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 SEPTEMBER 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 __
(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 NOVEMBER 13, 2001
- -------------------------------------- -----------------------------------
Common Stock par value .01 per share 15,478,850
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 to update publicly any forward-looking statements, except as required by
law. This discussion is permitted by the Private Securities Litigation Reform
Act of 1995.
2
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheets
September 30, 2001 (unaudited) and December 31, 2000 4
Consolidated Statements of Income
Three Months and Nine Months Ended September 30, 2001
and 2000 (unaudited) 5
Consolidated Statement of Shareholders' Equity
Nine Months Ended September 30, 2001 (unaudited) 6
Consolidated Statements of Cash Flow
Nine Months Ended September 30, 2001 and 2001 (unaudited) 7
Notes to Consolidated Financial Statements 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 20
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 21
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 21
Signature Page 22
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)
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------------- ------------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 36,401 $ 23,287
Accounts receivable 20,801 10,341
Prepaid expenses and other current assets 8,646 5,312
Prepaid income taxes -- 1,905
--------- ---------
TOTAL CURRENT ASSETS 65,848 40,845
Property, plant and equipment, at cost
Land and improvements 82,761 81,177
Buildings and improvements 225,042 142,753
Furniture, fixtures and equipment 97,731 79,606
Transportation equipment 1,138 1,015
Leasehold improvements 11,920 11,704
Construction in progress 10,869 3,643
--------- ---------
429,461 319,898
Less accumulated depreciation and amortization 50,843 31,582
--------- ---------
NET PROPERTY, PLANT AND EQUIPMENT 378,618 288,316
--------- ---------
Other assets
Investments in and advances to unconsolidated affiliates 15,426 14,584
Cash in escrow 500 5,107
Excess of cost over fair market value of net assets acquired (net of
accumulated amortization of $6,311 and $3,848, respectively) 164,223 78,161
Other intangible assets (net of accumulated amortization of $1,068) 24,678 --
Deferred financing costs, net 14,709 9,585
Miscellaneous 6,266 3,302
--------- ---------
TOTAL OTHER ASSETS 225,802 110,739
--------- ---------
$ 670,268 $ 439,900
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 14,204 $ 11,390
Accounts Payable 14,242 18,436
Purses due horsemen 1,333 2,262
Uncashed pari-mutuel tickets 1,108 1,393
Accrued expenses 28,626 6,913
Accrued interest 9,381 1,289
Accrued salaries and wages 6,026 3,957
Customers' deposits 794 834
Income taxes 1,210 --
Taxes, other than income taxes 4,055 2,816
--------- ---------
TOTAL CURRENT LIABILITIES 80,979 49,290
Long term liabilities
Long-term debt, net of current maturities 454,518 297,909
Deferred income taxes 38,257 13,480
--------- ---------
Total long-term liabilities 492,775 311,389
--------- ---------
Commitments and contingencies
Shareholders' equity
Preferred stock, $.01 par value, 1,000,000 shares authorized; no shares issued -- --
Common stock, $.01 par value, 200,000,000 shares authorized;
15,901,300 and 15,459,175 shares issued, respectively 159 155
Treasury stock, at cost, 427,700 shares outstanding (2,379) (2,379)
Additional paid-in capital 44,348 39,482
Retained earnings 60,776 41,963
Other comprehensive income (6,390) --
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 96,514 79,221
--------- ---------
$ 670,268 $ 439,900
========= =========
See accompanying notes to consolidated financial statements.
4
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
2001 2000 2001 2000
--------- -------- --------- ---------
Revenues
Gaming $ 104,366 $ 50,215 $ 267,264 $ 99,895
Racing 28,781 30,910 85,508 87,913
Management service fees 3,499 -- 5,480 --
Other revenue 8,888 5,857 25,173 12,209
--------- -------- --------- ---------
TOTAL REVENUES 145,534 86,982 383,425 200,017
--------- -------- --------- ---------
Operating expenses
Gaming 57,575 29,505 146,940 59,050
Racing 20,368 20,419 59,511 59,065
Other 9,604 5,774 25,847 11,980
General and administrative 26,195 13,143 68,515 29,316
Depreciation and amortization 9,157 4,089 25,079 8,457
--------- -------- --------- ---------
TOTAL OPERATING EXPENSES 122,899 72,930 325,892 167,868
--------- -------- --------- ---------
INCOME FROM OPERATIONS 22,635 14,052 57,533 32,149
--------- -------- --------- ---------
Other income (expense)
Interest expense (11,554) (6,188) (32,461) (11,004)
Interest income 468 607 2,654 1,334
Earnings from joint venture 460 815 2,020 2,244
Other (145) 1 (729) 1
--------- -------- --------- ---------
Total other income (expense) (10,771) (4,765) (28,516) (7,425)
--------- -------- --------- ---------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 11,864 9,287 29,017 24,724
--------- -------- --------- ---------
Taxes on income 4,151 3,285 10,204 8,876
--------- -------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 7,713 6,002 18,813 15,848
Extraordinary item -- loss on early extinguishment of
debt, net of income taxes of $4,615 -- (6,583) -- (6,583)
--------- -------- --------- ---------
NET INCOME (LOSS) $ 7,713 $ (581) $ 18,813 $ 9,265
========= ======== ========= =========
PER SHARE DATA:
BASIC
Income before extraordinary item $ 0.50 $ 0.40 $ 1.23 $ 1.06
Extraordinary item -- (0.44) -- (0.44)
--------- -------- --------- ---------
Net income (loss) $ 0.50 $ (0.04) $ 1.23 $ 0.62
--------- -------- --------- ---------
DILUTED
Income before extraordinary item $ 0.48 $ 0.39 $ 1.19 $ 1.03
Extraordinary item -- (0.43) -- (0.43)
--------- -------- --------- ---------
Net income (loss) $ 0.48 $ (0.04) $ 1.19 $ 0.60
--------- -------- --------- ---------
WEIGHTED SHARES OUTSTANDING
Basic 15,467 15,007 15,271 14,948
Diluted 16,043 15,504 15,836 15,407
See accompanying notes to consolidated financial statements.
