SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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)
Wyomissing Professional Center
825 Berkshire Blvd., Suite 200
PENNSYLVANIA 23-2234473 Wyomissing, Pennsylvania 19610
(State or other jurisdiction of (I.R.S. Employer (Address of principal executive offices) (Zip Code)
incorporation or organization) Identification No.)
Registrant's telephone number, including area code 610-373-2400
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
Common stock par value .01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Aggregate market value of the voting common stock held by nonaffiliates of the
Registrant as of March 19, 1999 was approximately $106,073,740.
Number of Shares of Common Stock outstanding as of March 19, 1999 - 14,757,059
Documents Incorporated by Reference
Registrants Definitive Proxy Statement with respect to annual meeting of
Shareholders to be held on May 5, 1999.
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
PART 1
ITEM 1 BUSINESS
GENERAL
The Company, which began operations in 1972, is a diversified gaming and
pari-mutuel wagering company that owns and operates two racetracks and ten
off-track wagering facilities ("OTWs") in Pennsylvania, and the Charles Town
Joint Venture which is an entertainment complex that includes a thoroughbred
racetrack and gaming machines in Charles Town, West Virginia (89% owned). The
Company's Pennsylvania racetracks include Penn National Race Course, located
outside Harrisburg, one of two thoroughbred racetracks in Pennsylvania, and
Pocono Downs, located outside Wilkes-Barre, one of two harness racetracks in
Pennsylvania. The Company intends to develop the one additional OTW that has
been allocated to it under Pennsylvania law, after which it would operate 11 of
the 23 OTWs currently authorized in Pennsylvania. Between 1994 and 1998, the
Company increased total wagers at a compound annual growth rate of 12.9% by
expanding its simulcast and OTW operations.
INDUSTRY OVERVIEW
Pari-mutuel wagering on thoroughbred or harness racing is pooled
wagering in which a pari-mutuel wagering system totals the amounts wagered and
adjusts the payouts to reflect the relative amounts bet on different horses and
various possible outcomes. The pooled wagers are (i) paid out to bettors as
winnings in accordance with the payoffs determined by the pari-mutuel wagering
system, (ii) paid to the applicable regulatory or taxing authorities and (iii)
distributed to the track's horsemen in the form of "purses" which encourage
owners and trainers to enter their horses in that track's live races. The
balance of the pooled wagers is retained by the wagering facility. Pari-mutuel
wagering is currently authorized in more than 40 states in the United States,
all provinces in Canada and approximately 100 other countries around the world.
Gaming and wagering companies, such as the Company, that focus on
pari-mutuel horse race wagering derive revenue through wagers placed at their
own tracks, at their OTWs and on their own races at the tracks and OTWs of
others. While some states, such as New York, operate off-track betting locations
that are independent of racetracks, in other states (such as Pennsylvania)
racetrack ownership and operation is a precondition to OTW ownership and
operation. Owning a racetrack in such a state, then, is akin to an "admission
ticket" to the OTW business. Over the past several years, attendance at live
racing has generally declined; however the decline in revenues from live racing
has been more than offset by an increase in telephone wagering, off-track
wagering in and gaming machine operations.
STRATEGY
The Company intends to be a leading operator in the pari-mutuel
wagering industry by capitalizing on its horse racing expertise and its numerous
wagering locations and when possible expand them to include gaming machines
("Gaming Wagering"). The Company plans to increase revenue significantly by
using the following strategies:
Focus on Gaming Machine Operations. The Company intends to seek
legislation to permit it to operate gaming machines at its racetracks where not
now permitted and to expand legislation in West Virginia. Legislation has been
passed in West Virginia, subject to the Governor's signature or veto, which
would allow coin out and reel slot machines at race tracks. If such legislation
is signed by the Governor, the Company intends to convert some or all of its
current machines to coin out and increase the maximum number of machines with
reel slot machines.
Open Additional OTWs. The Company operates ten of the 20 OTWs now open
in Pennsylvania and has the right to operate one of the three remaining OTWs
that have been authorized in Pennsylvania. The Company's OTWs are located in
Allentown, Carbondale, Chambersburg, Erie, Hazleton, Johnstown, Lancaster,
Reading, Williamsport and York, Pennsylvania. At OTWs, customers can place
3
wagers on thoroughbred and harness races simulcast from the Company's racetracks
and on import simulcast races from other tracks around the country. Under the
Pennsylvania Racing Act, only licensed thoroughbred and harness racing
associations, such as the Company, can operate OTWs or accept customer wagers on
simulcast races at Pennsylvania racetracks. The Company plans (subject to the
receipt of remaining regulatory approvals, including site approvals) to open and
operate an additional OTW in Stroudsburg, Pennsylvania, and to seek legislation
in other jurisdictions to operate additional OTW's.
Expand Simulcasting Operations. Simulcasting involves the transmission
to, or the receipt of, the audio and/or video signals of a live racing event
through a satellite for re-transmission at a different wagering location. The
Company transmits simulcasts of Company races to other wagering locations
year-round and receives simulcasts of races from other locations for wagering by
its customers at the Company's facilities year-round. During the past five
years, the Company expanded its simulcasting operations and took advantage of
favorable changes in pari-mutuel wagering and simulcasting laws in various
states and the expanded use of simulcasting technology. Import simulcasting
generates revenue for the Company by maximizing the number of events available
to a patron for wagering at the Company's facilities by utilizing idle time
between races at Company racetracks and OTWs. When customers place wagers on
import simulcast races, of the amount not returned to bettors as winning wagers,
a portion is paid to the state in which the Company's wagering facility is
located, a portion is paid to the "purse" fund for the horse owners and trainers
at the Company's racetrack with which the wagering facility is associated, a
portion is paid as a simulcast fee to the originating track and the balance is
retained by the wagering facility and/or track. In order to promote wagering,
the Company has increased and expects to continue to increase full-card import
simulcasts from premier racetracks. The Company currently receives import
simulcasts from approximately 77 racetracks, including premier racetracks such
as Belmont Park, Churchill Downs, Gulfstream Park, Hollywood Park, Santa Anita
and Saratoga. The Company believes that "full-card" import simulcasting, in
which all of the races at a non-Company track are import simulcast to a Company
wagering facility, has improved the wagering opportunities for its customers and
thereby increased the amount wagered at Company facilities. Export simulcasting
generates revenue for the Company by increasing the consumer base for Company
races beyond Company racetracks and OTWs. The Company transmits export
simulcasts of Company races to approximately 126 locations and receives a flat
percentage of the amounts wagered on Company races at non-Company locations,
while incurring minimal additional expense. The Company intends to increase
export simulcasting of races from Company-owned tracks to out-of-state
racetracks, OTWs, casinos and other gaming facilities.
Capitalize on Other Gaming and Pari-Mutuel Wagering Opportunities. The
Company intends to continue identifying opportunities in the gaming and
pari-mutuel wagering industries which complement the Company's core operations
and leverage its pari-mutuel management and operating strengths. Management also
intends to explore other opportunities to capitalize upon changes in gaming
legislation, including legislation relating to gaming machines.
ACQUISITIONS
Pocono Downs Acquisition
On November 27, 1996, the Company acquired Pocono Downs for an
aggregate purchase price of $48.2 million plus approximately $730,000 in
acquisition-related fees and expenses. In addition, pursuant to the terms of the
purchase agreement, the Company will be required to pay the sellers of Pocono
Downs an additional $10.0 million if, within five years after the consummation
of the acquisition of Pocono Downs, Pennsylvania authorizes any additional form
of gaming in which the Company may participate. The $10.0 million payment is
payable in annual installments of $2.0 million a year for five years, beginning
on the date that the Company first offers such additional form of gaming. As of
March 19, 1999, no such additional form of gaming in Pennsylvania has been
adopted, therefore no such payment is due at this time.
Charles Town Acquisition
On January 15, 1997, the Charles Town Joint Venture acquired
substantially all of the assets of Charles Town Races for an aggregate net
purchase price of approximately $16.0 million plus approximately $2.2 million in
acquisition-related fees and expenses. Prior to its acquisition by the Charles
Town Joint Venture, Charles Town Races conducted live thoroughbred horse racing,
on-site pari-mutuel wagering on live races run at Charles Town Races and
wagering on import simulcast races. The Company has refurbished and reopened the
facility as the Charles Town Entertainment Complex, which features live racing,
4
dining, simulcast wagering and, effective September 1997, gaming machines. The
cost of the refurbishment, exclusive of the cost of the gaming machines, was
approximately $27.8 million.
GAMING MACHINE OPERATIONS AT CHARLES TOWN ENTERTAINMENT COMPLEX
On November 5, 1996, Jefferson County, West Virginia approved a
referendum authorizing the installation and operation of gaming machines at the
Charles Town Entertainment Complex. As a result, the Company consummated the
Charles Town Acquisition on January 15, 1997. In April 1997, the Company
reopened the Charles Town Entertainment Complex, featuring live racing, dining
and simulcast wagering. In September 1997, the Company expanded wagering
opportunities by installing gaming machines at the Charles Town Entertainment
Complex. The gaming machines are dollar bill-fed video gaming machines that
replicate traditional spinning reel slot machines and also feature video card
games, such as blackjack and poker. Legislation has been passed in West
Virginia, subject to the Governor's signature or veto, which would allow coin
out and reel slot machines at racetracks. If such legislation is signed by the
Governor, the Company intends to convert some or all of its current machines to
coin out and increase the maximum number of machines with reel slot machines.
The West Virginia Video Lottery Act specifies a 20% maximum percentage of each
dollar wagered on gaming machines which can be retained by the Company. The
balance of each dollar wagered must be paid out to the public as winning wagers.
Of the portion retained by the Company, a portion is paid to taxing authorities
and other beneficiary organizations mandated by the State of West Virginia and a
portion is paid to the Charles Town Horsemen in the form of purses. The Company
has installed and is operating, as of March, 1999, 899 gaming machines at the
Charles Town Entertainment Complex. The Company has obtained all necessary
approvals for the installation and operation of a total of 1,000 gaming machines
at the Charles Town Entertainment Complex and will increase the number of gaming
machines if demand warrants and they are approved by the West Virginia Lottery
Commission.
RACING AND PARI-MUTUEL OPERATIONS
The Company's racing and pari-mutuel revenues have been derived from
(i) wagering on the Company's live races (a) at the Company's racetracks, (b) at
the Company's OTWs, (c) at other Pennsylvania racetracks and OTWs and (d)
through telephone wagering, as well as wagering at the Company's racetracks on
certain stakes races run at out-of-state racetracks (collectively, referred to
in the Company's financial statements as "pari-mutuel revenues from live
races"), (ii) wagering on full-card import simulcasts at the Company's
racetracks and OTWs and through telephone wagering (collectively, referred to in
the Company's financial statements as "pari-mutuel revenues from import
simulcasting") and (iii) fees from wagering on export simulcasting Company races
at out-of-state locations (referred to in the Company's financial statements as
"pari-mutuel revenues from export simulcasting"). The Company's other revenues
have been derived from admissions, program sales, food and beverage sales and
concessions and certain other ancillary activities.
Pari-Mutuel Revenues
Revenues from Company races consist of the total amount wagered, less the
amount paid as winning wagers. Of the amount not returned to bettors as winning
wagers, a portion is paid to the state in which the track is located, a portion
is distributed to the track's horsemen in the form of "purses" and the balance
is retained by the wagering facility. The Pennsylvania Racing Act specifies the
maximum percentages of each dollar wagered on horse races in Pennsylvania which
can be retained by the Company (prior to required payments to the horse owners
(the "Horsemen") in Pennsylvania and applicable taxing authorities). The
percentages vary, based on the type of wager; the average percentage which is
retained by the Company has approximated 20%. The balance of each dollar wagered
must be paid out to the public as winning wagers. With the exception of revenues
derived from wagers at the Company's racetracks and OTWs, the Company's revenues
on each race are determined pursuant to such maximum percentage and agreements
with the other racetracks and OTWs at which wagering is taking place. Amounts
payable to the Pennsylvania Horsemen are determined under agreements with the
Pennsylvania Horsemen ("Horsemen Agreements")and vary depending upon where the
wagering is conducted and the racetrack at which such races take place. The
Pennsylvania Horsemen receive their share of such wagering as race purses. The
Company retains a higher percentage of wagers made at its own facilities than of
wagers made at other locations. The West Virginia Racing Act provides for a
similar disposition of pari-mutuel wagers placed at the Charles Town
Entertainment Complex, with the average percentage of wagers retained by the
Company having been approximately 20% (prior to required payments to the Charles
Town Horsemen and to applicable West Virginia taxing authorities and other
mandated beneficiary organizations).
5
Simulcasting
The Company has been transmitting simulcasts of its races to other wagering
locations and receiving simulcasts of races from other locations for wagering by
its customers at Company facilities year-round, for more than five years. When
customers place wagers on import simulcast races, the Company receives revenue
and incurs expense in substantially the same manner as it would if the race had
been run at one of the Company's own tracks: of the amount not returned to
bettors as winning wagers, a portion is paid to the state in which the Company
wagering facility is located, a portion is paid to the purse fund for the horse
owners or trainers (thoroughbred or harness) of the Company's racetrack with
which the wagering facility is associated, a portion is paid to the racetrack
from which the race is simulcast and the balance is retained by the Company. The
Company believes that full-card import simulcasting, in which all of the races
at a non-Company track are import simulcast to a Company wagering facility, has
improved the wagering opportunities for its customers and thereby increased the
amount wagered at Company facilities. When the Company export simulcasts Company
races for wagering at non-Company locations, it receives a fixed percentage of
the amounts wagered on that race from the location to which the simulcast is
exported, while incurring minimal additional expense. During the years ended
December 31, 1997 and 1998, respectively, the Company received import simulcasts
from approximately 75 and 77 racetracks, respectively, including premier
racetracks such as Belmont Park, Church Hill Downs, Gulfstream Park, Hollywood
Park, Santa Anita and Saratoga and transmitted export simulcasts of Company
races to 98 and 126 locations, respectively.
Pursuant to an agreement among the members of the Pennsylvania Racing
Association, the Company and the two other Pennsylvania racetracks provide
simulcasts of all their races to all of each other's facilities and set the
commissions payable on such races. In addition, the Company has short-term
agreements with various racetracks throughout the United States to import
simulcast from, and export simulcast to, their facilities; these agreements
include import simulcasts of major stakes races. The Company believes that
import simulcasting of out-of-state races, including full card import
simulcasting, is beneficial economically to the Company because it makes
available wagering on higher quality races and which tends to increase the size
of the average wager.
Telephone Wagering
In 1983, the Company pioneered Telebet, Pennsylvania's first telephone
account wagering system. A telebet customer opens an account by depositing funds
with the Company. Account holders can then place wagers by telephone on Company
races and import simulcast races to the extent of the funds on deposit in the
account; any winnings are posted to the account and are available for withdrawal
or future wagers. In December 1995, Pocono Downs instituted Dial-A-Bet, a
similar telephone account betting system.
6
Operating Data of the Company
The following table summarizes certain key operating statistics for the
Company's pari-mutuel operations and their respective OTWs, including the pro
forma presentation of data assuming the acquisition of Pocono Downs occurred on
January 1, 1994:
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------
1994 1995 1996 1997 1998
---------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE DAILY PURSES)
NUMBER OF LIVE RACING DAYS:
Penn National Race Course 219 204 206 212 206
Pocono Downs 143 135 134 134 135
Charles Town Races - - - 159 206
TOTAL ATTENDANCE: (4)
Penn National Race Course (1) 485,224 430,128 370,898 339,487 304,220
Pocono Downs (1) 253,521 242,870 377,830 370,090 263,591
Reading OTW 253,183 246,012 214,314 178,237 159,818
Chambersburg OTW 110,075 143,554 132,447 125,448 105,384
York OTW - 232,109 238,610 225,672 213,929
Lancaster OTW - - 92,641 158,003 142,027
Williamsport OTW - - - 81,797 66,378
Johnstown OTW - - - - 25,411
Erie OTW 129,074 116,367 113,169 94,429 99,726
Allentown OTW 275,118 272,491 271,706 252,909 258,237
Carbondale OTW - - - - 62,757
Hazleton OTW - - - - 60,706
---------------------------------------------------------------------
Total paid attendance (1) 1,506,195 1,683,531 1,811,615 1,762,184 1,826,072
=====================================================================
TOTAL WAGERING: (1) (2)
Penn National Race Course $ 91,898 $ 85,661 $ 75,708 $ 69,687 $ 70,155
Pocono Downs 51,980 57,784 53,190 47,217 38,867
Reading OTW 39,714 42,810 41,320 30,811 29,178
Chambersburg OTW 14,589 24,365 25,024 24,899 22,336
York OTW - 42,140 49,864 45,245 43,873
Lancaster OTW - - 13,079 29,292 29,131
Williamsport OTW - - - 9,684 10,461
Johnstown OTW - - - - 3,977
Erie OTW 26,404 29,379 27,200 21,767 20,737
Allentown OTW 52,676 56,440 56,216 58,681 56,719
Carbondale OTW - - - - 10,284
Hazleton OTW - - - - 9,926
Penn National Telebet 7,967 8,281 8,423 9,473 10,333
Pocono Downs Dial-A-Bet - 75 5,510 8,179 9,088
Export simulcasting:
Penn National Race Course 90,878 113,639 148,702 181,281 199,041
Pocono Downs 25,723 30,121 32,493 26,426 23,986
Charles Town Races - - - 40,195 65,552
---------------------------------------------------------------------
=====================================================================
Total wagering $ 401,829 $ 490,695 $ 536,729 $ 602,836 $ 659,649
=====================================================================
7
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------
1994 1995 1996 1997 1998
---------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE DAILY PURSES)
AVERAGE DAILY PURSES:
Penn National Race Course $ 48,560 $ 57,897 $ 62,328 $ 60,623 $ 63,374
Pocono Downs 35,790 42,314 42,313 40,149 41,363
Charles Town Races - - - 25,805 50,985
---------------------------------------------------------------------
Total average daily purse $ 84,350 $ 100,211 $ 104,641 $ 126,577 $ 155,722
=====================================================================
GROSS MARGIN FROM WAGERING: (3)
Penn National Race Course $ 17,963 $ 24,915 $ 27,955 $ 28,669 $ 29,068
Pocono Downs 16,653 17,838 17,805 16,920 18,820
Charles Town Races - - - 3,099 5,878
---------------------------------------------------------------------
Total gross margin from wagering $ 34,616 $ 42,753 $ 45,760 $ 48,688 $ 53,766
---------------------------------------------------------------------
(1) Does not reflect attendance for wagering on simulcasts when live racing
is not conducted (i) for all periods presented, in the case of Penn
National Race Course (ii) for the years ended December 31, 1994-1995,
in the case of Pocono Downs.
