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, 1999 ----------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission File Number 0-24206 PENN NATIONAL GAMING, INC. (Exact name of registrant as specified in its charter) Wyomissing Professional Center 825 Berkshire Blvd., Suite 200 PENNSYLVANIA 23-2234473 Wyomissing, Pennsylvania 19610 ---------------------- ---------- ------------------------- ----- (State or other jurisdiction of (I.R.S. Employer (Address of principal executive incorporation or organization) Identification No.) offices) (Zip Code) Registrant's telephone number, including area code 610-373-2400 ------------ Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Each Class Common stock par value .01 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X Aggregate market value of the voting common stock held by nonaffiliates of the Registrant as of March 14, 2000 was approximately $111,809,813. Number of Shares of Common Stock outstanding as of March 14, 2000 - 14,907,975 Documents Incorporated by Reference Registrants Definitive Proxy Statement with respect to annual meeting of Shareholders to be held on May 17, 2000. THIS REPORT INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS REPORT LOCATED ELSEWHERE HEREIN REGARDING THE COMPANY'S OPERATIONS, FINANCIAL POSITION AND BUSINESS STRATEGY, MAY CONSTITUTE FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY", "WILL", "EXPECT", "INTEND", "ESTIMATE", "ANTICIPATE", "BELIEVE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR VARIATIONS THEREON OR SIMILAR TERMINOLOGY. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE AT THIS TIME, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ("CAUTIOUNARY STATEMENTS") ARE DISCLOSED IN THIS REPORT AND IN OTHER MATERIALS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS. References to "Penn National Gaming" or the "Company" include Penn National Gaming, Inc. and its subsidiaries. 2
PART 1 ITEM 1 BUSINESS GENERAL The Company, which began operations in 1972, is a diversified gaming and pari-mutuel wagering company that owns an 89% interest in the Charles Town entertainment complex which includes 1,500 gaming machines and a thoroughbred racetrack in Charles Town, West Virginia. The Company also owns and operates two racetracks and ten off-track wagering facilities ("OTWs") in Pennsylvania, and a 50% owned joint venture, Pennwood Racing Group, which owns and operates Freehold Raceway and under a long-term lease operates Garden State Park in New Jersey. The Company's Pennsylvania racetracks include Penn National Race Course, located outside Harrisburg, one of two thoroughbred racetracks in Pennsylvania, and Pocono Downs, located outside Wilkes-Barre, one of two harness racetracks in Pennsylvania. The Company intends to develop one additional OTW that has been allocated to it under Pennsylvania law, after which it will operate 11 of the 23 OTWs currently authorized in Pennsylvania. Between 1994 and 1999, the Company increased total wagers at a compound annual growth rate of 8.4% by expanding its simulcast and OTW operations. STRATEGY The Company has been a leading operator in the pari-mutuel wagering industry through its horse racing expertise and its numerous wagering locations. In developing its existing locations, the Company will, when possible, expand them to include gaming machines, entertainment facilities and other amenities to increase customer satisfaction and broaden market penetration of these facilities. The Company plans to increase revenue significantly by focusing on the following strategic objectives: Focus on Gaming Machine Operations. The Company continues to seek legislation to permit it to operate gaming machines at its racetracks where they are not now permitted and to expand legislation in West Virginia to create additional gaming opportunities. Legislation has been passed in West Virginia which allows for coin out and reel slot machines at race tracks. In December 1999 the Company installed an additional 565 coin out, reel slot machines at the Charles Town Entertainment Complex. The Company intends to convert some or all of its current machines to coin out and, as demand dictates, increase the maximum number of machines with reel slot machines. Continue Development of Existing Facilities. Based on increasing demand at the Company's Charles Town Entertainment Complex, the Company intends to implement a master planned development of this facility in an effort to further penetrate the primary market for this facility and to broaden its appeal as a destination based entertainment facility serving the Baltimore/Washington DC metropolitan area. Acquisitions. The Company intends to grow it's gaming and entertainment industry presence through select acquisitions of regional properties in emerging gaming markets. In evaluating acquisition candidates, the Company intends to focus its resources on under-developed properties which, with management's focus, can generate improved operating performance by encouraging customer loyalty among value conscious regional customers and by upgrading the amenities offered at these facilities. In expanding the Company's gaming and destination based entertainment offerings, the Company expects to diversify its revenue base and to broaden its geographical presence. In implementing this strategy, the Company intends to complete the recently announced acquisitions of the Casino Magic Bay St. Louis and the Boomtown Biloxi properties in Mississippi. (See pending Mississippi acquisition below.) Expand Pari-mutuel Operations. The Company plans (subject to the receipt of remaining regulatory approvals, including site approvals) to open and operate an additional OTW in East Stroudsburg, Pennsylvania. We also intend to seek legislation in other jurisdictions, principally New Jersey through the Company's investment in Pennwood Group to operate additional OTWs. Additionally, during the past five years, the Company has expanded its simulcasting operations and taken advantage of favorable changes in pari-mutuel wagering and simulcasting laws in various states and the expanded use of simulcasting 3
technology. In order to promote wagering, the Company has increased and expects to continue to increase full-card import simulcasts from premier racetracks. The Company also intends to increase export simulcasting of races from Company-owned tracks to out-of-state racetracks, OTWs, casinos and other gaming facilities. PENDING MISSISSIPPI ACQUISITION On December 10, 1999, the Company entered into two definitive agreements to purchase all of the assets of the Casino Magic hotel, casino, golf resort, recreational vehicle (RV) park and marina in Bay St. Louis, Mississippi and the Boomtown Biloxi casino in Biloxi, Mississippi, from Pinnacle Entertainment, Inc., formerly known as Hollywood Park, Inc. (NYSE:PNK) for $195 million. The agreements are contingent upon each other. In addition to acquiring all of the operating assets and related operations of the Casino Magic Bay St. Louis and Boomtown Biloxi properties, the Company will enter into a licensing agreement to use the Boomtown and Casino Magic names and marks at the properties being acquired. The transaction is subject to certain closing conditions including the approval of the Mississippi Gaming Commission, financing and expiration of the applicable Hart-Scott-Rodino waiting period. As part of the agreement, the Company paid a deposit of $5 million to an escrow account, which is refundable if certain conditions are not met. In connection with financing the Mississippi acquisition, the Company will explore a number of financing alternatives, which may include repaying or redeeming its existing debt. Casino Magic Bay St. Louis started operations in September 1992 on a permanently moored barge in a 17 acre marina with the adjoining land based facilities situated on 591 acres. The facility in Bay St. Louis offers approximately 39,500 square feet of gaming space, with 1,132 slot machines and 42 table games. The land based building is three stories with a restaurant, buffet, snack bar, gift shop, and a live entertainment lounge. In December 1994, Casino Magic Bay St. Louis also opened the Casino Magic Inn; a 201 room hotel, including four deluxe and 20 junior suites. The property also contains an 1,800 seat arena, which hosts approximately 50 events annually, including televised boxing matches, concerts and other special events. With the late 1997 addition of the 18 hole Bridges Golf Resort, Casino Magic Bay St. Louis is positioned as a full vacation resort destination. Boomtown Biloxi, which occupies nine acres on Biloxi, Mississippi's back bay, is located one-half mile from Interstate 110, the main highway connecting Interstate 10 (the main thoroughfare connecting New Orleans, Louisiana and Mobile, Alabama) and the Gulf of Mexico. Boomtown Biloxi, began operations in July 1994, and consists of a land-based facility that houses non-gaming operations and 33,000 square foot casino constructed on a 400 x 100 foot barge permanently moored to the land-based building. The casino offers 1,030 slot machines, 37 table games and other gaming amenities including restaurants, a western dance hall/cabaret and a 20,000 square foot family entertainment center. TRACKPOWER In July 1999, the Company entered into an agreement with Trackpower, Inc. (OTC BB: TPWR) ("Trackpower") to serve as the exclusive pari-mutuel wagering hub operator for Trackpower. Trackpower provides direct-to-home digital satellite transmissions of horse racing to its subscriber base. The initial term of the contract is for five years with an additional five-year option available. The Company pays Trackpower a commission on all new revenues earned from their subscriber base. As an additional incentive to enter into the contract, the Company received warrants to purchase 5,000,000 shares of common stock of Trackpower at prices ranging from $1.58 per share to $2.58 per share. The warrants vest at 20% per year and expire on April 30, 2004. The fair value of the warrants issued will be amortized over the vesting period or one year from the anniversary date of the agreement. As a result of the transition of operations in 1999, the amount to be amortized as a reduction of commissions earned in 1999 by Trackpower was not material. In March 2000, the Company entered into a letter of intent with Trackpower and eBet Limited ("eBet") which that, if a definitive agreement is executed, will replace and restate the above agreement. Under the terms of the letter of intent, the Company and eBet will contribute various assets, equipment, management agreements relating to our telephone account wagering systems and business operations to Trackpower. Under the proposed agreement, the Company will continue to receive the same level of income as in 1999. The Company and eBet will each receive 18,000,000 shares of Trackpower common stock as well as warrants to purchase additional shares exercisable at $1.00 per share. Upon completion of the proposed transaction the Company and eBet will each own 26.5% of Trackpower prior to considering the exercises of options or warrants. The agreement is subject to due diligence, regulatory and other approvals. 4
ACQUISITIONS New Jersey Joint Venture On January 28, 1999, pursuant to a First Amendment to an Asset Purchase Agreement by and among Greenwood New Jersey, Inc. ("Greenwood"), International Thoroughbred Breeders Inc., Garden State Race Track, Inc., Freehold Racing Association, Atlantic City Harness, Inc. and Circa 1850, Inc., the original parties to an Asset Purchase Agreement entered into as of July 2, 1998, and the Company (the "Agreement"), and pursuant to which the Company entered into a joint venture ("Joint Venture"), the Company, along with its Joint Venture partner, Greenwood, agreed to purchase certain assets of the Garden State Race Track and Freehold Raceway, both located in New Jersey (the "Acquisition"). The purchase price for the Acquisition was approximately $46 million (subject to reduction of certain disputed items, for which amounts have been placed in escrow). On July 29, 1999, after receiving the necessary approvals from the New Jersey Racing Commission and the necessary consents from the holders of its 10.625% Senior Notes due 2004, Series B, the Company completed its investment in the Joint Venture, pursuant to which Pennwood Inc. was formed with Greenwood New Jersey, Inc. (a wholly-owned subsidiary of Greenwood Racing, Inc. the owner of Philadelphia Park Race Track). Pursuant to the Joint Venture Agreement, the Company agreed to guarantee severally: (i) up to 50% of the obligation of the Joint Venture under its Put Option Agreement ($17.5 million) with Credit Suisse First Boston Mortgage Capital LLC ("CSFB"); (ii) up to 50% of the Joint Venture obligation for the seven year lease at Garden State Park; (iii) up to 50% of the Joint Venture obligation to International Thoroughbred Breeders, Inc. for the contingent purchase price notes ($10.0 million) relating to the operation, subject to passage by the New Jersey legislature, by the Joint Venture of OTWs and telephone wagering accounts in New Jersey. The Owner of Garden State Park, International Thoroughbred Breeders, Inc., announced on January 25, 2000 that it had entered into an agreement for the sale of the Garden State Park property, excluding a 10-acre parcel owned by our joint venture, to Turnbury/Cherry Hill, LLC. The closing of this agreement of sale is scheduled to occur on or before April 15, 2000. If the sale of Garden State Park is completed, our lease at Garden State Park will be terminated 180 days following the closing of the sale. In conjunction with the closing, the Company entered into a Debt Service Maintenance Agreement with Commerce Bank, N.A. for the funding of a $23.0 million credit facility to the Joint Venture. The Joint Venture Agreement provides for a limited obligation of the Company of $11.5 million subject to limitations provided for in the Company's 10.625% Senior Notes Indenture. The Company's investment in the Joint Venture is accounted for under the equity method, original investments are recorded at cost and adjusted by the Company's share of income or losses of the Joint Venture. The income or loss of the Joint Venture is included in earnings of unconsolidated affiliates in the accompanying Consolidated Statements of Income for the year ended December 31, 1999. 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. Since that time, we have increased the number of slot machines from 400 machines to 1,500 machines as of March 14, 2000. We intend to increase the number of slot machines if demand warrants and if approved by the West Virginia Lottery Commission. Presently, there is no statutory cap on the number of slot machines that may be installed at a location. Of the 1,500 machines, 565 machines are coin out, reel slot machines that we installed following the passage of legislation in West Virginia in April 1999 permitting this type of gaming machine. The remaining 935 slot machines are dollar bill-fed video slot machines that replicate traditional spinning reel slot machines and also feature video card games, such as blackjack and poker. We intend to convert some or all of the 935 video slot machines to coin out to increase the number of machines with reel slot machines. 5
RACING AND PARI-MUTUEL OPERATIONS Pari-mutuel wagering on thoroughbred or harness racing is pooled wagering in which a pari-mutuel wagering system totals the amounts wagered and adjusts the payouts to reflect the relative amounts bet on different horses and various possible outcomes. The pooled wagers are (i) paid out to bettors as winnings in accordance with the payoffs determined by the pari-mutuel wagering system, (ii) paid to the applicable regulatory or taxing authorities and (iii) distributed to the track's horsemen in the form of "purses" which encourage owners and trainers to enter their horses in that track's live races. The balance of the pooled wagers is retained by the wagering facility. Pari-mutuel wagering is currently authorized in more than 40 states in the United States, all provinces in Canada and approximately 100 other countries around the world. Gaming and wagering companies, such as the Company, that focus on pari-mutuel horse race wagering derive revenue through wagers placed at their own tracks, at their OTWs and on their own races at the tracks and OTWs of others. While some states, such as New York, operate off-track betting locations that are independent of racetracks, in other states (such as Pennsylvania) racetrack ownership and operation is a precondition to OTW ownership and operation. Owning a racetrack in such a state, then, is akin to an "admission ticket" to the OTW business. Over the past several years, attendance at live racing has generally declined; however the decline in revenues from live racing has been more than offset by an increase in telephone wagering, off-track wagering and gaming machine operations. The Company's racing and pari-mutuel revenues have been derived from (i) wagering on the Company's live races (a) at the Company's racetracks, (b) at the Company's OTWs, (c) at other Pennsylvania racetracks and OTWs and (d) through telephone wagering, as well as wagering at the Company's racetracks on certain stakes races run at out-of-state racetracks (collectively, referred to in the Company's financial statements as "pari-mutuel revenues from live races"), (ii) wagering on full-card import simulcasts at the Company's racetracks and OTWs and through telephone wagering (collectively, referred to in the Company's financial statements as "pari-mutuel revenues from import simulcasting") and (iii) fees from wagering on export simulcasting Company races at out-of-state locations (referred to in the Company's financial statements as "pari-mutuel revenues from export simulcasting"). The Company's other revenues have been derived from admissions, program sales, food and beverage sales and concessions and certain other ancillary activities. Pari-Mutuel Revenues Revenues from Company races consist of the total amount wagered, less the amount paid as winning wagers. Of the amount not returned to bettors as winning wagers, a portion is paid to the state in which the track is located, a portion is distributed to the track's horsemen in the form of "purses" and the balance is retained by the wagering facility. The Pennsylvania Racing Act specifies the maximum percentages of each dollar wagered on horse races in Pennsylvania which can be retained by the Company (prior to required payments to the horse owners (the "Horsemen") in Pennsylvania and applicable taxing authorities). The percentages vary, based on the type of wager; the average percentage which is retained by the Company has approximated 20%. The balance of each dollar wagered must be paid out to the public as winning wagers. With the exception of revenues derived from wagers at the Company's racetracks and OTWs, the Company's revenues on each race are determined pursuant to such maximum percentage and agreements with the other racetracks and OTWs at which wagering is taking place. Amounts payable to the Pennsylvania Horsemen are determined under agreements ("Horsemen 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 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 6
and incurs expense in substantially the same manner as it would if the race had been run at one of the Company's own tracks: of the amount not returned to bettors as winning wagers, a portion is paid to the state in which the Company wagering facility is located, a portion is paid to the purse fund for the horse owners or trainers (thoroughbred or harness) of the Company's racetrack with which the wagering facility is associated, a portion is paid to the racetrack from which the race is simulcast and the balance is retained by the Company. The Company believes that full-card import simulcasting, in which all of the races at a non-Company track are import simulcast to a Company wagering facility, has improved the wagering opportunities for its customers and thereby increased the amount wagered at Company facilities. When the Company export simulcasts Company races for wagering at non-Company locations, it receives a fixed percentage of the amounts wagered on that race from the location to which the simulcast is exported, while incurring minimal additional expense. During the years ended December 31, 1998 and 1999, respectively, the Company received import simulcasts from approximately 77 and 89 racetracks, respectively, including premier racetracks such as Belmont Park, Church Hill Downs, Gulfstream Park, Hollywood Park, Santa Anita and Saratoga and transmitted export simulcasts of Company races to 126 and 108 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 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. OTWs The Company operates ten of the 20 OTWs now open in Pennsylvania and has the right to operate one of the three remaining OTWs that have been authorized in Pennsylvania. The Company's OTWs are located in Allentown, Carbondale, Chambersburg, Erie, Hazleton, Johnstown, Lancaster, Reading, Williamsport and York, Pennsylvania. At OTWs, customers can place wagers on thoroughbred and harness races simulcast from the Company's racetracks and on import simulcast races from other tracks around the country. Under the Pennsylvania Racing Act, only licensed thoroughbred and harness racing associations, such as the Company, can operate OTWs or accept customer wagers on simulcast races at Pennsylvania racetracks. 7
