SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-24206
Penn National Gaming, Inc.
(Exact Name of Registrant
as Specified in its Charter)
Pennsylvania 23-2234473
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Penn National Gaming, Inc.
825 Berkshire Blvd., Ste. 200
Wyomissing, PA 19610
(Address of Principal Executive Offices)
610-373-2400
(Registrant's Telephone Number, Including Area Code:)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No __
<PAGE>
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Title Outstanding as of November 13, 1997
Common stock par value .01 per share 15,129,470
----------
This Report contains forward-looking statements that inherently involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those discussed in this Quarterly Report on Form 10-Q and
those discussed in the Company's Annual Report on Form 10-K. References to "Penn
National Gaming" or the "Company" include Penn National Gaming, Inc.
and its subsidiaries.
2
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I-FINANCIAL INFORMATION Page
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets - 4-5
September 30, 1997 (unaudited) and December 31, 1996
Consolidated Statements of Income - 6
Nine Months Ended September 30, 1997 and 1996 (unaudited)
Consolidated Statements of Income - 7
Three Months Ended September 30, 1997 and 1996 (unaudited)
Consolidated Statement of Shareholders' Equity - 8
Nine Months Ended September 30, 1997 (unaudited)
Consolidated Statement of Cash Flow - 9-10
Nine Months Ended September 30, 1997 and 1996 (unaudited)
Notes to Consolidated Financial Statements 11-14
Item 2. Management's Discussion and Analysis of Financial 15-18
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8 - K 19
3
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
Assets
Current assets
Cash $ 3,951 $ 5,634
Accounts receivable 3,160 4,293
Prepaid expenses and other current assets 2,857 1,552
Deferred income taxes 58 90
-------- --------
Total current assets 10,026 11,569
-------- --------
Property, plant and equipment, at cost
Land and improvements 18,736 15,728
Building and improvements 63,570 30,484
Furniture, fixtures and equipment 14,445 8,937
Transportation equipment 505 366
Leasehold improvements 6,727 6,680
Leased equipment under capitalized lease 824 1,626
Construction in progress 4,332 2,926
-------- --------
109,139 66,747
Less accumulated depreciation and amortization 10,113 8,029
-------- --------
Net property, plant and equipment 99,026 58,718
-------- --------
Other assets
Excess of cost over fair market value of net assets
acquired (net of accumulated amortization) 23,532 21,885
Prepaid acquisition costs -- 1,764
Deferred financing costs 1,798 2,416
Miscellaneous 537 371
-------- --------
Total other assets 25,867 26,436
-------- --------
$134,919 $ 96,723
======== ========
See accompanying notes to consolidated financial statements
4
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
September 30, December 31,
1997 1996
------------ ------------
(Unaudited)
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term debt and
capital lease obligations $ 6,009 $ 1,563
Accounts payable 8,718 5,066
Purses due horseman 587 1,421
Uncashed pari-mutuel tickets 1,202 1,336
Accrued expenses 2,070 1,880
Customer deposits 662 420
Taxes, other than income taxes 548 392
Income taxes 636 --
--------- ---------
Total current liabilities 20,432 12,078
--------- ---------
Long-term liabilities
Long-term debt and capital
lease obligations, net of
current maturities 47,851 45,954
Deferred income taxes 10,982 10,810
--------- ---------
Total long-term liabilities 58,833 56,764
--------- ---------
Commitments and contingencies
Shareholders' equity
Preferred stock, $.01 par value,
1,000,000 shares authorized:
none issued -- --
Common stock, $.01 par value,
20,000,000 shares authorized:
15,129,470 and 13,355,290
issued and outstanding 151 134
Additional paid in capital 38,072 14,299
Retained earnings 17,503 13,448
Treasury Stock, 4,320 shares at cost (72) --
--------- ---------
Total Shareholders' equity 55,654 27,881
--------- ---------
$ 134,919 $ 96,723
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1997 1996
---- ----
<S> <C> <C>
Revenues
Pari-mutuel revenues
Live races $ 18,234 $ 14,495
Import simulcasting 46,766 23,596
Export simulcasting 5,701 2,479
Gaming revenue 909 --
Admissions, programs and other racing revenues 4,388 3,403
Concession revenues 5.570 2,501
-------- --------
Total revenues 81,568 46,474
-------- --------
Operating expenses
Purses, stakes and trophies 16,550 9,744
Direct salaries, payroll taxes and employee benefits 12,034 6,211
Simulcast expenses 9,836 6,920
Pari-mutuel taxes 6,917 3,954
Lottery taxes and administration 298 --
Other direct meeting expenses 12,878 6,932
Off-track wagering concessions expenses 4,283 1,766
Other operating expenses 8,303 3,710
-------- --------
Total operating expenses 71,099 39,237
-------- --------
Income from operations 10,469 7,237
-------- --------
Other income (expenses)
Interest (expense) (2,652) (44)
Interest income 296 229
Site development (expenses) (599) --
Other 17 --
-------- --------
Total other income (expenses) (2,938) 185
-------- --------
Income before income taxes and extraordinary item 7,531 7,422
Taxes on income 3,093 3,016
-------- --------
Income before extraordinary item 4,438 4,406
-------- --------
Extraordinary item
Loss on early extinguishment
of debt, net of income taxes 383 --
-------- --------
Net income $ 4,055 $ 4,406
======== ========
Earnings per share before extraordinary item $ 0.29 $ 0.32
======== ========
Earnings per share $ 0.26 $ 0.32
======== ========
Weighted average common shares outstanding 15,400 13,754
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------
Revenues 1997 1996
---- ----
<S> <C> <C>
Pari-mutuel revenues
Live races $ 6,837 $ 4,823
Import simulcasting 15,428 8,087
Export simulcasting 2,306 703
Gaming revenue 909 --
Admissions, programs and other racing revenues 1,564 1,355
Concession revenues 2,120 900
-------- --------
Total revenues 29,164 15,868
-------- --------
Operating expenses
Purses, stakes and trophies 6,232 3,296
Direct salaries, payroll taxes and employee benefits 4,614 2,244
Simulcast expenses 3,955 2,240
Pari-mutuel taxes 2,498 1,324
Lottery taxes and administration 298 --
Other direct meeting expenses 4,379 2,454
Off-track wagering concessions expenses 1,643 721
Other operating expenses 2,868 1,225
-------- --------
Total operating expenses 26,487 13,504
-------- --------
Income from operations 2,677 2,364
-------- --------
Other income (expenses)
Interest (expense) (977) (6)
Interest income 138 76
Site development (expenses) (599) --
Other 21 --
-------- --------
Total other income (expenses) (1,417) 70
-------- --------
Income before income taxes 1,260 2,434
Taxes on income 542 992
-------- --------
Net income $ 718 $ 1,442
======== ========
Earnings per share $ 0.05 $ 0.10
-------- --------
Weighted average common shares outstanding 15,680 13,994
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
-------------- -------------- Additional
Paid-In
Shares Amounts Shares Amounts Capital Earnings Total
------ ------- ------ ------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, at January 1, 1997 13,355,290 $ 134 - $ - $ 14,299 $ 13,448 $ 27,881
Issuance of common stock 1,774,180 17 23,200 23,217
Purchase of Treasury Stock
at cost 4,320 (72) (72)
Tax benefit related to stock
options exercised 573 573
Net income for the nine
months ended
September 30, 1997 4,055 4,055
Balance, at September
30, 1997 15,129,470 $ 151 4,320 $ (72) $ 38,072 $ 17,503 $ 55,654
========== ======= ===== ======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
8
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 4,055 $ 4,406
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 2,701 911
Extraordinary item, loss on early extinguishment
of debt, before income tax benefit 642 --
Deferred Income taxes 204 144
Decrease (Increase) in
Accounts receivable 1,133 (350)
Prepaid expenses (1,305) (732)
Miscellaneous other assets (166) (197)
Increase (decrease) in
Accounts payable 3,652 473
Purses due horsemen (834) 36
Uncashed pari-mutuel tickets (134) (88)
Accrued expenses 190 (85)
Customer deposits 242 200
Taxes other than income payable 156 81
Taxes payable 636 (324)
-------- --------
Net cash provided by operating activities 11,172 4,475
-------- --------
Cash flows from investing activities
Expenditures for property and equipment (26,392) (4,784)
Acquisition of business,
(Primarily property and equipment) (16,000) --
Prepaid acquisition costs (310) (3,001)
-------- --------
Net cash provided by (used) in investing activities (42,702) (7,785)
-------- --------
</TABLE>
9
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
Continued September 30,
-----------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from financing activities
Proceeds from sale common stock 23,145 1,486
Tax benefit related to stock options exercised 573 --
Proceeds from long term debt 25,667 --
Principal payments on long-term debt and
capital lease obligations (19,324) (88)
Increase in unamortized financing cost (214) --
-------- --------
Net cash provided by financing activities 29,847 1,398
-------- --------
Net (decrease) in cash (1,683) (1,912)
Cash, at beginning of period 5,634 7,514
-------- --------
Cash, at end of period $ 3,951 $ 5,602
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
10
<PAGE>
PENN NATIONAL GAMING , INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Financial Statement Presentation
The accompanying consolidated financial statements are unaudited and
include the accounts of Penn National Gaming, Inc., ("Penn") and its wholly and
majority owned subsidiaries, (collectively, the "Company"). All significant
intercompany transactions and balances have been eliminated.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) have been made which are necessary to present fairly the
financial position of the Company as of September 30, 1997 and the results of
its operations for the nine month periods ended September 30, 1997 and 1996. The
results of operations experienced for the nine month period ending September 30,
1997 are not necessarily indicative of the results to be experienced for the
fiscal year ending December 31, 1997.
The financial statements and related notes have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations. The
accompanying notes should therefore be read in conjunction with the Company's
December 31, 1996 annual financial statements.
2. Wagering Information (in thousands):
<TABLE>
<CAPTION>
Three months ended September 30,
--------------------------------------------------------------------------
1997 1996
---------------------------------------------------------- -----
Penn National Pocono Downs Charles Town Total Penn National
<S> <C> <C> <C> <C> <C>
Pari-mutuel wagering in-state on company live races $ 22,142 $ 9,520 $ 6,852 $ 38,514 $ 23,095
--------- -------- -------- -------- --------
Pari-mutuel wagering on simulcasting:
Import simulcasting from other racetracks 39,014 29,710 7,630 76,354 41,444
Export simulcasting to out of Pennsylvania
wagering facilities 37,026 10,133 - 47,159 24,440
--------- -------- --------- -------- --------
76,040 39,843 7,630 123,513 65,884
-------- ------- --------- -------- --------
Total pari-mutuel wagering $98,182 $49,363 $ 14,482 $162,027 $ 88,979
======= ======= ======== ======== ========
</TABLE>
11
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. Wagering Information (in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------------------------------------------------
1997 1996
------ ----
Penn National Pocono Downs Charles Town Total Penn National
<S> <C> <C> <C> <C> <C>
Pari-mutuel wagering in-state on company live races $ 69,716 $ 18,763 $ 11,492 $ 99,971 $ 69,200
-------- -------- -------- -------- --------
Pari-mutuel wagering on simulcasting:
Import simulcasting from other racetracks 124,857 89,220 14,275 228,352 122,960
Export simulcasting to out of Pennsylvania
wagering facilities 113,387 18,960 - 132,347 84,228
---------- -------- --------- --------- ---------
238,244 108,180 14,275 360,699 207,188
---------- -------- --------- --------- ----------
Total pari-mutuel wagering $ 307,960 $126,943 $ 25,767 $460,670 $ 276,388
========= ======== ======== ======== =========
</TABLE>
3. Commitments
At September 30, 1997, the Company was contingently obligated under
letters of credit with face amounts aggregating $1,803,700. The $1,803,700
consisted of $1,703,700 relating to the horsemen's account balances and $100,000
for Pennsylvania pari-mutuel taxes.
On June 20, 1997, the Company acquired options to purchase
approximately 100 acres of land in Memphis, Tennessee for an aggregate purchase
price of $2.7 million. The Company paid $11,000 to acquire the options and has
the right to extend the options from month to month until June 20, 1998 upon the
payment of $11,000 per month. The Company has filed an application to the
Tennessee State Racing Commission for the proposed development of a harness race
track and off-track wagering facility at the site on October 9, 1997. A public
hearing on the Tennessee racing license application has been scheduled for
November 15, 1997.
On June 25, 1997, the Company entered into a five-year technology
agreement with GTECH Corporation for the installation and operation of the video
gaming machine ("Gaming Machine") system at the Charles Town facility. The
agreement provides for annual payments equal to the facility's net win
multiplied by a percentage which decreases as the net win per day per machine at
the facility increases.
12
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Supplemental Disclosures of Cash Flow Information
Cash paid during the nine months ended September 30, 1997 and 1996 for
interest was $3,010,000 and $44,000, respectively.
Cash paid during the nine months ended September 30, 1997 and 1996 for
income taxes was $2,741,000 and $3,196,000, respectively.
For the nine months ended September 30, 1997, the Company reclassified
approximately $1.8 million of prepaid acquisition costs to excess of cost over
fair market value of net assets acquired.
5. Common Stock
In February 1997, the Company completed a secondary public offering of
1,725,000 shares of its common stock. The net proceeds of $23 million were used
to repay $19 million of term loans outstanding under the $75 million credit
facility and to finance a portion of the cost of the refurbishment of the
Charles Town Races facility. In connection with such debt repayment, the Company
incurred an extraordinary loss of $383,000 after taxes, consisting primarily of
the write-off of deferred finance costs.
6. Acquisitions
On January 15, 1997, an 89% - owned Company subsidiary acquired
substantially all of the assets of Charles Town Races for approximately $16
million plus acquisition-related fees and expenses of approximately $1.9
million.
On March 26, 1997, the Company entered into an agreement to purchase
property for its Carbondale, Pennsylvania OTW facility. The agreement provides
for a purchase price of $200,000 and is subject to numerous contingencies,
including approval by the Pennsylvania State Harness Racing Commission. On June
5, 1997, the Company's application was approved by the Racing Commission. The
Company expects to have the facility constructed and operational in the first
quarter of 1998.
13
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On July 9, 1997, the Company entered into a lease agreement for its
Hazleton OTW facility. The lease is for 13,000 square feet at the Laurel Mall in
Hazleton, Pennsylvania. The initial term of the lease is for ten years with two
additional five-year renewal options available. The agreement is subject to
numerous contingencies, including approval by the Pennsylvania State Harness
Racing Commission. On September 26, 1997, the Company's application was approved
by the Racing Commission. The Company expects to have the facility constructed
and operational in the first quarter of 1998.