5
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 AMOUNT 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 442,125 4 -- 4,866 -- -- 4,870
Comprehensive income:
Net income for the nine months
ended September 30, 2001 -- -- -- -- 18,813 -- 18,813
Fair market value of swap agreement -- -- -- -- -- (6,358) (6,358)
Translation adjustment -- -- -- -- -- (32) (32)
---------- ---- ------- ------- ------- ------- --------
Total comprehensive income -- -- -- -- 18,813 (6,390) 12,423
---------- ---- ------- ------- ------- ------- --------
BALANCE, SEPTEMBER 30, 2001 15,901,300 $159 $(2,379) $44,348 $60,776 $(6,390) $ 96,514
========== ==== ======= ======= ======= ======= ========
See accompanying notes to consolidated financial statements.
6
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2001 2000
--------- ---------
Cash flows from operating activities
Net income $ 18,813 $ 9,265
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 25,079 8,457
Earnings from joint venture (2,020) (1,645)
Extraordinary loss relating to early extinguishment of debt -- 11,198
(Gain)/Loss on sale of net assets 731 --
Deferred income taxes 3,793 571
Decrease (increase) in:
Accounts receivable 792 (3,715)
Prepaid expenses and other current assets (1,441) (4,584)
Prepaid income taxes 1,905 843
Miscellaneous other assets (1,108) (2,013)
Increase (decrease) in:
Accounts payable (7,206) 3,368
Purses due horsemen (929) (1,105)
Uncashed pari-mutuel tickets (285) (201)
Accrues expenses 11,290 4,859
Accrued interest 1,734 939
Accrued salary and wages 2,069 3,845
Customer deposits (40) 321
Taxes, other than income taxes 1,239 523
Income taxes 1,210 --
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 55,626 30,926
--------- ---------
Cash flows from investing activities
Expenditures for property, plant and equipment (22,967) (17,348)
Proceeds from sales of property and equipment 237 151
Investment in and advances to joint venture 1,178 --
Decrease in cash in escrow 4,607 (8)
Acquisition of business, net of cash acquired (182,961) (203,906)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (199,906) (221,111)
--------- ---------
Cash flows from financing activities
Proceeds from exercise of stock options 4,870 626
Proceeds of long-term debt 211,000 319,895
Principal payments on long-term debt (51,576) (102,310)
(Increase) in unamortized financing costs (6,900) (10,258)
Payment of senior notes tender fee -- (6,685)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 157,394 201,268
--------- ---------
Net increase in cash and cash equivalents 13,114 10,968
Cash and cash equivalents, at beginning of period 23,287 9,434
--------- ---------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 36,401 $ 20,402
========= =========
See accompanying notes to consolidated financial statements.
7
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., 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 that are necessary to present fairly the
financial position of the Company as of September 30, 2001 and the results of
its operations for the nine month periods ended September 30, 2001 and 2000. The
results of operations experienced for the nine month period ended September 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 nine months ended September 30, 2001 and 2000 for
interest was $29,740,000 and $10,025,000, respectively.
Cash paid during the nine months ended September 30, 2001 and 2000 for
income taxes was $1,040,000 and $2,984,000, 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 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 (in
thousands):
8
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
REVENUES
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
---- ----
Gaming (1)(2)....................... $308,967 $122,029
Racing.............................. 75,456 79,256
Eliminations (3).................... (998) (1,268)
-------- -------
Total......................... $383,425 $200,017
======== ========
EBITDA
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
---- ----
Gaming (1)(2)....................... $71,015 $25,531
Racing (4).......................... 13,617 17,319
------- -------
Total......................... $84,632 $42,850
======= =======
TOTAL ASSETS
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------ -----------------
Gaming (1)(2)....................... $1,089,191 $671,655
Racing.............................. 89,560 91,756
Eliminations (3).................... (508,483) (323,511)
--------- --------
Total......................... $ 670,268 $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.
(4) Includes "Earnings from joint venture" of $2,020 and 2,244, respectively.
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.
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.
9
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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 the 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 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 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 totaling $53 million and consent payments totaling $7.8 million were
made on April 30, 2001.
