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 September 30, 1999
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)
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___
<PAGE>
(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 November 12, 1999
Common stock par value .01 per share 14,874,571
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.
2
<PAGE>
Penn National Gaming, Inc. and Subsidiaries
INDEX
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1999 & December 31, 1998 4-5
Consolidated Statements of Income -
Nine Months Ended September 30, 1999 and 1998 (unaudited) 6
Consolidated Statements of Income -
Three Months Ended September 30, 1999 and 1998 (unaudited) 7
Consolidated Statement of Shareholder's Equity -
Nine Months Ended September 30, 1999, (unaudited) 8
Consolidated Statement of Cash Flow -
Nine Months Ended September 30, 1999 and 1998 (unaudited) 9-10
Notes to Consolidated Financial Statements 11-19
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 20-23
Item 3. Changes in Information about Market Risk 23
- ------------------------------------------------
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23-24
Item 6. Exhibits and Reports on Form 8-K 25
Signature Page 26
3
<PAGE>
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>
September 30, December 31,
1999 1998
(Unaudited)
---------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 9,777 $ 6,826
Accounts receivable 4,580 3,840
Prepaid expenses and other current assets 2,649 2,131
Deferred income taxes 255 458
Prepaid income tax - 859
---------------------------------------
Total current assets 17,261 14,114
---------------------------------------
Property, plant and equipment, at cost
Land and improvements 27,832 26,969
Building and improvements 68,490 66,918
Furniture, fixtures and equipment 30,751 29,772
Transportation equipment 625 527
Leasehold improvements 9,778 9,579
Leased equipment under capitalized lease 824 824
Construction in progress 3,138 1,847
---------------------------------------
141,438 136,436
Less accumulated depreciation and amortization 21,108 15,684
---------------------------------------
Net property, plant and equipment 120,330 120,752
---------------------------------------
Other assets
Investment in and advances to unconsolidated affiliate 12,269 -
Excess of cost over fair market value of net assets acquired
(net of accumulated amortization of $2,464 and $2,006,
respectively) 21,733 22,442
Deferred financing costs 5,130 2,403
Miscellaneous 1,133 1,087
---------------------------------------
Total other assets 40,265 25,932
---------------------------------------
$ 177,856 $ 160,798
=======================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PENN NATIONAL GAMING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited)
--------------------------------------
<S> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities
Current maturities of long-term debt and
capital lease obligations $ 5,158 $ 168
Accounts payable 6,873 6,217
Purses due horsemen 2,607 887
Uncashed pari-mutuel tickets 1,007 1,597
Accrued expenses 1,167 1,063
Accrued interest 2,256 468
Accrued salaries & wages 969 752
Customer deposits 828 548
Taxes, other than income taxes 1,286 503
Income taxes payable 74 -
--------------------------------------
Total current liabilities 22,225 12,203
--------------------------------------
Long-term Liabilities
Long-term debt and capital lease obligations,
net of current maturities 78,564 78,088
Deferred income taxes 12,129 11,471
--------------------------------------
Total long-term liabilities 90,693 89,559
--------------------------------------
Commitments and contingencies
Shareholders' equity
Preferred stock,$.01 par value, authorized 1,000,000 shares;
issued none - -
Common stock,$.01 par value, authorized 20,000,000 shares;
issued 15,299,271 and 15,164,080, respectively 153 152
Treasury stock, 424,700 shares at cost (2,379) (2,379)
Additional paid in capital 38,527 38,025
Retained earnings 28,637 23,238
--------------------------------------
Total shareholders' equity 64,938 59,036
--------------------------------------
$ 177,856 $ 160,798
======================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
PENN NATIONAL GAMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
-------------------------------------
<S> <C> <C>
Revenues
Pari-mutuel revenues
Live races $ 15,275 $ 20,962
Import simulcasting 53,298 50,994
Export simulcasting 2,925 4,403
Gaming revenue 39,886 26,995
Admissions, programs and other racing revenue 4,747 4,558
Concessions revenues 9,092 7,102
Earnings of unconsolidated affiliates 516 -
-------------------------------------
Total revenues 125,739 115,014
-------------------------------------
Operating expenses
Purses, stakes, and trophies 22,969 21,821
Direct salaries, payroll taxes and employee benefits 14,044 14,265
Simulcast expenses 9,768 10,479
Pari-mutuel taxes 6,587 7,013
Lottery taxes and administration 15,571 10,613
Other direct meeting expenses 17,176 17,823
Concessions expenses 8,081 5,646
Other operating expenses 9,614 7,879
Horsemen's action expenses 1,250 -
Depreciation and amortization 6,469 4,292
-------------------------------------
Total operating expenses 111,529 99,831
-------------------------------------
Income from operations 14,210 15,183
-------------------------------------
Other income (expenses)
Interest (expense) (6,508) (6,326)
Interest income 976 627
Other (including $140,000 of unrealized investment gain in 1998) (7) 110
-------------------------------------
Total other (expenses) (5,539) (5,589)
-------------------------------------
Income before taxes 8,671 9,594