Operating Data of the Company The following table summarizes certain key operating statistics for the Company's pari-mutuel operations and their respective OTWs, including the pro forma presentation of data assuming the acquisition of Pocono Downs occurred on January 1, 1995: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31 ------------------------------------------------------------------- 1995 1996 1997 1998 1999 ------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT AVERAGE DAILY PURSES) <S> <C> <C> <C> <C> <C> NUMBER OF LIVE RACING DAYS: Penn National Race Course 204 206 212 206 153 Pocono Downs 135 134 134 135 130 Charles Town Races - - 159 206 213 TOTAL ATTENDANCE: (4) Penn National Race Course (1) 430,128 370,898 339,487 304,220 209,364 Pocono Downs (1) 242,870 377,830 370,090 263,591 200,368 Reading OTW 246,012 214,314 178,237 159,818 123,126 Chambersburg OTW 143,554 132,447 125,448 105,384 86,894 York OTW 232,109 238,610 225,672 213,929 170,677 Lancaster OTW - 92,641 158,003 142,027 115,519 Williamsport OTW - - 81,797 66,378 54,257 Johnstown OTW - - - 25,411 68,794 Erie OTW 116,367 113,169 94,429 99,726 96,543 Allentown OTW 272,491 271,706 252,909 258,237 228,933 Carbondale OTW - - - 62,757 77,580 Hazleton OTW - - - 60,706 66,328 ------------------------------------------------------------------- Total paid attendance (1) 1,683,531 1,811,615 1,826,072 1,762,184 1,498,383 =================================================================== TOTAL WAGERING: (1) (2) Penn National Race Course $ 85,661 $ 75,708 $ 69,687 $ 70,155 $ 60,018 Pocono Downs 57,784 53,190 47,217 38,867 33,134 Charles Town Races - - 40,195 69,659 79,847 Reading OTW 42,810 41,320 30,811 29,178 25,312 Chambersburg OTW 24,365 25,024 24,899 22,336 21,083 York OTW 42,140 49,864 45,245 43,873 38,470 Lancaster OTW - 13,079 29,292 29,131 24,964 Williamsport OTW - - 9,684 10,461 8,865 Johnstown OTW - - - 3,977 10,931 Erie OTW 29,379 27,200 21,767 20,737 19,795 Allentown OTW 56,440 56,216 58,681 56,719 53,397 Carbondale OTW - - - 10,284 16,430 Hazleton OTW - - - 9,926 13,474 Penn National Telebet 8,281 8,423 9,473 10,333 11,839 Pocono Downs Dial-A-Bet 75 5,510 8,179 9,088 12,145 Export simulcasting: Penn National Race Course 113,639 148,702 181,281 194,939 130,719 Pocono Downs 30,121 32,493 26,426 23,986 17,764 Charles Town Races - - - - 22,876 ------------------------------------------------------------------- Total wagering $ 490,695 $ 536,729 $ 602,836 $ 653,649 $ 601,063 =================================================================== </TABLE> 8
<TABLE> <CAPTION> YEAR ENDED DECEMBER 31 ------------------------------------------------------------------- 1995 1996 1997 1998 1999 ------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT AVERAGE DAILY PURSES) <S> <C> <C> <C> <C> <C> AVERAGE DAILY PURSES: Penn National Race Course $ 57,897 $ 62,328 $ 60,623 $ 63,374 $ 74,523 Pocono Downs 42,314 42,313 40,149 41,363 42,677 Charles Town Races - - 25,805 50,985 67,329 ------------------------------------------------------------------- Total average daily purse $ 100,211 $ 104,641 $ 126,577 $ 155,722 $ 184,529 =================================================================== GROSS MARGIN FROM WAGERING: (3) Penn National Race Course $ 24,915 $ 27,955 $ 28,669 $ 29,068 $ 24,761 Pocono Downs 17,838 17,805 16,920 18,820 19,151 Charles Town Races - - 3,099 5,878 6,995 ------------------------------------------------------------------- Total gross margin from wagering $ 42,753 $ 45,760 $ 48,688 $ 53,766 $ 50,907 ------------------------------------------------------------------- - -------------------------------------- </TABLE> (1) Does not reflect attendance for wagering on simulcasts when live racing is not conducted (i) for all periods presented, in the case of Penn National Race Course (ii) for the year ended December 31, 1995, in the case of Pocono Downs. (2) Wagering on certain stakes races is included in wagering on the Penn National Race Course races. (3) Amounts equal total pari-mutuel revenues, less purses paid to the Horsemen, taxes payable and simulcast commissions or host track fees paid to other racetracks. (4) Does not include attendance for Charles Town Races. Live Racing The following table summarizes the Company and its affiliates live racing facilities: <TABLE> <CAPTION> RACING FACILITY LOCATION DATE OPENED/STATUS OPERATIONS CONDUCTED - --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> 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 Gaming operations; at the Charles Town constructed in 1933; Live thoroughbred racing; Entertainment Complex acquired by Charles Town simulcast wagering; dining Joint Venture on January 15, 1997; refurbished in 1997 and reopened as the Charles Town Entertainment Complex </TABLE> <TABLE> <CAPTION> AFFILIATE FACILITY LOCATION DATE OPENED/STATUS OPERATIONS CONDUCTED - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Freehold Raceway Freehold, NJ Freehold Raceway was Live harness racing; simulcast constructed in 1986; wagering; dining acquired by Pennwood Racing, our 50% owned Joint Venture Garden State Park Cherry Hill, NJ Constructed in 1985; Leased by Live thoroughbred and harness racing; Pennwood Racing, our 50% simulcast wagering; dining owned Joint Venture </TABLE> 9
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 35 mile radius and approximately 2.2 million persons within a 50-mile radius of the Penn National Race Course. 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. The Penn National Race Course's main building is the grandstand/clubhouse, which is completely enclosed and heated and, at the clubhouse level, fully air-conditioned. The building has a capacity of approximately 15,000 persons with seating for approximately 9,000, including 1,400 clubhouse dining seats. Several other dining facilities and numerous food and beverage stands are situated throughout the facility. Television sets for viewing live racing and simulcasts are located throughout the facility. The pari-mutuel wagering areas are divided between those available for on-track wagering and those available for simulcast wagering. The Penn National Race Course includes stables for approximately 1,250 horses, a blacksmith shop, veterinarians' quarters, jockeys' quarters, a paddock building, living quarters for grooms, a cafeteria and recreational building in the backstretch area and water and sewage treatment plants. Parking facilities for approximately 6,500 vehicles adjoin the Penn National Race Course. The Company has conducted live racing at Penn National Race Course since 1972, and has held at least 204 days of live racing at the facility in each of the last five years except 1999, in which only 153 days of live racing were held as a result of a Horsemen action. The Horsemen action was settled on March 23, 1999. Penn National Race Course is one of only two thoroughbred racetracks in Pennsylvania. Post time at Penn National Race Course is 7:30 p.m. on Wednesdays, Fridays and Saturdays and 5:00 p.m. on Sundays and holidays. 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 7, 2000, no such additional form of gaming in Pennsylvania has been adopted, therefore no such payment is due at this time. 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 35 mile radius and approximately 1.5 million persons within a 50-mile radius of Pocono Downs. The property includes a 5/8-mile all-weather, lighted harness track. Pocono Downs's main buildings are the grandstand and the clubhouse. The clubhouse is completely enclosed, heated and fully air-conditioned. The grandstand has enclosed, heated and air-conditioned seating for approximately 500 persons and permanent open-air stadium-style seating for approximately 2,500 persons. The clubhouse is a tiered dining and wagering facility that seats approximately 1,000 persons. The clubhouse dining area seats 500 persons. Television sets for viewing live racing and simulcasts are located throughout the facility along with pari-mutuel wagering areas. A two-story 14,000 square foot building which houses the Pocono Downs offices is located on the property. Pocono Downs also includes stables for approximately 950 horses, five paddock stables, quarters for grooms, two blacksmith shops and a cafeteria for the Harness Horsemen. Parking facilities for approximately 5,000 vehicles adjoin the track. The acquisition of Pocono Downs was consummated following the last day of racing at Pocono Downs for the 1996 season. The Company resumed live racing at Pocono Downs in April 1997. The Company conducted 135 and 130 days of live harness racing at the facility during 1998 and 1999 racing seasons, respectively. Post time at Pocono Downs is 7:15 p.m. 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, 10
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 gaming machines, was approximately $27.8 million. 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, ample parking and water and sewage treatment facilities. The Charles Town Races reopened in April 1997. The Company conducted 206 and 213 days of thoroughbred racing at the facility during 1998 and 1999 racing seasons, respectively. Post time at the Charles Town Races is 7:15 p.m. on Thursdays, Fridays and Saturdays and 1:00 p.m. on Sundays. Although other regional racetracks offer nighttime thoroughbred racing, Penn National Race Course and Charles Town Races are the only racetracks in the Eastern time zone conducting year-round nighttime thoroughbred horse racing, which the Company believes increases its opportunities to export simulcast its races during periods in which other racetracks are not conducting live racing. The Freehold Raceway was constructed in 1986 and the grandstand is an approximately 150,000 square foot, five level, steel frame, enclosed, fully heated and air conditioned facility. The grandstand can accommodate up to 10,000 spectators, including seating for approximately 2,500 spectators, and has a sit-down restaurant as well as seven food concession stands. Additional facilities include receiving barns with an adjacent paddock area, parking lots to accommodate 2,500 vehicles and a two story administration building. The Garden State Park was constructed in 1985 and the reconstructed grandstand and clubhouse is an approximately 500,000 square foot, seven level, steel frame, glass enclosed, fully heated and air-conditioned facility with an adjacent multi-level glass thoroughbred paddock area. The clubhouse can accommodate up to 24,000 spectators, including seating for approximately 9,500 spectators, and contains three sit-down restaurants as well as 17 food concession stands. The Company is not currently using a portion of the clubhouse due to a decrease in business levels at Garden State Park over the last few years as a result of year-round simulcasting and less live racing at Garden State Park. The backstretch area includes 27 barns and stables capable of accommodating approximately 1,500 horses, a harness paddock, a training track, dormitories, cafeteria and recreation buildings for backstretch personnel, an administration building and other service buildings. Reconstruction also included restoration of the main dirt and turf tracks, installation of lighting for nighttime racing, paving of parking facilities to accommodate approximately 4,000 automobiles, landscaping, fencing and other amenities. The approximately 56,000 square foot, 1-1/2 story pavilion is used by the Company for closed circuit television events (racing as well as other sporting events and non-sporting events), wagering, concerts, special events, concessions and other conveniences. The pavilion has seating capacity for approximately 1,500 spectators. 11
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. <TABLE> <CAPTION> FACILITY/LOCATION DATE OPENED/STATUS SIZE (SQ.FT.) COST (1) OWNED/LEASED - ----------------- ------------------ ------------- -------- ------------ <S> <C> <C> <C> <C> Penn National Facilities 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 Chambersburg, PA Opened 4/94 12,500 $ 1,500,000 Leased Johnstown, PA Opened 9/98 14,220 $ 1,300,000 Leased Pocono Downs Facilities Allentown, PA Opened 7/93 28,500 $ 5,207,000 Owned Carbondale, PA Opened 3/98 13,000 $ 2,661,000 Owned Erie, PA Opened 5/91 22,500 $ 3,575,000 Owned Hazleton, PA Opened 3/98 13,000 $ 1,868,000 Leased East Stroudsburg, PA License authorized; approval to 12,000 $ 2,000,000 Leased (2) operate pending; site selected (estimated) </TABLE> (1) Consists of original construction costs, equipment and, for owned properties, the cost of land and building. (2) The Company is licensed to operate one additional OTW and has identified a site to operate the OTW facility in Stroudsburg, Pennsylvania, subject to receipt of all applicable approvals to operate this site. The Company considers its properties adequate for its presently anticipated purposes. MARKETING AND ADVERTISING The Company seeks to increase wagering by broadening its customer base and increasing the wagering activity of its existing customers. To attract new customers, the Company seeks to increase the racing knowledge of its customers through its television programming, and by providing "user friendly" automated wagering systems and comfortable surroundings. The Company also seeks to attract new customers by offering various types of promotions including family fun days, premium give-away programs, contests and handicapping seminars. Charles Town Gaming Machine Marketing and Player Tracking Programs Our marketing efforts, at the Charles Town Entertainment Complex include print and radio advertising and are focused on the Washington, D.C., Baltimore, Maryland, Northern Virginia, Eastern West Virginia and Southern Pennsylvania markets. In 1999, we installed a computerized player tracking system, called Player's Choice, at the Charles Town Entertainment Complex, which has helped to further refine our marketing efforts. This system is the first player tracking system installed in West Virginia. Our database consists of approximately 70,000 players as of March 3 2000. Our marketing efforts also include a bus program and numerous cash and merchandise give-aways. Pari-mutuel Player Tracking Program In 1999, we installed a computerized player tracking for all of the Company's pari-mutuel locations. This system, called Player's Choice, allows customer to accumulate points, at any of our facilities which are redeemable for admission, programs, food and beverage etc. Our database consists of approximately 15,000 players as of March 3, 2000. 12
Televised Racing Program The Company's Racing Alive program is televised by satellite transmission commencing approximately one hour before post time on each live racing day at the Penn National Race Course. The program provides color commentary on the races at the Penn National Race Course (including wagering odds, past performance information and handicapper analysis), general education on betting and handicapping, interviews with racing personalities and featured races from other thoroughbred racetracks across the country. The Racing Alive program is shown at the Penn National Race Course and on various cable television systems in Pennsylvania and is transmitted to all OTWs that receive the Penn National Race Course races. The Company has expanded Racing Alive and created additional televised programming to cover racing at Pocono Downs and at other harness racing venues throughout the United States. The Company's satellite transmissions are encoded so that only authorized facilities can receive the program. Automated Wagering Systems To make wagering more "user friendly" to the novice and more efficient for the expert, the Company leases Autotote Corporation's automated wagering equipment. These wagering systems enable the customer to choose a variety of ways to place a bet through touch-screen interactive terminals and personalized portable wagering terminals, provide current odds information and enable customers to place bets and credit winning tickets to their accounts. Currently, more than 35% of all wagers at Penn National are processed through these self-service terminals and Telebet. Modern Facilities The Company provides a comfortable, upscale environment at each of its OTWs, including a full bar, a range of restaurant services and an area devoted to televised sporting events. The Company believes that its attractive facilities appeal to its current customers and to new customers, including those who have not previously visited a racetrack. PURSES; AGREEMENTS WITH HORSEMEN The agreements with the Horsemen at each of the Company's racetracks set forth the purses. The continuation of these agreements is required to allow the Company to conduct live racing and export and import simulcasting. (See "Racing and Pari-Mutuel Operations"). The Penn National Race Course Thoroughbred Horsemen Agreement was entered into in February 1996, and expired on February 15, 1999. After failing to reach an agreement, the Pennsylvania Thoroughbred Horsemen stopped racing at Penn National Race Course on February 16, 1999 and withdrew their permission for the Company to import simulcast races from other racetracks. This resulted in the closure of Penn National Race Course and its six OTW facilities at Reading, Chambersburg, York, Lancaster, Williamsport and Johnstown. The Company continued its efforts to negotiate a new agreement with the Pennsylvania Thoroughbred Horsemen and on March 23, 1999 the Company signed a new Horsemen agreement with the Pennsylvania Thoroughbred Horsemen with an initial term that expires on January 1, 2004. As a result of the action the Company incurred a non-recurring $1,250,000 expense, primarily related to costs incurred to maintain the closed facilities inclusive of employee salaries and rents, for Horsemen's Action Expense. Live racing at the Penn National Race Course resumed on April 23, 1999. We believe that this new agreement will not have a material impact on our operating expenses at the Penn National Race Course and its OTWs. The Pennsylvania Harness Horsemen Agreement was entered into in November 1994, became effective in January 1995 and expired in January 2000. On December 17, 1999 the Company signed a new Horsemen Agreement with the Pennsylvania Harness Horsemen which became effective January 16, 2000 and expires on January 16, 2003. The Company has an agreement with the Charles Town Horsemen which expires on December 31, 2000. On February 24, 2000 the Charles Town Horsemen agreed to extend the contract to December 31, 2002. See Management's Discussion and Analysis of Financial Condition and Results of Operations - "Liquidity and Capital Resources." 13
COMPETITION The Company faces significant competition for wagering dollars from other racetracks and OTWs in Pennsylvania and neighboring states (some of which also offer other forms of gaming), other gaming venues such as casinos and state-sponsored lotteries, including the Pennsylvania Lottery and the West Virginia Lottery. The Company may also face competition in the future from new OTWs or from new racetracks. From time to time, Pennsylvania has considered legislation to permit other forms of gaming. Although Pennsylvania has not authorized any form of casino or other gaming, if additional gaming opportunities become available in or near Pennsylvania, such gaming opportunities could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's live races compete for wagering dollars and simulcast fees with live races and races simulcast from other racetracks both inside and outside Pennsylvania (including several in New York, New Jersey, West Virginia, Ohio, Maryland and Delaware). The Company's ability to compete successfully for wagering dollars is dependent, in part, on the quality of its live horse races. The quality of horse races at some racetracks that compete with the Company, either by live races or simulcasts, is higher than the quality of Company races. The Company believes that there has been some improvement over the last several years in the quality of the horses racing at the Penn National Race Course, due to higher purses being paid as a result of the Company's increased simulcasting activities, however, there can be no assurance that the Company can continue such improvement. The Company's OTWs compete with the OTWs of other Pennsylvania racetracks, and new OTWs may compete with the Company's existing or proposed wagering facilities. Competition between OTWs increases as the distance between them decreases. For example, the Company believes that its Allentown OTW, which was acquired in the acquisition of Pocono Downs and which is approximately 50 miles from the Penn National Race Course and 35 miles from the Company's Reading OTW, has drawn some patrons from the Penn National Race Course, the Reading OTW and the Company's telephone wagering system; and, the Company's Lancaster OTW, which is approximately 31 miles from the Penn National Race Course and 25 miles from the Company's York OTW, has drawn some patrons from the Penn National Race Course, the York OTW and the Company's telephone wagering system. Moreover, the Company believes that a competitor's OTW in King of Prussia, Pennsylvania, which is approximately 23 miles from the Reading OTW, has drawn some patrons from the Reading OTW. Although only two competing OTWs remain authorized by law for future opening, the opening of a new OTW in close proximity to the Company's existing or future OTWs could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's gaming machine operations face competition from other gaming machine venues in West Virginia and in neighboring states (including Dover Downs in Dover, Delaware, Delaware Park in northern Delaware, Harrington Raceway in southern Delaware and the casinos in Atlantic City, New Jersey). Venues in Delaware and New Jersey, in addition to video gaming machines, currently offer mechanical slot machines that feature physical spinning reels, pull-handles and the ability to both accept and pay out coins. Legislation has been passed in West Virginia, which allows for coin out and reel slot machines at race tracks. In December 1999, the Company installed 565 coin out, reel slot machines. The Company intends to convert some or all of its current machines to coin out and increase the maximum number of machines with reel slot machines. The failure to attract or retain gaming machine customers at the Charles Town Entertainment Complex, whether arising from such competition or from other factors, could have a material adverse effect upon the Company's business, financial condition and results of operations. EFFECT OF INCLEMENT WEATHER AND SEASONALITY Because horse racing is conducted outdoors, variable weather contributes to the seasonality of the Company's business. Weather conditions, 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, 1999, the Company canceled a total of 15 racing days because of inclement weather. The severe winter weather in 1996 14
