Add
PENN to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| PENN > SEC Filings for PENN > Form 10-K on 2-Mar-2009 | All Recent SEC Filings |
2-Mar-2009
Annual Report
Our Operations
We are a leading, diversified, multi-jurisdictional owner and manager of gaming and pari-mutuel properties. We currently own or operate nineteen facilities in fifteen jurisdictions, including Colorado, Florida, Illinois, Indiana, Iowa, Louisiana, Maine, Mississippi, Missouri, New Jersey, New Mexico, Ohio, Pennsylvania, West Virginia, and Ontario. We believe that our portfolio of assets provides us with a diversified cash flow from operations.
We have made significant acquisitions in the past, and expect to continue to pursue additional acquisition and development opportunities in the future. In 1997, we began our transition from a pari-mutuel company to a diversified gaming company with the acquisition of the Charles Town property and the introduction of video lottery terminals in West Virginia. Since 1997, we have continued to expand our gaming operations through strategic acquisitions, including the acquisitions of Hollywood Casino Bay St. Louis and Boomtown Biloxi, CRC Holdings, Inc., the Bullwhackers properties, Hollywood Casino Corporation, Argosy Gaming Company ("Argosy"), Black Gold Casino at Zia Park, and Sanford-Orlando Kennel Club.
The vast majority of our revenues is gaming revenue, derived primarily from gaming on slot machines and, to a lesser extent, table games. Other revenues are derived from our management service fee from Casino Rama, our hotel, dining, retail, admissions, program sales, concessions and certain other ancillary activities, and our racing operations. Our racing revenue includes our share of pari-mutuel wagering on live races after payment of amounts returned as winning wagers, our share of wagering from import and export simulcasting, and our share of wagering from our off-track wagering facilities ("OTWs").
We intend to continue to expand our gaming operations through the implementation of a disciplined capital expenditure program at our existing properties and the continued pursuit of strategic acquisitions of gaming properties, particularly in attractive regional markets.
Key performance indicators related to gaming revenue are slot handle (volume indicator), table game drop (volume indicator) and "win" or "hold" percentages. Our typical property slot win percentage is in the range of 6% to 10% of slot handle, and our typical table game win percentage is in the range of 15% to 25% of table game drop.
Our properties generate significant operating cash flow, since most of our revenue is cash-based from slot machines and pari-mutuel wagering. Our business is capital intensive, and we rely on cash flow from our properties to generate operating cash to repay debt, fund capital maintenance expenditures, fund new capital projects at existing properties and provide excess cash for future development and acquisitions.
Merger Announcement and Termination
On June 15, 2007, we announced that we had entered into a merger agreement that, at the effective time of the transactions contemplated thereby, would have resulted in our shareholders receiving $67.00 per share. Specifically, we, PNG Acquisition Company Inc. ("Parent") and PNG Merger Sub Inc., a wholly-owned subsidiary of Parent ("Merger Sub"), announced that we had entered into an Agreement and Plan of Merger, dated as of June 15, 2007 (the "Merger Agreement"), that provided, among other things, for Merger Sub to be merged with and into us (the "Merger"), as a result of which we would have continued as the surviving corporation and would have become a wholly-
owned subsidiary of Parent. Parent is indirectly owned by certain funds managed by affiliates of Fortress Investment Group LLC ("Fortress") and Centerbridge Partners, L.P. ("Centerbridge").
On July 3, 2008, we entered into an agreement with certain affiliates of Fortress and Centerbridge, terminating the Merger Agreement. In connection with the termination of the Merger Agreement, we agreed to receive a total of $1.475 billion, consisting of a nonrefundable $225 million cash termination fee (the "Cash Termination Fee") and a $1.25 billion, zero coupon, preferred equity investment (the "Investment"). Pursuant to the terms of the preferred equity purchase agreement, the purchasers made a nonrefundable $475 million payment (the "Initial Investment") to us on July 3, 2008, in addition to the payment of the Cash Termination Fee. Under the terms of the purchase agreement, the purchasers deposited the remaining preferred equity investment purchase consideration with an escrow agent, with the funds to be released from escrow upon the issuance of the Preferred Stock. On October 30, 2008, following the receipt of required regulatory approvals and the satisfaction of certain other conditions, we closed the sale of the Investment and received the remaining preferred equity investment purchase consideration of $775 million from the escrow agent.
