SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
--------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-24206
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PENN NATIONAL GAMING, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2234473
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Penn National Gaming, Inc.
825 Berkshire Blvd., Suite 200
Wyomissing, PA 19610
--------------------
(Address of principal executive offices)
610-373-2400
------------
(Registrant's telephone number including area code:)
Not Applicable
--------------
(Former name, former address, and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
1
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
--- ---
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Title Outstanding as of August 9, 2001
Common Stock par value .01 per share 15,472,850
THIS REPORT INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS OTHER THAN STATEMENTS OF
HISTORICAL FACTS INCLUDED IN THIS REPORT REGARDING THE COMPANY'S OPERATIONS,
FINANCIAL POSITION AND BUSINESS STRATEGY MAY CONSTITUTE FORWARD-LOOKING
TERMINOLOGY. THESE STATEMENTS MAY BE IDENTIFIABLE BY WORDS SUCH AS "MAY",
"WILL", "EXPECT", "INTEND", "ESTIMATE", "ANTICIPATE", "BELIEVE" OR "CONTINUE"
OR THE NEGATIVE THEREOF OR VARIATIONS THEREON OR SIMILAR TERMINOLOGY.
ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS ARE REASONABLE AT THIS TIME, IT CAN GIVE NO
ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT AND,
THEREFORE, YOU SHOULD NOT RELY ON ANY SUCH FORWARD-LOOKING STATEMENTS.
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THE COMPANY'S EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED IN THIS
REPORT AND IN OTHER MATERIALS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS. THE COMPANY DOES
NOT INTEND, AND IS NOT OBLIGATED, TO UPDATE PUBLICLY ANY FORWARD-LOOKING
STATEMENTS. THIS DISCUSSION IS PERMITTED BY THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995.
2
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION Page
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheets -
June 30, 2001 (unaudited) and December 31, 2000 4-5
Consolidated Statements of Income
Six Months Ended June 30, 2001
and 2000 (unaudited) 6
Consolidated Statements of Income -
Three Months Ended June 30, 2001
and 2000 (unaudited) 7
Consolidated Statement of Shareholders' Equity -
Six Months Ended June 30, 2001 (unaudited) 8
Consolidated Statements of Cash Flow -
Six Months Ended June 30, 2001
and 2000 (unaudited) 9
Notes to Consolidated Financial Statements 10-14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15-23
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 23
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 24
Signature Page 25
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENN NATIONAL GAMING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
June 30, December 31,
2001 2000
(Unaudited)
------------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 37,673 $ 23,287
Accounts receivable 20,599 10,341
Prepaid expenses and other current assets 6,951 5,312
Prepaid income taxes 1,649 1,905
---------- ----------
TOTAL CURRENT ASSETS 66,872 40,845
---------- ----------
Property, plant and equipment, at cost
Land and improvements 82,906 81,177
Building and improvements 218,606 142,753
Furniture, fixtures and equipment 99,081 79,606
Transportation equipment 1,126 1,015
Leasehold improvements 11,876 11,704
Construction in progress 6,598 3,643
---------- ----------
420,193 319,898
Less accumulated depreciation and amortization 43,745 31,582
---------- ----------
NET PROPERTY, PLANT AND EQUIPMENT 376,448 288,316
---------- ----------
Other assets
Investment in and advances to unconsolidated affiliate 15,067 14,584
Cash in escrow - 5,107
Excess of cost over fair market value of net assets acquired
(net of accumulated amortization of $4,367 and $3,858, respectively) 164,678 78,161
Other intangible assets (net of accumulated amortization of $734) 25,012 -
Deferred financing costs, net 15,356 9,585
Miscellaneous 6,093 3,302
---------- ----------
TOTAL OTHER ASSETS 226,206 110,739
---------- ----------
$ 669,526 $ 439,900
========== ==========
See accompanying notes to consolidated financial statements
4
PENN NATIONAL GAMING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
June 30, December 31,
2001 2000
(Unaudited)
-------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 13,266 $ 11,390
Accounts payable 13,857 18,436
Purses due horsemen 2,390 2,262
Uncashed pari-mutuel tickets 764 1,393
Accrued expenses 26,725 6,913
Accrued interest 11,048 1,289
Accrued salaries and wages 4,965 3,957
Customer deposits 825 834
Taxes, other than income taxes 3,026 2,816
----------------------------
TOTAL CURRENT LIABILITIES 76,866 49,290
----------------------------
Long term liabilities
Long-term debt, net of current maturities 463,368 297,909
Deferred income taxes 36,329 13,480
----------------------------
499,697 311,389
----------------------------
TOTAL LONG-TERM LIABILITIES
Commitments and contingencies
Shareholders' equity
Preferred stock,$.01 par value, authorized 1,000,000 shares;
no shares issued
Common stock,$.01 par value, authorized 200,000,000 shares;
shares issued and outstanding 15,896,550 and 15,459,175, respectively 159 155
Treasury stock, at cost 424,700 shares (2,379) (2,379)
Additional paid in capital 44,291 39,482
Retained earnings 53,063 41,963
Other comprehensive income (2,188) -
Cumulative translation adjustment 17 -
----------------------------
TOTAL SHAREHOLDERS' EQUITY 92,963 79,221
----------------------------
$ 669,526 $ 439,900
============================
See accompanying notes to consolidated financial statements
5
PENN NATIONAL GAMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Six Months Ended
June 30,
2001 2000
-----------------------------------
REVENUE
Gaming $ 162,898 $ 49,680
Racing 56,727 57,003
Management service fees 1,981 --
Other revenue 16,285 6,352
-----------------------------------
TOTAL REVENUES 237,891 $ 113,035
-----------------------------------
