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 June 30, 1996 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. State or other jurisdiction of(I.R.S. Employer incorporation or organization Identification No.) Pennsylvania 23-2234473 Penn National Gaming, Inc. 825 Berkshire Blvd. Wyomissing, PA 19610 610-373-2400 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 August 12, 1996 Common Stock par value .01 per share 6,665,145
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION Page Item 1. - Financial Statements Consolidated Balance Sheets - June 30, 1996 (unaudited) and December 31, 1995 3 - 4 Consolidated Statements of Income - Six Months Ended June 30, 1996 and 1995 (unaudited) 5 Consolidated Statements of Income - Three Months ended June 30, 1996 and 1995 (unaudited) 6 Consolidated Statement of Shareholders' Equity - Three months ended June 30, 1996 (unaudited) 7 Consolidated Statements of Cash Flow - Six Months Ended June 30, 1996 and 1995 (unaudited) 8 Notes to Consolidated Financial Statements 9 - 11 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 14 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 15
<TABLE> PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) <CAPTION> June 30, December 31, 1996 1995 (unaudited) ----------- ----------- <S> <C> <C> Assets Current Cash $ 9,310 $ 7,514 Accounts and notes receivable 2,792 1,618 Prepaid expenses and other current assets 1,304 600 Deferred income taxes 62 104 -------- -------- Total current assets 13,468 9,836 -------- -------- Property, plant and equipment, at cost Land and improvements 3,359 3,336 Building and improvements 8,700 8,651 Furniture, fixtures and equipment 4,870 4,696 Transportation equipment 309 309 Leasehold improvements 4,396 4,363 Leased equipment under capitalized lease 824 824 Construction in progress 2,020 255 -------- -------- 24,478 22,434 Less accumulated depreciation and amortization 7,286 6,728 -------- -------- Net property and equipment 17,192 15,706 -------- -------- Other assets Excess of cost over fair market value of net assets acquired (net of accumulated amortization) 1,864 1,898 Miscellaneous 344 92 Total other assets 2,208 1,990 -------- -------- $ 32,868 $ 27,532 ======== ======== <FN> See accompanying notes to consolidated financial statements </FN> </TABLE> 3
<TABLE> PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) <CAPTION> June 30, December 31, 1996 1995 (unaudited) ----------- ----------- <S> <C> <C> Liabilities and Shareholders Equity Current Maturities of long-term debt and capital lease obligations $ 246 $ 250 Accounts payable 2,521 1,395 Purses due horseman 1,421 1,293 Uncashed pari-mutuel tickets 418 704 Accrued expenses 710 702 Customer deposits 525 315 Taxes, other than income taxes 192 246 Income taxes 532 797 -------- -------- Total current liabilities 6,565 5,702 -------- -------- Long-term liabilities Long-term debt and capital lease obligations, net of current maturities 103 140 Deferred income taxes 948 888 -------- -------- Total long-term liabilities 1,051 1,028 -------- -------- Commitments and contingencies Shareholders' equity Preferred stock, $.01 par value, 1,000,000 shares authorized; none issued - - Common stock, $.01 par value, 10,000,000 shares authorized; 6,665,145 and 6,472,500 issued and outstanding 46 43 Additional paid in capital 14,304 12,821 Retained earnings 10,902 7,938 -------- -------- Total shareholders' equity 25,252 20,802 -------- -------- $ 32,868 $ 27,532 ======== ======== <FN> See accompanying notes to consolidated financial statements </FN> 4 </TABLE>
<TABLE> PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <CAPTION> Six Months Ended June 30, 1996 1995 ---- ---- <S> <C> <C> Revenues Pari-mutuel revenues Penn National races $ 9,672 $ 10,967 Import simulcasting 15,509 13,143 Export simulcasting 1,776 1,002 Admissions, programs and other racing revenues 2,048 1,791 Concession revenues 1,601 1,560 -------- -------- Total revenues 30,606 28,463 Operating expenses Purses, stakes and trophies 6,448 6,120 Direct salaries, payroll taxes and employee benefits 3,967 3,786 Simulcast expenses 4,680 4,541 Pari-mutuel taxes 2,630 2,438 Other direct meeting expenses 4,478 4,144 Off-track wagering concessions expenses 1,045 1,059 Other operating expenses 2,485 2,321 -------- -------- Total operating expenses 25,733 24,409 -------- -------- Income from operations 4,873 4,054 -------- -------- Other income (expenses) Interest (expense) (38) (34) Interest income 153 139 Other - 4 -------- -------- Total other income 115 109 -------- -------- Income before income taxes 4,988 4,163 Taxes on income 2,024 1,717 -------- -------- Net Income $ 2,964 $ 2,446 -------- -------- Earnings per share $ 0.44 $ 0.38 -------- -------- Weighted average number of common shares outstanding 6,798 6,450 ======== ======== <FN> See accompanying notes to consolidated financial statements </FN> 5 </TABLE>
