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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-24206
PENN NATIONAL GAMING, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2234473
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
WYOMISSING PROFESSIONAL CENTER
825 BERKSHIRE BLVD., SUITE 200
WYOMISSING, PENNSYLVANIA 19610
(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:
NAME OF EACH
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports 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 / /. No /X/.
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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $122,078,000. Such aggregate market value was
computed by reference to the closing price of the Common Stock as reported on
the Nasdaq National Market on March 19, 2001. For purposes of making this
calculation only, the registrant has defined affiliates as including all
directors, executive officers and beneficial owners of more than ten percent of
the Common Stock of the Company.
The number of shares of the registrant's Common Stock outstanding as of
March 19, 2001 was 15,053,600.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 2001 annual
meeting of shareholders are incorporated by reference into Part III.
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TABLE OF CONTENTS
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 23
Item 3. Legal Proceedings........................................... 24
Item 4. Submission of Matters to a Vote of Security Holders......... 24
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters....................................... 25
Item 6. Selected Consolidated Financial Data........................ 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 27
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 34
Item 8. Financial Statements and Supplementary Data................. 35
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 54
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 55
Item 11. Executive Compensation...................................... 56
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 56
Item 13. Certain Relationships and Related Transactions.............. 56
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................. 56
SIGNATURES.............................................................. 66
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PART I
ITEM 1. BUSINESS
This document includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, regarding, among other things, our
business strategy, our prospects and our financial position. These statements
can be identified by the use of forward-looking terminology such as "believes,"
"estimates," "expects," "intends," "may," "will," "should," or "anticipates" or
the negative or other variation of these or similar words, or by discussions of
strategy or risks and uncertainties. Forward-looking statements in this document
include, among others, statements concerning:
- projections of future results of operations or financial condition;
- our expectations for our Mississippi properties and the proposed CRC
acquisition;
- the timing, cost and expected impact on our results of operations of our
planned capital expenditures;
- the expected effect of regulatory changes that we are pursuing;
- our ability to consummate the proposed CRC acquisition; and
- expectations of the continued availability of capital resources.
Although we believe that the expectations reflected in such forward-looking
statements are reasonable, they are inherently subject to risks, uncertainties
and assumptions about us and our subsidiaries and, accordingly, we cannot assure
you that such expectations will prove to be correct. Important factors that
could cause actual results to differ materially from the forward-looking
statements made herein are set forth under the caption "Risk Factors" and
elsewhere in this offering memorandum and include, without limitation, risks
related to the following:
- our ability to integrate the full-scale casino operations of the
Mississippi properties and the proposed CRC acquisition into our business;
- capital expansions at our gaming and pari-mutuel facilities;
- the Showboat option at the Charles Town Entertainment Complex;
- the activities of our competitors;
- our ability to maintain regulatory approvals for our existing businesses
and to receive regulatory approvals for our new businesses;
- our dependence on key personnel;
- the maintenance of agreements with our horsemen and pari-mutuel clerks;
- the various conditions to closing for the proposed CRC acquisition; and
- our credit agreement.
All subsequent written and oral forward-looking statements attributable to
us or persons acting on our behalf are expressly qualified in their entirety by
the cautionary statements included in this document. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
document might not occur.
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INTRODUCTION
We are a diversified gaming and pari-mutuel wagering company with facilities
in West Virginia, Mississippi and Pennsylvania. On July 31, 2000, we entered
into an agreement to acquire all of the gaming assets of CRC Holdings, Inc. for
approximately $181.3 million, including amounts required to refinance certain
existing indebtedness, which will expand our gaming operations into Louisiana
and Ontario, Canada.
The following table sets forth certain features of our owned (or leased)
properties:
AT DECEMBER 31, 2000
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GAMING
TYPE OF SQUARE GAMING TABLE
PROPERTY LOCATION FACILITY FOOTAGE MACHINES GAMES
- -------- ------------------------- ------------------------- -------- -------- --------
Charles Town Charles Town, WV Land-based gaming/ 58,000 1,974 --
Entertainment Complex Thoroughbred racing
Casino Magic Bay St. Bay St. Louis, MS Dockside gaming 39,500 1,158 38
Louis
Boomtown Biloxi Biloxi, MS Dockside gaming 33,600 1,060 27
Penn National Race Course Harrisburg, PA(1) Thoroughbred racing -- -- --
Pocono Downs Wilkes-Barre, PA(1) Harness racing -- -- --
------- ----- ---
TOTALS 131,100 4,192 65
======= ===== ===
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(1) In addition to our racetracks, Penn National Race Course and Pocono Downs
have six and five off-track wagering facilities, respectively, located
throughout Pennsylvania.
Our Charles Town Entertainment Complex in Charles Town, West Virginia
features 1,974 gaming machines, a thoroughbred racetrack, simulcast wagering,
entertainment and dining. The facility is located within easy driving distance
of Baltimore, Maryland and Washington, D.C. and is the leading gaming property
serving those areas. There is a total population of approximately 3.1 million
persons within a 50-mile radius, and approximately 10.0 million persons within a
100-mile radius of the Charles Town Entertainment Complex, of which
approximately 7.2 million persons are over the age of 20. We have experienced
strong growth at the facility and have increased the number of gaming machines
from 400 machines in September 1997 to 1,974 machines as of December 31, 2000.
We recently expanded the gaming area to nearly 60,000 square feet and opened a
150-seat restaurant and bar. In addition, since receiving regulatory approval
permitting the operation of reel-spinning, coin-out machines in April 1999, we
have increased the number of reel-spinning machines relative to the number of
paper ticket video lottery terminals, or VLTs. As a result of these initiatives,
our monthly gaming revenues at Charles Town have grown from approximately
$5.8 million in January 2000 to approximately $10.3 million in January 2001.
Our business strategy is focused on exploiting the higher margins and more
stable cash flows associated with gaming operations compared to pari-mutuel
operations. As part of this strategy, on August 8, 2000, we completed our
acquisition of the Casino Magic Bay St. Louis casino and the Boomtown Biloxi
casino from Pinnacle Entertainment, Inc. for an aggregate purchase price of
approximately $201.3 million, including acquisition costs of approximately
$6.3 million. Both properties operate in the Gulf Coast gaming market and are
within easy driving distance of New Orleans, Louisiana, Mobile, Alabama and
other points in the Southeast. We refer to these two casinos as the "Mississippi
properties." Casino Magic Bay St. Louis in Bay St. Louis, Mississippi, offers
approximately 39,500 square feet of gaming space, with approximately 1,158 slot
machines and 38 table games, a 201-room hotel, an 1,800 seat arena, a
recreational vehicle park and an 18-hole Arnold Palmer-designed championship
golf course. Boomtown Biloxi in Biloxi, Mississippi, offers approximately 33,600
square feet of gaming space, with 1,060 slot machines, 27 table games and other
gaming amenities including restaurants and a 20,000 square foot entertainment
center.
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The acquisition by merger of CRC Holdings, Inc., which does business as
Carnival Resorts and Casinos, is expected to close in the first half of 2001.
Immediately prior to the closing, CRC will divest itself of all of its
non-gaming assets. CRC is the operator and 59.9% shareholder of Louisiana Casino
Cruises, Inc., or LCCI, the owner of Casino Rouge, the leading riverboat gaming
facility in Baton Rouge, Louisiana. We also have entered into a definitive
agreement with the minority holders of LCCI to acquire their 40.1% interest of
the business. Casino Rouge features a four-story riverboat casino with
approximately 28,000 square feet of gaming space, 980 gaming machines and 42
table games. In addition to the Casino Rouge property, a wholly owned subsidiary
of CRC operates Casino Rama on behalf of the Ontario Lottery and Gaming
Corporation, an agency of the Province of Ontario. Casino Rama is a casino and
full-service entertainment facility located approximately 90 miles north of
Toronto, Canada, with approximately 75,000 square feet of gaming space, 2,202
gaming machines and 122 table games. We believe the CRC acquisition will build
the critical mass of our gaming operations, further enhance our position in the
gaming sector and diversify the geographic reach of our properties.
In addition to our gaming facilities, we own and operate Penn National Race
Course, located outside of Harrisburg, one of two thoroughbred racetracks in
Pennsylvania, and Pocono Downs, located outside of Wilkes-Barre, one of two
harness racetracks in Pennsylvania. We also operate eleven off-track wagering
facilities, or OTWs, in Pennsylvania and hold a 50% interest in Pennwood
Racing, Inc., a joint venture that owns and operates Freehold Raceway and will
operate Garden State Park in New Jersey through May 31, 2001.
We are the successor to several businesses that have operated the Penn
National Race Course since 1972. We were incorporated in Pennsylvania in 1982 as
PNRC Corp. and adopted our present name in 1994. Our principal offices are
located in the Wyomissing Professional Center, 825 Berkshire Boulevard, Suite
200, Wyomissing, Pennsylvania 19610; our telephone number is (610) 373-2400.
RECENT DEVELOPMENTS
In February 2001, Kevin DeSanctis joined the company. He will assume the
titles of President and Chief Operating Officer upon receipt of necessary
licensing and regulatory approvals in applicable jurisdictions. Mr. DeSanctis
has over 20 years of experience in managing and developing gaming operations in
various jurisdictions including, Las Vegas, Atlantic City, New Orleans and
Colorado. Prior to joining us, Mr. DeSanctis was Chief Operating Officer, North
America for Sun International Hotels Limited from 1995 to 2000.
On February 20, 2001, we commenced a consent solicitation and cash tender
offer to purchase all of the 11% Senior Secured Notes of LCCI, the
majority-owned subsidiary of CRC. On March 6, 2001, we announced that all of the
holders of the LCCI notes had tendered notes and delivered consents. The closing
of the tender offer is conditioned upon the closing of the proposed CRC
acquisition.
On March 12, 2001, we completed the sale of $200 million in aggregate
principal amount of 11 1/8% Senior Subordinated Notes due March 1, 2008. The net
proceeds of the notes will be used, in part, to finance the proposed CRC
acquisition and to complete the tender offer for the LCCI notes. If we are
unable to consummate the CRC acquisition by October 31, 2001, we will use the
entire net proceeds from the sale of the notes to repay outstanding term loan
indebtedness under our senior secured credit facility.
BUSINESS STRATEGY
Our business strategy is to create a broad, diversified base of gaming and
pari-mutuel properties that provides our customers with high quality experiences
that build significant customer loyalty. We continue to improve our gaming
operations to take advantage of their higher margins and less seasonal cash flow
compared to our pari-mutuel operations, while we seek expansion in the more
profitable areas of the pari-mutuel business, such as OTWs and at-home wagering.
We intend to integrate our
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gaming properties to exploit operating synergies and marketing and promotional
activities. We have focused strategies for Charles Town, the Mississippi
properties, the racetracks and related assets, and CRC as follows:
- CHARLES TOWN ENTERTAINMENT COMPLEX--The Charles Town Entertainment Complex
has provided us with substantial internal growth over the past two years.
Revenue at the property grew from $80.0 million for the year ended
December 31, 1999 to $135.3 million for the year ended December 31, 2000.
Charles Town currently has 1,974 gaming machines and a customer database
with over 126,000 people. We intend to continue to capitalize on the
strong demographics of the mid-Atlantic gaming market and the property's
leading position in the Baltimore and Washington D.C. markets by adding
amenities such as a hotel, entertainment venue, showroom and structured
parking facility. A hotel at Charles Town should allow us to create a
regional destination that will attract customers from a broader geographic
area. Additionally, we believe we can increase the length of stay from
existing customers with these additional amenities. Finally, we are
pursuing legislative initiatives to increase the maximum $2 per pull West
Virginia wagering limit, which we believe will positively impact our cash
flow.
- CASINO MAGIC BAY ST. LOUIS AND BOOMTOWN BILOXI--Casino Magic Bay St. Louis
and Boomtown Biloxi provide us with the opportunity to cross-sell to a
large database of local casino customers. Each of the properties has
operated in the Gulf Coast market for over 6 years. We believe the
properties have loyal employee and local customer bases, and offer
superior customer service through focused marketing and promotional
campaigns. While both properties are primarily aimed at local residents,
we feel that Casino Magic Bay St. Louis provides us with the ability to
create a regional destination property where we can reward loyal customers
from any Penn National facility with a quality casino, hotel and golf
experience. We are planning to construct a new 300-room hotel, new
restaurants and a reconfigured gaming floor, which collectively are
anticipated to cost $35 million and be completed within two years. We
intend to drive our returns on invested capital at Casino Magic Bay St.
Louis by cross-selling the expanded property to customers in the databases
of all the Penn National facilities.
- PENN NATIONAL RACE COURSE AND POCONO DOWNS AND THEIR OTWS--We believe that
our racetracks and OTWs will continue to provide us with strong, stable
cash flows. While pari-mutuel operations are an increasingly smaller
component of our business, the pari-mutuel business may provide us with
significant upside if certain legislative initiatives are adopted. These
initiatives include permitting OTW and account wagering in New Jersey and
at-home wagering, including telephone wagering, throughout the country.
Coupled with our existing OTWs, these initiatives would provide us with
significant high growth, high margin opportunities. Additionally, we have
implemented a casino style customer tracking system throughout our
pari-mutuel facilities that should permit us to increase customer loyalty
and attract new customers.
- CASINO ROUGE AND CASINO RAMA--The anticipated purchase of the CRC gaming
division continues our strategy of acquiring strong assets in emerging
gaming markets at attractive valuations. The Casino Rouge caters to a
local and, we believe, loyal customer base. The property continues to be
the market leader in Baton Rouge in gaming revenue and admissions. If we
are successful in consummating the CRC acquisition, we intend to
cross-sell the Casino Magic Bay St. Louis property to the Casino Rouge's
customer base as a regional destination opportunity thereby generating
additional returns on our Bay St. Louis investment. Casino Rama draws its
customers from the Toronto metropolitan area and has been successful in
drawing patrons through targeted bussing and marketing programs. A
5,000-seat entertainment complex and 300-room hotel are currently under
construction at the property. We anticipate that this expansion will
increase the average customer's length of stay, as there is a lack of
overnight accommodations in the area. If we complete the CRC acquisition,
the Casino Rama
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management contract will provide us with an additional source of income
without any capital requirements by us.
THE CHARLES TOWN ENTERTAINMENT COMPLEX
The Charles Town Entertainment Complex is located in Charles Town, West
Virginia, and is a leading gaming facility in the Baltimore, Maryland and
Washington, D.C. area. The facility is approximately a 60-minute drive from
Baltimore 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 10.0 million persons within a 100-mile radius of the Charles Town
Entertainment Complex, of which approximately 7.2 million persons are over the
age of 20. The average household income within this 100-mile radius is
approximately $66,000 a year.
The Charles Town Entertainment Complex features gaming machines, live
racing, simulcast wagering and dining. Since we began operating gaming machines
at the facility in September 1997, we have experienced strong growth at the
facility and have increased the number of gaming machines from 400 machines at
September 1997 to 1,974 machines at December 2000. Currently, there is no
statutory cap on the number of gaming machines that may be installed at a
location, although any increases in the number of gaming machines is subject to
regulatory approval. Given the success of the Charles Town Entertainment
Complex, we have undertaken certain property enhancements and have formulated
plans for other improvements. Specifically, in November 2000, we completed our
expansion of the gaming facility to nearly 60,000 square feet of gaming space,
opened a new 150-seat restaurant and bar and increased the number of gaming
machines at the facility from 1,500 machines to approximately 2,000 machines. In
the next phase of the expansion, which we anticipate completing by early 2003,
we intend to construct additional gaming space, a structured parking facility, a
300-room hotel with meeting rooms and conference space and an entertainment
venue, at an estimated cost of $55 million.
Of the 1,974 machines at December 31, 2000, approximately 1,300 machines are
coin out gaming machines that we installed since the passage of legislation in
West Virginia in April 1999 permitting this type of gaming machine. The
remaining gaming machines are dollar bill-fed video gaming machines that
replicate traditional spinning reel gaming machines and video card games, such
as blackjack and poker. We intend to convert some or all of the remaining video
gaming machines to coin out spinning reel machines and hope to increase the
total number of gaming machines beyond our current level, pending approval by
the West Virginia Lottery Commission.
Our marketing efforts at the Charles Town Entertainment Complex include
print and radio advertising and are focused on the Washington, D.C., Baltimore,
Maryland, Northern Virginia, Eastern West Virginia and Southern Pennsylvania
markets. In 1999, we installed a computerized player tracking system called
Player's Choice at the Charles Town Entertainment Complex. This system has
helped to further refine our marketing efforts and our database now consists of
approximately 126,000 players as of February 1, 2001. Our marketing efforts also
include a bus program and cash and merchandise give-aways.
THE MISSISSIPPI PROPERTIES
The Mississippi Gulf Coast has a long tradition as a vacation destination.
Boomtown Biloxi and Casino Magic Bay St. Louis are within 65 and 46 miles of New
Orleans, Louisiana and 63 and 90 miles of Mobile, Alabama, respectively. The
Gulf Coast area draws an estimated two million visitors annually, primarily from
Louisiana, Mississippi, Alabama, Florida and Georgia. The Gulf Coast area also
boasts a local population of approximately 350,000, of which 66% are over the
age of 20, an average household income of approximately $33,000 and a median age
of 33. Approximately 6.3 million people live within a 200-mile radius around
Biloxi and Bay St. Louis with an average age of 32. Gross casino
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gaming revenues on the Mississippi Gulf Coast totaled approximately
$1,030 million and $814 million in 1999 and 1998, respectively, a year over year
increase of approximately 27%.
CASINO MAGIC BAY ST. LOUIS CASINO AND RESORT
The Casino Magic Bay St. Louis casino and resort commenced operation in
September 1992, as the first dockside casino in Mississippi to operate on a
barge rather than a traditional riverboat. The casino is located on a 17-acre
marina with the adjoining land-based facilities situated on 591 acres. Casino
Magic Bay St. Louis offers approximately 39,500 square feet of gaming space,
with approximately 1,158 slot machines and 38 table games. The three story
land-based building houses a steak and seafood restaurant, buffet-style
restaurant, cafe, gift shop and live entertainment lounge. The property has a
200-room hotel that includes 24 suites, banquet and meeting space and an outdoor
pool. The Casino Magic Bay St. Louis complex also includes an 1,800 seat arena
for concerts and sporting events, a 100-space recreational vehicle park, a child
entertainment center, and the Bridges Golf Resort, an 18-hole Arnold
Palmer-designed championship golf course that includes a clubhouse, pro shop,
and a casual dining restaurant.
We are planning a number of focused enhancements to the Casino Magic Bay St.
Louis property, including plans to construct a 300-room hotel adjacent to the
property that we anticipate could be completed by mid 2002. We believe that the
new hotel will enhance mid-week business at the facility and will geographically
extend the casino's target market. We also are planning to add two new
restaurant venues to the property to meet customer needs, to improve access to
the gaming floor by adding new escalators and elevators and to expand available
parking facilities.
Casino Magic Bay St. Louis is located 1.5 miles north of U.S. Highway 90,
approximately nine miles south of Interstate 10, the main thoroughfare
connecting New Orleans, Louisiana and Mobile, Alabama.
BOOMTOWN BILOXI CASINO
Boomtown Biloxi commenced operations in July 1994 and occupies nine acres on
Biloxi, Mississippi's historic back bay. The dockside property consists of a
land-based facility which houses all non-gaming operating space and an
approximately 33,600 square foot casino constructed on a 400 by 100-foot barge
permanently moored to the land-based building. There is approximately 14,000
square feet on the barge that remains available for development. The casino
offers 1,060 gaming machines, 27 table games and other non-gaming amenities
including a full service buffet/menu service restaurant, a 120 seat deli-style
restaurant, a full-service bakery, a western dance hall/cabaret and a 20,000
square foot family entertainment center. The western-themed family entertainment
center, complete with a dynamic motion theater, distinguishes Boomtown Biloxi
from other casinos on the Mississippi Gulf Coast as a destination offering
entertainment for the entire family.
Boomtown Biloxi offers gaming and entertainment amenities to primarily
middle income, value-oriented customers. The casino has an "old west" theme with
western memorabilia in its interior decor, country/western music and employees
dressed in western attire. We believe Boomtown Biloxi has a relaxed and friendly
environment and a broad and loyal customer base. We intend to continue to focus
on this target market by providing moderately priced, high value amenities and
by utilizing a broad array of marketing programs, including charter flights and
bus programs, among others.
Boomtown Biloxi is located one-half mile from Interstate 110, the main
highway connecting Interstate 10 and the Gulf of Mexico. Interstate 10 is the
main thoroughfare connecting New Orleans, Louisiana and Mobile, Alabama.
According to the Mississippi Department of Transportation, over 12 million
vehicles travel past the Boomtown Biloxi site on Interstate 110 each year. The
site is easily accessible by car when approaching from the north due to its
immediate proximity to the Interstate 110 spur from Interstate 10, which
provides the bulk of traffic to the Gulf Coast region. Boomtown Biloxi is
constructed in the Back Bay and is the first casino visible to auto traffic
traveling south on Interstate 110.
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We have an exclusive license to use the Boomtown Biloxi name, logo and
internet world wide web address. The term of the license is contingent upon
certain events, but in no event will it be for less than two years from
August 2000. If our license to use the Boomtown Biloxi name expires, we would
have to identify an alternative name for this casino.
RACING AND PARI-MUTUEL OPERATIONS
Our racing and pari-mutuel revenues are derived from:
- wagering on our live races at our racetracks, at our OTWs, at other
Pennsylvania racetracks and their OTWs and through telephone account
wagering, as well as wagering at our racetracks on certain stakes races
run at out-of-state racetracks;
- wagering on full-card import simulcasts at our racetracks and OTWs and
through telephone account wagering; and
- fees from wagering on export simulcasting our races at out-of-state
locations.
We also derive revenues from admissions, program sales, food and beverage
sales and concessions and certain other ancillary activities.
Pari-mutuel wagering on thoroughbred or harness racing is pooled wagering in
which a pari-mutuel wagering system totals the amounts wagered and adjusts the
payouts to reflect the relative amounts bet on different horses and various
possible outcomes. The pooled wagers are paid out to bettors as winnings in
accordance with the payoffs determined by the pari-mutuel wagering system, paid
to the applicable regulatory or taxing authorities and distributed to the
track's horsemen in the form of "purses" which encourage owners and trainers to
enter their horses in that track's live races. The balance of the pooled wagers
is retained by the wagering facility. Pari-mutuel wagering is currently
authorized in more than 40 states in the United States, all provinces in Canada
and approximately 100 other countries around the world.
