Primarily reflects intracompany transactions related to import/export
simulcasting.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
Revenues for the nine-month period ended September 30, 2000 increased 60.9%
to $202.3 million from $125.7 million during the first nine months of 1999.
EBITDA rose 95.9% to $42.9 million from $21.9 million in the first nine months
of 1999. Net income in the first nine months of 2000 was $15.8 million (before
the extraordinary charge for the early extinguishment of debt) compared to net
income of $5.4 million in the first nine months of 1999. Reflecting the third
quarter 2000 extraordinary charge net of taxes of $6.6 million for the early
extinguishment of debt, we recorded net income of $9.3 million in the first nine
months of 2000.
CHARLES TOWN ENTERTAINMENT COMPLEX
Revenues increased at Charles Town by approximately $41.9 million, or 72.0%,
to $100.2 million in 2000 from $58.3 million in 1999. Gaming revenue increased
by $40.2 million, or 100.2%, to $80.3 million in 2000 from $40.1 million in 1999
due to the addition of 136 new video lottery machines and 565 new reel spinning,
coin-out gaming machines since January of last year. The average number
22
of machines in play increased to 1,432 in 2000 from 893 in 1999 and the average
win per machine increased to $202 in 2000 from $164 in 1999. Racing revenue
increased by $1.3 million or 9.1% to $15.6 million in 2000 from $14.3 million in
1999. The live meet consisted of 160 race days in both 2000 and 1999. This
increase is due primarily to a change in the schedule from a Wednesday afternoon
race program to a Thursday evening race program in 2000 to accommodate export
simulcasting. Charles Town began exporting its live race program to tracks
across the country on June 5, 1999 and generated export simulcasting revenues of
$1.6 million in 2000 compared to $0.4 million in 1999. Concession revenues
increased by approximately $2.3 million, or 59.0%, to $6.2 million in 2000 from
$3.9 million in 1999 due to increased attendance for gaming and racing and the
expansion of the concession areas, dining room and buffet area. Operating
expenses increased by $21.6 million, or 45.3%, to $69.3 million in 2000 from
$47.7 million in 1999. The increase was due to an increase in direct costs
associated with additional wagering on horse racing and gaming machine play, the
addition of gaming machines and floor space (new temporary facility for gaming
machines), export simulcast expenses and expanded concession and dining
capability and capacity. EBITDA attributable to Charles Town increased by
$14.5 million, or 120.8%, to $26.5 million in 2000 from $12.0 million in 1999.
MISSISSIPPI CASINOS
The Casino Magic Bay St. Louis and Boomtown Biloxi acquisitions were
completed on August 8, 2000. For the period August 8 to September 30, 2000,
these two casinos had combined revenues of $21.8 million, operating expenses of
$19.6 million and EBITDA of $3.8 million.
PENN NATIONAL RACE COURSE AND ITS OTW FACILITIES
Penn National Race Course had an increase in revenue of approximately
$10.4 million, or 26.3%, to $49.9 million in 2000 from $39.5 million in 1999.
Pari-mutuel wagering for the nine-month period was $297.2 million in 2000
compared to $229.0 million in 1999. The increase in wagering and revenues is
attributed to Penn National Race Course running 153 live race days in 2000
compared to 101 live race days in 1999. Penn National only ran 101 live race
days in 1999 due to the Horsemen action in the first quarter that resulted in
the closure of all of the facilities from February 16 to March 24, 1999.
Operating expenses increased by approximately $6.9 million, or 19.3%, to
$42.7 million in 2000 from $35.8 million in 1999. Adjusting for the Horsemen
action in 1999, EBITDA attributable to these properties increased by
$2.3 million, or 37.1%, to $8.5 million in 2000 from $6.2 million in 1999.
POCONO DOWNS AND ITS OTW FACILITIES
Revenues at Pocono Downs increased by $0.9 million, or 3.2%, to
$29.3 million in 2000 from $28.4 million in 1999. Pari-mutuel wagering was
$126.8 million in 2000 and a refund from the Commonwealth of Pennsylvania for
pari-mutuel taxes was paid in 1999 in the amount of $0.6 million. Expenses
increased by approximately $1.5 million, or 6.6%, to $24.4 million in 2000 from
$22.9 million in 1999. The opening of the new OTW facility in East Stroudsburg
and the increase in purse expense per the terms of the new Horsemen's contract
of January 2000 accounted for most of the increase in expenses. EBITDA decreased
$0.6 million, or 8.5%, to $6.5 million in 2000 from $7.1 million in 1999.
NEW JERSEY JOINT VENTURE
We completed our investment in Pennwood Racing, Inc., our New Jersey joint
venture, on July 29, 1999. Pennwood Racing operates Freehold Raceway and Garden
State Park. Revenues of the joint venture increased to $45.1 million in 2000
from $10.5 million in 1999 as a result of the operating results in 2000
reflecting a full nine-month period. Net income was $4.5 million in 2000
compared to $1.0 million in 1999. Our 50% share of net income was $2.2 million
in 2000 compared to $0.5 million in 1999 and was recorded as other income on the
income statement.
23
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues in 1999 increased by approximately $17.4 million, or 11.3%, to
$171.5 million from $154.1 million in 1998. Operating expenses in 1999 increased
by approximately $19.0 million, or 14.1%, to $153.6 million from $134.6 million
in 1998. Included in operating expenses were nonrecurring expenses in 1999 for
the Horsemen's strike ($1.3 million) at Penn National Race Course, Tennessee
development and licensing expenses ($0.5 million) and litigation expenses
($1.5 million) to settle a lawsuit with a totalisator company. Income from
operations decreased by $1.7 million, or 8.7%, to $17.8 million in 1999 from
$19.5 million in 1998 due to the Horsemen's strike and nonrecurring expenses.
Net interest expense for the years ended December 31, 1999 and 1998 consisted of
approximately $7.3 million and $7.4 million, respectively, of net interest
primarily due to the 10.625% senior notes and our existing credit facility.
Taxes on income decreased by $0.7 million to $3.8 million in 1999 from
$4.5 million in 1998 and net income decreased by $0.8 million, or 10.7%, to
$6.7 million in 1999 from $7.5 million in 1998 due substantially to the factors
described above.
CHARLES TOWN ENTERTAINMENT COMPLEX
Revenues increased at Charles Town by approximately $23.1 million, or 40.6%,
to $80.0 million in 1999 from $56.9 million in 1998. Gaming revenue at Charles
Town increased by $17.7 million, or 46.9%, to $55.4 million in 1999 from
$37.7 million in 1998 due to the addition of 136 new video lottery machines and
565 new reel spinning, coin-out gaming machines during the year. At year-end
there were 1,500 gaming machines in operation compared to 799 machines at year
end in 1998. The average number of machines increased to 923 in 1999 from 704 in
1998 and the average win per machine increased to $163 in 1999 from $145 in
1998. Racing revenue increased by $3.8 million, or 24.5%, to $19.3 million in
1999 from $15.5 million in 1998. The live meet consisted of 213 race days in
1999 compared to 206 race days in 1998 and a change in the schedule from a
Wednesday afternoon race program to a Thursday evening race program to
accommodate export simulcasting. Charles Town began exporting its live race
program to tracks across the country on June 5, 1999 and generated export
simulcasting revenues of $0.9 million for the year. Concession revenues
increased by approximately $1.5 million, or 39.5%, to $5.3 million in 1999 from
$3.8 million in 1998 due to increased attendance for gaming and racing and the
expansion of the concession areas, dining room and buffet area. Operating
expenses increased by $14.2 million, or 28.6%, to $64.0 million in 1999 from
$49.8 million in 1998 due to the increase in direct costs associated with
additional wagering on horse racing and gaming machine play, the addition of
gaming machines and floor space (new temporary gaming facility), export
simulcast expenses and expanded concession and dining capability and capacity.
In addition to the operating expenses, Charles Town had a non-recurring expense
of $1.5 million in litigation settlement expenses for the settlement of a
lawsuit involving a former totalisator company vendor.
PENN NATIONAL RACE COURSE AND ITS OTW FACILITIES
Penn National Race Course had a decrease in revenue of approximately
$8.0 million, or 12.6%, to $55.6 million in 1999 from $63.6 million in 1998. The
decrease was primarily due to the expiration of the Horsemen's Agreement that
resulted in the closure of the facilities from February 16 to March 24, 1999.
Penn National re-opened for simulcast wagering on March 25, live racing on a
limited basis on April 23 and resumed a full live racing schedule the week of
June 26, 1999. For the year 1999, Penn National ran 153 live race days compared
to 206 live race days in 1998 and ran nine-race cards instead of ten-race cards
following the April reopening. Of the scheduled 210 live races for 1999, 46 race
days were lost due to the strike and 11 days were cancelled due to weather
compared to four days cancelled due to weather in 1998. Expenses decreased by
approximately $2.7 million, or 5.2%, to $49.6 million in 1999 from
$52.3 million in 1998. Included in the 1999 expenses is $1.3 million for the
Horsemen's strike. The results of operations also includes the operation of the
Johnstown OTW facility for 12 months in 1999 compared to three months in 1998.
24
POCONO DOWNS AND ITS OTW FACILITIES
Pocono Downs live race meet, which runs from April to November, consisted of
130 race days in 1999 compared to 135 races days in 1998. Revenues at Pocono
Downs increased by $0.7 million, or 2.0%, to $36.3 million in 1999 from
$35.6 million in 1998. The increase resulted from a full year of operations at
the Carbondale ($1.4 million) and Hazleton ($0.8 million) OTWs, which was
partially offset by a decrease in revenue at the Pocono Downs Racetrack
($1.0 million). The decrease was due to the close proximity of the two new OTWs
to the track. Revenue also decreased at the racetrack due to a 7.1% decrease in
export simulcast wagering on Pocono live races due to the temporary closing of
the barn area during the winter to accommodate improvements we made to the track
that resulted in starting the racing season with a shortage of horses. Expenses
increased by approximately $0.7 million, or 2.4%, to $29.5 million in 1999 from
$28.8 million in 1998.
NEW JERSEY JOINT VENTURE
On July 29, 1999, after receiving the necessary approvals from the New
Jersey Racing Commission and the necessary consents from the holders of our 1997
senior notes, we completed our investment in Pennwood Racing, Inc., our New
Jersey joint venture. Pennwood operates Freehold Raceway and Garden State Park.
Summarized results of operations of the unconsolidated joint venture (commencing
on July 30, 1999) for the period ended December 31, 1999 include $28.0 million
in revenue, $23.0 million in operating expenses, $5.0 million in EBITDA and net
income of $2.2 million. Our 50% share of the net income or $1.1 million is
recorded as other revenues on the income statement.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenue in 1998 increased by approximately $42.6 million, or 38.2%, to
$154.1 million in 1998 from $111.5 million in 1997. Operating expenses in 1998
increased by approximately $32.8 million, or 32.2%, to $134.6 million from
$101.8 million in 1997. Included in operating expenses were nonrecurring charges
for site development and restructuring expenses of $2.4 million in 1997. Income
from operations increased by approximately $9.8 million, or 101.0%, to
$19.5 million in 1998 from $9.7 million in 1997. Net interest expense increased
by approximately $3.7 million, or 100.0%, to $7.4 million in 1998 from
$3.7 million in 1997, primarily due to the 10 5/8% senior notes issued in
December 1997. Other income in 1998 consisted of a gain of $113,000 on the sale
of Casino Magic Corporation stock of $148,000 offset by a loss on the repurchase
of our 1997 senior notes in the amount of $35,000. Taxes on income increased by
approximately $2.2 million to $4.5 million in 1998 from $2.3 million in 1997.
The extraordinary item in 1997 consisted of a loss on the early extinguishment
of debt in the amount of approximately $1.5 million, net of income taxes. The
loss consists primarily of write-offs of deferred finance costs associated with
the retired bank notes and legal and bank fees relating to the early
extinguishment of the debt. Net income increased by approximately $5.2 million
to $7.5 million in 1998 from $2.3 million in 1997 due to the factors described
above.
CHARLES TOWN ENTERTAINMENT COMPLEX
Charles Town Entertainment Complex was purchased in January of 1997 and
began racing operations on April 30, 1997 and gaming machine operations on
September 10, 1997. Revenues at Charles Town increased by $40.4 million, or
244.8%, to $56.9 million in 1998 from $16.5 million in 1997. Revenues from
gaming machines increased by $32.0 million as a result of a full year of
operations in 1998 compared to three and one-half months of operations in 1997.
Racing revenues increased by $6.2 million due to a racing season of 206 live
race days at Charles Town in 1998 compared to 159 live races days in 1997 and
the opening of the new simulcast-racing center in January 1998. Concession and
other revenues increased by $2.2 million due to the increased attendance and the
opening of the new buffet area during the year. Operating expenses increased at
Charles Town by $32.5 million, or 173.8%, to $51.2 million in 1998 from
$18.7 million in 1997. The increase was due
25
primarily to the video lottery operations ($23.5 million), racing operations
($6.0 million) and concession and other operating expenses ($3.1 million).
PENN NATIONAL RACE COURSE AND OTW FACILITIES
Penn National Race Course had a small increase in revenue of approximately
$57,000, or 0.1%, to $63.6 million in 1998 from $63.5 million in 1997. Revenues
increased at the track ($0.3 million) due to an increase in on-track wagering
and export simulcast wagering and the purchase and opening of the Johnstown OTW
($0.9 million) on September 1, 1998. The increases were offset by a decrease in
revenues at the Chambersburg OTW ($0.6 million) due to the opening of the
Charles Town Entertainment Complex, and Reading ($0.3 million) and York
($0.3 million) OTWs. Penn National Race Course had a net decrease in operating
expenses of $0.8 million, or 1.5%, to $52.2 million in 1998 from $53.0 million
in 1997. The net decrease in operating expenses was due to an increase in
expenses at the new Johnstown OTW ($0.8 million) offset by a decrease in
operating expenses at the racetrack and other OTW facilities ($1.4 million).
POCONO DOWNS AND OTW FACILITIES
Revenues at Pocono Downs increased by $2.1 million, or 6.3%, to
$35.6 million in 1998 from $33.5 million in 1997. The increase in revenue was
primarily due to the opening of new OTW facilities in Hazleton ($2.2 million)
and Carbondale ($2.4 million). This increase was offset by a decrease at the
Wilkes-Barre racetrack ($2.0 million) due to the proximity of the two new OTW
facilities and decreases at Allentown OTW ($0.3 million) and the Erie OTW
($0.2 million). Pocono Downs had a net increase in operating expenses of
$0.4 million, or 1.4%, to $28.8 million in 1998 from $28.4 million in 1997. The
net increase in operating expenses was due to the opening of the Hazleton OTW
($1.9 million) and the Carbondale OTW ($1.8 million). The increase was offset by
a decrease in operating expenses at the Wilkes-Barre racetrack ($1.8 million),
Allentown OTW ($0.6 million) and the Erie OTW ($0.4 million).
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 equity securities.
CAPITAL EXPENDITURES
The following table summarizes our planned capital expenditures, other than
maintenance capital expenditures, by property level for fiscal years 2001 and
2002:
YEAR ENDED
DECEMBER 31,
-------------------
PROPERTY 2001 2002
- -------- -------- --------
(IN THOUSANDS)
Charles Town Entertainment Complex.......................... $ 9,200 $34,000
Casino Magic Bay St. Louis.................................. 18,500 16,500
Boomtown Biloxi............................................. 2,000 --
Casino Rouge................................................ 2,000 5,000
Pennsylvania Racetracks and OTW's........................... 800 --
------- -------
Totals.................................................. $32,500 $55,500
======= =======
Beginning in late 2000 and continuing through the end of 2002, we expect to
expend significant amounts on capital expenditures at the Charles Town
Entertainment Complex and Casino Magic Bay St. Louis. At Charles Town, we expect
to spend approximately $43.2 million on capital expenditures through 2002.
Specifically, we expect to construct a structured parking facility, at an
estimated cost of
26
$9.0 million, and a 300-room hotel with meeting and conference facilities, at an
estimated cost of $25.0 million, and expand the gaming and entertainment
facility at Charles Town, at an estimated cost of $9.2 million.
At Casino Magic Bay St. Louis, our capital expenditures in 2001 and 2002 are
anticipated to be approximately $35.0 million. We expect to construct a 300-room
hotel with meeting and conference facilities, at an estimated cost of
$30.0 million and three new restaurant venues, renovations to the existing
buffet restaurant, and certain amenities to the gaming floor, at an estimated
cost of $5.0 million.
At the Boomtown Biloxi property, we do not expect to incur significant
capital expenditures. However, we are presently exploring a buy-out of the
existing ground lease at the Boomtown Biloxi property; if we are successful, we
would consider additional expansion opportunities, which could include
structured parking at the facility and a hotel. At Casino Rouge, we anticipate
spending approximately $6.5 million to construct an entertainment facility at
the property. At our Pennsylvania racetracks and OTWs, we do not expect to incur
significant capital expenditures.
CREDIT FACILITY
On August 8, 2000, we entered into a $350 million senior secured credit
facility with a syndicate of lenders led by Lehman Brothers Inc. and CIBC World
Markets Corp. that replaced our then-existing credit facilities. The credit
facility is comprised of a $75 million revolving credit facility maturing on
August 8, 2005, a $75 million Tranche A term loan maturing on August 8, 2005 and
a $200 million Tranche B term loan maturing on August 8, 2006. Up to
$10 million of the revolving credit facility may be used for the issuance of
standby letters of credit, of which $2.0 million was outstanding as of
September 30, 2000. In addition, up to $10 million of the revolving credit
facility may be used for short-term credit to be provided to us on a same-day
basis, which must be repaid within five days.
At our option, the revolving credit facility and the Tranche A term loan may
bear interest at (1) the highest of 1/2 of 1% in excess of the federal funds
effective rate or the rate that the bank group 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 our total leverage. At our option, the Tranche
B term loan may bear interest at (1) the highest of 1/2 of 1% in excess of the
federal funds effective rate or the rate that the bank group announces from time
to time as its prime lending rate plus an applicable margin of up to 3.25%, 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 our total leverage. The eurodollar
rate is defined as the rate that appears on page 3750 of the Dow Jones Telerate
Screen as of 11:00 a.m. London time two days before the applicable funding date
(adjusted for statutory reserve requirements for eurocurrency liabilities) at
which eurodollar deposits for one, two, three or six months, as selected by us,
are offered in the interbank eurodollar market. At December 31, 2000, the
applicable Tranche A and Tranche B loan rates were 9.89% and 10.64%,
respectively. In addition, as of December 22, 2000, we have entered into a
$100.0 million interest rate swap contract obligating us to pay a fixed rate of
5.825% for three years against the 90-day eurodollar rate.
As of December 31, 2000, $71.3 million was outstanding on the Tranche A term
loan, $199.0 million was outstanding on the Tranche B term loan and
$39.0 million was outstanding under the revolving credit portion of the
facility. Proceeds from the credit facility to date have been used to finance
the acquisition of the Mississippi properties, to replace our existing term loan
and revolving credit facilities, to complete a tender offer for our 1997 senior
notes and for working capital purposes.
27
CONTINGENT OBLIGATIONS
In connection with our 50% ownership interest in Pennwood Racing, we have
agreed to guarantee up to 50% of certain obligations of the New Jersey joint
venture. These obligations include, but are not limited to, rent, real estate
taxes, insurance and utilities under a seven year lease at Garden State Park
expiring January 2006, subject to the termination of the lease on May 31, 2001;
a $10 million contingent purchase price due to International Thoroughbred
Breeders, former owner of certain of the joint venture's assets, if the joint
venture receives various approvals for off-track wagering or phone betting in
New Jersey; and the obligations of the joint venture under its $23 million
credit facility with Commerce Bank, N.A.
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 the new 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
the notes when required or to make anticipated capital expenditures. In
addition, if we consummate significant acquisitions in the future, our cash
requirements may increase significantly. We may need to refinance all or a
portion of our debt, including the notes, on or before maturity. Our future
operating performance and our ability to service or refinance the notes and to
service, extend or refinance the new credit facility will be subject to future
economic conditions and to financial, business and other factors, many of which
are beyond our control. See "Risk Factors."
28
SELECTED CONSOLIDATED HISTORICAL FINANCIAL
DATA -- CASINO MAGIC BAY ST. LOUIS
The following selected consolidated historical financial data of Mardi Gras
Casino Corp. (d/b/a Casino Magic Bay St. Louis) for the years ended
December 31, 1997, 1998 and 1999 is derived from financial statements that have
been audited by Arthur Andersen LLP, independent certified public accountants.
The selected historical interim financial data of Casino Magic Bay St. Louis for
the nine months ended September 30, 1999 and 2000 were derived from the
unaudited consolidated financial statements of Casino Magic Bay St. Louis for
such periods and reflect all adjustments necessary to present fairly the
financial position and results of operations for the periods presented. The
selected consolidated historical financial data should be read in conjunction
with the consolidated financial statements of Casino Magic Bay St. Louis and
notes thereto, and the other financial information included herein.
On August 8, 2000, we completed our acquisition of Casino Magic Bay St.
Louis. In the table below, we have presented operating results for this property
for the period January 1, 2000 to September 30, 2000 to aid in comparison of its
results for the same period in 1999. Revenues of $12.4 million and EBITDA of
$2.4 million at Casino Magic Bay St. Louis for the period August 8, 2000 to
September 30, 2000 also are included in Penn National's operating results for
the nine months ended September 30, 2000 presented elsewhere herein.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
Revenue
Gaming....................................... $81,103 $81,890 $80,349 $61,808 $60,545
Hotel, recreational vehicle park and golf.... 3,133 3,417 3,491 2,826 2,935
Other........................................ 4,178 4,897 5,055 3,846 4,873
------- ------- ------- ------- -------
Total revenues................................. 88,414 90,204 88,895 68,480 68,353
------- ------- ------- ------- -------
Operating expenses:
Gaming....................................... 47,268 48,174 47,446 36,203 36,131
Hotel, recreational vehicle park and golf.... 2,406 2,400 2,469 1,912 2,272
Selling, general and administrative.......... 11,356 12,789 12,291 9,079 10,152
Other........................................ 10,896 10,923 10,715 8,053 6,719
------- ------- ------- ------- -------
Total operating expenses....................... 71,926 74,286 72,921 55,247 55,274
------- ------- ------- ------- -------
Income from operations......................... 16,488 15,918 15,974 13,233 13,079
Other income (expenses)........................ (8,008) (10,948) 145 104 (2,425)
------- ------- ------- ------- -------
Income before income taxes and extraordinary
item........................................... 8,480 4,970 16,119 13,337 10,654
Taxes on income................................ 3,217 1,922 5,656 5,068 3,745
------- ------- ------- ------- -------
Income before extraordinary item............... 5,263 3,048 10,463 8,269 6,909
Extraordinary item -- loss on early
extinguishment of debt, net of tax........... -- 2,116 -- -- --
------- ------- ------- ------- -------
Net income..................................... $ 5,263 $ 932 $10,463 $ 8,269 $ 6,909
======= ======= ======= ======= =======
29
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA --
BOOMTOWN BILOXI
The following selected consolidated historical financial data of
Mississippi-I Gaming, L.P. (d/b/a Boomtown Biloxi) for the years ended
December 31, 1997, 1998 and 1999 is derived from financial statements that have
been audited by Arthur Andersen LLP, independent certified public accountants.
The selected historical interim financial data of Boomtown Biloxi for the nine
months ended September 30, 1999 and 2000 were derived from the unaudited
consolidated financial statements of Boomtown Biloxi for such periods and
reflect all adjustments necessary to present fairly the financial position and
results of operations for the periods presented. The selected consolidated
historical financial data should be read in conjunction with the consolidated
financial statements of Boomtown Biloxi and notes thereto, and the other
financial information included herein.
On August 8, 2000, we completed our acquisition of Boomtown Biloxi. In the
table below, we have presented operating results for this property for the
period January 1, 2000 to September 30, 2000 to aid in comparison of its results
for the same period in 1999. Revenues of $9.5 million and EBITDA of $1.4 million
at Boomtown Biloxi for the period August 8, 2000 to September 30, 2000 also are
included in Penn National's operating results for the nine months ended
September 30, 2000 presented elsewhere herein.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
Revenue
Gaming....................................... $52,022 $57,054 $58,191 $44,284 $43,930
Other........................................ 6,114 8,030 9,635 7,130 6,755
------- ------- ------- ------- -------
Total revenues................................. 58,136 65,084 67,826 51,414 50,685
------- ------- ------- ------- -------
Operating expenses:
Gaming....................................... 28,391 29,598 29,366 22,097 22,694
Selling, general and administrative.......... 15,012 16,088 15,954 12,096 11,825
Other........................................ 9,260 11,650 13,070 10,097 9,435
------- ------- ------- ------- -------
Total operating expenses....................... 52,663 57,336 58,390 44,290 43,954
------- ------- ------- ------- -------
Income from operations......................... 5,473 7,748 9,436 7,124 6,731
Other income (expenses)........................ (5,354) (4,319) (150) (129) (1,268)
Net tax benefit................................ -- -- -- -- 153
------- ------- ------- ------- -------
Net income..................................... $ 119 $ 3,429 $ 9,286 $ 6,995 $ 5,616
======= ======= ======= ======= =======
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- MISSISSIPPI PROPERTIES
COMBINATION OF RESULTS
We acquired two casinos in Mississippi, Casino Magic Bay St. Louis and
Boomtown Biloxi, on August 8, 2000. In the table below, we have presented
operating results for these properties for the period January 1, 2000 to
September 30, 2000 to aid in comparison of their results for the same period in
1999. The results for the period August 8, 2000 to September 30, 2000 also are
included in Penn National's operating results for the nine months ended
September 30, 2000 presented elsewhere herein.
The Mississippi properties have substantially increased our size and the
percentage of our revenues and operating profits derived from gaming operations.
In light of this, we are providing a Management's Discussion and Analysis of
Financial Condition and Results of Operations for these recently acquired
properties. For purposes of this discussion, we have combined the separate
statements of operations for the Mississippi properties for each of the years
and nine-month periods presented in the selected historical financial and
operating data tables on the preceding pages. These data are as follows:
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
Revenue
Gaming........................................ $133,125 $138,944 $138,540 $106,092 $104,475
Hotel, recreational vehicle park and golf..... 3,133 3,417 3,491 2,826 2,935
Other......................................... 10,292 12,927 14,690 10,976 11,628
-------- -------- -------- -------- --------
Total revenues.................................. 146,550 155,288 156,721 119,894 119,038
-------- -------- -------- -------- --------
Operating expenses:
Gaming........................................ 75,659 77,772 76,812 58,300 58,825
Hotel, recreational vehicle park and golf..... 2,406 2,400 2,469 1,912 2,272
Selling, general and administrative........... 26,368 28,877 28,245 21,175 21,977
Other......................................... 20,156 22,573 23,785 18,150 16,154
-------- -------- -------- -------- --------
Total operating expenses........................ 124,589 131,622 131,311 99,537 99,228
-------- -------- -------- -------- --------
Income from operations.......................... 21,961 23,666 25,410 20,357 19,810
Other income (expenses)......................... (13,362) (15,267) (5) (25) (3,693)
-------- -------- -------- -------- --------
Income before income taxes and extraordinary
item.......................................... 8,599 8,399 25,405 20,332 16,117
Taxes on income................................. 3,217 1,922 5,656 5,068 3,592
-------- -------- -------- -------- --------
Income before extraordinary item................ 5,382 6,477 19,749 15,264 12,525
Extraordinary item -- loss on early
extinguishment of debt, net of tax............ -- 2,116 -- -- --
-------- -------- -------- -------- --------
Net income...................................... $ 5,382 $ 4,361 $ 19,749 $ 15,264 $ 12,525
======== ======== ======== ======== ========
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
Total revenues for the nine months ended September 30, 2000 were
$119.0 million, as compared to $119.9 million for the nine months ended
September 30, 1999, a decrease of $0.9 million, or 0.7%. Gaming revenues
decreased by $1.6 million, or 1.5%, as a result of increased market competition
and a lower hold percentage at Casino Magic Bay St. Louis. Other revenue
increased by $0.7 million, or 5.9%, primarily due to the receipt of
$1.1 million in proceeds from a hurricane business interruption insurance claim,
which was offset by a decrease of $0.3 million in food and beverage revenues at
the Mississippi properties.
31
Total operating expenses decreased by $0.3 million, or 0.3%, during the nine
months ended September 30, 2000, as compared to the nine months ended
September 30, 1999. Gaming expenses increased by $0.5 million, or 0.9%,
primarily due to the increased cost of complimentary giveaways provided to
induce gaming play and counter competitors' marketing efforts at the Boomtown
facility. Other expenses decreased by $2.0 million, or 10.9%, during the nine
months ended September 30, 2000 as compared to the nine months ended
September 30, 1999. At the Boomtown facility, other expenses decreased
$0.7 million, or 6.6% primarily due to a decline of $0.3 million, or 5.9%, in
food and beverage expenses resulting from the volume decreases. Additionally,
expenses related to the Family Fun Center at the Boomtown facility were down
$0.2 million, or 17.4%, also as a result of volume declines. At the Casino Magic
Bay St. Louis facility, other expenses decreased approximately $1.3 million from
the same period last year, due primarily to a $0.6 million decrease in
depreciation expenses resulting from assets becoming fully depreciated in 1999.
Other income (expenses) increased by $3.7 million over the nine months ended
September 30, 1999, primarily due to interest expense related to the debt that
we incurred to acquire the Mississippi properties in August 2000.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Total revenues for the year ended December 31, 1999 increased by
$1.4 million, or 0.9%, to $156.7 million in 1999 from $155.3 million in 1998.
Gaming revenues decreased by $0.4 million, or 0.3%, due in part to a decrease in
revenue of $1.5 million at Casino Magic Bay St. Louis caused by increasing
market competition and a lower hold percentage. This decline was partially
offset by an increase in gaming revenues at Boomtown of $1.1 million resulting
from increased customer volume driven by additional marketing efforts. Other
revenue increased by $1.8 million, or 13.6%, due to a $1.2 million increase in
food and beverage revenues at Boomtown, which was also driven by additional
marketing, and the receipt of $0.9 million in proceeds from a hurricane business
interruption and property insurance claim.
Total operating expenses decreased by $0.3 million, or 0.3%, during the year
ended December 31, 1999, as compared to the year ended December 31, 1998. Gaming
expenses decreased by $1.0 million, or 1.2%, primarily due to the decrease in
gaming revenues at Casino Magic Bay St. Louis. Selling, general and
administrative expenses decreased by $0.6 million, or 2.2%, over the same period
last year as a result of a 1998 charge of $0.5 million at Casino Magic Bay St.
Louis for a US Treasury Department Currency Transaction Reporting fine and a
decrease in overall expenses of $0.1 million at Boomtown in 1999. Other expenses
increased by $1.2 million, or 5.4%, during the year ended December 31, 1999 as
compared to the year ended December 31, 1998. At the Boomtown facility, other
expenses increased by $1.4 million, or 12.2%, primarily due to an increase in
food and beverage expenses resulting from the volume increases driven by
additional marketing efforts.
Other income (expenses) decreased by $15.0 million in 1999 due to the
predecessor parent company of Casino Magic and Boomtown not charging interest on
inter-company notes in 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Total revenues for the year ended December 31, 1998 increased by
$8.7 million, or 6.0%, to $155.3 million in 1998 from $146.6 million in 1997.
Gaming revenues increased by $5.8 million, or 4.4%, due in part to an increase
in gaming revenues at Boomtown of $5.0 million, stemming from increased customer
volume driven by additional marketing efforts. There was also an increase in
gaming revenues of $0.8 million at Casino Magic Bay St. Louis caused by a higher
hold percentage on table games. Other revenue increased by $2.6 million, or
25.0%, due in part to a $2.2 million increase in food and beverage revenues
resulting from additional marketing at Boomtown and Casino Magic Bay St. Louis.
32
Total operating expenses increased by $7.0 million, or 5.6%, during the year
ended December 31, 1998, as compared to the year ended December 31, 1997. Gaming
expenses increased by $2.1 million, or 2.8%, primarily due to the increase in
gaming revenues at both Boomtown and Casino Magic Bay St. Louis. Selling,
general and administrative expenses increased by $2.5 million, or 9.5%, over the
same period last year as a result of: a 1998 charge of $0.5 million at Casino
Magic Bay St. Louis for a US Treasury Department Currency Transaction Reporting
fine; $0.7 million additional expenses at Casino Magic Bay St. Louis relating to
Hollywood Park's acquisition of the property in 1998; and an increase in
property rent, real estate taxes and medical cost totaling approximately
$1.1 million at Boomtown. Other operating expenses increased by $2.4 million, or
12.0%, during the year ended December 31, 1998 as compared to the year ended
December 31, 1997. The increase in other operating expenses was attributable to
an increase in Boomtown's food and beverage expenses and expenses related to the
Family Fun Center resulting from the volume increases driven by additional
marketing efforts.
Other income (expenses) increased by $1.9 million in 1998 due to a loss on
the sale of fixed assets of $1.9 million and a loss in earnings from an
unconsolidated affiliate of $2.9 million at Casino Magic Bay St. Louis. These
losses were offset by a decrease in interest expense of $2.4 million related to
debts associated with inter-company notes at both properties.
33
SELECTED HISTORICAL FINANCIAL DATA --
CRC HOLDINGS, INC. -- GAMING DIVISION
The following selected financial data of CRC Holdings, Inc. -- Gaming
Division for the years ended November 30, 1997, 1998 and 1999 is derived from
financial statements that have been audited by PricewaterhouseCoopers LLP,
independent certified public accountants. The selected financial data of CRC
Holdings, Inc. -- Gaming Division as of and for the nine months ended
August 31, 1999 and 2000 is derived from unaudited financial statements that
have been prepared on the same basis as the historical information derived from
audited financial statements and, in the opinion of management, contains all
adjustments, consisting only of normal recurring accruals, necessary for the
fair presentation of the results of operations for such periods and financial
positions as of such dates. The selected financial data should be read in
conjunction with, and is qualified in its entirety by reference to, the
consolidated financial statements of CRC Holdings, Inc. -- Gaming Division and
notes thereto, and the other financial information included herein.
NINE MONTHS ENDED
YEAR ENDED NOVEMBER 30, AUGUST 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
Revenue
Casino....................................... $67,694 $68,845 $82,250 $62,001 $67,751
Food and beverage............................ 7,266 6,174 7,465 5,434 6,083
Management service fees...................... 11,976 14,800 15,790 11,796 10,177
Less: promotional allowances................. (5,216) (4,174) (5,057) (3,611) (4,506)
------- ------- ------- ------- -------
Net revenues................................... 81,720 85,645 100,448 75,620 79,505
------- ------- ------- ------- -------
Operating expenses:
Casino....................................... 31,826 33,302 38,439 28,641 31,603
Food and beverage............................ 1,317 1,539 1,659 1,361 908
Management service and operating costs....... 29,540 28,850 30,323 21,795 25,315
Depreciation and amortization................ 4,571 5,004 5,628 4,133 3,833
------- ------- ------- ------- -------
Total operating expenses....................... 67,254 68,695 76,049 55,930 61,659
------- ------- ------- ------- -------
Income from operations before equity in net
losses of affiliates......................... 14,466 16,950 24,399 19,690 17,846
Equity in net losses of affiliates............. (27) (174) -- -- --
------- ------- ------- ------- -------
Income from operations......................... 14,439 16,776 24,399 19,690 17,846
Other expenses (net of other income)........... (6,329) (6,069) (7,879) (5,889) (4,613)
------- ------- ------- ------- -------
Income before income taxes, minority interest
and extraordinary loss....................... 8,110 10,707 16,520 13,801 13,233
Provision for income taxes..................... 3,861 719 7,191 5,821 5,466
------- ------- ------- ------- -------
Income before minority interest and
extraordinary loss........................... 4,249 9,988 9,329 7,980 7,767
Minority interest.............................. -- (108) 221 170 2,346
------- ------- ------- ------- -------
Income before extraordinary loss............... 4,249 10,096 9,108 7,810 5,421
Extraordinary item -- loss on early
extinguishment of debt, net of income tax
benefit of $1,115 and $1,106 in 1997 and
1999, respectively........................... (1,385) -- (1,731) (1,731) --
------- ------- ------- ------- -------
Net income..................................... $ 2,864 $10,096 $ 7,377 $ 6,079 $ 5,421
======= ======= ======= ======= =======
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- CRC HOLDINGS, INC. -- GAMING DIVISION
CRC Holdings, Inc. -- Gaming Division, d/b/a Carnival Resorts & Casinos,
owns, operates and develops casino properties. CRC consists principally of a
59.9% interest in Louisiana Casino Cruises, Inc., which owns the Casino Rouge
riverboat casino based in Baton Rouge, Louisiana; the operation of Casino Rama,
located north of Toronto, Canada, on behalf of the Ontario Lottery and Gaming
Corporation; and other casino development activities.
Casino and food and beverage revenues are from the operations of the Casino
Rouge which commenced operations on December 28, 1994. Management service fee
revenues consist of management fees earned based on gross revenues and operating
results of managed casinos and technical service fees earned in connection with
pre-opening activities. CRC was selected by the Ontario Casino Corporation, the
predecessor of the Ontario Lottery and Gaming Corporation, and the Mnjikaning
First Nation to develop, operate and partially finance the development of Casino
Rama. CRC loaned $25,000,000 to partially finance the development of Casino
Rama. CRC is under contract to operate the casino until July 31, 2011. CRC is
paid a base management fee in the amount of 2% of gross revenues and an
incentive management fee of 5% of operating profit.
Casino and food and beverage expenses are from the operations of the Casino
Rouge. Management service and operating costs consist primarily of the operating
and selling, general and administrative expenses of the Casino Rouge, management
support services and costs related to casino development activities.
