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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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OR
|_|TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-24206
PENN NATIONAL GAMING, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2234473
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Wyomissing Professional Center
825 Berkshire Blvd., Suite 203
Wyomissing, Pennsylvania 19610
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code 610-373-2400
Securities registered pursuant to Section 12(b)of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- --------------------------------------------------------------------------------
Common stock par value .01 per share NASDAQ National Market
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
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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. Yes No X
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Aggregate market value of the voting stock held by
nonaffiliates of the Registrant as of March 18, 1997
was approximately $134,012,320.
Number of Shares of Common Stock outstanding as of March 18, 1997 - 15,109,040
Documents Incorporated by Reference
-----------------------------------
Registrants Definitive Proxy Statement with respect to annual meeting of
Shareholders to be held on April 30, 1997.
This Annual Report contains forward-looking statements that inherently involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those discussed in this Annual Report. References to
"Penn National Gaming" or the "Company" include Penn National Gaming, Inc. and
its subsidiaries.
2
PART I
ITEM 1 BUSINESS
GENERAL
Penn National Gaming, which began operations in 1972, operates the largest
number of pari-mutuel wagering locations in Pennsylvania. The Company provides
pari-mutuel wagering opportunities on both live and simulcast thoroughbred and
harness horse races at two racetracks and seven Off-Track Wagering Facilities
("OTWs") located principally in Eastern and Central Pennsylvania. Prior to the
consummation of the Acquisitions (as described below), the Company owned and
operated Penn National Race Course located outside Harrisburg, Pennsylvania (the
"Thoroughbred Track") and four OTWs located in Chambersburg, Lancaster, Reading
and York, Pennsylvania. On November 27, 1996, the Company consummated the Pocono
Downs Acquisition, and as a result acquired Pocono Downs Race Track located
outside Wilkes-Barre, Pennsylvania (the "Harness Track") and two OTWs in
Allentown and Erie, Pennsylvania. The Company now operates one of the two
thoroughbred tracks in Pennsylvania and one of the two harness tracks in
Pennsylvania. On February 13, 1997, the Company opened a seventh OTW in
Williamsport, Pennsylvania. The Company intends to develop four additional OTWs
that have been allocated to it under Pennsylvania law, after which it would
operate a total of 11 of the 23 OTWs currently authorized in Pennsylvania.
Following the consummation of the Charles Town Acquisition on January 15, 1997,
the Company operates, and has reached an agreement with its joint venture
partner to hold an 89% interest in, Charles Town Races, a thoroughbred horse
racing facility located in Jefferson County, West Virginia. The Charles Town
Facility is approximately a 60-minute drive from Baltimore, Maryland and
approximately a 70-minute drive from Washington, D.C. After refurbishment, the
Company expects to reopen Charles Town Races as an entertainment complex (the
"Charles Town Facility") that will feature live racing, dining, simulcast
wagering and video gaming machines ("Gaming Machines"). On November 5, 1996,
Jefferson County approved a referendum permitting the installation of Gaming
Machines at the Charles Town Facility. Approval for the installation of 400
Gaming Machines has been applied for and is expected to be obtained from the
West Virginia Lottery Commission in the Spring of 1997. The Company expects that
these machines will be installed and operational in mid-1997. The installation
of additional Gaming Machines at the Charles Town Facility is subject to
approval by the West Virginia Lottery Commission after application and a public
hearing. The Company anticipates that the Charles Town Joint Venture will apply
for approval of the installation and operation of a total of 1,000 Gaming
Machines within the first year after the opening of the Charles Town Facility.
The Company conducts pari-mutuel wagering at all of its locations on
thoroughbred and harness races run at its own tracks ("Company Races") and on
thoroughbred and harness races import simulcast from other racetracks ("import
simulcasting"). The Company also simulcasts company races for wagering at other
racetracks and OTWs in Pennsylvania and at other locations throughout the United
States ("export simulcasting"). The Company's customers can also wager on
Company Races and on races import simulcast from other racetracks through the
Company's telephone account betting network ("Telebet").
INDUSTRY OVERVIEW
Pari-mutuel wagering on thoroughbred or harness racing is pooled wagering, in
which a totalisator system totals the amounts wagered and adjusts the payouts to
reflect the relative amounts bet on different horses and various possible
outcomes. A
3
portion of the pooled wagers is retained by the wagering facility, a portion is
paid to the applicable regulatory or taxing authorities, and a portion is
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 paid out to bettors as winnings in accordance
with the payoffs determined by the totalisator system. 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 (including Pennsylvania) racetrack
ownership and operation is typically a precondition to OTW ownership and
operation. 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.
Prior to the inception of OTWs, declining live racing attendance at a track
translated directly into lower purses at that track. As the size of the purses
declined, the quality of live racing at the track would suffer, leading in turn
to further reductions in attendance. The Company believes that increased
contributions to the purse pool from wagers placed at OTWs affiliated with
racetracks have significantly offset the effects of declining live racing
attendance on race quality, and thereby improved the marketability of many
tracks' export simulcast products. Indeed, despite declining live racing
attendance, total pari-mutuel wagering on horse races in the United States has
remained relatively constant in recent years, increasing slightly from
approximately $14.1 billion in 1992 to approximately $14.6 billion in 1995,
according to the Association of Racing Commissioners International, Inc.; an
increase in simulcast, inter-track, off-track and telephone wagering from
approximately $7.0 billion to approximately $10.1 billion during that period has
offset declining wagering at tracks on live races. Moreover, a number of states
have recently begun to authorize the installation of slot machines, video
lottery terminals or other gaming machines at live racing venues such as
thoroughbred horse tracks, harness tracks and dog tracks. The revenue from these
gaming opportunities and from the higher volume of wagers placed at these venues
has not only increased total revenues for the tracks at which they are
installed, but has generally further increased purse size and thereby resulted
in higher quality races that can command higher simulcast revenues. Given that
many pari-mutuel wagering companies, such as the Company, face the necessary
precondition of conducting live racing operations as their entree into the
industry, the Company believes that its opportunities for success can be
maximized through OTW operations, import simulcasting and export simulcasting
and the operation of Gaming Machines, to the extent permitted.
STRATEGY
The Company intends to be a leading participant in the wagering industry by
capitalizing upon its horse racing expertise and its numerous wagering
locations. The Company's strategy is to focus on:
Opening Additional OTWs
The Company intends to expand its operations and increase its OTW revenues by
opening the four additional OTWs consistent with this strategy which it has been
allocated under the Pennsylvania Race Horse Industry Reform Act (the
"Pennsylvania Racing Act"). On February 13, 1997, the Company opened an
additional OTW in Williamsport, Pennsylvania, and has applied for approval of
and is evaluating possible sites for an OTW in Downingtown, Pennsylvania. The
Company expects to move expeditiously to select appropriate locations, apply for
and obtain regulatory approvals and open its three remaining allocated OTWs in
Pennsylvania. In addition, the Company will consider opening OTWs in other
states to the extent that market conditions and the regulatory environment may
present opportunities for it to leverage its OTW operating experience. West
Virginia law currently does not permit the operation of OTWs.
Developing the Charles Town Facility and Operating Gaming Machines
The Company intends to refurbish the Charles Town Facility and reopen it as an
entertainment complex integrating Gaming Machines with the Company's core
business strengths of live racing and simulcast wagering. The refurbishment will
include
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the renovation of the Charles Town Facility's thoroughbred track and barns, the
remodeling of its clubhouse and dining facilities and the initial installation
of 400 Gaming Machines; the cost of purchasing or leasing the Gaming Machines is
not included in the $16.0 million estimated cost of the refurbishment. The
installation of the initial 400 Gaming Machines and any additional Gaming
Machines at the Charles Town Facility is subject to the approval of the West
Virginia Lottery Commission after application and a public hearing. The Company
has applied for, but has not yet obtained, approval for the installation of the
initial 400 Gaming Machines and anticipates that it will apply for approval of
the installation and operation of a total of 1,000 Gaming Machines within the
first year after the opening of the Charles Town Facility. The Company expects
that increased revenues at the Charles Town Facility from live and simulcast
wagering and from Gaming Machines will result in significantly higher purse
sizes and in a corresponding improvement in both the quality of live races and
their marketability as an export simulcast product. In addition, the Company
intends to explore opportunities to provide additional forms of entertainment at
land adjacent to the Charles Town Facility to attract additional patrons.
Maintaining Quality Import Simulcasting and Increasing Export Simulcasting
The Company intends to maintain the quality of import simulcast races that it
makes available for wagering by customers at its tracks and OTWs and to increase
the volume of export simulcasting of Company Races for wagering at the
facilities of others. The Company believes that by import simulcasting high
quality races from nationally known racetracks it can increase the number of
wagerers as well as the size of the average wager. Subject to applicable
regulations, the Company also will seek to increase export simulcasting of races
from the Thoroughbred Track and the Harness Track, and introduce export
simulcasting from the refurbished Charles Town Facility, for wagering at
out-of-state racetracks, OTWs, casinos and other gaming facilities, and to
improve the quality of its export simulcast products by increasing purse sizes
where practicable and to the fullest extent that changing laws and regulations
may make possible. The Company believes that the minimal direct costs associated
with export simulcasting make it a particularly desirable source of revenue.
Exploring Other Gaming Opportunities
The Company intends to continue identifying strategic opportunities in the
pari-mutuel wagering and gaming industry which complement the Company's core
operations and leverage its pari-mutuel management and operating strengths. The
Company intends to explore other opportunities to capitalize on any changes in
gaming legislation in Pennsylvania, West Virginia and other states, including
legislation relating to Gaming Machines and riverboat gaming. In December 1995,
the Company agreed in principle with an unrelated party to form a joint venture
to develop, manage and operate pari-mutuel racing facilities in a state other
than Pennsylvania or West Virginia, and will seek further such opportunities as
they may present themselves. Moreover, the Company is also closely monitoring
possible legislation to authorize Gaming Machines in Pennsylvania.
ACQUISITIONS
Pocono Downs Acquisition
On November 27, 1996, the Company acquired (the "Pocono Downs Acquisition") all
of the capital stock of the Plains Company and all of the limited partnership
interests in The Plains Company's affiliated entities (together, "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 Pocono Downs Acquisition, Pennsylvania authorizes any additional forms of
gaming in which the Company may participate. The $10.0 million payment would be
payable in annual installments of $2.0 million for five years, beginning on the
date that the Company first offers such additional forms of gaming.
Pocono Downs conducts harness racing at the Harness Track located outside
Wilkes-Barre, Pennsylvania, export simulcasting of Harness Track races to
locations throughout the United States, pari-mutuel wagering at the Harness
Track and at OTWs in Allentown and Erie, Pennsylvania on Pocono Downs races and
on import simulcast races from other
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racetracks and telephone account wagering on live and import simulcast races.
Charles Town Acquisition
On January 15, 1997, a joint venture (the "Charles Town Joint Venture") in which
the Company will hold an 89% ownership interest, acquired (the "Charles Town
Acquisition") substantially all of the assets of Charles Town Racing Limited
Partnership and Charles Town Races, Inc. (together "Charles Town") relating to
the Charles Town Facility for an aggregate net purchase price of approximately
$16.5 million plus approximately $1.6 million in acquisition-related fees and
expenses. The Charles Town Facility conducts live thoroughbred horse racing,
on-site pari-mutuel wagering on live races run at the Charles Town Facility and
wagering on import simulcast races. The Company expects to refurbish the Charles
Town Facility as an entertainment complex that will feature live racing, dining,
simulcast wagering and, in mid-1997, upon completion of the interior
refurbishment, 400 Gaming Machines. The estimated cost of the refurbishment,
exclusive of the cost of the purchase or lease of the Gaming Machines, is
approximately $16.0 million. Pursuant to the original operating agreement
governing the Charles Town Joint Venture, the Company obtained 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 Facility. In fact, the Company contributed 100% of
the purchase price of the Charles Town Acquisition and expects to contribute
100% of the cost of refurbishing the Charles Town Facility. The Company has
reached an agreement with its joint venture partner, Bryant Development Company
("Bryant") pursuant to which the parties will amend the operating agreement to
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 will
provide that the entire amount the Company has contributed, and will contribute,
to the Charles Town Joint Venture for the acquisition and refurbishment of the
Charles Town Facility would be treated, as between the parties, as a loan to the
Charles Town Joint Venture from the Company. The proposed changes in the
ownership of the Charles Town Joint Venture are subject to the review of
applicable West Virginia racing and lottery regulatory authorities.
The Charles Town Joint Venture acquired its option to purchase the Charles Town
Facility from Bryant; Bryant, in turn, acquired the option from Showboat
Operating Company ("Showboat"). Showboat retained an option (the "Showboat
Option") to operate any casino at the Charles Town Facility in return for a
management fee (to be negotiated at the time, based on rates payable for similar
properties). Showboat has also retained a right of first refusal to purchase or
lease the site of any casino at the Charles Town Facility 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 extend for a period of five
years from the date that the Charles Town Joint Venture exercises its option to
purchase the Charles Town Facility and expire thereafter unless legislation to
permit casino gaming at the Charles Town Facility 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 agreement with Showboat does not specify what activities at the
Charles Town Facility would constitute operation of a casino, Showboat has
agreed that the installation and operation of video lottery terminals (like the
Gaming Machines the Company intends to install) at the Charles Town Facility's
race track would not trigger the Showboat Option. If West Virginia law were to
permit casino gaming at the Charles Town Facility and if Showboat were to
exercise the Showboat Option, the Company would be required to pay a management
fee to Showboat for the operation of the casino.
