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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999
Commission file number 0-106-619
PINNACLE ENTERTAINMENT, INC.
(FORMERLY HOLLYWOOD PARK, INC.)
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
95-3667491
(IRS Employer Identification No.)
330 North Brand Boulevard, Suite 1100, Glendale, California 91203
(Address of Principal Executive Offices) (Zip Code)
(818) 662-5900
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
PINNACLE ENTERTAINMENT, Inc.
Common Stock, $.10 par value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates (therefore
excludes officers, directors and beneficial owners of 10% or more) of the
registrant at March 24, 2000, was $394,681,400 based on a closing price of
$20.00 per common share. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrant's common stock, as of the
close of business on March 24, 2000: 26,271,678.
PINNACLE ENTERTAINMENT, INC.
Table of Contents
Part I
Item 1. Description of Business .......................................... 1
Company Name Change............................................... 1
Acquisition Proposal.............................................. 1
General........................................................... 1
Gaming, Race Track and Other Operations........................... 3
Expansion Plans................................................... 7
Government Regulation............................................. 8
Competition....................................................... 22
Federal Income Tax Matters........................................ 23
Employees......................................................... 24
Other............................................................. 25
Item 2. Properties........................................................ 25
Properties........................................................ 25
Expansion Properties.............................................. 26
Properties Held For Sale.......................................... 26
Item 3. Legal Proceedings................................................. 26
Item 4. Submission of Matters to a Vote of Security Holders............... 28
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................. 28
Item 6. Selected Financial Data........................................... 29
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 31
Forward-Looking Statements and Risk Factors....................... 31
Factors Affecting Future Operating Results........................ 31
Results of Operations............................................. 34
Liquidity, Capital Resources and Other Factors
Influencing Future Results...................................... 37
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........ 38
Item 8. Financial Statements.............................................. 38
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................... 38
Part III
Item 10. Directors and Executive Officers of the Registrant................ 39
Item 11. Executive Compensation............................................ 42
Summary Compensation Table........................................ 42
Executive Deferred Compensation Plan.............................. 42
Stock Option Plans................................................ 43
Options/SAR Grants in Last Fiscal Year............................ 44
Aggregated Options/SAR Exercises in Last Fiscal Year and
Fiscal Year End Options/SAR Values.............................. 45
Board Meetings, Board Committees and Director Compensation........ 45
Amended and Restated Directors Deferred Compensation Plan......... 46
Employment Contracts, Termination of Employment and
Change-in-Control Arrangements................................. 47
Compensation Committee Interlocks and Insider Participation....... 48
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 49
Item 13. Certain Relationships and Related Transactions.................... 50
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 51
Signatures................................................................. 59
PART I
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY NAME CHANGE In February 2000, Hollywood Park, Inc. changed its name to
Pinnacle Entertainment, Inc. Pinnacle Entertainment, Inc. (the "Company" or
"Pinnacle Entertainment") is a diversified gaming company that owns and operates
eight casinos (four with hotels) in Nevada, Mississippi, Louisiana and
Argentina, two of which are subject to a pending sales transaction. Pinnacle
Entertainment receives lease income from two card clubs, both in the Los Angeles
metropolitan area; and owns and operates a horse racing facility in Arizona,
which is also subject to a pending sale transaction.
ACQUISITION PROPOSAL On March 8, 2000, the Company announced it had received a
proposal pursuant to which Harveys Casino Resorts ("Harveys") would acquire all
of the outstanding shares of common stock of Pinnacle Entertainment for cash at
$25 per fully diluted share (the "Acquisition Proposal"). The Acquisition
Proposal is subject to, among other things, the execution of a definitive
agreement containing the customary terms and conditions, including regulatory
approval, the agreement of Pinnacle Entertainment's senior management to retain
an equity interest in the combined company and the approval of a majority of
Pinnacle Entertainment's shareholders (see Note 20 to the Notes to Consolidated
Financial Statements). The Company's Board of Directors, excluding management
members, agreed to evaluate the Acquisition Proposal and to negotiate on an
exclusive basis through the end of March 2000. Harveys Casino Resorts is
majority owned by Colony Capital, Inc., a private investment firm.
GENERAL Pinnacle Entertainment owns and operates, through its Boomtown, Inc.
("Boomtown") subsidiary, land-based, dockside and riverboat gaming operations in
Verdi, Nevada ("Boomtown Reno"), Biloxi, Mississippi ("Boomtown Biloxi") (which
is subject to a pending sale transaction - see Note 4 to the Notes to
Consolidated Financial Statements) and Harvey, Louisiana ("Boomtown New
Orleans"), respectively. Pinnacle Entertainment also owns and operates, through
its Casino Magic Corp. ("Casino Magic") subsidiary, dockside gaming casinos in
the cities of Bay St. Louis and Biloxi, Mississippi ("Casino Magic Bay St.
Louis" and "Casino Magic Biloxi") (Casino Magic Bay St. Louis is subject to a
pending sale transaction - see Note 4 to the Notes to Consolidated Financial
Statements); riverboat gaming in Bossier City, Louisiana ("Casino Magic Bossier
City"); and two land-based casinos in Argentina ("Casino Magic Argentina"). In
October 1999, the Company purchased the 49% minority interest not owned by
Pinnacle Entertainment in Casino Magic Argentina (see Note 5 to the Notes to
Consolidated Financial Statements). Casino Magic's results of operations were
not consolidated with the Company prior to the October 15, 1998 acquisition of
Casino Magic, thus generating significant variances when comparing the 1999
financial results with those of 1998. Pinnacle Entertainment receives lease
income from two card clubs - the Hollywood Park-Casino and Crystal Park Hotel
and Casino. Since September 1999, the Hollywood Park-Casino has been leased from
Churchill Downs California Company ("Churchill Downs"), a wholly owned
subsidiary of Churchill Downs Incorporated, and is subleased to an unaffiliated
third party operator (see Note 3 to the Notes to Consolidated Financial
Statements). Prior to September 1999, the Hollywood Park-Casino was owned and
operated by the Company. The Crystal Park Hotel and Casino ("Crystal Park") is
owned by the Company and is leased to the same card club operator that now
leases and operates the Hollywood Park-Casino. In September 1999, the Company
completed the sale of the Hollywood Park Race Track in Inglewood, California to
Churchill Downs (see Note 3 to the Notes to Consolidated Financial Statements).
The Company owns Turf Paradise, Inc. ("Turf Paradise"), a horse racing facility
in Phoenix, Arizona, which is subject to a pending sale transaction (see Note 4
to the Notes to Consolidated Financial Statements). The Company began
construction in July 1999 on the Belterra Resort and Casino, a hotel and
riverboat casino resort in Switzerland County, Indiana, in which the Company
owns a 97% interest, with the remaining 3% held by a non-voting local partner
(see Note 6 to the Notes to Consolidated Financial Statements).
The Company's strategic plan is to develop a broad base of regionally
diversified casino entertainment facilities by developing new properties,
expanding existing facilities and making selected acquisitions in
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casino markets. The strategic plan anticipates the Company will establish and
maintain a prominent position in each of the markets in which it operates. In
the realization of this strategy, the Company acquired Boomtown in June 1997 and
Casino Magic in October 1998, hired a gaming management team in January 1999,
completed the sale of the Hollywood Park Race Track in September 1999, entered
into a definitive agreement to sell Turf Paradise in February 2000 and is
entertaining the Acquisition Proposal.
The Company is the successor to the Hollywood Park Turf Club, organized in 1938,
incorporated in 1981 under the name Hollywood Park Realty Enterprises, Inc., and
in 1992, as part of a restructuring, renamed Hollywood Park, Inc. In February
2000, Hollywood Park, Inc. changed its name to Pinnacle Entertainment (the name
change was effected through the merger of a newly created wholly owned
subsidiary into Hollywood Park, Inc. in which Hollywood Park, Inc. changed its
name). Pinnacle Entertainment's active subsidiaries are as follows: (1)
Boomtown, Inc., which has five active subsidiaries: Boomtown Hotel & Casino,
Inc., Bayview Yacht Club, Inc., Mississippi - I Gaming, L.P., Louisiana Gaming
Enterprises, Inc. and Louisiana - I Gaming; (2) Casino Magic Corp., which has
eight active subsidiaries: Mardi Gras Casino Corp., Biloxi Casino Corp.,
Jefferson Casino Corporation, Casino Magic of Louisiana, Corp., Casino Magic
Neuquen S.A., Casino Magic Support Services S.A,; Casino Magic Management
Services Corp. and Casino One Corp.; (3) Turf Paradise, Inc.; (4) HP/Compton,
Inc.; (5) HP Casino, Inc.; (6) HP Yakama, Inc.; (7) Realty Investment Group,
Inc.; and (8) Belterra Resort (Indiana), LLC.
The following is an overview of the Company's gaming properties:
NUMBER OF
GAMING ---------------------------------
SQUARE SLOT TABLE HOTEL
PROPERTY TYPE OF GAMING FOOTAGE MACHINES GAMES ROOMS
-------- -------------- ------- -------- ----- -----
OPERATING PROPERTIES:
Boomtown Reno Land-based 45,000 1,265 39 318
Boomtown New Orleans Cruising Riverboat 30,000 1,185 38 --
Casino Magic Biloxi Dockside 47,700 1,197 47 378
Casino Magic Bossier City Dockside Riverboat 30,000 1,058 41 188
Casino Magic Argentina (a) Land-based 33,000 515 55 --
------------ ----------- ---------- ----------
Subtotal 185,700 5,220 220 884
============ =========== ========== ==========
PROPERTIES HELD FOR SALE:
Boomtown Biloxi Dockside 33,632 1,184 28 --
Casino Magic Bay St. Louis Dockside 39,500 1,123 38 201
Turf Paradise Race Track Horse Racing
-- -- -- --
------------ ----------- ---------- ----------
Subtotal 73,132 2,307 66 201
------------ ----------- ---------- ----------
Grand Total 258,832 7,527 286 1,085
============ =========== ========== ==========
CARD CLUBS LEASED:
Hollywood Park-Casino (b) Card Club 30,000 -- 145 --
Crystal Park Casino (b) Card Club 30,000 -- 60 226
============ =========== ========== ==========
Card Club Total 60,000 -- 205 226
============ =========== ========== ==========
DEVELOPMENT PROPERTY:
Belterra Resort & Casino (c) Cruising Riverboat 38,000 1,300 55 309
============ =========== ========== ==========
- ---
(a) There are two separate land-based casinos in Argentina, Casino Magic Neuqen
and Casino Magic San Martin de los Andes,
(b) The Company does not operate these properties. It leases the Hollywood
Park-Casino and Crystal Park Casino to an
(c) The Company owns 97% of Belterra Resort and Casino, which is expected to
open in August 2000.
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GAMING RACE TRACK AND OTHER OPERATIONS BOOMTOWN, INC. On June 30, 1997, pursuant
to the Agreement and Plan of Merger dated as of April 23, 1996, by and among the
Company, HP Acquisition, Inc., (a wholly owned subsidiary of the Company), and
Boomtown, HP Acquisition, Inc. was merged with and into Boomtown (the "Boomtown
Merger"). As result of the Boomtown Merger, Boomtown became a wholly owned
subsidiary of the Company and each share of Boomtown common stock was converted
into the right to receive 0.625 of a share of the Company's common stock.
Approximately 5,362,850 shares of the Company's common stock, valued at $9.8125
per share (excluding shares retired, as described below) were issued in the
Boomtown Merger.
The Boomtown Merger was accounted for under the purchase method of accounting
for a business combination. The purchase price of the Boomtown Merger was
allocated to identifiable assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition. Based on financial analyses,
which considered the impact of general economic, financial and market conditions
on the assets acquired and the liabilities assumed, the estimated fair values
approximated their carrying values. The Boomtown Merger generated approximately
$15,302,000 of excess acquisition cost over the recorded value of the net assets
acquired, all of which was allocated to goodwill, which is being amortized over
40 years. The Company anticipates such goodwill will be reduced by approximately
$3,054,000 in connection with the sale of Boomtown Biloxi (see Note 4 to the
Notes to Consolidated Financial Statements). The amortization of the goodwill is
not deductible for income tax purposes.
The Company acquired three of the four Boomtown properties: Boomtown Reno,
Boomtown New Orleans and Boomtown Biloxi.
Boomtown Reno has been operating for over 32 years on 569 acres in the rolling
foothills of the Sierra Nevada mountains, (current operations are utilizing
approximately 61 acres, with 250 acres available for development) in Verdi,
Nevada. Depending on the direction of travel, Boomtown Reno is either the first
or the last hotel casino in Nevada seen when traveling on Interstate 80. About
25,000 cars and trucks pass by every day, mostly heading to or from California.
And every year, about 1,400,000 of them, or approximately 15% of all highway
traffic, stop in for gaming, dining or lodging. In 1999, Boomtown Reno completed
renovations at the property that added 196 new rooms, 24 luxury suites, new
convention/meeting space and new and improved restaurants. Boomtown Reno also
features, among other amenities, a truck stop, a recreational vehicle park, and
a full service gas station with a mini-mart and a family fun center.
Boomtown New Orleans opened in August 1994 on a 50-acre site in Harvey,
Louisiana, approximately ten miles from the French Quarter of New Orleans. Prior
to August 8, 1997, Boomtown New Orleans had a 7.5% minority interest partner. On
November 18, 1996, Boomtown entered into an agreement to buy out the minority
partner for $5,670,000, and as of August 8, 1997, the full payment had been
made. Located in the suburban area of New Orleans referred to as the "Westbank",
Boomtown New Orleans boasts a large new riverboat with the friendliest employees
and the best array of gaming attractions in the area. Adding to the appeal,
there were a number of improvements in 1999, such as a totally remodeled buffet
and the addition of a Cajun steak and seafood restaurant. Boomtown New Orleans
is the only gaming property in the Westbank.
Boomtown Biloxi opened in July 1994 and occupies 19 acres on Mississippi's
historic Back Bay of the Mississippi Gulf Coast. Boomtown Biloxi had been
operating with a 15% minority interest partner, and on September 11, 1998, the
Company acquired the minority interest for $400,000. Boomtown Biloxi leases the
majority of the acreage under a 99-year lease. Boomtown Biloxi targets middle
income local residents and offers a value oriented gaming experience, including
one of the best buffets in the Biloxi gaming market. Boomtown Biloxi is the
subject of a pending sale transaction - see Note 4 to the Notes to Consolidated
Financial Statements.
The fourth Boomtown property, Boomtown Las Vegas, was divested following the
Boomtown Merger on July 1, 1997. Boomtown and its subsidiaries exchanged
substantially all of their interest in the Las Vegas property, including
substantially all of the operating assets and notes receivable of approximately
$27,300,000
3
from the landowner/lessor of the Las Vegas property for, among other things, two
unsecured notes receivable totaling approximately $8,465,000, cash, assumption
of certain liabilities and release from certain lease obligations. In addition,
concurrently with the divestiture of the Las Vegas property, the Company
purchased and retired 446,491 shares of the Company's common stock issued to a
former principal of Boomtown for a price of approximately $3,465,000, payable in
the form of a Pinnacle Entertainment promissory note.
CASINO MAGIC CORP. On October 15, 1998, the Company acquired Casino Magic,
pursuant to the February 19, 1998 Agreement of Merger among Casino Magic Corp.,
the Company, and HP Acquisition II, Inc. (a wholly owned subsidiary of the
Company) (the "Casino Magic Merger"). The Company paid cash of approximately
$80,904,000 for Casino Magic's common stock. At the date of the acquisition, the
Company had purchased 792,900 common shares of Casino Magic, on the open market,
at a total cost of approximately $1,615,000. The Company paid $2.27 per share
for the remaining 34,929,224 shares of Casino Magic common stock outstanding.
The Casino Magic Merger was accounted for under the purchase method of
accounting for a business combination. The purchase price of the Casino Magic
Merger was allocated to identifiable assets acquired and liabilities assumed
based on their estimated fair values at the date of acquisition. Assets acquired
and liabilities assumed were, when found to be necessary, written up or down to
their fair market values based on financial analyses, which considered the
impact of general economic, financial and market conditions. The Casino Magic
Merger generated approximately $43,284,000 of excess acquisition cost over the
recorded value of the net assets acquired, all of which was allocated to
goodwill, to be amortized over 40 years. The Company anticipates such goodwill
will be reduced by approximately $10,277,000 in connection with the pending sale
of Casino Magic Bay St. Louis (see Note 4 to the Notes to Consolidated Financial
Statements). The amortization of the goodwill is not deductible for income tax
purposes.
Casino Magic owns and operates i) dockside casinos in Bay St. Louis,
Mississippi, and Biloxi, Mississippi; ii) dockside riverboat gaming in Bossier
City, Louisiana, and iii) land-based casinos at two Argentina locations.
Casino Magic Bay St. Louis, which is subject to a pending sale transaction (see
Note 4 to the Notes to Consolidated Financial Statements), began operations in
September 1992, on a permanently moored barge in a 17 acre marina with the
adjoining land-based facilities situated on 591 acres. Bay St. Louis is
approximately 46 miles east of New Orleans and 40 miles west of Biloxi. The
three story land-based building houses a restaurant, buffet, snack bar, gift
shop, and a live entertainment lounge. The property has a 201 room hotel, an
1,800 seat arena for concerts and sporting events, and is the only Casino in the
Gulf Coast market with an 18-hole championship golf course on the same property
as the gaming facility.
Casino Magic Biloxi is located in the Mississippi Gulf Coast market, and began
operations in June 1993. The facility includes over 47,000 square feet of gaming
space with 1,197 slot machines and 47 table games, a 378 luxury room hotel,
complete with 16 individually themed master suites and 70 junior suites, 6,600
square feet of convention and meeting space and a fine dining restaurant. The
property is nestled between two other casinos on the main strip of Biloxi,
commonly referred to as Casino Row. Biloxi, Mississippi is at the center of the
Mississippi Gulf Coast, which emerged as one of the major regional gaming
markets in the United States, exceeding the billion-dollar gaming revenue
milestone in 1999.
Casino Magic Bossier City opened in October 1996 on 23 acres of land, with
casino operations conducted from a dockside riverboat. The property is highly
visible from, and has convenient access to, Interstate 20, a major
thoroughfare connecting Shreveport/Bossier City to Dallas/Fort Worth, just a
three hour drive away. Casino Magic Bossier City boosts a 188-room luxury hotel,
with four master suites, 88 junior suites, a 55,000 square foot entertainment
pavilion, which includes the 350 seat Abracadabra buffet restaurant, a gift
shop, a bar and lounge area, and a 300 seat live entertainment theater.
In December 1994, Casino Magic, through its wholly owned subsidiary, Casino
Magic Neuquen S.A., entered into a twelve-year concession agreement with the
Province of Neuquen, Argentina. Casino Magic Argentina operates two casinos in
the Province of Neuquen in the cities of Neuquen and San Martin de los Andes
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in west-central Argentina. Neuquen Province is the gateway to the well
established tour destinations and ski resorts of the Andes Mountains. There are
approximately 900,000 residents within a 50 mile radius of the two cities.
HOLLYWOOD PARK-CASINO The Hollywood Park-Casino is located in Inglewood,
California. On September 10, 1999, the Company completed the dispositions of the
Hollywood Park Race Track and Hollywood Park-Casino to Churchill Downs for
$117,000,000 cash and $23,000,000 cash, respectively (see Note 3 to the Notes to
Consolidated Financial Statements). The Company then entered into a 10-year
leaseback of the Hollywood Park-Casino at an annual lease rate of $3,000,000 per
annum, with a 10-year renewal option. The Company then subleased the facility to
a third party operator for a lease payment of $6,000,000 per year. The sublease
is for a one-year period, at which time the Company and sub lessee will
negotiate the terms of any sublease extension.
By California state law, a corporation may operate a gambling enterprise in
California only if every officer, director and shareholder holds a state
gambling license. Only 5% or greater shareholders of a publicly traded racing
association, however, must hold a state gambling license. As a practical matter,
therefore, public corporations that are not qualified California racing
associations may not operate gambling enterprises in California. As a result,
the Hollywood Park-Casino, since September 10, 1999, is leased to, and operated
by, an unrelated third party.
By California state law, a California card club casino may neither bank card
games nor offer certain of the casino games permitted in Nevada and other
traditional gaming jurisdictions, and thus does not participate in the wagers
made or in the outcome of any of the games played.
THE CRYSTAL PARK CASINO The Crystal Park Casino, located in Compton, California
opened on October 25, 1996. As of December 31, 1997, the Company owned 100% of
Crystal Park Hotel and Casino Development Company, LLC ("Crystal Park LLC"), the
entity that owns the Crystal Park Casino. In December 1997, the Company paid
$1,000,000 (or the initial amount the member contributed) for 3.4% of Crystal
Park LLC and in February 1998, paid an additional $2,000,000 (or the initial
amount the member contributed) for the remaining outstanding 6.8% of Crystal
Park LLC in a transaction with an effective date of December 31, 1997.
As noted above, public corporations that are not qualified California racing
associations may not operate gambling enterprises in California. As a result,
the Crystal Park Casino is leased to, and operated by, the same third party
which operates the Hollywood Park-Casino. The lease is a 48 month, triple net
lease executed on December 19, 1997. Rent due under the lease was scheduled to
increase as of July 1, 1998, but under present market conditions, will be
$100,000 per month for the foreseeable future. Previously, the Crystal Park
Casino was under lease to Compton Entertainment, Inc. ("CEI"). On November 4,
1997, Crystal Park LLC obtained a judgment in an action for unlawful detainer
against CEI, due to CEI's failure to pay a portion of the June 1997 rent and to
make required additional rent payments. In October 1997, the California Attorney
General revoked CEI's conditional gaming registration, and the City of Compton
revoked CEI's city gaming license. CEI closed the Crystal Park Casino on October
11, 1997. The Crystal Park Casino reopened on December 26, 1997.
TURF PARADISE RACE TRACK Turf Paradise, located in Phoenix, Arizona and subject
to a pending sale transaction (see Note 4 to the Notes to Consolidated Financial
Statements), has one continuous live thoroughbred race meet that starts in
September and runs through May. Live racing is primarily conducted Friday
through Tuesday, with live races simulcast to approximately 45 off-track sites
in Arizona. The live racing signal is also simulcast to approximately 45 out-of-
state hubs, from which the signal is further disseminated to approximately 650
sites in five countries.
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At Turf Paradise, the state of Arizona fixes the pari-mutuel percentage
commissions for on-track, and within the state off-track racing as follows:
Win, Place, Two-Horse Three or More
Show Pool Horse Pool
---------------- ----------------- ----------------
Live in-state handle 18% 19% 23%
Simulcast in-state handle 20% 21% 25%
Turf Paradise also receives approximately 2.0% to 3.5% of the out-of-state,
off-track pari-mutuel handle wagered on its live races. When operating as a
simulcast facility for the smaller northern Arizona race tracks, Turf Paradise
receives 3.8% of the pari-mutuel handle generated at Turf Paradise.
OTHER GAMING Pinnacle Entertainment, through its wholly owned subsidiary HP
Yakama, Inc. ("HP Yakama") loaned approximately $9,618,000 to the Tribal Gaming
Corporation (the "Tribal Corporation") to construct the Legends Casino in 1998.
The Tribal Corporation gave HP Yakama a promissory note for the $9,618,000,
payable in 84 equal installments at a 10% rate of interest. As of December 31,
1999, the remaining balance on the note was $8,086,000.
Pursuant to a seven year Master Lease between HP Yakama and the Confederated
Tribes and Bands of the Yakama Indian Nation (the "Tribes"), HP Yakama must pay
the Tribes monthly rent of $1,000. HP Yakama and the Tribal Corporation entered
into a corresponding seven year Sublease, under which the Tribal Corporation
owes rent to HP Yakama. Rent under the Sublease was initially set at 28% of Net
Revenues (as defined in the relevant agreements), and decreases to 22% over the
seven year term of the lease. Through the end of 1999, the Company had received
approximately $622,000 of rent under the sublease.
GENERAL All of the Company's properties in Mississippi and Louisiana are
dependent upon attracting customers within their respective geographical
markets. The Company has three casinos in Mississippi, two in Biloxi and one in
nearby Bay St. Louis, and two casinos in Louisiana, one in Bossier City and one
in Harvey, near New Orleans (the Louisiana properties are located 320 miles
apart). The Company has a pending sales transaction for the sale of two of the
Mississippi properties (see Note 4 to the Notes to Consolidated Financial
Statements). There can be no assurance that the Company will be able to continue
to attract a sufficient number of customers necessary to make its operations
profitable. In addition, adverse regulatory changes or changes in the gaming
environment in Mississippi and Louisiana could have a materially adverse effect
on the Company's operations.
The Company's riverboat and dockside gaming facilities in Mississippi and
Louisiana, as well as any additional riverboats that might be developed or
acquired, such as the Belterra Resort and Casino, are subject to risks in
addition to those associated with land-based casinos, including loss of service
due to casualty, mechanical failure, extended or extraordinary maintenance,
flood, hurricane or other severe weather conditions. For cruising riverboats
there are additional risks associated with the movement of vessels on waterways,
including risks of casualty due to river turbulence and severe weather
conditions.
In September 1998, a hurricane struck the Gulf Coast region and Boomtown Biloxi,
Boomtown New Orleans, Casino Magic Biloxi, and Casino Magic Bay St. Louis were
forced to shut down operations for approximately one week, though none of the
properties sustained significant damage. If any of the Company's casinos, be it
riverboat, dockside or land-based cease operations for any period of time, it
could adversely affect the Company's results of operations.
MISSISSIPPI ANTI-GAMING INITIATIVE In 1998, two referenda were proposed which,
if approved, would have amended the Mississippi Constitution to ban gaming in
Mississippi and would have required all currently legal gaming entities to cease
operations within two years of the ban. A Mississippi State Circuit Court judge
ruled that the first of the proposed referenda was illegal because, among other
reasons, it failed to include required information regarding its anticipated
effect on government revenues. The Mississippi Supreme Court affirmed the
Circuit Court ruling, but only on procedural grounds. The second referendum
proposal
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included the same language on government revenues as the first referendum and
was struck down by another Mississippi State Circuit Court judge on the same
grounds as the first.
On March 22, 1999, another such referendum was filed with the Mississippi
Secretary of State. The Circuit Court of Hinds County struck down this third
referendum on May 6, 1999 because the initiative failed once again to include
language pertaining to the initiative's negative economic impact. This matter
has been appealed to the Mississippi Supreme Court where disposition is
currently pending. Any such referendum must be approved by the Mississippi
Secretary of State and signatures of approximately 98,000 registered voters must
be gathered and certified in order for such a proposal to be included on a
statewide ballot for consideration by the voters. The next election, for which
the proponents could attempt such a proposal on the ballot, would be November
2000. It is likely at some point that a revised initiative will be filed which
would adequately address the issues regarding the effect on government revenues
of prohibition of gaming in Mississippi. However, while it is too early in the
process for the Company to make any predictions with respect to whether such a
referendum will appear on a ballot or the likelihood of such a referendum being
approved by the voters, if such a referendum were passed and gaming were
prohibited in Mississippi, it would have a materially adverse effect on the
Company.
ARKANSAS The Arkansas Attorney General has, to date, certified at least three
(3) ballot initiatives that would permit casino gambling in the State. Each
initiative requires the collection, by July 7, 2000, of more than 70,000
signatures to qualify it for the November 2000 general election ballot. The
proposed initiatives each vary in their scope and breadth. The Company's Casino
Magic Bossier City casino, in particular, could be negatively impacted by the
existence of casino gambling in Arkansas.
EXPANSION PLANS The following is a summary of the property enhancements and
expansion projects that the Company undertook with respect to its properties.
BOOMTOWN RENO The expansion and renovation of Boomtown Reno was completed in
1999. The renovation included 196 new rooms, 24 luxury suites, new convention/
meeting space and new improved restaurants.
BOOMTOWN NEW ORLEANS In 1999, improvements included a totally remodeled buffet
and a Cajun steak and seafood restaurant.
CASINO MAGIC BOSSIER CITY Casino Magic Bossier City completed its 188 room
luxury hotel in December 1998, as well as other improvements to the 55,000
square foot Pavilion.
Based on the success of the luxury hotel tower completed in December 1998, the
overall strong performance of the property and the anticipated growth of the
Shreveport/Bossier City market, the Company is currently evaluating a
major expansion of the Casino Magic Bossier City facility. Such an
expansion would include: i) a new 300 room luxury hotel tower, ii) a new
riverboat casino comparable in size and quality to that now being constructed in
connection with the Belterra Resort and Casino, and iii) a completely redesigned
pavilion building.
CASINO MAGIC BILOXI Based on the success of the 378 hotel expansion completed in
May 1998, the anticipated growth of the Gulf Coast market and the superior
location of the Casino Magic Biloxi property (the heart of Casino Row), the
Company is evaluating a further expansion and renovation of the property. Such a
renovation would include: i) remodeling the facility to a new theme, ii) adding
a 250 all-suite hotel tower, iii) expanding the casino gaming square footage,
iv) building an entertainment facility, and v) adding themed restaurants and
retail shops.
BELTERRA RESORT AND CASINO In July 1999, the Company broke ground on the
Belterra Resort and Casino and is continuing on schedule for an opening in
August 2000. The project is located in Switzerland County, Indiana, which is
approximately 35 miles southwest of Cincinnati, Ohio and will be the gaming site
most readily accessible to major portions of northern and central Kentucky,
including the city of Lexington.
7
The Company plans to spend approximately $200,000,000 ($30,635,000 of which has
been spent as of December 31, 1999) in total cost (including land, capitalized
interest, pre-opening expenses, organizational expenses and community grants) on
the Belterra Resort and Casino, which will feature a 15-story, 308-room hotel, a
cruising riverboat casino with approximately 1,800 gaming positions, an 18-hole
championship golf course, a 1,500 seat entertainment facility, four restaurants,
retail areas and other amenities. (See Note 6 to the Notes to Consolidated
Financial Statements.)
LAKE CHARLES In November 1999, the Company filed an application for the
fifteenth and final gaming license to be issued by the Louisiana Gaming Control
Board. The Company's application is seeking approval to operate a cruising
riverboat casino, hotel and golf course resort complex in Lake Charles,
Louisiana.
In connection with such submittal, the Company entered into an option agreement
with the Lake Charles Harbor and Terminal District (the "District") to lease
225-acres of unimproved land from the District upon which such resort complex
would be constructed. The term of the lease would be for a total of up to 70
years. The lease would require the Company to develop certain on- and off- site
improvements. If awarded the license by the Louisiana Gaming Control Board, the
Company anticipates building a resort similar in design and scope to the
Belterra Resort and Casino currently under construction. (See Note 6 to the
Notes to Consolidated Financial Statements.)
There can be no assurance that the Company will be successful in completing any
currently contemplated or future expansion projects or, even if they are
completed, that the projects will be successful. Numerous factors, including
regulatory or financial constraints, could intervene and cause the Company to
alter, delay or abandon expansion plans. Such risks include an inability to
secure required financing and required local gaming approvals and other permits
and approvals, as well as risks typically associated with any construction
project, including possible shortages of materials or skilled labor, unforeseen
engineering, environmental or geological problems, work stoppages, weather
interference and unanticipated costs overruns. In addition, the Company is
subject to state and local laws and regulations, ordinances and similar
provisions relating to zoning and other matters that may restrict the possible
uses of the Company's land and other assets. Any additional development of the
Company's land, including the expansion plans described above, would require
approval of such items as environmental impact reports and similar
certifications. There can be no assurance that other requisite approvals would
be obtained.
GOVERNMENT REGULATION LOUISIANA The ownership and operation of a riverboat
gaming vessel is subject to the Louisiana Riverboat Economic Development and
Gaming Control Act (the "Louisiana Act"). As of May 1, 1996, gaming activities
are regulated by the Louisiana Gaming Control Board (the "Board"). The Board is
responsible for issuing the gaming license and enforcing the laws, rules and
regulations relative to riverboat gaming activities. The Board is empowered to
issue up to fifteen licenses to conduct gaming activities on a riverboat of new
construction in accordance with applicable law. However, no more than six
licenses may be granted to riverboats operating from any one parish.
An initial license to conduct gaming operations is valid for a term of five
years. The Louisiana Act provides for successive five year renewals after the
initial five year term.
The laws and regulations of Louisiana seek to (i) prevent unsavory or unsuitable
persons from having any direct or indirect involvement with gaming at any time
or in any capacity; (ii) establish and maintain responsible accounting practices
and procedures; (iii) maintain effective control over the financial practices of
licensees, including establishing procedures for reliable record keeping and
making periodic reports to the Board; (iv) prevent cheating and fraudulent
practices; (v) provide a source of state and local revenues through fees; and
(vi) ensure that gaming licensees, to the extent practicable, employ and
contract with Louisiana residents, women and minorities.
The Louisiana Act specifies certain restrictions and conditions relating to the
operation of riverboat gaming, including but not limited to the following: (i)
in parishes bordering the Red River, such as the Company's Casino Magic property
in Bossier, gaming may be conducted dockside; however, in all other authorized
8
locations such as Boomtown New Orleans, gaming is not permitted while a
riverboat is docked, other than for forty-five minutes between excursions,
unless dangerous weather or water conditions exist; (ii) each round trip
riverboat cruise may not be less than three nor more than eight hours in
duration, subject to specified exceptions; (iii) agents of the Board are
permitted on board at any time during gaming operations; (iv) gaming devices,
equipment and supplies may be purchased or leased from permitted suppliers;
(v) gaming may only take place in the designated river or waterway; (vi) gaming
equipment may not be possessed, maintained, or exhibited by any person on a
riverboat except in the specifically designated gaming area, or a secure area
used for inspection, repair, or storage of such equipment; (vii) wagers may be
received only from a person present on a licensed riverboat; (viii) persons
under 21 are not permitted in designated gaming areas; (ix) except for slot
machine play, wagers may be made only with tokens, chips, or electronic cards
purchased from the licensee aboard a riverboat; (x) licensees may only use
docking facilities and routes for which they are licensed and may only board and
discharge passengers at the riverboat's licensed berth; (xi) licensees must have
adequate protection and indemnity insurance; (xii) licensees must have all
necessary federal and state licenses, certificates and other regulatory
approvals prior to operating a riverboat; and (xiii) gaming may only be
conducted in accordance with the terms of the license and the rules and
regulations adopted by the Board.
No person may receive any percentage of the profits from the Company's
operations in Louisiana without first being found suitable. In March 1994,
Boomtown New Orleans, its officers, key personnel, partners and persons holding
a 5% or greater interest in the partnership were found suitable by the
predecessor to the Board. In April 1996, the Board's predecessor confirmed that
Casino Magic Bossier's officers, key personnel, partners and persons holding a
5% or greater interest in the corporation were suitable and authorized to
acquire an existing licensee. In July 1999, the Board renewed Boomtown New
Orleans' license to conduct gaming operations. In January 2000, Casino Magic
Bossier filed an application to renew its license to conduct gaming operations.
A gaming license is deemed to be a privilege under Louisiana law and as such may
be denied, revoked, suspended, conditioned or limited at any time by the Board.
In issuing a license, the Board must find that the applicant is a person of good
character, honesty and integrity and the applicant is a person whose prior
activities, criminal record, if any, reputation, habits and associations do not
pose a threat to the public interest of the State of Louisiana or to the
effective regulation and control of gaming, or create or enhance the dangers of
unsuitable, unfair or illegal practices, methods, and activities in the conduct
of gaming or the carrying on of business and financial arrangements in
connection therewith. The Board will not grant any licenses unless it finds
that: (i) the applicant is capable of conducting gaming operations, which means
that the applicant can demonstrate the capability, either through training,
education, business experience, or a combination of the above, to operate a
gaming casino; (ii) the proposed financing of the riverboat and the gaming
operations is adequate for the nature of the proposed operation and from a
source suitable and acceptable to the Board; (iii) the applicant demonstrates a
proven ability to operate a vessel of comparable size, capacity and complexity
to a riverboat in its application for a license; (v) the applicant designates
the docking facilities to be used by the riverboat; (vi) the applicant shows
adequate financial ability to construct and maintain a riverboat; (vii) the
applicant has a good faith plan to recruit, train and upgrade minorities in all
employment classifications; and (viii) the applicant is of good moral character.
