SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
o 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 ____
1
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ____ No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Title Outstanding as of August 12, 1998
Common Stock par value .01 per share 15,155,830
This Report contains forward-looking statements that inherently involve risks
and uncertainties. The Company's actual result could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those discussed in this Quarterly Report and those discussed
in the Company's Annual Report on Form 10-K. 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 -
June 30, 1998 (unaudited) and December 31, 1997 4-5
Consolidated Statements of Income -
Six Months Ended June 30, 1998
and 1997 (unaudited) 6-7
Consolidated Statements of Income -
Three Months Ended June 30, 1998 and
1997 (unaudited) 8-9
Consolidated Statement of Shareholders' Equity -
Six Months Ended June 30, 1998 (unaudited) 10
Consolidated Statements of Cash Flow -
Six Months Ended June 30, 1998
and 1997 (unaudited) 11-12
Notes to Consolidated Financial Statements 13-17
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-22
Item 3 - Changes in information about Market Risk 22
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 22
Item 6 - Exhibits and Reports on Form 8-K 23
Signature Page 24
Exhibit Index 25
3
Part I. Financial Information
Item 1. Financial Statements
PENN NATIONAL GAMING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
June 30, December 31,
1998 1997
(Unaudited)
----------- ----------
Assets
Current assets
Cash and cash equivalents $ 23,492 $ 21,854
Accounts receivable 4,060 2,257
Prepaid expenses and other current assets 2,109 1,441
Deferred income taxes 419 469
Prepaid income taxes 880 3,003
--- -----
Total current assets 30,960 29,024
------ ------
Property, plant and equipment, at cost
Land and improvements 26,249 24,643
Building and improvements 66,845 56,298
Furniture, fixtures and equipment 16,006 13,847
Transportation equipment 479 490
Leasehold improvements 8,451 6,778
Leased equipment under capitalized lease 824 824
Construction in progress 230 11,288
--- ------
119,084 114,168
Less accumulated depreciation and amortization 13,301 11,007
------ ------
Net property, plant and equipment 105,783 103,161
------- -------
Other assets
Excess of cost over fair market value of net assets acquired
(net of accumulated amortization
of $1,695 and $1,389, respectively) 22,749 23,055
Deferred financing costs 2,896 3,014
Miscellaneous 837 624
--- ---
Total other assets 26,482 26,693
------ ------
$163,225 $158,878
======== ========
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)
June 30, December 31,
1998 1997
(Unaudited)
----------- -------------
Liabilities and shareholders' equity
Current liabilities
Current maturities of long-term debt and
capital lease obligations $ 189 $ 204
Accounts payable 7,093 7,405
Purses due horsemen 1,423 -
Uncashed pari-mutuel tickets 950 1,504
Accrued interest 334 326
Accrued expenses 1,848 2,427
Accrued salaries and wages 951 813
Customer deposits 703 470
Taxes, other than income taxes 806 649
--- ---
Total current liabilities 14,297 13,798
------ ------
Long term liabilities
Long-term debt and capital lease obligations,
net of current maturities 80,113 80,132
Deferred income taxes 11,264 11,092
------ ------
Total long-term liabilities 91,377 91,224
------ ------
Commitments and contingencies
Shareholders' equity
Preferred stock,$.01 par value,
authorized 1,000,000 shares; none issued - -
Common stock,$.01 par value,
authorized 20,000,000 shares;
15,155,830 and 15,152,580
issued and outstanding, respectively 152 152
Additional paid in capital 37,987 37,969
Retained earnings 19,412 15,735
------ ------
Total shareholders' equity 57,551 53,856
--------- ---------
$ 163,225 $ 158,878
========= =========
See accompanying notes to consolidated financial statements
5
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Six Months Ended
June 30,
1998 1997
-------------------------------
Revenues
Pari-mutuel revenues
Live races $ 12,928 $ 11,397
Import simulcasting 34,114 31,338
Export simulcasting 2,828 3,395
Gaming revenue 16,160 -
Admissions, programs and other racing revenue 4,427 2,824
Concession revenues 2,956 3,450
----- -----
Total revenues 73,413 52,404
------ ------
Operating expenses
Purses, stakes, and trophies 13,946 10,318
Direct salaries, payroll taxes and employee benefits 9,263 7,420
Simulcast expenses 6,896 5,881
Pari-mutuel taxes 4,589 4,419