resulted in the closure of the Company's OTW facilities for two days in January 1996. Because of the Company's growing dependence upon OTW operations, severe weather that causes the Company's OTWs to close could have an adverse effect upon the Company's business, financial condition and results of operations. Attendance and wagering at the Company's facilities have been favorably affected by special racing events which stimulate interest in horse racing, such as the Triple Crown races in May and June and the heavier racing schedule throughout the country during the second and third quarter of the year. As a result, the Company's revenues and net income have been greatest in the second and third quarters of the year, and lowest in the first and fourth quarters of the year. REGULATION AND TAXATION General Certain of the Company's subsidiaries are authorized to conduct thoroughbred racing and harness racing in Pennsylvania under the Pennsylvania Racing Act. Such subsidiaries are also authorized, under the Pennsylvania Racing Act and the Federal Horseracing Act, to conduct import simulcast wagering. The Charles Town Joint Venture is subject to the provisions of the West Virginia Racing Act, which governs the conduct of thoroughbred horse racing in West Virginia, and the West Virginia Video Lottery Act, which governs the operation of gaming machines in West Virginia. The Company's live racing, pari-mutuel wagering and gaming machine operations are contingent upon the continued governmental approval of such operations as forms of legalized gaming. All of the Company's current and proposed operations are subject to extensive regulations and could be subjected at any time to additional or more restrictive regulations, or banned entirely. Pennsylvania Racing Regulations The Company's horse racing operations at Penn National Race Course and Pocono Downs are subject to extensive regulation under the Pennsylvania Racing Act, which established the Pennsylvania State Horse Racing Commission and the State Harness Racing Commission (together, the "Pennsylvania Racing Commissions") which are responsible for, among other things, (i) granting permission annually to maintain racing licenses and schedule race meets, (ii) approving, after a public hearing, the opening of additional OTWs, (iii) approving simulcasting activities, (iv) licensing all officers, directors, racing officials and certain other employees of the Company and (v) approving all contracts entered into by the Company affecting racing, pari-mutuel wagering and OTW operations. As in most states, the regulations and oversight applicable to the Company's operations in Pennsylvania are intended primarily to safeguard the legitimacy of the sport and its freedom from inappropriate or criminal influences. The Pennsylvania Racing Commissions have broad authority to regulate in the best interests of racing and may, to that end, disapprove the involvement of certain personnel in the Company's operations, deny approval of certain acquisitions following their consummation or withhold permission for a proposed OTW site for a variety of reasons, including community opposition. For example, the Pennsylvania State Thoroughbred Racing Commission withheld approval for the Company's initial site for its Lancaster OTW, but the Company applied and was ultimately approved for another site in Lancaster, which opened in July 1996. The Pennsylvania legislature also has reserved the right to revoke the power of the Pennsylvania Racing Commissions to approve additional OTWs and could, at any time, terminate pari-mutuel wagering as a form of legalized gaming in Pennsylvania or subject such wagering to additional restrictive regulation; such termination would, and any further restrictions could, have a material adverse effect upon the Company's business, financial condition and results of operations. The Company may not be able to obtain all necessary approvals for the continued operation or expansion of its business. Even if all such approvals are obtained, the regulatory process could delay implementation of the Company's plans to open additional OTWs. The Company has had continued permission from the Pennsylvania State Horse Racing Commission to conduct live racing at the Penn National Race Course since it commenced operations in 1972, and has obtained permission from the Pennsylvania State Harness Racing Commission to conduct live racing at Pocono Downs. Currently, the Company has approval from the Pennsylvania Racing Commissions to operate the ten OTWs that are currently open and the one additional OTW the Company proposes to open. A Commission may refuse to grant permission to open additional OTWs or to continue to operate existing facilities. The failure to obtain required regulatory approvals would have a material adverse effect upon the Company's business, financial condition and results of operations. 15
West Virginia Racing and Gaming Regulation The Company's operations at the Charles Town Entertainment Complex are subject to regulation by the West Virginia Racing Commission under the West Virginia Racing Act, and by the West Virginia Lottery Commission under the West Virginia Video Lottery Act. The powers and responsibilities of the West Virginia Racing Commission under the West Virginia Racing Act are substantially similar in scope and effect to those of the Pennsylvania Racing Commissions and extend to the approval and/or oversight of all aspects of racing and pari-mutuel wagering operations. The Charles Town Joint Venture has obtained from the West Virginia Racing Commission a license to conduct racing and pari-mutuel wagering at the Charles Town Entertainment Complex. Pursuant to the West Virginia Video Lottery Act, the Company has obtained approval for the installation and operation of a total of 1,500 gaming machines at the Charles Town Entertainment Complex. The Company purchased and installed 565 reel spinning, coin-out machines, which were open to the public on December 16, 1999 bringing the Company's total gaming machines at the Charles Town Entertainment Complex to 1,500. Installing and operating additional machines would require approval pursuant to the West Virginia Lottery act. State and Federal Simulcast Regulation The Federal Interstate Horseracing Act, the Pennsylvania Racing Act and the West Virginia Racing Act require that the Company have a written agreement with each applicable horsemen's organization in order to simulcast races. The Company has entered into the Horsemen Agreements, and in accordance therewith has agreed on the allocations of the Company's revenues from import simulcast wagering to the purse funds for the Penn National Race Course, Charles Town Races and Pocono Downs. Because the Company cannot conduct import simulcast wagering in the absence of the Horsemen Agreements, the termination or non-renewal of such Horsemen Agreements could have a material adverse effect on the Company's business, financial condition and results of operations. Taxation and Fees 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 Commissions. The certificates representing the Company 16
shares owned by 5% beneficial shareholders are required to bear certain legends prescribed by the Pennsylvania Racing Act. In addition, under the Pennsylvania Racing Act, the Pennsylvania Racing Commissions have the authority to order a 5% beneficial shareholder of the Company to dispose of his Common Stock of the Company if it determines that continued ownership would be inconsistent with the public interest, convenience or necessity or the best interest of racing generally. The West Virginia Video Lottery Act provides that a transfer of more than 5% of the voting stock of a corporation which controls the license may only be to persons who have met the licensing requirements of the West Virginia Video Lottery Act or which transfer has been pre-approved by the West Virginia Lottery Commission. Any transfer that does not comply with this requirement voids the license. Internal Revenue Service Regulations The Internal Revenue Service, or IRS, requires operators of casinos located in the United States to file information returns for U.S. citizens, including names and addresses of winners, for keno and slot machine winnings in excess of certain amounts. The IRS also requires operators to withhold taxes on certain keno, bingo and slot machine winnings of nonresident aliens. We are unable to predict the extent, if any, to which such requirements, if extended, might impede or otherwise adversely affect operations of, and/or income from, such other games. Regulations adopted by the Financial Crimes Enforcement Network of the United States Treasury Department and the gaming regulatory authorities in certain domestic jurisdictions in which we operate casinos, or in which we have applied for licensing to operate a casino, require the reporting of currency transactions in excess of $10,000 occurring within a gaming day, including identification of the patron by name and social security number. This reporting obligation commenced in May 1985 and may have resulted in the loss of casino revenues to jurisdictions outside the United States which are exempt from such regulations. ITEM 2 PROPERTIES See, ITEM 1 - BUSINESS - "RACING AND PARI-MUTUEL OPERATIONS" A solid waste landfill ("Landfill") is on a parcel of land we own that is adjacent to Pocono Downs. The East Side Landfill Authority (the "Landfill Authority"), which operated the Landfill from 1970 until 1982, disposed of municipal waste on behalf of four municipalities. The Landfill is currently subject to a closure order issued by the Pennsylvania Department of Environmental Resources ("PADER") which the four municipalities are required to implement pursuant to a 1986 Settlement Agreement among the former trustee in bankruptcy for Pocono Downs, the Landfill Authority, the municipalities and PADER (the "Settlement Agreement"). According to the Company's environmental consulting firm, the Landfill closure is substantially complete. To date, the municipalities obligated to implement the closure order pursuant to the Settlement Agreement have been fulfilling their obligations under the Settlement Agreement. In addition, the Company may be liable for future claims with respect to the Landfill under the federal Comprehensive Environmental Response, Compensation and Liability Act and analogous state laws. The Company may incur expenses in connection with the Landfill in the future, which expenses may not be reimbursed by the municipalities. Any such expenses could have a material adverse effect on the Company's business, financial condition and results of operations. Other Property and Equipment The Company currently leases 5,974 square feet of office space in an office building in Wyomissing, Pennsylvania for the Company's executive offices. The lease expires in April 2000 and provides for an annual minimum rental of $97,968. The office building is owned by an affiliate of Peter M. Carlino, the Chairman and Chief Executive Officer of the Company. The Company believes that the lease terms are not less favorable than lease terms that could have been obtained from an unaffiliated third party. The Company currently leases an aircraft from a company owned by John Jacquemin, a director of the Company. The lease expires in September 2007 and provides for monthly payments of $8,356. The Company believes that the lease terms are not less favorable than lease terms that could have been obtained from an unaffiliated third party. 17
EMPLOYEES AND LABOR RELATIONS At March 1, 2000, the Company had 1,870 permanent employees, of whom 1,252 were full-time and 618 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 September 30, 2002 for track employees and September 30, 2001 for OTW employees. The pari-mutuel clerks at Pocono Downs voted to unionize in June 1997. The Company has held negotiations with this union, but does not have a contract to date. Failure to reach agreement with this union would not result in the suspension or termination of the Company's license to operate live racing at Pocono Downs or to conduct simulcast or OTW operations. The pari-mutuel clerks and racing valets at Charles Town are represented under a collective bargaining agreement with the West Virginia Division of Mutuel Clerks, which expires on December 31, 2000. The West Virginia Video Lottery 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, this agreement expires on December 31, 2000. The Company believes that its relations with its employees are satisfactory. ITEM 3 LEGAL PROCEEDINGS In December 1997, Amtote international, Inc. ("Amtote"), filed an action against the Company and the Charles Town Joint Venture in the United States District Court for the Northern District of West Virginia. In its complaint, Amtote (i) states that the Company and the Charles Town Joint Venture allegedly breached certain contracts with Amtote and its affiliates when it entered into a wagering services contract with a third party (the "Third Party Wagering Services Contract"), and not with Amtote, effective January 1, 1998, (ii) sought preliminary and injunctive relief through a temporary restraining order seeking to prevent Charles Town Joint Venture from (a) entering into a wagering services contract with a party other than Amtote and (b) having a third party provide such wagering services, (iii) sought declaratory relief through September 2004 and (iv) sought unspecified compensatory damages, legal fees and costs associated with the action and other legal and equitable relief as the Court deemed just and appropriate. On December 24, 1997, a temporary restraining order was issued, which prescribed performance under the Third Party Wagering Contract. On January 14, 1998, a hearing was held to rule on whether a preliminary injunction should have been issued or whether the temporary restraining order should have been lifted. On February 20, 1998, the temporary restraining order was lifted by the court. The Company then pursued legal remedies in order to terminate Amtote and proceed under the Third Party Wagering Services Contract. This matter was tried before the State Court of West Virginia on June 17, 1999. On September 30, 1999 the United States District Court for the Northern District of West Virginia rendered a decision in favor of Amtote. The Court awarded liquidated damages to Amtote in connection with the Company's cancellation of the Amtote contract, which cancellation enabled the Company to enter into a computerized pari-mutuel wagering service contract with another company to provide such services to three of its racetracks and its ten off-track wagering facilities. On February 11, 2000, the Company and Amtote entered into a settlement agreement in which the Company paid Amtote in full satisfaction of the judgment the sum of $1.5 million. The Company submitted an application to the Tennessee State Racing Commission (the "Tennessee Commission") in October 1997 for an initial license for the development and operation of a harness track and an OTW at a site in the city of Memphis (the "Tennessee Development Project"). A land use plan for the construction of a 5/8-mile harness track, clubhouse and grandstand area was approved in October 1997 by the Land Use Hearing Board for the City of Memphis and County of Shelby. Tennessee Downs, Inc. ("Tennessee Downs"), a subsidiary of the Company, was determined to be financially suitable by the Tennessee Commission and a public comment hearing before the Tennessee Commission was held in November 1997. In December 1997, the Company received the necessary zoning and land development approvals from the Memphis City Council. In April 1998, the Tennessee Commission granted a license to Tennessee Downs, which would expire on the earlier of: (i) December 31, 2000 or (ii) the expiration of Tennessee Commission's term on June 30, 1998, if such term was not extended by the Tennessee State Legislature. The Tennessee State Legislature voted against extending the life of the Tennessee Commission, allowing the Tennessee Commission's term to expire on June 30, 1998. The Tennessee Commission held a meeting on May 29, 1998 at which it rejected the Company's request: (i) to grant Tennessee Downs an extended timeframe for the effectiveness of its racing license; and (ii) to operate a temporary simulcast facility. On July 28, 1998, 18
Tennessee Downs filed for a preliminary injunction and a declaratory ruling on the legal status of racing in Memphis. On November 23, 1998, the court ruled that the Tennessee Racing Control Act had not been repealed and cannot be repealed by implication by dissolving the Tennessee Commission. It was the opinion of the court that because the Tennessee Racing Control Act is still in force, horse-racing and pari-mutuel betting is a legal unregulated activity in Tennessee. This decision was appealed by the Tennessee Attorney General and a hearing was held before the Court of Appeals on June 21, 1999. On July 30, 1999, the Court of Appeals in Tennessee dissolved the injunction. The appellate court reversed the lower court ruling on the basis of jurisdiction. On September 28, 1999, Tennessee Downs filed its application for Permission to Appeal and brief to the Supreme Court of Tennessee. Tennessee Downs took a direct appeal to the Supreme Court of the State of Tennessee so that it may continue its efforts to develop and operate a harness track in Tennessee. In the appeal, Tennessee Downs asked the Supreme Court to take the jurisdictional question from the appellate court and to review the substantive issue of whether pari-mutuel wagering on horse racing is lawful in Tennessee under the existing statute without the Tennessee Commission. Costs incurred as of December 31, 1999 regarding the Tennessee license amounted to $534,135. On February 11, 2000, the Tennessee Supreme Court denied Tennessee Down's application for permission to appeal the decision of the Court of Appeals. As a result of this decision, Tennessee Downs has taken a charge against earnings in 1999 of $535,000 for costs incurred for its Tennessee racing license and does not anticipate future involvement in Tennessee. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 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. <TABLE> <CAPTION> HIGH LOW <S> <C> <C> <C> 1997 First Quarter $ 18.250 $ 14.000 Second Quarter 19.625 13.750 Third Quarter 20.125 14.625 Fourth Quarter 19.250 8.750 1998 First Quarter $ 13.125 $ 8.875 Second Quarter 12.000 6.813 Third Quarter 9.125 5.125 Fourth Quarter 10.313 5.500 1999 First Quarter $ 10.000 $ 5.813 Second Quarter 9.938 7.250 Third Quarter 10.375 8.250 Fourth Quarter 9.563 7.500 </TABLE> The closing sale price per share of Common Stock on The Nasdaq National Market on March 14, 2000, was $7.50. As of March 14, 2000, there were 692 holders of record of Common Stock. 19
DIVIDEND POLICY Since the Company's initial public offering of Common Stock in May 1994, the Company has not paid any cash dividends on its Common Stock. The Company intends to retain all of its earnings to finance the development of the Company's business, and thus, does not anticipate paying cash dividends on its Common Stock for the foreseeable future. Payment of any cash dividends in the future will be at the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, operations, capital requirements, the general financial condition of the Company and general business conditions. Moreover, the Company's existing credit facility (the "Credit Facility") prohibits the Company from authorizing, declaring or paying any dividends until the Company's commitments under the Credit Facility have been terminated and all amounts outstanding thereunder have been repaid. In addition, future financing arrangements may prohibit the payment of dividends under certain conditions. 20
