As filed with the Securities and Exchange Commission on April 29, 1998
Registration No. 333-45337
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
AMENDMENT NO. 1
to
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
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
incorporation or organization) or Identification Number)
825 Berkshire Blvd., Suite 200
Wyomissing, Pennsylvania 19610
(610) 373-2400
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Additional Registrants are set forth on the following pages
------------------
Peter M. Carlino
Chief Executive Officer
825 Berkshire Blvd., Suite 200
Wyomissing, Pennsylvania 19610
(610) 373-2400
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------
Copies to:
Brian J. Lynch, Esq.
MORGAN, LEWIS & BOCKIUS LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103-6993
(215) 963-5000
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this registration statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said section 8(a), may determine. Information contained herein is
subject to completion or amendment. A registration statement relating to these
statements has been filed with the Securities and Exchange Commission. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This registration statement shall
not constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such state.
================================================================================
<PAGE>
ADDITIONAL REGISTRANTS
(Initial Guarantors of 10 5/8% Senior Notes)
MOUNTAINVIEW THOROUGHBRED RACING ASSOCIATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
Pennsylvania 7948 25-1196820
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
incorporation or organization) Classification Code Number
</TABLE>
R.D. #1 (P.O. Box 32)
Grantville, PA 17028
(717) 469-2910
(Name, address including zip code and telephone number, including area code, or
Registrant's principal executive offices)
-------------------------
PENNSYLVANIA NATIONAL TURF CLUB, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
Pennsylvania 7948 23-2346492
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
incorporation or organization) Classification Code Number)
</TABLE>
R.D. #1 (P.O. Box 32)
Grantville, PA 17028
(717) 469-2910
(Name, address including zip code and telephone number, including area code, or
Registrant's principal executive offices)
-------------------------
PENN NATIONAL SPEEDWAY, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
Pennsylvania 7948 25-1759895
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
incorporation or organization) Classification Code Number)
</TABLE>
R.D. #1 (P.O. Box 32)
Grantville, PA 17028
(717) 469-2910
(Name, address including zip code and telephone number, including area code, or
Registrant's principal executive offices)
-------------------------
<PAGE>
NORTHEAST CONCESSIONS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
Pennsylvania 5812 23-2493823
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
incorporation of organization) Classification Code Number)
</TABLE>
Highway 1280, Route 315
Wilkes-Barre, PA 18702
(717) 825-6681
(Name, address, including zip code and telephone number, including area code, of
Registrant's principal executive offices)
-------------------------
THE DOWNS OFF-TRACK WAGERING, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
Pennsylvania 7999 23-2669470
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
incorporation of organization) Classification Code Number)
</TABLE>
Highway 1280, Route 315
Wilkes-Barre, PA 18702
(717) 825-6681
(Name, address, including zip code and telephone number, including area code, of
Registrant's principal executive offices)
-------------------------
THE DOWNS RACING, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
Pennsylvania 7948 23-2924948
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
incorporation of organization) Classification Code Number)
</TABLE>
Highway 1280, Route 315
Wilkes-Barre, PA 18702
(717) 825-6681
(Name, address, including zip code and telephone number, including area code, of
Registrant's principal executive offices)
-------------------------
STERLING AVIATION INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 7359 23-2818588
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
incorporation of organization) Classification Code Number)
</TABLE>
900 Market Street, Suite 200
Wilmington, DE 19801
(302) 421-7361
(Name, address, including zip code and telephone number, including area code, of
Registrant's principal executive offices)
-------------------------
<PAGE>
PENN NATIONAL HOLDING COMPANY
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 7948 51-0372406
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
incorporation of organization) Classification Code Number)
</TABLE>
900 Market Street, Suite 200
Wilmington, DE 19801
(302) 421-7361
(Name, address, including zip code and telephone number, including area code, of
Registrant's principal executive offices)
-------------------------
PNGI POCONO, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 7948 52-2058610
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
incorporation of organization) Classification Code Number)
</TABLE>
900 Market Street, Suite 200
Wilmington, DE 19801
(302) 421-7361
(Name, address, including zip code and telephone number, including area code, of
Registrant's principal executive offices)
-------------------------
PENN NATIONAL GAMING OF WEST VIRGINIA, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
West Virginia 7993 23-2839600
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
incorporation of organization) Classification Code Number)
</TABLE>
825 Berkshire Boulevard
Suite 200
Wyomissing, PA 19610
(610) 373-2400
(Name, address, including zip code and telephone number, including area code, of
Registrant's principal executive offices)
-------------------------
TENNESSEE DOWNS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
Tennessee 7948 62-1711858
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
incorporation of organization) Classification Code Number)
</TABLE>
825 Berkshire Boulevard
Suite 200
Wyomissing, PA 19610
(610) 373-2400
(Name, address, including zip code and telephone number, including area code, of
Registrant's principal executive offices)
-------------------------
<PAGE>
Subject to Completion dated April 29, 1998
Offer to Exchange All Outstanding
10 5/8% Senior Notes due 2004
($80,000,000 principal amount outstanding)
for 10 5/8% Senior Notes due 2004
of
PENN NATIONAL GAMING, INC.
The Exchange Offer and withdrawal rights will expire at 5:00 p.m., New York
City time on June 2, 1998 (as such date may be extended, the "Expiration Date").
Penn National Gaming, Inc. (the "Company") hereby offers (the "Exchange
Offer"), upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal"), to exchange $1,000 in principal amount of its 10 5/8% Senior
Notes due 2004 (the "Exchange Notes") for each $1,000 in principal amount of its
outstanding 10 5/8% Senior Notes due 2004 (the "Old Notes" and together with the
Exchange Notes, the "Notes") held by Holders (as defined) of which an aggregate
principal amount of $80,000,000 is outstanding. See "The Exchange Offer." For
purposes of the Exchange Offer, a "Holder" shall mean the registered owner of
any Registrable Notes and "Registrable Notes" means each Old Note, each Exchange
Note issued to the Holder that remains restricted under federal and state
securities laws, or each Private Exchange Note (as defined) until the earliest
to occur of (i) a registration statement filed under the Securities Act of 1933,
as amended (the "Securities Act"), covering such Old Note, Exchange Note or
Private Exchange Note has been made effective by the Securities and Exchange
Commission (the "Commission") and such Old Note, Exchange Note, or Private
Exchange Note has been disposed of in accordance with such effective
registration statement, (ii) such Old Note, Exchange Note, or Private Exchange
Note may be sold in compliance with Rule 144(k) promulgated under the Securities
Act, (iii) such Old Note has been exchanged for an Exchange Note or Exchange
Notes pursuant to an Exchange Offer and is entitled to be resold without
complying with the prospectus delivery requirements of the Securities Act or
(iv) such Old Note, Exchange Note, or Private Exchange Note ceases to be
outstanding under the Indenture (as defined). For purposes of the Exchange
Offer, "Private Exchange Note" means if any Old Note held by either of the
Initial Purchasers prior to the consummation of the Exchange Offer acquired by
them and having, or which are reasonably likely to be determined to have, the
status of an unsold allotment in the initial distribution, the Company, upon the
request of either Initial Purchaser (as defined) shall, simultaneously with the
delivery of the Exchange Notes in the Exchange Offer, issue and deliver such
Initial Purchaser, in exchange for such Old Notes held by such Initial
Purchaser, a like principal amount of debt securities of the Company that are
identical in all material respects to the Exchange Notes.
The Company will accept for exchange pursuant to the Exchange Offer any and
all Old Notes that are validly tendered prior to 5:00 p.m., New York City time,
on the Expiration Date. Tenders of Old Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is
not conditioned upon any amount of the Old Notes being tendered for exchange.
However, the Exchange Offer is subject to certain customary conditions, which
may be waived by the Company, and to the terms and provisions of the
Registration Rights Agreement (as defined). See "The Exchange Offer."
The Old Notes were issued in a transaction (the "Offering") pursuant to
which the Company issued an aggregate of $80 million principal amount of the Old
Notes. The Old Notes were sold by the Company to BT Alex. Brown Incorporated and
Jefferies & Company, Inc. (the "Initial Purchasers") on December 17, 1997 (the
"Closing Date") pursuant to a Purchase Agreement, dated December 12, 1997 (the
"Purchase Agreement") among the Company, certain subsidiaries of the Company
that have agreed to guarantee the Notes (collectively, the "Subsidiary
Guarantors") and the Initial Purchasers. The Initial Purchasers subsequently
resold the Old Notes in reliance on Rule 144A under the Securities Act. The
Company, the Subsidiary Guarantors and the Initial Purchasers also entered into
the Registration Rights Agreement dated as of December 17, 1997 (the
"Registration Rights Agreement"), pursuant to which the Company granted certain
registration rights for the benefit of the holders of the Old Notes. The
Exchange Offer is intended to satisfy certain of the Company's obligations under
the Registration Rights Agreement with respect to the Old Notes. See "The
Exchange Offer -- Purpose and Effect."
The Old Notes were, and the Exchange Notes will be, issued under the
Indenture, dated as of December 17, 1997 (the "Indenture"), among the Company,
the Subsidiary Guarantors and State Street Bank and Trust Company, as trustee
(in such capacity, the "Trustee").
The form and terms of the Exchange Notes will be identical in all material
respects to the form and terms of the Old Notes, except that (i) the Exchange
Notes have been registered under the terms of the Securities Act and, therefore,
will not bear legends restricting the transfer thereof and (ii) holders of
Exchange Notes will not be entitled to the additional interest payable under the
terms of the Registration Rights Agreement in respect of any Old Notes tendered
in accordance with the terms of the Exchange Offer, except with regard to Old
Notes that are not exchanged for Exchange Notes on or prior to the 45th day
after the Exchange Offer registration statement has been declared effective or
where a required Shelf Registration Statement (as defined) has been declared
effective and subsequently ceases to be effective at any time during the
effectiveness period and prior to the disposition of all Old Notes thereunder
(the "Additional Interest") and (iii) holders of Exchange Notes will not be, and
upon the consummation of the Exchange Offer, Holders of Old Notes will no longer
be, entitled to certain other rights under the Registration Rights Agreement
intended for the holders of unregistered securities; provided, however, that a
Holder of Old Notes who reasonably determines that (a) such Holder is prohibited
by applicable law or Commission policy from participating in the Exchange Offer,
(b) such Holder may not resell the Exchange Notes acquired by it in the Exchange
Offer to the public without delivering a prospectus and that this Prospectus is
not appropriate or available for such resales by such Holder, or (c) such Holder
is a broker-dealer registered under the Exchange Act and holds the Old Notes
acquired directly from the Company or one of its affiliates, subject to
reasonable verification by the Company, shall have the right to require the
Company to file a shelf registration statement pursuant to Rule 415 under the
Securities Act generally for the benefit of such Holder of Old Notes (the "Shelf
Registration Statement") and will be entitled to receive Additional Interest
following the occurrence of certain defined events of default in connection with
the filing of such Shelf Registration Statement. The Exchange Offer shall be
deemed consummated upon the occurrence of the delivery by the Company to the
Registrar under the Indenture of Exchange Notes in the same aggregate principal
amount as the aggregate principal amount of Old Notes that were tendered by
holders thereof pursuant to the Exchange Offer. See "The Exchange Offer --
Termination of Certain Rights" and "--Procedures for Tendering Old Notes" and
"Description of Exchange Notes."
(continued on next page)
-------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A
DISCUSSION OF CERTAIN RISKS THAT HOLDERS SHOULD
CONSIDER IN EVALUATING THE EXCHANGE OFFER.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY
AUTHORITY NOR HAS ANY SUCH COMMISSION OR REGULATORY AUTHORITY
PASSED UPON THE ACCURACY ORADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------------
The date of this Prospectus is April __, 1998
<PAGE>
The Exchange Notes will bear interest at a rate equal to 10 5/8% per annum
from and including their date of issuance. Interest on the Exchange Notes is
payable semiannually on June 15 and December 15 of each year (each, an "Interest
Payment Date"). Holders whose Old Notes are accepted for exchange will have the
right to receive interest accrued thereon from the date of their original
issuance or the last Interest Payment Date, as applicable to, but not including,
the date of issuance of the Exchange Notes, such interest to be payable with the
first interest payment on the Exchange Notes. Interest on the Old Notes accepted
for exchange will cease to accrue on the day prior to the issuance of the
Exchange Notes. The Exchange Notes will mature on December 15, 2004. See
"Description of Exchange Notes -- General."
The Exchange Notes will be redeemable, in whole or in part, on and after
December 15, 2001. After such date, the Exchange Notes will be redeemable at the
redemption prices set forth herein, plus interest accrued thereon to the
redemption date. In addition, at any time prior to December 15, 2000, the
Company may, at its option, use the net cash proceeds of one or more Public
Equity Offerings (as defined) to redeem up to 35% of the aggregate principal
amount of the Exchange Notes at the redemption price set forth herein. "Public
Equity Offering" means an underwritten public offering of capital stock of the
Company pursuant to a registration statement filed with the Commission in
accordance with the Securities Act. Upon the occurrence of a Change of Control
(as defined), each holder of Exchange Notes will have the right to require the
Company to purchase all or a portion of such holder's Exchange Notes at 101% of
the principal amount thereof, plus interest accrued thereon to the purchase.
Based on an interpretation by the Staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that the
Exchange Notes issued pursuant to the Exchange Offer to a Holder in exchange for
Old Notes may be offered for resale, resold and otherwise transferred by such
Holder (other than (i) a broker-dealer who purchased Old Notes directly from the
Company for resale pursuant to Rule 144A under the Securities Act or any other
available exemption under the Securities Act or (ii) a person that is an
affiliate of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that the Holder is not an affiliate of the
Company, is acquiring the Exchange Notes in the ordinary course of business and
is not participating, and has no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes. Holders wishing to
accept the Exchange Offer must represent to the Company, as required by the
Registration Rights Agreement, that such conditions have been met. Each
broker-dealer that receives Exchange Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "The Exchange Offer -- Plan of
Distribution." This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of Exchange
Notes received in exchange for Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making or other trading activities.
As of April 27, 1998, Cede & Co. ("Cede"), as nominee for The Depository
Trust Company, New York, New York ("DTC") was the sole registered holder of the
Old Notes and held the Old Notes for its participants. The Company believes that
no such participant is an affiliate (as such term is defined in Rule 405 under
the Securities Act) of the Company. There has previously been only a limited
secondary market and no public market for the Old Notes. The Old Notes are
eligible for trading in the Private Offering, Resales and Trading through
Automatic Linkages ("PORTAL") market. In addition, the Initial Purchasers have
advised the Company that they currently intend to make a market in the Exchange
Notes, however, neither is obligated to do so and any market-making activities
may be discontinued by either of the Initial Purchasers at any time. Therefore,
there can be no assurance that an active market for the Exchange Notes will
develop. If such a trading market develops for the Exchange Notes, future
trading prices will depend on many factors, including, among other things,
prevailing interest rates, the Company's results of operations and the market
for similar securities. Depending on such factors, the Exchange Notes may trade
at a discount from their face value. See "Risk Factors--Absence of Public Market
for Exchange Notes."
The Company will not receive any proceeds from the Exchange Offer, but,
pursuant to the Registration Rights Agreement, the Company will bear certain
registration expenses. No underwriter is being utilized in connection with the
Exchange Offer.
The Old Notes were issued originally in global form (the "Global Old
Notes"). The Global Old Note was deposited with, or on behalf of, DTC, as the
initial depository with respect to the Old Notes (in such capacity, the
"Depository"). The Global Old Note is registered in the name of Cede, as nominee
of DTC, and beneficial interests in the Global Old Note are shown on, and
transfers thereof are effected only through, records maintained by the
Depository and its participants. The use of the Global Old Note to represent
certain of the Old Notes permits the Depository's participants, and anyone
holding a beneficial interest in an Old Note registered in the name of such a
participant, to transfer interests in the Old Notes electronically in accordance
with the Depository's established procedures without the need to transfer a
physical certificate. Except as provided below, the Exchange Notes will also be
issued initially as a note in global form (the "Global Exchange Note," and
together with the Global Old Note, the "Global Notes") and deposited with, or on
behalf of, the Depository. Notwithstanding the foregoing, holders of Old Notes
that were held, at any time, by a person that is not a qualified institutional
buyer under Rule 144A, (a "Qualified Institutional Buyer"), and any Holder that
is not a Qualified Institutional Buyer that exchanges Old Notes in the Exchange
Offer, will receive the Exchange Notes in certificated form and is not, and will
not be, able to trade such securities through the Depository, unless the
Exchange Notes are resold to a Qualified Institutional Buyer. After the initial
issuance of the Global Exchange Note, Exchange Notes in certificated form will
be issued in exchange for a holder's proportionate interest in the Global
Exchange Note or as set forth in the Indenture.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information........................................................................ 3
Disclosure Regarding Forward-Looking Statements.............................................. 4
Prospectus Summary........................................................................... 5
Risk Factors................................................................................. 15
The Exchange Offer........................................................................... 24
Capitalization............................................................................... 32
Selected Consolidated Financial Data......................................................... 33
Management's Discussion and Analysis of Financial Condition and Results of Operations........ 35
Business..................................................................................... 42
Management................................................................................... 58
Description of Credit Facility............................................................... 60
Description of Exchange Notes................................................................ 61
Plan of Distribution......................................................................... 87
Incorporation of Certain Documents by Reference.............................................. 87
Legal Matters................................................................................ 88
Experts...................................................................................... 88
Index to Financial Statements................................................................ F-1
</TABLE>
AVAILABLE INFORMATION
The Company has filed a registration statement on Form S-4 (together
with any amendments thereto, the "Registration Statement") with the Commission
under the Securities Act with respect to the Exchange Notes. This Prospectus,
which constitutes a part of the Registration Statement, omits certain
information contained in the Registration Statement and reference is made to the
Registration Statement and the exhibits and schedules thereto for further
information with respect to the Company and the Exchange Notes offered hereby.
This Prospectus contains summaries of the material terms and provisions of
certain documents and in each instance reference is made to the copy of such
document filed as an exhibit to the Registration Statement. Each such summary is
qualified in its entirety by such reference.
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, is required to file reports and other information with the
Commission. In addition, upon registration of the guarantees of the Notes in
connection with the Exchange Offer, each subsidiary of the Company that is a
guarantor of the Exchange Notes (a "Subsidiary Guarantor") will also be subject
to the reporting requirements of the Exchange Act so long as the guarantee of
the Subsidiary Guarantor remains outstanding. Upon effectiveness of the
Registration Statement, the Subsidiary Guarantors will be subject to the
reporting requirements of the Exchange Act and the interpretations issued
thereunder by the Commission staff.
All documents filed by the Company and its Subsidiary Guarantors
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to
the date of this Prospectus and prior to the termination of the Exchange Offer
to which this Prospectus relates shall be deemed to be incorporated by reference
herein and to be a part hereof from the date of the filing of such reports and
documents. The Company will provide a copy of any and all of such documents
(exclusive of exhibits unless such exhibits are specifically incorporated by
reference therein) without charge to each person to whom a copy of this
Prospectus is delivered, upon written or oral request to Robert S. Ippolito,
Chief Financial Officer, Wyomissing Professional Center, 825 Berkshire
Boulevard, Suite 200, Wyomissing, PA 19610, (610) 373-2400.
3
<PAGE>
The Registration Statement (including the exhibits and schedules
thereto) and the periodic reports and other information filed by the Company and
the Subsidiary Guarantors with the Commission may be inspected without charge at
the Commission's principal office in Washington, D.C. or obtained from the
Public Reference Section of the Commission at 450 Fifth Street, NW, Washington,
D.C. 20549. Such material may also be accessed electronically by means of the
Commission's home page on the Internet (http://www.sec.gov). The Common Stock of
the Company is traded under the symbol "PENN" on the Nasdaq National Market.
Proxy statements, reports and other information filed by the Company, on behalf
of itself, before and after the date of this Prospectus, and on behalf of the
Subsidiary Guarantors, after the date of this Prospectus, with the Commission
and other information can be inspected at the offices of the National
Association of Securities Dealers, Inc., Report Section, 1735 K Street, N.W.,
Washington, D.C. 20006.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE
ACT. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS
PROSPECTUS, INCLUDING WITHOUT LIMITATION, CERTAIN STATEMENTS UNDER THE
"PROSPECTUS SUMMARY," "RISK FACTORS," "THE COMPANY," "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS"
AND LOCATED ELSEWHERE HEREIN REGARDING THE COMPANY'S OPERATIONS, FINANCIAL
POSITION AND BUSINESS STRATEGY, MAY CONSTITUTE FORWARD-LOOKING STATEMENTS. IN
ADDITION, FORWARD-LOOKING STATEMENTS GENERALLY CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "INTEND,"
"ESTIMATE," "ANTICIPATE," "BELIEVE," OR "CONTINUE" OR THE NEGATIVE THEREOF OR
VARIATIONS THEREON OR SIMILAR TERMINOLOGY. ALTHOUGH THE COMPANY BELIEVES THAT
THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE AT
THIS TIME, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE
BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE COMPANY'S EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE
DISCLOSED IN THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION IN CONJUNCTION WITH
THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS AND UNDER "RISK
FACTORS." ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and financial data,
including the financial statements and notes thereto, appearing elsewhere in
this Prospectus. References to "Penn National" or the "Company" include Penn
National Gaming, Inc. and its subsidiaries.
The Company
The Company, which began operations in 1972, is a diversified gaming
and pari-mutuel wagering company that owns and operates two racetracks and nine
off-track wagering facilities ("OTWs") in Pennsylvania, as well as an 89% joint
venture interest in PNGI Charles Town Gaming LLC (the "Charles Town Joint
Venture"), an entertainment complex that includes a thoroughbred racetrack and
video gaming machines ("Gaming Machines") in Charles Town, West Virginia (the
"Charles Town Entertainment Complex"). The Company's Pennsylvania racetracks
include Penn National Race Course, located outside Harrisburg, one of two
thoroughbred racetracks in Pennsylvania, and Pocono Downs Racetrack ("Pocono
Downs"), located outside Wilkes-Barre, one of two harness racetracks in
Pennsylvania. The Company intends to develop the two additional OTWs that have
been allocated to it under Pennsylvania law, after which it would operate 11 of
the 23 OTWs currently authorized in Pennsylvania. Between 1993 and 1996, the
Company increased its total wagers, including live track, simulcast and OTW
wagers, at a compound annual growth rate of 21.1% by expanding its simulcast and
OTW operations. In contrast, during the same period, total industry wagers
increased at a compound annual growth rate of 3.0%. For the year ended December
31, 1997, the Company generated $111.5 million in revenues and $13.8 million in
EBITDA (as defined in Note 2 to "--Summary Historical Consolidated Data").
The Company developed the Charles Town Entertainment Complex in order
to operate and market a facility that integrates Gaming Machines with the
Company's core business strengths of live racing and simulcast wagering. The
Charles Town Entertainment Complex is an approximately 60-minute drive from
Baltimore, Maryland and an approximately 70-minute drive from Washington, DC.
Through December 31, 1997, the Company has invested a total of approximately
$45.2 million to acquire and develop the Charles Town Entertainment Complex,
which includes $18.2 million in acquisition costs and $27.0 million for
substantial renovations and refurbishments. In developing the Charles Town
Entertainment Complex, the Company preserved the California mission-style
architecture of the original Charles Town Races facility and incorporated
extensive internal renovations including a 1930s art deco Hollywood theater
theme within the Silver Screen Gaming area. After having been closed for
approximately six months, the thoroughbred racing and simulcasting operations
("Charles Town Races") at the Charles Town Entertainment Complex were reopened
in April 1997. Gaming Machine operations commenced with a soft opening in
September 1997.
Business Strategy
The Company intends to be a leading operator in the gaming and
pari-mutuel wagering industry by capitalizing upon its horse racing expertise
and its numerous wagering locations. The Company plans to significantly increase
revenue and EBITDA using the following strategies:
Focus on Gaming Machine Operations. The Company's primary focus at the
Charles Town Entertainment Complex is on Gaming Machine operations. The Company
commenced Gaming Machine operations with a soft opening of 223 Gaming Machines
on September 10, 1997. The Company's grand opening of Gaming Machine operations
at the Charles Town Entertainment Complex occurred on October 17, 1997 with 400
Gaming Machines in operation. As of March 31, 1998, the Company had 609 Gaming
Machines in operation. The Company intends to conclude the facility renovation
and refurbishment, which is substantially complete, and increase the number of
Gaming Machines in operation at the Charles Town Entertainment Complex to 799 in
1998 and, if demand warrants, to 1,000 thereafter, the maximum number the
Company is currently approved to operate at this complex. The Charles Town
Entertainment Complex's Gaming Machines are dollar bill-fed video gaming
machines that replicate traditional spinning reel slot machines and also feature
video card games, such as blackjack and poker. Marketing efforts, which include
print and radio advertising, commenced in October 1997 and are focused on the
Washington, DC, Baltimore, Maryland, Northern Virginia, Eastern West Virginia
and Southern Pennsylvania markets. The Company intends to enhance these
marketing efforts by installing and operating a computerized player tracking
system to identify preferred players and encourage repeat Gaming Machine
patronage at the Charles Town Entertainment Complex.
5
<PAGE>
Open Additional OTWs. The Company operates nine of the 20 OTWs now open
in Pennsylvania and has the right to operate two of the three remaining OTWs
currently authorized in Pennsylvania. The Company's OTWs are located in
Allentown, Carbondale, Chambersburg, Erie, Hazleton, Lancaster, Reading,
Williamsport and York, Pennsylvania. At OTWs, customers can place wagers on
thoroughbred and harness races simulcast from the Company's racetracks and from
other tracks around the country. Under the Pennsylvania Race Horse Industry
Reform Act (the "Pennsylvania Racing Act"), only licensed thoroughbred and
harness racing associations, such as the Company, can operate OTWs or accept
customer wagers on simulcast races at Pennsylvania racetracks. The Company
opened OTWs in Carbondale and Hazleton, Pennsylvania during the first quarter of
1998 and plans (subject to the receipt of remaining regulatory approvals,
including site approvals) to open and operate additional OTWs in Stroudsburg and
Altoona, Pennsylvania, which would give the Company a total of 11 of the 23 OTWs
currently authorized by Pennsylvania law.
Expand Simulcasting Operations. Simulcasting involves the transmission
to or the receipt of audio and/or video signals of a live racing event through a
satellite for re-transmission at a different wagering location. The Company
transmits simulcasts of Company races to other wagering locations year-round
("export simulcasting") and receives simulcasts of races from other locations
for wagering by its customers at the Company's facilities year-round ("import
simulcasting"). Full-card import simulcasting, in which all of the races at a
non-Company track are import simulcast to a Company wagering facility, maximizes
the number of events available to a patron for wagering at the Company's
facilities. The Company currently receives import simulcasts from approximately
75 racetracks, including premier racetracks such as Belmont Park, Gulfstream
Park, Hollywood Park, Santa Anita and Saratoga. Export simulcasting increases
the consumer base for Company races beyond Company racetracks and OTWs. The
Company transmits export simulcasts of Company races to approximately 98
locations and receives a flat percentage of the amounts wagered on Company races
at non-Company locations. The Company intends to increase export simulcasting of
races from Company-owned tracks to out-of-state racetracks, OTWs, casinos and
other gaming facilities. The Company also seeks to improve the quality of its
export simulcast products by increasing purse sizes where practicable. The
Company believes that the minimal incremental costs associated with expanding
import simulcasting and export simulcasting make it a particularly desirable
source of revenue and EBITDA growth.
Capitalize on Other Gaming and Pari-Mutuel Wagering Opportunities. The
Company intends to continue identifying opportunities in the gaming and
pari-mutuel wagering industries that complement the Company's core operations
and leverage its pari-mutuel management and operating strengths. Management also
intends to explore other opportunities to capitalize upon changes in gaming
legislation, including legislation relating to Gaming Machines.
Recent Developments
The Company has acquired an option to purchase approximately 100 acres
of land in northeastern Memphis, Tennessee and has submitted an application to
the Tennessee State Racing Commission to obtain a racing license to develop a
harness track and OTW facility at this site. On December 2, 1997, the Company
received approval from the Memphis City Council for the necessary zoning and
land development plans. If the Company ultimately receives all necessary
regulatory approvals, the Company plans to spend approximately $9.0 million in
the next twelve months to purchase the land subject to the option and build a
combined OTW and grandstand facility. The Company estimates that total
development costs, including subsequent track construction, will be
approximately $15.0 million. See "Business - Potential Tennessee Development
Project.'' In addition, if the Company ultimately receives all necessary
regulatory approvals, it will be permitted to pursue the development of
additional OTWs in Tennessee, provided it first obtains necessary approvals,
including a public referendum for each proposed OTW site and other necessary
zoning and land development approvals.
In April 1998, the Tennessee State Racing Commission granted a
contingent license to the Company which expires the earlier of (i) December 31,
1999 or (ii) the Tennessee State Racing Commission's term on June 30, 1998, if
such term is not extended by the Tennessee legislature. As of April 28, 1998,
legislation is pending before the Tennessee legislature to extend the Tennessee
State Racing Commission's term beyond June 30, 1998, however there can be no
assurance that such legislation will be enacted.
-------------------------
The Company is the successor to several businesses which have operated
the Penn National Race Course since 1972. The Company was incorporated in
Pennsylvania in 1982 as PNRC Corp. It adopted its present name in 1994. The
Company's principal executive offices are located in the Wyomissing Professional
Center, 825 Berkshire Boulevard, Suite 200, Wyomissing, Pennsylvania 19610; its
telephone number is (610) 373-2400.
6
<PAGE>
Issuance Of The Old Notes
The Old Notes were sold to the Initial Purchasers on December 17, 1997
(the "Closing Date") pursuant to the Purchase Agreement. The Initial Purchasers
subsequently resold the Old Notes in reliance on Rule 144A under the Securities
Act and other available exemptions under the Securities Act. In connection with
such sale, the Company and the Initial Purchasers also entered into the
Registration Rights Agreement pursuant to which the Company granted certain
registration rights for the benefit of the holders of the Old Notes. The
Exchange Offer is intended to satisfy certain obligations of the Company and the
Subsidiary Guarantors under the Registration Rights Agreement with respect to
the Old Notes. See "The Exchange Offer--Purpose and Effect." Capitalized terms
used but not defined in this Prospectus Summary are defined elsewhere in the
Prospectus.
The Exchange Offer
The Exchange Offer.................. The Company is offering upon the terms and
subject to the conditions set forth herein
to exchange $1,000 in principal amount of
its 10 5/8% Senior Notes due 2004 (the
"Exchange Notes") for each $1,000 in
principal amount of the outstanding Old
Notes (the Old Notes and the Exchange
Notes are collectively referred to herein
as the "Notes"). As of the date of this
Prospectus, $80 million in aggregate
principal amount of the Old Notes is
outstanding. As of the date of this
Prospectus, there was one registered
holder of the Old Notes, Cede, which held
the Old Notes for its participants. See
"The Exchange Offer--Terms of the Exchange
Offer." The terms of the Exchange Notes
are identical in all material respects
(including principal amount, interest rate
and maturity) to the terms of the Old
Notes for which they may be exchanged. See
"The Exchange Offer."
Expiration Date..................... 5:00 p.m., New York City time, on June 2,
1998 as the same may be extended. See "The
Exchange Offer--Expiration Date;
Extensions; Amendments."
Conditions of the Exchange Offer.... The Exchange Offer is not conditioned upon
any minimum principal amount of Old Notes
being tendered for exchange. However, the
Exchange Offer is subject to certain
customary conditions, including that (i)
the Exchange Offer does not violate
applicable law or any applicable
interpretation of the staff of the
Commission, (ii) no action or proceeding
is instituted or threatened that would be
reasonably likely to materially impair the
ability of the Company or the Subsidiary
Guarantors to proceed with the Exchange
Offer, and (iii) all government approvals
deemed necessary by the Company have been
obtained. The Company expects that the
foregoing conditions will be satisfied.
All such conditions may be waived by the
Company. See "The Exchange
Offer--Conditions of the Exchange Offer."
7
<PAGE>
Termination of Certain Rights....... Pursuant to the Registration Rights
Agreement and the Old Notes, Holders (as
defined) of Old Notes have rights to
receive Additional Interest (as defined)
and have certain rights intended for the
holders of unregistered securities.
Holders of Exchange Notes will not be and,
upon consummation of the Exchange Offer,
Holders of Old Notes will no longer be,
entitled to (i) the right to receive the
Additional Interest or (ii) certain other
rights under the Registration Rights
Agreement intended for holders of
unregistered securities. The Exchange
Offer shall be deemed consummated upon the
occurrence of the delivery by the Company
to the Registrar under the Indenture of
Exchange Notes in the same aggregate
principal amount as the aggregate
principal amount of Old Notes that were
tendered by Holders thereof pursuant to
the Exchange Offer. "Holder" means the
registered owner of any Old Notes that
remain Transfer Restricted Securities as
reflected on the records of State Street
Bank and Trust Company, as registrar for
the Old Notes (in such capacity, the
"Registrar"), or any person whose Old
Notes are held of record by the Depository
(as defined) as of the date of this
Prospectus. See "The Exchange
Offer--Termination of Certain Rights" and
"Procedures for Tendering Old Notes."
Shelf Registration.................. The Company and the Subsidiary Guarantors
shall promptly as practicable deliver
written notice (the "Shelf Notice") to the
Trustee and such Holders as required by
the Registration Rights Agreement and,
within 30 days of the delivery of the
Shelf Notice, shall be required to file a
Shelf Registration Statement pursuant to
Rule 415 under the Securities Act covering
all of the Registrable Notes (the "Shelf
Registration") if (i) because of a change
in law or in currently prevailing
interpretations of the staff of the
Commission, the Company and the Subsidiary
Guarantors are not permitted to effect an
Exchange Offer, (ii) the Exchange Offer is
not consummated within 165 days of
December 17, 1997 (the "Issue Date"),
(iii) the holder of Private Exchange Notes
so requests at any time after the
consummation of an offer to exchange Old
Notes for Private Exchange Notes (the
"Private Exchange"), or (iv) in the case
of any Holder that participates in the
Exchange Offer, such Holder does not
receive Exchange Notes on the date of the
Exchange that may be sold without
restriction under state and federal
securities laws. The Company and the
Subsidiary Guarantors shall be required to
use their best efforts to cause the Shelf
Registration to be declared effective
under the Securities Act on or prior to
105 days after the Shelf Notice and to
keep the Shelf Registration continuously
effective under the Securities Act until
the earlier of (i) December 17, 1999 or
(ii) such period ending when all
Registrable Notes covered by the Shelf
Registration have been sold in the manner
set forth and as contemplated in the Shelf
Registration.
Accrued Interest on the Old Notes.... The Exchange Notes will bear interest at a
rate equal to 10 5/8% per annum from and
including their date of issuance. Holders
whose Old Notes are accepted for exchange
will have the right to receive interest
accrued thereon from the date of their
original issuance or the last Interest
Payment Date, as applicable, to, but not
including, the date of issuance of the
Exchange Notes, such interest to be
payable with the first interest payment on
the Exchange Notes. Interest on the Old
Notes accepted for exchange, which accrued
at the rate of 10 5/8% per annum, will
cease to accrue interest on, the day prior
to the issuance of the Exchange Notes.
8
<PAGE>
Additional Interest................ Pursuant to the Registration Rights
Agreement, if (i) notwithstanding that the
Company and Subsidiary Guarantors have
consummated or will consummate the
Exchange Offer, the Company and Subsidiary
Guarantors are required to file a Shelf
Registration and such Shelf Registration
is (a) not filed on or prior to the Filing
Date applicable thereto, (b) not declared
effective by the SEC on or prior to the
60th day following the date such Shelf
Registration was filed, or (c) declared
effective and then ceases to be effective
at any time during the two year period
ended December 17, 1999, or, prior to the
disposition of all Notes thereunder, (ii)
neither the Company nor the Subsidiary
Guarantors has exchanged Exchange Notes
for all Old Notes validly tendered in
accordance with the terms of the Exchange
Offer on or prior to the 45th day after
the date on which the Exchange Offer
Registration Statement has been declared
effective, additional interest shall
accrue for the period of any such failure
or event on the principal amount of the
applicable Old Notes at a rate of .50% per
annum for the first 90 days after such
failure or event and shall increase by an
additional .50% for each subsequent 90-day
period, provided, that such additional
interest shall not exceed in the aggregate
1.0% per annum ("Additional Interest"),
and provided, further, however, that upon
the filing of (i) the Shelf Registration
Statement, (ii) the exchange of all
Exchange Notes for all Old Notes tendered,
or (iii) upon the effectiveness of the
Shelf Registration which had ceased to
remain effective, such additional interest
shall cease to accrue.
Procedures for Tendering
Old Notes.......................... Unless a tender of Old Notes is effected
pursuant to the procedures for book-entry
transfer as provided herein, each Holder
desiring to accept the Exchange Offer must
complete, sign and date the Letter of
Transmittal, or a facsimile thereof, have
the signature thereon guaranteed if
required by the Letter of Transmittal, and
mail or otherwise deliver the Letter of
Transmittal, or such facsimile, together
with the Old Notes or a Notice of
Guaranteed Delivery and any other required
documents (such as evidence of authority
to act, if the Letter of Transmittal is
signed by someone acting in a fiduciary or
representative capacity), to the Exchange
Agent at the address set forth on the back
cover page of this Prospectus prior to
5:00 p.m., New York City time, on the
Expiration Date. Any Beneficial Owner (as
defined) of the Old Notes whose Old Notes
are registered in the name of a nominee,
such as a broker, dealer, commercial bank
or trust company and who wishes to tender
Old Notes in the Exchange Offer, should
instruct such entity or person to promptly
tender on such Beneficial Owner's behalf.
See "Exchange Offer--Procedures for
Tendering Old Notes."
Guaranteed Delivery Procedures...... Holders whose certificates for Old Notes
are not immediately available or who
cannot deliver their certificates and all
other required documents to the Exchange
Agent on or prior to the Expiration Date,
or who cannot complete the procedure for
book-entry on a timely basis, may tender
their Old Notes pursuant to the guaranteed
delivery procedures set forth in the
Letter of Transmittal.
9
<PAGE>
Acceptance of Old Notes and Delivery
of Exchange Notes................... Upon satisfaction or waiver of all
conditions of the Exchange Offer, the
Company will accept any and all Old Notes
that are properly tendered in the Exchange
Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The Exchange
Notes issued pursuant to the Exchange
Offer will be delivered promptly after
acceptance of the Old Notes. See "The
Exchange Offer--Acceptance of Old Notes
for Exchange; Delivery of Exchange Notes."
Withdrawal Rights................... Tenders of Old Notes may be withdrawn at
any time prior to 5:00 p.m., New York City
time, on the Expiration Date. See "The
Exchange Offer--Withdrawal Rights."
Private Exchange Notes.............. The Registration Rights Agreement provides
that if, prior to consummation of the
Exchange Offer, either of the Initial
Purchasers holds any Old Notes acquired by
them and having, or which are reasonably
likely to be determined to have, the
status of an unsold allotment in the
initial distribution, the Company, upon
the request of either Initial Purchaser
shall, simultaneously with the delivery of
the Exchange Notes in the Exchange Offer,
issue and deliver such Initial Purchaser,
in exchange for such Old Notes held by
such Initial Purchaser, a like principal
amount of debt securities of the Company
that are identical in all material
respects to the Exchange Notes. Any
Private Exchange Notes will be issued
pursuant to the same indenture as the
Exchange Notes. The Private Exchange
Notes, if any, are not covered by the
registration statement of which this
Prospectus is a part and are not being
offered hereby. Any Private Exchange Notes
will be entitled to all the rights and
subject to all the limitations applicable
thereto under the Indenture, and will be
subject to the same restrictions on
transfer applicable to untendered Old
Notes. However, pursuant to the
Registration Rights Agreement, holders of
Private Exchange Notes have certain rights
to require the Company to file and
maintain a Shelf Registration Statement
that would allow resales of such Private
Exchange Notes owned by such holders. See
"Exchange Offer--Shelf Registration" and
"Exchange Offer--Private Exchange Notes."
The Exchange Agent.................. State Street Bank and Trust Company is the
exchange agent (in such capacity, the
"Exchange Agent"). The address and
telephone number of the Exchange Agent are
set forth in "The Exchange Offer--The
Exchange Agent; Assistance."
Fees and Expenses................... All expenses incident to the Company's
consummation of the Exchange Offer and
compliance with the Registration Rights
Agreement will be borne by the Company or
the Subsidiary Guarantors. The Company
will also pay certain transfer taxes
applicable to the Exchange Offer. See "The
Exchange Offer--Fees and Expenses."
10
<PAGE>
Resales of the Exchange
Notes............................... Based on an interpretation by the staff of
the Commission set forth in no-action
letters issued to third parties, the
Company believes that Exchange Notes
issued pursuant to the Exchange Offer to a
Holder in exchange for Old Notes may be
offered for resale, resold and otherwise
transferred by such Holder (other than (i)
a broker-dealer who purchased Old Notes
directly from the Company for resale
pursuant to Rule 144A under the Securities
Act or any other available exemption under
the Securities Act, or (ii) a person that
is an affiliate of the Company within the
meaning of Rule 405 under the Securities
Act), without compliance with the
registration and prospectus delivery
provisions of the Securities Act, provided
that the Holder is acquiring the Exchange
Notes in the ordinary course of business
and is not participating, and has no
arrangement or understanding with any
person to participate, in a distribution
of the Exchange Notes. Each broker-dealer
that receives Exchange Notes for its own
account in exchange for Old Notes, where
such Old Notes were acquired by such
broker as a result of market-making, or
other trading, activities, must
acknowledge that it will deliver a
prospectus in connection with any resale
of such Exchange Notes. See "The Exchange
Offer--Resales of the Exchange Notes" and
"Plan of Distribution."
Description Of Exchange Notes
The form and terms of the Exchange Notes will be identical in all
material respects to the form and terms of the Old Notes, except that (i) the
Exchange Notes have been registered under the Securities Act and, therefore,
will not bear legends restricting the transfer thereof, (ii) holders of the
Exchange Notes will not be entitled to Additional Interest and (iii) holders of
the Exchange Notes will not be, and upon consummation of the Exchange Offer,
Holders of the Old Notes will no longer be, entitled to certain rights under the
Registration Rights Agreement intended for the holders of unregistered
securities, except in certain limited circumstances. See "Exchange
Offer--Termination of Certain Rights." The Exchange Offer shall be deemed
consummated upon the occurrence of the delivery by the Company to the Registrar
under the Indenture of Exchange Notes in the same aggregate principal amount as
the aggregate principal amount of Old Notes that were tendered by holders
thereof pursuant to the Exchange Offer. See "The Exchange Offer--Termination of
Certain Rights" and "Procedures for Tendering Old Notes," and "Description of
Exchange Notes."
Securities Offered................ $80,000,000 aggregate principal amount of
10 5/8% Senior Notes due 2004.
Maturity Date..................... December 15, 2004.
Interest Payments Dates........... Interest on the Exchange Notes will accrue
from the Issue Date and is payable
semi-annually in arrears on June 15 and
December 15, commencing June 15, 1998.
11
<PAGE>
Ranking........................... The Exchange Notes will be senior
unsecured obligations of the Company and
will rank pari passu in right of payment
with all existing and future unsubordinated
indebtedness of the Company and senior in
right of payment with all existing and
future subordinated indebtedness of the
Company. The Exchange Notes will be
effectively subordinated in right of payment
to all secured indebtedness of the Company,
including indebtedness incurred under a
$12.0 million revolving credit facility (the
"Credit Facility") entered into on December
17, 1997. As of March 31, 1998, the Company
has approximately $80.3 million of
indebtedness outstanding, including the Old
Notes, and no indebtedness outstanding under
the Credit Facility.
Optional Redemption............... The Exchange Notes will be redeemable, in
whole or in part, at the option of the
Company on or after December 15, 2001, at
the redemption prices set forth herein, plus
accrued and unpaid interest to the date of
redemption. In addition, at any time on or
prior to December 15, 2000, the Company, at
its option, may redeem up to 35% of the
aggregate principal amount of the Exchange
Notes originally issued with the net cash
proceeds of one or more Public Equity
Offerings, at a redemption price equal to
110.625% of the principal amount thereof,
plus accrued and unpaid interest to the date
of redemption; provided that at least 65% of
the aggregate principal amount of Exchange
Notes originally issued remains outstanding
immediately after any redemption. See
"Description of Exchange Notes--Redemption."
Change of Control................. Upon a Change of Control, each holder of
an Exchange Note will have the right to
require the Company to repurchase such
holder's Exchange Notes at a price equal to
101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the
date of repurchase. See "Description of
Exchange Notes--Change of Control."
Guarantees........................ The Exchange Notes will be unconditionally
guaranteed (the "Guarantees") on a senior
basis by the Subsidiary Guarantors. The
Guarantees will be general unsecured
obligations of the Subsidiary Guarantors and
will rank pari passu in right of payment to
any unsubordinated indebtedness of the
Subsidiary Guarantors and will rank senior
in right of payment to all other
subordinated obligations of the Subsidiary
Guarantors. The Guarantees will be
effectively subordinated to all secured
indebtedness of the Subsidiary Guarantors to
the extent of the value of the assets
securing such indebtedness.
Certain Covenants................. The Indenture governing the Exchange Notes
will contain certain covenants that limit
the ability of the Company and its
subsidiaries to, among other things, incur
additional indebtedness, pay dividends or
make certain other restricted payments,
consummate certain asset sales, enter into
certain transactions with affiliates, incur
liens, impose restrictions on the ability of
a subsidiary to pay dividends or make
certain payments to the Company and its
subsidiaries, merge or consolidate with any
other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or
substantially all of the assets of the
Company. These restrictions and
qualifications are subject to a number of
important qualifications and exceptions.
12
<PAGE>
Transfer Restrictions; Absence
of a Public Market for the
Exchange Notes.................. The Exchange Notes are a new issue of
securities with no established market.
