Penn National Gaming, Inc.

1972–1983

Penn National Gaming, Inc. is a gaming and pari-mutuel wagering company that owns and operates five horseracing tracks in Pennsylvania, West Virginia, and New Jersey, as well as ten off-track wagering facilities in Pennsylvania. The company's two Pennsylvania tracks are Penn National Race Course, a thoroughbred track located outside Harrisburg, and Pocono Downs Racetrack, a harness racetrack located outside Wilkes-Barre. Through a joint venture, Penn National owns 89 percent of the Charles Town Entertainment Complex, a Charles Town, West Virginia, facility that offers live horse racing, pari-mutuel wagering, and video gaming machines. The company owns 50 percent of two race tracks in New Jersey: Freehold Raceway in Freehold, New Jersey, and Garden State Park, in Cherry Hill. At its racetracks and off-track facilities, Penn conducts pari-mutuel wagering on both its own races and on simulcasts of races run at other tracks. The company is in the process of acquiring two casinos located in Mississippi.

1970s-80s: Off to the Races

Penn National Gaming was formed in the early 1970s, when a group of central Pennsylvania civic leaders banded together to establish and operate a thoroughbred racing track. The track, a one-mile oval, was built on approximately 225 acres of land 15 miles northeast of Harrisburg, Pennsylvania. It opened for its first day of racing on August 30, 1972, drawing a crowd of more than 10,500 spectators. During its first year of operation, Penn National had only 100 race dates, which made it difficult for the track to build up a large base of fans before season's end. The following year, however, the track added 100 more dates, establishing a year-round racing calendar. With the additional race dates, Penn National's popularity began to grow.

In 1978, Penn National expanded, opening the first turf course in Pennsylvania, a

-mile oval located next to the company's existing track. The turf track, which was praised for its consistency and safety, allowed Penn to again bulk up its racing calendar.

Throughout the early 1980s, the company introduced new ways to stir interest in racing to keep wagering revenues healthy. In 1982, it began offering customers a new way to wager--via phone. Christened 'Telebet,' the new initiative was Pennsylvania's first telephone betting system. It allowed a bettor to open a betting account by depositing funds with Penn National. The account holder could then place bets both on Penn races and on simulcast events simply by making a phone call. Any winnings were posted to the winner's account, for withdrawal or future wagering.

In 1983, Penn found another way to reach out to its customers. The company launched its own television program--'Racing Alive'--which was broadcast at the race course and, eventually, on various Pennsylvania cable TV stations. The show aired about an hour before post time on each live racing day and included commentary about that day's race, as well as general information on betting and handicapping, featured races from other tracks, and interviews with racing personalities.

Also in the 1980s, the company began to explore intertrack simulcasting. There were two sides to simulcasting: importing and exporting. Penn National took advantage of both. It began showing imported simulcasts of other races at the track during idle time between races. It also began exporting simulcasts of its own races to various other racetracks. In both cases, racetrack patrons were able to place bets on the simulcast races. Proceeds from the wagering--less the amount paid out to winning bettors--were shared by the originating track, the track simulcasting the race, and the purse fund for horse owners. Therefore, both importing and exporting simulcasts served to increase Penn's revenues.

Between 1991 and 1995, the company's sales grew from $33.3 million to $57.6 million.

1991–1997

Early 1990s: Building an Off-Track Business

Until the end of the 1980s, Penn National had focused almost exclusively on building business at its track, attracting patrons to the race course by adding live race dates and offering more wagering opportunities through simulcasting. Although these efforts had proven successful, Penn knew that in order to continue to grow it needed to reach a broader customer base. So in the early 1990s, the company began to push outward, offering betting to customers in other areas of Pennsylvania.

The company's then-CFO, Robert Ippolito, explained Penn's reasoning in a May 1997 interview with Investor's Business Daily: 'We decided that if we can't get people to come to the track, we ought to bring the track to the people--in areas where people won't drive 45 minutes to an hour to a racetrack on a regular basis.'

Penn's vehicle for 'bringing the track to the people' was the establishment of off-track wagering facilities (OTWs). Under Pennsylvania law, each racetrack in the state was authorized to operate a pre-determined number of off-track betting locations within the state. Penn National was allowed six such sites. The company opened its first OTW in May 1992 in Reading, a southeastern Pennsylvania city approximately 35 miles from Penn National Race Course. The 22,500-square foot facility provided area racing enthusiasts a comfortable place to dine, drink, and lounge, while wagering on races simulcast from all over the country.

When the Reading OTW proved a success, Penn National set about finding locations for the remaining five of its allotted sites. In 1994, the company opened a facility in Chambersburg, a mid-sized community about an hour southwest of the race course. Two more OTWs followed in 1995 and 1996. The facilities--in York and Lancaster--were both approximately 25 miles from the Penn National track.

The roll-out of the OTWs paid off in a big way for Penn. Between 1991 and 1995, the company's sales grew from $33.3 million to $57.6 million. In addition to merely boosting the company's revenues, the OTWs proved very cost-efficient and highly profitable. Because the fixed overhead at the off-track facilities was significantly lower than at the company's race track, their potential for moneymaking was far greater.

Mid-1990s: Expansion

Penn National went public in June 1994, trading on the NASDAQ exchange. Although the company consistently posted improved earnings, its stock price showed only modest gains for the first several months of trading. In early 1996, however, Penn announced a 1995 net income of $5 million, up 92 percent over 1994's $2.6 million. As a result, the company's stock price started a steady climb that would last the remainder of the year.