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data of the Company for the years ended December 31, 1995, 1996, 1997, 1998 and 1999, except for Operating Data, are derived from financial statements that have been audited by BDO Seidman, LLP independent certified public accountants, adjusted as described in the notes below. The selected consolidated financial data should be read in conjunction with the consolidated financial statements of the Company and Notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other financial information included herein. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31 ------------------------------------------------------------ 1995 1996 1997 (1) 1998 1999 ------------------------------------------------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> INCOME STATEMENT DATA Revenue Pari-mutuel revenues Live races $ 21,376 $ 18,727 $ 27,653 $ 26,893 $ 20,760 Import simulcasting 27,254 27,653 59,810 68,136 71,369 Export simulcasting 2,142 3,347 5,279 5,810 4,733 Gaming revenue - - 5,712 37,396 55,125 Admissions, programs and other racing revenue 3,704 4,379 5,678 6,280 6,256 Concessions revenues 3,200 3,389 7,404 9,550 12,117 Earnings from unconsolidated affiliates - - - - 1,098 ------------------------------------------------------------ Total revenues 57,676 62,834 111,536 154,065 171,458 ------------------------------------------------------------ OPERATING EXPENSES Purses, stakes, and trophies 12,091 12,874 22,335 29,141 31,290 Direct salaries, payroll taxes and employee benefits 7,699 8,669 16,200 19,134 19,519 Simulcast expenses 9,084 9,215 12,982 13,809 13,422 Pari-mutuel taxes 4,963 5,356 9,506 9,281 8,895 Lottery taxes and administration - - 1,874 14,749 21,545 Other direct meeting expenses 7,576 8,536 18,087 24,029 22,916 Concessions expenses 2,125 2,349 5,605 7,929 11,030 Other operating expenses 5,002 4,942 8,735 10,787 13,060 Horsemen's action expenses - - - - 1,250 Depreciation and amortization 881 1,433 4,040 5,748 8,679 Litigation expense - - - - 1,500 Site development and restructuring changes - - 2,437 - 535 ------------------------------------------------------------ Total operating expenses 49,421 53,374 101,801 134,607 153,641 ------------------------------------------------------------ Income from operations 8,255 9,460 9,735 19,458 17,817 ------------------------------------------------------------ Other income (expenses) Interest income (expense), net 198 (156) (3,656) (7,549) (7,299) Other 10 - (2) 113 (8) ------------------------------------------------------------ Total other income (expenses) 208 (156) (3,658) (7,436) (7,307) ------------------------------------------------------------ Income before income taxes and extraordinary item 8,463 9,304 6,077 12,022 10,510 Taxes on income 3,467 3,794 2,308 4,519 3,777 ------------------------------------------------------------ Income before extraordinary item 4,996 5,510 3,769 7,503 6,733 Extraordinary item - loss on early extinquishment of debt, net of income taxes of $1,001. - - - 1,482 - ------------------------------------------------------------ </TABLE> 21
<TABLE> <CAPTION> YEAR ENDED DECEMBER 31 ------------------------------------------------------------ 1995 1996 1997 (1) 1998 1999 ------------------------------------------------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> Net income $ 4,996 $ 5,510 $ 2,287 $ 7,503 $ 6,733 ============================================================ PER SHARE DATA: Basic income per share before extraordinary item $ 0.39 $ 0.41 $ 0.25 $ 0.50 $ .45 Basic net income per share $ 0.39 $ 0.41 $ 0.15 $ 0.50 $ .45 Diluted income per share before extraordinary item $ 0.38 $ 0.40 $ 0.24 $ 0.49 $ .44 Diluted net income per share $ 0.38 $ 0.40 $ 0.15 $ 0.49 $ .44 WEIGHTED SHARES OUTSTANDING: Basic 12,906 13,302 14,925 15,015 14,889 Diluted 13,017 13,822 15,458 15,374 15,223 OPERATING DATA: (Unaudited) Pari-mutuel wagering Live races $ 102,145 $ 89,327 $ 128,090 $ 122,686 $ 96,238 Import simulcasting 142,499 170,814 298,459 336,191 345,650 Export simulcasting 72,252 112,871 176,287 194,772 159,175 ------------------------------------------------------------ Total pari-mutuel wagering $ 316,896 $ 373,012 $ 602,836 $ 653,649 $ 601,063 ============================================================ Gross profit from wagering (2) $ 24,915 $ 27,955 $ 48,688 $ 53,766 $ 50,907 ============================================================ BALANCE SHEET DATA as of DECEMBER 31: Cash and cash equivalents $ 7,514 $ 5,634 $ 21,854 $ 6,826 $ 9,434 Working capital (deficiency) 4,134 (509) 15,226 1,911 (7,369) Total assets 27,532 96,723 158,878 160,798 190,600 Total debt 390 47,517 80,336 78,256 91,213 Shareholders' equity 20,802 27,881 53,856 59,036 66,272 - ------------------------------------------ </TABLE> Management believes that the following calculation of Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") and adjusted EBITDA are relevant to shareholders: <TABLE> <S> <C> <C> <C> <C> <C> Income from operations $ 8,255 $ 9,460 $ 9,735 $ 19,458 $ 17,817 add back depreciation and amortization 881 1,433 4,040 5,748 8,679 ----------- ----------- ----------- ----------- ---------- EBITDA 9,136 10,893 13,775 25,206 26,496 add back Horsemens action expense -- -- -- -- 1,250 Litigation expense -- -- -- -- 1,500 Site development and restructuring charges -- -- 2,437 -- 535 ----------- ----------- ----------- ----------- ---------- Adjusted EBITDA $ 9,136 $ 10,893 $ 16,212 $ 25,206 $ 29,781 =========== =========== =========== =========== ========== </TABLE> EBITDA is not a measure of financial performance under Generally Accepted Accounting Principles ("GAAP"), but is used by some investors to determine a company's ability to service or incur indebtedness. EBITDA and Adjusted EBITDA are not calculated by all entities in the same fashion and accordingly, may not be an appropriate measure of performance. Neither EBITDA nor Adjusted EBITDA should be considered in isolation from, or as a substitute for, net income (loss), cash flows from operations, or cash flow data prepared in accordance with GAAP. (1) Reflects the November 27, 1996 acquisition of Pocono Downs and the January 15, 1997 acquisition of a joint venture interest in the Charles Town Entertainment Complex. See "Business-Acquisitions." (2) Amounts equal total pari-mutuel revenues, less purses paid to Horsemen, taxes payable to Pennsylvania and simulcast commissions or host track fees paid to other racetracks. Figures for the years ended December 31, 1995 and 1996 do not include purses paid at Penn National Speedway. 22
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The percentage of the Company's revenue derived from gaming operations has increased over the last few years as a result of the gaming operations at the Charles Town Entertainment Complex. The Company expects that the Mississippi Acquisition and the continued expansion of the Charles Town Entertainment Complex will cause this trend to continue. In the future the Company expects to alter the presentation of certain of its financial information to better capture this trend. An example of a type of presentation that the Company is likely to use is presented below. The results of operations by property level are summarized as follows: <TABLE> <CAPTION> Charles Town Racing and Gaming Penn National and OTWs Pocono Downs and OTWs 1997 1998 1999 1997 1998 1999 1997 1998 1999 ---- ---- ---- ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Revenues Gaming $ 5,739 $37,716 $55,564 $ - $ - $ - $ - $ - $ - Racing 9,211 15,382 18,954 60,261 60,281 51,302 31,203 33,121 33,767 Other 1,533 3,785 5,254 3,302 3,339 4,308 2,255 2,455 2,555 --------------------------------- -------------------------------- ------------------------------- Total revenues 16,483 56,883 79,772 63,563 63,620 55,610 33,458 35,576 36,322 Expenses Gaming 5,446 28,958 38,672 - - - - - - Racing 9,566 15,585 18,766 45,815 45,276 41,441 22,203 22,748 23,169 Other* 2,111 5,237 6,554 5,329 5,305 6,334 3,784 4,109 4,199 --------------------------------- -------------------------------- ------------------------------- Total expenses 17,123 49,780 63,992 51,144 50,581 47,775 25,987 26,857 27,368 EBITDA Gaming 293 8,758 16,892 - - - - - - Racing (355) (203) 188 14,446 15,005 9,861 9,000 10,373 10,598 Other (578) (1,452) (1,300) (2,027) (1,966) (2,026) (1,529) (1,654) (1,644) ---------------------------------- -------------------------------- ------------------------------- Total EBITDA $ (640) $ 7,103 $15,780 $ 12,419 $13,039 $ 7,835 $ 7,471 $ 8,719 $ 8,954 ================================== ================================ =============================== - ---------------- </TABLE> *Other expenses includes property level general and administrative expenses and excludes corporate overhead and non-recurring expenses. YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 Revenues in 1999 increased by approximately $17.4 million or 11.3% to $171.5 million from $154.1 million in 1998. Operating expenses in 1999 increased by approximately $19.0 million or 14.1% to $153.6 million from $134.6 million in 1998. Included in operating expenses were non-recurring expenses in 1999 for the Horsemen's strike ($1.3 million) at Penn National Race Course, Tennessee development and licensing expenses ($.5 million) and litigation expenses ($1.5 million) to settle a lawsuit with a totalisator company. Income from operations decreased by $1.6 million or 8.4% to $17.8 million in 1999 from $19.4 million in 1998 due to the Horsemen's strike and non-recurring expenses. Other expenses for the year ended December 31, 1999 and 1998 consisted of approximately $7.3 million and $7.4 million, respectively, of net interest primarily due to the 10.625% Senior Notes and the Revolving Credit Facility. Taxes on income decreased by $.7 million to $3.8 million in 1999 from $4.5 million in 1998 and net income decreased by $.8 million or 10.3% to $6.7 million in 1999 from $7.5 million in 1998 due substantially to the factors described. 23
Charles Town Entertainment Complex Revenues increased at Charles Town by approximately $22.9 million or 40.2% to $79.8 million in 1999 from $56.9 million in 1998. Gaming revenue increased by $17.8 million or 47.3% to $55.6 million in 1999 from $37.7 million in 1998 due to the addition of 136 new video lottery machines and 565 new reel spinning, coin-out slot machines during the year. At year-end there were 1,500 gaming machines in operation compared to 799 machines in 1998. The average number of machines increased to 923 in 1999 from 704 in 1998 and the average win per machine increased to $163 in 1999 from $145 in 1998. Racing revenue increased by $3.5 million or 23.0% to $18.9 million in 1999 from $15.4 million in 1998. The live meet consisted of 213 race days in 1999 compared to 206 race days in 1998 and a change in the schedule from a Wednesday afternoon race program to a Thursday evening race program to accommodate export simulcasting. Charles Town began exporting its live race program to tracks across the country on June 5, 1999 and generated export simulcasting revenues of $.9 million for the year. Concession revenues increased by approximately $1.5 million or 40.0% to $5.3 million in 1999 from $3.8 million in 1998 due to increased attendance for gaming, racing, and the expansion of the concession areas, dining room and buffet area. Operating expenses increased by $14.2 million or 28.6% to $64.0 million in 1999 from $49.8 million in 1998 due to the increase in direct costs associated with additional wagering on horse racing and gaming machine play, the addition of gaming machines and floor space (new temporary gaming facility), export simulcast expenses and expanded concession and dining capability and capacity. In addition to the operating expenses, Charles Town had a non-recurring expense of $1.5 million in litigation settlement expenses for the settlement of a lawsuit involving a former totalisator company vendor. Penn National Race Course and its OTW Facilities (Penn National Race Course) Penn National Race Course had a decrease in revenue of approximately $8.0 million or 12.6% to $55.6 million in 1999 from $63.6 million in 1998. The decrease was due primarily to the expiration of the Horsemen's Agreement that resulted in the closure of the facilities from February 16 to March 24, 1999. Penn National re-opened for simulcast wagering on March 25, live racing on a limited basis on April 23 and resumed a full live racing schedule the week of June 26, 1999. For the year 1999, Penn National ran 153 live race days compared to 206 live race days in 1998 and has run nine-race cards instead of ten-race cards since the April reopening. Of the scheduled 210 live races for 1999, 46 race days were lost due to the strike and 11 days were cancelled due to weather compared to 4 days cancelled due to weather in 1998. Expenses decreased by approximately $2.8 million or 5.6% to $47.8 million in 1999 from $50.6 million in 1998. Included in the 1999 expenses is $1.3 million for the Horsemen's strike. The results of operations also includes the operation of the Johnstown OTW facility for 12 months in 1999 compared to 3 months in 1998. Pocono Downs and its OTW Facilities (Pocono Downs) Pocono Downs live race meet, which runs from April to November, consisted of 130 race days in 1999 compared to 135 races days in 1998. Revenues at Pocono Downs increased by $.7 million or 2.1% to $36.3 million in 1999 from $35.6 million in 1998. The increase resulted from a full year of operations at the Carbondale ($1.4 million) and Hazleton ($.8 million) OTWs that was offset by a decrease in revenue at the Pocono Downs Racetrack ($1.0 million). The decrease was due to the close proximity of the two new OTWs to the track. Revenue also decreased at the racetrack due to a 7.1% decrease in export simulcast wagering on Pocono live races due to the temporary closing of the barn area last winter due to the Company making improvements to the track that resulted in starting the racing season with a shortage of horses. Expenses increased by approximately $.5 million or 1.9% to $27.4 million in 1999 from $26.9 million in 1998. New Jersey Joint Venture On July 29, 1999, after receiving the necessary approvals from the New Jersey Racing Commission and the necessary consents from the holders of its 10.625% Senior Notes due 2004, Series B, the Company completed its investment in the Joint Venture. The Joint Venture operates Freehold Raceway and Garden State Race Track. Summarized results of operations of the unconsolidated Joint Venture (commencing on July 30, 1999) for the period ended December 31, 1999 include $28.0 million in revenue, $23.0 million in operating expenses $5.0 million in EBITDA and net income of $2.2 million. The Company's 50% share of the net income or $1.1 million is recorded as "Earnings from unconsolidated affiliates" on the income statement. 24
Capital Expenditures The Company had capital expenditures of $13.2 million in 1999 compared to $22.3 million in 1998. Capital expenditures at Charles Town were approximately $12.1 million for the construction of a new outdoor paddock, the purchase and construction of a new temporary gaming facility, and the purchase of additional gaming machines and player tracking system and other projects. Capital expenditures at Penn National and its OTW facilities ($.6 million) and Pocono Downs and its OTW facilities ($.5 million) were for normal equipment replacement and leasehold improvements. As a result, depreciation and amortization increased $2.9 million or 51.0% to $8.7 million in 1999 from $5.8 million in 1998. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Revenue in 1998 increased by approximately $42.5 million or 38.1% to $154.0 million in 1998 from $111.5 million in 1997. Operating expenses in 1998 increased by approximately $32.8 million or 32.2% to $134.6 million from $101.8 million in 1997. Included in operating expenses were non-recurring charges for site development and restructuring expenses of $2.4 million in 1997. Income from operations increased by approximately $9.7 million or 100.0 % to $19.4 million in 1998 from $9.7 million in 1997. Other expenses increased by approximately $3.8 million of 106.4 % to $7.4 million in 1998 from $3.6 million in 1997. Net interest expense increased by $3.9 million (primarily due to the 10 5/8% Senior Notes issued December 1997). Other income in 1998 of $113,000 consisted of a gain on the sale of Casino Magic Corporation stock of $148,000 offset by a loss on the repurchase of the Company's Senior Notes in the amount of $35,000. Taxes on income increased by approximately $2.2 million to $4.5 million in 1998 from $$2.3 million in 1997. The extraordinary item in 1997 consisted of a loss on the early extinquishment of debt in the amount of $1,482,000, net of income taxes. The loss consists primarily of write-offs of deferred finance costs associated with the retired bank notes and legal and bank fees relating to the early extinquishment of the debt. Net income increased by approximately $5.2 million to $7.5 million in 1998 from $2.3 million in 1997 due to the factors described above. Charles Town Races Charles Town Races was purchased in January of 1997 and began racing operations on April 30, 1997 and video lottery machine operations on September 10, 1997. Revenues at Charles Town increased by $40.4 million or 276.3% to $56.9 million in 1998 from $15.1 million in 1997. Video lottery machines increased by $32.0 million as a result of a full year of operations in 1998 compared to three and one-half months of operations in 1997. Racing revenues increased by $6.2 million due to a racing season of 206 live race days at the Charles Town Races in 1998 compared to 159 live races days in 1997 and the opening of the new simulcast-racing center in January 1998. Concession and other revenues increased by $2.2 million due to the increased attendance and the opening of the new buffet area during the year. Operating expenses increased at Charles Town Races by $32.6 million or 190.7% to $49.8 million in 1998 from $17.1 million in 1997. The increase was due primarily to the video lottery operations ($23.5 million), racing operations ($6.0 million) and concession and other operating expenses ($3.1 million). Penn National Race Course and its OTW Facilities (Penn National Race Course) Penn National Race Course had a small increase in revenue of approximately $57,000 or .1% to $63.6 million in 1998 from $63.5 million in 1997. Revenues increased at the track ($.3 million) due to an increase in on-track wagering and export simulcast wagering and the purchase and opening of the Johnstown OTW ($.9 million) on September 1, 1998. The increases were offset by a decrease in revenues at Chambersburg OTW ($.6 million) due to the opening of the Charles Town Facility, Reading ($.3 million) and York ($.3 million). Penn National Race Course had a net decrease in operating expenses of $.6 million or 1.1% to $50.6 million in 1998 from $51.1 million in 1997. The net decrease in operating expenses was due to an increase in expenses at the new Johnstown OTW ($.8 million) offset by a decrease in operating expenses at the racetrack and other OTW facilities ($1.4 million). Pocono Downs and its OTW Facilities (Pocono Downs) Revenues at Pocono Downs resulted in a net increase of $2.1 million or 6.3% to $35.6 million in 1998 from $33.5 million in 1997. The increase in revenue was primarily due to the opening of new facilities in Hazleton ($2.2 25
million) and Carbondale ($2.4 million). This was offset by a decrease at the Wilkes-Barre racetrack ($2.1 million) due to the proximity of the two new OTW facilities and decreases at Allentown OTW ($.3 million) and Erie OTW ($.2 million). Pocono Downs had a net increase in operating expenses of $.9 million or 3.3% to $26.9 million in 1998 from $26.0 million in 1997. The net increase in operating expenses was due to the opening of the Hazleton OTW ($1.9 million) and the Carbondale OTW ($1.8 million). The increase was offset by a decrease in operating expenses at the Wilkes-Barre racetrack ($1.8 million), Allentown OTW ($.6 million) and Erie OTW ($.4 million). Capital Expenditures The Company had capital expenditures of $22.3 million in 1998 compared to $29.4 million in 1997. Capital expenditures in 1998 consisted of renovation and refurbishment of the Charles Town facility and racetrack ($1.1 million), completion of the Hazleton and Carbondale OTW facilities ($3.2 million), the purchase of the Johnstown facility ($1.3 million), the purchase of the GTech video lottery machines and central monitoring system ($13.0 million), and $3.7 million in capital expenditures at other facilities. Depreciation and amortization increased by $1.7 million or 42.3% to $5.7 million in 1998 from $4.0 million in 1997. The increase was due primarily to depreciation associated with new facilities for Charles Town Gaming (September 1997), Charles Town Simulcast Center (January 1998), Hazleton and Carbondale OTW facilities (March 1998) and Johnstown OTW (September 1998). LIQUIDITY AND CAPITAL RESOURCES Historically, the Company's primary sources of liquidity and capital resources have been cash flow from operations, borrowings from banks and proceeds from issuance of equity securities. Net cash provided from operating activities was $22.5 million for the year ended December 31, 1999. This consisted of net income and non-cash expenses ($14.3 million), an increase in accounts receivable ($1.0 million) due from other tracks, an increase in accounts payable and accrued expenses due to construction at Charles Town ($5.6 million), an increase in purses due horsemen ($1.2 million) an increase in taxes, other than income taxes ($1.0 million) due to a change in payment schedules for Pennsylvania pari-mutuel taxes and other changes in certain assets and liabilities (-$.6 million). Cash flows used in investing activities for the year ended December 31, 1999 ($29.8 million) consisted of the Company's investment in and advance to the New Jersey Joint Venture ($11.7 million), a cash escrow deposit for the purchase of the Mississippi casinos ($5.0 million), capital expenditures at Charles Town for the outdoors paddock and jockey quarters ($.9 million), new temporary structure for slot machines ($1.8 million) additional gaming machines ($4.9 million) player tracking system ($1.3 million) and other projects ($3.1 million) and equipment replacement and building improvements at Penn National ($.6 million) and Pocono Downs ($.5 million) facilities. Cash flows provided by financing activities ($9.9 million) consisted of borrowings under the credit facility ($24.3 million) for the New Jersey Joint Venture ($11.5 million), Charles Town expansion ($9.7 million), and to fund part of the escrow deposit ($3.1 million) for the purchase of the Mississippi assets, proceeds from the exercise of stock options and warrants ($.5 million). This was offset by principal payments on long-term debt ($11.4 million), and an increase in financing costs ($3.5 million) for amending the credit facility and bondholder agreement. The Company is subject to possible liabilities arising from the environmental condition at the Landfill adjacent to Pocono Downs. Specifically, the Company may incur expenses in connection with the landfill in the future, which expenses may not be reimbursed by the four municipalities, which are parties to the Settlement Agreement. The Company is unable to estimate the amount, if any, that it may be required to expend. In 2000, the Company anticipates spending approximately $21.5 million on capital expenditures at its racetrack and OTW facilities. The Company anticipates expending approximately $18.2 million at the Charles Town Entertainment Complex for player tracking ($.7 million), new slot machines and conversion kits ($2.1 million), paddock casino and interior renovations ($7.4 million), machinery and equipment ($2.0 million) and other projects including structured parking facility, design and planning for a new hotel ($6.0 million). The Company also plans to spend approximately $261,000 at Pocono Downs, $550,000 at Penn National, $400,000 at the OTW facilities for building improvements and equipment and $2.0 million on building improvements and equipment for its new OTW facility in East Stroudsburg, Pennsylvania. 26
