FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
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
- ----
1
(Applicable only to corporate registrants)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding as of November 13, 1998
Common stock par value .01 per share 14,735,630
----------
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 4-5
Consolidated Statements of Income -
Nine Months Ended September 30, 1998 and 1997 (unaudited) 6-7
Consolidated Statements of Income -
Three Months Ended September 30, 1998 and 1997 (unaudited) 8-9
Consolidated Statement of Shareholder's Equity -
Nine Months Ended September 30, 1998, (unaudited) 10
Consolidated Statement of Cash Flow -
Nine Months Ended September 30, 1998 and 19 (unaudited) 11-12
Notes to Consolidated Financial Statements 13-20
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 21-24
Item 3. Changes in Information about Market Risk 24
- ------------------------------------------------
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 25
- ----------------------------------------
Signature Page 26
Exhibit Index 27
3
Part I. Financial Information
Item 1. Financial Statements
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
1998 1997
(Unaudited)
-------------- -------------
Assets
Current asset
Cash and cash equivalents $ 9,412 $ 21,854
Investment in marketable securities 3,092 -
Accounts receivable 6,503 2,257
Prepaid expenses and other current assets 2,333 1,441
Deferred income taxes 523 469
Prepaid income taxes 472 3,003
-------------- ---------------
Total current assets 22,335 29,024
-------------- ---------------
Property, plant and equipment, at cost
Land and improvements 26,629 24,643
Building and improvements 66,848 56,298
Furniture, fixtures and equipment 16,548 13,847
Transportation equipment 479 490
Leasehold improvements 9,567 6,778
Leased equipment under capitalized lease 824 824
Construction in progress 532 11,288
-------------- ---------------
121,427 114,168
Less accumulated depreciation and
amortization 14,485 11,007
-------------- ---------------
Net property, plant and equipment 106,942 103,161
-------------- ---------------
Other assets
Excess of cost over fair market value of
net assets acquired(net of accumulated
amortization of $1,848 and $1,389,
respectively) 22,596 23,055
Deferred financing costs 2,477 3,014
Miscellaneous 1,036 624
-------------- ---------------
Total other assets 26,109 26,693
-------------- ---------------
$ 155,386 $ 158,878
============== ===============
See accompanying notes to consolidated financial statement
4
PENN NATIONAL GAMING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
1998 1997
(Unaudited)
----------------------------------
Liabilities and Shareholders' Equity
Current liabilities
Current maturities of long-term debt
and capital lease obligations $ 175 $ 204
Accounts payable 9,395 7,405
Purses due horsemen 757 -
Uncashed pari-mutuel tickets 1,342 1,504
Accrued interest 2,156 326
Accrued expenses 886 2,427
Accrued salaries & wages 993 813
Customer deposits 681 470
Taxes, other than income taxes 921 649
------------ -------------
Total current liabilities 17,306 13,798
------------ -------------
Long term liabilities
Long-term debt and capital lease
obligations
net of current maturities 69,105 80,132
Deferred income taxes 11,410 11,092
------------ -------------
Total long-term liabilities
80,515 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, 15,160,330 less
treasury stock 424,700 and 15,152,580
issued respectively 152 152
Additional paid in capital 38,012 37,969
Treasury Stock, 424,700 shares at cost (2,379) -
Retained earnings 21,780 15,735
------------ -------------
Total Shareholders' equity 57,565 53,856
------------ -------------
$ 155,386 $ 158,878
============ =============
See accompanying notes to consolidated financial statement
5
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Nine Months Ended
September 30,
1998 1997
-------------------------
Revenue
Pari-mutuel revenues
Live races $ 20,962 $ 18,234
Import simulcasting 50,994 46,766
Export simulcasting 4,403 5,701
Gaming Revenue 26,995 909
Admissions, programs and other racing revenue 4,558 4,388
Concession revenues 7,102 5,570
------------ -----------
Total revenues 115,014 81,568
Operating expenses
Purses, stakes, and trophies 21,821 16,550
Direct salaries, payroll taxes and employee benefits 14,265 12,034
