PENN Entertainment Inc (PENN) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Penn National Fourth Quarter and Full Year 2002 Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. At that time, if you have a question, please press the “1”, followed by the “4” on your push-button phone. As a reminder, this conference is being recorded, Wednesday, February 12, 2003. I would now like to turn the conference over to Mr. Joe Jaffoni, Investor Relations. Please go ahead sir.

Thank you Operator. Before we begin this morning, I would like to read the following cautionary statement. In addition to historical information, management’s discussion with you today will contain forward-looking statements within the meaning of Section 27(a) of the Securities Act of 1933 as amended, and Section 21(e) of the Securities and Exchange Act of 1934 as amended.

Some of these statements include those regarding the pending acquisition of Hollywood Casino Corporation, expectations of favorable regulatory developments in certain jurisdictions in which the company operates, prospects for future growth, and the company’s optimism in light of current economic conditions.

These statements are subject to a number of risks and uncertainties that could cause the statements made to be incorrect, and the actual results to differ materially. The company describes certain of these risks and uncertainties in its filings with the Securities and Exchange Commission. Some of these risks include those relating to the ability of the company to integrate and manage consortiums it acquires, risks relating to the development and expansion of properties, risks of increased competition, and risks related to the fact that the company is heavily regulated by gaming authorities.

The company does not intend to update publicly any forward-looking statements, except as required by law. The cautionary advice just read is permitted by the Private Securities Litigation Reform Act of 1995. A replay of the call is available for 30 days. And the replay details are included in today’s news announcement. However, the call remains the property of Penn National Gaming, and any other taping and redistribution of the call is prohibited without the prior authorization of Penn National Gaming.

With that I will turn the call over to Penn National’s Chairman and CEO, Peter Carlino. Peter?

Thanks Joe. And good morning to all of you. I think we have a record dial-in group today. And that is the reason for the delay in starting our call, to give as many people as possible an opportunity to join us.

Suffice it to say that from management’s point of view we had a great year – just a spectacular year at Penn National. And we finished the quarter, as you know, with $0.20 pre-swap adjustment, which was one penny. Just to give you some frame of reference for that, earlier in the year we had given guidance of a dollar. And that is precisely where we have ended up.

And that is in the face of several significant things that we did to position ourselves for, as it has turned out, the Hollywood merger. At the time when we raised equity, and at the time when we did some additional debt financing, the Hollywood transaction was not in hand, or not necessarily even on the horizon. But for a variety of tactical reasons, we felt it was a wise thing for us to do. So in the face of some pretty significant dilution, we still made the number that we targeted earlier in the year. So we are particularly pleased with that. And I think it shows much about the earnings power of the company.

You will recall the swap issue is one we have talked about periodically. And because we did away with all of our floating rate debt, we are forced to swap to market until we put some more floating rate debt in place. So that is a peculiar anomaly that we deal with over these last couple of quarters. So great year for us. We are very, very happy about that.

The other issue that we would like to highlight is that we had great performance from virtually all of our properties. And if you look to the fourth quarter in particular, on the Gulf Coast, and the Southern market, it was flat to down for most of our competitors. We had great performance on a property to property basis year over year.

So again, we are very pleased with how we are running, and quality by management at those properties. I also want to highlight that at the end of the year, December was a particularly bad month for us, especially in the northeast. We were killed on the racing front, as you might imagine. It is pretty tough to create earnings when racetracks are shut down. And that had some impact. Also, it affects Charles Town on some of the very worst days.

In fact, December was a particularly weak month. But so strong were our earlier couple of months, that again we came through for the quarter, and were very, very pleased. I think I can publicly say that as we move into the new year, that things are going along extremely well, virtually across the board. So once again, we are off to a great start. We are quite happy with where we find ourselves. And the company is in a very good position now.

We are moving closer to our merger with Hollywood. That is on the very, very near horizon. And I suspect we will get questions about that as we go further in the discussion. So as we have done in recent quarters, I am going to keep my remarks to a very minimum. And we will let the Q&A direct our discussion where you would like to take it. So with that, Operator, if you will open the floor to questions.

(Caller Instructions.) The first question will come from [Joe Griff] from [Fulcrum] Global Partners [ph]. Please go ahead.

Good morning.

Good morning.

Peter, can you just review with us what regulatory hurdles, I guess what is left for you to close the Hollywood deal? And if you could remind us when the Gaming Commission meetings are. And then I have a couple of follow-ups.

Well agendas haven’t been set for Louisiana or for Illinois. But we are very hopeful that we will attend hearings in both those states this month yet. So that is our expectation. But again, it is not settled until those agendas become public.

Okay. And then if you could just talk about the timing for adding the additional slots to Charles Town. If you can redo those again with us.

Surely. Kevin, why don’t you take that?

Okay. We currently have approximately 2,700 slots [Joe]. We are anticipating some time towards the July/August timeframe we will have completed the additional facility space that is required to add up to another 800 machines. And just depending on how that is looking from a market standpoint at that point in time, we might add them all or add 500, and then drizzle in another 300 over the next couple of months. I would say by the end of ’03 we will have 3,500 slots on the floor at Charles Town.

And I might add that we have sufficient space in the combined new facilities to add still more, should we want to go back to the Lottery Commission for an approval. There is no certainty that we would get one. But up until this time, as you well know, demand has really been the driving force in their considerations in West Virginia. And if demand allows, we can or have the capacity to do still more. But that construction is underway right now, and going very well.

So is there a chance that maybe you would accelerate before July or August, given the strong demand? Or is that just not viable at this point?

It is really not viable in any significant amount. I suppose if we wanted to crowd the existing floor, or at least re-set the existing floor, we could bring in new games right now. But we have a plan that is laid out for the full compliment of machines in the new buildings. And I think we will wait until we get the new structure up, and place those machines where they are going to be for the longer term.