We are seeking to increase wagering by broadening our customer base and
increasing the wagering activity of our existing customers. To attract new
customers, we seek to increase the racing knowledge of our customers through our
television programming, and by providing "user friendly" automated wagering
systems and comfortable surroundings. We also seek to attract new customers by
offering various types of promotions including family fun days, premium
give-away programs, contests and handicapping seminars.
LIVE RACING
THE PENN NATIONAL RACE COURSE. The Penn National Race Course is located on
approximately 225 acres approximately 15 miles northeast of Harrisburg,
Pennsylvania, 100 miles west of Philadelphia and 200 miles east of Pittsburgh.
There is a total population of approximately 1.4 million persons within a radius
of approximately 35 miles around the Penn National Race Course and approximately
2.2 million persons within a 50-mile radius. The property includes a one-mile
all-weather thoroughbred racetrack and a 7/8-mile turf track. The property also
includes approximately 400 acres surrounding the Penn National Race Course that
are available for future expansion or development.
POCONO DOWNS. Pocono Downs is located on approximately 400 acres in Plains
Township, outside Wilkes-Barre, Pennsylvania. There is a total population of
approximately 785,000 persons within a radius of approximately 35 miles around
Pocono Downs and approximately 1.5 million persons within a 50-mile radius. The
property includes a 5/8-mile all-weather, lighted harness track.
THE CHARLES TOWN RACES. The Charles Town Races at the Charles Town
Entertainment Complex is located on a portion of a 250-acre parcel in Charles
Town, West Virginia. The property includes a 3/4-mile thoroughbred racetrack.
The property surrounding the Charles Town Entertainment Complex,
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including the site of the former Shenandoah Downs Racetrack, is available for
future expansion or development. In addition, we have a right of first refusal
for an additional 250 acres that are adjacent to the Charles Town Entertainment
Complex.
OTWS
Our OTWs provide areas for viewing import simulcasts and televised sporting
events, placing pari-mutuel wagers and dining. The facilities also provide
convenient parking. We presently operate 11 of the 20 OTWs now open in
Pennsylvania. There are two remaining OTWs that have been authorized in
Pennsylvania for our competitors. Some states, such as New York, operate
off-track betting locations that are independent of racetracks. Under the
Pennsylvania Racehorse Industry Reform Act, only licensed racing associations,
such as Penn National, can operate OTWs or accept customer wagers on simulcast
races at Pennsylvania racetracks. The following is a list of our OTW locations:
FACILITY/LOCATION DATE OPENED
- ----------------- -----------
PENN NATIONAL FACILITIES:
Reading, PA May 1992
Chambersburg, PA April 1994
York, PA March 1995
Lancaster, PA July 1996
Williamsport, PA February 1997
Johnstown, PA September 1998
POCONO DOWNS FACILITIES:
Erie, PA May 1991
Allentown, PA July 1993
Carbondale, PA March 1998
Hazleton, PA March 1998
East Stroudsburg, PA July 2000
We have been transmitting simulcasts of our races to other wagering
locations and receiving simulcasts of races from other locations for wagering by
our customers at our facilities year-round for more than seven years. During the
year ended December 31, 2000, we received import simulcasts from approximately
96 racetracks, including premier racetracks such as Belmont Park, Church Hill
Downs, Gulfstream Park, Hollywood Park, Santa Anita and Saratoga and transmitted
export simulcasts of our races to approximately 116 locations.
TELEPHONE ACCOUNT WAGERING/INTERNET WAGERING
In 1983, we pioneered Telebet-Registered Trademark-, Pennsylvania's first
telephone account wagering system. A Telebet customer opens an account by
depositing funds with us. Account holders can then place wagers by telephone on
Penn National races and import simulcast races to the extent of the funds on
deposit in the account; any winnings are posted to the account and are available
for withdrawal or future wagers. In December 1995, Pocono Downs instituted
Dial-A-Bet-Registered Trademark-, a similar telephone account betting system.
eBetUSA.com, Inc., our wholly owned subsidiary, is a closed-loop,
subscriber-based system that operates a pari-mutuel wagering platform accross
the Internet. eBetUSA.com operates in selected jurisdictions with the approval
of the Pennsylvania State Horse Racing Commission and the Pennsylvania State
Harness Racing Commission. The website technology is provided under a license
agreement with eBet Limited of Australia.
NEW JERSEY JOINT VENTURE -- PENNWOOD RACING, INC.
On October 30, 1998, we formed a 50%-50% joint venture with Greenwood New
Jersey, Inc., a subsidiary of Greenwood Racing, Inc. (the owner of Philadelphia
Park Race Track) to acquire certain assets of Garden State Park and Freehold
Raceway from International Thoroughbred Breeders, Inc. In
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January 1999, Greenwood New Jersey, Inc. consummated the acquisition on behalf
of the joint venture. On July 29, 1999, after receiving New Jersey Racing
Commission approval, we completed our investment in the New Jersey joint
venture, Pennwood Racing, Inc. The purchase price for the acquisition was
$46 million, however, if the joint venture receives various approvals for
off-track wagering or phone betting in New Jersey, it will be required to pay
additional purchase price of up to $10 million.
Through our interest in Pennwood Racing, Inc., we own Freehold Raceway in
Freehold, New Jersey and hold a leasehold interest in Garden State Park in
Cherry Hill, New Jersey. Freehold Raceway is located on a 51-acre site in
western Monmouth County, New Jersey and is the nation's oldest harness track.
Daytime racing has been conducted at Freehold Raceway since 1853; pari-mutuel
wagering commenced in 1941. The grandstand at Freehold Raceway is an
approximately 150,000 square foot, five level, steel frame, enclosed, fully
heated and air conditioned facility constructed in 1986 that can accommodate up
to 10,000 spectators. The grandstand also has a sit-down restaurant and seven
concession stands. Freehold Raceway is located less than 50 miles from New York
City and less than 30 miles from Princeton and Trenton, New Jersey.
Garden State Park is located on approximately 220 acres of land in Cherry
Hill, New Jersey. Cherry Hill forms part of the Philadelphia metropolitan area
and is approximately eight miles from downtown Philadelphia. The grandstand at
Garden State Park is an approximately 50,000 square foot facility that can
accommodate up to 24,000 spectators. On November 30, 2000, the owner of Garden
State Park, International Thoroughbred Breeders, Inc., announced that it had
completed the sale of the Garden State Park property, excluding a 10-acre parcel
owned by our joint venture, to Turnberry/ Cherry Hill, LLC. As a result of the
sale and a decision by the new owner to develop the property for non-racing
uses, Pennwood Racing's lease at Garden State Park will be terminated on
May 31, 2001. We do not believe that the termination of the Garden State Park
lease and the cessation of racing at that facility will have a material adverse
effect on our business, financial conditions or results of operations.
We have agreed to guarantee up to 50% of the obligations of the New Jersey
joint venture, including but not limited to: rent, real estate taxes, insurance
and utilities under a seven year lease at Garden State Park expiring
January 2006, subject to the termination of the lease discussed above; the
$10 million contingent purchase price due to International Thoroughbred Breeders
if the joint venture receives various approvals for off-track wagering or phone
betting in New Jersey; and the obligations of the joint venture under its
original $23 million credit facility with Commerce Bank, N.A.
AGREEMENTS WITH HORSEMEN AND PARI-MUTUEL CLERKS
We have agreements with the horsemen at each of our racetracks. The
continuation of these agreements is required to allow us to conduct live racing
and export and import simulcasting. In addition, our simulcasting agreements are
subject to the horsemen's approval.
In February 1999, the Pennsylvania Thoroughbred Horsemen stopped racing at
Penn National Race Course and withdrew their permission for us to import
simulcast races from other racetracks, resulting in the closure of Penn National
Race Course and six of our OTW facilities. As a result of the closure, our
operations at Penn National Race Course were suspended for more than five weeks,
we lost 46 race days at Penn National Race Course, and it took nearly six months
from the beginning of the action before we returned to pre-action levels of
operations. In March 1999, we signed a new agreement with the Pennsylvania
Thoroughbred Horsemen that has an initial term that expires on January 1, 2004.
In December 1999, we signed a new horsemen agreement with the Pennsylvania
Harness Horsemen that expires on January 16, 2003. We also have an agreement
with the Charles Town Horsemen that expires on December 31, 2002.
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In addition to our horsemen agreements, in order to operate gaming machines
in West Virginia, we are required to enter into written agreements regarding the
proceeds of our gaming machines at the Charles Town Entertainment Complex with
the pari-mutuel clerks at Charles Town. Our agreement with the pari-mutuel
clerks at Charles Town expires on December 31, 2004.
In addition, our New Jersey joint venture, Pennwood Racing, must maintain
written agreements with the horsemen at Freehold Raceway and Garden State Park
in order to simulcast races to the Atlantic City casinos. Horsemen agreements
are currently in effect at both facilities.
OPTION TO MANAGE THE CHARLESTOWN ENTERTAINMENT COMPLEX
We acquired the Charles Town Entertainment Complex by exercising an option
previously held by a subsidiary of Showboat, Inc., now a wholly owned subsidiary
of Harrah's Entertainment, Inc. In assigning the option, Showboat retained the
right to operate a casino at the Charles Town Entertainment Complex in return
for a management fee, to be negotiated at the time of exercise, based on
reasonable rates payable for similar properties. The express terms of the
Showboat option do not specify what activities at the Charles Town Entertainment
Complex would constitute operation of a casino. We do not believe that our
installation and operation of gaming devices linked to the West Virginia lottery
at the Charles Town Entertainment Complex constitutes the operation of a casino
under the Showboat option or under West Virginia law or triggers Showboat's
right to exercise the Showboat option. The rights under the Showboat option
extend until November 2001.
EMPLOYEES AND LABOR RELATIONS
As of December 31, 2000, we had 4,310 permanent employees, of whom 3,261
were full-time and 1,049 were part-time. Our employees in the admissions
department and pari-mutuel department at Penn National Race Course, Pocono Downs
and our OTWs are represented under collective bargaining agreements between us
and the Sports Arena Employees' Union Local 137. The agreements extend until
September 30, 2002 for track employees and September 30, 2001 for OTW employees.
The pari-mutuel clerks at Pocono Downs voted to unionize in June 1997. We have
held negotiations with this union, but do not have a contract to date. The
failure to reach an agreement with this union would not result in the suspension
or termination of our license to operate live racing at Pocono Downs or to
conduct simulcast or OTW operations.
In order to operate gaming machines in West Virginia, we are required to
enter into written agreements regarding the proceeds of the gaming machines with
a representative of a majority of the horse owners and trainers, a
representative of a majority of the pari-mutuel clerks and a representative of a
majority of our horse breeders. We have an agreement with the Charles Town
Horsemen that expires on December 31, 2002. The pari-mutuel clerks at Charles
Town are represented under a collective bargaining agreement with the West
Virginia Division of Mutuel Clerks, which expires on December 31, 2004.
COMPETITION
GAMING OPERATIONS
The gaming industry is highly fragmented and characterized by a high degree
of competition among a large number of participants, many of which have
financial and other resources that are greater than our resources. Competitive
gaming activities include casinos, video lottery terminals and other forms of
legalized gaming in the United States and other jurisdictions.
Legalized gambling is currently permitted in various forms throughout the
United States and in several Canadian provinces. Other jurisdictions may
legalize gaming in the near future through the introduction of proposals to
legalize gaming in their state legislatures. In addition, established gaming
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jurisdictions could award additional gaming licenses or permit the expansion of
existing gaming operations. New or expanded operations by other persons can be
expected to increase competition for our gaming operations and could have a
material adverse impact on us.
CHARLES TOWN, WEST VIRGINIA. Our gaming machine operations at the Charles
Town Entertainment Complex face competition from other gaming machine venues in
West Virginia and in neighboring states (including Dover Downs, Delaware Park
and Harrington Raceway in Delaware and the casinos in Atlantic City, New
Jersey). These venues also offer significantly higher stakes for their gaming
machines than in West Virginia. Atlantic City, New Jersey does not have a
per-pull limit on its gaming machines, while Delaware has a $25 per-pull limit.
Per-pull limits in West Virginia are only $2 per gaming machine. In addition to
existing competition, both Pennsylvania and Maryland have in the past considered
legislation to expand gaming in their respective states. The failure to attract
or retain gaming machine customers at the Charles Town Entertainment Complex,
whether arising from such competition or from other factors, could have a
material adverse effect on our business, financial condition and results of
operations.
MISSISSIPPI GULF COAST. Dockside gaming has grown rapidly on the
Mississippi Gulf Coast, increasing from no dockside casinos in March 1992 to 12
operating casinos as of December 31, 2000. Nine of these facilities are located
in Biloxi, two are located in Gulfport and one is located in Bay St. Louis. Our
Mississippi casino operations have numerous competitors, many of which have
greater name recognition, and financial and marketing resources than we have.
Competition in the Mississippi gaming market is significantly more intense than
the competition our gaming operations face in West Virginia or our pari-mutuel
operations face in Pennsylvania and New Jersey. We cannot be sure that we will
succeed in the competitive Mississippi Gulf Coast gaming market. The failure to
do so would have a material adverse effect on our business, financial condition
and results of operations.
Mississippi law does not limit the number of gaming licenses that may be
granted. A number of operators have completed or announced new construction or
expansions of existing casinos that will directly compete with us. The
development of the Gulf Coast gaming markets has resulted in market dilution and
any additional casinos could dilute gaming win even further, each of which could
have a material adverse effect on our operations.
RACING AND PARI-MUTUEL OPERATIONS
Our racing and pari-mutuel operations face significant competition for
wagering dollars from other racetracks and OTWs (some of which also offer other
forms of gaming), other gaming venues such as casinos and state-sponsored
lotteries, including the Pennsylvania, New Jersey, Delaware and West Virginia
lotteries. We may also face competition in the future from new OTWs or from new
racetracks. From time to time, states consider legislation to permit other forms
of gaming. If additional gaming opportunities become available in or near our
racing and pari-mutuel operations, such gaming opportunities could have a
material adverse effect on our business, financial condition and results of
operations.
Our OTWs compete with the OTWs of other Pennsylvania racetracks, and new
OTWs may compete with our existing wagering facilities. Our competitors have a
number of OTW facilities that are relatively close in distance to our OTWs.
Although only two competing OTWs remain authorized by law for future opening,
the opening of a new OTW in close proximity to our existing or future OTWs could
have a material adverse effect on our business, financial condition and results
of operations.
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REGULATION
GENERAL
We are subject to federal, state and local regulations related to our
current and proposed live racing, pari-mutuel, gaming machine and casino
operations. The following description of the regulatory environment in which we
operate is only a summary and not a complete recitation of all applicable
regulatory laws. Moreover, our current and proposed operations could be
subjected at any time to additional or more restrictive regulations, or banned
entirely.
WEST VIRGINIA RACING AND GAMING REGULATION
Our operations at the Charles Town Entertainment Complex are subject to
regulation by the West Virginia Racing Commission under the West Virginia Horse
and Dog Racing Act, and by the West Virginia Lottery Commission under the West
Virginia Racetrack Video Lottery Act. The powers and responsibilities of the
West Virginia Racing Commission under the West Virginia Horse and Dog Racing Act
extend to the approval and/or oversight of all aspects of racing and pari-mutuel
wagering operations. We have obtained from the West Virginia Racing Commission a
license to conduct racing and pari-mutuel wagering at the Charles Town
Entertainment Complex. Pursuant to the West Virginia Racetrack Video Lottery
Act, we have obtained approval for and currently are operating approximately
2,000 gaming machines and video lottery terminals at the Charles Town
Entertainment Complex. In addition to licensing, in West Virginia, the legality
of gaming machine operation in a particular county is determined by local option
election in the county where the racetrack is located. The West Virginia
Racetrack Video Lottery Act further provides that 5% of the qualified voters in
the county where gaming machines have been permitted by local option election
can petition for another election that may be held no sooner than five years
after the first election.
The West Virginia Racetrack Video Lottery Act provides that the transfer of
more than 5% of the voting stock of a corporation that holds a gaming machine
license, or that controls another entity that holds such a license, or the
transfer of the assets of a license holder may only be to persons who have met
the licensing requirements of the West Virginia Racetrack Video Lottery Act or
which transfer has been pre-approved by the West Virginia Lottery Commission.
Any transfer that does not comply with this requirement voids the license.
MISSISSIPPI REGULATORY COMPLIANCE
Our operation of the Casino Magic Bay St. Louis casino and Boomtown Biloxi
casino is subject to Mississippi regulatory compliance, a summary of which is
provided below.
The ownership and operation of casino gaming facilities in Mississippi are
subject to extensive state and local regulation primarily through the licensing
and regulatory control of the Mississippi Gaming Commission and the Mississippi
State Tax Commission. We must register and be licensed under the Mississippi
Gaming Control Act, or the Mississippi Act, and our gaming operations are
subject to the regulatory control of the Mississippi Gaming Commission, the
Mississippi State Tax Commission and various local, city and county regulatory
agencies. The Mississippi Act, which legalized dockside casino gaming in
Mississippi, was enacted on June 29, 1990 and, effective October 29, 1991, the
Mississippi Gaming Commission adopted regulations in furtherance of the
Mississippi Act.
The laws, regulations and supervisory procedures of Mississippi and the
Mississippi Gaming Commission seek to: (1) prevent unsavory or unsuitable
persons from having direct or indirect involvement with gaming at any time or in
any capacity; (2) establish and maintain responsible accounting practices and
procedures; (3) maintain effective control over the financial practices of
licensees, including establishing minimum procedures for internal fiscal affairs
and safeguarding assets and revenues, providing reliable record keeping and
making periodic reports to the Mississippi Gaming
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Commission; (4) prevent cheating and fraudulent practices; (5) provide a source
of state and local revenues through taxation and licensing fees; and (6) ensure
that gaming licensees, to the extent practicable, employ Mississippi residents.
The regulations are subject to amendment and interpretation by the Mississippi
Gaming Commission.
The Mississippi Act provides for legalized dockside gaming at the discretion
of the 14 counties that either border the Gulf Coast or the Mississippi River
but only if the voters in such counties have not voted to prohibit gaming in
that county. Dockside gaming is permissible in nine of the 14 eligible counties
in the state and gaming operations have commenced in Adams, Coahoma, Hancock,
Harrison, Tunica, Warren and Washington counties. The law permits unlimited
stakes gaming on permanently moored vessels on a 24-hour basis and does not
restrict the percentage of space that may be utilized for gaming. There are no
limitations on the number of gaming licenses which may be issued in Mississippi.
The legal age for gaming in Mississippi is 21.
We are required to submit detailed financial, operating and other reports to
the Mississippi Gaming Commission and Mississippi State Tax Commission. We must
report or seek approval for substantially all loans, leases, sales of securities
and similar financing transactions.
We have been investigated and on August 8, 2000, the Mississippi Gaming
Commission issued us a gaming operator's license for Boomtown Biloxi and for
Casino Magic Bay St. Louis. In addition, the Mississippi Gaming Commission has
found certain of our key principals suitable.
Each of our directors, officers and key employees who are actively and
directly engaged in the administration or supervision of gaming, or who have any
other significant involvement with our activities must be found suitable
therefor, and may be required to be licensed by the Mississippi Gaming
Commission. The finding of suitability is comparable to licensing, and both
require submission of detailed personal financial information followed by a
thorough investigation. In addition, any individual who is found to have a
material relationship to, or material involvement with, us may be investigated
in order to be found suitable or to be licensed as a business associate of ours.
Key employees, controlling persons or others who exercise significant influence
upon our management or affairs may also be deemed to have such a relationship or
involvement. We cannot assure you that such persons will be found suitable by,
and maintain such a suitability finding from, the Mississippi Gaming Commission.
An application for licensing may be denied for any cause deemed reasonable by
the Mississippi Gaming Commission. Changes in licensed positions must be
reported to the Mississippi Gaming Commission. In addition to its authority to
deny an application for a license, the Mississippi Gaming Commission has
jurisdiction to disapprove a change in a corporate position. If the Mississippi
Gaming Commission were to find a director, officer or key employee unsuitable
for licensing or unsuitable to continue having a relationship with us, we would
have to suspend, dismiss and sever all relationships with such person. We would
have similar obligations with regard to any person who refuses to file
appropriate applications. Each gaming employee must obtain a work permit that
may be revoked upon the occurrence of certain specified events.
Mississippi statutes and regulations give the Mississippi Gaming Commission
the discretion to require a suitability finding with respect to anyone who
acquires any of our securities, regardless of the percentage of ownership. The
current policy of the Mississippi Gaming Commission is to require anyone
acquiring 5% or more of any voting securities of a public company with a
licensed subsidiary or private company licensee to be found suitable. However,
the Mississippi Gaming Commission generally permits certain "institutional"
investors to beneficially own up to 15% of the voting securities of a registered
public company without a finding of suitability. If the owner of voting
securities who is required to be found suitable is a corporation, partnership or
trust, it must submit detailed business and financial information including a
list of beneficial owners. The applicant is required to pay all costs of
investigation.
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Any owner of voting securities found unsuitable and who holds, directly or
indirectly, any beneficial ownership of our equity interests beyond such period
of time as may be prescribed by the Mississippi Gaming Commission may be guilty
of a misdemeanor. Any person who fails or refuses to apply for a finding of
suitability or a license within 30 days of being ordered to do so by the
Mississippi Gaming Commission may be found unsuitable. We are subject to
disciplinary action if we, after receiving notice that a person is unsuitable to
be an owner of or to have any other relationship with us, (1) pay the unsuitable
person any dividends or interest upon any of our securities or any payments or
distribution of any kind whatsoever, (2) recognize the exercise, directly or
indirectly, of any voting rights of our securities by the unsuitable person, or
(3) pay the unsuitable person any remuneration in any form for services rendered
or otherwise, except in certain limited and specific circumstances. In addition,
if the Mississippi Gaming Commission finds any owner of voting securities
unsuitable, such owner must immediately surrender all securities to us, and we
must purchase the securities so offered for cash at fair market value within
10 days.
We will be required to maintain current ownership ledgers in the State of
Mississippi that may be examined by the Mississippi Gaming Commission at any
time. If any securities are held in trust by an agent or by a nominee, the
record holder may be required to disclose the identity of the beneficial owner
to the Mississippi Gaming Commission. A failure to make such disclosure may be
grounds for finding the record holder unsuitable. We are also required to render
maximum assistance in determining the identity of the beneficial owner. We may
be required to disclose to the Mississippi Gaming Commission, upon request, the
identities of the holders of certain of our indebtedness. In addition, the
Mississippi Gaming Commission under the Mississippi Act may, in its discretion,
(1) require holders of debt securities, including these notes, to file
applications, (2) investigate such holders, and (3) require such holders to be
found suitable to own such debt securities. Although the Mississippi Gaming
Commission generally does not require the individual holders of obligations such
as notes to be investigated and found suitable, the Mississippi Gaming
Commission retains the discretion to do so for any reason, including but not
limited to a default, or where the holder of the debt instrument exercises a
material influence over the gaming operations of the entity in question. Any
holder of the debt securities required to apply for a finding of suitability
must pay all investigative fees and costs of the Mississippi Gaming Commission
in connection with such an investigation.
