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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-24206
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PENN NATIONAL GAMING, INC.
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(Exact name of registrant as specified in its charter)
Wyomissing Professional Center
825 Berkshire Blvd., Suite 200
PENNSYLVANIA 23-2234473 Wyomissing, Pennsylvania 19610
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(State or other jurisdiction of (I.R.S. Employer (Address of principal executive (Zip Code)
incorporation or organization) Identification No.) officer)
Registrant's telephone number, including area code 610-373-2400
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Securities registered pursuant to Section 12(b) of the Act:
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 required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Aggregate market value of the voting common stock held by
nonaffiliates of the Registrant
as of March 20, 1998 was approximately $156,302,075.
Number of Shares of Common Stock outstanding as of March 20, 1998 - 15,155,830
Documents Incorporated by Reference
-----------------------------------
Registrant's Definitive Proxy Statement with respect to Annual Meeting of
Shareholders to be held on May 20, 1998.
THIS REPORT INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS
INCLUDED IN THIS REPORT LOCATED ELSEWHERE HEREIN REGARDING THE COMPANY'S
OPERATIONS, FINANCIAL POSITION AND BUSINESS STRATEGY, MAY CONSTITUTE
FORWARD-LOOKING STATEMENTS. IN ADDITION, FORWARD-LOOKING STATEMENTS GENERALLY
CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY,"
"WILL," "EXPECT," "INTEND," "ESTIMATE," "ANTICIPATE," "BELIEVE," OR "CONTINUE"
OR THE NEGATIVE THEREOF OR VARIATIONS THEREON OR SIMILAR TERMINOLOGY. ALTHOUGH
THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS ARE REASONABLE AT THIS TIME, IT CAN GIVE NO ASSURANCE THAT SUCH
EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ("CAUTIONARY
STATEMENTS") ARE DISCLOSED IN THIS REPORT AND IN OTHER MATERIALS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. ALL SUBSEQUENT WRITTEN AND ORAL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS
BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
References to "Penn National Gaming" or the "Company" include Penn National
Gaming, Inc. and its subsidiaries.
2
PART 1
ITEM 1 BUSINESS
GENERAL
The Company, which began operations in 1972, is a diversified gaming
and pari-mutuel wagering company that owns and operates two racetracks and eight
off-track wagering facilities ("OTWs") in Pennsylvania, as well as an 89%
interest in an entertainment complex that includes a thoroughbred racetrack and
video gaming machines ("Gaming Machines") in Charles Town, West Virginia. The
Company's Pennsylvania racetracks include the Penn National Race Course, located
outside Harrisburg, one of two thoroughbred racetracks in Pennsylvania, and
Pocono Downs, located outside Wilkes-Barre, one of two harness racetracks in
Pennsylvania. The Company intends to develop the three additional OTWs that have
been allocated to it under Pennsylvania law, after which it would operate 11 of
the 23 OTWs currently authorized in Pennsylvania. Between 1993 and 1996, the
Company increased total wagers at a compound annual growth rate of 21.1% by
expanding its simulcast and OTW operations. In contrast, during the same period,
total industry wagers increased at a compound annual growth rate of 3.0% based
upon industry data.
The Company developed the Charles Town Entertainment Complex in order
to operate and market a facility that integrates Gaming Machines with the
Company's core business strengths of live racing and simulcast wagering. The
Charles Town Entertainment Complex is an approximately 60-minute drive from
Baltimore, Maryland and an approximately 70-minute drive from Washington, DC.
Through December 31, 1997, the Company has invested a total of approximately
$45.2 million to acquire and develop the Charles Town Entertainment Complex,
which includes $18.2 million in acquisition costs and $27.0 million for
substantial renovations and refurbishments. In developing the Charles Town
Entertainment Complex, the Company preserved the California mission-style
architecture of the original Charles Town Races facility and incorporated
extensive internal renovations including a 1930s art deco Hollywood theater
theme within the Silver Screen Gaming area. After having been closed for
approximately six months, the thoroughbred racing and simulcasting operations at
the Charles Town Entertainment Complex were reopened in April 1997. Gaming
Machine operations commenced in September 1997.
INDUSTRY OVERVIEW
Pari-mutuel wagering on thoroughbred or harness racing is pooled
wagering, in which a pari-mutuel wagering system totals the amounts wagered and
adjusts the payouts to reflect the relative amounts bet on different horses and
various possible outcomes. The pooled wagers are (i) paid out to bettors as
winnings in accordance with the payoffs determined by the pari-mutuel wagering
system, (ii) paid to the applicable regulatory or taxing authorities and (iii)
distributed to the track's horsemen in the form of "purses" which encourage
owners and trainers to enter their horses in that track's live races. The
balance of the pooled wagers is retained by the wagering facility. Pari-mutuel
wagering is currently authorized in more than 40 states in the United States,
all provinces in Canada and approximately 100 other countries around the world.
Gaming and wagering companies, such as the Company, that focus on
pari-mutuel horse race wagering derive revenue through wagers placed at their
own tracks, at their OTWs and on their own races at the tracks and OTWs of
others. While some states, such as New York, operate off-track betting locations
that are independent of racetracks, in other states (such as Pennsylvania)
racetrack ownership and operation is a precondition to OTW ownership and
operation. A racetrack in such a state, then, is akin to an "admission ticket"
to the OTW business.
Over the past several years, attendance at live racing has generally
declined. Prior to the inception of OTWs, declining live racing attendance at a
track translated directly into lower purses at that track. As the size of the
purses declined, the quality of live racing at the track would suffer, leading
in turn to further reductions in attendance. The Company believes that increased
contributions to the purse pool from wagers placed at OTWs affiliated with
racetracks have significantly offset the effects of declining live racing
3
attendance on race quality, and thereby improved the marketability of many
tracks' export simulcast products. Indeed, despite declining live racing
attendance, total pari-mutuel wagering on horse races in the United States has
remained relatively constant in recent years, increasing from approximately
$13.7 billion in 1993 to approximately $15.0 billion in 1996, according to
industry data; an increase in simulcast, inter-track and off-track wagering from
approximately $7.6 billion to approximately $11.0 billion during that period has
offset declining wagering at tracks on live races. Given that many pari-mutuel
wagering companies, such as the Company, face the necessary precondition of
conducting live racing operations as their entree into the industry, the Company
believes that its opportunities for success can be maximized through OTW
operations, import and export simulcasting and the operation of Gaming Machines,
to the extent permitted.
A number of states have recently begun to authorize the installation of
slot machines, video lottery terminals or other gaming machines ("Gaming
Wagering") at live racing venues such as thoroughbred horse tracks, harness
tracks and dog tracks. The revenue from these gaming opportunities and from the
higher volume of wagers placed at these venues has not only increased total
revenues for the tracks at which they are installed, but has generally further
increased purse size and thereby resulted in higher quality races that can
command higher simulcast revenues. The Company has taken advantage of this
development by acquiring Charles Town Races shortly after West Virginia
authorized the operation of Gaming Machines at Charles Town Races. Since
pari-mutuel wagering companies, such as the Company, possess the necessary
precondition of conducting live racing operations to offer OTW wagering
opportunities and Gaming Wagering (where permitted by law), the Company believes
that its opportunities for success can be maximized through OTW operations,
import simulcasting and export simulcasting and the operation of Gaming
Machines, to the extent permitted. At present, more than 40 states authorize
inter-state and/or intra-state pari-mutuel wagering, which may involve the
simulcasting of such races.
STRATEGY
The Company intends to be a leading operator in the gaming and
pari-mutuel wagering industry by capitalizing on its horse racing expertise and
its numerous wagering locations. The Company plans to increase revenue by using
the following strategies:
Focus on Gaming Machine Operations. The Company's primary focus at the
Charles Town Entertainment Complex is on Gaming Machine operations. The Company
commenced Gaming Machine operations with a soft opening of 223 Gaming Machines
on September 10, 1997. The Company's grand opening of Gaming Machine operations
at the Charles Town Entertainment Complex occurred on October 17, 1997 with 400
Gaming Machines in operation. As of March 1998, the Company had 609 Gaming
Machines in operation. The Company intends to increase the number of Gaming
Machines in operation at the Charles Town Entertainment Complex to 799 in 1998,
and if demand warrants, to 1,000 thereafter, the maximum number the Company is
currently approved to operate at this complex. The Charles Town Entertainment
Complex's Gaming Machines are dollar bill-fed video gaming machines that
replicate traditional spinning reel slot machines and also feature video card
games, such as blackjack and poker. Marketing efforts, which include print and
radio advertising, commenced in October 1997 and are focused on the Washington,
DC, Baltimore, Maryland, Northern Virginia, Eastern West Virginia and Southern
Pennsylvania markets. The Company intends to enhance these marketing efforts by
installing and operating a computerized player tracking system, in order to
identify preferred players and encourage repeat Gaming Machine patronage at the
Charles Town Entertainment Complex.
Open Additional OTWs. The Company operates eight of the 19 OTWs now
open in Pennsylvania and has the right to operate three of the four remaining
OTWs that have been authorized in Pennsylvania. The Company's OTWs are located
in Allentown, Chambersburg, Erie, Lancaster, Reading, Williamsport, York and
Hazelton, Pennsylvania. At OTWs, customers can place wagers on thoroughbred and
harness races simulcast from the Company's racetracks and on import simulcast
races from other tracks around the country. Under the Pennsylvania Race Horse
Industry Reform Act ("Pennsylvania Racing Act"), only licensed thoroughbred and
harness racing associations, such as the Company, can operate OTWs or accept
customer wagers on simulcast races at Pennsylvania racetracks. The Company will
open an OTW in Carbondale, Pennsylvania (on or about March 31, 1998) and plans
(subject to the receipt of remaining regulatory approvals, including site
approvals) to open and operate additional OTWs in Stroudsburg and Altoona,
Pennsylvania, which would give the Company a total of 11 of the 23 OTWs
currently authorized by Pennsylvania law.
4
Expand Simulcasting Operations. Simulcasting involves the transmission
to, or the receipt of, the audio and/or video signals of a live racing event
through a satellite for re-transmission at a different wagering location. The
Company transmits simulcasts of Company races to other wagering locations
year-round and receives simulcasts of races from other locations for wagering by
its customers at the Company's facilities year-round. During the past five
years, the Company expanded its simulcasting operations and took advantage of
favorable changes in pari-mutuel wagering and simulcasting laws in various
states and the expanded use of simulcasting technology. Import simulcasting
generates revenue for the Company by maximizing the number of events available
to a patron for wagering at the Company's facilities by utilizing idle time
between races at Company racetracks and OTWs. When customers place wagers on
import simulcast races, of the amount not returned to bettors as winning wagers,
a portion is paid to the state in which the Company's wagering facility is
located, a portion is paid to the "purse" fund for the horse owners and trainers
of the Company's racetrack with which the wagering facility is associated, a
portion is paid as a simulcast fee to the originating track and the balance is
retained by the wagering facility and/or track. In order to promote wagering,
the Company has increased and expects to continue to increase full-card import
simulcasts from premier racetracks. The Company currently receives import
simulcasts from approximately 75 racetracks, including premier racetracks such
as Belmont Park, Gulfstream Park, Hollywood Park, Santa Anita and Saratoga. The
Company believes that "full-card" import simulcasting, in which all of the races
at a non-Company track are import simulcast to a Company wagering facility, has
improved the wagering opportunities for its customers and thereby increased the
amount wagered at Company facilities. Export simulcasting generates revenue for
the Company by increasing the consumer base for Company races beyond Company
racetracks and OTWs. The Company transmits export simulcasts of Company races to
approximately 98 locations and receives a flat percentage of the amounts wagered
on Company races at non-Company locations, while incurring minimal additional
expense. The Company intends to increase export simulcasting of races from
Company-owned tracks to out-of-state racetracks, OTWs, casinos and other gaming
facilities. The Company also seeks to improve the quality of its export
simulcast products by increasing purse sizes where practicable.
Capitalize on Other Gaming and Pari-Mutuel Wagering Opportunities. The
Company intends to continue identifying opportunities in the gaming and
pari-mutuel wagering industries which complement the Company's core operations
and leverage its pari-mutuel management and operating strengths. Management also
intends to explore other opportunities to capitalize upon changes in gaming
legislation, including legislation relating to Gaming Machines.
ACQUISITIONS
Pocono Downs Acquisition
On November 27, 1996, the Company acquired Pocono Downs for an
aggregate purchase price of $48.2 million plus approximately $730,000 in
acquisition-related fees and expenses. In addition, pursuant to the terms of the
purchase agreement, the Company will be required to pay the sellers of Pocono
Downs an additional $10.0 million if, within five years after the consummation
of the acquisition of Pocono Downs, Pennsylvania authorizes any additional form
of gaming in which the Company may participate. The $10.0 million payment is
payable in annual installments of $2.0 million a year for five years, beginning
on the date that the Company first offers such additional form of gaming. As of
March 20, 1998, no such additional form of gaming in Pennsylvania has been
adopted, and therefore, no such payment is due at this time.
Prior to the Company's acquisition, Pocono Downs conducted (a) harness
racing at Pocono Downs, located outside Wilkes-Barre, Pennsylvania, (b) export
simulcasting of Pocono Downs races to locations throughout the United States,
(c) pari-mutuel wagering at Pocono Downs and at OTWs in Allentown and Erie,
Pennsylvania on Pocono Downs races and on import simulcast races from other
racetracks, and (d) telephone account wagering on live and import simulcast
races.
5
Charles Town Acquisition
On January 15, 1997, the Charles Town Joint Venture acquired
substantially all of the assets of Charles Town Races for an aggregate net
purchase price of approximately $16.0 million plus approximately $2.2 million in
acquisition-related fees and expenses. Prior to its acquisition by the Charles
Town Joint Venture, Charles Town Races conducted live thoroughbred horse racing,
on-site pari-mutuel wagering on live races run at Charles Town Races and
wagering on import simulcast races. The Company has refurbished and reopened the
facility as the Charles Town Entertainment Complex, which features live racing,
dining, simulcast wagering and, effective September 1997, Gaming Machines. The
cost of the refurbishment, exclusive of the cost of the lease of the Gaming
Machines, is approximately $27.0 million as of December 31, 1997.
GAMING MACHINE OPERATIONS AT CHARLES TOWN ENTERTAINMENT COMPLEX
On November 5, 1996, Jefferson County, West Virginia approved a
referendum authorizing the installation and operation of Gaming Machines at the
Charles Town Entertainment Complex. As a result, the Company consummated the
Charles Town Acquisition on January 15, 1997. In April 1997, the Company
reopened the Charles Town Entertainment Complex, featuring live racing, dining
and simulcast wagering. In September 1997, the Company expanded wagering
opportunities by installing Gaming Machines at the Charles Town Entertainment
Complex. The Gaming Machines are dollar bill-fed video gaming machines that
replicate traditional spinning reel slot machines and also feature video card
games, such as blackjack and poker. The West Virginia Gaming Machine Act
specifies a 20% maximum percentage of each dollar wagered on Gaming Machines
which can be retained by the Company. The balance of each dollar wagered must be
paid out to the public as winning wagers. Of the portion retained by the
Company, a portion is paid to taxing authorities and other beneficiary
organizations mandated by the State of West Virginia and a portion is paid to
the Charles Town Horsemen in the form of purses. The Company has installed and
is operating, as of March 1998, 609 Gaming Machines at the Charles Town
Entertainment Complex, and anticipates installing 135 additional Gaming Machines
by April 1998. The Company has obtained all necessary approvals for the
installation and operation of a total of 1,000 Gaming Machines at the Charles
Town Entertainment Complex. After installing 799 Gaming Machines, the Company
will evaluate demand for its Gaming Machines and install an additional 201
Gaming Machines if demand warrants such installation.
RACING AND PARI-MUTUEL OPERATIONS
The Company's racing and pari-mutuel revenues have been derived from
(i) wagering on the Company's live races (a) at the Penn National Race Course,
(b) at the Company's OTWs, (c) at other Pennsylvania racetracks and OTWs and (d)
through telephone wagering, as well as wagering at the Company's racetracks on
certain stakes races run at out-of-state racetracks (collectively, referred to
in the Company's financial statements as "pari-mutuel revenues from Penn
National races"), (ii) wagering on full-card import simulcasts at the Company's
racetracks and OTWs and through telephone wagering (collectively, referred to in
the Company's financial statements as "pari-mutuel revenues from import
simulcasting") and (iii) fees from wagering on export simulcasting Company races
at out-of-state locations (referred to in the Company's financial statements as
"pari-mutuel revenues from export simulcasting"). The Company's other revenues
have been derived from admissions, program sales and certain other ancillary
activities, food and beverage sales and concessions.
Pennsylvania Operating Data of the Company
The following table summarizes certain key operating statistics for the
Company's Pennsylvania pari-mutuel operations related to Penn National Race
Course, Pocono Downs and their respective OTWs, including the pro forma
presentation of data assuming the acquisition of Pocono Downs occurred on
January 1, 1993:
6
PENN NATIONAL GAMING, INC.
PENNSYLVANIA WAGERING SUMMARY
YEARS ENDED DECEMBER 31
----------------------------------------------------------
1993 1994 1995 1996 1997
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(DOLLARS IN THOUSANDS, EXCEPT ATTENDANCE DATA AND AVERAGE DAILY PURSES)
NUMBER OF LIVE RACING DAYS:
Penn National Race Course............. 238 219 204 206 212
Pocono Downs.......................... 147 143 135 134 134
TOTAL ATTENDANCE:
Penn National Race Course(1).......... 548,085 485,224 430,128 370,898 339,487
Pocono Downs(1)....................... 211,629 253,521 242,870 377,830 370,090
Reading OTW........................... 251,540 253,183 246,012 214,314 178,237
Chambersburg OTW...................... -- 110,075 143,554 132,447 125,448
York OTW.............................. -- -- 232,109 238,610 225,672
Lancaster OTW......................... -- -- -- 92,641 158,003
Williamsport OTW...................... -- -- -- -- 81,797
Erie OTW.............................. 135,617 129,074 116,367 113,169 94,429
Allentown OTW......................... 136,620 275,118 272,491 271,706 252,909
------------------------------------------------------------
Total paid attendance(1).............. 1,283,491 1,506,195 1,683,531 1,811,615 1,826,072
============================================================
TOTAL WAGERING(1)(2):
Penn National Race Course............. $87,485 $91,898 $85,661 $75,708 $69,687
Pocono Downs.......................... 45,956 51,980 57,784 53,190 47,217
Reading OTW........................... 33,518 39,714 42,810 41,320 30,811
Chambersburg OTW...................... -- 14,589 24,365 25,024 24,899
York OTW.............................. -- -- 42,140 49,864 45,245
Lancaster OTW......................... -- -- -- 13,079 29,292
Williamsport OTW...................... -- -- -- -- 9,684
Erie OTW.............................. 20,452 26,404 29,379 27,200 21,767
Allentown OTW......................... 21,130 52,676 56,440 56,216 58,681
Penn National Telebet................. 8,103 7,967 8,281 8,423 9,473
Pocono Downs Dial-A-Bet............... -- -- 75 5,510 8,179
Export simulcasting:
Penn National Race Course............. 80,832 90,878 113,639 148,702 192,798
Pocono Downs.......................... 20,173 25,723 30,121 32,493 28,899
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Total wagering........................ $ 317,649 $401,829 $490,695 $536,729 $576,632
============================================================
7
YEARS ENDED DECEMBER 31
1993 1994 1995 1996 1997
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(DOLLARS IN THOUSANDS, EXCEPT ATTENDANCE DATA AND AVERAGE DAILY PURSES)
AVERAGE DAILY PURSES:
Penn National Race Course............. $40,834 $48,560 $57,897 $62,328 $60,623
Pocono Downs.......................... 26,022 35,790 42,314 42,313 40,149
------------------------------------------------------------
Total average daily purse............. $66,856 $84,350 $100,211 $104,641 $100,772
============================================================
GROSS MARGIN FROM WAGERING(3):
Penn National Race Course............. $15,346 $17,963 $24,915 $27,955 $28,669
Pocono Downs.......................... 10,918 16,653 17,838 17,805 16,920
------------------------------------------------------------
Total gross margin from
wagering.............................. $26,264 $34,616 $42,753 $45,760 $45,589
============================================================
(1) Does not reflect attendance for wagering on simulcasts when live racing is
not conducted (i) for all periods presented, in the case of Penn National
Race Course and (ii) for the years ended December 31, 1993-1995, in the
case of Pocono Downs.
(2) Wagering on certain imported stakes races is included in Wagering on the
Penn National Race Course races.