Great. And Peter you had mentioned that December was impacted somewhat by weather. So far in January has that been a factor?

Not a significant factor. I mean it has been in some places. Of course Charles Town has been down. Our race tracks have been down. Maybe Bill, do you want to add any comment about that?

I mean in January we haven’t had to close like we did in December. In fact, for Charles Town we closed two days in December for weather related issues, which we haven’t had to do in January. We have had some tough weather periods. And you can see the impact on revenues on those individual days. But suffice to say we are very, very happy with January results at Charles Town. And it is having some impact on racing. I think Rick could speak to it. But I don’t think we have had to close in January.

Yeah. We lost two days in January thus far. But frankly, we have been real fortunate. Only one of the days has been a weekend day. So we are happy with where we are at this date in February.

Thanks Rick. That is Richard Orbann, President of our Racing Operations. But suffice it to say that despite weather, we are having a great start to this quarter.

Great. And maybe you can sort of describe what the drivers were in the fourth quarter in Louisiana. And then if you could just comment on Bullwhackers.

Kevin?

[Joe], are you asking about Casino Rouge?

Exactly. Yes.

Okay. Well I think that is just a continuation of the program at Baton Rouge. As you know, Jon Zimmerman has been there now for several months. And what Jon basically did is reorient the entire marketing plan. And I think this is just a continuation of that effort. In addition to reorienting the marketing plan, Jon, I think overall, improved the management team and the focus.

And I think the result is what you see in terms of our increased share, and also improved operating performance. The drivers are database marketing, fundamentally, as they are in the rest of our operations. And a lot of it is dependent upon how focused your database program is. And I think Jon has proven that they are pretty focused on there. So that is pretty much it. It is a local driving business. The driver is database marketing.

What was the second question?

Bullwhackers.

Bullwhackers. It was a pretty decent quarter for Bullwhackers, as you may be aware. We are in the process of rebuilding the exterior on Bullwhackers. We also changed out the management team in the fourth quarter. We had some weather. We are re-tooling some of the mechanisms there, putting in some new slot machines. So fourth quarter was sort of a transition quarter for us.

And actually, although we had a very nice January at Bullwhackers, we could have some more disruption in February and in March, because we are trying to finish the exterior, and starting on the interiors. Our plan with Bullwhackers is to have that ready somewhere around the end of March, so that we are ready for the season, if you will.

But having said that, we have a new GM there, Tom Burke, who came from an Ameristar property I believe in Kansas City. And he has brought in two new executives. We are very happy with what is going on there, and would anticipate that we will start to see Bullwhackers perform where we would like them to be probably closer in towards the spring and summer. We are not really expecting too much from them in the first quarter, although, as I said, they had a nice January.

Great. Thank you guys.

Thanks. Kevin, I might add that property, as most of you know, is very, very tired and neglected. We are doing some very, very attractive things, with modest dollars, on the exterior of the building, to give it some presence. And I am satisfied, having sweated some of those details, that it will be a very attractive property, both inside and outside. The penalty of course in the short run is the disruption. But this is a long-term game. And I think we are going to be very happy with Bullwhackers come springtime.

Do you have some sort of targeted EBITDA range it could generate in an annual period once it is sort of up and running?

Probably for the moment – Kevin, I don’t think we want to venture anything now, do we?

Yeah. We really don’t have a targeted EBITDA [Joe]. We will be giving guidance, although probably not on a property basis.

Yeah. We do. But we are not going to say what it is.

I will wait for the guidance shortly then.

By the way, let me make a comment about guidance. Obviously we did not include it in this press release. Guidance and cap ex will follow our merger.

Thank you.

The next question will come from the line of [David Anders] from Merrill Lynch. Please go ahead.

All right, thanks. Hey [Peter], could you give us a quick update, or give us your impressions on the process in Pennsylvania right now as the allocation of those remaining race course licenses seems to be kind of clouding the issue, it appears?

Well I don’t think it is clouding it. One of the problems that I think we have had from a press standpoint is simply that Pennsylvania has been very quiet. I mean we have got a riot going on in Maryland. And we will spend a couple of minutes talking about that. And Pennsylvania has been kind of quiet.

I still feel that there is a very high likelihood that we will get a proper build in Pennsylvania this year. No change in my thinking there at all. The issue of extra licenses or new race tracks is really a distraction. First off, none of them are in a position – none of them will hurt us as a company. All of them are in markets that will have no impact on Penn National, number one.

If it is a distraction to the legislature, or potentially for the Governor, I am not sure. The Governor has come out to suggest that – and I think this is his word – that the rush to do the racetracks may be unseemly. Apologies to the Governor if that wasn’t his word. But it was a word very close to that, if not. I think that captures the spirit of it.

What he will ultimately want to suggest, I have absolutely no idea. They could put a hold on it. They could put, as has been suggested, might allow some new tracks, but let them run up to five years before they might get additional slot. All of that is in the making right now. None of it, I think, will have any impact on our progress towards a Bill. The process hasn’t been slowed down. It has really been very quiet. And frankly that, I think, is better than the alternative.

You have got a riot going on in Maryland. A Governor, of course, who has accused the race tracks of extreme greed. At the same time, the State is talking about taking about, overwhelmingly, the lion’s share of the revenue. It is not clear to me that Maryland is going particularly well. Clearly the racetracks cannot operate at the levels currently proposed. I mean it would be suicide. And if they did do it – put a large amount of money up front, and attempted to operate, we can pretty well assure you that they won’t be able to survive. I mean it just isn’t do-able.

So what they proposed in Maryland, similar to what has been proposed in New York, is a joke. I will say it without any reservation whatsoever. And it is kind of interesting to watch that free for all down there. So that is one issue.