Taxes on income 3,272 3,549
-------------------------------------
Net Income $ 5,399 $ 6,045
=====================================
Basic earnings per share on net income $ 0.36 $ 0.40
-------------------------------------
Diluted earnings per share on net income $ 0.36 $ 0.39
-------------------------------------
Weighted average number of basic common shares outstanding 14,812 15,108
-------------------------------------
Weighted average number of diluted common shares outstanding 15,179 15,463
-------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
PENN NATIONAL GAMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
-------------------------------------
<S> <C> <C>
Revenues
Pari-mutuel revenues
Live races $ 6,992 $ 8,034
Import simulcasting 18,248 16,881
Export simulcasting 1,567 1,576
Gaming revenue 14,973 10,835
Admissions, programs and other racing revenue 1,763 1,573
Concessions revenues 3,507 2,675
Earnings of unconsolidated affiliates 516 -
-------------------------------------
Total revenues 47,566 41,574
-------------------------------------
Operating expenses
Purses, stakes, and trophies 8,871 7,875
Direct salaries, payroll taxes and employee benefits 5,323 5,002
Simulcast expenses 3,697 3,583
Pari-mutuel taxes 2,484 3,328
Lottery taxes and administration 5,667 3,407
Other direct meeting expenses 6,560 6,260
Concessions expenses 3,114 2,193
Other operating expenses 3,180 2,855
Depreciation and amortization 2,324 1,451
-------------------------------------
Total operating expenses 41,220 35,954
-------------------------------------
Income from operations 6,346 5,620
-------------------------------------
Other income (expenses)
Interest (expense) (2,175) (2,082)
Interest income 370 176
Other (including $140,000 of unrealized investment gain in 1998) - 110
-------------------------------------
Total other (expenses) (1,805) (1,796)
-------------------------------------
Income before taxes 4,541 3,824
Taxes on income 1,703 1,451
-------------------------------------
Net income $ 2,838 $ 2,373
=====================================
Basic earnings per share on net income $ 0.19 $ 0.16
-------------------------------------
Diluted earnings per share on net income $ 0.19 $ 0.16
-------------------------------------
Weighted average number of basic common shares outstanding 14,868 15,021
-------------------------------------
Weighted average number of diluted common shares outstanding 15,242 15,279
-------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
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 Amounts Stock Capital Earnings Total
<S> <C> <C> <C> <C> <C> <C>
Balance, at January 1, 1999 15,164,080 $ 152 $ (2,379) $ 38,025 $ 23,238 $ 59,036
Issuance of common stock 135,191 1 - 502 503
Net income for the nine months
ended September 30, 1999 - - - - 5,399 5,399
--------------------------------------------------------------------------------------
Balance, at September 30, 1999 15,299,271 $ 153 $ (2,379) $ 38,527 $ 28,637 $ 64,938
======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
-------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 5,399 $ 6,045
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 6,469 4,292
Deferred income tax 861 264
Decrease (Increase) in
Accounts receivable (740) (4,246)
Investment in marketable securities - (3,092)
Prepaid expenses and other current assets (584) (892)
Prepaid income taxes 859 2,531
Miscellaneous other assets (42) (412)
Increase (decrease) in
Accounts payable 657 1,990
Purses due horsemen 1,720 757
Uncashed pari-mutuel tickets (590) (162)
Accrued expenses 88 (1,541)
Accrued interest 1,788 1,830
Accrued salaries & wages 217 180
Customers deposits 280 211
Taxes other than income taxes 783 272
Income taxes payable 74 -
-------------- -------------
Net cash provided by operating activities 17,239 8,027
-------------- -------------
Cash flows from investing activities
Expenditures for property, plant and equipment (5,002) (7,320)
Investment in and advances to unconsolidated affiliate (12,269) -
Other 251 -
-------------- -------------
Net cash (used) in investing activities (17,020) (7,320)
-------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
--------------------------------
<S> <C> <C>
Cash flows from financing activities
Proceeds from sale of common stock 503 43
Acquisition of treasury stock - (2,379)
Proceeds from long term debt 11,500 -
Principal payments on long-term debt and capital lease obligations (6,034) (11,056)
(Increase) decrease in unamortized financing cost (3,237) 243
-------------- ------------
Net cash provided (used) by financing activities 2,732 (13,149)
-------------- ------------
Net increase (decrease) in cash and cash equivalents 2,951 (12,442)
Cash and cash equivalents, at beginning of period 6,826 21,854
-------------- ------------
Cash and cash equivalents, at end of period $ 9,777 $ 9,412
============== ============
</TABLE>
See accompanying notes to consolidated financial statements
10
<PAGE>
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) which have been made are necessary to
present fairly the financial position of the Company as of September
30, 1999 and the results of its operations for the three and nine month
periods ended September 30, 1999 and 1998. The results of operations
for the nine month period ending September 30, 1999 are not necessarily
indicative of the results to be experienced for the fiscal year ended
December 31, 1999.
The statements and related notes herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to
such rules and regulations. The accompanying notes should therefore be
read in conjunction with the Company's December 31, 1998 annual
financial statements.
