FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 2000
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) (Zip code)
610-373-2400
(Registrant's telephone number including area code)
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 May 10, 2000
Common Stock Par value $.01 per share 14,925,975
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 LOCATED ELSEWHERE HEREIN REGARDING THE COMPANY'S
OPERATIONS, FINANCIAL POSITION AND BUSINESS STRATEGY, MAY CONSTITUTE
FORWARD-LOOKING TERMINOLOGY 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. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE COMPANY'S EXPECTATIONS ("CAUTIOUNARY 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.
References to "Penn National Gaming" or the "Company" include Penn National
Gaming, Inc. and its subsidiaries.
2
Penn National Gaming, Inc. and Subsidiaries
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1 - Financial Statements
Consolidated Balance Sheets -
March 31, 2000 (unaudited) and December 31, 1999 4-5
Consolidated Statements of Income -
Three Months Ended March 31, 2000
and 1999 (unaudited) 6
Consolidated Statements of Shareholders' Equity -
Three Months Ended March 31, 2000 (unaudited) 7
Consolidated Statements of Cash Flow -
Three Months Ended March 31, 2000 and 1999 (unaudited) 8
Notes to Consolidated Financial Statements 9-15
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-18
Item 3 - Changes in Information About Market Risk 19
- -------------------------------------------------
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 20
- -----------------------------------------
Signature Page 21
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)
March 31, December 31,
2000 1999
(Unaudited)
----------------------------------------
Assets
Current assets
Cash and cash equivalents $ 11,430 $ 9,434
Accounts receivable 4,410 4,779
Prepaid expenses and other current assets 2,192 1,793
Deferred income taxes 669 888
Prepaid income taxes - 1,088
----------------------------------------
Total current assets 18,701 17,982
----------------------------------------
Property, plant and equipment, at cost
Land and improvements 27,878 27,988
Building and improvements 72,114 70,870
Furniture, fixtures and equipment 37,870 36,195
Transportation equipment 887 860
Leasehold improvements 9,806 9,802
Construction in progress 991 1,980
----------------------------------------
149,546 147,695
Less accumulated depreciation and amortization 22,479 20,824
----------------------------------------
Net property, plant and equipment 127,067 126,871
----------------------------------------
Other assets
Investment in and advances to unconsolidated affiliate 13,449 12,862
Investment in minority interest purchase 5,845 -
Cash in escrow 5,000 5,000
Excess of cost over fair market value of net assets acquired
(net of accumulated amortization of $2,762 and $2,611,
respectively) 21,430 21,582
Deferred financing costs 4,825 5,014
Miscellaneous 1,262 1,289
----------------------------------------
Total other assets 51,811 45,747
----------------------------------------
$ 197,579 $ 190,600
----------------------------------------
See accompanying notes to consolidated financial statements.
4
PENN NATIONAL GAMING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
March 31, December 31,
2000 1999
(Unaudited)
--------------------------------------
Liabilities and Shareholders' Equity
Current liabilities
Current maturities of long-term debt and
capital lease obligations $ 5,160 $ 5,160
Accounts payable 5,346 10,210
Purses due horsemen 3,601 2,114
Uncashed pari-mutuel tickets 1,641 1,351
Accrued expenses 1,485 2,694
Accrued interest 2,302 433
Accrued salaries and wages 930 1,098
Customer deposits 946 800
Taxes, other than income taxes 2,189 1,491
Income taxes 845 -
--------------------------------------
Total current liabilities 24,445 25,351
--------------------------------------
Long-term liabilities
Long-term debt and capital lease obligations,
net of current maturities 90,292 86,053
Deferred income taxes 12,881 12,924
--------------------------------------
Total long-term liabilities 103,173 98,977
--------------------------------------
Commitments and contingencies
Shareholders' equity
Preferred stock,$.01 par value, authorized 1,000,000 shares;
issued none - -
Common stock,$.01 par value, authorized 20,000,000 shares;
issued 15,332,675 and 15,314,175, respectively 153 153
Treasury stock, 424,700 shares at cost (2,379) (2,379)
Additional paid in capital 38,597 38,527
Retained earnings 33,590 29,971
--------------------------------------
Total shareholders' equity 69,961 66,272
--------------------------------------
$ 197,579 $ 190,600
--------------------------------------
See accompanying note to consolidated financial statements.