RACING AND WAGERING OPERATIONS
The Company's revenues are derived from: (i) wagering on Company Races at
Company facilities; (ii) wagering on non-Company Races import simulcast to
Company facilities; (iii) fees from wagering on export simulcasting of Company
Races to non-Company wagering venues; (iv) admissions, program sales and certain
other ancillary activities; and (v) food and beverage sales and concessions.
6
The following table summarizes certain key operating statistics for the
Company's pari-mutuel operations related to the Thoroughbred Track and its OTWs
for the year ended December 31:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Number of live racing days .............. 206 204 219 238 247
Paid attendance:
At the Thoroughbred Track ............ 370,898 430,128 485,224 548,085 619,359
At the OTWs .......................... 678,012 621,675 363,258 251,540 166,210
------------ ------------ ------------ ------------ ------------
Total paid attendance (1) ............... 1,048,910 1,051,803 848,482 799,625 785,569
------------ ------------ ------------ ------------ ------------
Wagering on Penn National races (2):
At the Thoroughbred Track ............ $ 29,991,365 $ 36,833,992 $ 44,650,714 $ 53,558,980 $ 62,661,360
At the OTWs ......................... 19,895,385 19,876,199 11,572,987 10,503,690 8,246,778
Telebet .............................. 3,609,549 4,047,377 4,483,324 6,790,381 7,733,190
Simulcasts to Other PA Facilities .... 35,831,807 41,387,765 50,540,159 68,085,883 74,690,435
Export simulcasting .................. 112,870,310 72,251,622 40,337,450 12,745,934 10,201,902
------------ ------------ ------------ ------------ ------------
Total wagers on Penn National
races ................................ 202,198,416 174,396,955 151,584,634 151,684,868 163,533,665
------------ ------------ ------------ ------------ ------------
Wagering by Simulcast on
Non-Penn National races (2):
At the Thoroughbred Track ............ 45,716,269 48,826,682 47,247,589 33,925,635 29,576,594
At the OTWs .......................... 111,151,944 89,438,659 42,730,084 23,013,876 12,582,339
Telebet .............................. 4,813,546 4,233,532 3,483,500 1,312,904 --
------------ ------------ ------------ ------------ ------------
Total wagers on non-Penn
National races ....................... 161,681,759 142,498,873 93,461,173 58,252,415 42,158,933
------------ ------------ ------------ ------------ ------------
Total wagers on Penn National and
non-Penn National races .............. $363,880,175 $316,895,828 $245,045,807 $209,937,283 $205,692,598
============ ============ ============ ============ ============
Average daily purses
Penn National races ............... $ 62,328 $ 57,897 48,560 $ 40,834 $ 38,746
Gross margin from wagering (3):
Wagering on Penn National races ... $ 8,444,000 $ 8,513,000 $ 8,313,000 $ 8,850,000 $ 9,711,000
Wagering on non-Penn National races 19,511,000 16,121,000 9,650,000 6,496,000 4,838,000
......................................... ------------ ------------ ------------ ------------ ------------
Total gross margin from wagering ........ $ 27,955,000 $ 24,915,000 $ 17,963,000 $ 15,346,000 $ 14,549,000
============ ============ ============ ============ ============
(1) Does not reflect attendance at the Thoroughbred Track for wagering on
simulcasts when live racing is not conducted, but does reflect
attendance at the Reading, Chambersburg, York and Lancaster OTWs, which
opened in May 1992, April 1994, March 1995, and July 1996,
respectively.
(2) Wagering on certain imported stakes races is included in Wagering on
Penn National races.
(3) Amounts equal total pari-mutuel revenues, less purses paid to the
Thoroughbred Horsemen, taxes payable to Pennsylvania and simulcast
commissions or host track fees paid to other racetracks.
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The following table summarizes certain key operating statistics for the
operations related to the Harness Track and its OTWs for the year ended December
31:
1996 1995 1994 1993 1992
----- ---- ---- ---- ----
Number of live racing days: .......... 135 135 143 147 149
Paid attendance:
At the Harness Track .............. 377,830 242,870 253,521 211,629 257,249
At the OTWs ....................... 384,935 388,858 404,192 272,237 141,108
------------ ------------ ------------ ------------ ------------
Total paid attendance (1) ............ 762,765 631,728 657,713 483,866 398,357
------------ ------------ ------------ ------------ ------------
Wagering on Pocono Downs races (2):
At the Harness Track .............. $12, 184,677 $ 15,672,606 $ 17,758,559 $ 18,895,856 $ 21,327,604
At the OTWs ....................... 2,322,390 2,679,733 3,469,976 2,824,718 1,311,185
Dial-a-Bet ........................ 1,656,066 -- -- -- --
Simulcasts to Other PA Facilities . 8,903,757 11,754,011 14,887,587 20,172,606 20,871,054
Export simulcasting ............... 23,589,362 18,366,920 10,835,744 -- --
------------ ------------ ------------ ------------ ------------
Total wagers on Pocono Downs races ... $ 48,656,252 $ 48,473,270 $ 46,951,866 $ 41,893,180 $ 43,509,843
------------ ------------ ------------ ------------ ------------
Wagering by Simulcast on Non-Pocono
Downs races (2):
At the Harness Track .............. 41,005,248 42,111,065 34,221,051 27,059,965 24,536,505
At the OTWs ....................... 81,093,251 83,138,883 75,610,285 38,757,490 17,049,662
Dial-a-Bet ........................ 3,853,539 75,066 -- -- --
------------ ------------ ------------ ------------ ------------
Total wagers on non-Pocono Downs
races ............................. $125,952,038 $125,325,014 $109,831,336 $ 65,817,455 $ 41,586,167
------------ ------------ ------------ ------------ ------------
Total wagers on Pocono Downs and
non-Pocono Downs races ............ $174,608,290 $173,798,284 $156,783,202 $107,710,635 $ 85,096,010
============ ============ ============ ============ ============
Average daily purses
Pocono Downs races ................ $ 42,313 $ 42,314 $ 35,790 $ 26,022 $ 22,448
Gross margin from wagering (3) ....... $ 17,804,998 $ 17,838,231 $ 16,652,676 $ 10,918,491 $ 8,100,860
============ ============ ============ ============ ============
(1) Does not reflect attendance for the years 1992 thru 1995 at the Harness
Track for wagering on simulcasts when live racing is not conducted, but
does reflect attendance at the Erie and Allentown OTWs, which opened in
May 1991 and July 1993, respectively. The Company's Consolidated
results of Operations include the Harness Track and Pocono OTWs
operations from November 28, 1996.
(2) Wagering on certain imported stakes races is included in Wagering on
Pocono Downs races.
(3) Amounts equal total pari-mutuel revenues, less purses paid to the
Harness Horsemen, taxes payable to Pennsylvania and simulcast
commissions or host track fees paid to other racetracks.
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The following table summarizes the Company's operations and facilities:
TRACKS
FACILITY LOCATION DATE OPENED/STATUS OPERATIONS CONDUCTED
- -------- -------- ------------------ --------------------
Penn National Race Grantville, PA Constructed in 1972; operated by Live thoroughbred racing;
Course Penn National since 1972 simulcast wagering; dining;
telephone account wagering
Pocono Downs Plains Township, PA Constructed in 1965; operated by Live harness racing; simulcast
Racetrack Penn National since November 28, wagering; dining; telephone
1996 account wagering
Charles Town Races Charles Town, WV Constructed in 1933; acquired by When reopened: live thoroughbred
Charles Town Joint Venture on racing; simulcast wagering;
January 15, 1997; to be dining; Gaming Machines (applied for)
refurbished in 1997
OTWs (1)
SIZE HISTORICAL
FACILITY LOCATION DATE OPENED/STATUS (SQ. FT.) COST (2) LICENSEE
- -------- -------- ---- ------------- ---- ---- ---- --- --------
Allentown Allentown, PA Opened July 1993 28,500 $5,207,000 Pocono Downs
Chambersburg Chambersburg, PA Opened April 1994 12,500 1,500,000 Penn National
Erie Erie, PA Opened May 1991 22,500 3,575,000 Pocono Downs
Lancaster Lancaster, PA Opened July 1996 24,000 2,700,000 Penn National
Reading Reading, PA Opened May 1992 22,500 2,100,000 Penn National
York York, PA Opened March 1995 25,000 2,200,000 Penn National
Williamsport Williamsport, PA Opened February 1997 14,000 3,000,000 Penn National
(estimated)
Downingtown Downingtown, PA Proposed 20,000 4,000,000 Penn National
(estimated) (estimated)
- ----------
(1) This table does not include three additional Pennsylvania OTWs which
the Company is authorized to operate under Pennsylvania law.
(2) Consists of construction costs, equipment and, for owned properties,
the cost of land and building.
Live Racing
The Company has conducted live racing at the Thoroughbred Track since 1972, and
has held at least 204 days of live racing at that facility in each of the last
five years. The Thoroughbred Track is one of only two thoroughbred racetracks in
Pennsylvania. Although other regional racetracks offer nighttime thoroughbred
racing, the Thoroughbred Track is the only racetrack 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. Post time at
the Thoroughbred Track is 7:30 p.m. on Wednesdays, Fridays and Saturdays, and
1:30 p.m. on Sundays and holidays.
The Pocono Downs Acquisition was consummated following the last day of racing at
the Harness Track for the 1996 season. The Company expects to resume live racing
at the Harness Track in April 1997 and plans to conduct 135 days of live harness
racing at the facility in the 1997 season. Post time at the Harness Track is
expected to be 7:30 p.m.
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The Charles Town Facility is currently closed. The Company has received
preliminary approval for, and plans to conduct, 159 days of thoroughbred racing
at the facility in the 1997 season following the reopening of the Charles Town
Facility's racetrack (currently anticipated to be in May 1997). Post time at
the Charles Town Facility is expected to be 7:30 p.m. on Fridays and Saturdays
and 1:30 p.m. on Wednesdays and Sundays.
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 and the balance is
divided between the Company and purses for the horsemen at that track. 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 Pennsylvania Horsemen and applicable taxing
authorities). The percentages vary, based on the type of wager; the average
percentage is approximately 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 Thoroughbred Track or the Company's 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 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 Facility, with the average
percentage of wagers retained by Charles Town having also been approximately 20%
(prior to required payments to the Charles Town Horsemen and to applicable West
Virginia taxing authorities and other mandated beneficiary organizations).
OTW Wagering
At OTWs, as at the Company's racetracks, customers place 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. Each OTW is required by the Pennsylvania Racing Act to
provide various amenities, including dining and other services designed to
attract a wide range of patrons. The Company operates seven of the 17 OTWs now
open in Pennsylvania, located in Allentown, Chambersburg, Erie, Lancaster,
Reading, York and Williamsport, Pennsylvania, and has the right (subject to
applicable regulatory approvals) to open and operate an additional four
Pennsylvania OTWs, which would give the Company a total of 11 of the 23 OTWs
currently authorized by Pennsylvania law. Of its four additional allocated OTWs,
regulatory approval has been sought for a new OTW in Downingtown, Pennsylvania.
The Company expects to move expeditiously to select appropriate locations, apply
for and obtain regulatory approvals and open the remaining three allocated OTWs.
The Company believes that expansion through the opening of the additional
Pennsylvania OTWs will increase its customer wagering base. The Company intends
to open its OTWs outside of large metropolitan areas and away from the
Thoroughbred Track and the Harness Track and other existing OTWs; the Company
thus believes that it will be offering a new form of entertainment to the
communities that it enters.
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 race track sending the
race, 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, 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.
10
During the year ended December 31, 1996, the Company received import simulcasts
from approximately 57 racetracks (including Belmont Park, Saratoga, Gulfstream
Park, Santa Anita and Arlington International Racecourse) and transmitted export
simulcasts of Company Races to more than 63 locations.
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.
Wagering at the Company's facilities on import simulcasting of races from other
tracks, especially from nationally-known tracks in other states, competes with
wagering on Company Races. The Company believes, however, that import
simulcasting of out-of-state races, including full card import simulcasting, is
economically beneficial to the Company because it makes available wagering on
higher quality races and thus increases the size of the average wager.
Telebet
In 1983, the Company pioneered Telebet, Pennsylvania's first telephone account
wagering system. Telebet customers open an account by depositing funds with the
Company at one of its locations. 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 future wagers. In December 1995, the Harness Track instituted
Dial-A-Bet, a similar telephone account betting system.
Gaming Machine Operations
On November 5, 1996, Jefferson County, West Virginia approved a referendum
authorizing the installation and operation of Gaming Machines at the Charles
Town Facility. As a result, the Company consummated the Charles Town Acquisition
on January 15, 1997. In mid-1997, the Company intends to reopen the Charles Town
Facility as an entertainment complex that will feature live racing, dining,
simulcast wagering and Gaming Machines. The Charles Town Joint Venture has
applied to the West Virginia Lottery Commission for approval to operate
initially 400 Gaming Machines, and expects to obtain such approval in the Spring
of 1997. The machines will be slot-machine-style video machines that depict
spinning reels and video card games such as blackjack and poker. The Race Track
Video Lottery Act specifies the maximum percentage of each dollar wagered on
Gaming Machines which can be retained by the Company; the maximum statutory rate
is 20%. 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 anticipates that the Charles Town Joint Venture will apply
for approval of the installation and operation of a total of 1,000 Gaming
Machines at the Charles Town Facility within the first year after the opening of
the Charles Town Facility. The installation of additional Gaming Machines at the
Charles Town Facility is subject to approval by the West Virginia Lottery
Commission after application and a public hearing.
Other Gaming Opportunities
In December 1995, the Company agreed in principle with an unrelated party to
form a joint venture for the purpose of developing, managing and operating
pari-mutuel racing facilities in a state other than Pennsylvania or West
Virginia. The actual formation of the joint venture is subject to numerous
contingencies including receipt of regulatory approval from that state's Horse
Racing Commission. Additional investments by the Company in new or existing
businesses are subject to the consent of the Company's lenders under the Credit
Facility. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." To date, the Company
has not invested a material amount in the joint venture and the joint venture
has conducted no operations.