1996–1998

As Penn approached the end of 1996, it had opened four of the six OTWs that it was allowed under state law. A fifth facility, located in Williamsport, was in the works and scheduled to open in early 1997. Once the company opened its sixth and final OTW, it would have reached a state-imposed ceiling on off-track expansion. In order to circumvent this ceiling and continue growing, Penn National looked north, to Pocono Downs Racetrack, near Wilkes-Barre Pennsylvania. Pocono Downs, one of only two harness racing tracks in the state, consisted of a

-mile oval track, a 3,000-seat grandstand, and a clubhouse for dining and wagering.

Perhaps more important than the track itself, the Pocono acquisition also included the right to operate five off-track wagering facilities. Two such facilities were already established--in Allentown and Erie--when the acquisition was finalized on November 27, 1996.

Meanwhile, Penn National had another deal in the works. In early 1996, the company had entered into a joint venture with Bryant Development Company of Sterling, Virginia, which held an option to purchase the Charles Town Race Track in Charles Town, West Virginia. Penn planned to sink major money into the renovation and restoration of the 60-year-old track, which had suffered in recent years from a declining interest in racing. The plan, however, was contingent upon one key factor: before committing to the renovation, Penn wanted permission to install video gaming machines at the track.

The gaming machine decision rested in the hands of the county's voters, who just two years earlier had voted down a similar proposal. By the November 1996 elections, however, the voters had apparently had a change of heart. The referendum allowing gaming machines passed, and Penn National and Bryant went forward with the acquisition. Penn National became the majority owner of the track, with an 89 percent share.

Late 1990s: New Opportunities, New Alliances

The Charles Town acquisition was completed in January 1997, and Penn immediately began an extensive renovation of the track's clubhouse and grandstand. The $27 million project also included the addition of two new restaurants and a Hollywood-themed gaming section. After being closed several months for its facelift, the track reopened for racing in April, under the new name 'Charles Town Entertainment Complex.' The gaming area was completed over the ensuing summer, celebrating its grand opening in the autumn. The complex initially offered 400 video gaming machines, which simulated traditional spinning reel slot machines, along with video card games like poker and blackjack. By March 1998, Penn had added 209 more machines. By year-end, the company had 799 machines at Charles Town, with approval to install up to 1,000 total if demand dictated.

While Penn focused on ramping up its gaming operation in West Virginia, the growth of off-track facilities continued as planned in Pennsylvania. Two new OTW's opened in March 1998, bringing the company's total to nine. The new sites were in Carbondale and Hazleton, both approximately 30 miles from the Pocono Downs track. In the fall of 1998, Penn purchased an existing OTW in Johnstown, the company's second facility to be located in the western half of the state.

1998–2000

The early part of 1999 saw Penn National expanding into a new state. In January, the company entered into a joint venture with a New Jersey racing company in order to purchase Freehold Raceway, a 146-year-old harness half-mile harness track in central New Jersey. The joint venture, in which Penn held 50 percent ownership, also secured a long-term lease on Garden State Park, a racetrack in Cherry Hill, New Jersey. New Jersey legislature was, at that time, in the process of deciding whether to allow off-track and telephone wagering. If approval was granted, Penn and its partner planned to immediately expand their newly acquired facilities.

In April 1999, Penn formed still another strategic alliance. Through an agreement with American Digital Communications, Inc., the company became the exclusive U.S. wagering hub for TrackPower, a subscription pari-mutuel satellite service. TrackPower provided live transmissions of horse races from various tracks to its subscribers' homes throughout the United States and the Caribbean. Subscribers were able to place bets, via phone or computer, which, under the terms of the agreement, were to be handled though the Penn National wagering hub.

Meanwhile, Penn National's investment in its Charles Town facility was paying off spectacularly. The track and, more significantly, the gaming machines increased revenue by almost 50 percent in the first half of 1999, as compared to the first half of 1998. Charles Town got an added boost in April 1999, when West Virginia passed legislation approving the use of the more traditional coin-out and reel spinning slot machines, in addition to the video machines that were currently in use. Subsequently, Penn began to convert some of its video machines to coin-out machines.

The company also requested permission from the West Virginia Lottery Commission to install an additional 500 gaming machines at Charles Town, bringing the total to 1,500. Penn received the go-ahead for its additional machines in September 1999, and immediately initiated plans for expansion of the gaming area. 'Additional gaming devices have been a driving force in patronage, revenue and EBITDA [earnings before interest, taxes, depreciation and amortization] growth, and the addition of the reel-spinning, coin-out features address a common request we have had from players at Charles Town,' Penn's CEO, Peter Carlino, said in a October 26, 1999 press release, adding 'The significant increase in machines underscores our optimism for further growth from this facility in 2000.'

Penn National finished up 1999 by laying the groundwork for further expansion. In December, the company announced plans to purchase two casinos located in Mississippi: Casino Magic and Boomtown Biloxi. Casino Magic--which was located in Bay St. Louis, approximately 45 miles east of New Orleans, Louisiana--consisted of a 39,500-square foot casino and a 201-room hotel, as well as a golf course, an RV park, and a marina. The Boomtown Biloxi property was a 33,632-square foot casino in Biloxi, Mississippi. Penn National agreed to purchase both properties for $195 million.

Betting on Future Growth

After spending the latter part of the 1990s establishing beachheads in West Virginia, New Jersey, and Mississippi, it appeared that Penn National would devote a good portion of its energies to managing and expanding those operations. The potential for adding off-track and telephone wagering to its New Jersey operation was an especially likely avenue of growth, presuming legislative approval.

It also appeared probable that Penn would continue to look to other states for expansion opportunities. Most notably, as of October 1999, the company had tentative plans to develop a harness racetrack and off-track facility near Memphis, Tennessee, pending a favorable ruling by the Supreme Court of Tennessee.