NINE MONTHS ENDED AUGUST 31, 2000 COMPARED TO NINE MONTHS ENDED AUGUST 31, 1999
LCCI's casino revenues were $67,751,000 and $62,001,000 for the nine-month
periods ended August 31, 2000 and 1999, respectively. The increase in casino
revenue was due to an increase in customer counts and increase in win per
passenger for the nine months ended August 31, 2000 of $3.72 to $56.29 compared
to $52.57 for the nine months ended August 31, 1999.
Management service fees for the nine months ended August 31, 2000 and 1999
were $10,177,000 and $11,796,000, respectively. The decrease is due to the
reduction in Casino Rama management service fees of $1,619,000 during the nine
months ended August 31, 2000 compared to the nine months ended August 31, 1999
as a result of the decline in Casino Rama's operating performance. The reduction
in Casino Rama's operating performance is primarily due to increased competition
in the market from the addition of slot machines at certain area race tracks.
Casino expenses for the nine months ended August 31, 2000 and 1999, were
$31,603,000 and $28,641,000, respectively, which represented 46.6% and 46.2% of
casino revenues for each period, respectively. Overall casino expenses increased
during the 2000 period primarily due to the Baton Rouge market's increased
gaming activity and LCCI's increase in patrons, resulting in increased gaming
and patron taxes.
Management services and operating costs were $25,315,000 and $21,795,000 for
the nine months ended August 31, 2000 and 1999, respectively, including Casino
Rouge selling, general and administrative expenses of $16,993,000 and
$15,962,000 for the nine months ended August 31, 2000 and 1999, respectively;
and management support services costs and casino development costs of $8,322,000
and $5,833,000 for the nine months ended August 31, 2000 and 1999, respectively.
Casino Rouge selling, general and administrative expenses for 2000 were greater
than 1999 due primarily to an increase in revenue based rent, management fees,
and marketing expenses. Management support services costs increased primarily
due to bonus compensation resulting from the extension of the Development and
Operating Agreement for Casino Rama in 2000 and the recovery related to the
cancelled development of new permanent limited stakes charitable casinos at
various locations
35
throughout Ontario, Canada in 1999. Casino development costs increased due to
the recognition of the recovery of a pre-opening loan related to the
development, under a management contract of a proposed gaming facility, near
Spokane, Washington in 1999 partially offset by a reduction in casino
development expenditures in 2000.
Depreciation and amortization for the nine months ended August 31, 2000,
were $3,833,000 compared to $4,133,000 for the nine months ended August 31,
1999. The decrease in depreciation and amortization expenses was mainly due to
certain equipment becoming fully depreciated.
Interest income was $1,237,000 and $1,711,000 for the nine months ended
August 31, 2000 and 1999, respectively. The decrease in interest income is
primarily due to repayments of the project receivable from Casino Rama partially
offset by an increase in the variable interest rate on the project receivable.
Interest expense was $5,486,000 and $6,549,000 for the nine months ended
August 31, 2000 and 1999, respectively. The decrease in interest expense is
primarily due to LCCI's refinancing its variable rate senior secured increasing
rate notes during the 1999 period and the reduction in the balance outstanding
under a variable rate term loan.
Common stock dividends of subsidiary were $1,050,000 for the nine months
ended August 31, 1999. As LCCI's accumulated losses and dividends had previously
eliminated the minority interest, $1,050,000 of LCCI common stock dividends paid
to minority common stockholders were charged to operations during the nine
months ended August 31, 1999.
The provision for income taxes was $5,466,000 and $5,821,000 for the nine
months ended August 31, 2000 and 1999, respectively. The decrease is
attributable primarily to a decrease in taxable income during the nine months
ended August 31, 2000.
The extraordinary loss from early extinguishment of debt of $1,731,000
during the nine months ended August 31, 1999 is due to the early repayment in
January 1999 of the LCCI 1998 notes, which resulted in the incurrence of a
$2,837,000 extraordinary loss less an income tax benefit of $1,106,000.
YEAR ENDED NOVEMBER 30, 1999 COMPARED TO YEAR ENDED NOVEMBER 30, 1998
Casino revenues for LCCI were $82,250,000 and $68,845,000 for the years
ended November 30, 1999, and 1998, respectively. Casino revenues consist of
gaming machine and table revenues. Revenues from casino operations were 81.0%
from gaming machines and 19.0% from table games in 1999 compared to 78.0% and
22.0%, respectively, for 1998. Such mix for gaming machines and gaming table win
is attributable to the continuing popularity of gaming machines among LCCI's
base casino patrons and generally conforms to that experienced by riverboats
throughout Louisiana. Gaming machine revenues increased 24.1% in 1999 compared
to 1998 primarily due to a 22.8% increase in coin in. Table revenues increased
3.1% in 1999 compared to 1998 due to an increase in table game drop. For the
year ended November 30, 1999, LCCI's win per passenger increased 5.9% to $52.40
compared to $49.46 in the same period of 1998.
Management service fees for the year ended November 30, 1999 and 1998 were
$15,790,000 and $14,800,000, respectively. The increase is due to the increase
in Casino Rama management service fees of $1,134,000 during the year ended
November 30, 1999 compared to the year ended November 30, 1998 as a result of
Casino Rama's improved operating performance as gross gaming revenues increased
to $353,600,000 during the year ended November 30, 1999 from $321,100,000 during
the year ended November 30, 1998.
Casino expenses for the year ended November 30, 1999 and 1998 were
$38,439,000 and $33,302,000, respectively, which represents 46.7% and 48.4% of
casino revenues in each period. Overall casino expenses increased during 1999
primarily due to the market's increased gaming activity and
36
LCCI's increase in market share in both casino revenue and patrons, which
resulted in increased gaming and patron taxes. Overall casino expenses as a
percent of casino revenue decreased during 1999 primarily due to the elimination
of various special events and promotions.
Management services and operating costs were $30,323,000 and $28,850,000 for
the years ended November 30, 1999 and 1998, respectively, primarily including
Casino Rouge selling, general and administrative expenses of $21,558,000 and
$18,753,000 for the years ended November 30, 1999 and 1998, respectively; and
management support services costs and casino development costs of $8,765,000 and
$10,097,000 for the years ended November 30, 1999 and 1998, respectively. Casino
Rouge selling, general and administrative expenses for 1999 were greater than
1998 due primarily to an increase in revenue based rent and increased legal
fees. Casino development costs decreased during the year ended November 30, 1999
due to the termination of funding and recognition of the recovery of a
pre-opening loan related to the development, under a management contract with
the Kalispel Tribe of Indians, of a proposed gaming facility near Spokane,
Washington. Management support services costs also decreased in 1999 due to the
recovery of an allowance provided for in 1998 related to the cancelled
development of new permanent limited stakes charitable casinos at various
locations throughout Ontario, Canada.
Interest income was $2,200,000 and $2,249,000 for the years ended
November 30, 1999 and 1998, respectively. The decrease in interest income is
primarily due to the reduction in the balance outstanding under the project
receivable from Casino Rama partially offset by an increase in the variable
interest rate on the project receivable.
Interest expense was $8,478,000 and $8,896,000 for the years ended
November 30, 1999 and 1998, respectively. The decrease in interest expense is
primarily due to the reduction in the balance outstanding under a variable rate
term loan partially offset by an increase in interest expense due to the
repayment of LCCI's variable rate senior secured increasing rate notes and
additional debt outstanding resulting from the January 1999 issuance of LCCI's
11% senior secured notes.
Foreign currency gains were $157,000 and $1,418,000 for the years ended
November 30, 1999 and 1998, respectively. The decrease in foreign currency gains
is primarily the result of an amendment to the term loan to Casino Rama, which
denominated the loan in U.S. dollars from Canadian dollars thereby reducing
foreign currency exposure.
Common and redeemable preferred stock dividends of subsidiary were
$1,253,000 and $1,094,000 for the years ended November 30, 1999 and 1998,
respectively. As LCCI's accumulated losses and dividends had previously
eliminated the minority interest, $1,253,000 and $962,000 of LCCI common stock
dividends paid to minority common stockholders and to the LCCI common stock
warrantholders were charged to operations during the years ended November 30,
1999 and 1998, respectively. In addition, $132,000 of LCCI redeemable preferred
stock dividends were charged to operations in the year ended November 30, 1998.
The provision for income taxes was $7,191,000 and $719,000 for the years
ended November 30, 1999 and 1998, respectively. The increase is attributable to
an increase in taxable income during the year ended November 30, 1999 and the
release during the year ended November 30, 1998 of a previously established
$4,243,000 deferred income tax valuation allowance.
The extraordinary loss from early extinguishment of debt of $1,731,000
during the year ended November 30, 1999 is due to the early repayment in
January 1999 of the 1998 senior secured increasing rate notes, which resulted in
the incurrence of a $2,837,000 loss less an income tax benefit of $1,106,000.
YEAR ENDED NOVEMBER 30, 1998 COMPARED TO YEAR ENDED NOVEMBER 30, 1997
Casino revenues for LCCI were $68,845,000 and $67,694,000 for the years
ended November 30, 1998 and 1997, respectively. Casino revenues consist of
gaming machine and table revenues. Revenues
37
from casino operations were 78.0% from gaming machines and 22.0% from table
games in 1998 compared to 75.2% and 24.8%, respectively, for 1997. Such mix of
gaming machines and gaming table win is attributable to the continuing
popularity of gaming machines among LCCI's base casino patrons and generally
conforms to that experienced by riverboats throughout Louisiana. Table revenues,
excluding poker, decreased 11.2% in 1998 compared to 1997 due to a 16.7%
decrease in table game drop offset by an improvement of the hold percentage from
20.1% to 21.2% on an annual basis. Gaming machine revenues increased 5.5% in
1998 compared to 1997 primarily due to a 5.6% increase in coin in. Poker win for
1998 and 1997 was $494,000 and $300,000, respectively. CRC management believes
that the decline in table game drop is a direct result of patrons converting to
gaming machines due to new, exciting and innovative gaming equipment being
introduced by the casino industry. For the year ended November 30, 1998, LCCI's
win per passenger increased 8.3% to $49.46 compared to $45.69 in the same period
of 1997.
Management service fees for the year ended November 30, 1998 and 1997 were
$14,800,000 and $11,976,000, respectively. The increase is primarily due to the
increase in Casino Rama management service fees to $14,656,000 during the year
ended November 30, 1998 from $11,508,000 during the year ended November 30, 1997
as a result of Casino Rama's improved operating performance as gross gaming
revenues increased to $321,100,000 during the year ended November 30, 1998 from
$261,400,000 during the year ended November 30, 1997.
Casino expenses for the year ended November 30, 1998 and 1997 were
$33,302,000 and $31,826,000, respectively, which represents 48.4% and 47.0% of
casino revenues in each period. Overall casino expenses increased primarily due
to the introduction of CRC's Rouge Arena, a temporary facility used for
concerts, sporting activities, customer parties and other promotional
activities. The facility was in use through July 1998.
Management services and operating costs were $28,850,000 and $29,540,000 for
the years ended November 30, 1998 and 1997, respectively, including Casino Rouge
selling, general and administrative expenses of $18,753,000 and $18,825,000 for
the years ended November 30, 1998 and 1997, respectively; and management support
services costs and casino development costs of $10,097,000 and $10,715,000 for
the years ended November 30, 1998 and 1997, respectively. Casino Rouge selling,
general and administrative expenses for 1998 were lower than 1997 due primarily
to a decrease in risk management costs partially offset by an increase in legal
expenses. Casino development costs decreased due to the termination of funding
of a pre-opening loan related to the development, under a management contract
with the Wampanoag Tribe of Indians, of a proposed gaming facility and
entertainment complex in Southeastern Massachusetts. Management support services
costs increased due to a provision for bad debts incurred in 1998 as a result of
an allowance provided related to the cancelled development of new permanent
limited stakes charitable casinos at various locations throughout the Province
of Ontario, Canada.
Interest income was $2,249,000 and $1,842,000 for the years ended
November 30, 1998 and 1997, respectively. The increase in interest income is
primarily due to the increase in the variable interest rate on CRC's project
receivable from Casino Rama partially offset by the reduction in the balance
outstanding under the project receivable.
Interest expense was $8,896,000 and $8,824,000 for the years ended
November 30, 1998 and 1997, respectively. The increase in interest expense is
primarily due to interest and related financing costs being charged on both
LCCI's 11.5% first mortgage notes and LCCI's variable rate senior secured
increasing rate notes for a six day period during which proceeds were escrowed
to repay LCCI's 11.5% first mortgage notes. This increase was partially offset
by lower interest due to the refinancing of a term credit facility in
December 1996 with a variable rate term loan on more favorable terms.
38
Foreign currency gains were $1,418,000 and $1,029,000 for the years ended
November 30, 1998 and 1997, respectively, due to the effect of the strengthening
United States dollar in relation to the Canadian dollar on the term loan which
was denominated in Canadian dollars.
Common and redeemable preferred stock dividends of subsidiary were
$1,094,000 and $364,000 for the years ended November 30, 1998 and 1997,
respectively. As LCCI's accumulated losses and dividends had previously
eliminated the minority interest, $962,000 and $232,000 of LCCI common stock
dividends paid to minority common stockholders and to the LCCI common stock
warrantholders were charged to operations during the years ended November 30,
1998 and 1997, respectively. In addition, $132,000 of LCCI redeemable preferred
stock dividends were charged to operations in each of the years ended
November 30, 1998 and 1997.
The provision for income taxes was $719,000 and $3,861,000 for the years
ended November 30, 1998 and 1997, respectively. The decrease is attributable to
the release during the year ended November 30, 1998 of a previously established
$4,243,000 deferred income tax valuation allowance partially offset by an
increase in taxable income.
The extraordinary loss from early extinguishment of debt of $1,385,000
during the year ended November 30, 1997 is due to the early repayment in
December 1996 of a term credit facility, which resulted in the incurrence of a
$2,500,000 prepayment penalty less an income tax benefit of $1,115,000.
39
BUSINESS
INTRODUCTION
We are a diversified gaming and pari-mutuel wagering company with facilities
in West Virginia, Mississippi and Pennsylvania. On July 31, 2000, we entered
into an agreement to acquire all of the gaming assets of CRC Holdings, Inc. for
approximately $181.3 million, including amounts required to refinance certain
existing indebtedness, which will expand our gaming operations into Louisiana
and Ontario, Canada. On a pro forma basis reflecting our Mississippi properties
and the CRC acquisition, our revenues and Adjusted EBITDA would have been
$486.3 million and $111.1 million, respectively, for the twelve months ended
September 30, 2000.
The following table sets forth certain features and property-level EBITDA
(excluding corporate overhead) of our owned (or leased) and managed properties,
after giving effect to the CRC acquisition:
AT DECEMBER 31, 2000 PROPERTY-LEVEL
------------------------------ EBITDA FOR
GAMING LTM ENDED
TYPE OF SQUARE GAMING TABLE SEPTEMBER 30,
PROPERTY LOCATION FACILITY FOOTAGE MACHINES GAMES 2000
- -------- -------------------- -------------------- -------- -------- -------- --------------
(in thousands)
CURRENTLY OWNED OR LEASED:
Charles Town Charles Town, WV Land-based gaming/ 58,000 1,974 -- $ 27,854
Entertainment Thoroughbred racing
Complex
Casino Magic Bay St. Bay St. Louis, MS Dockside gaming 39,500 1,158 38 21,129
Louis
Boomtown Biloxi Biloxi, MS Dockside gaming 33,600 1,060 27 12,815
Penn National Race Harrisburg, PA(1) Thoroughbred racing -- -- -- 11,391
Course
Pocono Downs Wilkes-Barre, PA(1) Harness racing -- -- -- 8,408
CRC OWNED:
Casino Rouge Baton Rouge, LA Cruising riverboat 28,000 980 42 24,975(2)
------- ----- --- --------
TOTALS 159,100 5,172 107 $106,572
======= ===== === ========
CRC OPERATED:
Casino Rama Orillia, Ontario Land-based gaming 75,000 2,202 122 $ 14,173(3)
- -------------
(1) In addition to our racetracks, Penn National Race Course and Pocono Downs
have six and five off-track wagering facilities, respectively, located
throughout Pennsylvania.
(2) Adjusted to add back management fee paid to prior owners.
(3) Amount represents management services revenues from the operation of Casino
Rama.
Our Charles Town Entertainment Complex in Charles Town, West Virginia
features 1,974 gaming machines, a thoroughbred racetrack, simulcast wagering,
entertainment and dining. The facility is located within easy driving distance
of Baltimore, Maryland and Washington, D.C. and is the leading gaming property
serving those areas. There is a total population of approximately 3.1 million
persons within a 50-mile radius, and approximately 10.0 million persons within a
100-mile radius of the Charles Town Entertainment Complex, of which
approximately 7.2 million persons are over the age of 20. We have experienced
strong growth at the facility and have increased the number of gaming machines
from 400 machines in September 1997 to 1,974 machines as of December 31, 2000.
We recently expanded the gaming area to nearly 60,000 square feet and opened a
150-seat restaurant and bar. In addition, since receiving regulatory approval
permitting the operation of reel-spinning, coin-out machines in April 1999, we
have increased the number of reel-spinning machines relative to the number of
paper ticket video lottery terminals, or VLTs. As a result of these initiatives,
our monthly gaming revenues at Charles Town have grown from approximately
$5.8 million in January 2000 to approximately $10.3 million in January 2001.
40
Our business strategy is focused on exploiting the higher margins and more
stable cash flows associated with gaming operations compared to pari-mutuel
operations. As part of this strategy, on August 8, 2000, we completed our
acquisition of the Casino Magic Bay St. Louis casino and the Boomtown Biloxi
casino from Pinnacle Entertainment, Inc. for an aggregate purchase price of
approximately $201.3 million. Both properties operate in the Gulf Coast gaming
market and are within easy driving distance of New Orleans, Louisiana, Mobile,
Alabama and other points in the Southeast. We refer to these two casinos as the
"Mississippi properties." Casino Magic Bay St. Louis in Bay St. Louis,
Mississippi, offers approximately 39,500 square feet of gaming space, with
approximately 1,158 slot machines and 38 table games, a 201-room hotel, an 1,800
seat arena, a recreational vehicle park and an 18-hole Arnold Palmer-designed
championship golf course. Boomtown Biloxi in Biloxi, Mississippi, offers
approximately 33,600 square feet of gaming space, with 1,060 slot machines, 27
table games and other gaming amenities including restaurants and a 20,000 square
foot entertainment center.
The acquisition by merger of CRC Holdings, Inc., which does business as
Carnival Resorts and Casinos, is expected to close in the first half of 2001.
Immediately prior to CRC will divest itself of all of its non-gaming assets. CRC
is the operator and 59.9% shareholder of Louisiana Casino Cruises, Inc., or
LCCI, the owner of Casino Rouge, the leading riverboat gaming facility in Baton
Rouge, Louisiana. We also have entered into a definitive agreement with the
minority holders of LCCI to acquire their 40.1% interest of the business. Casino
Rouge features a four-story riverboat casino with approximately 28,000 square
feet of gaming space, 980 gaming machines and 42 table games. In addition to the
Casino Rouge property, a wholly owned subsidiary of CRC operates Casino Rama on
behalf of the Ontario Lottery and Gaming Corporation, an agency of the Province
of Ontario. Casino Rama is a casino and full-service entertainment facility
located approximately 90 miles north of Toronto, Canada, with approximately
75,000 square feet of gaming space, 2,202 gaming machines and 122 table games.
We believe the CRC acquisition will build the critical mass of our gaming
operations, further enhance our position in the gaming sector and diversify the
geographic reach of our properties.
In addition to our gaming facilities, we own and operate Penn National Race
Course, located outside of Harrisburg, one of two thoroughbred racetracks in
Pennsylvania, and Pocono Downs, located outside of Wilkes-Barre, one of two
harness racetracks in Pennsylvania. We also operate eleven off-track wagering
facilities, or OTWs, in Pennsylvania and hold a 50% interest in Pennwood
Racing, Inc., a joint venture that owns and operates Freehold Raceway and will
operate Garden State Park in New Jersey through May 31, 2001.
BUSINESS STRATEGY
Our business strategy is to create a broad, diversified base of gaming and
pari-mutuel properties that provides our customers with high quality experiences
that build significant customer loyalty. We continue to improve our gaming
operations to take advantage of their higher margins and less seasonal cash flow
compared to our pari-mutuel operations, while we seek expansion in the more
profitable areas of the pari-mutuel business, such as OTWs and at-home wagering.
We intend to integrate our gaming properties to exploit operating synergies and
marketing and promotional activities. We have focused strategies for Charles
Town, the Mississippi properties, the racetracks and related assets, and CRC as
follows:
- CHARLES TOWN ENTERTAINMENT COMPLEX--The Charles Town Entertainment Complex
has provided us with substantial internal growth over the past two years.
Revenue at the property grew from $80.0 million for the year ended
December 31, 1999 to $135.3 million for the year ended December 31, 2000.
Charles Town currently has 1,974 gaming machines and a customer database
with over 126,000 people. We intend to continue to capitalize on the
strong demographics of the mid-Atlantic gaming market and the property's
leading position in the Baltimore and Washington D.C. markets by adding
amenities such as a hotel, entertainment venue, showroom and structured
parking facility. A hotel at Charles Town should allow us to create a
regional
41
destination that will attract customers from a broader geographic area.
Additionally, we believe we can increase the length of stay from existing
customers with these additional amenities. Finally, we are pursuing
legislative initiatives to increase the maximum $2 per pull West Virginia
wagering limit, which we believe will positively impact our cash flow.
- CASINO MAGIC BAY ST. LOUIS AND BOOMTOWN BILOXI--Casino Magic Bay St. Louis
and Boomtown Biloxi provide us with the opportunity to cross-sell to a
large database of local casino customers. Each of the properties has
operated in the Gulf Coast market for over 6 years. We believe the
properties have loyal employee and local customer bases, and offer
superior customer service through focused marketing and promotional
campaigns. While both properties are primarily aimed at local residents,
we feel that Casino Magic Bay St. Louis provides us with the ability to
create a regional destination property where we can reward loyal customers
from any Penn National facility with a quality casino, hotel and golf
experience. We are planning to construct a new 300-room hotel, new
restaurants and a reconfigured gaming floor collectively anticipated to
cost $35 million and be completed within two years. We intend to drive our
returns on invested capital at Casino Magic Bay St. Louis by cross-selling
the expanded property to customers in the databases of all the Penn
National facilities.
- PENN NATIONAL RACE COURSE AND POCONO DOWNS AND THEIR OTWS--We believe that
our racetracks and OTWs will continue to provide us with strong, stable
cash flows. While pari-mutuel operations are an increasingly smaller
component of our business, the pari-mutuel business may provide us with
significant upside if certain legislative initiatives are adopted. These
initiatives include permitting OTW and account wagering in New Jersey and
at-home wagering, including telephone wagering, throughout the country.
Coupled with our existing OTWs, these initiatives would provide us with
significant high growth, high margin opportunities. Additionally, we have
implemented a casino style customer tracking system throughout our
pari-mutuel facilities that should permit us to increase customer loyalty
and attract new customers.
- CASINO ROUGE AND CASINO RAMA--The anticipated purchase of the CRC gaming
division continues our strategy of acquiring strong assets in emerging
gaming markets at attractive valuations. The Casino Rouge caters to a
local and, we believe, loyal customer base. The property continues to be
the market leader in Baton Rouge in gaming revenue and admissions. We
intend to cross-sell the Casino Magic Bay St. Louis property to the Casino
Rouge's customer base as a regional destination opportunity thereby
generating additional returns on our Bay St. Louis investment. Casino Rama
draws its customers from the Toronto metropolitan area and has been
successful in drawing patrons through targeted bussing and marketing
programs. A 5,000-seat entertainment complex and 300-room hotel are
currently under construction at the property. We anticipate that this
expansion will increase the average customer's length of stay, as there is
a lack of overnight accommodations in the area. The Casino Rama management
contract provides us with an additional source of income without any
capital requirements by us.
THE CHARLES TOWN ENTERTAINMENT COMPLEX
The Charles Town Entertainment Complex is located in Charles Town, West
Virginia, and is a leading gaming facility in the Baltimore, Maryland and
Washington, D.C. area. The facility is approximately a 60-minute drive from
Baltimore and a 70-minute drive from Washington, D.C. There is a total
population of approximately 3.1 million persons within a 50-mile radius, and
approximately 10.0 million persons within a 100-mile radius of the Charles Town
Entertainment Complex, of which approximately 7.2 million persons are over the
age of 20. The average household income within this 100-mile radius is
approximately $66,000 a year.
The Charles Town Entertainment Complex features gaming machines, live
racing, simulcast wagering and dining. Since we began operating gaming machines
at the facility in September 1997, we
42
have experienced strong growth at the facility and have increased the number of
gaming machines from 400 machines at September 1997 to 1,974 at December 2000.
Currently, there is no statutory cap on the number of gaming machines that may
be installed at a location, although any increases in the number of gaming
machines is subject to regulatory approval. Given the success of the Charles
Town Entertainment Complex, we have undertaken certain property enhancements and
have formulated plans for other improvements. Specifically, in November 2000, we
completed our expansion of the gaming facility to nearly 60,000 square feet of
gaming space, opened a new 150-seat restaurant and bar and increased the number
of gaming machines at the facility from 1,500 to approximately 2,000 machines.
In the next phase of the expansion, which we anticipate completing by early
2003, we intend to construct additional gaming space, a structured parking
facility, a 300-room hotel with meeting rooms and conference space and an
entertainment venue, at an estimated cost of $55 million.
Of the 1,974 machines at December 31, 2000, approximately 1,300 machines are
coin out gaming machines that we installed since the passage of legislation in
West Virginia in April 1999 permitting this type of gaming machine. The
remaining gaming machines are dollar bill-fed video gaming machines that
replicate traditional spinning reel gaming machines and video card games, such
as blackjack and poker. We intend to convert some or all of the remaining video
gaming machines to coin out spinning reel machines and hope to increase the
total number of gaming machines beyond our current level, pending approval by
the West Virginia Lottery Commission.
Our marketing efforts at the Charles Town Entertainment Complex include
print and radio advertising and are focused on the Washington, D.C., Baltimore,
Maryland, Northern Virginia, Eastern West Virginia and Southern Pennsylvania
markets. In 1999, we installed a computerized player tracking system called
Player's Choice at the Charles Town Entertainment Complex. This system has
helped to further refine our marketing efforts and our database now consists of
approximately 126,000 players as of February 1, 2001. Our marketing efforts also
include a bus program and cash and merchandise give-aways.
THE MISSISSIPPI PROPERTIES
The Mississippi Gulf Coast has a long tradition as a vacation destination.
Boomtown Biloxi and Casino Magic Bay St. Louis are within 65 and 46 miles of New
Orleans, Louisiana and 63 and 90 miles of Mobile, Alabama, respectively. The
Gulf Coast area draws an estimated two million visitors annually, primarily from
Louisiana, Mississippi, Alabama, Florida and Georgia. The Gulf Coast area also
boasts a local population of approximately 350,000, of which 66% are over the
age of 20, an average household income of approximately $33,000 and a median age
of 33. Approximately 6.3 million people live within a 200-mile radius around
Biloxi and Bay St. Louis with an average age of 32. Gross casino gaming revenues
on the Mississippi Gulf Coast totaled approximately $1,030 million and
$814 million in 1999 and 1998, respectively, a year over year increase of
approximately 27%.
CASINO MAGIC BAY ST. LOUIS CASINO AND RESORT
The Casino Magic Bay St. Louis casino and resort commenced operation in
September 1992, as the first dockside casino in Mississippi to operate on a
barge rather than a traditional riverboat. The casino is located on a 17-acre
marina with the adjoining land-based facilities situated on 591 acres. Casino
Magic Bay St. Louis offers approximately 39,500 square feet of gaming space,
with approximately 1,158 slot machines and 38 table games. The three story
land-based building houses a steak and seafood restaurant, buffet-style
restaurant, cafe, gift shop and live entertainment lounge. The property has a
200-room hotel that includes 24 suites, banquet and meeting space and an outdoor
pool. The Casino Magic Bay St. Louis complex also includes an 1,800 seat arena
for concerts and sporting events, a 100-space recreational vehicle park, a child
entertainment center, and the Bridges Golf Resort, an 18-hole Arnold
Palmer-designed championship golf course that includes a clubhouse, pro shop,
and a casual dining restaurant.
43
We are planning a number of focused enhancements to the Casino Magic Bay St.
Louis property, including plans to construct a 300-room hotel adjacent to the
property that we anticipate could be completed by mid 2002. We believe that the
new hotel will enhance mid-week business at the facility and will geographically
extend the casino's target market. We also are planning to add two new
restaurant venues to the property to meet customer needs, to improve access to
the gaming floor by adding new escalators and elevators and to expand available
parking facilities.
Casino Magic Bay St. Louis is located 1.5 miles north of U.S. Highway 90,
approximately nine miles south of Interstate 10, the main thoroughfare
connecting New Orleans, Louisiana and Mobile, Alabama.
BOOMTOWN BILOXI CASINO
Boomtown Biloxi commenced operations in July 1994 and occupies nine acres on
Biloxi, Mississippi's historic back bay. The dockside property consists of a
land-based facility which houses all non-gaming operating space and an
approximately 33,600 square foot casino constructed on a 400 by 100-foot barge
permanently moored to the land-based building. There is approximately 14,000
square feet on the barge that remains available for development. The casino
offers 1,060 gaming machines, 27 table games and other non-gaming amenities
including a full service buffet/menu service restaurant, a 120 seat deli-style
restaurant, a full-service bakery, a western dance hall/cabaret and a 20,000
square foot family entertainment center. The western-themed family entertainment
center, complete with a dynamic motion theater, distinguishes Boomtown Biloxi
from other casinos on the Mississippi Gulf Coast as a destination offering
entertainment for the entire family.
Boomtown Biloxi offers gaming and entertainment amenities to primarily
middle income, value-oriented customers. The casino has an "old west" theme with
western memorabilia in its interior decor, country/western music and employees
dressed in western attire. We believe Boomtown Biloxi has a relaxed and friendly
environment and a broad and loyal customer base. We intend to continue to focus
on this target market by providing moderately priced, high value amenities and
by utilizing a broad array of marketing programs, including charter flights and
bus programs, among others.
Boomtown Biloxi is located one-half mile from Interstate 110, the main
highway connecting Interstate 10 and the Gulf of Mexico. Interstate 10 is the
main thoroughfare connecting New Orleans, Louisiana and Mobile, Alabama.
According to the Mississippi Department of Transportation, over 12 million
vehicles travel past the Boomtown Biloxi site on Interstate 110 each year. The
site is easily accessible by car when approaching from the north due to its
immediate proximity to the Interstate 110 spur from Interstate 10, which
provides the bulk of traffic to the Gulf Coast region. Boomtown Biloxi is
constructed in the Back Bay and is the first casino visible to auto traffic
traveling south on Interstate 110.
We have an exclusive license to use the Boomtown Biloxi name, logo and
internet world wide web address. The term of the license is contingent upon
certain events, but in no event will it be for less than two years from
August 2000. If our license to use the Boomtown Biloxi name expires, we would
have to identify an alternative name for this casino.
CRC HOLDINGS, INC.
CRC Holdings, Inc., owns 59.9% of Louisiana Casino Cruises, Inc., or LCCI,
which owns and operates Casino Rouge, a Baton Rouge, Louisiana, riverboat gaming
facility. We intend to acquire the other 40.1% of LCCI concurrently with the
acquisition of CRC. In addition, CHC Casinos Canada Limited, a wholly owned
subsidiary of CRC, operates Casino Rama on behalf of the Ontario Lottery and
Gaming Corporation under a Development and Operating Agreement with Mnjikaning
First Nation, the Ontario Lottery and Gaming Corporation and certain other
parties.
44
CASINO ROUGE
The Casino Rouge opened on December 28, 1994, and is one of two riverboat
gaming facilities authorized to operate in Baton Rouge. For fiscal year 1999,
LCCI's share of the Baton Rouge gaming market was 61.7% of casino revenues and
59.2% of admissions, as reported by the Louisiana Gaming Control Board.
The Casino Rouge features a four-story, 47,000 square foot riverboat casino,
replicating a 19th century Mississippi River paddlewheel steamboat, and a
two-story, 58,000 square foot dockside embarkation building. The riverboat has a
capacity of 1,800 customers and emphasizes spaciousness with its ample aisle
space, 15-foot ceilings, a large central atrium and specially designed lighting.
The overall effect avoids the cramped atmosphere found in many riverboat
casinos. Patrons are offered a selection of 980 gaming machines and 42 table
games in 28,000 square feet of gaming space spread over three decks. The
dockside embarkation facility offers a panoramic view of the Mississippi River
and features a variety of amenities, including a 268-seat "International
Marketplace Buffet," an array of food, bar and lounge areas, meeting and
planning space and a gift shop. All of the facilities are open seven days a
week, 24 hours a day, with eight cruises scheduled daily.
The 23-acre site is located on the east bank of the Mississippi River in the
East Baton Rouge Downtown Development District less than one-quarter mile from
the state capital complex. The site is within approximately one mile of both
Interstate 10 and Interstate 110, two major highways in the area. In addition,
the site has convenient parking for approximately 1,650 cars adjacent to the
embarkation facility.
CASINO RAMA
CRC's wholly owned subsidiary, CHC Casinos, operates Casino Rama, a full
service gaming and entertainment facility, on behalf of the Ontario Lottery and
Gaming Corporation. This casino is located on the lands of Mnjikaning First
Nation near Orillia, Ontario approximately 90 miles north of Toronto, Ontario.
Casino Rama consists of 75,000 square feet of gaming space that includes 2,202
gaming machines and 122 table games. The casino opened in July of 1996 and is
open 24 hours a day, 7 days a week. There is an adult population of
approximately 1.1 million persons within 100-miles of Casino Rama.
CHC Casinos operates the facility on behalf of the Ontario Lottery and
Gaming Corporation pursuant to the Development and Operating Agreement among the
Ontario Lottery and Gaming Corporation, Mnjikaning First Nation, CRC, CHC
Casinos and certain other parties. The Development and Operating Agreement sets
out the duties, rights and obligations of CHC Casinos, as the operator of Casino
Rama. As the operator, CHC Casinos is entitled to a base fee equal to two
percent of gross revenues of the casino and an incentive fee equal to five
percent on the casino's net operating margin. The agreement terminates on
July 31, 2011, unless otherwise terminated earlier in accordance with the
termination provisions of the Development and Operating Agreement. The Ontario
Lottery and Gaming Corporation has the option to extend the term of the
Development and Operating Agreement and CHC Casinos' appointment as operator for
two successive periods of five years commencing on August 1, 2011.
Under the Development and Operating Agreement, our acquisition of CRC is an
event that requires the consent of the Ontario Lottery and Gaming Corporation
and Mnjikaning First Nation. If we consummated the CRC acquisition without the
Ontario Lottery and Gaming Corporation consent, the Ontario Lottery and Gaming
Corporation could terminate the Operating Agreement or replace CHC Casinos as
operator of Casino Rama with 90 days notice. If Mnjikaning First Nation does not
provide its consent and the acquisition materially and adversely affects it,
then Mnjikaning First Nation can terminate the agreement with the approval of
the Ontario Lottery and Gaming Corporation.
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Under a Casino Rama Expansion Project and Development Agreement dated
June 12, 2000 among the Ontario Lottery and Gaming Corporation, Mnjikaning First
Nation, CRC, CHC Casinos and certain other parties, the parties have agreed that
certain components of Casino Rama will be renovated and expanded, including the
construction of a 5,000 seat entertainment center expected to open in May 2001
and a 300-room hotel expected to open in spring 2002 located near the casino.
The majority of the capital necessary for this expansion will be financed by an
affiliate of Mnjikaning First Nation to be repaid out of the revenue of Casino
Rama pursuant to the terms of the Development and Operating Agreement.
RACING AND PARI-MUTUEL OPERATIONS
Our racing and pari-mutuel revenues are derived from:
- wagering on our live races at our racetracks, at our OTWs, at other
Pennsylvania racetracks and their OTWs and through telephone account
wagering, as well as wagering at our racetracks on certain stakes races
run at out-of-state racetracks;
- wagering on full-card import simulcasts at our racetracks and OTWs and
through telephone account wagering; and
- fees from wagering on export simulcasting our races at out-of-state
locations.
We also derive revenues from admissions, program sales, food and beverage
sales and concessions and certain other ancillary activities.
Pari-mutuel wagering on thoroughbred or harness racing is pooled wagering in
which a pari-mutuel wagering system totals the amounts wagered and adjusts the
payouts to reflect the relative amounts bet on different horses and various
possible outcomes. The pooled wagers are paid out to bettors as winnings in
accordance with the payoffs determined by the pari-mutuel wagering system, paid
to the applicable regulatory or taxing authorities and distributed to the
track's horsemen in the form of "purses" which encourage owners and trainers to
enter their horses in that track's live races. The balance of the pooled wagers
is retained by the wagering facility. Pari-mutuel wagering is currently
authorized in more than 40 states in the United States, all provinces in Canada
and approximately 100 other countries around the world.
We are seeking to increase wagering by broadening our customer base and
increasing the wagering activity of our existing customers. To attract new
customers, we seek to increase the racing knowledge of our customers through our
television programming, and by providing "user friendly" automated wagering
systems and comfortable surroundings. We also seek to attract new customers by
offering various types of promotions including family fun days, premium
give-away programs, contests and handicapping seminars.
LIVE RACING
THE PENN NATIONAL RACE COURSE. The Penn National Race Course is located on
approximately 225 acres approximately 15 miles northeast of Harrisburg, 100
miles west of Philadelphia and 200 miles east of Pittsburgh. There is a total
population of approximately 1.4 million persons within a radius of approximately
35 miles around the Penn National Race Course and approximately 2.2 million
persons within a 50-mile radius. The property includes a one-mile all-weather
thoroughbred racetrack and a 7/8-mile turf track. The property also includes
approximately 400 acres surrounding the Penn National Race Course that are
available for future expansion or development.