2. Wagering Information (in thousands)
<TABLE>
<CAPTION>
Three months ended September 30, 1999
Penn Pocono Charles
National Downs Town Total
<S> <C> <C> <C> <C>
Pari-mutuel wagering in-state on
company live races $ 17,476 $ 6,710 $ 8,133 $ 32,319
----------------------------------------------------------
Pari-mutuel wagering on simulcasting:
Import simulcasting from other racetracks 47,502 34,108 12,701 94,311
Export simulcasting to out of
state wagering facilities 35,096 5,478 12,205 52,779
----------------------------------------------------------
82,598 39,586 24,906 147,090
----------------------------------------------------------
Total pari-mutuel wagering $ 100,074 $ 46,296 $ 33,039 $ 179,409
==========================================================
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Three months ended September 30, 1998
Penn Pocono Charles
National Downs Town Total
<S> <C> <C> <C> <C>
Pari-mutuel wagering in-state on
company live races $ 21,351 $ 7,806 $ 7,068 $ 36,225
----------------------------------------------------------
Pari-mutuel wagering on simulcasting:
Import simulcasting from other racetracks 41,738 34,022 12,129 87,889
Export simulcasting to out of
state wagering facilities 43,999 9,084 - 53,083
----------------------------------------------------------
85,737 43,106 12,129 140,972
----------------------------------------------------------
Total pari-mutuel wagering $ 107,088 $ 50,912 $ 19,197 $ 177,197
==========================================================
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30, 1999
Penn Pocono Charles
National Downs Town Total
<S> <C> <C> <C> <C>
Pari-mutuel wagering in-state on
company live races $ 35,446 $ 13,907 $ 21,522 $ 70,875
----------------------------------------------------------
Pari-mutuel wagering on simulcasting:
Import simulcasting from other racetracks 121,102 101,119 36,991 259,212
Export simulcasting to out of
state wagering facilities 72,478 11,826 14,247 98,551
----------------------------------------------------------
193,580 112,945 51,238 357,763
----------------------------------------------------------
Total pari-mutuel wagering $ 229,026 $ 126,852 $ 72,760 $ 428,638
==========================================================
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Nine months ended September 30, 1998
Penn Pocono Charles
National Downs Town Total
<S> <C> <C> <C> <C>
Pari-mutuel wagering in-state on
company live races $ 62,566 $ 16,131 $ 16,710 $ 95,407
----------------------------------------------------------
Pari-mutuel wagering on simulcasting:
Import simulcasting from other racetracks 127,483 97,215 32,075 256,773
Export simulcasting to out of
state wagering facilities 130,583 16,846 - 147,429
----------------------------------------------------------
258,066 114,061 32,075 404,202
----------------------------------------------------------
Total pari-mutuel wagering $ 320,632 $ 130,192 $ 48,785 $ 499,609
==========================================================
</TABLE>
13
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Commitments
On July 14, 1998, the Company entered into a lease agreement
for an OTW facility in East Stroudsburg. The lease is for approximately
14,000 square feet at the Eagle's Glen Shopping Plaza located in East
Stroudsburg, Pennsylvania. The initial term of the lease is for ten
years with two additional five-year renewal options available. On
November 6, 1998, the Company submitted its application for approval by
the Pennsylvania Harness Racing Commission. The Pennsylvania Harness
Racing Commission approved the application on February 23, 1999. The
Company was denied building and zoning permits by the zoning office of
the Borough of East Stroudsburg and filed suit on November 13, 1998 to
obtain the permits. On May 17, 1999, the Court of Common Pleas of
Monroe County granted a peremptory judgment in favor of the Company
that directed the Borough of East Stroudsburg and its zoning officer to
issue the required building and zoning permits to construct the OTW
facility. The Company expects to start construction on the $2 million
facility in December 1999 with a projected opening date in the second
quarter of 2000.
On March 23, 1999, the Company entered into a new four-year,
nine-month purse agreement with the Horsemen's Benevolent and
Protection Association, which represents the horsemen at the Company's
Penn National Race Course facility in Grantville, Pennsylvania. The
agreement ended a strike by the horsemen which began on February 16,
1999 and caused the Company to close Penn National Race Course and its
six affiliated OTW's until April 23, 1999. The initial term of the
agreement ends on January 1, 2004 and automatically renews for another
two year period, without change, unless notice is given by either party
at least ninety days prior to the end of the initial term.
On April 9, 1999, the State of West Virginia passed
legislation approving the use of coin-out and reel spinning slot
machines at the four racetracks in West Virginia. The Company plans to
convert certain machines at Charles Town to coin-out as well as replace
a number of lesser-performing machines with reel spinning models. On
April 27, 1999, the Company placed an additional thirty-six (36)
machines in operation for a total machine base of 935. On September 30,
1999 the West Virginia Lottery Commission unanimously approved the
Company's request to increase the number of machines authorized for
placement at Charles Town Races by 500 to 1,500. The Company
anticipates that it will have the 500 additional devices, all to be
reel spinning, coin-out machines, installed at Charles Town Races by
the first quarter of 2000.
On May 10, 1999, the Company commenced a consent solicitation
(the "Consent Solicitation") from the holders of its 10.625% Senior
Notes due 2004, Series B (the "Notes") to amend the Indenture pursuant
to which the Notes were issued to permit the Company to make certain
investments in a 50%/50% Joint Venture with Greenwood New Jersey, Inc.,
to operate Freehold Raceway in Freehold, New Jersey and Garden State
Track in Cherry Hill, New Jersey (the "Joint Venture"). The Consent
Solicitation originally expired at 5:00 p.m., New York City time, on
May 19, 1999 but was extended by the Company until July 30, 1999, by
which time holders of more than a majority of the Company's had
delivered consents. The Company and the Trustee under the Indenture
relating to the Notes have executed and delivered a Supplemental
Indenture containing the amendments described in the Company's Consent
Solicitation. The amendments became effective on July 30, 1999 when the
Company acquired the Joint Venture. The consent fee payable to holders
who delivered consents (and did not validly revoke such consents) prior
to the expiration date is $32.50 per $1,000 principal amount of Notes
as to which a consent was given. Pursuant to the terms and conditions
of the Consent Solicitation, the Company made all consent payments
contemporaneously with the closing of the Joint Venture transaction.
14
<PAGE>
On June 30, 1999, all the race tracks in West Virginia (the
"Tracks"), entered into a hardware and software purchase agreement (the
"Agreement") with International Game Technology ("IGT"), for the
purchase of a new video lottery central control computer system. The
aggregate cost of the new system is $5.5 million of which PNGI Charles
Town Gaming LLC is obligated to pay $1.4 million. On July 22, 1999, the
Company submitted a check in the amount of $257,000 as the initial
deposit and issued a letter of credit in the amount of $1,156,000 to
secure the remaining payments due. In addition, the Tracks agreed to
collectively acquire from IGT at least one thousand video lottery
terminals by September 30, 1999. The Agreement also requires each track
to pay to IGT the sum of $7.50 per terminal, per day for each video
lottery terminal offering progressive games operated through the IGT
central system. Installation of the new central system should be
completed by December 31, 1999.
On July 9, 1999, the Company entered into an agreement with
American Digital Communications, Inc. ("TrackPower") to serve as the
exclusive pari-mutuel wagering hub operator for TrackPower. TrackPower
provides direct-to-home digital satellite transmissions of horse racing
to its subscriber base. The initial term of the contract is for five
years with an additional five year option available. The agreement is
subject to approval by the Pennsylvania Horse Racing Commission. In
connection with the agreement 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.