10
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
UNAUDITED PROFORMA FINANCIAL INFORMATION
Unaudited pro forma financial information for the nine months and
three months ended September 30, 2001 and 2000, as though the Mississippi and
CRC Acquisitions had occurred on January 1, 2000, is as follows (in
thousands):
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ---------------------
2001 2000 2001 2000
--------------------------------------------------
Revenues.................................... $419,399 $376,722 $145,535 $126,683
Net income.................................. 23,759 19,090 7,711 5,797
Net income per common share
Basic.................................. $1.56 $1.28 $0.50 $0.39
Diluted................................ 1.50 1.24 0.48 0.37
Weighted shares outstanding
Basic.................................. 15,271 14,948 15,467 15,007
Diluted................................ 15,836 15,407 16,043 15,504
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 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 September 30, 2001, net carrying amount of goodwill
is $164,223,000 and other intangible assets is $24,678,000. Amortization expense
during the nine-month period ended September 30, 2001 was $3,520,000. 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.
8. PENDING ACQUISITION
On August 30, 2001, the Company entered into a definitive agreement to
acquire all of the assets of the Bullwhackers Casino operations, in Black Hawk,
Colorado, from Colorado Gaming and Entertainment Co., a subsidiary of Hilton
Group plc, for $6.5 million in cash. The Bullwhackers assets consist of the
Bullwhackers Casino, the adjoining Bullpen Sports Casino, the Silver Hawk Saloon
and Casino, an administrative building and a 475-car parking area, all located
in the Black Hawk, Colorado gaming jurisdiction. The Bullwhackers properties
11
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
comprise a total of 63,800 square feet of interior space, 20,700 square feet of
which is devoted to gaming, consisting of 1,002 slot machines and 16 table
games. The properties are located on leased land as well as 3.25 acres of land
included in the acquisition, much of which is utilized for parking. The
transaction is anticipated to close in the second quarter of 2002.
9. LITIGATION
SHOWBOAT LITIGATION
As previously disclosed in its Exchange Act filings, in 1997 the
Company acquired the Charles Town Races property in Charles Town, West Virginia,
by exercising an option held by Showboat Development Company, now a wholly-owned
subsidiary of Harrah's Entertainment, Inc. In return for assigning the option,
Showboat retained the right to operate a casino at the Charles Town Races
property in return for a management fee, to be negotiated at the time of
exercise, based on reasonable rates for similar properties. The express terms of
the Showboat option do not specify what activities at Charles Town Races would
constitute operation of a casino. As previously disclosed, the Company believes
that its installation and operation of video lottery terminals linked to the
West Virginia Lottery at the Charles Town Races facility does not constitute the
operation of a casino under the Showboat option or under West Virginia law and
therefore does not trigger Showboat's right to exercise the Showboat option. The
rights under the showboat option extend until November 2001.
On August 20, 2001, the Company was served with a lawsuit brought by
Showboat Development Company against the Company and certain other parties
related to the Charles Town Races facility. The suit alleges, among other
things, that the Company's operation of coin-out video lottery terminals at the
Charles Town facility constitutes the operation of a casino, thereby triggering
Showboat's option. The suit also alleges that the Company's March 2000
acquisition of the 11% minority interest in Charles Town Races from BDC Group,
the Company's former joint venture partner, was made in violation of a right of
first refusal that Showboat holds from BDC covering the sale of any interest in
any casino at Charles Town Races. The Company has filed a motion to dismiss this
action in federal court in Nevada and, in the alternate, a motion to transfer
the case to the state of West Virginia. The Company believes that each of
Showboat's claims is without merit, and it intends to vigorously defend itself
against them.
OTHER
In July 2001, a lawsuit was filed against the Company by certain
surveillance employees at the Charles Town facility claiming that the
Company's surveillance of those employees during working hours was improper.
The lawsuit claims damages of $7.0 million and punitive damages of $14.0
million. The Company currently is conducting discovery in the case but, at
this time, believes that all of the claims of the employees are without
merit. The Company intends to vigorously defend itself against this action.
12
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. Over the past few years, revenues from our gaming machines at the
Charles Town Entertainment Complex, 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 simulcasts of our races at out-of-state locations. Our other
revenues have been derived from admissions, program sales, food and beverage
sales, concessions and certain other ancillary activities.
On a prospective basis, our August 2000 acquisition of the Mississippi
properties and our late-April 2001 acquisition of CRC Holdings, Inc. 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
nine months ended September 30, 2001 and 2000, gaming revenue represented
approximately 69.7% and 49.9% of our total revenue, respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
The results of operations by property level for the three months ended
September 30, 2001 and 2000 are summarized below (in thousands):
REVENUES EBITDA
---------------------- ---------------------
2001 2000 2001 2000
---- ---- ---- ----
Charles Town Entertainment Complex............ $ 54,152 $ 37,746 $ 14,312 $ 10,364
Casino Magic Bay St. Louis (1 ).............. 22,711 12,363 4,779 2,433
Boomtown Biloxi(1)............................ 17,594 9,473 3,420 1,419
Casino Rouge (2) ............................. 22,881 - 5,316 -
Casino Rama Management Contract (2)........... 3,520 - 3,257 -
Penn National Race Course and its OTWs........ 14,594 16,933 1,748 3,009
Pocono Downs and its OTWs..................... 10,592 10,971 1965 2,565
Pennwood Racing, Inc.......................... - - 459 814
Corporate eliminations (3).................... (510) (499) - -
Corporate operations.......................... - - (2,761) (1,648)
Corporate operations CRC Holdings (2)......... - - (243) -
------------------------------------------------
Total................................... $145,534 $ 86,982 $ 32,252 $ 18,956
================================================
- ----------
(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 September 30, 2001 increased by
$58.4 million, or 67.2%, to $145.4 million in 2001 from $87.0 million in 2000.