The regulations provide that we may not engage in any transaction that would
result in a change of our control without the prior approval of the Mississippi
Gaming Commission. Mississippi law prohibits us from making a public offering or
private placement of our securities without the approval of or waiver of
approval by the Mississippi Gaming Commission if any part of the proceeds of the
offering is to be used to finance the construction, acquisition or operation of
gaming facilities in Mississippi, or to retire or extend obligations incurred
for one or more of such purposes. The Mississippi Gaming Commission has the
authority to grant a continuous approval of securities offerings and has granted
us such approval, subject to an annual renewal.
Regulations of the Mississippi Gaming Commission prohibit certain
repurchases of securities of publicly traded corporations registered with the
Mississippi Gaming Commission without prior approval of the Mississippi Gaming
Commission. Transactions covered by these regulations are generally aimed at
discouraging repurchases of securities at a premium over market price from
certain holders of greater than 3% of the outstanding securities of the
registered publicly traded corporation. The regulations of the Mississippi
Gaming Commission also require prior approval for a "plan of recapitalization"
as defined in such regulations.
The Mississippi Act requires that certificates representing our securities
bear a legend to the general effect that the securities are subject to the
Mississippi Act and regulations of the Mississippi Gaming Commission. The
Mississippi Gaming Commission through the power to regulate licensees, has the
power to impose additional restrictions on the holders of our securities at any
time.
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We may not engage in gaming activities in Mississippi while also conducting
gaming operations outside of Mississippi without approval of the Mississippi
Gaming Commission. Such approvals were initially granted to us by the
Mississippi Gaming Commission as part of the original licensure process, and
additional approvals must be obtained on a jurisdiction-by-jurisdiction basis.
The failure to obtain or retain any such approval could have a material adverse
effect on us.
We may not transfer any of our licenses and we must renew each license every
three years. There can be no assurance that any of our renewal applications will
be approved. The Mississippi Gaming Commission may at any time dissolve,
suspend, condition, limit or restrict a license or approval to own equity
interests in us for any cause it deems reasonable. We may have substantial fines
levied against us in Mississippi for each violation of gaming laws or
regulations. A violation under any gaming license held by us may be deemed a
violation of the Mississippi licenses held by us. Suspension or revocation of
the Mississippi licenses or of the Mississippi Gaming Commission's approval of
us would have a material adverse effect upon our business.
In October 1994, the Mississippi Gaming Commission adopted a regulation
requiring, as a condition of licensure or license renewal, that a gaming
establishment's site development plan include an approved 500-car parking
facility in close proximity to the casino complex, and infrastructure facilities
that amount to at least 25% of the casino cost. Such facilities may include any
of the following: a 250-room hotel of at least a two star rating, as defined by
the current edition of the Mobil Travel Guide; a theme park; a golf course;
marinas; a tennis complex; entertainment facilities; or any other such facility
as approved by the Mississippi Gaming Commission as infrastructure. Parking
facilities, roads, sewage and water systems or facilities normally provided by
governmental entities are excluded. The Mississippi Gaming Commission may, in
its discretion, reduce the number of hotel rooms required where it is shown, to
the satisfaction of the Mississippi Gaming Commission, that sufficient rooms are
available to accommodate the anticipated visitor load. Such reduction in the
number of rooms does not affect the 25% investment requirement imposed by the
regulation. Casino Magic Bay St. Louis, Boomtown Biloxi and related facilities
have complied with these requirements. In January 1999, the Mississippi Gaming
Commission amended its infrastructure regulation thereby increasing the minimum
level of infrastructure investment from 25% to 100% of the casino cost. However,
the 100% infrastructure investment requirement would apply only to new casino
developments and existing casino developments that are not in operation at the
time of their acquisition or purchase, and therefore does not apply to Casino
Magic Bay St. Louis and Boomtown Biloxi. In any event, Casino Magic Bay St.
Louis and Boomtown Biloxi will attempt to comply with such requirements.
License fees and taxes are payable to the State of Mississippi and to the
counties and cities in which our Mississippi subsidiaries operate. One of the
license fees payable to the state of Mississippi is based upon gross revenue of
the licensee (generally defined as gaming receipts less payout to customers as
winnings) and equals 4% of gross revenue of $50,000 or less per month, 6% of
gross revenue over $50,000 and less than $134,000 per calendar month, and 8% of
gross revenue over $134,000 per calendar month. The foregoing license fees are
allowed as a credit against the licensee's Mississippi income tax liability for
the year paid. Additionally, a licensee must pay a $5,000 annual license fee and
an annual fee based upon the number of games it operates. Mississippi
communities and counties may impose fees on licensees equaling 0.4% of gross
revenue of $50,000 or less per calendar month, 0.6% of gross revenue over
$50,000 and less than $134,000 per calendar month and 0.8% of gross revenue over
$134,000 per calendar month. These fees have been imposed in, among other cities
and counties, Biloxi, Vicksburg, Tunica County and Coahoma County. Certain local
and private laws of the State of Mississippi may impose fees or taxes on our
Mississippi subisidiaries in addition to the fees described above.
The Mississippi Gaming Commission requires, as a condition of licensure or
license renewal, that casino vessels on the Mississippi Gulf Coast that are not
self-propelled must be moored to withstand a
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Category 4 hurricane with 155 mile-per-hour winds and 15-foot tidal surge. We
believe that all of our Mississippi gaming operations currently meet this
requirement. A 1996 Mississippi Gaming Commission regulation prescribes the
hurricane emergency procedure to be used by the Mississippi Gulf Coast casinos.
The sale of alcoholic beverages, including beer and wine, at Casino Magic
Bay St. Louis and Boomtown Biloxi is subject to licensing, control and
regulation by the Mississippi State Tax Commission. The Miscellaneous Tax
Division of the Mississippi State Tax Commission regulates the sale of beer and
light wine. The Alcoholic Beverage Control Division of the Mississippi State Tax
Commission, or the ABC, regulates the sale of alcoholic beverages containing
more than 5% alcohol by weight. The ABC requires that all equity owners and
managers file personal record forms and fingerprint cards for their licensing
process. In addition, owners of more than 5% of Casino Magic Bay St. Louis or
Boomtown Biloxi equity as well as officers and managers must submit detailed
financial information to the ABC for licensing. All such licenses are revocable
and are non-transferable. The Mississippi State Tax Commission has full power to
limit, condition, suspend or revoke any such license, and any such disciplinary
action could, and revocation would, have a material adverse effect on the
operations of Casino Magic Bay St. Louis and Boomtown Biloxi.
PENNSYLVANIA RACING REGULATIONS
Our horse racing operations at Penn National Race Course and Pocono Downs
are subject to extensive regulation under the Pennsylvania Racing Act, which
established the Pennsylvania State Horse Racing Commission and the Pennsylvania
State Harness Racing Commission (referred to herein as the Pennsylvania Racing
Commissions) which are responsible for, among other things:
- granting permission annually to maintain racing licenses and schedule
races;
- approving, after a public hearing, the opening of additional OTWs;
- approving simulcasting activities;
- licensing all officers, directors, racing officials and certain other
employees of a company; and
- approving all contracts entered into by a company affecting racing,
pari-mutuel wagering and OTW operations.
As in most states, the regulations and oversight applicable to our
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 our 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. 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 our
business, financial condition and results of operations.
We may not be able to obtain all necessary approvals for the continued
operation or expansion of our business. Even if all such approvals are obtained,
the regulatory process could delay implementation of our plans to open
additional OTWs. We have had continued permission from the Pennsylvania State
Horse Racing Commission to conduct live racing at the Penn National Race Course
since we commenced operations in 1972, and have obtained permission from the
Pennsylvania State Harness Racing Commission to conduct live racing at Pocono
Downs. Currently, we have approval from the Pennsylvania Racing Commissions to
operate the eleven OTWs that are currently open. A
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Commission may refuse to grant permission to open additional OTWs or to continue
to operate existing facilities. The failure to obtain or maintain required
regulatory approvals would have a material adverse effect upon our business,
financial condition and results of operations.
The Pennsylvania Racing Act requires that any shareholder proposing to
transfer beneficial ownership of 5% or more of our shares file an affidavit with
us setting forth certain information about the proposed transfer and transferee,
a copy of which we are required to furnish to the Pennsylvania Racing
Commissions. The certificates representing our shares owned by 5% beneficial
shareholders are required to bear certain legends prescribed by the Pennsylvania
Racing Act. In addition, under the Pennsylvania Racing Act, the Pennsylvania
Racing Commissions have the authority to order a 5% beneficial shareholder of a
company to dispose of his common stock of such company if it determines that
continued ownership would be inconsistent with the public interest, convenience
or necessity or the best interest of racing generally.
NEW JERSEY REGULATION
Our joint venture's operations at Garden State Park and Freehold Raceway in
New Jersey are subject to regulation (i) by the New Jersey Racing Commission
under the Racing Act of 1940, as amended and supplemented and the rules and
regulations of the Racing Commission and (ii) by the New Jersey Casino Control
Commission under the Casino Control Act and Casino Simulcasting Act.
Under the Racing Act, all pari-mutuel employees and all others who are
connected with the training of horses or the conduct of races, must be licensed
by the Racing Commission. In addition, no person may hold or acquire, directly
or indirectly, beneficial ownership of 5% or more of the voting securities of
the joint venture without the prior approval of the Racing Commission.
At least 85% of the persons employed by the New Jersey joint venture at
Garden State Park and Freehold Raceway must be residents of New Jersey
(excluding jockeys, drivers or apprentices, exercise boys, owners, trainers,
clockers, governing and managing officials and heads of departments of the
track). The Racing Commission has the authority to require that the joint
venture discharge any employee who: (i) fails or refuses for any reason to
comply with the rules and regulations of the Racing Commission; (ii) in the
opinion of the Racing Commission is guilty of fraud, dishonesty or incompetency;
(iii) has been convicted of a crime involving moral turpitude; or (iv) fails or
refuses for any reason to comply with any of the provisions of the Racing Act.
Additional restrictions and/or requirements imposed by the Racing Commission
on the joint venture's racetrack operations include, but are not limited to, the
setting of the admission price required to be charged by the joint venture, a
requirement that the joint venture (and all other racetracks operating in New
Jersey) must schedule at least one race per day limited to registered New
Jersey-bred foals and the methods the joint venture may use to distribute
pari-mutuel pools and "breaks" (the odd cents remaining after computing the
amount due holders of winning pari-mutuel tickets). The Racing Commission also
regulates the manner of keeping of certain of the joint venture's books and
records.
The Racing Commission is also responsible for the allocation of racing dates
based upon the annual application of the permit holder. The joint venture is
entitled to race the same number of dates as in the preceding year, when it is
in the public interest to do so, or for such other dates, not exceeding
100 days in the aggregate for harness racing and 75 days in the aggregate for
thoroughbred racing, as the Racing Commission shall designate; provided, however
that if another permit holder rejects any of the dates to which they may be
entitled the Racing Commission may allot those dates among other permitholders.
The Racing Commission has discretion to allot harness race permitholders an
additional 200 days and thoroughbred race permitholders an additional 100 days.
17
The failure to comply with the Racing Act and the rules and regulations of
the Racing Commission could result in monetary fines, operations restrictions or
the loss of our license.
Because the joint venture simulcasts to Atlantic City casinos, the joint
venture's simulcasting agreements are required to be filed with and approved by
the Casino Control Commission and the New Jersey Racing Commission. In addition,
the joint venture is required to be approved and licensed by the Casino Control
Commission as a non-gaming casino service industry. Certain of the joint
venture's employees and its directors and significant stockholders are also
required to be approved by the Casino Control Commission. As of the date hereof,
all of the joint venture's employees and directors required to be approved have
been approved by the Casino Control Commission or have filed applications
seeking such approval. There can be no assurance that all parties seeking Casino
Control Commission approval will obtain such approval or the effect on the joint
venture if such approvals are not obtained.
STATE AND FEDERAL SIMULCAST REGULATION
The Federal Interstate Horseracing Act, the Pennsylvania Racing Act, the
West Virginia Racing Act and the New Jersey Simulcasting Racing Act require that
we have a written agreement with each applicable horsemen's organization in
order to simulcast races. We have entered into the horsemen agreements, and in
accordance therewith have agreed on the allocations of our revenues from import
simulcast wagering to the purse funds for the Penn National Race Course, Charles
Town Races, Pocono Downs, Freehold Raceway and Garden State Park. Because we
cannot conduct import simulcast wagering in the absence of the Horsemen
Agreements, the termination or non-renewal of such horsemen agreements could
have a material adverse effect on our business, financial condition and results
of operations.
TAXATION
We believe 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, state, local and, in Canada, provincial income taxes, and such
taxes and fees are subject to increase at any time. We pay substantial taxes and
fees with respect to our operations. From time to time, federal, state, local
and provincial 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 our business, financial condition and results of operations.
IRS REGULATIONS AND CURRENCY TRANSACTION REPORTING
The Internal Revenue Service, or IRS, requires operators of casinos located
in the United States to file information returns for U.S. citizens, including
names and addresses of winners, for all winnings in excess of stipulated
amounts. The IRS also requires operators to withhold taxes on certain winnings
of nonresident aliens. We are unable to predict the extent, if any, to which
such requirements, if extended, might impede or otherwise adversely affect
operations of, and/or income from, such other games.
Regulations adopted by the Financial Crimes Enforcement Network of the
Treasury Department and the gaming regulatory authorities in certain domestic
jurisdictions in which we operate casinos, or in which we have applied for
licensing to operate a casino, require the reporting of currency transactions in
excess of $10,000 occurring within a gaming day, including identification of the
patron by name and social security number. This reporting obligation commenced
in May 1985 and may have resulted in the loss of casino revenues to
jurisdictions outside the United States that are exempt from
18
the ambit of such regulations. The operation of Casino Rama is subject to
similar requirements under Canadian federal law and gaming legislation.
COMPLIANCE WITH OTHER LAWS
Our operations are also subject to a variety of other rules and regulations,
including zoning, environmental, construction and land-use laws and regulations
governing the serving of alcoholic beverages. We derive a significant portion of
our non-racing revenues from the sale of alcoholic beverages to patrons of our
facilities. Any interruption or termination of our existing ability to serve
alcoholic beverages would have a material adverse effect on our business,
financial condition and results of operations.
RISKS RELATED TO OUR BUSINESS
AN INVESTMENT IN SHARES OF OUR COMMON STOCK IS SUBJECT TO A NUMBER OF RISKS.
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, AS WELL AS THE ADDITIONAL
INFORMATION CROSS-REFERENCED TO THE BODY OF THIS DOCUMENT AND THE OTHER MATTERS
DESCRIBED IN THIS DOCUMENT.
WE HAVE LIMITED EXPERIENCE OPERATING CASINOS AND, PRIOR TO AUGUST 2000, HAVE
NOT MANAGED CASINO OPERATIONS SUCH AS THOSE THAT ARE PART OF OUR MISSISSIPPI
PROPERTIES OR THAT WILL BE A PART OF THE CRC PROPERTIES, IF WE COMPLETE THAT
ACQUISITION.
We have limited experience in operating full-scale casino operations like
those associated with our Mississippi properties and that will be a part of the
CRC properties, if we complete that acquisition. Our Charles Town Entertainment
Complex features gaming machines, but does not include the full complement of
casino, entertainment and other amenities available at Casino Magic Bay St.
Louis, Boomtown Biloxi, Casino Rouge or Casino Rama. In addition, the Charles
Town Entertainment Complex faces limited direct competition, unlike the
substantial competition faced by the operations at Casino Magic Bay St. Louis,
Boomtown Biloxi, Casino Rouge and Casino Rama. We cannot be sure that we will be
successful in managing and operating our business in response to the new
challenges of conducting full-scale casino operations in highly competitive
gaming markets. The significant expansion of our business and the operational
and geographic expansion associated with the completed Mississippi acquisition
and the proposed CRC acquisition has and will place demands on our
administrative, operational and financial resources. Such strain, together with
demands related to our contemplated expansion of the Charles Town Entertainment
Complex and Casino Magic Bay St. Louis properties, may have a material adverse
effect on our business, financial condition and results of operations.
WE MAY FACE DISRUPTION IN INTEGRATING OUR OPERATIONS ASSUMING THE CONSUMMATION
OF THE CRC ACQUISITION AND IN MANAGING FACILITIES WE MAY ACQUIRE OR EXPAND.
The integration of the CRC operations assuming the consummation of the
acquisition will require the dedication of management resources that may
temporarily detract attention from our day-to-day business. The process of
integrating this organization may also interrupt the activities of that
business, which could have a material adverse effect on our business, financial
condition and results of operations. We cannot assure you that we will be able
to manage the combined operations effectively or realize any of the anticipated
benefits of the proposed acquisition.
Our ability to achieve our objectives in connection with the proposed CRC
acquisition is highly dependent on, among other things, our ability to maintain
effective senior management teams at Casino Rouge and Casino Rama. We plan to
maintain such management through the retention of certain current executives and
the attraction of new executives. If, for any reason, these executives do not
continue to be active in management after the acquisition or if we fail to
attract new capable
19
executives, our operations assuming the consummation of the CRC acquisition
could be materially adversely affected.
In addition, we may pursue expansion and acquisition opportunities in the
future and would face significant challenges not only in managing and
integrating the combined operations, but also in managing our expansion projects
and any other gaming operations that we might acquire in the future. Management
of such new projects will require that we increase our managerial resources. If
we fail to manage our growth effectively it could materially adversely affect
our operating results.
WE FACE RISKS RELATED TO THE DEVELOPMENT AND EXPANSION OF OUR CURRENT
PROPERTIES.
We will use a portion of our available cash for capital expenditures at the
Charles Town Entertainment Complex and at Casino Magic Bay St. Louis, including
the construction of new hotels at each of these facilities. The construction of
hotels involves substantial risks, including the possibility of construction
cost over-runs and delays due to various factors (including regulatory
approvals, inclement weather, and labor or material shortages), market or site
deterioration after construction has begun, and the emergence of competition
from unanticipated sources. The opening of the new hotels will be contingent
upon, among other things, receipt of all required licenses, permits and
authorizations. The scope of the approvals required for a new hotel is
extensive, including, without limitation, state and local land-use permits,
building and zoning permits and health and safety permits. In addition,
unexpected changes or concessions required by local, regulatory and state
authorities could involve significant additional costs and could delay or
prevent the completion of construction or the opening of a new hotel. We cannot
be sure that we will obtain the necessary permits, licenses and approvals for
the construction and operation of the new hotels, or that we will obtain such
permits, licenses and approvals within the anticipated time frame.
In addition to the new hotels, we are planning enhancements at the Charles
Town Entertainment Complex, including the expansion of the gaming floor and the
construction of a structured parking lot and an entertainment venue; at Casino
Magic Bay St. Louis, we are planning to reconfigure the gaming floor and
construct three new restaurants. These planned enhancements involve similar
risks to hotel construction risks including cost over-runs, delays, market
deterioration and receipt of required licenses, permits or authorizations, among
others.
The opening of the new hotels and the other proposed enhancements also will
require the establishment of new work forces of significant sizes. We cannot be
certain that management will be able to hire and retain a sufficient number of
employees to operate these facilities at their optimum levels. The failure to
employ the proper work force could result in inadequate customer service which
could ultimately harm profitability.
WE FACE SIGNIFICANT COMPETITION.
GAMING OPERATIONS
The gaming industry is highly fragmented and characterized by a high degree
of competition among a large number of participants, many of which have
financial and other resources that are greater than our resources. Competitive
gaming activities include casinos, video lottery terminals and other forms of
legalized gaming in the United States and other jurisdictions.
Legalized gambling is currently permitted in various forms throughout the
United States and in several Canadian provinces. Other jurisdictions may
legalize gaming in the near future through the introduction of proposals to
legalize gaming in their state legislatures. In addition, established gaming
jurisdictions could award additional gaming licenses or permit the expansion of
existing gaming operations. New or expanded operations by other persons can be
expected to increase competition for our gaming operations and could have a
material adverse impact on us.
20
CHARLES TOWN, WEST VIRGINIA. Our gaming machine operations at the Charles
Town Entertainment Complex face competition from other gaming machine venues in
West Virginia and in neighboring states (including Dover Downs, Delaware Park
and Harrington Raceway in Delaware and the casinos in Atlantic City, New
Jersey). These venues also offer significantly higher stakes for their gaming
machines than in West Virginia. Atlantic City, New Jersey does not have a
per-pull limit on its gaming machines, while Delaware has a $25 per-pull limit.
Per-pull limits in West Virginia are only $2 per gaming machine. In addition to
existing competition, both Pennsylvania and Maryland have in the past considered
legislation to expand gaming in their respective states. The failure to attract
or retain gaming machine customers at the Charles Town Entertainment Complex,
whether arising from such competition or from other factors, could have a
material adverse effect on our business, financial condition and results of
operations.
MISSISSIPPI GULF COAST. Dockside gaming has grown rapidly on the
Mississippi Gulf Coast, increasing from no dockside casinos in March 1992 to 12
operating dockside casinos at December 31, 2000. Nine of these facilities are
located in Biloxi, two are located in Gulfport and one is located in Bay St.
Louis. Our Mississippi casino operations have numerous competitors, many of
which have greater name recognition and financial and marketing resources than
we have. Competition in the Mississippi gaming market is significantly more
intense than the competition our gaming operations face in West Virginia or our
pari-mutuel operations face in Pennsylvania and New Jersey. We cannot be sure
that we will succeed in the competitive Mississippi Gulf Coast gaming market.
The failure to do so would have a material adverse effect on our business,
financial condition and results of operations.
RACING AND PARI-MUTUEL OPERATIONS
Our racing and pari-mutuel operations face significant competition for
wagering dollars from other racetracks and OTWs (some of which also offer other
forms of gaming), other gaming venues such as casinos and state-sponsored
lotteries, including the Pennsylvania, New Jersey, Delaware and West Virginia
lotteries. We may also face competition in the future from new OTWs or from new
racetracks. From time to time, states consider legislation to permit other forms
of gaming. If additional gaming opportunities become available in or near our
racing and pari-mutuel operations, such gaming opportunities could have a
material adverse effect on our business, financial condition and results of
operations.