Lottery taxes and administration 6,302 -
Other direct meet expenses 11,564 8,499
Off-track wagering concession expenses 3,453 2,640
Other operating expenses 5,021 3,775
Depreciation and amortization 2,841 1,660
----- -----
Total operating expenses 63,875 44,612
------ ------
Income from operations 9,538 7,792
----- -----
Other income (expenses)
Interest (expense) (4,243) (1,675)
Interest income 451 158
Other 30 (4)
-- --
Total other (expenses) (3,762) (1,521)
------ ------
Income before income taxes and
extraordinary item 5,776 6,271
Taxes on income 2,099 2,573
----- -----
See accompanying notes to consolidated financial statements
6
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
(Unaudited)
Six Months Ended
June 30,
1998 1997
----------------------------
Income before extraordinary item 3,677 3,698
Extraordinary Item
Loss of early extinguishment
of debt, net of income taxes
of $264 - 383
---- --- ---
Net income $ 3,677 $ 3,315
======= =======
Per share data
Basic
Income per share before extraordinary item $0.24 $0.24
Extraordinary item - 0.02
---- ----
Net income per share $0.24 $0.22
----- -----
Diluted
Income per share before extraordinary item $0.24 $0.24
Extraordinary item - 0.02
---- ----
Net income per share $0.24 $0.22
----- -----
Weighted average shares outstanding
Basic 15,154 15,126
------ ------
Diluted 15,558 15,319
------ ------
See accompanying notes to consolidated financial statements
7
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended
June 30,
1998 1997
--------------------------
Revenues
Pari-mutuel revenues
Live races $ 7,623 $ 7,028
Import simulcasting 17,763 16,541
Export simulcasting 1,502 2,272
Gaming revenue 9,004 -
Admissions, programs and other racing revenue 2,472 1,566
Concession revenues 1,694 2,177
----- -----
Total revenues 40,058 29,584
------ ------
Operating expenses
Purses, stakes, and trophies 7,639 6,116
Direct salaries, payroll taxes and employee benefits 4,904 4,174
Simulcast expenses 3,795 3,045
Pari-mutuel taxes 2,476 2,462
Lottery taxes and administration 3,371 -
Other direct meet expenses 6,122 5,121
Off-track wagering concession expenses 1,948 1,674
Other operating expenses 2,625 1,933
Depreciation and amortization 1,422 943
----- ---
Total operating expenses 34,302 25,468
------ ------
Income from operations 5,756 4,116
----- -----
Other income (expenses)
Interest (expense) (2,134) (775)
Interest income 250 72
Other 30 (4)
-- --
Total other (expenses) (1,854) (707)
------ ----
Income before income taxes 3,902 3,409
Taxes on income 1,435 1,395
----- -----
See accompanying notes to consolidated financial statements
8
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
(Unaudited)
Three Months Ended
June 30,
1998 1997
--------------------------
Net income $ 2,467 $ 2,014
======= =======
Per share data
Basic net income $0.16 $0.13
----- -----
Diluted net income $0.16 $0.13
----- -----
Weighted average shares outstanding
Basic 15,156 15,126
------ ------
Diluted 15,542 15,717
------ ------
See accompanying notes to consolidated financial statements
9
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Six Months Ended June 30, 1998
(In thousands, except share data)
(Unaudited)
Additional
Common Stock Paid-In Retained
------------
Shares Amounts Capital Earnings Total
------ ------- ------- -------- -----
Balance, January 1, 1998 15,152,580 $ 152 $ 37,969 $ 15,735 $ 53,856
Issuance of common stock 3,250 - 18 - 18
Net income for the six months
ended June 30, 1998 - - - 3,677 3,677
-- -- -- ----- -----
Balance, June 30, 1998 15,155,830 $ 152 $ 37,987 $ 19,412 $ 57,551
========== ====== ========= ========= =========
See accompanying notes to consolidated financial statements
10
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
1998 1997
--------------------------
Cash flows from operating activities $ 3,677 $ 3,315
Net income
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 2,841 1,660
Extraordinary item, loss on early extinguishment
of debt, before tax benefit - 647
Deferred income taxes 222 148
Decrease (increase) in:
Accounts receivable (1,803) 1,156
Prepaid expenses and other current assets (668) (2,286)
Prepaid income taxes 2,123 1,178
Miscellaneous other assets (213) (503)
Increase (decrease) in:
Accounts payable (312) 4,480
Purses due horsemen 1,423 458
Uncashed pari-mutuel tickets (554) (587)
Accrued expenses (579) (71)
Accrued interest 8 (152)
Accrued salaries and wages 138 306
Customers deposits 233 261
Taxes other than income taxes 157 (43)
--- ---
Net cash provided by operating activities 6,693 9,967