5
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ending March 31,
2000 1999
---------------------------------
Revenue
Pari-mutuel revenues
Live races $ 4,065 $ 2,414
Import simulcasting 19,816 15,301
Export simulcasting 1,594 511
Gaming revenue 22,166 11,297
Admissions, programs and other racing revenue 1,656 1,120
Concessions revenues 3,378 2,146
Earnings from unconsolidated affiliates 587 -
---------------------------------
Total revenues 53,262 32,789
---------------------------------
Operating expenses
Purses, stakes, and trophies 9,571 5,711
Direct salaries, payroll taxes and employee benefits 5,372 3,715
Simulcast expenses 3,501 2,387
Pari-mutuel taxes 2,322 1,669
Lottery taxes and administration 8,748 4,489
Other direct meeting expenses 6,315 4,592
Concessions expenses 2,974 2,022
Other operating expenses 4,437 3,074
Horsemen's action expenses - 1,250
Depreciation and amortization 2,176 2,015
---------------------------------
Total operating expenses 45,416 30,924
---------------------------------
Income from operations 7,846 1,865
---------------------------------
Other income (expense)
Interest (expense) (2,382) (2,125)
Interest income 450 209
Other (154) -
---------------------------------
Total other (expense) (2,086) (1,916)
---------------------------------
Income (loss) before income taxes 5,760 (51)
Taxes (benefit) on income 2,141 (73)
---------------------------------
Net income $ 3,619 $ 22
=================================
Per share data
Basic $ .24 $ .00
Diluted $ .24 $ .00
Weighted average shares outstanding
Basic 14,898 14,762
Diluted 15,212 15,079
See accompanying notes to consolidated financial statements.
6
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
Additional
Common Stock Treasury Paid-In Retained
Shares Amount Stock Capital Earnings Total
Balance, January 1, 2000 15,314,175 $ 153 $ (2,379) $ 38,527 $ 29,971 $ 66,272
Issuance of common stock 18,500 - - 70 - 70
Net income for the three
months ended March 31, 2000 - - - - 3,619 3,619
- ------------------------------------ ------------ ------------- ------------- ------------- ------------- -----------
Balance, March 31, 2000 15,332,675 $ 153 $ (2,379) $ 38,597 $ 33,590 $ 69,961
==================================== ============ ============= ============= ============= ============= ===========
See accompanying notes to consolidated financial statements.
7
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
Three Months Ended March 31,
2000 1999
----------------------------------
Cash flows from operating activities
Net income $ 3,619 $ 22
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 2,176 2,015
Income from unconsolidated affiliates (587) -
Deferred income taxes 176 232
Decrease (increase) in
Accounts receivable 369 533
Prepaid expenses (498) (149)
Prepaid income taxes 1,088 (482)
Miscellaneous other assets 25 (9)
Increase (decrease) in
Accounts payable (4,865) (562)
Purses due horsemen 1,487 871
Uncashed pari-mutuel tickets 290 152
Accrued expenses (1,209) 639
Accrued interest 1,869 1,975
Accrued salaries & wages (168) 40
Customer deposit 146 2
Taxes, other than income payable 698 (152)
Income taxes 845 -
----------------------------------
Net cash provided by operating activities 5,461 5,127
----------------------------------
Cash flows from investing activities
Expenditures for property, plant and equipment (1,851) (1,458)
Note receivable - (11,250)
Minority interest purchase (5,845) -
----------------------------------
Net cash (used) in investing activities (7,696) (12,708)
----------------------------------
Cash flows from financing activities
Proceeds from sale of common stock 70 29
Proceeds from long-term debt 4,247 11,500
Principal payments on long-term debt and capital lease (8) (17)
obligations
Increase in unamortized deferred financing costs (78) (579)
----------------------------------
Net cash provided by financing activities 4,231 10,933
----------------------------------
Net increase in cash and cash equivalents 1,996 3,352
Cash and cash equivalents, at beginning of period 9,434 6,826
----------------------------------
Cash and cash equivalents, at end of period $ 11,430 $ 10,178
==================================
See accompanying notes to consolidated financial statements
8
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Financial Statement Presentation
The accompanying consolidated financial statements are unaudited and
include the accounts of Penn National Gaming, Inc., ("Penn") and its wholly and
majority owned subsidiaries, (collectively, the "Company"). All significant
intercompany transactions and balances have been eliminated. 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, 2000 and the results of its
operations for the three month periods ended March 31, 2000 and 1999. The
results of operations experienced for the three month period ended March 31,
2000 are not necessarily indicative of the results to be experienced for the
fiscal year ended December 31, 2000.