OPERATING EXPENSES
Gaming 89,365 $ 29,545
Racing 39,143 38,646
Other 16,243 6,206
General and administrative 42,320 16,173
Depreciation and amortization 15,922 4,368
-----------------------------------
TOTAL OPERATING EXPENSES 202,993 94,938
-----------------------------------
INCOME FROM OPERATIONS 34,898 18,097
-----------------------------------
OTHER INCOME (EXPENSES)
Interest expense (20,907) (4,816)
Interest income 2,186 881
Earnings from joint venture 1,560 1,429
Other (584) (154)
-----------------------------------
TOTAL OTHER EXPENSES (17,745) (2,660)
-----------------------------------
INCOME BEFORE TAXES 17,153 15,437
-----------------------------------
TAXES ON INCOME 6,053 5,591
-----------------------------------
NET INCOME
$ 11,100 $ 9,846
===================================
Per share data
Basic $ .73 $ .66
Diluted $ .71 $ .64
Weighted shares outstanding
Basic 15,167 14,918
Diluted 15,729 15,338
See accompanying notes to consolidated financial statements
6
PENN NATIONAL GAMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
June 30,
2000 2001
--------------------
REVENUE
Gaming $ 92,289 $ 27,356
Racing 29,604 30,036
Management service fees 1,981 --
Other revenue 8,858 3,519
----------------------
TOTAL REVENUES 132,732 60,911
----------------------
OPERATING EXPENSES
Gaming 50,296 16,066
Racing 20,669 20,515
Other 9,015 3,393
General and administrative 23,175 7,910
Depreciation and amortization 8,987 2,192
----------------------
TOTAL OPERATING EXPENSES 112,142 50,076
----------------------
INCOME FROM OPERATIONS 20,590 10,835
OTHER INCOME (EXPENSES)
Interest expense (12,309) (2,434)
Interest income 1,180 585
Earnings from joint venture 490 842
Other (25) (154)
----------------------
TOTAL OTHER EXPENSES (10,664) (1,161)
----------------------
INCOME BEFORE TAXES 9,926 9,674
TAXES ON INCOME 3,442 3,450
----------------------
NET INCOME $ 6,484 $ 6,224
======================
Per share data $ .42 $ .42
Basic $ .41 $ .40
Diluted
Weighted shares outstanding
Basic 15,282 14,939
Diluted 15,895 15,431
7
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ADDITIONAL OTHER
COMMON STOCK TREASURY PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNTS STOCK CAPITAL EARNINGS INCOME TOTAL
------ ------- ----- ------- -------- ------ -----
Balance, January 1, 2001 15,459,175 $ 155 $ (2,379) $ 39,482 $ 41,963 $ - $ 79,221
Issuance of common stock 437,375 4 - 4,809 - - 4,813
Comprehensive Income:
Net income for the six months
Ended June 30, 2001 - - - - 11,100 - 11,100
Fair Market Value of Swap
Agreement - - - - - (2,188) (2,188)
Translation Adjustment - - - - - 17 17
-----------------------------------------------------------------------------------------
Total comprehensive income - - - - 11,100 (2,171) 8,929
-----------------------------------------------------------------------------------------
Balance, June 30, 2001 15,896,550 $ 159 $ (2,379) $ 44,291 53,063 $ (2,171) $ 92,963
=========================================================================================
See accompanying notes to consolidated financial statements
8
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
June 30,
2001 2000
---------------------------
Cash flows from operating activities
Net income $ 11,100 $ 9,846
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 15,922 4,368
Earnings from joint venture (1,560) (1429)
Loss on sale of net assets 598 -
Deferred income taxes 216 276
Decrease (increase) in:
Accounts receivable 994 (232)
Prepaid expenses and other current assets 254 (1,155)
Prepaid income taxes 1,905 1,088
Miscellaneous other assets (929) (17)
Increase (decrease) in:
Accounts payable (7,591) (3,548)
Purses due horsemen 128 337
Uncashed pari-mutuel tickets (629) (542)
Accrued expenses 18,017 (778)
Customers deposits (9) 321
Taxes payable, other than income taxes 210 77
Income taxes payable - 2,640
-----------------------------
Net cash provided by operating activities 38,626 11,252
-----------------------------
Cash flows from investing activities
Expenditures for property, plant and equipment (13,365) (7,298)
Proceeds from sale of property and equipment 98 178
Investment in and advances to joint venture 1,077 -
Decrease in cash in escrow 5,107 -
Acquisition of business, net of cash acquired (182,423) (5,845)
-----------------------------
Net cash used in investing activities (189,506) (12,191)
-----------------------------
Cash flows from financing activities
Proceeds from exercise of stock options 4,813 599
Proceeds of long-term debt 202,000 4,847
Principal payments on long-term debt (34,664) (17)
Increase in unamortized financing costs (6,883) (93)
-----------------------------
Net cash provided by financing activities 165,266 5,336
-----------------------------
Net increase in cash and cash equivalents 14,386 4,397
Cash and cash equivalents, at beginning of period 23,287 9,434
-----------------------------
Cash and cash equivalents, at end of period $ 37,673 $ 13,831
=============================
See accompanying notes to consolidated financial statements
9
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements are unaudited and include the
accounts of Penn National Gaming, Inc., (Penn) and its wholly owned
subsidiaries, (collectively the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain prior
year amounts have been reclassified to conform to current year presentation.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) have been made which are necessary to present fairly the
financial position of the Company as of June 30, 2001 and the results of its
operations for the six month periods ended June 30, 2001 and 2000. The results
of operations experienced for the six month period ended June 30,2001 are not
necessarily indicative of the results to be experienced for the fiscal year
ended December 31, 2001.
The statements and related notes have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. The accompanying notes should
therefore be read in conjunction with the Company's December 31, 2000 annual
financial statements.