(3) Amounts equal total pari-mutuel revenues, less purses paid to the Horsemen,
taxes payable to Pennsylvania and simulcast commissions or host track fees
paid to other racetracks.
Live Racing
The following table summarizes the Company's live racing facilities:
RACING FACILITY LOCATION DATE OPENED/STATUS OPERATIONS CONDUCTED
- ---------------------------------------------------------------------------------------------------------
Penn National Race Course Grantville, PA Constructed in 1972; Live thoroughbred racing;
operated by the Company simulcast wagering; dining;
since 1972 telephone account wagering
Pocono Downs Plains Township, PA Constructed in 1965; Live harness racing;
operated by the Company simulcast wagering; dining;
since November 1996 telephone account wagering
Charles Town Races Charles Town, WV Charles Town Races was Live thoroughbred racing;
at the Charles Town constructed in 1933; simulcast wagering; dining
Entertainment Complex acquired by Charles Town (this facility is adjacent
Joint Venture on January to Gaming Machine
15, 1997; refurbished in operations)
1997 and reopened as the
Charles Town Entertainment
Complex
The Penn National Race Course is located on approximately 225 acres
approximately 15 miles northeast of Harrisburg, 100 miles west of Philadelphia
and 200 miles east of Pittsburgh. There is a total population of approximately
1.4 million persons within a radius of approximately 35 miles around the Penn
National Race Course and approximately 2.2 million persons within a 50-mile
radius. The property includes a one mile all-weather thoroughbred racetrack and
a 7/8-mile turf track. The property also includes approximately 400 acres
surrounding the Penn National Race Course which are available for future
expansion or development.
8
The Penn National Race Course's main building is the
grandstand/clubhouse, which is completely enclosed and heated and, at the
clubhouse level, fully air-conditioned. The building has a capacity of
approximately 15,000 persons with seating for approximately 9,000, including
1,400 clubhouse dining seats. Several other dining facilities and numerous food
and beverage stands are situated throughout the facility. Television sets for
viewing live racing and simulcasts are located throughout the facility. The
pari-mutuel wagering areas are divided between those available for on-track
wagering and those available for simulcast wagering.
The Penn National Race Course includes stables for approximately 1,250
horses, a blacksmith shop, veterinarians' quarters, jockeys' quarters, a paddock
building, living quarters for grooms, a cafeteria and recreational building in
the backstretch area and water and sewage treatment plants. Parking facilities
for approximately 6,500 vehicles adjoin the Penn National Race Course.
The Company has conducted live racing at the Penn National Race Course
since 1972, and has held at least 204 days of live racing at the facility in
each of the last five years. The Penn National Race Course is one of only two
thoroughbred racetracks in Pennsylvania. Although other regional racetracks
offer nighttime thoroughbred racing, the Penn National Race Course is the only
racetrack in the Eastern time zone conducting year-round nighttime thoroughbred
horse racing, which the Company believes increases its opportunities to export
simulcast its races during periods in which other racetracks are not conducting
live racing. Post time at the Penn National Race Course is 7:30 p.m. on
Wednesdays, Fridays and Saturdays, and 1:30 p.m. on Sundays and holidays.
Pocono Downs is located on approximately 400 acres in Plains Township,
outside Wilkes-Barre, Pennsylvania. There is a total population of approximately
785,000 persons within a radius of approximately 35 miles around Pocono Downs
and approximately 1.5 million persons within a 50-mile radius. The property
includes a 5/8-mile all-weather, lighted harness track. Pocono Downs's main
buildings are the grandstand and the clubhouse. The clubhouse is completely
enclosed and heated and fully air-conditioned. The grandstand has enclosed,
heated and air-conditioned seating for approximately 500 persons and permanent
open-air stadium-style seating for approximately 2,500 persons. The clubhouse is
a tiered dining and wagering facility that seats approximately 1,000 persons.
The clubhouse dining area seats 500 persons. Television sets for viewing live
racing and simulcasts are located throughout the facility along with pari-mutuel
wagering areas.
A two-story 14,000 square foot building which houses the Pocono Downs
offices is located on the property. Pocono Downs also includes stables for
approximately 950 horses, five paddock stables, quarters for grooms, two
blacksmith shops and a cafeteria for the Harness Horsemen. Parking facilities
for approximately 5,000 vehicles adjoin the track.
The acquisition of Pocono Downs was consummated following the last day
of racing at Pocono Downs for the 1996 season. The Company resumed live racing
at Pocono Downs in April 1997 and conducted 134 days of live harness racing at
the facility in the 1997 season. Post time at Pocono Downs is 7:30 p.m.
The Charles Town Entertainment Complex is located on a portion of a
250-acre parcel in Charles Town, West Virginia, which is approximately a
60-minute drive from Baltimore, Maryland and a 70-minute drive from Washington,
D.C. There is a total population of approximately 3.1 million persons within a
50-mile radius and approximately 9.0 million persons within a 100-mile radius of
the Charles Town Entertainment Complex. The property includes a 3/4-mile
thoroughbred racetrack. The Charles Town Entertainment Complex's main building
is the grandstand/clubhouse, which is completely enclosed and heated. The
clubhouse dining room has seating for 600. Additional food and beverage areas
are situated throughout the facility. The property surrounding the Charles Town
Entertainment Complex, including the site of the former Shenandoah Downs
Racetrack, is available for future expansion or development. In addition, the
Company has a right of first refusal for an additional 250 acres that are
adjacent to the Charles Town Entertainment Complex. The Charles Town
Entertainment Complex also includes stables, an indoor paddock, ample parking
and water and sewage treatment facilities.
The Charles Town Races reopened in April 1997 and the Company conducted
159 days of thoroughbred racing at the facility in the 1997 season. Post time at
the Charles Town Races is 7:30 p.m. on Fridays and Saturdays and 1:30 p.m. on
Wednesdays and Sundays.
9
OTWs
The Company's OTWs provide areas for viewing import simulcasts and
televised sporting events, placing pari-mutuel wagers and dining. The facilities
also provide convenient parking.
SIZE OWNED OR
FACILITY/LOCATION DATE OPENED/STATUS (SQ. FT.) COST LEASED
- ----------------- ------------------ --------- ---- --------
Allentown, PA Opened 7/93 28,500 $5,207,000 Owned
Chambersburg, PA Opened 4/94 12,500 1,500,000 Leased
Erie, PA Opened 5/91 22,500 3,575,000 Owned
Lancaster, PA Opened 7/96 24,000 2,700,000 Leased
Reading, PA Opened 5/92 22,500 2,100,000 Leased
Williamsport, PA Opened 2/97 14,000 3,000,000 Owned
York, PA Opened 3/95 25,000 2,200,000 Leased
Hazleton, PA Opened 3/98 13,000 2,000,000 Leased
(estimated)
Carbondale, PA Approval obtained; expected to 13,000 2,300,000 Owned(2)
open on or about March 31, 1998 (estimated)
Stroudsburg, PA License authorized; approval to 12,000 2,000,000 Leased(2)
operate pending; site selected (estimated)
Altoona, PA License authorized; approval to 14,220 2,000,000 Leased(2)
operate pending; site selected (estimated)
(1) Consists of original construction costs, equipment and, for owned
properties, the cost of land and building.
(2) The Company has purchased land and is in the process of constructing its
proposed Carbondale OTW. All necessary approvals for operating such
facilities have been obtained. The Company expects to open the Carbondale
OTW on or about March 31, 1998. The Company is licensed to operate two
additional OTWs and has identified sites to operate OTW locations in
Stroudsburg and Altoona, Pennsylvania, subject to receipt of all applicable
approvals to operate these sites.
The Company considers its properties adequate for its presently anticipated
purposes.
Pari-Mutuel Revenues
Revenues from Company races consist of the total amount wagered, less
the amount paid as winning wagers. Of the amount not returned to bettors as
winning wagers, a portion is paid to the state in which the track is located, a
portion is distributed to the track's horsemen in the form of "purses" and the
balance is retained by the wagering facility. The Pennsylvania Racing Act
specifies the maximum percentages of each dollar wagered on horse races in
Pennsylvania which can be retained by the Company (prior to required payments to
the Pennsylvania Horsemen and applicable taxing authorities). The percentages
vary, based on the type of wager; the average percentage has approximated 20%,
which is retained by the Company. The balance of each dollar wagered must be
paid out to the public as winning wagers. With the exception of revenues derived
from wagers at the Company's racetracks and OTWs, the Company's revenues on each
race are determined pursuant to such maximum percentage and agreements with the
other racetracks and OTWs at which wagering is taking place. Amounts payable to
the Pennsylvania Horsemen are determined under agreements with the Pennsylvania
Horsemen and vary depending upon where the wagering is conducted and the
racetrack at which such races take place. The Pennsylvania Horsemen receive
their share of such wagering as race purses. The Company retains a higher
percentage of wagers made at its own facilities than of wagers made at other
locations. The West Virginia Racing Act provides for a similar disposition of
pari-mutuel wagers placed at the Charles Town Entertainment Complex, with the
average
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percentage of wagers retained by the Company having been approximately
20% (prior to required payments to the Charles Town Horsemen and to applicable
West Virginia taxing authorities and other mandated beneficiary organizations).
Simulcasting
The Company has been transmitting simulcasts of its races to other
wagering locations and receiving simulcasts of races from other locations for
wagering by its customers at Company facilities year-round, for more than five
years. When customers place wagers on import simulcast races, the Company
receives revenue and incurs expense in substantially the same manner as it would
if the race had been run at one of the Company's own tracks: of the amount not
returned to bettors as winning wagers, a portion is paid to the state in which
the Company wagering facility is located, a portion is paid to the purse fund
for the horse owners or trainers (thoroughbred or harness) of the Company's
racetrack with which the wagering facility is associated, a portion is paid to
the racetrack from which the race is simulcast and the balance is retained by
the Company. The Company believes that full-card import simulcasting, in which
all of the races at a non-Company track are import simulcast to a Company
wagering facility, has improved the wagering opportunities for its customers and
thereby increased the amount wagered at Company facilities. When the Company
exports simulcasts Company races for wagering at non-Company locations, it
receives a fixed percentage of the amounts wagered on that race from the
location to which the simulcast is exported, while incurring minimal additional
expense. During the years ended December 31, 1996 and 1997, respectively, the
Company received import simulcasts from approximately 57 and 75 racetracks,
respectively, including premier racetracks such as Arlington International
Racecourse, Belmont Park, Gulfstream Park, Hollywood Park, Santa Anita and
Saratoga and transmitted export simulcasts of Company races to 63 and 98
locations, respectively.
Pursuant to an agreement among the members of the Pennsylvania Racing
Association, the Company and the two other Pennsylvania racetracks provide
simulcasts of all their races to all of each other's facilities and set the
commissions payable on such races. In addition, the Company has short-term
agreements with various racetracks throughout the United States to import
simulcast from, and export simulcast to, their facilities; these agreements
include import simulcasts of major stakes races. The Company believes that
import simulcasting of out-of-state races, including full card import
simulcasting, is beneficial economically to the Company because it makes
available wagering on higher quality races and which tends to increase the size
of the average wager.
Telephone Wagering
In 1983, the Company pioneered Telebet, Pennsylvania's first telephone
account wagering system. A Telebet customer opens an account by depositing funds
with the Company. Account holders can then place wagers by telephone on Company
races and import simulcast races to the extent of the funds on deposit in the
account; any winnings are posted to the account and are available for withdrawal
or future wagers. In December 1995, Pocono Downs instituted Dial-A-Bet, a
similar telephone account betting system.
CHARLES TOWN JOINT VENTURE; OPERATING TERMS
Pursuant to the original operating agreement governing the Charles Town
Joint Venture, the Company held an 80% ownership interest in the Charles Town
Joint Venture and was obligated to contribute 80% of the purchase price of the
Charles Town Acquisition and 80% of the cost of refurbishing the Charles Town
Entertainment Complex. In consideration of the fact that the Company contributed
100% of the purchase price of the Charles Town Acquisition and 100% of the cost
of refurbishing the Charles Town Entertainment Complex, the Company has amended
its operating agreement with Bryant Development Company and its affiliates
("Bryant") to, among other things, increase the Company's ownership interest in
the Charles Town Joint Venture to 89% and decrease Bryant's interest to 11%. In
addition, the amendment provided that the entire amount the Company has
contributed, and will contribute, to the Charles Town Joint Venture for the
acquisition and refurbishment of the Charles Town Entertainment Complex would be
treated, as between the parties, as a loan to the Charles Town Joint Venture
from the Company. Accordingly, prior to the distribution of any profits pursuant
to the Charles Town Joint Venture, the
11
Company must be repaid in full all such contributions or loans, plus accrued
interest, which as of December 31, 1997, equaled $45.9 million.
The Charles Town Joint Venture acquired its option to purchase the
Charles Town Entertainment Complex from Bryant; Bryant, in turn, acquired the
option from Showboat Operating Company ("Showboat"). Showboat has retained an
option (the "Showboat Option") to operate any casino at the Charles Town
Entertainment Complex in return for a management fee (to be negotiated at the
time, based on rates payable for similar properties) and a right of first
refusal to purchase or lease the site of any casino at the Charles Town
Entertainment Complex proposed to be leased or sold and to purchase any interest
proposed to be sold in any such casino on the same terms offered by a third
party or otherwise negotiated with the Charles Town Joint Venture. The rights
retained by Showboat under the Showboat Option extend until November 5, 2001,
and expire thereafter unless legislation to permit casino gaming at the Charles
Town Entertainment Complex has been adopted prior to such date. If such
legislation has been adopted prior to such time, then the rights of Showboat
continue for a reasonable time (not less than 24 months) to permit completion of
negotiations.
While the express terms of the Showboat Option do not specify what
activities at the Charles Town Entertainment Complex would constitute operation
of a casino, Showboat has agreed that the installation and operation of gaming
devices linked to the lottery (like the Gaming Machines the Company has
installed and will continue to install) at the Charles Town Entertainment
Complex's racetrack do not trigger Showboat's right to exercise the Showboat
Option. If West Virginia law were to permit casino gaming at the Charles Town
Entertainment Complex and if Showboat were to exercise the Showboat Option, the
Company would be required to pay a management fee to Showboat for the operation
of the casino.
POTENTIAL TENNESSEE DEVELOPMENT PROJECT
In June 1997, the Company acquired twelve one-month options to purchase
approximately 100 acres of land in Memphis, Tennessee. Since such time, the
Company, through its subsidiary, Tennessee Downs, Inc. ("Tennessee Downs"), has
pursued the development of a harness track and simulcast facility on this option
site, which is located in the northeastern section of Memphis. The Company
submitted an application to the Tennessee Racing Commission (the "Tennessee
Commission") in October 1997 for an initial license for the development and
operation of a harness track and OTW facility at this site. Tennessee Downs has
been found financially suitable by the Tennessee Commission and a public comment
hearing before the Tennessee Commission was held on November 15, 1997. The
Tennessee Commission plans to have its portion of the application review
completed in April 1998. A land use plan for the construction of a 5/8-mile
harness track, clubhouse and grandstand area were approved in October 1997 by
the Land Use Hearing Board for the City of Memphis and County of Shelby. On
December 2, 1997, the Company received the necessary zoning and land development
approvals from the Memphis City Council.
If the Company is awarded a racing license, the Company plans to spend
approximately $9.0 million in the next year to purchase the land subject to the
option and build a combined OTW and grandstand facility. The Company estimates
that total development costs, including subsequent track construction, will be
approximately $15.0 million. In addition, if the Company is awarded a racing
license, it will be permitted to pursue the development of additional OTWs in
Tennessee, provided it first obtains necessary approvals, including a public
referendum for each proposed OTW site and other necessary zoning and land
development approvals.
If the Company's application is approved by the Tennessee Commission,
the Company plans to exercise its option to purchase the site and build the
track and OTW facility at an estimated cost of $15.0 million. If this
development project is pursued, the physical plant will be completed in two
phases as described below. The Tennessee Horse Racing Act permits the
construction of both a simulcast facility and a primary facility within the same
enclosure. Upon the approval of the racing license by the Tennessee State Horse
Racing Commission, Tennessee Downs plans to initiate the pre-construction site
improvements and move forward with the construction of the simulcast facility.
This portion of the project will include infrastructure improvements, the actual
simulcast facility and related parking. Estimated construction costs for the
first phase, along with development and land acquisition costs, are estimated to
be approximately $9.0 million. The second phase of the project will include
12
construction of the track, barns, paddock area and other racing related
amenities. Following timely receipt of all applicable approvals, Tennessee Downs
would initiate construction in the second or third quarter of fiscal 1998 with
the opening of the simulcast facility planned for January, 1999. Construction of
the second phase would follow during the spring/summer of 1999 with an
anticipated opening for live racing sometime in 2000. The second phase of the
project is estimated to cost approximately $6.0 million.
MARKETING AND ADVERTISING
The Company seeks to increase wagering by broadening its customer base
and increasing the wagering activity of its existing customers. To attract new
customers, the Company seeks to increase the racing knowledge of potential
customers through its television programming, and by providing "user friendly"
automated wagering systems and comfortable surroundings. The Company also seeks
to attract new customers by offering various types of promotions including
family fun days, premium give-away programs, contests and handicapping seminars.
Charles Town Gaming Machine Marketing Programs
The Company's marketing efforts, which include print and radio
advertising, commenced in October 1997 and are focused on the Washington, D.C.,
Baltimore, Maryland, Northern Virginia, Eastern West Virginia and Southern
Pennsylvania markets. At the Charles Town Entertainment Complex the Company
established the Silver Screen Video Slots Club, a manual player tracking system
designed to reward frequent and active customers. In 1998, the Company intends
to purchase and install a computerized player tracking system at the Charles
Town Entertainment Complex, which will further focus the Company's marketing
efforts. The Company has also implemented a coupon program where customers who
visit the Charles Town Entertainment Complex can redeem each coupon for five
dollars. From these coupons, the Company has compiled a database of customers
that will be targeted for future marketing programs.
Televised Racing Program
The Company's "Racing Alive" program is televised by satellite
transmission commencing approximately one hour before post time on each live
racing day at the Penn National Race Course. The program provides color
commentary on the races at the Penn National Race Course (including wagering
odds, past performance information and handicapper analysis), general education
on betting and handicapping, interviews with racing personalities and featured
races from other thoroughbred racetracks across the country. The Racing Alive
program is shown at the Penn National Race Course and on various cable
television systems in Pennsylvania and is transmitted to all OTWs that receive
the Penn National Race Course races. The Company intends to expand Racing Alive
and/or to create additional televised programming to cover racing at Pocono
Downs and at other harness racing venues throughout the United States. The
Company's satellite transmissions are encoded so that only authorized facilities
can receive the program.
Automated Wagering Systems
To make wagering more "user friendly" to the novice and more efficient
for the expert, the Company leases Autotote Systems, Inc.'s automated wagering
equipment. These wagering systems enable the customer to choose a variety of
ways to place a bet through touch-screen interactive terminals and personalized
portable wagering terminals, provide current odds information and enable
customers to place bets and credit winning tickets to their accounts. Currently,
more than 35% of all wagers at Penn National are processed through these
self-service terminals and Telebet.
Modern Facilities
The Company provides a comfortable, upscale environment at each of its
OTWs, including a full bar, a range of restaurant services and an area devoted
to televised sporting events. The Company believes that its attractive
facilities appeal to its current customers and to new customers, including those
who have not previously visited a racetrack.