<TABLE> PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <CAPTION> Three Months Ended June 30, 1996 1995 ---- ---- <S> <C> <C> Revenues Pari-mutuel revenues Penn National races $ 5,191 $ 5,772 Import simulcasting 7,915 7,229 Export simulcasting 926 530 Admissions, programs and other racing revenues 1,171 1,123 Concession revenues 840 978 Total revenues 16,043 15,632 -------- -------- Operating expenses Purses, stakes and trophies 3,522 3,244 Direct salaries, payroll taxes and employee benefits 2,058 2,053 Simulcast expenses 2,391 2,351 Pari-mutuel taxes 1,363 1,308 Other direct meeting expenses 2,252 2,301 Off-track wagering concessions expenses 536 651 Other operating expenses 1,087 1,230 -------- -------- Total operating expenses 13,209 13,138 -------- -------- Income from operations 2,834 2,494 -------- -------- Other income (expenses) Interest (expense) (24) (16) Interest income 85 72 Other - 8 -------- -------- Total other income 61 64 -------- -------- Income before income taxes 2,895 2,558 Taxes on income 1,170 1,039 -------- -------- Net Income $ 1,725 $ 1,519 -------- -------- Earnings per share $ 0.25 $ 0.23 -------- -------- Weighted average number of common shares outstanding 6,938 6,450 ======== ======== <FN> See accompanying notes to consolidated financial statements </FN> 6 </TABLE>
<TABLE> PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) <CAPTION> Additional Common Stock Paid-In Retained Shares Amounts Capital Earnings Total <S> <C> <C> <C> <C> <C> Balance, at January 1, 1996 6,472,500 $ 43 $ 12,821 $ 7,938 $ 20,802 Issuance of common stock 192,645 3 1,483 - 1,486 Net income for the six months ended June 30, 1996 - - - 2,964 2,964 (unaudited) --------- ----- -------- -------- -------- Balance at June 30, 1996 6,665,145 $ 46 $ 14,304 $ 10,902 $ 25,252 (unaudited) ========= ===== ======== ======== ======== <FN> See accompanying notes to consolidated financial statements </FN> </TABLE> 7
<TABLE> PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOW (IN THOUSANDS) (UNAUDITED) <CAPTION> Six months ended June 30, 1996 1995 ---- ---- <S> <C> <C> Cash flows from operating activities Net income $ 2,964 $ 2,446 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 592 430 Deferred income taxes 102 13 Decrease (Increase) in Accounts and notes receivable (1,174) 10 Prepaid expenses (704) (119) Miscellaneous other assets (252) (169) Increase (decrease) in Accounts payable 1,126 (251) Purses due horsemen 128 1,120 Uncashed pari-mutuel tickets (286) (147) Accrued expenses 8 (688) Customers deposits 210 170 Taxes other than income payable (54) 152 Income taxes payable (265) 95 -------- -------- Net cash provided by operating activities 2,395 3,062 -------- -------- Cash flows from investing activities expenditures for property and equipment (2,044) (2,219) -------- -------- Net cash (used) by investing activities (2,044) (2,219) -------- -------- Cash flows from financing activities Proceeds of sale common stock 1,486 - Principal payments on long-term debt and Capital lease obligations (41) (61) -------- -------- Net cash provided by (used) in financing activities 1,445 (61) -------- -------- Net increase in cash 1,796 782 Cash, at beginning of period 7,514 5,502 -------- -------- Cash, at end of period $ 9,310 $ 6,284 ======== ======== <FN> See accompanying notes to consolidated financial statements </FN> 8 </TABLE>
PENN NATIONAL GAMING , INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation The consolidated financial statements include the accounts of Penn National Gaming, Inc. and its wholly-owned subsidiaries, Mountainview Thoroughbred Racing Association, Pennsylvania National Turf Club, Inc., Penn National Speedway, Inc., Sterling Aviation, Inc., Penn National Holding Company, Penn National Gaming of West Virginia, Inc., and PNGI Charles Town Limited Liability Company (collectively, the "Company"). The financial information has been prepared in accordance with the Company's customary accounting practices and has not been audited. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the information presented reflects all adjustments necessary for a fair statement of interim results. All such adjustments are of a normal and recurring nature. The foregoing interim results are not necessarily indicative of the results of operations for the full year ending December 31, 1996. <TABLE> 2. Wagering Information (In Thousands): <CAPTION> Three months ended Six months ended June 30, June 30, 1996 1995 1996 1995 ---- ---- ---- ---- <S> <C> <C> <C> <C> Pari-mutuel wagering in Pennsylvania on Penn National races $ 24,798 $ 27,620 $ 46,105 $ 52,372 -------- -------- -------- -------- Pari-mutuel wagering on simulcasting Import simulcasting from other Pennsylvania racetracks 6,074 8,436 11,449 15,158 Import simulcasting from out of Pennsylvania racetracks 34,546 29,302 70,002 53,648 Export simulcasting to out of Pennsylvania wagering facilities 31,450 17,666 59,788 33,414 -------- -------- -------- -------- 72,070 55,404 141,239 102,220 -------- -------- -------- -------- Total pari-mutuel wagering $ 96,868 $ 83,024 $187,344 $154,592 ======== ======== ======== ======== </TABLE> 9
