August 14, 2000
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The percentage of the Company's revenue derived from gaming operations has increased over the last few years as
a result of the gaming operations at the Charles Town Entertainment Complex. The Company expects that the Mississippi
Acquisitions and the continued expansion of the Charles Town Entertainment Complex will cause this trend to continue.
In the future the Company expects to alter the presentation of certain of its financial information to better capture
this trend.
Three Months Ended June 30, 2000 Compared To Three Months Ended June 30, 1999
Revenues for the three months ended June 30, 2000 increased by approximately $17.0 million or 37.5% to $62.4 million
from $45.4 million for the three months ended June 30, 1999. At Charles Town, the increase in revenues ($14.7 million)
is attributed to the operation of an average of 1,406 gaming machines for the three months ended June 30, 2000
compared to 915 gaming machines for the three months ended June 30, 1999. Operating expenses for the three months
ended June 30, 2000 increased by approximately 11.3 million or 28.8% to $50.7 million from $39.4 million for the
three months ended June 30, 1999. Income from operations increased by $5.7 million or 94.7% to $11.7 million for
the three months ended June 30, 2000 from $6.0 million for the three months ended June 30, 1999. Other expenses
for the three months ended June 30, 2000 and 1999 consisted of approximately $2.0 million and $1.8 million, respectively,
of net interest primarily due to the 10.625% Senior Notes and the Revolving Credit Facility. Taxes on income increased
by $1.8 million to $3.4 million for the three months ended June 30, 2000 from $1.6 million for the three months
ended June 30, 1999. Net income increased by $3.7 million to $6.2 million for the three months ended June 30, 2000
from $2.5 million for the three months ended June 30, 1999.
The results of operations for the three months ended June 30, 1999 and 2000 by property level are summarized as
follows: (in thousands)
Charles Town Racing Penn National and Pocono Downs and OTWs
and Gaming OTWs
1999 2000 1999 2000 1999 2000
---- ---- ---- ---- ---- ----
Revenues
Gaming $ 13,768 $26,878 $ - $ - $ - $ -
Racing 4,763 5,214 13,668 15,406 9,674 9,483
Other 1,674 2,833 1,241 1,328 859 871
------------------------- ------------------------ -------------------------
Total revenues 20,205 34,925 14,909 16,734 10,533 10,354
------------------------- ------------------------ -------------------------
Expenses
Gaming 9,674 18,075 - - - -
Racing 3,835 4,101 10,652 12,086 6,705 6,827
Other* 2,333 3,353 1,807 1,885 1,160 1,142
------------------------- ------------------------ -------------------------
Total expenses 15,842 25,529 12,459 13,971 7,865 7,969
------------------------- ------------------------ -------------------------
EBITDA
Gaming 4,094 8,803 - - - -
Racing 928 1,113 3,016 3,320 2,969 2,656
Other (659) (520) (566) (557) (301) (271)
------------------------- ------------------------ -------------------------
Total EBITDA $ 4,363 $ 9,396 $ 2,450 $ 2,763 $ 2,668 $ 2,385
========================= ======================== =========================
* Other expenses include property level general and administrative expenses and excludes corporate overhead and
non-recurring expenses.
Charles Town Entertainment Complex
Revenues increased at Charles Town by approximately $14.7 million or 72.8% to $34.9 million in 2000 from $20.2
million in 1999. Gaming revenue increased by $13.1 million or 95.2% to $26.9 million in 2000 from $13.8 million
in 1999 due to the addition of 565 new reel spinning, coin-out slot machines since the second quarter of last year.
The average number of machines in play increased to 1,406 in 2000 from 915 in 1999 and the average win per machine
increased to $211 in 2000 from $164 in 1999. Racing revenue increased by $.5 million or 9.7% to $5.2 million in
2000 from $4.7 million in 1999. The live meet consisted of 60 race days in 2000 and 1999 and a change in the schedule
from a Wednesday afternoon race program to a Thursday evening race program to accommodate export simulcasting.