(2) Wagering on certain stakes races is included in Wagering on the
Penn National Race Course races.
(3) Amounts equal total pari-mutuel revenues, less purses paid to the
Horsemen, taxes payable and simulcast commissions or host track fees
paid to other racetracks.
(4) Does not include attendance for Charles Town Races.
Live Racing
The following table summarizes the Company's live racing facilities:
RACING FACILITY LOCATION DATE OPENED/STATUS OPERATIONS CONDUCTED
Penn National Race Course Grantville, PA Constructed in 1972; Live thoroughbred racing;
operated by the Company simulcast wagering; dining;
since 1972 telephone account wagering
Pocono Downs Plains Township, PA Constructed in 1965; Live harness racing;
operated by the Company simulcast wagering; dining;
since November 1996 telephone account wagering
Charles Town Races Charles Town, WV Charles Town Races was Live thoroughbred racing;
at the Charles Town constructed in 1933; simulcast wagering;
Entertainment Complex acquired by Charles Town dining (this facility is adjacent
Joint Venture on January gaming machine operations)
15, 1997; refurbished in
1997 and reopened as the
Charles Town Entertainment
Complex
The Penn National Race Course is located on approximately 225 acres
approximately 15 miles northeast of Harrisburg, 100 miles west of Philadelphia
and 200 miles east of Pittsburgh. There is a total population of approximately
1.4 million persons within a radius of approximately 35 miles around the Penn
National Race Course and approximately 2.2 million persons within a 50-mile
radius. The property includes a one mile all-weather thoroughbred racetrack and
a 7/8-mile turf track. The property also includes approximately 400 acres
surrounding the Penn National Race Course which are available for future
expansion or development.
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The Penn National Race Course's main building is the
grandstand/clubhouse, which is completely enclosed and heated and, at the
clubhouse level, fully air-conditioned. The building has a capacity of
approximately 15,000 persons with seating for approximately 9,000, including
1,400 clubhouse dining seats. Several other dining facilities and numerous food
and beverage stands are situated throughout the facility. Television sets for
viewing live racing and simulcasts are located throughout the facility. The
pari-mutuel wagering areas are divided between those available for on-track
wagering and those available for simulcast wagering.
The Penn National Race Course includes stables for approximately 1,250
horses, a blacksmith shop, veterinarians' quarters, jockeys' quarters, a paddock
building, living quarters for grooms, a cafeteria and recreational building in
the backstretch area and water and sewage treatment plants. Parking facilities
for approximately 6,500 vehicles adjoin the Penn National Race Course.
The Company has conducted live racing at Penn National Race Course since
1972, and has held at least 204 days of live racing at the facility in each of
the last five years. The Penn National Race Course is one of only two
thoroughbred racetracks in Pennsylvania. Post time at Penn National Race Course
is 7:30 p.m. on Wednesdays, Fridays and Saturdays, and 5:00 p.m. on Sundays and
holidays.
Pocono Downs is located on approximately 400 acres in Plains Township,
outside Wilkes-Barre, Pennsylvania. There is a total population of approximately
785,000 persons within a radius of approximately 35 miles around Pocono Downs
and approximately 1.5 million persons within a 50-mile radius. The property
includes a 5/8-mile all-weather, lighted harness track. Pocono Downs's main
buildings are the grandstand and the clubhouse. The clubhouse is completely
enclosed, heated and fully air-conditioned. The grandstand has enclosed, heated
and air-conditioned seating for approximately 500 persons and permanent open-air
stadium-style seating for approximately 2,500 persons. The clubhouse is a tiered
dining and wagering facility that seats approximately 1,000 persons. The
clubhouse dining area seats 500 persons. Television sets for viewing live racing
and simulcasts are located throughout the facility along with pari-mutuel
wagering areas.
A two-story 14,000 square foot building which houses the Pocono Downs
offices is located on the property. Pocono Downs also includes stables for
approximately 950 horses, five paddock stables, quarters for grooms, two
blacksmith shops and a cafeteria for the Harness Horsemen. Parking facilities
for approximately 5,000 vehicles adjoin the track.
The acquisition of Pocono Downs was consummated following the last day
of racing at Pocono Downs for the 1996 season. The Company resumed live racing
at Pocono Downs in April 1997. The Company conducted 134 and 135 days of live
harness racing at the facility during 1997 and 1998 racing seasons,
respectively. Post time at Pocono Downs is 7:15 p.m.
The Charles Town Entertainment Complex is located on a portion of a
250-acre parcel in Charles Town, West Virginia, which is approximately a
60-minute drive from Baltimore, Maryland and a 70-minute drive from Washington,
D.C. There is a total population of approximately 3.1 million persons within a
50-mile radius and approximately 9.0 million persons within a 100-mile radius of
the Charles Town Entertainment Complex. The property includes a 3/4-mile
thoroughbred racetrack. The Charles Town Entertainment Complex's main building
is the grandstand/clubhouse, which is completely enclosed and heated. The
clubhouse dining room has seating for 600. Additional food and beverage areas
are situated throughout the facility. The property surrounding the Charles Town
Entertainment Complex, including the site of the former Shenandoah Downs
Racetrack, is available for future expansion or development. In addition, the
Company has a right of first refusal for an additional 250 acres that are
adjacent to the Charles Town Entertainment Complex. The Charles Town
Entertainment Complex also includes stables, an indoor paddock, ample parking
and water and sewage treatment facilities.
The Charles Town Races reopened in April 1997. The Company conducted
159 and 206 days of thoroughbred racing at the facility during 1997 and 1998
racing seasons, respectively. Post time at the Charles Town Races is 7:15 p.m.
on Mondays, Fridays and Saturdays, 4:00 p.m. on Wednesdays and 1:00 p.m. on
Sundays. Although other regional racetracks offer nighttime thoroughbred racing,
Penn National Race Course and Charles Town Races are the only racetracks in the
Eastern time zone conducting year-round nighttime thoroughbred horse racing,
which the Company believes increases its opportunities to export simulcast its
races during periods in which other racetracks are not conducting live racing.
9
OTWs
The Company's OTWs provide areas for viewing import simulcasts and
televised sporting events, placing pari-mutuel wagers and dining. The facilities
also provide convenient parking.
FACILITY/LOCATION DATE OPENED/STATUS SIZE (SQ.FT.) COST (1) OWNED/LEASED
- - ----------------- ------------------ ------------- -------- ------------
Allentown, PA Opened 7/93 28,500 $ 5,207,000 Owned
Carbondale, PA Opened 3/98 13,000 $ 2,661,000 Owned
Chambersburg, PA Opened 4/94 12,500 $ 1,500,000 Leased
Erie, PA Opened 5/91 22,500 $ 3,575,000 Owned
Hazleton, PA Opened 3/98 13,000 $ 1,868,000 Leased
Johnstown, PA Opened 9/98 14,220 $ 1,300,000 Leased
Lancaster, PA Opened 7/96 24,000 $ 2,700,000 Leased
Reading, PA Opened 5/92 22,500 $ 2,100,000 Leased
Williamsport, PA Opened 2/97 14,000 $ 3,000,000 Owned
York, PA Opened 3/95 25,000 $ 2,200,000 Leased
Stroudsburg, PA License authorized; approval to 12,000 $ 2,000,000 Leased (2)
operate pending; site selected (estimated)
(1) Consists of original construction costs, equipment and, for owned
properties, the cost of land and building.
(2) The Company is licensed to operate one additional OTW and has identified a
site to operate the OTW facility in Stroudsburg, Pennsylvania, subject to
receipt of all applicable approvals to operate this site.
The Company considers its properties adequate for its presently
anticipated purposes.
POTENTIAL TENNESSEE DEVELOPMENT PROJECT
In June 1997, the Company acquired twelve one-month options to purchase
approximately 100 acres of land in Memphis, Tennessee. Since such time, the
Company, through its subsidiary, Tennessee Downs, Inc. ("Tennessee Downs"), has
pursued the development of a harness track and simulcast facility which is
located in the northeastern section of Memphis (the "Tennessee Development
Project"). 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 OTW facility at this
site. 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 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 Tennessee Commission's term on June 30, 1998, if such term was not
extended by the Tennessee Commission. On May 1, 1998, 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) for racing days for the period ending
December 31, 2000; and (iii) 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 Racing Control Act had not been repealed and cannot be repealed
by implication by dissolving the Tennessee Commission. It is the opinion of the
court that because the Racing Control Act is still in force, horse-racing and
pari-mutuel betting is a legal, unregulated activity in Tennessee. This opinion
has been appealed by the Tennessee Attorney General. The Company intends to
10
continue its efforts to develop and operate a harness track in Tennessee. Costs
incurred as of December 31, 1998 regarding the Tennessee license amount to
$489,000 and are presented in prepaid expenses and other current assets.
If the State of Tennessee reinstates the Tennessee Commission or
otherwise regulates racing, the Company plans to spend approximately $9.0
million in the next year to purchase the land subject to the option and build a
combined OTW and grandstand facility. The Company estimates that total
development costs, including subsequent track construction, will be
approximately $15.5 million. In addition, it will be permitted to pursue the
development of additional OTWs in Tennessee, provided it first obtains necessary
approvals, including a public referendum for each proposed OTW site and other
necessary zoning and land development approvals.
NEW JERSEY JOINT VENTURE
On January 28, 1999, pursuant to a First Amendment to an Asset Purchase
Agreement by, between 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 is 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. The Company is responsible for 50% of the
purchase price. The parties to the Joint Venture are also contingently liable to
the sellers in amounts not to exceed a total of $10 million, if the Joint
Venture receives various approvals for off-track wagering or phone betting.
The Joint Venture is contingent upon, among other things, the Company
obtaining approvals necessary to effect the Joint Venture, which approvals
include: (i) full and complete New Jersey regulatory approval (including but not
limited to approval of the New Jersey Racing Commission); (ii) Hart Scott Rodino
compliance; and (iii) the written consent of a majority of the holders of its
$80 million Senior Notes issued December 17, 1997 to any necessary modification
to the Indenture dated December 12, 1997 to permit the Company's investment in
the Joint Venture. At the initial closing of the Acquisition on January 28,
1999, The Company loaned FR Park Racing, LP, a New Jersey limited partnership,
$11,250,000 (at the Company's effective borrowing rate as specified in Note 3
under "Credit Facilities"), which is secured by certain assets. After obtaining
the above approvals, the Company will invest an additional $11,750,000 into the
Joint Venture with a portion of this amount treated as capital and the balance
as debt. The Company will have a 50% interest in the Joint Venture.
MARKETING AND ADVERTISING
The Company seeks to increase wagering by broadening its customer base and
increasing the wagering activity of its existing customers. To attract new
customers, the Company seeks to increase the racing knowledge of its customers
through its television programming, and by providing "user friendly" automated
wagering systems and comfortable surroundings. The Company also seeks to attract
new customers by offering various types of promotions including family fun days,
premium give-away programs, contests and handicapping seminars.
Charles Town Gaming Machine Marketing Programs
The Company's marketing efforts, which include print and radio advertising,
commenced in October 1997 and are focused on the Washington, D.C., Baltimore,
Maryland, Northern Virginia, Eastern West Virginia and Southern Pennsylvania
markets. At the Charles Town Entertainment Complex the Company established the
Silver Screen Video Slots Club, a manual player tracking system designed to
reward frequent and active customers. In 1999, the Company is installing a
computerized player tracking system at the Charles Town Entertainment Complex,
which will further focus the Company's marketing efforts. In 1998, the Company
11
implemented a coupon program where customers who visit the Charles Town
Entertainment Complex can redeem the coupons for $5. From these coupons, the
Company has compiled a database of customers which will be integrated into the
new player tracking system.
Televised Racing Program
The Company's Racing Alive program is televised by satellite
transmission commencing approximately one hour before post time on each live
racing day at the Penn National Race Course. The program provides color
commentary on the races at the Penn National Race Course (including wagering
odds, past performance information and handicapper analysis), general education
on betting and handicapping, interviews with racing personalities and featured
races from other thoroughbred racetracks across the country. The Racing Alive
program is shown at the Penn National Race Course and on various cable
television systems in Pennsylvania and is transmitted to all OTWs that receive
the Penn National Race Course races. The Company has expanded Racing Alive and
created additional televised programming to cover racing at Pocono Downs and at
other harness racing venues throughout the United States. The Company's
satellite transmissions are encoded so that only authorized facilities can
receive the program.
Automated Wagering Systems
To make wagering more "user friendly" to the novice and more efficient
for the expert, the Company leases Autotote Corporation's automated wagering
equipment. These wagering systems enable the customer to choose a variety of
ways to place a bet through touch-screen interactive terminals and personalized
portable wagering terminals, provide current odds information and enable
customers to place bets and credit winning tickets to their accounts. Currently,
more than 35% of all wagers at Penn National are processed through these
self-service terminals and Telebet.
Modern Facilities
The Company provides a comfortable, upscale environment at each of its
OTWs, including a full bar, a range of restaurant services and an area devoted
to televised sporting events. The Company believes that its attractive
facilities appeal to its current customers and to new customers, including those
who have not previously visited a racetrack.
GTECH GAMING MACHINE SUPPLY AND SERVICE AGREEMENT
In June 1997, the Charles Town Joint Venture, which is operated as PNGI
Charles Town Gaming, LLC, an 89% subsidiary of the Company, entered into an
agreement (the "GTECH Agreement") with GTECH relating to the lease, installation
and service of a video lottery system ("VLS") at the Charles Town Entertainment
Complex. On November 18, 1998, the Company entered into an agreement to purchase
GTECH's assets and rights related to the provision of gaming technology at
Charles Town Races. Under the terms of the agreement, the Company assumed the
ownership and operation of the 799 gaming devices and the central monitoring
system for consideration of $12.9 million.
PURSES; AGREEMENTS WITH HORSEMEN
The agreements with the Horsemen at each of the Company's racetracks set
forth the purses. The continuation of these agreements is required to allow the
Company to conduct live racing and export and import simulcasting. (See "Racing
and Pari-Mutuel Operations")
The Penn National Race Course Thoroughbred Horsemen Agreement was entered
into in February 1996, and expired on February 15, 1999. Failing to reach an
agreement through negotiations, on February 16, 1999, the Pennsylvania
Thoroughbred Horsemen stopped racing at Penn National Race Course and withdrew
their permission for the Company to import simulcast races from other
racetracks. This resulted in the closure of Penn National Race Course and its
six OTW facilities at Reading, Chambersburg, York, Lancaster, Williamsport and
Johnstown. The Company continued its efforts to negotiate a new agreement with
the Pennsylvania Thoroughbred Horsemen and on March 23, 1999 the Company signed
a new Horsemen agreement with the Pennsylvania Thoroughbred Horsemen with an
initial term that expires on January 1, 2004. The Pennsylvania Harness Horsemen
Agreement was entered into in November 1994, became effective in January 1995
and expires in January 2000. The Company has an agreement with the Charles Town
Horsemen, which expires on December 31, 2000. See, Management's Discussion and
Analysis of Financial Condition and Results of Operations - "Liquidity and
Capital
12
Resources". The West Virginia Video LotteryAct also requires that the operator
of the Charles Town Entertainment Complex be subject to a written agreement with
the pari-mutuel clerks in order to operate gaming machines, this agreement
expires on December 31, 2000.
COMPETITION
The Company faces significant competition for wagering dollars from
other racetracks and OTWs in Pennsylvania and neighboring states (some of which
also offer other forms of gaming), other gaming venues such as casinos and
state-sponsored lotteries, including the Pennsylvania Lottery and the West
Virginia Lottery. The Company may also face competition in the future from new
OTWs or from new racetracks. From time to time, Pennsylvania has considered
legislation to permit other forms of gaming. Although Pennsylvania has not
authorized any form of casino or other gaming, if additional gaming
opportunities become available in or near Pennsylvania, such gaming
opportunities could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's live races compete for wagering dollars and simulcast
fees with live races and races simulcast from other racetracks both inside and
outside Pennsylvania (including several in New York, New Jersey, West Virginia,
Ohio, Maryland and Delaware). The Company's ability to compete successfully for
wagering dollars is dependent, in part, on the quality of its live horse races.
The quality of horse races at some racetracks that compete with the Company,
either by live races or simulcasts, is higher than the quality of Company races.
The Company believes that there has been some improvement over the last several
years in the quality of the horses racing at the Penn National Race Course, due
to higher purses being paid as a result of the Company's increased simulcasting
activities, however, there can be no assurance that the Company can continue
such improvement.
The Company's OTWs compete with the OTWs of other Pennsylvania
racetracks, and new OTWs may compete with the Company's existing or proposed
wagering facilities. Competition between OTWs increases as the distance between
them decreases. For example, the Company believes that its Allentown OTW, which
was acquired in the acquisition of Pocono Downs and which is approximately 50
miles from the Penn National Race Course and 35 miles from the Company's Reading
OTW, has drawn some patrons from the Penn National Race Course, the Reading OTW
and the Company's telephone wagering system; and, the Company's Lancaster OTW,
which is approximately 31 miles from the Penn National Race Course and 25 miles
from the Company's York OTW, has drawn some patrons from the Penn National Race
Course, the York OTW and the Company's telephone wagering system. Moreover, the
Company believes that a competitor's OTW in King of Prussia, Pennsylvania, which
is approximately 23 miles from the Reading OTW, has drawn some patrons from the
Reading OTW. Although only one competing OTW remains authorized by law for
future opening, the opening of a new OTW in close proximity to the Company's
existing or future OTWs could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's gaming machine operations face competition from other
gaming machine venues in West Virginia and in neighboring states (including
Dover Downs in Dover, Delaware, Delaware Park in northern Delaware, Harrington
Raceway in southern Delaware and the casinos in Atlantic City, New Jersey).
Venues in Delaware and New Jersey, in addition to video gaming machines,
currently offer mechanical slot machines that feature physical spinning reels,
pull-handles and the ability to both accept and pay out coins. Legislation has
been passed in West Virginia, subject to the Governor's signature or veto, which
would allow coin out and reel slot machines at race tracks. If such legislation
is signed by the Governor, the Company intends to convert some or all of its
current machines to coin out and increase the maximum number of machines with
reel slot machines. The failure to attract or retain gaming machine customers at
the Charles Town Entertainment Complex, whether arising from such competition or
from other factors, could have a material adverse effect upon the Company's
business, financial condition and results of operations.