PENN NATIONAL GAMING , INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. Commitments The Company has a $4,200,000 credit facility with a commercial bank. The facility provides for a working capital line of credit in the amount of $2,500,000 at optional interest rates and a letter of credit facility for $1,700,000. The credit facility is unsecured and contains various covenants which include tangible net worth, debt to tangible net worth and debt coverage ratios. At June 30, 1996, the Company was contingently obligated under the letter of credit facility with face amounts aggregating $1,436,000. The $1,436,000 consists of $1,336,000 relating to the horsemen's account balances and $100,000 for Pennsylvania pari-mutuel taxes. All letters of credit expire December 31, 1996. In February 1996, the Company entered into an agreement to purchase land for its proposed Williamsport OTW facility. The agreement provides for a purchase price of $555,000 and is subject to numerous contingencies including approval from the Pennsylvania State Horse Racing Commission. On May 22, 1996 the Company received Phase I approval from the Pennsylvania State Horse Racing Commission for the Williamsport OTW facility. On February 26, 1996, the Company entered into a joint venture agreement with Bryant Development Company, the holder of an option to purchase the Charles Town Race Track in Jefferson County, West Virginia. The Company will hold an 80% interest in the joint venture with Bryant Development holding the remainder. The joint venture intends to purchase the track from its current owners, subject to approval of a referendum permitting installation of video lottery terminals at the track, for a purchase price which is currently being renegotiated. On March 29, 1996, the Company paid $250,000 to extend the purchase option until December 31, 1996. In March 1996, the Company entered into an agreement to purchase land for its proposed Downingtown OTW facility. The agreement provides for a purchase price of $1,696,000 and is subject to numerous contingencies including approval from the Pennsylvania State Horse Racing Commission. On March 26, 1996, the Company submitted an application to the Pennsylvania State Horse Racing Commission for approval of the Downingtown OTW facility. 4. Supplemental Disclosures of Cash Flow Information Cash paid during the six months ended June 30, 1996 and 1995 for interest was $37,000 and $30,000 respectively. Cash paid during the six months ended June 30, 1996 and 1995 for income taxes was $2,186,000 and $1,616,000 respectively. 10
PENN NATIONAL GAMING , INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Cash received during the six months ended June 30, 1996 for the issuance of 192,645 shares of stock from the exercise of options and warrants was $1,486,000. 5. Subsequent Items On August 7, 1996 the Company entered into an agreement with a contractor to begin construction of the Williamsport OTW facility. The agreement provides for a construction price of $1,648,000. 6. Earnings Per Share On April 17, 1996, the Board of Directors declared a three for two stock split in the form of a dividend payable May 23, 1996, to shareholders of record on May 3, 1996. Accordingly, all shares and per share data has been restated to reflect the split. 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Three months ended June 30, 1996 compared to three months ended June 30, 1995 Total revenue increased by approximately $411,000 or 2.6% from $15.6 million to $16.0 million for the three months ended June 30, 1996. The increase was attributable to an increase in import and export simulcasting revenues offset by a decrease in pari-mutuel revenues on Penn National races. The increase in export simulcasting revenues of $397,000 or 75% from $530,000 to $926,000 resulted from the Company's races being broadcast to additional out-of-state locations. The decrease in pari-mutuel revenues on Penn National races was due to increased import simulcasting revenue from wagering on other race tracks at Penn National facilities. For the quarter, Penn National scheduled and ran 52 live race days. Total operating expenses increased by approximately $71,000 from $13.1 million to $13.2 million for the three months ended June 30, 1996. The increase in operating expenses resulted from an increase in purses, stakes and trophies, pari-mutuel taxes, and simulcast expenses resulting from an increase in revenue from import simulcasting. Income from operations increased by approximately $340,000 or 13.6% from $2.5 million to $2.8 million due to the factors described above. Net income increased by approximately $206,000 or 13.6% from $1,519,000 to $1,725,000 for the three months ended June 30, 1996. Income tax expense increased from $1,039,000 to $1,170,000 due to the increase in income for the period. Six months ended June 30, 1996 compared to six months ended June 30, 1995 Total revenue increased by approximately $2.1 million or 7.5% from $28.5 million to $30.6 million for the six months ended June 30, 1996. The increase was attributable to an increase in import and export simulcasting revenues offset by a decrease in pari-mutuel revenues on Penn National races. The increase in export simulcasting revenues of $774,000 or 77% from $1.0 million to $1.8 million resulted from the Company's races being broadcast to additional out-of-state locations. The decrease in pari-mutuel revenues on Penn National races was due to increased import simulcasting revenue from wagering on other race tracks at Penn National facilities. For the six month period, Penn National was scheduled to run 113 live race days but canceled 11 days in the first quarter due to inclement weather. Total operating expenses increased by approximately $1.3 million from $24.4 million to $25.7 million for the six months ended June 30, 1996. The increase in operating expenses resulted from an increase in purses, stakes and trophies, pari-mutuel taxes, and simulcast expenses resulting from an increase in revenue from import simulcasting and from six months of operating expenses for the York OTW facility in 1996 compared to three months of expenses in 1995. 12
