AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 6, 1997
REGISTRATION NO. 333-18861
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PENN NATIONAL GAMING, INC.
(Exact Name of Registrant as Specified in its Charter)
PENNSYLVANIA 23-2234473
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
WYOMISSING PROFESSIONAL CENTER
825 BERKSHIRE BOULEVARD
SUITE 203
WYOMISSING, PENNSYLVANIA 19610
(610) 373-2400
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
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PETER M. CARLINO
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PENN NATIONAL GAMING, INC.
WYOMISSING PROFESSIONAL CENTER
825 BERKSHIRE BOULEVARD
SUITE 203
WYOMISSING, PENNSYLVANIA 19610
(610) 373-2400
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
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Copies to:
DAVID A. GERSON ALLAN G. SPERLING
MORGAN, LEWIS & BOCKIUS LLP CLEARY, GOTTLIEB, STEEN & HAMILTON
ONE OXFORD CENTRE ONE LIBERTY PLAZA
PITTSBURGH, PA 15219 NEW YORK, NY 10006
(412) 560-3300 (212) 225-2000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 426(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / _______________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
Subject to Completion
February 6, 1997
PROSPECTUS
2,300,000 SHARES
PENN NATIONAL GAMING, INC.
COMMON STOCK
($.01 PAR VALUE)
Of the 2,300,000 shares of common stock, $.01 par value per share (the "Common
Stock"), of Penn National Gaming, Inc. ("Penn National Gaming" or the "Company")
offered hereby, 1,725,000 are being issued and sold by the Company and 575,000
are being sold by the selling shareholders named herein under "Principal and
Selling Shareholders" (the "Selling Shareholders"). The Company will not receive
any proceeds from the sale of shares by the Selling Shareholders.
The Common Stock is quoted on The Nasdaq National Market under the symbol
"PENN." On February 5, 1997, the last reported sale price of the Common Stock on
The Nasdaq National Market was $16-1/4 per share. See "Price Range of Common
Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT COMPANY (1) SHAREHOLDERS
Per Share..................... $ $ $ $
Total (2)..................... $ $ $ $
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(1) Before deducting offering expenses payable by the Company estimated to be
$650,000. The Company will bear all expenses of the offering other than the
Underwriting Discount attributable to the shares being offered by the
Selling Shareholders, which will be borne by the respective Selling
Shareholders.
(2) The Company and the Selling Shareholders have granted the Underwriters a
30-day option to purchase up to 258,750 shares and 86,250 shares,
respectively, of Common Stock at the Price to the Public, less the
Underwriting Discount, solely to cover over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount, Proceeds to Company and Proceeds to Selling
Shareholders will be $ , $ , $ and $ , respectively.
See "Underwriting."
The shares of Common Stock are offered subject to receipt and acceptance by the
Underwriters, to prior sale and to the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the shares of Common Stock will be made at the
offices of Salomon Brothers Inc, Seven World Trade Center, New York, New York,
or through the facilities of The Depository Trust Company, on or about
, 1997.
SALOMON BROTHERS INC
GERARD KLAUER MATTISON & CO., INC.
JEFFERIES & COMPANY, INC.
The date of this Prospectus is , 1997.
[PICTURE] [PICTURE]
(See Appendix A for Description) (See Appendix A for Description)
Penn National, celebrating 25 Penn National's newest OTW facility
years of thoroughbred racing in Lancaster, PA.
in 1997.
[PICTURE] [PICTURE]
(See Appendix A for Description) (See Appendix A for Description)
The recently renovated paddock Racing on-track at Penn National since 1972.
area at Penn National.
2
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF
THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER
THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices: Seven World
Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. In addition, registration statements and
certain other filings made with the Commission through its Electronic Data
Gathering, Analysis and Retrieval ("EDGAR") system are publicly available
through the Commission's site on the Internet's World Wide Web, located at
http://www.sec.gov.
The Common Stock is quoted on The Nasdaq National Market. Reports, proxy
statements and other information concerning the Company can be inspected at the
National Association of Securities Dealers, Inc., 9513 Key West Avenue,
Rockville, MD 20850.
The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and its Common Stock, reference is hereby made to such
Registration Statement, exhibits and schedules. Statements contained in this
Prospectus as to the contents of any contract or any other document are not
necessarily complete, and in each instance reference is hereby made to the copy
of such contract or document (if any) filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Registration Statement and the exhibits and schedules thereto may
be examined without charge at the public reference section of the Commission at
Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
copies of all or any part thereof may be obtained from the Commission upon
payment of prescribed fees. The Registration Statement, including all exhibits
thereto and amendments thereof, has been filed with the Commission through EDGAR
and is publicly available through the Commission's site on the Internet's World
Wide Web.
3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated by reference in this Prospectus:
(1) Annual Report on Form 10-K for the year ended December 31, 1995;
(2) Quarterly Report on Form 10-Q for the quarterly period ended March
31, 1996;
(3) Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1996;
(4) Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1996;
(5) Current Report on Form 8-K filed June 24, 1996;
(6) Current Report on Form 8-K filed December 12, 1996, as amended by
Form 8-K/A filed February 6, 1997;
(7) Current Report on Form 8-K filed January 21, 1997;
(8) Current Report on Form 8-K filed January 30, 1997; and
(9) the description of the Company's Common Stock contained in its
Registration Statement on Form 8-A as filed with the Commission on
May 26, 1994.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Common Stock offered hereby shall be
deemed to be incorporated by reference into this Prospectus and to be a part
hereof from the filing date of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus. Subject to the foregoing, all information
appearing in this Prospectus is qualified in its entirety by the information
appearing in the documents incorporated by reference herein.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. These documents (not including exhibits to the
documents incorporated by reference unless such exhibits are specifically
incorporated by reference into the information that the Prospectus incorporates)
are available without charge to each person to whom a Prospectus is delivered
upon written or oral request. Written or telephone requests should be directed
to Penn National Gaming, Inc., Wyomissing Professional Center, 825 Berkshire
Boulevard, Suite 203, Wyomissing, Pennsylvania 19610, Attention: Robert S.
Ippolito, Chief Financial Officer (telephone number (610) 373-2400).
4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information contained in this Prospectus or incorporated by reference
herein. Unless otherwise indicated, all information in this Prospectus assumes
no exercise of the Underwriters' over-allotment option, and gives effect to: (i)
the three-for-two split of the Common Stock effected through a stock dividend
paid on May 23, 1996; (ii) the two-for-one split of the Common Stock effected
through a stock dividend paid on December 20, 1996; (iii) the Pocono Downs
Acquisition, as defined below; and (iv) the Charles Town Acquisition, as defined
below. The Pocono Downs Acquisition and the Charles Town Acquisition are
referred to collectively herein as the "Acquisitions." This Prospectus contains
forward-looking statements that inherently involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus. References to "Penn
National Gaming" or the "Company" include Penn National Gaming, Inc. and its
subsidiaries. "Penn National" refers to Penn National Gaming, Inc. and its
subsidiaries prior to the consummation of the Pocono Downs Acquisition.
THE COMPANY
Penn National Gaming, which began operations in 1972, operates the largest
number of pari-mutuel wagering locations in Pennsylvania. The Company provides
pari-mutuel wagering opportunities on both live and simulcast thoroughbred and
harness horse races at two racetracks and six off-track wagering facilities
("OTWs") located principally in Eastern and Central Pennsylvania. Prior to the
consummation of the Acquisitions, the Company owned and operated Penn National
Race Course located outside Harrisburg, Pennsylvania (the "Thoroughbred Track"),
and four OTWs in Chambersburg, Lancaster, Reading and York, Pennsylvania. On
November 27, 1996, the Company consummated the Pocono Downs Acquisition, and as
a result acquired Pocono Downs Racetrack, located outside Wilkes-Barre,
Pennsylvania (the "Harness Track"), and two OTWs in Allentown and Erie,
Pennsylvania. The Company now operates one of the two thoroughbred tracks in
Pennsylvania and one of the two harness tracks in Pennsylvania. The Company
intends to develop five additional OTWs that have been allocated to it under
Pennsylvania law, after which it would operate a total of 11 of the 23 OTWs
currently authorized in Pennsylvania.
Following the consummation of the Charles Town Acquisition on January 15,
1997, the Company operates, and has reached an agreement with its joint venture
partner to hold an 89% interest in, Charles Town Races, a thoroughbred racing
facility located in Jefferson County, West Virginia, which is approximately a
60-minute drive from Baltimore, Maryland and approximately a 70-minute drive
from Washington, D.C. After refurbishment, the Company expects to reopen Charles
Town Races as an entertainment complex (the "Charles Town Facility") that will
feature live racing, dining, simulcast wagering and video gaming machines
("Gaming Machines"). On November 5, 1996, Jefferson County approved a referendum
permitting the installation of Gaming Machines at the Charles Town Facility.
Approval for the installation of 400 Gaming Machines has been applied for and is
expected to be obtained from the West Virginia Lottery Commission within 90 to
120 days after the January 15, 1997 consummation of the Charles Town
Acquisition. The Company expects that these machines will be installed and
operational in mid-1997. The installation of additional Gaming Machines at the
Charles Town Facility is subject to approval by the West Virginia Lottery
Commission after application and a public hearing. The Company anticipates that
it will apply for approval of the installation and operation of a total of 1,000
Gaming Machines within the first year after the opening of the Charles Town
Facility.
STRATEGY
The Company intends to be a leading participant in the wagering industry by
capitalizing upon its horse racing expertise and its numerous wagering
locations. The Company's strategy is to focus on: (i) increasing its OTW
revenues by opening all five of the additional OTWs which it has been allocated
under Pennsylvania law; (ii) developing the Charles Town Facility into an
entertainment complex that integrates Gaming Machines with the Company's core
business strengths of live racing and simulcast
5
wagering; (iii) maintaining the quality of import simulcasting to all of the
Company's racetracks and OTWs, increasing the volume of export simulcasting from
the Thoroughbred Track and the Harness Track and introducing export simulcasting
from the refurbished Charles Town Facility; and (iv) exploring other gaming
opportunities, including capitalizing upon any changes in gaming legislation in
Pennsylvania, West Virginia and other states in order to expand the wagering
opportunities that the Company can make available to its customers. See
"Business -- Strategy."
RACING AND WAGERING OPERATIONS
The Company conducts pari-mutuel wagering at all of its locations on
thoroughbred and harness races run at its own tracks ("Company Races") and on
thoroughbred and harness races simulcast from other racetracks ("import
simulcasting"). The Company also simulcasts Company Races for wagering at other
racetracks and OTWs in Pennsylvania and at other locations throughout the United
States ("export simulcasting"). The Company's customers can also wager on
Company Races and on races import simulcast from other racetracks through the
Company's telephone account betting network ("Telebet"). See "Business."
Live Racing. The Company has conducted live racing at the Thoroughbred
Track since 1972, and has held at least 204 days of live racing at the facility
in each of the last five years. Although other regional racetracks offer
nighttime thoroughbred racing, the Thoroughbred Track is the only racetrack in
the Eastern time zone conducting year-round nighttime thoroughbred horse racing,
which the Company believes increases its opportunities to export simulcast
during periods in which other racetracks are not conducting live racing.
The Pocono Downs Acquisition was consummated following the last day of live
racing at the Harness Track for the 1996 season. The Company expects to resume
live racing at the Harness Track in April 1997 and plans to conduct 135 days of
live harness racing at the facility in the 1997 season. The Charles Town
Facility is currently closed. The Company has received preliminary approval for,
and plans to conduct, 159 days of thoroughbred racing at the Charles Town
Facility in the 1997 season following the reopening of the racetrack (currently
anticipated to be in April 1997).
OTW Wagering. At OTWs, as at the Company's racetracks, customers can place
wagers on thoroughbred and harness races simulcast from the Company's racetracks
and on import simulcast races from other tracks around the country. Under the
Pennsylvania Race Horse Industry Reform Act (the "Pennsylvania Racing Act"),
only licensed thoroughbred and harness racing associations, such as the Company,
can operate OTWs or accept customer wagers on simulcast races at Pennsylvania
racetracks. The Company operates six of the 16 OTWs now open in Pennsylvania and
has the right (subject to applicable regulatory approvals) to open and operate
an additional five Pennsylvania OTWs, which would give the Company a total of 11
of the 23 OTWs currently authorized by Pennsylvania law.
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, of the amount
not returned to bettors as winning wagers, a portion is paid to the state in
which the Company's wagering facility is located, a portion is paid to the
"purse" fund for the horse owners and trainers (thoroughbred or harness) of the
Company's racetrack with which the wagering facility is associated, and the
balance is retained by the Company. The Company believes that "full card" import
simulcasting, in which all of the races at a non-Company track are import
simulcast to a Company wagering facility, has improved the wagering
opportunities for its customers and thereby increased the amount wagered at
Company facilities. When the Company export simulcasts Company Races for
wagering at non-Company locations, it receives a flat percentage of the amounts
wagered on that race from the location to which the simulcast is exported, while
incurring minimal additional expense. During the year ended December 31, 1996,
the Company received import simulcasts from approximately 57 racetracks
(including Belmont Park, Saratoga, Gulfstream Park, Santa Anita and Arlington
International Racecourse) and transmitted export simulcasts of Company Races to
63 locations.
6
Telebet. In 1983, the Company pioneered Telebet, Pennsylvania's first
telephone account wagering system. Telebet customers open an account by
depositing funds with the Company at one of its locations. Account holders can
then place wagers by telephone on Company Races and import simulcast races to
the extent of the funds on deposit in the account; any winnings are posted to
the account and are available for future wagers. In December 1995, the Harness
Track instituted Dial-A-Bet, a similar telephone account wagering system.
Gaming Machine Operations. On November 5, 1996, Jefferson County, West
Virginia approved a referendum authorizing the installation and operation of
Gaming Machines at the Charles Town Facility. As a result, the Company
consummated the Charles Town Acquisition on January 15, 1997. In mid-1997, the
Company intends to reopen the Charles Town Facility as an entertainment complex
that will feature live racing, dining, simulcast wagering and Gaming Machines.
The Company anticipates that it will initially operate 400 Gaming Machines.
Approval for the installation of the 400 Gaming Machines has been applied for
and is expected to be obtained from the West Virginia Lottery Commission within
90 to 120 days after the January 15, 1997 consummation of the Charles Town
Acquisition. The Gaming Machines will be slot-machine-style video machines that
depict spinning reels and video card games such as blackjack and poker. The
installation of additional Gaming Machines at the Charles Town Facility is
subject to approval by the West Virginia Lottery Commission after application
and a public hearing. The Company anticipates that it will apply for approval of
the installation and operation of a total of 1,000 Gaming Machines at the
Charles Town Facility within the first year after opening.
ACQUISITIONS
Pocono Downs Acquisition. On November 27, 1996, the Company acquired (the
"Pocono Downs Acquisition") all of the capital stock of The Plains Company and
all of the limited partnership interests in The Plains Company's affiliated
entities (together, "Pocono Downs") for an aggregate purchase price of $47.0
million plus approximately $525,000 in acquisition-related fees and expenses.
Pocono Downs conducts harness racing at the Harness Track located outside
Wilkes-Barre, Pennsylvania, export simulcasting of Harness Track races to
locations throughout the United States, pari-mutuel wagering at the Harness
Track and at OTWs in Allentown and Erie, Pennsylvania on Pocono Downs races and
on import simulcast races from other racetracks and telephone account wagering
on live and import simulcast races. For the year ended December 31, 1995 and the
nine months ended September 30, 1996, Pocono Downs had revenues of approximately
$33.9 million and $25.7 million, respectively, and earnings before interest,
taxes, depreciation and amortization ("EBITDA") of approximately $8.0 million
and $5.5 million, respectively. See "Business -- Acquisitions -- Pocono Downs
Acquisition" and "-- Properties."
Charles Town Acquisition. On January 15, 1997, a joint venture (the
"Charles Town Joint Venture") in which the Company will hold an 89% ownership
interest, acquired (the "Charles Town Acquisition") substantially all of the
assets of Charles Town Racing Limited Partnership and Charles Town Races, Inc.
(together "Charles Town") relating to the Charles Town Facility for an aggregate
net purchase price of approximately $16.5 million plus approximately $2.0
million in acquisition-related fees and expenses. The Charles Town Facility
conducts live thoroughbred horse racing, on-site pari-mutuel wagering on live
races run at the Charles Town Facility and wagering on import simulcast races.
The Company expects to refurbish the Charles Town Facility as an entertainment
complex that will feature live racing, dining, simulcast wagering and, upon
completion of the interior refurbishment in mid-1997, 400 Gaming Machines. The
estimated cost of the refurbishment, exclusive of the cost of the purchase or
lease of the Gaming Machines, is approximately $16.0 million. Pursuant to the
original operating agreement governing the Charles Town Joint Venture, the
Company currently holds an 80% ownership interest in the Charles Town Joint
Venture and was obligated to contribute 80% of the purchase price of the Charles
Town Acquisition and 80% of the cost of refurbishing the Charles Town Facility.
In fact, the Company contributed 100% of the purchase price of the Charles Town
Acquisition and expects to contribute 100% of the cost of refurbishing the
Charles Town Facility. The Company has reached an agreement with its joint
venture partner, Bryant Development Company ("Bryant"), pursuant to which the
parties agreed to amend the operating agreement to increase the Company's
7
ownership interest in the Charles Town Joint Venture to 89% and decrease
Bryant's interest to 11%. In addition, the amendment will provide that the
entire amount the Company has contributed, and will contribute, to the Charles
Town Joint Venture for the acquisition and refurbishment of the Charles Town
Facility would be treated, as between the joint venture partners, as a loan to
the Charles Town Joint Venture from the Company. For the year ended December 31,
1995 and the nine months ended September 30, 1996, Charles Town had revenues of
approximately $11.0 million and $8.7 million, respectively, and net losses of
approximately $2.2 million and $1.9 million, respectively. See "Risk Factors --
Future Development of Charles Town Facility" and "Business -- Acquisitions --
Charles Town Acquisition" and "-- Properties."
------------------------
The Company is the successor to several businesses which have operated the
Penn National Race Course since 1972. The Company was incorporated in
Pennsylvania in 1982 as PNRC Corp. It adopted its present name in 1994. The
Company's principal executive offices are located in the Wyomissing Professional
Center, 825 Berkshire Boulevard, Suite 203, Wyomissing, Pennsylvania 19610; its
telephone number is (610) 373-2400.
THE OFFERING
Common Stock Offered by the Company................... 1,725,000 shares (1)
Common Stock Offered by the Selling Shareholders...... 575,000 shares (1)
Common Stock Outstanding Immediately After the
Offering............................................ 15,105,290 shares (1)(2)
Use of Proceeds....................................... To repay indebtedness incurred in connection with the
Pocono Downs Acquisition and the Charles Town
Acquisition, and to finance a portion of the cost of
refurbishment of the Charles Town Acquisition. The
balance, if any, will be used for working capital and
other general corporate purposes. See "Use of
Proceeds."
Nasdaq National Market Symbol......................... PENN
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(1) Excludes 258,750 shares of Common Stock to be issued and sold by the Company
and 86,250 shares to be sold by the Selling Shareholders if the
Underwriters' over-allotment option is exercised in full.
(2) Based on shares outstanding as of December 31, 1996. Excludes (i) 1,179,750
shares reserved for issuance under the Company's 1994 Stock Option Plan, of
which options to purchase 1,179,750 shares of Common Stock were outstanding
as of December 31, 1996, and (ii) 195,000 shares reserved for issuance upon
the exercise of warrants to purchase Common Stock which were outstanding as
of December 31, 1996 (170,000 shares following the consummation of the
offering). See "Description of Capital Stock -- Warrants" and Note 9 of the
Notes to the Consolidated Financial Statements of the Company included
elsewhere in this Prospectus.
RISK FACTORS
Prospective purchasers of the securities offered hereby should carefully
read the specific factors set forth under "Risk Factors" as well as the other
information set forth in this Prospectus or incorporated herein by reference.
8
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth the summary historical consolidated
financial data of the Company. The summary historical financial data for each of
the five years in the period ended December 31, 1995 are derived from the
Company's audited consolidated financial statements. The summary historical
financial data of the Company and its subsidiaries as of September 30, 1996 and
for the nine months ended September 30, 1995 and 1996 are unaudited, but, in the
opinion of management, all adjustments necessary to present fairly the financial
data for such periods have been made, none of which were other than normal
accruals. The results for the nine month period ended September 30, 1996 are not
necessarily indicative of the results for the full year, or any future period.
For additional information, see the consolidated financial statements of the
Company appearing elsewhere in this Prospectus. The summary historical financial
data should also be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------------- --------------------------
1991 (1) 1992 (1) 1993 (1) 1994 1995 1995 1996
--------- --------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND ATTENDANCE DATA)
INCOME STATEMENT DATA:
Total revenues................. $ 33,334 $ 41,824 $ 42,664 $ 46,031 $ 57,676 $ 43,893 $ 46,474
Total operating expenses....... 32,208 39,523 40,208 41,607 49,421 37,518 39,237
Income from operations......... 1,126 2,301 2,456 4,424 8,255 6,375 7,237
Income before income taxes and
extraordinary item........... 305 1,440 1,500 4,099 8,463 6,525 7,422
Taxes on income................ 76 150 42 1,381 3,467 2,680 3,016
Net income..................... 229 1,290 1,458 2,603 4,996 3,845 4,406
Net income per share........... .38 .29 .32
Supplemental pro forma net
income (2)................... 1,819 2,724
Supplemental pro forma net
income per share (2)......... .15 .22
Weighted average common shares
outstanding.................. 12,249,000(3) 12,663,000 13,104,000 13,044,000 13,754,000
OTHER DATA (UNAUDITED):
Total paid attendance (4)...... 636,944 785,569 799,625 848,482 1,051,803 813,823 802,948
Pari-mutuel wagering:
Penn National races.......... $ 128,551 $ 153,332 $ 138,939 $ 111,248 $ 102,145 $ 79,235 $ 69,200
Import simulcasting.......... 28,660 42,159 58,252 93,461 142,499 106,664 122,895
Export simulcasting.......... -- 10,202 12,746 40,337 72,252 48,327 84,228
--------- --------- ----------- ----------- ----------- ----------- -----------
Total pari-mutuel wagering..... $ 157,211 $ 205,693 $ 209,937 $ 245,046 $ 316,896 $ 234,226 $ 276,323
--------- --------- ----------- ----------- ----------- ----------- -----------
--------- --------- ----------- ----------- ----------- ----------- -----------
Gross profit from wagering
(5) ......................... $ 11,201 $ 14,549 $ 15,346 $ 17,963 $ 24,634 $ 18,430 $ 19,952
SEPTEMBER 30,
1996
-----------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash...................................................................... $ 5,602
Working capital........................................................... 2,994
Total assets.............................................................. 33,733
Total debt................................................................ 302
Shareholders' equity...................................................... 26,694
- ------------------
(1) The Consolidated Financial Statements of the Company include entities which,
prior to a reorganization which occurred in 1994 shortly before the
Company's initial public offering (the "Reorganization"), were affiliated
through common ownership and control. See Note 1 of the Notes to the
Consolidated Financial Statements of the Company included elsewhere in this
Prospectus.
(2) Supplemental pro forma amounts for the years ended December 31, 1993 and
1994 reflect (i) the elimination of $1,208,000 and $345,000, respectively,
in management fees paid to a related entity, (ii) the inclusion of $320,000
and $133,000, respectively, in executive compensation, (iii) the elimination
of $946,000 and $413,000, respectively, of interest expenses on Company debt
which was repaid with the proceeds of the initial public offering in 1994,
(iv) the elimination of $0 and $198,000, respectively, of loss on early
extinguishment of debt, and (v) a provision for income taxes of $701,000 and
$377,000, respectively, as if the S corporations and partnerships comprising
part of the Company prior to the Reorganization in 1994 had been taxed as C
corporations. There were no supplemental pro forma adjustments for any
subsequent periods.
(3) Based on 8,400,000 shares of Common Stock outstanding before the initial
public offering in May 1994 plus 4,500,000 shares sold by the Company in the
initial public offering.
(4) Does not reflect attendance at the Thoroughbred Track for wagering on
simulcasts when live racing is not conducted, but does reflect attendance at
the Reading, Chambersburg, York and Lancaster OTWs, which opened in May
1992, April 1994, March 1995 and July 1996, respectively.
(5) Amounts equal total pari-mutuel revenues, less purses paid to Horsemen,
taxes payable to Pennsylvania and simulcast commissions or host track fees
paid to other racetracks.
9
SUMMARY PRO FORMA FINANCIAL DATA
The following table sets forth certain unaudited pro forma consolidated
financial and other data for the Company, giving effect to the Pocono Downs
Acquisition and the Charles Town Acquisition using the purchase method of
accounting in each case and the related acquisition financing. The pro forma
consolidated balance sheet data as of September 30, 1996 assume that the Pocono
Downs Acquisition and the Charles Town Acquisition had both occurred on
September 30, 1996. The pro forma consolidated income statement data for the
year ended December 31, 1995 and for the nine months ended September 30, 1996
assume that the Pocono Downs Acquisition and the Charles Town Acquisition had
both occurred on January 1, 1995.
The unaudited pro forma consolidated financial data are presented for
informational purposes only and are not necessarily indicative of the results of
operations that would actually have been obtained if the Acquisitions had
occurred on the dates indicated, or the results of operations that may be
obtained in the future. These statements are qualified in their entirety by, and
should be read in conjunction with, the unaudited Pro Forma Consolidated
Financial Statements and related notes thereto included elsewhere in this
Prospectus, the historical consolidated financial statements of Penn National,
The Plains Company and Charles Town and related notes thereto included elsewhere
in this Prospectus or incorporated herein by reference and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PRO FORMA
----------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- -------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
INCOME STATEMENT DATA:
Total revenues................................................. $ 102,557 $ 80,966
Total operating expenses....................................... 89,448 70,802
Income from operations......................................... 13,109 10,164
Income before income taxes..................................... 8,235 6,470
Taxes on income................................................ 3,388 2,851
Net income..................................................... 4,847 3,619
Net income per share........................................... .37 .26
Weighted average common shares outstanding..................... 13,104,000 13,754,000
SEPTEMBER 30, 1996
-------------------------------
PRO FORMA
PRO FORMA AS ADJUSTED (1)
-------------- ---------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.......................................... $ 5,832 $ 5,932
Working capital.................................................... 1,355 1,455
Total assets....................................................... 100,659 106,659
Total debt......................................................... 63,802 41,825
Shareholders' equity............................................... 26,694 54,671
- ------------------
(1) As adjusted amounts reflect the application, as defined in "Use of
Proceeds," of net proceeds from (i) the sale of the 1,725,000 shares of
Common Stock offered by the Company hereby at an assumed price of $17.50 per
share (assuming no exercise of the Underwriters' over-allotment option) and
(ii) the issuance of 25,000 shares to a Selling Shareholder upon the
exercise of warrants at an exercise price of $4.00 per share. See "Use of
Proceeds."
10
RISK FACTORS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended. Discussions containing
such forward-looking statements may be found in the material set forth under
"Prospectus Summary," "Use of Proceeds," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business," as well as
within the Prospectus generally (including the documents incorporated by
reference). Also, documents subsequently filed by the Company with the
Commission may contain forward-looking statements. Actual results could differ
materially from those projected in the forward-looking statements as a result of
the risk factors set forth below and the matters set forth or incorporated by
reference in the Prospectus generally. The Company cautions the reader, however,
that this list of factors may not be exhaustive, particularly with respect to
future filings. Before making a decision to purchase any of the Common Stock,
prospective purchasers should carefully consider the following factors.
EFFECT OF RECENT ACQUISITIONS; ABSENCE OF COMBINED OPERATING HISTORY; POTENTIAL
INABILITY TO MANAGE GROWTH
The Pocono Downs Acquisition was consummated on November 27, 1996, and the
Charles Town Acquisition was consummated on January 15, 1997. The Company,
Pocono Downs and Charles Town have been operating independently, and the
Company's management control structure for the Pocono Downs business and the
Charles Town business is still in its formative stages. The Company may not be
able to integrate successfully and oversee these businesses and their disparate
operations, employees and management. Moreover, the Company intends to operate
Gaming Machines at the Charles Town Facility, although the Company's management
has no experience in operating Gaming Machines and may not be able to do so
effectively.
The Acquisitions represent a significant expansion of the Company's
business and operational scale. This expansion will place demands on the
Company's administrative, operational and financial resources. Any continued
growth of the Company's business, including growth from the opening of further
OTWs or from the operation of other forms of gaming at Company facilities, as
well as any geographic expansion that the Company may undertake, could place an
additional strain on the capacity, management and operations of the Company.
Such strain may have a material adverse effect on the Company's business,
financial condition and results of operations.
Approximately $13.6 million, or 13.5%, of the Company's pro forma total
assets as of September 30, 1996 consists of goodwill arising from the
Acquisitions that will represent an expense, and thereby reduce the Company's
net income, in the periods over which it is amortized. The reduction in net
income resulting from the amortization of goodwill may have an adverse impact
upon the market price for the Common Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Business -- Strategy" and "-- Acquisitions" and the Notes to the Consolidated
Financial Statements of the Company included elsewhere in this Prospectus.
DECLINE IN LIVE RACING ATTENDANCE AT THE THOROUGHBRED TRACK AND HARNESS TRACK;
FUTURE GROWTH DEPENDENT ON OTWS AND GAMING MACHINE OPERATIONS
The Pennsylvania Racing Act requires the Company to schedule 200 days of
live thoroughbred racing and 150 days of live harness racing, regardless of
attendance, in order to retain the Company's Pennsylvania thoroughbred and
harness licenses to present import simulcast racing. Over the past few years,
however, there has been a substantial decline in attendance and wagering on live
racing at the Thoroughbred Track, the Harness Track and the Charles Town
Facility even though the number of racing days has remained relatively constant.
The Company believes this decline is primarily a result of competition from
other forms of entertainment and gaming, including wagering at OTWs and wagering
at tracks in neighboring states where additional forms of casino-style gaming
(such as video gaming and slot machines) are available, and which are perhaps
closer in proximity to patrons who might otherwise travel to the Thoroughbred
Track, the Harness Track and the Charles Town Facility. Because live racing
revenues are declining, the Company's future growth is dependent on its OTWs and
Gaming Machine operations. If not offset by increased revenues from other
sources, continued
11
declines in live racing attendance could have a material adverse effect on the
Company's business, financial condition and results of operations because a
relatively high proportion of the Company's costs of operating its live racing
facilities are fixed. The Company intends (after compliance with regulatory
requirements) to open OTWs in Williamsport, Downingtown and up to three other
Pennsylvania locations which have yet to be determined, in addition to operating
its existing OTWs. The Company's existing OTWs may be unable to increase or
maintain their current level of profitability, and the remaining five OTWs which
the Company has been allocated under the Pennsylvania Racing Act may never be
opened, or, if opened, achieve profitability. Moreover, as with racetracks, a
relatively high proportion of the costs of operating an OTW are fixed, while OTW
attendance is subject to significant variation based on a variety of factors,
including the quality of the races import simulcast to the facility and the
proximity of other live racing and OTW venues. To the extent that attendance and
wagering at existing or new OTWs is not consistent with the Company's historical
experience, the Company's business, financial condition and results of
operations may be materially and adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- OTW Wagering" and "-- Competition."
COMPETITION
The Company faces significant competition for wagering dollars from other
racetracks and OTWs in Pennsylvania and neighboring states (some of which also
offer other forms of gaming), other gaming venues such as casinos and
state-sponsored lotteries, including the Pennsylvania Lottery. The Company may
also face competition in the future from new OTWs or from new racetracks. From
time to time, Pennsylvania has considered legislation to permit other forms of
gaming. Although Pennsylvania has not authorized any form of casino or other
gaming, if additional gaming opportunities become available in or near
Pennsylvania, such gaming opportunities could have a material adverse effect on
the Company's business, financial condition and results of operations.
Company Races compete for wagering dollars and simulcast fees with live
races and races simulcast from other racetracks both inside and outside
Pennsylvania (including several in New York, New Jersey, West Virginia, Ohio,
Maryland and Delaware). The Company's ability to compete successfully for
wagering dollars is dependent, in part, upon the quality of its live horse
races. The quality of horse races at some racetracks that compete with the
Company, either by live races or simulcasts, is higher than the quality of
Company Races. The Company believes that there has been some improvement over
the last several years in the quality of the horses racing at the Thoroughbred
Track, due to incrementally higher purses being paid as a result of the
Company's increased simulcasting activities. However, increased purses may not
result in a continued improvement in the quality of racing at the Thoroughbred
Track or in any material improvement in the quality of racing at the Harness
Track or the Charles Town Facility.
The Company's OTWs compete with the OTWs of other Pennsylvania racetracks,
and new OTWs may compete with the Company's existing or proposed wagering
facilities. Competition between OTWs increases as the distance between them
decreases. For example, the Company believes that its Allentown OTW, which was
acquired in the Pocono Downs Acquisition and which is approximately 50 miles
from the Thoroughbred Track and 35 miles from the Company's Reading OTW, has
drawn some patrons from the Thoroughbred Track, the Reading OTW and Telebet and
that its Lancaster OTW, which is approximately 31 miles from the Thoroughbred
Track and 25 miles from the Company's York OTW, has drawn some patrons from the
Thoroughbred Track, the York OTW and Telebet. Moreover, the Company believes
that a competitor's new OTW in King of Prussia, Pennsylvania, which is
approximately 23 miles from the Reading OTW, has drawn some patrons from the
Reading OTW. The opening of new OTWs in close proximity to the Company's
existing or future OTWs could have a material adverse effect on the Company's
business, financial condition and results of operations.
If the Company obtains approval for the installation of Gaming Machines at
the Charles Town Facility, the Company's Gaming Machine operations will face
competition from other Gaming Machine venues in West Virginia and in neighboring
states (including Dover Downs in Dover, Delaware, Delaware Park in northern
Delaware, Harrington Raceway in southern Delaware and the casinos in Atlantic
City, New Jersey). Venues in Delaware and New Jersey, in addition to video
gaming machines,
12
currently offer mechanical slot machines that feature physical spinning reels,
pull-handles and the ability to both accept and pay out coins. West Virginia has
not authorized, and may never approve, such mechanical slot machines. The
failure to attract or retain Gaming Machine customers at the Charles Town
Facility, whether arising from such competition or from other factors, could
have a material adverse effect upon the Company's business, financial condition
and results of operations.
RISKS ASSOCIATED WITH THE CHARLES TOWN FACILITY
On January 15, 1997, the Charles Town Joint Venture consummated the Charles
Town Acquisition. Pursuant to the original operating agreement governing the
Charles Town Joint Venture, the Company currently holds an 80% ownership
interest in the Charles Town Joint Venture and was obligated to contribute 80%
of the purchase price of the Charles Town Acquisition and 80% of the cost of
refurbishing the Charles Town Facility. In fact, the Company contributed 100% of
the purchase price of the Charles Town Acquisition and expects to contribute
100% of the cost of refurbishing the Charles Town Facility. The Company has
reached an agreement with its joint venture partner, Bryant, pursuant to which
the parties agreed to amend the operating agreement to increase the Company's
ownership interest in the Charles Town Joint Venture to 89% and decrease
Bryant's interest to 11%. In addition, the amendment will provide that the
entire amount the Company has contributed, and will contribute, to the Charles
Town Joint Venture for the acquisition and refurbishment of the Charles Town
Facility would be treated, as between the joint venture partners, as a loan to
the Charles Town Joint Venture from the Company. The proposed changes in the
ownership of the Charles Town Joint Venture are subject to the review of
applicable West Virginia racing and lottery regulatory authorities.
The Company and the Charles Town Joint Venture have applied to the West
Virginia State Racing Commission for confirmation of the Company's preliminary
license to conduct racing and pari-mutuel wagering and to the West Virginia
Lottery Commission for a license to install and operate Gaming Machines at the
refurbished Charles Town Facility. The failure to receive or retain or a delay
in receiving such licenses could cause the reduction or suspension of racing and
pari-mutuel wagering, as well as of Gaming Machines operations, at the Charles
Town Facility and have a material adverse effect upon the Company's business,
financial condition and results of operations. See "-- Regulation and Taxation."
Failure by the Company to obtain a license from the West Virginia Lottery
Commission by June 1, 1997 or to retain both licenses also constitutes an event
of default under the Company's bank credit agreement. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
The Charles Town Joint Venture acquired its option to purchase the Charles
Town Facility from Bryant; Bryant, in turn, acquired the option from Showboat
Operating Company ("Showboat"). Showboat retained an option (the "Showboat
Option") to operate any casino at the Charles Town Facility in return for a
management fee (to be negotiated at the time, based on rates payable for similar
properties). Showboat has also retained a right of first refusal to purchase or
lease the site of any casino at the Charles Town Facility proposed to be leased
or sold and to purchase any interest proposed to be sold in any such casino (on
the same terms offered by a third party or otherwise negotiated with the Charles
Town Joint Venture). The rights retained by Showboat extend for a period of five
years from the date that the Charles Town Joint Venture exercises its option to
purchase the Charles Town Facility and expire thereafter unless legislation to
permit casino gaming at the Charles Town Facility has been adopted prior to the
end of the five-year period. If such legislation has been adopted prior to such
time, then the rights of Showboat continue for a reasonable time (not less than
24 months) to permit completion of negotiations.
While the agreement with Showboat does not specify what activities at the
Charles Town Facility would constitute operation of a casino, Showboat has
agreed that the installation and operation of video lottery terminals (like the
Gaming Machines the Company proposes to install) at the Charles Town Facility's
racetrack would not trigger the Showboat Option. If West Virginia law were to
permit casino gaming at the Charles Town Facility and if Showboat were to
exercise the Showboat Option, the Company would be required to pay a management
fee to Showboat for the operation of the casino.
13
On December 11, 1996, GTECH Corporation ("GTECH") commenced an action in
the United States District Court for the Northern District of West Virginia
against Charles Town, the Company, Penn National Gaming of West Virginia, Inc.,
a wholly owned subsidiary of the Company, and Bryant. The complaint filed by
GTECH alleges that Charles Town and AmTote International, Inc. ("AmTote") were
parties to an October 20, 1994 agreement, as amended by an amendment agreement
dated January 1, 1995 (the "AmTote Agreement"), pursuant to which AmTote was
allegedly granted an exclusive right to install and operate a "video lottery
system" at the Charles Town Facility. When the AmTote Agreement was entered
into, AmTote was a subsidiary of GTECH; GTECH has since divested itself of
AmTote, but is purportedly the assignee of certain of AmTote's rights under the
AmTote Agreement pursuant to an assignment and assumption agreement dated
February 22, 1996. The complaint seeks (i) preliminary and permanent injunctive
relief enjoining Charles Town, Bryant, the Company and its subsidiary from
consummating the Charles Town Acquisition or any similar transaction unless the
purchasing party explicitly accepts and assumes the AmTote Agreement, (ii) a
declaratory judgment that the AmTote Agreement is valid and binding, that GTECH
has the right to be the exclusive installer, operator, provider and servicer of
a video lottery system at the Charles Town Facility and that any party buying
the stock or assets of Charles Town must accept and assume the AmTote Agreement
and recognize such rights of GTECH thereunder, (iii) compensatory damages, (iv)
legal fees and costs and (v) such other further legal and equitable relief as
the court deems just and appropriate. On December 23, 1996, the court denied
GTECH's motion to preliminarily enjoin the Company from consummating the Charles
Town Acquisition unless it accepts and assumes the AmTote Agreement. The court
noted that GTECH may pursue its claim for damages and, if warranted, pursue
other injunctive relief in the future. The Company consummated the Charles Town
Acquisition on January 15, 1997, at which time Charles Town assigned to the
Charles Town Joint Venture legally valid and binding obligations, if any, under
the AmTote Agreement. In addition, the Company has agreed to indemnify Charles
Town for any damages Charles Town may suffer as a result of a claim that Charles
Town failed to fulfill its obligations under the AmTote Agreement. On January
13, 1997, Charles Town filed a motion to dismiss GTECH's complaint. The court
has not yet ruled on the motion. The Company believes the allegations of the
complaint to be without merit and intends to contest the action vigorously.
REGULATION AND TAXATION
General. The Company is authorized to conduct thoroughbred racing and
harness racing in Pennsylvania under the Pennsylvania Racing Act. The Company is
also authorized, under the Pennsylvania Racing Act and the Federal Interstate
Horseracing Act of 1978 (the "Federal Horseracing Act"), to conduct import
simulcast wagering. The Company is also subject to the provisions of West
Virginia law that govern the conduct of thoroughbred horseracing in West
Virginia (the "West Virginia Racing Act") and the operation of Gaming Machines
in West Virginia (the "West Virginia Gaming Machine Act"). 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.
Sunset Provisions in Gaming Machine Legislation. The Company has applied
for approval to install and operate Gaming Machines at the refurbished Charles
Town Facility pursuant to the West Virginia Gaming Machine Act. The West
Virginia Gaming Machine Act was adopted in 1994, and will terminate on June 30,
1997 unless extended or reenacted. If the West Virginia Gaming Machine Act
terminates, then the Company will be required to discontinue any Gaming Machine
operations for which it may obtain approval. There can be no assurance that the
West Virginia legislature will extend or reenact the West Virginia Gaming
Machine Act beyond June 30, 1997. If the Company obtains approval for the
installation of Gaming Machines at the Charles Town Facility and the West
Virginia Gaming Machine Act is not extended or reenacted, then the Company's
business, financial condition and results of operations would be materially and
adversely affected.
Pennsylvania Racing Regulations. The Company's horse racing operations at
the Thoroughbred Track and the Harness Track are subject to extensive regulation
under the Pennsylvania Racing Act, which established the Pennsylvania State
Horse Racing Commission and the Pennsylvania State
14
Harness Racing Commission (together, the "Pennsylvania Racing Commissions"). The
Pennsylvania Racing Commissions are responsible for, among other things, (i)
granting permission annually to maintain racing licenses and schedule race
meets, (ii) approving, after a public hearing, the opening of additional OTWs,
(iii) approving simulcasting activities, (iv) licensing all officers, directors,
racing officials and certain other employees of the Company and (v) approving
all contracts entered into by the Company affecting racing, pari-mutuel wagering
and OTW operations.
As in most states, the regulations and oversight applicable to the
Company's operations in Pennsylvania are intended primarily to safeguard the
legitimacy of the sport and its freedom from inappropriate or criminal
influences. The Pennsylvania Racing Commissions have broad authority to regulate
in the best interests of racing and may, to that end, disapprove the involvement
of certain personnel in the Company's operations, deny approval of certain
acquisitions following their consummation or withhold permission for a proposed
OTW site for a variety of reasons, including community opposition. The
Pennsylvania legislature also has reserved the right to revoke the power of the
Pennsylvania Racing Commissions to approve additional OTWs and could, at any
time, terminate pari-mutuel wagering as a form of legalized gaming in
Pennsylvania or subject such wagering to additional restrictive regulation; such
termination would, and any further restrictions could, have a material adverse
effect upon the Company's business, financial condition and results of
operations.
The Company may not be able to obtain all necessary approvals for the
operation or expansion of its business. Even if all such approvals are obtained,
the regulatory process could delay implementation of the Company's plans to open
additional OTWs. The Company has had continued permission from the Pennsylvania
State Horse Racing Commission to conduct live racing at the Thoroughbred Track
since it commenced operations in 1972, and has obtained permission from the
Pennsylvania State Harness Racing Commission to conduct live racing at the
Harness Track beginning with the 1997 season. Currently, the Company has
approval from the Pennsylvania Racing Commissions to operate six OTWs and the
right, under the Pennsylvania Racing Act, to operate five additional OTWs,
subject to approval by the Pennsylvania Racing Commissions. A Commission may
refuse to grant permission to open additional OTWs or to continue to operate
existing facilities. The failure to obtain required regulatory approvals would
have a material adverse effect upon the Company's business, financial condition
and results of operations.
The Pennsylvania Racing Act provides that no corporation licensed to
conduct thoroughbred racing shall be licensed to conduct harness racing and that
no corporation licensed to conduct harness racing shall be licensed to conduct
thoroughbred racing. The Company's harness and thoroughbred licenses are held by
separate corporations, each of which is a wholly owned subsidiary of the
Company. Moreover, the Pennsylvania State Harness Racing Commission has reissued
the Pocono Downs harness racing license and has found, in connection with the
reissuance, that it is not "inconsistent with the best interests, convenience or
necessity or with the best interests of racing generally" that a subsidiary of
the Company beneficially owns Pocono Downs. The Company thus believes that the
arrangement under which it holds both a harness and a thoroughbred license
complies with applicable regulations.
West Virginia Racing and Gaming Regulation. The Company's operations at
the Charles Town Facility are subject to regulation by the West Virginia State
Racing Commission (the "West Virginia Racing Commission") under the West
Virginia Racing Act, and by the West Virginia Lottery Commission under the West
Virginia Gaming Machine Act. The powers and responsibilities of the West
Virginia Racing Commission under the West Virginia Racing Act are substantially
similar in scope and effect to those of the Pennsylvania Racing Commissions and
extend to the approval and/or oversight of all aspects of racing and pari-mutuel
wagering operations. The Company and the Charles Town Joint Venture have applied
to the West Virginia Racing Commission for a license to conduct racing and pari-
mutuel wagering at the Charles Town Facility. The West Virginia Racing
Commission has issued this license, subject to its review and approval of the
documents pursuant to which the Charles Town Acquisition was consummated and
financing therefor was obtained and to its review and approval of any changes in
the ownership of the Charles Town Joint Venture, among other conditions. The
Company and the Charles Town Joint Venture have also applied to the West
Virginia Lottery Commission for approval to install and operate 400 Gaming
Machines at the refurbished Charles Town
15
Facility; this approval has not yet been granted. The Company anticipates, but
cannot assure, that it will obtain approval for the installation and operation
of the 400 Gaming Machines within 90 to 120 days after the January 15, 1997
consummation of the Charles Town Acquisition. Failure by the Company to obtain
such approval by June 1, 1997 constitutes an event of default under the
Company's bank credit agreement. The Company and the Charles Town Joint Venture
may not receive or retain all of the regulatory approvals necessary from time to
time to conduct racing and pari-mutuel wagering operations at the Charles Town
Facility. The failure to receive or retain or a delay in receiving such
approvals could cause the reduction or suspension of racing and pari-mutuel
wagering, as well as of Gaming Machine operations, at the Charles Town Facility
and have a material adverse effect upon the Company's business, financial
condition and results of operations.
The installation of additional Gaming Machines at the Charles Town Facility
is subject to approval by the West Virginia Lottery Commission after application
and a public hearing. The Company anticipates that it will apply for approval of
the installation and operation of a total of 1,000 Gaming Machines at the
Charles Town Facility within the first year after the opening of the Charles
Town Facility. The West Virginia Lottery Commission may not approve the
installation of the initial 400 Gaming Machines or any additional Gaming
Machines, however, or may not do so in a timely manner, or may ultimately
approve the installation of a smaller number of Gaming Machines than the Company
expects to request.
Moreover, the West Virginia Gaming Machine Act requires that the operator
of the Charles Town Facility enter into a written agreement with the horse
owners and trainers who race horses at that facility (the "Charles Town
Horsemen") in order to conduct Gaming Machine operations. The West Virginia
Gaming Machine Act also requires that the operator of the Charles Town Facility
enter into a written agreement with the pari-mutuel clerks in order to operate
Gaming Machines. Currently, there is no agreement between the operator of the
Charles Town Facility and either the Charles Town Horsemen or the pari-mutuel
clerks. The Company has entered into discussions with both the Charles Town
Horsemen and the pari-mutuel clerks toward obtaining such agreements. The
absence of an agreement with the Charles Town Horsemen or the pari-mutuel clerks
at the Charles Town Facility, or the termination or non-renewal of such
agreement, would have a material adverse effect on the Company's business,
financial condition and results of operations.
State and Federal Simulcast Regulation. Both the Federal Horseracing Act
and the Pennsylvania Racing Act require that the Company have a written
agreement with the horse owners and trainers who race horses at the Thoroughbred
Track (the "Thoroughbred Horsemen") and with horse owners and trainers at the
Harness Track (the "Harness Horsemen" and, together with the Thoroughbred
Horsemen, the "Pennsylvania Horsemen") in order to simulcast races. The Company
has entered into agreements with the Pennsylvania Horsemen (the "Horsemen
Agreements"), and in accordance therewith has agreed upon the allocations of the
Company's revenues from import simulcast wagering to the purse funds for the
Thoroughbred Track and the Harness Track. Because the Company cannot conduct
import simulcast wagering in the absence of the Horsemen Agreements, the
termination or non-renewal of either Horsemen Agreement could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Federal Horseracing Act requires that the operator of the Charles Town
Facility obtain the approval of the Charles Town Horsemen before import
simulcast wagering can be conducted there. While such approval has been obtained
by Charles Town in the past, there is no written agreement with the Charles Town
Horsemen providing for such approval in the future. The Company has entered into
discussions with the Charles Town Horsemen toward obtaining an agreement
evidencing such approval. The failure to obtain such approval could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Taxation. The Company believes that the prospect of significant additional
revenue is one of the primary reasons that jurisdictions permit legalized
gaming. As a result, gaming companies are typically subject to significant taxes
and fees in addition to normal federal and state income taxes, and such taxes
and fees are subject to increase at any time. The Company pays substantial taxes
and fees with respect to its operations. From time to time, federal legislators
and officials have proposed changes in tax laws, or in the administration of
such laws, affecting the gaming industry. It is not
16
possible to determine with certainty the likelihood of changes in tax laws or in
the administration of such laws. Such changes, if adopted, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Compliance with Other Laws. The Company and its OTWs are also subject to a
variety of other rules and regulations, including zoning, construction and
land-use laws and regulations in Pennsylvania and West Virginia governing the
serving of alcoholic beverages. Currently, Pennsylvania laws and regulations
permit the construction of off-track wagering facilities, but may affect the
selection of a particular OTW site because of parking, traffic flow and other
similar considerations, any of which may serve to delay the opening of future
OTWs in Pennsylvania. By contrast, West Virginia law does not permit the
operation of OTWs. The Company derives a significant portion of its other
revenues from the sale of alcoholic beverages to patrons of its facilities. Any
interruption or termination of the Company's existing ability to serve alcoholic
beverages would have a material adverse effect on the Company's business,
financial condition and results of operations.
Restrictions on Share Ownership and Transfer. The Pennsylvania Racing Act
requires that any shareholder proposing to transfer beneficial ownership of 5%
or more of the Company's shares file an affidavit with the Company setting forth
certain information about the proposed transfer and transferee, a copy of which
the Company is required to furnish to the Pennsylvania Racing Commission. The
certificates representing the Company shares owned by 5% beneficial shareholders
are required to bear certain legends prescribed by the Pennsylvania Racing Act.
In addition, under the Pennsylvania Racing Act, the Pennsylvania Racing
Commission has the authority to order a 5% beneficial shareholder of the Company
to dispose of his Common Stock of the Company if it determines that continued
ownership would be inconsistent with the public interest, convenience or
necessity or the best interest of racing generally. The West Virginia Gaming
Machine Act provides that a transfer of more than 5% of the voting stock of a
corporation which controls the license may only be to persons who have met the
licensing requirements of the West Virginia Gaming Machine Act or which transfer
has been pre-approved by the West Virginia Lottery Commission. Any transfer that
does not comply with this requirement voids the license. See "Description of
Capital Stock -- Certain Restrictions on Share Ownership and Transfer."
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 Thoroughbred Track
and Harness Track expenses are fixed, the loss of scheduled racing days could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The severe winter weather in 1996 resulted in the closure of the Company's
OTW facilities for two days in January 1996. Because of the Company's growing
dependence upon OTW operations, severe weather that causes the Company's OTWs to
close could have a material adverse effect upon the Company's business,
financial condition and results of operations.