POCONO DOWNS. Pocono Downs is located on approximately 400 acres in Plains
Township, outside Wilkes-Barre, Pennsylvania. There is a total population of
approximately 785,000 persons within a
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radius of approximately 35 miles around Pocono Downs and approximately
1.5 million persons within a 50-mile radius. The property includes a 5/8-mile
all-weather, lighted harness track.
THE CHARLES TOWN RACES. The Charles Town Races at the Charles Town
Entertainment Complex is located on a portion of a 250-acre parcel in Charles
Town, West Virginia. The property includes a 3/4-mile thoroughbred racetrack.
The property surrounding the Charles Town Entertainment Complex, including the
site of the former Shenandoah Downs Racetrack, is available for future expansion
or development. In addition, we have a right of first refusal for an additional
250 acres that are adjacent to the Charles Town Entertainment Complex.
OTWS
Our OTWs provide areas for viewing import simulcasts and televised sporting
events, placing pari-mutuel wagers and dining. The facilities also provide
convenient parking. We presently operate 11 of the 20 OTWs now open in
Pennsylvania. There are two remaining OTWs that have been authorized in
Pennsylvania for our competitors. Some states, such as New York, operate
off-track betting locations that are independent of racetracks. Under the
Pennsylvania Racehorse Industry Reform Act, only licensed racing associations,
such as Penn National, can operate OTWs or accept customer wagers on simulcast
races at Pennsylvania racetracks. The following is a list of our OTW locations:
FACILITY/LOCATION DATE OPENED
- ----------------- -----------
PENN NATIONAL FACILITIES:
Reading, PA May 1992
Chambersburg, PA April 1994
York, PA March 1995
Lancaster, PA July 1996
Williamsport, PA February 1997
Johnstown, PA September 1998
POCONO DOWNS FACILITIES:
Erie, PA May 1991
Allentown, PA July 1993
Carbondale, PA March 1998
Hazleton, PA March 1998
East Stroudsburg, PA July 2000
We have been transmitting simulcasts of our races to other wagering
locations and receiving simulcasts of races from other locations for wagering by
our customers at our facilities year-round for more than seven years. During the
year ended December 31, 1999, we received import simulcasts from approximately
89 racetracks, including premier racetracks such as Belmont Park, Church Hill
Downs, Gulfstream Park, Hollywood Park, Santa Anita and Saratoga and transmitted
export simulcasts of our races to approximately 108 locations.
TELEPHONE ACCOUNT WAGERING/INTERNET WAGERING
In 1983, we pioneered Telebet-Registered Trademark-, Pennsylvania's first
telephone account wagering system. A Telebet customer opens an account by
depositing funds with us. Account holders can then place wagers by telephone on
Penn National races and import simulcast races to the extent of the funds on
deposit in the account; any winnings are posted to the account and are available
for withdrawal or future wagers. In December 1995, Pocono Downs instituted
Dial-A-Bet-Registered Trademark-, a similar telephone account betting system.
eBetUSA.com, Inc., our wholly owned subsidiary, is a closed-loop,
subscriber-based system that operates a pari-mutuel wagering platform accross
the Internet. eBetUSA.com operates in selected jurisdictions with the approval
of the Pennsylvania State Horse Racing Commission and the
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Pennsylvania State Harness Racing Commission. The website technology is provided
under a license agreement with eBet Limited of Australia.
NEW JERSEY JOINT VENTURE -- PENNWOOD RACING, INC.
On October 30, 1998, we formed a 50%-50% joint venture with Greenwood New
Jersey, Inc., a subsidiary of Greenwood Racing, Inc. (the owner of Philadelphia
Park Race Track) to acquire certain assets of Garden State Park and Freehold
Raceway from International Thoroughbred Breeders, Inc. In January 1999,
Greenwood New Jersey consummated the acquisition on behalf of the joint venture.
On July 29, 1999, after receiving New Jersey Racing Commission approval, we
completed our investment in the New Jersey joint venture through our interest in
Pennwood Racing, Inc. The purchase price for the acquisition was $46 million,
however, if the joint venture receives various approvals for off-track wagering
or phone betting in New Jersey, it will be required to pay additional purchase
price of up to $10 million.
Through our interest in Pennwood Racing, Inc., we own Freehold Raceway in
Freehold, New Jersey and hold a leasehold interest in Garden State Park in
Cherry Hill, New Jersey. Freehold Raceway is located on a 51-acre site in
western Monmouth County, New Jersey and is the nation's oldest harness track.
Daytime racing has been conducted at Freehold Raceway since 1853; pari-mutuel
wagering commenced in 1941. The grandstand at Freehold Raceway is an
approximately 150,000 square foot, five level, steel frame, enclosed, fully
heated and air conditioned facility constructed in 1986 that can accommodate up
to 10,000 spectators. The grandstand also has a sit-down restaurant and seven
concession stands. Freehold Raceway is located less than 50 miles from New York
City and less than 30 miles from Princeton and Trenton, New Jersey.
Garden State Park is located on approximately 220 acres of land in Cherry
Hill, New Jersey. Cherry Hill forms part of the Philadelphia metropolitan area
and is approximately eight miles from downtown Philadelphia. The grandstand at
Garden State Park is an approximately 50,000 square foot facility that can
accommodate up to 24,000 spectators. On November 30, 2000, the owner of Garden
State Park, International Thoroughbred Breeders, Inc., announced that it had
completed the sale of the Garden State Park property, excluding a 10-acre parcel
owned by our joint venture, to Turnberry/ Cherry Hill, LLC. As a result of the
sale and a decision by the new owner to develop the property for non-racing
uses, our joint venture's lease at Garden State Park will be terminated on
May 31, 2001. We do not believe that the termination of the Garden State Park
lease and the cessation of racing at that facility will have a material adverse
effect on our business, financial conditions or results of operations.
We have agreed to guarantee up to 50% of the obligations of the New Jersey
joint venture, including but not limited to: rent, real estate taxes, insurance
and utilities under a seven year lease at Garden State Park expiring
January 2006, subject to the termination of the lease discussed above; the
$10 million contingent purchase price due to International Thoroughbred Breeders
if the joint venture receives various approvals for off-track wagering or phone
betting in New Jersey; and the obligations of the joint venture under its
original $23 million credit facility with Commerce Bank, N.A.
AGREEMENTS WITH HORSEMEN AND PARI-MUTUEL CLERKS
We have agreements with the horsemen at each of our racetracks. The
continuation of these agreements is required to allow us to conduct live racing
and export and import simulcasting. In addition, our simulcasting agreements are
subject to the horsemen's approval.
In February 1999, the Pennsylvania Thoroughbred Horsemen stopped racing at
Penn National Race Course and withdrew their permission for us to import
simulcast races from other racetracks, resulting in the closure of Penn National
Race Course and six of our OTW facilities. As a result of the closure, our
operations at Penn National Race Course were suspended for more than five weeks,
we lost 46 race days at Penn National Race Course, and it took nearly six months
from the beginning of
48
the action before we returned to pre-action levels of operations. In
March 1999, we signed a new agreement with the Pennsylvania Thoroughbred
Horsemen that has an initial term that expires on January 1, 2004.
In December 1999, we signed a new horsemen agreement with the Pennsylvania
Harness Horsemen that expires on January 16, 2003. We also have an agreement
with the Charles Town Horsemen that expires on December 31, 2002.
In addition to our horsemen agreements, in order to operate gaming machines
in West Virginia, we are required to enter into written agreements regarding the
proceeds of our gaming machines at the Charles Town Entertainment Complex with
the pari-mutuel clerks at Charles Town. Our agreement with the pari-mutuel
clerks at Charles Town expires on December 31, 2004.
In addition, our New Jersey joint venture, Pennwood Racing, must maintain
written agreements with the horsemen at Freehold Raceway and Garden State Park
in order to simulcast races to the Atlantic City casinos. Horsemen agreements
are currently in effect at both facilities.
OPTION TO MANAGE THE CHARLESTOWN ENTERTAINMENT COMPLEX
We acquired the Charles Town Entertainment Complex by exercising an option
previously held by a subsidiary of Showboat, Inc., now a wholly owned subsidiary
of Harrah's Entertainment, Inc. In assigning the option, Showboat retained the
right to operate a casino at the Charles Town Entertainment Complex in return
for a management fee, to be negotiated at the time of exercise, based on
reasonable rates payable for similar properties. The express terms of the
Showboat option do not specify what activities at the Charles Town Entertainment
Complex would constitute operation of a casino. We do not believe that our
installation and operation of gaming devices linked to the West Virginia lottery
at the Charles Town Entertainment Complex constitutes the operation of a casino
under the Showboat option or under West Virginia law or triggers Showboat's
right to exercise the Showboat option. The rights under the Showboat option
extend until November 2001.
EMPLOYEES AND LABOR RELATIONS
As of December 31, 2000, we had 4,310 permanent employees, of whom 3,261
were full-time and 1,049 were part-time. On a combined basis for the CRC
acquisition, we would have had at December 31, 2000, 8,481 employees. Our
employees in the admissions department and pari-mutuel department at Penn
National Race Course, Pocono Downs and our OTWs are represented under collective
bargaining agreements between us and the Sports Arena Employees' Union Local
137. The agreements extend until September 30, 2002 for track employees and
September 30, 2001 for OTW employees. The pari-mutuel clerks at Pocono Downs
voted to unionize in June 1997. We have held negotiations with this union, but
do not have a contract to date. The failure to reach an agreement with this
union would not result in the suspension or termination of our license to
operate live racing at Pocono Downs or to conduct simulcast or OTW operations.
In order to operate gaming machines in West Virginia, we are required to
enter into written agreements regarding the proceeds of the gaming machines with
a representative of a majority of the horse owners and trainers, a
representative of a majority of the pari-mutuel clerks and a representative of a
majority of our horse breeders. We have an agreement with the Charles Town
Horsemen that expires on December 31, 2002. The pari-mutuel clerks at Charles
Town are represented under a collective bargaining agreement with the West
Virginia Division of Mutuel Clerks, which expires on December 31, 2004.
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COMPETITION
GAMING OPERATIONS
The gaming industry is highly fragmented and characterized by a high degree
of competition among a large number of participants, many of which have
financial and other resources that are greater than our resources. Competitive
gaming activities include casinos, video lottery terminals and other forms of
legalized gaming in the United States and other jurisdictions.
Legalized gambling is currently permitted in various forms throughout the
United States and in several Canadian provinces. Other jurisdictions may
legalize gaming in the near future through the introduction of proposals to
legalize gaming in their state legislatures. In addition, established gaming
jurisdictions could award additional gaming licenses or permit the expansion of
existing gaming operations. New or expanded operations by other persons can be
expected to increase competition for our gaming operations and could have a
material adverse impact on us.
CHARLES TOWN, WEST VIRGINIA. Our gaming machine operations at the Charles
Town Entertainment Complex face competition from other gaming machine venues in
West Virginia and in neighboring states (including Dover Downs, Delaware Park
and Harrington Raceway in Delaware and the casinos in Atlantic City, New
Jersey). These venues also offer significantly higher stakes for their gaming
machines than in West Virginia. Atlantic City, New Jersey does not have a
per-pull limit on its gaming machines, while Delaware has a $25 per-pull limit.
Per-pull limits in West Virginia are only $2 per gaming machine. In addition to
existing competition, both Pennsylvania and Maryland have in the past considered
legislation to expand gaming in their respective states. The failure to attract
or retain gaming machine customers at the Charles Town Entertainment Complex,
whether arising from such competition or from other factors, could have a
material adverse effect on our business, financial condition and results of
operations.
MISSISSIPPI GULF COAST. Dockside gaming has grown rapidly on the
Mississippi Gulf Coast, increasing from no dockside casinos in March 1992 to 12
operating casinos as of December 31, 2000. Nine of these facilities are located
in Biloxi, two are located in Gulfport and one is located in Bay St. Louis. Our
Mississippi casino operations have numerous competitors, many of which have
greater name recognition, and financial and marketing resources than we have.
Competition in the Mississippi gaming market is significantly more intense than
the competition our gaming operations face in West Virginia or our pari-mutuel
operations face in Pennsylvania and New Jersey. We cannot be sure that we will
succeed in the competitive Mississippi Gulf Coast gaming market. The failure to
do so would have a material adverse effect on our business, financial condition
and results of operations.
Mississippi law does not limit the number of gaming licenses that may be
granted. A number of operators have completed or announced new construction or
expansions of existing casinos that will directly compete with us. The
development of the Biloxi and Gulf Coast gaming markets has resulted in market
dilution and any additional casinos could dilute gaming win even further, each
of which could have a material adverse effect on our operations.
LOUISIANA. Our operation of the Casino Rouge riverboat will face
competition from land-based and riverboat casinos throughout Louisiana and on
the Mississippi Gulf Coast, casinos on Native American lands and from non-casino
gaming opportunities within Louisiana. The Louisiana Riverboat Economic
Development and Gaming Control Act limits the number of gaming casinos in
Louisiana to fifteen riverboat casinos statewide and one land-based casino in
New Orleans. Fourteen of the fifteen available riverboat licenses are currently
issued and the fifteenth license is currently under consideration.
The principal competitor to the Casino Rouge is the Belle of Baton Rouge,
owned by Argosy Gaming, which is the only other licensed riverboat casino in
Baton Rouge. In February 2001, Argosy
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opened a new 300-room Sheraton hotel at the casino. We also will face
competition from three major riverboat casinos and one land-based casino in the
New Orleans area, which is 75 miles from Baton Rouge, and from three Native
American casinos in Louisiana. The two closest Native American casinos are
land-based facilities located approximately 45 miles southwest and approximately
65 miles northwest of Baton Rouge. We also will face competition from several
truck stop gaming facilities located in certain surrounding parishes that are
authorized to operate up to 50 video poker machines each.
ONTARIO. Our operation of Casino Rama through CHC Casinos Canada Limited
will face competition in Ontario from a number of casinos and racetracks with
gaming machine facilities. Currently, there are two other commercial casinos,
five charity casinos and eleven racetracks with gaming machines in the Province
of Ontario. In 2001, four additional racetracks in Ontario are planning to open
gaming machine facilities. All of the casinos and gaming machine facilities are
operated on behalf of Ontario Lottery and Gaming Corporation, an agency of the
Province of Ontario. The Ontario Lottery and Gaming Corporation also operates
several province-wide lotteries.
Casino Rama is located near Orillia, Ontario approximately 90 miles north of
Toronto. Currently, there are five racetracks with gaming machine facilities and
one charity casino within a 150-mile radius of Casino Rama. The charity casino
has 40 gaming tables and 450 gaming machines. The number of gaming machines at
the racetracks range from 100 to 1,700 each. Woodbine Racetrack, located
approximately 95 miles from Casino Rama, near Toronto has 1,700 gaming machines.
There is an interim commercial casino located in Niagara Falls, Ontario, 80
miles southwest of Toronto with approximately 135 gaming tables and 2,000 gaming
machines. It is contemplated that Niagara Falls will have a permanent casino
with a similar number of gaming tables and gaming machines as the interim casino
that is scheduled to be completed by the spring of 2002. In addition, it has
been proposed in connection with the City of Toronto's waterfront revitalization
project that a casino be located in downtown Toronto. However, there are no
definitive plans for the development of such a casino.
RACING AND PARI-MUTUEL OPERATIONS
Our racing and pari-mutuel operations face significant competition for
wagering dollars from other racetracks and OTWs (some of which also offer other
forms of gaming), other gaming venues such as casinos and state-sponsored
lotteries, including the Pennsylvania, New Jersey, Delaware and West Virginia
lotteries. We may also face competition in the future from new OTWs or from new
racetracks. From time to time, states consider legislation to permit other forms
of gaming. If additional gaming opportunities become available in or near our
racing and pari-mutuel operations, such gaming opportunities could have a
material adverse effect on our business, financial condition and results of
operations.
Our OTWs compete with the OTWs of other Pennsylvania racetracks, and new
OTWs may compete with our existing wagering facilities. Our competitors have a
number of OTW facilities that are relatively close in distance to our OTWs.
Although only two competing OTWs remain authorized by law for future opening,
the opening of a new OTW in close proximity to our existing or future OTWs could
have a material adverse effect on our business, financial condition and results
of operations.
PROPERTIES
The following describes our principal real estate properties, both now and
after giving effect to the CRC acquisition:
CHARLES TOWN ENTERTAINMENT COMPLEX. We own a 250-acre parcel in Charles
Town, West Virginia, a portion of which contains the Charles Town Entertainment
Complex. The property also includes a
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3/4-mile thoroughbred racetrack and an enclosed grandstand/clubhouse. We have a
right of first refusal for an additional 250 acres that are adjacent to the
facility.
CASINO MAGIC BAY ST. LOUIS. We own approximately 591 acres in the city of
Bay St. Louis, Mississippi, including the 17-acre marina where the gaming barge
is moored. The property includes an 18-hole golf course, a hotel, and other
land-based facilities, all of which we own.
BOOMTOWN BILOXI. We lease substantially all of the 19 acres on which
Boomtown Biloxi is located under a 99-year lease that began in 1994. The lease
stipulates base rent based on gaming revenue with a minimum of $500,000 and a
maximum of $2 million annually, plus 5 percent of gaming revenues in excess of
$25 million but less than $50 million. If gaming revenue exceeds $50 million
dollars, the percentage rent increases to 11% of all gaming revenue over
$50 million. For the year ended December 31, 2000, rental payments totaled $3.8
million. In addition, we lease property for parking under several lease
agreements ranging from 10 to 25 years. We also lease approximately 5.1 acres of
submerged tidelands at the casino site from the State of Mississippi under a
ten-year lease with a five-year option to renew. We own the barge on which the
casino is located and all of the land-based facilities.
CASINO ROUGE. LCCI owns five acres of a 23-acre site on the east bank of
the Mississippi River in the East Baton Rouge Downtown Development District less
than one-quarter mile from the state capital complex. The remaining 18 acres of
the site are currently leased. The property site serves as the dockside
embarkation for the Casino Rouge and features a two-story, 58,000 square foot
building. The Casino Rouge also features a four-story 47,000 square foot
riverboat casino.
CASINO RAMA. Under the Development and Operating Agreement among the
Ontario Lottery and Gaming Corporation, Mnjikaning First Nation, CRC, CHC
Casinos and certain other parties, CHC Casinos operates Casino Rama on behalf of
the Ontario Lottery and Gaming Corporation. CRC and its wholly owned subsidiary,
CHC Casinos, the operator of Casino Rama, do not own any of the land located at
or near the casino. In addition, Casino Rama's facilities and equipment are
owned by the Ontario Lottery and Gaming Corporation. The Ontario Lottery and
Gaming Corporation has a long-term ground lease with an affiliate of Mnjikaning
First Nation, for the land on which Casino Rama is situated. Under the
Development and Operating Agreement, CHC Casinos has been granted a license
coupled with an interest in land pursuant to which it, as the operator, has been
granted full access to Casino Rama during the term of the Development and
Operating Agreement to perform its services under the Agreement.
PENN NATIONAL RACE COURSE. We own approximately 225 acres in Grantville,
Pennsylvania where the Penn National Race Course is located. The property
includes a one mile all-weather thoroughbred racetrack and a 7/8-mile turf
track. The property also includes approximately 400 acres surrounding the Penn
National Race course that are available for future expansion or development.
POCONO DOWNS. We own approximately 400 acres in Plains Township, outside of
Wilkes-Barre, Pennsylvania where Pocono Downs is located. The property includes
a 5/8-mile all weather, lighted harness track, a grandstand and a clubhouse. A
two-story 14,000 square foot building that houses the Pocono Downs office is
also located on the property.
FREEHOLD RACEWAY. Through our joint venture, we own a 51-acre site in
Western Monmouth County, New Jersey where Freehold Raceway in located. The
property features a half-mile oval harness track and a 150,000 square foot
grandstand.
GARDEN STATE PARK. Through our joint venture, we lease approximately 220
acres of land in Cherry Hill, New Jersey. The property includes a one-mile
racetrack and a 50,000 square foot grandstand. On November 29, 2000, the owner
of Garden State Park, International Thoroughbred Breeders, Inc., announced that
it had completed the sale of the Garden State Park property, excluding a 10-acre
parcel
52
owned by our joint venture, to Turnberry/Cherry Hill, LLC. As a result of the
sale, our lease at Garden State Park will be terminated on May 31, 2001. We do
not believe that the termination of the Garden State Park lease and the
cessation of racing at that facility will have a material adverse effect on our
business, financial conditions or results of operations.
OTWS. We own four of our existing OTW facilities and lease the remaining
seven facilities.
OTHER. We lease 6,674 square feet of office space in an office building in
Wyomissing, Pennsylvania for our executive offices. The office building is owned
by an affiliate of Peter M. Carlino, our Chairman and Chief Executive Officer.
We also lease an aircraft from a company owned by one of our directors. We
believe that the lease terms for both the executive office and aircraft are not
less favorable than such lease terms that could have been obtained from
unaffiliated third parties.
LEGAL PROCEEDINGS
We are from time to time involved in litigation that we believe is ordinary
and customary in our industry. We do not believe that any of our pending or
threatened litigation will result in an outcome that will materially affect our
business, financial condition or results of operations.
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REGULATION
GENERAL
We are subject to federal, state, local and, in Canada, provincial
regulations related to our current and proposed live racing, pari-mutuel, gaming
machine and casino operations. The following description of the regulatory
environment in which we operate is only a summary and not a complete recitation
of all applicable regulatory laws. Moreover, our current and proposed operations
could be subjected at any time to additional or more restrictive regulations, or
banned entirely.
WEST VIRGINIA RACING AND GAMING REGULATION
Our operations at the Charles Town Entertainment Complex are subject to
regulation by the West Virginia Racing Commission under the West Virginia Horse
and Dog Racing Act, and by the West Virginia Lottery Commission under the West
Virginia Racetrack Video Lottery Act. The powers and responsibilities of the
West Virginia Racing Commission under the West Virginia Horse and Dog Racing Act
extend to the approval and/or oversight of all aspects of racing and pari-mutuel
wagering operations. We have obtained from the West Virginia Racing Commission a
license to conduct racing and pari-mutuel wagering at the Charles Town
Entertainment Complex. Pursuant to the West Virginia Racetrack Video Lottery
Act, we have obtained approval for and currently are operating approximately
2,000 gaming machines and video lottery terminals at the Charles Town
Entertainment Complex. In addition to licensing, in West Virginia, the legality
of gaming machine operation in a particular county is determined by local option
election in the county where the racetrack is located. The West Virginia
Racetrack Video Lottery Act further provides that 5% of the qualified voters in
the county where gaming machines have been permitted by local option election
can petition for another election that may be held no sooner than five years
after the first election.
The West Virginia Racetrack Video Lottery Act provides that the transfer of
more than 5% of the voting stock of a corporation that holds a gaming machine
license, or that controls another entity that holds such a license, or the
transfer of the assets of a license holder may only be to persons who have met
the licensing requirements of the West Virginia Racetrack Video Lottery Act or
which transfer has been pre-approved by the West Virginia Lottery Commission.
Any transfer that does not comply with this requirement voids the license.
MISSISSIPPI REGULATORY COMPLIANCE
Our operation of the Casino Magic Bay St. Louis casino and Boomtown Biloxi
casino is subject to Mississippi regulatory compliance, a summary of which is
provided below.
The ownership and operation of casino gaming facilities in Mississippi are
subject to extensive state and local regulation primarily through the licensing
and regulatory control of the Mississippi Gaming Commission and the Mississippi
State Tax Commission. We must register and be licensed under the Mississippi
Gaming Control Act, or the Mississippi Act, and our gaming operations are
subject to the regulatory control of the Mississippi Gaming Commission and
various local, city and county regulatory agencies. The Mississippi Act, which
legalized dockside casino gaming in Mississippi, was enacted on June 29, 1990
and, effective October 29, 1991, the Mississippi Gaming Commission adopted
regulations in furtherance of the Mississippi Act.
The laws, regulations and supervisory procedures of Mississippi and the
Mississippi Gaming Commission seek to: (1) prevent unsavory or unsuitable
persons from having direct or indirect involvement with gaming at any time or in
any capacity; (2) establish and maintain responsible accounting practices and
procedures; (3) maintain effective control over the financial practices of
licensees, including establishing minimum procedures for internal fiscal affairs
and safeguarding assets
54
and revenues, providing reliable record keeping and making periodic reports to
the Mississippi Gaming Commission; (4) prevent cheating and fraudulent
practices; (5) provide a source of state and local revenues through taxation and
licensing fees; and (6) ensure that gaming licensees, to the extent practicable,
employ Mississippi residents. The regulations are subject to amendment and
interpretation by the Mississippi Gaming Commission.
The Mississippi Act provides for legalized dockside gaming at the discretion
of the 14 counties that either border the Gulf Coast or the Mississippi River
but only if the voters in such counties have not voted to prohibit gaming in
that county. Dockside gaming is permissible in nine of the 14 eligible counties
in the state and gaming operations have commenced in Adams, Coahoma, Hancock,
Harrison, Tunica, Warren and Washington counties. The law permits unlimited
stakes gaming on permanently moored vessels on a 24-hour basis and does not
restrict the percentage of space that may be utilized for gaming. There are no
limitations on the number of gaming licenses which may be issued in Mississippi.
The legal age for gaming in Mississippi is 21.
We are required to submit detailed financial, operating and other reports to
the Mississippi Gaming Commission and Mississippi State Tax Commission. We must
report or seek approval for substantially all loans, leases, sales of securities
and similar financing transactions.
We have been investigated and on August 8, 2000, the Mississippi Gaming
Commission issued us a gaming operator's license for Boomtown Biloxi and for
Casino Magic Bay St. Louis. In addition, the Mississippi Gaming Commission has
found certain of our key principals suitable.
Each of our directors, officers and key employees who are actively and
directly engaged in the administration or supervision of gaming, or who have any
other significant involvement with our activities must be found suitable
therefor, and may be required to be licensed by the Mississippi Gaming
Commission. The finding of suitability is comparable to licensing, and both
require submission of detailed personal financial information followed by a
thorough investigation. In addition, any individual who is found to have a
material relationship to, or material involvement with, us may be investigated
in order to be found suitable or to be licensed as a business associate of ours.
Key employees, controlling persons or others who exercise significant influence
upon our management or affairs may also be deemed to have such a relationship or
involvement. There can be no assurance that such persons will be found suitable
by, and maintain such a suitability finding from, the Mississippi Gaming
Commission. An application for licensing may be denied for any cause deemed
reasonable by the Mississippi Gaming Commission. Changes in licensed positions
must be reported to the Mississippi Gaming Commission. In addition to its
authority to deny an application for a license, the Mississippi Gaming
Commission has jurisdiction to disapprove a change in a corporate position. If
the Mississippi Gaming Commission were to find a director, officer or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with us, we would have to suspend, dismiss and sever all
relationships with such person. We would have similar obligations with regard to
any person who refuses to file appropriate applications. Each gaming employee
must obtain a work permit that may be revoked upon the occurrence of certain
specified events.
Mississippi statutes and regulations give the Mississippi Gaming Commission
the discretion to require a suitability finding with respect to anyone who
acquires any of our securities, regardless of the percentage of ownership. The
current policy of the Mississippi Gaming Commission is to require anyone
acquiring 5% or more of any voting securities of a public company with a
licensed subsidiary or private company licensee to be found suitable. However,
the Mississippi Gaming Commission generally permits certain "institutional"
investors to beneficially own up to 15% of the voting securities of a registered
public company without a finding of suitability. If the owner of voting
securities who is required to be found suitable is a corporation, partnership or
trust, it must submit detailed business and financial information including a
list of beneficial owners. The applicant is required to pay all costs of
investigation.
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Any owner of voting securities found unsuitable and who holds, directly or
indirectly, any beneficial ownership of our equity interests beyond such period
of time as may be prescribed by the Mississippi Gaming Commission may be guilty
of a misdemeanor. Any person who fails or refuses to apply for a finding of
suitability or a license within 30 days of being ordered to do so by the
Mississippi Gaming Commission may be found unsuitable. We are subject to
disciplinary action if we, after receiving notice that a person is unsuitable to
be an owner of or to have any other relationship with us, (1) pay the unsuitable
person any dividends or interest upon any of our securities or any payments or
distribution of any kind whatsoever, (2) recognize the exercise, directly or
indirectly, of any voting rights of our securities by the unsuitable person, or
(3) pay the unsuitable person any remuneration in any form for services rendered
or otherwise, except in certain limited and specific circumstances. In addition,
if the Mississippi Gaming Commission finds any owner of voting securities
unsuitable, such owner must immediately surrender all securities to us, and we
must purchase the securities so offered for cash at fair market value within
10 days.
We will be required to maintain current ownership ledgers in the State of
Mississippi that may be examined by the Mississippi Gaming Commission at any
time. If any securities are held in trust by an agent or by a nominee, the
record holder may be required to disclose the identity of the beneficial owner
to the Mississippi Gaming Commission. A failure to make such disclosure may be
grounds for finding the record holder unsuitable. We are also required to render
maximum assistance in determining the identity of the beneficial owner. We may
be required to disclose to the Mississippi Gaming Commission, upon request, the
identities of the holders of certain of our indebtedness. In addition, the
Mississippi Gaming Commission under the Mississippi Act may, in its discretion,
(1) require holders of debt securities, including these notes, to file
applications, (2) investigate such holders, and (3) require such holders to be
found suitable to own such debt securities. Although the Mississippi Gaming
Commission generally does not require the individual holders of obligations such
as notes to be investigated and found suitable, the Mississippi Gaming
Commission retains the discretion to do so for any reason, including but not
limited to a default, or where the holder of the debt instrument exercises a
material influence over the gaming operations of the entity in question. Any
holder of the debt securities required to apply for a finding of suitability
must pay all investigative fees and costs of the Mississippi Gaming Commission
in connection with such an investigation.
The regulations provide that we may not engage in any transaction that would
result in a change of our control without the prior approval of the Mississippi
Gaming Commission. Mississippi law prohibits us from making a public offering or
private placement of our securities without the approval of or waiver of
approval by the Mississippi Gaming Commission if any part of the proceeds of the
offering is to be used to finance the construction, acquisition or operation of
gaming facilities in Mississippi, or to retire or extend obligations incurred
for one or more of such purposes. The Mississippi Gaming Commission has the
authority to grant a continuous approval of securities offerings and has granted
us such approval, subject to an annual renewal.
Regulations of the Mississippi Gaming Commission prohibit certain
repurchases of securities of publicly traded corporations registered with the
Mississippi Gaming Commission without prior approval of the Mississippi Gaming
Commission. Transactions covered by these regulations are generally aimed at
discouraging repurchases of securities at a premium over market price from
certain holders of greater than 3% of the outstanding securities of the
registered publicly traded corporation. The regulations of the Mississippi
Gaming Commission also require prior approval for a "plan of recapitalization"
as defined in such regulations.
The Mississippi Act requires that certificates representing our securities
bear a legend to the general effect that the securities are subject to the
Mississippi Act and regulations of the Mississippi Gaming Commission. The
Mississippi Gaming Commission through the power to regulate licensees, has the
power to impose additional restrictions on the holders of our securities at any
time.
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We may not engage in gaming activities in Mississippi while also conducting
gaming operations outside of Mississippi without approval of the Mississippi
Gaming Commission. Such approvals were initially granted to us by the
Mississippi Gaming Commission as part of the original licensure process, and
additional approvals must be obtained on a jurisdiction-by-jurisdiction basis.
The failure to obtain or retain any such approval could have a material adverse
effect on us.
We may not transfer any of our licenses and we must renew each license every
three years. There can be no assurance that any of our renewal applications will
be approved. The Mississippi Gaming Commission may at any time dissolve,
suspend, condition, limit or restrict a license or approval to own equity
interests in us for any cause it deems reasonable. We may have substantial fines
levied against us in Mississippi for each violation of gaming laws or
regulations. A violation under any gaming license held by us may be deemed a
violation of the Mississippi licenses held by us. Suspension or revocation of
the Mississippi licenses or of the Mississippi Gaming Commission's approval of
us would have a material adverse effect upon our business.
In October 1994, the Mississippi Gaming Commission adopted a regulation
requiring, as a condition of licensure or license renewal, that a gaming
establishment's site development plan include an approved 500-car parking
facility in close proximity to the casino complex, and infrastructure facilities
that amount to at least 25% of the casino cost. Such facilities may include any
of the following: a 250-room hotel of at least a two star rating, as defined by
the current edition of the Mobil Travel Guide; a theme park; a golf course;
marinas; a tennis complex; entertainment facilities; or any other such facility
as approved by the Mississippi Gaming Commission as infrastructure. Parking
facilities, roads, sewage and water systems or facilities normally provided by
governmental entities are excluded. The Mississippi Gaming Commission may, in
its discretion, reduce the number of hotel rooms required where it is shown, to
the satisfaction of the Mississippi Gaming Commission, that sufficient rooms are
available to accommodate the anticipated visitor load. Such reduction in the
number of rooms does not affect the 25% investment requirement imposed by the
regulation. Casino Magic Bay St. Louis, Boomtown Biloxi and related facilities
have complied with these requirements. In January 1999, the Mississippi Gaming
Commission amended its infrastructure regulation thereby increasing the minimum
level of infrastructure investment from 25% to 100% of the casino cost. However,
the 100% infrastructure investment requirement would apply only to new casino
developments and existing casino developments that are not in operation at the
time of their acquisition or purchase, and therefore does not apply to Casino
Magic Bay St. Louis and Boomtown Biloxi. In any event, Casino Magic Bay St.
Louis and Boomtown Biloxi will attempt to comply with such requirements.
License fees and taxes are payable to the State of Mississippi and to the
counties and cities in which our Mississippi subsidiaries operate. One of the
license fees payable to the state of Mississippi is based upon gross revenue of
the licensee (generally defined as gaming receipts less payout to customers as
winnings) and equals 4% of gross revenue of $50,000 or less per month, 6% of
gross revenue over $50,000 and less than $134,000 per calendar month, and 8% of
gross revenue over $134,000 per calendar month. The foregoing license fees are
allowed as a credit against the licensee's Mississippi income tax liability for
the year paid. Additionally, a licensee must pay a $5,000 annual license fee and
an annual fee based upon the number of games it operates. Mississippi
communities and counties may impose fees on licensees equaling 0.4% of gross
revenue of $50,000 or less per calendar month, 0.6% of gross revenue over
$50,000 and less than $134,000 per calendar month and 0.8% of gross revenue over
$134,000 per calendar month. These fees have been imposed in, among other cities
and counties, Biloxi, Vicksburg, Tunica County and Coahoma County. Certain local
and private laws of the State of Mississippi may impose fees or taxes on our
Mississippi subisidiaries in addition to the fees described above.
The Mississippi Gaming Commission requires, as a condition of licensure or
license renewal, that casino vessels on the Mississippi Gulf Coast that are not
self-propelled must be moored to withstand a
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Category 4 hurricane with 155 mile-per-hour winds and 15-foot tidal surge. We
believe that all of our Mississippi gaming operations currently meet this
requirement. A 1996 Mississippi Gaming Commission regulation prescribes the
hurricane emergency procedure to be used by the Mississippi Gulf Coast casinos.
The sale of alcoholic beverages, including beer and wine, at Casino Magic
Bay St. Louis and Boomtown Biloxi is subject to licensing, control and
regulation by the Mississippi State Tax Commission. The Miscellaneous Tax
Division of the Mississippi State Tax Commission regulates the sale of beer and
light wine. The Alcoholic Beverage Control Division of the Mississippi State Tax
Commission, or the ABC, regulates the sale of alcoholic beverages containing
more than 5% alcohol by weight. The ABC requires that all equity owners and
managers file personal record forms and fingerprint cards for their licensing
process. In addition, owners of more than 5% of Casino Magic Bay St. Louis or
Boomtown Biloxi equity as well as officers and managers must submit detailed
financial information to the ABC for licensing. All such licenses are revocable
and are non-transferable. The Mississippi State Tax Commission has full power to
limit, condition, suspend or revoke any such license, and any such disciplinary
action could, and revocation would, have a material adverse effect on the
operations of Casino Magic Bay St. Louis and Boomtown Biloxi.
PENNSYLVANIA RACING REGULATIONS
Our horse racing operations at Penn National Race Course and Pocono Downs
are subject to extensive regulation under the Pennsylvania Racing Act, which
established the Pennsylvania State Horse Racing Commission and the Pennsylvania
State Harness Racing Commission (referred to herein as the Pennsylvania Racing
Commissions) which are responsible for, among other things:
- granting permission annually to maintain racing licenses and schedule
races;
- approving, after a public hearing, the opening of additional OTWs;
- approving simulcasting activities;
- licensing all officers, directors, racing officials and certain other
employees of a company; and
- approving all contracts entered into by a company affecting racing,
pari-mutuel wagering and OTW operations.
As in most states, the regulations and oversight applicable to our
operations in Pennsylvania are intended primarily to safeguard the legitimacy of
the sport and its freedom from inappropriate or criminal influences. The
Pennsylvania Racing Commissions have broad authority to regulate in the best
interests of racing and may, to that end, disapprove the involvement of certain
personnel in our operations, deny approval of certain acquisitions following
their consummation or withhold permission for a proposed OTW site for a variety
of reasons, including community opposition. The Pennsylvania legislature also
has reserved the right to revoke the power of the Pennsylvania Racing
Commissions to approve additional OTWs and could, at any time, terminate
pari-mutuel wagering as a form of legalized gaming in Pennsylvania or subject
such wagering to additional restrictive regulation; such termination would, and
any further restrictions could, have a material adverse effect upon our
business, financial condition and results of operations.