Our OTWs compete with the OTWs of other Pennsylvania racetracks, and new
OTWs may compete with our existing wagering facilities. Our competitors have a
number of OTW facilities that are relatively close in distance to our OTWs.
Although only two competing OTWs remain authorized by law for future opening,
the opening of a new OTW in close proximity to our existing or future OTWs could
have a material adverse effect on our business, financial condition and results
of operations.
WE FACE EXTENSIVE REGULATION FROM GAMING AUTHORITIES.
LICENSING REQUIREMENTS. As owners and operators of gaming and pari-mutuel
betting facilities, we are subject to extensive state and local regulation.
State and local authorities require us and our subsidiaries to demonstrate
suitability to obtain and retain various licenses and require that we have
registrations, permits and approvals to conduct gaming operations. Various
regulatory authorities, including the Pennsylvania State Horse Racing
Commission, the Pennsylvania State Harness Racing Commission, the New Jersey
Racing Commission, the New Jersey Casino Control Commission, the West Virginia
Racing Commission, the West Virginia Lottery Commission and the Mississippi
Gaming Commission may, for any reason set forth in the applicable legislation,
limit, condition, suspend or revoke a license or registration to conduct gaming
operations or prevent us from owning the securities of any of our gaming
subsidiaries. Like all gaming operators in the jurisdictions in which we
operate, we must periodically apply to renew our gaming licenses or
registrations. We cannot assure you that we
21
will be able to obtain such renewals. Regulatory authorities may also levy
substantial fines against or seize the assets of our company, our subsidiaries
or the people involved in violating gaming laws or regulations. Any of these
events could have a material adverse effect on our business, financial condition
and results of operation.
We have demonstrated suitability to obtain and have obtained all
governmental licenses, registrations, permits and approvals necessary for us to
operate our existing gaming facilities. We cannot assure you that we will be
able to retain them or demonstrate suitability to obtain any new licenses,
registrations, permits or approvals. If we expand our gaming operations in West
Virginia, Mississippi, Pennsylvania, New Jersey or to new areas, we will have to
meet suitability requirements and obtain additional licenses, registrations,
permits and approvals from gaming authorities in these jurisdictions. The
approval process can be time-consuming and costly and we cannot be sure that we
will be successful.
Gaming authorities in the United States can generally require that any
beneficial owner of our securities file an application for a finding of
suitability. If a gaming authority requires a record or beneficial owner of our
securities to file a suitability application, the owner must apply for a finding
of suitability within 30 days or at an earlier time prescribed by the gaming
authority. The gaming authority has the power to investigate an owner's
suitability and the owner must pay all costs of the investigation. If the owner
is found unsuitable, then the owner may be required, either by law or the terms
of our securities, to dispose of such securities. In addition, the issuance of
our securities is subject to approval by the West Virginia Racing Commission and
the West Virginia Lottery Commission.
POTENTIAL CHANGES IN REGULATORY ENVIRONMENT. From time to time, legislators
and special interest groups have proposed legislation that would expand,
restrict or prevent gaming operations in the jurisdictions in which we operate.
Any expansion of gaming or restriction on or prohibition of our gaming
operations could have a material adverse effect on our operating results.
TAXATION. We believe 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, state, local and provincial income taxes, and such
taxes and fees are subject to increase at any time. We pay substantial taxes and
fees with respect to our operations. From time to time, federal, state and local
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 our business, financial condition and results of operations.
COMPLIANCE WITH OTHER LAWS. We are also subject to a variety of other rules
and regulations, including zoning, environmental, construction and land-use laws
and regulations governing the serving of alcoholic beverages.
WE DEPEND ON OUR KEY PERSONNEL.
We are highly dependent on the services of Peter M. Carlino, our Chairman
and Chief Executive Officer, and other officers and key employees. We have
entered into employment agreements with Mr. Carlino and certain other officers.
However, the loss of the services of any of these individuals could have a
material adverse effect on our business, financial condition and results of
operations.
INCLEMENT WEATHER AND OTHER CONDITIONS COULD SERIOUSLY DISRUPT OUR OPERATIONS.
The operations of our facilities are subject to disruptions or reduced
patronage as a result of severe weather conditions. Our dockside facilities in
Mississippi are subject to risks in addition to those associated with land-based
casinos, including loss of service due to casualty, mechanical failure,
22
extended or extraordinary maintenance, flood, hurricane or other severe weather
conditions. Reduced patronage and the loss of a dockside casino from service for
any period of time due to severe weather could adversely affect our business,
financial condition and results of operations.
WE DEPEND ON AGREEMENTS WITH OUR HORSEMEN AND PARI-MUTUEL CLERKS TO OPERATE
OUR BUSINESS.
The Federal Horseracing Act, the West Virginia Racing Act and the
Pennsylvania Racing Act require that, in order to simulcast races, we have
written agreements with the horse owners and trainers at our West Virginia and
Pennsylvania race tracks. In addition, in order to operate gaming machines in
West Virginia, we are required to enter into written agreements regarding the
proceeds of the gaming machines with a representative of a majority of the horse
owners and trainers, a representative of a majority of the pari-mutuel clerks
and a representative of a majority of the horse breeders. On March 23, 1999, we
signed a new horsemen agreement with the Pennsylvania Thoroughbred Horsemen at
Penn National Race Course with an initial term that expires on January 1, 2004.
Our agreement with the Pennsylvania Harness Horsemen was entered into in
November 1999 and expires on January 16, 2003. At the Charles Town Entertainment
Complex, we have an agreement with the Charles Town Horsemen that expires on
December 31, 2002. Our agreement with the pari-mutuel clerks at Charles Town
expires on December 31, 2004.
If we fail to maintain operative agreements with the horsemen at a track, we
will not be permitted to conduct live racing and export and import simulcasting
at that track, and, in West Virginia, we will not be permitted to operate our
gaming machines. In addition, our simulcasting agreements are subject to the
horsemen's approval. In February 1999, the Pennsylvania Thoroughbred Horsemen
stopped racing at Penn National Race Course and withdrew their permission for us
to import simulcast races from other racetracks, resulting in the closure of
Penn National Race Course and its six OTWs. As a result of this action, our
operations at Penn National Race Course and its OTWs were suspended for more
than five weeks, we lost 46 race days at Penn National Race Course, and it took
nearly six months from the beginning of the action before we returned to
pre-action levels of racing and operations. If we fail to renew or modify
existing agreements on satisfactory terms, this failure could have a material
adverse effect on our business, financial condition and results of operations.
In addition, pursuant to the New Jersey Simulcasting Racing Act, our New
Jersey joint venture, Pennwood Racing, Inc., must maintain written agreements
with the horsemen at Freehold Raceway and Garden State Park in order to
simulcast races to the Atlantic City casinos. Horsemen agreements are currently
in effect at both facilities.
ITEM 2. PROPERTIES
The following describes our principal real estate properties as of
December 31, 2000:
CHARLES TOWN ENTERTAINMENT COMPLEX. We own a 250-acre parcel in Charles
Town, West Virginia, a portion of which contains the Charles Town Entertainment
Complex. The property also includes a 3/4-mile thoroughbred racetrack and an
enclosed grandstand/clubhouse. We have a right of first refusal on an additional
250 acres that are adjacent to the facility.
CASINO MAGIC BAY ST. LOUIS. We own approximately 591 acres in the city of
Bay St. Louis, Mississippi, including the 17-acre marina where the gaming barge
is moored. The property includes an 18-hole golf course, a hotel, and other
land-based facilities, all of which we own.
BOOMTOWN BILOXI. We lease substantially all of the 19 acres on which
Boomtown Biloxi is located under a 99-year lease that began in 1994. The lease
stipulates base rent based on adjusted gaming win, as provided in the lease,
with a minimum of $500,000 and a maximum of $2 million annually, plus 5 percent
of adjusted gaming win in excess of $25 million but less than $50 million. To
the extent adjusted gaming win exceeds $50 million dollars, the percentage rent
increases to 11% of all gaming
23
revenue over $50 million. For the year ended December 31, 2000, rental payments
totaled $3.8 million. In addition, we lease property for parking under several
lease agreements ranging from 10 to 25 years. We also lease approximately 5.1
acres of submerged tidelands at the casino site from the State of Mississippi
under a ten-year lease with a five-year option to renew. We own the barge on
which the casino is located and all of the land-based facilities.
PENN NATIONAL RACE COURSE. We own approximately 225 acres in Grantville,
Pennsylvania where the Penn National Race Course is located. The property
includes a one mile all-weather thoroughbred racetrack and a 7/8-mile turf
track. The property also includes approximately 400 acres surrounding the Penn
National Race Course that are available for future expansion or development.
POCONO DOWNS. We own approximately 400 acres in Plains Township, outside of
Wilkes-Barre, Pennsylvania where Pocono Downs is located. The property includes
a 5/8-mile all weather, lighted harness track, a grandstand and a clubhouse. A
two-story 14,000 square foot building that houses the Pocono Downs office is
also located on the property.
FREEHOLD RACEWAY. Through our joint venture, we own a 51-acre site in
Western Monmouth County, New Jersey where Freehold Raceway in located. The
property features a half-mile oval harness track and a 150,000 square foot
grandstand.
GARDEN STATE PARK. Through our joint venture, we lease approximately 220
acres of land in Cherry Hill, New Jersey. The property includes a one-mile
racetrack and a 50,000 square foot grandstand. On November 29, 2000, the owner
of Garden State Park, International Thoroughbred Breeders, Inc., announced that
it had completed the sale of the Garden State Park property, excluding a 10-acre
parcel owned by our joint venture, to Turnberry/Cherry Hill, LLC. As a result of
the sale, our lease at Garden State Park will be terminated on May 31, 2001. We
do not believe that the termination of the Garden State Park lease and the
cessation of racing at that facility will have a material adverse effect on our
business, financial conditions or results of operations.
OTWS. We own four of our existing OTW facilities and lease the remaining
seven facilities.
OTHER. We lease 6,674 square feet of office space in an office building in
Wyomissing, Pennsylvania for our executive offices. The office building is owned
by an affiliate of Peter M. Carlino, our Chairman and Chief Executive Officer.
We also lease an aircraft from a company owned by one of our directors. We
believe that the lease terms for both the executive office and aircraft are not
less favorable than such lease terms that could have been obtained from
unaffiliated third parties.
ITEM 3. LEGAL PROCEEDINGS
We are from time to time involved in litigation that we believe is ordinary
and customary in our industry. We do not believe that any of our pending or
threatened litigation will result in an outcome that will materially affect our
business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our 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 our common stock as reported on The Nasdaq
National Market.
HIGH LOW
---- --------
1999
First Quarter............................................ $10.000 $5.813
Second Quarter........................................... 9.938 7.250
Third Quarter............................................ 10.375 8.250
Fourth Quarter........................................... 9.563 7.500
2000
First Quarter............................................ $11.250 $6.813
Second Quarter........................................... 15.750 10.375
Third Quarter............................................ 15.375 12.500
Fourth Quarter........................................... 18.375 8.000
The closing sale price per share of common stock on The Nasdaq National
Market on March 19, 2001, was $12.563. As of March 19, 2001, there were 623
holders of record of common stock.
DIVIDEND POLICY
Since our initial public offering of common stock in May 1994, we have not
paid any cash dividends on our common stock. We intend to retain all of our
earnings to finance the development of our business, and thus, do not anticipate
paying cash dividends on our common stock for the foreseeable future. Payment of
any cash dividends in the future will be at the discretion of our Board of
Directors and will depend upon, among other things, our future earnings,
operations and capital requirements, our general financial condition and general
business conditions. Moreover, our existing credit facility prohibits us from
authorizing, declaring or paying any dividends until our commitments under the
credit facility have been terminated and all amounts outstanding thereunder have
been repaid. In addition, future financing arrangements may prohibit the payment
of dividends under certain conditions.
25
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial and operating data of Penn
National for the years ended December 31, 1996, 1997, 1998, 1999 and 2000,
except for Other data, are derived from financial statements that have been
audited by BDO Seidman, LLP, independent certified public accountants. The
selected consolidated financial and operating data should be read in conjunction
with the consolidated financial statements of Penn National and Notes thereto,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the other financial information included herein.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1997(1) 1998 1999 2000(2)
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenue
Gaming.................................................... $ -- $ 5,730 $37,665 $55,415 $159,589
Racing.................................................... 55,066 98,402 106,850 102,827 113,230
Other..................................................... 7,768 7,404 9,550 13,216 21,304
------- ------- ------- ------- --------
Total revenues.............................................. 62,834 111,536 154,065 171,458 294,123
Operating expenses:
Gaming.................................................... -- 4,134 26,544 34,951 94,087
Racing.................................................... 36,114 65,810 70,303 68,808 77,063
Selling, general and administrative....................... 13,881 26,234 29,680 38,709 58,310
Other..................................................... 3,379 5,623 8,080 11,173 18,776
------- ------- ------- ------- --------
Total operating expenses.................................... 53,374 101,801 134,607 153,641 248,236
Income from operations...................................... 9,460 9,735 19,458 17,817 45,887
Other income (expenses)..................................... (156) (3,658) (7,436) (7,307) (17,175)
------- ------- ------- ------- --------
Income before income taxes and extraordinary item........... 9,304 6,077 12,022 10,510 28,712
Taxes on income............................................. 3,794 2,308 4,519 3,777 10,137
------- ------- ------- ------- --------
Income before extraordinary item............................ 5,510 3,769 7,503 6,733 18,575
Extraordinary item--loss on early extinguishment of debt,
net of income taxes of $1,001 in 1997 and $4,615 in
2000...................................................... -- 1,482 -- -- 6,583
------- ------- ------- ------- --------
Net income.................................................. $ 5,510 $ 2,287 $ 7,503 $ 6,733 $ 11,992
======= ======= ======= ======= ========
PER SHARE DATA:
Basic income per share before extraordinary item............ $ 0.41 $ 0.25 $ 0.50 $ 0.45 $ 1.24
Basic net income per share.................................. $ 0.41 $ 0.15 $ 0.50 $ 0.45 $ 0.80
Diluted income per share before extraordinary item.......... $ 0.40 $ 0.24 $ 0.49 $ 0.44 $ 1.20
Diluted net income per share................................ $ 0.40 $ 0.15 $ 0.49 $ 0.44 $ 0.78
Weighted shares outstanding--basic.......................... 13,302 14,925 15,015 14,837 14,968
Weighted shares outstanding--diluted........................ 13,822 15,458 15,374 15,196 15,443
OTHER DATA:
Depreciation and amortization............................... $ 1,433 $ 4,040 $ 5,748 $ 8,679 $ 13,594
Interest expense............................................ 506 4,591 8,374 8,667 19,089
EBITDA(3)................................................... 10,893 13,775 25,206 26,496 59,481
Capital expenditures........................................ 6,995 29,196 22,333 13,243 27,295
AS OF DECEMBER 31,
----------------------------------------------------
1996 1997(1) 1998 1999 2000(2)
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 5,634 $21,854 $ 6,826 $ 9,434 $ 23,287
Total assets................................................ 96,723 158,878 160,798 189,712 439,900
Total debt.................................................. 47,517 80,336 78,256 91,213 309,299
Shareholders' equity........................................ 27,881 53,856 59,036 66,272 79,221
- ---------------
(1) Reflects our November 27, 1996 acquisition of Pocono Downs and our
January 15, 1997 acquisition of a joint venture interest in the Charles Town
Entertainment Complex.
(2) Reflects the August 8, 2000 acquisition of the Casino Magic Bay St. Louis
casino and the Boomtown Biloxi casino.
(3) EBITDA consists of income from operations plus depreciation and
amortization. EBITDA is presented because we believe it is frequently used
by securities analysts, investors and other interested parties in the
evaluation of companies in our industry. However, other companies in our
industry may calculate EBITDA differently than we do. EBITDA is not a
measurement of financial performance under generally accepted accounting
principles and should not be considered as an alternative to cash flow from
operating activities or as a measure of liquidity or an alternative to net
income as an indicator of operating performance or any other measure of
performance derived in accordance with generally accepted accounting
principles.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We derive substantially all of our revenues from gaming and pari-mutuel
operations. Since September 1997, revenues from our gaming machines at the
Charles Town Entertainment Complex have accounted for an increasingly large
share of our total revenues. Our pari-mutuel revenues have been derived from
wagering on our live races, wagering on import simulcasts at our racetracks and
OTWs and through telephone account wagering, and fees from wagering on export
simulcasting our races at out-of-state locations. Our other revenues have been
derived from admissions, program sales, food and beverage sales, concessions and
certain other ancillary activities.
Our acquisition of the Mississippi properties and the consummation of the
CRC acquisition will impact our revenue mix between gaming and pari-mutuel
revenues on a prospective basis. We expect that in future periods gaming revenue
as a percentage of our total revenues will continue to increase as we continue
to focus on our gaming operations. For the year ended December 31, 1999 and
2000, gaming revenue represented approximately 32% and 54% of our total revenue,
respectively.
MISSISSIPPI ACQUISITION
On August 8, 2000, we completed our acquisition of the Casino Magic Bay St.
Louis casino and the Boomtown Biloxi casino from Pinnacle Entertainment for
approximately $201.3 million in cash, which includes acquisition costs totaling
$6.3 million. The purchase price was funded with a portion of the proceeds from
our $350 million senior secured credit facility. As a result of the refinancing
and repayment of existing debt, we recorded an $11.2 million extraordinary
charge, which was included in our results of operations for the year ended
December 31, 2000. The results of operations for these properties from the
period August 8, 2000 to December 31, 2000 are included in the results of
operations discussed below.
THE PENDING CRC ACQUISITION
On July 31, 2000, we entered into an agreement to acquire by merger all of
the gaming assets of CRC Holdings, Inc. for approximately $181.3 million,
including amounts required to refinance certain existing indebtedness and to
acquire the minority interest in Louisiana Casino Cruises, Inc., or LCCI, CRC's
majority owned subsidiary. The closings of the agreements with the LCCI minority
owners and CRC are conditioned upon one another. We expect to close the CRC
acquisition in the first half of 2001 and in no event later than October 31,
2001. We expect to incur approximately $15.7 million in one-time acquisition and
financing related costs related to the closing of the CRC acquisition.
RECENT DEVELOPMENTS
On February 20, 2001, we commenced a cash tender offer to purchase all of
the LCCI 11% Senior Secured Notes and a related consent solicitation. On
March 6, 2001, we announced that all of the holders of the LCCI Notes had
tendered notes and delivered consents. The consummation of the tender offer is
conditioned upon the closing of the pending CRC acquisition. The tender offer is
currently set to expire on March 29, 2001, unless we further extend such
expiration to coincide with the anticipated closing of the pending CRC
acquisition.
On March 12, 2001, we completed the sale of $200 million in aggregate
principal amount of 11 1/8% Senior Subordinated Notes due March 1, 2008. The net
proceeds of these notes will be used, in part, to finance the CRC acquisition
and to complete the tender offer for the LCCI notes; however, if we do not
consummate the CRC acquisition by October 31, 2001, we will use the entire net
proceeds of these notes to repay outstanding term loan indebtedness under our
senior credit facility.
27
RESULTS OF OPERATIONS
The results of operations by property level for the years ended
December 31, 1998, 1999 and 2000 are summarized below:
REVENUES(1) EBITDA(1)
------------------------------ ------------------------------
1998 1999 2000 1998 1999 2000
-------- -------- -------- -------- -------- --------
Charles Town Entertainment Complex........ $ 56,883 $ 80,015 $135,290 $ 7,103 $16,023 $35,469
Casino Magic Bay St. Louis(2)............. -- -- 31,571 -- -- 6,092
Boomtown Biloxi(2)........................ -- -- 24,634 -- -- 3,460
Penn National Race Course and its OTWs.... 63,620 55,609 64,364 13,039 9,065 10,380
Pocono Downs and its OTWs................. 35,576 36,324 37,573 8,719 8,955 7,792
Earnings from Pennwood Racing, Inc.
(New Jersey joint venture).............. -- 1,098 2,832 -- 1,098 2,832
Corporate eliminations(3)................. (2,014) (1,588) (1,630) -- -- --
Corporate overhead........................ -- -- -- (3,655) (5,361) (6,033)
-------- -------- -------- ------- ------- -------
TOTAL..................................... $154,065 $171,458 $294,634 $25,206 $29,780 $59,992
-------- -------- -------- ------- ------- -------
- ------------
(1) Reflects property level revenues and EBITDA and excludes non-recurring
charges and expenses.
(2) Reflects results since the August 8, 2000 acquisition from Pinnacle
Entertainment.
(3) Primarily reflects intracompany transactions related to import/export
simulcasting.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenues for the year ended December 31, 2000 increased 71.8% to
$294.6 million from $171.5 million for the year ended December 31, 1999. EBITDA
rose 101.3% to $60.0 million from $29.8 million for the year ended December 31,
1999. Income before extraordinary item for the year ended December 31, 2000 was
$18.6 million compared to net income of $6.7 million for the year ended
December 31, 1999. Reflecting an extraordinary charge net of taxes of
$6.6 million incurred in the third quarter for the early extinguishment of debt,
we recorded net income of $12.0 million for the year ended December 31, 2000.
CHARLES TOWN ENTERTAINMENT COMPLEX
Revenues increased at Charles Town by approximately $55.3 million, or 69.1%,
to $135.3 million in 2000 from $80.0 million in 1999. Gaming revenue increased
by $53.9 million, or 97.3%, to $109.3 million in 2000 from $55.4 million in 1999
due to the addition of 136 new video lottery machines, 565 new reel spinning,
coin-out gaming machines and 452 gaming machines in the OK Corral slots center,
which opened on November 25, 2000, since January 1999. The average number of
machines in play increased to 1,494 in 2000 from 923 in 1999 and the average win
per machine increased to $199 in 2000 from $163 in 1999. Racing revenue
increased by $1.0 million, or 5.2% to $20.3 million in 2000 from $19.3 million
in 1999. This increase is due primarily to a change in the schedule from a
Wednesday afternoon race program to a Thursday evening race program in 2000 to
accommodate export simulcasting. Charles Town began exporting its live race
program to tracks across the country on June 5, 1999 and generated export
simulcasting revenues of $2.2 million in 2000 compared to $1.0 million in 1999.
Operating expenses increased by $30.1 million, or 43.2%, to $99.8 million in
2000 from $69.7 million in 1999. The increase was due to an increase in direct
costs associated with additional wagering on horse racing and gaming machine
play, the addition of gaming machines and floor space (new temporary facility
for gaming machines and the opening of the OK Corral slot center), export
simulcast expenses and expanded concession and dining capability and
28
capacity. EBITDA attributable to Charles Town increased by $19.5 million, or
121.9%, to $35.5 million in 2000 from $16.0 million in 1999.