Attendance and wagering at the Company's facilities have been favorably
affected by special racing events which stimulate interest in horse racing, such
as the Triple Crown races in May and June and the Breeders' Cup in autumn. As a
result, the Company's revenues and net income have been greatest in the second
and third quarters of the year and lowest in the first and fourth quarters of
the year. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Effect of Inclement Weather and Seasonality."
LIMITATIONS AND RESTRICTIONS OF CONTRACTS WITH HORSEMEN
The Thoroughbred Horsemen Agreement was entered into in February 1996,
expires in February 1999 and is subject to automatic renewal for successive one
year terms unless either party gives notice of termination at least 90 days
prior to the end of any such period. The Harness Horsemen Agreement was entered
into in November 1994, became effective in January 1995 and expires in
17
January 2000. There is no agreement between Charles Town and the Charles Town
Horsemen, and although such horsemen have granted approval for import simulcast
wagering in the past, there can be no assurance that such approval will be
obtained in the future. The future success of the Company depends, in part, on
its ability to maintain a good relationship with the Pennsylvania Horsemen and
the Charles Town Horsemen (together, the "Horsemen") and to obtain renewal of
the Horsemen Agreements and required approvals from the Charles Town Horsemen on
satisfactory terms. Failure to do so could lead to an interruption in live
racing or OTW operations or, at the Charles Town Facility, Gaming Machine
operations. The Company may not be able to renew or modify the Horsemen
Agreements on satisfactory terms, and failure to obtain satisfactory renewal
terms could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Purses; Agreements with
Horsemen" and "-- Regulation."
POTENTIAL ENVIRONMENTAL LIABILITIES
As a result of the Pocono Downs Acquisition, the Company owns a solid waste
landfill (the "Landfill") located outside Wilkes-Barre, Pennsylvania on a parcel
of land adjacent to the Harness Track. The Landfill was operated by the East
Side Landfill Authority (the "Landfill Authority"), which disposed of municipal
waste in the Landfill from 1970 until 1982 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 engineering consulting firm, the Landfill closure is
substantially complete. To date the municipalities have been substantially
fulfilling their obligations under the Settlement Agreement. However, there can
be no assurance that the municipalities will continue to meet their obligations
under the Settlement Agreement or that the terms of the Settlement Agreement
will not be amended in the future. In addition, as the owner of the property,
the Company may be liable for future claims with respect to the Landfill under
the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") 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.
Pursuant to an agreement entered into between the Charles Town Joint
Venture and Charles Town coincident with the consummation of the Charles Town
Acquisition, $200,000 of the purchase price of the Charles Town Acquisition was
held in escrow to satisfy certain costs expected to be incurred for the
remediation or other clean-up of various items of environmental concern; the
estimated cost of such remediation and clean-up is approximately $400,000. No
assurance can be given that additional liability in amounts that cannot now be
estimated by the Company will not arise for which the Company and the Charles
Town Joint Venture may not be able to obtain reimbursement or indemnification.
The Company operates a water and sewage treatment facility at the
Thoroughbred Track and a water and sewage treatment facility at the Charles Town
Facility. Operation of water and sewage treatment facilities is subject to both
federal and state environmental regulation. If the Company's operation of the
treatment facilities is found not to comply with these regulations or future
regulations which may be more stringent, the Company may be required to make
potentially significant expenditures to bring the facilities into compliance,
and the Company may also be subject to monetary penalties.
CONCENTRATION OF OWNERSHIP
Following the completion of this offering, and assuming no exercise of the
Underwriters' over-allotment option, the Company's executive officers, directors
and 5% shareholders will own beneficially an aggregate of approximately 47.8% of
the outstanding Common Stock. Peter M. Carlino, the Company's Chairman and Chief
Executive Officer, will have voting control, directly and indirectly through a
family trust (the "Carlino Family Trust") and another corporation, of
approximately 40.1% of the outstanding Common Stock. The Company's officers,
directors and 5% shareholders if acting
18
together, and Mr. Carlino acting alone, may be able to significantly influence
the election of directors and the business and affairs of the Company. Under
certain circumstances, including the sale of all or substantially all of the
assets of the Company or a merger, consolidation or liquidation of the Company,
other trustees of the Carlino Family Trust, including Harold Cramer, who is a
director of the Company, may have voting power over approximately 34.8% of the
outstanding shares of Common Stock. See "Principal and Selling Shareholders" and
"Description of Capital Stock -- Possible Antitakeover Effect of Certain
Charter, By-Law and Other Provisions."
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the services of: Peter M. Carlino, the
Company's Chairman and Chief Executive Officer; William J. Bork, the Company's
President, Chief Operating Officer and a Director; Robert S. Ippolito, the
Company's Chief Financial Officer, Secretary and Treasurer; Philip T. O'Hara,
Jr., the Company's Vice President and General Manager; and senior management
personnel of the Company's operating units. The loss of the services of any of
these individuals could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company has entered
into employment agreements with Messrs. Carlino, Bork and Ippolito. See Note 5
of the Notes to the Consolidated Financial Statements of the Company included
elsewhere in this Prospectus.
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the Common Stock has been, and may in the future be,
volatile. Fluctuations in the Company's operating results and other events or
factors, such as announcements of new gaming or wagering opportunities by the
Company or its competitors, legislation approving, defeating or restricting
gaming, other developments with respect to government regulation, developments
in the gaming industry generally and sales of substantial amounts of Common
Stock in the public market, or the prospect of such sales, may have a
significant effect on the market price of the Common Stock. In addition, the
stock market generally and the gaming industry in particular have, from time to
time, experienced extreme price and volume fluctuations; future fluctuations
could adversely affect the market price of the Common Stock without regard to
the financial or operating performance of the Company. A shift away from
investor interest in gaming in general could adversely affect the trading price
of the Common Stock in a manner unrelated to the Company's financial or
operating performance. See "Price Range of Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of the Company's Common Stock in
the public market following this offering could adversely affect the market
price of the Common Stock. Upon completion of this offering and assuming no
exercise of outstanding stock options or warrants, the Company will have
outstanding 15,105,290 shares of Common Stock (based upon the number of shares
outstanding as of December 31, 1996), of which the 2,300,000 shares sold in this
offering will be freely tradeable. Immediately prior to the completion of the
offering it is expected that 13,355,290 shares of Common Stock will be
outstanding (based upon the number of shares outstanding as of December 31,
1996), of which 575,000 shares will be sold in this offering by the Selling
Shareholders (661,250 shares if the Underwriters' over-allotment option is
exercised in full). Of the currently outstanding shares not being sold in this
offering, 6,649,827 shares are subject to agreements with the Underwriters under
which such shares may not be offered, sold or otherwise disposed of for a period
of 120 days after the date of this Prospectus without the prior written consent
of Salomon Brothers Inc as representative of the Underwriters.
POSSIBLE ANTITAKEOVER EFFECT OF CERTAIN CHARTER, BY-LAW AND OTHER PROVISIONS
The Company's Amended and Restated Articles of Incorporation and By-Laws
provide that the Board of Directors is to consist of three classes of directors,
each comprised as nearly as practicable of one-third of the Board, and that
one-third of the Board is to be elected each year. At each annual meeting, only
directors of the class whose term is expiring are voted upon, and upon election
each
19
such director serves a three-year term. The Company's Amended and Restated
Articles of Incorporation provide that a director may be removed with or without
cause only by the affirmative vote of the holders of 75% of the voting power of
all shares of the Company entitled to vote generally in the election of
directors, voting as a single class; the Company's By-Laws provide that a
director may only be removed without cause by written consent of the
shareholders and not at a meeting. The Company's Amended and Restated Articles
of Incorporation provide that shareholder-proposed nominations for election of
directors and shareholder-proposed business at meetings of shareholders shall be
subject to such advance notice requirements as may be contained in the By-Laws,
which may be amended by the directors.
The provisions of the Company's Amended and Restated Articles of
Incorporation with respect to classification of the Board of Directors and
shareholder approval of the removal of directors with or without cause may not
be altered, amended or repealed without the affirmative vote of the holders of
at least 75% of the voting power of all shares of the Company entitled to vote
generally in the election of directors, voting as a single class. See
"Description of Capital Stock -- Possible Antitakeover Effect of Certain
Charter, By-Law and Other Provisions."
Pursuant to the Company's Amended and Restated Articles of Incorporation,
the Board of Directors of the Company may issue shares of Preferred Stock of the
Company, without shareholder approval, on such terms as the Board of Directors
may determine. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. Moreover, although the ability to issue
Preferred Stock may provide flexibility in connection with possible acquisitions
and other corporate purposes, such issuances may make it more difficult for a
third party to acquire, or may discourage a third party from acquiring, stock of
the Company. The Company has no current plans to issue any shares of Preferred
Stock. See "Description of Capital Stock -- Preferred Stock."
Certain provisions of Pennsylvania law could delay or impede the removal of
incumbent directors and could make a merger, tender offer or proxy contest
involving the Company more difficult, even if such event could be beneficial to
the interests of the shareholders. Such provisions could limit the price that
certain investors might be willing to pay in the future for the Company's Common
Stock. See "Description of Capital Stock -- Possible Antitakeover Effect of
Certain Charter, By-Law and Other Provisions."
20
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,725,000 shares of
Common Stock offered by the Company hereby at an assumed public offering price
of $17.50 per share are estimated to be approximately $27.9 million
(approximately $32.2 million if the Underwriters' over-allotment option is
exercised in full), after deducting the underwriting discount and estimated
offering expenses payable by the Company. The Company will not receive any
proceeds from the sale of Common Stock by the Selling Shareholders.
The net proceeds to the Company will be used (i) to repay outstanding
indebtedness and accrued interest under a credit facility, which was entered
into with Bankers Trust Company, as Agent, in November 1996 (the "Credit
Facility"), and (ii) to finance a portion of the cost of the refurbishment of
the Charles Town Facility. Outstanding term loan indebtedness under the Credit
Facility was incurred to finance the Pocono Downs Acquisition and the Charles
Town Acquisition; additional term loan indebtedness is expected to be incurred
under the Credit Facility to finance the refurbishment of the Charles Town
Facility. Borrowings under the Credit Facility bear interest at an annual
interest rate equal to, at the option of the Company, either the "base rate" of
Bankers Trust Company plus an applicable margin of up to 2% or a eurodollar rate
plus an applicable margin of up to 3%. Quarterly mandatory repayments of the
amounts outstanding under the term loan portions of the Credit Facility commence
December 31, 1997 and continue until the maturity date, November 26, 2001.
Pursuant to the terms of the credit agreement under which such borrowings were
made, the Company is obligated to apply to repayment of amounts outstanding
under the Credit Facility 100% of the net proceeds to the Company of any public
offering of its equity securities if the aggregate amount of the remaining
commitments and amounts outstanding under the Credit Facility exceeds $50.0
million, and 50% of the net proceeds to the Company of any public offering of
its equity securities if the aggregate amount of the remaining commitments and
amounts outstanding under the Credit Facility is between $25.0 million and $50.0
million or if the Company's leverage ratio is greater than 2-to-1; however, the
credit agreement permits the Company to retain the first $6.0 million of
proceeds from any public offering of its equity securities if the offering
results in net proceeds to the Company of at least $25.0 million.
The Company intends to use any balance of the net proceeds remaining after
application as described above for working capital and other general corporate
purposes. Pending application of the net proceeds as described above, the
Company intends to invest the net proceeds in short-term investment grade
securities.
21
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on The Nasdaq National Market under
the symbol "PENN." The following table sets forth for the periods indicated the
high and low sales prices per share of the Company's Common Stock as reported on
The Nasdaq National Market since the date on which the Common Stock commenced
trading.
HIGH LOW
------- -------
1994
Second Quarter (May 25 through June 30, 1994)................ $ 3.458 $ 2.333
Third Quarter................................................ 3.167 2.396
Fourth Quarter............................................... 2.667 2.083
1995
First Quarter................................................ 2.917 2.250
Second Quarter............................................... 5.125 2.500
Third Quarter................................................ 6.833 4.417
Fourth Quarter............................................... 6.458 4.167
1996
First Quarter................................................ 6.000 4.292
Second Quarter............................................... 14.500 5.875
Third Quarter................................................ 15.625 9.000
Fourth Quarter............................................... 21.375 14.250
1997
First Quarter (through February 5, 1997)..................... 17.500 15.000
The closing sale price per share of Common Stock on The Nasdaq National
Market on February 5, 1997 was $16-1/4. As of December 31, 1996, there were 261
holders of record of Common Stock.
DIVIDEND POLICY
Since the Company's initial public offering of Common Stock in May 1994,
the Company has not paid any cash dividends on its Common Stock. The Company
intends to retain all of its earnings to finance the development of the
Company's business and, thus, does not anticipate paying cash dividends on its
Common Stock for the foreseeable future. Payment of any cash dividends in the
future will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, future earnings, operations, capital
requirements, the general financial condition of the Company and general
business conditions. The Credit Facility prohibits the Company from authorizing,
declaring or paying any dividends until the Company's commitments under the
Credit Facility have been terminated and all amounts outstanding thereunder have
been repaid. In addition, future bank financing may prohibit the payment of
dividends under certain conditions.
22
CAPITALIZATION
The following table sets forth: (i) the consolidated short-term debt and
capitalization of the Company as of September 30, 1996; (ii) the pro forma
short-term debt and capitalization of the Company as of September 30, 1996,
after giving effect to the Pocono Downs Acquisition, the Charles Town
Acquisition and the borrowings under the Credit Facility made or to be made
simultaneously with the consummation of each such Acquisition; and (iii) such
pro forma short-term debt and capitalization, as adjusted to reflect the sale of
the 1,725,000 shares of Common Stock offered by the Company hereby at the
assumed public offering price of $17.50 per share (assuming no exercise of the
Underwriters' over-allotment option) and the application by the Company of the
estimated net proceeds therefrom, as described under "Use of Proceeds." This
table should be read in conjunction with the pro forma consolidated financial
statements of the Company and the consolidated financial statements of the
Company, The Plains Company and Charles Town, which are included elsewhere or
incorporated by reference in this Prospectus.
SEPTEMBER 30, 1996
--------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
Current maturities of long-term debt....................................... $ 222 $ 222 $ 222
------- ------- -------
Long-term debt:
Tranche A Term Loan (1).................................................. -- 47,000 30,733
Tranche B Term Loan (1).................................................. -- 16,500 10,790
Other.................................................................... 80 80 80
------- ------- -------
Total long-term debt.................................................. 80 63,580 41,603
------- ------- -------
Total debt.......................................................... 302 63,802 41,825
------- ------- -------
Shareholders' equity:
Preferred Stock, par value $.01 per share, 1,000,000 shares authorized;
none issued........................................................... -- -- --
Common Stock, par value $.01 per share, 20,000,000 shares authorized,
13,330,290 shares outstanding and outstanding pro forma, 15,080,290
shares outstanding pro forma as adjusted (2).......................... 133 133 151
Additional paid-in capital............................................... 14,217 14,217 42,176
Retained earnings........................................................ 12,344 12,344 12,344
------- ------- -------
Total shareholders' equity............................................ 26,694 26,694 54,671
------- ------- -------
Total capitalization................................................ $26,996 $90,496 $96,496
------- ------- -------
------- ------- -------
- ------------------
(1) Repayments of the Term Loans are applied pro rata to the Tranche A Term Loan
and the Tranche B Term Loan.
(2) Excludes (i) 1,179,750 shares reserved for issuance under the Company's 1994
Stock Option Plan, of which options to purchase 823,750 shares of Common
Stock were outstanding as of September 30, 1996, and (ii) 195,000 shares
reserved for issuance upon the exercise of warrants to purchase Common Stock
outstanding as of September 30, 1996 (170,000 shares following the
consummation of the offering). As of December 31, 1996, the Company had
13,355,290 shares outstanding and outstanding pro forma, and 15,105,290
shares outstanding pro forma as adjusted, which excludes options to purchase
1,179,750 shares of Common Stock and warrants to purchase 195,000 shares of
Common Stock outstanding as of December 31, 1996. See "Description of
Capital Stock -- Warrants" and Note 9 of the Notes to the Consolidated
Financial Statements of the Company included elsewhere in this Prospectus.
23
PENN NATIONAL GAMING, INC.
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The accompanying pro forma consolidated financial statements present pro
forma information for the Company, giving effect to the Pocono Downs Acquisition
and the Charles Town Acquisition using the purchase method of accounting in each
case and the related acquisition financing. These pro forma consolidated
financial statements are based upon the historical financial statements of Penn
National, The Plains Company and Charles Town as of September 30, 1996 and for
the year ended December 31, 1995 and for the nine months ended September 30,
1996.
The accompanying pro forma consolidated balance sheet as of September 30,
1996 has been presented as if the Pocono Downs Acquisition and the Charles Town
Acquisition had both occurred on September 30, 1996. The accompanying pro forma
consolidated statements of income for the year ended December 31, 1995 and for
the nine months ended September 30, 1996 have been presented as if the Pocono
Downs Acquisition and the Charles Town Acquisition had both occurred on January
1, 1995.
The pro forma adjustments are based upon currently available information
and upon certain assumptions described in the accompanying Notes to Pro Forma
Consolidated Financial Statements. These assumptions include assumptions
relating to the allocation of the purchase price paid in the Pocono Downs
Acquisition and the purchase price paid in the Charles Town Acquisition to the
respective assets and liabilities of Pocono Downs and Charles Town based upon
preliminary estimates of their fair values; the actual allocation of such
purchase prices may differ from that reflected in the pro forma consolidated
financial statements. The Company's management believes the assumptions
underlying the pro forma consolidated financial statements to be reasonable
under the circumstances.
The pro forma consolidated financial statements are unaudited, are
presented for informational purposes only and are not necessarily indicative of
the results of operations that would actually have been obtained if the
Acquisitions had occurred on the dates indicated, or the results of operations
that may be obtained in the future. These statements are qualified in their
entirety by, and should be read in conjunction with, the historical financial
statements of Penn National, The Plains Company and Charles Town and related
notes thereto included elsewhere in this Prospectus or incorporated herein by
reference and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
24
PENN NATIONAL GAMING, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
POCONO DOWNS CHARLES TOWN
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS
PENN NATIONAL POCONO DOWNS CHARLES TOWN AND AND COMPANY
HISTORICAL HISTORICAL HISTORICAL ELIMINATIONS ELIMINATIONS PRO FORMA
------------- ------------- ------------- ------------- ------------- -----------
(IN THOUSANDS)
ASSETS
Cash and cash
equivalents............ $ 5,602 $ 4,521 $ 523 $(46,407)(1) (17,165)(a) $ 5,832
44,822(2) 16,500 (b)
(1,780)(3) (784)(c)
Marketable securities.... -- 6,001 -- (6,001)(2) -- --
Other current assets..... 3,362 1,557 190 -- (190)(a) 4,919
------- ------- ------ -------- --------- ---------
Total current assets... 8,964 12,079 713 (9,366) (1,639) 10,751
Property and equipment,
net.................... 19,629 12,712 9,093 22,541 (1) 7,407 (a) 71,382
Intangibles, including
goodwill............... 1,848 -- -- 11,563 (1) 2,025 (a) 15,436
Other assets, including
deferred charges....... 3,292 235 56 (1,118)(1) (1,939)(a) 3,090
1,780 (3) 784 (c)
------- ------- ------ -------- --------- ---------
Total assets........... $33,733 $25,026 $9,862 $ 25,400 $ 6,638 $ 100,659
------- ------- ------ -------- --------- ---------
------- ------- ------ -------- ---------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of
long-term debt......... $ 222 $ 1,020 $ 6,877 $ (1,020)(2) $ (6,877)(a) $ 222
Other current
liabilities............ 5,748 3,426 2,027 -- (2,027)(a) 9,174
------- ------- -------- -------- --------- --------
Total current
liabilities.......... 5,970 4,446 8,904 (1,020) (8,904) 9,396
------- ------- -------- -------- --------- --------
Long-term debt........... 80 7,159 2,704 39,841(2) (2,704)(a) 63,580
16,500 (b)
Other long-term
liabilities............ 989 -- 84 -- (84)(a) 989
------- ------- -------- -------- --------- --------
Total long-term
liabilities.......... 1,069 7,159 2,788 39,841 13,712 64,569
------- ------- -------- -------- --------- --------
Minority interest........ -- 1,880 -- (1,880)(1) -- --
Total shareholders'
equity (deficit)..... 26,694 11,541 (1,830) (11,541)(1) 1,830(a) 26,694
------- ------- -------- -------- --------- --------
Total liabilities and
shareholders'
equity............... $33,733 $25,026 $ 9,862 $ 25,400 $ 6,638 $100,659
------- ------- -------- -------- --------- --------
------- ------- -------- -------- --------- --------
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
25
PENN NATIONAL GAMING, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------------------------------
POCONO DOWNS CHARLES TOWN
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS
PENN NATIONAL POCONO DOWNS CHARLES TOWN AND AND COMPANY
HISTORICAL HISTORICAL HISTORICAL ELIMINATIONS ELIMINATIONS PRO FORMA
------------- ------------- ------------- ------------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenues............ $57,676 $33,854 $11,027 $ -- $ -- $ 102,557
Total operating expenses.. 49,421 27,261 12,776 (1,053)(6) 182(e) 89,448
861 (7)
------- ------- ------- ------- ---------- ---------
Income (loss) from
operations.............. 8,255 6,593 (1,749) 192 (182) 13,109
Total other income
(expenses).............. 208 (461) (402) (3,995)(4) (1,249)(d) (4,874)
561 (5) 664 (g)
(200)(h)
Minority interest......... -- (1,571) -- 1,571 (9) -- --
------- ------- ------- ------- ------- ---------
Income (loss) before
income taxes............ 8,463 4,561 (2,151) (1,671) (967) 8,235
Taxes on income........... 3,467 1,602 -- (1,362)(8) (979)(f) 3,388
660 (9)
------- -------- ------- ------- ------- ----------
Net income (loss)......... $ 4,996 $ 2,959 $(2,151) $ (969) $ 12 $ 4,847
------- -------- ------- ------- ------- ----------
------- -------- ------- ------- ------- ----------
Net income per share...... $ .38 $ .37
------- ----------
------- ----------
Weighted average common
shares outstanding...... 13,104 13,104
------- ----------
------- ----------
NINE MONTHS ENDED SEPTEMBER 30, 1996
--------------------------------------------------------------------------------------
POCONO DOWNS CHARLES TOWN
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS
PENN NATIONAL POCONO DOWNS CHARLES TOWN AND AND COMPANY
HISTORICAL HISTORICAL HISTORICAL ELIMINATIONS ELIMINATIONS PRO FORMA
------------- ------------- ------------- ------------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenues............ $46,474 $25,746 $ 8,746 $ -- $ -- $ 80,966
Total operating expenses.. 39,237 21,306 10,328 (804)(6) 134(e) 70,802
601 (7)
------- ------- ------- --------- -------- ---------
Income (loss) from
operations.............. 7,237 4,440 (1,582) 203 (134) 10,164
Total other income
(expenses).............. 185 (316) (271) (2,996)(4) (936)(d) (3,694)
306 (5) 534 (g)
(200)(h)
Minority interest......... -- (874) -- 874 (9) -- --
------- ------- ------- --------- -------- ---------
Income (loss) before
income taxes............ 7,422 3,250 (1,853) (1,613) (736) 6,470
Taxes on income........... 3,016 1,323 -- (1,045)(8) (810)(f) 2,851
367 (9)
------- ------- ------- ------- -------- ---------
Net income (loss)......... $ 4,406 $ 1,927 $(1,853) $ (935) $ 74 $ 3,619
------- ------- ------- ------- -------- ---------
------- ------- ------- ------- -------- ---------
Net income per share...... $ .32 $ .26
------- ---------
------- ---------
Weighted average common
shares outstanding...... 13,754 13,754
------- ---------
------- ---------
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
26
PENN NATIONAL GAMING, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
POCONO DOWNS ACQUISITION:
The pro forma adjustments are as follows:
(1) The Company purchased Pocono Downs for $47,000,000 and recorded a
charge of $525,000 for estimated acquisition-related costs.
The purchase price of the Pocono Downs Acquisition is reflected as
follows:
(IN THOUSANDS)
-------------
Cost of Pocono Downs Acquisition.......................... $ 47,525
Less: Historical minority interest........................ (1,880)
Pocono Downs historical equity....................... (11,541)
--------
Excess acquisition cost................................... $ 34,104
--------
--------
Allocations:
Increase to property and equipment........................ $ 22,541
Intangibles, including goodwill........................... 11,563
--------
$ 34,104
--------
--------
The following pro forma adjustment records the Pocono Downs
Acquisition:
SEPTEMBER 30, 1996
--------------------
DEBIT CREDIT
------- --------
(IN THOUSANDS)
Cash............................................................ $46,407
Property and equipment, net..................................... $22,541
Intangibles, including goodwill................................. 11,563
Minority interest............................................... 1,880
Stockholders' equity............................................ 11,541
Other assets, including deferred charges........................ 1,118
(2) In connection with the Pocono Downs Acquisition, the Company borrowed
$47,000,000. Approximately $8,179,000 of existing Pocono Downs cash and
marketable securities was used to retire its long-term indebtedness.
The following pro forma adjustment reflects the repayment of certain
Pocono Downs indebtedness, as well as the transaction-related
borrowings:
SEPTEMBER 30, 1996
------------------
DEBIT CREDIT
------- --------
(IN THOUSANDS)
Current maturities of long-term debt............................ $ 1,020
Long-term debt.................................................. $39,841
Cash............................................................ 44,822
Marketable securities........................................... 6,001
(3) Fees incurred or to be incurred in connection with the above-mentioned
bank borrowing are estimated to be $1,780,000. The following pro forma
adjustment represents the payment of these fees:
SEPTEMBER 30, 1996
------------------
DEBIT CREDIT
------ ------
(IN THOUSANDS)
Other assets, including deferred charges........................ $1,780
Cash............................................................ $1,780
27
PENN NATIONAL GAMING, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) The purchase price was financed with the above-mentioned bank
borrowing. The following pro forma adjustment records the interest
expense in connection with this borrowing at an assumed interest rate
of 8.5% per annum:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------ ------------------
(IN THOUSANDS)
Interest expense -- senior debt...................... $3,995 $2,996
(5) The following pro forma adjustment reflects the elimination of Pocono
Downs, net interest expense relating to the repayment of its
indebtedness:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- -------------------
(IN THOUSANDS)
Eliminate historical net interest expense............ $(561) $(306)
(6) The following pro forma adjustment reflects the elimination of certain
historical Pocono Downs corporate and administrative expenses,
principally certain duplicative senior management compensation:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- -------------------
(IN THOUSANDS)
Operating expenses other than depreciation and
amortization....................................... $(1,053) $(804)
(7) The following pro forma adjustment reflects the incurrence of
additional depreciation and amortization:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- -------------------
(IN THOUSANDS)
Operating expenses -- depreciation and
amortization....................................... $861 $601
(8) Pro forma adjustment to record income tax effect of pro forma income
statement adjustments at estimated effective tax rate of 42%:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- -------------------
(IN THOUSANDS)
Income tax effect.................................... $(1,362) $(1,045)
(9) Pro forma adjustment to eliminate allocation of income to Pocono Downs'
minority interest and the related tax effect:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- -------------------
(IN THOUSANDS)
Minority interest.................................... $1,571 $874
Income tax provision................................. 660 367
28
PENN NATIONAL GAMING, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CHARLES TOWN ACQUISITION:
The pro forma adjustments are as follows:
(a) The Charles Town Joint Venture, in which the Company has reached an
agreement with its joint venture partner to hold an 89% interest,
purchased substantially all of the assets of Charles Town for
approximately $16,500,000 and has incurred or will incur $2,025,000 of
estimated acquisition-related costs.
The purchase price of the Charles Town Acquisition is reflected as
follows:
(IN THOUSANDS)
---------------
Cost of Charles Town Acquisition...................... $18,525
Less: Historical value of assets being acquired....... (9,093)
-------
Excess acquisition cost............................... $ 9,432
-------
-------
Allocations:
Increase to property and equipment.................... $ 7,407
Intangibles, including goodwill....................... 2,025
-------
$ 9,432
-------
-------
The following pro forma adjustment records the Charles Town
Acquisition and the elimination of all other components of Charles
Town's balance sheet as of September 30, 1996:
SEPTEMBER 30, 1996
----------------------
DEBIT CREDIT
----- ------
(IN THOUSANDS)
Cash........................................... $17,165
Other current assets........................... 190
Property and equipment, net.................... $7,407
Intangibles, including goodwill................ 2,025
Current maturities of long-term debt........... 6,877
Other current liabilities...................... 2,027
Long-term debt................................. 2,704
Other long-term liabilities.................... 84
Shareholders' equity........................... 1,830
Other assets, including deferred charges....... 1,939
(b) The Company borrowed $16,500,000 to finance the Charles Town
Acquisition. The following pro forma adjustment reflects the financing
of the Charles Town Acquisition:
SEPTEMBER 30, 1996
----------------------
DEBIT CREDIT
------- ------
(IN THOUSANDS)
Long-term debt......................... 16,500
Cash................................... $16,500
(c) Fees incurred or to be incurred by the Company in connection with the
above-mentioned bank borrowing are estimated to be $784,000. The
following pro forma adjustment represents the payment for these costs:
SEPTEMBER 30, 1996
----------------------
DEBIT CREDIT
----- ------
(IN THOUSANDS)
Other assets, including deferred charges........ $784
Cash............................................ $784
29
PENN NATIONAL GAMING, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) The following pro forma adjustment records the interest expense in
connection with the above-mentioned bank borrowing at an assumed
interest rate of 8.5% per annum:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- --------------------
(IN THOUSANDS)
Interest expense -- senior debt...................... $1,249 $936
(e) The following pro forma adjustment reflects the effect of additional
depreciation and amortization:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- -------------------
(IN THOUSANDS)
Operating expenses -- depreciation and
amortization....................................... $182 $134
(f) Pro forma adjustment to record income tax effect of pro forma income
statement adjustments at estimated effective tax rate of 34%:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- -------------------
(IN THOUSANDS)
Income tax effect.................................... $(979) $(810)
(g) The following pro forma adjustment reflects the elimination of
substantially all of Charles Town's net interest expense:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- -------------------
(IN THOUSANDS)
Eliminate historical net interest expense............ $(664) $(534)
(h) The following pro forma adjustment reflects the elimination of other
income recorded by Charles Town in relation to purchase option
payments:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- -------------------
(IN THOUSANDS)
Other income......................................... $(200) $(200)
30
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial information with respect to
the Company's financial position as of December 31, 1994 and 1995 and its
results of operations for each of the three years in the period ended December
31, 1995 has been derived from the audited consolidated financial statements of
the Company appearing elsewhere in this Prospectus. The selected consolidated
financial information with respect to the Company's results of operations for
the years ended December 31, 1991 and 1992 and with respect to the Company's
financial position as of December 31, 1991, 1992 and 1993 has been derived from
audited financial statements of the Company that are not included in this
Prospectus. The selected consolidated financial data for each of the nine-month
periods ended September 30, 1995 and 1996 are derived from the Company's
unaudited financial statements, which, in the opinion of management, reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of such periods, adjusted as described in the
notes below. The results for the nine-month period ended September 30, 1996 are
not necessarily indicative of results for the full year, or any future period.
The selected historical 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 elsewhere in this
Prospectus or incorporated by reference herein.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------ ------------------------
1991 (1) 1992 (1) 1993 (1) 1994 1995 1995 1996
--------- -------- ------------ ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND ATTENDANCE DATA)
INCOME STATEMENT DATA:
Revenues
Pari-mutuel revenues
Penn National races........ $ 26,490 $ 31,967 $ 29,224 $ 23,428 $ 21,376 $ 16,578 $ 14,495
Import simulcasting........ 3,921 5,764 9,162 16,968 27,254 20,412 23,596
Export simulcasting........ -- 306 383 1,187 2,142 1,447 2,479
Admissions, programs and
other racing revenues.... 2,252 2,502 2,485 2,563 3,704 2,978 3,403
Concession revenues........ 671 1,285 1,410 1,885 3,200 2,478 2,501
--------- --------- ------------ ----------- ----------- ----------- -----------
Total revenues............. 33,334 41,824 42,664 46,031 57,676 43,893 46,474
--------- --------- ------------ ----------- ----------- ----------- -----------
Operating expenses
Purses, stakes and
trophies................... 8,704 9,581 9,719 10,674 12,091 9,329 9,744
Direct salaries, payroll
taxes and employee
benefits................... 5,329 5,939 6,394 6,707 7,699 5,823 6,211
Simulcast expenses........... 7,576 10,403 10,136 8,892 9,084 6,905 6,920
Pari-mutuel taxes............ 2,930 3,504 3,568 4,054 4,963 3,773 3,954
Other direct meeting
expenses................... 4,876 5,835 6,046 6,375 8,214 6,249 6,932
OTW concession expenses...... -- 541 806 1,231 2,221 1,689 1,766
Management fees paid to
related entity............. 882 1,366 1,208 345 -- -- --
Other operating expenses..... 1,911 2,354 2,331 3,329 5,149 3,750 3,710
--------- --------- ------------ ----------- ----------- ----------- -----------
Total operating expenses... 32,208 39,523 40,208 41,607 49,421 37,518 39,237
--------- --------- ------------ ----------- ----------- ----------- -----------
Income from operations......... 1,126 2,301 2,456 4,424 8,255 6,375 7,237
--------- --------- ------------ ----------- ----------- ----------- -----------
Other income (expenses)
Interest income (expense),
net........................ (910) (917) (962) (340) 198 146 185
Other........................ 89 56 6 15 10 4 --
--------- --------- ------------ ----------- ----------- ----------- -----------
Total other income
(expenses). . . (821) (861) (956) (325) 208 150 185
--------- --------- ------------ ----------- ----------- ----------- -----------
Income before income taxes and
extraordinary item........... 305 1,440 1,500 4,099 8,463 6,525 7,422
Taxes on income................ 76 150 42 1,381 3,467 2,680 3,016
--------- --------- ------------ ----------- ----------- ----------- -----------
Income before extraordinary
item......................... 229 1,290 1,458 2,718 4,996 3,845 4,406
Extraordinary item loss on
early extinguishment of debt,
net of income taxes of $83... -- -- -- 115 -- -- --
--------- --------- ------------ ----------- ----------- ----------- -----------
Net income..................... $ 229 $ 1,290 $ 1,458 $ 2,603 $ 4,996 $ 3,845 $ 4,406
--------- --------- ------------ ----------- ----------- ----------- -----------
--------- --------- ------------ ----------- ----------- ----------- -----------
Net income per share........... $ .38 $ .29 $ .32
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares
outstanding.................. 13,104,000 13,044,000 13,754,000
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL PRO FORMA INCOME
STATEMENT DATA (2):
Net income..................... $ 1,81 $ 2,724
Net income per share........... 0.15 0.22
Weighted average common shares
outstanding.................. 12,249,000(3) 12,663,000
----------- -----------
----------- -----------
31
SELECTED CONSOLIDATED FINANCIAL DATA -- (CONTINUED)
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------ -----------------------
1991 (1) 1992 (1) 1993 (1) 1994 1995 1995 1996
--------- --------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND ATTENDANCE DATA)
OTHER DATA (UNAUDITED):
Total paid attendance (4)...... 636,944 785,569 799,625 848,482 1,051,803 813,823 802,948
Pari-mutuel wagering
Penn National races.......... $ 128,551 $ 153,332 $ 138,939 $ 111,248 $ 102,145 $ 79,235 $ 69,200
Import simulcasting.......... 28,660 42,159 58,252 93,461 142,499 106,664 122,895
Export simulcasting.......... -- 10,202 12,746 40,337 72,252 48,327 84,228
--------- --------- ------------ ----------- ----------- ----------- -----------
Total pari-mutuel
wagering................. $ 157,211 $ 205,693 $ 209,937 $ 245,046 $ 316,896 $ 234,226 $ 276,323
--------- --------- ------------ ----------- ----------- ----------- -----------
--------- --------- ------------ ----------- ----------- ----------- -----------
Gross profit from wagering
(5)...................... $ 11,201 $ 14,549 $ 15,346 $ 17,963 $ 24,634 $ 18,430 $ 19,952
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------ ------------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- ------------ ----------- ----------- ----------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash........................... $ 88 $ 937 $ 1,002 $ 5,502 $ 7,514 $ 6,865 $ 5,602
Working capital (deficiency)... (4,120) (4,700) (4,549) 2,074 4,134 2,762 2,994
Total assets................... 14,602 18,071 18,373 21,873 27,532 26,579 33,733
Total debt..................... 10,181 11,716 10,422 516 390 425 302
Shareholders' equity........... 1,224 2,516 3,418 15,627 20,802 19,472 26,694
- ------------------
(1) The Consolidated Financial Statements of the Company include entities which,
prior to a reorganization which occurred in 1994 shortly before the
Company's initial public offering (the "Reorganization"), were affiliated
through common ownership and control. See Note 1 of the Notes to the
Consolidated Financial Statements of the Company included elsewhere in this
Prospectus.
(2) Supplemental pro forma amounts for the years ended December 31, 1993 and
1994 reflect (i) the elimination of $1,208,000 and $345,000, respectively,
in management fees paid to a related entity, (ii) the inclusion of $320,000
and $133,000, respectively, in executive compensation, (iii) the elimination
of $946,000 and $413,000, respectively, of interest expenses on Company debt
which was repaid with the proceeds of the initial public offering in 1994,
(iv) the elimination of $0 and $198,000, respectively, of loss on early
extinguishment of debt, and (v) a provision for income taxes of $701,000 and
$377,000, respectively, as if the S corporations and partnerships comprising
part of the Company prior to the Reorganization in 1994 had been taxed as C
corporations. There were no supplemental pro forma adjustments for any
subsequent periods.
(3) Based on 8,400,000 shares of Common Stock outstanding before the initial
public offering in May 1994 plus 4,500,000 shares sold by the Company in the
initial public offering.
(4) Does not reflect attendance at the Thoroughbred Track for wagering on
simulcasts when live racing is not conducted, but does reflect attendance at
the Reading, Chambersburg, York and Lancaster OTWs, which opened in May
1992, April 1994, March 1995 and July 1996, respectively.
(5) Amounts equal total pari-mutuel revenues, less purses paid to Horsemen,
taxes payable to Pennsylvania and simulcast commissions or host track fees
paid to other racetracks.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere in
this Prospectus.
GENERAL
Penn National's pari-mutuel revenues have been derived from (i) wagering on
Penn National races at the Thoroughbred Track, Penn National's OTWs, other
Pennsylvania racetracks and OTWs and through Telebet, as well as wagering at the
Thoroughbred Track on certain stakes races run at out-of-state racetracks
(referred to in the Company's financial statements as "pari-mutuel revenues from
Penn National races"), (ii) wagering on full cards of import simulcast races at
the Thoroughbred Track, Penn National's OTWs and through Telebet (referred to in
the Company's financial statements as "pari-mutuel revenues from import
simulcasting") and (iii) fees from wagering on export simulcasting Penn National
races at out-of-state locations (referred to in the Company's financial
statements as "pari-mutuel revenues from export simulcasting"). Penn National's
other revenues have been derived from admissions, program sales and certain
other ancillary activities and food and beverage sales and concessions.
The amount of revenue to Penn National from a wager depends upon where the
race is run and where the wagering takes place. Pari-mutuel revenues from Penn
National races and import simulcasting of out-of-state races has consisted of
the total amount wagered, less the amount paid as winning wagers. Pari-mutuel
revenues from wagering at the Thoroughbred Track or Penn National's OTWs on
import simulcasting from other Pennsylvania racetracks has consisted of the
total amount wagered, less the amounts paid as winning wagers, amounts payable
to the host racetrack and pari-mutuel taxes to Pennsylvania. Pari-mutuel
revenues from export simulcasting has consisted of amounts payable to Penn
National by the out-of-state racetracks with respect to wagering on live races
at the Thoroughbred Track.
Operating expenses have included purses payable to the Thoroughbred
Horsemen, commissions to other racetracks with respect to wagering at their
facilities on races at the Thoroughbred Track, pari-mutuel taxes on Penn
National races and export simulcasting and other direct and indirect operating
expenses.
The Pennsylvania Racing Act specifies the maximum percentages of each
dollar wagered on horse races in Pennsylvania which may be retained by Penn
National (prior to required payments to the Thoroughbred Horsemen and applicable
taxing authorities). The percentages vary, based on the type of wager; the
average percentage is approximately 20%. The balance of each dollar wagered must
be paid out to the public as winning wagers. With the exception of revenues
derived from wagers at the Thoroughbred Track or the Penn National OTWs, Penn
National's revenues on each race are determined pursuant to such maximum
percentage and agreements with the other racetracks and OTWs at which wagering
is taking place. Amounts payable to the Thoroughbred Horsemen are determined
under agreements with the Thoroughbred Horsemen and vary depending upon where
the wagering is conducted and the racetrack at which such races take place. The
Thoroughbred Horsemen receive their share of such wagering as race purses. Penn
National retains a higher percentage of wagers made at its own facilities than
of wagers made at other locations. See "Business -- Purses; Agreements with
Horsemen."
33
RECENT DEVELOPMENTS
Based on preliminary results, the Company expects that its net income for
the fourth quarter ending December 31, 1996 will approximate $1,100,000,
compared to net income of $1,151,000 for the fourth quarter ending December 31,
1995. The decrease in net income is due primarily to higher interest expense,
approximately $453,000 of which is related to short-term borrowings in
connection with the Pocono Downs Acquisition and less than expected net income
from the Company's Lancaster OTW, which opened in July 1996 after a court
challenge and strenuous opposition from local groups averse to gaming.
RESULTS OF OPERATIONS
The following table sets forth certain data from the Consolidated
Statements of Income of the Company as a percentage of total revenues:
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
Revenues
Pari-mutuel revenues
Penn National races........................... 68.5% 50.9% 37.1% 37.8% 31.2%
Import simulcasting........................... 21.5 36.9 47.3 46.5 50.8
Export simulcasting........................... 0.9 2.6 3.7 3.3 5.3
Admissions, programs and other
racing revenues............................... 5.8 5.5 6.4 6.8 7.3
Concession revenues............................. 3.3 4.1 5.5 5.6 5.4
--------- --------- --------- --------- ---------
Total revenues.............................. 100.0 100.0 100.0 100.0 100.0
--------- --------- --------- --------- ---------
Operating expenses
Purses, stakes and trophies..................... 22.8 23.2 21.0 21.3 21.0
Direct salaries, payroll taxes and
employee benefits............................. 15.0 14.6 13.3 13.3 13.3
Simulcast expenses.............................. 23.8 19.3 15.8 15.7 14.9
Pari-mutuel taxes............................... 8.3 8.8 8.6 8.6 8.5
Other direct meeting expenses................... 14.2 13.8 14.2 14.2 14.9
OTW concession expenses......................... 1.9 2.7 3.9 3.9 3.8
Management fees paid to related entity.......... 2.8 0.8 -- -- --
Other operating expenses........................ 5.4 7.2 8.9 8.5 8.0
--------- --------- --------- --------- ---------
Total operating expenses.................... 94.2 90.4 85.7 85.5 84.4
--------- --------- --------- --------- ---------
Income from operations............................ 5.8 9.6 14.3 14.5 15.6
--------- --------- --------- --------- ---------
Other income (expenses)
Interest income (expense), net.................. (2.3) (0.7) 0.4 0.4 0.4
Other........................................... 0.1 -- -- -- --
--------- --------- --------- --------- ---------
Total other income (expenses)............... (2.2) (0.7) 0.4 0.4 0.4
--------- --------- --------- --------- ---------
Income before income taxes and
extraordinary item.............................. 3.6 8.9 14.7 14.9 16.0
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income........................................ 3.4 5.7 8.7 8.8 9.5
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
Total revenue increased by approximately $2.6 million or 5.9% from $43.9
million for the nine months ended September 30, 1995 to $46.5 million for the
nine months ended September 30, 1996. The increase was attributable to an
increase in import and export simulcasting revenues, offset in part by a
decrease in pari-mutuel revenues on Penn National races. Revenues also increased
due to the opening of the Lancaster OTW on July 11, 1996. The increase in export
simulcasting revenues of $1.0 million or 71.3% from $1.4 million to $2.5 million
resulted from Penn National's races being broadcast to additional out-of-state
locations. The decrease in pari-mutuel revenues on Penn National races was
34
due to increased import simulcasting revenue from wagering on other racetracks
at Company facilities. For the nine-month period in 1996, Penn National was
scheduled to run 165 live race days but canceled 11 days in the first quarter
due to weather. In the comparable period in 1995, Penn National ran 154 live
race days.
Total operating expenses increased by approximately $1.7 million or 4.6%
from $37.5 million for the nine months ended September 30, 1995 to $39.2 million
for the nine months ended September 30, 1996. The increase in operating expenses
resulted from an increase in purses, stakes and trophies, pari-mutuel taxes, and
simulcast expenses resulting from an increase in revenue from import
simulcasting, nine months of operating expenses for the York OTW in 1996
compared to six months of expenses in 1995, and three months of operating
expenses for the new Lancaster OTW.
Income from operations increased by approximately $0.9 million or 13.5%
from $6.4 million to $7.2 million due to the factors described above.
Net income from operations increased by approximately $561,000 or 14.6%
from $3.8 million for the nine months ended September 30, 1995 to $4.4 million
for the nine months ended September 30, 1996. Income tax expense increased from
$2.7 million to $3.0 million, primarily due to the increase in income for the
period.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total revenues increased by approximately $11.6 million or 25.3% from $46.0
million to $57.7 million in 1995. This increase was primarily attributable to an
increase in import and export simulcasting revenues, admissions programs, other
racing revenues and concession revenues. The increase in revenues resulted from
a full year of operations at the Chambersburg OTW compared to eight months of
operations in 1994, the opening of the York OTW in March 1995, and an increase
of approximately $955,000 or 80.5% from $1.2 million to $2.1 million in export
simulcasting revenues due to Penn National races being broadcast to additional
out-of-state locations. The decrease in pari-mutuel revenues from live races at
the Thoroughbred Track was due to the decrease in the number of live race days
from 219 race days in 1994 to 204 race days in 1995.
Total operating expenses increased by approximately $7.8 million or 18.8%
from $41.6 million to $49.4 million in 1995. The increase in operating expenses
resulted from a full year of operations at the Chambersburg OTW, the opening of
the York OTW and the expansion of the corporate staff and office facility in
Wyomissing. The decrease in management fees was a result of the management fees
being discontinued when Penn National completed its initial public offering in
1994.
Income from operations increased by approximately $3.8 million or 86.6%
from $4.4 million to $8.3 million due to the factors described above.
Total other income (expense) increased by approximately $533,000 due to the
investment of available cash reserves and the decrease in interest expense as a
result of repayment of all bank debt with the proceeds of Penn National's
initial public offering in May 1994.
Net income increased by approximately $2.4 million or 91.9% from $2.6
million to $5.0 million reflecting the factors described above. Income tax
expenses increased from $1.4 million to $3.5 million due to the increased income
for the year.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Total revenues increased by $3.4 million or 7.9% from $42.7 million to
$46.0 million in 1994. This increase was primarily attributable to an increase
in import and export simulcasting revenues, which was partially offset by a
decrease in pari-mutuel revenues from live races at the Thoroughbred Track. The
increase in import simulcasting revenues resulted from a full year of full-card
import simulcasting and the opening of the Chambersburg OTW in April 1994. The
decrease in wagering on live races at the Thoroughbred Track was attributable to
a decrease in live racing days because of inclement
35
weather and competition from full-card import simulcasting. The increase in
export simulcasting revenues resulted from Penn National races being broadcast
to additional out-of-state locations.
Total operating expenses increased $1.4 million or 3.5% from $40.2 million
to $41.6 million in 1994. The increase was attributable to an increase in
purses, stakes and trophies, direct salaries, payroll taxes and employee
benefits, pari-mutuel taxes, other direct meeting expenses, off-track wagering
concession expenses and other operating expenses. These increases were partially
offset by a decrease in simulcast expenses and management fees paid to a related
entity. Direct salaries, payroll taxes and employee benefits, other direct
meeting expenses and offtrack wagering concession expenses increased due to the
April 26, 1994 opening of the Chambersburg OTW. The increases in purses, stakes
and trophies, and pari-mutuel taxes was directly related to the increase in
pari-mutuel revenues. The decrease in simulcast expenses was a result of the
decrease in wagering on Penn National Races at other Pennsylvania racetracks.
When Penn National completed its initial public offering in May 1994, it ceased
to pay management fees to a related entity which resulted in a decrease in these
fees. The increase in other operating expenses was attributable to the opening
of the Chambersburg OTW and the increase in officers' salaries and wages after
the initial public offering.
Income from operations increased by $2.0 million or 80.1% from $2.4 million
to $4.4 million in 1994, reflecting the factors described above.
Total other (expenses) decreased by $631,000 or 66.0% from $956,000 to
$325,000 primarily because of a decrease in interest expense as a result of Penn
National repaying all of its bank debt with the proceeds of the initial public
offering in May 1994.
Net income increased by $1.1 million, or 78.5% from $1.5 million to $2.6
million in 1994 reflecting the factors described above. The increase in income
before extraordinary item was offset in part by an increase in loss on early
extinguishment of debt of $115,000 net of income taxes in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Historically, Penn National's primary sources of liquidity and capital
resources have been cash flow from operations and borrowings from banks and
related parties. During the nine months ended September 30, 1996, Penn
National's cash position decreased by approximately $1.9 million from $7.5
million at December 31, 1995 to $5.6 million at September 30, 1996, as a result
of expenditures for improvements and equipment at the Thoroughbred Track,
construction of the Lancaster OTW, the start of construction of the Williamsport
OTW and prepaid acquisition costs in connection with the Acquisitions. During
the year ended December 31, 1995, the Company's cash position increased to $7.5
million from $5.5 million at December 31, 1994.
Net cash provided from operating activities totaled approximately $4.5
million for the nine months ended September 30, 1996, of which $5.3 million came
from net income and non-cash expenses, which was offset by other operating
activity items. Net cash provided from operating activities totaled $5.9 million
during 1995, of which substantially all came from net income and non-cash
expenses.
Cash flows used in investing activities for the nine months ended September
30, 1996 totaled approximately $7.8 million. Capital expenditures totaled $4.8
million for improvements and equipment at the Thoroughbred Track, the
construction of the Lancaster OTW and the start of construction of the
Williamsport OTW. Prepaid acquisition costs totaled $1.9 million for the Charles
Town Acquisition and $1.1 million for the Pocono Downs Acquisition. Cash flows
used in investing activities totaled $4.0 million for capital expenditures
during the year ended December 31, 1995. Capital expenditures were primarily for
improvements and equipment at the Thoroughbred Track and the cost of
construction of the York OTW.
Cash flows from financing activities for the nine months ended September
30, 1996 totaled approximately $1.5 million from the exercise of warrants and
the issuance of 385,290 shares of Common Stock.
36
The Company is subject to possible liabilities arising from environmental
conditions at the Landfill adjacent to the Harness Track. 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. Any such expenses could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors -- Potential Environmental Liability."
In May 1994, the Company completed an initial public offering which
generated proceeds of $13.0 million after payment of commissions and other
offering expenses. A portion of the proceeds was used to repay substantially all
of the Company's bank debt and other indebtedness outstanding at that time,
which aggregated approximately $11.0 million. In addition, the Company made S
corporation distributions of $3.0 million during the year ended December 31,
1994 to the shareholders of the S corporations partially comprising the Company
immediately prior to the initial public offering. Approximately $2.0 million of
these distributions were not paid out in cash, but were offset against and
applied to repay debts owed by the shareholders or their affiliates to the
Company.