----- -----
Cash flows from investing activities
Expenditures for property, plant and equipment (4,932) (15,450)
Acquisition of business - (16,000)
Increase in prepaid acquisition costs - (176)
--- ----
Net cash (used in) investing activities (4,932) (31,626)
------ -------
See accompanying notes to consolidated financial statements
11
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
1998 1997
--------------------------
Cash flows from financing activities
Proceeds from sale of common stock 18 23,082
Tax benefit related to stock options exercised - 573
Proceeds of long-term debt - 16,500
Principal payments on long-term debt and capital lease
obligations (34) (19,136)
Increase in unamortized finance costs (107) (167)
---- ----
Net cash provided by (used in) financing activities (123) 20,852
---- ------
Net increase (decrease) in cash and cash equivalents 1,638 (807)
Cash and cash equivalents, at beginning of period 21,854 5,634
------ -----
Cash and cash equivalents, at end of period $ 23,492 $ 4,827
======== =======
See accompanying notes to consolidated financial statements
12
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 June 30, 1998 and the results of its
operations for the six and three month periods ended June 30, 1998 and 1997.
The results of operations experienced for the six month period ended
June 30, 1998 are not necessarily indicative of the results to be experienced
for the fiscal year ended December 31, 1998.
The statements and related notes herein 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, 1997 annual financial statements.
2. Wagering Information (in thousands)
Three months ended June 30, 1998
--------------------------------
Penn National Pocono Downs Charles Town Total
------------- ------------ ------------ -----
Pari-mutuel wagering in-state company live
races $ 21,605 $ 7,410 $ 5,524 $ 34,539
--------- --------- -------- ---------
Pari-mutuel wagering on simulcasting:
Import simulcasting from other racetracks 44,549 36,253 11,877 92,679
Export simulcasting to out of
Pennsylvania wagering facilities 42,964 7,188 - 50,152
------ ----- --- ------
87,513 43,441 11,877 142,831
------ ------ ------ -------
Total pari-mutuel wagering $ 109,118 $ 50,851 $ 17,401 $ 177,370
========= ========= ======== =========
13
Three months ended June 30, 1997
--------------------------------
Penn National Pocono Downs Charles Town Total
------------- ------------ ------------ -----
Pari-mutuel wagering in-state company live
races $ 25,084 $ 9,243 $ 4,640 $ 38,967
--------- -------- -------- ---------
Pari-mutuel wagering on simulcasting:
Import simulcasting from other racetracks 42,603 30,258 6,645 79,506
Export simulcasting to out of
Pennsylvania Wagering facilities 38,930 8,827 - 47,757
------ ----- --- -----
81,533 39,085 6,645 127,263
------ ------ ----- -------
Total pari-mutuel wagering $ 106,617 $ 48,328 $ 11,285 $ 166,230
========= ======== ======== =========
Six months ended June 30, 1998
------------------------------
Penn National Pocono Downs Charles Town Total
------------- ------------ ------------ -----
Pari-mutuel wagering in-state company live
races $ 41,214 $ 8,323 $ 9,643 $ 59,180
--------- -------- -------- ---------
Pari-mutuel wagering on simulcasting:
Import simulcasting from other racetracks 87,394 67,318 22,029 176,741
Export simulcasting to out of
Pennsylvania Wagering facilities 86,585 7,763 - 94,348
------ ----- --- ------
173,979 75,081 22,029 271,089
------- ------ ------ -------
Total pari-mutuel wagering $ 215,193 $ 83,404 $ 31,672 $ 330,269
========= ======== ======== =========
Six months ended June 30, 1997
------------------------------
Penn National Pocono Downs Charles Town Total
------------- ------------ ------------ -----
Pari-mutuel wagering in-state company live
races $ 47,574 $ 9,243 $ 4,640 $ 61,457
---------- ------------ --------- ----------
Pari-mutuel wagering on simulcasting:
Import simulcasting from other racetracks 85,843 59,510 6,645 151,998
Export simulcasting to out of
Pennsylvania Wagering facilities 76,361 8,827 - 85,188
------ ----- --- ------
162,204 68,337 6,645 237,186
------- ------ ----- -------
Total pari-mutuel wagering $ 209,778 $ 77,580 $ 11,285 $ 298,643
---------- ------------ --------- ----------
3. Commitments
At June 30, 1998, the Company was contingently obligated under letters
of credit with principal amounts aggregating $2,041,000. The $2,041,000
consists of $1,786,000 for the horsemen's account balances, $100,000 for
Pennsylvania pari-mutuel taxes and $155,000 for purses.