Executive Summary
Factors affecting our results for the year ended December 31, 2008, as compared to the year ended December 31, 2007, included the impairment loss recorded in the year ended December 31, 2008, decreases in consumer spending on gaming activities caused by current economic conditions, competitive pressures at some of our properties, the impact of the Illinois and Colorado smoking bans that became effective on January 1, 2008, lobbying costs incurred for efforts primarily in Ohio, Maryland and Maine, separation payments to Leonard DeAngelo, the opening of the casino at Hollywood Casino at Penn National Race Course, the opening of the permanent facility at Hollywood Slots Hotel and Raceway in Bangor, Maine, the acquisitions of Sanford-Orlando Kennel Club and Black Gold Casino at Zia Park, the impact of the Argosy Casino Riverside hotel, the receipt of the Cash Termination Fee, net of related expenses, and the expiration of the 3% tax surcharge at Hollywood Casino Aurora and Empress Casino Hotel from May 26, 2008 through December 14, 2008.
Financial Highlights:
º •
º Net revenues decreased by $13.7 million, or 0.6%, for the year ended
December 31, 2008, as compared to the year ended December 31, 2007,
primarily due to decreases in consumer spending on gaming activities
caused by current economic conditions, competitive pressures at some
of our properties, as well as the effect of the impact of the Illinois
and Colorado smoking bans that became effective on January 1, 2008.
These decreases were partially offset by increases in net revenues due
to the opening of the casino at Hollywood Casino at Penn National Race
Course, the opening of the permanent facility at Hollywood Slots Hotel
and Raceway, the acquisitions of Sanford-Orlando Kennel Club and Black
Gold Casino at Zia Park, and the impact of the Argosy Casino Riverside
hotel.
º •
º As a result of a decline in our share price, an overall reduction in
industry valuations, and property operating performance in the current
economic environment, we recorded a pre-tax impairment charge of
$481.3 million ($392.6 million, net of taxes) during the year ended
December 31, 2008, as we determined that a portion of the value of our
goodwill, indefinite-life intangible assets and long-lived assets was
impaired.
º •
º Loss from continuing operations changed by $584.3 million, or 117.4%,
for the year ended December 31, 2008, as compared to the year ended
December 31, 2007, primarily due to the impairment loss recorded in
the year ended December 31, 2008, as well as the overall decrease
in net revenues and increases in gaming expense, food, beverage and other expense, general and administrative expense and depreciation expense.
º •
º Net loss changed by $313.4 million, or 195.8%, for the year ended
December 31, 2008, as compared to the year ended December 31, 2007,
primarily due to the variances explained above, which were partially
offset by the receipt of the Cash Termination Fee, net of related
expenses.
Other Developments:
º •
º In February 2009, we filed a license application with the Maryland
Video Lottery Facility Location Commission to be considered for a
Video Lottery Operation License for the Cecil County Zone in Cecil
County, Maryland. On July 7, 2008, we had announced that we had
secured an 18-month option to purchase approximately 36 acres of land
located in Perryville, Cecil County, Maryland from Principio Iron
Company L.P.
º •
º In December 2008, the Board of Directors extended the expiration date
for all previous stock option grants by three years. Due to potential
adverse tax consequences of IRS regulations, certain executives with
in the money stock options elected not to take advantage of this
extension for their in the money stock options or elected to extend
for less than three years.