On September 9, 1997, the Company entered into a lease agreement for
its Stroudsburg, Pennsylvania OTW facility. The initial term of the lease is for
ten years with two additional five years renewal options available. The
agreement is subjected to numerous contingencies, including approval by the
Pennsylvania State Harness Racing Commission. On November 6, 1997, the Company's
application was approved by the Racing Commission. The Company expects to have
the facility renovated and operational in the third quarter of 1998.
On September 26, 1997, the Company entered into a lease agreement for
its proposed Altoona, Pennsylvania OTW facility. The lease is for 14,220 square
feet at the Pleasant Valley Shopping Center in Altoona, Pennsylvania. The
initial term of the lease is for ten years with two additional five-year renewal
options available. The agreement is subjected to numerous contingencies,
including approval by the Pennsylvania State Racing Commission. On September 26,
1997, the Company submitted its application for such approval. If approved, the
Company expects to have the facility operational in the third quarter of 1998.
7. Subsequent Items
On October 30, 1997 the Company increased its revolving credit facility
with its banks to $10.0 million.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Three months ended September 30, 1997 compared to three months ended September
30, 1996
Total revenue increased by approximately $13.3 million, or 83.8%, to
$29.2 million for the three months ended September 30, 1997, as compared to the
three months ended September 30, 1996. Pocono Downs, which was acquired in the
fourth quarter of 1996, accounted for $9.4 million of the increase. Charles Town
Races, which was purchased in January 1997, accounted for $4.9 million of the
revenue increase. The Company renovated and refurbished the Charles Town
facility following its acquisition and commenced racing operations on April 30,
1997 and Gaming Machine operations, with a soft opening, on September 10, 1997.
Revenues decreased by approximately $1.8 million in the aggregate at the
Company's Penn National Race Course and OTW facilities in Reading, and
Chambersburg. This decrease was offset by a revenue increase of $798,000 which
was primarily due to the opening of Penn National's OTW facility in Williamsport
in February 1997. Management believes that the decrease in revenues at the
Reading and Chambersburg OTWs, respectively, was primarily due to the opening of
a competitor's OTW facility near Reading and the opening of the Charles Town
facility, which is within the Chambersburg target market.
Total operating expenses increased by approximately $13.0 million, or
96.3%, to $26.5 million for the three months ended September 30, 1997, as
compared to the three months ended September 30, 1996. Pocono Downs and Charles
Town Races, which the Company did not operate in the corresponding quarter,
accounted for $7.9 million and $5.2 million of this increase, respectively.
Operating expenses decreased by approximately $1.0 million in the aggregate at
the Company's Penn National Race Course and OTW facilities in Reading and
Chambersburg. This decrease was offset by a operating expense increase of
$596,000 which was primarily due to the opening of Penn National's OTW facility
in Williamsport in February 1997. The increase in corporate expenses of $321,000
was due to increased personnel and other administrative expense necessary to
support the expansion of the Company.
Income from operations increased by approximately $313,000, or 13.2%,
to $2.7 million due to the factors described above. Other expenses for the three
months ended September 30, 1997 consisted of approximately $1.0 million in
interest expense (primarily due to the financing of the Pocono Downs and Charles
Town acquisitions) compared to $6,000 in interest expense for the three months
ended September 30, 1996. Site development expenses for the three months ended
September 30, 1997 consist of a non-recurring pre-tax charge of $599,000
associated with the Company's failure to obtain the approval for the Downingtown
OTW and discontinued site development efforts in Indiana.
15
<PAGE>
Net income decreased by approximately $724,000 or 50.2% from $1.4
million to $718,000 for the three months ended September 30, 1997 compared to
the three months ended September 30, 1996 based on the factors described above.
Nine months ended September 30, 1997 compared to nine months ended September 30,
1996
Total revenue increased by approximately $35.1 million, or 75.5%, to
$81.6 million for the nine months ended September 30, 1997, as compared to the
nine months ended September 30, 1996. Pocono Downs, which was acquired in the
fourth quarter of 1996, accounted for $26.2 million of the increase. Charles
Town Races, which was purchased in January 1997, accounted for $7.8 million of
the increase. The Company renovated and refurbished the Charles Town facility
following its acquisition and commenced racing operations on April 30, 1997 and
Gaming Machine operations, with a soft opening, on September 10, 1997. The
remaining revenue increase of $1.1 million was primarily due to an increase of
$5.9 million associated with the opening of the Penn National OTW facility in
Williamsport in February 1997 and a full period of operations at the Lancaster
OTW facility; this increase was offset by a decrease in revenues of
approximately $4.2 million at the Company's OTW facilities in Reading and York
and at the Penn National Race Course. Management believes that the decrease in
revenues at these facilities was primarily due to the opening of a competitor's
OTW facility and the opening of the Company's Lancaster OTW facility in July of
1996. The company also had a decrease of $600,000 relating to the closing of
Penn National Speedway in Grantville at the end of 1996.
Total operating expenses increased by approximately $31.9 million, or
81.2%, to $71.1 million for the nine months ended September 30, 1997, as
compared to the nine months ended September 30, 1996. Pocono Downs and Charles
Town Races, which the Company did not operate in the corresponding prior period,
accounted for $21.4 million and $8.2 million of this increase, respectively.
Operating expenses also increased by $1.2 million primarily due to an increase
of $3.9 million associated with the opening of the OTW facility in Williamsport
in February 1997, and operations at the Lancaster OTW facility, which was offset
by a decrease in operating expenses of approximately $1.7 million at the
Company's OTW facilities in Reading and York and at the Penn National Race
Course associated with lower revenue levels at these facilities In addition,
there was a decrease of approximately $800,000 in operating expenses due to the
closing of Penn National Speedway. The increase in corporate expenses of $1.0
million was due to increased personnel, office space and other administrative
expense necessary to support the expansion of the Company.
Income from operations increased by approximately $3.2 million, or
44.7%, to $10.5 million due to the factors described above. Other expenses for
the nine months ended September 30, 1997 consisted of approximately $2.7 million
in interest expense (primarily due to the financing of the Pocono Downs and
Charles Town acquisitions) compared to $44,000 in interest expense for
16
<PAGE>
the nine months ended September 30, 1996. Site development expenses for the nine
months ended September 30, 1997 consist of a non-recurring pre-tax charge of
approximately $599,000 associated with the Company's failure to obtain the
approval for the Downingtown OTW facility and discontinued site development
efforts in Indiana.
The extraordinary item consisted of a non-cash write-off associated
with the early extinguishment of debt of $383,000, net of income taxes. This
resulted from the Company receiving approximately $23.0 million as proceeds from
the February 1997 equity offering and using approximately $19.0 million to
reduce long-term debt.
Net income decreased by approximately $351,000, or 8.0%, to $4.0 for
the nine months ended September 30, 1997 compared to the nine months ended
September 30, 1996 based on the factors described above.
Liquidity and Capital Resources
Historically, the Company's primary sources of liquidity and capital
resources have been cash flow from operations, borrowings from banks and
proceeds from issuances of equity securities.
Net cash provided from operating activities for the nine months ended
September 30, 1997 ($11.0 million) consisted of net income and non-cash expenses
($7.6 million), the repayment of the Charles Town Races receivable in January
1997 ($1.3 million) and other changes in working capital ($2.1 million).
Cash flows used in investing activities ($42.7 million) consisted of
the acquisition of the Charles Town facility ($16.0 million), construction in
progress and renovation and refurbishment of the Charles Town facility ($22.8
million), and $3.9 million in capital expenditures, including approximately
$700,000 for the completion of the Williamsport OTW facility.
Cash flows from financing activities ($29.9 million) consisted
principally of $23.1 million in proceeds from a secondary equity offering in
February 1997 and $16.5 million in proceeds from long-term debt used as payment
for the Charles Town acquisition on January 15, 1997. The Company used the
proceeds from the equity offering to repay $19.0 million of its bank debt
(including Charles Town acquisition borrowings), and the remaining amount was
used for the refurbishment of the Charles Town facility. The Company received an
additional $6.5 million in proceeds from long-term debt during the third quarter
to use for the refurbishment of the Charles Town facility.
17
<PAGE>
The Company has a $5.0 million revolving credit facility which
includes a $2.0 million sublimit for standby letters of credit for periods of up
to twelve months. At September 30, 1997 the Company borrowed $2.5 million of the
revolving credit facility for the refurbishment of the Charles Town Facility. On
October 30, 1997, the revolving credit facility was increased to $10.0 million.
The Company is subject to possible liabilities arising from
environmental conditions at the landfill adjacent to Pocono Downs 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 parities to an existing settlement agreement. The Company is unable to
estimate the amount, if any, that it may be required to expend.
During the balance of 1997, the Company anticipates capital
expenditures of approximately $2.4 million, exclusive of the cost of
refurbishing the Charles Town Facility (described below), to construct two
additional OTW facilities and approximately $200,000 for other capital
expenditures and improvements to existing facilities for Penn National Race
Course and Pocono Downs. Under the Company's 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 to be installed there
pursuant to a lease arrangement) of $12.0 million in 1997, $4.0 million in 1998
and $2.0 million in 1999 and in each year thereafter. The Company anticipates
expending approximately $27.3 million on the refurbishment of the Charles Town
Facility (excluding Gaming Machines), of which $22.8 million had already been
expended through September 30, 1997.
The Company currently estimates that the cash generated from operations
and borrowings under its credit facility, will be sufficient to finance its
current operations and planned capital expenditure requirements. There can be no
assurance, however, that the Company will not be required to seek capital, in
addition to that available from the foregoing sources. The Company may, from
time to time, seek additional funding through public or private financing,
including equity financing. There can be no assurance that adequate funding will
be available as needed or, if available, on terms acceptable to the Company. If
additional funds are raised by issuing equity securities, existing shareholders
may experience dilution.
18
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<S> <C> <C>
(a) Exhibits
2.9 Second amended and related operating agreement dated
as of October 17, 1997, among Penn National Gaming of
West Virginia, Inc., BDC Group, and PNGI Charles Town
Gaming Limited Liability Company.
10.66 Fourth amendment waiver and consent dated as of October 20,
1997, among the company Bankers Trust Company as agent,
CoreStates Bank, N.A. as co-agent, and certain banks party to the
credit agreement dated as of November 17, 1996
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
</TABLE>
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PENN NATIONAL GAMING, INC.
Date: November 14, 1997 By: /s/ Robert S. Ippolito
------------------------
Robert S. Ippolito
Chief Financial Officer
Secretary/Treasurer
20
<PAGE>
EXHIBIT INDEX
Exhibit Nos. Description of Exhibits Page No.
2.9 Second amended and related operating agreement
dated as of October 17, 1997, among Penn National
Gaming of West Virginia, Inc., BDC Group and
PNGI Charles Town Gaming Limited Liability
Company.
10.66 Fourth amendment waiver and consent dated as
of October 20, 1997, among the company, Bankers
Trust as agent, CoreStates Bank, N.A. as co-agent
and certain banks party to the credit agreement dated
as of November 17, 1996.
