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 March 31, 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. 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 ____
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed be a court. Yes __ No __ (APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Title Outstanding as of May 13, 1997 Common Stock par value .01 per share 15,111,290 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 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.
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES INDEX PART - FINANCIAL INFORMATION Page Item 1. - Financial Statements Consolidated Balance Sheets - March 31, 1997 (unaudited) and December 31, 1996 4 -5 Consolidated Statements of Income - Three Months Ended March 31, 1997 and 1996 (unaudited) 6 -7 Consolidated Statement of Shareholders' Equity - Three Months Ended March 31, 1997 (unaudited) 8 Consolidated Statements of Cash Flow - Three Months Ended March 31, 1997 and 1996 (unaudited) 9 -10 Notes to Consolidated Financial Statements 11 - 12 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 13 - 14 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8 -K 15
Item 1. Financial Statements <TABLE> PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share and share data) <CAPTION> March 31, December 31, 1997 1996 (Unaudited) <S> <C> <C> Assets Current Assets Cash $13,536 $ 5,634 Accounts receivable 3,048 4,293 Prepaid expenses and other current assets 2,108 1,552 Deferred income taxes 58 90 ------- -------- Total current assets 18,750 11,569 ------- -------- Property, plant and equipment, at cost Land and improvements 17,844 15,728 Buildings and improvements 46,738 30,484 Furniture, fixtures and equipment 11,385 8,937 Transportation equipment 417 366 Leasehold improvements 6,685 6,680 Leased equipment under capitalized lease 824 1,626 Construction in progress 1,310 2,926 ------- -------- 85,203 66,747 Less accumulated depreciation and amortization 8,673 8,029 ------- -------- Net property and equipment 76,530 58,718 ------- -------- Other assets Excess of cost over fair market value of net assets acquired (net of accumulated amortization of $974 and $811, respectively) 23,662 21,885 Prepaid acquisition costs - 1,764 Deferred financing costs 1,902 2,416 Miscellaneous 459 371 -------- -------- Total other assets 26,023 26,436 -------- -------- $121,303 $ 96,723 ======== ======== </TABLE> See accompanying notes to consolidated financial statements 4
<TABLE> PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share and share data) <CAPTION> March 31, December 31, 1997 1996 (Unaudited) <S> <C> <C> Liabilities and Shareholders' Equity Current Liabilities Current maturities of long-term debt and capital lease obligations $ 3,108 $ 1,563 Accounts payable 5,906 5,066 Purses due horsemen 2,363 1,421 Uncashed pari-mutuel tickets 1,598 1,336 Accrued expenses 1,640 1,880 Customer deposits 559 420 Taxes, other than income taxes 685 392 -------- ------- Total current liabilities 15,859 12,078 -------- ------- Long-term liabilities Long-term debt and capital lease obligations, net of current maturities 41,639 45,954 Deferred income taxes 10,836 10,810 Total long-term liabilities 52,475 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; 15,111,290 and 13,355,290 issued and outstanding 151 134 Additional paid in capital 38,069 14,299 Retained earnings 14,749 13,448 -------- ------- Total shareholders' equity 52,969 27,881 -------- ------- $121,303 $96,723 ======== ======= </TABLE> See accompanying notes to consolidated financial statements 5
<TABLE> PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited) <CAPTION> Three Months Ended March 31, 1997 1996 -------------------------- <S> <C> <C> Revenues Pari-mutuel revenues Penn National races $ 4,369 $ 4,482 Import simulcasting 14,797 7,593 Export simulcasting 1,123 850 Admissions, programs and other racing revenues 1,258 869 Concession revenues 1,273 766 ------- -------- Total revenues 22,820 14,560 ------- -------- Operating expenses Purses, stakes and trophies 4,202 2,925 Direct salaries, payroll taxes and employee benefits 3,246 1,909 Simulcast expenses 2,836 2,288 Pari-mutuel taxes 1,957 1,267 Other direct meeting expenses 3,378 2,225 Off-track wagering concessions expenses 966 508 Other operating expenses 2,559 1,399 ------- -------- Total operating expenses 19,144 12,521 ------- -------- Income from operations 3,676 2,039 ------- -------- Other income (expenses) Interest (expense) (900) (12) Interest income 86 66 ------ -------- Total other income (expenses) (814) 54 ------- -------- Income before income taxes and extraordinary item 2,862 2,093 Taxes on income 1,178 854 ------- -------- Income before extraordinary item 1,684 1,239 </TABLE> 6
<TABLE> PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited) <S> <C> <C> Extraordinary item Loss on early extinguishment of debt, net of income taxes of $264 383 - ------- -------- Net Income $ 1,301 $ 1,239 ------- -------- Earnings Per Share: Income before extraordinary item $ 0.11 $ 0.09 Extraordinary item ( 0.02) - ------- -------- Earnings Per Share: $ 0.09 $ 0.09 ======= ======== Weighted average common shares outstanding 14,912 13,302 ====== ====== </TABLE> See accompanying notes to consolidated financial statements 7