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, 1999
annual financial statements.
2. Wagering Information (in thousands)
Three months ended March 31, 2000
Penn Pocono Charles
National Downs Town Total
Pari-mutuel wagering in-state on
company live races $ 13,345 $ - $ 5,770 $ 19,115
----------------------------------------------------------------
Pari-mutuel wagering on simulcasting:
Import simulcasting from other racetracks 49,710 32,672 12,598 94,980
Export simulcasting to out of
State wagering facilities 38,190 - 14,693 52,883
----------------------------------------------------------------
87,900 32,672 27,291 147,863
----------------------------------------------------------------
Total pari-mutuel wagering $ 101,245 $32,672 $ 33,061 $ 166,978
================================================================
9
Three months ended March 31, 1999
Penn Pocono Charles
National Downs Town Total
Pari-mutuel wagering in-state on
company live races $ 6,679 $ - $ 5,043 $ 11,722
----------------------------------------------------------------
Pari-mutuel wagering on simulcasting:
Import simulcasting from other racetracks 27,605 35,164 12,599 75,368
Export simulcasting to out of
State wagering facilities
17,154 - - 17,154
----------------------------------------------------------------
44,759 35,164 12,599 92,522
----------------------------------------------------------------
Total pari-mutuel wagering $ 51,438 $35,164 $ 17,642 $ 104,244
================================================================
3. Commitments
At March 31, 2000, the Company was contingently obligated under letters
of credit with face amounts aggregating $1,970,000. These amounts consisted of
$1,727,000 relating to horsemen's account balances, $104,000 for Pennsylvania
pari-mutuel taxes and $139,000 for other items.
4. Supplemental Disclosures of Cash Flow Information
Cash paid during the three months ended March 31, 2000 and 1999 for
interest was $422,000 and $67,000, respectively.
Cash paid during the three months ended March 31, 2000 and 1999 for
income taxes was $29,800 and $199,000, respectively.
10
5. Subsidiary Guarantors
Summarized financial information for the three month period ended March
31, 2000 and 1999 for Penn National Gaming, Inc., ("Parent"), the Subsidiary
Guarantors and Subsidiary Nonguarantors is as follows:
- -----------------------------------------------------------------------------------------------------------------
Subsidiary
Parent Subsidiary Non- Elimin- Consoli-
Company Guarantors Guarantors ations dated
- -----------------------------------------------------------------------------------------------------------------
As of March 31, 2000
Consolidated Balance Sheet (In Thousands)
Current assets $ 3,316 $ 8,283 $ 8,125 $ (1,023) $ 18,701
Net property, plant and
equipment 822 79,226 47,019 - 127,067
Other assets 119,026 172,364 7,609 (247,188) 51,811
- -----------------------------------------------------------------------------------------------------------------
Total $ 123,164 $ 259,873 $ 62,753 $ (248,211) $ 197,579
- -----------------------------------------------------------------------------------------------------------------
Current liabilities $ 2,358 $ 26,491 $ 6,985 $ (11,389) $ 24,445
Long-term liabilities 81,995 96,180 53,449 (128,451) 103,173
Shareholders' equity 38,811 137,202 2,319 (108,371) 69,961
- -----------------------------------------------------------------------------------------------------------------
Total $ 123,164 $ 259,873 $ 62,753 $ (248,211) $ 197,579
- -----------------------------------------------------------------------------------------------------------------
Three months ended March 31, 2000
Consolidated Statement of Income (In Thousands)
Total revenues $ 6 $ 26,890 $ 28,718 $ (2,352) $ 53,262
Total operating expenses (1,469) 24,855 24,382 (2,352) 45,416
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Income from operations 1,475 2,035 4,336 - 7,846
Other income(expenses) (1,181) 411 (1,162) (154) (2,086)
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 294 2,446 3,174 (154) 5,760
Taxes on income 126 2,067 - (52) 2,141
- -----------------------------------------------------------------------------------------------------------------