27.1 Financial Data Schedule
21
<PAGE>
Second Amended and Restated
Operating Agreement
of
PNGI CHARLES TOWN GAMING
LIMITED LIABILITY COMPANY
(1)
<PAGE>
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TABLE OF CONTENTS
ARTICLE I................................................................................................1
FORMATION.......................................................................................1
1.1. Organization......................................................................1
1.2. Agreement, Effect of Inconsistencies with Act.....................................1
1.3. Name..............................................................................1
1.4. Effective.........................................................................1
1.5. Registered Agent and Office.......................................................1
1.6. Principal Office..................................................................2
1.7. Term..............................................................................2
ARTICLE II...............................................................................................2
DEFINITIONS.....................................................................................2
2.1. Definitions.......................................................................2
ARTICLE III..............................................................................................2
NATURE OF BUSINESS..............................................................................2
3.1. Purpose...........................................................................2
ARTICLE IV...............................................................................................2
POWERS .......................................................................................2
4.1. Powers...........................................................................2
ARTICLE V................................................................................................3
ACCOUNTING AND RECORDS..........................................................................3
5.1. Records to be Maintained..........................................................3
5.2. Reports to Members................................................................3
ARTICLE VI...............................................................................................3
MEMBERS .......................................................................................3
6.1. Member Eligibility................................................................3
6.2. Members...........................................................................4
ARTICLE VII..............................................................................................4
(2)
<PAGE>
<CAPTION>
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RIGHTS AND DUTIES OF MEMBERS....................................................................4
7.1. Voting Rights...............................................................4
7.2. Management Rights..........................................................5
7.3. Liability of Members........................................................5
7.4. Indemnification.............................................................5
7.5. Representations and Warranties.......................................................5
7.6. Conflicts of Interest.......................................................5
7.7. Miscellaneous Obligations...................................................7
7.8. Members' Rights and Liabilities.............................................7
ARTICLE VIII.............................................................................................7
MANAGING MEMBER.................................................................................7
8.1. Managing..........................................................................7
8.2. Authority of Members to Bind the Company..........................................7
8.3. Reimbursement for Managing Member's Expenses......................................8
8.4. Bank Accounts.....................................................................8
ARTICLE IX...............................................................................................8
CONTRIBUTIONS AND CAPITAL ACCOUNTS..............................................................8
9.1. Contributions.....................................................................8
9.2. Primary Funding and Primary Funding Loan..........................................8
9.3. Additional Contributions.........................................................10
9.4 Enforcement of Commitments........................................................11
9.5. Maintenance of Capital Accounts..................................................12
9.6. Distribution of Assets...........................................................12
9.7. Compliance with Section 704(b) of the Code.......................................12
ARTICLE X...............................................................................................13
ALLOCATIONS AND DISTRIBUTIONS..................................................................13
10.1. Allocations of Net Profits and Net Losses ......................................13
10.2 [Intentionally blank]............................................................13
10.3. Company Minimum Gain............................................................13
10.4. Member Minimum Gain Chargeback..................................................13
10.5. Qualified Income Offset.........................................................14
10.6. Company Non-Recourse Deductions.................................................14
(3)
<PAGE>
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10.7. Member Non-Recourse Deductions..................................................14
10.8. Interim Distributions...........................................................14
10.9. Limitations on Distributions....................................................14
ARTICLE XI..............................................................................................15
TAXES ................................................................................15
11.1. Elections.................................................................15
11.2. Taxes of Taxing Jurisdictions.............................................15
11.3. Tax.......................................................................15
11.4. Accrual Method of Accounting..............................................15
ARTICLE XII.............................................................................................15
DISPOSITION OF MEMBERSHIP INTERESTS............................................................15
12.1. Disposition of Membership Interests.............................................15
12.2 The BDC Group and its Members....................................................16
ARTICLE XIII............................................................................................16
DISSOCIATION OF A MEMBER.......................................................................16
13.1. Dissociation....................................................................16
13.2. Purchase of Dissociated Member's Membership Interest............................17
13.3. Purchase Price of Dissociated Member's Membership
Interest.....................................................................18
ARTICLE XIV.............................................................................................18
ADMISSION OF ADDITIONAL MEMBERS................................................................19
14.1. Admission of Additional Members.................................................19
ARTICLE XV..............................................................................................19
DISSOLUTION AND WINDING UP.....................................................................19
15.1. Dissolution.....................................................................19
15.2. Effect of Dissolution...........................................................19
15.3. Distribution of Assets on Dissolution...........................................19
15.4. Payment of Liquidation Proceeds.................................................19
15.5. Winding Up and Certificate of Dissolution.......................................19
(4)
<PAGE>
<CAPTION>
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ARTICLE XVI.............................................................................................20
AMENDMENT......................................................................................20
16.1. Operating Agreement May Be Modified.............................................20
16.2. Amendment or Modification of Operating Agreement................................20
ARTICLE XVII............................................................................................20
17.1 The Showboat Obligations.........................................................20
17.2 The $250,000 Loans..............................................................20
17.3 Certain Definitions.............................................................21
17.4 Determination of Members........................................................21
ARTICLE XVIII...........................................................................................22
MISCELLANEOUS PROVISIONS...............................................22
18.1. Entire Agreement................................................................22
18.2. No Partnership Intended for Nontax..............................................22
18.3. Rights of Creditors and Third Parties under Operating
Agreement....................................................................22
18.4. Arbitration.....................................................................22
18.5. Notices......................................................................24
18.6. Further Documents............................................................24
18.7. Exhibits and Schedules ......................................................24
18.8. Sections and Articles........................................................24
18.9. Headings.....................................................................24
18.10. Number and Gender of Words.....................................................24
18.11. Invalid Provisions.............................................................24
18.12. Multiple Counterparts..........................................................25
18.13. No Rule of Construction........................................................25
18.14. No Waiver......................................................................25
18.15. Governing Law..................................................................25
18.16. Assignment.....................................................................25
EXHIBIT A...............................................................................................28
Membership and Percentage Interest.............................................................28
EXHIBIT B...............................................................................................30
PRIMARY FUNDING LOANS AS OF AUGUST 31, 1997....................................................30
APPENDIX I..............................................................................................31
(5)
<PAGE>
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DEFINITIONS....................................................................................31
Act .......................................................................31
Additional Member...............................................................31
Articles .......................................................................31
Bankrupt Member.................................................................31
BDC .......................................................................31
BDC Group.......................................................................31
BDC Group Member................................................................31
BDC Group Representative........................................................31
BT Loan .......................................................................31
Business Day....................................................................31
Capital Account...............................................31
Capital Contribution............................................................32
Code .......................................................................32
Commission......................................................................32
Commitment......................................................................32
Company .......................................................................32
Company Liability...............................................................32
Company Minimum Gain............................................................32
Company Nonrecourse Liability...................................................32
Company Nonrecourse Deductions..................................................32
Company Property................................................................33
Contributing Member.............................................................33
Contribution....................................................................33
Default Interest Rate...........................................................33
Delinquent Member...............................................................33
Distribution....................................................................33
Disposition (Dispose)...........................................................33
Dissociation....................................................................33
Dissociated Member..............................................................33
Initial Capital Contribution....................................................33
Initial Members.................................................................33
License .......................................................................33
(6)
<PAGE>
<CAPTION>
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Licensed Activities.............................................................33
Majority of the Members.........................................................33
Managing Member.................................................................34
Member .......................................................................34
Member Guarantee................................................................34
Member Loan.....................................................................34
Member Minimum Gain.............................................................34
Member Nonrecourse Deductions...................................................34
Member Nonrecourse Liability....................................................34
Membership and Percentage Interest..............................................34
Membership Interest.............................................................34
Money .......................................................................34
Net Losses......................................................................35
Net Profits.....................................................................35
Nonrecourse Liabilities................................................35
Notice or Notify................................................................35
Offsettable Decrease............................................................35
Operating Agreement.............................................................35
Percentage Interest.............................................................35
Percentage Majority of the Members..............................................35
Percentage Majority of the Remaining
Members................................................................35
PNGI/West Virginia..............................................................35
Proceeding......................................................................35
Property .......................................................................36
Person .......................................................................36
Regulations.....................................................................36
Related Person..................................................................36
Removal .......................................................................36
Resignation.....................................................................36
Rules .......................................................................36
Statutes .......................................................................36
Taxable Year....................................................................36
(7)
<PAGE>
<CAPTION>
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Taxing Jurisdiction.............................................................36
Withdrawal......................................................................36
</TABLE>
(8)
<PAGE>
This Second Amended and Restated Operating Agreement (the "Operating Agreement")
of PNGI Charles Town Gaming Limited Liability Company, a limited liability
company organized pursuant to the Act, is entered into as of this 17th day of
October, 1997 and shall be effective as of the Effective Date, by and among the
Company and the Members.
For and in consideration of the mutual covenants herein contained and
for other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the Members executing the Operating Agreement hereby
agree to the following terms and conditions of the Operating Agreement, as it
may from time to time be amended according to its terms.
ARTICLE I.
FORMATION
1.1. Organization. - The Members confirm that they have organized the
Company on March 22, 1996 as a West Virginia limited liability company pursuant
to the provisions of the predecessor limited liability statutes to the Act. The
Company shall operate in accordance with and be regulated by the Act, except as
specifically provided by Section 1.2 below.
1.2. Agreement; Effect of Inconsistencies with Act- It is the express
intention of the Members that this Operating Agreement shall be the sole source
of agreement of the parties with respect to the subject matter hereof, and,
except to the extent a provision of this Operating Agreement expressly
incorporates federal income tax laws, rules or regulations by reference to
sections of the Code or Regulations or is expressly prohibited or ineffective
under the Act, this Operating Agreement shall govern, even when inconsistent
with, or different than, the provisions of the Act or any other law or rule.
To the extent any provision of this Operating Agreement is prohibited
or ineffective under the Act, this Operating Agreement shall be considered
amended to the smallest degree possible in order to make such provision
effective under the Act, consistent with the intent of the parties. In the event
the Act is subsequently amended or interpreted in such a way to make any such
provision of this Operating Agreement that was formerly invalid valid, such
provision shall be considered to be valid from the effective date of such
amendment or interpretation.
1.3. Name- The name of the Company is PNGI Charles Town Gaming Limited
Liability Company, and all business of the Company shall be conducted under that
name or under any other name, but in any case, only to the extent permitted by
applicable law.
<PAGE>
1.4. Effective Date - The Operating Agreement shall be deemed effective
as of March 22, 1996, the "Effective Date", as though it had been entered into
on such date.
1.5. Registered Agent and Office - The registered agent for the service
of process and the registered office shall be that Person and location reflected
in the Articles as filed in the office of the Secretary of State of West
Virginia. The Managing Member may, from time to time, change the registered
agent or office through appropriate filings with the Secretary of State of West
Virginia. In the event the registered agent ceases to act as such for any reason
or the registered office shall change, the Managing Member shall promptly
designate a replacement registered agent or file a notice of change of address
as the case may be. If the Managing Member shall fail to designate a replacement
registered agent or change of address of the registered office, any Member may
designate a replacement registered agent or file a notice of change of address.
1.6. Principal Office - The Principal Office of the Company shall be
located at:
Wyomissing Professional Center
825 Berkshire Boulevard, Suite 203
Wyomissing, Pennsylvania 19610
1.7. Term - The period of duration of the Company shall expire on
December 31, 2045, or when the Company is dissolved in accordance with Article
XV hereof.
ARTICLE II
DEFINITIONS
2.1. Definitions - For purposes of this Operating Agreement, unless the
context clearly indicates otherwise, the capitalized terms used herein and/or
set forth on Appendix I attached hereto shall have the meanings set forth in
such Appendix.
ARTICLE III.
NATURE OF BUSINESS
3.1. Purpose - The purpose of the Company shall be to transact any
lawful business that a limited liability company, corporation, general
partnership, limited partnership or other business entity may conduct under the
laws of the State of West Virginia, including but not limited to the conducting
of Licensed Activities, auto racing, casino or riverboat gambling, or other
gaming or wagering or other entertainment and hotel activities, and all forms of
communications and publications pertaining to the foregoing, and the Company
shall have the authority to do all things necessary or convenient to accomplish
its purpose and operate such business.
<PAGE>
ARTICLE IV.
POWERS
4.1. Powers - The Company may exercise the powers and privileges
conferred upon limited liability companies by the laws of the State of West
Virginia only in furtherance of and subject to its purpose as set forth in
Article III above and subject further to the following limitations:
4.1.1 The Company shall do nothing which if done by a Member would
violate the Statutes or the Rules; and
4.1.2 The Company, and if applicable to a Member then such Member,
shall at all times comply with the Statutes and the Rules, including that
the Company and if required each Member shall be, and the Company or Member
shall cause each employee of the Company or shareholder, partner, other
equity or beneficial owner, officer, director or employee of such Member
who is so required under the Statutes or the Rules, to be a Licensed
Person.
ARTICLE V.
ACCOUNTING AND RECORDS
5.1. Records to be Maintained - The Managing Member shall maintain
suchbusiness and financial records at the Principal Office as it deems necessary
or appropriate, including but not limited to a current list of the full name and
last known business address of each Member, former Member and other holder of a
Membership and Percentage Interest. All of such records shall be available for
inspection by a Member, or that Member's authorized representative during normal
business hours upon reasonable notice to the Managing Member.
<PAGE>
5.2. Reports to Members -
5.2.1. The Managing Member shall provide, for their confidential
use, financial reports at least quarterly, and, if otherwise
available, monthly, to each of the Members promptly after the same
become available.
5.2.2. The Managing Member shall provide each Member those
information returns required by the Code and the tax laws of any state
in which that Member resides.
5.2.3. The Managing Member shall promptly Notify each Member of
the occurrence of any event which reasonably would be expected to have
a material effect on the business or results of operations of the
Company.
ARTICLE VI.
MEMBERS
6.1. Member Eligibility - All Members, and, to the extent applicable,
their respective equity owners, beneficial owners, officers, directors and
employees, shall be Licensed Persons if required by the Statute or the Rules,
and shall otherwise meet and comply with any applicable requirements of the
Statutes and the Rules.
6.2. Members - The names and addresses of the Members, their respective
Membership and Percentage Interests, and the designation of the Managing Member
as of the date hereof are as set forth on Exhibit A attached hereto, provided
that if any Person acquires a Membership and Percentage Interest in the Company,
in accordance with and in a manner permitted by the terms of this Operating
Agreement, such new Member's name, address and Membership and Percentage
Interest will be added promptly to Exhibit A.
<PAGE>
ARTICLE VII.
RIGHTS AND DUTIES OF MEMBERS
7.1. Voting Rights
7.1.1. Except with respect to actions governed by Section 7.1.2.
below, all policy decisions on behalf of the Company, and any other
matters which pursuant to this Operating Agreement require a
determination or vote by the Members, shall be made by a Percentage
Majority of the Members.
7.1.2. Notwithstanding anything herein to the contrary, the
unanimous vote of the Members shall be required to approve the
following matters: any decision by the Company concerning the sale of
all or substantially all the assets of the Company; the termination,
dissolution or liquidation of the Company; the merger or consolidation
of the Company with or into any other Person; Capital Contributions,
Member Loans or Member Guarantees in excess of those identified in
Section 9.2 below; issuance of additional equity in the Company where
each Member has not been offered the opportunity to purchase equity on
the same terms and conditions as the same is offered to non-Members;
incurrence by the Company of loans, or guarantees of loans aggregating
more than $5,000,000 (but not including any loans or guarantees
referred to in Section 9.2 below); admission of additional Members
(other than permitted transferees of Members as set forth in Section
12.1 below); an amendment to this Operating Agreement which would
materially prejudice the rights or increase the obligations or
liabilities of any Member as compared with the pre-existing rights,
obligations or liabilities of Members; the election and qualification
of the Managing Member's successor (except that the lender holding a
pledge of or security interest in the Managing Member's Membership and
Percentage Interest may serve as or designate the Managing Member
should such lender foreclose on such pledge or security interest); or
the establishment of reserves in excess of those provided for in
Section 10.8(d) below. Where unanimous consent is required under this
Section 7.1.2, no Member shall unreasonably withhold its consent, and
the BDC Group Members collectively shall have one vote.
<PAGE>
7.2. Management Rights
7.2.1. No Member other than the Managing Member shall have any
authority to take any actions with respect to the business or affairs
of the Company, to execute or deliver any instrument or document
binding upon the Company, or to obligate the Company in any way.
7.2.2. The officers of the Company shall be as follows and shall
serve in said offices until the Members vote to remove or replace one
or more of them:
Chairman - Peter M. Carlino
President - Jay Fortney
Vice President - William J. Bork
Secretary - Robert S. Ippolito
Treasurer - Robert S. Ippolito
7.3. Liability of Members - No Member shall be liable as such for the
liabilities of the Company. The failure of the Company to observe any
formalities or requirements relating to the exercise of its powers or management
of its business or affairs under this Operating Agreement or the Act shall not
be grounds for imposing personal liability on the Members for liabilities of the
Company.
7.4. Indemnification - The Company shall indemnify the Company's
current and former Members, officers, employees and agents for all costs,
losses, liabilities, and damages paid or incurred by any of them arising out of
or in connection with the business of the Company to the fullest extent allowed
by any laws of the State of West Virginia, including, but not limited to, the
Act.
7.5. Representations and Warranties - Each Member hereby represents and
warrants to the Company and the other Members that: (a) such Member has all
necessary power and authority to execute and deliver this Operating Agreement
and to perform such Member's obligations hereunder; (b) the Member is acquiring
its interest in the Company for the Member's own account, or as nominee for the
account of the Member's beneficial owners, as an investment and without an
intent to distribute the interest; and (c) the Member acknowledges that the
Membership and Percentage Interests have not been registered under the
Securities Act of 1933 or any state securities laws, and may not be resold or
transferred by the Member without appropriate registration or the availability
of an exemption from such requirements.
<PAGE>
7.6. Conflicts of Interest -
7.6.1. A Member, including the Managing Member, does not violate
a duty or obligation to the Company merely because the Member's
conduct furthers the Member's own interest. A Member or an affiliate
of a Member may lend money to and transact other business with the
Company, so long as the terms and provisions of any such transaction
are substantially similar to those which would be available to the
Company, in an arms-length transaction, with a person who is not an
affiliate. The rights and obligations of a Member who directly or
indirectly lends money to or transacts business with the Company are
the same as those of a person who is not a Member, subject to other
applicable law. No transaction with the Company shall be void or
voidable or shall be rescinded solely because a Member has a direct or
indirect interest in the transaction if either the transaction is fair
to the Company or the other Members, knowing the material facts of the
transaction and the Member's interest, authorize, approve, or ratify
the transaction.