Accordingly, there can be no assurance as
to the development or liquidity of any
market for the Exchange Notes. The Initial
Purchasers have advised the Company that
they currently intend to make a market in
the Exchange Notes. However, neither
Initial Purchaser is obligated to do so,
and any market-making with respect to the
Exchange Notes may be discontinued at any
time without notice. The Company does not
intend to apply for listing of the
Exchange Notes on a securities exchange.
13
<PAGE>
Summary Historical Consolidated Financial Data
The following table sets forth the summary historical consolidated
financial data of the Company. The summary historical consolidated financial
data for each of the three years in the period ended December 31, 1997 and as of
December 31, 1997 are derived from the Company's audited consolidated financial
statements. For additional information, see the consolidated financial
statements of the Company appearing elsewhere in this Prospectus. The summary
historical consolidated financial data should also be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1995 1996 1997(1)
------ ------ --------
(dollars in thousands)
<S> <C> <C> <C>
Income Statement Data:
Total revenues................................................ $57,676 $62,834 $111,536
Total operating expenses...................................... 49,421 53,374 101,801
Income from operations........................................ 8,255 9,460 9,735
Net income.................................................... 4,996 5,510 2,287
Operating Data:
Pari-mutuel wagering:
Live races................................................. $102,145 $89,327 $128,090
Import simulcasting........................................ 142,499 170,814 298,459
Export simulcasting........................................ 72,252 112,871 176,287
-------- -------- --------
Total pari-mutuel wagering.................................... $316,896 $373,012 $602,836
======== ======== ========
Gross profit from wagering(2)................................. $24,915 $27,955 $45,589
Other Data:
EBITDA(3)..................................................... $9,136 $10,893 $13,775
Depreciation and amortization................................. 881 1,433 4,040
Capital expenditures.......................................... 3,958 6,995 29,196(4)
Site development and restructuring charges.................... -- -- 2,437(5)
</TABLE>
December 31,
1997
----------
Balance Sheet Data:
Cash and cash equivalents..................................... $ 21,854
Working capital............................................... 15,226
Total assets.................................................. 158,878
Total debt, net of current maturities......................... 80,336
Shareholders' equity.......................................... 53,856(6)
(1) Reflects the January 15, 1997 acquisition of a joint venture interest in
the Charles Town Entertainment Complex and the full-year impact of the
November 27, 1996 Pocono Downs Acquisition. See "Business--Acquisitions."
(2) Amounts equal total pari-mutuel revenues, less purses paid to the Horsemen,
taxes payable to Pennsylvania and simulcast commissions or host track fees
paid to other racetracks. Figures for the years ended December 31, 1995 and
1996 do not include purses paid at Penn National Speedway.
(3) Represents income from operations before depreciation and amortization
("EBITDA"). EBITDA is presented because management believes it provides
useful information regarding a company's ability to incur and/or service
debt. EBITDA should not be considered in isolation or as a substitute for
consolidated net income, cash flows, or other income or cash flow data
prepared in accordance with generally accepted accounting principles
("GAAP") or as a measure of a company's profitability or liquidity.
(4) Includes approximately $27.0 million in capital expenditures associated
with the renovation and refurbishment of the Charles Town Entertainment
Complex. The balance of the amount relates to normal ongoing capital
expenditures at the Company's other facilities.
(5) Represents site development expenses totaling $1.7 million related to the
Charles Town Entertainment Complex ($0.8 million) and the abandonment of
certain proposed operating sites during 1997 ($0.9 million). The remaining
$0.7 million
14
<PAGE>
represents restructuring charges associated with severance termination
benefits and other charges at the Charles Town Entertainment Complex ($0.3
million), a restructuring of the Erie, Pennsylvania OTW facility ($0.3
million), and property and equipment written-off in connection with the
discontinuation of operations at Penn National Speedway, Inc. during 1997
($0.1 million).
(6) Reflects write-off ($1.1 million, net of tax) of deferred financing costs
relating to the repayment, with the proceeds of the Offering, of amounts
outstanding under the Company's credit facility that was in place
immediately prior to the Offering (the "Old Credit Facility").
15
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
holders of Notes should consider carefully the following risk factors affecting
the business of the Company.
Substantial Leverage and Ability to Service Debt
The Company is highly leveraged. As of December 31, 1997, the Company's
total indebtedness is approximately $80.3 million. In addition, subject to
restrictions in the Credit Facility and the Indenture, the Company may incur up
to $12.0 million of borrowings under the Credit Facility. See "Description of
Credit Facility" and "Description of Exchange Notes."
The level of the Company's indebtedness could have important
consequences to holders of the Exchange Notes, including: (i) a substantial
portion of the Company's cash flow from operations being dedicated to debt
service, which may not be available for other purposes; (ii) the Company's
leveraged position may impede its ability to obtain financing in the future for
acquisitions, potential development opportunities, working capital, capital
expenditures and general corporate purposes; and (iii) the Company's leveraged
financial position may make it more vulnerable to economic downturns and may
limit its ability to withstand competitive pressures. The Company's ability to
pay interest on the Exchange Notes and to repay portions of its long-term
indebtedness (including the Exchange Notes and any future borrowings under the
Credit Facility) will depend upon its future operating performance and the
availability of refinancing indebtedness, which will be affected by prevailing
economic conditions and financial, business and other factors, certain of which
are beyond the Company's control. The Company believes that, based on its
current level of operations, it will have sufficient capital to carry on its
business and will be able to meet its scheduled debt service requirements.
However, there can be no assurance that the future cash flow of the Company will
be sufficient to meet the Company's obligations and commitments. If the Company
is unable to generate sufficient cash flow from operations in the future to
service its indebtedness and to meet its other commitments, the Company will be
required to adopt one or more alternatives, such as refinancing or restructuring
its indebtedness, selling material assets or operations or seeking to raise
additional debt or equity capital. There can be no assurance that any of these
actions could be effected on a timely basis or on satisfactory terms or that
these actions would enable the Company to continue to satisfy its capital
requirements. In addition, the terms of existing or future debt agreements,
including the Indenture and the Credit Facility, may prohibit the Company from
adopting any of these alternatives. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources,"
"Description of Credit Facility" and "Description of Exchange Notes."
Ranking; Holding Company Structure
The Exchange Notes will be general unsecured senior obligations and
will rank pari passu in right of payment with all existing and future
unsubordinated Indebtedness (as defined herein) of the Company, including any
obligations under the Credit Facility. As of December 31, 1997, the Company had
approximately $80.3 million of Indebtedness, including the Old Notes. The
Exchange Notes will be effectively subordinated to all secured Indebtedness of
the Company to the extent of the value of the assets securing such Indebtedness.
The Indebtedness of the Company and its subsidiaries under the Credit Facility
will be secured by liens upon real property and current assets of the Company
and its subsidiaries (including the pledge of certain subsidiary stock),
including receivables, inventory, general intangibles and equipment. The
Indenture permits the Company to incur additional Indebtedness under both the
Credit Facility and the Indenture. In the event of a bankruptcy, liquidation or
reorganization of the Company, the assets of the Company will be available to
pay obligations on the Exchange Notes only after all secured Indebtedness of the
Company has been paid in full and there may not be sufficient assets remaining
to pay amounts due on any or all of the Exchange Notes then outstanding.
The operations of the Company are conducted through subsidiaries.
Consequently, a substantial portion of the revenues available for payment of
debt service in respect of the Exchange Notes is expected to be generated
through direct and indirect subsidiaries of the Company. The Company's cash flow
and, consequently, its ability to service debt, including the Exchange Notes,
will depend in substantial part upon the cash flow of the Company's subsidiaries
and the payment of funds by those subsidiaries to the Company in the form of
loans, dividends or otherwise. Although the Exchange Notes will be guaranteed by
the Subsidiary Guarantors, the Charles Town Joint Venture will not be a
guarantor of the Exchange Notes due to the joint venture investment structure of
this entity, and the inability of the
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Company to secure a Guarantee by the Charles Town Joint Venture. Accordingly,
the Exchange Notes will be structurally subordinated to any indebtedness
incurred by the Charles Town Joint Venture. In addition, the Subsidiary
Guarantors are separate and distinct legal entities and are subject to the
provisions of the Credit Facility, which may contain limitations on the ability
of the Subsidiary Guarantors to make payments in respect of the Guarantee,
particularly upon the occurrence of any default or the insolvency of the Company
or any Subsidiary Guarantor. In addition, the laws of most jurisdictions provide
suretyship defenses to guarantors, which may limit the Subsidiary Guarantors'
legal obligations to make payments under their Guarantee.
Restrictions Imposed by the Company's Indebtedness
The Credit Facility requires the Company to maintain specified
financial ratios and satisfy certain financial tests, among other obligations,
including interest coverage and total leverage ratios. In addition, the Credit
Facility restricts, among other things, the Company's ability to incur
additional indebtedness and restricts the ability of the Company to dispose of
assets, incur additional indebtedness, incur guarantee obligations, repay
indebtedness or amend debt instruments, pay dividends, create liens on assets,
make investments, make acquisitions, engage in mergers or consolidations, make
capital expenditures, or engage in certain transactions with subsidiaries and
affiliates and otherwise restrict corporate activities. A failure to comply with
the restrictions contained in the Credit Facility could lead to an event of
default thereunder which could result in an acceleration of such indebtedness.
Such an acceleration could constitute an event of default under the Indenture
relating to the Exchange Notes. In addition, the Indenture restricts, among
other things, the Company's ability to incur additional indebtedness, make
certain payments and dividends or merge or consolidate. A failure to comply with
the restrictions in the Indenture could result in an event of default under the
Indenture. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources," "Description of
Credit Facility" and "Description of Exchange Notes."
Risks Associated with Expansion and New Gaming Machine Operations
The Company began to operate Gaming Machines at the Charles Town
Entertainment Complex with a soft opening of 223 Gaming Machines in September
1997 and, therefore, the Company's Gaming Machine management strategy at the
Charles Town Entertainment Complex is still in its early stages. This
significant expansion of the Company's business and operational scale will place
demands on the Company's administrative, operational and financial resources and
could place an additional strain on the capacity, management and operations of
the Company. Such strain, together with demands associated with any other growth
through geographic or emerging jurisdictional gaming opportunity expansion, may
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, to date, the Company has experienced
difficulty in obtaining timely delivery of the Gaming Machines it desires
because Gaming Machine manufacturers have been delayed in receiving the West
Virginia licensing approvals necessary for their machines to be installed and
operated in West Virginia. As of March 31, 1998, the Company had 609 Gaming
Machines installed and operational at the Charles Town Entertainment Complex.
Following the installation of approximately 799 Gaming Machines, the Company
will evaluate demand for Gaming Machine play at the Charles Town Entertainment
Complex and install an additional 201 Gaming Machines (to operate the maximum
1,000 Gaming Machines presently permitted) if demand warrants such installation.
One of the considerations in evaluating such demand will be that the Company
becomes obligated to pay a minimum licensing fee of $4.3 million per year to a
third party supply and servicing company once it has 800 or more Gaming Machines
in operation at the Charles Town Entertainment Complex. This minimum fee may
have an adverse impact on the Company's results of operations if Gaming Machine
play is not significant or is not profitable. See "Business--GTECH Gaming
Machine Supply and Service Agreement." There can be no assurance that the
Company will be able to effectively and profitably manage Gaming Machine
operations since the Company has no prior experience in operating Gaming
Machines.
Decline in Live Racing Attendance
The Pennsylvania Racing Act requires the Company to schedule 200 days
of live thoroughbred racing and 150 days of live harness racing, regardless of
attendance, in order to present full-card import simulcast ring. Over the past
few years, however, there has been a substantial decline in attendance and
wagering on live racing throughout the industry, in general, and at the Penn
National Race Course, Pocono Downs and Charles Town Races, in particular, even
though the number of racing days has remained relatively constant. The Company
believes this decline is primarily a result of competition from other forms of
entertainment and gaming, including wagering at OTWs and wagering at
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tracks in neighboring states where additional forms of casino-style gaming (such
as video gaming and slot machines) are available, and which are perhaps closer
in proximity to patrons who might otherwise travel to the Penn National Race
Course, Pocono Downs and the Charles Town Races. Because live racing revenues
are declining, the Company's future growth is dependent on its OTWs and Gaming
Machine operations. If not offset by increased revenues from other sources,
continued declines in live racing attendance could have a material adverse
effect on the Company's business, financial condition and results of operations
because a relatively high proportion of the Company's costs of operating its
live racing facilities are fixed. The Company intends, following receipt of all
regulatory approvals, to open OTWs in Stroudsburg and Altoona, Pennsylvania, in
addition to operating its existing OTWs. The Company's existing OTWs may be
unable to increase or maintain their current level of profitability, and the
remaining two OTWs which the Company has been allocated under the Pennsylvania
Racing Act may never be opened, or, if opened, achieve profitability. Moreover,
as with racetracks, a relatively high proportion of the costs of operating an
OTW are fixed, while OTW attendance is subject to significant variation based on
a variety of factors, including the quality of the races that are import
simulcast to the facility and the proximity of other live racing and OTW venues.
To the extent that attendance and wagering at existing or new OTWs is not
consistent with the Company's historical experience, the Company's business,
financial condition and results of operations may be materially and adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Racing and Pari-Mutuel Operations" and
"--Competition."
Competition
The Company faces significant competition for wagering dollars from
other racetracks and OTWs in Pennsylvania and neighboring states (some of which
also offer other forms of gaming), other gaming venues such as casinos and
state-sponsored lotteries, including the Pennsylvania Lottery and the West
Virginia Lottery. The Company may also face competition in the future from new
OTWs or from new racetracks. From time to time, Pennsylvania has considered
legislation to permit other forms of gaming. Although Pennsylvania has not
authorized any form of casino or other gaming, if additional gaming
opportunities become available in or near Pennsylvania, such gaming
opportunities could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's live races compete for wagering dollars and simulcast
fees with live races and races simulcast from other racetracks both inside and
outside Pennsylvania (including several in New York, New Jersey, West Virginia,
Ohio, Maryland and Delaware). On an industry-wide basis, attendance at live
racing has generally declined. The Company's ability to compete successfully for
wagering dollars is dependent, in part, on the quality of its live horse races.
The quality of horse races at some racetracks that compete with the Company,
either by live races or simulcasts, is higher than the quality of Company races.
The Company believes that there has been some improvement over the last several
years in the quality of the racing at the Penn National Race Course, due to
higher purses being paid as a result of the Company's increased simulcasting
activities. However, increased purses may not result in a continued improvement
in the quality of racing at the Penn National Race Course or in any material
improvement in the quality of racing at Pocono Downs or the Charles Town Races.
The Company's OTWs compete with the OTWs of other Pennsylvania
racetracks, and new OTWs may compete with the Company's existing or proposed
wagering facilities. Competition between OTWs increases as the distance between
them decreases. For example, the Company believes that its Allentown OTW, which
was acquired in the acquisition of Pocono Downs and which is approximately 50
miles from the Penn National Race Course and 35 miles from the Company's Reading
OTW, has drawn some patrons from the Penn National Race Course, the Reading OTW
and the Company's telephone wagering system, and that the Company's Lancaster
OTW, which is approximately 31 miles from the Penn National Race Course and 25
miles from the Company's York OTW, has drawn some patrons from the Penn National
Race Course, the York OTW and the Company's telephone wagering system. Moreover,
the Company believes that a competitor's new OTW in King of Prussia,
Pennsylvania, which is approximately 23 miles from the Reading OTW, has drawn
some patrons from the Reading OTW. Although only one competing OTW remains
authorized by law for future opening, the opening of a new competitive OTW in
close proximity to the Company's existing or future OTW authorizations (for a
competitor's new facility or facility relocation) could have an adverse effect
on the Company's business, financial condition and results of operations. A
competitor of the Company has applied to open an OTW within four miles of the
Company's OTW in Allentown. If the application were approved, such new OTW would
compete for patrons with the Company's site.
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However, the Company believes it is unlikely that the competitor's
proposed Allentown area site will be approved by gaming authorities under
existing legal precedent established by such gaming authorities.
The Company's Gaming Machine operations at the Charles Town
Entertainment Complex face competition from other Gaming Machine venues in
neighboring states (including Dover Downs in Dover, Delaware, Delaware Park in
northern Delaware, Harrington Raceway in southern Delaware and the casinos in
Atlantic City, New Jersey) and, to a lesser extent, other Gaming Machine venues
in West Virginia, which are less accessible to the Company's target market
audience than Gaming Machine venues in neighboring states. Venues in Delaware
and New Jersey, in addition to video gaming machines, currently offer mechanical
slot machines that feature traditional spinning reels, pull-handles and the
ability to both accept and pay out coins. West Virginia has not authorized, and
may never approve, such mechanical slot machines. The failure to attract or
retain Gaming Machine customers at the Charles Town Entertainment Complex,
whether arising from such competition or from other factors, could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
Risks Associated with the Charles Town Joint Venture and Charles Town
Entertainment Complex
The Charles Town Joint Venture acquired its option to purchase the
Charles Town Entertainment Complex from its 11% joint venture partner, Bryant
Development Company and its affiliates ("Bryant"); Bryant, in turn, acquired the
option from Showboat Operating Company ("Showboat"). Showboat retained an option
(the "Showboat Option") to operate any casino at the Charles Town Entertainment
Complex in return for a management fee (to be negotiated at the time, based on
rates payable for similar properties). Showboat has also retained a right of
first refusal to purchase or lease the site of any casino at the Charles Town
Entertainment Complex proposed to be leased or sold and to purchase any interest
proposed to be sold in any such casino (on the same terms offered by a third
party or otherwise negotiated with the Charles Town Joint Venture). The rights
retained by Showboat extend until November 5, 2001, the five-year anniversary of
the date that the Charles Town Joint Venture exercised its option to purchase
Charles Town Races, and expire thereafter unless legislation to permit casino
gaming at the Charles Town Entertainment Complex has been adopted prior to the
end of the five-year period. If such legislation has been adopted prior to such
time, then the rights of Showboat continue for a reasonable time (not less than
24 months) to permit completion of negotiations.
While the express terms of the Showboat Option do not specify what
activities at the Charles Town Entertainment Complex would constitute operation
of a casino, Showboat has agreed that the installation and operation of gaming
devices linked to the lottery (like the Gaming Machines the Company has
installed and will continue to install) at the Charles Town Entertainment
Complex's racetrack would not trigger the Showboat Option. If West Virginia law
were to permit casino gaming at the Charles Town Entertainment Complex and if
Showboat were to exercise the Showboat Option, the Company would be required to
pay a management fee to Showboat for the operation of the casino.
Regulation and Taxation
General. All of the Company's current and proposed operations are
subject to extensive regulations and could be subjected at any time to
additional or more restrictive regulations, or banned entirely. Company
subsidiaries are authorized to conduct thoroughbred racing and harness racing in
Pennsylvania under the Pennsylvania Racing Act. Such subsidiaries are also
authorized, under the Pennsylvania Racing Act and the Federal Interstate
Horseracing Act of 1978 (the "Federal Horseracing Act"), to conduct import and
export simulcast wagering. The Charles Town Joint Venture is also subject to the
provisions of West Virginia law that govern the conduct of thoroughbred horse
racing in West Virginia (the "West Virginia Racing Act") and the operation of
Gaming Machines in West Virginia (the "West Virginia Gaming Machine Act"). The
Company's live racing, pari-mutuel wagering and Gaming Machine operations are
contingent upon the continued governmental approval of such operations as forms
of legalized gaming. The Company also may be adversely affected by legislation
of additional forms of gaming, or expanded licensure, within or near the
Company's present or future markets.
Pennsylvania Racing Regulations. The Company's horse racing operations
at the Penn National Race Course and Pocono Downs are subject to extensive
regulation under the Pennsylvania Racing Act, which established the Pennsylvania
State Horse Racing Commission and the Pennsylvania State Harness Racing
Commission (together, the "Pennsylvania Racing Commissions"). The Pennsylvania
Racing Commissions are responsible for, among other things,
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(i) granting permission annually to maintain racing licenses and schedule race
meets, (ii) approving, after a public hearing, the opening of additional OTWs,
(iii) approving simulcasting activities, (iv) licensing all officers, directors,
racing officials and certain other employees of the Company and (v) approving
all contracts entered into by the Company affecting racing, pari-mutuel wagering
and OTW operations.
As in most states, the regulations and oversight applicable to the
Company's operations in Pennsylvania are intended primarily to safeguard the
legitimacy of the sport and its freedom from inappropriate or criminal
influences. The Pennsylvania Racing Commissions have broad authority to regulate
in the best interests of racing and may, to that end, disapprove the involvement
of certain personnel in the Company's operations or withhold permission for a
proposed OTW site for a variety of reasons, including community opposition. The
Pennsylvania legislature also has reserved the right to revoke the power of the
Pennsylvania Racing Commissions to approve additional OTWs and could, at any
time, terminate pari-mutuel wagering as a form of legalized gaming in
Pennsylvania or subject such wagering to additional restrictive regulation; such
termination would, and any further restrictions could, have a material adverse
effect upon the Company's business, financial condition and results of
operations.
The Company may not be able to obtain all necessary approvals for the
operation or expansion of its business. The Company has had continued permission
from the Pennsylvania State Horse Racing Commission to conduct live racing at
the Penn National Race Course since it commenced operations in 1972, and has
obtained permission from the Pennsylvania State Harness Racing Commission to
conduct live racing at Pocono Downs beginning with the 1997 season. Currently,
the Company has approval from the Pennsylvania Racing Commissions to operate 11
OTWs. A Commission may refuse to grant permission to continue to operate
existing facilities. The failure to obtain required regulatory approvals would
have a material adverse effect upon the Company's business, financial condition
and results of operations.
The Pennsylvania Racing Act provides that no corporation licensed to
conduct thoroughbred racing with pari-mutuel wagering shall be licensed to
conduct harness racing with pari-mutuel wagering and that no corporation
licensed to conduct harness racing with pari-mutuel wagering shall be licensed
to conduct thoroughbred racing with pari-mutuel wagering. The Company's harness
and thoroughbred licenses are held by separate corporations, each of which is a
wholly owned subsidiary of the Company. Moreover, the Pennsylvania State Harness
Racing Commission has reissued the Pocono Downs harness racing license and has
found, in connection with the reissuance, that it is not "inconsistent with the
best interests, convenience or necessity or with the best interests of racing
generally" that a subsidiary of the Company beneficially owns Pocono Downs. The
Company thus believes that the arrangement under which it holds both a harness
and a thoroughbred license complies with applicable regulations.
West Virginia Racing and Gaming Regulation. The Company's operations at
the Charles Town Entertainment Complex are subject to regulation by the West
Virginia State Racing Commission (the "West Virginia Racing Commission") under
the West Virginia Racing Act, and by the West Virginia Lottery Commission under
the West Virginia Gaming Machine Act. The powers and responsibilities of the
West Virginia Racing Commission are substantially similar in scope and effect to
those of the Pennsylvania Racing Commissions and extend to the approval and/or
oversight of all aspects of racing and pari-mutuel wagering operations. The
Company has received all necessary approvals to conduct races and OTW operations
and operate 1,000 Gaming Machines at the Charles Town Entertainment Complex;
however, such approvals are subject to renewal and approval annually. The
failure to receive or retain approvals or renewals of approvals, or a delay in
receiving such approvals and renewals, could cause the reduction or suspension
of racing and pari-mutuel wagering, as well as of Gaming Machine operations, at
the Charles Town Entertainment Complex and have a material adverse effect upon
the Company's business, financial condition and results of operations.
Pursuant to the West Virginia Gaming Machine Act, each of the two West
Virginia horse racetracks and two West Virginia dog racetracks licensed prior to
January 1, 1994 and which conduct a minimum number of days of live racing, may
apply for an annual license to operate video lottery terminals at its racetrack.
The West Virginia Gaming Machine Act requires that the operator of the Charles
Town Entertainment Complex be subject to a written agreement with the horse
owners, breeders and trainers who race horses at that facility (the "Charles
Town Horsemen") in order to conduct Gaming Machine operations. The Company is
party to the requisite agreement with the Charles Town Horsemen, which expires
on December 31, 2000. The West Virginia Gaming Machine Act also requires that
the operator of the Charles Town Entertainment Complex be subject to a written
agreement with the pari-mutuel clerks in
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order to operate Gaming Machines. Although this agreement expired on December
31, 1997, the Company continues to conduct negotiations for a new contract and
anticipates entering into a new contract which would operate through December
31, 2000. The absence of an agreement with the Charles Town Horsemen or the
pari-mutuel clerks at the Charles Town Entertainment Complex, or the termination
or non-renewal of such agreement, would have a material adverse effect on the
Company's business, financial condition and results of operations. The West
Virginia Lottery Commission has broad powers to approve and monitor all
operations of the video lottery terminals, the specification of the terminals
and the interface between the terminals and the West Virginia central lottery
system. In addition, the Commission licenses all persons who control the
licensed entity or are key personnel of the video lottery operation to ensure
their integrity and absence of any criminal involvement.
State and Federal Simulcast Regulation. The Federal Horseracing Act,
the West Virginia Racing Act and the Pennsylvania Racing Act require that, in
order to simulcast races, the Company have written agreements, and the Company
therefore is party to agreements (collectively, the "Horsemen Agreements"), with
the horse owners and trainers (the "Thoroughbred Horsemen Agreement") who race
horses at the Penn National Race Course and Charles Town Races (the
"Thoroughbred Horsemen") and with the horse owners and trainers (the "Harness
Horsemen Agreement") at Pocono Downs (the "Harness Horsemen" and, together with
the Thoroughbred Horsemen, the "Horsemen"). In accordance with the Horsemen
Agreements, the Company has agreed on the allocations of the Company's revenues
from import simulcast wagering to the purse funds for the Penn National Race
Course, Charles Town Races and Pocono Downs. Because the Company cannot conduct
import simulcast wagering in the absence of the Horsemen Agreements, the
termination or non-renewal of any Horsemen Agreement could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Potential Federal Regulation. In August 1996, the United States
Congress passed legislation, which President Clinton signed, creating the
National Gambling Impact and Policy Commission to conduct a comprehensive study
of all matters relating to the economic and social impact of gaming in the
United States. The legislation provides that, not later than two years after the
enactment of such legislation, the commission must issue a report to the
President and to Congress containing its findings and conclusions, together with
recommendations for legislation and administrative actions. Any such
recommendations, if enacted into law, could adversely impact the gaming industry
and have a material adverse effect on the Company's business or results of
operations. The Company is unable to predict whether this study will result in
legislation that would impose additional regulations on gaming industry
operators, including the Company, or whether such legislation, if any, would
have a material adverse effect on the Company. Additionally, from time to time,
certain federal legislators have proposed the imposition of a federal tax on
gaming revenues. Any such tax could have a material adverse effect on the
Company's financial condition or results of operations.
Taxation. The Company believes that the prospect of significant
additional revenue is one of the primary reasons that jurisdictions permit
legalized gaming. As a result, gaming companies are typically subject to
significant taxes and fees in addition to normal federal and state income taxes,
and such taxes and fees are subject to increase at any time. The Company pays
substantial taxes and fees with respect to its operations. From time to time,
federal legislators and officials have proposed changes in tax laws, or in the
administration of such laws, affecting the gaming industry. It is not possible
to determine with certainty the likelihood of changes in tax laws or in the
administration of such laws. Such changes, if adopted, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Compliance with Other Laws. The Company and its OTWs are also subject
to a variety of other rules and regulations, including zoning, construction and
land-use laws and regulations in Pennsylvania and West Virginia governing the
serving of alcoholic beverages. Currently, Pennsylvania laws and regulations
permit the construction of off-track wagering facilities, but may affect the
selection of a particular OTW site because of parking, traffic flow and other
similar considerations, any of which may serve to delay the opening of future
OTWs in Pennsylvania. By contrast, West Virginia law does not permit the
operation of OTWs. The Company derives a significant portion of its other
revenues from the sale of alcoholic beverages to patrons of its facilities. Any
interruption or termination of the Company's existing ability to serve alcoholic
beverages would have a material adverse effect on the Company's business,
financial condition and results of operations.
Restrictions on Share Ownership and Transfer. The Pennsylvania Racing
Act requires that any shareholder proposing to transfer beneficial ownership of
5% or more of the Company's shares file an affidavit with the Company
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setting forth certain information about the proposed transfer and transferee, a
copy of which the Company is required to furnish to the Pennsylvania Racing
Commission. The certificates representing the Company shares owned by 5%
beneficial shareholders are required to bear certain legends prescribed by the
Pennsylvania Racing Act. In addition, under the Pennsylvania Racing Act, the
Pennsylvania Racing Commission has the authority to order a 5% beneficial
shareholder of the Company to dispose of the shareholder's common stock of the
Company if it determines that continued ownership would be inconsistent with the
public interest, convenience or necessity or the best interest of racing
generally. The West Virginia Gaming Machine Act provides that a transfer of more
than 5% of the voting stock of a corporation which controls the license may only
be to persons who have met the licensing requirements of the West Virginia
Gaming Machine Act or which transfer has been pre-approved by the West Virginia
Lottery Commission. Any transfer that does not comply with this requirement
voids the license.
Potential Tennessee Development Regulatory Compliance. If the Company
successfully completes the development of its potential Tennessee harness track
and OTWs, the Company will likely face regulatory requirements that are similar
to the requirements affecting its existing operations; however, given the
absence of horse racing within Tennessee at this time, the Company may face more
burdensome regulatory approvals or compliance in light of the absence of
significant regulations, interpretation and administrative action at this time.
Effect of Inclement Weather and Seasonality
Because horse racing is conducted outdoors, variable weather
contributes to the seasonality of the Company's business. Weather conditions,
particularly during the winter months, may cause races to be canceled or may
curtail attendance. Because a substantial portion of the Penn National Race
Course, Pocono Downs and Charles Town Races expenses are fixed, the loss of
scheduled racing days could have a material adverse effect on the Company's
business, financial condition and results of operations.
For the year ended December 31, 1997, the Company canceled a total of
five racing days because of inclement weather. The severe winter weather in 1996
resulted in the closure of the Company's OTW facilities for two days in January
1996. Because of the Company's growing dependence upon OTW operations, severe
weather that causes the Company's OTWs to close could have an adverse effect
upon the Company's business, financial condition and results of operations.
Attendance and wagering at the Company's facilities have been favorably
affected by special racing events which stimulate interest in horse racing, such
as the Triple Crown races in May and June and the heavier racing schedule
throughout the country during the second and third quarters. As a result, the
Company's revenues and net income have been greatest in the second and third
quarters of the year and lowest in the first and fourth quarters of the year.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Effect of Inclement Weather and Seasonality."
Limitations and Restrictions of Contracts with Horsemen
The Penn National Race Course Horsemen Agreement was entered into in
February 1996, expires in February 1999 and is subject to automatic renewal for
successive one year terms unless either party gives notice of termination at
least 90 days prior to the end of any such period. The Pocono Downs Horsemen
Agreement was entered into in November 1994, became effective in January 1995
and expires in January 2000. The Charles Town Horsemen Agreement was entered
into on May 7, 1997 and expires on December 31, 2000. The future success of the
Company depends, in part, on its ability to maintain a good relationship with
the Horsemen and to obtain renewal of the Horsemen Agreements on satisfactory
terms. Failure to do so could lead to an interruption in live racing, simulcast
or OTW operations or, at the Charles Town Entertainment Complex, Gaming Machine
operations. The Company may not be able to renew or modify the Horsemen
Agreements on satisfactory terms, and failure to obtain satisfactory renewal
terms could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Purses; Agreements with
Horsemen" and "--Regulation and Taxation."
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Potential Environmental Liabilities
As a result of the acquisition of Pocono Downs, the Company owns a
solid waste landfill (the "Landfill") located outside Wilkes-Barre, Pennsylvania
on a parcel of land adjacent to Pocono Downs. The Landfill was operated by the
East Side Landfill Authority (the "Landfill Authority"), which disposed of
municipal waste in the Landfill from 1970 until 1982 on behalf of four
municipalities. The Landfill is currently subject to a closure order, issued by
the Pennsylvania Department of Environmental Resources ("PADER"), which the four
municipalities are required to implement pursuant to a 1986 Settlement Agreement
among the former trustee in bankruptcy for Pocono Downs, the Landfill Authority,
the municipalities and PADER (the "Settlement Agreement"). According to the
Company's environmental engineering consulting firm, the Landfill closure is
substantially complete. To date the municipalities have been substantially
fulfilling their obligations under the Settlement Agreement. However, there can
be no assurance that the municipalities will continue to meet their obligations
under the Settlement Agreement or that the terms of the Settlement Agreement
will not be amended in the future. In addition, as the owner of the property,
the Company may be liable for future claims with respect to the Landfill under
the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") and analogous state laws. The Company may incur expenses in
connection with the Landfill in the future, which expenses may not be reimbursed
by the municipalities. Any such expenses could have a material adverse effect on
the Company's business, financial condition and results of operations.
Concentration of Ownership
The Company's executive officers and directors own beneficially an
aggregate of approximately 44.2% of the outstanding common stock of the Company
as of April 3, 1998. Peter M. Carlino, the Company's Chairman and Chief
Executive Officer, has voting control, directly and indirectly through a family
trust (the "Carlino Family Trust") and another corporation, of approximately
41.4% of the outstanding common stock. The Company's officers and directors if
acting together, and Mr. Carlino acting alone, may be able to significantly
influence the election of directors and the business and affairs of the Company.
Under certain circumstances, including the sale of all or substantially all of
the assets of the Company or a merger, consolidation or liquidation of the
Company, other trustees of the Carlino Family Trust, including Harold Cramer,
who is a director of the Company, may have voting power over approximately 37.8%
of the shares of common stock outstanding.
Dependence on Key Personnel
The Company is highly dependent on the services of Peter M. Carlino,
the Company's Chairman and Chief Executive Officer, and other officers and key
employees. The loss of the services of any of these individuals could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company has entered into employment agreements with
Mr. Carlino and certain other officers. See Note 5 of the Notes to the
Consolidated Financial Statements of the Company included elsewhere in this
Prospectus.
Limitations on Change of Control
In the event of a Change of Control, the Company will be required to
make an offer for cash to purchase the Notes at 101% of the principal amount
thereof, plus accrued and unpaid interest, to the repurchase date. A Change of
Control will result in an event of default under the Credit Facility and may
result in a default under other indebtedness of the Company that may be incurred
in the future. The Credit Facility prohibits the purchase of outstanding Notes
prior to repayment of the borrowings under the Credit Facility and any exercise
by the holders of the Notes of their right to require the Company to repurchase
the Notes will cause an event of default under the Credit Facility. Finally,
there can be no assurance that the Company will have the financial resources
necessary to repurchase the Notes upon a Change of Control. See "Description of
Exchange Notes--Change of Control" for a description of Change of Control
obligations relevant to the Notes.
Fraudulent Conveyance
If the Company or any Subsidiary Guarantor receives less than
reasonably equivalent value in exchange for its issuance of the Exchange Notes
or, as the case may be, its Guarantee or the incurrence of liabilities pursuant
thereto, the Exchange Notes or such Guarantee, or any payments made in respect
thereof, could be avoided under federal or applicable state fraudulent transfer
law, regardless of whether the Company or any Subsidiary Guarantor was subject
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to any bankruptcy or insolvency proceedings. In particular, to the extent that
any Subsidiary Guarantor becomes liable for any obligations of the Company in
excess of the value actually received by the Subsidiary Guarantor, the relevant
Guarantee could be subject to avoidance as a fraudulent transfer if, at the time
of, or as a result of, either the issuance of such Guarantee or any payment
thereunder, (i) the Subsidiary Guarantor was or became insolvent, (ii) the
Subsidiary Guarantor had unreasonably small capital to conduct its business as
then conducted or contemplated to be conducted or (iii) the Subsidiary Guarantor
was unable or was rendered unable, to meet its probable liabilities as they
matured and became due and payable. If any Guarantee is avoided, the holders
could lose the benefit of the Guarantee, and the holders could also be required
to return to the Subsidiary Guarantor or its estate the amount of any payment or
other property received in respect of the Exchange Notes.
The Indenture provides that certain future subsidiaries of the Company
will be required to guarantee the Exchange Notes. If certain bankruptcy or
insolvency proceedings are initiated by or against the new subsidiaries within
90 days (or, possibly, one year) after any such guaranty, grant or assignment,
or if any Subsidiary Guarantor incurs obligations under its Guarantee in
anticipation of insolvency, all or a portion of the affected Guarantee could be
avoided as a preferential transfer under federal bankruptcy or applicable state
law. In addition, a court could require holders to return all payments made
under any such Guarantee within such 90 day period (or, possibly, one year) as
preferential transfers.
The Company does not believe that the Company and the Subsidiary
Guarantors, as a result of the issuance of the Exchange Notes, (i) will be
insolvent or rendered insolvent under the foregoing standards, (ii) will be
engaged in a business or transaction for which its remaining assets constitute
unreasonably small capital or (iii) intends to incur, or believes that it will
incur, debts beyond its ability to pay such debts as they mature. These beliefs
are based on the Company's and the Subsidiary Guarantors' operating history, net
worth and management's analysis of internal cash flow projections and estimated
values of assets and liabilities of such entities as of the date of this
Prospectus. There can be no assurance, however, that a court passing on these
issues would make the same determination.
Absence of Public Market for the Exchange Notes
The Exchange Notes are a new issue of securities for which there is
currently no established trading market. The Company does not intend to apply to
list the Exchange Notes on any stock exchange. The Company has been advised by
the Initial Purchasers that they currently intend to make a market in the
Exchange Notes. However, they are not obligated to do so and any market-making
activities with respect to the Exchange Notes may be discontinued at any time
without notice. In addition, such market-making activity will be subject to the
limits imposed by the Securities Act and the Exchange Act, and may be limited
during this Exchange Offer and the pendency of any Shelf Registration. There can
be no assurance that an active trading market for the Exchange Notes will
develop or be maintained. If a market for the Exchange Notes does not develop,
holders may not be able to resell the Exchange Notes for an extended period of
time, if at all. If a market were to exist, the Exchange Notes could trade at
prices that may be lower than the principal amount thereof depending on many
factors, including prevailing interest rates and the markets for similar
securities, general economic conditions and the financial condition and
performance of, and prospects for, the Company.
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THE EXCHANGE OFFER
Purpose and Effect
The Old Notes were sold by the Company to the Initial Purchasers on
December 17, 1997, pursuant to the Purchase Agreement. The Initial Purchasers
subsequently resold the Old Notes in reliance on Rule 144A under the Securities
Act. The Company, the Subsidiary Guarantors and the Initial Purchasers also
entered into the Registration Rights Agreement, pursuant to which the Company
agreed, with respect to the Old Notes to (i) cause to be filed the Registration
Statement with the Commission under the Securities Act concerning the Exchange
Offer, (ii) use all reasonable efforts (a) to cause such Registration Statement
to be declared effective by the Commission as soon as practicable and (b) to
cause the Exchange Offer to remain open for a period of not less than twenty
(20) business days. This Exchange Offer is intended to satisfy the Company's
exchange offer obligations under the Registration Rights Agreement.
Terms of the Exchange Offer
The Company hereby offers, upon the terms and subject to the conditions
set forth herein and in the accompanying Letter of Transmittal, to exchange
$1,000 in principal amount of the Exchange Notes for each $1,000 in principal
amount of the outstanding Old Notes. The Company will accept for exchange any
and all Old Notes that are validly tendered on or prior to 5:00 p.m., New York
City time, on the Expiration Date. Tenders of the Old Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date. The
Exchange Offer is not conditioned upon any minimum principal amount of Old Notes
being tendered for exchange. However, the Exchange Offer is subject to certain
customary conditions which may be waived by the Company, and to the terms and
provisions of the Registration Rights Agreement. See "--Conditions of the
Exchange Offer."
Old Notes may be tendered only in multiples of $1,000. Subject to the
foregoing, Holders may tender less than the aggregate principal amount
represented by the Old Notes held by them, provided that they appropriately
indicate this fact on the Letter of Transmittal accompanying the tendered Old
Notes (or so indicate pursuant to the procedures for book-entry transfer).
As of April 27, 1998, $80 million in aggregate principal amount of the
Old Notes were outstanding and there was one registered holder of the Old Notes,
Cede, which held the Old Notes for its participants. Only a Holder of the Old
Notes (or such Holder's legal representative or attorney-in-fact) may
participate in the Exchange Offer. There will be no fixed record date for
determining Holders of the Old Notes entitled to participate in the Exchange
Offer. The Company believes that as of April 27, 1998, no Holder is an affiliate
(as defined in Rule 405 under the Securities Act) of the Company.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
of Old Notes and for the purposes of receiving the Exchange Notes from the
Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering Holder thereof as promptly as practicable
after the Expiration Date.
Expiration Date; Extensions; Amendments
The Expiration Date shall be June 2, 1998 at 5:00 p.m., New York City
time, unless the Company, in its sole discretion, extends the Exchange Offer, in
which case the Expiration Date shall be the latest date and time to which the
Exchange Offer is extended.
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In order to extend the Exchange Offer, the Company will notify the
Exchange Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 10:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, (ii) to extend the Exchange Offer, or (iii) if any of
the conditions set forth below under "Conditions of the Exchange Offer" shall
not have been satisfied, to terminate the Exchange Offer, by giving oral or
written notice of such delay, extension, or termination to the Exchange Agent.
The Company reserves the right, in its sole discretion, to amend the terms of
the Exchange Offer in any manner. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, the Company will
promptly disclose such amendments by means of a prospectus supplement that will
be distributed to the registered holders of the Old Notes.
Conditions of the Exchange Offer
The Exchange Offer is not conditioned upon any minimum principal amount
of Old Notes being tendered for exchange. However, the Exchange Offer is subject
to certain customary conditions, including that (i) the Exchange Offer does not
violate applicable law or any applicable interpretation of the staff of the
Commission, (ii) no action or proceeding is instituted or threatened that would
be reasonably likely to materially impair the ability of the Company to proceed
with the Exchange Offer, and (iii) all government approvals deemed necessary by
the Company have been obtained.
The Company expects that the foregoing conditions will be satisfied.
The foregoing conditions are for the sole benefit of the Company and may be
waived by the Company in whole or in part at any time and from time to time in
its sole discretion. The failure by the Company at any time to exercise any of
the foregoing rights shall not be deemed a waiver of such rights and each such
right shall be deemed an ongoing right which may be asserted at any time and
from time to time. Any determination by the Company concerning the events
described above will be final and binding upon all parties.
Termination of Certain Rights
Pursuant to the Registration Rights Agreement and the Old Notes,
Holders of Old Notes have rights to receive Additional Interest and have certain
rights intended for the holders of unregistered securities. Holders of Exchange
Notes will not be and, upon consummation of the Exchange Offer, Holders of Old
Notes will no longer be, entitled to (i) the right to receive Additional
Interest or (ii) certain other rights under the Registration Rights Agreement
intended for holders of unregistered securities. The Exchange Offer shall be
deemed consummated upon the occurrence of the delivery by the Company to the
Registrar of Exchange Notes in the same aggregate principal amount as the
aggregate principal amount of Old Notes that were tendered by holders thereof
pursuant to the Exchange Offer.
Shelf Registration
The Company and Subsidiary Guarantors shall as promptly as practicable
deliver the Shelf Notice to the Trustee and such Holders as required by the
Registration Rights Agreement and, within 30 days of the delivery of the Shelf
Notice, shall be required to file the Shelf Registration Statement covering all
of the Registrable Notes if (i) because of a change in law or in currently
prevailing interpretations of the Staff of the Commission, the Company and
Subsidiary Guarantors are not permitted to effect an Exchange Offer, (ii) the
Exchange Offer is not consummated within 165 days of the Issue Date, (iii) the
holder of Private Exchange Notes so requests at any time after the consummation
of the Private Exchange, or (iv) in the case of any Holder that participates in
the Exchange Offer, such Holder does not receive Exchange Notes on the date of
the Exchange that may be sold without restriction under state and federal
securities laws. The Company and the Subsidiary Guarantors shall be required to
use their best efforts to cause the Shelf Registration to be declared effective
under the Securities Act on or prior to 105 days after the Shelf Notice and to
keep the Shelf Registration continuously effective under the Securities Act
until the earlier of (i) December 17, 1999 or (ii) such period
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<PAGE>
ending when all Registrable Notes covered by the Shelf Registration have been
sold in the manner set forth and as contemplated in the Shelf Registration.
Accrued Interest on the Old Notes
The Exchange Notes will bear interest at a rate equal to 105/8% per
annum from and including their date of issuance. Holders whose Old Notes are
accepted for exchange will have the right to receive interest accrued thereon
from the date of their original issuance or the last Interest Payment Date, as
applicable, to, but not including, the date of issuance of the Exchange Notes,
such interest to be payable with the first interest payment on the Exchange
Notes. Interest on the Old Notes accepted for exchange, which interest accrued
at the rate of 105/8% per annum, will cease to accrue on the day prior to the
issuance of the Exchange Notes.
Additional Interest
Pursuant to the Registration Rights Agreement, if (i) notwithstanding
that the Company and Subsidiary Guarantors have consummated or will consummate
the Exchange Offer, the Company and Subsidiary Guarantors are required to file a
Shelf Registration and such Shelf Registration is (a) not filed on or prior to
the Filing Date applicable thereto, (b) not declared effective by the SEC on or
prior to the 60th day following the date such Shelf Registration was filed, or
(c) declared effective and then ceases to be effective prior to the disposition
of all Old Notes thereunder at any time during the two year period ended
December 17, 1999, or (ii) neither the Company nor the Subsidiary Guarantors has
exchanged Exchange Notes for all Old Notes validly tendered in accordance with
the terms of the Exchange Offer on or prior to the 45th day after the date on
which the Exchange Offer Registration Statement has been declared effective,
additional interest shall accrue for the period of any such failure or event on
the principal amount of the applicable Old Notes at a rate of .50% per annum for
the first 90 days after such failure or event and shall increase by an
additional .50% for each subsequent 90-day period, provided, further, however,
that upon the filing of (i) the Shelf Registration Statement, (ii) the exchange
of all Exchange Notes for all Old Notes tendered, or (iii) upon the
effectiveness of the Shelf Registration which had ceased to remain effective,
such additional interest shall cease to accrue.