We may not be able to obtain all necessary approvals for the continued
operation or expansion of our business. Even if all such approvals are obtained,
the regulatory process could delay implementation of our plans to open
additional OTWs. We have had continued permission from the Pennsylvania State
Horse Racing Commission to conduct live racing at the Penn National Race Course
since we commenced operations in 1972, and have obtained permission from the
Pennsylvania State Harness Racing Commission to conduct live racing at Pocono
Downs. Currently, we have approval from the Pennsylvania Racing Commissions to
operate the eleven OTWs that are currently open. A Commission may refuse to
grant permission to open additional OTWs or to continue to operate existing
facilities. The failure to obtain or maintain required regulatory approvals
would have a material adverse effect upon our business, financial condition and
results of operations.
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The Pennsylvania Racing Act requires that any shareholder proposing to
transfer beneficial ownership of 5% or more of our shares file an affidavit with
us setting forth certain information about the proposed transfer and transferee,
a copy of which we are required to furnish to the Pennsylvania Racing
Commissions. The certificates representing our shares owned by 5% beneficial
shareholders are required to bear certain legends prescribed by the Pennsylvania
Racing Act. In addition, under the Pennsylvania Racing Act, the Pennsylvania
Racing Commissions have the authority to order a 5% beneficial shareholder of a
company to dispose of his common stock of such company if it determines that
continued ownership would be inconsistent with the public interest, convenience
or necessity or the best interest of racing generally.
NEW JERSEY REGULATION
Our joint venture's operations at Garden State Park and Freehold Raceway in
New Jersey are subject to regulation (i) by the New Jersey Racing Commission
under the Racing Act of 1940, as amended and supplemented and the rules and
regulations of the Racing Commission and (ii) by the New Jersey Casino Control
Commission under the Casino Control Act and Casino Simulcasting Act.
Under the Racing Act, all pari-mutuel employees and all others who are
connected with the training of horses or the conduct of races, must be licensed
by the Racing Commission. In addition, no person may hold or acquire, directly
or indirectly, beneficial ownership of 5% or more of the voting securities of
the joint venture without the prior approval of the Racing Commission.
At least 85% of the persons employed by the New Jersey joint venture at
Garden State Park and Freehold Raceway must be residents of New Jersey
(excluding jockeys, drivers or apprentices, exercise boys, owners, trainers,
clockers, governing and managing officials and heads of departments of the
track). The Racing Commission has the authority to require that the joint
venture discharge any employee who: (i) fails or refuses for any reason to
comply with the rules and regulations of the Racing Commission; (ii) in the
opinion of the Racing Commission is guilty of fraud, dishonesty or incompetency;
(iii) has been convicted of a crime involving moral turpitude; or (iv) fails or
refuses for any reason to comply with any of the provisions of the Racing Act.
Additional restrictions and/or requirements imposed by the Racing Commission
on the joint venture's racetrack operations include, but are not limited to, the
setting of the admission price required to be charged by the joint venture, a
requirement that the joint venture (and all other racetracks operating in New
Jersey) must schedule at least one race per day limited to registered New
Jersey-bred foals and the methods the joint venture may use to distribute
pari-mutuel pools and "breaks" (the odd cents remaining after computing the
amount due holders of winning pari-mutuel tickets). The Racing Commission also
regulates the manner of keeping of certain of the joint venture's books and
records.
The Racing Commission is also responsible for the allocation of racing dates
based upon the annual application of the permit holder. The joint venture is
entitled to race the same number of dates as in the preceding year, when it is
in the public interest to do so, or for such other dates, not exceeding
100 days in the aggregate for harness racing and 75 days in the aggregate for
thoroughbred racing, as the Racing Commission shall designate; provided, however
that if another permit holder rejects any of the dates to which they may be
entitled the Racing Commission may allot those dates among other permitholders.
The Racing Commission has discretion to allot harness race permitholders an
additional 200 days and thoroughbred race permitholders an additional 100 days.
The failure to comply with the Racing Act and the rules and regulations of
the Racing Commission could result in monetary fines, operations restrictions or
the loss of our license.
Because the joint venture simulcasts to Atlantic City casinos, the joint
venture's simulcasting agreements are required to be filed with and approved by
the Casino Control Commission and the
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New Jersey Racing Commission. In addition, the joint venture is required to be
approved and licensed by the Casino Control Commission as a non-gaming casino
service industry. Certain of the joint venture's employees and its directors and
significant stockholders are also required to be approved by the Casino Control
Commission. As of the date hereof, all of the joint venture's employees and
directors required to be approved have been approved by the Casino Control
Commission or have filed applications seeking such approval. There can be no
assurance that all parties seeking Casino Control Commission approval will
obtain such approval or the effect on the joint venture if such approvals are
not obtained.
LOUISIANA REGULATION
We will be subject to regulation by the State of Louisiana as a result of
our proposed ownership of LCCI, the operator of the Casino Rouge riverboat.
In July 1991, the Louisiana legislature adopted legislation permitting
certain types of gaming activity on certain rivers and waterways in Louisiana.
Since May 1, 1999, the Louisiana Gaming Control Board, or the Louisiana Board,
has regulated such gaming activities.
The Louisiana Riverboat Economic Development and Gaming Control Act
authorized the issuance of up to fifteen licenses to conduct gaming activities
on a riverboat of new construction in accordance with applicable law. However,
no more than six licenses may be granted to riverboats operating from any one
parish. Of the fifteen available licenses, thirteen are currently in operation,
one is being relocated and one has been returned to the state.
Riverboat gaming licenses in Louisiana are issued for an initial five-year
term with five year renewals thereafter. In issuing or renewing a license, the
Louisiana Board must find that the applicant is a person of good character,
honesty and integrity and that the applicant is a person whose prior activities,
criminal record, if any, reputation, habits and associations do not pose a
threat to the public interest of the State of Louisiana or to the effective
regulation and control of gaming, or create or enhance the dangers of
unsuitable, unfair or illegal practices, methods and activities in the conduct
of gaming or the carrying on of business and financial arrangements in
connection therewith. The Louisiana Board will grant or renew a license if it
finds that: (a) the applicant can demonstrate the capability, either through
training, education, business experience, or a combination of the above, to
operate a gaming casino; (b) the proposed financing of the riverboat and the
gaming operation is adequate for the nature of the proposed operation and from a
source suitable and acceptable to the Louisiana Board; (c) the applicant
demonstrates a proven ability to operate a vessel of comparable size, capacity
and complexity to a riverboat so as to ensure the safety of its passengers, with
each employee being appropriately United States Coast Guard certified; (d) the
applicant submits a detailed plan of design of the riverboat in its application
for a license; (e) the applicant designates the docking facilities to be used by
the riverboat; (f) the applicant shows adequate financial ability to construct
and maintain a riverboat; and (g) the applicant has a good faith plan to
recruit, train and upgrade minorities in all employment classifications.
LCCI's original five-year gaming license for the Casino Rouge expired in
July 1999. On June 15, 1999, LCCI received conditional license approval from the
Louisiana Board until the completion of the investigation and approval by the
Board with respect to the renewal. On or about July 25, 2000, the Gaming
Division of the Louisiana Attorney General's Office submitted a Report on
Conditional License Renewal of LCCI, in which the division outlined three
conditions which it and the Louisiana State Police recommended placing on the
license renewal of LCCI. The first condition involved LCCI minority shareholder
Jerry Bayles. The division recommended in the Report that in order to renew the
license of LCCI, that Mr. Bayles have no more direct day to day involvement in
the management or operations of Casino Rouge than he currently maintained. The
second condition related to CRC President Robert Sturges. The division suggested
in the report that LCCI's license also be conditioned upon the status quo
relating to Mr. Sturges' day to day management and operation of Casino Rouge.
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Finally, the report discussed the landlord of the property where Casino Rouge is
located. The landlord of the property, Capitol Lake Properties, Inc., or CLP,
currently receives 1.25% of gross revenues generated on the property from LCCI.
The division's third condition on the license renewal of LCCI is the requirement
that CLP submit itself to the suitability investigation of the division. The
report has not been formally acted upon by the Louisiana Gaming Control Board.
Attorneys for the Louisiana Gaming Control Board have indicated that the
Louisiana Gaming Control Board will decide the issue of renewal of LCCI and any
potential conditions along with the decision to allow the transfer of stock to
Penn National. On or about November 29, 2000, LCCI filed suit for Declaratory
Judgment in the 19th Judicial District Court of Louisiana against CLP seeking a
determination whether CLP, as a matter of law, must submit to the suitability
investigation of the division, and what, if any, obligation CLP has under the
lease agreement, to submit to suitability. It is expected that the litigation
will, when complete, decide whether the Louisiana Gaming Control Board will
condition LCCI's license on the suitability of CLP. It is not expected that the
conditions relating to the day to day involvement of Mr. Bayles or Mr. Sturges
will be challenged by LCCI or Penn National.
In addition, the Louisiana Gaming Control Board could consider other items
in its decision whether to renew the license of LCCI. Each of LCCI, CRC and its
officers, directors, managers, principal shareholders and their officers and
directors and key gaming employees will be subject to strict scrutiny and full
suitability and approval by the Louisiana Board. The factors that the Louisiana
Board has stated it will consider, among others, in order to renew LCCI's
license, include compliance with all the requirements of the Louisiana Act, the
approval of various systems and procedures, the demonstration of good character
(including an examination of criminal and civil records) and methods of business
practice. As a result of the Justice Department's recent convictions of former
Louisiana Governor Edwin Edwards and certain other persons, none of whom are
affiliated with LCCI, on charges relating to, among other things, gaming
licenses in Louisiana, the Louisiana regulators are applying greater scrutiny to
the suitability and business practices of the licensee. LCCI believes it will be
successful in receiving a renewal of its license from the Louisiana Board, but
no assurance can be given as to whether or when the license will be extended, or
the extent of any restrictions that may be imposed as a condition to the
issuance thereof. The Louisiana Board may also seek to impose, as a condition of
the license renewal, certain Louisiana, minority and female employment and
procurement goals. The loss, suspension or failure to obtain a renewal of such
license, or the renewal of the license subject to burdensome conditions, would
have a material adverse effect on the Company. Finally, it is likely that if
LCCI's license is ultimately renewed, the license will be dated from July 1999,
requiring an additional renewal as early as June 2004.
Other regulations imposed by the Louisiana Act or rules adopted pursuant
thereto include, but are not limited to, the following: (a) LCCI, which includes
CRC, must periodically submit financial and operating reports to the Louisiana
Board; (b) owners holding greater than a 5% interest in LCCI must be found
suitable by the Louisiana Board; (c) any individual who is found to have a
material relationship to, or involvement with, LCCI may be required to be
investigated for suitability; (d) if a director, officer, or key employee were
found to be unsuitable, LCCI would have to sever all relationships with that
person; (e) the transfer of a license or permit or an interest in a license or
permit is prohibited without prior approval; (f) LCCI must notify the Louisiana
Board of any withdrawals of capital, loans, advances, or distributions in excess
of 5% of retained earnings upon completion of such transaction; and (g) LCCI
must give prior notification to the Louisiana Board if it applies or receives,
accepts or modifies the terms of any loan or other financing transaction. In
some cases, the Louisiana Board will be required to investigate the reported
transaction and to either approve or disapprove the transaction.
The Louisiana Act or rules adopted pursuant thereto place certain
restrictions and conditions relating to the operation of riverboat gaming,
including the following: (a) gaming is not permitted while a riverboat is
docked, other than the forty-five minutes between excursions, and during times
when dangerous weather or water conditions exist, as certified by the
riverboat's master; (b) each round-trip
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riverboat cruise may not be less than three nor more than eight hours in
duration, subject to specified exceptions; (c) agents of the Louisiana Board are
permitted on board at any time during gaming operations; (d) gaming devices,
equipment and supplies may only be purchased or leased from permitted suppliers;
(e) gaming may only take place in the designated gaming area while the riverboat
is upon a designated river or waterway; (f) gaming equipment may not be
possessed, maintained or exhibited by any person on a riverboat except in the
specifically designated gaming area, or a secure area used for inspection,
repair or storage of such equipment; (g) wagers may be received only from a
person present on a licensed riverboat; (h) persons under 21 are not permitted
on gaming vessels; (i) except for slot machine play, wagers may be made only
with tokens, chips or electronic cards purchased from the licensee aboard a
riverboat; (j) licensees may only use docking facilities and routes for which
they are licensed and may only board and discharge passengers at the riverboat's
licensed berth; (k) licensees must have adequate protection and indemnity
insurance; (l) licensees must have all necessary federal and state licenses,
certificates and other regulatory approvals prior to operating a riverboat; and
(m) gaming may only be conducted in accordance with the terms of the license,
the Louisiana Act and the rules and regulations adopted by the Louisiana Board.
Fees for conducting gaming activities on a riverboat pursuant to the
Louisiana Act include (i) $50,000 per riverboat for the first year of operation
and $100,000 per year per riverboat thereafter plus (ii) 18.5% of net gaming
proceeds. The Louisiana Act also authorizes the local governing body to assess a
boarding fee up to $2.50 in East Baton Rouge Parish. The City of Baton Rouge has
imposed an admission fee of $2.50 for each patron boarding the vessel. For
fiscal year ended November 30, 1999, LCCI's boarding fee expense was $3,924,000.
For competitive reasons, LCCI and its Baton Rouge competitor have elected not to
collect boarding fees from patrons and instead pay those fees from their
respective earnings.
Proposals to amend or supplement the Louisiana Act are frequently introduced
in the Louisiana State legislature. In addition, the state legislature from time
to time considers proposals to repeal the Louisiana Act, which would effectively
prohibit riverboat gaming in the State of Louisiana. Although LCCI does not
believe that a prohibition of riverboat gaming in Louisiana is likely, no
assurance can be given that changes in the Louisiana gaming law will not occur
or that such changes will not have a material adverse affect on LCCI's business.
On November 5, 1996, in the six parishes in which riverboats are currently
located, including East Baton Rouge Parish, voters approved the continuation of
riverboat gaming. In East Baton Rouge Parish and the six parishes as a whole,
the vote in favor of riverboat gaming was 59% and 66% respectively.
Legislation may be proposed that could involve the expansion of cruising
requirements; the creation of "phantom" cruises; the establishment of a minimum
number of annual cruises a vessel must take; or the authorization of
unrestricted dockside gaming. An expansion of cruising requirements could have a
negative impact on our future gaming revenue.
ONTARIO REGULATION
The gaming operations in Ontario of CHC Casinos, a wholly owned subsidiary
of CRC, which operates Casino Rama, are subject to the regulatory control of the
Alcohol and Gaming Commission of Ontario pursuant to the Gaming Control Act and
the contractual provisions in the Development and Operating Agreement among CRC,
CHC Casinos, the Ontario Lottery and Gaming Corporation, Mnjikaning First Nation
and certain other parties.
CHC Casinos is required under the Gaming Control Act to be registered as a
casino operator with the Alcohol and Gaming Commission of Ontario and must
operate in accordance with the terms and conditions of its registration.
Pursuant to the Gaming Control Act and the terms of CHC Casinos'
registration, the Registrar of Alcohol and Gaming must approve any change in the
directors or officers of CHC Casinos. The Alcohol and Gaming Commission of
Ontario may require the submission of disclosure and
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informational material from any person who has an interest in CHC Casinos. This
includes parent companies and their directors and officers.
The Registrar of Alcohol and Gaming has the power, subject to the Gaming
Control Act, to grant, renew, suspend or revoke registrations. The Registrar is
entitled to make such inquiries and conduct such investigations as are necessary
to determine that applicants for registration meet the requirements of the
Gaming Control Act and to require information or material from any person who
has an interest in an applicant for registration. The criteria to be considered
in connection with registration under the Gaming Control Act include the
financial responsibility, integrity and honesty of the applicant, and the public
interest. The Registrar may, at any time, revoke, suspend or refuse to renew CHC
Casinos' registration for any reason that would have disentitled it to
registration.
In addition, any person who supplies a casino with goods and services must
be registered with the Alcohol and Gaming Commission of Ontario. Key employees
who engage in the administration or supervision of gaming or the operation of
gaming premises must also be registered with this agency.
The Development and Operating Agreement imposes certain obligations on CHC
Casinos relating to the operation of Casino Rama including obtaining all
necessary government consents required to operate various components of the
casino in accordance with applicable law and ensuring that all persons retained
by it for the provision of goods and services to the various components of the
casino are also registered as required by law.
STATE AND FEDERAL SIMULCAST REGULATION
The Federal Interstate Horseracing Act, the Pennsylvania Racing Act, the
West Virginia Racing Act and the New Jersey Simulcasting Racing Act require that
we have a written agreement with each applicable horsemen's organization in
order to simulcast races. We have entered into the horsemen agreements, and in
accordance therewith have agreed on the allocations of our revenues from import
simulcast wagering to the purse funds for the Penn National Race Course, Charles
Town Races, Pocono Downs, Freehold Raceway and Garden State Park. Because we
cannot conduct import simulcast wagering in the absence of the Horsemen
Agreements, the termination or non-renewal of such horsemen agreements could
have a material adverse effect on our business, financial condition and results
of operations.
TAXATION
We believe that the prospect of significant additional revenue is one of the
primary reasons that jurisdictions permit legalized gaming. As a result, gaming
companies are typically subject to significant taxes and fees in addition to
normal federal, state, local and, in Canada, provincial income taxes, and such
taxes and fees are subject to increase at any time. We pay substantial taxes and
fees with respect to our operations. From time to time, federal, state, local
and provincial legislators and officials have proposed changes in tax laws, or
in the administration of such laws, affecting the gaming industry. It is not
possible to determine with certainty the likelihood of changes in tax laws or in
the administration of such laws. Such changes, if adopted, could have a material
adverse effect on our business, financial condition and results of operations.
IRS REGULATIONS AND CURRENCY TRANSACTION REPORTING
The Internal Revenue Service, or IRS, requires operators of casinos located
in the United States to file information returns for U.S. citizens, including
names and addresses of winners, for all winnings in excess of stipulated
amounts. The IRS also requires operators to withhold taxes on certain winnings
of nonresident aliens. We are unable to predict the extent, if any, to which
such requirements, if extended, might impede or otherwise adversely affect
operations of, and/or income from, such other games.
63
Regulations adopted by the Financial Crimes Enforcement Network of the
Treasury Department and the gaming regulatory authorities in certain domestic
jurisdictions in which we operate casinos, or in which we have applied for
licensing to operate a casino, require the reporting of currency transactions in
excess of $10,000 occurring within a gaming day, including identification of the
patron by name and social security number. This reporting obligation commenced
in May 1985 and may have resulted in the loss of casino revenues to
jurisdictions outside the United States that are exempt from the ambit of such
regulations. The operation of Casino Rama is subject to similar requirements
under Canadian federal law and gaming legislation.
COMPLIANCE WITH OTHER LAWS
Our operations are also subject to a variety of other rules and regulations,
including zoning, environmental, construction and land-use laws and regulations
governing the serving of alcoholic beverages. We derive a significant portion of
our non-racing revenues from the sale of alcoholic beverages to patrons of our
facilities. Any interruption or termination of our existing ability to serve
alcoholic beverages would have a material adverse effect on our business,
financial condition and results of operations.
64
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The following table provides information regarding our directors and
executive officers as of the date of this document (except as to
Mr. DeSanctis):
NAME AGE POSITION
- ---- -------- -------------------------------------------------
Peter M. Carlino....................... 54 Chairman of the Board and Chief Executive Officer
William J. Bork........................ 67 President, Chief Operating Officer and
Director(1)
Kevin DeSanctis........................ 48 President and Chief Operating Officer(2)
Robert S. Ippolito..................... 49 Chief Financial Officer, Secretary and Treasurer
Joseph A. Lashinger, Jr................ 47 Vice President and General Counsel
Robert E. Abraham...................... 48 Vice President/Controller
George A. Connolly..................... 63 Vice President of Human Resources
Harold Cramer.......................... 73 Director
David A. Handler....................... 36 Director
John M. Jacquemin...................... 52 Director
Robert P. Levy......................... 69 Director
- ------------
(1) Upon Mr. DeSanctis' approval by applicable jurisdictions, Mr. Bork is
expected to assume the title of President, Racing Division.
(2) Mr. DeSanctis will become President and Chief Operating Officer upon the
receipt of necessary licensing and regulatory approval in applicable
jurisdictions.
Upon the consummation of the CRC acquisition, the following executive
officers of CRC are expected to join Penn National in the following capacities:
NAME AGE ANTICIPATED POSITION WITH PENN NATIONAL
- ---- -------- -------------------------------------------------
Sherwood M. Weiser..................... 69 Director(1)
Robert B. Sturges...................... 53 President, Canadian Operations
W. Peter Temling....................... 53 Chief Financial Officer, CRC Operations
- ------------
(1) Subject to the receipt of approval in applicable jurisdictions.
Our current directors and executive officers, along with their backgrounds,
are as follows:
PETER M. CARLINO. Mr. Carlino has served as our Chairman of the Board and
Chief Executive Officer since April 1994, and has devoted a significant amount
of time as a Director since 1991. From 1984 to 1994, Mr. Carlino devoted a
substantial portion of his business time to developing, building and operating
residential and commercial real estate projects located primarily in Central
Pennsylvania. Since 1976 he has been President of Carlino Financial Corporation,
a holding company which owns and operates various Carlino family businesses, in
which capacity he has been continuously active in strategic planning for Carlino
Financial and monitoring its operations. From 1972 until 1976, Mr. Carlino
served as President of Mountainview Thoroughbred Racing Association, a
subsidiary of Penn National.
WILLIAM J. BORK. Mr. Bork was elected President and a Director in
June 1995. From 1987 to June 1995 he was Vice President for Ladbroke Racing
Corporation. Prior to working with Ladbroke, Mr. Bork served as Vice President
of Operations of racetracks previously owned by Ogden Corporation including
Fairmount Park in Collinsville, Illinois; Mountaineer Park in Chester, West
Virginia; Wheeling Downs in Wheeling, West Virginia; and Suffolk Downs in
Boston, Massachusetts.
65
KEVIN DESANCTIS. In February 2001, Mr. DeSanctis joined the company. He
will assume the titles of President and Chief Operating Officer upon the receipt
of necessary licensing and regulatory approval in applicable jurisdictions.
Prior to joining us, Mr. DeSanctis served from 1995 to 2000 as Chief Operating
Officer, North America for Sun International Hotels Limited where he was
responsible for complete oversight of day-to-day operations of the company's
gaming properties in North America and the Bahamas. Prior to joining Sun
International, Mr. DeSanctis' experience included management and pre-opening
responsibilities for gaming operations in Las Vegas, Atlantic City, New Orleans
and Colorado.
ROBERT S. IPPOLITO. Mr. Ippolito, a certified public accountant, was
elected Chief Financial Officer, Secretary and Treasurer of Penn National in
April 1994. He was Corporate Controller and Secretary of Carlino Financial and
certain of its affiliates between June 1987 and May 1994, and from 1979 to 1987
was engaged in public accounting.
JOSEPH A. LASHINGER, JR., ESQ. Mr. Lashinger was elected Vice President and
General Counsel of Penn National in June 1997. Prior to joining us,
Mr. Lashinger served as a consultant to us from 1996 to 1997. From 1978 to 1990,
Mr. Lashinger was elected to seven consecutive terms in the Pennsylvania House
of Representatives as representative from the 150th Legislative District in
Montgomery County, Pennsylvania. From 1981 to 1992, Mr. Lashinger was a partner
in the law firm of Fox, Differ, Callahan, Sheridan, O'Neil and Lashinger.
Mr. Lashinger has also served as director of government affairs, development
director and counsel to several major casino companies including Hollywood
Casino Corporation and Bally Entertainment. In 1997, Mr. Lashinger voluntarily
filed for personal bankruptcy due in part to his personal guaranty of the debts
of a failed business in which he was a part owner.
ROBERT E. ABRAHAM. Mr. Abraham was elected Vice President and Corporate
Controller in January 1997. From 1986 to 1997, Mr. Abraham was the controller of
Mountainview Thoroughbred Racing Association and Pennsylvania National Turf
Club.
GEORGE A. CONNOLLY. Mr. Connolly was elected Vice President, Human
Resources in April, 1998. Prior to joining Penn National in 1998, Mr. Connolly
held a number of positions in the Human Resources and Labor and Public Relations
departments at Western Electric/AT&T in New York City, Kearny, New Jersey,
Newark, New Jersey, Kansas City, Missouri, and Reading, Pennsylvania.
Mr. Connolly spent 31 years at Western Electric/AT&T.
HAROLD CRAMER. Mr. Cramer has been a Director of Penn National since 1994.
From November 1996 to July 2000, Mr. Cramer was Counsel to Mesirov Gelman Jaffe
Cramer & Jamieson, LLP, which merged with Schnader Harrison Segal & Lewis, LLP
in July 2000. Schnader Harrison is a Philadelphia law firm that provides legal
services to Penn National. Mr. Cramer is now a retired partner of Schnader
Harrison Segal & Lewis, LLP. From November 1995 until November 1996, Mr. Cramer
was Chairman of the Board and Chief Executive Officer of HSI Management
Co., Inc. From 1989 until November 1995, Mr. Cramer was Chairman of the Board
and Chief Executive Officer of Graduate Health System, Inc. and has been a
Director of Graduate n/k/a/ Philadelphia Health Care Trust since November 1996.
He also serves as a Director of several of our subsidiaries.
DAVID A. HANDLER. Mr. Handler has been a Director of Penn National since
1994. Since April 2000, Mr. Handler has been a Senior Managing Director at Bear
Sterns & Co., Inc. From July 1995 to April 2000, Mr. Handler was employed by
Jefferies & Company, Inc., where he became a Managing Director in March 1998.
From October 1991 to July 1995, he was a Vice President at Fahnestock &
Co., Inc.
JOHN M. JACQUEMIN. Mr. Jacquemin has been a Director of Penn National since
1995 and is President of Mooring Financial Corporation, a financial services
group specializing in the purchase and administration of commercial loan
portfolios and equipment leases. Mr. Jacquemin joined Mooring
66
Financial Corporation in 1982 and has served as its President since 1987. He
also serves as a Director of Cel-Sci Corporation.
ROBERT P. LEVY. Mr. Levy has been a Director of Penn National since 1995.
He is Chairman of the Board of the Atlantic City Racing Association and served a
two-year term from 1989 to 1990 as President of the Thoroughbred Racing
Association. Mr. Levy has served as the Chairman of the Board of DRT
Industries, Inc., a diversified business based in the Philadelphia metropolitan
area, since 1960. Mr. Levy owns the Robert P. Levy Stable, a thoroughbred racing
and breeding operation which has bred and owned several award-winning horses,
including the 1987 Belmont Stakes winner, Bet Twice.
The backgrounds and business experience of the CRC executive officers that
are expected to join Penn National upon the consummation of the CRC acquisition
are as follows:
SHERWOOD M. WEISER. Mr. Weiser has been CRC's Chairman of the Board of
Directors, President and Chief Executive Officer since June 1998 and held the
same positions with CHC International Inc., CRC's predecessor, from March 1994
until June 1998. Since September 1998, he has also been the Chairman of the
Board of Directors of LCCI. Mr. Weiser is a member of the Board of Directors of
Carnival Corp and serves as a member of Carnival's Nominating Committee and
Chairman of the Compensation Committee and Plan Administration Committee of the
Board of Directors. Mr. Weiser is also a member of the Board of Directors of
Mellon United National Bank, a subsidiary of Mellon Financial Corp., Wyndham
International, Inc. and Interstate Hotels Corporation, and a trustee of the
University of Miami. We expect our Board to nominate Mr. Weiser for election to
the Penn National board at our next annual meeting of shareholders, subject to
the receipt of approval in applicable jurisdictions.
ROBERT B. STURGES. Mr. Sturges has been President of CRC's Gaming
Operations and a Director of CRC since June 1998 and held the same position with
CHC International Inc. from June 1994 until June 1998. He served as Chairman of
the Board of Directors of LCCI from April 1995 until September 1998. From 1989
until March 1994 he was President of Carnival Management Services, Inc. He began
his affiliation with Carnival in 1983 and in 1986 was named Special Assistant to
the Chairman of Carnival. Shortly thereafter, he was promoted to Vice President
of Resorts and Gaming, with responsibility for all of Carnival's gaming and
land-based development. We expect that Mr. Sturges will be the President of our
Canadian operations reporting to our Chief Executive Officer upon the
consummation of the CRC acquisition.
W. PETER TEMLING. Mr. Temling has been Executive Vice President/Finance and
Chief Financial Officer and a director of CRC since June 1998 and held the same
positions with CHC International Inc. from June 1994 until June 1998.
Mr. Temling also has been LCCI's Chief Financial Officer since October 1993,
become LCCI's Secretary and Treasurer in May 1998 and became a director of LCCI
in September 1998. Earlier in his career, Mr. Temling worked for 12 years at the
Sheraton Corporation, where his responsibilities included business planning for
more than 100 hotels, the opening of hotels worldwide and directing the
financial functions for the franchise division consisting of 400 hotels and
inns. Mr. Temling also is a certified public accountant. We expect that Mr.
Temling will be the Chief Financial Officer of our CRC operations upon the
consummation of the CRC acquisition.
67
CERTAIN TRANSACTIONS
James A. Irwin, the former husband of Anne Carlino Irwin, a beneficiary of
an irrevocable trust among Peter D. Carlino and his eight children, as settlors,
and certain trustees, is an officer, director and minority shareholder in USI
MidAtlantic, Inc., the insurance agency that is the broker for all of our
property and casualty insurance. In 1999 we paid premiums of $1,367,000 for such
insurance.
In August 1994, we signed a consulting agreement with Peter D. Carlino, our
former Chairman. Pursuant to the consulting agreement, as amended, Peter D.
Carlino receives an annual fee of $135,000.
We currently lease 6,674 square feet of office space in an office building
in Wyomissing, Pennsylvania for our executive offices. The lease expires in
April 2005 and provides for an annual rental of $97,968 plus common area
expenses and electric utility charges. The office building is owned by an
affiliate of Peter M. Carlino, Chairman and Chief Executive Officer. We believe
that the lease terms are not less favorable than lease terms that could have
been obtained from an unaffiliated third party.
We currently lease an aircraft from a company owned by John Jacquemin, one
of our directors. The lease expires in August 2007, and provides for monthly
payments of $26,203. We believe that the lease terms are not less favorable than
lease terms that could have been obtained from an unaffiliated third party.
We have agreed to pay the premiums on four life insurance policies, two
payable when Peter M. Carlino dies and two payable when the survivor of Peter M.
Carlino and his wife, Marshia W. Carlino, dies, under a "split-dollar"
arrangement by which certain irrevocable trusts established by Peter M. Carlino
are obligated to reimburse us for all premiums paid when the insurance matures
or possibly sooner. The owners and beneficiaries of the life insurance policies
are the irrevocable trusts. In 1999, we paid a total of $239,000 in premiums on
the life insurance policies pursuant to this arrangement.
68
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of December 31, 2000 (except as noted) for
(i) each stockholder who is known by us to own beneficially more than 5% of our
common stock, (ii) each director and executive officer, and (iii) all of our
directors and executive officers as a group. Except as otherwise indicated, we
believe, based on information furnished by the persons named in this table, that
such persons have voting and investment power with respect to all shares of
common stock beneficially owned by them, subject to community property laws,
where applicable.
As of December 31, 2000, there were 15,034,475 shares of our common stock
outstanding. To calculate a shareholder's percentage of beneficial ownership, we
must include in the numerator and denominator those shares underlying options
beneficially owned by that shareholder. Options held by other shareholders,
however, are disregarded in this calculation. Therefore, the denominator used in
calculating beneficial ownership among our shareholders may differ.
NUMBER OF
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
NAME AND ADDRESS (1) OWNED SHARES
- -------------------- ------------ -------------
Peter M. Carlino (2)........................................ 5,756,462 36.6%
Peter D. Carlino (3)........................................ 4,693,386 31.2%
Harold Cramer (4)........................................... 4,731,886 31.4%
Richard J. Carlino (5)...................................... 4,542,152 30.2%
Carlino Family Trust (6).................................... 4,510,808 30.0%
William J. Bork............................................. 300,668 2.0%
Robert S. Ippolito.......................................... 89,600 *
David A. Handler............................................ 86,395 *
John M. Jacquemin........................................... 38,100 *
Robert P. Levy.............................................. 37,500 *
Robert Abraham.............................................. 21,250 *
Joseph A. Lashingher, Jr.................................... 12,500 *
George A. Connolly.......................................... 6,450 *
Akre Capital Management, LLC ...............................
Potomac Tower, 6th Floor
1001 19th Street North
Arlington, Virginia 22209 (7)............................. 942,383 6.7%
All executive officers and directors as a group
(10 persons).............................................. 6,570,003 43.7%
- ------------
* Less than one percent.
(1) The persons named in the above table have sole voting and investment power
with respect to all shares of common stock shown as beneficially owned by
them except as otherwise shown in the succeeding footnotes, and the address
of each such person, other than Akre Capital Management, Inc., is c/o Penn
National Gaming, Inc., 825 Berkshire Boulevard, Suite 200, Wyomissing,
Pennsylvania 19610. The number of shares included in the table as to each
person(s) also includes shares that may be acquired by such person(s) within
sixty days of December 31, 2000 pursuant to stock options.
(2) The number of shares in the table includes 4,510,808 shares owned by the
family trust as to which Peter M. Carlino has sole voting power for the
election of directors and certain other matters, shared voting power with
respect to certain matters, and shared investment power; and 570,654 shares
owned jointly by Mr. Carlino and his wife, Marshia Carlino.
69
(3) The number of shares in the table includes 4,510,808 shares owned by an
irrevocable trust, referred to as the family trust in these footnotes, among
Peter D. Carlino and his eight children, as settlors, and certain trustees,
as to which Peter D. Carlino has shared investment and voting power with
respect to certain matters; and 182,578 shares owned by a marital trust for
the benefit of Peter D. Carlino and by a residuary trust for the benefit of
Peter D. Carlino's children as to both of which Peter D. Carlino has shared
investment power and shared voting power.
(4) The number of shares in the table includes 4,510,808 shares owned by the
family trust, and an aggregate of 182,578 shares owned by a marital trust
for the benefit of Peter D. Carlino and by a residuary trust for the benefit
of Peter D. Carlino's children as to both of which Harold Cramer has shared
investment power and shared voting power.
(5) The number of shares in the table includes 4,510,808 shares of Common Stock
owned by the family trust, as to which Richard J. Carlino has shared
investment power and shared voting power as to certain matters.
(6) See note (2).
(7) The information in the table is based on information contained in a
statement on Schedule 13G filed by Akre Capital Management, LLC with the
Securities and Exchange Commission dated March 31, 2000.
70
DESCRIPTION OF CREDIT FACILITY
The following is a summary of our existing credit facility that we entered
into in August 2000. This summary is qualified in its entirety by reference to
the credit facility, which has been filed with the Securities and Exchange
Commission.
On August 8, 2000, we entered into a $350 million senior secured credit
facility agreement with a syndicate of lenders led by Lehman Brothers Inc. and
CIBC World Markets Corp. The credit facility is comprised of a $75 million
revolving credit facility maturing on August 8, 2005, a $75 million Tranche A
term loan maturing on August 8, 2005 and a $200 million Tranche B term loan
maturing on August 8, 2006. Up to $10 million of the revolving credit facility
may be used for the issuance of standby letters of credit, of which
$2.0 million was outstanding at September 30, 2000. In addition, up to
$10 million of the revolving credit facility may be used for short term credit
to be provided to us on a same-day basis, which must be repaid within five days.
As of December 31, 2000, $71.3 million was outstanding on the Tranche A term
loan, $199.0 million was outstanding on the Tranche B term loan and,
$39.0 million was outstanding under the revolving credit portion of the
facility.
At our option, the revolving credit facility and the Tranche A term loan may
bear interest at (1) the highest of 1/2 of 1% in excess of the federal funds
effective rate or the rate that the bank group 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 our total leverage. At our option, the Tranche
B term loan may bear interest at (1) the highest of 1/2 of 1% in excess of the
federal funds effective rate or the rate that the bank group announces from time
to time as its prime lending rate plus an applicable margin of up to 3.25%, 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 our total leverage. The eurodollar
rate is defined as the rate that appears on page 3750 of the Dow Jones Telerate
Screen as of 11:00 a.m. London time two days before the applicable funding date
(adjusted for statutory reserve requirements for eurocurrency liabilities) at
which eurodollar deposits for one, two, three or six months, as selected by us,
are offered in the interbank eurodollar market. At December 31, 2000, the
applicable Tranche A and Tranche B term loan rates were 9.89% and 10.64%,
respectively. In addition, as of December 22, 2000, we have entered into a
$100.0 million interest rate swap contract obligating us to pay a fixed rate of
5.825% for three years against the 90-day eurodollar rate.
We are the borrower under the new credit facility pursuant to which all of
our present and future direct and indirect wholly-owned subsidiaries (other than
certain foreign subsidiaries) are guarantors on a senior basis. The new credit
facility is secured by the following:
- substantially all of our tangible and intangible assets and the assets of
all of our direct and indirect wholly-owned subsidiaries; and
- a pledge of all of the capital stock of each of Penn National's present
and future direct and indirect domestic subsidiaries and 65% of the
capital stock of certain of its first-tier foreign subsidiaries.
The documentation for the credit facility contains representations and
warranties, affirmative, negative and financial covenants and events of default
customary for credit facilities of a size and type similar to the credit
facility and other terms deemed appropriate by the lenders. Financial covenants
include minimum EBITDA, minimum fixed charge coverage, minimum consolidated net
worth and maximum total leverage covenants.
If we raise funds through the issuance of equity securities, the credit
facility agreement requires us to make prepayments on the outstanding
indebtedness under the facility of 50% of the cash proceeds
71
raised through the issuance. If we raise funds through the incurrence of certain
new indebtedness, the credit facility agreement requires us to make prepayments
on the outstanding indebtedness under the facility of 100% of the cash proceeds.