Simulcast expenses 10,479 9,836
Pari-mutuel taxes 7,013 6,917
Lottery taxes and administration 10,613 298
Other direct meeting expenses 17,823 12,878
Off-track wagering concession expenses 5,646 4,283
Other operating expenses 7,879 5,475
Site development and restructuring expense - 599
Depreciation and Amortization 4,292 2,828
------------ -----------
Total operating expenses 99,831 71,698
------------ -----------
Income from operations 15,183 9,870
------------ -----------
Other income (expenses)
Interest (expense) (6,326) (2,652)
Interest income 627 296
Other (including $140,000 of unrealized
investment gain) 110 17
------------ -----------
Total other (expenses) (5,589) (2,339)
Income before income taxes and
extraordinary item 9,594 7,531
Taxes on income 3,549 3,093
------------ -----------
See accompanying notes to consolidated financial statements
6
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Nine Months Ended
September 30,
1998 1997
------------------------------
Income before extraordinary item 6,045 4,438
Extraordinary Item
Loss of early extinguishment of debt,
net of income taxes of $264 - 383
-------------- -------------
Net income $ 6,045 $ 4,055
============== =============
Per share data
Basic
Income before extraordinary item $ 0.40 $ 0.29
Extraordinary item - 0.03
-------------- -------------
Net income $ 0.40 $ 0.26
============== =============
Diluted
Income before extraordinary item $ 0.39 $ 0.29
Extraordinary item 0.03 -
Net income $ 0.39 $ 0.26
============== =============
Weighted average shares outstanding
Basic 15,108 14,851
Diluted 15,463 15,444
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
September 30,
1998 1997
-----------------------------
Revenue
Pari-mutuel revenues
Live races $ 8,034 $ 6,837
Import simulcasting 16,881 15,428
Export simulcasting 1,576 2,306
Gaming Revenue 10,835 909
Admissions, programs and other racing revenue 1,573 1,564
Concession revenues 2,675 2,120
----------- -------------
Total revenues 41,574 29,164
----------- -------------
Operating expenses
Purses, stakes, and trophies 7,875 6,232
Direct salaries, payroll taxes and
employee benefits 5,002 4,614
Simulcast expenses 3,583 3,955
Pari-mutuel taxes 3,328 2,498
Lottery taxes and administration 3,407 298
Other direct meeting expenses 6,260 4,379
Off-track wagering concession expenses 2,193 1,643
Other operating expenses 2,855 2,194
Site development and restructuring expense - 599
Depreciation and Amortization 1,451 674
----------- -------------
Total operating expenses 35,954 27,086
----------- -------------
Income from operations 5,620 2,078
----------- -------------
Other income (expenses)
Interest (expense) (2,082) (977)
Interest income 176 138
Other (including $140,000 of unrealized
investment gain) 110 21
----------- -------------
Total other (expenses) (1,796) (818)
----------- -------------
Income before income taxes 3,824 1,260
Taxes on income 1,451 542
----------- -------------
Net income $ 2,373 $ 718
=========== =============
See accompanying notes to consolidated financial statements
8
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended
September 30,
1998 1997
----------------------------------------
Per share data
Basic
Net income $ 0.16 $ 0.05
============= =============
------------- -------------
Diluted
Net income $ 0.16 $ 0.05
============= =============
------------- -------------
Weighted average shares outstanding
Basic 15,021 15,127
Diluted 15,279 15,715
See accompanying notes to consolidated financial statements
9
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
Additional
Common Stock Paid-In Treasury Retained
Shares Amounts Capital Stock Earnings Total
Balance,
January 1, 1998 15,152,580 $ 152 $ 37,969 $ - $ 15,735 $ 53,856
Issuance of
common stock 7,750 - 43 - - 43
Purchase of
treasury stock (424,700) - - (2,379) - (2,379)
Net income for
the nine months
ended September
30, 1998 - - - - 6,045 6,045
-------------------------------------------------------------------
Balance,
September
30, 1998 14,735,630 $ 152 $ 38,012 $ (2,379) $ 21,780 $ 57,565
===================================================================
See accompanying notes to consolidated financial statements
10
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
1998 1997
--------- ----------
Cash flows from operating activities
Net income $ 6,045 $ 4,055