MISSISSIPPI CASINOS
The Casino Magic Bay St Louis and Boomtown Biloxi acquisitions were
completed on August 8, 2000. For the period August 8 to December 31, 2000, these
two casinos had combined revenues of $56.2 million, and EBITDA of $9.6 million.
PENN NATIONAL RACE COURSE AND ITS OTW FACILITIES
Penn National Race Course had an increase in revenue of approximately
$8.8 million, or 15.8%, to $64.4 million in 2000 from $55.6 million in 1999.
Pari-mutuel wagering was $386.6 million in 2000 compared to $333.8 million in
1999. The increase in wagering and revenues is attributed to Penn National Race
Course running 201 live race days in 2000 compared to 153 live races days in
1999. Penn National only ran 153 live race days in 1999 due to the Horsemen
action in the first quarter that resulted in the closure of all of the
facilities from February 16 to March 24, 1999. Operating expenses increased by
approximately $6.2 million, or 13.0%, to $54.0 million in 2000 from
$47.8 million in 1999. Adjusting for the Horsemen action in 1999, EBITDA
attributable to these properties increased by $1.3 million, or 14.3%, to
$10.4 million in 2000 from $9.1 million in 1999.
POCONO DOWNS AND ITS OTW FACILITIES
Revenues at Pocono Downs increased by $1.3 million, or 3.6%, to
$37.6 million in 2000 from $36.3 million in 1999. Pari-mutuel wagering was
$161.6 million in 2000 compared to $160.2 million in 1999. Expenses increased by
approximately $2.4 million, or 8.8%, to $29.8 million in 2000 from
$27.4 million in 1999. The opening of the new OTW facility in East Stroudsburg
and the increase in purse expense per the terms of the new Horsemen's contract
executed in January 2000 accounted for most of the increase in expenses. EBITDA
decreased $1.2 million, or 13.3%, to $7.8 million in 2000 from $9.0 million in
1999.
NEW JERSEY JOINT VENTURE
We completed our investment in Pennwood Racing, Inc., the New Jersey joint
venture, on July 29, 1999. Pennwood Racing operates Freehold Raceway and Garden
State Park. Revenues of the joint venture increased to $61.5 million in 2000
from $28.0 million in 1999 as a result of the operating results in 2000
reflecting a full twelve-month period. Net income was $5.6 million in 2000,
before non-recurring charges of $1.0 million relating to the termination of the
Garden State lease, compared to $2.2 million in 1999. Our 50% share of net
income was $2.8 million in 2000 compared to $1.1 million in 1999 and was
recorded as other revenues on the income statement.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues in 1999 increased by approximately $17.4 million, or 11.3%, to
$171.5 million from $154.1 million in 1998. Operating expenses in 1999 increased
by approximately $19.0 million, or 14.1%, to $153.6 million from $134.6 million
in 1998. Included in operating expenses were nonrecurring expenses in 1999 for
the Horsemen's strike ($1.3 million) at Penn National Race Course, Tennessee
development and licensing expenses ($0.5 million) and litigation expenses
($1.5 million) to settle a lawsuit with a totalisator company. Income from
operations decreased by $1.7 million, or 8.7%, to $17.8 million in 1999 from
$19.5 million in 1998 due to the Horsemen's strike and nonrecurring expenses.
Net interest expense for the years ended December 31, 1999 and 1998 consisted of
approximately $7.3 million and $7.4 million, respectively, of net interest
primarily due to the 10.625% senior notes and our existing credit facility.
Taxes on income decreased by $0.7 million to $3.8 million
29
in 1999 from $4.5 million in 1998 and net income decreased by $0.8 million, or
10.7%, to $6.7 million in 1999 from $7.5 million in 1998 due substantially to
the factors described above.
CHARLES TOWN ENTERTAINMENT COMPLEX
Revenues increased at Charles Town by approximately $23.1 million, or 40.6%,
to $80.0 million in 1999 from $56.9 million in 1998. Gaming revenue at Charles
Town increased by $17.7 million, or 46.9%, to $55.4 million in 1999 from
$37.7 million in 1998 due to the addition of 136 new video lottery machines and
565 new reel spinning, coin-out gaming machines during the year. At year end
there were 1,500 gaming machines in operation compared to 799 machines at year
end in 1998. The average number of machines increased to 923 in 1999 from 704 in
1998 and the average win per machine increased to $163 in 1999 from $145 in
1998. Racing revenue increased by $3.8 million, or 24.5%, to $19.3 million in
1999 from $15.5 million in 1998. The live meet consisted of 213 race days in
1999 compared to 206 race days in 1998 and a change in the schedule from a
Wednesday afternoon race program to a Thursday evening race program to
accommodate export simulcasting. Charles Town began exporting its live race
program to tracks across the country on June 5, 1999 and generated export
simulcasting revenues of $0.9 million for the year. Concession revenues
increased by approximately $1.5 million, or 39.5%, to $5.3 million in 1999 from
$3.8 million in 1998 due to increased attendance for gaming and racing and the
expansion of the concession areas, dining room and buffet area. Operating
expenses increased by $14.2 million, or 28.5%, to $64.0 million in 1999 from
$49.8 million in 1998 due to the increase in direct costs associated with
additional wagering on horse racing and gaming machine play, the addition of
gaming machines and floor space (new temporary gaming facility), export
simulcast expenses and expanded concession and dining capability and capacity.
In addition to the operating expenses, Charles Town had a non-recurring expense
of $1.5 million in litigation settlement expenses for the settlement of a
lawsuit involving a former totalisator company vendor.
PENN NATIONAL RACE COURSE AND ITS OTW FACILITIES
Penn National Race Course had a decrease in revenue of approximately
$8.0 million, or 12.6%, to $55.6 million in 1999 from $63.6 million in 1998. The
decrease was primarily due to the expiration of the Horsemen's Agreement that
resulted in the closure of the facilities from February 16 to March 24, 1999.
Penn National re-opened for simulcast wagering on March 25, live racing on a
limited basis on April 23 and resumed a full live racing schedule the week of
June 26, 1999. For the year 1999, Penn National ran 153 live race days compared
to 206 live race days in 1998 and ran nine-race cards instead of ten-race cards
following the April reopening. Of the scheduled 210 live races for 1999, 46 race
days were lost due to the strike and 11 days were cancelled due to weather
compared to four days cancelled due to weather in 1998. Expenses decreased by
approximately $2.7 million, or 5.2%, to $49.6 million in 1999 from
$52.3 million in 1998. Included in the 1999 expenses is $1.3 million for the
Horsemen's strike. The results of operations also includes the operation of the
Johnstown OTW facility for 12 months in 1999 compared to three months in 1998.
POCONO DOWNS AND ITS OTW FACILITIES
Pocono Downs live race meet, which runs from April to November, consisted of
130 race days in 1999 compared to 135 races days in 1998. Revenues at Pocono
Downs increased by $0.7 million, or 2.0%, to $36.3 million in 1999 from
$35.6 million in 1998. The increase resulted from a full year of operations at
the Carbondale ($1.4 million) and Hazleton ($0.8 million) OTWs, which was
partially offset by a decrease in revenue at the Pocono Downs Racetrack
($1.0 million). The decrease was due to the close proximity of the two new OTWs
to the track. Revenue also decreased at the racetrack due to a 7.1% decrease in
export simulcast wagering on Pocono live races due to the temporary closing of
the barn area during the winter to accommodate improvements we made to the track
that resulted in
30
starting the racing season with a shortage of horses. Expenses increased by
approximately $0.7 million, or 2.4%, to $29.5 million in 1999 from
$28.8 million in 1998.
NEW JERSEY JOINT VENTURE
On July 29, 1999, after receiving the necessary approvals from the New
Jersey Racing Commission and the necessary consents from the holders of our 1997
senior notes, we completed our investment in Pennwood Racing, Inc., our New
Jersey joint venture. Pennwood operates Freehold Raceway and Garden State Park.
Summarized results of operations of the unconsolidated joint venture (commencing
on July 30, 1999) for the period ended December 31, 1999 include $28.0 million
in revenue, $23.0 million in operating expenses, $5.0 million in EBITDA and net
income of $2.2 million. Our 50% share of the net income, or $1.1 million, is
recorded as other revenues on the income statement.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary sources of liquidity and capital resources have
been cash flow from operations, borrowings from banks and proceeds from the
issuance of debt and equity securities.
Net cash provided by operating activities was $42.0 million for the year
ended December 31, 2000. This consisted of net income ($12.0 million), non-cash
items ($24.5 million) and increases in balance sheet accounts ($5.5 million)
related primarily to the Mississippi acquisitions.
Cash flows used in investing activities totaled $230.3 million for the year
ended December 31, 2000. The acquisitions of the Mississippi properties
($197.2 million) and the remaining 11% minority interest in Charles Town
($5.8 million) totaled $203.0 million. Expenditures for property, plant and
equipment totaled $27.3 million and included the construction of the East
Stroudsburg OTW facility ($2.1 million), the OK Corral slots center at Charles
Town ($8.8 million), new gaming machines and a player tracking system at Charles
Town ($7.6 million), office expansion at Charles Town ($1.2 million), land and
building acquisitions at Charles Town ($1.0 million), new hotel planning and
design at Casino Magic ($1.3 million), other projects ($0.3 million) and
maintenance capital expenditures ($5.0 million).
Cash flows from financing activities provided net cash of $202.1 million in
2000. This cash flow consisted of proceeds from the exercise of options to
purchase our common stock of $1.0 million and borrowings under our new credit
facility of $323.4 million. The proceeds from our new credit facility were used
to repay certain existing long-term debt ($105.2 million), pay the senior note
tender fees ($6.7 million) and financing costs associated with the new credit
facility ($10.4 million), and to consummate the acquisition of our Mississippi
properties.
CAPITAL EXPENDITURES
The following table summarizes our planned capital expenditures, other than
maintenance capital expenditures, by property level for fiscal years 2001 and
2002:
YEAR ENDED
DECEMBER 31,
-------------------
PROPERTY 2001 2002
- -------- -------- --------
(IN THOUSANDS)
Charles Town Entertainment Complex.......................... $ 9,200 $34,000
Casino Magic Bay St. Louis.................................. 18,500 16,500
Boomtown Biloxi............................................. 2,000 --
Casino Rouge................................................ 2,000 5,000
Pennsylvania Racetracks and OTW's........................... 800 --
------- -------
Totals.................................................... $32,500 $55,500
------- -------
31
Beginning in late 2000 and continuing through the end of 2002, we expect to
expend significant amounts on capital expenditures at the Charles Town
Entertainment Complex and Casino Magic Bay St. Louis. At Charles Town, we expect
to spend approximately $43.2 million on capital expenditures through 2002.
Specifically, we expect to construct a structured parking facility, at an
estimated cost of $9.0 million, and a 300-room hotel with meeting and conference
facilities, at an estimated cost of $25.0 million, and expand the gaming and
entertainment facility at Charles Town, at an estimated cost of $9.2 million.
At Casino Magic Bay St. Louis, our capital expenditures in 2001 and 2002 are
anticipated to be approximately $35.0 million. We expect to construct a 300-room
hotel with meeting and conference facilities, at an estimated cost of
$30.0 million and three new restaurant venues, renovations to the existing
buffet restaurant, and certain amenities to the gaming floor, at an estimated
cost of $5.0 million.
At the Boomtown Biloxi property, we do not expect to incur significant
capital expenditures. However, we are presently exploring a buy-out of the
existing ground lease at the Boomtown Biloxi property; if we are successful, we
would consider additional expansion opportunities, which could include
structured parking at the facility and a hotel. At Casino Rouge, we anticipate
spending approximately $6.5 million to construct an entertainment facility at
the property. At our Pennsylvania racetracks and OTWs, we do not expect to incur
significant capital expenditures.
CREDIT FACILITY
On August 8, 2000, we entered into a $350 million senior secured credit
facility with a syndicate of lenders led by Lehman Brothers Inc. and CIBC World
Markets Corp. that replaced our then-existing credit facilities. The credit
facility is comprised of a $75 million revolving credit facility maturing on
August 8, 2005, a $75 million Tranche A term loan maturing on August 8, 2005 and
a $200 million Tranche B term loan maturing on August 8, 2006. Up to
$10 million of the revolving credit facility may be used for the issuance of
standby letters of credit, of which $2.0 million was outstanding as of
September 30, 2000. In addition, up to $10 million of the revolving credit
facility may be used for short-term credit to be provided to us on a same-day
basis, which must be repaid within five days.
At our option, the revolving credit facility and the Tranche A term loan may
bear interest at (1) the highest of 1/2 of 1% in excess of the federal funds
effective rate or the rate that the bank group announces from time to time as
its prime lending rate plus an applicable margin of up to 2.25%, or (2) a rate
tied to a eurodollar rate plus an applicable margin up to 3.25%, in either case
with the applicable rate based on our total leverage. At our option, the Tranche
B term loan may bear interest at (1) the highest of 1/2 of 1% in excess of the
federal funds effective rate or the rate that the bank group announces from time
to time as its prime lending rate plus an applicable margin of up to 3.25%, or
(2) a rate tied to a eurodollar rate plus an applicable margin up to 4.00%, in
either case with the applicable rate based on our total leverage. The eurodollar
rate is defined as the rate that appears on page 3750 of the Dow Jones Telerate
Screen as of 11:00 a.m. London time two days before the applicable funding date
(adjusted for statutory reserve requirements for eurocurrency liabilities) at
which eurodollar deposits for one, two, three or six months, as selected by us,
are offered in the interbank eurodollar market. At December 31, 2000, our
applicable Tranche A and Tranche B loan rates were 9.89% and 10.64%,
respectively. In addition, as of December 22, 2000, we have entered into a
$100.0 million interest rate swap contract obligating us to pay a fixed rate of
5.825% for three years against the 90-day eurodollar rate.
As of December 31, 2000, $71.3 million was outstanding on the Tranche A term
loan, $199.0 million was outstanding on the Tranche B term loan and
$39.0 million was outstanding under the revolving credit portion of the
facility. Proceeds from the credit facility to date have been used to
32
finance the acquisition of the Mississippi properties, to replace our existing
term loan and revolving credit facilities, to complete a tender offer for our
1997 senior notes and for working capital purposes.
SENIOR SUBORDINATED NOTES
On March 12, 2001, we completed the sale of $200 million in aggregate
principal amount of 11 1/8% Senior Subordinated Notes due March 1, 2008. The
proceeds of the notes will be used, in part, to finance the consummation
(subject to certain conditions) of our pending CRC acquisition, including the
completion of our tender offer for the LCCI notes. If we do not consummate the
CRC acquisition by October 31, 2001, we will use the entire proceeds of the
offering to repay outstanding term loan indebtedness under our senior credit
facility. Pending the anticipated closing of the CRC acquisition, the net
proceeds from our senior subordinated note offering are being invested in
interest bearing cash equivalents. Accordingly, until such time as the proceeds
are used to consummate the CRC acquisition or repay amounts outstanding under
our senior credit facility, we will incur the net interest cost of the senior
subordinated notes without the benefit of either the cash flow we expect to
derive from the CRC operations or the reduction in the outstanding amounts under
the senior credit facility. The after-tax net interest expense on the senior
subordinated notes is expected to impact our operating results by approximately
by $23,000 a day, beginning March 12, 2001 and until the consummation of CRC or
the repayment of indebtedness under the credit facility.
The senior subordinated notes rank equally with our other future senior
indebtedness and junior to our senior debt, including debt under our senior
secured credit facility. The senior subordinated notes are guaranteed by all of
our current and future wholly owned domestic subsidiaries. The senior
subordinated notes will not be registered under the Securities Act of 1933 and
may not be offered or sold in the United States absent registration or an
applicable exemption from the registration requirements of the Securities Act of
1933. It is anticipated that we will file a registration statement under the
Securities Act of 1933 to effect an exchange offer of registered senior
subordinated notes.
CONTINGENT OBLIGATIONS
In connection with our 50% ownership interest in Pennwood Racing, we have
agreed to guarantee up to 50% of certain obligations of the New Jersey joint
venture. These obligations include, but are not limited to, rent, real estate
taxes, insurance and utilities under a seven year lease at Garden State Park
expiring January 2006, subject to the termination of the lease on May 31, 2001;
a $10 million contingent purchase price due to International Thoroughbred
Breeders, former owner of certain of the joint venture's assets, if the joint
venture receives various approvals for off-track wagering or phone betting in
New Jersey; and the obligations of the joint venture under its $23 million
credit facility with Commerce Bank, N.A.
OUTLOOK
Based on our current level of operations, and anticipated revenue growth, we
believe that cash generated from operations and amounts available under our
credit facility will be adequate to meet our anticipated debt service
requirements, capital expenditures and working capital needs for the foreseeable
future. We cannot assure you, however, that our business will generate
sufficient cash flow from operations, that our anticipated revenue growth will
be realized, or that future borrowings will be available under our credit
facility or otherwise will be available to enable us to service our
indebtedness, including the credit facility and the notes, to retire or redeem
the notes when required or to make anticipated capital expenditures. In
addition, if we consummate significant acquisitions in the future, our cash
requirements may increase significantly. We may need to refinance all or a
portion of our debt on or before maturity. Our future operating performance and
our ability to service or refinance our debt will be subject to future economic
conditions and to financial, business and other factors, many of which are
beyond our control.
33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On December 20, 2000, we entered into an interest rate swap agreement with a
financial institution in the notional amount of $100 million. The interest rate
swap agreement hedges our exposure on our outstanding floating rate obligations,
which were $309,250,000 at December 31, 2000. The purpose of the interest rate
swap is to convert a portion of our floating rate interest obligations to
obligations having a fixed rate of 5.835% plus an applicable margin up to 4.00%
per annum through December 20, 2003. The fixing of interest rates reduces in
part our exposure to the uncertainty of floating interest rates. The
differentials paid or received by us on the interest rate swap agreement is
recognized as adjustments to interest expense in the period incurred. For the
year ended December 31, 2000, we reduced interest expense by approximately
$16,000 as a result of the interest rate swap agreement. We are exposed to
credit loss in the event of nonperformance by our counter party to the interest
rate swap agreement. We do not anticipate nonperformance by such financial
institution, and no material loss would be expected from the nonperformance of
such financial institution. Our interest rate swap agreement expires in December
2003.
For the period from August 8, 2000 to December 20, 2000, we had
approximately $309,250,000 of variable rate debt not covered by the interest
rate swap agreement. Based on average floating rate borrowings outstanding for
the period from August 8, 2000 to December 20, 2000, a 100 basis point change in
LIBOR would have caused our interest expense to change by approximately
$1,073,000.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 1999 and 2000, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 2000. 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 auditing standards generally
accepted in the United States. 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, 1999 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States.
