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 MARCH 31, 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 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 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 May 10, 2001 Common Stock par value .01 per share 15,099,100 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 <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION PAGE <S> <C> ITEM 1 - FINANCIAL STATEMENTS Consolidated Balance Sheets - March 31, 2001 (unaudited) and December 31, 2000 4-5 Consolidated Statements of Income - Three Months Ended March 31, 2001 and 2000 (unaudited) 6 Consolidated Statement of Shareholders' Equity - Three Months Ended March 31, 2001 (unaudited) 7 Consolidated Statements of Cash Flow - Three Months Ended March 31, 2001 and 2000 (unaudited) 8 Notes to Consolidated Financial Statements 9-11 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12-15 ITEM 3 - CHANGES IN INFORMATION ABOUT MARKET RISK 16 PART II - OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 17 Signature Page 18 </TABLE> 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) <TABLE> <CAPTION> March 31, December 31, 2001 2000 (UNAUDITED) ----------- ------------ <S> <C> <C> ASSETS Current assets Cash and cash equivalents $ 29,045 $ 23,287 Accounts receivable 9,874 10,341 Prepaid expenses and other current assets 6,020 5,312 Prepaid income taxes 442 1,905 -------- -------- TOTAL CURRENT ASSETS 45,381 40,845 -------- -------- Property, plant and equipment, at cost Land and improvements 81,483 81,177 Building and improvements 143,882 142,753 Furniture, fixtures and equipment 81,146 79,606 Transportation equipment 1,015 1,015 Leasehold improvements 11,715 11,704 Construction in progress 3,638 3,643 -------- -------- 322,879 319,898 Less accumulated depreciation and amortization 37,173 31,582 -------- -------- NET PROPERTY, PLANT AND EQUIPMENT 285,706 288,316 -------- -------- Other assets Investment in and advances to unconsolidated affiliate 14,577 14,584 Cash in escrow 199,483 5,107 Excess of cost over fair market value of net assets acquired (net of accumulated amortization of $4,367 and $3,858, respectively) 77,653 78,161 Deferred financing costs,net 15,328 9,585 Miscellaneous 3,660 3,302 -------- -------- TOTAL OTHER ASSETS 310,701 110,739 -------- -------- $641,788 $439,900 ======== ======== </TABLE> See accompanying notes to consolidated financial statement 4
PENN NATIONAL GAMING INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <TABLE> <CAPTION> March 31, December 31, 2001 2000 (UNAUDITED) ----------- ------------ <S> <C> <C> LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current maturities of long-term debt $ 12,327 $ 11,390 Accounts payable 11,160 18,436 Purses due horsemen 3,412 2,262 Uncashed pari-mutuel tickets 1,693 1,393 Accrued expenses 16,746 12,159 Customer deposits 922 834 Taxes, other than income taxes 2,881 2,816 -------- -------- TOTAL CURRENT LIABILITIES 49,141 49,290 -------- -------- Long term liabilities Long-term debt net of current maturities 496,597 297,909 Deferred income taxes 14,530 13,480 -------- -------- TOTAL LONG-TERM LIABILITIES 511,127 311,389 -------- -------- Commitments and contingencies Shareholders' equity Preferred stock,$.01 par value, authorized 1,000,000 shares; No shares issued Common stock,$.01 par value, authorized 20,000,000 shares; shares issued and outstanding 15,478,300 and 15,459,175, respectively 155 155 Treasury stock, at cost 424,700 shares (2,379) (2,379) Additional paid in capital 39,593 39,482 Retained earnings 46,579 41,963 Other Comprehensive income (2,428) - -------- -------- TOTAL SHAREHOLDERS' EQUITY 81,520 79,221 -------- -------- $641,788 $439,900 ======== ======== </TABLE> See accompanying notes to consolidated financial statements 5
PENN NATIONAL GAMING INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> Three Months Ended March 31, 2001 2000 ------------------------------------ <S> <C> <C> REVENUE Gaming $ 70,609 $ 22,324 Racing 27,123 26,967 Other Revenue 8,497 3,420 -------- -------- TOTAL REVENUES 106,229 52,711 -------- -------- OPERATING EXPENSES Gaming 39,069 13,479 Racing 18,474 18,131 Other 7,228 2,813 General and administrative 19,145 8,263 Depreciation and amortization 6,935 2,176 -------- -------- TOTAL OPERATING EXPENSES 90,851 44,862 -------- -------- INCOME FROM OPERATIONS 15,378 7,849 -------- -------- Other income (expenses) Interest expense (8,598) (2,382) Interest income 1,006 296 Other (559) - -------- -------- TOTAL OTHER EXPENSES (8,151) (2,086) -------- -------- INCOME BEFORE TAXES 7,227 5,763 Taxes on income 2,611 2,141 -------- -------- Net Income $ 4,616 $ 3,622 ======== ======= Per share data Basic $ .31 $ .24 -------- -------- Diluted $ .30 $ .24 -------- -------- Weighted shares outstanding Basic 15,044 14,898 Diluted 15,524 15,212 </TABLE> 6