7.6.2. For purposes of this Operating Agreement, the conduct by
Penn National Gaming, Inc. (the ultimate parent of PNGI/West Virginia)
or its subsidiaries or affiliates of horse racing and wagering
(including simulcast wagering and off-track wagering), auto racing,
casino or riverboat gambling, video lottery games, or other
entertainment, hotel or gaming or wagering activities, and all forms
of communications and publications pertaining to the foregoing, and
the management of such activities as they currently or may hereafter
exist shall not be deemed a conflict or potential conflict of
interest. The Members acknowledge and agree that PNGI/West Virginia
has specifically relied upon this provision as an inducement to enter
into this Operating Agreement. Notwithstanding anything herein to the
contrary, Penn National Gaming, Inc. or any of its majority owned
subsidiaries or affiliates shall not own or operate any pari-mutuel
wagering or video lottery wagering facility located in West Virginia
within 25 miles of Charles Town Races, West Virginia.
7.7. Miscellaneous Obligations -
7.7.1. Each Member shall maintain that Member's License and the
License of each Member's equity owners, beneficial owners, officers,
directors and employees if necessary under the Statutes or the Rules.
Each Member shall at all times comply and shall cause the Member's
equity owners, beneficial owners, officers, directors and employees to
comply with the Statutes and the Rules.
<PAGE>
7.7.2. It shall be the duty of each Member to act at all times
consistently with and in compliance with all and each of the
provisions of this Operating Agreement and with all policies, rules
and decisions of the Company adopted in accordance with any of the
provisions of this Operating Agreement.
7.8. Members' Rights and Liabilities - The Members shall have the same
rights and liabilities as shareholders of corporations organized under the laws
of the State of West Virginia, and the Managing Member shall have the same
rights and liabilities as a director of a corporation so organized.
ARTICLE VIII
MANAGING MEMBER
8.1. Managing- The sole initial Managing Member shall be PNGI/West
Virginia. The Managing Member shall serve until the earliest of:
8.1.1. The Dissociation of such Managing Member; or
8.1.2. The Resignation of such Managing Member; or
8.1.3. The Withdrawal of such Managing Member; or
8.1.4. The election and qualification of such Managing Member's
successor by the vote of the Members as provided in Section 7.1.2.
8.2. Authority of Members to Bind the Company - All actions with
respect to the business of the Company shall be taken as directed by the
Managing Member, who may exercise, without limitation, (except as specifically
provided herein or in the Act) all of the powers of the Company set forth in
Section 31B-1-112 of the Act and who shall have, without limitation, all powers
of a Manager set forth in Section 31B-4-404(b) of the Act. Only the Managing
Member and agents of the Company authorized by the Managing Member shall have
the authority to bind the Company. No Member who is not either a Managing Member
or otherwise authorized by the Managing Member as an agent shall take any action
to bind the
<PAGE>
Company, and each Member shall indemnify the Company for any costs or damages
incurred by the Company as a result of any unauthorized action of such Member.
8.3. Reimbursement for Managing Member's Expenses. The BDC Group
Members shall pay to the Managing Member an annual amount of $35,750 (the
"Expense Reimbursement") to compensate the Managing Member for the BDC Group
Members' share of all expenses incurred by the Managing Member in managing the
Company. Such amount shall be paid by the Company to the Managing Member, and
the Company shall deduct the amount of the Expense Reimbursement proportionately
from the Capital Accounts of the BDC Group Members. In the event that the
payment of any Expense Reimbursement is recharacterized as a company payment on
its account, the payment will be treated as a guaranteed payment to the Managing
Member and the deduction for such expense shall be specifically allocated to the
BDC Group Members proportionately to their Membership and Percentage Interests.
8.4. Bank Accounts- All funds of the Company shall be deposited in such
account or accounts to be maintained in such bank or banks as shall be selected
from time to time by the Managing Member. Withdrawals from any such bank account
or accounts shall be made in the Company's name upon the signature or signatures
which the Managing Member shall from time to time designate. Funds in such
account or accounts shall not be commingled with the funds of any Member.
ARTICLE IX.
CONTRIBUTIONS AND CAPITAL ACCOUNTS
9.1. Contributions -PNGI/W.Va has made an Initial Capital Contribution
in the amount of $8,000, and the Commitment of up to $40,000,000 relating to the
"Primary Funding" as defined in and as set forth in Section 9.2. BDC has made an
Initial Capital Contribution in the amount of $2,000 (which shall be allocated
to the BDC Group Members proportionately to their respective Membership and
Percentage Interests). The Membership and Percentage Interest of PNGI/West
Virginia is 89% and the aggregate Membership and Percentage Interest of the BDC
Group Members is 11%, as set forth on Exhibit A. No interest shall accrue on any
Capital Contribution and no Member shall have the right to withdraw or be repaid
any Capital Contribution, except as set forth in Section 9.2 and elsewhere in
the Operating Agreement relating to the "Primary Funding Loan" (as defined
below).
<PAGE>
9.2. Primary Funding and Primary Funding Loan -
9.2.1 No BDC Group Member shall have any liability or obligation
to provide additional Capital Contributions, Member Loans or Member
Guarantees in connection with the initial $40,000,000 of funding
(regardless of the form or source of such funding) for the Company
(the "Primary Funding"). All or any part of the amount of the Primary
Funding may be borrowed or otherwise raised directly by the Company.
To secure any obligations incurred in connection with the Primary
Funding, the Company may, in the discretion of the Managing Member,
grant a security interest in or lien on, or otherwise provide as
security for such obligations, all or any part of the Company Property
or other assets of the Company, in an amount up to the obligations
secured thereby, or guaranty such obligations, and, the Managing
Member may, in its discretion, pledge its Membership and Percentage
Interest.
9.2.2 To the extent PNGI/West Virginia directly or indirectly
provides Capital Contributions, Member Loans or Member Guarantees in
connection with the Primary Funding, that portion of such Primary
Funding shall be treated as a loan from PNGI/West Virginia to the
Company, regardless of the actual form or source of such Primary
Funding (each a "Primary Funding Loan").
9.2.3 Each Primary Funding Loan shall bear interest, and
principal and interest shall be repaid (including mandatory
prepayments of principal) under each Primary Funding Loan in the same
amount, at the same time and in the same manner as such payments (and
any other costs) would be due and payable if borrowed directly by the
Company under the BT Loan; provided, however, if Penn National Gaming,
Inc. ("Penn National") makes a voluntary (rather than mandatory)
prepayment of principal under the BT Loan, the Company shall not be
required to similarly make a voluntary prepayment under the Primary
Funding Loans, but shall continue making payments under the Primary
Funding Loans as if no such voluntary pre-payments had been made under
the BT Loan. The principal economic terms of the BT Loan are described
on Exhibit B.
9.2.4 To the extent the Company does not have sufficient cash
available or is otherwise unable to make any payments of principal or
interest when due under any Primary Funding Loans, such payments shall
accrue and bear interest at the "default" rates
<PAGE>
under the BT Loan, and shall be paid prior to the payments which
subsequently become due under the Primary Funding Loan. All principal
and accrued but unpaid interest under such Primary Funding Loans shall
be due and payable upon the sale of all or substantially all of the
assets, equity interests or business of the Company.
9.2.5 Payments of principal and interest or other amounts under
the Primary Funding Loans shall be paid by the Company to or on behalf
of or as directed by PNGI/West Virginia and, to the extent payments
under a Primary Funding Loan are due and payable, such payments shall
be made prior to any other distributions to any Member being declared,
allocated, made or provided for under this Operating Agreement, except
that the Company may make interim distributions of sufficient Money to
permit the Members to pay any local, state and Federal tax liabilities
owed by the Members with respect to income in respect of their
Membership and Percentage Interests, as contemplated by Section 10.8,
prior to making payments under Primary Funding Loans, provided that
the result thereof is not to cause a default under the ultimate source
of capital for any Primary Funding Loan.
9.2.6 The Members acknowledge and agree that on or prior to
August 31, 1997, Primary Funding Loans have been provided by PNGI/West
Virginia to the Company in an aggregate principal amount described on
Exhibit B.
9.3. Additional Contributions
9.3.1 In addition to the Initial Capital Contributions and the
Primary Funding, the Managing Member may determine from time to time
that the Company requires additional capital. If the Managing Member
determines to raise such additional capital by the Company obtaining
loans in excess of $5,000,000, or by issuing equity where each Member
is not offered the opportunity to purchase equity on the same terms
and conditions as the same is offered to non-Members, the Managing
Member shall obtain the unanimous consent of the Members as set forth
in Section 7.1.2. before incurring such indebtedness or issuing such
equity.
9.3.2. If the Managing Member determines to raise any required
additional capital by issuing equity in the Company (in a manner not
requiring the unanimous approval set forth in Section 7.1.2.), the
Managing Member shall give Notice to the other Members in writing at
least ten Business Days prior to the date on which payment for such
additional equity is due, which Notice shall set forth the amount and
form of the additional equity and the date on which payment for the
additional equity is due. The BDC Group Members shall have the right
<PAGE>
(but not the obligation) to acquire a portion of the additional equity
offered, in proportion to their respective Membership and Percentage
Interests, to maintain their current respective Membership and
Percentage Interests, provided that if one or more BDC Group Members
do not exercise their right to acquire additional equity (the "BDC
Additional Equity"), the other BDC Group Members may so acquire all or
part of the BDC Additional Equity in the following manner: (i) if only
one BDC Group Member wishes to acquire all or part of the BDC
Additional Equity, such BDC Group Member may acquire the amount of BDC
Additional Equity it wishes to acquire and (ii) if more than one BDC
Group Member wishes to acquire all or part of the BDC Additional
Equity, each such BDC Group Member shall be entitled to acquire an
amount of BDC Additional Equity equal to the product of (x) the BDC
Additional Equity and (y) a fraction, the numerator of which is such
BDC Group Member's Membership and Percentage Interest in the Company
and the denominator of which is the aggregate Membership and
Percentage Interests of the BDC Group Members who wish to acquire BDC
Additional Equity, provided that if a BDC Group Member determines to
acquire some but not all of the BDC Additional Equity it is entitled
to acquire pursuant to the formula set forth in clause (ii) of this
sentence, the other BDC Group Members who still wish to acquire BDC
Additional Equity may acquire the remaining BDC Additional Equity
applying the formula set forth in clause (ii) of this sentence
(assuming, for purposes of applying such formula after its initial
application, that such BDC Group Members have acquired BDC Additional
Equity pursuant to the previous application of the formula set forth
in clause (ii) of this sentence) until such available BDC Additional
Equity is either acquired by BDC Group Members or such BDC Group
Members do not wish to acquire any more BDC Additional Equity. All
determinations made by BDC Group Members under this Section 9.3.2
shall occur not later than the date set by the Managing Member in the
Notice for the closing of the additional equity sale.
<PAGE>
9.4 Enforcement of Commitments - In the event a Member (a Delinquent
Member) fails to perform the Delinquent Member's Commitment, the Company or any
Contributing Member may give each Delinquent Member a Notice of the failure to
meet the Commitment. If a Delinquent Member fails to perform the Commitment
(including any costs associated with the failure to comply with the Commitment
and interest on such obligation at the Default Interest Rate) within ten
Business Days of the giving of Notice, the Managing Member shall give Notice to
each other Member of the occurrence of a delinquency and the Company or any
Contributing Member may take such action, including but not limited to enforcing
the Commitment in a court of appropriate jurisdiction in the state in which the
Principal Office is located or the state of the Delinquent Member's address as
reflected in this Operating Agreement. Each Member expressly agrees to the
jurisdiction of such courts, but only for the enforcement of Commitments. If no
action is commenced to enforce a Delinquent Member's Commitment within forty
days after the occurrence of a delinquency, as an exclusive alternative, a
Contributing Member may elect to provide all or a portion of the Commitment of
the Delinquent Members. If one or more Contributing Members elect to provide a
portion of the Commitment of the Delinquent Member(s) (all of such Commitments
of Delinquent Member(s) being referred to herein as the "Shortfall"), the other
Contributing Members may provide additional Commitments to eliminate the
Shortfall, in the following manner: (i) if only one Contributing Member wishes
to acquire all or part of the Shortfall, such Contributing Member may acquire
the amount of Shortfall it wishes to acquire and (ii) if more than one
Contributing Member wishes to acquire all or part of the Shortfall, each such
Contributing Member shall be entitled to acquire an amount of Shortfall equal to
the product of (x) the Shortfall and (y) a fraction, the numerator of which is
such Contributing Member's Membership and Percentage Interests in the Company
and the denominator of which is the aggregate Membership and Percentage Interest
of the Contributing Members who wish to provide a portion of the Shortfall,
provided that if a Contributing Member determines to provide some but not all of
the Shortfall it is entitled to provide pursuant to the formula set forth in
clause (ii) of this sentence, the other Contributing Members who still wish to
may provide the remaining Shortfall, applying the formula set forth in clause
(ii) of this sentence (assuming, for purposes of applying such formula after its
initial application, that such Contributing Members have provided a portion of
the Shortfall pursuant to the previous application of the formula set forth in
clause (ii) of this sentence) until such available Shortfall is either acquired
by Contributing Members or such Contributing Members do not wish to provide any
more of the Shortfall. A Contributing Member shall be entitled to treat the
amounts provided pursuant to this section as a demand loan from the Contributing
Member to the Delinquent Member bearing interest at the Default Interest Rate
and secured by the Delinquent Member's Membership Interest in the Company. Until
such Contributing Member is fully repaid, such Contributing Member shall be
entitled to all Distributions to which the Delinquent Member would have been
entitled. Notwithstanding the foregoing, no Commitment or other obligation to
make an additional Capital Contribution, Member Loan or Member
<PAGE>
Guarantee may be enforced by a creditor of the Company or other Person other
than the Company unless the Contributing Member expressly consents to such
enforcement or to the assignment of the obligation to such creditor or Person.
Notwithstanding anything in this Section 9.4 to the contrary, if the Delinquent
Member is a BDC Group Member, the rights and remedies provided to the Company
and one or more Contributing Members in this Section 9.4 may be exercised, for a
period of sixty days after the date of a Notice to the BDC Group Members with
respect to all or any part of the Shortfall attributable to the BDC Group
Members, only by BDC Group Members, in such manner and upon such terms and
conditions as the BDC Members may agree or, upon failure to reach such agreement
within thirty days after the date of a Notice to the BDC Group Members with
respect to all or part of any Shortfall attributable to the BDC Group Members,
in the manner and upon the terms set forth in this Section 9.4 with respect to
such remaining Shortfall attributable to the BDC Group Members.