The Mississippi properties accounted for $18.5 million of the increase, while
the CRC properties acquired on April 27, 2001 accounted for $26.4 million of the
increase. Revenues increased at the Charles Town Entertainment Complex by $16.5
million, or 43.8%, to $54.2 million in 2001 from $37.7 million in 2000. Gaming
revenue accounted for 85% of the increase at Charles Town due to an increase in
the number of video lottery machines from 1,500 to 2,000 in 2001 and a change in
machine mix from video voucher
13
machines to coin-out machines. Revenues from the Pennsylvania racetracks and
OTWs have decreased by $2.7 million due to a decrease in wagering and a
Commonwealth of Pennsylvania supplement grant of $1.6 million received in 2000
that has not been received in 2001.
Operating expenses for the three months ended September 30, 2001
increased by $50.0 million, or 68.6%, to $122.9 million in 2001 from $72.9
million in 2000. The Mississippi properties accounted for $15.6 million of the
increase, while the CRC properties accounted for $20.1 million of the increase.
Operating expenses increased at the Charles Town Entertainment Complex by $13.7
million, or 48.2% to $42.1 million in 2001 from $28.4 million in 2000. Operating
expenses at the Pennsylvania racetracks and their OTWs increased by $.9 million
in the year 2000. Corporate overhead increased by $1.4 million or 66.7% to $3.5
million in 2001 from $2.1 million in 2000. Net interest expense increased by
$5.5 million to $11.1 million in 2001 from $5.6 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 and extraordinary item for the three months ended September 30 increased
by $2.6 million, or 28.0%, to $11.9 million in 2001 from $9.4 million in 2000 as
a result of the above.
CHARLES TOWN ENTERTAINMENT COMPLEX
Total revenues were $54.2 million for the three months ended September
30, 2001, an increase of $16.5 million, or 43.8%, from $37.7 million in 2000.
Gaming revenues were $45.3 million for the three months ended September 30,
2001, an increase of $14.7 million, or 48.0%, from gaming revenues of $30.6
million for the comparable period in 2000. This increase was due in part to an
increase in the total number of video lottery machines from 2,000 in 2001
compared to 1,500 in 2000 and expanded advertising and marketing campaigns in
the Baltimore and Washington D.C. areas. Racing revenues were $5.9 million for
the three months ended September 30, 2001, an increase of $0.4 million, or 7.3%,
from $5.5 million in 2000. This increase was due to increase an increase in live
race days and resulted in additional wagering of $13.5 million, or 32.8%, to
$54.5 million. Other revenues were $1.9 million for the three months ended
September 30, 2001, an increase of $0.2 million, or 11.8%, from other revenues
of $1.7 million for the prior period. Other revenues include revenues from food,
beverage, retail and commissions.
Total operating expenses were $39.8 million for the three months ended
September 30, 2001, an increase of $12.4 million, or 45.2%, from operating
expenses of $27.4 million for the prior period. The increase was primarily due
to an increase in gaming expense and related taxes of $9.2 million attributed to
increased gaming revenues and a change in gaming legislation that resulted in
the loss of the administrative fee refund. Salaries and wages increased by $1.7
million primarily due to additional labor associated with increased gaming
units, gaming square footage, and expanded concession and dining capacities.
Other direct costs increased due to the expanded capacity of the facility.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
was $14.3 million for the three months ended September 30, 2001, an increase of
$4.0 million, or 38.8%, from EBITDA of $10.3 million for the same period in
2000.
MISSISSIPPI ACQUISITION
The Casino Magic Bay St Louis and Boomtown Biloxi acquisitions were
completed on August 8, 2000. For the three months ended September 30, 2001,
Casino Magic Bay St. Louis had revenues of $22.7 million consisting mainly of
gaming revenues. Operating expenses for Casino Magic totaled $19.7 million
consisting of gaming ($11.4 million), other ($1.8 million), general and
administrative ($4.7 million) and depreciation and amortization expense ($1.8
million). For the three months ended September 30, 2001, Boomtown Biloxi had
revenues of $17.6 million consisting mainly of gaming revenues. Operating
expenses for Boomtown totaled $15.5 million consisting of gaming ($7.1 million),
other ($2.3 million), general and administrative ($4.8 million) and depreciation
and amortization expense ($1.3 million). EBITDA for the Mississippi casinos
totaled $8.2 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 or West Virginia or our pari-mutuel operations face
in Pennsylvania and New Jersey.
14
CRC ACQUISITION
On April 27, 2001, we completed the CRC acquisition, which included the
purchase of Casino Rouge in Baton Rouge, Louisiana and a management contract to
operate Casino Rama in Orillia, Canada. For the three months ended September 30,
2001, Casino Rouge had revenues of $22.9 million consisting mainly of gaming
revenues. Operating expenses for Casino Rouge totaled $19.5 million consisting
of gaming ($10.9 million), other ($1.4 million), general and administrative
($5.3 million) and depreciation and amortization expense ($1.9 million). For the
three months ended September 30, 2001, management fees from the Casino Rama
management contract totaled $3.5 million for which there was $266,000 of
operating expenses relating to the associated revenues. EBITDA for the CRC
acquisition totaled $8.3 million for the period.