º •
º In November 2008, the arbitrators of litigation between Capital
Seven, LLC and Shawn A. Scott (collectively, "Capital Seven"), the
sellers of Bangor Historic Track, Inc. ("BHT"), and us issued their
ruling regarding the disputed purchase price of BHT. Capital Seven was
seeking $30 million plus interest and other damages for breach of
contract by us based on our payment of a $51 million purchase price
for the purchase of BHT instead of an alleged $81 million purchase
price Capital Seven claimed was due under the purchase agreement. The
arbitrators stated that, under the applicable tax rate, the purchase
price was $61 million. The panel awarded $10 million plus contractual
interest to Capital Seven. Pursuant to the dispute resolution
procedures, we had deposited the disputed $30 million in escrow,
pending a resolution. This amount was included in other assets within
the consolidated balance sheet at December 31, 2007. On December 1,
2008, the escrowed funds were released, with $13.1 million being paid
to Capital Seven and the remainder being returned to us.
º •
º In November 2008, a ballot measure that would have amended the Ohio
Constitution to allow a casino near the Town of Wilmington in
Southwest Ohio failed. We contributed towards the campaign to defeat
the amendment. In Maryland, voters approved gaming expansion at five
targeted regions throughout the state. In Missouri, the state's $500
loss limit was repealed and, in Colorado, the state bet limit was
increased from $5 to $100.
º •
º On October 30, 2008, following the receipt of required regulatory
approvals and the satisfaction of certain other conditions, we closed
the sale of the Investment and received the remaining preferred equity
investment purchase consideration of $775 million from the escrow
agent. On July 3, 2008, we had entered into an agreement with certain
affiliates of Fortress and Centerbridge, terminating the Merger
Agreement. In connection with the termination of the Merger Agreement,
we had agreed to receive a total of $1.475 billion, consisting of the
Cash Termination Fee and the Investment. Pursuant to the terms of the
preferred equity purchase agreement, the purchasers made the Initial
Investment to us on July 3, 2008, in addition to the payment of the
Cash Termination Fee. Under the terms of the purchase agreement, the
purchasers had deposited the remaining preferred equity investment
purchase consideration with an escrow agent, with the funds to be
released from escrow upon the issuance of the Preferred Stock.
º •
º Pursuant to the terms of the preferred equity purchase agreement, and
in conjunction with the closing of the sale of the Investment, Wesley
R. Edens, the Chairman and Chief Executive Officer of Fortress, joined
our Board of Directors, increasing the size of our Board to seven
members.
º •
º We used a portion of the net proceeds from the Investment and the
after-tax proceeds of the Cash Termination Fee for the repayment of
some of our existing debt, repurchases of our Common Stock, lobbying
expenses for efforts in Ohio and the investment in corporate debt
securities, with the remainder being invested primarily in short-term
securities. The repurchase of up to $200 million of our Common Stock
over the twenty-four month period ending July 2010 was authorized by
our Board of Directors in July 2008. During the year ended
December 31, 2008, we repurchased 8,934,984 shares of our Common Stock
in open market transactions for approximately $152.6 million, at an
average price of $17.05.
º •
º On September 5, 2008, the 153-room hotel at Charles Town Entertainment
Complex was opened to the public.
º •
º In deference to the proposed Merger, our Board of Directors had
determined that the compensation to be paid in 2008 to the
non-employee directors be composed of a fixed amount of cash
compensation (with no special payment, meeting fees or equity grants).
Each non-employee director was expected to receive $150,000, 50% of
which was to be paid on January 25, 2008, and the balance of which was
expected to be paid in equal monthly installments throughout 2008
(with the total balance payable at the time of the closing of the
Merger). If the Merger was not consummated, our Board of Directors
would then consider whether equity awards were appropriate. As of
June 30, 2008, each non-employee director had received $112,500. On
August 8, 2008, our Board of Directors approved changes to the
compensation for the non-employee directors. Under the approved
program, in lieu of the $37,500 cash remaining to be paid to each
non-employee director in 2008, each non-employee director was granted
stock options to purchase 20,000 shares of our Common Stock at an
exercise price of $29.34 per share, in lieu of further cash payments.