The Company entered into its Credit Facility with Bankers Trust Company, as Agent in 1996. This credit facility was amended and restated on January 29, 1999 with First Union National Bank replacing Bankers Trust Company, as Agent. The Credit Facility, as amended, provides for a $20 million revolving Credit Facility, including a $3 million sub-limit for standby letters of credit and a $5 million term loan. Under the terms of the credit facility, as amended, the Company borrowed an additional $11.5 million which was used to finance its share of the New Jersey Joint Venture (see Note 4). The revolving credit facility is secured by substantially all of the assets of the Company, except for the assets of the Charles Town Entertainment Complex. The revolving Credit Facility provides for certain covenants, including those of a financial nature. The $5.0 million term loan was repaid on December 16, 1999. At the Company's option, the revolving facility may bear interest at the highest of: (1) 1/2 of 1% in excess of the federal reserve reported certificate of deposit rate, (2) the rate that the bank group announces from time to time as its prime lending rate and (3) 1/2 of 1% in excess of the federal funds rate plus an applicable margin of up to 2% or the revolving facility may also bear interest at a rate tied to a eurodollar rate plus an applicable margin of up to 3%. The outstanding amount under this Credit Facility as of December 31, 1999 was $12.9 million at an interest rate of 8.93%. Mandatory repayments of the revolving facility are required in an amount equal to a percentage of the net cash proceeds from any issuance or incurrence of equity or funded debt by the Company, that percentage to be dependent upon the then outstanding balance of the revolving facility and the Company's leverage ratio. Mandatory repayments of varying percentages are also required in the event of either asset sales in excess of stipulated amounts or defined excess cash flow. On December 13, 1999, the Company entered into a $20.0 million Senior Secured Multiple Draw Term Loan with Bank of America, as an Agent for a bank group. The term loan is payable in quarterly installments of $1.3 million principle plus interest. The loan is secured by gaming equipment and improvements at the Charles Town facility. The term loan is being used to repay the $5.0 million First Union term loan and finance gaming equipment and improvements at the Charles Town facility. At the Company's option the term loan may bear interest at the highest of: (1) 1/2 of 1% in excess of the federal reserve reported certificate of deposit rate, (2) the rate that the bank group announces from time to time as its prime lending rate and (3) 1/2 of 1% in excess of the federal funds rate plus an applicable margin of up to 1.75% or the facility may also bear interest at a rate tied to a eurodollar rate plus an applicable margin of up to 2.75%. The outstanding amount under this credit facility as of December 31, 1999 was $ 9.1 million at an interest rate of 8.91%. On March 23, 1999, the Company signed a new agreement with the Pennsylvania Thoroughbred Horsemen, replacing the previous agreement that expired on February 16, 1999. This new contract will result in an increase in future operating expenses, which expenses may be offset in whole or in part by changes in revenue mix or revenue increases going forward. These developments, therefore, may decrease earnings before interest, taxes, depreciation and amortization ("EBITDA") in future periods; however, management believes that such decreases, if any, will not result in any material decrease in EBITDA. In connection with the Company's agreement to acquire all of the assets of Casino Magic Bay St. Louis and Boomtown Biloxi, the Company will explore a number of financing alternatives, which may involve repaying or redeeming its existing debt. The Company would expect to use part of the proceeds from the refinancing to make certain improvements to the Mississippi properties. The Company currently estimates that the cash generated from operations and available borrowings under the credit facilities will be sufficient to finance its current operations and planned capital expenditure requirements. 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, 1999 were fixed rate obligations, and Management, therefore, does not believe that the Company has any material market risk from its debt obligations. 27
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA Page No. Report of Independent Certified Public Accountants 29 Consolidated financial statements Balance sheets 30-31 Statements of income 32-33 Statements of shareholders' equity 34 Statements of cash flows 35-36 Notes to consolidated financial statements 37-38 28
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, 1998 and 1999, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Penn National Gaming, Inc. and Subsidiaries at December 31, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. Philadelphia, Pennsylvania \s\ BDO Seidman, LLP -------------------- February 29, 2000 except BDO Seidman, LLP for Note 11 which is as of March 7, 2000 29
Penn National Gaming, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except share and per share data) <TABLE> <CAPTION> December 31, 1998 1999 ----------------------------- <S> <C> <C> Assets Current assets Cash and cash equivalents $ 6,826 $ 9,434 Accounts receivable 3,840 4,779 Prepaid expenses and other current assets 2,131 1,793 Deferred income taxes 458 888 Prepaid income taxes 859 1,088 ----------------------------- Total current assets 14,114 17,982 ----------------------------- Property, plant and equipment, at cost Land and improvements 26,969 27,988 Building and improvements 66,918 70,870 Furniture, fixtures and equipment 29,772 36,195 Transportation equipment 527 860 Leasehold improvements 9,579 9,802 Leased equipment under capitalized lease 824 - Construction in progress 1,847 1,980 ----------------------------- 136,436 147,695 Less accumulated depreciation and amortization 15,684 20,824 ----------------------------- Net property, plant and equipment 120,752 126,871 ----------------------------- Other assets Investment in and advances to unconsolidated affiliate - 12,862 Cash in escrow - 5,000 Excess of cost over fair market value of net assets acquired (net of accumulated amortization of $2,002 and $2,611, respectively) 22,442 21,582 Deferred financing costs 2,403 5,014 Miscellaneous 1,087 1,289 ----------------------------- Total other assets 25,932 45,747 ----------------------------- $ 160,798 $ 190,600 ----------------------------- </TABLE> See accompanying summary of significant accounting policies and notes to consolidated financial statements. 30
Penn National Gaming, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except share and per share data) <TABLE> <CAPTION> December 31, 1998 1999 --------------------------- <S> <C> <C> Liabilities and Shareholders' Equity Current liabilities Current maturities of long-term debt and capital lease obligations $ 168 $ 5,160 Accounts payable 6,217 10,210 Purses due horsemen 887 2,114 Uncashed pari-mutuel tickets 1,597 1,351 Accrued expenses 1,063 2,694 Accrued interest 468 433 Accrued salaries and wages 752 1,098 Customer deposits 548 800 Taxes, other than income taxes 503 1,491 --------------------------- Total current liabilities 12,203 25,351 --------------------------- Long-term liabilities Long-term debt and capital lease obligations, net of current maturities 78,088 86,053 Deferred income taxes 11,471 12,924 --------------------------- Total long-term liabilities 89,559 98,977 --------------------------- 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 15,164,080 and 15,314,175, respectively 152 153 Treasury stock, 424,700 shares at cost (2,379) (2,379) Additional paid-in capital 38,025 38,527 Retained earnings 23,238 29,971 --------------------------- Total shareholders' equity 59,036 66,272 --------------------------- $ 160,798 $ 190,600 --------------------------- </TABLE> See accompanying summary of significant accounting policies and notes to consolidated financial statements. 31
Penn National Gaming, Inc. and Subsidiaries Consolidated Statements of Income (In thousands, except per share data) <TABLE> <CAPTION> Year ended December 31, 1997 1998 1999 -------------------------------------------- <S> <C> <C> <C> Revenues Pari-mutuel revenues Live races $ 27,653 $ 26,893 $ 20,760 Import simulcasting 59,810 68,136 71,369 Export simulcasting 5,279 5,810 4,733 Gaming revenue 5,712 37,396 55,125 Admissions, programs and other racing revenues 5,678 6,280 6,256 Concessions revenues 7,404 9,550 12,117 Earnings from unconsolidated affiliates - - 1,098 -------------------------------------------- Total revenues 111,536 154,065 171,458 -------------------------------------------- Operating expenses Purses, stakes and trophies 22,335 29,141 31,290 Direct salaries, payroll taxes and employee benefits 16,200 19,134 19,519 Simulcast expenses 12,982 13,809 13,422 Pari-mutuel taxes 9,506 9,281 8,895 Lottery taxes and administration 1,874 14,749 21,545 Other direct meet expenses 18,087 24,029 22,916 Concessions expenses 5,605 7,929 11,030 Other operating expenses 8,735 10,787 13,060 Horsemen's action expenses - - 1,250 Depreciation and amortization 4,040 5,748 8,679 Litigation settlement - - 1,500 Site development and restructuring charges 2,437 - 535 -------------------------------------------- Total operating expenses 101,801 134,607 153,641 -------------------------------------------- Income from operations 9,735 19,458 17,817 -------------------------------------------- Other income (expenses) Interest (expense) (4,591) (8,374) (8,667) Interest income 935 825 1,368 Other (2) 113 (8) -------------------------------------------- Total other (expenses) (3,658) (7,436) (7,307) -------------------------------------------- </TABLE> See accompanying summary of significant accounting policies and notes to consolidated financial statements. 32
Penn National Gaming, Inc. and Subsidiaries Consolidated Statements of Income (In thousands, except per share data) <TABLE> <CAPTION> Year ended December 31, 1997 1998 1999 -------------------------------------------- <S> <C> <C> <C> Income before income taxes and extraordinary item $ 6,077 $ 12,022 $ 10,510 Taxes on income 2,308 4,519 3,777 -------------------------------------------- Income before extraordinary item 3,769 7,503 6,733 Extraordinary item Loss on early extinguishment of debt, net of income taxes of $1,001 1,482 - - -------------------------------------------- Net income $ 2,287 $ 7,503 $ 6,733 -------------------------------------------- Per share data Basic Income before extraordinary item $ .25 $ .50 $ .45 Extraordinary item .10 - - -------------------------------------------- Net income $ .15 $ .50 $ .45 -------------------------------------------- Diluted Income before extraordinary item $ .24 $ .49 $ .44 Extraordinary item .09 - - -------------------------------------------- Net income $ .15 $ .49 $ .44 -------------------------------------------- Weighted shares outstanding Basic 14,925 15,015 14,837 Diluted 15,458 15,374 15,196 </TABLE> See accompanying summary of significant accounting policies and notes to consolidated financial statements. 33
Penn National Gaming, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity (In thousands, except share data) <TABLE> <CAPTION> Additional Common Stock Treasury Paid-In Retained ---------------------- Shares Amount Stock Capital Earnings Total ------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Balance, January 1, 1997 13,355,290 $ 134 $ - $ 14,299 $ 13,448 $ 27,881 Issuance of common stock 1,725,000 17 - 22,914 - 22,931 Exercise of stock options and warrants 72,290 1 - 154 - 155 Tax benefit related to - stock options exercised - - 602 - 602 Net income for the year - - - - 2,287 2,287 ------------------------------------------------------------------------------ Balance, December 31, 1997 15,152,580 152 - 37,969 15,735 53,856 Exercise of stock options and warrants 11,500 - - 56 - 56 Acquisition of treasury stock - - (2,379) - - (2,379) Net income for the year - - - - 7,503 7,503 ------------------------------------------------------------------------------ Balance, December 31, 1998 15,164,080 152 (2,379) 38,025 23,238 59,036 Exercise of stock options and warrants 150,095 1 - 502 - 503 Net income for the year - - - - 6,733 6,733 ------------------------------------------------------------------------------ Balance, December 31, 1999 15,314,175 $ 153 $ (2,379) $ 38,527 $ 29,971 $ 66,272 ------------------------------------------------------------------------------ </TABLE> See accompanying summary of significant accounting policies and notes to consolidated financial statements. 34
Penn National Gaming, Inc. and Subsidiaries Consolidated Statements of Cash Flows (In thousands) <TABLE> <CAPTION> Year ended December 31, 1997 1998 1999 -------------------------------------------- <S> <C> <C> <C> Cash flows from operating activities Net income $ 2,287 $ 7,503 $ 6,733 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 4,040 5,748 8,679 Write-off of deferred financing costs - 376 - Income from unconsolidated affiliates - - (1,098) Extraordinary loss relating to early extinguishment of debt, before income tax benefit 2,483 - - Deferred income taxes (benefit) (97) 390 1,023 Decrease (increase) in Accounts receivable 2,036 (1,583) (939) Prepaid expenses and other current assets 111 (690) 338 Prepaid income taxes (3,003) 2,144 (229) Miscellaneous other assets (258) (463) (202) Increase (decrease) in Accounts payable 2,339 (1,188) 3,993 Purses due horsemen (1,421) 887 1,227 Uncashed pari-mutuel tickets 168 93 (246) Accrued expenses 1,155 (1,364) 1,631 Accrued interest 225 142 (35) Accrued salaries and wages 306 (61) 346 Customer deposits 50 78 252 Taxes, other than income taxes 257 (146) 988 -------------------------------------------- Net cash provided by operating activities 10,678 11,866 22,461 -------------------------------------------- Cash flows from investing activities Expenditures for property, plant and equipment (29,196) (22,333) (13,243) Acquisition of business, net of cash acquired (18,248) - - (Increase) in prepaid acquisition costs (176) - - Investment in and advances to unconsolidated affiliate - - (11,764) Cash in escrow - - (5,000) Other - - 251 -------------------------------------------- Net cash (used in) investing activities (47,620) (22,333) (29,756) -------------------------------------------- </TABLE> See accompanying summary of significant accounting policies and notes to consolidated financial statements. 35
Penn National Gaming, Inc. and Subsidiaries Consolidated Statements of Cash Flows (In thousands) <TABLE> <CAPTION> Year ended December 31, 1997 1998 1999 -------------------------------------------- <S> <C> <C> <C> Cash flows from financing activities Proceeds from sale of common stock $ 23,086 $ 56 $ 503 Acquisition of treasury stock - (2,379) - Tax benefit related to stock options exercised 602 - - Proceeds from long-term debt 111,167 9,000 24,350 Principal payments on long-term debt and capital lease obligations (78,348) (11,080) (11,393) (Increase) in unamortized financing costs (3,345) (158) (3,557) -------------------------------------------- Net cash provided by (used in) financing activities 53,162 (4,561) 9,903 -------------------------------------------- Net (decrease) increase in cash and cash equivalents 16,220 (15,028) 2,608 Cash and cash equivalents at beginning of period 5,634 21,854 6,826 -------------------------------------------- Cash and cash equivalents at end of period $ 21,854 $ 6,826 $ 9,434 -------------------------------------------- </TABLE> See accompanying summary of significant accounting policies and notes to consolidated financial statements. 36
1. Summary of Basis of Presentation Significant Accounting Policies The consolidated financial statements include the accounts of Penn National Gaming, Inc. and its subsidiaries (collectively the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior years' amounts have been reclassified to conform to the 1999 presentation. Description of Business The Company provides pari-mutuel wagering opportunities on live and simulcast thoroughbred and harness horse races at two racetracks and ten off-track wagering facilities ("OTWs") located in Pennsylvania and pari-mutuel wagering opportunities and video gaming machines at Charles Town Races, the Company's Charles Town, West Virginia thoroughbred racetrack. The Company's sole operating segment is gaming activities. At each of its three racetracks, the Company conducts pari-mutuel wagering on thoroughbred and harness races from the Company's racetracks and simulcasts from other racetracks. The Company also simulcasts its Penn National Race Course and Pocono Downs races for wagering at other racetracks and OTWs, including all Pennsylvania racetracks and OTWs and locations outside Pennsylvania. Wagering on Penn National Race Course and Pocono Downs races and races simulcast from other racetracks also occurs through the Company's Pennsylvania racetracks' telephone account betting network. Glossary of Terminology The following is a listing of terminology used throughout the financial statements: The Company's racetracks - Penn National Race Course near Harrisburg, Pennsylvania, Pocono Downs near Wilkes-Barre, Pennsylvania and Charles Town Races in Charles Town, West Virginia. Gaming machines - Video lottery terminal and coin operated 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. 37
Pari-mutuel revenues - Live races - The Company's share of pari-mutuel wagering on live races within Pennsylvania and West Virginia and certain stakes races from racetracks outside of Pennsylvania and West Virginia after payment of the amount returned as winning wagers. Import simulcasting - The Company's share of wagering at the Company's racetracks, at the Company's OTWs and by Telebet on full cards of races simulcast from other racetracks. Export simulcasting - The Company's share of wagering at out-of-state locations on live races conducted by the Company. Gaming revenue - The Company's share of net winnings from gaming wins and losses. A summary of pari-mutuel wagering for the periods indicated is as follows: <TABLE> <CAPTION> Year ended December 31, 1997 1998 1999 ------------------------------------------------------------------------------- (in thousands) <S> <C> <C> <C> Pari-mutuel wagering on the Company's live races $ 128,090 $ 122,686 $ 96,238 Pari-mutuel wagering on simulcasting Import simulcasting from other racetracks 298,459 336,191 345,650 Export simulcasting to out of Pennsylvania wagering facilities 176,287 194,772 159,175 --------------------------------------------- Total pari-mutuel wagering $ 602,836 $ 653,649 $ 601,063 --------------------------------------------- </TABLE> Racing Meet The racing seasons for the past three years consisted of the following number of live race days: Year ended December 31, 1997 1998 1999 -------------------------------------------------------------------- Penn National Race Course 212 206 153 Pocono Downs 134 135 130 Charles Town Races 159 206 213 38
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 1997, 1998 and 1999, amounted to $3,193,000, $4,705,000, and $7,124,000, 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 1997, 1998 and 1999, amounted to $578,000, $613,000, and $609,000, respectively. The Company evaluates the recoverability of the goodwill quarterly, or more frequently whenever events and circumstances warrant revised estimates and considers whether the goodwill should be completely or partially written off or the amortization period accelerated. The Company reviews the carrying values of its long-lived and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicates that the carrying amount of the assets may not be recoverable based on undiscounted estimated future operating cash flows. As of December 31, 1999, the Company has determined that no impairment has occurred. Income Taxes The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Customer Deposits Customer deposits represent amounts held by the Company for telephone wagering. Cash and Cash Equivalents The Company considers all cash balances and highly liquid investments with original maturities of three months or less to be cash equivalents. Net Income Per Common Share Basic net income per share includes no dilution and is calculated by dividing net income by the weighted average number of common shares outstanding for the period. Dilutive net income per share reflects the potential dilution of securities that could share in the net income of the Company which consist of stock options and warrants (using the treasury stock method). Deferred Financing Costs Deferred financing costs which are incurred by the Company in connection with debt are charged to operations over the life of the underlying indebtedness using the interest 39