In November 1996, the Company entered an agreement with a syndicate of
banks for which Bankers Trust Company acts as agent (the "Agent"), providing for
a $75.0 million Credit Facility. Amounts outstanding under the Credit Facility
bear interest, at the Company's option, at the Agent's base rate plus an
applicable margin of up to 2.0% or a eurodollar rate plus an applicable margin
of up to 3.0%. The Credit Facility includes (i) a $47.0 million term loan, which
was used to finance the consummation of the Pocono Downs Acquisition, (ii) a
$23.0 million term loan a portion of which was used to finance the Charles Town
Acquisition and the balance of which will be used to finance a portion of the
refurbishment of the Charles Town Facility and (iii) a $5.0 million revolving
loan, including a $2.0 million letter of credit sub-limit, of which $1.4 million
was outstanding as of December 31, 1996. The Company's existing credit facility
was repaid and terminated simultaneously with the closing of the Credit
Facility. The Credit Facility is secured by the assets of the Company and
contains customary covenants, including financial covenants with respect to the
Company's leverage and interest coverage ratios, payments of dividends and sales
of assets, and customary default provisions, including provisions related to
non-payment of principal and interest, default under other debt agreements and
bankruptcy. Pursuant to the terms of the credit agreement under which such
borrowings were made, the Company is obligated to apply to repayment of amounts
outstanding under the Credit Facility 100% of the net proceeds to the Company of
any public offering of its equity securities or of any funded indebtedness
issued by the Company if the aggregate amount of the remaining commitments and
amounts outstanding under the Credit Facility exceeds $50.0 million, and 50% of
the net proceeds to the Company of any public offering of its equity securities
or of any funded indebtedness issued by the Company if the aggregate amount of
the remaining commitments and amounts outstanding under the Credit Facility is
between $25.0 million and $50.0 million or if the Company's leverage ratio is
greater than 2-to-1; however, the credit agreement permits the Company to retain
the first $6.0 million of proceeds from any public offering of its equity
securities if the offering results in net proceeds to the Company of at least
$25.0 million. The Credit Facility requires the Company to obtain the
syndicate's consent prior to making additional investments in new or existing
businesses, subject to certain exceptions. The Company and the Charles Town
Joint Venture have applied to the West Virginia State Racing Commission for
confirmation of the Company's preliminary license to conduct racing and
pari-mutuel wagering and to the West Virginia Lottery Commission for a license
to install and operate Gaming Machines at the refurbished Charles Town Facility;
failure by the Company to obtain a license from the West Virginia Lottery
Commission by June 1, 1997 or to retain both licenses constitutes an event of
default under the Credit Facility. As of January 20, 1997, the principal amount
outstanding under the Credit Facility was $63.5 million, all of which was used
to pay the purchase price for the Pocono Downs Acquisition and the Charles Town
Acquisition and related transaction costs, and the average interest rate
applicable to such borrowings was approximately 8.625%.
37
During 1997, the Company anticipates capital expenditures of approximately
$4.0 million to construct the Downingtown OTW, approximately $3.0 million to
complete the Williamsport OTW, approximately $4.0 million towards the
construction of two additional OTWs and approximately $1.0 million for
miscellaneous capital expenditures and improvements. Under the Credit Facility,
the Company is permitted to make capital expenditures (not including the
refurbishment of the Charles Town Facility or the cost of Gaming Machines) of
$12.0 million in 1997, $4.0 million in 1998 and $2.0 million in 1999 and
thereafter. The Company anticipates expending approximately $16.0 million on the
refurbishment of the Charles Town Facility (excluding the cost of Gaming
Machines).
In December 1995, the Company agreed in principle to form a joint venture
to develop, manage and operate pari-mutuel racing facilities in a state other
than Pennsylvania or West Virginia. The actual formation of the joint venture is
subject to numerous contingencies, including receipt of regulatory approval from
that state's Horse Racing Commission and approval of the Company's lenders. The
Company intends to fund, if successful, the joint venture's operations through
additional borrowings and the Company's working capital.
On February 26, 1996, construction began on the Lancaster OTW. The
construction costs totaled approximately $2.4 million and were funded from the
Company's cash reserves. The Lancaster OTW opened July 11, 1996.
On May 13, 1996, the Company loaned $400,000 to an unrelated company in
Downingtown in connection with an option to acquire land upon which the Company
may construct an OTW. The loan bears interest at a rate of 10% per annum and
matures on May 13, 1997.
Effective June 4, 1996, the Charles Town Joint Venture entered into a Loan
and Security Agreement with Charles Town Races, Inc. The Loan and Security
Agreement provided for a working capital line of credit in the amount of
$1,250,000. Upon consummation of the Charles Town Acquisition, Charles Town
Races, Inc. repaid the loan and the purchase price for the Charles Town Facility
was to be reduced by $1.60 for each dollar borrowed. The parties agree that
$936,000 of the amount borrowed was eligible for the $1.60 purchase price
reduction and are negotiating the applicability of the purchase price reduction
to the remaining $219,000 that was borrowed. Approximately $350,000 has been
escrowed pending resolution of this issue.
The Company currently estimates that the net proceeds of this offering,
together with cash generated from operations and borrowings under the Credit
Facility, will be sufficient to finance its current operations, potential
obligations relating to the Acquisitions and planned capital expenditure
requirements at least through 1997. There can be no assurance, however, that the
Company will not be required to seek additional capital at an earlier date. The
Company may, from time to time, seek additional funding through public or
private financing, including equity financing. There can be no assurance that
adequate funding will be available as needed or, if available, on terms
acceptable to the Company. If additional funds are raised by issuing equity
securities, existing shareholders may experience dilution.
EFFECT OF INCLEMENT WEATHER AND SEASONALITY
Because horse racing is conducted outdoors, variable weather contributes to
the seasonality of the Company's business. Weather conditions, particularly
during the winter months, may cause races to be canceled or may curtail
attendance. During the year ended December 31, 1995, the Company lost six
scheduled racing days due to weather conditions and during the nine month period
ended September 30, 1996, the Company lost 11 scheduled racing days due to
weather conditions. Over the previous five years, the Company lost an average of
four days per year due to inclement weather. Because a substantial portion of
the Company's Thoroughbred Track and Harness Track expenses are fixed, the loss
of scheduled racing days could have a material adverse effect on the Company's
business, financial condition and results of operations.
The severe winter weather in 1996 also resulted in the closure of the
Company's OTW facilities for two days in January 1996. Although weather
conditions reduced attendance at OTWs, the reduction in
38
attendance at OTWs on days when both the Thoroughbred Track and the OTWs were
open was proportionately less than the reduction in attendance at the
Thoroughbred Track. Because of the Company's growing dependence upon OTW
operations, severe weather that causes the Company's OTWs to close could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Attendance and wagering at the Company's facilities have been favorably
affected by special racing events which stimulate interest in horse racing, such
as the Triple Crown races in May and June and the Breeders' Cup in autumn. As a
result, the Company's revenues and net income have been greatest in the second
and third quarters of the year and lowest in the first and fourth quarters of
the year.
OTHER MATTERS
During 1995, the Financial Accounting Standards Board ("FASB") adopted
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." The Company adopted the provisions of SFAS 121 during the year ended
December 31, 1995. SFAS 121 establishes accounting standards for the impairment
of long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of.
The Company reviews the carrying values of its long-lived and identifiable
intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. Any long-lived assets held for disposal are reported at the lower
of their carrying amounts or fair value less cost to sell.
During 1995, the FASB also adopted Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," which
has recognition provisions that establish a fair value based method of
accounting for stock-based employee compensation plans and established fair
value as the measurement basis for transactions in which an entity acquires
goods or services from nonemployees in exchange for equity instruments. SFAS 123
also has certain disclosure provisions. Adoption of the recognition provisions
of SFAS 123 with regard to these transactions with nonemployees was required for
all such transactions entered into after December 15, 1995 and the Company
adopted these provisions as required. The recognition provision with regard to
the fair value based method of accounting for stock-based employee compensation
plans is optional. The Company has decided to continue to apply Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees," for its stock-based employee compensation arrangements. APB 25 uses
what is referred to as an intrinsic value based method of accounting. The
disclosure provisions of SFAS 123 are effective for fiscal years beginning after
December 15, 1995. The Company will provide these disclosures when required.
39
BUSINESS
GENERAL
Penn National Gaming, which began operations in 1972, operates the largest
number of pari-mutuel wagering locations in Pennsylvania. The Company provides
pari-mutuel wagering opportunities on both live and simulcast thoroughbred and
harness horse races at two racetracks and six OTWs located principally in
Eastern and Central Pennsylvania. Prior to the consummation of the Acquisitions,
the Company owned and operated the Thoroughbred Track outside Harrisburg,
Pennsylvania and four OTWs in Chambersburg, Lancaster, Reading and York,
Pennsylvania. On November 27, 1996, the Company consummated the Pocono Downs
Acquisition, and as a result acquired the Harness Track outside Wilkes-Barre,
Pennsylvania and two OTWs in Allentown and Erie, Pennsylvania. The Company now
operates one of the two thoroughbred tracks in Pennsylvania and one of the two
harness tracks in Pennsylvania. The Company intends to develop five additional
OTWs that have been allocated to it under Pennsylvania law, after which it would
operate a total of 11 of the 23 OTWs currently authorized in Pennsylvania.
Following the consummation of the Charles Town Acquisition on January 15,
1997, the Company operates, and has reached an agreement with its joint venture
partner to hold an 89% interest in, Charles Town Races, a thoroughbred racing
facility located in Jefferson County, West Virginia. The Charles Town Facility
is approximately a 60-minute drive from Baltimore, Maryland and approximately a
70-minute drive from Washington, D.C. After refurbishment, the Company expects
to reopen Charles Town Races as an entertainment complex that will feature live
racing, dining, simulcast wagering and Gaming Machines. On November 5, 1996,
Jefferson County approved a referendum permitting the installation of Gaming
Machines at the Charles Town Facility. Approval for the installation of 400
Gaming Machines has been applied for and is expected to be obtained from the
West Virginia Lottery Commission within 90 to 120 days after the January 15,
1997 consummation of the Charles Town Acquisition. The Company expects that
these machines will be installed and operational in mid-1997. The installation
of additional Gaming Machines at the Charles Town Facility is subject to
approval by the West Virginia Lottery Commission after application and a public
hearing. The Company anticipates that it will apply for approval of the
installation and operation of a total of 1,000 Gaming Machines within the first
year after the opening of the Charles Town Facility.
The Company conducts pari-mutuel wagering at all of its locations on
thoroughbred and harness races run at its own tracks and on thoroughbred and
harness races import simulcast from other racetracks. The Company also export
simulcasts races run at its own tracks for wagering at other racetracks and OTWs
in Pennsylvania and at other locations throughout the United States. The
Company's customers can also wager on Company Races and on races import
simulcast from other racetracks through Telebet.
INDUSTRY OVERVIEW
Pari-mutuel wagering on thoroughbred or harness racing is pooled wagering,
in which a totalisator system totals the amounts wagered and adjusts the payouts
to reflect the relative amounts bet on different horses and various possible
outcomes. Portions of the pooled wagers are retained by the wagering facility,
paid to the applicable regulatory or taxing authorities and distributed to the
track's horsemen in the form of "purses" which encourage owners and trainers to
enter their horses in that track's live races. The balance of the pooled wagers
is paid out to bettors as winnings in accordance with the payoffs determined by
the totalisator system. Pari-mutuel wagering is currently authorized in more
than 40 states in the United States, all provinces in Canada and approximately
100 other countries around the world.
Gaming and wagering companies such as the Company that focus on pari-mutuel
horse race wagering derive revenue through wagers placed at their own tracks, at
their OTWs and on their own races at the tracks and OTWs of others. While some
states, such as New York, operate off-track betting locations that are
independent of racetracks, in other states racetrack ownership and operation is
typically a precondition to OTW ownership and operation. A racetrack in such a
state, then, is akin to an "admission ticket" to the OTW business.
40
Over the past several years, attendance at live racing has generally
declined. Prior to the inception of OTWs, declining live racing attendance at a
track translated directly into lower purses at that track. As the size of the
purses declined, the quality of live racing at the track would suffer, leading
in turn to further reductions in attendance. The Company believes that increased
contributions to the purse pool from wagers placed at OTWs affiliated with
racetracks have significantly offset the effects of declining live racing
attendance on race quality, and thereby improved the marketability of many
tracks' export simulcast products. Indeed, despite declining live racing
attendance, total pari-mutuel wagering on horse races in the United States has
remained relatively constant in recent years, increasing slightly from
approximately $14.1 billion in 1992 to approximately $14.6 billion in 1995,
according to the Association of Racing Commissioners International, Inc.; an
increase in simulcast, inter-track, off-track and telephone wagering from
approximately $7.0 billion to approximately $10.1 billion during that period has
offset declining wagering at tracks on live races. Moreover, a number of states
have recently begun to authorize the installation of slot machines, video
lottery terminals or other gaming machines at live racing venues such as
thoroughbred horse tracks, harness tracks and dog tracks. The revenue from these
gaming opportunities and from the higher volume of wagers placed at these venues
has not only increased total revenues for the tracks at which they are
installed, but has generally further increased purse size and thereby resulted
in higher quality races that can command higher simulcast revenues. Given that
many pari-mutuel wagering companies, such as the Company, face the necessary
precondition of conducting live racing operations as their entree into the
industry, the Company believes that its opportunities for success can be
maximized through OTW operations, import simulcasting and export simulcasting
and the operation of Gaming Machines, to the extent permitted.
STRATEGY
The Company intends to be a leading participant in the wagering industry by
capitalizing upon its horse racing expertise and its numerous wagering
locations. The Company's strategy is to focus on:
Opening Additional OTWs
The Company intends to expand its operations and increase its OTW revenues
by opening the five additional OTWs which it has been allocated under the
Pennsylvania Racing Act. The Company has already obtained approval for and
commenced construction of one additional OTW in Williamsport, Pennsylvania,
which is expected to open in the first quarter of 1997, and has applied for
approval of and is evaluating possible sites for an OTW in Downingtown,
Pennsylvania. The Company expects to move expeditiously to select appropriate
locations, apply for and obtain regulatory approvals and open its three
remaining allocated OTWs in Pennsylvania. In addition, the Company will consider
opening OTWs in other states to the extent that market conditions and the
regulatory environment may present opportunities for it to leverage its OTW
operating experience. West Virginia law currently does not permit the operation
of OTWs.
Developing the Charles Town Facility and Operating Gaming Machines
The Company intends to refurbish the Charles Town Facility and reopen it as
an entertainment complex integrating Gaming Machines with the Company's core
business strengths of live racing and simulcast wagering. The refurbishment will
include the renovation of the Charles Town Facility's thoroughbred track and
barns, the remodeling of its clubhouse and dining facilities and the initial
installation of 400 Gaming Machines; the cost of purchasing or leasing the
Gaming Machines is not included in the $16.0 million estimated cost of the
refurbishment. The installation of the initial 400 Gaming Machines and any
additional Gaming Machines at the Charles Town Facility is subject to the
approval of the West Virginia Lottery Commission after application and a public
hearing. The Company has applied for, but has not yet obtained, approval for the
installation of the initial 400 Gaming Machines and anticipates that it will
apply for approval of the installation and operation of a total of 1,000 Gaming
Machines within the first year after the opening of the Charles Town Facility.
The Company expects that increased revenues at the Charles Town Facility from
live and simulcast wagering and from Gaming Machines will result in
significantly higher purse sizes and in a corresponding improvement in both the
quality of live races and their marketability as an export simulcast product. In
addition, the Company intends to explore opportunities to provide additional
41
forms of entertainment at land adjacent to the Charles Town Facility in order to
attract additional patrons.
Maintaining Quality Import Simulcasting and Increasing Export Simulcasting
The Company intends to maintain the quality of import simulcast races that
it makes available for wagering by customers at its tracks and OTWs and to
increase the volume of export simulcasting of Company Races for wagering at the
facilities of others. The Company believes that by import simulcasting high
quality races from nationally known racetracks it can increase the number of
wagerers as well as the size of the average wager. Subject to applicable
regulations, the Company also will seek to increase export simulcasting of races
from the Thoroughbred Track and the Harness Track, and introduce export
simulcasting from the refurbished Charles Town Facility, for wagering at
out-of-state racetracks, OTWs, casinos and other gaming facilities, and to
improve the quality of its export simulcast products by increasing purse sizes
where practicable and to the fullest extent that changing laws and regulations
may make possible. The Company believes that the minimal direct costs associated
with export simulcasting make it a particularly desirable source of revenue.
Exploring Other Gaming Opportunities
The Company intends to continue identifying strategic opportunities in the
pari-mutuel wagering and gaming industry which complement the Company's core
operations and leverage its pari-mutuel management and operating strengths. The
Company intends to explore other opportunities to capitalize upon any changes in
gaming legislation, in Pennsylvania, West Virginia and other states, including
legislation relating to Gaming Machines and riverboat gaming. In December 1995,
the Company agreed in principle with an unrelated party to form a joint venture
to develop, manage and operate pari-mutuel racing facilities in a state other
than Pennsylvania or West Virginia, and will seek further such opportunities as
they may present themselves. Moreover, the Company is also closely monitoring
possible legislation to authorize Gaming Machines in Pennsylvania.
ACQUISITIONS
Pocono Downs Acquisition
On November 27, 1996, the Company acquired Pocono Downs for an aggregate
purchase price of $47.0 million plus approximately $525,000 in
acquisition-related fees and expenses. In addition, pursuant to the terms of the
purchase agreement, the Company will be required to pay the sellers of Pocono
Downs an additional $10.0 million if, within five years after the consummation
of the Pocono Downs Acquisition, Pennsylvania authorizes any additional 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.
Pocono Downs conducts harness racing at the Harness Track located outside
Wilkes-Barre, Pennsylvania, export simulcasting of Harness Track races to
locations throughout the United States, pari-mutuel wagering at the Harness
Track and at OTWs in Allentown and Erie, Pennsylvania on Pocono Downs races and
on import simulcast races from other racetracks and telephone account wagering
on live and import simulcast races. For the year ended December 31, 1995 and the
nine months ended September 30, 1996, Pocono Downs had revenues of approximately
$33.9 million and $25.7 million, respectively, and EBITDA of approximately $8.0
million and $5.5 million, respectively.
Charles Town Acquisition
On January 15, 1997, the Charles Town Joint Venture acquired substantially
all of the assets of Charles Town relating to the Charles Town Facility for an
aggregate net purchase price of approximately $16.5 million plus approximately
$2.0 million in acquisition-related fees and expenses. The Charles Town Facility
conducts live thoroughbred horse racing, on-site pari-mutuel wagering on live
races run at the Charles Town Facility and wagering on import simulcast races.
The Company expects to refurbish the Charles Town Facility as an entertainment
complex that will feature live racing, dining, simulcast wagering and, in
mid-1997, upon completion of the interior refurbishment, 400 Gaming Machines.
The estimated cost of the refurbishment, exclusive of the cost of the purchase
or lease of the Gaming Machines, is approximately $16.0 million. For the year
ended December 31, 1995 and the nine months ended September 30, 1996, Charles
Town had revenues of approximately $11.0
42
million and $8.7 million, respectively, and net losses of approximately $2.2
million and $1.9 million, respectively.
Pursuant to the original operating agreement governing the Charles Town
Joint Venture, the Company currently holds an 80% ownership interest in the
Charles Town Joint Venture and was obligated to contribute 80% of the purchase
price of the Charles Town Acquisition and 80% of the cost of refurbishing the
Charles Town Facility. In fact, the Company contributed 100% of the purchase
price of the Charles Town Acquisition and expects to contribute 100% of the cost
of refurbishing the Charles Town Facility. The Company has reached an agreement
with Bryant pursuant to which the parties will amend the operating agreement to
increase the Company's ownership interest in the Charles Town Joint Venture to
89% and decrease Bryant's interest to 11%. In addition, the amendment will
provide that the entire amount the Company has contributed, and will contribute,
to the Charles Town Joint Venture for the acquisition and refurbishment of the
Charles Town Facility would be treated, as between the parties, as a loan to the
Charles Town Joint Venture from the Company. The proposed changes in the
ownership of the Charles Town Joint Venture are subject to the review of
applicable West Virginia racing and lottery regulatory authorities.
The Charles Town Joint Venture acquired its option to purchase the Charles
Town Facility from Bryant; Bryant, in turn, acquired the option from Showboat.
Showboat has retained an option to operate any casino at the Charles Town
Facility in return for a management fee (to be negotiated at the time, based on
rates payable for similar properties). Showboat has also retained a right of
first refusal to purchase or lease the site of any casino at the Charles Town
Facility proposed to be leased or sold and to purchase any interest proposed to
be sold in any such casino (on the same terms offered by a third party or
otherwise negotiated with the Charles Town Joint Venture). The rights retained
by Showboat extend for a period of five years from the date that the Charles
Town Joint Venture exercises its option to purchase the Charles Town Facility
and expire thereafter unless legislation to permit casino gaming at the Charles
Town Facility has been adopted prior to the end of the five-year period. If such
legislation has been adopted prior to such time, then the rights of Showboat
continue for a reasonable time (not less than 24 months) to permit completion of
negotiations.
While the agreement with Showboat does not specify what activities at the
Charles Town Facility would constitute operation of a casino, Showboat has
agreed that the installation and operation of video lottery terminals (like the
Gaming Machines the Company intends to install) at the Charles Town Facility's
race track would not trigger the Showboat Option. If West Virginia law were to
permit casino gaming at the Charles Town Facility and if Showboat were to
exercise the Showboat Option, the Company would be required to pay a management
fee to Showboat for the operation of the casino.
RACING AND WAGERING OPERATIONS
The Company's revenues are derived from: (i) wagering on Company Races at
Company facilities; (ii) wagering on non-Company Races import simulcast to
Company facilities; (iii) fees from wagering on export simulcasting of Company
Races to non-Company wagering venues; (iv) admissions, program sales and certain
other ancillary activities; and (v) food and beverage sales and concessions.
43
The following table summarizes certain key operating statistics for the
Company's pari-mutuel operations related to the Thoroughbred Track for the year
ended December 31:
1991 1992 1993 1994 1995
------------- ------------- ------------- ------------- -------------
Number of live racing days......... 245 247 238 219 204
Paid attendance:
At the Thoroughbred Track........ 636,944 619,359 548,085 485,224 430,128
At Reading OTW................... -- 166,210 251,540 253,183 246,012
At Chambersburg OTW.............. -- -- -- 110,075 143,554
At York OTW...................... -- -- -- -- 232,109
------------- ------------- ------------- ------------- -------------
Total paid attendance (1)........ 636,944 785,569 799,625 848,482 1,051,803
------------- ------------- ------------- ------------- -------------
Wagering on Penn National
races (2):
At the Thoroughbred Track........ $ 64,941,583 $ 62,661,360 $ 53,558,980 $ 44,650,714 $ 36,833,992
At Reading OTW................... -- 8,246,778 10,503,690 8,022,458 7,140,405
At Chambersburg OTW.............. -- -- -- 3,550,529 4,193,087
At York OTW...................... -- -- -- -- 8,542,707
Telebet.......................... 6,957,480 7,733,190 6,790,381 4,483,324 4,047,377
Simulcasts:
At other PA racetracks........... 31,897,564 32,172,368 25,918,754 18,058,438 14,895,086
At other PA OTWs................. 24,754,654 42,518,067 42,167,129 32,481,721 26,492,679
Export simulcasting................ -- 10,201,902 12,745,934 40,337,450 72,251,622
------------- ------------- ------------- ------------- -------------
Total wagers on Penn National
races............................ 128,551,281 163,533,665 151,684,868 151,584,634 174,396,955
------------- ------------- ------------- ------------- -------------
Wagering by Simulcast on Non-Penn
National races (2):
At the Thoroughbred Track:
Other PA races............... 28,660,122 29,576,594 23,326,210 14,429,800 10,370,871
Out-of-state races............. -- -- 10,599,425 32,817,789 38,455,811
By Telebet:
Other PA races................. -- -- 795,054 1,232,123 1,267,306
Out-of-state races............. -- -- 517,850 2,251,377 2,966,226
At Reading OTW:
Other PA races................. -- 12,582,339 17,263,753 10,411,832 8,611,521
Out-of-state races............. -- -- 5,750,123 21,279,647 27,058,178
At Chambersburg OTW:
Other PA races................. -- -- -- 2,548,691 3,193,185
Out-of-state races............. -- -- -- 8,489,914 16,978,414
At York OTW:
Other PA races................. -- -- -- -- 5,716,279
Out-of-state races............. -- -- -- -- 27,881,082
------------- ------------- ------------- ------------- -------------
Total wagers on non-Penn National
races............................ 28,660,122 42,158,933 58,252,415 93,461,173 142,498,873
------------- ------------- ------------- ------------- -------------
Total wagers on Penn National and
non-Penn National races.......... $ 157,211,403 $ 205,692,598 $ 209,937,283 $ 245,045,807 $ 316,895,828
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Average daily purses
Penn National races.............. $ 35,613 $ 38,746 $ 40,834 $ 48,560 $ 57,897
Gross margin from wagering (3):
Wagering on Penn National
races.......................... 8,092,000 9,711,000 8,850,000 8,313,000 8,513,000
Wagering on non-Penn National
races.......................... 3,109,000 4,838,000 6,496,000 9,650,000 16,121,000
------------- ------------- ------------- ------------- -------------
Total gross margin from
wagering..................... $ 11,201,000 $ 14,549,000 $ 15,346,000 $ 17,963,000 $ 24,634,000
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
- ------------------
(1) Does not reflect attendance at the Thoroughbred Track for wagering on
simulcasts when live racing is not conducted, but does reflect attendance at
the Reading, Chambersburg, York and Lancaster OTWs, which opened in May
1992, April 1994, March 1995, and July 1996, respectively.
(2) Wagering on certain imported stakes races is included in Wagering on Penn
National races.
(3) Amounts equal total pari-mutuel revenues, less purses paid to the
Thoroughbred Horsemen, taxes payable to Pennsylvania and simulcast
commissions or host track fees paid to other racetracks.
44
The following table summarizes certain key operating statistics for the
Company's pari-mutuel operations related to the Harness Track for the year ended
December 31:
1991 1992 1993 1994 1995
------------- ------------- ------------- ------------- -------------
Number of live racing days: 150 149 147 143 135
Paid attendance:
At the Harness Track............. 279,683 257,249 211,629 253,521 242,870
At Erie OTW...................... 101,411 141,108 135,617 129,074 116,367
At Allentown OTW................. -- -- 136,620 275,118 272,491
------------- ------------- ------------- ------------- -------------
Total paid attendance (1)........ 381,094 398,357 483,866 657,713 631,728
------------- ------------- ------------- ------------- -------------
Wagering on Pocono Downs
races (2):
At the Harness Track............. $ 24,612,036 $ 21,327,604 $ 18,895,856 $ 17,758,559 $ 15,672,606
At Erie OTW...................... 942,647 1,311,185 1,392,676 1,014,707 653,745
At Allentown OTW................. -- -- 1,432,042 2,455,269 2,025,988
Simulcasts:
At other PA racetracks........... 7,765,756 7,196,291 7,122,072 5,241,868 4,063,992
At other PA OTWs................. 6,998,177 13,674,763 13,050,534 9,645,719 7,690,019
Export simulcasting................ -- -- -- 10,835,744 18,366,920
------------- ------------- ------------- ------------- -------------
Total wagers on Pocono Downs
races............................ $ 40,318,616 $ 43,509,843 $ 41,893,180 $ 46,951,866 $ 48,473,270
------------- ------------- ------------- ------------- -------------
Wagering by Simulcast on Non-Pocono
Downs races (2):
At the Harness Track:
Other PA races................. $ 21,785,756 $ 24,536,505 $ 21,243,244 $ 12,252,776 $ 13,261,224
Out-of-state races............. -- -- 5,816,721 21,968,275 28,849,841
By Dial-A-Bet:
Other PA races................. -- -- -- -- 40,925
Out-of-state races............. -- -- -- -- 34,141
At Erie OTW:
Other PA races................. 10,911,442 17,049,662 14,412,508 8,232,309 7,034,298
Out-of-state races............. -- -- 4,646,966 17,157,155 21,690,819
At Allentown OTW:
Other PA races................. -- -- 12,998,716 17,697,563 15,289,894
Out-of-state races............. -- -- 6,699,300 32,523,258 39,123,872
------------- ------------- ------------- ------------- -------------
Total wagers on non-Pocono Downs
races............................ $ 32,697,198 $ 41,586,167 $ 65,817,455 $ 109,831,336 $ 125,325,014
------------- ------------- ------------- ------------- -------------
Total wagers on Pocono Downs and
non-Pocono Downs races........... $ 73,015,814 $ 85,096,010 $ 107,710,635 $ 156,783,202 $ 173,873,350
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Average daily purses
Pocono Downs races............... $ 24,205 $ 22,448 $ 26,022 $ 35,790 $ 42,314
Gross margin from
wagering (3)..................... $ 7,204,591 $ 8,100,860 $ 10,918,491 $ 16,652,676 $ 17,838,231
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
- ------------------
(1) Does not reflect attendance at the Harness Track for wagering on simulcasts
when live racing is not conducted, but does reflect attendance at the Erie
and Allentown OTWs, which opened in May 1991 and July 1993, respectively.
(2) Wagering on certain imported stakes races is included in Wagering on Pocono
Downs races.
(3) Amounts equal total pari-mutuel revenues, less purses paid to the Harness
Horsemen, taxes payable to Pennsylvania and simulcast commissions or host
track fees paid to other racetracks.
45
The following table summarizes the Company's operations and facilities:
TRACKS
FACILITY LOCATION DATE OPENED/STATUS OPERATIONS CONDUCTED
- --------------------- --------------------- --------------------------------- ---------------------------------
Penn National Race Grantville, PA Constructed in 1972; operated by Live thoroughbred racing;
Course Penn National since 1972 simulcast wagering; dining;
telephone account wagering
Pocono Downs Plains Township, PA Constructed in 1965; operated by Live harness racing; simulcast
Racetrack Penn National since 1996 wagering; dining; telephone
account wagering
Charles Town Races Charles Town, WV Constructed in 1933; acquired by When reopened: live thoroughbred
Charles Town Joint Venture on racing; simulcast wagering;
January 15, 1997; to be dining; Gaming Machines
refurbished in 1997
OTWS(1)
SIZE
FACILITY LOCATION DATE OPENED/STATUS (SQ. FT.) COST (2) LICENSEE
- --------------------- --------------------- ----------------------- ------------ ------------ ----------------
Allentown Allentown, PA Opened July 1993 28,500 $ 5,207,000 Pocono Downs
Chambersburg Chambersburg, PA Opened April 1994 12,500 1,500,000 Penn National
Erie Erie, PA Opened May 1991 22,500 3,575,000 Pocono Downs
Lancaster Lancaster, PA Opened July 1996 24,000 2,200,000 Penn National
Reading Reading, PA Opened May 1992 22,500 2,100,000 Penn National
York York, PA Opened March 1995 25,000 2,200,000 Penn National
Williamsport Williamsport, PA Under construction; 14,000 3,000,000 Penn National
anticipated opening (estimated)
February 1997
Downingtown Downingtown, PA Proposed 20,000 4,000,000 Penn National
(estimated) (estimated)
- ------------------
(1) This table does not include three additional Pennsylvania OTWs which the
Company is authorized to operate under Pennsylvania law.
(2) Consists of construction costs, equipment and, for owned properties, the
cost of land and building.
Live Racing
The Company has conducted live racing at the Thoroughbred Track since 1972,
and has held at least 204 days of live racing at the facility in each of the
last five years. The Thoroughbred Track is one of only two thoroughbred
racetracks in Pennsylvania. Although other regional racetracks offer nighttime
thoroughbred racing, the Thoroughbred Track is the only racetrack in the Eastern
time zone conducting year-round nighttime thoroughbred horse racing, which the
Company believes increases its opportunities to export simulcast its races
during periods in which other racetracks are not conducting live racing. Post
time at the Thoroughbred Track is 7:30 p.m. on Wednesdays, Fridays and
Saturdays, and 1:30 p.m. on Sundays and holidays.
The Pocono Downs Acquisition was consummated following the last day of
racing at the Harness Track for the 1996 season. The Company expects to resume
live racing at the Harness Track in April 1997 and plans to conduct 135 days of
live harness racing at the facility in the 1997 season. Post time at the Harness
Track is expected to be 7:30 p.m. The Charles Town Facility is currently closed.
The Company has received preliminary approval for, and plans to conduct, 159
days of thoroughbred racing at the facility in the 1997 season following the
reopening of the Charles Town Facility's racetrack
46
(currently anticipated to be in April 1997). Post time at the Charles Town
Facility is expected to be 7:30 p.m. on Fridays and Saturdays and 1:30 p.m. on
Wednesdays and Sundays.
Revenues from Company Races consist of the total amount wagered, less the
amount paid as winning wagers. Of the amount not returned to bettors as winning
wagers, a portion is paid to the state in which the track is located and the
balance is divided between the Company and purses for the horsemen at that
track. The Pennsylvania Racing Act specifies the maximum percentages of each
dollar wagered on horse races in Pennsylvania which can be retained by the
Company (prior to required payments to the Pennsylvania Horsemen and applicable
taxing authorities). The percentages vary, based on the type of wager; the
average percentage is approximately 20%. The balance of each dollar wagered must
be paid out to the public as winning wagers. With the exception of revenues
derived from wagers at the Thoroughbred Track or the Company's OTWs, the
Company's revenues on each race are determined pursuant to such maximum
percentage and agreements with the other racetracks and OTWs at which wagering
is taking place. Amounts payable to the Pennsylvania Horsemen are determined
under agreements with the Pennsylvania Horsemen and vary depending upon where
the wagering is conducted and the racetrack at which such races take place. The
Pennsylvania Horsemen receive their share of such wagering as race purses. The
Company retains a higher percentage of wagers made at its own facilities than of
wagers made at other locations. The West Virginia Racing Act provides for a
similar disposition of pari-mutuel wagers placed at the Charles Town Facility,
with the average percentage of wagers retained by Charles Town having been
approximately 20% (prior to required payments to the Charles Town Horsemen and
to applicable West Virginia taxing authorities and other mandated beneficiary
organizations).
OTW Wagering
At OTWs, as at the Company's racetracks, customers place wagers on
thoroughbred and harness races simulcast from the Company's racetracks and on
import simulcast races from other tracks around the country. Under the
Pennsylvania Racing Act, only licensed thoroughbred and harness racing
associations, such as the Company, can operate OTWs or accept customer wagers on
simulcast races at Pennsylvania racetracks. Each OTW is required by the
Pennsylvania Racing Act to provide various amenities, including dining and other
services designed to attract a wide range of patrons. The Company operates six
of the 16 OTWs now open in Pennsylvania, located in Allentown, Chambersburg,
Erie, Lancaster, Reading and York, Pennsylvania, and has the right (subject to
applicable regulatory approvals) to open and operate an additional five
Pennsylvania OTWs, which would give the Company a total of 11 of the 23 OTWs
currently authorized by Pennsylvania law. Of its five additional allocated OTWs,
one new OTW has been approved and is under construction in Williamsport,
Pennsylvania, and regulatory approval has been sought for a new OTW in
Downingtown, Pennsylvania. The Company expects to move expeditiously to select
appropriate locations, apply for and obtain regulatory approvals and open the
remaining three allocated OTWs. The Company believes that expansion through the
opening of the five additional Pennsylvania OTWs which the Company has been
allocated will increase its customer wagering base. The Company intends to open
its OTWs outside of large metropolitan areas and away from the Thoroughbred
Track and the Harness Track and other existing OTWs; the Company thus believes
that it will be offering a new form of entertainment to the communities that it
enters.
Simulcasting
The Company has been transmitting simulcasts of its races to other wagering
locations and receiving simulcasts of races from other locations for wagering by
its customers at Company facilities year-round, for more than five years. When
customers place wagers on import simulcast races, the Company receives revenue
and incurs expense in substantially the same manner as it would if the race had
been run at one of the Company's own tracks: of the amount not returned to
bettors as winning wagers, a portion is paid to the state in which the Company
wagering facility is located, a portion is paid to the purse fund for the horse
owners or trainers (thoroughbred or harness) of the Company's racetrack with
which the wagering facility is associated, and the balance is retained by the
Company. The Company believes that full card import simulcasting, in which all
of the races at a non-
47
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 year ended
December 31, 1996, the Company received import simulcasts from approximately 57
racetracks (including Belmont Park, Saratoga, Gulfstream Park, Santa Anita and
Arlington International Racecourse) and transmitted export simulcasts of Company
Races to 63 locations.
Pursuant to an agreement among the members of the Pennsylvania Racing
Association, the Company and the two other Pennsylvania racetracks provide
simulcasts of all their races to all of each other's facilities and set the
commissions payable on such races. In addition, the Company has short-term
agreements with various racetracks throughout the United States to import
simulcast from, and export simulcast to, their facilities; these agreements
include import simulcasts of major stakes races.
Wagering at the Company's facilities on import simulcasting of races from
other tracks, especially from nationally-known tracks in other states, competes
with wagering on Company Races. The Company believes, however, that import
simulcasting of out-of-state races, including full card import simulcasting, is
beneficial economically to the Company because it makes available wagering on
higher quality races and thus increases the size of the average wager.
Telebet
In 1983, the Company pioneered Telebet, Pennsylvania's first telephone
account wagering system. Telebet customers open an account by depositing funds
with the Company at one of its locations. Account holders can then place wagers
by telephone on Company Races and import simulcast races to the extent of the
funds on deposit in the account; any winnings are posted to the account and are
available for future wagers. In December 1995, the Harness Track instituted
Dial-A-Bet, a similar telephone account betting system.
Gaming Machine Operations
On November 5, 1996, Jefferson County, West Virginia approved a referendum
authorizing the installation and operation of Gaming Machines at the Charles
Town Facility. As a result, the Company consummated the Charles Town Acquisition
on January 15, 1997. In mid-1997, the Company intends to reopen the Charles Town
Facility as an entertainment complex that will feature live racing, dining,
simulcast wagering and Gaming Machines. The Company has applied to the West
Virginia Lottery Commission for approval to operate initially 400 Gaming
Machines, and expects to obtain such approval within 90 to 120 days after the
January 15, 1997 consummation of the Charles Town Acquisition. The machines will
be slot-machine-style video machines that depict spinning reels and video card
games such as blackjack and poker. The West Virginia Gaming Machine Act
specifies the maximum percentage of each dollar wagered on Gaming Machines which
can be retained by the Company; the maximum statutory rate is 20%. The balance
of each dollar wagered must be paid out to the public as winning wagers. Of the
portion retained by the Company, a portion is paid to taxing authorities and
other beneficiary organizations mandated by the State of West Virginia and a
portion is paid to the Charles Town Horsemen in the form of purses. The
installation of additional Gaming Machines at the Charles Town Facility is
subject to approval by the West Virginia Lottery Commission after application
and a public hearing. The Company anticipates that it will apply for approval of
the installation and operation of a total of 1,000 Gaming Machines at the
Charles Town Facility within the first year after the opening of the Charles
Town Facility.
Other Gaming Opportunities
In December 1995, the Company agreed in principle with an unrelated party
to form a joint venture for the purpose of developing, managing and operating
pari-mutuel racing facilities in a state other than Pennsylvania or West
Virginia. The actual formation of the joint venture is subject to numerous
contingencies including receipt of regulatory approval from that state's Horse
Racing Commission. Additional investments by the Company in new or existing
businesses are subject to the
48
consent of the Company's lenders under the Credit Facility. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." To date, the Company has not invested a
material amount and the joint venture has conducted no operations.
MARKETING
The Company seeks to increase wagering by broadening its customer base and
increasing the wagering activity of its existing customers. To attract new
customers, the Company seeks to increase the racing knowledge of its customers
through its television programming, and by providing "user friendly" automated
wagering systems and comfortable surroundings. The Company also seeks to attract
new customers by offering various types of promotions including family fun days,
premium give-away programs, contests and handicapping seminars.
Televised Racing Program
The Company's Racing Alive program is televised by satellite transmission
commencing approximately one hour before post time on each live racing day at
the Thoroughbred Track. The program provides color commentary on the races at
the Thoroughbred Track (including wagering odds, past performance information
and handicapper analysis), general education on betting and handicapping,
interviews with racing personalities and featured races from other thoroughbred
racetracks across the country. The Racing Alive program is shown at the
Thoroughbred Track and on various cable television systems in Pennsylvania and
is transmitted to all OTWs that receive Penn National Races. The Company intends
to expand Racing Alive and/or to create additional televised programming to
cover racing at the Harness Track and at other harness racing venues throughout
the United States. The Company's satellite transmissions are encoded so that
only authorized facilities can receive the program.
Automated Wagering Systems
To make wagering more "user friendly" to the novice and more efficient for
the expert, the Company leases Autotote Corporation's automated wagering
equipment. These wagering systems enable the customer to choose a variety of
ways to place a bet through touch-screen interactive terminals and personalized
portable wagering terminals, provide current odds information and enable
customers to place bets and credit winning tickets to their accounts. Currently,
more than 35% of all wagers at the Thoroughbred Track are processed through
these self-service terminals and Telebet.
Modern Facilities
The Company provides a comfortable, upscale environment at each of its
OTWs, including a full bar, a range of restaurant services and an area devoted
to televised sporting events. The Company believes that its attractive
facilities appeal to its current customers and to new customers, including those
who have not previously visited a racetrack.
PURSES; AGREEMENTS WITH HORSEMEN
The Horsemen Agreements set forth the amounts to be paid to the
Pennsylvania Horsemen as racing purses. Revenues from wagering at the
Thoroughbred Track and the Harness Track, except for wagering on races simulcast
from outside Pennsylvania, are divided approximately equally between the Company
and the Pennsylvania Horsemen. Revenues from all other sources (all wagering at
the Company's OTWs and on races simulcast from outside Pennsylvania) are shared
such that the Pennsylvania Horseman generally receive between 3% and 7.5% of
total wagering at the OTWs.
The Company sets the purses paid on Company Races, based on projected
wagering and in accordance with the terms of the Horsemen Agreements. Because
the amount of the purses is based on projections, at any given point in time the
Pennsylvania Horsemen will have either been overpaid or underpaid. The agreement
with the Thoroughbred Horsemen also permits the Thoroughbred Horsemen to require
immediate purse adjustments should the amount of revenues to be paid to them
49
as purses, and remaining unpaid, exceed $100,000. The amount of underpaid or
overpaid purses varies from time to time, and the Company believes that further
action to reduce the amount of underpaid purses will not affect its ability to
increase purses in an orderly manner. In setting future purses the Company
seeks, over time, to adjust for the under or over-payments, but no assurance can
be given that any such adjustment will be accurate or adequate.
During the years ended December 31, 1993, 1994 and 1995, the Thoroughbred
Horsemen earned an aggregate of approximately $9.7 million, $10.7 million and
$12.0 million in purses, respectively. The average daily purses at the
Thoroughbred Track during the three-year period increased from approximately
$40,800 to approximately $57,900. During the nine months ended September 30,
1995 and 1996, the Thoroughbred Horsemen earned an aggregate of approximately
$9.3 million and $9.7 million in purses, respectively. The Company believes that
the increases in daily purses have contributed to an incremental increase in the
quality of horses racing at the Thoroughbred Track. The average daily purses at
the Thoroughbred Track for calendar 1996 were approximately $59,600 per day.
During the years ended December 31, 1993, 1994 and 1995, the Harness Horsemen
earned an aggregate of approximately $4.7 million, $6.0 million and $6.5 million
in purses, respectively. The average daily purses at the Harness Track during
the three-year period increased from approximately $26,000 to approximately
$42,300. During the nine months ended September 30, 1995 and 1996, the Harness
Horsemen earned an aggregate of approximately $5.2 million and $5.0 million in
purses, respectively. The average daily purses earned at the Harness Track for
calendar 1996 were approximately $42,300 per day.
The Thoroughbred Horsemen Agreement was entered into in February 1996,
expires in February 1999 and is subject to automatic renewal for successive one
year terms unless either party gives notice of termination at least 90 days
prior to the end of any such period. The Harness Horsemen Agreement was entered
into in November 1994, became effective in January 1995 and expires in January
2000. Currently, there is no agreement with the Charles Town Horsemen. The
Company has entered into discussions with the Charles Town Horsemen toward
obtaining an agreement. The future success of the Company depends, in part, on
its ability to maintain a good relationship with the Horsemen and to obtain
renewal of the Horsemen Agreements and required approvals for import simulcast
wagering from the Charles Town Horsemen on satisfactory terms.
COMPETITION
The Company faces significant competition for wagering dollars from other
racetracks and OTWs in Pennsylvania and neighboring states (some of which also
offer other forms of gaming), other gaming venues such as casinos and
state-sponsored lotteries, including the Pennsylvania Lottery. The Company may
also face competition in the future from new OTWs or from new racetracks. From
time to time, Pennsylvania has considered legislation to permit other forms of
gaming. Although Pennsylvania has not authorized any form of casino or other
gaming, if additional gaming opportunities become available in or near
Pennsylvania, such gaming opportunities could have a material adverse effect on
the Company's business, financial condition and results of operations.
Company Races compete for wagering dollars and simulcast fees with live
races and races simulcast from other racetracks both inside and outside
Pennsylvania (including several in New York, New Jersey, West Virginia, Ohio,
Maryland and Delaware). The Company's ability to compete successfully for
wagering dollars is dependent, in part, upon the quality of its live horse
races. The quality of horse races at some racetracks that compete with the
Company, either by live races or simulcasts, is higher than the quality of
Company Races. The Company believes that there has been some improvement over
the last several years in the quality of the horses racing at the Thoroughbred
Track, due to incrementally higher purses being paid as a result of the
Company's increased simulcasting activities. However, increased purses may not
result in a continued improvement in the quality of racing at the Thoroughbred
Track or in any material improvement in the quality of racing at the Harness
Track or the Charles Town Facility.
50
The Company's OTWs compete with the OTWs of other Pennsylvania racetracks,
and new OTWs may compete with the Company's existing or proposed wagering
facilities. Competition between OTWs increases as the distance between them
decreases. For example, the Company believes that its Allentown OTW, which was
acquired in the Pocono Downs Acquisition and which is approximately 50 miles
from the Thoroughbred Track and 35 miles from the Company's Reading OTW, has
drawn some patrons from the Thoroughbred Track, the Reading OTW and Telebet and
that its Lancaster OTW, which is approximately 31 miles from the Thoroughbred
Track and 25 miles from the Company's York OTW, has drawn some patrons from the
Thoroughbred Track, the York OTW and Telebet. Moreover, the Company believes
that a competitor's new OTW in King of Prussia, Pennsylvania, which is
approximately 23 miles from the Reading OTW, has drawn some patrons from the
Reading OTW. The opening of new OTWs in close proximity to the Company's
existing or future OTWs could have a material adverse effect on the Company's
business, financial condition and results of operations.
If the Company obtains approval for the installation of Gaming Machines at
the Charles Town Facility, the Company's Gaming Machine operations will face
competition from other Gaming Machine venues in West Virginia and in neighboring
states (including Dover Downs in Dover, Delaware, Delaware Park in northern
Delaware, Harrington Raceway in southern Delaware and the casinos in Atlantic
City, New Jersey). Venues in Delaware and New Jersey, in addition to video
gaming machines, currently offer mechanical slot machines that feature physical
spinning reels, pull-handles and the ability to both accept and pay out coins.
West Virginia has not authorized, and may never approve, such mechanical slot
machines. The failure to attract or retain Gaming Machine customers at the
Charles Town Facility, whether arising from such competition or from other
factors, could have a material adverse effect upon the Company's business,
financial condition and results of operations.
EFFECT OF INCLEMENT WEATHER AND SEASONALITY
Because horse racing is conducted outdoors, variable weather 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 Thoroughbred Track
and Harness Track expenses are fixed, the loss of scheduled racing days could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The severe winter weather in 1996 resulted in the closure of the Company's
OTW facilities for two days in January 1996. Because of the Company's growing
dependence upon OTW operations, severe weather that causes the Company's OTWs to
close could have a material adverse effect upon the Company's business,
financial condition and results of operations.
Attendance and wagering at the Company's facilities have been favorably
affected by special racing events which stimulate interest in horse racing, such
as the Triple Crown races in May and June and the Breeders' Cup in autumn. As a
result, the Company's revenues and net income have been greatest in the second
and third quarters of the year, and lowest in the first and fourth quarters of
the year. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Effect of Inclement Weather and Seasonality."
REGULATION AND TAXATION
General
The Company is authorized to conduct thoroughbred racing and harness racing
in Pennsylvania under the Pennsylvania Racing Act. The Company is also
authorized, under the Pennsylvania Racing Act and the Federal Horseracing Act,
to conduct import simulcast wagering. The Company is also subject to the
provisions of the West Virginia Racing Act, which governs the conduct of
horseracing in West Virginia, and West Virginia Gaming Machine Act, which
governs the operation of Gaming Machines in West Virginia. The Company's live
racing, pari-mutuel wagering and Gaming Machine operations are contingent upon
the continued governmental approval of such operations as forms of legalized
gaming. All of the Company's current and proposed operations are subject to
extensive
51
regulations and could be subjected at any time to additional or more restrictive
regulations, or banned entirely.
Sunset Provisions in Gaming Machine Legislation
The Company has applied for aproval to install and operate Gaming Machines
at the refurbished Charles Town Facility pursuant to the West Virginia Gaming
Machine Act. The West Virginia Gaming Machine Act was adopted in 1994, and will
terminate on June 30, 1997 unless extended or reenacted. If the West Virginia
Gaming Machine Act terminates, then the Company will be required to discontinue
any Gaming Machine operations for which it may obtain approval. There can be no
assurance that the West Virginia legislature will extend or reenact the West
Virginia Gaming Machine Act beyond June 30, 1997. If the Company obtains
approval for the installation of Gaming Machines at the Charles Town Facility
and the West Virginia Gaming Machine Act is not extended or reenacted, then the
Company's business, financial condition and results of operations would be
materially and adversely affected.
Pennsylvania Racing Regulations
The Company's horse racing operations at the Thoroughbred Track and the
Harness Track are subject to extensive regulation under the Pennsylvania Racing
Act, which established the Pennsylvania Racing Commissions. The Pennsylvania
Racing Commissions are responsible for, among other things, (i) granting
permission annually to maintain racing licenses and schedule race meets, (ii)
approving, after a public hearing, the opening of additional OTWs, (iii)
approving simulcasting activities, (iv) licensing all officers, directors,
racing officials and certain other employees of the Company and (v) approving
all contracts entered into by the Company affecting racing, pari-mutuel wagering
and OTW operations.
As in most states, the regulations and oversight applicable to the
Company's operations in Pennsylvania are intended primarily to safeguard the
legitimacy of the sport and its freedom from inappropriate or criminal
influences. The Pennsylvania Racing Commissions have broad authority to regulate
in the best interests of racing and may, to that end, disapprove the involvement
of certain personnel in the Company's operations, deny approval of certain
acquisitions following their consummation or withhold permission for a proposed
OTW site for a variety of reasons, including community opposition. For example,
the Pennsylvania State Thoroughbred Racing Commission withheld approval for the
Company's initial site for its Lancaster OTW, but the Company applied and was
ultimately approved for another site in Lancaster, which opened in July 1996.
The Pennsylvania legislature also has reserved the right to revoke the power of
the Pennsylvania Racing Commissions to approve additional OTWs and could, at any
time, terminate pari-mutuel wagering as a form of legalized gaming in
Pennsylvania or subject such wagering to additional restrictive regulation; such
termination would, and any further restrictions could, have a material adverse
effect upon the Company's business, financial condition and results of
operations.
