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 September 30, 1997 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., Ste. 200 Wyomissing, PA 19610 (Address of Principal Executive Offices) 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 __
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, 1997 Common stock par value .01 per share 15,129,470 ---------- This Report contains forward-looking statements that inherently involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed in this Quarterly Report on Form 10-Q 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 <TABLE> <CAPTION> PART I-FINANCIAL INFORMATION Page <S> <C> Item 1. Financial Statements Consolidated Balance Sheets - 4-5 September 30, 1997 (unaudited) and December 31, 1996 Consolidated Statements of Income - 6 Nine Months Ended September 30, 1997 and 1996 (unaudited) Consolidated Statements of Income - 7 Three Months Ended September 30, 1997 and 1996 (unaudited) Consolidated Statement of Shareholders' Equity - 8 Nine Months Ended September 30, 1997 (unaudited) Consolidated Statement of Cash Flow - 9-10 Nine Months Ended September 30, 1997 and 1996 (unaudited) Notes to Consolidated Financial Statements 11-14 Item 2. Management's Discussion and Analysis of Financial 15-18 Condition and Results of Operations PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8 - K 19 3
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) September 30, December 31, 1997 1996 ------------- ------------ (Unaudited) Assets Current assets Cash $ 3,951 $ 5,634 Accounts receivable 3,160 4,293 Prepaid expenses and other current assets 2,857 1,552 Deferred income taxes 58 90 -------- -------- Total current assets 10,026 11,569 -------- -------- Property, plant and equipment, at cost Land and improvements 18,736 15,728 Building and improvements 63,570 30,484 Furniture, fixtures and equipment 14,445 8,937 Transportation equipment 505 366 Leasehold improvements 6,727 6,680 Leased equipment under capitalized lease 824 1,626 Construction in progress 4,332 2,926 -------- -------- 109,139 66,747 Less accumulated depreciation and amortization 10,113 8,029 -------- -------- Net property, plant and equipment 99,026 58,718 -------- -------- Other assets Excess of cost over fair market value of net assets acquired (net of accumulated amortization) 23,532 21,885 Prepaid acquisition costs -- 1,764 Deferred financing costs 1,798 2,416 Miscellaneous 537 371 -------- -------- Total other assets 25,867 26,436 -------- -------- $134,919 $ 96,723 ======== ======== See accompanying notes to consolidated financial statements 4
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) September 30, December 31, 1997 1996 ------------ ------------ (Unaudited) Liabilities and Shareholders' Equity Current Liabilities Current maturities of long-term debt and capital lease obligations $ 6,009 $ 1,563 Accounts payable 8,718 5,066 Purses due horseman 587 1,421 Uncashed pari-mutuel tickets 1,202 1,336 Accrued expenses 2,070 1,880 Customer deposits 662 420 Taxes, other than income taxes 548 392 Income taxes 636 -- --------- --------- Total current liabilities 20,432 12,078 --------- --------- Long-term liabilities Long-term debt and capital lease obligations, net of current maturities 47,851 45,954 Deferred income taxes 10,982 10,810 --------- --------- Total long-term liabilities 58,833 56,764 --------- --------- Commitments and contingencies Shareholders' equity Preferred stock, $.01 par value, 1,000,000 shares authorized: none issued -- -- Common stock, $.01 par value, 20,000,000 shares authorized: 15,129,470 and 13,355,290 issued and outstanding 151 134 Additional paid in capital 38,072 14,299 Retained earnings 17,503 13,448 Treasury Stock, 4,320 shares at cost (72) -- --------- --------- Total Shareholders' equity 55,654 27,881 --------- --------- $ 134,919 $ 96,723 ========= ========= </TABLE> 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) <TABLE> <CAPTION> Nine Months Ended September 30, ---------------------- 1997 1996 ---- ---- <S> <C> <C> Revenues Pari-mutuel revenues Live races $ 18,234 $ 14,495 Import simulcasting 46,766 23,596 Export simulcasting 5,701 2,479 Gaming revenue 909 -- Admissions, programs and other racing revenues 4,388 3,403 Concession revenues 5.570 2,501 -------- -------- Total revenues 81,568 46,474 -------- -------- Operating expenses Purses, stakes and trophies 16,550 9,744 Direct salaries, payroll taxes and employee benefits 12,034 6,211 Simulcast expenses 9,836 6,920 Pari-mutuel taxes 6,917 3,954 Lottery taxes and administration 298 -- Other direct meeting expenses 12,878 6,932 Off-track wagering concessions expenses 4,283 1,766 Other operating expenses 8,303 3,710 -------- -------- Total operating expenses 71,099 39,237 -------- -------- Income