\s\ BDO Seidman, LLP
------------------------------------------------------------------------------
BDO Seidman, LLP
Philadelphia, Pennsylvania
March 12, 2001
35
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 2000
- ------------ -------- --------
(In thousands, except share and per share data)
Assets
Current assets
Cash and cash equivalents................................. $ 9,434 $ 23,287
Accounts receivable....................................... 4,779 10,341
Prepaid expenses and other current assets................. 1,793 5,312
Prepaid income taxes...................................... 1,088 1,905
-------- --------
Total current assets........................................ 17,094 40,845
-------- --------
Property, plant and equipment, at cost
Land and improvements..................................... 27,988 81,177
Building and improvements................................. 70,870 142,753
Furniture, fixtures and equipment......................... 36,195 79,606
Transportation equipment.................................. 860 1,015
Leasehold improvements.................................... 9,802 11,704
Construction in progress.................................. 1,980 3,643
-------- --------
147,695 319,898
Less accumulated depreciation and amortization............ 20,824 31,582
-------- --------
126,871 288,316
-------- --------
Other assets
Investment in and advances to unconsolidated affiliate.... 12,862 14,584
Cash in escrow............................................ 5,000 5,107
Excess of cost over fair market value of net assets
acquired net of accumulated amortization of $2,611 and
$3,858, respectively.................................... 21,582 78,161
Deferred financing costs, net............................. 5,014 9,585
Miscellaneous............................................. 1,289 3,302
-------- --------
Total other assets.......................................... 45,747 110,739
-------- --------
$189,712 $439,900
-------- --------
Liabilities and Shareholders' Equity
Current liabilities
Current maturities of long-term debt...................... $ 5,160 $ 11,390
Accounts payable.......................................... 10,210 18,436
Purses due horsemen....................................... 2,114 2,262
Uncashed pari-mutuel tickets.............................. 1,351 1,393
Accrued expenses.......................................... 2,694 6,913
Accrued interest.......................................... 433 1,289
Accrued salaries and wages................................ 1,098 3,957
Customer deposits......................................... 800 834
Taxes, other than income taxes............................ 1,491 2,816
-------- --------
Total current liabilities................................... 25,351 49,290
-------- --------
Long-term liabilities
Long-term debt, net of current maturities................. 86,053 297,909
Deferred income taxes..................................... 12,036 13,480
-------- --------
Total long-term liabilities................................. 98,089 311,389
-------- --------
Commitments and contingencies
Shareholders' equity
Preferred stock, $.01 par value, authorized 1,000,000
shares; no shares issued................................ -- --
Common stock, $.01 par value, authorized 20,000,000
shares; shares issued and outstanding 15,314,175 and
15,459,175, respectively................................ 153 155
Treasury stock, at cost 424,700 shares.................... (2,379) (2,379)
Additional paid-in capital................................ 38,527 39,482
Retained earnings......................................... 29,971 41,963
-------- --------
Total shareholders' equity.................................. 66,272 79,221
-------- --------
$189,712 $439,900
-------- --------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
36
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1998 1999 2000
- ----------------------- -------- -------- --------
(In thousands, except per share data)
Revenues
Gaming.................................................... $ 37,665 $ 55,415 $159,589
Racing.................................................... 106,850 102,827 113,230
Other..................................................... 9,550 13,216 21,304
-------- -------- --------
Total revenues.............................................. 154,065 171,458 294,123
-------- -------- --------
Operating expenses
Gaming.................................................... 26,544 34,951 94,087
Racing.................................................... 70,303 68,808 77,063
Other..................................................... 8,080 11,173 18,776
General and administrative................................ 23,932 30,030 44,716
Depreciation and amortization............................. 5,748 8,679 13,594
-------- -------- --------
Total operating expenses.................................... 134,607 153,641 248,236
-------- -------- --------
Income from operations...................................... 19,458 17,817 45,887
Other income (expense)
Interest expense.......................................... (8,374) (8,667) (19,089)
Interest income........................................... 825 1,368 1,875
Other..................................................... 113 (8) 39
-------- -------- --------
Total other expense......................................... (7,436) (7,307) (17,175)
-------- -------- --------
Income before income taxes and extraordinary item........... 12,022 10,510 28,712
Taxes on income............................................. 4,519 3,777 10,137
-------- -------- --------
Income before extraordinary item............................ 7,503 6,733 18,575
Extraordinary item, loss on early extinguishment of debt,
net of income taxes of $4,615............................. -- -- 6,583
-------- -------- --------
Net income.................................................. $ 7,503 $ 6,733 $ 11,992
-------- -------- --------
Per share data
Basic
Income before extraordinary item........................ $ .50 $ .45 $ 1.24
Extraordinary item...................................... -- -- (.44)
-------- -------- --------
Net income.............................................. $ .50 $ .45 $ .80
======== ======== ========
Diluted
Income before extraordinary item........................ $ .49 $ .44 $ 1.20
Extraordinary item...................................... -- -- (.42)
-------- -------- --------
Net income.............................................. $ .49 $ .44 $ .78
======== ======== ========
Weighted shares outstanding
Basic..................................................... 15,015 14,837 14,968
Diluted................................................... 15,374 15,196 15,443
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
37
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
--------------------- TREASURY PAID-IN RETAINED
SHARES AMOUNT STOCK CAPITAL EARNINGS TOTAL
(In thousands, except share data) ---------- -------- -------- ---------- -------- --------
Balance, December 31, 1997................. 15,152,580 $152 $ -- $37,969 $15,735 $53,856
Exercise of stock options and warrants..... 11,500 -- -- 56 -- 56
Acquisition of treasury stock.............. -- -- (2,379) -- -- (2,379)
Net income for the year.................... -- -- -- -- 7,503 7,503
---------- ---- ------- ------- ------- -------
Balance, December 31, 1998................. 15,164,080 152 (2,379) 38,025 23,238 59,036
Exercise of stock options and warrants..... 150,095 1 -- 502 -- 503
Net income for the year.................... -- -- -- -- 6,733 6,733
---------- ---- ------- ------- ------- -------
Balance, December 31, 1999................. 15,314,175 153 (2,379) 38,527 29,971 66,272
Exercise of stock options.................. 145,000 2 -- 955 -- 957
Net income for the year.................... -- -- -- -- 11,992 11,992
---------- ---- ------- ------- ------- -------
Balance, December 31, 2000................. 15,459,175 $155 $(2,379) $39,482 $41,963 $79,221
========== ==== ======= ======= ======= =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
38
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998 1999 2000
- ----------------------- -------- -------- ---------
(In thousands)
Cash flows from operating activities
Net income................................................ $ 7,503 $ 6,733 $ 11,992
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization........................... 5,748 8,679 13,594
Write-off of deferred financing costs................... 376 -- --
Income from unconsolidated affiliates................... -- (1,098) (1,722)
Extraordinary loss on early extinguishment of debt,
before income tax benefit............................. -- -- 11,198
Deferred income taxes................................... 390 1,023 1,444
Decrease (increase) in
Accounts receivable................................... (1,583) (939) (5,562)
Prepaid expenses and other current assets............. (690) 338 (3,752)
Prepaid income taxes.................................. 2,144 (229) (817)
Miscellaneous other assets............................ (463) (202) (2,025)
Increase (decrease) in
Accounts payable...................................... (1,188) 3,993 8,226
Purses due horsemen................................... 887 1,227 148
Uncashed pari-mutuel tickets.......................... 93 (246) 42
Accrued expenses...................................... (1,364) 1,631 4,219
Accrued interest...................................... 142 (35) 856
Accrued salaries and wages............................ (61) 346 2,859
Customer deposits..................................... 78 252 34
Taxes, other than income taxes........................ (146) 988 1,325
-------- -------- ---------
Net cash provided by operating activities................... 11,866 22,461 42,059
-------- -------- ---------
Cash flows from investing activities
Expenditures for property, plant and equipment............ (22,333) (13,243) (27,295)
Proceeds from sale of property and equipment.............. -- -- 151
Investment in and advances to unconsolidated affiliate.... -- (11,764) --
Acquisition of business, net of cash acquired............. -- 251 (203,030)
Increase in cash in escrow................................ -- (5,000) (107)
-------- -------- ---------
Net cash used in investing activities....................... (22,333) (29,756) (230,281)
-------- -------- ---------
Cash flows from financing activities
Proceeds from exercise of options and warrants............ 56 503 957
Acquisition of treasury stock............................. (2,379) -- --
Proceeds from long-term debt.............................. 9,000 24,350 323,395
Principal payments on long-term debt...................... (11,080) (11,393) (105,185)
Increase in unamortized financing cost.................... (158) (3,557) (10,407)
Payment of tender fees on senior notes.................... -- -- (6,685)
-------- -------- ---------
Net cash provided by (used in) financing activities......... (4,561) 9,903 202,075
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents........ (15,028) 2,608 13,853
Cash and cash equivalents at beginning of year.............. 21,854 6,826 9,434
-------- -------- ---------
Cash and cash equivalents at end of year.................... $ 6,826 $ 9,434 $ 23,287
======== ======== =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
39
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Penn National Gaming, Inc. (the "Company") owns and operates the Charles
Town Entertainment Complex in Charles Town, West Virginia, which features 1,974
gaming machines and live thoroughbred racing; two Mississippi casinos: the
Casino Magic Bay St. Louis casino, hotel, golf resort and marina in Bay St.
Louis, and the Boomtown Biloxi casino in Biloxi; and two racetracks and eleven
off-track wagering (OTW) facilities located in Pennsylvania. The Company expects
(subject to certain conditions) to complete the acquisition of CRC
Holdings, Inc. ("CRC") and the minority interest in Louisiana Casino
Cruises, Inc. ("LCCI") not currently owned by CRC in 2001. LCCI owns and
operates the Casino Rouge, a riverboat gaming facility in Baton Rouge, Louisiana
and CRC has a management contract for the operation of Casino Rama, a casino
located approximately ninety miles north of Toronto, Canada on the Chippewas of
Mnjikaning First Nation land.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
DEPRECIATION AND AMORTIZATION
Depreciation of property, plant and equipment and amortization of leasehold
improvements are computed by the straight-line method at rates adequate to
allocate the cost of applicable assets over their estimated useful lives ranging
from three to forty years. The excess of cost over fair value of net assets
acquired is being amortized on the straight-line method over forty years.
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, 2000, the Company has determined that no impairment has occurred.
GAMING REVENUES AND PROMOTIONAL ALLOWANCES
In accordance with common industry practice, casino revenues are the net of
gaming wins less losses. Revenues exclude the retail value of complimentary
rooms, food and beverage furnished gratuitously to customers. The estimated cost
of providing these promotional allowances (which are included in gaming
expenses) during the year ended December 31, 2000 was $8,806,000. These
complimentary items were not significant to the Company's total revenues prior
to 2000 when the Company operated primarily as a pari-mutual company.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement carrying amounts and the tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse.
40
CUSTOMER DEPOSITS
Customer deposits represent amounts held by the Company for telephone
wagering.
CASH AND CASH EQUIVALENTS
The Company considers all cash balances and highly liquid investments with
original maturities of three months or less to be cash equivalents.
NET INCOME PER COMMON SHARE
Basic net income per share includes no dilution and is calculated by
dividing net income by the weighted average number of common shares outstanding
for the period. Dilutive net income per share reflects the potential dilution of
net income per share that could result upon the exercise of outstanding stock
options to purchase the Company's common stock (using the treasury stock
method).
DEFERRED FINANCING COSTS
Deferred financing costs which are incurred by the Company in connection
with the issuance of debt are deferred and amortized to income over the life of
the underlying indebtedness using the interest method adjusted to reflect any
early repayments.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist of cash equivalents and accounts receivable.
The Company's policy is to limit the amount of credit exposure to any one
financial institution and place investments with financial institutions
evaluated as being creditworthy, or in short-term money market and tax-free bond
funds which are exposed to minimal interest rate and credit risk. At
December 31, 2000, the Company had bank deposits which exceeded federally
insured limits by approximately $2,753,000 and money market and tax-free bond
funds of approximately $2,517,000.
Concentration of credit risk, with respect to accounts receivable, is
limited through the Company's credit evaluation process. The Company does not
require collateral on its receivables. The Company's receivables consist
principally of amounts due from other racetracks and their OTWs. Historically,
the Company has not incurred any significant credit-related losses.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions are used to estimate the fair value of
each class of financial instruments for which it is practical to estimate:
Cash and Cash Equivalents: The carrying amount approximates the fair
value due to the short maturity of the cash equivalents.
Long-Term Debt: The fair value of the Company's long-term debt is
estimated based on the quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt of the
same remaining maturities. The carrying amount approximates fair value
since the Company's interest rates approximate current interest rates.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements,
41
and the reported amounts of revenue and expenses for the reporting periods.
Actual results could differ from those estimates.
INTEREST RATE SWAPS
The Company has a policy aimed at managing interest rate risk associated
with its current and anticipated future borrowings. This policy enables the
Company to use any combination of interest rate swaps, futures, options, caps
and similar instruments. To the extent the Company employs such financial
instruments pursuant to this policy, they are accounted for as hedging
instruments. In order to qualify for hedge accounting, the underlying hedged
item must expose the Company to risks associated with market fluctuations and
the financial instrument used must be designated as a hedge and must reduce the
Company's exposure to the market in fluctuations throughout the hedge period. If
these criteria are not met, a change in the market value of the financial
instrument is recognized as a gain or loss in the period of change. Otherwise,
gains and losses are not recognized except to the extent that the financial
instrument is disposed of prior to maturity. Net interest paid or received
pursuant to the financial instrument is included as interest expense in the
period.
The Company currently uses interest rate swaps to assist in managing
interest incurred on its long-term debt. The difference between amounts received
and amounts paid under such agreements, as well as any costs or fees, is
recorded as a reduction of, or addition to, interest expense as incurred over
the life of the swap or similar financial instrument. On December 20, 2000, the
Company entered into a forward interest rate swap with a notional amount of $100
million, which has an effective date of December 22, 2000 and a termination date
of December 22, 2003. Under this agreement, the Company pays a fixed rate of
5.835% against a variable interest rate based on the 90-day eurodollar rate. At
December 31, 2000, the 90 day eurodollar rate was 6.5%.
RECENT ACCOUNTING STANDARDS
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation", an interpretation of Accounting Principles Board Opinion
No. 25 ("APB 25"). FIN 44 clarifies the application of APB 25 for (a) the
definition of employee for purposes of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to the previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. The Company's adoption of FIN 44 in fiscal
2000 did not have a material effect on the Company's financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, which summarizes certain of the SEC staff's
accounting principles for revenue recognition in financial statements. The
adoption of this guidance did not have a material impact on the Company's
results of operations or financial position.
2. ACQUISITIONS
MISSISSIPPI ACQUISITIONS
On December 10, 1999, the Company entered into definitive agreements to
purchase all of the assets of the Casino Magic Bay St. Louis casino, hotel, golf
resort, recreational vehicle park and marina in Bay St. Louis, Mississippi and
the Boomtown Biloxi casino in Biloxi, Mississippi, from Pinnacle
Entertainment, Inc. (formerly Hollywood Park, Inc.) for $195 million. The
purchase price was funded with a portion of the proceeds from our $350 million
Senior Secured Credit Facility. In addition to acquiring all of the operating
assets and related operations of the Casino Magic Bay St. Louis and Boomtown
Biloxi properties, the Company entered into a licensing agreement to use the
Boomtown and Casino Magic names and marks at the properties being acquired. The
Company accounted for
42
these acquisitions as a purchase in accordance with Accounting Principles Board
Opinion No. 16. On August 8, 2000, the Mississippi Acquisitions were
consummated. Included in the consolidated statement of income are the operations
of the Mississippi properties from August 8, 2000 through December 31, 2000.
Unaudited pro forma financial information for the years ended December 31,
2000 and 1999, as though the Mississippi Acquisitions had occurred on
January 1, 1999, is as follows:
1999 2000
-------- --------
Revenues.................................................... $328,179 $391,836
Income before extraordinary item............................ $ 8,601 $ 19,574
Extraordinary item, net of income tax benefit............... -- (6,583)
-------- --------
Net income.................................................. $ 8,601 $ 12,991
-------- --------
Net income per common share
Basic..................................................... $ .58 $ .87
Diluted................................................... $ .57 $ .84
Weighted shares outstanding
Basic..................................................... 14,837 14,968
Diluted................................................... 15,196 15,443
CHARLES TOWN MINORITY INTEREST
On March 15, 2000, the Company purchased from the BDC Group ("BDC"), its
joint venture partner in West Virginia, BDC's 11% interest in PNGI Charles Town
Gaming Limited Liability Company, which owns and operates the Charles Town
Entertainment Complex, for $6.0 million in cash. The investment is recorded net
of the minority interest tax liability of $155,000 or $5.845 million. As a
result of the purchase, PNGI Charles Town Gaming Limited Liability Company is
now a 100% owned subsidiary of the Company.
3. LONG-TERM DEBT
Long-term debt is as follows:
DECEMBER 31, 1999 2000
- ------------ -------- --------
$350 million senior secured credit facility. This credit
facility is secured by substantially all of the assets of
the Company............................................... $ -- $309,250
$80 million Senior Notes, due December 15, 2004 with
interest at 10.625% per annum payable semi-annually. The
notes are unsecured and are unconditionally guaranteed by
certain subsidiaries of the Company....................... 69,000 --
Revolving credit facility payable to a bank group........... 12,900
Term loan payable to a bank group due on December 31, 2002
with interest at various rates. This note is secured by
certain assets of the Company............................. 9,100
Other notes payable......................................... 213 49
-------- --------
91,213 309,299
Less current maturities..................................... 5,160 11,390
-------- --------
$ 86,053 $297,909
-------- --------
43
CREDIT FACILITY
On August 8, 2000, the Company entered into a $350 million senior secured
credit facility with Lehman Brothers, Inc. and CIBC World Markets Corp. as
co-arrangers, among others. The proceeds of the credit facility were used to
finance the Mississippi Acquisitions, to pay off the Company's existing
long-term debt and for working capital purposes. The credit facility provides
for a $75 million revolving credit facility maturing on August 8, 2005, a $75
million Tranche A term loan maturing on August 8, 2005 and a $200 million
Tranche B term loan maturing on August 8, 2006. The Company is required to repay
the principal balance of the debt based upon a payment as stipulated in the loan
agreement.
At the Company's option, the revolving credit facility and the Tranche A
term loan may bear interest at (1) the highest of 1/2 of 1% in excess of the
federal funds effective rate or the rate that the bank group announces from time
to time as its prime lending rate plus an applicable margin of up to 2.25%, or
(2) a rate tied to a eurodollar rate plus an applicable margin up to 3.25%. At
the Company's option, the Tranche B term loan may bear interest at (1) the
highest of 1/2 of 1% in excess of the federal funds effective rate or the rate
that the bank group announces from time to time as its prime lending rate plus
an applicable margin of up to 3.25%, or (2) a rate tied to a eurodollar rate
plus an applicable margin up to 4.00%. The credit facility provides for certain
covenants, including those of a financial nature. Substantially all of the
Company's assets are pledged as collateral under the credit agreement.
The weighted average effective interest rate at December 31, 2000 was 10.5%.
The outstanding amounts under the credit facility as of December 31, 2000
(in thousands) are as follows:
Revolving credit facility................................... $ 39,000
Tranche A................................................... 71,250
Tranche B................................................... 199,000
--------
Total....................................................... $309,250
--------
As a result of the refinancing, the Company charged to operations deferred
financing costs of $4,513,000 related to the repayment of existing outstanding
debt. In addition, the Company paid a tender premium of $6,685,000. The total,
$11,198,000 has been reflected as an extraordinary item, net of an income tax
benefit of $4,615,000 in the consolidated statement of income for the year ended
December 31, 2000.
The following is a schedule of future minimum repayments of long-term debt
as of December 31, 2000:
DECEMBER 31,
(In thousands)
2001...................................................... $ 11,390
2002...................................................... 15,140
2003...................................................... 18,894
2004...................................................... 22,625
2005...................................................... 107,250
Thereafter................................................ 134,000
--------
Total minimum payments...................................... 309,299
Current maturities.......................................... 11,390
--------
Total noncurrent maturities................................. $297,909
--------
44
At December 31, 2000, the Company was contingently obligated under letters
of credit issued pursuant to the senior secured credit facility with face
amounts aggregating $2,055,500.
4. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is liable under numerous operating leases for automobiles, other
equipment and buildings, which expire through 2007. Total rental expense under
these agreements was $1,169,000, $1,296,000 and $2,054,000 for the years ended
December 31, 1998, 1999, and 2000, respectively.
The future lease commitments relating to noncancelable operating leases as
of December 31, 2000 are as follows:
(IN THOUSANDS)
2001...................................................... $ 3,241
2002...................................................... 2,927
2003...................................................... 2,620
2004...................................................... 1,962
2005...................................................... 915
Thereafter................................................ 942
-------
$12,607
-------
In addition, the Company leases land for use by Boomtown Biloxi. The lease
term is 99 years and is cancelable upon one year's notice. The lease called for
an initial deposit by the Company of $2,000,000 and for annual base lease rent
payments of $2,000,000 and percentage rent equal to 5.0% of adjusted gaming win
(as defined in the lease) over $25,000,000.00 and 6.0% of the amount by which
the adjusted gaming win exceeds $50,000,000. During the period from August 8,
2000 to December 31, 2000, the Company paid lease rent under this agreement of
$1,281,000.
OPTION TO MANAGE THE CHARLES TOWN ENTERTAINMENT COMPLEX
The Company acquired the Charles Town Entertainment Complex by exercising an
option previously held by a subsidiary of Showboat, Inc., now a wholly owned
subsidiary of Harrah's Entertainment, Inc. In assigning the option, Showboat
retained the right to operate a casino at the Charles Town Entertainment Complex
in return for a management fee, to be negotiated at the time of exercise, based
on reasonable rates payable for similar properties. The express terms of the
Showboat option do not specify what activities at the Charles Town Entertainment
Complex would constitute operation of a casino. The Company does not believe
that its installation and operation of gaming devices linked to the West
Virginia lottery at the Charles Town Entertainment Complex constitutes the
operation of a casino under the Showboat option or under West Virginia law or
triggers Showboat's right to exercise the Showboat option. The rights under the
Showboat option extend until November 2001.
POCONO DOWNS COMMITMENT
Pursuant to the terms of the Pocono Downs purchase agreement dated
November 27, 1996, 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.
45
PROFIT SHARING PLANS
The Company has profit sharing plans under the provisions of Section 401(k)
of the Internal Revenue Code that cover all eligible employees who are not
members of a bargaining unit. The plans enable employees choosing to participate
to defer a portion of their salary in a retirement fund to be administered by
the Company. The Company's contributions to the plans are set at 50% of
employees' elective salary deferrals up to a maximum of 6% of employee
compensation. The Company also has a defined contribution plan called the
Charles Town Races Future Service Retirement Plan covering substantially all of
its union employees at the Charles Town Entertainment Complex. The Company makes
monthly contributions equal to the amount accrued for retirement expense, which
is calculated as .25% of the daily mutual handle and .5% of the net video
lottery revenues. Total contributions to the plans for the years ended
December 31, 1998, 1999 and 2000 were $357,000, $408,000 and $1,096,000,
respectively.
AGREEMENTS WITH HORSEMEN AND PARI-MUTUEL CLERKS
The Company has agreements with the horsemen at each of the racetracks. The
continuation of these agreements is required to allow the Company to conduct
live racing and export and import simulcasting. In addition, the simulcasting
agreements are subject to the horsemen's approval.
On March 23, 1999, the Company entered into a new four-year, nine-month
purse agreement with the Horsemen's Benevolent and Protection Association, which
represents the horsemen at the Company's Penn National Race Course facility in
Grantville, Pennsylvania. The agreement ended an action by the horsemen which
began on February 16, 1999 and caused the Company to close Penn National Race
Course and its six affiliated OTWs. As a result of the action the Company
incurred a nonrecurring $1,250,000 expense, primarily related to costs incurred
to maintain the closed facilities inclusive of employee salaries and rents, for
Horsemen's Action Expense. The initial term of the agreement ends on January 1,
2004 and automatically renews for another two year period, without change,
unless notice is given by either party at least ninety days prior to the end of
the initial term.
On December 17, 1999, the Company entered into a new three-year purse
agreement with the Pennsylvania Harness Horsemen's Association, Inc. which
represents the owners, trainers, and drivers at the Company's The Downs Racing,
Inc. facility in Wilkes-Barre, Pennsylvania. The contract term begins on
January 16, 2000 and ends on January 15, 2003. The Company also has an agreement
with the Charles Town Horsemen that expires on December 31, 2002.
In addition to the horsemen agreements, in order to operate gaming machines
in West Virginia, the Company is required to enter into written agreements
regarding the proceeds of the gaming machines at the Charles Town Entertainment
Complex with the parti-mutuel clerks at Charles Town. The agreement with the
pari-mutuel clerks at Charles Town expires on December 31, 2004.
CRC HOLDINGS, INC. ACQUISITION
On July 31, 2000, the Company entered into a definitive agreement to acquire
the gaming assets of CRC which does business as Carnival Resorts and Casinos for
$95.8 million and the assumption of approximately $32 million in net debt (the
"CRC Acquisition"). CRC is an experienced operator of gaming facilities and the
owner of approximately 59% of LCCI, the owner and operator of the Casino Rouge,
a riverboat gaming facility located on the east bank of the Mississippi River in
Baton Rouge, Louisiana. The Company also entered into a definitive agreement
with the minority owners of LCCI to acquire their approximately 41% stake for
$32.5 million. CRC also has a management contract to operate the Casino Rama
casino through 2011. Casino Rama is located approximately 90 miles north of
Toronto, Canada, in Orillia, Canada, on land owned by the Chipewas of Mnjikaning
First Nation. Under the terms of the agreement, CRC will divest all of its
nongaming related assets prior to closing. The transaction, expected to close in
2001, is subject to regulatory and other approvals in both Louisiana and Canada,
financing, the expiration of the applicable Hart-Scott-Rodino waiting period and
other customary closing conditions. The Company expects to finance the
acquisition with proceeds from its senior subordinated notes offering. See Note
12, Subsequent Events.
46
NEW JERSEY JOINT VENTURE
On January 28, 1999, the Company, along with its Joint Venture partner,
Greenwood New Jersey, Inc. ("Greenwood") agreed to purchase certain assets of
the Garden State Race Track and Freehold Raceway, both located in New Jersey
(the "Acquisition"). The partners each received a 50% ownership interest in the
joint venture.