13
GTECH GAMING MACHINE SUPPLY AND SERVICE AGREEMENT
In June 1997, the Charles Town Joint Venture entered into an agreement
(the "GTECH Agreement") with GTECH Corporation ("GTECH") relating to the lease,
installation and service of a video lottery system ("VLS") at the Charles Town
Entertainment Complex. The GTECH Agreement provides that GTECH will be the
exclusive provider of VLS and related services, including video lottery
terminals and slot machines, if any, at the Charles Town Entertainment Complex;
provided, however, the Charles Town Joint Venture has retained management
control over the VLS. The GTECH Agreement has a term of five years from the
first date on which 400 Gaming Machines are installed, operational and
generating "Net Win," (total of all cash inserted into, or game credits played
on, a video lottery terminal minus the total value of all prizes paid). On
September 26, 1997, the Charles Town Joint Venture had 400 Gaming Machines
installed, operational and generating Net Win at the Charles Town Entertainment
Complex. Pursuant to the GTECH Agreement, the Charles Town Joint Venture has
agreed to pay GTECH a fee which can range between 4% and 10% of Gaming Machine
gross revenue. The Company generally is obligated to pay a lower percentage of
Gaming Machine gross revenue to GTECH at higher levels of average win per day
per machine and a higher percentage of Gaming Machine gross revenue at lower
levels of average win per day per machine; provided, however, the Charles Town
Joint Venture is obligated to pay GTECH the greater of the percentage fee
described above or a minimum annual fee of $4.3 million if more than 800 Gaming
Machines are in operation at the Charles Town Entertainment Complex. The
payments pursuant to the GTECH Agreement include the cost of the rental of the
Gaming Machines, the rental of the software (which is not a component of the
VLS), technical assistance and programming services, maintenance and marketing
services. At the end of the term of the GTECH Agreement, the Charles Town Joint
Venture will purchase the VLS from GTECH for a cash purchase price equal to the
net unamortized residual value of the VLS. In the event GTECH terminates the
agreement because of the Charles Town Joint Venture's material misrepresentation
and/or breach of the GTECH Agreement, the Charles Town Joint Venture must
purchase the VLS from GTECH at a price equal to the net unamortized residual
value of the VLS at that time and pay an additional one-time fee as follows: for
such termination in the first year of the term, $8.5 million; for such
termination in the second year of the term, $6.6 million; for such termination
in the third year of the term, $5.0 million; for such termination in the fourth
year of the term, $3.7 million; and for such termination in the fifth year of
the term, $2.5 million. Pursuant to the GTECH Agreement, the Charles Town Joint
Venture must maintain tangible net worth equal to at least 105% of the amounts
payable as additional fees in the event of a termination as set forth in the
preceding sentence.
PURSES; AGREEMENTS WITH HORSEMEN
The Horsemen Agreements set forth the amounts to be paid to the
Pennsylvania Horsemen as racing purses. Revenues from wagering at the Penn
National Race Course and Pocono Downs, except for wagering on races simulcast
from outside Pennsylvania, are divided approximately equally between the Company
and the Pennsylvania Horsemen. Revenues from all other sources (all wagering at
the Company's OTWs and on races simulcast from outside Pennsylvania) are shared
such that the Pennsylvania Horseman generally receive between 3.0% and 7.5% of
total wagering at the OTWs.
The Company sets the purses paid on Company races, based on projected
wagering and in accordance with the terms of the Horsemen Agreements. Because
the amount of the purses is based on projections, at any given point in time the
Pennsylvania Horsemen will have either been overpaid or underpaid. The agreement
with the Thoroughbred Horsemen permits the Thoroughbred Horsemen to require
immediate purse adjustments should the amount of revenues to be paid to them as
purses, and remaining unpaid, exceed $100,000. The amount of underpaid or
overpaid purses varies from time to time, and the Company believes that further
action to reduce the amount of underpaid purses will not affect its ability to
increase purses in an orderly manner. In setting future purses the Company
seeks, over time, to adjust for the under or over-payments, but no assurance can
be given that any such adjustment will be accurate or adequate.
During the years ended December 31, 1995, 1996 and 1997, the
Pennsylvania Thoroughbred Horsemen earned an aggregate of approximately $12.0
million, $12.3 million and $12.9 million in purses, respectively. The
14
average daily purses earned by the Pennsylvania Thoroughbred Horsemen who raced
at Penn National Race Course during the three-year period increased from
approximately $57,900 to approximately $60,600. The Company believes that the
increases in daily purses have contributed to an improvement in the quality of
horses racing at the Penn National Race Course. During the years ended December
31, 1995, 1996 and 1997, the Harness Horsemen earned an aggregate of
approximately $6.5 million, $5.7 million and $5.4 million in purses,
respectively. The average daily purses earned by the Harness Horsemen during the
four-year period ended December 31, 1997 increased from approximately $35,800 to
approximately $40,100. The average daily purses earned by the Harness Horsemen
for calendar 1996 and 1997 were approximately $42,300 and $40,100 per day,
respectively. The average daily purses at Charles Town Races during such period
decreased from approximately $28,538 to approximately $25,800.
The Penn National Race Course Thoroughbred Horsemen Agreement was
entered into in February 1996, expires in February 1999 and is subject to
automatic renewal for successive one year terms unless either party gives notice
of termination at least 90 days prior to the end of any such period. The Harness
Horsemen Agreement was entered into in November 1994, became effective in
January 1995 and expires in January 2000. The Company is party to the requisite
agreement with the Charles Town Horsemen, which expires on December 31, 2000.
The West Virginia Gaming Machine Act also requires that the operator of the
Charles Town Entertainment Complex be subject to a written agreement with the
pari-mutuel clerks in order to operate Gaming Machines, although this agreement
expired on December 31, 1997. The Company is in the process of negotiating a new
pari-mutuel clerks agreement.
COMPETITION
The Company faces significant competition for wagering dollars from
other racetracks and OTWs in Pennsylvania and neighboring states (some of which
also offer other forms of gaming), other gaming venues such as casinos and
state-sponsored lotteries, including the Pennsylvania Lottery and the West
Virginia Lottery. The Company may also face competition in the future from new
OTWs or from new racetracks. From time to time, Pennsylvania has considered
legislation to permit other forms of gaming. Although Pennsylvania has not
authorized any form of casino or other gaming, if additional gaming
opportunities become available in or near Pennsylvania, such gaming
opportunities could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's live races compete for wagering dollars and simulcast
fees with live races and races simulcast from other racetracks both inside and
outside Pennsylvania (including several in New York, New Jersey, West Virginia,
Ohio, Maryland and Delaware). The Company's ability to compete successfully for
wagering dollars is dependent, in part, on the quality of its live horse races.
The quality of horse races at some racetracks that compete with the Company,
either by live races or simulcasts, is higher than the quality of Company races.
The Company believes that there has been some improvement over the last several
years in the quality of the horses racing at the Penn National Race Course, due
to higher purses being paid as a result of the Company's increased simulcasting
activities. However, increased purses may not result in a continued improvement
in the quality of racing at the Penn National Race Course or in any material
improvement in the quality of racing at Pocono Downs or the Charles Town Races.
The Company's OTWs compete with the OTWs of other Pennsylvania
racetracks, and new OTWs may compete with the Company's existing or proposed
wagering facilities. Competition between OTWs increases as the distance between
them decreases. For example, the Company believes that its Allentown OTW, which
was acquired in the acquisition of Pocono Downs and which is approximately 50
miles from the Penn National Race Course and 35 miles from the Company's Reading
OTW, has drawn some patrons from the Penn National Race Course, the Reading OTW
and the Company's telephone wagering system and that the Company's Lancaster
OTW, which is approximately 31 miles from the Penn National Race Course and 25
miles from the Company's York OTW, has drawn some patrons from the Penn National
Race Course, the York OTW and the Company's telephone wagering system. Moreover,
the Company believes that a competitor's new OTW in King of Prussia,
Pennsylvania, which is approximately 23 miles from the Reading OTW, has drawn
some patrons from the Reading OTW. Although only one competing OTW remains
authorized by law for future opening, the opening of a new OTW in close
proximity
15
to the Company's existing or future OTWs could have a material adverse effect on
the Company's business, financial condition and results of operations. A
competitor of the Company has applied to open an OTW within four miles of the
Company's OTW in Allentown. If the application were approved, such new OTW could
compete for patrons with the Company's site. However, the Company believes it is
unlikely that the competitor's site will be approved by gaming authorities under
existing legal precedent established by such gaming authorities.
The Company's Gaming Machine operations face competition from other
Gaming Machine venues in West Virginia and in neighboring states (including
Dover Downs in Dover, Delaware, Delaware Park in northern Delaware, Harrington
Raceway in southern Delaware and the casinos in Atlantic City, New Jersey).
Venues in Delaware and New Jersey, in addition to video gaming machines,
currently offer mechanical slot machines that feature physical spinning reels,
pull-handles and the ability to both accept and pay out coins. West Virginia has
not authorized, and may never approve, such mechanical slot machines. The
failure to attract or retain Gaming Machine customers at the Charles Town
Entertainment Complex, whether arising from such competition or from other
factors, could have a material adverse effect upon the Company's business,
financial condition and results of operations.
EFFECT OF INCLEMENT WEATHER AND SEASONALITY
Because horse racing is conducted outdoors, variable weather
contributes to the seasonality of the Company's business. Weather conditions,
particularly during the winter months, may cause races to be canceled or may
curtail attendance. Because a substantial portion of the Company's racetrack
expenses are fixed, the loss of scheduled racing days could have a material
adverse effect on the Company's business, financial condition and results of
operations.
For the year ended December 31, 1997, the Company has canceled a total
of five racing days because of inclement weather. The severe winter weather in
1996 resulted in the closure of the Company's OTW facilities for two days in
January 1996. Because of the Company's growing dependence upon OTW operations,
severe weather that causes the Company's OTWs to close could have an adverse
effect upon the Company's business, financial condition and results of
operations.
Attendance and wagering at the Company's facilities have been favorably
affected by special racing events which stimulate interest in horse racing, such
as the Triple Crown races in May and June and the heavier racing schedule
throughout the country during the second and third quarter. As a result, the
Company's revenues and net income have been greatest in the second and third
quarters of the year, and lowest in the first and fourth quarters of the year.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
REGULATION AND TAXATION
General
Company subsidiaries are authorized to conduct thoroughbred racing and
harness racing in Pennsylvania under the Pennsylvania Racing Act. Such
subsidiaries are also authorized, under the Pennsylvania Racing Act and the
Federal Horseracing Act, to conduct import simulcast wagering. The Charles Town
Joint Venture is also subject to the provisions of the West Virginia Racing Act,
which governs the conduct of thoroughbred horse racing in West Virginia, and the
West Virginia Gaming Machine Act, which governs the operation of Gaming Machines
in West Virginia. The Company's live racing, pari-mutuel wagering and Gaming
Machine operations are contingent upon the continued governmental approval of
such operations as forms of legalized gaming. All of the Company's current and
proposed operations are subject to extensive regulations and could be subjected
at any time to additional or more restrictive regulations, or banned entirely.
16
Pennsylvania Racing Regulation
The Company's horse racing operations at the Penn National Race Course
and Pocono Downs are subject to extensive regulation under the Pennsylvania
Racing Act, which established the Pennsylvania State Horse Racing Commission and
the State Harness Racing Commission (together, the Pennsylvania Racing
Commissions). The Pennsylvania Racing Commissions are responsible for, among
other things, (i) granting permission annually to maintain racing licenses and
schedule race meets, (ii) approving, after a public hearing, the opening of
additional OTWs, (iii) approving simulcasting activities, (iv) licensing all
officers, directors, racing officials and certain other employees of the Company
and (v) approving all contracts entered into by the Company affecting racing,
pari-mutuel wagering and OTW operations.
As in most states, the regulations and oversight applicable to the
Company's operations in Pennsylvania are intended primarily to safeguard the
legitimacy of the sport and its freedom from inappropriate or criminal
influences. The Pennsylvania Racing Commissions have broad authority to regulate
in the best interests of racing and may, to that end, disapprove the involvement
of certain personnel in the Company's operations, deny approval of certain
acquisitions following their consummation or withhold permission for a proposed
OTW site for a variety of reasons, including community opposition. For example,
the Pennsylvania State Horse Racing Commission withheld approval for the
Company's initial site for its Lancaster OTW, but the Company applied and was
ultimately approved for another site in Lancaster, which opened in July 1996.
The Pennsylvania legislature also has reserved the right to revoke the power of
the Pennsylvania Racing Commissions to approve additional OTWs and could, at
anytime, terminate pari-mutuel wagering as a form of legalized gaming in
Pennsylvania or subject such wagering to additional restrictive regulation; such
termination would, and any further restrictions could, have a material adverse
effect upon the Company's business, financial condition and results of
operations.
The Company may not be able to obtain all necessary approvals for the
operation or expansion of its business. Even if all such approvals are obtained,
the regulatory process could delay implementation of the Company's plans to open
additional OTWs. The Company has had continued permission from the Pennsylvania
State Horse Racing Commission to conduct live racing at the Penn National Race
Course since it commenced operations in 1972, and has obtained permission from
the Pennsylvania State Harness Racing Commission to conduct live racing at
Pocono Downs. Currently, the Company has approval from the Pennsylvania Racing
Commissions to operate the eight OTWs that are currently open and the three
additional OTWs the Company proposed to open. A Commission may refuse to grant
permission to open additional OTWs or to continue to operate existing
facilities. The failure to obtain required regulatory approvals would have a
material adverse effect upon the Company's business, financial condition and
results of operations.
The Pennsylvania Racing Act provides that no corporation licensed to
conduct thoroughbred racing with pari-mutuel wagering shall be licensed to
conduct harness racing with pari-mutuel wagering and that no corporation
licensed to conduct harness racing with pari-mutuel wagering shall be licensed
to conduct thoroughbred racing with pari-mutuel wagering. The Company's harness
and thoroughbred licenses are held by separate corporations, each of which is a
wholly owned subsidiary of the Company. Moreover, the Pennsylvania State Harness
Racing Commission has reissued the Pocono Downs harness racing license and has
found, in connection with the reissuance, that it is not "inconsistent with the
best interests, convenience or necessity or with the best interests of racing
generally," that a subsidiary of the Company beneficially owns Pocono Downs. The
Company thus believes that the arrangement under which it holds both a harness
and a thoroughbred license complies with applicable regulations.
West Virginia Racing and Gaming Regulation
The Company's operations at the Charles Town Entertainment Complex are
subject to regulation by the West Virginia Racing Commission under the West
Virginia Racing Act, and by the West Virginia Lottery Commission under the West
Virginia Gaming Machine Act. The powers and responsibilities of the West
Virginia Racing Commission under the West Virginia Racing Act are substantially
similar in scope and effect to those of the Pennsylvania Racing Commissions and
extend to the approval and/or oversight of all aspects of racing and pari-mutuel
wagering operations. The Charles Town Joint Venture has obtained from the West
Virginia Racing Commission a license to conduct racing and pari-mutuel wagering
at the Charles Town Entertainment Complex. Pursuant to the West Virginia Gaming
Machine Act, the Company has obtained approval for the installation and
operation of a total of 1,000 Gaming Machines at the Charles Town Entertainment
Complex.
17
State and Federal Simulcast Regulation
Both the Federal Interstate Horseracing Act of 1978 (the "Federal Horse
Racing Act") and the Pennsylvania Racing Act require that the Company have a
written agreement with the Thoroughbred Horsemen and with the Harness Horsemen
in order to simulcast races. The Company has entered into the Horsemen
Agreements, and in accordance therewith has agreed on the allocations of the
Company's revenues from import simulcast wagering to the purse funds for the
Penn National Race Course, Charles Town Races and Pocono Downs. Because the
Company cannot conduct import simulcast wagering in the absence of the Horsemen
Agreements, the termination or non-renewal of either Horsemen Agreement could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Taxation
The Company believes that the prospect of significant additional
revenue is one of the primary reasons that jurisdictions permit legalized
gaming. As a result, gaming companies are typically subject to significant taxes
and fees in addition to normal federal and state income taxes, and such taxes
and fees are subject to increase at any time. The Company pays substantial taxes
and fees with respect to its operations. From time to time, federal legislators
and officials have proposed changes in tax laws, or in the administration of
such laws, affecting the gaming industry. It is not possible to determine with
certainty the likelihood of changes in tax laws or in the administration of such
laws. Such changes, if adopted, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Compliance with Other Laws
The Company and its OTWs are also subject to a variety of other rules
and regulations, including zoning, construction and land-use laws and
regulations in Pennsylvania and West Virginia governing the serving of alcoholic
beverages. Currently, Pennsylvania laws and regulations permit the construction
of off-track wagering facilities, but may affect the selection of a particular
OTW site because of parking, traffic flow and other similar considerations, any
of which may serve to delay the opening of future OTWs in Pennsylvania. By
contrast, West Virginia law does not permit the operation of OTWs. The Company
derives a significant portion of its other revenues from the sale of alcoholic
beverages to patrons of its facilities. Any interruption or termination of the
Company's existing ability to serve alcoholic beverages would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Restrictions on Share Ownership and Transfer
The Pennsylvania Racing Act requires that any shareholder proposing to
transfer beneficial ownership of 5% or more of the Company's shares file an
affidavit with the Company setting forth certain information about the proposed
transfer and transferee, a copy of which the Company is required to furnish to
the Pennsylvania Racing Commission. The certificates representing the Company
shares owned by 5% beneficial shareholders are required to bear certain legends
prescribed by the Pennsylvania Racing Act. In addition, under the Pennsylvania
Racing Act, the Pennsylvania Racing Commission has the authority to order a 5%
beneficial shareholder of the Company to dispose of his Common Stock of the
Company if it determines that continued ownership would be inconsistent with the
public interest, convenience or necessity or the best interest of racing
generally. The West Virginia Gaming Machine Act provides that a transfer of more
than 5% of the voting stock of a corporation which controls the license may only
be to persons who have met the licensing requirements of the West Virginia
Gaming Machine Act or which transfer has been pre-approved by the West Virginia
Lottery Commission. Any transfer that does not comply with this requirement
voids the license.
Potential Tennessee Development Regulatory Compliance.
If the Company successfully completes the development of its potential
Tennessee harness track and OTWs, the Company will likely face regulatory
requirements that are similar to the requirements affecting its existing
operations; however, given the absence of horse racing in Tennessee at this
time, the Company may face more burdensome regulatory approvals or compliance in
light of the absence of an established regulatory framework.
18
ITEM 2 PROPERTIES
Thoroughbred Track
The Thoroughbred Track is located on approximately 225 acres
approximately 15 miles northeast of Harrisburg, 100 miles west of Philadelphia
and 200 miles east of Pittsburgh. There is a total population of approximately
1.4 million persons within a radius of approximately 35 miles around the
Thoroughbred Track and approximately 2.2 million persons within a 50-mile
radius. The property includes a one mile all-weather thoroughbred racetrack and
a 7/8-mile turf track. The property also includes approximately 400 acres
surrounding the Thoroughbred Track which are available for future expansion or
development.
The Thoroughbred Track's main building is the grandstand/clubhouse,
which is completely enclosed and heated and, at the clubhouse level, fully
air-conditioned. The building has a capacity of approximately 15,000 persons
with seating for approximately 9,000, including 1,400 clubhouse dining seats.
Several other dining facilities and numerous food and beverage stands are
situated throughout the facility. Television sets for viewing live racing and
simulcasts are located throughout the facility. The pari-mutuel wagering areas
are divided between those available for on-track wagering and those available
for simulcast wagering.
The Thoroughbred Track includes stables for approximately 1,250 horses,
a blacksmith shop, veterinarians' quarters, jockeys' quarters, a paddock
building, living quarters for grooms, a cafeteria and recreational building in
the back stretch area and water and sewage treatment plants. Parking facilities
for approximately 6,500 vehicles adjoin the Thoroughbred Track.
Harness Track
The Harness Track is located on approximately 400 acres in Plains
Township, outside Wilkes-Barre, Pennsylvania. There is a total population of
approximately 785,000 persons within a radius of approximately 35 miles around
the Harness Track and approximately 1.5 million persons within a 50-mile radius.
The property includes a 5/8-mile all-weather, lighted harness track. The Harness
Track's main buildings are the grandstand and the clubhouse. The clubhouse is
completely enclosed and heated and fully air-conditioned. The grandstand has
enclosed, heated and air-conditioned seating for approximately 500 persons and
permanent open-air stadium-style seating for approximately 2,500 persons. The
clubhouse is a tiered dining and wagering facility that seats approximately
1,000 persons. The clubhouse dining area seats 500 persons. Television sets for
viewing live racing and simulcasts are located throughout the facility along
with pari-mutuel wagering areas.
A two-story 14,000 square foot building which houses the Pocono Downs
offices is located on the property. The Harness Track also includes stables for
approximately 950 horses, five paddock stables, quarters for grooms, two
blacksmith shops and a cafeteria for the Harness Horsemen. Parking facilities
for approximately 5,000 vehicles adjoin the track.
The solid waste landfill ("Landfill") is on a parcel of land adjacent
to the Harness Track. The East Side Landfill Authority (the "Landfill
Authority"), which operated the Landfill from 1970 until 1982, disposed of
municipal waste on behalf of four municipalities. The Landfill is currently
subject to a closure order issued by the Pennsylvania Department of
Environmental Resources ("PADER") which the four municipalities are required to
implement pursuant to a 1986 Settlement Agreement among the former trustee in
bankruptcy for Pocono Downs, the Landfill Authority, the municipalities and
PADER (the "Settlement Agreement"). According to the Company's environmental
consulting firm, the Landfill closure is substantially complete. To date, the
municipalities obligated to implement the closure order pursuant to the
Settlement Agreement, have been fulfilling their obligations. However, there can
be no assurance that the municipalities will continue to meet their obligations
under the Settlement Agreement or that the terms of the Settlement Agreement
will not be amended in the future. In addition, the Company may be liable for
future claims with respect to the Landfill under the Comprehensive Environmental
Response, Compensation and Liability Act and analogous state laws. The Company
may incur expenses in connection with the Landfill in the future, which expenses
may not be reimbursed by the
19
municipalities. Any such expenses could have a material adverse effect on the
Company's business, financial condition and results of operations.