PENN NATIONAL RACE COURSE AND ITS OTW FACILITIES
Penn National Race Course and its OTWs had revenues in 2001 of $14.6
million compared to $16.9 million in 2000, a decrease of $2.3 million or 13.6%.
Included in 2000 revenues is a Commonwealth of Pennsylvania supplement grant of
$1.0 million that has not been received in 2001. If the 2000 revenues were
adjusted for this grant, the decrease in 2001 revenues would be $1.3 million, or
8.2%. Live racing revenues continues to lag behind last year in spite of an
increasingly better field size. Average field size in 2001 for the third quarter
was 8.0 horses compared to 7.07 horses in 2000. The events of September 11, 2001
caused the cancellation of two days of racing and a slowdown in revenues during
the week following the tragedy. Operating expenses for the quarter were $12.9
million in 2001 compared to $13.9 million in 2000, a decrease of $1.0 million,
or 7.2%. The decline in operating expenses was attributable primarily to the
decline in revenues. EBITDA was approximately $1.7 million in 2001 compared to
$3.0 million in 2000, a decrease of $1.3 million, or 43.3%.
POCONO DOWNS AND ITS OTW FACILITIES
For the quarter ended September 30, 2001 Pocono Downs' revenue was
$10.6 million compared to $11.0 million for the same period in 2000, a decrease
of $0.4 million, or 3.7%. Included in 2000 revenues is a Commonwealth of
Pennsylvania supplement grant of $0.6 million that was not received in 2001. The
East Stroudsburg OTW was open for only two months in 2000; as a result, 2001
revenues were $0.3 million higher than in 2001. Live races, export simulcast and
concessions revenues decreased $0.1 million to $2.5 million compared to $2.6
million for the same period the previous year. Import simulcast increased $0.3
million, or 4.1%, to $7.6 million in 2001 from $7.3 million in 2000.
Operating expenses increased by approximately $0.2 million, or 2.6%, to
$8.6 million in 2001 from $8.4 million in 2000. Operating and administrative
expense increased $0.1 million to $2.3 million from $2.2 million. This increase
was attributable to a full quarter of expenses in 2001 at the new East
Stroudsburg OTW facility. EBITDA decreased 23.5% to $2.0 million in 2001 from
$2.6 million in 2000.
CORPORATE OVERHEAD EXPENSES
Corporate overhead expenses increased by $1.2 million, or 75.0%, to
$2.8 million in 2001 from $1.6 million in 2000. Salaries and wages, payroll
taxes, employee benefits, relocation expenses and office rent increased by
$550,000 due to the addition of new staff at the corporate office to support the
Mississippi and CRC acquisitions. Liability insurance increased by $120,000 due
to increased limits for general liability, fiduciary and directors and officers
liability insurance. Consulting and professional services increased by $250,000.
Travel expenses increased by $200,000 due to supporting properties in
Mississippi, Louisiana and Canada.
NEW JERSEY JOINT VENTURE
We have an investment in Pennwood Racing, Inc., a joint venture with
Greenwood Racing, Inc., that operates Freehold Raceway and, until May 2001,
operated Garden State Park. Revenues of the joint venture decreased by $5.7
million to $8.5 million in 2001 from $14.3 million in 2000. Net income decreased
by $0.7 million to $0.9 million in 2001 compared to $1.6 million in 2000
primarily due to the decrease in revenue and a decrease in expenses associated
with running 35 live race days in 2001 compared to 55 live race days in 2000. In
May 2001, the
15
owners of Garden State Park completed the sale of the facility and the joint
venture ceased operating Garden State Park. Our 50% share of net income was $0.5
million in 2001 compared to $0.8 million in 2000 and was recorded as other
income on the income statement.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
The results of operations by property level for the nine months ended
September 30, 2001 and 2000 are summarized below (in thousands):
REVENUES EBITDA
--------------------------- -------------------------
2001 2000 2001 2000
---- ---- ---- ----
Charles Town Entertainment Complex ......... $ 143,283 $ 100,194 $ 38,971 $ 26,470
Casino Magic Bay St. Louis (1) ............ 67,823 12,362 14,908 2,417
Boomtown Biloxi(1) ......................... 53,426 9,474 10,700 1,419
Casino Rouge (2) ........................... 38,934 -- 9,351 --
Casino Rama Management Contract (2) ........ 5,480 -- 5,062 --
Penn National Race Course and its OTWs ..... 45,386 49,939 6,065 8,537
Pocono Downs and its OTWs .................. 30,070 29,317 5,532 6,541
Pennwood Racing, Inc. ...................... -- -- 2,020 2,244
Corporate eliminations (3) ................. (1,349) (1.269) -- --
Corporate operations ....................... 372 -- (7,574) (4,778)
Corporate operations CRC Holdings (2) ...... -- -- (403) --
-------------------------------------------------------------
Total ................................ $ 383,425 $ 200,017 $ 84,632 $ 42,850
=============================================================
- ----------
(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 nine months ended September 30, 2001 increased by
$183.4 million, or 91.7%, to $383.4 million in 2001 from $200.0 million in 2000.