14
4. Supplemental Disclosures of Cash Flow Information
Cash paid during the six months ended June 30, 1998 and 1997 for
interest was $4,230,000 and $2,051,000 respectively.
Cash paid during the six months ended June 30, 1998 and 1997 for income
taxes was $1,476,000 and $629,000 respectively.
5. Potential Tennessee Development Project
In June 1997, the Company acquired twelve one-month options to
purchase approximately 100 acres of land in Memphis, Tennessee. Since such
time, the Company, through its subsidiary, Tennessee Downs, Inc.
("Tennessee Downs"), has pursued the development of a harness track and
simulcast facility on this option site, which is located in the northeastern
section of Memphis (The "Tennessee Development Project"). The Company
submitted an application to the Tennessee State Racing Commission (the
"Tennessee Commission") in October 1997 for an initial license for the
development and operation of a harness track and OTW facility at this site. A
land use plan for the construction of a 5/8-mile harness track, clubhouse and
grandstand area were approved in October 1997 by the Land Use Hearing Board for
the City of Memphis and County of Shelby. Tennessee Downs was determined to be
financially suitable by the Tennessee Commission and a public comment hearing
before the Tennessee Commission was held in November 1997. In December 1997,
the Company received the necessary zoning and land development approvals from
the Memphis City Council.
In April 1998, the Tennessee Commission granted a contingent license to
the Company which would expire on the earlier of (i) December 31, 2000 or (ii)
the Tennessee Commission's term on June 30, 1998, if such term is not extended
by the Tennessee legislature. On May 1, 1998, the Tennessee State Legislature
voted against extending the life of the Tennessee Commission, allowing the
Tennessee Commission's term to expire on June 30, 1998. The Tennessee
Commission held a meeting on May 29, 1998, at which it rejected the Company's
request: (i) to grant the Company an unconditional racing license; (ii) for
racing days for the periods ending December 31, 2000; and (iii) to operate a
temporary simulcast facility. On July 28, 1998, the Company filed for a
preliminary injunction and a declaratory ruling on the legal status of racing
in Memphis with the Chancery Court in Shelby County. As of August 12, 1998, the
Company has invested approximately $500,000 in the Tennessee Development
Project. The Company intends to continue its efforts to obtain an unconditional
racing license that would expire December 31, 2000. There can be no assurance
that the Company's efforts to obtain an unconditional racing license will be
successful.