The stock options were granted pursuant to our 2003 Long Term
Incentive Compensation Plan.
º •
º On August 4, 2008, we announced the departure of Leonard DeAngelo as
an officer. Mr. DeAngelo received benefits and separation payments in
accordance with the employment agreement between Mr. DeAngelo and us
dated as of July 31, 2006.
º •
º On July 16, 2008, we were served with a purported class action lawsuit
brought by plaintiffs seeking to represent a class of shareholders who
purchased shares of our Common Stock between March 20, 2008 and
July 2, 2008. The lawsuit alleges that our disclosure practices
relative to the proposed transaction with Fortress and Centerbridge
and the eventual termination of that transaction were misleading and
deficient in violation of the Securities Exchange Act of 1934. The
complaint, which seeks class certification and unspecified damages,
was filed in federal court in Maryland. The complaint has been
amended, among other things, to add three new named plaintiffs and to
name Peter M. Carlino, Chairman and Chief Executive Officer, and
William J. Clifford, Senior Vice President and Chief Financial
Officer, as additional defendants. We filed a motion to dismiss the
complaint in November 2008, and oral arguments for the motion were
heard by the court on February 23, 2009. Following oral arguments, the
court granted our motion and dismissed the complaint with prejudice.
We anticipate that the plaintiffs will file a motion for
reconsideration with the court.
º •
º In July 2008, we exercised our clawback right for the accelerated
change in control payments previously provided to certain members of
our management team in accordance with the Acknowledgement and
Agreement that we had entered into with certain members of our
management team on December 26, 2007, and advised the affected
executives of the amounts to
be repaid and the due date. We have received the net amount from each executive, and are working with each executive to recover the applicable taxes.
º •
º In the third quarter of 2008, we paid certain members of our
management team a total of approximately $3.1 million in cash, which
represents the external measure portion of our Annual Incentive Plan
for 2007. The payments to the named executive officers were made as
follows: Peter M. Carlino, $1.4 million; William J. Clifford,
$0.5 million; Leonard M. DeAngelo, $0.5 million; Jordan B. Savitch,
$0.2 million; Robert S. Ippolito, $0.1 million. The external measure
portion provided for the payment of incentive compensation upon our
achievement of pre-established goals regarding our free cash flow
(ranking results versus the peer group from data reported in the
Standard & Poors Research Insight database). The payments were not
made earlier as the external free cash flow measure is calculated
using publicly-available information regarding the peer group, which
had not yet been published. Each named executive officer agreed and
confirmed in writing that such payment would not be included in any
future determination of any severance or change in control payment
that may be due under any employment agreement between such executive
and us.
º •
º In July 2008, we made our annual stock option grant to executives and
other eligible employees following the termination of the Merger
Agreement. We issued 1,651,500 stock options on July 8, 2008, at a
price of $29.87. We had previously elected to defer our annual stock
option grant to executives and other eligible employees due to the
anticipated Merger.
º •
º On July 1, 2008, the permanent Hollywood Slots at Bangor facility,
which is called the Hollywood Slots Hotel and Raceway, was opened. The
permanent facility included 1,000 slot machines at opening, an
attached parking garage and several restaurants. In addition, a
152-room hotel opened in August 2008.
º •
º In June 2008, we entered into the second term of our first layer of
property insurance coverage in the amount of $200 million. The
$200 million coverage, which is effective from August 8, 2007 through
December 31, 2010, is on an "all risk" basis, including, but not
limited to, coverage for "named windstorms," floods and earthquakes.