Net income $ 168 $ 379 $ 3,174 $ (102) $ 3,619
- -----------------------------------------------------------------------------------------------------------------
Three months ended March 31, 2000
Consolidated Statement of Cash Flow (In Thousands)
Net cash provided by
(used in) operating
activities $ (3,780) $ (4,711) $ (3,893) $ 17,845 $ 5,461
Net cash provided by
(used in) investing
activities 2,841 2,606 (1,298) (11,845) (7,696)
Net cash provided by
(used in) financing
activities 320 3,920 5,991 (6,000) 4,231
- -----------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in cash and cash equivalents (619) 1,815 800 - 1,996
Cash and cash equivalents
at January 1, 2000 2,544 2,538 4,352 - 9,434
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents
at March 31, 2000 $ 1,925 $ 4,353 $ 5,152 $ - $ 11,430
- -----------------------------------------------------------------------------------------------------------------
11
- -----------------------------------------------------------------------------------------------------------------
Subsidiary
Parent Subsidiary Non- Elimin- Consoli-
Company Guarantors Guarantors ations dated
- -----------------------------------------------------------------------------------------------------------------
As of March 31, 1999
Consolidated Balance Sheet (In Thousands)
Current assets $ 6,667 $ 6,613 $ 4,687 $ (418) $ 17,549
Net property, plant and
equipment 13,200 62,510 44,778 - 120,488
Other assets 114,009 154,037 1,804 (232,371) 37,479
- -----------------------------------------------------------------------------------------------------------------
Total $ 133,876 $ 223,160 $ 51,269 $ (232,789) $ 175,516
- -----------------------------------------------------------------------------------------------------------------
Current liabilities $ 8,520 $ 14,165 $ 7,886 $ (10,410) $ 20,161
Long-term liabilities 87,735 78,313 47,559 (117,339) 96,268
Shareholders' equity
(deficiency) 37,621 130,682 (4,176) (105,040) 59,087
- -----------------------------------------------------------------------------------------------------------------
Total $ 133,876 $ 223,160 $ 51,269 $ (232,789) $ 175,516
- -----------------------------------------------------------------------------------------------------------------
Three months ended March 31, 1999
Consolidated Statement of Income (In Thousands)
Total revenues $ 3,696 $ 13,852 $ 16,365 $ (1,124) $ 32,789
Total operating expenses 2,019 15,179 14,850 (1,124) 30,924
- -----------------------------------------------------------------------------------------------------------------
Income from operations 1,677 (1,327) 1,515 - 1,865
Other income(expenses) (1,506) 755 (1,165) - (1,916)
- -----------------------------------------------------------------------------------------------------------------
Income(loss)before
income taxes 171 (572) 350 - (51)
Taxes (benefit) on
income 89 (324) 162 - (73)
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 82 $ (248) $ 188 $ - $ 22
- -----------------------------------------------------------------------------------------------------------------
Three months ended March 31, 1999
Consolidated Statement of Cash Flow (In Thousands)
Net cash provided by
(used in) operating
activities $ 2,506 $ 1,763 $ 858 $ - $ 5,127
Net cash provided by
(used in) investing
activities (11,379) (716) (613) - (12,708)
Net cash provided by
(used in) financing
activities 11,529 (596) - - 10,933
- -----------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in cash and cash equivalents 2,656 451 245 - 3,352
Cash and cash equivalents
at January 1, 1999 2,001 1,705 3,120 - 6,826
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents
at March 31, 1999 $ 4,657 $ 2,156 $ 3,365 $ - $ 10,178
- -----------------------------------------------------------------------------------------------------------------
12
6. Mississippi Agreement
On December 10, 1999, the Company entered into two definitive
agreements to purchase all of the assets of the Casino Magic hotel, casino, golf
resort, recreational vehicle (RV) park and marina in Bay St. Louis, Mississippi
and the Boomtown Biloxi casino in Biloxi, Mississippi, from Pinnacle
Entertainment, Inc. formerly Hollywood Park, Inc. (NYSE:PNK) for $195 million.