The Company may not be able to obtain all necessary approvals for the
operation or expansion of its business. Even if all such approvals are obtained,
the regulatory process could delay implementation of the Company's plans to open
additional OTWs. The Company has had continued permission from the Pennsylvania
State Horse Racing Commission to conduct live racing at the Thoroughbred Track
since it commenced operations in 1972, and has obtained permission from the
Pennsylvania State Harness Racing Commission to conduct live racing at the
Harness Track beginning with the 1997 season. Currently, the Company has
approval from the Pennsylvania Racing Commissions to operate six OTWs and the
right, under the Pennsylvania Racing Act, to operate five additional OTWs,
subject to approval by the Pennsylvania Racing Commissions. A Commission may
refuse to grant permission to open additional OTWs or to continue to operate
existing facilities. The failure to obtain required regulatory approvals would
have a material adverse effect upon the Company's business, financial condition
and results of operations.
The Pennsylvania Racing Act provides that no corporation licensed to
conduct thoroughbred racing shall be licensed to conduct harness racing and that
no corporation licensed to conduct harness racing shall be licensed to conduct
thoroughbred racing. The Company's harness and
52
thoroughbred licenses are held by separate corporations, each of which is a
wholly owned subsidiary of the Company. Moreover, the Pennsylvania State Harness
Racing Commission has reissued the Pocono Downs harness racing license and has
found, in connection with the reissuance, that it is not "inconsistent with the
best interests, convenience or necessity or with the best interests of racing
generally," that a subsidiary of the Company beneficially owns Pocono Downs. The
Company thus believes that the arrangement under which it holds both a harness
and a thoroughbred license complies with applicable regulations.
West Virginia Racing and Gaming Regulation
The Company's operations at the Charles Town Facility are subject to
regulation by the West Virginia Racing Commission under the West Virginia Racing
Act, and by the West Virginia Lottery Commission under the West Virginia Gaming
Machine 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 Company and the Charles Town Joint Venture have applied to the
West Virginia Racing Commission for a license to conduct racing and pari-mutuel
wagering at the Charles Town Facility. The West Virginia Racing Commission has
issued this license, subject to its review and approval of the documents
pursuant to which the Charles Town Acquisition was consummated and financing
therefor was obtained and to its review and approval of any changes in the
ownership of the Charles Town Joint Venture, among other conditions. The Company
and the Charles Town Joint Venture have also applied to the West Virginia
Lottery Commission for approval to install and operate 400 Gaming Machines at
the refurbished Charles Town Facility; this approval has not yet been granted.
The Company anticipates, but cannot assure, that it will obtain approval for the
installation and operation of the 400 Gaming Machines within 90 to 120 days
after the January 15, 1997 consummation of the Charles Town Acquisition. The
Company and the Charles Town Joint Venture may not receive or retain all of the
regulatory approvals necessary from time to time to conduct racing and
pari-mutuel wagering operations at the Charles Town Facility. The failure to
receive or retain a delay in receiving such approvals could cause the reduction
or suspension of racing and pari-mutuel wagering, as well as of Gaming Machine
operations, at the Charles Town Facility and have a material adverse effect upon
the Company's business, financial condition and results of operations.
The installation and operation of Gaming Machines at the Charles Town
Facility are subject to the provisions of the West Virginia Gaming Machine Act
and the regulatory authority of the West Virginia Lottery Commission. Pursuant
to the West Virginia Gaming Machine Act and regulatory approval currently being
sought by the Company thereunder, the Company plans, following the completion of
the interior refurbishment of the Charles Town Facility in mid-1997, to install
initially 400 Gaming Machines at the Charles Town Facility. The installation of
additional Gaming Machines at the Charles Town Facility is subject to approval
by the West Virginia Lottery Commission after application and a public hearing.
The Company anticipates that it will apply for approval of the installation and
operation of a total of 1,000 Gaming Machines at the Charles Town Facility
within the first year after the opening of the Charles Town Facility. The West
Virginia Lottery Commission may not approve the installation of the initial or
any additional Gaming Machines, however, or may not do so in a timely manner, or
may ultimately approve the installation of a smaller number of Gaming Machines
than the Company expects to request.
Moreover, the West Virginia Gaming Machine Act requires that the operator
of the Charles Town Facility enter into a written agreement with the Charles
Town Horsemen in order to conduct Gaming Machine operations. The West Virginia
Gaming Machine Act also requires that the Charles Town Joint Venture enter into
a written agreement with the pari-mutuel clerks in order to operate Gaming
Machines. Currently there is no agreement between the Charles Town Joint Venture
and either the Charles Town Horsemen or the pari-mutuel clerks. The Company has
entered into discussions with both the Charles Town Horsemen and the pari-mutuel
clerks toward obtaining such agreements. The absence of an agreement with the
Charles Town Horsemen or the pari-mutuel clerks at the Charles
53
Town Facility, or the termination or non-renewal of such agreement, would have a
material adverse effect on the Company's business, financial condition and
results of operations.
State and Federal Simulcast Regulation
Both the Federal Horseracing Act and the Pennsylvania Racing Act require
that the Company have a written agreement with the Thoroughbred Horsemen and
with the Harness Horsemen in order to simulcast races. The Company has entered
into the Horsemen Agreements, and in accordance therewith has agreed upon the
allocations of the Company's revenues from import simulcast wagering to the
purse funds for the Thoroughbred Track and the Harness Track. Because the
Company cannot conduct import simulcast wagering in the absence of the Horsemen
Agreements, the termination or non-renewal of either Horsemen Agreement could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Federal Horseracing Act requires that the operator of the Charles Town
Facility obtain the approval of the Charles Town Horsemen before import
simulcast wagering can be conducted there. While such approval has been obtained
by Charles Town in the past, there is no written agreement with the Charles Town
Horsemen providing for such approval in the future. The Company has entered into
discussions with the Charles Town Horsemen toward obtaining an agreement
evidencing such approval. The failure to obtain such approval could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Taxation
The Company believes that the prospect of significant additional revenue is
one of the primary reasons that jurisdictions permit legalized gaming. As a
result, gaming companies are typically subject to significant taxes and fees in
addition to normal federal and state income taxes, and such taxes and fees are
subject to increase at any time. The Company pays substantial taxes and fees
with respect to its operations. From time to time, federal legislators and
officials have proposed changes in tax laws, or in the administration of such
laws, affecting the gaming industry. It is not possible to determine with
certainty the likelihood of changes in tax laws or in the administration of such
laws. Such changes, if adopted, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Compliance with Other Laws
The Company and its OTWs are also subject to a variety of other rules and
regulations, including zoning, construction and land-use laws and regulations in
Pennsylvania and West Virginia governing the serving of alcoholic beverages.
Currently, Pennsylvania laws and regulations permit the construction of
off-track wagering facilities, but may affect the selection of a particular OTW
site because of parking, traffic flow and other similar considerations, any of
which may serve to delay the opening of future OTWs in Pennsylvania. By
contrast, West Virginia law does not permit the operation of OTWs. The Company
derives a significant portion of its other revenues from the sale of alcoholic
beverages to patrons of its facilities. Any interruption or termination of the
Company's existing ability to serve alcoholic beverages would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Restrictions on Share Ownership and Transfer
The Pennsylvania Racing Act requires that any shareholder proposing to
transfer beneficial ownership of 5% or more of the Company's shares file an
affidavit with the Company setting forth certain information about the proposed
transfer and transferee, a copy of which the Company is required to furnish to
the Pennsylvania Racing Commission. The certificates representing the Company
shares owned by 5% beneficial shareholders are required to bear certain legends
prescribed by the Pennsylvania Racing Act. In addition, under the Pennsylvania
Racing Act, the Pennsylvania Racing Commission has the authority to order a 5%
beneficial shareholder of the Company to dispose of his Common Stock of the
Company if it determines that continued ownership would be inconsistent with the
public interest, convenience or necessity or the best interest of racing
54
generally. The West Virginia Gaming Machine Act provides that a transfer of more
than 5% of the voting stock of a corporation which controls the license may only
be to persons who have met the licensing requirements of the West Virginia
Gaming Machine Act or which transfer has been pre-approved by the West Virginia
Lottery Commission. Any transfer that does not comply with this requirement
voids the license. See "Description of Capital Stock -- Certain Restrictions on
Share Ownership and Transfer."
PROPERTIES
Thoroughbred Track
The Thoroughbred Track is located on approximately 225 acres approximately
15 miles northeast of Harrisburg, 100 miles west of Philadelphia and 200 miles
east of Pittsburgh. There is a total population of approximately 1.4 million
persons within a radius of approximately 35 miles around the Thoroughbred Track
and approximately 2.2 million persons within a 50-mile radius. The property
includes a one mile all-weather thoroughbred racetrack and a 7/8-mile turf
track. The property also includes approximately 400 acres surrounding the
Thoroughbred Track which are available for future expansion or development.
The Thoroughbred Track's main building is the grandstand/clubhouse, which
is completely enclosed and heated and, at the clubhouse level, fully
air-conditioned. The building has a capacity of approximately 15,000 persons
with seating for approximately 9,000, including 1,400 clubhouse dining seats.
Several other dining facilities and numerous food and beverage stands are
situated throughout the facility. Television sets for viewing live racing and
simulcasts are located throughout the facility. The pari-mutuel wagering areas
are divided between those available for on-track wagering and those available
for simulcast wagering.
The Thoroughbred Track includes stables for approximately 1,250 horses, a
blacksmith shop, veterinarians' quarters, jockeys' quarters, a paddock building,
living quarters for grooms, a cafeteria and recreational building in the back
stretch area and water and sewage treatment plants. Parking facilities for
approximately 6,500 vehicles adjoin the Thoroughbred Track.
Harness Track
The Harness Track is located on approximately 400 acres in Plains Township,
outside Wilkes-Barre, Pennsylvania. There is a total population of approximately
785,000 persons within a radius of approximately 35 miles around the Harness
Track and approximately 1.5 million persons within a 50-mile radius. The
property includes a 5/8-mile all-weather, lighted harness track. The Harness
Track's main buildings are the grandstand and the clubhouse. The clubhouse is
completely enclosed and heated and fully air-conditioned. The grandstand has
enclosed, heated and air-conditioned seating for approximately 500 persons and
permanent open-air stadium-style seating for approximately 2,500 persons. The
clubhouse is a tiered dining and wagering facility that seats approximately
1,000 persons. The clubhouse dining area seats 500 persons. Television sets for
viewing live racing and simulcasts are located throughout the facility along
with pari-mutuel wagering areas.
A two-story 14,000 square foot building which houses the Pocono Downs
offices is located on the property. The Harness Track also includes stables for
approximately 950 horses, five paddock stables, quarters for grooms, two
blacksmith shops and a cafeteria for the Harness Horsemen. Parking facilities
for approximately 5,000 vehicles adjoin the track.
The Landfill is on a parcel of land adjacent to the Harness Track. 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 PADER. According to the Company's
environmental consulting firm, the Landfill closure is substantially complete.
To date, the municipalities obligated to implement the closure order pursuant to
the Settlement Agreement, have been fulfilling their obligations. However, there
can be no assurance that the municipalities will continue to meet their
obligations under the Settlement Agreement or that the terms of the Settlement
Agreement will not be amended in the future. In addition, the Company may be
liable for future claims
55
with respect to the Landfill under CERCLA and analogous state laws. The Company
may incur expenses in connection with the Landfill in the future, which expenses
may not be reimbursed by the municipalities. Any such expenses could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Charles Town Facility
The Charles Town Facility is located on a portion of a 250-acre parcel in
Charles Town, West Virginia, which is approximately a 60-minute drive from
Baltimore, Maryland and a 70-minute drive from Washington, D.C. There is a total
population of approximately 3.1 million persons within a 50-mile radius and
approximately 9.0 million persons within a 100-mile radius of the Charles Town
Facility. The property includes a 3/4-mile thoroughbred racetrack. The Charles
Town Facility's main building is the grandstand/clubhouse, which is completely
enclosed and heated. The clubhouse dining room has seating for 600. Additional
food and beverage areas are situated throughout the facility. The property
surrounding the Charles Town Facility, including the site of the former
Shenandoah Downs Racetrack, is available for future expansion or development. In
addition, the Company has a right of first refusal for an additional 250 acres
that are adjacent to the Charles Town Facility.
The Charles Town Facility also includes stables, an indoor paddock, ample
parking and water and sewage treatment facilities.
OTWs
The Company's OTWs provide areas for viewing import simulcasts and
televised sporting events, placing pari-mutuel wagers and dining. The facilities
also provide convenient parking.
The Company's current OTW properties are described in the following chart:
OWNED OR
LOCATION LEASED
--------- -----------
Allentown............................... Owned
Chambersburg............................ Leased
Erie.................................... Owned
Lancaster............................... Leased
Reading................................. Leased
York.................................... Leased
The Company has purchased the land for the Williamsport OTW facility and is
constructing a 14,000 square foot facility at a total estimated cost of $3.0
million including the purchase of the land for approximately $555,000. The
Company plans to open the facility in February 1997.
The Company has an agreement to purchase land for its proposed Downingtown
OTW facility. The agreement is subject to numerous contingencies including
approval from the Pennsylvania State Horse Racing Commission. On March 26, 1996,
the Company submitted an application to the Pennsylvania State Horse Racing
Commission for approval of the Downingtown OTW facility. The application is
pending.
Other Property and Equipment
The Company currently leases 2,100 square feet of office space in an office
building in Wyomissing, Pennsylvania for the Company's executive offices. The
lease is for a five-year term expiring April 2000 with an annual minimum rental
of $23,320. The office building is owned by an affiliate of Peter M. Carlino.
The Company considers its properties adequate for its present purposes. In
addition to the anticipated openings of the Williamsport and Downingtown OTWs,
the Company intends to open three additional OTWs for which sites have not been
selected. The Company believes, but cannot assure, that suitable sites will be
available on satisfactory terms.
56
LEGAL PROCEEDINGS
On December 11, 1996, GTECH commenced an action in the United States
District Court for the Northern District of West Virginia against Charles Town,
the Company, Penn National Gaming of West Virginia, Inc., a wholly owned
subsidiary of the Company, and Bryant. The complaint filed by GTECH alleges that
Charles Town and AmTote were parties to the October 20, 1994 AmTote Agreement,
pursuant to which AmTote was granted an exclusive right to install and operate a
"video lottery system" at the Charles Town Facility. When the AmTote Agreement
was entered into, AmTote was a subsidiary of GTECH; GTECH has since divested
itself of AmTote, but is purportedly the assignee of certain of AmTote's rights
under the AmTote Agreement pursuant to an assignment and assumption agreement
dated February 22, 1996. The complaint seeks (i) preliminary and permanent
injunctive relief enjoining Charles Town, Bryant, the Company and its subsidiary
from consummating the Charles Town Acquisition or any similar transaction unless
the purchasing party explicitly accepts and assumes the AmTote Agreement, (ii) a
declaratory judgment that the AmTote Agreement is valid and binding, that GTECH
has the right to be the exclusive installer, operator, provider and servicer of
a video lottery system at the Charles Town Facility and that any party buying
the stock or assets of Charles Town must accept and assume the AmTote Agreement
and recognize such rights of GTECH thereunder, (iii) compensatory damages, (iv)
legal fees and costs and (v) such other further legal and equitable relief as
the court deems just and appropriate. On December 23, 1996, the court denied
GTECH's motion to preliminarily enjoin the Company from consummating the Charles
Town Acquisition unless it accepts and assumes the AmTote Agreement. The court
noted that GTECH may pursue its claim for damages and, if warranted, pursue
other injunctive relief in the future. The Company consummated the Charles Town
Acquisition on January 15, 1997, at which time Charles Town assigned to the
Charles Town Joint Venture all legally valid and binding obligations, if any,
under the AmTote Agreement. In addition, the Company has agreed to indemnify
Charles Town for any damages Charles Town may suffer as a result of a claim that
Charles Town failed to fulfill its obligations under the AmTote Agreement. On
January 13, 1997, Charles Town filed a motion to dismiss GTECH's complaint; the
court has not yet ruled on this motion. The Company believes the allegations of
the complaint to be without merit and intends to contest the action vigorously.
EMPLOYEES AND LABOR RELATIONS
At November 30, 1996, the Company had 1,298 permanent employees, of whom
390 were full-time and 908 part-time. Of the total 1,298 employees, 417 were
employed at the Thoroughbred Track, 292 were employed at the Harness Track and
589 were employed at the Company's OTWs. Employees of the Company who work in
the admissions department and pari-mutuels department at the Thoroughbred Track,
the Harness Track and the OTWs are represented under collective bargaining
agreements between the Company and Sports Arena Employees' Union Local 137. The
agreements extend until October 3, 1999 for track employees and until May 20,
1998 for OTW employees. The Company believes that its relations with its
employees are satisfactory.
During the 1996 racing season at the Charles Town Facility, there were
approximately 113 full-time and 215 part-time employees. Charles Town employees
who work as pari-mutuel clerks were represented under a collective bargaining
agreement between Charles Town and the West Virginia Union of Mutuel Clerks,
Local No. 553. The agreement expired December 31, 1996. The Company has entered
into discussions with the pari-mutuel clerks toward entering into an agreement.
Entering into such an agreement is a requirement under the West Virginia Gaming
Machine Act to operate Gaming Machines. See "-- Regulation -- West Virginia
Racing and Gaming Regulation."
57
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are:
NAME AGE POSITION
- ---- --- --------
Peter M. Carlino................. 50 Chairman of the Board and Chief Executive Officer
William J. Bork.................. 63 President, Chief Operating Officer and Director
Robert S. Ippolito............... 45 Chief Financial Officer, Secretary and Treasurer
Philip T. O'Hara, Jr............. 43 Vice President and General Manager
Harold Cramer.................... 69 Director
David A. Handler................. 32 Director
Robert P. Levy................... 65 Director
John M. Jacquemin................ 50 Director
Peter M. Carlino. Mr. Carlino has served as Chairman of the Board and
Chief Executive Officer of the Company since April 1994, and has devoted a
significant amount of time to the activities of the Company as a director since
1991. From 1984 to 1994, Mr. Carlino devoted a substantial portion of his
business time to developing, building and operating residential and commercial
real estate projects located primarily in Central Pennsylvania. He has been
President of Carlino Financial Corporation ("Carlino Financial"), a holding
company which owns and operates various Carlino family businesses, since 1976,
in which capacity he has been continuously active in strategic planning for the
Company and monitoring its operations. From 1972 until 1976, Mr. Carlino served
as President of Mountainview Thoroughbred Racing Association ("Mountainview"), a
predecessor in interest of the Company.
William J. Bork. Mr. Bork was elected President, Chief Operating Officer
and a director in June 1995. From 1987 to June 1995 he was Vice President for
Ladbroke Racing Corporation. Prior to working with Ladbroke, Mr. Bork served as
Vice President of Operations of racetracks previously owned by Ogden Corporation
including Fairmount Park in Collinsville, Illinois; Mountaineer Park in Chester,
West Virginia; Wheeling Downs in Wheeling, West Virginia; and Suffolk Downs in
Boston, Massachusetts.
Robert S. Ippolito. Mr. Ippolito, a certified public accountant, was
elected Chief Financial Officer, Secretary and Treasurer of the Company in April
1994. He was Corporate Controller and Secretary of Carlino Financial and certain
of its affiliates between June 1987 and May 1994, and from 1979 to 1987 was
engaged in public accounting.
Philip T. O'Hara, Jr. Mr. O'Hara has been Vice President and General
Manager since January 1989. Mr. O'Hara joined the Company in April 1985 and has
served in various management capacities, including Director of Marketing and
Assistant General Manager. He has been a Director of the Thoroughbred Racing
Association since 1990.
58
Harold Cramer. Mr. Cramer has been a director of the Company since 1994.
Since November 1996, Mr. Cramer has been of counsel to Mesirov, Gelman, Jaffe,
Cramer & Jamieson, a Philadelphia law firm which provides legal services to the
Company. From November 1995 until November 1996, Mr. Cramer was Chairman of the
Board and Chief Executive Officer of HSI Management Co., Inc. From 1989 until
November 1995, Mr. Cramer was Chairman of the Board and Chief Executive Officer
of Graduate Health System, Inc. ("GHS"), and has been a Director of GHS since
November 1996. He also serves as a director of Mountainview and as a director of
Pennsylvania National Turf Club, Inc., a subsidiary of Penn National.
David A. Handler. Mr. Handler has been a director of the Company since
1994. From 1995 to the present, Mr. Handler has been an investment banker and is
currently a Senior Vice President of Corporate Finance at Jefferies & Company,
Inc. From 1991 to 1995, Mr. Handler was a Vice President at Fahnestock & Co.,
Inc.
Robert P. Levy. Mr. Levy has been a director of the Company since 1995. He
is Chairman of the Board of the Atlantic City Racing Association and served a
two-year term as President from 1989 to 1990 of the Thoroughbred Racing
Association. Mr. Levy has served as the Chairman of the Board of DRT Industries,
Inc., a diversified business based in the Philadelphia metropolitan area, since
1960. Mr. Levy owns the Robert P. Levy Stable, a thoroughbred racing and
breeding operation which has bred and owned several award-winning horses,
including the 1987 Belmont Stakes winner, Bet Twice.
John M. Jacquemin. Mr. Jacquemin has been a director of the Company since
1995 and is President of Mooring Financial Corporation, a financial services
group specializing in the purchase and administration of commercial loan
portfolios and equipment leases. Mr. Jacquemin joined Mooring Financial
Corporation in 1982 and has served as its President since 1987.
59
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the shares of
Common Stock beneficially owned as of December 31, 1996 by (i) each person known
to the Company to own beneficially more than five percent of the Company's
outstanding Common Stock, (ii) each director of the Company, (iii) each
executive officer of the Company, (iv) all of the executive officers and
directors of the Company as a group and (v) each Selling Shareholder.
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING (1) AFTER OFFERING (1)
NAME AND ADDRESS OF ------------------------ SHARES -------------------------
BENEFICIAL OWNER (1) NUMBER PERCENT BEING OFFERED (2) NUMBER PERCENT
- --------------------------------- ----------- ----------- ----------------- ------------ -----------
Peter D. Carlino (3)............. 6,043,178 45.2% 350,000(4) 5,693,178 37.7%
Peter M. Carlino (5)............. 6,661,842 49.3 550,000(6) 6,111,842 40.1
David E. Carlino (7)............. 5,546,838 41.5 255,000(8) 5,291,838 35.0
Richard J. Carlino (9)........... 5,522,504 41.4 255,000(8) 5,267,504 34.9
Harold Cramer (10)............... 5,701,386 42.7 255,000(11) 5,446,386 36.0
Carlino Family Trust............. 5,511,308 41.3 255,000(12) 5,256,308 34.8
Carlino Financial Corporation.... 301,132 2.3 95,000 206,132 1.4
William J. Bork (13)............. 50,000 * 0 50,000 *
Philip T. O'Hara, Jr. (14)....... 18,750 * 0 18,750 *
David A. Handler (15)............ 120,000 * 25,000(16) 95,000 *
Robert S. Ippolito (17).......... 29,100 * 0 29,100 *
John M. Jacquemin (18)........... 4,350 * 0 4,350 *
Robert P. Levy (19).............. 3,750 * 0 3,750 *
FMR Corp. (20)
82 Devonshire Street
Boston, MA 02109............... 879,000 6.6 0 879,000 5.8
All executive officers and
directors as a group
(8 persons) (21)............... 7,068,495 51.5 575,000(22) 6,493,495 42.0
- ------------------
* Less than one percent.
(1) Unless otherwise indicated in the footnotes to this table and subject to community property laws where
applicable, each of the shareholders named in this table has sole voting and investment power with respect to
the shares shown as beneficially owned. The address of each of the shareholders named in this table, other
than FMR Corp., is: c/o Penn National Gaming, Inc., Wyomissing Professional Center, Suite 203, 825 Berkshire
Boulevard, Wyomissing, Pennsylvania 19610.
(2) Assumes no exercise of the Underwriters' over-allotment option. Of the 345,000 shares to be sold if the over-
allotment option is exercised in full, 258,750 shares will be issued and sold by the Company, and 86,250
shares will be sold by certain of the Selling Shareholders.
(3) Includes 301,132 shares of Common Stock of the Company owned of record by Carlino Financial; such shares are
reported as beneficially owned by Peter D. Carlino as he is the Chairman of the Board of Carlino Financial
and has shared voting and investment power over such shares. Following the consummation of the offering and
the sale of 95,000 shares by Carlino Financial, includes 206,132 shares owned of record by Carlino Financial.
Also includes: 5,511,308 shares owned by the Carlino Family Trust among Peter D. Carlino and his eight
children, as settlors, and certain trustees, as to which Peter D. Carlino has shared investment and voting
power; 24,000 shares of Common Stock held by Penn Title Insurance Company as to which Peter D. Carlino has
shared voting and investment power; and 182,578 shares owned by a marital trust for the benefit of Peter D.
Carlino and by a residuary trust for the benefit of Peter D. Carlino's children as to both of which Peter D.
Carlino has shared investment power and shared voting power. Following the consummation of the offering and
the sale of 255,000 shares by the Carlino Family Trust, includes 5,256,308 shares owned by the Carlino Family
Trust.
60
(4) Consists of 255,000 shares being sold by the Carlino Family Trust and 95,000 shares being sold by Carlino
Financial. Of the shares being sold by the Carlino Family Trust, 31,875 shares are being sold for the benefit
of Peter D. Carlino as a settlor and beneficiary of the Carlino Family Trust.
(5) Includes 301,132 shares of Common Stock owned of record by Carlino Financial, as to which Peter M. Carlino
has shared voting and investment power. Following the consummation of the offering and the sale of 95,000
shares by Carlino Financial, includes 206,132 shares owned of record by Carlino Financial. Also includes
5,511,308 shares owned by the Carlino Family Trust, as to which Peter M. Carlino has sole voting power for
the election of directors and certain other matters, shared voting power with respect to certain matters and
shared investment power. Following the consummation of the offering and the sale of 255,000 shares by the
Carlino Family Trust, includes 5,256,308 shares owned by the Carlino Family Trust. Also includes 699,402 shares
owned jointly by Mr. Carlino and his spouse Marshia Carlino. Following the consummation of the offering and
the sale of 200,000 shares by Peter M. and Marshia Carlino, includes 499,402 shares owned jointly by Peter M.
and Marshia Carlino. Also includes 150,000 shares which may be acquired within 60 days of December 31, 1996
pursuant to the exercise of options under the Company's 1994 Stock Option Plan.
(6) Consists of 200,000 shares being sold by Peter M. Carlino and Marshia Carlino, 255,000 shares being sold by
the Carlino Family Trust and 95,000 shares being sold by Carlino Financial. None of the shares being sold by
the Carlino Family Trust are being sold for the benefit of Peter M. Carlino.
(7) Includes 5,511,308 shares of Common Stock owned by the Carlino Family Trust, as to which David E. Carlino has
shared voting power with respect to certain matters and shared investment power. Following consummation of
the offering and the sale of 255,000 shares by the Carlino Family Trust, includes 5,256,308 shares owned by
the Carlino Family Trust. Also includes 24,000 shares of Common Stock held by Penn Title Insurance Company,
as to which David E. Carlino has shared voting and investment power. Also includes 11,530 shares held by Mr.
Carlino's minor children. Mr. Carlino disclaims beneficial ownership of such shares.
(8) Consists of shares being sold by the Carlino Family Trust. Of such shares, 31,875 shares are being sold for
the benefit of this individual as a settlor and beneficiary of the Carlino Family Trust.
(9) Includes 5,511,308 shares of Common Stock owned by the Carlino Family Trust, as to which Richard J. Carlino
has shared voting power with respect to certain matters and shared investment power. Following consummation
of the offering and the sale of 255,000 shares by the Carlino Family Trust, includes 5,256,308 shares owned
by the Carlino Family Trust.
(10) Includes 5,511,308 shares of Common Stock owned by the Carlino Family Trust, and an aggregate of 182,578
shares owned by a marital trust for the benefit of Peter D. Carlino and by a residuary trust for the benefit
of Peter D. Carlino's children as to both of which Harold Cramer has shared investment power and shared
voting power. Following consummation of the offering and the sale of 255,000 shares by the Carlino Family
Trust, includes 5,256,308 shares owned by the Carlino Family Trust. Also includes 7,500 shares which may be
acquired within 60 days of December 31, 1996 pursuant to the exercise of options granted under the Company's
1994 Stock Option Plan.
(11) Consists of shares being sold by the Carlino Family Trust, of which Mr. Cramer is a trustee. None of the
shares being sold by the Carlino Family Trust are being sold for the benefit of Mr. Cramer.
(12) Of the 255,000 shares being sold by the Carlino Family Trust, 31,875 shares are being sold for the benefit of
each of the following settlors and beneficiaries of the trust: Peter D. Carlino (see footnote (3)); Richard
J. Carlino (see footnote (9)); David E. Carlino (see footnote (9)); Susan F. Harrington; Anne de Lourdes
Irwin; Robert M. Carlino; Stephen P. Carlino; and Rosina E. Carlino Gilbert.
(13) Consists of 50,000 shares which may be acquired within 60 days of December 31, 1996 pursuant to the exercise
of options granted under the Company's 1994 Stock Option Plan.
(14) Consists of 18,750 shares which may be acquired within 60 days of December 31, 1996 pursuant to the exercise
of options granted under the Company's 1994 Stock Option Plan.
(15) Includes 7,500 shares which may be acquired within 60 days of December 31, 1996 pursuant to the exercise of
options granted under the Company's 1994 Stock Option Plan. Also includes 100,500 shares which may be
acquired within 60 days of December 31, 1996 pursuant to the exercise of warrants granted in connection with
the Company's initial public offering in May 1994. Following consummation of the offering and the sale of
25,000 shares by Mr. Handler, includes 75,500 shares issuable upon the exercise of such warrants. Mr. Handler
is a Senior Vice President of Jefferies & Company, Inc., one of the Underwriters of the offering.
(16) Consists of shares issuable upon the exercise of warrants.
(17) Includes 28,500 shares which may be acquired within 60 days of December 31, 1996 pursuant to the exercise of
options granted under the Company's 1994 Stock Option Plan.
61
(18) Includes 3,750 shares which may be acquired within 60 days of December 31, 1996 pursuant to the exercise of
options granted under the Company's 1994 Stock Option Plan.
(19) Consists of 3,750 shares which may be acquired within 60 days of December 31, 1996 pursuant to the exercise
of options granted under the Company's 1994 Stock Option Plan.
(20) Based on information contained in a Schedule 13G filed by FMR Corp. with the Commission on or about March 16,
1996. Fidelity Management & Research Company, a wholly owned subsidiary of FMR Corp. acting as an investment
adviser to various investment companies registered under Section 8 of the Investment Company Act of 1940, is
the beneficial owner of 828,000 shares of Common Stock. Edward C. Johnson 3d, Chairman of FMR Corp., has
investment power with respect to these shares.
(21) Includes (i) 269,750 shares which may be acquired within 60 days of December 31, 1996 pursuant to the
exercise of options granted under the Company's 1994 Stock Option Plan, (ii) 100,500 shares which may be
acquired within 60 days of December 31, 1996 pursuant to the exercise of warrants granted in connection with
the Company's initial public offering in May 1994 (75,500 shares following consummation of the offering),
(iii) 301,132 shares owned of record by Carlino Financial (206,132 shares following consummation of the
offering), (iv) 5,511,308 shares of Common Stock owned by the Carlino Family Trust (5,256,308 shares
following consummation of the offering) and (v) 182,578 shares owned by a marital trust for the benefit of
Peter D. Carlino and by a residuary trust for the benefit of Peter D. Carlino's children. See footnotes (5),
(10), (11) and (13) through (19).
(22) Consists of 200,000 shares being sold by Peter M. Carlino, 255,000 shares being sold by the Carlino Family
Trust, 95,000 shares being sold by Carlino Financial and 25,000 shares being sold by David A. Handler. None
of the shares being sold by the Carlino Family Trust are being sold for the benefit of executive officers or
directors of the Company.
62
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 21,000,000 shares, of
which 20,000,000 shares are Common Stock and 1,000,000 shares are preferred
stock, par value $.01 per share (the "Preferred Stock"). As of December 31,
1996, there were 13,355,290 shares of Common Stock outstanding held of record by
approximately 261 persons, 1,179,750 shares of Common Stock reserved for
issuance upon the exercise of outstanding stock options and 195,000 shares
reserved for issuance upon the exercise of outstanding warrants.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of shareholders and do not have
cumulative voting rights. Holders of Common Stock are entitled to receive
ratably those dividends, if any, as may be declared from time to time by the
Board of Directors, in its discretion, out of funds legally available therefor,
subject to any preferential dividend rights of outstanding Preferred Stock. In
the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after the payment of all liabilities of the Company and subject to the
liquidation preferences of any outstanding Preferred Stock. The Common Stock
does not carry preemptive rights, is not redeemable, does not have any
conversion rights, is not subject to further calls and is not subject to any
sinking fund provisions. The outstanding shares of Common Stock are and the
shares offered by the Company in this offering will be, when issued and paid
for, fully paid and nonassessable. Except in certain circumstances as discussed
below under "-- Possible Antitakeover Effect of Certain Charter, By-Law and
Other Provisions," the Common Stock is not subject to discriminatory provisions
based on ownership thresholds.
The rights, preferences and privileges of holders of Common Stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Preferred Stock which the Company may designate and
issue in the future. See "-- Preferred Stock."
PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of Preferred
Stock. The Board of Directors is authorized, subject to any limitations
prescribed by law, without further shareholder approval, to issue such shares of
Preferred Stock in one or more series, with such rights, preferences,
privileges and restrictions, including voting rights, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as shall
be established by the Board of Directors at the time of issuance.
The issuance of Preferred Stock by the Board of Directors could adversely
affect the rights of holders of Common Stock. For example, the issuance of
shares of Preferred Stock could result in securities outstanding that would have
preference over the Common Stock with respect to dividends and in liquidation
and that could (upon conversion or otherwise) enjoy all of the rights of the
Common Stock.
The authority possessed by the Board of Directors to issue Preferred Stock
could potentially be used to discourage attempts by third persons to obtain
control of the Company through merger, tender offer, proxy or consent
solicitation or otherwise, by making such attempts more difficult to achieve or
more costly. The Board of Directors may issue Preferred Stock without
shareholder approval and with voting rights that could adversely affect the
voting power of holders of Common Stock. There are no agreements or
understandings for the issuance of Preferred Stock, and the Company has no plans
to issue any shares of Preferred Stock. See "-- Possible Antitakeover Effect of
Certain Charter, By-Law and Other Provisions."
63
WARRANTS
In connection with its initial public offering, the Company issued to
Fahnestock & Co. Inc. and Brenner Securities Corporation and their assignees
(together, the "Warrantholders") warrants to purchase shares of Common Stock, of
which warrants to purchase 195,000 shares (the "Warrants") remain outstanding as
of December 31, 1996. The Warrants are exercisable, at a price of $4.00 per
share, for a period expiring on May 31, 2000. The Warrantholders are entitled to
certain registration rights under the Securities Act in connection with the
issuance of the underlying shares of Common Stock received upon the exercise of
the Warrants. The exercise price and the number of shares of Common Stock which
may be purchased are subject to adjustment pursuant to anti-dilution provisions
of the Warrants.
CERTAIN 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 shares owned
by 5% beneficial shareholders are required to bear certain legends prescribed by
the Pennsylvania Racing Act. In addition, each Pennsylvania Racing Commission
has the authority to order a 5% beneficial shareholder of the Company to dispose
of its Common Stock if the commission determines that continued ownership would
be inconsistent with the public interest, convenience or necessity or the best
interest of racing generally.
The Pennsylvania Racing Act also specifies certain reporting and
notification requirements to the Company or the Pennsylvania Racing Commissions
relating to transfers of beneficial ownership of stock (i) comprising 5% or more
of a corporation licensed to conduct racing or any corporation which leases a
racetrack to a corporation licensed to conduct racing or (ii) comprising 5% or
more of a corporation which owns 25% or more of the stock of a corporation
licensed to conduct racing, such as the Company.
The West Virginia Gaming Machine Act provides that a transfer of more than
5% of the voting stock of a corporation which controls the license may only be
to persons who have met the licensing requirements of the West Virginia Gaming
Machine Act or which transfer has been pre-approved by the West Virginia Lottery
Commission. Any transfer that does not comply with this requirement voids the
license.
POSSIBLE ANTITAKEOVER EFFECT OF CERTAIN CHARTER, BY-LAW AND OTHER PROVISIONS
The Company's Amended and Restated Articles of Incorporation and By-Laws
provide that the Board of Directors is to consist of three classes of directors,
each comprised as nearly as practicable of one-third of the Board, and that
one-third of the Board is to be elected each year. At each annual meeting, only
directors of the class whose term is expiring are voted upon, and upon election
each such director serves a three-year term. The Company's Amended and Restated
Articles of Incorporation provide that a director may be removed with or without
cause only by the affirmative vote of the holders of 75% of the voting power of
all shares of the Company entitled to vote generally in the election of
directors, voting as a single class; the Company's By-Laws provide that a
director may only be removed without cause by written consent of the
shareholders and not at a meeting.
The Company's Amended and Restated Articles of Incorporation provide that
shareholder-proposed nominations for election of directors and
shareholder-proposed business at meetings of shareholders shall be subject to
such advance notice requirements as may be contained in the By-Laws, which may
be amended by the directors.
The provisions of the Company's Amended and Restated Articles of
Incorporation with respect to classification of the Board of Directors and
shareholder approval of the removal of directors with or without cause may not
be altered, amended or repealed without the affirmative vote of the holders of
at least 75% of the voting power of all shares of the Company entitled to vote
generally in the election of directors, voting as a single class.
64
The Pennsylvania Business Corporation Law ("BCL") contains a number of
interrelated provisions which are designed to support the validity of actions
taken by the Board of Directors in response to takeover bids, including
specifically the Board's authority to "accept, reject or take no action" with
respect to a takeover bid, and permitting the unfavorable disparate treatment of
a takeover bidder. One provision requires that mergers with or sales of assets
to an "interested shareholder" (which includes a shareholder who is a party to
the proposed transaction) be approved by a majority of voting shares
outstanding, other than those held by the interested shareholder, unless the
transaction has been approved by a majority of the corporation's directors who
are not affiliated with the interested shareholder, or the transaction results
in the payment to all other shareholders of an amount not less than the highest
amount paid for shares by the interested shareholder. Another provision of the
BCL gives the directors broad discretion in considering the best interests of
the corporation, including a provision which permits the Board, in taking any
action, to consider various corporate interests, including employees, suppliers,
clients and communities in which the corporation is located, the short and
long-term interests of the corporation, and the resources, intent and conduct of
any person seeking to acquire control of the corporation. Another provision
prohibits, subject to certain exceptions, a "business combination" with a
shareholder or group of shareholders beneficially owning more than 20% of the
voting power of a public corporation (excluding certain shares) for a five-year
period following the date on which the holder became an interested shareholder.
The effect of the BCL's antitakeover provisions may be to deter unsolicited
takeover attempts or other attempts to accumulate stock in the Company. This may
promote stability in the business, management and control, and in the price of
stock, of the Company. However, by discouraging open market accumulation of
stock in the Company and non-solicited, non-negotiated takeover attempts,
shareholders may be disadvantaged by foregoing the opportunity to participate in
such transactions, which may be in excess of the prevailing market price for the
Company's stock. In addition, while the antitakeover provisions may encourage a
party considering accumulating stock in or acquiring the Company to negotiate
with the Board, and place the Board in a better position to defend against
actions it believes not to be in the best interests of the Company and its
shareholders, the provisions may also make it more difficult to accomplish a
transaction requiring shareholder approval if the Board disapproves (even if the
shareholders may be in favor of such a transaction).
The restrictions of the Pennsylvania Racing Act on share ownership and
transfer may also discourage or make it more difficult for a party to accumulate
stock in or acquire the Company, as the Pennsylvania Racing Commission has broad
discretion in approving the activities of the Company and approving its
shareholders. The restrictions of the West Virginia Gaming Machine Act on share
ownership and transfer may also discourage or make it more difficult for a party
to accumulate stock in or acquire the Company, as the West Virginia Lottery
Commission has broad discretion in approving the activities of the Company and
approving its shareholders. See "-- Certain Restrictions on Share Ownership and
Transfer."
Peter M. Carlino may, by virtue of his ability to vote shares of the Common
Stock, be able significantly to influence the election of directors and the
business and affairs of the Company. The trustees of the Carlino Family Trust
may, by virtue of their ability to vote the shares of Common Stock held in the
Carlino Family Trust in certain circumstances, be able significantly to
influence the approval or disapproval of the sale of all or substantially all of
the assets of the Company, a merger, consolidation or liquidation of the
Company. In addition, in the event the Carlino Family Trust proposes to sell
Common Stock representing more than 3% of the Company's outstanding Common
Stock, Peter M. Carlino and other Carlino siblings have the right to acquire
such Common Stock on the price and terms proposed. Peter M. Carlino's control
position and certain other provisions of the Carlino Family Trust could deter
unsolicited takeover attempts to the same or greater extent than the BCL or the
Pennsylvania Racing Act. See "Risk Factors -- Concentration of Ownership."
TRANSFER AGENT
The transfer agent for the Common Stock is Continental Stock Transfer &
Trust Company.
65
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") among the Company, the Selling Shareholders and
the underwriters named below (the "Underwriters"), for whom Salomon Brothers
Inc, Gerard Klauer Mattison & Co., Inc. and Jefferies & Company, Inc. are acting
as representatives (the "Representatives"), the Company and the Selling
Shareholders have agreed to sell to each of the Underwriters, and each of the
Underwriters severally has agreed to purchase from the Company and the Selling
Shareholders, the shares of Common Stock set forth opposite its name below:
UNDERWRITERS NUMBER OF SHARES
- ------------------------------------------------------ ----------------
Salomon Brothers Inc..................................
Gerard Klauer Mattison & Co., Inc.....................
Jefferies & Company, Inc..............................
---------
Total............................................ 2,300,000
---------
---------
In the Underwriting Agreement, the several Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase all of the
shares of Common Stock offered hereby (other than those subject to the
over-allotment option described below) if any such shares are purchased. In the
event of a default by an Underwriter, the Underwriting Agreement provides that,
in certain circumstances, the purchase commitments of the nondefaulting
Underwriters may be increased or the Underwriting Agreement may be terminated.
The Company has been advised by the Representatives that the several
Underwriters initially propose to offer the shares of Common Stock directly to
the public at the public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share. After the initial public offering,
the public offering price and such concessions may be changed from time to time
by the Underwriters.
The Company and the Selling Shareholders have granted to the Underwriters
an option, expiring at the close of business on the 30th day subsequent to the
date of this Prospectus, to purchase up to 258,750 and 86,250 additional shares
of Common Stock, respectively, at the public offering price set forth on the
cover page of this Prospectus, less the underwriting discount. The Underwriters
may exercise such option only to cover over-allotments, if any, incurred in the
sale of the shares of Common Stock. To the extent that the Underwriters exercise
such option, each Underwriter will be obligated, subject to certain conditions,
to purchase approximately the same percentage of such additional shares as the
percentage it is required to purchase of the total number of shares of Common
Stock in the above table.
The Company's directors and executive officers, the Selling Shareholders
and certain members of the Carlino family have agreed that they will not offer,
sell or contract to sell or otherwise dispose of, directly or indirectly, or
announce the offering of, any shares of Common Stock or any securities
convertible into, or exchangeable for, shares of Common Stock for a period of
120 days after the date of this Prospectus, except for the shares of Common
Stock offered hereby, the issuance of shares by the Company pursuant to stock
options and the issuance of shares or options by the Company pursuant to
employee benefit, stock option or ownership plans of the Company outstanding or
in effect on the date of this Prospectus, without the prior written consent of
the Representatives.
66
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act, or contribute to payments the
Underwriters may be required to make in respect thereof.
David A. Handler, one of the Selling Shareholders, is a Senior Vice
President of Jefferies & Company, Inc., one of the Representatives, and a
director of the Company. The Shares being sold by Mr. Handler will be issued by
the Company pursuant to the exercise by Mr. Handler of warrants assigned to him
by his previous employer, Fahnestock & Co. Inc., which received the warrants
from the Company in connection with the Company's initial public offering in
1994.
LEGAL MATTERS
Certain legal matters with respect to the shares of Common Stock offered
hereby will be passed upon for the Company by Morgan, Lewis & Bockius LLP,
Pittsburgh, Pennsylvania. Certain legal matters relating to this offering will
be passed upon for the Underwriters by Cleary, Gottlieb, Steen & Hamilton, New
York, New York.
EXPERTS
The consolidated financial statements of the Company included and
incorporated by reference in this Prospectus and in the Registration Statement
have been audited by BDO Seidman, LLP, independent certified public accountants,
to the extent and for the periods set forth in their report included and
incorporated herein by reference, and are included and incorporated herein in
reliance upon such report given upon the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of The Plains Company included in
this Prospectus and elsewhere in the Registration Statement have been audited by
Robert Rossi & Co., independent certified public accountants, to the extent and
for the periods set forth in their report appearing elsewhere herein and in the
Registration Statement and have been included herein in reliance upon such
report given upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of Charles Town included in this
Prospectus and elsewhere in the Registration Statement have been audited by
Leonard J. Miller & Associates, Chartered, independent certified public
accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein and in the Registration Statement and have been
included herein in reliance upon such report given upon the authority of said
firm as experts in accounting and auditing.
67
INDEX TO FINANCIAL STATEMENTS
PAGE
----
PENN NATIONAL GAMING, INC.
Report of Independent Certified Public Accountants.................... F-2
Consolidated Balance Sheets........................................... F-3
Consolidated Statements of Income..................................... F-4
Consolidated Statements of Shareholders' Equity....................... F-5
Consolidated Statements of Cash Flows................................. F-6
Notes to Consolidated Financial Statements............................ F-7
THE PLAINS COMPANY
Report of Independent Certified Public Accountants.................... F-21
Consolidated Balance Sheets........................................... F-22
Consolidated Statements of Income and Retained Earnings............... F-24
Consolidated Statements of Cash Flows................................. F-25
Notes to Consolidated Financial Statements............................ F-26
CHARLES TOWN RACING LIMITED PARTNERSHIP AND CHARLES TOWN RACES, INC.
Report of Independent Certified Public Accountants.................... F-38
Combined Balance Sheets............................................... F-39
Combined Statements of Income and Equity (Deficit).................... F-40
Combined Statements of Cash Flows..................................... F-41
Notes to Combined Financial Statements................................ F-42
F-1
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, 1994 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material aspects, the financial position of Penn National
Gaming, Inc. and Subsidiaries at December 31, 1994 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
F-2
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
February 2, 1996
F-3
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
DECEMBER 31,
------------------ SEPTEMBER 30,
1994 1995 1996
------- ------- -------------
(UNAUDITED)
ASSETS
Current assets
Cash.................................................................. $ 5,502 $ 7,514 $ 5,602
Accounts receivable................................................... 1,256 1,618 1,968
Prepaid expenses and other current assets............................. 442 600 1,332
Deferred income taxes................................................. 49 104 62
------- ------- -------
Total current assets................................................ 7,249 9,836 8,964
------- ------- -------
Property, plant and equipment, at cost
Land and improvements................................................. 3,253 3,336 4,225
Building and improvements............................................. 7,867 8,651 8,740
Furniture, fixtures and equipment..................................... 2,802 4,696 5,660
Transportation equipment.............................................. 240 309 322
Leasehold improvements................................................ 2,814 4,363 6,388
Leased equipment under capitalized lease.............................. 934 824 824
Construction in progress.............................................. 566 255 1,059
------- ------- -------
18,476 22,434 27,218
Less accumulated depreciation and amortization........................ 5,914 6,728 7,589
------- ------- -------
Net property and equipment............................................ 12,562 15,706 19,629
------- ------- -------
Other assets
Excess of cost over fair market value of net assets acquired (net of
accumulated amortization of $646, $713 and $763, respectively)...... 1,965 1,898 1,848
Prepaid acquisition costs............................................. -- -- 3,001
Miscellaneous......................................................... 97 92 291
------- ------- -------
Total other assets.................................................. 2,062 1,990 5,140
------- ------- -------
$21,873 $27,532 $33,733
------- ------- -------
------- ------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt and capital lease obligations.... $ 258 $ 250 $ 222
Accounts payable...................................................... 1,410 1,395 1,868
Purses due horsemen................................................... 996 1,293 1,329
Uncashed pari-mutuel tickets.......................................... 520 704 617
Accrued expenses...................................................... 1,078 702 618
Customer deposits..................................................... 299 315 515
Income taxes.......................................................... 607 797 328
Taxes, other than income taxes........................................ 7 246 473
------- ------- -------
Total current liabilities........................................... 5,175 5,702 5,970
------- ------- -------
Long-term liabilities
Long-term debt and capital lease obligations, net of current
maturities.......................................................... 258 140 80
Deferred income taxes................................................. 813 888 989
------- ------- -------
Total long-term liabilities......................................... 1,071 1,028 1,069
------- ------- -------
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 12,900,000, 12,945,000 and 13,330,290, respectively..... 43 43 133
Additional paid-in capital............................................ 12,642 12,821 14,217
Retained earnings..................................................... 2,942 7,938 12,344
------- ------- -------
Total shareholders' equity.......................................... 15,627 20,802 26,694
------- ------- -------
$21,873 $27,532 $33,733
------- ------- -------
------- ------- -------
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
F-3
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
Revenues
Pari-mutuel revenues
Penn National races....................... $ 29,224 $ 23,428 $ 21,376 $ 16,578 $ 14,495
Import simulcasting....................... 9,162 16,968 27,254 20,412 23,596
Export simulcasting....................... 383 1,187 2,142 1,447 2,479
Admissions, programs and other racing
revenues.................................. 2,485 2,563 3,704 2,978 3,403
Concession revenues......................... 1,410 1,885 3,200 2,478 2,501
----------- ----------- ----------- ----------- -----------
Total revenues.......................... 42,664 46,031 57,676 43,893 46,474
----------- ----------- ----------- ----------- -----------
Operating expenses
Purses, stakes and trophies................. 9,719 10,674 12,091 9,329 9,744
Direct salaries, payroll taxes and employee
benefits.................................. 6,394 6,707 7,699 5,823 6,211
Simulcast expenses.......................... 10,136 8,892 9,084 6,905 6,920
Pari-mutuel taxes........................... 3,568 4,054 4,963 3,773 3,954
Other direct meeting expenses............... 6,046 6,375 8,214 6,249 6,932
Off-track wagering concession expenses...... 806 1,231 2,221 1,689 1,766
Management fees paid to related party....... 1,208 345 -- -- --
Other operating expenses.................... 2,331 3,329 5,149 3,750 3,710
----------- ----------- ----------- ----------- -----------
Total operating expenses................ 40,208 41,607 49,421 37,518 39,237
----------- ----------- ----------- ----------- -----------
Income from operations........................ 2,456 4,424 8,255 6,375 7,237
----------- ----------- ----------- ----------- -----------
Other income (expenses)
Interest (expense).......................... (989) (465) (71) (55) (44)
Interest income............................. 27 125 269 201 229
Other....................................... 6 15 10 4 --
----------- ----------- ----------- ----------- -----------
Total other income (expense)............ (956) (325) 208 150 185
----------- ----------- ----------- ----------- -----------
Income before income taxes and extraordinary
item........................................ 1,500 4,099 8,463 6,525 7,422
Taxes on income............................... 42 1,381 3,467 2,680 3,016
----------- ----------- ----------- ----------- -----------
Income before extraordinary item.............. 1,458 2,718 4,996 3,845 4,406
Extraordinary item
Loss on early extinguishment of debt, net of
income taxes of $83....................... -- 115 -- -- --
----------- ----------- ----------- ----------- -----------
Net income.................................... $ 1,458 $ 2,603 $ 4,996 $ 3,845 $ 4,406
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net income per share.......................... $ .38 $ .29 $ .32
----------- ----------- -----------
----------- ----------- -----------
Supplemental pro forma
Historical net income before taxes on
income.................................... 1,500 4,099
Supplemental pro forma adjustments.......... 1,834 625
----------- -----------
Supplemental pro forma income before taxes on
income...................................... 3,334 4,724
Supplemental pro forma taxes on income........ 1,515 2,000
----------- -----------
Supplemental pro forma net income............. $ 1,819 $ 2,724
----------- -----------
----------- -----------
Supplemental pro forma net income
per share................................... $ .15 $ .22
----------- -----------
----------- -----------
Weighted average common shares
outstanding................................. 12,249,000 12,663,000 13,104,000 13,044,000 13,754,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
F-4
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL
------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------------ ----------- ----------- ----------- ---------
Balance, January 1, 1993.............................. 8,400,000 $ 28 $ 2 $ 2,486 $ 2,516
Net income for the year ended December 31, 1993....... -- -- -- 1,458 1,458
Distributions to shareholders......................... -- -- -- (556) (556)
---------- ----- -------- -------- -------
Balance, December 31, 1993............................ 8,400,000 28 2 3,388 3,418
Deferred income taxes of S corporations and
partnerships........................................ -- -- (302) -- (302)
Distributions to shareholders......................... -- -- -- (3,049) (3,049)
Issuance of common stock.............................. 4,500,000 15 12,942 -- 12,957
Net income for the year ended December 31, 1994....... -- -- -- 2,603 2,603
---------- ----- -------- -------- -------
Balance, December 31, 1994............................ 12,900,000 43 12,642 2,942 15,627
Issuance of common stock.............................. 45,000 -- 179 -- 179
Net income for the year ended December 31, 1995....... -- -- -- 4,996 4,996
---------- ----- -------- -------- -------
Balance, December 31, 1995............................ 12,945,000 43 12,821 7,938 20,802
Issuance of common stock (unaudited).................. 385,290 3 1,483 -- 1,486
Stock splits (unaudited).............................. -- 87 (87) -- --
Net income for the nine months ended September 30,
1996 (unaudited).................................... -- -- -- 4,406 4,406
---------- ----- -------- -------- -------
Balance, September 30, 1996 (unaudited) 13,330,290 $133 $14,217 $ 12,344 $26,694
---------- ----- -------- -------- -------
---------- ----- --------- -------- -------
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
F-5
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- -------- -------
(UNAUDITED)
Cash flows from operating activities
Net income......................................... $ 1,458 $ 2,603 $ 4,996 $ 3,845 $ 4,406
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization.................. 640 699 881 648 911
Extraordinary loss related to early
extinguishment of debt, before income tax
benefit...................................... -- 198 -- -- --
Deferred income taxes.......................... 61 493 20 (2) 144
Decrease (increase) in
Accounts receivable.......................... (114) (309) (362) 16 (350)
Prepaid expenses and other
current assets............................ (73) (60) (158) (263) (732)
Miscellaneous other assets................... (2) (56) 5 (29) (197)
Increase (decrease) in
Accounts payable............................. 281 (228) (15) 182 473
Purses due horsemen.......................... 107 85 297 701 36
Uncashed pari-mutuel tickets................. 94 (12) 184 14 (88)
Accrued expenses............................. 151 196 (376) (539) (85)
Customer deposits............................ 12 (10) 16 205 200
Taxes other than income taxes................ 21 (147) 239 132 81
Income taxes................................. (62) 607 190 234 (324)
------- ------- ------- -------- --------
Net cash provided by operating activities............ 2,574 4,059 5,917 5,144 4,475
------- ------- ------- -------- --------
Cash flows from investing activities
Expenditures for property and equipment............ (412) (2,852) (3,958) (3,690) (4,784)
Decrease (increase) in advances to related
parties.......................................... (210) 3,688 -- -- --
(Increase) in prepaid acquisition costs............ -- -- -- -- (3,001)
------- ------- ------- -------- --------
Net cash (used) provided by investing activities..... (622) 836 (3,958) (3,690) (7,785)
------- ------- ------- -------- --------
Cash flows from financing activities
Proceeds from sale of common stock................. -- 12,957 179 -- 1,486
Principal payments on notes payable, banks......... (6) (1,289) -- -- --
Proceeds from notes payable, related party......... 64 178 -- -- --
Principal payments on notes payable, related
party............................................ (381) (361) -- -- --
Proceeds of long-term debt......................... -- 800 -- -- --
Principal payments on long-term debt and
capitalized lease obligations.................... (1,024) (9,433) (126) (91) (88)
Increase in unamortized financing cost............. -- (182) -- -- --
Distributions to shareholders...................... (556) (3,049) -- -- --
(Decrease) increase in advances from related
parties.......................................... 16 (16) -- -- --
------- ------- ------- -------- --------
Net cash (used) provided by financing activities..... (1,887) (395) 53 (91) 1,398
------- ------- ------- -------- --------
Net increase (decrease) in cash...................... 65 4,500 2,012 1,363 (1,912)
Cash, at beginning of period......................... 937 1,002 5,502 5,502 7,514
------- ------- ------- -------- --------
Cash, at end of period............................... $ 1,002 $ 5,502 $ 7,514 $ 6,865 $ 5,602
------- ------- ------- -------- --------
------- ------- ------- -------- --------
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
F-6
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION AND REORGANIZATION
The consolidated financial statements include the following entities of
Penn National Gaming, Inc. (collectively, the "Company") prior to the
reorganization, as described below, and which were affiliated through common
ownership and control.