In June 2008, we also purchased an additional $100 million of "all
risk" coverage including, but not limited to, coverage for "named
windstorms," floods and earthquakes. The additional $100 million of
"all risk" coverage excludes coverage for windstorms, "named
windstorms," floods, and earthquakes, for Boomtown Biloxi and
Hollywood Casino Bay St. Louis. An additional $300 million of "all
risk" coverage was purchased, which is subject to certain exclusions
including, among others, exclusions for windstorms, "named
windstorms," floods and earthquakes. The two additional coverage
layers are effective from June 1, 2008 through June 1, 2009. There is
a $25 million deductible for "named windstorm" events, and lesser
deductibles as they apply to other perils. All three layers are
subject to specific policy terms, conditions and exclusions.
º •
º On February 19, 2008, the Illinois Gaming Board resolved to allow us
to retain the Empress Casino Hotel. Previously, in connection with our
acquisition of Argosy, we entered into an agreement with the Illinois
Gaming Board in which we agreed, in part, to enter into an agreement
to divest the Empress Casino Hotel by December 31, 2006, which date
was later extended to June 30, 2008, subject to us having the right to
request that the Illinois Gaming Board review and reconsider the terms
of the agreement. As a result of this decision, we plan to invest
$55 million in the facility, in order to improve its competitive
position in the market. We began these facility enhancements in late
2008 and expect the gaming vessel, food, beverage, VIP amenity
upgrades and external improvements to be completed in the fourth
quarter of 2009.
º •
º On February 12, 2008, we opened Hollywood Casino at Penn National Race
Course, which included, upon opening, 2,020 slot machines, a
five-story garage, an innovative, multi-media
Hollywood design theme and bars and restaurants ranging from casual dining to higher-end fare. The facility has capacity for 980 additional gaming devices, and we added 207 additional slots in August 2008. The Epic Buffet was opened in October 2008 and Final Cut steakhouse was opened in December 2008.
º •
º On February 6, 2008, we announced that we named Timothy J. Wilmott to
the position of President and Chief Operating Officer.
º •
º On August 31, 2007 and November 28, 2007, we filed license
applications with the Kansas Lottery Commission to be considered as a
Lottery Gaming Facility Manager for our proposed resorts in Cherokee
County and Sumner County, respectively. In May 2008, the Kansas
Lottery Commission approved our subsidiary's contracts to act as a
Lottery Gaming Facility Manager in both counties. The management
contracts were sent to the Kansas Lottery Gaming Facility Review Board
(the "Review Board") for their consideration, and we presented our
proposals to the Review Board in July 2008. In June 2008, in
accordance with the management contracts, we paid privilege fees
totaling $50.0 million to the State of Kansas, which were refundable
if the required approvals were not obtained or if we withdrew our
application prior to obtaining all required approvals. In August 2008,
we learned that we were unsuccessful in our bid to manage a gaming
facility in Sumner County, and the $25 million privilege fee paid to
the State of Kansas for Sumner County was returned in September 2008.
In addition, in September 2008, we withdrew our application to manage
the facility in Cherokee County for various reasons.
º •
º On September 23, 2008, Kansas Penn Gaming, LLC ("KPG," a wholly-owned
subsidiary created to pursue a development project in Cherokee County,
Kansas) filed an action against HV Properties of Kansas, LLC ("HV") in
the U.S. District Court for the District of Kansas seeking a
declaratory judgment from the U.S. District Court finding that KPG has
no further obligations to HV under a Real Estate Sale Contract (the
"Contract") that KPG and HV entered into on September 6, 2007, and
that KPG properly terminated this Contract under the terms of the
Repurchase Agreement entered into between the parties effective
September 28, 2007. HV filed a counterclaim claiming KPG breached the
Contract, and seeks $37.5 million in damages. On October 7, 2008, HV
filed suit against us claiming that we are liable to HV for KPG's
alleged breach based on a Guaranty Agreement signed by us. Both cases
were consolidated. We have filed a motion to dismiss HV's claims
against us. This motion has been fully briefed and is pending.