I think Pennsylvania is, by contrast – and that is really the contrast I am trying to make – going about this in a much more deliberative way. There is action on these bills right now. The tracks are being asked for input on a whole host of things, and how the operations might be monitored, things of that sort – very practical, day-to-day kinds of things.

And well look, there is never any assurance that anything will happen where legislation is concerned. We still remain optimistic that there will be a proper Bill proposed and approved in Pennsylvania this year. And that is really all I can say to it. But silence should not be construed as a bad thing.

Got it. Thank you very much.

You are welcome.

The next question will come from the line of [Bill Brady] from Presidio Management. Please go ahead.

Hi Peter. A couple of questions on guidance. Would you be prepared to give guidance for the year then on the March quarter’s conference call? And could you give us the first quarter’s guidance?

Bill?

[Bill], we will be giving guidance – what we will do is with the announcement, assuming that the merger gets completed, at that point in time, which we are hopeful will be somewhere around the end of this month, we would be giving guidance for the first quarter and the rest of the year. So we wouldn’t be – it is not anticipated at this point in time that we would have to wait for the first quarter’s earnings call.

So [Bill], what we are hoping for of course is a closing at the very end of this month, or at the early days of next, literally the first few days. And concurrent with that would be earnings guidance.

Okay. And then initially you are quite optimistic financing-wise as to how you would be accretive to this year. Or can you comment on that?

We are optimistic. Bill, do you want to offer some thought about that?

We feel comfortable that the transaction as completed will be accretive to Penn.

We probably don’t want to say more than that. I think – yeah, we probably don’t want to say more about that, except to say that we think this is a great transaction for our company, and for the Hollywood properties as well. It is good for Hollywood shareholders, and good for Penn. So this is a wonderful transaction all the way around. And yes, it will be accretive.

Yeah. Okay. And then at Black Hawk, the Black Hawk Casino is anticipating a very major expansion. Have you factored that into your thinking on Bullwhackers? Or what do you think the effect of that will be?

Kevin?

I am not sure what expansion you are talking about.

The remodel.

Lots of new parking in addition to the casino, and a lot more rooms in the hotel.

Where. I am not aware of any major expansions going on, unless you are talking about the potential Colorado Central Station expansion.

Yeah. Mmm-hmm.

Oh, well I haven’t seen anything concrete on that at this point. I think – I mean our own view on the marketplace is that the market grew, I believe, in the 10% range last year. Denver has been hit fairly hard by the overall economic situation in the U.S. And I would – we are a pretty conservative company.

So we are going to be very conservative with this. We are not really overly concerned with what they do down the street a little bit. We think our place, with its size, and with its overall environment, is going to do just fine. And we are just a small piece of that market. So we will protect our database. We will grow our database a little bit. We will get a nice return on investment. And we will just leave it to others to spend lots of money at Black Hawk. That is not where we are right now.

[Bill], another way to think about it is that as the capital improvement dollars are spent, and you have got an attractive little property there, that you can expect that we anticipate a rate of return commensurate with what we receive at our other properties. The way to say it – we think we will get our targeted rate of return.

Which was 20%, at least?

That is our threshold.

Yeah. Okay. Thanks a lot.

The next question will come from the line of [John Maxwell] from [BNP Paribas][ph]. Please go ahead.

Good morning. Kevin, any early thoughts in terms of – you talked about the marketing programs helping out Baton Rouge. Any thoughts in terms of what you are thinking of with the Hollywood properties? Do you think that the marketing – do you envision new marketing programs at those three?

No. Actually [John], it is just an evolutionary process. Once the transaction is completed, we will sit down with each of the presidents of the property, the general managers, and we will walk through their marketing plans. And we will make some suggestions. It will be give and take. But in general we leave it up to the individual managers to set their marketing programs, with sort of a strategic overview from us here in Wyomissing. And it seems to work out real well.

But I think generally if you look at the Tunica property and the Aurora property, I think generally they are doing a pretty good job. And even in Shreveport, I think generally in terms of revenue production, they seem to be doing a decent job.

So I think it will be much more of a tweaking process than an overhaul. And as Peter said earlier, we look at this as a long-term game, which is more of a marathon. So we will take our time in each market, and make sure that we understand the product, the competitor, and how we are going to market to it.

Okay. All right. And Peter, another question on Pennsylvania if you would. If the State does enact a plan that you feel is just too onerous, your decision is just not to put them in right? I mean they can’t force you to put them in or risk losing your licenses there, right?

Oh no. You wouldn’t lose your license. And I would rather not make summary statements on a public call. But I think I will sort of stand by my belief that we have been at this for a long time in Pennsylvania. And I believe, in my gut believe, that we will get a fair piece of legislation in Pennsylvania, as opposed to what has occurred in Maryland. But no, they can’t force you to do anything.

The case that we have made is just simple economics. I mean it is economics 101, that there is a nexus of tax and revenue that, when you go beyond it, simply is not productive. Clearly if you tax something to death, there is no money to promote, no money to market, no money to create the revenue, from which the states take their piece off the top.

So at some level it is very, very destructive. And I think our State understands that. So I am not making any predictions about where it is going to go. But I think that we have a different climate in Pennsylvania than you have seen in a couple of other states.

Okay. All right. Thank you very much.

You are welcome.

The next question will come from the line of [Larry Clatskin] from Jeffries & Company. Please go ahead.

Hey guys. I have a couple questions here. One, have you been benefiting in Charles Town at all from the addition of no smoking in your competitor in Delaware? Has that been helping you at all?

Kevin, do you? I actually don’t know. Do you have any sense of that?

You know [Larry], that is awful hard to determine. It probably can’t hurt in any way. But I think it is hard to determine whether or not we are getting any benefit. If we are, I think it is probably marginal.

Okay. As far as Pennsylvania goes, Peter, is there any talk still of local vote? Or do you think it just goes to the legislature?