15
6. Subsidiary Guarantors
Summarized financial information as of June 30, 1998 and for three and
six months ended June 30, 1998 for Penn National Gaming, Inc. ("Parent"), the
Subsidiary Guarantors and Subsidiary Nonguarantors is as follows:
June 30, 1998
-------------
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
------- ---------- ------------- ------------ ------------
Current assets $ 17,076 $ 8,753 $ 5,598 $ (467) $ 30,960
Net property 416 61,878 43,489 - 105,783
Other assets 102,353 (306,342) 1,463 229,008 26,482
------- -------- ----- ------- ------
Total 119,845 (235,711) 50,550 228,541 163,225
------- -------- ------ ------- -------
Current liabilities 85 2,174 3,855 8,183 14,297
Long-term liabilities 80,024 (156,002) 52,037 115,318 91,377
Shareholders' equity 39,736 (81,883) (5,342) 105,040 57,551
------ -------- ------ ------- ------
Total $ 119,845 $ (235,711) $ 50,550 $ 228,541 $ 163,225
---------- ----------- ---------- ---------- ----------
Three months ended June 30, 1998
--------------------------------
Total revenues $ 2,862 $ 22,803 $ 13,697 $ 696 $ 40,058
Total operating expenses 1,097 20,420 12,089 696 34,302
----- ------ ------ --- ------
Income from operations 1,765 2,383 1,608 - 5,756
Other income (expenses) (1,390) 700 (1,164) - (1,854)
------ --- ------ ------
Income before income taxes 375 3,083 444 - 3,902
Taxes on income 94 1,341 - - 1,435
-- ----- -----
Net income $ 281 $ 1,742 $ 444 $ - $ 2,467
---------- ----------- ---------- ---------- -----------
Six months ended June 30, 1998
------------------------------
Total revenues $ 5,176 $ 42,425 $ 24,667 $ 1,145 $ 73,413
Total operating expenses 1,931 37,996 22,803 1,145 63,875
----- ------ ------ ----- ------
Income from operations 3,245 4,429 1,864 - 9,538
Other income (expenses) (2,777) 1,345 (2,330) - (3,762)
------ ----- ------ --- ------
Income before income taxes 468 5,774 (466) - 5,776
Taxes on income 26 2,073 - - 2,099
-- ----- --- --- -----
Net income $ 442 $ 3,701 $ (466) $ - $ 3,677
---------- ----------- ---------- ---------- ----------
Summarized financial information as of June 30, 1997 and for the three
and six months ended June 30, 1997, have not been presented. Separate
financial statements of the Subsidiary Guarantors and Subsidiary Nonguarantors
are not presented because management does not believe such statements are
material to investors.
16
7. Year 2000 Compliance
The Company is working directly and with its vendors to resolve the
potential impact of the year 2000 on the ability of the Company's computerized
information systems to accurately process information that may be date-
sensitive. Any of the Company's programs that recognize a date using "00" as
the year 1900 rather than the year 2000 could result in errors or system
failures. The Company utilizes a number of computer programs across its entire
operation. The Company has completed its assessment of the areas that must be
addressed and currently believes that costs of addressing this issue will not
have a material adverse impact on the Company's financial position. However,
if the Company and vendors upon which it relies are unable to address any
material issue in a timely manner, it would have a material financial impact on
the Company. In order to assure that this does not occur, the Company plans to
devote such resources as it deems necessary to resolve any significant year
2000 issues in a timely manner.
8. Subsequent Events
On July 7, 1998, the Company entered into an agreement with Ladbroke
Racing Management - Pennsylvania (Ladbroke) to purchase their Johnstown,
Pennsylvania OTW facility. The agreement provides for a purchase price of
$1,225,000 for the assignment of the facility lease and the sale of assets and
is subject to numerous contingencies, including approval by the Pennsylvania
State Racing Commission. Under the terms of the agreements, the Company will
sub-lease the facility from Ladbroke and operate the facility from September 1,
1998, the effective date of the agreement, through January 4, 1999, the closing
date of the agreement for $12,500 per month, at which time the Company will
assume full rights and ownership in the facility. The Johnstown facility will
replace the Company's proposed Altoona, Pennsylvania OTW facility upon receipt
of regulatory approval.
17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Result of Operations
Three months ended June 30, 1998 compared to three months ended June 30, 1997
- -----------------------------------------------------------------------------
Total revenue increased by approximately $10.5 million or 35.4% from
$29.6 million for the three months ended June 30, 1997 to $40.1 million for the
three months ended June 30, 1998. Charles Town Races, which was purchased in
January of 1997 and began racing operations on April 30, 1997 and video lottery
machines operations on September 10, 1997, accounted for $10.8 million
(approximately $1.8 million of pari-mutuel revenues and $9.0 million of gaming
revenues) of the increase. Revenues at Penn National Race Course and its OTW
facilities decreased by approximately $400,000 due to decreased wagering on
Pennsylvania racing. Revenues at Pocono Downs and its OTW facilities increased
by approximately $100,000. The net increase was due to a full quarter of
operations for the new facilities at Hazleton and Carbondale offset by a
decrease in revenue at Allentown due to highway construction, a decrease in
revenue at the Wilkes-Barre racetrack due to the opening of the two new OTW
facilities and a decrease in revenue at the Erie OTW.