The purchase price for the Acquisition was approximately $46 million and
consisted of $23 million in cash and $23 million pursuant to two deferred
purchase price promissory notes.
Pursuant to the Joint Venture Agreement, the Company agreed to guarantee
severally: (i) up to 50% of the obligation of the Joint Venture under its Put
Option Agreement ($17.5 million) with Credit Suisse First Boston Mortgage
Capital LLC ("CSFB"); (ii) up to 50% of the Joint Venture obligation for the
seven year lease at Garden State Park; (iii) up to 50% of the Joint Venture
obligation to International Thoroughbred Breeders, Inc. for the contingent
purchase price notes ($10.0 million) relating to the operation, subject to
passage by the New Jersey legislature, of OTWs and telephone wagering accounts
in New Jersey. In conjunction with the closing, the Company entered into a Debt
Service Maintenance Agreement with Commerce Bank, N.A. for the funding of a
$23.0 million credit facility to the Joint Venture. The Company's investment in
the Joint Venture is accounted for under the equity method. The original
investment was recorded at cost and adjusted by the Company's share of income or
losses of the Joint Venture. The Company's 50% share of the income of the Joint
Venture is included in other revenues in the accompanying Consolidated
Statements of Income for the years ended December 31, 1999 and 2000.
Summarized balance sheet information for the Joint Venture as of
December 31, 1999 and 2000 is as follows (in thousands):
1999 2000
-------- --------
Current assets............................................ $ 7,324 $12,122
Property, plant and equipment, net........................ 30,786 29,818
Other..................................................... 18,158 16,435
------- -------
Total assets.............................................. $56,268 $58,375
------- -------
Current liabilities....................................... $ 7,453 $ 8,698
Long-term liabilities..................................... 46,221 43,466
Members' equity........................................... 2,594 6,211
------- -------
Total liabilities and members' equity..................... $56,268 $58,375
------- -------
Summarized results of operations of the unconsolidated Joint Venture for the
period July 30, 1999 through December 31, 1999 and for the year ended
December 31, 2000 is as follows (in thousands):
1999 2000
-------- --------
Revenues.................................................. $27,982 $61,492
Operating expenses........................................ 23,005 48,771
------- -------
EBITDA*................................................... 4,977 12,721
------- -------
Net income................................................ $ 2,196 $ 4,643
------- -------
- ------------
* Earnings before interest, depreciation, taxes, and amortization.
47
5. INCOME TAXES
The provision for income taxes charged to operations was as follows:
YEAR ENDED DECEMBER 31, 1998 1999 2000
- ----------------------- -------- -------- --------
(in thousands)
Current tax expense
Federal.......................................... $3,374 $2,759 $ 6,199
State............................................ 755 108 660
------ ------ -------
Total current...................................... 4,129 2,867 6,859
------ ------ -------
Deferred tax expense (benefit)
Federal.......................................... 378 1,227 3,447
State............................................ 12 (317) (169)
------ ------ -------
Total deferred..................................... 390 910 3,278
------ ------ -------
Total provision.................................... $4,519 $3,777 $10,137
------ ------ -------
Net deferred tax liabilities are comprised of the following:
DECEMBER 31, 1999 2000
- ------------ -------- --------
Deferred tax assets
State net operating losses.............................. $ 888 $ 2,027
------- -------
Deferred tax liabilities
Property, plant and equipment........................... $12,924 $15,507
------- -------
The following is a reconciliation of the statutory federal income tax rate
to the actual effective income tax rate for the following periods:
YEAR ENDED DECEMBER 31, 1998 1999 2000
- ----------------------- -------- -------- --------
Percent of pretax income
Federal tax rate........................................ 34.0% 34.0% 34.0%
State and local income taxes, net of federal tax
benefit............................................... 4.2 2.0 1.1
Permanent difference relating to amortization of
goodwill.............................................. .4 .2 .1
Other miscellaneous items............................... (1.0) (.3) .1
---- ---- ----
37.6% 35.9% 35.3%
==== ==== ====
6. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest was $8,192,000, $8,742,000 and
$18,426,000 in 1998, 1999 and 2000, respectively.
Cash paid during the year for income taxes was $4,207,000, $2,970,000 and
$3,886,000 in 1998, 1999 and 2000, respectively.
7. STOCK BASED COMPENSATION
In April 1994, the Company's Board of Directors and shareholders adopted and
approved the Stock Option Plan (the "Plan"). The Plan permits the grant of
options to purchase up to 3,000,000 shares of Common Stock, subject to
antidilution adjustments, at a price per share no less than 100% of the fair
market value of the Common Stock on the date an option is granted with respect
to incentive
48
stock options only. The price would be no less than 110% of fair market value in
the case of an incentive stock option granted to any individual who owns more
than 10% of the total combined voting power of all classes of outstanding stock.
The Plan provides for the granting of both incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code of 1986, and nonqualified
stock options which do not so qualify. Unless the Plan is terminated earlier by
the Board of Directors, the Plan will terminate in April 2004.
Stock options that expire between May 26, 2001 and February 8, 2010 have
been granted to officers and directors to purchase Common Stock at prices
ranging from $3.33 to $17.63 per share. All options were granted at market
prices at date of grant. The following table contains information on stock
options issued under the Plan for the three-year period ended December 31, 2000:
EXERCISE PRICE AVERAGE
OPTION PER SHARE EXERCISE
SHARES RANGE PRICE
--------- -------------- --------
Outstanding at January 1, 1998............. 1,040,500 $3.33 to 17.63 $ 7.31
Granted.................................... 195,000 6.44 to 15.50 9.06
Exercised.................................. (11,500) 3.33 to 5.63 4.88
Canceled................................... (39,500) 5.63 to 15.50 13.36
---------
Outstanding at December 31, 1998........... 1,184,500 3.33 to 17.63 9.50
Granted.................................... 149,500 6.88 to 9.13 6.98
Exercised.................................. (27,000) 5.63 5.63
Canceled................................... (31,750) 5.63 to 15.50 13.40
---------
Outstanding at December 31, 1999........... 1,275,250 3.33 to 17.63 7.27
Granted.................................... 294,500 8.12 to 17.31 9.65
Exercised.................................. (145,000) 3.33 to 11.50 4.77
Canceled................................... (11,000) 8.25 to 12.37 10.36
---------
Outstanding at December 31, 2000........... 1,413,750 $3.33 to 17.63 $ 8.01
---------
In addition, 300,000 Common Stock options were issued to the Company's
Chairman outside the Plan on October 23, 1996. These options were issued at
$17.63 per share and are exercisable through October 23, 2006.
Exercisable at year end:
EXERCISE WEIGHTED
PRICE PER AVERAGE
OPTION SHARE EXERCISE
SHARES RANGE PRICE
--------- -------------- ----------
1998................................... 1,034,666 $3.33 to 17.63 $ 8.36
1999................................... 1,242,625 3.33 to 17.63 9.49
2000................................... 1,228,792 3.33 to 17.63 10.03
--------- -------------- ----------
Options available for future grant:.... 1994 PLAN
----------
2000................................... 1,253,250
----------
49
The following table summarizes information about stock options outstanding
at December 31, 2000:
EXERCISE PRICE RANGE TOTAL
-------------------------------- ---------------
$3.33 TO $5.58 $5.58 TO $17.63 $3.33 TO $17.63
-------------- --------------- ---------------
Outstanding options
Number outstanding at
December 31, 2000................. 548,000 1,165,750 1,713,750
Weighted average remaining
contractual life (years).......... 3.26 5.62 4.86
Weighted average exercise price..... $ 3.92 $ 12.40 $ 9.69
Exercisable options
Number outstanding at December 31,
2000.............................. 548,000 680,792 1,228,792
Weighted average exercise price..... $ 3.93 $ 14.95 $ 10.03
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has adopted
fair value as the measurement basis for transactions in which the Company
acquires goods or services from nonemployees in exchange for equity instruments.
In addition, SFAS 123 also has certain disclosure provisions. Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employers"
("APB 25"), uses 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 as follows:
YEAR ENDED DECEMBER 31, 1998 1999 2000
- ----------------------- ---------- ---------- -----------
Net income
As reported........................... $7,503,000 $6,733,000 $11,992,000
Pro forma............................. 6,827,000 6,143,000 11,702,000
Basic net income per share
As reported........................... $ .50 $ .45 $ .80
Pro forma............................. .45 .41 .78
Diluted net income per share
As reported........................... $ .49 $ .44 $ .78
Pro forma............................. .44 .40 .76
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998, 1999 and 2000: dividend yield of 0%;
expected volatility of 35%; risk-free interest rate of 6%; and expected lives of
five years. The effects of applying SFAS 123 in the above pro forma disclosure
are not indicative of future amounts. SFAS 123 does not apply to awards prior to
1995. Additional awards in future years are anticipated.
8. SHAREHOLDER RIGHTS PLAN
On May 20, 1998, the Board of Directors of the Company authorized and
declared a dividend distribution of one Preferred Stock purchase right (the
"Rights") for each outstanding share of the Company's common stock, par value
$.01 per share (the "Common Shares"), payable to shareholders of record at the
close of business on March 19, 1999. Each Right entitles the registered holder
to
50
purchase from the Company one one-hundredth of a share (a "Preferred Stock
Fraction"), or a combination of securities and assets of equivalent value, at a
purchase price of $40.00 per Preferred Stock Fraction (the "Purchase Price"),
subject to adjustment. The description and terms of the Rights are set forth in
a Rights Agreement (the "Rights Agreement") dated March 2, 1999 between the
Company and Continental Stock Transfer and Trust Company as Rights Agent. All
terms not otherwise defined herein are used as defined in the Rights Agreement.
The Rights will be exercisable only if a person or group acquires 15% or
more of the Company's common stock (the "Stock Acquisition Date"), announces a
tender or exchange offer that will result in such person or group acquiring 20%
or more of the outstanding common stock or is a beneficial owner of a
substantial amount of Common Shares (at least 10%) whose ownership may have a
material adverse impact ("Adverse Person") on the business or prospects of the
Company. The Company will be entitled to redeem the Rights at a price of $.01
per Right (payable in cash or stock) at any time until 10 days following the
Stock Acquisition Date or the date on which a person has been determined to be
an Adverse Person. If the Company is involved in certain transactions after the
Rights become exercisable, a Holder of Rights (other than Rights owned by a
shareholder who has acquired 15% or more of the Company's outstanding common
stock or is determined to be an Adverse Person, which Rights become void) is
entitled to buy a number of the acquiring company's Common Shares or the
Company's common stock, as the case may be, having a market value of twice the
exercise price of each Right. A potential dilutive effect may exist upon the
exercise of the Rights. Until a Right is exercised, the holder will have no
rights as a stockholder of the Company, including, without limitations, the
right to vote as a stockholder or to receive dividends. The Rights are not
exercisable until the Distribution Date and will expire at the close of business
on March 18, 2009, unless earlier redeemed or exchanged by the Company.
9. LITIGATION SETTLEMENT
In December 1997, Amtote International, Inc. ("Amtote"), filed an action
against the Company and the Charles Town Joint Venture in the United States
District Court for the Northern District of West Virginia. In its complaint,
Amtote stated that the Company and the Charles Town Joint Venture allegedly
breached certain contracts with Amtote and its affiliates when it entered into a
wagering services contract with a third party. On September 30, 1999, the United
States District Court for the Northern District of West Virginia rendered a
decision, which awarded liquidated damages to Amtote. On February 1, 2000, the
Company and Amtote entered into a settlement agreement in which the Company paid
Amtote, in full satisfaction of the judgement, the sum of $1.5 million, which
was recorded as an expense in 1999.
51
10. SUMMARIZED QUARTERLY DATA (UNAUDITED)
Following is a summary of the quarterly results of operations for the years
ended December 31, 1999 and 2000:
FISCAL QUARTER
-----------------------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS FIRST SECOND THIRD FOURTH
- -------------------------------------- -------- -------- -------- --------
1999
Total revenues.............................. $32,789 $45,383 $47,567 $45,719
Income from operations...................... 1,865 6,000 6,346 3,605
Net income.................................. 22 2,539 2,838 1,333
Basic earnings per share.................... -- .17 .19 .09
Diluted earnings per share.................. -- .17 .19 .09
2000
Total revenues.............................. $52,712 $61,753 $87,795 $91,863
Income from operations...................... 7,846 11,678 14,868 11,495
Net income (loss)........................... 3,619 6,226 (581) 2,728
Basic earnings (loss) per share............. .24 .42 (.04) .18
Diluted earnings (loss) per share........... .24 .40 (.04) .18
In accordance with gaming industry practice, total revenues for the first
three quarters of 2000 have been adjusted since the filing of the Company's
quarterly reports on Form 10Q to exclude the retail value of complimentary
rooms, food and beverages furnished gratuitously to customers. These
complimentary items were not significant to the Company's total revenues prior
to 2000 when the Company operated primarily as a pari-mutuel company and thus,
are included in total revenues for 1999.
11. SEGMENT INFORMATION
The Company has adopted SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information." The Company has determined that it
currently operates in the two segments: (1) gaming and (2) racing.
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies" for the year ended
December 31, 2000. The Company and the gaming industry use EBITDA as a means to
evaluate performance. EBITDA should not be considered as an alternative to, or
more meaningful than, net income (as determined in accordance with accounting
principles generally accepted in the United States) as a measure of operating
results or cash flows (as determined in accordance with accounting principles
generally accepted in the United States) or as a measure of the Company's
limitations.
52
The table below presents information about reported segments:
Revenues
YEAR ENDED DECEMBER 31, 1998 1999 2000
- ----------------------- -------- -------- --------
(in thousands)
Gaming(1)..................................... $ 56,883 $ 80,015 $191,495
Racing........................................ 99,196 93,031 104,258
Eliminations(2)............................... (2,014) (1,588) (1,630)
-------- -------- --------
Total......................................... $154,065 $171,458 $294,123
-------- -------- --------
EBITDA
YEAR ENDED DECEMBER 31, 1998 1999 2000
- ----------------------- -------- -------- --------
(in thousands)
Gaming(1)........................................ $ 3,448 $ 8,628 $38,988
Racing........................................... 21,758 17,868 20,493
------- ------- -------
Total............................................ $25,206 $26,496 $59,481
------- ------- -------
Total Assets
AS OF DECEMBER 31, 1999 2000
- ------------------ -------- --------
(in thousands)
Gaming(1)............................................... $280,270 $673,682
Racing.................................................. 89,744 91,756
Eliminations (2)........................................ (179,414) (323,511)
-------- --------
$190,600 $441,927
-------- --------
- ------------
(1) Reflects results of the Mississippi properties since the August 8, 2000
acquisition from Pinnacle Entertainment
(2) Primarily reflects intracompany transactions related to import/export
simulcasting.
12. SUBSEQUENT EVENTS
SENIOR SUBORDINATED NOTES OFFERING
On March 12, 2001, the Company consummated an offering of $200 million
aggregate principal of 11 1/8% Senior Subordinated Notes due March 1, 2008. The
proceeds of these notes will be used, in part, to finance the CRC acquisition;
however, if the Company does not consummate the CRC acquisition by October 31,
2001, the Company will use the entire net proceeds of the offering to repay
outstanding loan indebtedness under the Company's senior credit facility.
LCCI NOTES TENDER OFFER
On February 20, 2001, the Company commenced a cash tender offer to purchase
all of the LCCI 11% Senior Secured Notes due 2005 (the "LCCI Notes") and a
related consent solicitation to eliminate certain restrictive covenants and
related provisions in the indenture pursuant to which the LCCI Notes were
issued. The tender offer is scheduled to expire at 5:00 p.m., New York City
time, on March 22, 2001 unless extended. The principal purpose of the tender
offer is to acquire all of the outstanding LCCI Notes in connection with the CRC
Acquisition. Consummation of the tender offer is conditioned upon closing of the
CRC Acquisition. The tender offer and the consent solicitation are subject to
the terms and conditions set forth in the Offer to Purchase and Consent
Solicitation Statement and the related Consent and Letter of Transmittal that
are being sent to all holders of LCCI Notes. Subject to
53
the terms and conditions of the tender offer and consent solicitation, the
Company will make all payments promptly after the acceptance date.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
54
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concering directors is hereby
incorporated by reference to the Company's definitive proxy statement for its
2001 Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2000 pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended.
The following table provides information regarding our executive officers as
of March 15, 2001 (except as to Mr. DeSanctis):
NAME AGE POSITION
- ---- -------- -------------------------------------------------
Peter M. Carlino....................... 54 Chairman of the Board and Chief Executive Officer
William J. Bork........................ 67 President, Chief Operating Officer and
Director(1)
Kevin DeSanctis........................ 48 President and Chief Operating Officer(2)
Robert S. Ippolito..................... 49 Chief Financial Officer, Secretary and Treasurer
Joseph A. Lashinger, Jr................ 47 Vice President and General Counsel
Robert E. Abraham...................... 48 Vice President/Controller
George A. Connolly..................... 63 Vice President of Human Resources
- ------------
(1) Upon Mr. DeSanctis' approval by applicable jurisdictions, Mr. Bork is
expected to assume the title of President, Racing Division.
(2) Mr. DeSanctis will become President and Chief Operating Officer upon the
receipt of necessary licensing and regulatory approval in applicable
jurisdictions.
Our current executive officers, along with their backgrounds, are as
follows:
PETER M. CARLINO. Mr. Carlino has served as our Chairman of the Board and
Chief Executive Officer since April 1994, and has devoted a significant amount
of time as a Director since 1991. From 1984 to 1994, Mr. Carlino devoted a
substantial portion of his business time to developing, building and operating
residential and commercial real estate projects located primarily in Central
Pennsylvania. Since 1976 he has been President of Carlino Financial Corporation,
a holding company which owns and operates various Carlino family businesses, in
which capacity he has been continuously active in strategic planning for Carlino
Financial and monitoring its operations. From 1972 until 1976, Mr. Carlino
served as President of Mountainview Thoroughbred Racing Association, a
subsidiary of Penn National.
WILLIAM J. BORK. Mr. Bork was elected President and a Director in
June 1995. From 1987 to June 1995 he was Vice President for Ladbroke Racing
Corporation. Prior to working with Ladbroke, Mr. Bork served as Vice President
of Operations of racetracks previously owned by Ogden Corporation including
Fairmount Park in Collinsville, Illinois; Mountaineer Park in Chester, West
Virginia; Wheeling Downs in Wheeling, West Virginia; and Suffolk Downs in
Boston, Massachusetts.
KEVIN DESANCTIS. In February 2001, Mr. DeSanctis joined the company. He
will assume the titles of President and Chief Operating Officer upon the receipt
of necessary licensing and regulatory approval in applicable jurisdictions.
Prior to joining us, Mr. DeSanctis served from 1995 to 2000 as Chief Operating
Officer, North America for Sun International Hotels Limited where he was
responsible for complete oversight of day-to-day operations of the company's
gaming properties in North America and the Bahamas. Prior to joining Sun
International, Mr. DeSanctis' experience included management and pre-opening
responsibilities for gaming operations in Las Vegas, Atlantic City, New Orleans
and Colorado.
55
ROBERT S. IPPOLITO. Mr. Ippolito, a certified public accountant, was
elected Chief Financial Officer, Secretary and Treasurer of Penn National in
April 1994. He was Corporate Controller and Secretary of Carlino Financial and
certain of its affiliates between June 1987 and May 1994, and from 1979 to 1987
was engaged in public accounting.
JOSEPH A. LASHINGER, JR., ESQ. Mr. Lashinger was elected Vice President and
General Counsel of Penn National in June 1997. Prior to joining us,
Mr. Lashinger served as a consultant to us from 1996 to 1997. From 1978 to 1990,
Mr. Lashinger was elected to seven consecutive terms in the Pennsylvania House
of Representatives as representative from the 150th Legislative District in
Montgomery County, Pennsylvania. From 1981 to 1992, Mr. Lashinger was a partner
in the law firm of Fox, Differ, Callahan, Sheridan, O'Neil and Lashinger.
Mr. Lashinger has also served as director of government affairs, development
director and counsel to several major casino companies including Hollywood
Casino Corporation and Bally Entertainment. In 1997, Mr. Lashinger voluntarily
filed for personal bankruptcy due in part to his personal guaranty of the debts
of a failed business in which he was a part owner.
ROBERT E. ABRAHAM. Mr. Abraham was elected Vice President and Corporate
Controller in January 1997. From 1986 to 1997, Mr. Abraham was the controller of
Mountainview Thoroughbred Racing Association and Pennsylvania National Turf
Club.
GEORGE A. CONNOLLY. Mr. Connolly was elected Vice President, Human
Resources in April, 1998. Prior to joining Penn National in 1998, Mr. Connolly
held a number of positions in the Human Resources and Labor and Public Relations
departments at Western Electric/AT&T in New York City, Kearny, New Jersey,
Newark, New Jersey, Kansas City, Missouri, and Reading, Pennsylvania.
Mr. Connolly spent 31 years at Western Electric/AT&T.
ITEM 11. EXECUTIVE COMPENSATION
The information called for in this item is hereby incorporated by reference
to the 2001 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for in this item is hereby incorporated by reference
to the 2001 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for in this item is hereby incorporated by reference
to the 2001 Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1 and 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES. The
following is a list of the Consolidated Financial Statements
of the Company and its subsidiaries and supplementary data
filed as part of Item 8 hereof:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 1999 and 2000
Consolidated Statements of Income for the years ended
December 31, 1998,
1999 and 2000
Consolidated Statements of Shareholders' Equity for the
years ended December 31,
1998, 1999 and 2000
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000
56
All other schedules are omitted because they are not
applicable, or not required, or because the required
information is included in the Consolidated Financial
Statements or notes thereto.
3. EXHIBITS, INCLUDING THOSE INCORPORATED BY REFERENCE. The
exhibits to this Report are listed on the accompanying index
to exhibits and are incorporated herein by reference or are
filed as part of this annual report on Form 10-K.
(b) REPORTS ON FORM 8-K. The Company filed the following reports
on Form 8-K during the fourth quarter 2000:
On October 20, 2000, the Company filed a Current Report on
Form 8-K/A that included financial information pertaining to
the purchase of substantially all of the assets of the
Casino Magic Bay St. Louis Casino and Boomtown Biloxi Casino
from Pinnacle Entertainment, Inc. (formerly Hollywood
Park, Inc.) for $195 million which was reported in the
Current Form 8-K filed August 23, 2000.
57
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT
- --------------------- ----------------------
2.1 Agreement and Plan of Reorganization dated April 11, 1994
among Penn National Gaming, Inc., 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 Penn National Gaming, Inc., 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 Penn National Gaming, Inc. 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 Penn National Gaming, Inc. 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 current report
on Form 8-K, dated January 30, 1997.)
