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, 1999
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) (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 13, 1999
Common Stock Par value $.01 per share 14,843,059
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 TERMINOLGY. 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 ("CAUTIONARY STATEMENTS") ARE DISCLOSED IN THIS
REPORT AND IN OTHER MATERIALS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE
COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRETY BY THE CAUTIONARY STATEMENTS.
2
Penn National Gaming, Inc. and Subsidiaries
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1 - Financial Statements
Consolidated Balance Sheets -
March 31, 1999 (unaudited) and December 31, 1998 4-5
Consolidated Statements of Income -
Three Months Ended March 31, 1999
and 1998 (unaudited) 6
Consolidated Statements of Shareholders' Equity -
Three Months Ended March 31, 1999 (unaudited) 7
Consolidated Statements of Cash Flow -
Three Months Ended March 31, 1999 and 1998 (unaudited) 8
Notes to Consolidated Financial Statements 9-15
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-17
Item 3 - Changes in Information About Market Risk 17
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 18
Item 6 - Exhibits and Reports on Form 8-K 19
Signature Page 20
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,
1999 1998
(Unaudited)
-----------------------------------------
Assets
Current assets
Cash and cash equivalents $ 10,178 $ 6,826
Accounts receivable 3,307 3,840
Prepaid expenses and other current assets 2,280 2,131
Deferred income taxes 443 458
Prepaid income taxes 1,341 859
---------------------------------------
Total current assets 17,549 14,114
---------------------------------------
Property, plant and equipment, at cost
Land and improvements 26,987 26,969
Building and improvements 67,539 66,918
Furniture, fixtures and equipment 29,954 29,772
Transportation equipment 598 527
Leasehold improvements 9,585 9,579
Leased equipment under capitalized lease 824 824
Construction in progress 2,407 1,847
---------------------------------------
137,894 136,436
Less accumulated depreciation and amortization 17,406 15,684
---------------------------------------
Net property, plant and equipment 120,488 120,752
---------------------------------------
Other assets
Note receivable 11,250 --
Excess of cost over fair market value of net assets acquired
(net of accumulated amortization of $2,155 and $2,002,
respectively) 22,289 22,442
Deferred financing costs 2,844 2,403
Miscellaneous 1,096 1,087
---------------------------------------
Total other assets 37,479 25,932
---------------------------------------
$ 175,516 $ 160,798
=======================================
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,
1999 1998
(Unaudited)
----------------------------------------
Liabilities and Shareholders' Equity
Current liabilities
Current maturities of long-term debt and
capital lease obligations $ 5,159 $ 168
Accounts payable 5,657 6,217
Purses due horsemen 1,758 887
Uncashed pari-mutuel tickets 1,749 1,597
Accrued expenses 1,702 1,063
Accrued interest 2,443 468
Accrued salaries & wages 792 752
Customer deposits 550 548
Taxes, other than income taxes 351 503
---------------------------------------
Total current liabilities 20,161 12,203
---------------------------------------
Long-term liabilities
Long-term debt and capital lease obligations,
net of current maturities 84,580 78,088
Deferred income taxes 11,688 11,471
---------------------------------------
Total long-term liabilities 96,268 89,559
---------------------------------------
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 15,187,009 and 15,164,080, respectively 152 152
Treasury stock, 424,700 shares at cost (2,379) (2,379)
Additional paid in capital 38,054 38,025
Retained earnings 23,260 23,238
---------------------------------------
Total shareholders' equity 59,087 59,036
---------------------------------------
$ 175,516 $ 160,798
=======================================
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,
1999 1998
-------------------------------
Revenue
Pari-mutuel revenues
Live races $ 2,414 $ 5,305
Import simulcasting 15,301 16,351
Export simulcasting 511 1,326
Gaming revenue 11,297 7,156
Admissions, programs and other racing revenue 1,120 1,260
Concessions revenues 2,146 1,955
------------------------------
Total revenues 32,789 33,353
------------------------------
Operating expenses
Purses, stakes, and trophies 5,711 6,307
Direct salaries, payroll taxes and employee benefits 3,715 4,365
Simulcast expenses 2,387 3,101
Pari-mutuel taxes 1,669 2,697
Lottery taxes and administration 4,489 2,347
Other direct meeting expenses 4,592 5,442
Concessions expenses 2,022 1,505
Other operating expenses 3,074 2,396
Depreciation and amortization 2,015 1,419
Horsemen's action expenses 1,250 --
------------------------------
Total operating expenses 29,579 30,924
------------------------------
Income from operations 1,865 3,774
------------------------------
Other income (expense)
Interest (expense) (2,125) (2,110)
Interest income 209 201
------------------------------
