EXHIBIT 99.1
CASINO MAGIC OF LOUISIANA CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations:
Year Ended December 31, 1999 compared to Year Ended December 31, 1998:
- ----------------------------------------------------------------------
Gaming revenues increased by $26.6 million or 24.7% to $134.4 million for the
year ended December 31, 1999 compared to $107.8 million for the year ended
December 31, 1998. During this period table game revenue grew by $4.4 million
and slot revenue grew by $22.2 million in 1999. The increase is primarily a
result of additional patronage due to Casino Magic's opening of a 188-room
luxury hotel, improvement in the food and beverage facilities in December 1998,
upgrading of product mix in slot machines, and targeted marketing programs. The
Bossier City/Shreveport, Louisiana gaming market (as measured by taxable gaming
receipts) grew $42.5 million over last year or 7.1%. Casino Magic of Louisiana
Corp.'s dockside riverboat casino ("Casino Magic-Bossier City") taxable gaming
receipts increased 23.1% over the same comparative period, increasing its market
share by approximately 2.7%. Non-gaming revenues (food and beverage and hotel
operations net of complimentaries) increased $2.6 million over the comparable
periods principally as a result of the new facilities.
Total costs and expenses during 1999 were $115 million compared to $94.1 million
in 1998, a cost increase of $20.9 million or 22.2%. Casino costs increased $14.8
million or 27.3% over the comparative period. This increase was generally due to
increased taxes on marginal gaming revenues (23.9% tax rate) and increases in
the cost of slot club points with respect to triple points awarded on Tuesdays
in some months, and other promotional expenses. Other operating costs and
expenses decreased by $53 thousand or 7.9% over the prior year. Advertising and
marketing expenses increased by $1,920 million or 13.6% over 1998. Marketing
costs for 1999 were only 11.4% of net revenues compared to 12.7% in the same
period of 1998. Marketing strategy in 1998, although effective, required more
promotional costs to drive business and to compensate for lack of competitive
facilities and disruption from construction. General and administrative expenses
increased $779 thousand or 9.8% over the comparative period due primarily to an
increase in security costs. Property operation expenses increased $1 million or
12.8% as a result of increased maintenance and utility costs associated with the
new facilities. Depreciation increased $1.6 million or 23.9% as a result of the
increased cost of the new facilities.
Casino Magic-Bossier City earned an operating profit of $25.1 million for 1999
versus $16.8 million in 1998, an improvement of $8.3 million or 49.4%. There
was no income tax provision or benefit for 1999 or 1998. The Company is
included in a consolidated group subject to a tax-sharing agreement between
itself and affiliated companies. The difference between the 0% effective rate
and the statutory rate of 35% is due to a net operating loss carry forward in
excess of current taxable income. Casino Magic-Bossier City registered net
income of $3.5 million in 1999 compared with a net loss of $6.6 million during
1998.
Year Ended December 31, 1998 compared to Year Ended December 31, 1997:
- ----------------------------------------------------------------------
Gaming revenues increased by $18.3 million or 20.4% for the year ended December
31, 1998, as compared to the year ended December 31, 1997. The increase in
revenue was a result of the maturity in the Shreveport/Bossier City market, the
upgrading of product mix in slot machines,
1
and more effective marketing programs. Food and beverage revenues decreased by
$0.6 million or 21.1 % over the comparative year primarily due to the change in
marketing strategy for 1998 that greatly reduced complimentary food and beverage
promotions.
Total operating expenses increased $6.6 million or 8% during the year ended
December 31, 1998, as compared to the year ended December 31, 1997. Casino
expenses increased $6.7 million or 14% as a corresponding result of the
increased gaming revenues. Casino expenses as a percentage of total revenues
decreased from 51.0% in 1997 to 48.9% in 1998, principally as a result of
operating efficiencies at higher revenue levels. In addition, advertising and
marketing costs as a percentage of total revenues dropped from 16.1% to 12.7%.
This reduction reflects more focused and effective marketing programs,
particularly direct mail marketing. Other administrative and operating expenses
slightly increased by $49 thousand over the comparative year as a result of
increased revenues.
Other expenses increased $7.0 million or 43.0% during the year ended December
31, 1998, as compared to the year ended December 31, 1997. These expenses
include an increase in interest expense of $0.8 million over the comparative
year relating primarily to the First Mortgage Notes. Also included in other
income and expenses is an increase of $3.6 million in expenses related to the
merger between Casino Magic-Bossier City and Hollywood Park, Inc., and a $3.4
million increase in loss on sale of assets. In 1998, the Company recorded a
$1.9 million loss on sale of assets due to impairment in value; whereas in the
comparative year, the Company recorded a $1.4 million gain on sale of assets due
to the sale of the Crescent City Riverboat.