2. INTEREST RATE SWAPS
Financial Accounting Standards Board ("FASB") Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," and Statement
No. 138, "Accounting for Derivative Instruments and Hedging Activities - an
amendment of FASB 133," are effective for fiscal years beginning after June 15,
2000 - fiscal year 2001 for the Company. The Company has conducted evaluations
of hedging policies and strategies for existing and anticipated future
derivative transactions. Adoption of these statements as of January 1, 2001 did
not have a significant effect on the Company's financial statements other than
recognition of derivative assets and liabilities on the balance sheet with
market value adjustments recognized in other comprehensive income.
3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the six months ended June 30, 2001 and 2000 for interest
was $12,397,000 and $4,849,000 respectively.
Cash paid during the six months ended June 30, 2001 and 2000 for income
taxes was $1,021,000 and $1,735,000 respectively.
4. SEGMENT INFORMATION
In the year ended December 31, 2000, the Company adopted SFAS No. 131
"Disclosures About Segments of an Enterprise and Related Information." The
Company has determined that it currently operates in two segments: (1) gaming
and (2) racing.
The accounting policies for each segment are the same as those
described in the "Summary of Significant Accounting Policies" for the year
ended December 31, 2000. The Company and the gaming
10
industry use EBITDA as a means to evaluate performance. EBITDA should not be
considered as an alternative to, or more meaningful than, net income (as
determined in accordance with accounting principles generally accepted in the
United States) as a measure of operating results or cash flows (as determined in
accordance with accounting principles generally accepted in the United States)
or as a measure of the Company's limitations.
The table below presents information about reported segments:
REVENUES
SIX MONTHS ENDED JUNE 30, 2001 2000
------------------------- ---- ----
(in thousands)
Gaming(1)(2)............................. $ 188,109 $ 62,446
Racing................................... 50,272 51,353
Eliminations(3).......................... (490) (764)
-----------------------
Total.................................... $ 237,891 $ 113,035
-----------------------
EBITDA
SIX MONTHS ENDED JUNE 30, 2001 2000
------------------------- ---- ----
(in thousands)
Gaming(1)(2)............................. $ 42,936 $ 12,964
Racing................................... 9,444 10,930
-----------------------
Total.................................... $ 52,380 $ 23,894
-----------------------
JUNE 30, DECEMBER 31,
TOTAL ASSETS 2001 2000
------------ ---- ----
(in thousands)
Gaming(1)(2)............................. $1,100,617 $ 671,655
Racing................................... 90,504 91,756
Eliminations(3).......................... (521,595) (323,511)
-----------------------
Total.................................... $ 669,526 $ 439,900
-----------------------
- --------------
(1) Reflects results of the Mississippi properties since the August 8, 2000
acquisition from Pinnacle Entertainment.
(2) Reflects results of the CRC Acquisition since April 28, 2001.
(3) Primarily reflects intracompany transactions related to import/export
simulcasting.
5. SENIOR SUBORDINATED NOTES
On March 12, 2001, the Company completed an offering of $200,000,000
of its 11 1/8% Senior Subordinated Notes due 2008. Interest on the notes
is payable on March 1 and September 1 of each year, beginning September 1,
2001. These notes mature on March 1, 2008.
The Company may redeem all or part of the notes on or after March 1,
2005 at certain specified redemption prices. Prior to March 1, 2004, the
Company may redeem up to 35% of the notes from proceeds of certain sales
of its equity securities. The notes also are subject to redemption
requirements imposed by state and local gaming laws and regulations.
11
The notes are general unsecured obligations and are guaranteed on a senior
subordinated basis by all of the Company's current and future wholly owned
domestic subsidiaries. The notes rank equally with the Company's future senior
subordinated debt and junior to its senior debt, including debt under the
Company's senior credit facility. In addition, the notes will be effectively
junior to any indebtedness of our non-U.S. or unrestricted subsidiaries, none of
which guarantee the notes.
The notes and guarantees were originally issued in a private placement
pursuant to an exemption from the registration requirements of the Securities
Act of 1933, as amended (the "Securities Act"). On July 30, 2001, the Company
completed an offer to exchange the notes and guarantees for notes and
guarantees registered under the Securities Act having substantially identical
terms.
The proceeds from these notes were used to finance the CRC acquisition
that was completed on April 27, 2001.
6. ACQUISITIONS
MISSISSIPPI
On August 8, 2000, the Company completed its acquisition of all of the
assets of the Casino Magic hotel, casino, golf resort, recreational vehicle
park and marina in Bay St. Louis, Mississippi and the Boomtown Biloxi casino
in Biloxi, Mississippi (the "Mississippi Acquisitions"), from Pinnacle
Entertainment, Inc. (formerly Hollywood Park, Inc.) The Mississippi
Acquisitions were accomplished pursuant to the terms of two asset purchase
agreements, each dated December 10, 1999, for an aggregate of $195 million.
The terms of each of the agreements were the result of arm's length
negotiations among the parties. 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 entered into a licensing agreement to use
Boomtown and Casino Magic names and marks at the properties acquired.
CRC
On April 27, 2001, the Company completed its acquisitions of (i) CRC
Holdings, Inc. ("CRC") from the shareholders of CRC and (ii) the minority
interest in Louisiana Casino Cruises, Inc.("LCCI") not owned by CRC from Dan
S. Meadows, Thomas L. Meehan and Jerry L. Bayles (together, the "CRC
Acquisition"). The CRC Acquisition was accomplished pursuant to the terms of
Agreement and Plan of Merger among CRC Holdings, Inc., Penn National Gaming,
Inc., Casino Holdings, Inc. and certain shareholders of CRC Holdings, Inc.,
dated as of July 31, 2000 (the "Merger Agreement"), and a Stock Purchase
Agreement by and among Penn National Gaming, Inc., Dan S. Meadows, Thomas L.