Mountainview Thoroughbred Racing Association ("Mountainview")
Pennsylvania National Turf Club, Inc. ("Turf Club")
PNRC Reading, Inc. (An S corporation)
PNRC Chambersburg, Inc. (An S corporation)
PNRC Limited Partnership
Carlino Family Partnership
Penn National Gaming, Inc., formerly called PNRC Corp. (An S corporation)
The consolidated financial statements for the periods prior to the
reorganization have been prepared as if the entities had operated as a single
consolidated group assuming that the reorganization had taken place. After the
reorganization, the consolidated financial statements include Penn National
Gaming, Inc. and its wholly owned subsidiaries Turf Club, Mountainview, Penn
National Speedway, Inc. (formed in 1995) and Sterling Aviation, Inc. (formed in
1995). All significant intercompany accounts and transactions have been
eliminated in consolidation.
REORGANIZATION
The Company completed an initial public offering on May 25, 1994 by selling
4,500,000 shares of its common stock.
On April 11, 1994, the Company entered into an agreement and plan of
reorganization, pursuant to which, on May 24, 1994: (1) Penn National Gaming,
Inc. ("Penn National") acquired all of the outstanding stock of Mountainview,
Turf Club, PNRC Reading, Inc. and PNRC Chambersburg, Inc., (2) Penn National
Gaming, Inc. acquired the limited partners' interests in PNRC Limited
Partnership and all of the partnership interests in Carlino Family Partnership,
and these partnerships were liquidated into the Company. In exchange for the
stock and assets acquired in the transactions, the Company issued 8,400,000
shares of its common stock. Pursuant to the reorganization, Turf Club,
Mountainview, PNRC Reading, Inc. and PNRC Chambersburg, Inc. became wholly-owned
subsidiaries of Penn National. Subsequent to the reorganization, the Company
merged PNRC Reading, Inc. and PNRC Chambersburg, Inc. into Mountainview in
accordance with a statutory merger, leaving Turf Club and Mountainview as the
only subsidiaries of the Company.
The transaction was treated similar to a pooling of interests and the
exchange of stock and partnership interests was a tax-free exchange.
DESCRIPTION OF BUSINESS
The Company, which began operations in 1972, provides pari-mutuel wagering
opportunities on both live and simulcast thoroughbred and harness horse races at
two racetracks and six off-track wagering facilities ("OTWs") located
principally in Eastern and Central Pennsylvania. Prior to the consummation of
the acquisition of Pocono Downs (see Note 11), the Company owned and operated
Penn National Race Course located outside Harrisburg, Pennsylvania (the
"Thoroughbred Track"), and four OTWs in Chambersburg, Lancaster, Reading and
York, Pennsylvania. On November 27, 1996, the Company consummated the Pocono
Downs Acquisition, and as a result acquired Pocono Downs Racetrack, located
outside Wilkes-Barre, Pennsylvania (the "Harness Track"), and OTWs in Allentown
and Erie, Pennsylvania.
F-7
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
On January 15, 1997, a joint venture in which the Company has reached an
agreement to hold an 89% interest acquired substantially all of the assets
relating to Charles Town Races, a thoroughbred racing facility in Jefferson
County, West Virginia. The Company expects to refurbish the Charles Town
facility as an entertainment complex that will feature live racing, dining,
simulcast wagering and, upon completion of the interior refurbishment in
mid-1997, 400 Gaming Machines.
The Company conducts wagering at its tracks and at its OTWs on thoroughbred
and harness races which it runs at its tracks and on thoroughbred and harness
races simulcast from other racetracks. The Company also simulcasts its races for
wagering at other racetracks and OTWs, including all Pennsylvania racetracks and
OTWs and locations outside Pennsylvania. Wagering on Company races and races
simulcast from other racetracks also occurs through the Company's telephone
account betting network.
GLOSSARY OF TERMINOLOGY
The following is a listing of terminology used throughout the financial
statements:
OTW -- Off-track wagering location.
Pari-mutuel wagering -- All wagering at Penn National's racetracks, at Penn
National's OTWs and all wagering on Penn National's races at other
racetracks and their OTWs.
Telebet -- Telephone account wagering.
Totalisator Services -- Computer services provided to Penn National by
Autotote Enterprises, Inc. for processing pari-mutuel betting odds and
wagering proceeds.
Pari-mutuel Revenues:
Penn National Races -- Penn National's share of pari-mutuel wagering
on Penn National races within Pennsylvania and certain stakes races
from racetracks outside of Pennsylvania after payment of the amount
returned as winning wagers.
Import Simulcasting -- Penn National's share of wagering at Penn
National racetrack, at the Company's OTWs and by Telebet on full
cards of races simulcast from other racetracks.
Export Simulcasting -- Penn National's share of wagering at
out-of-state locations on Penn National races.
A summary of pari-mutuel wagering for the periods indicated is as follows:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Pari-mutuel wagering in Pennsylvania on Penn
National races............................... $ 138,939 $ 111,248 $ 102,145 $ 79,235 $ 69,200
----------- ----------- ----------- ----------- -----------
Pari-mutuel wagering on simulcasting
Import simulcasting from other Pennsylvania
race tracks............................... 41,385 28,622 29,159 22,018 17,704
Import simulcasting from out of Pennsylvania
race tracks............................... 16,867 64,839 113,340 84,646 105,191
Export simulcasting to out of Pennsylvania
wagering facilities....................... 12,746 40,337 72,252 48,327 84,228
----------- ----------- ----------- ----------- -----------
70,998 133,798 214,751 154,991 207,123
----------- ----------- ----------- ----------- -----------
Total pari-mutuel wagering................ $ 209,937 $ 245,046 $ 316,896 $ 234,226 $ 276,323
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
F-8
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
RACING MEET
The Company's racing seasons for the years ended December 31, 1993, 1994
and 1995 totaled 238, 219 and 204 live race days, respectively. The Company's
racing seasons for the nine month periods ended September 30, 1995 and 1996
totaled 154 live race days for each period.
The Reading OTW commenced simulcasting operations on May 15, 1992. During
the years ended December 31, 1993, 1994 and 1995, this facility was open 359,
363 and 364 calendar days, respectively. During the nine month periods ended
September 30, 1995 and 1996, this facility was open 273 and 272 calendar days,
respectively.
The Chambersburg OTW commenced simulcasting operations on April 25, 1994.
During the years ended December 31, 1994 and 1995, this facility was open 249
and 364 calendar days, respectively. During the nine month periods ended
September 30, 1995 and 1996, this facility was open 273 and 272 calendar days,
respectively.
The York OTW commenced simulcasting operations on March 20, 1995. During
the year ended December 31, 1995, this facility was open 286 calendar days.
During the nine months ended September 30, 1995 and 1996, this facility was open
195 and 272 calendar days, respectively.
The Lancaster OTW commenced simulcasting operations on July 11, 1996.
During the nine months ended September 30, 1996, this facility was open 82
calendar days.
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment and amortization of leasehold
improvements are computed by the straight-line method at rates adequate to
allocate the cost of applicable assets over their estimated useful lives.
Depreciation and amortization for the years ended December 31, 1993, 1994 and
1995 amounted to $553,000, $612,000 and $814,000, respectively. Depreciation and
amortization for the nine month periods ended September 30, 1995 and 1996
amounted to $598,000 and $861,000, 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 1993, 1994 and 1995 amounted to $67,000 in each year. Amortization
expense for the nine month periods ended September 30, 1995 and 1996 amounted to
$50,250 in each period. The Company evaluates the recoverability of the goodwill
quarterly, or more frequently whenever events and circumstances warrant revised
estimates, and considers whether the goodwill should be completely or partially
written off or the amortization period accelerated.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" during the year ended
December 31, 1995. SFAS 121 establishes accounting standards for the impairment
of long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used and for long-lived assets and certain
indentifiable intangibles to be disposed of.
The Company reviews the carrying values of its long-lived and identifiable
intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. Any long-lived assets held for disposal are reported at the lower
of their carrying amounts or fair value less cost to sell.
F-9
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
INCOME TAXES
Mountainview had historically joined in filing a consolidated federal
income tax return with Carlino Financial Corporation, its previous parent
company. Prior to the reorganization, federal income taxes were paid to or
recovered from Carlino Financial Corporation, based upon the terms of a tax
sharing agreement and the provision for federal income taxes was computed on a
separate return basis.
Turf Club had filed its income tax returns as a separate entity.
Prior to the reorganization, the other entities included within these
financial statements were partnerships and "S" corporations. Therefore, no
provision had been made for income taxes since such taxes, if any, were the
liabilities of the individual partners and shareholders.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") effective January
1, 1993. SFAS 109 requires a company to recognize deferred tax liabilities and
assets for the expected future tax consequences of events that have been
recognized in a company's financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse.
CASH AND CASH EQUIVALENTS
The Company considers all cash balances and highly liquid investments with
original maturities of three months or less to be cash equivalents.
EARNINGS PER COMMON SHARE (SUPPLEMENTAL)
Supplemental pro forma earnings per share is calculated by dividing
supplemental pro forma net income by the weighted average number of common stock
outstanding (see Note 7) adjusted by the dilutive effect of common stock
equivalents, which consist of stock options (using the treasury stock method)
and warrants. All earnings per share calculations reflect all stock splits (see
Note 9).
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to credit risk
consist of cash equivalents and accounts receivable.
The Company's policy is to limit the amount of credit exposure to any one
financial institution and place investments with financial institutions
evaluated as being creditworthy, or in short-term (less than seven days) money
market and tax free bond funds which are exposed to minimal interest rate and
credit risk. At December 31, 1995 and September 30, 1996, the Company had bank
deposits which exceeded federally insured limits by approximately $248,000 and
$517,000, respectively, and money market and tax free bond funds of
approximately $6,400,000 and $5,100,000, respectively. Concentration of credit
risk, with respect to accounts receivable, is limited due to the Company's
credit evaluation process. The Company does not require collateral from its
customers. The Company's receivables consist principally of amounts due from
other race tracks and OTWs. Historically, the Company has not incurred any
significant credit related losses.
F-10
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 1995 and September 30, 1996, the following methods and
assumptions were used to estimate the fair value of each class of financial
instruments for which it is practical to estimate:
Cash and Cash Equivalents: The carrying amount approximates the fair
value due to the short 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -----------------
(IN THOUSANDS)
Long-Term Debt
Notes are payable to former minority stockholders of
Pennsylvania National Turf Club, Inc. upon demand............ $ 136 $ 132 $ 132
Other........................................................... 6 -- --
Capital Lease Obligations
Various leases are payable in monthly installments ranging from
$213 to $5,431 including interest between 8.5% to 18.96% per
annum. The leases are collateralized by equipment and the
final payments are due in 1999............................... 374 258 170
------ ------ -----
516 390 302
Less current maturities........................................... 258 250 222
------ ------ -----
$ 258 $ 140 $ 80
------ ------ -----
------ ------ -----
F-11
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
2. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: -- (CONTINUED)
The following is a schedule of future minimum lease payments under
capitalized leases as of December 31, 1995:
(IN THOUSANDS)
-----------------
1996................................................... $146
1997................................................... 92
1998................................................... 49
1999................................................... 9
---
Total minimum lease payments........................... 296
Less amount representing interest...................... 38
---
Present value of net minimum lease payments............ $258
---
---
The net book value of property under capitalized lease obligations as of
December 31, 1995 and September 30, 1996 was $323,000 and $222,000 respectively.
3. RELATED PARTY TRANSACTIONS:
Management fees of $345,000 and $1,028,000 were paid in 1993 and 1994 to a
related company.
PCC Builders, Inc., a company owned by the chairman and chief executive
officer of Penn National Gaming, Inc., was engaged in 1993 to serve as the
general contractor to renovate the building in which the Company's Chambersburg
OTW is located. The contract provided for a fixed fee contract price of
$1,020,871. The renovation was completed on April 22, 1994.
In August 1994, the Company signed a consulting agreement with its former
Chairman expiring in August 1999 at an annual payment of $125,000.
4. CUSTOMER DEPOSITS:
Customer deposits represent amounts held by the Company for telephone
wagering.
5. COMMITMENTS AND CONTINGENCIES:
Mountainview and Turf Club are jointly liable for Totalisator Services and
equipment under a five-year agreement expiring March 31, 1998. The agreement
provides for annual payments based on a specified percentage of the total amount
wagered at the track, with a minimum annual payment of $300,000.
The Company is also liable under numerous operating leases for automobiles,
other equipment and buildings, which expire through 2004. Total rental expense
under these agreements was $492,000, $636,000 and $672,000 for the years ended
December 31, 1993, 1994 and 1995, respectively. Total rental expense under these
agreements was $504,000 and $578,000 for the nine month periods ended September
30, 1995 and 1996, respectively.
F-12
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
The future lease commitments relating to non-cancelable operating leases as
of December 31, 1995 are as follows:
(IN THOUSANDS)
---------------
1996.......................................... $ 703
1997.......................................... 698
1998.......................................... 453
1999.......................................... 330
2000.......................................... 315
Thereafter.................................... 1,005
---------
$3,504
---------
---------
On July 11, 1996, the Company opened its Lancaster OTW facility. The
Company entered into a ten-year lease agreement for the 24,050 square feet
Lancaster OTW facility. The Lancaster OTW lease provides for minimum annual
lease payments of $192,400 in years one through five and $211,640 in years six
through ten. The table presented above does not reflect this lease commitment.
In March 1996, the Company assumed an agreement to purchase land for its
proposed Downingtown OTW facility. The agreement which provides for a purchase
price of $1,696,000, is subject to numerous contingencies including approval
from the Pennsylvania State Horse Racing Commission.
On April 12, 1994, the Company entered into employment agreements with its
Chairman and Chief Financial Officer at annual base salaries of $225,000 and
$95,000, respectively. The agreements became effective June 1, 1994 and, as
amended, terminate on June 30, 1999. Each agreement prohibits the employee from
competing with the Company during its term and for one year thereafter, and
requires a death benefit payment by the Company equal to 50% of the employee's
annual salary in effect at the time of his death.
On June 1, 1995, the Company entered into an employment agreement with its
President and Chief Operating Officer at an annual base salary of $210,000. The
agreement terminates on June 12, 1998. The agreement prohibits the employee from
competing with the Company during its term and for two years thereafter, and
requires a death benefit payment by the Company equal to 50% of the employee's
annual salary in effect at the time of his death.
Under an agreement between the Company and its former president, the former
president received options to purchase 150,000 shares of common stock at $3.33
per share expiring May 31, 2000.
Effective January 1, 1990, the Company adopted a profit sharing plan under
the provisions of Section 401(k) of the Internal Revenue Code covering all
eligible employees who are not members of a bargaining unit. The Company's
contributions are set at 50% of employees' elective salary deferrals which may
be made up to a maximum of 6% of employee compensation. The Company made
contributions to the plan of approximately $48,000, $60,000 and $70,000 for the
years ended December 31, 1993, 1994 and 1995, respectively. The Company made
contributions to the plan of approximately $57,000 and $64,000 for the nine
month periods ended September 30, 1995 and 1996, respectively.
In December 1995, the Company agreed in principal with an unrelated party
to form a joint venture for the purpose of developing, managing and operating
pari-mutuel racing facilities in a state other than Pennsylvania or West
Virginia. The joint venture is subject to numerous contingencies, including
receipt of regulatory approvals from that state's horse racing commission.
F-13
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
In February 1996, the Company entered into an agreement to purchase land
for its proposed Williamsport OTW facility. The agreement provides for a
purchase price of $555,000 and is subject to numerous contingencies including
approval from the Pennsylvania State Horse Racing Commission. On May 22, 1996,
the Company received tentative approval from the Pennsylvania State Horse Racing
Commission for the Williamsport OTW facility which is expected to open during
February 1997.
CREDIT FACILITIES
Prior to November 1996, the Company had a $4,200,000 credit facility with a
commercial bank. The facility provided for a working capital line of credit in
the amount of $2,500,000 at various interest rates and a letter of credit
facility for $1,700,000. The credit facility was unsecured and contained various
covenants, such as tangible net worth, debt to tangible net worth and debt
coverage ratio. At both December 31, 1995 and September 30, 1996, the Company
was contingently obligated under the letter of credit facility with face amounts
aggregating $1,436,000. The $1,436,000 consisted of $1,336,000 relating to the
horsemens' account balances and $100,000 for Pennsylvania pari-mutuel taxes.
This entire credit facility was repaid and terminated in November 1996,
simultaneously with the closing of the Company's new credit facilities.
In November 1996, the Company entered into an agreement with a bank group
which provides an aggregate of $75 million of credit facilities ("Credit
Facility Agreement"). The credit facilities consist of two term loan facilities
of $47 million and $23 million (together, the "Term Loans") which were used for
the Pocono Downs and Charles Town acquisitions (see Note 11), respectively, and
which will be used for a portion of the cost of refurbishment of the Charles
Town Facility, and a revolving credit facility of $5 million (together, the
"Loans"). The Loans, which mature in November 2001, are secured by substantially
all of the assets of the Company. The Credit Facility Agreement provides for
certain covenants, including those of a financial nature.
Funding of the first $47 million Term Loan facility took place on November
27, 1996. On January 15, 1997, the Charles Town Acquisition was consummated and,
in accordance with the terms of the Credit Facility Agreement, the second $23
million Term Loan was made available for utilization by the Company. The Company
borrowed $16.5 million of the $23 million Term Loan on January 15, 1997.
Commencing on December 31, 1997, the Term Loans will amortize on a
quarterly basis with payments thereunder to be split proportionately between the
two Term Loans in annual aggregate amounts as follows (assuming the Term Loans
are fully drawn):
YEAR AMOUNT
--------- --------------
1997 $ 2,000,000
1998 8,000,000
1999 20,000,000
2000 20,000,000
2001 20,000,000
The $5 million revolving credit facility (the "Revolving Facility")
includes a $2 million sublimit for standby letters of credit for periods of up
to twelve months. $3 million of the Revolving Facility was made available on
November 27, 1996. In accordance with the terms of the Credit Facility
Agreement, the remaining $2 million became available upon consummation of the
Charles Town Acquisition on January 15, 1997.
At the Company's option, the Loans may be maintained from time to time as
Base Rate Loans, which bear interest at the highest of: (1) 1/2 of 1% in excess
of the federal reserve reported certificate of deposit rate, (2) the rate that
the bank group announces from time to time as its prime lending rate and (3)
1/2 of 1% in excess of the federal funds rate plus an applicable margin of up to
2%. The Loans may
F-14
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
also be maintained as Reserve Adjusted Eurodollar Loans, which bear interest at
a rate tied to a eurodollar rate plus an applicable margin of up to 3%.
Mandatory repayments of the Term Loans and the Revolving Facility are
required in an amount equal to a percentage of the net cash proceeds from any
issuance or incurrence of equity or funded debt by the Company, that percentage
to be dependent upon the then outstanding balances of the Term Loans and the
Revolving Facility and the Company's leverage ratio; however, the Credit
Facility Agreement permits the Company to retain the first $6 million of
proceeds from any public offering of the Company's equity securities if the
offering results in net proceeds to the Company of at least $25 million.
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.
6. INCOME TAXES:
The provision for income taxes charged to operations was as follows:
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Current tax expense (benefit)
Federal................................................. $ (28) $ 495 $ 2,580 $ 2,000 $ 2,166
State................................................... 17 377 842 653 707
--------- --------- --------- --------- ---------
Total current........................................ (11) 872 3,422 2,653 2,873
--------- --------- --------- --------- ---------
Deferred tax expense
Federal................................................. 37 501 34 20 108
State................................................... 16 8 11 7 35
--------- --------- --------- --------- ---------
Total deferred....................................... 53 509 45 27 143
--------- --------- --------- --------- ---------
Total provision...................................... $ 42 $ 1,381 $ 3,467 $ 2,680 $ 3,016
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
In 1993, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109")
effective January 1, 1993 (see Note 1). The adoption of the new standard had an
immaterial effect on the tax provision for 1993 and on periods ending prior to
January 1, 1993. The nature of deferred tax adjustments and their effect on
income tax expense are as follows:
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Depreciation methods...................................... $ 61 $ 74 $ 126 $ 81 $ 101
Reserve for debit balances of horsemens' accounts, bad
debts and litigation.................................... (8) (11) (81) (54) 42
Net operating loss........................................ -- 446 -- -- --
--------- --------- --------- --------- ---------
$ 53 $ 509 $ 45 $ 27 $ 143
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
F-15
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
6. INCOME TAXES: -- (CONTINUED)
Deferred tax assets and liabilities are comprised of the following:
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -----------------
(IN THOUSANDS)
Deferred tax assets
Reserve for debit balances of
horsemens' accounts, bad debts
and litigation.................................... $ 24 $ 104 $ 62
Loss carryforwards............................... 25 -- --
--------- --------- ------
$ 49 $ 104 $ 62
--------- --------- ------
--------- --------- ------
Deferred tax liabilities
Depreciation..................................... $ 813 $ 888 $ 989
--------- --------- ------
--------- --------- ------
The following is a reconciliation of the statutory federal income tax rate
to the actual effective income tax rate:
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
PERCENT OF PRETAX INCOME
Federal tax rate.............................................. 34.0% 34.0% 34.0% 34.0% 34.0%
Increase in taxes resulting from state and local income taxes,
net of federal tax benefit.................................. 1.5 6.2 6.7 6.8 6.4
Net change attributable to adoption of SFAS No. 109........... 2.5 -- -- -- --
Permanent difference relating to amortization of goodwill..... 1.9 0.6 0.3 0.3 0.2
Entities previously taxed as S corporations
and partnerships............................................ (45.3) (9.2) -- -- --
Other......................................................... 8.2 2.1 -- -- --
--------- --------- --------- --------- ---------
2.8% 33.7% 41.0% 41.1% 40.6%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
7. SUPPLEMENTAL PRO FORMA NET INCOME PER SHARE:
Supplemental pro forma amounts for the years ended December 31, 1993 and
1994 reflect: (i) the elimination of $1,208,000 and $345,000, respectively, in
management fees paid to a related entity; (ii) the inclusion of $320,000 and
$133,000, respectively, in executive compensation; (iii) the elimination of
$946,000 and $413,000, respectively, of interest expenses on Company debt which
was repaid with the proceeds of the initial public offering, (iv) the
elimination of $0 and $198,000, respectively, of loss on early extinguishment of
debt, and (v) a provision for income taxes of $701,000 and $377,000,
respectively, as if the S corporations and partnerships comprising part of the
Company had been taxed as a C corporation. There were no supplemental pro forma
adjustments for any subsequent periods.
Supplemental pro forma earnings per share are based on the weighted average
number of shares of common stock outstanding, plus the number of shares the
Company would have needed to sell to fund the retirement of debt and the number
of shares the Company would have needed to sell to fund $1,190,000 of
distributions of undistributed S corporation earnings.
F-16
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest was $905,000, $535,000 and $71,000
in 1993, 1994 and 1995, respectively. Cash paid during the nine month periods
ended September 30, 1995 and 1996 for interest was $55,000 and $44,000,
respectively.
Cash paid during the year for income taxes was $920,000, $250,000 and
$2,839,000 in 1993, 1994 and 1995, respectively. Cash paid during the nine month
periods ended September 30, 1995 and 1996 for income taxes was $2,475,000 and
$3,196,000, respectively.
Non-cash investing and financing activities were as follows:
During 1993 and 1994, capital lease obligations of $53,000 and
$199,000, respectively, were incurred to lease new equipment.
9. SHAREHOLDERS' EQUITY:
COMMON STOCK
On June 3, 1994, the Company completed its initial public offering. The
proceeds, net of expenses, amounted to $12,957,000 for 4,500,000 shares of
common stock issued. The initial public offering price per share was $3.33.
STOCK OPTIONS AND WARRANTS
In April 1994, the Company's Board of Directors and shareholders adopted
and approved the Stock Option Plan ("Plan"). The Plan permits the grant of
options to purchase up to 1,290,000 shares of Common Stock, subject to
antidilution adjustments, at a price per share no less than 100% of the fair
market value of the Common Stock on the date the option is granted with respect
to incentive stock options only. The price would be no less than 110% of fair
market value in the case of an incentive stock option granted to any individual
who owns more than 10% of the total combined voting power of all classes of
outstanding stock. The Plan provides for the granting of both incentive stock
options intended to qualify under Section 422 of the Internal Revenue Code of
1986, and non-qualified stock options which do not so qualify. Unless the Plan
is terminated earlier by the Board of Directors, the Plan will terminate in
April 2004. As of December 31, 1995 and September 30, 1996, the Company had
480,000 and 466,250 options, respectively, still permitted to be granted under
the Plan.
Stock options that expire between May 26, 2000 and 2003 have been granted
to officers and directors to purchase Common Stock at prices ranging from $3.33
to $5.58 per share.
All options were granted at market prices. A summary of the stock option
transactions follows:
OPTION PRICE
SHARES PER SHARE AGGREGATE
---------- ----------------- -------------
Outstanding at January 1, 1994.................. -- $ -- $ --
Granted......................................... 765,000 3.33 2,550,000
Cancelled....................................... (300,000) 3.33 (1,000,000)
---------- -------------
Outstanding at December 31, 1994................ 465,000 3.33 1,550,000
Granted......................................... 345,000 3.33 to 5.58 1,548,750
---------- -------------
Outstanding at December 31, 1995................ 810,000 3.33 to 5.58 3,098,750
Granted......................................... 99,000 5.58 552,915
Exercised....................................... (85,250) 3.33 (284,309)
---------- -------------
Outstanding at September 30, 1996............... 823,750 3.33 to 5.58 $ 3,367,356
---------- -------------
---------- -------------
Options to purchase 270,000 shares at $3.33 per share were exercisable at
December 31, 1995.
F-17
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
9. SHAREHOLDERS' EQUITY: -- (CONTINUED)
On May 25, 1994, the Compensation Committee granted options to purchase
765,000 shares of Common Stock to officers and directors of the Company at an
exercise price of $3.33, the fair market value on the day of the grant. On
December 20, 1994, the Company cancelled options to purchase 300,000 shares of
Common Stock granted to a former officer of the Company.
Warrants outstanding have been granted to the underwriters of the Company's
initial public offering and certain officers and directors to purchase Common
Stock at prices ranging from $3.33 to $4.00 per share which expire on June 2,
1999 and May 31, 2000. During 1995, the Company cancelled warrants to purchase
150,000 shares which were granted to a former officer of the Company at a price
of $3.33 per share and were to expire on May 31, 2000. The cancelled warrants
were replaced with options to purchase 150,000 shares of common stock at an
exercise price of $3.33 per share. A summary of the warrant transactions
follows:
WARRANT PRICE
SHARES PER SHARE AGGREGATE
---------- -------------- -------------
Warrants outstanding at January 1, 1994............... -- $ -- $ --
Warrants granted...................................... 690,000 3.33 to 4.00 2,660,000
---------- -------------
Warrants outstanding at December 31, 1994............. 690,000 3.33 to 4.00 2,660,000
Warrants cancelled.................................... (150,000) 3.33 (500,000)
Warrants exercised.................................... (45,000) 4.00 (180,000)
---------- -------------
Warrants outstanding at December 31, 1995............. 495,000 4.00 1,980,000
Warrants exercised.................................... (300,000) 4.00 (1,200,000)
---------- -------------
Warrants outstanding at September 30, 1996............ 195,000 4.00 $ 780,000
---------- -------------
---------- -------------
During 1995, the FASB adopted Statement of Financial Accounting Standards
No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," which has
recognition provisions that establish a fair value based method of accounting
for stock-based employee compensation plans and established fair value as the
measurement basis for transactions in which an entity acquires goods or services
from nonemployees in exchange for equity instruments. SFAS 123 also has certain
disclosure provisions. Adoption of the recognition provisions of SFAS 123 with
regard to these transactions with nonemployees was required for all such
transactions entered into after December 15, 1995, and the Company adopted these
provisions as required. The recognition provision with regard to the fair value
based method of accounting for stock-based employee compensation plans is
optional. The Company has decided to continue to apply Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," for
its stock-based employee compensation arrangements. APB 25 uses what is referred
to as an intrinsic value based method of accounting. The disclosure provisions
of SFAS 123 are effective for fiscal years beginning after December 15, 1995.
The Company will provide the disclosures when required.
STOCK SPLITS
The Board of Directors authorized a three-for-two stock split on April 18,
1996 on its Common Stock to shareholders of record on May 3, 1996, which was
paid on May 23, 1996. On November 13, 1996, the Board of Directors authorized a
two-for-one stock split on its Common Stock to shareholders of record on
November 22, 1996, which was paid on December 20, 1996. In addition, authorized
shares of Common Stock were increased from 10,000,000 to 20,000,000. All
references in the financial statements to number of shares, per share amounts
and market prices of the Company's Common Stock have been retroactively restated
to reflect the stock splits and the increased number of shares of Common Stock
outstanding.
F-18
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
10. LOSS FROM RETIREMENT OF DEBT:
In 1994, the Company recorded an extraordinary loss of $115,000 after taxes
for the early retirement of debt. The extraordinary loss consists primarily of
the write-off of deferred finance costs associated with the retired notes, and
legal and bank fees relating to the early extinguishment of the debt.
11. ACQUISITIONS:
On November 27, 1996, the Company purchased all of the capital stock of The
Plains Company and the limited partnership interests in The Plains Company's
affiliated entities (together, "Pocono Downs") for an aggregate purchase price
of $47 million plus acquisition-related fees and expenses (the "Pocono Downs
Acquisition"). Pocono Downs conducts live harness racing at the harness
racetrack located outside Wilkes-Barre, Pennsylvania (the "Harness Track"),
export simulcasting of Harness Track races to locations throughout the United
States, pari-mutuel wagering at the Harness Track and at OTWs in Allentown and
Erie, Pennsylvania on Pocono Downs races and on import simulcast races from
other racetracks, and telephone account wagering on live and import simulcast
races. In addition, pursuant to the terms of the purchase agreement, the Company
will be required to pay the sellers of Pocono Downs an additional $10 million
if, within five years after the consummation of the Pocono Downs Acquisition,
Pennsylvania authorizes any additional form of gaming in which the Company may
participate. The $10 million payment is payable in annual installments of $2
million a year for five years, beginning on the date that the Company first
offers such additional form of gaming.
On February 26, 1996, the Company entered into a joint venture agreement
(the "Charles Town Joint Venture") with Bryant Development Company, the holder
of an option to purchase substantially all of the assets of Charles Town Racing
Limited Partnership and Charles Town Races, Inc. (together, "Charles Town")
relating to the Charles Town Race Track and Shenandoah Downs (together, the
"Charles Town Facility") in Jefferson County, West Virginia. In connection with
the Charles Town Joint Venture agreement, Bryant Development Company assigned
the option to the Charles Town Joint Venture. In November 1996, the Charles Town
Joint Venture and Charles Town entered into an amended and restated option
agreement. On November 5, 1996, Jefferson County, West Virginia approved a
referendum permitting installation of gaming machines at the Charles Town
Facility. On January 15, 1997 the Charles Town Joint Venture acquired
substantially all of the assets of Charles Town (the "Charles Town Acquisition")
for approximately $16.5 million plus acquisition-related fees and expenses.
Pursuant to the original operating agreement governing the Charles Town Joint
Venture, the Company held an 80% ownership interest in the Charles Town Joint
Venture and was obligated to contribute 80% of the purchase price of the Charles
Town Acquisition and 80% of the cost of refurbishing the Charles Town Facility.
In fact, the Company contributed 100% of the purchase price of the Charles Town
Acquisition and expects to contribute 100% of the cost of refurbishing the
Charles Town Facility. The Company has reached an agreement with its joint
venture partner, Bryant Development Company ("Bryant"), pursuant to which the
parties have agreed to amend the operating agreement to increase the Company's
ownership interest to 89% and decrease Bryant's ownership interest to 11%. In
addition, the amendment will provide that the entire amount the Company has
contributed, and will contribute, to the Charles Town Joint Venture for the
acquisition and refurbishment of the Charles Town Facility would be treated, as
between the parties, as a loan to the Charles Town Joint Venture from the
Company. The proposed changes in the ownership of the Charles Town Joint Venture
are subject to the review of applicable West Virginia racing and regulatory
authorities.
The Charles Town Joint Venture has developed plans for the refurbishment of
the Charles Town Facility as an entertainment complex that will feature live
racing, dining, simulcast wagering and the
F-19
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
11. ACQUISITIONS: -- (CONTINUED)
installation of gaming machines; the estimated cost of the refurbishment is
approximately $16 million exclusive of the costs of gaming machines.
Effective June 4, 1996, the Charles Town Joint Venture entered into a Loan
and Security Agreement with Charles Town. The Loan and Security Agreement
provided for a working capital line of credit in the amount of $1,250,000 and a
requisite reduction of the purchase price under the option, by $1.60 for each
dollar borrowed under that line. Upon consummation of the Charles Town
Acquisition, Charles Town Races, Inc. repaid the loan. The parties agreed that
$936,000 of the amount borrowed was eligible for the $1.60 purchase price
reduction and are negotiating the applicability of the purchase price reduction
to the remaining $219,000 that was borrowed.
On December 11, 1996, GTECH Corporation ("GTECH") commenced an action in
the United States District Court for the Northern District of West Virginia
against Charles Town, the Company, Penn National Gaming of West Virginia, Inc.,
a wholly owned subsidiary of the Company, and Bryant. The complaint filed by
GTECH alleges that Charles Town and AmTote International, Inc. ("AmTote") were
parties to an October 20, 1994 agreement (the "AmTote Agreement"), pursuant to
which AmTote was allegedly granted an exclusive right to install and operate a
"video lottery system" at the Charles Town Facility. When the AmTote Agreement
was entered into, AmTote was a subsidiary of GTECH; GTECH has since divested
itself of AmTote, but is purportedly the assignee of certain of AmTote's rights
under the AmTote Agreement pursuant to an assignment and assumption agreement
dated February 22, 1996. The complaint seeks (i) preliminary and permanent
injunctive relief enjoining Charles Town, Bryant, the Company and its subsidiary
from consummating the Charles Town Acquisition or any similar transaction unless
the purchasing party explicitly accepts and assumes the AmTote Agreement, (ii) a
declaratory judgment that the AmTote Agreement is valid and binding, that GTECH
has the right to be the exclusive installer, operator, provider and servicer of
a video lottery system at the Charles Town Facility and that any party buying
the stock or assets of Charles Town must accept and assume the AmTote Agreement
and recognize such rights of GTECH thereunder, (iii) compensatory damages, (iv)
legal fees and costs and (v) such other further legal and equitable relief as
the court deems just and appropriate. On December 23, 1996, the court denied
GTECH's motion to preliminarily enjoin the Company from consummating the Charles
Town Acquisition unless it accepts and assumes the AmTote Agreement. The court
noted that GTECH may pursue its claim for damages and, if warranted, pursue
other injunctive relief in the future. The Company consummated the Charles Town
Acquisition on January 15, 1997. On January 13, 1997, Charles Town filed a
motion to dismiss GTECH's complaint; the court has not yet ruled on this motion.
The Company believes the allegations of the complaint to be without merit and
intends to contest the action vigorously.
F-20
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of The Plains Company
We have audited the accompanying consolidated balance sheets of The Plains
Company and its subsidiaries as of December 31, 1994 and 1995 and the related
consolidated statements of income and retained earnings, and cash flows for each
of the three years in the period ended December 31, 1995. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. 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 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 The Plains
Company and its subsidiaries at December 31, 1994 and 1995, and the results of
their operations and cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
Robert Rossi & Co.
Olyphant, Pennsylvania
December 6, 1996
F-21
THE PLAINS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- --------------
(UNAUDITED)
ASSETS
Current Assets
Cash and Cash Equivalents............................................ $ 6,116 $ 5,490 $ 4,521
Marketable Securities................................................ 2,142 4,701 6,001
Accounts Receivable.................................................. 258 499 981
Inventories.......................................................... 65 65 69
Due from Related Parties............................................. 41 41 41
Prepaid Insurance & Other Current Assets............................. 283 256 466
--------- --------- --------------
Total Current Assets............................................... 8,905 11,052 12,079
--------- --------- --------------
Property and Equipment
Land................................................................. 4,131 4,146 4,146
Land Improvements.................................................... 1,612 1,612 1,612
Buildings & Improvements............................................. 6,004 6,362 6,362
Equipment............................................................ 3,348 3,698 3,749
Race Track........................................................... 22 22 22
Property Held Under Capital Lease.................................... 1,172 1,326 1,326
Construction in Progress............................................. 64 -- --
--------- --------- --------------
Total.............................................................. 16,353 17,166 17,217
Less: Accumulated Depreciation....................................... 3,046 3,852 4,505
--------- --------- --------------
Net Property and Equipment......................................... 13,307 13,314 12,712
--------- --------- --------------
Other Assets
Marketable Securities................................................ 102 -- --
Deferred Expenses.................................................... 443 324 235
Other Assets......................................................... 27 27 --
--------- --------- --------------
Total Other Assets................................................. 572 351 235
--------- --------- --------------
Total Assets..................................................... $ 22,784 $ 24,717 $ 25,026
--------- --------- --------------
--------- --------- --------------
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
F-22
THE PLAINS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AND SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
--------------------
1994 1995 1996
--------- --------- --------------
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts Payable..................................................... $ 1,828 $ 1,693 $ 2,215
Underpaid Purses..................................................... 501 936 530
Payroll & Sales Taxes Payable........................................ 57 50 105
Accrued Expenses..................................................... 292 332 154
Deferred Income...................................................... 57 19 5
Income Taxes Payable................................................. 1,308 19 86
Deferred Income Taxes................................................ 543 364 331
Current Portion of Long-Term Liabilities............................. 602 656 1,020
--------- --------- --------------
Total Current Liabilities.......................................... 5,188 4,069 4,446
--------- --------- --------------
Long-Term Liabilities, Net of Current Portion.......................... 8,863 8,345 7,159
--------- --------- --------------
Limited Partner Interest in Controlled Limited Partnership
Investments.......................................................... 2,078 2,689 1,880
--------- --------- --------------
Commitments and Contingencies
Shareholders' Equity
Common Stock, $50 Par Value, 1,000 Shares Authorized, 100, 0 and 0
Shares Issued and Outstanding, respectively........................ 5 -- --
Common Stock, Class A Voting, $1 Par Value, 100 Shares Authorized, 0,
10 and 10 Shares Issued and Outstanding, respectively.............. -- -- --
Common Stock, Class B Non-Voting, $1 Par Value, 300,000 Shares
Authorized, 0, 30,000 and 30,000 Shares Issued and Outstanding,
respectively....................................................... -- 30 30
Additional Paid In Capital........................................... 1,009 984 984
Retained Earnings.................................................... 5,641 8,600 10,527
--------- --------- --------------
Total Shareholders' Equity......................................... 6,655 9,614 11,541
--------- --------- --------------
Total Liabilities and Shareholders' Equity....................... $ 22,784 $ 24,717 $ 25,026
--------- --------- --------------
--------- --------- --------------
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
F-23
THE PLAINS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
Operating Income
Pari-Mutuel Commissions and Breakage, Net........... $ 18,159 $ 26,244 $ 28,444 $ 22,348 $ 22,187
Purse Income........................................ 234 199 155 133 103
Operating Income from Programs, Admissions,
Concessions, Parking, and Other Sources........... 1,983 2,531 2,586 2,016 1,861
Rental Income....................................... 1,226 2,431 2,669 1,653 1,595
--------- --------- --------- --------- ---------
Total Operating Income.......................... 21,602 31,405 33,854 26,150 25,746
--------- --------- --------- --------- ---------
Operating Expenses
Purses.............................................. 4,721 6,038 6,500 5,225 5,003
Rent................................................ 1,226 2,431 2,669 1,653 1,595
Operating Fees & Expenses........................... 4,118 5,667 6,235 4,755 4,997
Salaries............................................ 4,377 5,321 5,779 3,810 4,476
Payroll Taxes, Benefits, and
Union Dues........................................ 553 756 671 575 612
Advertising & Promotions............................ 700 684 937 746 867
Utilities........................................... 517 600 593 456 451
Repairs & Maintenance............................... 800 1,032 1,136 970 964
Real Estate Taxes................................... 268 251 247 188 185
Insurance........................................... 341 364 403 268 336
General & Administrative............................ 903 1,023 1,150 828 1,079
Depreciation and Amortization....................... 732 927 941 628 741
--------- --------- --------- --------- ---------
Total Operating Expenses........................ 19,256 25,094 27,261 20,102 21,306
--------- --------- --------- --------- ---------
Income Before Other Income & (Expenses)............... 2,346 6,311 6,593 6,048 4,440
--------- --------- --------- --------- ---------
Other Income & (Expenses)
Interest & Dividend Income.......................... 158 208 396 287 334
Interest Expense.................................... (695) (934) (957) (723) (640)
Miscellaneous Income................................ -- 58 100 -- --
Bad Debt Expense.................................... -- -- -- -- (10)
--------- --------- --------- --------- ---------
Total Other Income & (Expenses)................. (537) (668) (461) (436) (316)
--------- --------- --------- --------- ---------
Income Before Limited Partner Share of Income from
Controlled Limited Partnership Investment........... 1,809 5,643 6,132 5,612 4,124
Limited Partner Pro-Rata Share of Income
from Controlled Limited Partnership
Investment.......................................... (571) (1,361) (1,571) (831) (874)
--------- --------- --------- --------- ---------
Income Before Provision for Income Taxes.............. 1,238 4,282 4,561 4,781 3,250
Provision for Income Taxes............................ 477 1,708 1,602 1,937 1,323
--------- --------- --------- --------- ---------
Income before Extraordinary Item...................... 761 2,574 2,959 2,844 1,927
Extraordinary Item (Net of Income Taxes).............. (175) -- -- -- --
--------- --------- --------- --------- ---------
Net Income............................................ 586 2,574 2,959 2,844 1,927
Retained Earnings, Beginning of Period................ 2,481 3,067 5,641 5,641 8,600
--------- --------- --------- --------- ---------
Retained Earnings, End of Period...................... $ 3,067 $ 5,641 $ 8,600 $ 8,485 $ 10,527
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
F-24
THE PLAINS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
Cash Flows from Operating Activities
Net Income............................................ $ 586 $ 2,574 $ 2,959 $ 2,844 $ 1,927
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Depreciation and Amortization....................... 732 927 941 628 741
Extraordinary Item.................................. 300 -- -- -- --
Limited Partner Interest in Net Income of
Consolidated Limited Partnerships................. 571 1,361 1,571 831 874
(Increase) Decrease in Accounts Receivable.......... 89 (115) (241) (533) (482)
(Increase) Decrease in Inventories.................. (30) 16 -- (4) (4)
(Increase) Decrease in Prepaid Insurance and Other
Current Assets.................................... 12 (111) 27 16 (210)
(Increase) Decrease in Other Assets................. -- (27) -- 27 27
(Decrease) Increase in Accounts Payable............. 595 678 (135) (30) 522
(Decrease) Increase in Underpaid Purses............. 270 101 435 198 (406)
(Decrease) Increase in Payroll and Sales
Tax Payable....................................... 12 (19) (7) 20 55
(Decrease) Increase in Accrued Expenses............. 74 136 40 (138) (178)
(Decrease) Increase in Deferred Income.............. (78) (53) (38) (29) (14)
(Decrease) Increase in Income Taxes Payable......... 31 1,277 (1,289) (767) 67
(Decrease) Increase in Deferred Income Taxes........ 88 103 (179) (33) (33)
--------- --------- --------- --------- ---------
Net Cash Provided by Operating Activities............... 3,252 6,848 4,084 3,030 2,886
--------- --------- --------- --------- ---------
Cash Flows from Investing Activities
Investment in Marketable Securities................... -- (2,244) (4,701) (1,001) (3,000)
Proceeds from Sale of Marketable Securities........... 2,266 -- 2,244 2,244 1,700
Purchase of Property and Equipment.................... (3,476) (818) (829) (691) (51)
Investment of Proceeds from Long-Term Borrowing....... (289) -- -- -- --
--------- --------- --------- --------- ---------
Net Cash (Used in) Provided by Investing Activities..... (1,499) (3,062) (3,286) 552 (1,351)
--------- --------- --------- --------- ---------
Cash Flows from Financing Activities
Proceeds Received on Long-Term Debt................... 815 -- 154 154 --
Payments Made on Short-Term Borrowings................ (50) -- -- -- --
Payments Made on Long-Term Debt....................... (712) (873) (618) (465) (821)
Loan Acquisition Costs................................ (19) -- -- -- --
Distribution to Limited Partners...................... -- (80) (960) (960) (1,683)
--------- --------- --------- --------- ---------
Net Cash (Used in) Provided by Financing Activities..... 34 (953) (1,424) (1,271) (2,504)
--------- --------- --------- --------- ---------
Net Increase (Decrease) in Cash & Cash Equivalents...... 1,787 2,833 (626) 2,311 (969)
Cash and Cash Equivalents at Beginning of Period........ 1,496 3,283 6,116 6,116 5,490
--------- --------- --------- --------- ---------
Cash and Cash Equivalents at End of Period.............. $ 3,283 $ 6,116 $ 5,490 $ 8,427 $ 4,521
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental Cash Flow Disclosures:
Cash Paid During the Period for:
Interest............................................ $ 695 $ 934 $ 957 $ 723 $ 640
Income Taxes........................................ 247 323 3,049 2,757 1,428
Schedule of Non-Cash Investing & Financing Activities:
Financing Property and Equipment.................... 13 -- -- -- --
Investment in Property and Equipment................ (13) -- -- -- --
Release of Restricted Cash Applied Against Related
Mortgage Note Payable............................. -- 200 -- -- --
Reduction in Mortgage Note Payable.................. -- (200) -- -- --
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
F-25
THE PLAINS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation: The consolidated financial statements include
the following subsidiaries and controlled enterprises of The Plains Company
(collectively, "The Plains Company").
Pocono Downs, Inc. (a Pennsylvania corporation), a wholly-owned
subsidiary of The Plains Company, holds the Pennsylvania racing license and
conducts harness race meets with pari-mutuel wagering.
The Downs Off-Track Wagering, Inc. (a Pennsylvania corporation), a
wholly-owned subsidiary of Pocono Downs, Inc. and sole general partner of
Lehigh Off-Track Wagering, L.P., operates both the Erie and Lehigh
off-track wagering facilities.
Northeast Concessions, Inc. (a Pennsylvania corporation), a
wholly-owned subsidiary of Pocono Downs, Inc., operates the concessions at
the Company's racetrack and off-track wagering facilities.
Audio Video Concepts, Inc. (a Pennsylvania corporation), a
wholly-owned subsidiary of Pocono Downs, Inc., supplies audio-video
services to the Company's racetrack and off-track wagering facilities.
Mill Creek Land, Inc. (a Pennsylvania corporation), a wholly-owned
subsidiary of Pocono Downs, Inc., holds title to a certain parcel of land
adjoining the racetrack, which land was previously operated as a landfill.