These agreements are contingent upon each other. In addition to acquiring all of
the operating assets and related operations of the Casino Magic Bay St. Louis
and Boomtown Biloxi properties (the "Mississippi Acquisitions"), the Company
will enter into a licensing agreement to use Boomtown and Casino Magic names and
marks at the properties being acquired. The transaction is subject to certain
closing conditions including the approval of the Mississippi Gaming Commission,
financing and expiration of the applicable Hart-Scott-Rodino waiting period. As
part of the agreement, the Company paid a deposit of $5 million to an escrow
account, which is refundable if certain conditions are not met. In connection
with financing the Mississippi acquisition, the Company will explore a number of
financing alternatives, which may include repaying or redeeming its existing
debt. The Company received approval for a gaming license from the Mississippi
Gaming Commission on April 20, 2000.
7. New Jersey Joint Venture
On January 28, 1999, pursuant to a First Amendment to an Asset Purchase
Agreement by and among Greenwood New Jersey, Inc. ("Greenwood"), International
Thoroughbred Breeders Inc., Garden State Race Track Inc., Freehold Racing
Association, Atlantic City Harness, Inc. and Circa 1850, Inc., the original
parties to an Asset Purchase Agreement entered into as of July 2, 1998 and the
Company (the "Agreement"), and pursuant to which the Company entered into a
joint venture ("Joint Venture"), the Company, along with its Joint Venture
partner, Greenwood, agreed to purchase certain assets of the Garden State Race
Track and Freehold Raceway, both located in New Jersey (the "Acquisition").
The purchase price for the Acquisition was approximately $46 million
(subject to reduction of certain disputed items, for which amounts have been
placed in escrow). The purchase price consisted of $23 million in cash and $23
million pursuant to two deferred purchase price promissory notes in the amount
of $22 million and $1 million each. On July 29, 1999, after receiving the
necessary consents from the holders of its 10.625% Senior Notes due 2004, Series
B, the Company completed its investment in the Joint Venture, pursuant to which
Pennwood, Inc. was formed with Greenwood New Jersey, Inc. (a wholly-owned
subsidiary of Greenwood Racing, Inc. the owner of Philadelphia Park Race Track).
Pursuant to the Joint Venture Agreement, the Company agreed to guarantee
severally: (i) up to 50% of the obligation of the Joint Venture under its Put
Option Agreement ($17.5 million) with Credit Suisse First Boston Mortgage
Capital LLC ("CSFB"); (ii) up to 50% of the Joint Venture obligation for the
seven year lease at Garden State Park and; (iii) up to 50% of the Joint Venture
obligation to International Thoroughbred Breeders, Inc. for the contingent
purchase price notes ($10.0 million) relating to the operation subject to
passage by the New Jersey legislature, by the Joint Venture of OTWs and
telephone wagering accounts in New Jersey. In conjunction with the closing, the
Company entered into a Debt Service Maintenance Agreement with Commerce Bank,
N.A. for the funding of a $23.0 million credit facility to the Joint Venture.
The Joint Venture Agreement provides for a limited obligation of the Company of
$11.5 million subject to limitations provided for in the Company's 10.625%
Senior Notes Indenture. The Company's investment in the Joint Venture is
accounted for under the equity method, original investments are recorded at cost
and adjusted by the Company's share of income or losses of the Joint Venture.
The income for the three months ended March 31, 2000 of the Joint Venture is
included in earnings of unconsolidated affiliates in the accompanying
Consolidated Statements of Income for the three months ended March 31, 2000.
13
Summarized balance sheet information for the Joint Venture as of March 31, 2000
is as follows (in thousands):
Current assets $ 9,604
Property, plant and equipment, net 30,473
Other 17,983
---------------------
Total assets $ 58,060
=====================
Current liabilities $ 8,070
Long-term liabilities 46,221
Members' equity 3,769
---------------------
Total liabilities and members' equity $ 58,060
=====================
Summarized results of operations of the unconsolidated Joint Venture for the
three months ended March 31, 2000 is as follows (in thousands):
Revenues $ 14,679
Operating expenses 11,813
-------------------
EBITDA* 2,866
-------------------
Net Income $ 1,174
-------------------
* Earnings before interest, taxes, depreciation and amortization.