from operations 10,469 7,237 -------- -------- Other income (expenses) Interest (expense) (2,652) (44) Interest income 296 229 Site development (expenses) (599) -- Other 17 -- -------- -------- Total other income (expenses) (2,938) 185 -------- -------- Income before income taxes and extraordinary item 7,531 7,422 Taxes on income 3,093 3,016 -------- -------- Income before extraordinary item 4,438 4,406 -------- -------- Extraordinary item Loss on early extinguishment of debt, net of income taxes 383 -- -------- -------- Net income $ 4,055 $ 4,406 ======== ======== Earnings per share before extraordinary item $ 0.29 $ 0.32 ======== ======== Earnings per share $ 0.26 $ 0.32 ======== ======== Weighted average common shares outstanding 15,400 13,754 ======== ======== </TABLE> 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) <TABLE> <CAPTION> Three Months Ended September 30, -------------------- Revenues 1997 1996 ---- ---- <S> <C> <C> Pari-mutuel revenues Live races $ 6,837 $ 4,823 Import simulcasting 15,428 8,087 Export simulcasting 2,306 703 Gaming revenue 909 -- Admissions, programs and other racing revenues 1,564 1,355 Concession revenues 2,120 900 -------- -------- Total revenues 29,164 15,868 -------- -------- Operating expenses Purses, stakes and trophies 6,232 3,296 Direct salaries, payroll taxes and employee benefits 4,614 2,244 Simulcast expenses 3,955 2,240 Pari-mutuel taxes 2,498 1,324 Lottery taxes and administration 298 -- Other direct meeting expenses 4,379 2,454 Off-track wagering concessions expenses 1,643 721 Other operating expenses 2,868 1,225 -------- -------- Total operating expenses 26,487 13,504 -------- -------- Income from operations 2,677 2,364 -------- -------- Other income (expenses) Interest (expense) (977) (6) Interest income 138 76 Site development (expenses) (599) -- Other 21 -- -------- -------- Total other income (expenses) (1,417) 70 -------- -------- Income before income taxes 1,260 2,434 Taxes on income 542 992 -------- -------- Net income $ 718 $ 1,442 ======== ======== Earnings per share $ 0.05 $ 0.10 -------- -------- Weighted average common shares outstanding 15,680 13,994 ======== ======== </TABLE> See accompanying notes to consolidated financial statements 7
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> Common Stock Treasury Stock -------------- -------------- Additional Paid-In Shares Amounts Shares Amounts Capital Earnings Total ------ ------- ------ ------- ---------- -------- ----- <S> <C> <C> <C> <C> <C> <C> <C> Balance, at January 1, 1997 13,355,290 $ 134 - $ - $ 14,299 $ 13,448 $ 27,881 Issuance of common stock 1,774,180 17 23,200 23,217 Purchase of Treasury Stock at cost 4,320 (72) (72) Tax benefit related to stock options exercised 573 573 Net income for the nine months ended September 30, 1997 4,055 4,055 Balance, at September 30, 1997 15,129,470 $ 151 4,320 $ (72) $ 38,072 $ 17,503 $ 55,654 ========== ======= ===== ======= ======== ======== ======== </TABLE> See accompanying notes to consolidated financial statements 8
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> Nine Months Ended September 30, ----------------- 1997 1996 ---- ---- <S> <C> <C> Cash flows from operating activities Net income $ 4,055 $ 4,406 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 2,701 911 Extraordinary item, loss on early extinguishment of debt, before income tax benefit 642 -- Deferred Income taxes 204 144 Decrease (Increase) in Accounts receivable 1,133 (350) Prepaid expenses (1,305) (732) Miscellaneous other assets (166) (197) Increase (decrease) in Accounts payable 3,652 473 Purses due horsemen (834) 36 Uncashed pari-mutuel tickets (134) (88) Accrued expenses 190 (85) Customer deposits 242 200 Taxes other than income payable 156 81 Taxes payable 636 (324) -------- -------- Net cash provided by operating activities 11,172 4,475 -------- -------- Cash flows from investing activities Expenditures for property and equipment (26,392) (4,784) Acquisition of business, (Primarily property and equipment) (16,000) -- Prepaid acquisition costs (310) (3,001) -------- -------- Net cash provided by (used) in investing activities (42,702) (7,785) -------- -------- </TABLE> 9
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> Nine Months Ended Continued September 30, ----------------- 1997 1996 ---- ---- <S> <C> <C> Cash flows from financing activities Proceeds from sale common stock 23,145 1,486 Tax benefit related to stock options exercised 573 -- Proceeds from long term debt 25,667 -- Principal payments on long-term debt and capital lease obligations (19,324) (88) Increase in unamortized financing cost (214) -- -------- -------- Net cash provided by financing activities 29,847 1,398 -------- -------- Net (decrease) in cash (1,683) (1,912) Cash, at beginning of period 5,634 7,514 -------- -------- Cash, at end of period $ 3,951 $ 5,602 ======== ======== </TABLE> See accompanying notes to consolidated financial statements 10