11
MARKETING
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.
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 Thoroughbred Track. The program provides color commentary on the races at
the Thoroughbred Track (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
Thoroughbred Track and on various cable television systems in Pennsylvania and
is transmitted to all OTWs that receive Penn National Races. The Company intends
to expand Racing Alive and/or to create additional televised programming to
cover racing at the Harness Track 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 the Thoroughbred Track 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.
PURSES; AGREEMENTS WITH HORSEMEN
The Horsemen Agreements set forth the amounts to be paid to the Pennsylvania
Horsemen as racing purses. Revenues from wagering at the Thoroughbred Track and
the Harness Track, except for wagering on races simulcast from outside
Pennsylvania and revenues received from export simulcasting, are divided
approximately equally between the Company and the Pennsylvania Horsemen.
Revenues from all other sources (all wagering at the Company's OTWs and on races
simulcast from outside Pennsylvania) are shared such that the Pennsylvania
Horseman generally receive between 3% and 7.5% of total wagering at the OTWs.
The Company sets the purses paid on Company Races, based on projected wagering
and in accordance with the terms of the Horsemen Agreements. Because the amount
of the purses is based on projections, at any given point in time the
Pennsylvania Horsemen will have either been overpaid or underpaid. The agreement
with the Thoroughbred Horsemen also permits the Thoroughbred Horsemen to require
immediate purse adjustments should the amount of revenues to be paid to them as
purses, and remaining unpaid, exceed $100,000. The amount of underpaid or
overpaid purses varies from time to time, and the Company believes that further
action to reduce the amount of underpaid purses will not affect its ability to
increase purses in an orderly manner. In setting future purses the Company
seeks, over time, to adjust for the under or over-payments, but no assurance can
be given that any such adjustment will be accurate or adequate.
12
During the years ended December 31, 1996, 1995 and 1994, the Thoroughbred
Horsemen earned an aggregate of approximately $12.3 million, $12.0 million and
$10.7 million in purses, respectively. The average annual daily purses at the
Thoroughbred Track during the three-year period increased from approximately
$49,000 to approximately $60,000. The Company believes that the increases in
daily purses have contributed to an increase in the quality of horses racing at
the Thoroughbred Track. During the years ended December 31, 1996, 1995 and 1994,
the Harness Horsemen earned an aggregate of approximately $5.7 million, $6.5
million and $6.0 million in purses, respectively. The average daily purses at
the Harness Track during the three-year period increased from approximately
$26,000 to approximately $42,300.
The Thoroughbred Horsemen Agreement was entered into in February 1996, expires
in February 1999 and is subject to automatic renewal for successive one year
terms unless either party gives notice of termination at least 90 days prior to
the end of any such period. The Harness Horsemen Agreement was entered into in
November 1994, became effective in January 1995 and expires in January 2000.
Currently, there is no agreement with the Charles Town Horsemen. The Company has
entered into discussions with the Charles Town Horsemen toward obtaining an
agreement. The future success of the Company depends, in part, on its ability to
maintain a good relationship with the Horsemen and to obtain renewal of the
Horsemen Agreements and required approvals for import simulcast wagering from
the Charles Town Horsemen on satisfactory terms.
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. 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.
Company 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 Thoroughbred Track, due to higher purses being paid
which, in turn, has primarily resulted from the Company's increased simulcasting
activities. However, increased purses may not result in a continued improvement
in the quality of racing at the Thoroughbred Track or in any material
improvement in the quality of racing at the Harness Track or the Charles Town
Facility.
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 Pocono Downs Acquisition and which is approximately 50 miles
from the Thoroughbred Track and 35 miles from the Company's Reading OTW, has
drawn some patrons from the Thoroughbred Track, the Reading OTW and Telebet and
that its Lancaster OTW, which is approximately 31 miles from the Thoroughbred
Track and 25 miles from the Company's York OTW, has drawn some patrons from the
Thoroughbred Track, the York OTW and Telebet. Moreover, the Company believes
that a competitor's new OTW in King of Prussia, Pennsylvania, which is
approximately 23 miles from the Reading OTW, has drawn some patrons from the
Reading OTW. The opening of new OTWs 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.
If the Company obtains approval for the installation of Gaming Machines at the
Charles Town Facility, the Company's Gaming Machine operations will 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,
13
currently offer mechanical slot machines that feature physical spinning reels,
pull-handles and the ability to both accept and pay out coins. West Virginia has
not authorized, and may never approve, such mechanical slot machines. The
failure to attract or retain Gaming Machine customers at the Charles Town
Facility, 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 conditions
contribute to the seasonality of the Company's business. Weather conditions,
particularly during the winter months, may cause races to be canceled or may
curtail attendance. Because a substantial portion of the Company's Thoroughbred
Track and Harness Track 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.
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 a material 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 Breeders' Cup in autumn. 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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations --Effect of Inclement Weather and Seasonality."
REGULATION AND TAXATION
General
The Company is authorized to conduct thoroughbred racing and harness racing in
Pennsylvania under the Pennsylvania Racing Act. The Company is also authorized,
under the Pennsylvania Racing Act and the Federal Interstate Horseracing Act of
1978 (the "Federal Horseracing Act"), to conduct import simulcast wagering. The
Company is also subject to the provisions of the Horse and Dog Racing Act (the
"West Virginia Racing Act") which governs the conduct of horseracing in West
Virginia, and the State Lottery Act and the Race Track Video Lottery Act (the
"West Virginia Gaming Machine Acts") 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. The West Virginia
State Lottery Commission is subject to review every six years. The next review
date is July 1, 1998. 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.
Sunset Provisions in Gaming Machine Legislation
The Company has applied for approval to install and operate Gaming Machines at
the refurbished Charles Town Facility pursuant to the West Virginia Gaming
Machine Acts. The Race Track Video Lottery Act was adopted in 1994, and was set
to terminate on June 30, 1997 unless extended or reenacted. In March 1997 the
West Virginia Legislature terminated this Sunset Provision, thus eliminating the
need to further extend the Gaming Machine Act.
Pennsylvania Racing Regulations
The Company's horse racing operations at the Thoroughbred Track and the Harness
Track are subject to extensive regulation under the Pennsylvania Racing Act,
which established the Pennsylvania Racing Commissions. The Pennsylvania Racing
Commissions 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.
14
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 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 Thoroughbred Track
since it commenced operations in 1972, and has obtained permission from the
Pennsylvania State Harness Racing Commission to conduct live racing at the
Harness Track beginning with the 1997 season. Currently, the Company has
approval from the Pennsylvania Racing Commissions to operate seven OTWs and the
right, under the Pennsylvania Racing Act, to operate four additional OTWs,
subject to approval by the Pennsylvania Racing Commissions. 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.
The Pennsylvania Racing Act provides that no corporation licensed to conduct
thoroughbred racing shall be licensed to conduct harness racing and that no
corporation licensed to conduct harness racing shall be licensed to conduct
thoroughbred racing. The Company's harness and thoroughbred licenses are held by
separate corporations, each of which is a wholly owned subsidiary of the
Company. Moreover, the Pennsylvania State Harness Racing Commission has reissued
the Pocono Downs harness racing license and has found, in connection with the
reissuance, that it is not "inconsistent with the best interests, convenience or
necessity or with the best interests of racing generally," that a subsidiary of
the Company beneficially owns Pocono Downs. The Company thus believes that the
arrangement under which it holds both a harness and a thoroughbred license
complies with applicable regulations.
West Virginia Racing and Gaming Regulation
The Company's operations at the Charles Town Facility 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 Gaming Machine
Acts. 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 applied to the West Virginia Racing
Commission for a license to conduct racing and pari-mutuel wagering at the
Charles Town Facility. The West Virginia Racing Commission has issued this
license, subject to its review and approval of the documents pursuant to which
the Charles Town Acquisition was consummated and financing therefor was obtained
and to its review and approval of any changes in the ownership of the Charles
Town Joint Venture, among other conditions. The Charles Town Joint Venture has
also applied to the West Virginia Lottery Commission for approval to install and
operate 400 Gaming Machines at the refurbished Charles Town Facility; this
approval has not yet been granted. The Company anticipates, but cannot assure,
that it will obtain approval for the installation and operation of the 400
Gaming Machines in the Spring of 1997. The Charles Town Joint Venture may not
receive or retain all of the regulatory approvals necessary from time to time to
conduct racing and pari-mutuel wagering operations at the Charles Town Facility.
The failure to receive or retain a delay in receiving such approvals could cause
the reduction or suspension of racing and pari-mutuel wagering, as well as of
Gaming Machine operations, at the Charles Town Facility and have a material
adverse effect upon the Company's business, financial condition and results of
operations.
The installation and operation of Gaming Machines at the Charles Town Facility
are subject to the provisions of the West Virginia
15
Gaming Machine Act and the regulatory authority of the West Virginia Lottery
Commission. Pursuant to the West Virginia Gaming Machine Act and regulatory
approval currently being sought by the Company thereunder, the Company plans,
following the completion of the interior refurbishment of the Charles Town
Facility in mid-1997, to install initially 400 Gaming Machines at the Charles
Town Facility. The installation of additional Gaming Machines at the Charles
Town Facility is subject to approval by the West Virginia Lottery Commission
after application and a public hearing. The Company anticipates that the Charles
Town Joint Venture will apply for approval of the installation and operation of
a total of 1,000 Gaming Machines at the Charles Town Facility within the first
year after the opening of the Charles Town Facility. The West Virginia Lottery
Commission may not approve the installation of the initial or any additional
Gaming Machines, however, or may not do so in a timely manner, or may ultimately
approve the installation of a smaller number of Gaming Machines than requested.
Moreover, the West Virginia Gaming Machine Act requires that the operator of the
Charles Town Facility enter into a written agreement with the Charles Town
Horsemen in order to conduct Gaming Machine operations. The West Virginia Gaming
Machine Act also requires that the Charles Town Joint Venture enter into a
written agreement with the pari-mutuel clerks in order to operate Gaming
Machines. In March 1997 the Charles Town Joint Venture entered into written
agreements with the Charles Town Horsemen, the West Virginia Breeders
Association and the pari-mutual clerks. The Agreements provide that the net
terminal income from the Gaming Machines shall be distributed in accordance with
the provisions of Section 29-22A-10(c) of the Race Track Video Lottery Act. The
agreements expire on June 30, 1998.
State and Federal Simulcast Regulation
Both the Federal Horseracing Act and the Pennsylvania Racing Act require that
the Company have a written agreement with the Thoroughbred Horsemen and with the
Harness Horsemen in order to simulcast races. The Company has entered into the
Horsemen Agreements, and in accordance therewith has agreed upon the allocations
of the Company's revenues from import simulcast wagering to the purse funds for
the Thoroughbred Track and the Harness Track. Because the Company cannot conduct
import simulcast wagering in the absence of the Horsemen Agreements, the
termination or non-renewal of either Horsemen Agreement could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Federal Horseracing Act requires that the operator of the Charles Town
Facility obtain the approval of the Charles Town Horsemen before import
simulcast wagering can be conducted there. While such approval has been obtained
by Charles Town in the past, there is no written agreement with the Charles Town
Horsemen providing for such approval in the future. The Company has entered into
discussions with the Charles Town Horsemen toward obtaining an agreement
evidencing such approval. The failure to obtain such approval 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
16
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.
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 Commission. 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 Commission has 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 Gaming Machine 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
Gaming Machine 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. See "Description of Capital Stock -- Certain Restrictions on
Share Ownership and Transfer."
ITEM 2 PROPERTIES
Thoroughbred Track
The Thoroughbred Track 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 Thoroughbred Track 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 Thoroughbred
Track which are available for future expansion or development.
The Thoroughbred Track'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 Thoroughbred Track 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 back
stretch area and water and sewage treatment plants. Parking facilities for
approximately 6,500 vehicles adjoin the Thoroughbred Track.
Harness Track
The Harness Track 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 the Harness
Track and approximately 1.5 million persons within a 50-mile radius. The
property includes a 5/8-mile all-weather, lighted harness track. The Harness
Track's main buildings are the grandstand and the clubhouse. The clubhouse is
completely enclosed and 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. The Harness Track
17
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.
As a result of the Pocono Downs Acquisition, the Company owns a solid waste
landfill (the "Landfill") located outside Wilkes-Barre, Pennsylvania. The
Landfill is on a parcel of land adjacent to the Harness Track. The Landfill was
operated by the East Side Landfill Authority (the "Landfill Authority") 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. 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. However, there can
be no assurance that the municipalities will continue to meet 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.
Charles Town Facility
The Charles Town Facility 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
Facility. The property includes a 3/4-mile thoroughbred racetrack. The Charles
Town Facility'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 Facility, 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 Facility.
The Charles Town Facility also includes stables, an indoor paddock, ample
parking and water and sewage treatment facilities.
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.
The Company's current OTW properties are described in the following chart:
OWNED OR
LOCATION LEASED
- -------- ------
Allentown............................................... Owned
Chambersburg............................................ Leased
Erie.................................................... Owned
Lancaster............................................... Leased
Reading................................................. Leased
York.................................................... Leased
Williamsport............................................ Owned
The Company has an agreement to purchase land for its proposed Downingtown OTW
facility. The agreement is subject to numerous contingencies including approval
from the Pennsylvania State Horse Racing Commission. On March 26, 1996, the
Company submitted an application to the Pennsylvania State Horse Racing
Commission which was amended on December 31, 1996, for approval of the
Downingtown OTW facility. The Pennsylvania State Horse Racing Commission has
scheduled a public hearing on April 7, 1997.