Charles Town began exporting its live race program to tracks across the country on June 5, 1999 and generated export
simulcasting revenues of $566,000 for 2000 compared to $61,000 in 1999. Concession and other revenues increased
by approximately $1.1 million or 69.2%
to $2.8 million in 2000 from $1.7 million in 1999 due to increased attendance for gaming and racing and the expansion
of the concession areas, dining room and buffet area. Operating expenses increased by $9.7 million or 61.1 % to
$25.5 million in 2000 from $15.8 million in 1999. The increase was due to an increase in direct costs associated
with additional wagering on horse racing and gaming machine play, the addition of gaming machines and floor space
(new temporary facility for gaming machines), export simulcast expenses and expanded concession and dining capability
and capacity. Earnings before interest, taxes, depreciation and amortization (EBITDA) increased by $5.0 million
or 115.4% to $9.4 million in 2000 from $4.4 million in 1999.
Penn National Race Course and OTW Facilities (Penn National Race Course)
Penn National Race Course had an increase in revenue of approximately $1.8 million or 12.2% to $16.7 million in
2000 from $14.9 million in 1999. The increase in revenues is attributed to Penn National Race Course running 51
live race days in 2000 compared to 32 live race days in 1999 resulting in an increase in live racing commissions
and export simulcasting revenue. Expenses increased by approximately $1.5 million or 12.1% to $14.0 million in
2000 from $12.5 million in 1999.
Pocono Downs and OTW Facilities (Pocono Downs)
Revenues at Pocono Downs decreased by $.2 million or 1.7% to $10.3 million in 2000 from $10.5 million in 1999.
Revenue decreased at Allentown and Hazleton due to loss of Penn National Race Course customers wagering at Pocono
Downs sites during the 1999 strike. Expenses increased by approximately $.1 million or 1.3% to $8.0 million in
2000 from $7.9 million in 1999.
New Jersey Joint Venture
On July 29, 1999, after receiving the necessary approvals from the New Jersey Racing Commission and the necessary
consents from the holders of its 10.625% Senior Notes due 2004, Series B, the Company completed its investment
in the Joint Venture. The Joint Venture operates Freehold Raceway and Garden State Race Track. Summarized results
of operations of the unconsolidated Joint Venture for the period ended June 30, 2000 include $15.1 million in revenue,
$11.6 million in operating expenses and net income of $1.7 million. The Company's 50% share of net income or $.8
million is recorded as "Earnings from unconsolidated affiliates" on the income statement.
Capital Expenditures
The Company had capital expenditures of $5.2 million in 2000 compared to $1.1 million in 1999. Capital expenditures
at Charles Town were approximately $3.7 million for the indoor paddock project that will be the new gaming floor
space for 500 machines ($1.6 million), 174 new reel spinning, coin-out slot machines ($1.3 million), and equipment
replacement and upgrades ($.8 million). Capital expenditures at Penn National and its OTW facilities ($.2 million)
and Pocono Downs and its OTW facilities ($.1 million) were for normal equipment replacement and leasehold improvements.
Pocono Downs has also spent $1.2 million on the construction of its new OTW facility in East Stroudsburg, Pennsylvania.
The new OTW opened July 31, 2000. As a result, depreciation and amortization increased $.1 million or 2.9% to $2.2
million in 2000 from $2.1 million in 1999.
Six Months Ended June 30, 2000 Compared To Six Months Ended June 30, 1999
Revenues for the six months ended June 30, 2000 increased by approximately $37.5 million or 48.0% to $115.7 million
from $78.2 million for the six months ended June 30, 1999. Operating expenses for the six months ended June 30,
2000 increased by approximately 25.8 million or 36.8% to $96.1 million from $70.3 million for the six months ended
June 30, 1999. Income from operations increased by 11.7 million or 148.2% to $19.5 million for the six months ended
June 30, 2000 from $7.8 million for the six months ended June 30, 1999. Other expenses for the six months ended
June 30, 2000 and 1999 consisted of approximately $4.1 million and $3.7 million, respectively, of net interest
primarily due to the 10.625% Senior Notes and the Revolving Credit Facility. Taxes on income increased by $4.0
million to $5.6 million for the six months ended June 30, 2000 from $1.6 million for the six months ended June
30, 1999. Net income increased by 7.3 million to $9.8 million for the six months ended June 30, 2000 from $2.5
million for the six months ended June 30, 1999.