The Mississippi properties accounted for $99.4 million of the increase, while
the CRC properties, which were acquired on April 27, 2001, accounted for $44.0
million of the increase. At the Charles Town Entertainment Complex revenues
increased by $43.1 million, or 43.0%, to $143.3 million in 2001 from $100.2
million in 2000. Gaming revenue accounted for 85% of the increase at Charles
Town due to an increase in the number of video lottery machines from 1,500 in
2000 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 $3.8 million due to a decrease in wagering and a Commonwealth of
Pennsylvania supplement grant of $1.6 million received in 2000 that has not been
received in 2001.
Operating expenses for the nine months ended September 30, 2001
increased by $158.0 million, or 94.1%, to $325.9 million from $167.9 million in
2000. The Mississippi properties accounted for $85.1 million of the increase and
the CRC properties accounted for $34.5 million of the increase. Operating
expenses increased at the Charles Town Entertainment Complex by $34.9 million,
or 45.7%, to $111.2 million in 2001 from $76.3 million in 2000. Operating
expenses at the Pennsylvania racetracks and their OTWs decreased by $0.3 million
in the year 2000. Corporate overhead increased by $3.7 million or 59.7% to $9.9
million in 2001 from $6.2 million in 2000. Net interest expense increased by
$20.1 million to $29.8 million in 2001 from $9.7 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 and extraordinary item for the nine months ended September 30, 2001
increased by $3.0 million, or 19.0%, to $18.8 million from $15.8 million in 2000
as a result of the above.
CHARLES TOWN ENTERTAINMENT COMPLEX
Total revenues were $143.3 million for the nine months ended September
30, 2001, an increase of $43.1 million or 43.0% from total revenues of $100.2
million for the nine months ended September 30, 2000. Gaming
16
revenues were $121.5 million for the nine months ended September 30, 2001, an
increase of $41.2 million, or 51.3%, from gaming revenues of $80.3 million for
the same period in 2000. This increase was due to an increase in the total
number of video lottery machines from 2,000 in 2001 compared to 1,500 in 2000,
and expanded advertising and marketing campaigns in the Baltimore and Washington
D.C. areas. Racing revenues were $16.6 million for the nine months ended
September 30, 2001, an increase of $1.0 million or 6.4% from $15.6 million in
2000. This increase was due to additional live race days and export simulcasting
days in 2001 that resulted in additional wagering of $27.3 million, or 23.7%, to
$142.5 million. Other revenues, consisting mainly of concessions revenues, were
$5.2 million for the nine months ended September 30, 2001, an increase of $0.9
million, or 20.9%, from other revenues of $4.3 million for the prior period. The
increase in food and beverage was due to an increase in restaurant patrons by
127,524 patrons to 274,332 in 2001 from 146,808 for 2001 primarily attributable
to the opening of the Sundance Cafe in November 2000 and expansion of the
concession areas, dining room and buffet.
Total operating expenses were $104.3 million for the nine months ended
September 30, 2001, an increase of $30.6 million, or 41.5%, from operating
expenses of $73.7 million for the prior period. The increase was due primarily
to an increase in gaming expenses and related taxes of $22.9 million attributed
to increased gaming and racing revenues and a change in gaming legislation that
resulted in the loss of the administrative fee refund. Salaries and wages
increased by $3.9 million primarily due to additional labor associated with
increased gaming units, gaming square footage, and expanded concession and
dining capacities. Other direct costs increased due to the expanded capacity of
the facility.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
was $39.0 million for the nine months ended September 30, 2001, an increase of
$12.5 million, or 47.2%, from EBITDA of $26.5 million for the comparable period
in 2000.
MISSISSIPPI CASINOS
The Casino Magic Bay St Louis and Boomtown Biloxi acquisitions were
completed on August 8, 2000. For the nine months ended September 30, 2001,
Casino Magic Bay St. Louis had revenues of $67.8 million consisting mainly of
gaming revenues. Operating expenses for Casino Magic totaled $58.4 million
consisting of gaming ($33.8 million), other ($5.0 million), general and
administrative ($14.1 million) and depreciation and amortization expense ($5.5
million). For the nine months ended September 30, 2001, Boomtown Biloxi had
revenues of $53.4 million consisting mainly of gaming revenues. Operating
expenses for Boomtown totaled $46.2 million consisting of gaming ($21.6
million), other ($6.8 million), general and administrative ($14.2 million) and
depreciation and amortization expense ($3.6 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 or West Virginia or our pari-mutuel
operations face in Pennsylvania and New Jersey.
CRC ACQUISITION
On April 27, 2001, we completed the CRC acquisition, which included the
purchase of Casino Rouge in Baton Rouge, Louisiana and a management contract to
operate Casino Rama in Orillia, Canada. For the period ended September 30, 2001,
Casino Rouge had revenues of $38.9 million consisting mainly of gaming revenues.
Operating expenses for Casino Rouge totaled $32.5 million consisting of gaming
($18.6 million), other ($2.1 million), general and administrative ($8.9 million)
and depreciation and amortization expense ($2.9 million). For the period ended
September 30, 2001, management fees from the Casino Rama management contract
totaled $5.5 million for which there was approximately $0.4 million of operating
expenses relating to the associated management fee revenues. EBITDA for the CRC
properties totaled $14.0 million for the period.