8. Trackpower, Inc. and eBet Limited
In July 1999, the Company entered into an agreement with Trackpower,
Inc. (OTC BB: TPWR) ("Trackpower") to serve as the exclusive pari-mutuel
wagering hub operator for Trackpower. Trackpower provides direct-to-home
digital satellite transmissions of horse racing to its subscriber base. The
initial term of the contract is for five years with an additional five-year
option available. The Company pays Trackpower a commission on all new revenues
earned from their subscriber base. As an additional incentive to enter into the
contract, the Company received warrants to purchase 5,000,000 shares of common
stock of Trackpower at prices ranging from $1.58 per share to $2.58 per share.
The warrants vest at 20% per year and expire on April 30, 2004. The fair market
value of the warrants issued will be amortized over the vesting period or one
year from the anniversary date of the agreement. As a result of the transition
of operations in 1999, the amount to be amortized as a reduction of commissions
earned in 1999 by Trackpower was not material.
In March 2000, the Company entered into a letter of intent with
Trackpower and eBet Limited ("eBet") which, if a definitive agreement is
executed, will replace and restate the above described agreement between the
Company and Trackpower. Under the terms of the letter of intent, the Company and
eBet will contribute various assets, equipment, management agreements relating
to our telephone account wagering systems and business operations to Trackpower.
Under the proposed agreement, the Company will continue to receive the same
level of income as in 1999, the Company and eBet will each receive 18,000,000
shares of Trackpower common stock as well as warrants to purchase additional
shares exercisable at $1.00 per share. Upon completion of the proposed
transaction the Company and eBet will each own 26.5% of Trackpower not including
future exercise of options or warrants. The proposed agreement is subject to due
diligence, regulatory and other approvals.
14
9. Minority Interest Purchase
On March 15, 2000, the Company purchased from the BDC Group ("BDC"),
its joint venture partner in West Virginia, BDC's 11% interest in PNGI Charles
Town Gaming Limited Liability Company, which owns and operates Charles Town
Races for $6.0 million in cash. The investment is recorded net of the minority
interest tax liability of $155,000 or $5.845 million. The Company is in the
process of determining the allocation of the purchase price to the various
property, plant and equipment accounts. The allocation will be based on the
results of an appraisal that is to be completed in June. As a result of the
purchase, Charles Town Races is now a 100%-owned subsidiary of the Company.
ITEM 2 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
Acquisition 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. An example of a type of presentation that the Company is likely to
use is presented below.
The results of operations for the three months ended March 31, 1999 and 2000 by
property level are summarized as follows:
Charles Town Racing Penn National and Pocono Downs and OTWs
and Gaming OTWs
(in thousands)
1999 2000 1999 2000 1999 2000
---- ---- ---- ---- ---- ----
Revenues
Gaming $11,399 $ 22,372 $ - $ - $ - $ -
Racing 3,964 4,628 7,795 15,101 7,623 7,501
Other 1,002 1,718 635 1,171 509 490
------------------------- ------------------------ -------------------------
Total revenues 16,365 28,718 8,430 16,272 8,132 7,991
Expenses
Gaming 8,593 16,416 - - - -
Racing 4,060 4,673 6,497 11,191 4,941 5,323
Other* 1,699 2,796 1,825 2,317 964 1,078
------------------------- ------------------------ -------------------------
Total expenses 14,352 23,885 8,322 13,508 5,905 6,401
EBITDA
Gaming 2,806 5,956 - - - -
Racing (96) (45) 1,298 3,910 2,682 2,178
Other (697) (1,078) (1,190) (1,146) (455) (588)
------------------------- ------------------------ -------------------------
Total EBITDA $ 2,013 $ 4,833 $ 108 $ 2,764 $ 2,227 $ 1,590
========================= ======================== =========================
* Other expenses include property level general and administrative expenses and
excludes corporate overhead and non-recurring expenses.
15
Three Months Ended March 31, 2000 Compared To Three Months Ended March 31, 1999
Revenues for the three months ended March 31, 2000 increased by
approximately $20.5 million or 62.4% to $53.3 million from $32.8 million for the
three months ended March 31, 1999. The increase in revenues is attributed to
Penn National Race Course running 48 live race days in the year 2000 compared to
18 live race days during a Horsemen action in the first quarter in 1999, the
addition of 663 slot and video lottery machines at Charles Town and simulcast of
race broadcasts from Charles Town in 2000. Operating expenses for the three
months ended March 31, 2000 increased by approximately $14.5 million or 46.8% to
$45.4 million from $30.9 million for the three months ended March 31, 1999.