The Board may not award a license to any applicant who fails to provide
information and documentation to reveal any fact material to qualifications or
who supplies information which is untrue or misleading as to a material fact
pertaining to the qualification criteria; who has been convicted of or pled nolo
contendere to an offense punishable by imprisonment of more than one year; who
is currently being prosecuted for or regarding whom charges are pending in any
jurisdiction of an offense punishable by more than one year imprisonment; if any
holder of 5% or more in the profits and losses of the applicant has been
convicted of or pled guilty or nolo contendere to an offense which at the time
of conviction is punishable as a felony.
The transfer of a license is prohibited. The sale, assignment, transfer, pledge,
or disposition of securities which represent 5% or more of the total outstanding
shares issued by a holder of a license is subject to prior Board approval. A
security issued by a holder of a license must generally disclose these
restrictions.
9
Section 2501 of the regulations enacted by the Louisiana State Police Riverboat
Gaming Division pursuant to the Louisiana Act (the "Regulations") requires prior
written approval of the Board of all persons involved in the sale, purchase,
assignment, lease, grant or foreclosure of a security interest, hypothecation,
transfer, conveyance or acquisition of an ownership interest (other than in a
corporation) or economic interest of five percent (5%) or more in any licensee.
Section 2523 of the Regulations requires notification to and prior approval from
the Board of the (a) application for, receipt, acceptance or modification of a
loan, or the (b) use of any cash, property, credit, loan or line of credit, or
the (c) guarantee or granting of other forms of security for a loan by a
licensee or person acting on a licensee's behalf. Exceptions to prior written
approval include without limitation to any transaction for less than $2,500,000
in which all of the lending institutions are federally regulated, the
transaction modifies the terms of an existing, previously approved loan
transaction, or if the transaction involves publicly registered debt and
securities sold pursuant to a firm underwriting agreement.
The failure of a licensee to comply with the requirements set forth above may
result in the suspension or revocation of that licensee's gaming license.
Additionally, if the Board finds that the individual owner or holder of a
security of a corporate license or intermediary company or any person with an
economic interest in a licensee is not qualified under the Louisiana Act, the
Board may require, under penalty of suspension or revocation of the license,
that the person not (a) receive dividends or interest on securities of the
corporation, (b) exercise directly or indirectly a right conferred by securities
of the corporation, (c) receive remuneration or economic benefit from the
licensee, or (d) continue in an ownership or economic interest in the licensee.
A licensee must periodically report the following information to the Board,
which is not confidential and is to be available for public inspection: the
licensee's net gaming proceeds from all authorized games; the amount of net
gaming proceeds tax paid; and all quarterly and annual financial statements
presenting historical data that are submitted to the Board, including annual
financial statements that have been audited by an independent certified public
accountant.
The Louisiana Act restricts gaming space on riverboats to no more than 30,000
square feet. The Board has adopted rules governing the method for approval of
the area of operations and the rules and odds of authorized games and devices
permitted, and prescribing grounds and procedures for the revocation, limitation
or suspension of licenses and permits.
On April 19, 1996, the Louisiana legislature adopted legislation requiring
statewide local elections on a parish-by-parish basis to determine whether to
prohibit or continue to permit licensed riverboat gaming, licensed video poker
gaming, and licensed land-based gaming in Orleans Parish. The applicable local
election took place on November 5, 1996, and the voters in the parishes of
Boomtown New Orleans and Casino Magic Bossier voted to continue licensed
riverboat and video poker gaming. However, it is noteworthy that the current
legislation does not provide for any moratorium on future local elections on
gaming.
Fees to the state of Louisiana for conducting gaming activities on a riverboat
include (i) $50,000 per riverboat for the first year of operation and $100,000
per year, per riverboat thereafter, plus (ii) 18.5% of net gaming proceeds.
MISSISSIPPI The ownership and operation of casino facilities in Mississippi are
subject to extensive state and local regulation, but primarily the licensing and
regulatory control of the Mississippi Gaming Commission (the "Mississippi
Commission") and the Mississippi State Tax Commission (the "Mississippi Gaming
Authorities").
The Mississippi Gaming Control Act (the "Mississippi Act"), which legalized
dockside casino gaming in Mississippi, was enacted June 29, 1990. Although not
identical, the Mississippi Act is similar to the Nevada Gaming Control Act. The
Mississippi Commission adopted regulations which are also similar in many
respects to the Nevada gaming regulations.
10
The laws, regulations and supervisory procedures of Mississippi and the
Mississippi Commission seek to: (i) prevent unsavory or unsuitable persons from
having any direct or indirect involvement with gaming at any time or in any
capacity; (ii) establish and maintain responsible accounting practices and
procedures; (iii) maintain effective control over the financial practices of
licensees, including establishing minimum procedures for internal fiscal affairs
and safeguarding of assets and revenues, providing reliable record keeping and
making periodic reports to the Mississippi Commission; (iv) prevent cheating and
fraudulent practices; (v) provide a source of state and local revenues through
taxation and licensing fees; and (vi) ensure that gaming licensees, to the
extent practicable, employ Mississippi residents. The regulations are subject to
amendment and interpretation by the Mississippi Commission. Changes in
Mississippi laws or regulations may limit or otherwise materially affect the
types of gaming that may be conducted and such changes, if enacted, could have
an adverse effect on the Company and the Company's Mississippi gaming
operations.
The Mississippi Act provides for legalized dockside gaming at the discretion of
the fourteen counties that border the Gulf Coast or the Mississippi River, but
only if the voters in such counties have not voted to prohibit gaming in that
county. During 1998, certain anti-gaming groups proposed for adoption through
the initiative and referendum process certain amendments to the Mississippi
Constitution which would prohibit gaming in the state. The proposals were
declared illegal by Mississippi courts on constitutional and procedural grounds.
If another such proposal were to be offered and if a sufficient number of
signatures were to be gathered to place a legal initiative on the ballot, it is
possible for the voters of Mississippi to consider such a proposal in November
of 2000. As of January 1, 2000, dockside gaming was permissible in nine of the
fourteen eligible counties in the state and gaming operations had commenced in
Adams, Coahoma, Hancock, Harrison, Tunica, Warren and Washington counties. Under
Mississippi law, gaming vessels must be located on the Mississippi River or on
navigable waters in eligible counties along the Mississippi River or in the
waters lying south of the counties along the Mississippi Gulf Coast. The law
permits unlimited stakes gaming on permanently moored vessels on a 24-hour basis
and does not restrict the percentage of space which may be utilized for gaming.
There are no limitations on the number of gaming licenses which may be issued in
Mississippi.
The Mississippi Act permits substantially all traditional casino games and
gaming devices, and, on August 11, 1997, a Mississippi Circuit Court judge
issued a ruling that the Mississippi Act permits race books on the premises of
licensed casinos. The Mississippi Commission appealed the decision to the
Mississippi Supreme Court, which has not yet rendered a decision.
The Company and any subsidiary of the Company (or partnership in which the
subsidiary is a partner) that operates a casino in Mississippi (a "Mississippi
Gaming Subsidiary"), is subject to the licensing and regulatory control of the
Mississippi Commission. The Company must be registered under the Mississippi Act
as a publicly traded holding company for the Mississippi Gaming Subsidiaries and
is required periodically to submit detailed financial and operating reports to
the Mississippi Commission and furnish any other information which the
Mississippi Commission may require. If the Company is unable to continue to
satisfy the registration requirements of the Mississippi Act, the Company and
its Mississippi Gaming Subsidiaries cannot own or operate gaming facilities in
Mississippi.
Each Mississippi Gaming Subsidiary must maintain a gaming license from the
Mississippi Commission to operate a casino in Mississippi. Such licenses are
issued by the Mississippi Commission subject to certain conditions, including
continued compliance with all applicable state laws and regulations. Gaming
licenses are not transferable, are issued for a two-year period and must be
renewed periodically thereafter. Boomtown Biloxi's license must be renewed in
July of 2000, Casino Magic Bay St. Louis's license must be renewed in April of
2000, and Casino Magic Biloxi's license must be renewed in December of 2000. No
person may become a stockholder of or receive any percentage of profits from a
licensed subsidiary of a registered holding company without first obtaining
licenses and approvals from the Mississippi Commission. The Company has obtained
such approvals in connection with the licensing of its Mississippi Gaming
Subsidiaries, and the registration of the Company as a publicly-traded holding
company.
11
Certain officers and employees of the Company and the officers, directors and
certain key employees of the Company's Mississippi Gaming Subsidiaries must be
found suitable to be licensed by the Mississippi Commission. The Company
believes that it has obtained, applied for or is in the process of applying for
all necessary findings of suitability with respect to such persons associated
with the Company or its Mississippi Gaming Subsidiaries, although the
Mississippi Commission in its discretion may require additional persons to file
applications for findings of suitability. In addition, any person having a
material relationship or involvement with the Company may be required to be
found suitable, in which case those persons must pay the costs and fees
associated with such investigation. The Mississippi Commission may deny an
application for a finding of suitability for any cause that it deems reasonable.
Changes in certain licensed positions must be reported to the Mississippi
Commission. In addition to its authority to deny an application for a finding of
suitability, the Mississippi Commission has jurisdiction to disapprove a change
in a person's corporate position or title and such changes must be reported to
the Mississippi Commission. The Mississippi Commission has the power to require
any Mississippi Gaming Subsidiary and the Company to suspend or dismiss
officers, directors and other key employees or sever relationships with other
persons who refuse to file appropriate applications or whom the authorities find
unsuitable to act in such capacities.
Employees associated with gaming must obtain work permits that are subject to
immediate suspension under certain circumstances. The Mississippi Commission
shall refuse to issue a work permit to a person convicted of a felony and it may
refuse to issue a work permit to a gaming employee if the employee has committed
certain misdemeanors, or knowingly violated the Mississippi Act, or for any
other reasonable cause.
At any time, the Mississippi Commission has the power to investigate and require
the finding of suitability of any record or beneficial stockholder of the
Company. Mississippi law requires any person who acquires more than 5% of the
common stock of a publicly traded corporation registered with the Mississippi
Commission to report the acquisition to the Mississippi Commission, and such
person may be required to be found suitable. Also, any person who becomes a
beneficial owner of more than 10% of the common stock of such a company, as
reported to the Securities and Exchange Commission, must apply for a finding of
suitability by the Mississippi Commission and must pay the costs and fees that
the Mississippi Commission incurs in conducting the investigation. The
Mississippi Commission has generally exercised its discretion to require a
finding of suitability of any beneficial owner of more than 5% of a registered
publicly-traded holding company's common stock. However, the Mississippi
Commission has adopted a policy that permits certain institutional investors to
own beneficially up to 10% of a registered public company's common stock without
a finding of suitability. If a stockholder who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information, including a list of beneficial owners.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Mississippi
Commission may be found unsuitable. The same restrictions apply to a record
owner, if the record owner, after request, fails to identify the beneficial
owner. Management believes that compliance by the Company with the licensing
procedures and regulatory requirements of the Mississippi Commission will not
affect the marketability of the Company's securities. Any person found
unsuitable and who holds, directly or indirectly, any beneficial ownership of
the securities of the Company beyond such time as the Mississippi Commission
prescribes, may be guilty of a misdemeanor. The Company is subject to
disciplinary action if, after receiving notice that a person is unsuitable to be
a stockholder or to have any other relationship with the Company or its
Mississippi Gaming Subsidiaries, the Company: (i) pays the unsuitable person any
dividend or other distribution upon the voting securities of the Company; (ii)
recognizes the exercise, directly or indirectly, of any voting rights conferred
by securities of the Company held by the unsuitable person; (iii) pays the
unsuitable person any remuneration in any form for services rendered or
otherwise, except in certain limited and specific circumstances; or (iv) fails
to pursue all lawful efforts to require the unsuitable person to divest himself
of the securities, including, if necessary, the immediate purchase of the
securities for cash at a fair market value.
The Company may be required to disclose to the Mississippi Commission upon
request the identities of the holders of any of the Company's debt or other
securities. In addition, under the Mississippi Act the
12
Mississippi Commission may, in its discretion, (i) require holders of securities
of registered corporations, including debt securities such as the Company's 9.5%
Notes and the 9.25% Notes, to file applications, (ii) investigate such holders,
and (iii) require such holders to be found suitable to own such securities. If
the Mississippi Commission determines that a person is unsuitable to own such
security, then the issuer may be sanctioned, including the loss of its
approvals, if without the prior approval of the Mississippi Commission, it (i)
pays to the unsuitable person any dividend, interest, or any distribution
whatsoever; (ii) recognizes any voting right by such unsuitable person in
connection with such securities; (iii) pays the unsuitable person remuneration
in any form; or (iv) makes any payment to the unsuitable person by way of
principal, redemption, conversion, exchange, liquidation, or similar
transaction. Although the Mississippi Commission generally does not require the
individual holders of obligations such as the Notes to be investigated and found
suitable, the Mississippi Commission retains the discretion to do so for any
reason, including but not limited to a default, or where the holder of the debt
instrument exercises a material influence over the gaming operations of the
entity in question. Any holder of debt securities required to apply for a
finding of suitability must pay all investigative fees and costs of the
Mississippi Commission in connection with such an investigation.
Each Mississippi Gaming Subsidiary must maintain in Mississippi a current ledger
with respect to ownership of its equity securities, and the Company must
maintain in Mississippi a current list of stockholders of the Company which must
reflect the record ownership of each outstanding share of any class of equity
security issued by the Company. The ledger and stockholder lists must be
available for inspection by the Mississippi Commission at any time. If any
securities of the Company are held in trust by an agent or by a nominee, the
record holder may be required to disclose the identity of the beneficial owner
to the Mississippi Commission. A failure to make such disclosure may be grounds
for finding the record holder unsuitable. The Company must also render maximum
assistance in determining the identity of the beneficial owners.
The Mississippi Act requires that the certificates representing securities of a
publicly-traded corporation bear a legend to the general effect that such
securities are subject to the Mississippi Act and the regulations of the
Mississippi Commission. The Company has received from the Mississippi Commission
a waiver from this legend requirement. The Mississippi Commission has the power
to impose additional restrictions on the holders of the Company's securities at
any time.
Substantially all loans, leases, sales of securities and similar financing
transactions by a Mississippi Gaming Subsidiary must be reported to or approved
by the Mississippi Commission. A Mississippi Gaming Subsidiary may not make a
public offering of its securities, but may pledge or mortgage casino facilities.
The Company may not make a public offering of its securities without the prior
approval of the Mississippi Commission if any part of the proceeds of the
offering is to be used to finance the construction, acquisition or operation of
gaming facilities in Mississippi or to retire or extend obligations incurred for
one or more such purposes. Such approval, if given, does not constitute a
recommendation or approval of the investment merits of the securities subject to
the offering.
Under the regulations of the Mississippi Commission, a gaming licensee may not
guarantee a security issued by an affiliate company pursuant to a public
offering, or pledge its assets to secure payment or performance of the
obligations evidenced by the security issued by the affiliated company, without
the prior approval of the Mississippi Commission. A pledge of stock of a gaming
licensee and the foreclosure of such a pledge are ineffective without the prior
approval of the Mississippi Commission. Moreover, restrictions on the transfer
of an equity security issued by a Mississippi licensee and agreements not to
encumber such securities are ineffective without the prior approval of the
Mississippi Commission.
Changes in control of the Company through merger, consolidation, acquisition of
assets, management or consulting agreements or any form of takeover, cannot
occur without the prior approval of the Mississippi Commission. The Mississippi
Commission may also require controlling stockholders, officers, directors and
other persons having a material relationship or involvement with the entity
proposing to acquire control, to be investigated and licensed as part of the
approval process relating to the transaction.
13
The Mississippi legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and other corporate
defense tactics that affect corporate gaming licensees in Mississippi and
corporations whose stock is publicly traded that are affiliated with those
licensees, may be injurious to stable and productive corporate gaming. The
Mississippi Commission has established a regulatory scheme to ameliorate the
potentially adverse effects of these business practices upon Mississippi's
gaming industry and to further Mississippi's policy to: (i) assure the financial
stability of corporate gaming operators and their affiliates; (ii) preserve the
beneficial aspects of conducting business in the corporate form; and (iii)
promote a neutral environment for the orderly governance of corporate affairs.
Approvals are, in certain circumstances, required from the Mississippi
Commission before the Company may make exceptional repurchases of voting
securities in excess of the current market price of its common stock (commonly
called "greenmail") or before a corporate acquisition opposed by management may
be consummated. Mississippi's gaming regulations will also require prior
approval by the Mississippi Commission if the Company adopts a plan of
recapitalization proposed by its Board of Directors opposing a tender offer made
directly to the shareholders for the purpose of acquiring control of the
Company.
Neither the Company nor any subsidiary may engage in gaming activities in
Mississippi while also conducting gaming operations outside of Mississippi
without approval of the Mississippi Commission. The Mississippi Commission may
require determinations that, among other things, there are means for the
Mississippi Commission to have access to information concerning the out-of-state
gaming operations of the Company and its affiliates. The Mississippi Commission
has approved the Company's current operations in other jurisdictions but must
approve the Company's future gaming operations in any new jurisdictions.
If the Mississippi Commission decides that a Mississippi Gaming Subsidiary
violated a gaming law or regulation, the Mississippi Commission could limit,
condition, suspend or revoke the license of the Mississippi Gaming Subsidiary,
subject to compliance with certain statutory and regulatory procedures. In
addition, a Mississippi Gaming Subsidiary, the Company and the persons involved
could be subject to substantial fines for each separate violation. Because of
such a violation, the Mississippi Commission could attempt to appoint a
supervisor to operate the casino facilities. Limitation, conditioning or
suspension of any gaming license or the appointment of a supervisor could (and
revocation of any gaming license would) materially adversely affect the Company,
the Mississippi Gaming Subsidiary's gaming operations and the Company's results
of operations.
License fees and taxes, computed in various ways depending on the type of gaming
involved, are payable to the State of Mississippi and to the counties and cities
in which a Mississippi Gaming Subsidiary's respective operations will be
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly or annually and are based upon (i) a
percentage of the gross gaming revenues received by the casino operation, (ii)
the number of slot machines operated by the casino, or (iii) the number of table
games operated by the casino. The license fee payable to the State of
Mississippi is based upon "gaming receipts" (generally defined as gross receipts
less pay outs to customers as winnings) and equals 4% of gaming receipts of
$50,000 or less per month, 6% of gaming receipts over $50,000 and less than
$134,000 per month, and 8% of gaming receipts over $134,000. The foregoing
license fees are allowed as a credit against the licensee's Mississippi income
tax liability for the year paid. The gross revenue fee imposed by the
Mississippi communities in, which the Company's casino operations are located,
equals approximately 4% of the gaming receipts.
In October 1994, the Mississippi Commission adopted two new regulations. Under
the first regulation, as a condition of licensure or license renewal, casino
vessels on the Mississippi Gulf Coast that are not self-propelled must be moored
to withstand a Category 4 hurricane with 155 mile-per-hour winds and 15-foot
tidal surge. The Company believes that all of its Mississippi Gaming
Subsidiaries currently meet this requirement. The second regulation requires as
a condition of licensure or license renewal that a gaming establishment's plan
include a 500-car parking facility in close proximity to the casino complex and
infrastructure facilities, the expenditures for which will amount to at least
25% of the casino cost. Such facilities shall include any of the following: a
250-room hotel of at least a two-star rating as defined by the current edition
of the Mobil Travel Guide, a theme park, golf courses, marinas, tennis complex,
entertainment
14
facilities, or any other such facility as approved by the Mississippi Commission
as infrastructure. Parking facilities, roads, sewage and water systems, or
facilities normally provided by cities and/or counties are excluded. The
Mississippi Commission may in its discretion reduce the number of rooms
required, where it is shown to the Commission's satisfaction that sufficient
rooms are available to accommodate the anticipated visitor load. The Company
believes that all of its Mississippi Gaming Subsidiaries currently meet such
requirements. The Mississippi Commission has recently adopted amendments to the
regulation that increase the infrastructure development requirement from 25% to
100% for new casinos (or upon acquisition of a closed casino), but grandfather
existing licensees.
The sale of food or alcoholic beverages at the Mississippi Gaming Subsidiaries
is subject to licensing, control and regulation by the applicable state and
local authorities. The agencies involved have full power to limit, condition,
suspend or revoke any such license, and any such disciplinary action could (and
revocation would) have a materially adverse effect upon the operations of the
affected casino or casinos. Certain officers and managers of the Company and the
Mississippi Gaming Subsidiaries must be investigated by the Alcoholic Beverage
Control Division of the State Tax Commission (the "ABC") in connection with the
Mississippi Gaming Subsidiaries' liquor permits. Changes in licensed positions
must be approved by the ABC.
NEVADA The ownership and operation of casino gaming facilities in Nevada are
subject to: (i) the Nevada Gaming Control Act and the regulations promulgated
thereunder (collectively, "Nevada Act"); and (ii) various local regulations. The
Company's gaming operations are subject to the licensing and regulatory control
of the Nevada Gaming Commission ("Nevada Commission"), the Nevada State Gaming
Control Board ("Nevada Board") and Washoe County. The Nevada Commission, the
Nevada Board and Washoe County are collectively referred to as the "Nevada
Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) providing a source of state and local revenues
through taxation and licensing fees. Changes in such laws, regulations and
procedures could have an adverse effect on Boomtown Reno's gaming operations.
Boomtown Hotel & Casino, Inc. (the "Gaming Subsidiary"), which operates Boomtown
Reno and two other gaming operations with slot machines only, is required to be
licensed by the Nevada Gaming Authorities. The gaming licenses require the
periodic payment of fees and taxes and are not transferable. The Company is
currently registered by the Nevada Commission as a publicly traded corporation
(a "Registered Corporation") and has been found suitable to own the stock of
Boomtown, which is registered as an intermediary company ("Intermediary
Company"). Boomtown has been found suitable to own the stock of the Gaming
Subsidiary, which is a corporate licensee (a "Corporate Licensee") under the
terms of the Nevada Act. As a Registered Corporation, the Company is required
periodically to submit detailed financial and operating reports to the Nevada
Commission and furnish any other information which the Nevada Commission may
require. No person may become a stockholder of, or holder of an interest of, or
receive any percentage of profits from an Intermediary Company or a Corporate
Licensee without first obtaining licenses and approvals from the Nevada Gaming
Authorities. The Company, Boomtown and the Gaming Subsidiary have obtained from
the Nevada Gaming Authorities the various registrations, findings of
suitability, approvals, permits and licenses required in order to engage in
gaming activities in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a material
relationship to, or material involvement with, the Company, Boomtown or the
Gaming Subsidiary in order to determine whether such individual is suitable or
should be licensed as a business associate of a gaming licensee. Officers,
directors and certain key employees of the Company, Boomtown and the Gaming
Subsidiary must file
15
applications with the Nevada Gaming Authorities and may be required to be
licensed or found suitable by the Nevada Gaming Authorities. Officers, directors
and key employees of the Company and Boomtown who are actively and directly
involved in gaming activities of the Gaming Subsidiary may be required to be
licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming
Authorities may deny an application for licensing for any cause which they deem
reasonable. A finding of suitability is comparable to licensing, and both
require submission of detailed personal and financial information followed by a
thorough investigation. The applicant for licensing or a finding of suitability
must pay all the costs of the investigation. Changes in licensed positions must
be reported to the Nevada Gaming Authorities and, in addition to their authority
to deny an application for a finding of suitability or licensure, the Nevada
Gaming Authorities have jurisdiction to disapprove a change in a corporate
position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company, Boomtown or the Gaming Subsidiary, the companies
involved would have to sever all relationships with such person. In addition,
the Nevada Commission may require the Company, Boomtown or the Gaming Subsidiary
to terminate the employment of any person who refuses to file appropriate
applications. Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.
The Company and the Gaming Subsidiary are required to submit detailed financial
and operating reports to the Nevada Commission. Substantially all material
loans, leases, sales of securities and similar financing transactions by the
Company, Boomtown and the Gaming Subsidiary must be reported to or approved by
the Nevada Commission.
If it were determined that the Nevada Act was violated by the Gaming Subsidiary,
the gaming licenses it holds could be limited, conditioned, suspended or
revoked, subject to compliance with certain statutory and regulatory procedures.
In addition, the Company, Boomtown, the Gaming Subsidiary and the persons
involved could be subject to substantial fines for each separate violation of
the Nevada Act at the discretion of the Nevada Commission. Further, a supervisor
could be appointed by the Nevada Commission to operate Boomtown Reno and, under
certain circumstances, earnings generated during the supervisor's appointment
(except for reasonable rental value of the casino) could be forfeited to the
State of Nevada. Limitation, conditioning or suspension of the gaming licenses
of the Gaming Subsidiary or the appointment of a supervisor could (and
revocation of any gaming license would) materially adversely affect the
Company's gaming operations.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and be found suitable as a beneficial holder of the Company's voting securities
if the Nevada Commission has reason to believe that such ownership would
otherwise be inconsistent with the declared policies of the State of Nevada. The
applicant must pay all costs of investigation incurred by the Nevada Gaming
Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires beneficial ownership of more
than 5% of a Registered Corporation's voting securities to report the
acquisition to the Nevada Commission. The Nevada Act requires that beneficial
owners of more than 10% of a Registered Corporation's voting securities apply to
the Nevada Commission for a finding of suitability within thirty days after the
Chairman of the Nevada Board mails the written notice requiring such filing.
Under certain circumstances, an "institutional investor," as defined in the
Nevada Act, which acquires more than 10%, but not more than 15%, of a Registered
Corporation's voting securities may apply to the Nevada Commission for a waiver
of such finding of suitability if such institutional investor holds the voting
securities for investment purposes only. An institutional investor shall not be
deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Registered Corporation, any change in the Registered Corporation's
corporate charter, bylaws, management, policies or operations of the Registered
Corporation, or any of its gaming affiliates, or any other action which the
Nevada Commission finds to be inconsistent with holding the Registered
Corporation's voting securities for investment purposes
16
only. Activities which are not deemed to be inconsistent with holding voting
securities for investment purposes only include: (i) voting on all matters voted
on by stockholders; (ii) making financial and other inquiries of management of
the type normally made by securities analysts for informational purposes and not
to cause a change in its management, policies or operations; and (iii) such
other activities as the Nevada Commission may determine to be consistent with
such investment intent. If the beneficial holder of voting securities who must
be found suitable is a corporation, partnership or trust, it must submit
detailed business and financial information, including a list of beneficial
owners. The applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock
beyond such period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. The Company is subject to disciplinary action if,
after it receives notice that a person is unsuitable to be a stockholder or to
have any other relationship with the Company, Boomtown or the Gaming Subsidiary,
the Company (i) pays that person any dividend or interest upon voting securities
of the Company, (ii) allows that person to exercise, directly or indirectly, any
voting right conferred through securities held by that person, (iii) pays
remuneration in any form to that person for services rendered or otherwise, or
(iv) fails to pursue all lawful efforts to require such unsuitable person to
relinquish his voting securities including, if necessary, the immediate purchase
of said voting securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file applications, be investigated and
be found suitable to own the debt security of a Registered Corporation. If the
Nevada Commission determines that a person is unsuitable to own such security,
then pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.
The Company is required to maintain a current stock ledger in Nevada which may
be examined by the Nevada Gaming Authorities at any time. If any securities are
held in trust by an agent or by a nominee, the record holder may be required to
disclose the identity of the beneficial owner to the Nevada Gaming Authorities.
A failure to make such disclosure may be grounds for finding the record holder
unsuitable. The Company is also required to render maximum assistance in
determining the identity of the beneficial owner. The Nevada Commission has the
power to require that the Company's stock certificates bear a legend indicating
that the securities are subject to the Nevada Act. However, to date the Nevada
Commission has not imposed such a requirement on the Company.
The Company is not permitted to make a public offering of its securities without
the prior approval of the Nevada Commission if the securities or the proceeds
therefrom are intended to be used to construct, acquire or finance gaming
facilities in Nevada, or to retire or extend obligations incurred for such
purposes. On March 25, 1999, the Nevada Commission granted the Company prior
approval to make public offerings for a period of two years, subject to certain
conditions (the "Shelf Approval"). The Shelf Approval also applies to any
affiliated company wholly owned by the Company (an "Affiliate"), which is a
publicly traded corporation or would thereby become a publicly traded
corporation pursuant to a public offering. The Shelf Approval also includes
approval for Boomtown and the Gaming Subsidiary to guarantee any security issued
by, and for the Gaming Subsidiary to hypothecate its assets to secure the
payment or performance of any obligations evidenced by a security issued by the
Company or an Affiliate in a public offering under the Shelf Registration. The
Shelf Approval also includes approval to place restrictions upon the transfer of
and enter into agreements not to encumber the equity securities of Boomtown and
the Gaming Subsidiary (collectively, "Stock
17
Restrictions"). The Shelf Approval, however, may be rescinded for good cause
without prior notice upon the issuance of an interlocutory stop order by the
Chairman of the Nevada Board. The Shelf Approval does not constitute a finding
recommendation or approval of the Nevada Gaming Authorities as to the accuracy
or the adequacy of the prospectus or the investment merits of the securities
offered thereby. Any representation to the contrary is unlawful.
Changes in control of a Registered Corporation through merger, consolidation,
stock or asset acquisitions, management or consulting agreements, or any act or
conduct by a person whereby he obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
Registered Corporation must satisfy the Nevada Board and Nevada Commission in a
variety of stringent standards prior to assuming control of such Registered
Corporation. The Nevada Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control to be investigated and
licensed as part of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed by
management, repurchases of voting securities and corporate defense tactics
affecting Nevada corporate gaming licensees, and Registered Corporations that
are affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming licensees and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Registered Corporation can make exceptional repurchases of
voting securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Registered
Corporation's Board of Directors in response to a tender offer made directly to
the Registered Corporation's stockholders for the purposes of acquiring control
of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of gaming
or activity involved, are payable to the State of Nevada and to Washoe County,
in which the Gaming Subsidiary's operations are conducted. Depending upon the
particular fee or tax involved, these fees and taxes are payable either monthly,
quarterly or annually and are based upon either: (i) a percentage of the gross
revenues received; (ii) the number of gaming devices operated; or (iii) the
number of table games operated. A casino entertainment tax is also paid by
casino operations where entertainment is furnished in a cabaret, nightclub,
cocktail lounge or casino showroom in connection with the serving or selling of
food or refreshments, or the selling of any merchandise.
Any person who is licensed, required to be licensed, registered, required to be
registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of such Licensee's participation in such foreign gaming. The
revolving fund is subject to increase or decrease in the discretion of the
Nevada Commission. Thereafter, Licensees are required to comply with certain
reporting requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if they knowingly violate any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fail to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engage in activities or
enter into associations that are harmful to the State of Nevada or its ability
to collect gaming taxes and fees, or employ, contract with, or associate with a
person in the foreign operation who has been denied a license or finding of
suitability in Nevada on the ground of unsuitability.
18
CALIFORNIA Operation of California card club casinos such as the Hollywood
Park-Casino and the Crystal Park Casino is governed by the Gambling Control Act
(the "GCA") and is subject to the oversight of the California Attorney General
and the California Gambling Control Commission. Under the GCA, a California card
club casino may only offer certain forms of card games, including Poker, Pai
Gow, and California Blackjack. A card club casino may not offer many of the card
games and other games of chance permitted in Nevada and other jurisdictions
where the Company conducts business.
Although the California Attorney General takes the position that, under the GCA,
only individuals, partnerships or privately-held companies (as opposed to
publicly-traded companies such as Pinnacle Entertainment) are eligible to
operate card club casinos, the enactment of California Senate Bill 100 ("SB-
100") in 1995, and the subsequent enactment of Senate Bill-8 permit a publicly-
owned racing association to own and operate a card club casino if it also owns
and operates a race track on the same premises.
In September 1995, the Attorney General granted the Company a provisional
registration under SB-100 to operate the Hollywood Park-Casino, which
provisional registration was renewed effective January 1, 1999. Pursuant to the
GCA, on September 10, 1999, in connection with the sale of the Hollywood Park
Race Track (see Note 3 to the Notes to Consolidated Financial Statements), the
Company was no longer eligible to operate the Hollywood Park-Casino and
therefore entered into a sub lease arrangement of the Hollywood Park-Casino with
the same third party operator which leases the Crystal Park Casino. In the event
the GCA were to be amended to permit publicly-traded companies such as Pinnacle
Entertainment to operate card clubs, the Company, and its officers, directors
and certain stockholders, would likely have to file the necessary licensing
applications with the Attorney General, if it wished to operate the Hollywood
Park-Casino or the Crystal Park Casino.
Pursuant to the GCA, the operator of a card club casino, and its officers,
directors and certain stockholders are required to be registered by the Attorney
General and licensed by the municipality in which it is located. A permanent
registration will not be granted until the California Department of Justice
completes its review of the applications of The Company and its corporate
officers and directors. The Attorney General has broad discretion to deny a
gaming registration and may impose reasonably necessary conditions upon the
granting of a gaming registration. Grounds for denial include felony
convictions, criminal acts, convictions involving dishonesty, illegal gambling
activities, and false statements on a gaming application. Such grounds also
generally include having a financial interest in a business or organization that
engages in gaming activities that are illegal under California law. In addition,
the Attorney General possesses broad authority to suspend or revoke a gaming
registration on any of the foregoing grounds, as well as for violation of any
federal, state or local gambling law, failure to take reasonable steps to
prevent dishonest acts or illegal activities on the premises of the card club
casino, failure to cooperate with the Attorney General in its oversight of the
card club casino and failure to comply with any condition of the registration.
The City of Inglewood and the City of Compton have granted the operator of the
Hollywood Park-Casino and the Crystal Park Casino all municipal gaming licenses
necessary for operation of such facilities, and the operator has received
provisional registrations for both locations from the California Department of
Justice.
INDIANA On September 14, 1998, the Indiana Gaming Commission ("Indiana
Commission") voted to award a Certificate of Suitability to Pinnacle Gaming
Development Corporation ("Pinnacle Gaming"), ninety-seven percent (97%) of the
equity of which is owned and controlled by affiliates of the Company. By action
approved by the Indiana Commission, Pinnacle Gaming has been absorbed by
Belterra Resort (Indiana), LLC ("Belterra"). The Company continues to own a 97%
interest in Belterra. The Certificate of Suitability, issued by the Indiana
Commission, authorizes Belterra to develop a riverboat gaming resort, including
a hotel and golf course, in Switzerland County, Indiana. Upon completion of
development of the project in accordance with the Certificate of Suitability and
satisfaction of other conditions, the Indiana Commission is expected to issue a
license to Belterra. That license would be the fifth and final license
authorized under Indiana law for riverboat gaming operations conducted from
sites on the Ohio River. Certificates of Suitability have a one hundred eighty
(180) day life and are subject to renewal by Commission action. The Certificate
of Suitability originally
19
awarded to Pinnacle Gaming and held by Belterra has been renewed on three (3)
occasions and will be subject to one additional renewal before the anticipated
opening date for gaming and hotel operations.
The ownership and operation of riverboat casinos docked at Indiana-based sites
are subject to extensive state regulation under the Indiana Riverboat Gaming Act
("Indiana Act") and regulations which the Indiana Commission has adopted under
the Indiana Act. The Indiana Act and the regulations are significant to the
Company's prospects for successfully developing and operating the Switzerland
County, Indiana based riverboat casino and associated developments through
Belterra, its Indiana affiliate.
The Indiana Act extends broad and pervasive regulatory powers and authority to
the Indiana Commission. It has adopted a comprehensive set of regulations
covering ownership and reporting for licensed riverboat casinos together with
"rules of the game" governing riverboat casino operations. The Indiana
Commission has also adopted a set of regulations under the Indiana Act which
covers numerous operational matters concerning riverboat casinos licensed by the
Commission.
Among the regulations adopted by the Indiana Commission is one dealing with
riverboat excursions, routes and public safety. The Indiana Act requires
licensed riverboat casinos to be cruising vessels, and the regulations carry out
the legislative intent with appropriate recognition of public safety needs. The
regulations explicitly preclude "dockside gambling". Riverboat gaming excursions
are limited to a duration of up to four hours unless otherwise expressly
approved by the Indiana Commission. Excursion routes and schedules are subject
to the approval of the Indiana Commission. No gaming may be conducted while the
boat is docked except: (1) for thirty-minute embarkment and disembarkment
periods at the beginning and end of a cruise; (2) if the master of the riverboat
reasonably determines that specific weather or water conditions present a danger
to the riverboat, its passengers and crew; (3) if either the vessel or the
docking facility is undergoing mechanical or structural repair; (4) if water
traffic conditions present a danger to the riverboat, riverboat passengers and
crew, or to other vessels on the water, or (5) if the master has been notified
that a condition exists that would cause a violation of Federal law if the
riverboat were to cruise.