Liquidity and Capital Resources:
- --------------------------------
At December 31, 1999, the Company had unrestricted cash and cash equivalents of
$20.2 million compared to unrestricted cash and cash equivalents of $8.7 million
at December 31, 1998. For the year ended December 31, 1999, the Company
generated $13.1 million of cash flow from operating activities and spent $4.3
million for acquisitions of property and equipment. Casino Magic-Bossier City
received proceeds from the issuance of long-term debt of $2.5 million, reduced
principal payments on third party debt by $4.9 million during 1999, and
increased debt to affiliated companies by $3.3 million for a net decrease in
long-term debt of $2.8 million.
The Company completed construction of a 188-room hotel and related amenities,
including restaurants and beverage service in December 1998. The construction
of the hotel and amenities of approximately $21 million was funded primarily by
$11.7 million in proceeds received from the sale of the Crescent City Queen
riverboat, cash flow of Casino Magic-Bossier City, and loans from affiliated
companies. The addition of the new hotel and facilities has substantially
increased income from operations. The Company still has significant need for
cash, including debt service. However, management believes that cash at December
31, 1999 and cash flows from operations will be sufficient to service its
operating needs and debt service through at least the next twelve months,
although no assurances can be given.
In August 1996, the Company issued $115 million in aggregate principal amount of
13% Louisiana First Mortgage Notes (of which, $2.1 million was tendered in
December 1998 in connection with a change of control purchase offer made by
Hollywood Park, Inc., the new parent of Casino Magic-Bossier City - see note 1
of Notes to Financial Statements) with contingent interest at 5% of the
Company's adjusted consolidated cash flow (as defined under the indenture
governing the notes). Although no contingent interest had previously been paid
to note holders (as the adjusted fixed charge coverage ratio as defined had not
previously been met), contingent interest of $1.3 million (as calculated for the
twelve month period ended June 30, 1999) was paid
2
in connection with the scheduled interest payment on August 16, 1999. As of
December 31, 1999, contingent interest of $2.1 million was accrued, which
represented all of the accrued contingent interest since the notes were issued
in 1996 less the amount paid on August 16, 1999. On February 14, 2000, the $2.1
million of accrued contingent interest as of December 31, 1999, was paid in
connection with the scheduled interest payment of $7.3 million on that date.
(See Note 2 to the Notes to Financial Statements.)
The First Mortgage Notes are governed by the Louisiana Indenture. The Louisiana
Indenture pursuant to which the First Mortgage Notes have been issued contains
certain covenants that limit the Company to, among other things, incur
additional indebtedness and issue preferred stock, pay dividends, make
investments or make other restricted payments, incur liens, enter into mergers
or consolidations, enter into transactions with affiliates or sell assets.
3
Index to Financial Statements
-----------------------------
Contents Pages
-----
Report of Independent Public Accountants F-2
Statements of Operations for the years ended December 31, 1999, 1998 and 1997 F-3
Balance Sheets as of December 31, 1999 and December 31, 1998 F-4
Statement of Changes in Shareholder's Equity for the years ended
December 31, 1999, 1998 and 1997 F-5
Statement of Cash Flows for the years ended December 31, 1999, 1998 and 1997 F-6
Notes to Financial Statements F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Casino Magic of Louisiana Corp.:
We have audited the accompanying balance sheet of Casino Magic of Louisiana
Corp. (a Louisiana Corporation and wholly owned subsidiary of Pinnacle
Entertainment, Inc.) as of December 31, 1999 and 1998, and the related
statements of operations, changes in 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 auditing standards generally accepted
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 Casino Magic of Louisiana Corp.
as of December 31, 1999 and 1998, and the results of its operations and 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
New Orleans, Louisiana
February 8, 2000 (except with respect to the
Matters discussed in Note 7, as to which the
Date is March 8, 2000)
F-2
CASINO MAGIC OF LOUISIANA CORP.