The results of operations for the six months ended June 30, 1999 and 2000 by property level are summarized as follows:
(in thousands)
Charles Town Racing Penn National and Pocono Downs and OTWs
and Gaming OTWs
1999 2000 1999 2000 1999 2000
---- ---- ---- ---- ---- ----
Revenues
Gaming $ 25,206 $49,059 $ - $ - $ - $ -
Racing 8,575 9,612 21,447 30,474 17,276 16,899
Other 2,789 4,972 1,892 2,532 1,389 1,446
------------------------- ------------------------ -------------------------
Total revenues 36,570 63,643 23,339 33,006 18,665 18,345
------------------------- ------------------------ -------------------------
Expenses
Gaming 18,622 33,514 - - - -
Racing 6,957 7,671 16,657 23,804 11,637 12,140
Other* 3,740 6,284 2,874 3,675 2,133 2,230
------------------------- ------------------------ -------------------------
Total expenses 29,319 47,469 19,531 27,479 13,770 14,370
------------------------- ------------------------ -------------------------
EBITDA
Gaming 6,584 15,545 - - - -
Racing 1,618 1,941 4,790 6,670 5,639 4,759
Other (951) (1,312) (982) (1,143) (744) (784)
------------------------- ------------------------ -------------------------
Total EBITDA $ 7,251 $16,174 $ 3,808 $ 5,527 $ 4,895 $ 3,975
========================= ======================== =========================
* Other expenses include property level general and administrative expenses and excludes corporate overhead and
non-recurring expenses.
Charles Town Entertainment Complex
Revenues increased at Charles Town by approximately $27.1 million or 74.0% to $63.6 million in 2000 from $36.5
million in 1999. Gaming revenue increased by $23.9 million or 94.6% to $49.1 million in 2000 from $25.2 million
in 1999 due to the addition of 136 new video lottery machines and 565 new reel spinning, coin-out slot machines
since January of last year. The average number of machines in play increased to 1,435 in 2000 from 876 in 1999
and the average win per machine increased to $190 in 2000 from $157 in 1999. Racing revenue increased by $1.0 million
or 12.1% to $9.6 million in 2000 from $8.6 million in 1999. The live meet consisted of 105 race days in 2000 and
compared to 99 race days in 1999 and a change in the schedule from a Wednesday afternoon race program to a Thursday
evening race program in 2000 to accommodate export simulcasting. Charles Town began exporting its live race program
to tracks across the country on June 5, 1999 and generated export simulcasting revenues of $1,031,000 for 2000
compared to $61,000 in 1999. Concession and other revenues increased by approximately $2.2 million or 78.3% to
$5.0 million in 2000 from $2.8 million in 1999 due to increased attendance for gaming and racing and the expansion
of the concession areas, dining room and buffet area. Operating expenses increased by $18.1 million or 61.2 % to
$47.4 million in 2000 from $29.3 million in 1999. The increase was due to an increase in direct costs associated
with additional wagering on horse racing and gaming machine play, the addition of gaming machines and floor space
(new temporary facility for gaming machines), export simulcast expenses and expanded concession and dining capability
and capacity. Earnings before interest, taxes, depreciation and amortization (EBITDA) increased by $8.9 million
or 123.1% to $16.2 million in 2000 from $7.3 million in 1999.
Penn National Race Course and OTW Facilities (Penn National Race Course)
Penn National Race Course had an increase in revenue of approximately $9.7 million or 41.4% to $33.0 million in
2000 from $23.3 million in 1999. The increase in revenues is attributed to Penn National Race Course running 99
live race days in 2000 compared to 50 live race days in 1999 resulting in an increase in live racing commissions
and export simulcasting revenue. Penn National only ran 50 live race days in 1999 due to the Horsemen action in
the first quarter that resulted in the closure of all of the facilities from February 16 to March 24, 1999. Expenses
increased by approximately $6.7 million or 32.2% to $27.5 million in 2000 from $20.8 million in 1999.