º •
º On September 11, 2008, the Board of County Commissioners of Cherokee
County, Kansas (the "County") filed suit against KPG and us in the
District Court of Shawnee County, Kansas. The petition alleges that
KPG breached its pre-development agreement with the County when KPG
withdrew its application to manage a lottery gaming facility in
Cherokee County and seeks in excess of $50 million in damages. In
connection with their petition, the County obtained an ex-parte order
attaching the $25 million privilege fee paid to the Kansas Lottery
Commission in conjunction with the gaming application for the Cherokee
County zone. Defendants are currently contesting the validity and
scope of the attachment and intend to defend the merits of the case
going forward.
º •
º In May 2006, the Illinois Legislature passed into law House Bill 1918,
effective May 26, 2006, which singled out four of the nine Illinois
casinos, including our Empress Casino Hotel and Hollywood Casino
Aurora, for a 3% tax surcharge to subsidize local horse racing
interests. On May 30, 2006, Empress Casino Hotel and Hollywood Casino
Aurora joined with the two other riverboats affected by the law,
Harrah's Joliet and the Grand Victoria Casino in Elgin, and filed suit
in Circuit Court of the Twelfth Judicial District in Will County,
Illinois (the "Court"), asking the Court to declare the law
unconstitutional. Empress Casino Hotel and Hollywood Casino Aurora
began paying the 3% tax surcharge into a protest fund which accrues
interest during the
pendency of the lawsuit, and have subsequently expensed approximately $30.3 million in incremental tax, including $5.6 million during the year ended December 31, 2008. In two orders dated March 29, 2007 and April 20, 2007, the Court declared the law unconstitutional under the Uniformity Clause of the Illinois Constitution and enjoined the collection of this tax surcharge. The State of Illinois requested, and was granted, a stay of this ruling. As a result, Empress Casino Hotel and Hollywood Casino Aurora continued paying the 3% tax surcharge into the protest fund until May 25, 2008, when the 3% tax surcharge expired. The State of Illinois appealed the ruling to the Illinois Supreme Court. On June 5, 2008, the Illinois Supreme Court reversed the trial court's ruling and issued a decision upholding the constitutionality of the 3% tax surcharge. On January 21, 2009, the four casino plaintiffs filed a petition for certiorari, requesting the U.S. Supreme Court to hear the case. The accumulated funds will be returned to Empress Casino Hotel and Hollywood Casino Aurora if they ultimately prevail in the lawsuit.
º •
º On December 15, 2008, former Illinois Governor Rod Blagojevich signed
Public Act No. 95-1008 requiring the same four casinos to continue
paying the 3% tax surcharge to subsidize Illinois horse racing
interests. On January 8, 2009, the four casinos filed suit in the
Circuit Court of the Twelfth Judicial District in Will County,
Illinois, asking the Court to declare the law unconstitutional. The 3%
tax surcharge being paid pursuant to Public Act No. 95-1008 is paid
into a protest fund where it accrues interest. The accumulated funds
will be returned to Empress Casino Hotel and Hollywood Casino Aurora
if they ultimately prevail in the lawsuit.
º •
º We are continuing to build and develop several of our properties,
including Argosy Casino Lawrenceburg and Empress Casino Hotel.
Additional information regarding our capital projects is discussed in
detail in the section entitled "Liquidity and Capital
Resources-Capital Expenditures" below.
Critical Accounting Policies
We make certain judgments and use certain estimates and assumptions when applying accounting principles in the preparation of our consolidated financial statements. The nature of the estimates and assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain factors or the susceptibility of such factors to change. We have identified the policies related to the accounting for long-lived assets, goodwill and other intangible assets, income taxes and litigation, claims and assessments as critical accounting policies, which require us to make significant judgments, estimates and assumptions.
We believe the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations and, in certain situations, could have a material adverse effect on our financial condition.
The development and selection of the critical accounting policies, and the related disclosures, have been reviewed with the Audit Committee of our Board of Directors.
Long-lived assets
At December 31, 2008, we had a net property and equipment balance of . . .
|
|