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. 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 September 30, 1997 and the results of its operations for the nine month periods ended September 30, 1997 and 1996. The results of operations experienced for the nine month period ending September 30, 1997 are not necessarily indicative of the results to be experienced for the fiscal year ending December 31, 1997. The financial 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, 1996 annual financial statements. 2. Wagering Information (in thousands): <TABLE> <CAPTION> Three months ended September 30, -------------------------------------------------------------------------- 1997 1996 ---------------------------------------------------------- ----- Penn National Pocono Downs Charles Town Total Penn National <S> <C> <C> <C> <C> <C> Pari-mutuel wagering in-state on company live races $ 22,142 $ 9,520 $ 6,852 $ 38,514 $ 23,095 --------- -------- -------- -------- -------- Pari-mutuel wagering on simulcasting: Import simulcasting from other racetracks 39,014 29,710 7,630 76,354 41,444 Export simulcasting to out of Pennsylvania wagering facilities 37,026 10,133 - 47,159 24,440 --------- -------- --------- -------- -------- 76,040 39,843 7,630 123,513 65,884 -------- ------- --------- -------- -------- Total pari-mutuel wagering $98,182 $49,363 $ 14,482 $162,027 $ 88,979 ======= ======= ======== ======== ======== </TABLE> 11
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 2. Wagering Information (in thousands) <TABLE> <CAPTION> Nine months ended September 30, ------------------------------------------------------------------------- 1997 1996 ------ ---- Penn National Pocono Downs Charles Town Total Penn National <S> <C> <C> <C> <C> <C> Pari-mutuel wagering in-state on company live races $ 69,716 $ 18,763 $ 11,492 $ 99,971 $ 69,200 -------- -------- -------- -------- -------- Pari-mutuel wagering on simulcasting: Import simulcasting from other racetracks 124,857 89,220 14,275 228,352 122,960 Export simulcasting to out of Pennsylvania wagering facilities 113,387 18,960 - 132,347 84,228 ---------- -------- --------- --------- --------- 238,244 108,180 14,275 360,699 207,188 ---------- -------- --------- --------- ---------- Total pari-mutuel wagering $ 307,960 $126,943 $ 25,767 $460,670 $ 276,388 ========= ======== ======== ======== ========= </TABLE> 3. Commitments At September 30, 1997, the Company was contingently obligated under letters of credit with face amounts aggregating $1,803,700. The $1,803,700 consisted of $1,703,700 relating to the horsemen's account balances and $100,000 for Pennsylvania pari-mutuel taxes. On June 20, 1997, the Company acquired options to purchase approximately 100 acres of land in Memphis, Tennessee for an aggregate purchase price of $2.7 million. The Company paid $11,000 to acquire the options and has the right to extend the options from month to month until June 20, 1998 upon the payment of $11,000 per month. The Company has filed an application to the Tennessee State Racing Commission for the proposed development of a harness race track and off-track wagering facility at the site on October 9, 1997. A public hearing on the Tennessee racing license application has been scheduled for November 15, 1997. On June 25, 1997, the Company entered into a five-year technology agreement with GTECH Corporation for the installation and operation of the video gaming machine ("Gaming Machine") system at the Charles Town facility. The agreement provides for annual payments equal to the facility's net win multiplied by a percentage which decreases as the net win per day per machine at the facility increases. 12
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. Supplemental Disclosures of Cash Flow Information Cash paid during the nine months ended September 30, 1997 and 1996 for interest was $3,010,000 and $44,000, respectively. Cash paid during the nine months ended September 30, 1997 and 1996 for income taxes was $2,741,000 and $3,196,000, respectively. For the nine months ended September 30, 1997, the Company reclassified approximately $1.8 million of prepaid acquisition costs to excess of cost over fair market value of net assets acquired. 5. Common Stock In February 1997, the Company completed a secondary public offering of 1,725,000 shares of its common stock. The net proceeds of $23 million were used to repay $19 million of term loans outstanding under the $75 million credit facility and to finance a portion of the cost of the refurbishment of the Charles Town Races facility. In connection with such debt repayment, the Company incurred an extraordinary loss of $383,000 after taxes, consisting primarily of the write-off of deferred finance costs. 