Oh, there is no chance. Look, I can’t tell you anything for certain. But first off, the Attorney General has made it very clear that a vote from the communities is not constitutional. He ruled on that before. He is still there. That position hasn’t changed.

Then again, the climate is different [Larry]. This is something that the legislature wants. The effort last time frankly, was, I think, an effort on the part of [Tom Ridge] to make certain that it didn’t happen, and to put up as much flack as possible. You remember he ran kind of a proposed omnibus approval for riverboats, for VLTs in bars, for slots at racetracks, in one gigantic Bill. That was pretty much assured to fail. And it was designed for that. There never was any doubt about it.

That is not the case now. I think everyone realizes the good sense of taking advantage of these racetrack facilities, their existing gaming capability, all the things that we know. So this is a different process this year, very different.

Okay, good. No, I am glad to hear that.

No. There is no chance of a local referendum, or a state-wide referendum.

What are you guys hearing on the possibility of increasing the limits in Illinois, which obviously would make your Hollywood acquisition very profitable?

We probably would prefer not to comment on Illinois. I mean we have some sense of – clearly we follow with interest what is going on there. We are not licensed there. We are really not the owner today. And I think we will withhold any comment at all until after we are there.

Okay. Is it true – I have been told that your Indian management contracts, new competition has opened up around you? Has that affected you at all?

Are you talking, I assume, about Canada?

Yeah.

Kevin, do you want to take that?

Sure. Larry, I think you may be talking about [Peco] Camps?

Yes, I am.

[Peco] is not necessarily going to give any great impact. I believe they were authorized to get 200 machines. And we have heard some murmurs that some of the other tracks may get an additional charge for machines. But there has been no definite information on that yet. But clearly it is a very competitive environment. And if they get more machines, it is just going to increase the pressure a little bit.

Having said that, if you look at our round numbers, I think our group up there has been doing very, very well in the face of pretty strong competition. So we can be optimistic that will be a steady stream of cash for the company, although, as Peter says, probably on a long-term basis a bit of a declining annuity.

Okay. And then as some of these other states look at gaming, is there any chance you guys will buy a track somewhere to keep this [Racino] [ph] block, that hopefully you will end up with a group of them, and you will get more percentages?

Well we are always on the lookout for gaming opportunities [Larry]. But I want to highlight, there is nothing special about slots at racetracks. It is just another gaming opportunity. And I think that generally people are aware of what the values are. And it is a little bit tougher to buy a racetrack on the come.

There are plenty of companies – and I will not name some of our competitors – who have had racetrack interests for many, many years. And they are still holding those interests, in hopes that they are going to get slots there. And maybe someday they will be rewarded. And maybe some time it will turn out to have been a good investment. But you can lose a lot of money while you are waiting to get slots at a racetrack.

So yeah, sure. We are pretty alert to what is out there. But we are alert to every market that offers gaming in one form or another. And frankly racetracks are just one small part of that.

Okay. Thanks Peter. If Pennsylvania did get slots, what kind of spending do you think you could spend at those tracks? I am sure you guys have sat down and figured that 2,000 to 2,500 is probably the number. Do you have any kind of feeling for what you would do with those two locations?

Well I think you are going to see – we are suggesting 3,000 machines at a minimum at each of the facilities. And it is not clear yet just how that legislation is going to read. I think the State now understands that it is not sensible [inaudible]. Take Philadelphia as an illustration. There is a market that could easily sustain – I will give you a number that is very simple – 15,000 machines.

So to put 1,000 machines or 2,000 machines is almost more of a problem than not. You will just aggravate so many people. You can’t begin to touch demand. So they recognize well that 3,000 machines is probably a starting point of good sense. And I think that you are going to see a larger number, rather than a smaller number.

As for spending, let’s see how the Bill shakes out, because clearly if the Bill were less attractive, you will do little to no spending. I mean clearly this is an economic issue. And our willingness to spend has everything to do with how reasonable the legislation is.

Okay. I am assuming Pennsylvania is reasonable. I guess the last question is, if Maryland goes, I know there has been talk of trying to help you out at your property, by giving you some kind of additional games, like cable games or something. Do you think that is a possibility? And would that really help you if there are casinos outside of Baltimore and Washington?

Well let me make two comments about that. And Kevin may want to add something to it as well. First, yes. I think that West Virginia would likely respond in a very positive way. It would require obviously a whole different kind of legislation around the table games, because obviously they are more costly to run. And in fact, you can lose money. And so the economics have to be very different.

But I think there is a reasonable possibility that we could get that kind of legislation in West Virginia. And the advantage, as you well know, is that we could then become full casinos, in every sense of the word. And that would give us enormous marketing power. I mean that is the real advantage, to build our overall gaming operation in Charles Town. So yeah, it could help us enormously.

The other thing I would call people’s attention to, there is this constant panic about Maryland. Would we like for Maryland not to have slots? Sure. Would we like them if they are going to have slots to have the worst piece of legislation on the history of the world? Absolutely. Because they will be utterly defenseless for all but the convenience gamer.

The reality is, and I invite anybody to take a look at the numbers, that the market where we are – and that is the whole Maryland/Virginia/Washington/Delaware market – is so huge, and our market penetration even now is so small, that there is a tremendous capacity for growth in that market. And so to conclude that somehow the Maryland slots are the end of the world for Charles Town is a huge mistake. And people who make that judgment, in my opinion, have simply not looked at the depth of the market. Kevin, anything you would add to that?

Really I think you summarized it pretty well Peter. And [Larry], you understand the economics of table games are much different than slots. So if we want the appropriate debt limit, and the appropriate tax rate, they are just not workable.

No. I agree with you 100% on that. All right, well listen thanks guys.

You are welcome.

The next question will come from the line of [George Smith] from [Davenport]. Please go ahead.