Total operating expenses increased by $8.8 million or 34.7% from $25.5
million for the three months ended June 30, 1997 to $34.3 million for the three
months ended June 30, 1998. Charles Town Races accounted for $8.6 million of
the increase due primarily to the video lottery operation and the opening of
the racing simulcast center. Penn National Race Course and its OTW facilities
had a decrease in operating expenses of approximately $600,000 due to the
decrease in revenues. Pocono Downs and its OTW facilities had an increase of
approximately $100,000 due to a full period of operations at Hazleton and
Carbondale offset by decreases at its other facilities. Corporate expenses
increased by $158,000 due to the hiring of additional staff for OTW facility
management, human resource management and the leasing of additional office
space. Depreciation and amortization increased by $479,000 or 50.1% from
$943,000 for the three months ended June 30, 1997 to $1,422,000 for the three
months ended June 30, 1998. The increase was due primarily to depreciation
associated with new facilities for Charles Town Gaming (September 1997),
Charles Town Simulcast Facility (January 1998), Hazleton OTW (March 1998) and
Carbondale OTW (March 1998).
Income from operations increased by approximately $1.6 million or
39.8% from $4.1 million for the three months ended June 30, 1997 to $5.8
million for the three months ended June 30, 1998 due to the factors described
above.
Other expenses for the three months ended June 30, 1998 consisted of
$1.9 million in net interest expense (primarily due to the 10 5/8% Senior Notes
issued December 1997) compared to $.7 million in net interest expense for the
three months ended June 30, 1997.
Income tax expense increased approximately $40,000 or 2.9% from
$1,395,000 for the three months ended June 30, 1997 to $1,435,000 for the three
months ended June 30, 1998 due to the increase in net income for the period.
18
Net income increased approximately $453,000 or 22.5% from $2.0 million
for the three months ended June 30, 1997 to $2.5 million for the three months
ended June 30, 1998 due to the factors described above.
Six months ended June 30, 1998 compared to six months ended June 30, 1997
- -------------------------------------------------------------------------
Total revenue increased by approximately $21.0 million or 40.1% from
$52.4 million for the six months ended June 30, 1997 to $73.4 million for the
six months ended June 30, 1998. Charles Town Races, which was purchased in
January, 1997 and began racing operations on April 30, 1997 and video lottery
machines operations on September 10, 1997, accounted for $21.7 million
(approximately $5.5 million of pari-mutuel revenues and $16.2 million of gaming
revenues) of the increase. Revenues at Penn National Race Course and its OTW
facilities decreased by approximately $1.1 million due to a decrease in
revenues at its Chambersburg OTW facility resulting from the opening of the
Charles Town Facility, competition in the Reading area from Philadelphia Park
facilityand decreased wagering on Pennsylvania racing. Revenue increased at
the Williamsport OTW due to a full period of operations in 1998 compared to
five months in 1997. Revenues at Pocono Downs and its OTW facilities increased
by approximately $300,000. This was due to the opening of new facilities in
Hazleton and Carbondale offset by a decrease in revenue at Allentown caused by
construction, a decrease in revenue at the Wilkes-Barre racetrack due to an
opening of the two new OTW facilities and a decrease in revenue at the Erie OTW
facility.