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> COMMON STOCK ADDITIONAL OTHER ------------ TREASURY PAID-IN RETAINED COMPREHENSIVE SHARES AMOUNTS STOCK CAPITAL EARNINGS INCOME TOTAL ------- ------- ------- -------- -------- -------- ----- <S> <C> <C> <C> <C> <C> <C> <C> Balance, January 1, 2001 15,459,175 $155 $(2,379) $39,482 $41,963 $ - $79,221 Issuance of common stock 19,125 - - 111 - - 111 Comprehensive Income: Net income for the three months Ended March 31, 2001 - - - - 4,616 4,616 Fair Market Value of Swap Agreement - - - - - (2,428) (2,428) ---------------------------------------------------------------------------------------------- Total comprehensive income - - - - 4,616 (2,428) 2,188 ---------------------------------------------------------------------------------------------- Balance, March 31, 2001 15,478,300 $155 $(2,379) $39,593 $46,579 $(2,428) $81,520 ============================================================================================== </TABLE> See accompanying notes to consolidated financial statements 7
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> Three Months Ended March 31, 2001 2000 ------------------------------------ <S> <C> <C> Cash flows from operating activities Net income $ 4,616 $ 3,619 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 6,935 2,176 Income (loss) from unconsolidated affiliates 7 (587) Loss on sale of net assets 570 - Deferred income taxes 1,050 176 Decrease (increase) in: Accounts receivable 467 369 Prepaid expenses and other current assets (708) (498) Prepaid income taxes 1,463 1,088 Miscellaneous other assets (361) 25 Increase (decrease) in: Accounts payable (7,276) (4,865) Purses due horsemen 1,150 1,487 Uncashed pari-mutuel tickets 300 290 Accrued expenses 2,159 492 Customers deposits 88 146 Taxes, other than income taxes 65 698 Income taxes - 845 --------- ------- Net cash provided by operating activities 10,525 5,461 --------- ------- Cash flows from investing activities Expenditures for property, plant and equipment (4,015) (1,851) Proceeds from sale of property and equipment 98 - Increase in cash in escrow (194,376) - Minority interest purchase - (5,845) --------- ------- Net cash used in investing activities (198,293) (7,696) --------- ------- Cash flows from financing activities Proceeds from exercise of stock options 111 70 Proceeds of long-term debt 202,000 4,247 Principal payments on long-term debt (2,375) (8) Increase in unamortized financing costs (6,210) (78) --------- ------- Net cash provided by financing activities 193,526 4,231 --------- ------- Net increase in cash and cash equivalents 5,758 1,996 Cash and cash equivalents, at beginning of period 23,287 9,434 --------- ------- Cash and cash equivalents, at end of period $ 29,045 $11,430 ========= ======= </TABLE> See accompanying notes to consolidated financial statements 8
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 March 31, 2001 and the results of its operations for the three month periods ended March 31, 2001 and 2000. The results of operations experienced for the three month period ended March 31, 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 three months ended March 31, 2001 and 2000 for interest was $5,604,000 and $422,000 respectively. Cash paid during the three months ended March 31, 2001 and 2000 for income taxes was $21,000 and $29,800 respectively. 4. SEGMENT INFORMATION The Company has adopted SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information." The Company has determined that it currently operates in the two segments: (1) gaming and (2) racing. 9
The accounting policies of the segments 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: <TABLE> <CAPTION> REVENUES THREE MONTHS ENDED MARCH 31, 2001 2000 ----------------------------- --------- --------- (in thousands) <S> <C> <C> Gaming(1)..................................................... $ 81,230 $ 28,183 Racing........................................................ 25,049 24,850 Eliminations(2)............................................... (50) (322) --------- --------- Total......................................................... $ 106,229 $ 52,711 ========= ========= </TABLE> <TABLE> <CAPTION> EBITDA THREE MONTHS ENDED MARCH 31, 2001 2000 ----------------------------- --------- --------- (in thousands) <S> <C> <C> Gaming(1).................................................... $ 17,330 $ 5,083 Racing....................................................... 