For Ohio River excursions, such as those Belterra will conduct from its
Switzerland County development, "full excursions" must be conducted at all times
during the year unless the master determines otherwise, for the above-stated
reasons. A "full excursion" is a cruise on the Ohio River. The Ohio River has
waters in both Indiana and Kentucky. The Company believes there is ample room to
cruise fully in Indiana waters on the Ohio River with no need or likelihood of
entering Kentucky waters. Therefore, the provisions of Kentucky law (which
preclude any kind of casino gaming) will not have any impact on the Company's
prospective Indiana operations.
An Indiana riverboat owner's license has an initial effective period of five
years; thereafter, a license is subject to annual renewal. The Indiana
Commission has broad discretion over the initial issuance of licenses and over
the renewal, revocation, suspension and control of riverboat owner's licenses.
Belterra has received a Certificate of Suitability designed to lead to issuance
of a license upon completion of project development and satisfaction of various
conditions. The Indiana Act requires a reinvestigation after three years to
ensure the owner continues to be in compliance with the Indiana Act. Officers,
directors and principal owners of the actual license holder and employees who
are to work on the riverboat are subject to substantial disclosure requirements
as a part of securing and maintaining necessary licenses. Significant contracts
to which Belterra is party are subject to disclosure and approval processes
imposed by the regulations. A riverboat owner's licensee may not enter into or
perform any contract or transaction in which it transfers or receives
consideration which is not commercially reasonable or which does not reflect the
fair market value of the goods or services rendered or received. All contracts
are subject to disapproval by the Indiana Commission. Suppliers of gaming
equipment and materials must also be licensed under the Indiana Act.
Licensees are statutorily required to disclose to the Indiana Commission the
identity of all directors, officers and persons holding direct or indirect
beneficial interests of 1% or greater. The Indiana Commission also requires a
broad and comprehensive disclosure of financial and operating information on
licensees and their principal officers, and their parent corporations and other
upstream owners. The Company and Belterra
20
have provided full information and documentation to the Indiana Commission, and
they must continue to do so until issuance of the license and then throughout
the period of licensure. The Indiana Act prohibits contributions to candidate
for a state, legislative, or local office, or to a candidate's committee or to a
regular party committee by the holder of a riverboat owner's license or a
supplier's license, by an officer of a licensee, by an officer of a person that
holds at least a 1% interest in the licensee or by a person holding at least a
1% interest in the licensee. The Indiana Commission has promulgated a rule
requiring quarterly reporting by such licensees, officers, and persons.
As a condition to receiving a license to conduct riverboat casino operations
from the Indiana Commission, the Company has obtained permits and approvals from
the United States Army Corp of Engineers to develop the facilities it will use
to conduct operations. Clearances will be required to be received from the
Indiana Department of Natural Resources for portions of the proposed
development. Alcoholic beverage permits for riverboat excursions and for the
hotel and boarding facilities will be required as will various other permits and
governmental consents or clearances.
Adjusted gross receipts from gambling games authorized under the Indiana Act are
subject to a tax at the rate of 20% on adjusted gross receipts. "Adjusted gross
receipts" means the total of all cash and property received from gaming
operations less cash paid out as winnings and uncollectible gaming receivables
(not to exceed 2%). The Indiana Act also prescribes an additional tax for
admissions, based upon $3 per person per excursion. Property taxes may be
imposed on riverboats at rates determined by local taxing authorities. Income to
the Company from Belterra will be subject to the Indiana gross income tax, the
Indiana adjusted gross income tax and the Indiana supplemental corporate net
income tax. Sales on a riverboat and at related resort facilities are subject to
applicable use, excise and retail taxes. The Indiana Act requires a riverboat
owner licensee to directly reimburse the Indiana Commission for the costs of
inspectors and agents required to be present while authorized gaming is
conducted.
Through the establishment of purchasing "goals," the Indiana Act encourages
minority and women's business enterprise participation in the riverboat gaming
industry. Any person issued a riverboat owner's license must establish goals of
at least 10% of the total dollar value of the licensee's contracts for goods and
services with minority business enterprises and 5% of the total dollar value of
the licensee's contracts for goods and services with women's business
enterprises. Compliance with these conditions is incorporated into the Indiana
Affiliate's Certificate of Suitability. The Indiana Commission may suspend,
limit or revoke the owner's license or impose a fine for failure to comply with
the statutory requirements. The Indiana Commission has indicated it will be
vigilant in monitoring attainment of these goals.
Minimum and maximum wagers on games on the riverboat are left to the discretion
of the licensee. Wagering may not be conducted with money or other negotiable
currency. There are no statutory restrictions on extending credit to patrons;
however, the matter of credit may come under scrutiny in future legislative
sessions.
If an institutional investor acquires 5% or more of any class of voting
securities of a holding company of a licensee, the investor is required to
notify the Indiana Commission and to provide additional information, and may be
subject to a finding of suitability. Any other person who acquires 5% or more of
any class of voting securities of a holding company of a licensee is required to
apply to the Indiana Commission for a finding of suitability. A riverboat
licensee or an affiliate may not enter into a debt transaction of $1,000,000 or
more without approval of the Indiana Commission. The Indiana Commission has
taken the position that a "debt transaction" includes increases in maximum
amount available under reducing revolving credit facilities. A riverboat owner's
license is a revocable privilege and is not a property right under the Indiana
Act. A riverboat owner licensee or any other person may not lease, hypothecate,
borrow money against or loan money against or otherwise scrutinize or monetize a
riverboat owner's license.
The study commission on the impact of legalized wagering in Indiana appointed by
the Governor has called for a limit on expansion of legalized wagering in
Indiana.
21
Proposals introduced before the 2000 General Assembly in Indiana to authorize
dockside gaming by eliminating cruise requirements were not successful. Parts of
those legislative efforts included proposals for increased taxes on admissions
or increased taxes on adjusted gross gaming receipts. These matters are the
subject of continued attention by legislators and other policy makers.
ARIZONA The Arizona Racing Commission ("ARC") has jurisdiction and supervision
over all racing activities in the State of Arizona. The ARC issues live racing
permits that are valid for three years, and off-track permits are granted on a
year to year basis. In June 1997, Turf Paradise received a live racing permit
from the ARC, which will remain in force through the 1999/2000 race year. The
permit specifies that live racing may be conducted between the first week of
September through the third week of May and that, so long as there is live
racing at Turf Paradise on an average of at least five days a week, Turf
Paradise may have simulcast wagering on days when there is no live racing.
ARGENTINA The Provincial Government of Neuquen, Argentina enacted a casino
privatization program to issue twelve-year exclusive concession agreements to
operate existing casinos. The Company's two casinos are the only casinos in the
province of Neuquen, in west central Argentina, and are located in Neuquen City
and San Martin de los Andes. The casinos had previously been operated by the
provincial government. The Ministry of Finance of Argentina has adopted a
modified regulatory system for casinos, based somewhat on the regulatory system
utilized by the State of Nevada, and such regulatory system is being
administered by the Provincial Government of Neuquen. The Company cannot predict
what effect the enactment of other laws, regulations or pronouncements relating
to casino operations may have on the operations of Casino Magic Argentina.
COMPETITION Pinnacle Entertainment faces significant competition in each of the
jurisdictions in which it has established gaming operations, and such
competition is expected to intensify as new gaming operations enter these
markets and existing competitors expand their operations. The Company's
properties compete directly with other gaming properties in Nevada, Mississippi,
Louisiana, Indiana, California, Arizona, and Argentina. To a lesser extent, the
Company also competes for customers with other casino operators in North
American markets, including casinos located on Indian reservations, and other
forms of gaming such as lotteries. Many of the Company's competitors are larger,
have substantially greater name recognition and marketing resources as well as
access to lower cost sources of financing. Moreover, consolidation of companies
in the gaming industry could increase the concentration of large gaming
companies in the markets which the Company operates, and may result in Pinnacle
Entertainment's competitors having even greater resources, name recognition and
licensing prospects than such competitors currently enjoy.
MISSISSIPPI AND LOUISIANA - GULF COAST MARKETS The Company operates four gaming
properties (including two which are pending a sale) in this market; Boomtown New
Orleans, Boomtown Biloxi, Casino Magic Bay St. Louis and Casino Magic Biloxi.
Competition in this market expanded during 1999. Further, Mississippi law does
not limit the number of gaming licenses that may be granted. In March 1999,
Mirage Resorts opened the Beau Rivage Resort, an 1,800 room hotel and casino in
Biloxi costing in excess of $675,000,000. Grand Casino Biloxi, a subsidiary of
Park Place Entertainment, expanded its casino, which is next to Casino Magic
Biloxi. In the spring of 2000, the New Palace Casino is expected to open in
Biloxi and will have 232 hotel rooms, restaurants and a casino. Grand Casino
Gulfport in June 1999 completed and opened a 600 room hotel expansion, as well
as a 3 acre water park, spa and salon at its Gulfport property (located near
Bay. St. Louis). Mandalay Bay has announced plans to construct a new hotel and
casino at Bay St. Louis, but construction has not yet begun.
BOSSIER CITY/SHREVEPORT MARKET The Company operates its 188 room luxury hotel
and riverboat Casino Magic Bossier City property in the Bossier City/Shreveport
market, which competes directly with three other gaming facilities. The largest
is Horseshoe Casino, which has a 606 room luxury hotel and has the largest
riverboat, at 62,400 square feet (though all of the casinos in Louisiana are
limited to 30,000 square feet of gaming space). Isle of Capri Casinos has
completed construction of a 305 room hotel, which opened in mid-1999.
Additionally, Hollywood Casino (which is not affiliated with the Company) has
begun construction of a $230,000,000 hotel and riverboat casino in Shreveport,
which is expected to open in the fourth quarter of
22
2000. Harrah's is also constructing an approximately 500 room hotel in
Shreveport adjacent to its casino, which is expected to open in the fall of
2000.
NEW ORLEANS MARKET The Company operates its Boomtown New Orleans property in
Harvey, Louisiana, approximately ten miles from the French Quarter of New
Orleans, on the "Westbank" in Jefferson Parish. In October 1999, Harrah's Jazz
Casino opened a significant land-based casino and entertainment facility in
downtown New Orleans. The Harrah's Jazz Casino has 100,000 square feet and
approximately 4,200 gaming positions compared with Boomtown New Orleans which
has 30,000 square feet and approximately 1,300 positions.
CALIFORNIA AND RENO MARKETS, PROPOSITION 1A In California, the Company leases
the Hollywood Park-Casino and the Crystal Park Casino (both which are California
card clubs) to a third party operator, and operates Boomtown Reno in Nevada.
Indian tribes have operated casinos in California for approximately ten years,
and currently there are approximately 40 Indian tribes operating gambling halls,
though most are significantly smaller than the typical Las Vegas casino. In
March 2000, California voters passed Proposition 1A, a ballot initiative that
allows Indian tribes to conduct various gaming activities including horse race
wagering, gaming devices (including slot machines), banked card games (as in
traditional Las Vegas card games) and lotteries. As a result of the passage of
Proposition 1A in California, the Company expects the increased Indian gaming
competition will adversely affect the Company's gaming operations in Reno,
Nevada and the California Card Clubs which are run by a third party operator.
The Hollywood Park-Casino and the Crystal Park Casino also face competition from
other card club casinos in neighboring cities.
ARIZONA MARKET The Company operates the Turf Paradise Race Track in this market.
In February 2000, the Company signed a definitive agreement to sell this
property for $53,000,000 cash and it is expected to close in April or May 2000.
Turf Paradise's primary competition is from local Indian run Las Vegas-style
casinos. Twenty of the twenty-one tribes in Arizona are currently involved in
gaming at some level, with five of the state's eleven Indian run casinos
operating within 60 miles of Turf Paradise.
GENERAL While the Company believes that it has been able to effectively compete
in these markets to date, increasing competition may adversely affect gaming
operations in the future. The Company believes that increased legalized gaming
in other states, particularly in areas close to our existing gaming properties,
such as in Texas, Alabama or Kentucky could adversely affect its operations.
FEDERAL INCOME TAX MATTERS The Company accounts for income taxes under Statement
of Financial Accounting Standards No. 109 ACCOUNTING FOR INCOME TAXES, whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
As of December 31, 1999, the Company had federal net operating loss ("NOL") and
capital loss ("CL") carryforwards of approximately $64,700,000, and $5,600,000,
respectively, comprised principally of NOL carryforwards acquired in the Casino
Magic and Boomtown Mergers, and CL carryforwards resulting from the disposition
of Boomtown's Las Vegas property. The NOL carryforwards expire on various dates
through 2018, and the CL carryforwards expire on various dates through 2002. In
addition, the Company has approximately $400,000 of foreign tax credits related
to Casino Magic Argentina operations, which expire in 2000, and approximately
$8,400,000 of alternative minimum tax credits which do not expire. The
alternative minimum tax credits can reduce future federal income taxes but
generally cannot reduce federal income taxes paid below the amount of
alternative minimum tax.
Under several provisions of the Internal Revenue Code (the "Code") and the
regulations promulgated thereunder, the utilization of NOL, CL and tax credit
carryforwards to reduce tax liability is restricted under certain circumstances.
Events which cause such a limitation include, but are not limited to, certain
changes in the ownership of a corporation. Both the Boomtown Merger and the
Casino Magic Merger caused such a
23
change in ownership with respect to Boomtown and Casino Magic. As a result, the
Company's use of approximately $13,800,000 and $50,900,000 of Boomtown and
Casino Magic's NOL carryforwards, respectively; $1,400,000 of Boomtown's CL
carryforwards; and $3,400,000 and $3,700,000 of Boomtown and Casino Magic's tax
credit carryforwards, respectively, is subject to certain limitations imposed by
Sections 382 and 383 of the Code and by the separate return limitation year
rules of the consolidated return regulations. Section 382 of the Code generally
provides that in each taxable year following an ownership change with respect to
a corporation, the corporation (or consolidated group of which the corporation
is a part) is subject to a limitation on the amount of the corporation's pre-
ownership change NOLs which maybe used equal to the value of the stock of the
corporation (determined immediately prior to the ownership change and subject to
certain adjustments) multiplied by the "long term tax exempt rate" which is in
effect at the time of the ownership change. For ownership changes occurring
during June 1997 (Boomtown) and October 1998 (Casino Magic), the long term tax
exempt rates were 5.64% and 5.15%, respectively. Section 383 of the Code imposes
a comparable and related set of rules for limiting the use of CL and tax credit
carryforwards in the event of an ownership change. In addition, the separate
return limitation year rules of the consolidated return regulations generally
provide that Boomtown and Casino Magic's pre-merger NOLs can be used in
computing post-merger taxable income of the Company only to the extent that
Boomtown and Casino Magic, respectively, contribute to the Company's
consolidated income. The separate return limitation year rules also impose
similar limitations with respect to CL and tax credit carryforwards of Boomtown
and Casino Magic. Furthermore, the utilization of the foreign tax credit is also
subject to certain limitations imposed by Section 904 of the Code which
generally provides that foreign tax credits cannot be used to reduce U.S. tax
liability on income sources with the U.S. These various limitations restrict the
amount of NOL, CL and tax credit carryforwards that may be used by the Company
in any taxable year and, consequently, are expected to defer the Company's use
of a substantial portion of such carryforwards and may ultimately prevent the
Company's use of a portion thereof. Therefore, a valuation allowance has been
recorded related to the Boomtown and Casino Magic carryforwards.
For California tax purposes, as of December 31, 1999, the Company also had
approximately $11,700,000 of Los Angeles Revitalization Zone ("LARZ") tax
credits. The LARZ tax credits can only be used to reduce certain California tax
liability and cannot be used to reduce federal tax liability. A valuation
allowance has been recorded with respect to the LARZ tax credits because the
Company may not generate enough income subject to California tax to utilize the
LARZ tax credits before they expire.
EMPLOYEES The following is a summary of Pinnacle Entertainment's employees by
property at December 31, 1999:
PERMANENT SEASONAL TOTAL STAFFING
PROPERTY STAFF STAFF RANGE
---------------------------------- --------------- -------------- -----------------
Belterra (a) 8 -- 8
Boomtown Reno 1,000 150 1,000 - 1,150
Boomtown New Orleans 1,156 -- 1,156
Boomtown Biloxi (b) 988 -- 988
Casino Magic Bay St. Louis (b) 1,210 50 1,210 - 1,260
Casino Magic Biloxi 1,319 -- 1,319
Casino Magic Bossier City 1,450 -- 1,450
Casino Magic Argentina 255 10 265
Turf Paradise (b) 85 340 85 - 425
Corporate 35 -- 35
-------------- ------------- -----------------
Total 7,506 550 7,506 - 8,056
============== ============= =================
(a) When Belterra opens in August 2000, it expects to have approximately 1,400 employees.
(b) This property is pending a sale in which when consummated, the employees will no longer be
The Company does not employ the staff at the Hollywood Park-Casino or the
Crystal Park Casino.
The Company's staff is non-union. The Company believes that it has good
relationships with its employees.
24
OTHER Information concerning backlog, sources and availability of raw materials
is not essential to an understanding of the Company's business.
The Company does not engage in material research activities relating to
development of new products or services or improvement of existing products or
services.
Compliance with federal, state and local provisions which have been enacted or
adopted regulating the discharge of materials into the environment or otherwise
relating to the protection of the environment have not had a material effect
upon capital expenditures, earnings or the competitive position of the Company.
The Company owns two land-based casinos in Argentina. Casino Magic Argentina's
contribution to the Company's net income is immaterial as compared with the
contributions of the Company's domestic gaming operations.
ITEM 2. PROPERTIES
The following describes the Company's principal real estate properties:
PROPERTIES
PINNACLE ENTERTAINMENT, INC. In connection with the sale of the Hollywood Park
Race Track to Churchill Downs (see Note 3 to the Notes to Consolidated Financial
Statements), the Company relocated its corporate offices to Glendale,
California. The Company leases approximately 10,000 square feet under a sub
lease agreement that expires in May 2005.
HOLLYWOOD PARK-CASINO As discussed in Note 3 to the Notes to Consolidated
Financial Statements, upon the sale of the Hollywood Park-Casino to Churchill
Downs, the Company entered into a 10-year leaseback agreement with Churchill
Downs, and immediately sub leased the facility to an unaffiliated third party
tenant to operate the card club casino. The Hollywood Park-Casino contains
approximately 30,000 square feet of card club gaming space and 30,000 square
feet of retail and restaurant space.
THE CRYSTAL PARK CASINO The Crystal Park LLC owns approximately six acres
including the ground floor of the Crystal Park Casino, which houses the
approximately 40,000 square feet of gaming space. The Crystal Park LLC leases
the hotel, along with approximately 35 acres of unimproved land (to be used for
expansion, if ever needed) from the City of Compton under a 50 year lease. An
unaffiliated third party operates the Crystal Park Casino under a four year
triple net lease.
BOOMTOWN RENO The Company owns 569 acres in Verdi, Nevada, with current
operations presently utilizing approximately 61 acres. The Company considers
approximately 250 of the excess acreage as available for development. The
Company owns all of the improvements and facilities at the property, including
the casino, hotel, truck stop, recreational vehicle park and service station,
along with the related water rights.
BOOMTOWN NEW ORLEANS The Company owns approximately 50 acres in Harvey,
Louisiana which are utilized by Boomtown New Orleans. The Company owns the
facilities and associated improvements at the property, including the riverboat
casino.
CASINO MAGIC BILOXI Casino Magic Biloxi is located on approximately 16 acres, of
which 4.5 acres are owned and approximately 11.5 acres are leased, inclusive of
approximately 6.4 acres of submerged tidelands leased from the state of
Mississippi. The tidelands are under a ten year lease, with approximately 4
years remaining, with a five year option to renew. The Company owns the barge on
which the casino is located and all of the land-base facilities including the
hotel.
25
CASINO MAGIC BOSSIER CITY The Company owns 23 acres on the Red River in Bossier
City, Louisiana. The property contains a dockside riverboat casino, hotel,
parking structure and other land-based facilities, all of which are owned by the
Company. The property secures the Casino Magic 13% Notes. The Company leases
approximately one acre of water bottoms from the State of Louisiana.
CASINO MAGIC ARGENTINA The Company operates two casinos in west central
Argentina, in the cities of Neuquen and San Martin de los Andes. The Company
does not own any real property at these sites.
EXPANSION PROPERTIES
BELTERRA RESORT AND CASINO The Company owns and leases a total of approximately
315 acres in Switzerland County, Indiana. The Company is constructing a
15-story, 308-room hotel, a cruising riverboat casino with approximately 1,800
gaming positions, an 18-hole championship golf course, a 1,500 seat
entertainment facility, four restaurants, retail areas and other amenities.
LAKE CHARLES In November 1999, the Company filed an application for the
fifteenth and final gaming license to be issued by the Louisiana Gaming Control
Board. The Company's application is seeking approval to operate a cruising
riverboat casino, hotel and golf course resort complex in Lake Charles,
Louisiana.
In connection with such submittal, the Company entered into an option agreement
with the Lake Charles Harbor and Terminal District to lease 225-acres of
unimproved land from the District upon which such resort complex would be
constructed. The term of the lease would be for a total of up to 70 years. The
lease would require the Company to develop certain on- and off- site
improvements. If awarded the license by the Louisiana Gaming Control Board, the
Company anticipates building a resort similar in design and scope to the
Belterra Resort and Casino currently under construction.
PROPERTIES HELD FOR SALE
BOOMTOWN BILOXI The Company leases substantially all of the 19 acres that
Boomtown Biloxi utilizes for operations, under a 99 year lease, entered into in
1994. In addition, the Company leases property for parking under several lease
agreements ranging from 10 to 25 years. The Company leases approximately 5.1
acres of submerged tidelands, underneath the barge where the casino sits, from
the state of Mississippi under a ten year lease with a five year option to
renew. The Company owns the barge and all of the land-based facilities.
CASINO MAGIC BAY ST. LOUIS The Company owns approximately 591 acres in Bay St.
Louis, Mississippi, including the 17 acre marina where the gaming barge is
moored. There are approximately 50 acres available for development. The property
includes a golf course, a hotel, a recreational vehicle park, and other
land-based facilities, all of which are owned by the Company.
TURF PARADISE Turf Paradise, located in the northwest region of Phoenix,
Arizona, owns approximately 275 acres and all associated improvements, with
approximately 100 acres available for future development.
INGLEWOOD, CALIFORNIA The Company owns approximately 97 acres of unimproved
land adjacent to the Hollywood Park Race Track in Inglewood, California.
ITEM 3. LEGAL PROCEEDINGS
POULOS LAWSUIT A class action lawsuit was filed on April 26, 1994, in the United
States District Court, Middle District of Florida (the "Poulos Lawsuit"), naming
as defendants 41 manufacturers, distributors and casino operators of video poker
and electronic slot machines, including Casino Magic. The lawsuit alleges that
the defendants have engaged in a course of fraudulent and misleading conduct
intended to induce people to play such games based on false beliefs concerning
the operation of the gaming machines and the extent to which there is an
opportunity to win. The suit alleges violations of the Racketeer Influenced and
Corrupt Organization Act, as well as claims of common law fraud, unjust
enrichment and negligent
26
misrepresentation, and seeks damages in excess of $6 billion. On May 10, 1994, a
second class action lawsuit was filed in the United States District Court,
Middle District of Florida (the "Ahern Lawsuit"), naming as defendants the same
defendants who were named in the Poulos Lawsuit and adding as defendants the
owners of certain casino operations in Puerto Rico and the Bahamas, who were not
named as defendants in the Poulos Lawsuit. The claims in the Ahern Lawsuit are
identical to the claims in the Poulos Lawsuit. Because of the similarity of
parties and claims, the Poulos Lawsuit and Ahern Lawsuit were consolidated into
one case file in the United States District Court, Middle District of Florida.
On December 9, 1994 a motion by the defendants for change of venue was granted,
transferring the case to the United States District Court for the District of
Nevada, in Las Vegas. In an order dated April 17, 1996, the court granted
motions to dismiss filed by Casino Magic and other defendants and dismissed the
Complaint without prejudice. The plaintiffs then filed an amended Complaint on
May 31, 1996 seeking damages against Casino Magic and other defendants in excess
of $1 billion and punitive damages for violations of the Racketeer Influenced
and Corrupt Organizations Act and for state common law claims for fraud, unjust
enrichment and negligent misrepresentation. Casino Magic and other defendants
have moved to dismiss the amended Complaint. Casino Magic believes that the
claims are without merit and does not expect that the lawsuit will have a
materially adverse effect on the financial condition or results of operations of
Casino Magic.
CASINO AMERICA LITIGATION On or about September 6, 1996, Casino America, Inc.
commenced litigation in the Chancery Court of Harrison County, Mississippi,
Second Judicial District, against Casino Magic, and James Edward Ernst, its then
Chief Executive Officer, seeking injunctive relief and unspecified compensatory
damages in an amount to be proven at trial as well as punitive damages. The
plaintiff claims, among other things, that the defendants (i) breached the terms
of an agreement they had with the plaintiff, (ii) tortiously interfered with
certain of the plaintiff's business relations; and (iii) breached covenants of
good faith and fair dealing they allegedly owed to the plaintiff. On or about
October 8, 1996, the defendants interposed an answer, denying the allegations
contained in the Complaint. On June 26, 1998, defendents filed a motion for
summary judgment. Thereafter, plaintiffs, in July of 1998, filed a motion to
reopen discovery. Both of these motions are pending. On November 30, 1999, the
matter was transferred to the First Judicial District Court for Harrison County,
Mississippi. No trial date has been set. While the Company cannot predict the
outcome of this action, it believes plaintiff's claims are without merit and
intends to vigorously defend this action.
BUS LITIGATION On May 9, 1999, a bus owned and operated by Custom Bus Charters,
Inc. was involved in an accident in New Orleans, Louisiana while en route to
Casino Magic in Bay St. Louis, Mississippi. To date, multiple deaths and
numerous injuries are attributed to this accident and the Company's
subsidiaries, Casino Magic Corp. and / or Mardi Gras Casino Corp., together with
several other defendants, have been named in thirty-eight (38) lawsuits, each
seeking unspecified damages due to the deaths and injuries sustained in this
accident. While the Company cannot predict the outcome of the litigation, the
Company believes Casino Magic is not liable for any damages arising from this
accident and the Company and its insurers intend to vigorously defend these
actions.
SKRMETTA LAWSUIT A suit was filed on August 14, 1998 in the Circuit Court of
Harrison County, Mississippi by the ground lessor of property underlying
Boomtown Biloxi landbased improvements in Biloxi, Mississippi (the "Project").
The lawsuit alleges that the plaintiff agreed to exchange the first two years'
ground rentals for an equity position in the Project based upon defendants'
purported assurances that a hotel would be constructed as a component of the
Project. Plaintiff seeks recovery in excess of $4,000,000 plus punitive
damages. No substantive developments in the matter occurred prior to July 30,
1999 when the court denied the defendants' motions to arbitrate, and to stay,
the matter. Trial of the matter will commence on March 28, 2000. The Company
believes that the claims are without merit and intends to contest the matter
vigorously.
CLASS ACTION LAWSUITS On March 14, 2000, Harbor Finance Partners filed a class
action lawsuit in the Chancery Court of the State of Delaware against the
Company, and each of its directors, claiming that the defendants have breached
their fiduciary duty to the stockholders of the Company by agreeing to negotiate
exclusively with Harveys Resorts Casinos, a majority owned company of Colony
Capital, Inc. (see Acquisition Proposal discussion above). On March 21, 2000, a
similar class action lawsuit was filed by Leta Hilliard in the Superior Court of
the State of California. The lawsuits claim that the Company and its directors
have failed to
27
undertake an appropriate evaluation of the Company's worth and engage in an
auction of the Company with third parties, and that the price for the stock is
inadequate. The Company intends to vigorously defend these actions and believes
no basis exists for the plaintiffs' claims.
Pinnacle Entertainment is party to a number of other pending legal proceedings,
though management does not expect that the outcome of such proceedings, either
individually or in the aggregate, will have a material effect on the Company's
financial results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999, through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is listed on the New York Stock Exchange and is
traded under the name Pinnacle Entertainment, Inc., identified by the symbol
"PNK". Prior to February 28, 2000, the Company's common stock was traded on the
New York Stock Exchange under the name Hollywood Park, Inc., identified by the
symbol "HPK".
The following table sets forth the high and low sales prices per common share of
the Company's common stock on the New York Stock Exchange. All sales prices are
rounded to the nearest 0.125. The prices shown are between dealers and do not
reflect retail markups, markdowns, or commissions, nor do they necessarily
represent actual transactions.
Price Range
----------------------------------
High Low
---------------- ----------------
1999
----
First Quarter $10.44 $8.25
Second Quarter 17.00 10.50
Third Quarter 18.69 14.75
Fourth Quarter 23.13 15.13
1998
----
First Quarter $22.19 $11.75
Second Quarter 13.25 11.00
Third Quarter 12.38 10.00
Fourth Quarter 10.56 8.13
As of March 24, 2000, there were approximately 3,342 stockholders of record
of the Company's common stock.
DIVIDENDS The Company did not pay any dividends in 1999 or 1998. Payments of
future dividends would be at the discretion of the Company's Board of Directors
and would depend upon, among other things, future earnings, operational and
capital requirements, the overall financial condition of the Company and general
business conditions. The Board of Directors does not anticipate paying any cash
dividends on the Company's common stock in the foreseeable future.
28
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information for the years 1995 through 1999 was
derived from the consolidated financial statements of the Company. The Hollywood
Park Race Track and Hollywood Park-Casino were disposed of in September 1999.
The Company leased the Hollywood Park-Casino back from Churchill downs and
immediately subleased the facility to an unaffiliated third party (see Note 3 to
the Notes to Consolidated Financial Statements). Casino Magic was acquired on
October 15, 1998 and Boomtown was acquired on June 30, 1997, with both
acquisitions accounted for under the purchase method of accounting for a
business combination, and therefore Casino Magic's and Boomtown's financial
results were not included in periods prior to their respective acquisitions. The
Crystal Park Casino began operations on October 25, 1996, under a lease with an
unaffiliated third party. As of March 31, 1996, Sunflower Racing, Inc.'s (a
horse and greyhound racing facility in Kansas) results of operations were no
longer consolidated with the Company's due to Sunflower Racing, Inc.'s May 17,
1996, filing for reorganization under Chapter 11 of the Bankruptcy Code. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations", the
financial statements and related notes thereto.
29
Pinnacle Entertainment, Inc.
Selected Financial Data
For the years ended December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- ------------- ------------ ------------ -------------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Gaming $ 557,526 $ 293,057 $ 137,659 $ 50,717 $ 26,656
Racing 55,209 66,871 68,844 71,308 79,862
Food and beverage 39,817 30,510 19,894 13,947 19,783
Other 54,305 36,529 21,731 7,253 4,271
----------- ----------- ----------- ----------- -----------
706,857 426,967 248,128 143,225 130,572
----------- ----------- ----------- ----------- -----------
Expenses:
Gaming 309,508 161,549 74,733 27,249 5,291
Racing 22,694 29,316 30,304 30,167 30,960
Food and beverage 46,558 38,860 25,745 19,573 24,749
General, administrative and other 174,030 118,397 77,370 43,962 54,735
Depreciation and amortization 51,924 32,121 18,157 10,695 11,384
(Gain) loss on disposition of assets (42,061) 2,221 0 11,412 0
----------- ----------- ----------- ----------- -----------
562,653 382,464 226,309 143,058 127,119
----------- ----------- ----------- ----------- -----------
Operating income 144,204 44,503 21,819 167 3,453
Interest expense, net 57,544 22,518 7,302 942 3,922
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and
minority interests 86,660 21,985 14,517 (775) (469)
Minority interests 1,687 374 (3) 15 0
Income tax expense 40,926 8,442 5,850 3,459 693
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 44,047 $ 13,169 $ 8,670 ($ 4,249) ($ 1,162)
=========== =========== =========== =========== ===========
=======================================================================================================================
Dividends on convertible preferred stock $ 0 $ 0 $ 1,520 $ 1,925 $ 1,925
----------- ----------- ----------- ----------- -----------
Net income (loss) available to (allocated to)
common stockholders $ 44,047 $ 13,169 $ 7,150 ($ 6,174) ($ 3,087)
=========== =========== =========== =========== ===========
Net income (loss) per common share:
Basic $ 1.70 $ 0.50 $ 0.33 ($ 0.33) ($ 0.17)
Diluted $ 1.67 $ 0.50 $ 0.32 ($ 0.33) ($ 0.17)
OTHER DATA:
Earnings before interest, taxes, depreciation
amortization and other non-recurring
items (EBITDA) $ 157,087 $ 80,085 $ 42,459 $ 22,274 $ 20,925
Cash flows provided by (used in):
Operating activities $ 75,323 $ 38,112 $ 14,365 $ 13,677 $ 20,291
Investing activities (51,063) (136,532) (16,226) (19,895) (32,922)
Financing activities 54,868 118,498 9,609 (4,268) (2,085)
Capital expenditures 59,680 56,747 32,505 23,786 25,150
BALANCE SHEET DATA:
Cash and cash equivalents $ 123,362 $ 44,234 $ 24,156 $ 16,408 $ 25,532
Short-term investments 123,428 3,179 0 4,766 6,447
Total assets 1,045,408 891,339 419,029 205,886 283,303
Current liabilities 145,008 128,592 57,317 35,364 74,951
Long term notes payable 618,698 527,619 132,102 282 15,629
Total liabilities 764,532 656,611 195,729 44,711 117,557
Minority interests 0 3,752 1,946 3,015 0
Stockholders' equity 280,876 230,976 221,354 158,160 165,746
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Except for the historical information contained herein, the matters addressed in
this Annual Report on Form 10K may constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended. Such
forward-looking statements are subject to a variety of risks and uncertainties
that could cause actual results to differ materially from those anticipated by
Pinnacle Entertainment, Inc.'s management. Factors that may cause actual
performance of Pinnacle Entertainment, Inc. to differ materially from that
contemplated by such forward-looking statements include, among others: the
failure to complete pending asset sale transactions (discussed below); the
failure to complete or successfully operate planned expansion and development
projects (including the Belterra Resort and Casino); the failure to obtain
adequate financing to meet strategic goals; the failure to obtain or retain
gaming licenses or regulatory approvals; increased competition by casino
operators who have more resources and have built or are building competitive
casino properties; severe weather conditions; the failure to meet Pinnacle
Entertainment, Inc.'s debt service obligations; and other adverse changes in the
gaming markets in which Pinnacle Entertainment, Inc. operates (particularly in
the southeastern United States). The Private Securities Litigation Reform Act of
1995 (the "Act") provides certain "safe harbor" provisions for forward-looking
statements. All forward-looking statements made in this Annual Report on Form
10K are made pursuant to the Act. For more information on the potential factors
which could affect the Company's financial results, please review the Company's
filings with the Securities and Exchange Commission, including the Company's
Form S-4 Registration Statement dated March 26, 1999, and the discussion
contained therein under the caption "Risk Factors".
FACTORS AFFECTING FUTURE OPERATING RESULTS
SALES OF HOLLYWOOD PARK RACE TRACK AND HOLLYWOOD PARK-CASINO On September 10,
1999, the Company completed the dispositions of the Hollywood Park Rack Track
and Hollywood Park-Casino to Churchill Downs for $117,000,000 cash and
$23,000,000 cash, respectively. Churchill Downs acquired the race track, 240
acres of related real estate and the Hollywood Park-Casino. The Company then
entered into a 10-year leaseback of the Hollywood Park-Casino at an annual lease
rate of $3,000,000 per annum, with a 10-year renewal option. The Company then
subleased the facility to a third party operator for a lease payment of
$6,000,000 per year. The sublease is for a one-year period, at which time the
Company and sub lessee will negotiate the terms of any sublease extension.
The disposition of the Hollywood Park Race Track and related real estate was
accounted for as a sale and resulted in a pre-tax gain of $61,522,000. The
disposition of the Hollywood Park-Casino was accounted for as a financing
transaction and therefore not recognized as a sale for accounting purposes as
the Company subleased the Hollywood Park-Casino to a third-party operator. Under
the provisions of SFAS No. 121, the Company recorded an impairment write-down of
the Hollywood Park-Casino of $20,446,000 during the quarter ended September 30,
1999. The pre-tax gain on the sale of the race track and impairment write-down
of the Hollywood Park-Casino are included in "(Gain) loss on disposition of
assets, net" in the accompanying Consolidated Statements of Operations. Pursuant
to accounting guidelines, the Company recorded a long-term debt obligation of
$23,000,000 for the Hollywood Park-Casino (see Note 9 to the Notes to
Consolidated Financial Statements). The Hollywood Park-Casino building will
continue to be depreciated over its estimated useful life. The estimated tax
liability on the sales transactions to Churchill Downs is approximately
$22,000,000.