Procedures for Tendering Old Notes
The tender of a Holder's Old Notes as set forth below and the
acceptance thereof by the Company will constitute a binding agreement between
the tendering Holder and the Company upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal. Except as set forth below, a Holder who wishes to tender Old Notes
for exchange pursuant to the Exchange Offer must transmit such Old Notes,
together with a properly completed and duly executed Letter of Transmittal,
including all other documents required by such Letter of Transmittal, to the
Exchange Agent at the address set forth on the back cover page of this
Prospectus prior to 5:00 p.m., New York City time, on the Expiration Date. THE
METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SUCH DELIVERY IS BY
MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT
THE HOLDER USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY.
Any financial institution that is a participant in DTC's Book-Entry
Transfer Facility system may make book entry delivery of the Old Notes by
causing DTC to transfer such Old Notes into the Exchange Agent's account in
accordance with DTC's procedures for such transfer. In connection with a
book-entry transfer, a Letter of Transmittal need not be transmitted to the
Exchange Agent, provided that the book-entry transfer procedure must be complied
with prior to 5:00 p.m., New York City time, on the Expiration Date.
Each signature on a Letter of Transmittal or a notice of withdrawal, as
the case may be, must be guaranteed unless the Old Notes surrendered for
exchange pursuant hereto are tendered (i) by a registered holder of the Old
Notes
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who has not completed either the box entitled "Special Exchange Instructions" or
the box entitled "Special Delivery Instructions" in the Letter of Transmittal,
or (ii) by an Eligible Institution (as defined). In the event that a signature
on a Letter of Transmittal or a notice of withdrawal, as the case may be, is
required to be guaranteed, such guarantee must be by a firm which is a member of
a registered national securities exchange or the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or otherwise be an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(collectively, "Eligible Institutions"). If the Letter of Transmittal is signed
by a person other than the registered holder of the Old Notes, the Old Notes
surrendered for exchange must either (i) be endorsed by the registered holder,
with the signature thereon guaranteed by an Eligible Institution, or (ii) be
accompanied by a bond power, in satisfactory form as determined by the Company
in its sole discretion, duly executed by the registered holder, with the
signature thereon guaranteed by an Eligible Institution. The term "registered
holder" as used herein with respect to the Old Notes means any person in whose
name the Old Notes are registered on the books of the Registrar.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Old Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
Old Notes not property tendered and to reject any Old Notes the Company's
acceptance of which might, in the judgment of the Company, or its counsel, be
unlawful. The Company also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to particular Old Notes
either before or after the Expiration Date (including the right to waive the
ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and Conditions of the Exchange Offer
(including the Letter of Transmittal and the instructions thereto) by the
Company shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes for exchange must be
cured within such period of time as the Company shall determine. The Company
will use reasonable efforts to give notification of defects or irregularities
with respect to tenders of Old Notes for exchange but shall not incur any
liability for failure to give such notification. Tenders of the Old Notes will
not be deemed to have been made until such irregularities have been cured or
waived.
If any Letter of Transmittal, endorsement, bond power, power of
attorney or any other document required by the Letter of Transmittal is signed
by a trustee, executor. administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company, in its sole discretion, of such
person's authority to so act must be submitted.
Any beneficial owner of the Old Notes (a "Beneficial Owner") whose Old
Notes are registered in the name of a broker-dealer, commercial bank, trust
company or other nominee and who wishes to tender Old Notes in the Exchange
Offer should contact such registered holder promptly and instruct such
registered holder to tender on such Beneficial Owner's behalf. If such
Beneficial Owner wishes to tender directly, such Beneficial Owner must, prior to
completing and executing the Letter of Transmittal and tendering Old Notes, make
appropriate arrangements to register ownership of the Old Notes in such
Beneficial Owner's name. Beneficial Owners should be aware that the transfer of
registered ownership may take considerable time.
By tendering, each registered holder will represent to the Company
that, among other things (i) the Exchange Notes to be acquired in connection
with the Exchange Offer by the Holder and each Beneficial Owner of the Old Notes
are being acquired by the Holder and each Beneficial Owner in the ordinary
course of business of the Holder and each Beneficial Owner, (ii) the Holder and
each Beneficial Owner are not participating, do not intend to participate, and
have no arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes, (iii) the Holder and each Beneficial Owner
acknowledge and agree that any person participating in the Exchange Offer for
the purpose of distributing the Exchange Notes must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the Exchange Notes acquired by such person and
cannot rely on the position of the staff of the Commission set forth in
no-action letters that are discussed herein under "--Resales of the Exchange
Notes," (iv) that if the Holder is a broker-dealer that acquired Old Notes as a
result of market-making or other trading activities, it will deliver a
prospectus in connection with any resale of Exchange Notes acquired in the
Exchange Offer, (v) the Holder and each Beneficial Owner understand that a
secondary, resale transaction described in clause (iii) above should be covered
by an effective registration statement containing the selling security holder
information required by Item 507 of Regulation S-K of the Commission, and (vi)
neither the Holder nor any
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Beneficial Owner is an "affiliate," as defined under Rule 405 of the Securities
Act, of the Company except as otherwise disclosed to the Company in writing. In
connection with a book-entry transfer, each participant will confirm that it
makes the representations and warranties contained in the Letter of Transmittal.
Guaranteed Delivery Procedures
Holders whose certificates for Old Notes are not immediately available
or who cannot deliver their certificates and all other required documents to the
Exchange Agent on or prior to the Expiration Date, or who cannot complete the
procedure for book-entry transfer on a timely basis, may tender their Old Notes
pursuant to the guaranteed delivery procedures set forth in the Letter of
Transmittal. Pursuant to such procedures, if the Holder desires to tender Old
Notes other than by book-entry transfer, (i) such tender must be made through an
Eligible Institution, (ii) prior to the Expiration Date, the Exchange Agent must
receive from such Eligible Institution a properly completed and duly executed
Letter (or a facsimile thereof) and Notice of Guaranteed Delivery, substantially
in the form provided by the Company (by facsimile transmission, mail or hand
delivery), setting forth the name and address of the Holder of Old Notes, the
certificate number or numbers of any Old Notes which will not be tendered by
book-entry transfer, and the amount of Old Notes tendered, stating that the
tender is being made thereby and guaranteeing that within five business days
after the date of execution of the Notice of Guaranteed Delivery, the
certificates for all physically tendered Old Notes, in proper form for transfer,
and any other documents required by the Letter of Transmittal, will be deposited
by the Eligible Institution with the Exchange Agent, and (iii) the certificates
for all physically tendered Old Notes, in proper form for transfer, and all
other documents required by this Letter, are received by the Exchange Agent
within five business days after the date of execution of the Notice of
Guaranteed Delivery. In the case of a book-entry transfer, pursuant to the
guaranteed delivery procedures set forth in the Letter of Transmittal (i) the
tender must be made through an Eligible Institution, (ii) prior to the
Expiration Date, the Exchange Agent must receive confirmation from the
Depository of receipt by the Depository of a Notice of Guaranteed Delivery via
ATOP, by which the tendering Holder will expressly acknowledge the receipt of,
and agree to be bound by, the Notice of Guaranteed Delivery, including a
guarantee that Book-Entry Confirmation will be received by the Exchange Agent
within five business days after the date of transmittal of the Notice of
Guaranteed Delivery, and (iii) Book-Entry Confirmation must be received by the
Exchange Agent within five business days after the date of the transmittal of
the Notice of Guaranteed Delivery via ATOP. Any Holder who wishes to tender Old
Notes pursuant to the Guaranteed Delivery Procedures described above must ensure
that the Exchange Agent receives the Notice of Guaranteed Delivery and Letter of
Transmittal relating to such Old Notes prior to 5:00 p.m., New York City time,
on the Expiration Date.
Acceptance of Old Notes for Exchange; Delivery of Exchange Notes
Upon satisfaction or waiver of all the conditions to the Exchange
Offer, the Company will accept any and all Old Notes that are properly tendered
in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration
Date. The Exchange Notes issued pursuant to the Exchange Offer will be delivered
promptly after acceptance of the Old Notes. For purposes of the Exchange Offer,
the Company shall be deemed to have accepted validly tendered Old Notes, when,
as, and if the Company has given oral or written notice thereof to the Exchange
Agent.
In all cases, issuances of Exchange Notes for Old Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of such Old Notes, a properly completed and
duly executed Letter of Transmittal and all other required documents (or of
confirmation of a book-entry transfer of such Old Notes into the Exchange
Agent's account at DTC); provided, however, that the Company reserves the
absolute right to waive any defects or irregularities in the tender or
conditions of the Exchange Offer. If any tendered Old Notes are not accepted for
any reason, such unaccepted Old Notes will be returned without expense to the
tendering Holder thereof as promptly as practicable after the expiration or
termination of the Exchange Offer.
Withdrawal Rights
Tenders of the Old Notes may be withdrawn by delivery of a written
notice to the Exchange Agent at its address set forth on the back cover page of
this Prospectus, at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes, as applicable), (iii) be signed
by the Holder in the same manner as
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the original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accompanied by a
bond power in the name of the person withdrawing the tender, in satisfactory
form as determined by the Company in its sole discretion, duly executed by the
registered holder, with the signature thereon Guaranteed by an Eligible
Institution together with the other documents required upon transfer by the
Indenture, and (iv) specify the name in which such Old Notes are to be
re-registered, if different from the depositor, pursuant to such documents of
transfer. All questions as to the validity, form and eligibility (including time
of receipt) of such notices will be determined by the Company, in its sole
discretion. The Old Notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the Exchange Offer. Any Old Notes which
have been tendered for exchange but which are withdrawn will be returned to the
Holder thereof without cost to such Holder as soon as practicable after
withdrawal. Properly withdrawn Old Notes may be retendered by following one of
the procedures described under "--Procedures for Tendering Old Notes" at any
time on or prior to the Expiration Date.
Private Exchange Notes
The Registration Rights Agreement provides that if, prior to
consummation of the Exchange Offer, either of the Initial Purchasers hold any
Old Notes acquired by them and having, or which are reasonably likely to be
determined to have, the status of an unsold allotment in the initial
distribution, the Company, upon the request of either Initial Purchaser shall,
simultaneously with the delivery of the Exchange Notes in the Exchange Offer,
issue and deliver to such Initial Purchaser, in exchange for such Old Notes held
by such Initial Purchaser, Private Exchange Notes. Any Private Exchange Notes
will be issued pursuant to the same indenture as the Exchange Notes. The Private
Exchange Notes are not covered by the registration statement of which this
Prospectus is a part and are not being offered hereby. Any Private Exchange
Notes will be entitled to all the rights and subject to all the limitations
applicable thereto under the Indenture, and will be subject to the same
restrictions on transfer applicable to untendered Old Notes. However, pursuant
to the Registration Rights Agreement, holders of Private Exchange Notes have
certain rights to require the Company to file and maintain a shelf registration
statement that would allow resales of such Private Exchange Notes owned by such
holders. See "--Shelf Registration."
Consequences of Failure to Exchange
As a result of the making of this Exchange Offer, the Company will have
fulfilled one of its obligations under the Registration Rights Agreement, and,
except as described under "--Shelf Registration," Holders of Old Notes, other
than the Initial Purchasers holding any Old Notes acquired by them and having,
or which are reasonably likely to be determined to have the status of an unsold
allotment in the initial distribution, who do not tender their Old Notes will
not have any further registration rights under the Registration Rights Agreement
or otherwise. Accordingly, any Holder of Old Notes that does not exchange that
Holder's Old Notes for Exchange Notes will continue to hold the untendered Old
Notes and will be entitled to all the rights and limitations applicable thereto
under the Indenture, except to the extent such rights or limitations, by their
terms, terminate or cease to have further effectiveness as a result of the
Exchange Offer.
The Old Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Old Notes
may be resold only (i) to the Company (upon redemption thereof or otherwise),
(ii) pursuant to an effective registration statement under the Securities Act,
(iii) so long as the Old Notes are eligible for resale pursuant to Rule 144A, to
a qualified institutional buyer within the meaning of Rule 144A under the
Securities Act in a transaction meeting the requirements of Rule 144A, (iv)
outside the United States to a foreign person pursuant to the exemption from the
registration requirements of the Securities Act provided by Regulation S
thereunder, (v) to an institutional accredited investor that, prior to such
transfer, furnishes to U.S. Trust Company of Texas, N.A., as trustee, a signed
letter containing certain representations and agreements relating to the
restrictions on transfer of the Old Notes evidenced thereby (the form of which
letter can be obtained from such trustee) or (vi) pursuant to another available
exemption from the registration requirements of the Securities Act, in each case
in accordance with any applicable securities laws of any state of the United
States.
Accordingly, to the extent that Old Notes are tendered and accepted in
the Exchange Offer, the trading market for the untendered Old Notes could be
adversely affected.
30
<PAGE>
The Exchange Agent; Assistance
State Street Bank and Trust Company is the Exchange Agent. All tendered
Old Notes, executed Letters of Transmittal and other related documents should be
directed to the Exchange Agent. Questions and requests for assistance and
requests for additional copies of the Prospectus, the Letter of Transmittal and
other related documents should be addressed to the Exchange Agent as follows:
By Hand, Registered or Certified Mail or Overnight Courier:
State Street Bank and Trust Company
Two International Place
Boston, MA 02110
------
By Facsimile:
(617) 664-5314
Attention: Kellie Mullen, Corporate Trust Department
Confirm by Telephone (617) 664-5587
Fees and Expenses
All fees and expenses incident to the performance of or compliance with
the Registration Rights Agreement by the Company will be borne by the Company or
the Subsidiary Guarantors whether or not the Exchange Offer or a Shelf
Registration is filed or becomes effective, including, without limitation, (i)
all registration and filing fees (including, without limitation, (A) fees with
respect to filings to be made with the National Association of Securities
Dealers, Inc. in connection with an underwritten offering and (B) fees and
expenses for compliance with state securities or Blue Sky laws, (including,
without limitation, the fees and disbursements of counsel in connection with
Blue Sky qualifications of the Registrable Notes or Exchange Notes and
determination of the eligibility of the Registrable Notes or Exchange Notes for
investment under the laws of such jurisdictions (y) where the holders of
Registrable Notes are located, in the case of Exchange Notes, or (z) where,
subject to certain limitations, the Holder or Participating Broker-Dealer may
reasonably request, in the case of Registrable Notes or Exchange Notes to be
sold by a broker-dealer that received Exchange Notes in the Exchange Offer
during the period not to exceed 180 days after the consummation of the Exchange
Offer)), (ii) printing expenses, including, without limitation, expenses of
printing certificates for Registrable Notes or Exchange Notes in a form eligible
for deposit with The Depository Trust Company and of printing prospectuses if
the printing of prospectuses is requested by the managing underwriter or
underwriters, if any, by the Holders of a majority in aggregate principal amount
of the Registrable Notes included in any Registration Statement or Prospectus
sold by any broker-dealer that received Exchange Notes in the Exchange Offer
during the period not to exceed 180 days after the consummation of the Exchange
Offer, as the case may be, (iii) messenger, telephone and delivery expenses,
(iv) fees and disbursements of counsel for the Company and the Subsidiary
Guarantors and, in the case of a Shelf Registration, fees and disbursements of
special counsel for the sellers of Registrable Notes, (v) fees and disbursements
of all independent certified public accountants required (including, without
limitation, the expenses of any special audit and "cold comfort" letters
required by or incident to such performance), (vi) rating agency fees, if any,
and any fees associated with making the Registrable Notes or Exchange Notes
eligible for trading through the Depository Trust Company, (vii) Securities Act
liability insurance, if the Company desires such insurance, (viii) fees and
expenses of all other persons retained by the Company or Subsidiary Guarantors,
(ix) internal expenses of the Company or Subsidiary Guarantors (including,
without limitation, all salaries and expenses of officers and employees of the
Company or Subsidiary Guarantors performing legal or accounting duties), (x) the
expense of any annual audit, (xi) the fees and expenses incurred in connection
with the listing of the securities to be registered on any securities exchange,
if applicable, (xii) the expenses relating to printing, word processing and
distributing of all Registration Statements, underwriting agreements, securities
sales agreements, indentures and any other documents necessary to comply with
the Registration Rights Agreement.
31
<PAGE>
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptance of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The Company will pay all transfer taxes, if any, applicable to the
exchange of Old Notes pursuant to the Exchange Offer. If, however, a transfer
tax is imposed for any reason other than the exchange of Old Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
Accounting Treatment
The Exchange Notes will be recorded at the same carrying value as the
Old Notes, as reflected in the Company's accounting records on the date of the
exchange. Accordingly, no gain or loss will be recognized by the Company for
accounting purposes. The expenses of the Exchange Offer will be amortized over
the term of the Exchange Notes.
Resales of the Exchange Notes
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that the
Exchange Notes issued pursuant to the Exchange Offer to a Holder in exchange for
Old Notes may be offered for resale, resold and otherwise transferred by such
Holder (other than (i) a broker-dealer who purchased Old Notes directly from the
Company for resale pursuant to Rule 144A under the Securities Act or any other
available exemption under the Securities Act, or (ii) a person that is an
affiliate of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that the Holder is acquiring the Exchange Notes
in the ordinary course of business and is not participating, and has no
arrangement or understanding with any person to participate, in the distribution
of the Exchange Notes. However, if any Holder acquires Exchange Notes in the
Exchange Offer for the purpose of distributing or participating in a
distribution of the Exchange Notes, such Holder cannot rely on the position of
the staff of the Commission enunciated in Morgan Stanley & Co., Incorporated
(available June 5, 1991) and Exxon Capital Holdings Corporation (available April
13, 1989), or interpreted in the Commission's letter to Shearman and Sterling
(available June 2, 1993), or similar no-action or interpretive letters and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction, unless an
exemption for resale is otherwise available. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Old Notes, where such Old
Notes were acquired by such broker-dealer as a result of market-making or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes.
See "Plan of Distribution."
32
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997. This table should be read in conjunction with the
consolidated financial statements of the Company, which are included elsewhere
in this Prospectus. See "Selected Consolidated Financial Data."
<TABLE>
<CAPTION>
December 31, 1997
----------------------
(dollars in thousands)
<S> <C>
Cash and cash equivalents........................................... $ 21,854
Long-term debt (including current portion):
Credit Facility..................................................... $ --(1)
Old Notes........................................................... 80,000
Other debt.......................................................... 336
--------
Total debt.................................................... 80,336
Total shareholders' equity.................................... 53,856
--------
Total capitalization.......................................... $134,192
========
</TABLE>
- ----------
(1) Excludes letters of credit in the face amount of $1.6 million.
33
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data with respect to the
Company's financial position as of December 31, 1996 and 1997 and its results of
operations for each of the three years in the period ended December 31, 1997,
except for "Other Data," has been derived from the audited consolidated
financial statements of the Company appearing elsewhere in this Prospectus. The
selected consolidated financial data with respect to the Company's results of
operations for the years ended December 31, 1993 and 1994 and with respect to
the Company's financial position as of December 31, 1993, 1994 and 1995 has been
derived from audited financial statements of the Company that are not included
in this Prospectus. The selected consolidated financial data should be read in
conjunction with the consolidated financial statements of the Company and Notes
thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the other financial information included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------
1993(1) 1994 1995 1996 1997(2)
--------- --------- --------- --------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues
Pari-mutuel revenues
Live races..................................... $29,224 $23,428 $21,376 $18,727 $ 27,653
Import simulcasting............................ 9,162 16,968 27,254 32,992 59,810
Export simulcasting............................ 383 1,187 2,142 3,347 5,279
Gaming revenue.................................... -- -- -- -- 5,712
Admissions, programs and other racing revenues.... 2,485 2,563 3,704 4,379 5,678
Concession revenues............................... 1,410 1,885 3,200 3,389 7,404
------- ------- ------- ------- --------
Total revenues................................. 42,664 46,031 57,676 62,834 111,536
Operating expenses
Purses, stakes and trophies....................... 9,719 10,674 12,091 12,874 22,335
Direct salaries, payroll taxes and employee benefits 6,394 6,707 7,699 8,669 16,200
Simulcast expenses................................ 10,136 8,892 9,084 9,215 12,982
Pari-mutuel taxes................................. 3,568 4,054 4,963 5,356 9,506
Lottery taxes and administration.................. -- -- -- -- 1,874
Other direct meeting expenses..................... 5,817 6,093 7,576 8,536 18,087
OTW concession expenses........................... 767 1,175 2,125 2,349 5,605
Management fees paid to related entity............ 1,208 345 -- -- --
Other operating expenses.......................... 1,959 2,968 5,002 4,942 8,735
Depreciation and amortization..................... 640 699 881 1,433 4,040
Site development and restructuring charges........ -- -- -- -- 2,437
------- ------- ------- ------- --------
Total operating expenses....................... 40,208 41,607 49,421 53,374 101,801
------- ------- ------- ------- --------
Income from operations............................... 2,456 4,424 8,255 9,460 9,735
Other income (expenses)
Interest income (expense), net.................... (962) (340) 198 (156) (3,656)
Other............................................. 6 15 10 -- (2)
------- ------- ------- ------- --------
Total other income (expenses).................. (956) (325) 208 (156) (3,658)
------- ------- ------- ------- --------
Income before income taxes and extraordinary item.... 1,500 4,099 8,463 9,304 6,077
Taxes on income...................................... 42 1,381 3,467 3,794 2,308
------- ------- ------- ------- --------
Income before extraordinary item..................... 1,458 2,718 4,996 5,510 3,769
Extraordinary item
Loss on early extinguishment of debt, net of income
taxes of $83 and $1,001, respectively............. -- 115 -- -- 1,482
------- ------- ------- ------- --------
Net income........................................... $ 1,458 $ 2,603 $ 4,996 $ 5,510 $ 2,287
======= ======= ======= ======= ========
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------
1993(1) 1994 1995 1996 1997(2)
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating Data:
Pari-mutuel wagering
Live races........................................ $138,939 $111,248 $102,145 $ 89,327 $128,090
Import simulcasting............................... 58,252 93,461 142,499 170,814 298,459
Export simulcasting............................... 12,746 40,337 72,252 112,871 176,287
-------- -------- -------- -------- --------
Total pari-mutuel wagering........................... $209,937 $245,046 $316,896 $373,012 $602,836
======== ======== ======== ======== ========
Gross profit from wagering(3)........................ $ 15,346 $ 17,936 $ 24,915 $ 27,955 $ 45,589
Other Data:
EBITDA(4)............................................ $ 3,096 $ 5,123 $ 9,136 $ 10,893 $ 13,775
Depreciation and amortization........................ 640 699 881 1,433 4,040
Capital expenditures................................. 412 2,852 3,958 6,995 29,196(5)
Site development and restructuring charges(6)........ -- -- -- -- 2,427
Ratio of earnings to fixed charges(7)................ 2.3x 6.9x 29.7x 11.7x 2.0x
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................ $ 1,002 $ 5,502 $ 7,514 $ 5,634 $ 21,854
Working capital (deficiency)......................... (4,549) 2,074 4,134 (509) 15,226
Total assets......................................... 18,373 21,873 27,532 96,723 158,878
Total debt........................................... 10,422 516 390 47,517 80,336
Shareholders' equity................................. 3,418 15,627 20,802 27,881 53,856
</TABLE>
- ----------
(1) The Consolidated Financial Statements of the Company include entities
which, prior to a recapitalization which occurred in 1994 shortly before
the Company's initial public offering, were affiliated through common
ownership and control. See Note 1 of the Notes to the Consolidated
Financial Statements of the Company included elsewhere in this Prospectus.
(2) Reflects the January 15, 1997 acquisition of a joint venture interest in
the Charles Town Entertainment Complex. See "Business--Acquisitions."
(3) Amounts equal total pari-mutuel revenues, less purses paid to Horsemen,
taxes payable to Pennsylvania and simulcast commissions or host track fees
paid to other racetracks. Figures for the years ended December 31, 1995
and 1996 do not include purses paid at Penn National Speedway.
(4) EBITDA is presented because management believes it provides useful
information regarding a company's ability to incur and/or service debt.
EBITDA should not be considered in isolation or as a substitute for
consolidated net income, cash flows, or other income or cash flow data
prepared in accordance with GAAP or as a measure of a company's
profitability or liquidity.
(5) Includes approximately $27.0 million in capital expenditures associated
with the renovation and refurbishment of the Charles Town Entertainment
Complex. The balance of the amount relates to normal ongoing capital
expenditures at the Company's other facilities.
(6) Represents site development expenses totaling $1.7 million related to the
Charles Town Entertainment Complex ($0.8 million) and the abandonment of
certain proposed operating sites during 1997 ($0.9 million). The remaining
$0.7 million represents restructuring charges associated with severance
termination benefits and other charges at the Charles Town Entertainment
Complex ($0.3 million), a restructuring of the Erie, Pennsylvania OTW
facility ($0.3 million), and property and equipment written-off in
connection with the discontinuation of operations at Penn National
Speedway, Inc. during 1997 ($0.1 million).
(7) For the purpose of determining the ratio of earnings to fixed charges,
"earnings" consists of pre-tax income from continuing operations plus
fixed charges (as defined), less the amount of any interest capitalized
during the period. "Fixed charges" consist of interest expense (both
capitalized and expensed), which includes the amortization of deferred
debt issuance costs and the interest portion of the Company's rent expense
(assumed to be one third of rent expense).
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Disclosure Regarding
Forward-Looking Statements," "Risk Factors" and elsewhere in this Prospectus.
Overview
The Company's pari-mutuel revenues have been derived from (i) wagering
on the Company's live races (a) at the Penn National Race Course, (b) at the
Company's OTWs, (c) at other Pennsylvania racetracks and OTWs and (d) through
telephone wagering, as well as wagering at the Company's racetracks on certain
stakes races run at out-of-state racetracks (collectively, referred to in the
Company's financial statements as "pari-mutuel revenues from Penn National
races"), (ii) wagering on full-card import simulcasts at the Company's
racetracks and OTWs and through telephone wagering (collectively, referred to in
the Company's financial statements as "pari-mutuel revenues from import
simulcasting") and (iii) fees from wagering on export simulcasting Company races
at out-of-state locations (referred to in the Company's financial statements as
"pari-mutuel revenues from export simulcasting"). The Company's other revenues
have been derived from admissions, program sales and certain other ancillary
activities, food and beverage sales and concessions and, beginning in September
1997, Gaming Machines.
Over the past several years, attendance at live racing, on an
industry-wide basis, has generally declined. Prior to the inception of OTWs,
declining live racing attendance at a track translated directly into lower
purses at that track. As the size of the purses declined, the quality of live
racing at the track would suffer, leading in turn to further reductions in
attendance. However, the Company believes that increased contributions to the
purse pool from wagers placed at OTWs affiliated with racetracks have
significantly offset the effects of declining live racing attendance on race
quality, and thereby improved the marketability of many tracks' export simulcast
products. Indeed, despite declining live racing attendance, total pari-mutuel
wagering on horse races in the United States has remained relatively constant in
recent years. Moreover, a number of states have recently begun to authorize the
installation of slot machines, video lottery terminals or other gaming machines
at live racing venues such as thoroughbred horse tracks, harness tracks and dog
tracks. The revenue from these gaming opportunities and from the higher volume
of wagers placed at these venues has not only increased total revenues for the
tracks at which they are installed, but has generally further increased purse
size and thereby resulted in higher quality races that can command higher
simulcast revenues.
The amount of revenue to the Company from a wager depends upon where
the race is run and where the wagering takes place. Pari-mutuel revenues from
Company races and import simulcasting of out-of-state races have consisted of
the total amount wagered, less the amount paid as winning wagers. Pari-mutuel
revenues from wagering at the Company's racetracks or the Company's OTWs on
import simulcasting from other Pennsylvania racetracks have consisted of the
total amount wagered, less the amounts paid as winning wagers, amounts payable
to the host racetrack and pari-mutuel taxes to Pennsylvania. Pari-mutuel
revenues from export simulcasting have consisted of amounts payable to the
Company by the out-of-state racetracks with respect to wagering on live races at
the Company's racetracks. Operating expenses have included purses payable to the
Thoroughbred Horsemen, commissions to other racetracks with respect to wagering
at their facilities on races at the Company's racetracks, pari-mutuel taxes on
races at the Company's racetracks and export simulcasting and other direct and
indirect operating expenses.
The Pennsylvania Racing Act specifies the maximum percentages of each
dollar wagered on horse races in Pennsylvania which may be retained by the
Company (prior to required payments to the Thoroughbred Horsemen and applicable
taxing authorities). The percentages vary, based on the type of wager; the
average percentage has approximated 20%. The balance of each dollar wagered must
be paid out to the public as winning wagers. With the exception of revenues
derived from wagers at the Company's racetracks or the Company's OTWs, the
Company's revenues on each race are determined pursuant to such maximum
percentage and agreements with the other racetracks and OTWs at which wagering
is taking place. Amounts payable to the Thoroughbred Horsemen are determined
under agreements with the Thoroughbred Horsemen and vary depending upon where
the wagering is conducted and the racetrack at which such races take place. The
Thoroughbred Horsemen receive their share of such wagering as race
36
<PAGE>
purses. The Company retains a higher percentage of wagers made at its own
facilities than of wagers made at other locations. See "Business--Purses;
Agreements with Horsemen."
On November 27, 1996, the Company acquired Pocono Downs for an
aggregate purchase price of $48.2 million plus approximately $730,000 in
acquisition-related fees and expenses. Pocono Downs conducts harness racing and
pari-mutuel wagering at its track outside Wilkes-Barre, Pennsylvania, export
simulcasting of Pocono Downs races to locations throughout the United States,
pari-mutuel wagering at Pocono Downs and at OTWs in Allentown and Erie,
Pennsylvania on Pocono Downs races and on import simulcast races from other
racetracks and telephone account wagering on live and import simulcast races.
The Company applied and was approved by the Pennsylvania Harness Commission for
a new racing license and 1998 harness racing dates at Pocono Downs. This
approval entitles the Company to reduce, for a period of four years, its
pari-mutuel tax by one-half percent with respect to wagering at Pocono Downs and
the Company's OTWs in Allentown, Carbondale, Erie, Hazleton and Stroudsburg,
Pennsylvania.
Prior to the acquisition of Pocono Downs, the Company operated four
OTWs in Chambersburg, Lancaster, Reading and York, Pennsylvania. The Company
added the OTWs in Allentown and Erie, Pennsylvania in November 1996 through the
acquisition of Pocono Downs and an additional OTW through the opening of the
Williamsport OTW in February 1997 and the Hazleton and Carbondale, Pennsylvania
OTWs in March 1998. Subject to the receipt of all regulatory approvals, the
Company anticipates opening additional OTWs in Stroudsburg and Altoona,
Pennsylvania, at which time the Company would operate 11 of the 23 OTWs,
authorized under Pennsylvania law.
On January 15, 1997, the Company acquired for a net purchase price of
approximately $18.2 million (including acquisition costs) a controlling joint
venture interest in Charles Town Races. After substantially completing a major
renovation and refurbishment of the property, the Company reopened Charles Town
Races as the Charles Town Entertainment Complex which features Gaming Machines,
live racing, simulcast wagering and dining. The Company currently owns an 89%
joint venture interest in the Charles Town Joint Venture. Racing operations
reopened at the Charles Town Entertainment Complex in April 1997. Gaming Machine
operations commenced with a soft opening on September 10, 1997, followed by the
Company's grand opening on October 17, 1997. The Company operated an average of
approximately 300 Gaming Machines in September 1997, and increased the number of
Gaming Machines in operation to 550 as of October 31, 1997. The Company expects
to increase the number of Gaming Machines in operation at the Charles Town
Entertainment Complex to 799 in 1998. The Company ultimately intends to operate
at the Charles Town Entertainment Complex 1,000 Gaming Machines, the maximum
number it is currently permitted to operate by law, if demand warrants.
37
<PAGE>
Results of Operations
The following table sets forth certain data from the Consolidated
Statements of Income of the Company as a percentage of total revenues:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Revenues
Pari-mutuel revenues
Live races............................................ 37.1% 29.8% 24.8%
Import simulcasting................................... 47.3 52.5 53.6
Export simulcasting................................... 3.7 5.3 4.7
Gaming revenues............................................ -- -- 5.1
Admissions, programs and other racing revenues............. 6.4 7.0 5.1
Concession revenues........................................ 5.5 5.4 6.6
----- ----- -----
Total revenues........................................ 100.0 100.0 100.0
Operating expenses............................................
Purses, stakes and trophies................................ 21.0 20.5 20.0
Direct salaries, payroll taxes and employee benefits....... 13.3 13.8 14.5
Simulcast expenses......................................... 15.8 14.7 11.6
Pari-mutuel taxes.......................................... 8.6 8.5 8.5
Lottery taxes and administration........................... -- -- 1.7
Other direct meeting expenses.............................. 13.1 13.7 16.2
OTW concession expenses.................................... 3.7 3.7 5.0
Other operating expenses................................... 8.7 7.9 7.8
Depreciation and amortization.............................. 1.5 2.3 3.6
Site development and restructuring charges................. -- -- 2.2
----- ----- -----
Total operating expenses................................... 85.7 84.9 91.3
----- ----- -----
Income from operations........................................ 14.3 15.1 8.7
Total other income (expenses)................................. 0.4 (0.2) (3.3)
----- ----- -----
Income before income taxes and extraordinary item............. 14.7 14.9 5.4
----- ----- -----
Net income.................................................... 8.7% 8.8% 2.1%
===== ===== =====
</TABLE>
Year Ended December 31, 1997 compared to Year Ended December 31, 1996
Total revenue increased by approximately $48.7 million, or 77.5%, from
$62.8 million in 1996 to $111.5 million in 1997. Pocono Downs, which was
acquired in the fourth quarter of 1996 accounted for $30.8 million of the
increase. Charles Town Races, which was purchased in January 1997, accounted for
$16.5 million of the increase. The Company renovated and refurbished the Charles
Town Entertainment Complex following its acquisition and commenced racing
operations on April 30, 1997 and Gaming Machine operations, with a soft opening,
on September 10, 1997. The remaining revenue increase of $1.4 million was
primarily due to an increase of approximately $6.2 million associated with the
opening of the Penn National OTW facility in Williamsport in February 1997, and
a full year of operations at the Lancaster OTW facility. This increase was
offset by a decrease in revenues of approximately $4.2 million at the Company's
OTW facilities in Reading and York. Management believes that the decrease in
revenues at these facilities was primarily due to the opening of a competitor's
OTW facility and the opening of the Company's Lancaster OTW facility in July
1996. The Company also had a decrease in revenues of $.6 million due to the
closing of Penn National Speedway at the end of the 1996 season.
Total operating expenses increased by approximately $48.4 million, or
90.7%, from $53.4 million in 1996 to $101.8 million in 1997. Pocono Downs and
Charles Town Races, which the Company did not operate in the corresponding prior
period, accounted for $25.5 million and $17.5 million of this increase,
respectively. Operating expenses also increased by $5.4 million primarily due to
an increase of $4.4 million associated with the opening of the Company's new OTW
facility in Williamsport in February 1997, and a full year of operations at the
Lancaster OTW facility. This increase was offset by a decrease in operating
expenses of approximately $1.9 million at the Penn National Race Course facility
and at the Company's OTW facilities in Reading and York associated with lower
revenues at those facilities. The increase in corporate expenses of $1.4 million
was due to increased personnel, office space and other administrative expense
necessary to support the expansion of the Company. The Company also incurred
site development and restructuring charges in the amount of $2.4 million. The
site development charges ($1.7 million)
38
<PAGE>
consist of $800,000 related to the Charles Town Races facility and $935,000
related to the abandonment of certain proposed operating sites during 1997. The
restructuring charges primarily consist of $350,000 in severance termination
benefits and other charges at the Charles Town Races facility, $300,000 for the
restructuring of the Erie, Pennsylvania off-track wagering facility and $52,000
of property and equipment written-off in connection with the discontinuation of
Penn National Speedway, Inc. operations during 1997. The Company also had a
decrease in expenses of $.9 million due to the closing of Penn National Speedway
at the end of the 1996 season.
Income from operations increased by approximately $265,000, or 2.9%,
from $9.5 million in 1996 to $9.7 million in 1997 due to the factors described
above. The Company had other expenses of approximately $3.7 million in 1997
compared to $156,000 in 1996, primarily as a result of increased interest
expense. The increase in interest expense is due to the Company's incurring bank
debt for the purchase of Pocono Downs and Charles Town Races, and for the
renovations to the Charles Town Facility and issuing $80.0 million of 10.625%
Senior Notes on December 12, 1997 to repay existing bank debt.
The extraordinary item consisted of a loss on the early extinguishment
of debt in the amount of $1,482,000, net of income taxes. The loss consists
primarily of write-offs of deferred finance costs associated with the retired
bank notes and legal and bank fees relating to the early extinguishment of the
debt.
Net income decreased by approximately $3.2 million or 58.5%, from $5.5
million in 1996 to $2.3 million in 1997 based on the factors described above.
Income taxes decreased by $1.5 million from $3.8 million in 1996 to $2.3 million
in 1997 as a result of the decrease in income for the year.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total revenues increased by approximately $5.2 million, or 8.9%, from
$57.7 million in 1995 to $62.8 million in 1996. The increase was attributable to
an increase in import and export simulcasting revenues, offset in part by a
decrease in pari-mutuel revenues on live races at the Penn National Race Course.
The increases in pari-mutuel revenues from import simulcasting, admissions,
programs and other racing revenues and concession revenue were due primarily to
operating the York OTW facility for twelve months in 1996 compared to nine
months in 1995, the opening of the Lancaster OTW facility in July 1996, and the
additional revenue from the acquisition of Pocono Downs since November 28, 1996.
The increase in export simulcasting revenue of $1.2 million or 56.3% from $2.1
million to $3.3 million resulted from the marketing of the Penn National Race
Course races to additional out-of-state locations. The decrease in pari-mutuel
revenues on the Penn National Race Course races was due to increased import
simulcasting revenue from wagering on other racetracks at Company facilities and
inclement winter weather conditions throughout the state of Pennsylvania during
the first quarter. For the year, the Penn National Race Course was scheduled to
run 217 live race days but canceled eleven in the first quarter due to weather.
In 1995, the Penn National Race Course ran 204 live race days and had six
cancellations.
Total operating expenses increased by approximately $4.0 million, or
8.0%, from $49.4 million in 1995 to $53.4 million in 1996. The increase in
operating expenses resulted from a full year of operations for the York OTW
compared to nine months in 1995, six months of operating expenses for the new
Lancaster OTW, one month of operating expenses at Pocono Downs and the expansion
of the corporate staff and office facility at Wyomissing in June of 1995.
Income from operations increased by approximately $1.2 million, or
14.6%, from $8.3 million in 1995 to $9.5 million in 1996 due to the factors
described above.
The Company had other operating expenses of $156,000 in 1996 compared
to other operating income of $208,000 in 1995, primarily as a result of
increased interest expense. The increase in interest expense is due to the
company incurring bank debt of $47 million on November 27, 1996 for the purchase
of Pocono Downs.
Net income increased $514,000 or 10.3%, from $5.0 million in 1995 to
$5.5 million in 1996 reflecting the factors described above. Income tax expense
increased from $3.5 million to $3.8 million due to the increase in income for
the year.
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Liquidity and Capital Resources
Historically, the Company's primary sources of liquidity and capital
resources have been cash flow from operations, borrowings from banks and
proceeds from issuance of equity securities.
Net cash provided from operating activities for the year ended December
31, 1997 ($10.7 million) consisted of net income and non-cash expenses ($6.3
million), the extraordinary loss relating to early extinguishment of debt ($2.5
million), the repayment of the Charles Town Entertainment Complex receivable in
January 1997 ($1.3 million) and other changes in certain assets and liabilities
($0.6 million).
Cash flows used in investing activities for the year ended December 31,
1997 ($47.6 million) consisted of the acquisition of the Charles Town Races
($18.2 million), construction in progress and renovation and refurbishment of
the Charles Town Races ($25.5 million), and $3.9 million in capital
expenditures, including approximately $700,000 for the completion of the
Williamsport OTW facility.
Net cash flows from financing activities totaled approximately $53.2
million for the year ended December 31, 1997. Cash flows consisted principally
of $23.1 million in proceeds from an equity offering in February 1997, $16.5
million in proceeds from long-term debt used as payment for the acquisition of
Charles Town Races on January 15, 1997, $31.0 million in additional proceeds
from long-term debt used for renovations at the Charles Town Entertainment
Complex and capital improvements at other locations, and $80 million from the
issuance on December 12, 1997, of 10 5/8% Senior Notes due 2004. The Company
used the proceeds from the equity offering to repay $19.0 million of its bank
debt under the Old Credit Facility (including borrowings from the acquisition
of the Charles Town Races facility), with the remaining amount used for the
refurbishment of the Charles Town Entertainment Complex. The Company used
$59.0 million of the proceeds from the issuance of the Senior Notes to repay
the balance of its bank debt on December 12, 1997. The Company also incurred
$3.0 million of financing costs associated with the sale of the Senior Notes.
The Company is subject to possible liabilities arising from the
environmental condition at the landfill adjacent to Pocono Downs. Specifically,
the Company may incur expenses in connection with the landfill in the future,
which expenses may not be reimbursed by the four municipalities which are
parties to the Settlement Agreement. The Company is unable to estimate the
amount, if any, that it may be required to expend. See "Risk Factors--Potential
Environmental Liabilities."
During 1998 the Company anticipates capital expenditures of
approximately $7.2 million to complete construction of four additional OTW
facilities. For the existing racetracks and OTW facilities, at Penn National
Race Course and Pocono Downs, the Company plans to spend an additional $500,000
and $350,000, respectively, on building improvements and equipment. The Company
anticipates expending approximately $1.4 million on the refurbishment of the
Charles Town Entertainment Complex (excluding the cost of Gaming Machines). If
approval of the Tennessee license is received, the Company anticipates expending
$9.0 million to complete the first phase of the project.
The Company entered into a Credit Facility with Bankers Trust Company,
as agent. The Credit Facility provides for, subject to certain terms and
conditions, a $12.0 million revolving credit facility and has a five-year term
from its closing. The Credit Facility, under certain circumstances, requires the
Company to make mandatory prepayments and commitment reductions and to comply
with certain covenants, including financial ratios and maintenance tests. In
addition, the Company may make optional prepayments and commitment reductions
pursuant to the terms of the Credit Facility. Borrowings under the Credit
Facility will accrue interest, at the option of the Company, at either a base
rate plus an applicable margin of up to 2.0% or a eurodollar rate plus an
applicable margin of up to 3.0%. The Credit Facility contains certain covenants
that, among other things, restrict the ability of the Company and its
subsidiaries to dispose of assets, incur additional indebtedness, incur
guarantee obligations, repay indebtedness or amend debt instruments, pay
dividends, create liens on assets, make investments, make acquisitions, engage
in mergers or consolidations, make capital expenditures, or engage in certain
transactions with subsidiaries and affiliates and otherwise restrict corporate
activities. The Credit Facility is secured by the assets of the Company and
certain of its subsidiaries and guaranteed by all of the subsidiaries except the
Charles Town Joint Venture. In addition, the Credit Facility requires the
Company to comply with certain financial ratios and maintenance tests. As of
December 31, 1997, the Company would not have been in compliance with certain
covenants under the Credit Facility had the bank group not granted waiver,
through March 30, 1998, of certain defaults regarding minimum consolidated net
worth, consolidated cash interest coverage ratio
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and minimum leverage ratio. As of April 27, 1998 the bank group granted
a waiver of a default regarding the minimum consolidated net worth and, to the
extent any such other default exists as of March 31, 1998 (which is to be
calculated on or before May 15, 1998), the Company expects to obtain a waiver of
default or an amendment of the Credit Facility. However, as of April 27, 1998,
the Company had not drawn any portion of the Credit Facility (although a $2.0
million letter of credit was issued against such Credit Facility) and had
adequate capital resources even without consideration of the Credit Facility.
A portion of the net proceeds of the Offering of the 10 5/8% Senior
Notes, was used to repay amounts outstanding immediately prior to the
Offering under the Old Credit Facility. The Company currently estimates that
excess proceeds of the Offering, cash generated from operations and available
borrowings under the Credit Facility will be sufficient to finance its current
operations, planned capital expenditure requirements and the costs associated
with the Tennessee development project. There can be no assurance, however,
that the Company will not be required to seek additional capital, in addition
to that available from the foregoing sources. The Company may, from time to
time, seek additional funding through public or private financing, including
equity financing. There can be no assurance that adequate funding will be
available as needed or, if available, on terms acceptable to the Company.
Effect of Inclement Weather and Seasonality
Because horse racing is conducted outdoors, variable weather
contributes to the seasonality of the Company's business. Weather conditions,
particularly during the winter months, may cause races to be canceled or may
curtail attendance. During the years ended December 31, 1996 and 1997, the
Company lost 11 and five scheduled racing days due to weather conditions,
respectively. Over the previous five years, the Company lost an average of four
days per year due to inclement weather. Because a substantial portion of the
Company's Penn National Race Course and Pocono Downs expenses are fixed, the
loss of scheduled racing days could have a material adverse effect on the
Company's business, financial condition and results of operations.
The severe winter weather in 1996 also resulted in the closure of the
Company's OTW facilities for two days in January 1996. Although weather
conditions reduced attendance at OTWs, the reduction in attendance at OTWs on
days when both the Penn National Race Course and the OTWs were open was
proportionately less than the reduction in attendance at the Penn National Race
Course. Because of the Company's growing dependence upon OTW operations, severe
weather that causes the Company's OTWs to close could have a material adverse
effect on the Company's business, financial condition and results of operations.