Meehan and Jerry L. Bayles, dated as of July 31, 2000. Under the Merger
Agreement, CRC merged with Casino Holdings, Inc., a wholly-owned subsidiary
of the Company (the "Merger"). The terms of each of the agreements were the
result of arm's length negotiations among the parties. The aggregate
consideration paid by the Company for the CRC Acquisition was approximately
$182.4 million, including the repayment of existing debt at CRC or its
subsidiaries. The purchase price of the
12
CRC Acquisition was funded by the proceeds of the Company's offering of
senior subordinated notes, which was completed in March 2001.
The assets acquired pursuant to the Merger and CRC Acquisition consist
primarily of the Casino Rouge riverboat gaming facility in Baton Rouge,
Louisiana, and a management contract for Casino Rama, a gaming facility located
in Orillia, Canada.
LCCI NOTES TENDER OFFER
On February 20, 2001, the Company commenced a cash tender offer to
purchase all of the LCCI 11% Senior Secured Notes due 2005 (the "LCCI Notes")
and a related consent solicitation to eliminate certain restrictive covenants
and related provisions in the indenture pursuant to which the LCCI Notes were
issued. The tender offer was completed on April 27, 2001 in conjunction with
the completion of the CRC Acquisition. The total consideration for each
$1,000 principal amount of notes tendered was $1,146.90, plus accrued and
unpaid interest up to but not including, the payment date, which includes a
consent payment of $30 per $1,000 principal amount of notes. Payment for the
notes and consent payments were made on April 30, 2001.
UNAUDITED PROFORMA FINANCIAL INFORMATION
Unaudited pro forma financial information for the six months ended June
30, 2001 and 2000, as though the Mississippi and CRC Acquisitions had occurred
on January 1, 2000, is as follows:
Six Months Ended Three Months Ended
June 30, June 30,
2001 2000 2001 2000
-----------------------------------------------------
Revenues.............................. $273,865 $250,039 $140,191 $128,592
Net Income............................ 13,688 13,944 7,189 7,981
Net Income per common share...........
Basic............................ $ .90 $ .93 $ .47 $ .53
Diluted.......................... $ .87 $ .91 $ .45 $ .52
Weighted shares outstanding..........
Basic........................... 15,167 14,918 15,282 14,939
Diluted......................... 15,729 15,338 15,895 15,431
7. RECENT ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, BUSINESS COMBINATIONS (SFAS 141). and No. 142, GOODWILL AND
OTHER INTANGIBLES ASSETS (SFAS 142). SFAS 141 requires the use of the purchase
method accounting and prohibits the use of pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for the
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassifies the carrying
amounts of intangible assets and goodwill based on certain criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but
13
instead test goodwill for impairment at least annually. In addition, SFAS 142
requires that the Company identify reporting units for the purpose of
assessing potential future impairments of goodwill, reassess the useful lives
of the other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. Any intangible asset with
an indefinite useful life should be tested for impairment in accordance with
the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized. SFAS 142 requires the Company to complete a transitional goodwill
impairment test six months from the date of adoption. The Company is also
required to reassess the useful lives of the other intangible assets within
the first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted for using the
purchase method. As of June 30, 2001, net carrying amount of goodwill is
$164,678 and other intangible assets is $25,012. Amortization expense during the
six-month period ended June 30, 2001 was $2,193. Currently, the Company is
assessing but has not yet determined how the adoption of SFAS 142 will impact
its financial position and results of operations.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We derive substantially all of our revenues from gaming and racing
operations. Revenues from our gaming machines at the Charles Town
Entertainment Complex and our gaming operations in Mississippi and Louisiana
and our management contract in Orillia, Canada have accounted for an
increasingly larger share of our total revenues. Our racing 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.
On a prospective basis, our acquisition of the Mississippi properties
and the consummation of the CRC acquisition on April 27, 2001 will impact
further our revenue mix between gaming and racing revenues. 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 six months ended June 30, 2001 and 2000, gaming revenue represented
approximately 68.5% and 44.0% of our total revenue, respectively.
15
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
The results of operations by property level for the three months ended
June 30, 2001 and 2000 are summarized below:
REVENUES EBITDA
-------- ------
2001 2000 2001 2000
---- ---- ---- ----
Charles Town Entertainment Complex............ $ 48,014 $ 34,263 $13,659 $ 9,391
Casino Magic Bay St. Louis (1 ) ............ 22,892 - 5,023 -
Boomtown Biloxi (1)........................... 17,939 - 3,685 -
Casino Rouge (2).............................. 16,053 - 4,034 -
Casino Rama Management Contract (2) 1,981 - 1,826 -
Penn National Race Course and its OTWs........ 15,514 16,733 2,017 2,763
Pocono Downs and its OTWs..................... 10,779 10,354 1,955 2,385
Pennwood Racing, Inc.......................... - - 490 842
Corporate eliminations (3).................... (479) (499) - -
Corporate operations.......................... 39 60 (2,463) (1,512)
Corporate operations-CRC Holdings (2) - - (159) -
-------------------------------------------------
Total........................................ $132,732 $ 60,911 $ 30.067 $ 13,869
======== ======== ======== ========
- -----------
(1) Reflects results of the Mississippi properties since the August 8, 2000
acquisition from Pinnacle Entertainment.
(2) Reflect results of the CRC acquisition since April 28, 2001
(3) Primarily reflects intracompany transactions related to import/export
simulcasting.
Revenues for the three months ended June 30, increased by $71.8
million, or 117.9%, to $132.7 million in 2001 from $60.9 million in 2000. The
Mississippi properties accounted for $40.8 million of the increase, while the
CRC properties, which were acquired on April 27, 2001, accounted for $18.0
million of the increase. Revenues increased at the Charles Town Entertainment
Complex by $13.7 million or 39.9% to $48.0 million in 2001 from $34.3 million
in 2000. Gaming revenue accounted for 96% of the increase at Charles Town due
to an increase in the number of machines from 1,500 to 2,000 in 2001 and a
change in machine mix from video voucher machines to coin-out machines.