However, pursuant to the credit facility agreement, the issuance of the notes
does not require any prepayment to the extent the proceeds of the notes are used
to consummate our acquisition of CRC. In addition, we may make optional
prepayments on the outstanding indebtedness under the credit facility without
penalty or premium. If the CRC acquisition is consummated, we intend to repay
approximately $25.5 million of our outstanding indebtedness under the revolving
credit facility with proceeds from the notes.
Proceeds from the credit facility to date have been used to finance the
acquisition of our Mississippi properties, to refinance certain indebtedness, to
complete a tender offer for our 1997 senior notes and for working capital
purposes.
72
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
PENN NATIONAL GAMING, INC.
Report of Independent Certified Public Accountants........ F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998
and 1999 and September 30, 2000...................... F-3
Consolidated Statements of Income for the years ended
December 31, 1997, 1998 and 1999 and the nine months
ended September 30, 1999 and 2000.................... F-5
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1997, 1998 and 1999 and
the nine months ended September 30, 1999 and 2000.... F-6
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1998 and 1999 and the nine
months ended September 30, 1999 and 2000............. F-7
Notes to Consolidated Financial Statements................ F-8
MARDI GRAS CASINO CORP.
Report of Independent Public Accountants.................. F-28
Audited Financial Statements:
Balance Sheets as of August 7, 2000 and December 31,
1999................................................. F-29
Statements of Operations for the 220-day period ended
August 7, 2000 and the years ended December 31, 1999
and 1998............................................. F-30
Statements of Changes in Stockholders' Equity for the
220-day period ended August 7, 2000 and the years
ended December 31, 1999 and 1998..................... F-31
Statements of Cash Flows for the 220-day period ended
August 7, 2000 and the years ended December 31, 1999
and 1998............................................. F-32
Notes to Financial Statements............................. F-33
MISSISSIPPI-I GAMING, L.P.
Report of Independent Public Accountants.................. F-41
Audited Financial Statements:
Balance Sheets as of August 7, 2000 and December 31,
1999................................................. F-42
Statements of Operations for the 220-day period ended
August 7, 2000 and the years ended December 31, 1999
and 1998............................................. F-43
Statements of Changes in Partners' Capital (Deficit)
for the 220-day period ended August 7, 2000 and the
years ended December 31, 1999 and 1998............... F-44
Statements of Cash Flows for the 220-day period ended
August 7, 2000 and the years ended December 31, 1999
and 1998............................................. F-45
Notes to Financial Statements............................. F-46
CRC HOLDINGS, INC., GAMING DIVISION
Report of Independent Certified Public Accountants........ F-51
Financial Statements:
Balance Sheets as of November 30, 1998 and 1999 and
August 31, 2000 (unaudited).......................... F-52
Statements of Operations for the years ended November
30, 1997, 1998 and 1999 and the nine months ended
August 31, 1999 and 2000 (unaudited)................. F-53
Statements of Changes in Stockholders' Equity
(Deficit) for the years ended November 30, 1997, 1998
and 1999 and the nine month period ended August 31,
2000 (unaudited)..................................... F-54
Statements of Cash Flows for the years ended November
30, 1997, 1998 and 1999 and the nine months ended
August 31, 1999 and 2000 (unaudited)................. F-55
Notes to Financial Statements............................. F-56
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Penn National Gaming, Inc.
and Subsidiaries
Wyomissing, Pennsylvania
We have audited the accompanying consolidated balance sheets of Penn National
Gaming, Inc. and Subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Penn National
Gaming, Inc. and Subsidiaries at December 31, 1998 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ BDO SEIDMAN, LLP
- -------------------------------------------
BDO Seidman, LLP
Philadelphia, Pennsylvania
February 29, 2000
F-2
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
------------------- SEPTEMBER 30,
1998 1999 2000
-------- -------- -------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents................................. $ 6,826 $ 9,434 $ 20,402
Accounts receivable....................................... 3,840 4,779 8,494
Prepaid expenses and other current assets................. 2,131 1,793 6,144
Deferred income taxes..................................... 458 888 538
Prepaid income taxes...................................... 859 1,088 245
-------- -------- --------
Total current assets........................................ 14,114 17,982 35,823
-------- -------- --------
Property, plant and equipment, at cost
Land and improvements..................................... 26,969 27,988 78,168
Building and improvements................................. 66,918 70,870 139,298
Furniture, fixtures and equipment......................... 29,772 36,195 69,932
Transportation equipment.................................. 527 860 913
Leasehold improvements.................................... 9,579 9,802 11,631
Leased equipment under capitalized lease.................. 824 -- --
Construction in progress.................................. 1,847 1,980 9,998
-------- -------- --------
136,436 147,695 309,940
Less accumulated depreciation and amortization............ 15,684 20,824 27,371
-------- -------- --------
Net property, plant and equipment........................... 120,752 126,871 282,569
-------- -------- --------
Other assets
Investment in and advances to unconsolidated affiliate.... -- 12,862 14,507
Cash in escrow............................................ -- 5,000 5,008
Excess of cost over fair market value of net assets
acquired net of accumulated amortization of $2,002,
$2,611, and $3,359, respectively........................ 22,442 21,582 79,660
Deferred financing costs.................................. 2,403 5,014 9,860
Miscellaneous............................................. 1,087 1,289 3,307
-------- -------- --------
Total other assets.......................................... 25,932 45,747 112,342
-------- -------- --------
$160,798 $190,600 $430,734
======== ======== ========
See accompanying summary of significant accounting policies and notes
to consolidated financial statements.
F-3
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
------------------- SEPTEMBER 30,
1998 1999 2000
-------- -------- -------------
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt and capital lease
obligations............................................. $ 168 $ 5,160 $ 10,563
Accounts payable.......................................... 6,217 10,210 13,578
Purses due horsemen....................................... 887 2,114 1,009
Uncashed pari-mutuel tickets.............................. 1,597 1,351 1,150
Accrued expenses.......................................... 1,063 2,694 7,555
Accrued interest.......................................... 468 433 1,372
Accrued salaries and wages................................ 752 1,098 4,943
Customer deposits......................................... 548 800 1,006
Taxes, other than income taxes............................ 503 1,491 2,014
-------- -------- --------
Total current liabilities................................... 12,203 25,351 43,190
-------- -------- --------
Long-term liabilities
Long-term debt and capital lease obligations, net of
current maturities...................................... 78,088 86,053 298,236
Deferred income taxes..................................... 11,471 12,924 13,145
-------- -------- --------
Total long-term liabilities................................. 89,559 98,977 311,381
-------- -------- --------
Commitments and contingencies
Shareholders' equity
Preferred stock, $.01 par value, authorized 1,000,000
shares; issued none..................................... -- -- --
Common stock, $.01 par value, authorized 20,000,000
shares; issued and outstanding 15,164,080, 15,314,175
and 15,432,675, respectively............................ 152 153 154
Treasury stock, 424,700 shares at cost.................... (2,379) (2,379) (2,379)
Additional paid-in capital................................ 38,025 38,527 39,152
Retained earnings......................................... 23,238 29,971 39,236
-------- -------- --------
Total shareholders' equity.................................. 59,036 66,272 76,163
-------- -------- --------
$160,798 190,600 $430,734
======== ======== ========
See accompanying summary of significant accounting policies and notes
to consolidated financial statements.
F-4
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
Revenues
Gaming.................................. $ 5,730 $ 37,665 $ 55,415 $ 40,069 $ 99,895
Racing.................................. 98,402 106,850 102,827 76,062 87,913
Other revenue........................... 7,404 9,550 13,216 9,608 14,453
-------- -------- -------- -------- --------
Total revenues............................ 111,536 154,065 171,458 125,739 202,261
-------- -------- -------- -------- --------
Operating expenses
Gaming.................................. 4,134 26,544 34,952 25,202 59,050
Racing.................................. 65,810 70,303 68,808 50,784 59,065
Other operating expenses................ 5,623 8,080 11,173 8,195 11,980
General and administrative.............. 22,194 23,932 30,030 20,879 29,316
Depreciation and amortization........... 4,040 5,748 8,679 6,469 8,457
-------- -------- -------- -------- --------
Total operating expenses.................. 101,801 134,607 153,642 111,529 167,868
-------- -------- -------- -------- --------
Income from operations.................... 9,735 19,458 17,816 14,210 34,393
Interest expense, net..................... (3,658) (7,436) (7,307) (5,539) (9,669)
-------- -------- -------- -------- --------
Income before taxes and extraordinary
item.................................... 6,077 12,022 10,509 8,671 24,724
Taxes on income........................... 2,308 4,519 3,777 3,271 8,876
-------- -------- -------- -------- --------
Income before extraordinary item.......... 3,769 7,503 6,732 5,400 15,848
Extraordinary item, loss on early
extinguishment of debt, net of income
taxes of $1,007 in 1997 and $4,615 in
2000.................................... (1,482) -- -- -- (6,583)
-------- -------- -------- -------- --------
Net income................................ $ 2,287 $ 7,503 $ 6,732 $ 5,400 $ 9,265
======== ======== ======== ======== ========
Per share data
Basic
Income before extraordinary item...... $ .25 $ .50 $ .45 $ .36 $ 1.06
Extraordinary item.................... (.10) -- -- -- (.44)
-------- -------- -------- -------- --------
Net income............................ $ .15 $ .50 $ .45 $ .36 $ .62
======== ======== ======== ======== ========
Diluted
Income before extraordinary item...... $ .24 $ .49 $ .44 $ 36 $ 1.03
Extraordinary item.................... (.09) -- -- -- (.43)
-------- -------- -------- -------- --------
Net income............................ $ .15 $ .49 $ .44 $ .36 $ .60
======== ======== ======== ======== ========
Weighted average shares outstanding
Basic................................... 14,925 15,015 14,837 14,812 14,948
======== ======== ======== ======== ========
Diluted................................. 15,458 15,374 15,196 15,179 15,407
======== ======== ======== ======== ========
See accompanying summary of significant accounting policies and notes
to consolidated financial statements.
F-5
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL
--------------------- TREASURY PAID-IN RETAINED
SHARES AMOUNT STOCK CAPITAL EARNINGS TOTAL
---------- -------- -------- ---------- -------- --------
Balance, January 1, 1997............ 13,355,290 $134 $ -- $14,299 $13,448 $27,881
Issuance of common stock............ 1,725,000 17 -- 22,914 -- 22,931
Exercise of stock options and
warrants.......................... 72,290 1 -- 154 -- 155
Tax benefit related to stock options
exercised......................... -- -- -- 602 -- 602
Net income for the year............. -- -- -- -- 2,287 2,287
---------- ---- ------- ------- ------- -------
Balance, December 31, 1997.......... 15,152,580 152 -- 37,969 15,735 53,856
Exercise of stock options and
warrants.......................... 11,500 -- -- 56 -- 56
Acquisition of treasury stock....... -- -- (2,379) -- -- (2,379)
Net income for the year............. -- -- -- -- 7,503 7,503
---------- ---- ------- ------- ------- -------
Balance, December 31, 1998.......... 15,164,080 152 (2,379) 38,025 23,238 59,036
Exercise of stock options and
warrants.......................... 150,095 1 -- 502 -- 503
Net income for the year............. -- -- -- -- 6,733 6,733
---------- ---- ------- ------- ------- -------
Balance, December 31, 1999.......... 15,314,175 153 (2,379) 38,527 29,971 66,272
Issuance of common stock
(unaudited)....................... 118,500 1 -- 625 -- 626
Net income for the nine months ended
September 30, 2000 (unaudited).... -- -- -- -- 9,265 9,265
---------- ---- ------- ------- ------- -------
Balance, September 30, 2000
(unaudited)....................... 15,432,675 $154 $(2,379) $39,152 $39,236 $76,163
========== ==== ======= ======= ======= =======
See accompanying summary of significant accounting policies and notes
to consolidated financial statements.
F-6
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ --------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- ---------
(UNAUDITED)
Cash flows from operating activities
Net income................................................ $ 2,287 $ 7,503 $ 6,733 $ 5,400 $ 9,265
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization......................... 4,040 5,748 8,679 6,469 8,457
Write-off of deferred financing costs................. -- 376 -- -- (1,645)
Income from unconsolidated affiliates................. -- -- (1,098) -- --
Extraordinary loss relating to early extinguishment of
debt, before income tax benefit..................... 2,483 -- -- -- 11,198
Deferred income taxes (benefit)....................... (97) 390 1,023 861 571
Decrease (increase) in
Accounts receivable................................. 2,036 (1,583) (939) (740) (3,715)
Prepaid expenses and other current assets........... 111 (690) 338 (584) (4,584)
Prepaid income taxes................................ (3,003) 2,144 (229) 858 843
Miscellaneous other assets.......................... (258) (463) (202) (42) (2,013)
Increase (decrease) in
Accounts payable.................................... 2,339 (1,188) 3,993 657 3,368
Purses due horsemen................................. (1,421) 887 1,227 1,720 (1,105)
Uncashed pari-mutuel tickets........................ 168 93 (246) (590) (201)
Accrued expenses.................................... 1,155 (1,364) 1,631 88 4,859
Accrued interest.................................... 225 142 (35) 1,788 939
Accrued salaries and wages.......................... 306 (61) 346 217 3,845
Customer deposits................................... 50 78 252 280 206
Taxes, other than income taxes...................... 257 (146) 988 783 523
Income taxes payable................................ -- -- -- 74 --
-------- -------- -------- -------- ---------
Net cash provided by operating activities................... 10,678 11,866 22,461 17,239 30,811
-------- -------- -------- -------- ---------
Cash flows from investing activities
Expenditures for property, plant and equipment............ (29,196) (22,333) (13,243) (5,002) (17,348)
Proceeds from sale of property and equipment.............. -- -- -- -- 151
Investment in and advances to unconsolidated affiliate.... -- -- (11,764) (12,269) --
Acquisition of business, net of cash acquired............. (18,248) -- 251 251 (203,906)
(Increase) in prepaid acquisition costs................... (176) -- -- -- --
Cash in escrow............................................ -- -- (5,000) -- (8)
-------- -------- -------- -------- ---------
Net cash (used in) investing activities..................... (47,620) (22,333) (29,756) (17,020) (221,111)
-------- -------- -------- -------- ---------
Cash flows from financing activities
Proceeds from sale of common stock........................ $ 23,086 $ 56 $ 503 $ 503 $ 626
Acquisition of treasury stock............................. -- (2,379) -- -- --
Proceeds from long-term debt.............................. 111,167 9,000 24,350 11,500 319,895
Principal payments on long-term debt and capital lease
obligations............................................. (78,348) (11,080) (11,393) (6,034) (102,310)
(Increase) in unamortized financing cost.................. (3,345) (158) (3,557) (3,237) (10,258)
Tax benefit related to stock options exercised............ 602 -- -- -- --
Payment of senior notes tender fees....................... -- -- -- (6,685)
-------- -------- -------- -------- ---------
Net cash provided by (used in) financing activities......... 53,162 (4,561) 9,903 2,732 201,268
-------- -------- -------- -------- ---------
Net increase (decrease) in cash and cash equivalents........ 16,220 (15,028) 2,608 2,951 10,968
Cash and cash equivalents at beginning of period............ 5,634 21,854 6,826 6,826 9,434
-------- -------- -------- -------- ---------
Cash and cash equivalents at end of period.................. $ 21,854 $ 6,826 $ 9,434 $ 9,777 $ 20,402
======== ======== ======== ======== =========
See accompanying summary of significant accounting policies and notes
to consolidated financial statements.
F-7
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Penn National
Gaming, Inc. and its wholly owned subsidiaries (collectively the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
On March 15, 2000, the Company purchased from the BDC Group ("BDC"), its
joint venture partner in West Virginia, BDC's 11% interest in PNGI Charles Town
Gaming Limited Liability Company, which owns and operates Charles Town Races,
for $6.0 million in cash. The investment is recorded net of the minority
interest tax liability of $155,000 or $5.845 million. As a result of the
purchase, PNGI Charles Town Gaming Limited Liability Company is now a 100% owned
subsidiary of the Company.
Certain reclassifications have been made to the statements of income for the
years ended December 31, 1999, 1998 and 1997 in order for them to conform with
the presentation for the nine months ended September 30, 2000.
INTERIM UNAUDITED INFORMATION
The accompanying interim financial statements as of September 30, 2000 and
for the nine month periods ended September 30, 1999 and 2000 and related
disclosures in the accompanying notes have not been audited and do not include
all information and notes necessary for the presentation of financial position,
results of operations and cash flows in conformity with Generally Accepted
Accounting Principles. However, in the opinion of management, all adjustments
(consisting of normal recurring accruals) have been included to present fairly,
in all material respects, the financial position of the Company as of
September 30, 2000, and the results of its operations and its cash flows for the
nine months period ended September 30, 1999 and 2000. Operating results for the
nine months period ended September 30, 2000 are not necessarily indicative of
the results that may be expected for a full year.
DESCRIPTION OF BUSINESS
The Company provides pari-mutuel wagering opportunities on live and
simulcast thoroughbred and harness horse races at two racetracks and ten
off-track wagering facilities ("OTWs") located in Pennsylvania and pari-mutuel
wagering opportunities and video gaming machines at Charles Town Races, the
Company's Charles Town, West Virginia thoroughbred racetrack.
At each of its three racetracks, the Company conducts pari-mutuel wagering
on thoroughbred and harness races from the Company's racetracks and simulcasts
from other racetracks. The Company also simulcasts its Penn National Race Course
and Pocono Downs races for wagering at other racetracks and OTWs, including all
Pennsylvania racetracks and OTWs and locations outside Pennsylvania. Wagering on
Penn National Race Course and Pocono Downs races and races simulcast from other
racetracks also occurs through the Company's Pennsylvania racetracks' telephone
account betting network.
On August 8, 2000, the Company acquired two casinos in Mississippi. See
Note 2 for additional information. The Company's sole operating segment is
gaming activities.
F-8
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GLOSSARY OF TERMINOLOGY
The following is a listing of terminology used throughout the financial
statements:
THE COMPANY'S RACETRACKS -- Penn National Race Course near Harrisburg,
Pennsylvania, Pocono Downs near Wilkes-Barre, Pennsylvania and Charles Town
Races in Charles Town, West Virginia.
GAMING MACHINES -- Video lottery terminal and coin operated gaming machines.
OTW -- Off-track wagering location.
PARI-MUTUEL WAGERING -- All wagering at the Company's racetracks, at the
Company's OTWs and all wagering on the Company's races at other racetracks
and OTWs.
TELEBET -- Telephone account wagering.
TOTALISATOR SERVICES -- Computer services provided to the Company by various
totalisator companies for processing pari-mutuel betting odds and wagering
proceeds.
PARI-MUTUEL REVENUES
LIVE RACES -- The Company's share of pari-mutuel wagering on live races
within Pennsylvania and West Virginia and certain stakes races from
racetracks outside of Pennsylvania and West Virginia after payment of the
amount returned as winning wagers.
IMPORT SIMULCASTING -- The Company's share of wagering at the Company's
racetracks, at the Company's OTWs and by Telebet on full cards of races
simulcast from other racetracks.
EXPORT SIMULCASTING -- The Company's share of wagering at out-of-state
locations on live races conducted by the Company.
GAMING REVENUE -- The Company's share of net winnings from gaming wins
and losses.
A summary of pari-mutuel wagering for the periods indicated is as follows:
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
Pari-mutuel wagering on the Company's live
races................................... $128,090 $122,686 $ 96,238 $ 70,875 $ 78,407
Pari-mutuel wagering on simulcasting
Import simulcasting from other
racetracks.............................. 298,459 336,191 $345,650 $259,212 282,460
Export simulcasting to out of Pennsylvania
wagering facilities..................... 176,287 194,772 $159,175 $ 98,551 176,368
-------- -------- -------- -------- --------
Total pari-mutuel wagering................ $602,836 $653,649 $601,063 $428,638 $537,235
======== ======== ======== ======== ========
F-9
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RACING MEET
The racing seasons for the past three years consisted of the following
number of live race days:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
Penn National Race Course............... 212 206 153 101 153
Pocono Downs............................ 134 135 130 88 107
Charles Town Races...................... 159 206 213 160 160
DEPRECIATION AND AMORTIZATION
Depreciation of property, plant and equipment and amortization of leasehold
improvements are computed by the straight-line method at rates adequate to
allocate the cost of applicable assets over their estimated useful lives.
Depreciation and amortization for the years ended 1997, 1998 and 1999, amounted
to $3,193,000, $4,705,000, and $7,124,000, respectively.
The excess of cost over fair value of net assets acquired is being amortized
on the straight-line method over a forty-year period. Amortization expense for
1997, 1998 and 1999, amounted to $578,000, $613,000, and $609,000, respectively.
The Company reviews the carrying values of its long-lived and identifiable
intangible assets for possible impairment whenever events or changes in
circumstances indicates that the carrying amount of the assets may not be
recoverable based on undiscounted estimated future operating cash flows. As of
December 31, 1999, the Company has determined that no impairment has occurred.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities using enacted
tax rates in effect in the years in which the differences are expected to
reverse.
CUSTOMER DEPOSITS
Customer deposits represent amounts held by the Company for telephone
wagering.
CASH AND CASH EQUIVALENTS
The Company considers all cash balances and highly liquid investments with
original maturities of three months or less to be cash equivalents.
NET INCOME PER COMMON SHARE
Basic net income per share includes no dilution and is calculated by
dividing net income by the weighted average number of common shares outstanding
for the period. Dilutive net income per share reflects the potential dilution of
securities that could share in the net income of the Company which consist of
stock options and warrants (using the treasury stock method).
F-10
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS
Deferred financing costs which are incurred by the Company in connection
with debt are charged to operations over the life of the underlying indebtedness
using the interest method adjusted to give effect to any early repayments.
Amortization of deferred financing costs for 1997, 1998 and 1999, amounted to
$269,000, $430,000, and $946,000, respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to credit risk
consist of cash equivalents and accounts receivable. The Company's policy is to
limit the amount of credit exposure to any one financial institution and place
investments with financial institutions evaluated as being creditworthy, or in
short-term money market and tax-free bond funds which are exposed to minimal
interest rate and credit risk. At December 31, 1999, the Company had bank
deposits which exceeded federally insured limits by approximately $5,235,000 and
money market and tax-free bond funds of approximately $400,000. Concentration of
credit risk, with respect to accounts receivable, is limited due to the
Company's credit evaluation process. The Company does not require collateral
from its customers. The Company's receivables consist principally of amounts due
from other racetracks and their OTWs. Historically, the Company has not incurred
any significant credit-related losses.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions are used to estimate the fair value of
each class of financial instruments for which it is practical to estimate.
Cash and Cash Equivalents: The carrying amount approximates the fair value
due to the short maturity of the cash equivalents.
Long-Term Debt and Capital Lease Obligations: The fair value of the
Company's long-term debt and capital lease obligations is estimated based on
the quoted market prices for the same or similar issues or on the current
rates offered to the Company for debt of the same remaining maturities. The
carrying amount approximates fair value since the Company's interest rates
approximate current interest rates.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses at the reporting
period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments"
("SFAS 133 as amended by SFAS 137"). SFAS 137 delays the effective date of
implementation of SFAS 133 by one year. SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
133 requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair market value. Presently, the
Company does not use derivative instruments either in hedging activities or as
investments. Accordingly, the Company believes that adoption of SFAS 133 will
have no impact on its financial position or results of operations.
F-11
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company has no comprehensive income items as defined in Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income".
2. MISSISSIPPI ACQUISITION
On December 10, 1999, the Company entered into two definitive agreements to
purchase all of the assets of the Casino Magic hotel, casino, golf resort,
recreational vehicle (RV) park and marina in Bay St. Louis, Mississippi and the
Boomtown Biloxi casino in Biloxi, Mississippi, from Pinnacle Entertainment, Inc.
formerly Hollywood Park, Inc. (NYSE:PNK) for $195 million which are contingent
upon each other. In addition to acquiring all of the operating assets and
related operations of the Casino Magic Bay St. Louis and Boomtown Biloxi
properties, the Company will enter into a licensing agreement to use the
Boomtown and Casino Magic names and marks at the properties being acquired. The
transaction was subject to certain closing conditions including the approval of
the Mississippi Gaming Commission, financing and expiration of the applicable
Hart-Scott-Rodino waiting period. As part of the agreement, the Company paid a
deposit of $5 million to an escrow account, which is refundable if certain
conditions are not met. On August 8, 2000, the Mississippi Acquisitions were
consummated. A portion of the proceeds of the new credit facility were used to
finance the acquisition. See Note 3 for additional information.
Unaudited pro forma financial information for the nine months ended
September 30, 1999 and 2000, as though the Mississippi Acquisitions had occurred
on January 1, 1999, is as follows:
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
---------------------
1999 2000
--------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Revenues................................................ $245,633 $299,463
Net income before extraordinary item.................... 5,484 15,975
Extraordinary item, net of income tax benefit........... -- (6,583)
Net income.............................................. 5,484 9,392
Net income per common share
Basic................................................. $ 0.37 $ 0.63
Diluted............................................... 0.36 0.61
Weighted average shares outstanding
Basic................................................. 14,812 14,984
Diluted............................................... 15,179 15,407
F-12
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations are as follows:
DECEMBER 31,
------------------- SEPTEMBER 30,
1998 1999 2000
-------- -------- -------------
(UNAUDITED)
(IN THOUSANDS)
Long-term debt
$350 million senior secured credit facility with banks and
institutional lenders. This credit facility is secured
by substantially all of the assets of the Company....... $ -- $ -- $308,625
$80 million Senior Notes, due December 15, 2004 with
interest at 10.625% per annum payable semi-annually. The
notes are unsecured and are unconditionally guaranteed
by certain subsidiaries of the Company.................. 69,000 69,000 --
Revolving credit facility payable to a bank group (see
additional information below under Credit
Facilities)............................................. 9,000 12,900 --
Term loan payable to a bank group due on December 31, 2002
with interest at various rates. This note is secured by
certain assets of the Company (see additional
information below under Term Loan)...................... 9,100 --
Other notes payable....................................... 246 213 174
Capital lease obligations................................... 10 -- --
------- ------- --------
78,256 91,213 308,799
Less current maturities..................................... 168 5,160 10,563
------- ------- --------
$78,088 $86,053 $298,236
======= ======= ========
CREDIT FACILITIES
The Company's Credit Facility, as amended, provides for a $20 million
revolving credit facility, including a $3 million sublimit for standby letters
of credit, which matures in December 2002 and a $5 million term loan. The
revolving credit facility is secured by substantially all of the assets of the
Company, except for the assets of the Charles Town facility. The revolving
credit facility provides for certain covenants, including those of a financial
nature. The $5.0 million term loan was repaid on December 16, 1999.
At the Company's option, the revolving facility may bear interest at the
highest of: (1) 1/2 of 1% in excess of the federal reserve reported certificate
of deposit rate, (2) the rate that the bank group announces from time to time as
its prime lending rate and (3) 1/2 of 1% in excess of the federal funds rate
plus an applicable margin of up to 2% or the revolving facility may also bear
interest at a rate tied to a eurodollar rate plus an applicable margin of up to
3%. The effective interest rate at December 31, 1999 was 8.93%.
Mandatory repayments of the revolving facility are required in an amount
equal to a percentage of the net cash proceeds from any issuance or incurrence
of equity or funded debt by the Company, that percentage to be dependent upon
the then outstanding balance of the revolving facility and the
F-13
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
Company's leverage ratio. Mandatory repayments of varying percentages are also
required in the event of either asset sales in excess of stipulated amounts or
defined excess cash flow.
At December 31, 1999, the Company was contingently obligated under letters
of credit with face amounts aggregating $2,015,000. This amount includes
$1,786,000 relating to the horsemens' account balances, and $100,000 for
Pennsylvania pari-mutuel taxes.
TERM LOAN
On December 13, 1999 the Company entered into a $20,000,000 Senior Secured
Multiple Draw Term Loan with a bank group. The term loan is payable in quarterly
installments of $1.3 On December 13, 1999 the Company entered into a $20.0
million Senior Secured Multiple million principle plus interest. The loan is
secured by the gaming equipment and Draw Term Loan with Bank of America as Agent
for a bank group. The term loan is payable improvements at the Charles Town
facility. At the Company's option the term loan may in quarterly installments of
$1.3 million principal plus interest. The loan is secured bear interest at the
highest of (1) 1/2 of 1% in excess of the federal reserve by gaming equipment
and improvements at the Charles Town Entertainment Complex. At the reported
certificate of deposit rate, (2) the rate that the bank group announces from
Company's option the term loan may bear interest at the highest of (1) 1/2 of
time to time as its prime lending rate and (3) 1/2 of 1% in excess of the 1% in
excess of the federal reserve reported certificate of deposit rate, (2) the rate
federal funds rate plus an applicable margin of up to 1.75% or the revolving
facility may that the bank group announces from time to time as its prime
lending rate and (3) also bear interest at a rate tied to a eurodollar rate plus
an applicable margin of up to 1/2 of 1% in excess of the federal funds rate plus
an applicable margin of up 2.75%. The outstanding amount under this credit
facility as of December 31, 1999 was to 1.75% or the facility may also bear
interest at a rate tied to a eurodollar rate plus $12.9 million at an interest
rate of 7.8125%. an applicable margin of up to 2.75%. The effective interest
rate at December 31, 1999 was 8.91%.
On September 3, 1998, the Company repurchased $11 million of the 10.625%
Senior Notes due 2004 at 97.25% of the principal amount ($10,697,500) plus
accrued interest of $253,229 in public market trading. In conjunction with the
repurchase of the notes, the Company recorded a write-off of deferred financing
costs associated with this portion of the long-term debt. The extinguishment of
these notes did not result in any material net loss.
CREDIT FACILITY REFINANCING
On August 8, 2000, the Company entered into a $350 million senior secured
credit facility with Lehman Brothers, Inc. and CIBC World Markets Corp. as
co-arrangers, among others. The proceeds of the credit facility were used to
finance the Mississippi Acquisitions, to pay off the Company's existing debts,
to tender for the outstanding 10 5/8% Senior Notes and for working capital
purposes. The credit facility provides for a $75 million revolving credit
facility maturing on August 8, 2005, a $75 million Tranche A term loan maturing
on August 8, 2005 and a $200 million Tranche B term loan maturing on August 8,
2006.
At the Company's option, the revolving credit facility and the Tranche A
term loan may bear interest at (1) the highest of 1/2 of 1% in excess of the
federal funds effective rate or the rate that the bank group 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%. At
the Company's option, the Tranche B term loan may bear interest at (1) the
highest of 1/2 of 1% in excess of the federal funds effective rate or the rate
that the bank group announces from time to time as its prime lending rate plus
an applicable margin of up to 3.25%, or (2) a rate tied to a eurodollar rate
plus an
F-14
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
applicable margin up to 4.00%. The credit facility provides for certain
covenants, including those of a financial nature. Substantially all of the
Company's assets are pledged as collateral under the Credit Agreement. The
outstanding amounts under the credit facility as of September 30, 2000 is as
follows (in millions):
Revolving credit facility................................... $ 36.0
Tranche A................................................... 73.1
Tranche B................................................... 199.5
------
Total....................................................... $308.6
======
On August 8, 2000, the Company paid off all of its outstanding $69 million
10 5/8% Senior Notes due 2004 (the "Notes"). As a result of the tender offer,
the Company paid a tender premium of $6.7 million.
The following is a schedule of future minimum repayments of long-term debt
as of December 31, 1999 in accordance with the terms of the new credit facility:
DECEMBER 31, (IN THOUSANDS)
- ------------ --------------
2000...................................................... $ 2,375
2001...................................................... 11,375
2002...................................................... 15,125
2003...................................................... 18,875
2004...................................................... 22,625
Thereafter................................................ 238,250
--------
Total minimum payments...................................... 308,625
Current maturities.......................................... 2,375
--------
Total noncurrent maturities................................. $306,250
========
4. COMMITMENTS AND CONTINGENCIES
OPERATING AGREEMENTS
In November 1997, the Company signed a new Totalisator services and
equipment agreement for all of its subsidiaries. Effective November 1, 1999 the
terms of the contract were amended and the contract was extended through May 31,
2005. The amended agreement provides for annual payments based on a specified
percentage of the total amount wagered at the Company's facilities with no
minimum annual payment.
The Company is also liable under numerous operating leases for automobiles,
other equipment and buildings, which expire through 2004. Total rental expense
under these agreements was $807,000, $1,169,000, and $1,296,000 for the years
ended December 31, 1997, 1998, and 1999, respectively. The
F-15
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
future lease commitments relating to noncancelable operating leases as of
December 31, 1999 are as follows:
(IN THOUSANDS)
--------------
2000........................................................ $1,468
2001........................................................ 1,387
2002........................................................ 1,218
2003........................................................ 1,124
2004........................................................ 1,069
Thereafter.................................................. 1,794
------
$8,060
======
On February 26, 1996, the Company entered into a joint venture agreement
(the "Charles Town Joint Venture") with Bryant Development Company and its
affiliates ("Bryant"), the holder of an option to purchase substantially all of
the assets of Charles Town Racing Limited Partnership and Charles Town Races,
Inc. (together, "Charles Town") relating to the Charles Town Race Track and
Shenandoah Downs (together, the "Charles Town Entertainment Complex") in
Jefferson County, West Virginia. Bryant had acquired its option from Showboat
Operating Company ("Showboat"). Showboat has retained an option (the "Showboat
Option") to operate any casino at the Charles Town Entertainment Complex in
return for a management fee (to be negotiated at the time, based on rates
payable for similar properties) and a right of first refusal to purchase or
lease the site of any casino at the Charles Town Entertainment Complex proposed
to be leased or sold and to purchase any interest proposed to be sold in any
such casino on the same terms offered by a third party or otherwise negotiated
with the Charles Town Joint Venture. The rights retained by Showboat under the
Showboat Option extend for a period of five years from November 6, 1996, the
date that the Charles Town Joint Venture exercised its option to purchase the
Charles Town Races, and expires thereafter unless legislation to permit casino
gaming at the Charles Town Entertainment Complex has been adopted prior to the
end of the five-year period. If such legislation has been adopted prior to such
time, then the rights of Showboat continue for a reasonable time (not less than
24 months) to permit completion of negotiations.
While the express terms of the Showboat Option do not specify which
activities at the Charles Town Entertainment Complex would constitute operation
of a casino, the Company believes that the installation and operation of gaming
devices linked to the lottery (like the gaming machines the Company has
installed and will continue to install) at the Charles Town Entertainment
Complex's racetrack would not trigger Showboat's right to exercise the Showboat
Option.
Pursuant to the terms of the Pocono Downs purchase agreement dated
November 27, 1996, the Company will be required to pay the sellers of Pocono
Downs an additional $10 million if, within five years after the consummation of
the Pocono Downs acquisition, Pennsylvania authorizes any additional form of
gaming in which the Company may participate. The $10 million payment would be
payable in annual installments of $2 million for five years, beginning on the
date that the Company first offers such additional form of gaming.
PROFIT SHARING PLANS
The Company has a profit sharing plan under the provisions of Section 401(k)
of the Internal Revenue Code, called The Penn National Gaming, Inc. Profit
Sharing Plan (the "Penn National 401(k) Plan") that cover all eligible employees
who are not members of a bargaining unit. The plan enables
F-16
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
employees choosing to participate to defer a portion of their salary in a
retirement fund to be administered by the Company. The Company's contributions
to the Penn National 401(k) Plan are set at 50% of employees elective salary
deferrals which may be made up to a maximum of 6% of employee compensation for
employees of Penn National Race Course and Pocono Downs. The Company made
contributions to the plan of approximately $145,000, $172,000 and $169,000, for
the years ended December 31, 1997, 1998 and 1999, respectively.
The Company also has a defined contribution plan called the Charles Town
Races Future Service Retirement Plan covering substantially all of its union
employees. Charles Town makes monthly contributions equal to the amount accrued
for retirement expense, which is calculated as .25% of the daily mutual handle
and .5% of the net video lottery revenues. Total contributions for the years
ended December 31, 1997, 1998 and 1999 were $114,000, $185,000 and $239,000,
respectively.
OTW AND OPERATING FACILITIES
On July On July 14, 1998, the Company entered into a lease agreement for an
OTW facility in East Stroudsburg. The lease is for approximately 14,000 square
feet at the Eagle's Glen Shopping Plaza located in East Stroudsburg,
Pennsylvania. The initial term of the lease is for ten years with two additional
five-year renewal options available. On November 6, 1998, the Company submitted
its application for approval by the Pennsylvania Harness Racing Commission. The
Pennsylvania Harness Racing Commission approved the application on February 23,
1999. The Company was denied building and zoning permits by the zoning office of
the Borough of East Stroudsburg and filed suit on November 13, 1998 to obtain
the permits. On May 17, 1999, the Court of Common Pleas of Monroe County granted
a peremptory judgment in favor of the Company that directed the Borough of East
Stroudsburg and its zoning officer to issue the required building and zoning
permits to construct the OTW facility. The Company started construction on the
$2 million facility in February 2000 with a projected opening date in the second
quarter of 2000.
On March 23, 1999, the Company entered into a new four-year, nine-month
purse agreement with the Horsemen's Benevolent and Protection Association, which
represents the horsemen at the Company's Penn National Race Course facility in
Grantville, Pennsylvania. The agreement ended an action by the horsemen which
began on February 16, and caused the Company to close Penn National Race Course
and its six affiliated OTWs. As a result of the action the Company incurred a
non-recurring $1,250,000 expense, primarily related to costs incurred to
maintain the closed facilities inclusive of employee salaries and rents, for
Horsemen's Action Expense. The initial term of the agreement ends on January 1,
2004 and automatically renews for another two year period, without change,
unless notice is given by either party at least ninety days prior to the end of
the initial term. On June 30, 1999, all the race tracks in West Virginia (the
"Tracks"), entered into a hardware and software purchase agreement (the
"Agreement") with International Game Technology ("IGT"), for the purchase of a
new video lottery central control computer system. The aggregate cost of the new
system is $5.5 million of which PNGI Charles Town Gaming LLC is obligated to pay
$1.4 million. On July 22, 1999, the Company submitted a check in the amount of
$257,000 as the initial deposit and issued a letter of credit in the amount of
$1,156,000 to secure the remaining payments due. In addition, the Tracks agreed
to collectively acquire from IGT at least one thousand video lottery terminals
by September 30, 1999. (Charles Town is to acquire 400 new terminals). The
Agreement also requires each track to pay to IGT the sum of $7.50 per terminal,
per day for each video lottery terminal offering progressive games operated
through the IGT central system. Installation of the new central system was
substantially complete on December 31, 1999.