Good morning. I am wondering, looking out into 2003 and thinking of Penn National on a standalone basis, I guess first and foremost, Charles Town. I mean obviously that property has been far exceeding anyone’s expectations, once you back out weather variables. Do you think this year it can post the same type of EBITDA growth as we saw in 2002, or anything even close? Can you provide some sort of guidance there?

Bill?

I think we are not going to really come out with any kind of projections for the future until we come out with our guidance. And we don’t typically give guidance relative to an individual property in any event. So I think I am going to respectfully decline. I mean clearly the market is very healthy. And clearly we are very optimistic, and we are seeing very good results. So I think that is – and the market is not penetrated. There is no doubt about that. So there is clearly a huge market that we have got a wonderful opportunity with. And the level of growth, we will take a view, and incorporate it into our total numbers.

Yeah. And I think you will have an answer to that question after the first quarter numbers are posted.

And any update in terms of the Hollywood refinancing, how things are progressing there? Any change?

Well I don’t know what you mean by refinancing. We of course are financing our merger.

The financing.

And I think that is going well enough. Clearly we have a great team in Merrill and Bear. And we have absolute certitude that financing is there. And we will get to closing.

All right. Good enough. Thank you.

You are welcome.

The next question will come from the line of [Andrew Suzor] from Bank of America Securities. Please go ahead.

Good morning. I was wondering if I could talk about Hollywood Shreveport. In sort of broad strokes, what kind of EBITDA do you think that facility could do say in 2004?

Kevin, do you want to?

Well we don’t seem to want to respond to that question.

Well I mean obviously there is – as much as we would like to comment on that, we are precluded from making any kind of forward-looking statements relative to our beliefs on any of the Hollywood properties prior to the merger, as is actually Hollywood also precluded from doing so in the merger agreement.

Yeah, the one comment I think we will make is that we would hope and I think believe that – and not to criticize Hollywood at all. They have done a great job with their properties. But we have a high degree of confidence in our management team, and would hope that past the merger that the properties will get refocused, and that we can work with them, and maximize the return from all of those properties.

I am just surmising that, as you might well imagine, that through any merger process, when change is in the offering, it is tough for people at the property level to keep completely focused on their goals. That is pretty common. And I hope we can help refocus that. But we are very optimistic all across the board with Hollywood. And I think we have just got to get past the merger, get focused with our properties, in the way that Kevin described. It is a very careful, very gentle iterative process, that we look forward to.

Well that makes sense, that Shreveport is doing 20m, and I guess you are doing 28 out of Baton Rouge, that maybe there are some things that you would like to do. But what – so would I take it that, given your long-range focus, and the confidence you have in the management team, and the fact that Shreveport is distracted right now, that your plans for the Hollywood Shreveport sub are to fund a change of control put offer? Or would you allow that to go bankrupt?

Well that is an awfully tough word.

Well that is what would happen, right? I mean it would go bankrupt.

I really wouldn’t ever speculate about what might happen in the future. Our official and only statement about Shreveport or frankly any of the Hollywood properties is that we cannot and will not comment now. We don’t own those properties. And we are precluded from making any comment at all. Immediately following the closing, we will sit down with all interested parties, management, and everyone else who would want to talk with us, and look at the future. It is as simple as that. We can’t do any of that now. We will do it, as I say, the day after.

Well I don’t understand. The merger agreement doesn’t preclude you from talking about what your plans for financing the change of control put would be. I mean is it that you don’t know your plans? Or are you saying that your plan is to try and negotiate a better deal?

No. Our plan right now is no comment.

Okay.

I can’t make it any plainer than that, that it really is not appropriate, in our judgment, to talk about this now. First off, any discussion would be, by its nature, selective.

Well this is a public call, as you started out the conversation. I just think it is a poor strategy Peter. I think you are much better off giving people certainty. That way -- your bank deal has been struggling due to this uncertainty. Your bonds are down. Your stock faces a potential bankruptcy of a subsidiary, which has great potential. And I really think that you should reconsider your strategy and come up with what your thoughts are and put them out on the table. And then everyone will know what they are dealing with.

Well I appreciate the comment. I am not – I wouldn’t want to even characterize our approach as a strategy as to stock price and all those sorts of things. Our judgment is always this – we run the company. We run it well. We get the performance of these assets. The stock price will take care of itself. So the short-term confusion, and all those issues, are really not important to us at this instant. Not that we don’t care. It is just that we keep our focus on the big pictures.

Okay.

And if you followed us over time, you will find that is very, very consistent with what we have always done.

Well that is what we are looking for, is a little bit more big picture clarity as to how this company is going to look 70 days from closing.

I think extremely well.

Well maybe that will bode well for the Shreveport subsidiary, meaning that you will fund the change of control put. I think that you should just come out and say that if that is your plans, because it is hurting the – just sort of the credibility that you have in the financial markets, because people on the credit side covet certainty. But anyway, thank you for letting me ask questions.

Okay. Thank you.

The next question will come from the line of [Chuck Gregg] from Atlantis Capital. Please go ahead.

Good morning. Just a couple of housekeeping questions, and then a question on Bullwhackers. Would you guys be willing to kind of give us some guidance on shares outstanding, debt and cash levels?

Bill?

I can give you where we stood at the end of the fourth quarter. Cash levels for the company was $55.1m. There was nothing outstanding on our $75m revolver. At the end of the third quarter we were $13.2m. And that was paid down.

Okay.

The remaining debt is the 8-7/8 175m, and the 11-1/8 200m bond. The total debt is 375.

And how should we think about your shares outstanding?

Shares outstanding reflected at the fourth quarter totals, which are basically on a fully diluted basis, 40.2m.

All right.

I am sorry. Make sure I have got the right number. Hold on, I may have quoted the last one – 40.3. I am sorry.