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 4,292 2,701
Extraordinary item, loss on early
extinguishment of debt, before income tax
benefit - 642
Deferred income taxes 264 204
Decrease (Increase) in
Accounts receivable (4,246) 1,133
Investment in marketable securities (3,092) -
Prepaid expenses and other current assets (892) (1,305)
Prepaid income taxes 2,531 -
Miscellaneous other assets (412) (166)
Increase (decrease) in
Accounts payable 1,990 3,652
Purses due horsemen 757 (834)
Uncashed pari-mutuel tickets (162) (134)
Accrued expenses (1,541) 190
Accrued interest 1,830 -
Accrued salaries & wages 180 -
Customers deposits 211 242
Taxes other than income taxes payable 272 156
Income taxes payble - 636
----------- ---------
Net cash provided by operating activities 8,027 11,172
----------- ---------
Cash flows from investing activities
Expenditures for property, plant and
equipment (7,320) (26,392)
Acquisition of business
(Primarily property and equipment) - (16,000)
Prepaid acquisition costs - (310)
------------ ---------
Net cash (used in) investing activities (7,320) (42,702)
------------ ---------
11
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
1998 1997
Cash flows from financing activities
Proceeds from sale of common stock $ 43 $ 23,145
Purchase of treasury stock (2,379) -
Tax benefit related to stock option
exercised - 573
Proceeds from long term debt - 25,667
Principal payments on long-term debt
and capital lease obligations (11,056) (19,324)
Increase (decrease)in unamortized financing
cost 243 (214)
----------- -----------
Net cash provided by (used) in financing
activities (13,149) 29,847
----------- -----------
Net (decrease) in cash (12,442) (1,683)
Cash, at beginning of period 21,854 5,634
----------- -----------
Cash, at end of period $ 9,412 $ 3,951
============ ============
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) which have been made are necessary to
present fairly the financial position of the Company as of September
30, 1998 and the results of its operations for the nine and three month
periods ended September 30, 1998 and 1997. The results of operations
for the nine month period ended September 30, 1998 are not necessarily
indicative of the results to be experienced for the fiscal year ended
December 31, 1998.
2. Wagering Information (in thousands)
Three months ended September 30, 1998
Penn Pocono Charles
National Downs Town Total
Pari-mutuel wagering in-state
on company live races $ 21,351 $ 7,806 $ 7,068 $ 36,225
---------------------------------------------
Pari-mutuel wagering on
simulcasting:
Import simulcasting from other
racetracks 41,738 34,022 12,129 87,889
Export simulcasting to out of
Pennsylvania wagering facilities 43,999 9,084 - 53,083
---------------------------------------------
85,737 43,106 12,129 140,972
---------------------------------------------
Total pari-mutuel wagering $ 107,088 $ 50,912 $ 19,197 $ 177,197
=============================================
13
Three months ended September 30, 1997
Penn Pocono Charles
National Downs Town Total
Pari-mutuel wagering in-state
on company live races $ 22,142 $ 9,520 $ 6,852 $ 38,514
----------------------------------------------
Pari-mutuel wagering on
simulcasting:
Import simulcasting from other
racetracks 39,014 29,710 7,630 76,354
Export simulcasting to out of
Pennsylvania wagering facilities 37,026 10,133 - 47,159
----------------------------------------------
76,040 39,843 7,630 123,513
----------------------------------------------
Total pari-mutuel wagering $ 98,182 $ 49,363 $ 14,482 $162,027
==============================================
Nine months ended September 30, 1998
Penn Pocono Charles
National Downs Town Total
Pari-mutuel wagering in-state
on company live races $ 62,566 $ 16,131 $ 16,710 $ 95,407
--------------------------------------------
Pari-mutuel wagering on
simulcasting:
Import simulcasting from other
racetracks 129,132 101,340 34,159 264,631
Export simulcasting to out of
Pennsylvania wagering facilities 130,583 16,846 - 147,429
--------------------------------------------
259,715 118,186 34,159 412,060
--------------------------------------------
Total pari-mutuel wagering $ 322,281 $ 134,317 $ 50,869 $507,467
=============================================
14
Nine months ended September 30, 1997
Penn Pocono Charles
National Downs Town Total
Pari-mutuel wagering in-state