Charles Town Facility
The Charles Town Facility is located on a portion of a 250-acre parcel
in Charles Town, West Virginia, which is approximately a 60-minute drive from
Baltimore, Maryland and a 70-minute drive from Washington, D.C. There is a total
population of approximately 3.1 million persons within a 50-mile radius and
approximately 9.0 million persons within a 100-mile radius of the Charles Town
Facility. The property includes a 3/4-mile thoroughbred racetrack. The Charles
Town Facility's main building is the grandstand/clubhouse, which is completely
enclosed and heated. The clubhouse dining room has seating for 600. Additional
food and beverage areas are situated throughout the facility. The property
surrounding the Charles Town Facility, including the site of the former
Shenandoah Downs Racetrack, is available for future expansion or development. In
addition, the Company has a right of first refusal for an additional 250 acres
that are adjacent to the Charles Town Facility.
The Charles Town Facility also includes stables, an indoor paddock,
ample parking and water and sewage treatment facilities.
OTWs
The Company's OTWs provide areas for viewing import simulcasts and
televised sporting events, placing pari-mutuel wagers and dining. The facilities
also provide convenient parking.
The Company's current OTW properties are described in the following
table:
OWNED OR
LOCATION LEASED
- -------- --------
Allentown.................................................... Owned
Chambersburg................................................. Leased
Erie......................................................... Owned
Lancaster.................................................... Leased
Reading...................................................... Leased
York......................................................... Leased
Williamsport................................................. Owned
Hazelton..................................................... Leased
Other Property and Equipment
The Company currently leases 6,183 square feet of office space in an
office building in Wyomissing, Pennsylvania for the Company's executive offices.
The lease expires in April 2005 and provides for an annual rental of $71,100
plus common area expenses and electric utility charges. The office building is
owned by an affiliate of Peter M. Carlino, the Chairman and Chief Executive
Officer of the Company. The Company believes that the lease terms are not less
favorable than lease terms that could have been obtained from an unaffiliated
third party.
The Company currently leases an aircraft from a company owned by John
Jacquemin, a director of the Company. The lease expires in August 2007, and
provides for monthly payments of $8,356. The Company believes that the lease
terms are not less favorable than lease terms that could have been obtained from
an unaffiliated third party.
20
EMPLOYEES AND LABOR RELATIONS
At March 16, 1998, the Company had 1,629 permanent employees, of whom
749 were full-time and 880 part-time. Employees of the Company who work in the
admissions department and pari-mutuels department at the Penn National Race
Course, Pocono Downs and the OTWs are represented under collective bargaining
agreements between the Company and Sports Arena Employees' Union Local 137. The
agreements extend until October 3, 1999 for track employees and until May 20,
1998 for OTW employees. The pari-mutuel clerks at Pocono Downs voted to unionize
in June 1997. The Company has held negotiations with this union, but does not
have a contract to date. Failure to reach agreement with this union would not
result in the suspension or termination of the Company's license to operate live
racing at Pocono Downs or to conduct simulcast or OTW operations. The Company
believes that its relations with its employees are satisfactory.
ITEM 3 LEGAL PROCEEDINGS
In December 1997, Amtote International, Inc. ("Amtote"), filed an
action against the Company and the Charles Town Joint Venture in the United
States District Court for the Northern District of West Virginia. In its
complaint, Amtote (i) states that the Company and the Charles Town Joint Venture
allegedly breached certain contracts with Amtote and its affiliates when it
entered into a wagering services contract with a third party (the "Third Party
Wagering Services Contract"), and not with Amtote, effective January 1, 1998,
(ii) sought preliminary and injunctive relief through a temporary restraining
order seeking to prevent the Charles Town Joint Venture from (a) entering into a
wagering services contract with a party other than Amtote and (b) having a third
party provide such wagering services, (iii) seeks declaratory relief that
certain contracts allegedly bind the Charles Town Joint Venture to retain Amtote
for wagering services through September 2004 and (iv) seeks unspecified
compensatory damages, legal fees and costs associated with the action and other
legal and equitable relief as the Court deems just and appropriate. On December
24, 1997, a temporary restraining order was issued, which prescribes performance
under the Third Party Wagering Contract. On January 14, 1998, a hearing was held
to rule on whether a preliminary injunction should be issued or whether the
temporary restraining order should be lifted, and on February 20, 1998, the
court lifted the temporary restraining order. The Company intends to pursue
legal remedies to terminate Amtote and proceed under the Third Party Wagering
Services Contract. The Company believes that this action, and any resolution
thereof, will not have any material adverse impact upon its financial condition,
results, or the operations of either the Charles Town Joint Venture or the
Company.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
21
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is quoted on The Nasdaq National Market
under the symbol "PENN." The following table sets forth for the periods
indicated the high and low sales prices per share of the Company's Common Stock
as reported on The Nasdaq National Market.
1996 HIGH LOW
------- -------
First Quarter........................................ $ 6.000 $4.292
Second Quarter....................................... 14.500 5.875
Third Quarter........................................ 15.625 9.000
Fourth Quarter....................................... 21.375 13.750
1997 HIGH LOW
------- -------
First Quarter........................................ $18.250 $14.000
Second Quarter....................................... 19.625 13.750
Third Quarter........................................ 20.125 14.625
Fourth Quarter....................................... 19.250 8.750
The closing sale price per share of Common Stock on The Nasdaq National
Market on March 20,1998 was $10.313. As of March 20, 1998, there were 581
holders of record of Common Stock.
DIVIDEND POLICY
Since the Company's initial public offering of Common Stock in May
1994, the Company has not paid any cash dividends on its Common Stock. The
Company intends to retain all of its earnings to finance the development of the
Company's business, and thus, does not anticipate paying cash dividends on its
Common Stock for the foreseeable future. Payment of any cash dividends in the
future will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, future earnings, operations, capital
requirements, the general financial condition of the Company and general
business conditions. Moreover, the Company's existing credit facility prohibits
the Company from authorizing, declaring or paying any dividends.
22
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company for
the years ended December 31, 1993, 1994, 1995, 1996 and 1997, except for Other
Data, are derived from financial statements that have been audited by BDO
Seidman, LLP, independent certified public accountants, adjusted as described in
the notes below. The selected consolidated financial data should be read in
conjunction with the consolidated financial statements of the Company and Notes
thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the other financial information included herein.
YEARS ENDED DECEMBER 31
----------------------------------------------------------
1993(1) 1994 1995 1996 1997(2)
------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
INCOME STATEMENT DATA
Revenues
Pari-mutuel revenues
Live races ............................ $ 29,224 $ 23,428 $ 21,376 $ 18,727 $ 27,653
Import simulcasting ................... 9,162 16,968 27,254 32,992 59,810
Export simulcasting ................... 383 1,187 2,142 3,347 5,279
Gaming Machine revenue .................... -- -- -- -- 5,712
Admissions, programs and other racing
revenues ............................. 2,485 2,563 3,704 4,379 5,678
Concession revenues ....................... 1,410 1,885 3,200 3,389 7,404
------------------------------------------------------------
Total revenues ........................ 42,664 46,031 57,676 62,834 111,536
------------------------------------------------------------
Operating expenses
Purses, stakes and trophies ............... 9,719 10,674 12,091 12,874 22,335
Direct salaries, payroll taxes and employee
benefits .............................. 6,394 6,707 7,699 8,669 16,200
Simulcast expenses ........................ 10,136 8,892 9,084 9,215 12,982
Pari-mutuel taxes ......................... 3,568 4,054 4,963 5,356 9,506
Lottery taxes and administration .......... -- -- -- -- 1,874
Other direct meeting expenses ............. 5,817 6,093 7,576 8,536 18,087
OTW concession expenses ................... 767 1,175 2,125 2,349 5,605
Management fees paid to related entity .... 1,208 345 -- -- --
Other operating expenses .................. 1,959 2,968 5,002 4,942 8,735
Depreciation and amortization ............. 640 699 881 1,433 4,040
Site development and restructuring changes -- -- -- -- 2,437
------------------------------------------------------------
Total operating expenses .............. 40,208 41,607 49,421 53,374 101,801
------------------------------------------------------------
Income from operations ........................ 2,456 4,424 8,255 9,460 9,735
------------------------------------------------------------
Other income (expenses)
Interest income (expense), net ............ (962) (340) 198 (156) (3,656)
Other ...................................... 6 15 10 -- (2)
------------------------------------------------------------
Total other income (expenses) .......... (956) (325) 208 (156) (3,658)
------------------------------------------------------------
Income before income taxes and extraordinary
item ...................................... 1,500 4,099 8,463 9,304 6,077
Taxes on income ............................... 42 1,381 3,467 3,794 2,308
------------------------------------------------------------
23
YEARS ENDED DECEMBER 31
---------------------------------------------------------------
1993(1) 1994 1995 1996 1997(2)
------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE)
Income before extraordinary item ............................ 1,458 2,718 4,996 5,510 3,769
Extraordinary item loss on early extinguishment
of debt, net of income taxes of $83 and
respectively ............................................ -- 115 -- -- 1,482
---------------------------------------------------------------
Net income .................................................. $ 1,458 $ 2,603 $ 4,996 $ 5,510 $ 2,287
===============================================================
PER SHARE DATA:
Basic Income per share before extraordinary
item ..................................................... $ .39 $ .41 $ .25
Basic net income per share .................................. $ .39 $ .41 $ .15
Diluted income per share before extraordinary
item ..................................................... $ .38 $ .40 $ .24
Diluted net income per share ................................ $ .38 $ .40 $ .15
SHARES OUTSTANDING:
Basic ....................................................... 12,906 13,302 14,925
Diluted ..................................................... 13,017 13,822 15,458
Supplemental Pro Forma Net Income
Statement Data (4):
Supplemental pro forma net income ........................... $ 1,819 $ 2,724
------- -------
Supplemental pro forma net income per share ................. $ 0.15 $ 0.22
------- -------
Weighted average number of common shares
outstanding ............................................. 12,249(5) 12,663
======= =======
OPERATING DATA:
Pari-mutuel wagering
Live races................................... $138,939 $111,248 $102,145 $89,327 $128,090
Import simulcasting.......................... 58,252 93,461 142,499 170,814 298,459
Export simulcasting.......................... 12,746 40,337 72,252 112,871 176,287
-----------------------------------------------------
Total pari-mutuel wagering................... $209,937 $245,046 $316,896 $373,012 $602,836
=====================================================
Gross profit from wagering(3)................ $ 15,346 $ 17,936 $ 24,915 $ 27,955 $ 45,589
=====================================================
AS OF DECEMBER 31
---------------------------------------------------
1993 1994 1995 1996 1997
---------------------------------------------------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.................... $1,002 $5,502 $7,514 $5,634 $21,854
Working capital (deficiency)................. (4,549) 2,074 4,134 (509) 15,226
Total assets................................. 18,373 21,873 27,532 96,723 158,878
Total debt................................... 10,422 516 390 47,517 80,336
Shareholders' equity......................... 3,418 15,627 20,802 27,881 53,856
24
(1) The Consolidated Financial Statements of the Company include entities
which, prior to a recapitalization which occurred in 1994 shortly before
the Company's initial public offering, were affiliated through common
ownership and control.
(2) Reflects the November 27, 1996 acquisition of Pocono Downs and the January
15, 1997 acquisition of a joint venture interest in the Charles Town
Entertainment Complex. See "BUSINESS-ACQUISITIONS."
(3) Amounts equal total pari-mutuel revenues, less purses paid to Horsemen,
taxes payable to Pennsylvania and simulcast commissions or host track fees
paid to other racetracks. Figures for the years ended December 31, 1995
and 1996 do not include purses paid at Penn National Speedway.
(4) Supplemental pro forma amounts for the years ended December 31, 1993 and
1994 reflect (i) the elimination of $1,208,000 and $345,000, respectively,
in management fees paid to a related entity, (ii) the inclusion of
$320,000 and $133,000, respectively, in executive compensations, (iii) the
elimination of $946,000 and $413,000, respectively, of interest expenses
on Company debt which was repaid with the proceeds of the initial public
offering in 1994, (iv) the elimination of $0 and $198,000, respectively,
of loss on early extinguishment of debt, and (v) a provision for income
taxes of $701,000 and $377,000, respectively, as if the S corporations and
partnerships comprising part of the Company prior to the Reorganization in
1994 had been taxed as C corporations. There were no supplemental pro
forma adjustments for any subsequent periods.
(5) Based on 8,400,000 shares of Common Stock outstanding before the initial
public offering in May 1994, plus 4,500,000 shares sold by the Company in
the initial public offering.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's pari-mutuel revenues have been derived from (i) wagering
on the Company's live races (a) at the Penn National Race Course, (b) at the
Company's OTWs, (c) at other Pennsylvania racetracks and OTWs and (d) through
telephone wagering, as well as wagering at the Company's racetracks on certain
stakes races run at out-of-state racetracks (collectively, referred to in the
Company's financial statements as "pari-mutuel revenues from Penn National
races"), (ii) wagering on full-card import simulcasts at the Company's
racetracks and OTWs and through telephone wagering (collectively, referred to in
the Company's financial statements as "pari-mutuel revenues from import
simulcasting") and (iii) fees from wagering on export simulcasting Company races
at out-of-state locations (referred to in the Company's financial statements as
"pari-mutuel revenues from export simulcasting"). The Company's other revenues
have been derived from admissions, program sales and certain other ancillary
activities, food and beverage sales and concessions and, beginning in September
1997, Gaming Machines.
Over the past several years, attendance at live racing, on an
industry-wide basis, has generally declined. Prior to the inception of OTWs,
declining live racing attendance at a track translated directly into lower
purses at that track. As the size of the purses declined, the quality of live
racing at the track would suffer, leading in turn to further reductions in
attendance. However, the Company believes that increased contributions to the
purse pool from wagers placed at OTWs affiliated with racetracks have
significantly offset the effects of declining live racing attendance on race
quality, and thereby improved the marketability of many tracks' export simulcast
products. Indeed, despite declining live racing attendance, total pari-mutuel
wagering on horse races in the United States has remained relatively constant in
recent years. Moreover, a number of states have recently begun to authorize the
installation of slot machines, video lottery terminals or other gaming machines
at live racing venues such as thoroughbred horse tracks, harness tracks and dog
tracks. The revenue from these gaming opportunities and from the higher volume
of wagers placed at these venues has not only increased total revenues for the
tracks at which they are installed, but has generally further increased purse
size and thereby resulted in higher quality races that can command higher
simulcast revenues.
25
The amount of revenue to the Company from a wager depends upon where
the race is run and where the wagering takes place. Pari-mutuel revenues from
Company races and import simulcasting of out-of-state races have consisted of
the total amount wagered, less the amount paid as winning wagers. Pari-mutuel
revenues from wagering at the Company's racetracks or the Company's OTWs on
import simulcasting from other Pennsylvania racetracks have consisted of the
total amount wagered, less the amounts paid as winning wagers, amounts payable
to the host racetrack and pari-mutuel taxes to Pennsylvania. Pari-mutuel
revenues from export simulcasting have consisted of amounts payable to the
Company by the out-of-state racetracks with respect to wagering on live races at
the Company's racetracks. Operating expenses have included purses payable to the
Thoroughbred Horsemen, commissions to other racetracks with respect to wagering
at their facilities on races at the Company's racetracks, pari-mutuel taxes on
races at the Company's racetracks and export simulcasting and other direct and
indirect operating expenses.
The Pennsylvania Racing Act specifies the maximum percentages of each
dollar wagered on horse races in Pennsylvania which may be retained by the
Company (prior to required payments to the Thoroughbred Horsemen and applicable
taxing authorities). The percentages vary, based on the type of wager; the
average percentage has approximated 20%. The balance of each dollar wagered must
be paid out to the public as winning wagers. With the exception of revenues
derived from wagers at the Company's racetracks or the Company's OTWs, the
Company's revenues on each race are determined pursuant to such maximum
percentage and agreements with the other racetracks and OTWs at which wagering
is taking place. Amounts payable to the Thoroughbred Horsemen are determined
under agreements with the Thoroughbred Horsemen and vary depending upon where
the wagering is conducted and the racetrack at which such races take place. The
Thoroughbred Horsemen receive their share of such wagering as race purses. The
Company retains a higher percentage of wagers made at its own facilities than of
wagers made at other locations. See "BUSINESS-PURSES; AGREEMENTS WITH HORSEMEN."
On November 27, 1996, the Company acquired Pocono Downs for an
aggregate purchase price of $48.2 million plus approximately $730,000 in
acquisition-related fees and expenses. Pocono Downs conducts harness racing and
pari-mutuel wagering at its track outside Wilkes-Barre, Pennsylvania, export
simulcasting of Pocono Downs races to locations throughout the United States,
pari-mutuel wagering at Pocono Downs and at OTWs in Allentown and Erie,
Pennsylvania on Pocono Downs races and on import simulcast races from other
racetracks and telephone account wagering on live and import simulcast races.
The Company applied and was approved by the Pennsylvania Harness Commission for
a new racing license and 1998 harness racing dates at Pocono Downs. This
approval entitles the Company to reduce, for a period of four years, its
pari-mutuel tax by one-half percent with respect to wagering at Pocono Downs and
the Company's OTWs in Allentown, Carbondale, Erie, Hazleton and Stroudsburg,
Pennsylvania.
Prior to the acquisition of Pocono Downs, the Company operated four
OTWs, one each in Chambersburg, Lancaster, Reading and York, Pennsylvania. The
Company added the OTWs in Allentown and Erie, Pennsylvania in November 1996
through the acquisition of Pocono Downs and added two OTWs through the opening
of the Williamsport OTW in February 1997 and the Hazleton OTW in March, 1998.
The Company has obtained approvals to operate, and expects to open on or about
March 31, 1998, an OTW in Carbondale, Pennsylvania. Subject to the receipt of
all regulatory approvals, the Company anticipates opening additional OTWs in
Stroudsburg and Altoona, Pennsylvania, at which time the Company would operate
11 of the 23 OTWs, authorized under Pennsylvania law.
On January 15, 1997, the Company acquired for a net purchase price of
approximately $18.2 million (including acquisition costs) a controlling joint
venture interest in Charles Town Races. After substantially completing a major
renovation and refurbishment of the property, the Company reopened Charles Town
Races as the Charles Town Entertainment Complex which features Gaming Machines,
live racing, simulcast wagering and dining. The Company currently owns an 89%
joint venture interest in the Charles Town Joint Venture. Racing operations
reopened at the Charles Town Entertainment Complex in April 1997. Gaming Machine
operations commenced with a soft opening on September 10, 1997, followed by the
Company's grand opening on October 17, 1997. The Company operated an average of
approximately 300 Gaming Machines in September 1997, and
26
increased the number of Gaming Machines in operation to 550 as of October 31,
1997. The Company has installed and is operating, as of March 1998, 609 Gaming
Machines at the Charles Town Entertainment Complex, and anticipates that the
Company will install 135 additional Gaming Machines by April 1998. The Company
ultimately intends to operate at the Charles Town Entertainment Complex 1,000
Gaming Machines, the maximum number it is currently permitted to operate by law
if demand warrants.