18
Other Property and Equipment
The Company currently leases 2,100 square feet of office space in an office
building in Wyomissing, Pennsylvania for the Company's executive offices. The
lease is for a five-year term expiring April 2000 with an annual minimum rental
of $23,320. The office building is owned by an affiliate of Peter M. Carlino.
The Company considers its properties adequate for its present purposes. In
addition to the anticipated openings of the Williamsport and Downingtown OTWs,
the Company intends to open three additional OTWs for which sites have not been
selected. The Company believes, but cannot assure, that suitable sites will be
available on satisfactory terms.
EMPLOYEES AND LABOR RELATIONS
At March 18, 1997, the Company had 1,183 permanent employees, of whom 389 were
full-time and 794 part-time. Of the total 1,183 employees, 476 were employed at
the Thoroughbred Track, 191 were employed at the Harness Track and 516 were
employed at the Company's OTWs. Employees of the Company who work in the
admissions department and pari-mutuels department at the Thoroughbred Track, the
Harness Track 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 20,
1998 for OTW employees. The Company believes that its relations with its
employees are satisfactory.
During the 1996 racing season at the Charles Town Facility, there were
approximately 113 full-time and 215 part-time employees. Charles Town employees
who work as pari-mutuel clerks were represented under a collective bargaining
agreement between Charles Town and the West Virginia Union of Mutuel Clerks,
Local No. 553. The agreement expired December 31, 1996, and was extended one
year until December 31, 1997.
ITEM 3 LEGAL PROCEEDINGS
On December 11, 1996, GTECH commenced an action in the United States District
Court for the Northern District of West Virginia against Charles Town, the
Company, Penn National Gaming of West Virginia, Inc. (a wholly-owned subsidiary
of the Company) and Bryant. The complaint filed by GTECH alleges that Charles
Town and AmTote were parties to the October 20, 1994 AmTote Agreement, pursuant
to which AmTote was granted an exclusive right to install and operate a "video
lottery system" at the Charles Town Facility. When the AmTote Agreement was
executed, AmTote was a subsidiary of GTECH; GTECH has since divested itself of
AmTote, but is purportedly the assignee of certain of AmTote's rights under the
AmTote Agreement pursuant to an assignment and assumption agreement dated
February 22, 1996. The complaint seeks (i) preliminary and permanent injunctive
relief enjoining Charles Town, Bryant, the Company and its subsidiary from
consummating the Charles Town Acquisition or any similar transaction unless the
purchasing party explicitly accepts and assumes the AmTote Agreement, (ii) a
declaratory judgment that the AmTote Agreement is valid and binding, that GTECH
has the right to be the exclusive installer, operator, provider and servicer of
a video lottery system at the Charles Town Facility, and that any party buying
the stock or assets of Charles Town must accept and assume the AmTote Agreement
and recognize such rights of GTECH thereunder, (iii) compensatory damages, (iv)
legal fees and costs and (v) such other further legal and equitable relief as
the court deems just and appropriate. On December 23, 1996, the court denied
GTECH's motion preliminarily to enjoin the Company from consummating the Charles
Town Acquisition unless it accepted and assumed the AmTote Agreement. The court
noted that GTECH may pursue its claim for damages and, if warranted, pursue
other injunctive relief in the future. The Company consummated the Charles Town
Acquisition on January 15, 1997, at which time Charles Town assigned to the
Charles Town Joint Venture all legally valid and binding obligations, if any,
under the AmTote Agreement. In addition, the Company has agreed to indemnify
Charles Town for any damages Charles Town may suffer as a result of a claim that
Charles Town failed to fulfill its obligations under the AmTote Agreement. On
January 13, 1997, Charles Town filed a motion to dismiss GTECH's complaint. As
of March 18, 1997, the court had not yet ruled on this motion. The Company
believes the allegations of the complaint to be without merit and intends to
contest the action vigorously.
19
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
20
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 since the date on which the Common Stock commenced
trading.
HIGH LOW
---- ---
1994
Second Quarter (May 25 through June 30, 1994).......... $3.458 $2.333
Third Quarter.......................................... 3.167 2.396
Fourth Quarter......................................... 2.667 2.083
1995
First Quarter.......................................... 2.917 2.250
Second Quarter......................................... 5.125 2.500
Third Quarter.......................................... 6.833 4.417
Fourth Quarter......................................... 6.458 4.167
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
The closing sale price per share of Common Stock on The NASDAQ National Market
on March 18, 1997, was $16.00. As of March 18, 1997, there were 402 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 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.
21
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company for the years
ended December 31, 1996, 1995, 1994, 1993 and 1992, except for Other 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, and Notes related thereto,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other financial information included herein. All shares and
earnings per share have been adjusted for the three-for-two and two-for-one
stock splits declared and paid in 1996.
Year Ended December 31,
-----------------------
1996 1995 1994 1993(1) 1992(1)
---- ---- ----- ---- ----
(In thousands, except share and per share data)
Income Statement Data:
Pari-mutuel revenues
Penn National races ......... $18,727 $21,376 $23,428 $29,224 $31,967
Import simulcasting ......... 32,992 27,254 16,968 9,162 5,764
Export simulcasting ......... 3,347 2,142 1,187 383 306
Admissions, programs and
other racing revenues ..... 4,379 3,704 2,563 2,485 2,502
Concession revenues ............ 3,389 3,200 1,885 1,410 1,285
------- ------- ------- ------- -------
Total revenues .............. 62,834 57,676 46,031 42,664 41,824
------- ------- ------- ------- -------
Operating expenses
Purses, stakes and trophies ... 12,874 12,091 10,674 9,719 9,581
Direct salaries, payroll
taxes and employee benefits . 8,669 7,699 6,707 6,394 5,939
Simulcast expenses ............ 9,215 9,084 8,892 10,136 10,403
Pari-mutuel taxes ............. 5,356 4,963 4,054 3,568 3,504
Other direct meeting expenses . 9,583 8,214 6,375 6,046 5,835
OTW concession expenses ....... 2,451 2,221 1,231 806 541
Management fees paid to
related entity .............. -- -- 345 1,208 1,366
Other operating expenses ...... 5,226 5,149 3,329 2,331 2,354
------- ------- ------- ------- -------
Total operating expenses ... 53,374 49,421 41,607 40,208 39,523
------- ------- ------- ------- -------
Income from operations ........... 9,460 8,255 4,424 2,456 2,301
------- ------- ------- ------- -------
Other income (expenses)
Interest income (expense),
net.......................... (156) 198 (340) (962) (917)
Other ......................... -- 10 15 6 56
------- ------- ------- ------- -------
Total other income
(expenses)................. (156) 208 (325) (956) (861)
------- ------- ------- ------- -------
Income before income taxes and
extraordinary item .......... 9,304 8,463 4,099 1,500 1,440
Taxes on income .................. 3,794 3,467 1,381 42 150
------- ------- ------- ------- -------
Income before extraordinary item . 5,510 4,996 2,718 1,458 1,290
Extraordinary item ............... -- -- 115 -- --
------- ------- ------- ------- -------
Net income ....................... $ 5,510 $4,996 $2,603 $1,458 $1,290
======= ====== ====== ====== ======
Net income per share ............. $ .39 $ .38
======= ======
Supplemental Pro Forma Net Income
Statement Data (2):
Supplemental pro forma net income $2,724 $1,819
Supplemental pro forma net income
per share ...................... $ 0.22 $ 0.15
Weighted average number of common
shares outstanding ............ 14,020,000 13,104,000 12,663,000 12,249,000(3)
========== ========== ========== ==========
22
SELECTED CONSOLIDATED FINANCIAL DATA - (Continued)
Year Ended December 31,
-----------------------
1996 1995 1994 1993 (1) 1992 (1)
---- ---- ---- ------- -------
(In thousands, except attendance data)
Other Data: (Unaudited)
Total paid attendance (4) .......................... 1,088,621 1,051,803 848,482 799,625 785,569
Pari-mutuel wagering
Penn National races .............................. $ 89,327 $102,145 $111,248 $138,939 $153,332
Import simulcasting .............................. 170,814 142,499 93,461 58,252 42,159
Export simulcasting .............................. 112,871 72,252 40,337 12,746 10,202
----------- ----------- ----------- ----------- -----------
Total pari-mutuel
wagering ................................... $373,012 $316,896 $245,046 $209,937 $205,693
=========== =========== =========== =========== ===========
Gross profit from wagering (5) ................ $ 27,955 $ 24,915 $ 7,963 $ 15,346 $ 14,549
December 31,
------------
1996 1995 1994 1993 1992
---- ---- ---- ------ ------
Balance Sheet Data: (In thousands)
Cash ............................................... $ 5,634 $ 7,514 $ 5,502 $ 1,002 $ 937
Working capital (deficiency) ....................... (509) 4,134 2,074 (4,549) (4,700)
Total assets ....................................... 96,723 27,532 21,873 18,373 18,071
Total debt ......................................... 47,517 390 516 10,422 11,716
Shareholders' equity ............................... 27,881 20,802 15,627 3,418 2,516
(1) The Consolidated Financial Statements of the Company include entities
which, prior to a reorganization which occurred in 1994 shortly before
the Company's initial public offering (the "Reorganization"), were
affiliated through common ownership and control.
(2) Supplemental pro forma amounts for the years ended December 31, 1994
and 1993 reflect (i) the elimination of $345,000 and $1,208,000,
respectively, in management fees paid to a related entity, (ii) the
inclusion of $133,000 and $320,000, respectively, in executive
compensation, (iii) the elimination of $413,000 and $946,000 ,
respectively, 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 and $0, respectively, of loss on early
extinguishment of debt, and (v) a provision for income taxes of
$377,000 and $701,000, respectively, 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.
(3) 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.
(4) Does not reflect attendance at the Thoroughbred Track for wagering on
simulcasts when live racing is not conducted, but does reflect
attendance at the Reading, Chambersburg, York and Lancaster OTWs, which
opened in May 1992, April 1994, March 1995 and July 1996, respectively.
(5) 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.
23
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Penn National's pari-mutuel revenues are comprised of (i) wagering on Penn
National races at the Thoroughbred and Harness Tracks, Penn National's OTWs,
other Pennsylvania racetracks and OTWs and through Telebet, as well as wagering
at the Thoroughbred and Harness Tracks on certain stakes races run at
out-of-state racetracks (referred to in the Company's financial statements as
"pari-mutuel revenues from Penn National races"), (ii) wagering on full cards of
import simulcast races at the Thoroughbred and Harness Tracks, Penn National's
OTWs and through Telebet (referred to in the Company's financial statements as
"pari-mutuel revenues from import simulcasting") and (iii) fees from wagering on
export simulcasting Penn National races at out-of-state locations (referred to
in the Company's financial statements as "pari-mutuel revenues from export
simulcasting"). Penn National's other revenues are comprised of admissions,
program sales and certain other ancillary activities and food and beverage sales
and concessions. All revenues and expenses derived from the Harness Track and
from the Pocono OTWs are only included from the date of the Pocono Downs
Acquisition (November 28, 1996).
The amount of revenue to Penn National from a wager depends upon where the race
is run and where the wagering takes place. Pari-mutuel revenues from Penn
National races and import simulcasting of out-of-state races consist of the
total amount wagered, less the amount paid as winning wagers. Pari-mutuel
revenues from wagering at the Thoroughbred and Harness Tracks or Penn National's
OTWs on import simulcasting from other Pennsylvania racetracks consists of the
total amount wagered, less the amounts paid as winning wagers, amounts payable
to the host racetrack and pari-mutuel taxes to Pennsylvania. Pari-mutuel
revenues from export simulcasting consists of amounts payable to Penn National
by the out-of-state racetracks with respect to wagering on live races at the
Thoroughbred and Harness Tracks.
Operating expenses include purses payable to the horsemen, commissions to other
racetracks with respect to wagering at their facilities on races at the
Thoroughbred and Harness Tracks, pari-mutuel taxes on Penn National races and
export simulcasting and other direct and indirect operating expenses.
The Pennsylvania Race Horse Industry Reform Act specifies the maximum
percentages of each dollar wagered on horse races in Pennsylvania which may be
retained by Penn National (prior to required payments to the horsemen and
applicable taxing authorities). The percentages vary, based on the type of
wager; however, the average percentage is approximately 20%. The balance of each
dollar wagered must be paid out as winning wagers. With the exception of
revenues derived from wagers at the Thoroughbred and Harness Tracks or the Penn
National OTWs, Penn National'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 horsemen are determined
under agreements with the horsemen and vary depending upon where the wagering is
conducted and the racetrack at which such races take place. The horsemen receive
their share of such wagering as race purses. Penn National retains a higher
percentage of wagers made at its own facilities than of wagers made at other
locations. See "Business -- Purses; Agreements with Horsemen."