on company live races $ 69,716 $ 18,763 $ 11,492 $ 99,971
-------------------------------------------
Pari-mutuel wagering on
simulcasting:
Import simulcasting from other
racetracks 124,857 89,220 14,275 228,352
Export simulcasting to out of
Pennsylvania wagering
facilities 113,387 18,960 - 132,347
-------------------------------------------
238,244 108,180 14,275 360,699
-------------------------------------------
Total pari-mutuel wagering $ 307,960 $ 126,943 $ 25,767 $460,670
===========================================
3. Commitments
At September 30, 1998, the Company was contingently obligated
under letters of credit with principal amounts aggregating $2,041,000.
This amount consists of $1,786,000 for the horsemen's account balances,
$100,000 for Pennsylvania pari-mutuel taxes and $155,000 for purses.
4. Supplemental Disclosures of Cash Flow Information
Cash paid during the nine months ended September 30, 1998 and
1997 for interest was $4,496,000 and $3,010,000 respectively.
Cash paid during the nine months ended September 30, 1998 and
1997 for income taxes was $2,646,000 and $2,741,000, respectively.
15
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 license to
the Company, which would expire on the earlier of (I) December 31, 2000
or (ii)the expiration of Tennessee Racing Commission's term on June 30,
1998, if such term is not extended by the Tennessee. 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 extension-time frame for the effectiveness of its 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. A full hearing was held before Judge Peete of Shelby
County on September 17, 1998. As of November 13, 1998, the Company had
not received an opinion from Judge Peete. The Company intends to
continue its efforts to obtain a racing license that does not hinge on
the existence of a racing commission.There can be no assurance that the
Company's efforts to obtain a racing license will be successful.
16
6. Subsidiary Guarantors
Summarized financial information as of September 30, 1998 and
for three and nine months ended September 30, 1998 for Penn National
Gaming, Inc. ("Parent"), the Subsidiary Guarantors and Subsidiary
Nonguarantors is as follows:
September 30, 1998
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
Current assets $ 6,872 $ 9,881 $ 5,289 $ 293 $ 22,335
Net property 703 62,666 43,572 1 106,942
Other assets 103,872 152,925 1,655 (232,343) 26,109
--------- ---------- ------------- ------------- -------------
Total 111,447 225,472 50,516 (232,049) 155,386
--------- ---------- ------------- ------------- -------------
Current liabilities 1,893 16,986 7,311 (8,884) 17,306
Long-term liabilities 72,084 78,895 47,661 (118,125) 80,515
Shareholders' equity 37,470 129,591 (4,456) (105,040) 57,565
--------- ---------- ------------- ------------- -------------
Total $111,447 $225,472 $ 50,516 $(232,049) $ 155,386
--------- ---------- ------------- ------------- -------------
Three months ended September 30, 1998
Total revenues $ 2,690 $ 21,830 $ 16,353 $ 701 $ 41,574
Total operating
expenses 1,258 19,726 14,269 701 35,954
--------- ----------- ------------- ------------- -------------
Income from
operations 1,432 2,104 2,084 - 5,620
Other income (expenses) (1,316) 719 (1,199) - (1,796)
--------- ----------- ------------- ------------- -------------
Income before income
taxes 116 2,823 885 - 3,824
Taxes on income 28 1,423 - - 1,451
========= =========== ============= ============= =============
Net income $ 88 $ 1,400 $ 885 $ - $ 2,373
========= =========== ============= ============= =============
17
Nine months ended September 30, 1998
Total revenues $ 7,865 $ 64,253 $ 41,050 $ 1,846 $ 115,014
Total operating
expenses 3,189 57,724 37,072 1,846 99,831
----------- ---------- ---------- ----------- -----------
Income from
operations 4,676 6,529 3,978 - 15,183
Other income
(expenses) (4,094) 2,064 (3,559) - (5,589)
----------- ----------- ---------- ----------- -----------
Income before
income taxes 582 8,593 419 - 9,594
Taxes on income 55 3,494 - - 3,549
----------- ----------- ---------- ----------- -----------
Net income $ 527 $ 5,099 $ 419 $ - $ 6,045
=========== =========== ========== =========== ===========
Summarized financial information as of September 30, 1997 and
for the three and nine months ended September 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.