4,983 4,942 --------- --------- Total........................................................ $ 22,313 $ 10,025 ========= ========= </TABLE> <TABLE> <CAPTION> TOTAL ASSESTS ------------- MARCH 31, DECEMBER 31, AS OF 2001 2000 ----- -------- ------------ (in thousands) <S> <C> <C> Gaming(1).................................................... $ 873,722 $ 671,655 Racing....................................................... 93,348 91,756 Eliminations(2).............................................. (325,282) (323,511) --------- --------- Total........................................................ $ 641,788 $ 439,900 ========= ========= </TABLE> (1) Reflects results of the Mississippi properties since the August 8, 2000 acquisition from Pinnacle Entertainment. (2) 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 will 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. 10
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 Company and the subsidiary guarantors have agreed to file a registration statement or, under certain circumstances, a shelf registration statement with the United States Securities and Exchange Commission relating to an offer to exchange the notes and guarantees for publicly tradable notes and guarantees having substantially identical terms. The notes are designated for trading in the Private Offering, Resales and Trading Automatic Linkages (PORTAL) Market. The proceeds from these notes were used to finance the CRC acquisition that was completed on April 27, 2001. 6. SUBSEQUENT EVENTS CRC ACQUISITION On April 27, 2001, the Company completed its previously announced 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 "Acquisition"). The 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 Acquisition was approximately $160 million, including the repayment of existing debt at CRC or its subsidiaries. The purchase price of the 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 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 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. 11
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 pari-mutuel operations. Revenues from our gaming machines at the Charles Town Entertainment Complex and Mississippi properties have accounted for an increasingly larger share of our total revenues. Our pari-mutuel revenues have been derived from wagering on our live races, wagering on import simulcasts at our racetracks and OTWs and through telephone account wagering, and fees from wagering on export simulcasting our races at out-of-state locations. Our other revenues have been derived from admissions, program sales, food and beverage sales, concessions and certain other ancillary activities. 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 pari-mutuel 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 three months ended March 31, 2000 and 2001, gaming revenue represented approximately 53% and 76% of our total revenue, respectively. RESULTS OF OPERATIONS The results of operations by property level for the three months ended March 31, 2001 and 2000 are summarized below: <TABLE> <CAPTION> REVENUES EBITDA (1) -------- ---------- 2001 2000 2001 2000 ------- -------- --------- -------- <S> <C> <C> <C> <C> Charles Town Entertainment Complex............ $ 41,116 $28,183 $10,999 $ 6,713 Casino Magic Bay St. Louis(2)................. 22,221 - 5,098 - Boomtown Biloxi(2)............................ 17,893 - 3,585 - Penn National Race Course and its OTWs........ 15,279 16,272 2,302 2,765 Pocono Downs and its OTWs..................... 8,700 7,991 1,613 1,590 Pennwood Racing, Inc.......................... 1,070 587 1,070 587 Corporate eliminations(3)..................... (50) (322) - - Corporate operations.......................... - - (2,354) (1,630) ----------------------------------------------------- Total $106,229 $52,711 $22.313 $10,025 ======== ======= ======= ======= </TABLE> (1) Reflects property level EBITDA and excludes non-recurring changes (2) Reflects results of the Mississippi properties since the August 8, 2000 acquisition from Pinnacle Entertainment. (3) Primarily reflects intracompany transactions related to import/export simulcasting. 12