Revenues from the Pennsylvania racetracks and their OTWs have decreased by
$.8 million due to a slight decrease in wagering.
Operating expenses for the three months ended June 30, 2001 increased
by $62.1 million, or 124.2%, to $112.1 million from $50.0 million in 2000.
The Mississippi properties accounted for $35.2 million of the increase, while
the CRC properties accounted for $14.4 million of the increase. Operating
expenses increased at the Charles Town Entertainment Complex by $10.8
million, or 42.0% to $36.5 million in 2001 from $25.7 million in 2000.
Operating expenses at the Pennsylvania racetracks and their OTWs increased by
$.4 million in the year 2000. Corporate overhead increased by $1.1 million or
52.4% to $3.2 million in 2001 from $2.1 million in 2000. Net interest expense
increased by $9.3 million to $11.1 million in 2001 from $1.8 million in 2000
16
due to the additional borrowings to fund the acquisitions of the Mississippi
properties on August 7, 2000 and the CRC acquisition on April 27, 2001.
Income before income taxes for the three months ended June 30, 2001 increased
by $.2 million to $9.9 in 2001 from $9.7 in 2000 as a result of the above.
CHARLES TOWN ENTERTAINMENT COMPLEX
Revenues increased at Charles Town by approximately $13.7 million or
39.9% to $48.0 million in 2001 from $34.3 million in 2000. Gaming revenue
increased by $12.9 million or 47.1% to $40.3 million in 2001 from $27.4
million in 2000 due to the addition of 474 new reel spinning and video,
coin-out slot machines since the fourth quarter of last year and an
additional 26 coin-out video slots since June 21, 2001. The average number of
slot machines increased to 1,956 in 2001 from 1,344 in 2000. The company
currently has 2,000 slot machines operating at the facility. Racing revenue
increased by $.5 million or 9.3% to $5.9 million in 2001 from $5.4 million in
2000. The live meet consisted of 59 race days in 2001 compared to 60 race
days in 2000. The increase in racing revenue is due mainly to the growth of
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 $.8 million for 2001 compared to $.6 million in 2000. Other
revenues increased by approximately $.3 million or 20.0% to $1.8 million in
2001 from $1.5 million in 2000 due to increased attendance for gaming and
racing, the opening of the Sundance Cafe in the OK Corral, and the expansion
of the concession areas, dining room and buffet area. Operating expenses
increased by $10.8 million or 42.0% to $36.5 million in 2001 from $25.7
million in 2000. The increase was due to increased lottery taxes, purses,
salaries, wages and administrative expenses relating to the increase in
gaming revenues. Depreciation expense increased by $1.3 million to $2.1
million in 2001 from $.8 million in 2000 due to additional gaming machines
and improvements in 2001. EBITDA increased by $4.3 million, or 45.7% to
$13.7 million in 2001 from $9.4 million in 2000.
MISSISSIPPI CASINOS
The Casino Magic Bay St Louis and Boomtown Biloxi acquisitions were
completed on August 8, 2000. For the three months ended June 30, 2001, Casino
Magic Bay St. Louis had revenues of $22.9 million consisting mainly of gaming
revenues. Operating expenses for Casino Magic totaled $19.7 million consisting
of gaming ($11.4 million), other ($1.7 million), general and administrative
($4.8 million) and depreciation and amortization expense ($1.8 million). For the
three months ended June 30, 2001, Boomtown Biloxi had revenues of $17.9 million
consisting mainly of gaming revenues. Operating expenses for Boomtown totaled
$15.5 million consisting of gaming ($7.2 million), other ($2.3 million), general
and administrative ($4.7 million) and depreciation and amortization expense
($1.3 million). EBITDA for the Mississippi casinos totaled $8.7 million for the
period. Our Mississippi casino operations have numerous competitors, many of
which have greater name recognition and financial and marketing resources than
we do. Competition in the Mississippi gaming markets is significantly more
intense than the competition that our gaming operations face in Louisiana, West
Virginia or our pari-mutuel operations face in Pennsylvania and New Jersey.
CRC ACQUISITION
The CRC acquisition was completed on April 27, 2001 and includes the
purchase of Casino Rouge in Baton Rouge Louisiana and a management contract
to operate Casino Rama in Orillia Canada. For the period which commenced
April 28, 2001 and ended June 30, 2001, Casino Rouge had revenues of $16.1
million consisting mainly of gaming revenues. Operating expenses for Casino
Rouge totaled $13.0
17
million consisting of gaming ($7.6 million), other ($.8 million), general and
administrative ($3.6 million) and depreciation and amortization expense ($1.0
million). For the period ended June 30, 2001, management fees from the Casino
Rama management contract totaled $2.0 million for which there was $155,000 of
operating expenses relating to the associated revenues. EBITDA for the CRC
acquisition totaled $5.7 million for the period.
PENN NATIONAL RACE COURSE AND ITS OTW FACILITIES
Penn National Race Course and its OTWs, for the three months ended June
30, 2000 had a decrease in revenue of $1.2 million, or 7.3%, to $15.5 million
in 2001 from $16.7 million in 2000. Pari-mutuel wagering was $95.1 million in
2001 compared to $103.3 million in 2000. The decrease in wagering is
attributed to the reduction of telephone account wagering as a result of the
discontinuation of the Track Power agreement, the reduction at Penn National
of horse field sizes and increased competition from other telephone account
and internet wagering systems. The decrease in revenue is attributed to the
decrease in wagering. Operating expenses decreased by $.5 million, or 3.5%,
to $13.9 million in 2001 from $14.4 million in 2000. The decrease in
operating expenses was directly related to the decrease in total revenues.