7. Year 2000 Compliance
The "Year 2000 Issue" is typically the result of software and
hardware being writtem using two digits rather than four to define the
applicable year. If the Company's software and hardware with
date-sensitive functions are not Year 2000 compliant, these systems may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, interruptions
in pari-mutuel wagering or the inability to operate the Company's video
lottery machines.
The Company is currently conducting a review of all systems and
contacting all software suppliers to determine major areas of exposure
to Year 2000 issues. The Company believes that, with minor
modifications and testing of its systems, the Year 2000 issue will not
pose a significant operations problem. The Compnay is using its
internal resources to reprogram or replace and test its software
for Year 2000 modificaitons. If the Company is unable to make the
required modifications to existing software or convert to new
software in a timely manner, the Year 2000 Issue could have a
material adverse impact on the Company's operations.
The Company has initiated formal communication with
significant suppliers and third party vendors to determine the extent
to which the Company's operations are vulnerable to those third
parties' failure to remediate their own Year 2000 hardware and
software issues. Most of these parties state that they intend to be
Year 2000 compliant by 2000. In the event that any of the Company's
significant suppliers are unable to become Year 2000 compliant,
the Company's business or operations could be adversely affected.
There can be no assurance that the systems of other companies
on which the Company relies will be compliant by the year 2000 and
would not have an adverse effect on operations.
The Company does not expect the total cost associated with
required modifications to become Year 2000 compliant to be
material to its financial position.
The Company has not yet fully developed a comprehensive
contingency plan addressing situations that may result if the Company
is unable to achieve Year 2000 readiness of its critical operations.
Contingency plan development is in process and the Company expects
to finalize its plan during the remainder of 1998. There can be no
assurance that the Company will be able to develop a contingency plan
that will adequately address issues that may arise in the year 2000.
18
8. Johnstown OTW Facility
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 Horse Racing Commission.
Approval for the sale and transfer of the Johnstown OTW was received
from the State Harness Racing Commission on August 14, 1998 and the
State Horse Racing Commission on August 20, 1998. 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.
9. Treasury Stock
From August 21, 1998 to September 10, 1998, the Company
purchased 424,700 shares of its commonstock in public market
trading. The total cost of these transactions were $2,378,465 or
$5.60 per share average price.
10. 10 5/8% Senior Notes
On September 3, 1998, the Company repurchased $11,000,000 of
10 5/8% Senior Notes due 2004 at 97.25% in the principal amount
($10,697,500) plus accrual interest of $253,229 in public market
trading. In conjunction with the repurchase of the Notes, the Company
recorded a write-off of $337,719 for deferred finance fees associated
with this portion of the long-term debt and the recognition of
discounts income of $302,500.