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000 Revenues for the three months ended March 31, 2001 increased 101.5% to $106.2 million from $52.7 million for the three months ended March 31, 2000. EBITDA rose 125.6% to $22.6 million from $10.0 million for the three months ended March 31, 2000. Income before taxes in 2001 was $7.8 million compared to $5.8 million in 2000. CHARLES TOWN ENTERTAINMENT COMPLEX Revenues increased at Charles Town by approximately $12.9 million or 45.9% to $41.1 million in 2001 from $28.2 million in 2000. Gaming revenue increased by $12.5 million, or 56.2%, to $34.9 million in 2001 from $22.3 million in 2000, primarily due to additional machines and higher win per machine in 2001. The average number of machines in play increased to 1,640 in 2001 from 1,449 in 2000; the average win per machine increased to $234 in 2001 from $170 in 2000, primarily as a result of a higher percentage of reel spinning, coin-out gaming machines in 2001, which tend to yield average wins higher then video lottery machines. Racing revenue increased by $.1 million, or 2.1% to $4.8 million in 2001 from $4.7 million in 2000. The live meet consisted of 44 race days in 2001 compared to 45 race days in 2000. Operating expenses increased by $8.6 million, or 40.3%, to $30.1 million in 2001 from $21.5 million in 2000. The increase was due to an increase in direct costs associated with the addition of gaming machines and floor space (specifically, the opening of the OK Corral slot center), and expanded concession and dining capability and capacity (the opening of the Sundance Cafe). EBITDA attributable to Charles Town increased by $4.3 million, or 63.9%, to $11.0 million in 2001 from $6.7 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 March 31, 2001, these two casinos had combined revenues of $40.1 million, and EBITDA of $8.7 million. PENN NATIONAL RACE COURSE AND ITS OTW FACILITIES Penn National Race Course had a decrease in revenue of approximately $1.0 million, or 6.1%, to $15.3 million in 2001 from $16.3 million in 2000. Pari-mutuel wagering was $104.1 million in 2001 compared to $103.4 million in 2000. The increase in wagering is attributed to Penn National Race Course running 50 live race days in 2001 compared to 48 live races days in 2000 offset by slightly lower wagering levels per race day. The decrease in revenue is attributed to a change in the percent of wagering between full card, common pool, and live racing. Operating expenses decreased by approximately $.5 million, or 3.9%, to $13.0 million in 2001 from $13.5 million in 2000. EBITDA attributable to these properties decreased by $.5 million, or 16.7%, to $2.3 million in 2001 from $2.8 million in 2000. POCONO DOWNS AND ITS OTW FACILITIES Revenues at Pocono Downs increased by $.7 million, or 8.9%, to $8.7 million in 2001 from $8.0 million in 2000. Pari-mutuel wagering was $38.8 million in 2001 compared to $34.8 million in 2000. Expenses increased by approximately $.7 million, or 10.7%, to $7.1 million in 2001 from $6.4 million in 2000. In 2001, the Company had additional revenue and expenses 13
from the operation of the East Stroudsburg OTW (opened July 2000) and the running of its live meet (8 race days) in March. In 2000, the live meet did not occur until April. EBITDA was approximately $1.6 million in each of 2001 and 2000. NEW JERSEY JOINT VENTURE The Company has an investment in Pennwood Racing, Inc., which operates Freehold Raceway and Garden State Park. Revenues of the joint venture increased by $.1 million to $15.2 million in 2001 from $15.1 million in 2000. Net income increased by $1.0 million to $2.2 million in 2001 compared to $1.2 million in 2000 primarily due to the decrease in expenses associated with running no live race days in 2001 compared to eight live race days in 2000 at Garden State Park. Our 50% share of net income was $1.1 million in 2001 compared to $.6 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 equity securities. Net cash provided by operating activities was $10.5 million for the period ended March 31, 2001. This consisted of net income and non-cash items ($12.1 million), an increase in deferred income taxes ($1.0 million), and a decrease in current assets ($.1 million) and current liabilities ($2.5 million) related to the normal course of business. Cash flows from investing totaled $198.3 million for the period ended March 31, 2001. Expenditures for property, plant, and equipment totaled $4.0 million and included new hotel planning and design at Casino Magic ($0.4 million), new gaming equipment at Casino Magic (0.7 million) new gaming equipment and slot system at Boomtown ($0.4 million), land and building acquisitions at Charles Town ($0.4 million), the OK Corral slot center at Charles Town ($.5 million), other small projects ($0.1 million) and maintenance capital expenditures ($2.0 million). Proceeds from the issuance of $200.0 million, in 11 1/8% senior subordinated notes ($194.3 million), were placed in escrow until the closing of the CRC acquisition on April 27, 2001. Cash flows from financing activities provided net cash flow of $193.5 million for the period ended March 31, 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 ($6.2 million). Principal payments on long-term debt under our existing credit facility, net of additional borrowings on the revolving line of credit, were $0.3 million. 14