Total operating expenses increased by $19.3 million or 43.2% from
$44.6 million for the six months ended June 30, 1997 to $63.9 million for the
six months ended June 30, 1998. Charles Town Races accounted for $18.7 million
of the increase due primarily to the video lottery operation and the opening of
the racing simulcast center. Penn National Race Course and its OTW facilities
had a decrease in operating expenses of approximately $1.1 million due to the
decrease in revenues. Pocono Downs and its OTW facilities had an increase of
approximately $200,000 due to three months of operations at Hazleton and
Carbondale offset by decreases at its other facilities. Corporate expenses
increased by $282,000 due to the hiring of additional office staff for OTW
facility management, human resource management and the leasing of additional
office space. Depreciation and amortization increased by $1.1 million or 71.1%
from $1.7 million for the six months ended June 30, 1997 to $2.8 million for
the six months ended June 30, 1998. The increase was due primarily to
depreciation associated with new facilities for Charles Town Gaming (September
1997), Charles Town Simulcast Facility (January 1998), Hazleton OTW (March
1998) and Carbondale OTW (March 1998).
Income from operations increased by approximately $1.7 million or
22.4% from $7.8 million for the six months ended June 30, 1997 to $9.5 million
for the six months ended June 30, 1998 due to the factors described above.
Other expenses for the six months ended June 30, 1998 consisted of
$3.8 million in net interest expense (primarily due to the 10 5/8% Senior Notes
issued December 1997) compared to $1.5 million in net interest expense for the
six months ended June 30, 1997.
19
Income tax expense decreased approximately $474,000 or 18.4% from
$2,573,000 for the six months ended June 30, 1997 to $2,099,000 for the six
months ended June 30, 1998 due to the decrease in income for the period.
The extraordinary item in 1997 consisted of a loss on the early
extinquishment of debt in the amount of $383,000 net of income taxes. The
Company used approximately $19 million of the $23 million in proceeds from the
February 1997 equity offering to reduce long-term debt, resulting in a write-
off of $647,000 for fees associated with the early extinquishment of debt.
Net income increased approximately $362,000 or 10.9% from $3.3 million
for the six months ended June 30, 1997 to $3.7 million for the six months ended
June 30, 1998 due to the factors described above.
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 for the six months ended
June 30, 1998 ($6.7 million) consisted of net income and non-cash expenses
($6.7 million), an increase in purses due horsemen ($1.4 million), income taxes
payable ($2.1 million), a decrease in accounts receivable ($1.8 million) and
a decrease in other changes in working capital ($1.7 million).
Cash flows used in investing activities ($4.9 million) consisted of
renovation and refurbishment of the Charles Town facility and race track
surface ($1.1 million) and $3.8 million in capital expenditures, including
approximately $3.2 million for the completion of the Hazleton and Carbondale
OTW facilities.
Cash flows from financing activities ($123,000) consisted principally of
additional financing fees associated with the sale of Senior Notes in December
1997.
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.
Such expenses may not be reimbursed by the four municipalities that are parties
to the settlement agreement. The Company is unable to estimate the amount, if
any, that it may be required to expend.
During the balance of 1998, the Company anticipates capital expenditures
of approximately $3.5 million to purchase the Johnstown OTW facility and the
construction of one additional OTW facility. For the existing racetracks and
OTW facilities at Penn National Race Course and Pocono Downs, the Company plans
to spend an additional $500,000 and $350,000, respectively, on building
improvements and equipment. The Company anticipates expending approximately
$.5 million on the refurbishment of the Charles Town Entertainment Complex
(excluding the cost of Gaming Machines). If approval of the Tennessee license
beyond June 30, 1998 is ultimately received, the Company anticipates expending
$9.0 million to complete the first phase of the project.