Attendance and wagering at the Company's facilities have been favorably
affected by special racing events which stimulate interest in horse racing, such
as the Triple Crown races in May and June and the heavier racing schedule
throughout the country during the second and third quarter. As a result, the
Company's revenues and net income have been greatest in the second and third
quarters of the year and lowest in the first and fourth quarters of the year.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129"), effective for periods ending
after December 15, 1997, establishes standards for disclosing information about
an entity's capital structure. SFAS 129 requires disclosure of the pertinent
rights and privileges of various securities outstanding (stock, options,
warrants, preferred stock, debt and participation rights) including dividend and
liquidation preferences, participant rights, call prices and dates, conversion
or exercise prices and redemption requirements. Adoption of SFAS 129 will have
no effect on the Company because it currently discloses the information
specified.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of a Business Enterprise" ("SFAS 131"), establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial
41
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statements issued to the public. It also establishes standards for disclosures
regarding products and services, geographic areas and major customers. SFAS 131
defines operating segments as components of an enterprise about which separate
financial information is available and that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
SFAS 130, SFAS 131 and SFAS 132 are effective for financial statements
for periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Due to the recent issuance of
these standards, management has been unable to fully evaluate the impact, if
any, they may have on future financial statement disclosures.
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<PAGE>
BUSINESS
General
The Company, which began operations in 1972, is a diversified gaming
and pari-mutuel wagering company that owns and operates two racetracks and nine
OTWs in Pennsylvania, as well as an 89% joint venture interest in the Charles
Town Joint Venture, an entertainment complex that includes a thoroughbred
racetrack and Gaming Machines in Charles Town, West Virginia. The Company's
Pennsylvania racetracks include the Penn National Race Course, located outside
Harrisburg, one of two thoroughbred racetracks in Pennsylvania, and Pocono
Downs, located outside Wilkes-Barre, one of two harness racetracks in
Pennsylvania. The Company intends to develop the two additional OTWs that have
been allocated to it under Pennsylvania law, after which it would operate 11 of
the 23 OTWs currently authorized in Pennsylvania. Between 1993 and 1996, the
Company increased total wagers at a compound annual growth rate of 21.1% by
expanding its simulcast and OTW operations. In contrast, during the same period,
total industry wagers increased at a compound annual growth rate of 3.0% based
upon industry data. For the year ended December 31, 1997, the Company generated
$111.5 million in revenues and $13.8 million in EBITDA.
The Company developed the Charles Town Entertainment Complex in order
to operate and market a facility that integrates Gaming Machines with the
Company's core business strengths of live racing and simulcast wagering. The
Charles Town Entertainment Complex is an approximately 60-minute drive from
Baltimore, Maryland and an approximately 70-minute drive from Washington, DC.
Through December 31, 1997, the Company has invested a total of approximately
$45.2 million to acquire and develop the Charles Town Entertainment Complex,
which includes $18.2 million in acquisition costs and $27.0 million for
substantial renovations and refurbishments. In developing the Charles Town
Entertainment Complex, the Company preserved the California mission-style
architecture of the original Charles Town Races facility and incorporated
extensive internal renovations including a 1930s art deco Hollywood theater
theme within the Silver Screen Gaming area. After having been closed for
approximately six months, the Company reopened thoroughbred racing and
simulcasting operations at the Charles Town Entertainment Complex in April 1997.
Gaming Machine operations commenced with a soft opening in September 1997.
Industry Overview
Pari-mutuel wagering on thoroughbred or harness racing is pooled
wagering, in which a pari-mutuel wagering system totals the amounts wagered and
adjusts the payouts to reflect the relative amounts bet on different horses and
various possible outcomes. The pooled wagers are (i) paid out to bettors as
winnings in accordance with the payoffs determined by the pari-mutuel wagering
system, (ii) paid to the applicable regulatory or taxing authorities and (iii)
distributed to the track's horsemen in the form of "purses" which encourage
owners and trainers to enter their horses in that track's live races. The
balance of the pooled wagers is retained by the wagering facility. Pari-mutuel
wagering is currently authorized in more than 40 states in the United States,
all provinces in Canada and approximately 100 other countries around the world.
Gaming and wagering companies, such as the Company, that focus on
pari-mutuel horse race wagering derive revenue through wagers placed at their
own tracks, at their OTWs and on their own races at the tracks and OTWs of
others. While some states, such as New York, operate off-track betting locations
that are independent of racetracks, in other states (such as Pennsylvania)
racetrack ownership and operation is a precondition to OTW ownership and
operation. A racetrack in such a state, then, is akin to an "admission ticket"
to the OTW business.
Over the past several years, attendance at live racing has generally
declined. Prior to the inception of OTWs, declining live racing attendance at a
track translated directly into lower purses at that track. As the size of the
purses declined, the quality of live racing at the track would suffer, leading
in turn to further reductions in attendance. The Company believes that increased
contributions to the purse pool from wagers placed at OTWs affiliated with
racetracks have significantly offset the effects of declining live racing
attendance on race quality, and thereby improved the marketability of many
tracks' export simulcast products. Indeed, despite declining live racing
attendance, total pari- mutuel wagering on horse races in the United States has
remained relatively constant in recent years increasing slightly from
approximately $13.7 billion in 1993 to approximately $15.0 billion in 1996,
according to industry data; an increase in simulcast, inter-track and off-track
wagering from approximately $7.6 billion to approximately $11.0 billion during
that period has offset declining wagering at tracks on live races. Given that
many pari-mutuel wagering companies, such
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as the Company, face the necessary precondition of conducting live racing
operations as their entree into the industry, the Company believes that its
opportunities for success can be maximized through OTW operations, import and
export simulcasting and the operation of Gaming Machines, to the extent
permitted.
A number of states have recently begun to authorize the installation of
slot machines, video lottery terminals or other gaming machines ("Gaming
Wagering") at live racing venues such as thoroughbred horse tracks, harness
tracks and dog tracks. The revenue from these gaming opportunities and from the
higher volume of wagers placed at these venues has not only increased total
revenues for the tracks at which they are installed, but has generally further
increased purse size and thereby resulted in higher quality races that can
command higher simulcast revenues. The Company has taken advantage of this
development by acquiring Charles Town Races shortly after West Virginia
authorized the operation of Gaming Machines at Charles Town Races. Since
pari-mutuel wagering companies, such as the Company, possess the necessary
precondition of conducting live racing operations to offer OTW wagering
opportunities and Gaming Wagering (where permitted by law), the Company believes
that its opportunities for success can be maximized through OTW operations,
import simulcasting and export simulcasting and the operation of Gaming
Machines, to the extent permitted. At present, more than 40 states authorize
inter-state and/or intra-state pari-mutuel wagering, which may involve the
simulcasting of such races.
Strategy
The Company intends to be a leading operator in the gaming and
pari-mutuel wagering industry by capitalizing upon its horse racing expertise
and its numerous wagering locations. The Company plans to increase revenue and
EBITDA using the following strategies:
Focus on Gaming Machine Operations. The Company's primary focus at the
Charles Town Entertainment Complex is on Gaming Machine operations. The Company
commenced Gaming Machine operations with a soft opening of 223 Gaming Machines
on September 10, 1997. The Company's grand opening of Gaming Machine operations
at the Charles Town Entertainment Complex occurred on October 17, 1997 with 400
Gaming Machines in operation. As of March 31, 1998, the Company had 609 Gaming
Machines in operation. The Company intends to increase the number of Gaming
Machines in operation at the Charles Town Entertainment Complex to 799 in 1998
and, if demand warrants, to 1,000 thereafter, the maximum number the Company is
currently approved to operate at this complex. The Charles Town Entertainment
Complex's Gaming Machines are dollar bill-fed video gaming machines that
replicate traditional spinning reel slot machines and also feature video card
games, such as blackjack and poker. Marketing efforts, which include print and
radio advertising, commenced in October 1997 and are focused on the Washington,
DC, Baltimore, Maryland, Northern Virginia, Eastern West Virginia and Southern
Pennsylvania markets. The Company intends to enhance these marketing efforts by
installing and operating a computerized player tracking system, in order to
identify preferred players and encourage repeat Gaming Machine patronage at the
Charles Town Entertainment Complex.
Open Additional OTWs. The Company operates nine of the 20 OTWs now open
in Pennsylvania and has the right to operate two of the three remaining OTWs
that have been authorized in Pennsylvania. The Company's OTWs are located in
Allentown, Carbondale, Chambersburg, Erie, Hazleton, Lancaster, Reading,
Williamsport and York, Pennsylvania. At OTWs, customers can place wagers on
thoroughbred and harness races simulcast from the Company's racetracks and on
import simulcast races from other tracks around the country. Under the
Pennsylvania Racing Act, only licensed thoroughbred and harness racing
associations, such as the Company, can operate OTWs or accept customer wagers on
simulcast races at Pennsylvania racetracks. The Company opened OTWs in
Carbondale and Hazleton, Pennsylvania during the first quarter of 1998 and plans
(subject to the receipt of remaining regulatory approvals, including site
approvals) to open and operate additional OTWs in Stroudsburg and Altoona,
Pennsylvania, which would give the Company a total of 11 of the 23 OTWs
currently authorized by Pennsylvania law.
Expand Simulcasting Operations. Simulcasting involves the transmission
to, or the receipt of, the audio and/or video signals of a live racing event
through a satellite for re-transmission at a different wagering location. The
Company transmits simulcasts of Company races to other wagering locations
year-round and receives simulcasts of races from other locations for wagering by
its customers at the Company's facilities year-round. During the past five
years, the Company expanded its simulcasting operations and took advantage of
favorable changes in pari-mutuel wagering and simulcasting laws in various
states and the expanded use of simulcasting technology. Import simulcasting
generates revenue and EBITDA for the Company by maximizing the number of events
available to a patron for wagering at the
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Company's facilities by utilizing idle time between races at Company racetracks
and OTWs. When customers place wagers on import simulcast races, of the amount
not returned to bettors as winning wagers, a portion is paid to the state in
which the Company's wagering facility is located, a portion is paid to the
"purse" fund for the horse owners and trainers of the Company's racetrack with
which the wagering facility is associated, a portion is paid as a simulcast fee
to the originating track and the balance is retained by the wagering facility
and/or track. In order to promote wagering, the Company has increased and
expects to continue to increase full-card import simulcasts from premier
racetracks. The Company currently receives import simulcasts from approximately
75 racetracks, including premier racetracks such as Belmont Park, Gulfstream
Park, Hollywood Park, Santa Anita and Saratoga. The Company believes that
"full-card" import simulcasting, in which all of the races at a non-Company
track are import simulcast to a Company wagering facility, has improved the
wagering opportunities for its customers and thereby increased the amount
wagered at Company facilities. Export simulcasting generates revenue and EBITDA
for the Company by increasing the consumer base for Company races beyond Company
racetracks and OTWs. The Company transmits export simulcasts of Company races to
approximately 98 locations and receives a flat percentage of the amounts wagered
on Company races at non- Company locations, while incurring minimal additional
expense. The Company intends to increase export simulcasting of races from
Company-owned tracks to out-of-state racetracks, OTWs, casinos and other gaming
facilities. The Company also seeks to improve the quality of its export
simulcast products by increasing purse sizes where practicable. The Company
believes that the minimal incremental costs associated with expanding import
simulcasting and export simulcasting make it a particularly desirable source of
revenue and EBITDA growth.
Capitalize on Other Gaming and Pari-Mutuel Wagering Opportunities. The
Company intends to continue identifying opportunities in the gaming and
pari-mutuel wagering industries which complement the Company's core operations
and leverage its pari-mutuel management and operating strengths. Management also
intends to explore other opportunities to capitalize upon changes in gaming
legislation, including legislation relating to Gaming Machines.
Acquisitions
Pocono Downs Acquisition
On November 27, 1996, the Company acquired Pocono Downs for an
aggregate purchase price of $48.2 million plus approximately $730,000 in
acquisition-related fees and expenses. In addition, pursuant to the terms of the
purchase agreement, the Company will be required to pay the sellers of Pocono
Downs an additional $10.0 million if, within five years after the consummation
of the acquisition of Pocono Downs, Pennsylvania authorizes any additional form
of gaming in which the Company may participate. The $10.0 million payment is
payable in annual installments of $2.0 million a year for five years, beginning
on the date that the Company first offers such additional form of gaming.
As of March 30, 1998, no such additional form of gaming in Pennsylvania has
been adopted, and therefore, no such payment is due at this time.
Prior to the Company's acquisition, Pocono Downs conducted (i) harness
racing at Pocono Downs, located outside Wilkes-Barre, Pennsylvania, (ii) export
simulcasting of Pocono Downs races to locations throughout the United States,
(iii) pari-mutuel wagering at Pocono Downs and at OTWs in Allentown and Erie,
Pennsylvania on Pocono Downs races and on import simulcast races from other
racetracks and (iv) telephone account wagering on live and import simulcast
races.
Charles Town Acquisition
On January 15, 1997, the Charles Town Joint Venture acquired
substantially all of the assets of Charles Town Races for an aggregate net
purchase price of approximately $16.0 million plus approximately $2.2 million in
acquisition-related fees and expenses. Prior to its acquisition by the Charles
Town Joint Venture, Charles Town Races conducted live thoroughbred horse racing,
on-site pari-mutuel wagering on live races run at Charles Town Races and
wagering on import simulcast races. The Company has refurbished and reopened the
facility as the Charles Town Entertainment Complex, which features live racing,
dining, simulcast wagering and, effective September 1997, Gaming Machines. The
cost of the refurbishment, exclusive of the cost of the lease of the Gaming
Machines, is approximately $27.0 million as of December 31, 1997. See "--GTECH
Gaming Machine Supply and Service Agreement."
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Gaming Machine Operations at Charles Town Entertainment Complex
On November 5, 1996, Jefferson County, West Virginia approved a
referendum authorizing the installation and operation of Gaming Machines at the
Charles Town Entertainment Complex. As a result, the Company consummated the
Charles Town Acquisition on January 15, 1997. In April 1997, the Company
reopened the Charles Town Entertainment Complex, featuring live racing, dining
and simulcast wagering. In September 1997, the Company expanded wagering
opportunities by installing Gaming Machines at the Charles Town Entertainment
Complex. The Gaming Machines are dollar bill-fed video gaming machines that
replicate traditional spinning reel slot machines and also feature video card
games, such as blackjack and poker. The West Virginia Gaming Machine Act
specifies a 20% maximum percentage of each dollar wagered on Gaming Machines
which can be retained by the Company. The balance of each dollar wagered must be
paid out to the public as winning wagers. Of the portion retained by the
Company, a portion is paid to taxing authorities and other beneficiary
organizations mandated by the State of West Virginia and a portion is paid to
the Charles Town Horsemen in the form of purses. The Company has installed and
is operating, as of March 1998, 609 Gaming Machines at the Charles Town
Entertainment Complex, and anticipates installing 135 additional Gaming Machines
by April 1998. The Company has obtained all necessary approvals for the
installation and operation of a total of 1,000 Gaming Machines at the Charles
Town Entertainment Complex. After installing 799 Gaming Machines, the Company
will evaluate demand for its Gaming Machines and install an additional 201
Gaming Machines if demand warrants such installation.
Racing and Pari-Mutuel Operations
The Company's racing and pari-mutuel revenues have been derived from
(i) wagering on the Company's live races (a) at the Penn National Race Course,
(b) at the Company's OTWs, (c) at other Pennsylvania racetracks and OTWs and (d)
through telephone wagering, as well as wagering at the Company's racetracks on
certain stakes races run at out-of-state racetracks (collectively referred to in
the Company's financial statements as "pari-mutuel revenues from Penn National
races"), (ii) wagering on full-card import simulcasts at the Company's
racetracks and OTWs and through telephone wagering (collectively referred to in
the Company's financial statements as "pari-mutuel revenues from import
simulcasting") and (iii) fees from wagering on export simulcasting Company races
at out-of-state locations (referred to in the Company's financial statements as
"pari-mutuel revenues from export simulcasting"). The Company's other revenues
have been derived from admissions, program sales and certain other ancillary
activities, food and beverage sales and concessions.
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Pro Forma Pennsylvania Operating Data of the Company
The following table summarizes certain key operating statistics for the
Company's Pennsylvania pari-mutuel operations related to Penn National Race
Course, Pocono Downs and their respective OTWs, including the pro forma
presentation of data assuming the acquisition of Pocono Downs occurred on
January 1, 1993:
Penn National Gaming, Inc.
Pennsylvania Wagering Summary
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Number of live racing days:
Penn National Race Course................ 238 219 204 206 212
Pocono Downs............................. 147 143 135 134 134
Total attendance:
Penn National Race Course(1)............. 548,085 485,224 430,128 370,898 339,487
Pocono Downs(1).......................... 211,629 253,521 242,870 377,830 370,090
Reading OTW.............................. 251,540 253,183 246,012 214,314 178,237
Chambersburg OTW......................... -- 110,075 143,554 132,447 125,448
York OTW................................. -- -- 232,109 238,610 225,672
Lancaster OTW............................ -- -- -- 92,641 158,003
Williamsport OTW......................... -- -- -- -- 81,797
Erie OTW................................. 135,617 129,074 116,367 113,169 94,429
Allentown OTW............................ 136,620 275,118 272,491 271,706 252,909
---------- ---------- ---------- ---------- ----------
Total paid attendance(1)............. 1,283,491 1,506,195 1,683,531 1,811,615 1,826,072
========== ========== ========== ========== ==========
Total wagering(1)(2):
Penn National Race Course................ $ 87,485 $ 91,898 $ 85,661 $ 75,708 $ 69,687
Pocono Downs............................. 45,956 51,980 57,784 53,190 47,217
Reading OTW.............................. 33,518 39,714 42,810 41,320 30,811
Chambersburg OTW......................... -- 14,589 24,365 25,024 24,899
York OTW................................. -- -- 42,140 49,864 45,245
Lancaster OTW............................ -- -- -- 13,079 29,292
Williamsport OTW......................... -- -- -- -- 9,684
Erie OTW................................. 20,452 26,404 29,379 27,200 21,767
Allentown OTW............................ 21,130 52,676 56,440 56,216 58,681
Penn National Telebet.................... 8,103 7,967 8,281 8,423 9,473
Pocono Downs Dial-A-Bet.................. -- -- 75 5,510 8,179
Export simulcasting:
Penn National Race Course.............. 80,832 90,878 113,639 148,702 192,798
Pocono Downs........................... 20,173 25,723 30,121 32,493 28,899
---------- ---------- ---------- ---------- ----------
Total wagering....................... $ 317,649 $ 401,829 $ 490,695 $ 536,729 $ 576,632
========== ========== ========== ========== ==========
Average daily purses:
Penn National Race Course................ $ 40,834 $ 48,560 $ 57,897 $ 62,328 $ 60,623
Pocono Downs............................. 26,022 35,790 42,314 42,313 40,149
---------- ---------- ---------- ---------- ----------
Total average daily purse................ $ 66,856 $ 84,350 $ 100,211 $ 104,641 $ 100,772
========== ========== ========== ========== ==========
Gross margin from wagering(3):
Penn National Race Course................ $ 15,346 $ 17,963 $ 24,915 $ 27,955 $ 28,669
Pocono Downs............................. 10,918 16,653 17,838 17,805 16,920
---------- ---------- ---------- ---------- ----------
Total gross margin from wagering......... $ 26,264 $ 34,616 $ 42,753 $ 45,760 $ 45,589
========== ========== ========== ========== ==========
</TABLE>
- ----------
(1) Does not reflect attendance for wagering on simulcasts when live racing is
not conducted (i) for all periods presented, in the case of Penn National
Race Course and (ii) for the years ended December 31, 1993-1995, in the
case of Pocono Downs.
(2) Wagering on certain imported stakes races is included in Wagering on the
Penn National Race Course races.
(3) Amounts equal total pari-mutuel revenues, less purses paid to the Horsemen,
taxes payable to Pennsylvania and simulcast commissions or host track fees
paid to other racetracks.
47
<PAGE>
Live Racing
The following table summarizes the Company's live racing facilities:
<TABLE>
<CAPTION>
RACING FACILITY LOCATION DATE OPENED/STATUS OPERATIONS CONDUCTED
- --------------- -------- ------------------ --------------------
<S> <C> <C> <C>
Penn National Race Course Grantville, PA Constructed in 1972; operated Live thoroughbred racing;
by the Company since 1972 simulcast wagering; dining;
telephone account wagering
Pocono Downs Plains Township, PA Constructed in 1965; operated Live harness racing; simulcast
by the Company since wagering; dining; telephone
November 1996 account wagering
Charles Town Races Charles Town, WV Charles Town Races was Live thoroughbred racing;
at the Charles Town constructed in 1933; acquired simulcast wagering; dining (this
Entertainment Complex by Charles Town Joint Venture facility is adjacent to Gaming
on January 15, 1997; Machine operations)
refurbished in 1997 and
reopened as the Charles Town
Entertainment Complex
</TABLE>
The Penn National Race Course is located on approximately 225 acres
approximately 15 miles northeast of Harrisburg, 100 miles west of Philadelphia
and 200 miles east of Pittsburgh. There is a total population of approximately
1.4 million persons within a radius of approximately 35 miles around the Penn
National Race Course and approximately 2.2 million persons within a 50-mile
radius. The property includes a one mile all-weather thoroughbred racetrack and
a 7/8-mile turf track. The property also includes approximately 400 acres
surrounding the Penn National Race Course which are available for future
expansion or development.
The Penn National Race Course's main building is the
grandstand/clubhouse, which is completely enclosed and heated and, at the
clubhouse level, fully air-conditioned. The building has a capacity of
approximately 15,000 persons with seating for approximately 9,000, including
1,400 clubhouse dining seats. Several other dining facilities and numerous food
and beverage stands are situated throughout the facility. Television sets for
viewing live racing and simulcasts are located throughout the facility. The
pari-mutuel wagering areas are divided between those available for on-track
wagering and those available for simulcast wagering.
The Penn National Race Course includes stables for approximately 1,250
horses, a blacksmith shop, veterinarians' quarters, jockeys' quarters, a paddock
building, living quarters for grooms, a cafeteria and recreational building in
the backstretch area and water and sewage treatment plants. Parking facilities
for approximately 6,500 vehicles adjoin the Penn National Race Course.
The Company has conducted live racing at the Penn National Race Course
since 1972, and has held at least 204 days of live racing at the facility in
each of the last five years. The Penn National Race Course is one of only two
thoroughbred racetracks in Pennsylvania. Although other regional racetracks
offer nighttime thoroughbred racing, the Penn National Race Course is the only
racetrack in the Eastern time zone conducting year-round nighttime thoroughbred
horse racing, which the Company believes increases its opportunities to export
simulcast its races during periods in which other racetracks are not conducting
live racing. Post time at the Penn National Race Course is 7:30 p.m. on
Wednesdays, Fridays and Saturdays, and 1:30 p.m. on Sundays and holidays.
Pocono Downs is located on approximately 400 acres in Plains Township,
outside Wilkes-Barre, Pennsylvania. There is a total population of approximately
785,000 persons within a radius of approximately 35 miles around Pocono Downs
and approximately 1.5 million persons within a 50-mile radius. The property
includes a 5/8-mile all-weather, lighted harness track. Pocono Downs's main
buildings are the grandstand and the clubhouse. The clubhouse is completely
enclosed and heated and fully air-conditioned. The grandstand has enclosed,
heated and air-conditioned seating for approximately 500 persons and permanent
open-air stadium-style seating for approximately 2,500 persons. The clubhouse is
a tiered dining and wagering facility that seats approximately 1,000 persons.
The clubhouse dining
48
<PAGE>
area seats 500 persons. Television sets for viewing live racing and simulcasts
are located throughout the facility along with pari-mutuel wagering areas.
A two-story 14,000 square foot building which houses the Pocono Downs
offices is located on the property. Pocono Downs also includes stables for
approximately 950 horses, five paddock stables, quarters for grooms, two
blacksmith shops and a cafeteria for the Harness Horsemen. Parking facilities
for approximately 5,000 vehicles adjoin the track.
The acquisition of Pocono Downs was consummated following the last day
of racing at Pocono Downs for the 1996 season. The Company resumed live racing
at Pocono Downs in April 1997 and conducted 134 days of live harness racing at
the facility in the 1997 season. Post time at Pocono Downs is 7:30 p.m.
The Charles Town Entertainment Complex is located on a portion of a
250-acre parcel in Charles Town, West Virginia, which is approximately a
60-minute drive from Baltimore, Maryland and a 70-minute drive from Washington,
D.C. There is a total population of approximately 3.1 million persons within a
50-mile radius and approximately 9.0 million persons within a 100-mile radius of
the Charles Town Entertainment Complex. The property includes a 3/4-mile
thoroughbred racetrack. The Charles Town Entertainment Complex's main building
is the grandstand/clubhouse, which is completely enclosed and heated. The
clubhouse dining room has seating for 600. Additional food and beverage areas
are situated throughout the facility. The property surrounding the Charles Town
Entertainment Complex, including the site of the former Shenandoah Downs
Racetrack, is available for future expansion or development. In addition, the
Company has a right of first refusal for an additional 250 acres that are
adjacent to the Charles Town Entertainment Complex. The Charles Town
Entertainment Complex also includes stables, an indoor paddock, ample parking
and water and sewage treatment facilities.
The Charles Town Races reopened in April 1997 and the Company conducted
159 days of thoroughbred racing at the facility in the 1997 season. Post time at
the Charles Town Races is 7:30 p.m. on Fridays and Saturdays and 1:30 p.m. on
Wednesdays and Sundays.
OTWs
The Company's OTWs provide areas for viewing import simulcasts and
televised sporting events, placing pari- mutuel wagers and dining. The
facilities also provide convenient parking.
<TABLE>
<CAPTION>
FACILITY/ SIZE OWNED OR
LOCATION DATE OPENED/STATUS (SQ. FT.) COST(1) LEASED
- -------- ------------------ --------- ------- ------
<S> <C> <C> <C> <C>
Allentown, PA Opened 7/93 28,500 $5,207,000 Owned
Chambersburg, PA Opened 4/94 12,500 1,500,000 Leased
Erie, PA Opened 5/91 22,500 3,575,000 Owned
Lancaster, PA Opened 7/96 24,000 2,700,000 Leased
Reading, PA Opened 5/92 22,500 2,100,000 Leased
Williamsport, PA Opened 2/97 14,000 3,000,000 Owned
York, PA Opened 3/95 25,000 2,200,000 Leased
Hazleton, PA Opened 3/98 13,000 2,000,000 Leased
(estimated)
Carbondale, PA Opened 3/98 13,000 2,300,000 Owned
(estimated)
Stroudsburg, PA Approval to operate pending; 12,000 2,000,000 Leased(2)
site selected (estimated)
Altoona, PA License authorized; approval to operate 14,220 2,000,000 Leased(2)
pending; site selected (estimated)
</TABLE>
- ----------
(1) Consists of original construction costs, equipment and, for owned
properties, the cost of land and building.
(2) The Company is licensed to operate two additional OTWs and has identified
sites to operate OTW locations in Stroudsburg and Altoona, Pennsylvania,
subject to receipt of all applicable approvals to operate these sites.
The Company considers its properties adequate for its presently anticipated
purposes.
49
<PAGE>
Pari-Mutuel Revenues
Revenues from Company races consist of the total amount wagered, less
the amount paid as winning wagers. Of the amount not returned to bettors as
winning wagers, a portion is paid to the state in which the track is located, a
portion is distributed to the track's horsemen in the form of "purses" and the
balance is retained by the wagering facility. The Pennsylvania Racing Act
specifies the maximum percentages of each dollar wagered on horse races in
Pennsylvania which can be retained by the Company (prior to required payments to
the Pennsylvania Horsemen and applicable taxing authorities). The percentages
vary, based on the type of wager; the average percentage has approximated 20%,
which is retained by the Company. The balance of each dollar wagered must be
paid out to the public as winning wagers. With the exception of revenues derived
from wagers at the Company's racetracks and OTWs, the Company's revenues on each
race are determined pursuant to such maximum percentage and agreements with the
other racetracks and OTWs at which wagering is taking place. Amounts payable to
the Pennsylvania Horsemen are determined under agreements with the Pennsylvania
Horsemen and vary depending upon where the wagering is conducted and the
racetrack at which such races take place. The Pennsylvania Horsemen receive
their share of such wagering as race purses. The Company retains a higher
percentage of wagers made at its own facilities than of wagers made at other
locations. The West Virginia Racing Act provides for a similar disposition of
pari-mutuel wagers placed at the Charles Town Entertainment Complex, with the
average percentage of wagers retained by the Company having been approximately
20% (prior to required payments to the Charles Town Horsemen and to applicable
West Virginia taxing authorities and other mandated beneficiary organizations).
Simulcasting
The Company has been transmitting simulcasts of its races to other
wagering locations and receiving simulcasts of races from other locations for
wagering by its customers at Company facilities year-round, for more than five
years. When customers place wagers on import simulcast races, the Company
receives revenue and incurs expense in substantially the same manner as it would
if the race had been run at one of the Company's own tracks: of the amount not
returned to bettors as winning wagers, a portion is paid to the state in which
the Company wagering facility is located, a portion is paid to the purse fund
for the horse owners or trainers (thoroughbred or harness) of the Company's
racetrack with which the wagering facility is associated, a portion is paid to
the racetrack from which the race is simulcast and the balance is retained by
the Company. The Company believes that full-card import simulcasting, in which
all of the races at a non-Company track are import simulcast to a Company
wagering facility, has improved the wagering opportunities for its customers and
thereby increased the amount wagered at Company facilities. When the Company
export simulcasts Company races for wagering at non-Company locations, it
receives a fixed percentage of the amounts wagered on that race from the
location to which the simulcast is exported, while incurring minimal additional
expense. During the years ended December 31, 1996 and 1997, respectively, the
Company received import simulcasts from approximately 57 and 75 racetracks,
respectively, including premier racetracks such as Belmont Park, Gulfstream
Park, Hollywood Park, Santa Anita and Saratoga and transmitted export simulcasts
of Company races to 63 and 98 locations, respectively.
Pursuant to an agreement among the members of the Pennsylvania Racing
Association, the Company and the two other Pennsylvania racetracks provide
simulcasts of all their races to all of each other's facilities and set the
commissions payable on such races. In addition, the Company has short-term
agreements with various racetracks throughout the United States to import
simulcast from, and export simulcast to, their facilities; these agreements
include import simulcasts of major stakes races. The Company believes that
import simulcasting of out-of-state races, including full card import
simulcasting, is beneficial economically to the Company because it makes
available wagering on higher quality races and which tends to increase the size
of the average wager.
Telephone Wagering
In 1983, the Company pioneered Telebet, Pennsylvania's first telephone
account wagering system. A Telebet customer opens an account by depositing funds
with the Company. Account holders can then place wagers by telephone on Company
races and import simulcast races to the extent of the funds on deposit in the
account; any winnings are posted to the account and are available for withdrawal
or for future wagers. In December 1995, Pocono Downs instituted Dial-A-Bet, a
similar telephone account betting system.
50
<PAGE>
Charles Town Joint Venture; Operating Terms
Pursuant to the original operating agreement governing the Charles Town
Joint Venture, the Company held an 80% ownership interest in the Charles Town
Joint Venture and was obligated to contribute 80% of the purchase price of the
Charles Town Acquisition and 80% of the cost of refurbishing the Charles Town
Entertainment Complex. In consideration of the fact that the Company contributed
100% of the purchase price of the Charles Town Acquisition and 100% of the cost
of refurbishing the Charles Town Entertainment Complex, the Company has amended
its operating agreement with Bryant to, among other things, increase the
Company's ownership interest in the Charles Town Joint Venture to 89% and
decrease Bryant's interest to 11%. In addition, the amendment provided that the
entire amount the Company has contributed, and will contribute, to the Charles
Town Joint Venture for the acquisition and refurbishment of the Charles Town
Entertainment Complex would be treated, as between the parties, as a loan to the
Charles Town Joint Venture from the Company. Accordingly, prior to the
distribution of any profits pursuant to the Charles Town Joint Venture, the
Company must be repaid in full all such contributions or loans, plus accrued
interest, which as of December 31, 1997, equaled $45.9 million.
The Charles Town Joint Venture acquired its option to purchase the
Charles Town Entertainment Complex from Bryant; Bryant, in turn, acquired the
option from Showboat. Showboat has retained an option to operate any casino at
the Charles Town Entertainment Complex in return for a management fee (to be
negotiated at the time, based on rates payable for similar properties) and a
right of first refusal to purchase or lease the site of any casino at the
Charles Town Entertainment Complex proposed to be leased or sold and to purchase
any interest proposed to be sold in any such casino on the same terms offered by
a third party or otherwise negotiated with the Charles Town Joint Venture. The
rights retained by Showboat under the Showboat Option extend until November 5,
2001 and expire thereafter unless legislation to permit casino gaming at the
Charles Town Entertainment Complex has been adopted prior to such date. If such
legislation has been adopted prior to such time, then the rights of Showboat
continue for a reasonable time (not less than 24 months) to permit completion of
negotiations.
While the express terms of the Showboat Option do not specify what
activities at the Charles Town Entertainment Complex would constitute operation
of a casino, Showboat has agreed that the installation and operation of gaming
devices linked to the lottery (like the Gaming Machines the Company has
installed and will continue to install) at the Charles Town Entertainment
Complex's race track do not trigger Showboat's right to exercise the Showboat
Option. If West Virginia law were to permit casino gaming at the Charles Town
Entertainment Complex and if Showboat were to exercise the Showboat Option, the
Company would be required to pay a management fee to Showboat for the operation
of the casino.
Potential Tennessee Development Project
In June 1997, the Company acquired twelve one-month options to purchase
approximately 100 acres of land in Memphis, Tennessee. Since such time, the
Company, through its subsidiary, Tennessee Downs, Inc. ("Tennessee Downs"), has
pursued the development of a harness track and simulcast facility on this option
site, which is located in the northeastern section of Memphis. The Company
submitted an application to the Tennessee Racing Commission (the "Tennessee
Commission") in October 1997 for an initial license for the development and
operation of a harness track and OTW facility at this site. Tennessee Downs has
been found financially suitable by the Tennessee Commission and a public comment
hearing before the Tennessee Commission was held on November 15, 1997. A land
use plan for the construction of a 5/8-mile harness track, clubhouse and
grandstand area were approved in October 1997 by the Land Use Hearing Board for
the City of Memphis and County of Shelby. On December 2, 1997, the Company
received the necessary zoning and land development approvals from the Memphis
City Council.
In April 1998, the Tennessee Commission granted a contingent license to
the Company which expires the earlier of (i) December 31, 1999 or (ii) the
Tennessee Commission's term on June 30, 1998, if such term is not extended by
the Tennessee legislature. As of April 28, 1998, legislation is pending before
the Tennessee legislature to extend the Tennessee Commission's term beyond June
30, 1998, however there can be no assurance that such legislation will be
enacted.
If the Company ultimately obtains all necessary regulatory approvals,
the Company plans to spend approximately $9.0 million over the next twelve
months to purchase the land subject to the option and build a combined
51
<PAGE>
OTW and grandstand facility. The Company estimates that total development costs,
including subsequent track construction, will be approximately $15.0 million. In
addition, if the Company is awarded a racing license, it will be permitted to
pursue the development of additional OTWs in Tennessee, provided it first
obtains necessary approvals, including a public referendum for each proposed OTW
site and other necessary zoning and land development approvals.
If the Company's application is approved by the Tennessee Commission,
the Company plans to exercise its option to purchase the site and build the
track and OTW facility at an estimated cost of $15 million. If this development
project is pursued, the physical plant will be completed in two phases as
described below. The Tennessee Horse Racing Act permits the construction of both
a simulcast facility and a primary facility within the same enclosure. Upon the
approval of the racing license by the Tennessee State Horse Racing Commission,
Tennessee Downs plans to initiate the pre-construction site improvements and
move forward with the construction of the simulcast facility. This portion of
the project will include infrastructure improvements, the actual simulcast
facility and related parking. Estimated construction costs for the first phase,
along with development and land acquisition costs, are estimated to be
approximately $9.0 million. The second phase of the project will include
construction of the track, barns, paddock area and other racing related
amenities. Following timely receipt of all applicable approvals, Tennessee Downs
would initiate construction in the second or third quarter of fiscal 1998 with
the opening of the simulcast facility planned for January 1999. Construction of
the second phase would follow during the spring/summer of 1999 with an
anticipated opening for live racing sometime in early 2000. The second phase of
the project is estimated to cost approximately $6.0 million.
Marketing and Advertising
The Company seeks to increase wagering by broadening its customer base
and increasing the wagering activity of its existing customers. To attract new
customers, the Company seeks to increase the racing knowledge of potential
customers through its television programming, and by providing "user friendly"
automated wagering systems and comfortable surroundings. The Company also seeks
to attract new customers by offering various types of promotions including
family fun days, premium give-away programs, contests and handicapping seminars.
Charles Town Gaming Machine Marketing Programs
The Company's marketing efforts, which include print and radio
advertising, commenced in October 1997 and are focused on the Washington, D.C.,
Baltimore, Maryland, Northern Virginia, Eastern West Virginia and Southern
Pennsylvania markets. At the Charles Town Entertainment Complex, the Company has
established the Silver Screen Video Slots Club, a manual player tracking system
designed to reward frequent and active customers. In 1998, the Company intends
to purchase and install a computerized player tracking system at the Charles
Town Entertainment Complex, which will further focus the Company's marketing
efforts. The Company has also implemented a coupon program where customers who
visit the Charles Town Entertainment Complex can redeem each coupon for five
dollars. From these coupons, the Company has compiled a database of customers
that will be targeted for future marketing programs.
Televised Racing Program
The Company's Racing Alive program is televised by satellite
transmission commencing approximately one hour before post time on each live
racing day at the Penn National Race Course. The program provides color
commentary on the races at the Penn National Race Course (including wagering
odds, past performance information and handicapper analysis), general education
on betting and handicapping, interviews with racing personalities and featured
races from other thoroughbred racetracks across the country. The Racing Alive
program is shown at the Penn National Race Course and on various cable
television systems in Pennsylvania and is transmitted to all OTWs that receive
the Penn National Race Course races. The Company intends to expand Racing Alive
and/or to create additional televised programming to cover racing at Pocono
Downs and at other harness racing venues throughout the United States. The
Company's satellite transmissions are encoded so that only authorized facilities
can receive the program.
52
<PAGE>
Automated Wagering Systems
To make wagering more "user friendly" to the novice and more efficient
for the expert, the Company leases Autotote Systems, Inc.'s automated wagering
equipment. These wagering systems enable the customer to choose a variety of
ways to place a bet through touch-screen interactive terminals and personalized
portable wagering terminals, provide current odds information and enable
customers to place bets and credit winning tickets to their accounts. Currently,
more than 35% of all wagers at Penn National are processed through these
self-service terminals and Telebet.
Modern Facilities
The Company provides a comfortable, upscale environment at each of its
OTWs, including a full bar, a range of restaurant services and an area devoted
to televised sporting events. The Company believes that its attractive
facilities appeal to its current customers and to new customers, including those
who have not previously visited a racetrack.
GTECH Gaming Machine Supply and Service Agreement
In June 1997, the Charles Town Joint Venture entered into an agreement
(the "GTECH Agreement") with GTECH Corporation ("GTECH") relating to the lease,
installation and service of a video lottery system ("VLS") at the Charles Town
Entertainment Complex. The GTECH Agreement provides that GTECH will be the
exclusive provider of VLS and related services, including video lottery
terminals and slot machines, if any, at the Charles Town Entertainment Complex;
provided, however, the Charles Town Joint Venture has retained management
control over the VLS. The GTECH Agreement has a term of five years from the
first date on which 400 Gaming Machines are installed, operational and
generating "Net Win" (total of all cash inserted into, or game credits played
on, a video lottery terminal minus the total value of all prizes paid). On
September 26, 1997, the Charles Town Joint Venture had 400 Gaming Machines
installed, operational and generating Net Win at the Charles Town Entertainment
Complex. Pursuant to the GTECH Agreement, the Charles Town Joint Venture has
agreed to pay GTECH a fee which can range between 4% and 10% of Gaming Machine
gross revenue. The Company generally is obligated to pay a lower percentage of
Gaming Machine gross revenue to GTECH at higher levels of average win per day
per machine and a higher percentage of Gaming Machine gross revenue at lower
levels of average win per day per machine; provided, however, the Charles Town
Joint Venture is obligated to pay GTECH the greater of the percentage fee
described above or a minimum annual fee of $4.3 million if more than 800 Gaming
Machines are in operation at the Charles Town Entertainment Complex. The
payments pursuant to the GTECH Agreement include the cost of the rental of the
Gaming Machines, the rental of the software (which is not a component of the
VLS), technical assistance and programming services, maintenance and marketing
services. At the end of the term of the GTECH Agreement, the Charles Town Joint
Venture will purchase the VLS from GTECH for a cash purchase price equal to the
net unamortized residual value of the VLS. In the event GTECH terminates the
agreement because of the Charles Town Joint Venture's material misrepresentation
and/or breach of the GTECH Agreement, the Charles Town Joint Venture must
purchase the VLS from GTECH at a price equal to the net unamortized residual
value of the VLS at that time and pay an additional one-time fee as follows: for
such termination in the first year of the term, $8.5 million; for such
termination in the second year of the term, $6.6 million; for such termination
in the third year of the term, $5.0 million; for such termination in the fourth
year of the term, $3.7 million; and for such termination in the fifth year of
the term, $2.5 million. In the GTECH Agreement, the Charles Town Joint Venture
covenants to maintain tangible net worth equal to at least 105% of the amounts
payable as additional fees in the event of a termination as set forth in the
preceding sentence.
Purses; Agreements with Horsemen
The Horsemen Agreements set forth the amounts to be paid to the
Pennsylvania Horsemen as racing purses. Revenues from wagering at the Penn
National Race Course and Pocono Downs, except for wagering on races simulcast
from outside Pennsylvania, are divided approximately equally between the Company
and the Pennsylvania Horsemen. Revenues from all other sources (all wagering at
the Company's OTWs and on races simulcast from outside Pennsylvania) are shared
such that the Pennsylvania Horseman generally receive between 3.0% and 7.5% of
total wagering at the OTWs.
The Company sets the purses paid on Company races, based on projected
wagering and in accordance with the terms of the Horsemen Agreements. Because
the amount of the purses is based on projections, at any given point
53
<PAGE>
in time the Pennsylvania Horsemen will have either been overpaid or underpaid.
The agreement with the Thoroughbred Horsemen also permits the Thoroughbred
Horsemen to require immediate purse adjustments should the amount of revenues to
be paid to them as purses, and remaining unpaid, exceed $100,000. The amount of
underpaid or overpaid purses varies from time to time, and the Company believes
that further action to reduce the amount of underpaid purses will not affect its
ability to increase purses in an orderly manner. In setting future purses the
Company seeks, over time, to adjust for the under or over-payments, but no
assurance can be given that any such adjustment will be accurate or adequate.
During the years ended December 31, 1995, 1996 and 1997, the
Pennsylvania Thoroughbred Horsemen earned an aggregate of approximately $12.0
million, $12.3 million and $12.9 million in purses, respectively. The average
daily purses earned by the Pennsylvania Thoroughbred Horsemen who raced at Penn
National Race Course during the three-year period increased from approximately
$57,900 to approximately $60,600. The Company believes that the increases in
daily purses have contributed to an improvement in the quality of horses racing
at the Penn National Race Course. During the years ended December 31, 1995, 1996
and 1997, the Harness Horsemen earned an aggregate of approximately $6.5
million, $5.7 million and $5.4 million in purses, respectively. The average
daily purses earned by the Harness Horsemen during the four-year period ended
December 31, 1997 increased from approximately $35,800 to approximately $40,100.
The average daily purses earned by the Harness Horsemen for calendar 1996 and
1997 were approximately $42,300 and $40,100 per day, respectively. The average
daily purses at Charles Town Races during such period decreased from
approximately $28,538 to approximately $25,800.
The Penn National Race Course Thoroughbred Horsemen Agreement was
entered into in February 1996, expires in February 1999 and is subject to
automatic renewal for successive one year terms unless either party gives notice
of termination at least 90 days prior to the end of any such period. The Harness
Horsemen Agreement was entered into in November 1994, became effective in
January 1995 and expires in January 2000. The Company is party to the requisite
agreement with the Charles Town Horsemen, which expires on December 31, 2000.
The West Virginia Gaming Machine Act also requires that the operator of the
Charles Town Entertainment Complex be subject to a written agreement with the
pari-mutuel clerks in order to operate Gaming Machines, although this agreement
expired on December 31, 1997. The Company is in the process of negotiating a new
pari-mutuel clerks agreement.
Competition
The Company faces significant competition for wagering dollars from
other racetracks and OTWs in Pennsylvania and neighboring states (some of which
also offer other forms of gaming), other gaming venues such as casinos and
state-sponsored lotteries, including the Pennsylvania Lottery and the West
Virginia Lottery. The Company may also face competition in the future from new
OTWs or from new racetracks. From time to time, Pennsylvania has considered
legislation to permit other forms of gaming. Although Pennsylvania has not
authorized any form of casino or other gaming, if additional gaming
opportunities become available in or near Pennsylvania, such gaming
opportunities could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's live races compete for wagering dollars and simulcast
fees with live races and races simulcast from other racetracks both inside and
outside Pennsylvania (including several in New York, New Jersey, West Virginia,
Ohio, Maryland and Delaware). The Company's ability to compete successfully for
wagering dollars is dependent, in part, on the quality of its live horse races.
The quality of horse races at some racetracks that compete with the Company,
either by live races or simulcasts, is higher than the quality of Company races.
The Company believes that there has been some improvement over the last several
years in the quality of the horses racing at the Penn National Race Course, due
to higher purses being paid as a result of the Company's increased simulcasting
activities. However, increased purses may not result in a continued improvement
in the quality of racing at the Penn National Race Course or in any material
improvement in the quality of racing at Pocono Downs or the Charles Town Races.
The Company's OTWs compete with the OTWs of other Pennsylvania
racetracks, and new OTWs may compete with the Company's existing or proposed
wagering facilities. Competition between OTWs increases as the distance between
them decreases. For example, the Company believes that its Allentown OTW, which
was acquired in the acquisition of Pocono Downs and which is approximately 50
miles from the Penn National Race Course and 35 miles from the Company's Reading
OTW, has drawn some patrons from the Penn National Race Course, the Reading OTW
54
<PAGE>
and the Company's telephone wagering system and that the Company's Lancaster
OTW, which is approximately 31 miles from the Penn National Race Course and 25
miles from the Company's York OTW, has drawn some patrons from the Penn National
Race Course, the York OTW and the Company's telephone wagering system. Moreover,
the Company believes that a competitor's new OTW in King of Prussia,
Pennsylvania, which is approximately 23 miles from the Reading OTW, has drawn
some patrons from the Reading OTW. Although only one competing OTW remains
authorized by law for future opening, the opening of a new OTW in close
proximity to the Company's existing or future OTWs could have a material adverse
effect on the Company's business, financial condition and results of operations.