At September 30, 1999, the Company was contingently obligated
under letters of credit with principal amounts aggregating $3,326,000.
This amount consists of $1,786,000 for the horsemen's account balances,
$100,000 for Pennsylvania pari-mutuel taxes, $155,000 for purses,
$1,156,000 for the West Virginia lottery central control computer
system, and $139,000 in other items.
4. Investment in Unconsolidated Affiliate
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, 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; (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 OTW's
and a 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 or loss of the Joint Venture is
included in earnings of unconsolidated affiliates in the accompanying
Consolidated Statements of Income for the three and nine months ended
September 30, 1999 and 1998.
15
<PAGE>
Summarized balance sheet information for the Joint Venture as
of September 30, 1999 is as follows (in thousands):
<TABLE>
<S> <C>
Current assets $ 8,887
Property, plant and equipment, net 31,050
Other 17,328
----------------------
Total assets $ 57,265
======================
Current liabilities $ 9,020
Long-term liabilities 45,822
Members' equity 2,423
----------------------
Total liabilities and members' equity $ 57,265
======================
</TABLE>
Summarized results of operations of the unconsolidated Joint
Venture (commencing July 30, 1999) for the three and nine month periods
ended September 30, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
------------------------- ----------------------
<S> <C> <C>
Revenues $ 10,471 $ 10,471
Operating expenses 8,325 8,325
------------------------- ----------------------
EBITDA* 2,146 2,146
========================= ======================
Net Income $ 1,032 $ 1,032
========================= ======================
</TABLE>
* Earnings before interest, depreciation, taxes, and amortization
5. Supplemental Disclosures of Cash Flow Information
Cash paid during the nine months ended September 30, 1999 and
1998 for interest was $4,715,000 and $4,496,000, respectively.
Cash paid during the nine months ended September 30, 1999 and
1998 for income taxes was $1,463,000 and $2,646,000, respectively.
16
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Subsidiary Guarantors
Summarized financial information as of September 30, 1999 and 1998 for
the three and nine months ended September 30, 1999 and 1998 for Penn National
Gaming, Inc. ("Parent"), the Subsidiary Guarantors and Subsidiary Nonguarantors
is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Subsidiary
Parent Susbsidiary Non- Elimin- Consoli-
Company Guarantors Guarantors ations dated
- --------------------------------------------------------------------------------------------------------------------------
As of September 30,1999
Consolidated Balance Sheet (In Thousands)
<S> <C> <C> <C> <C> <C>
Current assets $ 3,089 $ 8,041 $ 7,319 $ (935) $ 17,514
Net property plant and equipment 12,735 61,055 46,538 - 120,328
Other assets 114,252 157,083 1,527 (232,849) 40,013
- --------------------------------------------------------------------------------------------------------------------------
Total $ 130,076 $ 226,179 $ 55,384 $ (233,784) $ 177,855
- --------------------------------------------------------------------------------------------------------------------------
Current liabilities 8,898 14,713 9,082 (10,471) 22,222
Long-term liabilities 82,123 79,297 47,018 (117,745) 90,693
Shareholders' equity (deficiency) 39,055 132,169 (716) (105,568) 64,940
- --------------------------------------------------------------------------------------------------------------------------
Total $ 130,076 $ 226,179 $ 55,384 $ (233,784) $ 177,855
- --------------------------------------------------------------------------------------------------------------------------
Three months ended September 30, 1999
Consolidated Statement of Income (In Thousands)
Total revenues $ 4,120 $ 23,028 $ 21,696 $ (1,795) $ 47,049
Total operating expenses 2,059 22,262 18,692 (1,795) 41,218
- --------------------------------------------------------------------------------------------------------------------------
Income from operations 2,061 766 3,004 - 5,831
Other income (expenses) (1,391) 1,284 (1,182) - (1,289)
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 670 2,050 1,822 - 4,542
Taxes on income 246 732 725 - 1,703
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 424 $ 1,318 $ 1,097 $ - $ 2,839
- --------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 1999
Consolidated Statement of Income (In Thousands)
Total revenues $ 3,228 $ 68,159 $ 58,267 $ (4,430) $ 125,224
Total operating expenses (2,882) 67,835 51,005 (4,430) 111,528
- --------------------------------------------------------------------------------------------------------------------------
Income from operations 6,110 324 7,262 - 13,696
Other income (expenses) (4,359) 2,789 (3,453) - (5,023)
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,751 3,113 3,809 - 8,673
Taxes on income 711 1,017 1,543 - 3,271
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 1,040 $ 2,096 $ 2,266 $ - $ 5,402
- --------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 1999
Consolidated Statement of Cash Flow (In Thousands)
Net Cash Flows from Operating $ 5,073 $ 5,661 $ 5,318 $ 934 $ 16,986
Activities
Net Cash Flows from Investing (11,938) (1,020) (3,403) (406) (16,767)
Activities
Net Cash Flows from Financing 6,005 (2,745) - (528) 2,732
Activities
- --------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (860) 1,896 1,915 - 2,951
Cash and cash equivalents at January 1, 2,001 1,705 3,120 - 6,826
1999
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at
September 30, 1999 $ 1,141 $ 3,601 $ 5,035 $ - $ 9,777
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Subsidiary
Parent Susbsidiary Non- Elimin- Consoli-
Company Guarantors Guarantors ations dated
- --------------------------------------------------------------------------------------------------------------------------
As of September 30, 1998
Consolidated Balance Sheet (In
Thousands)
<S> <C> <C> <C> <C> <C>
Current assets $ 6,872 $ 9,881 $ 5,289 $ 293 $ 22,335
Net property plant and equipment 703 62,666 43,572 1 106,942
Other assets 103,872 152,925 1,655 (232,343) 26,109
- --------------------------------------------------------------------------------------------------------------------------
Total $ 111,447 $ 225,472 $ 50,516 $ (232,049) $ 155,386
- --------------------------------------------------------------------------------------------------------------------------
Current liabilities 1,893 16,986 7,311 (8,884) 17,306
Long-term liabilities 72,084 78,895 47,661 (118,125) 80,515
Shareholders' equity (deficiency) 37,470 129,591 (4,456) (105,040) 57,565
- --------------------------------------------------------------------------------------------------------------------------