CAPITAL EXPENDITURES The following table summarizes our planned capital expenditures, other than maintenance capital expenditures, by property level, for 2001: <TABLE> <CAPTION> BUDGET EXPENDITURES BALANCE PROPERTY 2001 THRU 3/31/01 TO EXPEND - -------- ------ ------------ --------- <S> <C> <C> <C> Charles Town Entertainment Complex $ 9,200 $ 989 $ 8,211 Casino Magic Bay St. Louis 18,500 402 18,098 Boomtown Biloxi 2,000 447 1,553 Casino Rouge 2,000 - 2,000 Pennsylvania Racetracks and OTW's 800 101 699 ---------- ---------- ---------- Total $32,500 $1,939 $30,561 ========== ========== ========== </TABLE> 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. It is anticipated that we subsequently will file a registration statement under the Securities Act of 1933 to effect an exchange offer of registered Senior Subordinated Notes. 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. 15
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 $308,875,000 at March 31, 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 three months ended March 31, 2001, we reduced interest expense by approximately $124,000 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. 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits <TABLE> <S> <C> 4.1* Indenture dated as of March 12, 2001 by and among Penn National Gaming, Inc., certain guarantors and State Street Bank and Trust Company relating to the Series A and Series B 11 1/8% Senior Subordinated Notes due 2008. 10.22a* Amendment No. 1 dated as of October 4, 2000 to Credit Agreement among Penn National Gaming, Inc., as Borrower, the Lenders under the Credit Agreement, Lehman Commercial Paper Inc., as syndication agent for the Lenders, and Canadian Imperial Bank of Commerce, as administrative agent for the Lenders. 10.23a* Amendment No. 2 dated as of April 5, 2001 to Credit Agreement among PennNational Gaming, Inc., as Borrower, the Lenders under the Credit Agreement, Lehman Commercial Paper Inc., as syndication agent for the Lenders, and Canadian Imperial Bank of Commerce, as administrative agent for the Lenders. 10.24a* Registration Rights Agreement dated as of March 12, 2001, by and among Penn National Gaming, Inc., certain of its subsidiaries, and Lehman Brothers Inc. and CIBC World Markets Corp. </TABLE> ------------ * Filed herewith. (b) Reports on Form 8-K o Current Report on Form 8-K filed on February 14, 2001 disclosing certain information that was to be disclosed in connection with the private placement of senior subordinated notes and filing a press release announcing the Company's intent to pursue a private placement of $200 million of senior subordinated notes. o Current Report on Form 8-K filed on March 2, 2001 filing a press release announcing the sale of $200 million of senior subordinated notes. 17
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. MAY 15, 2001 By: /s/ ROBERT S. IPPOLITO - ----------------- --------------------------------------------- Date Robert S. Ippolito, Chief Financial Officer, Secretary/Treasurer 18
EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION ----------- ----------- <S> <C> 4.1* Indenture dated as of March 12, 2001 by and among Penn National Gaming, Inc., certain guarantors and State Street Bank and Trust Company relating to the Series A and Series B 11 1/8% Senior Subordinated Notes due 2008. 10.22a* Amendment No. 1 dated as of October 4, 2000 to Credit Agreement among Penn National Gaming, Inc., as Borrower, the Lenders under the Credit Agreement, Lehman Commercial Paper Inc., as syndication agent for the Lenders, and Canadian Imperial Bank of Commerce, as administrative agent for the Lenders. 10.23a* Amendment No. 2 dated as of April 5, 2001 to Credit Agreement among Penn National Gaming, Inc., as Borrower, the Lenders under the Credit Agreement, Lehman Commercial Paper Inc., as syndication agent for the Lenders, and Canadian Imperial Bank of Commerce, as administrative agent for the Lenders. 10.24a* Registration Rights Agreement dated as of March 12, 2001, by and among Penn National Gaming, Inc., certain of its subsidiaries, and Lehman Brothers Inc. and CIBC World Markets Corp. </TABLE> - ------------ * Filed herewith. 19