PENN NATIONAL RACE COURSE AND ITS OTW FACILITIES
Revenues at Penn National Race Course and its OTWs decreased
approximately $4.5 million, or 9.1%, to $45.4 million in 2001 from $49.9 million
in 2000. Included in 2000 revenues is a Commonwealth of Pennsylvania supplement
grant of $1.0 million that was not received in 2001. The revenue decrease in
2001, adjusted for the grant, would have been $3.5 million, or 7.2%. Bad weather
in the northeastern U.S. in early 2001 adversely
17
impacted both live racing and simulcast attendance during that period. The loss
of pools due to short fields in early 2001 also negatively effected both revenue
and EBITDA. Attendance had started to return to last year's levels until the
events of September 11, 2001. Expenses were approximately $39.3 million in 2001
compared to $41.4 million in 2000, a decrease of $2.1 million, or 5.1%. EBITDA
was approximately $6.1 million in 2001 compared to $8.5 million in 2000, a
decrease of $2.4 million, or 28.2%.
POCONO DOWNS AND ITS OTW FACILITIES
For the nine months ended September 30, 2001, revenues at Pocono Downs
were $30.1 million compared to $29.3 million for the same period 2000, an
increase of $0.7 million or 2.4%. The increase was due primarily to the opening
in 2000 of the East Stroudsburg OTW facility, which was in operation for nine
months in 2001 compared to two months in 2000. East Stroudsburg OTW revenue was
$2.7 million in 2001 compared to $0.6 million the previous year, an increase of
$2.1 million. Included in 2000 revenues is a Commonwealth of Pennsylvania
supplement grant of $0.6 million that was not received in 2001. The Pocono Downs
racetrack, along with the Erie OTW, reported an increase in operating revenue
from the previous year of $0.3 million, or 2.1%, while the other four
established OTW reported an aggregate decrease in revenue from the previous year
of $1.1 million, or 8.0%. The Allentown OTW accounted for the majority of the
lost revenue with $0.8 million, or 9.0%, compared to the same period the
previous year. This was offset by the Dial-a-Bet telephone account wagering
operation (including the newly-opened internet operating unit, eBetUSA) which
registered an increase in wagering of $2.4 million, or 22%, to $13.3 million
compared to $10.9 million for the same period previous year.
Expenses increased by $1.7 million, or 7.7%, to $24.5 million in 2001
from $22.8 million in 2000. Other operating expenses, administrative expense and
concessions expenses increased $0.8 million to $8.8 million compared to $8.0
million for the same period last year. This increase was attributable in part to
a full quarter of expenses in 2001 at the new East Stroudsburg OTW facility.
Expenses directly related to revenues, such as purse expenses, simulcast
expenses and pari-mutuel taxes, increased $0.7 million, or 6.4%, to $11.6
million in 2001, compared to $10.9 million in 2000. EBITDA decreased by $1.0
million to $5.5 million in 2001 from $6.5 million in 2000.
CORPORATE OVERHEAD EXPENSES
Corporate overhead expenses increased by $2.8 million or 58.3% to $7.6
million in 2001 from $4.8 million in 2000. Salaries and wages, payroll taxes,
employee benefits, relocation expenses and office rent increased by $1.6 million
due to the addition of new staff at the corporate office to support the
Mississippi and CRC acquisitions. Liability insurance increased by $.4 million
due to increased limits for general liability, fiduciary and directors and
officers liability insurance. Consulting and professional services increased by
$0.4 million. Travel expenses increased by $0.4 million due to supporting
properties in Mississippi, Louisiana and Canada.
NEW JERSEY JOINT VENTURE
We have an investment in Pennwood Racing, Inc., a joint venture with
Greenwood Racing, Inc., that operates Freehold Raceway and, until May 2001,
operated Garden State Park. Revenues of the joint venture decreased by $8.3
million to $36.8 million in 2001 from $45.1 million in 2000. Net income
decreased by $0.5 million to $4.5 million in 2001 compared to $4.0 million in
2000 primarily due to the decrease in revenue and a decrease in expenses
associated with running 148 live race days in 2001 compared to 184 live race
days in 2000. In May 2001, the owners of Garden State Park completed the sale of
the facility and the joint venture ceased operating Garden State Park. Our 50%
share of net income was $2.0 million in 2001 compared to $2.2 million in 2000
and was recorded as other income 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.
18
Net cash provided by operating activities was $55.6 million for the
nine months ended September 30, 2001. This consisted of net income and non-cash
items ($44.6 million), earnings from joint venture ($2.0 million), an increase
in deferred income taxes ($3.8 million), a decrease in current assets ($0.1
million) and an increase in current liabilities ($9.1 million) related to the
normal course of business, net of the CRC acquisition on April 27, 2001.
Cash flows used in investing activities totaled $199.9 million for the
nine months ended September 30, 2001. Expenditures for property, plant, and
equipment totaled $ 23.0 million and included new hotel construction at Casino
Magic ($8.2 million), new gaming equipment at Casino Magic ($2.7 million), new
gaming equipment and slot system at Boomtown ($3.5 million), land and building
acquisitions at Charles Town ($1.0 million), the OK Corral video lottery machine
center at Charles Town ($0.6 million), property additions at Charles Town ($0.3
million), parking garage and expansion at Charles Town ($0.4 million), building
and design of a steak house at Casino Rouge ($1.5 million), other small projects
($0.7 million) and maintenance capital expenditures ($4.1 million). The CRC
acquisition totaled $182.9 million. Cash received from the joint venture totaled
$1.2 million. Cash in escrow decreased by $4.6 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 $157.4
million for the nine months ended September 30, 2001. Aggregate proceeds from
the issuance of senior subordinated 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
$40.6 million. Proceeds from the exercise of stock options totaled $4.9 million.