24
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 1995 1994
---- ---- ----
Revenues
Pari-mutuel revenues
Penn National races................................. 29.8% 37.1% 50.9%
Import simulcasting................................. 52.5 47.3 36.9
Export simulcasting................................. 5.3 3.7 2.6
Admissions, programs and other
racing revenues..................................... 7.0 6.4 5.5
Concession revenues.................................... 5.4 5.5 4.1
--- --- ---
Total revenues.................................... 100.0 100.0 100.0
----- ----- -----
Operating expenses
Purses, stakes and trophies......................... 20.5 21.0 23.2
Direct salaries, payroll taxes and
employee benefits................................. 13.8 13.3 14.6
Simulcast expenses.................................. 14.7 15.8 19.3
Pari-mutuel taxes................................... 8.5 8.6 8.8
Other direct meeting expenses....................... 15.3 14.2 13.8
OTW concession expenses............................. 3.9 3.9 2.7
Management fees paid to related entity.............. -- -- 0.8
Other operating expenses............................ 8.3 8.9 7.2
----- ----- -----
Total operating expenses.......................... 84.9 85.7 90.4
----- ----- -----
Income from operations................................. 15.1 14.3 9.6
----- ----- -----
Other income (expenses)
Interest income (expense), net...................... (0.2) 0.4 (0.7)
Other............................................... -- -- --
-- -- --
Total other income (expenses).................... (0.2) 0.4 (0.7)
----- ----- -----
Income before income taxes and
extraordinary item.................................. 14.9 14.7 8.9
===== ===== =====
Net income............................................. 8.8 8.7 5.7
===== ===== =====
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total revenues increased by approximately $5.1 million or 8.9% from
$57.7 million in 1995 to $62.8 million in 1996. The increase was attributable to
an increase in import and export simulcasting revenues, offset in part by a
decrease in pari-mutuel revenues on Penn National races. The increases in
pari-mutuel revenue from import simulcasting, admissions, programs and other
racing revenues and concession revenue were due primarily to operating the York
OTW facility for twelve months in 1996 compared to nine months in 1995, the
opening of the Lancaster OTW facility in July of 1996, and the additional
revenue from
25
the Pocono Downs Acquisition since November 28, 1996. The increase in export
simulcasting revenue of $1.2 million or 56.3% from $2.1 million to $3.3 million
resulted from the marketing of Penn National races to additional out-of-state
locations. The decrease in pari-mutuel revenues on Penn National races was due
to increased import simulcasting revenue form wagering on other racetracks at
Company facilities and inclement winter weather conditions throughout the state
of Pennsylvania during the first quarter. For the year, Penn National was
scheduled to run 217 live race days but canceled eleven in the first quarter due
to weather. In 1995, Penn National ran 204 live race days and had six
cancellations.
Total operating expenses increased by approximately $4.0 million or
8.0% from $49.4 million in 1995 to $53.4 million in 1996. The increase in
operating expenses resulted from a full year of operations for the York OTW
compared to nine months in 1995, six months of operating expenses for the new
Lancaster OTW, one month of operating expenses at Pocono Downs and the expansion
of the corporate staff and office facility at Wyomissing in June of 1995.
Income from operations increased by approximately $1.2 million or 14.6%
from $8.3 million in 1995 to $9.5 million in 1996 due to the factors described
above.
The Company had other operating expenses of $156,000 in 1996 compared
to other operating income of $208,000 in 1995, primarily as a result of
increased interest expense. The increase in interest expense is due to the
company incurring bank debt of $47 million on November 27, 1996 for the purchase
of Pocono Downs.
Net income increased 10.3% or $514,000 from $5.0 million in 1995 to
$5.5 million in 1996 reflecting the factors described above. Income tax expense
increased from $3.5 million to $3.8 million due to the increase in income for
the year.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total revenues increased by approximately $11.6 million or 25.3% from $46.0
million to $57.7 million in 1995. This increase was primarily attributable to an
increase in import and export simulcasting revenues, admissions, programs and
other racing revenues and concession revenues. The increase in revenues resulted
from a full year of operations at the Chambersburg OTW compared to eight months
of operations in 1994, the opening of the York OTW in March 1995, and an
increase of approximately $955,000 or 80.5% from $1.2 million to $2.1 million in
export simulcasting revenues due to Penn National races being broadcast to
additional out-of-state locations. The decrease in pari-mutuel revenues from
live races at the Thoroughbred Track was due to the decrease in the number of
live race days from 219 race days in 1994 to 204 race days in 1995.
Total operating expenses increased by approximately $7.8 million or 18.8% from
$41.6 million to $49.4 million in 1995. The increase in operating expenses
resulted from a full year of operations at the Chambersburg OTW, the opening of
the York OTW and the expansion of the corporate staff and office facility in
Wyomissing. The decrease in management fees was a result of the management fees
being discontinued when Penn National completed its initial public offering in
1994.
Income from operations increased by approximately $3.8 million or 86.6% from
$4.4 million to $8.3 million due to the factors described above.
Total other income (expense) increased by approximately $533,000 due to the
investment of available cash reserves and the decrease in interest expense as a
result of repayment of all bank debt with the proceeds of Penn National's
initial public offering in May 1994.
Net income increased by approximately $2.4 million or 91.9% from $2.6 million to
$5.0 million reflecting the factors described above. Income tax expenses
increased from $1.4 million to $3.5 million due to the increased income for the
year.
26
LIQUIDITY AND CAPITAL RESOURCES
Historically, Penn National's primary sources of liquidity and capital resources
have been cash flow from operations and borrowings from banks and related
parties. During the year ended December 31, 1996, Penn National's cash position
decreased by approximately $1.9 million from $7.5 million at December 31, 1995
to $5.6 million at December 31, 1996, as a result of expenditures for
improvements and equipment at the Thoroughbred Track, construction of the
Lancaster OTW, the start of construction of the Williamsport OTW and prepaid
acquisition costs in connection with the Pocono Downs and Charles Town
Acquisitions.
Net cash provided from operating activities totaled approximately $8.0 million
for the year ended December 31, 1996, of which $7.2 million came from net income
and non-cash expenses, which was offset by other operating activity items.
Cash flows used in investing activities for the year ended December 31, 1996
totaled approximately $55.8 million. Capital expenditures totaled $7.0 million
for improvements and equipment at the Thoroughbred Track, the construction of
the Lancaster OTW and the start of construction of the Williamsport OTW. Prepaid
acquisition costs totaled $1.6 million for the Charles Town Acquisition. The
acquisition of Pocono Downs totaled $48.2 million.
Cash flows from financing activities for the year ended December 31, 1996
totaled approximately $1.6 million from the exercise of options and warrants and
the issuance of 410,290 shares of Common Stock and $47 million in proceeds from
long-term debt.
At December 31, 1996, the Company was contingently obligated under letters of
credit with face amounts aggregating $1,436,000. The $1,436,000 consisted of
$1,336,000 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 ("Credit Facility
Agreement"). Simultaneously with the closing of the Credit Facility Agreement,
the Company repaid amounts outstanding under its old facility and replaced it.
The credit facilities consist 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 will be used for a
portion of the cost of refurbishment of the Charles Town Facility, and a
revolving credit facility of $5 million (together, the "Loans"). The credit
facilities mature in November 2001. The Loans are secured by substantially all
of the assets of the Company. The Credit Facility Agreement provides for certain
covenants, including those of a financial nature.
Funding of the first $47 million Term Loan facility took place on November 27,
1996 in conjunction with the Pocono Downs acquisition. On January 15, 1997, the
Charles Town Acquisition was consummated and, in accordance with the terms of
the Credit Facility Agreement, the second $23 million Term Loan was made
available for utilization by the Company. The Company borrowed $16.5 million of
the $23 million Term Loan on January 15, 1997.
The $5 million revolving credit facility (the "Revolving Facility") includes a
$2 million sublimit for standby letters of credit for periods of up to twelve
months. Up to $3 million of the Revolving Facility was made available on
November 27, 1996. The remaining $2 million was made available upon completion
of the Charles Town Acquisition on January 15, 1997.
27
At the Company's option, the Loans may be maintained from time to time as Base
Rate Loans, which shall 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%.
The Loans may also be maintained as Reserve Adjusted Eurodollar Loans, which
bear interest at a rate tied to a eurodollar rate plus an applicable margin of
up to 3%.
Mandatory repayments of the Term Loans and 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 balances of the Term Loans and the Revolving
Facility and the Company's leverage ratio; however, the Credit Facility
Agreement, as amended, permitted the Company to retain up to the first $8
million of proceeds from an offering of the Company's equity securities. As a
result of the Company's offering, the Company retained $4 million of such
proceeds. 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.
In February 1997, the Company completed a second public offering which generated
proceeds of approximately $23 million after payment of commissions and other
offering expenses. The Company used $19 million of the proceeds to repay a
portion of the company's bank debt. The remaining amount of approximately $4
million will be used to finance the refurbishment of the Charles Town facility.
During 1997, the Company anticipates capital expenditures of approximately $4.0
million to construct the Downingtown OTW, approximately $3.0 million to complete
the Williamsport OTW, approximately $4.0 million towards the construction of two
additional OTWs and approximately $1.0 million for miscellaneous capital
expenditures and improvements. Under the Credit Facility, the Company is
permitted to make capital expenditures (not including the refurbishment of the
Charles Town Facility or the cost of Gaming Machines) of $12.0 million in 1997,
$4.0 million in 1998 and $2.0 million in 1999 and thereafter. The Company
anticipates expending approximately $16.0 million on the refurbishment of the
Charles Town Facility (excluding the cost of Gaming Machines).
In December 1995, the Company agreed in principle to form a joint venture to
develop, manage and operate pari-mutuel racing facilities in a state other than
Pennsylvania or West Virginia. The actual formation of the joint venture is
subject to numerous contingencies, including receipt of regulatory approval from
that state's Horse Racing Commission and approval of the Company's lenders. The
Company intends to fund, if successful, the joint venture's operations through
additional borrowings and the Company's working capital.
On February 26, 1996, construction began on the Lancaster OTW. The construction
costs totaled approximately $2.7 million and were funded from the Company's cash
reserves. The Lancaster OTW opened July 11, 1996.
On May 13, 1996, the Company loaned $400,000 to an unrelated company in
Downingtown in connection with an option to acquire land upon which the Company
may construct an OTW. The loan bears interest at a rate of 10% per annum and
matures on May 13, 1997.
The Company currently estimates that the net proceeds of the offering, together
with cash generated from operations and borrowings under the Credit Facility,
will be sufficient to finance its current operations, potential obligations
relating to the Acquisitions and planned capital expenditure requirements at
least through 1997. There can be no assurance, however, that the Company will
not be required to seek additional capital at an earlier date. The Company may,
from time to time, seek additional funding through public or private financing,
including equity financing. There can be no assurance that adequate funding will
be available as needed or, if available, on terms acceptable to the Company. If
additional funds are raised by issuing equity securities, existing shareholders
may experience dilution.
28
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, particularly during
the winter months, may cause races to be canceled or may curtail attendance.
During the year ended December 31, 1995, the Company lost six scheduled racing
days due to weather conditions and during the year ended December 31, 1996, the
Company lost eleven scheduled racing days due to weather conditions. Over the
previous five years, the Company lost an average of four days per year due to
inclement weather. Because a substantial portion of the Company's Thoroughbred
Track and Harness Track 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.
The severe winter weather in 1996 also resulted in the closure of the Company's
OTW facilities for two days in January 1996. Although weather conditions reduced
attendance at OTWs, the reduction in attendance at OTWs on days when both the
Thoroughbred Track and the OTWs were open was proportionately less than the
reduction in attendance at the Thoroughbred Track. Because of the Company's
growing dependence upon OTW operations, severe weather that causes the Company's
OTWs to close could have a material adverse effect on 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 Breeders' Cup in autumn. 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.
OTHER MATTERS
During 1995, the Financial Accounting Standards Board ("FASB") adopted Statement
of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Company adopted the provisions of SFAS 121 during the year ended December
31, 1995. SFAS 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of.
The Company reviews the carrying values of its long-lived and identifiable
intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. Any long-lived assets held for disposal are reported at the lower
of their carrying amounts or fair value less cost to sell.
During 1995, the FASB also adopted Statement of Financial Accounting Standards
No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," 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, 1995 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. In accordance with SFAS 123, the Company
disclosed the effects of employee stock options issued for the years ended
December 31, 1996 and 1995.
On March 3, 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS 128"). This pronouncement is effective for
financial statements issued for periods ending after December 15, 1997 and
provides a different method of calculating earnings per share than is currently
used in accordance with APB 15, "Earning per Share". SFAS 128 provides for the
calculation of "Basic" and "Diluted" earnings per share. Basic earnings per
share includes no dilution and is calculated by dividing net income by the
common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution of securities that could share in the earnings of an
entity, similar to fully diluted earnings per share. The Company does not feel
that the adoption of SFAS 128 will have a material effect in 1997.
