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, 2000 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission file number: 0-24206 Penn National Gaming, Inc. (Exact name of Registrant as specified in its charter) Pennsylvania 23-2234473 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Penn National Gaming, Inc. 825 Berkshire Blvd., Suite 200 Wyomissing, PA 19610 (Address of principal executive offices) (Zip code) 610-373-2400 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____
(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 10, 2000 Common Stock Par value $.01 per share 14,925,975 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 TERMINOLOGY. 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 ("CAUTIOUNARY 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. 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> <S> <C> PART I - FINANCIAL INFORMATION PAGE Item 1 - Financial Statements Consolidated Balance Sheets - March 31, 2000 (unaudited) and December 31, 1999 4-5 Consolidated Statements of Income - Three Months Ended March 31, 2000 and 1999 (unaudited) 6 Consolidated Statements of Shareholders' Equity - Three Months Ended March 31, 2000 (unaudited) 7 Consolidated Statements of Cash Flow - Three Months Ended March 31, 2000 and 1999 (unaudited) 8 Notes to Consolidated Financial Statements 9-15 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 15-18 Item 3 - Changes in Information About Market Risk 19 - ------------------------------------------------- PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 20 - ----------------------------------------- Signature Page 21 </TABLE> 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) <TABLE> <CAPTION> March 31, December 31, 2000 1999 (Unaudited) ---------------------------------------- <S> <C> <C> Assets Current assets Cash and cash equivalents $ 11,430 $ 9,434 Accounts receivable 4,410 4,779 Prepaid expenses and other current assets 2,192 1,793 Deferred income taxes 669 888 Prepaid income taxes - 1,088 ---------------------------------------- Total current assets 18,701 17,982 ---------------------------------------- Property, plant and equipment, at cost Land and improvements 27,878 27,988 Building and improvements 72,114 70,870 Furniture, fixtures and equipment 37,870 36,195 Transportation equipment 887 860 Leasehold improvements 9,806 9,802 Construction in progress 991 1,980 ---------------------------------------- 149,546 147,695 Less accumulated depreciation and amortization 22,479 20,824 ---------------------------------------- Net property, plant and equipment 127,067 126,871 ---------------------------------------- Other assets Investment in and advances to unconsolidated affiliate 13,449 12,862 Investment in minority interest purchase 5,845 - Cash in escrow 5,000 5,000 Excess of cost over fair market value of net assets acquired (net of accumulated amortization of $2,762 and $2,611, respectively) 21,430 21,582 Deferred financing costs 4,825 5,014 Miscellaneous 1,262 1,289 ---------------------------------------- Total other assets 51,811 45,747 ---------------------------------------- $ 197,579 $ 190,600 ---------------------------------------- </TABLE> 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) <TABLE> <CAPTION> March 31, December 31, 2000 1999 (Unaudited) -------------------------------------- <S> <C> <C> Liabilities and Shareholders' Equity Current liabilities Current maturities of long-term debt and capital lease obligations $ 5,160 $ 5,160 Accounts payable 5,346 10,210 Purses due horsemen 3,601 2,114 Uncashed pari-mutuel tickets 1,641 1,351 Accrued expenses 1,485 2,694 Accrued interest 2,302 433 Accrued salaries and wages 930 1,098 Customer deposits 946 800 Taxes, other than income taxes 2,189 1,491 Income taxes 845 - -------------------------------------- Total current liabilities 24,445 25,351 -------------------------------------- Long-term liabilities Long-term debt and capital lease obligations, net of current maturities 90,292 86,053 Deferred income taxes 12,881 12,924 -------------------------------------- Total long-term liabilities 103,173 98,977 -------------------------------------- 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 15,332,675 and 15,314,175, respectively 153 153 Treasury stock, 424,700 shares at cost (2,379) (2,379) Additional paid in capital 38,597 38,527 Retained earnings 33,590 29,971 -------------------------------------- Total shareholders' equity 69,961 66,272 -------------------------------------- $ 197,579 $ 190,600 -------------------------------------- </TABLE> 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) <TABLE> Three Months Ending March 31, 2000 1999 --------------------------------- <S> <C> <C> Revenue Pari-mutuel revenues Live races $ 4,065 $ 2,414 Import simulcasting 19,816 15,301 Export simulcasting 1,594 511 Gaming revenue 22,166 11,297 Admissions, programs and other racing revenue 1,656 1,120 Concessions revenues 3,378 2,146 Earnings from unconsolidated affiliates 587 - --------------------------------- Total revenues 53,262 32,789 --------------------------------- Operating expenses Purses, stakes, and trophies 9,571 5,711 Direct salaries, payroll taxes and employee benefits 5,372 3,715 Simulcast expenses 3,501 2,387 Pari-mutuel taxes 2,322 1,669 Lottery taxes and administration 8,748 4,489 Other direct meeting expenses 6,315 4,592 Concessions expenses 2,974 2,022 Other operating expenses 4,437 3,074 Horsemen's action expenses - 1,250 Depreciation and amortization 2,176 2,015 --------------------------------- Total operating expenses 45,416 30,924 --------------------------------- Income from operations 7,846 1,865 --------------------------------- Other income (expense) Interest (expense) (2,382) (2,125) Interest income 450 209 Other (154) - --------------------------------- Total other (expense) (2,086) (1,916) --------------------------------- Income (loss) before income taxes 5,760 (51) Taxes (benefit) on income 2,141 (73) --------------------------------- Net income $ 3,619 $ 22 ================================= Per share data Basic $ .24 $ .00 Diluted $ .24 $ .00 Weighted average shares outstanding Basic 14,898 14,762 Diluted 15,212 15,079 </TABLE> 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) <TABLE> <CAPTION> Additional Common Stock Treasury Paid-In Retained Shares Amount Stock Capital Earnings Total <S> <C> <C> <C> <C> <C> <C> Balance, January 1, 2000 15,314,175 $ 153 $ (2,379) $ 38,527 $ 29,971 $ 66,272 Issuance of common stock 18,500 - - 70 - 70 Net income for the three months ended March 31, 2000 - - - - 3,619 3,619 - ------------------------------------ ------------ ------------- ------------- ------------- ------------- ----------- Balance, March 31, 2000 15,332,675 $ 153 $ (2,379) $ 38,597 $ 33,590 $ 69,961 ==================================== ============ ============= ============= ============= ============= =========== </TABLE> See accompanying notes to consolidated financial statements. 7
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (In thousands) (Unaudited) <TABLE> <CAPTION> Three Months Ended March 31, 2000 1999 ---------------------------------- <S> <C> <C> Cash flows from operating activities Net income $ 3,619 $ 22 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 2,176 2,015 Income from unconsolidated affiliates (587) - Deferred income taxes 176 232 Decrease (increase) in Accounts receivable 369 533 Prepaid expenses (498) (149) Prepaid income taxes 1,088 (482) Miscellaneous other assets 25 (9) Increase (decrease) in Accounts payable (4,865) (562) Purses due horsemen 1,487 871 Uncashed pari-mutuel tickets 290 152 Accrued expenses (1,209) 639 Accrued interest 1,869 1,975 Accrued salaries & wages (168) 40 Customer deposit 146 2 Taxes, other than income payable 698 (152) Income taxes 845 - ---------------------------------- Net cash provided by operating activities 5,461 5,127 ---------------------------------- Cash flows from investing activities Expenditures for property, plant and equipment (1,851) (1,458) Note receivable - (11,250) Minority interest purchase (5,845) - ---------------------------------- Net cash (used) in investing activities (7,696) (12,708) ---------------------------------- Cash flows from financing activities Proceeds from sale of common stock 70 29 Proceeds from long-term debt 4,247 11,500 Principal payments on long-term debt and capital lease (8) (17) obligations Increase in unamortized deferred financing costs (78) (579) ---------------------------------- Net cash provided by financing activities 4,231 10,933 ---------------------------------- Net increase in cash and cash equivalents 1,996 3,352 Cash and cash equivalents, at beginning of period 9,434 6,826 ---------------------------------- Cash and cash equivalents, at end of period $ 11,430 $ 10,178 ================================== See accompanying notes to consolidated financial statements </TABLE> 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, 2000 and the results of its operations for the three month periods ended March 31, 2000 and 1999. The results of operations experienced for the three month period ended March 31, 2000 are not necessarily indicative of the results to be experienced for the fiscal year ended December 31, 2000. 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, 1999 annual financial statements. 