9.5. Maintenance of Capital Accounts - The Company shall establish and
maintain Capital Accounts for each Member. Each Member's Capital Account shall
be increased by (A) the amount of any Money actually contributed by the Member
to the capital of the Company as a Capital Contribution, (B) the fair market
value of any Property or "in-kind" services contributed as a Capital
Contribution, such fair market value as determined by the Company and the
contributing Member at arm's length at the time of contribution (net of
liabilities assumed by the Company or subject to which the Company takes such
Property, within the meaning of Section 752 of the Code), and (C) the Member's
share of Net Profits and of any separately allocated items of income or gain
(including any gain and income from unrealized income with respect to accounts
receivable allocated to the Member to reflect the difference between the book
value and tax basis of assets contributed by the Member). Each Member's Capital
Account shall be decreased by (x) the amount of any Money distributed to the
Member by the Company in respect of the Member's Membership and Percentage
Interest, (y) the fair market value of any Property distributed to the Member in
respect of the Member's Membership and Percentage Interest, such fair market
value as determined by the Company and the contributing Member at arm's length
at the time of distribution (net of liabilities of the Company assumed by the
Member or subject to which the Member takes such Property within the meaning of
Section 752 of the Code), and (z) the Member's share of Net Losses and of any
separately allocated items of deduction or loss (including any loss or deduction
allocated to the Member to reflect the difference between the book value and tax
basis of assets of the Company).
9.6. Distribution of Assets - If the Company at any time distributes
any of its assets in-kind to any Member (excluding any such distribution in
repayment of a Primary Funding Loan or like obligation), the Capital Account of
each Member shall be adjusted to account for that Member's allocable share (as
determined under Article X below) of the Net Profits or Net Losses that would
have been realized by the Company had it sold the assets that were distributed
at their respective fair market values immediately prior to their distribution.
<PAGE>
9.7. Compliance with Section 704(b) of the Code - The provisions of
this Article IX as they relate to the maintenance of Capital Accounts are
intended, and shall be construed, and, if necessary, modified to cause the
allocations of profits, losses, income, gain and credit pursuant to Article X
hereof to have substantial economic effect under the Regulations promulgated
under Section 704(b) of the Code, in light of the distributions made pursuant to
Articles X and XV hereof and the Capital Contributions made pursuant to this
Article IX.
ARTICLE X.
ALLOCATIONS AND DISTRIBUTIONS
10.1. Allocations of Net Profits and Net Losses - Except as may be
required by section 704(c) of the Code, and Sections 10.3, 10.4, 10.5, 10.6 and
10.7 of this Article X, Net Profits, Net Losses, and other items of income,
gain, loss, deduction and credit shall be apportioned among the Members in
proportion to their Membership and Percentage Interests.
10.2 [Intentionally blank]..
10.3. Company Minimum Gain - If there is a net decrease in Company
Minimum Gain for a Taxable Year, each Member must be allocated items of income
and gain for that Taxable Year (and, if necessary, for succeeding Taxable Years)
equal to that Member's share of the net decrease in Company Minimum Gain. A
Member's share of the net decrease in Company Minimum Gain is the amount of the
total net decrease multiplied by the Member's percentage share of the Company
Minimum Gain at the end of the immediately preceding Taxable Year. A Member's
share of any decrease in Company Minimum Gain resulting from a revaluation of
Company Property equals the increase in the Member's Capital Account
attributable to the revaluation to the extent the reduction in Company Minimum
Gain is caused by the revaluation. A Member is not subject to the Company
Minimum Gain Chargeback Requirement to the extent the Member's share of the net
decrease in Company Minimum Gain is caused by a guarantee, refinancing, or other
change in the debt instrument causing it to become partially or wholly a Member
Nonrecourse Liability, and the Member bears the economic risk of loss (within
the meaning of '1.752-2 of the Regulations) for the newly guaranteed,
refinanced, or otherwise changed liability.
10.4. Member Minimum Gain Chargeback - If during a Taxable Year there
is a net decrease in Member Minimum Gain, any Member with a share of that Member
Minimum Gain (as determined under '1.704-2(i)(5)of the Regulations) as of the
beginning of that Taxable Year must be allocated items of income and gain for
that Taxable Year (and, if necessary, for succeeding Taxable Years) equal to
that Member's share of the net decrease in the Member Minimum Gain. A Member's
share of the net decrease in Member Minimum Gain is determined in
<PAGE>
a manner consistent with the provisions of paragraph (g)(2) of section 1.704-2
of the Regulations. A Member is not subject to this Member Minimum Gain
Chargeback, however, to the extent the net decrease in Member Minimum Gain
arises because the liability ceases to be Member Nonrecourse Liability due to a
conversion, refinancing, or other change in the debt instrument that causes it
to become partially or wholly a Company Nonrecourse Liability. The amount that
would otherwise be subject to the Member Minimum Gain Chargeback is added to the
Member's share of Company Minimum Gain. In addition, rules consistent with those
applicable to Company Minimum Gain shall be applied to determine the shares of
Member Minimum Gain and Member Minimum Gain Chargeback to the extent provided
under the Regulations issued pursuant to '704(b) of the Code.
10.5. Qualified Income Offset - In the event any Member, in such
capacity, unexpectedly receives an Offsettable Decrease, such Member will be
allocated items of income and gain (consisting of a portion of each item of
Company income and gain for such year) in an amount and manner sufficient to
offset such Offsettable Decrease as quickly as possible.
10.6. Company Non-Recourse Deductions. Company Non-Recourse Deductions
shall be allocated amongst the Members in proportion to their Membership and
Percentage Interests.
10.7. Member Non-Recourse Deductions. Member Non-Recourse Deductions
shall be allocated, in proportion to their Membership and Percentage Interests,
exclusively to the Member or Members who bear or are deemed to bear the economic
risk of loss with respect to the Member Non-Recourse Liability to which the
deduction relates.
10.8. Interim Distributions- The Company shall carry on its books a
drawing account for each Member. On the Business Days nearest the 15th and last
day of each month, and at such other times as may be determined by the Managing
Member, in accordance with the Company's cash flow and financial projections,
each Member shall be paid such amounts as may be determined by the Managing
Member, which shall thereupon be charged to that Member's drawing account. Such
interim distributions shall be in cash and/or Property which shall distributed
proportionately to the Members in accordance with their Membership and
Percentage Interests. All interim distributions which, when made, exceed the
recipient Member's basis in that Member's Membership and Percentage Interest
shall be considered advances or drawings against the Member's distributive share
of Net Profits. To the extent it is determined at the end of the Taxable Year of
the Company that the recipient Member has been allocated net taxable income that
is less than the total of such advances or drawings for such year, the recipient
Member shall, at the request of the Managing Member, be obligated to promptly
restore any such advances or drawings to the Company. Notwithstanding the
foregoing sentence, the Member will not be required to restore such advances or
drawings to the extent that, on the last day of the Taxable Year, the recipient
<PAGE>
Member's basis in the Member's Membership and Percentage Interest in the Company
has increased from the time of such advance or drawing. The Members intend that,
if possible, sufficient Money be distributed to permit the Members, including
each BDC Group Member, to pay any local, state and Federal tax liabilities owed
by the Members, including each BDC Group Member, with respect to income in
respect of their Membership and Percentage Interests. In addition, the Company
shall distribute all available cash after providing for (a) debt service
(including repayments of principal and interest under any Primary Funding Loan),
(b) scheduled capital expenditures, (c reserves for debt service (including
repayments of principal and interest under any Primary Funding Loan), and (d)
reserves for additional capital improvements and working capital requirements
which shall not, in the case of this clause (d), exceed 10% of the gross
annualized revenues of the Company without the unanimous consent of the Members,
provided that, if the $40 million limit set forth in Section 9.2 hereof has
previously been reached, no additional reserves may be established pursuant to
this clause (d) (and the 10% gross annualized revenue provision in this clause
(d) shall be inapplicable) without the unanimous consent of the Members, which
consent shall not be unreasonably withheld.
10.9. Limitations on Distributions - No distribution shall be declared
and paid which would be in violation of Section 31B-4-406 of the Act.
ARTICLE XI.
TAXES
11.1. Elections - The Managing Member may make any tax elections for
the Company allowed under the Code or the tax laws of any state or other
jurisdiction having taxing jurisdiction over the Company.
11.2. Taxes of Taxing Jurisdictions- To the extent that the laws of any
Taxing Jurisdiction requires, each Member (or such Members as may be required by
the Taxing Jurisdiction) will submit an agreement indicating that the Member
will make timely income tax payments to the Taxing Jurisdiction and that the
Member accepts personal jurisdiction of the Taxing Jurisdiction with regard to
the collection of income taxes attributable to the Member's income, and
interest, and penalties assessed on such income. If the Member fails to provide
such agreement, the Company may withhold and pay over to such Taxing
Jurisdiction the amount of tax, penalty and interest determined under the laws
of the Taxing Jurisdiction with respect to such income. Any such payments with
respect to the income of a Member shall be treated as a distribution to such
Member for purposes of Article X hereof.
<PAGE>
The Managing Member may, where permitted by the rules of any Taxing
Jurisdiction, file a composite, combined or aggregate tax return reflecting the
income of the Company and pay the tax, interest and penalties of some or all of
the Members on such income to the Taxing Jurisdiction, in which case the Company
shall inform the Members of the amount of such tax interest and penalties so
paid.
11.3. Tax - The Managing Member shall be designated the "tax matters
partner" of the Company pursuant to Section 6231(a)(7) of the Code. The Managing
Member shall also be the notice partner within the meaning of Section 6223 of
the Code.
11.4. Accrual Method of Accounting- The records of the Company shall be
maintained on an accrual method of accounting.
ARTICLE XII.
DISPOSITION OF MEMBERSHIP INTERESTS
12.1. Disposition of Membership Interests - No Member shall have the
right, without the prior written consent of the other Members, to transfer all
or any part of a Membership and Percentage Interest, including the Member's
interest in any of the Company's Property, other than to another Member, except
that: (i) other Members of the Company may succeed to the rights of one or more
of them in accordance with the terms of the Operating Agreement or by operation
of law; (ii) a Member may pledge or grant a security interest in its Membership
and Percentage Interest so long as the pledgee or secured party (or the
pledgee's or secured party's transferee) agrees in writing to be bound by the
terms and provisions hereof in the place and stead of the debtor Member in the
event of a foreclosure on such pledge or security interest, and, in such event,
such a foreclosing creditor (or the creditor's transferee) shall have and may
exercise all of the rights of the Member whose obligation is being foreclosed,
subject to the terms and provisions hereof; or (iii) Members may transfer their
Membership and Percentage Interest to the equity or beneficial owners of a
Member or to a trust or estate for the benefit of the heirs or beneficiaries of
such equity or beneficial owners or to another entity controlled by such equity
or beneficial owners or such trust or estate, or to a charitable trust or other
charitable entity, provided that each such transferee agrees in writing to be
bound by the terms and provisions hereof in the place and stead of the
transferring Member. No collateral assignment by a Member of that Member's
Membership and Percentage Interest shall cause such Member to cease to be a
Member pursuant to the provisions of Section 31B-6-601(3) of the Act. The
Members hereby unanimously consent, pursuant to Section 31B-5-503 of the Act,
to the admission as a Member of an assignee of a Member's Membership and
Percentage Interest pursuant to this Section 12.1. Notwithstanding the
foregoing, no transfer of all or any part of a Membership and Percentage
Interest shall be effective unless such transfer is made
<PAGE>
in compliance with any applicable securities laws, the Statutes, and the Rules
and regulations (and, if applicable, the approval) of the Commissions.
12.2 The BDC Group and its Members. The Company, PNGI/West Virginia and
BDC acknowledge that BDC has held its Membership and Percentage Interest in the
Company as nominee for its beneficial owners constituting the Members of the BDC
Group as set forth on Exhibit A attached hereto. The Company and its Managing
Member acknowledge that BDC has retitled its interest as nominee into individual
interests held by the BDC Group Members, and that the BDC Group Members have
thereby become Members of the Company and parties to the Operating Agreement.
ARTICLE XIII.
DISSOCIATION OF A MEMBER
13.1. Dissociation- A Person shall cease to be a Member upon the
happening of any of the following events:
13.1.1. the Withdrawal of a Member;
13.1.2. the Member's ceasing to be eligible to be a Member of the
Company;
13.1.3. the Member's becoming a Bankrupt Member;
13.1.4. in the case of a Member that is a corporation, the filing
of a certificate of dissolution, or its equivalent, for the
corporation or the revocation of its charter.
13.1.5. in the event that a Member, or its equity owners,
beneficial owners, officers, directors or employees fail, if required
by either Commission, to become a Licensed Person, or such person
ceases to be a Licensed Person and the failure of which could cause
the Company to lose a License.
<PAGE>
13.2. Purchase of Dissociated Member's Membership Interest - All
Members shall be notified of the Dissociation of a Member by the Managing Member
within two Business Days of any such Dissociation. Upon the Dissociation of a
BDC Group Member, one or more of the other BDC Group Members may purchase all or
a portion of such Dissociated BDC Group Member's Membership and Percentage
Interest in such manner and upon such terms and conditions as the BDC Group
Members may agree or, upon failure to reach such agreement within sixty days of
receipt of Notice of such a Dissociation, in the manner and upon the terms and
conditions set forth below in this Section 13.2. In the event all of a
Dissociated BDC Group Member's Membership and Percentage Interest is not
purchased in accordance with the foregoing provisions of this Section 13.2., or
upon the Dissociation of any other Member, the unpurchased portion of the
Dissociated Member's Membership and Percentage Interest may be purchased by the
Company (and shall be purchased by the Company under the circumstances set forth
in the last sentence of this Section 13.2) for a purchase price equal to the
fair market value thereof determined in accordance with Section 13.3 hereof. If
the Company does not determine to purchase all of the Dissociated Member's
Membership and Percentage Interest within ten Business Days, the Company shall
provide the Members Notice of such determination, and such unpurchased portion
(the "Available Interest") may be purchased by the other Members (or an
affiliate of such Members) in accordance with the formula set forth below (each
such Member or Member affiliate purchaser referred to in Sections 13.2 and 13.3
hereof as a "Purchaser") for a purchase price equal to the aggregate fair market
value of the Available Interest determined according to the provisions of
Section 13.3 hereof, in the following manner (with a decision provided for in
each following step to be made within five Business Days: (i) if only one
Purchaser wishes to acquire all or part of the Available Interest such Purchaser
may acquire the amount of the Available Interest it wishes to acquire and (ii)
if more than one Purchaser wishes to acquire all or part of the Available
Interest, each such Purchaser shall be entitled to acquire an amount of the
Available Interest equal to the product of (x) the Available Interest and (y) a
fraction, the numerator of which is such Purchaser's Membership and Percentage
Interest in the Company and the denominator of which is the aggregate Membership
and Percentage Interests of all Purchasers who wish to acquire the Available
Interest, provided that if a Purchaser determines to acquire some but not all of
the Available Interest it is entitled to acquire pursuant to the formula set
forth in clause (ii) of this sentence, the other Purchasers who still wish to
acquire any of the remaining Available Interest may acquire the same applying
the formula set forth in clause (ii) of this sentence (assuming for purposes of
applying such formula after its initial application, that such Purchasers have
acquired a portion of the Available Interest pursuant to the previous
application of the formula set forth in clause (ii) of this sentence) until such
available remaining unpurchased portion of the Available Interest is either
acquired by Purchasers or such Purchasers do not wish to acquire any more
remaining unpurchased portion of the Available Interest. The purchase price of
such interest shall be paid by the
<PAGE>
Purchasers (or, as applicable, the Company) to the Dissociated Member in cash
within 60 days of determination of the purchase price as determined in
accordance with Section 13.3 below. The Company shall purchase all of the
Dissociated Member's remaining Membership and Percentage Interest not purchased
initially by the Company or by the Purchasers as set forth above for the
purchase price and on the payment terms set forth in the preceding sentence.