EFFECT OF INCLEMENT WEATHER AND SEASONALITY
Because horse racing is conducted outdoors, variable weather
contributes to the seasonality of the Company's business. Weather conditions,
13
particularly during the winter months, may cause races to be canceled or may
curtail attendance. Because a substantial portion of the Company's racetrack
expenses are fixed, the loss of scheduled racing days could have a material
adverse effect on the Company's business, financial condition and results of
operations.
For the year ended December 31, 1998, the Company canceled a total of
five racing days because of inclement weather. The severe winter weather in 1996
resulted in the closure of the Company's OTW facilities for two days in January
1996. Because of the Company's growing dependence upon OTW operations, severe
weather that causes the Company's OTWs to close could have an adverse effect
upon the Company's business, financial condition and results of operations.
Attendance and wagering at the Company's facilities have been favorably
affected by special racing events which stimulate interest in horse racing, such
as the Triple Crown races in May and June and the heavier racing schedule
throughout the country during the second and third quarter of the year. As a
result, the Company's revenues and net income have been greatest in the second
and third quarters of the year, and lowest in the first and fourth quarters of
the year.
REGULATION AND TAXATION
General
Company subsidiaries are authorized to conduct thoroughbred racing and
harness racing in Pennsylvania under the Pennsylvania Racing Act. Such
subsidiaries are also authorized, under the Pennsylvania Racing Act and the
Federal Horseracing Act, to conduct import simulcast wagering. The Charles Town
Joint Venture is subject to the provisions of the West Virginia Racing Act,
which governs the conduct of thoroughbred horse racing in West Virginia, and the
West Virginia Video Lottery Act, which governs the operation of gaming machines
in West Virginia. The Company's live racing, pari-mutuel wagering and gaming
machine operations are contingent upon the continued governmental approval of
such operations as forms of legalized gaming. All of the Company's current and
proposed operations are subject to extensive regulations and could be subjected
at any time to additional or more restrictive regulations, or banned entirely.
Pennsylvania Racing Regulations
The Company's horse racing operations at Penn National Race Course and
Pocono Downs are subject to extensive regulation under the Pennsylvania Racing
Act, which established the Pennsylvania State Horse Racing Commission and the
State Harness Racing Commission (together, the "Pennsylvania Racing
Commissions") which are responsible for, among other things, (i) granting
permission annually to maintain racing licenses and schedule race meets, (ii)
approving, after a public hearing, the opening of additional OTWs, (iii)
approving simulcasting activities, (iv) licensing all officers, directors,
racing officials and certain other employees of the Company and (v) approving
all contracts entered into by the Company affecting racing, pari-mutuel wagering
and OTW operations.
As in most states, the regulations and oversight applicable to the
Company's operations in Pennsylvania are intended primarily to safeguard the
legitimacy of the sport and its freedom from inappropriate or criminal
influences. The Pennsylvania Racing Commissions have broad authority to regulate
in the best interests of racing and may, to that end, disapprove the involvement
of certain personnel in the Company's operations, deny approval of certain
acquisitions following their consummation or withhold permission for a proposed
OTW site for a variety of reasons, including community opposition. For example,
the Pennsylvania State Thoroughbred Racing Commission withheld approval for the
Company's initial site for its Lancaster OTW, but the Company applied and was
ultimately approved for another site in Lancaster, which opened in July 1996.
The Pennsylvania legislature also has reserved the right to revoke the power of
the Pennsylvania Racing Commissions to approve additional OTWs and could, at any
time, terminate pari-mutuel wagering as a form of legalized gaming in
Pennsylvania or subject such wagering to additional restrictive regulation; such
termination would, and any further restrictions could, have a material adverse
effect upon the Company's business, financial condition and results of
operations.
The Company may not be able to obtain all necessary approvals for the
continued operation or expansion of its business. Even if all such approvals are
obtained, the regulatory process could delay implementation of the Company's
plans to open additional OTWs. The Company has had continued permission from the
Pennsylvania State Horse Racing Commission to conduct live racing at the Penn
National Race Course since it commenced operations in 1972, and has obtained
permission from the Pennsylvania State Harness Racing Commission to conduct live
racing at Pocono Downs. Currently, the Company has approval from the
14
Pennsylvania Racing Commissions to operate the ten OTWs that are currently open
and the one additional OTW the Company proposes to open. A Commission may refuse
to grant permission to open additional OTWs or to continue to operate existing
facilities. The failure to obtain required regulatory approvals would have a
material adverse effect upon the Company's business, financial condition and
results of operations.
West Virginia Racing and Gaming Regulation
The Company's operations at the Charles Town Entertainment Complex are
subject to regulation by the West Virginia Racing Commission under the West
Virginia Racing Act, and by the West Virginia Lottery Commission under the West
Virginia Video Lottery Act. The powers and responsibilities of the West Virginia
Racing Commission under the West Virginia Racing Act are substantially similar
in scope and effect to those of the Pennsylvania Racing Commissions and extend
to the approval and/or oversight of all aspects of racing and pari-mutuel
wagering operations. The Charles Town Joint Venture has obtained from the West
Virginia Racing Commission a license to conduct racing and pari-mutuel wagering
at the Charles Town Entertainment Complex. Pursuant to the West Virginia Video
Lottery Act, the Company has obtained approval for the installation and
operation of a total of 1,000 gaming machines at the Charles Town Entertainment
Complex.
State and Federal Simulcast Regulation
The Federal Interstate Horseracing Act, the Pennsylvania Racing Act and
the West Virginia Racing Act require that the Company have a written agreement
with each applicable horsemen's organization in order to simulcast races. The
Company has entered into the Horsemen Agreements, and in accordance therewith
has agreed on the allocations of the Company's revenues from import simulcast
wagering to the purse funds for the Penn National Race Course, Charles Town
Races and Pocono Downs. Because the Company cannot conduct import simulcast
wagering in the absence of the Horsemen Agreements, the termination or
non-renewal of such Horsemen Agreements could have a material adverse effect on
the Company's business, financial condition and results of operations.
Taxation
The Company believes that the prospect of significant additional
revenue is one of the primary reasons that jurisdictions permit legalized
gaming. As a result, gaming companies are typically subject to significant taxes
and fees in addition to normal federal and state income taxes, and such taxes
and fees are subject to increase at any time. The Company pays substantial taxes
and fees with respect to its operations. From time to time, federal legislators
and officials have proposed changes in tax laws, or in the administration of
such laws, affecting the gaming industry. It is not possible to determine with
certainty the likelihood of changes in tax laws or in the administration of such
laws. Such changes, if adopted, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Compliance with Other Laws
The Company and its OTWs are also subject to a variety of other rules
and regulations, including zoning, construction and land-use laws and
regulations in Pennsylvania and West Virginia governing the serving of alcoholic
beverages. Currently, Pennsylvania laws and regulations permit the construction
of off-track wagering facilities, but may affect the selection of a particular
OTW site because of parking, traffic flow and other similar considerations, any
of which may serve to delay the opening of future OTWs in Pennsylvania. By
contrast, West Virginia law does not permit the operation of OTWs. The Company
derives a significant portion of its other revenues from the sale of alcoholic
beverages to patrons of its facilities. Any interruption or termination of the
Company's existing ability to serve alcoholic beverages would have a material
adverse effect on the Company's business, financial condition and results of
operations.
15
Restrictions on Share Ownership and Transfer
The Pennsylvania Racing Act requires that any shareholder proposing to
transfer beneficial ownership of 5% or more of the Company's shares file an
affidavit with the Company setting forth certain information about the proposed
transfer and transferee, a copy of which the Company is required to furnish to
the Pennsylvania Racing Commissions. The certificates representing the Company
shares owned by 5% beneficial shareholders are required to bear certain legends
prescribed by the Pennsylvania Racing Act. In addition, under the Pennsylvania
Racing Act, the Pennsylvania Racing Commissions have the authority to order a 5%
beneficial shareholder of the Company to dispose of his Common Stock of the
Company if it determines that continued ownership would be inconsistent with the
public interest, convenience or necessity or the best interest of racing
generally. The West Virginia Video Lottery Act provides that a transfer of more
than 5% of the voting stock of a corporation which controls the license may only
be to persons who have met the licensing requirements of the West Virginia Video
Lottery Act or which transfer has been pre-approved by the West Virginia Lottery
Commission. Any transfer that does not comply with this requirement voids the
license.
Potential Tennessee Development Regulatory Compliance.
If the Company successfully completes the development of its potential
Tennessee harness track and OTWs, the Company will likely face regulatory
requirements that are similar to the requirements affecting its existing
operations; however, given the absence of horse racing in Tennessee at this
time, the Company may face more burdensome regulatory approvals or compliance in
light of the absence of an established regulatory framework.
ITEM 2 PROPERTIES
See, ITEM 1-BUSINESS - "RACING AND PARI-MUTUEL OPERATIONS"
A solid waste landfill ("Landfill") is on a parcel of land adjacent to
the Company's Harness Track. The East Side Landfill Authority (the "Landfill
Authority"), which operated the Landfill from 1970 until 1982, disposed of
municipal waste on behalf of four municipalities. The Landfill is currently
subject to a closure order issued by the Pennsylvania Department of
Environmental Resources ("PADER") which the four municipalities are required to
implement pursuant to a 1986 Settlement Agreement among the former trustee in
bankruptcy for Pocono Downs, the Landfill Authority, the municipalities and
PADER (the "Settlement Agreement"). According to the Company's environmental
consulting firm, the Landfill closure is substantially complete. To date, the
municipalities obligated to implement the closure order pursuant to the
Settlement Agreement, have been fulfilling their obligations under the
Settlement Agreement or that the terms of the Settlement Agreement will not be
amended in the future. In addition, the Company may be liable for future claims
with respect to the Landfill under the Comprehensive Environmental Response,
Compensation and Liability Act and analogous state laws. The Company may incur
expenses in connection with the Landfill in the future, which expenses may not
be reimbursed by the municipalities. Any such expenses could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Other Property and Equipment
The Company currently leases 6,183 square feet of office space in an
office building in Wyomissing, Pennsylvania for the Company's executive offices.
The lease expires in April 2000 and provides for an annual minimum rental of
$71,100. The office building is owned by an affiliate of Peter M. Carlino, the
Chairman and Chief Executive Officer of the Company. The Company believes that
the lease terms are not less favorable than lease terms that could have been
obtained from an unaffiliated third party.
The Company currently leases an aircraft from a company owned by John
Jacquemin, a director of the Company. The lease expires in September, 2007 and
provides for monthly payments of $8,356. The Company believes that the lease
terms are not less favorable than lease terms that could have been obtained from
an unaffiliated third party.
16
EMPLOYEES AND LABOR RELATIONS
At March 19, 1999, the Company had 1,654 permanent employees, of whom
837 were full-time and 817 part-time. Employees of the Company who work in the
admissions department and pari-mutuels department at the Penn National Race
Course, Pocono Downs and the OTWs are represented under collective bargaining
agreements between the Company and Sports Arena Employees' Union Local 137. The
agreements extend until October 3, 1999 for track employees and until May 27,
1999 for OTW employees. The pari-mutuel clerks at Pocono Downs voted to unionize
in June 1997. The Company has held negotiations with this union, but does not
have a contract to date. Failure to reach agreement with this union would not
result in the suspension or termination of the Company's license to operate live
racing at Pocono Downs or to conduct simulcast or OTW operations. The
pari-mutuel clerks and racing valets at Charles Town are represented under a
collective bargaining agreement with the West Virginia Division of Mutuel
Clerks, which expires on December 31, 2000. The Company believes that its
relations with its employees are satisfactory.
ITEM 3 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 the 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 that
certain contracts allegedly bind the Charles Town Joint Venture to retain Amtote
for wagering services through September 2004 and (iv) seeks unspecified
compensatory damages, legal fees and costs associated with the action and other
legal and equitable relief as the Court deems just and appropriate. On December
24, 1997, a temporary restraining order was issued, which prescribed performance
under the Third Party Wagering Contract. On February 20, 1998, the temporary
restraining order was lifted by the court. The Company intends to pursue legal
remedies in order to terminate Amtote and proceed under the Third Party Wagering
Services Contract. The Company believes that this action, and any resolution
thereof, will not have any material adverse impact upon its financial condition,
results, or the operations of either the Charles Town Joint Venture or the
Company.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
17
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on The Nasdaq National Market
under the symbol "PENN". The following table sets forth for the periods
indicated the high and low sales prices per share of the Company's Common Stock
as reported on The Nasdaq National Market.
HIGH LOW
1996
First Quarter $ 6.000 $ 4.292
Second Quarter 14.500 5.875
Third Quarter 15.625 9.000
Fourth Quarter 21.375 13.750
1997
First Quarter $ 18.250 $ 14.000
Second Quarter 19.625 13.750
Third Quarter 20.125 14.625
Fourth Quarter 19.250 8.750
1998
First Quarter $ 13.125 $ 8.875
Second Quarter 12.000 6.813
Third Quarter 9.125 5.125
Fourth Quarter 10.313 5.500
The closing sale price per share of Common Stock on The Nasdaq National
Market on March 19, 1999, was $7.188. As of March 19, 1999, there were 738
holders of record of Common Stock.
DIVIDEND POLICY
Since the Company's initial public offering of Common Stock in May
1994, the Company has not paid any cash dividends on its Common Stock. The
Company intends to retain all of its earnings to finance the development of the
Company's business, and thus, does not anticipate paying cash dividends on its
Common Stock for the foreseeable future. Payment of any cash dividends in the
future will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, future earnings, operations, capital
requirements, the general financial condition of the Company and general
business conditions. Moreover, the Company's existing credit facility (the
"Credit Facility") prohibits the Company from authorizing, declaring or paying
any dividends until the Company's commitments under the Credit Facility have
been terminated and all amounts outstanding thereunder have been repaid. In
addition, future bank financing may prohibit the payment of dividends under
certain conditions.
18
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company for
the years ended December 31, 1994, 1995, 1996 1997 and 1998, except for
Operating Data, are derived from financial statements that have been audited by
BDO Seidman, LLP independent certified public accountants, adjusted as described
in the notes below. The selected consolidated financial data should be read in
conjunction with the consolidated financial statements of the Company and Notes
thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the other financial information included herein.
YEAR ENDED DECEMBER 31
-------------------------------------------------------------
1994 1995 1996 1997 (1) 1998
-------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA
Revenue
Pari-mutuel revenues
Live races $ 23,428 $ 21,376 $ 18,727 $ 27,653 $ 26,893
Import simulcasting 16,968 27,254 32,992 59,810 68,136
Export simulcasting 1,187 2,142 3,347 5,279 5,810
Gaming revenue - - - 5,712 37,396
Admissions, programs and other racing revenue 2,563 3,704 4,379 5,678 6,280
Concessions revenues 1,885 3,200 3,389 7,404 9,550
-------------------------------------------------------------
Total revenues 46,031 57,676 62,834 111,536 154,065
-------------------------------------------------------------
OPERATING EXPENSES
Purses, stakes, and trophies 10,674 12,091 12,874 22,335 29,141
Direct salaries, payroll taxes and employee benefits 6,707 7,699 8,669 16,200 19,134
Simulcast expenses 8,892 9,084 9,215 12,982 13,809
Pari-mutuel taxes 4,054 4,963 5,356 9,506 9,281
Lottery taxes and administration - - - 1,874 14,749
Other direct meeting expenses 6,093 7,576 8,536 18,087 24,029
Concessions expenses 1,175 2,125 2,349 5,605 7,929
Management fees paid to related entity 345 - - - -
Other operating expenses 2,968 5,002 4,942 8,735 10,787
Depreciation and amortization 699 881 1,433 4,040 5,748
Site development and restructuring changes - - - 2,437 -
-------------------------------------------------------------
Total operating expenses 41,607 49,421 53,374 101,801 134,607
-------------------------------------------------------------
Income from operations 4,424 8,255 9,460 9,735 19,458
-------------------------------------------------------------
Other income (expenses)
Interest income (expense), net (340) 198 (156) (3,656) (7,549)
Other 15 10 - (2) 113
-------------------------------------------------------------
Total other income (expenses) (325) 208 (156) (3,658) (7,436)
-------------------------------------------------------------
Income before income taxes and extraordinary item 4,099 8,463 9,304 6,077 12,022
Taxes on income 1,381 3,467 3,794 2,308 4,519
-------------------------------------------------------------
Income before extraordinary item 2,718 4,996 5,510 3,769 7,503
Extraordinary item - loss on early extinquishment of debt,
net of income taxes of $83 and $1,001 respectively 115 - - 1,482 -
-------------------------------------------------------------
19
YEAR ENDED DECEMBER 31
-------------------------------------------------------------
1994 1995 1996 1997 (1) 1998
-------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
=============================================================
Net income $ 2,603 $ 4,996 $ 5,510 $ 2,287 $ 7,503
=============================================================
PER SHARE DATA:
Basic income per share before extraordinary item $ 0.39 $ 0.41 $ 0.25 $ 0.50
Basic net income per share $ 0.39 $ 0.41 $ 0.15 $ 0.50
Diluted income per share before extraordinary item $ 0.38 $ 0.40 $ 0.24 $ 0.49
Diluted net income per share $ 0.38 $ 0.40 $ 0.15 $ 0.49
WEIGHTED SHARES OUTSTANDING:
Basic 12,906 13,302 14,925 15,015
Diluted 13,017 13,822 15,458 15,374
SUPPLEMENTAL PRO FORMA NET INCOME:
Statement data (3)
Supplemental pro forma net income $ 2,724
Supplemental pro forma net income per share $ 0.22
Weighted average number of common shares outstanding (4) 12,663
=============
OPERATING DATA:
Pari-mutuel wagering $ 111,248 $ 102,145 $ 89,327 $ 128,090 $ 122,686
Import simulcasting 93,461 142,499 170,814 298,459 336,191
Export simulcasting 40,337 72,252 112,871 176,287 194,772
-------------------------------------------------------------
Total pari-mutuel wagering $ 245,046 316,896 373,012 602,836 653,649
=============================================================
Gross profit from wagering (2) $ 17,936 24,915 27,955 45,589 47,888
=============================================================
BALANCE SHEET DATA:
Cash and cash equivalents $ 5,502 $ 7,514 $ 5,634 $ 21,854 6,826
Working capital (deficiency) 2,074 4,134 (509) 15,226 1,911
Total assets 21,873 27,532 96,723 158,878 160,798
Total debt 516 390 47,517 80,336 78,256
Shareholders' equity 15,627 20,802 27,881 53,856 59,036
(1) Reflects the November 27, 1996 acquisition of Pocono Downs and the
January 15, 1997 acquisition of a joint venture interest in
the Charles Town Entertainment Complex. See "Business-Acquisitions."