And then with regard to Bullwhackers, you purchased it in April ’02 for 6-1/2m?

Correct. Plus expenses. Correct. Some closing expenses. It went up to 7.1.

And can you give us an update as to how much you are investing in the facility – both redoing the exterior, and then the interior renovations as well?

We have put some money in this year –

In total it is going to be about 3.2 million.

Right. In the fourth quarter we spent about a half a million towards that goal.

Okay.

Let me just expand on that a little bit for you. The 3.2m, fundamentally we are cleaning up the exterior of the building. We are doing what we would term lipstick on the interior of the building, which is paint and wallpaper and stuff like that. And we are adding slot machines. And we put in last year a slot tracking and accounting system.

So it is just the fundamentals. It is a very nice property. It is generally well maintained. Although, as Peter said, it is a bit tired. And so the overall spend from a cap ex standpoint will be approximately 3.2m. Now that does not necessarily include normal cap ex spend, which is fundamentally for new slot machines on an ongoing basis.

Understand. So all in, you are going to add a little under 10m in the property before kind of maintenance cap ex?

That is correct. And in addition to that – go ahead Bill.

Well we have exercised an option to purchase the land on which the building stands. And there was a provision within the lease buyout, which actually just became possible last year. So that was an option to purchase that piece, which allowed us to have a corresponding decrease in the lease expense, which is based on revenues. And that is $6m, which we believe will close – is scheduled to close in April of ’03. And so that is another $6m. And there will be a corresponding reduction in the lease expense.

So fundamentally, I think in general if you look at the company, one of the strategies that we probably will pursue fairly consistently is wherever we have a lease that is locked into revenue generation, we would like to eliminate that, to the extent that we can. It clearly increases EBITDA and overall performance of the property.

And can you give us, since you acquired it in April, can you just give us a sense as to what revenues were for the facility for the full year? Understanding a portion of it wasn’t under your control.

For the full year, roughly –

Thirty-five, something like that.

We don’t really know. If you want to call us back, we can give you an accurate number.

I think it is in the 35 range.

Because obviously looking at that number, looking at your kind of margin targets and return targets, operationally if you do the right thing and you are successful, there is a lot of opportunity at Bullwhackers.

Yeah. But we don’t want to overplay Bullwhackers. We don’t have a huge investment there. And relatively speaking, it is going to not ultimately be material to the overall company. But yeah, we think it is going to provide a very nice return on investment. And actually it is going to do some other things for us.

It is a great, what we would term a living laboratory, where we will get to test certain products and systems in that place, that gives us the opportunity, without any huge down side to the company. Whether you are talking about a take it in/take it out strategy, whether you are talking about participation games, whether you are talking about food concepts, whatever you are.

So there is more than just the return on investment there, which we believe will be very good, and frankly in excess of what we will do in the rest of the company. But yeah, it is a nice little investment. But I wouldn’t over work it.

And the actual number was basically 30 million, rounded, for revenues.

Okay. Thanks a lot guys.

You are welcome.

You bet.

The next question will come from the line of [Bobby Melnick] from [Terrier] Partners. Please go ahead.

Hi. Good morning. I don’t want to beat a dead dog. I mean I want to spend a second on Charles Town. And I guess I should preface my observation in question with – I mean obviously you guys have pulled away from the pack in West Virginia. Your win is higher. Your EBITDA is higher. I mean you just had a fantastic year there. And kudos to you. So I guess point stop on that.

And my question Kevin has to do with your statement earlier on the call about really a dramatic potential expansion, adding around 30% to the count there – the VLT count, I am sorry – with an observation that that would make Charles Town the largest casino in America that doesn’t have any table games. And it would make you parenthetically I think the eighth or ninth largest. I think there is one in Las Vegas that has that many. None on the strip. There is five in AC, with a sixth pending. There are obviously two gigantic ones in Connecticut.

And I guess I am just wondering, as an observation, with the recognition that your counterparts in West Virginia have different management, different markets, different property, but an observation that about nine months or so ago, seven-eight months ago, they added 20% to their 2,500 slot count, added a hotel, put a lot of money into it. And subsequent to that time, the absorption has been dramatically slower than their historic addition of slots or VLTs. They have actually had four weeks since then where they have literally had down wins.

I guess it is just a question about your comfort level that Charles Town can absorb all of these new slots, when as I say you will be the eighth or ninth largest casino in America in terms of slot counts.

Yeah. Well if the question is why do we believe that our growth will continue, when some of our competitors in West Virginia are not having that same success, I think the answer is pretty simple. If you look at the demographics around Charles Town, they are much, much stronger than some of the other folks in West Virginia.

Bill can speak to the specific numbers. But we find in our analysis that the penetration rate within reach of Charles Town is one of the lowest at this point in all of the U.S. gaming markets. I think I will just let Bill talk to that for a second.

Well there is roughly – the ways we look at it, we look at it on the number – how many people live within 90 minutes, or are closer to your facility than to any other facility. And that break-out gives us roughly five million people at the Charles Town facility, where we have got five million people within 90 minutes, or are closer to us than another facility.

There is some odd cross-over with Delaware. But assuming the half-way drive time concept, we have five million people. In a totally penetrated market level, if you assume $500 win per person, which is what we see in a lot of markets, it indicates a total market of roughly $2-1/2b gaming dollars for a potential. And you can see that in ’02 we were only – we were basically at roughly 10% of that.

But we are – that is what gives us the confidence to say on a go-forward basis there is no reason to believe that we shouldn’t have a very nice growth profile going forward, assuming that all of the constraining factors that might come into play are under control. Things like highway systems, parking facilities to accommodate the growth, etc., etc.

And that is part of what Peter talked about earlier, as to why we are not as pessimistic about the impact of Maryland, in that it is a $2-1/2b market. Even though you might add some additional facilities, it is a very large market. And it certainly could accommodate some additional capacity.