13.3. Purchase Price of Dissociated Member's Membership Interest -
13.3.1. The fair market value of a Member's Membership and
Percentage Interest to be purchased by the Company and/or one or more
Purchasers pursuant to Section 13.2 hereof shall be determined by
agreement between the Dissociated Member and the Company and/or such
Purchasers, as applicable, which purchase, if made by the Company,
shall be subject to the approval of the other Members. For this
purpose, the fair market value of the Dissociated Member's Membership
and Percentage Interest shall be computed as the amount which could
reasonably be expected to be realized by such Member upon the sale of
the business conducted by the Company (or, if the Company is not
conducting its business as contemplated in Article III hereof, then
upon the sale of the Company Property), in the ordinary course of
business at the time of the Dissociation, subject to any discounts
(not to exceed 5%) which may apply by virtue of a Member owning a
minority interest in the Company where the fair market value is
determined in contemplation of a sale of the business conducted by the
Company rather than a sale of the Company Property, and the
distribution of such amounts as if the Company were wound up and its
assets distributed as provided in Section 15.3 (subject to Section
15.4) hereof.
13.3.2. If the Dissociated Member and/or the Company and/or one
or more Purchasers, as applicable, cannot agree upon the fair market
value of such Membership and Percentage Interest within 30 days (the
"Valuation Period), the fair market value thereof shall be determined,
within twenty Business Days after appointment, by appraisal, such
Purchasers (and the Company, if applicable), and the Dissociated
Member each to choose one appraiser within five Business Days after
expiration of the Valuation Period. If the fair market values as
determined by the appraisers are within ten (10%) of each other, the
fair market value shall be the average of the appraisals. If the fair
market values determined by appraisers are not within ten percent of
each other, and such Purchasers (and/or the Company, if applicable),
and the Dissociated Member are still unable to agree on the fair
market value, the appraisers shall choose an additional appraiser (the
"Final Appraiser") within five Business Days thereafter, and the Final
Appraiser shall choose, within ten Business Days after his or her
appointment, the fair
<PAGE>
market value of one of such original appraisers as the most accurate.
Each such appraiser shall be required to have substantial experience
appraising the type of business predominately conducted by the Company
at the time of Dissociation. The decision of the Appraiser as to the
fair market value of such Membership and Percentage Interest in
accordance with this Section 13.3. shall be final and binding and may
be enforced by legal proceedings. The Dissociated Member and such
Purchasers (and/or the Company, if applicable), shall each compensate
the appraiser appointed by it and the compensation of the Final
Appraiser, if such Final Appraiser is engaged, shall be borne equally
by such parties.
ARTICLE XIV.
ADMISSION OF ADDITIONAL MEMBERS
14.1. Admission of Additional Members - The Members by unanimous
consent may admit Additional Members.
ARTICLE XV
DISSOLUTION AND WINDING UP
15.1. Dissolution - The Company shall be dissolved and its affairs
wound up, upon the unanimous written consent of the Members, the expiration of
the term set forth in Section 1.7, or as otherwise provided by Section 31B-8-801
of the Act.
15.2. Effect of Dissolution- Upon dissolution, the Company shall cease
carrying on as distinguished from the winding up of the Company business, but
the Company shall not be terminated, but shall continue until the winding up of
the affairs of the Company is completed and a Certificate of Dissolution has
been issued by the Secretary of State of West Virginia.
15.3. Distribution of Assets on Dissolution - Upon the winding up of
the Company, the Company Property shall be distributed as follows:
<PAGE>
15.3.1. to secured creditors to the extent of their security,
including Members who are secured creditors for reasons other than
unpaid Distributions;
15.3.2. to general unsecured creditors, including Members who are
creditors for reasons other than unpaid Distributions, to the extent
permitted by law, in satisfaction of Company Liabilities;
15.3.3. to Members who are creditors as a result of unpaid
Distributions; provided, however, that if such Distributions were made
within one year of the Dissolution, then such Member will be at parity
with other general unsecured creditors; and
15.3.4. to Members in the amount of their respective positive
Capital Account balances taking into account all Capital Account
adjustments for the Company's Taxable Year in which the liquidation
occurs.
15.4. Payment of Liquidation Proceeds - Liquidation proceeds shall be
paid within 60 days of the end of the Company's Taxable Year or, if later,
within 90 days after the date of liquidation. Such distributions shall be in
cash and/or Property which shall be distributed proportionately to the Members
in accordance with their Membership and Percentage Interests.
15.5. Winding Up and Certificate of Dissolution - The winding up of the
Company shall be completed when all debts, liabilities, and obligations of the
Company have been paid and discharged or reasonably adequate provision therefor
has been made, and all of the remaining property and assets of the Company have
been distributed to the Members. Upon the completion of winding up of the
Company, a Certificate of Dissolution shall be delivered to the Secretary of
State of West Virginia for filing. The Certificate of Dissolution shall set
forth the information required by the Act.
ARTICLE XVI
AMENDMENT
16.1. Operating Agreement May Be Modified This Operating Agreement may
be modified or amended as provided in this Article XVI (as the same may from
time to time be amended). No Member or Managing Member shall have any vested
rights in the Operating Agreement which may not be modified through an amendment
to this Operating Agreement.
16.2. Amendment or Modification of Operating Agreement - This Operating
Agreement may be amended or modified from time to time only by a vote of or
written instrument
<PAGE>
signed by the Members as provided in Section 7.1. hereof. Notwithstanding the
foregoing or anything to the contrary in this Operating Agreement, no amendment
or modification to this Operating Agreement which adversely affects a Member's
right to allocations or Distributions as provided for herein shall be effective
against any such Member which did not vote in favor of, consent to, or ratify
such amendment or modification. The Managing Member shall promptly notify each
Member prior to any amendment to this Operating Agreement.
ARTICLE XVII
17.1 The Showboat Obligations. The Company and the Members hereby
acknowledge and agree that the Company shall, and hereby does, assume the
obligation of BDC as Nominee to pay Showboat, Inc. $250,000 (the "Showboat
Obligation"), as provided in that certain letter dated March 14, 1996 from
Showboat, Inc. to BDC and confirmed in that certain letter dated March 29, 1996
from BDC to Showboat, Inc. The Company hereby covenants and agrees that it shall
pay, perform and discharge the Showboat Obligation, and hereby agrees to
indemnify, defend and hold harmless BDC, BDC's shareholders, officers and
directors, and BDC Group Members from any liability, cost or expense any of them
may suffer or incur by reason of any failure of the Company to properly pay,
perform and discharge the Showboat Obligation.
17.2 The $250,000 Loans - The Company and the Members hereby
acknowledge and agree that the $250,000 loan made by BDC as Nominee to the
Company, and evidenced by a promissory note issued by the Company to BDC has
been satisfied in full by a payment by the Company to BDC of $175,000, receipt
of which is hereby acknowledged, and that the $250,000 loan made by PNGI/West
Virginia to the Company, and evidenced by a promissory note issued by the
Company to PNGI/West Virginia shall be paid by the Company to PNGI/West Virginia
in accordance with the terms of such promissory note.
17.3 Certain Definitions. The Members hereby acknowledge and agree that
the terms "Percentage Interest", "Membership Interest", and "Membership and
Percentage Interest" as used in this Operating Agreement shall mean one and the
same thing, being "Percentage Interest" as defined in Appendix I to the
Operating Agreement.
17.4 Determination of Members. To the extent unanimous consent or the
consent of a majority of the Members measured by the number of Members (rather
than by Membership and Percentage Interests) is required or permitted for any
action under this Operating Agreement, for all such purposes (except with
respect to an amendment or modification to this Operating Agreement as described
in the second sentence of Section 16.2 above), the BDC Group Members together
shall constitute a single Member. The BDC Group Members hereby appoint James A.
Reeder as their attorney-in-fact (the "BDC Representative") for purposes of
notifying the Managing Member of the vote or consent of the BDC Group Members
under this Operating
<PAGE>
Agreement, receiving notices from the Company or other Members to the BDC Group
Members (which shall be in addition to the Notices required to be given by the
Managing Member to all Members pursuant to the provision of Section 18.5 below)
and the taking of any action required or permitted to be taken under this
Operating Agreement by the BDC Group Members collectively. The BDC Group Members
hereby agree that the Managing Member may rely on the actions and communications
of the BDC Representative for such purposes, until such time as the Managing
Member receives a written instrument executed by each of the BDC Group Members
appointing a new BDC Representative, in which case the Managing Member may rely
thereafter on such communications and actions of such new BDC Representative.
ARTICLE XVIII.
MISCELLANEOUS PROVISIONS
18.1. Entire Agreement/Binding Effect - This Operating Agreement sets
forth the entire understanding and agreement among the parties hereto with
respect to the subject matter hereof, and supersedes and is instead of the
original Operating Agreement between the parties hereto dated February, 1996 and
amended as of December 31, 1996, and any and all other prior or contemporaneous
agreements or understandings, written or oral, between or among such parties
with respect to such subject matter. All of the terms and provisions of this
Operating Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective personal representatives, heirs, successors and
permitted assigns of the Members.
18.2. No Partnership Intended for Nontax - The Members have formed the
Company under the Act, and expressly do not intend hereby to form a partnership
under either the West Virginia Partnership Act or the West Virginia Uniform
Limited Partnership Act. The Members do not intend to be partners one to
another, or partners as to any third party. To the extent any Member, by word or
action, represents to another person that any other Member is a partner or that
the Company is a partnership, the Member making such wrongful representation
shall be liable to any other Member who incurs personal liability by reason of
such wrongful representation.
18.3. Rights of Creditors and Third Parties under Operating Agreement -
This Operating Agreement is entered into among the Company and the Members for
the exclusive benefit of the Company, its Members, and their personal
representatives, heirs, successors and permitted assigns. This Operating
Agreement is expressly not intended for the benefit of any creditor of the
Company or any other Person, except as specifically provided herein. Except and
only to the extent provided herein or by applicable statute, no such creditor or
third party shall have any rights under this Operating Agreement or any
agreement between the Company and any Member with respect to any Capital
Contribution or otherwise.
<PAGE>
18.4. Arbitration. The Members agree that any controversy, claim or
dispute arising out of or relating to this Operating Agreement, including, but
not limited to, the breach, validity or termination thereof (a "Dispute"), shall
be finally settled by arbitration before a single arbitrator to be held in the
city of Wilmington, Delaware in accordance with the Commercial Arbitration Rules
of the American Arbitration Association then in effect ("Rules"). If the parties
do not agree upon an arbitrator within 15 days after a Member's receipt of a
demand for arbitration then, upon the written request of any Member, the
arbitrator shall be appointed in accordance with Rule 13 of the Rules. The
arbitration and this Section 18.4 shall be governed by the Federal Arbitration
Act, 9 U.S.C. '1 et seq. Judgment may be entered on the Arbitrator's award in
any court having jurisdiction. By agreeing to arbitrate, the Members do not
intend to deprive any Court of its jurisdiction to issue a pre-arbitral
injunction, pre-arbitral attachment or other order in aid of an arbitration
proceeding.
18.5. Notices. All written notices, demands and requests of any kind
which either party may be required or may desire to serve upon the other party
hereto in connection with this Agreement shall be delivered only by nationally
recognized overnight courier or other means of personal service which provides
written verification of receipt (a "Notice"). All Notices shall be addressed to
each of the parties to be served as follows:
PNGI/West Virginia
Peter M. Carlino, Chairman
Wyomissing Professional Center
825 Berkshire Boulevard, Suite 203
Wyomissing, Pennsylvania 19610
All Notices with a copy to:
Robert P. Krauss, Esquire
Mesirov Gelman Jaffe Cramer & Jamieson
1735 Market Street, 38th Floor
Philadelphia, Pennsylvania 19103-7598
Bryant Development Company, as nominee for the BDC Group, or any
BDC Group Members (all such Notices to go to each of the following)
<PAGE>
James A. Reeder, individually or as President of The BDC Group
Members with an address at:
c/o Patton Boggs, L.L.P.
2550 M Street, N.W.
Washington, D.C. 20037
Thomas Hale Boggs, Jr., with an address at:
c/o Patton Boggs, L.L.P.
2550 M Street, N.W.
Washington, D.C. 20037
William C. Bryant, with an address at:
c/o James A. Reeder
Patton Boggs, L.L.P.
2550 M. Street, N.W.
Washington, D.C. 20037
Timber Nation Limited Partnership, with an address at:
c/o Falconwood Corporation
565 Fifth Avenue, 3rd Floor
New York, NY 10017
All Notices to Bryant Development Company or any and all BDC Group
Members shall be sent to each BDC Group Member with a copy in each
case to:
Nancy A. Lieberman, Esquire
Skadden, Arps, Slate, Meagher & Flom, LLP
919 Third Avenue
New York, New York 10022
or other such address as shall be furnished in writing by any such party to the
other party, and such Notice shall be effective and be deemed to have been given
as of the date actually received.
<PAGE>
18.6. Further Documents. The Members and the Company shall, at any time
and from time to time after the date hereof, upon request by one or more of the
others and without further consideration, execute and deliver such instruments
or other documents and take such further action as may be reasonably required in
order to perfect any other undertaking made by the Members or the Company
hereunder.
18.7 Exhibits and Schedules. The Exhibits and Schedules (and any
appendices thereto) referred to in this Operating Agreement are and shall be
incorporated herein and made a part hereof.