RESULTS OF OPERATIONS
The following table sets forth certain data from the Consolidated
Statements of Income of the Company as a percentage of total revenues:
YEAR ENDED DECEMBER 31
----------------------
1995 1996 1997
- --------------------------------------------------------------------------------
Revenues
Pari-mutuel revenues
Live races......................................... 37.1% 29.8% 24.8%
Import simulcasting................................ 47.3 52.5 53.6
Export simulcasting................................ 3.7 5.3 4.7
Gaming Machine revenues............................ -- -- 5.1
Admissions, programs and other racing
revenues........................................... 6.4 7.0 5.1
Concession revenues................................ 5.5 5.4 6.7
-------------------------
Total revenues..................................... 100.0 100.0 100.0
Operating expenses
Purses, stakes and trophies........................ 21.0 20.5 20.0
Direct salaries, payroll taxes and employee
benefits........................................... 13.3 13.8 14.5
Simulcast expenses................................. 15.8 14.7 11.7
Pari-mutuel taxes.................................. 8.6 8.5 8.5
Lottery taxes and administration................... -- -- 1.7
Other direct meeting expenses...................... 13.1 13.6 16.2
OTW concession expenses............................ 3.7 3.7 5.0
Other operating expenses........................... 8.7 7.9 7.8
Depreciation and amortization...................... 1.5 2.3 3.6
Site development and restructuring charges......... -- -- 2.2
-------------------------
Total operating expenses........................... 85.7 84.9 91.3
-------------------------
Income from operations............................. 14.3 15.1 8.7
Total other income (expenses)...................... 0.4 (0.2) (3.3)
-------------------------
Income before income taxes and extraordinary
item............................................... 14.7 14.9 5.4
=========================
Net income......................................... 8.7% 8.8% 2.1%
=========================
27
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Total revenue increased by approximately $48.7 million, or 77.5%, from
$62.8 million in 1996 to $111.5 million in 1997. Pocono Downs, which was
acquired in the fourth quarter of 1996 accounted for $30.8 million of the
increase. Charles Town Races, which was purchased in January 1997, accounted for
$16.5 million of the increase. The Company renovated and refurbished the Charles
Town Entertainment Complex following its acquisition and commenced racing
operations on April 30, 1997 and Gaming Machine operations, with a soft opening,
on September 10, 1997. The remaining revenue increase of $1.4 million was
primarily due to an increase of approximately $6.2 million associated with the
opening of the Penn National OTW facility in Williamsport in February 1997, and
a full year of operations at the Lancaster OTW facility. This increase was
offset by a decrease in revenues of approximately $4.2 million at the Company's
OTW facilities in Reading and York. Management believes that the decrease in
revenues at these facilities was primarily due to the opening of a competitor's
OTW facility and the opening of the Company's Lancaster OTW facility in July
1996. The Company also had a decrease in revenues of $.6 million due to the
closing of Penn National Speedway at the end of the 1996 season.
Total operating expenses increased by approximately $48.4 million, or
90.7%, from $53.4 million in 1996 to $101.8 million in 1997. Pocono Downs and
Charles Town Races, which the Company did not operate in the corresponding prior
period, accounted for $25.5 million and $17.5 million of this increase,
respectively. Operating expenses also increased by $5.4 million primarily due to
an increase of $4.4 million associated with the opening of the Company's new OTW
facility in Williamsport in February 1997, and a full year of operations at the
Lancaster OTW facility. This increase was offset by a decrease in operating
expenses of approximately $1.9 million at the Penn National Race Course facility
and at the Company's OTW facilities in Reading and York associated with lower
revenues at those facilities. The increase in corporate expenses of $1.4 million
was due to increased personnel, office space and other administrative expense
necessary to support the expansion of the Company. The Company also incurred
site development and restructuring charges in the amount of $2.4 million. The
site development charges ($1.7 million) consist of $800,000 related to the
Charles Town Races facility and $935,000 related to the abandonment of certain
proposed operating sites during 1997. The restructuring charges primarily
consist of $350,000 in severance termination benefits and other charges at the
Charles Town Races facility, $300,000 for the restructuring of the Erie,
Pennsylvania off-track wagering facility and $52,000 of property and equipment
written-off in connection with the discontinuation of Penn National Speedway,
Inc. operations during 1997. The Company also had a decrease in expenses of $.9
million due to the closing of Penn National Speedway at the end of the 1996
season.
Income from operations increased by approximately $265,000, or 2.9%,
from $9.5 million in 1996 to $9.7 million in 1997 due to the factors described
above. The Company had other expenses of approximately $3.7 million in 1997
compared to $156,000 in 1996, primarily as a result of increased interest
expense. The increase in interest expense is due to the Company's incurring bank
debt for the purchase of Pocono Downs and Charles Town Races, and for the
renovations to the Charles Town Facility and issuing $80.0 million of 10.625%
Senior Notes on December 12, 1997 to repay existing bank debt.
The extraordinary item consisted of a loss on the early extinquishment
of debt in the amount of $1,482,000, net of income taxes. The loss consists
primarily of write-offs of deferred finance costs associated with the retired
bank notes and legal and bank fees relating to the early extinquishment of the
debt.
Net income decreased by approximately $3.2 million or 58.5%, from $5.5
million in 1996 to $2.3 million in 1997 based on the factors described above.
Income taxes decreased by $1.5 million from $3.8 million in 1996 to $2.3 million
in 1997 as a result of the decrease in income for the year.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total revenues increased by approximately $5.2 million, or 8.9%, from
$57.7 million in 1995 to $62.8 million in 1996. The increase was attributable to
an increase in import and export simulcasting revenues, offset in
28
part by a decrease in pari-mutuel revenues on live races at the Penn National
Race Course. The increases in pari-mutuel revenues from import simulcasting,
admissions, programs and other racing revenues and concession revenue were due
primarily to operating the York OTW facility for twelve months in 1996 compared
to nine months in 1995, the opening of the Lancaster OTW facility in July 1996,
and the additional revenue from the acquisition of Pocono Downs since November
28, 1996. The increase in export simulcasting revenue of $1.2 million or 56.3%
from $2.1 million to $3.3 million resulted from the marketing of the Penn
National Race Course races to additional out-of-state locations. The decrease in
pari-mutuel revenues on the Penn National Race Course races was due to increased
import simulcasting revenue from wagering on other racetracks at Company
facilities and inclement winter weather conditions throughout the state of
Pennsylvania during the first quarter of 1996. For the year, the Penn National
Race Course was scheduled to run 217 live race days but canceled eleven in the
first quarter of 1996 due to weather. In 1995, the Penn National Race Course ran
204 live race days and had six cancellations.
Total operating expenses increased by approximately $4.0 million, or
8.0%, from $49.4 million in 1995 to $53.4 million in 1996. The increase in
operating expenses resulted from a full year of operations for the York OTW
compared to nine months in 1995, six months of operating expenses for the new
Lancaster OTW, one month of operating expenses at Pocono Downs and the expansion
of the corporate staff and office facility at Wyomissing in June of 1995.
Income from operations increased by approximately $1.2 million, or
14.6%, from $8.3 million in 1995 to $9.5 million in 1996 due to the factors
described above.
The Company had other operating expenses of $156,000 in 1996 compared
to other operating income of $208,000 in 1995, primarily as a result of
increased interest expense. The increase in interest expense is due to the
company incurring bank debt of $47 million on November 27, 1996 for the purchase
of Pocono Downs.
Net income increased $514,000 or 10.3%, from $5.0 million in 1995 to
$5.5 million in 1996 reflecting the factors described above. Income tax expense
increased from $3.5 million to $3.8 million due to the increase in income for
the year.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of liquidity and capital
resources have been cash flow from operations, borrowings from banks and
proceeds from issuance of equity securities.
Net cash provided from operating activities for the year ended December
31, 1997 ($10.7 million) consisted of net income and non-cash expenses ($6.3
million), the extraordinary loss relating to early extinquishment of debt ($2.5
million), the repayment of the Charles Town Entertainment Complex receivable in
January 1997 ($1.3 million) and other changes in certain assets and liabilities
($.6 million).
Cash flows used in investing activities for the year ended December 31,
1997 ($47.6 million) consisted of the acquisition of the Charles Town Races
($18.2 million), construction in progress and renovation and refurbishment of
the Charles Town Races ($25.5 million), and $3.9 million in capital
expenditures, including approximately $700,000 for the completion of the
Williamsport OTW facility.
Net cash flows from financing activities totaled approximately $53.2
million for the year ended December 31, 1997. Cash flows consisted principally
of $23.1 million in proceeds from an equity offering in February 1997, $16.5
million in proceeds from long-term debt used as payment for the acquisition of
Charles Town Races on January 15, 1997, $31.0 million in additional proceeds
from long-term debt used for renovations at the Charles Town Entertainment
Complex and capital improvements at other locations, and $80 million from the
issuance on December 12, 1997, of 10.625% Senior Notes due 2004. The Company
used the proceeds from the equity offering to repay $19.0 million of its bank
debt (including borrowings from the acquisition of the Charles Town Races
facility), with the remaining amount used for the refurbishment of the Charles
Town Entertainment Complex. The Company used $59.0 million of the proceeds from
the issuance of the Senior Notes to repay the
29
balance of its bank debt on December 12, 1997. The Company also incurred $3.0
million of financing costs associated with the sale of the Senior Notes.
The Company is subject to possible liabilities arising from the
environmental condition at the landfill adjacent to Pocono Downs. Specifically,
the Company may incur expenses in connection with the landfill in the future,
which expenses may not be reimbursed by the four municipalities which are
parties to the Settlement Agreement. The Company is unable to estimate the
amount, if any, that it may be required to expend. See "PROPERTIES-Harness
Track."
During 1998 the Company anticipates capital expenditures of
approximately $7.2 million to complete construction of four additional OTW
facilities. For the existing racetracks and OTW facilities, at Penn National
Race Course and Pocono Downs, the Company plans to spend an additional $500,000
and $350,000, respectively, on building improvements and equipment. The Company
anticipates expending approximately $1.4 million on the refurbishment of the
Charles Town Entertainment Complex (excluding the cost of Gaming Machines). If
approval of the Tennessee license is received, the Company anticipates expending
$9.0 million to complete the first phase of the project.
The Company entered into a Credit Facility with Bankers Trust Company,
as agent. The Credit Facility provides for, subject to certain terms and
conditions, a $12.0 million revolving credit facility and has a five-year term
from its closing. The Credit Facility, under certain circumstances, requires the
Company to make mandatory prepayments and commitment reductions and to comply
with certain covenants, including financial ratios and maintenance tests. The
Company would not have been in compliance with certain convents had the bank
group not granted waivers of certain technical defaults regarding minimum
consolidated net worth, consolidated cash interest ratio and minimum leverage
ratio. In addition, the Company may make optional prepayments and commitment
reductions pursuant to the terms of the Credit Facility. Borrowings under the
Credit Facility will accrue interest, at the option of the Company, at either a
base rate plus an applicable margin of up to 2.0% or a eurodollar rate plus an
applicable margin of up to 3.0%. The Credit Facility is secured by the assets of
the Company and certain of its subsidiaries and guaranteed by all subsidiaries,
except the Charles Town Joint Venture.
The net proceeds of the 1997 equity offering, together with cash
generated from operations, borrowings under the 10.625% Senior Notes and the
revolving credit facility, were sufficient to repay amounts outstanding under
the Credit Facility. The Company currently estimates that such proceeds will
also be sufficient to finance its current operations, planned capital
expenditure requirements and the costs associated with the Tennessee development
project. There can be no assurance, however, that the Company will not be
required to seek additional capital, in addition to that available from the
foregoing sources. The Company may, from time to time, seek additional funding
through public or private financing, including equity financing. There can be no
assurance that adequate funding will be available as needed or, if available, on
terms acceptable to the Company.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
All of the Company's debt obligations at December 31, 1997 were fixed
rate obligations, and Management, therefore, does not believe that the Company
has any material market risk from its debt obligations.
30
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Page No.
--------
Report of Independent Certified Public Accountants 32
Consolidated financial statements
Balance sheets 33-34
Statements of income 35-36
Statements of shareholders' equity 37
Statements of cash flows 38-39
Notes to consolidated financial statements 40-66
31
Report of Independent Certified Public Accountants
Penn National Gaming, Inc.
and Subsidiaries
Wyomissing, Pennsylvania
We have audited the accompanying consolidated balance sheets of Penn National
Gaming, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material aspects, the financial position of Penn National Gaming,
Inc. and Subsidiaries at December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
\s\ BDO Seidman, LLP
Philadelphia, Pennsylvania --------------------
March 2, 1998 BDO Seidman, LLP
32
Penn National Gaming, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Data)
December 31, 1996 1997
------------------------------
Assets
Current assets
Cash and cash equivalents $ 5,634 $ 21,854
Accounts receivable 4,293 2,257
Prepaid expenses and other current assets 1,552 1,441
Deferred income taxes 90 469
Prepaid income taxes -- 3,003
------------------------------
Total current assets 11,569 29,024
------------------------------
Property, plant and equipment, at cost
Land and improvements 15,728 24,643
Building and improvements 30,484 56,298
Furniture, fixtures and equipment 8,937 13,847
Transportation equipment 366 490
Leasehold improvements 6,680 6,778
Leased equipment under capitalized lease 1,626 824
Construction in progress 2,926 11,288
------------------------------
66,747 114,168
Less accumulated depreciation and amortization 8,029 11,007
------------------------------
Net property, plant and equipment 58,718 103,161
------------------------------
Other assets
Excess of cost over fair market value of net assets acquired (net of
accumulated amortization of $811 and $1,389,
respectively) 21,885 23,055
Prepaid acquisition costs 1,764 --
Deferred financing costs 2,416 3,014
Miscellaneous 371 624
------------------------------
Total other assets 26,436 26,693
------------------------------
$ 96,723 $ 158,878
------------------------------
See accompany summary of significant accounting policies
and notes to consolidated financial statements.
33
Penn National Gaming, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Data)
December 31, 1996 1997
------------------------------
Liabilities and Shareholders' Equity
Current liabilities
Current maturities of long-term debt and
capital lease obligations $ 1,563 $ 204
Accounts payable 5,066 7,405
Purses due horsemen 1,421 --
Uncashed pari-mutuel tickets 1,336 1,504
Accrued expenses 1,373 2,753
Accrued salaries and wages 507 813
Customer deposits 420 470
Taxes, other than income taxes 392 649
------------------------------
Total current liabilities 12,078 13,798
------------------------------
Long-term liabilities
Long-term debt and capital lease obligations,
net of current maturities 45,954 80,132
Deferred income taxes 10,810 11,092
------------------------------
Total long-term liabilities 56,764 91,224
------------------------------
Commitments and contingencies
Shareholders' equity
Preferred stock, $.01 par value, authorized 1,000,000 shares;
issued none -- --
Common stock, $.01 par value, authorized 20,000,000 shares;
issued and outstanding 13,355,290 and 15,152,580, respectively 134 152
Additional paid-in capital 14,299 37,969
Retained earnings 13,448 15,735
------------------------------
Total shareholders' equity 27,881 53,856
------------------------------
$ 96,723 $ 158,878
------------------------------
See accompany summary of significant accounting policies
and notes to consolidated financial statements.
34
Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Income
(In Thousands, Except Share Data)
1995 1996 1997
Year ended December 31,
----------------------------------------
Revenues
Pari-mutuel revenues
Live races $ 21,376 $ 18,727 $ 27,653
Import simulcasting 27,254 32,992 59,810
Export simulcasting 2,142 3,347 5,279
Gaming revenue -- -- 5,712
Admissions, programs and other racing revenues 3,704 4,379 5,678
Concession revenues 3,200 3,389 7,404
----------------------------------------
Total revenues 57,676 62,834 111,536
----------------------------------------
Operating expenses
Purses, stakes and trophies 12,091 12,874 22,335
Direct salaries, payroll taxes and employee benefits 7,699 8,669 16,200
Simulcast expenses 9,084 9,215 12,982
Pari-mutuel taxes 4,963 5,356 9,506
Lottery taxes and administration -- -- 1,874
Other direct meet expenses 7,576 8,536 18,087
Off-track wagering concessions expenses 2,125 2,349 5,605
Other operating expenses 5,002 4,942 8,735
Depreciation and amortization 881 1,433 4,040
Site development and restructuring charges -- -- 2,437
----------------------------------------
Total operating expenses 49,421 53,374 101,801
----------------------------------------
Income from operations 8,255 9,460 9,735
----------------------------------------
Other income (expenses)
Interest (expense) (71) (506) (4,591)
Interest income 269 350 935
Other 10 -- (2)
----------------------------------------
Total other income (expenses) 208 (156) (3,658)
----------------------------------------
35
Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Income
(In Thousands, Except Share Data)
Year ended December 31, 1995 1996 1997
-------------------------------------------
Income before income taxes and extraordinary item $ 8,463 $ 9,304 $ 6,077
Taxes on income 3,467 3,794 2,308
-------------------------------------------
Income before extraordinary item 4,996 5,510 3,769
Extraordinary item
Loss on early extinguishment of debt,
net of income taxes of $1,001 -- -- 1,482
-------------------------------------------
Net income $ 4,996 $ 5,510 $ 2,287
-------------------------------------------
Per share data
Basic
Income per share before extraordinary item $ .39 $ .41 $ .25
Extraordinary item -- -- .10
-------------------------------------------
Net income per share .39 .41 .15
-------------------------------------------
Diluted
Income per share before extraordinary item $ .38 $ .40 $ .24
Extraordinary item -- -- .09
-------------------------------------------
Net income per share .38 .40 .15
-------------------------------------------
Shares outstanding
Basic 12,906 13,302 14,925
Diluted 13,017 13,822 15,458
-------------------------------------------
See accompany summary of significant accounting policies and notes to
consolidated financial statements.
36
Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(In Thousands, Except Share Data)
Common Stock Additional
------------------------- Paid in Retained
Shares Amount Capital Earnings Total
-----------------------------------------------------------------
Balance, January 1, 1995 12,900,000 $ 43 $ 12,642 $ 2,942 $15,627
Issuance of common stock 45,000 -- 179 -- 179
Net income for the year -- -- -- 4,996 4,996
-----------------------------------------------------------------
Balance, December 31, 1995 12,945,000 43 12,821 7,938 20,802
Issuance of common stock 410,290 4 1,565 -- 1,569
Stock splits -- 87 (87) -- --
Net income for the year -- -- -- 5,510 5,510
-----------------------------------------------------------------
Balance, December 31, 1996 13,355,290 134 14,299 13,448 27,881
Issuance of common stock 1,725,000 17 22,914 -- 22,931
Exercise of stock options and warrants 72,290 1 154 -- 155
Tax benefit related to
stock options exercised -- -- 602 -- 602
Net income for the year -- -- -- 2,287 2,287
-----------------------------------------------------------------
Balance, December 31, 1997 15,152,580 $ 152 $ 37,969 $ 15,735 $53,856
-----------------------------------------------------------------
See accompany summary of significant accounting policies and notes to
consolidated financial statements.
37
Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
1995 1996 1997
Year ended December 31,
--------------------------------------
Cash flows from operating activities
Net income $ 4,996 $ 5,510 $ 2,287
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 881 1,433 4,040
Extraordinary loss relating to early
extinguishment of debt, before income
tax benefit -- -- 2,483
Deferred income taxes (benefit) 20 228 (97)
Decrease (increase) in
Accounts receivable (362) (1,870) 2,036
Prepaid expenses and other current assets (158) 871 111
Prepaid income taxes -- -- (3,003)
Miscellaneous other assets 5 (255) (258)
Increase (decrease) in
Accounts payable (15) 1,288 2,339
Purses due horsemen 297 (248) (1,421)
Uncashed pari-mutuel tickets 184 632 168
Accrued expenses (504) 827 1,380
Accrued salaries and wages 128 265 306
Customer deposits 16 105 50
Taxes other than income taxes 239 146 257
Income taxes 190 (985) --
--------------------------------------
Net cash provided by operating activities 5,917 7,947 10,678
--------------------------------------
Cash flows from investing activities
Expenditures for property, plant and equipment (3,958) (6,995) (29,196)
Acquisition of business, net of cash acquired -- (47,320) (18,248)
(Increase) in prepaid acquisition costs -- (1,514) (176)
--------------------------------------
Net cash (used in) investing activities (3,958) (55,829) (47,620)
--------------------------------------
38
Penn National Gaming, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
Year ended December 31, 1995 1996 1997
----------------------------------
Cash flows from financing activities
Proceeds from sale of common stock $ 179 $ 1,569 $ 23,086
Tax benefit related to stock options exercised -- -- 602
Proceeds from long-term debt -- 47,000 111,167
Principal payments on long-term debt
and capital lease obligations (126) (123) (78,348)
Increase in unamortized financing cost -- (2,444) (3,345)
----------------------------------
Net cash provided by financing activities 53 46,002 53,162
----------------------------------
Net increase (decrease) in cash 2,012 (1,880) 16,220
Cash, beginning of period 5,502 7,514 5,634
----------------------------------
Cash, end of period $ 7,514 $ 5,634 $ 21,854
----------------------------------
See accompany summary of significant accounting policies
and notes to consolidated financial statements.
39
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Basis of Presentation
Significant
Accounting The consolidated financial statements include
Policies the accounts of Penn National Gaming, Inc. and
its subsidiaries (collectively the "Company").