11. Investment in Marketable Securities
During the period July 20, 1998 to October 9, 1998, the
Company purchased 1,400,000 shares of Casino Magic Corp. stock on the
open market at prices ranging from $2.11 to $2.17 per share. Prior to
the purchase of Casino Magic stock by the company, Casino Magic and
Hollywood Park Inc. shareholders had approved the purchase of Casino
Magic by Hollywood Park for $2.27 per share. The purchase was completed
on October 20, 1998 and the Company received $3,178,000 for its shares
on that date. At September 30, 1998, the Company recorded an unrealized
gain on investment in marketable securities of $140,000 to account for
this transaction.
19
12. East Stroudsburg Lease
On July 14, 1998, the Company entered into a lease agreement
for an OTW facility in East Stroudsburg. The lease is for approximately
14,000 square feet at the Eagle's Glen Shopping Plaza located in East
Stroudsburg, Pennsylvania. The initial term of the lease is for ten
years with two additional five-year renewal options available. The
agreement is subject to numerous contingencies, including approval by
the Pennsylvania State Harness Racing Commission. On November 6, 1998,
the Company submitted its application for such approval. If approved by
the Racing Commission, the Company expects to have the facility
constructed and operational by the end of 1999.
13. Subsequent Events
On October 30, 1998, the Company entered into a joint venture
agreement with Greenwood New Jersey, Inc. (GNJI), which has a
definitive agreement to purchase Freehold Raceway and secure a
long-term lease on Garden State Park, the principal racetrack assets of
International Thoroughbred Breeders, Inc. (ITB) for $45 million and an
additional $12.5 million contingent upon the expansion of these
facilities. GNJI is a wholly-owned subsidiary of Greenwood Racing,
Inc., the owner of Philadelphia Park Racetrack. Pursuant to the joint
venture, Penn National will acquire a 50% interest in the New Jersey
entity, which is purchasing the ITB assets. GNJI has provided notice
to the Board of Directors of ITB that it has entered into the
joint venture agreement with Penn National. Under the terms of the
joint venture agreement, Penn National and GNJI will acquire
certain assets of ITB for up to $57.5 million in cash and notes. Penn
National intends to fund its portion of the cash payment from cash on
hand and available bank lines. The joint venture parties will operate
Garden State Park under a lease from ITB, and will share equally in the
income and losses derived from Garden State Park and Freehold Raceway.
GNJI and Penn National will apply for licensing from the New Jersey
Racing Commission and seek other regulatory approvals and they intend
to close on the transaction immediately upon securing such approvals.
On November 3, 1998 New Jersey voters passed a Referendum
granting the State Legislature decision-making power to approve
off-track wagering (OTW) and telephone wagering.
20
Item 2. Management's Discussion and Analysis of Financial and Results of
Operations
Three months ended September 30, 1998 compared to three months ended
September 30, 1997
Total revenue increased by approximately $12.4 million or 42.6% from
$29.2 million for the three months ended September 30, 1997 to $41.6 million for
the three months ended September 30, 1998. The majority of the gain was
attributable to a 230.4% or $11.4 million revenue increase at the Charles Town
Races facility which began video lottery machines operations on September 10,
1997. Revenues at Penn National Race Course and its OTW facilities increased by
approximately $400,000 due to an 18.4% increase in export simulcast wagering on
Penn National races and the addition of the Johnstown OTW facility on September
1, 1998. Revenues at Pocono Downs and its OTW facilities increased by
approximately $600,000. The net increase was due to a full quarter of operations
for the new facilities at Hazleton and Carbondale ($1.5 million) offset a
decrease in revenue at the Wilkes-Barre racetrack ($.9million) due to the
opening of the two new OTW facilities.
Total operating expenses increased by $8.9 million or 32.7% from $27.1
million for the three months ended September 30, 1997 to $36.0 million for the
three months ended September 30, 1998. Charles Town Races accounted for $8.7
million of the increase due primarily to the video lottery operation and the
operation of the racing simulcast center. Penn National Race Course and its OTW
facilities had a net decrease in operating expenses of approximately $100,000
due to an increase in expenses from the addition of the Johnstown OTW facility
($171,000) that was offset by a decrease in expenses at the other facilities.