Backside, Inc. (a Pennsylvania corporation), a wholly-owned subsidiary
of Pocono Downs, Inc., operates the horsemen's cafeteria located at the
Plains Township racetrack facility.
Peach Street Ltd. Partnership (a Pennsylvania limited partnership),
which is controlled by Pocono Downs, Inc., its sole general partner, holds
title to the off-track wagering facility located in Erie, Pennsylvania.
Lehigh Off-Track Wagering, L.P. (a Pennsylvania limited partnership),
which is controlled by the Downs Off-Track Wagering, Inc., its sole general
partner, held title to the off-track wagering facility located in Lehigh
County, Pennsylvania. In the acquisition of The Plains Company and its
affiliated entities on November 27, 1996, Lehigh Off-Track Wagering, L.P.
was dissolved into The Downs Off-Track Wagering, Inc., which now holds
title to the Lehigh County facility.
All intercompany accounts and transactions have been eliminated in
consolidation. The limited partnership interests in Peach Street Limited
Partnership and Lehigh Off-Track Wagering, L.P. have been recorded in the
accompanying financial statements as consolidated subsidiaries as described in
Note 10.
Nature of Operations: The Plains Company conducts harness race meets with
pari-mutuel wagering at its race track in Plains Township, Luzerne County,
Pennsylvania. The racing license must be obtained annually from the Pennsylvania
Harness Racing Commission. In addition to pari-mutuel wagering on the The Plains
Company's live harness race meet, The Plains Company also conducts simulcasted
racing programs from other Pennsylvania licensed racetracks and interstate
simulcasted racing programs from racetracks located outside Pennsylvania. The
Plains Company also simulcasts racing programs from its two off-track wagering
facilities (non-primary locations) located in Erie and Lehigh County,
Pennsylvania. The Erie off-track wagering facility was opened on May 1, 1991,
and the Lehigh off-track wagering facility began operating on July 28, 1993.
During December 1995, The Plains Company commenced acceptance of pari-mutuel
wagering through telephone account wagering.
F-26
THE PLAINS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Marketable Securities: Marketable securities are accounted for using the
accounting provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Investments in Debt and Equity Securities" ("SFAS 115"), whereby
debt securities which The Plains Company has the ability and intent to hold to
maturity are classified as held to maturity and are carried at cost. All other
marketable securities are classified as available for sale and are carried at
fair value. Unrealized gains and losses on securities available for sale are
recognized as direct increases or decreases in shareholders' equity. Cost of
securities sold is recognized using the specific identification method.
Accounts Receivable: Accounts receivable are written off to an expense
account in the year determined by management to be uncollectible. It is
management's position that the reserve method is not necessary because of the
current status and nature of the accounts.
Inventories: Inventories are stated at the lower of cost or market. Cost
is determined on a first-in, first-out basis.
Property & Equipment: Property and equipment are carried at cost.
Depreciation is provided for over the estimated useful life of the assets
principally using the straight line and declining balance method for financial
purposes and the straight line method and accelerated cost recovery system for
income tax purposes.
Deferred Expenses: Costs associated with debt financing are amortized over
the term of the related obligation; and costs associated with the activities of
organizing newly created entities are amortized over a five year period.
Deferred Income: Deferred mortgage discount is recognized as interest
income using the interest method.
Income Taxes: The Plains Company files a consolidated federal income tax
return, and each entity files a separate state income tax return. The provision
for federal and state income taxes has been computed on such basis.
The income and deductions of The Plains Company's affiliated limited
partnerships are passed through and reported on the tax returns of the limited
partnerships' partners in accordance with their respective percentage shares of
ownership. Accordingly, federal and state income taxes have been provided on The
Plains Company's pro-rata share of partnership income incurred during the years
ended December 31, 1993, 1994 and 1995.
In January 1993, The Plains Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 is an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in The Plains Company's financial statements or tax
returns. In estimating future tax consequences, SFAS 109 generally considers all
expected future events other than the enactment of changes in tax laws or rates.
Deferred income taxes are provided for in the accompanying consolidated
financial statements based on differences in the financial accounting basis of
property and equipment over their tax basis;
F-27
THE PLAINS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
depreciation is computed under the straight line and declining balance method
for financial purposes and under the straight line and accelerated cost recovery
system for income tax purposes; and based upon the timing differences relative
to recognition of deferred mortgage discount.
Cash Equivalents: For purposes of reporting cash flows, cash equivalents
include cash on hand, certificates of deposit and all highly liquid investments
with original maturities of three months or less.
2. COMMITMENTS AND CONTINGENCIES:
Concentration of Credit Risk: Financial instruments that potentially
subject The Plains Company to significant concentrations of credit risk consist
principally of cash investments, marketable securities and trade accounts
receivable.
The Plains Company maintains its cash investments and certain other
financial instruments with various financial institutions located throughout
Pennsylvania. At December 31, 1994 and 1995, these investments included
$2,000,000 and $4,700,000 of municipal debt securities and cash balances in
excess of the $100,000 federal deposit insurance limits amounting to $5,158,741
and $4,563,261, respectively. Concentration of credit risk, with respect to
accounts receivable, is limited due to The Plains Company's credit evaluation
and collection process. The Plains Company does not require collateral from it's
customers. The Plains Company's accounts receivable are mainly concentrated in
the horse racing industry and consist principally of amounts due from other
racetracks and off-track wagering facilities located in various parts of the
country. Historically, The Plains Company has not incurred any significant
credit related losses in regard to its trade accounts receivable.
Harness Horsemen's Agreement: In January 1995, The Plains Company entered
into an agreement with the Pennsylvania Harness Horsemen's Association (PHHA)
which expires January 15, 2000. The agreement requires that The Plains Company
distribute to its horsemen a racing purse determined on varying percentages of
handle or commission and breakage as stipulated in the agreement. For the years
ended December 31, 1993 and 1994, a similar agreement with the Pennsylvania
Harness Horsemen's Association was also in force which expired in January 1995.
Purse expense as determined in accordance with The Plains Company's
agreement with the PHHA and with the Pennsylvania statute for off-track wagering
locations usually do not equal the actual purses paid. Any resulting overpayment
or underpayment of purses is applied to future race meets. The amount of purses
underpaid at December 31, 1994 and 1995 was $500,528 and $936,314, respectively.
The total purse expense under the aforementioned agreements was $4,721,366,
$6,038,421 and $6,499,979 for the years ended December 31, 1993, 1994 and 1995,
respectively.
Leases: In December 1993, The Plains Company entered into a lease agreement
for certain totalisator equipment. The agreement provides for a five-year term
expiring on December 31, 1998 and requires an annual fee determined by the
greater of a specified percentage of gross handle wagered plus a flat per item
rental charge computed on a daily basis for equipment used at The Plains
Company's two off-track wagering locations, or a minimum annual payment of
$200,000. For the year ended December 31, 1993, a similar agreement was also in
force which expired in December 1993.
Totalisator equipment rentals charged to The Plains Company under the
aforementioned lease agreements were $564,676, $636,890 and $735,844 for the
years ended December 31, 1993, 1994 and 1995, respectively. Minimum future
rental payments under this agreement are $200,000 for each of the years ending
December 31, 1996, 1997 and 1998.
F-28
THE PLAINS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
2. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
The Plains Company entered into a transponder service agreement during
1993, 1994 and 1995 with an unrelated service provider to utilize a satellite
system for distribution of a horse racing television service. The agreements are
negotiated on an annual basis and expire at the end of each harness racing year.
Such agreements require monthly payments based on the hours the transponder is
accessed at a rate specified in the agreement. The total fees charged to expense
for the years ended December 31, 1993, 1994 and 1995 were $136,246, $244,184 and
$128,369, respectively.
Pocono Downs, Inc. leases its Erie off-track wagering facility from Peach
Street Ltd. Partnership, an affiliate as described in Note 1, under a long-term
operating lease agreement through April 27, 2005. Such lease requires Pocono
Downs, Inc. to pay an annual rent equal to the debt service required to finance
the construction of the premises, plus the payment of all taxes, utilities and
expenses associated with the premises, and a contingent rental based on a
percentage of gross handle in excess of a minimum handle as defined within the
lease. Rent charged to expense for the years ended December 31, 1993, 1994 and
1995 was $552,568, $672,770 and $730,350, which included contingent rents of
$88,168, $208,370 and $265,950, for each respective year.
Pocono Downs, Inc. leases its Lehigh off-track wagering facility from
Lehigh Off-Track Wagering, L.P., an affiliate as described in Note 1, under a
long-term operating lease agreement through July 27, 2008. The lease requires
Pocono Downs, Inc. to pay an annual rent equal to the debt service required to
finance the construction of the premises, plus the payment of all taxes,
utilities and expenses associated with the premises, and a contingent rental
based on a percentage of gross handle in excess of a minimum handle as defined
within the lease. Pursuant to the lease agreement, Pocono Downs, Inc. has
guaranteed the repayment of the mortgage notes issued by Lehigh Off-Track
Wagering, L.P. as described in Note 6. Rent charged to expense for the years
ended December 31, 1993, 1994 and 1995 was $673,928, $1,758,568 and $1,938,362,
which included contingent rents of $405,277, $1,113,805 and $1,293,599, for each
respective year.
Minimum future rental payments under the aforementioned non-cancelable
operating leases which have a remaining term in excess of one year as of
December 31, 1995 and for each of the next five periods are as follows:
DECEMBER 31, AMOUNT
- ------------ ----------
1996........................................................... $1,109,400
1997........................................................... 1,109,400
1998........................................................... 1,109,400
1999........................................................... 1,109,400
2000........................................................... 1,109,400
Subsequent to 2000............................................. 6,010,332
Restricted Cash: The Plains Company was required to maintain a $200,000
cash balance as additional collateral for the term loan at the local bank which
provided the financing to purchase the original mortgage held on Pocono Downs,
Inc. as described in Notes 6 and 8. During the year ended December 31, 1994, the
bank released the $200,000 cash balance and The Plains Company applied the
proceeds to reduce the outstanding balance of the related debt.
Guarantee of Debt Obligation: The Plains Company's racetrack facilities in
Plains Township were pledged on a secondary lien mortgage to provide additional
collateral on a $3.4 million mortgage note payable by Peach Street Limited
Partnership.
F-29
THE PLAINS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
2. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
Consulting Agreement: In March 1989, The Plains Company entered into a
consulting agreement with a former officer and director of The Plains Company.
The agreement, which would have expired in December 2003, included an agreement
not to compete in any business similar to The Plains Company's operations and
required monthly payments of $12,500. On November 27, 1996, The Plains Company's
obligations under this consulting agreement were terminated by The Plains
Company pursuant to the terms of the sale agreement described in Note 14. The
termination of The Plains Company's obligations required a payment of $1.8
million as stipulated by the terms of the consulting and non-compete agreement.
401(k) Plan: The Plains Company has an employee retirement plan under
Section 401(k) of the Internal Revenue Code, which covers all eligible employees
who are not members of a bargaining unit. The retirement plan enables employees
choosing to participate to defer a portion of their salary in a retirement fund
to be administered by The Plains Company. The Plains Company has no obligation
to contribute to such plan. However, for the year ended December 31, 1995, The
Plains Company made a discretionary contribution based upon a percentage of the
employee elective deferrals. The Plains Company's contributions to the plan
amounted to $0, $0 and $40,334, for the year ended December 31, 1993, 1994 and
1995, respectively.
Employment Agreements: During February 1996 and March 1996, The Plains
Company entered into employment agreements with two of its corporate officers.
Both agreements provided for minimum salary and benefits subject to scheduled
annual increases through March 1999 and March 2006. These agreements were
terminated on November 27, 1996 by The Plains Company at a cost of approximately
$1,083,000 as stipulated in the agreement of sale described in Note 14.
3. MARKETABLE SECURITIES:
At December 31, 1994 and 1995, marketable securities consist of The Plains
Company's investment in debt and equity securities which management has
classified in accordance with SFAS 115. The carrying amount and approximate fair
value of theses securities included in the accompanying classified balance sheet
are as follows:
DECEMBER 31, 1994 DECEMBER 31, 1995
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- --------- ----------- --------
(IN THOUSANDS)
Current:
Equity Securities --
Available for Sale......................................... $ 142 $ 142 $ 1 $ 1
Obligation of State and Political Subdivisions --
Available for Sale......................................... 2,000 2,000 4,700 4,700
-------- ------ - ------ ------
$2,142 $2,142 $4,701 $4,701
-------- ------ - ------ ------
-------- ------ - ------ ------
Non-Current:
U.S. Government Securities Held to Maturity.................. $ 102 $ 102 $ -- $ --
-------- ------ - ------ ------
-------- ------ - ------ ------
At December 31, 1994 and 1995, the fair value of The Plains Company's
investment in marketable securities equaled their cost basis; accordingly, there
is no unrealized holding gains or losses associated with such investments.
F-30
THE PLAINS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
3. MARKETABLE SECURITIES: -- (CONTINUED)
Gross proceeds from the sale or maturity of marketable securities for the
years ended December 31, 1994 and 1995 were $0 and $2,244,009, respectively.
There were no realized gain or losses on the sale or maturity of The Plains
Company's investment in marketable securities for the years ended December 31,
1994 and 1995.
4. INVENTORIES:
Inventories valued at the lower of cost or market are summarized as
follows:
DECEMBER 31,
---------------
1994 1995
----- -----
(IN THOUSANDS)
Food and Beverage Products.............................. $ 63 $ 63
Audio-Video Equipment & Parts........................... 2 2
----- -----
$ 65 $ 65
----- -----
----- -----
5. DUE FROM RELATED PARTIES:
At December 31, 1994 and 1995, The Plains Company's sole shareholder was
indebted to The Plains Company on a non-interest bearing unsecured advance with
no stated maturity date in the amount of $41,000. Such indebtedness was
subsequently repaid during November 1996.
6. LONG-TERM LIABILITIES:
Long-term liabilities consist of the following:
DECEMBER 31,
--------------
1994 1995
------ ------
(IN THOUSANDS)
Promissory Note Payable................................... $1,077 $ 958
Mortgage Payable.......................................... 2,670 2,460
Mortgage Notes Payable.................................... 5,000 4,995
Capitalized Lease Obligations............................. 718 588
------ ------
9,465 9,001
Less: Current Portion..................................... 602 656
------ ------
$8,863 $8,345
------ ------
------ ------
Promissory Note Payable: The Plains Company was indebted to a local area
bank on a term loan which was secured by the assignment of a related party
mortgage on the Plains Township racetrack facilities between Pocono Downs, Inc.
and The Plains Company as described in Note 8 and by land with a carrying value
of $750,000 as of December 31, 1994 and 1995.
The promissory note payable bore interest at a rate of 1% above the
national prime lending rate and required monthly payments of principal and
interest in the amount of $18,085. Such amount was fixed for the succeeding
twelve month period at which time the monthly payment would have been
recalculated to an amount necessary to amortize the then outstanding principal
amount over the remaining amortization term. The promissory note was being
amortized over a 15-year period and had a due date of January 1997. The note was
paid in November 1996 in conjunction with the sale of The Plains Company to Penn
National Gaming, Inc. as described in Note 14.
F-31
THE PLAINS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
6. LONG-TERM LIABILITIES: -- (CONTINUED)
Mortgage Payable: Peach Street Ltd. Partnership was indebted to a local
bank on a mortgage obligation which financed the acquisition and construction of
an off-track wagering facility located in Erie, Pennsylvania. The debt was
secured by the off-track wagering facility, a first lien on all machinery,
equipment and fixtures located at the facility, a secondary mortgage on The
Plains Company's racetrack facility located in Plains Township and the personal
guarantee of an officer of The Plains Company. The loan agreement required
monthly payments of $38,700, which included principal and interest computed at
1% over the prime rate, for a 10-year term through December 2001. The note was
paid in November 1996 in conjunction with the sale of The Plains Company to Penn
National Gaming, Inc., as described in Note 14.
Mortgages Notes Payable: During 1992, Lehigh Off-Track Wagering, L.P.
filed a registration statement with the Pennsylvania Securities Commission under
which the partnership would offer for sale from time to time up to $5,000,000 of
secured mortgage notes pursuant to the Pennsylvania Securities Act of 1972, as
amended. Proceeds from the sale of such mortgage notes were used to acquire
property located in Lehigh County, Pennsylvania and to finance the construction
of an off-track wagering facility at this location. The mortgage notes would
have matured five years from the date of issuance and required quarterly
interest payments computed at a rate of 2% above the national prime rate of a
local area bank. Additionally, the rate of interest paid on these notes was
further restricted to a floor and ceiling of 10% and 15%, respectively. These
mortgage obligations were secured by a first lien mortgage on the Lehigh County
property, the off-track wagering facility and the corporate guarantee of Pocono
Downs, Inc. through the terms of the lease agreement with Lehigh Off-Track
Wagering, L.P. The note was paid in November 1996 in conjunction with the sale
of The Plains Company to Penn National Gaming, Inc., as described in Note 14.
Capitalized Lease Obligations: The Plains Company leased various
audio-video, camera, telecommunication and computer equipment installed at the
Plains Township racetrack facility, and the Erie and Lehigh off-track wagering
facilities, under six capital leases which would have expired between November
1995 and January 2000. The assets and liabilities under capital leases were
recorded at the present value of the minimum lease payments. The Plains Company
was obligated to pay insurance, maintenance and expenses related to the leased
property. The leases were paid in November 1996 in conjunction with the sale of
The Plains Company to Penn National Gaming, Inc., as described in Note 14.
Depreciation expense of $135,325, $176,681 and $186,714 has been recorded
on these assets held under capital lease for the years ended December 31, 1993,
1994 and 1995, respectively. Such depreciation has been recorded based on the
estimated useful life of the equipment.
F-32
THE PLAINS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
6. LONG-TERM LIABILITIES: -- (CONTINUED)
Minimum future lease payments under these capital leases for each of the
five years succeeding December 31, 1995 and in the aggregate were as follows:
(IN THOUSANDS)
-------------
1996.................................................. $329
1997.................................................. 193
1998.................................................. 127
1999.................................................. 38
2000.................................................. 3
----
Total Minimum Lease Payments.......................... 690
Less: Amount Representing Interest.................... 102
----
Present Value of Net Minimum Lease Payments........... $588
----
----
Maturities of long-term liabilities including minimum future lease payments
under capital lease for each of the five years succeeding December 31, 1995 were
as follows:
(IN THOUSANDS)
--------------
1996................................................... $ 656
1997................................................... 5,837
1998................................................... 807
1999................................................... 356
2000................................................... 355
7. DEFERRED EXPENSES:
Deferred expenses net of accumulated amortization consists of the
following:
DECEMBER 31,
--------------
1994 1995
---- ----
(IN THOUSANDS)
Loan Acquisition Costs, Net of Accumulated Amortization of $555,689 in
1994 and $672,798 in 1995............................................ $438 $321
Organization Costs, Net of Accumulated Amortization of $10,056 in 1994
and $11,912 in 1995................................................. 5 3
---- ----
$443 $324
---- ----
---- ----
F-33
THE PLAINS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
8. DEFERRED INCOME:
Discount on Mortgage: The Plains Company holds a mortgage note from its
wholly-owned subsidiary Pocono Downs, Inc., which operates the Plains Township
racetrack facility. Such mortgage note was originally issued by Pocono Downs,
Inc. to the Teamsters Central States, Southeast and Southwest Areas Pension Fund
(the "Pension Fund") in the amount of $4.5 million. On May 5, 1983, as part of a
plan of reorganization of Pocono Downs, Inc., The Plains Company purchased such
mortgage note from the Pension Fund at a cost of $2,450,000. At that time, the
mortgage note had a balance of approximately $4.3 million including interest
through October 30, 1974. The purchase price of the mortgage note was discounted
from the outstanding balance by the cash received by the Pension Fund in the
reorganization as a Class IV creditor to Pocono Downs, Inc. This discount is
being amortized over the life of the mortgage using a constant rate on the
outstanding balance under the interest method.
The aforementioned mortgage note is secured by a mortgage on all of the
real property of the mortgagor used in connection with the Plains Township
racing establishment, restaurant and other related business. The mortgage also
provides for the assignment of all leases and all rental and profits of the
mortgaged premises as further security. The mortgage has been assigned by The
Plains Company as collateral for the promissory note payable as described in
Note 6.
9. INCOME TAXES:
The provision for income taxes included in the consolidated statements of
income and retained earnings is comprised of the following components.
DECEMBER 31,
----------------------
1993 1994 1995
---- ------ ------
(IN THOUSANDS)
Current Tax Expense
Federal............................................................. $276 $1,145 $1,350
State............................................................... 112 461 431
---- ------ ------
Total Current.................................................... 388 1,606 1,781
---- ------ ------
Deferred Tax (Benefits)/Expense
Federal............................................................. 63 75 (113)
State............................................................... 26 27 (66)
---- ------ ------
Total Deferred................................................... 89 102 (179)
---- ------ ------
Total Provision for Income Taxes................................. $477 $1,708 $1,602
---- ------ ------
---- ------ ------
F-34
THE PLAINS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
9. INCOME TAXES: -- (CONTINUED)
Deferred tax (assets)/liabilities are comprised of the following at
December 31, 1994 and 1995.
DECEMBER 31,
------------
1994 1995
----- ----
(IN THOUSANDS)
Deferred Tax Assets
Property and Equipment --
Depreciation and Basis Adjustments..................... $ -- $(86)
---- ----
Gross Deferred Tax Asset.................................... -- (86)
Valuation Allowance....................................... -- 86
---- ----
Net Deferred Tax Asset...................................... -- --
---- ----
Deferred Tax Liabilities
Property and Equipment --
Depreciation and Basis Adjustments..................... 139 --
Discount on Mortgage...................................... 402 362
Other..................................................... 2 2
---- ----
Gross Deferred Tax Liability................................ 543 364
---- ----
Net Deferred Tax Liability.................................. $543 $364
---- ----
---- ----
The provision for income taxes differs from the amount of income tax
determined applying the applicable U.S. statutory federal income tax rate to
pre-tax income from continuing operations as a result of the following
differences.
DECEMBER 31,
-----------------------------------------------------
1993 1994 1995
----------------- --------------- --------------
(DOLLARS IN THOUSANDS)
Federal Statutory Provision on Financial Statement
Income................................................... $420 34.0% $1,456 34.0% $1,551 34.0%
Non-Taxable Interest Income at Statutory Rates............. 0 0.0 (6) (0.1) (21) (0.5)
Non-Deductible Expenses Incurred at Statutory Rates........ 6 0.4 5 0.1 12 0.3
State Income Tax, Net of Federal Income Tax Benefits....... 74 6.0 304 7.1 284 6.2
Other, Including Tax Credits, and Deferred Income Tax
Expense (Benefit) Arising from Timing Differences in
Reporting Income & Expense............................... (23) (1.9) (51) (1.2) (224) (4.9)
---- ----- ------ ---- ------ ----
Provision for Income Taxes............................... $477 38.5% $1,708 39.9% $1,602 35.1%
---- ----- ------ ---- ------ ----
---- ----- ------ ---- ------ ----
The net change in the valuation allowance for deferred tax asset for the
year ended December 31, 1995 was an increase of $85,826. The change relates to
an increase in the provision for income taxes to which the valuation relates.
During the year ended December 31, 1995, Pennsylvania reinstated a statute
permitting a deduction for net operating losses. Accordingly, The Plains Company
received a tax benefit which resulted from the utilization of a net operating
loss carryforward from an earlier year to reduce its current year state income
tax liability.
At December 31, 1995, The Plains Company had available a $6,519 unused
operating loss carryforward that may be applied against future state taxable
income which expires in various years through 1997.
F-35
THE PLAINS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
10. INVESTMENTS IN LIMITED PARTNERSHIPS:
The Plains Company and subsidiaries hold the controlling general
partnership interest in Peach Street Ltd. Partnership and Lehigh Off-Track
Wagering L.P., which have been recorded as consolidated subsidiaries in the
financial statements. At December 31, 1994 and 1995, the limited partnership
interests have been recorded as liabilities in the accompanying consolidated
balance sheets in the amount of $2,078,177 and $2,688,893, respectively.
11. RECAPITALIZATION:
On November 28, 1995, The Plains Company approved a plan of
recapitalization under which it converted all of the outstanding shares of
common stock into shares of newly created classes of common stock. As a result
of the transaction, the 100 issued and outstanding shares of common stock were
converted into 10 shares of Class A voting common stock and 30,000 shares of
Class B non-voting common stock.
Immediately after the November 28, 1995 recapitalization, The Plains
Company's capital consisted of:
Common Stock, Class A
Voting (10 Shares)..........................................$ 10
Common Stock, Class B
Non-Voting (30,000 Shares).................................. 30,000
-------
$30,010
-------
-------
12. EXTRAORDINARY ITEM:
In March 1993, The Plains Company dedicated a portion of its Lehigh County,
Pennsylvania real estate to Hanover Township as part of a land development
agreement entered into by The Plains Company. An extraordinary loss of $173,745,
net of income tax benefit of $126,255, represents the cost of the land
transferred to the municipality.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Cash Equivalents: The carrying amount approximated fair
value because of the short-term nature of those instruments.
Marketable Securities: The fair values for marketable debt and equity
securities are based on quoted market prices.
Long Term Debt: The carrying amount approximated fair value because
the current rates being charged The Plains Company for debt are similar to
the borrowing rates currently available for bank loans with similar terms
and average maturities.
F-36
THE PLAINS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS: -- (CONTINUED)
The carrying amounts and fair values of The Plains Company's financial
instruments at December 31, 1994 and 1995 are as follows:
DECEMBER 31, 1994 DECEMBER 31, 1995
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ------- ----------- ---------
Cash and Cash Equivalents
Current......................................................... $6,116 $6,116 $5,490 $5,490
Non-Current..................................................... -- -- -- --
Marketable Securities:
Current......................................................... 2,142 2,142 4,701 4,701
Non-Current..................................................... 102 102 -- --
Long-Term Debt.................................................... $9,465 $9,465 $9,001 $9,001
14. SALES AGREEMENT:
On September 13, 1996, The Plains Company's sole shareholder entered into
an agreement to sell all of the outstanding stock of The Plains Company and the
limited partnership interests in affiliated entities to Penn National Gaming,
Inc. As stipulated by the terms of the agreement of sale, The Plains Company was
required to retire all of its long-term liabilities described in Note 6 and
terminate its commitment under the consulting/non-compete agreement described in
Note 2. On November 27, 1996, the stock sale was settled with change of
ownership and control being transferred to Penn National Gaming, Inc. effective
November 28, 1996.
F-37
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Charles Town Racing Limited Partnership
Charles Town Races, Inc.
Charles Town, West Virginia
We have audited the accompanying combined balance sheets of Charles Town
Racing Limited Partnership and Charles Town Races, Inc., as of December 31, 1994
and 1995, and the related combined statements of income and equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1995.
These combined financial statements are the responsibility of the entities'
management. Our responsibility is to express an opinion on these 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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Charles Town Racing
Limited Partnership and Charles Town Races, Inc. as of December 31, 1994 and
1995, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Charles Town Racing Limited Partnership and Charles Town Races, Inc. will
continue as a going concern. As discussed in Note 8 to the financial statements,
such entities' significant operating losses raise substantial doubt about their
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Leonard J. Miller & Associates, Chartered
Baltimore, Maryland
April 8, 1996
F-38
CHARLES TOWN RACING LIMITED PARTNERSHIP
CHARLES TOWN RACES, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
------------------ SEPTEMBER 30,
ASSETS 1994 1995 1996
------- ------- -------------
(UNAUDITED)
Current Assets
Cash.................................................................. $ 1,436 $ 1,007 $ 523
Inventory............................................................. 3 2 2
Accounts Receivable................................................... 43 2 8
Prepaid Expenses...................................................... 52 8 148
Deposits.............................................................. 26 25 32
------- ------- -------
Total Current Assets.............................................. 1,560 1,044 713
------- ------- -------
Property, Plant and Equipment (at cost)
Furniture and Fixtures................................................ 18 31 31
Machinery and Equipment............................................... 1,402 1,485 1,448
Building and Improvements............................................. 13,423 13,493 13,581
Land Improvements..................................................... 962 962 962
Land.................................................................. 1,811 1,804 1,804
Vehicles.............................................................. 91 67 67
Construction in Progress.............................................. -- 38 --
------- ------- -------
17,707 17,880 17,893
Less: Accumulated Depreciation........................................ (7,764) (8,334) (8,800)
------- ------- -------
Net Property, Plant and Equipment................................. 9,943 9,546 9,093
------- ------- -------
Other Assets
Restricted Cash....................................................... -- 29 56
Advances and exchanges -- Capital Improvement
Fund, restricted.................................................... 180 -- --
Unamortized Loan Acquisition Costs.................................... 2 1 --
------- ------- -------
Total Other Assets................................................ 182 30 56
------- ------- -------
Total Assets...................................................... $11,685 $10,620 $ 9,862
------- ------- -------
------- ------- -------
LIABILITIES AND EQUITY (DEFICIT)
Current Liabilities
Payables.............................................................. $ 296 $ 845 $ 542
Accrued Expenses and Deposits......................................... 640 1,025 1,424
Nominating Fees and Outstanding Mutuel Tickets........................ -- 85 61
Demand Notes payable -- Partners...................................... 767 -- --
Current Portion of Long-Term Debt..................................... 555 73 6,877
------- ------- -------
Total Current Liabilities......................................... 2,258 2,028 8,904
------- ------- -------
Long-Term Liabilities
Accrued Pension....................................................... -- 104 84
Notes Payable -- Partners............................................. 656 1,631 1,779
Long-Term Debt, Less Current Portion.................................. 6,597 6,834 925
------- ------- -------
Total Non-Current Liabilities..................................... 7,253 8,569 2,788
------- ------- -------
Total Liabilities................................................. 9,511 10,597 11,692
Commitments and Contingencies (Note 7)
Equity (Deficit)........................................................ 2,174 23 (1,830)
------- ------- -------
Total Liabilities and Equity (Deficit)............................ $11,685 $10,620 $ 9,862
------- ------- -------
------- ------- -------
See accompanying summary of significant accounting policies and
notes to combined financial statements.
F-39
CHARLES TOWN RACING LIMITED PARTNERSHIP
CHARLES TOWN RACES, INC.
COMBINED STATEMENTS OF INCOME AND EQUITY (DEFICIT)
(IN THOUSANDS)
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
Revenues
Pari-mutuel revenues............................. $14,240 $11,619 $10,136 $ 7,578 $ 7,231
Admissions, programs, parking and other racing
revenues....................................... 1,250 1,076 875 673 605
Concession revenues.............................. 686 312 16 15 --
Restaurant revenues.............................. -- -- -- -- 910
------- ------- ------- ------- -------
Total revenues................................. 16,176 13,007 11,027 8,266 8,746
------- ------- ------- ------- -------
Operating Expenses
Purses and trophies.............................. 6,330 5,194 4,332 3,263 3,053
Direct salaries, payroll taxes and employee
benefits....................................... 4,669 4,008 3,455 2,470 2,654
Simulcast expenses............................... 1,449 1,129 1,358 943 1,104
State licence fee -- simulcast................... 351 288 312 222 254
Other direct meeting expenses.................... 1,869 1,708 2,000 1,490 1,564
Restaurant expenses.............................. -- -- -- -- 679
Other operating expenses......................... 1,762 1,764 1,319 967 1,020
------- ------- ------- ------- -------
Total operating expenses......................... 16,430 14,091 12,776 9,355 10,328
------- ------- ------- ------- -------
(Loss) from Operations....................... (254) (1,084) (1,749) (1,089) (1,582)
------- ------- ------- ------- -------
Other Income (Expense)
Interest expense................................. (573) (650) (769) (573) (564)
Interest income.................................. 159 132 106 85 30
Rent income...................................... 18 57 19 18 18
Apartment building income........................ 47 56 63 47 49
Apartment building expenses...................... (64) (76) (71) (55) (54)
Other Income -- (Note 5)......................... 12 -- 250 250 250
------- ------- ------- ------- -------
Total Other Income (Expense)................. (401) (481) (402) (228) (271)
------- ------- ------- ------- -------
Net Loss........................................... (655) (1,565) (2,151) (1,317) (1,853)
Equity, beginning of period........................ 4,394 3,739 2,174 2,174 23
------- ------- ------- ------- -------
Equity (deficit), end of period.................... $ 3,739 $ 2,174 $ 23 $ 857 $(1,830)
------- ------- ------- ------- -------
------- -------- ------- ------- -------
See accompanying summary of significant accounting policies and
notes to combined financial statements.
F-41
CHARLES TOWN RACING LIMITED PARTNERSHIP
CHARLES TOWN RACES, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------------
1993 1994 1995 1995 1996
--------- ------ ------- ------- -------
(UNAUDITED)
Cash Flows from Operating Activities:
Net Loss.............................................. $ (655) $(1,565) $(2,151) $(1,317) $(1,853)
------ ------- ------- ------- -------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization....................... 640 630 621 474 467
(Gain) Loss on Disposition of Asset................. 13 -- -- (48) --
Changes in Assets and Liabilities:
(Increase) Decrease In Inventory.................... 4 4 1 2 --
(Increase) Decrease In Accounts Receivable.......... 261 (153) 40 (2) (6)
(Increase) Decrease In Prepaid Expenses............. 41 29 44 44 (140)
(Increase) Decrease In Deposits..................... (7) (1) 2 (60) (8)
(Increase) Decrease In Restricted Cash.............. (29) 185 (29) 121 (26)
(Increase) Decrease In Advances and Exchanges....... -- -- 180 -- --
Increase (Decrease) In Payables..................... (20) 139 548 217 (302)
Increase (Decrease) In Accrued Expenses............. (59) 14 561 271 399
Increase (Decrease) In Nominating Fees And
Outstanding Mutuel Tickets........................ 88 (115) 85 88 (25)
Increase (Decrease) In Reserve For Deferred
Compensation Plan................................. 25 8 -- -- (20)
------ ------- ------- ------- -------
Total Adjustments................................. 957 740 2,053 1,107 339
------ ------- ------- ------- -------
Net Cash Provided (Used) By Operating Activities........ 302 (825) (98) (210) (1,514)
------ ------- ------- ------- -------
Cash Flows From Investing Activities:
Capital Expenditures, net of Reimbursement from W.V.
Thoroughbred Development Fund....................... (296) -- (294) (280) (13)
------ ------- ------- ------- -------
Net Cash Provided (Used) By Investing Activities........ (296) -- (294) (280) (13)
------ ------- ------- ------- -------
Cash Flows From Financing Activities:
Loan Acquisition Costs................................ (3) -- -- -- --
Principal Payments on Debts........................... (257) (236) (245) (182) (42)
Increase (Decrease) in Demand Notes -- Partners....... (456) (793) (767) 331 16
Borrowings............................................ -- 1,020 975 -- 1,069
------ ------- ------- ------- -------
Net Cash Provided (Used) by Financing Activities........ (716) (9) (37) 149 1,043
------ ------- ------- ------- -------
Net Increase (Decrease) in Cash and Cash Equivalents.... (710) (834) (429) (341) (484)
Cash And Cash Equivalents, Beginning of Period.......... 2,980 2,270 1,436 1,436 1,007
------ ------- ------- ------- -------
Cash And Cash Equivalents, End of Period................ $2,270 $ 1,436 $ 1,007 $ 1,095 $ 523
------ ------- ------- ------- -------
------ ------- ------- ------- -------
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for:
Interest.............................................. $ 608 $ 654 $ 734 $ 549 $ 676
See accompanying summary of significant accounting policies and
notes to combined financial statements.
F-42
CHARLES TOWN RACING LIMITED PARTNERSHIP
CHARLES TOWN RACES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
1. SUMMARY OF ACCOUNTING POLICIES
ORGANIZATION
The accompanying combined financial statements reflect the accounts of
Charles Town Racing Limited Partnership (the "Partnership") and Charles Town
Races, Inc. (the "Corporation"). The Corporation is wholly-owned by its sole
shareholder, the Partnership. All material intercompany transactions have been
eliminated.
DESCRIPTION OF BUSINESS
The Partnership owns equipment and the real estate at Charles Town Races in
Charles Town, West Virginia, which it leases to the Corporation.
The Corporation conducts thoroughbred horse racing with facilities for
pari-mutuel wagering at Charles Town Race Course, as well as other business
activities related to such racing.
PURSE EXPENSE
Purses earned by the horsemen are recorded as purse expenses and are
calculated as a percentage of the daily pari-mutuel handle as set by state law.
Because of the manner in which purses are calculated, the Corporation may
overpay or underpay purses earned for any individual meet during the year. Purse
overpayments are recorded as assets, while purse underpayments are recorded as
liabilities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
PARI-MUTUEL WAGERING
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Pari-mutuel wagering -- live............ $ 53,129 $ 43,440 $ 23,043 $ 18,224 $ 15,095
Pari-mutuel wagering -- simulcast....... 26,395 20,082 29,815 21,318 22,724
INVENTORY
Inventory is valued at the lower of cost (first-in, first-out basis) or
market.
DEPRECIATION AND AMORTIZATION
Property, plant and equipment are recorded at cost. The entities, for
financial reporting purposes, compute depreciation using the straight-line
method over the estimated useful lives of the respective assets. Expenditures
for additions, major renewals and betterments are capitalized and expenditures
for maintenance and repairs are expensed as incurred. Amortization of loan
acquisition costs are computed on the straight-line method over the life of the
loan.
F-42
CHARLES TOWN RACING LIMITED PARTNERSHIP
CHARLES TOWN RACES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
1. SUMMARY OF ACCOUNTING POLICIES -- CONTINUED
INCOME TAXES
The Partnership is a partnership; therefore, it incurs no liability for
income taxes. The profits and losses are reportable in individual income tax
returns.
For tax purposes, depreciation is computed on the accelerated method in
accordance with applicable tax laws for both the Partnership and the
Corporation.
The Corporation accounts for income taxes using Financial Accounting
Standard No. 109, Accounting for Income Taxes, which requires an asset and
liability approach to financial accounting and reporting for income taxes.
Deferred income tax assets and liabilities are computed annually for differences
between the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable or refundable for the period plus or minus the change
during the period in deferred tax assets and liabilities.
The types of temporary differences that resulted in deferred taxes are net
operating loss carryforwards, contribution carryforwards, bad debt reserves and
depreciation. The net deferred tax account consists of the following:
DECEMBER 31,
---------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- --------------
(IN THOUSANDS)
Deferred tax assets....................... $ 1,160 $ 1,994 $ 2,728
Deferred tax liabilities.................. (15) (14) (14)
Valuation allowance....................... (1,145) (1,980) (2,714)
---------- ---------- --------------
Net deferred taxes........................ $ -- $ -- $ --
---------- ---------- --------------
---------- ---------- --------------
The Corporation has net operating losses from 1995 and prior years
available to be carried forward in the amount of $5,782,105 expiring in the
years 2007 through 2010.
CASH AND CASH EQUIVALENTS
The Partnership and the Corporation consider all cash balances and highly
liquid investments with a maturity of three months or less to be cash
equivalents.
CONCENTRATION OF CREDIT RISKS
The Partnership and the Corporation maintain their cash in bank deposit
accounts which at times may exceed federally insured limits. Management does not
believe that the Partnership or the Corporation is exposed to any significant
credit risk on cash.
PRESENTATION OF PRIOR YEAR DATA
Certain reclassifications have been made to conform prior year data with
the current presentation.
F-43
CHARLES TOWN RACING LIMITED PARTNERSHIP
CHARLES TOWN RACES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
2. NOTES PAYABLE
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- ---------------
(IN THOUSANDS, EXCEPT
DESCRIPTIVE INFORMATION)
Note payable - One Valley Bank -- secured by all real property, tangible
and intangible property and all other assets of the Partnership and
the Corporation. It is personally guaranteed by the Partners. All
principal and interest payments have been suspended until 1/10/97, the
maturity date. Accrued interest through 12/10/96 has been prepaid.
Interest is at 9%. (See Note 6)....................................... $ 5,631 $ 5,530 $ 5,501
Notes payable - One Valley Bank -- secured by a second deed of trust on
all real property, tangible and intangible property and all other
assets of the Partnership and Corporation. They are personally
guaranteed by the Partners. All principal and interest payments have
been suspended until 1/10/97, the maturity date. Accrued interest
through 12/10/96 has been paid. Interest is at 9%. (See Note 6)....... 447 366 366
Note payable - One Valley Bank -- secured by a first deed of trust on an
apartment building owned by the Partnership. Payments of $3,977
including interest at 8.5% are due monthly. The note matures 12/1/00.
(See Note 6).......................................................... 324 303 287
Notes payable - Partners -- unsecured notes with interest at
9% - 9.25%............................................................ 1,423 1,631 1,779
PNGI Charles Town Gaming, Limited Liability Company ("PNGI") -- a line
of credit up to $1,250,000. PNGI had an option to purchase
substantially all of the assets of the Corporation and the
Partnership. In addition to the obligation of the Corporation to repay
the loan, the purchase price was to be reduced $1.60 for each dollar
borrowed under the line. Interest was at prime plus 1 1/2%. The loan
was secured by a second mortgage on the real estate owned by the
Partnership (guarantor) as well as the stock of the Corporation.
Principal and interest were payable in full on the earlier of the
termination date or in the event of default, the default date. The
termination date was January 15, 1997, the date PNGI purchased
substantially all of the assets of the Corporation and the
Partnership........................................................... -- -- 936
F-44
CHARLES TOWN RACING LIMITED PARTNERSHIP
CHARLES TOWN RACES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
2. NOTES PAYABLE -- CONTINUED
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- ---------------
(IN THOUSANDS, EXCEPT
DESCRIPTIVE INFORMATION)
Note payable - AmTote -- to be repaid in 84 monthly principal payments
of $4,166 plus interest at prime plus 1%. The loan matures March 3,
2002. Demand for immediate repayment may be made in the event of a
dispute regarding certain exclusive supply rights granted to AmTote
International, Inc. ("AmTote") or in the event of default as outlined
in the loan agreement. Past due payments are due as of September 30,
1996; however, AmTote has not sent a notice regarding these payments
(See Note 7).......................................................... 750 708 712
--------- --------- ---------------
Total................................................................... 8,575 8,538 9,581
Less current maturities................................................. 1,322 73 6,877
--------- --------- ---------------
Total long-term......................................................... $ 7,253 $ 8,465 $ 2,704
--------- --------- ---------------
The maturities of debt as of September 30, 1996 are as follows:
SEPTEMBER 30 (IN THOUSANDS)
------------ --------------
1997................................ $ 6,877
1998................................ 76
1999................................ 79
2000................................ 81
2001................................ 226
Thereafter.......................... 2,242
---------------
$ 9,581
---------------
---------------
OTHER DEBT
As a result of a settlement agreement dated April 30, 1996, the Partnership
and Corporation have been ordered to pay $120,000 over 60 months in equal
payments of $2,000 per month to the Future Service Pension Plan and the
plaintiffs' attorneys. The balance at September 30, 1996 was $108,000. If the
Corporation is sold, the unpaid balance is due in full.
F-45
CHARLES TOWN RACING LIMITED PARTNERSHIP
CHARLES TOWN RACES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
3. EMPLOYEE BENEFITS
DEFERRED COMPENSATION AGREEMENT
The Corporation has satisfied the deferred compensation agreements it had
with two participants, Donald Hudson and William Dick (see Note 7 -- Employment
Separation Agreement). The purpose of the agreement was to provide retirement
benefits that would have been provided by the Defined Benefit pension plan for
key employees, which was required to be terminated December 31, 1988. The plan
was required to be terminated due to the minimum participation rules of Tax
Reform Act of 1986. The normal retirement benefit at age 65 is equal to 60% of
the highest five-year consecutive earnings, minus 83.33% of the primary
insurance amount payable from Social Security, minus the December 31, 1998
accrued benefit from the terminated pension plan, minus the equivalent annual
annuity which will be earned in the Future Service pension plan.
FINAL
VALUATION DATE
NOVEMBER 15, 1994
---------------------
(THOUSANDS)
Service Cost -- Value of benefits earned during year.... $ 6
Interest cost on projected benefit obligation........... 6
Return on plan assets................................... --
Net amortization (deferral)............................. 2
Net pension expense..................................... 14
Actuarial present value of:
Vested benefit obligation............................. 118
Accumulated benefit obligation........................ 118
Projected benefit obligation.......................... 118
Estimated assets at fair market value................... --
Excess of assets over PBO............................... (118)
Unrecognized net (loss)................................. (21)
Unrecognized net asset.................................. --
Prior service costs not yet recognized.................. 21
Prepaid (accrued) pension cost.......................... $ (118)
The deferred compensation expense for the years ended December 31, 1993,
1994 and 1995 is $24,868, $14,423 and $3,108, respectively.
FUTURE SERVICE PLAN
The Corporation has a defined contribution plan covering substantially all
of its employees. The Corporation makes monthly contributions equal to the
amount accrued for retirement expense, which is calculated as .25% of the daily
mutuel handle.
Total contributions for the years ended December 31, 1993, 1994 and 1995
are $157,883, $158,804 and $132,045, respectively. Total contributions for the
nine months ended September 30, 1995 and 1996 are $99,038 and $94,454,
respectively.
F-46
CHARLES TOWN RACING LIMITED PARTNERSHIP
CHARLES TOWN RACES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
3. EMPLOYEE BENEFITS -- CONTINUED
VOLUNTARY EMPLOYEE BENEFICIARY ASSOCIATION (VEBA) TRUST
The VEBA is a trust created to provide for payment of certain employee
benefits such as vacation and medical benefits and other insured and/or
self-insured employee welfare benefits. The VEBA expense, net of salary
reimbursements from the VEBA Trust, amounted to $274,591, $195,742 and $197,602
for the years ended December 31, 1993, 1994 and 1995, respectively, and $145,900
and $139,886 for the nine months ended September 30, 1995 and 1996,
respectively.
4. LEASES
The Corporation rents totalisator equipment under the terms of an operating
lease expiring December 31, 1996, which also provides for maintenance and
operation of the equipment. The lease agreement provides for a basic amount
computed by multiplying .005 by all wagers processed through the system
(exclusive of refunds) at the racetrack (including intertrack wagers), provided
that such payment shall not be less than $1,360 per live racing program and a
range of $595 to $1,955 per intertrack wagering program, depending on the time
of day, number of programs and the combination of live and intertrack wagering
programs.
The Corporation leases from the Partnership all race track facilities,
including all real and tangible personal property owned by the Partnership. The
lease, effective January 1, 1996 and expiring on December 31, 1996, has an
option to renew for one additional period of one year. The lease calls for a
minimum rent of $1,200,000 per year plus a percentage rent equal to seven
percent (7%) of the total amount of money wagered in all of the pari-mutuel
pools during the lease terms in excess of $100 million. The minimum rent is
payable in twelve equal installments and the percentage rent is payable on the
31st day of December of any renewal term.
In the event that video lottery terminals are licensed by the state of West
Virginia and placed in operation on the premises, this lease will be subject to
renegotiation for the unexpired portion of the lease.
5. OTHER INCOME
OPTION -- SEE NOTE 7 OPTION AGREEMENTS.
6. RETAINED EARNINGS AND PARTNERSHIP EQUITY RESTRICTIONS
The loan agreement with One Valley Bank requires that the Partnership and
the Corporation maintain a net worth of not less than $2,000,000 on a
consolidated basis, as of the end of each semi-annual period.
So long as the above minimum net worth requirement is satisfied, all debt
service payments are current, no default of any loan would be caused thereby,
and the entities both show a positive cash flow, the Partnership may pay and
distribute to its partners, quarterly, an aggregate amount which does not exceed
the equivalent of a 10% annual return on the Partners' equity in the Partnership
and the Corporation. As of September 30, 1996, the net deficit of these entities
was $(1,830,412).
As of August 30, 1995, the bank required that a $650,000 minimum be
maintained in the One Valley Bank account. On March 4, 1996, One Valley Bank
entered into an agreement amending the terms and extending the due dates of the
debt; the minimum requirement has been reduced to zero.
F-47
CHARLES TOWN RACING LIMITED PARTNERSHIP
CHARLES TOWN RACES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES
LITIGATION
On December 11, 1996, GTECH Corporation ("GTECH") commenced an action in
the United States District Court for the Northern District of West Virginia
against the Corporation, the Partnership, Penn National Gaming, Inc., Penn
National Gaming of West Virginia, Inc., a wholly owned subsidiary of Penn
National Gaming, Inc., and Bryant Development Company. The complaint filed by
GTECH alleges that the Corporation, the Partnership and AmTote were parties to
an October 20, 1994 agreement (the "AmTote Agreement"), pursuant to which AmTote
was allegedly granted an exclusive right to install and operate a "video lottery
system" at Charles Town Races. When the AmTote Agreement was entered into,
AmTote was a subsidiary of GTECH; GTECH has since divested itself of AmTote, but
is purportedly the assignee of certain of AmTote's rights under the AmTote
Agreement pursuant to an assignment and assumption agreement dated February 22,
1996. The complaint seeks (i) preliminary and permanent injunctive relief
enjoining the Corporation, the Partnership, Bryant Development Company, Penn
National Gaming, Inc., and its subsidiary from consummating the Charles Town
Acquisition or any similar transaction unless the purchasing party explicitly
accepts and assumes the AmTote Agreement, (ii) a declaratory judgment that the
AmTote Agreement is valid and binding, that GTECH has the right to be the
exclusive installer, operator, provider and servicer of a video lottery system
at Charles Town Races and that any party buying the stock or assets of the
Corporation and the Partnership must accept and assume the AmTote Agreement and
recognize such rights of GTECH thereunder, (iii) compensatory damages, (iv)
legal fees and costs and (v) such other further legal and equitable relief as
the court deems just and appropriate. On December 23, 1996, the court denied
GTECH's motion to preliminarily enjoin the Corporation and the Partnership from
consummating the Charles Town Acquisition unless the purchaser in the Charles
Town Acquisition accepts and assumes the AmTote Agreement. The court noted that
GTECH may pursue its claim for damages and, if warranted, pursue other
injunctive relief in the future. The Corporation and the Partnership consummated
the Charles Town Acquisition on January 15, 1997. On January 13, 1997, the
Corporation and the Partnership filed a motion to dismiss GTECH's complaint; the
court has not yet ruled on this motion.
On December 16, 1996, Randall Conrad, James G. Cameron, Ben Kline, Charles
E. Walker, Nelson W. Shaw, Joseph G. Farrie and all other present and former
employees ("Plaintiffs") of Charles Town Races, Inc. commenced an action in the
Circuit Court of Jefferson County, West Virginia against the Corporation. The
complaint alleges violation of the Warren Act and that the Corporation failed to
pay wages in a timely manner under the West Virginia Wage Payment and Collection
Act when the Track closed in early 1995. The complaint seeks liquidated damages
under the West Virginia Wage Payment and Collection Act in the amount of thirty
days wages, plus prejudgment interest, the cost of the suit, reasonable attorney
fees and such other relief as the court deems just.
The Corporation and Partnership settled a case wherein they are required to
make a repair to a water pipe on a neighboring property by December 31, 1996,
which in management's opinion could cost $250,000. This amount was revised from
$50,000 previously estimated. This has been recorded as a liability. $200,000 is
included in expense for the nine months ended September 30, 1996 and $50,000 is
included in the year ended December 31, 1995.
Certain other claims, suits and complaints arising in the ordinary course
of business have been filed or are pending against the Corporation and the
Partnership. In the opinion of management, with the exception of the GTECH
litigation described above, all such matters are adequately covered by
insurance, or if not so covered, are without merit or are of such kind, or
involve such amounts, as would not have a significant effect on the financial
position or results of operations of the Corporation and the Partnership if
disposed of unfavorably.