All significant intercompany accounts and
transactions have been eliminated in
consolidation. Certain prior years' amounts
have been reclassified to conform to the 1997
presentation.
Description of Business
The Company, which began operations in 1972,
provides pari-mutuel wagering opportunities on
both live and simulcast thoroughbred and
harness horse races at two racetracks and
seven off-track wagering facilities ("OTWs")
located in Pennsylvania and pari-mutuel
wagering opportunities and video gaming
machines at Charles Town Races, the Company's
Charles Town, West Virginia thoroughbred race
track. Prior to the consummation of the
acquisitions of Pocono Downs and Charles Town
Races (see Note 2), the Company owned and
operated Penn National Race Course located
near Harrisburg, Pennsylvania ("Penn National
Race Course"), and operated four OTWs, one
each in Chambersburg, Lancaster, Reading and
York, Pennsylvania. On November 27, 1996, the
Company consummated the acquisition of Pocono
Downs (the "Pocono Downs Acquisition") and as
a result acquired Pocono Downs Racetrack,
located outside Wilkes-Barre, Pennsylvania
("Pocono Downs"), and OTWs in Allentown and
Erie, Pennsylvania. In February 1997, the
Company opened its seventh OTW in
Williamsport, Pennsylvania.
On January 15, 1997, a joint venture, in which
the Company holds an 89% interest, acquired
substantially all of the assets relating to
Charles Town Races, a thoroughbred racing
facility in Jefferson County, West Virginia
(the "Charles Town Acquisition"). The Company
refurbished and reopened the Charles Town
facility as an entertainment complex featuring
live racing, dining, simulcast wagering and,
effective September 1997, Gaming Machines.
At each of its three racetracks, the Company
conducts pari-mutuel wagering on thoroughbred
and harness races from the Company's
racetracks and simulcasts from other
racetracks. The Company also simulcasts its
Penn National Race Course and Pocono Downs
races for wagering at other racetracks and
OTWs, including all Pennsylvania racetracks
and OTWs and locations outside
40
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Pennsylvania. Wagering on Penn National Race
Course and Pocono Downs races and races
simulcast from other racetracks also occurs
through the Company's Pennsylvania racetracks'
telephone account betting network.
Glossary of Terminology
The following is a listing of terminology used
throughout the financial statements:
The Company's Racetracks - Penn
National Race Course near Harrisburg,
Pennsylvania, Pocono Downs near
Wilkes-Barre, Pennsylvania and
Charles Town Races in Charles Town,
West Virginia.
Gaming Machines - Video lottery
terminal gaming machines.
OTW - Off-track wagering location.
Pari-mutuel wagering - All wagering
at the Company's racetracks, at the
Company's OTWs and all wagering on
the Company's races at other
racetracks and OTWs.
Telebet - Telephone account wagering.
Totalisator Services - Computer
services provided to the Company by
various totalisator companies for
processing pari-mutuel betting odds
and wagering proceeds.
Pari-mutuel Revenues:
Live Races - The Company's share of
pari-mutuel wagering on live races
within Pennsylvania and West Virginia
and certain stakes races from
racetracks outside of Pennsylvania
and West Virginia after payment of
the amount returned as winning
wagers.
Import Simulcasting - The Company's
share of wagering at the Company's
racetracks, at the Company's OTWs and
by Telebet on full cards of races
simulcast from other racetracks.
Export Simulcasting - The Company's
share of wagering at out-of-state
locations on live races.
41
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A summary of pari-mutuel wagering for the
periods indicated is as follows:
December 31, 1995 1996 1997
----------------------------------------
Pari-mutuel wagering on
the Company's live races $ 102,145 $ 89,327 $ 128,090
Pari-mutuel wagering on
simulcasting
Import simulcasting from
other racetracks 142,499 170,814 298,459
Export simulcasting to out
of Pennsylvania
wagering facilities 72,252 112,871 176,287
----------------------------------------
Total pari-mutuel wagering $ 316,896 $ 373,012 $ 602,836
----------------------------------------
Racing Meet
The Penn National Race Course racing seasons
for the years ended December 31, 1995, 1996
and 1997 totaled 204, 206 and 212 live race
days, respectively. For the year ended
December 31, 1997, the Pocono Downs and
Charles Town Races racing seasons totaled 134
and 159 live race days, respectively.
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.
Depreciation and amortization for the years
ended December 31, 1995, 1996 and 1997
amounted to $814,000, $1,301,000 and
$3,193,000, respectively.
The excess of cost over fair value of net
assets acquired is being amortized on the
straight-line method over a forty-year period.
Amortization expense for 1995, 1996 and 1997
amounted to $67,000, $98,000 and $578,000,
respectively. The Company evaluates the
recoverability of the goodwill quarterly, or
more frequently whenever events and
circumstances warrant revised estimates and
considers whether the goodwill should be
completely or partially written off or the
amortization period accelerated.
Deferred financing costs are charged to
operations over the life of the underlying
indebtedness. Amortization of deferred
financing
42
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
costs for 1995, 1996 and 1997 amounted to
$-0-, $34,000 and $269,000, respectively.
The Company adopted the provisions of
Statement of Financial Accounting Standards
No. 121 ("SFAS 121") "Accounting for the
Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" during
the year ended December 31, 1995. SFAS 121
establishes accounting standards for the
impairment of long-lived assets, certain
identifiable intangibles and goodwill related
to those assets to be held and used and for
long-lived assets and certain identifiable
intangibles to be disposed of. The Company
reviews the carrying values of its long-lived
and identifiable intangible assets for
possible impairment whenever events or changes
in circumstances indicates that the carrying
amount of the assets may not be recoverable
based on undiscounted estimated future
operating cash flows. As of December 31, 1997,
the Company has determined that no impairment
has occurred.
Income Taxes
The Company has adopted the provisions of
Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires a company to
recognize deferred tax liabilities and assets
for the expected future tax consequences of
events that have been recognized in a
company's financial statements or tax returns.
Under this method, deferred tax liabilities
and assets are determined based on the
difference between the financial statement
carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect
in the years in which the differences are
expected to reverse.
Cash and Cash Equivalents
The Company considers all cash balances and
highly liquid investments with original
maturities of three months or less to be cash
equivalents.
Net Income Per Common Share
The Company adopted the provisions of
Statement of Financial Accounting Standards
No. 128 ("SFAS 128") "Earnings Per Share" in
1997. SFAS 128 provides for the calculation of
"basic" and "diluted" net income per share.
Basic net income per share includes no
dilution and is calculated by dividing net
income by
43
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
the weighted average number of common shares
outstanding for the period. Dilutive net
income per share reflects the potential
dilution of securities that could share in the
net income of the Company which consist of
stock options and warrants (using the treasury
stock method).
Deferred Financing Costs
Deferred financing costs, which are incurred
by the Company in connection with debt, are
charged to operations over the life of the
underlying indebtedness using the interest
method adjusted to give effect to any early
repayments.
Concentration of Credit Risk
Financial instruments which potentially
subject the Company to credit risk consist of
cash equivalents and accounts receivable.
The Company's policy is to limit the amount of
credit exposure to any one financial
institution and place investments with
financial institutions evaluated as being
creditworthy, or in short-term (less than
seven days) money market and tax free bond
funds which are exposed to minimal interest
rate and credit risk. At December 31, 1997,
the Company had bank deposits which exceeded
federally insured limits by approximately
$960,000 and money market and tax free bond
funds of approximately $18,939,000.
Concentration of credit risk, with respect to
accounts receivable, is limited due to the
Company's credit evaluation process. The
Company does not require collateral from its
customers. The Company's receivables consist
principally of amounts due from other
racetracks and OTWs. Historically, the Company
has not incurred any significant credit
related losses.
Fair Value of Financial Instruments
The following methods and assumptions are used
to estimate the fair value of each class of
financial instruments for which it is
practical to estimate.
Cash and Cash Equivalents: The
carrying amount approximates the
fair value due to the short maturity
of the cash equivalents.
Long-Term Debt and Capital Lease
Obligations: The fair value of the
Company's long-term debt and capital
lease
44
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
obligations is estimated based on
the quoted market prices for the
same or similar issues or on the
current rates offered to the Company
for debt of the same remaining
maturities. The carrying amount
approximates fair value since the
Company's interest rates approximate
current interest rates.
Prepaid Acquisition Costs
Prepaid acquisition costs, which were incurred
by the Company substantially in connection
with the Charles Town Acquisition (see Note
2), are included in the purchase price of the
Charles Town Acquisition and allocated to the
appropriate assets.
Use of Estimates
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make
estimates and assumptions that affect the
reported amounts of assets and liabilities and
disclosure of contingent assets and
liabilities at the date of the financial
statements and the reported amounts of revenue
and expenses at the reporting period. Actual
results could differ from those estimates.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards
No. 129, "Disclosure of Information about
Capital Structure" ("SFAS 129"), effective for
periods ending after December 15, 1997,
establishes standards for disclosing
information about an entity's capital
structure. SFAS 129 requires disclosure of the
pertinent rights and privileges of various
securities outstanding (stock, options,
warrants, preferred stock, debt and
participation rights) including dividend and
liquidation preferences, participant rights,
call prices and dates, conversion or exercise
prices and redemption requirements. Adoption
of SFAS 129 will have no effect on the Company
because it currently discloses the information
specified.
Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income"
("SFAS 130"), establishes standards for
reporting and display of comprehensive income,
its components and accumulated balances.
Comprehensive income is defined to include all
changes in equity except those resulting from
investments by owners and distributions to
owners. Among other disclosures, SFAS 130
requires that all items that are required to
be recognized under current accounting
standards as components
45
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
of comprehensive income be reported in a
financial statement that is displayed with the
same prominence as other financial statements.
Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of a
Business Enterprise" ("SFAS 131"), establishes
standards for the way that public enterprises
report information about operating segments in
annual financial statements and requires
reporting of selected information about
operating segments in interim financial
statements issued to the public. It also
establishes standards for disclosures
regarding products and services, geographic
areas and major customers. SFAS 131 defines
operating segments as components of an
enterprise about which separate financial
information is available and that is evaluated
regularly by the chief operating decision
maker in deciding how to allocate resources
and in assessing performance.
Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits"
("SFAS 132"), revises employers' disclosures
about pension and other postretirement benefit
plans. It does not change the measurement or
recognition of those plans. It standardizes
the disclosure requirements for pensions and
other postretirement benefits to the extent
practicable, requires additional information
on changes in the benefit obligations and fair
values of plan assets that will facilitate
financial analysis and eliminates certain
existing disclosure requirements.
SFAS 130, SFAS 131 and SFAS 132 are effective
for financial statements for periods beginning
after December 15, 1997 and require
comparative information for earlier years to
be restated. Due to the recent issuance of
these standards, management has been unable to
fully evaluate the impact, if any, they may
have on future financial statement
disclosures.
2. Acquisitions Pocono Downs Acquisition
On November 27, 1996, the Company purchased
all of the capital stock of The Plains Company
and the limited partnership interests in The
Plains Company's affiliated entities
(together, "Pocono Downs") for an aggregate
purchase price of $48.2 million plus
acquisition-related fees and expenses of
$730,000. Pocono Downs conducts live harness
racing at the harness racetrack located
outside Wilkes-Barre, Pennsylvania, export
simulcasting of
46
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Pocono Downs races to locations throughout the
United States, pari-mutuel wagering at Pocono
Downs and at OTWs in Allentown and Erie,
Pennsylvania on Pocono Downs races and on
import simulcast races from other racetracks,
and telephone account wagering on live and
import simulcast races.
The Pocono Downs Acquisition was accounted for
using the purchase method of accounting.
Accordingly, a portion of the purchase price
was allocated to the net assets acquired based
on their estimated fair values. In accordance
with SFAS 109, the Company recorded an
additional increase to goodwill of
approximately $9.7 million and a corresponding
increase to a deferred tax liability,
representing the difference between the
financial and tax bases of certain assets
acquired.
The results of operations of Pocono Downs have
been included in the Company's consolidated
financial statements since the effective date
of the acquisition. The balance of the
purchase price was recorded at cost over net
assets acquired as goodwill, approximately
$10.4 million, and is being amortized over
forty years on a straight-line basis. The
Company used its Credit Facility (see Note 3)
and cash of Pocono Downs to fund the
acquisition.
In addition, pursuant to the terms of the
purchase agreement, the Company will be
required to pay the sellers of Pocono Downs an
additional $10 million if, within five years
after the consummation of the Pocono Downs
Acquisition, Pennsylvania authorizes any
additional form of gaming in which the Company
may participate. The $10 million payment would
be payable in annual installments of $2
million for five years, beginning on the date
that the Company first offers such additional
form of gaming.
Charles Town Acquisition
On February 26, 1996, the Company entered into
a joint venture agreement (the "Charles Town
Joint Venture") with Bryant Development
Company and its affiliates ("Bryant"), the
holder of an option to purchase substantially
all of the assets of Charles Town Racing
Limited Partnership and Charles Town Races,
Inc. (together, "Charles Town") relating to
the Charles Town Race Track and Shenandoah
Downs (together, the "Charles Town
Entertainment Complex") in Jefferson County,
West Virginia. In connection with the Charles
Town Joint Venture agreement, Bryant assigned
the option to the Charles Town Joint Venture.
In
47
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
November 1996, the Charles Town Joint Venture
and Charles Town entered into an amended and
restated option agreement. On November 5,
1996, Jefferson County, West Virginia approved
a referendum permitting installation of gaming
machines at the Charles Town Entertainment
Complex. On January 15, 1997, the Charles Town
Joint Venture acquired substantially all of
the assets of Charles Town for approximately
$16.0 million plus acquisition-related fees
and expenses of approximately $2.2 million.
Pursuant to the original operating agreement
governing the Charles Town Joint Venture, the
Company held an 80% ownership interest in the
Charles Town Joint Venture and was obligated
to contribute 80% of the purchase price of the
Charles Town Acquisition and 80% of the cost
of refurbishing and Charles Town Entertainment
Complex. In consideration of the fact that the
Company contributed 100% of the purchase price
of the Charles Town Acquisition and 100% of
the cost of refurbishing the Charles Town
Entertainment Complex, the Company amended its
operating agreement with Bryant to, among
other things, increase the Company's ownership
interest in the Charles Town Joint Venture to
89% and decrease Bryant's interest to 11%. In
addition, the amendment provided that the
entire amount the Company has contributed to
the Charles Town Joint Venture for the
acquisition and refurbishment of the Charles
Town Entertainment Complex would be treated,
as between the parties, as a loan to the
Charles Town Joint Venture from the Company.
Accordingly, prior to the distribution of any
profits pursuant to the Charles Town Joint
Venture, the Company must be repaid in full
all such contributions or loans, plus accrued
interest, which as of December 31, 1997,
amounted to $45.9 million.
Bryant had acquired its option from Showboat
Operating Company ("Showboat"). Showboat has
retained an option (the "Showboat Option") to
operate any casino at the Charles Town
Entertainment Complex in return for a
management fee (to be negotiated at the time,
based on rates payable for similar properties)
and a right of first refusal to purchase or
lease the site of any casino at the Charles
Town Entertainment Complex proposed to be
leased or sold and to purchase any interest
proposed to be sold in any such casino on the
same terms offered by a third party or
otherwise negotiated with the Charles Town
Joint Venture. The rights retained by Showboat
under the Showboat Option extend for a period
of five years from November 6, 1996, the date
that the Charles Town Joint Venture exercised
its option to purchase the Charles Town Races,
and expires thereafter unless legislation to
48
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
permit casino gaming at the Charles Town
Entertainment Complex has been adopted prior
to the end of the five-year period. If such
legislation has been adopted prior to such
time, then the rights of Showboat continue for
a reasonable time (not less than 24 months) to
permit completion of negotiations.
While the express terms of the Showboat Option
do not specify which activities at the Charles
Town Entertainment Complex would constitute
operation of a casino, Showboat has agreed
that the installation and operation of gaming
devices linked to the lottery (like the Gaming
Machines the Company has installed and will
continue to install) at the Charles Town
Entertainment Complex's racetrack would not
trigger Showboat's right to exercise the
Showboat Option. The Company would be required
to pay a management fee to Showboat for the
operation of the casino.
The Charles Town Joint Venture refurbished and
reopened the Charles Town Entertainment
Complex as an entertainment complex that
features live racing, dining, simulcast
wagering and, effective September 1997, the
operation of gaming machines. The cost of the
refurbishment was approximately $27.0 million
inclusive of $614,000 of capitalized interest
and exclusive of the costs of leasing gaming
machines through December 31, 1997.
Construction in progress at December 31, 1997
primarily consists of approximately $9.5
million related to the Charles Town
Entertainment Complex refurbishments. The
estimated cost to complete these
refurbishments as of December 31, 1997 is
approximately $475,000.
Effective June 4, 1996, the Charles Town Joint
Venture entered into a Loan and Security
Agreement with Charles Town. The Loan and
Security Agreement provided for a working
capital line of credit in the amount of
$1,250,000 and a requisite reduction of the
purchase price under the option, by $1.60 for
each dollar borrowed under that line. Upon
consummation of the Charles Town Acquisition,
Charles Town Races, Inc. repaid the loan. The
parties agreed that $936,000 of the amount
borrowed was eligible for the $1.60 purchase
price reduction and are negotiating the
applicability of the purchase price reduction
to the remaining $219,000 that was borrowed.
The Charles Town Acquisition was accounted for
using the purchase method of accounting.
Accordingly, a portion of the purchase price
was allocated to the net assets acquired based
on their estimated fair values. The balance of
the purchase price was recorded as cost over
net assets acquired as goodwill,
49
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
approximately $1.7 million, and is being
amortized over forty years on a straight-line
basis. The Company used its credit facility
(see Note 3) and cash from operations to fund
the acquisition.
The 1997 results of operations of Charles Town
have been included in the Company's
consolidated financial statements since
January 15, 1997, the effective date of the
acquisition. The 1997 results of Charles Town
closely represents a full year of operations
and the 1996 results of Charles Town are
immaterial to the financial statements taken
as a whole, therefore, no pro forma financial
information is presented.
3. Long-Term Debt Long-term debt and capital lease obligations are as follows:
and Capital Lease
Obligations December 31, 1996 1997
----------------------
(In thousands)
Long-term debt
Senior Notes - $80 million face amount,
due December 15, 2004 with interest
payable at 10.625% per annum to
noteholders semi-annually on June 15
and December 15, commencing June 15,
1998. The notes are unsecured and
are unconditionally guaranteed by
certain subsidiaries of the Company.
$ -- $ 80,000
Term loans payable to a bank group in
quarterly installments (see
additional information below under
Credit Facilities). These term loans
were paid in December 1997 from the
proceeds of
the Debt Offering. 47,000 --
Other notes payable 380 279
Capital Lease Obligations 137 57
----------------------
47,517 80,336
Less current maturities 1,563 204
----------------------
$ 45,954 $ 80,132
----------------------
50
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Credit Facilities
At December 31, 1996 and 1997, the Company was
contingently obligated under letters of credit
with face amounts aggregating $1,436,000 and
$1,634,000, respectively. These amounts
consisted of $1,336,000 and $1,534,000,
respectively, relating to the horsemens'
account balances and $100,000 for Pennsylvania
pari-mutuel taxes in each period.
In November 1996, the Company entered into an
agreement with a bank group which provides an
aggregate of $75 million of credit facilities,
which included a $5 million revolving credit
facility ("1996 Credit Facility").
Simultaneously with the closing of the 1996
Credit Facility, the Company repaid amounts
outstanding under its old credit facility and
replaced it. The 1996 Credit Facility
consisted of two term loan facilities of $47
million and $23 million (together, the "Term
Loans") which were used for the Pocono Downs
and Charles Town acquisitions, respectively,
and which were used for a portion of the cost
of refurbishment of the Charles Town
Entertainment Complex, and a revolving credit
facility of $5 million (together, the
"Loans"). The Term Loans were repaid in
December 1997 with the proceeds of the
Company's debt offering. See "Debt Offering"
hereinafter. At such time the 1996 Credit
Facility was amended and restated to provide
for a $12 million revolving credit facility,
including a $3 million sublimit for standby
letters of credit, which matures in December
2002. The revolving credit facility is secured
by substantially all of the assets of the
Company. The revolving credit facility
provides for certain covenants, including
those of a financial nature. The Company would
not have been in compliance with certain
covenants had the bank group not granted
waiver of certain technical defaults regarding
minimum consolidated net worth, consolidated
cash interest coverage ratio and minimum
leverage ratio. However, at December 31, 1997
the Company had not drawn any portion of the
revolving credit facility (although a $1.6
million letter of credit was issued against
such revolving credit facility) and had
adequate capital resources even without
consideration of its revolving credit
facility.