6. Acquisitions On January 15, 1997, an 89% - owned Company subsidiary acquired substantially all of the assets of Charles Town Races for approximately $16 million plus acquisition-related fees and expenses of approximately $1.9 million. On March 26, 1997, the Company entered into an agreement to purchase property for its Carbondale, Pennsylvania OTW facility. The agreement provides for a purchase price of $200,000 and is subject to numerous contingencies, including approval by the Pennsylvania State Harness Racing Commission. On June 5, 1997, the Company's application was approved by the Racing Commission. The Company expects to have the facility constructed and operational in the first quarter of 1998. 13
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) On July 9, 1997, the Company entered into a lease agreement for its Hazleton OTW facility. The lease is for 13,000 square feet at the Laurel Mall in Hazleton, 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 September 26, 1997, the Company's application was approved by the Racing Commission. The Company expects to have the facility constructed and operational in the first quarter of 1998. On September 9, 1997, the Company entered into a lease agreement for its Stroudsburg, Pennsylvania OTW facility. The initial term of the lease is for ten years with two additional five years renewal options available. The agreement is subjected to numerous contingencies, including approval by the Pennsylvania State Harness Racing Commission. On November 6, 1997, the Company's application was approved by the Racing Commission. The Company expects to have the facility renovated and operational in the third quarter of 1998. On September 26, 1997, the Company entered into a lease agreement for its proposed Altoona, Pennsylvania OTW facility. The lease is for 14,220 square feet at the Pleasant Valley Shopping Center in Altoona, Pennsylvania. The initial term of the lease is for ten years with two additional five-year renewal options available. The agreement is subjected to numerous contingencies, including approval by the Pennsylvania State Racing Commission. On September 26, 1997, the Company submitted its application for such approval. If approved, the Company expects to have the facility operational in the third quarter of 1998. 7. Subsequent Items On October 30, 1997 the Company increased its revolving credit facility with its banks to $10.0 million. 14
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Three months ended September 30, 1997 compared to three months ended September 30, 1996 Total revenue increased by approximately $13.3 million, or 83.8%, to $29.2 million for the three months ended September 30, 1997, as compared to the three months ended September 30, 1996. Pocono Downs, which was acquired in the fourth quarter of 1996, accounted for $9.4 million of the increase. Charles Town Races, which was purchased in January 1997, accounted for $4.9 million of the revenue increase. The Company renovated and refurbished the Charles Town facility following its acquisition and commenced racing operations on April 30, 1997 and Gaming Machine operations, with a soft opening, on September 10, 1997. Revenues decreased by approximately $1.8 million in the aggregate at the Company's Penn National Race Course and OTW facilities in Reading, and Chambersburg. This decrease was offset by a revenue increase of $798,000 which was primarily due to the opening of Penn National's OTW facility in Williamsport in February 1997. Management believes that the decrease in revenues at the Reading and Chambersburg OTWs, respectively, was primarily due to the opening of a competitor's OTW facility near Reading and the opening of the Charles Town facility, which is within the Chambersburg target market. Total operating expenses increased by approximately $13.0 million, or 96.3%, to $26.5 million for the three months ended September 30, 1997, as compared to the three months ended September 30, 1996. Pocono Downs and Charles Town Races, which the Company did not operate in the corresponding quarter, accounted for $7.9 million and $5.2 million of this increase, respectively. Operating expenses decreased by approximately $1.0 million in the aggregate at the Company's Penn National Race Course and OTW facilities in Reading and Chambersburg. This decrease was offset by a operating expense increase of $596,000 which was primarily due to the opening of Penn National's OTW facility in Williamsport in February 1997. The increase in corporate expenses of $321,000 was due to increased personnel and other administrative expense necessary