EBITDA decreased by $.8 million, or 28.5%, to $2.0 million in 2001 from $2.8
million in 2000.
POCONO DOWNS AND ITS OTW FACILITIES
For the three months ended June 30, 2001 Pocono Downs and its OTWs had
revenue of $10.8 million compared to $10.3 million for the same period in
2000 which was an increase of $.4 million or 3.8%. The increase came
primarily from the opening of a new OTW facility (East Stroudsburg) which
increased the import simulcast revenue by $.6 million to $ 7.8 million in
2001 from $ 7.2 million in 2000. Operating expenses increased by
approximately $.9 million or 10.6% to $9.4 million in 2001 from $8.5 million
in 2000. Operating and administrative expense increase was attributable to
the opening of the new OTW facility. Purse expenses, simulcast expenses and
pari-mutuel tax increases were directly related to the revenue increase. For
the quarter, EBITDA decreased by 16.7% to $2.0 million in 2001 from $2.4
million in 2000.
CORPORATE OVERHEAD EXPENSES
Corporate overhead expenses increased by $1.1 million, or 52.4%, to $3.2
million in 2001 from $2.1 million in 2000. Salaries and wages, payroll taxes,
benefits and related expenses increased by $.8 million due to the expansion of
the corporate office to support the Mississippi and CRC acquisitions.
NEW JERSEY JOINT VENTURE
The Company has an investment in Pennwood Racing, Inc., which operates
Freehold Raceway and, until May 2001, operated Garden State Park. Revenues of
the joint venture decreased by $2.4 million to $12.3 million in 2001 from
$14.7 million in 2000. Net income decreased by $.8 million to $.9 million in
2001 compared to $1.7 million in 2000 primarily due to the decrease in
revenue and a decrease in expenses associated with running 113 live race days
in 2001 compared to 121 live race days in 2000. In May 2001 Garden State Park
was sold and the joint venture ceased operating Garden State Park. Our 50%
share of net income was $.5 million in 2001 compared to $.8 million in 2000
and was recorded as other income on the income statement.
18
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
The results of operations by property level for the six months ended June
30, 2001 and 2000 are summarized below:
REVENUES EBITDA
-------- ------
2001 2000 2001 2000
---- ---- ---- ----
Charles Town Entertainment Complex............ $89,130 $62,446 $24,658 $16,104
Casino Magic Bay St. Louis (1 ) ............ 45,113 - 10,121 -
Boomtown Biloxi (1)........................... 35,832 - 7,270 -
Casino Rouge (2).............................. 16.053 - 4,034 -
Casino Rama Management Contract (2)........... 1,981 - 1,826 -
Penn National Race Course and its OTWs........ 30,793 33,005 4,319 5,528
Pocono Downs and its OTWs..................... 19,479 18,345 3,568 3.975
Pennwood Racing, Inc.......................... - - 1,560 1,429
Corporate eliminations (3).................... (529) (821) - -
Corporate operations.......................... 39 60 (4,817) (3,142)
Corporate operations-CRC Holdings (2)......... - - (159) -
-----------------------------------------------------
Total $237,891 $113,035 $52,380 $23,894
=====================================================
- -----------
(1) Reflects results of the Mississippi properties since the August 8, 2000
acquisition from Pinnacle Entertainment.
(2) Reflect results of the CRC acquisition since April 28, 2001
(3) Primarily reflects intracompany transactions related to import/export
simulcasting.
Revenues for the six months ended June 30, increased by $124.9 million,
or 110.5%, to $237.9 million in 2001 from $113.0 million in 2000. The
Mississippi properties accounted for $80.9 million of the increase, while the
CRC properties, which were acquired on April 27, 2001, accounted for $18.0
million of the increase. Revenues increased at the Charles Town Entertainment
Complex by $26.7 million or 42.7% to $89.1 million in 2001 from $62.4 million
in 2000. Gaming revenue accounted for 96% of the increase at Charles Town due
to an increase in the number of machines from 1,500 to 2,000 in 2001 and a
change in machine mix from video voucher machines to coin-out machines.
Revenues from their Pennsylvania racetracks and OTWs have decreased by $1.1
million due to a slight increase in wagering.
Operating expenses for the six months ended June 30, 2001 increased by
$108.1 million, or 113.9%, to $203.0 million from $94.9 million in 2000. The
Mississippi properties accounted for $69.6 million of the increase, while the
CRC properties accounted for $14.4 million of the increase. Operating
expenses increased at the Charles Town Entertainment Complex by $21.2
million, or 44.3% to $69.1 million in 2001 from $47.9 million in 2000.
Operating expenses at the Pennsylvania racetracks and their OTWs increased by
$.6 million in the year 2000. Corporate overhead increased by $1.7 million or
54.8% to $4.8 million in 2001 from $3.1 million in 2000. Net interest expense
increased by $14.6 million to $18.7 million in 2001 from $4.1 million in 2000
due to the additional borrowings to fund the acquisitions of the Mississippi
properties on August 7, 2000 and the CRC acquisition on April 27, 2001.
Income before income taxes for the six months ended June 30 increased by $1.7
million, or 11.0%, to $17.1 in 2001 from $15.4 in 2000 as a result of the
above.