Just to build on that, if Maryland were to go, and West Virginia were to do something that would allow us a little bit more flexibility, what we believe would happen ultimately is that you just unlock some of that potential.

Just as a follow-up also, assuming that Maryland has approved slot machines at the race track they discussed, there are still in excess of 800,000 people who will be closer to our Charles Town facility within our market than they would be to another gaming facility. And that is still a very, very, very nice situation to be in, where you have got basically I won’t call it a monopoly on those 800,000 people. Eight hundred thousand people clearly translates into roughly a $400m gaming market. That is after [inaudible].

And it is also worth pointing out that if a Bill comes through in Maryland anywhere close to what is presently offered, these guys will barely be able to roll out carpet and turn on the lights. And that does not exaggerate. There is no hyperbole in that whatsoever. They could spend the money, I suppose, to do more. But it will be the financial disaster of the century. They simply cannot do it with that kind of a take-out, and the kind of economics we are talking about.

And I would like to make just one final comment. In addition to having a great demographic, I think we have put together a very nice facility at a reasonable cost. And I think all of that is just magnified when you look at the management team that we have put in place there. We have a very, very strong management team operating that facility. So when you put all those factors together, it is pretty hard to not be optimistic.

Oh, I prefaced my observation with all the recognition that you just cited. And I am not here to criticize Charles Town. I am just making an observation that the fact of the matter is really apart from Connecticut and AC, there simply aren’t any single facilities that are that large. And I just wonder, and obviously it is helpful to hear you give comfort as to whether or not you don’t at some point bump into a ceiling beyond which you experience diminishing returns in each incremental machine you install.

Let me – there clearly is a point. I routinely say on the road and through all of our presentations – we talk about that, that Charles Town is the largest slot operation, and clearly on its way to be so by a wide margin, east of Nevada and west of Atlantic City and Connecticut. Period. But it should be. It really should be, when you look at the size of the market. So hopefully Kevin and Bill answered that, I think, pretty well.

Thank you very much.

The next question will come from the line of [Adam Weiss] from [Chilton]. Please go ahead.

Hi. Good morning. I guess the margins in Bay St. Louis were down, because of the new hotel.

Kevin?

Yeah [Adam], I think if you recall, last year we talked about Bay St. Louis being a 2003 story. And I think that is starting to come to fruition a little bit. Clearly when you look at Bay St. Louis, our management team there has been very, very aggressive in trying to drive trial. And frankly the margin reduction, if you will, has a lot to do with that.

We drove a lot of trial at Bay St. Louis. You saw a fairly significant revenue gain at Bay St. Louis right after we added the hotel. And clearly we put a very small percentage of that to the bottom line. And I believe that was intentional. We would love to have a little bit more flow through. But the first goal is to get people in to see the facility, to see the hotel, and get people used to coming back to Bay St. Louis.

What we saw towards the latter part of the quarter, which is not reflected in these numbers, is that our margin started to increase a little bit. And in January we had a very nice month, where we started to hit the margins that we were targeting. So the short answer is in part it is because of the hotel. But really it is much more associated with the effort to drive trial.

The money you put into that property I think was about 40m. Is that right?

Yes.

Thirty-seven I think is what we have quoted. Bill is that - ?

Thirty-eight.

Okay.

How much of that do you think was just to kind of keep the property competitive, versus getting a real return on it?

Well Peter, why don’t you answer [inaudible].

Not a whole lot of it, from our point of view. What we did in our spending – remember, this is a facility that was the first to open on the Gulf Coast, in which it was the headquarters for Casino Magic. Not five cents of spending had occurred in almost a decade. Well not quite that. But certainly seven or eight years. So it too was very, very tired.

So if you go down and look at the facility today, we have significantly freshened the casino in a number of important ways. Adding elevators where they needed to be. Just did some smart things. And forgive me for not recalling the precise allocation for casino refit and improvement. And then of course we rationalized that property with a hotel that is actually connected to it, and not a quarter of a mile across the parking lot.

We have got a very lovely golf course there. It had somewhat the feeling of a resort. But it lacked the key component. So what we did was target making the casino all it could be. We built a new buffet, or certainly dramatically changed what was there. And just we think did what smart things we had to, just to bring the property up to date, because that capital spending had been neglected.

And then the lion’s share, of course, was the investment in the hotel, meeting rooms and the like, which I think Kevin said a year ago was going to take us a year to fully realize, to get the thing operating on all cylinders. Hopefully now we are seeing in the early running that that is starting to happen.

Okay. And I guess the depreciation for the quarter, versus prior quarters, because of cap ex?

That is right. It is the combination of all of the assets coming on line with the Bay St. Louis, as well as the Charles Town and the [inaudible] components finished up towards the end of the third quarter. And keep in mind that as we add additional machines, which would blast those up some more, that those machines all go on with a five year life, which is clearly lower than the company average on our asset base.

Okay. And in Pennsylvania, did I hear you say you thought each facility was going to be able to get 3,000 machines?

That is in what we call the preferred Bill offered by the industry. And yeah, I think you are going to see – let me try it again this way – more rather than less. I think we have made a pretty clear argument to the State that just sticking a few machines in makes absolutely no sense at all. You have got big cities to deal with. And even 3,000 machines, for example in Philadelphia or Pittsburgh, doesn’t begin to scratch the market.

I have seen in some – I don’t know where this number came from. But I have seen it in a couple of articles that [Rendell] wants $500m in revenue.

That $500m, by the way – I can’t swear he used our number. But that is the number that we gave to his folks, and to the various people with whom we talked in the House and Senate. It is tied to some very careful analysis that our company did, looking at those markets. And we feel very, very comfortable that on a fully-developed basis, that the four racetracks – [inaudible] didn’t say anything about [inaudible] – the four racetracks in the State can generate that revenue at the proposed 30% tax rate that we have requested. Those are real numbers. The State can count on them.