31
Condensed results of operations for the Hollywood Park Race Track and the
Hollywood Park-Casino for the years ended December 31, 1999, 1998 and 1997 were:
YEAR ENDED DECEMBER 31,
------------------------------
1999 (a) 1998 1997
-------- -------- --------
(IN THOUSANDS)
Revenues $ 86,235 $114,751 $121,799
Expenses 73,019 103,760 107,775
-------- -------- --------
Operating income 13,216 10,991 14,024
Interest expense (b) 0 0 0
-------- -------- --------
Income before income taxes $ 13,216 $ 10,991 $ 14,024
======== ======== ========
(a) Operating results through the sales date of September 10, 1999.
(b) No interest expense was specifically identified for these operations.
PENDING CASINO, RACE TRACK AND LAND SALES Assets held for sale at December 31,
1999 consisted of the following, and excluded the related goodwill and deferred
income taxes associated with such assets:
NET PROPERTY
PLANT &
EQUIPMENT OTHER TOTAL
----------- -------- --------
(IN THOUSANDS)
Two casinos in Mississippi $115,731 $ 5,876 $121,607
Turf Paradise Race Track in Arizona 10,873 4,359 15,232
Other (primarily undeveloped land in California) 17,810 0 17,810
-------- -------- --------
$144,414 $ 10,235 $154,649
======== ======== ========
Sales transactions for these assets were pending or the properties were actively
being marketed as of December 31, 1999. There are no assurances these
transactions will close or the anticipated cash proceeds and after tax gains as
described below will be achieved. Until the sales transactions are completed,
the Company continues to operate the race track and casinos held for sale. In
addition, certain liabilities will be assumed by the buyers of these assets.
Such liabilities, consisting primarily of accrued liabilities and accounts
payable, have been classified as "Liabilities to be assumed by buyers of assets
held for sale" on the accompanying Consolidated Balance Sheets. Goodwill net of
amortization at December 31, 1999 includes approximately $13,331,000 related to
the pending race track and casino sales. The after tax cash proceeds generated
by these sales will be used to retire long-term debt, make capital improvements
to existing properties or acquire new properties and for general corporate
purposes.
CASINOS IN MISSISSIPPI On December 10, 1999, the Company announced it had
entered into definitive agreements with subsidiaries of Penn National Gaming,
Inc. ("Penn National") to sell its Casino Magic Bay St. Louis, Mississippi, and
Boomtown Biloxi, Mississippi, casino operations for $195,000,000 in cash.
Subsidiaries of Penn National will purchase all of the operating assets and
certain liabilities and related operations of the Casino Magic Bay St. Louis and
Boomtown Biloxi properties, including the 590 acres of land at Casino Magic Bay
St. Louis and the leasehold rights at Boomtown Biloxi. The transactions are
subject to certain closing conditions, including approval by the Mississippi
Gaming Commission, the purchaser completing the necessary financing and
termination of the Hart-Scott-Rodino waiting period. The Company estimates the
transactions will close in the second quarter of 2000 and generate an after tax
gain of approximately $32,300,000.
32
RACE TRACK IN ARIZONA On December 30, 1999, the Company announced the signing of
a letter of intent under which the Company will sell its Turf Paradise horse
racing facility located in Phoenix, Arizona to a private investor. In February
2000, the Company announced the signing of a definitive agreement for the sale
of Turf Paradise for $53,000,000 in cash. The agreement includes the horse
racing operations and all 275 acres at the Phoenix, Arizona property. Pinnacle
Entertainment anticipates closing the transaction in the second quarter of 2000.
The after tax gain from such sale is expected to be approximately $23,000,000.
OTHER On July 15, 1999, the Company announced it had entered into an agreement
to sell 42 acres of the 139 acres retained in the Churchill Downs transaction
for approximately $24,000,000 in cash. In March 2000, the Company completed the
sale (see Note 20 to the Notes to Consolidated Financial Statements). The
Company anticipates an after tax gain of approximately $13,800,000 from this
sale. On November 4, 1999, the Company announced it had entered into an
agreement for the sale of the remaining 97 acres for approximately $63,000,000
in cash. On February 7, 2000, the Company elected to terminate such agreement
and has begun discussions with other buyers. The Company expects to close the
sale of this property for cash by the end of 2000, which will result in a gain.
The Company owns other land parcels in Missouri, which it is actively trying to
sell.
Condensed results of operations for the Casino Magic Bay St. Louis and Boomtown
Biloxi casinos and the Turf Paradise horse racing facility for the years ended
December 31, 1999, 1998 and 1997 are as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 (a) 1997 (b)
-------- -------- --------
(IN THOUSANDS)
Revenues $174,380 $100,014 $ 46,655
Expenses 145,066 86,051 40,479
-------- -------- --------
Operating income 29,314 13,963 6,176
Interest expense (income), net 86 339 (153)
-------- -------- --------
Income before income taxes $ 29,228 $ 13,624 $ 6,329
======== ======== ========
(a) Includes the results of Casino Magic Bay St. Louis from October 15, 1998
(see Note 5 to the Notes to Consolidated Financial Statements).
(b) Includes the results of Boomtown Biloxi from June 30, 1997 (see Note 5 to
the Notes to Consolidated Financial Statements).
EXPANSION & DEVELOPMENT BELTERRA RESORT AND CASINO In September 1998, the
Indiana Gaming Commission approved the Company to receive the last available
license to conduct riverboat gaming operations on the Ohio River in Indiana for
the Belterra Resort and Casino. Pinnacle Entertainment owns 97% of the Belterra
Resort and Casino (currently under construction), with the remaining 3% held by
a non-voting local partner.
In July 1999, the Company broke ground on the Belterra Resort and Casino and is
continuing on schedule for an opening in August 2000. The project is located in
Switzerland County, Indiana, which is approximately 35 miles southwest of
Cincinnati, Ohio and will be the gaming site most readily accessible to major
portions of northern and central Kentucky, including the city of Lexington.
The Company plans to spend approximately $200,000,000 ($30,635,000 of which has
been spent as of December 31, 1999) in total costs (including land, capitalized
interest, pre-opening expenses, organizational expenses and community grants) on
the Belterra Resort and Casino, which will feature a 15-story, 308-room hotel, a
cruising riverboat casino with approximately 1,800 gaming positions, an 18-hole
championship golf course, a 1,500 seat entertainment facility, four restaurants,
retail areas and other amenities.
33
In October 1999, the Company acquired the Ogle Haus Inn, a 54-room hotel
operation in the city of Vevay, for $2,500,000. The Company is utilizing the
facility principally for the Belterra pre-opening operations, including housing
various key management staff, converting rooms into offices and training hotel
and food and beverage employees. Operational costs of the Ogle Haus Inn, as well
as all other pre-opening costs of Belterra Resort and Casino, are being expensed
as incurred. After completion of Belterra, the Ogle Haus will be operated as a
hotel and restaurant facility and will provide overflow capacity for Belterra.
LAKE CHARLES In November 1999, the Company filed an application for the
fifteenth and final gaming license to be issued by the Louisiana Gaming Control
Board. The Company was one of five applicants for such license. The Company's
application is seeking approval to operate a cruising riverboat casino, hotel
and golf course resort complex in Lake Charles, Louisiana. The Louisiana Gaming
Control Board has not awarded such license and there are no assurances such
license will be issued to the Company or any other applicant.
In connection with such submittal, Pinnacle Entertainment has entered into an
option agreement with the Lake Charles Harbor and Terminal District to lease
225-acres of unimproved land from the District upon which such resort complex
would be constructed. The initial lease option is for a six-month period ending
January 2000, with three six-month renewal options, at a cost of $62,500 per
six-month option. If the lease option is exercised, the annual rental payment
would be $815,000, with a maximum annual increase of 5%. The term of the lease
would be for a total of up to 70 years, with an initial term of 10 years and six
consecutive renewal options of 10 years each. The lease would require the
Company to develop certain on-and off- site improvements at the location. If
awarded the license by the Louisiana Gaming Control Board, the Company
anticipates building a resort similar in design and scope to the Belterra Resort
and Casino currently under construction in Indiana.
CALIFORNIA CARD CLUBS By California state law, a corporation may operate a
gambling enterprise in California only if every officer, director and
shareholder holds a state gambling license. Only 5% or greater shareholders of a
publicly traded racing association, however, must hold a state gambling license.
As a practical matter, therefore, public corporations that are not qualified
racing associations may not operate gambling enterprises in California. As a
result, the Hollywood Park-Casino, since September 10, 1999 (see sales of
California track and casino above), and the Crystal Park Hotel and Casino, are
leased to, and operated by, an unrelated third party.
By law, a California card club may neither bank card games nor offer certain of
the casino games permitted in Nevada and other traditional gambling
jurisdictions, and thus does not participate in the wagers made or in the
outcome of any of the games played.
YEAR 2000 The Company has not experienced any disruption due to the Year 2000
issue. The Year 2000 issue exists because computer systems and applications were
historically designed to use two digit fields (rather than four) to designate a
year, which could result in miscalculations or system failures. Costs incurred
prior to December 31, 1999 to mitigate the Year 2000 issue were approximately
$1,028,000. The Company cannot be assured there will not be Year 2000 issues in
the future.
RESULTS OF OPERATIONS
On October 15, 1998, the Company acquired Casino Magic, and accounted for the
acquisition under the purchase method of accounting for a business combination.
As required under the rules of the purchase method of accounting for a business
combination, Casino Magic's results of operations were not consolidated with
those of the Company prior to the acquisition date, thus generating significant
variances when comparing 1999's financial results with those of 1998 and 1997.
In addition, the results of operations of the Hollywood Park Race Track and
Hollywood Park-Casino, which were disposed of on September 10, 1999, are
included in the results of operations only until that date. Future revenue and
operating results will be materially reduced due to the sale of these assets, as
well as by the
34
future sale of assets, which are classified as held for sale at
December 31, 1999 on the Consolidated Balance Sheets (see discussion above).
YEAR ENDED DECEMBER 31, 1999, COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Total revenues increased by $279,890,000, or 65.6%, for the year ended December
31, 1999, as compared to the year ended December 31, 1998. Contribution to total
revenue from Casino Magic was approximately $280,723,000 in 1999 compared to
$63,621,000 in 1998. This increase is primarily attributed to the timing of the
Casino Magic acquisition. The 1998 results include operations from the five
Casino Magic casinos from the October 15, 1998, acquisition date to December 31,
1998, whereas their results are included in all of 1999. Gaming revenues
increased by $264,469,000, or 90.2%, with $260,806,000 of the increase due to
Casino Magic. The remaining net increase is due to increases at each of the
Boomtown properties, offset by a decrease in gaming revenue at the Hollywood
Park-Casino (due to the September 10, 1999, disposition discussed above).
Boomtown Reno gaming revenues increased by $6,765,000, primarily attributed to
the remodeling completed in 1999, enhanced marketing programs and unusually warm
weather in the fourth quarter 1999 which provided increased visitor counts to
the casino. Boomtown New Orleans gaming revenue increased by $9,778,000,
primarily attributed to updated marketing and advertising programs in 1999 as
well as a new slot machine mix for the casino floor. Similar increases are not
expected in 2000 particularly in light of the opening of a larger land-based
casino in New Orleans by a competitor in late October 1999. Boomtown Biloxi
gaming revenue increased by $1,137,000, primarily due to a growth in the Biloxi
gaming market brought about by the opening of a larger casino hotel in the
second quarter 1999, as well as expansions by other competitors, and by the
success of the buffet marketing. Racing revenue decreased by $11,662,000, or
17.4%, including a decrease of $12,220,000 from the sale of the Hollywood Park
Race Track (discussed above). Turf Paradise revenue increased by $558,000,
primarily due to increase sale of the racing signal to out of state locations.
Food and beverage revenue increased by $9,307,000, or 30.5%, with $9,045,000 of
the increase due to Casino Magic. The remaining net increase is due to increases
at Boomtown Reno and Boomtown Biloxi, offset by decreases at the Hollywood Park
Race Track and Hollywood Park-Casino. Boomtown Reno food and beverage revenues
increased by $1,561,000, primarily due to the improvements completed in 1999 and
the higher visitor counts. Boomtown Biloxi food and beverage revenues increased
by $2,189,000, primarily due to an aggressive marketing program focusing on the
property's buffet. Hotel and recreational vehicle revenues increased by
$8,661,000, or 281.6%, with $6,821,000 of the increase due Casino Magic. The
remaining increase is due primarily to the hotel room addition and room
renovation at Boomtown Reno. Truck stop income increased by $3,145,000, or
21.7%, due primarily to the increased traffic flow at the Boomtown Reno
property, and increased fuel prices. Other income increased by $5,970,000, or
31.5%, with $4,051,000 of the increase due to Casino Magic. The remaining
increase is primarily due to the lease rent income earned by the Hollywood
Park-Casino (see discussion above).
Total operating expenses increased by $180,189,000, or 47.1%, for the year ended
December 31, 1999, as compared to the year ended December 31, 1998. Excluding
any gain (loss) on the disposition of assets, operating expenses increased by
$224,471,000, or 59.0%, during the year ended December 31, 1999, as compared to
the year ended December 31, 1998. Contribution to total operating expenses in
1999 from Casino Magic was $229,788,000 compared to $54,582,000 in 1998. Gaming
expenses increased by $147,959,000, or 91.6%, including $153,897,000 due to
Casino Magic, and decreases at Boomtown Reno and the Hollywood Park-Casino (due
to the disposition discussed above), offset by increases at Boomtown New
Orleans. Boomtown Reno gaming expenses decreased by $1,561,000, primarily due to
improved marketing programs in 1999 including the elimination of the costly fun
flight program and by management changes. Boomtown New Orleans gaming expenses
increased by $4,782,000, primarily due to the corresponding increase in gaming
revenue, including the improved marketing programs. Racing expenses decreased by
$6,622,000, or 22.6%, including a decrease in Hollywood Park Race Track racing
expenses of $6,807,000 due to the sale of the race track discussed above and an
increase in racing expenses at Turf Paradise of $185,000 primarily attributed to
the increased racing revenues. Food and beverage expenses increased by
$7,698,000, or 19.8%, including an increase of $9,457,000 due to Casino Magic
and a decrease of $4,662,000 due to the dispositions of the Hollywood Park Race
Track and Hollywood Park-Casino. Boomtown
35
Reno food and beverage expenses increased by $1,750,000, consistent with the
overall increase in food and beverage revenue. Boomtown Biloxi food and beverage
expenses increased by $1,175,000, also primarily due to the increase in revenue
and volume at the buffet. Hotel and recreational vehicle expense increased by
$4,710,000, or 388.3%, with $3,499,000 due to the addition of Casino Magic and
the remainder due to the additional hotel operations at Boomtown Reno. Truck
stop expenses increased by $3,017,000, or 22.7%, primarily due to the increased
volume at the Boomtown Reno property and fuel costs. General and administrative
expenses increased by $40,200,000, or 42.5%, with $36,095,000 due to the
addition of Casino Magic and increased casino management. Depreciation and
amortization increased by $19,803,000, or 61.7%, including $20,338,000 due to
Casino Magic, offset by a reduction in depreciation and amortization expenses
from the disposition of the Hollywood Park Race Track in September 1999
(discussed above). Pre-opening costs for the Belterra Resort and Casino
increased by $2,199,000, or 267.8%, consistent with the development of the
project. Gain on disposition of assets of $42,061,000 is primarily related to
the dispositions of the Hollywood Park Race Track and Hollywood Park-Casino.
Other expenses increased by $5,507,000, or 65.5%, including $6,502,000 due to
the Casino Magic acquisition, offset by a reduction in other expenses from the
dispositions of the Hollywood Park Race Track and Hollywood Park-Casino in
September 1999 (discussed above). Net interest expense increased by $35,026,000,
or 155.6%, with $14,502,000 of the increase due primarily to the debt assumed in
the Casino Magic acquisition and the remaining increase due to the 9.25% Notes
issued in February 1999. Income tax expense increased by $32,484,000, or 384.8%,
with approximately $22,000,000 of the increase attributed to the dispositions of
the track and casino.
YEAR ENDED DECEMBER 31, 1998, COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
On October 15, 1998, and on June 30, 1997, the Company acquired Casino Magic and
Boomtown, respectively, and accounted for each acquisition under the purchase
method of accounting for a business combination. As required under the rules of
the purchase method of accounting for a business combination, Casino Magic's and
Boomtown's results of operations were not consolidated with those of the
Company's, prior to their respective acquisition dates, thus generating
significant variances when comparing 1998's financial results with those of
1997. Boomtown's results of operations include a full year of activity in 1998
and just six months of activity in 1997 (July 1, 1997 through December 31,
1997). Casino Magic's results of operations include the period October 16, 1998
through December 31, 1998, only, and no 1997 results.
Total revenues increased by $178,839,000, or 72.1%, for the year ended December
31, 1998, as compared to the year ended December 31, 1997. Approximately
$174,075,000 ($110,454,000 related to Boomtown and $63,621,000 related to Casino
Magic) of the increase was due to the timing of Boomtown and Casino Magic
acquisitions. Gaming revenues increased by $155,398,000, or 112.9%, with
$150,095,000 of the increase due to the timing of acquisitions. Gaming revenues
increased at the Boomtown properties by $10,687,000 (when comparing the six
months ended December 31, 1998 to the six months ended December 31, 1997) due
primarily to increases at Boomtown New Orleans, generated by a new larger
riverboat placed into service in February 1998. Gaming revenues decreased at the
Hollywood Park-Casino by approximately $4,562,000, primarily a result of the ban
on smoking in such establishments and economic problems in various Asian
countries (as a significant number of Hollywood Park-Casino's patrons are
Asian). Racing revenues decreased by $1,973,000, or 2.9%, due to there being
five fewer live race days at the Hollywood Park Race Track in 1998 as compared
to 1997. Food and beverage revenues increased by $10,616,000, or 53.4%, with
$9,002,000 of the increase due to the timing of acquisitions, and the balance of
the increase primarily attributable to increased sales at both Boomtown New
Orleans and Boomtown Biloxi, a result of successful marketing programs. Hotel
and recreational vehicle park revenues increased by $2,139,000, or 228.3%, due
to the timing of acquisitions. Truck stop and service station revenues (all of
which are attributable to Boomtown Reno) increased by $5,866,000, or 67.9%,
primarily due to the timing of the Boomtown acquisition. Other income increased
by $6,793,000, or 55.9%, with $6,456,000 of the increase due to the timing of
acquisitions.
Total operating expenses increased by $156,155,000, or 69.0%, during the year
ended December 31, 1998, as compared to the year ended December 31, 1997.
Approximately $151,578,000 ($96,996,000 related to Boomtown and $54,582,000
related to
36
Boomtown and $54,582,000 related to Casino Magic) of the increase related to the
timing of acquisitions. Gaming expenses increased by $86,816,000, or 116.2%,
with $85,538,000 of the increase due to the timing of acquisitions, with the
balance of the increase primarily a corresponding result of the increased gaming
revenues at the Boomtown properties. Food and beverage expenses increased by
$13,115,000, or 50.9%, with $10,801,000 of the increase due to the timing of
acquisitions. The balance of the increase was primarily due to increased costs
at Boomtown New Orleans and Boomtown Biloxi, where food and beverage marketing
promotions were increased. Hotel and recreational vehicle expenses increased by
$857,000, or 240.7%, primarily due to the timing of acquisitions. Truck stop and
service station expenses (all of which are attributable to Boomtown Reno)
increased by $5,310,000, or 66.6%, due primarily to the timing of the Boomtown
acquisition. General and administrative expenses increased by $33,156,000, or
53.9%, with $33,361,000 of the increase attributable to the timing of
acquisitions, with the balance of the increase primarily due to additional
staffing at corporate, and expansion related expense increases. Depreciation and
amortization increased by $13,964,000, or 76.9%, with $12,236,000 of the
increase due to the timing of acquisitions, with the balance of the increase
primarily due to Boomtown New Orleans' February 1998 placement of a new
riverboat into service. Loss on write off of assets was $2,221,000 for the year
ended December 31, 1998, of which $1,086,000 related to the closing of the
Hollywood Park Golf Center; $500,000 related to the abandonment of a project in
Kansas, with the balance related to the write off of obsolete assets at Boomtown
Reno. Other expenses increased by $883,000, or 11.7%, including $2,892,000
due to the timing of acquisitions, offset by a reduction in REIT restructuring
expenses (the Company ceased in 1998 its effort to restructure into a real
estate investment trust). Net interest expense increased by $15,216,000, or
208.4%, due to interest on the 9.5% Notes, which were issued in August 1997, and
interest on bank borrowings, including borrowing to purchase Casino Magic and to
retire the Casino Magic 11.5% Notes. Income tax expense increased by $2,592,000,
or 44.3%, due to increased pre-tax income in 1998.
LIQUIDITY, CAPITAL RESOURCES AND OTHER FACTORS INFLUENCING FUTURE RESULTS
As of December 31, 1999, The Company had cash, cash equivalents and short-term
investments, all of which had maturities within ninety days, of $246,790,000
compared to $47,413,000 as of December 31, 1998.
The Consolidated Statements of Cash Flows detailing changes in the cash balances
are on page 66.
Operating activities provided net cash increase of $75,323,000 in 1999 compared
with $38,112,000 in 1998. This year-over-year change is largely due to the
increase in net income, increased depreciation and increased current deferred
tax liabilities. The increase in the current deferred tax liabilities at
December 31, 1999 results primarily because Federal and State income taxes of
approximately $22,000,000 due on the gain of the sale of the Hollywood Park Race
Track have not yet been paid.
The 1999 investing activities included the purchase of the minority interest in
Casino Magic Argentina for $16,500,000, the net purchase of short-term
investments of $120,249,000 and the purchase of $59,680,000 of property, plant
and equipment. The construction, land costs and other capitalizable cost for the
Belterra Resort and Casino represented approximately $31,000,000 of the
additions to property, plant and equipment. Approximately $160,000,000 will be
required in 2000 to complete construction and fund the necessary pre-opening
expenses, community grants and other related expenses associated with the
project (which amount excludes capitalized interest and other non-cash costs).
The net cash provided from financing activities of $54,868,000 reflects that in
February 1999, the Company received the net proceeds from the issuance of
$350,000,000 of 9.25% Senior Subordinated Notes, which proceeds were used to
retire all of the Company's outstanding bank borrowings of $287,000,000 and to
invest in approximately $63,000,000 of short term securities. Since February,
the Company has not borrowed any amounts under its bank credit facility and in
May 1999 such bank credit facility was reduced from $300,000,000 (with an option
to increase to $375,000,000) to $200,000,000 (with an option to increase to
$300,000,000).
37
At December 31, 1999, the Company had signed definitive sales agreements to sell
assets for $219,000,000 cash, which transactions are expected to close in 2000.
This includes the sale of essentially all of the assets to operate the Casino
Magic Bay St. Louis and Boomtown Biloxi casinos in Mississippi and vacant land
adjacent to the Hollywood Park Race Track sold in 1999. In addition, in February
2000, the Company signed a definitive agreement for the sale of Turf Paradise
Race Track in Phoenix, Arizona, for $53,000,000 in cash, and is actively seeking
buyers to purchase the additional land in California and Missouri. See "Pending
Casino, Race Track and Land Sales" above for additional information on these
proposed transactions. The sales of these assets are expected to generate gains;
however, there is no assurance any of these transactions will be consummated in
2000.
The Company believes that its available cash, cash equivalents, short-term
investments, cash to be generated by assets held for sale and cash flow from
operations will be sufficient to finance operations and capital requirements for
the foreseeable future. Although the Company has substantial cash resources and
unused bank credit facilities, it has committed to utilize approximately
$160,000,000 to complete the Belterra project and pay approximately $22,000,000
in Federal and State income taxes related to the sale of the Hollywood Park
Race Track. In addition, the Company may use a portion of these resources to i)
reduce its outstanding debt obligations prior to their scheduled maturities, ii)
make significant capital improvements to existing properties, and/or iii) make
acquisitions of other casino properties or companies. To the extent cash is used
for these purposes, the Company's cash reserves will also be diminished and the
Company may require additional capital to finance any such activities.
Additional capital may be generated through internally generated cash flow,
future borrowings (including amounts available under the bank credit facility)
and/or lease transactions. There can be no assurance, however, that such capital
will be available on terms acceptable to the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary exposure to market risk (or the risk of loss arising from
adverse changes in market rates and prices, such as interest rates and foreign
currency exchange rates) is with respect to potential interest rate risk
associated with the long term floating interest rate on borrowings under the
bank credit facility (see - Liquidity, Capital Resources and Other Factors
Affecting Future Results). As of December 31, 1999, the Company had no
outstanding borrowings under the bank credit facility.
As of December 31, 1999, the Company did not hold any investments in market risk
sensitive instruments of the type described in Item 305 of Regulation S-K.
ITEM 8. FINANCIAL STATEMENTS
Financial statements and accompanying footnotes are attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the Directors
and Executive Officers of the Company:
Name Age Position
- ---------------------------------- -------- ----------------------------
R.D. Hubbard (a) 64 Chairman of the Board of
Directors and Chief
Executive Officer
Paul R. Alanis 51 Director, President and
Chief Operating Officer
Robert T. Manfuso (b) 62 Director
James L. Martineau (b) 59 Director
Gary G. Miller (c) 49 Director
Michael Ornest (c) 42 Director
Timothy J. Parrott (a) 52 Director
Lynn P. Reitnouer (a), (b) 67 Director
Herman Sarkowsky (c) 74 Director (resigned in March
2000)
Marlin Torguson 55 Director
J. Michael Allen 52 Senior Vice President, Chief Operating Officer
of Gaming Operations
G. Michael Finnigan 51 President and Chief Executive Officer of Realty
Investment Group, Inc., a wholly-owned subsidiary
of the Company
Bruce C. Hinckley 53 Senior Vice President, Chief Financial Officer
and Treasurer
- ----
(a) Member of Executive Committee
(b) Member of Compensation Committee
(c) Member of Audit Committee
MR. HUBBARD has been a Director of the Company since 1990; Chairman of the Board
and Chief Executive Officer of the Company since September 1991; Chairman of the
Board and Chief Executive Officer, Hollywood Park Operating Company from
February 1991 to September 1999; President, Hollywood Park Operating Company
from February to July 1991; Chairman, AFG Industries, Inc. and its parent
company, Clarity Holdings Corp. (glass manufacturing), and director of AFG
Industries, Inc.'s subsidiaries, from 1978 to July 1993; Chairman of the Board
(and 60% stockholder until March 1994), Sunflower (The Woodlands Race Tracks--
greyhound racing and horse racing) from 1988 to March 1994; President, Director,
and majority owner, Ruidoso Downs Racing, Inc. (horse racing) since 1988;
Chairman of the Board, Chief Executive Officer and sole stockholder, Multnomah
Kennel Club, Inc. (greyhound racing) from December 1991 to April 1998; and owner
and breeder of numerous thoroughbreds and quarter horses since 1962.
MR. ALANIS has been a Director of the Company since October 1999; President and
Chief Operating Officer of the Company since January 1999; President, Horseshoe
Gaming, Inc., which is the manager and a member of Horseshoe Gaming, LLC, and
Horseshoe GP, Inc., a wholly-owned subsidiary of Horseshoe Gaming, LLC, from
January 1996 to December 1998; President, KII-Pasadena, Inc. since December
1988; and President, Koar International, Inc. from 1991 to 1995.
MR. MANFUSO has been a Director of the Company since 1991; Director, Hollywood
Park Operating Company from February 1991 to January 1992; Co-Chairman of the
Board, Laurel Racing Association (horse race track management) from 1984 to
February 1994; Vice Chairman of the Board, The Maryland Jockey Club (horse
racing) from 1986 to February 1994; Executive Vice President, Laurel Racing
Association from 1984 to May 1990; Executive Vice President, The Maryland Jockey
Club from 1986 to June 1990; Director, Maryland Horse Breeders Association from
1984 to 1992; and Member, Executive Committee, Maryland Million since 1991.
MR. MARTINEAU has been a Director of the Company since May 1999; President (and
Founder), Viracon, Inc. from 1970 to 1996; Executive Vice President, Apogee
Enterprises, Inc. (which acquired Viracon, Inc. in 1973) from 1996 to 1998;
Director, Apogee Enterprises, Inc. since 1973; Advisory Director, Northstar
Photonics since
39
December 1998; Chairman, Genesis Portfolio Partners, LLC since
August 1998; Director, Borgen Systems since 1994; and Trustee, Owatonna
Foundation since 1973.
MR. MILLER has been a Director of the Company since May 1999; Chairman and Chief
Executive Officer, Fore Star Golf since 1993; President, Cumberland Capital
Corporation since 1990; Executive Vice President--Finance and Administration,
Treasurer, Director, AFG Industries, Inc. from 1977 to 1993; Director, Nordic
Tugs since January 1999; and Director, United Stationers, Inc. from 1992 to
October 1998.
MR. ORNEST has been a Director of the Company since October 1998 (and his family
has been a shareholder of the Company since 1962); Director of the Ornest Family
Partnership since 1983; Director of the Ornest Family Foundation since 1993;
Director of the Toronto Argonauts Football Club from 1988 to 1990; President of
the St. Louis Arena and Vice President of the St. Louis Blues Hockey Club from
1983 to 1986; and Managing Director of the Vancouver Canadians Baseball Club,
Pacific Coast League from 1979 to 1980.
MR. PARROTT has been a Director of the Company since June 1997; Chairman of the
Board and Chief Executive Officer, Boomtown, Inc. from September 1992 to October
1998; President and Treasurer, Boomtown, Inc. from June 1987 to September 1992;
Director, Boomtown, Inc. since 1987; Chairman of the Board and Chief Executive
Officer, Boomtown Hotel & Casino, Inc. since May 1988; Chief Executive Officer,
Parrott Investment Company (a family-held investment company with agricultural
interests in California) since April 1995; and Director, The Chronicle
Publishing Company since April 1995.
MR. REITNOUER has been a Director of the Company since 1991; Director, Hollywood
Park Operating Company from September 1991 to January 1992; Partner, Crowell
Weedon & Co. (stock brokerage) since 1969; Director and Chairman of the Board,
COHR, Inc. from 1986 to 1999; Director and Chairman, Forest Lawn Memorial Parks
Association since 1975; and Trustee, University of California Santa Barbara
Foundation (and former Chairman) since 1992.
MR. SARKOWSKY was a Director of the Company from 1991 to March 2000; Director,
Hollywood Park Operating Company from February 1991 to January 1992; Owner,
Sarkowsky Investment Corporation and SPF Holding, Inc. (real estate development
and investments) since 1980; Director, The Sarkowsky Foundation (charitable
foundation) since 1982; thoroughbred horse breeder and owner since 1959;
Director, Synetics, Inc. (porous plastic manufacturing); Director, Eagle
Hardware & Garden, since 1990; and Director, Medical Manager Corp. Mr. Sarkowsky
elected to resign from the Company's Board of Directors in March 2000.
MR. TORGUSON has been a Director of the Company since October 1998; Chairman of
the Board, Casino Magic Corp. since December 1994; President and Chief Executive
Officer, Casino Magic from April 1992 through November 1994; Chief Financial
Officer and Treasurer, Casino Magic from April 1992 to February 1993; and 50%
owner and a Vice President, G.M.T. Management Co. (casino management and
operations) from December 1983 to December 1994.
Mr. ALLEN has served as the Company's Senior Vice President and Chief Operating
Officer, Gaming Operations, since January 1999; Senior Vice President, Horseshoe
Gaming, Inc. from October 1, 1995 to December 31, 1998 and, prior to that,
General Manager, Horseshoe Casino Center from May 1994; and Principal of Gaming
Associates, Inc. from September 1992 to May 1994.
Mr. FINNIGAN has served as the President and Chief Executive Officer of Realty
Investment Group, Inc. a wholly-owned subsidiary of the Company which conducts
all of the Company's real estate business and related development activities,
since December 1998; Chief Financial Officer and Executive Vice President of the
Company and Hollywood Park Operating Company from March 1989 to March 31, 1999;
President, Sports and Entertainment, from January 1996 to December 1998;
President, Gaming and Entertainment, from February 1994 to January 1996;
Treasurer of the Company and Hollywood Park Operating Company from March 1992 to
March 31, 1999; Chairman of the Board, Southern California Special Olympics
since 1996; Chairman of the Board, Centinela Hospital since 1996; and Director,
Shoemaker Foundation since 1993.
40
Mr. HINCKLEY joined the Company in February 1999 and has served as its Chief
Financial Officer, Senior Vice President and Treasurer since April 1, 1999;
Executive Vice President, Chief Financial Officer and Secretary, Iwerks
Entertainment, Inc. from September 1996 to February 1999; financial consultant
from September 1995 to September 1996; and Vice President, Controller and Chief
Accounting Officer, Caesars World, Inc. (casino and hotel company) from November
1985 to September 1995. Mr. Hinckley is a certified public accountant.
In accordance with the requirements of the Agreement and Plan of Merger dated as
of April 23, 1996 governing the Boomtown merger, the Company's Board was
expanded upon completion of the Boomtown merger to eleven directors, seven of
whom (Messrs. Hubbard, Harry Ornest, J.R. Johnson, Manfuso, Reitnouer, Sarkowsky
and Warren B. Williamson) had been serving as members of the Company's Board
(the "Company Directors") and four of whom (Messrs. Parrott, Richard Goeglein,
Peter L. Harris and Delbert W. Yocam) had been members of the Boomtown Board of
Directors (the "Boomtown Directors"). The Company agreed to cause its Board of
Directors and any nominating committee thereof to take the necessary steps to
nominate the initial Boomtown Directors or their replacements (selected by a
majority of the Boomtown Directors) for re-election at the first three annual
stockholders meetings following June 30, 1997. On March 29, 1999, with the
consent of Mr. Parrott, the sole Boomtown Director then on the Company's Board,
the Company's Board of Directors amended the by-laws to eliminate the
requirement that the Boomtown Directors or their replacements be nominated for
re-election.
In connection with the Casino Magic acquisition, Mr. Torguson agreed to vote his
Casino Magic shares (which amounted to approximately 21.5% of the then
outstanding common stock of Casino Magic) in favor of the acquisition by the
Company. The Company agreed to appoint Mr. Torguson to the Board of Directors of
the Company.
In October 1999, the Board of Directors of the Company amended the Company's
by-laws to increase the number of directors on the Board from nine to ten.
41
ITEM 11. EXECUTIVE COMPENSATION
The following tables summarize the annual and long-term compensation of, and
stock options held by, the Company's Chief Executive Officer and the four
additional most highly compensated executive officers whose annual salaries and
bonuses exceeded $100,000 in total during the fiscal year ended December 31,
1999 (collectively, the "Named Officers"). None of the Named Officers held stock
appreciation rights during the years reported in the tables.
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Awards
-----------------
Annual Compensation Securities
-------------------------- Underlying
Name and Principal Salary Bonus Other Annual Options/ All Other
Position Year ($) ($) Compensation SARs (#) Compensation
- ------------------------------ ------ ------------ ---------- ---------------- ----------------- ----------------
R. D. Hubbard 1999 $ 500,000 $ 700,000 $0 100,000 $1,339 (a)
Chairman of the Board 1998 500,000 160,000 0 50,000 2,370 (b)
and Chief Executive 1997 400,000 40,235 0 45,000 4,740 (b)
Paul R. Alanis 1999 $ 600,000 $ 400,000 $0 0 $1,735 (c)
President and Chief 1998 0 0 0 400,000 0
Operating Officer 1997 0 0 0 0 0
J. Michael Allen 1999 $ 389,657 $ 125,000 $0 0 $1,735 (d)
Senior Vice President and 1998 0 0 0 200,000 0
Chief Operating Officer of 1997 0 0 0 0 0
Gaming Operations
G. Michael Finnigan 1999 $ 400,000 $ 500,000 $0 40,000 $1,003 (e)
President and Chief 1998 307,600 75,000 0 35,000 23,633 (f)
Executive Officer of 1997 307,608 0 0 25,000 3,555 (b)
Investment Group, Inc.