F-17
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On December 17, 1999, the Company entered into a new three-year purse
agreement with the Pennsylvania Harness Horsemen's Association, Inc. which
represents the owners, trainers, and drivers at the Company's The Downs Racing,
Inc. facility in Wilkes-Barre, Pennsylvania. The contract term begins on
January 16, 2000 and ends on January 15, 2003.
On July 31, 2000, the Company entered into a definitive agreement to acquire
by merger the gaming assets of CRC Holdings, Inc. ("CRC") which does business as
Carnival Resorts and Casinos for $95.8 million and the assumption of
approximately $32 million in net debt (the "CRC Acquisition"). CRC is an
experienced operator of gaming facilities and the owner of approximately 59% of
Louisiana Casino Cruises, Inc. ("LCCI") the owner and operator of the Casino
Rouge, a riverboat gaming facility located on the east bank of the Mississippi
River in Baton Rouge, Louisiana. The Company also entered into a definitive
agreement with the minority owners of LCCI to acquire their approximately 41%
stake for $32.5 million. CRC also has a management contract for the Casino Rama
casino which terminates in 2011. Casino Rama is located approximately 80 miles
north of Toronto, Canada, in Orillia, Canada on land owned by the Chipewas of
Mnjikaning First Nation. Under the terms of the agreement, CRC will divest all
of its non-gaming related assets prior to closing. The transaction, expected to
close in the first half of 2001, is subject to regulatory and other approvals in
both Louisiana and Canada, financing, the expiration of the applicable
Hart-Scott-Rodino waiting period and other customary closing conditions.
NEW JERSEY JOINT VENTURE
On January 28, 1999, the Company, along with its Joint Venture partner,
Greenwood, New Jersey, Inc. ("Greenwood") agreed to purchase certain assets of
the Garden State Park and Freehold Raceway, both located in New Jersey (the
"Acquisition").
The purchase price for the Acquisition was approximately $46 million
(subject to reduction of certain disputed items, for which amounts have been
placed in escrow). The purchase price consisted of $23 million in cash and $23
million pursuant to two deferred purchase price promissory notes in the amount
of $22 million and $1 million each.
On July 29, 1999, after receiving the necessary approvals from the New
Jersey Racing Commission and the necessary consents from the holders of its
10.625% Senior Notes due 2004, Series B, the Company completed its investment in
the Joint Venture, pursuant to which Pennwood Racing, Inc. was formed with
Greenwood New Jersey, Inc. (a wholly-owned subsidiary of Greenwood Racing, Inc.
the owner of Philadelphia Park Race Track). Pursuant to the Joint Venture
Agreement, the Company agreed to guarantee severally: (i) up to 50% of the
obligation of the Joint Venture under its Put Option Agreement ($17.5 million)
with Credit Suisse First Boston Mortgage Capital LLC ("CSFB"); (ii) up to 50% of
the Joint Venture obligation for the seven year lease at Garden State Park;
(iii) up to 50% of the Joint Venture obligation to International Thoroughbred
Breeders, Inc. for the contingent purchase price notes ($10.0 million) relating
to the operation, subject to passage by the New Jersey legislature, by the Joint
Venture of OTWs and telephone wagering accounts in New Jersey. In conjunction
with the closing, the Company entered into a Debt Service Maintenance Agreement
with Commerce Bank, N.A. for the funding of a $23.0 million credit facility to
the Joint Venture. The Joint Venture Agreement provides for a limited obligation
of the Company of $11.5 million subject to limitations provided for in the
Company's 10.625% Senior Notes Indenture. The Company's investment in the Joint
Venture is accounted for under the equity method, original investments are
recorded at cost and adjusted by the Company's share of income or losses of the
Joint Venture. The income from July 30, 1999 through December 31, 1999 of the
Joint Venture is included in earnings of
F-18
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
unconsolidated affiliates in the accompanying Consolidated Statements of Income
for the year ended December 31, 1999.
Summarized balance sheet information for the Joint Venture as of
December 31, 1999 is as follows (in thousands):
Current assets.............................................. $ 7,324
Property, plant and equipment, net.......................... 30,786
Other....................................................... 18,158
-------
Total assets................................................ $56,268
=======
Current liabilities......................................... $ 7,453
Long-term liabilities....................................... 46,221
Members' equity............................................. 2,594
-------
Total liabilities and members' equity....................... $56,268
=======
Summarized results of operations of the unconsolidated Joint Venture
(commencing on July 30, 1999) for the year ended December 31, 1999 is as follows
(in thousands):
Revenues.................................................... $27,982
-------
Operating expenses.......................................... 23,005
-------
EBITDA*..................................................... 4,977
-------
Net Income.................................................. 2,196
-------
- ------------
* Earnings before interest, depreciation, taxes, and amortization.
5. INCOME TAXES
The provision for income taxes charged to operations was as follows:
YEAR ENDED DECEMBER 31, 1997 1998 1999
- ----------------------- -------- -------- --------
(IN THOUSANDS)
Current tax expense
Federal........................................... $2,006 $3,374 $2,759
State............................................. 399 755 108
------ ------ ------
Total current....................................... 2,405 4,129 2,867
------ ------ ------
Deferred tax expense (benefit)
Federal........................................... (56) 378 1,227
State............................................. (41) 12 (317)
------ ------ ------
Total deferred...................................... (97) 390 910
------ ------ ------
Total provision..................................... $2,308 $4,519 $3,777
====== ====== ======
F-19
5. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities are comprised of the following:
DECEMBER 31, 1998 1999
- ------------ -------- --------
Deferred tax assets
Reserve for debit balances of horsemens' accounts, bad
debts restructuring charges and litigation............ $ 458 $ 888
======= =======
Deferred tax liabilities
Property, plant and equipment........................... $11,471 $12,924
======= =======
The following is a reconciliation of the statutory federal income tax rate
to the actual effective income tax rate for the following periods:
YEAR ENDED DECEMBER 31, 1997 1998 1999
- ----------------------- -------- -------- --------
Percent of pretax income
Federal tax rate.................................... 34.0% 34.0% 34.0%
Increase in taxes resulting from state and local
income taxes, net of federal tax benefit.......... 3.9 4.2 2.0
Permanent difference relating to amortization of
goodwill.......................................... .9 .4 .2
Other miscellaneous items........................... (.8) (1.0) (.3)
---- ---- ----
38.0% 37.6% 35.9%
==== ==== ====
6. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest was $4,346,000, $8,192,000 and
$8,742,000 in 1997, 1998 and 1999, respectively.
Cash paid during the year for income taxes was $3,649,000, $4,207,000, and
$2,970,000 in 1997, 1998 and 1999, respectively.
Cash paid during the nine months ended September 30, 2000 and 1999 for
interest was $10,025,000 and $4,715,000, respectively.
Cash paid during the nine months ended September 30, 2000 and 1999 for
income taxes was $2,984,000 and $1,463,000, respectively.
7. COMMON STOCK
On February 18, 1997, the Company completed a secondary public offering of
1,725,000 shares of its common stock. The net proceeds of $23 million were used
to reduce $19 million of the Term Loan amounts outstanding under the Credit
Facility with the balance of the proceeds used to finance a portion of the cost
of the refurbishment of the Charles Town Entertainment Complex (see Note 2 for
Acquisitions).
In 1998, the Company purchased 424,700 shares of its common stock in public
market trading. The total cost of these transactions was $2,378,465 or $5.60 per
share average price.
In April 1994, the Company's Board of Directors and shareholders adopted and
approved the Stock Option Plan (the "Plan"). On April 30, 1997, the shareholders
and the Board of Directors approved an increase in the number of authorized
shares underlying stock options to be granted from 1,290,000 to 2,000,000
shares. Therefore, the Plan permits the grant of options to purchase up to
F-20
7. COMMON STOCK (CONTINUED)
2,000,000 shares of Common Stock, subject to antidilution adjustments, at a
price per share no less than 100% of the fair market value of the Common Stock
on the date an option is granted with respect to incentive stock options only.
The price would be no less than 110% of fair market value in the case of an
incentive stock option granted to any individual who owns more than 10% of the
total combined voting power of all classes of outstanding stock. The Plan
provides for the granting of both incentive stock options intended to qualify
under Section 422 of the Internal Revenue Code of 1986, and nonqualified stock
options which do not so qualify. Unless the Plan is terminated earlier by the
Board of Directors, the Plan will terminate in April 2004.
Stock options that expire between August 20, 2000 and January 4, 2009 have
been granted to officers and directors to purchase Common Stock at prices
ranging from $3.33 to $17.63 per share. All options and warrants were granted at
market prices at date of grant. The following table contains information on
stock options issued under the Plan for the three-year period ended
December 31, 1999:
EXERCISE
OPTION PRICE RANGE AVERAGE
SHARES PER SHARE PRICE
--------- --------------- --------
Outstanding at January 1, 1997............ 979,750 $ 3.33 to 17.63 $ 9.10
Granted................................... 100,000 11.50 to 16.63 15.59
Exercised................................. (39,250) 3.33 to 5.63 4.01
---------
Outstanding at December 31, 1997.......... 1,040,500 3.33 to 17.63 7.31
Granted................................... 195,000 6.44 to 15.50 9.06
Exercised................................. (11,500) 3.33 to 5.63 4.88
Canceled.................................. (39,500) 5.63 to 15.50 13.36
---------
Outstanding at December 31, 1998 1,184,500 3.33 to 17.63 9.50
Granted................................... 144,500 6.88 to 9.13 6.98
Exercised................................. (27,000) 5.63 5.63
Canceled.................................. (31,750) 5.63 to 15.50 13.40
---------
Outstanding at December 31, 1999.......... 1,270,250 3.33 to 17.63 7.27
---------
In addition, 300,000 Common Stock options were issued to the Chairman
outside the Plan on October 23, 1996. These options were issued at $17.63 per
share and are exercisable through October 23, 2006.
Exercisable at year-end:
EXERCISE WEIGHTED
OPTION PRICE RANGE AVERAGE
SHARES PER SHARE PRICE
--------- --------------- ---------
1997................................... 653,833 $ 3.33 to 17.63 $ 7.08
1998................................... 1,034,666 3.33 to 17.63 8.36
1999................................... 1,242,625 3.33 to 17.63 9.49
Options available for future grant:
1994 PLAN
---------
1999........................................................ 541,750
--------
F-21
7. COMMON STOCK (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1999:
RANGES TOTAL
-------------------- ----------
$ 3.33 $ 5.58 $ 3.33
Range of exercise prices..................... to $5.50 to $17.63 to $ 17.63
-------- --------- ----------
Outstanding options
Number outstanding at December 31, 1999.... 637,250 933,000 1,570,250
Weighted average remaining contractual life
(years).................................. 3.84 5.94 5.09
Weighted average exercise price............ $ 3.84 $ 12.94 $ 9.25
Exercisable options
Number outstanding at December 31, 1999.... 637,250 605,375 1,242,625
Weighted average exercise price............ $ 3.84 $ 15.44 $ 9.49
Warrants were granted to the underwriters of the Company's initial public
offering at a price of $4.00 per share and were all exercised prior to their
expiration on June 2, 1999.
A summary of the warrant transactions follows:
EXERCISE
PRICE WEIGHTED
WARRANT RANGE AVERAGE
SHARES PER SHARE PRICE
-------- --------- --------
Warrants outstanding at January 1, 1997......... 195,000 $4.00 $4.00
Warrants exercised.............................. (43,000) 4.00 4.00
--------
Warrants outstanding at December 31, 1997....... 152,000 4.00 4.00
Warrants exercised.............................. (3,000) 4.00 4.00
--------
Warrants outstanding at December 31, 1998....... 149,000 4.00 4.00
Warrants exercised.............................. (149,000) 4.00 4.00
--------
Warrants outstanding at December 31, 1999....... --
--------
During 1995, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which has recognition provisions that establish a
fair value based method of accounting for stock-based employee compensation
plans and established fair value as the measurement basis for transactions in
which an entity acquires goods or services from nonemployees in exchange for
equity instruments. SFAS 123 also has certain disclosure provisions. Adoption of
the recognition provisions of SFAS 123 with regard to these transactions with
nonemployees was required for all such transactions entered into after
December 15, 1994, and the Company adopted these provisions as required. The
recognition provision with regard to the fair value based method of accounting
for stock-based employee compensation plans is optional. Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employers" ("APB 25"),
uses what is referred to as an intrinsic value based method of accounting. The
Company has decided to continue to apply APB 25 for its stock-based employee
compensation arrangements. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Company's employee stock option plan
been determined based on the fair value at the grant date for awards under
F-22
7. COMMON STOCK (CONTINUED)
the plan consistent with the method of SFAS 123, the Company's net income and
net income per share would have been reduced to the pro forma amounts indicated
below:
YEAR ENDED DECEMBER 31, 1997 1998 1999
- ----------------------- ---------- ---------- ----------
Net income
As reported............................ $2,287,000 $7,503,000 $6,733,000
Pro forma.............................. 1,660,000 6,827,000 6,143,000
Basic net income per share
As reported............................ $ .15 $ .50 $ .45
Pro forma.............................. .11 .45 .41
Diluted net income per share
As reported............................ $ .15 $ .49 $ .44
Pro forma.............................. .11 .44 .40
The fair value of each option and warrant grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in 1997, 1998 and 1999: dividend yield of
0%; expected volatility of 20%; risk-free interest rate of 6%; and expected
lives of five years. The effects of applying SFAS 123 in this 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.
8. SHAREHOLDER RIGHTS PLAN
On May 20, 1998, the Board of Directors of the Company authorized and
declared a dividend distribution of one Preferred Stock purchase right (the
"Rights") for each outstanding share of the Company's common stock, par value
$.01 per share (the "Common Shares"), payable to shareholders of record at the
close of business on March 19, 1999. Each Right entitles the registered holder
to purchase from the Company one one-hundredth of a share (a "Preferred Stock
Fraction"), or a combination of securities and assets of equivalent value, at a
purchase price of $40.00 per Preferred Stock Fraction (the "Purchase Price"),
subject to adjustment. The description and terms of the Rights are set forth in
a Rights Agreement (the "Rights Agreement") dated March 2, 1999 between the
Company and Continental Stock Transfer and Trust Company as Rights Agent. All
terms not otherwise defined herein are used as defined in the Rights Agreement.
The Rights will be exercisable only if a person or group acquires 15% or
more of the Company's common stock (the "Stock Acquisition Date"), announces a
tender or exchange offer that will result in such person or group acquiring 20%
or more of the outstanding common stock or is a beneficial owner of a
substantial amount of Common Shares (at least 10%) whose ownership may have a
material adverse impact ("Adverse Person") on the business or prospects of the
Company. The Company will be entitled to redeem the Rights at a price of $.01
per Right (payable in cash or stock) at anytime until 10 days following the
Stock Acquisition Date or the date on which a person has been determined to be
an Adverse Person. If the Company is involved in certain transactions after the
Rights become exercisable, a Holder of Rights (other than Rights owned by a
shareholder who has acquired 15% or more of the Company's outstanding common
stock or is determined to be an Adverse Person, which Rights become void) is
entitled to buy a number of the acquiring company's Common Shares or the
Company's common stock, as the case may be, having a market value of twice the
exercise price of each Right. A potential dilutive effect may exist upon the
exercise of the Rights. Until a Right is exercised, the holder will have no
rights as a stockholder of the Company, including, without limitations, the
right to vote as a stockholder or to receive dividends. The Rights are not
exercisable
F-23
8. SHAREHOLDER RIGHTS PLAN (CONTINUED)
until the Distribution Date and will expire at the close of business on
March 18, 2009, unless earlier redeemed or exchanged by the Company.
9. LOSS FROM RETIREMENTS OF DEBT
In 1997, the Company recorded an extraordinary loss of $1,482,000 after
taxes for the early retirement of debt. The extraordinary loss consists
primarily of write-offs of deferred finance costs associated with the retired
notes and legal and bank fees relating to the early extinguishment of the debt.
At September 30, 2000, the Company charged to operations deferred financing
costs, amounting to $4,513,000 as a result of the refinancing discussed in
Note 3. In addition, the Company paid a fender premium of $6,685,000. The total,
$11,198,000 has been reflected as an extraordinary item, net of an income tax
benefit of $4,165,000 in the consolidated statements of income for the nine
months ended September 30, 2000.
10. SITE DEVELOPMENT AND RESTRUCTURING CHARGES
During 1997, the Company incurred site development ($1,735,000) and
restructuring ($702,000) charges of $2,437,000. The site development charges
consist of $800,000 related to the Charles Town Races facility and $935,000
related to the abandonment of certain proposed operating sites during 1997. The
restructuring charges primarily consist of: $350,000 in severance termination
benefits and other charges at the Charles Town Races facility; $300,000 for the
restructuring of the Erie, Pennsylvania OTW facility and $52,000 of property and
equipment written off in connection with the discontinuation of Penn National
Speedway, Inc. operations during 1997. These charges, net of income taxes,
decreased the 1997 net income and diluted net income per share by $1,462,000 and
$.09 per share, respectively.
On February 11, 2000, the Tennessee Supreme Court denied the Company's
application for permission to appeal the decision of the Court of Appeals. In
the appeal, the Company was asking the Supreme Court to take the jurisdictional
question from the Appellate Court and to review the substantive issue of whether
pari-mutuel wagering on horse racing is lawful in Tennessee under the existing
statute without the Tennessee Commission. As a result of this decision, the
Company has taken a charge against earnings in the year 1999 of $535,000 for
costs incurred for its Tennessee racing license.
11. LITIGATION SETTLEMENT
In December 1997, Amtote international, Inc. ("Amtote"), filed an action
against the Company and the Charles Town Joint Venture in the United States
District Court for the Northern District of West Virginia. In its complaint,
Amtote stated that the Company and the Charles Town Joint Venture allegedly
breached certain contracts with Amtote and its affiliates when it entered into a
wagering services contract with a third party. On September 30, 1999 the United
States District Court for the Northern District of West Virginia rendered a
decision which awarded liquidated damages to Amtote. On February 11, 2000, the
Company and Amtote entered into a settlement agreement in which the Company
which paid Amtote in full satisfaction of the judgement the sum of
$1.5 million, which is included in accrued expenses.
F-24
12. SUBSIDIARY GUARANTORS
Summarized financial information for years ended December 31, 1997, 1998,
and 1999 for Penn National Gaming, Inc. ("Parent"), the Subsidiary Guarantors
and Subsidiary Nonguarantors is as follows:
SUBSIDIARY
PARENT SUBSIDIARY NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ----------- ----------- ------------ ------------
YEAR ENDED DECEMBER 31, 1997
CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS)
Total revenues................................... $ 6,887 $ 90,320 $16,484 $ (2,155) $ 111,536
Total operating expenses......................... 3,434 81,822 18,700 (2,155) 101,801
-------- --------- ------- --------- ---------
Income from operations........................... 3,453 8,498 (2,216) -- 9,735
Other income (expenses).......................... (3,565) 1,612 (1,705) -- (3,658)
-------- --------- ------- --------- ---------
Income before income taxes....................... (112) 10,110 (3,921) -- 6,077
Taxes on income.................................. (38) 3,909 (1,563) -- 2,308
Extraordinary item............................... (142) (768) (572) (1,482)
-------- --------- ------- --------- ---------
Net income (loss)................................ $ (216) $ 5,433 $(2,930) $ -- $ 2,287
======== ========= ======= ========= =========
CONSOLIDATED STATEMENT OF CASH FLOWS (IN
THOUSANDS)
Net cash provided by (used in) operating
activities..................................... $ 2,559 $(169,422) $ 882 $ 176,659 $ 10,678
Net cash provided by (used in) investing
activities..................................... (8,995) 68,529 40 (107,194) (47,620)
Net cash provided by (used in) financing
activities..................................... 22,361 100,266 -- (69,465) 53,162
-------- --------- ------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.................................... 15,925 (627) 922 -- 16,220
Cash and cash equivalents at beginning of
period......................................... 3,015 2,597 22 -- 5,634
-------- --------- ------- --------- ---------
Cash and cash equivalents at end of period....... $ 18,940 $ 1,970 $ 944 $ -- $ 21,854
======== ========= ======= ========= =========
AS OF DECEMBER 31, 1998
CONSOLIDATED BALANCE SHEET (IN THOUSANDS)
Current assets................................... $ 3,558 $ 6,944 $ 4,204 $ (592) $ 14,114
Net property, plant and equipment................ 13,576 62,598 44,578 -- 120,752
Other assets..................................... 102,400 153,818 1,779 (232,065) 25,932
-------- --------- ------- --------- ---------
Total............................................ $119,534 $ 223,360 $50,561 $(232,657) $ 160,798
======== ========= ======= ========= =========
Current liabilities.............................. $ 1,000 $ 13,961 $ 7,520 $ (10,278) $ 12,203
Long-term liabilities............................ 81,037 78,527 47,334 (117,339) 89,559
Shareholders' equity (deficiency)................ 37,497 130,872 (4,293) (105,040) 59,036
-------- --------- ------- --------- ---------
Total............................................ $119,534 $ 223,360 $50,561 $(232,657) $ 160,798
======== ========= ======= ========= =========
YEAR ENDED DECEMBER 31, 1999
CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS)
Total revenues................................... $ 10,789 $ 89,142 $56,883 $ (2,749) $ 154,065
Total operating expenses......................... 4,612 81,187 51,557 (2,749) 134,607
-------- --------- ------- --------- ---------
Income from operations........................... 6,177 7,955 5,326 -- 19,458
Other income (expenses).......................... (5,535) 2,842 (4,743) -- (7,436)
-------- --------- ------- --------- ---------
Income before income taxes....................... 642 10,797 583 -- 12,022
Taxes on income.................................. 100 4,186 233 -- 4,519
-------- --------- ------- --------- ---------
Net income....................................... $ 542 $ 6,611 $ 350 $ -- $ 7,503
======== ========= ======= ========= =========
F-25
12. SUBSIDIARY GUARANTORS (CONTINUED)
SUBSIDIARY
PARENT SUBSIDIARY NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ----------- ----------- ------------ ------------
YEAR ENDED DECEMBER 31, 1998
CONSOLIDATED STATEMENT OF CASH FLOWS (IN
THOUSANDS)
Net cash provided by (used in) operating
activities..................................... $ (2,072) $ (4,121) $ 1,267 $ 16,792 $ 11,866
Net cash provided by (used in) investing
activities..................................... (13,387) 290 909 (10,145) (22,333)
Net cash provided by (used in) financing
activities..................................... (1,480) 3,566 -- (6,647) (4,561)
-------- --------- ------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.................................... (16,939) (265) 2,176 -- (15,028)
Cash and cash equivalents at beginning of
period......................................... 18,940 1,970 944 -- 21,854
-------- --------- ------- --------- ---------
Cash and cash equivalents at end of period....... $ 2,001 $ 1,705 $ 3,120 $ -- $ 6,826
======== ========= ======= ========= =========
AS OF DECEMBER 31, 1999
CONSOLIDATED BALANCE SHEET (IN THOUSANDS)
Current assets................................... $ 3,651 $ 7,669 $ 6,523 $ 139 $ 17,982
Net property, plant and equipment................ 813 79,932 46,126 -- 126,871
Other assets..................................... 116,170 155,509 1,620 (227,552) 45,747
-------- --------- ------- --------- ---------
Total............................................ $120,634 $ 243,110 $54,269 $(227,413) $ 190,600
======== ========= ======= ========= =========
Current liabilities.............................. $ (29) $ 25,731 $ 7,664 $ (8,015) $ 25,351
Long-term liabilities............................ 82,091 86,556 47,459 (117,129) 98,977
Shareholders' equity (deficiency)................ 38,572 130,823 (854) (102,269) 66,272
-------- --------- ------- --------- ---------
Total............................................ $120,634 $ 243,110 $54,269 $(227,413) $ 190,600
======== ========= ======= ========= =========
YEAR ENDED DECEMBER 31, 1999
CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS)
Total revenues................................... $ 4,147 $ 93,651 $79,772 $ (6,112) $ 171,458
Total operating expenses......................... (3,393) 91,448 71,698 (6,112) 153,641
-------- --------- ------- --------- ---------
Income from operations........................... 7,540 2,203 8,074 -- 17,817
Other income(expenses)........................... (5,693) 3,020 (4,634) -- (7,307)
-------- --------- ------- --------- ---------
Income before income taxes....................... 1,847 5,223 3,440 -- 10,510
Taxes on income.................................. 642 3,135 -- -- 3,777
-------- --------- ------- --------- ---------
Net income....................................... $ 1,205 $ 2,088 $ 3,440 $ -- $ 6,733
======== ========= ======= ========= =========
YEAR ENDED DECEMBER 31, 1999
CONSOLIDATED STATEMENT OF CASH FLOWS (IN
THOUSANDS)
Net cash provided by (used in) operating
activities..................................... $ 6,287 $ 14,842 $ 4,313 $ (2,981) $ 22,461
Net cash provided by (used in) investing
activities..................................... (6,516) (20,245) (3,205) 210 (29,756)
Net cash provided by financing activities........ 772 6,236 124 2,771 9,903
-------- --------- ------- --------- ---------
Net increase in cash and cash equivalents........ 543 833 1,232 -- 2,608
Cash and cash equivalents at beginning of
period......................................... 2,001 1,705 3,120 -- 6,826
-------- --------- ------- --------- ---------
Cash and cash equivalents at end of period....... $ 2,544 $ 2,538 $ 4,352 $ -- $ 9,434
======== ========= ======= ========= =========
F-26
MARDI GRAS CASINO CORP.
A MISSISSIPPI CORPORATION
Financial Statements
As of August 7, 2000 and December 31, 1999
Together with Auditors' Report
F-27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Mardi Gras Casino Corp.:
We have audited the accompanying balance sheets of Mardi Gras Casino Corp.
(a Mississippi corporation and a wholly-owned subsidiary of Pinnacle
Entertainment, Inc.) as of August 7, 2000 and December 31, 1999, and the related
statements of operations, changes in stockholder's equity and cash flows for the
220-day period ended August 7, 2000 and the years ended December 31, 1999 and
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mardi Gras Casino Corp. as
of August 7, 2000 and December 31, 1999, and the results of its operations and
its cash flows for the 220-day period ended August 7, 2000 and the years ended
December 31, 1999 and 1998 in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
September 8, 2000
F-28
MARDI GRAS CASINO CORP.
BALANCE SHEETS--AUGUST 7, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS)
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,728 $ 3,642
Accounts receivable, net of allowance for doubtful
accounts of $243 in 2000 and $217 in 1999............... 915 587
Prepaid expenses and other current assets................. 888 572
Inventories............................................... 593 666
Deferred tax assets....................................... 290 285
-------- --------
Total current assets.................................. 5,414 5,752
Property, plant and equipment, net.......................... 70,773 71,798
Investment in affiliate..................................... 932 932
Other assets................................................ 127 202
-------- --------
Total assets.......................................... $ 77,246 $ 78,684
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,344 $ 1,497
Accrued expenses.......................................... 2,842 3,016
Accrued payroll and related benefits...................... 1,982 2,829
Accrued progressive gaming liabilities.................... 759 1,076
Notes payable............................................. 14 148
-------- --------
Total current liabilities............................. 9,941 8,566
Notes payable............................................. 34 49
Due to affiliates......................................... 49,380 59,409
Deferred tax liabilities.................................. 2,790 2,860
Commitments and contingencies............................. -- --
-------- --------
Total noncurrent liabilities.......................... 52,204 62,318
Stockholder's equity:
Common stock ($0.01 par, 3,000 shares issued and
outstanding)............................................ -- --
Additional paid-in capital................................ 39,688 39,688
Accumulated deficits...................................... (24,587) (31,888)
-------- --------
Total stockholder's equity............................ 15,101 7,800
-------- --------
$ 77,246 $ 78,684
======== ========
The accompanying notes are an integral part of these financial statements.
F-29
MARDI GRAS CASINO CORP.
STATEMENTS OF OPERATIONS
FOR THE 220-DAY PERIOD ENDED AUGUST 7, 2000 AND THE YEARS ENDED DECEMBER 31,
1999 AND 1998
(IN THOUSANDS)
2000 1999 1998
-------- -------- --------
Revenues:
Gaming.................................................... $49,224 $80,349 $81,890
Food and beverage......................................... 2,321 3,821 3,681
Hotel and recreational vehicle park....................... 1,273 1,797 1,800
Golf...................................................... 1,297 1,694 1,617
Other income.............................................. 1,875 1,234 1,216
------- ------- -------
55,990 88,895 90,204
------- ------- -------
Expenses:
Gaming.................................................... 29,126 47,446 48,174
Food and beverage......................................... 2,358 3,723 3,426
Hotel and recreational vehicle park....................... 710 893 923
Golf...................................................... 962 1,576 1,477
General and administrative................................ 7,829 12,291 12,789
Other..................................................... 608 1,043 1,143
Depreciation and amortization............................. 2,843 5,949 6,354
------- ------- -------
44,436 72,921 74,286
------- ------- -------
Income from operations...................................... 11,554 15,974 15,918
Other (income) expense:
Interest expense, net of interest capitalized............. 9 31 6,247
Interest income........................................... (3) (110) (38)
(Gain) loss from disposal of assets....................... 301 (66) 1,872
Equity in losses of affiliate............................. -- -- 2,867
------- ------- -------
307 (145) 10,948
------- ------- -------
Income before income taxes and extraordinary item........... 11,247 16,119 4,970
Income tax expense........................................ 3,946 5,656 1,922
------- ------- -------
Income before extraordinary item............................ 7,301 10,463 3,048
Extraordinary item -- debt redemption costs associated with
early extinguishment of debt, net of income tax........... -- -- 2,116
------- ------- -------
Net income after extraordinary item......................... $ 7,301 $10,463 $ 932
======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-30
MARDI GRAS CASINO CORP.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE 220-DAY PERIOD ENDED AUGUST 7, 2000 AND THE YEARS ENDED DECEMBER 31,
1999 AND 1998
(IN THOUSANDS)
COMMON ADDITIONAL ACCUMULATED
STOCK PAID-IN CAPITAL DEFICITS TOTAL
--------- --------------- ----------- --------
BALANCES, DECEMBER 31, 1997....................... $ -- $39,688 $(25,067) $14,621
Net income...................................... -- -- 932 932
Dividends declared.............................. -- -- (18,216) (18,216)
--------- ------- -------- -------
Balances, December 31, 1998....................... -- 39,688 (42,351) (2,663)
Net income...................................... -- -- 10,463 10,463
--------- ------- -------- -------
Balances, December 31, 1999....................... -- 39,688 (31,888) 7,800
Net income...................................... -- -- 7,301 7,301
--------- ------- -------- -------
Balances, August 7, 2000.......................... $ -- $39,688 $(24,587) $15,101
========= ======= ======== =======
The accompanying notes are an integral part of these financial statements.
F-31
MARDI GRAS CASINO CORP.
STATEMENTS OF CASH FLOWS
FOR THE 220-DAY PERIOD ENDED AUGUST 7, 2000 AND THE YEARS ENDED DECEMBER 31,
1999 AND 1998
(IN THOUSANDS)
2000 1999 1998
--------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 7,301 $ 10,463 $ 932
Adjustments to reconcile net income to net cash provided
by
Operating activities:
Depreciation and amortization......................... 2,845 5,949 6,354
Loss (gain) on disposal of property and equipment..... 301 (66) 1,872
Equity in losses of affiliate......................... -- -- 2,867
(Increase) decrease in accounts receivable............ (328) 515 219
(Increase) decrease in prepaid expenses............... (316) 25 386
(Increase) decrease in inventories.................... 73 (72) (107)
Increase (decrease) in deferred taxes, net............ (75) 166 (554)
Increase (decrease) in accounts payable............... 2,847 (172) (673)
Increase (decrease) in accrued expenses............... (174) 53 949
Increase (decrease) in accrued payroll and related
benefits............................................ (847) (65) 552
Increase (decrease) in accrued gaming liabilities..... (317) (116) 278
Increase (decrease) in due to affiliates, net......... (10,029) (12,234) 8,474
--------- --------- --------
Net cash provided by operating activities........... 1,281 4,446 21,549
--------- --------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment.............. 148 137 142
Acquisitions of property and equipment.................... (2,269) (4,998) (2,372)
(Increase) decrease in deposits and other long-term
assets.................................................. 75 (29) 35
--------- --------- --------
Net cash used in investing activities............... (2,046) (4,890) (2,195)
--------- --------- --------
Cash flows from financing activities:
Dividends declared........................................ -- -- (18,216)
Principal payments on notes payable....................... (149) (201) (415)
--------- --------- --------
Net cash used in financing activities............... (149) (201) (18,631)
--------- --------- --------
Net increase (decrease) in cash and cash equivalents........ (914) (645) 723
Cash and cash equivalents, beginning of year................ 3,642 4,287 3,564
--------- --------- --------
Cash and cash equivalents, end of year...................... $ 2,728 $ 3,642 $ 4,287
========= ========= ========
The accompanying notes are an integral part of these financial statements.
F-32
MARDI GRAS CASINO CORP.
NOTES TO FINANCIAL STATEMENTS
AUGUST 7, 2000 AND DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Mardi Gras Casino Corp. (the "Company" or "Mardi Gras") is a Mississippi
Corporation and a wholly owned subsidiary of Casino Magic Corp., which as a
result of a merger on October 15, 1998 (the "Merger") is a wholly owned
subsidiary of Pinnacle Entertainment, Inc. ("Pinnacle Entertainment"), (formerly
known as Hollywood Park, Inc.). The Company operates Casino Magic Bay St. Louis
in Bay St. Louis, Mississippi.
SALE TO PENN NATIONAL
On December 10, 1999, Pinnacle Entertainment announced it had entered into
definitive agreements with subsidiaries of Penn National Gaming, Inc. ("Penn
National") to sell Mardi Gras and Mississippi I Gaming L.P. (d/b/a Boomtown
Biloxi), casino operations for $195,000,000 in cash. Subsidiaries of Penn
National agreed to purchase all of the operating assets and certain liabilities
and related operations of Mardi Gras and Boomtown Biloxi properties, including
the 590 acres of land at Mardi Gras and the leasehold rights at Boomtown Biloxi.
On August 8, 2000, Pinnacle Entertainment completed the casino sales to Penn
National and received $195,000,000 in cash.
GAMING REVENUES AND PROMOTIONAL ALLOWANCES
In accordance with common industry practice, casino revenues are the net of
gaming wins less losses. Revenues exclude the retail value of complimentary
rooms, food and beverage furnished gratuitously to customers. The estimated cost
of providing these promotional allowances (which are included in gaming
expenses) during the 220-day period ended August 7, 2000, and the years ended
December 31, 1999 and 1998, was $5,260,516, $8,415,144 and $9,005,589,
respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash, certificates of deposit and short
term investments with original maturities of 90 days or less.
CAPITALIZED INTEREST
No capitalized interest was recorded during the 220-day period ended
August 7, 2000, and the years ended December 31, 1999 and 1998.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight line method over estimated useful lives of 15 to 31.5 years for barges
and buildings, the term of the leases for leasehold improvements, and 5 to
7 years for furniture and equipment. Normal repairs and maintenance are charged
to expense as incurred. Expenditures which materially extend the useful lives of
capital assets are capitalized.
F-33
MARDI GRAS CASINO CORP.
NOTES TO FINANCIAL STATEMENTS
AUGUST 7, 2000 AND DECEMBER 31, 1999 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS
The Company has a 50 percent investment in Casino Magic Finance Corp. and
accounts for its investment in this affiliate using the equity method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Due to the short-term maturity of financial instruments classified as
current assets and liabilities, the fair value approximates the carrying value.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") 109, Accounting for Income Taxes, whereby deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that included the enactment date.
LONG-LIVED ASSETS
The Company periodically reviews the propriety of the carrying amount of
long-lived assets and any related intangible assets as well as the related
amortization period to determine whether current events or circumstances warrant
adjustments to the carrying value and/or estimates of useful lives. This
evaluation consists of comparing asset carrying values to the company's
projection of the undiscounted cash flows over the remaining lives of the
assets, in accordance with Statement of Financial Accounting Standards No. 121
Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
Be Disposed Of ("SFAS No. 121"). Based on its review, the Company believes that
as of August 7, 2000, there were no significant impairments of its long-lived
assets or intangible assets.
CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES:
GAMING REGULATION LICENSING
The Company conducts gaming operations in the State of Mississippi that
depends on the continued licensability or qualification of the Company. Such
licensing and qualifications are reviewed periodically by the Mississippi Gaming
Commission.
COMPETITION
The gaming industry is extremely competitive and the Company faces
competition from new developments in the United States, specifically in
Mississippi and Louisiana.
F-34
MARDI GRAS CASINO CORP.
NOTES TO FINANCIAL STATEMENTS
AUGUST 7, 2000 AND DECEMBER 31, 1999 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEVERE WEATHER
The Mississippi Gulf Coast is subject to severe weather, including
hurricanes. Severe weather could cause damage to the Company's casino facility.
The Company maintains insurance against casualty losses resulting from severe
weather and against business interruption. Existing insurance may not adequately
compensate the Company for future loss of profits resulting from severe weather.