STATEMENTS OF OPERATIONS
(in thousands)
Years Ended December 31,
-----------------------------------------------
1999 1998 1997
----- ----- ----
Revenues:
Casino $134,406 $107,796 $ 89,540
Food and beverage 2,561 2,272 2,880
Hotel operations 2,202 26 -
Other operating income 971 817 785
-------- ------- --------
Total revenues 140,140 110,911 93,205
-------- ------- --------
Costs and expenses:
Casino 69,095 54,263 47,556
Food and beverage 2,968 3,104 3,608
Hotel 1,120 40 -
Other operating costs and expenses 614 667 618
Advertising and marketing 15,989 14,069 14,999
General and administrative 8,744 7,965 7,235
Property operation and maintenance cost 5,582 4,550 4,976
Rents, property taxes and insurance 2,861 2,935 2,576
Depreciation and amortization 8,073 6,515 5,900
-------- -------- --------
Total costs and expenses 115,046 94,108 87,468
-------- -------- --------
Income from operations 25,094 16,803 5,737
-------- -------- --------
Other (income) expenses:
Interest expense 17,538 17,829 17,036
Capitalized interest - (847) (107)
Interest income (350) (447) (464)
Loss (gain) on disposal of assets 78 1,930 (1,440)
Other expense 4,315 4,960 1,354
-------- ------- --------
Total other expenses 21,581 23,425 16,379
-------- ------- --------
Income before income taxes 3,513 (6,622) (10,642)
Income tax expense - - -
-------- -------- --------
Net income (loss) $ 3,513 $ (6,622) $(10,642)
======== ======== ========
See notes to financial statements.
F-3
CASINO MAGIC OF LOUISIANA CORP.
BALANCE SHEETS
(in thousands, except share data)
ASSETS
December 31, December 31,
1999 1998
---------------- ------------------
Current Assets:
Cash and cash equivalents $ 20,249 $ 8,731
Other current assets 1,767 1,260
------------ --------------
Total current assets 22,016 9,991
Property and Equipment, net 88,425 92,218
Other Long-Term Assets:
Deferred gaming license 34,843 36,446
Debt issuance costs, net 2,984 3,890
Deposits and other assets 130 132
------------ --------------
Total other long-term assets 37,957 40,468
------------ --------------
$148,398 $142,677
============ ==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Current maturities of long-term debt $ 348 $ 5,214
Accounts payable 5,348 4,925
Accrued expenses 3,211 1,800
Accrued interest (including $862 and $25 at
December 31, 1999 and 1998 respectively due affiliates) 8,169 7,679
Accrued payroll and related benefits 2,667 2,426
Accrued progressive gaming liabilities 251 1,670
Other current liabilities 3 1,699
------------ --------------
Total current liabilities 19,997 25,413
Other long-term liabilities due affiliates 7,198 3,853
Long-term debt, net of current maturities 122,627 118,348
Shareholder's Equity (Accumulated Deficit):
Common stock, no par value, 10,000 shares authorized
1,000 shares issued and outstanding at December 31, 1999
and December 31, 1998 1 1
Additional paid-in capital 22,353 22,353
Accumulated deficit (23,778) (27,291)
------------ --------------
Total shareholder's equity (accumulated deficit) (1,424) (4,937)
------------ --------------
$148,398 $142,677
============ ==============
See notes to financial statements.
F-4
CASINO MAGIC OF LOUISIANA CORP.
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
For the years ended December 31, 1999, 1998 and 1997
(in thousands)
Additional Total
Common Paid-In Accumulated Shareholder's
Stock Capital Deficit Equity
------------ ------------ ------------- ---------------
Balance as of December 31, 1996 $ 1 $ 22,353 $ (10,027) $ 12,327
Net loss - - (10,642) (10,642)
------------ ------------ ------------- ---------------
Balance as of December 31, 1997 1 22,353 (20,669) 1,685
Net loss - - (6,622) (6,622)
------------ ------------ -------------
Balance as of December 31, 1998 1 22,353 (27,291) (4,937)
Net income - - 3,513 3,513
------------ ------------ ------------- ---------------
Balance as of December 31, 1999 $ 1 $ 22,353 $ (23,778) $ (1,424)
============ ============ ============= ===============
See notes to financial statements.
F-5
CASINO MAGIC OF LOUISIANA CORP.
STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Cash Flows From Operating Activities:
Net income (loss) $ 3,513 $ (6,622) $(10,642)
Depreciation and amortization 8,073 6,515 5,900
(Gain) loss on disposal of assets 78 1,930 (1,440)
Amortization of debt issuance costs 904 819 931
(Increase) decrease in prepaid expenses (97) 227 (161)
Increase in notes and accounts receivable, net (159) (206) (113)
(Increase) decrease in other current assets 1,356 (460) 315
(Increase) decrease in marketable securities - 10,628 (10,629)
Increase (decrease) in accounts payable and
other accrued liabilities (1,273) 916 (102)
Increase in accrued expenses 1,411 38 5,134
Increase in accrued interest 490 285 901
Increase (decrease) in accrued payroll and related benefits 241 (516) 1,222
Increase (decrease) in accrued progressive gaming liabilities (1,419) 1,281 275
---------------------------------------
Net Cash Provided by Operating Activities 13,118 14,835 (8,409)
---------------------------------------
Cash Flows From Investing Activities:
Proceeds from sale of property and equipment 7 - 11,707
Acquisition of property and equipment (4,365) (18,562) (7,227)
(Increase) decrease in deposits and other long-term assets - (40) (98)
--------------------------------------
Net Cash Used in (Provided by) Investing Activities (4,358) (18,602) 4,382
--------------------------------------
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt 2,500 7,226 3,850
Principal payments on notes payable and long-term debt (3,087) (5,404) (9,461)
Increase (decrease) in other long-term liabilities 3,345 - (545)
--------------------------------------
Net Cash Provided by (Used in) Financing Activities 2,758 1,822 (6,156)
--------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 11,518 (1,945) (10,183)
Cash and Cash Equivalents, Beginning of Period 8,731 10,676 20,859
--------------------------------------
Cash and Cash Equivalents, End of Period $ 20,249 $ 8,731 $ 10,676
======================================
Cash Paid During the Period for:
Interest (net of amount capitalized) $ 15,972 $ 15,029 $ 15,111
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Property and equipment and other asset acquisitions included
in accounts and construction payable and accrued expenses $ 245 $ 2,508 $ (832)
Property and equipment and property held for sale financed
with long-term debt $ - $ 345 $ 946
See notes to financial statements.
F-6
CASINO MAGIC OF LOUISIANA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Organization and basis of presentation:
On May 13, 1996 ("Inception"), Jefferson Casino Corporation ("Jefferson Corp."
or the "Company"), a Louisiana corporation and a wholly-owned subsidiary of
Casino Magic Corp. ("Casino Magic"), commenced development stage activities by
acquiring all of the outstanding capital stock of Crescent City Capital
Development Corporation, a Louisiana corporation. Immediately following the
acquisition of Crescent City Capital Development Corporation ("Crescent City"),
the name was changed to Casino Magic of Louisiana Corp. ("Louisiana Corp.").
Louisiana Corp. has developed a dockside riverboat casino and entertainment
complex in Bossier City, Louisiana ("Casino Magic-Bossier City"). Casino Magic-
Bossier City opened on October 4, 1996. Effective October 15, 1998, Casino Magic
Corp. became a wholly owned subsidiary of Pinnacle Entertainment, Inc. (formerly
Hollywood Park, Inc.).
Merger:
On February 19, 1998, Casino Magic entered into an Agreement and Plan of merger
(the "Merger Agreement") with Pinnacle Entertainment, Inc. (formerly Hollywood
Park, Inc.) and Acquisition II, Inc. ("HP") a wholly-owned subsidiary of
Pinnacle Entertainment, Inc. Under the Merger Agreement, on October 15, 1998,
Casino Magic merged with HP and Casino Magic became the surviving entity and
became a wholly owned subsidiary of Pinnacle Entertainment, Inc. The Form 10-K
for Pinnacle Entertainment, Inc. as of December 31, 1999 is an integral part of
these separate financial statements of Casino Magic of Louisiana Corp.
Casino revenues and complimentaries:
In accordance with common industry practice, casino revenues are the net of
gaming wins less losses. Revenues exclude the retail value of complimentary
rooms, food, and beverage furnished gratuitously to customers. The estimated
departmental costs of providing rooms, food, and beverage services included in
casino expenses were $10.2 million, $8.2 million and $7.5 million for the years
ended December 31, 1999, 1998 and 1997, respectively.
Cash and cash equivalents:
For purposes of the balance sheet and statement of cash flows, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
Property and equipment:
Property and equipment are stated at cost. Depreciation, including amortization
of capital leases and leasehold improvements, is computed using the straight-
line method. Estimated useful lives for property and equipment are 18 - 39
years for barges and buildings, life of the lease for leasehold improvements and
5 - 7 years for furniture and equipment.
Normal repairs and maintenance are charged to expense when incurred.
Expenditures which materially extend the useful life of capital assets are
capitalized.
