Securities and exchange commission


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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-24206
PENN NATIONAL GAMING, INC.

(Exact name of registrant as specified in its charter)

Wyomissing Professional Center

825 Berkshire Blvd., Suite 200

PENNSYLVANIA 23-2234473 Wyomissing, Pennsylvania 19610

(State or other jurisdiction of (I.R.S. Employer (Address of principal executive offices) (Zip Code)

incorporation or organization) Identification No.)
Registrant's telephone number, including area code 610-373-2400
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class

Common stock par value .01 per share
Indicate by check mark whether the registrant (1) has filed all reports required

to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during

the preceding 12 months (or for such shorter period that the registrant was

required to file such reports), and (2) has been subject to such filing

requirements for the past 90 days. Yes X No ___

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405

of Regulation S-K is not contained herein, and will not be contained, to the

best of registrant's knowledge, in definitive proxy or information statements

incorporated by reference in Part III of this Form 10-K or any amendment to this

Form 10-K. X
Aggregate market value of the voting common stock held by nonaffiliates of the

Registrant as of March 19, 1999 was approximately $106,073,740.
Number of Shares of Common Stock outstanding as of March 19, 1999 - 14,757,059
Documents Incorporated by Reference
Registrants Definitive Proxy Statement with respect to annual meeting of

Shareholders to be held on May 5, 1999.
THIS REPORT INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION

27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT

OF 1934, AS AMENDED. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS

INCLUDED IN THIS REPORT LOCATED ELSEWHERE HEREIN REGARDING THE COMPANY'S

OPERATIONS, FINANCIAL POSITION AND BUSINESS STRATEGY, MAY CONSTITUTE

FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY", "WILL", "EXPECT", "INTEND",

"ESTIMATE", "ANTICIPATE", "BELIEVE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR

VARIATIONS THEREON OR SIMILAR TERMINOLOGY. ALTHOUGH THE COMPANY BELIEVES THAT

THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE AT

THIS TIME, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE

BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER

MATERIALLY FROM THE COMPANY'S EXPECTATIONS ("CAUTIOUNARY STATEMENTS") ARE

DISCLOSED IN THIS REPORT AND IN OTHER MATERIALS FILED WITH THE SECURITIES AND

EXCHANGE COMMISSION. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS

ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY

QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
References to "Penn National Gaming" or the "Company" include

Penn National Gaming, Inc. and its subsidiaries.
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PART 1
ITEM 1 BUSINESS
GENERAL
The Company, which began operations in 1972, is a diversified gaming and

pari-mutuel wagering company that owns and operates two racetracks and ten

off-track wagering facilities ("OTWs") in Pennsylvania, and the Charles Town

Joint Venture which is an entertainment complex that includes a thoroughbred

racetrack and gaming machines in Charles Town, West Virginia (89% owned). The

Company's Pennsylvania racetracks include Penn National Race Course, located

outside Harrisburg, one of two thoroughbred racetracks in Pennsylvania, and

Pocono Downs, located outside Wilkes-Barre, one of two harness racetracks in

Pennsylvania. The Company intends to develop the one additional OTW that has

been allocated to it under Pennsylvania law, after which it would operate 11 of

the 23 OTWs currently authorized in Pennsylvania. Between 1994 and 1998, the

Company increased total wagers at a compound annual growth rate of 12.9% by

expanding its simulcast and OTW operations.
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. Owning a racetrack in such a state, then, is akin to an "admission

ticket" to the OTW business. Over the past several years, attendance at live

racing has generally declined; however the decline in revenues from live racing

has been more than offset by an increase in telephone wagering, off-track

wagering in and gaming machine operations.
STRATEGY
The Company intends to be a leading operator in the pari-mutuel

wagering industry by capitalizing on its horse racing expertise and its numerous

wagering locations and when possible expand them to include gaming machines

("Gaming Wagering"). The Company plans to increase revenue significantly by

using the following strategies:
Focus on Gaming Machine Operations. The Company intends to seek

legislation to permit it to operate gaming machines at its racetracks where not

now permitted and to expand legislation in West Virginia. Legislation has been

passed in West Virginia, subject to the Governor's signature or veto, which

would allow coin out and reel slot machines at race tracks. If such legislation

is signed by the Governor, the Company intends to convert some or all of its

current machines to coin out and increase the maximum number of machines with

reel slot machines.
Open Additional OTWs. The Company operates ten of the 20 OTWs now open

in Pennsylvania and has the right to operate one of the three remaining OTWs

that have been authorized in Pennsylvania. The Company's OTWs are located in

Allentown, Carbondale, Chambersburg, Erie, Hazleton, Johnstown, Lancaster,

Reading, Williamsport and York, Pennsylvania. At OTWs, customers can place

3
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 plans (subject to the

receipt of remaining regulatory approvals, including site approvals) to open and

operate an additional OTW in Stroudsburg, Pennsylvania, and to seek legislation

in other jurisdictions to operate additional OTW's.
Expand Simulcasting Operations. Simulcasting involves the transmission

to, or the receipt of, the audio and/or video signals of a live racing event

through a satellite for re-transmission at a different wagering location. The

Company transmits simulcasts of Company races to other wagering locations

year-round and receives simulcasts of races from other locations for wagering by

its customers at the Company's facilities year-round. During the past five

years, the Company expanded its simulcasting operations and took advantage of

favorable changes in pari-mutuel wagering and simulcasting laws in various

states and the expanded use of simulcasting technology. Import simulcasting

generates revenue for the Company by maximizing the number of events available

to a patron for wagering at the Company's facilities by utilizing idle time

between races at Company racetracks and OTWs. When customers place wagers on

import simulcast races, of the amount not returned to bettors as winning wagers,

a portion is paid to the state in which the Company's wagering facility is

located, a portion is paid to the "purse" fund for the horse owners and trainers

at 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 77 racetracks, including premier racetracks such

as Belmont Park, Churchill Downs, Gulfstream Park, Hollywood Park, Santa Anita

and Saratoga. The Company believes that "full-card" import simulcasting, in

which all of the races at a non-Company track are import simulcast to a Company

wagering facility, has improved the wagering opportunities for its customers and

thereby increased the amount wagered at Company facilities. Export simulcasting

generates revenue for the Company by increasing the consumer base for Company

races beyond Company racetracks and OTWs. The Company transmits export

simulcasts of Company races to approximately 126 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.
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 19, 1999, no such additional form of gaming in Pennsylvania has been

adopted, therefore no such payment is due at this time.
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,

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dining, simulcast wagering and, effective September 1997, gaming machines. The

cost of the refurbishment, exclusive of the cost of the gaming machines, was

approximately $27.8 million.
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. Legislation has been passed in West

Virginia, subject to the Governor's signature or veto, which would allow coin

out and reel slot machines at racetracks. If such legislation is signed by the

Governor, the Company intends to convert some or all of its current machines to

coin out and increase the maximum number of machines with reel slot machines.

The West Virginia Video Lottery 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
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