Pocono Downs and OTW Facilities (Pocono Downs)
Revenues at Pocono Downs decreased by $.3 million or 1.7% to $18.3 million in 2000 from $18.6 million in 1999.
Revenue decreased at Allentown and Hazleton due to loss of Penn National Race Course customers wagering at Pocono
Downs sites during the 1999 horsemen action. Expenses increased by approximately $.6 million or 4.3% to $14.4 million
in 2000 from $13.8 million in 1999.
New Jersey Joint Venture
Summarized results of operations of the unconsolidated Joint Venture for the six months ended June 30, 2000 were
$29.8 million in revenue, $23.5 million in operating expenses and net income of $2.8 million. The Company's 50%
share of net income or $1.4 million is recorded as "Earnings from unconsolidated affiliates" on the income
statement.
Capital Expenditures
The Company had capital expenditures of $7.3 million in 2000 compared to $2.6 million in 1999. Capital expenditures
at Charles Town were approximately $5.1 million for the indoor paddock project that will be the new gaming floor
space for 500 machines ($1.7 million), 174 new reel spinning, coin-out slot machines ($1.3 million) and equipment
replacement and upgrades ($2.3 million). Capital expenditures at Penn National and its OTW facilities ($.3 million)
and Pocono Downs and its OTW facilities ($.2 million) were for normal equipment replacement and leasehold improvements.
Pocono Downs has also spent $1.5 million on the construction of its new OTW facility in East Stroudsburg, Pennsylvania.
The new OTW opened July 31, 2000. As a result, depreciation and amortization increased $.2 million or 5.4% to $4.4
million in 2000 from $4.1 million in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of liquidity and capital resources have been cash flow from operations,
borrowings from banks and proceeds from issuance of equity securities.
Net cash provided from operating activities was $12.0 million for the period ended June 30, 2000. This consisted
of net income and non-cash expenses ($13.8 million), a decrease in prepaid income taxes ($1.1 million) and an increase
in corporate income tax liability ($2.6 million) due to an increase in taxable income, a decrease in accounts payable
and accrued expenses due to completion of construction for the temporary facility at Charles Town ($4.2 million),
an increase in prepaid expenses for the Mississippi acquisition ($.8 million) and other expenses ($.4 million),
and other changes in certain assets and liabilities ($.1 million).
Cash flows used in investing activities for the period ended June 30, 2000 ($13.0 million) consisted of the Company's
buyout of the 11% interest in Charles Town that was owned by other investors ($5.9 million), machinery, equipment
and improvements at Charles Town ($2.3 million), 174 new reel spinning, coin-out slot machines at Charles Town
($1.3 million), construction of the new gaming area at Charles Town ($1.6 million), equipment replacement and building
improvements at Penn National ($.3 million) and Pocono Downs ($.2 million) facilities, and construction of the
East Stroudsburg OTW facility ($1.5 million).
Cash flows provided by financing activities ($5.3 million) consisted of borrowings under the credit facility ($4.8
million) for Charles Town expansion and proceeds from the exercise of stock options and warrants ($.6 million).
This was offset by an increase in financing costs ($.1 million) for amending the credit facility.
The Company is subject to possible liabilities arising from the environmental condition at the Landfill adjacent
to Pocono Downs. Specifically, the Company may incur expenses in connection with the Landfill in the future, which
expenses may not be reimbursed by the four municipalities, which are parties to the Settlement Agreement. The Company
is unable to estimate the amount, if any, that it may be required to expend.
In fiscal year 2000, the Company anticipates spending approximately $21.5 million on capital expenditures at its
racetrack and OTW facilities. The Company anticipates expending approximately $18.2 million at the Charles Town
Entertainment Complex for player tracking ($.7 million), new slot machines and conversion kits ($2.1 million),
paddock casino and interior renovations ($7.4 million), machinery and equipment ($2.0 million) and other projects
including construction of a structured parking facility, design and planning for a new hotel ($6.0 million). The
Company also plans to spend approximately $261,000 at Pocono Downs, $550,000 at Penn National, $400,000 at the
OTW facilities for building improvements and equipment and $2.0 million on building improvements and equipment
for its new OTW facility in East Stroudsburg, Pennsylvania. The Company spent approximately $7.3 million on these
projects through June 30, 2000.