(2) Amounts equal total pari-mutuel revenues, less purses paid to Horsemen,
taxes payable to Pennsylvania and simulcast commissions or host track fees
paid to other racetracks. Figures for the years ended December 31, 1995
and 1996 do not include purses paid at Penn National Speedway.
(3) Supplemental pro forma amounts for the year ended December 31, 1994
reflect (i) the elimination of $345,000 in management fees paid to a
related entity, (ii) the inclusion of $133,000, in executive
compensations, (iii) the elimination of $413,000 of interest expenses on
Company debt which was repaid with the proceeds of the initial public
offering in 1994, (iv) the elimination of $198,000 of loss on early
extinguishment of debt, and (v) a provision for income taxes of $377,000
as if the S corporations and partnerships comprising part of the Company
prior to the Reorganization in 1994 had been taxed as C corporations.
There were no supplemental pro forma adjustments for any subsequent
periods.
(4) Based on 8,400,000 shares of Common Stock outstanding before the initial
public offering in May 1994, plus 4,500,000 shares sold by the Company in
the initial public offering.
20
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company's pari-mutuel revenues have been derived from (i) wagering
on the Company's live races (a) at the Company's racetracks, (b) at the
Company's OTWs, (c) at other Pennsylvania racetracks and OTWs and (d) through
telephone wagering, as well as wagering at the Company's racetracks on certain
stakes races run at out-of-state racetracks (collectively, referred to in the
Company's financial statements as "pari-mutuel revenues from live races"), (ii)
wagering on full-card import simulcasts at the Company's racetracks and OTWs and
through telephone wagering (collectively, referred to in the Company's financial
statements as "pari-mutuel revenues from import simulcasting") and (iii) fees
from wagering on export simulcasting Company races at out-of-state locations
(referred to in the Company's financial statements as "pari-mutuel revenues from
export simulcasting"). The Company's other revenues have been derived from
admissions, program sales and certain other ancillary activities, food and
beverage sales and concessions and, beginning in September 1997, gaming
machines.
RESULTS OF OPERATIONS
The following table sets forth certain data from the Consolidated
Statements of Income of the Company as a percentage of total revenues:
YEAR ENDED DECEMBER 31
-----------------------------
1996 1997 1998
-----------------------------
INCOME STATEMENT DATA
Revenue
Pari-mutuel revenues
Live races 29.8% 24.8% 17.5%
Import simulcasting 52.5 53.6 44.2
Export simulcasting 5.3 4.7 3.8
Gaming revenue - 5.1 24.3
Admissions, programs and other racing revenue 7.0 5.1 4.1
Concessions revenues 5.4 6.7 6.2
-----------------------------
Total revenues 100.0 100.0 100.0
-----------------------------
Operating expenses
Purses, stakes, and trophies 20.5 20.0 18.9
Direct salaries, payroll taxes and employee benefits 13.8 14.5 12.4
Simulcast expenses 14.7 11.7 9.0
Pari-mutuel taxes 8.5 8.5 6.0
Lottery taxes and administration - 1.7 9.6
Other direct meeting expenses 13.6 16.2 15.6
Concessions expenses 3.7 5.0 5.1
Other operating expenses 7.9 7.8 7.0
Depreciation and amortization 2.3 3.6 3.7
Site development and restructuring changes - 2.2 -
-----------------------------
Total operating expenses 84.9 91.3 87.4
-----------------------------
Income from operations 15.1 8.7 12.6
-----------------------------
Total other (expenses) (0.2) (3.3) (4.8)
-----------------------------
Income before income taxes and extraordinary item 14.9 5.4 7.8
=============================
Net income 8.8% 2.1% 4.9%
=============================
21
Year Ended December 31, 1998 compared to Year Ended December 31, 1997
Total revenue increased by approximately $42.5 million or 38.1% from $111.5
million in 1997 to $154.1 million in 1998. Charles Town Races, which was
purchased in January of 1997 and began racing operations on April 30, 1997 and
video lottery machine operations on September 10, 1997, accounted for $40.4
million of the increase. Revenues from video lottery machines increased by $31.7
million as a result of a full year of operations in 1998 compared to three and
one-half months of operations in 1997. Racing revenues increased by $6.2 million
due to a racing season of 206 live race days at the Charles Town Races in 1998
compared to 159 live races days in 1997 and the opening of the new
simulcast-racing center in January 1998. Concession revenues increased by $2.2
million due to the increased attendance and the opening of the new buffet dining
area during the year. At Penn National Race Course and its OTW facilities,
revenues increased at the track ($.3 million) due to an increase in on-track
wagering and export simulcast wagering and the purchase and opening of the
Johnstown OTW ($.9 million) on September 1, 1998. The increases were offset by a
decrease in revenues at Chambersburg OTW ($.6 million) due to the opening of the
Charles Town Facility, Reading OTW ($.3 million) and York OTW ($.3 million).
Revenues at Pocono Downs and its OTW facilities resulted in a net increase of
$2.1 million primarily due to the opening of new facilities in Hazleton ($2.2
million) and Carbondale ($2.4 million). This was offset by a decrease at the
Pocono Downs racetrack ($2.1 million) due to the proximity of the two new OTW
facilities and decreases at Allentown OTW ($.3 million) and Erie OTW ($.2
million).
Total operating expenses increased by approximately $32.8 million or 32.2%
from $101.8 million in 1997 to $134.6 million in 1998. Charles Town Races
accounted for $32.6 million of the increase due primarily to the video lottery
operations ($24.7 million), racing operations ($5.9 million) and concession
operations ($2.1 million). Penn National Race Course and its OTW facilities had
a net decrease in operating expenses of $.6 million due to an increase in
expenses at the new Johnstown OTW ($.8 million) offset by a decrease in
operating expenses at the racetrack and other OTW facilities ($1.4 million).
Pocono Downs and its OTW facilities had a net increase in operating expenses of
$.9 million due to the opening of Hazleton OTW ($1.9 million) and Carbondale OTW
($1.8 million). The increase was offset by a decrease in operating expenses at
the Pocono Downs racetrack ($1.8 million), Allentown OTW ($.6 million) and Erie
OTW ($.4 million). Corporate expenses increased by $.6 million due to the hiring
of additional staff for OTW facility management, human resource management and
the leasing of additional office space. Depreciation and amortization increased
by $1.7 million due primarily to depreciation associated with new facilities for
Charles Town Gaming (September 1997), Charles Town Simulcast Center (January
1998), Hazleton and Carbondale OTW facilities (March 1998) and Johnstown OTW
(September 1998). Site development and restructuring expenses were $2.4 million
in 1997.
Income from operations increased by approximately $9.7 million or 100.0 %
from $9.7 million in 1997 to $19.5 million in 1998 due to the factors described
above.
Other expenses increased by approximately $3.8 million or 105.6% from $3.6
million in 1997 to $7.4 million in 1998. Net interest expense increased by $3.9
million (primarily due to the 10.625% Senior Notes issued December 1997). Other
income in 1998 of $113,000 consisted of a gain on the sale of Casino Magic
Corporation stock of $148,000 offset by a write-off of deferred financing cost
on the repurchase of the Company's 10.625% Senior Notes.
Taxes on income increased by approximately $2.2 million from $2.3 million
in 1997 to $4.5 million in 1998, due to the increase in income for the year.
The extraordinary item in 1997 consisted of a loss on the early
extinquishment of debt in the amount of $1,482,000, net of income taxes. The
loss consists primarily of write-offs of deferred finance costs associated with
the retired bank notes and legal and bank fees relating to the early
extinquishment of the debt.
Net income increased by approximately $5.2 million from $2.3 million in
1997 to $7.5 million in 1998 due to the factors described above.
22
Year Ended December 31, 1997 compared to Year Ended December 31, 1996
Total revenue increased by approximately $48.7 million, or 77.5%, from
$62.8 million in 1996 to $111.5 million in 1997. Pocono Downs, which was
acquired in the fourth quarter of 1996 under the purchase method, accounted for
$30.8 million of the increase. Charles Town Races, which was purchased in
January 1997, accounted for $16.5 million of the increase. The Company renovated
and refurbished the Charles Town Entertainment Complex following its acquisition
and commenced racing operations on April 30, 1997 and gaming machine operations,
with a soft opening, on September 10, 1997. The remaining revenue increase of
$1.4 million was primarily due to an increase of approximately $6.2 million
associated with the opening of the Penn National OTW facility in Williamsport in
February 1997, a full year of operations at the Lancaster OTW facility, and
increased export of the Penn National Race Course live signal. This increase was
offset by a decrease in revenues of approximately $4.2 million at the Company's
OTW facilities in Reading and York. Management believes that the decrease in
revenues at these facilities was primarily due to the opening of a competitor's
OTW facility and the opening of the Company's Lancaster OTW facility in July
1996. The Company also had a decrease in revenues of $.6 million due to the
closing of Penn National Speedway at the end of the 1996 season.
Total operating expenses increased by approximately $48.4 million, or
90.7%, from $53.4 million in 1996 to $101.8 million in 1997. Pocono Downs and
Charles Town Races, which the Company did not operate in the corresponding prior
period, accounted for $25.5 million and $17.5 million of this increase,
respectively. Operating expenses also increased by $5.4 million primarily due to
an increase of $4.4 million associated with the opening of the Company's new OTW
facility in Williamsport in February 1997, and a full year of operations at the
Lancaster OTW facility. This increase was offset by a decrease in operating
expenses of approximately $1.9 million at the Penn National Race Course facility
and at the Company's OTW facilities in Reading and York associated with lower
revenues at those facilities. The increase in corporate expenses of $1.4 million
was due to increased personnel, office space and other administrative expense
necessary to support the expansion of the Company. The Company also incurred
site development and restructuring charges in the amount of $2.4 million. The
site development charges ($1.7 million) consist of $800,000 related to the
Charles Town Races Facility and $935,000 related to the abandonment of certain
proposed operating in 1997. The restructuring charges primarily consist of
$350,000 in severance termination benefits and other charges at the Charles Town
Races facility, $300,000 for the restructuring of the Erie, Pennsylvania OTW
facility and $52,000 of property and equipment written-off in connection with
the discontinuation of Penn National Speedway, Inc. operations during 1997. The
Company also had a decrease in expenses of $.9 million due to the closing of
Penn National Speedway at the end of the 1996 season.
Income from operations increased by approximately $275,000, or 2.9%,
from $9.5 million in 1996 to $9.7 million in 1997 due to the factors described
above. The Company had other expenses of approximately $3.7 million in 1997
compared to $156,000 in 1996, primarily as a result of increased interest
expense. The increase in interest expense is due to the company incurring bank
debt for the purchase of Pocono Downs and Charles Town Races, renovations to the
Charles Town Facility and the issuance of 10.625% Senior Notes on December 12,
1997 to repay existing bank debt.
The extraordinary item consisted of a loss on the early extinquishment
of debt in the amount of $1,482,000, net of income taxes. The loss consists
primarily of write-offs of deferred financing costs associated with the retired
bank notes and legal and bank fees relating to the early extinquishment of the
debt.
Net income decreased by approximately $3.2 million or 58.5%, from $5.5
million in 1996 to $2.3 million in 1997 based on the factors described above.
Income taxes decreased by $1.5 million from $3.8 million in 1996 to $2.3 million
in 1997 as a result of the decrease in income for the year.
23
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 $11.9 million for the
year ended December 31, 1998. This consisted of net income and non-cash expenses
($13.6 million), an increase in accounts receivable ($1.6 million) due from
other tracks, a decrease in accounts payable and accrued expenses due to the
completion of construction at Charles Town ($2.6 million), an increase in purses
due horsemen ($.9 million) a decrease in prepaid income taxes ($2.1 million) and
other changes in certain assets and liabilities ($.5 million).
Cash flows used in investing activities for the year ended December 31,
1998 ($22.3 million) consisted of renovation and refurbishment of the Charles
Town facility and racetrack ($1.1 million), completion of the Hazleton and
Carbondale OTW facilities ($3.2 million), the purchase of the Johnstown OTW
facility ($1.3 million), the purchase of the GTECH video lottery machines and
central monitoring system ($12.9 million) and $3.8 million in capital
expenditures at other facilities.
Net cash flows used in financing activities was approximately $4.6
million for the year ended December 31, 1998. The Company purchased 424,700
shares of the Company's common stock ($2.4 million) and $11.0 million of the
Company's 10.625% Senior Notes at 97.25% during the year. In November 1998, the
Company borrowed $9.0 million under its Credit Facility to buy the GTECH video
lottery machines and central monitoring system.
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. See ITEM 2 -"PROPERTIES".
In the first quarter of 1999, the Company anticipates a one time
material loss associated with the actions by the Pennsylvania Thoroughbred
Horsemen on February 16, 1999 that resulted in the closing of Penn National Race
Course and its six OTW facilities at Reading, Chambersburg, York, Lancaster,
Williamsport and Johnstown, from February 16, 1999 through March 24, 1999. At
this time the Company has insufficient information to reasonably quantify the
amount of the loss.
Also in 1999, the Company anticipates spending approximately $9.0
million on capital expenditures at its racetrack and OTW facilities. The Company
anticipates expending approximately $5.0 million at the Charles Town
Entertainment Complex for player tracking ($1.5 million), new video slot
machines ($.8 million), interior renovations ($.4 million), machinery and
equipment ($.7 million) and other projects including design and planning for a
new motel ($1.6 million). The Company also plans to spend approximately $578,000
at Pocono Downs, $645,000 at Penn National, $295,000 at the OTW facilities for
building improvements and equipment and $2.0 million on building improvements
and equipment for its new OTW facility in Stroudsburg, Pennsylvania. 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 the Tennessee 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 29, 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 in one year, a $3.0 million sublimit for standby letters of credit and has a
four-year term from its closing. 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 will accrue interest, at the option of the Company, at
24
either a base rate plus an applicable margin of up to 2.0% or a eurodollar rate
plus an applicable margin of up to 3.0%. The Credit Facility is secured by the
assets of the Company and contains certain financial ratios and maintenance
tests. On December 31, 1998, the Company was in compliance with all applicable
ratios.
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. The Company
intends to fund its portion of the Joint Venture with Greenwood New Jersey, Inc.
(up to $28.75 million) from cash on hand, available credit lines and other
financing. 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.
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, has been and is currently conducting a review of all
systems and contacting all software suppliers to determine major areas of
exposure to Year 2000 issues. The Company believes that, with minor
modifications and testing of its systems, the Year 2000 issue will not pose a
significant operations problem. The Company is using its internal resources to
reprogram or replace and test its software for Year 2000 modifications. If the
Company is unable to make the required modifications to existing software or
convert to new software in a timely manner, the Year 2000 issue could have a
material adverse impact on the Company's operations.
The Company has initiated formal communication with significant
suppliers and third party vendors to determine the extent to which the Company's
operations are vulnerable to those third parties failure to remediate their own
Year 2000 hardware and software issues. Most of these parties state that they
intend to be Year 2000 compliant by 2000. In the event that any of the Company's
significant suppliers are unable to become Year 2000 compliant, the Company's
business or operations could be adversely affected. There can be no assurance
that the systems of other companies on which the Company relies will be
compliant by the year 2000 and would not have an adverse effect on operations.
The Company does not expect the total cost associated with required
modifications to become Year 2000 compliant to be material to its financial
position.
The Company has not yet fully developed a comprehensive contingency
plan addressing situations that may result if the Company is unable to achieve
Year 2000 readiness of its critical operations. Contingency plan development is
in process and the Company expects to finalize its plan during the remainder of
1999. There can be no assurance that the Company will be able to develop a
contingency plan that will adequately address issues that may arise in the year
2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
All of the Company's debt obligations at December 31, 1998 were fixed
rate obligations, and Management, therefore, does not believe that the Company
has any material market risk from its debt obligations.
25
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Page No.
Report of Independent Certified Public Accountants 27
Consolidated financial statements
Balance sheets 28-29
Statements of income 30-31
Statements of shareholders' equity 32
Statements of cash flows 33-34
Notes to consolidated financial statements 35-55
26
Report of Independent Certified Public Accountants
Penn National Gaming, Inc.
and Subsidiaries
Wyomissing, Pennsylvania
We have audited the accompanying consolidated balance sheets of Penn National
Gaming, Inc. and Subsidiaries as of December 31, 1997 and 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Penn National
Gaming, Inc. and Subsidiaries at December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
Philadelphia, Pennsylvania \s\BDO Seidman, LLP
February 26, 1999, except for --------------------
Note 11 which is as of March 23, 1999 BDO Seidman, LLP
27
Penn National Gaming, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share data)
December 31, 1997 1998
---------------------------------
Assets
Current assets
Cash and cash equivalents $ 21,854 $ 6,826
Accounts receivable 2,257 3,840
Prepaid expenses and other current assets 1,441 2,131
Deferred income taxes 469 458
Prepaid income taxes 3,003 859
---------------------------------
Total current assets 29,024 14,114
---------------------------------
Property, plant and equipment, at cost
Land and improvements 24,643 26,969
Building and improvements 56,298 66,918
Furniture, fixtures and equipment 13,847 29,772
Transportation equipment 490 527
Leasehold improvements 6,778 9,579
Leased equipment under capitalized lease 824 824
Construction in progress 11,288 1,847
---------------------------------
114,168 136,436
Less accumulated depreciation and amortization 11,007 15,684
---------------------------------
Net property, plant and equipment 103,161 120,752
---------------------------------
Other assets
Excess of cost over fair market value of net assets acquired (net of
accumulated amortization of $1,389 and $2,002,
respectively) 23,055 22,442
Deferred financing costs 3,014 2,403
Miscellaneous 624 1,087
---------------------------------
Total other assets 26,693 25,932
---------------------------------
$ 158,878 $ 160,798
---------------------------------
See accompanying summary of significant accounting
policies and notes to consolidated financial statements.
28
Penn National Gaming, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share data)
December 31, 1997 1998
---------------------------------
Liabilities and Shareholders' Equity
Current liabilities
Current maturities of long-term debt and
capital lease obligations $ 204 $ 168
Accounts payable 7,405 6,217
Purses due horsemen -- 887
Uncashed pari-mutuel tickets 1,504 1,597
Accrued expenses 2,427 1,063
Accrued interest 326 468
Accrued salaries and wages 813 752
Customer deposits 470 548
Taxes, other than income taxes 649 503
---------------------------------
Total current liabilities 13,798 12,203
---------------------------------
Long-term liabilities
Long-term debt and capital lease obligations,
net of current maturities 80,132 78,088
Deferred income taxes 11,092 11,471
---------------------------------
Total long-term liabilities 91,224 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 15,152,580 and 15,164,080, respectively 152 152
Treasury stock, 424,700 shares at cost -- (2,379)
Additional paid-in capital 37,969 38,025
Retained earnings 15,735 23,238
---------------------------------
Total shareholders' equity 53,856 59,036
---------------------------------
$ 158,878 $ 160,798
---------------------------------
See accompanying summary of significant accounting
policies and notes to consolidated financial statements.