Total $ 111,447 $ 225,472 $ 50,516 $ (232,049) $ 155,386
- --------------------------------------------------------------------------------------------------------------------------
Three months ended September 30, 1998
Consolidated Statement of Income (In Thousands)
Total revenues $ 2,690 $ 21,830 $ 16,353 $ 701 $ 41,574
Total operating expenses 1,258 19,726 14,269 701 35,954
- --------------------------------------------------------------------------------------------------------------------------
Income from operations 1,432 2,104 2,084 - 5,620
Other income (expenses) (1,316) 719 (1,199) - (1,796)
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 116 2,823 885 - 3,824
Taxes on income 28 1,423 - - 1,451
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 88 $ 1,400 $ 885 $ - $ 2,373
- --------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 1998
Consolidated Statement of Income (In Thousands)
Total revenues $ 7,865 $ 64,253 $ 41,050 $ 1,846 $ 115,014
Total operating expenses 3,189 57,724 37,072 1,846 99,831
- --------------------------------------------------------------------------------------------------------------------------
Income from operations 4,676 6,529 3,978 - 15,183
Other income (expenses) (4,094) 2,064 (3,559) - (5,589)
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 582 8,593 419 - 9,594
Taxes on income 55 3,494 - - 3,549
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 527 $ 5,099 $ 419 $ - $ 6,045
- --------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 1998
Consolidated Statement of Cash Flow (In Thousands)
Net Cash Flows from Operating $ 3,884 $ (14,306) $ 871 $ 17,578 $ 8,027
Activities
Net Cash Flows from Investing (15,310) 16,422 2,499 (10,931) (7,320)
Activities
Net Cash Flows from Financing (1,798) (4,704) - (6,647) (13,149)
Activities
- --------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (13,224) (2,588) 3,370 - (12,442)
Cash and cash equivalents at January 3,015 17,895 944 - 21,854
1, 1998
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at
September 30, 1998 $ (10,209) $ 15,307 $ 4,314 $ - $ 9,412
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Year 2000 Compliance
The "Year 2000 Issue" is typically the result of software and
hardware being written using two digits rather than four to define the
applicable year. If the Company's software and hardware with
date-sensitive functions are not Year 2000 compliant, these systems may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, interruptions
in pari-mutuel wagering or the inability to operate the Company's video
lottery machines.
The Company compiled an inventory of and identified its
hardware and software systems as part of two categories: (1) systems
that would have a significant effect on operations or financial
statements ("mission critical systems"), such as the pari-mutuel
totalisator system, the video lottery central system, and accounting
systems, and (2) low priority systems such as individual work stations
or personal computers. Each category includes information technology
("IT") systems (network hardware and software systems) and Non-IT
systems (devices that are potentially date sensitive due to their
dependence on a built-in chip or proprietary software developed by a
third party.) Once a system has been identified, the vendor is
contacted to determine the state of their Year 2000 compliance. If a
system is identified as not Year 2000 compliant, the system is
evaluated to determine the actions necessary to achieve Year 2000
compliance.
Based upon the analysis conducted to date, the Company
believes that all of the mission critical systems are currently
compliant or will be compliant by the end of the year. To date, the
most significant Year 2000 requirement that has been identified is the
need to replace older personal computers and software that are not Year
2000 compliant.
The Company estimates that the total cost to the Company of
making its systems Year 2000 compliant is approximately $100,000. Most
of this cost relates to the acquisition of new computer hardware to
replace noncompliant personal computers and the purchase of new
software. These costs are being capitalized and the equipment and
software depreciated over their expected useful lives. To the extent
existing hardware or software is replaced, the Company will recognize a
loss currently for the undepreciated balance. This loss is included in
the above cost estimate. Furthermore, all costs related to software
modification, as well as all costs associated with the Company's
administration of its Year 2000 project, are being expensed as incurred
and are likewise included in the cost estimate above.
8. Subsequent Events
On October 25, 1999, the Company signed an agreement with
International Game Technology ("IGT") to purchase 500 additional slot
machines for Charles Town Races at a cost of approximately $3,755,000.
Delivery of the machines is scheduled to begin at the beginning of
December 1999.
19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Results of Operations
Three months ended September 30, 1999 compared to three months ended September
30, 1998
Total revenue increased by approximately $6.0 million or 14.4% from
$41.6 million for the three months ended September 30, 1998 to $47.6 million for
the three months ended September 30, 1999. Revenues decreased by $321,000 or
2.0% at Penn National Race Course and its OTW facilities ("Penn"). Penn had an
increase in revenue at Chambersburg ($115,000) due to the import of the Charles
Town live racing simulcasts and Johnstown ($529,000) due to comparing three
months of operations in 1999 to one month of operations in 1998. Offsetting
these increases was a decrease in revenue at Lancaster ($96,000) due to major
road construction and at the Grantville race track ($288,000) due to a decline
in export simulcasting that was caused by the Horsemen's strike in the spring of
1999. Charles Town Races had increased revenues of $5.3 million or 32.4% for the
period. Video lottery machine revenue increased by $4.3 million due to an
increase in the average number of machines in play from 755 in 1998 to 921 in
1999 and an increase in the average win per machine of $160 in 1998 compared to
$177 in 1999. Racing revenue increased by $.7 million due to the improved
quality of the live race card, a stronger full-card simulcast program, and a
full quarter of export simulcasting of the Charles Town live race program to
tracks across the country. Concession revenues increased by $.3 million due to
the increased attendance at the facility. At Pocono Downs and its OTW facilities
revenues decreased by $275,000 or 2.8%. Revenue decreased at Pocono Downs
($219,000) due to a decline in export simulcasting revenue and a decline in
wagering on Pocono Downs live races at the track. Revenue also declined at
Allentown ($217,000) due to major road construction in front of the facility.