Bruce C. Hinckley 1999 $ 192,514 $ 75,000 $0 25,000 $1,756 (g)
Senior Vice President, 1998 0 0 0 0 0
Chief Financial Officer 1997 0 0 0 0 0
Treasurer
(a) Includes the Company matching contribution under the Company's 401(k) Plan
of $790, and $549 of payment by the Company for premiums with respect to
term life insurance.
(b) Reflects the Company matching contributions under the Company's 401(k)
Plan.
(c) Includes the Company matching contribution under the Company's 401(k) Plan
of $1,666, and $69 of payment by the Company for premiums with respect to
term life insurance.
(d) Includes the Company matching contribution under the Company's 401(k) Plan
of $1,666, and $69 of payment by the Company for premiums with respect to
term life insurance.
(e) Includes the Company matching contribution under the Company's 401(k) Plan
of $790 and $213 of payment by the Company for premiums with respect to
term life insurance.
(f) Includes the Company matching contribution under the Company's 401(k) Plan
of $2,370, and $21,262 of distribution related to the termination of the
Company's Supplemental Executive Retirement Plan.
(g) Includes the Company matching contribution under the Company's 401(k) Plan
of $1,687, and $69 of payment for premiums with respect to term life
insurance.
EXECUTIVE DEFERRED COMPENSATION PLAN
Effective January 1, 2000, the Company adopted the Executive Deferred
Compensation Plan ("Executive Plan"), which allows certain highly compensated
employees of the Company and its subsidiaries (each an "Employer") to defer, on
a pre-tax basis, a portion of their base annual salaries and bonuses. The
Executive Plan is administered by the Compensation Committee of the Board of
Directors (the "Committee") and
42
participation in the Executive Plan is limited to employees who are (i)
determined by an Employer to be includable within a select group of management
or highly compensated employees, (ii) specifically selected by an Employer and
(iii) approved by the Committee. A participating employee may elect to defer up
to 75% of his or her base annual salary and up to 90% of his or her bonus per
year. Any such deferred compensation is credited to a deferral contribution
account. A participating employee is at all times fully vested in his or her
deferred contributions, as well as any appreciation or depreciation attributable
thereto.
For purposes of determining the rate of return credited to a deferral
contribution account, each participating employee must select from a list of
hypothetical investment funds among which deferred contributions shall be
allocated. Although a participating employee's deferred compensation will not be
invested directly in the selected hypothetical investment funds, his or her
deferral compensation account shall be adjusted according to the performance of
such funds.
Participating employees may elect in advance to receive their deferral
contribution account balances upon retirement in a lump sum or in annual
payments of five, ten or fifteen years (except that, if an employee's account
balance is less than $10,000, such balance will be paid as a lump sum). A
participating employee may make an advance election to defer retirement
distributions until age 75. In the event a participating employee dies or
suffers a disability (as defined in the Executive Plan) during employment, such
employee's account balance shall be paid (i) in one lump sum if the account
balance is less than $10,000, or (ii) if the account balance is $10,000 or more,
in five annual installments unless the employee has elected, in advance and with
the Committee's approval, to receive a lump sum distribution. In the event of a
voluntary or involuntary termination of employment for any reason other than
retirement, disability or death, a participating employee shall receive his or
her account balance (i) in one lump sum if the account balance is less than
$10,000, or (ii) if the account balance is $10,000 or more, in five annual
installments unless the employee has elected, in advance and with the
Committee's approval, to receive a lump sum distribution.
A participating employee may make an advance election to receive interim
distributions from a deferral compensation account prior to retirement, but not
earlier than three years after the election is made. Such interim distributions
are distributed as lump sum payments. In the event of a financial emergency
(such as a sudden illness or accident, a loss of property due to casualty or
other extraordinary and unforeseeable events beyond the employee's control), a
participating employee may petition the Committee to suspend deferrals and/or to
request withdrawal of a portion of the account to satisfy the emergency. A
participating employee may request to receive all of his or her account balance,
without regard to whether benefits are due or the occurrence of a financial
emergency; any distribution made pursuant to such a request shall be subject to
forfeiture of ten percent (10%) of the total account balance and temporary
suspension of the employee's participation in the Executive Plan; PROVIDED,
HOWEVER, that a distribution pursuant to a request, following a change in
control (as defined in the Executive Plan), by a participating employee to
receive all or a portion of his or her account balance without regard to whether
benefits are due or the occurrence of a financial emergency (i) shall not be
subject to the ten percent (10%) forfeiture of any part of the account balance
if such request was made within ninety (90) days following the change in
control, and (ii) shall be available in lump sum or in installment payments over
up to five years.
An Employer may terminate, amend or modify the Executive Plan with respect to
its participating employees at any time, except that (i) no termination,
amendment or modification may decrease or restrict the value of a participating
employee's account balance and (ii) no amendment or modification shall be made
after a change in control which adversely affects the vesting, calculation or
payment of benefits or any other rights or protections of any participating
employee. Upon termination of the Executive Plan, all amounts credited to
participating employees' accounts shall be distributed in lump sums.
STOCK OPTION PLANS
In 1993 and 1996, the stockholders of the Company adopted stock option plans
("Stock Option Plans"), which provided for the issuance of up to 625,000 and
900,000 shares of the Company's Common Stock upon exercise of the options,
respectively. Except for the provisions governing the number of shares issuable
43
thereunder and except for certain provisions which reflect changes in tax and
securities laws, the provisions of the Stock Option Plans are substantially
similar. The Stock Option Plans are administered and terms of option grants are
established by the Compensation Committee of the Board of Directors. Under the
Stock Option Plans, options alone or coupled with stock appreciation rights may
be granted to selected key employees, directors, consultants and advisors of the
Company. Options become exercisable according to a vesting period as determined
by the Compensation Committee at the date of grant, and expire on the earlier of
one month after termination of employment, six months after the death or
permanent disability of the optionee, or the expiration of the fixed option term
set by the Compensation Committee at the grant date (not to exceed ten years
from the grant date). The exercise prices of all options granted under the Stock
Option Plans are determined by the Compensation Committee on the grant date,
provided that the exercise price of an incentive stock option may not be less
than the fair market value of the Common Stock at the date of grant.
As of December 31, 1999, the 1996 Stock Option Plan was the only plan with stock
option awards available for grant; all of the 625,000 shares eligible for
issuance under the 1993 Stock Option Plan had been granted. Of the 900,000
shares eligible for issuance under the 1996 Stock Option Plan, options to
purchase 554,449 had been granted. In addition, 721,077 and 256,136 shares of
Common Stock were issuable upon exercise of options granted under pre-merger
stock option plans of Boomtown and Casino Magic, respectively, which the Company
assumed in each merger. The Company has filed registration statements with the
Securities and Exchange Commission covering an aggregate of 3,505,332 shares of
Common Stock issuable upon exercise of options granted under the Stock Option
Plans, Boomtown's stock option plans and Casino Magic's stock option plans.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following table summarizes the option grants to Named Officers during the
year ended December 31, 1999. None of the Named Officers held stock appreciation
rights during the year ended December 31, 1999.
Individual Grants
- ------------------------------------------------------------------------------------------------
Percent of
Total
Number of Options/ Potential Realizable Value
Securities SARs at Assumed Annual Rates
Underlying Granted to Exercise of Stock Price Appreciation
Options/SARs Employees or for Option Term
Granted in Fiscal Base Price Expiration -----------------------------
Name (#) Year ($/Sh) Date 5% ($) 10% ($)
- -------------------- ----------------- -------------- ------------- --------------- ------------- ------------
R.D. Hubbard 100,000 36% $9.625 Mar. 29, 2009 $ 605,000 $1,534,000
G. Michael Finnigan 40,000 15% 9.625 Mar. 29, 2009 242,000 614,000
Bruce C. Hinckley 25,000 9% 9.6875 Mar. 17, 2009 151,000 386,000
44
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTIONS/SAR VALUES
The following table sets forth information with respect to the exercise of stock
options during the year ended December 31, 1999, and the final year end value of
unexercised options. None of the Named Officers held stock appreciation rights
during the year ended December 31, 1999.
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Shares Options/SARs Options/SARs
Acquired At Fiscal At Fiscal
On Value Year-End (#) Year-End ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable (a)
- ----------------------- --------- ------------ --------------- ------------------------
R.D. Hubbard 0 $0 133,000/149,000 $1,452,941/$1,699,434
Paul R. Alanis 0 $0 200,000/200,000 $2,059,375/$2,059,375
J. Michael Allen 0 $0 100,000/100,000 $1,029,688/$1,029,688
G. Michael Finnigan 30,000 $213,912 63,332/ 71,668 $666,239/$782,199
Bruce C. Hinckley 0 $0 0/ 25,000 $0/$318,750
BOARD MEETINGS, BOARD COMMITTEES AND DIRECTOR COMPENSATION
The full Board of Directors of the Company had three formal meetings in 1999 and
acted by unanimous written consent on one occasion. During 1999, each incumbent
director of the Company attended at least 75% of the aggregate of (i) the three
meetings of the Board of Directors, and (ii) the total number of meetings of the
committees on which he served (during the periods that he served).
The Company has a standing Executive Committee, which is chaired by Mr. Hubbard
and currently consists of Messrs. Hubbard, Reitnouer, and Parrott. The Executive
Committee has and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the Company to the
fullest extent authorized by Delaware law. The Executive Committee had three
formal meetings in 1999 and acted by unanimous written consent on thirteen
occasions.
The Company has a standing Audit Committee, which is chaired by Mr. Miller and
currently consists of Messrs. Miller, Sarkowsky and Ornest. The functions of the
Audit Committee are to provide an avenue of communication between the Board of
Directors and the independent external auditors, the Company's financial
management and the internal auditors; to assure the independence of the
Company's independent auditors and the adequacy of disclosure to stockholders
and to the public; to consider matters of accounting policy; and to recommend
independent auditors to the Board of Directors for approval. The Audit Committee
met two times in 1999 and acted by unanimous written consent on one occasion.
The Company has a standing Compensation Committee, which is chaired by Mr.
Reitnouer and currently consists of Messrs. Reitnouer, Martineau and Manfuso.
The functions of the Compensation Committee are to make recommendations to the
Board of Directors regarding the annual salaries and other compensation of the
officers of the Company, to provide assistance and recommendations with respect
to the compensation policies and practices of the Company and to assist with the
administration of the Company's compensation plans. The Compensation Committee
met three times in 1999 and acted by unanimous written consent on ten occasions.
The Executive Committee acts as the Company's nominating committee. The
Executive Committee generally does not consider nominees recommended by the
Company's stockholders.
45
All directors hold office until the next annual meeting of stockholders and
until their successors are duly elected and qualified. Directors are entitled to
receive an annual retainer of $25,000 per year plus $1,000 for each Board
meeting attended, which they may take in cash or in deferred compensation under
the Company's Amended and Restated Directors Deferred Compensation Plan as
outlined below. In addition, non-employee directors are entitled to receive a
minimum of 2,000 stock options. Members of the Executive Committee, Audit
Committee and Compensation Committee also receive $1,000 for each committee
meeting attended, and such amounts are also eligible for the Amended and
Restated Directors Deferred Compensation Plan.
On August 5, 1999, each of Messrs. Martineau, Miller and Ornest was granted a
non-qualified stock option to purchase 5,000 shares of Common Stock at an
exercise price of $14.75 per share. One-third of the shares purchasable upon
exercise of these options will vest on each of the first, second and third
anniversary of the grant date. All of these options expire on the tenth
anniversary of the grant date and, except for the option granted to Mr.
Martineau, were granted under the Company's 1996 Stock Option Plan.
On October 29, 1999, each of Messrs. Manfuso, Martineau, Miller, Ornest,
Parrott, Reitnouer, Sarkowsky and Torguson was granted a non-qualified stock
option to purchase 2,000 shares of Common Stock at an exercise price of $17.3125
per share. One-third of the shares purchasable upon exercise of these options
was vested on the grant date, with an additional one-third to vest on each of
the first and second anniversary of the grant date. All of these options expire
on the tenth anniversary of the grant date and, except for the options granted
to Messrs. Manfuso, Martineau and Reitnouer, were granted under the Company's
1996 Stock Option Plan.
AMENDED AND RESTATED DIRECTORS DEFERRED COMPENSATION PLAN
Participation in the Company's Amended and Restated Directors Deferred
Compensation Plan (the "Directors Plan") is limited to directors of the Company,
and each eligible director may elect to defer all or a portion of his annual
retainer and any fees for meetings attended. Any such deferred compensation is
credited to a deferred compensation account, either in cash or in shares of
Common Stock, at each director's election. As of the date the director's
compensation would otherwise have been paid, and depending on the director's
election, the director's deferred compensation account will be credited with
either (i) cash, (ii) the number of full and/or fractional shares of Common
Stock obtained by dividing the amount of the director's compensation for the
calendar quarter or month which he elected to defer, by the average of the
closing price of the Common Stock on the principal stock exchange on which the
Common Stock is listed (or, if the common shares are not listed on a stock
exchange, the NASDAQ National Market System) on the last ten business days of
the calendar quarter or month for which such compensation is payable or (iii) a
combination of cash and shares of Common Stock as described in clause (i) and
(ii). All cash amounts credited to the director's deferred compensation account
bear interest at an amount to be determined from time to time by the Board of
Directors.
If a director has elected to receive shares of Common Stock in lieu of his
retainer and the Company declares a dividend, such director's deferred
compensation account is credited at the end of each calendar quarter with the
number of full and/or fractional shares of Common Stock obtained by dividing the
dividends which would have been paid on the shares credited to the director's
deferred compensation account as of the dividend record date, if any, occurring
during such calendar quarter if such shares had been shares of issued and
outstanding Common Stock on such date, by the closing price of the Common Stock
on the principal stock exchange on which the Common Stock is listed (or, if the
common shares are not listed on a stock exchange, the NASDAQ National Market
System) on the date such dividend(s) was paid. In addition, if the Company
declares a dividend payable in shares of Common Stock, the director's deferred
compensation account is credited at the end of each calendar quarter with the
number of full and/or fractional shares of Common Stock which such shares would
have been entitled to if such shares had been shares of issued and outstanding
Common Stock on the record date for such stock dividend(s).
46
Participating directors do not have any interest in the cash and/or Common Stock
credited to their deferred compensation accounts until distributed in accordance
with the Directors Plan, nor do they have any voting rights with respect to such
shares until shares credited to their deferred compensation accounts are
distributed. The rights of a director to receive payments under the Directors
Plan are no greater than the rights of an unsecured general creditor of the
Company. Each participating director may elect to have the aggregate amount of
cash and shares credited to his deferred compensation account distributed to him
in one lump sum payment or in a number of approximately equal annual
installments over a period of time not to exceed fifteen years. The lump sum
payment or the first installment will be paid as of the first business day of
the calendar quarter immediately following the cessation of the director's
service as a director of the Company. Prior to the beginning of any calendar
year, a director may elect to change the method of distribution, but amounts
credited to a director's account prior to the effective date of such change may
not be affected, but rather will be distributed in accordance with the election
at the time such amounts were credited to the director's deferred compensation
account.
The maximum number of shares of Common Stock that can be issued pursuant to the
Directors Plan is 275,000 shares. The Company is not required to reserve or set
aside funds or shares of Common Stock for the payment of its obligations
pursuant to the Directors Plan. The Company is obligated to make available, as
and when required, a sufficient number of shares of Common Stock to meet the
needs of the Directors Plan. The shares of Common Stock to be issued under the
Directors Plan may be either authorized and unissued shares or reacquired
shares.
Amendment, modification or termination of the Directors Plan may not (i)
adversely affect any eligible director's rights with respect to amounts then
credited to his account or (ii) accelerate any payments or distributions under
the Directors Plan (except with regard to bona fide financial hardships).
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company has entered into a three-year employment agreement with Paul R.
Alanis, effective January 1, 1999. Mr. Alanis' annual compensation is $600,000,
with an annual bonus of not less than $100,000 and up to $600,000. The bonus is
payable as follows: (a) $100,000 if Mr. Alanis remains employed by the Company
for the year in question; (b) $200,000 based on the Company's actual earnings
before interest, taxes, depreciation and amortization as compared to budget, and
not exceeding the capital budget; and (c) the remaining $300,000 to be awarded
at the discretion of the Board of Directors. If Mr. Alanis terminates his
employment for good reason, or if the Company terminates Mr. Alanis without
cause, Mr. Alanis will receive an annual salary of $700,000 through the balance
of the contract period, and retain his health and disability insurance for six
months after termination. Mr. Alanis will also immediately vest in all stock
option grants. Since Mr. Alanis was not promoted to the Company's Chief
Executive Officer by December 31, 1999, he may elect, on or before March 31,
2000, to terminate his employment. Upon such termination, Mr. Alanis would be
entitled to a lump sum severance payment of $700,000, and continued health and
disability insurance coverage for six months. He would also immediately vest in
75% of the 400,000 options granted to him on September 10, 1998.
The Company has entered into a three-year employment agreement with J. Michael
Allen, effective January 1, 1999. Mr. Allen's annual compensation is $400,000,
with a possible bonus of up to $200,000. The bonus is payable as follows: (a)
$100,000 based on the Company's actual earnings before interest, taxes,
depreciation and amortization as compared to budget, and not exceeding the
capital budget, and (b) $100,000 at the discretion of the Board of Directors. If
Mr. Allen terminates his employment for good reason, or if the Company
terminates him without cause, and so long as he does not compete with the
Company or its subsidiaries in the gaming business prior to the end of the
employment contract term, he will be entitled to $400,000 per year for the
balance of the employment contract term, with health and disability insurance
coverage for six months. Mr. Allen will also immediately vest in all stock
option grants. If Mr. Alanis terminates his employment due to his failure to be
promoted to the Company's Chief Executive Officer by December 31, 1999, Mr.
Allen may elect, within 90 days after Mr. Alanis' termination, to terminate his
employment. Upon such termination, Mr. Allen would receive any accrued but
unpaid salary and vacation benefits.
47
The Company has entered into a three-year employment agreement with G. Michael
Finnigan, effective January 1, 1999. Mr. Finnigan's annual compensation is
$400,000 with an annual bonus of up to $200,000. The bonus is payable as
follows: (a) an amount at the discretion of the Board in the first year, and (b)
in each of the remaining years, $100,000 based on Realty Investment Group,
Inc.'s performance, and $100,000 at the discretion of the Board of Directors. If
Mr. Finnigan terminates his employment for good reason (defined for present
purposes as a material breach of the employment agreement by the Company and
failure to timely remedy such breach), or if the Company terminates him without
cause, Mr. Finnigan will receive his annual compensation for one year (including
salary and bonus), with health and disability coverage for six months. Mr.
Finnigan will also immediately vest in all of his stock options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Reitnouer served on the Compensation Committee from January 1, 1999 to
December 31, 1999. Messrs. Johnson and Williamson were members of the
Compensation Committee from January 1, 1999 to May 1999. Messrs. Martineau and
Manfuso were members of the Compensation Committee from May 1999 to December 31,
1999. None of the members of the Compensation Committee were officers or
employees or former officers or employees of the Company or its subsidiaries,
except that Mr. Williamson served as Secretary of the Company from September
1991 to August 1996.
48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the name, address (address is provided for
persons listed as beneficial owners of 5% or more of the outstanding Common
Stock), number of shares and percent of the outstanding Common Stock
beneficially owned as of March 24, 2000 (except where a different date is
indicated below) by each person known to the Board of Directors of the Company
to be the beneficial owner of 5% or more of the outstanding shares of Common
Stock, each Director, each Named Officer, and all current Directors and
Executive Officers as a group.
Shares Percent of
Beneficially Shares
Name and Address of Beneficial Owner Owned Outstanding (a)
----------------------------------------------- ---------------------- --------------------
Legg Mason, Inc. 2,883,104 (b) 11.0%
111 South Calvert Street
Baltimore, Maryland 21202
R.D. Hubbard 2,802,820 (c) 10.6%
Pinnacle Entertainment, Inc.
330 North Brand Boulevard, Suite 1100
Glendale, California 91203
Paul R. Alanis 500,000 (d) 1.9%
Timothy J. Parrott 410,049 (e) 1.5%
Michael Ornest 301,166 (f) 1.1%
Marlin Torguson 92,100 (g) *
Herman Sarkowsky 68,708 (h) *
Lynn P. Reitnouer 64,000 (i) *
Robert T. Manfuso 42,333 (j) *
James L. Martineau 6,858 (k) *
Gary G. Miller 3,667 (l) *
G. Michael Finnigan 113,748 (m) *
J. Michael Allen 100,000 (n) *
Bruce C. Hinckley 13,333 *
Current Directors and Executive
Officers as a group (13 persons) 4,518,782 (o) 16.7%
* Less than one percent (1%) of the outstanding common shares.
(a) Assumes exercise of stock options beneficially owned by the named
individual or entity into shares of Common Stock which are exercisable
within 60 days of March 24, 2000. Based on 26,271,678 shares outstanding
as of March 24, 2000.
(b) Based upon information provided by the stockholder in Schedule 13G filed
with the Securities and Exchange Commission on February 14, 2000.
According to such Schedule 13G, as of December 31, 1999, 2,515,000 (9.6%)
shares were held by Legg Mason Fund Adviser, Inc., which has power to
dispose thereof. The Schedule 13G further reports that the remaining
368,104 shares were held by Legg Mason Capital Management, Inc., Legg
Mason Trust, fsb and Legg Mason Wood Walker, Inc., which have power to
dispose thereof. Legg Mason Fund
49
Adviser, Inc., Legg Mason Capital Management, Inc., Legg Mason Trust, fsb
and Legg Mason Wood Walker, Inc. are reported as subsidiaries of Legg
Mason, Inc.
(c) Includes 183,000 shares of Common Stock, which Mr. Hubbard has the right
to acquire upon the exercise of options, which are exercisable within 60
days of March 24, 2000.
(d) Includes 200,000 shares of Common Stock, which Mr. Alanis has the right
to acquire upon the exercise of options, which are exercisable within 60
days of March 24, 2000.
(e) Includes 237,278 shares of Common Stock which Mr. Parrott has the right
to acquire upon exercise of options which are exercisable within 60 days
of March 24, 2000, including 235,278 options assumed by the Company in
connection with the Boomtown merger.
(f) Includes 2,000 shares of Common Stock, which Mr. Ornest has the right to
acquire upon the exercise of options, which are exercisable within 60
days of March 24, 2000.
(g) Includes 2,000 shares of Common Stock, which Mr. Torguson has the right
to acquire upon the exercise of options, which are exercisable within 60
days of March 24, 2000.
(h) Includes 14,000 shares of Common Stock, which Mr. Sarkowsky has the right
to acquire upon the exercise of options, which are exercisable within 60
days of March 24, 2000. Mr. Sarkowsky resigned as a Director in March
2000.
(i) Includes 14,000 shares of Common Stock, which Mr. Reitnouer has the right
to acquire upon the exercise of options, which are exercisable within 60
days of March 24, 2000.
(j) Includes 14,000 shares of Common Stock, which Mr. Manfuso has the right
to acquire upon the exercise of options, which are exercisable within 60
days of March 24, 2000.
(k) Includes 6,191 shares of Common Stock owned by Mr. Martineau's wife,
beneficial ownership of which is disclaimed by Mr. Martineau, and 667
shares of Common Stock which Mr. Martineau has the right to acquire upon
the exercise of options, which are exercisable within 60 days of March
24, 2000.
(l) Includes 667 shares of Common Stock, which Mr. Miller has the right to
acquire upon the exercise of options, which are exercisable within 60
days of March 24, 2000.
(m) Includes 88,333 shares of Common Stock, which Mr. Finnigan has the right
to acquire upon the exercise of options, which are exercisable within 60
days of March 24, 2000.
(n) Includes 100,000 shares of Common Stock, which Mr. Allen has the right to
acquire upon the exercise of options, which are exercisable within 60
days of March 24, 2000.
(o) Includes 864,278 shares of Common Stock of which the Directors and
Executive Officers may be deemed to have beneficial ownership following
the exercise of options to purchase Common Stock, which are exercisable
within 60 days of March 24, 2000. Excluding such shares, the Directors
and Executive Officers of the Company have beneficial ownership of
3,654,504 shares of Common Stock, which represents 13.9% of the shares of
Common Stock outstanding as of March 24, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 2, 1998, the Company and R.D. Hubbard Enterprises, Inc. ("Hubbard
Enterprises"), which is wholly owned by Mr. Hubbard, entered into a new Aircraft
Time Sharing Agreement. The former agreement was entered into in November 1993.
The June 2, 1998 Aircraft Time Sharing Agreement is identical to the former
agreement in all aspects, except for the type of aircraft covered by the
agreement. The Aircraft Time Sharing Agreement expired on December 31, 1999, and
automatically renews each month unless written notice of termination is given by
either party at least two weeks before a renewal date. The Company reimburses
Hubbard Enterprises for expenses incurred as a result of the Company's use of
the aircraft, which totaled approximately $176,000 in 1999, $72,000 in 1998 and
$106,000 in 1997.
On August 31, 1998, the Company received a promissory note for up to $3,500,000
from Paul R. Alanis. As of December 31, 1998, the Company had loaned Mr. Alanis
$3,232,000, who used the funds to purchase 300,000 shares of Common Stock. The
principal amount of the promissory note, along with accrued interest, was paid
in full in June 1999.
Timothy J. Parrott purchased 270,738 shares of Boomtown common stock in
connection with Boomtown's 1988 acquisition of Boomtown Hotel & Casino, Inc.
(which operates Boomtown Reno). Mr. Parrott paid an aggregate purchase price for
the common stock of $222,000, of which $1,000 was paid in cash and $221,000 was
paid by a promissory note secured by pledge to Boomtown of all of the shares
owned by Mr. Parrott. As of October 31, 1998, Mr. Parrott resigned his position
as Chairman of Boomtown, and was retained by the Company as a consultant to
provide services relating to gaming and other business issues. Mr. Parrott was
50
retained for a three year period, with an annual retainer of $350,000 with
health and disability benefits equivalent to those he received as Chairman of
Boomtown. Mr. Parrott's $221,000 note will be forgiven in three equal parts on
each anniversary of the consulting agreement.
Marlin Torguson, who beneficially owned approximately 21.5% of the outstanding
common shares of Casino Magic prior to the Company's acquisition of Casino
Magic, agreed, in connection with such acquisition, to vote his Casino Magic
shares in favor of the acquisition by the Company. In addition, Mr. Torguson
agreed to continue to serve as an employee of Casino Magic for three years
following the acquisition and, during such three-year period, not to compete
with the Company or Casino Magic in any jurisdiction in which either the Company
or Casino Magic operates. The Company appointed Mr. Torguson to its board of
directors. The Company issued to Mr. Torguson 60,000 shares of the Company's
Common Stock as compensation for his three-year service as an employee, and will
pay him $300,000 per year, during a three-year period, for his non-compete
agreement. In addition, the Company issued Mr. Torguson 30,000 options to
acquire the Company's Common Stock as of the October 15, 1998 acquisition of
Casino Magic, priced at the closing price of the Common Stock on that date. The
foregoing payments will be made to Mr. Torguson whether or not the Company or
Casino Magic terminates Mr. Torguson's employment, except for termination for
cause.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report.
1. The consolidated financial statements are set forth in the index to
Consolidated Financial Statements attached hereto.
2. Exhibits
Exhibit
Number Description of Exhibit
- ------ ----------------------
2.1 Agreement and Plan of Merger, by and among Hollywood Park, Inc., HP
Acquisition, Inc. and Boomtown, Inc., dated April 23, 1996, is hereby
incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K, filed May 3, 1996.
2.2 Agreement and Plan of Merger, dated as of February 19, 1998, among
Casino Magic Corp., Hollywood Park, Inc. and HP Acquisition II, Inc.,
is hereby incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K, filed February 26, 1998.
3.1 Certificate of Incorporation of Hollywood Park, Inc., is hereby
incorporated by reference to Exhibit 3.1 to the Company's Amendment No.
1 to Form S-4 Registration Statement dated March 26, 1999.
3.2 Restated By-laws of Hollywood Park, Inc. are hereby incorporated by
reference to Exhibit 3.2 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated March 26, 1999.
3.3 * Certificate of Ownership and Merger, dated February 23, 2000, merging
Pinnacle Entertainment, Inc. into Hollywood Park, Inc.
3.4 Articles of Incorporation of HP/Compton, Inc., are hereby incorporated
by reference to Exhibit 3.9 to the Company's Amendment No. 1 to Form
S-4 Registration dated October 30, 1997.
3.5 By-laws of HP/Compton, Inc., are hereby incorporated by reference to
Exhibit 3.10 to the Company's Amendment No. 1 to Form S-4 Registration
Statement dated October 30, 1997.
3.6 Articles of Organization of Crystal Park Hotel and Casino Development
Company, LLC, are hereby incorporated by reference to Exhibit 3.11 to
the Company's Amendment No. 1 to Form S-4 Registration Statement dated
October 30, 1997.
3.7 Operating Agreement of Crystal Park Hotel and Casino Development
Company, LLC, are hereby incorporated by reference to Exhibit 3.12 to
the Company's Amendment No. 1 to Form S-4 Registration Statement dated
October 30, 1997.
3.8 Restated Articles of Incorporation of Turf Paradise, Inc., are hereby
incorporated by reference to Exhibit 3.13 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated October 30, 1997.
51
3.9 By-laws of Turf Paradise, are hereby incorporated by reference to
Exhibit 3.14 to the Company's Amendment No. 1 to Form S-4 Registration
Statement dated October 30, 1997.
3.10 Certificate of Incorporation of HP Yakama, Inc., is hereby incorporated
by reference to Exhibit 3.15 to the Company's Amendment No. 1 to Form
S-4 Registration Statement dated October 30, 1997.
3.11 By-laws of HP Yakama, Inc., are hereby incorporated by reference to
Exhibit 3.16 to the Company's Amendment No. 1 to Form S-4 Registration
Statement dated October 30, 1997.
3.12 Amended and Restated Certificate of Incorporation of Boomtown, Inc., is
hereby incorporated by reference to Exhibit 3.17 to the Company's
Amendment No. 1 to Form S-4 Registration Statement dated October 30,
1997.
3.13 By-laws of Boomtown, Inc., are hereby incorporated by reference to
Exhibit 3.18 to the Company's Amendment No. 1 to Form S-4 Registration
Statement dated October 30, 1997.
3.14 Certificate of Amended and Restated Articles of Incorporation of
Boomtown Hotel & Casino, Inc., are hereby incorporated by reference to
Exhibit 3.19 to the Company's Amendment No. 1 to Form S-4 Registration
Statement dated October 30, 1997.
3.15 Revised and Restated By-laws of Boomtown Hotel & Casino, Inc., are
hereby incorporated by reference to Exhibit 3.20 to the Company's
Amendment No. 1 to Form S-4 Registration Statement dated October 30,
1997.
3.16 Articles of Incorporation of Bayview Yacht Club, Inc., are hereby
incorporated by reference to Exhibit 3.21 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated October 30, 1997.
3.17 By-laws of Bayview Yacht Club, Inc., are hereby incorporated by
reference to Exhibit 3.22 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated October 30, 1997.
3.18 Certificate of Mississippi Limited Partnership of Mississippi - I
Gaming, L.P., are hereby incorporated by reference to Exhibit 3.23 to
the Company's Amendment No. 1 to Form S-4 Registration Statement dated
October 30, 1997.
3.19 Amended and Restated Agreement of Limited Partnership of Mississippi -
I Gaming, L.P., is hereby incorporated by reference to Exhibit 10.31 to
the Company's Quarterly Report on Form 10-Q for quarter ended June 30,
1997.
3.20 Articles of Incorporation of Louisiana Gaming Enterprises, Inc., are
hereby incorporated by reference to Exhibit 3.25 to the Company's
Amendment No. 1 to Form S-4 Registration Statement dated October 30,
1997.
3.21 Second Amended and Restated Partnership Agreement of Louisiana - I
Gaming, a Louisiana Partnership in Commendam, is hereby incorporated by
reference to Exhibit 3.26 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated March 26, 1999.
3.22 Certificate of Incorporation of HP Yakama Consulting, Inc., is hereby
incorporated by reference to Exhibit 3.27 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
3.23 By-laws of HP Yakama Consulting, Inc., are hereby incorporated by
reference to Exhibit 3.28 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated March 26, 1999.
3.24 Articles of Incorporation of Casino Magic Corp., are hereby
incorporated by reference to Exhibit 3.29 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
3.25 Amended By-laws of Casino Magic Corp., are hereby incorporated by
reference to Exhibit 3.30 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated March 26, 1999.
3.26 Articles of Incorporation of Casino Magic American Corp., are hereby
incorporated by reference to Exhibit 3.31 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
3.27 By-laws of Casino Magic American Corp., are hereby incorporated by
reference to Exhibit 3.32 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated March 26, 1999.
3.28 Articles of Incorporation of Biloxi Casino Corp., are hereby
incorporated by reference to Exhibit 3.33 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
3.29 By-laws of Biloxi Casino Corp., are hereby incorporated by reference to
Exhibit 3.34 to the Company's Amendment No. 1 to Form S-4 Registration
Statement dated March 26, 1999.
52
3.30 Articles of Incorporation of Casino Magic Finance Corp., are hereby
incorporated by reference to Exhibit 3.35 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
3.31 By-laws of Casino Magic Finance Corp., are hereby incorporated by
reference to Exhibit 3.36 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated March 26, 1999.
3.32 Articles of Incorporation of Casino One Corporation, are hereby
incorporated by reference to Exhibit 3.37 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
3.33 By-laws of Casino One Corporation, are hereby incorporated by reference
to Exhibit 3.38 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated March 26, 1999.
3.34 Articles of Incorporation of Bay St. Louis Casino Corp., are hereby
incorporated by reference to Exhibit 3.39 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
3.35 By-laws of Bay St. Louis Casino Corp., are hereby incorporated by
reference to Exhibit 3.40 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated March 26, 1999.
3.36 Articles of Incorporation of Mardi Gras Casino Corp., are hereby
incorporated by reference to Exhibit 3.41 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
3.37 By-laws of Mardi Gras Casino Corp., are hereby incorporated by
reference to Exhibit 3.42 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated March 26, 1999.
3.38 Articles of Incorporation of Boomtown Hoosier, Inc., are hereby
incorporated by reference to Exhibit 3.43 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
3.39 By-laws of Boomtown Hoosier, Inc., are hereby incorporate by reference
to Exhibit 3.44 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated March 26, 1999.
3.40 Articles of Incorporation of Indiana Ventures LLC, are hereby
incorporated by reference to Exhibit 3.45 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
3.41 Operating Agreement of Indiana Ventures LLC, is hereby incorporated by
reference to Exhibit 3.46 to the Company Amendment No. 1 to Form S-4
Registration Statement dated March 26, 1999.
3.42 Articles of Incorporation of HP Casino, Inc., are hereby incorporated
by reference to Exhibit 3.51 to the Company's Amendment No. 1 to Form
S-4 Registration Statement dated March 26, 1999.
3.43 By-laws of HP Casino, Inc., are hereby incorporated by reference to
Exhibit 3.52 to the Company's Amendment No. 1 to Form S-4 Registration
Statement dated March 26, 1999.
4.1 Hollywood Park 1996 Stock Option Plan is hereby incorporated by
reference to Exhibit 10.24 to the Company's Registration Statement on
Form S-4 dated September 18, 1996.
4.2 Hollywood Park 1993 Stock Option Plan is hereby incorporated by
reference to Exhibit 4.2 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated March 26, 1999.
4.3 Indenture, dated August 1, 1997, by and among the Company, Hollywood
Park Operating Company, Hollywood Park Food Services, Inc., Hollywood
Park Fall Operating Company, HP/Compton, Inc., Crystal Park Hotel and
Casino Development Company, LLC, HP Yakama, Inc., Turf Paradise, Inc.,
Boomtown, Inc., Boomtown Hotel & Casino, Inc., Louisiana - I Gaming,
Louisiana Gaming Enterprises, Inc., Mississippi - I Gaming, L.P.,
Bayview Yacht Club, Inc. and The Bank of New York, as trustee, is
hereby incorporated by reference to Exhibit 10.37 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
4.4 First Supplemental Indenture, dated as of February 5, 1999, to
Indenture dated as of August 1, 1997 governing the 9.5% Senior
Subordinated Notes due 2007, by and among the Company and Hollywood
Park Operating Company, as co-issuers, and Bayview Yacht Club, Inc.,
Boomtown Hotel & Casino, Inc., Boomtown, Inc., Crystal Park Hotel and
Casino Development Company, LLC, Hollywood Park Fall Operating Company,
Hollywood Park Food Services, Inc., Hollywood Park Operating Company,
HP/Compton, Inc., HP Yakama, Inc., Louisiana Gaming Enterprises, Inc.,
Louisiana - I Gaming, a Louisiana Partnership in Commendam, Mississippi
- I Gaming, LP, and Turf Paradise, Inc. as guarantors, and The Bank of
New York, as trustee, is hereby incorporated by reference to Exhibit
4.4 to the Company's S-4 Registration dated March 2, 1999.