19
CHARLES TOWN ENTERTAINMENT COMPLEX
Revenues increased at Charles Town by $26.7 million or 42.7% to $89.1
million in 2001 from $62.4 million in 2000. Gaming revenue increased by $25.5
million or 51.3% to $75.2 million in 2001 from $49.7 million in 2000 due to
the addition of 474 new reel spinning and video, coin-out slot machines since
the fourth quarter of last year and an additional 26 coin-out video slots
since June 21, 2001. The average number of slot machines increased to 1,927
in 2001 from 1,358 in 2000. The company currently has 2,000 slot machines
operating at the facility. Racing revenue increased by $.5 million or 5.0% to
$10.6 million in 2001 from $10.1 million in 2000. The live meet consisted of
103 race days in 2001 and 105 race days in 2000. Charles Town generated
export simulcasting revenues of $1.4 million for 2001 compared to 1.0 million
in 2000. Concessions and other revenues increased by approximately $.4
million or 14.8% to $3.1 million in 2001 from $2.7 million in 2000 due to
increased attendance for gaming and racing, the opening of the Sundance Cafe
in the OK Corral, and the expansion of the concession areas, dining room and
buffet area. Operating expenses increased by $21.2 million or 44.2% to $69.1
million in 2001 from $47.9 million in 2000. The increase was primarily due to
an increase in gaming expenses of $17.1 million, or 57.8%, to $46.7 million
in 2001 from $29.6 million in 2000. This increase was mainly due to increased
lottery taxes, purses, salaries and wages and administrative expenses related
to the increase in gaming revenues. Depreciation expense increased by $3.0
million to $4.6 million in 2001 from $1.6 million in 2000 due to additional
gaming machines and improvements in 2001. EBITDA increased by $8.6 million,
or 53.4% to $24.7 million in 2001 from $16.1 million in 2000.
MISSISSIPPI CASINOS
The Casino Magic Bay St Louis and Boomtown Biloxi acquisitions were
completed on August 8, 2000. For the six months ended June 30, 2001, Casino
Magic Bay St. Louis had revenues of $45.1 million consisting mainly of gaming
revenues. Operating expenses for Casino Magic totaled $38.7 million
consisting of gaming ($22.4 million), other ($3.2 million), general and
administrative ($9.3 million) and depreciation and amortization expense ($3.8
million). For the six months ended June 30, 2001, Boomtown Biloxi had
revenues of $35.8 million consisting mainly of gaming revenues. Operating
expenses for Boomtown totaled $30.8 million consisting of gaming ($14.6
million), other ($4.5 million), general and administrative ($9.4 million) and
depreciation and amortization expense ($2.3 million). EBITDA for the
Mississippi casinos totaled $17.4 million for the period. Our Mississippi
casino operations have numerous competitors, many of which have greater name
recognition and financial and marketing resources than we do. Competition in
the Mississippi gaming markets is significantly more intense than the
competition that our gaming operations face in Louisiana, West Virginia or
our pari-mutuel operations face in Pennsylvania and New jersey. We do not
expect that this competition will have a material adverse effect on our
results of operations.
CRC ACQUISITION
The CRC acquisition was completed on April 27, 2001 and includes the
purchase of Casino Rouge in Baton Rouge Louisiana and a management contract
to operate Casino Rama in Orilio Canada. For the period ended June 30, 2001,
Casino Rouge had revenues of $16.1 million consisting mainly of gaming
revenues. Operating expenses for Casino Rouge totaled $13.0 million
consisting of gaming ($7.6 million), other ($.8 million), general and
administrative ($3.6 million) and depreciation and amortization expense ($1.0
million). For the period ended June 30, 2001, management fees from the Casino
Rama management contract totaled $2.0 million for
20
which there was $155,000 of operating expenses relating to the associated
revenues. EBITDA for the CRC acquisition totaled $5.7 million for the period.
PENN NATIONAL RACE COURSE AND ITS OTW FACILITIES
Penn National Race Course and its OTWs for the six months ended June
30, had a decrease in revenue of $2.2 million, or 6.7%, to $30.8 million in
2001 from $33.0 million in 2000. The decrease was primarily at Penn National
Race Course with pari-mutuel wagering decreasing by $2.9 million, or 2.2% to
$130.2 million in 2001 from $133.1 million in 2000. Inclement weather for the
northeastern part of the country had an adverse impact on both live racing,
as well as simulcast attendance during the first three months of the year.
Operating expenses decreased by approximately $1.1 million, or 3.9%, to $27.3
million in 2001 from $28.4 million in 2000. The decrease was primarily
related to the decrease in revenues as discussed above. EBITDA attributable
to these properties decreased by $1.2 million, or 21.8%, to $4.3 million in
2001 from $5.5 million in 2000.
POCONO DOWNS AND ITS OTW FACILITIES
Pocono Downs and its OTWs, for the six months ended June 30, had a
increase in revenue of $1.2 million, or 6.6%, to $19.5 million in 2001 from
$18.3 million in 2000. The increase was due primarily to the opening of the
new East Stroudsburg OTW facility in late July 2000 which generated revenues
of $1.7 million. The racetrack, along with the other four established OTWs,
reported a slight decrease in revenue of $.5 million. Operating expenses
increased by approximately $1.6 million, or 10.3%, to $17.1 million in 2001
from $15.5 million in 2000. The operating expense increases in the amount of
$1.5 million was attributable to the opening of the East Stroudsburg OTW. For
the six months ended June 30, 2001, EBITDA decreased by $.4 million to $3.6
million in 2001 from $4.0 million in 2000.
CORPORATE OVERHEAD EXPENSES
Corporate overhead expenses increased by $1.7 million, or 54.8%, to $4.8
million in 2001 from $3.1 million in 2000. Salaries and wages, payroll taxes,
benefits and related expenses increased by $1.4 million due to the expansion of
the corporate office to support the Mississippi and CRC acquisitions.
NEW JERSEY JOINT VENTURE
The Company has an investment in Pennwood Racing, Inc., which operates
Freehold Raceway and, until May 2001, operated Garden State Park. Revenues of
the joint venture decreased by $2.3 million to $27.5 million in 2001 from
$29.8 million in 2000. Net income increased by $.2 million to $3.1 million in
2001 compared to $2.9 million in 2000 primarily due to the decrease in
expenses associated with running 56 live race days in 2001 compared to 65
live race days in 2000. In May 2001 Garden State Park was sold and the joint
venture ceased operating Garden State Park. Our 50% share of net income was
$1.6 million in 2001 compared to $1.4 million in 2000 and was recorded as
other income expenses on the income statement.