F-48
CHARLES TOWN RACING LIMITED PARTNERSHIP
CHARLES TOWN RACES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES -- CONTINUED
EMPLOYMENT SEPARATION AGREEMENT
An employment separation agreement was signed on August 29, 1995, between
the Corporation and Donald E. Hudson. In the agreement, the Corporation agreed
to pay Hudson's health insurance through April 1997, and to transfer the vehicle
and house that Hudson was using while in his employ, and in exchange Hudson
released all claims to his accrued deferred compensation and will provide ten
hours of consulting per month through April 1997. The health insurance benefits
have not been accrued and in the opinion of management would not have a material
effect on the financial statements.
OPTION AGREEMENTS
An Option Agreement dated February 17, 1995 was signed with Showboat
Operating Company ("Showboat") granting Showboat the right to purchase
substantially all of the assets of the Corporation and the Partnership for a
stated amount through April 30, 1995. The option price was $250,000. The option
was then acquired by Bryant Development Company ("Bryant"); Bryant then
transferred the option to PNGI. The option was extended until March 31, 1996 for
an additional $250,000. The option was renewed again until December 31, 1996 for
an additional $250,000. The option payments are non-refundable unless the
Corporation and the Partnership fail to convey title to the property. The first
two option payments in the amounts of $250,000 each are shown as income under
the caption other income. As of September 30, 1996, the third option payment of
$250,000 is included in accrued expenses and deposits. PNGI exercised the option
and, on January 15, 1997, acquired substantially all of the assets of the
Corporation and the Partnership.
During 1993, the Partnership collected a non-refundable deposit on an
expired land option in the amount of $12,000. This is shown as other income.
CONTRACT
In August 1995, a contract was signed with Sheetz, Inc. granting it the
right to purchase 100,000 square feet of track property located at Routes 340
and 17 for $500,000. This option is subject to a feasibility study, including
environmental audit, zoning, permits, etc. A $10,000 refundable deposit is being
held in escrow. The option under the contract was extended until February 1,
1997.
8. OPERATING DEFICITS AND ECONOMIC CONDITIONS
Adverse economic conditions in the racing industry have limited the ability
of the Partnership and the Corporation to cover its operating and administrative
costs. As a result, the Corporation and the Partnership incurred a combined loss
for the years ended December 31, 1993, 1994 and 1995 of $654,452, $1,565,428 and
$2,150,905, respectively, and for the nine months ended September 30, 1995 and
1996 incurred losses of $1,316,676 and $1,853,409, respectively. The Corporation
temporarily ceased racing operations from December 31, 1994, until February 24,
1995 and has currently ceased racing operations as of November 11, 1996. While
the Corporation and the Partnership are seeking additional sources of capital,
including equity capital, there can be no assurance that they will be successful
in accomplishing their objectives. See Note 2 (PNGI Charles Town Gaming, Limited
Liability Company) and Note 7 for management's plans.
Because of the uncertainties surrounding the ability of the Corporation and
the Partnership to continue their operations and to satisfy their creditors on a
timely basis, there is doubt about their ability to continue as a going concern.
The financial statements do not include any adjustments that might be necessary
should the entities be unable to continue as a going concern.
F-49
[PICTURE] [PICTURE]
(See Appendix A for Description) (See Appendix A for Description)
Pocono Downs, the Company's harness Charles Town Races is conveniently
racetrack outside of Wilkes-Barre, PA, located, only a 60-minute drive
was acquired iun November 1996. from Baltimore, Maryland, and a
70-minute drive from Washington, D.C.
[PICTURE]
(See Appendix A for Description)
Artists rendering of Charles Town Races
entertainment complex, expected to re-open
for live racing, dining, simulcast wagering
and video gaming machines in mid-1997.
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------------
TABLE OF CONTENTS
PAGE
---------
Available Information............................. 3
Incorporation of Certain Documents by Reference... 4
Prospectus Summary................................ 5
Risk Factors...................................... 11
Use of Proceeds................................... 21
Price Range of Common Stock....................... 22
Dividend Policy................................... 22
Capitalization.................................... 23
Pro Forma Consolidated Financial Statements....... 24
Selected Consolidated Financial Data.............. 31
Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 33
Business.......................................... 40
Management........................................ 58
Principal and Selling Shareholders................ 60
Description of Capital Stock...................... 63
Underwriting...................................... 66
Legal Matters..................................... 67
Experts........................................... 67
Index to Financial Statements..................... F-1
2,300,000 SHARES
PENN NATIONAL
GAMING, INC.
COMMON STOCK
($.01 PAR VALUE)
SALOMON BROTHERS INC
GERARD KLAUER MATTISON
& CO., INC.
JEFFERIES & COMPANY, INC.
PROSPECTUS
DATED , 1997
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table shows all expenses of the issuance and distribution of
the securities offered hereby, other than underwriting discounts:
Securities and Exchange Commission registration fee............. $ 11,725
National Association of Securities Dealers, Inc. filing fee..... 4,368
Nasdaq National Market listing fee.............................. 17,500
Transfer Agent and Registrar fees............................... 5,000
Printing expenses............................................... 200,000
Legal fees and expenses......................................... 200,000
Accounting fees and expenses.................................... 170,000
Miscellaneous expenses.......................................... 41,407
--------
Total......................................................... $650,000
--------
--------
The Securities and Exchange Commission (the "Commission") registration fee,
National Association of Securities Dealers, Inc. filing fee and Nasdaq National
Market listing fee are exact. All other amounts are estimates. All the above
expenses will be paid by the Company.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Underwriting Agreement provides that each of the Underwriters will
indemnify the directors and officers of the Company against certain liabilities,
including liabilities under the Securities Act. Pursuant to the Company's
By-Laws, no director, as such, is personally liable for monetary damages for any
action taken, or any failure to take any action, unless the director breaches or
fails to perform the duties of his or her office under Section 1721 of the BCL,
and the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness. These provisions of the Company's By-Laws, however,
do not apply to the responsibility or liability of a director pursuant to any
criminal statute, or to the liability of a director for the payment of taxes
pursuant to local, Pennsylvania or federal law. These provisions offer persons
who serve on the Board of Directors of the Company protection against awards of
monetary damages for negligence in the performance of their duties. They do not
affect the availability of equitable remedies such as an injunction or
rescission based upon a director's breach of the duty of care.
ITEM 16. EXHIBITS
The following exhibits are filed as part of this registration statement.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
1.1 Form of Underwriting Agreement.**
5.1 Opinion of Morgan, Lewis & Bockius LLP regarding
legality of securities being registered.*
23.1 Consent of BDO Seidman, LLP.**
23.2 Consent of Robert Rossi & Co.**
23.3 Consent of Leonard J. Miller & Associates,
Chartered.**
23.4 Consent of Morgan, Lewis & Bockius LLP (included
in its opinion to be filed as Exhibit 5.1
hereto).*
24.1 Powers of Attorney.*
27.1 Financial Data Schedule.*
- ------------------
* Previously filed.
** Filed herewith.
II-1
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Wyomissing, Pennsylvania, on February 6, 1997.
PENN NATIONAL GAMING, INC.
By: /s/ PETER M. CARLINO
------------------------------
Peter M. Carlino
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PETER M. CARLINO Chairman and Chief Executive Officer and February 6, 1997
- ----------------------------- Director (Principal Executive Officer)
Peter M. Carlino
* President, Chief Operating Officer and February 6, 1997
- ----------------------------- Director
William J. Bork
* Chief Financial Officer February 6, 1997
- ----------------------------- (Principal Financial and
Robert S. Ippolito Accounting Officer)
* Director February 6, 1997
- -----------------------------
David A. Handler
* Director February 6, 1997
- -----------------------------
Harold Cramer
* Director February 6, 1997
- -----------------------------
John M. Jacquemin
* Director February 6, 1997
- -----------------------------
Robert P. Levy
*By /s/PETER M. CARLINO
- -----------------------------
Peter M. Carlino, Attorney-in-Fact,
pursuant to powers of attorney,
previously filed as part of
this registration statement.
II-3
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
- ------ ----------- --------
1.1 Form of Underwriting Agreement.**
5.1 Opinion of Morgan, Lewis & Bockius
LLP regarding legality of
securities being registered.*
23.1 Consent of BDO Seidman, LLP.**
23.2 Consent of Robert Rossi & Co.**
23.3 Consent of Leonard J. Miller &
Associates, Chartered.**
23.4 Consent of Morgan, Lewis & Bockius
LLP (included in its opinion to be
filed as Exhibit 5.1 hereto).*
24.1 Powers of Attorney.*
27.1 Financial Data Schedule.*
- ------------------
* Previously filed.
** Filed herewith.
APPENDIX A -- DESCRIPTION OF GRAPHICS
INSIDE FRONT COVER--
There are four pictures on the inside front cover; each has a caption
beneath it.
Above the caption, "Penn National, celebrating 25 years of thoroughbred
racing in 1997." is a picture of the Penn National Race Course facility;
the view is of the front entrance.
Above the caption, "Penn National's newest OTW facility in Lancaster, PA."
is a picture of the inside of the Lancaster OTW. The restaurant seating
area is pictured in the foreground; televisions are in the background.
Above the caption, "The recently renovated paddock area at Penn National."
is a picture taken from above the new paddock area showing the paddock area
in the foreground and the track in the background. In the picture there are
people viewing the horses in the paddock area.
Above the caption, "Racing on-track at Penn National since 1972." is a
picture of a live thoroughbred horse race at Penn National Race Course.
INSIDE BACK COVER--
The inside back cover includes:
A picture of the Pocono Downs Harness Track with a view of the racetrack
and the grandstand. The picture shows people in the grandstand and a live
harness race taking place on the track. The caption beneath the picture
reads, "Pocono Downs, the Company's harness racetrack outside of
Wilkes-Barre, PA was acquired in November 1996."
A map depicting the location of Baltimore, Maryland, Washington, D.C. and
Charles Town, West Virginia. The map depicts the paths of Interstates 95,
83, 68, 66 and 81. The caption beneath the map reads, "Charles Town Races
is conveniently located, only a 60-minute drive from Baltimore, Maryland
and a 70-minute drive from Washington, D.C."
An artist's depiction of the Charles Town Facility; the view is the front
of the facility. The caption beneath the artist's depiction reads,
"Artist's rendering of Charles Town Races entertainment complex, expected
to re-open for live racing, dining, simulcast wagering and video gaming
machines in mid-1997."
Penn National Gaming, Inc.
2,300,000 Shares*
Common Stock
($.01 par value)
Underwriting Agreement
New York, New York
_________________ , 1997
Salomon Brothers Inc
Gerard Klauer Mattison & Co., Inc.
Jefferies & Company, Inc.
As Representatives of the several Underwriters
c/o Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
Ladies and Gentlemen:
Penn National Gaming, Inc., a Pennsylvania corporation (the
"Company"), proposes to sell to the underwriters named in Schedule I hereto (the
"Underwriters"), for whom you (the "Representatives") are acting as
representatives, 1,725,000 shares of Common Stock, $.01 par value, of the
Company ("Common Stock"), and the persons and entities named in Schedule II
hereto (the "Selling Stockholders") propose to sell to the Underwriters 575,000
shares of Common Stock (said shares to be issued and sold by the Company and
shares to be sold by the Selling Stockholders collectively being hereinafter
called the "Underwritten Securities"). The Company and the Selling Stockholders
named in Schedule III hereto also propose to grant to the Underwriters an option
to purchase up to 345,000 additional shares of Common Stock (the "Option
Securities"; the Option Securities, together with the Underwritten Securities,
being hereinafter called the "Securities").
1. Representations and Warranties.
(a) The Company represents and warrants to, and agrees with,
each Underwriter as set forth below in this Section 1. Certain terms used in
this Section 1 are defined in paragraph (iii) hereof.
(i) The Company meets the requirements for use of
Form S-3 under the Securities Act of 1933, as amended (the "Act"), and
has filed with the Securities and Exchange Commission (the
- --------------------
* Plus an option to purchase from Penn National Gaming, Inc. and the other
persons and entities named in Schedule III hereto up to 345,000 additional
shares to cover over-allotments.
"Commission") a registration statement (file number 333-18861) on such
Form, including a related preliminary prospectus, for the registration
under the Act of the offering and sale of the Securities. The Company
may have filed one or more amendments thereto, including the related
preliminary prospectus, each of which has previously been furnished to
you. The Company will next file with the Commission one of the
following: (A) prior to effectiveness of such registration statement, a
further amendment to such registration statement, including the form of
final prospectus, or (B) a final prospectus in accordance with Rules
430A and 424(b)(1) or (4). In the case of clause (B), the Company has
included in such registration statement, as amended at the Effective
Date, all information (other than Rule 430A Information) required by
the Act and the rules thereunder to be included in the Prospectus with
respect to the Securities and the offering thereof. As filed, such
amendment and form of final prospectus, or such final prospectus, shall
contain all Rule 430A Information, together with all other such
required information, with respect to the Securities and the offering
thereof and, except to the extent the Representatives shall agree in
writing to a modification, shall be in all substantive respects in the
form furnished to you prior to the Execution Time or, to the extent not
completed at the Execution Time, shall contain only such specific
additional information and other changes (beyond that contained in the
latest Preliminary Prospectus) as the Company has advised you, prior to
the Execution Time, will be included or made therein.
(ii) On the Effective Date, the Registration
Statement did or will, and when the Prospectus is first filed (if
required) in accordance with Rule 424(b) and on the Closing Date, the
Prospectus (and any supplements thereto) will, comply in all material
respects with the applicable requirements of the Act, the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the
respective rules thereunder; on the Effective Date, the Registration
Statement did not or will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date, the Prospectus, if not filed
pursuant to Rule 424(b), did not or will not, and on the date of any
filing pursuant to Rule 424(b) and on the Closing Date, the Prospectus
(together with any supplement thereto) will not, include any untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the Company makes no representations or warranties as to
the information contained in or omitted from the Registration Statement
or the Prospectus (or any supplement thereto) in reliance upon and in
conformity with information furnished in writing to the Company by or
on behalf of any Underwriter through the Representatives specifically
for inclusion in the Registration Statement or the Prospectus (or any
supplement thereto).
(iii) The terms which follow, when used in this
Agreement, shall have the meanings indicated. The term "Effective Date"
shall mean each date that the Registration Statement and any
post-effective amendment or amendments thereto became or become
effective. "Execution Time" shall mean the date and time that this
2
Agreement is executed and delivered by the parties hereto. "Preliminary
Prospectus" shall mean any preliminary prospectus referred to in
paragraph (i) above and any preliminary prospectus included in the
Registration Statement at the Effective Date that omits Rule 430A
Information. "Prospectus" shall mean the prospectus relating to the
Securities that is first filed pursuant to Rule 424(b) after the
Execution Time or, if no filing pursuant to Rule 424(b) is required,
shall mean the form of final prospectus relating to the Securities
included in the Registration Statement at the Effective Date.
"Registration Statement" shall mean the registration statement referred
to in paragraph (i) above, including incorporated documents, exhibits
and financial statements, as amended at the Execution Time (or, if not
effective at the Execution Time, in the form in which it shall become
effective) and, in the event any post-effective amendment thereto or a
registration statement filed with respect to additional shares of
Common Stock pursuant to Rule 462(b) (or post-effective amendment
thereto) becomes effective prior to the Closing Date (as hereinafter
defined), shall also mean such registration statement as so amended or
such registration statement (or amendment thereto) filed pursuant to
Rule 462(b), respectively. The term "Registration Statement" shall
include any Rule 430A Information deemed to be included therein at the
Effective Date as provided by Rule 430A. "Rule 424," "Rule 430A,"
"Regulation S-K" and "Regulation S-X" refer to such rules or regulation
under the Act. "Rule 430A Information" shall mean information with
respect to the Securities and the offering thereof permitted to be
omitted from the Registration Statement when it becomes effective
pursuant to Rule 430A. Any reference herein to the Registration
Statement, a Preliminary Prospectus or the Prospectus shall be deemed
to refer to and include the documents incorporated by reference therein
pursuant to Item 12 of Form S-3 which were filed under the Exchange Act
on or before the Effective Date of the Registration Statement or the
issue date of such Preliminary Prospectus or the Prospectus, as the
case may be; and any reference herein to the terms "amend," "amendment"
or "supplement" with respect to the Registration Statement, any
Preliminary Prospectus or the Prospectus shall be deemed to refer to
and include the filing of any document under the Exchange Act after the
Effective Date of the Registration Statement, or the issue date of any
Preliminary Prospectus or the Prospectus, as the case may be, deemed to
be incorporated therein by reference.
(iv) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania with full corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Registration Statement and the Prospectus, and is duly
registered and qualified to conduct its business and is in good
standing in each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does
not have a material adverse effect on the condition (financial or
other), earnings, business or properties of the Company and the
Subsidiaries (as hereinafter defined), taken as a whole (a "Material
Adverse Effect"), and no proceeding has been instituted in any such
jurisdiction revoking, limiting or curtailing, or seeking to revoke,
limit or curtail, such power and authority, qualification, license or
eligibility.
3
(v) All the Company's subsidiaries (as defined in
the Act) are set forth on Schedule IV hereto and are referred to herein
individually as a "Subsidiary" and collectively as the "Subsidiaries."
Each Subsidiary is a corporation duly organized, validly existing and
in good standing in the jurisdiction of its incorporation, with full
corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Registration Statement
and the Prospectus, and is duly registered and qualified to conduct its
business and is in good standing in each jurisdiction or place where
the nature of its properties or the conduct of its business requires
such registration or qualification, except where the failure so to
register or qualify or be in good standing does not have a Material
Adverse Effect, and no proceeding has been instituted in any such
jurisdiction revoking, limiting or curtailing, or seeking to revoke,
limit or curtail, such power and authority, qualification, license or
eligibility.
(vi) All the outstanding shares of capital stock of
or other equity interests in each of the Subsidiaries have been duly
authorized and validly issued, are fully paid and nonassessable and,
except with respect to PNGI Charles Town Limited Liability Company
("PNGI Charles Town"), in which the Company holds an 89% membership
interest, are wholly owned by the Company directly or indirectly
through one of the other Subsidiaries, free and clear of any lien,
adverse claim, security interest, equity or other encumbrance, except
as described in the Prospectus; and there are no (A) existing
preemptive rights under any Subsidiary's articles of incorporation or
code of regulations, or other organizational documents, or applicable
law or (B) similar rights that entitle or will entitle any person to
acquire any shares of or other equity interests in any Subsidiary. No
Subsidiary is currently prohibited, directly or indirectly, from paying
any dividends to the Company, from making any other distribution on
such Subsidiary's capital stock, from repaying to the Company any loans
or advances to such Subsidiary from the Company or from transferring
any of such Subsidiary's property or assets to the Company or any other
subsidiary of the Company.
(vii) The Company's authorized, issued and
outstanding capital stock is as set forth under the caption
"Capitalization" in the Prospectus; and the authorized capital stock of
the Company conforms to the description thereof in the Registration
Statement and the Prospectus. All the outstanding shares of capital
stock of the Company (including the shares to be sold by the Selling
Stockholders) have been duly authorized and validly issued, are fully
paid and nonassessable and are free of any preemptive or similar rights
and were issued and sold by the Company in compliance with all
applicable Federal and state securities laws; and the Securities to be
issued and sold to the Underwriters by the Company have been duly
authorized and, when issued and delivered to the Underwriters against
payment therefor in accordance with the terms hereof, will be validly
issued, fully paid and nonassessable and free of any preemptive or
similar rights. No holders of securities of the Company have preemptive
or similar rights to purchase Common Stock. Except as described in or
contemplated by the Prospectus, there are no outstanding options,
warrants or other rights calling for the issuance of, and there are no
commitments, plans or arrangements to issue, any shares of capital
4
stock of the Company or any security convertible into or exchangeable
or exercisable for capital stock of the Company. The Common Stock
(including the Securities) has been approved for quotation on the
Nasdaq National Market.
(viii) The Company has full corporate power and
authority to execute, deliver and perform its obligations under this
Agreement; the execution and delivery of, and the performance by the
Company of its obligations under, this Agreement have been authorized
by all necessary corporate action of the Company; and this Agreement
has been duly executed and delivered by the Company.
(ix) None of the issuance, offer, sale or delivery
of the Securities, the execution, delivery or performance of this
Agreement by the Company or the consummation of the other transactions
contemplated hereby (A) requires any consent, approval, authorization
or order of, or registration or filing with, any court, regulatory
body, administrative agency or other governmental body, agency or
official, including without limitation, the Pennsylvania State Horse
Racing Commission (the "Horse Racing Commission"), the Pennsylvania
State Harness Racing Commission (the "Harness Commission"), the West
Virginia State Racing Commission (the "West Virginia Racing
Commission") and the West Virginia Lottery Commission (the "Lottery
Commission") (collectively, the "Gaming Authorities") (except as
described in the Prospectus with respect to any person or entity that,
following completion of the offering of the Securities, is a 5%
beneficial owner of the Company's Common Stock), (B) conflicts or will
conflict with or constitutes or will constitute a breach of, or a
default under, the articles of incorporation or code of regulations, or
other organizational documents, of the Company or any of the
Subsidiaries, (C) conflicts or will conflict with or constitutes or
will constitute a breach of, or a default under any material (from the
perspective of the Company and the Subsidiaries, taken as a whole)
agreement, indenture, lease or other instrument to which the Company or
any of the Subsidiaries is a party or by which any of them or any of
their respective properties is bound, (D) violates or will violate any
statute, law, regulation, Permit (as hereinafter defined) or filing or
judgment, injunction, order or decree applicable to the Company or any
of the Subsidiaries or any of their respective properties or (E) will
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any of the Subsidiaries
pursuant to the terms of any agreement or instrument to which any of
them is a party or by which any of them is bound or to which any of the
property or assets of any of them is subject.
(x) To the knowledge of the Company, after due
inquiry, BDO Seidman, LLP, which has certified certain financial
statements of the Company and its consolidated subsidiaries and
delivered its reports with respect to the audited consolidated
financial statements and schedules included in the Registration
Statement and the Prospectus (or any amendment or supplement thereto),
are independent public accountants as required by the Act and the rules
and regulations thereunder.
5
(xi) The financial statements of the Company,
together with related notes, included or incorporated by reference in
the Registration Statement and the Prospectus (and any amendment or
supplement thereto), comply in all material respects with the
requirements of the Act and present fairly in all material respects the
consolidated financial position, results of operations and changes in
shareholders' equity and cash flows of the Company and the Subsidiaries
on the basis stated in the Registration Statement at the respective
dates or for the respective periods to which they apply; such
statements and related notes have been prepared in accordance with
generally accepted accounting principles consistently applied
throughout the periods involved, except as disclosed therein; and the
other financial and statistical information and data set forth in the
Registration Statement and the Prospectus (and any amendment or
supplement thereto) is accurately presented and, to the extent such
information and data is derived from the financial books and records of
the Company, is prepared on a basis consistent with such financial
statements and the books and records of the Company. The unaudited pro
forma financial statements included in the Registration Statement and
the Prospectus comply as to form in all material respects with the
requirements of the Act; the pro forma adjustments have been properly
applied to the historical amounts in the compilation of such pro forma
statements; the assumptions described in the notes to such pro forma
statements provide a reasonable basis for presenting the significant
direct effects of the transactions contemplated therein; and such pro
forma adjustments give appropriate effect to those adjustments, in each
case, in accordance with Regulation S-X.
(xii) To the knowledge of the Company, after due
inquiry, Robert Rossi & Co., which has certified certain financial
statements of The Plains Company, a Pennsylvania corporation ("Plains
Company"), and its consolidated subsidiaries and delivered its report
with respect to the audited consolidated financial statements of Plains
Company included in the Registration Statement and the Prospectus (or
any amendment or supplement thereto), are independent public
accountants as required by the Act and the rules and regulations
thereunder.
(xiii) The financial statements of Plains Company,
together with related notes, included in the Registration Statement and
the Prospectus (and any amendment or supplement thereto), comply in all
material respects with the requirements of the Act and present fairly
in all material respects the consolidated financial position, results
of operations and changes in shareholders' equity and cash flows of
Plains Company and its consolidated subsidiaries on the basis stated in
the Registration Statement at the respective dates or for the
respective periods to which they apply; such statements and related
notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods
involved, except as disclosed therein; and the other financial and
statistical information and data of Plains Company set forth in the
Registration Statement and the Prospectus (and any amendment or
supplement thereto) is accurately presented and, to the extent such
information and data is derived from the financial books and records of
Plains Company, is prepared on a basis consistent with such financial
statements and the books and records of Plains Company.
6
(xiv) To the knowledge of the Company, after due
inquiry, Leonard J. Miller & Associates, Chartered, which has certified
certain financial statements of Charles Town Racing Limited Partnership
and Charles Town Races, Inc., a West Virginia limited partnership and a
West Virginia corporation, respectively (collectively, "Charles Town"),
delivered its report with respect to the audited combined financial
statements of Charles Town included in the Registration Statement and
the Prospectus (or any amendment or supplement thereto), are
independent public accountants as required by the Act and the rules and
regulations thereunder.
(xv) The financial statements of Charles Town,
together with related notes, included in the Registration Statement and
the Prospectus (and any amendment or supplement thereto), comply in all
material respects with the requirements of the Act and present fairly
in all material respects the combined financial position, results of
operations and changes in shareholders' equity and cash flows of
Charles Town on the basis stated in the Registration Statement at the
respective dates or for the respective periods to which they apply;
such statements and related notes have been prepared in accordance with
generally accepted accounting principles consistently applied
throughout the periods involved, except as disclosed therein; and the
other financial and statistical information and data of Charles Town
set forth in the Registration Statement and the Prospectus (and any
amendment or supplement thereto) is accurately presented and, to the
extent such information and data is derived from the financial books
and records of Charles Town, is prepared on a basis consistent with
such financial statements and the books and records of Charles Town.
(xvi) Neither the Company nor any of the
Subsidiaries is (i) in violation of its articles of incorporation or
by-laws or other organizational documents, or of any law, ordinance,
administrative or governmental rule or regulation applicable to the
Company or any of the Subsidiaries or of any decree of any court or
governmental agency or body (including without limitation any racing,
wagering or gaming regulatory agency or body) having jurisdiction over
the Company or any of the Subsidiaries, except where any such violation
or violations in the aggregate would not have a Material Adverse
Effect, or (ii) in default in any material respect in the performance
of any obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in any
agreement, indenture, lease or other instrument to which the Company or
any of the Subsidiaries is a party or by which any of them or any of
their respective properties may be bound, except as may be disclosed in
the Registration Statement and the Prospectus, and there does not exist
with respect to any such bond, debenture, note, other evidence of
indebtedness, agreement, indenture, lease or other instrument any state
of facts which constitutes an event of default, as defined in such
documents, or which, with notice or lapse of time or both, would
constitute such an event of default.
(xvii) There are no legal or governmental
proceedings pending or, to the knowledge of the Company, threatened,
against the Company or any of the Subsidiaries or to which the Company
or any of the Subsidiaries, or any of their respective properties, is
7
subject, that are required to be described in the Registration
Statement or the Prospectus but are not described as required. There
are no statutes, regulations, agreements, contracts, indentures, leases
or other instruments that are required to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit
to the Registration Statement (or to be described in any of the
documents filed by the Company with the Commission pursuant to the
Exchange Act that are incorporated by reference in the Prospectus (the
"Exchange Act Filings") or to be filed as an exhibit to any of the
Exchange Act Filings) that are not described or filed as required by
the Act or the Exchange Act.
(xviii) No order preventing or suspending the use
of any Preliminary Prospectus has been issued and no proceedings for
that purpose are pending or, to the best knowledge of the Company,
threatened or contemplated by the Commission; no order suspending the
offering of the Securities in any jurisdiction designated by the
Representatives pursuant to paragraph (a)(v) of Section 5 of this
Agreement has been issued and no proceedings for that purpose have been
instituted or, to the best knowledge of the Company, are threatened or
contemplated; and any request of the Commission for additional
information (to be included in the Registration Statement or Prospectus
or otherwise) has been complied with to the Commission's satisfaction.
(xix) Except as disclosed in the Registration
Statement and the Prospectus (or any amendment or supplement thereto),
subsequent to the respective dates as of which such information is
given in the Registration Statement and the Prospectus (or any
amendment or supplement thereto), (i) neither the Company nor any of
the Subsidiaries has (A) incurred any liability or obligation, direct
or contingent, or entered into any transaction not in the ordinary
course of business, that is material to the Company and the
Subsidiaries taken as a whole, (B) declared or paid any dividend or
made any distribution on any shares of its capital stock or
(C) redeemed, purchased or otherwise acquired or agreed to redeem,
purchase or otherwise acquire any shares of its stock and (ii) there
has not been any material change in the capital stock, or material
increase in the short-term or long-term debt of the Company or any of
the Subsidiaries, or any material adverse change, or any development
involving or which could reasonably be expected to have a Material
Adverse Effect.
(xx) The Company and its subsidiaries (A) are in
compliance with any and all applicable foreign, federal, state and
local laws and regulations relating to the protection of human health
and safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("Environmental Laws"), (B) have received
all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses
and (C) are in compliance with all terms and conditions of any such
permit, license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or
other approvals or failure to comply with the terms and conditions of
such permits, licenses or approvals would not, singly or in the
aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
8
(xxi) On the basis of a review of the effect of
Environmental Laws on the business, operations and properties of the
Company and its subsidiaries, the Company has reasonably concluded that
such associated costs and liabilities would not, singly or in the
aggregate, have a Material Adverse Effect.
(xxii) Except as disclosed in the Prospectus, the
Company and each Subsidiary and each officer and director of the
Company and each Subsidiary have all permits, licenses, certificates,
franchises and authorizations of governmental or regulatory authorities
(including, without limitation, all permits, licenses, certificates,
franchises and authorizations of all applicable insurance regulatory
agencies or bodies and all licenses or certificates of authority
necessary to conduct thoroughbred racing, harness racing, wagering on
live and simulcast racing and telephone account wagering activities, to
operate off-track wagering facilities and video gaming machines and to
broadcast live racing) ("Permits") as are necessary to own and lease
their respective properties and conduct their businesses in the manner
described in the Prospectus, subject to such qualifications as may be
set forth in the Prospectus, except where the failure to have such
Permits would not have a Material Adverse Effect. No such Permit
contains a materially burdensome restriction that is not adequately
disclosed in the Prospectus. Except as disclosed in the Prospectus, the
Company and each Subsidiary have conducted, and the Company and each
Subsidiary are conducting, their business in compliance with such
Permits and all applicable federal, state, local and foreign laws,
rules and regulations, except where the failure to conduct such
business in compliance with such Permits or such laws, rules and
regulations would not have a Material Adverse Effect. The Company and
each Subsidiary have fulfilled and performed in all material respects
all their respective obligations with respect to the Permits, neither
the Company nor any Subsidiary has received any notice of proceedings
relating to the revocation, modification, termination or non-renewal of
any Permit, and no event has occurred which allows, or after notice or
lapse of time would allow, revocation, modification, termination or
non-renewal thereof or results in any other material impairment of the
rights of the holder of any such Permit, subject in each case to such
qualification as may be set forth in the Prospectus and except to the
extent any such revocation or termination would not have a Material
Adverse Effect.
(xxiii) The Company has no reason to believe that
any of the Gaming Authorities is considering modifying, suspending,
revoking or not granting renewal of any of the Permits, and, to its
knowledge, neither the Gaming Authorities nor any other governmental
agency is investigating the Company or any of its Subsidiaries or
related parties or any director or executive officer of the Company or
any of its Subsidiaries, other than in ordinary course administrative
reviews. Except as disclosed in the Prospectus, to the best knowledge
of the Company, no change in any laws or regulations is pending which
could reasonably be expected to be adopted and if adopted, could
reasonably be expected to have, individually or in the aggregate with
all such changes, a Material Adverse Effect.
9
(xxiv) In the case of the Company, since January 1,
1991, and in the case of each Subsidiary, since the date of its
acquisition, the Company and each of its Subsidiaries have filed all
material reports, registrations and statements, together with any
amendments required to be made with respect thereto, that they were
required to file with any regulatory commission, agency or authority,
except where the failure to file such report, registrations or
statements would not have a Material Adverse Effect. As of their
respective dates, such reports, registrations and statements complied
in all material respects with all of the rules and regulations
promulgated by the applicable commission, agency or authority. The
Company and its Subsidiaries maintain their books and records in
accordance in all material respects with all applicable laws, rules and
regulations.
(xxv) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general
or specific authorization; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain accountability
for assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(xxvi) None of the Company, any of the Subsidiaries
or, to the Company's knowledge, any employee or agent of the Company or
any Subsidiary has made any payment of funds of the Company or any
Subsidiary or received or retained any funds in violation of any law,
rule or regulation, which payment, receipt or retention of funds is of
a character required to be disclosed in the Prospectus.
(xxvii) The Company has not distributed and, prior
to the later to occur of the Closing Date and completion of the
distribution of the Securities, will not distribute any offering
material in connection with the offering and sale of the Securities
other than the Registration Statement, any Preliminary Prospectus, the
Prospectus or other materials, if any, permitted by the Act, it being
understood that materials consistent with the Company's historical
practices with respect to responses to investor relations inquiries
that are transmitted pursuant to unsolicited requests do not constitute
"offering materials." Neither the Company nor any of its Subsidiaries
has taken, nor will it take, directly or indirectly, any action
designed to or which reasonably might be expected to cause or result
in, or which has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of any of the Securities.
(xxviii) No holder of any security of the Company
has the right (other than a right which has been waived in writing) to
have any security owned by such holder included in the Registration
Statement or to demand registration of any security owned by such
holder.
10
(b) Each Selling Stockholder represents and warrants to, and
agrees with, each Underwriter that:
(i) Such Selling Stockholder is the lawful owner of
the Securities to be sold by such Selling Stockholder hereunder, free
and clear of all liens, encumbrances, equities and claims whatsoever.
Upon sale and delivery of, and payment for, such Securities, as
provided herein, such Selling Stockholder will convey good and
marketable title to such Securities, free and clear of all liens,
encumbrances, equities and claims whatsoever, including, without
limitation, any restrictions on transfer.
(ii) Such Selling Stockholder has all requisite
power and authority to execute, deliver and perform its obligations
under this Agreement; the execution and delivery of, and the
performance by such Selling Stockholder of its obligations under, this
Agreement have been duly and validly authorized by such Selling
Stockholder; and this Agreement has been duly executed and delivered by
such Selling Stockholder.
(iii) Such Selling Stockholder has no reason to
believe that the representations and warranties of the Company
contained in this Section 1 are not true and correct, is familiar with
the Registration Statement and has no knowledge of any material fact,
condition or information not disclosed in the Prospectus or any
supplement thereto which has adversely affected or may adversely affect
the business of the Company or any of its subsidiaries; and the sale of
Securities by such Selling Stockholder pursuant hereto is not prompted
by any material information concerning the Company or any of its
subsidiaries which is not set forth in the Prospectus or any supplement
thereto.
(iv) Certificates in negotiable form for such
Selling Stockholder's Securities have been placed in custody, for
delivery pursuant to the terms of this Agreement, under a Custody
Agreement duly authorized, executed and delivered by such Selling
Stockholder, in the form heretofore furnished to you (the "Custody
Agreement"), with Continental Stock Transfer & Trust Company of New
York, New York, as Custodian (the "Custodian"); the Securities
represented by the certificates so held in custody for each Selling
Stockholder are subject to the interests hereunder of the Underwriters,
the Company and the other Selling Stockholders; the arrangements for
custody and delivery of such certificates, made by such Selling
Stockholder hereunder and under the Custody Agreement, are not subject
to termination by any acts of such Selling Stockholder, or by operation
of law, whether by the death or incapacity of such Selling Stockholder
or the occurrence of any other event; and if any such death, incapacity
or any other such event shall occur before the delivery of such
Securities hereunder, certificates for the Securities will be delivered
by the Custodian in accordance with the terms and conditions of this
Agreement and the Custody Agreement as if such death, incapacity or
other event had not occurred, regardless of whether or not the
Custodian shall have received notice of such death, incapacity or other
event.
(v) None of the sale and delivery of the Securities
to be sold by such Stockholder, the execution and delivery of this
Agreement or the Custody Agreement by or on behalf of such Selling
11
Stockholder or the consummation of the transactions herein or therein
contemplated by or on behalf of such Selling Stockholder (i) requires
any consent, approval, authorization or order of, or registration or
filing with, any court, regulatory body, administrative agency or other
governmental body, agency or official (except such as may be required
under the Act) or (ii) conflicts or will conflict with or constitutes
or will constitute a breach of, or default under, or violates or will
violate, any agreement, indenture or other instrument to which such
Selling Stockholder is a party or by which such Selling Stockholder is
or may be bound or to which any such Selling Stockholder's property or
assets is subject, or any statute, law, rule regulation, ruling,
judgment, injunction, order or decree applicable to such Selling
Stockholder or to any property or assets of such Selling Stockholder.
(vi) Such Selling Stockholder has not taken and
will not take, directly or indirectly, any action designed to or which
has constituted or which might reasonably be expected to cause or
result, under the Exchange Act or otherwise, in stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Securities and has not effected any sales of
shares of Common Stock which, if effected by the issuer, would be
required to be disclosed in response to Item 701 of Regulation S-K.
(vii) Such Selling Stockholder has not since the
filing of the Registration Statement (i) sold, bid for, purchased,
attempted to induce any person to purchase, or paid anyone any
compensation for soliciting purchases of, the Common Stock or (ii) paid
or agreed to pay to any person any compensation for soliciting another
to purchase any other securities of the Company (except in each case
for the sale of the Securities by such Selling Stockholder under this
Agreement).
In respect of any statements in or omissions from the Registration Statement or
the Prospectus or any supplement thereto made in reliance upon and in conformity
with information furnished in writing to the Company by any Selling Stockholder
specifically for use in connection with the preparation thereof, such Selling
Stockholder hereby makes the same representations and warranties to each
Underwriter as the Company makes to such Underwriter under paragraph (a)(ii) of
this Section.
2. Purchase and Sale. (a) Subject to the terms and conditions
and in reliance upon the representations and warranties herein set forth, the
Company and the Selling Stockholders (collectively, the "Sellers" and
individually a "Seller") agree, severally and not jointly, to sell to each
Underwriter the amount of the Securities set forth opposite each Seller's name
in Schedule II hereto, and each Underwriter agrees, severally and not jointly,
to purchase from the Sellers, at a purchase price of $_____ per share, the
amount of the Securities set forth opposite such Underwriter's name in Schedule
I hereto. The amount of Securities to be purchased by each Underwriter from each
Seller shall be as nearly as practicable in the same proportion to the total
amount of Securities to be purchased by such Underwriter as the total amount of
Securities to be sold by each Seller bears to the total amount of Securities to
be sold pursuant hereto.
12
(b) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Company and the Selling
Stockholders named in Schedule III hereto hereby grant, severally and not
jointly, an option to the several Underwriters to purchase, severally and not
jointly, up to 345,000 shares of the Option Securities at the same purchase
price per share as the Underwriters shall pay for the Underwritten Securities.
Said option may be exercised only to cover over-allotments in the sale of the
Underwritten Securities by the Underwriters. Said option may be exercised in
whole or in part at any time (but not more than once) on or before the 30th day
after the date of the Prospectus upon written or telegraphic notice by the
Representatives to the Company and such Selling Stockholders setting forth the
number of shares of the Option Securities as to which the several Underwriters
are exercising the option and the settlement date. Delivery of certificates for
the shares of Option Securities by the Company and such Selling Stockholders,
and payment therefor to the Company and such Selling Stockholders, shall be made
as provided in Section 3 hereof. The maximum number of shares of the Option
Securities to be sold by the Company and each of such Selling Stockholders is
set forth in Schedule III hereto. In the event that the Underwriters exercise
less than their full over-allotment option, the number of shares of the Option
Securities to be sold by each party listed on Schedule III shall be, as nearly
as practicable, in the same proportion to each other as are the number of shares
of the Option Securities listed opposite their respective names on said Schedule
III. The number of shares of the Option Securities to be purchased by each
Underwriter shall be the same percentage of the total number of shares of the
Option Securities to be purchased by the several Underwriters as such
Underwriter is purchasing of the Underwritten Securities, subject to such
adjustments as the Representatives in their absolute discretion shall make to
eliminate any fractional shares.
3. Delivery and Payment. Delivery of and payment for the
Underwritten Securities (and the Option Securities (if the option provided for
in Section 2(b) hereof shall have been exercised on or before the business day
prior to the Closing Date)) shall be made at 10:00 AM, New York City time, on
________________, 1997, or such later date (not later than ______________, 1997)
as the Representatives shall designate, which date and time may be postponed by
agreement among the Representatives, the Company and the Selling Stockholders or
as provided in Section 9 hereof (such date and time of delivery and payment for
the Underwritten Securities being herein called the "Closing Date"). Delivery of
the Securities shall be made to the Representatives for the respective accounts
of the several Underwriters against payment by the several Underwriters through
the Representatives of the respective aggregate purchase prices of the
Securities being sold by the Company and each of the Selling Stockholders to or
upon the order of the Company and the Selling Stockholders by wire transfer in
immediately available funds. Delivery of the Securities shall be made through
the facilities of the Depository Trust Company, and payment for the Securities
shall be made at the office of Cleary, Gottlieb, Steen & Hamilton, New York, New
York. Certificates for the Securities shall be registered in such names and in
such denominations as the Representatives may request not less than one full
business day in advance of the Closing Date.
Each Selling Stockholder will pay all applicable state
transfer taxes, if any, involved in the transfer to the several Underwriters of
13
the Securities to be purchased by them from such Selling Stockholder, and the
respective Underwriters will pay any additional stock transfer taxes involved in
further transfers.
If the option provided for in Section 2(b) hereof is exercised
after the first full business day prior to the Closing Date, the Company will
deliver (at the expense of the Company) to the Representatives, at Seven World
Trade Center, New York, New York, on the date specified by the Representatives
(which shall be within three business days after exercise of said option),
certificates for the Option Securities in such names and denominations as the
Representatives shall have requested against payment of the purchase price
thereof to or upon the order of the Company and the Selling Stockholders
identified in Schedule III by wire transfer in immediately available funds. If
settlement for the Option Securities occurs after the Closing Date, the Company
and such Selling Stockholders will deliver to the Representatives on the
settlement date for the Option Securities, and the obligation of the
Underwriters to purchase the Option Securities shall be conditioned upon receipt
of, supplemental opinions, certificates and letters confirming as of such date
the opinions, certificates and letters delivered on the Closing Date pursuant to
Section 6 hereof.
4. Offering by Underwriters. It is understood that the
several Underwriters propose to offer the Securities for sale to the public as
set forth in the Prospectus.
5. Agreements. (a) The Company agrees with the several
Underwriters that:
(i) The Company will use its best efforts to cause
the Registration Statement, if not effective at the Execution Time, and
any amendment thereof, to become effective. Prior to the termination of
the offering of the Securities, the Company will not file any amendment
of the Registration Statement or supplement to the Prospectus unless
the Company has furnished the Representatives a copy for their review
prior to filing and will not file any such proposed amendment or
supplement to which the Representatives reasonably object. Subject to
the foregoing sentence, if the Registration Statement has become or
becomes effective pursuant to Rule 430A, or filing of the Prospectus is
otherwise required under Rule 424(b), the Company will cause the
Prospectus, properly completed, and any supplement thereto to be filed
with the Commission pursuant to the applicable paragraph of Rule 424(b)
within the time period prescribed and will provide evidence
satisfactory to the Representatives of such timely filing. The Company
will promptly advise the Representatives (A) when the Registration
Statement, if not effective at the Execution Time, and any amendment
thereto, shall have become effective, (B) when the Prospectus, and any
supplement thereto, shall have been filed (if required) with the
Commission pursuant to Rule 424(b), (C) when, prior to termination of
the offering of the Securities, any amendment to the Registration
Statement shall have been filed or become effective, (D) of any request
by the Commission for any amendment of the Registration Statement or
supplement to the Prospectus or for any additional information, (E) of
the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the institution or
threatening of any proceeding for that purpose and (F) of the receipt
by the Company of any notification with respect to the suspension of
the qualification of the Securities for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose. The
Company will use its best efforts to prevent the issuance of any such
stop order and, if issued, to obtain as soon as possible the withdrawal
thereof.
14
(ii) If, at any time when a prospectus relating to
the Securities is required to be delivered under the Act, any event
occurs as a result of which the Prospectus as then supplemented would
include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein in the light of
the circumstances under which they were made not misleading, or if it
shall be necessary to amend the Registration Statement or supplement
the Prospectus to comply with the Act or the Exchange Act or the
respective rules thereunder, the Company promptly will prepare and file
with the Commission, subject to the second sentence of subparagraph
(a)(i) of this Section 5, an amendment or supplement which will correct
such statement or omission or an amendment which will effect such
compliance.
(iii) As soon as practicable, the Company will make
generally available to its security holders and to the Representatives
an earnings statement or statements of the Company and its subsidiaries
which will satisfy the provisions of Section 11(a) of the Act and Rule
158 under the Act.
(iv) The Company will furnish to the
Representatives and counsel for the Underwriters, without charge,
copies of the manually executed signature pages to the Registration
Statement, it being understood that the originals of such pages will be
retained in the Company's files as required by the rules of the
Commission and copies of the Registration Statement (including exhibits
thereto) and to each other Underwriter a copy of the Registration
Statement (without exhibits thereto). The Company will furnish to the
Underwriters not later than (A) 6:00 PM, New York City time, on the
date of determination of the public offering price, if such
determination occurred at or prior to 10:00 AM, New York City time, on
such date or (B) 6:00 PM, New York City time, on the business day
following the date on which the public offering price was determined,
if such determination occurred after 10:00 AM, New York City time, on
such date, as many copies of each Preliminary Prospectus and the
Prospectus and any supplement thereto as the Representatives may
reasonably request for purposes of confirming sales of Securities to be
delivered on the Closing Date; further, so long as delivery of a
prospectus by an Underwriter or dealer may be required by the Act, as
many copies of each Preliminary Prospectus and the Prospectus and any
supplement thereto as the Representatives may reasonably request. The
Company will pay the expenses of printing or other production of all
documents relating to the offering.
(v) The Company will cooperate with the
Representatives in arranging the qualification of the Securities for
sale under the laws of such jurisdictions as the Representatives may
designate and in maintaining such qualifications in effect so long as
required for the distribution of the Securities; provided, however,
15
that the Company shall not be required to file a general consent to
service of process or be required to qualify as a foreign corporation
in any jurisdiction. The Company will pay the fee of the National
Association of Securities Dealers, Inc., in connection with its review
of the offering.
(vi) The Company will not, for a period of 120 days
following the Execution Time, without the prior written consent of the
Representatives, (A) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of, directly or indirectly, or announce the
offering of, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock (whether such
shares or any such securities are now owned by the Company or are
hereafter acquired) or (B) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic
consequences of ownership of the Common Stock, whether any such
transaction described in clause (A) or (B) above is to be settled by
delivery of Common Stock or such other securities, in cash or
otherwise; provided, however, that the Company may issue and sell
Common Stock pursuant to any employee stock option plan, stock
ownership plan or dividend reinvestment plan of the Company in effect
at the Execution Time and the Company may issue Common Stock issuable
upon the conversion of securities or the exercise of warrants
outstanding at the Execution Time.
(b) Each Selling Stockholder agrees with the several
Underwriters that such Selling Shareholder will not during the period of 120
days following the Execution Time, without the prior written consent of the
Representatives, (A) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, or announce the offering of, any other shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock,
(whether such shares or any such securities are now owned by such Selling
Stockholder or are hereafter acquired) or (B) enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of the Common Stock, whether any such transaction
described in clause (A) or (B) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise; provided, however, that
such Selling Stockholder may dispose of shares of Common Stock as bona fide
gifts. In addition, each Selling Stockholder agrees that, without the prior
written consent of the Representatives, such Selling Stockholder will not,
during the period of 120 days following the Execution Time, make any demand for,
or exercise any right with respect to, the registration of any shares of Common
Stock or any security convertible into or exercisable or exchangeable for Common
Stock.
6. Conditions to the Obligations of the Underwriters. The
obligations of the Underwriters to purchase the Securities shall be subject to
the accuracy of the representations and warranties on the part of the Company
and the Selling Stockholders contained herein as of the Execution Time and the
Closing Date, to the accuracy of the statements of the Company and the Selling
Stockholders made in any certificates pursuant to the provisions hereof, to the
performance by the Company and the Selling Stockholders of their respective
obligations hereunder and to the following additional conditions:
16
(a) If the Registration Statement has not become effective
prior to the Execution Time, unless the Representatives agree in writing to a
later time, the Registration Statement will become effective not later than (i)
6:00 PM New York City time, on the date of determination of the public offering
price, if such determination occurred at or prior to 3:00 PM New York City time
on such date or (ii) 12:00 Noon on the business day following the day on which
the public offering price was determined, if such determination occurred after
3:00 PM New York City time on such date; if filing of the Prospectus, or any
supplement thereto, is required pursuant to the applicable paragraph of Rule
424(b), the Prospectus, and any such supplement, will be filed in the manner and
within the time period required by Rule 424(b); and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or threatened.