20
The Company entered into a credit facility in December 1997 (the "Credit
Facility") with Bankers Trust Company, as agent. The Credit Facility provides
for, subject to certain terms and conditions, a $12.0 million revolving credit
facility and has a five-year term from its closing. The Credit Facility, under
certain circumstances, requires the Company to make mandatory prepayments and
commitment reductions and to comply with certain covenants, including financial
ratios and maintenance tests. In addition, the Company may make optional
prepayments and commitment reductions pursuant to the terms of the Credit
Facility. Borrowings under the Credit Facility will accrue interest, at the
option of the Company, at either a base rate plus an applicable margin of up to
2.0% or a eurodollar rate plus an applicable margin of up to 3.0%. The Credit
Facility contains certain covenants that, among other things, restrict the
ability of the Company and its subsidiaries to dispose of assets, incur
additional indebtedness, incur guarantee obligations, repay indebtedness or
amend debt instruments, pay dividends, create liens on assets, make
investments, make acquisitions, engage in mergers or consolidations, make
capital expenditures, or engage in certain transactions with subsidiaries and
affiliates and otherwise restrict corporate activities. The Credit Facility is
secured by the assets of the Company and certain of its subsidiaries and
guaranteed by all subsidiaries, except the Charles Town Joint Venture. In
addition, the Credit Facility requires the Company to comply with certain
financial ratios and maintenance tests. As of December 31, 1997, the Company
would not have been in compliance with certain covenants under the Credit
Facility had the bank group not granted a waiver, through March 30, 1998, of
certain defaults regarding minimum consolidated net worth, consolidated cash
interest coverage ratio and minimum leverage ratio. At the end of the first
quarter, the Company was in technical default of certain required ratios, which
defaults were waived and ratios were adjusted. On June 30, 1998, the Company
was in compliance with all applicable ratios. As of August 11, 1998, the
Company had not drawn any portion of the Credit Facility (although a $2.0
million letter of credit was issued against such Credit Facility) and had
adequate capital resources even without consideration of the Credit Facility.
A portion of the net proceeds of the offering of the 10 5/8% Senior Notes
was used to repay amounts outstanding immediately prior to the offering under a
pre-existing credit facility. The Company currently estimates that excess
proceeds from the offering, cash generated from operations and available
borrowings under the Credit Facility will be sufficient to finance its current
operations, planned capital expenditure requirements and the costs associated
with the Tennessee development project. There can be no assurance, however,
that the Company will not be required to seek additional capital through public
or private financing, including equity financing, in addition to that available
from the foregoing sources. There can be no assurance that adequate funding
will be available as needed or, if available, on terms acceptable to the
Company.
21
Item 3. Changes in Information About Market Risk
All of the Company's debt obligations at June 30, 1998, were fixed rate
obligations and Management, therefore, does not believe that the Company has
any material market risk from its debt obligations.
Part II. Other Information
Item 1. Legal Proceedings
In December 1997, Amtote International, Inc. ("Amtote"), filed an action
against the Company and the Charles Town Joint Venture in the United States
District Court for the Northern District of West Virginia. In its complaint,
Amtote (i) states that the Company and the Charles Town Joint Venture allegedly
breached certain contracts with Amtote and its affiliates when it entered into
a wagering services contract with a third party (the "Third Party Wagering
Services Contract"), and not with Amtote, effective January 1, 1998, (ii)
sought preliminary and injunctive relief through a temporary restraining order
seeking to prevent the Charles Town Joint Venture from (a) entering into a
wagering services contract with a party other than Amtote and (b) having a
third party provide such wagering services, (iii) seeks declaratory relief that
certain contracts allegedly bind the Charles Town Joint Venture to retain
Amtote for wagering services through September 2004 and (iv) seeks unspecified
compensatory damages, legal fees and costs associated with the action and other
legal and equitable relief as the Court deems just and appropriate. On December
24, 1997, a temporary restraining order was issued, which prescribes
performance under the Third Party Wagering Contract. On January 14, 1998, a
hearing was held to rule on whether a preliminary injunction should be issued
or whether the temporary restraining order should be lifted. On February 20,
1998, the temporary restraining order was lifted by the court and the Company
terminated Amtote Agreement and proceeded under the Third Party Wagering
Services Contract. Amtote is contuning its litigation against the Company
for monetary damages. The Company believes that this action, and any
resolution thereof, will not have any material adverse impact upon its
financial condition, results, or the operations of either the Charles Town
Joint Venture or the Company.
22
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.77 Purchase Agreement dated July 7, 1998, between
Ladbroke Racing Management and Mountainview
Thoroughbred Racing Association.
(b) Reports on Form 8-K
None
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Penn National Gaming, Inc.
August 14, 1998 By: /s/ Robert S. Ippolito
- --------------- --------------------------
Date Robert S. Ippolito,
Chief Financial Officer,
Secretary/Treasurer
24
EXHIBIT INDEX
Exhibit Nos. Description of Exhibits Page No.
Purchase Agreement dated July 7, 1998, between
Ladbroke Racing Management and Mountainview
Thoroughbred Racing Association. 26-39