Total other (expense) (1,916) (1,909)
------------------------------
Income (loss) before income taxes (51) 1,865
Taxes (benefit) on income (73) 663
------------------------------
Net income $ 22 $ 1,202
==============================
Per share data
Basic .00 .08
Diluted .00 .08
Weighted average shares outstanding
Basic 14,762 15,153
Diluted 15,079 15,586
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, 1999 15,164,080 $ 152 $ (2,379) $ 38,025 $ 23,238 $ 59,036
Issuance of common stock 23,025 - - 29 - 29
Net income for the three
months ended March 31, 1999 - - - - 22 22
- ------------------------------------ ------------ ------------- ------------- ------------- ------------- -----------
Balance, March 31, 1999 15,187,105 $ 152 $ (2,379) $ 38,054 $ 23,260 $ 59,087
==================================== ============ ============= ============= ============= ============= ===========
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,
1999 1998
-------------------------------
Cash flows from operating activities
Net income $ 22 $ 1,202
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 2,015 1,417
Deferred income taxes 232 20
Decrease (increase) in
Accounts receivable 533 (1,161)
Prepaid expenses and other current assets (149) (338)
Prepaid income taxes (482) 865
Miscellaneous other assets (9) (181)
Increase (decrease) in
Accounts payable (562) 515
Purses due horsemen 871 1,281
Uncashed pari-mutuel tickets 152 220
Accrued expenses 639 (476)
Accrued interest 1,975 2,096
Accrued salaries & wages 40 (121)
Customer deposit 2 55
Taxes, other than income payable (152) 235
-------------------------------
Net cash provided by operating activities 5,127 5,629
-------------------------------
Cash flows from investing activities
Expenditures for property, plant and equipment (1,458) (3,766)
Note receivable (11,250) --
-------------------------------
Net cash (used) in investing activities (12,708) (3,766)
-------------------------------
Cash flows from financing activities
Proceeds from sale of common stock 29 18
Proceeds from long-term debt 11,500 --
Principal payments on long-term debt and capital lease
obligations (17) (16)
Increase in unamortized deferred financing costs (579) (164)
-------------------------------
Net cash provided by (used) in financing activities 10,933 (162)
-------------------------------
Net increase in cash and cash equivalents 3,352 1,701
Cash and cash equivalents, at beginning of period 6,826 21,854
-------------------------------
Cash and cash equivalents, at end of period $ 10,178 $ 23,555
===============================
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, 1999 and the results of its
operations for the three month periods ended March 31, 1999 and 1998. The
results of operations experienced for the three month period ended March 31,
1999 are not necessarily indicative of the results to be experienced for the
fiscal year ended December 31, 1999.
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, 1998
annual financial statements.
2. Wagering Information (in thousands)
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
Pennsylvania 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
========================================================
9
Three months ended March 31, 1998
Penn Pocono Charles
National Downs Town Total
Pari-mutuel wagering in-state on
company live races $ 19,610 $ 915 $ 4,118 $ 24,643
--------------------------------------------------------
Pari-mutuel wagering on simulcasting:
Import simulcasting from other racetracks 42,845 31,065 10,153 84,063
Export simulcasting to out of
Pennsylvania wagering facilities 43,620 574 - 44,194
--------------------------------------------------------
86,465 31,639 10,153 128,257
--------------------------------------------------------
Total pari-mutuel wagering $ 106,075 $ 32,554 $ 14,271 $ 152,900
========================================================
3. Commitments
At March 31, 1999, the Company was contingently obligated under letters
of credit with face amounts aggregating $1,876,000. These amounts consisted of
$1,776,000 relating to horsemen's account balances and $100,000 for Pennsylvania
pari-mutuel taxes.
On March 23, 1999, the Company entered into a new four year, nine month
purse agreement with the Horsemen's Benevolent and Protection Association, which
represents the horsemen at the Company's Penn National Race Course facility in
Grantville, Pennsylvania. The agreement ends the strike by the horsemen which
began on February 16, and caused the Company to close Penn National Race Course
and its six affiliated off-track wagering facilities (OTWs). Purse payments are
calculated as a percent of net commissions, as defined in the agreement. The
initial term of the agreement ends on January 1, 2004 and automatically renews
for another two year period, without change, unless notice is given by either
party at least ninety days prior to the end of a term.
4. Supplemental Disclosures of Cash Flow Information
Cash paid during the three months ended March 31, 1999 and 1998 for
interest was $67,000 and $14,000, respectively.
Cash paid during the three months ended March 31, 1999 and 1998 for
income taxes was $199,000 and $218,000, respectively.