29
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Report of Independent Certified Public Accountants 31
Consolidated financial statements
Balance sheets 32 - 33
Statements of income 34 - 35
Statements of shareholders' equity 36
Statements of cash flows 37 - 38
Notes to consolidated financial statements 39 - 64
30
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, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
February 25, 1997
31
Penn National Gaming, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Per Share and Share Data)
December 31,
------------
1996 1995
---- ----
Assets
Current assets
Cash $ 5,634 $ 7,514
Accounts receivable 4,293 1,618
Prepaid expenses and other current assets 1,552 600
Deferred income taxes 90 104
------- -------
Total current assets 11,569 9,836
------- -------
Property, plant and equipment, at cost
Land and improvements 15,728 3,336
Building and improvements 30,484 8,651
Furniture, fixtures and equipment 8,937 4,696
Transportation equipment 366 309
Leasehold improvements 6,680 4,363
Leased equipment under capitalized lease 1,626 824
Construction in progress 2,926 255
------- -------
66,747 22,434
Less accumulated depreciation and amortization 8,029 6,728
------- -------
Net property, plant and equipment 58,718 15,706
------- -------
Other assets
Excess of cost over fair market value of
net assets acquired (net of accumulated
amortization of $811 and $713, respectively) 21,885 1,898
Prepaid acquisition costs 1,764 --
Deferred financing costs 2,416 --
Miscellaneous 371 92
------- -------
Total other assets 26,436 1,990
------- -------
$96,723 $27,532
======= =======
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
32
Penn National Gaming, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Per Share and Share Data)
December 31,
------------
1996 1995
---- ----
Liabilities and Shareholders' Equity
Current liabilities
Current maturities of long-term debt
and capital lease obligations $ 1,563 $ 250
Accounts payable 5,066 1,395
Purses due horsemen 1,421 1,293
Uncashed pari-mutuel tickets 1,336 704
Accrued expenses 1,880 702
Customer deposits 420 315
Income taxes -- 797
Taxes, other than income taxes 392 246
------- -------
Total current liabilities 12,078 5,702
------- -------
Long-term liabilities
Long-term debt and capital lease obligations,
net of current maturities 45,954 140
Deferred income taxes 10,810 888
------- -------
Total long-term liabilities 56,764 1,028
------- -------
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 and outstanding 13,355,290 and
12,945,000, respectively 134 43
Additional paid-in capital 14,299 12,821
Retained earnings 13,448 7,938
------- -------
Total shareholders' equity 27,881 20,802
------- -------
$96,723 $27,532
======= =======
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
33
Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Revenues
Pari-mutuel revenues
Penn National races $18,727 $21,376 $23,428
Import simulcasting 32,992 27,254 16,968
Export simulcasting 3,347 2,142 1,187
Admissions, programs and other racing revenues 4,379 3,704 2,563
Concession revenues 3,389 3,200 1,885
------- ------- -------
Total revenues 62,834 57,676 46,031
------- ------- -------
Operating expenses
Purses, stakes and trophies 12,874 12,091 10,674
Direct salaries, payroll taxes and employee benefits 8,669 7,699 6,707
Simulcast expenses 9,215 9,084 8,892
Pari-mutuel taxes 5,356 4,963 4,054
Other direct meeting expenses 9,583 8,214 6,375
Off-track wagering concession expenses 2,451 2,221 1,231
Management fees paid to related party -- -- 345
Other operating expenses 5,226 5,149 3,329
------- ------- -------
Total operating expenses 53,374 49,421 41,607
------- ------- -------
Income from operations 9,460 8,255 4,424
------- ------- -------
Other income (expenses)
Interest (expense) (506) (71) (465)
Interest income 350 269 125
Other -- 10 15
------- ------- -------
Total other income (expense) (156) 208 (325)
======= ======= =======
34
Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Income before income taxes and
extraordinary item $ 9,304 $ 8,463 $ 4,099
Taxes on income 3,794 3,467 1,381
------- ------- -------
Income before extraordinary item 5,510 4,996 2,718
------- ------- -------
Extraordinary item
Loss on early extinguishment of debt,
net of income taxes of $83 -- -- 115
------- ------- -------
Net income $ 5,510 $ 4,996 $ 2,603
======= ======= =======
Net income per share $ .39 $ .38
======= =======
Supplemental pro forma
Historical net income before taxes on income $ 4,099
Supplemental pro forma adjustments 625
-------
Supplemental pro forma income
before taxes on income 4,724
Supplemental pro forma taxes on income 2,000
-------
Supplemental pro forma net income $ 2,724
=======
Supplemental pro forma net income per share $ .22
=======
Weighted average common shares outstanding 14,020 13,104 12,663
======= ======= =======
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
35
Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(In Thousands, Except Share Data)
Common Stock Additional
------------ Paid-In Retained
Shares Amount Capital Earnings Total
------ ------ ---------- -------- -----
Balance, January 1, 1994 8,400,000 $ 28 $ 2 $ 3,388 $ 3,418
Deferred income taxes of S
corporations and partnerships -- -- (302) -- (302)
Distributions to stockholders -- -- -- (3,049) (3,049)
Issuance of common stock 4,500,000 15 12,942 -- 12,957
Net income for the year ended
December 31, 1994 -- -- -- 2,603 2,603
---------- --------- ------------- ---------- ---------
Balance, December 31, 1994 12,900,000 43 12,642 2,942 15,627
Issuance of common stock 45,000 -- 179 -- 179
Net income for the year ended
December 31, 1995 -- -- -- 4,996 4,996
---------- --------- ------------- ---------- ---------
Balance, December 31, 1995 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 ended
December 31, 1996 -- -- -- 5,510 5,510
---------- --------- ------------- ---------- ---------
Balance, December 31, 1996 13,355,290 $ 134 $ 14,299 $ 13,448 $ 27,881
========== ========= ============= ========== =========
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
36
Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Cash flows from operating activities
Net income $ 5,510 $ 4,996 $ 2,603
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 1,433 881 699
Extraordinary loss related to early extinguishment
of debt, before income tax benefit -- -- 198
Deferred income taxes 228 20 493
Decrease (increase) in
Accounts receivable (1,870) (362) (309)
Prepaid expenses and other current assets 871 (158) (60)
Miscellaneous other assets (255) 5 (56)
Increase (decrease) in
Accounts payable 1,288 (15) (228)
Purses due horsemen (248) 297 85
Uncashed pari-mutuel tickets 632 184 (12)
Accrued expenses 1,092 (376) 196
Customer deposits 105 16 (10)
Taxes other than income taxes 146 239 (147)
Income taxes (985) 190 607
-------- ------- -------
Net cash provided by operating activities 7,947 5,917 4,059
-------- ------- -------
Cash flows from investing activities
Expenditures for property and equipment (6,995) (3,958) (2,852)
(Increase) in advances to related parties -- -- (3,688)
(Increase) in prepaid acquisition costs (1,514) -- --
Acquisition of business, net of cash acquired (47,320) -- --
-------- ------- -------
Net cash (used in) provided by investing activities (55,829) (3,958) 836
-------- ------- -------
37
Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Cash flows from financing activities
Proceeds from sale of common stock $ 1,569 $ 179 $12,957
Principal payments on notes payable, banks -- -- (1,289)
Proceeds from notes payable, related party -- -- 178
Principal payments on notes payable, related party -- -- (361)
Proceeds of long-term debt 47,000 -- 800
Principal payments on long-term debt and
capitalized lease obligations (123) (126) (9,433)
Increase in unamortized financing cost (2,444) -- (182)
Distributions to shareholders -- -- (3,049)
(Decrease) in advances from related parties -- -- (16)
------- ------ -------
Net cash provided by (used in) financing activities 46,002 53 (395)
------- ------ -------
Net (decrease) increase in cash (1,880) 2,012 4,500
Cash, at beginning of year 7,514 5,502 1,002
------- ------ -------
Cash, at end of year $ 5,634 $7,514 $ 5,502
======= ====== =======
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
38
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of
Significant
Accounting
Policies
Principles of Consolidation and Reorganization
The consolidated financial statements include the following entities of Penn
National Gaming, Inc. prior to the reorganization, as described below, and which
were affiliated through common ownership and control.
Mountainview Thoroughbred Racing Association ("Mountainview")
Pennsylvania National Turf Club, Inc. ("Turf Club")
PNRC Reading, Inc. (An S Corporation)
PNRC Chambersburg, Inc. (An S Corporation)
PNRC Limited Partnership
Carlino Family Partnership
Penn National Gaming, Inc.,
formerly called PNRC Corp. (An S Corporation)
The consolidated financial statements for the periods prior to the
reorganization have been prepared as if the entities had operated as a single
consolidated group assuming that the reorganization had taken place. After the
reorganization and the current year's business acquisition (see Note 2), the
consolidated financial statements include the accounts of Penn National Gaming,
Inc. and its wholly owned subsidiaries (collectively referred to as the
"Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
Reorganization
The Company completed an initial public offering on May 25, 1994 by selling
4,500,000 shares of its common stock.
On April 11, 1994, the Company entered into an agreement and plan of
reorganization, pursuant to which, on May 24, 1994: (1) Penn National Gaming,
Inc. ("Parent") acquired all of the outstanding stock of Mountainview, Turf
Club, PNRC Reading, Inc. and PNRC Chambersburg, Inc., (2) Penn National Gaming,
Inc. acquired the limited partners' interests in PNRC Limited Partnership and
all of the partnership interests in Carlino Family Partnership, and these
partnerships were liquidated into the Company. In exchange for the stock and
assets acquired in the transactions, the Company issued 8,400,000 shares of its
common stock. Pursuant to the reorganization, Turf Club, Mountainview, PNRC
Reading, Inc. and PNRC Chambersburg, Inc. became wholly-owned subsidiaries of
the Parent. Subsequent to the
39
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
reorganization, the Company merged PNRC Reading, Inc. and PNRC Chambersburg,
Inc. into Mountainview in accordance with a statutory merger, leaving Turf Club
and Mountainview as the only subsidiaries of the Company.
The transaction was treated similar to a pooling of interests and the exchange
of stock and partnership interests was a tax-free exchange.
Description of Business
The Company, which began operations in 1972, provides pari-mutuel wagering
opportunities on both live and simulcast thoroughbred and harness horse races at
two racetracks and six off-track wagering facilities ("OTWs") located
principally in Eastern and Central Pennsylvania. Prior to the consummation of
the acquisition of Pocono Downs (see Note 2), the Company owned and operated
Penn National Race Course located outside Harrisburg, Pennsylvania (the
"Thoroughbred Track"), and four OTWs in Chambersburg, Lancaster, Reading and
York, Pennsylvania. On November 27, 1996, the Company consummated the Pocono
Downs Acquisition, and as a result acquired Pocono Downs Racetrack, located near
Wilkes-Barre, Pennsylvania (the "Harness Track"), and OTWs in Allentown and
Erie, Pennsylvania.
On January 15, 1997, a joint venture, in which the Company has reached an
agreement to hold an 89% interest, acquired substantially all of the assets
relating to Charles Town Races, a thoroughbred racing facility in Jefferson
County, West Virginia (see Note 2). The Company expects to refurbish the Charles
Town facility as an entertainment complex that will feature gaming machines,
live racing, dining and simulcast wagering.
The Company conducts wagering at its tracks and its OTWs on thoroughbred and
harness races which it runs at its tracks and on thoroughbred and harness races
simulcast from other racetracks. The Company also simulcasts its races for
wagering at other racetracks and OTWs, including all Pennsylvania racetracks and
OTWs and locations outside Pennsylvania. Wagering on Company races and races
simulcast from other racetracks also occurs through the Company's telephone
account betting network.
40
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Glossary of Terminology
The following is a listing of terminology used throughout the financial
statements:
The Company's -- The Thoroughbred Track in Grantville, Pennsylvania
Racetracks and the Harness Track near Wilkes-Barre, Pennsylvania
(See Note 2)
OTW -- Off-track wagering location.
Pari-mutuel -- All wagering at the Company's racetracks and OTWs
wagering and all wagering on Penn National races at other
racetracks and their OTWs.
Telebet -- Telephone account wagering.
Totalisator -- Computer services provided to the Company by
Services Autotote Enterprises, Inc. for processing pari-mutuel
betting odds and wagering proceeds.
Pari-mutuel
Revenues:
Penn National -- The Company's share of pari-mutuel wagering
Races on races at the Company's racetracks within
Pennsylvania and certain stakes races from
racetracks outside of Pennsylvania after
payment of the amount returned as winning
wagers.
Import -- Company's share of wagering at the Company's
Simulcasting racetracks and OTWs and by Telebet on full
cards of races simulcast from other racetracks.
Export -- Company's share of wagering at out-of-state
Simulcasting locations on Penn National Races.
41
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A summary of pari-mutuel wagering for the periods indicated is as follows:
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
(In Thousands)
Pari-mutuel wagering in
Pennsylvania on Penn
National races $ 89,327 $102,145 $111,248
-------- -------- --------
Pari-mutuel wagering
on simulcasting
Import simulcasting from
other Pennsylvania race
tracks 24,780 29,159 28,622
Import simulcasting from
out of Pennsylvania
race tracks 146,034 113,340 64,839
Export simulcasting to
out of Pennsylvania
wagering facilities 112,871 72,252 40,337
-------- -------- --------
283,685 214,751 133,798
-------- -------- --------
Total pari-mutuel wagering $373,012 $316,896 $245,046
======== ======== ========
Racing Meet
The Company's racing seasons for the years ended December 31, 1996, 1995 and
1994 totaled 206, 204 and 219 live race days, respectively.
42
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Depreciation and Amortization
Depreciation of property and equipment and amortization of leasehold
improvements are computed by the straight-line method at rates adequate to
allocate the cost of the applicable assets over their estimated useful lives.
Depreciation and amortization for the years ended December 31, 1996, 1995 and
1994 amounted to $1,301,000, $814,000 and $612,000, 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, 1995 and 1994 amounted to $98,000, $67,000 and $67,000, 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 adopted the provisions of Statement of Financial Accounting
Standards No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" during the year ended
December 31, 1995. SFAS 121 establishes accounting standards for the impairment
of long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. The Company reviews the carrying
values of its long-lived and identifiable intangible assets for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable based on undiscounted
estimated future operating cash flows. As of December 31, 1996, the Company has
determined that no impairment has occurred.
Income Taxes
Prior to the reorganization, certain entities included within these financial
statements were partnerships and "S" corporations. Therefore, no provision had
been made for income taxes since such taxes, if any, were the liabilities of the
individual partners and shareholders.
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 requires a company to recognize deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized in a
43
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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.
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
Net income and supplemental pro forma net income per share are calculated by
dividing net income or supplemental pro forma net income by the weighted average
number of common stock outstanding (see Note 8) adjusted by the dilutive effect
of common stock equivalents, which consist of stock options (using the treasury
stock method) and warrants. All net income per share calculations reflect all
stock splits (see Note 10).
Deferred Financing Costs
Deferred financing costs, which were incurred by the Company in connection with
the new credit facility (see Note 3), are charged to operations as additional
interest expense over the life of the underlying indebtedness using the interest
method adjusted to give effect to any early repayments.
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 (less than seven days) money
market and tax free bond funds which are exposed to minimal interest rate and
credit risk. At December 31, 1996 and 1995, the Company had bank deposits which
exceeded federally insured limits by approximately $499,000, and $248,000
respectively, and money market and tax free bond funds of approximately
$2,553,000 and $6,400,000, respectively. 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 customer base consists principally of other race tracks and OTWs.