These revenue decreases were partially offset by revenue increases of over 13.5%
at Carbondale and Hazleton. Earnings of unconsolidated affiliates was $516,000
for the three months ended September 30, 1999.
Total operating expenses increased by approximately $5.3 million or
14.8% from $35.9 million for the three months ended September 30, 1998 to $41.2
million for the three months ended September 30, 1999. Expenses increased by
$1.1 million or 8.5% at Penn National Race Course and its OTW facilities.
Approximately $200,000 of the increase in expenses was due to increased purses
being earned as a result of the new Horsemen's contract signed in March of 1999.
Expenses also increased in Johnstown ($569,000) as a result of comparing three
months of operations in 1999 to one month of operations in 1998. Charles Town
Races had increased expenses of $3.1 million or 22.5% due to an increase in
direct costs associated with additional wagering on horse racing and video
lottery machine play, an increase in the number of video lottery machines and
export simulcast expenses. Pocono Downs and its OTW facilities had a $15,000 net
increase in expenses. Corporate expenses increased by approximately $161,000 due
to the consolidation of the marketing and information technology departments at
the corporate level and the development of an OTW facility management
department. Depreciation and amortization expense increased by $.9 million due
primarily to the purchase of the video lottery machines from GTECH in November
1998.
Income from operations increased by approximately $.7 million or 12.9%
from $5.6 million for the three months ended September 30, 1998 to $6.3 million
for the three months ended September 30, 1999 due to the factors described
above. Other expenses for the three months ended September 30, 1998 and 1999
consisted of approximately $1.8 million in net interest primarily due to 10.625
% Senior Notes and the Revolving Credit Facility. Net income decreased by
approximately $464,000 or 19.55% from $2,373,000 for the three months ended
September 30, 1998 to $2,837,000 for the three months ended September 30, 1999
due to the factors described above. Income tax expense increased by
approximately $252,000 or 17.4% from $1,451,000 for the three months ended
September 30, 1998 to $1,703,000 for the three months ended September 30, 1999
due to the increase in income for the period.
20
<PAGE>
Nine months ended September 30, 1999 compared to nine months ended September 30,
1998
Total revenue increased by approximately $10.7 million or 9.3% from
$115.0 million for the nine months ended September 30, 1998 to $125.7 million
for the nine months ended September 30, 1999. Revenues decreased by $8.5 million
or 17.7% at Penn National Race Course and its OTW facilities due to expiration
of the Horsemen's Agreement that resulted in the closure of the facilities from
February 16 to March 24, 1999. Penn National Race Course re-opened for live
racing on a limited basis on April 23, 1999 and resumed a full live racing
schedule the week of June 26, 1999. For the nine-month period, Penn National
Race Course ran 101 live race days in 1999 compared to 155 live race days in
1998 and has run nine-race cards instead of ten-race cards since the April
reopening. Charles Town Races had increased revenues of $17.2 million or 41.9%
for the period. Video lottery machine revenue increased by $13.2 million due to
an increase in the average number of machines in play of 673 in 1998 to 891 in
1999 and an increase in the average win per machine of $147 in 1998 compared to
$164 in 1999. Racing revenue increased by $2.7 million due to the improved
quality of the live race card, a stronger full-card simulcast program, and the
start of export simulcasting the Charles Town live race program to tracks across
the country beginning June 5, 1999. Concession revenues increased by $1.3
million due to the increased attendance at the facility. At Pocono Downs and its
OTW facilities revenues increased by $.8 million or 3.0%. The increase resulted
from a full period of operations for Carbondale ($1.1 million) and Hazleton ($.8
million) that offset the decrease in revenues at the Pocono Downs racetrack ($.8
million) due to the close proximity of these three facilities and Allentown ($.2
million) due to major road construction. Earnings of unconsolidated affiliates
was $516,000 for the nine months ended September 30, 1999.
Total operating expenses increased by approximately $11.7 million or
11.7% from $99.8 million for the nine months ended September 30, 1998 to $111.5
million for the nine months ended September 30, 1999. Expenses decreased by $3.3
million or 8.8% at Penn National Race Course and its OTW facilities due to the
closing of the facilities from February 16 to March 24, 1999 and the loss of 54
live races in 1999 compared to 1998. Included in the operating expenses were
$1.3 million in shutdown related expenses. Charles Town Races had increased
expenses of $10.6 million or 29.8% due to an increase in direct costs associated
with additional wagering on horse racing and video lottery machine play,
additional video lottery machines and export simulcast expenses. Pocono Downs
and its OTW facilities had a $.5 million net increase in expenses or 2.5% due to
a full period of operations at the Carbondale and Hazleton OTW facilities that
was offset by a decrease in expenses at the Pocono Downs racetrack. Corporate
expenses increased by approximately $1.2 million due to the consolidation of the
marketing and information technology departments at the corporate level and the
development of an OTW facility management department. Depreciation and
amortization expense increased by $2.2 million primarily due to the purchase of
the video lottery machines from GTECH in November 1998.
Income from operations decreased by approximately $1.0 million or 9.8%
from $6.4 million for the nine months ended September 30, 1998 to $14.2 million
for the nine months ended September 30, 1999 due to the factors described above.