At the Company's option, the revolving
facility may bear interest at the highest of:
(1) 1/2 of 1% in excess of the federal reserve
reported certificate of deposit rate, (2) the
rate that the bank group announces from time
to time as its prime lending rate and (3) 1/2
of 1% in excess of the federal funds rate plus
an applicable margin of
51
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
up to 2% or the revolving facility may also
bear interest at a rate tied to a eurodollar
rate plus an applicable margin of up to 3%.
Mandatory repayments of the revolving facility
are required in an amount equal to a
percentage of the net cash proceeds from any
issuance or incurrence of equity or funded
debt by the Company, that percentage to be
dependent upon the then outstanding balance of
the revolving facility and the Company's
leverage ratio; however, the existing credit
facility, as amended, permitted the Company to
retain up to the first $19 million of proceeds
from an offering of the Company's equity
securities. Mandatory repayments of varying
percentages are also required in the event of
either asset sales in excess of stipulated
amounts or defined excess cash flow.
Debt Offering
On December 12, 1997, the Company and certain
of its subsidiaries (as guarantors) entered
into a purchase agreement for the sale and
issuance of $80,000,000 aggregate principal
amount of its 10.625% Senior Notes due 2004
(the "Offering"). The net proceeds of the
Offering were used for repayment of existing
indebtedness, for capital expenditures and for
general corporate purposes. Interest on the
notes will accrue from their date of original
issuance (the "Issue Date") and will be
payable semi-annually, commencing in 1998. The
notes will be redeemable, in whole or in part,
at the option of the Company in 2001 or
thereafter at the redemption prices set forth
in the Offering, plus accrued and unpaid
interest to the date of redemption.
The notes are general unsecured senior
obligations of the Company and rank equally in
right of payment to any existing and future
unsubordinated indebtedness of the Company and
senior in right of payment with all existing
and future subordinated indebtedness of the
Company. The notes are unconditionally
guaranteed (the "Guarantees") on a senior
basis by certain of the Company's existing
subsidiaries (the "Subsidiary Guarantors").
The Guarantees are general unsecured
obligations of the Subsidiary Guarantors and
rank equally in right of payment to any
unsubordinated indebtedness of the Subsidiary
Guarantors and rank senior in right of payment
to all other subordinated obligations of the
Subsidiary Guarantors. The notes are
effectively subordinated in right of payment
to all secured indebtedness of the
52
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Company, including indebtedness incurred under
the amended $12 million revolving credit
facility.
53
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following is a schedule of future minimum
lease payments under capitalized leases and
repayments of long-term debt, as of December
31, 1997:
Term
Loans
and
Capitalized Notes
December 31, Leases Payable Total
-------------------------------------------
(In thousands)
1998 $ 51 $ 157 $ 208
1999 10 32 42
2000 -- 35 35
2001 -- 38 38
2002 -- 17 17
Thereafter -- 80,000 80,000
-------------------------------------------
Total minimum payments 61 80,279 80,340
Less interest discount amount 4 -- 4
-------------------------------------------
Total present value of net
minimum lease payments and total
notes payable 57 80,279 80,326
Current maturities 47 157 204
-------------------------------------------
Total noncurrent maturities $ 10 $ 80,122 $ 80,132
-------------------------------------------
On February 18, 1997, the Company completed a
secondary public offering of 1,725,000 shares
of common stock and used $19 million of the
$23 million proceeds therefrom to reduce the
then outstanding Term Loan amounts (see Note
8).
4. Customer Customer deposits represent amounts held by
Deposits the Company for telephone wagering.
5. Commitments In November 1997, the Company signed a new
and Totalisator services and equipment agreement
Contingencies for all of its subsidiaries. The agreement is
for five years, expiring on March 31, 2003.
The new agreement provides for annual payments
based on a specified percentage of the total
amount wagered at the Company's facilities
with a minimum annual payment of $1,475,000.
The Company is also liable under numerous
operating leases for automobiles, other
equipment and buildings, which expire through
2004. Total rental expense under these
agreements were $672,000, $1,001,000 and
$807,000 for the years ended December 31,
1995, 1996 and 1997, respectively.
54
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The future lease commitments relating to
noncancelable operating leases as of December
31, 1997 are as follows:
(In thousands)
1998 $ 1,035
1999 1,084
2000 1,099
2001 1,067
2002 1,070
Thereafter 1,696
---------
$ 7,051
---------
On April 12, 1994, the Company entered into
employment agreements with its Chairman and
Chief Financial Officer at annual base
salaries of $225,000 and $95,000,
respectively. The agreements became effective
June 1, 1994 and, as amended, terminate on
June 30, 1999. Each agreement prohibits the
employee from competing with the Company
during its term and for one year thereafter,
and requires a death benefit payment by the
Company equal to 50% of the employee's annual
salary in effect at the time of death.
In August 1994, the Company signed a
consulting agreement with its former Chairman
expiring in August 1999 at an annual payment
of $125,000.
On June 1, 1995, the Company entered into an
employment agreement with its President and
Chief Operating Officer at an annual base
salary of $210,000. The agreement terminates
on June 12, 1998. The agreement prohibits the
employee from competing with the Company
during its term and for two years thereafter,
and requires a death benefit payment by the
Company equal to 50% of the employee's annual
salary in effect at the time of his death.
Under an agreement between the Company and its
former president, the former president
received options to purchase 150,000 shares of
common stock at the fair value as of the date
of grant of $3.33 per share expiring May 31,
2000.
The Company has two profit sharing plans under
the provisions of Section 401(k) of the
Internal Revenue Code; The Penn National
Gaming, Inc. Profit Sharing Plan (the "Penn
National 401(k) Plan") and the Pocono Downs
Inc. Profit Sharing Plan
55
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(the "Pocono Downs 401(k) Plan") cover all
eligible employees who are not members of a
bargaining unit. Both Plans enable employees
choosing to participate to defer a portion of
their salary in a retirement fund to be
administered by the Company. The Company's
contributions to the Penn National 401(k) Plan
are set at 50% of employees' elective salary
deferrals which may be made up to a maximum of
6% of employee compensation. The Company has
no obligation to contribute to the Pocono
Downs 401(k) plan. However, for the years
ended December 31, 1995, 1996 and 1997 the
Company has made discretionary contributions
to the Pocono Downs 401(k) Plan based upon a
percentage of the employee elective deferrals
which may be made up to a maximum of 15% of
employee compensation. The Company made
contributions to these plans of approximately
$70,000, $89,000 and $145,000 for the years
ended December 31, 1995, 1996 and 1997,
respectively.
Charles Town has a defined contribution plan
covering substantially all of its employees.
Charles Town makes monthly contributions equal
to the amount accrued for retirement expense,
which is calculated as .25% of the daily
mutual handle and .5% of the net video lottery
revenues. Total contributions for the year
ended December 31, 1997 was $114,000.
In June 1997, the Charles Town Joint Venture,
which is operated as PNGI Charles Town Gaming,
LLC, an 89% subsidiary of the Company entered
into an agreement (the "GTECH Agreement") with
GTECH relating to the lease, installation and
service of a video lottery system ("VLS") at
the Charles Town Entertainment Complex. The
GTECH Agreement provides that GTECH will be
the exclusive provider of VLS and related
services, including video lottery terminals
and slot machines, if any, at the Charles Town
Entertainment Complex; provided, however, the
Charles Town Joint Venture has retained
management control over the VLS. The GTECH
Agreement has a term of five years from the
first date on which 400 Gaming Machines are
installed, operational and generating net win
(total of all cash inserted into, or game
credits played on, a video lottery terminal
minus the total value of all prizes paid).
Pursuant to the GTECH Agreement, the Charles
Town Joint Venture has agreed to pay GTECH a
fee which can range between 4% and 10% of
Gaming Machine gross revenue. The Company
generally is obligated to pay a lower
percentage of Gaming Machine gross revenue to
GTECH at higher levels of average win per day
per machine and a higher percentage of Gaming
Machine gross revenue at lower levels of
average win per
56
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
day per machine; provided, however, the
Charles Town Joint Venture is obligated to pay
GTECH the greater of the percentage fee
described above or a minimum annual fee of
$4.3 million if more than 800 Gaming Machines
are in operation at the Charles Town
Entertainment Complex. The payments pursuant
to the GTECH Agreement include the cost of the
rental of the Gaming Machines, the rental of
the software (which is not a component of the
VLS, as defined), technical assistance and
programming services, maintenance and
marketing services. At the end of the term of
the GTECH Agreement, the Charles Town Joint
Venture will purchase the VLS from GTECH for a
cash purchase price equal to the net
unamortized residual value of the VLS. In the
event GTECH terminates the agreement because
of the Charles Town Joint Venture's material
misrepresentation and/or breach of the GTECH
Agreement, the Charles Town Joint Venture must
purchase the VLS from GTECH at a price equal
to the net unamortized residual value of the
VLS at that time and pay an additional
one-time fee as follows: for such termination
in the first year of the term, $8.5 million,
for such termination in the second year of the
term, $6.6 million; for such termination in
the third year of the term, $5.0 million; for
such termination in the fourth year of the
term, $3.7 million; and for such termination
in the fifth year of the term, $2.5 million.
Pursuant to the GTECH Agreement, the Charles
Town Joint Venture must maintain tangible net
worth equal to at least 105% of the amounts
payable as additional fees in the event of a
termination as set forth in the preceding
sentence.
On March 26, 1997, the Company entered into an
agreement to purchase property for its
Carbondale, Pennsylvania OTW facility. The
agreement provides for a purchase price of
$200,000 and is subject to numerous
contingencies, including approval by the
Pennsylvania State Harness Racing Commission
(the "Harness Racing Commission"). On June 5,
1997, the Company's application was approved
by the Harness Racing Commission. In October
1997, the Company entered into a construction
contract regarding the Carbondale OTW
facility. Commitments under this contract at
December 31, 1997 were approximately $1.2
million. The Company expects to have the
facility constructed and operational in the
first quarter of 1998.
On June 20, 1997, the Company acquired options
to purchase approximately 100 acres of land in
Memphis, Tennessee for an aggregate purchase
price of $2.7 million. The Company paid
$11,000 to acquire the options and has the
right to extend the
57
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
options from month to month until June 20,
1998 upon the payment of $11,000 per month.
The Company has filed an application to the
Tennessee State Racing Commission for the
proposed development of a harness racetrack
and off-track wagering facility at the site on
October 9, 1997. The Company anticipates to
hear the results of the Commission's review of
the application during the second quarter of
1998.
On July 9, 1997, the Company entered into a
lease agreement for its Hazleton, Pennsylvania
OTW facility. The initial term of the lease is
for ten years with two additional five-year
renewal options available. This lease provides
for minimum annual lease payments of $98,400
in years one through five and $108,240 in
years six through ten. The agreement is
subject to numerous contingencies, including
approval by the Harness Racing Commission. On
September 26, 1997, the Company's application
was approved by the Harness Racing Commission.
In November 1997, the Company entered into a
construction contract regarding the Hazleton
OTW facility. Commitments under this contract
at December 31, 1997 were approximately $1.2
million. The Company expects to have the
facility constructed and operational in the
first quarter of 1998.
On September 9, 1997, the Company entered into
a lease agreement for its Stroudsburg,
Pennsylvania OTW facility. The initial term of
the lease is for ten years with two additional
five-year renewal options available. This
lease provides for minimum annual lease
payments of $101,640 during its initial term.
The table above does not reflect this lease
commitment. The agreement is subject to
numerous contingencies, including approval by
the Harness Racing Commission. On November 6,
1997, the Company's application was approved
by the Harness Racing Commission. The Company
is awaiting land development plan approvals
and has no definitive date of opening at this
time.
On September 26, 1997, the Company entered
into a lease agreement for its proposed
Altoona, Pennsylvania OTW facility. The
initial term of the lease is for ten years
with two additional five-year renewal options
available. This lease provides for minimum
annual lease payments of $92,400 during its
initial term. The table presented above does
not reflect this lease commitment. The
agreement is subjected to numerous
contingencies, including approval by the
Pennsylvania State Horse Racing Commission. On
January 15, 1998, the Company's application
was approved by the Pennsylvania State Horse
Racing Commission. The Company
58
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
expects to have the facility renovated and
operational in the third quarter of 1998.
The Company is subject to possible liabilities
arising from environmental conditions at the
landfill adjacent to Pocono Downs racetrack.
Specifically, the Company may incur expenses
in connection with the landfill in the future,
which expenses may not be reimbursed by the
four municipalities which are parties to an
existing settlement agreement. The Company is
unable to estimate the amount, if any, that it
may be required to expend.
59
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6. Income Taxes The provision for income taxes charged to operations was as follows:
Year ended December 31, 1995 1996 1997
-----------------------------------
Current tax expense
Federal $ 2,605 $ 2,686 $ 2,006
State 842 880 399
-----------------------------------
Total current 3,447 3,566 2,405
-----------------------------------
Deferred tax expense (benefit)
Federal 15 178 (56)
State 5 50 (41)
-----------------------------------
Total deferred 20 228 (97)
-----------------------------------
Total provision $ 3,467 $ 3,794 $ 2,308
-----------------------------------
Deferred tax assets and liabilities are
comprised of the following:
December 31, 1996 1997
-------------------------
Deferred tax assets
Reserve for debit balances
of horsemens' accounts, bad
debts restructuring charges
and litigation $ 90 $ 469
-------------------------
Deferred tax liabilities
Property, plant and
equipment $ 10,810 $ 11,092
-------------------------
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, 1995 1996 1997
--------------------------------
Percent of pretax income
Federal tax rate 34.0% 34.0% 34.0%
Increase in taxes resulting from
state and local income taxes,
net of federal tax benefit 6.7 6.6 3.9
Permanent difference relating to
amortization of goodwill .3 .2 .9
Other miscellaneous items -- -- (.8)
----------------------------------
41.0% 40.8% 38.0%
----------------------------------
60
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. Supplemental Cash paid during the year for interest was
Disclosures of $71,000, $506,000 and $4,346,000 in 1995,
Cash Flow 1996 and 1997, respectively.
Information
Cash paid during the year for income taxes was
$2,839,000, $2,490,000 and $3,649,000 in 1995,
1996 and 1997, respectively.
Noncash investing and financing activities
were as follows:
During 1996, the Company purchased Pocono
Downs for an aggregate purchase price of
$47,320,000, net of cash acquired. In
conjunction with the acquisition, liabilities
were assumed as follows:
Fair value of assets acquired, primarily
property, plant and equipment $ 53,150,000
Cash paid for the capital stock and the limited
partnership interests 47,320,000
--------------
Liabilities assumed $ 5,830,000
--------------
During 1996, the Company issued a $250,000
long-term note payable for the incurrence of
prepaid Charles Town Acquisition costs.
8. Common Stock On February 18, 1997, the Company completed a
secondary public offering of 1,725,000 shares
of its common stock. The net proceeds of $23
million were used to reduce $19 million of the
Term Loan amounts outstanding under the
Existing Credit Facility with the balance of
the proceeds used to finance a portion of the
cost of the refurbishment of the Charles Town
Entertainment Complex (see Note 2 for
Acquisitions).
In April 1994, the Company's Board of
Directors and shareholders adopted and
approved the Stock Option Plan ("Plan"). On
April 30, 1997, the shareholders and the Board
of Directors approved an increase in the
number of authorized shares underlying stock
options to be granted from 1,290,000 to
2,000,000 shares. Therefore, the Plan permits
the grant of options to purchase up to
2,000,000 shares of Common Stock, subject to
antidilution adjustments, at a price per share
no less than 100% of the fair market value of
the Common Stock on the date an option is
granted with respect to incentive stock
options only. The price would be no less than
110% of fair market value in the case of an
incentive stock option granted to any
individual who owns more than 10% of the total
combined voting power of all classes of
outstanding stock. The Plan provides for the
granting of both incentive stock options
intended to qualify under Section 422 of the
Internal Revenue Code of 1986, and
nonqualified stock options which do not so
qualify. Unless the Plan is terminated earlier
by the Board of Directors, the Plan will
terminate in April 2004.
Stock options that expire between May 26, 2001
and October 23, 2006 have been granted to
officers and directors to purchase Common
Stock at prices ranging from $3.33 to $17.63
per share.
61
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
All options and warrants were granted at
market prices at date of grant. The following
table contains information on stock options
issued under the Plan for the three year
period ended December 31, 1997:
Exercise
Option Price Range Average
Shares Per Share Price
------------------------------------------------
Outstanding at
January 1, 1995 465,000 $3.33 $ 3.33
Granted 345,000 3.33 to 5.58 5.51
-----------
Outstanding at
December 31, 1995 810,000 3.33 to 5.58 3.82
Granted 280,000 5.63 to 17.63 12.99
Exercised (110,250) 3.33 3.33
-----------
Outstanding at
December 31, 1996 979,750 3.33 to 17.63 9.10
Granted 100,000 11.50 to 16.63 15.59
Exercised (39,250) 3.33 to 5.63 4.01
-----------
Outstanding at
December 31, 1997 1,040,500 3.33 to 17.63 7.31
-----------
In addition, 300,000 common stock options were
issued outside the Plan on October 23, 1996.
These options were issued at $17.63 per share
and are exercisable through October 23, 2006.
Exercisable at year-end:
Exercise Weighted
Option Price Range Average
Shares Per Share Price
--------------------------------------------------
1995 270,000 $3.33 to $5.58 $ 3.33
1996 337,250 3.33 to 17.63 3.71
1997 653,833 3.33 to 17.63 7.08
--------------------------------------------------
Options available for future grant: 1994 Plan
------------
1997 805,000
------------
62
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following table summarizes information
about stock options outstanding at December
31, 1997:
Ranges Total
----------------------------- ---------
$3.33 $5.58 $3.33
Range of exercise prices to $5.50 to $17.63 to $17.63
-------------------------------------------
Outstanding options:
Number outstanding at
December 31, 1997 641,000 694,500 1,335,500
Weighted average remaining
contractual life
(years) 5.82 7.36 6.62
Weighted average exercise
price $ 3.84 $ 14.97 $ 9.63
Exercisable options
Number outstanding at
December 31, 1997 471,000 182,833 653,833
Weighted average exercise
price $ 3.79 $ 15.56 $ 7.08
Warrants outstanding have been granted to the
underwriters of the Company's initial public
offering and to certain officers and directors
to purchase Common Stock at prices ranging
from $3.33 to $4.00 per share which expire on
June 2, 1999 and May 31, 2000.
63
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
During 1995, the Company canceled 150,000
warrants which were granted to a former
officer of the Company at a price of $3.33 per
share and were to expire on May 31, 2000. The
150,000 canceled warrants were replaced with
150,000 shares of common stock purchase
options at an exercise price of $3.33 per
share. A summary of the warrant transactions
follows:
Exercise
Price Weighted
Warrant Range Average
Shares Per Share Price
-----------------------------------------
Warrants outstanding at 690,000 $3.33 to $ 3.85
January 1, 1995 $4.00
Warrants canceled (150,000) 3.33 3.33
Warrants exercised (45,000) 4.00 4.00
---------
Warrants outstanding at
December 31, 1995 495,000 4.00 4.00
Warrants exercised (300,000) 4.00 4.00
---------
Warrants outstanding at
December 31, 1996 195,000 4.00 4.00
Warrants exercised (46,000) 4.00 4.00
---------
Warrants outstanding at
December 31, 1997 149,000 4.00 4.00
---------
During 1995, the FASB adopted Statement of
Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock-Based
Compensation", which has recognition
provisions that establish a fair value based
method of accounting for stock-based employee
compensation plans and established fair value
as the measurement basis for transactions in
which an entity acquires goods or services
from nonemployees in exchange for equity
instruments. SFAS 123 also has certain
disclosure provisions. Adoption of the
recognition provisions of SFAS 123 with regard
to these transactions with nonemployees was
required for all such transactions entered
into after December 15, 1994, and the Company
adopted these provisions as required. The
recognition provision with regard to the fair
value based method of accounting for
stock-based employee compensation plans is
optional. Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to
Employers" ("APB 25") uses what is referred to
as an intrinsic value based method of
accounting. The Company has decided to
continue to apply APB 25 for its stock-based
employee compensation arrangements.