($271,000)Pocono Downs and its OTW facilities had an increase in
expenses due to a full quarter of operations for the new facilities at
Hazleton and Carbondale ($1.2 million) that was offset by a decrease in
expenses at the Wilkes-Barre racetrack ($1.1 million) due to decreased revenue.
Depreciation and amortization increased by $776,000 or 115.1% from $674,000 for
the three months ended September 30, 1997 to $1,450,000 for the three months
ended September 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). Site development expenses for the three
months ended September 30, 1997 consisted of a non-recurring pre-tax charge
of $599,000 associated with the Company's failure to obtain approval for the
Downingtown OTW and discontinued site development efforts in Indiana.
Other expenses increased by 1.0 million from $.8 million in net
interest expense for the three months ended September 30, 1997 to $1.8 million
in net interest expense for the three months ended September 30, 1998 (primarily
due to the 10 5/8% Senior Notes issued during December 1997).
Income tax expense increased approximately $910,000 or 167.9% from
$542,000 for the three months ended September 30, 1997 to $1,452,000 for the
three months ended September 30, 1998 due to the increase in net income for the
period.
Net income increased approximately $1.7 or 242.9% from $.7 million for
the three months ended September 30, 1997 to $2.4 million for the three months
ended September 30, 1998 due to the factors described above.
21
Nine months ended September 30, 1998 compared to nine months ended September 30,
1997
Total revenue increased by approximately $33.4 million or 41.0% from
$81.6 million for the nine months ended September 30, 1997 to $115.0 million for
the nine months ended September 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 $33.2
million of the increase. Revenues at Penn National Race Course and its OTW
facilities decreased by approximately $.7 million due to a decrease in revenues
at its Chambersburg OTW ($.6 million) resulting from the opening of the
Charles Town Facility and at the Reading OTW ($.2 million) due to competition in
the Reading area. Revenue increased at the Williamsport OTW ($.2 million)due to
a full period of operations in 1998 compared to eight months in 1997 and at the
Johnstown OTW that opened September 1, 1998. Revenues at Pocono Downs and its
OTW facilities resulted in a net increase of approximately $.8 million primarily
due to the opening of new facilities in Hazleton and Carbondale ($3.3 million).
Revenue decreased at Allentown OTW ($.4 million) and Erie OTW ($.3 million)
due to a decrease in wagering at the Wilkes-Barre racetrack ($1.8 million)
due to the proximity of the two new OTW facilities.
Total operating expenses increased by $28.1 million or 39.2% from $71.7
million for the nine months ended September 30, 1997 to $99.8 million for the
nine months ended September 30, 1998. Charles Town Races accounted for $27.4
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 $1.2 million
due to the decrease in revenues. Pocono Downs and its OTW facilities had an
increase of approximately $225,000 in expenses due to six months of operations
at Hazleton and Carbondale ($2.6 million) offset by decreases at its other
facilities ($2.4 million) due to decreased revenue. Corporate expenses increased
by $325,000 due to the hiring of additional staff for OTW facility management
and human resource management and the leasing of additional office space.
Depreciation and amortization increased by $1.8 million or 72.0% from $2.5
million for the nine months ended September 30, 1997 to $4.3 million for the
nine months ended September 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). Site development expenses for the nine months
ended September 30, 1997 consisted of a non-recurring pre-tax charge of $599,000
associated with the Company's failure to obtain approval for the Downingtown OTW
and discontinued site development efforts in Indiana.
Other expenses increased by $3.3 million from $2.3 million in net
interest expense for the nine months ended September 30, 1997 to $5.6 million in
net interest expense.consisted of for the nine months ended September 30, 1998
(primarily due to the 10 5/8% Senior Notes issued December 1997).