method adjusted to give effect to any early repayments. In 1999, the Company paid a consent fee to the holders of its 10.625% Senior Notes in the amount of $2,243,000 for approval of its investment in the New Jersey Joint Venture (see Note 3). Amortization of deferred financing costs for 1997, 1998 and 1999, amounted to $269,000, $430,000, and $946,000, respectively. Concentration of Credit Risk Financial instruments which potentially subject the Company to credit risk consist of cash equivalents and accounts receivable. The Company's policy is to limit the amount of credit exposure to any one financial institution and place investments with financial institutions evaluated as being creditworthy, or in short-term money market and tax-free bond funds which are exposed to minimal interest rate and credit risk. At December 31, 1999, the Company had bank deposits which exceeded federally insured limits by approximately $5,235,000 and money market and tax-free bond funds of approximately $400,000. 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 their OTWs. Historically, the Company has not incurred any significant credit-related losses. Fair Value of Financial Instruments The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practical to estimate. Cash and Cash Equivalents: The carrying amount approximates the fair value due to the short maturity of the cash equivalents. Long-Term Debt and Capital Lease Obligations: The fair value of the Company's long-term debt and capital lease obligations is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The carrying amount approximates fair value since the Company's interest rates approximate current interest rates. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses at the reporting period. Actual results could differ from those estimates. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments" ("SFAS 133 as amended by SFAS 137"). SFAS 137 delays the effective date of implementation of SFAS 133 by one year. SFAS 133 establishes accounting and 40
reporting standards for derivative instruments and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair market value. Presently, the Company does not use derivative instruments either in hedging activities or as investments. Accordingly, the Company believes that adoption of SFAS 133 will have no impact on its financial position or results of operations. The Company has no comprehensive income items as defined in Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". <TABLE> <CAPTION> 2. Long-Term Debt Long-term debt and capital lease obligations are as follows: and Capital Lease Obligations December 31, 1998 1999 -------------------------- (In thousands) <S> <C> <C> <C> Long-term debt $80 million Senior Notes, due December 15, 2004 with interest at 10.625% per annum payable semi-annually. The notes are unsecured and are unconditionally guaranteed by certain subsidiaries of the Company. $ 69,000 $ 69,000 Revolving credit facility payable to a bank group (see additional information below under Credit Facilities). 9,000 12,900 Term loan payable to a bank group due on December 31, 2002 with interest at various rates. This note is secured by certain assets of the Company (see additional information below under Term Loan). - 9,100 Other notes payable 246 213 Capital lease obligations 10 - -------------------------- 78,256 91,213 Less current maturities 168 5,160 -------------------------- $ 78,088 $ 86,053 -------------------------- </TABLE> Credit Facilities On January 28, 1999, the Company entered into a second amendment and restatement of the Credit Facility. The Credit Facility, as amended, provides for a $20 million revolving credit facility, including a $3 million sublimit for standby letters of credit, which matures in December 2002 and a $5 million term loan. Under the terms of the Credit Facility, as amended, the Company borrowed an additional $11.5 million, of which $11.2 million of the proceeds was used to finance its share of the New Jersey Joint Venture (see Note 3). The revolving credit facility is secured by substantially all of the assets of the Company, except for the assets of the Charles Town facility. The revolving credit facility provides for certain covenants, including those of a financial nature. The $5.0 million term loan was repaid on December 16, 1999. 41
At the Company's option, the revolving facility may bear interest at the highest of: (1) 1/2 of 1% in excess of the federal reserve reported certificate of deposit rate, (2) the rate that the bank group announces from time to time as its prime lending rate and (3) 1/2 of 1% in excess of the federal funds rate plus an applicable margin of up to 2% or the revolving facility may also bear interest at a rate tied to a eurodollar rate plus an applicable margin of up to 3%. The outstanding amount under this credit facility as of December 31, 1999 was $12.9 million at an interest rate of 8.93%. Mandatory repayments of the revolving facility are required in an amount equal to a percentage of the net cash proceeds from any issuance or incurrence of equity or funded debt by the Company, that percentage to be dependent upon the then outstanding balance of the revolving facility and the Company's leverage ratio. Mandatory repayments of varying percentages are also required in the event of either asset sales in excess of stipulated amounts or defined excess cash flow. At December 31, 1999, the Company was contingently obligated under letters of credit with face amounts aggregating $2,015,000. This amount includes $1,786,000 relating to the horsemens' account balances, and $100,000 for Pennsylvania pari-mutuel taxes. Term Loan On December 13, 1999 the Company entered into a $20.0 million Senior Secured Multiple Draw Term Loan with Bank of America as Agent for a bank group. The term loan is payable in quarterly installments of $1.3 million principal plus interest. The loan is secured by gaming equipment and improvements at the Charles Town Entertainment Complex. At the Company's option the term loan may bear interest at the highest of (1)1/2of 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)1/2of 1% in excess of the federal funds rate plus an applicable margin of up to 1.75% or the facility may also bear interest at a rate tied to a eurodollar rate plus an applicable margin of up to 2.75%. The outstanding amount under this credit facility as of December 31, 1999 was $ 9.1 million at an interest rate of 8.91%. 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, and commenced 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 42
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 Company, including indebtedness incurred under the amended $20 million revolving credit facility. On September 3, 1998, the Company repurchased $11 million of the 10.625% Senior Notes due 2004 at 97.25% of the principal amount ($10,697,500) plus accrued interest of $253,229 in public market trading. In conjunction with the repurchase of the notes, the Company recorded a write-off of deferred financing costs associated with this portion of the long-term debt. The extinguishment of these notes did not result in any material net loss. The following is a schedule of future minimum repayments of long-term debt as of December 31, 1999: December 31, (In thousands) 2000 $ 5,160 2001 4,138 2002 12,915 2003 - 2004 69,000 ------------- Total minimum payments 91,213 Current maturities 5,160 ------------- Total noncurrent maturities $ 86,053 ------------- 3. Commitments and Contingencies Operating Agreements In November 1997, the Company signed a new Totalisator services and equipment agreement for all of its subsidiaries. Effective November 1, 1999 the terms of the contract were amended and the contract was extended through May 31, 2005. The amended agreement provides for annual payments based on a specified percentage of the total amount wagered at the Company's facilities with no minimum annual payment. The Company is also liable under numerous operating leases for automobiles, other equipment and buildings, which expire through 2004. Total rental expense under these agreements was $807,000, $1,169,000, and $1,296,000 for the years ended December 31, 1997, 1998, and 1999, respectively. The future lease commitments relating to noncancelable operating leases as of December 31, 1999 are as follows: (In thousands) 2000 $ 1,468 2001 1,387 2002 1,218 2003 1,124 2004 1,069 Thereafter 1,794 -------- $ 8,060 -------- 43
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. Bryant had acquired its option from Showboat Operating Company ("Showboat"). Showboat has retained an option (the "Showboat Option") to operate any casino at the Charles Town Entertainment Complex in return for a management fee (to be negotiated at the time, based on rates payable for similar properties) and a right of first refusal to purchase or lease the site of any casino at the Charles Town Entertainment Complex proposed to be leased or sold and to purchase any interest proposed to be sold in any such casino on the same terms offered by a third party or otherwise negotiated with the Charles Town Joint Venture. The rights retained by Showboat under the Showboat Option extend for a period of five years from November 6, 1996, the date that the Charles Town Joint Venture exercised its option to purchase the Charles Town Races, and expires thereafter unless legislation to permit casino gaming at the Charles Town Entertainment Complex has been adopted prior to the end of the five-year period. If such legislation has been adopted prior to such time, then the rights of Showboat continue for a reasonable time (not less than 24 months) to permit completion of negotiations. While the express terms of the Showboat Option do not specify which activities at the Charles Town Entertainment Complex would constitute operation of a casino, Showboat has agreed that the installation and operation of gaming devices linked to the lottery (like the gaming machines the Company has installed and will continue to install) at the Charles Town Entertainment Complex's racetrack would not trigger Showboat's right to exercise the Showboat Option. Pursuant to the terms of the Pocono Downs purchase agreement dated November 27, 1996, the Company will be required to pay the sellers of Pocono Downs an additional $10 million if, within five years after the consummation of the Pocono Downs acquisition, Pennsylvania authorizes any additional form of gaming in which the Company may participate. The $10 million payment would be payable in annual installments of $2 million for five years, beginning on the date that the Company first offers such additional form of gaming. Profit Sharing Plans The Company has a profit sharing plan under the provisions of Section 401(k) of the Internal Revenue Code, called The Penn National Gaming, Inc. Profit Sharing Plan (the "Penn National 401(k) Plan") that cover all eligible employees who are not members of a bargaining unit. The plan enables 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 for employees of Penn National Race Course and Pocono Downs. Charles Town employees receive an annual employer contribution based on an allocation formula that is derived from a total retirement expense calculated as .25% of the daily mutual handle and .5% of the net 44
video lottery revenues. The Company made contributions to the plan of approximately $145,000, $172,000 and $169,000, for the years ended December 31, 1997, 1998 and 1999, respectively. The Company also has a defined contribution plan called the Charles Town Races Future Service Retirement Plan covering substantially all of its union employees. Charles Town makes monthly contributions equal to the amount accrued for retirement expense, which is calculated as .25% of the daily mutual handle and .5% of the net video lottery revenues. Total contributions for the years ended December 31, 1997, 1998 and 1999 were $114,000, $185,000 and $239,000, respectively. OTW and Operating Facilities On July On July 14, 1998, the Company entered into a lease agreement for an OTW facility in East Stroudsburg. The lease is for approximately 14,000 square feet at the Eagle's Glen Shopping Plaza located in East Stroudsburg, Pennsylvania. The initial term of the lease is for ten years with two additional five-year renewal options available. On November 6, 1998, the Company submitted its application for approval by the Pennsylvania Harness Racing Commission. The Pennsylvania Harness Racing Commission approved the application on February 23, 1999. The Company was denied building and zoning permits by the zoning office of the Borough of East Stroudsburg and filed suit on November 13, 1998 to obtain the permits. On May 17, 1999, the Court of Common Pleas of Monroe County granted a peremptory judgment in favor of the Company that directed the Borough of East Stroudsburg and its zoning officer to issue the required building and zoning permits to construct the OTW facility. The Company started construction on the $2 million facility in February 2000 with a projected opening date in the second quarter of 2000. On March 23, 1999, the Company entered into a new four-year, nine-month purse agreement with the Horsemen's Benevolent and Protection Association, which represents the horsemen at the Company's Penn National Race Course facility in Grantville, Pennsylvania. The agreement ended an action by the horsemen which began on February 16, and caused the Company to close Penn National Race Course and its six affiliated OTWs. As a result of the action the Company incurred a non-recurring $1,250,000 expense, primarily related to costs incurred to maintain the closed facilities inclusive of employee salaries and rents, for Horsemen's Action Expense. The initial term of the agreement ends on January 1, 2004 and automatically renews for another two year period, without change, unless notice is given by either party at least ninety days prior to the end of the initial term. 45
On June 30, 1999, all the race tracks in West Virginia (the "Tracks"), entered into a hardware and software purchase agreement (the "Agreement") with International Game Technology ("IGT"), for the purchase of a new video lottery central control computer system. The aggregate cost of the new system is $5.5 million of which PNGI Charles Town Gaming LLC is obligated to pay $1.4 million. On July 22, 1999, the Company submitted a check in the amount of $257,000 as the initial deposit and issued a letter of credit in the amount of $1,156,000 to secure the remaining payments due. In addition, the Tracks agreed to collectively acquire from IGT at least one thousand video lottery terminals by September 30, 1999. (Charles Town is to acquire 400 new terminals). The Agreement also requires each track to pay to IGT the sum of $7.50 per terminal, per day for each video lottery terminal offering progressive games operated through the IGT central system. Installation of the new central system was substantially complete on December 31, 1999. On December 17, 1999, the Company entered into a new three-year purse agreement with the Pennsylvania Harness Horsemen's Association, Inc. which represents the owners, trainers, and drivers at the Company's The Downs Racing, Inc. facility in Wilkes-Barre, Pennsylvania. The contract term begins on January 16, 2000 and ends on January 15, 2003. Mississippi Agreement On December 10, 1999, the Company entered into two definitive agreements to purchase all of the assets of the Casino Magic hotel, casino, golf resort, recreational vehicle (RV) park and marina in Bay St. Louis, Mississippi and the Boomtown Biloxi casino in Biloxi, Mississippi, from Pinnacle Entertainment, Inc. formerly Hollywood Park, Inc. (NYSE:PNK) for $195 million which are contingent upon each other. In addition to acquiring all of the operating assets and related operations of the Casino Magic Bay St. Louis and Boomtown Biloxi properties, the Company will enter into a licensing agreement to use the Boomtown and Casino Magic names and marks at the properties being acquired. The transaction is subject to certain closing conditions including the approval of the Mississippi Gaming Commission, financing and expiration of the applicable Hart-Scott-Rodino waiting period. As part of the agreement, the Company paid a deposit of $5 million to an escrow account, which is refundable if certain conditions are not met. In connection with financing the Mississippi acquisition, the Company will explore a number of financing alternatives, which may include repaying or redeeming its existing debt. New Jersey Joint Venture On January 28, 1999, pursuant to a First Amendment to an Asset Purchase Agreement by and among Greenwood New Jersey, Inc. ("Greenwood"), International Thoroughbred Breeders Inc., Garden State Race Track, Inc., Freehold Racing Association, Atlantic City Harness, Inc. and Circa 1850, Inc., the original parties to an Asset Purchase Agreement entered into as of July 2, 1998, and the Company (the "Agreement"), and pursuant to which the Company entered into a joint venture ("Joint Venture"), the Company, along with its Joint Venture partner, Greenwood, agreed to purchase certain assets of the Garden State Race Track and Freehold Raceway, both located in New Jersey (the "Acquisition"). 46
The purchase price for the Acquisition was approximately $46 million (subject to reduction of certain disputed items, for which amounts have been placed in escrow). The purchase price consisted of $23 million in cash and $23 million pursuant to two deferred purchase price promissory notes in the amount of $22 million and $1 million each. On July 29, 1999, after receiving the necessary approvals from the New Jersey Racing Commission and the necessary consents from the holders of its 10.625% Senior Notes due 2004, Series B, the Company completed its investment in the Joint Venture, pursuant to which Pennwood, Inc. was formed with Greenwood New Jersey, Inc. (a wholly-owned subsidiary of Greenwood Racing, Inc. the owner of Philadelphia Park Race Track). Pursuant to the Joint Venture Agreement, the Company agreed to guarantee severally: (i) up to 50% of the obligation of the Joint Venture under its Put Option Agreement ($17.5 million) with Credit Suisse First Boston Mortgage Capital LLC ("CSFB"); (ii) up to 50% of the Joint Venture obligation for the seven year lease at Garden State Park; (iii) up to 50% of the Joint Venture obligation to International Thoroughbred Breeders, Inc. for the contingent purchase price notes ($10.0 million) relating to the operation, subject to passage by the New Jersey legislature, by the Joint Venture of OTWs and telephone wagering accounts in New Jersey. In conjunction with the closing, the Company entered into a Debt Service Maintenance Agreement with Commerce Bank, N.A. for the funding of a $23.0 million credit facility to the Joint Venture. The Joint Venture Agreement provides for a limited obligation of the Company of $11.5 million subject to limitations provided for in the Company's 10.625% Senior Notes Indenture. The Company's investment in the Joint Venture is accounted for under the equity method, original investments are recorded at cost and adjusted by the Company's share of income or losses of the Joint Venture. The income from July 30, 1999 through December 31, 1999 of the Joint Venture is included in earnings of unconsolidated affiliates in the accompanying Consolidated Statements of Income for the year ended December 31, 1999. Summarized balance sheet information for the Joint Venture as of December 31, 1999 is as follows (in thousands): <TABLE> <S> <C> <C> Current assets $ 7,324 Property, plant and equipment, net 30,786 Other 18,158 ------------- Total assets $ 56,268 ============= Current liabilities $ 7,453 Long-term liabilities 46,221 Members' equity 2,594 ------------- Total liabilities and members' equity $ 56,268 ============= </TABLE> 47
Summarized results of operations of the unconsolidated Joint Venture (commencing on July 30, 1999) for the year ended December 31, 1999 is as follows (in thousands): Revenues $ 27,982 ------------- Operating expenses 23,005 ------------- EBITDA* 4,977 ------------- Net Income 2,196 ------------- * Earnings before interest, depreciation, taxes, and amortization. <TABLE> <CAPTION> 4. Income Taxes The provision for income taxes charged to operations was as follows: Year ended December 31, 1997 1998 1999 ------------------------------------------------------------------------------ (in thousands) <S> <C> <C> <C> <C> Current tax expense Federal $ 2,006 $ 3,374 $ 2,759 State 399 755 108 ---------------------------------- Total current 2,405 4,129 2,867 ---------------------------------- Deferred tax expense (benefit) Federal (56) 378 (317) State (41) 12 1,227 ---------------------------------- Total deferred (97) 390 910 ---------------------------------- Total provision $ 2,308 $ 4,519 $ 3,777 ---------------------------------- </TABLE> <TABLE> <CAPTION> Deferred tax assets and liabilities are comprised of the following: December 31, 1998 1999 -------------------------- <S> <C> <C> <C> Deferred tax assets Reserve for debit balances of horsemens' accounts, bad debts restructuring charges and litigation $ 458 $ 888 -------------------------- Deferred tax liabilities Property, plant and equipment $ 11,471 $ 12,924 -------------------------- </TABLE> 48