CAPITAL EXPENDITURES
The table below summarizes our planned capital expenditures, other
than maintenance capital expenditures, by property level, for 2001-2002 (in
thousands). However, we continue to assess and refine our capital expenditure
plans at each property; the projects ultimately completed and the costs of
such projects may differ from our current expectations described below.
ESTIMATED EXPENDITURES
BUDGET THROUGH
PROPERTY 2001-2002 SEPTEMBER 30, 2001
-------- --------- ------------------
Charles Town Entertainment Complex $ 50,000 $ 2,221
Casino Magic Bay St. Louis 37,500 8,936
Boomtown Biloxi 2,000 2,000
Casino Rouge 2,000 1,487
Pennsylvania Racetracks and OTW's 800 800
------------------------------
Total $ 92,300 $ 15,444
------------------------------
At our Charles Town facility, we expect to spend approximately
$50.0 million in 2001 and 2002 on capital expenditures. In November 2001, we
began construction of a 1,500 space structured parking facility, at an
estimated cost of $12.0 million. We are considering the expansion of the
gaming and entertainment facility at Charles Town to accommodate additional
gaming machines at an estimated cost of between $35.0 and $40.0 million.
Depending upon future market conditions in the West Virginia gaming market,
we will continue to evaluate our plan to build a 300-room hotel at Charles
Town.
At Casino Magic Bay St. Louis, our capital expenditures in 2001 and
2002 are anticipated to be approximately $37.5 million. We have completed the
renovation to the existing buffet restaurant and have begun construction on a
300-room hotel with meeting and conference facilities, three new restaurant
ventures and renovations to the gaming floor, at an estimated cost of $33.0
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
19
hotel. At Casino Rouge and our Pennsylvania racetracks and OTW's we do not
expect to incur significant capital expenditures.
SENIOR SUBORDINATED NOTES
On March 12, 2001, we completed a private placement 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.
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.
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, especially in light of the current economic
environment, 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, and August 3, 2001 we entered into two interest
rate swap agreements with financial institutions in the notional amount of $136
million. The interest rate swap agreements hedges our exposure on our
outstanding floating rate obligations, which were $268,678,500 at September 30,
2001. The purpose of the interest rate swaps are to convert a portion of our
floating rate interest obligations to obligations having a fixed rate of 5.835%
and 4.8125% plus an applicable margin up to 4.00% per annum through June 30,
2004. 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 nine months ended September 30, 2001,
interest expense increased by approximately $875,000 as a result of the interest
rate swap agreements. 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 agreements expires in December 2003 and June 2004.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SHOWBOAT LITIGATION
As previously disclosed in our Exchange Act filings, in 1997 we
acquired our Charles Town Races property in Charles Town, West Virginia, by
exercising an option held by Showboat Development Company, now a wholly-owned
subsidiary of Harrah's Entertainment, Inc. In return for assigning the option,
Showboat retained the right to operate a casino at the Charles Town Races
property in return for a management fee, to be negotiated at the time of
exercise, based on reasonable rates for similar properties. The express terms of
the Showboat option do not specify what activities at Charles Town Races would
constitute operation of a casino. As previously disclosed, we believe that our
installation and operation of video lottery terminals linked to the West
Virginia Lottery at the Charles Town Races facility does not constitute the
operation of a casino under the Showboat option or under West Virginia law and
therefore does not trigger Showboat's right to exercise the Showboat option. The
rights under the showboat option extend until November 2001.
On August 20, 2001, we were served with a lawsuit brought by Showboat
Development Company against us and certain other parties related to the Charles
Town Races facility. The suit alleges, among other things, that the our
operation of coin-out video lottery terminals at the Charles Town facility
constitutes the operation of a casino, thereby triggering Showboat's option. The
suit also alleges that our March 2000 acquisition of the 11% minority interest
in Charles Town Races from BDC Group, our former joint venture partner, was made
in violation of a right of first refusal that Showboat holds from BDC covering
the sale of any interest in any casino at Charles Town Races. We have filed a
motion to dismiss this action in federal court in Nevada and, in the alternate,
a motion to transfer the case to the state of West Virginia. We believe that
each of Showboat's claims is without merit, and we intend to vigorously defend
ourselves against them.
OTHER
In July 2001, a lawsuit was filed against us by certain
surveillance employees at the Charles Town facility claiming that our
surveillance of those employees during working hours was improper. The
lawsuit claims damages of $7.0 million and punitive damages of $14.0 million.
We currently are conducting discovery in the case but, at this time, believes
that all of the claims of the employees are without merit. We intend to
vigorously defend ourselves against this action.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
We filed the following Current Report on Form 8-K during the third
quarter 2001:
On August 23, 2001, we filed a Current Report on Form 8-K that
described a lawsuit brought by Showboat Development Company against us and
certain other parties related to the Charles Town Races property.
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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.
NOVEMBER 13, 2001 By: /S/ WILLIAM J. CLIFFORD
- ----------------- -----------------------------
William J. Clifford
Chief Financial Officer
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