Amortization of intangibles:
Deferred charges relating to debt issuance costs on long-term debt instruments
are amortized over the life of the related debt using the straight-line method
that approximates the effective interest
F-7
rate method. Included on the balance sheet is "Deferred gaming license."
Deferred gaming license represents the estimated fair value of the Louisiana
gaming license, an asset acquired in conjunction with the purchase of Crescent
City. This cost is being amortized on a straight-line basis over twenty-five
years, the estimated period to be benefited by the license, commencing at the
time gaming operations began at Casino Magic-Bossier City. The realizability of
this cost is periodically accessed based on expected future profitability and
undiscounted future cash flows generated by gaming operations.
Preopening costs:
Expenses incurred prior to the opening and operation of the hotel in December
1998 were expensed as incurred. Prior to 1998, preopening costs were initially
capitalized and then expensed when the related business commenced operations.
In April 1998, Statement of Position 98-5 Reporting on the Costs of Start-Up
Activities was issued and was effective for years after December 31, 1998.
Statement of Position 98-5 required that start-up activities and organizational
costs be expensed as incurred. The adoption of Statement of Position 98-5 did
not have an impact on the financial statements of the Company.
Income taxes:
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. 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.
Certain significant risks and uncertainties:
The Company's ability to conduct gaming operations in the State of Louisiana
depends on the continued licensabilty and qualification of Pinnacle
Entertainment, Inc. and Casino Magic - Bossier City under Louisiana Gaming
Regulations. Such licensing and qualifications are reviewed periodically by the
gaming authorities in Louisiana.
The Company is highly leveraged, with substantial debt service in addition to
operating expenses.
The preparation of 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 the 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.
F-8
2. Long-Term Debt:
Long-term debt at December 31, 1999 and 1998 consisted of the following:
(in thousands) December 31,
------------
1999 1998
---------- -----------
Notes payable, bank $ - $ 1,705
Equipment contracts (a) 333 1,700
Other (b) 24 39
Other, due to affiliates (c) 9,743 7,243
Louisiana First Mortgage Notes (d) 112,875 112,875
----------- -----------
122,975 123,562
Less current maturities (348) (5,214)
----------- -----------
$122,627 $118,348
=========== ===========
(a) Consists of one note collateralized by equipment. In March 1998 two notes
were refinanced to a term loan payable in twenty-three monthly installments
of approximately $93,000 bearing interest at 10.5% with a final balloon
payment due in March 2000.
(b) Consists of various collateralized notes payable through the year 2001. The
interest rates on those notes vary from 9.6% to 12.95%.
(c) Consists of four promissory notes payable to affiliates - two payable to
Casino Magic Corp. and two payable to Casino Magic Management Services.
Approximately $7,244,000 of these notes originated in 1998, and $2,500,000
originated in 1999. The notes bear interest at 8.25%, which is being
accrued, but not currently being paid. Principal and interest are due in
full 36 months from the date of each note.
(d) In August 1996, the Company issued $115,000,000 13% First Mortgage Notes
due 2003 with contingent interest ("First Mortgage Notes"), with contingent
interest equal to 5% of Casino Magic-Bossier City's adjusted consolidated
cash flow. Payment of all or a portion of any installment of contingent
interest may be deferred, at the option of Casino Magic-Bossier City, if,
and only to the extent that, (i) the payment of such portion of contingent
interest will cause Casino Magic-Bossier City's adjusted fixed charge
coverage ratio (as defined in the Louisiana Indenture) for Casino Magic-
Bossier City's most recently completed reference period prior to such
interest payment date to be less than 1.5 to 1.0 on a pro forma basis after
giving effect to the assumed payment of such contingent interest and (ii)
the principal amount of the First Mortgage Notes corresponding to such
contingent interest has not then matured and become due and payable (at
stated maturity, upon acceleration, upon redemption, upon maturity of a
repurchase obligation or otherwise). The aggregate amount of contingent
interest payable in any semiannual period will be reduced pro rate for
reductions in the outstanding principal amount of notes prior to the close
of business on the record date immediately preceding such payment of
contingent interest.
The First Mortgage Notes are secured by a first priority security interest,
subject to permitted liens, in substantially all of the existing and future
assets of Casino Magic-Bossier City, including the Riverboat and
substantially all of the other assets that comprise Casino Magic-Bossier
City. The Jefferson Corp. Guarantee will be secured by
F-9
a pledge of all the capital stock of Casino Magic of Louisiana Corp. a
wholly owned subsidiary of Jefferson Corp.