53
4.5 Form of Series B 9.5% Senior Subordinated Notes due 2007 (included in
Exhibit 4.3), is hereby incorporated by reference to the Company's
Amendment No.1 to Registration Statement on Form S-4 dated October 30,
1997.
4.6 Indenture, dated as of February 18, 1999, governing the 9.25% Senior
Subordinated Notes due 2007, by and among the Company as issuer, and
Bay St. Louis Casino Corp., Bayview Yacht Club, Inc., Biloxi Casino
Corp., Boomtown Hoosier, Inc., Boomtown Hotel & Casino, Inc., Boomtown,
Inc., Casino Magic American Corp., Casino Magic Corp., Casino Magic
Finance Corp., Casino One Corporation, Crystal Park Hotel and Casino
Development Company, LLC, Hollywood Park Fall Operating Company,
Hollywood Park Food Services, Inc., Hollywood Park Operating Company,
HP Casino, Inc., HP/Compton, Inc., HP Yakama, Inc., HP Yakama
Consulting, Inc., Indiana Ventures LLC, Louisiana Gaming Enterprises,
Inc., Louisiana - I Gaming, a Louisiana Partnership in Commendam, Mardi
Gras Casino Corp., Mississippi - I Gaming, L.P., Pinnacle Gaming
Development Corp., Switzerland County Development Corp., and Turf
Paradise, Inc. as initial guarantors, and The Bank of New York, as
trustee, is hereby incorporated by reference to Exhibit Company's S-4
Registration Statement dated March 2, 1999.
4.7 Form of Series B 9.25% Senior Subordinated Notes due 2007 (included in
Exhibit 4.6), is hereby incorporated by reference to Exhibit 4.7 to the
Company's S-4 Registration Statement dated March 2, 1999.
10.1 Directors Deferred Compensation Plan for Hollywood Park, Inc. is hereby
incorporated by reference to Exhibit 10.1 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
10.2 Aircraft Time Sharing Agreement dated June 2, 1998, by and between
Hollywood Park, Inc. and R.D. Hubbard Enterprises, Inc. is hereby
incorporated by reference to Exhibit 10.2 to the Company's Amendment
No.1 to Form S-4 Registration Statement dated March 26, 1999.
10.3 Amended and Restated Disposition and Development Agreement of Purchase
and Sale, and Lease with Option to Purchase, dated August 2, 1995, by
and between The Community Redevelopment Agency of the City of Compton
and Compton Entertainment, Inc., is hereby incorporated by reference to
Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995.
10.4 Guaranty, dated July 31, 1995, by Hollywood Park, Inc., in favor of the
Community Redevelopment Agency of the City of Compton, is hereby
incorporated by reference to Exhibit 10.17 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995.
10.5 Assignment, Assumption and Consent Agreement, by and among HP/Compton,
Inc., and Crystal Park Hotel and Casino Development Company LLC,
Hollywood Park, Inc. and The Community Redevelopment Agency of the City
of Compton, dated July 18, 1996, is hereby incorporated by reference to
Exhibit 10.20 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
10.6 Operating Agreement for Crystal Park Hotel and Casino Development
Company, LLC, a California Limited Liability Company, dated July 18,
1996, effective August 28, 1996, is hereby incorporated by reference to
Exhibit 10.24 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
10.7 Lease, by and between Crystal Park Hotel and Casino Development
Company, LLC and California Casino Management, Inc., dated December 19,
1997, is hereby incorporated by reference to Exhibit 10.41 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997.
10.8 Addendum to the Lease Agreement dated December 19, 1997, by and between
Crystal Park Hotel and Casino Development Company, LLC and California
Casino Management, Inc., dated June 30, 1998, is hereby incorporated by
reference to Exhibit 10.46 of the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998.
10.9 Blue Diamond Swap Agreement by and among Boomtown, Inc., Blue Diamond
Hotel & Casino, Inc., Hollywood Park, Inc., Edward P. Roski, Jr., IVAC
and Majestic Realty Co., dated August 12, 1996, is hereby incorporated
by reference to Exhibit 10.22 to the Company's Registration Statement
on Form S-4 filed September 18, 1996.
54
10.10 Stock Purchase Agreement, by and between Hollywood Park, Inc. and
Edward P. Roski, Jr., dated August 12, 1996, is hereby incorporated by
reference to Exhibit 10.23 to the Company's Registration Statement on
Form S-4 filed September 18, 1996.
10.11 Second Addendum to the Lease Agreement dated December 19, 1997, by and
between Crystal Park Hotel and Casino Development Company, LLC and
California Casino Management, Inc. dated March 8, 1999, is hereby
incorporated by reference to Exhibit 10.11 to the Company's Amendment
No.1 to Form S-4 Registration Statement dated March 26, 1999.
10.12 Ground Lease, dated October 19, 1993, between Raphael Skrmetta as
Landlord and Mississippi - I Gaming, L.P. as Tenant, is hereby
incorporated by reference to Exhibit 10.33 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997.
10.13 First Amendment to Ground Lease dated October 19, 1993, between Raphael
Skrmetta and Mississippi - I Gaming, L.P., is hereby incorporated by
reference to Exhibit 10.34 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997.
10.14 Second Amendment to Ground Lease dated October 19, 1993, between
Raphael Skrmetta and Mississippi - I Gaming, L.P., is hereby
incorporated by reference to Exhibit 10.35 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997.
10.15 Profit Participation Agreement, by and between Hollywood Park, Inc.,
and North American Sports Management, Inc., dated July 14, 1997, is
hereby incorporated by reference to Exhibit 10.40 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
10.16 Loan Agreement, by and between Yakama Tribal Gaming Corporation and HP
Yakama, Inc., dated September 11, 1997, is hereby incorporated by
reference Exhibit 10.41 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997.
10.17 Security Agreement, by and between Yakama Tribal Gaming Corporation and
HP Yakama, Inc., dated September 11, 1997, is hereby incorporated by
reference to Exhibit 10.42 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997.
10.18 Master Lease, by and between The Confederated Tribes and Bands of the
Yakama Indian Nation and HP Yakama, Inc., dated September 11, 1997, is
hereby incorporated by reference to Exhibit 10.43 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
10.19 Sublease, by and between HP Yakama, Inc. and Yakama Tribal Gaming
Corporation, dated September 11, 1997, is hereby incorporated by
reference to Exhibit 10.44 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997.
10.20 Construction and Development Agreement, by and between Yakama Tribal
Gaming Corporation and HP Yakama Consulting, Inc., dated September 11,
1997, is hereby incorporated by reference to Exhibit 10.45 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.
10.21 Voting Agreement, dated as of February 25, 1998, by and between
Hollywood Park, Inc., and Marlin F. Torguson, is hereby incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K,
filed February 26, 1998.
10.22 Public Trust Tidelands Lease, dated August 15, 1994, by and between the
Secretary of State on behalf of the State of Mississippi and
Mississippi - I Gaming, L.P., is hereby incorporated by reference to
Exhibit 10.43 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.23 Public Trust Tidelands Lease Amendment, dated March 31, 1997, by and
between the Secretary of State on behalf of the State of Mississippi
and Mississippi - I Gaming, L.P., is hereby incorporated by reference
to Exhibit 10.43 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
10.24 Option agreement, by and among The Webster Family Limited Partnership
and The Diuguid Family Limited Partnership, and Pinnacle Gaming
Development Corp., dated June 2, 1998, is hereby incorporated by
reference to Exhibit 10.47 of the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998.
10.25 Memorandum of Option Agreement, by and between the Webster Family
Limited Partnership and The Duiguid Family Limited Partnership, and
Pinnacle Gaming Development Corp., dated June 2, 1998, is hereby
incorporated by reference to Exhibit 10.48 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
55
10.26 Amended and Restated Option Agreement, by and among Daniel Webster,
Marsha S. Webster, William G. Duiguid, Sara T. Diuguid, J.R. Showers,
III and Carol A. Showers, and Pinnacle Gaming Development Corp., dated
June 2, 1998, is hereby incorporated by reference to Exhibit 10.49 of
the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998.
10.27 Memorandum of Amended and Restated Option Agreement, by and between
Daniel Webster, Marsha S. Webster, William Diuguid, Sara T. Diuguid,
J.R. Showers, III and Carol A. Showers, and Pinnacle Gaming Development
Corp., dated June 4, 1998, is hereby incorporated by reference to
Exhibit 10.50 of the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998.
10.28 Assignment of Option Agreement, by Daniel Webster and Marsha S.
Webster, and Pinnacle Gaming Development Corp., dated June 2, 1998, is
hereby incorporated by reference to Exhibit 10.51 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
10.29 Amended and Restated Reducing Revolving Loan Agreement, dated October
14, 1998, among Hollywood Park, Inc., and the banks named therein,
Societe Generale and Bank of Scotland (as Managing Agents), First
National Bank of Commerce (as Co-Agent), and Bank of America National
Trust and Savings Association (as Administrative Agent), is hereby
incorporated by reference to Exhibit 2 of the Company's Current Report
on Form 8-K, filed October 30, 1998.
10.30 Purchase Agreement, dated February 12, 1999, by and among the Company
and Bay St. Louis Casino Corp., Bayview Yacht Club, Inc., Biloxi Casino
Corp., Boomtown Hoosier, Inc., Boomtown Hotel & Casino, Inc., Boomtown,
Inc., Casino Magic American Corp., Casino Magic Corp., Casino Magic
Finance Corp., Casino One Corporation, Crystal Park Hotel and Casino
Development Company, LLC, Hollywood Park Fall Operating Company,
Hollywood Park Food Services, Inc., Hollywood Park Operating Company,
HP Casino, Inc., HP/Compton, Inc., HP Yakama, Inc., HP Yakama
Consulting, Inc., Indiana Ventures LLC, Louisiana Gaming Enterprises,
Inc., Louisiana - I Gaming, a Louisiana Partnership in Commendam, Mardi
Gras Casino Corp., Mississippi - I Gaming, L.P., Pinnacle Gaming
Development Corp., Switzerland County Development Corp., and Turf
Paradise, Inc., and Lehman Brothers, Inc., CIBC Oppenheimer Corp.,
Morgan Stanley & Co., Incorporated, NationsBanc Montgomery Securities
LLC, SG Cowen Securities Corporation, and Wassers Securities, Inc., as
initial purchasers, is hereby incorporated by reference to Exhibit
10.34 to the Company's S-4 Registration Statement dated March 2, 1999.
10.31 Registration Rights Agreement, dated as of February 18, 1999, by and
among the Company and Bay St. Louis Casino Corp., Bayview Yacht Club,
Inc., Biloxi Casino, Corp., Boomtown Hoosier, Inc., Boomtown Hotel &
Casino, Inc., Boomtown, Inc., Casino Magic American Corp., Casino Magic
Finance Corp., Casino One Corporation, Crystal Park Hotel and Casino
Development Company, LLC, Hollywood Park Fall Operating Company,
Hollywood Park Food Services, Inc., Hollywood Park Operating Company,
HP Casino, Inc., HP/Compton, Inc., HP Yakama, Inc., HP Yakama
Consulting, Inc., Indiana Ventures LLC, Louisiana Gaming Enterprises,
Inc., Louisiana - I Gaming, a Louisiana Partnership in Commendam, Mardi
Gras Casino Corp., Mississippi - I Gaming L.P., Pinnacle Gaming
Development Corp., Switzerland County Development Corp., and Turf
Paradise, Inc., and Lehman Brothers Inc., CIBC Oppenheimer Corp.,
Morgan Stanley & Co. Incorporated, NationsBanc Montgomery Securities
LLC, SG Cowen Securities Corporation and Wasserstein P Securities,
Inc., as initial purchasers, is hereby incorporated by reference to
Exhibit 10.35 to the Company's S-4 Registration Statement dated March
2, 1999.
10.32 Employment Agreement, dated December 23, 1998, by and between Hollywood
Park, Inc. and G. Michael Finnigan, is hereby incorporated by reference
to Exhibit 10.36 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated March 26, 1999.
10.33 Employment Agreement, dated September 10, 1998, by and between
Hollywood Park, Inc. and Paul Alanis, is hereby incorporated by
reference to Exhibit 10.37 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated March 26, 1999.
10.34 Employment Agreement, dated September 10, 1998, by and between
Hollywood Park, Inc. and Mike Allen, is hereby incorporated by
reference to Exhibit 10.38 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated March 26, 1999.
56
10.35 Employment Agreement, dated January 1, 1999, by and between Hollywood
Park, Inc. and Donald M. Robbins, is here by incorporated by reference
to Exhibit 10.39 to the Company's Amendment No. 1 S-4 Registration
Statement dated March 26, 1999.
10.36 Purchase Agreement, dated as of February 25, 1998, among Hilton Gaming
(Switzerland County) Corporation and Boomtown Hoosier, Inc., is hereby
incorporated by reference to Exhibit 10.40 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
10.37 Asset Purchase Agreement, dated May 5, 1999, among Hollywood Park, Inc.
and Churchill Downs Incorporated, is hereby incorporated by reference
to Exhibit 10.41 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999.
10.38 Amendment No. 1 to Amended and Restated Reducing Revolving Loan
Agreement, dated June 2, 1999, is hereby incorporated by reference to
Exhibit 10.42 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999.
10.39 Amendment No. 2 to Amended and Restated Reducing Revolving Loan
Agreement, dated September 24, 1999, is hereby incorporated by
reference to Exhibit 10.43 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999.
10.40 Asset Purchase Agreement, dated as of December 9, 1999, between BSL,
Inc., and Casino Magic Corp. is hereby incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed December
21, 1999.
10.41 Asset Purchase Agreement, dated as of December 9, 1999, between BTN,
Inc. and Boomtown, Inc. is hereby incorporated by reference to Exhibit
10.2 to the Company's Current Report on Form 8-K filed December 21,
1999.
10.42 First Amendment to Asset Purchase Agreement, dated December 17, 1999,
between BSL, Inc. and Casino Magic Corp. is hereby incorporated by
reference to Exhibit 10.3 to the Company's Current Report on Form 8-K
filed December 21, 1999.
10.43 First Amendment to Asset Purchase Agreement, dated December 17, 1999,
between BTN, Inc. and Boomtown, Inc. is hereby incorporated by
reference to Exhibit 10.4 to the Company's Current Report on Form 8-K
filed December 21, 1999.
10.44 Guaranty issued by Penn National in favor of Casino Magic Corp. entered
into as of December 9, 1999 is hereby incorporated by reference to
Exhibit 10.5 to the Company's Current Report on Form 8-K filed December
21, 1999.
10.45 Guaranty issued by Penn National in favor of Boomtown, Inc. entered
into as of December 9, 1999 is hereby incorporated by reference to
Exhibit 10.6 to the Company's Current Report on Form 8-K filed December
21, 1999.
10.46 Guaranty issued by Hollywood Park in favor of BSL, Inc. entered into as
of December 9, 1999 is hereby incorporated by reference to Exhibit 10.7
to the Company's Current Report on Form 8-K filed December 21, 1999.
10.47 Guaranty issued by Hollywood Park in favor of BTN, Inc. entered into as
of December 9, 1999 is hereby incorporated by reference to Exhibit 10.8
to the Company's Current Report on Form 8-K filed December 21, 1999.
10.48 * Executive Deferred Compensation Plan for Hollywood Park, Inc.
10.49 * Agreement for Purchase and Sale of Assets, dated as of February 24,
2000, between Pinnacle Entertainment, Inc. and Jerry Simms.
11.1 * Statement re: Computation of Per Share Earnings
21.1 Subsidiaries of Hollywood Park, Inc. is hereby incorporated by
reference to Exhibit 21.1 to the Company's Form S-4 Registration
Statement dated March 2, 1999.
23.1 * Consent of Arthur Andersen LLP
27.1 * Financial Data Schedule
- --------
* Filed herewith
57
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed December 21, 1999, to report (i)
the execution on December 9, 1999 of the Asset Purchase Agreements
under which wholly-owned subsidiaries of the Company agreed to sell the
operating assets of certain of the Company's casino properties to
subsidiaries of Penn National Gaming, Inc., and (ii) the December 10,
1999 press release announcing the execution of such Agreements.
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PINNACLE ENTERTAINMENT, INC.
(Registrant)
By: /s/ R.D. HUBBARD Dated: March 27, 2000
-----------------------------------
R.D. Hubbard
Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
By: /s/ BRUCE C. HINCKLEY Dated: March 27, 2000
-----------------------------------
Bruce C. Hinckley
Senior Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
59
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
it the capacities and on the dates indicated:
PINNACLE ENTERTAINMENT, INC.
/s/ R.D. HUBBARD Dated: March 27, 2000
- ----------------------------------------
R.D. Hubbard - Director
/s/ PAUL ALANIS Dated: March 27, 2000
- ----------------------------------------
Paul Alanis - Director
/s/ ROBERT T. MANFUSO Dated: March 27, 2000
- ----------------------------------------
Robert T. Manfuso - Director
/s/ JAMES MARTINUEAU Dated: March 27, 2000
- ----------------------------------------
James Martineau - Director
/s/ GARY MILLER Dated: March 27, 2000
- ----------------------------------------
Gary Miller - Director
/s/ MICHAEL ORNEST Dated: March 27, 2000
- ----------------------------------------
Michael Ornest - Director
/s/ TIMOTHY J. PARROTT Dated: March 27, 2000
- ----------------------------------------
Timothy J. Parrott - Director
/s/ LYNN P. REITNOUER Dated: March 27, 2000
- ----------------------------------------
Lynn P. Reitnouer - Director
/s/ MARLIN TORGUSON Dated: March 27, 2000
- ----------------------------------------
Marlin Torguson - Director
60
PINNACLE ENTERTAINMENT, INC.
Index to Consolidated Financial Statements
Report of Independent Public Accountants
Report of Arthur Andersen LLP............................................62
Consolidated Statements of Operations for the years
ended December 31, 1999, 1998 and 1997................................63
Consolidated Balance Sheets as of December 31, 1999 and 1998...............64
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997..................65
Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997................................66
Notes to Consolidated Financial Statements.................................67
Schedule II ...............................................................90
Other Financial Data.......................................................91
61
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Pinnacle Entertainment, Inc.:
We have audited the accompanying consolidated balance sheets of Pinnacle
Entertainment, Inc., (a Delaware corporation, formerly Hollywood Park, Inc.) and
subsidiaries (the "Company") as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pinnacle Entertainment, Inc.
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 8, 2000 (except with
respect to the matters discussed
in Note 20, as to which the date
is March 21, 2000)
62
Pinnacle Entertainment, Inc.
Consolidated Statements of Operations
For the years ended December 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands, except per share data)
REVENUES:
Gaming $ 557,526 $ 293,057 $ 137,659
Racing 55,209 66,871 68,844
Food and beverage 39,817 30,510 19,894
Hotel and recreational vehicle park 11,737 3,076 937
Truck stop and service station 17,644 14,499 8,633
Other 24,924 18,954 12,161
--------- --------- ---------
706,857 426,967 248,128
--------- --------- ---------
EXPENSES:
Gaming 309,508 161,549 74,733
Racing 22,694 29,316 30,304
Food and beverage 46,558 38,860 25,745
Hotel and recreational vehicle park 5,923 1,213 356
Truck stop and service station 16,296 13,279 7,969
General and administrative 134,870 94,670 61,514
Depreciation and amortization 51,924 32,121 18,157
Pre-opening costs, Belterra Resort and Casino 3,020 821 0
(Gain) loss on disposition of assets, net (42,061) 2,221 0
Other 13,921 8,414 7,531
--------- --------- ---------
562,653 382,464 226,309
--------- --------- ---------
OPERATING INCOME 144,204 44,503 21,819
Interest expense, net 57,544 22,518 7,302
--------- --------- ---------
Income before minority interests and income taxes 86,660 21,985 14,517
Minority interests 1,687 374 (3)
Income tax expense 40,926 8,442 5,850
--------- --------- ---------
NET INCOME $ 44,047 $ 13,169 $ 8,670
========= ========= =========
================================================================================================
Dividend requirements on convertible preferred stock $ 0 $ 0 $ 1,520
--------- --------- ---------
Net income attributable to common stockholders $ 44,047 $ 13,169 $ 7,150
========= ========= =========
Net income per common share:
Net income - basic $ 1.70 $ 0.50 $ 0.33
Net income - diluted $ 1.67 $ 0.50 $ 0.32
Number of shares - basic 25,966 26,115 22,010
Number of shares - diluted 26,329 26,115 22,340
See accompanying notes to the consolidated financial statements.
63
Pinnacle Entertainment, Inc.
Consolidated Balance Sheets
December 31, December 31,
1999 1998
------------ ------------
ASSETS (in thousands, except share data)
Current Assets:
Cash and cash equivalents $ 123,362 $ 44,234
Restricted cash 0 0
Short term investments 123,428 3,179
Receivables, net 17,132 16,783
Prepaid expenses and other assets 13,118 15,207
Deferred income taxes 0 18,425
Assets held for sale 154,649 0
Current portion of notes receivable 5,785 2,320
------------ ------------
Total current assets 437,474 100,148
Notes receivable 8,912 17,852
Net property, plant and equipment 437,715 602,912
Goodwill, net of amortization 87,481 97,098
Gaming licenses, net of amortization 41,485 44,037
Debt issuance costs, net of amortization 22,813 12,105
Other assets 9,528 17,187
------------ ------------
$ 1,045,408 $ 891,339
============ ============
============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 21,096 $ 20,970
Accrued interest 26,080 16,741
Other accrued liabilities 45,569 61,498
Accrued compensation 16,073 17,819
Liabilities to be assumed by buyers of assets held for sale 9,866 0
Deferred income taxes 19,542 0
Current portion of notes payable 6,782 11,564
------------ ------------
Total current liabilities 145,008 128,592
Notes payable, less current maturities 618,698 527,619
Deferred income taxes 826 400
Minority interests 0 3,752
Stockholders' Equity:
Capital stock --
Preferred - $1.00 par value, authorized 250,000 shares;
none issued and outstanding in 1999 and 1998 0 0
Common - $0.10 par value, authorized 40,000,000 shares;
26,234,699 and 25,800,069 shares issued and outstanding in 1999 and 1998 2,624 2,580
Capital in excess of par value 224,654 218,375
Retained earnings 53,598 10,021
------------ ------------
Total stockholders' equity 280,876 230,976
------------ ------------
$ 1,045,408 $ 891,339
============ ============
See accompanying notes to the consolidated financial statements.
64
Pinnacle Entertainment, Inc.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 1999, 1998 and 1997
Retained
Capital in Earnings Total
Preferred Common Excess of (Accumulated Stockholders'
Stock Stock Par Value Deficit) Equity
--------- --------- ---------- ------------ -------------
(in thousands)
BALANCE AS OF DECEMBER 31, 1996 $ 28 $ 1,833 $ 167,074 ($10,775) $ 158,160
Net income 0 0 0 8,670 8,670
Issuance of common stock to acquire
Boomtown, Inc. 0 582 56,425 0 57,007
Repurchase and retirement of common stock 0 (45) (3,420) 0 (3,465)
Common stock options exercised 0 20 1,975 0 1,995
Other (28) 232 296 (1,513) (1,013)
--------- --------- --------- --------- ---------
BALANCE AS OF DECEMBER 31, 1997 0 2,622 222,350 (3,618) 221,354
Net income 0 0 0 13,169 13,169
Repurchase and retirement of common stock 0 (50) (5,490) 0 (5,540)
Common stock options exercised 0 8 627 0 635
Tax benefit associated with exercised
common stock options 0 0 888 0 888
Investment in stock - unrealized holding gain 0 0 0 470 470
--------- --------- --------- --------- ---------
BALANCE AS OF DECEMBER 31, 1998 0 2,580 218,375 10,021 230,976
Net income 0 0 0 44,047 44,047
Executive stock option compensation 0 0 828 0 828
Common stock options exercised 0 44 4,335 0 4,379
Tax benefit associated with exercised
common stock options 0 0 1,116 0 1,116
Investment in stock - realized holding gain 0 0 0 (470) (470)
--------- --------- --------- --------- ---------
BALANCE AS OF DECEMBER 31, 1999 $ 0 $ 2,624 $ 224,654 $ 53,598 $ 280,876
========= ========= ========= ========= =========
See accompanying notes to the consolidated financial statements.
65
Pinnacle Entertainment, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 44,047 $ 13,169 $ 8,670
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 51,924 32,121 18,157
(Gain) loss on disposition of assets (42,061) 2,221 0
Other changes that (used) provided cash, net of the effects
of the purchase and disposition of businesses:
Receivables, net (2,242) (2,937) (312)
Prepaid expenses and other assets (4,780) 2,927 (452)
Accounts payable (10,948) (3,074) (2,468)
Accrued liabilities (16,254) 2,009 (9,119)
Accrued interest payable 9,344 516 5,175
Deferred income taxes 38,393 (5,546) (4,822)
All other, net 7,900 (3,294) (464)
--------- --------- ---------
Net cash provided by operating activities 75,323 38,112 14,365
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (59,680) (56,747) (32,505)
Receipts from disposition of property, plant and equipment 140,083 980 187
Principal collected on notes receivable 5,283 2,489 52
Notes receivable issued 0 (12,850) 0
(Purchase of) proceeds from short term investments, net (120,249) (2,709) 4,776
Payment to buy-out minority interest in subsidiaries (16,500) (1,946) (1,000)
Net cash paid for the acquisition of Casino Magic 0 (65,749) 0
Cash acquired in the acquisition of Boomtown, net of
cash transaction and other costs 0 0 12,264
--------- --------- ---------
Net cash used in investing activities (51,063) (136,532) (16,226)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from secured Bank Credit Facility 17,000 270,000 112,000
Payment of secured Bank Credit Facility (287,000) 0 (112,000)
Payment of notes payable (15,566) (7,625) (4,942)
Assumption of notes payable 1,364 0 0
Proceeds from issuance of 9.5% Notes 0 0 125,000
Proceeds from issuance of 9.25% Notes 350,000 0 0
Payment of the 11.5% Casino Magic Notes 0 (135,000) 0
Payment of 11.5% Boomtown Notes 0 (1,253) (110,924)
Increase in debt issuance costs (15,309) (2,719) 0
Common stock options exercised 4,379 635 1,995
Common stock repurchase and retirement 0 (5,540) 0
Dividends paid to preferred stockholders 0 0 (1,520)
--------- --------- ---------
Net cash provided by financing activities 54,868 118,498 9,609
--------- --------- ---------
Increase in cash and cash equivalents 79,128 20,078 7,748
Cash and cash equivalents at the beginning of the period 44,234 24,156 16,408
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 123,362 $ 44,234 $ 24,156
========= ========= =========
See accompanying notes to the consolidated financial statements.
66
PINNACLE ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL In February 2000, a newly formed wholly owned subsidiary of Hollywood
Park, Inc. merged into Hollywood Park, Inc. for the sole purpose of changing
Hollywood Park, Inc.'s name to Pinnacle Entertainment, Inc. Pinnacle
Entertainment, Inc. (the "Company" or "Pinnacle Entertainment") is a diversified
gaming company that owns and operates eight casinos (four with hotels) in
Nevada, Mississippi, Louisiana and Argentina, two of which are subject to a
pending sales transaction (see Note 4). Pinnacle Entertainment receives lease
income from two card clubs, both in the Los Angeles metropolitan area; and owns
and operates a horse racing facility in Arizona, which is also subject to a
pending sale transaction (see Note 4).
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of Pinnacle Entertainment and its majority owned subsidiaries. All
significant inter-company accounts and transactions have been eliminated. The
Company's significant subsidiaries include Boomtown, Inc. (and its Boomtown
casinos), Casino Magic, Corp. (and its Casino Magic casinos), Turf Paradise,
Inc. and Belterra Resort and Casino, LLC.
GAMING LICENSES In 1994, Casino Magic acquired a twelve-year concession
agreement to operate the two Casino Magic Argentina casinos, and capitalized the
costs related to obtaining the concession agreement. The costs are being
amortized over the life of the concession agreement (see Note 5). In 1996,
Casino Magic acquired a Louisiana gaming license to conduct the gaming
operations of Casino Magic Bossier City. Casino Magic allocated a portion of the
purchase price to the gaming license and is amortizing the cost over twenty-five
years.
AMORTIZATION OF DEBT ISSUANCE COSTS Debt issuance costs incurred in connection
with long-term debt and bank financing are capitalized and amortized to interest
expense during the period the debt or loan commitments are outstanding.
Amortization expense was $2,343,000, $1,141,000 and $598,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
GOODWILL Goodwill consists of the excess of the acquisition cost over the fair
value of net assets acquired in business combinations and is being amortized on
a straight-line basis over 40 years. Amortization expense was $2,859,000,
$1,888,000 and $943,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
RACING REVENUES AND EXPENSES The Company recorded pari-mutuel revenues,
admissions, food and beverage and other racing income associated with racing on
a daily basis, except for prepaid admissions, which were recorded ratably over
the racing season. Expenses associated with racing revenues were charged against
income in those periods in which racing revenues were recognized. Other expenses
were recognized as they occurred throughout the year.
GAMING REVENUE AND PROMOTIONAL ALLOWANCES Gaming revenues at the Boomtown and
Casino Magic properties consists of the difference between gaming wins and
losses, and at the Hollywood Park-Casino consists of fees collected from patrons
on a per seat or per hand basis. Revenues in the accompanying statements of
operations exclude the retail value of food and beverage, hotel rooms and other
items provided to patrons on a complimentary basis. The estimated cost of
providing these promotional allowances (which is included in gaming expenses)
during the years ended December 31, 1999, 1998, and 1997 was $41,341,000,
$21,270,000 (which includes Casino Magic's promotional allowances from October
15, 1998) and $8,285,000 (which includes Boomtown's promotional allowances from
June 30, 1997), respectively.
USE OF ESTIMATES The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect (i) the reported amounts of assets
and liabilities, (ii) the disclosure of contingent assets and liabilities at the
date of
67
consolidated financial statements, and (iii) the reported amounts of
revenues and expenses during the reporting period. The Company uses estimates in
evaluating the recoverability of property, plant and equipment, other long-term
assets, deferred tax assets and in determining litigation and other obligations.
PROPERTY, PLANT AND EQUIPMENT Additions to property, plant and equipment are
recorded at cost and projects in excess of $10,000,000 include interest on funds
borrowed to finance construction. Capitalized interest was $1,359,000,
$2,142,000 and $425,000 in fiscal 1999, 1998 and 1997, respectively.
Depreciation and amortization are provided on the straight-line method over
their estimated useful lives as follows:
YEARS
-----
Land improvements 3 to 25
Buildings 5 to 40
Vessels and Barges 25 to 31
Equipment 3 to 10
Maintenance and repairs are charged to expense, and betterments are capitalized.
The cost of property sold or otherwise disposed of and its associated
accumulated depreciation are eliminated from both the property and accumulated
depreciation accounts with any gain or loss recorded in the expense accounts.
Property, plant and equipment is carried on the Company's balance sheets at
depreciated cost. Whenever there are recognized events or changes in
circumstances that affect the carrying amount of the property, plant and
equipment, management reviews the assets for possible impairment.
CASH AND CASH EQUIVALENTS Cash and cash equivalents consisted of cash,
certificates of deposit and short term investments with original maturities of
90 days or less, as well as restricted cash of $300,000 at December 31, 1998.
There was no restricted cash at December 31, 1999.
SHORT TERM INVESTMENTS Short term investments are classified as held to maturity
and are carried at cost, which approximates market value.
INCOME TAXES The Company accounts for income taxes under Statement of Financial
Accounting Standards 109, ACCOUNTING FOR INCOME TAXES ("SFAS No. 109"), whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that included the enactment date.
STOCK-BASED COMPENSATION The Company accounts for its stock-based compensation
under Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and follows the disclosure provisions of Financial Accounting
Standards Board's Statement of Accounting Standards No. 123 ACCOUNTING FOR
STOCK-BASED COMPENSATION.
SEGMENT INFORMATION Statement of Financial Accounting Standards No. 131
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS No.
131") was effective for years after December 31, 1997, and has been adopted by
the Company for all periods presented in these consolidated financial
statements. SFAS No. 131 establishes guidelines for public companies in
determining operating segments based on those used for internal reporting to
management. Based on these guidelines, Pinnacle Entertainment reports
information under a single gaming segment.
LONG-LIVED ASSETS The Company periodically reviews the propriety of the carrying
amount of long-lived assets and the related intangible assets as well as the
related amortization period to determine whether current events or circumstances
warrant adjustments to the carrying value and/or the estimates of useful
68
lives. This evaluation consists of comparing asset carrying values to the
Company's projection of the undiscounted cash flows over the remaining lives of
the assets, in accordance with Statement of Financial Accounting Standards No.
121 ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS
TO BE DISPOSED OF ("SFAS No. 121"). Based on its review, the Company believes
that as of December 31, 1999, there were no significant impairments of its
long-lived assets or related intangible assets. In September 1999, an impairment
write-down of the Hollywood Park-Casino was recorded (see Note 3).
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In September 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133 ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No.
133"). The Company has not made such investments in the past and does not expect
to make such investments in the foreseeable future, and thus SFAS No. 133 has no
impact on the financial reporting of the Company.
COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130,
REPORTING COMPREHENSIVE INCOME ("SFAS 130") requires that the Company disclose
comprehensive income and its components. The objective of SFAS 130 is to report
a measure of all changes in equity of an enterprise that result from
transactions and other economic events of the period other than transactions
with owners. Comprehensive income is the sum of the following: net income and
other comprehensive income, which is defined as all other nonowner changes in
equity. Other comprehensive income is immaterial for all periods.
EARNINGS PER SHARE Basic earnings per share are based on net income less
preferred stock dividend requirements divided by the weighted average common
shares outstanding during the period. Diluted earnings per share assume exercise
of in-the-money stock options outstanding at the beginning of the year or date
of the issuance, unless they are antidilutive.
RECLASSIFICATIONS Certain reclassifications have been made to the 1998 and 1997
amounts to be consistent with the 1999 financial statement presentation.
NOTE 2 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the years ended December 31,
----------------------------------------------------------
1999 1998 1997
----------------- ---------------- -----------------
(in thousands)
Cash paid during the year for:
Interest $58,943 $22,024 $1,321
Income taxes 6,223 8,195 827
NOTE 3 - ASSETS SOLD
On September 10, 1999, the Company completed the dispositions of the Hollywood
Park Race Track and Hollywood Park-Casino to Churchill Downs California Company
("Churchill Downs"), a wholly owned subsidiary of Churchill Downs Incorporated,
for $117,000,000 cash and $23,000,000 cash, respectively. Churchill Downs
acquired the race track, 240 acres of related real estate and the Hollywood
Park-Casino. The Company then entered into a 10-year leaseback of the Hollywood
Park-Casino at an annual lease rate of $3,000,000 per annum, with a 10-year
renewal option. The Company then subleased the facility to a third party
operator for a lease payment of $6,000,000 per year. The sublease is for a
one-year period, at which time the Company and sublessee will negotiate the
terms of any sublease extension.
The disposition of the Hollywood Park Race Track and related real estate was
accounted for as a sale and resulted in a pre-tax gain of $61,522,000. The
disposition of the Hollywood Park-Casino was accounted for as a financing
transaction and therefore not recognized as a sale for accounting purposes as
the Company subleased the Hollywood Park-Casino to a third-party operator. Under
the provisions of SFAS No. 121, the Company recorded an impairment write-down of
the Hollywood Park-Casino of $20,446,000 during the quarter ended September 30,
1999. The pre-tax gain on the sale of the race track and impairment write-
69
down of the Hollywood Park-Casino are included in "(Gain) loss on disposition of
assets, net" in the accompanying Consolidated Statements of Operations. Pursuant
to accounting guidelines, the Company recorded a long-term debt obligation of
$23,000,000 for the Hollywood Park-Casino (see Note 9). The Hollywood
Park-Casino building will continue to be depreciated over its estimated useful
life. The estimated tax liability on the sales transactions to Churchill Downs
is approximately $22,000,000.