<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 Earning Total <S> <C> <C> <C> <C> <C> Balance, at January 1, 1997 13,355,290 $ 134 $14,299 $13,448 $27,881 Issuance of common stock 1,756,000 17 23,197 - 23,214 Tax benefit related to stock options exercised - - 573 - 573 Net income for the three months ended March 31, 1997 - - - 1,301 1,301 ---------- ------ ------- ------ ------- Balance at March 31, 1997 15,111,290 $ 151 $38,069 $14,749 $52,969 ========== ====== ======= ======= ======= </TABLE> See accompanying notes to consolidated financial statements 8
<TABLE> PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (In thousands) (Unaudited) <CAPTION> Three Months Ended March 31, 1997 1996 ----------------------- <S> <C> <C> Cash flows from operating activities Net income $ 1,301 $ 1,239 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 841 299 Extraordinary item, loss on early extingushiment of debt, before income tax benefit 647 - Deferred income taxes 26 22 Decrease (Increase) in Accounts receivable 1,245 188 Prepaid expenses and other current assets (556) (552) Deferred income assets 32 (186) Miscellaneous other assets (88) - Increase (decrease) in Accounts payable 840 1,244 Purses due horsemen 942 (100) Uncashed pari-mutuel tickets 262 153 Accrued expenses (240) 31 Customers deposits 139 93 Taxes other than income taxes 293 - Income taxes 740 - ------- ------- Net cash provided by operating activities 5,684 3,171 ------- ------- Cash flows from investing activities Expenditures for property and equipment (2,456) (504) Acquisition of business, (Primarily property and equipment) (16,000) - Increase in prepaid acquisition cost (176) - ------- ------- Net cash (used in) investing activities (18,632) (504) ------- ------- </TABLE> 9
<TABLE> PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (In thousands) (Unaudited) <S> <C> <C> Cash flows from financing activities Proceeds of sale common stock 23,214 426 Tax benefit related to stock options exercised 573 - Proceeds of long term debt 16,500 - Principal payments on long-term debt and capital lease obligations (19,270) (15) Increase in unamortized financing cost (167) - ------- ------- Net cash provided by financing activities 20,850 411 ------- ------- Net increase in cash 7,902 3,078 Cash, at beginning of period 5,634 7,514 ------- ------- Cash, at end of period $13,536 $10,592 ======= ======= </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 March 31, 1997 and the results of its operations for the three month periods ended March 31, 1997 and 1996. The results of operations experienced for the three month period ended March 31, 1997 are not necessarily indicative of the results to be experienced for the fiscal year ended December 31, 1997. 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 include 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. <TABLE> 2. Wagering Information <CAPTION> Three months ended March 31, 1997 1996 (in thousands) <S> <C> <C> Pari-mutuel wagering in Pennsylvania on Company Races $ 22,490 $21,308 -------- ------- Pari-mutuel wagering on simulcasting Import simulcasting from other racetracks 75,436 39,070 Export simulcasting to out of Pennsylvania wagering facilities 37,431 28,338 -------- ------- 112,867 67,408 -------- ------- Total pari-mutuel wagering $135,357 $88,716 ======== ======= </TABLE> 11
PENN NATIONAL GAMING , INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. Commitments At March 31, 1997, the Company was contingently obligated under letters of credit with face amounts aggregating $1,634,000. The $1,634,000 consisted of $1,534,000 relating to the horsemen's account balances and $100,000 for Pennsylvania pari-mutuel taxes. 4. Supplemental Disclosures of Cash Flow Information Cash paid during the three months ended March 31, 1997 and 1996 for interest was $1,034,000 and $12,000 respectively. Cash paid during the three months ended March 31, 1997 and 1996 for income taxes was $398,000 and $92,000 respectively. For the three months ended March 31, 1997, the Company reclassified approximately $1.9 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 proposed 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 April 1, 1997, the Company submitted its application for such approval). If approved by the Racing Commission, the Company expects to have the facility constructed and operational in the fourth quarter of 1997. 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Results of Operation Three months ended March 31, 1997 compared to three months ended March 31, 1996 Total revenues increased by approximately $8.3 million or 56.7% from $14.6 million to $22.8 million for the three months ended March 31, 1997 as compared to the three months ended March 31, 1996. $7.0 million of this increase was attributable to the addition of the Pocono Downs operations, which were acquired in the fourth quarter of 1996. In addition, revenues at the Penn National facilities, exclusive of the Pocono Downs operations, increased by $1.3 million. The increase was primarily due to an increase of $2.2 million in revenue at the Company's new OTW facilities in Lancaster and Williamsport offset by a decrease of $900,000 at the Company's thoroughbred track and other OTW facilities. Management believes that the decrease at its other OTW facilities, exclusive of the Pocono Downs operations, was primarily due to competition from the opening of a competitor's OTW facility and of the Company's Lancaster OTW facility. Total operating expenses increased by approximately $6.6 million or 52.9% from $12.5 million to $19.1 million for the three months ended March 31, 1997 as compared to the three months ended March 31, 1996. Pocono Downs accounted for $5.9 million of this increase. Penn National Race Course operations accounted for $745,000 of the total increase. 