64
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Accordingly, no compensation cost has been
recognized. Had compensation cost for the
Company's employee stock option plan been
determined based on the fair value at the
grant date for awards under the plan
consistent with the method of SFAS 123, the
Company's net income and net income per share
would have been reduced to the pro forma
amounts indicated below:
Year ended December 31, 1995 1996 1997
---------------------------------------
Net income
As reported $ 4,996,000 $ 5,510,000 $ 2,287,000
Pro forma 4,984,000 5,344,000 1,660,000
Basic net income
per share
As reported $ .39 $ .41 $ .15
Pro forma .39 .40 .11
Diluted net income
per share
As reported $ .38 $ .40 $ .15
Pro forma .38 .39 .11
The fair value of each option and warrant
grant is estimated on the date of grant using
the Black-Scholes option-pricing model with
the following weighted-average assumptions
used for grants in 1995, 1996 and 1997:
dividend yield of 0%; expected volatility of
20%; risk-free interest rate of 6%; and
expected lives of 5 years. The effects of
applying SFAS 123 in this pro forma disclosure
are not indicative of future amounts. SFAS 123
does not apply to awards prior to 1995 and
additional awards in future years are
anticipated.
9. Loss From In 1997, the Company recorded an extraordinary
Retirement loss of $1,482,000 after taxes for the early
of Debt retirement of debt. The extraordinary loss
consists primarily of write-offs of deferred
finance costs associated with the retired
notes and legal and bank fees relating to the
early extinguishment of the debt.
10. Site Development During 1997, the Company incurred site
and Restructuring development ($1,735,000) and restructuring
Charges ($702,000) charges of $2,437,000. The site
development charges consist of $800,000
related to the Charles Town Races facility and
$935,000 related to the abandonment of certain
certain proposed operating sites during 1997.
The restructuring charges primarily consist of
$350,000 in severance termination benefits and
other charges at the Charles Town Races
facility; $300,000 for the restructuring of
the Erie, Pennsylvania off-track wagering
facility and $52,000 of property and equipment
written-off in connection with the
discontinuation of Penn National Speedway,
Inc. operations during 1997. These charges,
net of
65
Penn National Gaming, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
income taxes, decreased the 1997 net income
and diluted net income per share by $1,462,000
and $0.09 per share, respectively.
66
ITEM 9 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
67
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference from
the Company's definitive proxy statement with respect to the Company's
Annual Meeting of Shareholders to be held on May 20, 1998. Such proxy
statement shall be filed pursuant to Regulation 14A promulgated under
the Securities Exchange Act of 1934, as amended, within 120 days after
the end of the fiscal year covered by this Annual Report on Form 10-K.
ITEM 11 EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from
the Company's definitive proxy statement with respect to the Company's
Annual Meeting of Shareholders to be held on May 20, 1998. Such proxy
statement shall be filed pursuant to Regulation 14A promulgated under
the Securities Exchange Act of 1934, as amended, within 120 days after
the end of the fiscal year covered by this Annual Report on Form 10-K.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from
the Company's definitive proxy statement with respect to the Company's
Annual Meeting of Shareholders to be held on May 20, 1998. Such proxy
statement shall be filed pursuant to Regulation 14A promulgated under
the Securities Exchange Act of 1934, as amended, within 120 days after
the end of the fiscal year covered by this Annual Report on Form 10-K.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from
the Company's definitive proxy statement with respect to the Company's
Annual Meeting of Shareholders to be held on May 20, 1998. Such proxy
statement shall be filed pursuant to Regulation 14A promulgated under
the Securities Exchange Act of 1934, as amended, within 120 days after
the end of the fiscal year covered by this Annual Report on Form 10-K.
68
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) (1) The Financial Statements included in the Index to Part II, Item 8, are
filed as part of this Report
(2) List of Exhibits
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --- ----------------------
1. Purchase Agreement
2.1 Agreement and Plan of Reorganization dated April 11, 1994 among the
Registrant, Carlino Family Partnership, Carlino Financial Corporation
and the shareholders and general partners of the entities now
comprising Penn National Gaming, Inc. (Incorporated by reference to the
Company's registration statement on Form S-1, File #33-77758, dated May
26, 1994.)
2.1.1 Amendment to Agreement and Plan of Reorganization dated April 26, 1994
among the Registrant, Carlino Family Partnership, Carlino Financial
Corporation and the shareholders and general partners of the entities
now comprising Penn National Gaming, Inc. (Incorporated by reference to
the Company's registration statement on Form S-1, File #33-77758, dated
May 26, 1994.)
2.2 Agreement and Plan of Reorganization dated April 11, 1994 between the
Registrant and Thomas J. Gorman. (Incorporated by reference to the
Company's registration statement on Form S-1, File #33-77758, dated May
26, 1994.)
2.2.1 Amendment to Agreement and Plan of Reorganization dated April 26, 1994
between the Registrant and Thomas J. Gorman. (Incorporated by reference
to the Company's registration statement on Form S-1, File #33-77758,
dated May 26, 1994.)
2.3 Closing Agreement dated January 15, 1997 among Charles Town Races,
Inc., Charles Town Racing Limited Partnership, and PNGI Charles Town
Gaming Limited Liability Company. (Incorporated by reference to the
Company's registration statement on Form 8-K, File #0-24206, dated
January 30, 1997.)
2.4 Amended and Restated Operating Agreement dated as of December 31, 1996
among Penn National Gaming of West Virginia, Inc., Bryant Development
Company and PNGI Charles Town Gaming Limited Liability Company.
(Incorporated by reference to the Company's registration statement on
Form 8-K, File #0-24206, dated January 30, 1997.)
69
2.5 Letter dated January 14, 1997 from Peter M. Carlino to James A. Reeder
(Incorporated by reference to the Company's registration statement on
Form 8-K, File #0-24206, dated January 30, 1997.)
2.6 First Amendment and Consent dated as of January 7, 1997 among the
Company, Bankers Trust Company as Agent, CoreStates Bank, N.A. as
Co-Agent, and certain banks party to the Credit Agreement dated as of
November 27, 1996 (Incorporated by reference to the Company's
registration statement on Form 8-K, File #0-24206, dated January 30,
1997.)
2.7 Amended and Restated Option Agreement dated as of February 17, 1995
among Charles Town Races, Inc., Charles Town Racing Limited
Partnership, and PNGI Charles Town Gaming Limited Liability Company
(Incorporated by reference to Exhibit 2.1 of the Company's Form 8-K,
File #0-24206, dated January 30, 1997.)
2.8 Transfer, Assignment and Assumption Agreement and Bill of Sale dated
January 15, 1997 among Charles Town Races, Inc., Charles Town Racing
Limited Partnership, and PNGI Charles Town Limited Liability Company
(Incorporated by reference to Exhibit 2.2 of the Company's Form 8-K,
File #0-24206, dated January 30, 1997.)
2.9 Second Amended and Restated Operating Agreement dated as of October 17,
1997, among Penn National Gaming of West Virginia, Inc., BDC Group and
PNGI Charles Town Gaming Limited Liability Company (Incorporated by
reference to the Company's Form 10-Q, File #0-24206, dated November 14,
1997.)
2.10 Purchase Agreement dated September 13, 1996 between the Company and the
Estate of Joseph B. Banks for the purchase of Pocono Downs Race Track
and two related OTW facilities. (Incorporated by reference to the
Company's Form 10-Q file #0-24206, dated November 13, 1996.)
3.1 Amended and Restated Articles of Incorporation of Registrant, filed
with the Pennsylvania Department of State on April 12, 1994.
(Incorporated by reference to the Company's registration statement on
Form S-1, File #33-77758, dated May 26, 1994.)
3.2 By-laws of Registrant (Incorporated by reference to the Company's
registration statement on Form S-1, File #33-77758, dated May 26,
1994.)
4.1 Indenture. (Incorporated by reference to the Company's registration
statement on Form S-4, File #333-45337, dated January 30, 1998.)
4.2 Registration Rights Agreement dated as of December 17, 1997 among the
Company, certain subsidiaries, BT Alex. Brown Incorporated and
Jefferies & Company, Inc. (Incorporated by reference to the Company's
registration statement on Form S-4, File #333-45337, dated January 30,
1998.)
70
5 Opinion of Morgan, Lewis & Bockius regarding validity of Notes.
(Incorporated by reference to the Company's registration statement on
Form S-4, File #333-45337, dated January 30, 1998.)
9.1 Form of Trust Agreement of Peter D. Carlino, Peter M. Carlino, Richard
J. Carlino, David E. Carlino, Susan F. Harrington, Anne de Lourdes
Irwin, Robert M. Carlino, Stephen P. Carlino and Rosina E. Carlino
Gilbert. (Incorporated by reference to the Company's registration
statement on Form S-1, File #33-77758, dated May 26, 1994.)
10.1 1994 Stock Option Plan. (Incorporated by reference to the Company's
registration statement on Form S-1, File #33-77758, dated May 26,
1994.)
10.2 Employment Agreement dated April 12, 1994 between the Registrant and
Peter M. Carlino. (Incorporated by reference to the Company's
registration statement on Form S-1, File #33-77758, dated May 26,
1994.)
10.3 Credit Agreement, dated as of November 27, 1996, among Penn National
Gaming, Inc., various banks, CoreStates Bank, N.A., as Co-Agent and
Bankers Trust Company, as Agent. (Incorporated by reference to Exhibit
10.1 of the Company's registration statement on Form 8-K, File
#0-24206, dated December 12, 1996.)
10.4 Employment Agreement dated April 12, 1994 between the Registrant and
Robert S. Ippolito. (Incorporated by reference to the Company's
registration statement on Form S-1, File #33-77758, dated May 26,
1994.)
10.8 Consolidation of PRA Agreement dated May 18, 1992 and PRA Amendment
dated February 9, 1993 among all members of the Pennsylvania Racing
Association. (Incorporated by reference to the Company's registration
statement on Form S-1, File #33-77758, dated May 26, 1994.)
10.11 Lease dated March 7, 1991 between Shelbourne Associates and PNRC
Limited Partnership. (Incorporated by reference to the Company's
registration statement on Form S-1, File #33-77758, dated May 26,
1994.)
10.13 Lease dated June 30, 1993 between John E. Kyner, Jr. and Sandra R.
Kyner, and PNRC Chambersburg, Inc. (Incorporated by reference to the
Company's registration statement on Form S-1, File #33-77758, dated May
26, 1994.)
10.34 Warrant Agreement between the Registrant and Fahnestock & Co. Inc.
(Incorporated by reference to the Company's registration statement on
Form S-1, File #33-77758, dated May 26, 1994.)
10.38 Consulting Agreement dated August 29, 1994, between the Company and
Peter D. Carlino. (Incorporated by reference to the Company's Form 10-K
File #0-24206 dated March 23, 1995.)
71
10.39 Lease dated July 7, 1994, between North Mall Associates and the Company
for the York OTW. (Incorporated by reference to the Company's Form 10-K
file #0-24206 dated March 23, 1995.)
10.41 Lease dated March 31, 1995 between Wyomissing Professional Center III,
LP and the Company for the Wyomissing Corporate Office. (Incorporated
by reference to the Company's Form 10-K file #0-24206 dated March 20,
1996.)
10.42 Employment agreement dated June 1, 1995 between the Company and William
J. Bork. (Incorporated by reference to the Company's Form 10-K file
#0-24206 dated March 20, 1996.)
10.43 Lease dated July 17, 1995 between E. Lampeter Associates and
Pennsylvania National Turf Club, Inc. for the Lancaster OTW, as
amended. (Incorporated by reference to the Company's Form 10-K file
#0-24206 dated March 20, 1996.)
10.44 Agreement dated September 1, 1995 between Mountainview Thoroughbred
Racing Association and Pennsylvania National Turf Club, Inc. And Sports
Arena Employees' Union Local 137 (non-primary location). (Incorporated
by reference to the Company's Form 10-K file #0-24206 dated March 20,
1996.)
10.45 Agreement dated December 27, 1995 between Pennsylvania National Turf
Club, Inc. And Teleview Racing Patrols, Inc. (Incorporated by reference
to the Company's Form 10-K file #0-24206 dated March 20, 1996.)
10.47 Agreement dated February 15, 1996 among Mountainview Thoroughbred
Racing Association, Pennsylvania National Turf Club, Inc. and
Pennsylvania Division, Horsemen's Benevolent and Protection
Association, Inc. (Incorporated by reference to the Company's Form 10-K
file #0-24206 dated March 20, 1996.)
10.50 Formation agreement dated February 26, 1996 between the Company and
Bryant Development Company. (Incorporated by reference to the Company's
Form 10-K file #0-24206 dated March 20, 1996.)
10.51 Assignment of agreement of sale dated March 6, 1996 between the Company
and Montgomery Realty Growth Fund, Inc. (Incorporated by reference to
the Company's Form 10-Q file #0-24206, dated May 14, 1996.)
10.56 Amended and restated option agreement dated as of February 17, 1995
between the PNGI Charles Town Gaming Limited Liability Company (The
joint venture) and Charles Town Racing Limited Partnership and Charles
Town Races, Inc. (Incorporated by reference to the Company's Form 10-Q
file #0-24206, dated November 13, 1996.)
10.57 General Contractor Agreement dated December 23, 1996, between PNGI
Charles Town Gaming Limited Liability Company and Warfel Construction
Company. (Incorporated by reference to the Company's Form 10-K, File
#0-24206, dated March 27, 1997.)
72
10.58 Agreement dated March 19, 1997, between PNGI Charles Town Gaming
Limited Liability Company and The Charles Town HBPA, Inc. (Incorporated
by reference to the Company's Form 10-K, File #0-24206, dated March 27,
1997.)
10.59 Agreement dated March 21, 1997, between PNGI Charles Town Gaming
Limited Liability Company and The West Virginia Thoroughbred Breeders
Association. (Incorporated by reference to the Company's Form 10-K,
File #0-24206, dated March 27, 1997.)
10.60 Agreement between PNGI Charles Town Gaming Limited Liability Company
and The West Virginia Union of Mutuels Clerks, Local 533, Service
Employees International Union, AFL-CIO. (Incorporated by reference to
the Company's Form 10-K, File #0-24206, dated March 27, 1997.)
10.61 General Contractor Agreement dated March 26, 1997, between PNGI Charles
Town Gaming Limited Liability Company and Myers Building Systems, Inc.
(Incorporated by reference to the Company's Form 10-Q, File #0-24206,
dated May 15, 1997.)
10.62 Agreement dated June 25, 1997, between the PNGI Charles Town Gaming
Limited Liability Company and GTECH Corporation. (Incorporated by
reference to the Company's Form 10-Q, File #0-24206, dated August 12,
1997.)
10.63 Purchase Option dated June 20, 1997, between the Company and Roosevelt
Boyland Devisees. (Incorporated by reference to the Company's Form
10-Q, File #0-24206, dated August 12, 1997.)
10.64 Purchase Option dated June 20, 1997, between the Company and Joyce M.
Peck. (Incorporated by reference to the Company's Form 10-Q, File
#0-24206, dated August 12, 1997.)
10.65 Purchase Option dated June 20, 1997, between the Company and Alan J.
Aste. (Incorporated by reference to the Company's Form 10-Q, File
#0-24206, dated August 12, 1997.)
10.66 Fourth amendment waiver and consent dated as of October 20, 1997, among
the Company, Bankers Trust as agent, CoreStates, N.A. as co-agent and
certain banks party to the credit agreement dated as of November 17,
1996. (Incorporated by reference to the Company's Form 10-Q, File
#0-24206, dated November 14, 1997.)
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.)
10.68 Lease dated July 1, 1997 between Laurel Mall Associates and the Downs
Off-Track Wagering, Inc.
10.69 General Contractor Agreement dated August 15, 1997, between Pocono
Downs, Inc. and S.G. Mastriani Construction Management.
73
10.70 General Contractor Agreement dated October 15, 1997, between Pocono
Downs, Inc. and S.G.Mastriani Construction Management.
10.71 General Contractor Agreement dated November 12, 1997, between Pocono
Downs, Inc. and Warfel Construction Company.
10.72 Totalisator Agreement dated November 19, 1997, between Penn National
Gaming, Inc. and AutoTote Systems,Inc.
10.73 Amended and Restated Credit Facility dated as of December 17, 1997,
among the Company, certain lenders, Bankers Trust Company, as agent,
and CoreStates Bank, N.A., as Co-agent.
10.74 Waiver dated March 25, 1998, between the Company, certain lenders,
Bankers Trust Company as Agent, and CoreStates Bank, N.A., as Co-Agent.
21 Subsidiaries of the Registrant.
23.1 Consent of BDO Seidman, LLP. (Incorporated by reference to the
Company's registration statement on Form S-3, File #333-18861, dated
February 11, 1997.)
23.2 Consent of Robert Rossi & Co. (Incorporated by reference to the
Company's registration statement on Form S-3, File #333-18861, dated
February 11, 1997.)
23.3 Consent of Leonard J. Miller & Associates, Chartered. (Incorporated by
reference to the Company's registration statement on Form S-3, File
#333-18861, dated February 11, 1997.)
23.4 Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed
as Exhibit 5.1 hereto). (Incorporated by reference to the Company's
registration statement on Form S-3, File #333-18861, dated February 11,
1997.)
23.6 Consent of Morgan, Lewis & Bockius (included in Exhibit 5)
(Incorporated by reference to the Company's Form S-4, File #333-45337,
date January 30, 1997.)
24.1 Powers of Attorney. (Incorporated by reference to the Company's
registration statement on Form S-3, File #333-18861, dated February 11,
1997.)
27.1 Financial Data Schedule.
27.2 Financial Data Schedule Restated for the year 1996.
27.3 Financial Data Schedule Restated for the first three quarters 1997.
27.4 Financial Data Schedule Restated for the year 1995.
99 Press release of Penn National Gaming Inc., issued January 20, 1995.
(Incorporated by reference to the Company's Form 8-K, File #0-24206,
dated January 21, 1997.)
(B) Reports on Form 8-K
None
74
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PENN NATIONAL GAMING, INC.
By \s\ Peter M. Carlino
---------------------------------------
Peter M. Carlino, Chairman of the Board
Dated: March 27, 1998
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.
SIGNATURE TITLE DATE
--------- ----- ----
\s\ Peter M. Carlino Chief Executive Officer and Director March 27, 1998
- ------------------------------------ (Principal Executive Officer) --------------
Peter M. Carlino
\s\ William J. Bork. Chief Operating Officer and Director March 27, 1998
- ------------------------------------ (Principal Executive Officer) --------------
William J. Bork
\s\ Robert S. Ippolito Chief Executive Officer March 27, 1998
- ------------------------------------ (Principal Executive Officer) --------------
Robert S. Ippolito
\s\ Harold Cramer Director March 27, 1998
- ------------------------------------ --------------
Harold Cramer
\s\ David A. Handler Director March 27, 1998
- ------------------------------------ --------------
David A. Handler
\s\ Robert P. Levy Director March 27, 1998
- ------------------------------------ --------------
Robert P. Levy
\s\ John M. Jacquemin Director March 27, 1998
- ------------------------------------ --------------
John M. Jacquemin
75
EXHIBIT INDEX
Exhibit Nos. Description of Exhibits
- ------------ -----------------------
1 Purchase Agreement dated December 12, 1997 between Penn National
Gaming, Inc. and BT Alex. Brown Incorporated and Jeffries & Company,
Inc.
10.67 Agreement between Pennsylvania National Turf Club, Inc.,
Mountainview Racing Association and Sports Arena Employees' Union
Local No. 137 (Primary Location).
10.68 Lease dated July 1, 1997 between Laurel Mall Associates and the
Downs Off-Track Wagering, Inc.
10.69 General Contractor Agreement dated August 15, 1997, between Pocono
Downs, Inc. and S.G. Mastriani Construction Management.
10.70 General Contractor Agreement dated October 15, 1997, between Pocono
Downs, Inc. and S.G.Mastriani Construction Management.
10.71 General Contractor Agreement dated November 12, 1997, between Pocono
Downs, Inc. and Warfel Construction Company.
10.72 Totalisator Agreement dated November 19, 1997, between Penn National
Gaming, Inc. and AutoTote Systems, Inc.
10.73 Amended and Restated Credit Facility dated as of December 17, 1997,
among the Company, certain lenders, Bankers Trust Company, as agent,
and CoreStates Bank, N.A., as Co-agent.
10.74 Waiver dated March 25, 1998, between the Company, certain lenders,
Bankers Trust Company as Agent, and CoreStates Bank, N.A., as
Co-Agent.
21 Subsidiaries of the Registrant
27.1 Financial Data Schedule.
27.2 Financial Data Schedule Restated for the year 1996.
27.3 Financial Data Schedule Restated for the first three quarters 1997.
27.4 Financial Data Schedule Restated for the year 1995.
76