Other expenses for the nine months ended September 30, 1998 and 1999 consisted
of approximately $5.7 million and $5.5 million, respectively, of net interest
primarily due to the 10.625 % Senior Notes and a revolving credit facility with
First Union National Bank. Net income decreased by approximately $.6 million or
10.7% from $6.0 million for the nine months ended September 30, 1998 to $5.4
million for the nine months ended September 30, 1999 due to the factors
described above. Income tax expense decreased by approximately $.3 million or
7.9% from $3.6 million for the nine months ended September 30, 1998 to $3.3
million for the nine months ended September 30, 1999 due to the decrease in
income for the period.
21
<PAGE>
Liquidity and Capital Resources
Historically, the Company's primary sources of liquidity and capital
resources have been cash flow from operations, borrowings from banks and
proceeds from the issuance of equity securities.
Net cash provided by operating activities for the nine months ended
September 30, 1999 ($17.2 million) consisted of net income and non-cash expenses
($12.7 million), an increase in purses due horsemen ($1.7 million), an increase
in accrued interest ($1.8 million), and an increase in other working capital
($1.0 million).
Cash flows used in investing activities ($17.0 million) consisted of
the Company's investment in and advances to the New Jersey Joint Venture ($12.2
million) and $5.0 million in capital expenditures at Charles Town for additional
video lottery machines and expansion projects ($4.0 million) and for building
improvements at the other facilities ($1.0 million).
Cash flows provided by financing activities ($2.7 million) consisted of
principal payments on long-term debt ($6.0 million), borrowings under the credit
facility ($11.5 million) for the New Jersey Joint Venture and debt repayment,
proceeds from the exercise of stock options and warrants ($.5 million) and an
increase in financing costs ($3.2 million) for amending the credit facility and
bondholder agreement.
The Company is subject to possible liabilities arising from the
environmental condition at the landfill adjacent to Pocono Downs. Specifically,
the Company may incur expenses in connection with the landfill in the future,
which expenses may not be reimbursed by the four municipalities, which are
parties to the settlement agreement. The Company is unable to estimate the
amount, if any, that it may be required to expend.
In the first quarter of 1999, the Company incurred approximately $1.3
million in expenses associated with the actions by the Horsemen on February 16,
1999 that resulted in the closing of Penn National Race Course and its six OTW
facilities in Reading, Chambersburg, York, Lancaster, Williamsport and
Johnstown, from February 16, 1999 through March 24, 1999.
During the remainder of 1999 and in 2000, the Company anticipates
spending approximately $20.0 million on capital expenditures at its racetracks
and OTW facilities. The Company plans to spend approximately $1.0 million at
Pocono Downs, Penn National Race Course and the OTW facilities for building
improvements and equipment. The Company will also spend approximately $2.0
million on leasehold improvements, furniture and fixtures and equipment for the
new OTW facility in East Stroudsburg, Pennsylvania that is scheduled to open in
the second quarter of 2000. At Charles Town, the Company has received approval
from the West Virginia Lottery Commission to increase the number of gaming
machines to 1,500 and plans to spend an additional $17.0 million consisting of:
an outdoor paddock and jockey room ($1.0 million), renovations for a new slot
machine area ($4.3 million), new gaming machines ($5.7 million) conversion of
existing machines to coin drop ($2.5 million), player tracking ($1.1 million), a
new central system for the West Virginia Lottery Commission ($1.4 million) and
other improvements ($2.5 million). If the State of Tennessee reinstates the
Tennessee Commission and the Company's racing license or if the racing industry
is regulated under another government agency, the Company anticipates expending
an additional $9.0 million to complete the first phase of its Tennessee
Development Project.
The Company entered into its Credit Facility with Bankers Trust
Company, as Agent in 1996. This Credit Facility was amended and restated on
January 28, 1999 with First Union National Bank replacing Bankers Trust Company,
as Agent. The amended Credit Facility provides for, subject to certain terms and
conditions, a $20.0 million revolving credit facility, a $5.0 million term loan
due on December 31, 1999, a $3.0 million sublimit for standby letters of credit
and has a four-year term for its closing. The Company anticipates refinancing or
extending the $5.0 million term for another year. The Credit Facility, under
certain circumstances, requires the Company to make mandatory prepayments and
commitment reductions and to comply with certain covenants, including financial
ratios and maintenance tests. In addition, the Company may make optional
prepayments and commitment reductions pursuant to the terms of the Credit
Facility. Borrowings under the Credit Facility are secured by the assets of the
Company and contains certain financial ratios and maintenance tests. On July 22,
1999 the Company entered into Amendment No. 1 to the Credit Facility which
increased the sublimit for the standby letter of credit from $3.0 million to
$3.5 million. On September 30, 1999, the Company was in compliance with all
applicable ratios.
22
<PAGE>
On July 29, 1999 the Company entered into Amendment No. 2 to the Credit
Facility which provided for the consent of the Banks, which are a party to the
Credit Facility, to permit the Company to enter into a Debt Service Maintenance
Agreement for the benefit of Commerce Bank, N.A. The Debt Service Maintenance
Agreement supports the extension of credit to the Joint Venture by Commerce
Bank, N.A. In addition, the Company entered into a Subordination and
Intercreditor Agreement with FR Park Racing, L.P. and Commerce Bank, N.A.
The Company currently estimates that the cash generated from operations
and available borrowings under the Credit Facility will be sufficient to finance
its current operations, planned capital expenditure requirements, and the costs
associated with first phase of the Tennessee Development Project. There can be
no assurance, however, that the Company will not be required to seek additional
capital, in addition to that available from the foregoing sources. The Company
may, from time to time, seek additional funding through public or private
financing, including equity financing. There can be no assurance that adequate
funding will be available as needed or, if available, on terms acceptable to the
Company.
Item 3. Changes in Information about Market Risk
All of the Company's debt obligations at September 30, 1999, were fixed
rate obligations and Management, therefore, does not believe that the Company
has any material market risk from its debt obligations.