2. Wagering Information (in thousands) <TABLE> <CAPTION> Three months ended March 31, 2000 Penn Pocono Charles National Downs Town Total <S> <C> <C> <C> <C> Pari-mutuel wagering in-state on company live races $ 13,345 $ - $ 5,770 $ 19,115 ---------------------------------------------------------------- Pari-mutuel wagering on simulcasting: Import simulcasting from other racetracks 49,710 32,672 12,598 94,980 Export simulcasting to out of State wagering facilities 38,190 - 14,693 52,883 ---------------------------------------------------------------- 87,900 32,672 27,291 147,863 ---------------------------------------------------------------- Total pari-mutuel wagering $ 101,245 $32,672 $ 33,061 $ 166,978 ================================================================ </TABLE> 9
<TABLE> <CAPTION> Three months ended March 31, 1999 Penn Pocono Charles National Downs Town Total <S> <C> <C> <C> <C> 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 State 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 ================================================================ </TABLE> 3. Commitments At March 31, 2000, the Company was contingently obligated under letters of credit with face amounts aggregating $1,970,000. These amounts consisted of $1,727,000 relating to horsemen's account balances, $104,000 for Pennsylvania pari-mutuel taxes and $139,000 for other items. 4. Supplemental Disclosures of Cash Flow Information Cash paid during the three months ended March 31, 2000 and 1999 for interest was $422,000 and $67,000, respectively. Cash paid during the three months ended March 31, 2000 and 1999 for income taxes was $29,800 and $199,000, respectively. 10
5. Subsidiary Guarantors Summarized financial information for the three month period ended March 31, 2000 and 1999 for Penn National Gaming, Inc., ("Parent"), the Subsidiary Guarantors and Subsidiary Nonguarantors is as follows: <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------- Subsidiary Parent Subsidiary Non- Elimin- Consoli- Company Guarantors Guarantors ations dated - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> As of March 31, 2000 Consolidated Balance Sheet (In Thousands) Current assets $ 3,316 $ 8,283 $ 8,125 $ (1,023) $ 18,701 Net property, plant and equipment 822 79,226 47,019 - 127,067 Other assets 119,026 172,364 7,609 (247,188) 51,811 - ----------------------------------------------------------------------------------------------------------------- Total $ 123,164 $ 259,873 $ 62,753 $ (248,211) $ 197,579 - ----------------------------------------------------------------------------------------------------------------- Current liabilities $ 2,358 $ 26,491 $ 6,985 $ (11,389) $ 24,445 Long-term liabilities 81,995 96,180 53,449 (128,451) 103,173 Shareholders' equity 38,811 137,202 2,319 (108,371) 69,961 - ----------------------------------------------------------------------------------------------------------------- Total $ 123,164 $ 259,873 $ 62,753 $ (248,211) $ 197,579 - ----------------------------------------------------------------------------------------------------------------- Three months ended March 31, 2000 Consolidated Statement of Income (In Thousands) Total revenues $ 6 $ 26,890 $ 28,718 $ (2,352) $ 53,262 Total operating expenses (1,469) 24,855 24,382 (2,352) 45,416 - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Income from operations 1,475 2,035 4,336 - 7,846 Other income(expenses) (1,181) 411 (1,162) (154) (2,086) - ----------------------------------------------------------------------------------------------------------------- Income before income taxes 294 2,446 3,174 (154) 5,760 Taxes on income 126 2,067 - (52) 2,141 - ----------------------------------------------------------------------------------------------------------------- Net income $ 168 $ 379 $ 3,174 $ (102) $ 3,619 - ----------------------------------------------------------------------------------------------------------------- Three months ended March 31, 2000 Consolidated Statement of Cash Flow (In Thousands) Net cash provided by (used in) operating activities $ (3,780) $ (4,711) $ (3,893) $ 17,845 $ 5,461 Net cash provided by (used in) investing activities 2,841 2,606 (1,298) (11,845) (7,696) Net cash provided by (used in) financing activities 320 3,920 5,991 (6,000) 4,231 - ----------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (619) 1,815 800 - 1,996 Cash and cash equivalents at January 1, 2000 2,544 2,538 4,352 - 9,434 - ----------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at March 31, 2000 $ 1,925 $ 4,353 $ 5,152 $ - $ 11,430 - ----------------------------------------------------------------------------------------------------------------- </TABLE> 11
<TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------- Subsidiary Parent Subsidiary Non- Elimin- Consoli- Company Guarantors Guarantors ations dated - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> 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 $ 8,520 $ 14,165 $ 7,886 $ (10,410) $ 20,161 Long-term liabilities 87,735 78,313 47,559 (117,339) 96,268 Shareholders' equity (deficiency) 37,621 130,682 (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 - ----------------------------------------------------------------------------------------------------------------- </TABLE> 12
6. Mississippi Agreement On December 10, 1999, the Company entered into two definitive agreements to purchase all of the assets of the Casino Magic hotel, casino, golf resort, recreational vehicle (RV) park and marina in Bay St. Louis, Mississippi and the Boomtown Biloxi casino in Biloxi, Mississippi, from Pinnacle Entertainment, Inc. formerly Hollywood Park, Inc. (NYSE:PNK) for $195 million. These agreements are contingent upon each other. In addition to acquiring all of the operating assets and related operations of the Casino Magic Bay St. Louis and Boomtown Biloxi properties (the "Mississippi Acquisitions"), the Company will enter into a licensing agreement to use Boomtown and Casino Magic names and marks at the properties being acquired. The transaction is subject to certain closing conditions including the approval of the Mississippi Gaming Commission, financing and expiration of the applicable Hart-Scott-Rodino waiting period. As part of the agreement, the Company paid a deposit of $5 million to an escrow account, which is refundable if certain conditions are not met. In connection with financing the Mississippi acquisition, the Company will explore a number of financing alternatives, which may include repaying or redeeming its existing debt. The Company received approval for a gaming license from the Mississippi Gaming Commission on April 20, 2000. 7. New Jersey Joint Venture On January 28, 1999, pursuant to a First Amendment to an Asset Purchase Agreement by and among Greenwood New Jersey, Inc. ("Greenwood"), International Thoroughbred Breeders Inc., Garden State Race Track Inc., Freehold Racing Association, Atlantic City Harness, Inc. and Circa 1850, Inc., the original parties to an Asset Purchase Agreement entered into as of July 2, 1998 and the Company (the "Agreement"), and pursuant to which the Company entered into a joint venture ("Joint Venture"), the Company, along with its Joint Venture partner, Greenwood, agreed to purchase certain assets of the Garden State Race Track and Freehold Raceway, both located in New Jersey (the "Acquisition"). The purchase price for the Acquisition was approximately $46 million (subject to reduction of certain disputed items, for which amounts have been placed in escrow). The purchase price consisted of $23 million in cash and $23 million pursuant to two deferred purchase price promissory notes in the amount of $22 million and $1 million each. On July 29, 1999, after receiving the necessary consents from the holders of its 10.625% Senior Notes due 2004, Series B, the Company completed its investment in the Joint Venture, pursuant to which Pennwood, Inc. was formed with Greenwood New Jersey, Inc. (a wholly-owned subsidiary of Greenwood Racing, Inc. the owner of Philadelphia Park Race Track). Pursuant to the Joint Venture Agreement, the Company agreed to guarantee severally: (i) up to 50% of the obligation of the Joint Venture under its Put Option Agreement ($17.5 million) with Credit Suisse First Boston Mortgage Capital LLC ("CSFB"); (ii) up to 50% of the Joint Venture obligation for the seven year lease at Garden State Park and; (iii) up to 50% of the Joint Venture obligation to International Thoroughbred Breeders, Inc. for the contingent purchase price notes ($10.0 million) relating to the operation subject to passage by the New Jersey legislature, by the Joint Venture of OTWs and telephone wagering accounts in New Jersey. In conjunction with the closing, the Company entered into a Debt Service Maintenance Agreement with Commerce Bank, N.A. for the funding of a $23.0 million credit facility to the Joint Venture. The Joint Venture Agreement provides for a limited obligation of the Company of $11.5 million subject to limitations provided for in the Company's 10.625% Senior Notes Indenture. The Company's investment in the Joint Venture is accounted for under the equity method, original investments are recorded at cost and adjusted by the Company's share of income or losses of the Joint Venture. The income for the three months ended March 31, 2000 of the Joint Venture is included in earnings of unconsolidated affiliates in the accompanying Consolidated Statements of Income for the three months ended March 31, 2000. 13