5. Note Receivable
On January 28, 1999, the Company loaned $11,250,000 to FR Park Racing,
L.P., a New Jersey partnership, in accordance with the terms of the Joint
Venture Agreement dated October 30, 1998, as amended. The loan is a Registered
Subordinated Secured Promissory Note that is secured by a Mortgage
10
and Security Agreement dated January 28, 1999 between the Company and FR Park
Racing, L.P. on the property of Freehold Raceway. This Note shall bear interest,
compounded quarterly, at a rate equal to the lesser of prime rate plus two
percent or the LIBOR rate plus three percent. Interest shall be due and payable
quarterly in arrears commencing on April 30, 1999 and continuing on the last day
of each succeeding quarter until the earlier of April 30, 2000 (the Maturity
Date), the Extended Maturity Date (as defined), the Put Maturity Date (as
defined), or the Demand Date (as defined). In the event that the Company
participates in the subsequent closing as contemplated by the Joint Venture
Agreement, the Maturity Date of this note shall be adjusted to reflect the
conversion of the note to a Demand Note (as defined), and, at such point, all
outstanding principal, together with interest thereon, shall be due and payable
on demand by the Company.
11
6. Subsidiary Guarantors
Summarized financial information as of March 31, 1999 and 1998 for the
three months ended March 31, 1999 and 1998 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, 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 $ 8,532 14,165 $ 7,886 $ (10,410) $ 20,161
Long-term liabilities 87,736 78,313 47,559 (117,339) 96,268
Shareholders' equity
(deficiency) 37,608 130,682 (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
- ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Subsidiary
Parent Subsidiary Non- Elimin- Consoli-
Company Guarantors Guarantors ations dated
- ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
As of March 31, 1998
Consolidated Balance Sheet (In Thousands)
Current assets $ 16,667 $ 9,936 $ 3,162 $ 1,638 $ 31,403
Net property, plant and 439 61,714 43,622 -- 105,775
equipment
Other assets 103,284 146,333 1,370 (224,213) 26,774
- ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Total $ 120,390 $ 217,983 $ 48,154 $ (222,575) $ 163,952
- ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Current liabilities $ 912 11,188 $ 3,857 $ 1,639 $ 17,596
Long-term liabilities 80,023 81,116 50,081 (119,941) 91,279
Shareholders' equity
(deficiency) 39,455 125,679 (5,784) (104,273) 55,077
- ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Total $ 120,390 $ 217,983 $ 48,154 $ (222,575) $ 163,952
- ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Three months ended March 31, 1998
Consolidated Statement of Income (In Thousands)
Total revenues $ 2,313 $ 20,521 $ 10,969 $ (450) $ 33,353
Total operating expenses
834 18,477 10,718 (450) 29,579
- ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Income from operations 1,479 2,044 251 -- 3,774
Other income(expenses) (1,387) 644 (1,166) -- (1,909)
- ----------------------------- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Income (loss) before income
taxes 92 2,688 (915) -- 1,865
Taxes (benefit) on
income (67) 730 -- -- 663
Extraordinary item -- -- -- -- --
- ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
- ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Net income (loss) $ 159 $ 1,958 $ (915) $ -- $ 1,202
- ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Three months ended March 31, 1998
Consolidated Statement of Cash Flow (In Thousands)
Net cash provided by
used in) operating
activities $ 3,070 $ (15,459) $ (609) $ 18,627 $ 5,629
Net cash provided by
(used in) investing
activities (5,994) 12,970 2,005 (12,747) (3,766)
Net cash provided by
(used in) financing
activities (34) 5,752 -- (5,880) (162)
- ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Net increase (decrease)
in cash and cash
equivalents (2,958) 3,263 1,396 -- 1,701
Cash and cash
equivalents at
January 1, 1998 3,015 17,895 944 -- 21,854
- ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Cash and cash
equivalents at
March 31, 1998 $ 57 $ 21,158 $ 2,340 $ -- $ 23,555
- ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
13
7. Year 2000 Compliance
The "Year 2000 issue" is typically the result of software and hardware being
written 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
that 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, has been and 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 Company is using its internal resources to reprogram or replace and test its
software for Year 2000 modifications. 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
1999. 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.
8. Subsequent Events
On April 9, 1999, the State of West Virginia passed legislation
approving the use of coin-out and reel spinning slot machines at the four race
tracks in West Virginia. The Company plans to convert certain machines at
Charles Town to coin-out as well as replace a number of lesser-performing
machines with reel spinning models. On April 27, 1999, the Company placed an
additional thirty-six (36) machines in operation for a total machine base of
935. During the remainder of 1999, the Company plans to add, subject to
regulatory approval, 565 more machines to bring the total machine base to 1,500.