to support the expansion of the Company. Income from operations increased by approximately $313,000, or 13.2%, to $2.7 million due to the factors described above. Other expenses for the three months ended September 30, 1997 consisted of approximately $1.0 million in interest expense (primarily due to the financing of the Pocono Downs and Charles Town acquisitions) compared to $6,000 in interest expense for the three months ended September 30, 1996. Site development expenses for the three months ended September 30, 1997 consist of a non-recurring pre-tax charge of $599,000 associated with the Company's failure to obtain the approval for the Downingtown OTW and discontinued site development efforts in Indiana. 15
Net income decreased by approximately $724,000 or 50.2% from $1.4 million to $718,000 for the three months ended September 30, 1997 compared to the three months ended September 30, 1996 based on the factors described above. Nine months ended September 30, 1997 compared to nine months ended September 30, 1996 Total revenue increased by approximately $35.1 million, or 75.5%, to $81.6 million for the nine months ended September 30, 1997, as compared to the nine months ended September 30, 1996. Pocono Downs, which was acquired in the fourth quarter of 1996, accounted for $26.2 million of the increase. Charles Town Races, which was purchased in January 1997, accounted for $7.8 million of the increase. The Company renovated and refurbished the Charles Town facility following its acquisition and commenced racing operations on April 30, 1997 and Gaming Machine operations, with a soft opening, on September 10, 1997. The remaining revenue increase of $1.1 million was primarily due to an increase of $5.9 million associated with the opening of the Penn National OTW facility in Williamsport in February 1997 and a full period of operations at the Lancaster OTW facility; this increase was offset by a decrease in revenues of approximately $4.2 million at the Company's OTW facilities in Reading and York and at the Penn National Race Course. Management believes that the decrease in revenues at these facilities was primarily due to the opening of a competitor's OTW facility and the opening of the Company's Lancaster OTW facility in July of 1996. The company also had a decrease of $600,000 relating to the closing of Penn National Speedway in Grantville at the end of 1996. Total operating expenses increased by approximately $31.9 million, or 81.2%, to $71.1 million for the nine months ended September 30, 1997, as compared to the nine months ended September 30, 1996. Pocono Downs and Charles Town Races, which the Company did not operate in the corresponding prior period, accounted for $21.4 million and $8.2 million of this increase, respectively. Operating expenses also increased by $1.2 million primarily due to an increase of $3.9 million associated with the opening of the OTW facility in Williamsport in February 1997, and operations at the Lancaster OTW facility, which was offset by a decrease in operating expenses of approximately $1.7 million at the Company's OTW facilities in Reading and York and at the Penn National Race Course associated with lower revenue levels at these facilities In addition, there was a decrease of approximately $800,000 in operating expenses due to the closing of Penn National Speedway. The increase in corporate expenses of $1.0 million was due to increased personnel, office space and other administrative expense necessary to support the expansion of the Company. Income from operations increased by approximately $3.2 million, or 44.7%, to $10.5 million due to the factors described above. Other expenses for the nine months ended September 30, 1997 consisted of approximately $2.7 million in interest expense (primarily due to the financing of the Pocono Downs and Charles Town acquisitions) compared to $44,000 in interest expense for 16
the nine months ended September 30, 1996. Site development expenses for the nine months ended September 30, 1997 consist of a non-recurring pre-tax charge of approximately $599,000 associated with the Company's failure to obtain the approval for the Downingtown OTW facility and discontinued site development efforts in Indiana. The extraordinary item consisted of a non-cash write-off associated with the early extinguishment of debt of $383,000, net of income taxes. This resulted from the Company receiving approximately $23.0 million as proceeds from the February 1997 equity offering and using approximately $19.0 million to reduce long-term debt. Net income decreased by approximately $351,000, or 8.0%, to $4.0 for the nine months ended September 30, 1997 compared to the nine months ended September 30, 1996 based on 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 