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 securities.
21
Net cash provided by operating activities was $38.6 million for the six
months ended June 30, 2001. This consisted of net income and non-cash items
($27.6 million), earnings from joint venture ($ 1.6 million), an increase in
deferred income taxes ($.2 million), and a decrease in current assets ($2.2
million) and an increase in current liabilities ($10.2 million) related to
the normal course of business, net of the CRC acquisition on April 27, 2001.
Cash flows from investing totaled $189.5 million for the six months
ended June 30, 2001. Expenditures for property, plant, and equipment totaled
$ 13.4 million and included new hotel construction at Casino Magic ($ 3.7
million), new gaming equipment at Casino Magic ($1.4 million), new gaming
equipment and slot system at Boomtown ($2.9 million), land and building
acquisitions at Charles Town ($1.0 million), the OK Corral slot center at
Charles Town ($0.6 million), property additions at Charles Town ($0.3
million), building and design of a steak house at Casino Rouge ($0.7
million), other small projects ($0.4 million) and maintenance capital
expenditures ($ 2.4 million). The CRC acquisition totaled $182.4 million.
Cash received from the joint venture totaled $1.1 million. Cash in escrow
decreased by $5.1 million as a result of the closing of the CRC acquisition
on April 27, 2001.
Cash flows from financing activities provided net cash flow of $165.3
million for the six months ended June 30, 2001. Aggregate proceeds from the
issuance of notes were $200.0 million, a portion of which were used to pay
financing costs associated with the issuance ($6.9 million). Principal payments
on long-term debt under our existing credit facility, net of additional
borrowings on the revolving line of credit, were $32.6 million. Proceeds from
the exercise of stock options totaled $4.8 million.
CAPITAL EXPENDITURES
The following table summarizes our planned capital expenditures, other
than maintenance capital expenditures, by property level, for 2001:
BUDGET EXPENDITURES BALANCE
PROPERTY 2001 THRU 6/30/01 TO EXPEND
- -------- ---- ------------ ---------
Charles Town Entertainment Complex $ 9,200 $ 1,786 $ 7,414
Casino Magic Bay St. Louis 18,500 3,698 14,802
Boomtown Biloxi 2,000 2,000 -
Casino Rouge 2,000 704 1,296
Pennsylvania Racetracks and OTWs 800 494 306
--------- -------- ------------
Total $ 32,500 $ 8,682 $ 23,818
--------- -------- ------------
SENIOR SUBORDINATED NOTES
On March 12, 2001, we completed through a private placement, the sale
of $200 million in aggregate principal amount of 11 1/8% of Senior
Subordinated Notes due March 1, 2008 the proceeds of the notes were used, in
part, to complete the acquisition of CRC Holding, Inc. and the minority
interest in Louisiana Casino Cruises, Inc. (LCCI) not owned by CRC. The
Senior Subordinated Notes rank equally with our other senior indebtedness and
junior to our senior debt, including debt under our senior secured credit
facility. The Senior Subordinated Notes are guaranteed by all of our current
and future wholly owned domestic subsidiaries. We have filed a registration
statement under the Securities Act of 1933 to effect an exchange offer of
registered Senior Subordinated Notes.
22
OUTLOOK
Based on our current level of operations, and anticipated revenue growth,
we believe that cash generated from operations and amounts available under our
credit facility will be adequate to meet our anticipated debt service
requirements, capital expenditures and working capital needs for the foreseeable
future. We cannot assure you, however, that our business will generate
sufficient cash flow from operations, that our anticipated revenue growth will
be realized, or that future borrowings will be available under our credit
facility or otherwise will be available to enable us to service our
indebtedness, including the credit facility and the notes, to retire or redeem
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 on or before maturity. Our future operating performance and
our ability to service or refinance our debt will be subject to future economic
conditions and to financial, business and other factors, many of which are
beyond our control.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On December 20, 2000, we entered into an interest rate swap agreement with
a financial institution in the notional amount of $100 million. The interest
rate swap agreement hedges our exposure on our outstanding floating rate
obligations, which were $276,600,000 at June 30, 2001. The purpose of the
interest rate swap is to convert a portion of our floating rate interest
obligations to obligations having a fixed rate of 5.835% plus an applicable
margin up to 4.00% per annum through December 20, 2003. The fixing of interest
rates reduces in part our exposure to the uncertainty of floating interest
rates. The differentials paid or received by us on the interest rate swap
agreement is recognized as adjustments to interest expense in the period
incurred. For the six months ended June 30, 2001, interest expense increased by
approximately $265,000 as a result of the interest rate swap agreement. We are
exposed to credit loss in the event of nonperformance by our counter party to
the interest rate swap agreement. We do not anticipate nonperformance by such
financial institution, and no material loss would be expected from the
nonperformance by such financial institution. Our interest rate swap agreement
expires in December 2003.
23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Current Report on Form 8-K filed on May 7, 2001 that reflected the completion
on April 27,2001, of the purchase of CRC Holdings, Inc. and the minority
interest in Louisiana Casino Cruises, Inc. for approximately $160 million.
Current Report on Form 8-K/A filed on June 8, 2001 that included financial
information pertaining to the purchase of CRC Holdings, Inc and the minority
interest in Louisiana Casino Cruises, Inc. for approximately $160 million which
was reported in the current Form 8-K filed May 7, 2001
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Penn National Gaming, Inc.
August 14, 2001 By: /s/ WILLIAM J. CLIFFORD
- ------------------- ---------------------------------------
Date William J. Clifford,
Chief Financial Officer
25