On April 29, 1999, the Company signed a binding Letter of Intent with
American Digital Communications, Inc. ("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 agreement is subject to approval by the Pennsylvania
Horse Racing Commission.
14
On May 10, 1999, the Company commenced a consent solicitation from the
holders of its 10.625% Senior Notes due 2004, Series B (the Notes) to amend the
indenture pursuant to which the Notes were issued to permit the Company to make
certain investments in a joint venture with Greenwood New Jersey, Inc. that will
operate Freehold Raceway in Freehold, New Jersey and Garden State Track in
Cherry Hill, New Jersey. The total consent fee payable pursuant to the consent
solicitation to holders who deliver consents (and do not validly revoke such
consents prior to 5:00pm, New York City time, on May 19, 1999) is $32.50 per
$1,000 principal amount of Notes as to which a consent is given.
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Results of Operations
Three months ended March 31, 1999 compared to three months ended March 31, 1998
Total revenue decreased by approximately $564,000 or 1.7% from $33.4 million for
the three months ended March 31, 1998 to $32.8 million for the three months
ended March 31, 1999. Revenues decreased by $7.2 million or 46.0% at Penn
National Race Course and its OTW facilities due to expiration of the Horsemen's
Agreement that resulted in the closure of the facilities from February 16 to
March 24, 1999. Charles Town Races had increased revenues of $5.4 million or
49.2% for the period. Video lottery machine revenue increased by $4.2 million
due to an increase in the average number of machines in play of 564 in 1998
compared to 837 in 1999 and an increase in the average win per machine of $141
in 1998 compared to $150 in 1999. Racing revenue at the Charles Town Facility
increased by $.8 million due to the improved quality of the live race card and a
stronger full-card simulcast program now available to the race fan. Concessions
revenues increased by $.4 million due to the increased attendance at the Charles
Town facility. At Pocono Downs and its OTW facilities revenues increased by $1.0
million or 13.7%. The increase resulted from a full period of operations for
Carbondale ($.9 million) and Hazleton ($.7 million) that offset the decrease in
revenues at the Pocono Downs racetrack ($.6 million) due to the close proximity
of these three facilities.
Total operating expenses increased by approximately $1.3 million or 4.6% from
$29.6 million for the three months ended March 31, 1998 to $30.9 million for the
three months ended March 31, 1999. Expenses decreased by $3.9 million or 32.8%
at Penn National Race Course and its OTW facilities due to the closing of the
facilities from February 16 to March 24, 1999. Included in the operating
expenses are $1.3 million in horsemen action expenses such as fixed operating
expenses of the closed facilities, salaries and benefits, contract negotiation
expenses, horsemen purses expenses and other related expenses. Charles Town
Races had increased expenses of $4.2 million or 40.9% due to an increase in
direct costs associated with additional wagering on horse racing and video
lottery machine play. Pocono Downs and its OTW facilities had a $.6 million net
increase in expenses due to a full period of operations at the Carbondale and
Hazleton OTW facilities that was offset by a decrease in expenses at the Pocono
Downs racetrack. Corporate expenses increased by approximately $.7 million due
to the consolidation of the marketing and information technology departments at
the corporate level and the development of an OTW facility management
department. Depreciation and amortization expense increased by $.6 million due
to the purchase of the video lottery machines from GTECH in November 1998.
Income from operations decreased by approximately $1.9 million or 50.6% from
$3.8 million for the three months ended March 31, 1998 to $1.9 million for the
three months ended March 31, 1999 due to the factors described above. Other
expenses for the three months ended March 31, 1998 and 1999 consisted of
approximately $1.9 million in net interest primarily due to 10.625 % Senior
Notes and the Revolving Credit Facility.
15
Net income decreased by approximately $1.2 million or 98.2% from $1.2 million
for the three months ended March 31, 1998 to approximately $22,000 for the three
months ended March 31, 1999 due to the factors described above. Income tax
expense decreased by approximately $736,000 or 111.0% from $663,000 for the
three months ended March 31, 1998 to a credit of $73,000 for the three months
ended March 31, 1999 due to the decrease in income for the period.
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 the
issuance of equity securities.
Net cash provided by operating activities for the three months ended March 31,
1999 ($5.1 million) consisted of net income and non-cash expenses ($2.3
million), a decrease in accounts receivable ($.5 million), an increase in purses
due horsemen ($.9 million), an increase in accrued interest ($2.0 million) and a
decrease in other working capital ($.6 million).