A competitor of the Company has applied to open an OTW within four miles of the
Company's OTW in Allentown. If the application were approved, such new OTW could
compete for patrons with the Company's site. However, the Company believes it is
unlikely that the competitor's site will be approved by gaming authorities under
existing legal precedent established by such gaming authorities.
The Company's Gaming Machine operations face competition from other
Gaming Machine venues in West Virginia and in neighboring states (including
Dover Downs in Dover, Delaware, Delaware Park in northern Delaware, Harrington
Raceway in southern Delaware and the casinos in Atlantic City, New Jersey).
Venues in Delaware and New Jersey, in addition to video gaming machines,
currently offer mechanical slot machines that feature physical spinning reels,
pull-handles and the ability to both accept and pay out coins. West Virginia has
not authorized, and may never approve, such mechanical slot machines. The
failure to attract or retain Gaming Machine customers at the Charles Town
Entertainment Complex, whether arising from such competition or from other
factors, could have a material adverse effect upon the Company's business,
financial condition and results of operations.
Effect of Inclement Weather and Seasonality
Because horse racing is conducted outdoors, variable weather
contributes to the seasonality of the Company's business. Weather conditions,
particularly during the winter months, may cause races to be canceled or may
curtail attendance. Because a substantial portion of the Company's racetrack
expenses are fixed, the loss of scheduled racing days could have a material
adverse effect on the Company's business, financial condition and results of
operations.
For the year ended December 31, 1997, the Company canceled a total of
five racing days because of inclement weather. The severe winter weather in 1996
resulted in the closure of the Company's OTW facilities for two days in January
1996. Because of the Company's growing dependence upon OTW operations, severe
weather that causes the Company's OTWs to close could have an adverse effect
upon the Company's business, financial condition and results of operations.
Attendance and wagering at the Company's facilities have been favorably
affected by special racing events which stimulate interest in horse racing, such
as the Triple Crown races in May and June and the heavier racing schedule
throughout the country during the second and third quarter. As a result, the
Company's revenues and net income have been greatest in the second and third
quarters of the year, and lowest in the first and fourth quarters of the year.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Effect of Inclement Weather and Seasonality."
Regulation and Taxation
General
Company subsidiaries are authorized to conduct thoroughbred racing and
harness racing in Pennsylvania under the Pennsylvania Racing Act. Such
subsidiaries are also authorized, under the Pennsylvania Racing Act and the
Federal Horseracing Act, to conduct import simulcast wagering. The Charles Town
Joint Venture is also subject to the provisions of the West Virginia Racing Act,
which governs the conduct of thoroughbred horse racing in West Virginia, and the
West Virginia Gaming Machine Act, which governs the operation of Gaming Machines
in West Virginia. The Company's live racing, pari-mutuel wagering and Gaming
Machine operations are contingent upon the continued governmental approval of
such operations as forms of legalized gaming. All of the Company's current and
proposed operations are subject to extensive regulations and could be subjected
at any time to additional or more restrictive regulations, or banned entirely.
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Pennsylvania Racing Regulations
The Company's horse racing operations at the Penn National Race Course
and Pocono Downs are subject to extensive regulation under the Pennsylvania
Racing Act, which established the Pennsylvania Racing Commissions. The
Pennsylvania Racing Commissions are responsible for, among other things, (i)
granting permission annually to maintain racing licenses and schedule race
meets, (ii) approving, after a public hearing, the opening of additional OTWs,
(iii) approving simulcasting activities, (iv) licensing all officers, directors,
racing officials and certain other employees of the Company and (v) approving
all contracts entered into by the Company affecting racing, pari-mutuel wagering
and OTW operations.
As in most states, the regulations and oversight applicable to the
Company's operations in Pennsylvania are intended primarily to safeguard the
legitimacy of the sport and its freedom from inappropriate or criminal
influences. The Pennsylvania Racing Commissions have broad authority to regulate
in the best interests of racing and may, to that end, disapprove the involvement
of certain personnel in the Company's operations, deny approval of certain
acquisitions following their consummation or withhold permission for a proposed
OTW site for a variety of reasons, including community opposition. For example,
the Pennsylvania State Horse Racing Commission withheld approval for the
Company's initial site for its Lancaster OTW, but the Company applied and was
ultimately approved for another site in Lancaster, which opened in July 1996.
The Pennsylvania legislature also has reserved the right to revoke the power of
the Pennsylvania Racing Commissions to approve additional OTWs and could, at
anytime, terminate pari-mutuel wagering as a form of legalized gaming in
Pennsylvania or subject such wagering to additional restrictive regulation; such
termination would, and any further restrictions could, have a material adverse
effect upon the Company's business, financial condition and results of
operations.
The Company may not be able to obtain all necessary approvals for the
operation or expansion of its business. Even if all such approvals are obtained,
the regulatory process could delay implementation of the Company's plans to open
additional OTWs. The Company has had continued permission from the Pennsylvania
State Horse Racing Commission to conduct live racing at the Penn National Race
Course since it commenced operations in 1972, and has obtained permission from
the Pennsylvania State Harness Racing Commission to conduct live racing at
Pocono Downs. Currently, the Company has approval from the Pennsylvania Racing
Commissions to operate the nine OTWs that are currently open and the two
additional OTWs the Company proposed to open. A Commission may refuse to grant
permission to open additional OTWs or to continue to operate existing
facilities. The failure to obtain required regulatory approvals would have a
material adverse effect upon the Company's business, financial condition and
results of operations.
The Pennsylvania Racing Act provides that no corporation licensed to
conduct thoroughbred racing with pari- mutuel wagering shall be licensed to
conduct harness racing with pari-mutuel wagering and that no corporation
licensed to conduct harness racing with pari-mutuel wagering shall be licensed
to conduct thoroughbred racing with pari-mutuel wagering. The Company's harness
and thoroughbred licenses are held by separate corporations, each of which is a
wholly owned subsidiary of the Company. Moreover, the Pennsylvania State Harness
Racing Commission has reissued the Pocono Downs harness racing license and has
found, in connection with the reissuance, that it is not "inconsistent with the
best interests, convenience or necessity or with the best interests of racing
generally," that a subsidiary of the Company beneficially owns Pocono Downs. The
Company thus believes that the arrangement under which it holds both a harness
and a thoroughbred license complies with applicable regulations.
West Virginia Racing and Gaming Regulation
The Company's operations at the Charles Town Entertainment Complex are
subject to regulation by the West Virginia Racing Commission under the West
Virginia Racing Act, and by the West Virginia Lottery Commission under the West
Virginia Gaming Machine Act. The powers and responsibilities of the West
Virginia Racing Commission under the West Virginia Racing Act are substantially
similar in scope and effect to those of the Pennsylvania Racing Commissions and
extend to the approval and/or oversight of all aspects of racing and pari-mutuel
wagering operations. The Charles Town Joint Venture has obtained from the West
Virginia Racing Commission a license to conduct racing and pari-mutuel wagering
at the Charles Town Entertainment Complex. Pursuant to the West Virginia Gaming
Machine Act, the Company has obtained approval for the installation and
operation of a total of 1,000 Gaming Machines at the Charles Town Entertainment
Complex.
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State and Federal Simulcast Regulations
Both the Federal Horseracing Act and the Pennsylvania Racing Act
require that the Company have a written agreement with the Thoroughbred Horsemen
and with the Harness Horsemen in order to simulcast races. The Company has
entered into the Horsemen Agreements, and in accordance therewith has agreed on
the allocations of the Company's revenues from import simulcast wagering to the
purse funds for the Penn National Race Course, Charles Town Races and Pocono
Downs. Because the Company cannot conduct import simulcast wagering in the
absence of the Horsemen Agreements, the termination or non-renewal of either
Horsemen Agreement could have a material adverse effect on the Company's
business, financial condition and results of operations.
Taxation
The Company believes that the prospect of significant additional
revenue is one of the primary reasons that jurisdictions permit legalized
gaming. As a result, gaming companies are typically subject to significant taxes
and fees in addition to normal federal and state income taxes, and such taxes
and fees are subject to increase at any time. The Company pays substantial taxes
and fees with respect to its operations. From time to time, federal legislators
and officials have proposed changes in tax laws, or in the administration of
such laws, affecting the gaming industry. It is not possible to determine with
certainty the likelihood of changes in tax laws or in the administration of such
laws. Such changes, if adopted, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Compliance with Other Laws
The Company and its OTWs are also subject to a variety of other rules
and regulations, including zoning, construction and land-use laws and
regulations in Pennsylvania and West Virginia governing the serving of alcoholic
beverages. Currently, Pennsylvania laws and regulations permit the construction
of off-track wagering facilities, but may affect the selection of a particular
OTW site because of parking, traffic flow and other similar considerations, any
of which may serve to delay the opening of future OTWs in Pennsylvania. By
contrast, West Virginia law does not permit the operation of OTWs. The Company
derives a significant portion of its other revenues from the sale of alcoholic
beverages to patrons of its facilities. Any interruption or termination of the
Company's existing ability to serve alcoholic beverages would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Restrictions on Share Ownership and Transfer
The Pennsylvania Racing Act requires that any shareholder proposing to
transfer beneficial ownership of 5% or more of the Company's shares file an
affidavit with the Company setting forth certain information about the proposed
transfer and transferee, a copy of which the Company is required to furnish to
the Pennsylvania Racing Commission. The certificates representing the Company
shares owned by 5% beneficial shareholders are required to bear certain legends
prescribed by the Pennsylvania Racing Act. In addition, under the Pennsylvania
Racing Act, the Pennsylvania Racing Commission has the authority to order a 5%
beneficial shareholder of the Company to dispose of his Common Stock of the
Company if it determines that continued ownership would be inconsistent with the
public interest, convenience or necessity or the best interest of racing
generally. The West Virginia Gaming Machine Act provides that a transfer of more
than 5% of the voting stock of a corporation which controls the license may only
be to persons who have met the licensing requirements of the West Virginia
Gaming Machine Act or which transfer has been pre-approved by the West Virginia
Lottery Commission. Any transfer that does not comply with this requirement
voids the license.
Potential Tennessee Development Regulatory Compliance.
If the Company successfully completes the development of its potential
Tennessee harness track and OTWs, the Company will likely face regulatory
requirements that are similar to the requirements affecting its existing
operations; however, given the absence of horse racing within Tennessee at this
time, the Company may face more burdensome regulatory approvals or compliance in
light of the absence of significant regulations, interpretation and
administrative action at this time.
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Other Leases
The Company currently leases 6,183 square feet of office space in an
office building in Wyomissing, Pennsylvania for the Company's executive offices.
The lease expires in April 2005 and provides for an annual rental of $71,100
plus common area expenses and electric utility charges. The office building is
owned by an affiliate of Peter M. Carlino, the Chairman and Chief Executive
Officer of the Company. The Company believes that the lease terms are not less
favorable than lease terms that could have been obtained from an unaffiliated
third party.
The Company currently leases an aircraft from a company owned by John
Jacquemin, a director of the Company. The lease expires in August 2007 and
provides for monthly payments of $8,356. The Company believes that the lease
terms are not less favorable than lease terms that could have been obtained from
an unaffiliated third party.
Employees and Labor Relations
At April 17, 1998, the Company had 1,709 permanent employees, of whom
752 were full-time and 957 part-time. Employees of the Company who work in the
admissions department and pari-mutuels department at the Penn National Race
Course, Pocono Downs and the OTWs are represented under collective bargaining
agreements between the Company and Sports Arena Employees' Union Local 137. The
agreements extend until October 3, 1999 for track employees and until May 20,
1998 for OTW employees. The pari-mutuel clerks at Pocono Downs voted to unionize
in June 1997. The Company has held negotiations with this union, but does not
have a contract to date. Failure to reach agreement with this union would not
result in the suspension or termination of the Company's license to operate live
racing at Pocono Downs or to conduct simulcast or OTW operations. The Company
believes that its relations with its employees are satisfactory.
Legal Proceedings
In December 1997, Amtote International, Inc. ("Amtote"), filed an
action against the Company and the Charles Town Joint Venture in the United
States District Court for the Northern District of West Virginia. In its
complaint, Amtote (i) states that the Company and the Charles Town Joint Venture
allegedly breached certain contracts with Amtote and its affiliates when it
entered into a wagering services contract with a third party (the "Third Party
Wagering Services Contract"), and not with Amtote, effective January 1, 1998,
(ii) sought preliminary and injunctive relief through a temporary restraining
order seeking to prevent the Charles Town Joint Venture from (a) entering into a
wagering services contract with a party other than Amtote and (b) having a third
party provide such wagering services, (iii) seeks declaratory relief that
certain contracts allegedly bind the Charles Town Joint Venture to retain Amtote
for wagering services through September 2004 and (iv) seeks unspecified
compensatory damages, legal fees and costs associated with the action and other
legal and equitable relief as the Court deems just and appropriate. On December
24, 1997, a temporary restraining order was issued, which proscribed performance
under the Third Party Wagering Contract. On January 14, 1998, a hearing was held
to rule on whether a preliminary injunction should be issued or whether the
temporary restraining order should be lifted, and on February 20, 1998, the
Court lifted the temporary restraining order. The Company intends to pursue
legal remedies to terminate Amtote and proceed under the Third Party Wagering
Services Contract. The Company believes that this action, and any resolution
thereof, will not have any material adverse impact upon its financial condition,
results, or the operations of either the Charles Town Joint Venture or the
Company.
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MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C>
Peter M. Carlino.................. 51 Chairman of the Board and Chief Executive Officer
William J. Bork................... 64 President, Chief Operating Officer and Director
Robert S. Ippolito................ 46 Chief Financial Officer, Secretary and Treasurer
Philip T. O'Hara, Jr.............. 45 Vice President and General Manager
Joseph A. Lashinger, Jr........... 44 Vice President
Robert E. Abraham................. 45 Vice President and Corporate Controller
Harold Cramer..................... 70 Director
David A. Handler.................. 33 Director
Robert P. Levy.................... 66 Director
John M. Jacquemin................. 51 Director
</TABLE>
Peter M. Carlino. Mr. Carlino has served as Chairman of the Board and
Chief Executive Officer of the Company since April 1994, and has devoted a
significant amount of time to the activities of the Company as a director since
1991. From 1984 to 1994, Mr. Carlino devoted a substantial portion of his
business time to developing, building and operating residential and commercial
real estate projects located primarily in Central Pennsylvania. He has been
President of Carlino Financial Corporation ("Carlino Financial"), a holding
company which owns and operates various Carlino family businesses, since 1976,
in which capacity he has been continuously active in strategic planning for the
Company and monitoring its operations. From 1972 until 1976, Mr. Carlino served
as President of Mountainview Thoroughbred Racing Association ("Mountainview"), a
predecessor in interest of the Company.
William J. Bork. Mr. Bork was elected President, Chief Operating
Officer and a director in June 1995. From 1987 to June 1995 he was Vice
President for Ladbroke Racing Corporation. Prior to working with Ladbroke, Mr.
Bork served as Vice President of Operations of racetracks previously owned by
Ogden Corporation including Fairmount Park in Collinsville, Illinois;
Mountaineer Park in Chester, West Virginia; Wheeling Downs in Wheeling, West
Virginia; and Suffolk Downs in Boston, Massachusetts.
Robert S. Ippolito. Mr. Ippolito, a certified public accountant, was
elected Chief Financial Officer, Secretary and Treasurer of the Company in April
1994. He was Corporate Controller and Secretary of Carlino Financial and certain
of its affiliates between June 1987 and May 1994, and from 1979 to 1987 was
engaged in public accounting.
Philip T. O'Hara, Jr. Mr. O'Hara has been Vice President and General
Manager since January 1989. Mr. O'Hara joined the Company in April 1985 and has
served in various management capacities, including Director of Marketing and
Assistant General Manager. He has been a Director of the Thoroughbred Racing
Association since 1990.
Joseph A. Lashinger, Jr., Esquire. Mr. Lashinger was elected Vice
President of the Company in June 1997. Prior to joining the Company, Mr.
Lashinger served as a consultant to the Company from 1996 to 1997. From 1978 to
1990, Mr. Lashinger was elected to seven consecutive terms in the Pennsylvania
House of Representatives as representative from the 150th Legislative District
in Montgomery County, Pennsylvania. From 1981 to 1992, Mr. Lashinger was a
partner in the law firm of Fox, Differ, Callahan, Sheridan, O'Neil and
Lashinger. Mr. Lashinger has
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also served as director of government affairs, development director and counsel
to several major casino companies including Sands Casino, Hollywood Casino
Corporation and Bally Entertainment.
Robert E. Abraham. Mr. Abraham was elected Vice President and Corporate
Controller of the Company in January 1997. Mr. Abraham joined the Company in
1986 as Controller of Mountainview and Pennsylvania National Turf Club. Mr.
Abraham's prior experience includes six years in public accounting serving on
audit and management advisory services engagements.
Harold Cramer. Mr. Cramer has been a director of the Company since
1994. Since November 1996, Mr. Cramer has been of counsel to Mesirov, Gelman,
Jaffe, Cramer & Jamieson, LLP, a Philadelphia law firm which provides legal
services to the Company. From November 1995 until November 1996, Mr. Cramer was
Chairman of the Board and Chief Executive Officer of HSI Management Co., Inc.
From 1989 until November 1995, Mr. Cramer was Chairman of the Board and Chief
Executive Officer of Graduate Health System, Inc. ("GHS"), and has been a
Director of GHS since November 1996. He also serves as a director of
Mountainview and as a director of Pennsylvania National Turf Club, Inc., a
subsidiary of the Company.
David A. Handler. Mr. Handler has been a director of the Company since
1994. From 1995 to the present, Mr. Handler has been an investment banker and is
currently a Senior Vice President of Corporate Finance at Jefferies & Company,
Inc. From 1991 to 1995, Mr. Handler was a Vice President at Fahnestock & Co.,
Inc.
Robert P. Levy. Mr. Levy has been a director of the Company since 1995.
He is Chairman of the Board of the Atlantic City Racing Association and served a
two-year term as President from 1989 to 1990 of the Thoroughbred Racing
Association. Mr. Levy has served as the Chairman of the Board of DRT Industries,
Inc., a diversified business based in the Philadelphia metropolitan area, since
1960. Mr. Levy owns the Robert P. Levy Stable, a thoroughbred racing and
breeding operation which has bred and owned several award-winning horses,
including the 1987 Belmont Stakes winner, Bet Twice.
John M. Jacquemin. Mr. Jacquemin has been a director of the Company
since 1995 and is President of Mooring Financial Corporation, a financial
services group specializing in the purchase and administration of commercial
loan portfolios and equipment leases. Mr. Jacquemin joined Mooring Financial
Corporation in 1982 and has served as its President since 1987.
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DESCRIPTION OF CREDIT FACILITY
Concurrently with the Offering, the Company amended and replaced its
Old Credit Facility with the Credit Facility arranged by Bankers Trust Company
as agent (the "Agent"). The following is a summary description of the principal
terms of the Credit Facility and is subject to, and qualified in its entirety by
reference to, the definitive Credit Facility, a copy of which may be found by
reference to exhibits filed as part of the Company's Annual Report on Form 10-K
for the period ended December 31, 1997.
The Credit Facility provides for, subject to certain terms and
conditions, a $12.0 million revolving credit facility with a five-year term. The
Credit Facility, under certain circumstances, requires the Company to make
mandatory prepayments and commitment reductions. In addition, the Company may
make optional prepayments and commitment reductions pursuant to the terms of the
Credit Facility. Borrowings under the Credit Facility accrue interest, at the
option of the Company, at either the Agent's base rate plus an applicable margin
of up to 2.0% or a eurodollar rate plus an applicable margin of up to 3.0%.
The Credit Facility contains certain covenants that, among other
things, restrict the ability of the Company and its subsidiaries to dispose of
assets, incur additional indebtedness, incur guarantee obligations, repay
indebtedness or amend debt instruments, pay dividends, create liens on assets,
make investments, make acquisitions, engage in mergers or consolidations, make
capital expenditures, or engage in certain transactions with subsidiaries and
affiliates and otherwise restrict corporate activities. The Credit Facility is
secured by the assets of the Company and certain of its subsidiaries and
guaranteed by all of the subsidiaries except the Charles Town Joint Venture. In
addition, the Credit Facility requires the Company to comply with certain
financial ratios and maintenance tests.
The Company would not have been in compliance with certain covenants
under the Credit Facility had the bank group not granted waiver of certain
technical defaults regarding minimum consolidated net worth, consolidated cash
interest coverage ratio and minimum leverage ratio. However, at December 31,
1997, the Company had not drawn any portion of the Credit Facility (although a
$1.6 million letter of credit was issued against such Credit Facility) and had
adequate capital resources even without consideration of the Credit Facility.
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DESCRIPTION OF EXCHANGE NOTES
General
The Exchange Notes will be issued under an indenture (the "Indenture"),
dated as of December 17, 1997, by and among the Company, the Subsidiary
Guarantors and State Street Bank and Trust Company, as Trustee (the "Trustee").
The following summary of certain provisions of the Indenture does not purport to
be complete and is subject to, and is qualified in its entirety by reference to,
the Trust Indenture Act of 1939, as amended (the "TIA"), and to all of the
provisions of the Indenture (a copy of the form of which may be obtained from
the Company), including the definitions of certain terms therein and those terms
made a part of the Indenture by reference to the TIA as in effect on the date of
the Indenture. The definitions of certain capitalized terms used in the
following summary are set forth below under "--Certain Definitions." For
purposes of this section, references to the "Company" include only the Company
and not its Subsidiaries.
The Exchange Notes will be issued in fully registered form only,
without coupons, in denominations of $1,000 and integral multiples thereof.
Initially, the Trustee will act as Paying Agent and Registrar for the Exchange
Notes. The Exchange Notes may be presented for registration or transfer and
exchange at the offices of the Registrar, which initially will be the Trustee's
corporate trust office. The Company may change any Paying Agent and Registrar
without notice to holders of the Exchange Notes (the "Holders"). The Company
will pay principal (and premium, if any) on the Exchange Notes at the Trustee's
corporate office in New York, New York. At the Company's option, interest may be
paid at the Trustee's corporate trust office or by check mailed to the
registered address of Holders. Any Old Notes that remain outstanding after the
completion of the Exchange Offer, together with the Exchange Notes issued in
connection with this Exchange Offer, will be treated as a single class of
securities under the Indenture.
Principal, Maturity and Interest
The Exchange Notes are unsecured senior obligations of the Company. The
Indenture is limited in aggregate principal amount to $150,000,000, of which
$80,000,000 will be issued in the Exchange Offering. The Exchange Notes will
mature on December 15, 2004. Additional amounts may be issued in one or more
series from time to time subject to the limitations set forth under "--Certain
Covenants--Limitation on Incurrence of Additional Indebtedness" and restrictions
contained in the Credit Facility. Interest on the Exchange Notes will accrue at
the rate of 105/8% per annum and will be payable semiannually in cash on June 15
and December 15, commencing on June 15, 1998, to the persons who are registered
Holders at the close of business on the June 1 and December 1 immediately
preceding the applicable interest payment date. Interest on the Exchange Notes
will accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from and including the date of issuance.
The Exchange Notes will not be entitled to the benefit of any mandatory
sinking fund.
Redemption
Optional Redemption. The Exchange Notes will be redeemable, at the
Company's option, in whole at any time or in part from time to time, on and
after December 15, 2001, upon not less than 30 nor more than 60 days notice, at
the following redemption prices (expressed as percentages of the principal
amount thereof) if redeemed during the twelve-month period commencing on
December 15 of the year set forth below, plus, in each case, accrued and unpaid
interest thereon to the date of redemption:
Year Percentage
---- ----------
2001........................................ 105.313%
2002........................................ 102.656%
2003 and thereafter......................... 100.000%
Optional Redemption upon Public Equity Offerings. At any time, or from
time to time, on or prior to December 15, 2000, the Company may, at its option,
use the net cash proceeds of one or more Public Equity Offerings (as defined
below) to redeem up to 35% of the Exchange Notes at a redemption price equal to
110.625% of the principal amount
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thereof plus accrued and unpaid interest thereon to the date of redemption;
provided that at least 65% of the principal amount of Exchange Notes originally
issued remains outstanding immediately after any such redemption. In order to
effect the foregoing redemption with the proceeds of any Public Equity Offering,
the Company shall make such redemption not more than 90 days after the
consummation of any such Public Equity Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of Qualified Capital Stock of the Company pursuant
to a registration statement filed with the Commission in accordance with the
Securities Act.
Selection and Notice of Redemption
In the event that less than all of the Exchange Notes are to be
redeemed at any time, selection of such Exchange Notes for redemption will be
made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which such Exchange Notes are listed
or, if such Exchange Notes are not then listed on a national securities
exchange, on a pro rata basis, by lot or by such method as the Trustee shall
deem fair and appropriate; provided, however, that no Exchange Notes of a
principal amount of $1,000 or less shall be redeemed in part; provided, further,
that if a partial redemption is made with the proceeds of a Public Equity
Offering, selection of the Exchange Notes or portions thereof for redemption
shall be made by the Trustee only on a pro rata basis or on as nearly a pro rata
basis as is practicable (subject to DTC procedures), unless such method is
otherwise prohibited. Notice of redemption shall be mailed by first-class mail
at least 30 but not more than 60 days before the redemption date to each Holder
of Exchange Notes to be redeemed at its registered address. If any Note is to be
redeemed in part only, the notice of redemption that relates to such Note shall
state the portion of the principal amount thereof to be redeemed. A new Note in
a principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note. On and after
the redemption date, interest will cease to accrue on Exchange Notes or portions
thereof called for redemption as long as the Company has deposited with the
Paying Agent funds in satisfaction of the applicable redemption price pursuant
to the Indenture.
Guarantees
Each Subsidiary Guarantor will unconditionally guarantee, on a senior
unsecured basis, jointly and severally, to each Holder and the Trustee, the full
and prompt performance of the Company's obligations under the Indenture and the
Exchange Notes, including the payment of principal of and interest on the
Exchange Notes. The Guarantees will be effectively subordinated in right of
payment to all existing and future secured Indebtedness of the related
Subsidiary Guarantor to the extent of the value of the assets securing such
Indebtedness.
The obligations of each Subsidiary Guarantor are limited to the maximum
amount which, after giving effect to all other contingent and fixed liabilities
of such Subsidiary Guarantor and after giving effect to any collections from or
payments made by or on behalf of any other Subsidiary Guarantor in respect of
the obligations of such other Subsidiary Guarantor under its Guarantee or
pursuant to its contribution obligations under the Indenture, will result in the
obligations of such Subsidiary Guarantor under the Guarantee not constituting a
fraudulent conveyance or fraudulent transfer under federal or state law.
Each Subsidiary Guarantor that makes a payment or distribution under a
Guarantee shall be entitled to a contribution from each other Subsidiary
Guarantor in an amount pro rata, based on the net assets of each Subsidiary
Guarantor, determined in accordance with GAAP.
Each Subsidiary Guarantor may consolidate with or merge into or sell
its assets to the Company or another Subsidiary Guarantor that is a Wholly Owned
Restricted Subsidiary of the Company without limitation, or with other Persons
upon the terms and conditions set forth in the Indenture. See "--Certain
Covenants--Merger, Consolidation and Sale of Assets." In the event all of the
Capital Stock of a Subsidiary Guarantor is (or all or substantially all of the
assets of a Subsidiary Guarantor are) sold by the Company and the sale complies
with the provisions set forth in "--Certain Covenants--Limitation on Asset
Sales" the Subsidiary Guarantor's Guarantee will be released.
Separate financial statements of the Subsidiary Guarantors are not
included herein because such Subsidiary Guarantors are jointly and severally
liable with respect to the Company's obligations pursuant to the Exchange Notes,
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and the aggregate net assets, earnings and equity of the Subsidiary Guarantors
and the Company are substantially equivalent to the net assets, earnings and
equity of the Company on a consolidated basis.
Change of Control
The Indenture provides that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Company purchase all or a
portion of such Holder's Exchange Notes pursuant to the offer described below
(the "Change of Control Offer"), at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest thereon to the date of
purchase.
Within 30 days following the date upon which the Change of Control
occurred, the Company must send, by first class mail, a notice to each Holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 45 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). Holders electing to have an Exchange Note purchased pursuant to
a Change of Control Offer will be required to surrender the Exchange Note, with
the form entitled "Option of Holder to Elect Purchase" on the reverse of the
Note completed, to the Paying Agent at the address specified in the notice prior
to the close of business on the third business day prior to the Change of
Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that
the Company will have available funds sufficient to pay the Change of Control
purchase price for all the Exchange Notes that might be delivered by Holders
seeking to accept the Change of Control Offer. In the event the Company is
required to purchase outstanding Exchange Notes pursuant to a Change of Control
Offer, the Company expects that it would seek third party financing to the
extent it does not have available funds to meet its purchase obligations.
However, there can be no assurance that the Company would be able to obtain such
financing. Neither the Board of Directors of the Company nor the Trustee may
waive the covenant relating to a Holder's right to redemption upon a Change of
Control.
The Change of Control purchase feature of the Exchange Notes may make
more difficult or discourage a takeover of the Company, and, thus, the removal
of incumbent management. The Change of Control purchase feature is a result of
negotiations between the Company and the Initial Purchasers. Except as described
herein with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Exchange Notes to require the Company
to repurchase or redeem the Exchange Notes in the event of a takeover,
recapitalization or similar restructuring. Restrictions in the Indenture
described herein on the ability of the Company and its Restricted Subsidiaries
to incur additional Indebtedness, to grant liens on its property, to make
Restricted Payments and to make Asset Sales may also make more difficult or
discourage a takeover of the Company, whether favored or opposed by the
management of the Company. Consummation of any such transaction in certain
circumstances may require redemption or repurchase of the Exchange Notes, and
there can be no assurance that the Company or the acquiring party will have
sufficient financial resources to effect such redemption or repurchase. Such
restrictions and the restrictions on transactions with Affiliates may, in
certain circumstances, make more difficult or discourage any leveraged buyout of
the Company or any of its Subsidiaries by the management of the Company. While
such restrictions cover a wide variety of arrangements which have traditionally
been used to effect highly leveraged transactions, the Indenture may not afford
the Holders of Exchange Notes protection in all circumstances from the adverse
aspects of a highly leveraged transaction, reorganization, restructuring, merger
or similar transaction.
The phrases "all or substantially all" of the assets of the Company or
"all or substantially all of the Company's assets whether as an entirety or
substantially as an entirety," as used in the Indenture has no clearly
established meaning under New York law (which governs the Indenture), has been
the subject of limited judicial interpretation in few jurisdictions and will be
interpreted based upon the particular facts and circumstances. As a result,
there may be a degree of uncertainty in ascertaining whether a sale or transfer
of "all or substantially all" of the assets of the Company has occurred and
therefore whether a Change of Control has occurred.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act, if applicable, and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of Notes pursuant to a Change of Control Offer. To the
extent that the provisions of any securities laws or regulations conflict with
the "Change of Control" provisions of the Indenture, the Company shall comply
with the
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applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
Certain Covenants
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. The Company will
not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company or any Subsidiary Guarantor may
incur Indebtedness (including, without limitation, Acquired Indebtedness) if on
the date of the incurrence of such Indebtedness, after giving effect to the
incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company
is greater than (i) 2.25 to 1.0 if the date of such incurrence is on or prior to
December 15, 1998 or (ii) 2.50 to 1.0 if the date of such incurrence is after
December 15, 1998.
The Company will not, and will not permit any Subsidiary Guarantor to,
directly or indirectly, in any event incur any Indebtedness which by its terms
(or by the terms of any agreement governing such Indebtedness) is subordinated
to any other Indebtedness of the Company or of such Subsidiary Guarantor, as the
case may be, unless such Indebtedness is also by its terms (or by the terms of
any agreement governing such Indebtedness) made expressly subordinate to the
Notes or the Guarantees of such Subsidiary Guarantor, as the case may be, to the
same extent and in the same manner as such Indebtedness is subordinated pursuant
to subordination provisions that are most favorable to the holders of any other
Indebtedness of the Company or of such Subsidiary Guarantor, as the case may be.
Limitation on Restricted Payments. The Company will not, and will not
cause or permit any of its Restricted Subsidiaries to, directly or indirectly,
(a) declare or pay any dividend or make any distribution (other than dividends
or distributions payable in Qualified Capital Stock of the Company) on or in
respect of shares of the Company's Capital Stock to holders of such Capital
Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any warrants, rights or options to purchase or acquire
shares of any class of such Capital Stock, (c) make any principal payment on,
purchase, defease, redeem, prepay, decrease or otherwise acquire or retire for
value, prior to any scheduled maturity, scheduled or mandatory repayment or
scheduled sinking fund payment, any Indebtedness of the Company or its
Subsidiaries that is subordinate or junior in right of payment to the Notes, or
(d) make any Investment (other than Permitted Investments) (each of the
foregoing actions set forth in clauses (a), (b), (c) and (d) being referred to
as a "Restricted Payment"), if at the time of such Restricted Payment or
immediately after giving effect thereto, (i) a Default or an Event of Default
shall have occurred and be continuing or (ii) the Company is not able to incur
at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in
compliance with the covenant described under "--Limitation on Incurrence of
Additional Indebtedness" or (iii) the aggregate amount of Restricted Payments
(including such proposed Restricted Payment) made subsequent to the Issue Date
(the amount expended for such purposes, if other than in cash, being the fair
market value of such property as determined reasonably and in good faith by the
Board of Directors of the Company) shall exceed the sum of: (i) $1,000,000 plus
(2) (w) 50% of the cumulative Consolidated Net Income (or if cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss) of the Company
earned commencing on the first day of the fiscal quarter including the Issue
Date, to and including the last day of the latest fiscal quarter ended
immediately prior to the date of each such calculation subsequent to the Issue
Date and on or prior to the date the Restricted Payment occurs (the "Reference
Date") (treating such period as a single accounting period); plus (x) 100% of
the aggregate net cash proceeds received by the Company from any Person (other
than a Subsidiary of the Company) from the issuance and sale subsequent to the
Issue Date and on or prior to the Reference Date of Qualified Capital Stock of
the Company plus (y) without duplication of any amounts included in clause
(iii)(x) above, 100% of the aggregate net cash proceeds of any equity
contribution received by the Company from a holder of the Company's Capital
Stock (excluding, in the case of clauses (iii)(x) and (y), any net cash proceeds
from a Public Equity Offering to the extent used to redeem the Notes); plus (z)
an amount equal to the sum of (1) any net reduction subsequent to the Issue
Date, in Investments in Unrestricted Subsidiaries resulting from dividends,
repayments of loans or advances or other transfers of assets by any Unrestricted
Subsidiary to the Company or any Restricted Subsidiary or the receipt of
proceeds by the Company or any Restricted Subsidiary from the sale or other
disposition of any portion of the Capital Stock of any Unrestricted Subsidiary,
in each case occurring subsequent to the
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Issue Date (but without duplication of any such amount included in Consolidated
Net Income), and (2) the consolidated net Investments on the date of Revocation
made by the Company or any of the Restricted Subsidiaries in any Subsidiary of
the Company that has been designated an Unrestricted Subsidiary after the Issue
Date upon its redesignation as a Restricted Subsidiary in accordance with the
covenant described under "--Limitation on Designations of Unrestricted
Subsidiaries."
Notwithstanding the foregoing, the provisions set forth in the
immediately preceding paragraph do not prohibit: (1) the payment of any dividend
or consummation of any irrevocable redemption within 60 days after the date of
declaration of such dividend or giving of such irrevocable redemption notice if
the dividend or redemption payment, as the case may be, would have been
permitted on the date of declaration or the giving of the irrevocable redemption
notice; (2) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any shares of Capital Stock of the Company,
either (i) solely in exchange for shares of Qualified Capital Stock of the
Company or (ii) through the application of net proceeds of a substantially
concurrent sale for cash (other than to a Restricted Subsidiary of the Company)
of shares of Qualified Capital Stock of the Company; (3) if no Default or Event
of Default shall have occurred and be continuing, the acquisition of any
Indebtedness of the Company or a Subsidiary of the Company that is subordinate
or junior in right of payment to the Notes either (i) solely in exchange for
shares of Qualified Capital Stock of the Company, or (ii) through the
application of net proceeds of a substantially concurrent sale for cash (other
than to a Restricted Subsidiary of the Company) of (A) shares of Qualified
Capital Stock of the Company or (B) Refinancing Indebtedness; (4) so long as no
Default or Event of Default shall have occurred and be continuing, repurchases
by the Company of Common Stock of the Company or options or warrants to purchase
Common Stock of the Company, stock appreciation rights or any similar equity
interest in the Company from directors and employees of the Company or any of
its Subsidiaries (or their authorized representatives upon the death, disability
or termination of employment of such employees) in an aggregate amount not to
exceed $500,000 in any calendar year; and (5) an investment in PNGI Charlestown
Gaming LLC in an amount not to exceed $5.0 million to be funded with the
proceeds of the offering of the Notes, provided, however, that $4.0 million of
such investment will be funded within 60 days of the Issue Date and the
remaining $1.0 million within 180 days of the Issue Date or as soon as
practicable thereafter or as is permitted by any applicable regulatory
organization. In determining the aggregate amount of Restricted Payments made
subsequent to the Issue Date in accordance with clause (iii) of the immediately
preceding paragraph, amounts expended pursuant to clauses (1), (2)(ii),
(3)(ii)(A), (4) and (5) of this paragraph shall be included in such calculation.
Not later than the date of making any Restricted Payment, the Company
shall deliver to the Trustee an officers' certificate stating that such
Restricted Payment complies with the Indenture and setting forth in reasonable
detail the basis upon which the required calculations were computed, which
calculations may be based upon the Company's latest available internal quarterly
financial statements.
Limitation on Asset Sales. The Company will not, and will not permit
any of the Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 80% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents and is received
at the time of such disposition; provided, however, that the amount of (A) any
liabilities (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet or the notes thereto), of the Company or any Restricted
Subsidiary (other than liabilities that are by their terms subordinated to the
Notes) that are assumed by the transferee in such Asset Sale and from which the
Company or such Restricted Subsidiary is released and (B) any notes or other
obligations received by the Company or any such Restricted Subsidiary from such
transferee that are converted within 10 business days by the Company or such
Restricted Subsidiary into cash or Cash Equivalents (to the extent of the cash
or Cash Equivalents received), shall be deemed to be cash for the purposes of
this provision; and (iii) upon the consummation of an Asset Sale, the Company
shall apply, or cause such Restricted Subsidiary to apply, the Net Cash Proceeds
relating to such Asset Sale within 270 days of receipt thereof either (A) to
prepay any Indebtedness ranking at least pari passu with the Notes and, in the
case of any such Indebtedness under any revolving credit facility, effect a
permanent reduction in the availability under such revolving credit facility,
(B) to make an investment in properties and assets that replace the properties
and assets that were the subject of such Asset Sale or in properties and assets
that will be used in the business of the Company and the Restricted Subsidiaries
as existing on the Issue Date or in businesses reasonably related thereto
("Replacement Assets"), or (C) a combination of prepayment
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and investment permitted by the foregoing clauses (iii)(A) and (iii)(B). On the
271st day after an Asset Sale or such earlier date, if any, as the Board of
Directors of the Company or of such Restricted Subsidiary determines not to
apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses
(iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each, a "Net
Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds which
have not been applied on or before such Net Proceeds Offer Trigger Date as
permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding
sentence (each a "Net Proceeds Offer Amount") shall be applied by the Company or
such Restricted Subsidiary to make an offer to purchase (the "Net Proceeds
Offer") on a date (the "Net Proceeds Offer Payment Date") not less than 30 nor
more than 45 days following the applicable Net Proceeds Offer Trigger Date, from
all Holders on a pro rata basis, that amount of Notes equal to the Net Proceeds
Offer Amount at a price equal to 100% of the principal amount of the Notes to be
purchased, plus accrued and unpaid interest thereon, if any, to the date of
purchase; provided, however, that if at any time any non-cash consideration
received by the Company or any Restricted Subsidiary, as the case may be, in
connection with any Asset Sale is converted into or sold or otherwise disposed
of for cash (other than interest received with respect to any such non-cash
consideration), then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with this covenant. The Company may defer the Net Proceeds
Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to
or in excess of $5.0 million resulting from one or more Asset Sales (at which
time, the entire unutilized Net Proceeds Offer Amount, not just the amount in
excess of $5.0 million, shall be applied as required pursuant to this
paragraph). To the extent the aggregate amount of the Notes tendered pursuant to
the Net Proceeds Offer is less than the Net Proceeds Offer Amount, the Company
may use such deficiency for general corporate purposes. Upon completion of such
offer to purchase, the Net Proceeds Offer Amount shall be reset at zero.
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and the Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "--Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
properties and assets of the Company and the Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of the Company
or the Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Notwithstanding the two immediately preceding paragraphs, the Company
and its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (i) at least 80% of the
consideration for such Asset Sale constitutes Replacement Assets and (ii) such
Asset Sale is for fair market value; provided that any consideration not
constituting Replacement Assets received by the Company or any of the Restricted
Subsidiaries in connection with any Asset Sale permitted to be consummated under
this paragraph shall constitute Net Cash Proceeds subject to the provisions of
the two preceding paragraphs.
Each Net Proceeds Offer will be mailed to the record Holders as shown
on the register of Holders within 25 days following the Net Proceeds Offer
Trigger Date, with a copy to the Trustee, and shall comply with the procedures
set forth in the Indenture. Upon receiving notice of the Net Proceeds Offer,
Holders may elect to tender their Notes in whole or in part in integral
multiples of $1,000 in exchange for cash. To the extent Holders properly tender
Notes in an amount exceeding the Net Proceeds Offer Amount, Notes of tendering
Holders will be purchased on a pro rata basis (based on amounts tendered). A Net
Proceeds Offer shall remain open for a period of 20 business days or such longer
period as may be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act, if applicable, and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of Notes pursuant to a Net Proceeds Offer. To the extent
that the provisions of any securities laws or regulations conflict with the
"Asset Sale" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Asset Sale" provisions of the Indenture by
virtue thereof.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not cause or permit any of the
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions on or in respect of its Capital Stock; (b) make loans or advances
or to pay any
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Indebtedness or other obligation owed to the Company or any other Restricted
Subsidiary; or (c) transfer any of its property or assets to the Company or any
other Restricted Subsidiary, except for such encumbrances or restrictions
existing under or by reason of: (1) applicable law; (2) the Indenture and the
Notes; (3) customary non-assignment provisions of (y) any contract concerning a
Restricted Subsidiary or (z) any lease governing a leasehold interest of any
Restricted Subsidiary; (4) any instrument governing Acquired Indebtedness, which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person or the properties or assets of the
Person so acquired (including, but not limited to, such Person's direct and
indirect Subsidiaries); (5) agreements existing on the Issue Date to the extent
and in the manner such agreements are in effect on the Issue Date (including the
Credit Facility); (6) restrictions on the transfer of assets subject to any Lien
permitted under the Indenture imposed by the holder of such Lien; (7) any
agreement or instrument governing the payment of dividends or other
distributions on or in respect of Capital Stock of any Person that is acquired;
or (8) an agreement governing Indebtedness incurred to Refinance the
Indebtedness issued, assumed or incurred pursuant to an agreement referred to in
clause (2), (4) or (5) above; provided, however, that the provisions relating to
such encumbrance or restriction contained in any such Indebtedness are no less
favorable to the Company in any material respect as determined by the Board of
Directors of the Company in its reasonable and good faith judgment than the
provisions relating to such encumbrance or restriction contained in agreements
referred to in such clause (2), (4) or (5).
Limitation on Preferred Stock of Restricted Subsidiaries. The Company
will not permit any of its Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Wholly Owned Restricted Subsidiary) or permit
any Person (other than the Company or a Wholly Owned Restricted Subsidiary) to
own any Preferred Stock of any Restricted Subsidiary.
Limitation on Liens. The Company will not, and will not cause or permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or permit or suffer to exist any Liens upon any property or assets of the
Company or any of the Restricted Subsidiaries whether owned on the Issue Date or
acquired after the Issue Date, or any proceeds therefrom, or assign or otherwise
convey any right to receive income or profits therefrom unless (i) in the case
of Liens securing Indebtedness that is expressly subordinate or junior in right
of payment to the Exchange Notes or any Guarantee, the Exchange Notes and the
Guarantees are secured by a Lien on such property, assets or proceeds that is
senior in priority to such Liens and (ii) in all other cases, the Notes and the
Guarantees are secured on an equal and ratable basis, except for (a) Liens
existing as of the Issue Date to the extent and in the manner such Liens are in
effect on the Issue Date; (b) Liens securing Indebtedness under the Credit
Facility; (c) Liens securing the Exchange Notes; (d) Liens of the Company or a
Restricted Subsidiary on assets of any Restricted Subsidiary of the Company; (e)
Liens securing Refinancing Indebtedness which is incurred to Refinance any
Indebtedness which has been secured by a Lien permitted under the Indenture and
which has been incurred in accordance with the provisions of the Indenture;
provided, however, that such Liens (A) are no less favorable to the Holders and
are not more favorable to the lienholders with respect to such Liens than the
Liens in respect of the Indebtedness being Refinanced and (B) do not extend to
or cover any property or assets of the Company or any of the Restricted
Subsidiaries not securing the Indebtedness so Refinanced; (f) Liens in favor of
the Company; and (g) Permitted Liens.