The First Mortgage Notes are governed by the Louisiana Indenture. The
Louisiana Indenture contains certain covenants limiting Casino Magic-
Bossier City from engaging in lines of business other than the current
gaming operations at Casino Magic-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.
The Louisiana First Mortgage 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:
Through August 15,
2000 106.500%
2001 104.332%
2002 102.166%
The Indenture requires the disclosure of the following information as of
December 31:
(in thousands)
1999 1998
------- -------
Contingent Interest paid $ 1,300 $ -
Contingent Interest accrued and unpaid 1,640 983
Accrued Management Fees 3,280 1,966
Adjusted Consolidated Cash Flow 33,424 19,786
All the above terms are as defined in the Indenture.
Maturities of the Company's long-term debt as of December 31, 1999 are as
follows:
Period (in thousands)
------
2000 $ 6,583
2001 3,447
2002 70
2003 112,875
Thereafter -
----------
$122,975
==========
3. Benefit Plan:
The Company participates in Pinnacle Entertainment's 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 were $160,000, $58,000,
and $20,000, respectively.
F-10
4. Related Party Transactions:
In August 1996, the Company entered into a management agreement (the "Management
Agreement") with Casino Magic and a wholly owned subsidiary of Casino Magic (the
"Manager") for a term of 10 years. In consideration for the license of the
"Casino Magic" name and the services provided under the Management Agreement,
the Company has agreed to pay a management fee equal to 10% of Adjusted
Consolidated Cash Flow, as defined in the Indenture. Payment of the management
fee will be subject to certain restrictions contained in the Indenture. The
Company accrued management fees of $3.3 million, $1.4 million and $2.5 million
during 1999, 1998 and 1997, respectively, none of which has been paid.
During 1998 and 1999, the Company executed certain promissory notes payable to
Casino Magic Corp. and Casino Magic Management Services (See Note 2).
5. Income Taxes:
Components of deferred tax assets (liabilities) are as follows (in thousands):
1999 1998
---- ----
Depreciation and amortization $(14,268) $(13,564)
Net operating loss carryforward 19,850 21,080
Other 5,325 4,821
-------- --------
Gross deferred tax assets 10,907 12,337
Less valuation allowance (10,907) (12,337)
-------- --------
Net deferred tax liabilities $ - $ -
======== ========
The provision for income taxes differs from the amount of income tax determined
by applying the applicable U.S. statutory federal income tax rate to pre-tax
income from continuing operations as a result of the following differences.
(in thousands)
1999 1998 1997
---- ---- ----
Statutory U.S. tax rate (35%) $ 1,230 $(2,318) $(3,725)
Increase (decrease) in rates resulting
from:
Expenses which were non-deductible
for tax purposes 23 331 914
Expenses which were deductible for
tax purposes and not book - - (4,255)
Valuation allowance (1,430) 1,425 6,637
Other 177 562 428
------- ------- -------
Income tax expense $ - $ - $ -
======= ======= =======
The valuation allowance against deferred tax assets was recorded in recognition
of operating losses incurred by the Casino Magic-Bossier City since inception
because Casino Magic-Bossier City believes it is more likely than not that the
net deferred tax amount will not be realized. As of December 31, 1999, the
Company has federal net operating loss ("NOL") carryforwards of approximately
$19,800,000. The NOL carryforwards expire on various dates through 2018.
F-11
6. Fair Value of Financial Instruments:
The carrying amounts and fair values of the Company's financial instruments at
December 31, 1999 are as follows:
(in thousands) Carrying Fair
Amount Value
-------- -----
Cash and cash equivalents $ 20,249 $ 20,249
Notes payable and current maturities
of long-term debt and long-term debt 130,174 123,300
The following methods and assumptions were used by the Company in estimating its
fair value disclosure:
Cash and cash equivalents and marketable securities. The carrying amount
reported on the balance sheet approximates its fair value because of the short
nature of these instruments.
Notes payable and current maturities of long-term debt and long-term debt. The
fair value of the Company's debt either approximates its carrying value or is
based upon the market price of the debt instruments.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
7. Subsequent Event:
On March 8, 2000, Pinnacle Entertainment, Inc. 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, Inc. 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 Inc.'s senior
management to retain an equity interest in the combined company and the approval
of a majority of Pinnacle Entertainment Inc.'s shareholders. Pinnacle
Entertainment Inc.'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. Harvey's Casino Resorts is majority owned by Colony
Capital, Inc., a private investment firm.
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