Income from operations increased by approximately $817,000 or 20.1% from $4.1 million to $4.9 million due to the factors described above. Net income increased by approximately $518,000 or 21.2% from $2.4 million to $2.9 million for the six months ended June 30, 1996. Income tax expense increased from $1.7 million to $2.0 million due to the increase 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 and borrowing from banks and related parties. During the six months ended June 30, 1996, the Company's cash position increased by approximately $1.8 million from $7.5 million at December 31, 1995 to $9.3 million as a result of increased cash flow from operations. Net cash provided from operating activities totaled approximately $2.4 million for the six months ended June 30, 1996 of which $3.6 million came from net income and non-cash expenses. Cash flows used in investing activities totaled approximately $2.0 million for capital expenditures. Capital expenditures were primarily for improvements and equipment at the race track and the construction of the Lancaster OTW facility. Cash flows from financing activities totaled approximately $1,486,000 from the exercise of stock options and warrants and the issuance of 192,645 shares of common stock. The Company has a $4,200,000 credit facility with a commercial bank. The facility provides for a working capital line of credit in the amount of $2,500,000 at optional interest rates and a letter of credit facility for $1,700,000. The credit facility is unsecured and contains various covenants which include tangible net worth, debt to tangible net worth and debt coverage ratio. At June 30, 1996, the Company was contingently obligated under the letter of credit facility with face amounts aggregating $1,436,000. The $1,436,000 consists of $1,336,000 relating to the horsemen's account balances and $100,000 for Pennsylvania pari-mutuel taxes. All letters of credit expire December 31, 1996. On February 26, 1996, construction began on the Lancaster OTW facility. The construction costs totaling approximately $2.4 million were funded from the Company's cash reserves. The Lancaster OTW facility opened July 11,1996. On February 26, 1996, the Company entered into a joint venture agreement with Bryant Development Company, the holder of an option to purchase the Charles Town Race Track in Jefferson County, West Virginia. The Company will hold an 80% interest in the joint venture with Bryant Development holding the remainder. The joint venture intends to purchase the track from its current owners, subject to approval of a referendum permitting installation of video lottery terminals at the track, for a purchase price which is currently being renegotiated. On March 29, 1996, the Company paid 13
$250,000 to extend the purchase option until December 31, 1996. The Company intends to fund, if successful, the joint venture operations through additional borrowing and the Company's working capital. On May 13, 1996, the Company entered into a Mortgage Note Receivable with the company it has entered into an agreement for the purchase of land for the Downingtown OTW facility. The note has a principal sum of $400,000 with interest due on the unpaid balance at a rate of 10% per annum. The note matures on the later of the first anniversary date of the note or six months after the termination of the land purchase agreement for the Downingtown OTW facility. On June 4, 1996, the Company entered into a Loan and Security Agreement with Charles Town Races, Inc. The Agreement provides for a working capital line of credit in the amount of $1,250,000. As of June 30, 1996, Charles Town Races, Inc. has borrowed $860,000 of the available credit. The Company believes that the cash on hand, cash generated from operations, and the above credit facility will be sufficient to fund its anticipated future cash requirements. 14
Part II. Other Information 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.52 General contractor agreement dated August 7, 1996, between Pennsylvania National Turf Club, Inc. and Warfel Construction Company. (b) Reports on Form 8-K On June 17, 1996, the Company filed Form 8-K which reflected an agreement entered into on June 4, 1996, between the Company and Charles Town Races Limited Partnership and Charles Town Races, Inc. The Company agreed to lend Charles Town Races $1,250,000. 15
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. By: /s/ Robert S. Ippolito Robert S. Ippolito Chief Financial Officer Secretary/Treasurer Date: August 14, 1996 16
EXHIBIT INDEX Exhibit Nos. Description of Exhibits Page No. 10.52 General contractor agreement dated August 7, 18-28 1996, between Pennsylvania National Turf Club, Inc. And Warfel Construction Company. 17