Included in operating expenses were non-recurring expenses for the three months
ended March 31, 1999 for the Horsemen's action at Penn National Race Course
($1.3 million). Income from operations increased by $6.0 million to $7.8 million
for the three months ended March 31, 2000 from $1.8 million for the three months
ended March 31, 1999. Other expenses for the three months ended March 31, 2000
and 1999 consisted of approximately $2.1 million and $2.0 million, respectively,
of net interest primarily due to the 10.625% Senior Notes, the Bank of America
term loan and the revolving Credit Facility with First Union National Bank.
Taxes on income increased by $2.2 million to $2.1 million for the three months
ended March 31, 2000 from a credit of $.1 million for the three months ended
March 31, 1999. Net income increased by $3.6 million to $3.6 million for the
three months ended March 31, 2000 from $22,000 for the three months ended March
31, 1999 due to the factors described above.
Charles Town Entertainment Complex
Revenues increased at Charles Town by approximately $12.3 million or
75.5% to $28.7 million in 2000 from $16.4 million in 1999. Gaming revenue
increased by $11.0 million or 96.2% to $22.4 million in 2000 from $11.4 million
in 1999 due to the addition of 136 new video lottery machines and 565 new reel
spinning, coin-out slot machines since the first quarter of last year. The
average number of machines in play increased to 1,464 in 2000 from 837 in 1999
and the average win per machine increased to $169 in 2000 from $150 in 1999.
Racing revenue increased by $.7 million or 16.7% to $4.6 million in 2000 from
$3.9 million in 1999. The live meet consisted of 45 race days in 2000 compared
to 39 race days in 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
$.5 million for the quarter. Concession revenues increased by approximately $.7
million or 71.4% to $1.7 million in 2000 from $1.0 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 $9.5 million
or 66.4 % to $23.9 million in 2000 from $14.4 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.
Penn National Race Course and OTW Facilities (Penn National Race Course)
Penn National Race Course had an increase in revenue of approximately
$7.9 million or 93.0% to $16.3 million in 2000 from $8.4 million in 1999. The
increase in revenues is attributed to Penn National Race Course running 48 live
race days in 2000 compared to 18 live race days during a Horsemen action in the
first quarter that resulted in the closure of the facilities from February 16 to
March 24, 1999. Operating expenses increased by approximately $5.2 million or
62.3% to $13.5 million in 2000 from $8.3 million in 1999 as a result of the
increased race days. Included in the 1999 expenses is $1.3 million for the
Horsemen's action.
16
Pocono Downs and OTW Facilities (Pocono Downs)
Revenues at Pocono Downs decreased by $.1 million or 1.7% to $8.0
million in 2000 from $8.1 million in 1999. Revenue decreased at Allentown OTW
($.3 million) and Hazleton OTW ($.1 million) due to loss of Penn National Race
Course customers wagering at Pocono Downs sites during the 1999 action. The
revenue decrease was partially offset by revenue increases at Erie OTW,
Carbondale OTW and the Pocono Downs racetrack. Expenses increased by
approximately $.5 million or 8.4% to $6.4 million in 2000 from $5.9 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 three months ended March 31, 2000 include $14.7 million in revenue,
$11.8 million in operating expenses and net income of $1.2 million. The
Company's 50% share of net income or $.6 million is recorded as "Earnings from
unconsolidated affiliates" on the income statement.
Capital Expenditures
The Company had capital expenditures of $1.8 million in 2000 compared
to $1.5 million in 1999. Capital expenditures at Charles Town were approximately
$1.3 million for machinery, equipment and improvements. Capital expenditures at
Penn National and its OTW facilities ($.2 million) and Pocono Downs and its OTW
facilities ($.3 million) were for equipment replacement and leasehold
improvements. As a result, depreciation and amortization increased $.2 million
or 8.9% to $2.2 million in 2000 from $2.0 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 $5.5 million for the
period ended March 31, 2000. This consisted of net income and non-cash expenses
($5.2 million), a decrease in prepaid income taxes ($1.1 million) and an
increase in corporate income tax liability ($.9 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 ($6.1
million), an increase in purses due horsemen ($1.5 million), an increase in
taxes, other than income taxes ($.7 million) due to a change in payment
schedules for Pennsylvania pari-mutuel taxes, an increase in accrued interest
for the 10.625% Senior Notes ($1.9 million) and other changes in certain assets
and liabilities ($.3 million).