Cash flows used in investing activities ($12.7 million) consisted of a note
receivable ($11.2 million) from FR Park Racing, LP, a New Jersey limited
partnership and a part of the New Jersey Joint Venture Agreement and $1.5
million in capital expenditures.
Cash flows provided by financing activities ($10.9 million) consisted of
borrowings under the Credit Facility ($11.5 million) for the New Jersey Joint
Venture and debt repayment and an increase in financing costs ($.6 million) for
amending the Credit Facility.
The Company is subject to possible liabilities arising from the environmental
condition at the landfill adjacent to Pocono Downs. Specifically, the Company
may incur expenses in connection with the landfill in the future, which expenses
may not be reimbursed by the four municipalities, which are parties to the
settlement agreement. The Company is unable to estimate the amount, if any, that
it may be required to expend.
In the first quarter of 1999, the Company incurred approximately $1.3 million in
expenses associated with the actions by the Pennsylvania Thoroughbred Horsemen
on February 16, 1999 that resulted in the closing of Penn National Race Course
and its six OTW facilities at Reading, Chambersburg, York, Lancaster,
Williamsport and Johnstown, from February 16, 1999 through March 24, 1999.
During the last nine months of 1999 the Company anticipates spending
approximately $7.5 million on capital expenditures at its racetrack and OTW
facilities. The Company anticipates expending approximately $4.5 million at the
Charles Town Entertainment Complex for player tracking ($1.3 million), new video
slot machines ($.8 million), interior renovations ($.3 million), machinery and
equipment ($.5 million) and other projects including design and planning for a
new motel ($1.6 million). The Company also anticipates approval for and
increasing the number of slot machines at the Charles Town Entertainment Complex
to 1,500 by December 31, 1999. At this time the Company is unable to estimate
the amount required to purchase and install the additional machines. The Company
also plans to spend approximately $390,000 at Pocono Downs, $445,000 at Penn
National, $200,000 at the OTW facilities for building improvements and equipment
and $2.0 million on building improvements and equipment for the new OTW facility
in Stroudsburg, Pennsylvania. If the State of Tennessee reinstates the Tennessee
Commission and the Company's racing license or if the racing industry is
regulated under another government agency, the Company anticipates expending an
additional $9.0 million to complete the first phase of its Tennessee development
project.
The Company entered into its Credit Facility with Bankers Trust Company, as
Agent in 1996. This Credit Facility was amended and restated on January 28, 1999
with First Union National Bank replacing Bankers Trust Company, as Agent. The
amended Credit Facility provides for, subject to certain terms and conditions, a
$20.0 million revolving credit facility, a $5.0 million term loan due in one
year, a $3.0 million sublimit for standby letters of credit and has a four-year
16
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 as applicable margin of up to
3.0%. The Credit Facility is secured by the assets of the Company and contains
certain financial ratios and maintenance tests. On March 31, 1999, the Company
was in compliance with all applicable ratios.
The Company currently estimates that the 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 first phase of the Tennessee development project. The Company
intends to fund its portion of the Joint Venture with Greenwood New Jersey, Inc.
(up to $28.75 million) from cash on hand, available credit lines and other
financing. There can be no assurance, however, that the Company will not be
required to seek additional capital, in addition to that available from the
foregoing sources. The Company may, from time to time, seek additional funding
through public or private financing, including equity financing. There can be no
assurance that adequate funding will be available as needed or, if available, on
terms acceptable to the Company.
Item 3. Changes in Information About Market Risk
All of the Company's debt obligations at March 31, 1999 were fixed rate
obligations, and management, therefore, does not believe that the Company has
any material risk from its debt obligations.
17
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 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. The Company is pursuing legal
remedies in order to terminate Amtote and proceed under the Third Party Wagering
Services Contract. 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.
18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K
during the first quarter of 1999:
On February 12, 1999, the Company filed a Current Report on
Form 8-K which reflected the purchase of certain assets of
Garden State Race Track and Freehold Raceway, both located in
New Jersey, by the Company and its Joint Venture partner,
Greenwood New Jersey, Inc.
On March 2, 1999, the Company filed a Current Report on Form
8-K which reflected the Rights Agreement dated March 2, 1999
between the Company and Continental Stock Transfer and Trust
Company as Rights Agent.
19
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 13, 1999 By: s//Robert S. Ippolito
Date Chief Financial Officer,
Secretary/Treasurer
20
5
1000
3-Mos
Dec-31-1999
Jan-1-1999
Mar-31-1999
10,178
0
3,307
0
0
17,549
137,894
17,406
175,516
20,161
69
0
0
152
58,935
175,516
32,789
32,789
27,850
27,850
3,074
0
2,125
(51)
(73)
22
0
0
0
22
0
0