Summarized balance sheet information for the Joint Venture as of March 31, 2000 is as follows (in thousands): Current assets $ 9,604 Property, plant and equipment, net 30,473 Other 17,983 --------------------- Total assets $ 58,060 ===================== Current liabilities $ 8,070 Long-term liabilities 46,221 Members' equity 3,769 --------------------- Total liabilities and members' equity $ 58,060 ===================== Summarized results of operations of the unconsolidated Joint Venture for the three months ended March 31, 2000 is as follows (in thousands): Revenues $ 14,679 Operating expenses 11,813 ------------------- EBITDA* 2,866 ------------------- Net Income $ 1,174 ------------------- * Earnings before interest, taxes, depreciation and amortization. 8. Trackpower, Inc. and eBet Limited In July 1999, the Company entered into an agreement with Trackpower, Inc. (OTC BB: TPWR) ("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 Company pays Trackpower a commission on all new revenues earned from their subscriber base. As an additional incentive to enter into the contract, the Company received warrants to purchase 5,000,000 shares of common stock of Trackpower at prices ranging from $1.58 per share to $2.58 per share. The warrants vest at 20% per year and expire on April 30, 2004. The fair market value of the warrants issued will be amortized over the vesting period or one year from the anniversary date of the agreement. As a result of the transition of operations in 1999, the amount to be amortized as a reduction of commissions earned in 1999 by Trackpower was not material. In March 2000, the Company entered into a letter of intent with Trackpower and eBet Limited ("eBet") which, if a definitive agreement is executed, will replace and restate the above described agreement between the Company and Trackpower. Under the terms of the letter of intent, the Company and eBet will contribute various assets, equipment, management agreements relating to our telephone account wagering systems and business operations to Trackpower. Under the proposed agreement, the Company will continue to receive the same level of income as in 1999, the Company and eBet will each receive 18,000,000 shares of Trackpower common stock as well as warrants to purchase additional shares exercisable at $1.00 per share. Upon completion of the proposed transaction the Company and eBet will each own 26.5% of Trackpower not including future exercise of options or warrants. The proposed agreement is subject to due diligence, regulatory and other approvals. 14
9. Minority Interest Purchase On March 15, 2000, the Company purchased from the BDC Group ("BDC"), its joint venture partner in West Virginia, BDC's 11% interest in PNGI Charles Town Gaming Limited Liability Company, which owns and operates Charles Town Races for $6.0 million in cash. The investment is recorded net of the minority interest tax liability of $155,000 or $5.845 million. The Company is in the process of determining the allocation of the purchase price to the various property, plant and equipment accounts. The allocation will be based on the results of an appraisal that is to be completed in June. As a result of the purchase, Charles Town Races is now a 100%-owned subsidiary of the Company. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The percentage of the Company's revenue derived from gaming operations has increased over the last few years as a result of the gaming operations at the Charles Town Entertainment Complex. The Company expects that the Mississippi Acquisition and the continued expansion of the Charles Town Entertainment Complex will cause this trend to continue. In the future the Company expects to alter the presentation of certain of its financial information to better capture this trend. An example of a type of presentation that the Company is likely to use is presented below. The results of operations for the three months ended March 31, 1999 and 2000 by property level are summarized as follows: <TABLE> <CAPTION> Charles Town Racing Penn National and Pocono Downs and OTWs and Gaming OTWs (in thousands) 1999 2000 1999 2000 1999 2000 ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> Revenues Gaming $11,399 $ 22,372 $ - $ - $ - $ - Racing 3,964 4,628 7,795 15,101 7,623 7,501 Other 1,002 1,718 635 1,171 509 490 ------------------------- ------------------------ ------------------------- Total revenues 16,365 28,718 8,430 16,272 8,132 7,991 Expenses Gaming 8,593 16,416 - - - - Racing 4,060 4,673 6,497 11,191 4,941 5,323 Other* 1,699 2,796 1,825 2,317 964 1,078 ------------------------- ------------------------ ------------------------- Total expenses 14,352 23,885 8,322 13,508 5,905 6,401 EBITDA Gaming 2,806 5,956 - - - - Racing (96) (45) 1,298 3,910 2,682 2,178 Other (697) (1,078) (1,190) (1,146) (455) (588) ------------------------- ------------------------ ------------------------- Total EBITDA $ 2,013 $ 4,833 $ 108 $ 2,764 $ 2,227 $ 1,590 ========================= ======================== ========================= </TABLE> * Other expenses include property level general and administrative expenses and excludes corporate overhead and non-recurring expenses. 15