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 the additional operating expenses of the Lancaster and Williamsport OTW facilities. Income from operations increased by approximately $1.7 million or 80.3% from $2.0 million to $3.7 million due to the factors described above. Other expenses for the 1997 quarter consisted of approximately $900,000 in interest expense (due to the financing of the Pocono Downs acquisition) compared to $12,000 in interest expense for the 1996 quarter. Income tax expense increased from $854,000 to $1,178,000 due to the increase in income for the period. The extraordinary item consisted of a loss on the early extinguishment of debt in the amount of $383,000 net of income taxes. The Company received approximately $23 million as proceeds from the February 1997 equity offering and used approximately $19 million to reduce long-term debt. This resulted in a write- off of $647,000 for fees associated with the retired debt. 13
Net Income increased by approximately $62,000 or 5.0% from $1,239,000 to $1,301,000 for the three months ended March 31, 1997 as compared to the three months ended March 31, 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 and borrowing from banks. During the three months ended March 31, 1997, the Company's cash position increased by approximately $7.9 million from $5.6 million at December 31, 1996 to $13.5 million as a result of increased cash flow from operations, proceeds from the sale of common stock, and net additional long-term borrowings. Net cash provided from operating activities totaled approximately $5.7 million for the three months ended March 31, 1997 of which $2.8 million came from net income and non-cash expenses and $1.3 million came from the repayment of the Charles Town Races loan receivable in January 1997. The balance of $1.6 million was generated primarily by other changes in working capital . Cash flows used in investing activities totaled approximately $18.6 million. Acquisition costs and construction in progress totaled $17.3 million for the Charles Town Race facility that was purchased on January 15, 1997. Capital expenditures totaled $700,000 for the completion of the Williamsport OTW facility. Cash flows from financing activities totaled approximately $23.2 million from the secondary equity offering in February 1997 and the exercise of options which resulted in the issuance of 1,756,000 shares of common stock. The Company also received $16.5 million in proceeds from long-term debt to use as payment for the Charles Town Acquisition on January 15, 1997. The Company used $19 million of the proceeds from the offering to repay a portion of its bank debt. The remaining amount of the proceeds approximately $4 million will be used for the refurbishment of the Charles Town facility. During the balance of 1997, the Company anticipates capital expenditures of approximately $4.0 million, exclusive of the cost of refurbishing the Charles Town Facility ( described below), to construct two additional OTWs, and approximately $1.0 million for miscellaneous capital expenditures and improvements. Under the Company 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) 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 $16.0 million on the refurbishment of the Charles Town Facility (excluding the cost of gaming machines), of which $1.3 million had already been expended at March 31, 1997. 14
The Company currently estimates that the net proceeds of the equity offering, together with 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. 15
Part II. Other Information 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.61 General Contractor Agreement dated March 26, 1997, between PGNI Charles Town Gaming Limited Liability Company and Myers Building Systems, Inc. (b) Reports on Form 8-K The Company filed the following Current Reports on Form 8-K during the first quarter of 1997: On January 21, 1997, the Company filed a Current Report on Form 8-K which reflected the completion, on January 15, 1997, of the purchase of the Charles Town Race Track. On February 6, 1997, the Company filed an amendment to its Current Report on Form 8-K dated December 12, 1996 to include required financial statements with respect to Pocono Downs. On March 25, 1997, the Company filed an amendment to its Current Report on Form 8-K dated January 21, 1997 to include required financial statements with respect to Charles Town Race Track. 16
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 Date May 15, 1997 Robert S. Ippolito Chief Financial Officer Secretary/Treasurer 17
EXHIBIT INDEX Exhibit Nos. Description of Exhibits Page No. 10.61 General Contractor Agreement dated March 26, 1997, between 19 -26 PGNI Charles Town Gaming Limited Liability Company and Myers Building Systems, Inc. 18