The Company entered into its Credit Facility with Bankers Trust Company, as Agent in 1996. This Credit Facility
was amended and restated on January 29, 1999 with First Union National Bank replacing Bankers Trust Company, as
Agent. The Credit Facility, as amended, provides for a $20 million revolving Credit Facility, including a $3 million
sub-limit for standby letters of credit and a $5 million term loan. Under the terms of the Credit Facility, as
amended, the Company borrowed an additional $11.5 million which was used to finance its share of the New Jersey
Joint Venture (see Note 4). The outstanding amount under this Credit Facility as of June 30, 2000 was $12.9 million
at an interest rate of 9.16%. The credit facility was repaid on August 8, 2000.
On December 13, 1999, the Company entered into a $20.0 million Senior Secured Multiple Draw Term Loan with Bank
of America, as an Agent for a bank group. The term loan was payable in quarterly installments of $1.3 million principle
plus interest. The loan was secured by gaming equipment and improvements at the Charles Town Entertainment Complex.
Part of the term loan was used to repay the $5.0 million First Union term loan and the balance will be used to
finance gaming equipment and improvements at the Charles Town Entertainment Complex. The outstanding amount under
this credit facility as of June 30, 2000 was $ 13.9 million at an interest rate of 9.15%. The credit facility was
repaid on August 8, 2000.
On June 14, 2000, the Company entered into a financing commitment letter with Lehman Brothers, Inc. and CIBC World
Markets, Corp. for a $350 million credit facility with bank and institutional lenders. On August 8, 2000, the Company
completed the credit agreement with Lehman Brothers, Inc. and CIBC World Markets Corp. as co-arrangers among others.
The proceeds of the credit facility were used to finance the $195 million Mississippi acquisition, to refinance
the Company's existing debts with First Union National Bank and Bank of America, to purchase the outstanding 10
5/8% Senior Notes and for working capital purposes. The credit facility provides for a $75 million revolving credit
facility maturing on August 8, 2005, a $75 million Tranche A term loan maturing on August 8, 2005 and a $200 million
Tranche B term loan maturing on August 8, 2006.
At the Company's option, the revolving credit facility and the Tranche A term loan may bear the interest at (1)
the highest of 1/2 of 1% in excess of the federal funds effective rate or the rate that the bank group announces
from time to time as its prime lending rate plus an applicable margin of up to 2.25% or, (2) a rate tied to a eurodollar
rate plus an applicable margin up to 3.25%. At the Company's option, the Tranche B term loan may bear the interest
at (1) the highest of 1/2 of 1% in excess of the federal funds effective rate or the rate that the bank group announces
from time to time as its prime lending rate plus an applicable margin of up to 3.25%, or, (2) a rate tied to a
eurodollar rate plus an applicable margin up to 4.00%. The credit facility provides for certain covenants, including
those of a financial nature. Substantially all of the Company's assets are pledged as collateral under the Credit
agreement. The outstanding amount under this credit facility as of August 8, 2000 was $312 million. A form 8-K
will be filed with further information regarding this Credit Facility.
The Company currently estimates that the cash generated from operations and available borrowings under the new
credit facilities will be sufficient to finance its current operations and planned capital expenditure requirements,
not including the CRC Acquisition. There can be no assurance, however, that the Company will not be required to
seek additional capital, in addition to that available from the foregoing sources. The Company may, from time to
time, seek additional funding through public or private financing, including equity financing. There can be no
assurance that adequate funding will be available as needed or, if available, on terms acceptable to the Company.
Item 3. Changes in Information about Market Risk
Most of the Company's debt obligations at June 30, 2000 were fixed rate obligations, and management, therefore,
does not believe that the Company has any material risk from its debt obligations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None