Merger, Consolidation and Sale of Assets. The Company will not, in a
single transaction or series of related transactions, consolidate or merge with
or into any Person, or sell, assign, transfer, lease, convey or otherwise
dispose of (or cause or permit any Restricted Subsidiary to sell, assign,
transfer, lease, convey or otherwise dispose of) all or substantially all of the
Company's assets (determined on a consolidated basis for the Company and the
Restricted Subsidiaries) whether as an entirety or substantially as an entirety
to any Person unless: (i) either (1) the Company shall be the surviving or
continuing corporation or (2) the Person (if other than the Company) formed by
such consolidation or into which the Company is merged or the Person which
acquires by sale, assignment, transfer, lease, conveyance or other disposition
the properties and assets of the Company and of the Restricted Subsidiaries
substantially as an entirety (the "Surviving Entity") (x) shall be a corporation
organized and validly existing under the laws of the United States or any State
thereof or the District of Columbia and (y) shall expressly assume, by
supplemental indenture (in form and substance satisfactory to the Trustee),
executed and delivered to the Trustee, the due and punctual payment of the
principal of, and premium, if any, and interest on all of the Exchange Notes and
the performance of every covenant of the Exchange Notes, the Indenture and the
Registration Rights Agreement on the part of the Company to be performed or
observed; (ii) immediately after giving effect to such transaction and the
assumption contemplated by clause (i)(2)(y) above (including giving effect to
any Indebtedness and Acquired Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction), the Company or
such Surviving Entity, as the case may be, (1) shall
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have a Consolidated Net Worth equal to or greater than the Consolidated Net
Worth of the Company immediately prior to such transaction and (2) shall be able
to incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to the covenant described under "--Limitation on
Incurrence of Additional Indebtedness"; (iii) immediately before and immediately
after giving effect to such transaction and the assumption contemplated by
clause (i)(2)(y) above (including, without limitation, giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred
and any Lien granted in connection with or in respect of the transaction), no
Default or Event of Default shall have occurred or be continuing; and (iv) the
Company or the Surviving Entity shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that such consolidation,
merger, sale, assignment, transfer, lease, conveyance or other disposition and,
if a supplemental indenture is required in connection with such transaction,
such supplemental indenture comply with the applicable provisions of the
Indenture and that all conditions precedent in the Indenture relating to such
transaction have been satisfied. For purposes of the foregoing, the transfer (by
lease, assignment, sale or otherwise, in a single transaction or series of
transactions) of all or substantially all of the properties or assets of one or
more Restricted Subsidiaries the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
The Indenture provides that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the Company
in accordance with the foregoing, in which the Company is not the continuing
corporation, the Surviving Entity shall succeed to, and be substituted for, and
may exercise every right and power of, the Company under the Indenture and the
Exchange Notes with the same effect as if such Surviving Entity had been named
as such.
Each Subsidiary Guarantor (other than any Subsidiary Guarantor whose
Guarantee is to be released in accordance with the terms of the Guarantee and
the Indenture in connection with any transaction complying with the provisions
of "--Limitation on Asset Sales") will not, and the Company will not cause or
permit any Subsidiary Guarantor to, consolidate with or merge with or into any
Person other than the Company or any other Subsidiary Guarantor unless: (i) the
entity formed by or surviving any such consolidation or merger is a corporation
organized and existing under the laws of the United States or any State thereof
or the District of Columbia; (ii) such entity assumes by supplemental indenture
all of the obligations of the Subsidiary Guarantor on the Guarantee; (iii)
immediately after giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing; and (iv) immediately after giving
effect to such transaction and the use of any proceeds therefrom on a pro forma
basis, the Company could satisfy the provisions of clause (ii) of the first
paragraph of this covenant. Any merger or consolidation of a Subsidiary
Guarantor with and into the Company (with the Company being the surviving
entity) or another Subsidiary Guarantor that is a Wholly Owned Restricted
Subsidiary of the Company need only comply with clause (iv) of the first
paragraph of this covenant.
Limitations on Transactions with Affiliates. The Company will not, and
will not permit any of the Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate
Transactions permitted under paragraph (b) below and (y) Affiliate Transactions
on terms that are no less favorable than those that might reasonably have been
obtained in a comparable transaction at such time on an arm's-length basis from
a Person that is not an Affiliate of the Company or such Restricted Subsidiary.
All Affiliate Transactions (and each series of related Affiliate Transactions
which are similar or part of a common plan) involving aggregate payments or
other property with a fair market value in excess of $1,000,000 shall be
approved by the Board of Directors of the Company or such Restricted Subsidiary,
as the case may be, such approval to be evidenced by a Board Resolution stating
that such Board of Directors has determined that such transaction complies with
the foregoing provisions. If the Company or any Restricted Subsidiary enters
into an Affiliate Transaction (or a series of related Affiliate Transactions
related to a common plan) that involves an aggregate fair market value of more
than $5,000,000, the Company or such Restricted Subsidiary, as the case may be,
shall, prior to the consummation thereof, obtain an opinion stating that such
transaction or series of related transactions are fair to the Company or the
relevant Restricted Subsidiary, as the case may be, from a financial point of
view, from an Independent Financial Advisor.
The restrictions set forth in the preceding paragraph shall not apply
to (i) reasonable fees and compensation paid to and indemnity provided on behalf
of, officers, directors, employees or consultants of the Company or any
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Restricted Subsidiary as determined in good faith by the Company's Board of
Directors; (ii) transactions exclusively between or among the Company and any of
its Restricted Subsidiaries or exclusively between or among such Restricted
Subsidiaries, provided such transactions are not otherwise prohibited by the
Indenture; (iii) any agreement as in effect as of the Issue Date or any
amendment thereto or any transaction contemplated thereby (including pursuant to
any amendment thereto) in any replacement agreement thereto so long as any such
amendment or replacements agreement is not more disadvantageous to the Holders
in any material respect than the original agreement as in effect on the Issue
Date; and (iv) Restricted Payments permitted by the Indenture.
Additional Subsidiary Guarantees. If the Company or any of its
Restricted Subsidiaries transfers or causes to be transferred, in one
transaction or a series of related transactions, any property to any Restricted
Subsidiary that is not a Subsidiary Guarantor, or if the Company or any of the
Restricted Subsidiaries shall organize, acquire or otherwise invest in or hold
an Investment in another Restricted Subsidiary having total consolidated assets
with a book value in excess of $500,000, then such transferee or acquired or
other Restricted Subsidiary shall (a) execute and deliver to the Trustee a
supplemental indenture in form reasonably satisfactory to the Trustee pursuant
to which such Restricted Subsidiary shall unconditionally guarantee all of the
Company's obligations under the Notes and the Indenture on the terms set forth
in the Indenture and (b) deliver to the Trustee an opinion of counsel that such
supplemental indenture has been duly authorized, executed and delivered by such
Restricted Subsidiary and constitutes a legal, valid, binding and enforceable
obligation of such Restricted Subsidiary. Thereafter, such Restricted Subsidiary
shall be a Subsidiary Guarantor for all purposes of the Indenture. In the event
PNGI Charlestown Gaming LLC is not prohibited from entering into a Guarantee
pursuant to restrictions contained in its operating or other similar agreement
in existence on the Issue Date it shall become a Subsidiary Guarantor as
provided in this paragraph at the time such restriction is no longer applicable.
Conduct of Business. The Company and its Restricted Subsidiaries will
not engage in any businesses which are not the same, similar or related to the
businesses in which the Company and its Restricted Subsidiaries are engaged on
the Issue Date.
Limitation on Designations of Unrestricted Subsidiaries. The Company
may designate any Subsidiary of the Company (other than a Subsidiary of the
Company which owns Capital Stock of a Restricted Subsidiary) as an "Unrestricted
Subsidiary" under the Indenture (a "Designation") only if:
(a) no Default shall have occurred and be continuing at the time
of or after giving effect to such Designation; and
(b) the Company would be permitted under the Indenture to make an
Investment at the time of Designation (assuming the
effectiveness of such Designation) in an amount (the
"Designation Amount") equal to the sum of (i) fair market
value of the Capital Stock of such Subsidiary owned by the
Company and the Restricted Subsidiaries on such date and (ii)
the aggregate amount of other Investments of the Company and
the Restricted Subsidiaries in such Subsidiary on such date;
and
(c) the Company would be permitted to incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to
the covenant described under "--Limitation on Incurrence of
Additional Indebtedness" at the time of Designation (assuming
the effectiveness of such Designation).
In the event of any such Designation, the Company shall be deemed to
have made an Investment constituting a Restricted Payment pursuant to the
covenant described under "--Limitation on Restricted Payments" for all purposes
of the Indenture in the Designation Amount. The Indenture provides that the
Company shall not, and shall not permit any Restricted Subsidiary to, at any
time (x) provide direct or indirect credit support for or a guarantee of any
Indebtedness of any Unrestricted Subsidiary (including of any undertaking,
agreement or instrument evidencing such Indebtedness), (y) be directly or
indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be
directly or indirectly liable for any Indebtedness which provides that the
holder thereof may (upon notice, lapse of time or both) declare a default
thereon or cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity upon the occurrence of a default with respect to any
Indebtedness of any Unrestricted Subsidiary (including any right to take
enforcement action against such Unrestricted Subsidiary), except, in the case of
clause (x) or (y), to the extent permitted under the covenant described under
"--Limitation on Restricted Payments."
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The Indenture provides that the Company may revoke any Designation of a
Subsidiary as an Unrestricted Subsidiary (a "Revocation"), whereupon such
Subsidiary shall then constitute a Restricted Subsidiary, if:
(a) no Default shall have occurred and be continuing at the time
of and after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if
incurred at such time, have been permitted to be incurred for
all purposes of the Indenture.
All Designations and Revocations must be evidenced by Board Resolutions
of the Company certifying compliance with the foregoing provisions.
Reports to Holders. The Company will deliver to the Trustee within 15
days after the filing of the same with the Commission, copies of the quarterly
and annual reports and of the information, documents and other reports, if any,
which the Company is required to file with the Commission pursuant to Section 13
or 15(d) of the Exchange Act. The Indenture further provides that,
notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company will file
with the Commission, to the extent permitted, and provide the Trustee and
Holders with such annual reports and such information, documents and other
reports specified in Sections 13 and 15(d) of the Exchange Act. The Company will
also comply with the other provisions of TIA Section 314(a).
Events of Default
The following events are defined in the Indenture as "Events of
Default":
(i) the failure to pay interest on any Exchange Notes when the
same becomes due and payable and the default continues for a
period of 30 days;
(ii) the failure to pay the principal on any Exchange Notes, when
such principal becomes due and payable, at maturity, upon
redemption or otherwise (including the failure to make a
payment to purchase Exchange Notes tendered pursuant to a
Change of Control Offer or a Net Proceeds Offer);
(iii) a default in the observance or performance of any other
covenant or agreement contained in the Indenture which default
continues for a period of 30 days after the Company receives
written notice specifying the default (and demanding that such
default be remedied) from the Trustee or the Holders of at
least 25% of the outstanding principal amount of the Exchange
Notes (except in the case of a default with respect to the
covenant described under "-- Certain Covenants--Merger,
Consolidation and Sale of Assets," which will constitute an
Event of Default with such notice requirement but without such
passage of time requirement);
(iv) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the
principal amount of any Indebtedness of the Company or any
Restricted Subsidiary, or the acceleration of the final stated
maturity of any such Indebtedness if the aggregate principal
amount of such Indebtedness, together with the principal
amount of any other such Indebtedness in default for failure
to pay principal at final maturity or which has been
accelerated, aggregates $5,000,000 or more at any time;
(v) one or more judgments in an aggregate amount in excess of
$5,000,000 (to the extent not covered by third-party insurance
as to which the insurance company has acknowledged coverage)
shall have been rendered against the Company or any of the
Significant Subsidiaries and such judgments remain
undischarged, unpaid or unstayed for a period of 60 days after
such judgment or judgments become final and non-appealable;
(vi) certain events of bankruptcy affecting the Company or any of
its Significant Subsidiaries; or
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(vii) any of the Guarantees of a Subsidiary Guarantor that is a
Significant Subsidiary ceases to be in full force and effect
or any of such Guarantees is declared to be null and void and
unenforceable or any of such Guarantees is found to be
invalid, in each case by a court of competent jurisdiction in
a final non-appealable judgment, or any of such Subsidiary
Guarantors denies its liability under its Guarantee (other
than by reason of release of any such Subsidiary Guarantor in
accordance with the terms of the Indenture).
If an Event of Default (other than an Event of Default specified in
clause (vi) above with respect to the Company) shall occur and be continuing,
the Trustee or the Holders of at least 25% in principal amount of outstanding
Exchange Notes may declare the principal of and accrued interest on all the
Exchange Notes to be due and payable by notice in writing to the Company and the
Trustee specifying the respective Event of Default, and the same shall become
immediately due and payable. If an Event of Default specified in clause (vi)
above relating to the Company occurs and is continuing, then all unpaid
principal of, and premium, if any, and accrued and unpaid interest on all of the
outstanding Exchange Notes shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the Exchange Notes as described in the preceding
paragraph, the Holders of a majority in principal amount of the Exchange Notes
may rescind and cancel such declaration and its consequences (i) if the
rescission would not conflict with any judgment or decree, (ii) if all existing
Events of Default have been cured or waived except nonpayment of principal or
interest that has become due solely because of the acceleration, (iii) to the
extent the payment of such interest is lawful, interest on overdue installments
of interest and overdue principal, which has become due otherwise than by such
declaration of acceleration, has been paid, (iv) if the Company has paid the
Trustee its reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of an
Event of Default of the type described in clause (vi) of the description above
of Events of Default, the Trustee shall have received an officers' certificate
and an opinion of counsel that such Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
The Holders of a majority in principal amount of the Exchange Notes may
waive any existing Default or Event of Default under the Indenture, and its
consequences, except a default in the payment of the principal of or interest on
any Exchange Notes.
Holders of the Exchange Notes may not enforce the Indenture or the
Exchange Notes except as provided in the Indenture and under the TIA. Subject to
the provisions of the Indenture relating to the duties of the Trustee, the
Trustee is under no obligation to exercise any of its rights or powers under the
Indenture at the request, order or direction of any of the Holders, unless such
Holders have offered to the Trustee reasonable indemnity. Subject to all
provisions of the Indenture and applicable law, the Holders of a majority in
aggregate principal amount of the then outstanding Exchange Notes have the right
to direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have its
obligations and the obligations of the Subsidiary Guarantors discharged with
respect to the outstanding Exchange Notes ("Legal Defeasance"). Such Legal
Defeasance means that the Company shall be deemed to have paid and discharged
the entire indebtedness represented by the outstanding Exchange Notes, except
for (i) the rights of Holders to receive payments in respect of the principal
of, premium, if any, and interest on the Exchange Notes when such payments are
due, (ii) the Company's obligations with respect to the Exchange Notes
concerning issuing temporary Exchange Notes, registration of Exchange Notes,
mutilated, destroyed, lost or stolen Exchange Notes and the maintenance of an
office or agency for payments, (iii) the
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rights, powers, trust, duties and immunities of the Trustee and the Company's
obligations in connection therewith and (iv) the Legal Defeasance provisions of
the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Exchange Notes. In the event
Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, reorganization and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the Exchange Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance,
(i) the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders cash in U.S. dollars, non-callable U.S. government
obligations, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on the Exchange Notes on
the stated date for payment thereof or on the applicable redemption date, as the
case may be; (ii) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (B) since
the date of the Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that the Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit (other than a
Default or Event of Default with respect to the Indenture resulting from the
incurrence of Indebtedness, all or a portion of which will be used to defease
the Exchange Notes concurrently with such incurrence), or insofar as Events of
Default from bankruptcy or insolvency events are concerned at any time in the
period ending on the 91st day after the date of deposit; (v) such Legal
Defeasance or Covenant Defeasance shall not result in a breach or violation of,
or constitute a default under the Indenture or any other material agreement or
instrument to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company shall
have delivered to the Trustee an officers' certificate stating that the deposit
was not made by the Company with the intent of preferring the Holders over any
other creditors of the Company or with the intent of defeating, hindering,
delaying or defrauding any other creditors of the Company or others; (vii) the
Company shall have delivered to the Trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent provided for or
relating to the Legal Defeasance or the Covenant Defeasance have been complied
with; (viii) the Company shall have delivered to the Trustee an opinion of
counsel to the effect that, after the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable federal, New York or
Pennsylvania bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; and (ix) certain other customary conditions
precedent are satisfied. Notwithstanding the foregoing, the opinion of counsel
required by clauses (ii)(A) and (iii) above need not be delivered if all the
Exchange Notes not theretofore delivered to the Trustee for cancellation (i)
have become due and payable, (ii) will become due and payable on the maturity
date within one year, or (iii) are to be called for redemption within one year
under arrangements satisfactory to the Trustee for the giving of notice of
redemption by such Trustee in the name, and at the expense, of the Company.
Satisfaction and Discharge
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Exchange Notes, as expressly provided for in the Indenture) as to all
outstanding Exchange Notes when (i) either (a) all the Exchange Notes
theretofore authenticated and delivered (except lost, stolen or destroyed
Exchange Notes which have been replaced or paid and Exchange Notes for whose
payment money has theretofore been deposited in trust or segregated and held in
trust by the Company and thereafter repaid to the Company or discharged from
such trust) have been delivered to the Trustee for cancellation or (b) all
Exchange Notes not theretofore delivered to the Trustee for cancellation have
become due and payable and the Company has irrevocably deposited or caused to be
deposited with the Trustee funds in an amount sufficient to pay and discharge
the
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entire Indebtedness on the Exchange Notes not theretofore delivered to the
Trustee for cancellation, for principal of, premium, if any, and interest on the
Exchange Notes to the date of deposit together with irrevocable instructions
from the Company directing the Trustee to apply such funds to the payment
thereof at maturity or redemption, as the case may be; (ii) the Company has paid
all other sums payable under the Indenture by the Company; and (iii) the Company
has delivered to the Trustee an officers' certificate and an opinion of counsel
stating that all conditions precedent under the Indenture relating to the
satisfaction and discharge of the Indenture have been complied with.
Modification of the Indenture
From time to time, the Company, the Subsidiary Guarantors and the
Trustee, without the consent of the Holders, may amend the Indenture for certain
specified purposes, including curing ambiguities, defects or inconsistencies, so
long as such change does not, in the opinion of the Trustee, adversely affect
the rights of any of the Holders in any material respect. In formulating its
opinion on such matters, the Trustee will be entitled to rely on such evidence
as it deems appropriate, including, without limitation, solely on an opinion of
counsel. Other modifications and amendments of the Indenture may be made with
the consent of the Holders of a majority in principal amount of the then
outstanding Exchange Notes issued under the Indenture, except that, without the
consent of each Holder affected thereby, no amendment may: (i) reduce the amount
of Exchange Notes whose Holders must consent to an amendment; (ii) reduce the
rate of or change or have the effect of changing the time for payment of
interest, including defaulted interest, on any Exchange Notes; (iii) reduce the
principal of or change or have the effect of changing the fixed maturity of any
Exchange Notes, or change the date on which any Exchange Notes may be subject to
redemption or repurchase, or reduce the redemption or repurchase price therefor;
(iv) make any Exchange Notes payable in money other than that stated in the
Exchange Notes; (v) make any change in provisions of the Indenture protecting
the right of each Holder to receive payment of principal of and interest on such
Note on or after the due date thereof or to bring suit to enforce such payment,
or permitting Holders of a majority in principal amount of Exchange Notes to
waive Defaults or Events of Default; (vi) amend, change or modify in any
material respect the obligation of the Company to make and consummate a Change
of Control Offer in the event of a Change of Control or make and consummate a
Net Proceeds Offer with respect to any Asset Sale that has been consummated or
modify any of the provisions or definitions with respect thereto; (vii) modify
or change any provision of the Indenture or the related definitions affecting
the ranking of the Exchange Notes or any Guarantee in a manner which adversely
affects the Holders or (viii) release any Subsidiary Guarantor from any of its
obligations under its Guarantee of the Indenture otherwise than in accordance
with the terms of the Indenture.
Governing Law
The Indenture provides that it, the Exchange Notes and the Guarantees
will be governed by, and construed in accordance with, the laws of the State of
New York but without giving effect to applicable principles of conflicts of law
to the extent that the application of the law of another jurisdiction would be
required thereby.
The Trustee
The Indenture provides that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it by the Indenture, and use the
same degree of care and skill in its exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations
on the rights of the Trustee, should it become a creditor of the Company or of a
Subsidiary of the Company, to obtain payments of claims in certain cases or to
realize on certain property received in respect of any such claim as security or
otherwise. Subject to the TIA, the Trustee will be permitted to engage in other
transactions; provided that if the Trustee acquires any conflicting interest as
described in the TIA, it must eliminate such conflict or resign.
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Certain Definitions
Set forth below is a summary of certain of the defined terms used in
the Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary or
at the time it merges or consolidates with the Company or any of the Restricted
Subsidiaries or is assumed in connection with the acquisition of assets from
such Person and in each case not incurred by such Person in connection with, or
in anticipation or contemplation of, such Person becoming a Restricted
Subsidiary or such acquisition, merger or consolidation.
"Affiliate" means, with respect to any specified Person, any other
Person who directly or indirectly through one or more intermediaries controls,
or is controlled by, or is under common control with, such specified Person. The
term "control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative of the
foregoing.
"Asset Acquisition" means (a) an Investment by the Company or any
Restricted Subsidiary in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged with or into the Company or
any Restricted Subsidiary, or (b) the acquisition by the Company or any
Restricted Subsidiary of the assets of any Person (other than a Restricted
Subsidiary) which constitute all or substantially all of the assets of such
Person or comprises any division or line of business of such Person or any other
properties or assets of such Person other than in the ordinary course of
business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
the Restricted Subsidiaries (including any Sale and Leaseback Transaction) to
any Person other than the Company or a Restricted Subsidiary of (a) any Capital
Stock of any Restricted Subsidiary; or (b) any other property or assets of the
Company or any Restricted Subsidiary other than in the ordinary course of
business; provided, however, that Asset Sales shall not include (i) a
transaction or series of related transactions for which the Company or the
Restricted Subsidiaries receive aggregate consideration of less than $500,000,
(ii) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Company as permitted under "--Certain
Covenants--Merger, Consolidation and Sale of Assets," (iii) disposals or
replacements of obsolete equipment in the ordinary course of business, (iv) the
sale, lease, conveyance, disposition or other transfer by the Company or any
Restricted Subsidiary of assets or property to the Company or one or more
Restricted Subsidiaries, (v) sale or discount, in each case without recourse, of
accounts receivable in the ordinary course of business, but only in connection
with the compromise or collection thereof and (vi) sales, transfers or other
dispositions of assets which are Restricted Payments permitted by the provisions
described under "--Limitations on Restricted Payments."
"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Capitalized Lease Obligation" means, as to any Person, the obligations
of such Person under a lease that are required to be classified and accounted
for as capital lease obligations under GAAP and, for purposes of this
definition, the amount of such obligations at any date shall be the capitalized
amount of such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means (i) with respect to any Person that is a
corporation, any and all shares, interests, participations or other equivalents
(however designated and whether or not voting) of corporate stock, including
each
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class of Common Stock and Preferred Stock of such Person and (ii) with respect
to any Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"Cash Equivalents" means (i) marketable direct obligations issued by,
or unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state thereof or the District of Columbia or
any U.S. branch of a foreign bank having at the date of acquisition thereof
combined capital and surplus of not less than $250,000,000; (v) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (iv) above; and (vi) investments in money
market funds which invest substantially all their assets in securities of the
types described in clauses (i) through (v) above.
"Change of Control" means the occurrence of one or more of the
following events: (i) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or substantially all of
the assets of the Company to any Person or group of related Persons (other than
to a Permitted Holder) for purposes of Section 13(d) of the Exchange Act (a
"Group"), together with any Affiliates thereof (whether or not otherwise in
compliance with the provisions of the Indenture); (ii) the approval by the
holders of Capital Stock of the Company of any plan or proposal for the
liquidation or dissolution of the Company (whether or not otherwise in
compliance with the provisions of the Indenture); (iii) any Person or Group,
other than a Permitted Holder, shall become the owner, directly or indirectly,
beneficially or of record, of shares representing more than 50% of the aggregate
ordinary voting power represented by the issued and outstanding Capital Stock of
the Company; or (iv) the replacement of a majority of the Board of Directors of
the Company over a two-year period from the directors who constituted the Board
of Directors of the Company at the beginning of such period, and such
replacement shall not have been approved by a vote of at least a majority of the
Board of Directors of the Company then still in office who either were members
of any such Board of Directors at the beginning of such period or whose election
as a member of any such Board of Directors was previously so approved.
"Common Stock" of any Person means any and all shares, interests or
other participations in, and other equivalents (however designated and whether
voting or non-voting) of such Person's common stock, whether outstanding on the
Issue Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Consolidated EBITDA" means, for any period, the sum (without
duplication) of (i) Consolidated Net Income and (ii) to the extent Consolidated
Net Income has been reduced thereby, (A) all income taxes of the Company and the
Restricted Subsidiaries paid or accrued in accordance with GAAP for such period
(other than income taxes attributable to extraordinary, unusual or nonrecurring
gains or losses or taxes attributable to sales or dispositions outside the
ordinary course of business), (B) Consolidated Interest Expense and (C)
Consolidated Non-cash Charges less any non-cash items increasing Consolidated
Net Income for such period, all as determined on a consolidated basis for the
Company and the Restricted Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means the ratio of
Consolidated EBITDA during the four full fiscal quarters (the "Four Quarter
Period") ending on or prior to the date of the transaction giving rise to the
need to calculate the Consolidated Fixed Charge Coverage Ratio (the "Transaction
Date") to Consolidated Fixed Charges for the Four Quarter Period. In addition to
and without limitation of the foregoing, for purposes of this definition,
"Consolidated EBITDA" and "Consolidated Fixed Charges" shall be calculated after
giving effect on a pro forma basis (including any non-recurring expenses
associated with the transactions described in clause (i) and (ii) below and pro
forma expense and cost reductions, in each case, calculated on a basis
consistent with Regulation S-X under the Securities Act in effect on the Issue
Date) basis for the period of such calculation to (i) the incurrence or
repayment of any Indebtedness of the Company or any of the Restricted
Subsidiaries (and the application of the proceeds thereof)
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giving rise to the need to make such calculation and any incurrence or repayment
of other Indebtedness (and the application of the proceeds thereof), other than
the incurrence or repayment of Indebtedness in the ordinary course of business
for working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period and (ii) any
Asset Sales or Asset Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of the
Company or one of the Restricted Subsidiaries (including any Person who becomes
a Restricted Subsidiary as a result of the Asset Acquisition) incurring,
assuming or otherwise being liable for Acquired Indebtedness and also including
any Consolidated EBITDA (provided that such Consolidated EBITDA shall be
included only to the extent includable pursuant to the definition of
"Consolidated Net Income") attributable to the assets which are the subject of
the Asset Acquisition or Asset Sale during the Four Quarter Period) occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such Asset
Sale or Asset Acquisition (including the incurrence, assumption or liability for
any such Acquired Indebtedness) occurred on the first day of the Four Quarter
Period. If the Company or any of the Restricted Subsidiaries directly or
indirectly guarantees Indebtedness of a third Person, the preceding sentence
shall give effect to the incurrence of such guaranteed Indebtedness as if the
Company or any such Restricted Subsidiary had directly incurred or otherwise
assumed such guaranteed Indebtedness. Furthermore, in calculating "Consolidated
Fixed Charges" for purposes of determining the denominator (but not the
numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1) interest on
outstanding Indebtedness determined on a fluctuating basis as of the Transaction
Date and which will continue to be so determined thereafter shall be deemed to
have accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date; (2) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in effect during the
Four Quarter Period; and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements. For the purpose of this definition, "Asset Sale" shall include
clause (v) under the definition "Asset Sale".
"Consolidated Fixed Charges" means, with respect to the Company for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) the product of (x) the amount of all dividend payments on any series of
Preferred Stock of the Company (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(y) a fraction, the numerator of which is one and the denominator of which is
one minus the then current effective consolidated federal, state and local tax
rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to the Company for
any period, the sum of, without duplication: (i) the aggregate of the interest
expense of the Company and the Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (a) any amortization of debt discount, (b) the net costs or benefit
under Interest Swap Obligations, (c) all capitalized interest and (d) the
interest portion of any deferred payment obligation; and (ii) the interest
component of Capitalized Lease Obligations paid, accrued and/or scheduled to be
paid or accrued by the Company and the Restricted Subsidiaries during such
period as determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to the Company, for any
period, the aggregate net income (or loss) of the Company and the Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom (a) after-tax gains
or losses from Asset Sales or abandonments or reserves relating thereto, (b)
after-tax items classified as extraordinary or nonrecurring gains or losses, (c)
the net income (or loss) of any Person acquired in a "pooling of interests"
transaction accrued prior to the date it becomes a Restricted Subsidiary or is
merged or consolidated with the Company or any Restricted Subsidiary, (d) the
net income (but not loss) of any Restricted Subsidiary to the extent that the
declaration of dividends or similar distributions by that Restricted Subsidiary
of that income is restricted by a contract, operation of law or otherwise, (e)
the net income of any Person, other than the Company or a Restricted Subsidiary,
except to the extent of cash dividends or distributions paid to the Company or
to a Restricted Subsidiary by such Person, (f) any restoration to income of any
contingency reserve, except to the extent that provision for such reserve was
made out of Consolidated Net Income
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accrued at any time following the Issue Date, (g) income or loss attributable to
discontinued operations (including, without limitation, operations disposed of
during such period whether or not such operations were classified as
discontinued), (h) in the case of a successor to the Company by consolidation or
merger or as a transferee of the Company's assets, any net income of the
successor corporation prior to such consolidation, merger or transfer of assets.
"Consolidated Net Worth" of any Person means the consolidated
stockholders' equity of such Person, determined on a consolidated basis in
accordance with GAAP, less (without duplication) amounts attributable to
Disqualified Capital Stock of such Person.
"Consolidated Non-cash Charges" means, with respect to the Company, for
any period, the aggregate depreciation, amortization and other non-cash expenses
of the Company and the Restricted Subsidiaries reducing Consolidated Net Income
of the Company for such period, determined on a consolidated basis in accordance
with GAAP (including deferred rent but excluding any such charge which requires
an accrual of or a reserve for cash charges for any future period).
"Covenant Defeasance" has the meaning set forth under "--Legal
Defeasance and Covenant Defeasance."
"Credit Facility" means the Amended and Restated Credit Agreement dated
as of December 17, 1997 among the Company, the lenders party thereto in their
capacities as lenders thereunder, Bankers Trust Company, as agent, and
CoreStates Bank, N.A., as co-agent, together with the related documents thereto
(including, without limitation, any guarantee agreements and security
documents), in each case as such agreements may be amended (including any
amendment and restatement thereof), supplemented or otherwise modified from time
to time, including any agreement extending the maturity of, refinancing,
replacing or otherwise restructuring (including increasing the amount of
available borrowings thereunder adding Restricted Subsidiaries of the Company as
additional borrowers or guarantors thereunder) all or any portion of the
Indebtedness under such agreement or any successor or replacement agreement and
whether by the same or any other agent, lender or group of lenders.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary against fluctuations in currency values.
"Default" means an event or condition the occurrence of which is, or
with the lapse of time or the giving of notice or both would be, an Event of
Default.
"Designation" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"Designation Amount" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"Disqualified Capital Stock" means that portion of any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the sole option of the holder
thereof on or prior to the final maturity date of the Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute or statutes thereto.
"Fair market value" means, with respect to any asset or property, the
price which could be negotiated in an arm's-length, free market transaction, for
cash, between a willing seller and a willing and able buyer, neither of whom is
under undue pressure or compulsion to complete the transaction. Fair market
value shall be determined by the Board of Directors of the Company acting
reasonably and in good faith and shall be evidenced by a Board Resolution of the
Board of Directors of the Company delivered to the Trustee.
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"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"Guarantee" means the guarantee of the Notes by the Subsidiary
Guarantors.
"Incur" has the meaning set forth under "--Certain
Covenants--Limitation on Incurrence of Additional Indebtedness."
"Indebtedness" means with respect to any Person, without duplication,
(i) all Obligations of such Person for borrowed money, (ii) all Obligations of
such Person evidenced by bonds, debentures, notes or other similar instruments,
(iii) all Capitalized Lease Obligations of such Person, (iv) all Obligations of
such Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business that are not overdue by 90 days or
more or are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted), (v) all Obligations for the reimbursement
of any obligor on any letter of credit, banker's acceptance or similar credit
transaction, (vi) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (i) through (v) above and clause (viii)
below, (vii) all Obligations of any other Person of the type referred to in
clauses (i) through (vi) above which are secured by any lien on any property or
asset of such Person, the amount of such Obligation being deemed to be the
lesser of the fair market value of such property or asset or the amount of the
Obligation so secured, (viii) all Obligations under currency agreements and
interest swap agreements of such Person and (ix) all Disqualified Capital Stock
issued by such Person with the amount of Indebtedness represented by such
Disqualified Capital Stock being equal to the greater of its voluntary or
involuntary liquidation preference and its maximum fixed repurchase price, but
excluding accrued dividends, if any. For purposes hereof, the "maximum fixed
repurchase price" of any Disqualified Capital Stock which does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Disqualified Capital Stock as if such Disqualified Capital Stock were purchased
on any date on which Indebtedness shall be required to be determined pursuant to
the Indenture, and if such price is based upon, or measured by, the fair market
value of such Disqualified Capital Stock, such fair market value shall be
determined reasonably and in good faith by the Board of Directors of the issuers
of such Disqualified Capital Stock.
"Independent Financial Advisor" means a firm (i) which does not, and
whose directors, officers and employees or Affiliates do not, have a direct or
indirect material financial interest in the Company and (ii) which, in the
judgment of the Board of Directors of the Company, is otherwise independent and
qualified to perform the task for which it is to be engaged.
"Interest Swap Obligations" means the obligations of any Person
pursuant to any arrangement with any other Person, whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such other
Person calculated by applying a fixed or a floating rate of interest on the same
notional amount and shall include, without limitation, interest rate swaps,
caps, floors, collars and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect
loan or other extension of credit (including, without limitation, a guarantee)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by the
Company and the Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. If the Company or any Restricted Subsidiary
sells or otherwise disposes of any Common Stock of any direct or indirect
Restricted Subsidiary such that, after giving effect to any such sale or
disposition, it ceases to be a Subsidiary of the Company, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Common Stock of such Restricted Subsidiary
not sold or disposed of.
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"Issue Date" means the date of original issuance of the Old Notes.
"Legal Defeasance" has the meaning set forth under "--Legal Defeasance
and Covenant Defeasance."
"Lien" means any lien, mortgage, deed of trust, pledge, security
interest, charge or encumbrance of any kind (including any conditional sale or
other title retention agreement, any lease in the nature thereof and any
agreement to give any security interest).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of cash or Cash
Equivalents (other than the portion of any such deferred payment constituting
interest) received by the Company or any of the Restricted Subsidiaries from
such Asset Sale net of (a) reasonable out-of-pocket expenses and fees relating
to such Asset Sale (including, without limitation, legal, accounting and
investment banking fees and sales commissions), (b) taxes paid or payable after
taking into account any reduction in consolidated tax liability due to available
tax credits or deductions and any tax sharing arrangements, (c) repayment of
Indebtedness that is required to be repaid in connection with such Asset Sale
and (d) appropriate amounts to be provided by the Company or any Restricted
Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against
any liabilities associated with such Asset Sale and retained by the Company or
any Restricted Subsidiary, as the case may be, after such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Permitted Holder" means Peter M. Carlino, and each of his immediate
family members, the Carlino Family Trust, trustees of the Carlino Family Trust
or similar trusts, entities or arrangements for the benefit of the foregoing
persons and entities.
"Permitted Indebtedness" means, without duplication, each of the
following:
(i) Indebtedness incurred on the Issue Date under the Notes, the
Indenture and the Guarantees, and other Indebtedness and
Guarantees of such Indebtedness under the Indenture properly
incurred in accordance with the "--Certain
Covenants--Limitation on Incurrence of Additional
Indebtedness" covenant;
(ii) Indebtedness incurred pursuant to the Credit Facility in an
aggregate principal amount at any time outstanding not to
exceed $20.0 million, less any required permanent repayment
pursuant to the provisions set forth under "Certain
Covenants--Limitation on Asset Sales";
(iii) other Indebtedness (including Capitalized Lease Obligations)
of the Company and the Restricted Subsidiaries outstanding on
the Issue Date reduced by the amount of any scheduled
amortization payments or mandatory prepayments when actually
paid or permanent reductions thereon;
(iv) Purchase Money Indebtedness and Capitalized Lease Obligations
incurred in connection with the purchase or capital lease of
video gaming machines, slot machines or similar gaming
equipment in an aggregate amount for all Indebtedness incurred
by the Company or any Restricted Subsidiary pursuant to this
subclause (iv) not to exceed $20.0 million outstanding at any
one time;
(v) Interest Swap Obligations of the Company or a Restricted
Subsidiary covering Indebtedness of the Company or any of the
Restricted Subsidiaries; provided, however, that such Interest
Swap Obligations are entered into to protect the Company and
the Restricted Subsidiaries from fluctuations in interest
rates on Indebtedness incurred in accordance with the
Indenture to the extent the notional principal amount of such
Interest Swap Obligation does not exceed the principal amount
of the Indebtedness to which such Interest Swap Obligation
relates;
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(vi) Indebtedness under Currency Agreements; provided that in the
case of Currency Agreements which relate to Indebtedness, such
Currency Agreements do not increase the Indebtedness of the
Company and the Restricted Subsidiaries outstanding other than
as a result of fluctuations in foreign currency exchange rates
or by reason of fees, indemnities and compensation payable
thereunder;
(vii) Indebtedness of a Wholly Owned Restricted Subsidiary to the
Company or to a Wholly Owned Restricted Subsidiary for so long
as such Indebtedness is held by the Company or a Wholly Owned
Restricted Subsidiary, in each case subject to no Lien (other
than Liens securing the Credit Facility) held by a Person
other than the Company or a Wholly Owned Restricted
Subsidiary; provided that if as of any date any Person other
than the Company or a Wholly Owned Restricted Subsidiary owns
or holds any such Indebtedness or holds a Lien in respect of
such Indebtedness, such date shall be deemed the incurrence of
Indebtedness not constituting Permitted Indebtedness by the
issuer of such Indebtedness;
(viii) Indebtedness of the Company to a Wholly Owned Restricted
Subsidiary for so long as such Indebtedness is held by a
Wholly Owned Restricted Subsidiary, in each case subject to no
Lien; provided that (a) any Indebtedness of the Company to any
Wholly Owned Restricted Subsidiary is unsecured and
subordinated, pursuant to a written agreement, to the
Company's obligations under the Indenture and the Notes and
(b) if as of any date any Person (other than lenders under the
Credit Facility) other than a Wholly Owned Restricted
Subsidiary owns or holds any such Indebtedness or any Person
holds a Lien in respect of such Indebtedness, such date shall
be deemed the incurrence of Indebtedness not constituting
Permitted Indebtedness by the Company;
(ix) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument
inadvertently (except in the case of daylight overdrafts)
drawn against insufficient funds in the ordinary course of
business; provided, however, that such Indebtedness is
extinguished within two business days of incurrence;
(x) Indebtedness of the Company or any of the Restricted
Subsidiaries represented by letters of credit for the account
of the Company or such Restricted Subsidiary, as the case may
be, in order to provide security for workers' compensation
claims, payment obligations in connection with self-insurance
or similar requirements in the ordinary course of business;
(xi) Guarantees by the Company and the Subsidiary Guarantors of
each other's Indebtedness; provided that such Indebtedness is
permitted to be incurred under the Indenture;
(xii) Refinancing Indebtedness;
(xiii) Indebtedness of the Company or any Restricted Subsidiary
incurred to finance the payments to the seller of Pocono Downs
Racetrack in an amount not to exceed $10.0 million in the
event Pennsylvania authorizes any additional form of gaming in
which the Company may participate and any Refinancing thereof;
and
(xiv) Additional Indebtedness of the Company in an aggregate
principal amount not to exceed $10.0 million at any one time
outstanding.
"Permitted Investments" means (i) Investments by the Company or any
Restricted Subsidiary in any Person that is or will become immediately after
such Investment a Wholly Owned Restricted Subsidiary or that will merge or
consolidate into the Company or a Wholly Owned Restricted Subsidiary, (ii)
Investments in the Company by any Restricted Subsidiary; provided that any
Indebtedness incurred by the Company evidencing such Investment is unsecured and
subordinated, pursuant to a written agreement, to the Company's obligations
under the Notes and the Indenture; (iii) investments in cash and Cash
Equivalents; (iv) loans and advances to employees and officers of the Company
and the Restricted Subsidiaries in the ordinary course of business for bona fide
business purposes not in excess of $500,000 at any one time outstanding; (v)
Currency Agreements and Interest Swap Obligations entered into in the ordinary
course of the Company's or a Restricted Subsidiary's businesses and otherwise in
compliance with the
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Indenture; (vi) other Investments, including Investments in Unrestricted
Subsidiaries not to exceed $10.0 million at any one time outstanding; (vii)
Investments in securities of trade creditors or customers received pursuant to
any plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of such trade creditors or customers; (viii) guarantees by the
Company or any Subsidiary Guarantor of Indebtedness otherwise permitted to be
incurred by the Company or any Subsidiary Guarantor under the Indenture; and
(ix) Investments made by the Company or the Restricted Subsidiaries as a result
of consideration received in connection with an Asset Sale made in compliance
with the covenant described under "--Certain Covenants--Limitation on Asset
Sales".
"Permitted Liens" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by
appropriate proceedings and as to which the Company or the
Restricted Subsidiaries shall have set aside on its books such
reserves as may be required pursuant to GAAP;
(ii) statutory Liens of landlords and Liens of carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen and
other Liens imposed by law incurred in the ordinary course of
business for sums not yet delinquent or being contested in
good faith, if such reserve or other appropriate provision, if
any, as shall be required by GAAP shall have been made in
respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation,
unemployment insurance and other types of social security,
including any Lien securing letters of credit issued in the
ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases,
government contracts, performance and return-of-money bonds
and other similar obligations (exclusive of obligations for
the payment of borrowed money);
(iv) Judgment Liens not giving rise to an Event of Default so long
as such Lien is adequately bonded and any appropriate legal
proceedings which may have been duly initiated for the review
of such judgment shall not have been finally terminated or the
period within which such proceedings may be initiated shall
not have expired;
(v) Easements, rights-of-way, zoning restrictions and other
similar charges or encumbrances in respect of real property
not interfering in any material respect with the ordinary
conduct of the business of the Company or any of the
Restricted Subsidiaries;
(vi) Any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any
property or assets which is not leased property subject to
such Capitalized Lease Obligation;
(vii) Purchase money Liens to finance property or assets of the
Company or any Restricted Subsidiary acquired after the Issue
Date; provided, however, that (A) the related Purchase Money
Indebtedness shall not exceed the cost of such property or
assets and shall not be secured by any property or assets of
the Company or any Restricted Subsidiary other than the
property and assets so acquired and (B) the Lien securing such
Indebtedness shall be created within 90 days of such
acquisition;
(viii) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in
respect of bankers' acceptances issued or created for the
account of such Person to facilitate the purchase, shipment or
storage of such inventory or other goods;
(ix) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and
other property relating to such letters of credit and products
and proceeds thereof;
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(x) Liens encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual, or warranty
requirements of the Company or any of the Restricted
Subsidiaries, including rights of offset and set-off;
(xi) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted
under the Indenture;
(xii) Liens securing Indebtedness under Currency Agreements;
(xiii) Liens securing Acquired Indebtedness incurred in accordance
with the covenant described under "--Certain
Covenants--Limitation on Incurrence of Additional
Indebtedness" and liens securing any Refinancing of Acquired
Indebtedness; provided that (A) such Liens secured such
Acquired Indebtedness at the time of and prior to the
incurrence of such Acquired Indebtedness by the Company or a
Restricted Subsidiary and were not granted in connection with,
or in anticipation of, the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary and (B)
such Liens do not extend to or cover any property or assets of
the Company or of any of the Restricted Subsidiaries other
than the property or assets that secured the Acquired
Indebtedness prior to the time such Indebtedness became
Acquired Indebtedness of the Company or a Restricted
Subsidiary and are no more favorable to the lienholders than
those securing the Acquired Indebtedness prior to the
incurrence of such Acquired Indebtedness by the Company or a
Restricted Subsidiary;
(xiv) Leases or subleases granted to others not interfering in any
material respect with the business of the Company or any
Restricted Subsidiary; and
(xv) Liens arising from filing UCC financing statements for
precautionary purposes in connection with true leases of
personal property that are otherwise permitted under the
Indenture and under which the Company or any Restricted
Subsidiary is lessee.
"Person" means an individual, partnership, corporation, unincorporated
organization, limited liability company, trust or joint venture, or a
governmental agency or political subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person
that has preferential rights to any other Capital Stock of such Person with
respect to dividends or redemptions or upon liquidation.
"Purchase Money Indebtedness" means Indebtedness of the Company or its
Restricted Subsidiaries incurred for the purpose of financing all or any part of
the purchase price or the cost of installation, construction or improvement of
any property and any Refinancing thereof.
"Qualified Capital Stock" means any Capital Stock that is not
Disqualified Capital Stock.
"Reference Date" has the meaning set forth under "--Certain
Covenants--Limitation on Restricted Payments."
"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of Indebtedness incurred in accordance with the covenant
described under "--Certain Covenants--Limitation on Incurrence of Additional
Indebtedness" (other than pursuant to clause (ii), (iv), (v), (vi), (vii),
(viii), (ix), (x), (xi), (xiii) or (xiv) of the definition of Permitted
Indebtedness), in each case that does not (1) result in an increase in the
aggregate principal amount of Indebtedness of such Person as of the date of such
proposed Refinancing (plus the amount of any premium required to be paid under
the terms of the instrument governing such Indebtedness and plus the amount of
reasonable expenses incurred by the Company or any Restricted Subsidiary in
connection with such Refinancing) or (2) create Indebtedness with (A) a Weighted
Average Life to Maturity that is less than the Weighted Average Life to Maturity
of the Indebtedness being Refinanced or (B) a final maturity earlier than the
final maturity of the Indebtedness
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being Refinanced; provided that (x) if such Indebtedness being Refinanced is
Indebtedness of the Company or a Subsidiary Guarantor, then such Refinancing
Indebtedness shall be Indebtedness solely of the Company and/or a Subsidiary
Guarantor and (y) if such Indebtedness being Refinanced is subordinate or junior
to the Notes, then such Refinancing Indebtedness shall be subordinate to the
Notes at least to the same extent and in the same manner as the Indebtedness
being Refinanced.