issuances of equity securities. Net cash provided from operating activities for the nine months ended September 30, 1997 ($11.0 million) consisted of net income and non-cash expenses ($7.6 million), the repayment of the Charles Town Races receivable in January 1997 ($1.3 million) and other changes in working capital ($2.1 million). Cash flows used in investing activities ($42.7 million) consisted of the acquisition of the Charles Town facility ($16.0 million), construction in progress and renovation and refurbishment of the Charles Town facility ($22.8 million), and $3.9 million in capital expenditures, including approximately $700,000 for the completion of the Williamsport OTW facility. Cash flows from financing activities ($29.9 million) consisted principally of $23.1 million in proceeds from a secondary equity offering in February 1997 and $16.5 million in proceeds from long-term debt used as payment for the Charles Town acquisition on January 15, 1997. The Company used the proceeds from the equity offering to repay $19.0 million of its bank debt (including Charles Town acquisition borrowings), and the remaining amount was used for the refurbishment of the Charles Town facility. The Company received an additional $6.5 million in proceeds from long-term debt during the third quarter to use for the refurbishment of the Charles Town facility. 17
The Company has a $5.0 million revolving credit facility which includes a $2.0 million sublimit for standby letters of credit for periods of up to twelve months. At September 30, 1997 the Company borrowed $2.5 million of the revolving credit facility for the refurbishment of the Charles Town Facility. On October 30, 1997, the revolving credit facility was increased to $10.0 million. The Company is subject to possible liabilities arising from environmental conditions at the landfill adjacent to Pocono Downs Harness Track. 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 parities to an existing settlement agreement. The Company is unable to estimate the amount, if any, that it may be required to expend. During the balance of 1997, the Company anticipates capital expenditures of approximately $2.4 million, exclusive of the cost of refurbishing the Charles Town Facility (described below), to construct two additional OTW facilities and approximately $200,000 for other capital expenditures and improvements to existing facilities for Penn National Race Course and Pocono Downs. Under the Company's credit facility, the Company is permitted to make capital expenditures (not including the refurbishment of the Charles Town Facility, or the cost of Gaming Machines to be installed there pursuant to a lease arrangement) of $12.0 million in 1997, $4.0 million in 1998 and $2.0 million in 1999 and in each year thereafter. The Company anticipates expending approximately $27.3 million on the refurbishment of the Charles Town Facility (excluding Gaming Machines), of which $22.8 million had already been expended through September 30, 1997. The Company currently estimates that the cash generated from operations and borrowings under its credit facility, will be sufficient to finance its current operations and planned capital expenditure requirements. There can be no assurance, however, that the Company will not be required to seek 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. If additional funds are raised by issuing equity securities, existing shareholders may experience dilution. 18
PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K <TABLE> <S> <C> <C> (a) Exhibits 2.9 Second amended and related operating agreement dated as of October 17, 1997, among Penn National Gaming of West Virginia, Inc., BDC Group, and PNGI Charles Town Gaming Limited Liability Company. 10.66 Fourth amendment waiver and consent dated as of October 20, 1997, among the company Bankers Trust Company as agent, CoreStates Bank, N.A. as co-agent, and certain banks party to the credit agreement dated as of November 17, 1996 27.1 Financial Data Schedule (b) Reports on Form 8-K None </TABLE> 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. Date: November 14, 1997 By: /s/ Robert S. Ippolito ------------------------ Robert S. Ippolito Chief Financial Officer Secretary/Treasurer 20
EXHIBIT INDEX Exhibit Nos. Description of Exhibits Page No. 2.9 Second amended and related operating agreement dated as of October 17, 1997, among Penn National Gaming of West Virginia, Inc., BDC Group and PNGI Charles Town Gaming Limited Liability Company. 10.66 Fourth amendment waiver and consent dated as of October 20, 1997, among the company, Bankers Trust as agent, CoreStates Bank, N.A. as co-agent and certain banks party to the credit agreement dated as of November 17, 1996. 27.1 Financial Data Schedule 21