The Company received an insurance settlement in the amount of $1,136,254 during
1999 for property damage and business interruption.
USE OF ESTIMATES
Financial statements prepared in accordance with generally accepted
accounting principles require the use of management estimates, including
estimates used to evaluate the recoverability of property, plant and equipment,
to determine the fair value of financial instruments, and to determine
litigation related obligations. Actual results could differ from estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 and 1998 balances to be
consistent with the 2000 financial statement presentation.
2. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest during the 220-day period ended August 7, 2000, and
the years ended December 31, 1999, and 1998 was $12,916, $3,789, and $102,221,
respectively.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of August 7, 2000 and December 31, 1999
consisted of the following:
(IN THOUSANDS)
2000 1999
-------- --------
Land and improvements..................................... $37,688 $37,888
Buildings and improvements................................ 25,297 25,119
Barges and improvements................................... 11,685 11,685
Furniture and equipment................................... 32,950 31,748
Construction in progress.................................. 883 1,456
------- -------
108,503 107,896
------- -------
Less accumulated depreciation............................. (37,730) (36,098)
------- -------
$70,773 $71,798
======= =======
F-35
MARDI GRAS CASINO CORP.
NOTES TO FINANCIAL STATEMENTS
AUGUST 7, 2000 AND DECEMBER 31, 1999 (CONTINUED)
4. NOTES PAYABLE AND EXTRAORDINARY ITEM
Notes payable as of August 7, 2000 and December 31, 1999 consisted of the
following:
(IN THOUSANDS)
2000 1999
-------- --------
Secured note payable........................................ $ -- $ 61
Capital lease obligations................................... 48 136
---- -----
48 197
Less current maturities..................................... (14) (148)
---- -----
$ 34 $ 49
==== =====
Maturities of the Company's capital lease obligations as of August 7, 2000
are as follows:
(IN THOUSANDS)
YEAR ENDED
- ----------
December 31, 2001........................................... $14
December 31, 2002........................................... 16
December 31, 2003........................................... 18
---
$48
===
The carrying amounts and fair values of notes payable and current maturities
of long-term debt as of August 7, 2000 and December 31, 1999 approximate the
carrying values.
On October 14, 1993, the 50% owned affiliate of the Company, Casino Magic
Finance Corp. ("Finance Corp."), sold $135,000,000 in aggregate principal amount
of 11 1/2% First Mortgage Notes due 2001 (the "Finance Notes") and warrants to
purchase 810,000 shares of Casino Magic Corp. common stock. Finance Corp. is a
special purpose finance subsidiary formed specifically to issue the Finance
Notes. The Finance Notes were governed by an Indenture (the "Indenture") entered
into on the same date between Finance Corp., the Company and IBJ Schroder
Bank & Trust Company as the Trustee.
The Finance Notes were secured by a pledge of the stock of Finance Corp.,
Mardi Gras Casino Corp. and Biloxi Casino Corp., an affiliate of the Company,
along with the accounts receivable, inventories, property and equipment,
property held for development and deposits of the Company and Casino
Magic-Biloxi.
In connection with the Merger, Pinnacle Entertainment elected to redeem the
Finance Notes for the redemption amount of 103.833% in accordance with the
Indenture. On October 15, 1998, Pinnacle Entertainment deposited the amount
required to redeem the Finance Notes with the Trustee and the Trustee discharged
the debt and released the collateral on that date. Accordingly, the Company's
proportionate share of redemption costs of $2,116,213, net of related income tax
benefit, were recorded in the period ended December 31, 1998 and are reflected
as an extraordinary item on the accompanying Statement of Operations. These
costs primarily include the redemption premium.
F-36
MARDI GRAS CASINO CORP.
NOTES TO FINANCIAL STATEMENTS
AUGUST 7, 2000 AND DECEMBER 31, 1999 (CONTINUED)
5. INCOME TAXES
The Company is included in the consolidated federal tax return of Pinnacle
Entertainment and allocated income tax expense as if it were a separate
taxpayer.
Provision (benefit) for income taxes for the 220-day period ended August 7,
2000 and the years ended December 31, 1999 and 1998 are as follows (including a
current tax benefit of $1,139,499 associated with an extraordinary item in
1998):
(IN THOUSANDS)
CURRENT DEFERRED TOTAL
-------- -------- --------
220-day period ended August 7, 2000
U.S. Federal..................................... $4,018 $ (74) $3,944
State............................................ 2 -- 2
------ ------- ------
$4,020 $ (74) $3,946
====== ======= ======
Year ended December 31, 1999:
U.S. Federal..................................... $5,488 $ 166 $5,654
State............................................ 2 -- 2
------ ------- ------
$5,490 $ 166 $5,656
====== ======= ======
Year ended December 31, 1998:
U.S. Federal..................................... $2,091 $(1,308) $ 783
State............................................ -- -- --
------ ------- ------
$2,091 $(1,308) $ 783
====== ======= ======
The following table reconciles the Company's income tax expense (based on
its effective tax rate) to the federal statutory tax rate of 35% (including a
current tax benefit of $1,139,499 associated with an extraordinary item in
1998):
(IN THOUSANDS)
FOR THE 200- FOR THE YEARS
DAY PERIOD ENDED
ENDED DECEMBER 31,
AUGUST 7, -------------------
2000 1999 1998
------------ -------- --------
Income before income tax expense, at the statutory
rate............................................ $3,936 $5,642 $600
Expenses which were non-deductible for tax
purposes........................................ 8 12 183
State income taxes, net of federal tax benefits... 2 2 --
Other............................................. -- -- --
------ ------ ----
Income tax expense................................ $3,946 $5,656 $783
====== ====== ====
F-37
MARDI GRAS CASINO CORP.
NOTES TO FINANCIAL STATEMENTS
AUGUST 7, 2000 AND DECEMBER 31, 1999 (CONTINUED)
5. INCOME TAXES (CONTINUED)
At August 7, 2000 and December 31, 1999, the tax effects of temporary
differences that gave rise to significant portions of the deferred tax assets
and deferred tax liabilities are presented below:
(IN THOUSANDS)
2000 1999
-------- --------
Current deferred tax assets:
Vacation and sick pay accrual........................... $ 203 $ 211
Bad debt allowance...................................... 28 119
Chips and tokens........................................ 95 --
Other................................................... 4 4
------- -------
Current deferred tax assets............................. 330 334
Current deferred tax liabilities:
Accrued bonus........................................... (40) (49)
------- -------
Net current deferred tax assets........................... $ 290 $ 285
======= =======
Non-current deferred tax assets:
Net operating loss carryforwards........................ $ 125 $ 126
Acquisition costs....................................... 48 80
Other................................................... 9 72
------- -------
Non-current deferred tax assets....................... 182 278
------- -------
Non-current deferred tax Liabilities:
Depreciation............................................ (2,972) (3,138)
------- -------
Net non-current deferred tax liabilities.................. $ 2,790 $ 2,860
======= =======
6. EMPLOYEE BENEFITS
Pinnacle Entertainment offers a 401(k) Investment Plan (the "401(k) Plan")
which is subject to the provisions of the Employee Retirement Income Security
Act of 1994. The 401(k) Plan is open to all employees of the Company who have
completed a minimum of 500 hours of service. Employees may contribute up to 18%
of pretax income (subject to the legal limitation of $10,500 for 2000). The
Company offers discretionary matching, and for the 220-day period ended
August 7, 2000, and the years ended December 31, 1999 and 1998 matching
contributions to the 401(k) Plan totaled $118,475, $257,732 and $106,351,
respectively.
7. COMMITMENTS AND CONTINGENCIES
DEBT GUARANTEES
On August 6, 1997, Pinnacle Entertainment issued $125,000,000 of Series A
9.5% Senior Subordinated Notes due 2007 (the "9.5% Notes"). In February of 1999,
Pinnacle Entertainment issued $350,000,000 of 9.25% Senior Subordinating Notes
due 2007 (the "9.25% Notes).
F-38
MARDI GRAS CASINO CORP.
NOTES TO FINANCIAL STATEMENTS
AUGUST 7, 2000 AND DECEMBER 31, 1999 (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Both the 9.25% and 9.5% Notes are unsecured obligations of Pinnacle
Entertainment, Inc. guaranteed by all material restricted subsidiaries of the
Company, as defined in the indentures, including the Mardi Gras Casino Corp. The
indentures governing both the 9.25% and 9.5% Notes contain certain covenants
limiting the ability of Pinnacle Entertainment and its restricted subsidiaries
to incur additional indebtedness, issue preferred stock, pay dividends or make
certain distributions, repurchase equity interests or subordinated indebtedness,
create certain liens, enter into certain transactions with affiliates, sell
assets, issue or sell equity interests in its subsidiaries, or enter into
certain mergers and consolidations.
BUS LITIGATION
On May 9, 1999, a bus owned and operated by Custom Bus Charters, Inc. was
involved in an accident in New Orleans, Louisiana while en route to the
Company's Casino in Bay St. Louis, Mississippi. To date multiple deaths and
numerous injuries are attributed to this accident and Mardi Gras, together with
several other defendants, have been named in fifty-four (54) lawsuits, each
seeking unspecified damages due to the deaths and injuries sustained in this
accident. While the Company cannot predict the outcome of the litigation, the
Company believes it is not liable for any damages arising from this accident and
the Company, together with its applicable insurers, which have reserved their
rights with respect to insurance coverage relating to this matter, intend to
vigorously defend these actions.
WRONGFUL DEATH LITIGATION
On February 18, 2000, three Casino Magic Bay St. Louis patrons, after
leaving the casino property, were involved in a vehicular accident which
resulted in the death of two of the individuals and injury to the third. On
April 13, 2000, a lawsuit was filed on behalf of the injured individual and one
of the deceased individuals against the Company seeking compensatory damages in
the amount of $2,000,000 and punitive damages in the amount of $10,000,000. The
suit alleges, among other things, that Mardi Gras employees negligently served
alcoholic beverages to the three individuals and the acts and omissions of the
employees were the proximate cause of the accident. While the Company cannot
predict the outcome of this action, it believes that the plaintiffs' claims are
without merit and intends to vigorously defend this action.
Mardi Gras is party to a number of other pending legal proceedings, though
management does not expect that the outcome of such proceedings, either
individually or in the aggregate, will have a material effect on the Company's
financial results.
8. LEASE OBLIGATIONS
As of August 7, 2000, all operating leases, which were obligations of Mardi
Gras and having non-cancelable terms in excess of one year, were legally
assigned to Pinnacle Entertainment. Rent expense for the 220-day period ended
August 7, 2000, and the years ended December 31, 1999 and 1998 was $220,910,
$189,508 and $139,500, respectively.
F-39
MISSISSIPPI-I-GAMING LP
A MISSISSIPPI LIMITED PARTNERSHIP
Financial Statements
As of August 7, 2000 and December 31, 1999
Together with Auditors' Report
F-40
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Mississippi-I Gaming, L.P.:
We have audited the accompanying balance sheets of Mississippi-I Gaming, L.P.
(the "Partnership") as of August 7, 2000 and December 31, 1999 and the related
statements of operations, partners' capital and cash flows for the 220 day
period ended August 7, 2000, and years ended December 31, 1999 and 1998. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mississippi-I Gaming, L.P. as
of August 7, 2000 and December 31, 1999 and the results of its operations and
its cash flows for the 220 day period ended August 7, 2000, and years ended
December 31, 1999 and 1998, in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
September 8, 2000
F-41
MISSISSIPPI-I GAMING, L.P.
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
AUGUST 7, DECEMBER 31,
2000 1999
--------- ------------
Current Assets:
Cash and cash equivalents................................. $ 3,334 $ 2,974
Receivables, net of allowance for doubtful accounts of $72
and $59................................................. 186 969
Prepaid expenses and other current assets................. 1,490 1,414
Inventories............................................... 446 527
------- -------
Total current assets.................................... 5,456 5,884
Property, plant and equipment, net........................ 43,588 43,934
Other assets.............................................. 2,044 2,059
------- -------
$51,088 $51,877
------- -------
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities:
Accounts payable.......................................... $ 3 $ 551
Accrued compensation...................................... 968 1,225
Other accrued liabilities................................. 3,346 4,445
Current portion of notes payable, Boomtown, Inc........... 32,711 36,259
Current portion of notes payable, other................... -- 1,250
------- -------
37,028 43,730
Commitments and Contingencies............................... -- --
Partner's Capital:
General partner........................................... 748 453
Limited partners.......................................... 13,312 7,694
------- -------
Total partners' capital................................. 14,060 8,147
------- -------
$51,088 $51,877
======= =======
The accompanying notes are an integral part of these financial statements.
F-42
MISSISSIPPI-I GAMING, L.P.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
220 DAY
PERIOD ENDED YEAR ENDED YEAR ENDED
AUGUST 7, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Revenues:
Gaming................................................ $35,616 $58,191 $57,054
Food and beverage..................................... 3,864 6,270 5,097
Other................................................. 1,732 3,365 2,933
------- ------- -------
41,212 67,826 65,084
Costs and Expenses:
Gaming................................................ 18,390 29,366 29,598
Food and beverage..................................... 4,440 7,555 6,380
Administrative........................................ 9,275 15,954 16,088
Other................................................. 883 1,669 1,603
Depreciation and amortization......................... 2,227 3,846 3,667
------- ------- -------
35,215 58,390 57,336
------- ------- -------
Income from Operations.................................. 5,997 9,436 7,748
Other Expense:
Interest Expense, net of interest income.............. 84 150 4,319
------- ------- -------
Net Income.............................................. $ 5,913 $ 9,286 $ 3,429
======= ======= =======
Net Income Allocated to Partners:
General partner....................................... $ 295 $ 416 $ 26
Limited partners...................................... 5,618 8,870 3,403
------- ------- -------
$ 5,913 $ 9,286 $ 3,429
======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-43
MISSISSIPPI-I GAMING, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(IN THOUSANDS)
LIMITED PARTNERS TOTAL
-------------------- PARTNERS'
GENERAL BOOMTOWN, CAPITAL
PARTNER INC. OTHER (DEFICIT)
-------- --------- -------- ---------
Year ended, December 31, 1997............................. $ 11 $(3,856) $(723) $(4,568)
Transfer of partnership interest........................ -- (601) 601 --
Net Income.............................................. 26 3,281 122 3,429
---- ------- ----- -------
Year Ended, December 31, 1998............................. 37 (1,176) -- (1,139)
Net income.............................................. 416 8,870 -- 9,286
---- ------- ----- -------
Year ended, December 31, 1999............................. 453 7,694 -- 8,147
Net income.............................................. 295 5,618 -- 5,913
---- ------- ----- -------
220 day period ended, August 7, 2000...................... $748 $13,312 $ -- $14,060
==== ======= ===== =======
The accompanying notes are an integral part of these financial statements.
F-44
MISSISSIPPI-I GAMING, L.P.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
220 DAY
PERIOD ENDED YEAR ENDED YEAR ENDED
AUGUST 7, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Cash Flows from Operating Activities:
Net income............................................ $ 5,913 $ 9,286 $ 3,429
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 2,227 3,846 3,667
Loss on disposal of property and equipment........ 50 327 94
Decrease (increase) in receivables, net........... 783 (830) (26)
Decrease (increase) in prepaid expenses and other
current assets.................................. 5 475 (802)
Decrease in other assets.......................... 15 1 8
Decrease in accounts payable...................... (548) (85) (34)
Increase (decrease) in accrued compensation....... (257) 257 45
Increase (decrease) in accrued liabilities........ (1,099) 215 980
Decrease in accrued interest payable, Boomtown,
Inc............................................. -- (1,442) (3,547)
------- ------- -------
Net cash provided by operating activities....... 7,089 12,050 3,814
------- ------- -------
Cash Flows from Investing Activities:
Additions to property, plant and equipment............ (1,958) (3,669) (2,980)
Proceeds from sale of property and equipment.......... 27 4 353
------- ------- -------
Net cash used in investing activities........... (1,931) (3,665) (2,627)
------- ------- -------
Cash Flows from Financing Activities:
(Payment of) proceeds from note payable, Boomtown,
Inc., net........................................... (3,548) (8,712) 517
Payment of notes payable, other....................... (1,250) (1,254) (1,292)
------- ------- -------
Net cash used in financing activities........... (4,798) (9,966) (775)
------- ------- -------
Increase (Decrease) in Cash and Cash Equivalents........ 360 (1,581) 412
Cash and Cash Equivalents, at the beginning of the
year.................................................. 2,974 4,555 4,143
------- ------- -------
Cash and Cash Equivalents, at the end of the year....... $ 3,334 $ 2,974 $ 4,555
======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-45
MISSISSIPPI-I GAMING, L.P.
NOTES TO FINANCIAL STATEMENTS
AUGUST 7, 2000 AND DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Mississippi-I Gaming, L.P. ("the Partnership") is a Mississippi limited
partnership, which is owned and controlled by Pinnacle Entertainment, Inc.
("Pinnacle Entertainment"), (formerly known as Hollywood Park, Inc.), through
its wholly owned subsidiaries, Boomtown, Inc. ("Boomtown") and Bayview Yacht
Club, Inc., which own 95% and 5%, respectively, of the Mississippi Partnership.
On September 11, 1998, Pinnacle Entertainment, through its Boomtown subsidiary,
purchased for $400,000 the 15% of the Partnership owned by Eric Skrmetta
("Skrmetta"). The Partnership owns and operates a casino ("Boomtown Biloxi"),
which opened in July 1994. Boomtown Biloxi occupies nineteen acres in Biloxi,
Mississippi.
SALE TO PENN NATIONAL
On December 10, 1999, Pinnacle Entertainment announced it had entered into
definitive agreements with subsidiaries of Penn National Gaming, Inc. ("Penn
National") to sell its Casino Magic Bay St. Louis, Mississippi, and Boomtown
Biloxi, Mississippi, casino operations for $195,000,000 in cash. Subsidiaries of
Penn National agreed to purchase all of the operating assets and certain
liabilities and related operations of the Casino Magic Bay St. Louis and
Boomtown Biloxi properties, including the 590 acres of land at Casino Magic Bay
St. Louis and the leasehold rights at Boomtown Biloxi.
On August 8, 2000, Pinnacle Entertainment completed the casino sales to Penn
National and received $195,000,000 in cash.
GAMING REVENUES AND PROMOTIONAL ALLOWANCES
In accordance with common industry practice, casino revenues are the net of
gaming wins less losses. Revenues exclude the retail value of complimentary
rooms, food and beverage furnished gratuitously to customers. The estimated cost
of providing these promotional allowances (which are included in gaming
expenses) during the periods ended August 7, 2000, December 31, 1999 and 1998,
was $2,712,145, $4,186,000 and $4,454,000, respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash, certificates of deposit and short
term investments with original maturities of 90 days or less.
CAPITALIZED INTEREST
No capitalized interest was recorded during the 220-day period ended
August 7, 2000 and the years ended December 31, 1999 and 1998.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight line method over estimated useful lives, ranging from three to
thirty-five years. Normal repairs and maintenance are charged to expense as
incurred. Expenditures which materially extend the useful lives of capital
assets are capitalized.
F-46
MISSISSIPPI-I GAMING, L.P.
NOTES TO FINANCIAL STATEMENTS
AUGUST 7, 2000 AND DECEMBER 31, 1999 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Due to the short-term maturity of financial instruments classified as
current assets and liabilities, the fair value approximates the carrying value.
INCOME TAXES
The Partnership is not subject to state or federal income taxes. The
Partnership's income or loss is allocated to the partners and included in their
respective income tax returns.
LONG-LIVED ASSETS
The Partnership periodically reviews the propriety of the carrying amount of
long-lived assets and any related intangible assets as well as the related
amortization period to determine whether current events or circumstances warrant
adjustments to the carrying value and/or estimates of useful lives. This
evaluation consists of comparing asset carrying values to the Partnership's
projection of the undiscounted cash flows over the remaining lives of the
assets, in accordance with Statement of Financial Accounting Standards No. 121
Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
Be Disposed Of ("SFAS No. 121"). Based on its review, Partnership management
believes that as of August 7, 2000, there were no significant impairments of its
long-lived assets or intangible assets.
CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES:
GAMING REGULATION LICENSING
The Partnership conducts gaming operations in the State of Mississippi that
depends on the continued licensability or qualification of the Partnership. Such
licensing and qualifications are reviewed periodically by the Mississippi Gaming
Commission.
COMPETITION
The gaming industry is extremely competitive and the Partnership faces
competition from new developments in the United States, specifically in
Mississippi and Louisiana.
SEVERE WEATHER
The Mississippi Gulf Coast is subject to severe weather, including
hurricanes. Severe weather could cause damage to the Partnership's casino
facility. The Partnership maintains insurance against casualty losses resulting
from severe weather and against business interruption. Such insurance may not
adequately compensate the Partnership for loss of profits resulting from severe
weather. On September 25, 1998, the Partnership suspended operations due to
Hurricane Georges, and the casino remained closed until October 1, 1998. The
Partnership received an insurance settlement for $895,000 during 1999 for
property damage and business interruption.
F-47
MISSISSIPPI-I GAMING, L.P.
NOTES TO FINANCIAL STATEMENTS
AUGUST 7, 2000 AND DECEMBER 31, 1999 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
HIGHWAY CLOSURE
During the 220 day period ended August 7, 2000, the Partnership received an
insurance settlement for $150,000 for business interruption resulting from the
temporary closure of the Partnership's main highway access.
USE OF ESTIMATES
Financial statements prepared in accordance with generally accepted
accounting principles require the use of management estimates, including
estimates used to evaluate the recoverability of property, plant and equipment,
to determine the fair value of financial instruments, and to determine
litigation related obligations. Actual results could differ from estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 and 1998 balances to be
consistent with the 2000 financial statement presentation.
2. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest during the 220 day period ended August 7, 2000, and
years ended December 31, 1999 and 1998 was $84,000, $222,000 and $280,000,
respectively.
3. OTHER LONG TERM ASSETS
Other long term assets as of August 7, 2000 and December 31, 1999 included
$2,000,000 which is prepayment of the 99th year of the land lease with Skrmetta.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
(IN THOUSANDS)
AUGUST 7, DECEMBER 31,
2000 1999
--------- ------------
Land and land improvements............................ $ 1,406 $ 1,236
Buildings and building improvements................... 41,988 41,417
Equipment............................................. 15,609 14,464
Construction in progress.............................. 163 326
-------- --------
59,166 57,443
Less: Accumulated depreciation........................ (15,578) (13,509)
-------- --------
$ 43,588 $ 43,934
======== ========
F-48
MISSISSIPPI-I GAMING, L.P.
NOTES TO FINANCIAL STATEMENTS
AUGUST 7, 2000 AND DECEMBER 31, 1999 (CONTINUED)
5. SECURED AND UNSECURED NOTES PAYABLE
Notes payable consisted of the following at December 31, 1999. There were no
balances outstanding as of August 7, 2000.
(IN THOUSANDS)
DECEMBER 31,
1999
------------
Secured notes payable....................................... $1,250
------
1,250
Less: current maturities.................................... (1,250)
------
$ --
======
As of August 7, 2000 and December 31, 1999 the Partnership had an
outstanding note payable to Boomtown in the amounts of $32,711,000 and
$36,259,000, respectively. These amounts primarily related to funds invested by
Boomtown for the initial construction of the property, and the net of subsequent
cash transfers to Boomtown from the Partnership, and from Boomtown to the
Partnership. Interest on the notes payable to Boomtown was fixed at 11.5%. In
September 1998, Boomtown, Inc. discontinued charging interest to the
Partnership.
On August 4, 1997, Pinnacle Entertainment executed an agreement on behalf of
the Partnership to purchase the barge that Boomtown Biloxi sits upon and the
associated building shell for $5,250,000. The Partnership had been leasing these
assets. In connection therewith, the Partnership had made a down payment of
$1,500,000 upon signing the agreement, with the balance payable in three equal
annual installments of $1,250,000, the last of which was paid in 1999, with
interest set at the prime rate as of the first day of each quarter.
6. EMPLOYEE BENEFITS
Pinnacle Entertainment has a 401(k) Investment Plan (the "401(k) Plan")
which is subject to the provisions of the Employee Retirement Income Security
Act of 1994. The 401(k) Plan is open to all employees of the Partnership who
have completed a minimum of 500 hours of service. Employees may contribute up to
18% of pretax income (subject to the legal limitation of $10,000 for 1999). The
Partnership offers discretionary matching, and for the 220 day period ended
August 7, 2000, and years ended December 31, 1999 and 1998 matching
contributions to the 401(k) Plan totaled $47,486, $166,239 and $157,491,
respectively.
7. COMMITMENTS AND CONTINGENCIES
DEBT GUARANTEES
On August 6, 1997, Pinnacle Entertainment issued $125,000,000 of Series A
9.5% Senior Subordinated Notes due 2007 (the "9.5% Notes"). In February of 1999,
Pinnacle Entertainment issued $350,000,000 of 9.25% Senior Subordinating Notes
due 2007 (the "9.25% Notes").
Both the 9.25% and 9.5% Notes are unsecured obligations of Pinnacle
Entertainment, Inc. guaranteed by all material restricted subsidiaries of the
Company, as defined in the indentures, including the Partnership. The indentures
governing both the 9.25% and 9.5% Notes contain certain
F-49
MISSISSIPPI-I GAMING, L.P.
NOTES TO FINANCIAL STATEMENTS
AUGUST 7, 2000 AND DECEMBER 31, 1999 (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
covenants limiting the ability of Pinnacle Entertainment and its restricted
subsidiaries to incur additional indebtedness, issue preferred stock, pay
dividends or make certain distributions, repurchase equity interests or
subordinated indebtedness, create certain liens, enter into certain transactions
with affiliates, sell assets, issue or sell equity interests in its
subsidiaries, or enter into certain mergers and consolidations.
TIDELANDS LEASE
The Mississippi Partnership leases submerged tidelands at the Boomtown
Biloxi site from the State of Mississippi. The lease has a ten-year term,
(entered into in 1994) with a five-year option to renew. Lease rent for each of
the first three years of the lease was $525,000 and $425,000 for the third and
fourth years. During 1999, the Partnership was notified of a rate increase for
the sixth through tenth years. The State of Mississippi has increased the rent
to $620,000 based on the Consumer Price Index ("CPI").
8. LEASE OBLIGATIONS AND LEASEHOLD RIGHTS
As of August 7, 2000, all operating leases, which were obligations of
Boomtown Biloxi and having non-cancelable terms in excess of one year, were
legally assigned to Boomtown. Total rent expense for these lease obligations for
the 220 day period ended August 7, 2000, and years ended December 31, 1999 and
1998 was $703,246, $986,126, and $901,917, respectively.
In addition, the Partnership leases land from Skrmetta for use by Boomtown
Biloxi. The lease term is 99 years and is cancelable upon one year's notice. The
lease called for an initial deposit by the Company of $2,000,000 and for annual
base lease rent payments of $2,000,000 and percentage rent equal to 5.0% of
adjusted gaming win (as defined in the lease) over $25,000,000.00. Skrmetta
agreed to provide the land, free of annual base rent, for two years in exchange
for a 15% interest in the Company, which was subsequently acquired by Boomtown
(see Note 1). During the 220 day period ended August 7, 2000 and years ended
December 31, 1999 and 1998 the Partnership paid lease rent to Skrmetta of
$2,121,679, $3,519,349 and $3,116,131, respectively.
F-50
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of CRC Holdings, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of CRC
Holdings, Inc. Gaming Division (the "Company") at November 30, 1998 and 1999,
and the results of its operations and its cash flows for each of the three years
in the period ended November 30, 1999 in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Miami, Florida
February 11, 2000, except for the second paragraph of Note 1 which is as of
July 31, 2000.
F-51
CRC HOLDINGS, INC. -- GAMING DIVISION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOVEMBER 30,
------------------- AUGUST 31,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents................................. $15,575 $ 22,395 $21,533
Trade accounts receivable, net of allowance for doubtful
accounts of $298, $274 and $348 at November 30, 1998 and
1999, and August 31, 2000, respectively................. 8,454 9,552 9,719
Receivables............................................... 6,381 7,754 6,250
Deferred income tax....................................... 2,175 1,595 667
Other current assets...................................... 1,949 2,471 1,995
------- -------- -------
Total current assets.................................... 34,534 43,767 40,164
Property and equipment, net................................. 41,880 42,742 42,980
Receivables, net............................................ 12,188 5,938 1,250
Goodwill, net............................................... 3,466 3,367 3,293
Other assets................................................ 6,661 4,286 3,778
------- -------- -------
Total Assets............................................ $98,729 $100,100 $91,465
======= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.......................................... $ 3,069 $ 2,137 $ 2,847
Due to affiliates and officers............................ 146 164 168
Accrued expenses.......................................... 10,668 16,922 13,024
Current portion of long-term debt......................... 3,445 6,333 6,275
------- -------- -------
Total current liabilities............................... 17,328 25,556 22,314
Deferred compensation plan liability........................ 1,738 1,826 2,085
Long-term debt.............................................. 62,462 58,958 54,250
Deferred income tax......................................... 2,994 4,044 4,478
Other liabilities........................................... 102 87 43
------- -------- -------
Total liabilities....................................... 84,624 90,471 83,170
------- -------- -------
Redeemable preferred stock and common stock warrants of
subsidiary................................................ 4,131 -- --
------- -------- -------
Commitments and contingencies (Note 10)
Minority interest........................................... 4 51 1,365
Stockholders' Equity
Common stock $.005 par value; 20,000 shares authorized;
10,742 shares issued and outstanding.................... 54 54 54
Additional paid-in capital................................ 18,135 10,335 2,268
(Accumulated deficit) retained earnings................... (8,181) (804) 4,617
Cumulative translation adjustment......................... (38) (7) (9)
------- -------- -------
Total stockholders' equity.............................. 9,970 9,578 6,930
------- -------- -------
Total liabilities and stockholders' equity................ $98,729 $100,100 $91,465
======= ======== =======
F-52
CRC HOLDINGS, INC.--GAMING DIVISION
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED NINE MONTHS
NOVEMBER 30, ENDED AUGUST 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
Revenues
Casino....................................... $67,694 $68,845 $82,250 $62,001 $67,751
Food and beverage............................ 7,266 6,174 7,465 5,434 6,083
Management service fees...................... 11,976 14,800 15,790 11,796 10,177
Less: promotional allowances................. (5,216) (4,174) (5,057) (3,611) (4,506)
------- ------- ------- ------- -------
Net revenues................................... 81,720 85,645 100,448 75,620 79,505
------- ------- ------- ------- -------
Operating Expenses
Casino....................................... 31,826 33,302 38,439 28,641 31,603
Food and beverage............................ 1,317 1,539 1,659 1,361 908
Management service and operating costs....... 29,540 28,850 30,323 21,795 25,315
Depreciation and amortization................ 4,571 5,004 5,628 4,133 3,833
------- ------- ------- ------- -------
Total operating expenses................... 67,254 68,695 76,049 55,930 61,659
------- ------- ------- ------- -------
Income from operations before equity in net
losses of affiliates......................... 14,466 16,950 24,399 19,690 17,846
Equity in net losses of affiliates............. (27) (174) -- -- --
------- ------- ------- ------- -------
Income from operations......................... 14,439 16,776 24,399 19,690 17,846
------- ------- ------- ------- -------
Other Income (Expense)
Interest income.............................. 1,842 2,249 2,200 1,711 1,237
Interest expense............................. (8,824) (8,896) (8,478) (6,549) (5,486)
Foreign currency gains....................... 1,029 1,418 157 179 (105)
Common and redeemable preferred stock
dividends of subsidiary.................... (364) (1,094) (1,253) (1,050) --
Other income (expense)....................... (12) 254 (505) (180) (259)
------- ------- ------- ------- -------
Total other income (expense)............... (6,329) (6,069) (7,879) (5,889) (4,613)
------- ------- ------- ------- -------
Income before provision for income taxes,
minority interest and extraordinary loss..... 8,110 10,707 16,520 13,801 13,233
Provision for income taxes..................... 3,861 719 7,191 5,821 5,466
------- ------- ------- ------- -------
Income before minority interest and
extraordinary loss........................... 4,249 9,988 9,329 7,980 7,767
Minority interest.............................. -- (108) 221 170 2,346
------- ------- ------- ------- -------
Income before extraordinary loss............... 4,249 10,096 9,108 7,810 5,421
Extraordinary loss from early extinguishment of
debt, net of income tax benefit of $1,115,
$1,106, and $1,106 for the periods ended
November 30, 1997 and 1999 and August 31,
1999, respectively........................... (1,385) -- (1,731) (1,731) --
------- ------- ------- ------- -------
Net income..................................... $ 2,864 $10,096 $ 7,377 $ 6,079 $ 5,421
======= ======= ======= ======= =======
F-53
CRC HOLDINGS, INC. -- GAMING DIVISION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED NOVEMBER 30, 1997, 1998 AND 1999
AND NINE MONTH PERIOD ENDED AUGUST 31, 2000 (UNAUDITED)
(IN THOUSANDS)
TOTAL
COMMON STOCK ADDITIONAL CUMULATIVE STOCKHOLDERS'
------------------- PAID-IN ACCUMULATED TRANSLATION EQUITY
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT (DEFICIT)
-------- -------- ---------- ----------- ----------- -------------
Balance, November 30, 1996...... 10,621 $53 $20,757 $(21,141) $(43) $ (374)
Net change in hospitality
division intercompany
account....................... -- -- (2,259) -- -- (2,259)
Net income...................... -- -- -- 2,864 -- 2,864
Other comprehensive income:
Foreign currency translation
adjustment.................. -- -- -- -- 69 69
------ --- ------- -------- ---- -------
Comprehensive income............ -- -- -- -- -- 2,933
------ --- ------- -------- ---- -------
Balance, November 30, 1997...... 10,621 53 18,498 (18,277) 26 300
------ --- ------- -------- ---- -------
Additional common shares
issued........................ 121 1 (1) -- -- --
Net change in hospitality
division intercompany
account....................... -- -- (362) -- -- (362)
Net income...................... -- -- -- 10,096 -- 10,096
Other comprehensive income:
Foreign currency translation
adjustment.................. -- -- -- -- (64) (64)
------ --- ------- -------- ---- -------
Comprehensive income............ -- -- -- -- -- 10,032
------ --- ------- -------- ---- -------
Balance, November 30, 1998...... 10,742 54 18,135 (8,181) (38) 9,970
------ --- ------- -------- ---- -------
Net change in hospitality
division intercompany
account....................... -- -- (7,800) -- -- (7,800)
Net income...................... -- -- -- 7,377 -- 7,377
Other comprehensive income:
Foreign currency translation
adjustment.................. -- -- -- -- 31 31
------ --- ------- -------- ---- -------
Comprehensive income............ -- -- -- -- -- 7,408
------ --- ------- -------- ---- -------
Balance, November 30, 1999...... 10,742 54 10,335 (804) (7) 9,578
------ --- ------- -------- ---- -------
Net change in hospitality
division intercompany account
(unaudited)................... -- -- (8,067) -- -- (8,067)
Net income (unaudited).......... -- -- -- 5,421 -- 5,421
Other comprehensive income:
Foreign currency translation
adjustment (unaudited)...... -- -- -- -- (2) (2)
------ --- ------- -------- ---- -------
Comprehensive income............ -- -- -- -- -- 5,419
------ --- ------- -------- ---- -------
Balance, August 31, 2000
(unaudited)................... 10,742 $54 $ 2,268 $ 4,617 $ (9) $ 6,930
====== === ======= ======== ==== =======
F-54
CRC HOLDINGS, INC.--GAMING DIVISION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED NINE MONTHS
NOVEMBER 30 ENDED AUGUST 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
Cash flows from operating activities:
Net income.................................................. $ 2,864 $10,096 $ 7,377 $ 6,079 $ 5,421
Adjustments to reconcile net income to net cash provided by
operating activities:
Extraordinary loss on early extinguishment of debt, net... -- -- 1,731 1,731 --
Provision (recovery) for losses on receivables and equity
investments, net........................................ 1,400 745 (446) (487) 88
Depreciation and amortization............................. 4,571 5,004 5,628 4,133 3,833
Amortization of deferred charges.......................... 1,378 1,560 778 578 410
Undistributed equity in net losses of affiliates.......... 27 174 -- -- --
Foreign currency (gains) losses........................... (1,029) (1,418) (157) (179) 105
Deferred income taxes..................................... 490 (975) 1,161 923 1,144
Minority interest......................................... -- (108) 221 170 2,346
Other..................................................... 132 (3) (59) -- --
Change in assets and liabilities:
(Increase) decrease in:
Trade accounts receivable............................... (962) (146) (1,053) (465) (299)
Other assets............................................ 281 205 403 672 423
Increase (decrease) in:
Accounts payable........................................ (459) 400 (932) 1,887 710
Accrued expenses........................................ (2,612) (4,705) 6,394 1,702 (3,369)
Deferred compensation plan liability.................... 826 321 88 (118) 258
Other liabilities....................................... 1,575 1,367 661 58 (16)
-------- ------- -------- -------- --------
Net cash provided by operating activities................... 8,482 12,517 21,795 16,684 11,054
-------- ------- -------- -------- --------
Cash flows from investing activities:
Receipts from project loans and advances.................. 3,125 3,438 6,250 4,687 6,191
Purchases of property and equipment....................... (1,294) (5,373) (6,343) (3,628) (4,117)
Decrease in restricted cash............................... 939 4,824 -- -- --
Investments in and advances to affiliates................. (20) (578) -- -- --
Sale of property and equipment............................ 67 42 -- -- --
Project loans and advances................................ (1,425) (760) (943) (853) --
-------- ------- -------- -------- --------
Net cash flows (used) provided by investing activities...... 1,392 1,593 (1,036) 206 2,074
-------- ------- -------- -------- --------
Cash flows from financing activities:
(Increase) decrease in due from affiliates................ 746 (834) (278) (193) (167)
Borrowings................................................ 33,104 50,000 55,000 55,000 --
Payments of debt and other deferred charges............... (35,115) (55,175) (56,736) (55,152) (4,725)
Payments of redeemable preferred and accrued dividends of
subsidiary.............................................. -- (1,760) -- -- --
Purchase of common stock and common stock warrants of
subsidiary.............................................. -- -- (4,073) (3,749) --
Payments of common stock dividends of subsidiary.......... -- -- (174) -- (1,031)
Increase in restricted cash............................... (2,694) -- -- -- --
Net change in hospitality division intercompany account... (2,259) (362) (7,678) (6,651) (8,067)
-------- ------- -------- -------- --------
Net cash flows used by financing activities................. (6,218) (8,131) (13,939) (10,745) (13,990)
-------- ------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 3,656 5,979 6,820 6,145 (862)
Cash and cash equivalents at beginning of period............ 5,940 9,596 15,575 15,575 22,395
-------- ------- -------- -------- --------
Cash and cash equivalents at end of period.................. $ 9,596 $15,575 $ 22,395 $21,720 $ 21,533
======== ======= ======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 10,759 $ 9,700 $ 4,798 $ 4,613 $ 7,122
Cash paid during the period for income taxes.............. $ 1,174 $ 415 $ 1,880 $ 921 $ 4,358
Cash received during the period for income taxes.......... $ 8 $ 36 $ 12 $ 12
The accompanying notes are an intrgral part of these financial statements.