"Registration Rights Agreement" means the Registration Rights Agreement
dated December 17, 1997 among the Company, the Subsidiary Guarantors and the
Initial Purchasers.
"Restricted Subsidiary" means any Subsidiary of the Company that has
not been designated by the Board of Directors of the Company, by a Board
Resolution delivered to the Trustee, as an Unrestricted Subsidiary pursuant to
and in compliance with the covenant described under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries." Any such
Designation may be revoked by a Board Resolution of the Company delivered to the
Trustee, subject to the provisions of such covenant.
"Revocation" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"Sale and Leaseback Transaction" means any direct or indirect
arrangement with any Person or to which any such Person is a party, providing
for the leasing to the Company or a Restricted Subsidiary of any property,
whether owned by the Company or any Restricted Subsidiary at the Issue Date or
later acquired, which has been or is to be sold or transferred by the Company or
such Restricted Subsidiary to such Person or to any other Person from whom funds
have been or are to be advanced by such Person on the security of such Property.
"Significant Subsidiary" shall have the meaning set forth in Rule
1.02(w) of Regulation S-X under the Securities Act.
"Subsidiary", with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (ii) any
other Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Subsidiary Guarantor" means (i) each of The Plains Company, a
Pennsylvania corporation, Mountainview Thoroughbred Racing Association, a
Pennsylvania corporation, Pennsylvania National Turf Club, Inc., a Pennsylvania
corporation, Penn National Speedway, Inc., a Pennsylvania corporation, Penn
National Holding Company, a Delaware Corporation, Penn National Gaming of West
Virginia, Inc., a West Virginia corporation, Sterling Aviation Inc., a Delaware
corporation, Pocono Downs, Inc., a Pennsylvania corporation, Northeast
Concessions, Inc., a Pennsylvania corporation, The Downs Off-Track Wagering,
Inc., a Pennsylvania corporation, The Downs Racing, Inc., a Pennsylvania
corporation, Penn National Gaming of Indiana, Inc., a Delaware corporation, PNGI
Pocono, Inc., a Delaware Corporation and Tennessee Downs, Inc., a Tennessee
corporation, and (ii) each of the Company's Restricted Subsidiaries that in the
future executes a supplemental indenture in which such Restricted Subsidiary
agrees to be bound by the terms of the Indenture as a Subsidiary Guarantor;
provided that any Person constituting a Subsidiary Guarantor as described above
shall cease to constitute a Subsidiary Guarantor when its respective Guarantee
is released in accordance with the terms of the Indenture.
"Unrestricted Subsidiary" means any Subsidiary of the Company
designated as such pursuant to and in compliance with the covenant described
under "--Certain Covenants--Limitation on Designations of Unrestricted
Subsidiaries." Any such designation may be revoked by a Board Resolution of the
Company delivered to the Trustee, subject to the provisions of such covenant.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the then
outstanding aggregate principal amount of such Indebtedness into (b) the sum of
the total of the products obtained by multiplying (i) the amount of each then
remaining installment, sinking fund, serial maturity or other required payment
of principal, including payment at final maturity, in respect thereof, by (ii)
the
84
<PAGE>
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
which all the outstanding voting securities (other than in the case of a foreign
Restricted Subsidiary, directors' qualifying shares or an immaterial amount of
shares required to be owned by other Persons pursuant to applicable law) are
owned by the Company or another Wholly Owned Restricted Subsidiary.
85
<PAGE>
BOOK-ENTRY; DELIVERY AND FORM
Except as described in the next paragraph, the Exchange Notes and the
related Guarantees initially will be represented by one or more permanent global
certificates in definitive, fully registered form (the "Global Exchange Notes").
The Global Exchange Notes will be deposited with, or on behalf of, The
Depository Trust Company, New York, New York ("DTC") and registered in the name
of a nominee of DTC.
Exchange Notes (i) held by or transferred to foreign purchasers or (ii)
held by QIBs or Accredited Investors who are not QIBs who elect to take physical
delivery of their certificates instead of holding their interests through the
Global Notes (and which are thus ineligible to trade through DTC) (collectively
referred to herein as the "Non-Global Purchasers") will be issued in registered
form (the "Certificated Security"). Upon the transfer to a QIB of any
Certificated Security initially issued to a Non-Global Purchaser, such
Certificated Security will, unless the transferee requests otherwise or the
Global Note has previously been exchanged in whole for Certificated Securities,
be exchanged for an interest in the Global Note.
The Global Exchange Notes. The Company expects that pursuant to
procedures established by DTC (i) upon the issuance of the Global Exchange
Notes, DTC or its custodian will credit, on its internal system, the principal
amount of Exchange Notes of the individual beneficial interests represented by
such Global Exchange Notes to the respective accounts of persons who have
accounts with such depositary and (ii) ownership of beneficial interests in the
Global Exchange Notes will be shown on, and the transfer of such ownership will
be effected only through, records maintained by DTC or its nominee (with respect
to interests of participants) and the records of participants (with respect to
interests of persons other than participants). Ownership of beneficial
interests in the Global Exchange Notes will be limited to persons who have
accounts with DTC ("participants") or persons who hold interests through
participants. QIBs and Accredited Investors may hold their interests in the
Global Exchange Notes directly through DTC if they are participants in such
system, or indirectly through organizations which are participants in such
system.
So long as DTC, or its nominee, is the registered owner or holder of
the Exchange Notes, DTC or such nominee, as the case may be, will be considered
the sole owner or holder of the Exchange Notes represented by such Global
Exchange Notes for all purposes under the Indenture. No beneficial owner of an
interest in the Global Exchange Notes will be able to transfer that interest
except in accordance with DTC's procedures, in addition to those provided for
under the Indenture with respect to the Notes.
Payments of the principal of, premium (if any), interest (including
Additional Interest) on, the Global Exchange Notes will be made to DTC or its
nominee, as the case may be, as the registered owner thereof. None of the
Company, the Trustee or any Paying Agent will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the Global Exchange Notes or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interest.
The Company expects that DTC or its nominee, upon receipt of any
payment of principal, premium, if any, interest (including Additional Interest)
on the Global Exchange Notes, will credit participants' accounts with payments
in amounts proportionate to their respective beneficial interests in the
principal amount of the Global Exchange Notes as shown on the records of DTC or
its nominee. The Company also expects that payments by participants to owners of
beneficial interests in the Global Exchange Notes held through such participants
will be governed by standing instructions and customary practice, as is now the
case with securities held for the accounts of customers registered in the names
of nominees for such customers. Such payments will be the responsibility of such
participants.
Transfers between participants in DTC will be effected in the ordinary
way through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell Exchange Notes to
persons in states which require physical delivery of the Exchange Notes, or to
pledge such securities, such holder must transfer its interest in the Global
Exchange Note, in accordance with the normal procedures of DTC and with the
procedures set forth in the Indenture.
86
<PAGE>
DTC has advised the Company that it will take any action permitted to
be taken by a holder of Exchange Notes (including the presentation of Notes for
exchange as described below) only at the direction of one or more participants
to whose account the DTC interests in the Global Notes are credited and only in
respect of such portion of the aggregate principal amount of Exchange Notes as
to which such participant or participants has or have given such direction.
However, if there is an Event of Default under the Indenture, DTC will exchange
the Global Exchange Notes for Certificated Securities, which it will distribute
to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Exchange Notes among
participants of DTC, it is under no obligation to perform such procedures, and
such procedures may be discontinued at any time. Neither the Company nor the
Trustee will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Exchange Notes and a successor
depositary is not appointed by the Company within 90 days, Certificated
Securities will be issued in exchange for the Global Exchange Note.
87
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that holds Old Notes that were acquired for its own
account as a result of market-making or other trading (other than Old Notes
acquired directly from the Company), may exchange Old Notes for Exchange Notes
in the Exchange Offer. However, any such broker-dealer may be deemed to be an
"underwriter" within the meaning of such term under the Securities Act and must,
therefore, acknowledge that it will deliver a prospectus in connection with any
resale of Exchange Notes received in the Exchange Offer. This prospectus
delivery requirement may be satisfied by the delivery by such broker-dealer of
this Prospectus, as it may be amended or supplemented from time to time. The
Company has agreed that, for a period of 180 days after the consummation of the
Exchange Offer, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such sale and will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. In addition, until October 27, 1998 (180 days
after the date of this Prospectus), all dealers effecting transactions in the
Exchange Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sales of Exchange
Notes by broker-dealers. Any resales of Exchange Notes by broker-dealers may be
made directly to a purchaser or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on such
resales of Exchange Notes and any commissions or concessions received by such
persons may be deemed to be underwriting compensation under the Securities Act.
The Company has agreed to pay all expenses incident to the Exchange Offer other
that commissions or concessions of any brokers or dealers and will indemnify
Holders (including broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
By its acceptance of the Exchange Offer, any broker-dealer that
receives Exchange Notes pursuant to the Exchange Offer hereby agrees to notify
the Company prior to using the Prospectus in connection with the sale or
transfer of Exchange Notes, and acknowledges and agrees that, upon receipt of
notice from the Company of the happening of any event which makes any statement
in the Prospectus untrue in any material respect or which requires the making of
any changes in the Prospectus in order to make the statements therein not
misleading or which may impose upon the Company disclosure obligations that may
have a material adverse effect on the Company (which notice the Company agrees
to deliver promptly to such broker-dealer), such broker-dealer will suspend use
of the Prospectus until the Company has notified such broker-dealer that
delivery of the Prospectus may resume and has furnished copies of any amendment
or supplement to the Prospectus to such broker-dealer.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company incorporates herein by reference, the following documents
filed with the Commission under the Exchange Act:
(a) The Company's Annual Report on Form 10-K for the year ended
December 31, 1997;
(b) The description of the Company's Common Stock contained in the
Company's Form 8-A filed by the Company to register such securities
under the Exchange Act, including all amendments and reports filed
for the purpose of updating such description prior to the
termination of the Exchange Offer;
(c) The information under the caption entitled "Certain Transactions"
contained within the Company's Proxy Statement dated April 20,
1998, relating to its 1998 Annual Meeting of Stockholders; and
88
<PAGE>
(d) All documents and reports subsequently filed by the Company
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date of this Prospectus and prior to termination of the
Exchange Offer, shall be deemed to be incorporated by reference
into this Prospectus and to be a part hereof from the date of
filing such documents or reports.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded, except as so modified or superseded, shall
not be deemed to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy
of this Prospectus has been delivered, on the oral or written request of such
person, a copy of any and all the documents incorporated herein by reference,
other than exhibits to such documents unless they are specifically incorporated
by reference into such documents. Requests for such copies should be directed
to: Robert S. Ippolito, Chief Financial Officer, Wyomissing Professional Center,
825 Berkshire Boulevard, Suite 200, Wyomissing, PA 19610, (610) 373-2400.
LEGAL MATTERS
Certain legal matters with respect to the Exchange Notes offered hereby
will be passed upon for the Company by Morgan, Lewis & Bockius LLP,
Philadelphia, Pennsylvania.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996 and 1997 and for each of the three years ended December 31, 1995, 1996 and
1997 included in this Prospectus have been audited by BDO Seidman, LLP,
independent certified public accountants, to the extent and for the periods set
forth in their report included herein, and are included herein in reliance upon
such report given upon the authority of said firm as experts in accounting and
auditing.
89
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants.......................F-2
Consolidated Balance Sheets..............................................F-3
Consolidated Statements of Income........................................F-4
Consolidated Statements of Shareholders' Equity..........................F-5
Consolidated Statements of Cash Flows....................................F-6
Notes to Consolidated Financial Statements...............................F-7
F - 1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Penn National Gaming, Inc.
and Subsidiaries
Wyomissing, Pennsylvania
We have audited the accompanying consolidated balance sheets of Penn National
Gaming, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Penn National
Gaming, Inc. and Subsidiaries at December 31, 1996 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
Philadelphia, Pennsylvania
March 2, 1998
F - 2
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
1996 1997
----------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................................. $ 5,634 $ 21,854
Accounts receivable................................................... 4,293 2,257
Prepaid expenses and other current assets............................. 1,552 1,441
Deferred income taxes................................................. 90 469
Prepaid income taxes.................................................. -- 3,003
------- --------
Total current assets................................................ 11,569 29,024
------- --------
Property, plant and equipment, at cost
Land and improvements................................................. 15,728 24,643
Building and improvements............................................. 30,484 56,298
Furniture, fixtures and equipment..................................... 8,937 13,847
Transportation equipment.............................................. 336 490
Leasehold improvements................................................ 6,680 6,778
Leased equipment under capitalized lease.............................. 1,626 824
Construction in progress.............................................. 2,926 11,288
------- --------
66,747 114,168
Less accumulated depreciation and amortization........................ 8,029 11,007
------- --------
Net property, plant and equipment..................................... 58,718 103,161
------- --------
Other assets
Excess of cost over fair market value of net assets acquired (net of
accumulated amortization of $811 and $1,389, respectively).......... 21,885 23,055
Prepaid acquisition costs............................................. 1,764 --
Deferred financing costs.............................................. 2,416 3,014
Miscellaneous......................................................... 371 624
------- --------
Total other assets.................................................. 26,436 26,693
------- --------
$96,723 $158,878
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt and capital lease obligations.... $ 1,563 $ 204
Accounts payable...................................................... 5,066 7,405
Purses due horsemen................................................... 1,421 --
Uncashed pari-mutuel tickets.......................................... 1,336 1,504
Accrued expenses...................................................... 1,373 2,753
Accrued salaries and wages............................................ 507 813
Customer deposits..................................................... 420 470
Taxes, other than income taxes........................................ 392 649
------- --------
Total current liabilities........................................... 12,078 13,798
------- --------
Long-term liabilities....................................................
Long-term debt and capital lease obligations, net of current maturities 45,954 80,132
Deferred income taxes................................................. 10,810 11,092
------- --------
Total long-term liabilities......................................... 56,764 91,224
------- --------
Commitments and contingencies
Shareholders' equity
Preferred stock, $.01 par values; authorized 1,000,000 shares; issued none -- --
Common stock, $.01 par values; authorized 20,000,000 shares; issued and
outstanding 13,355,290 and 15,152,580, respectively................ 134 152
Additional paid-in capital............................................. 14,299 37,969
Retained earnings...................................................... 13,448 15,735
------- --------
Total shareholders' equity........................................... 27,881 53,856
------- --------
$96,723 $158,878
======= ========
</TABLE>
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
F - 3
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Revenues
Pari-mutuel revenues
Live races ................................................... $21,376 $18,727 $ 27,653
Import simulcasting .......................................... 27,254 32,992 59,810
Export simulcasting .......................................... 2,142 3,347 5,279
Gaming revenue ............................................... -- -- 5,712
Admissions, programs and other racing revenues ................... 3,704 4,379 5,678
Concession revenues .............................................. 3,200 3,389 7,404
------- ------- --------
Total revenues .............................................. 57,676 62,834 111,536
------- ------- --------
Operating expenses
Purses, stakes and trophies ..................................... 12,091 12,874 22,335
Direct salaries, payroll taxes and employee benefits ............ 7,699 8,669 16,200
Simulcast expenses .............................................. 9,084 9,215 12,982
Pari-mutuel taxes ............................................... 4,963 5,356 9,506
Lottery taxes and administration ................................ -- -- 1,874
Other direct meeting expenses ................................... 7,576 8,536 18,087
Off-track wagering concession expenses .......................... 2,125 2,349 5,605
Other operating expenses ........................................ 5,002 4,942 8,735
Depreciation and amortization ................................... 881 1,433 4,040
Site development and restructuring charges ...................... -- -- 2,437
------- ------- --------
Total operating expenses .................................... 49,421 53,374 101,801
------- ------- --------
Income from operations ............................................. 8,255 9,460 9,735
------- ------- --------
Other income (expenses)
Interest (expense) .............................................. (71) (506) (4,591)
Interest income ................................................. 269 350 935
Other ........................................................... 10 -- (2)
------- --------
Total other income (expense) ................................ 208 (156) (3,658)
------- ------- --------
Income before income taxes and extraordinary item .................. 8,463 9,304 6,077
Taxes on income .................................................... 3,467 3,794 2,308
------- ------- --------
Income before extraordinary item ................................... 4,996 5,510 3,769
Extraordinary item
Loss on early extinguishment of debt, net of
income taxes of $1,001 ......................................... -- -- 1,482
------- --------
Net income ......................................................... $ 4,996 $ 5,510 $ 2,287
------- ------- --------
Per share data:
Basic income per share before extraordinary item ................. $ .39 $ .41 $ .25
Basic extraordinary items ........................................ -- -- .10
--------
Basic net income per share ....................................... $ .39 $ .41 $ .15
======= ======= ========
Diluted net income per share before extraordinary item ........... .38 $ .40 $ .24
Diluted extraordinary items ...................................... -- -- .09
--------
Diluted net income per share ..................................... $ .38 $ .40 $ .15
======= ======= ========
Shares outstanding:
Basic ........................................................... 12,906 13,302 14,925
======= ======= ========
Diluted ......................................................... 13,017 13,822 15,458
======= ======= ========
</TABLE>
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
F - 4
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Additional
-------------------- Paid-In Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995.................... 12,900,000 $ 43 $ 12,642 $ 2,942 $ 15,627
Issuance of common stock.................... 45,000 -- 179 -- 179
Net income for the year..................... -- -- -- 4,996 4,996
---------- ----- -------- -------- --------
Balance, December 31, 1995.................. 12,945,000 43 12,821 7,938 20,802
Issuance of common stock ................... 410,290 4 1,565 -- 1,569
Stock splits ............................... -- 87 (87) -- --
Net income for the year..................... -- -- -- 5,510 5,510
---------- ----- -------- -------- --------
Balance, December 31, 1996.................. 13,355,290 134 14,299 13,448 27,881
Issuance of common stock.................... 1,725,000 17 22,914 -- 22,931
Exercise of stock options and warrants...... 72,290 1 154 -- 155
Tax benefit related to stock options
exercised................................. -- -- 602 -- 602
Net income for the year..................... -- -- -- 2,287 2,287
---------- ----- -------- -------- --------
Balance, December 31, 1997.................. 15,152,580 $ 152 $ 37,969 $ 15,735 $ 53,856
========== ===== ======== ======== ========
</TABLE>
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
F - 5
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1995 1996 1997
------ ------ -----
<S> <C> <C> <C>
Cash flows from operating activities
Net income ........................................................... $ 4,996 $ 5,510 $ 2,287
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization ................................. 881 1,433 4,040
Extraordinary loss relating to early extinguishment
of debt, before income tax benefit ......................... -- -- 2,483
Deferred income taxes (benefit) ................................ 20 228 (97)
Decrease (increase) in:
Accounts receivable ......................................... (362) (1,870) 2,036
Prepaid expenses and other current assets ................... (158) 871 111
Prepaid income taxes ........................................ -- -- (3,003)
Miscellaneous other assets .................................. 5 (255) (258)
Increase (decrease) in:
Accounts payable ............................................ (15) 1,288 2,339
Purses due horsemen ......................................... 297 (248) (1,421)
Uncashed pari-mutuel tickets ................................ 184 632 168
Accrued expenses ............................................ (504) 827 1,380
Accrued salaries and wages .................................. 128 265 306
Customer deposits ........................................... 16 105 50
Taxes other than income taxes ............................... 239 146 257
Income taxes ................................................ 190 (985) --
--------- --------- ---------
Net cash provided by operating activities ........................... 5,917 7,947 10,678
--------- --------- ---------
Cash flows from investing activities
Expenditures for property, plant and equipment .................. (3,958) (6,995) (29,196)
Acquisition of business, net of cash acquired ................... -- (47,320) (18,248)
(Increase) in prepaid acquisition costs ......................... -- (1,514) (176)
--------- --------- ---------
Net cash used in investing activities ............................... (3,958) (55,829) (47,620)
--------- --------- ---------
Cash flows from financing activities
Proceeds from sale of common stock .............................. 179 1,569 23,086
Tax benefit related to stock option exercise .................... -- -- 602
Proceeds from long-term debt .................................... -- 47,000 111,167
Principal payments on long-term debt and
capital lease obligations ..................................... (126) (123) (78,348)
Increase in unamortized financing cost .......................... -- (2,444) (3,345)
--------- --------- ---------
Net cash provided by financing activities ........................... 53 46,002 53,162
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ................. 2,012 (1,880) 16,220
Cash and cash equivalents, beginning of period ....................... 5,502 7,514 5,634
--------- --------- ---------
Cash and cash equivalents, end of period ............................. $ 7,514 $ 5,634 $ 21,854
========= ========= =========
</TABLE>
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
F - 6
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The consolidated financial statements include the accounts of Penn
National Gaming, Inc. and its subsidiaries (collectively the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain prior years' amounts have been reclassified to conform to
the 1997 presentation.
Description of Business
The Company, which began operations in 1972, provides pari-mutuel
wagering opportunities on both live and simulcast thoroughbred and harness horse
races at two racetracks and seven off-track wagering facilities ("OTWs") located
in Pennsylvania and pari-mutuel wagering opportunities and video gaming machines
at Charles Town Races, the Company's Charles Town, West Virginia thoroughbred
race track. Prior to the consummation of the acquisitions of Pocono Downs and
Charles Town Races (see Note 2), the Company owned and operated Penn National
Race Course located near Harrisburg, Pennsylvania ("Penn National Race Course"),
and operated four OTWs, one each in Chambersburg, Lancaster, Reading and York,
Pennsylvania. On November 27, 1996, the Company consummated the acquisition of
Pocono Downs (the "Pocono Downs Acquisition") and as a result acquired Pocono
Downs Racetrack, located outside Wilkes-Barre, Pennsylvania ("Pocono Downs"),
and OTWs in Allentown and Erie, Pennsylvania. In February 1997, the Company
opened its seventh OTW in Williamsport, Pennsylvania.
On January 15, 1997, a joint venture, in which the Company holds an 89%
interest, acquired substantially all of the assets relating to Charles Town
Races, a thoroughbred racing facility in Jefferson County, West Virginia (the
"Charles Town Acquisition"). The Company refurbished and reopened the Charles
Town facility as an entertainment complex featuring live racing, dining,
simulcast wagering and, effective September 1997, Gaming Machines.
At each of its three racetracks, the Company conducts pari-mutuel
wagering on thoroughbred and harness races from the Company's racetracks and
simulcasts from other racetracks. The Company also simulcasts its Penn National
Race Course and Pocono Downs races for wagering at other racetracks and OTWs,
including all Pennsylvania racetracks and OTWs and locations outside
Pennsylvania. Wagering on Penn National Race Course and Pocono Downs races and
races simulcast from other racetracks also occurs through the Company's
Pennsylvania racetracks' telephone account betting network.
Glossary of Terminology
The following is a listing of terminology used throughout the financial
statements:
The Company's Racetracks -- Penn National Race Course near Harrisburg,
Pennsylvania, Pocono Downs near Wilkes-Barre, Pennsylvania and Charles
Town Races in Charles Town, West Virginia.
F - 7
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
Gaming Machines -- Video lottery terminal gaming machines.
OTW -- Off-track wagering location.
Pari-mutuel wagering -- All wagering at the Company's racetracks, at
the Company's OTWs and all wagering on the Company's races at other
racetracks and OTWs.
Telebet -- Telephone account wagering.
Totalisator Services -- Computer services provided to the Company by
various totalisator companies for processing pari-mutuel betting odds
and wagering proceeds.
Pari-mutuel Revenues:
Live Races -- The Company's share of pari-mutuel wagering on
live races within Pennsylvania and Weat Virginia and certain
stakes races from racetracks outside of Pennsylvania and West
Virginia after payment of the amount returned as winning
wagers.
Import Simulcasting -- The Company's share of wagering at the
Company's racetracks, at the Company's OTWs and by Telebet on
full cards of races simulcast from other racetracks.
Export Simulcasting -- The Company's share of wagering at
out-of-state locations on live races.
A summary of pari-mutuel wagering for the periods indicated is as
follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Pari-mutuel wagering on the Company's live races.............. $102,145 $ 89,327 $128,090
Pari-mutuel wagering on simulcasting:
Import simulcasting from other racetracks.................. 142,499 170,814 298,459
Export simulcasting to out of Pennsylvania
wagering facilities...................................... 72,252 112,871 176,287
-------- -------- --------
Total pari-mutuel wagering.............................. $316,896 $373,012 $602,836
======== ======== ========
</TABLE>
Racing Meet
The Penn National Race Course racing seasons for the years ended
December 31, 1995, 1996 and 1997 totaled 204, 206 and 212 live race days,
respectively. For the year ended December 31, 1997, the Pocono Downs and Charles
Town Races racing season totaled 134 and 159 live race days, respectively.
F - 8
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
Depreciation and Amortization
Depreciation of property, plant and equipment and amortization of
leasehold improvements are computed by the straight-line method at rates
adequate to allocate the cost of applicable assets over their estimated useful
lives. Depreciation and amortization for the years ended December 31, 1995, 1996
and 1997 amounted to $814,000, $1,301,000 and $3,193,000, respectively.
The excess of cost over fair value of net assets acquired is being
amortized on the straight-line method over a forty-year period. Amortization
expense for 1995, 1996 and 1997 amounted to $67,000, $98,000 and $578,000,
respectively. The Company evaluates the recoverability of the goodwill
quarterly, or more frequently whenever events and circumstances warrant revised
estimates and considers whether the goodwill should be completely or partially
written off or the amortization period accelerated.
Deferred financing costs are charged to operations over the life of the
underlying indebtedness. Amortization of deferred financing costs for 1995, 1996
and 1997 amounted to $-0-, $34,000 and $269,000, respectively.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" during the year ended
December 31, 1995. SFAS 121 establishes accounting standards for the impairment
of long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. The Company reviews the carrying
values of its long-lived and identifiable intangible assets for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable based on undiscounted
estimated future operating cash flows. As of December 31, 1997, the Company has
determined that no impairment has occurred.
Income Taxes
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 requires a company to recognize deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized in a
company's financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and liabilities
using enacted tax rates in effect in the years in which the differences are
expected to reverse.
Cash and Cash Equivalents
The Company considers all cash balances and highly liquid investments
with original maturities of three months or less to be cash equivalents.
F - 9
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
Net Income Per Common Share
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128 ("SFAS 128") "Earnings Per Share" in 1997. SFAS 128 provides
for the calculation of "basic" and "diluted" net income per share. Basic net
income per share includes no dilution and is calculated by dividing net income
by the weighted average number of common shares outstanding for the period.
Dilutive net income per share reflects the potential dilution of securities that
could share in the net income of the Company which consist of stock options and
warrants (using the treasury stock method).
Deferred Financing Costs
Deferred financing costs, which are incurred by the Company in
connection with debt, are charged to operations over the life of the underlying
indebtedness using the interest method adjusted to give effect to any early
repayments.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to credit
risk consist of cash equivalents and accounts receivable.
The Company's policy is to limit the amount of credit exposure to any
one financial institution and place investments with financial institutions
evaluated as being creditworthy, or in short-term (less than seven days) money
market and tax free bond funds which are exposed to minimal interest rate and
credit risk. At December 31, 1997, the Company had bank deposits which exceeded
federally insured limits by approximately $960,000 and money market and tax free
bond funds of approximately $18,939,000. Concentration of credit risk, with
respect to accounts receivable, is limited due to the Company's credit
evaluation process. The Company does not require collateral from its customers.
The Company's receivables consist principally of amounts due from other
racetracks and OTWs. Historically, the Company has not incurred any significant
credit related losses.
Fair Value of Financial Instruments
The following methods and assumptions are used to estimate the fair
value of each class of financial instruments for which it is practical to
estimate:
Cash and Cash Equivalents: The carrying amount approximates the fair
value due to the short maturity of the cash equivalents.
Long-Term Debt and Capital Lease Obligations: The fair value of the
Company's long-term debt and capital lease obligations is estimated
based on the quoted market prices for the same or similar
F - 10
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
issues or on the current rates offered to the Company for debt of the
same remaining maturities. The carrying amount approximates fair value
since the Company's interest rates approximate current interest rates.
Prepaid Acquisition Costs
Prepaid acquisition costs, which were incurred by the Company
substantially in connection with the Charles Town Acquisition (see Note 2), are
included in the purchase price of the Charles Town Acquisition and allocated to
the appropriate assets.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses at the reporting
period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129"), effective for periods ending
after December 15, 1997, establishes standards for disclosing information about
an entity's capital structure. SFAS 129 requires disclosure of the pertinent
rights and privileges of various securities outstanding (stock, options,
warrants, preferred stock, debt and participation rights) including dividend and
liquidation preferences, participant rights, call prices and dates, conversion
or exercise prices and redemption requirements. Adoption of SFAS 129 will have
no effect on the Company because it currently discloses the information
specified.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of a Business Enterprise" ("SFAS 131"), establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines
F - 11
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
operating segments as components of an enterprise about which separate financial
information is available and that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
Statement of Financial Accounting Standards No.132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"),
revises employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans. It
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis and eliminates certain existing disclosure requirements.
SFAS 130, SFAS 131 and SFAS 132 are effective for financial statements
for periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Due to the recent issuance of
these standards, management has been unable to fully evaluate the impact, if
any, they may have on future financial statement disclosures.
2. ACQUISITIONS:
Pocono Downs Acquisition
On November 27, 1996, the Company purchased all of the capital stock of
The Plains Company and the limited partnership interests in The Plains Company's
affiliated entities (together, "Pocono Downs") for an aggregate purchase price
of $48.2 million plus acquisition-related fees and expenses of $730,000. Pocono
Downs conducts live harness racing at the harness racetrack located outside
Wilkes-Barre, Pennsylvania, export simulcasting of Pocono Downs races to
locations throughout the United States, pari-mutuel wagering at Pocono Downs and
at OTWs in Allentown and Erie, Pennsylvania on Pocono Downs races and on import
simulcast races from other racetracks, and telephone account wagering on live
and import simulcast races.
The Pocono Downs Acquisition was accounted for using the purchase
method of accounting. Accordingly, a portion of the purchase price was allocated
to the net assets acquired based on their estimated fair values. In accordance
with SFAS 109, the Company recorded an additional increase to goodwill of
approximately $9.7 million and a corresponding increase to a deferred tax
liability, representing the difference between the financial and tax bases of
certain assets acquired.
The results of operations of Pocono Downs have been included in the
Company's consolidated financial statements since the effective date of the
acquisition. The balance of the purchase price was recorded at cost over net
assets acquired as goodwill, approximately $10.4 million, and is being amortized
over forty years on a straight-line basis. The Company used its Credit Facility
(see Note 3) and cash of Pocono Downs to fund the acquisition.
F - 12
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. ACQUISITIONS -- (Continued)
In addition, pursuant to the terms of the purchase agreement, the
Company will be required to pay the sellers of Pocono Downs an additional $10
million if, within five years after the consummation of the Pocono Downs
Acquisition, Pennsylvania authorizes any additional form of gaming in which the
Company may participate. The $10 million payment would be payable in annual
installments of $2 million for five years, beginning on the date that the
Company first offers such additional form of gaming.
Charles Town Acquisition
On February 26, 1996, the Company entered into a joint venture
agreement (the "Charles Town Joint Venture") with Bryant Development Company and
its affiliates ("Bryant"), the holder of an option to purchase substantially all
of the assets of Charles Town Racing Limited Partnership and Charles Town Races,
Inc. (together, "Charles Town") relating to the Charles Town Race Track and
Shenandoah Downs (together, the "Charles Town Entertainment Complex") in
Jefferson County, West Virginia. In connection with the Charles Town Joint
Venture agreement, Bryant assigned the option to the Charles Town Joint Venture.
In November 1996, the Charles Town Joint Venture and Charles Town entered into
an amended and restated option agreement. On November 5, 1996, Jefferson County,
West Virginia approved a referendum permitting installation of gaming machines
at the Charles Town Entertainment Complex. On January 15, 1997, the Charles Town
Joint Venture acquired substantially all of the assets of Charles Town for
approximately $16.0 million plus acquisition-related fees and expenses of
approximately $2.2 million.
Pursuant to the original operating agreement governing the Charles Town
Joint Venture, the Company held an 80% ownership interest in the Charles Town
Joint Venture and was obligated to contribute 80% of the purchase price of the
Charles Town Acquisition and 80% of the cost of refurbishing and Charles Town
Entertainment Complex. In consideration of the fact that the Company contributed
100% of the purchase price of the Charles Town Acquisition and 100% of the cost
of refurbishing the Charles Town Entertainment Complex, the Company amended its
operating agreement with Bryant to, among other things, increase the Company's
ownership interest in the Charles Town Joint Venture to 89% and decrease
Bryant's interest to 11%. In addition, the amendment provided that the entire
amount the Company has contributed to the Charles Town Joint Venture for the
acquisition and refurbishment of the Charles Town Entertainment Complex would be
treated, as between the parties, as a loan to the Charles Town Joint Venture
from the Company. Accordingly, prior to the distribution of any profits pursuant
to the Charles Town Joint Venture, the Company must be repaid in full all such
contributions or loans, plus accrued interest, which as of December 31, 1997,
amounted to $45.9 million.
Bryant had acquired its option from Showboat Operating Company
("Showboat"). Showboat has retained an option (the "Showboat Option") to operate
any casino at the Charles Town Entertainment Complex in return for a management
fee (to be negotiated at the time, based on rates payable for similar
properties) and a right of first refusal to purchase or lease the site of any
casino at the Charles Town Entertainment Complex proposed to be leased or sold
and to purchase any interest proposed to be sold in any such casino on the same
terms offered by a third party or otherwise negotiated with the Charles Town
Joint Venture. The rights retained by Showboat under the Showboat Option extend
for a period of five years from
F - 13
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. ACQUISITIONS: -- (Continued)
November 6, 1996, the date that the Charles Town Joint Venture exercised its
option to purchase the Charles Town Races, and expires thereafter unless
legislation to permit casino gaming at the Charles Town Entertainment Complex
has been adopted prior to the end of the five-year period. If such legislation
has been adopted prior to such time, then the rights of Showboat continue for a
reasonable time (not less than 24 months) to permit completion of negotiations.
While the express terms of the Showboat Option do not specify which
activities at the Charles Town Entertainment Complex would constitute operation
of a casino, Showboat has agreed that the installation and operation of gaming
devices linked to the lottery (like the Gaming Machines the Company has
installed and will continue to install) at the Charles Town Entertainment
Complex's racetrack would not trigger Showboat's right to exercise the Showboat
Option. The Company would be required to pay a management fee to Showboat for
the operation of the casino.
The Charles Town Joint Venture refurbished and reopened the Charles
Town Entertainment Complex as an entertainment complex that features live
racing, dining, simulcast wagering and, effective September 1997, the operation
of gaming machines. The cost of the refurbishment was approximately $27.0
million inclusive of $614,000 of capitalized interest and exclusive of the costs
of leasing gaming machines through December 31, 1997. Construction in progress
at December 31, 1997 primarily consists of approximately $9.5 million related to
the Charles Town Entertainment Complex refurbishments. The estimated cost to
complete these refurbishments as of December 31, 1997 is approximately $475,000.
Effective June 4, 1996, the Charles Town Joint Venture entered into a
Loan and Security Agreement with Charles Town. The Loan and Security Agreement
provided for a working capital line of credit in the amount of $1,250,000 and a
requisite reduction of the purchase price under the option, by $1.60 for each
dollar borrowed under that line. Upon consummation of the Charles Town
Acquisition, Charles Town Races, Inc. repaid the loan. The parties agreed that
$936,000 of the amount borrowed was eligible for the $1.60 purchase price
reduction and are negotiating the applicability of the purchase price reduction
to the remaining $219,000 that was borrowed.
The Charles Town Acquisition was accounted for using the purchase
method of accounting. Accordingly, a portion of the purchase price was allocated
to the net assets acquired based on their estimated fair values. The balance of
the purchase price was recorded as cost over net assets acquired as goodwill,
approximately $1.7 million, and is being amortized over forty years on a
straight-line basis. The Company used its credit facility (see Note 3) and cash
from operations to fund the acquisition.
The 1997 results of operations of Charles Town have been included in
the Company's consolidated financial statements since January 15, 1997, the
effective date of the acquisition. The 1997 results of Charles Town closely
represent a full year of operations and the 1996 results of Charles Town are
immaterial to the financial statements taken as a whole, therefore, no pro forma
financial information is presented.
F - 14
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
Long-term debt and capital lease obligations are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1997
------ -----
(In thousands)
<S> <C> <C>
Long-Term Debt
Senior Notes - $80 million face amount, due December 15, 2004 with interest
payable at 10.625% per annum to noteholders semi-annually on June 15 and
December 15, commencing June 15, 1998. The notes are unsecured and are
unconditionally guranteed by certain subsidiaries of the Company............... $ -- $80,000
Term loans payable to a bank group in quarterly installments (see
additional information below under Credit Facilities). These term
loans were paid in December 1997 from the proceeds of the Debt
Offering....................................................................... 47,000 --
Other notes payable................................................................ 380 279
Capital lease obligations.......................................................... 137 57
------- -------
47,517 80,336
Less current maturities............................................................ 1,563 204
------- -------
$45,954 $80,132
======= =======
</TABLE>
Credit Facilities
At December 31, 1996 and 1997, the Company was contingently obligated
under letters of credit with face amounts aggregating $1,436,000 and $1,634,000,
respectively. These amounts consisted of $1,336,000 and $1,534,000,
respectively, relating to the horsemens' account balances and $100,000 for
Pennsylvania pari-mutuel taxes in each period.
In November 1996, the Company entered into an agreement with a bank
group which provides an aggregate of $75 million of credit facilities, which
included a $5 million revolving credit facility ("1996 Credit Facility").
Simultaneously with the closing of the 1996 Credit Facility, the Company repaid
amounts outstanding under its old credit facility and replaced it. The 1996
Credit Facility consisted of two term loan facilities of $47 million and $23
million (together, the "Term Loans") which were used for the Pocono Downs and
Charles Town acquisitions, respectively, and which were used for a portion of
the cost of refurbishment of the Charles Town Entertainment Complex, and a
revolving credit facility of $5 million (together, the "Loans"). The Term Loans
were repaid in December 1997 with the proceeds of the Company's debt offering.
See "Debt Offering" hereinafter. At such time, the 1996 Credit Facility was
amended and restated to provide for a $12 million revolving credit facility,
including a $3 million sublimit for standby letters of credit, which matures in
December 2002. The revolving credit facility is secured by substantially all of
the assets of the Company. The revolving credit facility provides for certain
covenants, including those of a financial nature. The Company would not have
been in compliance with certain covenants had the bank group not granted waiver
of certain technical defaults regarding minimum consolidated net worth,
F - 15
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: -- (Continued)
consolidated cash interest coverage ratio and minimum leverage ratio. However,
at December 31, 1997, the Company had not drawn any portion of the revolving
credit facility (although a $1.6 million letter of credit was issued against
such revolving credit facility) and had adequate capital resources even without
consideration of its revolving credit facility.
At the Company's option, the revolving facility may bear interest at
the highest of: (1) 1/2 of 1% in excess of the federal reserve reported
certificate of deposit rate, (2) the rate that the bank group announces from
time to time as its prime lending rate and (3) 1/2 of 1% in excess of the
federal funds rate plus an applicable margin of up to 2% or the revolving
facility may also bear interest at a rate tied to a eurodollar rate plus an
applicable margin of up to 3%.
Mandatory repayments of the revolving facility are required in an
amount equal to a percentage of the net cash proceeds from any issuance or
incurrence of equity or funded debt by the Company, that percentage to be
dependent upon the then outstanding balance of the revolving facility and the
Company's leverage ratio; however, the existing credit facility, as amended,
permitted the Company to retain up to the first $19 million of proceeds from an
offering of the Company's equity securities. Mandatory repayments of varying
percentages are also required in the event of either asset sales in excess of
stipulated amounts or defined excess cash flow.
Debt Offering
On December 12, 1997, the Company and certain of its subsidiaries (as
guarantors) entered into a purchase agreement for the sale and issuance of
$80,000,000 aggregate principal amount of its 10.625% Senior Notes due 2004 (the
"Offering"). The net proceeds of the Offering were used for repayment of
existing indebtedness, for capital expenditures and for general corporate
purposes. Interest on the notes will accrue from their date of original issuance
(the "Issue Date") and will be payable semi-annually, commencing in 1998. The
notes will be redeemable, in whole or in part, at the option of the Company in
2001 or thereafter at the redemption prices set forth in the Offering, plus
accrued and unpaid interest to the date of redemption.
The notes are general unsecured senior obligations of the Company and
rank equally in right of payment to any existing and future unsubordinated
indebtedness of the Company and senior in right of payment with all existing and
future subordinated indebtedness of the Company. The notes are unconditionally
guaranteed (the "Guarantees") on a senior basis by certain of the Company's
existing subsidiaries (the "Subsidiary Guarantors"). The Guarantees are general
unsecured obligations of the Subsidiary Guarantors and rank equally in right of
payment to any unsubordinated indebtedness of the Subsidiary Guarantors and rank
senior in right of payment to all other subordinated obligations of the
Subsidiary Guarantors. The notes are effectively subordinated in right of
payment to all secured indebtedness of the Company, including indebtedness
incurred under the amended $12 million revolving credit facility. Certain
subsidiaries of the Company are not guarantors of the notes (the "Subsidiary
Nonguarantors").
F - 16
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: -- (Continued)
Subsidiary Guarantors
Summarized financial information as of December 31, 1997 and for the
year ended December 31, 1997 for Penn National Gaming, Inc. ("Parent"), the
Subsidiary Guarantors and Subsidiary Nonguarantors is as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------------------------------------
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets...................... $ 21,478 $ 6,434 $ 1,637 $ 525 $ 29,024
Net property, plant and equipment... 446 59,507 43,208 -- 103,161
Other assets........................ 98,701 136,685 1,556 210,249 26,693
-------- -------- -------- -------- --------
Total............................... 120,625 202,626 46,401 210,774 158,878
-------- -------- -------- -------- --------
Current liabilities................. 1,326 7,770 5,232 530 13,798
Long-term liabilities............... 80,022 77,017 46,046 111,861 91,224
Shareholders' equity................ 39,277 117,839 (4,877) 98,383 53,856
-------- -------- -------- -------- --------
Total............................... $120,625 $202,626 $ 46,401 $210,774 $158,878
======== ======== ======== ======== ========
Year ended December 31, 1997
----------------------------------------------------------------------------------------
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
------- ---------- ------------- ------------ ------------
Total revenues...................... $ 6,886 $ 98,573 $ 15,118 $ 9,041 $111,536
Total operating expenses............ 3,210 90,283 17,349 9,041 101,801
-------- -------- -------- -------- --------
Income from operations.............. 3,676 8,290 (2,231) -- 9,735
Other income (expenses)............. (3,789) 1,835 (1,704) -- (3,658)
-------- -------- -------- -------- --------
Income before income taxes
and extraordinary item............ (113) 10,125 (3,935) -- 6,077
Taxes on income..................... (38) 1,966 -- (380) 2,308
-------- -------- -------- -------- --------
Income before extraordinary.........
item.............................. (75) 8,159 (3,935) 380 3,769
Extraordinary item.................. 142 768 952 380 1,482
-------- -------- -------- -------- --------
Net income.......................... $ (217) $ 7,391 $ (4,887) $ -- $ 2,287
======== ======== ======== ======== ========
</TABLE>
Summarized financial information as of December 31, 1996 and for the
years ended Decmber 31, 1995 and 1996 has not been presented because, prior to
fiscal 1997, the Subsidiary Nonguarantors were immaterial. Separate financial
statements of the Subsidiary Guarantors and Subsidiary Nonguarantors are not
presented because management does not believe such statements are meaningful.
F - 17
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:-- (Continued)
Future Minimum Lease Payments and Repayments of Long-term Debt
The following is a schedule of future minimum lease payments under
capitalized leases and repayments of long-term debt as of December 31, 1997:
<TABLE>
<CAPTION>
Capitalized Term Loans and
December 31, Leases Notes Payable Total
------------ ------ ------------- -----
(in thousands)
<S> <C> <C> <C> <C>
1998......................................................... $ 51 $ 157 $ 208
1999......................................................... 10 32 42
2000......................................................... -- 35 35
2001......................................................... -- 38 38
2002......................................................... -- 17 17
Thereafter................................................... -- 80,000 80,000
-------- ------- -------
Total minimum payments.................................... 61 80,279 80,340
Less interest discount amount............................ 4 -- 4
-------- ------- -------
Total present value of net minimum lease
payments and total notes payable....................... 57 80,279 80,336
Current maturities....................................... 47 157 204
-------- ------- -------
Total non-current portion................................ $ 10 $80,122 $80,132
======== ======= =======
</TABLE>
On February 18, 1997, the Company completed a secondary public offering
of 1,725,000 shares of common stock and used $19 million of the $23 million
proceeds therefrom to reduce the then outstanding Term Loan amounts (see Note
8).
4. CUSTOMER DEPOSITS:
Customer deposits represent amounts held by the Company for telephone
wagering.
5. COMMITMENTS AND CONTINGENCIES:
In November 1997, the Company signed a new Totalisator services and
equipment agreement for all of its subsidiaries. The agreement is for five
years, expiring on March 31, 2003. The new agreement provides for annual
payments based on a specified percentage of the total amount wagered at the
Company's facilities with a minimum annual payment of $1,475,000.
The Company is also liable under numerous operating leases for
automobiles, other equipment and buildings, which expire through 2004. Total
rental expense under these agreements were $672,000, $1,001,000 and $807,000 for
the years ended December 31, 1995, 1996 and 1997, respectively.