Historically, the Company has not incurred any significant credit related
losses.
44
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Fair Value of Financial Instruments
As of December 31, 1996 and 1995, the following methods and assumptions were
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-term 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.
Prepaid Acquisition Costs
Prepaid acquisition costs, which were incurred by the Company substantially in
connection with the Charles Town Acquisition (see Note 2), will be included in
the purchase price of the Charles Town Acquisition and allocated to the
appropriate assets.
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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
45
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 (the
"Pocono Downs Acquisition"). Pocono Downs conducts live harness racing at the
harness racetrack located near Wilkes-Barre, Pennsylvania (the "Harness Track"),
export simulcasting of Harness Track races to locations throughout the United
States, pari-mutuel wagering at the Harness Track and at OTWs in Allentown and
Erie, 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. In accordance with
SFAS 109, 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 balance of the purchase price was recorded as 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 used its credit facility (see
Note 3) and cash of Pocono Downs to fund the acquisition.
46
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following unaudited pro forma financial information for the Company gives
effect to the Pocono Downs Acquisition as if it had taken place at the beginning
of the fiscal year for each of the periods presented:
Year ended December 31,
-----------------------
1996 1995
---- ----
(In Thousands, Except Per Share Data)
Revenues $93,849 $91,530
Net income 6,306 6,546
Net income per share .45 .50
------- -------
Shares used in computation 14,020 13,104
------- -------
The pro forma consolidated results do not purport to be indicative of results
that would have occurred had the acquisition been in effect for the periods
presented, nor do they purport to be indicative of the results that will be
obtained in the future.
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 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 ("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 Facility") in Jefferson County, West Virginia. In connection
with the Charles Town Joint Venture
47
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 Facility. On January 15, 1997, the Charles Town Joint
Venture acquired substantially all of the assets of Charles Town (the "Charles
Town Acquisition") for approximately $16.5 million plus acquisition-related fees
and expenses of approximately $1.6 million. Pursuant to the original operating
agreement governing the Charles Town Joint Venture, the 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 Facility. In fact, the Company
contributed 100% of the purchase price of the Charles Town Acquisition and
expects to contribute 100% of the cost of refurbishing the Charles Town
Facility. The Company has reached an agreement with Bryant, pursuant to which
the parties have agreed to amend the operating agreement to increase the
Company's ownership interest to 89% and decrease Bryant's ownership interest to
11%. In addition, the amendment will provide that the entire amount the Company
has contributed, and will contribute, to the Charles Town Joint Venture for the
acquisition and refurbish ment of the Charles Town Facility would be treated, as
between the parties, as a loan to the Charles Town Joint Venture from the
Company. The proposed changes in the ownership of the Charles Town Venture are
subject to the review of applicable West Virginia racing and regulatory
authorities. 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 Charles Town Joint Venture has developed plans for the refurbishment of the
Charles Town Facility as an entertainment complex that will feature live racing,
dining, simulcast wagering and the installation of gaming machines; the
estimated cost of the refurbishment is approximately $16 million exclusive of
the costs of gaming machines.
48
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Effective June 4, 1996, the Charles Town Joint Venture entered into a Loan
and Security Agreement with Charles Town. The Loan and Security Agree
ment provided for a working capital line of credit in the amount of $1,250,000
and a requisite reduction of the purchase price under the option, by $1.60 for
each dollar borrowed under that line. Upon consummation of the Charles
Town Acquisition, Charles Town Races, Inc. repaid the loan.
3. Long-Term
Debt and
Capital Lease
Obligations
December 31,
------------
1996 1995
---- ----
(In Thousands)
Long-Term Debt
Term loans payable to a bank group in quarterly
installments with interest at 8.625% at
December 31, 1996 and floating rates through
2001. The term loans are collateralized by
substantially all of the Company's assets
(see additional information below under Credit
Facilities). $47,000 $ --
Notes are payable to former minority shareholders
of Pennsylvania National Turf Club, Inc. upon
demand. 130 132
Note payable to Bryant Development Co., Charles
Town Joint Venture partner. The note is due
April 1, 1998 and accrues interest at 8%. 250 --
Capital lease obligations 137 258
------- ------
47,517 390
Less current maturities 1,563 250
------- ------
$45,954 $ 140
======= ======
49
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Credit Facilities
At December 31, 1996, the Company was contingently obligated under letters of
credit with face amounts aggregating $1,436,000. The $1,436,000 consisted of
$1,336,000 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 ("Credit Facility
Agreement"). Simultaneously with the closing of the Credit Facility Agreement,
the Company repaid amounts outstanding under its old facility and replaced it.
The credit facilities consist 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 will be used for a
portion of the cost of refurbishment of the Charles Town Facility, and a
revolving credit facility of $5 million (together, the "Loans"). The credit
facilities mature in November 2001. The Loans are secured by substantially all
of the assets of the Company. The Credit Facility Agreement provides for certain
covenants, including those of a financial nature.
Funding of the first $47 million Term Loan facility took place on November 27,
1996 in conjunction with the Pocono Downs acquisition. On January 15, 1997, the
Charles Town Acquisition was consummated and, in accordance with the terms of
the Credit Facility Agreement, the second $23 million Term Loan was made
available for utilization by the Company. The Company borrowed $16.5 million of
the $23 million Term Loan on January 15, 1997.
The $5 million revolving credit facility (the "Revolving Facility") includes a
$2 million sublimit for standby letters of credit for periods of up to twelve
months. Up to $3 million of the Revolving Facility was made available on
November 27, 1996. The remaining $2 million was made available upon completion
of the Charles Town Acquisition on January 15, 1997.
50
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
At the Company's option, the Loans may be maintained from time to time as Base
Rate Loans, which shall 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%.
The Loans may also be maintained as Reserve Adjusted Eurodollar Loans, which
bear interest at a rate tied to a eurodollar rate plus an applicable margin of
up to 3%.
Mandatory repayments of the Term Loans and 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 balances of the Term Loans and the Revolving
Facility and the Company's leverage ratio; however, the Credit Facility
Agreement, as amended, permitted the Company to retain up to the first $8
million of proceeds from an offering of the Company's equity securities.
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.
Commencing on December 31, 1997 according to the Credit Facility Agreement, the
Term Loans will amortize on a quarterly basis with payments thereunder to be
split proportionately between the two Term Loans in annual aggregate amounts as
follows (assuming the Term Loans are fully drawn):
Year Amount
---- ------
1997 $2,000,000
1998 8,000,000
1999 20,000,000
2000 20,000,000
2001 20,000,000
51
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following is a schedule of future minimum lease payments under capitalized
leases and repayment of long-term debt, as of December 31, 1996:
Term
Loans
and
Capitalized Notes
December 31, Leases Payable Total
------------ ----------- ------- -----
(In Thousands)
1997 $ 90 $ 1,473 $ 1,563
1998 51 5,621 5,672
1999 10 13,429 13,439
2000 -- 13,429 13,429
2001 -- 13,428 13,428
----- ------- -------
Total minimum payments 151 47,380 47,531
Less interest discount amount 14 -- 14
----- ------- -------
Total present value of net
minimum lease payments and
total notes payable 137 47,380 47,517
Current portion 90 1,473 1,563
----- ------- -------
Total non-current portion $ 47 $45,907 $45,954
===== ======= =======
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 10).
4. Related
Party
Transactions
Management fees of $345,000 were paid in 1994 to a related company.
In August 1994, the Company signed a consulting agreement with its former
Chairman expiring in August 1999 at an annual payment of $125,000.
52
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Customer
Deposits
Customer deposits represent amounts held by the Company for telephone wagering.
6. Commitments
and
Contingencies
The Company is liable for Totalisator Services and equipment under two five-year
agreements expiring in 1998. The agreements provide for annual payments based on
a specified percentage of the total amount wagered at the Company's race tracks,
with minimum annual payments of $500,000.
On July 11, 1996, the Company opened its Lancaster OTW facility. The Company
entered into a ten year lease agreement for the 24,050 square feet facility,
which provides for minimum annual lease payments of $192,400 in years one
through five and $211,640 in years six through ten.
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, $672,000 and $636,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
The future lease commitments relating to non-cancelable operating leases, as of
December 31, 1996 are as follows:
December 31,
------------
(In Thousands)
1997 $1,010
1998 886
1999 616
2000 615
2001 624
Thereafter 2,267
------
$6,018
======
In March 1996, the Company took an assignment of an agreement to purchase land
for its proposed Downingtown OTW facility. The agreement, which provides for a
purchase price of $1,696,000, is subject to numerous contingencies including
approval from the Pennsylvania State Horse Racing Commission.
53
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
On April 12, 1994, the Company entered into 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 his death.
On June 1, 1995, the Company entered into an employment agreement with its
President and Chief Operating Officer at an annual base salary of $210,000. The
agreement terminates on June 12, 1998. 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.
Under the agreement between the Company and its former president, the former
president received options to purchase 150,000 shares of common stock at $3.33
per share expiring May 31, 2000.
Effective January 1, 1990, the Company adopted a profit sharing plan under the
provisions of Section 401(k) of the Internal Revenue Code covering all eligible
employees who are not members of a bargaining unit. The Company's contributions
are set at 50% of employees' elective salary deferrals which may be made up to a
maximum of 6% of employee compensation. The Company made contributions to the
plan of approximately $89,000, $70,000 and $60,000 for the years ended December
31, 1996, 1995 and 1994, respectively. Additionally, the Company has an employee
retirement plan under Section 401(k) of the Internal Revenue Code covering
Pocono Downs employees. The Company has no obligation to contribute to this
plan. The Company may make discretionary contributions based on percentages of
employee elective deferrals.
54
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
In December 1995, the Company agreed in principal with an unrelated party to
form a joint venture for the purpose of developing, managing and operating
pari-mutuel racing facilities in a state other than Pennsylvania or West
Virginia. The joint venture is subject to numerous contingencies, including
receipt of regulatory approvals from that state's horse racing commission.
On December 11, 1996, GTECH Corporation ("GTECH") commenced an action in the
United States District Court for the Northern District of West Virginia against
Charles Town, the Company, Penn National Gaming of West Virginia, Inc., a wholly
owned subsidiary of the Company, and Bryant. The complaint filed by GTECH
alleges that Charles Town and AmTote International, Inc. ("AmTote") were
parties to an October 20, 1994 agreement (the "AmTote Agreement"), pursuant to
which AmTote was allegedly granted an exclusive right to install and operate a
"video lottery system" at the Charles Town Facility. When the AmTote Agreement
was entered into, AmTote was a subsidiary of GTECH; GTECH has since divested
itself of AmTote, but is purportedly the assignee of certain of AmTote's rights
under the AmTote Agreement pursuant to an assignment and assumption agreement
dated February 22, 1996. The complaint seeks (i) preliminary and permanent
injunctive relief enjoining Charles Town, Bryant, the Company and its subsidiary
from consummating the Charles Town Acquisition or any similar transaction unless
the purchasing party explicitly accepts and assumes the AmTote Agreement, (ii) a
declaratory judgment that the AmTote Agreement is valid and binding, that GTECH
has the right to be the exclusive installer, operator, provider and servicer of
a video lottery system at the Charles Town Facility and that any party buying
the stock or assets of Charles Town must accept and assume the AmTote Agreement
and recognize such rights of GTECH thereunder, (iii) compensatory damages, (iv)
legal fees and costs and (v) such other further legal and equitable relief as
the court deems just and appropriate. On December 23, 1996, the court denied
GTECH's motion to preliminarily enjoin the Company from consummating the Charles
Town Acquisition unless it accepts and assumes the AmTote Agreement. The court
noted that GTECH may pursue its claim for damages and, if warranted, pursue
other injunctive relief in the future. The Company consummated the Charles Town
Acquisition on January 15, 1997. On January 13, 1997, Charles Town filed a
motion to dismiss GTECH's complaint. As of March 17, 1997, the court has not yet
ruled on this motion. The Company believes the allegations of the complaint to
be without merit and intends to contest the action vigorously.
55
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. Income Taxes
The provision for income taxes charged to operations was as follows:
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
(In Thousands)
Current tax expense
Federal $2,686 $2,605 $ 511
State 880 842 377
------ ------ ------
Total current 3,566 3,447 888
------ ------ ------
Deferred tax expense
Federal 178 15 485
State 50 5 8
------ ------ ------
Total deferred 228 20 493
------ ------ ------
Total provision $3,794 $3,467 $1,381
====== ====== ======
Deferred tax assets and liabilities are comprised of the following:
December 31,
------------
1996 1995
---- ----
(In Thousands)
Deferred tax assets
Reserve for debit balances
of horsemens' accounts,
bad debts and litigation $ 90 $104
======= ====
Deferred tax liabilities
Property, plant and equipment $10,810 $888
======= ====
56
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following is a reconciliation of the statutory federal income tax rate to
the actual effective income tax rate:
December 31,
------------
1996 1995 1994
---- ---- ----
(In Thousands)
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 6.7 6.2
Permanent difference
relating to amortization
of goodwill .2 .3 .6
Entities previously taxed
as S Corporations and
Partnerships -- -- (9.2)
Other -- -- 2.1
---- ---- ----
40.8% 41.0% 33.7%
==== ==== ====
8. Supplemental
Pro Forma
Net Income
Per Share
The supplemental pro forma amount for the year ended December 31, 1994 reflects:
(i) the elimination of $345,000 in management fees paid to a related entity;
(ii) the inclusion of $133,000 in executive compensation; (iii) the elimination
of $413,000 of interest expenses on Company debt which was repaid with the
proceeds of the initial public offering, and (iv) a provision for income taxes
of $377,000 as if the S corporations and partnerships comprising part of the
Company had been taxed as a C corporation. There were no supplemental pro forma
adjustments for any subsequent periods.