29
Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
Year ended December 31, 1996 1997 1998
--------------------------------------------
Revenues
Pari-mutuel revenues
Live races $ 18,727 $ 27,653 $ 26,893
Import simulcasting 32,992 59,810 68,136
Export simulcasting 3,347 5,279 5,810
Gaming revenue -- 5,712 37,396
Admissions, programs and other racing revenues 4,379 5,678 6,280
Concessions revenues 3,389 7,404 9,550
--------------------------------------------
Total revenues 62,834 111,536 154,065
--------------------------------------------
Operating expenses
Purses, stakes and trophies 12,874 22,335 29,141
Direct salaries, payroll taxes and employee benefits 8,669 16,200 19,134
Simulcast expenses 9,215 12,982 13,809
Pari-mutuel taxes 5,356 9,506 9,281
Lottery taxes and administration -- 1,874 14,749
Other direct meet expenses 8,536 18,087 24,029
Concessions expenses 2,349 5,605 7,929
Other operating expenses 4,942 8,735 10,787
Depreciation and amortization 1,433 4,040 5,748
Site development and restructuring charges -- 2,437 --
--------------------------------------------
Total operating expenses 53,374 101,801 134,607
--------------------------------------------
Income from operations 9,460 9,735 19,458
--------------------------------------------
Other income (expenses)
Interest (expense) (506) (4,591) (8,374)
Interest income 350 935 825
Other -- (2) 113
--------------------------------------------
Total other (expenses) (156) (3,658) (7,436)
--------------------------------------------
See accompanying summary of significant accounting
policies and notes to consolidated financial statements.
30
Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
Year ended December 31, 1996 1997 1998
--------------------------------------------
Income before income taxes and extraordinary item $ 9,304 $ 6,077 $ 12,022
Taxes on income 3,794 2,308 4,519
--------------------------------------------
Income before extraordinary item 5,510 3,769 7,503
Extraordinary item
Loss on early extinguishment of debt,
net of income taxes of $1,001 -- 1,482 --
--------------------------------------------
Net income $ 5,510 $ 2,287 $ 7,503
--------------------------------------------
Per share data
Basic
Income per share before extraordinary item $ .41 $ .25 $ .50
Extraordinary item -- .10 --
--------------------------------------------
Net income per share $ .41 $ .15 $ .50
--------------------------------------------
Diluted
Income per share before extraordinary item $ .40 $ .24 $ .49
Extraordinary item -- .09 --
--------------------------------------------
Net income per share $ .40 $ .15 $ .49
--------------------------------------------
Weighted shares outstanding
Basic 13,302 14,925 15,015
Diluted 13,822 15,458 15,374
--------------------------------------------
See accompanying summary of significant accounting
policies and notes to consolidated financial statements.
31
Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(In thousands, except share data)
Additional
Common Stock Treasury Paid-In Retained
Shares Amount Stock Capital Earnings Total
---------------------------------------------------------------------------
Balance, January 1, 1996 12,945,000 $ 43 $ -- $12,821 $ 7,938 $20,802
Issuance of common stock 410,290 4 -- 1,565 -- 1,569
Stock splits -- 87 -- (87) -- --
Net income for the year -- -- -- -- 5,510 5,510
---------------------------------------------------------------------------
Balance, December 31, 1996 13,355,290 134 -- 14,299 13,448 27,881
Issuance of common stock 1,725,000 17 -- 22,914 -- 22,931
Exercise of stock options and warrants 72,290 1 -- 154 -- 155
Tax benefit related to
stock options exercised -- -- -- 602 -- 602
Net income for the year -- -- -- -- 2,287 2,287
---------------------------------------------------------------------------
Balance, December 31, 1997 15,152,580 152 -- 37,969 15,735 53,856
Exercise of stock options and warrants 11,500 -- -- 56 -- 56
Acquisition of treasury stock -- -- (2,379) -- -- (2,379)
Net income for the year -- -- -- -- 7,503 7,503
---------------------------------------------------------------------------
Balance, December 31, 1998 15,164,080 $152 $(2,379) $ 38,025 $ 23,238 $59,036
---------------------------------------------------------------------------
See accompanying summary of significant accounting
policies and notes to consolidated financial statements.
32
Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year ended December 31, 1996 1997 1998
--------------------------------------------
Cash flows from operating activities
Net income $ 5,510 $ 2,287 $ 7,503
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 1,433 4,040 5,748
Write-off of deferred financing costs -- -- 376
Extraordinary loss relating to early
extinguishment of debt, before income
tax benefit -- 2,483 --
Deferred income taxes (benefit) 228 (97) 390
Decrease (increase) in
Accounts receivable (1,870) 2,036 (1,583)
Prepaid expenses and other current assets 871 111 (690)
Prepaid income taxes -- (3,003) 2,144
Miscellaneous other assets (255) (258) (463)
Increase (decrease) in
Accounts payable 1,288 2,339 (1,188)
Purses due horsemen (248) (1,421) 887
Uncashed pari-mutuel tickets 632 168 93
Accrued expenses 726 1,155 (1,364)
Accrued interest 101 225 142
Accrued salaries and wages 265 306 (61)
Customer deposits 105 50 78
Taxes,other than income taxes 146 257 (146)
Income taxes (985) -- --
--------------------------------------------
Net cash provided by operating activities 7,947 10,678 11,866
--------------------------------------------
Cash flows from investing activities
Expenditures for property, plant and equipment (6,995) (29,196) (22,333)
Acquisition of business, net of cash acquired (47,320) (18,248) --
(Increase) in prepaid acquisition costs (1,514) (176) --
--------------------------------------------
Net cash (used in) investing activities (55,829) (47,620) (22,333)
--------------------------------------------
33
Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year ended December 31, 1996 1997 1998
--------------------------------------------
Cash flows from financing activities
Proceeds from sale of common stock $ 1,569 $ 23,086 $ 56
Acquisition of treasury stock -- -- (2,379)
Tax benefit related to stock options exercised -- 602 --
Proceeds from long-term debt 47,000 111,167 9,000
Principal payments on long-term debt
and capital lease obligations (123) (78,348) (11,080)
(Increase) in unamortized financing costs (2,444) (3,345) (158)
--------------------------------------------
Net cash provided (used) by financing activities 46,002 53,162 (4,561)
--------------------------------------------
Net (decrease) increase in cash and cash equivalents (1,880) 16,220 (15,028)
Cash and cash equivalents at beginning of period 7,514 5,634 21,854
--------------------------------------------
Cash and cash equivalents at end of period $ 5,634 $ 21,854 $ 6,826
--------------------------------------------
See accompanying summary of significant accounting
policies and notes to consolidated financial statements.
34
1. Summary of Basis of Presentation
Significant
Accounting The consolidated financial statements
Policies include the accounts of Penn National
Gaming, Inc. and its subsidiaries
(collectively the "Company"). All
significant intercompany accounts and
transactions have been eliminated in
consolidation. Certain prior years' amounts
have been reclassified to conform to the 1998
presentation.
Description of Business
The Company provides pari-mutuel wagering
opportunities on both live and simulcast
thoroughbred and harness horse races at two
racetracks and ten off-track wagering
facilities ("OTWs") located in Pennsylvania
and pari-mutuel wagering opportunities and
video gaming machines at Charles Town Races,
the Company's Charles Town, West Virginia
thoroughbred racetrack. In March 1998, the
Company opened OTW facilities in Hazleton and
Carbondale, Pennsylvania and acquired its
tenth OTW facility in Johnstown, Pennsylvania
from Ladbroke Racing Management-Pennsylvania
("Ladbroke") in September 1998. The Company's
sole operating segment is gaming activities.
At each of its three racetracks, the Company
conducts pari-mutuel wagering on thoroughbred
and harness races from the Company's
racetracks and simulcasts from other
racetracks. The Company also simulcasts its
Penn National Race Course and Pocono Downs
races for wagering at other racetracks and
OTWs, including all Pennsylvania racetracks
and OTWs and locations outside Pennsylvania.
Wagering on Penn National Race Course and
Pocono Downs races and races simulcast from
other racetracks also occurs through the
Company's Pennsylvania racetracks' telephone
account betting network.
Glossary of Terminology
The following is a listing of terminology
used throughout the financial statements:
The Company's racetracks - Penn
National Race Course near
Harrisburg, Pennsylvania, Pocono
Downs near Wilkes-Barre,
Pennsylvania and Charles Town Races
in Charles Town, West Virginia.
Gaming machines - Video lottery
terminal gaming machines.
OTW - Off-track wagering location.
Pari-mutuel wagering - All wagering
at the Company's racetracks, at the
Company's OTWs and all wagering on
the Company's races at other
racetracks and OTWs.
Telebet - Telephone account
wagering.
Totalisator services - Computer
services provided to the Company by
various totalisator companies for
processing pari-mutuel betting odds
and wagering proceeds.
35
Pari-mutuel revenues:
Live races - The Company's
share of pari-mutuel wagering
on live races within
Pennsylvania and West Virginia
and certain stakes races from
racetracks outside of
Pennsylvania and West Virginia
after payment of the amount
returned as winning wagers.
Import simulcasting - The
Company's share of wagering at
the Company's racetracks, at
the Company's OTWs and by
Telebet on full cards of races
simulcast from other
racetracks.
Export simulcasting - The
Company's share of wagering at
out-of-state locations on live
races conducted by the
Company.
Gaming revenue - The Company's
share of net winnings from
gaming wins and losses.
A summary of pari-mutuel wagering for the
periods indicated is as follows:
Year ended December 31, 1996 1997 1998
- - --------------------------------------------------------------------------------
(in thousands)
Pari-mutuel wagering on
the Company's live races $ 89,327 $ 128,090 $ 122,686
Pari-mutuel wagering on
simulcasting
Import simulcasting from
other racetracks 170,814 298,459 336,191
Export simulcasting to out
of Pennsylvania
wagering facilities 112,871 176,287 194,772
--------------------------------------------
Total pari-mutuel wagering $ 373,012 $ 602,836 $ 653,649
Racing Meet
The racing seasons, under the management
of the Company, for the past three years
consisted of the following number of live
race days:
Year ended December 31, 1996 1997 1998
- - --------------------------------------------------------------------------------
Penn National Race Course 206 212 206
Pocono Downs -- 134 135
Charles Town Races -- 159 206
Depreciation and Amortization
Depreciation of property, plant and equipment
and amortization of leasehold improvements
are computed by the straight-line method at
rates adequate to allocate the cost of
applicable assets over their estimated useful
36
lives. Depreciation and amortization for the
years ended December 31, 1996, 1997 and 1998
amounted to $1,301,000, $3,193,000 and
$4,705,000, respectively.
The excess of cost over fair value of net
assets acquired is being amortized on the
straight-line method over a forty-year
period. Amortization expense for 1996, 1997
and 1998 amounted to $98,000, $578,000 and
$613,000, respectively. The Company evaluates
the recoverability of the goodwill quarterly,
or more frequently whenever events and
circumstances warrant revised estimates and
considers whether the goodwill should be
completely or partially written off or the
amortization period accelerated.
The Company reviews the carrying values of
its long-lived and identifiable intangible
assets for possible impairment whenever
events or changes in circumstances indicates
that the carrying amount of the assets may
not be recoverable based on undiscounted
estimated future operating cash flows. As of
December 31, 1998, the Company has determined
that no impairment has occurred.
Deferred financing costs are charged to
operations over the life of the underlying
indebtedness. Amortization of deferred
financing costs for 1996, 1997 and 1998
amounted to $34,000, $269,000 and $430,000,
respectively.
Income Taxes
The Company recognizes deferred tax
liabilities and assets for the expected
future tax consequences of events that have
been recognized in the Company's financial
statements or tax returns. Under this method,
deferred tax liabilities and assets are
determined based on the difference between
the financial statement carrying amounts and
tax bases of assets and liabilities using
enacted tax rates in effect in the years in
which the differences are expected to
reverse.
Customer Deposits
Customer deposits represent amounts held by
the Company for telephone wagering.
Cash and Cash Equivalents
The Company considers all cash balances and
highly liquid investments with original
maturities of three months or less to be cash
equivalents.
Net Income Per Common Share
Basic net income per share includes no
dilution and is calculated by dividing net
income by the weighted average number of
common shares outstanding for the period.
Dilutive net income per share reflects the
potential dilution of securities that could
share in the net income of the Company which
consist of stock options and warrants (using
the treasury stock method).
Deferred Financing Costs
Deferred financing costs which are incurred
by the Company in connection with debt are
charged to operations over the life of the
underlying indebtedness using the interest
method, adjusted to give effect to any early
repayments.
37
Concentration of Credit Risk
Financial instruments which potentially
subject the Company to credit risk consist of
cash equivalents and accounts receivable.
The Company's policy is to limit the amount
of credit exposure to any one financial
institution and place investments with
financial institutions evaluated as being
creditworthy, or in short-term money market
and tax-free bond funds which are exposed to
minimal interest rate and credit risk. At
December 31, 1998, the Company had bank
deposits which exceeded federally insured
limits by approximately $3,298,000 and money
market and tax-free bond funds of
approximately $975,000. Concentration of
credit risk, with respect to accounts
receivable, is limited due to the Company's
credit evaluation process. The Company does
not require collateral from its customers.
The Company's receivables consist principally
of amounts due from other racetracks and
OTWs. Historically, the Company has not
incurred any significant credit-related
losses.
Fair Value of Financial Instruments
The following methods and assumptions are
used to estimate the fair value of each class
of financial instruments for which it is
practical to estimate.
Cash and Cash Equivalents: The
carrying amount approximates the fair
value due to the short maturity of the
cash equivalents.
Long-Term Debt and Capital Lease
Obligations: The fair value of the
Company's long-term debt and capital
lease obligations is estimated based on
the quoted market prices for the same
or similar issues or on the current
rates offered to the Company for debt
of the same remaining maturities. The
carrying amount approximates fair value
since the Company's interest rates
approximate current interest rates.
Use of Estimates
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make
estimates and assumptions that affect the
reported amounts of assets and liabilities
and disclosure of contingent assets and
liabilities at the date of the financial
statements and the reported amounts of
revenue and expenses at the reporting period.
Actual results could differ from those
estimates.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting
Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for
Derivative Instruments" ("SFAS 133"). SFAS
133 is effective for all fiscal quarters of
the fiscal years beginning after June 15,
1999 and establishes accounting and reporting
standards for derivative instruments and for
hedging activities. SFAS 133 requires that an
entity recognize all derivatives as either
assets or liabilities and measure those
instruments at fair market value. Presently,
the Company does not use derivative
instruments either in hedging activities or
as investments. Accordingly, the Company
believes that adoption of SFAS 133 will have
no impact on its financial position or
results of operations.
38
The Company has no comprehensive income
items as required by Statement of
Financial Accounting Standards No. 130,
"Comprehensive Income".
2. Acquisitions Pocono Downs Acquisition
On November 27, 1996, the Company purchased
all of the capital stock of The Plains
Company and the limited partnership interests
in The Plains Company's affiliated entities
(together, "Pocono Downs") for an aggregate
purchase price of $48.2 million plus
acquisition-related fees and expenses of
$730,000. Pocono Downs conducts live harness
racing at the harness racetrack located
outside Wilkes-Barre, Pennsylvania, export
simulcasting of Pocono Downs races to
locations throughout the United States,
pari-mutuel wagering at Pocono Downs and at
OTWs in Allentown, Erie, Carbondale and
Hazleton, Pennsylvania on Pocono Downs races
and on import simulcast races from other
racetracks, and telephone account wagering on
live and import simulcast races.
The Pocono Downs acquisition was accounted
for using the purchase method of accounting.
Accordingly, a portion of the purchase price
was allocated to the net assets acquired
based on their estimated fair values. The
balance of the purchase price was recorded at
cost over net assets acquired as goodwill,
approximately $10.4 million, and is being
amortized over forty years on a straight-line
basis. The Company recorded an additional
increase to goodwill of approximately $9.7
million and a corresponding increase to a
deferred tax liability, representing the
difference between the financial and tax
bases of certain assets acquired. The results
of operations of Pocono Downs have been
included in the Company's consolidated
financial statements since the effective date
of the acquisition. The Company used its
credit facility (see Note 3) and cash of
Pocono Downs to fund the acquisition.
Pursuant to the terms of the Pocono Downs
purchase agreement, the Company will be
required to pay the sellers of Pocono Downs
an additional $10 million if, within five
years after the consummation of the Pocono
Downs acquisition, Pennsylvania authorizes
any additional form of gaming in which the
Company may participate. The $10 million
payment would be payable in annual
installments of $2 million for five years,
beginning on the date that the Company first
offers such additional form of gaming.
Charles Town Acquisition
On February 26, 1996, the Company entered
into a joint venture agreement (the "Charles
Town Joint Venture") with Bryant Development
Company and its affiliates ("Bryant"), the
holder of an option to purchase substantially
all of the assets of Charles Town Racing
Limited Partnership and Charles Town Races,
Inc. (together, "Charles Town") relating to
the Charles Town Race Track and Shenandoah
Downs (together, the "Charles Town
Entertainment Complex") in Jefferson County,
West Virginia. In connection with the Charles
Town Joint Venture agreement, Bryant assigned
the option to the Charles Town Joint Venture.
In November 1996, the Charles Town Joint
Venture and Charles Town entered into an
amended and restated option agreement. On
November 5, 1996, Jefferson County, West
Virginia approved a referendum permitting
installation of gaming machines at the
Charles Town Entertainment Complex. On
January 15, 1997, the Charles Town Joint
Venture acquired substantially all of the
assets of Charles Town for approximately
$16.0 million plus acquisition-related fees
and expenses of approximately $2.2 million.
Pursuant to the original operating agreement
governing the Charles Town Joint Venture, the
39
Company held an 80% ownership interest in the
Charles Town Joint Venture and was obligated
to contribute 80% of the purchase price of
the Charles Town acquisition and 80% of the
cost of refurbishing the Charles Town
Entertainment Complex. In consideration of
the fact that the Company contributed 100% of
the purchase price of the Charles Town
acquisition and 100% of the cost of
refurbishing the Charles Town Entertainment
Complex, the Company amended its operating
agreement with Bryant to, among other things,
increase the Company's ownership interest in
the Charles Town Joint Venture to 89% and
decrease Bryant's interest to 11%. In
addition, the amendment provided that the
entire amount the Company has contributed to
the Charles Town Joint Venture for the
acquisition and refurbishment of the Charles
Town Entertainment Complex would be treated,
as between the parties, as a loan to the
Charles Town Joint Venture from the Company.