Condensed results of operations for the Hollywood Park Race Track and the
Hollywood Park-Casino for the years ended December 31, 1999, 1998 and 1997 were:
1999 (a) 1998 1997
-------- -------- --------
(IN THOUSANDS)
Revenues $ 86,235 $114,751 $121,799
Expenses 73,019 103,760 107,775
-------- -------- --------
Operating income 13,216 10,991 14,024
Interest expense (b) 0 0 0
-------- -------- --------
Income before income taxes $ 13,216 $ 10,991 $ 14,024
======== ======== ========
(a) Operating results through the sales date of September 10, 1999.
(b) No interest expense was specifically identified for these operations.
NOTE 4 - ASSETS HELD FOR SALE
Assets held for sale at December 31, 1999 consisted of the following, and
excluded the related goodwill and deferred income taxes associated with such
assets:
NET PROPERTY
PLANT &
EQUIPMENT OTHER TOTAL
----------- -------- --------
(IN THOUSANDS)
Two casinos in Mississippi $115,731 $ 5,876 $121,607
Turf Paradise Race Track in Arizona 10,873 4,359 15,232
Other (primarily undeveloped land in California) 17,810 0 17,810
-------- -------- --------
$144,414 $ 10,235 $154,649
======== ======== ========
Sales transactions for these assets were pending or the properties were actively
being marketed as of December 31, 1999. There are no assurances these
transactions will close or the anticipated cash proceeds and after tax gains as
described below will be achieved. Until the sales transactions are completed,
the Company continues to operate the race track and casinos held for sale. In
addition, certain liabilities will be assumed by the buyers of these assets.
Such liabilities, consisting primarily of accrued liabilities and accounts
payable, have been classified as "Liabilities to be assumed by buyers of assets
held for sale" on the accompanying Consolidated Balance Sheets. Goodwill net of
amortization at December 31, 1999 includes approximately $13,331,000 related to
the pending race track and casino sales.
CASINOS IN MISSISSIPPI On December 10, 1999, the Company announced it had
entered into definitive agreements with subsidiaries of Penn National Gaming,
Inc. ("Penn National") to sell its Casino Magic Bay St. Louis, Mississippi, and
Boomtown Biloxi, Mississippi, casino operations for $195,000,000 in cash.
Subsidiaries of Penn National will purchase all of the operating assets and
certain liabilities and related operations of the Casino Magic Bay St. Louis and
Boomtown Biloxi properties, including the 590 acres of land at Casino Magic
Bay St. Louis and the leasehold rights at Boomtown Biloxi. The transactions are
subject to certain closing
70
conditions, including approval by the Mississippi Gaming Commission, the
purchaser completing the necessary financing and termination of the Hart-Scott-
Rodino waiting period. The Company estimates the transactions will close in the
second quarter of 2000 and generate an after tax gain of approximately
$32,300,000.
RACE TRACK IN ARIZONA On December 30, 1999, the Company announced the signing of
a letter of intent under which the Company will sell its Turf Paradise horse
racing facility located in Phoenix, Arizona to a private investor. In February
2000, the Company announced the signing of a definitive agreement for the sale
of Turf Paradise for $53,000,000 in cash. The agreement includes the horse
racing operations and all 275 acres at the Phoenix, Arizona property. Pinnacle
Entertainment anticipates closing the transaction in the second quarter of 2000.
The after tax gain from such sale is expected to be approximately $23,000,000.
OTHER On July 15, 1999, the Company announced it had entered into an agreement
to sell 42 acres of the 139 acres retained in the Churchill Downs transaction
for approximately $24,000,000 in cash. In March 2000, the Company completed the
sale (see Note 20). The Company anticipates an after tax gain of approximately
$13,800,000 from this sale. On November 4, 1999, the Company announced it had
entered into an agreement for the sale of the remaining 97 acres for
approximately $63,000,000 in cash. On February 7, 2000, the Company elected to
terminate such agreement and has begun discussions with other buyers. The
Company expects to close the sale of this property for cash by the end of 2000,
which will result in a gain.
The Company owns other land parcels in Missouri, which it is actively trying to
sell.
Condensed results of operations for the Casino Magic Bay St. Louis and Boomtown
Biloxi casinos and the Turf Paradise horse racing facility for the years ended
December 31, 1999, 1998 and 1997 are as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 (a) 1997 (b)
-------- -------- --------
(IN THOUSANDS)
Revenues $174,380 $100,014 $ 46,655
Expenses 145,066 86,051 40,479
-------- -------- --------
Operating income 29,314 13,963 6,176
Interest expense (income), net 86 339 (153)
-------- -------- --------
Income before income taxes $ 29,228 $ 13,624 $ 6,329
======== ======== ========
(a) Includes the results of Casino Magic Bay St. Louis from October 15, 1998
(see Note 5).
(b) Includes the results of Boomtown Biloxi from June 30, 1997 (see Note 5).
NOTE 5 - ACQUISITIONS
CASINO MAGIC ARGENTINA On October 8, 1999, the Company purchased the 49%
minority interest not owned by the Company in Casino Magic Argentina for
$16,500,000 in cash. The Casino Magic Argentina operations consist of two
casinos in the Province of Neuquen, Argentina. The Company operates the two
casinos under an exclusive concession contract with the Province that is
currently scheduled to expire in December 2006. The Company and the province are
in discussions to possibly extend such concession contract for an additional ten
years. The $12,300,000 purchase price in excess of the minority interest of
approximately $4,200,000 is being amortized over the extended life of the
concession contract beginning October 1999.
CASINO MAGIC ACQUISITION On October 15, 1998, the Company acquired Casino Magic,
Corp. (the "Casino Magic Merger"). The Company paid cash of approximately
$80,904,000 for Casino Magic's common stock. At the date of the acquisition, the
Company had purchased 792,900 common shares of Casino Magic on the open market,
at a total cost of approximately $1,615,000. The Company paid $2.27 per share
for the remaining 34,929,224 shares of Casino Magic common stock outstanding.
71
The Casino Magic Merger was accounted for under the purchase method of
accounting for a business combination. The purchase price of the Casino Magic
Merger was allocated to identifiable assets acquired and liabilities assumed
based on their estimated fair values at the date of acquisition. Assets acquired
and liabilities assumed were, when necessary, written up or down to their fair
market values based on financial analyses, which considered the impact of
general economic, financial and market conditions. The Casino Magic Merger
generated approximately $43,284,000 of excess acquisition cost over the recorded
value of the net assets acquired, all of which was allocated to goodwill, and is
being amortized over 40 years. The Company anticipates such goodwill will be
reduced by approximately $10,277,000 in connection with the pending sale of
Casino Magic Bay St. Louis in 2000 (see Note 4). The amortization of this
goodwill is not deductible for income tax purposes. At December 31, 1999 and
1998, accumulated amortization was $1,350,000 and $262,000, respectively.
BOOMTOWN, INC. On June 30, 1997, pursuant to the Agreement and Plan of Merger
dated as of April 23, 1996, the Company acquired Boomtown (the "Boomtown
Merger"). As result of the Boomtown Merger, Boomtown became a wholly owned
subsidiary of the Company and each share of Boomtown common stock was converted
into the right to receive 0.625 of a share of the Company's common stock.
The Boomtown Merger was accounted for under the purchase method of accounting
for a business combination. The purchase price of the Boomtown Merger was
allocated to identifiable assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition. Based on financial analyses,
which considered the impact of general economic, financial and market conditions
on the assets acquired and the liabilities assumed, the estimated fair values
approximated their carrying values. The Boomtown Merger generated approximately
$15,302,000 of excess acquisition cost over the recorded value of the net assets
acquired, all of which was allocated to goodwill, to be amortized over 40 years.
The Company anticipates such goodwill will be reduced by approximately
$3,054,000 in connection with the pending sale of Boomtown Biloxi in 2000 (see
Note 4). The amortization of the goodwill is not deductible for income tax
purposes. At December 31, 1999 and 1998, accumulated amortization was $773,000
and $375,000, respectively.
PRO FORMA RESULTS OF OPERATIONS The following unaudited pro forma results of
operations were prepared under the assumption that the acquisitions of Boomtown
and Casino Magic had occurred as of January 1, 1997. The historical results of
operations of Boomtown prior to the Company's June 30, 1997 acquisition
(excluding the approximately $1,900,000 net loss associated with Boomtown's Las
Vegas property, which was sold on June 30, 1997), and Casino Magic prior to the
Company's October 15, 1998 acquisition were combined with the Company's results
for 1998 and 1997. Pro forma adjustments were made for the following: (a) the
early retirement of $102,200,000 principal amount of the Boomtown 11.5% Notes;
(b) the issuance of the 9.5% Notes; (c) redemption of the Casino Magic 11.5%
Notes; (d) the borrowing of approximately $222,615,000 to redeem the Casino
Magic 11.5% Notes ($141,515,000) and to purchase Casino Magic's common stock
($81,100,000); (e) amortization of the costs associated with amending the Bank
Credit Facility to provide the funds necessary to purchase Casino Magic's common
stock and redeem the Casino Magic 11.5% Notes; (f) elimination of compensation
expense associated with three Casino Magic executives who resigned and will not
be replaced; (g) elimination of expenses associated with Casino Magic's board of
directors; (h) the amortization of the excess purchase price over net assets
acquired for both the Casino Magic Merger and the Boomtown Merger; (i) the
amortization of the premium associated with the purchase accounting write-up of
the Casino Magic 13% Notes; and (j) the tax expense associated with the net pro
forma adjustments.
72
PINNACLE ENTERTAINMENT, INC.
Unaudited Pro Forma Combined Consolidated Results of Operations
For the years ended
December 31,
-----------------------------
1998 1997
------------- -------------
(in thousands, except per share data)
Revenues:
Gaming $ 516,622 $ 467,328
Racing 66,871 68,844
Other 82,846 74,659
------------- -------------
$ 666,339 $ 610,831
============= =============
Operating income (a) $ 74,752 $ 55,569
============= =============
Income before extraordinary item $ 7,678 $ 4,323
Extraordinary item, redemption of the
Casino Magic 11.5% Notes $ 0 $ 11,039
------------- -------------
Net income (loss) $ 7,678 ($6,716)
Dividend requirement on preferred stock $ 0 $ 1,520
------------- -------------
Net income (loss) to common shareholders $ 7,678 ($ 8,236)
============= =============
Per common share:
Net income (loss) - basic $0.29 ($0.37)
Net income (loss) - diluted $0.29 ($0.37)
- --------
(a) In 1998, the operating income is inclusive of costs of $6,243,000, related
to the Casino Magic merger.
The unaudited pro forma combined results of operations are for comparative
purposes only and are not necessarily indicative of the operating results or
financial position that would have occurred if the Boomtown Merger and the
Casino Magic Merger had occurred as of January 1, 1997.
NOTE 6 - EXPANSION AND DEVELOPMENT
BELTERRA RESORT AND CASINO In September 1998, the Indiana Gaming Commission
approved the Company to receive the last available license to conduct riverboat
gaming operations on the Ohio River in Indiana for the Belterra Resort and
Casino. Pinnacle Entertainment owns 97% of the Belterra Resort and Casino
(currently under construction), with the remaining 3% held by a non-voting local
partner.
In July 1999, the Company broke ground on the Belterra Resort and Casino and is
continuing on schedule for an opening in August 2000. The project is located in
Switzerland County, Indiana, which is approximately 35 miles southwest of
Cincinnati, Ohio and will be the gaming site most readily accessible to major
portions of northern and central Kentucky, including the city of Lexington.
The Company plans to spend approximately $200,000,000 ($30,635,000 of which has
been spent as of December 31, 1999) in total costs (including land, capitalized
interest, pre-opening expenses, organizational expenses and community grants) on
the Belterra Resort and Casino, which will feature a 15-story, 308-room hotel, a
cruising riverboat casino with approximately 1,800 gaming positions, an 18-hole
championship golf course, a 1,500 seat entertainment facility, four restaurants,
retail areas and other amenities.
In October 1999, the Company acquired the Ogle Haus Inn, a 54-room hotel
operation in the city of Vevay, for $2,500,000. The Company is utilizing the
facility principally for the Belterra pre-opening operations, including housing
various key management staff, converting rooms into offices and training hotel
and food and beverage employees. Operational costs of the Ogle Haus Inn, as well
as all other pre-opening costs of Belterra Resort and Casino, are being expensed
as incurred. After completion of Belterra, the Ogle Haus will be operated as a
hotel and restaurant facility and will provide overflow capacity for Belterra.
73
LAKE CHARLES In November 1999, the Company filed an application for the
fifteenth and final gaming license to be issued by the Louisiana Gaming Control
Board. The Company was one of five applicants for such license. The Company's
application is seeking the approval to operate a cruising riverboat casino,
hotel and golf course resort complex in Lake Charles, Louisiana. The Louisiana
Gaming Control Board has not awarded such license and there are no assurances
such license will be issued to the Company or any other applicant.
In connection with such submittal, Pinnacle Entertainment has entered into an
option agreement with the Lake Charles Harbor and Terminal District to lease
225-acres of unimproved land from the District upon which such resort complex
would be constructed. The initial lease option is for a six-month period ending
January 2000, with three six-month renewal options, at a cost of $62,500 per
six-month option. If the lease option is exercised, the annual rental payment
would be $815,000, with a maximum annual increase of 5%. The term of the lease
would be for a total of up to 70 years, with an initial term of 10 years and six
consecutive renewal options of 10 years each. The lease would require the
Company to develop certain on-and off- site improvements at the location. If
awarded the license by the Louisiana Gaming Control Board, the Company
anticipates building a resort similar in design and scope to the Belterra Resort
and Casino currently under construction in Indiana.
NOTE 7 - SHORT TERM INVESTMENTS
As of December 31, 1999, short term held to maturity investments consisted of
investments in commercial paper of $123,428,000. The commercial paper consisted
of investment grade instruments issued by major corporations and financial
institutions that are highly liquid and have original maturities between three
months and one year. Commercial paper held as short term investments is carried
at cost which approximates market value.
At December 31, 1998, short term available for sale investments consisted of
investments in equity securities of approximately $3,179,000.
Interest income for the years ended December 31, 1999, 1998 and 1997 was
$7,927,000, $1,842,000 and $1,294,000, respectively.
NOTE 8 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment held at December 31, 1999, and 1998 consisted of
the following:
December 31,
-------------------------------------
1999 (a) 1998
----------------- ----------------
(in thousands)
Land and land improvements $71,052 $141,536
Buildings 253,126 393,200
Equipment 134,701 174,270
Vessel and barges 65,580 76,605
Construction in progress 32,813 46,297
---------------- ----------------
557,272 831,908
Less accumulated depreciation 119,557 228,996
---------------- ----------------
$437,715 $602,912
================ ================
(a) Excludes $213,992,000 of assets and $69,578,000 of accumulated
depreciation related to assets classified as held for sale (see Note 4)
74
NOTE 9 - SECURED AND UNSECURED NOTES PAYABLE
Notes payable at December 31, 1999, and 1998 consisted of the following:
December 31,
------------------------------------
1999 1998
---------------- ---------------
(in thousands)
Secured notes payable, Bank Credit Facility $0 $270,000
Unsecured 9.25% Notes 350,000 0
Unsecured 9.5% Notes 125,000 125,000
Casino Magic 13% Notes (a) 119,814 121,685
Hollywood Park-Casino debt obligation 22,566 0
Other secured notes payable 5,785 16,569
Other unsecured notes payable 2,315 5,288
Capital lease obligations 0 641
---------------- ---------------
625,480 539,183
Less current maturities 6,782 11,564
---------------- ---------------
$618,698 $527,619
================ ===============
(a) Includes a write up to fair market value (net of amortization), as of
the October 15, 1998 acquisition of Casino Magic, of $6,939,000 and
$8,810,000, as of December 31, 1999 and 1998, respectively, as required
under the purchase method of accounting for a business combination.
SECURED NOTES PAYABLE, BANK CREDIT FACILITY Under the terms of the 1998 bank
credit facility with a syndicate of banks, expiring in 2003 (the "Credit
Facility"), the Company chose in May of 1999 to reduce the amount available
under the facility from $300,000,000 (with an option to increase to
$375,000,000), to $200,000,000 (with an option to increase to $300,000,000). The
Credit Facility also provides for letters of credit up to $30,000,000 and swing
line loans of up to $10,000,000.
At December 31, 1998, the Company had outstanding borrowings under the Credit
Facility of $270,000,000. Through February of 1999, the Company borrowed an
additional $17,000,000, before repaying all $287,000,000 with a portion of the
proceeds from the issuance of the 9.25% Notes (see below). The Credit Facility
has remained unused since the February 1999 repayment, and there was no
outstanding balance at December 31, 1999.
Interest rates on borrowings under the Credit Facility are determined by adding
a margin, which is based upon the Company's debt to cash flow ratio (as defined
in the Credit Facility), to either the LIBOR rate or Prime Rate (at the
Company's option). The Company also pays a quarterly commitment fee on the
unused balance of the Credit Facility. The Credit Facility allows for interest
rate swap agreements or other interest rate protection agreements, to a maximum
notional amount of $300,000,000. Presently, the Company does not use such
financial instruments.
UNSECURED 9.25% AND 9.5% NOTES In February of 1999 the Company issued
$350,000,000 of 9.25% Senior Subordinated Notes due 2007 (the "9.25% Notes"),
the proceeds of which were used to pay the outstanding borrowings on the Credit
Facility, fund current capital expenditures, and other general corporate
purposes.
In August of 1997 the Company issued $125,000,000 of 9.5% Senior Subordinated
Notes due 2007 (the "9.5% Notes"). On January 29, 1999, the Company received the
required number of consents to modify selected covenants associated with the
9.5% Notes. Among other things, the modifications lowered the required minimum
consolidated coverage ratio for debt assumption and increased the size of
allowed borrowings under the Credit Facility. The Company paid a consent fee of
$50.00 per $1,000 principal amount of the 9.5% Notes, which, combined with other
transactional expenses, is being amortized over the remaining term of the 9.5%
Notes.
75
The 9.25% and 9.5% Notes are redeemable, at the option of the Company, in whole
or in part, on the following dates, at the following premiums to face value:
9.25% Notes redeemable: 9.5% Notes redeemable:
-------------------------------------------- -------------------------------------------
after February 14, at a premium of After July 31, at a premium of
-------------------------------------------- -------------------------------------------
2003 104.625% 2002 104.750%
2004 103.083% 2003 102.375%
2005 101.542% 2004 101.188%
2006 100.000% 2005 100.000%
2007 maturity 2006 100.000%
2007 maturity
Both the 9.25% and 9.5% Notes are unsecured obligations of the Company,
guaranteed by all material restricted subsidiaries of the Company, as defined in
the indentures. The subsidiaries which do not guaranty the debt include certain
Casino Magic subsidiaries, principally Casino Magic of Louisiana, Corp. (Casino
Magic Bossier City) and the Casino Magic Argentina subsidiaries. The indentures
governing the 9.25% and 9.5% Notes, as well as the Credit Facility, contain
certain covenants limiting the ability of the Company and its restricted
subsidiaries to incur additional indebtedness, issue preferred stock, pay
dividends or make certain distributions, repurchase equity interests or
subordinated indebtedness, create certain liens, enter into certain transactions
with affiliates, sell assets, issue or sell equity interests in its
subsidiaries, or enter into certain mergers and consolidations.
CASINO MAGIC 13% NOTES In August of 1996 Casino Magic of Louisiana, Corp.
(Casino Magic Bossier City) issued $115,000,000 of 13% First Mortgage Notes due
2003 (the "Casino Magic 13% Notes"), with contingent interest equal to 5% of
Casino Magic Bossier City's adjusted consolidated cash flow (as defined by the
indenture). The Casino Magic 13% Notes are secured by a first priority lien and
security interest in substantially all of the assets of Casino Magic Bossier
City. The Casino Magic 13% Notes are redeemable, at the option of the Company,
in whole or in part, on or after August 15, 2000, at a premium to face amount,
plus accrued interest, as follows: (a) August 15, 2000, at 106.5%; (b) August
15, 2001, at 104.332%; and (c) August 15, 2002 through maturity at 102.166%.
In December of 1998, the Company completed the post Casino Magic Merger change
of control purchase offer whereby $2,125,000 of principal amount of the Casino
Magic 13% Notes was tendered to the Company at a price of 101% of face value.
At December 31, 1999 $2,115,000 of contingent interest was accrued. This entire
amount was paid with the February 15, 2000 scheduled interest payment.
The indenture governing the Casino Magic 13% Notes contains certain covenants
limiting the subsidiaries that own Casino Magic Bossier City from engaging in
lines of business other than the current gaming operations at Bossier City and
incidental related activities, to borrow funds or otherwise become liable for
additional debt, to pay dividends, issue preferred stock, make investments and
certain types of payments, to grant liens on its property, enter into mergers or
consolidations, or to enter into certain specified transactions with affiliates.
HOLLYWOOD PARK-CASINO DEBT OBLIGATION In connection with the disposition of the
Hollywood Park-Casino to Churchill Downs (see Note 3), the Company recorded a
long-term lease finance obligation of $23,000,000. Annual lease payments to
Churchill Downs of $3,000,000 will be applied as principal and interest on the
finance debt. The debt is being amortized over 10 years (the initial lease term
with Churchill Downs).
76
ANNUAL MATURITIES As of December 31, 1999, annual maturities of secured and
unsecured notes payable are as follows:
Year ending
December 31: (in thousands)
------------ --------------
2000 $6,782
2001 5,338
2002 5,655
2003 116,667
2004 2,329
Thereafter 488,709
---------------
$625,480
===============
NOTE 10 - INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 ACCOUNTING FOR INCOME TAXES, whereby deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases.
The composition of the Company's income tax expense (benefit) for the years
ended December 31, 1999, 1998 and 1997 was as follows:
Current Deferred Total
----------------- ---------------- ----------------
(in thousands)
YEAR ENDED DECEMBER 31, 1999:
U.S. Federal $10,986 $21,963 $32,949
State 2,392 3,137 5,529
Foreign 2,448 0 2,448
---------------- --------------- ---------------
$15,826 $25,100 $40,926
================ =============== ===============
YEAR ENDED DECEMBER 31, 1998:
U.S. Federal $5,793 $97 $5,890
State 2,511 41 2,552
---------------- --------------- ---------------
$8,304 $138 $8,442
================ =============== ===============
YEAR ENDED DECEMBER 31, 1997:
U.S. Federal ($1,616) $6,972 $5,356
State (698) 1,192 494
---------------- --------------- ---------------
($2,314) $8,164 $5,850
================ =============== ===============
The following table reconciles the Company's income tax expense (based on its
effective tax rate) to the federal statutory tax rate of 35%:
For the years ended December 31,
--------------------------------------------------------
1999 1998 1997
---------------- ----------------- ---------------
(in thousands)
Income before income tax expense, at the
statutory rate $29,741 $7,348 $4,935
State income taxes, net of federal tax benefits 5,529 2,552 494
Non-deductible impairment write-down on
Hollywood Park-Casino (see Note 3) 7,157 0 0
Other non-deductible expenses (1,501) (1,458) 421
--------------- ---------------- ---------------
Income tax expense $40,926 $8,442 $5,850
=============== ================ ===============
77
At December 31, 1999, and 1998, the tax effects of temporary differences that
gave rise to significant portions of the deferred tax assets and deferred tax
liabilities were:
1999 1998
------------ ------------
(in thousands)
CURRENT DEFERRED TAX ASSETS (LIABILITIES):
Workers' compensation insurance reserve $1,059 $1,029
General liability insurance reserve 1,463 1,430
Write off of investment in Kansas Race Track and
excess loss recapture 0 7,139
Vacation and sick pay accrual 1,584 1,709
Sale of Hollywood Race Track & Casino (22,000) 0
Other (1,648) 7,118
------------ ------------
Net current deferred tax assets (liabilities) ($19,542) $18,425
============ ============
NON-CURRENT DEFERRED TAX ASSETS (LIABILITIES):
Net operating loss carryforwards $24,615 $29,279
Excess tax basis over book value of acquired assets 11,736 11,736
Alternative minimum tax credits 8,395 7,207
Los Angeles revitalization zone tax credits 11,717 11,717
Less valuation allowance (23,490) (23,490)
Depreciation and amortization (30,160) (41,125)
Other (3,639) 4,276
------------ ------------
Net non-current deferred tax liabilities ($826) ($400)
============ ============
Current income taxes payable of $8,773,000 and $9,935,000 at December 31, 1999
and 1998 respectively are included in other accrued liabilities in the
accompanying consolidated balance sheets.
Prior to 1999 the Company earned a substantial amount of California tax credits
related to the ownership of and operation of the Hollywood Park Race Track and
Hollywood Park-Casino as well as the Crystal Park Card Club Casino, which were
located in the Los Angeles Revitalization Tax Zone (LARZ). At December 31, 1999
the amount subject to carry forward of these unused California tax credits (net
of valuation allowance) was approximately $3,520,000, which can be used to
reduce certain future California tax liabilities. The LARZ credits will expire
between 2007 to 2012.
As of December 31, 1999, the Company had federal net operating loss ("NOL") and
capital loss ("CL") carryforwards of approximately $64,700,000, and $5,600,000,
respectively, comprised principally of NOL carryforwards acquired in the Casino
Magic and Boomtown Mergers, and CL carryforwards resulting from the disposition
of Boomtown's Las Vegas property. The NOL carryforwards expire on various dates
through 2018, and the CL carryforwards expire on various dates through 2002. In
addition, the Company has approximately $400,000 of foreign tax credits related
to Casino Magic Argentina operations, which expire in 2000, and approximately
$8,400,000 of alternative minimum tax credits, which do not expire. The
alternative minimum tax credits can reduce future federal income taxes but
generally cannot reduce federal income taxes paid below the amount of the
alternative minimum tax.
Under several provisions of the Internal Revenue Code (the "Code") and the
regulations promulgated there under, the utilization of NOL, CL and tax credit
carryforwards to reduce tax liability is restricted under certain circumstances.
Events, which cause such a limitation, include, but are not limited to, certain
changes in the ownership of a corporation. Both the Boomtown Merger and the
Casino Magic Merger caused such a change in ownership with respect to Boomtown
and Casino Magic. As a result, the Company's use of approximately $13,800,000
and $50,900,000 of Boomtown and Casino Magic's NOL carryforwards, respectively,
and $3,400,000 and $3,700,000 of Boomtown and Casino Magic's tax credit
carryforwards, respectively, is subject to certain limitations imposed by
Sections 382 and 383 of the Code. These various limitations restrict the amount
of NOL, CL and tax credit carryforwards that may be used by the Company in any
taxable year and, consequently, are expected to defer the Company's use of a
substantial portion of such carryforwards and may ultimately prevent the
Company's use of a portion thereof. Therefore, a valuation allowance has been
recorded related to the Boomtown and Casino Magic carryforwards.
78
NOTE 11- STOCKHOLDERS' EQUITY
In September 1998, the Company granted 817,500 stock options (625,000 at an
exercise price of $10.1875 and 192,500 at an exercise price of $18.00) outside
of the Company's 1993 and 1996 Stock Option Plans (see Note 15) to four
executives hired on January 1, 1999. Of these grants, 613,125 (420,625 at an
exercise price of $10.1875 and 192,500 at an exercise price of $18.00) were made
subject to shareholder approval, which approval was granted at the shareholder
meeting held May 25, 1999 (the "Measurement Date") at which time the stock price
was $14.13. Accounting Principles Board Opinion No. 25 requires that
compensation be determined as of the Measurement Date based on the excess of the
quoted market price over the exercise price of the stock and charged over the
service period of the executives in their employment agreements or option
vesting period, whichever is shorter. Compensation related to these options for
the year ended December 31, 1999, was $828,000.
In August 1998, the Company announced its intention to repurchase and retire up
to 20% or approximately 5,256,000 shares of its then issued and outstanding
common stock on the open market or in negotiated transactions. As of December
31, 1999 and 1998, the Company had repurchased and retired 500,000 shares at a
total cost of approximately $5,540,000 (with the last purchase being made on
September 28, 1998). At December 31, 1999, under the most restrictive debt
agreement, the Company could spend a maximum of $15,000,000 to buy back its
common stock.
On June 30, 1997, the Company acquired Boomtown and each share of Boomtown
common stock was converted into the right to receive 0.625 of a share of the
Company's common stock. Approximately 5,362,850 net shares of the Company's
common stock were issued in connection with such transaction. In connection with
the Boomtown Merger, the Company purchased and retired 446,491 shares of its
common stock held by a former Boomtown shareholder.
NOTE 12- LEASE OBLIGATIONS
The Company leases certain equipment for use in gaming operations and general
office equipment. Minimum lease payments required under operating leases that
have initial terms in excess of one year as of December 31, 1999 are as follows:
Period (in thousands)
------ --------------
2000 $6,876
2001 5,954
2002 5,584
2003 5,181
2004 4,453
Thereafter 3,743
Total rent expense for these long-term lease obligations for the years ended
December 31, 1999, 1998 and 1997 was $6,481,000, $5,194,000 and $2,453,000,
respectively.
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Company offers a 401(k) Investment Plan (the "401(k) Plan") which is subject
to the provisions of the Employee Retirement Income Security Act of 1994. The
401(k) Plan is available to all employees of the Company (except those covered
by collective bargaining agreements) who have completed a minimum of 500 hours
of service. Employees may contribute up to 18% (up to 15% through June 30, 1999)
of pretax income (subject to the legal limitation of $10,000 for 1999). The
Company offers discretionary matching, and for the years ended December 31,
1999, 1998 and 1997 matching contributions to the 401(k) Plan totaled
$1,437,000, $987,000 and $717,000, respectively.
79
The Company merged the 401(k) plans of Boomtown and Casino Magic into the
Company's 401(k) Plan on July 1, 1998 and January 1, 1999, respectively.
Prior to the sale of the Hollywood Park Race Track in September of 1999, the
Company contributed to several collectively-bargained multi-employer pension and
retirement plans, which were administered by unions, and to a pension plan
covering non-union employees, administered by an association of race track
owners. Amounts charged to pension cost and contributed to these plans for the
years ended December 31, 1999, 1998 and 1997 totaled $948,000, $1,690,000 and
$1,842,000, respectively. Contributions to the collectively-bargained plans were
determined in accordance with the provisions of negotiated labor contracts and
generally based upon the number of employee hours or days worked. Contributions
to the non-union plans were based on the covered employees' compensation. It is
management's belief that no withdrawal liability existed for these plans at the
time of the sale of the race track.
On January 1, 2000, the Company instituted a nonqualified Executive Deferred
Compensation Plan (the "Deferred Plan") to permit certain key employees to defer
receipt of current compensation in order to provide retirement benefits on
behalf of such employees. The Company will not make matching contributions to
the Deferred Plan. As a nonqualified plan (as defined by the Internal Revenue
Service Code), all deferred compensation remains within the general assets of
the Company and would be subject to claims of general creditors in the unlikely
case of insolvency. The Company has the right to amend, modify or terminate the
Deferred Plan.
NOTE 14 - RELATED PARTY TRANSACTIONS
In June 1998, the Company and R.D. Hubbard Enterprises, Inc. ("Hubbard
Enterprises"), which is wholly owned by Mr. Hubbard, (the Company's Chairman and
Chief Executive Officer) entered into a new Aircraft Time Sharing Agreement. The
former agreement was entered into in November 1993. The June 1998 Aircraft Time
Sharing Agreement is identical to the former agreement in all respects, except
for the type of aircraft covered by the agreement. The Aircraft Time Sharing
Agreement expired on December 31, 1999, and now automatically renews each month
unless written notice of termination is given by either party at least two weeks
before a renewal date. The Company reimburses Hubbard Enterprises for expenses
incurred as a result of the Company's use of the aircraft, which totaled
approximately $176,000 in 1999, $72,000 in 1998 and $106,000 in 1997.
In August 1998, the Company received a promissory note for up to $3,500,000 from
Paul Alanis (effective January 1, 1999, Mr. Alanis became the Company's
President and Chief Operating Officer and in October 1999 became a director). At
December 31, 1998, the Company had loaned Mr. Alanis $3,232,000. Interest on the
promissory note was at the prime interest rate. The principal amount of the
promissory note, along with accrued interest, was paid in full in June 1999.
Timothy J. Parrott (a director and member of the Executive Committee of the
Company's Board of Directors) purchased 270,738 shares of Boomtown common stock
in connection with Boomtown's 1988 acquisition of Boomtown Hotel & Casino, Inc.
(which operates Boomtown Reno). Mr. Parrott paid an aggregate purchase price for
the common stock of $222,000, of which $1,000 was paid in cash and $221,000 was
paid by a promissory note secured by a pledge to Boomtown of all of the shares
owned by Mr. Parrott. As of October 31, 1998, Mr. Parrott resigned his position
as Chairman of Boomtown, and the Company retained him as a consultant to provide
services relating to gaming and other business issues. Mr. Parrott was retained
for a three year period, with an annual retainer of $350,000 with health and
disability benefits equivalent to those he received as Chairman of Boomtown. Mr.
Parrott's $221,000 note will be forgiven in three equal parts on each
anniversary of the consulting agreement.
Marlin Torguson, who beneficially owned approximately 21.5% of the then
outstanding common shares of Casino Magic, agreed, in connection with the Casino
Magic acquisition, to vote his Casino Magic shares in favor of the acquisition
by the Company. In addition, Mr. Torguson agreed to continue to serve as an
employee of Casino Magic for three years following the acquisition, and during
such three year period, not to
80
compete with the Company or Casino Magic in any jurisdiction in which either the
Company or Casino Magic operates. The Company appointed Mr. Torguson to its
board of directors. The Company issued to Mr. Torguson 60,000 shares of the
Company's common stock as compensation for his three-year service as an
employee, and will pay him $300,000 for each year, during a three-year period,
for his non-compete agreement. In addition, the Company issued Mr. Torguson
30,000 options to acquire the Company's common stock as of the October 15, 1998,
acquisition of Casino Magic, priced at the closing price of the Company's common
stock on that date. The foregoing payments have been and will be made to Mr.
Torguson whether or not the Company or Casino Magic terminates Mr. Torguson's
employment, except for termination for cause.
NOTE 15 - STOCK OPTION PLANS
The Company has two stock option plans that provide for the granting of stock
options to officers and key employees. The objectives of these plans include
attracting and retaining the best personnel, providing for additional
performance incentives, and promoting the success of the Company.
In 1996, the shareholders of the Company adopted the 1996 Stock Option Plan (the
"1996 Plan"), which provides for the issuance of up to 900,000 shares. Except
for the provisions governing the number of shares issuable under the 1996 Plan
and except for provisions which reflect changes in tax and securities laws, the
provisions of the 1996 Plan are substantially similar to the provisions of the
prior plan adopted in 1993. The 1996 Plan is administered and terms of option
grants are established by the Board of Directors' Compensation Committee. Under
the terms of the 1996 Plan, options alone or coupled with stock appreciation
rights may be granted to selected key employees, directors, consultants and
advisors of the Company. Options become exercisable ratably over a vesting
period as determined by the Compensation Committee and expire over terms not
exceeding ten years from the date of grant, one month after termination of
employment, or six months after the death or permanent disability of the
optionee. The purchase price for all shares granted under the 1996 Plan shall be
determined by the Compensation Committee, but in the case of incentive stock
options, the price will not be less than the fair market value of the common
stock at the date of grant. On April 26, 1996, the Company amended the
non-qualified stock option agreements issued through this date, to lower the per
share price of the outstanding options to $10.00.
As of December 31, 1999, the 1996 Stock Option Plan is the only plan with stock
option awards available for grant; all of the 625,000 shares eligible for
issuance under the 1993 Stock Option Plan have been granted. Of the 900,000
shares eligible for issuance under the 1996 Stock Option Plan, 554,449 have been
granted. In addition, 721,077 shares (with a weighted average exercise price of
$9.98 per share) of Pinnacle Entertainment common stock are issuable upon
exercise of options granted under pre-merger stock option plans of Boomtown. Of
such Boomtown stock options, 711,742 (with a weighted average exercise price of
$9.99) are currently vested. In addition, 256,136 shares (with a weighted
average exercise price of $24.57 per share) of Pinnacle Entertainment common
stock are issuable upon exercise of options granted under pre-merger stock
options plans of Casino Magic. Of such Casino Magic stock options, 169,590 (with
a weighted average exercise price of $23.65 per share) are currently vested.