Cash flows used in investing activities for the period ended March 31,
2000 ($7.7 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 ($1.3 million), and equipment
replacement and building improvements at Penn National ($.2 million) and Pocono
Downs ($.3 million) facilities.
Cash flows provided by financing activities ($4.2 million) consisted of
borrowings under the credit facility ($4.2 million) for Charles Town expansion
and proceeds from the exercise of stock options and warrants ($.1 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
17
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 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 $1.8 million on these projects in the first quarter.
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 revolving Credit
Facility is secured by substantially all of the assets of the Company, except
for the assets of the Charles Town Entertainment Complex. The revolving Credit
Facility provides for certain covenants, including those of a financial nature.
The $5.0 million term loan was repaid on December 16, 1999. At the Company's
option, the revolving facility may bear interest at the highest of: (1) 1/2 of
1% in excess of the federal reserve reported certificate of deposit rate, (2)
the rate that the bank group announces from time to time as its prime lending
rate and (3) 1/2 of 1% in excess of the federal funds rate plus an applicable
margin of up to 2% or the revolving facility may also bear interest at a rate
tied to a eurodollar rate plus an applicable margin of up to 3%. The outstanding
amount under this Credit Facility as of March 31, 2000 was $12.9 million at an
interest rate of 8.75%. Mandatory repayments of the revolving facility are
required in an amount equal to a percentage of the net cash proceeds from any
issuance or incurrence of equity or funded debt by the Company, that percentage
to be dependent upon the then outstanding balance of the revolving facility and
the Company's leverage ratio. Mandatory repayments of varying percentages are
also required in the event of either asset sales in excess of stipulated amounts
or defined excess cash flow.
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 is payable in quarterly installments of $1.3 million
principle plus interest. The loan is 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. At the Company's option the term loan may bear interest
at the highest of: (1) 1/2 of 1% in excess of the federal reserve reported
certificate of deposit rate, (2) the rate that the bank group announces from
time to time as its prime lending rate and (3) 1/2 of 1% in excess of the
federal funds rate plus an applicable margin of up to 1.75% or the facility may
also bear interest at a rate tied to a eurodollar rate plus an applicable margin
of up to 2.75%. The outstanding amount under this credit facility as of March
31, 2000 was $ 13.3 million at an interest rate of 8.89%.
In connection with the Company's agreement to acquire all of the assets
of Casino Magic Bay St. Louis and Boomtown Biloxi, the Company is exploring a
number of financing alternatives, which may involve repaying or redeeming its
existing debt. The Company expects to use part of the proceeds from any
refinancing to make certain improvements to the Mississippi properties.
The Company currently estimates that the cash generated from operations
and available borrowings under the credit facilities will be sufficient to
finance its current operations and planned capital expenditure requirements, not
including the Mississippi 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.
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Item 3. Changes in Information about Market Risk
Most of the Company's debt obligations at March 31, 2000 were fixed
rate obligations, and management, therefore, does not believe that the Company
has any material risk from its debt obligations.
19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Purchase Agreement dated March 15, 2000, between PNGI Charles
Town Gaming, LLC and BDC Group.
Amendment No. 1 to Term Loan Agreement between the Company
and Bank of America, dated March 29, 2000.
Amendment No. 4 to Loan Agreement between the Company and
First Union National Bank dated March 29, 2000.
(b) Reports on Form 8-K
None
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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.
May 12, 2000 By: /s/Robert S. Ippolito
- ------------ ------------------------
Date Chief Financial Officer,
Secretary/Treasurer
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EXHIBIT INDEX
Page
10.18a Purchase Agreement dated March 15, 2000, between PNGI
Charles Town Gaming, LLC and BDC Group. 23-36
10.19a Amendment No. 1 to Term Loan Agreement between the Company
and Bank of America, dated March 29, 2000. 37-38
10.20a Amendment No. 4 to Loan Agreement between the Company and
First Union National Bank dated March 29, 2000. 39-48
22