Three Months Ended March 31, 2000 Compared To Three Months Ended March 31, 1999 Revenues for the three months ended March 31, 2000 increased by approximately $20.5 million or 62.4% to $53.3 million from $32.8 million for the three months ended March 31, 1999. The increase in revenues is attributed to Penn National Race Course running 48 live race days in the year 2000 compared to 18 live race days during a Horsemen action in the first quarter in 1999, the addition of 663 slot and video lottery machines at Charles Town and simulcast of race broadcasts from Charles Town in 2000. Operating expenses for the three months ended March 31, 2000 increased by approximately $14.5 million or 46.8% to $45.4 million from $30.9 million for the three months ended March 31, 1999. Included in operating expenses were non-recurring expenses for the three months ended March 31, 1999 for the Horsemen's action at Penn National Race Course ($1.3 million). Income from operations increased by $6.0 million to $7.8 million for the three months ended March 31, 2000 from $1.8 million for the three months ended March 31, 1999. Other expenses for the three months ended March 31, 2000 and 1999 consisted of approximately $2.1 million and $2.0 million, respectively, of net interest primarily due to the 10.625% Senior Notes, the Bank of America term loan and the revolving Credit Facility with First Union National Bank. Taxes on income increased by $2.2 million to $2.1 million for the three months ended March 31, 2000 from a credit of $.1 million for the three months ended March 31, 1999. Net income increased by $3.6 million to $3.6 million for the three months ended March 31, 2000 from $22,000 for the three months ended March 31, 1999 due to the factors described above. Charles Town Entertainment Complex Revenues increased at Charles Town by approximately $12.3 million or 75.5% to $28.7 million in 2000 from $16.4 million in 1999. Gaming revenue increased by $11.0 million or 96.2% to $22.4 million in 2000 from $11.4 million in 1999 due to the addition of 136 new video lottery machines and 565 new reel spinning, coin-out slot machines since the first quarter of last year. The average number of machines in play increased to 1,464 in 2000 from 837 in 1999 and the average win per machine increased to $169 in 2000 from $150 in 1999. Racing revenue increased by $.7 million or 16.7% to $4.6 million in 2000 from $3.9 million in 1999. The live meet consisted of 45 race days in 2000 compared to 39 race days in 1999 and a change in the schedule from a Wednesday afternoon race program to a Thursday evening race program to accommodate export simulcasting. Charles Town began exporting its live race program to tracks across the country on June 5, 1999 and generated export simulcasting revenues of $.5 million for the quarter. Concession revenues increased by approximately $.7 million or 71.4% to $1.7 million in 2000 from $1.0 million in 1999 due to increased attendance for gaming and racing and the expansion of the concession areas, dining room and buffet area. Operating expenses increased by $9.5 million or 66.4 % to $23.9 million in 2000 from $14.4 million in 1999. The increase was due to an increase in direct costs associated with additional wagering on horse racing and gaming machine play, the addition of gaming machines and floor space (new temporary facility for gaming machines), export simulcast expenses and expanded concession and dining capability and capacity. Penn National Race Course and OTW Facilities (Penn National Race Course) Penn National Race Course had an increase in revenue of approximately $7.9 million or 93.0% to $16.3 million in 2000 from $8.4 million in 1999. The increase in revenues is attributed to Penn National Race Course running 48 live race days in 2000 compared to 18 live race days during a Horsemen action in the first quarter that resulted in the closure of the facilities from February 16 to March 24, 1999. Operating expenses increased by approximately $5.2 million or 62.3% to $13.5 million in 2000 from $8.3 million in 1999 as a result of the increased race days. Included in the 1999 expenses is $1.3 million for the Horsemen's action. 16