So that doesn’t assume you have got eight or nine or ten tracks. It is four or five tracks, 3,000 machines per track? And then you go from there?

The number gets better the farther that – as more machines are added. Yeah, absolutely.

And the 30%, that would be lower than what a lot of other states?

No. It is actually right there. Again, that is before local horseman’s purses, all the other components that go into it as well. Remember, there is more take-out off the top than just the States.

That assumes approximately 50% goes to the operator, very similar to the West Virginia model.

Okay.

Clearly if the State wants capital spending, it has to leave money with the facilities to develop those facilities.

And can you talk about a time line? Like under what – what are the critical dates as far as the legislature and the Governor to have to actually put a proposal on the table, and it has to get voted on, and so forth?

I don’t think there are any critical dates. We are not in a race in Pennsylvania. I do think you are going to see – that having been said – a Bill, and potentially votes yet this Spring. That is some time before June. But I am not making a prediction. I just think that is likely to move in that kind of a time frame.

What is still open to question is how will the industry be regulated. What kind of monitoring or agencies, or what all will be provided? And that is going to get to how fast the facilities can roll out. Suffice it to say that we can move very quickly. And we suspect that the State has a significant interest in having us do so. But that is all speculative at this time.

Okay. Thank you.

You are welcome.

The next question will come from [Chuck Okrey] from [Okrey] Capital Management. Please go ahead.

Good morning. It is [Chuck Okrey]. And two or three questions. First of all, in Louisiana and Illinois, I believe you said that you are not yet on the dockets. Is that correct?

Who wants to answer that at our end?

[Chuck], I will take it. It is Kevin. And the agendas have not been published for either venue yet. And as Peter said, we are hopeful that we will be on both.

Just out of curiosity, what is the time frame by which you would come to realize that you are either going to be on them or not going to be on them for a February meeting?

We will know very shortly.

Usually a week or two weeks.

Correct.

It is about a week to two weeks [Chuck].

Okay, great. And then as it relates to Illinois – and this is obviously still speculative – but any comments that you would offer up about either the Governor or Chicago Mayor’s issues about the gaming industry out there?

[Chuck], as I had suggested before, I think it would be highly inappropriate and even unwise for us to comment, until we are actually in the State and doing business there.

Okay. Fair enough. Well how about in a place where you are doing some business? And that is your New Jersey and your Pennwood joint venture. What is going on in New Jersey now? I mean obviously we see a lot in the press, between the prominent members of the legislature and the Governor and so on, as to your opportunity to manage OTBs and/or issues for slots at the tracks in Pennsylvania? Is there anything there that can have an impact on Penn National within the next 12 or 24 months in a meaningful way?

Well let’s let Rich Orbann handle that.

Okay.

I was out of the room [Chuck]. I am sorry.

I don’t think I can repeat it.

If you could paraphrase for me quickly.

Yeah sure. Is there anything in New Jersey that is either rumbling around, that can have a positive or a negative impact on your Pennwood operation there within the next 12 or 24 months?

No. At this time I think that you have categorized it accurately. There is a lot of rumbling going on. I think at this point the casinos are going to mount an all out effort to prevent slots or /VLTs at racetracks. It is on the table. And where it goes is anybody’s guess. But my guess is that in the near term we won’t see any impact from VLTs or slots on our Pennsylvania operation.

Rich, how about our agreement with – ?

Our participation agreement, which would allow us to build the off-tracks and participate in telephone wagering, is moving along, as I have mentioned in previous calls. It is a very, very, very slow and tedious process. We seem to, each quarter, make a little bit of progress. In this past quarter we have made probably more significant progress than we have in the past. I am encouraged. But yet I still remain tempered with that.

[Chuck], clearly New Jersey is hard to figure. They have had this legislation in place for now several years. It is appalling that these agreements haven’t long been settled. And remember, and the state is in the business, and that these off-tracks have not opened. I mean none of us can begin to explain why that is.

Rich pretty well characterizes it. We talk about it periodically. Progress is being made. And then who knows, one day there may be an off-track in New Jersey. New Jersey is also scary for a bunch of – apart from that, clearly the Governor’s thinking threatens all of the New Jersey casinos with a tax increase, which would be highly destructive to them.

One alternative to a tax increase could be slots at the racetrack. So there are a couple of ugly choices for the New Jersey gaming community down there. And we will just have to play that out.

But in the New Jersey racetracks, you currently – in a joint venture – operate one. And do you not hold a license for another? Or not?

No [Chuck]. We hold a license to operate harness racing. And in fact we hold two licenses to operate harness racing at Freehold. But the license at Garden State Park is currently on the shelf with the Racing Commission.

I got you. So that in the event that New Jersey ended up with slots at the tracks, the way it now stands is you might have one opportunity. Is that correct?

We would hope that if slots or VLTs come to fruition in New Jersey, we would be real hopeful that we would be able to participate in it, in one way, shape or form.

But that would be at Freehold.

That would be just at Freehold?

That is right.

Yes.

Well great. Good. Thanks. Keep up the good work.

Thanks, [Chuck].

Gentlemen, I do show that is all the time we have for Q&A. Please continue with your presentation or any closing remarks you may have.

Well if we are out of time, then I suspect we are out of time. I will quickly summarize by saying again, we are very happy with the way last year unfolded. We are tremendously optimistic about this year. Looking ahead, the Hollywood merger should be outstanding, as I said, for both Hollywood shareholders and for us – just a great combination, that we trust will be concluded in the next, well, in a very short time. But with that we will thank you, and look forward to talking with you all next quarter.

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation, and ask that you please disconnect your line.