Accordingly, prior to the distribution of any
future profits pursuant to the Charles Town
Joint Venture, the Company must be repaid in
full all such contributions or loans, plus
accrued interest, which as of December 31,
1998 amounted to $52.0 million.
Bryant had acquired its option from Showboat
Operating Company ("Showboat"). Showboat has
retained an option (the "Showboat Option") to
operate any casino at the Charles Town
Entertainment Complex in return for a
management fee (to be negotiated at the time,
based on rates payable for similar
properties) and a right of first refusal to
purchase or lease the site of any casino at
the Charles Town Entertainment Complex
proposed to be leased or sold and to purchase
any interest proposed to be sold in any such
casino on the same terms offered by a third
party or otherwise negotiated with the
Charles Town Joint Venture. The rights
retained by Showboat under the Showboat
Option extend for a period of five years from
November 6, 1996, the date that the Charles
Town Joint Venture exercised its option to
purchase the Charles Town Races, and expires
thereafter unless legislation to permit
casino gaming at the Charles Town
Entertainment Complex has been adopted prior
to the end of the five-year period. If such
legislation has been adopted prior to such
time, then the rights of Showboat continue
for a reasonable time (not less than 24
months) to permit completion of negotiations.
While the express terms of the Showboat
Option do not specify which activities at the
Charles Town Entertainment Complex would
constitute operation of a casino, Showboat
has agreed that the installation and
operation of gaming devices linked to the
lottery (like the gaming machines the Company
has installed and will continue to install)
at the Charles Town Entertainment Complex's
racetrack would not trigger Showboat's right
to exercise the Showboat Option.
The Charles Town Joint Venture refurbished
and reopened the Charles Town Entertainment
Complex as an entertainment complex that
features live racing, dining, simulcast
wagering and, effective September 1997, the
operation of gaming machines. The cost of the
refurbishment was approximately $27.8 million
inclusive of $614,000 of capitalized interest
and exclusive of the costs of the gaming
machines.
The Charles Town acquisition was accounted
for using the purchase method of accounting.
Accordingly, a portion of the purchase price
was allocated to the net assets acquired
based on their estimated fair values. The
balance of the purchase price was recorded as
cost over net assets acquired as goodwill,
approximately $1.7 million, and is being
40
amortized over forty years on a straight-line
basis. The Company used its credit facility
(see Note 3) and cash from operations to fund
the acquisition.
The results of operations of Charles Town
have been included in the Company's
consolidated financial statements since
January 15, 1997, the effective date of the
acquisition.
3. Long-Term Debt Long-term debt and capital lease obligations are as
and Capital Lease follows:
Obligations
December 31, 1997 1998
--------------------------
(In thousands)
Long-term debt
$80 million Senior Notes,
due December 15, 2004 with interest at
10.625% per annum payable semi-annually on
June 15 and December 15, commencing
June 15, 1998. The notes are unsecured and
are unconditionally guaranteed by certain
subsidiaries of the Company $ 80,000 $ 69,000
Revolving credit facility payable to a bank
group (see additional information below
under Credit Facilities) -- 9,000
Other notes payable 279 246
Capital lease obligations 57 10
--------------------------
80,336 78,256
Less current maturities 204 168
--------------------------
$ 80,132 $ 78,088
--------------------------
Credit Facilities
At December 31, 1998, the Company was
contingently obligated under letters of
credit with face amounts aggregating
$1,886,000. These amounts consisted of
$1,786,000 relating to the horsemens' account
balances and $100,000 for Pennsylvania
pari-mutuel taxes.
In November 1996, the Company entered into an
agreement with a bank group which provides an
aggregate of $75 million of credit
facilities, which included a $5 million
revolving credit facility (the "Credit
Facility"). Simultaneously with the closing
of the Credit Facility, the Company repaid
amounts outstanding under its old credit
facility and replaced it. The Credit Facility
consisted of two term loan facilities of $47
million and $23 million (together, the "Term
Loans") which were used for the Pocono Downs
and Charles Town acquisitions, respectively,
and which were used for a portion of the cost
of refurbishment of the Charles Town
Entertainment Complex, and a revolving credit
facility of $5 million (together, the
"Loans"). The Term Loans were repaid in
December 1997 with the proceeds of the
Company's debt offering. See "Debt Offering"
hereinafter. At such time, the Credit
Facility was amended and restated to provide
for a $12 million revolving credit facility,
41
including a $3 million sublimit for standby
letters of credit, which matures in December
2002.
On January 28, 1999, the Company entered into
a second amendment and restatement of the
Credit Facility. The Credit Facility, as
amended, provides for a $20 million revolving
credit facility, including a $3 million
sublimit 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, of
which $11.2 million of the proceeds 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 facility. The
revolving credit facility provides for
certain covenants, including those of a
financial nature.
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 December 31, 1998 was $9.0 million at
an interest rate of 7.8125%.
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.
Debt Offering
On December 12, 1997, the Company and certain
of its subsidiaries (as guarantors) entered
into a purchase agreement for the sale and
issuance of $80,000,000 aggregate principal
amount of its 10.625% Senior Notes due 2004
(the "Offering"). The net proceeds of the
Offering were used for repayment of existing
indebtedness, for capital expenditures and
for general corporate purposes. Interest on
the notes will accrue from their date of
original issuance (the "Issue Date") and will
be payable semi-annually, commencing in 1998.
The notes will be redeemable, in whole or in
part, at the option of the Company in 2001 or
thereafter at the redemption prices set forth
in the Offering, plus accrued and unpaid
interest to the date of redemption.
The notes are general unsecured senior
obligations of the Company and rank equally
in right of payment to any existing and
future unsubordinated indebtedness of the
Company and senior in right of payment with
all existing and future subordinated
indebtedness of the Company. The notes are
unconditionally guaranteed (the "Guarantees")
on a senior basis by certain of the Company's
existing subsidiaries (the "Subsidiary
Guarantors"). The Guarantees are general
unsecured obligations of the Subsidiary
Guarantors and rank equally in right of
payment to any unsubordinated indebtedness of
42
the Subsidiary Guarantors and rank senior in
right of payment to all other subordinated
obligations of the Subsidiary Guarantors. The
notes are effectively subordinated in right
of payment to all secured indebtedness of the
Company, including indebtedness incurred
under the amended $20 million revolving
credit facility.
On September 3, 1998, the Company repurchased
$11 million of the 10.625% Senior Notes due
2004 at 97.25% of the principal amount
($10,697,500) plus accrued interest of
$253,229 in public market trading. In
conjunction with the repurchase of the notes,
the Company recorded a write-off of deferred
financing costs associated with this portion
of the long-term debt. The extinguishment of
these notes did not result in any material
net loss.
The following is a schedule of future minimum
lease payments under capitalized leases and
repayments of long-term debt as of December
31, 1998:
Term
Loans
and
Capitalized Notes
December 31, Leases Payable Total
---------------------------------------
(In thousands)
1999 $ 10 $ 158 $ 168
2000 -- 34 34
2001 -- 37 37
2002 -- 9,017 9,017
2003 -- -- --
Thereafter -- 69,000 69,000
---------------------------------------
Total minimum payments 10 78,246 78,256
Less interest discount amount -- -- --
---------------------------------------
Total present value of net
minimum lease payments and total
notes payable 10 78,246 78,256
Current maturities 10 158 168
---------------------------------------
Total noncurrent maturities $ -- $ 78,088 $ 78,088
---------------------------------------
On February 18, 1997, the Company completed a
secondary public offering of 1,725,000 shares
of common stock and used $19 million of the
$23 million proceeds therefrom to reduce the
then outstanding Term Loan amounts (see Note
7).
4. Commitments Operating Agreements
and
Contingencies In November 1997, the Company signed a new
Totalisator services and equipment agreement
for all of its subsidiaries. The agreement is
for five years, expiring on March 31, 2003.
The new agreement provides for annual
payments based on a specified percentage of
the total amount wagered at the Company's
facilities with a minimum annual payment of
$1,475,000.
The Company is also liable under numerous
operating leases for automobiles, other
equipment and buildings, which expire through
2004. Total rental expense under these
agreements was $1,001,000, $807,000 and
$1,169,000 for the years ended December 31,
1996, 1997 and 1998, respectively.
43
The future lease commitments relating to
noncancelable operating leases as of December
31, 1998 are as follows:
(In thousands)
1999 $ 1,369
2000 1,370
2001 1,286
2002 1,052
2003 957
Thereafter 2,339
-------------
$ 8,373
-------------
In June 1997, the Charles Town Joint Venture,
which is operated as PNGI Charles Town
Gaming, LLC, an 89% subsidiary of the
Company, entered into an agreement (the
"GTECH Agreement") with GTECH relating to the
lease, installation and service of a video
lottery system ("VLS") at the Charles Town
Entertainment Complex. The GTECH Agreement
included a minimum annual fee of $4.3 million
if more than 799 gaming machines were placed
in operation. Due to significant economic
benefits to the Company, on November 18, 1998
the Company entered into an agreement to
purchase GTECH's assets and rights related to
the provision of gaming technology at Charles
Town Races. Under the terms of the agreement,
the Company assumed the ownership and
operation of the 799 gaming machines and the
central monitoring system for consideration
of $12.9 million.
Employment and Consulting Agreements
The Company has employment agreements with
its Chairman and Chief Financial Officer at
annual base salaries of $225,000 and $95,000,
respectively. The agreements became effective
June 1, 1994 and, as amended, terminate on
June 30, 1999. Each agreement prohibits the
employee from competing with the Company
during its term and for one year thereafter,
and requires a death benefit payment by the
Company equal to 50% of the employee's annual
salary in effect at the time of death.
The Company signed a consulting agreement
with its former Chairman expiring in August
1999 at an annual payment of $125,000. On
July 1, 1998, the consulting agreement was
amended to increase the annual payment to
$135,000.
The Company has an employment agreement with
its President and Chief Operating Officer at
an annual base salary of $210,000. The
agreement was to terminate on June 12, 1998,
but has been extended until June 12, 1999.
The agreement prohibits the employee from
competing with the Company during its term
and for two years thereafter, and requires a
death benefit payment by the Company equal to
50% of the employee's annual salary in effect
at the time of his death.
The Company has two profit sharing plans
under the provisions of Section 401(k) of the
Internal Revenue Code, The Penn National
Gaming, Inc. Profit Sharing Plan (the Penn
National 401(k) Plan") and the Pocono Downs,
Inc. Profit Sharing Plan (the "Pocono Downs
401(k) Plan"), that cover all eligible
employees who are not members of a bargaining
unit. Both plans enable employees choosing to
participate to defer a portion of their
salary in a retirement fund to be
administered by the Company. The Company's
44
contributions to the Penn National 401(k)
Plan are set at 50% of employees elective
salary deferrals which may be made up to a
maximum of 6% of employee compensation. The
Company has no obligation to contribute to
the Pocono Downs 401(k) plan. However, for
the years ended December 31, 1996, 1997, and
1998, the Company has made discretionary
contributions to the Pocono Downs 401(k) Plan
based upon a percentage of the employee
elective deferrals which may be made up to a
maximum of 15% of employee compensation. The
Company made contributions to these plans of
approximately $89,000, $145,000 and $172,000
for the years ended December 31, 1996, 1997,
and 1998, respectively. Charles Town has a
defined contribution plan covering
substantially all of its employees. Charles
Town makes monthly contributions equal to the
amount accrued for retirement expense, which
is calculated as .25% of the daily mutual
handle and .5% of the net video lottery
revenues. Total contributions for the years
ended December 31, 1997 and 1998 were
$114,000 and $185,000, respectively.
On December 31, 1998, the Company merged the
Pocono Downs, Inc. Profit Sharing Plan into
the Penn National Gaming, Inc. 401(k) Plan
and spun off the assets into the
non-bargaining unit employees in the Charles
Town Races Future Services Retirement Plan
and merged those assets into the Penn
National 401(k) Plan. The results of the
merger is that the Company operates the Penn
National 401(k) Plan for all non-bargaining
unit employees at all locations while the
Charles Town Races Future Services Retirement
Plan is for bargaining unit employees at the
Charles Town facility.
OTW and Operating Facilities
On July 7, 1998, the Company entered into an
agreement with Ladbroke to purchase their
Johnstown, Pennsylvania OTW facility. The
agreement provided for a purchase price of
$1,225,000 for the assignment of the facility
lease and the sale of assets and was subject
to numerous contingencies, including approval
by the Pennsylvania State Horse Racing
Commission. Approval for the sale and
transfer of the Johnstown OTW was received
from the Harness Racing Commission on August
14, 1998 and the Pennsylvania State Horse
Racing Commission on August 20, 1998. Under
the terms of the agreements, the Company
sub-leased the facility from Ladbroke and
operated the facility from September 1, 1998,
the effective date of the agreement, through
December 30, 1998, the closing date of the
agreement, for $12,500 per month, at which
time the Company assumed full rights and
ownership of the facility.
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. The
agreement is subject to numerous
contingencies, including approval by the
Harness Racing Commission. On November 6,
1998, the Company submitted its application
for such approval. If approved by the Harness
Racing Commission, the Company expects to
spend approximately $2 million to have the
facility constructed and operational by the
end of 1999.
The Company is subject to possible
liabilities arising from environmental
conditions at the landfill adjacent to Pocono
Downs Racetrack. Specifically, the Company
may incur expenses in connection with the
landfill in the future, which expenses may
not be reimbursed by the four municipalities
45
which are parties to an existing settlement
agreement. The Company is unable to estimate
the amount, if any, that it may be required
to expend.
Potential Tennessee Development Project
In June 1997, the Company acquired twelve
one-month options to purchase approximately
100 acres of land in Memphis, Tennessee.
Since such time, the Company, through its
subsidiary, Tennessee Downs, Inc. ("Tennessee
Downs"), has pursued the development of a
harness track and simulcast facility, which
is located in the northeastern section of
Memphis (the "Tennessee Development
Project"). 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 OTW facility at this
site. 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
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
Tennessee Commission's term on June 30, 1998,
if such term was not extended by the
Tennessee Commission. On May 1, 1998, 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) for racing days
for the period ending December 31, 2000; and
(iii) 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 Racing Control Act had
not been repealed and cannot be repealed by
implication by dissolving the Tennessee
Commission. It is the opinion of the court
that because the Racing Control Act is still
in force, horse-racing and pari-mutuel
betting is a legal unregulated activity in
Tennessee. This opinion has been appealed by
the Tennessee Attorney General. The Company
intends to continue its efforts to develop
and operate a harness track in Tennessee.
Costs incurred as of December 31, 1998
regarding the Tennessee license amounted to
$489,000 and are presented in prepaid
expenses and other current assets.
New Jersey Joint Venture
On January 28, 1999, pursuant to a First
Amendment to an Asset Purchase Agreement by,
between 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"). 46
The purchase price for the Acquisition is
approximately $46 million (subject to
reduction of up to approximately $1 million
based upon the resolution of certain disputed
items, for which amounts have been placed in
escrow). The purchase price will consist 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. The Company is responsible for
50% of the purchase price. The parties to the
Joint Venture are also contingently liable to
the sellers in amounts not to exceed a total
of $10 million, if the Joint Venture receives
various approvals for off-track wagering or
phone betting.
The Joint Venture is contingent upon, among
other things, the Company obtaining approvals
necessary to effect the Joint Venture, which
approvals include: (i) full and complete New
Jersey regulatory approval (including but not
limited to approval of the New Jersey Racing
Commission); (ii) Hart Scott Rodino
compliance; and (iii) the written consent of
a majority of the holders of its $80 million
Senior Notes issued December 17, 1997 to any
necessary modification to the Indenture dated
December 12, 1997 to permit the Company's
investment in the Joint Venture. At the
initial closing of the Acquisition on January
28, 1999, the Company loaned FR Park Racing,
LP, a New Jersey limited partnership,
$11,250,000 (at the Company's effective
borrowing rate as specified in Note 3 under
"Credit Facilities"), which is secured by
certain assets. After obtaining the above
approvals, the Company will invest an
additional $11,750,000 into the Joint Venture
with a portion of this amount being treated
as capital and the balance as debt. The
Company will have a 50% interest in the Joint
Venture.
5. Income Taxes
The provision for income taxes charged to operations was as follows:
Year ended December 31, 1996 1997 1998
--------------------------------------------------------------------------------
(in thousands)
Current tax expense
Federal $ 2,686 $ 2,006 $ 3,374
State 880 399 755
---------------------------------------
Total current 3,566 2,405 4,129
---------------------------------------
Deferred tax expense (benefit)
Federal 178 (56 ) 378
State 50 (41 ) 12
---------------------------------------
Total deferred 228 (97 ) 390
---------------------------------------
Total provision $ 3,794 $ 2,308 $ 4,519
---------------------------------------
47
Deferred tax assets and liabilities are comprised of the following:
December 31, 1997 1998
--------------------------
(in thousands)
Deferred tax assets
Reserve for debit balances of
horsemens' accounts, bad debts
restructuring charges and
litigation $ 469 $ 458
--------------------------
Deferred tax liabilities
Property, plant and equipment $ 11,092 $ 11,471
--------------------------
The following is a reconciliation of the
statutory federal income tax rate to the
actual effective income tax rate for the
following periods:
Year ended December 31, 1996 1997 1998
-----------------------------------
Percent of pretax income
Federal tax rate 34.0% 34.0% 34.0%
Increase in taxes resulting from
state and local income taxes,
net of federal tax benefit 6.6 3.9 4.2
Permanent difference relating to
amortization of goodwill .2 .9 .4
Other miscellaneous items -- (.8) (1.0)
-----------------------------------
40.8% 38.0% 37.6%
-----------------------------------
6. Supplemental Cash paid during the year for interest was
Disclosures of $506,000, $4,346,000 and $8,192,000
Cash Flow in 1996, 1997 and 1998, respectively.
Information
Cash paid during the year for income taxes
was $2,490,000, $3,649,000 and $4,207,000 in
1996, 1997 and 1998, respectively.