18.8. Sections and Articles. Unless the context otherwise requires, all
Sections, Articles, Schedules and Exhibits referred to herein are, respectively,
sections and articles of, and schedules and exhibits to, this Operating
Agreement.
18.9. Headings. Headings as to the contents of particular Articles and
Sections hereof are for convenience only and are in no way to be construed as a
part of this Operating Agreement or as a limitation of the scope of the
particular Articles or Sections to which they refer.
18.10. Number and Gender of Words. Whenever herein the singular number
is used, the same shall include the plural where appropriate and words of any
gender shall include each other gender where appropriate.
18.11. Invalid Provisions. If any provision of this Operating Agreement
is held to be illegal, invalid, or unenforceable under present or future laws,
such provisions shall be fully severable as if such invalid or unenforceable
provisions had never comprised a part of the Agreement; and the remaining
provisions of this Operating Agreement shall remain in full force and effect and
shall not be affected by the illegal, invalid or unenforceable provision or by
its severance from this Operating Agreement. Furthermore, in lieu of such
illegal, invalid or unenforceable provision, there shall be automatically as a
part of this Operating Agreement, a provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible and be legal,
valid and enforceable.
18.12. Multiple Counterparts. This Operating Agreement may be executed
in a number of identical counterparts. If so executed, each of such counterparts
is to be deemed an original for all purposes and all such counterparts shall,
collectively, constitute one agreement, but, in making proof of this Operating
Agreement, it shall not be necessary to produce or account for more than one
such counterpart.
<PAGE>
18.13. No Rule of Construction. All of the parties hereto have been
represented by counsel in the negotiations and preparation of this Operating
Agreement; therefore, this Operating Agreement will be deemed to be drafted by
each of the parties hereto, and no rule of construction will be invoked
respecting the authorship of this Operating Agreement.
18.14. Waiver. No waiver by any Member of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, (i) shall be binding unless in writing signed by the Member
to be bound and (ii) shall be deemed to extend to any prior or subsequent
default, misrepresentation or breach of warranty or covenant hereunder or affect
in any way any rights arising by virtue of any such prior or subsequent
occurrence.
18.15.Governing Law - This Operating Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of West
Virginia applicable to agreements made and to be performed entirely within such
State without reference to that state's "conflict of laws" laws.
18.16 Assignment - No Member may assign either this Operating Agreement
or any of its rights, interests or obligations hereunder, except as otherwise
specifically provided herein, without the prior written consent of all other
Members.
<PAGE>
IN WITNESS WHEREOF, we have hereunto set our hands and seals on the
date set forth beside our names.
PNGI CHARLES TOWN GAMING LIMITED
LIABILITY COMPANY
BY: /s/ Peter M. Carlino
-----------------------------
PETER M. CARLINO, CHAIRMAN
Date: October 17, 1997
PENN NATIONAL GAMING OF
WEST VIRGINIA, INC.
BY: /s/ William J. Bork
-----------------------------
WILLIAM J. BORK, PRESIDENT
Date: October 17, 1997
BRYANT DEVELOPMENT COMPANY, NOMINEE
BY: /s/ James A. Reeder
-----------------------------
JAMES A. REEDER, PRESIDENT
Date: November 5, 1997
/s/ James A. Reeder
- ----------------------
JAMES A. REEDER
Date: November 5, 1997
/s/ Thomas Hale Boggs, Jr.
- --------------------------
THOMAS HALE BOGGS, JR.
Date: November 5, 1997
/s/ William C. Bryant
- ----------------------
WILLIAM C. BRYANT
Date: October 28, 1997
<PAGE>
TIMBER NATION LIMITED PARTNERSHIP
BY: /s/ Dr. Henry G. Jarecki
-----------------------------
DR. HENRY G. JARECKI, GENERAL PARTNER
Date: November 12, 1997
<PAGE>
The undersigned is executing this signature page below for the
sole purpose of agreeing to be bound by Section 18.4 of the Operating Agreement
to the extent the undersigned is a party to a Dispute subject to Section 18.4.
PENN NATIONAL GAMING, INC.
BY: /s/ William J. Bork
--------------------------
WILLIAM J. BORK, PRESIDENT
<PAGE>
EXHIBIT A
Membership and Percentage Interest
Member
Penn National Gaming PERCENTAGE
INTEREST
of West Virginia, Inc. 89%
James A. Reeder* 2.75%
Thomas Hale Boggs, Jr.* 2.75%
William C. Bryant* 2.75%
Timber Nation Limited Partnership* 2.75%
- ---------------------
* transferred to each Member from BDC, which held such interests as nominee
Managing Member
Penn National Gaming of West Virginia, Inc., or any direct or indirect
subsidiary of Penn National Gaming, Inc., shall be the sole Managing Member.
Members
Penn National Gaming of West Virginia, Inc., a West Virginia corporation and an
indirect wholly-owned subsidiary of Penn National Gaming, Inc., with an address
at:
Peter M. Carlino, Chairman
Wyomissing Professional Center
825 Berkshire Boulevard, Suite 203
Wyomissing, Pennsylvania 19610
Bryant Development Company, as nominee for the BDC Group, with an address at:
James A. Reeder, President
c/o Patton Boggs, L.L.P.
2550 M Street, N.W.
Washington, D.C. 20037
<PAGE>
The BDC Group Members
James A. Reeder, with an address at:
c/o Patton Boggs, L.L.P.
2550 M Street, N.W.
Washington, D.C. 20037
Thomas Hale Boggs, Jr., with an address at:
c/o Patton Boggs, L.L.P.
2550 M Street, N.W.
Washington, D.C. 20037
William C. Bryant, with an address at:
c/o James A. Reeder
Patton Boggs, L.L.P.
2550 M. Street, N.W.
Washington, D.C. 20037
Timber Nation Limited Partnership, with an address at:
c/o Falconwood Corporation
565 Fifth Avenue, 3rd Floor
New York, NY 10017
<PAGE>
EXHIBIT B
PRIMARY FUNDING LOANS AS OF AUGUST 31, 1997
Amount of Primary
Funding Loan
<TABLE>
<S> <C> <C> <C>
Option Fees ($250,000 Showboat; $175,000 extension) $ 425,000
Referendum $ 593,067
Financing cost ($750,000 BT Loan Fee plus legal fees and settlement costs) $ 880,538
Acquisition of Charles Town Races [$16,500,000 less sale of Scheetz land] $16,009,564
Construction Period Interest $ 554,122
Refurbishment of CharlesTown Races Facility - in progress $17,432,206
Capital Expenditures $ 848,122
Operating Expenses of the Company $ 538,386
-----------
Total $37,281,055
===========
</TABLE>
Principal Economic Terms of The BT Loan:
A copy of the BT Loan has been provided to the BDC Representative and
to Nancy Lieberman, Esquire.
<PAGE>
APPENDIX I
DEFINITIONS
Act - The West Virginia Limited Liability Company Act effective July 1,
1996 and all amendments to such Act as they shall from time to time be adopted.
Additional Member - A Member other than an Initial Member who has
acquired a Membership and Percentage Interest from the Company.
Articles - The Articles of Organization of the Company as properly
adopted and amended from time to time by the Members and filed with the
Secretary of State.
Bankrupt Member - A Member who: (1) has become the subject of an Order
for Relief under the United States Bankruptcy Code, (2) has initiated, either in
an original Proceeding or by way of answer in any state insolvency or
receivership proceeding, an action for liquidation arrangement, composition,
readjustment, dissolution, or similar relief.
BDC - Bryant Development Company, a Virginia corporation, as nominee
for the BDC Group.
BDC Group - BDC, James A. Reeder, Thomas Hale Boggs, Jr., William C.
Bryant and Timber Nation Limited Partnership and any transferee(s) or
acquiree(s) of a Membership and Percentage Interest in the Company from such
Person(s) who acquires such Membership and Percentage Interest in accordance
with, or in a manner permitted by, the terms of this Operating Agreement, or any
subsequent transferee(s) or acquiree(s) of a Membership and Percentage Interest
in the Company from such an initial transferee or acquiree who acquires such
Membership and Percentage Interest in accordance with or in the manner permitted
by the terms of this Operating Agreement.
BDC Group Member - A Member of the Company which is also a member of
the BDC Group, including, without limitation, any "transferees" or "acquirees"
as such terms are used in the definition of the BDC Group.
BDC Group Representative - The Person permitted to receive Notices, to
Notify the Managing Member and/or and act on behalf of the BDC Group Members
pursuant to Section 17.4 of the Operating Agreement.
<PAGE>
BT Loan - That certain Tranche B Term Loan under that certain Credit
Agreement dated as of November 27, 1996 among Penn National Gaming, Inc.,
various banks, CoreStates Bank, N.A. as Co-Agent and Bankers Trust Company as
Agent.
Business Day - Any day other than Saturday, Sunday or any legal holiday
observed in West Virginia.
Capital Account - The account maintained for a Member determined in
accordance with Article IX of the Operating Agreement.
Capital Contribution - Any Contribution or contribution of services
made by or on behalf of a new or existing Member as consideration for a
Membership and Percentage Interest.
Code - The Internal Revenue Code of 1986 as amended from time to time.
Commission - The West Virginia Horse Racing Commission or any successor
thereto and the West Virginia Lottery Commission (which are individually
referred to as a "Commission" and collectively are referred to as the
"Commissions").
Commitment - The obligation of a Member to make a Capital Contribution,
Member Loan or Member Guarantee in the future.
Company - PNGI Charles Town Limited Liability Company, a limited
liability company formed under the laws of the State of West Virginia, and any
successor limited liability company.
Company Liability - Any enforceable debt or obligation for which the
Company is liable or which is secured by any Company Property.
Company Minimum Gain - An amount determined by first computing for each
Company Nonrecourse Liability any gain the Company would realize if it disposed
of the Company Property subject to that liability for no consideration other
than full satisfaction of the liability, and then aggregating the separately
computed gains. The amount of Company Minimum Gain includes such minimum gain
arising from a conversion, refinancing, or other change to a debt instrument,
only to the extent a Member is allocated a share of that minimum gain. For any
Taxable Year, the net increase or decrease in Company Minimum Gain is determined
by comparing the Company Minimum Gain on the last day of the immediately
preceding Taxable Year with the Minimum Gain on the last day of the current
Taxable Year. Notwithstanding any provision to the contrary contained herein,
Company Minimum Gain and
<PAGE>
increases and decreases in Company Minimum Gain are intended to be computed in
accordance with section 704 of the Code and the Regulations issued thereunder,
as the same may be issued and interpreted from time to time. A Member's share of
Company Minimum Gain at the end of any Taxable Year equals: the sum of
Nonrecourse Deductions allocated to that Member (and to that Member's
predecessors in interest) up to that time and the distributions made to that
Member (and to that Member's predecessors in interest) up to that time of
proceeds of a nonrecourse liability allocable to an increase in Company Minimum
Gain minus the sum of that Member's (and that Member's predecessors in interest)
aggregate share of the net decreases in Company Minimum Gain plus their
aggregate share of decreases resulting from revaluations of Company Property
subject to one or more Company Nonrecourse Liabilities.
Company Nonrecourse Liability - Nonrecourse liability of the Company as
defined in Section 1.704-2(b)(3) of the Regulations.
Company Nonrecourse Deductions - Any loss or deduction or other
expenditure of the Company described in Section 705(a)(2)(B) of the Code which
loss or deduction is attributable to a Company Nonrecourse Liability, all as
more specifically set forth in Regulations Section 1.704-2. The amount of the
Company Nonrecourse Deductions for a given fiscal year of the Company shall be
equal to the excess, if any, of the net increase, if any, in the amount of
Company Minimum Gain during that year, over the aggregate amount of any
distributions during such year of proceeds of a Company Nonrecourse Liability
that are allocable to an increase in Company Minimum Gain, as determined
according to the provisions of Section 1.704-2(d) of the Regulations.
Company Property - Any Property owned by the Company.
Contributing Member - Members making Contributions, Member Loans to the
Company or Member Guarantees of Company debt as a result of the failure of a
Delinquent Member to make the Contributions, Member Loans or Member Guarantees
pursuant to a Commitment, required by a Commitment as described in Article IX of
the Operating Agreement.
Contribution - Any contribution of Property made by or on behalf of a
new or existing Member as consideration for a Membership and Percentage
Interest.
Default Interest Rate - The lower of the legal rate or the then current
prime rate quoted by the largest commercial bank in the jurisdiction of the
Principal Office plus three percent.
Delinquent Member - A Member who has failed to perform that Member's
Commitment.
<PAGE>
Distribution - A transfer of Property to a Member on account of a
Membership and Percentage Interest as described in Article X of the Operating
Agreement.
Disposition (Dispose) - Any sale, assignment, transfer, exchange,
mortgage, pledge, grant, hypothecation, or other transfer, absolute or as
security or encumbrance (including dispositions by operation of law).
Dissociation - Any action which causes a Person to cease to be Member
as described in Article XIII of the Operating Agreement.
Dissociated Member - A Person who has ceased to be Member as a result
of Dissociation in Article XIII of the Operating Agreement.
Initial Capital Contribution - The Capital Contribution made by the
Initial Members as described in Article IX of the Operating Agreement.
Initial Members - BDC as Nominee for the BDC Group Members and
PNGI/West Virginia.
License - Any permit or license or other authorization required to
conduct or participate in or otherwise be associated with any Licensed Activity.
Any Person who obtains such a permit or license shall be a "Licensed Person."
Licensed Activities - The conduct of horse or dog racing and
pari-mutuel wagering in connection therewith, the conduct of video lottery games
or any other lawful wagering or gaming activity under current or future West
Virginia law, and all activities necessary, customary, convenient, or incident
to the foregoing.
Majority of the Members - A majority by number of the Members entitled
to vote on, consent to, or approve a particular matter.
Managing Member - A Member selected to manage the affairs of the
Company under Article VIII of the Operating Agreement.
Member - The BDC Group Members and PNGI/West Virginia, provided that
any initial or subsequent transferee(s) or acquiree(s) of a Member's Membership
and Percentage Interest who acquires such Membership and Percentage Interest in
accordance with, or in a manner permitted by, the terms of the Operating
Agreement, or any third parties who acquire a
<PAGE>
Membership and Percentage Interest in the Company in accordance with, or in a
manner permitted by, the terms of the Operating Agreement, shall also be a
"Member".
Member Guarantee - Guarantees by a Member of a loan to the Company.
Member Loan - A loan from a Member to the Company or a loan incurred by
a Member for the benefit of the Company and the Company receives the proceeds
thereof (after payment or provision for fees and expenses relating thereto).