(b) The Company shall have furnished to the Representatives
the opinion of Morgan, Lewis & Bockius LLP, counsel for the Company, dated the
Closing Date, to the effect that:
(i) the Company is a corporation validly existing
and in good standing under the laws of the Commonwealth of Pennsylvania
with corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Registration
Statement and the Prospectus, and is duly registered and qualified to
conduct its business and is in good standing in each jurisdiction or
place where the Company has informed such counsel that the nature of
its properties or the conduct of its business requires such
registration or qualification, except where the failure so to register
or qualify does not have a Material Adverse Effect;
(ii) each Subsidiary is a corporation, partnership
or limited liability company, as the case may be, validly existing and
in good standing in the jurisdiction of its organization, with the
requisite power and authority to own, lease and operate its properties
and to conduct its business as described in the Registration Statement
and the Prospectus, and is duly registered and qualified to conduct its
business and is in good standing in each jurisdiction or place where
the Company has informed such counsel that the nature of its properties
or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify or be
in good standing does not have a Material Adverse Effect;
(iii) all the outstanding shares of capital stock
of or other equity interests in each of the Subsidiaries have been
authorized by all necessary action of the Subsidiaries and validly
issued, are fully paid and nonassessable and, except with respect to
PNGI Charles Town, in which the Company holds an 89% membership
interest, are wholly owned by the Company directly or indirectly
through one of the other Subsidiaries, free and clear of any perfected
security interest and, to the knowledge of such counsel, free and clear
of any other lien, adverse claim, security interest, equity or other
encumbrance, except in each case as described in the Prospectus; and
there are no (A) existing preemptive rights under any Subsidiary's
articles of incorporation or code of regulations, or other
organizational documents, or applicable law or (B) to the knowledge of
17
such counsel, other rights that entitle or will entitle any person to
acquire any shares of or other equity interests in any Subsidiary;
(iv) the Company's authorized, issued and
outstanding capital stock is as set forth under the caption
"Capitalization" in the Prospectus; the authorized capital stock of the
Company conforms in all material respects as to legal matters to the
description thereof in the Registration Statement and the Prospectus;
all the outstanding shares of capital stock of the Company (including
the shares to be sold by the Selling Stockholders) have been authorized
by all necessary corporate action of the Company and validly issued,
are fully paid and nonassessable and are free of any (A) preemptive
rights under the Company's Articles of Incorporation or applicable law
or (B) to the knowledge of such counsel, other rights that entitle any
person to acquire any Securities upon the issuance thereof by the
Company; the Securities to be issued and sold to the Underwriters by
the Company have been duly authorized and, when issued and delivered to
the Underwriters against payment therefor in accordance with the terms
hereof, will be validly issued, fully paid and nonassessable and free
of any (1) preemptive rights under the Company's Articles of
Incorporation or applicable law or (2) to the knowledge of such
counsel, other rights that entitle any person to acquire any Securities
upon the issuance thereof by the Company; no holders of securities of
the Company have (x) preemptive rights under the Company's Articles of
Incorporation or applicable law or (y) to the knowledge of such
counsel, other rights to acquire any Securities upon the issuance
thereof by the Company; to the knowledge of such counsel, except as
described in or contemplated by the Prospectus, there are no
outstanding options, warrants or other rights calling for the issuance
of, and there are no commitments, plans or arrangements to issue, any
shares of capital stock of the Company or any security convertible into
or exchangeable or exercisable for capital stock of the Company; and
the Common Stock (including the Securities) has been approved for
quotation on the Nasdaq National Market;
(v) the form of certificates for the Securities
complies as to form to the requirements of Pennsylvania law;
(vi) the Company has the corporate power and
authority to execute, deliver and perform its obligations under this
Agreement; the execution and delivery of, and the performance by the
Company of its obligations under, this Agreement have been authorized
by all necessary corporate action of the Company; and this Agreement
has been duly executed and delivered by the Company;
(vii) to the knowledge of such counsel, there are
no legal or governmental proceedings pending or, based solely on such
counsel's inquiry of management of the Company, threatened against the
Company or any of the Subsidiaries or to which the Company or any of
the Subsidiaries, or any of their respective properties, is subject,
that are required to be described in the Registration Statement or the
Prospectus (or any Exchange Act Filing) but are not described as
18
required; to the knowledge of such counsel, there are no agreements,
contracts, indentures, leases or other instruments that are required to
be described in the Registration Statement or the Prospectus (or any
Exchange Act Filing) or to be filed as an exhibit to the Registration
Statement (or any Exchange Act Filing) that are not described or filed
as required by the Act;
(viii) based upon the inquiry by such counsel of
the Commission's staff, the Registration Statement has become effective
under the Act; any required filing of the Prospectus, and any
supplements thereto, pursuant to Rule 424(b) has been made in the
manner and within the time period required by Rule 424(b); to the best
knowledge of such counsel, based upon the inquiry by such counsel of
the Commission's staff, no stop order suspending the effectiveness of
the Registration Statement has been issued, no proceedings for that
purpose have been instituted or threatened and the Registration
Statement and the Prospectus (other than the financial statements and
other financial and statistical information contained therein as to
which such counsel need express no opinion) comply as to form in all
material respects with the applicable requirements of the Act and the
Exchange Act and the respective rules thereunder;
(ix) no consent, approval, authorization or order
of, or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency or official is
required for the issuance, offer, sale or delivery of the Securities,
the execution, delivery or performance of this Agreement by the Company
or the consummation of the transactions contemplated hereby, except
such as have been obtained under the Act, such as may be required under
the gaming, racing, wagering and/or lottery laws of Pennsylvania, West
Virginia or the United States, as to which such counsel need express no
opinion, and such other approvals (specified in such opinion) as have
been obtained;
(x) neither the issue and sale of the Securities
nor the consummation of any of the other transactions contemplated
hereby will result in a breach of or constitute a default under (A) the
Certificate of Incorporation or By-Laws of the Company, (B) the terms
of any agreement or instrument filed as an exhibit to the Registration
Statement (or to any Exchange Act Filing) to which the Company or any
of the Subsidiaries is a party or by which any of them or any of their
respective properties is bound or (C) any judgment, order or decree of
any court, governmental, regulatory or administrative body or agency or
arbitrator having jurisdiction over the Company or any Subsidiary,
which judgment, order or decree is known to such counsel to be
applicable to the Company or any Subsidiary;
(xi) to the knowledge of such counsel, no holders
of securities of the Company have rights to the registration of such
securities under the Registration Statement.
In rendering such opinion, such counsel may (A) rely as to matters of fact, to
the extent they deem proper, on certificates of responsible officers of the
Company and public officials and (B) state that they express no opinion with
19
respect to the laws of any jurisdiction other than the laws of the Commonwealth
of Pennsylvania, the General Corporation Law of the State of Delaware and the
federal laws of the United States. References to the Prospectus in this
paragraph (b) include any supplements thereto at the Closing Date.
In addition, such counsel shall indicate that it has
participated in conferences with the Representatives, officers and
representatives of the Company and representatives of the independent certified
public accountants of the Company and certain of the Subsidiaries, at which
conferences the contents of the Registration Statement and the Prospectus and
related matters were discussed, and, although such counsel does not pass upon
and does not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement or the
Prospectus, on the basis of the foregoing, no facts have come to such counsel's
attention which cause such counsel to believe that the Registration Statement at
the Effective Date and the Closing Date and any settlement date for the Option
Securities contained or contains an untrue statement of a material fact or
omitted or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that the Prospectus,
as amended or supplemented, if applicable, on the Execution Date and on the
Closing Date and any settlement date for the Option Securities, included or
includes any untrue statement of a material fact or omitted or omits to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that such counsel need not express any comment with respect to the financial
statements, the notes thereto, the related schedules or any other financial or
statistical information contained in the Registration Statement or the
Prospectus or incorporated by reference therein.
(c) The Company shall have furnished to the Representatives
the opinion of Mesirov Gelman Jaffe Cramer & Jamieson, counsel for the Company,
dated the Closing Date, to the effect that:
(i) Mountainview Thoroughbred Racing Association
("Mountainview") and Pennsylvania National Turf Club ("PNTC") each
holds a valid and existing license (the "Thoroughbred Licenses") under
the Pennsylvania Industry Race Horse Reform Act (the "Race Horse Act")
to conduct thoroughbred horse racing with pari-mutuel wagering in the
manner described in the Prospectus; Pocono Downs, Inc. holds a valid
and existing license (the "Harness License" and, together with the
Thoroughbred Licenses, the "Licenses") under the Race Horse Act to
conduct harness racing with pari-mutuel wagering in the manner
described in the Prospectus; the Horse Racing Commission and the
Harness Commission approved, respectively, four and two non-primary
locations in the Commonwealth of Pennsylvania at which the Company (or
a Subsidiary thereof) is authorized to conduct pari-mutuel wagering in
the manner described in the Prospectus, and such approvals are in full
force and effect; the direct and indirect ownership by the Company, as
currently owned, of the capital stock of the entities holding the
Licenses does not violate the Race Horse Act; to such counsel's
knowledge, none of the Gaming Authorities in Pennsylvania is
considering modifying, suspending, revoking or not granting renewal of
any of the Licenses, and, to such counsel's knowledge, neither of such
Gaming Authorities nor any other governmental agency is investigating
the Company or any of its Subsidiaries or related parties or any
director or executive officer of the Company or any of its Subsidiaries
other than in ordinary course administrative reviews; and except as
20
disclosed in the Prospectus, to the knowledge of such counsel, no
change in any laws or regulations is pending which could reasonably be
expected to be adopted and if adopted, could reasonably be expected to
materially limit the operations currently conducted by the Company or
which, individually or in the aggregate with all such changes, would
have a Material Adverse Effect;
(ii) The Underwriters are not required to be
licensed or approved by the Harness Commission or the Horse Racing
Commission as a result of the execution of this Agreement or the
consummation of the transactions contemplated hereby;
(iii) to the knowledge of such counsel, there are
no legal or governmental proceedings pending or threatened against the
Company or any of the Subsidiaries or to which the Company or any of
the Subsidiaries, or any of their respective properties, is subject,
that are required to be described in the Registration Statement or the
Prospectus (or any Exchange Act Filing) but are not described as
required; to the knowledge of such counsel, there are no statutes,
regulations, agreements, contracts, indentures, leases or other
instruments that are required to be described in the Registration
Statement or the Prospectus (or any Exchange Act Filing) or to be filed
as an exhibit to the Registration Statement (or any Exchange Act
Filing) that are not described or filed as required by the Act; the
statements in the Prospectus under the headings "Risk Factors - Future
Development of Charles Town Facility," "Risk Factors - Regulation and
Taxation," "Business - Racing and Wagering Operations - Live Racing,"
"Business - Purses; Agreements with Horsemen," "Business - Regulation
and Taxation" and "Business - Legal Proceedings," insofar as such
statements purport to summarize certain provisions of the requirements
under the Pennsylvania State Racing Act and any other laws or
regulation of the Commonwealth of Pennsylvania, or certain agreements
or legal proceedings to which the Company or any of the Subsidiaries is
a party, fairly summarize the matters therein described; and the
conduct of the business of the Company and the Subsidiaries is not
subject to any material racing, wagering or gaming law or regulation
that is not described in the Prospectus under "Business - Regulation
and Taxation";
(iv) such counsel has no knowledge that at the
Effective Date the Registration Statement includes any untrue statement
of a material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading or that the Prospectus includes any untrue statement of a
material fact or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading;
(v) no consent, approval, authorization or order
of, or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency or official
under the gaming, racing, wagering and/or lottery laws of Pennsylvania
is required for the issuance, offer, sale or delivery of the
Securities, the execution, delivery or performance of this Agreement by
21
the Company or the consummation of the transactions contemplated
hereby, except such as have been obtained under the Act and such other
approvals (specified in such opinion) as have been obtained; and
(vi) neither the issue and sale of the Securities
nor the consummation of any of the other transactions contemplated
hereby will result in a breach of or constitute a default under (A) the
Certificate of Incorporation or By-Laws of the Company, (B) the terms
of any agreement or instrument filed as an exhibit to the Registration
Statement (or to any Exchange Act Filing) to which the Company or any
of the Subsidiaries is a party or by which any of them or any of their
respective properties is bound or (C) any judgment, order or decree of
any court, governmental, regulatory or administrative body or agency or
arbitrator having jurisdiction over the Company or any Subsidiary,
which judgment, order or decree is known to such counsel to be
applicable to the Company or any Subsidiary.
In rendering such opinion, such counsel may rely (A) as to matters involving the
application of laws of any jurisdiction other than the laws of the Commonwealth
of Pennsylvania, the General Corporation Law of the State of Delaware or the
federal laws of the United States, to the extent they deem proper and specified
in such opinion, upon the opinion of other counsel of good standing whom they
believe to be reliable and who are satisfactory to counsel for the Underwriters
and (B) as to matters of fact, to the extent they deem proper, on certificates
of responsible officers of the Company and public officials. References to the
Prospectus in this paragraph (c) include any supplements thereto at the Closing
Date.
(d) The Company shall have furnished to the Representatives
the opinion of Hamb & Poffenbarger, West Virginia counsel for the Company, dated
the Closing Date, to the effect that:
(i) each of Penn National Gaming of West Virginia,
Inc. and PNGI Charles Town (together, the "West Virginia Subsidiaries")
is a corporation duly organized, validly existing and in good standing
in the jurisdiction of its incorporation, with full corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus,
and is duly registered and qualified to conduct its business and is in
good standing in each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify or be
in good standing does not have a Material Adverse Effect;
(ii) all the outstanding shares of capital stock of
each of the West Virginia Subsidiaries have been duly authorized and
validly issued, fully paid and nonassessable, and are wholly owned by
the Company directly or indirectly through one of the other
Subsidiaries, free and clear of any perfected security interest and, to
the knowledge of such counsel, after due inquiry, free and clear of any
other lien, adverse claim, security interest, equity or other
encumbrance, except in each case as described in the Prospectus; and
there are no (A) existing preemptive rights under any West Virginia
Subsidiary's articles of incorporation or code of regulations, or other
22
organizational documents, or applicable law or (B) similar rights that
entitle or will entitle any person to acquire any shares of any West
Virginia Subsidiary;
(iii) PNGI Charles Town holds a valid and existing
license (the "West Virginia License") under the West Virginia Racing
Act to conduct thoroughbred horse racing with pari-mutuel wagering in
the manner described in the Prospectus; PNGI Charles Town has applied
for a license under the West Virginia Racetrack Video Lottery Act to
operate video gaming machines in the manner described in the
Prospectus; such counsel has no reason to believe that any of the
Gaming Authorities in West Virginia is considering modifying,
suspending, revoking or not granting renewal of the West Virginia
License, and, to such counsel's knowledge, neither of such Gaming
Authorities nor any other governmental agency is investigating the
Company or any of its Subsidiaries or related parties or any director
or executive officer of the Company or any of its Subsidiaries; and
except as disclosed in the Prospectus, to the best knowledge of such
counsel, no change in any laws or regulations is pending which could
reasonably be expected to be adopted and if adopted, could reasonably
be expected to have, individually or in the aggregate with all such
changes, a Material Adverse Effect;
(iv) The Underwriters are not required to be
licensed or approved by the West Virginia Racing Commission or the
Lottery Commission as a result of the execution of this Agreement or
the consummation of the transactions contemplated hereby;
(v) to the knowledge of such counsel, there are no
legal or governmental proceedings pending or threatened against the
Company or any of the West Virginia Subsidiaries or to which the
Company or any of the West Virginia Subsidiaries, or any of their
respective properties, is subject, that are required to be described in
the Registration Statement or the Prospectus (or any Exchange Act
Filing) but are not described as required; there are no statutes or
regulations of the State of West Virginia or agreements, contracts,
indentures, leases or other instruments to which any of the West
Virginia Subsidiaries is a party that are required to be described in
the Registration Statement or the Prospectus (or any Exchange Act
Filing) or to be filed as an exhibit to the Registration Statement (or
any Exchange Act Filing) that are not described or filed as required by
the Act; the statements in the Prospectus under the headings "Risk
Factors - Future Development of Charles Town Facility," "Risk Factors -
Regulation and Taxation," "Business - Racing and Wagering Operations -
Live Racing," "Business - Regulation and Taxation" and "Business -
Legal Proceedings," insofar as such statements purport to summarize
certain provisions of the requirements under the West Virginia Racing
Act, the West Virginia Racetrack Video Lottery Act and any other laws
or regulation of the State of West Virginia, or certain agreements or
legal proceedings to which the Company or any of the West Virginia
Subsidiaries is a party, fairly summarize the matters therein
described; and the conduct of the business of the Company and the
Subsidiaries is not subject to any material racing, wagering or gaming
23
law or regulation of the State of West Virginia that is not described
in the Prospectus under "Business Regulation and Taxation";
(vi) no consent, approval, authorization or order
of, or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency or official of
the State of West Virginia is required for the issuance, offer, sale or
delivery of the Securities, the execution, delivery or performance of
this Agreement by the Company or the consummation of the transactions
contemplated hereby, except such approvals (specified in such opinion)
as have been obtained;
(vii) none of the issuance, offer, sale or delivery
of the Securities, the execution, delivery or performance of this
Agreement by the Company or the consummation of the other transactions
contemplated hereby (A) conflicts or will conflict with or constitutes
or will constitute a breach of, or a default under, the articles of
incorporation or code of regulations, or other organizational
documents, of the West Virginia Subsidiaries, (B) conflicts or will
conflict with or constitutes or will constitute a breach of, or a
default under any agreement, indenture, lease or other instrument to
which the Company or any of the West Virginia Subsidiaries is a party
or by which any of them or any of their respective properties may be
bound and that is an exhibit to the Registration Statement (or any
Exchange Act Filing) or known to such counsel, (C) violates or will
violate any existing statute, law, regulation, Permit or filing or
judgment, injunction, order or decree in each case known to such
counsel and applicable to the Company or any of the West Virginia
Subsidiaries or any of their respective properties or (D) will result
in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company or any of the West Virginia
Subsidiaries pursuant to the terms of any agreement or instrument to
which any of them is a party or by which any of them may be bound or to
which any of the property or assets of any of them is subject and that
is an exhibit to the Registration Statement (or any Exchange Act
Filing) or known to such counsel; and
(viii) neither the Company nor any of the West
Virginia Subsidiaries is (i) in violation of its articles of
incorporation or by-laws or other organizational documents or (ii) to
the knowledge of such counsel, after due inquiry, in default in any
material respect in the performance of any obligation, agreement or
condition contained in any bond, debenture, note or any other evidence
of indebtedness or in any agreement, indenture, lease or other
instrument to which the Company or any of the West Virginia
Subsidiaries is a party or by which any of them or any of their
respective properties may be bound that is an exhibit to the
Registration Statement (or any Exchange Act Filing) or known to such
counsel, except in each case as may be disclosed in the Registration
Statement and the Prospectus.
In rendering such opinion, such counsel may rely (A) as to matters involving the
application of laws of any jurisdiction other than the State of West Virginia or
the United States, to the extent they deem proper and specified in such opinion,
upon the opinion of other counsel of good standing whom they believe to be
24
reliable and who are satisfactory to counsel for the Underwriters and (B) as to
matters of fact, to the extent they deem proper, on certificates of responsible
officers of the Company and public officials. References to the Prospectus in
this paragraph (d) include any supplements thereto at the Closing Date.
(e) The Selling Stockholders shall have furnished to the
Representatives the opinion of Mesirov Gelman Jaffe Cramer & Jamieson, counsel
for the Selling Stockholders, dated the Closing Date, to the effect that:
(i) each of this Agreement, the Custody Agreement
and the Power-of-Attorney has been duly authorized, executed and
delivered by the Selling Stockholders, the Custody Agreement is valid
and binding on the Selling Stockholders and each Selling Stockholder
has full legal right and authority to sell, transfer and deliver in the
manner provided in this Agreement and the Custody Agreement the
Securities being sold by such Selling Stockholder hereunder;
(ii) the delivery by each Selling Stockholder to
the several Underwriters of certificates for the Securities being sold
hereunder by such Selling Stockholder against payment therefor as
provided herein, will pass good and marketable title to such Securities
to the several Underwriters, free and clear of all liens, encumbrances,
equities and claims whatsoever;
(iii) no consent, approval, authorization or order
of, or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency or official is
required for the sale or delivery of the Securities to be sold by the
Selling Stockholders, the execution, delivery or performance of this
Agreement by the Selling Stockholders or the consummation by any
Selling Stockholder of the transactions contemplated hereby, except
such as have been obtained under the Act and such other approvals
(specified in such opinion) as have been obtained; and
(iv) neither the sale of the Securities being sold
by any Selling Stockholder nor the consummation of any other of the
transactions herein contemplated by any Selling Stockholder or the
fulfillment of the terms hereof by any Selling Stockholder will
conflict with, result in a breach or violation of, or constitute a
default under the charter, by-laws or trust agreement of the Selling
Stockholder, if applicable, or any law, or the terms of any indenture
or other agreement or instrument known to such counsel and to which any
Selling Stockholder is a party or bound, or any judgment, order or
decree known to such counsel to be applicable to any Selling
Stockholder of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over any Selling
Stockholder.
In rendering such opinion, such counsel may rely (A) as to matters involving the
application of laws of any jurisdiction other than the Commonwealth of
Pennsylvania or the United States, to the extent they deem proper and specified
in such opinion, upon the opinion of other counsel of good standing whom they
believe to be reliable and who are satisfactory to counsel for the Underwriters,
and (B) as to matters of fact, to the extent they deem proper, on certificates
of the Selling Stockholders (and/or its responsible officers, if any) and public
officials.
25
(f) The Representatives shall have received from Cleary,
Gottlieb, Steen & Hamilton, counsel for the Underwriters, such opinion or
opinions, dated the Closing Date, with respect to the issuance and sale of the
Securities, the Registration Statement, the Prospectus (together with any
supplement thereto) and other related matters as the Representatives may
reasonably require, and the Company and each Selling Stockholder shall have
furnished to such counsel such documents as they request for the purpose of
enabling them to pass upon such matters.
(g) The Company shall have furnished to the Representatives a
certificate of the Company, signed by the Chairman of the Board or the President
and the principal financial or accounting officer of the Company in their
capacities as such officers, dated the Closing Date, to the effect that the
signers of such certificate have carefully examined the Registration Statement,
the Prospectus, any supplement to the Prospectus and this Agreement and that:
(i) the representations and warranties of the
Company in this Agreement are true and correct in all material respects
on and as of the Closing Date with the same effect as if made on the
Closing Date and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied
at or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that
purpose have been instituted or, to the Company's knowledge,
threatened; and
(iii) since the date of the most recent financial
statements included in the Prospectus (exclusive of any supplement
thereto), there has been no material adverse change in the condition
(financial or other), earnings, business or properties of the Company
and its subsidiaries, whether or not arising from transactions in the
ordinary course of business, except as set forth in or contemplated in
the Prospectus (exclusive of any supplement thereto).
(h) Each Selling Stockholder shall have furnished to the
Representatives a certificate, signed by such Selling Stockholder, dated the
Closing Date, to the effect that the signers of such certificate have carefully
examined the Registration Statement, the Prospectus, any supplement to the
Prospectus and this Agreement and that the representations and warranties of
such Selling Stockholder in this Agreement are true and correct in all material
respects on and as of the Closing Date to the same effect as if made on the
Closing Date.
(i) At the Execution Time and at the Closing Date, BDO
Seidman, LLP shall have furnished to the Representatives a letter or letters,
dated respectively as of the Execution Time and as of the Closing Date, in form
and substance satisfactory to the Representatives, confirming that they are
independent accountants within the meaning of the Act and the Exchange Act and
the respective applicable published rules and regulations thereunder and stating
in effect that:
26
(i) in their opinion the audited financial
statements and financial statement schedules of the Company and its
consolidated subsidiaries and pro forma financial statements included
or incorporated in the Registration Statement and the Prospectus and
reported on by them comply in form in all material respects with the
applicable accounting requirements of the Act and the Exchange Act and
the related published rules and regulations thereunder;
(ii) on the basis of a reading of the latest
unaudited financial statements made available by the Company and its
subsidiaries; their limited review in accordance with standards
established by the American Institute of Certified Public Accountants
of the unaudited interim financial information as indicated in their
reports incorporated in the Registration Statement and the Prospectus;
carrying out certain specified procedures (but not an examination in
accordance with generally accepted auditing standards) which would not
necessarily reveal matters of significance with respect to the comments
set forth in such letter; a reading of the minutes of the meetings of
the stockholders, directors and Audit and Compensation committees of
the Company; and inquiries of certain officials of the Company who have
responsibility for financial and accounting matters of the Company and
its subsidiaries as to transactions and events subsequent to December
31, 1995, nothing came to their attention which caused them to believe
that:
(1) any unaudited financial statements included
or incorporated in the Registration Statement and the
Prospectus do not comply in form in all material respects with
applicable accounting requirements and with the published
rules and regulations of the Commission with respect to
financial statements included or incorporated in quarterly
reports on Form 10-Q under the Exchange Act; and said
unaudited financial statements are not in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial
statements included or incorporated in the Registration
Statement and the Prospectus; or
(2) with respect to the period subsequent to
September 30, 1996, there were any changes, at a specified
date not more than three business days prior to the date of
the letter, in the long-term debt and capital lease
obligations, net of current maturities, of the Company and its
subsidiaries or capital stock of the Company or decreases in
the total shareholders' equity of the Company as compared with
the amounts shown on the September 30, 1996 consolidated
balance sheet included or incorporated in the Registration
Statement and the Prospectus, or for the period from October
1, 1996 to such specified date there were any decreases, as
compared with the corresponding period in the preceding year
in pari-mutuel revenues, total revenues or income before
income taxes and extraordinary items or in total or per share
amounts of net income of the Company and its subsidiaries,
except in all instances for changes or decreases set forth in
such letter, in which case the letter shall be accompanied by
an explanation by the Company as to the significance thereof
unless said explanation is not deemed necessary by the
Representatives;
27
(iii) they have performed certain other specified
procedures as a result of which they determined that certain
information of an accounting, financial or statistical nature (which is
limited to accounting, financial or statistical information derived
from the general accounting records of the Company and its
subsidiaries) set forth in the Registration Statement and the
Prospectus, including the information set forth under the captions
"Prospectus Summary," "Risk Factors," "Capitalization," "Pro Forma
Consolidated Financial Statements," "Selected Consolidated Financial
Data," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and "Description of Capital Stock"
in the Prospectus, the information included or incorporated in Items 1,
2, 6, 7, 11 and 13 of the Company's Annual Report on Form 10-K,
incorporated in the Registration Statement and the Prospectus, the
information included in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included or incorporated
in the Company's Quarterly Reports on Form 10-Q, incorporated in the
Registration Statement and the Prospectus, and the information included
or incorporated in the Company's Current Report on Form 8-K dated
February __, 1997, incorporated in the Registration Statement and the
Prospectus, agrees with the accounting records of the Company and its
subsidiaries, excluding any questions of legal interpretation;
(iv) on the basis of a reading of the unaudited pro
forma financial statements included or incorporated in the Registration
Statement and the Prospectus (the "pro forma financial statements");
carrying out certain specified procedures; inquiries of certain
officials of the Company, Plains Company, Charles Town Racing Limited
Partnership and Charles Town Races, Inc. who have responsibility for
financial and accounting matters; and proving the arithmetic accuracy
of the application of the pro forma adjustments to the historical
amounts in the pro forma financial statements, nothing came to their
attention which caused them to believe that the pro forma financial
statements do not comply in form in all material respects with the
applicable accounting requirements of Rule 11-02 of Regulation S-X or
that the pro forma adjustments have not been properly applied to the
historical amounts in the compilation of such statements;
(v) on the basis of a reading of the unaudited
financial statements of Plains Company and its subsidiaries as of
November 27, 1996 reviewed by Rossi & Co. and the latest unaudited
financial statements made available by Plains Company and its
subsidiaries; carrying out certain specified procedures (but not an
examination in accordance with generally accepted auditing standards)
which would not necessarily reveal matters of significance with respect
to the comments set forth in such letter; a reading of the minutes of
the meetings of the stockholders and directors of Plains Company; and
inquiries of certain officials of Plains Company who have
responsibility for financial and accounting matters of Plains Company
and its subsidiaries as to transactions and events subsequent to
November 27, 1996, nothing came to their attention which caused them to
believe that:
(1) with respect to the period subsequent to
November 27, 1996, there were any changes, at a specified date
28
not more than three business days prior to the date of the
letter, in the long-term liabilities, net of current portion,
of Plains Company and its subsidiaries or capital stock of
Plains Company or decreases in the total shareholders' equity
of Plains Company as compared with the amounts shown on the
November 27, 1996 consolidated balance sheet of Plains Company
attached to such letter, or for the period from October 1,
1996 to such specified date there were any decreases, as
compared with the corresponding period in the preceding year
in pari-mutuel commissions and brokerage, net, total operating
income or income before provision for income taxes or in net
income of Plains Company and its subsidiaries, except in all
instances for changes or decreases set forth in such letter,
in which case the letter shall be accompanied by an
explanation by the Company as to the significance thereof
unless said explanation is not deemed necessary by the
Representatives;
(vii) they have performed certain other specified
procedures with respect to the audited and unaudited financial
statements and financial statement schedules of Plains Company included
or incorporated in the Registration Statement and the Prospectus, the
unaudited financial statements of Pocono Downs, Inc. and its
subsidiaries and the audited and unaudited financial statements and
financial statement schedules of Charles Town Racing Limited
Partnership and Charles Town Races, Inc. included or incorporated in
the Registration Statement and the Prospectus for the purpose of (A)
determining whether such financial statements have been prepared in
accordance with generally accepted accounting principles and the
applicable accounting requirements of the Act and the Exchange Act and
the related published rules and regulations thereunder and, if audited,
audited in accordance with generally accepted auditing standards and
(B) identifying any assets or liabilities not recorded or disclosed on
certain of such financial statements.
References to the Prospectus in this paragraph (i) include any
supplement thereto at the date of the letter.
(j) At the Execution Time and at the Closing Date, Robert
Rossi & Co. shall have furnished to the Representatives a letter or letters,
dated respectively as of the Execution Time and as of the Closing Date, in form
and substance satisfactory to the Representatives, confirming that they are
independent accountants with respect to Plains Company and its subsidiaries
under Rule 101 of the AICPA's Code of Professional Conduct and its
interpretations and rulings thereunder and stating in effect that:
(i) in their opinion the audited financial
statements of Plains Company and its consolidated subsidiaries included
in the Registration Statement and the Prospectus and reported on by
them comply in form in all material respects with the applicable
accounting requirements of generally accepted accounting principles;
(ii) on the basis of a reading of the latest
unaudited financial statements made available by Plains Company and its
subsidiaries; carrying out certain specified procedures (but not an
29
examination in accordance with generally accepted auditing standards)
which would not necessarily reveal matters of significance with respect
to the comments set forth in such letter; a reading of the minutes of
the meetings of the stockholders and directors of Plains Company; and
inquiries of certain officials of Plains Company who have
responsibility for financial and accounting matters of Plains Company
and its subsidiaries as to transactions and events subsequent to
December 31, 1995, nothing came to their attention which caused them to
believe that:
(1) any unaudited financial statements included
in the Registration Statement and the Prospectus are not in
conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the
audited financial statements included in the Registration
Statement and the Prospectus;
(2) the unaudited financial statements of
Plains Company and its consolidated subsidiaries as of the
period ended November 27, 1996 attached to such letter are not
in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the
audited financial statements included in the Registration
Statement and the Prospectus; or
(3) with respect to the period from September
30, 1996 to November 27, 1996, there were any changes in the
long-term liabilities, net of current portion, of Plains
Company and its subsidiaries or capital stock of Plains
Company or decreases in the total shareholders' equity of
Plains Company as compared with the amounts shown on the
September 30, 1996 consolidated balance sheet included in the
Registration Statement and the Prospectus, or for the period
from October 1, 1996 to October 31, 1996 there were any
decreases, as compared with the corresponding period in the
preceding year in pari-mutuel commissions and brokerage, net,
total operating income or income before provision for income
taxes or in net income of Plains Company and its subsidiaries,
except in all instances for changes or decreases set forth in
such letter, in which case the letter shall be accompanied by
an explanation by the Company as to the significance thereof
unless said explanation is not deemed necessary by the
Representatives; and
(iii) they have performed certain other specified
procedures as a result of which they determined that certain
information of an accounting, financial or statistical nature (which is
limited to accounting, financial or statistical information derived
from the general accounting records of Plains Company and its
subsidiaries) set forth in the Registration Statement and the
Prospectus, including the information set forth under the captions
"Prospectus Summary," "Risk Factors," "Capitalization," "Pro Forma
Consolidated Financial Statements," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business" in the Prospectus, and the information included or
incorporated in the Company's Current Report on Form 8-K dated February
__, 1997, incorporated in the Registration Statement and the
30
Prospectus, agrees with the accounting records of Plains Company and
its subsidiaries, excluding any questions of legal interpretation.
References to the Prospectus in this paragraph (j) include any
supplement thereto at the date of the letter.
(k) At the Execution Time and at the Closing Date, Leonard
Miller & Associates shall have furnished to the Representatives a letter or
letters, dated respectively as of the Execution Time and as of the Closing Date,
in form and substance satisfactory to the Representatives, confirming that they
are independent accountants within the meaning of the Act and the Exchange Act
and the respective applicable published rules and regulations thereunder and
stating in effect that:
(i) in their opinion the audited combined financial
statements of Charles Town included in the Registration Statement and
the Prospectus and reported on by them comply in form in all material
respects with the applicable accounting requirements of the Act and the
Exchange Act and the related published rules and regulations
thereunder;
(ii) on the basis of a reading of the latest
unaudited financial statements made available by Charles Town; carrying
out certain specified procedures (but not an examination in accordance
with generally accepted auditing standards) which would not necessarily
reveal matters of significance with respect to the comments set forth
in such letter; a reading of the minutes of the meetings of the
stockholders and directors committees of Charles Town; and inquiries of
certain officials of Charles Town who have responsibility for financial
and accounting matters of Charles Town as to transactions and events
subsequent to December 31, 1995, nothing came to their attention which
caused them to believe that:
(1) any unaudited financial statements included
in the Registration Statement and the Prospectus do not comply
in form in all material respects with applicable accounting
requirements and with the published rules and regulations of
the Commission with respect to financial statements included
or incorporated in quarterly reports on Form 10-Q under the
Exchange Act; and said unaudited financial statements are not
in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the
audited financial statements included in the Registration
Statement and the Prospectus; or
(2) with respect to the period subsequent to
September 30, 1996, there were any changes, at a specified
date not more than three business days prior to the date of
the letter, in notes payable - partners and long-term debt,
less current portion, of Charles Town or capital stock of
Charles Town or decreases in the total equity of Charles Town
as compared with the amounts shown on the September 30, 1996
consolidated balance sheet included in the Registration
Statement and the Prospectus, or for the period from October
1, 1996 to such specified date there were any decreases, as
compared with the corresponding period in the preceding year
in pari-mutuel revenues, total revenues or income before
31
income taxes and extraordinary items or in net income of
Charles Town and its subsidiaries, except in all instances for
changes or decreases set forth in such letter, in which case
the letter shall be accompanied by an explanation by the
Company as to the significance thereof unless said explanation
is not deemed necessary by the Representatives; and
(iii) they have performed certain other specified
procedures as a result of which they determined that certain
information of an accounting, financial or statistical nature (which is
limited to accounting, financial or statistical information derived
from the general accounting records of Charles Town and its
subsidiaries) set forth in the Registration Statement and the
Prospectus, including the information set forth under the captions
"Prospectus Summary," "Risk Factors," "Capitalization," "Pro Forma
Consolidated Financial Statements," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business" in the Prospectus, and the information included or
incorporated in the Company's Current Report on Form 8-K dated February
__, 1997, incorporated in the Registration Statement and the
Prospectus, agrees with the accounting records of Charles Town and its
subsidiaries, excluding any questions of legal interpretation.
References to the Prospectus in this paragraph (k) include any
supplement thereto at the date of the letter.
(l) Subsequent to the Execution Time or, if earlier, the dates
as of which information is given in the Registration Statement (exclusive of any
amendment thereof) and the Prospectus (exclusive of any supplement thereto),
there shall not have been (i) any change or decrease specified in the letter or
letters referred to in paragraphs (i), (j) or (k) of this Section 6 or (ii) any
change, or any development involving a prospective change, in or affecting the
business or properties of the Company and its subsidiaries the effect of which,
in any case referred to in clause (i) or (ii) above, is, in the judgment of the
Representatives, so material and adverse as to make it impractical or
inadvisable to proceed with the offering or delivery of the Securities as
contemplated by the Registration Statement (exclusive of any amendment thereof)
and the Prospectus (exclusive of any supplement thereto).
(m) At the Execution Time, the Company shall have furnished to
the Representatives a letter substantially in the form of Exhibit A hereto from
each officer and director of the Company and the other persons listed in
Schedule V addressed to the Representatives, in which each such person agrees
not to (A) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or indirectly,
or announce the offering of, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock (whether such
shares or any such securities are now owned by such person or are hereafter
acquired) or (B) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (A) or (B)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise, for a period of 120 days following the Execution Time without
32
the prior written consent of the Representatives, other than shares of Common
Stock disposed of as bona fide gifts.
(n) Prior to the Closing Date, the Company and each Selling
Stockholder shall have furnished to the Representatives such further
information, certificates and documents as the Representatives may reasonably
request.
If any of the conditions specified in this Section 6 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material respects reasonably
satisfactory in form and substance to the Representatives and counsel for the
Underwriters, this Agreement and all obligations of the Underwriters hereunder
may be canceled at, or at any time prior to, the Closing Date by the
Representatives. Notice of such cancellation shall be given to the Company and
each Selling Stockholder in writing or by telephone or telegraph confirmed in
writing.
7. Reimbursement of Underwriters' Expenses. If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 6 hereof is not satisfied,
because of any termination pursuant to Section 10 hereof or because of any
refusal, inability or failure on the part of the Company or any Selling
Stockholder to perform any agreement herein or comply with any provision hereof
other than by reason of a default by any of the Underwriters, the Company will
reimburse the Underwriters severally upon demand for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
incurred by them in connection with the proposed purchase and sale of the
Securities. If the Company is required to make any payments to the Underwriters
under this Section 7 because of any Selling Stockholder's refusal, inability or
failure to satisfy any condition to the obligations of the Underwriters set
forth in Section 6, the Selling Stockholder shall reimburse the Company on
demand for all amounts so paid.
8. Indemnification and Contribution. (a) The Company agrees to
indemnify and hold harmless each Underwriter and each person who controls any
Underwriter within the meaning of either the Act or the Exchange Act against any
and all losses, claims, damages or liabilities, joint or several, to which they
or any of them may become subject under the Act, the Exchange Act or other
federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement for the
registration of the Securities as originally filed or in any amendment thereof,
or in any Preliminary Prospectus or the Prospectus, or in any amendment thereof
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and agrees to reimburse
each such indemnified party, as incurred, for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
33
therein in reliance upon and in conformity with written information furnished to
the Company by or on behalf of any Underwriter through the Representatives
specifically for inclusion therein. This indemnity agreement will be in addition
to any liability which the Company may otherwise have.
(b) Each Selling Stockholder severally agrees to indemnify and
hold harmless the Company, each of its directors, each of its officers who signs
the Registration Statement, each Underwriter, the directors, officers, employees
and agents of each Underwriter and each person who controls the Company or any
Underwriter within the meaning of either the Act or the Exchange Act and each
other Selling Stockholder to the same extent as the foregoing indemnity from the
Company to each Underwriter, but only with reference to written information
furnished to the Company by or on behalf of such Selling Stockholder
specifically for use in the preparation of the documents referred to in the
foregoing indemnity. In no event, however, shall the liability of a Selling
Stockholder for indemnification under this Section 8(b) exceed the proceeds (net
of underwriting discounts and commissions) from the Securities sold by such
Selling Stockholder in this offering. This indemnity agreement will be in
addition to any liability which any Selling Stockholder may otherwise have.
(c) Each Underwriter severally agrees to indemnify and hold
harmless the Company, each of its directors, each of its officers who signs the
Registration Statement, and each person who controls the Company within the
meaning of either the Act or the Exchange Act and each Selling Stockholder, to
the same extent as the foregoing indemnity from the Company to each Underwriter,
but only with reference to written information relating to such Underwriter
furnished to the Company by or on behalf of such Underwriter through the
Representatives specifically for inclusion in the documents referred to in the
foregoing indemnity. This indemnity agreement will be in addition to any
liability which any Underwriter may otherwise have. The Company and each Selling
Stockholder acknowledge that the statements set forth in the last paragraph of
the cover page and the third paragraph under the heading "Underwriting" in any
Preliminary Prospectus and the Prospectus constitute the only information
furnished in writing by or on behalf of the several Underwriters for inclusion
in any Preliminary Prospectus or the Prospectus, and the Representatives, in
their capacities as such, confirm that such statements are correct.
(d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party (i)
will not relieve it from liability under paragraph (a), (b) or (c) above unless
and to the extent it did not otherwise learn of such action and such failure
results in the forfeiture by the indemnifying party of substantial rights and
defenses and (ii) will not, in any event, relieve the indemnifying party from
any obligations to any indemnified party other than the indemnification
obligation provided in paragraph (a), (b) or (c) above. The indemnifying party
shall be entitled to appoint counsel of the indemnifying party's choice at the
indemnifying party's expense to represent the indemnified party in any action
34
for which indemnification is sought (in which case the indemnifying party shall
not thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
provided, however, that such counsel shall be satisfactory to the indemnified
party. Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party shall have
the right to employ separate counsel (including local counsel), and the
indemnifying party shall bear the reasonable fees, costs and expenses of such
separate counsel if (i) the use of counsel chosen by the indemnifying party to
represent the indemnified party would present such counsel with a conflict of
interest, (ii) the actual or potential defendants in, or targets of, any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, (iii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of the institution of such action or (iv) the indemnifying party
shall authorize the indemnified party to employ separate counsel at the expense
of the indemnifying party. An indemnifying party will not, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any pending or threatened claim,
action, suit or proceeding in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified parties are actual or
potential parties to such claim or action) unless such settlement, compromise or
consent includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding.
(e) In the event that the indemnity provided in paragraph (a),
(b) or (c) of this Section 8 is unavailable to or insufficient to hold harmless
an indemnified party for any reason, the Company, the Selling Stockholders and
the Underwriters agree to contribute to the aggregate losses, claims, damages
and liabilities (including legal or other expenses reasonably incurred in
connection with investigating or defending same) (collectively "Losses") to
which the Company, one or more of the Selling Stockholders and one or more of
the Underwriters may be subject in such proportion as is appropriate to reflect
the relative benefits received by the Company, by the Selling Stockholders and
by the Underwriters from the offering of the Securities; provided, however, that
in no case shall any Underwriter (except as may be provided in any agreement
among underwriters relating to the offering of the Securities) be responsible
for any amount in excess of the underwriting discount or commission applicable
to the Securities purchased by such Underwriter hereunder; provided, further,
that no Selling Stockholder shall be required to contribute any amount in excess
of the proceeds (net of underwriting discounts and commissions) from the
Securities sold by such Selling Stockholder in this offering. If the allocation
provided by the immediately preceding sentence is unavailable for any reason,
the Company, the Selling Stockholders and the Underwriters shall contribute in
such proportion as is appropriate to reflect not only such relative benefits but
also the relative fault of the Company, of the Selling Stockholders and of the
Underwriters in connection with the statements or omissions which resulted in
such Losses as well as any other relevant equitable considerations. Benefits
received by the Company and by the Selling Stockholders shall be deemed to be
equal to the total net proceeds from the offering (before deducting expenses)
received by each of them, and benefits received by the Underwriters shall be
deemed to be equal to the total underwriting discounts and commissions, in each
case as set forth on the cover page of the Prospectus. Relative fault shall be
35
determined by reference to whether any alleged untrue statement or omission
relates to information provided by the Company, the Selling Stockholders or the
Underwriters. The Company, the Selling Stockholders and the Underwriters agree
that it would not be just and equitable if contribution were determined by pro
rata allocation or any other method of allocation which does not take account of
the equitable considerations referred to above. Notwithstanding the provisions
of this paragraph (e), no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. For purposes
of this Section 8, each person who controls an Underwriter within the meaning of
either the Act or the Exchange Act and each director, officer, employee and
agent of an Underwriter shall have the same rights to contribution as such
Underwriter, and each person who controls the Company within the meaning of
either the Act or the Exchange Act, each officer of the Company who shall have
signed the Registration Statement and each director of the Company shall have
the same rights to contribution as the Company, subject in each case to the
applicable terms and provisions of this paragraph (e).
9. Default by an Underwriter. If any one or more Underwriters
shall fail to purchase and pay for any of the Securities agreed to be purchased
by such Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of Securities set
forth opposite their names in Schedule I hereto bears to the aggregate amount of
Securities set forth opposite the names of all the remaining Underwriters) the
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase; provided, however, that in the event that the aggregate amount of
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase shall exceed 10% of the aggregate amount of Securities set forth in
Schedule I hereto, the remaining Underwriters shall have the right to purchase
all, but shall not be under any obligation to purchase any, of the Securities,
and if such nondefaulting Underwriters do not purchase all the Securities, this
Agreement will terminate without liability to any nondefaulting Underwriter, the
Selling Stockholders or the Company. In the event of a default by any
Underwriter as set forth in this Section 9, the Closing Date shall be postponed
for such period, not exceeding seven days, as the Representatives shall
determine in order that the required changes in the Registration Statement and
the Prospectus or in any other documents or arrangements may be effected.
Nothing contained in this Agreement shall relieve any defaulting Underwriter of
its liability, if any, to the Company, the Selling Stockholders and any
nondefaulting Underwriter for damages occasioned by its default hereunder.
10. Termination. This Agreement shall be subject to
termination in the absolute discretion of the Representatives, by notice given
to the Company prior to delivery of and payment for the Securities, if prior to
such time (i) trading in the Company's Common Stock shall have been suspended by
the Commission or the National Association of Securities Dealers Automated
Quotation National Market System or trading in securities generally on the New
York Stock Exchange or the National Association of Securities Dealers Automated
Quotation National Market System shall have been suspended or limited or minimum
prices shall have been established on such Exchange or Market System, (ii) a
banking moratorium shall have been declared either by federal or New York State
36
authorities or (iii) there shall have occurred any outbreak or escalation of
hostilities, declaration by the United States of a national emergency or war or
other calamity or crisis the effect of which on financial markets is such as to
make it, in the judgment of the Representatives, impracticable or inadvisable to
proceed with the offering or delivery of the Securities as contemplated by the
Prospectus (exclusive of any supplement thereto).
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers, of each Selling Stockholder and of the Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter,
any Selling Stockholder or the Company or any of the officers, directors or
controlling persons referred to in Section 8 hereof, and will survive delivery
of and payment for the Securities. The provisions of Sections 7 and 8 hereof
shall survive the termination or cancellation of this Agreement.
12. Notices. All communications hereunder will be in writing
and effective only on receipt, and, if sent to the Representatives, will be
mailed, delivered or telegraphed and confirmed to them, care of Salomon Brothers
Inc, at Seven World Trade Center, New York, New York, 10048; or, if sent to the
Company, will be mailed, delivered or telegraphed and confirmed to it at 825
Berkshire Boulevard, Suite 203, Wyomissing, Pennsylvania, 19610, attention of
its Chairman; or if sent to the Selling Stockholders, will be mailed, delivered
or telegraphed and confirmed to them at the addresses set forth in Schedule II
hereto.
13. Successors. This Agreement will inure to the benefit of
and be binding upon the parties hereto and their respective successors and the
officers and directors and controlling persons referred to in Section 8 hereof,
and no other person will have any right or obligation hereunder.
14. Applicable Law. This Agreement will be governed by and
construed in accordance with the laws of the State of New York.
37
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicate hereof,
whereupon this letter and your acceptance shall represent a binding agreement
among the Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
Penn National Gaming, Inc.
By:
-----------------------------------
Name:
Title:
Carlino Family Trust
By:
-----------------------------------
Name:
Title:
--------------------------------------
Peter M. Carlino
Carlino Financial Corporation
By:
-----------------------------------
Name:
Title:
--------------------------------------
David A. Handler
38
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
Salomon Brothers Inc
Gerard Klauer Mattison & Co., Inc.
Jefferies & Company, Inc.
By: Salomon Brothers Inc
By:
------------------------------------
Name:
Title:
For themselves and the other
several Underwriters named in
Schedule I to the foregoing
Agreement.
39
SCHEDULE I
Number of Shares
of Securities
Underwriters to be Purchased
- ------------ ----------------
Salomon Brothers Inc ........................................................
Gerard Klauer Mattison & Co., Inc. ..........................................
Jefferies & Company, Inc. ...................................................
---------
Total .............................................................. 2,300,000
=========
40
SCHEDULE II
Number of Shares of
Selling Stockholders Securities to be Sold
- -------------------- ---------------------
Carlino Family Trust ........................................................ 255,000
c/o Penn National Gaming, Inc.
825 Berkshire Boulevard, Suite 203
Wyomissing, Pennsylvania 19610
Peter M. Carlino............................................................. 200,000
c/o Penn National Gaming, Inc.
825 Berkshire Boulevard, Suite 203
Wyomissing, Pennsylvania 19610
Carlino Financial Corporation................................................ 95,000
c/o Penn National Gaming, Inc.
825 Berkshire Boulevard, Suite 203
Wyomissing, Pennsylvania 19610
David A. Handler............................................................. 25,000
c/o Penn National Gaming, Inc.
825 Berkshire Boulevard, Suite 203
Wyomissing, Pennsylvania 19610 -------
Total .............................................................. 575,000
=======
41
SCHEDULE III
Maximum Number
of Shares of Option
Name Securities to be Sold
- ---- ---------------------
Penn National Gaming, Inc. ................................................... 258,750
Carlino Family Trust ......................................................... 40,000
Peter M. Carlino.............................................................. 31,350
Carlino Financial Corporation................................................. 14,900
-------
Total ............................................................... 345,000
=======
42
SCHEDULE IV
Mountainview Thoroughbred Racing Association
Pennsylvania National Turf Club, Inc.
Penn National Speedway, Inc.
Sterling Aviation, Inc.
Penn National Holding Company
Penn National Gaming of Indiana, Inc.
PNGI Pocono, Inc.
Plains Company
Pocono Downs, Inc.
The Downs Off-Track Wagering, Inc.
Northeast Concessions, Inc.
Audio Video Concepts, Inc.
Mill Creek Land, Inc.
Backside, Inc.
Peach Street Ltd. Partnership
Lehigh Off-Track Wagering, L.P.
Penn National Gaming of West Virginia, Inc.
PNGI Charles Town Gaming Limited Liability Company
43
SCHEDULE V
Peter M. Carlino
William J. Bork
Robert S. Ippolito
Philip T. O'Hara, Jr.
Harold Cramer
Robert P. Levy
John M. Jacquemin
Peter D. Carlino
David E. Carlino
Richard J. Carlino
Susan F. Harrington
Anne Irwin
Robert Carlino
Stephen Carlino
Rosina Gilbert
44
EXHIBIT A
[Letterhead of officer, director or shareholder of
Penn National Gaming, Inc.]
Penn National Gaming, Inc.
Public Offering of Common Stock
, 1997
Salomon Brothers Inc
Gerard Klauer Mattison & Co., Inc.
Jefferies & Company, Inc.
As Representatives of the several Underwriters
c/o Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
Ladies and Gentlemen:
This letter is being delivered to you in connection with the
proposed Underwriting Agreement (the "Underwriting Agreement"), among Penn
National Gaming, Inc., a Pennsylvania corporation (the "Company"), certain
Selling Stockholders named therein and each of you as representatives of a group
of Underwriters named therein, relating to an underwritten public offering of
Common Stock, $.01 par value (the "Common Stock"), of the Company.
In order to induce you and the other Underwriters to enter
into the Underwriting Agreement, the undersigned agrees not to (A) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly, or
announce the offering of, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock (whether such
shares or any such securities are now owned by the undersigned or are hereafter
acquired) or (B) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (A) or (B)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise, for a period of 120 days following the day on which the
Underwriting Agreement is executed without your prior written consent, other
than shares of Common Stock disposed of as bona fide gifts. In addition, the
undersigned agrees that, without the prior written consent of the
Representatives, the undersigned will not, during the period of 120 days
following the Execution Time, make any demand for, or exercise any right with
respect to, the registration of any shares of Common Stock or any security
convertible into or exercisable or exchangeable for Common Stock.
45
If for any reason the Underwriting Agreement shall be
terminated prior to the Closing Date (as defined in the Underwriting Agreement),
the agreement set forth above shall likewise be terminated.
Yours very truly,
[Signature of officer,
director or shareholder]
[Name and address of
officer, director or shareholder]
46
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Penn National Gaming, Inc.
and Subsidiaries
425 Berkshire Boulevard
Wyomissing, Pennsylvania
We hereby consent to the incorporation by reference and inclusion in
the Prospectus constituting a part of Amendment No. 2 to the Registration
Statement on Form S-3 of our report dated February 2, 1996, relating to the
consolidated financial statements of Penn National Gaming, Inc. and Subsidiaries
as of December 31, 1994 and 1995, and for each of the years in the three-year
period ended December 31, 1995.
We also consent to the reference to us under the caption "Experts" in
the Prospectus.
/s/ BDO Seidman, LLP
--------------------------------
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
February 6, 1997
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Penn National Gaming, Inc.
425 Berkshire Boulevard
Wyomissing, Pennsylvania
We hereby consent to the inclusion in the Prospectus constituting a part of
Amendment No. 2 to the Registration Statement on Form S-3 of our report
dated December 6, 1996, relating to the consolidated financial statements of The
Plains Company as of December 31, 1994 and 1995, and for each of the years in
the three-year period ended December 31, 1995.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ Robert Rossi & Co.
----------------------
ROBERT ROSSI & CO.
Olyphant, Pennsylvania
February 6, 1997
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Penn National Gaming, Inc.
425 Berkshire Boulevard
Wyomissing, Pennsylvania
We hereby consent to the inclusion in the Prospectus constituting a
part of Amendment No. 2 to the Registration Statement on Form S-3 of our
report dated April 8, 1996, relating to the combined financial statements of
Charles Town Racing Limited Partnership and Charles Town Races, Inc. as of
December 31, 1994 and 1995, and for each of the years in the three-year period
ended December 31, 1995.
We also consent to the reference to us under the caption "Experts" in
the Prospectus.
/s/ Leonard J. Miller & Associates, Chartered
---------------------------------------------
LEONARD J. MILLER & ASSOCIATES, CHARTERED
Baltimore, Maryland
February 6, 1997