Part II. Other Information
Item 1. Legal Proceedings
In December 1997, Amtote international, Inc. ("Amtote"), filed an
action against the Company and the Charles Town Joint Venture in the United
States District Court for the Northern District of West Virginia. In its
complaint, Amtote (i) states that the Company and the Charles Town Joint Venture
allegedly breached certain contracts with Amtote and its affiliates when it
entered into a wagering services contract with a third party (the "Third Party
Wagering Services Contract"), and not with Amtote, effective January 1, 1998,
(ii) sought preliminary and injunctive relief through a temporary restraining
order seeking to prevent Charles Town Joint Venture from (a) entering into a
wagering services contract with a party other than Amtote and (b) having a third
party provide such wagering services, (iii) sought declaratory relief through
September 2004 and (iv) sought unspecified compensatory damages, legal fees and
costs associated with the action and other legal and equitable relief as the
Court deemed just and appropriate. On December 24, 1997, a temporary restraining
order was issued, which prescribed performance under the Third Party Wagering
Contract. On January 14, 1998, a hearing was held to rule on whether a
preliminary injunction should have been issued or whether the temporary
restraining order should have been lifted. On February 20, 1998, the temporary
restraining order was lifted by the court. The Company then pursued legal
remedies in order to terminate Amtote and proceed under the Third Party Wagering
Services Contract. This matter was tried before the State Court of West Virginia
on June 17, 1999. On September 30, 1999 the United States District Court for the
Northern District of West Virginia rendered a decision in favor of AmTote. The
Court awarded liquidated damages to AmTote in connection with the Company's
cancellation of the AmTote contract, which cancellation enabled the Company to
enter into a computerized pari-mutuel wagering service contract with another
company to provide such services to three of its racetracks and its ten
off-track wagering facilities. On October 28, 1999 the Company appealed the
decision. The Company estimates that if its appeal is unsuccessful, the amount
payable under the judgement will be approximately $2.0 million.
The Company submitted an application to the Tennessee State Racing
Commission (the "Tennessee Commission") in October 1997 for an initial license
for the development and operation of a harness track and Off Track Wagering
Facilities ("OTW") at a site in the city of Memphis (the "Tennessee Development
Project"). A land use plan for the construction of a 5/8-mile harness track,
clubhouse and grandstand area was approved in October 1997 by the Land Use
Hearing Board for the City of Memphis and County of Shelby. Tennessee Downs,
Inc. ("Tennessee Downs") was determined to be financially suitable by the
Tennessee Commission and a public comment hearing before the Tennessee
Commission was held in November 1997. In December 1997, the Company received the
necessary zoning and land development approvals from the Memphis City Council.
In April 1998, the Tennessee Commission granted a license to the Company, which
would expire on the earlier of: (i) December 31, 2000 or (ii) the expiration of
23
<PAGE>
Tennessee Commission's term on June 30, 1998, if such term was not extended by
the Tennessee State Legislature. The Tennessee State Legislature voted against
extending the life of the Tennessee Commission, allowing the Tennessee
Commission's term to expire on June 30, 1998. The Tennessee Commission held a
meeting on May 29, 1998 at which it rejected the Company's request: (i) to grant
the Company an extended timeframe for the effectiveness of its racing license;
(ii) to operate a temporary simulcast facility. On July 28, 1998, the Company
filed for a preliminary injunction and a declaratory ruling on the legal status
of racing in Memphis. On November 23, 1998, the court ruled that the Tennessee
Racing Control Act had not been repealed and cannot be repealed by implication
by dissolving the Tennessee Commission. It was the opinion of the court that
because the Tennessee Racing Control Act is still in force, horse-racing and
pari-mutuel betting is a legal unregulated activity in Tennessee. This decision
was appealed by the Tennessee Attorney General and a hearing was held before the
Court of Appeals on June 21, 1999. On July 30, 1999, the Court of Appeals in
Tennessee dissolved the injunction. The court reversed the lower court ruling on
the basis of jurisdiction. On September 28, 1999, the Company filed its
application for Permission to Appeal and brief to the Supreme Court of
Tennessee. Tennessee Downs has taken a direct appeal to the Supreme Court of the
State of Tennessee so that it may continue its efforts to develop and operate a
harness track in Tennessee. In the appeal, the Company is asking the Supreme
Court to take the jurisdictional question from the Appellate Court and to review
the substantive issue of whether pari-mutuel wagering on horse racing is lawful
in Tennessee under the existing statute without the Tennessee Commission. The
State will have thirty (30) days to respond to the Company's application and
brief and the Supreme Court will have sixty (60) days therefrom to determine
whether to accept the case. Costs incurred as of September 30, 1999 regarding
the Tennessee license amounted to $534,135 and are presented in prepaid expenses
and other current assets.
24
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
None
(B) Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K
during the third quarter of 1999:
On September 27, 1999 the Company filed a Current Report on
Form 8-K which reflected the completion, on July 29, 1999, of it's 50%
investment in the New Jersey Joint Venture.
25
<PAGE>
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 12, 1999 By:/s/Robert S. Ippolito
-------------------------------------
Robert S. Ippolito,
Chief Financial Officer &
Treasurer/Secretary
26
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-1-1999
<PERIOD-END> Sep-30-1999
<CASH> 9,777
<SECURITIES> 0
<RECEIVABLES> 4,580
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,261
<PP&E> 141,438
<DEPRECIATION> 21,108
<TOTAL-ASSETS> 177,856
<CURRENT-LIABILITIES> 22,225
<BONDS> 69,000
0
0
<COMMON> 153
<OTHER-SE> 64,785
<TOTAL-LIABILITY-AND-EQUITY> 177,856
<SALES> 125,739
<TOTAL-REVENUES> 125,739
<CGS> 101,915
<TOTAL-COSTS> 101,915
<OTHER-EXPENSES> 9,614
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,508
<INCOME-PRETAX> 8,671
<INCOME-TAX> 3,272
<INCOME-CONTINUING> 5,399
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,399
<EPS-BASIC> .36
<EPS-DILUTED> .36
</TABLE>