On September 10, 1998, the Company granted 817,500 options (625,000 at an
exercise price of $10.1875, and 192,500 at an exercise price of $18.00) outside
of the 1993 and 1996 Plans to the new executive management team hired as of
January 1, 1999. As of December 31, 1999, none of these options were exercised.
81
The following table summarizes information related to shares under option and
shares available for grant under the Company's 1993 and 1996 Plans:
Weighted
Average
Number Exercise
of Shares Price
------------- -------------
Options outstanding at December 31, 1996 622,500 $10.00
Granted 261,000 $14.75
Exercised, expired or forfeited (26,001) $10.00
------------------------------------------------------------------------------------
Options outstanding at December 31, 1997 857,499 $11.50
Granted 219,188 $12.66
Exercised, expired or forfeited (249,866) $10.00
------------------------------------------------------------------------------------
Options outstanding at December 31, 1998 826,821 $12.02
Granted 278,500 $11.73
Exercised, expired or forfeited (253,478) $11.72
------------------------------------------------------------------------------------
Options outstanding at December 31, 1999 851,843 $12.01
====================================================================================
Options exercisable at:
December 31, 1999 474,426 $11.86
December 31, 1998 584,846 $10.00
December 31, 1997 696,813 $10.00
====================================================================================
The following table summarizes information about stock options under the 1993
and 1996 Plans outstanding as of December 31, 1999:
Outstanding Exercisable
----------------------------- ------------------------------
Weighted Weighted
Number of Average Number of Average
Range of Shares at Exercise Shares at Exercise
Exercise Price 12/31/99 Price 12/31/99 Price
- ---------------------------------------------------------------------------------------------------------------
$8.63 to $10.00 457,633 $ 9.80 271,633 $ 9.94
$10.19 to $14.81 363,210 $ 14.34 197,460 $ 14.34
$16.50 to $18.19 31,000 $ 17.33 5,333 $ 17.31
- ---------------------------------------------------------------------------------------------------------------
$8.63 to $18.19 851,843 $ 12.01 474,426 $ 11.86
===============================================================================================================
The weighted average remaining contractual life of the outstanding options under
the Company's 1993 and 1996 Plans as of December 31, 1999 is approximately 8.3
years.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company estimated the fair market value of stock options using an
option-pricing model taking into account, as of the date of grant, the exercise
price and expected life of the option, the then current price of the underlying
stock and its expected volatility, expected dividend on the stock, and the
risk-free interest rate for the expected term of the options.
In computing the stock-based compensation, the following assumptions were made:
Risk-Free
Interest Expected Expected
Rate Expected Life Volatility Dividends
------------ ---------------- ------------ --------------
Options granted in the following periods:
Third quarter 1997 5.0% 3 years 47.8% None
Third quarter 1998 4.5% 10 years 40.1% None
Fourth quarter 1998 4.5% 3 to 10 years 40.1% None
Fourth quarter 1999 4.6% 10 years 47.3% None
82
The following sets forth the pro forma financial results related to the
Company's employee stock-based compensation plans, with respect to the options
estimated fair value, based on the Company's stock price at the grant date:
For the years ended December 31,
----------------------------------------------------------
1999 1998 1997
----------------- ---------------- -----------------
(in thousands, except per share data)
Net income before stock-based compensation expense $44,047 $13,169 $8,670
Stock-based compensation expense 1,510 1,905 629
---------------- --------------- ----------------
Pro forma net income $42,537 $11,264 $8,041
================ =============== ================
Dividend requirements on convertible preferred stock $0 $0 $1,520
Pro forma net income attributed to common stockholders $42,537 $11,264 $6,521
================ =============== ================
Net income per common share:
Net income - basic $1.64 $0.43 $0.30
Net income - diluted $1.62 $0.43 $0.29
Number of shares - basic 25,966 26,115 22,010
Number of shares - diluted 26,329 26,115 22,340
NOTE 16 - COMMITMENTS AND CONTINGENCIES
BELTERRA RESORT AND CASINO The Company plans to spend approximately $200,000,000
($30,635,000 of which has been spent as of December 31, 1999) in total costs
(including land, capitalized interest, pre-opening expenses, organizational
expenses and community grants) on the Belterra Resort and Casino, which will
feature a 15-story, 308-room hotel, a cruising riverboat casino with
approximately 1,800 gaming positions, an 18-hole championship golf course, a
1,500 seat entertainment facility, four restaurants, retail areas and other
amenities. As of December 31, 1999, the Company has contractual commitments of
$113,301,000 for construction contracts executed as of such date.
EMPLOYMENT AND SEVERANCE AGREEMENTS The Company has employment agreements with
five employees (including three officers) which grant these employees the right
to receive their annual salary for up to the balance of the contract period,
plus extension of certain benefits and the immediate vesting of certain stock
options, if the employee terminates the contract for good reason (as defined and
which definition includes a change in control), or if the Company terminates the
employee without cause (as defined). At December 31, 1999, the maximum
contingent liability for salary and incentive compensation under these
agreements was approximately $3,850,000.
In addition, the Company has severance agreements with three employees which
grant the employees the right to receive up to two and one-half times their
annual salary and two and one-half times their incentive compensation, as well
as the extension of certain benefits, if there is a change in control (as
defined). At December 31, 1999, the maximum contingent liability for salary and
incentive compensation under these agreements was approximately $1,574,000.
Eleven employees have the right to receive severance payments if their
employment is terminated. At December 31, 1999, the maximum contingent liability
for these severance payments was approximately $195,000. There are also three
former employees entitled to future compensation under severance agreements. At
December 31, 1999, the contingent liability for such compensation was
approximately $251,000.
The Company also has (i) a consulting agreement until October 31, 2001, with a
former employee (now a director) for which the contingent liability at December
31, 1999 was $788,000, and (ii) a non-compete agreement with a director for
which the contingent liability at December 31, 1999 was $550,000.
LEGAL POULOS LAWSUIT A class action lawsuit was filed on April 26, 1994, in the
United States District Court, Middle District of Florida (the "Poulos Lawsuit"),
naming as defendants 41 manufacturers, distributors and casino operators of
video poker and electronic slot machines, including Casino Magic. The lawsuit
alleges that the defendants have engaged in a course of fraudulent and
misleading conduct intended to induce
83
people to play such games based on false beliefs concerning the operation of the
gaming machines and the extent to which there is an opportunity to win. The suit
alleges violations of the Racketeer Influenced and Corrupt Organization Act, as
well as claims of common law fraud, unjust enrichment and negligent
misrepresentation, and seeks damages in excess of $6 billion. On May 10, 1994, a
second class action lawsuit was filed in the United States District Court,
Middle District of Florida (the "Ahern Lawsuit"), naming as defendants the same
defendants who were named in the Poulos Lawsuit and adding as defendants the
owners of certain casino operations in Puerto Rico and the Bahamas, who were not
named as defendants in the Poulos Lawsuit. The claims in the Ahern Lawsuit are
identical to the claims in the Poulos Lawsuit. Because of the similarity of
parties and claims, the Poulos Lawsuit and Ahern Lawsuit were consolidated into
one case file in the United States District Court, Middle District of Florida.
On December 9, 1994 a motion by the defendants for change of venue was granted,
transferring the case to the United States District Court for the District of
Nevada, in Las Vegas. In an order dated April 17, 1996, the court granted
motions to dismiss filed by Casino Magic and other defendants and dismissed the
Complaint without prejudice. The plaintiffs then filed an amended Complaint on
May 31, 1996 seeking damages against Casino Magic and other defendants in excess
of $1 billion and punitive damages for violations of the Racketeer Influenced
and Corrupt Organizations Act and for state common law claims for fraud, unjust
enrichment and negligent misrepresentation. Casino Magic and other defendants
have moved to dismiss the amended Complaint. The Company believes that the
claims are without merit and does not expect that the lawsuit will have a
materially adverse effect on the financial condition or results of operations of
the Company.
CASINO AMERICA LITIGATION On or about September 6, 1996, Casino America, Inc.
commenced litigation in the Chancery Court of Harrison County, Mississippi,
Second Judicial District, against Casino Magic, and James Edward Ernst, its then
Chief Executive Officer, seeking injunctive relief and unspecified compensatory
damages in an amount to be proven at trial as well as punitive damages. The
plaintiff claims, among other things, that the defendants (i) breached the terms
of an agreement they had with the plaintiff, (ii) tortiously interfered with
certain of the plaintiff's business relations; and (iii) breached covenants of
good faith and fair dealing they allegedly owed to the plaintiff. On or about
October 8, 1996, the defendants interposed an answer, denying the allegations
contained in the Complaint. On June 26, 1998, defendants filed a motion for
summary judgment. Thereafter, plaintiffs, in July of 1998, filed a motion to
reopen discovery. Both of these motions are pending. On November 30, 1999, the
matter was transferred to the First Judicial District Court for Harrison County,
Mississippi. No trial date has been set. While the Company cannot predict the
outcome of this action, it believes plaintiff's claims are without merit and
intends to vigorously defend this action.
BUS LITIGATION On May 9, 1999, a bus owned and operated by Custom Bus Charters,
Inc. was involved in an accident in New Orleans, Louisiana while en route to
Casino Magic in Bay St. Louis, Mississippi. To date, multiple deaths and
numerous injuries are attributed to this accident and the Company's
subsidiaries, Casino Magic Corp. and / or Mardi Gras Casino Corp., together with
several other defendants, have been named in thirty-eight (38) lawsuits, each
seeking unspecified damages due to the deaths and injuries sustained in this
accident. While the Company cannot predict the outcome of the litigation, the
Company believes Casino Magic is not liable for any damages arising from this
accident and the Company and its insurers intend to vigorously defend these
actions.
SKRMETTA LAWSUIT A suit was filed on August 14, 1998 in the Circuit Court of
Harrison County, Mississippi by the ground lessor of property underlying
Boomtown Biloxi landbased improvements in Biloxi, Mississippi (the "Project").
The lawsuit alleges that the plaintiff agreed to exchange the first two years'
ground rentals for an equity position in the Project based upon defendants'
purported assurances that a hotel would be constructed as a component of the
Project. Plaintiff seeks recovery in excess of $4,000,000 plus punitive
damages. No substantive developments in the matter occurred prior to July 30,
1999 when the court denied the defendants' motions to arbitrate, and to stay,
the matter. Trial of the matter will commence on March 28, 2000. The Company
believes that the claims are without merit and intends to contest the matter
vigorously.
The Company is party to a number of other pending legal proceedings in the
ordinary course of business, though management does not expect that the outcome
of such proceedings, either individually or in the aggregate, will have a
material effect on the Company's financial condition or results of operations.
84
NOTE 17 - UNAUDITED QUARTERLY INFORMATION; SUPPLEMENTARY FINANCIAL INFORMATION
The following is a summary of unaudited quarterly financial data for the years
ended December 31, 1999 and 1998:
1999
--------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31,
------------- ------------ ------------- ------------
(in thousands, except per share data)
Revenues $150,675 $184,655 $199,529 $171,998
(Gain) loss on dispositions of assets, net $78 $(42,139) $0 $0
Pre opening costs $827 $684 $802 $707
Operating income $18,937 $70,246 $33,183 $21,838
Net income $3,971 $26,232 $9,711 $4,133
Net income per common share:
Net income - basic $0.15 $1.01 $0.38 $0.16
Net income - diluted $0.15 $0.98 $0.37 $0.16
1998
--------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31,
------------- ----------- ------------- ------------
(in thousands, except per share data)
Revenues $158,218 $87,467 $103,125 $78,157
(Gain) loss on dispositions of assets, net $635 $1,586 $0 $0
Pre opening costs $361 $367 $93 $0
Operating income $18,906 $6,337 $17,602 $1,658
Net income (loss) $4,302 $1,972 $8,129 ($1,234)
Net income (loss) per common share:
Net income (loss) - basic $0.17 $0.08 $0.31 ($0.05)
Net income (loss) - diluted $0.17 $0.08 $0.31 ($0.05)
(a) No dividends were paid in 1999 or 1998.
(b) Net income per share calculations for each quarter are based on the
weighted average number of shares outstanding during the respective
periods; accordingly, the sum of the quarters may not equal the full year
income per share.
(c) The Company acquired Casino Magic on October 15, 1998, and accounted
for the acquisition under the purchase method of accounting for a business
combination, and therefore, Casino Magic's results of operations are not
included prior to its acquisition date.
(d) Hollywood Park Race Track and Casino were sold on September 10, 1999,
and accordingly, results of operations after that date are excluded.
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Due to the short term maturity of financial instruments classified as current
assets and liabilities, the fair value approximates the carrying value. It is
not practical to estimate the fair value of long term receivables and long term
debt instruments, other than the 9.25% Notes, 9.5% Notes and the Casino Magic
13% Notes, because there are no quoted market prices for transactions of a
similar nature.
Based on quoted market values at December 31, 1999, the carrying values of the
9.25% Notes and the 9.5% Notes approximate fair value and the carrying value of
$119,800,000 for the Casino Magic 13% Notes is below the fair value by
approximately $3,500,000.
85
NOTE 19 - CONSOLIDATING CONDENSED FINANCIAL INFORMATION
The Company's subsidiaries (excluding Casino Magic of Louisiana, Corp., Casino
Magic Argentina and certain non-material subsidiaries) have fully and
unconditionally guaranteed the payment of all obligations under the 9.25% Notes
and the 9.5% Notes. Separate financial statements and other disclosures
regarding the subsidiary guarantors are not included herein because management
has determined that such information is not material to investors. In lieu
thereof, the Company includes the following:
Pinnacle Entertainment, Inc.
Consolidating Condensed Financial Information
As of and for the year ended December 31, 1999
(b)
(a) Wholly
Wholly Owned Consolidating Pinnacle
Pinnacle Owned Non- and Entertainment,
Entertainment, Guarantor Guarantor Eliminating Inc.
Inc. Subsidiaries Subsidiaries Entries Consolidated
----------- ------------ ------------ ------------- -------------
(in thousands)
AS OF AND FOR THE YEAR
ENDED DEC. 31, 1999
BALANCE SHEET
Current assets $ 220,216 $ 188,330 $ 28,928 $ 0 $ 437,474
Property, plant and equipment, net 36,671 311,165 89,879 0 437,715
Other non-current assets 28,369 40,788 44,599 56,463 170,219
Investment in subsidiaries 340,840 86,215 0 (427,055) 0
Inter-company 239,469 173,002 31,493 (443,964) 0
----------- ----------- ----------- ----------- -----------
$ 865,565 $ 799,500 $ 194,899 ($ 814,556) $ 1,045,408
=========== =========== =========== =========== ===========
Current liabilities $ 75,933 $ 52,159 $ 16,916 $ 0 $ 145,008
Notes payable, long term 502,421 3,393 112,884 0 618,698
Other non-current liabilities (7,165) 83 20,114 (12,206) 826
Inter-company 13,500 406,437 24,031 (443,968) 0
Equity 280,876 337,428 20,954 (358,382) 280,876
----------- ----------- ----------- ----------- -----------
$ 865,565 $ 799,500 $ 194,899 ($ 814,556) $ 1,045,408
=========== =========== =========== =========== ===========
STATEMENT OF OPERATIONS
Revenues:
Gaming $ 33,638 $ 368,993 $ 154,895 $ 0 $ 557,526
Racing 39,714 15,495 0 0 55,209
Food and beverage 8,073 27,823 3,921 0 39,817
Equity in subsidiaries 78,679 42,974 0 (121,653) 0
Other 6,661 44,324 3,320 0 54,305
----------- ----------- ----------- ----------- -----------
166,765 499,609 162,136 (121,653) 706,857
----------- ----------- ----------- ----------- -----------
Expenses:
Gaming 18,241 200,594 90,673 0 309,508
Racing 15,843 6,851 0 0 22,694
Food and beverage 11,060 31,237 4,261 0 46,558
Administrative and other 34,124 114,633 25,273 0 174,030
(Gain) loss on disposition of assets (42,828) 767 0 0 (42,061)
Depreciation and amortization 5,295 35,480 9,664 1,485 51,924
----------- ----------- ----------- ----------- -----------
41,735 389,562 129,871 1,485 562,653
----------- ----------- ----------- ----------- -----------
Operating income (loss) 125,030 110,047 32,265 (123,138) 144,204
Interest expense, net 41,030 (1,460) 17,974 0 57,544
----------- ----------- ----------- ----------- -----------
Income (loss) before minority interests and taxes 84,000 111,507 14,291 (123,138) 86,660
Minority interests 0 1,687 0 0 1,687
Income tax expense 38,469 10 2,447 0 40,926
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 45,531 $ 109,810 $ 11,844 ($ 123,138) $ 44,047
=========== =========== =========== =========== ===========
STATEMENT OF CASH FLOWS
Net cash provided by (used in) operating $ 592 $ 56,861 $ 19,632 ($ 1,762) $ 75,323
Net cash provided by (used in) investing 897 (49,100) (2,860) 0 (51,063)
Net cash provided by (used in) financing 66,941 (3,149) (8,924) 0 54,868
86
Pinnacle Entertainment, Inc.
Consolidating Condensed Financial Information
As of and for the year ended December 31, 1998
Hollywood
Park
Pinnacle Operating (b) (c)
Entertainment, Co. (a) Wholly Non Wholly
Inc. (Co-Obligor Wholly Owned Owned Consolidating Pinnacle
Guarantor 9.5% Notes/ Owned Non- Non- And Entertainment,
(Parent Guarantor Guarantor Guarantor Guarantor Eliminating Inc.
Obligor) 9.25% Notes) Subsidiaries Subsidiaries Subsidiaries Entries Consolidated
-------- ------------ ------------ ------------ ------------ -------------- --------------
(in thousands)
AS OF AND FOR THE YEAR
ENDED DEC. 31, 1998
BALANCE SHEET
Current assets $ 14,820 $ 2,574 $ 69,790 $ 17,726 $ 15,046 ($ 19,808) $ 100,148
Property, plant and
equipment, net 85,870 1,953 421,380 92,218 1,491 0 602,912
Other non-current assets 41,365 4,196 31,275 53,452 7,591 50,400 188,279
Investment in subsidiaries 279,442 17,839 174,141 0 0 (471,422) 0
Inter-company 252,556 144,569 303,855 0 5,012 (705,992) 0
----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 674,053 $ 171,131 $ 1,000,441 $ 163,396 $ 29,140 ($1,146,822) $ 891,339
=========== =========== =========== =========== =========== =========== ===========
Current liabilities $ 11,048 $ 12,547 $ 79,178 $ 29,266 $ 5,604 ($ 9,051) $ 128,592
Notes payable, long term 279,018 125,228 10,042 118,349 0 (5,018) 527,619
Other non-current
liabilities 5,889 0 9,747 2,727 7,532 (25,495) 400
Inter-company 147,122 23,323 564,207 0 21,549 (756,201) 0
Minority interest 0 0 4,366 0 0 (614) 3,752
Equity 230,976 10,033 332,901 13,054 (5,545) (350,443) 230,976
----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 674,053 $ 171,131 $ 1,000,441 $ 163,396 $ 29,140 ($1,146,822) $ 891,339
=========== =========== =========== =========== =========== =========== ===========
STATEMENT OF OPERATIONS
Revenues:
Gaming $ 46,255 $ 0 $ 221,029 $ 21,985 $ 3,788 $ 0 $ 293,057
Racing 0 39,618 27,253 0 0 0 66,871
Food and beverage 4,881 0 25,008 381 240 0 30,510
Equity in subsidiaries 20,812 0 3,390 0 0 (24,202) 0
Inter-company 0 0 22,856 0 0 (22,856) 0
Other 3,797 1,983 30,487 214 48 0 36,529
----------- ----------- ----------- ----------- ----------- ----------- -----------
75,745 41,601 330,023 22,580 4,076 (47,058) 426,967
----------- ----------- ----------- ----------- ----------- ----------- -----------
Expenses:
Gaming 27,167 0 118,813 14,602 967 0 161,549
Racing 0 17,198 12,118 0 0 0 29,316
Food and beverage 9,613 0 28,490 566 191 0 38,860
Administrative and other 19,035 14,254 80,451 3,394 1,263 0 118,397
Loss on write off of
assets 1,586 0 635 0 0 0 2,221
Depreciation and
amortization 4,346 3,985 21,451 1,429 306 604 32,121
----------- ----------- ----------- ----------- ----------- ----------- -----------
61,747 35,437 261,958 19,991 2,727 604 382,464
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss) 13,998 6,164 68,065 2,589 1,349 (47,662) 44,503
Interest expense 6,871 12,565 (226) 3,308 0 0 22,518
Inter-company interest 0 0 22,856 0 0 (22,856) 0
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
minority interests and
taxes 7,127 (6,401) 45,435 (719) 1,349 (24,806) 21,985
Minority interests 0 0 0 0 0 374 374
Income tax expense
(benefit) (6,213) 0 14,164 0 491 0 8,442
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ 13,340 ($ 6,401) $ 31,271 ($ 719) $ 858 ($ 25,180) $ 13,169
=========== =========== =========== =========== =========== =========== ===========
STATEMENT OF CASH FLOWS
Net cash provided by
(used in) operating
activities ($ 153,372) $ 1,965 $ 203,874 $ 7,042 $ 1,055 ($ 22,452) $ 38,112
Net cash provided by
(used in) investing
activities (89,208) (2,132) (57,942) (5,844) (72) 18,666 (136,532)
Net cash provided by
(used in) financing
activities 261,682 (27) (140,773) 0 0 (2,384) 118,498
87
Pinnacle Entertainment, Inc.
Consolidating Condensed Financial Information
As of and for the year ended December 31, 1997
Hollywood
Park
Pinnacle Operating (b) (c)
Entertainment, Co. (a) Wholly Non Wholly
Inc. (Co-Obligor Wholly Owned Owned Consolidating Pinnacle
Guarantor 9.5% Notes/ Owned Non- Non- and Entertainment,
(Parent Guarantor Guarantor Guarantor Guarantor Eliminating Inc.
Obligor) 9.25% Notes) Subsidiaries Subsidiaries Subsidiaries Entries Consolidated
-------- ------------ ------------- ------------ ------------ ------- ------------
(in thousands)
AS OF AND FOR THE YEAR
ENDED DEC. 31, 1997
BALANCE SHEET
Current assets $19,844 $8,568 $25,074 $6,720 $0 $0 $60,206
Property, plant and
equipment, net 68,515 23,753 140,105 68,293 0 0 300,666
Other non-current assets 22,306 0 29,320 7,611 0 (1,080) 58,157
Investment in subsidiaries 126,121 15,132 116,020 0 0 (257,273) 0
Inter-company 125,210 148,380 122,035 0 0 (395,625) 0
-------- -------- -------- ------- - ---------- --------
$361,996 $195,833 $432,554 $82,624 $0 ($653,978) $419,029
======== ======== ======== ======= == ========== ========
Current liabilities $16,890 $14,232 $19,583 $6,612 $0 $0 $57,317
Notes payable, long term 2,406 125,256 1,936 2,504 0 0 132,102
Other non-current liabilities 4,753 5,202 83 0 0 (3,728) 6,310
Inter-company 146,145 21,589 178,448 49,443 0 (395,625) 0
Minority interest 0 0 0 0 0 1,946 1,946
Equity 191,802 29,554 232,504 24,065 0 (256,571) 221,354
-------- -------- -------- ------- - ---------- --------
$361,996 $195,833 $432,554 $82,624 $0 ($653,978) $419,029
======== ======== ======== ======= == ========== ========
STATEMENT OF OPERATIONS
Revenues:
Gaming $50,820 $0 $58,622 $28,217 $0 $0 $137,659
Racing 0 39,930 28,914 0 0 0 68,844
Food and beverage 4,659 0 13,483 1,752 0 0 19,894
Equity in subsidiaries 13,963 3,735 (43) 0 0 (17,655) 0
Inter-company 0 0 4,823 0 0 (4,823) 0
Other 4,601 1,808 13,789 1,533 0 0 21,731
-------- -------- -------- ------- - ---------- --------
74,043 45,473 119,588 31,502 0 (22,478) 248,128
-------- -------- -------- ------- - ---------- --------
Expenses:
Gaming 28,353 0 32,370 14,010 0 0 74,733
Racing 0 17,822 12,482 0 0 0 30,304
Food and beverage 9,658 0 13,784 2,303 0 0 25,745
Administrative and other 18,282 14,536 33,277 8,792 0 0 74,887
REIT restructuring 2,483 0 0 0 0 0 2,483
Depreciation and
amortization 4,632 3,804 6,229 3,459 0 33 18,157
-------- -------- -------- ------- - ---------- --------
63,408 36,162 98,142 28,564 0 33 226,309
-------- -------- -------- ------- - ---------- --------
Operating income (loss) 10,635 9,311 21,446 2,938 0 (22,511) 21,819
Interest expense 1,789 5,368 (37) 182 0 0 7,302
Inter-company interest 0 0 2,244 2,579 0 (4,823) 0
-------- -------- -------- ------- - ---------- --------
Income (loss) before
minority interests and
taxes 8,846 3,943 19,239 177 0 (17,688) 14,517
Minority interests 0 0 0 0 0 (3) (3)
Income tax expense 4,124 0 1,726 0 0 0 5,850
-------- -------- -------- ------- - ---------- --------
Net income (loss) $4,722 $3,943 $17,513 $177 $0 ($17,685) $8,670
======== ======== ======== ======= == ========== ========
STATEMENT OF CASH FLOWS
Net cash provided by
(used in) operating
activities $19,559 ($122,039) $129,260 $5,250 $0 ($17,665) $14,365
Net cash provided by
(used in) investing
activities 14,747 (3,139) (23,516) (4,328) 0 10 (16,226)
Net cash provided by
(used in) financing
activities 475 124,975 (114,345) (2,373) 0 877 9,609
88
- -----
(a) All of the subsidiaries mentioned in this footnote (a) became wholly owned
subsidiaries of the Company at different points in time, in some cases,
during the periods presented. All of such subsidiaries were guarantors on
both the 9.5% Notes and the 9.25% Notes. The following subsidiaries were
treated as guarantors for all periods presented: Turf Paradise, Inc.,
Hollywood Park Food Services, Inc. (through September 10, 1999), Hollywood
Park Fall Operating Company (through September 10, 1999) and, with respect
to the 9.25% Notes, Hollywood Park Operating Company (through September 10,
1999) (it was a co-obligor on the 9.5% Notes through September 10, 1999).
The following subsidiaries were treated as guarantors for periods beginning
on June 30, 1997, when the Boomtown Merger was consummated: Boomtown, Inc.,
Boomtown Hotel & Casino, Inc., Bay View Yacht Club, Inc., Louisiana - I
Gaming, Louisiana Gaming Enterprises, Inc., and Boomtown Hoosier, Inc. The
following subsidiaries were treated as guarantors for periods beginning on
October 15, 1998, when the Casino Magic Merger was consummated: Casino
Magic Corp., Mardi Gras Casino Corp., Biloxi Casino Corp., Bay St. Louis
Casino Corp., Casino Magic Finance Corp., Casino Magic American Corp., and
Casino One Corporation. HP Casino, Inc., HP Yakama, Inc., and HP
Consulting, Inc., were treated as guarantors beginning in 1997 when these
subsidiaries began operations. HP/Compton, Inc. was treated as a guarantor
beginning in October 1996 when this subsidiary began operations. Crystal
Park Hotel and Casino Development Company, LLC and Mississippi - I Gaming
L.P. were treated as wholly owned guarantors for periods beginning in
January 1998 and October 1998, respectively, when the Company acquired the
outstanding minority interests therein and they became wholly owned
subsidiaries.
(b) The following wholly owned subsidiaries were not guarantors on either the
9.5% Notes or the 9.25% Notes and became subsidiaries of the Company on
October 15, 1998, when the Casino Magic Merger was consummated: Jefferson
Casino Corporation, Casino Magic of Louisiana, Corp., and Casino Magic
Management Services, Corp. In October 1999, Casino Magic Neuquen S.A. and
its subsidiary Casino Magic Support Services, became wholly owned
subsidiaries of the Company but remain non-guarantors of the 9.5% Notes and
9.25% Notes.
(c) The following non-wholly owned subsidiaries were not guarantors on either
the 9.5% notes or the 9.25% Notes and became subsidiaries of the Company on
October 15, 1998, when the Casino Magic Merger was consummated: Casino
Magic Neuquen S.A. and its subsidiary, Casino Magic Support Services S.A.
NOTE 20 - SUBSEQUENT EVENTS
On March 8, 2000, the Company announced it had received a proposal pursuant to
which Harveys Casino Resorts ("Harveys") would acquire all of the outstanding
shares of common stock of Pinnacle Entertainment for cash at $25 per fully
diluted share (the "Acquisition Proposal"). The Acquisition Proposal is subject
to, among other things, the execution of a definitive agreement containing the
customary terms and conditions, including regulatory approval, the agreement of
Pinnacle Entertainment's senior management to retain an equity interest in the
combined company and the approval of a majority of Pinnacle Entertainment's
shareholders. The Company's Board of Directors, excluding management members,
agreed to evaluate the Acquisition Proposal and to negotiate on an exclusive
basis through the end of March 2000. Harveys Casino Resorts is majority owned by
Colony Capital, Inc., a private investment firm.
On March 14, 2000, Harbor Finance Partners filed a class action lawsuit in the
Chancery Court of the State of Delaware against the Company, and each of its
directors, claiming that the defendants have breached their fiduciary duty to
the stockholders of the Company by agreeing to negotiate exclusively with
Harveys Resorts Casinos, a majority owned company of Colony Capital, Inc. (see
Acquisition Proposal discussion above). On March 21, 2000, a similar class
action lawsuit was filed by Leta Hilliard in the Superior Court of the State of
California. The lawsuits claim that the Company and its directors have failed to
undertake an appropriate evaluation of the Company's worth and engage in an
auction of the Company with third parties, and that the price for the stock is
inadequate. The Company intends to vigorously defend these actions and believes
no basis exists for the plaintiffs' claims.
On March 17, 2000, the Company completed the sale of approximately 42 acres of
the 139 acres retained in the Churchill Downs transaction for $24,200,000 in
cash (see Note 4). The Company anticipates an after tax gain of approximately
$13,800,000 from this sale.
89
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR BAD DEBTS: (IN THOUSANDS)
--------------
Balance as of December 31, 1996 ($1,089)
Add Boomtown balance as of June 30, 1997 (a) (225)
Charges to expense (189)
Write offs 754
----------
Balance as of December 31, 1997 (749)
Add Casino Magic balance as of October 15, 1998 (b) (1,442)
Charges to expense (1,280)
Write offs 1,070
---------
Balance as of December 31, 1998 (2,401)
Charges to expense (2,456)
Write offs 2,993
---------
Balance as of December 31, 1999 ($1,864)
=========
-----
(a) The Company acquired Boomtown as of June 30, 1997.
(b) The Company acquired Casino Magic as of October 15, 1998.
90
Pinnacle Entertainment, Inc.
Selected Financial Data by Property
For the three months ended, For the year
-------------------------------------------------------- ended
December 31, September 30, June 30, March 31, December 31,
1999 1999 1999 1999 1999
------------ ------------ ------------ ----------- ------------
(unaudited) (audited)
--------------------------------------------------------
(in thousands, except per share total)
Revenues:
Boomtown Reno $19,390 $25,558 $21,356 $14,142 $80,446
Boomtown New Orleans 24,588 28,548 27,167 25,721 106,024
Boomtown Biloxi 16,426 16,722 16,894 17,799 67,841
Casino Magic Bay St. Louis 20,415 22,798 22,719 22,963 88,895
Casino Magic Biloxi 21,293 24,280 23,067 24,631 93,271
Casino Magic Bossier City 35,085 36,064 35,139 33,852 140,140
Casino Magic Argentina 5,055 5,963 5,651 5,327 21,996
Hollywood Park Race Track 0 11,412 28,747 5,465 45,624
Turf Paradise, Inc. 5,945 1,414 3,499 6,786 17,644
Hollywood Park, Inc. - Casino Division 1,500 11,596 14,990 14,025 42,111
Crystal Park and HP Yokoma, Inc. 859 300 300 589 2,048
Hollywood Park, Inc. - Corporate 119 0 0 698 817
--------- --------- --------- --------- ---------
150,675 184,655 199,529 171,998 706,857
--------- --------- --------- --------- ---------
Expenses:
Boomtown Reno 16,417 18,781 16,818 13,198 65,214
Boomtown New Orleans 17,549 19,301 18,471 17,269 72,590
Boomtown Biloxi 13,241 13,533 13,685 14,086 54,545
Casino Magic Bay St. Louis 16,080 17,120 16,954 16,753 66,907
Casino Magic Biloxi 17,738 17,894 18,020 17,587 71,239
Casino Magic Bossier City 27,202 27,760 26,609 25,477 107,048
Casino Magic Argentina 3,261 3,409 3,334 3,155 13,159
Hollywood Park Race Track 0 9,118 16,043 7,184 32,345
Turf Paradise, Inc. 4,005 1,812 2,618 4,205 12,640
Hollywood Park, Inc. - Casino Division 0 10,086 12,273 11,839 34,198
Crystal Park and HP Yokoma, Inc. 148 (87) 669 26 756
Hollywood Park, Inc. - Corporate 3,617 3,990 6,215 5,307 19,129
--------- --------- --------- --------- ---------
119,258 142,717 151,709 136,086 549,770
--------- --------- --------- --------- ---------
Non-recurring income (expenses):
Gain (loss) on disposition of assets, net (78) 42,139 0 0 42,061
Pre-opening costs, Bellerra Resort and Casino (827) (684) (802) (707) (3,020)
Depreciation and amortization:
Boomtown Reno 1,343 1,840 1,858 1,659 6,700
Boomtown New Orleans 1,350 1,465 1,434 1,425 5,674
Boomtown Biloxi 860 973 1,020 993 3,846
Casino Magic Bay St. Louis 1,557 1,483 1,471 1,438 5,949
Casino Magic Biloxi 1,820 1,766 1,747 1,739 7,072
Casino Magic Bossier City 2,071 2,049 2,065 1,889 8,074
Casino Magic Argentina 415 408 395 372 1,590
Hollywood Park Race Track 0 739 1,086 1,090 2,915
Turf Paradise, Inc. 290 292 302 295 1,179
Hollywood Park, Inc. - Casino Division 630 559 671 665 2,525
Crystal Park and HP Yokoma, Inc. 404 484 485 485 1,858
Hollywood Park, Inc. - Corporate 835 1,089 1,301 1,317 4,542
--------- --------- --------- --------- ---------
11,575 13,147 13,835 13,367 51,924
--------- --------- --------- --------- ---------
Operating income (loss):
Boomtown Reno 1,630 4,937 2,680 (715) 8,532
Boomtown New Orleans 5,689 7,782 7,262 7,027 27,760
Boomtown Biloxi 2,325 2,216 2,189 2,720 9,450
Casino Magic Bay St. Louis 2,778 4,195 4,294 4,772 16,039
Casino Magic Biloxi 1,735 4,620 3,300 5,305 14,960
Casino Magic Bossier City 5,812 6,255 6,465 6,486 25,018
Casino Magic Argentina 1,379 2,146 1,922 1,800 7,247
Hollywood Park Race Track 0 1,555 11,618 (2,809) 10,364
Turf Paradise, Inc. 1,650 (690) 579 2,286 3,825
Hollywood Park, Inc. - Casino Division 870 951 2,046 1,521 5,388
Crystal Park and HP Yokoma, Inc. 307 (97) (854) 78 (566)
Hollywood Park, Inc. - Corporate (4,333) (5,079) (7,516) (5,926) (22,854)
Gain (loss) on disposition of assets, net (78) 42,139 0 0 42,061
Pre-opening costs, Bellerra Resort and Casino (827) (684) (802) (707) (3,020)
--------- --------- --------- --------- ---------
18,937 70,246 33,183 21,838 144,204
--------- --------- --------- --------- ---------
Interest expense, net 12,732 14,759 15,562 14,491 57,544
--------- --------- --------- --------- ---------
Income before minority interests and income taxes 6,205 55,487 17,621 7,347 86,660
Minority interests 0 550 679 458 1,687
Income tax expense 2,234 28,705 7,231 2,756 40,926
--------- --------- --------- --------- ---------
Net income $3,971 $26,232 $9,711 $4,133 $44,047
========= ========= ========= ========= =========
Per common share:
Net income - basic $0.15 $1.01 $0.33 $0.10 $1.70
Net income - diluted $0.15 $0.98 $0.37 $0.16 $1.67
Number of shares - basic 26,145 26,045 25,871 25,800 25,966
Number of shares - diluted 26,999 26,860 26,129 25,800 26,329
91