F-55
CRC HOLDINGS, INC.--GAMING DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
CRC Holdings, Inc. ("CRC"), d/b/a Carnival Resorts & Casinos, owns, operates
and develops casino properties (for purposes hereof, the "CRC Gaming Division"
or the "Company") and develops and manages hotel and resort properties. The CRC
Gaming Division consists principally of a 59% interest in Louisiana Casino
Cruises, Inc. ("LCCI"), which owns the Casino Rouge, a riverboat casino based in
Baton Rouge, Louisiana, and through a wholly-owned subsidiary, CHC Casinos
Canada Limited ("CHC Canada"), the operations of Casino Rama located north of
Toronto, Canada, on behalf of the Chippewas of Rama First Nation and the Ontario
Casino Corporation. These financial statements depict the financial condition
and results of operations of the CRC Gaming Division as of and for the periods
presented.
Pursuant to the Agreement and Plan of Merger among CRC, Penn National
Gaming, Inc. ("Penn"), Casino Holdings, Inc. ("Casino Holdings"), a wholly-owned
subsidiary of Penn and certain stockholders of CRC, dated July 31, 2000 (the
"Merger Agreement"), subject to appropriate approvals and certain conditions
including financing, CRC has agreed to (i) distribute its hospitality division
and certain other assets and liabilities to the stockholders of CRC,
(ii) distribute its net after-tax income, as defined, less certain adjustments
for the period from the date of the Merger Agreement through the closing date of
the Merger Agreement to the stockholders of CRC, and (iii) immediately
subsequent to the distributions, merge the CRC Gaming Division with and into
Casino Holdings. In addition, pursuant to a Stock Purchase Agreement among
certain minority stockholders of a 40% interest in LCCI (the "LCCI Minority
Stockholders") and Penn dated July 31, 2000 (the "Stock Purchase Agreement"),
the LCCI Minority Stockholders, subject to closing of the Merger Agreement,
appropriate approvals and certain conditions, have agreed to sell their 40%
interest in LCCI to Penn. The Merger Agreement and Stock Purchase Agreement
provide the foregoing transactions shall be consummated on or before
October 31, 2001 although there can be no assurance to that effect.
Pursuant to an Agreement and Plan of Merger with CHC International, Inc.
("CHC"), Wyndham International, Inc. ("Wyndham"), and Patriot American
Hospitality, Inc., on June 30, 1998, CHC (i) contributed its gaming and
hospitality development business to CRC, (ii) distributed all of the common
stock of CRC to the stockholders of CHC pro rata based on their ownership in
CHC, and (iii) merged with and into Wyndham subsequent to the pro rata
distribution (collectively the "Patriot Merger").
The financial statements have been prepared as if the Company has operated
as an independent, stand alone entity for all periods presented and give no
effect to the net changes of assets and liabilities contemplated by the Merger
Agreement, the Stock Purchase Agreement and the Patriot Merger. Such financial
statements have been prepared using the historical basis of accounting and
include all of the assets, liabilities, revenues and expenses previously
included in CRC's and CHC's consolidated financial statements prior to the
transactions contemplated by the Merger Agreement, the Stock Purchase Agreement
and the Patriot Merger, except for all the assets, liabilities (including
contingent liabilities), revenues and expenses of the hospitality division of
CRC and CHC and their respective subsidiaries. Consequently, these financial
statements include certain balances and allocations for assets and liabilities
and corresponding income and expense items related to the Company that were
previously included in CRC's and CHC's consolidated financial statements. In
accordance with
F-56
CRC HOLDINGS, INC.--GAMING DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
NOTE 1--BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Securities and Exchange Commission Staff Accounting Bulletin No. 55, these
financial statements exclude certain corporate expenses incurred by CRC and CHC
on the hospitality division's behalf. All significant intercompany balances and
transactions have been eliminated. Investments in less than majority-owned
gaming businesses, in which a significant equity ownership interest is held, are
accounted for on the equity method.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements as of November 30, 1998 and 1999 and
for the years ended November 30, 1997, 1998 and 1999 have been prepared in
accordance with accounting principles generally accepted in the United States.
Significant accounting policies are summarized below.
INTERIM UNAUDITED INFORMATION
The accompanying interim financial statements as of August 31, 2000 and for
the nine month periods ended August 31, 2000 and 1999 and related disclosures in
the accompanying notes have not been audited and do not include all information
and notes necessary for the presentation of financial position, results of
operations and cash flows in conformity with accounting principles generally
accepted in the United States. However, in the opinion of management, all
adjustments (consisting only of normal recurring accruals) have been included to
present fairly, in all material respects, the financial position of the Company
as of August 31, 2000, and the results of its operations and its cashflows for
the nine month periods ended August 31, 2000 and 1999. Operating results for the
nine month periods ended August 31, 2000 and 1999 are not necessarily indicative
of the results that may be expected for a full year.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Casino Revenue represents the net win from gaming wins and losses. The
estimated direct costs of providing promotional allowances for food and beverage
and other items have been classified as casino operating expenses and totaled
$3,090, $2,793, and $3,104 for the years ended November 30, 1997, 1998 and 1999,
respectively, and $2,176 and $2,530 for the nine month periods ended August 31,
1999 and 2000, respectively. Revenues from food and beverage sales are
recognized at the time the related service is performed. Revenues from
management service fees for management of casinos are based upon contracted
terms and are recognized when the services are performed, and include management
service fees from affiliates of $216, $144, and $0 for the years ended
November 30, 1997, 1998 and 1999, respectively.
F-57
CRC HOLDINGS, INC.--GAMING DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
NOTE 1--BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
REIMBURSED OPERATING EXPENSES
The Company is fully reimbursed by Casino Rama for salaries and related
costs for casino personnel employed by the Company in accordance with management
contract terms and the administration of services consisting primarily of sales,
marketing and reservations. These costs amounted to $60,880, $66,399, and
$67,921 for the years ended November 30, 1997, 1998 and 1999, respectively. All
such costs and related reimbursements have been netted in the statements of
operations, with reimbursable amounts and accrued salaries and related costs
reflected as trade accounts receivable and accrued expenses, respectively, in
the balance sheets.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign operations are generally
translated into United States dollars at year end exchange rates, and revenues
and expenses are generally translated at average exchange rates for the year.
Comprehensive income resulting from translation adjustments are reflected within
stockholders' equity. Transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations, as incurred.
STOCK BASED COMPENSATION
The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock Based Compensation" which establishes a fair
value based method of accounting for stock based compensation plans, the effect
of which can either be disclosed or recorded. The Company has chosen to retain
its intrinsic value method of accounting for stock based compensation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include short-term investments with original
purchase maturities of 90 days or less.
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are from properties under management and casino
customers. The Company provides an allowance for doubtful accounts based on a
periodic review of outstanding receivables and an evaluation of aggregate
collectibility.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
provided on a straight-line basis over the estimated useful lives of the assets
or the expected term of the land lease (including renewals), whichever is
shorter. Useful lives range from three to thirty years. Expenditures for repairs
and maintenance are charged to expense as incurred. Expenditures for major
renewals and betterments, which significantly extend the useful lives of
existing equipment, are capitalized and depreciated. The Company continually
evaluates its long-lived assets by assessing recoverability based on an analysis
of undiscounted cash flows.
F-58
CRC HOLDINGS, INC.--GAMING DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
NOTE 1--BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Equipment held under capital leases is amortized over the lesser of useful
life or lease term.
OTHER ASSETS
Costs incurred in connection with the Company's financing arrangements are
recorded as deferred charges and are amortized over the terms of the debt
issuances. All costs incurred which relate to obtaining regulatory approval of
the Baton Rouge riverboat facility are recorded as deferred charges and are
amortized over the license period. Deferred licensing charges and debt issuance
costs are included in other current assets and other assets. In April 1998,
Statement of Position 98-5 -- "Reporting on the Costs of Start-Up Activities"
("SOP 98-5") was issued. SOP 98-5 requires that all start-up or pre-opening
costs be expensed as incurred. In 1998, the Company adopted SOP 98-5 and,
accordingly, expensed previously deferred organization costs. The effect was
immaterial on the financial statements.
GOODWILL
Goodwill is associated with the acquisition of LCCI and is amortized on a
straight-line basis over 30 years, with accumulated amortization of $495 and
$594 as of November 30, 1998 and 1999, respectively, and amortization expense of
$99 in each of the three years ended November 30, 1999.
INCOME TAXES
Income taxes are provided based on the liability method of accounting
pursuant to SFAS No. 109, "Accounting for Income Taxes." Deferred income taxes
are recorded to reflect tax consequences on future years' differences between
tax bases of assets and liabilities and their financial reporting amounts at
each year-end, reflecting the combination of LCCI and CHC Canada as separate tax
filers and as if the Company and its other subsidiaries were a stand alone
taxpayer.
CONCENTRATION OF CREDIT RISK
The Company has a receivable from Casino Rama, Inc. (see Notes 2 and
10) pursuant to an agreement to develop and operate Casino Rama. To monitor the
credit risk with respect to the receivable from Casino Rama, Inc., the Company
periodically reviews the financial condition of Casino Rama, Inc. through its
management of Casino Rama. Management currently believes the credit risk related
to this receivable is minimal.
FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined by the
Company using available market and effective interest rate information for such
instruments. The carrying amounts of such financial instruments approximate
their fair value except for LCCI's 11% senior secured notes which fair value
approximated $54,590 at November 30, 1999.
F-59
CRC HOLDINGS, INC.--GAMING DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
NOTE 1--BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
COMMON SHARE DATA
On June 30, 1998, CRC's common stock was adjusted pursuant to a 10,621-for-1
stock split where each share of CRC's common stock, $.01 par value per share was
converted into 10,621 shares of CRC's common stock, $.005 par value per share.
RECLASSIFICATIONS
Certain amounts in the financial statements have been reclassified to
conform to the current period presentation.
NOTE 2--RECEIVABLES
Receivables consist of the following at November 30, 1998 and 1999:
1998 1999
-------- --------
Receivable from Casino Rama, Inc. -- Canadian prime plus 1%
(effective rate of interest of 7.74% as of November 30,
1998 and 1999), principal of $625 payable quarterly, plus
interest for as long as there are amounts outstanding
under the Casino Rama, Inc. credit agreements and
principal of $1,563 payable quarterly, plus interest once
there are no longer any amounts outstanding under the
Casino Rama, Inc. credit agreements....................... $18,438 $12,188
Receivable from the Kalispel Tribe -- prime plus 2%
(effective interest rate of 9.75% and 9.38% as of November
30, 1998 and 1999, respectively). (The receivable was
repaid on January 28, 2000)............................... 578 1,504
Other receivables........................................... 131 139
Allowance for doubtful receivables.......................... (578) (139)
------- -------
18,569 13,692
Current portion............................................. (6,381) (7,754)
------- -------
Noncurrent portion.......................................... $12,188 $ 5,938
======= =======
F-60
CRC HOLDINGS, INC.--GAMING DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consist of the following at November 30, 1998 and
1999:
1998 1999
-------- --------
Land...................................................... $ 1,109 $ 1,385
Vessel.................................................... 16,839 17,138
Building.................................................. 19,084 19,840
Furniture, fixtures and other equipment................... 11,919 13,988
Gaming equipment.......................................... 8,783 11,282
Leasehold improvements.................................... 204 204
Equipment under capital leases............................ 262 262
------- -------
58,200 64,099
Accumulated depreciation and amortization................. (16,457) (21,629)
Construction in progress.................................. 137 272
------- -------
Property and equipment, net............................. $41,880 $42,742
======= =======
Capitalized interest included in property and equipment is $1,628 as of
November 30, 1998 and 1999. Unamortized capitalized interest is $1,206 and
$1,099 as of November 30, 1998 and 1999, respectively. Depreciation expense is
$4,301, $4,789 and $5,434 for the years ended November 30, 1997, 1998 and 1999,
respectively.
NOTE 4--LEASES
CAPITAL LEASES
The Company leases certain equipment under capital leases. Future minimum
rentals under such capital leases are as follows at November 30, 1999:
Year ending November 30, 2000............................... $ 91
Year ending November 30, 2001............................... 20
----
Total minimum lease payments................................ 111
Less amount representing interest........................... (7)
----
Net obligations............................................. 104
Less current portion........................................ (83)
----
Long-term portion........................................... $ 21
====
Capital lease obligations are included in current portion of long-term debt
and long-term debt.
OPERATING LEASES
LCCI has an operating lease agreement for property on which LCCI constructed
the riverboat facility and parking facility. The initial lease term is 10 years
beginning January 1994. The terms of the lease include payment of minimum
monthly rent of $8 through October 1, 1994, increasing to the greater of $33 or
1.25% of the gross revenue for the remainder of the lease term. LCCI entered
into an amendment to the lease agreement to lease an additional parcel of land
from the lessor. LCCI
F-61
CRC HOLDINGS, INC.--GAMING DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
NOTE 4--LEASES (CONTINUED)
prepaid rent in the amount of $1,756 for the additional property. The prepaid
rent is being amortized on a straight-line basis over the initial lease term.
LCCI has the option to purchase the entire site on or after 15 years for the
then appraised value of the original site, excluding improvements. LCCI also
leases a total of approximately 81,600 square feet for general warehousing,
office use and employee parking pursuant to two separate two-year leases. On
September 1, 1999 LCCI purchased approximately 1.3 acres of land with general
warehousing, office space, and employee parking, formerly leased at $8 per
month. The remaining rent is $7 per month. The lease is a triple net lease, has
two-year renewal options and grants LCCI a right of first refusal to purchase
the property. The Company also leases office and warehouse space under operating
lease agreements.
The following is a schedule of future minimum lease payments, for all
operating leases with non-cancellable terms in excess of one year at
November 30, 1999:
Year ending November 30, 2000............................... $1,046
Year ending November 30, 2001............................... 956
Year ending November 30, 2002............................... 956
Year ending November 30, 2003............................... 956
Thereafter.................................................. 265
------
Total minimum lease payments............................ $4,179
======
Rental expense amounted to $1,522, $1,636, and $1,899 for the years ended
November 30, 1997, 1998 and 1999, respectively. Rental expense for the years
ended November 30, 1997, 1998 and 1999 includes $464, $509, and $698,
respectively, of contingent rental payments in excess of the monthly minimum
rent with respect to LCCI's land lease for riverboat and parking facilities.
NOTE 5--EMPLOYEE BENEFITS PLANS
CRC maintains a non-qualified defined contribution deferred compensation
plan (the "Deferred Compensation Plan") which covers most management employees.
Benefits accumulate by participants based on a percentage of their annual
compensation and generally vest 20% per year. The Deferred Compensation Plan's
costs, net of forfeitures, included in the statements of operations for the
years ended November 30, 1997, 1998 and 1999 were approximately $1,043, $576 and
$631, respectively. The earnings rate for the Deferred Compensation Plan
unfunded benefit liability is 7% for the years ended November 30, 1997, 1998 and
1999.
Deferred Compensation Plan benefits funded by the Company are taxable to the
participants and the Company advances the participants amounts equal to the
income and payroll taxes on the funded benefits. The amounts of such advances
were $251 plus accrued interest of 6% per annum as of November 30, 1999, and
will be repaid from pledged death benefit proceeds of participants' life
insurance policies.
CRC also maintains defined contribution plans under Section 401(k) of the
Internal Revenue Code for all qualified employees (the "401(k) Plans").
Contributions to the 401(k) Plans by the Company are based on the participants'
contributions. For the years ended November 30 1997, 1998 and 1999, the Company
contributed $129, $147, and $207, respectively. The Company paid certain
expenses associated with administration of the 401(k) Plans.
F-62
CRC HOLDINGS, INC.--GAMING DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
NOTE 6--INCOME TAXES
The Company's provision for income taxes attributable to continuing
operations is comprised of the following for the years ended November 30, 1997,
1998 and 1999:
1997 1998 1999
-------- -------- --------
Current
Federal............................................ $ 731 $271 $4,703
State.............................................. (70) 4 459
Foreign............................................ 474 108 78
------ ---- ------
Total current tax expense........................ 1,135 383 5,240
Deferred
Deferred tax expense............................... 2,726 336 1,951
------ ---- ------
Total provision for income taxes................. $3,861 $719 $7,191
====== ==== ======
The difference between the taxes provided for continuing operations at the
U.S. federal statutory rate and the Company's actual tax provision is reconciled
below for the years ended November 30, 1997, 1998 and 1999:
1997 1998 1999
-------- -------- --------
Taxes provided at statutory rate................... $2,757 $ 3,677 $5,542
Release of valuation allowance..................... 655 (4,243) --
State tax expense, net of federal tax benefit...... 294 393 592
Foreign tax expense................................ 417 158 26
Dividends of subsidiary............................ 124 372 426
Other.............................................. (386) 362 605
------ ------- ------
Total provision for income taxes................. $3,861 $ 719 $7,191
====== ======= ======
F-63
CRC HOLDINGS, INC.--GAMING DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
NOTE 6--INCOME TAXES (CONTINUED)
The approximate effect of the Company's temporary differences and
carryforwards that give rise to deferred tax balances at November 30, 1998 and
1999 were as follows:
1998 1999
-------- --------
Net operating loss carryforwards.......................... $ 533 $ --
Deferred pre-opening costs................................ 602 --
Alternative minimum tax credit carryforward............... 414 851
Other, net................................................ 626 744
------- -------
Current deferred tax asset.............................. $ 2,175 $ 1,595
======= =======
Foreign currency gain..................................... $ (904) $ (686)
Other, net................................................ 213 255
------- -------
Current deferred tax liability.......................... $ (691) $ (431)
======= =======
1998 1999
-------- --------
Deferred compensation plan liability...................... $ 695 $ 686
Capitalized investment costs.............................. 231 --
Deferred prepayment penalty............................... 396 206
Other, net................................................ 250 98
------- -------
Noncurrent deferred tax asset........................... $ 1,572 $ 990
======= =======
Depreciation.............................................. $(4,084) $(4,359)
Deferred pre-opening costs................................ 50 --
Alternative minimum tax credit carryforward............... 1,064 295
Other, net................................................ (24) 20
------- -------
Noncurrent deferred tax liability....................... $(2,994) $(4,044)
======= =======
F-64
CRC HOLDINGS, INC.--GAMING DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
NOTE 7--LONG-TERM DEBT
Long-term debt is comprised of the following as of November 30, 1998 and
1999:
1998 1999
-------- --------
11% senior secured notes -- interest payable semi-annually
June 1, and December 1, with balance due December 1,
2005...................................................... $ -- $53,000
Variable-rate senior secured increasing rate notes --
(effective interest rate of 12.25% at November 30, 1998)
-- interest payable quarterly and principal payable at
December 1, 2001.......................................... 50,000 --
Variable-rate term loan -- (effective interest rate of 9.25%
and 9.59% at November 30, 1998 and 1999, respectively) --
interest payable at the option of CHC Canada, in one, two,
three or six month installments and principal payable in a
quarterly installment of $241 on April 30, 1999, quarterly
installments of $1,563 commencing July 31, 1999 through
July 31, 2001, with balance due October 31, 2001.......... 15,725 12,187
Capital lease obligations (see Note 4)...................... 182 104
------- -------
Total debt................................................ 65,907 65,291
Current portion............................................. (3,445) (6,333)
------- -------
Total long-term debt...................................... $62,462 $58,958
======= =======
Aggregate principal payments for the long-term debt, including capital lease
obligations, are as follows at November 30, 1999:
Year ending November 30, 2000............................... $ 6,333
Year ending November 30, 2001............................... 5,958
Year ending November 30, 2002............................... --
Year ending November 30, 2003............................... --
Year ending November 30, 2004............................... --
Thereafter.................................................. 53,000
-------
Total..................................................... $65,291
=======
Variable-rate senior secured increasing rate notes--on November 25, 1998,
LCCI issued $50,000 of variable rate senior secured increasing rate notes due
December 1, 2001 ("the 1998 Notes") in a private placement offering to refinance
the $51,000, 11 1/2% first mortgage notes issued in December 1993 in connection
with the development of the Casino Rouge.
11% senior secured notes--on January 27, 1999, LCCI issued $55,000 of 11%
senior secured notes due December 1, 2005, (the "1999 Notes") in a private
placement offering with interest due semi-annually beginning June 1, 1999. The
proceeds were used to redeem the 1998 Notes. After December 1, 2002, LCCI may,
at its option, redeem all or some of the 1999 Notes at a premium that will
decrease over time from 105.5% in 2002 to 100% in 2004 of their face amount,
plus interest. The redemption of the 1998 Notes resulted in LCCI incurring a net
extraordinary loss of $1,731 during the year ended November 30, 1999 and the
nine months ended August 31, 1999. The 1999 Notes were exchanged in May 1999 for
Notes registered under the Securities Act of 1933. The registered 1999
F-65
CRC HOLDINGS, INC.--GAMING DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
NOTE 7--LONG-TERM DEBT (CONTINUED)
Notes are freely transferable by holders thereof and are substantially identical
in all material respects to the privately placed 1999 Notes for which they were
exchanged. The registered 1999 Notes are collateralized by substantially all of
LCCI's assets.
Variable-rate secured term loan--in December 1998, CHC Canada amended the
variable-rate secured loan denominating the outstanding balance in U.S. dollars
and amending the repayment schedule. The amended loan bears interest at varying
rates approximating LIBOR plus 4% per annum. The loan is collateralized by
substantially all of CHC Canada's assets.
CRC has a variable rate line of credit with a commercial bank collateralized
by assets of certain shareholders of CRC. As of November 30, 1999, $462 was
available under the variable rate line of credit.
RELATED PARTY BORROWING
In December 1996, CHC Canada paid Carnival Corporation ("CCL") $27,835 in
full satisfaction of a $25,000 term credit facility, including accrued interest
thereon which resulted in a net extraordinary loss of $1,385.
The Company's financing agreements contain certain financial covenants.
NOTE 8--REDEEMABLE PREFERRED STOCK AND COMMON STOCK WARRANTS OF SUBSIDIARY
LCCI has authorized 50,000 shares of preferred stock, of which 11,000 shares
of 12% cumulative redeemable preferred stock was issued and outstanding at
November 30, 1997, at a carrying value of $1,628 including accrued non-cash
dividends. The preferred stock and accrued dividends were redeemed by LCCI on
November 30, 1998 for $1,760.
LCCI's debt offering in December 1993 included 153,000 detachable warrants
with put rights whereby LCCI had an obligation to purchase the 153,000 warrants,
at the value of LCCI's common stock as of December 1, 1998, as determined by two
independent investment banking firms. At November 30, 1998, the warrants were
classified as redeemable equity due to the put right feature and accreted to the
amount at which LCCI expected to repurchase these warrants. Holders of 14,100
warrants elected to convert to an equivalent number of LCCI common shares, while
holders of 138,900 warrants elected to have LCCI purchase the warrants. On
March 1, 1999, LCCI received valuations from two investment banking firms. Based
on the average of the values determined by the investment banking firms, LCCI
paid on March 8, 1999, $3,749 to holders of 138,900 warrants who exercised their
put rights. On September 21, 1999, at a previous warrantholder's request, LCCI
purchased 12,000 LCCI common shares for $324, the price originally offered for
the warrants.
NOTE 9--MINORITY INTEREST
The Company owns a 59% interest in LCCI. The Company's financial statements
include 100% of the assets, liabilities and operations of LCCI. The effects of
the minority interest have been reflected in the accompanying balance sheets and
statements of operations. During the years ended November 30, 1997, 1998 and
1999, and nine months ended August 31, 1999, LCCI paid cash dividends to holders
of its common stock and common stock warrants totaling $482, $1,996, $3,498 and
$2,562, respectively. As
F-66
CRC HOLDINGS, INC.--GAMING DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
NOTE 9--MINORITY INTEREST (CONTINUED)
LCCI's accumulated losses and dividends had previously eliminated the minority
interest, $232, $962, $1,253 and $1,050 of LCCI common stock dividends paid to
minority common stockholders and to the common stock warrantholders were charged
to operations during the years ended November 30, 1997, 1998 and 1999, and nine
months ended August 31, 1999, respectively. During the nine-month period ended
August 31, 2000, LCCI paid a cash dividend to the minority holders of its common
stock of $1,031. On September 15, 2000, LCCI paid a cash dividend to the
minority holders of its common stock of $337.
NOTE 10--COMMITMENTS AND CONTINGENCIES
In the ordinary course of its business, the Company is involved in legal
proceedings resulting from incidents taking place at casinos it manages, or in
which it has an ownership interest. The Company maintains comprehensive
liability insurance and also requires casino owners to maintain adequate
insurance coverage. In the opinion of management, the ultimate outcome of all
such matters should not have a material adverse effect on the financial position
of the Company, but, if decided adversely to the Company, could have a material
adverse effect upon the Company's operating results during the period in which
the litigation is resolved.
Riverboat gaming licenses in Louisiana are issued for an initial five-year
term with annual renewals thereafter. LCCI's original five-year gaming license
was up for renewal in July 1999. On June 15, 1999, LCCI received a conditional
license approval from the Louisiana Gaming Control Board (the "Louisiana Board")
until completion of their investigation. LCCI, its officers, directors,
managers, principal shareholders, including the Company and its officers and
directors and key gaming employees, will be subject to strict scrutiny and full
suitability investigations and approval by the Louisiana Board in connection
with LCCI's renewal application. The factors the Louisiana Board has stated it
will consider, among others, in order to renew LCCI's license, include LCCI's
compliance with all the requirements of the Louisiana Riverboat Economic
Development and Gaming Control Act, the approval of various systems and
procedures, the demonstration of good character (including an examination of
criminal and civil records) and methods of business practice. The Louisiana
Board may also seek to impose, as a condition of the license renewal, certain
Louisiana, minority and female employment and procurement goals.
Gaming licenses in Ontario are issued for four-year terms. CHC Canada's
original gaming license is up for renewal in July 2000. CHC Canada has filed its
renewal application and paid its annual renewal fee and its license is deemed to
continue to July 2001 pending completion of the relicensing investigation. CHC
Canada and its officers, directors, managers, principal shareholders, including
the Company and its officers and directors and key gaming employees, will be
subject to strict scrutiny and full suitability investigations and approval by
the Ontario Alcohol and Gaming Commission in connection with CHC Canada's
renewal application.
LCCI and CHC Canada believe they will be successful in receiving renewals of
the licenses, but no assurance can be given as to whether or when the licenses
will be renewed, or extent of any restrictions that may be imposed as conditions
thereof. The loss, suspension or failure to obtain renewals of the licenses
would have a material adverse effect on the Company.
Pursuant to the agreement to manage the Casino Rama complex, dated
March 18, 1996, as amended (the "Agreement"), CHC Canada will receive during the
first three years from the opening
F-67
CRC HOLDINGS, INC.--GAMING DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
date, July 31, 1996, a management fee, subject to certain limitations, of 2.75%
of gross revenues plus 5.0% of net operating margin (as such terms are defined
in the Agreement) and, subsequent to year three, an operator's fee of 2.0% of
gross revenues plus 5.0% of net operating margin. The term of the Agreement,
which is 10 years from the opening date, requires CHC Canada to loan Casino
Rama, Inc. $25,000 (see Note 2) and, under certain circumstances additional
amounts to fund Casino Rama operating deficits, if any. The performance and
obligations of CHC Canada under the Agreement are guaranteed by CRC. In
addition, CRC and CHC Canada each guarantee, with recourse limited to a pledge
of shares of CHC Canada and its interests under the Agreement; (i) a term loan
credit facility in the amount of $105,500 and (ii) a revolving term loan credit
facility in the amount of $3,404, both between Casino Rama, Inc. and a Canadian
commercial bank, of which no amounts remain outstanding as of November 30, 1999.
Financing provided by third parties and CHC Canada to Casino Rama, Inc. were
repaid from the operating profits of Casino Rama.
In November 1993, LCCI was involved in a dispute regarding consulting
services. Although a formal demand had not been made to LCCI, management
believed the dispute could lead to litigation and accrued $1,700 for the
estimated cost of resolution. LCCI settled litigation related to this dispute in
May 1998. Pursuant to the settlement, each party entered into mutual general
releases and neither party admitted any liability in connection with the
settlement. As a result of the settlement, LCCI has recognized a net reduction
of $400 in management services and operating costs for the year ended
November 30, 1998.
NOTE 11--STOCKHOLDERS' EQUITY
CRC has an Employee Stock Option Plan (the "Plan") which provides for the
grant to employees of both incentive stock options (within the meaning of
Section 422 of the Internal Revenue Code) and nonstatutory stock options to
eligible employees (including officers and directors) and non-employee
directors. A total of 1,700,000 shares of common stock have been reserved for
issuance under the Plan. In conjunction with the Patriot Merger, CHC's options
were cancelled and CRC granted new options which retained the term and vesting
attributes of the CHC options.
The table below summarizes the status of the CRC's Plan as of November 30,
1998 and 1999, and changes during the years then ended as follows:
1998 1999
---------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ------- --------- ---------------- --------- ----------------
Outstanding at beginning of year.......... -- $ -- 1,387,071 $2.36
Granted................................... 1,387,071 2.36 -- --
Exercised................................. -- (14,150) 3.43
Forfeited................................. -- (500) 3.43
--------- ---------
Outstanding at end of year................ 1,387,071 2.36 1,372,421 2.35
========= =========
Options excercisable at year-end.......... 933,315 1,203,439
Weighted-average fair value of options
granted during the year................. $ 2.08 $ --
F-68
CRC HOLDINGS, INC.--GAMING DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
NOTE 11--STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about options outstanding at
November 30, 1999:
OPTIONS OUTSTANDING OPTIONS EXCERCISABLE
------------------------------------------------- -------------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXCERCISABLE EXERCISE PRICE
- --------------------- ----------- ---------------- ---------------- ------------ ----------------
$ 1.93 988,052 5.0 years $1.93 988,052 $1.93
$ 3.43 384,369 6.6 3.43 215,387 3.43
--------- ---------
1,372,421 5.5 2.35 1,203,439 2.20
========= =========
All options issued were granted at fair market value on the original date of
grant, generally have a term of 10 years, and generally become exercisable with
respect to 20% of the covered shares commencing one year after grant, and are
generally exercisable with respect to an additional 20% of the covered shares
after each additional year until fully exercisable.
The fair value of each option grant was estimated on the date of the grant
using the minimum value method with the following assumptions: risk-free
interest rate of 7.5%, no dividend yield, expected lives of 10 years and no
volatility.
The Company applies Accounting Principles Board No. 25 and related
interpretations in accounting for the Plan. Accordingly, no compensation cost
has been recognized. Had compensation cost for the Company's Plan been
determined based on the fair value at the grant dates for awards under the Plan
consistent with the method of SFAS No. 123, the Company's pro forma net income
would have been $9,519 and $6,805 for the years ended November 30, 1998 and
1999, respectively.
On June 30, 1998, CRC settled a liability assumed as part of the Patriot
Merger by issuing to an executive officer 121,289 shares of CRC common stock.
The stock grant vested immediately.
NOTE 12--RELATED PARTY TRANSACTIONS
CRC and CCL entered into a trademark license agreement providing for the
Company's use of the "Carnival" trademark so that the Company may conduct
business as "Carnival Resorts and Casinos." Fees due under the agreement are the
greater of $100 or 1% of the Company's revenues, as defined. The trademark
license fees for the years ended November 30, 1997, 1998 and 1999 were $480,
$518, and $649, respectively.
The Company provides accounting services, at cost, to certain entities owned
and controlled by certain of its officers. The entities are obligated to
reimburse the Company for such services provided. The cost of such services were
$154 and $46 for the years ended November 30, 1998 and 1999, respectively.
NOTE 13--REPORT ON CONDITIONAL LICENSE RENEWAL OF LCCI (UNAUDITED)
On or about July 25, 2000, the Division of the Louisiana Attorney General's
Office (the "Division") submitted a Report on Conditional License Renewal of
LCCI, in which the Division and the Louisiana State Police outlined three
conditions on the license renewal of LCCI. The first condition involved LCCI
minority shareholder Jerry Bayles. The Division recommended that in order to
renew
F-69
CRC HOLDINGS, INC.--GAMING DIVISION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
NOTE 13--REPORT ON CONDITIONAL LICENSE RENEWAL OF LCCI (UNAUDITED) (CONTINUED)
the license of LCCI, that Mr. Bayles have no more direct day to day involvement
in the management or operations of Casino Rouge than he currently maintained.
The second condition related to CRC officer Robert Sturges. The Division
suggested in the report that LCCI's license also be conditioned upon the status
quo relating to Mr. Sturges' day to day management and operation of Casino
Rouge. Finally, the report addressed, among other things, Capital Lake
Properties, Inc. ("CLP"), the landlord of the leased property where Casino Rouge
is located, which currently receives rent based upon 1.25% of gross cash
revenue, as defined. The Division's report contained a proposed condition on the
license renewal of LCCI, that CLP submit itself to a suitability investigation.
The report has not been formally acted upon by the Louisiana Board. Attorneys
for the Louisiana Board have indicated that the Louisiana Board will decide the
issue of renewal of LCCI's license, and any potential conditions, along with the
decision to allow the transfer of LCCI's common stock to Penn. On or about
November 29, 2000, LCCI filed suit against CLP for declaratory judgment in the
19th Judicial District Court of Louisiana seeking a determination whether CLP,
as a matter of law, must submit to a suitability investigation and what, if any,
obligations CLP has under the lease agreement, to submit to suitability. It is
expected that the litigation will, when complete, decide whether the Louisiana
Board will condition LCCI's license on the suitability of CLP. It is not
expected that the conditions relating to the day to day involvement of Mr.
Bayles or Mr. Sturges will be challenged by LCCI.
****************************
F-70
Exhibit 99.2
CONTACT:
Robert Ippolito Joseph N. Jaffoni
Chief Financial Officer Jaffoni & Collins Incorporated
610/373-2400 212/835-8500 or penn@jcir.com
FOR IMMEDIATE RELEASE
PENN NATIONAL GAMING, INC. TO PURSUE $200 MILLION
PRIVATE PLACEMENT OF SENIOR SUBORDINATED NOTES
Wyomissing, PA, February 13, 2001 - Penn National Gaming, Inc. (Nasdaq: PENN)
announced today that it is pursuing through a private placement the issuance of
$200 million of Senior Subordinated Notes.
The Senior Subordinated Notes will rank equally with all of the Company's other
future senior subordinated indebtedness and will be junior to the Company's
senior indebtedness, including debt under the Company's senior secured credit
facility. The Senior Subordinated Notes will be guaranteed by all of the
Company's current and future wholly-owned domestic subsidiaries.
The Senior Subordinated Notes will not be registered under the Securities Act of
1933 and may not be offered or sold in the United States absent registration or
an applicable exemption from the registration requirements of the Securities Act
of 1933. It is anticipated that the Company subsequently will file a
registration statement under the Securities Act of 1933 to effect an exchange
offer of registered Senior Subordinated Notes.
Penn National owns and operates two Mississippi casinos, the Casino Magic hotel,
casino, golf resort and marina in Bay St. Louis, and the Boomtown Biloxi casino
in Biloxi as well as three racetracks and eleven off-track wagering (OTW)
facilities located in Pennsylvania (two tracks and eleven OTWs) and West
Virginia (one track). The West Virginia track, Charles Town Races, presently
features 1,974 gaming machines that will soon be increased to 2,000. Penn
National intends (subject to certain conditions) to complete its previously
announced acquisition of CRC Holdings, Inc. and the minority interest in
Louisiana Casino Cruises, Inc. (LCCI) not owned by CRC. LCCI owns and operates
the Casino Rouge, a riverboat gaming
-more-
PENN NATIONAL GAMING, 2/13/01 page 2
facility in Baton Rouge, Louisiana and CRC has a management contract for Casino
Rama located in Canada on the Chippewas of Mnjikaning First Nation land.
This announcement contains certain forward-looking statements that are subject
to risks and uncertainties. Forward-looking statements reflect management's
current views and are based on certain expectations and assumptions. Such
statements include, among others, statements regarding the expected impact and
timing of our planned capital expansions, facility improvements and pending CRC
acquisition, the pursuit and expected amount of the private placement and the
subsequent registration of the notes. Actual results could differ materially
from those currently anticipated and expressed in these and other
forward-looking statements as a result of a number of factors, including, but
not limited to, risks related to our operating and financial results and market
conditions, and any other risks and uncertainties discussed in this announcement
and in Penn National's filings with the Securities and Exchange Commission. Penn
National disclaims any intent or obligation to update, revise or correct these
forward-looking statements.
# # #