The following is a reconciliation of the statutory federal income tax rate to the actual effective income tax rate for the following periods: <TABLE> <CAPTION> Year ended December 31, 1997 1998 1999 -------------------------------------- <S> <C> <C> <C> <C> 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 3.9 4.2 2.0 Permanent difference relating to amortization of goodwill .9 .4 .2 Other miscellaneous items (.8) (1.0) (.3) -------------------------------------- 38.0 % 37.6 % 35.9 % -------------------------------------- </TABLE> 5. Supplemental Disclosures of Cash Flow Information Cash paid during the year for interest was $4,346,000, $8,192,000 and $8,742,000 in 1997, 1998 and 1999, respectively. Cash paid during the year for income taxes was $3,649,000, $4,207,000, and $2,970,000 in 1997, 1998 and 1999, respectively. 6. Common Stock On February 18, 1997, the Company completed a secondary public offering of 1,725,000 shares of its common stock. The net proceeds of $23 million were used to reduce $19 million of the Term Loan amounts outstanding under the Credit Facility with the balance of the proceeds used to finance a portion of the cost of the refurbishment of the Charles Town Entertainment Complex (see Note 2 for Acquisitions). In 1998, the Company purchased 424,700 shares of its common stock in public market trading. The total cost of these transactions was $2,378,465 or $5.60 per share average price. In April 1994, the Company's Board of Directors and shareholders adopted and approved the Stock Option Plan (the "Plan"). On April 30, 1997, the shareholders and the Board of Directors approved an increase in the number of authorized shares underlying stock options to be granted from 1,290,000 to 2,000,000 shares. Therefore, the Plan permits the grant of options to purchase up to 2,000,000 shares of Common Stock, subject to antidilution adjustments, at a price per share no less than 100% of the fair market value of the Common Stock on the date an option is granted with respect to incentive stock options only. The price would be no less than 110% of fair market value in the case of an incentive stock option granted to any individual who owns more than 10% of the total combined voting power of all classes of outstanding stock. The Plan provides for the granting of both incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, and nonqualified stock options which do not so qualify. Unless the Plan is terminated earlier by the Board of Directors, the Plan will terminate in April 2004. 49
Stock options that expire between August 20, 2000 and January 4, 2009 have been granted to officers and directors to purchase Common Stock at prices ranging from $3.33 to $17.63 per share. All options and warrants were granted at market prices at date of grant. The following table contains information on stock options issued under the Plan for the three-year period ended December 31, 1999: <TABLE> <CAPTION> Exercise Option Price Range Average Shares Per Share Price ------------------------------------------------ <S> <C> <C> <C> <C> Outstanding at January 1, 1997 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 Granted 195,000 6.44 to 15.50 9.06 Exercised (11,500) 3.33 to 5.63 4.88 Canceled (39,500) 5.63 to 15.50 13.36 ------------------------------------------------ Outstanding at December 31, 1998 1,184,500 3.33 to 17.63 9.50 Granted 144,500 6.88 to 9.13 6.98 Exercised (27,000) 5.63 5.63 Canceled (31,750) 5.63 to 15.50 13.40 ------------------------------------------------ Outstanding at December 31, 1999 1,270,250 $ 3.33 to 17.63 $ 7.27 ------------------------------------------------ </TABLE> In addition, 300,000 Common Stock options were issued to the Chairman outside the Plan on October 23, 1996. These options were issued at $17.63 per share and are exercisable through October 23, 2006. <TABLE> <CAPTION> Exercisable at year-end: Exercise Weighted Option Price Range Average Shares Per Share Price ------------------------------------------------------ <S> <C> <C> <C> <C> 1997 653,833 $ 3.33 to 17.63 $ 7.08 1998 1,034,666 3.33 to 17.63 8.36 1999 1,242,625 3.33 to 17.63 9.49 ------------------------------------------------------ Options available for future grant: 1994 Plan ------------- 1999 541,750 ------------- </TABLE> 50
The following table summarizes information about stock options outstanding at December 31, 1999 <TABLE> <CAPTION> Ranges Total -------------------------------------------- <S> <C> <C> <C> <C> $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, 1999 637,250 933,000 1,570,250 Weighted average remaining contractual life (years) 3.84 5.94 5.09 Weighted average exercise price $ 3.84 $ 12.94 $ 9.25 Exercisable options Number outstanding at December 31, 1999 637,250 605,375 1,242,625 Weighted average exercise price $ 3.84 $ 15.44 $ 9.49 </TABLE> Warrants were granted to the underwriters of the Company's initial public offering at a price of $4.00 per share and were all exercised prior to their expiration on June 2, 1999. A summary of the warrant transactions follows: <TABLE> <CAPTION> Exercise Price Weighted Warrant Range Average Shares Per Share Price --------------------------------------------- <S> <C> <C> <C> <C> Warrants outstanding at January 1, 1997 195,000 $ 4.00 $ 4.00 Warrants exercised (43,000) 4.00 4.00 --------------------------------------------- Warrants outstanding at December 31, 1997 152,000 4.00 4.00 Warrants exercised (3,000) 4.00 4.00 --------------------------------------------- Warrants outstanding at December 31, 1998 149,000 4.00 4.00 Warrants exercised (149,000) 4.00 4.00 --------------------------------------------- Warrants outstanding at December 31, 1999 - --------------------------------------------- </TABLE> During 1995, the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which has recognition provisions that establish a fair value based method of accounting for stock-based employee compensation plans and established fair value as the measurement basis for transactions in which an entity 51
acquires goods or services from nonemployees in exchange for equity instruments. SFAS 123 also has certain disclosure provisions. Adoption of the recognition provisions of SFAS 123 with regard to these transactions with nonemployees was required for all such transactions entered into after December 15, 1994, and the Company adopted these provisions as required. The recognition provision with regard to the fair value based method of accounting for stock-based employee compensation plans is optional. Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employers" ("APB 25"), uses what is referred to as an intrinsic value based method of accounting. The Company has decided to continue to apply APB 25 for its stock-based employee compensation arrangements. Accordingly, no compensation cost has been recognized. Had compensation cost for the Company's employee stock option plan been determined based on the fair value at the grant date for awards under the plan consistent with the method of SFAS 123, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below: Year ended December 31, 1997 1998 1999 ------------------------------------------------ Net income As reported $ 2,287,000 $ 7,503,000 $ 6,733,000 Pro forma 1,660,000 6,827,000 6,143,000 Basic net income per share As reported $ .15 $ .50 $ .45 Pro forma .11 .45 .41 Diluted net income per share As reported $ .15 $ .49 $ .44 Pro forma .11 .44 .40 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 1997, 1998 and 1999: dividend yield of 0%; expected volatility of 20%; risk-free interest rate of 6%; and expected lives of five years. The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995. Additional awards in future years are anticipated. 7. Shareholder Rights Plan On May 20, 1998, the Board of Directors of the Company authorized and declared a dividend distribution of one Preferred Stock purchase right (the "Rights") for each outstanding share of the Company's common stock, par value $.01 per share (the "Common Shares"), payable to shareholders of record at the close of business on March 19, 1999. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share (a "Preferred Stock Fraction"), or a combination of securities and assets of equivalent value, at a purchase price of $40.00 per Preferred Stock Fraction (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement") dated March 2, 1999 between the Company and Continental Stock Transfer and Trust Company as Rights Agent. All terms not otherwise defined herein are used as defined in the Rights Agreement. The Rights will be exercisable only if a person or group acquires 15% or more of the Company's common stock (the "Stock Acquisition Date"), announces a tender or exchange offer that will result in such person or group acquiring 20% 52
or more of the outstanding common stock or is a beneficial owner of a substantial amount of Common Shares (at least 10%) whose ownership may have a material adverse impact ("Adverse Person") on the business or prospects of the Company. The Company will be entitled to redeem the Rights at a price of $.01 per Right (payable in cash or stock) at anytime until 10 days following the Stock Acquisition Date or the date on which a person has been determined to be an Adverse Person. If the Company is involved in certain transactions after the Rights become exercisable, a Holder of Rights (other than Rights owned by a shareholder who has acquired 15% or more of the Company's outstanding common stock or is determined to be an Adverse Person, which Rights become void) is entitled to buy a number of the acquiring company's Common Shares or the Company's common stock, as the case may be, having a market value of twice the exercise price of each Right. A potential dilutive effect may exist upon the exercise of the Rights. Until a Right is exercised, the holder will have no rights as a stockholder of the Company, including, without limitations, the right to vote as a stockholder or to receive dividends. The Rights are not exercisable until the Distribution Date and will expire at the close of business on March 18, 2009, unless earlier redeemed or exchanged by the Company. 8. Loss From Retirement of Debt In 1997, the Company recorded an extraordinary loss of $1,482,000 after taxes for the early retirement of debt. The extraordinary loss consists primarily of write-offs of deferred finance costs associated with the retired notes and legal and bank fees relating to the early extinguishment of the debt. 9. Site Development and Restructuring Charges During 1997, the Company incurred site development ($1,735,000) and restructuring ($702,000) charges of $2,437,000. The site development charges consist of $800,000 related to the Charles Town Races facility and $935,000 related to the abandonment of certain proposed operating sites during 1997. The restructuring charges primarily consist of: $350,000 in severance termination benefits and other charges at the Charles Town Races facility; $300,000 for the restructuring of the Erie, Pennsylvania OTW facility and $52,000 of property and equipment written off in connection with the discontinuation of Penn National Speedway, Inc. operations during 1997. These charges, net of income taxes, decreased the 1997 net income and diluted net income per share by $1,462,000 and $.09 per share, respectively. On February 11, 2000, the Tennessee Supreme Court denied the Company's application for permission to appeal the decision of the Court of Appeals. In the appeal, the Company was asking the Supreme Court to take the jurisdictional question from the Appellate Court and to review the substantive issue of whether pari-mutuel wagering on horse racing is lawful in Tennessee under the existing statute without the Tennessee Commission. As a result of this decision, the Company has taken a charge against earnings in the year 1999 of $535,000 for costs incurred for its Tennessee racing license. 10. Litigation Settlement In December 1997, Amtote international, Inc. ("Amtote"), filed an action against the Company and the Charles Town Joint Venture in the United States District Court for the Northern District of West Virginia. In its complaint, Amtote stated that the Company and the Charles Town Joint Venture allegedly breached certain contracts with Amtote and its affiliates when it entered into a wagering services contract with a third party. On September 30, 1999 the United States District Court for the Northern District of West Virginia rendered a decision which awarded liquidated damages to Amtote. On February 11, 2000, the Company and Amtote entered into a settlement agreement in which the Company which paid Amtote in full satisfaction of the judgement the sum of $1.5 million, which is included in accrued expenses. 53
11. Subsequent Events In July 1999, the Company entered into an agreement with Trackpower, Inc. (OTC BB: TPWR) ("Trackpower") to serve as the exclusive pari-mutuel wagering hub operator for Trackpower. Trackpower provides direct-to-home digital satellite transmissions of horse racing to its subscriber base. The initial term of the contract is for five years with an additional five-year option available. The Company pays Trackpower a commission on all new revenues earned from their subscriber base. As additional incentive to enter into the contract, the Company received warrants to purchase 5,000,000 shares of common stock of Trackpower at prices ranging from $1.58 per share to $2.58 per share. The warrants vest at 20% per year and expire on April 30, 2004. The fair value of the warrants issued will be amortized over the vesting period or one year from the anniversary date of the agreement. As a result of the transition of operations in 1999, the amount to be amortized as a reduction of commissions earned in 1999 by Trackpower was not material. In March 2000, the Company entered into a letter of intent with Trackpower and eBet Limited ("eBet") which that, if a definitive agreement is executed, will replace and restate the above agreement. Under the terms of the letter of intent, the Company and eBet will contribute various assets, equipment, management agreements relating to our telephone account wagering systems and business operations to Trackpower. Under the proposed agreement, the Company will continue to receive the same level of income as in 1999. The Company and eBet will each receive 18,000,000 shares of Trackpower common stock as well as warrants to purchase additional shares exercisable at $1.00 per share. Upon completion of the proposed transaction the Company and eBet will each own 26.5% of Trackpower prior to considering the exercises of options or warrants. The agreement is subject to due diligence, regulatory and other approvals. 54
12. Subsidiary Guarantors Summarized financial information for years ended December 31, 1997, 1998, and 1999 for Penn National Gaming, Inc. ("Parent"), the Subsidiary Guarantors and Subsidiary Nonguarantors is as follows: <TABLE> <CAPTION> - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- -------------- Subsidiary Parent Subsidiary Non- Elimin- Consoli- Company Guarantors Guarantors ations dated Year ended December 31, 1997 Consolidated Statement of Income (In Thousands) <S> <C> <C> <C> <C> <C> Total revenues $ 6,887 $ 90,320 $ 16,484 $ (2,155) $ 111,536 Total operating expenses 3,434 81,822 18,700 (2,155) 101,801 - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- -------------- Income from operations 3,453 8,498 (2,216) -- 9,735 Other income(expenses) (3,565) 1,612 (1,705) -- (3,658) - ----------------------------- ------------- -- ------------- -- ------------- --- ------------ --- -------------- Income before income taxes (112) 10,110 (3,921) -- 6,077 Taxes on income (38) 3,909 (1,563) -- 2,308 Extraordinary item (142) (768) (572) (1,482) - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- -------------- - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- -------------- Net income (loss) $ (216) $ 5,433 $ (2,930) $ -- $ 2,287 - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- -------------- Consolidated Statement of Cash Flows (In Thousands) Net cash provided by (used in) operating activities $ 2,559 $ (169,422) $ 882 $ 176,659 $ 10,678 Net cash provided by (used in) investing activities (8,995) 68,529 40 (107,194) (47,620) Net cash provided by (used in) financing activities 22,361 100,266 -- (69,465) 53,162 - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- -------------- Net increase (decrease) in cash and cash equivalents 15,925 (627) 922 -- 16,220 Cash and cash equivalents at beginning of period 3,015 2,597 22 -- 5,634 - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- -------------- Cash and cash equivalents at end of period $ 18,940 $ 1,970 $ 944 $ -- $ 21,854 - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- -------------- </TABLE> 55
<TABLE> <CAPTION> - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- -------------- Subsidiary Parent Subsidiary Non- Elimin- Consoli- Company Guarantors Guarantors ations dated - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- -------------- As of December 31, 1998 Consolidated Balance Sheet (In Thousands) <S> <C> <C> <C> <C> <C> Current assets $ 3,558 $ 6,944 $ 4,204 $ (592) $ 14,114 Net property, plant and equipment 13,576 62,598 44,578 -- 120,752 Other assets 102,400 153,818 1,779 (232,065) 25,932 - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- -------------- Total $ 119,534 $ 223,360 $ 50,561 $ (232,657) $ 160,798 - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- -------------- Current liabilities $ 1,000 $ 13,961 $ 7,520 $ (10,278) $ 12,203 Long-term liabilities 81,037 78,527 47,334 (117,339) 89,559 Shareholders' equity (deficiency) 37,497 130,872 (4,293) (105,040) 59,036 - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- -------------- Total $ 119,534 $ 223,360 $ 50,561 $ (232,657) $ 160,798 - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- -------------- Year ended December 31, 1998 Consolidated Statement of Income (In Thousands) Total revenues $ 10,789 $ 89,142 $ 56,883 $ (2,749) $ 154,065 Total operating expenses 4,612 81,187 51,557 (2,749) 134,607 - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- -------------- Income from operations 6,177 7,955 5,326 -- 19,458 Other income(expenses) (5,535) 2,842 (4,743) -- (7,436) - ----------------------------- ------------- -- ------------- -- ------------- --- ------------ --- -------------- Income before income taxes 642 10,797 583 -- 12,022 Taxes on income 100 4,186 233 -- 4,519 - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- -------------- Net income $ 542 $ 6,611 $ 350 $ -- $ 7,503 - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- -------------- Year ended December 31, 1998 Consolidated Statement of Cash Flows (In Thousands) Net cash provided by (used in) operating activities $ (2,072) $ (4,121) $ 1,267 $ 16,792 $ 11,866 Net cash provided by (used in) investing activities (13,387) 290 909 (10,145) (22,333) Net cash provided by (used in) financing activities (1,480) 3,566 -- (6,647) (4,561) - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- -------------- Net increase (decrease) in cash and cash equivalents (16,939) (265) 2,176 -- (15,028) Cash and cash equivalents at beginning of period 18,940 1,970 944 -- 21,854 - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- -------------- Cash and cash equivalents at end of period $ 2,001 $ 1,705 $ 3,120 $ -- $ 6,826 - ------------------------- --- ------------- -- ------------- -- ------------- --- ------------ --- -------------- </TABLE> 56
<TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------- Subsidiary Parent Subsidiary Non- Elimin- Consoli- Company Guarantors Guarantors ations dated - ----------------------------------------------------------------------------------------------------------------- As of December 31, 1999 Consolidated Balance Sheet (In Thousands) <S> <C> <C> <C> <C> <C> Current assets $ 3,651 $ 7,669 $ 6,523 $ 139 $ 17,982 Net property, plant and equipment 813 79,932 46,126 -- 126,871 Other assets 116,170 155,509 1,620 (227,552) 45,747 - ----------------------------------------------------------------------------------------------------------------- Total $ 120,634 $ 243,110 $ 54,269 $ (227,413) $ 190,600 - ----------------------------------------------------------------------------------------------------------------- Current liabilities $ (29) $ 25,731 $ 7,664 $ (8,015) $ 25,351 Long-term liabilities 82,091 86,556 47,459 (117,129) 98,977 Shareholders' equity (deficiency) 38,572 130,823 (854) (102,269) 66,272 - ----------------------------------------------------------------------------------------------------------------- Total $ 120,634 $ 243,110 $ 54,269 $ (227,413) $ 190,600 - ----------------------------------------------------------------------------------------------------------------- Year ended December 31, 1999 Consolidated Statement of Income (In Thousands) Total revenues $ 4,147 $ 93,651 $ 79,772 $ (6,112) $ 171,458 Total operating expenses (3,393) 91,448 71,698 (6,112) 153,641 - ----------------------------------------------------------------------------------------------------------------- Income from operations 7,540 2,203 8,074 -- 17,817 Other income(expenses) (5,693) 3,020 (4,634) -- (7,307) - ----------------------------------------------------------------------------------------------------------------- Income before income taxes 1,847 5,223 3,440 -- 10,510 Taxes on income 642 3,135 -- -- 3,777 - ----------------------------------------------------------------------------------------------------------------- Net income $ 1,205 $ 2,088 $ 3,440 $ -- $ 6,733 - ----------------------------------------------------------------------------------------------------------------- Year ended December 31, 1999 Consolidated Statement of Cash Flows (In Thousands) Net cash provided by (used in) operating activities $ 6,287 $ 14,842 $ 4,313 $ (2,981) $ 22,461 Net cash provided by (used in) investing activities (6,516) (20,245) (3,205) 210 (29,756) Net cash provided by financing activities 772 6,236 124 2,771 9,903 - ----------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 543 833 1,232 -- 2,608 Cash and cash equivalents at beginning of period 2,001 1,705 3,120 -- 6,826 - ----------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 2,544 $ 2,538 $ 4,352 $ -- $ 9,434 - ----------------------------------------------------------------------------------------------------------------- </TABLE> 57