2.4 Amended and Restated Operating Agreement dated as of
December 31, 1996 among Penn National Gaming of West
Virginia, Inc., Bryant Development Company and PNGI Charles
Town Gaming Limited Liability Company. (Incorporated by
reference to the Company's current report on Form 8-K, 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
current report on Form 8-K, dated January 30, 1997.)
2.6 First Amendment to Asset Purchase Agreement dated as of
January 28, 1999 by and between among Greenwood New
Jersey, Inc., International Thoroughbred Breeders, Inc.,
Garden State Race Track, Inc., Freehold Racing Association,
Atlantic City Harness Inc., Circa 1850, Inc., and Penn
National Gaming, Inc. (Incorporated by reference to the
Company's current report on Form 8-K, dated February 12,
1999.)
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 current report on Form 8-K,
dated January 30, 1997.)
2.8 Transfer, Assignment and Assumption Agreement and Bill of
Sale dated January 15, 1997 among Charles Town Races, Inc.,
Charles Town Racing Limited Partnership, and PNGI Charles
Town Limited Liability Company. (Incorporated by reference
to Exhibit 2.2 of the Company's Form 10-Q, dated
November 14, 1997.)
2.9 Second Amended and Restated Operating Agreement dated as of
October 17, 1997, among Penn National Gaming of West
Virginia, Inc., BDC Group and PNGI Charles Town Gaming
Limited Liability Company. (Incorporated by reference to the
Company's Form 10-Q, dated November 14, 1997.)
58
EXHIBIT DESCRIPTION OF EXHIBIT
- --------------------- ----------------------
2.10 Purchase Agreement dated September 13, 1996 between Penn
National Gaming, Inc. 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, dated November 13, 1996.)
2.11 Asset Purchase Agreement dated as of December 9, 1999
between BSL, Inc. and Casino Magic Corp. (Incorporated by
reference to the Company's current report on Form 8-K,
dated August 8, 2000.)
2.12 First Amendment to Asset Purchase Agreement dated as of
December 17, 1999 between BSL, Inc. and Casino Magic Corp.
(Incorporated by reference to the Company's current report
on Form 8-K, dated August 8, 2000.)
2.13 Second Amendment to Asset Purchase Agreement dated as of
August 1, 2000 between BSL, Inc. and Casino Magic Corp.
(Incorporated by reference to the Company's current report
on Form 8-K, dated August 8, 2000.)
2.14 Asset Purchase Agreement dated as of December 9, 1999
between BTN, Inc. and Boomtown Inc. (Incorporated by
reference to the Company's current report on Form 8-K,
dated August 8, 2000.)
2.15 First Amendment to Asset Purchase Agreement dated as of
December 17, 1999 between BTN, Inc. and Boomtown Inc.
(Incorporated by reference to the Company's current report
on Form 8-K, dated August 8, 2000.)
2.16 Second Amendment to Asset Purchase Agreement dated as of
August 1, 2000 between BTN, Inc. and Boomtown Inc.
(Incorporated by reference to the Company's current report
on Form 8-K, dated August 8, 2000.)
2.17 Agreement and Plan of Merger among CRC Holdings, Inc., Penn
National Gaming, Inc., Casino Holdings, Inc., Sherwood
Weiser and Donald E. Lefton, dated as of July 31, 2000.
(Incorporated by reference to the Company's current report
on Form 8-K, dated July 31, 2000.)
2.18 Stock Purchase Agreement by and among Penn National
Gaming, Inc., Dan S. Meadows, Thomas L. Meehan and Jerry L.
Bayles, dated as of July 31, 2000. (Incorporated by
reference to the Company's current report on Form 8-K, dated
July 31, 2000.)
3.1 Amended and Restated Articles of Incorporation of Penn
National Gaming, Inc., filed with the Pennsylvania
Department of State on April 12, 1994. (Incorporated by
reference to the Company's registration statement on
Form S-1, File #33-77758, dated May 26, 1994.)
3.2 By-laws of Penn National Gaming, Inc. (Incorporated by
reference to the Company's registration statement on
Form S-1, File #33-77758, dated May 26, 1994.)
4 Rights Agreement dated as of March 2, 1999, between Penn
National Gaming, Inc. and Continental Stock Transfer and
Trust Company. (Incorporated by reference to the Company's
current report on Form 8-K, dated March 17, 1999.)
4.1 Indenture dated December 17, 1997 between Penn National
Gaming, Inc. and State Street Bank and Trust Company.
(Incorporated by reference to the Company's registration
statement on Form S-4, File #333-45337, dated January 30,
1998.)
9.1 Form of Trust Agreement of Peter D. Carlino, Peter M.
Carlino, Richard J. Carlino, David E. Carlino, Susan F.
Harrington, Anne de Lourdes Irwin, Robert M. Carlino,
Stephen P. Carlino and Rosina E. Carlino Gilbert.
(Incorporated by reference to the Company's registration
statement on Form S-1, File #33-77758, dated May 26, 1994.)
59
EXHIBIT DESCRIPTION OF EXHIBIT
- --------------------- ----------------------
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 Penn
National Gaming, Inc. and Peter M. Carlino. (Incorporated by
reference to the Company's registration statement on
Form S-1, File #33-77758, dated May 26, 1994.)
10.4# Employment Agreement dated April 12, 1994 between the
Registrant and Robert S. Ippolito. (Incorporated by
reference to the Company's registration statement on
Form S-1, File #33-77758, dated May 26, 1994.)
10.8 Consolidation of PRA Agreement dated May 18, 1992 and PRA
Amendment dated February 9, 1993 among all members of the
Pennsylvania Racing Association. (Incorporated by reference
to the Company's registration statement on Form S-1, File
#33-77758, dated May 26, 1994.)
10.11 Lease dated March 7, 1991 between Shelbourne Associated and
PNRC Limited Partnership. (Incorporated by reference to the
Company's registration statement on Form S-1, File
#33-77758, dated May 26, 1994.)
10.13.1 Lease dated June 30, 1993 between John E. Kyner, Jr. and
Sandra R. Kyner, and PNRC Chambersburg, Inc. (Incorporated
by reference to the Company's registration statement on
Form S-1, File #33-77758, dated May 26, 1994.)
10.38 Consulting Agreement dated August 29, 1994, between Penn
National Gaming, Inc. and Peter D. Carlino. (Incorporated by
reference to the Company's Form 10-K, dated March 23,
1995.)
10.39 Lease dated July 7, 1994, between North Mall Associates and
Penn National Gaming, Inc. for the York OTW. (Incorporated
by reference to the Company's Form 10-K, dated March 23,
1995.)
10.41.1 Lease dated March 31, 1995 between Wyomissing Professional
Center III, LP and Penn National Gaming, Inc. for the
Wyomissing Corporate Office. (Incorporated by reference to
the Company's Form 10-K, dated March 20, 1996.)
10.42# Employment Agreement dated June 1, 1995 between Penn
National Gaming, Inc. and William J. Bork. (Incorporated by
reference to the Company's Form 10-K, 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, 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, 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,
dated March 20, 1996.)
10.50 Formation Agreement dated February 26, 1996 between Penn
National Gaming, Inc. and Bryant Development Company.
(Incorporated by reference to the Company's Form 10-K,
dated March 20, 1996.)
60
EXHIBIT DESCRIPTION OF EXHIBIT
- --------------------- ----------------------
10.51 Assignment of Agreement of Sale dated March 6, 1996 between
Penn National Gaming, Inc. and Montgomery Realty Growth
Fund, Inc. (Incorporated by reference to the Company's
Form 10-Q, dated May 14, 1996.)
10.56 Amended and Restated Option Agreement dated as of
February 17, 1995 between the PNGI Charles Town Gaming
Limited Liability Company (The Joint Venture) and Charles
Town Racing Limited Partnership and Charles Town
Races, Inc. (Incorporated by reference to the Company's
Form 10-Q, dated November 13,1996.)
10.58# Agreement dated March 19, 1997, between PNGI Charles Town
Gaming Limited Liability Company and the Charles Town
HBPA, Inc. (Incorporated by reference to the Company's
Form 10-K, dated March 27, 1997.)
10.59# Agreement dated March 21, 1997, between PNGI Charles Town
Gaming Limited Liability Company and The West Virginia
Thoroughbred Breeders Association. (Incorporated by
reference to the Company's Form 10-K, dated March 27, 1997.)
10.60# Agreement between PNGI Charles Town Gaming Limited Liability
Company and The West Virginia Union of Mutuel Clerks, Local
533, Service Employees International Union, AFL-CIO.
(Incorporated by reference to the Company's Form 10-K, File
#0-24206, dated March 27, 1997.)
10.66*# Agreement dated January 1, 2001 by and between PNGI Charles
Town Gaming Limited Liability Company, or its successors,
and the West Virginia Union of Mutuel Clerks, Local 553,
Service Employees International Union, AFL-CIO.
10.67# Agreement dated October 2, 1996 between Pennsylvania
National Turf Club, Inc., Mountainview Racing Association
and Sports Arena Employees' Union Local No. 137 (Primary
Location.) (Incorporated by reference to the Company's
Form 10-K, dated March 27, 1998.)
10.68 Lease dated July 1, 1997 between Laurel Mall Associated and
the Downs Off-Track Wagering, Inc. (Incorporated by
reference to the Company's Form 10-K, dated March 27,
1998.)
10.72 Totalisator Agreement dated November 19, 1997, between Penn
National Gaming, Inc. and AutoTote Systems, Inc.
(Incorporated by reference to the Company's Form 10-K, dated
March 27, 1998.)
10.73 Amended and Restated Credit Facility dated as of
December 17, 1997, among Penn National Gaming, Inc., certain
lenders, Bankers Trust Company, as Agent, and CoreStates
Bank, N.A., as Co-Agent. (Incorporated by reference to the
Company's Form 10-K, dated March 27, 1998.)
10.76 First Amendment and Waiver dated May 15, 1998, among Penn
National Gaming, Inc., CoreStates Bank, N.A. and Bankers
Trust Company. (Incorporated by reference to the Company's
Form 10-Q, dated March 31, 1998.)
10.77 Purchase Agreement dated July 7, 1998, between Ladbroke
Racing Management-Pennsylvania and Mountainview Thoroughbred
Racing Association. (Incorporated by reference to the
Company's Form 10-Q, dated June 30, 1998.)
10.78 Lease Agreement between Penn National Gaming, Inc. and Eagle
Valley Realty dated July 14, 1998. (Incorporated by
reference to the Company's Form 10-Q, dated September 30,
1998.)
61
EXHIBIT DESCRIPTION OF EXHIBIT
- --------------------- ----------------------
10.79 Joint Venture Agreement dated October 30, 1998 between Penn
National Gaming, Inc. and Greenwood New Jersey, Inc.
(Incorporated by reference to the Company's Form 10-Q,
dated September 30, 1998.)
10.80 Amendment dated November 2, 1998 to Joint Venture Agreement
between Penn National Gaming, Inc. and Greenwood New
Jersey, Inc. (Incorporated by reference to the Company's
Form 10-Q, dated September 30, 1998.)
10.81 First Amendment to Joint Venture Agreement dated as of
January 28, 1999, by and between Greenwood New
Jersey, Inc., and Penn National Gaming, Inc. (Incorporated
by reference to the Company's current report on Form 8-K,
dated February 12, 1999.)
10.82 First Amendment to Asset Purchase Agreement dated as of
January 28, 1999 by and among Greenwood New Jersey, Inc.,
International Thoroughbred Breeders, Inc., Garden State Race
Track, Inc., Freehold Racing Association, Atlantic City
Harness Inc., Circa 1850, Inc., and Penn National
Gaming, Inc. (Incorporated by reference to the Company's
current report on Form 8-K, dated January 28, 1999.)
10.83 First Amendment to Joint Venture Agreement dated as of
January 28, 1999, by and between Greenwood New Jersey, Inc.
and Penn National Gaming, Inc. (Incorporated by reference to
the Company's current report on Form 8-K, dated January 28,
1999.)
10.85 Assignment and Assumption of Lease Agreement dated
December 31, 1998 between Mountainview Thoroughbred Racing
Association and Ladbroke Racing Management-Pennsylvania.
(Incorporated by reference to the Company's Form 10K, dated
March 30, 1999.)
10.86 Subordination, Non-Disturbance and Attornment Agreement
dated December 31, 1998 between Mountainview Thoroughbred
Racing Association and CRIIMI MAE Services Limited
Partnership. (Incorporated by reference to the Company's
Form 10-K, dated March 30, 1999.)
10.87 Second Amended and Restated Credit Agreement dated as of
January 28, 1999 between Penn National Gaming, Inc. and
various banks, First Union National Bank, as Agent.
(Incorporated by reference to the Company's Form 10-K, dated
March 30, 1999.)
10.88 Live Racing Agreement dated March 23, 1999 between
Pennsylvania National Turf Club, Inc. and Mountainview
Thoroughbred Racing Association and Pennsylvania Horsemen's
Benevolent and Protection Association, Inc. (Incorporated by
reference to the Company's Form 10-K, dated March 30, 1999.)
10.89 Amendment to Employment Agreement dated June 1, 1999,
between Penn National Gaming, Inc. and Peter M. Carlino.
(Incorporated by reference to the Company's Form 10-Q, dated
August 12, 1999.)
10.90# Amendment to Employment Agreement dated June 1, 1999,
between Penn National Gaming, Inc. and Robert S. Ippolito.
(Incorporated by reference to the Company's Form 10-Q, dated
August 12, 1999.)
10.91 Second Amendment to Joint Venture Agreement dated as of
July 29, 1999, between Penn National Gaming, Inc. and
Greenwood Racing, Inc. (Incorporated by reference to the
Company's Form 10-Q, dated August 12, 1999.)
10.92 Shareholder's Agreement dated July 29, 1999, between Penn
National Holding Company and Greenwood Racing, Inc.
(Incorporated by reference to the Company's Form 10-Q,
dated August 12, 1999.)
62
EXHIBIT DESCRIPTION OF EXHIBIT
- --------------------- ----------------------
10.93 Amended and Restated Limited Partnership Agreement dated
July 29, 1999, between FR Park Racing, L.P., Pennwood
Racing, Inc. and Penn National GSFR, Inc. (Incorporated by
reference to the Company's Form 10-Q, dated August 12,
1999.)
10.94 Amended and Restated Limited Partnership Agreement dated
July 29, 1999, between FR Park Services, L.P., Pennwood
Racing, Inc. and Penn National GSFR, Inc. (Incorporated by
reference to the Company's Form 10-Q, dated August 12,
1999.)
10.95 Amended and Restated Limited Partnership Agreement dated
July 29, 1999, between GS Park Racing, L.P., Pennwood
Racing, Inc. and Penn National GSFR, Inc. (Incorporated by
reference to the Company's Form 10-Q, dated August 12,
1999.)
10.96 Amended and Restated Limited Partnership Agreement dated
July 29, 1999, between GS Park Services, L.P., Pennwood
Racing, inc. and Penn National GSFR, Inc. (Incorporated by
reference to the Company's Form 10-Q, dated August 12,
1999.)
10.97 Amendment No. 1 to Second Amended and Restated Credit
Agreement dated July 29, 1999, between Penn National
Gaming, Inc. and First Union National Bank. (Incorporated by
reference to the Company's Form 10-Q, dated August 12,
1999.)
10.98 Amendment No. 2 to Second Amended and Restated Credit
Agreement dated July 29, 1999, Penn National Gaming, Inc.
and First Union National Bank. (Incorporated by reference to
the Company's Form 10-Q, dated August 12, 1999.)
10.99 Agreement dated July 9, 1999, between Penn National
Gaming, Inc. and American Digital Communications, Inc.
(Portions of this Exhibit have been omitted pursuant to a
request for confidential treatment.) (Incorporated by
reference to the Company's Form 10-Q, dated August 12,
1999.)
10.01a Subordination and Intercreditor Agreement dated July 29,
1999, between Penn National Gaming, Inc., FR Park Racing,
L.P., and Commerce Bank, N.A. (Incorporated by reference to
the Company's Form 10-Q, dated August 12, 1999.)
10.02a Debt Service Maintenance Agreement dated July 29, 1999,
between Penn National Gaming, Inc. and Commerce Bank, N.A.
(Incorporated by reference to the Company's Form 10-Q, dated
August 12, 1999.)
10.03a First Supplemental Indenture dated May 19, 1999, between
Penn National Gaming, Inc. and State Street Bank and Trust
Company, Trustee. (Incorporated by reference to the
Company's Form 10-Q, dated August 12, 1999.)
10.04a Asset Purchase Agreement between BSL., Inc. and Casino Magic
Corp. dated December 9, 1999. (Filed as exhibit 99.2 to the
Company's current report on Form 8-K, dated December 17,
1999.)
10.05a Guaranty of Penn National Gaming, Inc. to Casino Magic Corp.
dated December 9, 1999. (Filed as exhibit 99.3 to the
Company's current report on Form 8-K, dated December 17,
1999.)
10.06a Guaranty of Hollywood Park, Inc. to BSL, Inc. dated
December 9, 1999. (Filed as exhibit 99.4 to the Company's
current report on Form 8-K, dated December 17, 1999.)
10.07a First Amendment to Asset Purchase Agreement between
BSL, Inc. and Casino Magic Corp. dated December 17, 1999.
(Filed as exhibit 99.5 to the Company's current report on
Form 8-K, dated December 17, 1999.)
10.08a Asset Purchase Agreement between BTN, Inc. and
Boomtown, Inc. dated December 9, 1999. (Filed as
exhibit 99.6 to the Company's current report on Form 8-K,
dated December 17, 1999.)
63
EXHIBIT DESCRIPTION OF EXHIBIT
- --------------------- ----------------------
10.09a Guaranty of Penn National Gaming, Inc. to Boomtown, Inc.
dated December 9, 1999 (Filed as exhibit 99.7 to the
Company's current report on Form 8-K, dated December 17,
1999.)
10.10a Guaranty of Hollywood Park, Inc. to BTN, Inc. dated
December 9, 1999. (Filed as exhibit 99.8 to the Company's
current report on Form 8-K, dated December 17, 1999.)
10.11a First Amendment to Asset Purchase Agreement between
BTN, Inc. and Boomtown, Inc. dated December 17, 1999.
(Filed as exhibit 99.9 to the Company's current report on
Form 8-K, dated December 17, 1999.)
10.12a Senior secured multiple draw term loan dated December 13,
1999 between Penn National Gaming of West Virginia, Inc. and
Bank of America. (Incorporated by reference to the Company's
Form 10-K, dated March 20, 2000.)
10.13a Amendment No. 3 and Consent and Waiver under Second Amended
and Restated Credit Agreement dated December 13, 1999
between Penn National Gaming, Inc. and First Union National
Bank, as Agent. (Incorporated by reference to the Company's
Form 10-K, dated March 20, 2000.)
10.14a Harness horsemen agreement dated December 17, 1999 between
The Downs Racing, Inc. and the Pennsylvania Harness
Horsemen. (Incorporated by reference to the Company's
Form 10-K, dated March 20, 2000.)
10.15a Settlement agreement dated February 11, 2000 between Penn
National Gaming, Inc. and Amtote International, Inc.
(Incorporated by reference to the Company's Form 10-K, dated
March 20, 2000.)
10.16a Thoroughbred horsemen letter dated February 24, 2000 between
PNGI Charles Town Gaming, LLC and the Charles Town
thoroughbred horsemen. (Incorporated by reference to the
Company's Form 10-K, dated March 20, 2000.)
10.17a Agreement dated March 7, 2000 between Penn National
Gaming, Inc. and Trackpower, Inc. and eBet Limited, Inc.
(Incorporated by reference to the Company's Form 10-K, dated
March 20, 2000.)
10.18a Purchase Agreement dated March 15, 2000, between PNGI
Charles Town Gaming, LLC and BDC Group. (Incorporated by
reference to the Company's Form 10-Q, dated May 12, 2000.)
10.19a Amendment No. 1 to Term Loan Agreement between the Company
and Bank of America, dated March 28, 2000. (Incorporated by
reference to the Company's Form 10-Q, dated May 12, 2000.)
10.20a Amendment No. 4 to Loan Agreement between the Company and
First Union National Bank dated March 29, 2000.
(Incorporated by reference to the Company's Form 10-Q,
dated May 12, 2000.)
10.21a Credit Agreement among Penn National Gaming, Inc., as
Borrower, the Several Lenders from time to time parties
hereto, Lehman Brothers Inc., as Lead Arranger and Book-
Running Manager, CIBC World Markets Corp., as Co-Lead
Arranger and Co-Book Running Manager, Lehman Commercial
Paper Inc., as Syndication Agent, Canadian Imperial Bank of
Commerce, as Administrative Agent, and The CIT
Group/Equipment Financing, Inc., First Union National Bank
and Wells Fargo Bank, N.A., as Documentation Agents, dated
as of August 8, 2000. (Incorporated by reference to the
Company's Form 8-K, dated August 8, 2000)
21* Subsidiaries of the Registrant.
23.1* Consent of BDO Seidman, LLP.
64
EXHIBIT DESCRIPTION OF EXHIBIT
- --------------------- ----------------------
24.1* Power of attorney (included on the signature page to this
Form 10-K report).
- ------------
# Compensation plans and arrangements for executives and others.
* Filed herewith.
+ Confidential treatment has been requested as to certain portions of this
exhibit. The omitted portions have been separately filed with the Securities
and Exchange Commission.
65
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
AND CHIEF EXECUTIVE OFFICER
Dated: March 23, 2001
Pursuant to the requirements of the Securities Exchange 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.
Each person whose signature appears below in so signing also makes,
constitutes and appoints Robert S. Ippolito his true and lawful
attorney-in-fact, in his name, place and stead to execute and cause to be filed
with the Securities and Exchange Commission any or all amendments to this
report.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PETER M. CARLINO Chief Executive Officer and
------------------------------------------- Director (Principal March 23, 2001
Peter M. Carlino Executive Officer)
/s/ WILLIAM J. BORK
------------------------------------------- President, Chief Operating March 23, 2001
William J. Bork Officer and Director
Chief Financial Officer,
/s/ ROBERT S. IPPOLITO Secretary and Treasurer
------------------------------------------- (Principal Financial and March 23, 2001
Robert S. Ippolito Accounting Officer)
/s/ HAROLD CRAMER
------------------------------------------- Director March 23, 2001
Harold Cramer
/s/ DAVID A. HANDLER
------------------------------------------- Director March 23, 2001
David A. Handler
/s/ ROBERT P. LEVY
------------------------------------------- Director March 23, 2001
Robert P. Levy
/s/ JOHN M. JACQUEMIN
------------------------------------------- Director March 23, 2001
John M. Jacquemin
66