F - 18
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. COMMITMENTS AND CONTINGENCIES: -- (Continued)
The future lease commitments relating to noncancelable operating leases
as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C> <C>
1998................................................................... $1,035
1999................................................................... 1,084
2000................................................................... 1,099
2001................................................................... 1,067
2002................................................................... 1,070
Thereafter............................................................. 1,696
-------
$ 7,051
=======
</TABLE>
On April 12, 1994, the Company entered into employment agreements with
its Chairman and Chief Financial Officer at annual base salaries of $225,000 and
$95,000, respectively. The agreements became effective June 1, 1994 and, as
amended, terminate on June 30, 1999. Each agreement prohibits the employee from
competing with the Company during its term and for one year thereafter, and
requires a death benefit payment by the Company equal to 50% of the employee's
annual salary in effect at the time of death.
In August 1994, the Company signed a consulting agreement with its
former Chairman expiring in August 1999 at an annual payment of $125,000.
On June 1, 1995, the Company entered into an employment agreement with
its President and Chief Operating Officer at an annual base salary of $210,000.
The agreement terminates on June 12, 1998. The agreement prohibits the employee
from competing with the Company during its term and for two years thereafter,
and requires a death benefit payment by the Company equal to 50% of the
employee's annual salary in effect at the time of his death..
Under an agreement between the Company and its former president, the
former president received options to purchase 150,000 shares of common stock at
the fair value as of the date of grant of $3.33 per share expiring May 31, 2000.
The Company has two profit sharing plans under the provisions of
Section 401(k) of the Internal Revenue Code; The Penn National Gaming, Inc.
Profit Sharing Plan (the "Penn National 401(k) Plan") and the Pocono Downs Inc.
Profit Sharing Plan (the "Pocono Downs 401(k) Plan") cover all eligible
employees who are not members of a bargaining unit. Both Plans enable employees
choosing to participate to defer a portion of their salary in a retirement fund
to be administered by the Company. The Company's contributions to the Penn
National 401(k) Plan are set at 50% of employees' elective salary deferrals
which may be made up to a maximum of 6% of employee compensation. The Company
has no obligation to contribute to the Pocono Downs 401(k) Plan. However, for
the years ended December 31, 1995, 1996 and 1997 the Company has made
discretionary contributions to the Pocono Downs 401(k) Plan based upon a
percentage of the employee elective deferrals which may be made up to a maximum
of 15% of employee compensation. The Company made contributions to these plans
of approximately $70,000, $89,000 and $145,000 for the years ended December 31,
1995, 1996 and 1997, respectively.
F - 19
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. COMMITMENTS AND CONTINGENCIES: -- (Continued)
Charles Town has a defined contribution plan covering substantially
all of its employees. Charles Town makes monthly contributions equal to the
amount accrued for retirement expense, which is calculated as .25% of the daily
mutual handle and .5% of the net video lottery revenues. Total contributions for
the year ended December 31, 1997 was $114,000.
In June 1997, the Charles Town Joint Venture, which is operated as PNGI
Charles Town Gaming, LLC, an 89% subsidiary of the Company entered into an
agreement (the "GTECH Agreement") with GTECH relating to the lease, installation
and service of a video lottery system ("VLS") at the Charles Town Entertainment
Complex. The GTECH Agreement provides that GTECH will be the exclusive provider
of VLS and related services, including video lottery terminals and slot
machines, if any, at the Charles Town Entertainment Complex; provided, however,
the Charles Town Joint Venture has retained management control over the VLS. The
GTECH Agreement has a term of five years from the first date on which 400 Gaming
Machines are installed, operational and generating net win (total of all cash
inserted into, or game credits played on, a video lottery terminal minus the
total value of all prizes paid). Pursuant to the GTECH Agreement, the Charles
Town Joint Venture has agreed to pay GTECH a fee which can range between 4% and
10% of Gaming Machine gross revenue. The Company generally is obligated to pay a
lower percentage of Gaming Machine gross revenue to GTECH at higher levels of
average win per day per machine and a higher percentage of Gaming Machine gross
revenue at lower levels of average win per day per machine; provided, however,
the Charles Town Joint Venture is obligated to pay GTECH the greater of the
percentage fee described above or a minimum annual fee of $4.3 million if more
than 800 Gaming Machines are in operation at the Charles Town Entertainment
Complex. The payments pursuant to the GTECH Agreement include the cost of the
rental of the Gaming Machines, the rental of the software (which is not a
component of the VLS, as defined), technical assistance and programming
services, maintenance and marketing services. At the end of the term of the
GTECH Agreement, the Charles Town Joint Venture will purchase the VLS from GTECH
for a cash purchase price equal to the net unamortized residual value of the
VLS. In the event GTECH terminates the agreement because of the Charles Town
Joint Venture's material misrepresentation and/or breach of the GTECH Agreement,
the Charles Town Joint Venture must purchase the VLS from GTECH at a price equal
to the net unamortized residual value of the VLS at that time and pay an
additional one-time fee as follows: for such termination in the first year of
the term, $8.5 million; for such termination in the second year of the term,
$6.6 million; for such termination in the third year of the term, $5.0 million;
for such termination in the fourth year of the term, $3.7 million; and for such
termination in the fifth year of the term, $2.5 million. Pursuant to the GTECH
Agreement, the Charles Town Joint Venture must maintain tangible net worth equal
to at least 105% of the amounts payable as additional fees in the event of a
termination as set forth in the preceding sentence.
On March 26, 1997, the Company entered into an agreement to purchase
property for its Carbondale, Pennsylvania OTW facility. The agreement provides
for a purchase price of $200,000 and is subject to numerous contingencies,
including approval by the Pennsylvania State Harness Racing Commission (the
"Harness Racing Commission"). On June 5, 1997, the Company's application was
approved by the Harness Racing Commission. In October 1997, the Company entered
into a construction contract regarding the
F - 20
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. COMMITMENTS AND CONTINGENCIES: -- (Continued)
Carbondale OTW facility. Commitments under this contract at December 31, 1997
were approximately $1.2 million. The Company expects to have the facility
constructed and operational in the first quarter of 1998.
On June 20, 1997, the Company acquired options to purchase
approximately 100 acres of land in Memphis, Tennessee for an aggregate purchase
price of $2.7 million. The Company paid $11,000 to acquire the options and has
the right to extend the options from month to month until June 20, 1998 upon the
payment of $11,000 per month. The Company has filed an application to the
Tennessee State Racing Commission for the proposed development of a harness
racetrack and off-track wagering facility at the site on October 9, 1997. The
Company anticipates to hear the results of the Commission's review of the
application during the second quarter of 1998.
On July 9, 1997, the Company entered into a lease agreement for its
Hazleton, Pennsylvania OTW facility. The initial term of the lease is for ten
years with two additional five-year renewal options available. This lease
provides for minimum annual lease payments of $98,400 in years one through five
and $108,240 in years six through ten. The agreement is subject to numerous
contingencies, including approval by the Harness Racing Commission. On September
26, 1997, the Company's application was approved by the Harness Racing
Commission. In November 1997, the Company entered into a construction contract
regarding the Hazleton OTW facility. Commitments under this contract at December
31, 1997 were approximately $1.2 million. The Company expects to have the
facility constructed and operational in the first quarter of 1998.
On September 9, 1997, the Company entered into a lease agreement for
its Stroudsburg, Pennsylvania OTW facility. The initial term of the lease is for
ten years with two additional five-year renewal options available. This lease
provides for minimum annual lease payments of $101,640 during its initial term.
The table above does not reflect this lease commitment. The agreement is subject
to numerous contingencies, including approval by the Harness Racing Commission.
On November 6, 1997, the Company's application was approved by the Harness
Racing Commission. The Company is awaiting land development plan approvals and
has no definitive date of opening at this time.
On September 26, 1997, the Company entered into a lease agreement for
its proposed Altoona, Pennsylvania OTW facility. The initial term of the lease
is for ten years with two additional five-year renewal options available. This
lease provides for minimum annual lease payments of $92,400 during its initial
term. The table presented above does not reflect this lease commitment. The
agreement is subjected to numerous contingencies, including approval by the
Pennsylvania State Horse Racing Commission. On January 15, 1998, the Company's
application was approved by the Pennsylvania State Horse Racing Commission. The
Company expects to have the facility renovated and operational in the third
quarter of 1998.
The Company is subject to possible liabilities arising from
environmental conditions at the landfill adjacent to Pocono Downs racetrack.
Specifically, the Company may incur expenses in connection with the
F - 21
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. COMMITMENTS AND CONTINGENCIES: -- (Continued)
landfill in the future, which expenses may not be reimbursed by the four
municipalities which are parties to an existing settlement agreement. The
Company is unable to estimate the amount, if any, that it may be required to
expend.
6. INCOME TAXES:
The provision for income taxes charged to operations was as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1995 1996 1997
------ ------ -----
(In thousands)
<S> <C> <C> <C>
Current tax expense (benefit)
Federal............................................... $2,605 $2,686 $2,006
State................................................. 842 880 399
------ ------ ------
Total current...................................... 3,447 3,566 2,405
------ ------ ------
Deferred tax expense (benefit)
Federal............................................... 15 178 (56)
State................................................. 5 50 (41)
------- ------ ------
Total deferred..................................... 20 228 (97)
------- ------ ------
Total provision.................................... $3,467 $3,794 $2,308
====== ====== ======
</TABLE>
Deferred tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
December 31,
1996 1997
------ -----
<S> <C> <C>
Deferred tax assets
Reserve for debit balances of horsemens' accounts, bad
debts, restructuring charges and litigation.......... $ 90 $ 469
======= =======
Deferred tax liabilities
Property, plant and equipment......................... $10,810 $11,092
======= =======
</TABLE>
The following is a reconciliation of the statutory federal income tax
rate to the actual effective income tax rate for the following periods:
F - 22
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. INCOME TAXES: -- (Continued)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1995 1996 1997
------- ------ ----
<S> <C> <C> <C>
Percent of Pretax Income
Federal tax rate..................................... 34.0% 34.0% 34.0%
Increase in taxes resulting from state and local income
taxes, net of federal tax benefit................. 6.7 6.6 3.9
Permanent difference relating to amortization of
goodwill.......................................... .3 .2 .9
Other miscellaneous items............................ -- -- (.8)
----- ----- ----
41.0% 40.8% 38.0%
===== ===== ====
</TABLE>
7. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest was $71,000, $506,000 and
$4,346,000 in 1995, 1996 and 1997, respectively.
Cash paid during the year for income taxes was $2,839,000, $2,490,000
and $3,649,000 in 1995, 1996 and 1997, respectively.
Non-cash investing and financing activities were as follows:
During 1996, the Company purchased Pocono Downs for an aggregate
purchase price of $47,320,000, net of cash acquired. In conjunction with the
acquisition, liabilities were assumed as follows:
Fair value of assets acquired............................... $53,150,000
Cash paid for the capital stock and the limited partnership
interests................................................... 47,320,000
-----------
Liabilities assumed......................................... $ 5,830,000
===========
During 1996, the Company issued a $250,000 long-term note payable for
the incurrence of prepaid Charles Town Acquisition costs.
8. COMMON STOCK:
On February 18, 1997, the Company completed a secondary public
offering of 1,725,000 shares of its common stock. The net proceeds of $23
million were used to reduce $19 million of the Term Loan amounts outstanding
under the Existing Credit Facility with the balance of the proceeds used to
finance a portion of the cost of the refurbishment of the Charles Town
Entertainment Complex (see Note 2 for Acquisitions).
F - 23
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. COMMON STOCK: -- (Continued)
In April 1994, the Company's Board of Directors and shareholders
adopted and approved the Stock Option Plan ("Plan"). On April 30, 1997, the
shareholders and the Board of Directors approved an increase in the number of
authorized shares underlying stock options to be granted from 1,290,000 to
2,000,000 shares. Therefore, the Plan permits the grant of options to purchase
up to 2,000,000 shares of Common Stock, subject to antidilution adjustments, at
a price per share no less than 100% of the fair market value of the Common Stock
on the date an option is granted with respect to incentive stock options only.
The price would be no less than 110% of fair market value in the case of an
incentive stock option granted to any individual who owns more than 10% of the
total combined voting power of all classes of outstanding stock. The Plan
provides for the granting of both incentive stock options intended to qualify
under Section 422 of the Internal Revenue Code of 1986, and nonqualified stock
options which do not so qualify. Unless the Plan is terminated earlier by the
Board of Directors, the Plan will terminate in April 2004.
Stock options that expire between May 26, 2001 and October 23, 2006
have been granted to officers and directors to purchase Common Stock at prices
ranging from $3.33 to $17.63 per share.
All options and warrants were granted at market prices at date of
grant. The following table contains information on stock options issued under
the Plan for the three year period ended December 31, 1997:
<TABLE>
<CAPTION>
Exercise Price
Option Range
Shares Per Share Average Price
------ --------- -------------
<S> <C> <C> <C>
Outstanding at January 1, 1995............... 465,000 $ 3.33 $ 3.33
Granted...................................... 345,000 3.33 to 5.58 5.51
---------
Outstanding at December 31, 1995............. 810,000 3.33 to 5.58 3.82
Granted...................................... 280,000 5.63 to 17.63 12.99
Exercised.................................... (110,250) 3.33 3.33
---------
Outstanding at December 31, 1996............. 979,750 3.33 to 17.63 9.10
Granted...................................... 100,000 11.50 to 16.63 15.59
Exercised.................................... (39,250) 3.33 to 5.63 4.01
---------
Outstanding at December 31, 1997............. 1,040,500 3.33 to 17.63 7.31
=========
</TABLE>
In addition, 300,000 common stock options were issued outside the Plan
on October 23, 1996. These options were issued at $17.63 per share and are
exercisable through October 23, 2006.
<TABLE>
<CAPTION>
Exercise Weighted
Price Range Average
Options shares Per Share Price
-------------- --------- -----
<S> <C> <C> <C>
Exercisable at year-end:
1995.......................................... 270,000 $3.33 to $5.58 $3.33
1996.......................................... 337,250 3.33 to 17.63 3.71
1997.......................................... 653,833 3.33 to 17.63 7.08
</TABLE>
F - 24
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. COMMON STOCK: -- (Continued)
<TABLE>
<CAPTION>
1994 Plan
---------
Options available for future grant:
-----------------------------------
<S> <C> <C>
1997........................................................... 805,000
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Ranges Total
------------------------------ -----
$3.33 $5.58 $3.33
Range of exercise prices to $5.50 to $17.63 to $17.63
- ------------------------ --------- ---------- -----------
<S> <C> <C> <C>
Outstanding options:
Number outstanding at December 31, 1997.... 641,000 694,500 1,335,500
Weighted average remaining contractual life
(years)............................... 5.82 7.36 6.62
Weighted average exercise price............ $3.84 $14.97 $9.63
Exercisable options:
Number outstanding at December 31, 1997.... 471,000 182,833 653,833
Weighted average exercise price............ $3.79 $15.56 $7.08
</TABLE>
Warrants outstanding have been granted to the underwriters of the
Company's initial public offering and to certain officers and directors to
purchase Common Stock at prices ranging from $3.33 to $4.00 per share which
expire on June 2, 1999 and May 31, 2000.
During 1995, the Company canceled 150,000 warrants which were granted
to a former officer of the Company at a price of $3.33 per share and were to
expire on May 31, 2000. The 150,000 canceled warrants were replaced with 150,000
shares of common stock purchase options at an exercise price of $3.33 per share.
A summary of the warrant transactions follows:
F - 25
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. COMMON STOCK: -- (Continued)
<TABLE>
<CAPTION>
Exercise Price
Warrant Range Weighed
Shares Per Share Average Price
------ --------- -------------
<S> <C> <C> <C>
Warrants outstanding at January 1, 1995.......... 690,000 $3.33 to $4.00 $3.85
Warrants canceled................................ (150,000) 3.33 3.33
Warrants exercised............................... (45,000) 4.00 4.00
---------
Warrants outstanding at December 31, 1995........ 495,000 4.00 4.00
Warrants exercised............................... (300,000) 4.00 4.00
---------
Warrants outstanding at December 31, 1996........ 195,000 4.00 4.00
Warrants exercised............................... (46,000) 4.00 4.00
---------
Warrants outstanding at December 31, 1997........ 149,000 4.00 4.00
---------
</TABLE>
During 1995, the FASB adopted Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", which
has recognition provisions that establish a fair value based method of
accounting for stock-based employee compensation plans and established fair
value as the measurement basis for transactions in which an entity acquires
goods or services from nonemployees in exchange for equity instruments. SFAS 123
also has certain disclosure provisions. Adoption of the recognition provisions
of SFAS 123 with regard to these transactions with nonemployees was required for
all such transactions entered into after December 15, 1994, and the Company
adopted these provisions as required. The recognition provision with regard to
the fair value based method of accounting for stock-based employee compensation
plans is optional. Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employers" ("APB 25") uses what is referred to as an intrinsic
value based method of accounting. The Company has decided to continue to apply
APB 25 for its stock-based employee compensation arrangements. Accordingly, no
compensation cost has been recognized. Had compensation cost for the Company's
employee stock option plan been determined based on the fair value at the grant
date for awards under the plan consistent with the method of SFAS 123, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net income
As reported...................................... $4,996,000 $5,510,000 $2,287,000
Pro forma........................................ 4,984,000 5,344,000 1,660,000
Basic net income per share
As reported...................................... $.39 $.41 $.15
Pro forma........................................ .39 .40 .11
Diluted net income per share
As reported...................................... $.38 $.40 $.15
Pro forma........................................ .38 .39 .11
</TABLE>
The fair value of each option and warrant grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1995, 1996 and 1997: dividend
yield of 0%; expected volatility of 20%; risk-free interest rate of 6%; and
F - 26
<PAGE>
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. COMMON STOCK: -- (Continued)
expected lives of 5 years. The effects of applying SFAS 123 in this pro forma
disclosure are not indicative of future amounts. SFAS 123 does not apply to
awards prior to 1995 and additional awards in future years are anticipated.
9. LOSS FROM RETIREMENT OF DEBT:
In 1997, the Company recorded an extraordinary loss of $1,482,000 after
taxes for the early retirement of debt. The extraordinary loss consists
primarily of write-offs of deferred finance costs associated with the retired
notes and legal and bank fees relating to the early extinguishment of the debt.
10. SITE DEVELOPMENT AND RESTRUCTURING CHARGES:
During 1997, the Company incurred site development ($1,735,000) and
restructuring ($702,000) charges of $2,437,000. The site development charges
consist of $800,000 related to the Charles Town Races facility and $935,000
related to the abandonment of certain proposed operating sites during 1997. The
restructuring charges primarily consist of $350,000 in severance termination
benefits and other charges at the Charles Town Races facility; $300,000 for the
restructuring of the Erie, Pennsylvania off-track wagering facility and $52,000
of property and equipment written-off in connection with the discontinuation of
Penn National Speedway, Inc. operations during 1997. These charges, net of
income taxes, decreased the 1997 net income and diluted net income per share by
$1,462,000 and $0.09 per share, respectively.
F - 27
<PAGE>
================================================================================
All tendered Old Notes, executed Letters of
Transmittal and other related documents should be
directed to the Exchange Agent. Questions and
requests for assistance and requests for additional
copies of the Prospectus, the Letter of Transmittal
and other related documents should be addressed to
the Exchange Agent as follows:
By Hand, Registered or Certified Mail
or Overnight Carrier:
State Street Bank and Trust Company
Two International Place
Boston, MA 02110
By Facsimile:
(617) 664-5314
Attention: Kellie Mullen, Corporate Trust Department
Confirm by telephone: (617) 664-5587
(Originals of all documents submitted by facsimile should be sent
promptly by hand, overnight courier, or registered or certified
mail)
No person has been authorized to give any
information or to make any representation other than
those contained in this Prospectus and the
accompanying Letter of Transmittal, and, if given
or made, such information or representation must not be
relied upon as having been authorized. Neither this
Prospectus nor the accompanying letter of
Transmittal nor both together constitute an offer to
sell at the solicitation of an offer to buy any securities
other than the securities to which such offer of
solicitation is unlawful. Neither the delivery of this
Prospectus or the Letter of Transmittal or both
together nor any exchange made hereunder shall,
under any circumstances, create any implication that
there has been no change in the affairs of the
Company since the date hereof or that the
information contained herein is correct as of any time
subsequent to its date.
Until July 7, 1998 (25 days after the date of consummation of this
Exchange Offer), all dealers effecting transactions in
the Exchange Notes, whether or not participating in
this Exchange Offer, may be required to deliver a
Prospectus.
================================================================================
<PAGE>
================================================================================
Offer to Exchange
All Outstanding
10 5/8% Senior Notes Due 2004
($80,000,000 Principal Amount)
For 10 5/8% Senior Notes
Due 2004
PENN NATIONAL GAMING,
INC.
Payment of Principal and
Interest Unconditionally
Guaranteed by Certain
of its Subsidiaries
--------------
PROSPECTUS
--------------
April __, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. Indemnification of Directors and Officers
The Company's Articles of Incorporation and By-laws require it to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed proceeding by reason of the fact that he
is or was a director or officer of the Company or any other person designated by
the Board of Directors (which may included any person serving at the request of
the Company as a director, officer, employee, agent, fiduciary or trustee of
another corporation, partnership, joint venture, trust, employee benefit plan or
other entity or enterprise), in each case, against certain liabilities
(including, damages, judgments, amounts paid in settlement, fines, penalties and
expenses (including attorneys' fees and disbursements)), except where such
indemnification is expressly prohibited by applicable law, where such person has
engaged in willful misconduct or recklessness or where such indemnification has
been determined to be unlawful. Such indemnification as to expenses is mandatory
to the extent the individual is successful on the merits of the matter.
Pennsylvania law permits the Company to provide similar indemnification to
employees and agents who are not directors or officers. The determination of
whether an individual meets the applicable standard of conduct may be made by
the disinterested directors, independent legal counsel or the stockholders.
Pennsylvania law also permits indemnification in connection with a proceeding
brought by or in the right of the Company to procure a judgment in its favor.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "Act") may be permitted to directors, officers, or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in that Act and is
therefore unenforceable. The Company expects to obtain a directors and officers
liability insurance policy prior to the effective date of this Registration
Statement.
ITEM 21. Exhibits and Financial Statement Schedules
Exhibit Index
Exhibit
Number Description
- ------ -----------
4.1# -- Indenture dated as of December 17, 1997 among the Company, certain
subsidiaries and State Street Bank and Trust Company, as trustees.
4.2# -- Registration Rights Agreement dated as of December 17, 1997 among
the Company, certain subsidiaries, BT Alex. Brown Incorporated and
Jefferies & Company, Inc.
4.3(6) -- Purchase Agreement dated December 12, 1997 among the Company,
certain subsidiaries, and BT Alex Brown Incorporated and Jefferies
& Company, Inc.
5* -- Opinion of Morgan, Lewis & Bockius LLP regarding validity of
Exchange Notes.
10.1(6) -- Amended and Restated Credit Facility dated as of December 17, 1997
among the Company, certain lenders, Bankers Trust Company, as
agent, and CoreStates Bank, N.A., as co-agent.
10.2(1) -- Second Amended and Restated Operating Agreement of PNGI Charles
Town Gaming Limited Liability Company dated October 17, 1997.
10.3(1) -- Fourth Amendment, Waiver and Consent among Company, CoreStates
Bank, N.A. and Bankers Trust Company dated 10/30/97.
10.4(2) -- Agreement dated June 25, 1997 by and between GTECH Corporation and
PNGI Charles Town Gaming, LLC.
10.5(2) -- Option to Purchase Real Property dated June 20, 1997 between
Roosevelt Boyland Devisees and the Company.
10.6(2) -- Option to Purchase Real Property dated June 20, 1997 between Joyce
M. Peck and the Company.
10.7(2) -- Option to Purchase Real Property dated June 20, 1997 between Alan
J. Aste and the Company.
10.8(3) -- Standard Form of Agreement dated March 26, 1997 between the
Company and Myers Building Systems, Inc. with respect to the
construction of Horse Barns for the Charles Town Race Track.
10.9(4) -- Standard Form of Agreement dated December, 1996 between the
Company and Warfel Construction Company with respect to
renovations to the Charles Town Race Track.
II - 1
<PAGE>
10.10(5) -- Amended and Restated Option Agreement.
10.10(5) -- Amended and Restated Operating Agreement of PNGI Charles Town
Gaming Limited Liability Company dated December 31, 1996.
10.10(5) -- Term Sheet to First Amendment to Amended and Restated Operating
Agreement of PNGI Charles Town Gaming Limited Liability Company.
10.74(6) -- Waiver dated March 25, 1998 between the Company, certain
lenders, Bankers Trust Company as Agent, and CoreStates Bank,
N.A., as Co-Agent.
10.75* -- Waiver dated April 27, 1998, between the Company, certain
lenders, Bankers Trust Company as Agent, and CoreStates Bank,
N.A., as Co-Agent.
12* -- Statement regarding computation of earnings to fixed charges ratio
21(6) -- Subsidiaries of Penn National Gaming, Inc.
23.1* -- Consent of Morgan, Lewis & Bockius (included in Exhibit 5)
23.2* -- Consent of BDO Seidman, LLP
24.1 -- Powers of Attorney (included on signature pages hereof)
- ---------------
# Previously filed
* Filed herewith.
** To be filed by Amendment
(1) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-Q for the
year ended December 31, 1996 and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Form 8-K dated January 30, 1997 and
incorporated herein by reference.
(6) Filed as an exhibit to the Company's Annual Report on Form 10-K for fiscal
1997 and incorporated herein by reference.
ITEM 22. Undertakings
The undersigned registrant hereby undertakes:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provision, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
II - 2
<PAGE>
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
II - 3
<PAGE>
SIGNATURES
Pursuant to the requirements on the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-4 and has duly caused this registration
statements to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Wyomissing, State of Pennsylvania on January 30,
1998.
PENN NATIONAL GAMING, INC.
By: /s/ PETER M. CARLINO
-----------------------
Peter M. Carlino,
Chairman of the Board
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Peter M. Carlino and Robert S. Ippolito
his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities, to sign any and all registration statements filed by Penn
National Gaming, Inc., a Pennsylvania corporation, in which the undersigned
holds offices, and any amendments to the registration statement, and to file any
and all of the same, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents or any of them full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ PETER M. CARLINO Chairman of the Board and Chief Executive April 28, 1998
- ------------------------------------
Peter M. Carlino Officer (Principal Executive Officer)
/s/ WILLIAM J. BORK President, Chief Operating Officer and Director April 28, 1998
- ------------------------------------
William J. Bork
/s/ PHILIP T. O'HARA, JR. Vice President and General Manager April 28, 1998
- ------------------------------------
Philip T. O'Hara, Jr.
/s/ HAROLD CRAMER Director April 28, 1998
- ------------------------------------
Harold Cramer
/s/ DAVID A. HANDLER Director April 28, 1998
- ------------------------------------
David A. Handler
/s/ ROBERT P. LEVY Director April 28, 1998
- ------------------------------------
Robert P. Levy
/s/ JOHN M. JACQUEMIN Director April 28, 1998
- ------------------------------------
John M. Jacquemin
/s/ JOSEPH A. LASHINGER, JR. Vice President April 28, 1998
- ------------------------------
Joseph A. Lashinger, Jr.
</TABLE>
II - 4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ ROBERT S. IPPOLITO Chief Financial Officer, Secretary and April 28, 1998
- ------------------------------------
Robert S. Ippolito Treasurer (Principal Financial Officer)
/s/ ROBERT E. ABRAHAM Vice President and Corporate Controller April 28, 1998
- --------------------------------
Robert E. Abraham (Principal Accounting Officer)
</TABLE>
II - 5
<PAGE>
SIGNATURES
Pursuant to the requirements on the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-4 and has duly caused this registration
statements to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Wyomissing, State of Pennsylvania on January 30,
1998.
MOUNTAINVIEW THOROUGHBRED RACING
ASSOCIATION
By: /s/ PETER M. CARLINO
-----------------------------------
Peter M. Carlino,
President and Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Peter M. Carlino and Robert S. Ippolito
his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities, to sign any and all registration statements filed by
Mountainview Thoroughbred Racing Association, a Pennsylvania corporation, in
which the undersigned holds offices, and any amendments to the registration
statement, and to file any and all of the same, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents or any of them full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ PETER M. CARLINO President and Director (Principal Executive April 28, 1998
- ---------------------------------------
Peter M. Carlin Officer)
/s/ ROBERT S. IPPOLITO Chief Financial Officer (Principal Financial April 28, 1998
- ---------------------------------------
Robert S. Ippolito Officer and Principal Accounting Officer)
/s/ HAROLD CRAMER Director April 28, 1998
- ---------------------------------------
Harold Cramer
</TABLE>
II - 6
<PAGE>
SIGNATURES
Pursuant to the requirements on the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this registration
statements to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Wyomissing, State of Pennsylvania on January 30,
1998.
PENNSYLVANIA NATIONAL TURF CLUB, INC.
By: /s/ PETER M. CARLINO
---------------------------------
Peter M. Carlino,
President and Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Peter M. Carlino and Robert S. Ippolito his true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to sign any and all registration statements filed by Pennsylvania
National Turf Club, Inc., a Pennsylvania corporation, in which the undersigned
holds offices, and any amendments to the registration statement, and to file any
and all of the same, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents or any of them full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ PETER M. CARLINO President and Director (Principal Executive April 28, 1998
- ---------------------------------------
Peter M. Carlino Officer)
/s/ ROBERT S. IPPOLITO Secretary and Treasurer (Principal Financial April 28, 1998
- ---------------------------------------
Robert S. Ippolito Officer and Principal Accounting Officer)
/s/ HAROLD CRAMER Director April 28, 1998
- ---------------------------------------
Harold Cramer
</TABLE>
II - 7
<PAGE>
SIGNATURES
Pursuant to the requirements on the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this registration
statements to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Wyomissing, State of Pennsylvania on January 30,
1998.
PENN NATIONAL SPEEDWAY, INC.
By: /s/ WILLIAM J. BORK
-------------------------------
William J. Bork,
Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Peter M. Carlino and Robert S. Ippolito his true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to sign any and all registration statements filed by Penn National
Speedway, Inc., a Pennsylvania corporation, in which the undersigned holds
offices, and any amendments to the registration statement, and to file any and
all of the same, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents or any of them full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ RICHARD CARLINO Chief Executive Officer (Principal Executive April 28, 1998
- ------------------------------------
Richard Carlino Officer)
/s/ ROBERT S. IPPOLITO Secretary and Treasurer (Principal Financial April 28, 1998
- ------------------------------------
Robert S. Ippolito Officer and Principal Accounting Officer)
/s/ WILLIAM J. BORK Director April 28, 1998
- ------------------------------------
William J. Bork
/s/ PETER M. CARLINO Director April 28, 1998
- ------------------------------------
Peter M. Carlino
</TABLE>
II - 8
<PAGE>
SIGNATURES
Pursuant to the requirements on the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this registration
statements to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Wyomissing, State of Pennsylvania on January 30,
1998.
NORTHEAST CONCESSIONS, INC.
By: /s/ PETER M. CARLINO
-------------------------------
Peter M. Carlino,
Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Peter M. Carlino and Robert S. Ippolito his true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to sign any and all registration statements filed by Northeast
Concessions, Inc., a Pennsylvania corporation, in which the undersigned holds
offices, and any amendments to the registration statement, and to file any and
all of the same, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents or any of them full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ WILLIAM J. BORK President and Director (Principal Executive April 28, 1998
- ---------------------------------
William J. Bork Officer)
/s/ ARTHUR E. MANUEL Treasurer (Principal Financial Officer and April 28, 1998
- ---------------------------------
Arthur E. Manuel Principal Accounting Officer)
/s/ PETER M. CARLINO Director April 28, 1998
- ---------------------------------
Peter M. Carlino
</TABLE>
II - 9
<PAGE>
SIGNATURES
Pursuant to the requirements on the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this registration
statements to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Wyomissing, State of Pennsylvania on January 30,
1998.
THE DOWNS OFF-TRACK WAGERING, INC.
By: /s/ PETER M. CARLINO
-------------------------------
Peter M. Carlino,
Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Peter M. Carlino and Robert S. Ippolito his true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to sign any and all registration statements filed by The Downs
Off-Track Wagering, Inc., a Pennsylvania corporation, in which the undersigned
holds offices, and any amendments to the registration statement, and to file any
and all of the same, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents or any of them full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ WILLIAM J. BORK President and Director (Principal Executive April 28, 1998
- ---------------------------------
William J. Bork Officer)
/s/ ARTHUR E. MANUEL Treasurer (Principal Financial Officer and April 28, 1998
- ---------------------------------
Arthur E. Manuel Principal Accounting Officer)
/s/ PETER M. CARLINO Director April 28, 1998
- ---------------------------------
Peter M. Carlino
</TABLE>
II - 10
<PAGE>
SIGNATURES
Pursuant to the requirements on the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this registration
statements to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Wyomissing, State of Pennsylvania on January 30,
1998.
THE DOWNS RACING, INC.
By: /s/ JOSEPH A. LASHINGER, JR.
------------------------------
Joseph A. Lashinger, Jr.
President and Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Peter M. Carlino and Robert S. Ippolito his true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to sign any and all registration statements filed by The Downs
Racing, Inc., a Pennsylvania corporation, in which the undersigned holds
offices, and any amendments to the registration statement, and to file any and
all of the same, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents or any of them full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ JOSEPH A. LASHINGER, JR. President, Treasurer, Secretary and Director April 28, 1998
- -------------------------------------
Joseph A. Lashinger, Jr. (Principal Executive Officer, Principal
Financial Officer and Principal Accounting
Officer)
</TABLE>
II - 11
<PAGE>
SIGNATURES
Pursuant to the requirements on the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this registration
statements to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Wyomissing, State of Pennsylvania on January 30,
1998.
STERLING AVIATION INC.
By: /s/ PETER M. CARLINO
------------------------------
Peter M. Carlino,
President and Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Peter M. Carlino and Robert S. Ippolito his true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to sign any and all registration statements filed by Sterling
Aviation Inc., a Delaware corporation, in which the undersigned holds offices,
and any amendments to the registration statement, and to file any and all of the
same, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents or any of them full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ PETER M. CARLINO President and Director (Principal Executive April 28, 1998
- -----------------------------------
Peter M. Carlino Officer)
/s/ ROBERT S. IPPOLITO Secretary and Treasurer (Principal Financial April 28, 1998
- -----------------------------------
Robert S. Ippolito Officer and Principal Accounting Officer)
/s/ HAROLD CRAMER Director April 28, 1998
- -----------------------------------
Harold Cramer
</TABLE>
II - 12
<PAGE>
SIGNATURES
Pursuant to the requirements on the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this registration
statements to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Wyomissing, State of Pennsylvania on January 30,
1998.
PENN NATIONAL HOLDING COMPANY
By: /s/ PETER M. CARLINO
------------------------------
Peter M. Carlino,
Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Peter M. Carlino and Robert S. Ippolito his true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to sign any and all registration statements filed by Penn National
Holding Company, a Delaware corporation, in which the undersigned holds offices,
and any amendments to the registration statement, and to file any and all of the
same, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents or any of them full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ WILLIAM J. BORK President and Director (Principal Executive April 28, 1998
- -----------------------------------
William J. Bork Officer)
/s/ ROBERT S. IPPOLITO Treasurer, Secretary and Director (Principal April 28, 1998
- -----------------------------------
Robert S. Ippolito Financial Officer and Principal Accounting
Officer)
/s/ PETER M. CARLINO Director April 28, 1998
- -----------------------------------
Peter M. Carlino
</TABLE>
II - 13
<PAGE>
SIGNATURES
Pursuant to the requirements on the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this registration
statements to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Wyomissing, State of Pennsylvania on January 30,
1998.
PNGI POCONO, INC.
By: /s/ WILLIAM J. BORK
------------------------------
William J. Bork,
President and Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Peter M. Carlino and Robert S. Ippolito his true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to sign any and all registration statements filed by PNGI Pocono,
Inc., a Delaware corporation, in which the undersigned holds offices, and any
amendments to the registration statement, and to file any and all of the same,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents or any of them full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ WILLIAM J. BORK President and Director (Principal Executive April 28, 1998
- ------------------------------------
William J. Bork Officer)
/s/ ROBERT S. IPPOLITO Treasurer and Secretary (Principal Financial April 28, 1998
- ------------------------------------
Robert S. Ippolito Officer and Principal Accounting Officer)
</TABLE>
II - 14
<PAGE>
SIGNATURES
Pursuant to the requirements on the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this registration
statements to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Wyomissing, State of Pennsylvania on January 30,
1998.
PENN NATIONAL GAMING OF WEST VIRGINIA, INC.
By: /s/ PETER M. CARLINO
-------------------------------------
Peter M. Carlino,
Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Peter M. Carlino and Robert S. Ippolito his true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to sign any and all registration statements filed by Penn National
Gaming of West Virginia, Inc., a West Virginia corporation, in which the
undersigned holds offices, and any amendments to the registration statement, and
to file any and all of the same, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents or any of them full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ WILLIAM J. BORK President (Principal Executive Officer) April 28, 1998
- ------------------------------------
William J. Bork
/s/ ROBERT S. IPPOLITO Secretary and Treasurer (Principal Financial April 28, 1998
- ------------------------------------
Robert S. Ippolito Officer and Principal Accounting Officer)
/s/ PETER M. CARLINO Director April 28, 1998
- ------------------------------------
Peter M. Carlino
/s/ HAROLD CRAMER Director April 28, 1998
- ------------------------------------
Harold Cramer
</TABLE>
II - 15
<PAGE>
SIGNATURES
Pursuant to the requirements on the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this registration
statements to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Wyomissing, State of Pennsylvania on January 30,
1998.
TENNESSEE DOWNS, INC.
By: /s/ PETER M. CARLINO
------------------------------
Peter M. Carlino,
Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Peter M. Carlino and Robert S. Ippolito his true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to sign any and all registration statements filed by Tennessee
Downs, Inc., a Tennessee corporation, in which the undersigned holds offices,
and any amendments to the registration statement, and to file any and all of the
same, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents or any of them full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ WILLIAM J. BORK President and Director (Principal Executive April 28, 1998
- ------------------------------------
William J. Bork Officer)
/s/ ROBERT S. IPPOLITO Treasurer, Secretary and Director (Principal April 28, 1998
- ------------------------------------
Robert S. Ippolito Financial Officer and Principal Accounting
Officer)
/s/ PETER M. CARLINO Director April 28, 1998
- ------------------------------------
Peter M. Carlino
/s/ JOSEPH A. LASHINGER, JR. Director April 28, 1998
- ------------------------------------
Joseph A. Lashinger, Jr.
</TABLE>
II - 16
Exhibit 5
April 29, 1998
Penn National Gaming, Inc.
825 Berkshire Blvd., Suite 200
Wyomissing, PA 19610
Re: Penn National Gaming, Inc. and Certain Subsidiary Guarantors
Registration Statement on Form S-4
Ladies and Gentlemen:
We have acted as counsel to Penn National Gaming, Inc., a Pennsylvania
corporation (the "Company") and certain of its subsidiaries (the "Subsidiary
Guarantors"), in connection with the filing by the Company and the Subsidiary
Guarantors of a Registration Statement on Form S-4 (No. 333-45337) (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Act"), with the Securities and Exchange Commission. The Registration Statement
registers under the Act the proposed issuance of up to $80,000,000 aggregate
principal amount of the Company's 10 5/8% Series B Senior Notes due 2004 (the
"Exchange Notes") and related guarantees (the "Guarantees" and, together with
the Exchange Notes, the "Securities"), in exchange for the Company's outstanding
10 5/8% Series A Senior Notes due 2004 (the "Old Notes"). The Securities are
issuable, and the Old Notes and related guarantees were issued, under an
Indenture dated as of December 17, 1997 (the "Indenture") among the Company, the
Subsidiary Guarantors as of such date, and State Street Bank and Trust Company,
as Trustee (the "Trustee").
In rendering the opinion set forth below, we have reviewed (a) the Registration
Statement, (b) the Indenture, (c) the Articles or Certificate of Incorporation
and Bylaws of the Company and each Subsidiary Guarantor, each as amended to
date, (d) certain records of the corporate proceedings of the Company and the
Subsidiary Guarantors as reflected in their respective minute books, and (e)
such records, documents, statutes and decisions as we have deemed relevant. In
our examination, we have assumed the genuineness of all signatures, the
authenticity of all
<PAGE>
Penn National Gaming, Inc.
April 29, 1998
Page 2
documents submitted to us as originals and the conformity with the original of
all documents submitted to us as copies thereof.
Our opinion set forth below is limited to the laws of the State of New York. We
express no opinion herein concerning any gaming, race, wagering or lottery law,
regulation, interpretation or matter of any jurisdiction (including the
jurisdiction specified in the preceding sentence). To the extent relevant to the
opinion set forth below, we have assumed that the Trustee is duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization; that the Trustee is duly qualified to engage in the activities
contemplated by the Indenture and is qualified and eligible under the terms of
the Indenture to act as trustee thereunder; that the Indenture was duly
authorized, executed and delivered by the Trustee; that the Indenture is a
legal, valid and binding obligation of the Trustee; and that the Trustee has the
requisite organizational and legal power and authority to perform its
obligations under the Indenture.
Based upon the foregoing, and subject to the effectiveness of the Registration
Statement under the Act and the qualification of the Indenture under the Trust
Indenture Act of 1939, as amended, we are of the opinion that when the Exchange
Notes are duly executed, attested, issued and delivered by duly authorized
officers of the Company and the Guarantees thereon are endorsed and the Exchange
Notes are duly authenticated by the Trustee, all in accordance with the terms of
the Indenture, against surrender and cancellation of an identical principal
amount of Old Notes, the Securities will constitute valid and legally binding
obligations of the Company and the Subsidiary Guarantors, enforceable against
the Company and the Subsidiary Guarantors in accordance with their terms, except
to the extent that enforcement thereof may be limited by bankruptcy, insolvency
(including, without limitation, all laws relating to fraudulent conveyances and
transfers), reorganization, moratorium or other similar laws relating to or
affecting enforcement of creditors' rights generally, or by general principals
of equity (regardless of whether such enforcement is considered in a proceeding
in equity or at law).
We hereby consent to the use of this opinion as Exhibit 5 to the Registration
Statement and further consent to the reference to us under the caption "Legal
Matters" in the prospectus included in the Registration Statement. In giving
such opinion, we do not hereby admit that we are acting within the category of
persons whose consent is required under Section 7 of the Act or the rules or
regulations of the Securities and Exchange Commission thereunder.
The opinion expressed herein is solely for your benefit, and may be relied upon
only by you.
<PAGE>
Penn National Gaming, Inc.
April 29, 1998
Page 3
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
Exhibit 10.75
WAIVER
WAIVER (this "Waiver"), dated as of April 27, 1998, among PENN
NATIONAL GAMING, INC. (the "Borrower"), the lenders party to the 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.
W I T N E S S E T H
WHEREAS, the Borrower, the Banks, the Co-Agent, and the Agent
are parties to a Credit Agreement, dated as of November 27, 1996 and amended and
restated as of December 17, 1997 (as amended, modified or supplemented to, 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 Waiver, the
parties hereto agree as follows;
NOW THEREFORE, it is agreed:
1. The Banks hereby waive any Default or Event of Default that may have
arisen under the Credit Agreement solely as a result of the Borrower failing to
comply with Section 8.09 of the Credit Agreement for the Test Period ending on
March 31, 1998.
2. The Banks hereby waive any requirement that the Borrower comply with
Sections 8.09 during the period from April 1, 1998 through April 30, 1998. It is
hereby understood and agreed that the Borrower shall be in compliance with such
Sections on and after May 1, 1998.
3. This Waiver shall become effective on the date (the "Waiver
Effective Date") when the Borrower, the Agent and the Required Banks 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.
4. In order to induce the Banks to enter into this Waiver, the Borrower
hereby represents and warrants that:
<PAGE>
(a) no Default or Event of Default exists on the Waiver Effective Date,
after giving effect to this Waiver; and
(b) on the Waiver Effective Date, and after giving effect to this
Waiver, all representations and warranties contained in the Credit Agreement and
in the other Credit Documents are true and correct in all material respects as
though such representations and warranties were made on the Waiver Effective
Date.
5. This Waiver 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 an 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.
6. THIS WAIVER AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF
NEW YORK.
7. From and after the Waiver 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.
8. This Waiver is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
* * *
2
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart
of this Waiver to be duly executed and delivered as of the date first above
written.
PENN NATIONAL GAMING, INC.
By: /s/ ROBERT S. IPPOLITO
----------------------------------
Title: Chief Financial Officer
BANKERS TRUST COMPANY,
Individually and as Agent
By: /s/ DAVID J. BELL
----------------------------------
Title: Vice President
CORESTATES BANK, N.A.
By: /s/ DONALD W. HOUNL
----------------------------------
Title: Senior Vice President
3
PENN NATIONAL GAMING, INC.
RATIO OF EARNINGS TO FIXED CHARGES
12/31/97
<TABLE>
<CAPTION>
(dollar amounts in thousands)
Year ended
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Fixed Charges:
Interest expense $989 $465 $71 $506 $4,591
Interest portion of rent expense 164 212 224 334 269
Amortization of deferred financing costs 20 20 0 26 18
Capitalized interest 0 0 0 0 641
------ ------ ------ ------- ------
Total fixed charges $1,173 $697 $295 $866 $5,519
====== ==== ==== ==== ======
Earnings:
Pretax income from continuing operations $1,500 $4,099 $8,463 $9,304 $6,077
Fixed charges 1,173 697 295 866 5,519
Less: capitalized interest 0 0 0 0 (641)
------ ------ ------ ------- ---------
Total earnings $2,673 $4,796 $8,758 $10,170 $10,955
====== ====== ====== ======= =======
Ratio of earnings to fixed charges 2.3 6.9 29.7 11.7 2.0
</TABLE>
Exhibit 23.2
Penn National Gaming, Inc.
Wyomissing, Pennsylvania
We hereby consent to the inclusion in the Prospectus constituting a part of this
Registration Statement on Amendment No. 1 to Form S-4 of our report dated
March 2, 1998, relating to the consolidated financial statements of Penn
National Gaming, Inc. and Subsidiaries appearing in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
Philadelphia, Pennsylvania
April 27, 1998