Noncash investing and financing activities
were as follows:
During 1996, the Company purchased Pocono
Downs for an aggregate purchase price of
$47,320,000, net of cash acquired. In
conjunction with the acquisition, liabilities
were assumed as follows:
Fair value of assets acquired, primarily property,
plant and equipment $ 53,150,000
Cash paid for the capital stock and the limited
partnership interests 47,320,000
------------------
Liabilities assumed $ 5,830,000
------------------
During 1996, the Company issued a $250,000
long-term note payable for the incurrence of
prepaid Charles Town Acquisition costs.
48
7. Common
Stock On February 18, 1997, the Company
completed a secondary public offering of
1,725,000 shares of its common stock.
The net proceeds of $23 million were used to
reduce $19 million of the Term Loan amounts
outstanding under the Credit Facility with
the balance of the proceeds used to finance
a portion of the cost of the refurbishment
of the Charles Town Entertainment
Complex (see Note 2 for Acquisitions).
From August 21, 1998 to September 10, 1998,
the Company purchased 424,700 shares of its
common stock in public market trading. The
total cost of these transactions was
$2,378,465 or $5.60 per share average price.
In April 1994, the Company's Board of
Directors and shareholders adopted and
approved the Stock Option Plan (the "Plan").
On April 30, 1997, the shareholders and the
Board of Directors approved an increase in
the number of authorized shares underlying
stock options to be granted from 1,290,000 to
2,000,000 shares. Therefore, the Plan permits
the grant of options to purchase up to
2,000,000 shares of Common Stock, subject to
antidilution adjustments, at a price per
share no less than 100% of the fair market
value of the Common Stock on the date an
option is granted with respect to incentive
stock options only. The price would be no
less than 110% of fair market value in the
case of an incentive stock option granted to
any individual who owns more than 10% of the
total combined voting power of all classes of
outstanding stock. The Plan provides for the
granting of both incentive stock options
intended to qualify under Section 422 of the
Internal Revenue Code of 1986, and
nonqualified stock options which do not so
qualify. Unless the Plan is terminated
earlier by the Board of Directors, the Plan
will terminate in April 2004.
Stock options that expire between August 20,
2000 and August 6, 2008 have been granted to
officers and directors to purchase Common
Stock at prices ranging from $3.33 to $17.63
per share. All options and warrants were
granted at market prices at date of grant.
The following table contains information on
stock options issued under the Plan for the
three-year period ended December 31, 1998:
Exercise
Option Price Range Average
Shares Per Share Price
------------------------------------------------
Outstanding at
January 1, 1996 810,000 $ 3.33 to 5.58 $ 3.82
Granted 280,000 5.63 to 17.63 12.99
Exercised (110,250) 3.33 3.33
------------
Outstanding at
December 31, 1996 979,750 3.33 to 17.63 9.10
Granted 100,000 11.50 to 16.63 15.59
Exercised (39,250) 3.33 to 5.63 4.01
------------
49
Exercise
Option Price Range Average
Shares Per Share Price
------------------------------------------------
Outstanding at
December 31, 1997 1,040,500 3.33 to 17.63 7.31
Granted 195,000 6.44 to 15.50 9.06
Exercised (11,500) 3.33 to 5.63 4.88
Canceled (39,500) 5.63 to 15.50 13.36
------------
Outstanding at
December 31, 1998 1,184,500 3.33 to 17.63 9.50
------------
In addition, 300,000 common stock options
were issued to the Chairman outside the Plan
on October 23, 1996. These options were
issued at $17.63 per share and are
exercisable through October 23, 2006.
Exercisable at year-end:
Exercise Weighted
Option Price Range Average
Shares Per Share Price
------------------------------------------------------
1996 337,250 $ 3.33 to 17.63 $ 3.71
1997 653,833 3.33 to 17.63 7.08
1998 1,034,666 3.33 to 17.63 8.36
------------------------------------------------------
Options available for future grant: 1994 Plan
-------------
1998 654,500
-------------
The following table summarizes information
about stock options outstanding at December
31, 1998:
Ranges Total
-------------------------- ----------
$3.33 $5.58 $3.33
Range of exercise prices to $5.50 to $17.63 to $17.63
--------------------------------------------
Outstanding options
Number outstanding at
December 31, 1998 637,250 847,250 1,484,500
Weighted average remaining
contractual life (years) 4.84 6.51 5.79
Weighted average exercise
price $ 3.84 $ 13.75 $ 9.50
Exercisable options
Number outstanding at
December 31, 1998 637,250 397,416 1,034,666
Weighted average exercise
price $ 3.84 $ 15.61 $ 8.36
Warrants outstanding have been granted to the
underwriters of the Company's initial public
offering at a price of $4.00 per share which
expire on June 2, 1999.
50
A summary of the warrant transactions follows:
Exercise
Price Weighted
Warrant Range Average
Shares Per Share Price
---------------------------------------------
Warrants outstanding at
January 1, 1996 495,000 $ 4.00 $ 4.00
Warrants exercised (300,000) 4.00 4.00
------------
Warrants outstanding at
December 31, 1996 195,000 4.00 4.00
Warrants exercised (43,000) 4.00 4.00
------------
Warrants outstanding at
December 31, 1997 152,000 4.00 4.00
Warrants exercised (3,000) 4.00 4.00
------------
Warrants outstanding
at December 31, 1998 149,000 4.00 4.00
------------
During 1995, the Financial Accounting
Standards Board adopted Statement of
Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation"
("SFAS 123"), which has recognition
provisions that establish a fair value based
method of accounting for stock-based employee
compensation plans and established fair value
as the measurement basis for transactions in
which an entity acquires goods or services
from nonemployees in exchange for equity
instruments. SFAS 123 also has certain
disclosure provisions. Adoption of the
recognition provisions of SFAS 123 with
regard to these transactions with
nonemployees was required for all such
transactions entered into after December 15,
1994, and the Company adopted these
provisions as required. The recognition
provision with regard to the fair value based
method of accounting for stock-based employee
compensation plans is optional. Accounting
Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employers" ("APB 25"),
uses what is referred to as an intrinsic
value based method of accounting. The Company
has decided to continue to apply APB 25 for
its stock-based employee compensation
arrangements. Accordingly, no compensation
cost has been recognized. Had compensation
cost for the Company's employee stock option
plan been determined based on the fair value
at the grant date for awards under the plan
consistent with the method of SFAS 123, the
Company's net income and net income per share
would have been reduced to the pro forma
amounts indicated below:
51
Year ended December 31, 1996 1997 1998
---------------------------------------------
Net income
As reported $ 5,510,000 $ 2,287,000 $ 7,503,000
Pro forma 5,344,000 1,660,000 6,827,000
Basic net income
per share
As reported $ .41 $ .15 $ .50
Pro forma .40 .11 .45
Diluted net income
per share
As reported $ .40 $ .15 $ .49
Pro forma .39 .11 .44
The fair value of each option and
warrant grant is estimated on the date
of grant using the Black-Scholes
option-pricing model with the following
weighted average assumptions used for
grants in 1996, 1997 and 1998: dividend
yield of 0%; expected volatility of
20%; risk-free interest rate of 6%; and
expected lives of five years. The
effects of applying SFAS 123 in this
pro forma disclosure are not indicative
of future amounts. SFAS 123 does not
apply to awards prior to 1995.
Additional awards in future years are
anticipated.
8. Shareholder On May 20, 1998, the Board of Directors
Rights Plan of the Company authorized and declared a
dividend distribution of one Preferred
Stock purchase right (the "Rights") for
each outstanding share of the Company's
common stock, par value $.01 per share (the
"Common Shares"), payable to shareholders of
record at the close of business on March 19,
1999. Each Right entitles the registered
holder to purchase from the Company one
one-hundredth of a share (a "Preferred Stock
Fraction"), or a combination of securities
and assets of equivalent value, at a purchase
price of $40.00 per Preferred Stock Fraction
(the "Purchase Price"), subject to
adjustment. The description and terms of the
Rights are set forth in a Rights Agreement
(the "Rights Agreement") dated March 2, 1999
between the Company and Continental Stock
Transfer and Trust Company as Rights Agent.
All terms not otherwise defined herein are
used as defined in the Rights Agreement.
The Rights will be exercisable only if a
person or group acquires 15% or more of the
Company's common stock (the "Stock
Acquisition Date"), announces a tender or
exchange offer that will result in such
person or group acquiring 20% or more of the
outstanding common stock or is a beneficial
owner of a substantial amount of Common
Shares (at least 10%) whose ownership may
have a material adverse impact ("Adverse
Person") on the business or prospects of the
Company. The Company will be entitled to
redeem the Rights at a price of $.01 per
Right (payable in cash or stock) at anytime
until 10 days following the Stock Acquisition
Date or the date on which a person has been
determined to be an Adverse Person. If the
Company is involved in certain transactions
after the Rights become exercisable, a Holder
of Rights (other than Rights owned by a
shareholder who has acquired 15% or more of
the Company's outstanding common stock or is
determined to be an Adverse Person, which
Rights become void) is entitled to buy a
number of the acquiring company's Common
Shares or the Company's common stock, as the
case may be, having a market value of twice
the exercise price of each Right. A potential
dilutive effect may exist upon the exercise
of the Rights. Until a Right is exercised,
52
the holder will have no rights as a
stockholder of the Company, including,
without limitations, the right to vote as a
stockholder or to receive dividends. The
Rights are not exercisable until the
Distribution Date and will expire at the
close of business on March 18, 2009, unless
earlier redeemed or exchanged by the Company.
9. Loss From In 1997, the Company recorded an
Retirement extraordinary loss of $1,482,000 after taxes
of Debt for the early retirement of debt. The
extraordinary loss consists primarily of
write-offs of deferred finance costs
associated with the retired notes and legal
and bank fees relating to the early
extinguishment of the debt.
10. Site Development During 1997, the Company incurred site
and Restructuring development (1,735,000) and restructuring
Charges ($702,000) charges of $2,437,000. The site
development charges consist of $800,000
related to the Charles Town Races facility
and $935,000 related to the abandonment of
certain proposed operating sites during 1997.
The restructuring charges primarily consistof
$350,000 in severance termination benefits
and other charges at the Charles Town Races
facility; $300,000 for the restructuring of
the Erie, Pennsylvania OTW facility and
$52,000 of property and equipment written off
in connection with the discontinuation of
Penn National Speedway, Inc. operations
during 1997. These charges, net of income
taxes, decreased the 1997 net income and
diluted net income per share by $1,462,000
and $.09 per share, respectively.
11. Subsequent The Company's contract with the Penn
Event National Race Course Thoroughbred Horsemen
("Horsemen") expired on February 15, 1999.
On that date, the Horsemen stopped
live racing at Penn National Race Course and
withdrew their permission for the Company to
import simulcast races from other racetracks,
resulting in the closure of Penn National
Race Course and its six OTW facilities at
Reading, Chambersburg, York, Lancaster,
Williamsport and Johnstown. Effective March
23, 1999, the parties signed a new Horsemen
Agreement with an initial term which expires
on January 1, 2004.
53
12. Subsidiary Summarized financial information for years ended December
31, 1998 and 1997 for Guarantors Penn National Gaming, Inc. ("Parent"),
the Subsidiary Guarantors and Subsidiary Nonguarantors is as follows:
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Subsidiary
Parent Subsidiary Non- Elimin- Consoli-
Company Guarantors Guarantors ations dated
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
As of December 31, 1997
Consolidated Balance Sheet (In Thousands)
Current assets $ 3,068 $ 21,842 $ 1,636 $ 2,478 $ 29,024
Net property, plant and 21,856 38,097 43,208 103,161
equipment
Other assets (2,575) 237,878 1,764 (210,374) 26,693
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Total $ 22,349 $ 297,817 $ 46,608 $ (207,896) $ 158,878
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Current liabilities $ 5,077 $ 3,403 $ 7,628 $ (2,310) $ 13,798
Long-term liabilities 1,117 155,388 41,913 (107,194) 91,224
Shareholders' equity
(deficiency) 16,155 139,026 (2,933) (98,392) 53,856
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Total $ 22,349 $ 297,817 $ 46,608 (207,896) $ 158,878
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Year ended December 31, 1997
Consolidated Statement of Income (In Thousands)
Total revenues $ 6,887 $ 90,320 $ 16,484 $ (2,155) $ 111,536
Total operating expenses
3,434 81,822 18,700 (2,155) 101,801
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Income from operations 3,453 8,498 (2,216) 9,735
Other income(expenses) (3,565) 1,612 (1,705) (3,658)
- - ----------------------------- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Income before income taxes
(112) 10,110 (3,921) 6,077
Taxes on income (38) 3,909 (1,563) 2,308
Extraordinary item (142) (768) (572) (1,482)
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Net income (loss) $ (216) $ 5,433 $ (2,930) $ $ 2,287
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Consolidated Statement of Cash Flows (In Thousands)
Net cash provided by
(used in) operating
activities $ 2,559 $ (169,422) $ 882 $ 176,659 $ 10,678
Net cash provided by
(used in) investing
activities (8,995) 68,529 40 (107,194) (47,620)
Net cash provided by
(used in) financing
activities 22,361 100,266 (69,465) 53,162
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Net increase (decrease)
in cash and cash
equivalents 15,925 (627) 922 16,220
Cash and cash
equivalents at
beginning of period 3,015 2,597 22 5,634
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Cash and cash
equivalents at end of
period $ 18,940 $ 1,970 $ 944 $ $ 21,854
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
54
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Subsidiary
Parent Subsidiary Non- Elimin- Consoli-
Company Guarantors Guarantors ations dated
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
As of December 31, 1998
Consolidated Balance Sheet (In Thousands)
Current assets $ 3,558 $ 6,944 $ 4,204 $ (592) $ 14,114
Net property, plant and 13,576 62,598 44,578 120,752
equipment
Other assets 102,400 153,818 1,779 (232,065) 25,932
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Total $ 119,534 $ 223,360 $ 50,561 $ (232,657) $ 160,798
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Current liabilities $ 1,000 $ 13,961 $ 7,520 $ (10,278) $ 12,203
Long-term liabilities 81,037 78,527 47,334 (117,339) 89,559
Shareholders' equity
(deficiency) 37,497 130,872 (4,293) (105,040) 59,036
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Total $ 119,534 $ 223,360 $ 50,561 (232,657) $ 160,798
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Year ended December 31, 1998
Consolidated Statement of Income (In Thousands)
Total revenues $ 10,789 $ 89,142 $ 56,883 $ (2,749) $ 154,065
Total operating expenses
4,612 81,187 51,557 (2,749) 134,607
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Income from operations 6,177 7,955 5,326 19,458
Other income(expenses) (5,535) 2,842 (4,743) (7,436)
- - ----------------------------- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Income before income taxes 642 10,797 583 12,022
Taxes on income 100 4,186 233 4,519
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Net income $ 542 $ 6,611 $ 350 $ $ 7,503
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Consolidated Statement of Cash Flows (In Thousands)
Net cash provided by
(used in) operating
activities $ (2,072) $ (4,121) $ 1,267 $ 16,792 $ 11,866
Net cash provided by
(used in) investing
activities (13,387) 290 909 (10,145) (22,333)
Net cash provided by
(used in) financing
activities (1,480) 3,566 (6,647) (4,561)
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Net increase (decrease)
in cash and cash
equivalents (16,939) (265) 2,176 (15,028)
Cash and cash
equivalents at
beginning of period 18,940 1,970 944 21,854
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
Cash and cash
equivalents at end of
period $ 2,001 $ 1,705 $ 3,120 $ $ 6,826
- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- --------------
55
ITEM 9 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by
reference from the Company's definitive proxy statement with
respect to the Company's Annual Meeting of Shareholders to be
held on May 5, 1999. Such proxy statement shall be filed
pursuant to Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended, within 120 days after the
end of the fiscal year covered by this Annual Report on Form
10-K.
ITEM 11 EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by
reference from the Company's definitive proxy statement with
respect to the Company's Annual Meeting of Shareholders to be
held on May 5, 1999. Such proxy statement shall be filed
pursuant to Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended, within 120 days after the
end of the fiscal year covered by this Annual Report on Form
10-K.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by Item 12 is incorporated by
reference from the Company's definitive proxy statement with
respect to the Company's Annual Meeting of Shareholders to be
held on May 5, 1999. Such proxy statement shall be filed
pursuant to Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended, within 120 days after the
end of the fiscal year covered by this Annual Report on Form
10-K.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by
reference from the Company's definitive proxy statement with
respect to the Company's Annual Meeting of Shareholders to be
held on May 5, 1999. Such proxy statement shall be filed
pursuant to Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended, within 120 days after the
end of the fiscal year covered by this Annual Report on Form
10-K.
56
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(A) (1) The Financial Statements included in the Index to Part II,
Item 8, are filed as part of this Report
(2) List of Exhibits
EXHIBIT
NOS. DESCRIPTION OF EXHIBIT
1. Purchase Agreement.
2.1 Agreement and Plan of Reorganization dated April 11, 1994 among the
Registrant, Carlino Family Partnership, Carlino Financial Corporation
and the shareholders and general partners of the entities now
comprising Penn national Gaming, Inc. (Incorporated by reference to the
Company's registration statement on Form S-1, File #33-77758, dated May
26, 1994.)
2.1.1 Amendment to Agreement and Plan of Reorganization dated April 26, 1994
among the registrant, Carlino Family Partnership, Carlino Financial
Corporation and the shareholders and general partners of the entities
now comprising Penn national Gaming, Inc. (Incorporated by reference to
the Company's registration statement on Form S-1, File #33-77758, dated
May 26, 1994.)
2.2 Agreement and Plan of Reorganization dated April 11, 1994 between the
Registrant and Thomas J. Gorman. (Incorporated by reference to the
Company's registration statement on Form S-1, File #33/77758, dated May
26, 1994.)
2.2.1 Amendment to Agreement and Plan of Reorganization dated April 26, 1994
between the Registrant and Thomas J. Gorman. (Incorporated by reference
to the Company's registration statement on Form S-1, File #33-77758,
dated May 26, 1994.)
2.3 Closing Agreement dated January 15, 1997 among Charles Town Races,
Inc., Charles Town Racing Limited Partnership, and PNGI Charles Town
Gaming Limited Liability Company. (Incorporated by reference to the
Company's registration statement on Form 8-K, File #0-24206, dated
January 30, 1997.)
2.4 Amended and Restated Operating Agreement dated as of December 31, 1996
among Penn National Gaming of West Virginia, Inc., Bryant Development
Company and PNGI Charles Town Gaming limited Liability Company.
(Incorporated by reference to the Company's registration statement on
Form 8-K, File #0-24206, dated January 30, 1997.)
2.5 Letter dated January 14, 1997 from Peter M. Carlino to James A. Reeder
(Incorporated by reference to the Company's registration statement on
Form 8-K, File #0-24206, dated January 30, 1997.)