Pocono Downs and OTW Facilities (Pocono Downs) Revenues at Pocono Downs decreased by $.1 million or 1.7% to $8.0 million in 2000 from $8.1 million in 1999. Revenue decreased at Allentown OTW ($.3 million) and Hazleton OTW ($.1 million) due to loss of Penn National Race Course customers wagering at Pocono Downs sites during the 1999 action. The revenue decrease was partially offset by revenue increases at Erie OTW, Carbondale OTW and the Pocono Downs racetrack. Expenses increased by approximately $.5 million or 8.4% to $6.4 million in 2000 from $5.9 million in 1999. New Jersey Joint Venture On July 29, 1999, after receiving the necessary approvals from the New Jersey Racing Commission and the necessary consents from the holders of its 10.625% Senior Notes due 2004, Series B, the Company completed its investment in the Joint Venture. The Joint Venture operates Freehold Raceway and Garden State Race Track. Summarized results of operations of the unconsolidated Joint Venture for the three months ended March 31, 2000 include $14.7 million in revenue, $11.8 million in operating expenses and net income of $1.2 million. The Company's 50% share of net income or $.6 million is recorded as "Earnings from unconsolidated affiliates" on the income statement. Capital Expenditures The Company had capital expenditures of $1.8 million in 2000 compared to $1.5 million in 1999. Capital expenditures at Charles Town were approximately $1.3 million for machinery, equipment and improvements. Capital expenditures at Penn National and its OTW facilities ($.2 million) and Pocono Downs and its OTW facilities ($.3 million) were for equipment replacement and leasehold improvements. As a result, depreciation and amortization increased $.2 million or 8.9% to $2.2 million in 2000 from $2.0 million in 1999. 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 issuance of equity securities. Net cash provided from operating activities was $5.5 million for the period ended March 31, 2000. This consisted of net income and non-cash expenses ($5.2 million), a decrease in prepaid income taxes ($1.1 million) and an increase in corporate income tax liability ($.9 million) due to an increase in taxable income, a decrease in accounts payable and accrued expenses due to completion of construction for the temporary facility at Charles Town ($6.1 million), an increase in purses due horsemen ($1.5 million), an increase in taxes, other than income taxes ($.7 million) due to a change in payment schedules for Pennsylvania pari-mutuel taxes, an increase in accrued interest for the 10.625% Senior Notes ($1.9 million) and other changes in certain assets and liabilities ($.3 million). Cash flows used in investing activities for the period ended March 31, 2000 ($7.7 million) consisted of the Company's buyout of the 11% interest in Charles Town that was owned by other investors ($5.9 million), machinery, equipment and improvements at Charles Town ($1.3 million), and equipment replacement and building improvements at Penn National ($.2 million) and Pocono Downs ($.3 million) facilities. Cash flows provided by financing activities ($4.2 million) consisted of borrowings under the credit facility ($4.2 million) for Charles Town expansion and proceeds from the exercise of stock options and warrants ($.1 million). This was offset by an increase in financing costs ($.1 million) for amending the credit facility. The Company is subject to possible liabilities arising from the 17
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 2000, the Company anticipates spending approximately $21.5 million on capital expenditures at its racetrack and OTW facilities. The Company anticipates expending approximately $18.2 million at the Charles Town Entertainment Complex for player tracking ($.7 million), new slot machines and conversion kits ($2.1 million), paddock casino and interior renovations ($7.4 million), machinery and equipment ($2.0 million) and other projects including construction of a structured parking facility, design and planning for a new hotel ($6.0 million). The Company also plans to spend approximately $261,000 at Pocono Downs, $550,000 at Penn National, $400,000 at the OTW facilities for building improvements and equipment and $2.0 million on building improvements and equipment for its new OTW facility in East Stroudsburg, Pennsylvania. The Company spent approximately $1.8 million on these projects in the first quarter. The Company entered into its Credit Facility with Bankers Trust Company, as Agent in 1996. This Credit Facility was amended and restated on January 29, 1999 with First Union National Bank replacing Bankers Trust Company, as Agent. The Credit Facility, as amended, provides for a $20 