ITEM 9 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 is incorporated by reference from the Company's definitive proxy statement with respect to the Company's Annual Meeting of Shareholders to be held on May 17, 2000. 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 17, 2000. 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 17, 2000. 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 17, 2000. 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. 58
PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) (1) The Financial Statements included in the Index to Part II, Item 8, are filed as part of this Report (2) List of Exhibits EXHIBIT NOS. DESCRIPTION OF EXHIBIT 1. Purchase Agreement dated December 12, 1997 between Penn National Gaming, Inc. and BT Alex Brown Incorporated and Jefferies & Company, Inc. 2.1 Agreement and Plan of Reorganization dated April 11, 1994 among Penn National Gaming, Inc., Carlino Family Partnership, Carlino Financial Corporation and the shareholders and general partners of the entities now comprising Penn National Gaming, Inc. (Incorporated by reference to the Company's registration statement on Form S-1, File #33-77758, dated May 26, 1994.) 2.1 First Amendment to Asset Purchase Agreement dated as of January 28, 1999 by and between among Greenwood New Jersey, Inc., International Thoroughbred Breeders, Inc., Garden State Race Track, Inc., Freehold Racing Association, Atlantic City Harness Inc., Circa 1850, Inc., and Penn National Gaming, Inc. (Incorporated by reference to the Company's current report on Form 8-K, dated February 12, 1999.) 2.1.1Amendment to Agreement and Plan of Reorganization dated April 26, 1994 among Penn National Gaming, Inc., Carlino Family Partnership, Carlino Financial Corporation and the shareholders and general partners of the entities now comprising Penn National Gaming, Inc. (Incorporated by reference to the Company's registration statement on Form S-1, File #33-77758, dated May 26, 1994.) 2.2 Agreement and Plan of Reorganization dated April 11, 1994 between Penn National Gaming, Inc. and Thomas J. Gorman. (Incorporated by reference to the Company's registration statement on Form S-1, File #33-77758, dated May 26, 1994.) 2.2 First Amendment to Joint Venture Agreement dated as of January 28, 1999, by and between Greenwood New Jersey, Inc., and Penn National Gaming, Inc. (Incorporated by reference to the Company's current report on Form 8-K, dated February 12, 1999.) 2.2.1Amendment to Agreement and Plan of Reorganization dated April 26, 1994 between Penn National Gaming, Inc. and Thomas J. Gorman. (Incorporated by reference to the Company's registration statement on Form S-1, File #33-77758, dated May 26, 1994.) 2.3 Closing Agreement dated January 15, 1997 among Charles Town Races, Inc., Charles Town Racing Limited Partnership, and PNGI Charles Town Gaming Limited Liability Company. (Incorporated by reference to the Company's current report on Form 8-K, dated January 30, 1997.) 2.4 Amended and Restated Operating Agreement dated as of December 31, 1996 among Penn National Gaming of West Virginia, Inc., Bryant Development Company and PNGI Charles Town Gaming limited Liability Company. (Incorporated by reference to the Company's current report on Form 8-K, dated January 30, 1997.) 2.5 Letter dated January 14, 1997 from Peter M. Carlino to James A. Reeder (Incorporated by reference to the Company's current report on Form 8-K, dated January 30, 1997.) 2.6 First Amendment and Consent dated as of January 7, 1997 among Penn National Gaming, Inc., 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 current report on Form 8-K, dated January 30, 1997.) 59
2.7 Amended and Restated Option Agreement dated as of February 17, 1995 among Charles Town Races, Inc., Charles Town Racing Limited Partnership, and PNGI Charles Town Gaming limited Liability Company (Incorporated by reference to Exhibit 2.1 of the Company's current report on Form 8-K, dated January 30, 1997.) 2.8 Transfer, Assignment and Assumption Agreement and Bill of Sale dated January 15, 1997 among Charles Town Races, Inc., Charles Town Racing Limited Partnership, and PNGI Charles Town Limited Liability Company (Incorporated by reference to Exhibit 2.2 of the Company's Form 10-Q, dated November 14, 1997.) 2.9 Second Amended and Restated Operating Agreement dated as of October 17, 1997, among Penn National Gaming of West Virginia, Inc., BDC Group and PNGI Charles Town Gaming Limited Liability Company (Incorporated by reference to the Company's Form 10-Q, dated November 14, 1997.) 2.10 Purchase Agreement dated September 13, 1996 between Penn National Gaming, Inc. and the Estate of Joseph B. Banks for the purchase of Pocono Downs Race Track and two related OTW facilities. (Incorporated by reference to the Company's Form 10-Q, dated November 13, 1996.) 3.1 Amended and Restated Articles of Incorporation of Penn National Gaming, Inc., filed with the Pennsylvania Department of State on April 12, 1994. (Incorporated by reference to the Company's registration statement on Form S-1, File #33-77758, dated May 26, 1994.) 3.2 By-laws of Penn National Gaming, Inc. (Incorporated by reference to the Company's registration statement on Form S-1, File #33-77758, dated May 26, 1994.) 4. Rights Agreement dated as of March 2, 1999, between Penn National Gaming, Inc. and Continental Stock Transfer and Trust Company. (Incorporated by reference to the Company's current report on Form 8-K, dated March 17, 1999.) 4.1 Indenture dated December 17, 1997 between Penn National Gaming, Inc. and State Street Bank and Trust Company. (Incorporated by reference to the Company's registration statement on Form S-4, File #333-45337, dated January 30, 1998.) 9.1 Form of Trust Agreement of Peter D. Carlino, Peter M. Carlino, Richard J. Carlino, David E. Carlino, Susan F. Harrington, Anne de Lourdes Irwin, Robert M. Carlino, Stephen P. Carlino and Rosina E. Carlino Gilbert. (Incorporated by reference to the Company's registration statement on Form S-1, File #33-77758, dated May 26, 1994.) 10.1 1994 Stock Option Plan. (Incorporated by reference to the Company's registration statement on Form S-1, File #33-77758, dated May 26, 1994.) 10.2 Employment Agreement dated April 12, 1994 between Penn National Gaming, Inc. and Peter M. Carlino. (Incorporated by reference to the Company's registration statement on Form S-1, File #33-77758, dated May 26, 1994.) 10.3 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 current report on Form 8-K, 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.) 60
10.11Lease dated March 7, 1991 between Shelbourne Associated and PNRC Limited Partnership. (Incorporated by reference to the Company's registration statement on Form S-1, File #33-77758, dated May 26, 1994.) 10.13.1 Lease dated June 30, 1993 between John E. Kyner, Jr. and Sandra R. Kyner, and PNRC Chambersburg, Inc. (Incorporated by reference to the Company's registration statement on Form S-1, File #33-77758, dated May 26, 1994.) 10.38Consulting Agreement dated August 29, 1994, between Penn National Gaming, Inc. and Peter D. Carlino. (Incorporated by reference to the Company's Form 10-K, dated March 23, 1995.) 10.39Lease dated July 7, 1994, between North Mall Associates and Penn National Gaming, Inc. for the York OTW. (Incorporated by reference to the Company's Form 10-K, dated March 23, 1995.) 10.41.1 Lease dated March 31, 1995 between Wyomissing Professional Center III, LP and Penn National Gaming, Inc. for the Wyomissing Corporate Office. (Incorporated by reference to the Company's Form 10-K, dated March 20, 1996.) 10.42Employment agreement dated June 1, 1995 between Penn National Gaming, Inc. and William J. Bork. (Incorporated by reference to the Company's Form 10-K, dated March 20, 1996.) 10.43Lease dated July 17, 1995 between E. Lampeter Associates and Pennsylvania National Turf Club, Inc. for the Lancaster OTW, as amended. (Incorporated by reference to the Company's Form 10-K, dated March 20, 1996.) 10.44Agreement dated September 1, 1995 between Mountainview Thoroughbred racing Association and Pennsylvania National Turf Club, Inc. and Sports Arena Employees' Union Local 137 (non-primary location.) (Incorporated by reference to the Company's Form 10-K, dated March 20, 1996.) 10.45Agreement dated December 27, 1995 between Pennsylvania National Turf Club, Inc. and Teleview Racing Patrols, Inc. (Incorporated by reference to the Company's Form 10-K, dated March 20, 1996.) 10.50Formation Agreement dated February 26, 1996 between Penn National Gaming, Inc. and Bryant Development Company. (Incorporated by reference to the Company's Form 10-K, dated March 20, 1996.) 10.51Assignment of Agreement of Sale dated March 6, 1996 between Penn National Gaming, Inc. and Montgomery Realty Growth Fund, Inc. (Incorporated by reference to the Company's Form 10-Q, dated May 14, 1996.) 10.56Amended and Restated Option Agreement dated as of February 17, 1995 between the PNGI Charles Town Gaming Limited Liability Company (The Joint Venture) and Charles Town Racing Limited Partnership and Charles Town Races, Inc. (Incorporated by reference to the Company's Form 10-Q, dated November 13,1996.) 10.58Agreement dated March 19, 1997, between PNGI Charles Town Gaming Limited Liability Company and the Charles Town HBPA, Inc. (Incorporated by reference to the Company's Form 10-K, dated March 27, 1997.) 10.59Agreement dated March 21, 1997, between PNGI Charles Town Gaming Limited Liability Company and The West Virginia Thoroughbred Breeders Association. (Incorporated by reference to the Company's Form 10-K, dated March 27, 1997.) 10.60Agreement between PNGI Charles Town Gaming Limited Liability Company and The West Virginia Union of Mutuel Clerks, Local 533, Service Employees International Union, AFL-CIO. (Incorporated by reference to the Company's Form 10-K, File #0-24206, dated March 27, 1997.) 10.66Fourth Amendment Waiver and Consent dated as of October 20, 1997, among Penn National Gaming, Inc., Bankers Trust, as Agent, CoreStates Bank, N.A. as Co-Agent and certain banks party to the Credit Agreement dated as of November 17, 1996. (Incorporated by reference to the Company's Form 10-Q, dated November 14, 1997.) 61
10.67Agreement dated October 2, 1996 between Pennsylvania National Turf Club, Inc., Mountainview Racing Association and Sports Arena Employees' Union Local No. 137 (Primary Location.) (Incorporated by reference to the Company's Form 10-K, dated March 27, 1998.) 10.68Lease dated July 1, 1997 between Laurel Mall Associated and the Downs Off-Track Wagering, Inc. (Incorporated by reference to the Company's Form 10-K, dated March 27, 1998.) 10.72Totalisator Agreement dated November 19, 1997, between Penn National Gaming, Inc. and AutoTote Systems, Inc. (Incorporated by reference to the Company's Form 10-K, dated March 27, 1998.) 10.73Amended and Restated Credit Facility dated as of December 17, 1997, among Penn National Gaming, Inc., certain lenders, Bankers Trust Company, as Agent, and CoreStates Bank, N.A., as Co-Agent. (Incorporated by reference to the Company's Form 10-K, dated March 27, 1998.) 10.74Waiver dated March 25, 1998, between Penn National Gaming, Inc., certain lenders, Bankers Trust Company as Agent, and CoreStates Bank, N.A., as Co-Agent. (Incorporated by reference to the Company's Form 10-K, dated March 27, 1998.) 10.76First Amendment and Waiver dated May 15, 1998, among Penn National Gaming, Inc., CoreStates Bank, N.A. and Bankers Trust Company. (Incorporated by reference to the Company's Form 10-Q, dated March 31, 1998.) 10.77Purchase Agreement dated July 7, 1998, between Ladbroke Racing Management - Pennsylvania and Mountainview Thoroughbred Racing Association. (Incorporated by reference to the Company's Form 10-Q, dated June 30, 1998.) 10.78Lease Agreement between Penn National Gaming, Inc. and Eagle Valley Realty dated July 14, 1998. (Incorporated by reference to the Company's Form 10-Q, dated September 30, 1998.) 10.79Joint Venture Agreement dated October 30, 1998 between Penn National Gaming, Inc. and Greenwood New Jersey, Inc. (Incorporated by reference to the Company's Form 10-Q, dated September 30, 1998.) 10.80Amendment dated November 2, 1998 to Joint Venture Agreement between Penn National Gaming, Inc. and Greenwood New Jersey, Inc. (Incorporated by reference to the Company's Form 10-Q, dated September 30, 1998.) 10.82First Amendment to Asset Purchase Agreement dated as of January 28, 1999 by and among Greenwood New Jersey, Inc., International Thoroughbred Breeders, Inc., Garden State Race Track, Inc., Freehold Racing Association, Atlantic City Harness Inc., Circa 1850, Inc., and Penn National Gaming, Inc. (Incorporated by reference to the Company's current report on Form 8-K, dated January 28, 1999.) 10.83First Amendment to Joint Venture Agreement dated as of January 28, 1999, by and between Greenwood New Jersey, Inc. and Penn National Gaming, Inc. (Incorporated by reference to the Company's current report on Form 8-K, dated January 28, 1999.) 10.85Assignment and Assumption of Lease Agreement dated December 31, 1998 between Mountainview Thoroughbred Racing Association and Ladbroke Racing Management-Pennsylvania. (Incorporated by reference to the Company's Form 10K, dated March 30, 1999.) 10.86Subordination, Non-Disturbance and Attornment Agreement dated December 31, 1998 between Mountainview Thoroughbred Racing Association and CRIIMI MAE Services Limited Partnership. (Incorporated by reference to the Company's Form 10-K, dated March 30, 1999.) 10.87Second Amended and Restated Credit Agreement dated as of January 28, 1999 between Penn National Gaming, Inc. and various banks, First Union National Bank, as Agent. (Incorporated by reference to the Company's Form 10-K, dated March 30, 1999.) 10.88Live Racing Agreement dated March 23, 1999 between Pennsylvania National Turf Club, Inc. and Mountainview Thoroughbred Racing Association and Pennsylvania Horsemen's Benevolent and Protection Association, Inc. (Incorporated by reference to the Company's Form 10-K, dated March 30, 1999.) 62
10.89Amendment to Employment Agreement dated June 1, 1999, between Penn National Gaming, Inc. and Peter M.Carlino. (Incorporated by reference to the Company's Form 10-Q, dated August 12, 1999.) 10.90Amendment to Employment Agreement dated June 1, 1999, between Penn National Gaming, Inc. and Robert S. Ippolito. (Incorporated by reference to the Company's Form 10-Q, dated August 12, 1999.) 10.91Second Amendment to Joint Venture Agreement dated as of July 29, 1999, between Penn National Gaming, Inc. and Greenwood Racing, Inc. (Incorporated by reference to the Company's Form 10-Q, dated August 12, 1999.) 10.92Shareholder's Agreement dated July 29, 1999, between Penn National Holding Company and Greenwood Racing, Inc. (Incorporated by reference to the Company's Form 10-Q, dated August 12, 1999.) 10.93Amended and Restated Limited Partnership Agreement dated July 29, 1999, between FR Park Racing, L.P., Pennwood Racing, Inc. and Penn National GSFR, Inc. (Incorporated by reference to the Company's Form 10-Q, dated August 12, 1999.) 10.94Amended and Restated Limited Partnership Agreement dated July 29, 1999, between FR Park Services, L.P., Pennwood Racing, Inc. and Penn National GSFR, Inc. (Incorporated by reference to the Company's Form 10-Q, dated August 12, 1999.) 10.95Amended and Restated Limited Partnership Agreement dated July 29, 1999, between GS Park Racing, L.P., Pennwood Racing, Inc. and Penn National GSFR, Inc. (Incorporated by reference to the Company's Form 10-Q, dated August 12, 1999.) 10.96Amended and Restated Limited Partnership Agreement dated July 29, 1999, between GS Park Services, L.P., Pennwood Racing, inc. and Penn National GSFR, Inc. (Incorporated by reference to the Company's Form 10-Q, dated August 12, 1999.) 10.97Amendment No. 1 to Second Amended and Restated Credit Agreement dated July 29, 1999, between Penn National Gaming, Inc. and First Union National Bank. (Incorporated by reference to the Company's Form 10-Q, dated August 12, 1999.) 10.98Amendment No. 2 to Second Amended and Restated Credit Agreement dated July 29, 1999, Penn National Gaming, Inc. and First Union National Bank. (Incorporated by reference to the Company's Form 10-Q, dated August 12, 1999.) 10.99Agreement dated July 9, 1999, between Penn National Gaming, Inc. and American Digital Communications, Inc. (Portions of this Exhibit have been omitted pursuant to a request for confidential treatment.) (Incorporated by reference to the Company's Form 10-Q, dated August 12, 1999.) 10.01a Subordination and Intercreditor Agreement dated July 29, 1999, between Penn National Gaming, Inc., FR Park Racing, L.P., and Commerce Bank, N.A. (Incorporated by reference to the Company's Form 10-Q, dated August 12, 1999.) 10.02a Debt Service Maintenance Agreement dated July 29, 1999, between Penn National Gaming, Inc. and Commerce Bank, N.A. (Incorporated by reference to the Company's Form 10-Q, dated August 12, 1999.) 10.03a First Supplemental Indenture dated May 19, 1999, between Penn National Gaming, Inc. and State Street Bank and Trust Company, Trustee. (Incorporated by reference to the Company's Form 10-Q, dated August 12, 1999.) 10.04a Asset Purchase Agreement between BSL., Inc. and Casino Magic Corp. dated December 9, 1999. (Filed as exhibit 99.2 to the Company's current report on Form 8-K, dated December 17, 1999.) 10.05a Guaranty of Penn National Gaming, Inc. to Casino Magic Corp. dated December 9, 1999 (Filed as exhibit 99.3 to the Company's current report on Form 8-K, dated December 17, 1999.) 63
10.06a Guaranty of Hollywood Park, Inc. to BSL, Inc. dated December 9, 1999. (Filed as exhibit 99.4 to the Company's current report on Form 8-K, dated December 17, 1999.) 10.07a First Amendment to Asset Purchase Agreement between BSL, Inc. and Casino Magic Corp. dated December 17, 1999. (Filed as exhibit 99.5 to the Company's current report on Form 8-K, dated December 17, 1999.) 10.08a Asset Purchase Agreement between BTN, Inc. and Boomtown, Inc. dated December 9, 1999 (Filed as exhibit 99.6 to the Company's current report on Form 8-K, dated December 17, 1999.) 10.09a Guaranty of Penn National Gaming, Inc. to Boomtown, Inc. dated December 9, 1999 (Filed as exhibit 99.7 to the Company's current report on Form 8-K, dated December 17, 1999.) 10.10a Guaranty of Hollywood Park, Inc. to BTN, Inc. dated December 9, 1999. (Filed as exhibit 99.8 to the Company's current report on Form 8-K, dated December 17, 1999.) 10.11a First Amendment to Asset Purchase Agreement between BTN, Inc. and Boomtown, inc. dated December 17, 1999. (Filed as exhibit 99.9 to the Company's current report on Form 8-K, dated December 17, 1999.) 10.12a Senior secured multiple draw term loan dated December 13, 1999 between Penn National Gaming of West Virginia, Inc. and Bank of America. 10.13a Amendment No. 3 and Consent and Waiver under Second Amended and Restated Credit Agreement dated December 13, 1999 between Penn National Gaming, Inc. and First Union National Bank, as Agent. 10.14a Harness horsemen agreement dated December 17, 1999 between The Downs Racing, Inc. and the Pennsylvania Harness Horsemen. 10.15a Settlement agreement dated February 11, 2000 between Penn National Gaming, Inc. and Amtote International, Inc. 10.16a Thoroughbred horsemen letter dated February 24, 2000 between PNGI Charles Town Gaming, LLC and the Charles Town thoroughbred horsemen. 10.17a Agreement dated March 7, 2000 between Penn National Gaming, Inc. and Trackpower, Inc. and eBet Limited, Inc. 21 Subsidiaries of the Registrant. 27.1 Financial Data Schedule. (B) Reports on Form 8-K The Company filed the following reports on Form 8K during the fourth quarter 1999: On December 10, 1999, the Company filed a current report on Form 8K which reflected the definitive agreement to purchase all of the assets of Casino Magic hotel, etc. 64
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 20, 2000 Pursuant to the requirements of the Securities Act of 1934 this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE Chief Executive Officer and Director (Principal Executive /s/Peter M. Carlino Officer) March 20, 2000 - -------------------------------------- Peter M. Carlino Chief Operating Officer and Director (Principal Operating /s/William J. Bork Officer) March 20, 2000 - -------------------------------------- William J. Bork Chief Financial Officer /s/Robert S. Ippolito (Principal Financial Officer) March 20, 2000 - -------------------------------------- Robert S. Ippolito /s/Harold Cramer Director March 20, 2000 - -------------------------------------- Harold Cramer /s/David A. Handler Director March 20, 2000 - -------------------------------------- David A. Handler /s/Robert P. Levy Director March 20, 2000 - -------------------------------------- Robert P. Levy /s/ John M. Jacquemin Director March 20, 2000 - -------------------------------------- John M. Jacquemin 65
EXHIBIT INDEX <TABLE> <CAPTION> Exhibit Nos. Description of Exhibits Page No. - ------- ------------------------------ -- -------- -------- <S> <C> <C> 10.04a Senior secured multiple draw term loan dated December 13, 1999 between Penn National Gaming of West Virginia, Inc. and Bank of America. 67-186 10.13a Amendment No. 3 and Consent and Waiver under Second Amended 187-196 and Restated Credit Agreement dated December 13, 1999 between Penn National Gaming, Inc. and First Union National Bank, as Agent. 10.05a Harness horsemen agreement dated December 17, 1999 between 197-205 The Downs Racing, Inc. and the Pennsylvania Harness Horsemen. 10.06a Settlement agreement dated February 11, 2000 between Penn National 206-208 Gaming, Inc. and Amtote International, Inc. 10.07a Thoroughbred horsemen letter dated February 24, 2000 between PNGI 209 Charles Town Gaming, LLC and the Charles Town thoroughbred horsemen. 10.08a Agreement dated March 7, 2000 between Penn National Gaming, Inc. 210-218 and Trackpower, Inc. and eBet Limited, Inc. 66 </TABLE>