Income tax expense increased approximately $456,000 or 14.7% from $3.1
million for the nine months ended September 30, 1997 to $3.5 for the nine months
ended September 30, 1998 due to the increase in net 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 $2.0 million or 49.2% from $4.0
million for the nine months ended September 30, 1997 to $6.0 million for the
nine months ended September 30, 1998 due to the factors described above.
22
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 form issuance of equity securities.
Net cash provided from operating activities for the nine months ended
September 30, 1998 ($8.0 million), consisted of net income and non-cash expenses
($10.3 million), an increase in investment in marketable securities ($3.1
million) for 1,4000,000 shares of Casino Magic common stock, a decrease in
prepared income taxes ($2.5 million), an increase in accounts receivable ($4.2
million) from other racetracks primarily due to totalisator settlement delays,
an increase in accounts payable ($2.0 million), and a decrease in other changes
in working capital ($.5 million).
Cash flows used in investing activities ($7.3 million) consisted of
renovations and refurbishment of the Charles Town facility and race track
surface ($1.1 million), completion of the Hazleton and Carbondale facilities
($3.2 million), the purchase of the Johnstown OTW facility ($1.3 million), and
($1.7 million) in capital expenditures at the other facilities.
Cash flows from financing activities ($13.1 million) consisted of the
purchase of 424,700 shares of the Company's common stock ($2.4 million) and the
repurchase of $11 million of 10 5/8% Senior Notes at 97.25% of the principal
amount ($10.7 million).
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 this 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 fourth quarter of 1998, the Company anticipates capital
expenditures of approximately $1.9 million. 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 $400,000 respectively, on building improvements
and equipment. The Company anticipates expending approximately $1.0 million on
the refurbishment of the Charles Town Entertainment Complex (excluding the cost
of Gaming Machines). If approval of the Tennessee license beyond September 30,
1998 is ultimately received, the Company anticipates expending $9.0 million to
complete the first phase of the project.
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 additional indebtedness, incur
guarantee obligations, repay indebtedness, 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 financial ratios and maintenance tests.
23
On September 30, 1998, the Company was in compliance with all
applicable ratios. As of November 13, 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 amount outstanding immediately prior to the offering
under a preexisting, credit facility. The Company currently estimates that
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. The Company intends to fund its portion
of the joint venture agreement with Greenwood New Jersey, Inc. (up to $28.75
million) from cash on hand, available credit lines and seller financing.
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.
Item 3. Changes in Information about Market Risk
All of the Company's debt obligations at September 30, 1998, were fixed
rate obligations and Management, therefore, does not believe that the Company
has any material market risk from its debt obligations.
24
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
the Amtote Agreement and proceeded under the Third Party Wagering Services
Contract. Amtote is continuing 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 of the Company.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
10.78 Lease agreement dated July 14, 1998 between Penn
National Gaming, Inc. and Eagle Valley Realty.
10.79 Joint Venture Agreement dated October 30, 1998
between Penn National Gaming, Inc. and
Greenwood New Jersey, Inc.
10.80 Amendment dated November 2, 1998 to Joint Venture
Agreement between Penn National Gaming, Inc.
and Greenwood New Jersey, Inc.
(B) Reports on Form 8-K
None
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Penn National Gaming, Inc.
November 13, 1998 By: /S/ Robert S. Ippolito
- -----------------------
Date Robert S. Ippolito,
Chief Financial Officer &
Treasurer/Secretary
26
EXHIBIT INDEX
Exhibit Nos. Description of Exhibits Page No.
Lease agreement 28-54
between Penn National Gaming,
Inc. and Eagle Valley Realty
dated July 14, 1998
Joint Venture agreement dated 55-56
October 30, 1998 between Penn
National Gaming, Inc. and Greenwood
New Jersey, Inc.
Amendment dated November 2, 1998 57
To joint venture agreement between
Penn National Gaming, Inc. and
Greenwood New Jersey, Inc.
27