million revolving Credit Facility, including a $3 million sub-limit for standby letters of credit and a $5 million term loan. Under the terms of the Credit Facility, as amended, the Company borrowed an additional $11.5 million which was used to finance its share of the New Jersey Joint Venture (see Note 4). The revolving Credit Facility is secured by substantially all of the assets of the Company, except for the assets of the Charles Town Entertainment Complex. The revolving Credit Facility provides for certain covenants, including those of a financial nature. The $5.0 million term loan was repaid on December 16, 1999. At the Company's option, the revolving facility may bear interest at the highest of: (1) 1/2 of 1% in excess of the federal reserve reported certificate of deposit rate, (2) the rate that the bank group announces from time to time as its prime lending rate and (3) 1/2 of 1% in excess of the federal funds rate plus an applicable margin of up to 2% or the revolving facility may also bear interest at a rate tied to a eurodollar rate plus an applicable margin of up to 3%. The outstanding amount under this Credit Facility as of March 31, 2000 was $12.9 million at an interest rate of 8.75%. Mandatory repayments of the revolving facility are required in an amount equal to a percentage of the net cash proceeds from any issuance or incurrence of equity or funded debt by the Company, that percentage to be dependent upon the then outstanding balance of the revolving facility and the Company's leverage ratio. Mandatory repayments of varying percentages are also required in the event of either asset sales in excess of stipulated amounts or defined excess cash flow. On December 13, 1999, the Company entered into a $20.0 million Senior Secured Multiple Draw Term Loan with Bank of America, as an Agent for a bank group. The term loan is payable in quarterly installments of $1.3 million principle plus interest. The loan is secured by gaming equipment and improvements at the Charles Town Entertainment Complex. Part of the term loan was used to repay the $5.0 million First Union term loan and the balance will be used to finance gaming equipment and improvements at the Charles Town Entertainment Complex. At the Company's option the term loan may bear interest at the highest of: (1) 1/2 of 1% in excess of the federal reserve reported certificate of deposit rate, (2) the rate that the bank group announces from time to time as its prime lending rate and (3) 1/2 of 1% in excess of the federal funds rate plus an applicable margin of up to 1.75% or the facility may also bear interest at a rate tied to a eurodollar rate plus an applicable margin of up to 2.75%. The outstanding amount under this credit facility as of March 31, 2000 was $ 13.3 million at an interest rate of 8.89%. In connection with the Company's agreement to acquire all of the assets of Casino Magic Bay St. Louis and Boomtown Biloxi, the Company is exploring a number of financing alternatives, which may involve repaying or redeeming its existing debt. The Company expects to use part of the proceeds from any refinancing to make certain improvements to the Mississippi properties. The Company currently estimates that the cash generated from operations and available borrowings under the credit facilities will be sufficient to finance its current operations and planned capital expenditure requirements, not including the Mississippi Acquisition. 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. 18
Item 3. Changes in Information about Market Risk Most of the Company's debt obligations at March 31, 2000 were fixed rate obligations, and management, therefore, does not believe that the Company has any material risk from its debt obligations. 19
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Purchase Agreement dated March 15, 2000, between PNGI Charles Town Gaming, LLC and BDC Group. Amendment No. 1 to Term Loan Agreement between the Company and Bank of America, dated March 29, 2000. Amendment No. 4 to Loan Agreement between the Company and First Union National Bank dated March 29, 2000. (b) Reports on Form 8-K None 20
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 12, 2000 By: /s/Robert S. Ippolito - ------------ ------------------------ Date Chief Financial Officer, Secretary/Treasurer 21
EXHIBIT INDEX <TABLE> <CAPTION> Page <S> <C> <C> 10.18a Purchase Agreement dated March 15, 2000, between PNGI Charles Town Gaming, LLC and BDC Group. 23-36 10.19a Amendment No. 1 to Term Loan Agreement between the Company and Bank of America, dated March 29, 2000. 37-38 10.20a Amendment No. 4 to Loan Agreement between the Company and First Union National Bank dated March 29, 2000. 39-48 </TABLE> 22