57
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Supplemental pro forma net income per share is based on the weighted average
number of shares of common stock outstanding, plus the number of shares the
Company would have needed to sell to fund the retirement of debt and the
number of shares the Company would have needed to sell to fund $1,190,000
of distributions of undistributed S corporation earnings.
9. Supplemental
Disclosures
of Cash Flow
Information
Cash paid during the year for interest was $506,000, $71,000 and $535,000 in
1996, 1995 and 1994, respectively.
Cash paid during the year for income taxes was $2,490,000, $2,839,000 and
$250,000 in 1996, 1995 and 1994, respectively.
Non-cash investing and financing activities were as follows:
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 $53,150,000
Cash paid for the capital stock and
the limited partnership interests 47,320,000
-----------
Liabilities assumed $ 5,830,000
===========
During 1994, capital lease obligations of $199,000 were incurred to lease new
equipment.
During 1996, the Company issued a $250,000 long-term note payable for the
incurrence of prepaid Charles Town Acquisition costs.
10. Shareholders'
Equity
Common Stock
On June 3, 1994, the Company completed its initial public offering. The
proceeds, net of expenses, amounted to $12,957,000 for 4,500,000 shares of
common stock issued. The offering price per share was $3.33.
58
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 $75 million
credit facility with the balance of the proceeds to be used to finance a portion
of the cost of the refurbishment of the Charles Town Races facility (see Note 2
for Acquisitions).
Stock Options and Warrants
In April 1994, the Company's Board of Directors and shareholders adopted and
approved the Stock Option Plan ("Plan"). The Plan permits the grant of options
to purchase up to 1,290,000 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 the 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
non-qualified 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 May 26, 2001 and October 23, 2006 have been
granted to officers and directors to purchase Common Stock at prices ranging
from $3.33 to $17.63 per share.
59
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
All options were granted at market prices. The following table contains
information on stock options issued under the Plan for the three year period
ended December 31, 1996:
Exercise Weighted
Option Price Range Average
Shares Per Share Price
------ ----------- --------
Outstanding at
January 1, 1994 -- $ -- $ --
Granted 765,000 3.33 3.33
Cancelled (300,000) 3.33 3.33
------- ------------- --------
Outstanding at
December 31, 1994 465,000 3.33 3.33
Granted 345,000 3.33 to 5.58 5.51
------- ------------- --------
Outstanding at
December 31, 1995 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
======= ============= ========
In addition, 300,000 common stock options were issued outside the plan on
October 23, 1996. These options were issued at $17.63 per share and are
exercisable through October 23, 2006.
60
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Exercise Weighted
Option Price Range Average
Shares Per Share Price
------ ----------- --------
Exercisable at year-end
1994 150,000 $ 3.33 $ 3.33
1995 270,000 3.33 to 5.58 3.33
1996 337,250 3.33 to 17.63 3.71
1994 Plan
Available for future grant
1994 825,000
1995 480,000
1996 200,000
The following table summarizes information about stock options outstanding at
December 31, 1996:
Ranges Total
------ -----
$ 3.33 $ 5.58 $ 3.33
to to to
Range of exercise prices 5.50 17.63 17.63
======= ======= =========
Outstanding options
Number outstanding
at December 31, 1996 669,750 310,000 979,750
Weighted average remaining
contractual life (years) 6.04 7.97 6.96
Weighted average
exercise price $ 3.81 $ 14.91 $ 9.10
Exercisable options
Number outstanding
at December 31, 1996 329,750 7,500 337,250
Weighted average
exercise price $ 3.66 $ 5.58 $ 3.71
61
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Warrants outstanding have been granted to the Company's underwriters and certain
officers and directors to purchase Common Stock at prices ranging from $3.33 to
$4.00 per share which expire on June 2, 1999 and May 31, 2000. During 1995, the
Company cancelled 300,000 warrants which were granted to a former officer of the
Company at a price of $3.33 per share and were to expire on May 31, 2000. The
300,000 cancelled warrants were replaced with 300,000 shares of common stock
purchase options at an exercise price of $3.33 per share. A summary of the
warrant transactions follows:
Exercise Weighted
Warrant Price Range Average
Shares Per Share Price
------- ----------- --------
Warrants outstanding
at January 1, 1994 -- $ -- $ --
Warrants granted 690,000 3.33 to 4.00 3.85
------- ------------ ---------
Warrants outstanding
at December 31, 1994 690,000 3.33 to 4.00 3.85
Warrants cancelled (150,000) 3.33 3.33
Warrants exercised (45,000) 4.00 4.00
------- ------------ ---------
Warrants outstanding
at December 31, 1995 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
======= ============ =========
62
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
During 1995, the FASB adopted Statement of Financial Accounting Standards No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation", 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, 1995, 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:
Year ended December 31,
-----------------------
1996 1995
---- ----
Net income
As reported $5,510,000 $4,996,000
Pro forma 5,020,000 4,984,000
Net income per share
As reported $.39 $.38
Pro forma .36 .38
---------- ---------
63
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Stock Splits
The Board of Directors authorized a three-for-two stock split on April 18, 1996
on its Common Stock to shareholders of record on May 3, 1996 which was paid on
May 23, 1996. On November 13, 1996, the Board of Directors authorized a
two-for-one stock split on its Common Stock to be paid on December 20, 1996 to
shareholders of record on November 22, 1996. In addition, authorized shares of
Common Stock were increased from 10,000,000 to 20,000,000. All references in the
financial statements to number of shares, net income per share amounts and
market prices of the Company's Common Stock have been retroactively restated to
reflect the increased number of Common Stock shares outstanding.
11. Loss from
Retirement
of Debt
In 1994, the Company recorded an extraordinary loss of $115,000 after taxes for
the early retirement of debt. The extraordinary loss consists primarily of the
write-off of deferred finance costs associated with the retired notes, and legal
and bank fees relating to the early extinguishment of the debt.
64
ITEM 9 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable
65
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 April 30, 1997. 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 April 30, 1997. 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 April 30, 1997. 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 April 30, 1997. 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.
66
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 Form of Underwriting Agreement among the Company, Fahnestock & Co. Inc.
and Brenner Securities Corporation (Incorporated by reference to the
Company's registration statement on Form S-1, File #33-77758, dated
May 26, 1994.)
1.1 Form of Underwriting Agreement among the Company, Saloman Brothers
Inc., Gerard Klauer, Mattison & Company Inc. and Jefferies & Company,
Inc. (Incorporated by reference to the Company's registration
statement on Form S-3, File #333-18861, dated February 11, 1997)
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 Form 8-K, File #0-24206, dated January 30, 1997.)
67
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 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 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 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 Gaming Limited Liability
Company (Incorporated by reference to Exhibit 2.2 of the Company's Form
8-K, File #0-24206, dated January 30, 1997.)
3.1 Amended and Restated Articles of Incorporation of Registrant,
Incorporated 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.)
5.2 Loan and Security agreement dated May 8, 1996 between the Company and
Charles Town Races, Inc. (Incorporated by reference to of the Company's
Form 8-K, File #0-24206, dated June 12, 1996.)
5.3 Security agreement dated May 8, 1996 between the Company and Charles
Town Racing Limited Partnership. (Incorporated by reference to Exhibit
5.1 of the Company's Form 8-K, File #0-24206, dated June 12, 1996.)
5.4 Stock Pledge agreement dated May 8, 1996 between the Company and
Charles Town Racing Limited Partnership. (Incorporated by reference to
the Company's Form 8-K, File #0-24206, dated June 12, 1996.)
5.5 Limited Recourse Guaranty agreement dated May 8, 1996 between the
Company and Charles Town Racing Limited Partnership. (Incorporated by
reference to the Company's Form 8-K, File #0-24206, dated June 12,
1996.)
68
5.6 Cooperation agreement dated April 30, 1996 between the Company and
Charles Town Races, Inc. and Charles Town Racing Limited Partnership.
(Incorporated by reference to Exhibit 5.1 of the Company's Form 8-K,
File #0-24206, dated June 12, 1996.)
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 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.)
10.5 Agreement dated February 15, 1993 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
registration statement on Form S-1, File #33-77758, dated May 26,
1994.)
10.6 Agreement dated October 3, 1990 between Pennsylvania National Turf
Club, Inc., Mountainview Thoroughbred Racing Association and Sports
Arena Employees' Union Local No. 137 (Penn National Race Track).
(Incorporated by reference to the Company's registration statement on
Form S-1, File #33-77758, dated May 26, 1994.)
10.7 Agreement dated May 20, 1992 between Mountainview Thoroughbred Racing
Association and Pennsylvania National Turf Club, Inc. and Sports Arena
Employees' Union Local 137 (non-primary locations). (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 Associates 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.)
69
10.17 Totalisator Agreement dated February 9, 1993 between Mountainview
Thoroughbred Racing Association, Pennsylvania National Turf Club, Inc.
and Autotote Systems, Inc. (Incorporated by reference to the Company's
registration statement on Form S-1, File #33-77758, dated May 26,
1994.)
10.18 Assignment and Assumption of Concession Agreement dated December 30,
1982 between Mountainview Thoroughbred Racing Association, Carlino
Family Partnership, PNRC Limited Partnership, Pennsylvania National
Turf Club, Inc., and Harry M. Stevens, Inc. of Penn. (Incorporated by
reference to the Company's registration statement on Form S-1, File
#33-77758, dated May 26, 1994.)
10.18.1 Concession Agreement dated December 2, 1971 between Pennsylvania
National Turf Club, Inc. and Harry M. Stevens, Inc. of Penn and
amendment thereto dated October 1, 1973. (Incorporated by reference to
the Company's registration statement on Form S-1, File #33-77758, dated
May 26, 1994.)
10.19 Agreement dated December 8, 1991 between Teleview Racing Patrol, Inc.
and Pennsylvania National Turf Club, 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 Lease 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 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.)
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.)
70
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.)
10.48 Agreement dated February 16, 1996 between Pennsylvania National Turf
Club, Inc. And Crown Investment Trust. (Incorporated by reference to
the Company's Form 10-K file #0-24206 dated March 20, 1996.)
10.49 General Contractor agreement dated February 26, 1996 between
Pennsylvania National Turf Club, Inc. And Warfel Construction Company.
(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.)
10.52 General contractor agreement dated August 7, 1996, between Pennsylvania
National Turf Club, Inc. And Warfel Construction Company. (Incorporated
by reference to the Company's Form 10-Q file #0-24206, dated August 14,
1996.)
10.53 Agreement dated September 24, 1996 between the Company and Fred V.
Schubert to purchase land for the Company's Downingtown OTW.
(Incorporated by reference to the Company's Form 10-Q file #0-24206,
dated November 13, 1996.)
10.54 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.)
10.55 Loan Commitment Letter dated October 15, 1996 between the Company and
Bankers Trust Company. (Incorporated by reference to the Company's Form
10-Q file #0-24206, dated November 13, 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.
10.58 Agreement dated March 19, 1997, between PNGI Charles Town Gaming
Limited Liability Company and The Charles Town HBPA, Inc.
10.59 Agreement dated March 21, 1997, between PNGI Charles Town Gaming
Limited Liability Company and The West Virginia Thoroughbred Breeders
Association.
71
10.60 Agreement between PNGI Charles Town Gaming Limited Liability Company
and The West Virginia Union of Mutuels Clerks, Local 533, Service
Employees International Union, AFL-CIO.
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. (Incorporated by reference to
the Company's registration statement on Form S-3, File #333-18861,
dated February 11, 1997.)
23.5 Consent of Leonard J. Miller & Associates, Chartered (Incorporated by
reference to the Company's Form 8-K/A File #0-24206, dated March 25,
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 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.)
72
(B) Reports on Form 8-K
The Company filed the following Form 8-K during the fourth quarter
1996:
On December 12, 1996, the Company filed Form 8-K which reflected
the completion, on November 27, 1996, of the purchase of Pocono
Downs Racetrack and the completion of a $75 million credit
facility with various banks.
73
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 27, 1997
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
\s\ Peter M. Carlino Director (Principal Executive
- -------------------------------------------- Officer) March 27, 1997
Peter M. Carlino
Chief Operating Officer and
\s\ William J. Bork Director (Principal Operating
- -------------------------------------------- Officer) March 27, 1997
William J. Bork
\s\ Robert S. Ippolito Chief Financial Officer
- -------------------------------------------- (Principal Financial Officer) March 27, 1997
Robert S. Ippolito
\s\ Harold Cramer
- -------------------------------------------- Director March 27, 1997
Harold Cramer
\s\ David A. Handler
- -------------------------------------------- Director March 27, 1997
David A. Handler
\s\ Robert P. Levy
- -------------------------------------------- Director March 27, 1997
Robert P. Levy
\s\ John M. Jacquemin
- -------------------------------------------- Director March 27, 1997
John M. Jacquemin
74
EXHIBIT INDEX
Exhibit Nos. Description of Exhibits Page No.
- ------------ ----------------------- --------
10.57 General Contractor Agreement dated December 23, 1996, between PNGI Charles Town 76 - 94
Gaming Limited Liability Company and Warfel Construction Company.
10.58 Agreement dated March 19, 1997, between PNGI Charles Town Gaming Limited Liability 95 - 97
Company and The Charles Town HBPA, Inc.
10.59 Agreement dated March 21, 1997, between PNGI Charles Town Gaming Limited Liability 98 - 100
Company and The West Virginia Thoroughbred Breeders Association.
10.60 Agreement between PNGI Charles Town Gaming Limited Liability Company and The West 101 - 102
Virginia Union of Mutuels Clerks, Local 533, Service Employees International Union, AFL-CIO.
21 Subsidiaries of Registrant. 103
27 Financial Data Schedule. 104
75