2.6 First Amendment and Consent dated as of January 7, 1997 among the
Company, Bankers Trust Company as Agent, CoreStates Bank, N.A. as
Co-Agent, and certain banks party to the Credit Agreement dated as of
November 27, 1996 (Incorporated by reference to the Company's
registration statement on Form 8-K, File #0-24206, dated January 30,
1997.)
2.7 Amended and Restated Option Agreement dated as of February 17, 1995
among Charles Town Races, Inc., Charles Town Racing Limited
Partnership, and PNGI Charles Town Gaming limited Liability Company
(Incorporated by reference to Exhibit 2.1 of the Company's Form 8-K,
File #0-24206, dated January 30, 1997)
2.8 Transfer, Assignment and Assumption Agreement and Bill of Sale dated
January 15, 1997 among Charles Town Races, Inc., Charles Town Racing
Limited Partnership, and PNGI Charles Town Limited Liability Company
(Incorporated by reference to Exhibit 2.2 of the Company's Form 10-Q ,
File #0-24206, dated November 14, 1997.)
2.9 Second Amended and Restated Operating Agreement dated as of October 17,
1997, among Penn National Gaming of West Virginia, Inc., BDC Group and
PNGI Charles Town Gaming Limited Liability Company (Incorporated by
reference to the Company's Form 10-Q, File #0-24206, dated November 14,
1997.)
57
2.10 Purchase Agreement dated September 13, 1996 between the Company and the
Estate of Joseph B. Banks for the purchase of Pocono Downs Race Track
and two related OTW facilities. (Incorporated by reference to the
Company's Form 10-Q , File #0-24206, dated November 13, 1996.)
3.1 Amended and Restated Articles of Incorporation of Registrant,filed with
the Pennsylvania Department of State on April 12, 1994. (Incorporated
by reference to the Company's registration statement on Form S-1,
File #33-77758, dated May 26, 1994.)
3.2 By-laws of Registrant (Incorporated by reference to the Company's
registration statement on Form S-1, File #33-77758, dated
May 26, 1994.)
4.1 Indenture. (Incorporated by reference to the Company's registration
statement on Form S-4, File #333-45337, dated January 30, 1998.)
4.2 Registration Rights Agreement dated as of December 17, 1997 among the
Company, certain subsidiaries, BT Alex. Brown Incorporated and
Jefferies & Company, Inc. (Incorporated by reference to the Company's
registration statement on Form S-4, File #333-45337, dated January 30,
1998.)
5 Opinion of Morgan, Lewis & Bockius regarding validity of Notes.
(Incorporated by reference to the Company's registration statement on
Form S-4, File #333-45337, dated January 30, 1998.)
9.1 Form of Trust Agreement of Peter D. Carlino, Peter M. Carlino,
Richard J. Carlino, David E. Carlino, Susan F. Harrington,
Anne de Lourdes Irwin, Robert M. Carlino, Stephen P. Carlino and
Rosina E. Carlino Gilbert. (Incorporated by reference to
the Company's registration statement on Form S-1, File #33-77758,
dated May 26, 1994.)
10.1 1994 Stock Option Plan. (Incorporated by reference to the Company's
registration statement on Form S-1, File #33-77758, dated May 26,
1994.)
10.2 Employment Agreement dated April 12, 1994 between the Registrant and
Peter M. Carlino. (Incorporated by reference to the Company's
registration statement on Form S-1, File #33-77758, dated May 26,
1994.)
10.3 Credit Agreement, dated as of November 27, 1996, among Penn National
Gaming, inc., various banks, CoreStates bank, N.A., as Co-Agent and
Bankers Trust Company, as Agent. (Incorporated by reference to Exhibit
10.1 of the Company's registration statement on Form 8-K, File
#0-24206, dated December 12, 1996.)
10.4 Employment Agreement dated April 12, 1994 between the Registrant and
Robert S. Ippolito. (Incorporated by reference to the Company's
registration statement on Form S-1, File #33-77758, dated May 26,
1994.)
10.8 Consolidation of PRA Agreement dated may 18, 1992 and PRA Amendment
dated February 9, 1993 among all members of the Pennsylvania Racing
Association. (Incorporated by reference to the Company's registration
statement on Form S-1, File #33-77758, dated may 26, 1994.)
10.11 Lease dated march 7, 1991 between Shelbourne Associated and PNRC
Limited Partnership. (Incorporated by reference to the Company's
registration statement on Form S-1, File #33-77758, dated May 26,
1994.)
10.13 Lease dated June 30, 1993 between John E. Kyner, Jr. and Sandra R.
Kyner, and PNRC Chambersburg, Inc. (Incorporated by reference to
the Company's registration statement on Form S-1, File #33-77758,
dated May 26, 1994.)
10.34 Warrant Agreement between the Registrant and Fahnestock & Co. Inc.
(Incorporated by reference to the Company's registration statement on
Form S-1, File #33-77758, dated May 26, 1994.)
10.38 Consulting Agreement dated August 29, 1994, between the Company and
Peter D. Carlino. (Incorporated by reference to the Company's Form
10-K, File #0-24206 dated March 23, 1995.)
10.39 Lese dated July 7, 1994, between North Mall Associates and the Company
for the York OTW. (Incorporated by reference to the Company's Form
10-K, File #0-24206 dated March 23, 1995.)
10.41.1 Lease dated March 31, 1995 between Wyomissing Professional Center III,
LP and the Company for the Wyomissing Corporate Office. (Incorporated
by reference to the Company's Form 10-K, File #0-24206 dated March 20,
1996.)
58
10.42 Employment Agreement dated June 1, 1995 between the Company and William
J. Bork. (Incorporated by reference to the Company's Form 10-K, File
#0-24206 dated March 20, 1996.)
10.43 Lease dated July 17, 1995 between E. Lampeter Associates and
Pennsylvania National Turf Club, Inc. for the Lancaster OTW, as
amended. (Incorporated by reference to the Company's Form 10-K, File
#0-24206 dated March 20, 1996.)
10.44 Agreement dated September 1, 1995 between Mountainview Thoroughbred
racing Association and Pennsylvania national Turf Club, Inc. and Sports
Arena Employees' Union Local 137 (non-primary location.) (Incorporated
by reference to the Company's Form 10-K, File #0-24206 dated March 20,
1996.)
10.45 Agreement dated December 27, 1995 between Pennsylvania national Turf
Club, Inc. and Teleview Racing Patrols, Inc. (Incorporated by reference
to the Company's Form 10-K, File #0-24206 dated March 20, 1996.)
10.47 Agreement dated February 15, 1996 among Mountainview Thoroughbred
Racing Association, Pennsylvania national Turf Club, Inc. and
Pennsylvania Division, horsemen's Benevolent and Protection
Association, Inc. (Incorporated by reference to the Company's Form
10-K, File #0-24206 dated March 20, 1996.)
10.50 Formation Agreement dated February 26, 1996 between the Company and
Bryant Development Company. (Incorporated by reference to the Company's
Form 10-K, File #0-24206 dated March 20, 1996.)
10.51 Assignment of Agreement of Sale dated March 6, 1996 between the Company
and Montgomery Realty Growth Fund, Inc. (Incorporated by reference to
the Company's Form 10-Q, File #0-24206, dated May 14, 1996.)
10.56 Amended and Restated Option Agreement dated as of February 17, 1995
between the PNGI Charles Town Gaming Limited Liability Company (The
Joint Venture) and Charles Town Racing Limited Partnership and Charles
Town Races, Inc. (Incorporated by reference to the Company's Form 10-Q,
File #0-24206, dated November 13,1996.)
10.57 General Contractor Agreement dated December 23, 1996, between PNGI
Charles Town Gaming Limited Liability Company and Warfel Construction
Company. (Incorporated by reference to the Company's Form 10-K, File
#0-24206, dated March 27, 1997.)
10.58 Agreement dated March 19, 1997, between PNGI Charles Town Gaming
Limited Liability Company and the Charles Town HBPA, Inc. (Incorporated
by reference to the Company's Form 10-K, File #0-24206, dated March 27,
1997.)
10.59 Agreement dated March 21, 1997, between PNGI Charles Town Gaming
Limited Liability Company and The West Virginia Thoroughbred Breeders
Association. (Incorporated by reference to the Company's Form 10-K,
File #0-24206, dated March 27, 1997.)
10.60 Agreement between PNGI Charles Town Gaming Limited Liability Company
and The West Virginia Union of Mutuel Clerks, Local 533, Service
Employees International Union, AFL-CIO. (Incorporated by reference to
the Company's Form 10-K, File #0-24206, dated March 27, 1997.)
10.61 General Contractor Agreement dated March 26, 1997, between PNGI Charles
Town Gaming Limited Liability Company and Myers Building Systems, Inc.
(Incorporated by reference to the Company's Form 10-Q, File #0-24206,
dated May 15, 1997.)
10.62 Agreement dated June 25, 1997, between the PNGI Charles Town Gaming
Limited Liability Company and GTECH Corporation. (Incorporated by
reference to the Company's Form 10-Q, File #0-24206, dated August 12,
1997.)
10.63 Purchase Option dated June 20, 1997, between the Company and Roosevelt
Boyland Devisees. (Incorporated by reference to the Company's Form
10-Q, File #0-24206, dated August 12, 1997.)
10.64 Purchase Option dated June 20, 1997, between the Company and Joyce M.
Peck. (Incorporated by reference to the Company's Form
10-Q, File #0-24206, dated August 12, 1997.)
10.65 Purchase Option dated June 20, 1997, between the Company and Alan J.
Aste. (Incorporated by reference to the Company's Form
10-Q, File #0-24206, dated August 12, 1997.)
10.66 Fourth Amendment Waiver and Consent dated as of October 20, 1997, among
the Company, Bankers Trust, as Agent, CoreStates Bank, N.A. as Co-Agent
and certain banks party to the Credit Agreement dated as of November
17, 1996. (Incorporated by reference to the Company's Form 10-Q, File
#0-24206, dated November 14, 1997.)
59
10.67 Agreement dated October 2, 1996 between Pennsylvania National Turf
Club, Inc., Mountainview Racing Association and Sports Arena Employees'
union Local No. 137 (Primary Location.) (Incorporated by reference to
the Company's Form 10-K, File #0-24206, dated March 27, 1998.)
10.68 Lease dated July 1, 1997 between Laurel Mall Associated and the Downs
Off-Track Wagering, Inc. (Incorporated by reference to the Company's
Form 10-K, File #0-24206, dated March 27, 1998.)
10.69 General Contractor Agreement dated August 15, 1997, between Pocono
Downs, Inc. and S.G. Mastriani Construction Management.
(Incorporated by reference to the Company's Form 10-K, File #0-24206,
dated March 27, 1998.)
10.70 General Contractor Agreement dated October 15, 1997, between Pocono
Downs, Inc. and S.G. Mastriani Construction Management.
(Incorporated by reference to the Company's Form 10-K, File #0-24206,
dated March 27, 1998.)
10.71 General Contractor Agreement dated November 12, 1997, between Pocono
Downs, Inc. and Warfel Construction Company. (Incorporated by reference
to the Company's Form 10-K, File #0-24206, dated March 27, 1998.)
10.72 Totalisator Agreement dated November 19, 1997, between Penn National
Gaming, Inc. and AutoTote Systems, Inc. (Incorporated by reference to
the Company's Form 10-K, File #0-24206, dated March 27, 1998.)
10.73 Amended and Restated Credit Facility dated as of December 17, 1997,
among the Company, certain lenders, Bankers Trust Company, as Agent,
and CoreStates Bank, N.A., as Co-Agent. (Incorporated by reference to
the Company's Form 10-K, File #0-24206, dated March 27, 1998.)
10.74 Waiver dated March 25, 1998, between the Company, certain lenders,
Bankers Trust Company as Agent, and CoreStates Bank, N.A., as Co-Agent.
(Incorporated by reference to the Company's Form 10-K, File #0-24206,
dated March 27, 1998.)
10.75 General Contractor Agreement dated April 24, 1998, between Penn
National Turf Club and Warfel Construction Company. (Incorporated by
reference to the Company's Form 10-Q, File #0-24206, dated March 31,
1998.)
10.76 First Amendment and Waiver dated May 15, 1998, among Penn National
Gaming, Inc., CoreStates Bank, N.A. and Bankers Trust Company.
(Incorporated by reference to the Company's Form 10-Q, File #0-24206,
dated March 31, 1998.)
10.77 Purchase Agreement dated July 7, 1998, between Ladbroke Racing
Management - Pennsylvania and Mountainview Thoroughbred Racing
Association. (Incorporated by reference to the Company's Form 10-Q,
File #0-24206, dated June 30, 1998.)
10.78 Lease Agreement between Penn National Gaming, Inc. and Eagle Valley
Realty dated July 14, 1998. (Incorporated by reference to the Company's
Form 10-Q, File #0-24206, dated September 30, 1998.)
10.79 Joint Venture Agreement dated October 30, 1998 between Penn National
Gaming, Inc. and Greenwood New Jersey, Inc. (Incorporated by reference
to the Company's Form 10-Q, File #0-24206, dated September 30, 1998.)
10.80 Amendment dated November 2, 1998 to Joint Venture Agreement between
Penn National Gaming, Inc. and Greenwood New Jersey, Inc. (Incorporated
by reference to the Company's Form 10-Q, File #0-24206, dated September
30, 1998.)
10.81 Rights Agreement dated as of March 2, 1999 between Penn National
Gaming, Inc., and Continental Stock Transfer and Trust Company.
(Incorporated by reference to the Company's Form 8-K, File #0-24206,
dated March 2, 1999.)
10.82 First Amendment to Asset Purchase Agreement dated as of January 28,
1999 by and among Greenwood New Jersey, Inc., International
Thoroughbred Breeders, Inc., Garden State Race Track, Inc., Freehold
Racing Association, Atlantic City Harness Inc., Circa 1850, Inc., and
Penn National Gaming, Inc. (Incorporated by reference to the Company's
Form 8-K, File #0-24206, dated January 28, 1999.)
10.83 First Amendment to Joint Venture Agreement dated as of January 28,
1999, by and between Greenwood New Jersey, Inc. and Penn National
Gaming, Inc. (Incorporated by reference to the Company's Form 8-K, File
#0-24206, dated January 28, 1999.)
10.84 Purchase Agreement dated November 17, 1998 between the Company and
GTECH Corporation.
60
10.85 Assignment and Assumption of Lease Agreement dated December 31, 1998
between Mountainview Thoroughbred Racing Association and
Ladbroke Racing Management-Pennsylvania.
10.86 Subordination, Non-Disturbance and Attornment Agreement dated
December 31, 1998 between Mountainview Thoroughbred Racing
Association and CRIIMI MAE Services Limited Partnership.
10.87 Second Amended and Restated Credit Agreement dated as of
January 28, 1999 between the Company and various banks, First Union
National Bank, as Agent.
10.88 Live Racing Agreement dated March 23, 1999 between Pennsylvania
National Turf Club, Inc. and Mountainview Thoroughbred Racing
Association and Pennsylvania Horsemen's Benevolent and Protection
Association, Inc.
21 Subsidiaries of the Registrant.
23.1 Consent of BDO Seidman, LLP. (Incorporated by reference to the
Company's registration statement on Form S-3, file #333-18861, dated
February 11, 1997.)
23.2 Consent of Robert Rossi & Co. (Incorporated by reference to the
Company's registration statement on Form S-3, File #333-18861, dated
February 11, 1997.)
23.3 Consent of Leonard J. Miller & Associates, Chartered. (Incorporated by
reference to the Company's registration statement on Form S-3, File
#333-18861, dated February 11, 1997.)
23.4 Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed
as Exhibit 5.1 hereto). (Incorporated by reference to the Company's
registration statement of Form S-3, File #333-18861, dated February 11,
1997.)
23.6 Consent of Morgan, Lewis & Bockius LLP (included in Exhibit 5)
(Incorporated by reference to the Company's Form S-4, File
#333-45337, dated January 30, 1997.)
24.1 Powers of Attorney. (Incorporated by reference to the Company's
registration statement on Form S-3, File #333-18861, dated
February 11, 1997.)
27.1 Financial Data Schedule.
99 Press Release of Penn National Gaming, Inc., issued January 20, 1995.
(Incorporated by reference to the Company's Form 8-K, File #0-24206,
dated January 21, 1997.)
(B) Reports on Form 8-K
None
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PENN NATIONAL GAMING, INC.
By \s\Peter M. Carlino
-----------------------
Peter M. Carlino,
Chairman of the Board
Dated: March 30 , 1999
Pursuant to the requirements of the Securities Act of 1934 this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
Chief Executive Officer and
Director (Principal Executive
\s\ Peter M. Carlino Officer) March 30, 1999
- - -----------------------------------------------------
Peter M. Carlino
Chief Operating Officer and
Director (Principal Operating
\s\ William J. Bork Officer) March 30, 1999
- - -----------------------------------------------------
William J. Bork
Chief Financial Officer
\s\ Robert S. Ippolito (Principal Financial Officer) March 30, 1999
- - -----------------------------------------------------
Robert S. Ippolito
\s\ Harold Cramer Director March 30, 1999
- - -----------------------------------------------------
Harold Cramer
\s\ David A. Handler Director March 30, 1999
- - -----------------------------------------------------
David A. Handler
\s\ Robert P. Levy Director March 30, 1999
- - -----------------------------------------------------
Robert P. Levy
\s\ John M. Jacquemin Director March 30, 1999
- - -----------------------------------------------------
John M. Jacquemin
62
EXHIBIT INDEX
Exhibit Nos. Description of Exhibits Page No.
10.84 Purchase Agreement dated November 17, 1998 between the
Company and GTECH Corporation. 64-69
10.85 Assignment and Assumption of Lease Agreement dated
December 31, 1998 between Mountainview Thoroughbred
Racing Association and Ladbroke Racing Management-Pennsylvania. 70-75
10.86 Subordination, Non-Disturbance and Attornment Agreement dated
December 31, 1998 between Mountainview Thoroughbred Racing
Association and CRIIMI MAE Services Limited Partnership. 76-85
10.87 Second Amended and Restated Credit Agreement dated as
of January 28, 1999 between the Company and various
banks, First Union National Bank, as Agent. 86-225
10.88 Live Racing Agreement dated March 23, 1999 between Pennsylvania
National Turf Club, Inc., Mountainview Thoroughbred Racing
Association and Pennsylvania Horsemen's Benevolent and Protection
Association, Inc. 226-239
21 Subsidiaries of the Registrant 240
27.1 Financial Data Statement 241
63