Member Minimum Gain - An amount determined by first computing for each
Member Nonrecourse Liability any gain the Company would realize if it disposed
of the Company Property subject to that liability for no consideration other
than full satisfaction of the liability, and then aggregating the separately
computed gains. The amount of Member Minimum Gain includes such minimum gain
arising from a conversion, refinancing, or other change to a debt instrument,
only to the extent a Member is allocated a share of that minimum gain. For any
Taxable Year, the net increase or decrease in Member Minimum Gain is determined
by comparing the Member Minimum Gain on the last day of the immediately
preceding Taxable Year with the Minimum Gain on the last day of the current
Taxable Year. Notwithstanding any provision to the contrary contained herein,
Member Minimum Gain and increases and decreases in Member Minimum Gain are
intended to be computed in accordance with section 704 of the Code the
Regulations issued thereunder, as the same may be issued and interpreted from
time to time.
Member Nonrecourse Deductions - Any Company deductions that would be
Company Nonrecourse Deductions if they were not attributable to a Member
Nonrecourse Liability, as set forth in Regulations Section 1.704-2(i).
Member Nonrecourse Liability - Nonrecourse liability of a Member as
defined in Section 1.704-2(b)(4) of the Regulations.
Membership and Percentage Interest - The Membership Interest and
Percentage Interest of a Member as indicated on Exhibit A of the Operating
Agreement, as the same may be amended, from time to time.
Membership Interest - The interest of a Member determined by such
Member's Capital Account relative to the Capital Accounts of all Members.
<PAGE>
Money - Cash or other legal tender of the United States, or any
obligation that is immediately reducible to legal tender without delay or
discount. Money shall be considered to have a fair market value equal to its
face amount.
Net Losses - The losses and deductions of the Company determined in
accordance with generally accepted accounting principles consistently applied
from year to year employed under the method of accounting adopted by the Company
and as reported separately or in the aggregate, as appropriate, on the tax
return of the Company filed for federal income tax purposes.
Net Profits - The income and gains of the Company determined in
accordance with generally accepted accounting principles consistently applied
from year to year employed under the method of accounting adopted by the Company
and as reported separately or in the aggregate, as appropriate, on the tax
return of the Company filed for federal income tax purposes.
Nonrecourse Liabilities - Nonrecourse Liabilities include Company
Nonrecourse Liabilities and Member Nonrecourse Liabilities.
Notice or Notify - Notice is defined in Section 18.5 of the Operating
Agreement. The terms "notice", "notify", or "notification", whether or not
capitalized in this Operating Agreement, shall have the meaning set forth in
this paragraph.
Offsettable Decrease - Any allocation that unexpectedly causes or
increases a deficit in the Member's Capital Account as of the end of the taxable
year to which the allocation relates attributable to depletion allowances under
ss.1.704(b)(2)(iv)(k) of the Regulations, allocations of loss and deductions
under ss.ss.704(e)(2) or 706 of the Code or under ss.1.751-1 of the Regulations,
or distributions that, as of the end of the year are reasonably expected to be
made to the extent they exceed the offsetting increases to such Member's Capital
Account that reasonably are expected to occur during or (prior to) the taxable
years in which the such distributions are expected to be made (other than
increases pursuant to a Minimum Gain Chargeback).
Operating Agreement - This operating agreement including all amendments
adopted in accordance with the Operating Agreement and the Act.
Percentage Interest - The rights of a Member in Distributions
(liquidating or otherwise) and allocations of the profits, losses, gains,
deductions, and credits of the Company.
Percentage Majority of the Members - A majority by Membership and
Percentage Interest of the Members entitled to vote on, consent to, or approve a
particular matter.
<PAGE>
Percentage Majority of the Remaining Members- A majority by Membership
and Percentage Interest of all the Remaining Members.
PNGI/West Virginia - Penn National Gaming of West Virginia, Inc., a
West Virginia corporation and an indirect wholly-owned subsidiary of Penn
National Gaming, Inc., a publicly-held Pennsylvania corporation.
Proceeding - Any judicial or administrative trial, hearing or other
activity, civil, criminal or investigative, the result of which may be that a
court, arbitrator, or governmental agency may enter a judgment, order, decree,
or other determination which, if not appealed and reversed, would be binding
upon the Company, a Member or other Person subject to the jurisdiction of such
court, arbitrator, or governmental agency.
Property - Any property, real or personal, tangible or intangible,
including Money and any legal or equitable interest in such property, but
excluding services and promises to perform services in the future.
Person - An individual, trust, estate, or any incorporated or
unincorporated organization permitted to be a member of a limited liability
company under the laws of West Virginia.
Regulations - Except where the context indicates otherwise, the
permanent, temporary, proposed, or proposed and temporary regulations of
Department of the Treasury under the Code as such regulations may be lawfully
changed from time to time.
Related Person - A person having a relationship to a Member that is
described in 1.752-4(b) of the Regulations.
Removal - The act of the Remaining Members by which the Managing Member
is Removed as the Managing Member but continues to be a Member.
Resignation - The act of a Managing Member by which such Member ceases
to be a Managing Member but continues to be a Member.
Rules - The Rules promulgated by either Commission under the Statutes
and as amended from time to time.
Statutes - Article 23 [Horse and Dog Racing] of Chapter 19
[Agriculture] of the West Virginia Code (including the amendments set forth in
the 1996 Simulcast Facility and Telecommunications Bill if and when approved and
adopted as provided under West Virginia
<PAGE>
law) and Article 22A [Racetrack Video Lottery] of Chapter 19 [Agriculture] of
the West Virginia Code, and any other statute which governs any gaming or
wagering activities conducted by the Company as such exist as of the date of the
Operating Agreement or may hereafter be amended, or any successor rule or
statute of similar purpose.
Taxable Year - The taxable year of the Company shall end on December
31.
Taxing Jurisdiction - Any state, local, or foreign government that
collects tax, interest or penalties, however designated, on any Member's share
of the income or gain attributable to the Company.
Withdrawal - The act of a Member by which such Member voluntarily
ceases to be a Member.
FOURTH AMENDMENT, WAIVER AND CONSENT
FOURTH AMENDMENT, WAVIER AND CONSENT (this "Amendment"), dated as of
October 30, 1997, among PENN NATIONAL GAMING, INC. ("the Borrower"), the lenders
party to Credit Agreement referred to below (the "Banks"), CORESTATES BANK,
N.A., as Co-Agent (the "Co-Agent"). And BANKERS TRUST COMPANY, as Agent (the
"Agent"). All capitalized terms used herein and not otherwise defined herein
shall have the respective meanings provided such terms in the Credit Agreement.
WITNESSETH:
WHEREAS, the Borrower, the Banks, the Co-Agent, and the Agent are
parties to a Credit Agreement, dated as of November 27, 1996 (as amended,
modified or supplemented through, but not including the date hereof, the "Credit
Agreement");
WHEREAS, the parties hereto wish to further modify the Credit Agreement
as herein provided ; and
WHEREAS, subject to the terms and conditions of this Amendment, the
parties hereto agree as follows;
NOW, THEREFORE, it is agreed:
1. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN SECTIONS 4.02
(a) 10.02 and 10.07 (b) of the Credit Agreement, the Banks hereby agree that (I)
the Borrower may sell and leaseback its airplane that is currently owns and that
the Net Sale Proceeds from such sale shall not be required to be applied as
provided in Section 4.02(e) of the Credit Agreement, so long as (x) the Net Sale
Proceeds therefrom equal at least $890,000 and (y) the annual lease payments
made in connection with the lease of such airplane do not exceed $100,272.12.
2. Section 10.08(d) of the Credit Agreement is hereby amended by
deleting the amount "$6,000,000" appearing therein and inserting the amount
"$24,000,000" in lieu thereof.
3. The Banks hereby waive any Default or Event of Default that has
arisen under the Credit Agreement solely as a result of the Borrower failing to
comply with Section 10.12(b) of the Credit Agreement for the Test Period ending
September 30, 1997.
4. The Banks hereby agree that, on the Fourth Amendment Effective Date
(as defined below), the Total Revolving Loan Commitment shall be increased by
$5,000,000, and in connection therewith, Section I to the Credit Agreement is
hereby replaced in its entirety with the new Schedule I attached hereto and with
the amount of each Bank's Revolving Loan Commitment and/or such bank's
outstanding Terms Loans after giving effect to this Amendment to be as set forth
thereon. In connection with such increase in the Total Revolving Loan
Commitment, the Banks hereby agree that the borrower and the Agent may take all
such actions as may be necessary to ensure that all Banks continue to
participate in each Borrowing of Revolving Loans on a pro rata basis (based on
the Revolving Loan Commitment of each Bank after giving effect to the
Amendment), and it is hereby further agreed that to the extent any existing
Borrowings of Revolving Loans that are maintained as Eurodollar Loans are broken
as a result thereof, any breakage costs of the type described in Section 1.11 of
the Credit Agreement incurred by such Banks in
<PAGE>
connection therewith shall be for the account of the borrower. In addition, it
is hereby further agreed that at the time of such increase in the Total
Revolving Loan Commitment, with respect to all outstanding Letters of Credit,
there shall be an automatic adjustment to the participations by the Banks after
giving effect to this Amendment.
5. The Borrower agrees that on or promptly after the Fourth Amendment
Effective Date, and at its own expense, the Borrower will issue new Revolving
Notes to those Banks whose Revolving Loan Commitments were increased as a result
of this Amendment, which Revolving Notes shall be in conformity with the
requirements of Sections 1.05(d) of the Credit Agreement after giving effect tot
this Amendment and shall replace the existing Revolving Notes of such Banks.
6. Each Credit Party hereby agrees that, on or promptly after the
Fourth Amendment Effective Date and upon the request of the Agent, such Credit
Party will execute such amendments to the Mortgages as the Agent shall
reasonably require in connection with the transactions contemplated by Section 4
of the Amendment.
7. This Amendment shall become effective on the date (the "Fourth
Amendment Effective Date") when each of the following conditions have been met:
(A) each Credit Party , the Agent, the Required Banks and each bank
whose Revolving Loan Commitment has been increased pursuant to this Amendment
shall have signed a counterpart hereof (whether the same or different
counterparts) and shall have delivered (including by way of facsimile
transmission) the same to the Agent at the Notice Office;
(B) the Agent shall have receives from Morgan, Lewis & Bockius LLP,
counsel to the Credit Parties, an opinion addressed to the Agent and each of the
Banks and dated the Fourth Amendment Effective Date, in from and substance
reasonably satisfactory to the Agent, and covering such matters incident to this
Amendment and the transactions contemplated herein ad the Agent may reasonably
request;
(C) to the extent required, the Agent shall have received resolutions
of the Board of Directors of each Credit Party, which resolutions shall be
certified by the Secretary or any Assistant Secretary of such Credit Party of
this Amendment and the consummation of the transactions contemplated hereby, and
foregoing shall be reasonably acceptable to the Agent; and
(D) the Borrower shall have paid to the Agent for the pro rata
distribution to each of the Banks (based on the amount of each Bank's
outstanding Term Loans and Revolving Loan Commitment (after giving effect to
this Amendment), an amendment fee equal to $100,000.
8. In order to induce the Banks to enter on the Fourth Amendment, each
Credit Party hereby represents and warrants that:
(A) no Default or Event of Default exists on the Fourth Amendment
Effective Date, after giving to this Amendment; and
(B) on the Fourth Amendment Effective Date, and after giving effect to
this Amendment, all representations and warranties contained in the Credit
Agreement and in the other Credit Documents are true and correct in all material
respects ad though such representations and warranties were made on the Fourth
Amendment Effective.
<PAGE>
9. By executing and delivering a counterpart hereof, each Subsidiary
Guarantor hereby agrees that all Loans (including, without limitation, the
additional Revolving Loans which may be incurred pursuant to the Total Revolving
Loan Commitment after giving effect to this Amendment) shall be fully guaranteed
pursuant to the Subsidiary Guaranty in accordance with the terms and provisions
thereof and shall be fully secured pursuant to the Security Documents.
10. This Amendment may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be ab original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be delivered to the Borrower and the Agent.
11. THIS AMENDMENT AND THE RIGHT AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE
STATE OF NEW YORK.
12. From and after the Fourth Amendment Effective Date, all references
in the Credit Agreement and each of the other Credit Documents to the Credit
Agreement shall be deemed to be references to the Credit Agreement as modified
hereby.
13. This Amendment is limited as specified and hall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart
of this Amendment to be duly executed and delivered as of the date first above
written.
PENN NATIONAL GAMING, INC.
By /s/ William J. Bork
Title: President
MOUNTAINVIEW THOROUGHBRED
RACING ASSOCIATION
By /s/ Peter M. Carlino
Title: President
PENNSYLVANIA NATIONAL TURF
CLUB, INC.
By /s/ Peter M. Carlino
Title: President
PENN NATIONAL SPEEDWAY, INC.
By /s/ Robert S. Ippolito
Title: Secretary
STERLING AVIATION, INC.
By /s/ Peter M. Carlino
Title: President
PENN NATIONAL HOLDING COMPANY
By /s/ William J. Bork
Title: President
PENN NATIONAL GAMING OF
WEST VIRGINIA, INC.
By /s/ William J. Bork
Title: President
PENN NATIONAL GAMING OF INDIANA
By /s/ William J. Bork
Title: President
<PAGE>
PNGI POCONO, INC.
By /s/ William J. Bork
Title: President
THE PLAINS COMPANY
By /s/ William J. Bork
Title: President
POCONO DOWNS, INC.
By /s/ William J. Bork
Title: President
NORTHEAST CONCESSIONS, INC.
By /s/ William J. Bork
Title: President
AUDIO VIDEO CONCEPTS, INC.
By /s/ William J. Bork
Title: President
BACKSIDE, INC.
By /s/ William J. Bork
Title: President
THE DOWNS OFF-TRACK
WAGERING, INC.
By /s/ William J. Bork
Title: President
MILL CREEK LAND, INC
By /s/ William J. Bork
Title: President
BANKERS TRUST COMPANY,
Individually and as Agent
By /s/ David J. Bell
Title: Vice President
<PAGE>
CORESTATES BANK, N.A.,
Individually and as Co-Agent
By /s/Jeffery Wasmuth
Title: Vice President
SUMMIT BANK
By /s/Donald McCarty
Title: Senior Vice President
THE CAPTIAL SENIOR SECURED HIGH
INCOME FUND, L.P.
By: ING CAPTIAL ADVISORS, INC., as
Investment Advisor
By /s/ Michael D. Hatley
Title: Vice President &
Portfolio Manager
<PAGE>
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<CURRENCY> U.S. Doller
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
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<RECEIVABLES> 3,160
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<CURRENT-ASSETS> 10,026
<PP&E> 109,139
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0
0
<COMMON> 151
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